<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
R. R. DONNELLEY & SONS COMPANY
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
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NOTICE AND PROXY STATEMENT 77 West Wacker Drive
ANNUAL MEETING OF STOCKHOLDERS Chicago, Illinois 60601-1696
[LOGO OF R.R. DONNELLEY & SONS COMPANY]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON THURSDAY, MARCH 26, 1998
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The Annual Meeting of Stockholders of R. R. Donnelley & Sons Company will be
held on Thursday, March 26, 1998, at nine o'clock a.m., Chicago time, at First
Chicago Center, One First National Plaza, at Dearborn Street and Madison
Street, Chicago, Illinois 60602 for the following purposes:
1. To elect four directors;
2. To consider and vote on a proposal to amend the Company's 1995 Stock
Incentive Plan;
3. To consider and vote on a stockholder proposal regarding executive
compensation, if properly presented at the meeting; and
4. To transact such other business as may properly come before the meeting or
any adjournment or adjournments thereof.
Enclosed herewith is a Proxy Statement setting forth certain additional
information.
Only stockholders of record at the close of business on February 4, 1998 will
be entitled to notice of and to vote at the meeting.
Stockholders are cordially invited to attend the meeting. If you plan to
attend and you are a stockholder as of February 4, 1998, please check the
appropriate box on your proxy card and bring the admission ticket attached to
the enclosed proxy with you to the meeting. PLEASE SIGN, DATE AND RETURN THE
ENCLOSED PROXY IN THE ENVELOPE PROVIDED WHETHER OR NOT YOU PLAN TO ATTEND THE
MEETING IN PERSON. If your shares are held in the name of a broker or other
nominee, please ask the broker or other nominee that holds the shares to
provide you with evidence of your share ownership, which will enable you to
gain admission to the meeting. If you want to vote in person your shares held
in the name of a broker or other nominee, you will have to get a proxy in your
name from the registered holder. Please note that attendance at the meeting
will be limited to stockholders as of the record date (or authorized
representatives) having an admission card or evidence of their share ownership
and guests of the Company.
Stockholders who do not expect to be present at the meeting are requested to
sign and date the enclosed proxy and return it promptly in the envelope
enclosed for that purpose. Any person giving a proxy has the power to revoke it
at any time before it is exercised and stockholders who are present at the
meeting may withdraw their proxies and vote in person. Revocation of a proxy
may be effected in the manner provided on page 1 of the Proxy Statement.
By Order of the Board of Directors
Monica M. Fohrman
Secretary
February 18, 1998
[LOGO] Printed on recycled paper
<PAGE>
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77 West Wacker Drive
Chicago, Illinois 60601-1696
[LOGO OF R.R. DONNELLEY & SONS COMPANY]
February 18, 1998
PROXY STATEMENT
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This Proxy Statement is furnished to stockholders of R. R. Donnelley & Sons
Company in connection with the solicitation, by order of the Board of
Directors, of proxies for use at the Annual Meeting of Stockholders of the
Company to be held on Thursday, March 26, 1998 (the "1998 Annual Meeting") at
the time and place and for the purposes set forth in the accompanying notice of
the meeting. This Proxy Statement and the accompanying proxy are first being
mailed to stockholders on or about February 18, 1998.
The accompanying proxy is solicited on behalf of the Board of Directors of the
Company and is revocable at any time before it is exercised. A proxy may be
revoked at any time before it is exercised by delivering a written notice of
revocation to the Secretary of the Company or by executing a proxy bearing a
later date which is exercised at the 1998 Annual Meeting. Attendance at the
1998 Annual Meeting will not automatically revoke a proxy, but a stockholder in
attendance may request a ballot and vote in person, thereby revoking a prior
granted proxy.
All outstanding shares of the Company's common stock, par value $1.25 ("Common
Stock"), represented by properly executed and unrevoked proxies received in the
accompanying form in time for the 1998 Annual Meeting will be voted. A
stockholder may, with respect to the election of directors (i) vote for the
election of all four nominees named herein as directors, (ii) withhold
authority to vote for all such director nominees or (iii) vote for the election
of all such director nominees other than any nominee with respect to whom the
stockholder withholds authority to vote by so indicating in the appropriate
space on the proxy. A stockholder may, with respect to each other matter
specified in the notice of the meeting (i) vote "FOR" the matter, (ii) vote
"AGAINST" the matter or (iii) "ABSTAIN" from voting on the matter. Shares will
be voted as instructed in the accompanying proxy on each matter submitted to
stockholders. If no instructions are given, the shares will be voted for the
election of all four nominees named herein as directors, for approval of the
amendment to the 1995 Stock Incentive Plan, and against the stockholder
proposal regarding executive compensation, if it is properly presented at the
1998 Annual Meeting.
A proxy submitted by a stockholder may indicate that all or a portion of the
shares represented by such proxy are not being voted by such stockholder with
respect to a particular matter. This could occur, for example, when a broker is
not permitted to vote stock held in street name on certain matters in the
absence of instructions from the beneficial owner of the stock. The shares
subject to any such proxy which are not being voted with respect to a
particular matter (the "non-voted shares") will be considered shares not
present and entitled to vote on such matter, although such shares may be
considered present and entitled to vote for other purposes and will count for
purposes of determining the presence of a quorum.
The affirmative vote of a plurality of the shares of Common Stock present in
person or by proxy at the meeting and entitled to vote on the election of
directors is required to elect directors. Accordingly, if a quorum is present
at the meeting, the four persons receiving the greatest number of votes will be
elected to serve as directors. Therefore, withholding authority to vote for a
director(s) and non-voted shares with respect to the election of directors will
not affect the outcome of the election of directors. If a quorum is present at
the meeting, approval of each matter other than the
<PAGE>
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election of directors requires the affirmative vote of a majority of the shares
of Common Stock present in person or by proxy at the meeting and entitled to
vote on such matter. An abstention with respect to such matter has the legal
effect of a vote against such matter. Non-voted shares with respect to such
matter will not affect the determination of whether such matter is approved.
If a stockholder is a participant in the Company's Dividend Reinvestment Plan
or Employee Monthly Investment Plan and the accounts are registered in the same
name, the proxy represents the number of full shares in each plan account, as
well as shares registered in the participant's name. If a stockholder is a
participant in the Company's Tax Credit Stock Ownership Plan and the account is
registered in the same name, the proxy will also serve as a voting instruction
for the trustee of this plan.
The Company will bear the cost of the solicitation. In addition to
solicitation by mail, the Company will request banks, brokers and other
custodian nominees and fiduciaries to supply proxy material to the beneficial
owners of Common Stock of whom they have knowledge, and will reimburse them for
their expenses in so doing; and certain directors, officers and other employees
of the Company, not specially employed for the purpose, may solicit proxies,
without additional remuneration therefor, by personal interview, mail,
telephone or telegraph. The Company has retained Morrow & Co. to aid in the
solicitation of proxies for a fee of $8,000, plus out-of-pocket expenses.
There were issued and outstanding 144,874,072 shares of Common Stock
(exclusive of 6,014,978 shares held in the Treasury) as of February 4, 1998.
Each such issued and outstanding share is entitled to one vote upon each matter
to be voted on at the 1998 Annual Meeting. The close of business on February 4,
1998 has been fixed as the record date for the determination of stockholders
entitled to vote at the meeting.
ELECTION OF DIRECTORS
The Company's Certificate of Incorporation provides for three classes of
directors of as nearly equal size as possible and further provides that the
total number of directors shall be determined by the Company's By-Laws, except
that the total number of directors shall be not less than nine nor more than
twelve. The term of each class of directors is three years and the term of one
class expires each year in rotation.
The terms of the Directors of the First Class expire at the 1998 annual
election to be held at the 1998 Annual Meeting. At the present time it is
intended that shares represented by the enclosed proxy will be voted for the
election of Martha Layne Collins, William L. Davis, Oliver R. Sockwell and
Stephen M. Wolf as Directors of the First Class for a three-year term expiring
at the 2001 annual election. Charles C. Haffner III, who is a Director of the
Second Class, will retire on June 1, 1998 in accordance with the Company's
Retirement Policy for directors.
All of the nominees are currently members of the Board of Directors. In the
event that any nominee should become unavailable for reasons not now known, it
is intended that such shares will be voted for such substitute nominee as may
be selected by the Board of Directors or the Board may elect not to fill the
vacancy and to reduce the number of directors.
The affirmative vote of the holders of a plurality of the shares of Common
Stock present in person or by proxy at the 1998 Annual Meeting and entitled to
vote on the election of directors is required to elect the nominees as
Directors of the First Class.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE NOMINEES FOR DIRECTORS
OF THE FIRST CLASS.
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INFORMATION ABOUT DIRECTORS AND NOMINEES FOR DIRECTORS
The names of the directors whose terms of office shall continue after the 1998
Annual Meeting and the nominees, their principal occupations during the past
five years, certain other directorships held, and certain other information are
set forth below.
2
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DIRECTORS OF THE FIRST CLASS
Nominated for election at the 1998 Annual Meeting for Terms Expiring in 2001
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MARTHA LAYNE COLLINS, Director of International Business and
Management at the University of Kentucky since 1996 and
President, Martha Layne Collins & Associates, a consulting firm,
[PHOTO] since 1988. She was President of St. Catharine College,
Springfield, Kentucky from 1990 until 1996, a Fellow at John F.
Kennedy School of Government at Harvard University from January,
1989 to May, 1989 and was Executive-in-Residence, University of
Louisville from January, 1988 to December, 1988. She was Governor
of the Commonwealth of Kentucky from 1983 to 1987 and Lieutenant
Governor from 1979 to 1983. She has been a director since 1987.
She is a director of Eastman Kodak Company and Mid-America
Bancorp (dba Bank of Louisville). Age 61. Member of the Audit and
Executive Committees.
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WILLIAM L. DAVIS, Chairman and Chief Executive Officer of the
Company since 1997. He was Senior Executive Vice President of
Emerson Electric Company, manufacturer of electrical, electronic
[PHOTO] and related products, from 1993 until 1997, and Executive Vice
President from 1988 until 1993. He has been a director since
1997. He is a director of Mallinckrodt, Inc. Age 54. Member of
the Executive Committee.
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OLIVER R. SOCKWELL, Executive-In-Residence of Columbia University
Graduate School of Business, since 1997. He was President and
Chief Executive Officer of Construction Loan Insurance
[PHOTO] Corporation (Connie Lee) and its subsidiary, Connie Lee Insurance
Company, financial guarantee insurance companies, from 1987 until
1997. He was Executive Vice President, Finance, Administration
and Planning, for the Student Loan Marketing Association (Sallie
Mae) from 1984 until 1987. He has been a director since 1997. Age
54. Member of the Audit and Corporate Responsibility and
Governance Committees.
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STEPHEN M. WOLF, Chairman and Chief Executive Officer of US
Airways Group, Inc. since 1996. He was Senior Advisor to Lazard
Freres & Co., an investment banking firm, from 1994 until 1996.
[PHOTO] He was Chairman and Chief Executive Officer of UAL Corporation
and United Air Lines, Inc. from 1987 to 1994. He has been a
director since 1995. He is a director of Philip Morris Companies,
Inc., and US Airways Group, Inc. Age 56. Member of the Finance
and Human Resources Committees.
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DIRECTORS OF THE SECOND CLASS
Terms Expire in 1999
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CHARLES C. HAFFNER III, Retired Vice Chairman of the Board of the
Company. He was Vice Chairman of the Board from 1984 until 1990.
From 1983 to 1984, he served as Vice Chairman and Treasurer. He
[PHOTO] has been a director since 1961. He is a director of DuKane
Corporation and Protection Mutual Insurance Company. Mr. Haffner
is a cousin of James R. Donnelley, a director of the Company. Age
69. Member of the Executive and Finance Committees.
3
<PAGE>
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JUDITH H. HAMILTON, President and Chief Executive Officer of
FirstFloor Software, an internet software publisher, since 1996.
She was President and Chief Executive Officer of Dataquest
[PHOTO] Incorporated, a high-technology market research analysis and
consulting firm, from 1992 until 1995, Senior Vice President and
General Manager, Systems Division, of Locus Computing Corporation
from 1991 to 1992 and a Partner of Ernst & Young and the National
Director of Market Development for the Information Technology
Organization of Ernst & Young from 1988 to 1991. She has been a
director since 1995. She is a director of FirstFloor Software,
Sentry Technology Group and Software.com, Inc. Age 53. Member of
the Audit and Corporate Responsibility and Governance Committees.
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WILLIAM D. SANDERS, Chairman and Chief Executive Officer of
Security Capital Group Incorporated, an owner and operator of
public real estate companies, since 1990. He has been a director
[PHOTO] since 1986. He is a director of CarrAmerica Realty Corporation,
Security Capital Group Incorporated, Security Capital U.S.
Realty, and Storage USA, Inc. Age 56. Member of the Corporate
Responsibility and Governance and Human Resources Committees.
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BIDE L. THOMAS, Retired President of Commonwealth Edison Company,
a producer, distributor and seller of electric energy. He was
President of Commonwealth Edison Company from 1987 until his
[PHOTO] retirement in 1992. He has been a director since 1987. He is a
director of MYR Group Inc. and The Northern Trust Corporation.
Age 62. Member of the Audit and Finance Committees.
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DIRECTORS OF THE THIRD CLASS
Terms Expire in 2000
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JAMES R. DONNELLEY, Vice Chairman of the Board of the Company
since 1990. From 1988 to 1990, he was Group President, Corporate
Development. Prior to that, he was Group President, Financial
[PHOTO] Printing Services. He has been a director since 1976. He is a
director of Sierra Pacific Resources and Pacific Magazines and
Printing Limited. Mr. Donnelley is a cousin of Charles C. Haffner
III, a director of the Company. Age 62. Member of the Executive
and Finance Committees.
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THOMAS S. JOHNSON, Chairman and Chief Executive Officer of
GreenPoint Financial Corp. and its subsidiary, GreenPoint Bank,
[PHOTO] since 1993. He was President of Manufacturers Hanover Corporation
and Manufacturers Hanover Trust Company, diversified financial
institutions, from 1989 until 1991. He was President and a
director of Chemical Banking Corporation and Chemical Bank from
1983 until 1989. He has been a director since 1990. He is a
director of GreenPoint Financial Corp. and GreenPoint Bank,
Alleghany Corporation and Online Resources & Communications
Corporation. Age 57. Member of the Finance and Human Resources
Committees.
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GEORGE A. LORCH, Chairman, President and Chief Executive Officer
of Armstrong World Industries, Inc., a manufacturer of floor
coverings, ceiling systems and industrial products, since 1994.
[PHOTO] He was President and Chief Executive Officer at Armstrong World
Industries, Inc. from 1993 until 1994, Executive Vice President
from 1988 until 1993 and Group Vice President from 1983 until
1988. He has been a director since 1996. He is a director of
Armstrong World Industries, Inc., Dal-Tile International,
Household International, Inc., and Warner Lambert. Age 56. Member
of the Corporate Responsibility and Governance and Human
Resources Committees.
4
<PAGE>
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M. BERNARD PUCKETT, Former President and Chief Executive Officer
of Mobile Telecommunication Technologies Corp., a provider of
[PHOTO] paging and wireless messaging services, serving from 1994 until
1996. He was Senior Vice President, Corporate Strategy and
Development of International Business Machines from 1993 to 1994,
Vice President and General Manager, Applications Solutions
Division of International Business Machines from 1991 to 1993,
and President, Data Systems Division of International Business
Machines from 1988 to 1991. He has been a director since 1995. He
is a director of Cognizant Corporation, P-Com, Oacis Healthcare,
Software.com and MUSE Networks. Age 53. Member of the Audit,
Executive and Finance Committees.
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In 1997, the Board of Directors met seven times. During 1997, each director was
present for 75% or more of the total number of meetings of the Board of
Directors and Committees of the Board of which such director was a member.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has standing Audit, Corporate Responsibility and Governance,
Executive, Finance and Human Resources Committees of the Board of Directors.
The members of these Committees have been identified above.
The Audit Committee recommends the selection of independent public accountants
to the Board of Directors; reviews the scope of the audits performed by the
independent public accountants and internal audit department, together with
their audit reports and any recommendations made by them; reviews in January of
each year the results of the audit for the prior fiscal year with the
independent public accountants before the earnings report for such fiscal year
is released publicly; and reviews periodically the performance of the Company's
accounting and financial personnel. The Audit Committee also reviews the
Company's financial disclosure documents, management perquisites, material
litigation and regulatory proceedings and other issues relative to potentially
significant corporate liability and reviews and monitors the Company's codes of
conduct. The Audit Committee met five times in 1997.
The Corporate Responsibility and Governance Committee oversees the Company's
commitment to employee health and safety, equal employment opportunity and the
environment. The Corporate Responsibility and Governance Committee also
recommends to the full Board nominees for election to the Board of Directors in
connection with any meeting of stockholders at which directors are to be
elected, and recommends to the full Board persons for appointment to fill any
Board vacancy, such as may occur due to death, resignation, retirement or the
creation of a new directorship, which the Board of Directors is authorized
under the By-Laws to fill, and may recommend to the Board policies and
guidelines concerning criteria for Board membership, the structure and
composition of Board Committees and other matters related to tenure and
retirement of the Board members. The Corporate Responsibility and Governance
Committee met five times in 1997.
The Executive Committee is empowered to exercise all of the authority of the
Board of Directors, except that it does not have the power to take specific
actions delegated to other Committees or to take certain other actions
enumerated in the Company's By-Laws. The Executive Committee meets as necessary
and met one time in 1997.
The Finance Committee reviews the financial policies of the Company and makes
recommendations to the Board of Directors regarding the Company's financial
condition and requirements for and disposition of funds, including the payment
of dividends. The Finance Committee also reviews the performance and management
of the Company's Retirement Benefit Plan. The Finance Committee met six times
in 1997.
5
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The Human Resources Committee determines the annual salary, bonus and other
benefits of selected senior officers of the Company and establishes and
reviews, as appropriate, performance standards under compensation programs for
senior officers. The Human Resources Committee recommends new employee benefit
plans and changes to stock incentive plans to the Board of Directors, approves
amendments to the non-stock employee benefit plans and administers all of the
Company's employee benefit plans. The Human Resources Committee also
recommends to the Board of Directors candidates for election as corporate
officers. The Human Resources Committee met seven times in 1997.
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BENEFICIAL OWNERSHIP OF COMMON STOCK
CERTAIN PRINCIPAL OWNERS
The following table lists the beneficial ownership of Common Stock with
respect to all persons known to the Company to be the beneficial owner of more
than 5% of Common Stock. The information shown was furnished by FMR Corp.,
Northern Trust Corporation, Oppenheimer Group, Inc., Dodge & Cox and the
Regents of the University of California. The percentage of outstanding Common
Stock owned by such holders is based on outstanding shares of Common Stock as
of December 31, 1997.
<TABLE>
<CAPTION>
Number of Shares % of Outstanding
Name and address Beneficially Owned Common Stock
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<S> <C> <C>
FMR Corp. 17,449,816(1) 12.02%
82 Devonshire Street
Boston, Massachusetts 02109
Northern Trust Corporation 14,008,420(2) 9.65%
50 South LaSalle Street
Chicago, Illinois 60675
Oppenheimer Group, Inc. 9,721,254(3) 6.70%
Oppenheimer Tower
World Financial Center
New York, New York 10281
Dodge & Cox 8,062,531(4) 5.56%
One Sansome Street
35th Floor
San Francisco, California 94104
Regents of the University of Cali- 7,633,200(5) 5.26%
fornia
300 Lakeside Drive
Oakland, California 94612
</TABLE>
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(1) FMR Corp. is a parent holding company for Fidelity Management & Research
Company, an investment adviser, and other affiliates and files one
Schedule 13G to report beneficial ownership of Common Stock by all such
entities and by clients of Fidelity Management & Research Company.
Holdings are as of July 31, 1997 as reported in Schedule 13G. FMR Corp.
has sole power to dispose or direct the disposition of all reported shares
and sole power to vote or direct the vote of 1,172,642 shares (0.81%).
(2) Northern Trust Corporation is a parent holding company for The Northern
Trust Company and other affiliates and files one Schedule 13G to report
beneficial ownership by all such entities of Common Stock. Northern Trust
Corporation has sole power to dispose or direct the disposition of
4,480,141 shares (3.09%) and shared power to dispose or direct the
disposition of 8,520,896 shares (5.87%); sole power to vote or direct the
vote of 8,475,962 shares (5.84%) and shared power to vote or direct the
vote of 2,883,556 shares (1.99%). Also includes 5,426,871 shares (3.74%)
which are shown elsewhere in this Proxy Statement as beneficially owned by
James R. Donnelley and 879,222 shares (0.61%) which are shown elsewhere in
this Proxy Statement as beneficially owned by Charles C. Haffner III.
6
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(3) Oppenheimer Group, Inc. is a parent holding company and files one Schedule
13G to report beneficial ownership by all subsidiaries of Common Stock.
Oppenheimer Group, Inc. has shared power to dispose or direct the
disposition of all reported shares and shared power to vote or direct the
voting of 5,510,264 shares (3.80%).
(4) Dodge & Cox is an investment advisor and files one Schedule 13G to report
beneficial ownership of Common Stock by clients of Dodge & Cox. Holdings
are as of December 31, 1996 as reported in Schedule 13G. Dodge & Cox has
sole power to dispose or direct the disposition of 8,039,731 shares
(5.54%) and shared power to dispose or direct the disposition of 22,800
shares (0.02%); sole power to vote or direct the vote of 7,304,921 shares
(5.03%) and shared power to vote or direct the vote of 757,610 shares
(0.52%).
(5) The Regents of the University of California has the sole power to dispose
or direct the disposition of, and the sole power to vote or direct the
vote of, all reported shares.
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The descendants of Richard Robert Donnelley (1836-1899), the Company's
founder, and members of their families, own approximately 16% of the
outstanding Common Stock.
BENEFICIAL OWNERSHIP OF COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS
The following table lists the beneficial ownership, as of December 31, 1997,
of Common Stock by all directors and nominees, each of the individuals named
in the Summary Compensation Table and the directors and all five individuals
serving as executive officers on December 31, 1997 as a group. The percentage
of outstanding Common Stock owned by each such person is based on outstanding
shares of Common Stock as of December 31, 1997, plus shares subject to stock
options held by each such person.
<TABLE>
<S> <C> <C>
Number of Shares % of Outstanding
Name Beneficially Owned Common Stock
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Directors
Martha Layne Collins 24,200(1) *
James R. Donnelley 6,371,877(2) 4.39%
Charles C. Haffner III 1,329,050(3) *
Judith H. Hamilton 6,166(4) *
Thomas S. Johnson 31,462(1) *
George A. Lorch 5,447(4) *
M. Bernard Puckett 11,316(5) *
William D. Sanders 31,505(1) *
Oliver R. Sockwell 0 *
Bide L. Thomas 14,892(6) *
Stephen M. Wolf 38,000(5) *
Named Executive Officers
Steven J. Baumgartner 65,891(7) *
William L. Davis 316,198(8) *
Cheryl A. Francis 46,200(9) *
John M. Richman 115,625(10) *
W. Ed Tyler 174,669(11) *
Jonathan P. Ward 163,618(12) *
Directors and all five Executive Officers as a group 8,746,116 6.03%
</TABLE>
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*Less than one percent.
(1) Includes 24,000 shares which are not now owned but which could be
acquired by exercise of non-employee director stock options.
(2) Includes 7,400 shares which are subject to conditions of forfeiture and
restrictions on sale, transfer or other disposition, and 69,800 shares
which are not now owned but could be acquired by exercise of stock
options. Includes 1,268,238 shares as to which he has sole investment and
voting power and 4,950,314 (3.41%) shares as to which he shares
investment and voting power. Does not include 38,513 shares owned by a
family member as to which beneficial ownership is disclaimed.
(3) Includes 24,000 shares which are not now owned but which could be
acquired by exercise of non-employee director stock options. Includes
425,828 shares as to which he has sole investment and voting power and
879,222 shares as to which he shares investment and voting
7
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power. Of such 879,222 shares, 609,678 shares are held in trusts as to
which Mr. Haffner acts as a co-trustee and as to which Mr. Haffner has no
economic interest. Does not include 74,355 shares owned by family members
as to which beneficial ownership is disclaimed.
(4) Includes 4,000 shares which are not now owned but which could be acquired
by exercise of non-employee director stock options.
(5) Includes 8,000 shares which are not now owned but which could be acquired
by exercise of non-employee director stock options.
(6) Includes 12,000 shares which are not now owned but which could be
acquired by exercise of non-employee director stock options.
(7) Includes 12,300 shares which are subject to conditions of forfeiture and
restrictions on sale, transfer or other disposition, and 51,500 shares
which are not now owned but which could be acquired by exercise of stock
options.
(8) Includes 303,256 shares which are subject to conditions of forfeiture and
restrictions on sale, transfer or other disposition.
(9) Includes 25,000 shares which are subject to conditions of forfeiture and
restrictions on sale, transfer or other disposition, and 16,200 shares
which are not now owned but which could be acquired by exercise of stock
options.
(10) Includes 109,000 shares which are not now owned but which could be
acquired by exercise of stock options.
(11) Includes 20,800 shares which are subject to conditions of forfeiture and
restrictions on sale, transfer or other disposition, and 122,200 shares
which are not now owned but which could be acquired by exercise of stock
options.
(12) Includes 20,800 shares which are subject to conditions of forfeiture and
restrictions on sale, transfer or other disposition, and 115,700 shares
which are not now owned but which could be acquired by exercise of stock
options.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following Summary Compensation Table sets forth the cash compensation and
certain other components of the compensation of John M. Richman, the former
Acting Chairman and Chief Executive Officer, William L. Davis, the Chairman
and Chief Executive Officer since March 1997, and the other four most highly
compensated executive officers of the Company serving as such on December 31,
1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
------------------------------------
Annual Compensation Awards Payouts
---------------------------- --------------------- -----------
Other
Annual Restricted Securities All
Name and Compen- Stock Underlying Other
Principal sation Award(s) Options/ LTIP Compen-
Position Year Salary($) Bonus($) ($) ($)(4) SARs(#) Payouts ($) sation($)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
W. L. Davis 1997 552,784 459,600 233,759(2) 9,727,229 1,000,000 0 4,049,721(6)
Chairman
and CEO
J. M. Richman 1997 28,333(1) 0 35,185 0 0 0 0
Former Acting 1996 49,000(1) 0 20 0 89,000(5) 0 0
Chairman
and CEO
S. J. Baumgartner 1997 368,000 326,363 3,256 267,000 55,000 0 7,298(7)
Executive VP 1996 350,000 0 17,060(3) 0 31,000 0 7,298
1995 325,000 133,611 9,467 573,750 141,000 401,826 4,007
C. A. Francis 1997 375,000 332,571 82 0 165,000 0 7,382(7)
Executive VP 1996 300,000 0 0 0 151,000 0 5,117
and CFO 1995 62,500 180,000 0 937,500 25,000 0 5,117
W. E. Tyler 1997 386,000 342,327 5,775 0 0 0 5,565(7)
Executive VP 1996 368,000 0 21,679(3) 0 31,000 0 6,745
1995 350,000 143,889 14,479 573,750 196,000 296,335 6,745
J. P. Ward 1997 457,739 405,949 4,301 0 175,000 0 6,259(7)
President and 1996 420,000 0 22,446(3) 0 31,000 0 7,538
Chief Operating 1995 400,000 164,444 16,893 573,750 196,000 339,867 7,538
Officer
</TABLE>
8
<PAGE>
- -------------------------------------------------------------------------------
- --------
(1) Fees paid while serving as a non-employee director of the Company during
1996 and 1997.
(2) Includes relocation expenses of $64,636 paid to W.L. Davis in connection
with his employment with the Company.
(3) Includes the Company matched contribution under the Stock Purchase Plan
equal to 50% of the amount contributed by the employee toward the purchase
of Common Stock for the employee's account, and a cash payment equal to
20% of the amount the employee contributed to assist in the payment of
taxes owed by the employee as a result of the Company matched
contribution.
(4) Values of Restricted Stock Awards shown in the Summary Compensation Table
are based on the closing price of Common Stock on the date of grant. As of
December 31, 1997, J. M. Richman held no shares of restricted Common
Stock; W. L. Davis held 303,256 shares of restricted Common Stock, valued
at $11,296,286 in the aggregate; S. J. Baumgartner held 12,300 shares of
restricted Common Stock, valued at $458,175 in the aggregate; C. A.
Francis held 25,000 shares of restricted Common Stock, valued at $931,250
in the aggregate; W. E. Tyler held 20,800 shares of restricted Common
Stock, valued at $774,800 in the aggregate; and J. P. Ward held 20,800
shares of restricted Common Stock valued at $774,800 in the aggregate.
Dividends are paid on restricted Common Stock at the same rate and at the
same time as on the Common Stock. All restricted Common Stock other than
restricted Common Stock held by Mr. Davis vests on the fifth anniversary
of the date of grant. Restricted Common Stock held by Mr. Davis vests as
set forth in an agreement between Mr. Davis and the Company described on
page 13 below.
(5) Includes options to purchase 4,000 shares of Common Stock granted while
serving as a non-employee director of the Company during 1996.
(6) Includes the following: cash signing bonuses paid in connection with W. L.
Davis' employment with the Company, including interest on deferred
amounts; and premiums paid by the Company in connection with whole life
insurance policies which are owned by Mr. Davis.
(7) Premiums paid by the Company in connection with whole life insurance
policies which are owned by the named executive officers.
- -------------------------------------------------------------------------------
OPTION/SAR GRANTS IN 1997
The following table sets forth certain information concerning options to
purchase Common Stock granted in 1997 to the individuals named in the Summary
Compensation Table.
<TABLE>
<CAPTION>
Individual Grants
- ------------------------------------------------------------------
Number of % of Total
Securities Options/SARs Grant
Underlying Granted to Exercise Date
Options/SARs Employees in or Base Expiration Present
Name Granted(#)(1) 1997 Price($/sh) Date Value($)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
W. L. Davis 500,000(1) 33.67% $30.1250 3/17/2007 4,990,000(5)
500,000(2) 33.67% $45.1875 3/17/2007 3,105,000(5)
J. M. Richman 0 0.00% N/A N/A N/A
S. J. Baumgart- 18,334(3) 1.23% $47.2500 12/31/2006 129,438(4)
ner
18,333(3) 1.23% $55.1300 12/31/2006 105,231(4)
18,333(3) 1.23% $63.0000 12/31/2006 85,982(4)
C. A. Francis 18,334(3) 1.23% $47.2500 12/31/2006 129,438(4)
18,333(3) 1.23% $55.1300 12/31/2006 105,231(4)
18,333(3) 1.23% $63.0000 12/31/2006 85,982(4)
110,000(2) 7.41% $45.1875 3/17/2007 1,027,400(5)
W. E. Tyler 0 0.00% N/A N/A N/A
J. P. Ward 175,000(2) 11.79% $45.1875 3/17/2007 1,634,500(5)
</TABLE>
- --------
(1) Option becomes exercisable (at fair market value on the date of grant)
over a four year period, with 20% of the shares becoming exercisable at
the beginning of each of the second, third and
9
<PAGE>
- -------------------------------------------------------------------------------
fourth years following the date of grant and with the remaining portion of
the option becoming exercisable at the end of the fourth year, unless the
vesting schedule is accelerated to become fully exercisable upon death,
retirement, disability or a change in control as defined in an agreement
between the Company and Mr. Davis described on page 13 below.
(2) Option becomes fully exercisable if on each trading day for a period of 10
consecutive trading days during the six year period commencing March 18,
1997, the average of the high and low transaction prices for the Common
Stock as reported in the New York Stock Exchange Composite Transactions
equals or exceeds the exercise price (a 50% premium above the fair market
value at the date of grant), but no earlier than March 18, 2000, except
that in the case of Mr. Davis' option, exercisability may be accelerated
upon a change of control as defined in an agreement between the Company
and Mr. Davis described on page 13 below, and in the case of other
options, exercisability may be accelerated upon a change of control as
defined in the Company's 1995 Stock Incentive Plan (a "Change in
Control").
(3) Option becomes fully exercisable (at a significant premium above the
thirty day average closing price as of December 31, 1996) on June 30,
2006, except that exercisability may be accelerated upon a Change in
Control or in the event Total Stockholder Return for any four-year period
(each, a "Performance Period") during the period commencing on January 1,
1997 and ending on December 31, 2005 exceeds the cumulative total return
during such Performance Period of the Standard and Poor's Industrial Index
stock index. Total Stockholder Return means, with respect to any
Performance Period, the fair market value on the last day of such
Performance Period of the number of shares of Common Stock which is deemed
to be purchased by investing $100 as of the day immediately preceding the
first day of such Performance Period. In calculating Total Stockholder
Return, dividends on the Common Stock are assumed to be reinvested in
shares of Common Stock.
(4) The Black-Scholes option pricing method has been used to calculate present
value as of date of grant, January 1, 1997. The present value as of the
date of grant, calculated using the Black-Scholes method, is based on
assumptions about future interest rates, stock price volatility and
dividend yield. The Black-Scholes model is a complicated mathematical
formula widely used to value exchange traded options. However, stock
options granted by the Company to its executive officers differ from
exchange traded options in two key respects: options granted by the
Company to its executives and non-employee directors are long-term and
generally subject to vesting restrictions while exchange traded options
are short-term and can be exercised or sold immediately in a liquid
market. The Black-Scholes model relies on several key assumptions to
estimate the present value of options, including the volatility of and
dividend yield on the security underlying the option, the risk-free rate
of return on the date of grant and the term of the option. In calculating
the grant date present values set forth in the table, a factor of 22.80%
has been assigned to the volatility of the Common Stock; based on daily
stock market quotations for the twelve months preceding the date of grant,
the yield on the Common Stock has been set at 2.41%; based upon its annual
dividend rate of $0.76 per share at the date of grant, the risk-free rate
of return has been fixed at 6.58%, the rate for a ten year U.S. Treasury
Note on the date of grant as reported in the Federal Reserve Statistical
Release, and the exercise of the options has been assumed to occur at the
end of the actual option term of ten years. There is no assurance that
these assumptions will prove to be true in the future. Consequently, the
grant date present values set forth in the table are only theoretical
values and may not accurately determine present value. The actual value,
if any, that may be realized by each individual will depend on the market
price of Common Stock on the date of exercise.
(5) The Black-Scholes option pricing method (as described above) has been used
to calculate present value of the following options as of the date of
grant based on the following factors:
<TABLE>
<CAPTION>
Date of Grant Expiration Date Volatility Factor Yield Annual Dividend Rate Risk-Free Rate of Return
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3/18/97 3/17/07 21.10% 2.52% $0.76 6.69%
11/19/97 3/17/07 24.84% 2.28% $0.80 6.68%
</TABLE>
- -------------------------------------------------------------------------------
10
<PAGE>
- -------------------------------------------------------------------------------
AGGREGATED OPTION/SAR EXERCISES IN 1997 AND FISCAL YEAR-END OPTION/SAR VALUES
The following table sets forth certain information concerning the exercise in
1997 of options to purchase Common Stock by the individuals named in the
Summary Compensation Table and unexercised options to purchase such stock held
by such individuals at December 31, 1997.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs at In-the-Money Options/SARs
12/31/97(#) at 12/31/97($)(2)
Shares Acquired Value ------------------------- -------------------------
Name on Exercise(#) Realized($)(1) Exercisable/Unexercisable Exercisable/Unexercisable
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
W. L. Davis 0 0 0 1,000,000 0 3,500,000
J. M. Richman 0 0 109,000 0 678,188 0
S. J. Baumgartner 0 0 51,500 219,000 327,669 224,738
C. A. Francis 0 0 16,200 324,800 43,100 169,275
W. E. Tyler 7,000 136,719 122,200 220,800 1,364,625 240,375
J. P. Ward 7,000 169,750 115,700 395,800 1,250,875 240,375
</TABLE>
- --------
(1) The value realized equals the aggregate amount of the excess of the fair
market value on the date of exercise (the average of the high and low
prices of Common Stock as reported in the New York Stock Exchange
Composite Transactions report for the exercise date) over the relevant
exercise price(s).
(2) The value is calculated based on the aggregate amount of the excess of the
average of the high and low prices of Common Stock as reported in the New
York Stock Exchange Composite Transactions report for December 31, 1997
over the relevant exercise price(s).
RETIREMENT BENEFITS
Under the Company's Retirement Benefit Plan, employees who met the eligibility
requirements accrued in 1997 an annual retirement benefit computed at the rate
of 1.5% on compensation up to "covered compensation," and 2% on compensation
in excess of "covered compensation" but not in excess of $160,000 (the maximum
amount of compensation for 1997 on which benefits can accrue under current
law). The formula for determining benefits has been revised at various times
since the present Retirement Benefit Plan was adopted in 1951. The
compensation covered by the Retirement Benefit Plan includes wages and
salaries, supplementary compensation and commissions. An employee's "covered
compensation" for a year is the average of the Social Security wage bases for
the thirty-five-year period ending with such year. Prior to January 1, 1979,
employees could elect to participate on a contributory basis. Since then, the
Retirement Benefit Plan has been noncontributory, so that the Company pays the
full cost of benefits credited under the Retirement Benefit Plan after
December 31, 1978. Benefits are paid monthly after retirement for the life of
the participant (straight life annuity amount) or, if the participant is
married or has elected an optional benefit form, in an actuarially reduced
amount for the life of the participant and the participant's surviving spouse
or other surviving person named as a contingent member. Benefits under the
Retirement Benefit Plan are limited to the extent required by provisions of
the Internal Revenue Code and the Employee Retirement Income Security Act of
1974. If payment of actual retirement benefits is limited by such provisions,
an amount equal to any reduction in retirement benefits will be paid as a
supplemental benefit under the Unfunded Supplemental Benefit Plan adopted by
the Board of Directors in 1981.
The following table contains information concerning annual benefits payable
pursuant to the Retirement Benefit Plan and the Unfunded Supplemental Benefit
Plan on a straight life annuity basis upon retirement at age 65 for the
individuals named in the Summary Compensation Table. These benefits include
the annual benefits to be paid at age 65 computed on service through December
31, 1997, estimated additional annual benefits which may be earned in the
future, assuming the individuals continue in the Company's employ to age 65 at
current base pay plus incentive
11
<PAGE>
- -------------------------------------------------------------------------------
compensation paid at assumed target amounts through age 65, and total
estimated annual benefits on retirement at age 65.
<TABLE>
<CAPTION>
Estimated Additional
Annual Benefits Total Estimated
Annual Benefits on Retirement Annual Benefits
to be paid at Age 65 Computed on Service
at Age 65 for Service after 1997 through December 31,
on the Basis Assuming Continuation 1997 Plus Benefits
of Service through of Employment Which May Be
Individual December 31, 1997 ($) Until Age 65 ($) Earned in Future ($)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
W. L. Davis 65,600 763,400(1) 829,000(1)
J. M. Rich-
man 0 0 0
S. J. Baum-
gartner 36,282 20,820(2) 57,102(2)
C. A. Fran-
cis 38,497 510,826 549,323
W. E. Tyler 78,268 275,040 353,308
J. P. Ward 102,795 464,100 566,895
</TABLE>
- -------------------------------------------------------------------------------
(1) Notwithstanding the provisions of the Retirement Benefit Plan, pursuant to
an agreement between the Company and W. L. Davis described on page 13
below, should Mr. Davis be employed by the Company through March 18, 2002,
these benefits will be paid at age 65.
(2) S. J. Baumgartner will cease to be deemed employed by the Company as of
December 31, 1999. The estimated annual benefit to be paid to Mr.
Baumgartner under the Retirement Benefit Plan at age 65, based on benefits
accruing through December 31, 1999, will be $57,102.
DIRECTOR COMPENSATION
Directors who are not officers receive annual retainer fees as follows:
$32,000 for service as a director, plus $1,000 per committee for service as a
member of a Board committee, and $2,500 for service as Chairman of a Board
committee (payable in addition to retainer fees for service as a member of the
committee). In addition to these retainer fees, such directors receive an
attendance fee of $1,000 per day for attendance at Board meetings and any
committee meetings held on the same day. Such directors are paid an attendance
fee of $1,000 per day for any committee meetings held on days other than Board
meeting days and for each day spent at the Company's request on committee work
when no formal meeting is held. The 1993 Stock Ownership Plan for Non-Employee
Directors, approved by the stockholders at the 1993 Annual Meeting, permits
directors who are not employees to elect to apply all or a portion of
retainer, meeting and committee fees toward the purchase of shares of Common
Stock at fair market value on the date of purchase. Alternatively, non-
employee directors may elect to defer all or a portion of retainer, meeting
and committee fees, in which case the amount deferred will earn interest at a
rate equal to the rate on U.S. government bonds having a five-year maturity.
Deferred amounts will be paid out in no more than ten equal annual
installments or in a lump sum payment after the later to occur of the
director's attaining age 65 and termination of service as a director. The 1995
Stock Incentive Plan provides that each individual who, immediately following
the annual meeting of stockholders, is a non-employee director shall receive
an option to purchase 4,000 shares of Common Stock at an option price equal to
100% of the fair market value of such shares on the date the option is granted
(the "Option Date"). Such options are fully exercisable during the period
beginning on the earlier to occur of (a) the date that is the first
anniversary of the Option Date or (b) the day immediately preceding the date
of the Annual Meeting of Stockholders of the Company next following the Option
Date and ending ten years after the Option Date.
In 1996, the Board amended the retirement plan for directors as of January 1,
1997. Prior to the plan amendment, a director with 10 or more years of service
as a director would receive an annual retirement benefit equal to the then
current annual retainer fee paid to active directors and a
12
<PAGE>
- --------------------------------------------------------------------------------
director with less than 10 years of service as a director would receive an
annual retirement benefit equal to 10% of such fee for each year or fraction
thereof of service as a director. Under the amended plan, each director who was
active as of January 1, 1997 could elect to (i) receive an annual retirement
benefit determined as if the plan had not been amended, (ii) have an amount
equal to the present value of that director's earned annual retirement benefit
at December 31, 1996 credited to a book-entry account of that director pursuant
to a deferred compensation agreement (as described in the prior paragraph with
respect to the deferral of retainer, meeting and committee fees) or (iii)
convert such present value to shares of phantom stock to be credited to a book-
entry account of that director. In addition, a non-employee director who was
either active as of January 1, 1997 with less than ten years of service who
chose alternative (ii) or (iii) above or first elected to the Board on or after
January 1, 1997 will be credited as of January 1 of each year beginning January
1, 1997 (until the commencement of the director's tenth year of service) with
the number of shares of phantom stock determined by dividing 35% of the annual
retainer then payable by the fair market value of a share of Common Stock.
SEVERANCE PAY PROGRAM AND SPECIAL SEVERANCE PLAN
The Company has adopted a Severance Pay Program consisting of severance
agreements between the Company and certain officers and key employees
(including the executive officers named in the Summary Compensation Table), and
a Special Severance Plan applicable to all other employees of the Company and
certain subsidiaries. The severance agreements and the Special Severance Plan
provide severance benefits in the event of a change in control of the Company
(as defined in the agreements and Special Severance Plan) followed by
termination of employment. These agreements provide that if the executive's
employment is terminated following a change in control of the Company either
(a) by the Company for reasons other than cause (as defined in the agreements)
or other than as a consequence of death, disability or retirement, or (b) by
the executive for reasons relating to a diminution of responsibilities,
compensation or benefits or relocation requiring a change in residence or a
significant increase in travel, the executive will receive certain payments and
benefits. These include (i) a lump sum payment equal to up to three times the
executive's current planned compensation (salary and bonus), (ii) an amount in
cash in lieu of outstanding stock bonus awards under the Company's Stock
Incentive Plans, (iii) an amount in cash equal to the value of outstanding
stock options, (iv) an amount in cash equal to three years of additional
accrued benefits under the Company's pension plan and (v) life, disability,
accident and health insurance benefits for a period of 24 months after
termination of employment. These agreements also provide that if after a change
in control of the Company any compensation paid to the executive, whether or
not pursuant to such agreement, is subject to the federal excise tax on "excess
parachute payments," the Company will pay to the executive such additional
amount as may be necessary so that the executive realizes, after the payment of
such excise tax and any income or excise tax on such additional amount, the
amount of such compensation.
EXECUTIVE AGREEMENTS
Effective March 18, 1997, the Company and William L. Davis entered into an
employment agreement (the "Davis Agreement") pursuant to which Mr. Davis became
employed by the Company as Chief Executive Officer. The Davis Agreement has an
initial term ending March 31, 2002, with an automatic extension through March
31, 2004 unless terminated by either the Company or Mr. Davis on 6 months'
prior written notice.
The Davis Agreement provides that Mr. Davis will receive a base salary of
$700,000 per year and will participate in an annual bonus plan with a target
award of 75% of base salary and a maximum bonus of two times target. Mr. Davis
is entitled to participate in any long-term performance bonus plan adopted by
the Company's Human Resources Committee.
Effective on the date of the Davis Agreement, Mr. Davis was granted stock
options for 500,000 shares of Common Stock at an exercise price of $30.125 (the
price of the Common Stock on the
13
<PAGE>
- --------------------------------------------------------------------------------
date of the Davis Agreement), 20% of which shares vest on March 18 of each of
1998 through 2000 and which is 100% vested on March 18, 2001; and a premium
priced option to purchase 500,000 shares of Common Stock at $45.1875 (150% of
the price of the Common Stock on the date of the Davis Agreement) vesting upon
the date that the price of the Common Stock as traded on the New York Stock
Exchange for ten consecutive trading days exceeds $45.1875 but in no event
exercisable prior to March 18, 2000. Mr. Davis was also awarded restricted
stock grants in the amount of (a) 50,947 shares vesting in three installments
in November, 1997 through 1999, and (b) 269,291 shares with 80,744 shares
vesting on February 1, 1998, 45,008 shares vesting on November 1, 2000, 80,604
shares vesting on November 3, 2001 and 62,935 shares vesting on October 1,
2004.
Notwithstanding the provisions of the Company's Retirement Benefit Plan, Mr.
Davis is guaranteed a pension upon reaching the age of 65 in an annual amount
equal to the excess of (a) the greater of $907,000 or 50% of his "final average
compensation" (as defined in the Davis Agreement) over (b) the sum of (i) any
pension amounts accrued and vested under the Retirement Benefit Plan, (ii)
retirement benefits paid under plans of Mr. Davis' former employers and (iii)
his primary social security benefit. If Mr. Davis' employment is terminated
voluntarily or for cause prior to March 17, 2002, the pension amount is to be
reduced proportionately to the length of employment prior to the fifth
anniversary of the Davis Agreement.
Mr. Davis was also awarded cash signing bonuses covering amounts forfeited
from his prior employer, payable as follows: (i) $1,812,612 immediately paid
into a deferred payment account, (ii) an additional $1,908,606 paid in
November, 1997 into the deferred account, and (iii) $179,507 paid in November,
1997. The deferred amounts bear interest quarterly at a rate equal to a 5 year
U.S. bond rate, and were paid to Mr. Davis on January 15, 1998. The Company
also reimbursed Mr. Davis for expenses incurred in connection with his
relocation to Chicago, Illinois.
In the event of Mr. Davis' death prior to expiration of the initial employment
term, in addition to rights under the Davis Agreement covering stock options
and restricted stock awards, his estate will receive a "Termination Bonus"
equal to his previous year's salary, prorated for the portion of the year
worked prior to his death. In the case of his disability, either the Company or
Mr. Davis may terminate the Davis Agreement and in addition to a Termination
Bonus as described above, Mr. Davis is to receive 60% of his last base salary
amount plus full benefit and pension accrual until he reaches age 65. The Davis
Agreement also provides for certain payments to be made to Mr. Davis in the
event that his employment is terminated by the Company without cause or by him
for "Good Reason" (as defined in the Davis Agreement), including a lump sum
severance payment equaling 250% of his then base salary and target bonus amount
(300% if such termination follows a Change of Control (as defined in the Davis
Agreement)) and a Termination Bonus, in addition to base salary and bonus
earned through the date of termination and continued benefit coverage and
pension accrual for a period of 30 months. Further, in the event Mr. Davis'
employment is terminated by the Company without cause or if there is a Change
in Control, all stock options and restricted stock awards not yet vested shall
become fully vested.
As part of the Davis Agreement, Mr. Davis has agreed to certain limitations on
his ability to compete with, or solicit employees from, the Company for a
period ending two years after the termination of the Davis Agreement.
In connection with commencing employment as Executive Vice President and Chief
Financial Officer of the Company, Cheryl A. Francis entered into an agreement
(the "Francis Agreement") with the Company. The Francis Agreement sets forth
certain of the terms under which Ms. Francis is employed by the Company.
Under the Francis Agreement, in addition to base salary and participation in
the Company's incentive plans, Ms. Francis was granted 10,000 shares of
restricted Common Stock, options to purchase 25,000 shares of Common Stock and
premium-priced options to purchase 120,000 shares of Common Stock.
The Francis Agreement does not provide for a term of employment. However, if
Ms. Francis is terminated by the Company for any reason other than cause prior
to June 30, 2005, she will receive
14
<PAGE>
- --------------------------------------------------------------------------------
an amount equal to $838,525 (increased beginning on October 16, 1995 by the
Company's borrowing rate) minus (a) the sum of (i) the amount of ordinary
income actually recognized by Ms. Francis upon the exercise of the options
referred to in the preceding paragraph and (ii) if such options are vested but
unexercised on the date of Ms. Francis' termination of employment, the amount
of ordinary income which would be recognized if such options were exercised on
such date and (b) the value of the 10,000 shares of restricted Common Stock
referred to in the preceding paragraph on the date such shares vest, if such
shares have vested.
Under the Francis Agreement, Ms. Francis is 100% vested in retirement benefits
under the Company's Retirement Benefit Plan. In addition, she will receive a
$10,130 additional credit in annual age 65 benefits for each full year she is
employed by the Company after December 31, 1995 and before January 1, 2019,
which amount represents the annualized difference between the amount Ms.
Francis would have earned under her prior employer's retirement plan and the
Company's Retirement Benefit Plan. See "Retirement Benefits."
As part of a reorganization of the Company's management announced October 21,
1997, the Company entered into two agreements. The Company and Steven J.
Baumgartner entered into an agreement (the "Baumgartner Agreement") pursuant to
which Mr. Baumgartner resigned as Sector President on November 19, 1997 and
terminated his active employment with the Company effective December 31, 1997.
The Baumgartner Agreement provides that in consideration for the agreement of
Mr. Baumgartner to forebear from certain activities in competition with the
Company for the period through December, 1999, and to release any and all
claims he might have against the Company and its affiliates, Mr. Baumgartner
will continue to receive payments equal to his last salary of $30,667 per
month, to participate in the Company's health, welfare and retirement plans,
and to continue to vest in stock options and awards through December 31, 1999,
as though still actively employed with the Company.
In addition, the Baumgartner Agreement provides for the immediate cancellation
of a restricted stock award of 15,000 shares previously granted to Mr.
Baumgartner and the grant of two new restricted stock awards in the total
amount of 7,500 shares, vesting on December 31, 1999, as well as acceleration
to December 31, 1999 of the vesting of all then-outstanding stock options other
than premium priced stock options granted to Mr. Baumgartner prior to the date
of the Baumgartner Agreement.
The Company has also agreed to pay Mr. Baumgartner $29,723 for vacation days
accrued and not taken prior to termination of his active employment; the bonus
payments to be made, if any, based upon the Company's performance both for 1997
and the 1995-97 performance periods, when calculated and paid to other
executives; and up to $10,000 in attorneys' fees incurred by Mr. Baumgartner in
preparing the Baumgartner Agreement. Mr. Baumgartner is also allowed to
continue to draw from a financial planning account previously established by
the Company for his benefit, although no additional contributions will be made
by the Company to that account.
Also in connection with the reorganization, W. Ed Tyler entered into an
agreement with the Company (the "Tyler Agreement"). Under the terms of the
Tyler Agreement, in the event that prior to December 31, 1998 Mr. Tyler's
employment is terminated for any reason (including his voluntary resignation)
other than termination by the Company for cause (as defined in the Tyler
Agreement), the Company is obligated to pay Mr. Tyler severance amounts
consisting of two times his then annual base salary, paid over a period of not
less than 36 months, and a bonus for 1998, prorated based upon the time from
January 1, 1998 through termination of his employment. The Company has also
agreed to allow Mr. Tyler to continue to receive health, welfare and retirement
benefits as though actively employed for a period ending on the third
anniversary of the termination of his employment, extended by the number of
days of accrued but untaken vacation earned by Mr. Tyler through the date of
termination (the "Termination Date"), and to allow stock options previously
granted to continue to vest through the Termination Date, and has provided for
acceleration of all then outstanding stock options other than premium priced
stock options to the Termination Date.
Should Mr. Tyler's employment terminate prior to December 31, 1998, then a
restricted stock award of 15,000 shares which was granted to him in 1995 and
would otherwise vest in 2000 shall
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be immediately cancelled and replaced with a new restricted stock award for a
number of shares equal to the sum of (i) 9,000 plus (ii) the product of 200
times the number of full calendar months elapsed since October 1, 1997 to the
date of termination of his employment. Of the restricted stock
award, 6,000 shares shall vest on December 31, 2000, and the balance shall vest
on the third anniversary of the termination of his employment.
Mr. Tyler is also allowed to continue to draw from a financial planning
account previously established by the Company for his benefit, although no
additional contributions will be made by the Company to that account, and the
Company has agreed to reimburse up to $10,000 in attorneys' fees incurred by
him in preparing the Tyler Agreement. Mr. Tyler's continuing obligations to the
Company after termination, including non-competition obligations continuing
through the third anniversary of the termination of his employment, are
consideration for any severance-related payments that may be made under the
Tyler Agreement. The Tyler Agreement expires after December 31, 1998.
HUMAN RESOURCES COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMMITTEE APPROACH TO COMPENSATION EVALUATION
The Human Resources Committee (the "Committee") determined the annual salary,
short-term and long-term cash and stock incentive compensation, and other
compensation of executive officers, including the executive officers named in
the Summary Compensation Table (the "named executive officers").
The Committee considered the following factors in setting compensation for
1997: (a) Company performance, both separately and compared to other companies,
(b) the individual performance of each executive officer, (c) a number of
comparative compensation surveys, (d) historical compensation levels and stock
awards, (e) the overall competitive environment for executives and the level of
compensation necessary to attract and retain executive talent and (f) the
recommendations of professional compensation consultants and management.
Companies used for executive compensation pay comparison purposes include a
broad group of companies similar in revenue size to the Company, as well as
printing and publishing companies also similar in revenue size to the Company.
The companies used to define the market for pay comparison purposes include 7
of the 30 companies in the Peer Group used in the Performance Graph. The
Committee relies on market data comprised of a broad array of companies in
various industries for comparative analysis of executive compensation because
the Committee believes that the Company's competitors for executive talent are
more varied than the Peer Group chosen for comparing stockholder return in the
Performance Graph.
EXECUTIVE OFFICERS GENERALLY
Generally, total compensation for executive officers is targeted between the
50th and 75th percentile of the market. The Committee determines the individual
components of the total compensation package based on the desired mix between
salary and at-risk components of short- and long-term compensation.
As described below, approximately 40% through 60% (depending on the level of
responsibility of an executive officer) of targeted annual cash compensation is
linked to Company performance.
Salary: The Committee annually reviews the base salary of each executive
officer. For 1997, the base salaries for named executive officers were
targeted, on average, at the median salaries at comparable companies. Increases
in base salaries for 1997 were determined based on this market positioning goal
and on individual performance.
Short- and Long-Term Incentive Compensation: Both the Senior Officer Annual
Incentive Compensation Plan (the "Annual Plan") and the Long-Term Performance
Awards (the "Long-Term Awards") tie payouts to Company performance. Under the
Annual Plan and the Long-Term Awards, potential payout amounts (expressed as a
percentage of salary) and related performance goals were established at the
beginning of the relevant performance periods by the Committee.
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Company performance under the 1997 Annual Plan was measured by Economic Value
Added (EVA(R)) for the Company as a whole. EVA represents the cash operating
earnings of the Company after deducting a charge for capital employed. The
Company and the Committee believe that EVA represents a key financial indicator
of shareholder value and is an appropriate measure of Company financial
performance.
Under the Long-Term Awards, payouts for the 1995-1997 performance period were
based on Company performance, measured by return on average stockholders'
equity, with the potential for increased payout if net asset growth was also
achieved. Under the Long-Term Awards for the 1995-1997 performance period
granted to executive officers responsible for various businesses, return on
average stockholders' equity counted for 50% in the calculation of the Long-
Term Awards, and the factors specific to the performance of relevant businesses
also counted for 50%. No payouts will be made based on corporate performance
under the 1995-1997 Long-Term Awards. Only three executive officers will
receive any payouts under these Awards due to performance of the executives'
business units.
No grants were made under the Long-Term Awards for the period beginning 1997.
Instead, the Committee combined potential payouts under the 1997 Long-Term
Award with the potential payout under the 1997 Annual Plan which amount will be
determined and paid in 1998.
Stock Awards: Executive officers are granted stock options to align the
interests of management more closely with those of the stockholders by
increasing stock ownership and tying a meaningful portion of compensation to
the performance of the Company's stock. In addition, to emphasize the
importance of stock ownership by management, the Committee and management have
implemented stock ownership guidelines for officers which require all officers
to hold Company stock having a market value relative to salary; the minimum
ownership guideline is owning Company stock having a market value at least
equal to base salary, with the level of target ownership increasing as levels
of responsibility increase, up to five times base salary, which is the
ownership guideline for the CEO.
Historically, stock options have been granted annually in December at the fair
market value of the stock on the grant date. However, no options were granted
in December 1997. The Committee has determined to review this element of
compensation together with annual salary increases, which become effective in
April of each year.
Premium priced option grants are periodically made to certain executive
officers to supplement the target total pay structure so that total pay
opportunity for those executive officers, including the premium priced options,
would approximate the 75th percentile of the market. The terms of the premium
priced option grants are provided in the "Option/SAR Grants in 1997" Table. The
Committee believes that the incremental pay opportunity provided by the premium
priced options is warranted by the significant appreciation in the Company's
stock price required in order for the options to have value which focuses
executives on creating shareholder value.
The Committee makes restricted stock grants only on a selective basis for
specific retention and recruiting requirements.
Deductibility of Executive Compensation: Tax laws limit the deduction a
publicly held company is allowed for compensation paid to certain executive
officers. Generally, amounts paid in excess of $1 million to a covered
executive, other than performance-based compensation, cannot be deducted. The
Committee considers ways to maximize the deductibility of executive
compensation, but intends to retain the discretion the Committee deems
necessary to compensate executive officers in a manner commensurate with
performance and the competitive environment for executive talent.
CEO COMPENSATION
John M. Richman, a director of the Company, served as Acting Chairman and Chief
Executive Officer until William L. Davis was named CEO in March 1997. Mr.
Davis' total compensation for 1997
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was established pursuant to his employment agreement with the Company. That
agreement sets forth Mr. Davis' salary, target bonus and signing bonus, and,
pursuant to that agreement, Mr. Davis was granted options to purchase shares of
common stock and restricted shares of common stock, as described below. Mr.
Davis' compensation for 1997 was established using substantially the same
criteria that were used to determine compensation levels for other executive
officers, discussed at the beginning of this report. Mr. Davis' total
compensation is near the 60th percentile of the market, and may be increased to
the 75th percentile based on performance. Approximately 60% of Mr. Davis'
targeted annual cash compensation is linked to Company performance.
Mr. Davis' salary of $700,000 per year is below average for CEOs in the
compensation surveys used by the Committee, ranking approximately in the 40th
percentile. Including his target bonus, his cash compensation is approximately
in the 50th percentile.
Of the options granted to Mr. Davis, options to purchase 500,000 shares of
common stock were granted at fair market value on the grant date and options to
purchase 500,000 shares of common stock were granted at 150% of fair market
value on the grant date. The premium priced options vest only if fair market
value equals or exceeds the exercise price for ten consecutive trading days
within six years from the grant date. These options are intended to cover
grants which would otherwise be expected to be made over three years. The
Committee believes that these option grants directly align Mr. Davis' interests
with those of shareholders and are consistent with grants made to newly-hired
CEOs of other companies.
An award of 320,238 restricted shares and signing bonuses totaling $3.88
million replace compensation Mr. Davis forfeited at his previous employer as a
result of his employment by the Company. The restricted shares vest at
different times over a seven-year period, mirroring the vesting of the
compensation he would otherwise have received. Because the Company's Stock
Incentive Plan limits the number of restricted shares the Committee may grant
to one individual, a portion of the foregone compensation was in the form of a
$3.7 million signing bonus, which was deferred (and bore interest) until paid
in January 1998.
Mr. Davis also received a pension enhancement to replace the pension amounts
he would have received if he had finished his career with his previous
employer.
Mr. Richman did not receive a salary for his services as Acting Chairman and
CEO. Instead, he was awarded stock options on November 7, 1996, details of
which are provided in the "Option/SAR Grants in 1996" Table in the 1997 Proxy
Statement. Mr. Richman did not participate in any other short- or long-term
incentive compensation program. Mr. Richman did use Company aircraft, the value
of which is reported for 1997.
The Human Resources Committee
Thomas S. Johnson, Chairman
George A. Lorch
William D. Sanders
Stephen M. Wolf
EVA is a registered mark of Stern Stewart & Co.
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PERFORMANCE GRAPH
The following Performance Graph compares the Company's cumulative total
stockholder return on its Common Stock for a five-year period (December 31,
1992 to December 31, 1997) with the cumulative total return of the Standard &
Poor's 500 stock index (which includes the Company) and a peer group of
companies selected by the Company for purposes of the comparison and described
more fully below (the "Peer Group"). Dividend reinvestment has been assumed
and, with respect to companies in the Peer Group, the returns of each such
company have been weighted to reflect relative stock market capitalization.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
AMONG R. R. DONNELLEY, S&P 500 INDEX AND PEER GROUP**
LOGO
Assumes $100 Invested on December 31, 1992 in R. R. Donnelley Common
Stock, S&P 500 Index and Peer Group.
* Total Return Assumes Reinvestment of Dividends
** Fiscal Year Ended December 31
The data points for the above graph are as follows:
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
R. R. Donnelley 100 96.78 93.62 127.36 103.67 125.82
Standard & Poor's 500 100 110.08 111.53 153.45 188.68 251.63
Peer Group 100 111.04 108.20 138.75 153.68 206.57
</TABLE>
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The Company provides a broad range of services to a diverse group of customers
in several industries, including publishers (of, for example, magazines and
books), merchandisers (such as retailers and catalog merchants), technology
companies (such as computer hardware manufacturers and software publishers) and
information providers. Because the Company's services and customers are
diverse, the Company does not believe that there is a single published industry
or line of business index that is appropriate for comparing stockholder return.
The Peer Group
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selected by the Company for the above Performance Graph is a combination of
two industry groups of companies identified by Value Line Publishing, Inc., a
publisher of investment surveys ("Value Line")--the publishing group (which
includes printing companies) and the newspaper group--except that the Company
has been excluded. Also, any company whose common stock has not been traded on
domestic exchanges for the relevant five-year period is excluded. All
companies included by Value Line in the two relevant industry groups have
common stock that has been traded for the relevant five-year period as of
December 31, 1997. Other printing companies (as well as the Company) are
included by Value Line in its publishing group. Many companies included in
these two Value Line groups are ones with whom the Company is most frequently
compared by investment analysts. This combination of printing, publishing and
newspaper companies has been selected as representative of the Company's
diverse range of products, services and customers.
The companies included in the Peer Group are: Banta Corporation; Bowne & Co.
Inc.; Central Newspapers (class A stock); Deluxe Corporation; Dow Jones &
Company, Inc.; The Dun & Bradstreet Corporation; Gannett Co., Inc.; Golden
Books Family Entertainment; Harcourt General Inc.; John H. Harland Company;
Houghton Mifflin Company; Knight-Ridder, Inc.; Lee Enterprises, Inc.;
McClatchy Newspapers, Inc. (class A stock); McGraw-Hill, Inc.; Media General,
Inc. (class A stock); Meredith Corporation; News Corp Ltd; The New York Times
Company (class A stock); Playboy Enterprises, Inc. (class B stock); Pulitzer
Publishing Company; The Reader's Digest Association, Inc. (class A stock);
Scholastic Corporation; The E.W. Scripps Company (class A stock); Southam
Inc.; The Times Mirror Company (class A stock); Thomson Corp.; Tribune
Company; and The Washington Post Company (class B stock). Graphic Industries
and National Education Corporation, which were in the Peer Group for 1996,
were deleted from the Peer Group because they are no longer included in the
Value Line publishing or newspaper group.
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RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
The Company has not selected its independent public accountants for 1998. This
selection is normally made by the Board of Directors after the annual meeting
of stockholders, after the Audit Committee, the members of which are
identified under "Information about Directors and Nominees for Directors," has
reviewed audit proposals for such year. After such review, the Audit Committee
will recommend the selection of accountants for 1998 to the Board of
Directors, which will make the final selection.
Arthur Andersen LLP served as the Company's independent public accountants in
1997 and for thirty-one years prior thereto. Representatives of that firm are
expected to be present at the 1998 Annual Meeting with the opportunity to make
a statement if they so desire and to be available to respond to appropriate
questions.
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PROPOSAL TO AMEND 1995 STOCK INCENTIVE PLAN
INTRODUCTION
In 1995, the stockholders approved the 1995 Stock Incentive Plan (the "Plan").
The purposes of the Plan are to provide incentives to (i) management through
rewards based upon the ownership or performance of the Common Stock and (ii)
non-employee directors of the Company through the grant of options to purchase
Common Stock. Under the Plan, the Company may grant options to purchase Common
Stock, including "incentive stock options" within the meaning of section 422
of the Internal Revenue Code of 1986, as amended (the "Code"), stock
appreciation rights ("SARs"), restricted stock, stock units and cash awards.
Non-qualified options to purchase 4,000 shares of Common Stock are also
granted automatically to non-employee directors on the date of each annual
meeting of stockholders of the Company. Ten non-employee directors and
approximately 750 employees are eligible to participate in the Plan. An
aggregate of 7,500,000 shares of Common Stock were initially authorized for
issuance under the Plan, of which no more than 500,000 could be issued in the
form of restricted stock awards.
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PROPOSED AMENDMENT
As of December 31, 1997, approximately 2,400,000 shares were available for
grants and awards under the Plan as a result in part of the grants to William
L. Davis as a part of his compensation at the time of his initial employment
with the Company of options and shares of restricted stock which constituted
all remaining shares of restricted stock available under the Plan. These grants
and awards are described in the Human Resources Committee Report on page 16
above, and replace in part compensation forfeited by Mr. Davis at his previous
employer as a result of his employment with the Company. The Board of Directors
has determined that it is in the best interests of the Company and the
stockholders to authorize additional shares for issuance under the Plan so that
an adequate number of shares are available for Plan purposes. Accordingly, the
Board of Directors, on the recommendation of the Human Resources Committee,
adopted an amendment to the Plan, subject to stockholder approval, that would
provide for an increase in the total number of shares that may be issued under
the Plan from 7,500,000 to 9,500,000, of which no more than 750,000 (increased
from 500,000) may be issued in the form of restricted stock awards. Set forth
below is a summary of the Plan, as proposed to be amended. None of the
additional shares that, upon stockholder approval, will be available under the
Plan is subject to any outstanding stock award or option.
DESCRIPTION OF THE PLAN
Administration
The Plan is administered by a committee designated by the Board of Directors
(the "Plan Committee") and no member of the Plan Committee may be an "inside"
or employee director. No member of the Plan Committee is eligible to receive a
discretionary award of Common Stock or other equity securities of the Company
or an affiliate of the Company under the Plan or any other plan of the Company
or an affiliate of the Company.
Subject to the express provisions of the Plan, and except for options granted
to non-employee directors, the Plan Committee has the authority to select
eligible officers and key management employees of the Company and its
subsidiaries for participation in the Plan and determine all of the terms and
conditions of each grant and award. Each grant and award will be evidenced by a
written agreement containing such provisions not inconsistent with the Plan as
the Plan Committee shall approve. The Plan Committee also has authority to
prescribe rules and regulations for administering the Plan and to decide
questions of interpretation of any provision of the Plan. Except with respect
to grants to officers of the Company who are subject to Section 16 of the
Securities Exchange Act of 1934, as amended, or a person whose compensation is
likely to be subject to the $1 million deduction limit under section 162(m) of
the Code (described below under "Federal Income Tax Consequences"), the Plan
Committee may delegate some or all of its power and authority to administer the
Plan to the Chief Executive Officer or other executive officer of the Company.
Available Shares
Under the Plan, 9,500,000 shares of Common Stock are available for grants and
awards to officers, other key management employees and non-employee directors,
subject to adjustment in the event of a stock split, stock dividend,
recapitalization, reorganization, merger or other similar event or change in
capitalization. In general, shares subject to a grant or award which for any
reason are not issued or delivered, including by reason of the expiration,
termination, cancellation or forfeiture of all or a portion of a grant or award
or by reason of the delivery or withholding of shares to pay all or a portion
of the exercise price of an option or to satisfy tax withholding obligations,
would again be available under the Plan. The maximum number of shares of Common
Stock with respect to which (i) options and SARs or a combination thereof may
be granted during any three-year period to any person is 1,000,000, and (ii)
fixed awards in the form of restricted stock may be granted under the Plan is
750,000 in the aggregate, in each case subject to adjustment in the event of a
stock split, stock dividend, recapitalization, reorganization, merger or other
similar event or change in capitalization.
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Change in Control
In the event (i) a person (subject to certain exceptions) becomes the
beneficial owner of 50% or more of the voting power of the Company's
outstanding securities, (ii) during any period of two consecutive years
beginning on January 1, 1995, individuals who at the beginning of such period
constitute the Board and any new director whose election was approved by at
least two-thirds of the directors still in office who either were directors at
the beginning of the period or whose election was previously so approved, cease
to constitute a majority of the Board of Directors or (iii) the stockholders
approve a merger or consolidation with any other corporation (unless the
Company's stockholders and any employee benefit plan of the Company receive 50%
or more of the voting stock of the surviving company or unless the merger or
consolidation implements a recapitalization in which no person acquires more
than 50% of the combined voting power of the Company's outstanding securities)
or the stockholders approve a complete liquidation of the Company or sale of
all or substantially all of the Company's assets, all options and SARs will be
fully and immediately exercisable, the highest level of achievement will be
deemed to be met with respect to performance awards of restricted stock, stock
units or cash and such performance awards will be fully and immediately vested,
and the period of continued employment for all fixed awards of restricted
stock, stock units or cash will be deemed completed and such fixed awards will
be fully and immediately vested.
Termination and Amendment
The Plan will terminate on December 31, 1999, unless terminated earlier by the
Board of Directors. The Board of Directors may amend the Plan at any time
except that (i) no amendment may be made without stockholder approval if
stockholder approval is required by applicable law or rule including Section
162(m) of the Code (described below) or regulation or such amendment would
increase the maximum number of shares of Common Stock available under the Plan
and (ii) the number of shares subject to options granted to non-employee
directors, the purchase price therefor, the date of grant of any such option,
the termination provisions relating to such options and the category of persons
eligible to be granted such options will not be amended more than once every
six months, other than to comply with changes in the Code or the Employee
Retirement Income Security Act of 1974, as amended, or the rules and
regulations thereunder.
Stock Options and Stock Appreciation Rights
The period for the exercise of a non-qualified stock option (other than options
granted to non-employee directors) or SAR and the option exercise price and
base price of an SAR will be determined by the Plan Committee; provided that
the option exercise price and the base price of an SAR will not be less than
the fair market value of a share of Common Stock on the date of grant. SARs may
be granted in tandem with a related stock option, in which event the grantee
may elect to exercise either the SARs or the option, but not both, or SARs may
be granted independently of a stock option. The exercise of an SAR entitles the
holder thereof to receive (subject to withholding taxes) shares of Common
Stock, cash or a combination thereof with a value equal to the appreciation in
market value of a stated number of shares of Common Stock from the date of
grant to the date of exercise.
No incentive stock option will be exercisable more than ten years after its
date of grant, unless the recipient of the incentive stock option owns greater
than ten percent of the voting power of all shares of capital stock of the
Company (a "ten percent holder"), in which case the option will be exercisable
for no more than five years after its date of grant. If the recipient of an
incentive stock option is a ten percent holder, the option exercise price will
be the price required by the Code, currently 110% of fair market value.
Individuals who immediately following the Company's annual meeting are non-
employee directors are automatically granted, on the date of such meeting, non-
qualified options to purchase 4,000 shares of Common Stock at an exercise price
per share equal to the fair market value of a share of Common Stock on the date
of grant. Such options will expire on the first business day preceding the
tenth anniversary of the date of grant and will become exercisable as to all of
the shares of
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Common Stock subject to the option on and after the earlier to occur of (i) the
date which is the first anniversary of the date of grant or (ii) the day
immediately preceding the date of the first annual meeting of stockholders
following the date of grant.
Upon exercise, the option exercise price may be paid in cash or by the
delivery of previously owned shares of Common Stock, as determined by the Plan
Committee. In the event of termination of employment or service on the Board by
reason of retirement or total and permanent disability, each option and SAR
will be exercisable to the extent set forth in the agreement evidencing such
option or SAR for a period of no more than five years (or such other period
(not to exceed the original term of the option) as set forth in the agreement
relating to the option) after the date of such termination of employment or
service on the Board, but in no event after the expiration of such option or
SAR. In the event of termination of employment or service on the Board by
reason of death or any reason other than retirement or total and permanent
disability, each option and SAR will be exercisable to the extent set forth in
the agreement evidencing such option or SAR for a period of 90 days after the
date of death or termination, but in no event after the expiration of such
option or SAR.
The Plan includes a UK Stock Option Sub-Plan in order to vary the terms on
which options may be granted to officers and key management employees who are
employed by the Company or any of its subsidiaries in the United Kingdom. The
terms and conditions of stock options granted under the Sub-Plan will be
substantially the same as the terms and conditions applicable to other options
granted under the Plan, but will contain additional terms and conditions, as
set forth in the Sub-Plan, required to cause such options to qualify for
certain favorable tax consequences to the optionees provided under Schedule 9
of the United Kingdom Income and Corporation Taxes Act 1988.
Performance Awards and Fixed Awards
Under the Plan, bonus awards, whether performance awards or fixed awards, may
be made in the form of (i) cash, whether in an absolute amount or as a
percentage of compensation, (ii) stock units, each of which is substantially
the equivalent of a share of Common Stock but for the power to vote and,
subject to the Plan Committee's discretion, the entitlement to an amount equal
to dividends or other distributions otherwise payable on a like number of
shares of Common Stock and (iii) shares of Common Stock issued to the employee
but forfeitable and with restrictions on transfer.
Performance Awards may be made in terms of a stated potential maximum dollar
amount, percentage of compensation or number of units or shares, with such
actual amount, percentage or number to be determined by reference to the level
of achievement of corporate, sector, business unit, division, individual or
other specific objectives over a performance period of not less than one nor
more than ten years, as determined by the Plan Committee. Fixed awards are not
contingent on the achievement of specific objectives, but are contingent on the
participant's continuing in the Company's employ for a period specified in the
award.
If shares of restricted stock are subject to a bonus award, the participant
will have the right, unless and until such award is forfeited or unless
otherwise determined by the Plan Committee at the time of grant, to vote the
shares and to receive dividends thereon from the date of grant and the right to
participate in any capital adjustment applicable to all holders of Common
Stock; provided, however, that a distribution with respect to shares of Common
Stock, other than a regular quarterly cash dividend, shall be deposited with
the Company and shall be subject to the same restrictions as the shares of
Common Stock with respect to which such distribution was made. Upon termination
of any applicable restriction period, including, if applicable, the
satisfaction or achievement of applicable performance objectives, a certificate
evidencing ownership of the shares of Common Stock will be delivered to the
holder of such award.
If stock units are credited to a participant pursuant to a bonus award, then,
subject to the Plan Committee's discretion, amounts equal to dividends and
other distributions otherwise payable on a like number of shares of Common
Stock after the crediting of the units will 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.
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The Plan Committee may 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, will 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
Plan Committee determines, and the participant's account to which dividend
equivalents, other distributions and interest have been credited will be paid
in cash, (ii) the award, if a cash bonus award, will be paid to the participant
either in cash, or in shares of Common Stock with a then fair market value
equal to the amount of such award, or in such combination thereof as the Plan
Committee determines and (iii) shares of restricted Common Stock issued
pursuant to an award will be released from the restrictions.
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief summary of certain of the U.S. federal income tax
consequences generally arising with respect to grants and awards under the
Plan.
Stock Options
A participant will not recognize any income upon the grant of a stock option. A
participant will recognize compensation taxable as ordinary income (and subject
to income tax withholding) upon exercise of a non-qualified stock option equal
to the excess of the fair market value of the shares purchased over their
exercise price, and the Company will be entitled to a corresponding deduction.
A participant will not recognize any income (except for purposes of the
alternative minimum tax) upon exercise of an incentive stock option. If the
shares acquired by exercise of an incentive stock option are held for the
longer of two years from the date the option was granted and one year from the
date it was exercised, any gain or loss arising from a subsequent disposition
of such shares will be taxed as long-term capital gain or loss, and the Company
will not be entitled to any deduction. If, however, such shares are disposed of
within such period, then in the year of such disposition the participant will
recognize compensation taxable as ordinary income equal to the excess of the
lesser of the excess of (A) either (i) the amount realized upon such
disposition and (ii) the fair market value of such shares on the date of
exercise, over (B) the exercise price, and the Company will be entitled to a
corresponding deduction.
SARs
A participant will not recognize any income upon the grant of SARs. A
participant will recognize compensation taxable as ordinary income (and subject
to income tax withholding) upon exercise of an SAR equal to the fair market
value of any shares delivered and the amount of cash paid by the Company upon
such exercise, and the Company will be entitled to a corresponding deduction.
Restricted Stock and Stock Units
A participant will not recognize any income at the time of the grant of shares
of restricted stock (unless the participant makes an election to be taxed at
the time the restricted stock is granted) or stock units, and the Company will
not be entitled to a tax deduction at such time. A participant will recognize
compensation taxable as ordinary income at the time the restrictions lapse on
restricted stock (if such election was not made) and stock units in an amount
equal to the excess of the fair market value of the shares or units at such
time over the amount, if any, paid for such shares or units. The amount of
ordinary income recognized by a participant is deductible by the Company as
compensation expense, except to the extent the deduction limit of section
162(m) of the Code applies. In addition, a participant receiving dividends with
respect to restricted stock for which the above-described election has not been
made and prior to the time the restrictions lapse will recognize compensation
taxable as ordinary income (subject to income tax withholding), rather than
dividend income, in an amount equal to the dividends paid and the Company will
be entitled to a corresponding deduction, except to the extent the deduction
limit of section 162(m) of the Code applies. A participant will recognize
compensation taxable as ordinary income (subject to income
24
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tax withholding) when amounts attributable to stock units are paid (or made
available) and the Company will be entitled to a corresponding deduction,
except to the extent the deduction limit of section 162(m) of the Code applies.
Cash Bonus Awards
A participant will not recognize any income upon the grant of a bonus award
payable in cash and the Company will not be entitled to a tax deduction at such
time. At the time such award is paid (or made available), the participant will
recognize compensation taxable as ordinary income (subject to income tax
withholding) in an amount equal to any cash paid by the Company, and the
Company will be entitled to a corresponding deduction, except to the extent the
deduction limit of section 162(m) of the Code applies.
Section 162(m) of the Code
Section 162(m) of the Code generally limits to $1 million the amount that a
publicly held corporation is allowed each year to deduct for the compensation
paid to each of the corporation's chief executive officer and the corporation's
four most highly compensated executive officers other than the chief executive
officer. However, "performance-based" compensation is not subject to the $1
million deduction limit. To qualify as performance-based compensation, the
following requirements must be satisfied: (i) the performance goals are
determined by a committee consisting solely of two or more "outside directors,"
(ii) the material terms under which the compensation is to be paid, including
the performance goals, are approved by a majority of the corporation's
stockholders and (iii) the committee certifies that the applicable performance
goals were satisfied before payment of any performance-based compensation is
made. The Plan Committee will consist solely of "outside directors" as defined
for purposes of section 162(m) of the Code. As a result, and based on certain
proposed regulations issued by the U.S. Department of the Treasury, certain
compensation under the Plan, such as that payable with respect to options and
SARs, is not expected to be subject to the $1 million deduction limit, but
other compensation payable under the Plan, such as any restricted stock award
which is not subject to a performance condition to vesting, would be subject to
such limit.
GENERAL/VOTE REQUIRED
The number of stock options or other forms of award that will be granted
hereafter under the Plan is not currently determinable, except that options to
purchase 4,000 shares of Common Stock will be granted to each non-employee
director on the date of each annual meeting. Information regarding awards in
1997 under the Plan to the named executive officers is provided in the "Summary
Compensation Table," the "Option/SAR Grants in 1997" table and the "Aggregated
Option/SAR Exercises in 1997 and Fiscal Year-End Option/SAR Values" table. In
addition, in 1997, (i) options for 40,000 shares were granted to all current
non-employee directors as a group, (ii) options for 1,395,000 shares and
320,238 shares of restricted stock were granted to all current executive
officers as a group and (iii) options for 49,000 shares were granted to all
other eligible employees, including current officers who are not executive
officers. At December 31, 1997, 145,117,830 shares of Common Stock were
outstanding. On February 4, 1998, the average of the high and low transactions
prices in trading of the Common Stock, as reported in the New York Stock
Exchange Composite Transactions was $37.09375 per share.
The affirmative vote of the holders of a majority of the shares of Common
Stock present in person or by proxy at the 1998 Annual Meeting and entitled to
vote on the proposal to amend the Plan is required to approve the amendment.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR AMENDMENT OF THE 1995 STOCK
INCENTIVE PLAN.
25
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STOCKHOLDER PROPOSAL REGARDING EXECUTIVE COMPENSATION
The Company has been notified that the following stockholders intend to
introduce and support the following proposal at the 1998 Annual Meeting:
Adrian Dominican Sisters, 1257 East Siena Heights Drive, Adrian, Michigan
49221, which has provided certification to the Company indicating that, as of
October 10, 1997, it was the beneficial owner of 100 shares of Common Stock,
Dominican Sisters of Hope, 299 North Highland Avenue, Ossining, New York
10562, which has provided certification to the Company indicating that, as of
November 10, 1997, it was the beneficial owner of 100 shares of Common Stock,
Maryknoll Fathers and Brothers, P.O. Box 306, Maryknoll, New York 10545, which
has provided certification to the Company indicating that, as of October 31,
1997, it was the beneficial owner of 200 shares of Common Stock and Mercy
Consolidated Asset Management Program, 20 Washington Square North, New York,
New York 10011, which has provided certification to the Company that, as of
October 21, 1997, it was the beneficial owner of 200 shares of Common Stock.
Based on the certifications of ownership outlined above, the stockholder
proponents own a total of 600 shares of Common Stock which represents less
than one percent (1%) of the total shares of Common Stock outstanding on
December 31, 1997.
WHEREAS: We believe financial, social and environmental criteria should all be
taken into account in setting compensation packages for corporate officers.
Public scrutiny of executive compensation is intensifying, with serious
concerns being expressed about the widening chasm between salaries of top
corporate officers, U.S. employees and workers in low wage countries. Concerns
include:
. In 1995 Pearl Meyer and Partners reported that CEO compensation packages
at large corporations increased 23%, to an average of $4.37 million. That
is $2,100 an hour, or 183 times the average U.S. worker's 1995 hourly
earnings according to the Council on International and Public Affairs.
. As CEO salaries soared in 1995, U.S. private sector worker pay and
benefits inched up just 2.8%, the lowest increase since the Department of
Labor created the employment cost index in 1980.
. A 1997 IRS report shows that from 1980 to 1995, senior executives'
compensation rose 182%, from $109 billion in 1980 to $307.6 billion in
1995 (NY Times, 8/2/97).
. Executives of companies with Mexican operations often make several
thousand times the pay of their Mexican employees. In 1994, Ford's CEO
Alexander Trotman made 2,003 times the annual pay of an average Ford
employee in Mexico. Allied Signal's CEO, Lawrence Bossidy's compensation
package of $8.4 million in 1995 was more than the company's total annual
Mexican payroll of $7.8 million for approximately 3,800 workers.
. Our company's former CEO and Chairman, J.R. Walter, received a total
compensation package of $1,058,559 in 1996. In our company's plant in
Reynosa, Mexico, R. R. Donnelley's maquiladora workers received a base
wage of between 143.50 pesos ($19) and 275 pesos ($36.65) for a five day
week (Donnelley's "Reynosa Operation Report," December 1995). This salary
does not even provide purchasing power sufficient for workers to meet
their families' basic needs.
. Our company needs to address the implications of paying high executive
salaries and poverty wages to workers in developing nations. The
situation in Mexico is illustrative of conditions in other R. R.
Donnelley plants benefiting from cheap labor. Consequences of paying
widely divergent compensation levels might include decreased worker
commitment, poor labor-management relations, and harm to R. R.
Donnelley's public image. We believe our company should adopt a policy of
paying a sustainable wage, providing enough purchasing power for workers
to support themselves and their families.
RESOLVED: Shareholders request the Board institute a special Executive
Compensation Review, and prepare a report available to shareholders by October
1998 summarizing the results and recommended changes. The review shall cover
pay, benefits, perks, stock options, and special
26
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arrangements in the compensation packages for all top officers.
The review will include:
1. Ways to link our company's executive compensation more closely to
financial, social and environmental performance with proposed criteria.
2. Comparison of compensation packages for company officers with the
lowest and average wages for company employees in the U.S. and with three
low wage countries, including Mexico.
3. Whether a cap should be placed on compensation packages for officers to
prevent our company from paying excessive compensation.
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POSITION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS SUPPORT THE BOARD OF
DIRECTORS AND VOTE AGAINST THE STOCKHOLDER PROPOSAL.
The proposal on executive compensation is similar, in its emphasis on the wage
and benefit practices at the Company's maquiladora operations, to proposals
that were defeated by the stockholders at the Annual Meetings in 1995 (by over
91% of the votes cast, excluding abstentions and broker non-votes), 1996 (by
over 95% of the votes cast, excluding abstentions and broker non-votes) and
1997 (by over 94% of the votes cast, excluding abstentions and broker non-
votes).
The Human Resources Committee of the Board of Directors is responsible for
determining the compensation to be paid to the Company's senior officers. The
Committee's approach to compensation is discussed at length in the Human
Resources Committee Report on Executive Compensation included in this proxy
statement (the "Committee Report"). The Committee annually reviews the base
salary of each executive officer and selects the performance factors and
targets which determine payouts to executive officers under the Company's
short- and long-term incentive compensation plans. In selecting these factors
and targets, the Committee is assisted by professional compensation consultants
who provide, among other things, objective data concerning compensation
programs at companies used to define the market for executive compensation pay
comparison purposes. The market data are used to determine the overall
competitive environment for executives and the level of compensation and the
nature of the compensation programs and performance targets necessary to
attract and retain executive talent.
The Board believes that the Company's compensation program for executive
officers is competitive and is carefully and thoroughly researched by the
Committee, and that the incentive compensation programs are appropriately tied
to key performance factors with payout dependent on the achievement of stated
performance objectives. These factors are discussed at length in the Committee
Report. The Board believes that the executive compensation review and report
requested by the proponents is not warranted and would not result in any
benefit to the stockholders.
The Company has also reviewed wage and benefits practices at its Reynosa,
Mexico operations in the recent past and the Board believes that these
practices are satisfactory and that changes in these practices are unnecessary
at this time. The Board believes that the data the Human Resources Committee
used in establishing executive compensation is appropriate and that a
comparison of the compensation packages of the executive officers with the
lowest and average wages for Company employees at various locations, including
Mexico, would be redundant.
The affirmative vote of the holders of a majority of the shares of Common
Stock present in person or by proxy at the 1998 Annual Meeting, and entitled to
vote on the stockholder proposal on executive compensation, is required to
approve it.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE AGAINST THE
STOCKHOLDER PROPOSAL.
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STOCKHOLDER PROPOSALS AND NOMINATIONS FOR 1999 ANNUAL MEETING
Proposals of stockholders intended to be presented at the 1999 Annual Meeting
of Stockholders must be received by the Company by October 20, 1998, to be
considered for inclusion in the Company's Proxy Statement and form of proxy
relating to that meeting. The 1999 Annual Meeting of Stockholders is currently
scheduled to be held on March 25, 1999.
The Corporate Responsibility and Governance Committee will consider nominees
recommended by stockholders as candidates for election to the Board of
Directors, and proposals recommended by stockholders, at the Annual Meeting of
Stockholders. The By-Laws of the Company provide that a stockholder wishing to
nominate a candidate for election to the Board, or make a proposal, is required
to give written notice to the Secretary of the Company of his or her intention
to do so. The notice of nomination or proposal must be received by the Company
not less than sixty days nor more than ninety days prior to the stockholders'
meeting, or if less than seventy-five days' notice or prior public disclosure
of the meeting date is given or made, the notice of nomination or proposal must
be received within ten days after the meeting date is announced. The notice of
nomination or proposal is required to contain certain information about the
nominee or proposal and the stockholder making the nomination or proposal. The
Company may require that a proposed nominee furnish other information to
determine that person's eligibility to serve as director. A nomination or
proposal which does not comply with the above procedure will be disregarded.
Such proposals or nominations should be addressed to Secretary, R. R.
Donnelley & Sons Company, 77 West Wacker Drive, Chicago, Illinois 60601-1696.
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DISCRETIONARY VOTING OF PROXIES ON OTHER MATTERS
Management does not now intend to bring before the 1998 Annual Meeting any
matters other than those specified in the notice of the meeting, and it does
not know of any business which persons other than the management could properly
present at the meeting other than the stockholder proposal discussed in this
Proxy Statement. Should any other matter requiring a vote of the stockholders
properly come before the meeting, the persons named in the accompanying proxy
intend to vote the shares represented by them in accordance with their best
judgment.
By order of the Board of Directors
Monica M. Fohrman
Secretary
Chicago, Illinois
February 18, 1998
28
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P R O X Y
R.R. Donnelley & Sons Company PROXY/VOTING INSTRUCTION CARD
Chicago, Illinois
================================================================================
This proxy is solicited on behalf of the Board of Directors for the Annual
Meeting on March 26, 1998.
The undersigned hereby appoints William L. Davis, James R. Donnelley and Cheryl
A. Francis, or any of them, proxies for the undersigned, each with full power of
substitution, to attend the Annual Meeting of Stockholders of R. R. Donnelley &
Sons Company to be held on March 26, 1998 at nine o'clock a.m., Chicago time,
and at any adjournments thereof, and to vote as specified in this Proxy all the
shares of stock of the Company which the undersigned would be entitled to vote
if personally present.
Your vote with respect to the election of Directors and the other proposals may
be indicated on the reverse. Nominees for Directors are Martha Layne Collins,
William L. Davis, Oliver R. Sockwell and Stephen M. Wolf.
Your vote is important! Please sign and date on the reverse and return promptly
in the enclosed postage-paid envelope.
This card also provides voting instructions for shares held in the Dividend
Reinvestment Plan, shares held for the benefit of Donnelley employees in the
Tax Credit Stock Ownership Plan ("TRASOP") and the Employee Monthly Investment
Plan ("EMIP").
================================================================================
Comments
------------------------------------------------------------------------
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(If you have written in the above space, please mark the "Comments" box on the
reverse of this card.)
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. FOLD AND DETACH HERE .
<PAGE>
[X] Please mark your votes as in this example. 7827
This Proxy, when properly executed will be voted in the manner directed
herein. If no direction is made, this proxy will be voted FOR the election of
Directors and FOR proposal 2 and AGAINST proposal 3.
The Board of Directors recommends a vote FOR the election of Directors and FOR
proposal 2.
FOR WITHHELD
1. Election of Directors (See reverse) [_] [_]
For, except vote withheld from the following Nominee(s):
- --------------------------------------------------------
FOR AGAINST ABSTAIN
2. Amend the 1995 Stock Incentive Plan [_] [_] [_]
Will Attend Annual Meeting [_]
Change of Address/Comments on reverse side [_]
The Board of Directors recommends a vote AGAINST proposal 3.
FOR AGAINST ABSTAIN
3. Stockholder Proposal regarding Executive
Compensation [_] [_] [_]
4. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
Please sign exactly as name
appears hereon. Joint owners
should each sign. When signing
as attorney, executor,
administrator, trustee,
guardian, officer, general
partner, etc. please give full
title as such.
--------------------------------
--------------------------------
SIGNATURE(S) DATE
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. FOLD AND DETACH HERE .
Admission Ticket
[LOGO] RR Donnelley & Sons Company
Annual Meeting of Stockholders
Thursday, March 26, 1998 at 9:00 AM
First Chicago Center at One First National Plaza
Dearborn & Madison Streets
Chicago, Illinois
------------------------------------------------------------
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This ticket admits the named Stockholder(s) and one guest.
Photocopies will not be accepted. You may be asked for
identification at the time of admission.
