<PAGE>
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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 JUNE 30, 1996
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 JULY 31, 1996 153,238,963
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<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
INDEX NUMBER(S)
----- ---------
<S> <C>
Condensed Consolidated Statements of Income (Unaudited) for
the three and six month periods ended June 30, 1996 and
1995........................................................ 3
Condensed Consolidated Balance Sheets as of June 30, 1996
(Unaudited) and December 31, 1995........................... 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the six months ended June 30, 1996 and 1995............. 5
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations--Comparison of Second Quarter and First
Half 1996 to 1995........................................... 8-11
Changes in Financial Condition............................... 11
Other Information............................................ 11-12
Outlook...................................................... 12-13
</TABLE>
2
<PAGE>
R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
----------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales................ $ 1,577,500 $ 1,490,633 $ 3,124,496 $ 2,808,722
Cost of sales............ 1,287,438 1,212,501 2,593,611 2,300,775
------------ ------------ ------------ ------------
Gross profit............. 290,062 278,132 530,885 507,947
Selling and
administrative expenses. 184,792 155,356 363,273 290,674
Restructuring charge..... 48,084 -- 560,632 --
------------ ------------ ------------ ------------
Earnings (loss) from
operations.............. 57,186 122,776 (393,020) 217,273
Interest expense......... 24,713 27,013 49,796 49,867
Gain on Metromail stock
offering................ (44,158) -- (44,158) --
Other (income) expense--
net..................... (2,982) 967 (29,558) 3,725
------------ ------------ ------------ ------------
Earnings (loss) before
income taxes............ 79,613 94,796 (369,100) 163,681
Provision (benefit) for
income taxes............ 25,336 30,335 (46,458) 52,378
------------ ------------ ------------ ------------
Net income (loss)........ $ 54,277 $ 64,461 $ (322,642) $ 111,303
============ ============ ============ ============
Per common share:
Net income (loss)...... $ 0.35 $ 0.42 $ (2.09) $ 0.73
============ ============ ============ ============
Cash dividends......... $ 0.18 $ 0.16 $ 0.36 $ 0.32
============ ============ ============ ============
Average shares
outstanding............. 154,113,294 153,526,000 154,062,081 153,308,000
============ ============ ============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, 1996 AND DECEMBER 31, 1995
(THOUSANDS OF DOLLARS)
<TABLE>
<S> <C> <C> <C>
ASSETS
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C> <C>
Cash and equivalents........................... $ 30,693 $ 33,122
Receivables, less allowance for doubtful
accounts of $25,134 and $25,311 at June 30,
1996 and December 31, 1995, respectively...... 1,065,759 1,466,159
Inventories.................................... 356,857 380,078
Prepaid expenses............................... 21,058 28,600
----------- -----------
Total current assets......................... 1,474,367 1,907,959
----------- -----------
Property, plant and equipment, at cost......... 4,191,238 4,120,449
Accumulated depreciation....................... (2,276,165) (2,111,461)
----------- -----------
Net property, plant and equipment............ 1,915,073 2,008,988
Goodwill and other intangibles--net............ 562,661 1,024,954
Other noncurrent assets........................ 547,766 442,909
----------- -----------
Total assets................................. $ 4,499,867 $ 5,384,810
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable............................... $ 405,975 $ 601,814
Accrued compensation........................... 86,796 126,483
Short-term debt................................ 50,000 50,000
Current and deferred income taxes.............. 76,131 86,737
Other accrued liabilities...................... 435,796 265,340
----------- -----------
Total current liabilities.................... 1,054,698 1,130,374
----------- -----------
Long-term debt................................. 1,228,345 1,560,960
Deferred income taxes.......................... 238,958 300,840
Other noncurrent liabilities................... 187,087 219,466
Shareholders' equity:
Common stock, at stated value ($1.25 par
value)...................................... 330,612 330,612
Retained earnings, net of cumulative
translation adjustments of $33,284 and
$29,031 at June 30, 1996 and December 31,
1995, respectively.......................... 1,611,593 1,994,098
Unearned compensation........................ (7,801) (9,297)
Reacquired common stock, at cost............. (143,625) (142,243)
----------- -----------
Total shareholders' equity............... 1,790,779 2,173,170
----------- -----------
Total liabilities and shareholders'
equity.................................. $ 4,499,867 $ 5,384,810
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Cash flows provided by (used for) operating activities:
Net income (loss)...................................... $(322,642) $ 111,303
Restructuring charge, net of tax and minority interest. 435,380 --
Depreciation........................................... 176,608 159,093
Amortization........................................... 33,155 33,191
Gain on Metromail stock offering....................... (44,158) --
Net change in operating working capital................ 144,747 (255,525)
Net change in other assets and liabilities............. (20,221) (24,851)
Other.................................................. (7,787) 8,653
--------- ---------
Net cash provided by operating activities................ 395,082 31,864
--------- ---------
Cash flows provided by (used for) investing activities:
Capital expenditures................................... (235,997) (224,739)
Proceeds from receivables from Metromail............... 248,510 --
Other investments including acquisitions, net of cash
acquired.............................................. (22,368) (23,812)
--------- ---------
Net cash used for investing activities................... (9,855) (248,551)
--------- ---------
Cash flows provided by (used for) financing activities:
Net increase (decrease) in borrowings.................. (332,616) 249,584
Disposition of reacquired common stock................. 25,849 28,205
Acquisition of common stock............................ (25,831) (20,744)
Cash dividends on common stock......................... (55,514) (49,052)
--------- ---------
Net cash from (used for) financing activities............ (388,112) 207,993
--------- ---------
Effect of exchange rate changes on cash and equivalents.. 456 (323)
--------- ---------
Net decrease in cash and equivalents..................... (2,429) (9,017)
--------- ---------
Cash and equivalents at beginning of period.............. 33,122 20,569
--------- ---------
Cash and equivalents at end of period.................... $ 30,693 $ 11,552
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
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 December 31, 1995 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 1995 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.
Note 2. Components of the company's inventories at June 30, 1996 and
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
(THOUSANDS OF
DOLLARS)
------------------
1996 1995
-------- --------
<S> <C> <C>
Raw materials and manufacturing supplies.................... $213,493 $230,694
Work in process............................................. 216,159 213,741
Finished goods.............................................. 29,033 34,041
Progress billings........................................... (45,579) (47,549)
LIFO reserve................................................ (56,249) (50,849)
-------- --------
Total inventories....................................... $356,857 $380,078
======== ========
Note 3. The following provides supplemental cash flow information:
<CAPTION>
(THOUSANDS OF
DOLLARS)
------------------
SIX MONTHS ENDED
JUNE 30
------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flow data:
Interest paid, net of capitalized interest................. $50,561 $41,312
Income taxes paid.......................................... $31,847 $31,161
</TABLE>
6
<PAGE>
Note 4. In the first half of 1996, the company provided for the
restructuring and realignment of its gravure printing operations in North
America, the repositioning of other businesses, the write-down of certain
equipment, and the impairment of intangible assets and investments in non-core
businesses. These actions resulted in pre-tax charges of $560 million, or
$2.82 per share after tax. Approximately $195 million of the charges related
to the gravure platform realignment and approximately $233 million related to
other manufacturing restructuring. Pre-tax cash outlays associated with the
restructuring and realignment charges are expected to total approximately $177
million and will be incurred in 1996 and 1997. In addition, the company is
recognizing the impairment of approximately $133 million in equipment,
intangibles and investments in non-core businesses. The impairment loss was
calculated based on the excess of the carrying amount of the assets over the
assets' fair values. The fair value of an asset is generally determined as the
discounted estimates of future cash flows generated by the asset. Reflected in
the total charges is $127 million to reposition Stream International's
worldwide operations.
The following table presents the components of the company's restructuring
reserves along with charges against these reserves from their establishment
until June 30, 1996 (in thousands of dollars):
<TABLE>
<CAPTION>
WRITEDOWN OF
PROPERTY AND
ORIGINAL INVESTMENTS RESTRUCTURING
RESTRUCTURING TO FAIR CASH RESERVES AS OF
RESERVES VALUE PAYMENTS JUNE 30, 1996
------------- ------------ -------- --------------
<S> <C> <C> <C> <C>
Restructuring loss on
writedown of property,
plant and equipment, and
other assets............... $250,731 $(250,731) $ -- $ --
Restructuring expenditures
to reposition
operations and close
facilities................. 176,960 -- (4,545) 172,415
Impairment loss on
intangible assets and
investments................ 132,941 (132,941) -- --
-------- --------- ------- --------
Total restructuring
reserves............... $560,632 $(383,672) $(4,545) $172,415
======== ========= ======= ========
</TABLE>
Note 5. On June 19, 1996, Metromail (the company's previously wholly-owned
subsidiary, which is a leading provider of market-oriented consumer
information and reference services) completed an initial public offering of
13.8 million shares of its common stock at $20.50 per share. As a result of
the offering, the company's interest in Metromail has been reduced to
approximately 38%. Approximately $250 million of the proceeds from the
completed offering were used by Metromail to retire certain indebtedness owed
to the company. The company in turn used the payment from Metromail to pay
down debt and for general corporate purposes. The transaction resulted in a
pre-tax gain for the company of approximately $44 million and a deferred tax
provision of approximately $18 million. As a result of this transaction, the
company has changed its method of accounting for Metromail from consolidation
to the equity method, effective July 1, 1996. Under the equity method, the
company will recognize in income its proportionate share of the net income of
Metromail.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
COMPARISON OF SECOND QUARTER 1996 TO SECOND QUARTER 1995
ABOUT THE COMPANY
R.R. Donnelley & Sons Company is a world leader in distributing, managing
and reproducing print and digital information for the publishing, retailing,
merchandising and information technology markets worldwide. The company is the
largest commercial printer headquartered in North America, with approximately
38,000 employees in 26 countries on five continents.
The company is organized into the following business sectors, which
accounted for the following sales results during the second quarter of 1996:
Commercial Print Sector, which includes consumer and trade magazines
($275 million, or 17% of 1996 second quarter consolidated net sales), and
catalogs, retail advertising circulars and direct mail products ($270
million, or 17% of 1996 second quarter consolidated net sales).
Global Commercial Print Sector, which includes the company's commercial
print operations outside the United States--in Europe, Latin America and
Asia ($75 million, or 5% of 1996 second quarter consolidated net sales).
Information Management Sector, which includes Telecommunications ($165
million, or 11% of 1996 second quarter consolidated net sales), Book
Publishing Services ($163 million, or 10% of 1996 second quarter
consolidated net sales) and Financial Services ($114 million, or 7% of 1996
second quarter consolidated net sales), as well as Metromail ($69 million,
or 4% of 1996 second quarter consolidated net sales), the company's Digital
Division, the 77 Capital venture-capital fund, creative design and
communication services and a variety of information services ($42 million,
or 3% of 1996 second quarter consolidated net sales). As described below,
on June 19, 1996, the company's interest in Metromail was reduced to
approximately 38% as a result of the completion of Metromail's initial
public offering of common stock.
Stream International, the world's largest software manufacturer, marketer
and technical-support and services provider, approximately 80% owned by the
company, formed in April 1995 from the merger of the company's Global
Software Services business with Corporate Software Inc. ($404 million, or
26% of 1996 second quarter consolidated net sales).
NET SALES BY BUSINESS UNIT
AS A PERCENTAGE OF CONSOLIDATED NET SALES
<TABLE>
<CAPTION>
SECOND QUARTER FIRST HALF
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Stream International/Global Software Services..... 26 24 13 26 19 13
Consumer & Trade Magazines........................ 17 19 23 19 21 23
Catalogs, Retail, Direct-Mail..................... 17 18 23 17 20 23
Telecommunications................................ 11 10 11 10 10 11
Book Publishing................................... 10 12 14 10 13 14
Financial Services................................ 7 6 7 6 6 7
Global Commercial Print........................... 5 5 3 5 5 3
Other............................................. 7 6 6 7 6 6
</TABLE>
CONSOLIDATED RESULTS OF OPERATIONS
The company reported second quarter 1996 net income of $54 million, or $0.35
per share, reflecting a $48 million pre-tax restructuring charge recorded in
the second quarter of 1996 ($24 million after taxes and a minority interest
benefit) which was primarily related to the continued repositioning of Stream
International's manufacturing businesses, as well as a $44 million pre-tax
gain ($26 million after taxes) related to the June 1996 Metromail IPO.
Excluding the restructuring charge and the Metromail gain, net income declined
by 19% from last year's second quarter to $52 million and earnings per share
decreased $0.08 to $0.34. Second quarter sales of $1.6 billion were up 6% from
the year-earlier quarter.
8
<PAGE>
For the first half of 1996, the company reported a net loss of $323 million,
or $2.09 per share, reflecting the $560 million pre-tax restructuring charges
($435 million after taxes and a minority interest benefit) recorded in the
first half of 1996, as well as the Metromail gain recorded in the second
quarter of 1996. Excluding the restructuring charges and the Metromail gain,
net income declined by 23% from last year's first half to $86 million.
Earnings per share decreased $0.17 to $0.56. First half sales of $3.1 billion
were up 11% from the year-earlier period.
Excluding the restructuring charges and the Metromail gain, the company's
1996 second-quarter and first-half earnings performance declined primarily due
to the drop in by-product paper prices (a $30 million impact on a year-to-date
basis), and a number of developments that affected the performance of Stream
International (notably the slower-than-expected corporate demand for new
systems and software and substantially reduced demand for printing and disk
replication, as well as software price competition). In addition, higher paper
and postage prices in 1995 depressed the demand for magazine pages and
circulation in 1996 and the trade book sales environment was sluggish during
the first half of 1996 due to excessive retail inventories resulting from the
weak 1995 holiday sales season.
CONSOLIDATED NET SALES
Net sales for the second quarter increased $87 million, or 6%, to $1.6
billion due to higher paper prices and growth across many business units, most
notably Stream International, Financial Services and Telecommunications.
Higher paper prices accounted for approximately $21 million of the increase.
These increases were partially offset by lower volume in Book Publishing,
Latin America and Consumer Magazines due to soft market conditions.
Net sales from foreign operations represented approximately $258 million, or
16% of total net sales in the second quarter, up 17% from $220 million, or 15%
of total net sales in the second quarter of 1995. The growth in foreign sales
reflected volume increases from Stream International and operations in Europe
and Asia, partially offset by decreased volume in Latin America due to
recessionary conditions in Argentina and Brazil.
Net sales for the first half increased $316 million, or 11%, to $3.1
billion, reflecting higher paper prices and growth across many business units,
most notably Stream International (in part due to the acquisition of Corporate
Software Inc. in April 1995), Financial Services, Telecommunications,
Information Services and European operations. Higher paper prices accounted
for approximately $124 million of the increase. These increases were partially
offset by lower volume in Book Publishing Services, Consumer Magazines,
Catalog Services and Latin America due to soft market conditions.
Net sales from foreign operations represented approximately $525 million, or
17% of total net sales in the first half, up 31% from $402 million, or 14% of
total net sales in the first half of 1995. The growth in foreign sales
reflected volume increases from Stream International and operations in Europe
and Asia, partially offset by decreased volume in Latin America due to
recessionary conditions in Argentina and Brazil.
CONSOLIDATED EXPENSES
Gross profit for the second quarter increased 4% to $290 million due to the
sales growth as noted above, partially offset by lower by-product revenue
(down $19 million). Selling and administrative expenses increased 19% to $185
million, primarily reflecting increases in Stream International's expenses
($12 million higher than the 1995 second quarter), higher expenses at
Metromail and increased volume-related expenses in Financial Services. The
ratio of selling and administrative expenses to net sales, at 12% in the
quarter, increased from the 1995 ratio of 10%, primarily reflecting the higher
expenses at Stream International and Metromail. Interest expense decreased $2
million, reflecting decreased debt balances and lower interest rates.
9
<PAGE>
For the first half, gross profit increased 5% to $531 million due to the
sales growth as noted above, partially offset by lower by-product revenue
(down $30 million). Selling and administrative expenses increased 25% to $363
million, reflecting increases in Stream International's expenses ($44.7
million higher than the 1995 first half), higher expenses at Metromail and
increased volume-related expenses in Financial Services. The ratio of selling
and administrative expenses to net sales, at 12% in the first half, increased
from the 1995 ratio of 10% reflecting higher expenses at Stream International
(partially due to the acquisition of Corporate Software Inc. in April 1995)
and Metromail. Other income increased $33 million, primarily due to
approximately $17 million of minority interest benefits resulting from the
restructuring charges and approximately $16 million of gains on the sales of
investments in the company's venture-capital portfolio.
SUMMARY OF CONSOLIDATED EXPENSE TRENDS
<TABLE>
<CAPTION>
SECOND QUARTER ENDED JUNE
30, % INCREASE % INCREASE
(THOUSANDS OF DOLLARS) 1996 (DECREASE) 1995 (DECREASE) 1994
- ------------------------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Cost of materials........ $743,794 6% $703,960 54% $455,641
Cost of manufacturing.... 442,958 8% 408,435 10% 370,882
Depreciation............. 85,052 10% 79,881 29% 61,859
Amortization............. 15,634 (23)% 20,225 57% 12,905
Selling and
administrative.......... 184,793 19% 155,356 31% 118,147
Net interest expense..... 24,713 (9)% 27,013 117% 12,472
<CAPTION>
FIRST HALF ENDED JUNE 30, % INCREASE % INCREASE
(THOUSANDS OF DOLLARS) 1996 (DECREASE) 1995 (DECREASE) 1994
- ------------------------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Cost of materials........ $1,492,991 16% $1,286,933 44% $894,410
Cost of manufacturing.... 890,857 8% 821,558 12% 734,594
Depreciation............. 176,608 11% 159,093 27% 124,843
Amortization............. 33,155 -- 33,191 27% 26,045
Selling and
administrative.......... 363,272 25% 290,674 25% 233,150
Net interest expense..... 49,796 -- 49,867 106% 24,199
</TABLE>
RESULTS OF OPERATIONS OF PRINT-RELATED BUSINESSES AND OF STREAM INTERNATIONAL
Print-Related Businesses
The company's print-related businesses (all business sectors other than
Stream International) had net sales of $1.2 billion, a 3% increase over last
year's second quarter net sales of $1.1 billion. The increase was attributable
primarily to growth in the Information Management sector, most notably
Financial Services, Telecommunications and Metromail, due to strong market
conditions. Excluding the restructuring charge, the print-related businesses
had operating income of $107 million, a 9% decrease from the same quarter in
1995. The decrease was attributable to unfavorable by-products pricing and
decreased earnings in Latin America due to recessionary market conditions in
Argentina and Brazil.
For the first half, the company's print-related businesses had net sales of
$2.32 billion, a 3% increase over last year's first half net sales of $2.26
billion. The increase was attributable primarily to increased volume in
Financial Services, Telecommunications, Information Services and Metromail, in
addition to strong growth in European sales. Excluding the restructuring
charges, the print-related
10
<PAGE>
businesses had first half operating income of $178 million, a 15% decrease
from $209 million in the first half of 1995. The decrease was attributable to
the drop in by-product paper prices and decreased earnings in Latin America
due to unfavorable market conditions.
Stream International
Stream International had second quarter 1996 net sales of $404 million, a
13% increase over last year's second quarter net sales of $357 million. The
sales growth was primarily due to increased demand for help-desk and other
value-added services, partially offset by a substantially decreased demand for
printed product and disk replication. Stream International had a second
quarter operating loss of $2 million, compared to earnings of $4 million in
1995's second quarter. For the first half, Stream International had net sales
of $796 million, a 45% increase over last year's first half net sales of $548
million. This sales growth was attributable in part to the inclusion of
Corporate Software Inc. beginning in April 1995, as well as increased demand
for help-desk and other value-added services. Stream International had a first
half operating loss of $10 million, compared to earnings of $8 million in the
first half of 1995. The earnings decrease primarily resulted from the sooner-
than-expected drop in demand for printing and disk replication, which is being
replaced by demand for electronic ordering and delivery and CD-ROM capability.
Stream International is actively pursuing methods to capitalize on these
electronic and digital opportunities. Operating earnings were also unfavorably
impacted by decreased demand for software updates and software price
competition.
CHANGES IN FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
For the first half, cash flow from operations totaled $395 million, up $363
million from the first half of 1995. Of this amount, operating working capital
reductions provided cash of $145 million during the first half of 1996,
compared to a $256 million use of cash during the first half of 1995. This
improvement primarily resulted from decreases in receivables and inventories
in the first half of 1996 versus increases in these components during the
first half of 1995 (largely due to the impact of paper prices). Management
believes that the company's cash flow and borrowing capacity are sufficient to
fund current operations and growth. Capital expenditures in the first half
totaled $236 million, including purchases of equipment to meet the growing
needs of customers and purchases related to improving manufacturing
productivity and efficiency. Full year capital spending is expected to be
between $500 million and $550 million.
At June 30, 1996, the company had an available 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. In addition, certain
subsidiaries of the company had credit facilities with unused borrowing
capacities totaling approximately $130 million at June 30, 1996.
On July 25, 1996, the company announced its intention to repurchase shares
of its common stock having an aggregate purchase price of up to $250 million
through June 30, 1997. Shares acquired under this program will be retired. The
April 25, 1996 authorization to repurchase up to 1.8 million shares of stock
for use under various employee benefit plans will remain in effect.
OTHER INFORMATION
Metromail--On June 19, 1996, Metromail completed an initial public offering
of its common stock. As a result of the offering, the company's interest in
Metromail has been reduced to approximately 38%. Approximately $250 million of
the proceeds from the completed offering were used by Metromail
11
<PAGE>
to retire certain indebtedness owed to the company. The company in turn used
the payment from Metromail to pay down debt and for general corporate
purposes. The transaction resulted in a pre-tax gain of approximately $44
million ($26 million after taxes). As a result of this transaction, the
company has changed its method of accounting for Metromail from consolidation
to the equity method. Under the equity method, the company will recognize in
income its proportionate share of the net income of Metromail.
Restructuring--On March 28, 1996, the company announced a $512 million pre-
tax charge to first quarter earnings ($411 million or $2.67 per share after
tax) to restructure and realign its gravure operations in North America,
reposition other businesses, and write down certain equipment, investments in
non-core businesses and intangible assets. Approximately $195 million of the
charge is related to the gravure platform realignment. Approximately $189
million is related to other manufacturing restructuring, including
approximately $92 million to reposition Stream International's worldwide
operations. Additionally, the company wrote down approximately $128 million in
equipment, intangibles and investments in non-core businesses, in accordance
with FASB 121.
On July 25, 1996, the company announced a charge of $48 million before taxes
($24 million or $0.16 per share after tax) primarily to restructure Stream
International's software manufacturing, printing, kitting and fulfillment
operations. The restructuring reflects changes in customer demand, which is
shifting from disk-based media and printed materials to CD-ROM and other forms
of electronic media, packaging and delivery.
Pre-tax cash outlays associated with the restructuring and realignment
charges are expected to total approximately $177 million and will be incurred
in 1996 and 1997. The remaining $383 million relates to non-cash items, mainly
the write-down of fixed assets and goodwill. Because of this write-down, 1996
depreciation and amortization expenses will be approximately $11 million
(before taxes) less than they would have been had the charges not been
incurred.
Human Resources and Plant Closings--As part of the restructuring during the
first half of 1996 as noted above, the company has announced plans to close or
consolidate six operations, including gravure-printing plants in Newton, NC
and Casa Grande, AZ; Stream International manufacturing facilities in
Crawfordsville, IN and Weathersby, England; a book prepress operation in
Barbados; and a stand-alone book bindery in Scranton, PA. Through these
actions, the Metromail public offering and other streamlining initiatives
underway, the company expects to reduce its workforce by approximately 15%
over the next year (from the 41,000 employees as of December 31, 1995), with
most of the reductions coming in 1996.
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 commercial print markets
to have excess capacity. Competition is largely based on price, quality and
servicing the special needs of customers.
Management believes the company's prospects in 1996 will be challenging.
Despite weaknesses in the company's primary printing markets during the first
half of 1996, demand is beginning to rebound in the book, catalog and magazine
businesses and management believes second-half results will improve. In
addition, there is substantial capacity committed under long-term contracts.
Despite slower than expected corporate demand for software and software price
discounting in early 1996, the company believes Stream International should
see improved sales and profits for the second half of the year relative to the
first half as it actively pursues methods to capitalize on the electronic and
digital opportunities in the software market.
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The company is a large consumer of paper, acquired for and by customers;
therefore, the cost and supply of certain paper grades consumed in the
manufacturing process will continue to affect the company's financial results.
As paper price discounting has surfaced during the first half of 1996,
management believes that the industry will continue to experience declining
paper prices and balanced supplies during the remainder of the year. In
addition to paper consumed in the manufacturing process, the company is also
affected by the price of by-product paper which it sells. Financial results in
the second half of 1996 will continue to be negatively impacted by decreased
by-product prices compared to 1995.
Additionally, there is currently legislation before the United States
Congress proposing to initially reduce and eventually eliminate the deduction
for interest on loans borrowed against corporate-owned life insurance (COLI).
The company has used this deduction for several years and is carefully
watching any changes in legislation that may reduce or eliminate it going
forward.
In summary, the company's competitive strengths of worldwide geographic
coverage, strategic raw materials purchasing (primarily paper and ink),
comprehensive service offerings, technology advantage and economies of scale
should result in second-half performance that is stronger than the second half
of 1995 and the first half of 1996.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
10(a) 1986 Stock Incentive Plan, as amended*
10(b) 1991 Stock Incentive Plan, as amended*
10(c) Memorandum of Agreement and Understanding among Stream
International Holdings, Inc., R. R. Donnelley & Sons Company and
Rory J. Cowan*
27 Financial Data Schedule
- ----------
*Management contract or compensatory plan or arrangement
(b) No current Report on Form 8-K was filed during the second quarter of
1996.
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SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
R. R. Donnelley & Sons Company
/s/ Peter F. Murphy
By __________________________________
Peter F. Murphy
Corporate Controller
(Authorized Officer and
Chief Accounting Officer)
August 2, 1996
Date __________________________
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R. R. DONNELLEY & SONS COMPANY
1986
STOCK INCENTIVE PLAN
(As amended on April 24, 1986, July 27, 1989, September 28, 1989, October 26,
1995 and January 25, 1996)
I. GENERAL
1. Plan. To provide incentives to management through rewards based
upon the ownership and performance of the common stock of R. R. Donnelley & Sons
Company (the "Company"), the Committee hereinafter designated, with the approval
of the Board of Directors, may grant stock bonus awards, stock options, stock
appreciation rights, or combinations thereof, to eligible officers and other key
management personnel, on the terms and subject to the conditions stated in this
Plan.
2. Eligibility. Officers and other key management employees of the
Company, its subsidiaries, and any other entity designated by the Board of
Directors or the Committee in which the Company has a direct or indirect equity
interest, shall be eligible, upon selection by the Committee, to receive stock
bonus awards, stock options or stock appreciation rights, either singly or in
combination, as the Committee, in its discretion, shall determine. For purposes
of the Plan, references to employment by the Company also mean 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.
3. Limitation on Shares to be Issued. The maximum number of shares
of common stock, par value $1.25 per share, to be issued pursuant to all grants
made under the Plan shall be 3,200,000 of which no more than 1,200,000 shares
shall be issued pursuant to stock bonus awards granted under the Plan. Shares
awarded pursuant to grants which, by reason of the expiration, cancellation or
other termination of the grants prior to issuance are not issued, shall again be
available for future grants.
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"). No member of
the Committee shall be eligible to participate in, or within one year prior to
appointment to the Committee have participated in, this Plan or any other stock
purchase, stock bonus, stock option, stock appreciation rights or other stock
incentive plan of the Company. The Committee shall, within the limits of the
Plan and subject to the approval of the Board of Directors, establish selection
guidelines; select eligible persons for participation; and determine the form of
grant, either as
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stock bonus, stock option or stock appreciation rights or combination thereof,
determine the form of stock option, the number of shares subject to the grant,
the fair market value of the common stock when necessary, the time and
conditions of vesting or exercise, and all other terms and conditions of the
grant. The Committee may establish rules and regulations for the administration
of the Plan, interpret the Plan, and impose, incidental to a grant, 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.
5. Adjustments for Changes in Capitalization. Appropriate
adjustments shall be made by the Committee in the maximum number of shares to be
issued under the Plan, the maximum number of shares to be issued pursuant to
stock bonus awards, and in the number of shares the subject of any grant, to
give effect to any stock splits, stock dividends and other relevant changes in
capitalization occurring after the effective date of the Plan.
6. Effective Date and Term of Plan. The Plan shall be submitted to
the stockholders of the Company for approval at the 1986 annual meeting
scheduled to be held on March 27, 1986, and if approved shall become effective
on that date. The Plan shall terminate five years after it becomes effective
unless terminated prior thereto by action of the Board of Directors. No further
grants shall be made under the Plan after termination, but termination shall not
affect the rights of any participant under any grants made prior to termination.
7. Amendments. The Plan may be amended or terminated by the Board of
Directors in any respect except that no amendment may be made without
stockholder approval if such amendment would
(a) increase the maximum number of shares available for issuance
under the Plan or stock bonus awards;
(b) modify the class of eligible employees; or
(c) extend the period during which any option or other right may be
exercised under the Plan.
8. Prior Plans. Upon the effectiveness of this Plan, no further
grants shall be made under the Company's 1976 Stock Option Plan, as amended, and
the 1981 Stock Incentive Plan, as amended, except that stock appreciation rights
may be granted with respect to options previously granted and outstanding under
these Plans. Bonuses awarded under the 1981 Stock Incentive Plan, as amended,
and options granted under the 1976 Stock Option Plan, as amended, and the 1981
Stock Incentive Plan, as amended, prior to the effectiveness of this Plan shall
continue in accordance with their terms.
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9. 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. 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 date the obligation to withhold or pay
taxes arises (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) and that in the case of a holder who is subject to Section 16 of the
Exchange Act (as defined below), the Company may require that the method of
satisfying such an obligation be in compliance with Section 16 and the rules and
regulations thereunder. Shares of common stock to be delivered or withheld may
have 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 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.
II. STOCK BONUS AWARDS
1. Form of Award. Stock bonus awards, whether Performance Awards or
Fixed Awards, may be made to eligible officers and other key management
personnel in the form of stock units, each of which is the equivalent of a share
of common stock but for the power to vote and the entitlement to current
dividends, or in the form of shares of common stock issued to the employee but
forfeitable and with restrictions on transfer in any form as hereinafter
provided.
2. Performance Awards. Awards may be made in terms of a stated
potential maximum number of units or shares, with the actual number to be
determined by reference to the level of achievement of corporate, group,
division, individual or other specific objectives over a period of not less than
three nor more than ten years. 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, and the time of vesting thereafter shall be as specified in the award.
3
<PAGE>
3. Fixed Awards. Awards may be made which are not contingent on the
performance of objectives, but are contingent on the participant's continuing in
the Company's employ for a period to be specified in the award, which period
shall be not less than five nor more than ten years from the date of award.
4. Rights with Respect to Restricted Shares. If shares of restricted
common stock are issued pursuant to an award, the participant shall have the
right to vote the shares and to receive dividends thereon from the date of
issuance, unless and until forfeited.
5. Rights with Respect to Stock Units. If stock units are credited
to a participant pursuant to an award, amounts equal to dividends otherwise
payable on a like number of shares of common stock after the crediting of the
units 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, 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 dividends and interest
have been credited shall be paid in cash. Shares of restricted common stock
issued pursuant to an award shall, at the time of vesting, be released from the
restrictions.
7. Acceleration Upon Change in Control. If while any Performance
Award or Fixed Award remains outstanding under this Plan--
(a) any "person," as such term is defined in Section 3(a)(9)
of the Securities Exchange Act of 1934 (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)
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 execution of this Amendment),
individuals who at the
4
<PAGE>
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
(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, all levels of
achievement specified in the award shall be deemed met and the award shall be
immediately and fully vested, and (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.
III. STOCK OPTIONS
1. Grants. Options to purchase shares of common stock of the Company may
be granted to such eligible officers and other key management personnel as may
be selected by the Committee and approved by the Board of Directors. These
options may, but need not, constitute
5
<PAGE>
"incentive stock options" under Part II of subchapter D of the Internal Revenue
Code of 1986, as amended, or any other form of option under the Code as
hereafter amended.
2. Terms of Options. No option shall be exercisable less than one nor
more than ten years after the date of grant. The per share option price shall be
not less than 100% of the fair market value at the time the option is granted.
Upon exercise, the option price may be paid in cash, in shares of common stock
of the Company having a fair market value equal to the option price, or in a
combination thereof. Options shall not be transferable, except that in the event
of the death of an optionee during employment or within a period not in excess
of five years after termination of employment by reason of retirement or total
and permanent disability or within ninety days after termination of employment
for any other reason, outstanding options may be exercised by the executor,
administrator or personal representative of such deceased optionee within ninety
days of the death of such optionee. Options may be exercised during the
individual's continued employment with the Company and for a period not in
excess of ninety days following termination of employment and only within the
original term of that option; provided, however, that if employment of the
optionee by the Company and its subsidiaries shall have terminated by reason of
retirement or total and permanent disability, then the option may be exercised
for a period not in excess of five years following termination of employment but
not after the expiration of the term of the option.
3. Acceleration of Stock Options Upon a Change in Control. If while any
stock option granted pursuant to this Article III of the Plan remains
unexercised and outstanding, a Change in Control (as defined in Article II,
Section 7, above) occurs, then from and after the Acceleration Date (as defined
in Article II, Section 7, above) all such outstanding and unexercised options,
whether or not then vested, shall be fully and immediately exercisable.
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 key management personnel 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 this Stock Incentive Plan and shall comply in all
respects with the terms and conditions applicable to options granted under
Article III of this Stock Incentive Plan.
(b) Definitions. In the Sub-Plan the following terms shall have the
following meanings:
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"the Subsidiaries" shall mean all companies which are
controlled by the Company (as defined in
Section 534 of the Income and Corporation
Taxes Act 1970) and which are an
affiliate controlled by the Company
directly or indirectly through one or
more intermediaries for the purposes of
rule 12b - 2 of the U.S. Securities
Exchange Act of 1934;
"the Group" shall mean the Company and the
Subsidiaries;
"Associated Company" shall have the meaning attributed to it
in section 302 of the Income and
Corporation Taxes Act 1970;
"the Committee" shall mean the committee designated to
administer this Stock Incentive Plan;
"Full Time Employee" shall mean any director or employee of
the Group 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 4(1)(b)
of Schedule 10 from participating in the
Sub-Plan;
"Relevant Emoluments" shall have the meaning which the term
bears in sub-paragraph (2) of paragraph 5
of Schedule 10 by virtue of sub-paragraph
5 of that paragraph;
"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 Transaction compiled by
Associated Press or if no trading
occurred on such date then on the next
preceding date on which such trading
occurred;
"Schedule 10" shall mean Schedule 10 of the United
Kingdom Finance Act of 1984.
7
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"Share" or "Shares" shall mean a share or shares of common
stock of par value $1.25 which satisfy
the conditions specified in Paragraphs 7
to 11 inclusive of Schedule 10.
(c) Sub-Plan. The Committee, with the approval of the Board of Directors of
the Company, may grant stock options to officers and other key management
personnel eligible to participate in the Sub-Plan on the terms and subject to
the conditions stated in this Sub-Plan.
(d) Eligibility. Full time employees who are officers or key management
personnel 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, par value $1.25 per share shall be subject to
the maximum specified in this Stock Incentive Plan.
(f) Administration. The Sub-Plan shall be administered by the Committee in
accordance with the provisions set out in this Stock Incentive 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 1986 annual
meeting scheduled to be held on March 27, 1986, and if approved shall become
effective on that date. The Sub-Plan shall terminate five years after it
becomes effective unless terminated prior thereto by action of the Board of
Directors. No further grants shall be made under the Sub-Plan after termination
but termination shall not affect the right of any participation under the grants
made prior to termination.
(h) Amendments. The Sub-Plan may be amended or terminated by the Board of
Directors subject to the conditions specified in this Stock Incentive Plan. No
amendment may be made which will put the Sub-Plan in breach of conditions for
approval set out in Schedule 10 and no amendment to the Sub-Plan or any
provision in this Stock Incentive 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 of the Company may
be granted to such eligible officers and eligible key management personnel as
may be selected by the Committee and approved by the Board of Directors.
8
<PAGE>
(b) Variations in Options. Variations may not be made to options granted
under the Sub-Plan pursuant to Article I clause 5 of this Stock Incentive Plan
without prior consent of the Board of UK Inland Revenue.
(c) Terms of Options. No options shall be exercisable less than one nor
more than ten years after the date of the 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. Options shall not be transferable except that such options may be
exercised by the personal representative of a deceased optionee 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. No option may be exercised
by an individual at any time when he is precluded by Paragraph 4(1)(b) of
Schedule 10 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 payment in full of the option price for the number of shares so
purchased. The Company shall within 30 days post to the optionee certificates
representing the number of shares specified, 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 this Sub-
Plan which would, at the time that they are obtained, cause the aggregate Market
Value of the shares which he may acquire in pursuant 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 Revenue under Schedule 10
(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.
V. STOCK APPRECIATION RIGHTS
9
<PAGE>
1. Grants. Rights 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 of the Company from the date
of grant, or in the case of rights granted in tandem with or by reference to a
stock option granted prior to the grant of such rights, from the date of grant
of the related stock option to the date of exercise may be granted to such
eligible officers and other key management personnel as may be selected by the
Committee and approved by the Board of Directors.
2. Terms of Grant. Such rights may be granted in tandem with or with
reference to a related stock option, in which event the grantee may elect to
exercise either the option or the right, but not both, as to the same share of
common stock subject to the option and the right, or the right may be granted
independently of a related stock option. In either event, the right shall be
exercisable not more than ten years after the date of grant. Stock appreciation
rights shall not be transferable, except that in the event of the death of a
grantee during employment or within a period not in excess of five years after
termination of employment by reason of retirement or total and permanent
disability or within ninety days after termination of employment for any other
reason, outstanding rights may be exercised by the executor, administrator or
personal representative of such deceased grantee within ninety days of the death
of such grantee. Stock appreciation rights may be exercised during the
individual's continued employment with the Company and for a period not in
excess of ninety days following termination of employment and only within the
original term of that grant; provided, however, that if employment of the
grantee by the Company and its subsidiaries shall have terminated by reason of
retirement or total and permanent disability, then the grant may be exercised
for a period not in excess of five years following termination of employment but
not after the expiration of the term of the grant.
3. Payment on Exercise. Upon exercise of a right, the grantee shall be
paid the excess of the then fair market value of the number of shares to which
the right relates over the fair market value of such number of shares at the
date of grant of the right 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.
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R.R. DONNELLEY & SONS COMPANY
1991 STOCK INCENTIVE PLAN
(as amended on September 1, 1992, October 26, 1995 and January 25, 1996)
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 stock
bonus awards, stock options, stock appreciation rights, or combinations thereof,
to eligible officers and other key management employees, on the terms and
subject to the conditions stated in this 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
this Plan.
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 stock appreciation rights, 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. For
purposes of the Plan, references to employment by the Company also mean
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.
3. Limitation on Shares to be Issued. The maximum number of shares of common
stock, par value $1.25 per share, to be issued pursuant to all grants made under
the Plan shall be 3,600,000. Shares awarded pursuant to grants (other than
shares of restricted common stock) which, by reason of the expiration,
cancellation or other termination of the grants prior to issuance, are not
issued, shall again be available for future grants.
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
consisting of two or more members of the Board of Directors designated by the
Board of Directors (the "Committee"). No member of the Committee, during the one
year prior to service on the Committee or during such service, shall have been
or be granted
<PAGE>
or awarded shares of common stock, options to purchase shares of common stock,
or other equity securities of the Company pursuant to the Plan or any other plan
of the Company or any affiliate of the Company, except as provided in Article
III, Section 1(b) and except for a grant or award which would not result in such
member ceasing to be a "disinterested person" 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, establish selection
guidelines; select eligible officers and key management employees for
participation; determine the form of grant, either as a bonus award, or as stock
option or stock appreciation rights or combination thereof; and determine the
form of stock option, the number of shares subject to the grant, the fair market
value of the common stock when necessary, the time and conditions of vesting or
exercise, and all other terms and conditions of the grant. The Committee may
establish rules and regulations for the administration of the Plan, interpret
the Plan, and impose, incidental to a grant, 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 grants and awards under this Plan shall be evidenced by written instruments
delivered by the Company to the participants, and no such grant or award shall
be valid until so evidenced.
Notwithstanding the foregoing, neither the Board nor the Committee shall
have any discretion to alter the number of shares granted to non-employee
directors pursuant to Article III, Section 1(b) or the terms or conditions under
which such shares are granted.
5. Adjustments for Changes in Capitalization. Appropriate adjustments shall be
made by the Committee in the class and maximum number of shares to be issued
under the Plan, the class and maximum number of shares to be issued pursuant to
bonus awards, and the class and number of shares the subject of any grant and
the option price therefor, if applicable, to give effect to any stock splits,
stock dividends and other relevant changes in capitalization occurring after the
effective date of the Plan.
6. Effective Date and Term of Plan. The Plan shall be submitted to the
stockholders of the Company for approval at the 1991 annual meeting scheduled to
be held on March 28, 1991, and if approved shall become effective on that date.
The Plan shall terminate five years after it becomes effective unless terminated
prior thereto by action of the Board. No further grants shall be made under the
Plan after termination, but termination shall not affect the rights of any
participant under any grants made prior to termination.
7. Amendments. The Plan may be amended or terminated by the Board in any
respect, except that (i) no amendment may be made without stockholder approval
if such amendment would increase the maximum number of shares available for
issuance under the Plan or otherwise require stockholder approval, (ii) Article
III, Section 1(b) shall not be amended more than once every six months, other
than amendments to
<PAGE>
comport with changes in the Internal Revenue Code of 1986, as amended, the
Employee Retirement Income Security Act of 1974, as amended, or the rules and
regulations thereunder, and (iii) notwithstanding the foregoing clause (ii), no
amendment may be made without stockholder approval if such amendment would
change the number of shares to be granted, pursuant to stock options, to non-
employee directors.
8. Prior Plans. Upon the effectiveness of this Plan, no further grants shall be
made under the Company's 1981 Stock Incentive Plan, as amended, and the 1986
Stock Incentive Plan, as amended, except that stock appreciation rights may be
granted with respect to options previously granted and outstanding under such
Plans. Bonuses awarded under the 1986 Stock Incentive Plan, as amended, and
options granted under the 1981 Stock Incentive Plan, as amended, and the 1986
Stock Incentive Plan, as amended, prior to the effectiveness of this Plan shall
continue in effect in accordance with their terms.
9. 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. 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 date the obligation to withhold or pay taxes arises
(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) and that in the
case of a holder who is subject to Section 16 of the Exchange Act (as defined
below), the Company may require that the method of satisfying such an obligation
be in compliance with Section 16 and the rules and regulations thereunder.
Shares of common stock to be delivered or withheld may have 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 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.
<PAGE>
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 the entitlement to current dividends, (iii)
in the form of 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, group, 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 performance
of objectives, but are contingent on the participant's continuing in the
Company's employ for a period to be specified in the award, which period shall
be not less than one nor more than ten years from the date of award.
4. Rights with Respect to the Restricted Shares. If shares of restricted common
stock are issued pursuant to an award, the participant shall have the right to
vote the shares and to receive dividends thereon from the date of issuance,
unless and until forfeited.
5. Rights with Respect to Stock Units. If stock units are credited to a
participant pursuant to an award, amounts equal to dividends otherwise payable
on a like number of shares of common stock after the crediting of the units
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 dividends 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
<PAGE>
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. A
Bonus Award is not transferable other than by will or the laws of descent and
distribution.
7. Acceleration Upon Change in Control. If while any Performance Award or Fixed
Award remains outstanding under this Plan--
(a) any "person," as such term is defined in Section 3(a)(9) of
the Securities Exchange Act of 1934 (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) 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, 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
<PAGE>
(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, and (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.
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
422A of the Internal Revenue Code of 1986, as amended, or any other form of
option under the Code as hereafter amended.
(b) Options for Non-Employee Directors. An option to purchase 2,000
shares of common stock of the Company shall be granted on March 28, 1991 and,
thereafter, annually on the date of the Company's annual meeting of stockholders
to each individual who immediately following such meeting on such date is a non-
employee director.
2. Terms of Options. No option shall be exercisable earlier than one, nor more
than ten years after, the date of grant. The per share option price shall be not
less than 100% of the fair market value of a share of common stock of the
Company at the time the option is granted; provided that options granted to non-
employee directors shall be 100% of the fair market value of a share of common
stock of the Company at the time the option is granted. Upon exercise, the
option price may be paid in cash, in shares of common stock of the Company
having a fair market value equal to the option price, or in a combination
thereof. Options may be exercised during the individual's continued employment
with the Company or service on the Board, as the case may be, and for a period
not in excess of ninety days following termination of employment or service on
<PAGE>
the Board and only within the original term of that option; provided, however,
that if employment of the optionee by the Company and its subsidiaries 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
for a period not in excess of five years following termination of employment or
service on the Board, but not after the expiration of the term of the option.
Options shall not be transferable, except that 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 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 after termination of employment
or service on the Board, as the case may be, for any other reason, outstanding
options may be exercised by the executor, administrator or personal
representative of such deceased optionee within ninety days of the death of such
optionee.
3. Acceleration of Stock Options Upon a Change in Control. If while any stock
option granted pursuant to this Article III of the Plan remains unexercised and
outstanding, a Change in Control (as defined in Article II, Section 8, above)
occurs, then from and after the Acceleration Date (as defined in Article II,
Section 8, above) all such outstanding and unexercised options, whether or not
then vested, shall be fully and immediately exercisable.
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 this Stock Incentive Plan and shall comply in all respects
with the terms and conditions applicable to options granted under Article III of
this Stock Incentive 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 U.S. Securities
Exchange Act of 1934;
<PAGE>
"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 this
Stock Incentive 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;
"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 Transaction 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 this Sub-Plan.
<PAGE>
(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, par value $1.25 per share, shall be subject to the
maximum specified in this Stock Incentive Plan.
(f) Administration. The Sub-Plan shall be administered by the Committee in
accordance with the provisions set out in this Stock Incentive Plan and varied
by the terms of this 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 1991 annual meeting
scheduled to be held on March 28, 1991, and if approved shall become effective
on that date. The Sub-Plan shall terminate five years after it becomes effective
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 right of any participation under the grants made prior to termination.
(h) Amendments. The Sub-Plan may be amended or terminated by the Board subject
to the conditions specified in this Stock Incentive 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 this Stock
Incentive 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 of the Company may be
granted to such eligible Full-Time Employees as may be selected by the
Committee.
(b) Variations in Options. Variations may not be made to options granted under
the Sub-Plan pursuant to Article I clause 5 of this Stock Incentive Plan without
prior consent of the Board of UK Inland Revenue.
(c) Terms of Options. No options shall be exercisable less than one nor more
than ten years after the date of the 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.
Options shall not be transferable except that such options may be exercised by
the personal representative of a deceased
<PAGE>
optionee 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 payment in full of the option price for the number of shares so purchased.
The Company shall within thirty days post to the optionee certificates
representing the number of shares specified, 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 this Sub-Plan
which would, at the time that they are obtained, cause the aggregate Market
Value of the shares which he 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 U.K. 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.
(f) Withholding Tax. Article III Clause 3 of this Stock Incentive Plan shall not
apply to the Sub-Plan.
V. STOCK APPRECIATION RIGHTS
1. Grants. Rights 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 of the Company from the date of grant,
or in the case of
<PAGE>
rights granted in tandem with or by reference to a stock option granted prior to
the grant of such rights, from the date of grant of the related stock option to
the date of exercise may be granted to such eligible officers and other key
management employees as may be selected by the Committee.
2. Terms of Grant. Such rights may be granted in tandem with or with reference
to a related stock option, in which event the grantee may elect to exercise
either the option or the right, but not both, as to the same share of common
stock subject to the option and the right, or the right may be granted
independently of a related stock option. In either event, the right shall be
exercisable not more than ten years after the date of grant. In the case of a
participant who is an officer or director of the Company (within the meaning of
Section 16 of the Exchange Act), the election to exercise a stock appreciation
right, and the exercise of such stock appreciation right, shall be in compliance
with Rule 16b-3 under the Exchange Act. Stock appreciation rights shall not be
transferable, except that in the event of the death of a grantee during
employment or within a period not in excess of five years after termination of
employment by reason of retirement or total and permanent disability or within
ninety days after termination of employment for any other reason, outstanding
rights may be exercised by the executor, administrator or personal
representative of such deceased grantee within ninety days of the death of such
grantee. Stock appreciation rights may be exercised during the individual's
continued employment with the Company and for a period not in excess of ninety
days following termination of employment and only within the original term of
that grant; provided, however, that if employment of the grantee by the Company
and its subsidiaries shall have terminated by reason of retirement or total and
permanent disability, then the grant may be exercised for a period not in excess
of five years following termination of employment but not after the expiration
of the term of the grant.
3. Payment on Exercise. Upon exercise of a right, the grantee shall be paid the
excess of the then fair market value of the number of shares to which the right
relates over the fair market value of such number of shares at the date of grant
of the right 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.
4. Withholding Tax. A stock appreciation right may provide that the holder
thereof may elect to deliver to the Company (or authorize the Company to retain
from any shares of common stock of the Company to be delivered in payment
thereof) whole shares of common stock of the Company to satisfy the Company's
obligation, if any, to withhold federal, state, local or other taxes required to
be withheld in respect of such award; provided, however, that in the case of a
holder who is an officer or director of the Company (within the meaning of
Section 16 of the Exchange Act), such election and the execution thereof shall
be in compliance with Rule 16b-3 under the Exchange Act.
<PAGE>
5. Acceleration Upon Change in Control. If while any stock appreciation right
granted pursuant to this Article V of this Plan remains unexercised and
outstanding, a Change in Control (as defined in Article II, Section 8, above)
occurs, then from and after the Acceleration Date (as defined in Article II,
Section 8, above) all such outstanding and unexercised stock appreciation
rights, whether or not then vested, shall be fully and immediately exercisable.
<PAGE>
MEMORANDUM OF AGREEMENT AND UNDERSTANDING
dated as of June 21, 1996
Memorandum of Agreement and Understanding made as of this 21st day of June,
1996 by and between RORY J. COWAN of Concord, MA ("Cowan"), on the one hand, and
STREAM INTERNATIONAL HOLDINGS INC., a Delaware corporation with its principal
offices in Norwood, MA ("Stream") and R.R. DONNELLEY & SONS COMPANY, a Delaware
corporation with its principal offices in Chicago, IL ("RRD"), on the other
hand.
Recitals
--------
Cowan is Chief Executive Officer of Stream under an Employment Agreement
dated as of April 21, 1995 ("Agreement") and is also serving as Executive Vice
President of RRD. The parties have agreed that Cowan's employment by and
relationships with Stream and RRD shall terminate. This Memorandum is intended
to set forth the terms and conditions of the termination of employment and
relationships with each of Stream and RRD with the understanding that, to the
extent that further more formal steps and/or documentation are necessary or
desirable to effectuate the parties' mutual agreements, the parties shall work
together speedily, cooperatively and in good faith to develop any such steps and
documentation to effect completion of such separation and termination as well as
any collateral and related matters.
In consideration of the mutual promises and covenants of the parties and
other good and valuable consideration, by each party paid to the other, the
receipt and adequacy of which are hereby acknowledged, the parties have agreed
and do hereby agree as follows:
1. TERMINATION; SALARY CONTINUATION; BENEFITS, ETC.
------------------------------------------------
(a) Employee Status: Cowan's status as an employee of Stream will continue
until midnight, December 31, 1996 ("Termination Date"), at which time such
status will formally terminate. During the period from July 1, 1996 through
the Termination Date, Cowan shall be on an unpaid leave of absence from
Stream which leave of absence shall not affect his eligibility for health
and welfare benefits. Similarly, Cowan will be deemed to be an employee of
RRD on an unpaid leave of absence (without benefits) during the period from
the date hereof through the Termination Date. The parties' sole purpose
and intention in continuing Cowan's employment status is to permit the
continued vesting of Cowan's options and rights under existing stock plans
with Stream and with RRD, the effect of which will permit the following:
(i) the vesting of 12.5% of Stream options ("Stream Options") to purchase
Class A Common Stock, par value $.01 per share ("Stream Stock") outstanding
under a grant dated April 21, 1995; (ii) the vesting of RRD options ("RRD
Options") to purchase Common Stock, par value $1.25 per share ("RRD Stock")
outstanding under grants dated December 10, 1992, December 9, 1993 and
December 12, 1994, in the amounts of 10,400 shares, 5,200 shares and
-1-
<PAGE>
4,200 shares, respectively; and (iii) the lapse by time of restrictions
applicable to, or the possibility of forfeiture of, a grant of restricted
RRD Stock under an agreement dated December 12, 1991 between Cowan and RRD.
Notwithstanding his employment status, by execution hereof, Cowan resigns
from any and all officerships and board memberships he holds in both Stream
and RRD, as well as any officerships and board memberships he holds in any
entity the majority of the equity of which is owned by either of Stream or
RRD, either directly or indirectly.
(b) Salary, Benefits, etc.:
----------------------
(i) Cowan shall be paid all accrued base salary, one-half the full bonus
which would be paid to Cowan for 1996 (to be calculated and paid at such
time in 1997 as bonuses are calculated and paid to other executives of
Stream), pension and other benefits, and accrued vacation and reimbursed
expenses due from Stream under the Agreement for the period ending June 30,
1996.
(ii) Thereafter, in lieu of any other payments of salary and bonus under
the Agreement or otherwise, Cowan shall be paid the amount of the "Minimum
Guaranteed Severance" provided for in Para. 4.7 of the Agreement for and
during the 18-month period July 1, 1996 through December 31, 1997
("Severance Period"). Cowan may elect to receive prepayment of the entire
sum due under said Para. 4.7 for the entire 18-month period, i.e., so much
as remains unpaid at his time of election (as hereinafter provided),
discounted to the date of prepayment at an annual discount rate equal to
the interest rate of The Note (hereinafter defined) of 7.34% by giving
Stream two weeks' written notice of such election at any time during the
18-month period.
(iii) In addition to the foregoing, Cowan shall also receive the
following:
a.) Should Cowan elect to continue coverage under Stream's group
health plans from and after the Termination Date pursuant to the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"),
then for any such coverage provided for benefits provided under
COBRA for calendar year 1997, Stream shall either (i) reimburse
Cowan for his COBRA expenses, or (ii) pay Cowan's COBRA expenses
directly.
b.) Stream shall reimburse Cowan for his expenses in securing
office and administrative support services in the Boston area for
use during the period beginning July 1, 1996 and ending June 30,
1997, up to a maximum reimbursement amount of $20,000. Such
expenses shall be reimbursed on receipt of a copy of an invoice,
with sufficient supporting documentation, from Cowan.
c.) Cowan shall be deemed to have purchased from Stream and/or
RRD, all computer, facsimile, office supply and telephonic
equipment currently held by Cowan at his permanent residence, and
he shall be free to continue to use such
-2-
<PAGE>
equipment; provided that Cowan shall be disconnected from any lines or
services furnished by or connected to, either of Stream or RRD.
d.) Stream shall pay up to $5,000 of legal and financial planning
expenses incurred by Cowan in the negotiation of this Memorandum. Such
payment shall be in lieu of any other payment due Cowan for financial
planning services from either Stream or RRD, if any and whether or not
previously accrued. Cowan shall provide Stream with copies of all
invoices received by him for such expenses, and Stream shall pay such
invoices directly to the attorneys/planner involved, subject to the
dollar limitation set forth above.
e.) For so long as Cowan is obligated to file reports with the
Securities and Exchange Commission as a result of being an executive
officer of RRD, RRD will furnish Stock Max services from Richard M.
Sawdey at the expense of RRD.
2. STREAM AND RRD STOCK AND OPTIONS
--------------------------------
(a) Recitals:
--------
(i) Cowan presently owns certain shares of Stream Stock purchased in
conjunction with and at or about the date of execution of the Agreement.
Also pursuant to the terms of the Agreement and the Stream 1995 Stock
Option Plan, Cowan holds certain Stream Options. Cowan also owns certain
shares of RRD Stock (subject in the case of shares received pursuant to
grants of restricted shares to certain conditions relating to his
continuing employment with RRD) and holds certain RRD Options.
(ii) One-third of Cowan's Stream Stock was purchased by Cowan from his
own funds and two-thirds Cowan's Stream Stock was purchased through funds
borrowed by Cowan from an affiliate of Stream, such borrowing being
evidenced by a promissory note ("The Note") in the form of Exhibit C to the
Agreement. The Stream Stock is pledged with Stream to secure this loan
under a Stock Pledge Agreement in the form of Exhibit D to the Agreement.
(b) Vesting, Rights, etc. Prior to Termination Date: Until the Termination
Date, all options and rights relating to Stream Stock and Stream Options
and RRD Stock and RRD Options shall continue to accrue and vest in Cowan,
and any condition to the RRD Stock relating to Cowan's continuing
employment which is satisfied prior to the Termination Date shall lapse and
terminate on such Date, all as provided under the terms and conditions of
the Agreement and any other documentation relating to the Stream Stock,
Stream Options, RRD Stock and RRD Options, such as, without limitation,
option agreements and plans, Certificates of Incorporation, the Merger
Agreement between the two constituent corporations which merged to form
Stream, and grants of restricted stock; after giving effect to the
foregoing, in addition to any Stream Stock and RRD Stock owned by
-3-
<PAGE>
Cowan, and any Stream Options and RRD Options vested in but unexercised by
Cowan as of the date hereof, Cowan will (i) vest in 12.5% of Stream Options
outstanding under a grant dated April 21, 1995 as set forth in the
Agreement; (ii) vest in RRD Options for 10,400 shares under a grant dated
December 10, 1992; 5,200 shares under a grant dated December 9, 1993; and
4,200 shares under a grant dated December 12, 1994; and (iii) own, without
restrictions on transfer or possibility of forfeiture, RRD Stock granted
under a restricted stock agreement dated December 12, 1991.
(c) Vesting, Rights, etc. After Termination Date:
--------------------------------------------
(i) From and after the Termination Date, there will be no further vesting
in Cowan of any additional Stream Options or RRD Options over and above
those that shall have vested prior to that Date, except, however, that 50%
of each then unvested Stream Option granted to Cowan under the Agreement
shall immediately vest upon the Termination Date.
(ii) Pursuant to the terms of the Stream 1995 Stock Option Plan, Stream
grants to Cowan a period of up to eighteen months from January 1, 1997
(ending June 30, 1998) in which to exercise any Stream Options vested in
Cowan on the Termination Date. During this period, Cowan shall be entitled
to all rights (including rights due in the event of an Acquisition Event as
defined in the Stream 1995 Stock Option Plan) available to all other Stream
Option holders.
(iii) Pursuant to the terms of the 1991 and 1995 RRD Stock Incentive Plans,
Cowan may exercise his RRD Options at any time during the 90-day period
next following the Termination Date.
3. REPURCHASE OF COWAN'S STREAM STOCK
-----------------------------------
In lieu of any right Stream may have now or in the future to purchase
Cowan's Stream Stock as provided in Para. 4.3.5 of the Agreement (which
rights are hereby declared null and void and of no further force or
effect), the parties have agreed on the following arrangement whereby Cowan
can elect to sell his Purchased Shares (as defined in Para. 4.3.1 of the
Agreement) to Stream, failing of which election by Cowan, he shall continue
to own such Stock.
(a) Stream Obligation to Repurchase Stream Stock, Price: Until such time as
there shall have occurred a Trigger Event (as defined in the Agreement) or
until the Stream Stock is publicly traded, Cowan shall have the right,
exercisable by notice to Stream, to require Stream to buy back up to one-
half of his total Purchased Shares on either or both of two occasions
("First Election" and "Second Election," respectively) at Cowan's purchase
price for such Shares plus an additional amount representing interest on
the purchase price for such Shares.
-4-
<PAGE>
(b) Allocation of Repurchase Price Between Borrowed Funds and Cowan's Own
Funds: Cowan may, on each of the First Election and Second Election dates,
elect to allocate the Purchase Shares sold to Stream between (i) those
Shares purchased for cash and (ii) those Shares purchased using funds
borrowed from Stream. Such election shall be in Cowan's own sole and
unfettered discretion, and he shall designate such allocation at the time
of, and in his notice of exercise of each of, the First Election or the
Second Election, as the case may be. Failing and in default of such a
designation by Cowan, in any sale of Purchased Shares to Stream, the shares
sold shall be deemed to be 50% those purchased by Cowan for cash and 50%
those purchased by Cowan using funds borrowed from Stream.
(c) How Purchase Effected: As to any Purchased Shares purchased by Cowan
using funds borrowed from Stream, a repurchase by Stream shall be effected
by crediting against the principal amount of The Note an amount equal to
(i) the elected number of Purchased Shares to be sold times (ii) $6
(adjusted for any splits, stock dividends, combination of shares or
recapitalization), and credit against interest due on The Note all interest
accrued to date of credit on such portion of the principal. As to any
Purchased Shares purchased by Cowan for cash, a repurchase shall be
effected by a cash payment to Cowan which shall include interest on such
funds computed at the rate of interest as provided in The Note, namely
7.34% per annum for the period from the date of original purchase by Cowan
until the date of such repurchase by Stream hereunder. Except for
reflection of credits against The Note, nothing herein shall be deemed to
amend or accelerate any terms contained in The Note.
(d) When Cowan Election May be Made: Cowan may exercise the First Election at
any time before the later of (i) thirty (30) days after the actual
execution and delivery of this Memorandum, and (ii) fifteen (15) business
days next following Cowan's receipt of Stream financial statements for the
second fiscal quarter of 1996 (the "Financial Statements"). Cowan may
exercise the Second Election at any time after April 30, 1997 and before a
date fifteen (15) full calendar months next following the end of First
Election period, as aforesaid (being the later of October 31, 1997 or a
date fifteen (15) full calendar months from the fifteenth business day
following Cowan's receipt of the Financial Statements).
(e) Stockholder Information/Reports: The parties agree and acknowledge that
these agreements with respect to Stream Stock and Stream Options are
intended to afford Cowan certain limited participation in any public
offerings or stock sales in connection with a purchase of Stream by a third
party. Accordingly, so long as Cowan shall hold any Stream Stock or Stream
Options and provided that the Stream Stock is not publicly traded, Cowan
shall have the right to meet no more frequently than quarterly with the
Chief Financial Officer of RRD (currently Cheryl A. Francis), who shall
keep him advised of such developments and events as may be appropriate
under the described circumstances; provided, however, that Cowan agrees
that all such information shall be deemed confidential and proprietary
information of Stream and RRD, and Cowan shall
-5-
<PAGE>
be prohibited from discussing such information with, or disclosing such
information to, any third party.
4. REFERENCES
----------
Upon request by Cowan, Stream and RRD shall furnish references with respect
to Cowan and his accomplishments and achievements during his tenure with
them, from among the following persons: Messrs John R. Walter, Robert
White, Mark Nunnelley, Morton Rosenthal and Steven Baumgartner.
5. CONFIDENTIALITY AND NON-DISPARAGEMENT
-------------------------------------
(a) Cowan, for his part, and Stream and RRD (together the "Companies") for
theirs, each agree that the terms of this Memorandum of Agreement shall be
and remain confidential and shall not be disclosed except when required by
law or government decree, judicial process, court order or the like, or in
connection with Cowan's seeking legal or financial planning advice. Cowan
acknowledges that this Memorandum of Agreement will be filed by RRD as
required by law with the Securities and Exchange Commission, and that such
filing shall not constitute a breach of confidentiality. Cowan shall not
make, utter or issue any public statements that may be reasonably construed
as disparaging to the Companies or placing the Companies in a negative or
false light; and likewise, the Companies shall and shall cause their
officers, employees and agents, not to make, utter or issue any public
statements that may be reasonably construed as disparaging to Cowan or
placing Cowan in a negative or false light.
(b) In addition to the foregoing, each of Cowan and Stream acknowledge the
continuing application to Cowan of Para. 7.1. of the Agreement
notwithstanding termination of Cowan's employment with Stream.
6. MODIFICATION OF THE AGREEMENT'S NON-COMPETE RESTRICTIONS
--------------------------------------------------------
(a) Recitals: Para. 8. of the Agreement sets forth certain non-compete
restrictions to apply in the event of termination of Cowan's employment by
Stream. In view of the termination of Cowan's employment relationship
approximately a year after beginning his tenure at Stream, the parties have
agreed to narrow the scope of non-compete restrictions as follows:
(b) Restated Agreement Not to Compete: Cowan agrees that from and after the
date hereof and for the Non-Competition Period set forth in the Agreement
(ending December 31, 1997), he shall not directly or indirectly own,
manage, operate, control or participate in, whether as an officer,
employee, partner, director, principal, consultant, agent or
-6-
<PAGE>
otherwise, or aid or assist anyone else in the conduct of, any business in
competition with Stream which business involves the manufacture,
replication, ordering, fulfillment, distribution or support of software
products, through either physical or electronic means, anywhere in the
world except in such countries or areas where Stream is neither operating
such a business or is proposing to operate such a business as of the date
hereof. Nothing herein shall prohibit Cowan from participating in any
business involving the creation and publication of software products,
provided such business is not involved in competition with Stream in the
business of manufacture, replication, ordering, fulfillment, distribution
or support of software products.
7. RELEASE
-------
(a) Cowan, on behalf of himself, his heirs, executors, attorneys,
administrators and assigns, agrees to release from and not to sue either of
Stream or RRD (including current and former employees, partners,
fiduciaries, directors, agents, divisions, subsidiaries, affiliates or
other related entities) for all known or unknown claims, demands,
agreements, actions, causes of action, damages or liabilities of any kind,
in law or equity or otherwise, which Cowan has, had or may have against
either Stream or RRD related to Cowan's employment with either Stream or
RRD, resignation from his officerships with each of Stream or RRD or his
resignation from his directorship with Stream, including but not limited
to, claims which could have been asserted under any fair employment,
contract or tort law, or any other federal, state or local law, regulation
or ordinance, such as Title VII of the Civil Rights Act of 1964, the
Employee Retirement Income Security Act, the Age Discrimination in
Employment Act, the Americans with Disabilities Act, the Older Workers
Benefit and Protection Act, or under any compensation, bonus, severance or
other benefit plan. Notwithstanding the foregoing, nothing herein shall
release or waive any rights Cowan may have to enforce the provisions of
this Agreement. Cowan acknowledges and agrees that the release and
covenant not to sue included herein are essential and material terms of
this Memorandum and that without such release and covenant not to sue no
agreement would have been reached by the parties. Cowan understands and
acknowledges the significance and consequences of this release, and further
acknowledges the receipt of separate consideration beyond that to which he
would otherwise be entitled in exchange for such release and covenant not
to sue.
(b) Each of Stream and RRD, on behalf of itself, its attorneys, administrators
and assigns, directors, agents, divisions, subsidiaries, affiliates or
other related entities, agrees to release from and not to sue Cowan for all
known or unknown claims, demands, agreements, actions, causes of action,
damages or liabilities of any kind, in law or equity or otherwise, which it
has, had or may have against Cowan related to Cowan's employment with
either Stream or RRD, resignation from his officerships with each of Stream
or RRD or his resignation from his directorship with Stream.
Notwithstanding the foregoing, nothing herein shall release or waive any
rights either of Stream or RRD
-7-
<PAGE>
may have to enforce the provisions of this Agreement or to recover from
Cowan any amounts determined to have been wrongfully paid to him under the
terms of any compensation, reimbursement or benefit plan if an audit of
such plan reveals such wrongful payment.
8. REVOCATION RIGHTS
-----------------
Notwithstanding anything in this Memorandum to the contrary, Cowan
acknowledges that he has had the opportunity to have at least twenty-one
(21) days within which to decide whether or not to sign this Memorandum.
Cowan further acknowledges that he has been given the right to revoke this
Memorandum by serving, within a seven (7) day period after signing, a
written notice of revocation. The Memorandum shall become effective on the
eighth day following its execution by Cowan. If Cowan revokes the
Memorandum, neither party shall have any obligation under it.
9. MISCELLANEOUS
-------------
(a) Notices: Para. 13.4 of the Agreement is hereby incorporated by reference
as a part hereof, except that the addresses for notice purposes shall be:
Stream International Inc.
2 Edgewater Drive
Norwood, MA 02062 Attn: CEO
Copy to: Monica M. Fohrman, Esq.
Vice President, Law and
Assistant General Counsel
R.R. Donnelley & Sons Company
Corporate Headquarters
77 West Wacker Drive
Chicago, IL 60601
Notices to RRD shall be sent to the Chairman, at
the foregoing Chicago address, copy to Attorney
Fohrman at same.
Notices to Cowan shall be sent to:
Rory J. Cowan
281 Fairhaven Hill Road
Concord, MA 01742
-8-
<PAGE>
Copy to: Milton Bordwin, Esq.
Rubin and Rudman
50 Rowes Wharf - 3rd Fl.
Boston, MA 02110
(b) Captions/Headings: The headings and captions in this Memorandum are for
convenience only and are not intended to define or describe the scope or
content of the substantive provisions hereof.
(c) Counterparts: This Memorandum may be executed in any number of
counterparts, each of which shall be an original and all of which together
shall constitute one and the same instrument.
(d) Governing Law: This Memorandum shall be governed by and construed in
accordance with the domestic substantive laws of The Commonwealth of
Massachusetts without giving effect to any choice or conflict of laws
principles or rules that would cause the application of the domestic
substantive laws of any other jurisdiction.
(e) Consent to Jurisdiction: Para. 13.9 of the Agreement is hereby
incorporated by reference as a part hereof, mutatis mutandis, including
references to the "Executive" to mean Cowan and references to "Company" to
mean RRD and Stream.
(f) Withholding: The payments and benefits described in this Memorandum shall
be subject to withholding taxes to the extent required by law.
(g) Status of Agreement: Except as specifically set forth or incorporated
herein by reference and except for the following additional provisions
thereof, the Agreement shall be of no further force and effect: Para.
4.3.4; Para 4.3.6; Para. 7.2; Para. 9, which provisions shall continue in
full force and effect, as shall The Note, and the Stock Pledge Agreement
referred to in the Agreement. This Memorandum embodies the entire
agreement and understanding of the parties with regard to the matters
described in this Memorandum and supersedes any and all prior or
contemporaneous agreements and understandings, oral or written between
Cowan, on the one hand, and either of Stream or RRD, on the other hand.
The parties agree to execute such other agreements and documents and do
such acts and deeds as are reasonably necessary or appropriate to
effectuate this agreement and understanding and the mutual purposes of the
parties hereto.
(h) Legal Advice: In signing below, Cowan expressly acknowledges that he has
read this Memorandum carefully, that he fully understands its terms and
conditions, that he has been advised of his rights and has been advised to
consult an attorney prior to executing this Memorandum. Cowan intends to
be legally bound by the terms and conditions of this Memorandum.
-9-
<PAGE>
Executed as a sealed instrument effective as of the date and year first
above written, but in fact signed and delivered on the following date for the
purposes hereof: June 30, 1996
Stream International Holdings Inc.
/s/Rory J. Cowan by /s/Cheryl A. Francis
- ----------------------------------- ----------------------------------
Rory J. Cowan Cheryl A. Francis, Director
Hereunto duly authorized
R.R. Donnelley & Sons Company
by /s/Steven J. Baumgartner
-------------------------------------
Steven J. Baumgartner, Exec. V.P.
& Sector President
Hereunto duly authorized
-10-
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 30,693
<SECURITIES> 0
<RECEIVABLES> 1,090,893
<ALLOWANCES> 25,134
<INVENTORY> 356,857
<CURRENT-ASSETS> 1,474,367
<PP&E> 4,191,238
<DEPRECIATION> 2,276,165
<TOTAL-ASSETS> 4,499,867
<CURRENT-LIABILITIES> 1,054,698
<BONDS> 1,228,345
<COMMON> 330,612
0
0
<OTHER-SE> 1,460,167
<TOTAL-LIABILITY-AND-EQUITY> 4,499,867
<SALES> 3,124,496
<TOTAL-REVENUES> 3,124,496
<CGS> 2,593,611
<TOTAL-COSTS> 2,593,611
<OTHER-EXPENSES> 923,905
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49,796
<INCOME-PRETAX> (369,100)
<INCOME-TAX> (46,458)
<INCOME-CONTINUING> (322,642)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (322,642)
<EPS-PRIMARY> (2.09)
<EPS-DILUTED> (2.09)
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