-----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, FIc6adO16ezRi9O3x+S2w46KT5MYV4hU3PQQWeIqkTgFs1Xj3hSFewZm8ZhvhkmB KGZ60C1WjIi7BqsP66/IvQ== 0000950109-98-005451.txt : 19981218 0000950109-98-005451.hdr.sgml : 19981218 ACCESSION NUMBER: 0000950109-98-005451 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19980926 FILED AS OF DATE: 19981217 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: 98771101 BUSINESS ADDRESS: STREET 1: ONE UNIVAC LN STREET 2: P O BOX 755 CITY: WINDSOR STATE: CT ZIP: 06095 BUSINESS PHONE: 8602856120 MAIL ADDRESS: STREET 1: ONE UNIVAC LANE STREET 2: P O BOX 755 CITY: WINDSOR STATE: CT ZIP: 06095-2668 FORMER COMPANY: FORMER CONFORMED NAME: ADVO SYSTEM INC DATE OF NAME CHANGE: 19920128 10-K 1 FORM 10-K ADVO, Inc. Form 10-K September 26, 1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 26, 1998 ------------------ 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. [_] The aggregate market value of voting stock held by non-affiliates of the registrant at November 27, 1998 was $506,416,219. On that date, there were 22,133,572 outstanding shares of the registrant's common stock. Documents Incorporated by Reference: Portions of the 1998 Annual Report to Stockholders are incorporated by reference into Parts II and IV of this Report. Portions of the Proxy Statement for the 1999 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 26, 1998 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................................................. 7 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 7 7a. Quantitative and Qualitative Disclosure about Market Risk............... 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...................... 8 11. Executive Compensation.................................................. 8 12. Security Ownership of Certain Beneficial Owners and Management.......... 8 13. Certain Relationships and Related Transactions.......................... 8 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 mail 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. PRODUCTS AND SERVICES ADVO's direct mail marketing products and services include shared mail and solo mail. ADVO also provides ancillary services in conjunction with its direct mail marketing programs. In addition, during fiscal 1998, the Company acquired a franchise-based coupon envelope mail company. SHARED MAIL In the Company's shared mail programs (Marriage Mail(R) and Mailbox Values(R)), the advertisements of several advertisers are combined into 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. During fiscal 1998, the Company began offering the nationwide availability of ADVO Targeting Zones ("ATZs") which enables advertisers to target their ads to consumer clusters of about 3,500 households. ATZs are neighboring postal carrier delivery routes within a ZIP Code that are clustered together based on shared demographic characteristics and proximity to key retail shopping areas. The Company's shared mail programs offer the features of penetration and target marketing at a significant cost reduction when compared to mailing on an individual or solo mail basis. This cost advantage is available because the Company pays the total postage expense, and advertisers are generally charged a selling price based upon, among other factors, the incremental weight of their promotional pieces. As a part of its shared mail programs, the Company provides the addresses of the households receiving the mail packages, 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. 1 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 60 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. In fiscal 1997, the Company formed a new network, known as ADVO National Network Extension ("A.N.N.E."), of regional shared mail companies to provide its clients with extended coverage outside the markets already served by the Company. Approximately an additional 21.5 million households can be reached on a shared mail basis through A.N.N.E. The Company handles the clients' orders directly and manages distribution of their advertising through A.N.N.E.'s partners. Conversely, A.N.N.E. 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 Through a specialized firm hired by the Company to manage it, the Company rents portions of its mailing list to organizations interested in distributing their own mailings. The Company may or may not perform the associated distribution services for the customer. 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. On February 27, 1998, the Company acquired The Mailhouse, Inc., a franchise- based cooperative coupon envelope mail company headquartered in Avon, MA. The company was renamed MailCoups, Inc. ("MailCoups") and operates as a subsidiary of ADVO. The new subsidiary, operating under the trade name of SuperCoups, is a leader in creating and distributing attractive, cost-effective targeted coupons in a distinctive envelope format for local neighborhood merchants via an extended network of franchise owners. At the end of fiscal 1998, MailCoups had approximately 300 franchise units in 26 states and directly employed 145 people. MAILING LIST ADVO's management believes its computerized mailing list is the largest residential/household mailing list in the country. It contains over 116 million delivery points (constituting nearly all of the households in the 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. 2 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, which allows ADVO to qualify for the lowest possible postage rates. The USPS provides these updates to any user 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 1998, 1997, or 1996. OPERATIONS Customers' advertising circulars are processed by approximately 2,400 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 equipment are the principal pieces of equipment used to process the Company's products and services. At several of the Company's production facilities, a new computerized mail sorter is 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. MailCoups operates a cooperative direct mail coupon envelope advertising business by performing printing and distribution services for the franchisees at their one production facility. During fiscal 1996, the Company entered into a ten year agreement with Integrated Systems Solution 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 systems, and carrier routing of addresses received from customer files and demographic analyses. COMPETITION In general, the printed advertising market is highly competitive with companies competing primarily on 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." Newspapers represent the Company's most significant and direct competition. Through the distribution of preprinted circulars, classified advertising and run of press advertising ("ROP"), newspapers have been the traditional and dominant medium for advertising by retailers for many years. Insertion rates are highly competitive and many newspapers' financial resources are substantial. 3 ADVO's principal direct marketing competitors are other companies with residential lists or similar cooperative mailing programs. These companies have a significant presence in many of the Company's markets and represent serious competition to the Company's Marriage Mail(R) programs in those markets. There are local mailers in practically every market of the country. In addition to local mailers, there are many local private delivery services such as "shoppers" and "pennysavers" which compete by selling ROP advertisements and classified advertisements. ADVO believes that it competes effectively in its various markets. SEASONALITY ADVO's business generally follows the trends of retail advertising spending. The Company has historically experienced higher revenues in the second half of the calendar year. RESEARCH AND DEVELOPMENT Expenditures of the Company in research and development during the last three years have not been material. ENVIRONMENTAL MATTERS The Company believes that it is substantially in compliance with all regulations concerning the discharge of materials into the environment, and such regulations have not had a material effect on the capital expenditures or operations of the Company. RAW MATERIALS The Company manages approximately 45,000 tons of paper per year 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 26, 1998, the Company had a total of approximately 4,600 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 subject to cautionary factors which could cause the Company's actual results to differ materially from those in the forward looking statements. Such factors include but are not limited to: changes in customer demand; the possibility of consolidation throughout the retail sector; 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 efficiencies achieved with technology upgrades; the amount of shares the Company will purchase in the future under its buyback program; the successful completion and estimated costs of the Year 2000 program; fluctuations in interest rates related to the outstanding debt; and other general economic factors. 4 ITEM 2. PROPERTIES ADVO does not own any real estate except for its corporate headquarters. The corporate headquarters, located in Windsor, Connecticut, consist of two buildings totaling approximately 136,000 square feet. The Company leases 20 production facilities, including the MailCoups facility, 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....... 62 Chairman and Chief Executive Officer Gary M. Mulloy.......... 53 President and Chief Operating Officer Myron L. Lubin.......... 58 Executive Vice President--Marketing and Sales Donald E. McCombs....... 42 Senior Vice President and Chief Financial Officer Henry S. Evans.......... 45 Senior Vice President--Operations Vince Giuliano.......... 51 Senior Vice President--Government Relations Rick Kurz............... 58 Senior Vice President--Chief Strategic Growth Officer Mardelle Pena........... 46 Senior Vice President--Chief Human Resources Officer A. Brian Sanders........ 37 Senior Vice President--Chief Marketing Officer David Stigler........... 55 Senior Vice President--Chief Legal and Public Affairs Officer and General Counsel Frank Talz.............. 54 Senior Vice President--Network Development B. Kabe Woods........... 43 Senior Vice President--Chief Information Officer Julie A. Abraham........ 40 Vice President and Controller C. David Taugher........ 43 Vice President--Change Management
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., R.H. Donnelley Corporation, and IMS Health. Mr. Kamerschen is retiring as Chief Executive Officer as of January 1, 1999. 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. Mulloy has been elected to succeed Mr. Kamerschen in the position of Chief Executive Officer as of January 1, 1999. Mr. Lubin became Executive Vice President--Marketing and Sales on October 29, 1998. From December 1995 to October 1998, he was Senior Vice President-- Chief Sales Officer. Prior to that, he was Senior Vice President--President Western Division from January 1990 to November 1995. Mr. McCombs became Senior Vice President and Chief Financial Officer on November 7, 1997. Prior to that, from 1989 to October 1997, he was Vice President--Financial Planning and Measurement. 5 Mr. Evans became Senior Vice President--Operations in August 1997. From 1992 to 1997 he was Senior Vice President of Operations with Anchor Glass Container Corporation. Mr. Giuliano has been Senior Vice President--Government Relations since October 28, 1996. From April 1983 to October 1996 he was Vice President-- Government Relations. Mr. Kurz became Senior Vice President--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. Ms. Pena has been Senior Vice President--Chief Human Resources Officer since August 1997. From May 1994 to August 1997, she was Vice President--Human Resources. Prior to that she held various management positions at the Company since August 1992. 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. Stigler has been Senior Vice President--Chief Legal and Public Affairs Officer and General Counsel since January 1990. He has also served as the Company's Secretary since August 1986. Mr. Talz became Senior Vice President--Network Development on October 29, 1998. From April 1997 to October 1998 he was Senior Vice President--Chief Client Services Officer. Prior to that, he was Senior Vice President of Organizational Development from January 1996 to April 1997 and Senior Vice President--President Central Division from September 1986 to January 1996. Mr. Woods became Senior Vice President--Chief Information Officer on August 25, 1997. From November 1995 to August 1997, he was Director--End User Services of Lucent Technologies and from November 1993 to November 1995 he was Chief Information Officer of AT&T Advanced Technology Systems. In addition, for a short time in 1995 he held the concurrent position of Chief Information Officer of AT&T Multimedia Ventures and Technologies. Ms. Abraham became Vice President and Controller on October 8, 1998. From November 1997 to October 1998, she was Vice President--Financial Planning and Investor Relations. From August 1995 to November 1997, she was Vice President--Shared Financial Services. Prior to that, she held several other financial management positions at the Company since April 1992. Mr. Taugher has been Vice President--Change Management since April 15, 1997. From 1995 to 1997, he was Vice President of Organizational Development. Prior to that, he was an independent consultant working with various senior management client teams conducting team building, strategic planning, and organizational development interventions. The Company is not aware of any family relationships between any of the foregoing officers and any of the Company's directors. Each of the foregoing officers holds such office until his successor shall have been duly chosen and shall have 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 1998 Annual Report to Stockholders includes on page 39 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). 6 For the fiscal years ended September 26, 1998 and 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 stockholders of record on February 20, 1996. The announcement was a result of the Company's initiative to explore strategic alternatives aimed at increasing stockholder 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 closing price as of November 27, 1998 of the Company's common stock, under the symbol AD, on the New York Stock Exchange as reported in The Wall Street Journal was $25 11/16 per share. The approximate number of holders of record of the common stock on November 27, 1998 was 831. During fiscal 1998, 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 1998 Annual Report to Stockholders on page 22 under the caption "Selected Financial Data" and is incorporated herein by reference and made a part hereof (see Exhibit 13). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is included in ADVO's 1998 Annual Report to Stockholders on pages 23 through 27 under the caption "Financial Report" and is incorporated herein by reference and made a part hereof (see Exhibit 13). ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is included in ADVO's 1998 Annual Report to Stockholders on page 26 under the caption "Market Risk" 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 20, 1998, appearing on pages 28 through 40 of ADVO's 1998 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 39 of ADVO's 1998 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. 7 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 through 5 of the Company's definitive proxy statement dated December 17, 1998 for the annual meeting of stockholders to be held on January 21, 1999 (the "Proxy Statement"), under the caption "Election of Directors," and on page 6 of the Proxy Statement under the subcaption "Section 16 (a) Beneficial Ownership Reporting Compliance", and is incorporated herein by reference and made a part hereof. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is included under the caption "Executive Compensation" on pages 7 through 18 (except for those portions appearing under the subcaptions "Report of the Compensation Committee" and "Company Financial Performance"), and "Governance of the Company" on 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 18 of ADVO's Proxy Statement and in footnote 9 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. 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.
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EXHIBIT NO. EXHIBIT WHERE LOCATED - ----------- ------- ------------- 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 22, 1998. 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 22, 1998. 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) 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(h) 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(i) 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(j) Executive Severance Agreement dated Incorporated by reference to Exhibit May 19, 1997 between ADVO and A. 10(k) to the Company's Annual Report Brian Sanders. * on Form 10-K for the fiscal year ended September 27, 1997. 10(k) 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. 10(l) Executive Severance Agreement dated Incorporated by reference to Exhibit November 7, 1997 between ADVO and 10(m) to the Company's Annual Report Donald E. McCombs. * on Form 10-K for the fiscal year ended September 27, 1997.
9
EXHIBIT NO. EXHIBIT WHERE LOCATED - ----------- ------- ------------- 10(m) Employment Agreement dated July 31, Filed herewith. 1998 between ADVO and Gary M. Mulloy. * 10(n) Executive Severance Agreements dated Filed herewith. October 17, 1995 between ADVO and the executive officers named therein. * 10(o) Executive Severance Agreement dated Filed herewith. October 17, 1995 between ADVO and David Stigler.* 10(p) Executive Severance Agreement dated Filed herewith. July 1, 1997 between ADVO and Mardelle Pena. * 10(q) Executive Severance Agreement dated Filed herewith. July 30, 1997 between ADVO and Henry S. Evans. * 10(r) Executive Severance Agreement dated Filed herewith. August 6, 1997 between ADVO and B. Kabe Woods. * 10(s) Consulting Agreement dated December Filed herewith. 1, 1998 between ADVO and Robert Kamerschen. * 13 1998 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. (b) Reports on Form 8-K. A report on Form 8-K dated September 8, 1998 was filed by the Company during the quarter ended September 26, 1998. The Form 8-K reported under item 5 thereof the Company's announcement of a new stock repurchase program for up to 1 million shares through September 25, 1999. This new program includes the approximate 442,000 shares remaining from its previous buyback program. 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. December 17, 1998 Date: _______________________________ ADVO, Inc. Julie A. Abraham /s/ By: _________________________________ JULIE A. ABRAHAM 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 JULIE A. ABRAHAM, 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 17, 1998 Robert Kamerschen /s/ Chairman, Chief Executive ---------------------------- Officer and Director ROBERT KAMERSCHEN (Principal Executive Officer) December 17, 1998 Gary M. Mulloy /s/ President, Chief ---------------------------- Operating Officer and GARY M. MULLOY Director December 17, 1998 Donald E. McCombs /s/ Senior Vice President and ---------------------------- Chief Financial Officer DONALD E. MCCOMBS (Principal Financial Officer) December 17, 1998 Julie A. Abraham /s/ Vice President and ---------------------------- Controller (Principal JULIE A. ABRAHAM Accounting Officer) December 17, 1998 Bruce Crawford /s/ Director ---------------------------- BRUCE CRAWFORD December 17, 1998 David F. Dyer /s/ Director ---------------------------- DAVID F. DYER December 17, 1998 Jack W. Fritz /s/ Director ---------------------------- JACK W. FRITZ December 17, 1998 Howard H. Newman /s/ Director ---------------------------- HOWARD H. NEWMAN December 17, 1998 John R. Rockwell /s/ Director ---------------------------- JOHN R. ROCKWELL December 17, 1998 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 26, 1998, September 27, 1997 and September 28, 1996......................... * Consolidated balance sheets at September 26, 1998 and September 27, 1997. * Consolidated statements of cash flows for the years ended September 26, 1998, September 27, 1997 and September 28, 1996......................... * Consolidated statements of changes in stockholders' equity (deficiency) for the years ended September 26, 1998, September 27, 1997 and September 28, 1996................................................................ * 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 28 to 40 of the ADVO, Inc. 1998 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 OF COSTS AND OTHER FROM END OF DESCRIPTION PERIOD EXPENSES ACCOUNTS RESERVES PERIOD ----------- ------------ ---------- ---------- ---------- ---------- Year ended September 28, 1996: Allowances for sales adjustments............ $ 2,126 $ -- $10,007(b) $ 9,297 $ 2,836 Allowances for doubtful accounts............... 1,292 3,701 -- 3,603(a) 1,390 Restructuring reserve... 9,879 -- -- 7,820 2,059 Accumulated amortization Goodwill............... 1,032 390 -- -- 1,422 Accumulated amortization Intangibles............ 4,398 892 -- -- 5,290 ------- ------ ------- ------- ------- $18,727 $4,983 $10,007 $20,720 $12,997 ======= ====== ======= ======= ======= Year ended September 27, 1997: Allowances for sales adjustments............ $ 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 ======= ====== ======= ======= ======= Year ended September 26, 1998: Allowances for sales adjustments............ $ 2,582 $ -- $ 2,787(b) $ 3,373 $ 1,996 Allowances for doubtful accounts............... 2,578 4,459 -- 4,409(a) 2,628 Restructuring reserve... 348 -- -- 61 287 Accumulated amortization Goodwill............... 1,814 564 -- -- 2,378 Accumulated amortization Intangibles............ 6,019 710 -- -- 6,729 ------- ------ ------- ------- ------- $13,341 $5,733 $ 2,787 $ 7,843 $14,018 ======= ====== ======= ======= =======
- -------- (a) Write off of uncollectible accounts, net of recoveries on accounts previously written off. (b) Reduction of revenues. F-2 EX-10.M 2 EMPLOYMENT AGREEMENT/GARY M. MULLOY 7/31/98 EXHIBIT 10 (m) EMPLOYMENT AGREEMENT -------------------- AGREEMENT made this day of July 31, 1998, by and between ADVO, Inc., a Delaware corporation (the "Company"), and Gary Mulloy (the "Employee"). RECITAL ------- The Company desires to employ the Employee to perform as Chief Executive Officer of the Company and to obtain the benefit of the Employee's knowledge, experience, and abilities, and the Employee is willing to serve as such officer of and be employed by the Company. NOW THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto hereby agree as follows: 1. Position and Responsibilities. ----------------------------- 1.1 During the Employment Period (as hereinafter defined), the Company shall employ the Employee and the Employee shall serve the Company as Chief Executive Officer. All of the Company's operating and administrative functions will report into the Employee in that capacity. The Employee shall devote his full business time and best efforts to the business and affairs of the Company and the promotion of its interests, and perform all duties and services on behalf of the Company necessary to carry out the function of such office as determined from time to time by the Board of Directors of the Company. During the Employment Period, and without additional compensation, the Employee shall serve in such other office or offices (including as a director) of the Company and its subsidiaries to which he may be elected or appointed from time to time. The Employee shall continue as a director of the Company throughout the Employment Period. -1- 2. Employment Period. ----------------- 2.1 The Employment Period shall be the period commencing on January 1, 1999 and continuing until December 31, 2004. 2.2 Notwithstanding the provisions of Section 2.1 hereof, the Company shall have the right in its sole discretion, on written notice to the Employee, to terminate the Employee's employment with or without Cause (as hereinafter defined), such termination to be effective as of the date on which notice is given or as of such later date otherwise specified in the notice. In the event of the death of the Employee prior to any other termination of his employment hereunder or the Employment Period (i) his employment hereunder and the Employment Period shall terminate on the date of his death (ii) except as expressly provided in Section 5.1 hereof and the Employee's Executive Severance Agreement dated November 4, 1996 (hereinafter "Severance Agreement"), the Company shall not have any obligation to pay any salary or provide any benefits under this Agreement to the heirs, estate, executors, administrators, or legal representative of the Employee in respect of any period after the death of the Employee. 3. Compensation. ------------ 3.1 Upon the start of the Employment Period, the Corporation shall pay to the Employee for the services to be rendered by the Employee hereunder a base salary at the rate of Five Hundred Thousand ($500,000) Dollars per annum, payable in equal installments no less frequently than every two weeks. Such salary will be reviewed at least annually after the end of the fiscal year, starting with after the end of FY99, and may be increased, but not decreased, by the Board of Directors of the Company (or the Compensation Committee thereof as appropriate) in its sole discretion, to be effective in the first pay period of the ensuing January, starting with January 2000. In addition, the Employee shall be entitled to participate during the Employment -2- Period in the Corporate Management Incentive Plan (the "Bonus Plan") which the Company has adopted. The Employee's target bonus under that or any successor plan shall be 75% of his base salary (the "Target Bonus"). 3.2 The Employee shall be entitled to participate in, and receive benefits from, any insurance, medical, disability, stock purchase, or any other employee benefit plan of the Company which may be in effect at any time during the course of his employment by the Company and which shall be generally available to senior executives of the Company. 3.3 The Company shall reimburse the Employee for all reasonable and necessary business expenses incurred by him in the course of performing his duties and services described in Section 1 hereof against the presentation by the Employee of appropriate vouchers thereof or other evidence as may be reasonably requested by the Company. The Employee shall be entitled to four weeks vacation a year, or more if corporate policy permits. 3.4 As long as the Employee's physical presence in the Hartford area is required, the Employee shall receive a housing allowance of $2,000 per month during the Employment Period, to be paid on a pro rata basis twice monthly. 4. Other Activities During and After the Employment Period. ------------------------------------------------------- 4.1 During the Employment Period the Employee shall not undertake, continue, or otherwise engage in any employment, occupation, or business enterprise other than as provided in Section 1 of this Agreement except that subject to compliance with the provisions of this Agreement, the Employee may engage in reasonable activities with respect to personal investments of the Employee and may serve on the Boards of Directors of a maximum of two outside companies. The maximum may be changed only with the approval of the Board. 4.2 The Employee shall not at any time during or after the Employment Period (regardless of the reason for the termination thereof), directly or indirectly divulge, furnish, use, -3- publish, or make accessible to any person or entity any Confidential Information (as hereinafter defined) except as properly required in the conduct of the Company's business. Any records of Confidential Information prepared by the Employee or which come into the Employee's possession are and remain the property of the Company, and upon termination shall be either left with or returned to the Company. The term "Confidential Information" shall mean information disclosed to the Employee or known, learned, created, or observed by him as a consequence of or through his employment by the Company or any subsidiary of the Company which is confidential, secret, or otherwise not generally known in the relevant trade or industry, and pertains directly or indirectly to the business activities, products, services, or processes of the Company, any subsidiary of the Company or any of their clients, customers or suppliers, including but not limited to information concerning mailing lists, advertising, sales promotion, publicity, sales data, research, copy, other printed matter, tear sheets, artwork, photographs, films, reproductions, layout, finances, accounting, methods, processes, trade secrets, business plans, client lists and records, potential client lists, and client billing. 4.3 During the Employment Period, and the period of one year thereafter, the Employee shall not directly or indirectly engage in any business (whether as a consultant, officer, director, owner, employee, agent, partner, or other participant) with or for, be financially interested (whether as a lender, guarantor, or other participant), represent or otherwise render assistance to any person or entity who or which competes or intends to compete, or who or which is affiliated (by reason of common control, ownership, or otherwise) with any other person or entity who or which competes or intends to compete, directly or indirectly with the business then conducted by the Company; provided, however, that the foregoing shall not be deemed to prevent the Employee from investing in securities if such class of securities in which the investment is so made is listed on a national securities exchange or is issued by a company -4- registered under Section 12(g) of the Securities Exchange Act of 1934 or subject to the obligations of Section 15(d) of that Act, so long as such investment holdings do not, in the aggregate, constitute more than 1% of the voting stock of any company's securities. 4.4 The Employee will not, during the Employment Period and one year thereafter, hire or offer to hire or entice away or in any other manner persuade or attempt to persuade, either in the Employee's individual capacity or as agent for another, any officers, employees, or agents of the Company or any subsidiary to discontinue their relationship with the Company of any subsidiary, nor divert or attempt to divert from the company or any subsidiary any business whatsoever by influencing or attempting to influence any customer or supplier of the Company or any subsidiary. 4.5 The Employee acknowledges that he has been employed for his special talents and that his leaving the employ of the Company would seriously hamper the business of the Company. The Employee agrees that the Company shall be entitled to injunctive relief, in addition to all remedies permitted by law, to enforce the provisions of this Section 4. The Employee further acknowledges that his training, experience, and technical skills are of such breadth that they can be employed to advantage in other areas which are not competitive with the present business or the Company and consequently the foregoing obligation will not unreasonably impair his ability to engage in business activity after the termination of his present employment. 4.6 As used in Section 4, the Period "one year after the Employment Period" (or words to that effect) shall commence when Employee goes off the Company's payroll, for whatever reason. 5. Severance Pay. ------------- -5- 5.1 In the event that (a) the Company terminates the Employment Period for any reason other than for Cause (as hereinafter defined), or (b) the Employee terminates his employment as a result of any of the following reasons (a "Section 5.1 Termination"): (i) the Company assigned to the Employee duties inconsistent with this present position that materially diminish the scope of Employee's duties or change his reporting relationship; (ii) the Company reduces the Employee's bonus by a proportion greater than the average proportionate reduction in bonus awarded to the Company's other executive officers other than by operation of the Bonus Plan; or (iii) the Company breaches any of its material obligations under this Agreement, then for two years after the termination date, the Company shall continue to pay an amount of severance (the "Severance Compensation") to the Employee at the rate and in the manner provided in Section 3.1 hereof, including an amount equal to the Target Bonus, and shall continue to allow the Employee to participate in the insurance, medical and disability plans (to the extent permitted by such plans) in which the Employee shall have been participating at the date of termination. The auto and housing allowances shall cease upon the date of termination. As long as the Severance Compensation is being paid, the Employee's granted, but unvested stock rights, shall continue to vest on their regularly scheduled dates. The obligation of the Company to pay Severance Compensation and allow such participation in such plans shall be the only obligations of the Company to the Employee in the event of a termination pursuant to clauses (a) or (b) above. Notwithstanding the foregoing, the Company shall not in any case have any obligation to pay such Severance Compensation or allow such participation in the event of any material breach by the Employee of his obligations under this Agreement or in the event the Employee is eligible to receive compensation pursuant to Section 6 hereof. The Company shall not be relieved of its obligation to pay Severance Compensation pursuant to this Section 5.1 by the reason of the death of the Employee during the period in which Severance Compensation is being paid. -6- 5.2 For purposes of this Agreement, the term "Cause" shall mean: (i) failure by the Employee to comply with any of the material terms of this Agreement; (ii) willful engagement by the Employee in his capacity as an executive officer of the Company or any subsidiary, in gross misconduct injurious to the Company or any subsidiary; (iii) neglect or refusal by the Employee to attend to the material duties assigned to him by the Board of Directors of the Company, (iv) intentional misappropriation of property of the Company or any subsidiary to the Employee's own use; (v) the commission by the Employee of an act of fraud or embezzlement; (vi) conviction of the Employee for a crime (excluding minor traffic offenses); or (vii) the failure of the Employee because of illness or other incapacity to render any services or perform any duties required pursuant to Section 1 hereof for any period of ninety (90) consecutive days during the Employment Period or for shorter periods aggregating more than six (6) months during the Employment Period provided, however, if the Employee should leave the Company under the circumstances described in (vii), he will be entitled to such benefits as provided in the then-current long- and short-term disability plans. 6. Change of Control. ----------------- 6.1 The terms of the Severance Agreement shall govern the Company's treatment of the Employee if there should be a Change of Control (as defined therein). 7. Restricted Shares and Stock Options. ----------------------------------- 7.1 As of June 23, 1998, Employee has been granted options for 100,000 shares of the Company's stock, from the Company's 1988 Stock Option Plan (the "Plan"). The strike price for these options will be the closing price of the Company's stock on the New York Stock Exchange on June 23, 1998. These options will be subject to the terms of the Plan and shall vest as follows: One fourth on January 1, 2000; one fourth on January 1, 2001; one fourth on January 1, 2002; and one fourth on January 1, 2003. -7- 7.2 Upon shareholder approval of an appropriate plan, which approval is contemplated being sought at the Company's January 1999 Annual Meeting of Shareholders, Employee will be granted 25,000 shares of performance restricted stock of the Company. Such stock shall vest, subject to its performance requirements, one-third annually each on January 1, 2000, 2001, and 2002. If, for any reason, such a performance restricted stock plan is not established, the Employee will be given an equivalent value amount of stock rights in some other form, subject to similar vesting requirements. In the event of Change of Control of the Company, the Employee shall immediately become fully vested in his Restricted Shares and Stock Options pursuant to the term of those plans. 8. Other Consideration. Employee shall receive a car allowance ------------------- of $600 per month. 9. Assignments. This Agreement shall inure to the benefit of and ----------- be binding upon the Company, its successors and assigns, and upon the Employee and his heirs, estate, executors, administrators, and legal representatives. No rights or obligations under this Agreement shall be assignable by the Employee, except those which survive his death or disability which may be assigned upon that occurrence. 10. No Third Party Beneficiaries. This Agreement does not create, ---------------------------- and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement, except with respect to salary or other payments or benefits required to be paid after the death of the Employee pursuant to Section 5.1 and the Severance Agreement. 11. Headings. The headings of the sections hereof are inserted for -------- convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. 12. Interpretation. In case any one or more of the provisions -------------- contained in this Agreement shall, for any reason, be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provisions of this -8- Agreement, and this Agreement shall be construed as if such invalid, illegal, or unenforceable provision had never been contained herein. If, moreover, any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. 13. Notices. All notices under this Agreement shall be in writing and ------- shall be deemed to have been given at the time when mailed by registered or certified mail, addressed to the address below stated of the party to which notice is given, or to such changed address as such party may have fixed by notice. To the Company: ADVO, Inc. One Univac Lane Windsor, CT 06095 Attention: General Counsel To the Employee: Mr. Gary Mulloy One Univac Lane Windsor, CT 06095 provided, however, that any notice of change of address shall be effective only upon receipt. 14. Waivers. If either party should waive any breach of any provision ------- of this Agreement, he or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. 15. Complete Agreement; Amendments; Counterparts. The foregoing is the -------------------------------------------- entire agreement of the parties with respect to the subject matter hereof and may not be amended, supplemented, canceled, or discharged except by written instrument executed by both parties hereto. This Agreement specifically supersedes and replaces the agreement between the parties dated November 4, 1996, except that Agreement shall remain in full force and effect until the commencement of the Employment Period. This agreement may be executed in counterparts, -9- each of which shall be an original copy and which together shall constitute one and the same instrument. 16. Governing Law. This Agreement is to be governed by and construed in ------------- accordance with the laws of the State of Connecticut, without giving effect to principles of conflicts of law. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. ADVO, INC. By: ROBERT KAMERSCHEN /s/ ------------------------ Robert Kamerschen GARY MULLOY /s/ ------------------------ Gary Mulloy -10- EX-10.N 3 EXECUTIVE SEVERANCE AGREEMENT/OCTOBER 17, 1995 EXHIBIT 10 (n) Following is a copy of the Executive Severance Agreement, dated as of October 17, 1995, by and between ADVO, Inc. and each of the following executive officers: Vince Giuliano Julie A. Abraham EXHIBIT 10 (n) EXECUTIVE SEVERANCE AGREEMENT ----------------------------- This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement"),is, made as of October 17, 1995, by and between ADVO, Inc. (the "Company") and ___________________ (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 tern 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 30% 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 any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than Warburg (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of voting securities of the Company where such acquisition causes such Person to own 30% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not be deemed to result in a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any corporation pursuant to a transaction that complies with clauses (A), (B) and (C) of subsection (iii) below; and provided, further, that if any Person's beneficial ownership of the Outstanding Company Voting Securities reaches or exceeds 30% as a result of a transaction described in clause (A) or (B) above, and such Person subsequently acquires beneficial ownership of additional voting securities of the Company, such subsequent acquisition shall be treated as an acquisition that causes such Person to own 30% or more of the Outstanding Company Voting Securities; or (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; and provided, further, than any partner, employee or representative of Warburg proposed by Warburg to be elected to the Board shall be considered a member of the Incumbent Board; or (iii) The approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation ("Business Combination") or, if consummation of such Business Combination is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding, however, such a Business Combination pursuant to which (A) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then 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 purposes of this Agreement, no act on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interests of the Company. (f) "Date of Termination" means the date of receipt of the Notice of Termination or any later date specified therein, as the case may be; provided, however, that if the Executive is Terminated by the Company other than for Cause or for disability pursuant to Section 2(a)(ii), the Date of Termination will be the date on which the Executive receives the Notice of Termination from the Company; and provided further, if 3 the Executive is Terminated by reason of death or disability pursuant to Section 2(a)(i) or 2(a)(ii), the Date of Termination will be the last day of the month in which occurs the date of death or the disability effective date, as the case may be. (g) "Employee Benefits" means the perquisites, benefits and service credit for benefits as provided under the plans and programs maintained by the Company, including, but not limited to, plans and programs which are "employee benefit plans" under Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, and any amendment, or successor, to such plans or programs (whether insured, funded or unfunded). (h) "Good Reason" means the occurrence of any of the events listed in Sections 2(b)(i) through 2(b)(vii), inclusive. (i) "Incentive Pay" means an annual amount equal to the aggregate annual bonus, in addition to Base Pay, made or to be made in regard to services rendered in any calendar year or performance period pursuant to any bonus plan of the Company. (j) "Notice of Termination" means a written notice which (i) indicates the specific provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for the Termination under the provision so indicated, and (iii) if the effective date of the Termination is other than the date of receipt of such notice, specifies the effective date of Termination (which date will be not more than sixty (60) days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing that the Executive is entitled to the benefits intended to be provided by this Agreement will not constitute a waiver of any right of the Executive hereunder or .otherwise preclude the Executive from later asserting such fact or circumstance in enforcing the Executive's rights hereunder. (k) "Severance Period" means the period of time commencing on the date of an occurrence of a Change of Control and continuing until the earlier of (i) the date which is one year following the occurrence of the Change of Control and (ii) the Executive's death. (l) "Subsidiary" means an entity, at least a majority of the total voting power of the then-outstanding voting securities of which is held, directly or indirectly, by the Company and/or one or more other Subsidiaries or, for any entity that is not a corporation, at least a majority of the then- outstanding capital interests of which is so held. (m) "Term" means (A) the period commencing on the date hereof and ending on the second anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to 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 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 6 highest rate in effect at any time within the 90-day period preceding the date of the first occurrence of a Change of Control, and (B) an amount equal to the greatest amount of Incentive Pay received by the Executive during any calendar year or portion thereof from and including the third calendar year prior to the first occurrence of a Change of Control; and (ii) For the period of one year from the Date of Termination, the Executive shall be eligible for participation in and shall receive all benefits under such benefit plans, practices, policies and programs of the Company that provide medical, prescription dental, or life insurance coverage, with the costs of such participation to be paid by the Company to the same extent as prior to the Executive's Termination. In the event that such continued participation is not allowed under the terms and provisions of such plans or programs, then in lieu thereof, the Company shall acquire individual insurance policies providing comparable coverage for the Executive; provided that if any such individual coverage is unavailable, the Company shall pay to the Executive an amount equal to the contributions that would have been made by the Company for such coverage on the Executive's behalf if the Executive had remained in the employ of the Company for the period referred to in the preceding sentence. (b) There will be no right of set-off or counterclaim in respect of any claim, debt, or obligation against any payment to or benefit for the Executive provided for in this Agreement. (c) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided under this Agreement (including under this Section 3 or Section 6) on a timely basis, the Company will pay interest on the amount or value thereof at an annualized rate of interest equal to the so-called composite "prime rate" as quoted from time to time during the relevant period in the Northeast Edition of The Wall Street Journal. Such interest will be payable as ----------------------- it accrues on demand. Any change in such prime rate will be effective on and as of the date of such change. (d) Notwithstanding any other provision hereof, the parties, respective rights and obligations under this Section 3 and under Sections 4 and 6 will survive any termination or expiration of this Agreement following a Change of Control or any Termination following a Change of Control for any reason whatsoever. 4. Excise and Other Taxes. The Executive shall bear -all expense of, and ---------------------- be solely responsible for, all federal, state, local or foreign taxes due with respect to any payment received hereunder, including, without limitation, any excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the Code); provided, however, that all payments under this Agreement shall be reduced to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code but only if, by reason of such reduction, the net after-tax benefit received by the Executive shall exceed the net after-tax benefit received by the Executive if no such 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 28OG of the Code, less (ii) the amount of all federal, state and local income taxes payable with respect to the foregoing calculated at the maximum marginal income tax rate for each year in which the foregoing shall be paid to the Executive (based on the rate in effect for such year as set forth in the Code as in effect at the time of the first payment of the foregoing), less (iii) the amount of excise taxes imposed with respect to the payments and benefits described in W above by Section 4999 of the Code. The foregoing determination will be made by a nationally recognized accounting firm (the "Accounting Firm") selected by the Executive and reasonably acceptable to the Company (which may be, but will not be required to be, the Company's independent auditors). The Executive will direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and the Executive within fifteen (15) days after the Date of Termination. If the Accounting Firm determines that such reduction is required by this Section 4, the Company shall pay such reduced amount to the Executive in accordance with Section 3(a). If the Accounting Firm determines that no reduction is necessary under this Section 4, it will, at the same time as it makes such determination, furnish the Company and the Executive an opinion that the Executive will not be liable for any excise tax under Section 4999 of the Code. The Company and the Executive will each provide the Accounting Firm access to and copies of any books, records, and documents in the possession of the Company or the Executive, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by this Section 4. The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by this Section 4 will be borne by the Company. 5. No Mitigation Obligation: The Company hereby acknowledges that it will ------------------------ be difficult, and may be impossible, for the Executive to find reasonably comparable employment following the Date of Termination. The payment of the severance compensation by the Company to the Executive in accordance with the terms of this Agreement will be liquidated damages, and the Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings, or other benefits from any source whatsoever create any mitigation, offset, reduction, or any other obligation on the part of the Executive hereunder or otherwise. 6. Legal Fees and Expenses: If the Company has failed to comply with any ----------------------- of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, the Executive the benefits provided or intended to be provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to time to retain counsel of the Executive's choice, at the expense of the Company, to advise 8 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 an 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 writing signed by the Executive and the Company. No waiver by either party hereto at 10 any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. (b) The Executive and the Company acknowledge that this Agreement supersedes any other agreement between them concerning the subject matter hereof. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. ADVO, Inc. By_________________________ Robert Kamerschen _________________________ [ Executive ] 11 EX-10.O 4 EXECUTIVE SEVERANCE AGREEMENT-DAVID STIGLER 10/95 EXHIBIT 10 (o) EXECUTIVE SEVERANCE AGREEMENT ----------------------------- This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement"), is made as of October 17, 1995, by and between ADVO, Inc. (the "Company") and David M. Stigler (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 any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than Warburg (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of voting securities of the Company where such acquisition causes such Person to own 30% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not be deemed to result in a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any corporation pursuant to a transaction that complies with clauses (A), (B) and (C) of subsection (iii) below; and provided, further, that if any Person's beneficial ownership of the Outstanding Company Voting Securities reaches or exceeds 30% as a result of a transaction described in clause (A) or (B) above, and such Person subsequently acquires beneficial ownership of additional voting securities of the Company, such subsequent acquisition shall be treated as an acquisition that causes such Person to own 30% or more of the Outstanding Company Voting Securities; or (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; and provided, further, than any partner, employee or representative of Warburg proposed by Warburg to be elected to the Board shall be considered a member of the Incumbent Board; or (iii) The approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation ("Business Combination") or, if consummation of such Business Combination is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding, however, such a Business Combination pursuant to which (A) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then 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 purposes of this Agreement, no act on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interests of the Company. (f) "Date of Termination" means the date of receipt of the Notice of Termination or any later date specified therein, as the case may be; provided, however, that if the Executive is Terminated by the Company other than for Cause or for disability pursuant to Section 2(a)(ii), the Date of Termination will be the date on which the Executive receives the Notice of Termination from the Company; and provided further, if 3 the Executive is Terminated by reason of death or disability pursuant to Section 2(a)(i) or 2(a)(ii), the Date of Termination will be the last day of the month in which occurs the date of death or the disability effective date, as the case may be. (g) "Employee Benefits" means the perquisites, benefits and service credit for benefits as provided under the plans and programs maintained by the Company, including, but not limited to, plans and programs which are "employee benefit plans" under Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, and any amendment, or successor, to such plans or programs (whether insured, funded or unfunded). (h) "Good Reason" means the occurrence of any of the events listed in Sections 2(b)(i) through 2(b)(vii), inclusive. (i) "Incentive Pay" means an annual amount equal to the aggregate annual bonus, in addition to Base Pay, made or to be made in regard to services rendered in any calendar year or performance period pursuant to any bonus plan of the Company. (j) "Notice of Termination" means a written notice which (i) indicates the specific provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for the Termination under the provision so indicated, and (iii) if the effective date of the Termination is other than the date of receipt of such notice, specifies the effective date of Termination (which date will be not more than sixty (60) days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing that the Executive is entitled to the benefits intended to be provided by this Agreement will not constitute a waiver of any right of the Executive hereunder or otherwise preclude the Executive from later asserting such fact or circumstance in enforcing the Executive's rights hereunder. (k) "Severance Period" means the period of time commencing on the date of an occurrence of a Change of Control and continuing until the earlier of (i) the date which is one and one/half years following the occurrence of the Change of Control, and (ii) the Executive's death. (l) "Subsidiary" means an entity, at least a majority of the total voting power of the then-outstanding voting securities of which is held, directly or indirectly, by the Company and/or one or more other Subsidiaries or, for any entity that is not a corporation, at least a majority of the then-outstanding capital interests of which is so held. (m) "Term" means (A) the period commencing on the date hereof and ending on the second anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal 4 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 a 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 1-1/2 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 6 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 7 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, 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 orobligations 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 DAVID M. STIGLER /s/ -------------------- David M. Stigler 11 EX-10.P 5 EXECUTIVE SEVERANCE AGREEMENT-MARDELLE PENA 7/97 EXHIBIT 10 (p) EXECUTIVE SEVERANCE AGREEMENT ----------------------------- This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement"), is made as of July 1, 1997 by and between ADVO, Inc. (the "Company") and Mardelle W. Pena (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 /s/ ROBERT KAMERSCHEN --------------------- Robert Kamerschen /s/ MARDELLE W. PENA -------------------- Mardelle W. Pena 11 EX-10.Q 6 EXECUTIVE SEVERANCE AGREEMENT-HENRY S. EVANS 7/97 EXHIBIT 10 (q) EXECUTIVE SEVERANCE AGREEMENT ----------------------------- This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement"), is made as of July 30, 1997 by and between ADVO, Inc. (the "Company") and Henry S. Evans (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 /s/ ROBERT KAMERSCHEN --------------------- Robert Kamerschen /s/ HENRY S. EVANS ------------------ Henry S. Evans 11 EX-10.R 7 EXECUTIVE SEVERANCE AGREEMENT-B.KABE WOODS 8/97 EXHIBIT 10 (r) EXECUTIVE SEVERANCE AGREEMENT ----------------------------- This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement"), is made as of August 6, 1997 by and between ADVO, Inc. (the "Company") and B. Kabe Woods (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 /s/ ROBERT KAMERSCHEN ---------------------- Robert Kamerschen /s/ B. KABE WOODS ---------------------- B. Kabe Woods 11 EX-10.S 8 CONSULTING AGREEMENT-ROBERT KAMERSCHEN 12/98 EXHIBIT 10 (s) CONSULTING AGREEMENT -------------------- AGREEMENT made this 1st day of December, 1998, by and between ADVO, Inc. a Delaware corporation (the "Company"), and Robert J. Kamerschen (the "Consultant"). RECITAL ------- The Company and the Consultant (together, the "Parties") desire to supersede and replace an employment agreement between the Company and the Consultant dated May 29, 1996, (the "Contract") by creating this new agreement (the "Agreement") to define the future relationship between the Parties. NOW THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto hereby agree as follows: 1. Positions and Responsibilities. ------------------------------ 1.1 During the Agreement Period (as hereinafter defined), the Company shall retain the Consultant in the capacity as internal consultant to the Company. The role of 'internal consultant' shall mean the provision of advice, counsel and assistance on a senior level to the Company on a reasonable basis, as requested by the Company. Specifically, in addition to any other consulting, during this Agreement Period the Consultant will fully cooperate with, and be reasonably available to consult in any manner reasonably requested relative to, including but not limited to, the full transition of his successor(s) as Chief Executive Officer and Chairman of the Board of Directors of the Company, and the Company's postal strategy. During the Agreement Period, and without additional compensation, the Consultant shall serve in such office or offices (including as a Director and Board Committee member) of the Company and its subsidiaries to which he may be elected or appointed from time to time. The Consultant shall report on his services on a regular basis to the Company. 1.2 The Consultant is currently Chairman of the Board of the Company. He shall continue to serve as such solely at the discretion of the Board of Directors, and nothing in the Agreement shall be taken to affect or guarantee such tenure. 2. Agreement Period. ---------------- 2.1 The Agreement Period shall be the period commencing as of January 1, 1999 and continuing until December 31, 2008. 2.2 In the event of the death of the Consultant prior to any other termination of this relationship hereunder or of the Agreement Period (i) his employment hereunder and the Agreement Period shall terminate on the date of his death (ii) except as expressly provided in Section 5.3 hereof, the Company shall not have any obligation to pay any salary or provide any benefits under this Agreement to the heirs, estate, executors, administrators or legal representative of the Employee in respect of any period after the death of the Employee. 3. Compensation. ------------ 3.1 The Company shall pay to the Consultant for the services to be rendered by the Consultant hereunder and as consideration for the termination of the Contract, annual compensation in the amount of Three Hundred Fifty Thousand Dollars ($350,000), payable in equal installments no less frequently than every two weeks. Such compensation shall not be increased or decreased during the Agreement Period. The Consultant shall not be entitled to participate in any Incentive Compensation Plan (the "Compensation Plan") or its successors which the Company has adopted. The Consultant shall not be entitled to any grants of stock options, restricted stock, stock appreciation rights or any similar benefit being given to senior executives of the Company, except as noted in Section 3.6. 3.2 The Consultant shall be entitled to participate in, and receive benefits from, any insurance, medical, disability, stock purchase or any other employee benefit plan of the Company which may be in effect at any time during the Agreement Period and which shall be generally available to senior executives of the Company. 3.3 The Company shall reimburse the Consultant for all reasonable and necessary business expenses incurred by him in the course of performing his duties and services described in Section 1 hereof against the presentation by the Consultant of appropriate vouchers therefore or other evidence as may be reasonably requested by the Company. 3.4 As long as the Consultant maintains an office at the Company's headquarters, but at the latest until January 1, 2000, the Consultant shall receive a housing allowance of $3,346.19 per month as long as this Agreement is in effect, which amount shall increase annually effective January 1 of each year by the same percentage as the United States City Average Consumer Price Index for all Urban Consumers for All Items increased in the previous year. Upon termination of the Consultant's housing allowance, his auto allowance from the Company shall also cease. 3.5 Starting January 1, 2000, the Consultant shall be given $75,000 annually, before withholding, to be used for the Consultant to have an appropriate operating budget from which to secure an office and related services, including secretarial services, from which to work. This will remain in effect for two years, until December 31, 2001. If the Consultant vacates his office at the Company's headquarters prior to January 1, 2000, he will be given prorated office-related compensation for the part of the year 1999 in which he is out 2 of his Company office. The Consultant shall vacate his Company office no later than January 1, 2000. If the Consultant obtains full-time employment prior to December 31, 2001, this allowance will be terminated immediately, on a pro rata basis. 3.6 Effective no later than January 21, 1999, and to the degree practicable as of today's date, the Consultant shall receive a grant of 150,000 stock options of the Company, subject to the terms and conditions of the appropriate plans. Those options shall vest one-quarter annually, starting from the first anniversary of the grant date. 4. Other Activities During and After the Agreement Period. ------------------------------------------------------ 4.1 The Consultant shall not at any time during or after the Agreement Period (regardless of the reason for the termination thereof), directly or indirectly divulge, furnish, use, publish or make accessible to any person or entity any Confidential Information (as hereinafter defined) except as properly required in the conduct of the Company's business. Any records of Confidential Information prepared by the Consultant or which comes into the Consultant's possession are and remain the property of the Company and upon termination shall be either left with or returned to the Company. The term "Confidential Information" shall mean information disclosed to the Consultant or known, learned, created or observed by him as a consequence of or through his employment by the Company or any subsidiary of the Company which is confidential, secret or otherwise not generally known in the relevant trade or industry, and pertains directly or indirectly to the business activities, products, services or processes of the Company, any subsidiary of the Company or any of their clients, customers or suppliers, including but not limited to information concerning mailing lists, advertising, sales promotion, publicity, sales data, research, copy, other printed matter, tear sheets, artwork, photographs, films, reproductions, layout, finances, accounting, methods, processes, trade secrets, business plans, client lists and records, potential client lists, and client billing. 4.2 During the Agreement Period, and the period of one year thereafter, the Consultant shall not directly or indirectly engage in any business (whether as a consultant, officer, director, owner, employee, agent, partner or other participant) with or for, be financially interested in (whether as a lender, guarantor or otherwise), represent or otherwise render assistance to: any person or entity who or which competes or intends to compete, or who or which is affiliated (by reason of common control, ownership or otherwise) with the business then conducted by the Company provided, however, that the foregoing shall not be deemed to prevent the Employee from investing in securities if such class of securities in which the investment is so made is listed on a national securities exchange or is issued by a company registered under Section 12(g) of the Securities Exchange Act of 1934 or subject to the obligations of Section 15(d) of that Act, so long as such investment holdings do not, in the aggregate, constitute more than 1% of the voting stock of any company's securities. This paragraph does not include the Consultant's current board memberships. 4.3 The Consultant will not, during the Agreement Period and one year thereafter, hire or offer to hire or entice away or in any other manner persuade or attempt to persuade, either in the Consultant's individual capacity or as agent for another, any officers, 3 employees, or agents of the Company or any subsidiary to discontinue their relationship with the Company or any subsidiary, nor divert or attempt to divert from the company or any subsidiary any business whatsoever by influencing or attempting to influence any customer or supplier of the Company or any subsidiary. 4.4 The Consultant acknowledges that he has been employed for his special talents and that his termination of this relationship with the Company would seriously hamper the business of the Company. The Consultant agrees that the Company shall be entitled to injunctive relief, in addition to all remedies permitted by law, to enforce the provisions of this Section 4. The Consultant further acknowledges that his training, experience and technical skills are of such breadth that they can be employed to advantage in other areas which are not competitive with the present business of the Company and consequently the foregoing obligation will not unreasonably impair his ability to engage in business activity after the termination of this Agreement. 4.5 Other than the obligations contained in this Section 4, and his duties under Section 1.1, nothing in this Agreement shall preclude the Consultant from engaging in any activity. 5. Termination. ----------- 5.1 This Agreement can be terminated by the Company prior to the end of the Agreement Period only for Cause. 5.2 For purposes of this Agreement, the term "Cause' shall mean: (i) willful failure by the Consultant to comply with any of the material terms of this Agreement; (ii) willful engagement by the Consultant in his capacity as a consultant to the Company or any subsidiary, in gross misconduct injurious to the Company or any subsidiary; (iii) intentional misappropriation of substantial property of the Company or any subsidiary to the Employee's own use; (iv) the commission by the Employee of an act of fraud or embezzlement from the Company, or (v) conviction of the Employee for a crime (excluding minor traffic offenses) the public knowledge of which would bring harm to the Company because of the Consultant's relationship to the Company. 5.3 If the Consultant should die prior to the end of the Agreement Period, his widow shall be paid at the annual rate of $175,000 until the earlier of the end of the Agreement Period or her death. She shall not be entitled to any other rights or benefits under this Agreement, but she shall be entitled to all relevant rights then currently available pursuant to COBRA, stock plans, etc. 6. Change of Control. ----------------- 6.1 The Consultant hereby fully renounces any and all rights that might have become available to him under his Executive Severance Agreement, and agrees that said agreement is hereafter null and void. 4 6.2 The Company agrees that this Agreement shall be fully binding on any successor and assign of the Company, for the full Agreement Period. If that is for some reason not possible, the Company shall create a fund adequate to fully cover the Company's financial obligations under this Agreement. 7. Restricted Shares and Options. In the event of Change of Control of ----------------------------- the Company (as defined by the Plans), or the demise of the Consultant, the Consultant or his estate shall immediately become fully vested in his Restricted Shares and Stock Options pursuant to the term of those Plans. 8. Assignments. This Agreement shall inure to the benefit of and be ----------- binding upon the Consultant and his heirs, estate, executors, administrators and legal representatives. No rights or obligations under this Agreement shall be assignable by the Consultant, except those which survive his death or disability which may be assigned upon that occurrence. 9. No Third Party Beneficiaries. This Agreement does not create, and ---------------------------- shall not be construed as creating, any rights enforceable by any person to a party to this Agreement, except with respect to salary or other payments or benefits required to be paid after the death of the Consultant pursuant to Section 5.3. 10. Headings. The headings of the sections hereof are inserted for -------- convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. 11. Interpretation. In case any one or more of the provisions contained -------------- in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. If, moreover, any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. 12. Notices. All notices under this Agreement shall be in writing and ------- shall be deemed to have been given at the time when mailed by registered or certified mail, addressed to the address below stated of the party to which notice is given, or to such changed address as such party may have fixed by notice: To the Company: ADVO, Inc. One Univac Lane Windsor, CT 06095 Attention: General Counsel 5 To the Consultant: Mr. Robert Kamerschen 204 Parade Hill Road New Canaan, CT 06840 provided, however, that any notice of change of address shall be effective only upon receipt. 13. Waivers. If either party should waive any breach of any provision of ------- this Agreement, he or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. 14. Complete Agreement; Amendments. The foregoing is the entire agreement ------------------------------ of the parties with respect to the subject matter hereof and may not be amended, supplemented, canceled or discharged except by written instrument executed by both Parties hereto. Upon the commencement of the Agreement Period, this Agreement specifically supersedes and replaces the Contract between the Parties dated May 29, 1996, as well as the Executive Severance Agreement between the Parties. 15. Governing Law. This Agreement is to be governed by and construed in ------------- accordance with the laws of the State of Connecticut, without giving effect to principles of conflicts of law. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. ADVO, INC. By: GARY MULLOY /s/ ---------------------- Gary Mulloy, President ROBERT KAMERSCHEN /s/ --------------------- Robert Kamerschen 6 EX-13 9 1998 ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13 Financial Contents Selected Financial Data 22 Financial Report 23 Consolidated Statements of Operations 28 Consolidated Balance Sheets 29 Consolidated Statements of Cash Flows 30 Consolidated Statements of Changes in Stockholders' Equity (Deficiency) 31 Notes to Consolidated Financial Statements 32 Report of Independent Auditors 40 Report of Financial Responsibility 40 Corporate Information 41 ADVO, INC. 21 Selected Financial Data
Year ended Year ended Year ended Year ended Year ended September 26, September 27, September 28, September 30, September 24, (In millions, except per share data) 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Summary of Operations Revenues $ 1,046.5 $ 1,016.5 $ 986.2 $ 1,011.9 $ 920.3 Operating income 72.1 58.5 24.8(2) 46.3 39.7 Income from continuing operations 35.6 26.8 11.3 30.9 24.6 Net income 35.6 26.8 3.1 25.0 25.2 Earnings per common share from continuing operations--assuming dilution (1) 1.55 1.09 .47 1.33 1.03 Earnings per common share-- assuming dilution (1) 1.55 1.09 .13 1.07(3) 1.05 Dividends declared per share -- -- 10.025(4) .10 .095 - --------------------------------------------------------------------------------------------------------------------------- Weighted average diluted shares 23.1 24.7 24.1 23.3 23.9 =========================================================================================================================== September 26, September 27, September 28, September 30, September 24, (In millions) 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Balance Sheet Data Cash, cash equivalents and marketable securities $ 8.7 $ 26.0 $ 13.3 $ 54.5 $ 71.1 Total assets 219.2 208.6 185.1 234.2 225.7 Long-term debt 167.8 140.7 161.1 -- -- Stockholders' equity (deficiency) (74.9) (59.9) (85.2) 130.4 108.0 =========================================================================================================================== Year ended Year ended Year ended Year ended Year ended September 26, September 27, September 28, September 30, September 24, (In millions) 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Other Financial Data EBITDA (5) $ 95.7 $ 76.1 $ 51.7 $ 60.6 $ 53.0 ===========================================================================================================================
(1) Earnings per common share from continuing operations and earnings per common share -- assuming dilution have been restated for fiscal years 1997-1994 in accordance with SFAS No. 128. (See Note 8 to the consolidated financial statements). (2) Reflects nonrecurring charges of $12.1 million. (See Note 12 to the consolidated financial statements). (3) Reflects a charge for the cumulative effect of an accounting change for postemployment benefits of $1.5 million, net of tax, or $.07 per share. (4) Reflects a special $10 per share dividend declared in January of 1996. (See Note 7 to the consolidated financial statements). (5) Represents income from continuing operations before interest, taxes, depreciation and amortization, and nonrecurring charges in fiscal 1996 ("EBITDA"). Although EBITDA is not a measure of liquidity or performance calculated in accordance with generally accepted accounting principles ("GAAP"), the Company believes that EBITDA is an indicator and measurement of its debt service ability. 22 ADVO, INC. Financial Report This section should be read in conjunction with the Company's Consolidated Financial Statements and the notes thereto. Financial Overview ADVO, Inc. ("ADVO" or the "Company") concluded another year of growth. Fiscal 1998 was highlighted by record revenues, operating income and diluted earnings per common share. Revenues increased 3%, operating income rose 23% and diluted earnings per common share reached $1.55, reflecting growth of 42% over fiscal 1997. Underlying fiscal 1998 results were the growth in average pieces per package and revenue per thousand pieces, which represent key statistics of the Company, strict fixed cost controls, improved branch operating efficiencies and a strong performance from the Company's A.N.N.E. (ADVO National Network Extension) brokered distribution program. Other fiscal 1998 highlights included the acquisition of The Mailhouse, Inc., a cooperative coupon envelope mail company which creates and distributes cost-effective targeted coupons in a distinctive envelope format for local neighborhood merchants via an extended network of franchise owners. Such company was renamed MailCoups, Inc. ("MailCoups") and operates as a subsidiary of ADVO. This acquisition also contributed positively to ADVO's fiscal 1998 results. The Company continued to purchase its common stock under the buyback program announced on September 29, 1997. Initially, the Company purchased 1.9 million shares from Warburg, Pincus Capital Partners, L.P. ("Warburg") (see Note 7 to the consolidated financial statements) and an additional 0.8 million shares throughout fiscal 1998 on the open market. At the end of the current fiscal year, the Company announced a new stock buyback program for the purchase of up to 1.0 million shares throughout fiscal 1999. This new program includes 0.4 million shares remaining from the Company's previous buyback program. Fiscal 1998 Compared to Fiscal 1997 Revenues. Fiscal 1998 revenues increased $30.0 million over fiscal 1997 to $1,046.5 million. The 3.0% revenue growth was driven by an increase in revenue per thousand pieces, the growth in average pieces per package, the volume growth associated with the Company's A.N.N.E. brokered distribution program, as well as the acquisition of MailCoups. The increase in revenue per thousand pieces of 0.7% was attributable to increases in product weights associated with the Company's preprint customers, shifts in product mix and a general price increase initiated early in fiscal 1998. Average pieces per package increased 1.9% to 8.69 in fiscal 1998 from 8.53 in fiscal 1997. Total shared mail packages declined 1.8% to 3.1 billion when compared to the previous fiscal year as a result of the Company's strategic decision to discontinue its "second-in-home date" program in the Detroit market. Operating Expenses. Cost of sales as a percentage of revenue decreased from 74.5% in fiscal 1997 to 73.5% in fiscal 1998. The decrease in cost of sales as a percentage of revenue was the result of efficiencies and cost containment in the Company's branch operations, lower postage expense and the flow through of the price increase mentioned above. Cost of sales, in absolute terms, increased $11.8 million over the prior fiscal year. This increase was attributable to higher brokered print expense, as well as higher distribution and delivery costs incurred as a result of the volume growth in A.N.N.E. and the acquisition of MailCoups. These increases were somewhat offset by lower postage expense as a result of the strategic reduction in shared mail packages. Selling, general and administrative costs, including the provision for bad debts, as a percentage of revenue, decreased from 19.7% for the year ended 1997 to 19.6% for the year ended 1998. Fiscal 1998 selling, general and administrative costs were $205.1 million, representing a $4.6 million increase over the prior year. The increase was comprised of a $9.0 million increase in general and administrative expenses offset by a $3.5 million decrease in selling expense and $.9 million attributable to lower bad debt expense. Fewer sales associates and lower advertising and promotional expenditures, as well as strict cost controls contributed to the decrease in selling expense in the current fiscal year. The general and administrative cost increase of $9.0 million year-over-year was primarily the result of depreciation related to new systems, software development and other technological enhancements, as well as remediation costs associated with the Year 2000 program. Higher compensation related expenses also contributed to the increase in general and administrative expenses. Offsetting these increases, to a degree, were the Company's overall cost control initiatives. Operating Income. As a result of the aforementioned, the Company reported a $13.6 million increase in operating income to $72.1 million in fiscal 1998 compared to $58.5 million in fiscal 1997, representing a 23.3% increase over the prior year. As a percentage of revenue, operating income increased from 5.8% in the fiscal year ended 1997 to 6.9% in the current fiscal year. Interest Expense. Interest expense relating to the credit facilities totaled $14.0 million for fiscal 1998 and $14.8 million for fiscal 1997. The decrease in interest expense was the result of lower interest rates under a renegotiated credit agreement, even though the Company's overall debt balance was higher throughout the current year when compared to the prior year. Income Taxes. The Company's effective tax rate was approximately 39% in both fiscal 1998 and 1997. Earnings Per Common Share. Earnings per common share -- assuming dilution increased 42.2% to $1.55 per share in fiscal 1998 from $1.09 per common share in fiscal 1997 primarily related to the Company's improved operating results. The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("EPS") during the first quarter of fiscal 1998. As such, prior year EPS amounts have been restated to conform to the provisions of the new statement. ADVO, INC. 23 Financial Report Weighted average common and diluted shares decreased from the prior period primarily due to the Company's stock buyback program, including the purchase of approximately 1.9 million shares of its common stock from Warburg during the first quarter of fiscal 1998. Fiscal 1997 Compared to Fiscal 1996 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 period ended September 28, 1996 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, general and administrative costs of the discontinued segment. Continuing Operations Revenues. Fiscal 1997 revenues increased $30.3 million to $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 3.1 billion, 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 ended 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 Common Share. Earnings per common share from continuing operations - -- assuming dilution increased from $.47 in fiscal 1996 to $1.09 in fiscal 1997. Adjusting for the nonrecurring charges in fiscal 1996, earnings per common share from continuing operations -- assuming dilution 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. Financial Position Working Capital. The Company's working capital ratio remained consistent with the prior year at approximately 1.0. Decreases in current assets of $4.8 million were offset by decreases in current liabilities of $4.5 million. The decrease in current assets was caused mainly by a decline in cash and cash equivalents of approximately $17.2 million, offset in part by an increase in accounts receivable of $13.5 million. The change in cash and cash equivalents is attributable to capital spending for equipment, acquisitions, and treasury stock purchases under the Company's 24 ADVO, INC. Financial Report buyback program, offset to a degree by cash provided by operating activities and net borrowings under the Company's credit agreement. The increase in accounts receivable is a result of revenue growth and the timing of customer payments. Revenue growth alone for the last month of the year increased substantially over the prior year and therefore accounted for a large part of the increase in accounts receivable. The change in current liabilities is related to decreases in accounts payable associated with changes in the timing of vendor payments to take advantage of payment term discounts, decreases in accrued compensation and benefits associated with a change in the payment structure to the sales force, and reductions in federal and state taxes payable due to the timing of estimated tax payments. These decreases were offset in part by an increase in the current portion of long-term debt reflective of scheduled debt repayments. Property, Plant and Equipment. Acquisitions of property, plant and equipment totaled $29.3 million for fiscal year 1998. A majority of these purchases were aimed at improving operating performance and efficiencies throughout the Company. The Company continued to transition to new computerized mail sorters, which are more efficient and effective in their targeting capabilities. The Company also continued to upgrade computer hardware throughout the Company to support the requirements of the financial and operational software currently being developed, as well as allow for the implementation of a wide area network. Some of these projects are designed to address the Company's system needs, while simultaneously addressing Year 2000 issues. Of the total fiscal 1998 property, plant and equipment expenditures, approximately $2.2 million relates to the development of a human resource/payroll system, which was accelerated in order to be Year 2000 compliant. The total cost of this system is estimated to be approximately $4.0 million. The Company's fiscal 1999 capital plan estimates expenditures to be approximately $38.0 million. Cash provided by operating activities is the expected source of financing for these capital expenditures, as it was in fiscal 1998. Stockholders' Deficiency. Stockholders' deficiency increased $15.0 million to $74.9 million at September 26, 1998 from $59.9 million at September 27, 1997. The increase in the net deficiency was primarily attributable to the $60.8 million of common stock purchased by the Company, offset by net income of $35.6 million, $8.9 million of employee stock plan activity and related tax benefits, and $1.3 million from the amortization of deferred compensation. The treasury stock purchases of $60.8 million during fiscal 1998 are comprised of $55.2 million related to buyback programs and $5.6 million pursuant to elections by employees to satisfy withholding requirements under the Company's restricted stock and stock option plans. Purchases of common stock for treasury of $55.2 million under the Company's buyback programs include $20.4 million of open market purchases and $34.8 million purchased from Warburg. During the first quarter of fiscal 1998, the Company increased its previously announced stock repurchase program to allow for the purchase of approximately 1.9 million shares of common stock for treasury from Warburg, the Company's largest shareholder at September 27, 1997, for $34.8 million. The Company financed this transaction through available credit commitments under its renegotiated credit agreement. On September 8, 1998, the Company announced a new stock buyback program for up to 1.0 million shares through fiscal 1999. This new program includes approximately 0.4 million shares remaining from the Company's previous buyback program. As of September 26, 1998 there are approximately 0.8 million shares available for purchase under the buyback program. Liquidity. Cash flows generated from operating activities are the Company's primary source of liquidity to fund working capital and investing activities. The Company also has available commitments under its credit agreement which may be used to fund operating activities. Cash flows generated from operating activities decreased by $12.2 million from the prior year. The growth in operating income was more than offset by the year-over-year increase in accounts receivable as a result of revenue growth and timing of customer payments. Also contributing were the decrease in accounts payable due to the decision to take advantage of vendor discounts and the decline in accrued compensation and benefits specifically related to changes in the payment structure of the sales force. Cash provided by operating activities during fiscal 1997 increased by $22.6 million over fiscal 1996. The major factors affecting the increase were; the year-over-year change in accounts receivable and accounts payable due to the timing of customer receipts and payments, and the increase in accrued compensation related to the associate incentive program as a result of improved operating results. Overall cash and cash equivalents decreased $17.2 million from the prior year. This decrease was mainly attributable to cash used in investing and financing activities, offset in part by cash generated from operating activities. The Company's investments included $29.3 million for property, plant and equipment purchases and $10.7 million related to the acquisition of MailCoups. Financing activities of the Company included $60.8 million in treasury stock purchases, which were financed in part by increased net borrowings of $33.2 million under the credit agreement. Financing Arrangements. On September 29, 1997, the Company renegotiated the terms of its credit agreement dated March 4, 1996. The 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 ADVO, INC. 25 Financial Report reducing revolving line of credit, maturing at various dates through September 2003. Available commitments under the Amended Agreement totaled $93.5 million as of September 26, 1998. Subsequent to year end, the Company had additional net borrowings of $12 million through fiscal month end November 1998. 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). Under the current agreement the "applicable margin" ranges from .50% to 1.50% on the LIBOR rate and 0% to .25% on the base rate. Under the previous agreement in effect during fiscal 1997, the applicable margin ranged from 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 fiscal 1998, the Company entered into two separate three-year interest rate swap transaction agreements to hedge notional amounts totaling $100 million. The rate is fixed at approximately 5.7%. The Company believes the interest rate swap transaction agreements limit substantial risk should interest rates fluctuate. The interest rate swap agreements had no material effect on interest expense during fiscal 1998. During fiscal 1996, the Company entered into two separate two-year Interest Rate Collar Agreements to hedge notional amounts totaling $150 million. The cap rates ranged from 7.39% to 8.0% with the floor rate ranging from 5.0% to 5.5%. The interest rate collar agreements had no effect on interest expense in either fiscal 1998 or 1997. The total fiscal 1999 maturities of long-term debt of $16.2 million, as well as future scheduled repayments, are expected to be paid through funds generated from ongoing operations. Market Risk. The Company's interest expense is sensitive to changes in the general level of interest rates. In this regard, changes in interest rates affect the interest paid on its debt. To mitigate the impact of interest rate fluctuations, the Company maintains interest rate swap agreements on notional amounts totaling $100 million, which is currently over 50% of its outstanding debt balance. (See Financing Arrangements.) The Company believes that the interest rate swap agreements limit substantial risk if interest rates should fluctuate. If interest rates should change by 2% in 1999 from those rates in effect at September 26, 1998, assuming no change in the outstanding debt balance and considering the effects of the Company's interest rate swap agreements, the effect on interest expense would be immaterial. These amounts are determined by considering the hypothetical interest rates on the Company's borrowing cost and interest rate swap agreements. This analysis does not consider the effects of actions management would take if interest rates were to fluctuate by such a significant degree. The sensitivity analysis also assumes no changes in the Company's financial structure. Year 2000 Readiness. The Company has been addressing the effect of the Year 2000 issue on computer and production systems. The Year 2000 issue arose because many systems, application software, facilities and equipment were constructed/ written with two, rather than four, digits to identify the appropriate year. On or before January 1, 2000, these systems may incorrectly process critical data or stop processing altogether. State of Readiness At the beginning of 1998, the Company established a Year 2000 program management office comprised of dedicated project managers and key resources from various strategic process areas within the Company. The team's objective has been to coordinate and identify systems, applications, processes and software programs that will be required to be modified or replaced in order for the Company's computer and production systems to function properly with respect to dates in the Year 2000 and thereafter. After the initial assessment, the team identified three areas of compliance which are affected by the Year 2000 issue; information technology ("IT") systems, non-IT systems (such as production facilities and machinery containing embedded systems) and third parties (i.e., vendors, customers and business partners, and other parties that provide services to the Company). The team identified five phases to resolve the Year 2000 issue for the three compliance areas mentioned above: 1) identification of systems, both IT and non-IT, and third parties, 2) assessment and analysis, 3) modification or replacement, 4) testing, and 5) implementation. Phase 1 was completed by February 1998 and the Company is concurrently working on Phases 2,3,4 and 5 for specific sub-categories within the three compliance areas listed above. The Company is currently proceeding on schedule in its overall Year 2000 program and is approximately 40% complete as of November 30, 1998. The remainder of the project has been targeted for staggered completion ending no later than September 1999. The Company will continue to utilize both internal and external resources to complete the Year 2000 modifications and/or replacements. The Company's analysis of IT systems included mainframe and client server applications, the computer desktop (personal computers and desktop software) and the technical architecture and infrastructure (i.e., network, servers, e-mail). All mainframe and client server applications have been assessed and plans have been put in place for the required conversion of those computer programs. Several converted programs have been tested and placed into operation. In addition, the Company is making a concerted effort to update its computer desktops and technical infrastructure by updating non-compliant components. 26 ADVO, INC. Financial Report The Company is proceeding in accordance with its plans to ensure all IT systems are compliant and expects to have sub-categories completed by various dates through September 1999. The Year 2000 issue also affects certain aspects of the Company's facilities and production equipment containing embedded technology. While the Company has largely completed its assessment of these non-IT systems, remediation and testing are scheduled to be completed by various dates through September 1999. As part of the third party relationship assessment, the Company is sending out questionnaires and surveying third parties who were identified in Phase 1 to ensure their products, services and interfaces are in compliance or expected to be in compliance no later than September 1999. The Company is actively pursuing responses from the remainder of those third parties which have not responded or whose responses were deemed unsatisfactory. The Company is developing contingency plans to mitigate exposure resulting from non-compliance of third parties, such as considering the substitution of vendors in the event that a vendor provides an unacceptable response. Costs The Company's total cost of modifying the required systems for Year 2000 compliance is currently estimated from inception in fiscal 1998 through completion in September 1999 to be approximately $12 million and will be expensed as incurred. Of these costs, $3.2 million were incurred during fiscal 1998. These costs have been budgeted and will be funded through the shifting of existing resources through 1999 and by cash provided from operating activities. The process of evaluating the Company's systems, especially those which contain embedded technology, and third party relationships is an ongoing process and, therefore, estimated costs may increase as the project progresses. Costs associated with replacements of systems will be capitalized under the Company's normal capitalization policy. (See discussion under Property, Plant and Equipment). Risks and Contingency Plans The Company's greatest risk for material impact lies in the potential disruption of its service delivery process through the United States Postal Service ("USPS"). Although the USPS has expressed to the Company its intention to be Year 2000 compliant, the failure of the USPS to achieve Year 2000 compliance could have an adverse effect on the operation of the Company's business, financial position, results of operations, and cash flows. Because the number of scenarios is extensive, it is not possible to assess them all; however, the severity of the impact could vary widely. It should be noted that approximately 85% of ADVO's mail bypasses almost all of the USPS' systems and is delivered directly by ADVO to the USPS' local post offices for carrier distribution. Therefore, the Company has somewhat mitigated its risk. In addition, in order to further mitigate any material effects, the Company is continually monitoring the USPS' Year 2000 progress through monthly status meetings, and eventually will include the testing of common interfaces. The Company also relies on print vendors for the printing of certain direct mail products. The Company has sent out letters requiring certification from all print vendors ensuring they are Year 2000 compliant. The failure of all of the Company's print vendors could have a material adverse effect on the Company. Unlike the USPS, the Company will identify alternate sources of suppliers for similar print services through the contingency planning process. Currently, the Company is developing formal contingency plans for non-compliance that could have an adverse effect on the Company's business, financial position and results of operation. These plans will continue to be refined as the Company completes the evaluation, modification and/or replacement of its IT and non-IT systems and as it receives and evaluates information from third parties. The Company currently believes that with timely modifications to existing software and conversions to new software, the Year 2000 issue will not pose significant operational problems for its computer and production systems and will not have a material impact on the Company's consolidated financial position or results of operations. The project is estimated to be completed no later than September 1999. At this point, the Company intends to have its internal application systems, technical infrastructure, building control systems and production equipment and third party relationships/interfaces fully Year 2000 compliant. The implementation, modifications and/or replacements, effectiveness, estimated costs and the date on which the Company believes it will complete the Year 2000 compliance efforts are based on management's best estimates at the present time. These estimates were derived utilizing numerous assumptions of future events including continued availability of certain resources, third party remediation plans, and other factors. However, due to the inherent complexity of the issues, possible unidentified risks and changing environment there can be no guarantee that these estimates will be accurate or achieved and therefore, actual costs and results could materially differ from those estimated. 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 subject to cautionary factors which could cause the Company's actual results to differ materially from those in the forward looking statements. Such factors include but are not limited to: changes in customer demand; the possibility of consolidation throughout the retail sector; 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 efficiencies achieved with technology upgrades; the amount of shares the Company will repurchase in the future under its buyback program; the successful completion and estimated costs of the Year 2000 program; fluctuations in interest rates related to the outstanding debt and other general economic factors. ADVO, INC. 27 Consolidated Statements of Operations
Year ended Year ended Year ended September 26, September 27, September 28, (In thousands, except per share data) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Revenues $1,046,511 $1,016,492 $ 986,162 Costs and expenses: Cost of sales 769,256 757,413 761,506 Selling, general and administrative 200,662 195,196 184,084 Nonrecurring charges -- -- 12,082 Provision for bad debts 4,459 5,374 3,701 - --------------------------------------------------------------------------------------------------------------------------- Operating income 72,134 58,509 24,789 Gain on sale of business line -- -- 2,687 Interest income (1) 949 687 1,285 Interest expense 14,043 14,820 9,669 Other expense 613 660 556 - --------------------------------------------------------------------------------------------------------------------------- Income before income taxes 58,427 43,716 18,536 Provision for income taxes 22,787 16,918 7,229 - --------------------------------------------------------------------------------------------------------------------------- Income from continuing operations 35,640 26,798 11,307 - --------------------------------------------------------------------------------------------------------------------------- Loss on disposal of discontinued operations, net of tax -- -- (8,199) - --------------------------------------------------------------------------------------------------------------------------- Net income $ 35,640 $ 26,798 $ 3,108 =========================================================================================================================== Earnings per common share (2): Earnings from continuing operations $ 1.59 $ 1.10 $ .50 Loss on disposal of discontinued operations, net of tax -- -- (.36) - --------------------------------------------------------------------------------------------------------------------------- Earnings per common share $ 1.59 $ 1.10 $ .14 - --------------------------------------------------------------------------------------------------------------------------- Earnings per common share--assuming dilution (2): Earnings from continuing operations $ 1.55 $ 1.09 $ .47 Loss on disposal of discontinued operations, net of tax -- -- (.34) - --------------------------------------------------------------------------------------------------------------------------- Earnings per common share--assuming dilution $ 1.55 $ 1.09 $ .13 - --------------------------------------------------------------------------------------------------------------------------- Dividends declared per share $ -- $ -- $ 10.025 - --------------------------------------------------------------------------------------------------------------------------- Weighted average common shares 22,427 24,320 22,803 Weighted average diluted shares 23,056 24,688 24,126 ===========================================================================================================================
(1) Includes interest income from related party of $458,000 and $1,219,000 in fiscal 1997 and 1996, respectively. (2) The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("EPS") during the first quarter of fiscal 1998. As such, prior year EPS amounts have been restated to conform to the provisions of the new statement. See accompanying Notes to Consolidated Financial Statements 28 ADVO, INC. Consolidated Balance Sheets
September 26, September 27, (In thousands, except share data) 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents (1) $ 8,724 $ 25,963 Accounts receivable, less allowances of $4,624 in 1998 and $5,160 in 1997 80,140 66,664 Inventories 3,740 4,149 Prepaid expenses and other current assets 4,886 4,759 Deferred income taxes 13,535 14,248 - --------------------------------------------------------------------------------------------------------------------------- Total Current Assets 111,025 115,783 Property, plant and equipment--net 85,790 76,092 Other assets 22,391 16,678 - --------------------------------------------------------------------------------------------------------------------------- Total Assets $ 219,206 $ 208,553 =========================================================================================================================== Liabilities and Stockholders' Deficiency Current liabilities: Current portion of long-term debt $ 16,200 $ 10,125 Accounts payable 37,586 44,644 Accrued compensation and benefits 27,473 29,245 Customer advances 3,892 3,409 Federal and state income taxes payable 5,270 7,080 Accrued other expenses 20,628 21,080 - --------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 111,049 115,583 Long-term debt 167,766 140,666 Deferred income taxes 12,035 9,589 Other liabilities 3,230 2,636 Stockholders' deficiency: Series A Convertible Preferred Stock, $.01 par value (Authorized 5,000,000 shares, none issued) -- -- Common Stock, $.01 par value (Authorized 40,000,000 shares, Issued 29,237,700 in 1998 and 28,428,952 in 1997) 292 284 Additional paid-in capital 173,433 163,317 Accumulated deficit (119,473) (155,113) Less shares of common stock held in treasury at cost, 7,001,271 in 1998 and 4,077,371 in 1997 (129,126) (68,409) - --------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Deficiency (74,874) (59,921) - --------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Deficiency $ 219,206 $ 208,553 ===========================================================================================================================
(1) Includes cash and cash equivalents invested with related party of $11,613,000 at September 27, 1997. See accompanying Notes to Consolidated Financial Statements ADVO, INC. 29 Consolidated Statements of Cash Flows
Year ended Year ended Year ended September 26, September 27, September 28, (In thousands) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Cash flows from continuing operating activities: Net income $ 35,640 $ 26,798 $ 3,108 Less: Loss from discontinued operations -- -- (8,199) - --------------------------------------------------------------------------------------------------------------------------- Income from continuing operations 35,640 26,798 11,307 Adjustments to reconcile net income to net cash flows from continuing operating activities: Cashless option exercises and option repricing -- -- 8,747 Depreciation 21,031 16,150 12,967 Amortization 3,524 2,096 2,203 Deferred income taxes 3,159 4,562 (2,275) Provision for bad debts 4,459 5,374 3,701 Gain on sale of business lines -- -- (2,687) Other 708 528 1 Change in operating assets and liabilities, net of effects of acquisitions: Accounts receivable (16,130) (9,370) (5,280) Inventories 898 3,369 470 Prepaid expenses and other current assets 461 (247) 539 Other assets 1,050 (1,367) 332 Accounts payable (7,973) 6,776 13,401 Accrued compensation and benefits (2,087) 6,353 (2,815) Customer advances 483 (2,551) (4,350) Federal and state income taxes payable 4,262 1,732 4,486 Other liabilities (531) 950 (2,155) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by continuing operating activities 48,954 61,153 38,592 - --------------------------------------------------------------------------------------------------------------------------- Cash flows from continuing investing activities: Proceeds from sale of business lines -- -- 742 Acquisitions, net of cash acquired (10,720) -- -- Expenditures for property, plant and equipment (29,271) (28,615) (17,679) Proceeds from disposals of property and equipment 22 18 10 Available-for-sale securities--purchases -- -- (49,604) Available-for-sale securities--sales and maturities -- -- 80,482 - --------------------------------------------------------------------------------------------------------------------------- Net cash (used) provided by continuing investing activities (39,969) (28,597) 13,951 - --------------------------------------------------------------------------------------------------------------------------- Cash flows from continuing financing activities: Proceeds from long-term borrowings--term loans -- -- 155,000 Payments on long-term borrowings--term loans (12,525) (17,559) (1,650) Revolving line of credit--net 45,700 -- 15,000 Payment of debt issue costs (1,349) -- (5,458) Proceeds from exercise of warrants -- -- 7,200 Proceeds from exercise of stock options 2,757 2,323 2,473 Purchases of common stock for treasury (60,807) (4,660) (741) Cash dividends paid -- -- (240,561) - --------------------------------------------------------------------------------------------------------------------------- Net cash used by continuing financing activities (26,224) (19,896) (68,737) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by discontinued operations -- -- 5,648 - --------------------------------------------------------------------------------------------------------------------------- (Decrease) increase in cash and cash equivalents (17,239) 12,660 (10,546) - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 25,963 13,303 23,849 - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 8,724 $ 25,963 $ 13,303 ===========================================================================================================================
See accompanying Notes to Consolidated Financial Statements 30 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 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) Purchase of common stock for treasury (2,928) (60,807) (60,807) Cancellation of restricted stock (4) -- Grants of restricted stock 72 1 4 90 (4) 87 Exercise of stock options 741 7 2,750 2,757 Tax effect-- employee stock plans 6,074 6,074 Amortization of deferred compensation (1) 1,296 1,296 Net Income 35,640 35,640 - --------------------------------------------------------------------------------------------------------------------------- Balance-- September 26, 1998 29,238 $292 (7,001) $(129,126) $173,433 $ 0 $ (119,473) $ (74,874) ===========================================================================================================================
(1) Unamortized deferred compensation at September 26, 1998, September 27, 1997, and September 28, 1996 was $940,000, $780,000, and $140,000, respectively. See accompanying Notes to Consolidated Financial Statements ADVO, INC. 31 Notes to Consolidated Financial Statements Note 1 Summary of Accounting Policies Organization. ADVO, Inc. ("ADVO" or the "Company") is a direct mail 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 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 1997 and 1996 financial statements to conform with the fiscal 1998 presentation. ADVO's fiscal closing date is the last Saturday in September. 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 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. Interest Rate Swaps. The Company enters into interest rate swap agreements to modify the interest characteristics of a portion of its outstanding debt. These agreements involve the exchange of amounts based on the London Interbank Offered Rate ("LIBOR") for amounts based on a fixed interest rate over the life of the agreement, without an exchange of the notional amount upon which the payments are based. The differential to be paid or received as interest rates change is accrued and recognized as an adjustment of interest expense. The related amount payable or receivable from counter parties is included in accrued other expenses. The fair value of these agreements is not recognized in the financial statements. 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. In 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" ("EPS"). Statement No. 128 replaced the previously reported primary and fully diluted earnings per share with earnings per common share (basic) and earnings per common share -- assuming dilution (diluted). Earnings per common share exclude common stock equivalents, such as stock options, and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Earnings per common share -- assuming dilution reflects the potential dilution that could occur if common stock equivalents, such as stock options, were exercised. As required, the Statement was adopted in fiscal 1998 and, where appropriate, proper periods have been restated to conform to the related provisions. 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. 32 ADVO, INC. Notes to Consolidated Financial Statements Note 2 Acquisitions On February 27, 1998 the Company acquired The Mailhouse, Inc., a cooperative coupon envelope mail company for approximately $10.7 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 of all acquisitions over the estimated fair values of all net assets acquired of $10.8 million and $4.5 million, net of accumulated amortization, is reflected in other assets at September 26, 1998 and September 27, 1997, respectively. Also included in other assets at September 26, 1998 and September 27, 1997 is $2.4 million and $2.8 million, respectively, of other intangible assets, net of accumulated amortization, which were acquired in the acquisitions. As of September 26, 1998 and September 27, 1997, accumulated amortization of goodwill and other intangibles was $9.1 million and $7.8 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 sale 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 fiscal 1996 consolidated statement of operations include revenues of $19.3 million, losses to disposal date of $13.8 million and a related income tax benefit of $5.6 million. Note 4 Property, Plant and Equipment Balances of major classes of property, plant and equipment and accumulated depreciation and amortization are as follows:
September 26, September 27, (In thousands) 1998 1997 - -------------------------------------------------------------------------------- Land, buildings and building improvements $ 8,733 $ 8,083 Leasehold improvements 13,209 11,867 Machinery and equipment 81,018 71,844 Furniture and fixtures 15,984 17,719 Computer hardware 31,878 33,145 Computer software and software development costs 38,416 24,333 - ------------------------------------------------------------------------------- Total $189,238 $166,991 Less accumulated depreciation and amortization 103,448 90,899 - ------------------------------------------------------------------------------- Property, plant and equipment-net $ 85,790 $ 76,092 - -------------------------------------------------------------------------------
Note 5 Accrued Compensation and Benefits The composition of accrued compensation and benefits is as follows:
September 26, September 27, (In thousands) 1998 1997 - -------------------------------------------------------------------------------- Employee compensation $14,874 $18,316 Workers' compensation 6,263 5,638 Employee withholdings and other benefits 6,336 5,291 - ------------------------------------------------------------------------------- Total $27,473 $29,245 - --------------------------------------------------------------------------------
Note 6 Financing Arrangements The Company has credit facilities consisting of a $135 million term loan and a $165 million reducing revolving line of credit, 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 2003 through September 2003. Mandatory repayments of debt in defined amounts are required in the event of certain events including the sale of certain assets. The Company and its subsidiaries have pledged all of their assets as collateral under the credit agreement. The debt bears interest at either the 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). Under the current agreement the ADVO, INC. 33 Notes to Consolidated Financial Statements "applicable margin" ranges from .50% to 1.50% of the LIBOR rate and 0% to .25% on the base rate. Under a previous agreement in effect during fiscal 1997, the applicable margin ranged from 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 outstanding facilities' balance and related interest rates inclusive of applicable margins are as follows :
LIBOR Base Rate Total September 26, 1998 Interest Interest Outstanding (In thousands) 6.32% 8.50% Facilities - -------------------------------------------------------------------------------- Term loan $120,000 $ 2,475 $122,475 Revolving line of credit 50,791 10,700 61,491 - -------------------------------------------------------------------------------- $170,791 $ 13,175 183,966 Less: Current portion of long-term debt 16,200 - -------------------------------------------------------------------------------- $167,766 - --------------------------------------------------------------------------------
LIBOR Base Rate Total September 27, 1997 Interest Interest Outstanding (In thousands) 7.21% 8.71% Facilities - -------------------------------------------------------------------------------- Term loans $ 52,165 $ 83,626 $135,791 Revolving line of credit 15,000 15,000 - -------------------------------------------------------------------------------- $ 67,165 $ 83,626 150,791 Less: Current portion of long-term debt 10,125 - -------------------------------------------------------------------------------- $140,666 - --------------------------------------------------------------------------------
The Company is required to maintain certain financial ratios under the facilities. In addition, the facilities also place restrictions on disposal of assets, mergers and acquisitions, dividend payments, investments and additional debt. In connection with the facilities, 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 fiscal 1998, the Company entered into two separate three-year interest rate swap transaction agreements to hedge notional amounts totaling $100 million. The rate is fixed at approximately 5.7%. The Company believes the interest rate swap transaction agreements limit substantial risk should interest rates fluctuate. The interest rate swap agreements had no material effect on interest expense in fiscal 1998. During fiscal 1996, the Company entered into two separate two-year Interest Rate Collar Agreements to hedge notional amounts totaling $150 million. The cap rates ranged from 7.39% to 8.0% with the floor rate ranging from 5.0% to 5.5%. The interest rate collar agreements had no effect on interest expense in either fiscal 1998 or 1997. The Company pays fees on the unused commitments under the facilities at a rate ranging from .175% to .375% depending on the Company's total leverage ratio, as defined. As of September 26, 1998, $93.5 million of the revolver was available for future borrowings. Total maturities of long-term debt which are due over the next five fiscal years at September 26, 1998 are as follows :
(In thousands) - -------------------------------------------------------------------------------- 1999 $ 16,200 2000 20,250 2001 22,950 2002 27,002 2003 97,564 - -------------------------------------------------------------------------------- Total maturities $183,966 - --------------------------------------------------------------------------------
The revolving line of credit has been classified as long-term since management has the intent and ability to maintain the September 26, 1998 outstanding balance throughout fiscal 1999. The Company capitalized debt issue costs directly associated with the issuance of the debt of $5.5 million under a previous agreement in fiscal 1996 and $1.3 million for fiscal 1998 under the renegotiated agreement. These costs are included in other assets and are being amortized over the term of the debt agreement. At September 26, 1998 and September 27, 1997, unamortized costs totaled $4.8 million and $4.4 million, respectively. The Company has outstanding letters of credit of approximately $6.3 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 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. 34 ADVO, INC. Notes to Consolidated Financial Statements 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.) In fiscal 1997 the Company announced a stock buyback program to purchase up to 2.0 million shares of the Company's common stock. During fiscal 1998 the Company increased its stock buyback program authorization to 3.8 million shares under two separate announcements. In connection with the increased authorization, the Company purchased 1.9 million shares of its common stock from Warburg for $34.8 million. In fiscal 1998 and 1997, the Company purchased 2.7 million shares for $55.2 million and 0.2 million shares for $3.4 million, respectively, in connection with the buyback programs. As of September 26, 1998, there were 0.8 million shares remaining to be purchased. At September 26, 1998 there are 1.8 million shares of common stock reserved for issuance upon the exercise of stock options. Note 8 Earnings Per Common Share The following table sets forth the computation of earnings per common share and earnings per common share -- assuming dilution:
Year ended Year ended Year ended (In thousands, September 26, September 27, September 28, except per share data) 1998 1997 1996 - ---------------------------------------------------------------------------- Net Income $35,640 $26,798 $ 3,108 Weighted average common shares 22,427 24,320 22,803 Effect of dilutive securities: Stock options 598 357 462 Warrants -- -- 844 Restricted stock 31 11 17 - ---------------------------------------------------------------------------- Dilutive potential common shares 629 368 1,323 Weighted average diluted shares 23,056 24,688 24,126 - ---------------------------------------------------------------------------- Earnings per common share $ 1.59 $ 1.10 $ .14 - ---------------------------------------------------------------------------- Earnings per common share -- assuming dilution $ 1.55 $ 1.09 $ .13 - ----------------------------------------------------------------------------
Note 9 Gain on Sale of Business Line Midcoast Press, the Company's commercial web offset printer, was sold during 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 pre-tax gain of $2.7 million ($1.7 million after tax or $.07 per share) in conjunction with the sale in fiscal 1996. 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 $3.7 million, $3.4 million, and $3.7 million for fiscal 1998, 1997, and 1996, respectively. Note 11 Stock Compensation Plans As of September 26, 1998 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"). All the plans are detailed below. 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", 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 1998, 1997, and 1996: ADVO, INC. 35 Notes to Consolidated Financial Statements
September 26, September 27, September 28, 1998 1997 1996 - -------------------------------------------------------------------------------- Risk free rate of interest 5.8% 5.5% 5.8% Dividend yield 0.0% 0.0% 0.0% Volatility factor 36% 32% 36% Expected life of option (years) 4.4 4.3 4.9 - --------------------------------------------------------------------------------
The weighted average fair value of options granted was $8.47 in 1998 and $4.61 for both 1997 and 1996.
Year ended Year ended Year ended (In thousands, except September 26, September 27, September 28, per share data) 1998 1997 1996 - -------------------------------------------------------------------------------- Pro forma net income $ 33,326 $ 25,386 $ 2,802 Pro forma earnings per share --assuming dilution $ 1.46 $ 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, 1997 and 1998. 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 Plan. 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 5,825,000 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. The Company's common stock reached this level during the first quarter of fiscal 1998. These plans contain a reload option feature which 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 in fiscal 1996 (see Note 7), the Company made equitable adjustments to outstanding options. As a result, 2.1 million options were repriced. The repriced options 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 26, 1998 and September 27, 1997 there were 0.7 million and 0.6 million options available for future grant under the fixed stock option plans, respectively. Information with respect to the Company's fixed stock option plans is summarized below:
Weighted Average Shares Exercise Price - -------------------------------------------------------------------------------- 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 Granted 960,247 23.077 Cancelled (251,599) 12.217 Exercised (1,127,958) 11.594 - -------------------------------------------------------------------------------- Outstanding at September 26, 1998 1,841,128 $ 17.816 - --------------------------------------------------------------------------------
Options Outstanding
Weighted Average Outstanding as of Remaining Weighted Average Range of Exercise Prices September 26, 1998 Contractual Life Exercise Price - -------------------------------------------------------------------------------- $ 6.375 - $ 8.625 180,723 4.4 $ 7.978 9.100 - 12.250 343,262 6.4 11.891 12.625 - 18.500 421,726 8.1 15.164 18.625 - 21.500 444,100 9.1 21.253 22.500 - 24.875 240,352 5.5 22.833 27.063 - 29.875 210,965 7.8 28.232 - -------------------------------------------------------------------------------- 1,841,128 7.3 $ 17.816 - --------------------------------------------------------------------------------
Options Exercisable
Exercisable as of Weighted Average Range of Exercise Prices September 26, 1998 Exercise Price - -------------------------------------------------------------------------------- $ 6.375 - $ 8.625 115,596 $ 8.022 9.100 - 12.250 116,512 11.723 12.625 - 18.500 81,801 15.779 18.625 - 21.500 9,500 18.724 22.500 - 24.875 -- -- 27.063 - 29.875 -- -- - -------------------------------------------------------------------------------- 323,409 $11.632 - --------------------------------------------------------------------------------
36 ADVO, INC. Notes to Consolidated Financial Statements Nonvested Stock Plans. The 1986 Employee Restricted Stock Plan and 1990 Non-Employee Directors' Restricted Stock Plan provide for the granting of up to 2,692,500 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 the grant. The compensation cost charged against income over the restriction period was $1.3 million, $.3 million, and $.6 million for the years ended September 26, 1998, September 27, 1997 and September 28, 1996, respectively. Unamortized deferred compensation was $.9 million at September 26, 1998. There are 0.2 million shares available for future grant under these plans at September 26, 1998. The weighted average grant price of shares granted during fiscal 1998 and fiscal 1997 was $21.049 and $18.431, 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 was distributed when the restricted shares vested. Information with respect to the Company's nonvested stock plans are summarized below:
Shares - -------------------------------------------------------------------------------- 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 Granted 72,000 Cancelled (4,000) - -------------------------------------------------------------------------------- Outstanding at September 26, 1998 2,516,912 - --------------------------------------------------------------------------------
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 fiscal 1996 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. All significant elements of the Company's plan of restructure were completed by the end of its fiscal 1997 year. For fiscal 1997 and 1996, $1.6 million, and $7.3 million, respectively, was charged to the restructuring accrual for cash payments related to severance costs and other termination based arrangements for exited activities and the centralization of operations. For fiscal 1997 and 1996, $.1 million and $.6 million, respectively, was charged for cash payments related to facility closure and downsizing costs. For the three year period ended 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. 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 26, September 27, September 28, (In thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- Federal: Current $17,527 $10,660 $ 5,494 Deferred 2,792 3,844 505 - -------------------------------------------------------------------------------- Total Federal 20,319 14,504 5,999 - -------------------------------------------------------------------------------- State: Current 2,101 1,696 742 Deferred 367 718 488 - -------------------------------------------------------------------------------- Total State 2,468 2,414 1,230 - -------------------------------------------------------------------------------- Total Provision $22,787 $16,918 $ 7,229 - --------------------------------------------------------------------------------
ADVO, INC. 37 Notes to Consolidated Financial Statements 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 26, September 27, September 28, 1998 1997 1996 - -------------------------------------------------------------------------------- Federal statutory rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 2.7 3.6 4.3 Other 1.3 .1 (.3) - -------------------------------------------------------------------------------- Effective income tax rate 39.0% 38.7% 39.0% - --------------------------------------------------------------------------------
Significant components of the Company's deferred tax assets and liabilities are as follows:
September 26, September 27, (In thousands) 1998 1997 - -------------------------------------------------------------------------------- Deferred tax assets: Deferred compensation $ 6,138 $ 5,455 Employee benefits 4,612 4,123 Other 3,782 5,567 - -------------------------------------------------------------------------------- Total deferred tax assets 14,532 15,145 - -------------------------------------------------------------------------------- Deferred tax liabilities: Property, plant and equipment (13,032) (10,486) - -------------------------------------------------------------------------------- Net federal and state deferred assets $ 1,500 $ 4,659 - --------------------------------------------------------------------------------
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 26, 1998 under long term noncancellable operating leases are as follows:
(In thousands) - ------------------------------------------------------------------------------- Fiscal year: 1999 $12,221 2000 9,476 2001 7,529 2002 5,787 2003 4,265 Thereafter 5,517 - ------------------------------------------------------------------------------- Total minimum lease payments $44,795 - -------------------------------------------------------------------------------
Certain of these leases contain renewal options and certain leases also provide for cost escalation payments. Rental expense for the years ended September 26, 1998, September 27, 1997 and September 28, 1996 was approximately $16.7 million, $17.1 million and $20.6 million, respectively. During fiscal 1996, the Company entered into a ten-year agreement with Integrated System Solutions Corporation (d/b/a ISSC) now known as International Business Machines Corporation ("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 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 1998 and 1997 totaled approximately $.6 million and $.3 million, respectively. Future commitments for the noncancellable portion of the agreement, excluding termination fees and the cost of living adjustments total $10.7 million for fiscal year 1999. In addition, the Company may receive additional credits or charges if the Company does not meet or exceeds certain baseline utilization assumptions. During fiscal 1998, the Company entered into a five-year agreement with IBM to provide a customer service support center for the Company. The contract allows for cancellation after the completion of the third year, subject to termination charges of $.6 million in year four and $.4 million in year five. The annual service charges for the noncancellable portion of the agreement total $3.6 million, $3.6 million, and $1.8 million, respectively, for fiscal years 1999, 2000, and 2001. The agreement also provides for the Company to pay a cost of living adjustment due to inflation beginning in fiscal year 1999. In addition, the Company may receive additional credits or charges if the Company does not meet or exceeds certain baseline utilization assumptions as well as, if IBM does not meet or exceeds certain service level standards. ADVO is party to various legal proceedings and claims related to its normal business operations, including several suits in which it is a defendant. In the opinion of management, the Company has substantial and meritorious defenses for these claims and proceedings in which it is a defendant, and believes these matters will be ultimately resolved without material adverse effect on the consolidated financial position, results of operations or liquidity of the Company. 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 who was the Company's largest shareholder, and considered a related party at September 27, 1997, owns a majority interest in Counsellors. 38 ADVO, INC. Notes to Consolidated Financial Statements Warburg ceased being a related party upon the Company's purchase of 1.9 million shares of its common stock from Warburg. Income earned on investments managed by Counsellors was $.5 million and $1.2 million in fiscal 1997 and 1996, respectively. At September 27, 1997, $11.6 million was being managed by Counsellors. Two Directors of the Company are officers of Warburg and another Director is a Director of the various Counsellors managed mutual funds. Note 17 Supplemental Cash Flow Information Cash paid for income taxes was $16.0 million, $11.0 million and $3.2 million in fiscal 1998, 1997 and 1996, respectively. Cash paid for interest expense in fiscal 1998, 1997 and 1996 was $13.6 million, $14.4 million and $7.2 million, respectively. Excluded from continuing investing activities was the effect of a certain noncash activity in which the Company received a note for $3.5 million in conjunction with the sale of a business line in fiscal 1996. (See Note 9.) Note 18 Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued SFAS 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 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. In June 1997, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes the accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires recognition of all derivatives as either assets or liabilities measured at the fair value. Depending on the intended use of the derivative, changes in fair value will be reported in the period of change as either a component of earnings or a component of other comprehensive income. The Company has not quantified the impact of adoption on its financial statements. The Company will adopt this statement in the first quarter of fiscal 2000. Note 19 Quarterly Financial Data (Unaudited) (In millions, except per share data)
Fiscal year ended First Second Third Fourth September 26, 1998 Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------- Revenues $ 262.1 $ 253.2 $ 269.0 $ 262.2 Gross profit 67.2 63.9 74.9 71.2 Operating income 17.2 12.5 23.2 19.2 Net income 8.4 5.4 12.1 9.7 Earnings per common share .37 .24 .54 .43 Earnings per common share --assuming dilution .36 .24 .52 .42 Common stock price High 23 5/8 26 13/16 30 15/16 33 5/8 Low 17 3/4 19 24 11/16 22 1/4 - -------------------------------------------------------------------------------- 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 common share (1) .26 .11 .39 .35 Earnings per common share --assuming dilution (1) .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 - --------------------------------------------------------------------------------
(1) Reflects restated earnings per share in accordance with SFAS No. 128. (See Note 8.) ADVO, INC. 39 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 26, 1998 and September 27, 1997, 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 26, 1998. 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 26, 1998 and September 27, 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 26, 1998 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Hartford, Connecticut October 20, 1998 Report of Financial Responsibility To the Stockholders of ADVO, Inc. The management of ADVO, Inc. is responsible for the integrity and objectivity of the consolidated financial statements and other financial information presented in this report. These statements have been prepared in accordance with generally accepted accounting principles and necessarily include amounts based on judgements and estimates by management. ADVO maintains internal accounting control policies and related procedures designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management's authorization and properly recorded, and that accounting records may be relied upon for the preparation of reliable published annual and interim financial statements and other financial information. The design, monitoring, and revision of internal accounting control systems involve, among other things, management's judgement with respect to the relative cost and expected benefits of specific control measures. The Company also maintains an internal auditing function which evaluates and reports on the adequacy and effectiveness of internal accounting controls and policies and procedures. The Company's consolidated financial statements have been audited by independent auditors who have expressed their opinion with respect to the fairness of these statements. The Audit Committee of the Board of Directors, composed solely of outside directors, meets periodically with ADVO's management, internal auditors and independent auditors to review matters relating to the quality of financial reporting and internal accounting controls. Both the internal auditors and the independent auditors have unrestricted access to the Committee. /s/ Robert Kamerschen Robert Kamerschen Chairman and Chief Executive Officer /s/ Donald E. McCombs Donald E. McCombs Senior Vice President and Chief Financial Officer /s/ Julie A. Abraham Julie A. Abraham Vice President and Controller October 20, 1998 40 ADVO, INC. EX-21 10 SUBSIDIARIES OF ADVO EXHIBIT 21 SUBSIDIARIES OF ADVO, INC. AS OF SEPTEMBER 26, 1998
PERCENT OF VOTING STATE OF SECURITIES OWNED AS INCORPORATION NAME OF SUBSIDIARY OF SEPTEMBER 26, 1998 - ------------- ------------------ --------------------- 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) Delaware MailCoups, Inc. 100
- -------- (1)Owned by ADVO Investment Company, Inc. EX-23 11 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 20, 1998, included in the 1998 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 the Dividend Reinvestment, (Post-Effective Amendment No. 5 to the ADVO Form S-8 No. 333-49987) 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 20, 1998, 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 14, 1998 EX-27 12 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ADVO, INC'S FORM 10-K FOR THE YEAR ENDED SEPTEMBER 26, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS SEP-26-1998 SEP-28-1997 SEP-26-1998 8,724 0 84,764 4,624 3,740 111,025 189,238 103,448 219,206 111,049 167,766 0 0 292 (75,166) 219,206 0 1,046,511 0 769,256 0 4,459 14,043 58,427 22,787 0 0 0 0 35,640 $1.59 $1.55 THE EPS - PRIMARY TAG REPRESENTS BASIC EPS UNDER SFAS 128. THE EPS-DILUTED TAG REPRESENTS DILUTED EPS UNDER SFAS 128.
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