-----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, KWGVS6+V+OYbgRsmlqiQ+wGyjN19lpPBgVbXec9NzP7OibQiyXEvam5LdYUetHYY F4n8kaUj+9WnWSQVBOw5+g== 0000950131-98-005959.txt : 19981113 0000950131-98-005959.hdr.sgml : 19981113 ACCESSION NUMBER: 0000950131-98-005959 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DONNELLEY R R & SONS CO CENTRAL INDEX KEY: 0000029669 STANDARD INDUSTRIAL CLASSIFICATION: COMMERCIAL PRINTING [2750] IRS NUMBER: 361004130 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04694 FILM NUMBER: 98744921 BUSINESS ADDRESS: STREET 1: 77 W WACKER DR CITY: CHICAGO STATE: IL ZIP: 60601 BUSINESS PHONE: 3123268000 MAIL ADDRESS: STREET 1: 77 W WACKER DRIVE CITY: CHICAGO STATE: IL ZIP: 60601 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM 10-Q ----------- (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-4694 R. R. DONNELLEY & SONS COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 36-1004130 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 77 WEST WACKER DRIVE, CHICAGO, ILLINOIS 60601 (ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE) OFFICES) REGISTRANT'S TELEPHONE NUMBER (312) 326-8000 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 the filing requirements for the past 90 days. X Yes------- No ------- NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF OCTOBER 31, 1998 135,807,414 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
PAGE INDEX NUMBER(S) ----- --------- Condensed Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 1998 and 1997........ 3 Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 1998 and December 31, 1997....................... 4 Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 1998 and 1997.............. 5 Notes to Condensed Consolidated Financial Statements (Unaudited).................................................... 6-8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Comparison of Third Quarter and First Nine Months 1998 to 1997.. 9-11 Changes in Financial Condition.................................. 11-12 Other Information............................................... 12-14 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK... 14 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS............................................ 15 ITEM 5. OTHER INFORMATION............................................ 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................. 15
2 R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES ---------------- CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------------- ---------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Net sales..................... $1,274,479 $1,221,743 $3,604,040 $3,479,702 Cost of sales................. 980,459 961,214 2,851,213 2,817,233 ---------- ---------- ---------- ---------- Gross profit.................. 294,020 260,529 752,827 662,469 Selling and administrative expenses..................... 145,776 126,275 419,425 376,207 ---------- ---------- ---------- ---------- Earnings from operations...... 148,244 134,254 333,402 286,262 Other income (expense): Interest expense............ (19,400) (22,079) (59,036) (67,262) Gain on sale of Metromail shares..................... -- -- 145,656 -- Gain on sale of DESI shares ........................... 23,247 -- 23,247 -- Other income--net........... 2,078 4,356 3,960 18,686 ---------- ---------- ---------- ---------- Earnings before income taxes.. 154,169 116,531 447,229 237,686 Provision for income taxes.... 54,926 35,226 164,975 76,345 ---------- ---------- ---------- ---------- Income from continuing operations................... 99,243 81,305 282,254 161,341 Loss from discontinued operations................... -- (9,148) (80,067) (22,168) ---------- ---------- ---------- ---------- Net income.................... $ 99,243 $ 72,157 $ 202,187 $ 139,173 ========== ========== ========== ========== Income from continuing operations per share of common stock: Basic....................... $ 0.72 $ 0.56 $ 2.00 $ 1.10 Diluted..................... $ 0.71 $ 0.55 $ 1.97 $ 1.09 Loss from discontinued operations per share of common stock: Basic....................... $ -- $ (0.06) $ (0.57) $ (0.15) Diluted..................... $ -- $ (0.06) $ (0.56) $ (0.15) Net income per share of common stock: Basic....................... $ 0.72 $ 0.50 $ 1.43 $ 0.95 Diluted..................... $ 0.71 $ 0.49 $ 1.41 $ 0.94 Cash dividends per basic share........................ $ 0.21 $ 0.20 $ 0.62 $ 0.58 Average basic shares outstanding.................. 138,075 146,192 140,982 146,086 Average diluted shares outstanding.................. 140,247 148,507 143,212 147,719
See accompanying Notes to Condensed Consolidated Financial Statements. 3 R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES ------------ CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 (THOUSANDS OF DOLLARS) ASSETS
1998 1997 ---------- ---------- Cash and equivalents................................... $ 86,172 $ 47,814 Receivables, less allowance for doubtful accounts of $20,366 and $16,259 at September 30, 1998 and December 31, 1997, respectively................................ 868,092 814,664 Inventories............................................ 208,540 201,402 Prepaid expenses....................................... 70,729 82,691 ---------- ---------- Total current assets................................. 1,233,533 1,146,571 ---------- ---------- Property, plant and equipment, at cost................. 4,313,963 4,214,765 Accumulated depreciation............................... 2,613,683 2,426,649 ---------- ---------- Net property, plant and equipment.................... 1,700,280 1,788,116 Goodwill and other intangibles--net.................... 368,503 385,512 Other noncurrent assets................................ 512,602 659,260 Net assets of discontinued operations.................. 45,472 154,707 ---------- ---------- Total assets......................................... $3,860,390 $4,134,166 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable....................................... $ 299,554 $ 291,666 Accrued compensation................................... 184,232 152,235 Short-term debt........................................ 45,000 45,000 Current and deferred income taxes...................... 94,233 58,888 Other accrued liabilities.............................. 285,903 264,833 ---------- ---------- Total current liabilities............................ 908,922 812,622 ---------- ---------- Long-term debt......................................... 1,086,239 1,153,226 Deferred income taxes.................................. 239,768 229,538 Other noncurrent liabilities........................... 337,262 347,283 Shareholders' equity: Common stock, at stated value ($1.25 par value)...... 320,962 320,962 Retained earnings, net of cumulative translation adjustments of $52,645 and $45,782 at September 30, 1998 and December 31, 1997, respectively............ 1,555,506 1,482,624 Unearned compensation................................ (7,183) (9,414) Reacquired common stock, at cost..................... (581,086) (202,675) ---------- ---------- Total shareholders' equity....................... 1,288,199 1,591,497 ---------- ---------- Total liabilities and shareholders' equity....... $3,860,390 $4,134,166 ========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements. 4 R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES ------------ CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30 (THOUSANDS OF DOLLARS)
1998 1997 --------- --------- Cash flows provided by (used for) operating activities: Net income............................................. $ 202,187 $ 139,173 Loss from discontinued operations...................... 80,067 22,168 Gain on sale of Metromail shares, net of tax........... (87,394) -- Gain on sale of DESI shares, net of tax................ (13,948) -- Depreciation........................................... 239,334 242,588 Amortization........................................... 35,683 31,563 Gain on sale of assets................................. (7,855) (15,990) Net change in operating working capital................ (17,540) 89,995 Net change in other assets and liabilities............. 38,791 (4,838) Other.................................................. (7,807) (2,595) --------- --------- Net cash provided by operating activities................ 461,518 502,064 --------- --------- Cash flows provided by (used for) investing activities: Capital expenditures................................... (159,083) (284,959) Other investments...................................... (49,994) (35,171) Dispositions of assets................................. 15,657 34,230 Disposition of Metromail shares, net of tax............ 238,438 -- Disposition of DESI shares, net of tax................. 35,641 -- --------- --------- Net cash provided by (used for) investing activities..... 80,659 (285,900) --------- --------- Cash flows provided by (used for) financing activities: Net decrease in borrowings............................. (66,987) (98,278) Disposition of reacquired common stock................. 64,324 36,275 Acquisition of common stock............................ (443,674) (50,615) Cash dividends on common stock......................... (86,477) (85,871) --------- --------- Net cash used for financing activities................... (532,814) (198,489) --------- --------- Effect of exchange rate changes on cash and equivalents.. (174) (239) --------- --------- Net increase in cash and equivalents from continuing operations.............................................. 9,189 17,436 Net increase in cash from discontinued operations........ 29,169 8,870 Cash and equivalents at beginning of period.............. 47,814 21,317 --------- --------- Cash and equivalents at end of period.................... $ 86,172 $ 47,623 ========= =========
See accompanying Notes to Condensed Consolidated Financial Statements. 5 R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES ------------ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1. The condensed consolidated financial statements included herein are unaudited (although the balance sheet at Dec. 31, 1997, is condensed from the audited balance sheet at that date) and have been prepared by the company to conform with the requirements applicable to this quarterly report on Form 10- Q. Certain information and disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been omitted as permitted by such requirements. However, the company believes that the disclosures made are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in the company's 1997 annual report on Form 10-K. The condensed consolidated financial statements included herein reflect, in the opinion of the company, all adjustments (which include only normal, recurring adjustments) necessary to present fairly the financial information for such periods. Certain prior year amounts have been reclassified to maintain comparability with current year classifications and to reflect the reclassification of operations discontinued in 1997. Note 2. Components of the company's inventories at Sept. 30, 1998, and Dec. 31, 1997, were as follows:
(THOUSANDS OF DOLLARS) ------------------ 1998 1997 -------- -------- Raw materials and manufacturing supplies.................... $128,731 $123,280 Work in process............................................. 212,839 153,142 Finished goods.............................................. 918 1,047 Progress billings........................................... (88,070) (31,715) LIFO reserve................................................ (45,878) (44,352) -------- -------- Total inventories....................................... $208,540 $201,402 ======== ======== Note 3. The following provides supplemental cash flow information: (THOUSANDS OF DOLLARS) ------------------ NINE MONTHS ENDED SEPTEMBER 30 ------------------ 1998 1997 -------- -------- Interest paid, net of capitalized interest.................. $ 44,200 $ 51,000 Income taxes paid........................................... $128,437 $ 46,233
The increase in income taxes paid in the nine months ended 1998, primarily reflects the payment of taxes resulting from the transactions described in Notes 6 and 7 below. Note 4. On Nov. 25, 1996, a purported class action was brought against the company in federal district court in Chicago, Ill., on behalf of all current and former African-American employees, alleging that the company racially discriminated against them in violation of the Civil Rights Act of 1871, as amended, and the U.S. Constitution (Jones, et al. v. R.R. Donnelley & Sons Co.). The complaint seeks declaratory and injunctive relief, and asks for actual, compensatory, consequential and punitive damages in an amount not less than $500 million. Although plaintiffs seek nationwide class certification, most of the specific factual assertions of the complaint relate to the closing by the company of its Chicago catalog production operations in 1993. Other general claims relate to other company locations. The company has filed a motion for partial summary judgment as to all claims relating to its Chicago catalog operations on the grounds that those claims are untimely, and plaintiffs have filed a motion for class certification. Both motions are pending. 6 R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) On Dec. 18, 1995, a class action was filed against the company in federal district court in Chicago alleging that older workers were discriminated against in selection for termination upon the closing of the Chicago catalog operations (Gerlib, et al. v. R.R. Donnelley & Sons Co.). The suit also alleges that the company violated the Employee Retirement Income Security Act (ERISA) in determining benefits payable to retiring or terminated employees. On Oct. 8, 1996, plaintiffs filed a motion to maintain the ERISA claims as a class action on behalf of all company retirement plan participants who were eligible for early retirement benefits at the time of their termination. On Aug. 14, 1997, the court denied plaintiffs' motion and certified classes in both the age discrimination and ERISA claims limited to former employees of the Chicago catalog operations. On June 30, 1998, a purported class action was filed against the company in federal district court in Chicago on behalf of current and former African- American employees, alleging that the company racially discriminated against them in violation of Title VII of the Civil Rights Act of 1964 (Adams, et al. v. R.R. Donnelley & Sons Co.). While making many of the same general discrimination claims contained in the Jones complaint, the Adams plaintiffs also claim retaliation by the company for the filing of discrimination charges or otherwise complaining of race discrimination. The complaint seeks the same relief and damages as sought in the Jones case. Both the Jones and Gerlib cases relate primarily to the circumstances surrounding the closing of the Chicago catalog operations. The company believes that it acted properly in the closing of the operations. Further, with regard to all three cases, the company believes it has a number of valid defenses to all of the claims made and will vigorously defend its actions. However, management is unable to make a meaningful estimate of any loss that could result from an unfavorable outcome of any of the pending cases. Note 5. The company adopted Statement of Financial Accounting Standard No. 130, Comprehensive Income, effective for the nine months ended Sept. 30, 1998. This statement is intended to report a measure of all changes in shareholders' equity that result from either recognized transactions or other economic events, excluding capital stock transactions, that impact shareholders' equity. For the company, the only difference between net income and comprehensive income is the effect of the increase in unrealized foreign currency translation losses of $7 million and $13 million for the nine months ended Sept. 30, 1998 and 1997, respectively. Comprehensive income equaled $195 million and $126 million for the nine months ended Sept. 30, 1998 and 1997, respectively. Note 6. Metromail Corporation, formerly a wholly-owned subsidiary of the company, completed an initial public offering of its common stock in June 1996, reducing the company's ownership to approximately 38%. In March 1998, Metromail entered into a merger agreement with The Great Universal Stores, P.L.C. (GUS), pursuant to which GUS initiated a tender offer for the outstanding shares of Metromail. In conjunction with the merger, the company committed to sell its remaining interest in Metromail to GUS. On April 13, 1998, the company received $297 million, or approximately $238 million after- tax, for its remaining interest in Metromail. Note 7. Donnelley Enterprise Solutions Incorporated (DESI), formerly a wholly-owned subsidiary of the company, completed an initial public offering of its common stock in November 1996, reducing the company's ownership to approximately 43%. In May 1998, DESI entered into a merger agreement with Bowne & Co., Inc. (Bowne), pursuant to which Bowne initiated a tender offer to acquire all outstanding shares of DESI. In conjunction with the merger, the company committed to sell its remaining interest in DESI to Bowne. On July 7, 1998, the company received $45 million, or approximately $36 million after-tax for its remaining interest in DESI. 7 R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Note 8. In the second quarter of 1998, the company recorded an $80 million impairment charge related to the write-down of goodwill on the books of Corporate Software & Technologies Incorporated (CS&T) remaining from the 1995 transaction that created Stream International Holdings Inc. CS&T is reported as a discontinued operation in the accompanying financial statements. Note 9. On June 30, 1998, the company issued $69 million of 8.82% debentures due 2031 in exchange for the same amount of its 8.88% debentures due 2021. No accounting gain or loss was recognized on this transaction. 8 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF THIRD QUARTER AND FIRST NINE MONTHS OF 1998 TO 1997 ABOUT THE COMPANY R.R. Donnelley & Sons Company operates in a single industry segment as the largest commercial printer in North America. The company is a leading provider of printing and related services to the merchandising, magazine, book, directory and financial markets. The company applies its superior skills, scale and technology to deliver solutions that efficiently meet customers' strategic business needs. The company has approximately 26,000 employees in 19 countries on four continents. The commercial print industry is a large, fragmented industry consisting of more than 52,000 firms and over 1 million employees in the United States and generates approximately $140 billion in revenue. The company has market- leading positions in five categories of the market served by its business units: Merchandise Media, which serves the catalog, retail insert and direct- mail markets; Magazine Publishing Services, which serves the consumer and the trade and specialty magazine markets; Book Publishing Services, which serves the trade, juvenile, educational and religious book markets; Telecommunications, which serves the domestic and international directory markets; and Financial Services, which serves the communication needs of the capital markets and the mutual fund and healthcare industries. In addition to its domestic operations, the company has operations in Europe, Latin America and Asia. For most of 1997, the company owned approximately 80% of Stream International Holdings Inc. (SIH), which included three business units: Modus Media International (software replication, documentation, and kitting and assembly), Corporate Software & Technology (licensing and fulfillment, customized documentation, license administration and user training) and Stream International (technical and help-line support). SIH was formed in April 1995 by a merger of the company's Global Software Services business with Corporate Software, Inc. In December 1997, SIH was reorganized into three separate businesses, and the company's interest was restructured such that the company now owns 87% of the common stock of Stream International Inc., 86% of the common stock of Corporate Software & Technology Holdings, Inc. (CS&T) and non-voting preferred stock of Modus Media International Holdings, Inc. (MMI). As a result of the restructuring and the company's intention to dispose of its interest in CS&T, the company has reported its interests in CS&T and MMI as discontinued operations and reclassified the prior years' consolidated financial results. The financial results of Stream International are reported in the consolidated results of the company's continuing operations. Sales results by business unit for the third quarter and first nine months of 1998 and 1997 are presented below: NET SALES BY BUSINESS UNIT
THIRD QUARTER ENDED SEPTEMBER 30, (THOUSANDS OF DOLLARS) 1998 % OF TOTAL 1997 % OF TOTAL ----------------------------- ---------- ---------- ---------- ---------- Merchandise Media............. $ 335,247 26% $ 335,137 27% Magazine Publishing Services.. 339,982 27% 322,566 26% Book Publishing Services...... 202,379 16% 203,211 17% Telecommunications............ 198,615 16% 182,125 15% Financial Services............ 133,235 10% 119,896 10% Other......................... 65,021 5% 58,808 5% ---------- ---- ---------- ---- $1,274,479 100% $1,221,743 100% ========== ==== ========== ====
9 NET SALES BY BUSINESS UNIT--YEAR TO DATE
NINE MONTHS ENDED SEPTEMBER 30, % OF % OF (THOUSANDS OF DOLLARS) 1998 SALES 1997 SALES - ------------------------------- ---------- ----- ---------- ----- Merchandise Media............................. $ 905,199 25% $ 910,789 26% Magazine Publishing Services.................. 984,030 27% 932,157 27% Book Publishing Services...................... 546,315 15% 556,376 16% Telecommunications............................ 564,146 16% 526,182 15% Financial Services............................ 403,021 11% 367,483 11% Other......................................... 201,329 6% 186,715 5% ---------- ---- ---------- ---- $3,604,040 100% $3,479,702 100% ========== ==== ========== ====
CONSOLIDATED RESULTS OF OPERATIONS The company reported income from continuing operations [excluding the gain on the sale of the company's remaining interest in Donnelley Enterprise Solutions Incorporated (DESI)] for the third quarter of 1998 of $85 million, or 61 cents per diluted share, compared with $81 million, or 55 cents per diluted share, in the third quarter of 1997. Including the DESI gain and last year's loss from discontinued operations, net income for the third quarter of 1998 was $99 million, or 71 cents per diluted share, compared with $72 million, or 49 cents per diluted share, in the third quarter of 1997. For the first nine months of 1998, the company reported income from continuing operations (excluding gain on the sale of the company's remaining interest in Metromail Corporation and the DESI gain) of $181 million, or $1.26 per diluted share, compared with $161 million, or $1.09 per diluted share, in 1997's first nine months. Including the Metromail and DESI gains and losses from discontinued operations, net income rose by 45 percent to $202 million, or $1.41 per diluted share, from $139 million or 94 cents per diluted share, a year earlier. CONSOLIDATED NET SALES Net sales for the third quarter of 1998 increased by $53 million, or 4.3 percent, to $1.3 billion. Magazine Publishing Services increased due to relatively strong demand across most product categories. Telecommunications increased as a result of increased advertising demand. Financial Services increased due to the strength of the capital markets early in the quarter. Merchandise Media increased slightly from the third quarter of 1997. Third quarter 1998 sales for this business unit reflected the production of fewer retail inserts and changes initiated in paper purchasing activities, which reduced net sales and material costs. Book Publishing Services declined due to weakness in the four-color trade market and a reduction in the company's distribution and fulfillment activities. Net sales for the first nine months increased by $124 million, or 3.6 percent, to $3.6 billion. Magazine sales were higher, reflecting strong advertising. Telecommunication sales were higher reflecting a significant customer's change in production cycle to move directory titles from the fourth quarter of 1997 to the first quarter of 1998, and Financial Services' sales were higher resulting from the strength of the capital markets. Excluding materials (principally paper and ink), sales increased by 5.8 percent for the third quarter and 4.6 percent for the first nine months, reflecting the expanded scope of value-added services provided by the company. CONSOLIDATED EXPENSES Gross profit in the third quarter of 1998 increased 13% to $294 million and in the first nine months of 1998 increased 14% to $753 million, due to lower costs driven by the benefit of restructuring activities begun in 1997 and the company's focus on continuous productivity improvement, as well as improvements in the operations of the logistics and fulfillment businesses. In addition, in the previous year's first nine months, the company incurred higher expenses associated with the development of the company's logistics and fulfillment businesses and the startup of a Roanoke, Va., four-color short run book plant. 10 Selling and administrative expenses for the third quarter of 1998 increased 15% to $146 million, due to increases in volume and information systems- related expenditures. The ratio of selling and administrative expenses to net sales was 11.4% for the third quarter of 1998 and 10.3% for the third quarter of 1997. Earnings from operations increased by 10% to $148 million, corresponding to an improvement in operating margins from 11.0% to 11.6% of net sales. Selling and administrative expenses in the first nine months of 1998 increased 11% to $419 million due to volume increases, increases in information systems-related expenditures and higher Stream International expenditures. The ratio of selling and administrative expenses to net sales was 11.6% for the first nine months of 1998 and 10.8% in the first nine months of 1997. Earnings from operations increased 16% to $333 million. The operating margin widened to 9.3% from 8.2% a year earlier. SUMMARY OF EXPENSE TRENDS
THIRD QUARTER ENDED SEPTEMBER 30, % INCREASE (THOUSANDS OF DOLLARS) 1998 1997 (DECREASE) ---------------------- ----------- ---------- ---------- --- --- --- Cost of materials........... $ 478,068 $ 468,902 2.0% Cost of manufacturing....... 403,965 394,804 2.3% Depreciation................ 81,193 87,101 (6.8)% Amortization................ 17,233 10,407 65.6% Selling and administrative.. 145,776 126,275 15.4% Net interest expense........ 19,400 22,079 (12.1)% NINE MONTHS ENDED SEPTEMBER 30, % INCREASE (THOUSANDS OF DOLLARS) 1998 1997 (DECREASE) --------------------------- ----------- ---------- ---------- Cost of materials........... $ 1,360,153 $1,335,126 1.9% Cost of manufacturing....... 1,216,043 1,207,956 0.7% Depreciation................ 239,334 242,588 (1.3)% Amortization................ 35,683 31,563 13.1% Selling and administrative.. 419,425 376,207 11.5% Net interest expense........ 59,036 67,262 (12.2)%
NONOPERATING ITEMS Interest expense decreased approximately $3 million in the quarter and $8 million in the first nine months of 1998 due to lower average debt balances associated with improved balance sheet management. Other income declined approximately $2 million in the quarter due to a gain, in the third quarter of 1997, on the sale of non-core investments. Other income declined approximately $15 million in the first nine months of 1998 due to non-recurring gains in 1997 on the sale of the company's interest in a magazine distribution venture in the United Kingdom and the sale of other non-core investments. DISCONTINUED OPERATIONS The operations of MMI and CS&T are reported as discontinued operations in conjunction with the restructuring of the company's ownership interest in SIH, as discussed above. Results for the first nine months of 1998 include an $80 million impairment charge related to the write-down of goodwill on the books of CS&T. Results for the third quarter and first nine months of 1997 include losses from discontinued operations of $9 million and $22 million, respectively. CHANGES IN FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES For the first nine months of 1998, net cash flow provided by operating activities was $462 million, down $41 million from last year's first nine months. Increased net income was offset by a decline in cash provided from operating working capital (defined as inventories, accounts receivable and prepaid expenses, minus accounts payable, accrued compensation and other accrued liabilities) predominantly 11 due to an increase in receivables on the higher sales, and the payment of incentive compensation. Capital expenditures totaled $159 million for the first nine months of 1998 compared with $285 million spent in the first nine months of 1997. Spending was focused on projects that are expected to further enhance productivity. Full-year capital spending is expected to be approximately $270 million. Management believes that the company's cash flow and borrowing capacity are sufficient to fund current operations and growth. At Sept. 30, 1998, the company had an unused revolving credit facility of $550 million with a number of banks. This credit facility provides support for the issuance of commercial paper and other credit needs. OTHER INFORMATION Share repurchase--In January 1998, the board of directors authorized a program to repurchase up to $500 million of the company's common stock in privately negotiated or open-market transactions over an 18-month period. The program includes shares purchased for issuance under various stock option plans. On Sept. 24, 1998, the board of directors approved a new, $300 million stock repurchase program, which augments the $500 million repurchase program announced in January 1998. The company utilized proceeds from the sale of its remaining interests in Metromail and DESI to support the share buyback. During the first nine months of the year, the company purchased approximately 10.6 million shares, at an average price of $41.72 per share. Technology--The company remains a technology leader, investing not only in print-related technologies, such as computer-to-plate and digital printing, but also in areas such as distribution of content and images over the Internet. Technology is applied to enhance customers' products across the entire manufacturing process. The company's recent investments have been focused on development of a digital platform to support the movement of work from customers' desktops across the company's manufacturing process, enabling output in multiple media. The company is focused on investing in technologies that contribute to its financial performance and help it deliver products, services and solutions its competitors cannot easily duplicate. Process control and information systems are becoming increasingly important to the effective management of the company. Increased spending on new systems and updating of existing systems will be necessary. In 1998 and 1999, these efforts will be focused on ensuring that processes and systems are Year 2000 compliant. In addition, the company is focused on an initiative to upgrade and standardize the company's information technology infrastructure, which has the incidental effect of addressing certain of the company's Year 2000 compliance issues. The company is deferring a number of other infrastructure and systems initiatives that would support continuous productivity improvements and enhanced service capabilities until after the company completes its Year 2000 efforts. The Year 2000 compliance issues stem from the computer industry's practice of conserving data storage by using two digits to represent a year. Systems and hardware using this format may process data incorrectly or fail with the use of dates in the next century. These types of failures can influence applications that rely on dates to perform calculations (such as an accounts receivable aging report), as well as facility systems (such as building security and heating) and manufacturing equipment. The company's effort to address Year 2000 compliance issues in its core business includes (i) evaluating internal computing infrastructure, business applications and shop-floor systems for Year 2000 compliance (ii) replacing or renovating systems and applications as necessary to assure such compliance, and (iii) testing the replaced or renovated systems and applications. The company's efforts in these respects are well under way, and the company currently expects that all phases of such efforts will be completed by mid- 1999. In addition to its internal remediation activities, the company is 12 continuing to evaluate compliance by key suppliers and vendors and other external companies, including customers whose systems interact with those of the company. The company expects to substantially complete this evaluation in early 1999. Separate Year 2000 compliance programs are in progress at Stream International and CS&T, which is classified as discontinued. Although the company expects its internal systems to be Year 2000 compliant as described above, the company intends to prepare a contingency plan that will specify what it plans to do if critical systems, processes, suppliers, vendors and external companies encounter Year 2000 issues. The company expects to have an initial contingency plan finalized by March 31, 1999, and to update it from time to time as developments warrant. Company employees, assisted by the expertise of external consultants where necessary, staff the Year 2000 compliance efforts. Management expects to spend approximately $40 million for all of 1998 in connection with its Year 2000 initiative, of which approximately $30 million has been spent through the third quarter of 1998. Management expects that expenses will be similar for 1999. These estimated expenses do not include costs being capitalized with respect to the company's information and technology infrastructure upgrade and standardization initiative or estimated costs associated with Year 2000 initiatives at Stream International or CS&T. Litigation--On Nov. 25, 1996, a purported class action was brought against the company in federal district court in Chicago, Ill., on behalf of current and former African-American employees, alleging that the company racially discriminated against them in violation of the Civil Rights Act of 1871, as amended, and the U.S. Constitution (Jones, et al. v. R.R. Donnelley & Sons Co.). The complaint seeks declaratory and injunctive relief, and asks for actual, compensatory, consequential and punitive damages in an amount not less than $500 million. Although plaintiffs seek nationwide class certification, most of the specific factual assertions of the complaint relate to the closing by the company of its Chicago catalog production operations begun in 1993. Other general claims relate to other company locations. The company has filed a motion for partial summary judgment as to all claims relating to its Chicago catalog operations on the grounds that those claims are untimely and plaintiffs have filed a motion for class certification. Both motions are pending. On Dec. 18, 1995, a class action was filed against the company in federal district court in Chicago alleging that older workers were discriminated against in selection for termination upon closing of the Chicago catalog operations (Gerlib, et al. v. R.R. Donnelley & Sons Co.). The suit also alleges that the company violated the Employee Retirement Income Security Act (ERISA) in determining benefits payable to retiring or terminating employees. On Oct. 8, 1996, plaintiffs filed a motion to maintain the ERISA claims as a class action on behalf of all company retirement plan participants who were eligible for early retirement benefits at the time of their termination. On Aug. 14, 1997, the court denied plaintiffs' motion and certified classes in both the age discrimination and ERISA claims limited to former employees of the Chicago catalog operations. On June 30, 1998, a purported class action was filed against the company in federal district court in Chicago on behalf of current and former African- American employees, alleging that the company racially discriminated against them in violation of Title VII of the Civil Rights Act of 1964 (Adams, et al. v. R.R. Donnelley & Sons Co.). While making many of the same general discrimination claims contained in the Jones complaint, the Adams plaintiffs also claim retaliation by the company for the filing of discrimination charges or otherwise complaining of race discrimination. The complaint seeks the same relief and damages as sought in the Jones case. Both the Jones and Gerlib cases relate primarily to the circumstances surrounding the closing of the Chicago catalog operations. The company believes that it acted properly in the closing of the operations. Further, with regard to all three cases, the company believes it has a number of valid 13 defenses to all of the claims made and will vigorously defend its actions. However, management is unable to make a meaningful estimate of any loss that could result from an unfavorable outcome of any of the pending cases. Environmental Regulations--The company is subject to various laws and regulations relating to employee health and safety and to environmental protection. The company's policy is to be in compliance with all such laws and regulations that govern protection of the environment and employee health and safety. The company does not anticipate that compliance with such environmental, safety and health laws and regulations will have a material adverse effect upon the company's competitive or consolidated financial position. Outlook--The commercial printing business in North America (the company's primary geographic market) is highly competitive in most product categories and geographic regions. Industry analysts consider most of the commercial printing markets to suffer from overcapacity, and competition, therefore, is fierce. Competition is based largely on price, quality and servicing the special needs of customers. The company is a large consumer of paper, acquired for customers and by customers. The cost and supply of certain paper grades consumed in the manufacturing process will continue to affect the company's financial results. Management currently does not foresee any disruptive conditions affecting prices and supply of paper in 1998. Postal costs are a significant component of the cost structure of the customers of the company. Changes in postal rates in 1999 are expected to be manageable for most key customer segments. Additionally, proposed changes to the Postal Service's legislative charter also could affect the postal communication and commerce environment. While the proposed legislative changes are controversial, aspects of the proposal could strengthen the company's position as a postal intermediary. Even in the absence of legislative reform, the company's ability to improve the cost efficiency of mail processing and distribution will enhance its position in the postal business marketplace. In addition to paper and postage costs, consumer confidence and economic growth are key drivers of print demand. While current economic conditions remain favorable, there is uncertainty around next year's business environment. The company's financial printing business unit has performed well to date but is primarily dependent on capital market activity. Management believes the company's competitive strengths--including its comprehensive service offerings, depth of customer relationships, technology leadership, management experience and economies of scale--should result in profitable growth throughout 1998 and well into the future. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company is exposed to market risk from changes in interest rates and foreign exchange rates. However, since the majority of the company's debt is at fixed interest rates, the company's exposure to interest rate fluctuations is immaterial to the consolidated financial statements of the company as a whole. The company's exposure to adverse changes in foreign exchange rates is also immaterial to the consolidated financial statements of the company as a whole, although the company occasionally uses financial instruments to hedge what exposure to foreign exchange rate changes it may have. The company does not use financial instruments for trading purposes and is not a party to any leveraged derivatives. Further disclosure relating to financial instruments is included in the Debt Financing and Interest Expense note in the Notes to Consolidated Financial Statements included in the company's 1997 annual report on Form 10-K. 14 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On each of June 30, 1998, and Nov. 25, 1996, a purported class action was brought against the company alleging racial discrimination and seeking actual, compensatory, consequential and punitive damages in an amount not less than $500 million. On Dec. 18, 1995, a purported class action was brought against the company alleging age discrimination in connection with the 1993 closing of the company's Chicago, Ill., catalog operations, and violation of the Employee Retirement Income Security Act. These actions are described in part I of this quarterly report on Form 10-Q. ITEM 5. OTHER INFORMATION Certain statements in this filing, including the discussions of management expectations for future periods and Year 2000 compliance, constitute "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from the future results expressed or implied by those statements. Refer to Part I, Item 1 of the company's 1997 Annual Report on Form 10-K for a description of such factors. The company's expectation to be Year 2000 compliant in a timely manner and at the costs described could be adversely affected by several factors, including the ability of the company to attract and retain trained personnel or third-party suppliers in this area, the costs to do so, and the ability to identify and correct systems or applications that require remediation. The failure of the company to achieve Year 2000 compliance or the failure of its key suppliers, vendors or customers to achieve Year 2000 compliance in a timely manner could have a material adverse effect on the company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS 10(a) Retirement Policy for Directors, as amended 10(b) Directors' Deferred Compensation Agreement, as amended 10(c) Senior Management Incentive Plan, as amended 10(d) 1995 Stock Incentive Plan, as amended 10(e) Form of option agreement with non-employee directors, as amended 27 Financial Data Schedule
(b) NO CURRENT REPORT ON FORM 8-K WAS FILED DURING THE THIRD QUARTER OF 1998. 15 SIGNATURE PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. R. R. Donnelley & Sons Company /s/ Peter F. Murphy By __________________________________ Corporate Controller (Authorized Officer and Chief Accounting Officer) November 12, 1998 Date __________________________ 16 EX-10.A 2 RETIREMENT POLICY FOR DIRECTORS EXHIBIT 10(a) RETIREMENT POLICY FOR DIRECTORS (As revised, effective September 24, 1998) 1. An outside director will retire from the Board as of the first day of the month following his or her attaining age 70. An outside director, for the purposes of this policy, is one who has never been an employee of the Company. 2. Any employee director who was first elected to the Board prior to September 28, 1990 will tender his or her resignation from the Board as of the effective date of his or her retirement from the Company and such resignation will be accepted absent a determination by the Board that the services of the director are unique and essential for such period as the Board may determine. 3. Any employee director who was first elected to the Board on or after September 28, 1990 will retire from the Board as of the effective date of his or her termination of employment for any reason or at the age of 65, whichever occurs first. However, such an employee director who has served as Chief Executive Officer will retire from the Board at the end of his or her current term upon retirement as an employee from the Company or immediately upon termination of employment prior to retirement. If desired by the Board, such a retiring Chief Executive Officer may serve as a consultant to the Board. 4. Nothing in this policy shall be construed to restrict the stockholders' right to elect any person a director of the Company in accordance with the Certificate of Incorporation and By-Laws. RETIREMENT BENEFITS, PHANTOM STOCK GRANTS AND STOCK OPTIONS FOR DIRECTORS (Effective January 1, 1997, as revised September 24, 1998) Retirement benefits for directors will be determined as follows: . A director who is retired as of January 1, 1997 will receive an annual retirement benefit equal to 10% of the annual retainer fee payable to active directors at the time such benefit is actually paid for each year or fraction thereof of service as a director (with a maximum of ten years). . Each director who was active as of January 1, 1997 shall have elected, prior to February 15, 1997, to: (1) receive an annual retirement benefit equal to 10% of the annual retainer fee payable to active directors at the time such benefit is actually paid for each year or fraction thereof of service as a director (with a maximum of ten years); or (2) have an amount equal to the present value of that director's earned annual retirement benefit at December 31, 1996 credited as of January 1, 1997 to a book-entry account of that director pursuant to a Deferred Compensation Agreement; or (3) convert the present value of that director's earned annual retirement benefit at December 31, 1996 to the number of shares of phantom stock (carried to four decimal places) determined by dividing such present value by the fair market value of a share of common stock on the most recent trading day of the common stock on the NYSE, which shares will be credited as of January 1, 1997 to a book-entry phantom stock account. . A non-employee director who (i) was active as of January 1, 1997 with less than ten years of service as a director and who chose alternative (2) or (3) in the preceding paragraph or (ii) is first elected to the Board on or after January 1, 1997, will be credited as of January 1 of each year beginning January 1, 1997 with the number of shares of phantom stock (carried to four decimal places) determined by dividing an amount equal to 35% of the annual retainer fee payable to active directors for such year by the fair market value of a share of common stock on the most recent trading day of the common stock; provided that a non-employee director shall be credited with phantom shares only until the commencement of the tenth year of service as a non-employee director; provided, further, that a non- employee director may elect, as set forth in and pursuant to the applicable Stock Incentive Plan of the Company, to receive in lieu of crediting all or some of such shares of phantom stock, an option to purchase shares of common stock. 2 PAYMENT OF ANNUAL RETIREMENT BENEFITS, DEFERRED COMPENSATION AND PHANTOM STOCK AND TREATMENT OF STOCK OPTIONS Annual Retirement Benefits - -------------------------- Annual retirement benefits will be paid quarterly in advance as follows: . The annual retirement benefit of a director whose service on the Board terminates at or after age 65 for any reason will begin with the first calendar quarter following the effective date of retirement. . The annual retirement benefit of a director whose service on the Board terminates prior to age 65 for any reason except disability that ends the director's active business career or employment will begin with the first calendar quarter following the attainment of age 65. . The annual retirement benefit of a director whose service on the Board terminates prior to age 65 by reason of disability that ends the director's active business career or employment will begin with the first calendar quarter following the effective date of retirement. . In all cases, no payment of an annual retirement benefit will occur following the date of death. . Former directors will receive any future increases in annual retirement benefits from and after the time such increases are put into effect. Deferred Compensation - --------------------- . A director who was active as of January 1, 1997 who elected to have an amount equal to the present value of that director's earned annual retirement benefit at December 31, 1996 credited as of January 1, 1997 to a book-entry account pursuant to a Director Deferred Compensation Agreement will be paid in accordance with the terms and conditions of that Agreement. Phantom Stock - ------------- . On each dividend payment date in respect of the common stock, a director's phantom stock account shall be credited with the number of shares of phantom stock (carried to four decimal places) determined by dividing (i) the product of the number of shares of phantom stock credited to that director's phantom stock account as of the record date for such dividend multiplied by the per share amount of the dividend by (ii) the fair market value of a share of common stock on the dividend payment date (or if the dividend 3 payment date is not a trading day on the NYSE, the most recent trading day of the common stock on the NYSE). Stock Options - ------------- . Each option to purchase shares of common stock shall be governed by the terms and conditions of the applicable stock option agreement and stock incentive plan. . In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of common stock other than a regular cash dividend, the number and class of phantom securities credited to a director's account shall be appropriately adjusted by a committee designated by the Board. . In connection with termination of service on the Board for any reason other than death, the director may elect as of the effective date of such cessation of service (and if the director's cessation of service is by reason of death, the director shall be deemed to elect as of the date of death) to convert the value of that director's phantom stock account (determined by multiplying the number of shares of phantom stock by the fair market value of the common stock on the effective date of such cessation of service) to a cash amount to be credited to a book-entry cash account. Such cash account shall be credited quarterly (beginning on the last day of the calendar quarter in which the retirement occurred) with an amount of interest on the balance (including interest previously credited) at an annual rate equal to the then current yield obtainable on United States government bonds having a maturity date of approximately five years. Failure to make such an election shall result in the continuation of the director's phantom stock account. A director's cash account or phantom stock account will be paid as follows: . A director whose service on the Board terminates at or after age 65 for any reason except death shall elect to receive, as of the first day of the first calendar quarter following the effective date of such cessation of service, either (1) an annual amount in cash for the lesser of ten years or the number of years of service (rounded to the nearest whole number) determined by dividing the value of the director's cash account or phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the date of such cessation of service) as of the effective date of such cessation of service by the number of annual payments to be made; provided that the last payment made shall be for 100% of the value of the director's account as of the date of the last payment, (2) an annual amount in cash for the lesser of ten years or the number of years of service (rounded to the nearest whole number) determined by dividing the value of the director's cash account or phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the effective date of the distribution) as of the effective date of 4 the distribution by the number of annual payments remaining to be made; provided that the last payment made shall be for 100% of the value of the director's account as of the date of the last payment, or (3) a lump sum amount in cash equal to the value of the director's cash account or phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the effective date of such cessation of service) as of the effective date of such cessation of service. In the absence of an election, a director shall be deemed to have elected option (1). . A director whose service on the Board terminates prior to age 65 for any reason except death or disability that ends the director's active business career or employment shall elect to receive, as of the first day of the first calendar quarter following the attainment of age 65, either (1) an annual amount in cash for the lesser of ten years or the number of years of service (rounded to the nearest whole number) determined by dividing the value of the director's cash account or phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the date of such cessation of service) as of the effective date of such cessation of service by the number of annual payments to be made; provided that the last payment made shall be for 100% of the value of the director's account as of the date of the last payment, (2) an annual amount in cash for the lesser of ten years or the number of years of service (rounded to the nearest whole number) determined by dividing the value of the director's cash account or phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the effective date of the distribution) as of the effective date of the distribution by the number of annual payments remaining to be made; provided that the last payment made shall be for 100% of the value of the director's account as of the date of the last payment, or (3) a lump sum amount in cash equal to the value of the director's cash account or phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the effective date of such cessation of service) as of the effective date of such cessation of service. In the absence of an election, a director shall be deemed to have elected option (1). . A director whose service on the Board terminates prior to age 65 by reason of disability that ends the director's active business career or employment shall elect to receive, as of the first day of the first calendar quarter following the effective date of such cessation service, either (1) an annual amount in cash for the lesser of ten years or the number of years of service (rounded to the nearest whole number) determined by dividing the value of the director's cash account or phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the date of such cessation of service) as of the effective date of such cessation of service by the number of annual payments to be made; provided that the last payment made shall be for 100% of the value of the director's account as of the date of the last payment, (2) an annual amount in cash for the lesser of ten years or the number of years of service (rounded to the nearest whole number) determined by dividing the value of the director's 5 cash account or phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the effective date of the distribution) as of the effective date of the distribution by the number of annual payments remaining to be made; provided that the last payment made shall be for 100% of the value of the director's account as of the date of the last payment, or (3) a lump sum amount in cash equal to the value of the director's cash account or phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the effective date of such cessation of service) as of the effective date of such cessation of service. In the absence of an election, a director shall be deemed to have elected option (1). . In all cases, if a director's cessation of service as a director is by reason of death or if a director dies while retired and amounts remain to be paid under the director's cash account or phantom stock account, 100% of the value of the director's cash account or phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the date of death) as of the date of death shall be paid as soon as practicable after the date of death to the director's estate or any beneficiaries designated by the director. MISCELLANEOUS To be entitled to receive any benefits under this policy, a former director must agree to consult with and render advice to the Company as requested at times that do not unreasonably interfere with his personal or other business activities. Conduct detrimental to the Company, as determined by the Board of Directors, will result in forfeiture of all benefits under this policy. These provisions on benefits will apply to all living, former directors effective January 1, 1997, regardless of when they were first elected or ceased to serve, to all active, non-employee directors as of January 1, 1997 whose service on the Board terminates after January 1, 1997 and to all non-employee directors who are first elected to the Board on or after January 1, 1997. . A director's rights to receive benefits shall be no greater than the rights of any unsecured general creditor of the Company. . A director shall not have any rights as a stockholder of the Company with respect to any shares of phantom stock. . This policy and all determinations made and actions taken pursuant hereto, to the extent not governed by the Internal Revenue Code or the laws of the United States, shall be governed by the laws of the State of Delaware and construed in accordance therewith without giving effect to principles of conflict of laws. 6 . Benefits described herein may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. For the purposes of these provisions on retirement benefits and phantom stock grants: . A non-employee director is a director who is not currently an employee of the Company and/or its subsidiaries and who never has been an employee of the Company and/or its subsidiaries. . The fair market value of the common stock shall be determined by reference to the average of the high and low trading prices as reported in the New York Stock Exchange Composite Transactions in the Wall Street Journal for the relevant trading day. ------------------- 7 EX-10.B 3 NON-EMPLOYEE DIR. DEFERRED COMPENSATION AGREE. EXHIBIT 10(b) R.R. DONNELLEY & SONS COMPANY NON-EMPLOYEE DIRECTOR DEFERRED COMPENSATION AGREEMENT ----------------------------------------------------- This AGREEMENT made this _____ day of ________________, _____, by and between R.R. DONNELLEY & SONS COMPANY, a Delaware corporation (hereinafter called the "Company"), and ___________________________ (hereinafter called "Director"). W I T N E S S E T H ------------------- WHEREAS, the Director is a member of the Board of Directors of the Company (the "Board"), or has been nominated for election as a member of the Board; WHEREAS, the Director is not an employee of the Company or any subsidiary of the Company; and WHEREAS, the Company and the Director desire to enter into this Agreement with respect to compensation earned by the Director from the Company for the period commencing with the calendar quarter beginning immediately after the date hereof and continuing so long as the Director shall continue to serve as a director of the Company or until terminated by the Board in accordance with Section 3 or by the Director in accordance with Section 4; NOW, THEREFORE, in consideration of the Director's service as a member of the Board, it is agreed: 1. As compensation for such services, the Company agrees to pay to the Director during the periods specified in Section 2(d) and Section 2(e), as applicable, the aggregate amounts specified pursuant to Section 2. 2. (a) The Company shall set up on its books an interest account and/or a stock equivalent account in the name of the Director as set forth in Section 2(b) (the "Interest Account") and Section 2(c) (the "Stock Equivalent Account") , respectively: (b) The Company shall credit to the Interest Account: (i) An amount equal to ____ percent (____%) of the annual retainer fee for services as a director of the Company, to be credited quarterly for each month or part thereof during which the Director serves as a director of the Company subsequent to the effective date of this Agreement; (ii) An amount equal to ____ percent (____%) of any fees for attendance at meetings of the Board or any committee of the Board and any fees for serving as a member or chairman of any committee of the Board, as from time to time determined by the Board, in respect of services performed subsequent to the effective date of this Agreement; and (iii) An amount equivalent to interest on the balance (including interest theretofore credited) from time to time credited to such account, to be credited quarterly at a rate equal to the then current yield obtainable on United States government bonds having a maturity date of approximately five years. The amounts properly to be credited to the Interest Account shall in the event of dispute be determined by the Board, and such determination shall be binding and conclusive. (c) The Company shall credit to the Stock Equivalent Account: (i) An amount equal to ____ percent (____%) of the annual retainer fee for services as a director of the Company, to be credited quarterly for each month or part thereof during which the Director serves as a director of the Company subsequent to the effective date of this Agreement; (ii) An amount equal to ____ percent (____%) of any fees for attendance at meetings of the Board or any committee of the Board and any fees for serving as a member or chairman of any committee of the Board, as from time to time determined by the Board, in respect of services performed subsequent to the effective date of this Agreement; and (iii) On the applicable dividend payment date, an amount equal to the dividend paid per share of Company common stock for each Share Equivalent (as defined below) in the Stock Equivalent Account as of the applicable record date. The dates upon which amounts are credited to the Stock Equivalent Account shall be "Credit Dates." Amounts credited to the Stock Equivalent Account shall be converted into Company common stock equivalents ("Share Equivalents") on each Credit Date. The number of Share Equivalents shall be determined by dividing the amount credited to the Stock Equivalent Account on each Credit Date by the average of the high and low transaction prices for the Company common stock reported in the New York Stock Exchange Composite Transactions report for such day ("Fair Market Value"). Fractional Share Equivalents will be computed to four decimal places. The amounts and number of Share Equivalents properly to be credited to the Stock Equivalent Account shall in the event of dispute be determined by the Board, and such determination shall be binding and conclusive. (d) Commencing with the first day of the calendar month next following (i) termination of the Director's service as a director of the Company or (ii) the Director attaining age 65, whichever later occurs, the Company shall pay to the Director the amount then credited to the Interest Account, in either (x) a lump sum amount or (y) equal (as nearly as possible) annual installments, the number of which shall be the lesser of ten and the number of years during which the Director served as a director of the Company after the date of this Agreement, as designated by the Director in writing. (e) Commencing with the first day of the calendar month next following (i) termination of the Director's service as a director of the Company or (ii) the Director attaining age 65, whichever later occurs, the Company shall pay to the Director the Cash Value (as defined below) of the Share Equivalents in the Stock Equivalent Account, in either (x) a lump sum amount or (y) annual installments, the number of which shall be the lesser of ten and the number of years during which the Director served as a director of the Company after the date of this Agreement, as designated by the Director in writing. The "Cash Value" of the Stock Equivalent Account as of any determination date shall be equal to the product of the number of Share Equivalents accumulated in the Stock Equivalent Account multiplied by the Fair Market Value on such determination date. In the event the Cash Value is to be paid in annual installments, the Company shall pay to the Director the Cash Value as of the most recent determination date, divided by the total number of payments to be made (or remaining to be paid). (f) Upon the death of the Director prior to complete distribution to the Director of the amount credited to the Director's Interest Account and/or Stock Equivalent Account, any undistributed amount shall be paid, as soon as practicable after the Director's death, in a lump sum to such beneficiaries and in such proportions among them as the Director shall have designated in the latest instrument in writing filed by the Director with the Company; provided, however, that the Director may specify that such undistributed amount (together with interest or dividend equivalents to be thereafter credited to such account as above provided) shall be paid to the Director's spouse in annual installments (substantially as provided in (d) and (e) above), commencing as soon as practicable after the Director's death, the aggregate number of which (including installments, if any, paid to the Director before the Director's death) shall be the lesser of ten and the number of years during which the Director served as a director after the date of this Agreement. If there shall be no beneficiary designated or in existence at the Director's death, any undistributed amount shall be paid to the executor or administrator of the Director's estate. If payments are being made in installments to the Director's spouse, then upon the spouse's death, any amount then undistributed shall be paid as soon as practicable after such spouse's death, in one lump sum to the executor or administrator of the spouse's estate. 3. The Board may, by action taken before any annual meeting of the stockholders of the Company, terminate the continued effectiveness of Section 2 of this Agreement, so that no further amounts (other than interest as provided in Section 2(b)(iii) and dividend equivalents as provided in Section 2(c)(iii)) are credited to the account of the Director from and after such annual meeting date. 4. The Director may, by filing with the Company a written direction to such effect, terminate the continued effectiveness of Section 2 of this Agreement so that no further amounts (other than interest as provided in Section 2(b)(iii) and dividend equivalents as provided in Section 2(c)(iii)) are credited to the account of the Director from and after the calendar quarter beginning after the filing of such direction. No termination pursuant to this Section shall adversely affect the rights of the Director, the Director's personal representative or designated beneficiary, to receive the amounts theretofore credited to the Director's account, with interest or dividend equivalents thereon, as applicable, as provided in this Agreement. 5. The Director shall have no power to commute, encumber, sell or otherwise dispose of the rights provided herein and such rights shall be nonassignable and nontransferable. 6. The Company shall not be obligated to set aside any assets to satisfy its obligations hereunder. Neither the Director nor any spouse or other beneficiary shall have any claim against any specific assets of the Company, but shall have only the rights of a general creditor of the Company. 7. In the event of any stock split, stock dividend, spin-off, split-up, recapitalization, merger, consolidation, combination or exchange of shares, liquidation or the like, the number and class of Share Equivalents credited to the Stock Equivalent Account shall be appropriately adjusted by the Board or a committee designated by the Board. 8. This Agreement shall be construed and interpreted in accordance with the laws (other than those pertaining to conflicts of law) of the State of Illinois, and shall be binding upon and inure to the benefit of the Director, the Company and the heirs, executors, administrators, assigns and successors of each. IN WITNESS WHEREOF, the parties have signed this Agreement on the day and year first above written. R.R. DONNELLEY & SONS COMPANY By By ------------------------- --------------------------- Director Title EX-10.C 4 SENIOR MANAGEMENT INCENTIVE PLAN EXHIBIT 10(c) R.R. DONNELLEY & SONS COMPANY SENIOR MANAGEMENT INCENTIVE PLAN 1. Purpose. To promote the growth and profitability of R.R. Donnelley & ------- Sons Company (the "Company") and its subsidiaries, and to provide senior officers and other key executives of the Company and its subsidiaries with incentives to achieve corporate objectives, and to attract and retain officers and other key management employees of outstanding competence, all with a view towards enhancing shareholder value, the Committee hereinafter designated may grant Performance Awards to eligible officers and other key management employees on the terms and subject to the conditions stated in this Plan. 2. Eligibility. Senior officers and other key management employees of the ----------- Company and its subsidiaries, under selection guidelines to be established by the Committee, shall be eligible, upon selection by the Committee, to receive Performance Awards as the Committee, in its discretion, shall determine. 3. Administration of the Plan. The Plan shall be administered by the Human -------------------------- Resources Committee of the Board of Directors (the "Committee"). The Committee shall, subject to the terms of the Plan, establish selection guidelines; select eligible officers and key management employees for participation; and determine the terms and conditions of the Performance Awards. The Committee may establish rules and regulations for the administration of the Plan, interpret the Plan, and impose, incidental to the grant of a Performance Award, conditions with respect to competitive employment or other activities not inconsistent with or conflicting with the Plan. All such rules, regulations and interpretations relating to the Plan adopted by the Committee shall be conclusive and binding on all parties. All Performance Awards under this Plan shall be evidenced by written instruments issued by the Company to the participants, and no such award shall be valid unless so evidenced. 4. Effective Date and Term of Plan. The Plan shall become effective as of ------------------------------- January 1, 1998 upon approval of the Committee and shall continue in effect until terminated by the Committee. 5. Amendments. The Plan may be amended or terminated by the Committee in ---------- any respect except that no amendment may be made which would adversely affect the rights of a participant under a Performance Award granted and outstanding prior to the date such amendment is adopted. 6. Form of Award. Performance Awards shall be made in terms of a stated ------------- potential performance target determined by reference to the level of achievement of corporate, group, division, individual or other specific objectives over a period of one fiscal year of the Company, as determined by the Committee in its sole discretion. An amount equal to the earned Performance Award for the fiscal year shall be added to or subtracted from the participant's Bank Balance, as appropriate, upon determination of the award. Any Performance Award may be increased or decreased, in the discretion of the Committee, to reflect any special circumstances that the Committee deems significant, and each Performance Award granted hereunder shall so state. There shall be no maximum amount payable each fiscal year under the Plan based on the executive's Target Award, however an award may be negative, resulting in the reduction of the executive's Bank Balance as set forth above. Except as set forth in paragraph 9 of this Plan, no rights or interests of any kind shall be vested in an individual receiving a Performance Award until the conclusion of the period and the determination of the level of achievement specified in the award. 7. Administrative Credit. Upon selection for participation by the --------------------- Committee, a "Bank Balance" shall be established for each participant in the Plan. Initially the Bank Balance will be credited with an amount equal to such participant's Target Award for the initial Performance Period (the "Administrative Credit"). 8. Bank Balance. An amount equal to the earned Performance Award for the ------------ fiscal year shall be added to or subtracted from the participant's Bank Balance, as appropriate, upon determination of the award. A participant's Bank Balance may be less than zero. If a participant's Bank Balance exceeds the amount of such participant's Administrative Credit, a percentage of such participant's Bank Balance, as determined by the Committee, shall be paid to the participant at fiscal year end, and the remainder of the Bank Balance shall carry over to become the participant's beginning Bank Balance for the following fiscal year. Notwithstanding the foregoing, a payout to a participant may not reduce such participant's Bank Balance to an amount less than such participant's Administrative Credit. 9. Treatment upon Separation or Termination. Prior to any payment to a ---------------------------------------- participant under this Section 9, such participant's Bank Balance shall be reduced by the amount of such participant's Administrative Credit; provided that such participant's Bank Balance shall not be reduced to an amount less than zero. (a) Death. Notwithstanding Section 8, if a participant shall cease to be ----- employed by the Company at any time while a participant in this Plan by reason of death, the Company shall pay to the participant's executor, administrator, personal representative or beneficiary such participant's Bank Balance in excess of such participant's Administrative Credit, including an estimate of the Performance Award which would have been earned during the fiscal year in which death occurred pro rated through the date of death. The foregoing payment shall be made at the first Committee meeting held following the date of death. (b) Disability. If a participant shall cease to be employed by the Company at ---------- any time while a participant in this Plan by reason of total and permanent disability, an amount equal to the estimated Performance Award which would have been earned during the fiscal year in 2 which the disability occurred, pro rated through the date of disability, shall be added to such participant's Bank Balance. Notwithstanding Section 8: (1) the Company shall pay the participant one-third (33%) of the participant's Bank Balance in excess of such participant's Administrative Credit on the date which the next payment would otherwise be made to participants, one- half (50%) of the remaining Bank Balance in excess of such participant's Administrative Credit on the date the second subsequent payment would otherwise be made to participants and the remainder of the Bank Balance in excess of such participant's Administrative Credit on the two-year anniversary of the disability, in each case only if the participant continues to receive disability payments from the Company on and through such date; (2) if at any time after the date of the disability the participant ceases to receive disability payments and the participant is not then employed full- time by the Company or any of its affiliates, the participant's Bank Balance shall be forfeited unless the Committee specifically authorizes payment of all or a portion of the Bank Balance to such participant; (3) if at any time after the date of the disability the participant ceases to receive disability payments and resumes full-time employment with the Company or any of its affiliates in a capacity in which such participant may resume participation in the Plan, a new Administrative Credit shall be added to such participant's remaining Bank Balance and the participant shall resume participation in the Plan pursuant to the terms of the Plan; and (4) if at any time after the date of disability the participant ceases to receive disability payments and resumes full-time employment with the Company or any of its affiliates in a capacity in which such participant may not resume participation in the Plan, the Company shall make any payments pursuant to section 9(b)(1) which have not yet been made on the dates which the next applicable payments are made, or would be made, to participants in the Plan. (c) Retirement. If a participant shall cease to be employed by the Company at ---------- any time while a participant in this Plan by reason of retirement on or after age 65 or retirement on or after age 55 with the consent of the Company, on the date of each of the next three payments made, or which would otherwise be made, to participants the Company shall pay the participant an amount equal to one- third (33%) of the participant's Bank Balance in excess of such participant's Administrative Credit on the date of retirement, including an estimate of the Performance Award which would have been earned during the fiscal year in which retirement occurred pro rated through the date of retirement; provided, however, that such participant's Bank Balance shall be forfeited if the participant directly or indirectly accepts employment by or serves as a consultant, agent, stockholder, corporate officer or director of, or in any other representative capacity for, any entity which is engaged in a line of business in a geographic area in which the Company (either directly or through a subsidiary or affiliate) 3 is engaged on the date of such participant's retirement and which is a competitor of the Company or any of its subsidiaries. (d) Change in Control. If a "Change in Control" as defined in the R.R. ----------------- Donnelley & Sons Company 1995 Stock Incentive Plan and successor plans thereto shall occur while a participant is employed by the Company and while this Plan is in effect, an amount equal to such participant's Target Award for the fiscal year in which the change in control occurred, pro rated through the "Acceleration Date" (as defined in the 1995 Stock Incentive Plan), shall be added to such participant's Bank Balance. The participant's Bank Balance shall be paid out pursuant to the terms of such participant's change in control agreement. (e) Other Separations. If a participant shall cease to be employed by the ----------------- Company at any time prior to a change in control while a participant in this Plan for any reason other than death, total and permanent disability, retirement on or after age 65 or retirement on or after age 55 with the consent of the Company, the participant's Bank Balance, including any Performance Award for the fiscal year in which such cessation of employment occurs, shall be forfeited unless the Committee specifically authorizes payment to such participant of all or a portion of such particpant's Bank Balance in excess of such participant's Administrative Credit. 10. Miscellaneous. (a) Award Confers No Right to Employment. Nothing in ------------- this Plan or any Award granted hereunder shall be construed as an employment contract or as otherwise conferring upon a participant any right to remain in the employ of the Company or any of its subsidiaries. (b) Withholding Taxes. The Company may, in its discretion, deduct any such ----------------- required withholding taxes from the amount to be paid under any Award granted hereunder or from any other amount then or thereafter payable by the Company to a participant. (c) Interest. No interest shall accrue at any time on any participant's Bank -------- Balance. (d) Successors. Awards granted hereunder shall be binding upon and inure to ---------- the benefit of any successor or successors to the Company. (e) Governing Law. This Plan and the Awards granted hereunder shall be ------------- governed in accordance with the laws of the State of Illinois. 4 EXHIBIT A --------- 1998 AWARD UNDER R.R. DONNELLEY & SONS COMPANY ---------------------------------------------- SENIOR MANAGEMENT INCENTIVE PLAN -------------------------------- As used in an award issued under the above-captioned plan (an "Award"), the following terms when capitalized shall have the following respective meanings: Base Annual Salary. The base salary established by the Committee for a - ------------------ participant for the calendar year covered by an Award, provided that in the case -------- that an Award is granted as of a date subsequent to the first day of a calendar year, there shall be included as Base Annual Salary only that pro rata portion of such base salary applicable to the period included in the calendar year subsequent to the effective date of the Award. Target Award. A percentage of the participant's Base Annual Salary to be added - ------------ to the participant's Bank Balance to the extent that the Performance Goals established for the participant in an Award are satisfied. Performance Period. The calendar year for which an Award is granted as set - ------------------ forth in the Award. Performance Factor. Economic Value Added (EVA), Earnings Per Share (EPS), MBOs - ------------------ and Strategic Inclusion Plan (SIPs), each as defined below. Performance Goal. The performance goals set forth in the Award in respect of a - ---------------- Performance Factor. Economic Value Added. EVA is defined as Earnings after the Cost of Capital - -------------------- calculated as follows: Revenues - Operating Costs - Depreciation - Taxes ----- = Net Operating Profit After Tax - *c% x Net Capital ----------------- = EVA *c = Weighted Average Cost of Capital The Committee has the authority to exclude from the EVA calculation such extraordinary, unusual or non-recurring charges as the Committee in its discretion deems appropriate. Earnings Per Share. EPS is defined as the income per basic share of common - ------------------ stock of the Company for the Performance Period as determined for purposes of reporting in the Company's annual report to shareholders for the Performance Period. The Committee has authority to exclude from the EPS calculation such extraordinary, unusual or non-recurring charges as the Committee in its discretion deems appropriate. MBOs. MBOs are defined as personal objectives approved by the Chairman of the - ---- Company. Strategic Inclusion Plan. SIPs are defined as objectives related to the - ------------------------ Company's Diversity Initiative. The Committee's determination with respect to each of the terms defined above shall be binding and conclusive on the participant and any persons claiming benefits on behalf or on account of the participant. EX-10.D 5 1995 STOCK INCENTIVE PLAN EXHIBIT 10(d) R.R. DONNELLEY & SONS COMPANY 1995 STOCK INCENTIVE PLAN (as amended on January 25, 1996, September 1, 1996, November 7, 1996, July 24, 1997, March 26, 1998, and September 24, 1998) I. GENERAL 1. Plan. To provide incentives to management through rewards based upon the ownership or performance of the common stock of R.R. Donnelley & Sons Company (the "Company"), the Committee hereinafter designated, may grant cash or bonus awards, stock options, stock appreciation rights ("SARs"), or combinations thereof, to eligible officers and other key management employees, on the terms and subject to the conditions stated in the Plan. In addition, to provide incentives to members of the Board of Directors ("Board") who are not employees of the Company ("non-employee directors"), such non-employee directors are hereby granted options on the terms and subject to the conditions set forth in the Plan. For purposes of the Plan, references to employment by the Company also means employment by a majority-owned subsidiary of the Company and employment by any other entity designated by the Board or the Committee in which the Company has a direct or indirect equity interest. 2. Eligibility. Officers and other key management employees of the Company, its subsidiaries, and any other entity designated by the Board or the Committee in which the Company has a direct or indirect equity interest, shall be eligible, upon selection by the Committee, to receive cash or bonus awards, stock options or SARs, either singly or in combination, as the Committee, in its discretion, shall determine. Non-employee directors shall receive stock options on the terms and subject to the conditions stated in the Plan. 3. Limitation on Shares to be Issued. Subject to adjustment as provided in Section 5 of this Article I, 9,500,000 shares of common stock, par value $1.25 per share ("common stock"), shall be available under the Plan, reduced by the aggregate number of shares of common stock which become subject to outstanding bonus awards, stock options and SARs which are not granted in tandem with or by reference to a stock option ("free-standing SARs"). Shares subject to a grant or award which for any reason are not issued or delivered, including by reason of the expiration, termination, cancellation or forfeiture of all or a portion of the grant or award or by reason of the delivery or withholding of shares to pay all or a portion of the exercise price or to satisfy tax withholding obligations, shall again be available for future grants and awards; provided, however, that for purposes of this sentence, stock options and SARs granted in tandem with or by reference to a stock option granted prior to the grant of such SARs ("tandem SARs") shall be treated as one grant. For the purpose of complying with Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), and the rules and regulations thereunder, the maximum number of shares of common stock with respect to which options or SARs or a combination thereof may be granted during any three-year period to any person shall be 1,000,000, subject to adjustment as provided in Section 5 of this Article I. The maximum number of shares of common stock with respect to which fixed awards in the form of restricted stock may be granted hereunder is 750,000 in the aggregate, subject to adjustment as provided in Section 5 of this Article I. Shares of common stock to be issued may be authorized and unissued shares of common stock, treasury stock or a combination thereof. 4. Administration of the Plan. The Plan shall be administered by a Committee designated by the Board of Directors (the "Committee"). Each member of the Committee shall be (i) an "outside director" within the meaning of Section 162(m) of the Code and (ii) a "Non-Employee Director" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Committee shall, subject to the terms of the Plan, select eligible officers and key management employees for participation; determine the form of each grant and award, either as cash, a bonus award, stock options or SARs or a combination thereof; and determine the number of shares or units subject to the grant or award, the fair market value of the common stock or units when necessary, the time and conditions of vesting, exercise or settlement, and all other terms and conditions of each grant and award, including, without limitation, the form of instrument evidencing the grant or award. The Committee may establish rules and regulations for the administration of the Plan, interpret the Plan, and impose, incidental to a grant or award, conditions with respect to competitive employment or other activities not inconsistent with the Plan. All such rules, regulations, interpretations and conditions shall be conclusive and binding on all parties. Each grant and award shall be evidenced by a written instrument and no grant or award shall be valid until an agreement is executed by the Company and the recipient thereof and, upon execution by each party and delivery of the agreement to the Company, such grant or award shall be effective as of the effective date set forth in the agreement. The Committee may delegate some or all of its power and authority hereunder to the Chief Executive Officer or other executive officer of the Company as the Committee deems appropriate; provided, however, that the Committee may not delegate its power and authority with regard to (i) the selection for participation in the Plan of (A) an employee who is a "covered employee" within the meaning of Section 162(m) of the Code or who, in the Committee's judgment, is likely to be a covered employee at any time during the period a grant or award hereunder to such employee would be outstanding or (B) an officer or other person subject to Section 16 of the Exchange Act or (ii) decisions concerning the timing, pricing or amount of a grant or award to such an employee, officer or other person. -2- A majority of the Committee shall constitute a quorum. The acts of the Committee shall be either (i) acts of a majority of the members of the Committee present at any meeting at which a quorum is present or (ii) acts approved in writing by a majority of the members of the Committee without a meeting. 5. Adjustments. In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of common stock other than a regular cash dividend, the number and class of securities available under the Plan, the number and class of securities subject to each outstanding bonus award, the number and class of securities subject to each outstanding stock option and the purchase price per security, the number of securities subject to each stock option to be granted to non-employee directors pursuant to Article III and the terms of each outstanding SAR shall be appropriately adjusted by the Committee, such adjustments to be made in the case of outstanding stock options and SARs without a change in the aggregate purchase price or base price. If any such adjustment would result in a fractional security being (i) available under the Plan, such fractional security shall be disregarded, or (ii) subject to an outstanding grant or award under the Plan, the Company shall pay the holder thereof, in connection with the first vesting, exercise or settlement of such grant or award, in whole or in part, occurring after such adjustment, an amount in cash determined by multiplying (i) the fraction of such security (rounded to the nearest hundredth) by (ii) the excess, if any, of (A) the fair market value on the vesting, exercise or settlement date over (B) the exercise or base price, if any, of such grant or award. 6. Effective Date and Term of Plan. The Plan shall be submitted to the stockholders of the Company for approval at the 1995 annual meeting of stockholders and, if approved, shall become effective on January 1, 1995. The Plan shall terminate on December 31, 1999 unless terminated prior thereto by action of the Board. No further grants or awards shall be made under the Plan after termination, but termination shall not affect the rights of any participant under any grants or awards made prior to termination. 7. Amendments. The Plan may be amended or terminated by the Board in any respect except that no amendment may be made without stockholder approval if stockholder approval is required by applicable law, rule or regulation, including Section 162(m) of the Code, or such amendment would increase (subject to Section 5 of this Article I) the maximum number of shares available under the Plan. No amendment may impair the rights of a holder of an outstanding grant or award without the consent of such holder. 8. Prior Plans. Upon approval of the Plan by the stockholders of the Company, no further grants or awards shall be made under the Company's 1981 Stock Incentive Plan, as amended (the "1981 Plan"), the 1986 Stock Incentive Plan, as amended (the "1986 Plan"), or the 1991 Stock Incentive Plan, as amended (the "1991 Plan"), except that SARs may be granted with respect to options previously granted and outstanding under such Plans. Grants and awards made under the -3- 1981 Plan, the 1986 Plan and the 1991 Plan prior to approval of the Plan by the stockholders of the Company shall continue in effect in accordance with their terms. II. BONUS AWARDS 1. Form of Award. Bonus awards, whether performance awards or fixed awards, may be made to eligible officers and other key management employees in the form of (i) cash, whether in an absolute amount or as a percentage of compensation, (ii) stock units, each of which is substantially the equivalent of a share of common stock but for the power to vote and, subject to the Committee's discretion, the entitlement to an amount equal to dividends or other distributions otherwise payable on a like number of shares of common stock, (iii) shares of common stock issued to the employee but forfeitable and with restrictions on transfer in any form as hereinafter provided or (iv) any combination of the foregoing. 2. Performance Awards. Awards may be made in terms of a stated potential maximum dollar amount, percentage of compensation or number of units or shares, with the actual such amount, percentage or number to be determined by reference to the level of achievement of corporate, sector, business unit, division, individual or other specific objectives over a performance period of not less than one nor more than ten years, as determined by the Committee. No rights or interests of any kind shall be vested in an individual receiving a performance award until the conclusion of the performance period and the determination of the level of achievement specified in the award, and the time of vesting, if any, thereafter shall be as specified in the award. 3. Fixed Awards. Awards may be made which are not contingent on the achievement of specific objectives, but are contingent on the participant's continuing in the Company's employ for a period specified in the award. 4. Rights with Respect to Restricted Shares. If shares of restricted common stock are subject to an award, the participant shall have the right, unless and until such award is forfeited or unless otherwise determined by the Committee at the time of grant, to vote the shares and to receive dividends thereon from the date of grant and the right to participate in any capital adjustment applicable to all holders of common stock; provided, however, that a distribution with respect to shares of common stock, other than a regular quarterly cash dividend, shall be deposited with the Company and shall be subject to the same restrictions as the shares of common stock with respect to which such distribution was made. During the restriction period, a certificate or certificates representing restricted shares shall be registered in the holder's name and may bear a legend, in addition to any legend which may be required under applicable laws, rules or regulations, indicating that the ownership of the shares of common stock represented by such certificate is subject to the restrictions, terms and conditions of the Plan and the agreement relating to the restricted shares. All such certificates shall be deposited with the Company, together with stock powers or other instruments of -4- assignment (including a power of attorney), each endorsed in blank with a guarantee of signature if deemed necessary or appropriate, which would permit transfer to the Company of all or a portion of the shares of common stock subject to the award in the event such award is forfeited in whole or in part. Upon termination of any applicable restriction period, including, if applicable, the satisfaction or achievement of applicable objectives, and subject to the Company's right to require payment of any taxes, a certificate or certificates evidencing ownership of the requisite number of shares of common stock shall be delivered to the holder of such award. 5. Rights with Respect to Stock Units. If stock units are credited to a participant pursuant to an award, then, subject to the Committee's discretion, amounts equal to dividends and other distributions otherwise payable on a like number of shares of common stock after the crediting of the units (unless the record date for such dividends or other distributions precedes the date of grant of such award) shall be credited to an account for the participant and held until the award is forfeited or paid out. Interest shall be credited on the account annually at a rate equal to the return on five year U.S. Treasury obligations. 6. Vesting and Resultant Events. The Committee may, in its discretion, provide for early vesting of an award in the event of the participant's death, permanent and total disability or retirement. At the time of vesting, (i) the award, if in units, shall be paid to the participant either in shares of common stock equal to the number of units, in cash equal to the fair market value of such shares, or in such combination thereof as the Committee shall determine, and the participant's account to which dividend equivalents, other distributions and interest have been credited shall be paid in cash, (ii) the award, if a cash bonus award, shall be paid to the participant either in cash, or in shares of common stock with a then fair market value equal to the amount of such award, or in such combination thereof as the Committee shall determine and (iii) shares of restricted common stock issued pursuant to an award shall be released from the restrictions. III. STOCK OPTIONS 1. Grants. (a) Options for Officers and Key Management Employees. Options to purchase shares of common stock of the Company may be granted to such eligible officers and key management employees as may be selected by the Committee. These options may, but need not, constitute "incentive stock options" under Section 422 of the Code or any other form of option under the Code. To the extent that the aggregate fair market value (determined as of the date of grant) of shares of common stock with respect to which options designated as incentive stock options are exercisable for the first time by a participant during any calendar year (under the Plan or any other plan of the Company, or any parent or subsidiary) exceeds the amount (currently $100,000) established by the Code, such options shall not constitute incentive stock options. (b) Automatic Options for Non-Employee Directors. An option to purchase 4,000 shares of common stock of the Company shall be granted on the date of the 1995 annual meeting of stockholders and, thereafter, annually on the date of the Company's annual meeting of -5- stockholders to each non-employee director. An option granted to a non-employee director pursuant to this Section 1(b) (a "Director Option") shall become exercisable in whole or in part on the earlier to occur of (i) the date which is the first anniversary of the date the Director Option is granted (the date of grant being hereafter referred to as the "Option Date") or (ii) the day immediately preceding the date of the first annual meeting of stockholders of the Company next following the Option Date. (c) Elective Options for Non-Employee Directors. Effective January 1, 1999, each non-employee director may from time to time elect, in accordance with procedures to be specified by the Committee, to receive in lieu of all or part of (i) the annual retainer fee for services as a director of the Company, any fees for attendance at meetings of the Board or any committee of the Board and any fees for serving as a member or chairman of any committee of the Board that would otherwise be payable to such non-employee director ("Fees") or (ii) the annual phantom stock award granted to such non-employee director pursuant to the Retirement Benefits and Phantom Stock Grants for Directors Policy ("Retirement Benefit"), an option to purchase shares of Common Stock, which option shall have a value (as determined in accordance with the Black-Scholes stock option valuation method) as of the date of grant of such option equal to the amount of such Fees or Retirement Benefit. An option granted to a non-employee director pursuant to this Section 1(c) shall be a Director Option and shall become exercisable in whole or in part on the date which is the first anniversary of the date the Director Option is granted. 2. Number of Shares and Purchase Price. The number of shares of common stock subject to an option and the purchase price per share of common stock purchasable upon exercise of the option shall be determined by the Committee; provided, however, that the purchase price per share of common stock shall not be less than 100% of the fair market value of a share of common stock on the date of grant of the option; provided further, that if an incentive stock option shall be granted to any person who, on the date of grant of such option, owns capital stock possessing more than ten percent of the total combined voting power of all classes of capital stock of the Company (or of any parent or subsidiary) (a "Ten Percent Holder"), the purchase price per share of common stock shall be the price (currently 110% of fair market value) required by the Code in order to constitute an incentive stock option; and provided further, that the purchase price per share of common stock subject to a Director Option shall be 100% of the fair market value of a share of common stock on the date of grant of such option. 3. Exercise of Options. The period during which options granted hereunder (other than options granted to non-employee directors) may be exercised shall be determined by the Committee; provided, however, that no incentive stock option shall be exercised later than ten years after its date of grant; provided further, that if an incentive stock option shall be granted to a Ten Percent Holder, such option shall not be exercisable more than five years after its date of grant. The Committee may, in its discretion, establish performance measures which shall be satisfied or met as a condition to the grant of an option or to the exercisability of all or a portion of an option. The Committee shall determine whether an option shall become exercisable in cumulative or -6- non-cumulative installments and in part or in full at any time. An exercisable option, or portion thereof, may be exercised only with respect to whole shares of common stock. An option may be exercised (i) by giving written notice to the Company specifying the number of whole shares of common stock to be purchased and accompanied by payment therefor in full (or arrangement made for such payment to the Company's satisfaction) either (A) in cash, (B) in previously owned whole shares of common stock (which the optionee has held for at least six months prior to delivery of such shares or which the optionee purchased on the open market and for which the optionee has good title free and clear of all liens and encumbrances) having a fair market value, determined as of the date of exercise, equal to the aggregate purchase price payable by reason of such exercise, (C) in cash by a broker-dealer acceptable to the Company to whom the optionee has submitted an irrevocable notice of exercise or (D) a combination of (A) and (B), (ii) if applicable, by surrendering to the Company any SARs which are cancelled by reason of the exercise of the option and (iii) by executing such documents as the Company may reasonably request. The Committee shall have sole discretion to disapprove of an election pursuant to any of clauses (B)-(D). Any fraction of a share of common stock which would be required to pay such purchase price shall be disregarded and the remaining amount due shall be paid in cash by the optionee. No certificate representing common stock shall be delivered until the full purchase price therefor has been paid. 4. Termination of Employment or Service. An option may be exercised during the optionee's continued employment with the Company or service on the Board, as the case may be, and, unless otherwise determined by the Committee as set forth in the agreement relating to the option, for a period not in excess of ninety days following termination of employment or service on the Board and only within the original term of the option; provided, however, that if employment of the optionee by the Company or service on the Board, as the case may be, shall have terminated by reason of retirement or total and permanent disability, then the option may be exercised to the extent set forth in the agreement relating to the option for a period not in excess of five years (or such other period (not to exceed the original term of the option) as is set forth in the agreement relating to the option) following termination of employment or service on the Board, but not after the expiration of the term of the option. In the event of the death of an optionee (i) during employment or service on the Board, as the case may be, (ii) within a period not in excess of five years (or such other period (not to exceed the original term of the option) as is set forth in the agreement relating to the option) after termination of employment or service on the Board, as the case may be, by reason of retirement or total and permanent disability or (iii) within ninety days (or such other period (not to exceed the original term of the option) as is set forth in the agreement relating to the option) after termination of employment or service on the Board, as the case may be, for any other reason, outstanding options held by such optionee at the time of death may be exercised to the extent set forth in the agreement relating to the option by the executor, administrator, personal representative, beneficiary or similar persons of such deceased optionee within ninety days of the date of death (or such other period (not to exceed the original term of the option) as is set forth in the agreement relating to the option). -7- IV. UK STOCK OPTION SUB-PLAN 1. GENERAL (a) Sub-Plan. The UK Stock Option Sub-Plan ("the Sub-Plan") has been established in order to vary the terms on which options may be given to officers and other key management employees who are employed in the United Kingdom by the Company or any of its subsidiaries. Stock options granted under the Sub-Plan shall be deemed granted under the Plan and shall, unless otherwise stated or implied in this Article IV, comply in all respects with the terms and conditions applicable to options granted under Article III of the Plan. Articles II and V and Clause 2 of Article VI shall not apply to options granted under the Sub- Plan. (b) Definitions. In the Sub-Plan the following terms shall have the following meanings: "the Subsidiaries" shall mean all companies which are controlled by the Company (as defined in Section 840 of the Income and Corporation Taxes Act 1988) and which are affiliates controlled by the Company directly or indirectly through one or more intermediaries for the purposes of Rule 12b-2 of the Exchange Act; "the Group" shall mean the Company and the Subsidiaries; "Associated Company" shall have the meaning attributed to it in Section 416(1) of the Income and Corporation Taxes Act 1988; "the Committee" shall mean the committee designated to administer the Plan; "Full Time Employee" shall mean any director or employee who is employed by the Group in the United Kingdom and who is required to devote to his duties not less than 25 hours (or in the case of an employee who is not a director of any company in the Group, 20 hours) per week (excluding meal breaks) and is not precluded by paragraph 8 of Schedule 9 from participating in the Sub-Plan; "Relevant Emoluments" shall have the meaning which the term bears in sub- paragraph (2) of paragraph 28 of Schedule 9 by virtue of sub-paragraph (4) of that paragraph; -8- "Year of Assessment" shall mean a year beginning on any 6 April and ending on the following 5 April; "Market Value" shall mean on any day the average of high and low transaction prices in trading in the common stock of the Company as reported on the New York Stock Exchange--Composite Transactions compiled by Associated Press or if no trading occurred on such date then on the next preceding date on which such trading occurred; "Schedule 9" shall mean Schedule 9 of the United Kingdom Income and Corporation Taxes Act 1988; "Share" or "Shares" shall mean a share or shares of common stock of par value $1.25 which satisfy the conditions specified in Paragraphs 10 to 14 inclusive of Schedule 9. (c) Sub-Plan. The Committee may grant stock options to officers and other key management employees eligible to participate in the Sub-Plan on the terms and subject to the conditions stated in the Sub-Plan. (d) Eligibility. Full Time Employees who are officers or other key management employees employed by the Group in the United Kingdom under selection guidelines to be established by the Committee, shall be eligible, upon selection by the Committee, to receive stock options. (e) Shares to be Issued. Shares to be issued shall be authorized and unissued shares of common stock, treasury stock or a combination thereof. The issue of shares of common stock shall be subject to the maximum specified in the Plan. (f) Administration. The Sub-Plan shall be administered by the Committee in accordance with the provisions set out in the Plan and varied by the terms of the Sub-Plan. (g) Effective Date and Term of the Sub-Plan. The Sub-Plan shall be submitted to the stockholders of the Company for approval at the 1995 annual meeting of stockholders and, if approved, shall become effective on January 1, 1995. Options shall not be granted until the Sub-Plan has been approved by the Board of UK Inland Revenue under the provisions of paragraph 1 of Schedule 9. Any change required to be made to the Plan by the Board of UK Inland Revenue in order to obtain its approval may be made without stockholder approval, except as otherwise provided in Clause 7 of Article I. The Sub-Plan shall terminate on December 31, 1999 unless terminated prior thereto by action of the Board. No further grants shall be made under the Sub-Plan after termination, but termination shall not affect the rights of any participant under the grants made prior to termination. -9- (h) Amendments. The Sub-Plan may be amended or terminated by the Board subject to the conditions specified in the Plan. No amendment may be made which will put the Sub-Plan in breach of conditions for approval set out in Schedule 9 and no amendment to the Sub-Plan or any provision in the Plan which applies to options granted under the Sub-Plan shall be made without prior approval of the Board of UK Inland Revenue. 2. STOCK OPTIONS (a) Grants. Options to purchase shares of common stock may be granted to such eligible Full-Time Employees as may be selected by the Committee. No variation shall be made in relation to a spin-off nor to any class of securities available under the Sub-Plan. (b) Variations in Options. Variations may not be made to options granted under the Sub-Plan pursuant to Article I clause 5 of the Plan without prior consent of the Board of UK Inland Revenue. (c) Terms of Options. Terms attaching to options shall be contained in a stock option agreement, the form of which must be approved in advance by the Board of UK Inland Revenue. If any performance targets are attached to the exercisability of an option, these shall be objectively determined and subject to the prior approval of the Board of UK Inland Revenue. No option shall be exercisable more than ten years after its date of grant. The per share option price shall be stated at the time the option is granted and shall be not less than 100% of the Market Value of the share on the date on which the optionee is offered options under the Sub-Plan. Upon exercise, the option price shall be paid in cash. The provisions in Clause 3 of Article III for the exercise of options by payment in whole shares of common stock or in cash by a broker-dealer to whom the optionee has submitted an irrevocable notice of exercise will not apply for the purposes of the Sub-Plan unless, in the case of the latter, approved by the Board of UK Inland Revenue. Options shall not be transferable except that such options may be exercised by the personal representative of a deceased optionee or a beneficiary of such deceased optionee who has been designated pursuant to beneficiary designation procedures approved by the Company, in each case within ninety days of the death of the optionee. Options may be exercised during the individual's continued employment with the Group and for a period not in excess of ninety days following termination of employment and only within the original term of the option. No option may be exercised by an individual at any time when he is precluded by Paragraph 8 of Schedule 9 from participating in the Sub-Plan. (d) Exercise of Option. An option may be exercised by delivery of written notice to the Company specifying the number of shares to be purchased and accompanied by (i) payment in full of the option price in the form of cash, cheque or credit transfer for the number of shares so purchased or (ii) if permitted by the Committee in its sole discretion, irrevocable written instructions to an agent or broker to effect the immediate sale of purchased whole shares of Common Stock and remit to the Company, out of the proceeds from such sale, sufficient funds to -10- cover (A) the aggregate option price payable for the shares subject to the exercise and (B) the taxes if any associated with such exercise, and to pay to the optionee the balance (if any after payment of any brokerage fees) remaining after the remission of such funds to the Company. The Company shall within thirty days post to the optionee certificates representing the number of shares over which the option has been exercised (less any sold by the agent or broker referred to above) and shall pay all original issue or transfer taxes and all other fees and expenses incidental to such delivery. (e) Limits on Options. No person shall be granted options under the Sub-Plan which would, at the time that they are obtained, cause the aggregate Market Value of the shares which such person may acquire in pursuance of rights obtained under the Sub-Plan or under any other scheme established by the Group or by any Associated Company of the Company and approved by the Board of UK Inland Revenue under Schedule 9 (and not exercised) to exceed or further exceed the greater of: (1) 100,000 British Pounds Sterling or (2) Four times the Relevant Emoluments of the optionee for the current or preceding Year of Assessment (whichever of those years gives the greater amount) or if there were no Relevant Emoluments for the preceding Year of Assessment four times the amount of the Relevant Emoluments for the period of twelve months beginning with the first day during the current Year of Assessment in respect of which there are Relevant Emoluments. For the purposes of this clause the Market Value of the shares shall be converted from US Dollars to sterling at the middle rate for the buying and selling of that amount of sterling for US Dollars as quoted by the Barclays Bank PLC at the opening of business on the day on which the optionee is offered options under the Sub-Plan./(1)/ V. STOCK APPRECIATION RIGHTS 1. Grants. Free-standing SARs entitling the grantee to receive cash or shares of common stock having a fair market value equal to the appreciation in market value of a stated number of shares of common stock from the date of grant to the date of exercise of such SARs, or in the case of tandem SARs, from the date of grant of the related stock option to the date of exercise of such tandem SARs, may be granted to such eligible officers and other key management employees as may be selected by the Committee. The holder of a tandem SAR may elect to exercise either the option or the SAR, but not both. 2. Number of SARs and Base Price. The number of SARs subject to a grant shall be determined by the Committee. Any tandem SAR related to an incentive stock option shall be granted at the same time that such incentive stock option is granted. The base price of a tandem SAR shall be the purchase price per share of common stock of the related option. The base price of a free-standing SAR shall be determined by the Committee; provided, however, that such base price -11- shall not be less than 100% of the fair market value of a share of common stock on the date of grant of such SAR. 3. Exercise of SARs. The agreement relating to a grant of SARs may specify whether such grant shall be settled in shares of common stock (including restricted shares of common stock) or cash or a combination thereof. Upon exercise of an SAR, the grantee shall be paid the excess of the then fair market value of the number of shares of common stock to which the SAR relates over the fair market value of such number of shares at the date of grant of the SAR or of the related stock option, as the case may be. Such excess shall be paid in cash or in shares of common stock having a fair market value equal to such excess or in such combination thereof as the Committee shall determine. The period during which SARs granted hereunder may be exercised shall be determined by the Committee; provided, however, that no tandem SAR shall be exercised if the related option has expired or has been cancelled or forfeited or has otherwise terminated. The Committee may, in its discretion, establish performance measures which shall be satisfied or met as a condition to the grant of an SAR or to the exercisability of all or a portion of an SAR. The Committee shall determine whether an SAR may be exercised in cumulative or non-cumulative installments and in part or in full at any time. An exercisable SAR, or portion thereof, may be exercised, in the case of a tandem SAR, only with respect to whole shares of common stock and, in the case of a free-standing SAR, only with respect to a whole number of SARs. If an SAR is exercised for restricted shares of common stock, a certificate or certificates representing such restricted shares shall be issued in accordance with Section 4 of Article II and the holder of such restricted shares shall have such rights of a stockholder of the Company as determined pursuant to such Section. Prior to the exercise of an SAR for shares of common stock, including restricted shares, the holder of such SAR shall have no rights as a stockholder of the Company with respect to the shares of common stock subject to such SAR. A tandem SAR may be exercised (i) by giving written notice to the Company specifying the number of whole SARs which are being exercised, (ii) by surrendering to the Company any options which are cancelled by reason of the exercise of such SAR and (iii) by executing such documents as the Company may reasonably request. A free-standing SAR may be exercised (i) by giving written notice to the Company specifying the whole number of SARs which are being exercised and (ii) by executing such documents as the Company may reasonably request. 4. Termination of Employment. An SAR may be exercised during the grantee's continued employment with the Company and, unless otherwise determined by the Committee as set forth in the agreement relating to the SAR, for a period not in excess of ninety days following termination of employment and only within the original term of the SAR; provided, however, that if employment of the grantee by the Company shall have terminated by reason of retirement or total and permanent disability, then the SAR may be exercised to the extent set forth in the agreement relating to the SAR for a period not in excess of five years following termination of employment but not after the expiration of the term of the SAR. In the event of the death of a holder of an SAR (i) during employment, (ii) within a period not in excess of five years after termination of employment by reason of retirement or total and permanent disability or (iii) -12- within ninety days after termination of employment for any other reason, outstanding SARs held by such holder at the time of death may be exercised to the extent set forth in the agreement relating to the SAR by the executor, administrator, personal representative, beneficiary or similar persons of such deceased holder within ninety days of the date of death. VI. OTHER 1. Non-Transferability of Options and Stock Appreciation Rights. No option or SAR shall be transferable other than (i) by will, the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company or (ii) as otherwise set forth in the agreement relating to such option or SAR. Each option or SAR may be exercised during the participant's lifetime only by the participant or the participant's guardian, legal representative or similar person. Except as permitted by the second preceding sentence, no option or SAR may be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of any option or SAR, such award and all rights thereunder shall immediately become null and void. 2. Tax Withholding. The Company shall have the right to require, prior to the issuance or delivery of any shares of common stock or the payment of any cash pursuant to a grant or award hereunder, payment by the holder thereof of any Federal, state, local or other taxes which may be required to be withheld or paid in connection therewith. An agreement may provide that (i) the Company shall withhold whole shares of common stock which would otherwise be delivered to a holder, having an aggregate fair market value determined as of the date the obligation to withhold or pay taxes arises in connection therewith (the "Tax Date"), or withhold an amount of cash which would otherwise be payable to a holder, in the amount necessary to satisfy any such obligation or (ii) the holder may satisfy any such obligation by any of the following means: (A) a cash payment to the Company, (B) delivery to the Company of previously owned whole shares of common stock (which the holder has held for at least six months prior to the delivery of such shares or which the holder purchased on the open market and for which the holder has good title, free and clear of all liens and encumbrances) having an aggregate fair market value determined as of the Tax Date, (C) authorizing the Company to withhold whole shares of common stock which would otherwise be delivered having an aggregate fair market value determined as of the Tax Date or withhold an amount of cash which would otherwise be payable to a holder, (D) in the case of the exercise of an option, a cash payment by a broker-dealer acceptable to the Company to whom the optionee has submitted an irrevocable notice of exercise or (E) any combination of (A), (B) and (C); provided, however, that the Committee shall have sole discretion to disapprove of an election pursuant to any of clauses (B)-(E). An agreement relating to a grant or award hereunder may provide for shares of common stock to be delivered or withheld having an aggregate fair market value in excess of the minimum amount required to be withheld, but not in excess of the amount determined by applying the holder's maximum -13- marginal tax rates. Any fraction of a share of common stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the holder. 3. Acceleration Upon Change in Control. If while (i) any performance award or fixed award granted under Article II is outstanding or (ii) any stock option granted under Article III or IV of the Plan or SAR granted under Article V of the Plan is outstanding -- (a) any "person," as such term is defined in Section 3(a)(9) of the Exchange Act, as modified and used in Section 13(d) and 14(d) thereof (but not including (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company) (hereinafter a "Person") is or becomes the beneficial owner, as defined in Rule 13d-3 of the Exchange Act, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates, excluding an acquisition resulting from the exercise of a conversion or exchange privilege in respect of outstanding convertible or exchangeable securities) representing 50% or more of the combined voting power of the Company's then outstanding securities; or (b) during any period of two (2) consecutive years (not including any period prior to the effective date of the Plan), individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into any agreement with the Company to effect a transaction described in Clause (a), (c) or (d) of this Section) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (c) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or -14- (d) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets, (any of such events being hereinafter referred to as a "Change in Control"), then from and after the date on which public announcement of the acquisition of such percentage shall have been made, or the date on which the change in the composition of the Board set forth above shall have occurred, or the date of any such stockholder approval of a merger, consolidation, plan of complete liquidation or an agreement for the sale of the Company's assets as described above occurs (the applicable date being hereinafter referred to as the "Acceleration Date"), (i) with respect to such performance awards, the highest level of achievement specified in the award shall be deemed met and the award shall be immediately and fully vested, (ii) with respect to such fixed awards, the period of continued employment specified in the award upon which the award is contingent shall be deemed completed and the award shall be immediately and fully vested and (iii) with respect to such options and SARs, all such options and SARs, whether or not then exercisable in whole or in part, shall be fully and immediately exercisable. 4. Restrictions on Shares. Each grant and award made hereunder shall be subject to the requirement that if at any time the Company determines that the listing, registration or qualification of the shares of common stock subject thereto upon any securities exchange or under any law, or the consent or approval of any governmental body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the delivery of shares thereunder, such shares shall not be delivered unless such listing, registration, qualification, consent, approval or other action shall have been effected or obtained, free of any conditions not acceptable to the Company. The Company may require that certificates evidencing shares of common stock delivered pursuant to any grant or award made hereunder bear a legend indicating that the sale, transfer or other disposition thereof by the holder is prohibited except in compliance with the Securities Act of 1933, as amended, and the rules and regulations thereunder. 5. No Right of Participation or Employment. No person (other than non-employee directors to the extent provided in Article III) shall have any right to participate in the Plan. Neither the Plan nor any grant or award made hereunder shall confer upon any person any right to continued employment by the Company, any subsidiary or any affiliate of the Company or affect in any manner the right of the Company, any subsidiary or any affiliate of the Company to terminate the employment of any person at any time without liability hereunder. 6. Rights as Stockholder. No person shall have any right as a stockholder of the Company with respect to any shares of common stock or other equity security of the Company which is subject to a grant or award hereunder unless and until such person becomes a stockholder of record with respect to such shares of common stock or equity security. 7. Governing Law. The Plan, each grant and award hereunder and the related agreement, and all determinations made and actions taken pursuant thereto, to the extent not otherwise governed by the Code or the laws of the United States, shall be governed by the laws of the State of Delaware and construed in accordance therewith without giving effect to principles of conflicts of laws. -15- 8. Approval of Plan. The Plan and all grants and awards made hereunder shall be null and void if the adoption of the Plan is not approved by the affirmative vote of a majority of the shares of common stock present in person or represented by proxy at the 1995 annual meeting of stockholders. /(1)/Note: Options granted on or after April 29, 1996 are subject to (Pounds)30,000 limit instead of the (Pounds)100,000 limit set out in Article IV, Section 2(e). For purposes of calculating whether this limit would be exceeded by a subsequent option grant, it is necessary to include the value of shares subject to unexercised options granted in the past (whether or not they were granted before April 29, 1996) as well as the value of the shares which would be subject to the proposed grant. The calculation would include unexercised options granted under the UK Sub-Plans of the 1991 Stock Incentive Plan, the 1986 Stock Incentive Plan and the Donnelley Shares Stock Option Plan. The value of shares subject to unexercised options should be calculated on the basis of their fair market value at the original dates of grant (that is, their exercise price), converted into pounds Sterling at the exchange rates in effect on such dates. -16- EX-10.E 6 STOCK OPTION AGREE. FOR NON-EMPLOYEE DIR. EXHIBIT 10(e) R. R. DONNELLEY & SONS COMPANY STOCK OPTION AGREEMENT ---------------------- (For Non-Employee Directors) R. R. DONNELLEY & SONS COMPANY, a Delaware corporation (herein called the "Company"), acting pursuant to the provisions of its 1995 Stock Incentive Plan, which was approved by the stockholders on March 23, 1995 (as amended, herein called the "Plan"), hereby grants to ___________________ (herein called "Optionee"), as of ___________ (herein called the "option date"), an option to purchase from the Company _____ shares of common stock of the Company, par value $1.25 per share (herein called "common stock"), at a price of $_______ per share (herein called the "option") to be exercisable during the term (i) commencing on the date which is the first anniversary of the option date and (ii) ending on the first business day preceding the tenth anniversary of the option date (herein called the "option term"), but only upon the following terms and conditions: 1. The option may be exercised by Optionee, in whole or in part, from time to time, during the option term only in accordance with the following conditions and limitations: (a) Except as provided in Sections 5 and 7 hereof, Optionee must, at any time the option becomes exercisable and at any time the option is exercised, have been continuously a non-employee director of the Company since the date hereof. (b) Unless a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), is in effect as to the shares purchasable under the option, no shares of common stock may be purchased under the option unless, prior to the purchase thereof, the Company shall have received an opinion of counsel to the effect that the sale of such shares by the Company to Optionee will not constitute a violation of the Securities Act. Optionee hereby agrees that as a condition of exercise, Optionee will, if requested by the Company, submit a written statement, in form satisfactory to counsel for the Company, to the effect that any shares of common stock purchased upon exercise of the option will be purchased for investment and not with a view to the distribution thereof within the meaning of the Securities Act, and the Company shall have the right, in its discretion, to cause the certificates (or other evidence of ownership) representing shares of common stock purchased under the option to be appropriately legended to refer to such undertaking or to any legal restrictions imposed upon the transferability thereof by reason of such undertaking. (c) (1) Subject to Sections 5 and 7 hereof, at any time on and after the earlier to occur of (i) the date which is the first anniversary of the option date or (ii) the day immediately preceding the date of the first annual meeting of stockholders of the Company following the option date, Optionee may purchase all of the shares of common stock subject to the option. (2) Notwithstanding the foregoing subsection (1), if while any portion of the option is outstanding and unexercisable, a Change in Control (as defined in the Plan) occurs, then from and after the Acceleration Date (as defined in the Plan), the option shall be exercisable with respect to all of the shares of common stock subject to such portion of the option. (d) No fractional shares may be purchased at any time. 2. Subject to the limitations herein set forth, the option may be exercised by delivery of written notice to the Company specifying the number of shares of common stock to be purchased and accompanied by payment in full of the option price (or arrangement made for such payment to the Company's satisfaction) for the number of shares so purchased. The option price may be paid (i) in cash, (ii) by delivering previously owned whole shares of common stock (which Optionee has held for at least six months prior to the delivery of such shares or which Optionee purchased on the open market and for Which Optionee has good title, free and clear of all liens and encumbrances) having a fair market value equal to the option price, or (iii) in a combination thereof. Payment of the option price, or any part thereof, in previously owned shares of common stock shall not be effective unless Optionee delivers one or more stock certificates (or otherwise delivers shares of common stock to the satisfaction of the Company) representing shares having a fair market value on the date of exercise equal to or in excess of the option price, or applicable portion thereof, accompanied by such endorsements, signature guarantees or other documents or assurances as may reasonably be required to effect the transfer to the company of such number of shares. If Optionee delivers a certificate or certificates (or otherwise delivers shares of common stock to the satisfaction of the Company) representing shares in excess of the number required to cover the option price, a certificate (or other evidence of ownership) representing such excess number of shares will be issued and redelivered to Optionee. For purposes of this Agreement, the fair market value of the common stock on a specified date shall be determined by reference to the average of the high and low transaction prices in trading of the common stock on such date as reported in the New York Stock Exchange-Composite Transactions, or, if no such trading in the common stock occurred on such date, then on the next preceding date when such trading occurred; provided, that if the Committee administering the Plan shall determine that such New York Stock Exchange-Composite Transactions prices are not representative of the fair market value, such Committee shall determine such fair market value by such other appropriate means as it shall determine. 3. Upon exercise of the option in whole or in part pursuant to Section 2 hereof, the Company shall deliver or cause to be delivered a certificate (or other evidence of ownership) representing the number of shares specified against payment therefor and shall pay all original issue or transfer taxes and all other fees and expenses incident to such delivery. 4. Optionee shall be entitled to the privileges of ownership with respect to shares subject to the option only with respect to shares purchased upon exercise of all or part of the option and as to which Optionee becomes a stockholder of record. 5. (a) If Optionee ceases to serve as a non-employee director of the Company by reason of death, then from and after the date of death the option shall be exercisable by the executor, administrator, personal representative or Optionee's beneficiary designated pursuant to the Beneficiary Designation Form attached hereto as Exhibit A (herein called a "Beneficiary") during the 90-day period commencing on the date of Optionee's death, but only during the option term, to the extent Optionee was entitled under Section 1(c) hereof to exercise the option on the date of Optionee's death. The portion of the option which may not become exercisable pursuant to the preceding sentence shall be cancelled as of the date of Optionee's death. (b) If Optionee ceases to serve as a non-employee director of the Company by reason of retirement or total and permanent disability, then from and after the effective date of such cessation of service the option shall be exercisable by Optionee during the five-year period commencing on the effective date of such cessation of service, but only during the option term, to the extent Optionee was entitled under Section 1(c) hereof to exercise the option on the effective date of such cessation of service. The portion of the option which may not become exercisable pursuant to the preceding sentence shall be cancelled as of the effective date of Optionee's cessation of service. (c) If Optionee ceases to serve as a non-employee director of the Company for any reason other than death, retirement or total and permanent disability, then from and after the effective date of such cessation of service the option shall be exercisable by Optionee during the 90-day period commencing on the effective date of such cessation of service, but only during the option term, to the extent Optionee was entitled under Section 1(c) hereof to exercise the option on the effective date of such cessation of service. The portion of the option which may not become exercisable pursuant to the preceding sentence shall be cancelled as of the effective date of Optionee's cessation of service. 6. The option may not be transferred by Optionee other than: (a) by will, the laws of descent and distribution or pursuant to the beneficiary designation procedures approved by the Company; (b) in whole or in part to one or more transferees; provided that (i) any such transfer must be without consideration, (ii) each transferee must be a member of Optionee's "immediate family," a trust established for the exclusive benefit of Optionee and/or one or more members of Optionee's immediate family or a partnership whose sole equity owners are Optionee and/or members of Optionee's immediate family, and (iii) such transfer is specifically approved by the Vice President, Compensation and Benefits or the Committee administering the Plan following the receipt of a completed Assignment of Option to Purchase Common Stock attached hereto as Exhibit B; or (c) as otherwise set forth in an amendment to this Agreement. Optionee hereby acknowledges that Optionee will recognize income upon exercise of a transferred option and Optionee hereby agrees to pay to the Company such amount as the Company is advised it is required under applicable federal, state, local or other tax laws to withhold and pay over to governmental taxing authorities by reason of the purchase of shares of common stock pursuant to the option. In the event the option is transferred as contemplated in this Section 6, such transfer shall become effective when approved by the Vice President, Compensation and Benefits or a member of the Committee administering the Plan (as evidenced by counterexecution of the Assignment of Option to Purchase Common Stock on behalf of the Company), and such option may not be subsequently transferred by the transferee other than by will or the laws of descent and distribution. Any transferred option shall continue to be governed by and subject to the terms and conditions of the Plan and the transferee shall be entitled to the same rights as Optionee as if no transfer had taken place. During Optionee's lifetime the option is exercisable only by Optionee or Optionee's guardian, personal representative or similar person or by a transferee permitted under paragraph (b) or (c) above. Except as permitted by the foregoing, the option may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of the option, the option and all rights hereunder shall immediately become null and void. As used in this Section, "immediate family" shall mean, with respect to any person, any spouse, child, stepchild or grandchild, and shall include relationships arising from legal adoption. 7. In the event of the death of Optionee (a) during the five-year period commencing on the effective date of Optionee's cessation of service as a non- employee director by reason of retirement or total and permanent disability or (b) during the 90-day period commencing on the effective date of Optionee's cessation of service as a non-employee director for any other reason, the option may be exercised by the executor, administrator, personal representative or Beneficiary of Optionee during the 90-day period commencing on the date of Optionee's death, but only during the option term, to the extent Optionee was entitled to exercise the option on the date of Optionee's death. 8. In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of common stock other than a regular cash dividend, the number and class of securities subject to the option and the purchase price per security shall be appropriately adjusted by the Committee without an increase in the aggregate purchase price, other than an increase resulting from rounding. If any adjustment would result in a fractional security being subject to the Option, the Company shall pay the Optionee, in connection with the first exercise of the Option, in whole or in part, occurring after such adjustment, an amount in cash determined by multiplying (i) the fraction of such security (rounded to the nearest hundredth) by (ii) the excess, if any, of (A) the fair market value of the common stock on the exercise date over (B) the exercise price of the option. The decision of the Committee regarding the amount and timing of any adjustment pursuant to this Section 8 shall be final, binding and conclusive. 9. The option is subject to the condition that if the listing, registration or qualification of the shares subject to the option on any securities exchange or under any state or federal law, or if the assent or approval of any regulatory body shall be necessary as a condition of, or in connection with, the granting of the option or the delivery or purchase of shares thereunder, the option may not be exercised in whole or in part unless and until such listing, registration, qualification, consent or approval shall have been effected or obtained. The Company agrees to use its best efforts to obtain any such requisite listing, registration, qualification, consent or approval. 10. The Committee administering the Plan, as from time to time constituted, shall have the right to determine any questions which arise in connection with this Agreement or the option. This Agreement and the option are subject to the provisions of the Plan and shall be interpreted in accordance therewith. 11. The option shall not be treated as an incentive stock option within the meaning of Section 422 of the Code. 12. This Agreement shall be binding upon and shall inure to the benefit of any successor or successors of the Company and any person or persons who shall, upon the death of the Optionee, acquire any rights in the option. 13. Any notice, including a Beneficiary Designation Form and a notice of exercise of the option, required to be given hereunder to the Company shall be addressed to the Company at its office at 77 West Wacker Drive, Chicago, Illinois 60601-1696, attention of the Vice President, Compensation and Benefits, and any notice required to be given hereunder to Optionee shall be addressed to Optionee at Optionee's residence address as shown in the Company's records, subject to the right of either party hereafter to designate in writing to the other some other address. Any such notice shall be deemed to have been duly given on the day that such notice is received by the Vice President, Compensation and Benefits. Any such notice shall be (i) delivered to the Vice President, Compensation and Benefits by personal delivery, facsimile, United States mail or by express courier service and (ii) deemed to be received upon personal delivery, upon confirmation of receipt of facsimile transmission or upon receipt by the Vice President, Compensation and Benefits if by United States mail or express courier service; provided, however, that if any notice is not received during regular business hours, it shall be deemed to be received on the next succeeding business day of the Company. 14. The option, this Agreement, and all determinations made and actions taken pursuant hereto and thereto, to the extent not governed by the laws of the United States, shall be governed by the laws of the State of Delaware and construed in accordance therewith without giving effect to principles of conflicts of laws. IN WITNESS WHEREOF, R. R. DONNELLEY & SONS COMPANY has caused this instrument to be executed as of the day and year first above written. R. R. DONNELLEY & SONS COMPANY By -------------------------- Dewey Ingham V.P., Compensation & Benefits The terms and conditions of the foregoing Stock Option Agreement are hereby accepted by the undersigned as of March 26, 1998. - ------------------------------- Exhibit A R.R. DONNELLEY & SONS COMPANY 1995 STOCK INCENTIVE PLAN BENEFICIARY DESIGNATION FORM ---------------------------- Stock Option Agreement (the "Option") dated: --------------------- (fill in option date) You may designate a primary beneficiary and a secondary beneficiary. You may name more than one person as a primary or secondary beneficiary. For example, you may wish to name your spouse as primary beneficiary and your children as secondary beneficiaries. Your secondary beneficiary(ies) will receive nothing if any of your primary beneficiaries survive you. All primary beneficiaries will share equally unless you indicate otherwise. The same rule applies for secondary beneficiaries. Designate Your Beneficiary(ies): Primary Beneficiary(ies) (give name, address and relationship to you): ------------------------------------------------------------ ------------------------------------------------------------ ------------------------------------------------------------ Secondary Beneficiary(ies) (give name, address and relationship to you): -------------------------------------- ------------------------------------------------------------ ------------------------------------------------------------ I certify that my designation of beneficiary set forth above is my free act and deed. If you are married and are not naming your spouse as the sole primary beneficiary, please print the name, address and social security number of your spouse in the following space: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ------- - ------------------------------ ------------------------------ Name (Please Print) Signature ------------------------------ Date This Beneficiary Designation Form shall be effective on the day it is received by the Vice President, Compensation and Benefits of the Company at 77 West Wacker Drive, Chicago, Illinois 60601-1696. This Form shall be (i) delivered to the Vice President, Compensation and Benefits by personal delivery, facsimile, United States mail or by express courier service and (ii) deemed to be received upon personal delivery, upon confirmation of receipt of facsimile transmission or upon receipt by the Vice President, Compensation and Benefits if by United States mail or express courier service; provided, however, that if this Form is not received during regular business hours, it shall be deemed to be received on the next succeeding business day of the Company. NOTICE: The signature on this Beneficiary Designation Form shall correspond to the name in which the Option is registered in the books and records of the Company; provided, however, that if the person executing this Form is not such registered owner, proof of such person's right to execute this Form is being delivered with this Form. The Company shall have sole and final authority to determine whether such proof is satisfactory. Exhibit B R.R. DONNELLEY & SONS COMPANY ASSIGNMENT OF OPTION TO PURCHASE COMMON STOCK I, _____________________ (the "Transferor"), hereby transfer unto _______________ (the "Transferee"), as a gift and without receipt of any consideration, those option(s) (or portions thereof specified below) to purchase shares of common stock of the Company ("Common Stock") standing in my name on the books of the Company, and set forth as follows (the "Options"): Date of Grant Shares being Transferred Exercise Price Expiration Date ------------- ------------------------ -------------- ---------- ---- 1. 2. 3. I hereby authorize the Secretary to transfer the Options (or portions thereof) as set forth above on the books and records of the Company. I understand that the proposed transfer(s) set forth above are subject to the approval of the Company and, if approved, the proposed transfer(s) shall become effective on the date this Assignment is signed by the Company. Date signed: Signature ------------------------ ----------------------------- Print Name: ----------------------------- NOTICE: The signature on this Assignment shall correspond to the name in which the Option(s) is registered on the books and records of the Company; provided, however, that if the person transferring the Option(s) is not such registered owner, proof of such person's right to transfer the Option(s) is being delivered with this Assignment. The Company shall have sole and final authority to determine whether such proof is satisfactory. To: R.R. Donnelley & Sons Company The undersigned Transferee acknowledges and agrees that he or she has received and reviewed a copy of the R.R. Donnelley & Sons Company 1995 Stock Incentive Plan (the "Plan"), the agreement relating to each Option (including any amendment to each such Option), the Prospectus of the Company relating to the shares of Common Stock subject to each such Option, the Company's most recent Annual Report to Stockholders and the Company's Proxy Statement relating to its most recent Annual Meeting of Stockholders. The undersigned Transferee further acknowledges and agrees that, except as otherwise specifically provided in an amendment to an Option, each Option (i) shall be governed by and remain subject to the terms and conditions of the Plan and related Option Agreement, as so amended, including provisions relating to the expiration date, exercisibility, exercise price and forfeiture of an Option, (ii) except as set forth in any such amendment, the Transferee shall be entitled to the same rights as the person transferring the Option as if no transfer had taken place and (iii) may be amended by the Transferor (and not the Transferee) subsequent to the date this Assignment is signed by the Transferee. TRANSFEREE - -------------------------------------------------------------------------------- Signature Date signed - -------------------------------------------------------------------------------- Street Address Zip Code - -------------------------------------------------------------------------------- Print Name and, if applicable, representative capacity (e.g., as State trustee, as general partner) - --------------------------------------- Taxpayer I.D. Number ACKNOWLEDGED AND AGREED: R.R. DONNELLEY & SONS COMPANY - -------------------------------------------------------------------------------- Print Name and Title Date signed EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 86,172 0 888,458 20,366 208,540 1,233,533 4,313,963 2,613,683 3,860,390 880,274 1,086,239 0 0 320,962 995,885 3,860,390 3,604,040 3,604,040 2,851,213 3,270,638 172,863 0 (59,036) 447,229 164,975 282,254 (80,067) 0 0 202,187 1.43 1.41
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