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