-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hx5bg5UMzYObPs+5mB8Gq1Il4ZRLoWLdaWqIBROYK3p4V4YxY0ZV1Z3Y0ASq6T8r dDfdwSRJX11eDz93KhcW3w== 0000927016-97-001213.txt : 19970501 0000927016-97-001213.hdr.sgml : 19970501 ACCESSION NUMBER: 0000927016-97-001213 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19970430 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STREAM INTERNATIONAL HOLDINGS INC CENTRAL INDEX KEY: 0001034928 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 364003866 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-26185 FILM NUMBER: 97591607 BUSINESS ADDRESS: STREET 1: 275 DAN ROAD CITY: CANTON STATE: MA ZIP: 02021 BUSINESS PHONE: 6176800 MAIL ADDRESS: STREET 1: 275 DAN ROAD CITY: CANTON STATE: MA ZIP: 02021 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1997 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- STREAM INTERNATIONAL HOLDINGS INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- DELAWARE 7379 364003866 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER) INCORPORATION OR CLASSIFICATION CODE ORGANIZATION) NUMBER) ---------------- 275 DAN ROAD, CANTON, MASSACHUSETTS 02021 (617) 575-6800 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- STEPHEN D.R. MOORE STREAM INTERNATIONAL HOLDINGS INC. 275 DAN ROAD CANTON, MASSACHUSETTS 02021 (617) 575-6800 FAX (617) 575-6973 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE AND FAX NUMBERS, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ---------------- COPIES TO: MARK G. BORDEN, ESQ. EDWIN L. MILLER, JR., ESQ. HALE AND DORR LLP TESTA, HURWITZ & THIBEAULT, LLP 60 STATE STREET 125 HIGH STREET BOSTON, MASSACHUSETTS 02109 BOSTON, MASSACHUSETTS 02110 (617) 526-6000 (617) 248-7000 FAX (617) 526-5000 FAX (617) 248-7100 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date hereof. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [_] ---------------- CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED PROPOSED AMOUNT AMOUNT MAXIMUM MAXIMUM OF TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER SHARE (1) OFFERING PRICE(1) FEE - ------------------------------------------------------------------------------------- Common Stock, $.01 par value per share....... $ $150,000,000 $45,455
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended. ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION APRIL 30, 1997 Shares [Stream logo] Common Stock -------- Of the shares of Common Stock offered hereby, are being sold by Stream International Inc. ("Stream" or the "Company") and are being sold by R.R. Donnelley & Sons Company ("R.R. Donnelley"), certain of its affiliates and certain other stockholders of the Company (collectively, the "Selling Stockholders"). The Company will not receive any proceeds from the sale of the shares by the Selling Stockholders. Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $ and $ per share. See "Underwriting" for the factors to be considered in determining the initial public offering price. Application has been made for quotation of the Common Stock on the Nasdaq National Market under the symbol "STRM." Upon completion of this offering, R.R. Donnelley and certain of its affiliates will own up to 39.9% of the outstanding Common Stock of the Company (approximately % if the Underwriters' over-allotment option is exercised in full). See "Principal and Selling Stockholders." -------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING AT PAGE 6. -------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS PROCEEDS TO TO DISCOUNTS AND TO SELLING PUBLIC COMMISSIONS COMPANY (1) STOCKHOLDERS - -------------------------------------------------------------------------------- Per Share........................ $ $ $ $ - -------------------------------------------------------------------------------- Total (2)........................ $ $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Before deducting expenses of the offering payable by the Company, estimated at $ . (2) R.R. Donnelley and certain of its affiliates have granted the Underwriters a 30-day option to purchase up to additional shares of Common Stock solely to cover over-allotments, if any. To the extent that the option is exercised, the Underwriters will offer the additional shares at the Price to Public shown above. If the option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to Selling Stockholders will be $ , $ , $ and $ , respectively. See "Underwriting." -------- The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if delivered to and accepted by them, and subject to the right of the Underwriters to reject any order in whole or in part. It is expected that delivery of the shares of Common Stock will be made at the offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about , 1997. Joint Lead Managers Alex. Brown & Sons INCORPORATED Lehman Brothers -------- J.P. Morgan & Co. Salomon Brothers Inc Smith Barney Inc. THE DATE OF THIS PROSPECTUS IS , 1997. [INSIDE COVER PAGE OF PROSPECTUS] [LEFT PANEL] TOP LEFT OF PANEL: PHOTOGRAPH OF A GLOBE SHOWING NORTH AMERICA TOP RIGHT OF PANEL: "TECHNICAL SUPPORT SERVICES" MIDDLE RIGHT OF PANEL: PARAGRAPH WRITTEN IN ORANGE LETTERING "STREAM CURRENTLY HANDLES CALLS FROM MORE THAN 4,400 WORKSTATIONS IN TEN CALL CENTERS IN THE UNITED STATES, GERMANY, FRANCE, THE UNITED KINGDOM AND THE NETHERLANDS." PARAGRAPH WRITTEN IN BLUE LETTERING "STREAM HAS PURSUED A STRATEGY OF GEOGRAPHIC EXPANSION, WITH FIVE CALL CENTERS IN EUROPE, A JOINT VENTURE IN JAPAN AND SUPPORT CAPABILITIES IN ELEVEN LANGUAGES." BOTTOM OF PANEL: GRAPHICAL IMAGE OF WORLD MAP INDICATING LOCATIONS OF STREAM CALL CENTERS [MIDDLE PANEL] TOP CENTER: PARAGRAPH IN BLUE LETTERING "STREAM PROVIDES TECHNICAL SUPPORT SERVICES VIA TELEPHONE, E-MAIL AND THE INTERNET PRIMARILY TO THE CUSTOMERS OF SOFTWARE PUBLISHERS, HARDWARE MANUFACTURERS AND ONLINE SERVICE PROVIDERS." TOP CENTER: "MARKET FOCUS AND CUSTOMER SERVICES" MIDDLE UPPER LEFT OF PANEL: PHOTOGRAPH OF THE LEFT SIDE OF A COMPUTER MONITOR MIDDLE UPPER RIGHT OF PANEL: PHOTOGRAPH OF THE RIGHT SIDE OF A COMPUTER MONITOR DISPLAYING A GRAPH MIDDLE LOWER LEFT OF PANEL: PHOTOGRAPH OF COMPUTER HARDWARE MIDDLE OF LOWER RIGHT OF PANEL: PHOTOGRAPH OF COMPUTER HARDWARE BOTTOM OF PANEL: FOUR PARAGRAPHS ALIGNED SIDE-BY-SIDE ENTITLED: "SOFTWARE PUBLISHER," "HARDWARE MANUFACTURER," "ONLINE SERVICE PROVIDER," AND "CORPORATE HELP DESK. "THE FOLLOWING PARAGRAPH FOLLOWS THE HEADING: "SOFTWARE PUBLISHER," "STREAM SUPPORT SERVICES ADDRESS OPERATING ENVIRONMENTS, APPLICATIONS, DATABASES, COMMUNICATION AND NETWORK TOOLS, AND SYSTEM TOOLS." THE FOLLOWING PARAGRAPH FOLLOWS THE HEADING "HARDWARE MANUFACTURER:" STREAM PROVIDES SUPPORT FOR A VARIETY OF HARDWARE PRODUCTS, INCLUDING PCS, PERIPHERALS, REMOTE ACCESS SERVERS AND HANDHELD COMPUTERS, AS WELL AS THEIR ASSOCIATED SOFTWARE APPLICATIONS. THE FOLLOWING PARAGRAPH FOLLOWS THE HEADING "ONLINE SERVICE PROVIDER:" "STREAM SUPPORTS INTERNET AND INTRANET PRODUCTS THROUGH TELEPHONE AND E-MAIL.THE FOLLOWING PARAGRAPH FOLLOWS THE HEADING "CORPORATE HELP DESK:" "STREAM SUPPORTS LARGE CORPORATIONS THAT OUTSOURCE HARDWARE AND SOFTWARE HELP DESK SUPPORT TO THIRD PARTIES." [RIGHT PANEL] TOP MIDDLE PANEL: PARAGRAPH IN BLUE LETTERING "STREAM IS A LEADING PROVIDER OF OUTSOURCE TECHNICAL SUPPORT SERVICES. ITS SCALE OF OPERATIONS AND INFRASTRUCTURE ALLOW IT TO IMPLEMENT SUPPORT FOR THE GROWING INFORMATION TECHNOLOGY INDUSTRY." RIGHT MIDDLE PANEL: "TECHNICAL SUPPORT SPECIALISTS" LEFT CENTER OF PANEL: PHOTOGRAPH OF STREAM TRAINING SESSION IN PROGRESS AND ORANGE INDICATOR WITH ORANGE LETTERING "ONGOING SERVICE AGENT TRAINING" MIDDLE OF PANEL: PHOTOGRAPH OF STREAM SERVICE AGENT AT A WORKSTATION HANDLING A TELEPHONE SUPPORT REQUEST AND ORANGE INDICATOR WITH ORANGE LETTERING "WELL-TRAINED SERVICE PROFESSIONALS." PHOTOGRAPH OF COMPUTER MONITOR AND PHOTOGRAPH OF MAN MONITORING COMPUTER EQUIPMENT WITH ORANGE INDICATOR AND ORANGE LETTERING "FOCUS ON TECHNOLOGY AND TECHNICAL SUPPORT." BOTTOM OF PANEL: ORANGE LETTERING "STREAM'S SERVICE AGENTS ANSWER QUESTIONS, DIAGNOSE PROBLEMS AND RESOLVE TECHNICAL DIFFICULTIES, RANGING FROM SIMPLE ERROR MESSAGES TO WIDE AREA NETWORK FAILURES." CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements and the notes thereto appearing elsewhere in this Prospectus. THE COMPANY Stream is a leading worldwide provider of outsource technical support services. The Company provides support services via the telephone, e-mail and the Internet primarily to customers of leading software publishers, hardware manufacturers and online service providers. The Company's service agents answer questions, diagnose problems and resolve technical difficulties, ranging from simple error messages to wide area network failures. The Company employs more than 4,300 service agents, who resolve inquiries in 11 languages at ten call centers located in the U.S., Germany, France, the U.K. and the Netherlands. By focusing on technical support, a more complex activity than traditional teleservices, Stream believes that it is able to differentiate itself from its competitors and provide its clients with high quality service and a cost- effective solution to their technical support needs. Stream's clients include software publishers such as Microsoft, Netscape, SunSoft and Symantec; hardware manufacturers such as Apple Computer and Hewlett-Packard; and online service providers such as CompuServe, The Microsoft Network and Sprint. The Company also provides support for companies in emerging market segments such as online financial services and interactive video services. In addition, the Company provides corporate help desk services to major corporations, including Norell Services and Shell. The Company has recently begun to offer its services directly to end users in the consumer/SOHO market. Stream's corporate client base has grown from three clients in 1992 to 137 clients as of February 1, 1997, and the Company currently supports over 70 products for its top ten clients. The Company's commitment to quality service has been critical to its ability to establish and maintain client relationships. The Company has won numerous awards for its services, including Software Support Professionals Association Star Awards for Software Technical Assistance for the last four years and EuroChannel's Innovator Award in 1996. The Company was also recently given special recognition by Microsoft for Excellence in Client Satisfaction. The Company's ability to provide high quality service is enhanced by its advanced technologies and systems, including automatic call distributors, computer telephony integration, call tracking software and relational database information systems. In addition, Stream utilizes sophisticated in-house and client database technology to capture and utilize information gathered from the millions of support requests it receives annually. Because of the complex nature of its services, Stream believes a key component of its success is its ability to attract, retain and manage a well-trained and stable work force. The Company employs experts in numerous products and platforms, ranging from advanced programming languages such as C++, JAVA and VisualBasic to common desktop applications. Growing product complexity, shorter product life cycles and an increasing number of products and multi-vendor computer and network configurations have increased the demand for technical support services. At the same time, software publishers, hardware manufacturers, online service providers and other organizations are finding it increasingly difficult and expensive to service all their needs in-house. Technical support is especially challenging to undertake as a non-core function because of the need for ongoing capital investment in specialized equipment, the attendant workforce management challenge and the inherent need for scale. As a result, companies are increasingly outsourcing these services to third-party providers as part of an overall effort to focus internal resources on core competencies, improve operating efficiencies and reduce costs. Dataquest estimates that outsource technical support services provided by third parties to software publishers, hardware manufacturers and online service providers totaled approximately $2 billion in 1996. In addition, corporations are increasingly seeking to outsource their internal help desk functions. The Gartner Group predicts that more than 40% of companies with internal help desks will outsource a portion of this function by 1998, compared to 15% in 1995. 3 The Company believes it is well-positioned to capitalize on the accelerating trend toward outsourcing technical support services. Key elements of the Company's growth strategy include: (i) expanding relationships with existing clients as they develop new products and continue to outsource technical support activity, (ii) establishing new client relationships, especially in the corporate help desk market, (iii) capitalizing on the growth of technology- enabled products as companies increasingly incorporate technology into products and services and (iv) pursuing strategic alliances and acquisitions. THE REORGANIZATION The Company's outsource technical support business began in 1992 as a unit of Corporate Software Incorporated ("CSI"), which sold and licensed software products and services to major corporations (to be known as "Corporate Software & Technology" or the "Corporate Software & Technology Business" after this offering). CSI established its technical support business unit in response to demands from key clients that were increasingly seeking to outsource technical support. In December 1993, Software Holdings, Inc. ("SHI"), which was organized by members of management of CSI, certain affiliates of Bain Capital, Inc. ("Bain") and certain other investors, purchased CSI from its public stockholders. In 1995, CSI and the Global Software Services Division (to be known as "Modus Media International" or the "MMI Business" after this offering) of R.R. Donnelley combined to form the Stream family of companies (the "CSI-MMI Merger"). Modus Media International is a leading provider of outsource manufacturing services to major software publishers and OEMs. Prior to the closing of this offering, the Company will effect a reorganization (the "Reorganization") pursuant to which the Company will (i) contribute to two wholly-owned subsidiaries (the "Spin-Off Subsidiaries") its Corporate Software & Technology Business and MMI Business, (ii) contribute to PLEX LLC ("PLEX"), a limited liability company wholly-owned by the Company, the capital stock of the Spin-Off Subsidiaries and (iii) distribute to the Company's stockholders all of the equity interests in PLEX (the "Spin-Off Distribution"). Accordingly, upon consummation of the Reorganization, the only business conducted by the Company will be the outsource technical support business. The consummation of the Reorganization is a condition to the closing of this offering. Purchasers of Common Stock in this offering will not receive any part of the Spin-Off Distribution. R.R. Donnelley and certain of its affiliates, who are Selling Stockholders in this offering, own approximately % of the outstanding Common Stock of the Company. Upon the closing of this offering, R.R. Donnelley and its affiliates will own up to 39.9% of the outstanding Common Stock of the Company ( % if the Underwriters' over-allotment option is exercised in full). R.R. Donnelley has agreed that for a period of three years following the closing of this offering it will not purchase any additional shares of Common Stock that would result in it and its affiliates owning over 49.9% of the Company's outstanding Common Stock. See "Certain Transactions" and "The Reorganization." THE OFFERING Common Stock offered by the Company............. shares Common Stock offered by the Selling Stockhold- ers............................................ shares Common Stock to be outstanding after the offer- ing............................................ shares (1) Use of proceeds................................. Repayment of certain indebtedness to R.R. Donnelley, capital expenditures, working capital, potential acquisitions and general corporate purposes Proposed Nasdaq National Market symbol.......... STRM
- -------- (1) Excludes options to purchase shares of Common Stock outstanding as of March 1, 1997. The Company plans upon the closing of this offering to grant options to employees for approximately shares of Common Stock at an exercise price equal to the initial public offering price. 4 SUMMARY CONSOLIDATED FINANCIAL AND OPERATING INFORMATION (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
YEAR ENDED DECEMBER 31, ---------------------------------------- 1992 1993 1994 1995 1996 ------ ------- ------- ------- -------- STATEMENT OF OPERATIONS DATA (1): Revenues............................ $2,842 $14,074 $37,388 $78,243 $155,498 Cost of services.................... 1,560 9,905 22,891 57,338 117,309 Selling, general and administrative expenses........................... 872 3,661 10,646 23,994 39,110 Nonrecurring charges (2)............ -- -- -- -- 4,500 Income (loss) from operations....... 410 508 3,851 (3,089) (5,421) Income (loss) from operations excluding nonrecurring charges..... 410 508 3,851 (3,089) (921) Net income (loss)................... 227 284 2,127 (2,272) (4,685) Pro forma net income (loss) per com- mon share (3).......................... $ $ $ $ $ Pro forma weighted average common shares outstanding (3)............. OPERATING DATA (AT PERIOD END): Call centers........................ 1 5 6 10 11
DECEMBER 31, 1996 ------------------------------------- PRO FORMA ACTUAL PRO FORMA (4) AS ADJUSTED (5) ------- ------------- --------------- BALANCE SHEET DATA (1): Cash and cash equivalents............... $ 1,142 $ $ Working capital......................... 19,910 Total assets............................ 76,987 Long-term obligations, net of current portion................................ 3,952 Total stockholders' equity.............. 52,663
- -------- (1) Gives effect to the Reorganization. The historical consolidated financial data may not be indicative of the Company's future performance and do not necessarily reflect what the financial position and results of operations of the Company would have been had the Company operated as a separate, stand-alone entity during the periods covered. (2) During the fiscal year ended December 31, 1996, the Company recorded a pre- tax charge of $4.5 million associated with the consolidation of certain European facilities, recruitment of certain members of management and establishment of new compensation and benefit plans. See Note 5 of Notes to Consolidated Financial Statements. (3) Gives effect to (i) the automatic conversion of all outstanding shares of Class B Common Stock into shares of Class A Common Stock, and the reclassification of all shares of Class A Common Stock as Common Stock, upon the closing of this offering, (ii) a one-for reverse stock split of the Company's Common Stock effective prior to the closing of this offering and (iii) the exercise in full of the Incentive Option described below. (4) Reflects the Company's assumption of approximately $50 million of indebtedness to R.R. Donnelley and the exercise in full of the Incentive Option. (5) Adjusted to give effect to the receipt and application by the Company of the estimated net proceeds to the Company from the sale of shares in this offering based upon an assumed initial public offering price of $ per share. See "Use of Proceeds." -------- Unless otherwise indicated, all information in this Prospectus assumes and gives effect to: (i) the consummation of the Reorganization prior to the closing of this offering, (ii) the automatic conversion of all outstanding shares of Class B-V Common Stock and Class B-N Common Stock (collectively, "Class B Common Stock") into shares of Class A Common Stock, and the reclassification of all shares of Class A Common Stock as Common Stock, upon the closing of this offering, (iii) a one-for- reverse stock split of the Company's Common Stock effective prior to the closing of this offering, (iv) the issuance by the Company prior to the closing of this offering of shares of Common Stock to certain stockholders of the Company upon their exercise of the Incentive Option granted to them in connection with the CSI-MMI Merger (the "Incentive Option") and (v) no exercise of the Underwriters' over-allotment option. See "Certain Transactions," "The Reorganization" and "Underwriting." 5 RISK FACTORS This Prospectus contains certain forward-looking statements that involve substantial known and unknown risks and uncertainties. When used in this Prospectus, the terms "anticipates," "expects," "estimates," "believes" and similar terms as they relate to the Company or its management are intended to identify such forward-looking statements. The Company's actual results, performance or achievements may differ materially from those expressed or implied by such forward-looking statements. In addition to the other information presented in this Prospectus, the following factors should be considered carefully in evaluating an investment in the shares of Common Stock offered by this Prospectus. Dependence on Key Clients. An aggregate of approximately 40%, 57% and 73% of the Company's revenues in 1996, 1995 and 1994, respectively, were attributable to Microsoft Corporation ("Microsoft"), including The Microsoft Network ("MSN"). In addition, approximately 13%, 12% and 12% of the Company's revenues in 1996 were attributable to Hewlett-Packard Company, Incorporated ("Hewlett- Packard"), Compaq Computer Corporation ("Compaq") and CompuServe Incorporated ("CompuServe"), respectively; the Company expects that its revenues from certain of these clients will decline in 1997. The Company's ten largest clients accounted for approximately 92% of the Company's revenues in 1996. The Company's agreements with key clients have limited terms, typically one year, and there can be no assurance that the Company's clients will renew or extend their current agreements. In addition, the Company's clients typically utilize additional technical support providers and retain broad discretion over the ongoing allocation of support requests among such providers. The loss of, or the failure to retain a significant amount of business with, any key client could have a material adverse effect on the Company. In addition, many of the Company's agreements with its key clients generate revenues based on the number of support requests received by the Company or the time spent on such requests. Consequently, the amount of revenues generated from a client is generally dependent upon consumers' use of the client's products and the support needs of such products. With respect to client agreements that provide for pricing on a per-call basis, the Company's profitability may be adversely affected if the Company receives fewer support requests than anticipated or the time spent in resolving inquiries is greater than anticipated. The Company's agreements with key clients provide that, in the event the Company fails to meet specified performance criteria, the clients can terminate the agreements on short notice. Any failure by the Company to meet performance requirements or a cancellation of, or decrease in, the services requested by a key client could have a material adverse effect on the Company. In addition, the Company may be required to rapidly expand its operations to meet the demands of its clients. Such rapid changes to the size of the Company's operations and employee base could involve significant costs, including costs associated with employee hiring and training, the purchase of additional workstations, equipment and technology and the establishment of additional call centers. Certain client agreements also provide that specified information obtained by the Company as a result of support requests is the property of the client, and therefore, upon the termination of any such client relationship, the Company will be required to discontinue use of such information. There can be no assurance that such contract terms will not have a material adverse effect on the Company. See "Business--Clients." History of Operating Losses. The Company has incurred operating losses in each of the last two fiscal years. At December 31, 1996, the Company's accumulated deficit was approximately $4.3 million. In order to achieve profitability, the Company must continue to successfully market and sell its support services to major clients, improve operating efficiencies and otherwise manage costs, including costs associated with future growth. There can be no assurance the Company will achieve profitability in 1997, if at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Competition. The industry in which the Company competes is extremely competitive and highly fragmented. The Company believes many of its clients purchase technical support services primarily from 6 a limited number of preferred vendors. The Company's competitors include corporations that may possess greater resources, greater name recognition and a more established client base than the Company. The Company believes its principal competitors are currently National TechTeam, Inc. ("National TechTeam"), SITEL Corporation ("SITEL"), Sykes Enterprises, Incorporated ("Sykes") and TeleTech Holdings, Inc. ("TeleTech"). In addition, the Company competes with the internal technical support divisions of organizations that provide technical support through in-house personnel. As a result of this competition, client agreements may be subject to pricing pressure, and competition for contracts for certain of the Company's services may take the form of competitive bidding in response to requests for proposals. In addition, clients may require vendors to provide services in multiple locations and meet client volume and satisfaction thresholds. Such pricing pressures and contract terms could have a material adverse effect on the Company. There can be no assurance that the Company will be able to compete effectively with existing or future competitors or in-house technical support operations. See "Business--Competition." Ability to Manage Growth. The Company has significantly expanded its operations since it began providing outsource technical support services in 1992. Since 1992, the number of call centers has increased from one to ten, and since 1994, the number of employees, including temporary and part-time employees, of the Company has grown from approximately 1,300 to over 4,700. This expansion has placed significant demands on the Company's operational, administrative and financial resources, and any continued growth may place additional significant strain on its resources. The Company's future performance and profitability will depend in part on its ability to successfully attract and retain qualified management personnel to manage the growth and operations of the Company's business as well as its ability to hire a significant number of additional service agents as required. In addition, the Company anticipates that it will add workstation capacity in both the United States and Europe in 1997. The failure to establish additional workstations, call centers or other facilities as needed in a timely and cost- effective manner could have a material adverse effect on the Company. There can be no assurance that the Company will have sufficient resources or otherwise be able to maintain its historic rate of growth. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business--Operations and Quality Assurance," "Business--Facilities," "Business--Employees" and "Management." Ownership by R.R. Donnelley. R.R. Donnelley and certain of its affiliates, who are Selling Stockholders in this offering, own approximately % of the outstanding Common Stock of the Company. Upon the closing of this offering, R.R. Donnelley and its affiliates will own up to 39.9% of the outstanding Common Stock of the Company ( % if the Underwriters' over-allotment option is exercised in full). As a result, R.R. Donnelley will have significant influence over the outcome of corporate actions requiring stockholder approval, including the election of directors of the Company. In addition, upon the closing of this offering one member of the Board of Directors of the Company will be designated by R.R. Donnelley. The significant ownership interest of R.R. Donnelley may discourage certain types of transactions involving an actual or potential change of control of the Company, including transactions in which the holders of the Company's Common Stock might receive a premium for their shares over the prevailing market price of the Common Stock. Risks Relating to the Reorganization. The Company has historically depended on the businesses being transferred to the Spin-Off Subsidiaries and on R.R. Donnelley for certain financial, tax, insurance, payroll, employee benefits, information technology and other services. In connection with the Reorganization, the Company will enter into agreements with the Spin-Off Subsidiaries (collectively, the "Transitional Service Agreements") for the continued provision after the Reorganization of certain services formerly shared among such entities or provided by R.R. Donnelley. Pursuant to the Transitional Service Agreements, the Company will receive from the Spin-Off Subsidiaries certain financial, tax, insurance, payroll, employee benefits, information technology and other services, and the Company will provide to the Spin-Off Subsidiaries certain legal services, outsource technical support for certain clients of the Spin-Off Subsidiaries and information technology services. Each party to the Transitional Service Agreements is generally prohibited from hiring the employees of the other party and from using or disclosing the other 7 party's confidential information other than in connection with the performance of its obligations under such agreements. The Transitional Service Agreements terminate on the one-year anniversary of the closing of this offering, provided that the party receiving the services may terminate the agreement with respect to some or all of such services upon 90 days' notice at any time after , 1997. After such termination, the Company will be required to provide such services internally or find a third- party provider of such services. There can be no assurance that the Company will be able to secure the provision of such services on acceptable terms, and the failure to do so could have a material adverse effect on the Company. The Company's historical financial statements reflect an allocation of expenses in connection with the services covered by the Transitional Service Agreements. The Company has incurred, and anticipates incurring in the future, higher payroll costs associated with the hiring of additional personnel and the addition of certain officers, which costs were previously allocated in part to the businesses being transferred to the Spin-Off Subsidiaries. In addition, certain of the Company's services have been sold to corporate accounts on a bundled basis with software provided by the businesses being contributed to the Spin-Off Subsidiaries. There can be no assurance that the Company will not encounter difficulties in achieving sales of such services through its own sales agents and without being bundled with such software. In addition, the Company's reputation and the goodwill associated with its name could be materially adversely affected by the actions and reputation of the Spin-Off Subsidiaries, the businesses of which, until the Reorganization, will operate as units of Stream and, in some cases, under the "Stream" name. The Spin-Off Subsidiaries are currently wholly owned by the Company. Following the Reorganization approximately 48.0% of the outstanding capital stock of each of the Spin-Off Subsidiaries will be indirectly owned (through ownership interests in PLEX) by R.R. Donnelley and its affiliates. None of the agreements to be entered into by the Company with the Spin-Off Subsidiaries resulted from "arm's length" negotiations. In addition, the Company did not retain separate counsel from that retained by the Spin-Off Subsidiaries in negotiating such agreements. The Company believes, however, that the terms of the Transitional Service Agreements are on a basis at least as favorable to the Company as those that would have been obtained from third parties on an arm's length basis and that they will be adequate to allow the Company to continue its business as previously conducted on an independent basis. These agreements may be modified in the future and additional arrangements may be entered into between the Company, the Spin-Off Subsidiaries and R.R. Donnelley. The Company intends that, insofar as a determination can objectively be made, each future agreement or transaction between the Company and any affiliated parties (including the Spin-Off Subsidiaries and R.R. Donnelley) will be on terms at least as favorable to the Company as could be obtained from unaffiliated parties for comparable services or arrangements. In connection with the Reorganization, the Company will contribute to the Spin-Off Subsidiaries its Corporate Software & Technology Business and MMI Business and their related assets and liabilities. In addition, all of the indebtedness of the Company to R.R. Donnelley prior to the Reorganization, other than approximately $50 million, will be retained by PLEX, and R.R. Donnelley will release the Company from such indebtedness retained by PLEX. Each Spin-Off Subsidiary will indemnify the Company from and against the respective liabilities assumed by it in the Reorganization, and R.R. Donnelley will indemnify the Company for three years following this offering against any such assumed liabilities not paid by such entities (up to an aggregate of $100 million). The Company will, however, generally remain contingently liable for all such assumed liabilities. There can be no assurance that claims relating to such liabilities will not be asserted against the Company or that, if any such claim is successfully asserted, the Company will be able to collect any indemnified amounts from the Spin-Off Subsidiaries or R.R. Donnelley. Any failure to do so could have a material adverse effect on the Company. Until the expiration of the applicable statutes of limitations, R.R. Donnelley has agreed to indemnify the Company in respect of any tax payable by the Company with respect to (i) any gain realized by the Company as a result of the Reorganization or the Spin-Off Distribution, which is not intended to be tax- 8 free to the stockholders of the Company or to the Company, and (ii) any other income tax liabilities of the Company relating to the Spin-Off Subsidiaries' businesses, to the extent that such taxes and/or liabilities in the aggregate exceed the value of the net operating loss carryforwards, if any, retained by the Company. The Company will, however, remain contingently liable for all such taxes and liabilities, and there can be no assurance any indemnified amounts will be collected from R.R. Donnelley. See "The Reorganization." Fluctuations in Quarterly Operating Results. The Company could experience quarterly variations in revenues and operating income as a result of many factors, including the introduction of new products, platforms, or technologies by clients or potential clients, the introduction of new services by the Company, actions taken by competitors, the timing of the establishment or termination of client agreements, the allocation of support requests by clients among various support providers, the timing of additional selling, general and administrative expenses incurred to acquire and support new or additional business and changes in the Company's revenue mix among its various service offerings. For example, the Company's revenues in the fourth quarter of fiscal 1995 and 1996 increased in part due to the seasonally higher volume of calls attributable to its hardware manufacturer clients. Many of the factors that could cause such variations are outside of the control of the Company. In connection with certain contracts, the Company could incur costs in periods prior to recognizing revenues under those contracts. The Company must plan its operating expenditures based on revenue forecasts, and a revenue shortfall below such forecasts in any quarter would likely adversely affect the Company's operating results for that quarter. The Company's revenues may be difficult to forecast because the Company's sales cycle is relatively long and may depend on factors such as the size and scope of assignments, the degree of penetration of clients' new products and general economic conditions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Attraction and Retention of Employees and Key Executives. The Company's business involves the delivery of professional services and is highly labor- intensive. The Company's growth and success depend largely upon its ability to attract, develop, motivate and retain highly skilled technical employees. The Company's industry is characterized by high personnel turnover. In addition, qualified technical employees are in great demand and are likely to remain a limited resource for the foreseeable future. There can be no assurance that the Company will be able to attract and retain sufficient numbers of highly skilled technical employees in the future. The inability to hire and retain technical personnel could have a material adverse effect on the Company, including its ability to secure client arrangements and meet client demands. In addition, a significant portion of the Company's costs consist of wages to hourly workers. An increase in hourly wages, costs of employee benefits or employment taxes could have a material adverse effect on the Company. The success of the Company is also partially dependent upon the efforts, direction and guidance of its key executives. Other than Mr. Moore and Ms. Salerno, who are expected to enter into employment agreements prior to the closing of this offering, none of the Company's key executives are subject to employment agreements, and the Company carries no key person life insurance. The loss of any of the Company's key executives or its inability to attract and retain key executives in the future could have a material adverse effect on the Company. See "Business--Operations and Quality Assurance," "Business--Employees" and "Management." Risks Relating to International Operations. A portion of the Company's operations are conducted outside the U.S., and the Company intends to further expand its international operations. Currently, the Company operates five call centers in Europe, has approximately 470 permanent and 60 temporary full-time employees outside of the U.S., participates in a joint venture in Japan and sells its services to clients in seven countries. In 1996, revenues from the Company's services outside the U.S. totaled approximately $21 million, representing 13% of the Company's total revenues. International revenues have increased in absolute dollars and as a percentage of revenues in each year since 1993, and the Company anticipates that international revenues will continue to account for an increasing percentage of its total revenues. The Company may encounter difficulties in marketing, selling and delivering its services outside 9 of the U.S. due to differences in cultures, languages and employment policies and differing political, social and economic systems. The Company is subject to risks associated with international operations and sales, including changes in foreign regulatory requirements, devaluations of currency and fluctuations in currency exchange rates, trade barriers and political and economic instability. Such risks could have a material adverse effect on the Company. See "Business--International Operations." Dependence on Growth of Outsource Technical Support Services Market. The Company derives all of its revenues from the sale of outsource technical support services. Accordingly, the Company's business and growth depend in large part on the industry trend toward outsourcing technical support services, an increasing number of products requiring support and an increasing demand for support services by corporations and individual end users. There can be no assurance that these trends will continue, as organizations may elect to perform such services in-house or the demand for support services may not continue to increase. A significant change in the direction of these trends could have a material adverse effect on the Company. See "Business-- Industry Background" and "Business--Competition." Risk of Emergency Interruption of Call Center Operations. The Company's business is highly dependent on its computer and telecommunications equipment and software systems. The Company has taken precautions to protect itself and its clients from events that could interrupt delivery of the Company's services. These precautions include off-site storage of backup data, fire protection, physical security systems and rerouting of telephone calls to one or more of the Company's other call centers in the event of an emergency. There can be no assurance, however, that natural disaster, human error, equipment malfunction or inadequacy, or other event would not result in a prolonged interruption in the Company's ability to provide support services to its clients. The temporary or permanent loss of the Company's computer or telephone equipment or systems, through casualty, operating malfunction or otherwise, could have a material adverse effect on the Company. The Company's property and business interruption insurance may not be adequate to compensate the Company for all losses that it may incur. See "Business--Operations and Quality Assurance" and "Business--Facilities." Risks Associated with Rapidly Changing Technology. The Company's business is highly dependent on its computer and telecommunications equipment and software systems. The Company's failure to maintain the quality of its technological capabilities or to respond effectively to technological changes could have a material adverse effect on the Company. The Company's future success will also be highly dependent on its ability to enhance existing services, service new products and platforms and introduce new services to respond to changing technological developments. There can be no assurance that the Company can successfully develop and bring to market any new services in a timely manner, that such services will be commercially successful or that competitors' technologies or services will not render the Company's services noncompetitive or obsolete. In addition, the Company is planning to implement a new workforce management system in late 1997, which is designed to increase the utilization of service agents through improved scheduling. There can be no assurance the Company will be able to implement such system in a timely and cost-effective manner, that the establishment of such system will not cause interruptions to the Company's operations or that, once established, such system will be effectively utilized. The introduction of new products or platforms by clients or potential clients that require a lower level of expert technical support, that require the Company to hire or train additional employees or implement new systems or that are not supported by the Company and reduce the usage of products supported by the Company could have a material adverse effect on the Company. See "Business--Technology." Intellectual Property Risks. The Company licenses third party software that is important to its operations and the provision of its services, such as Aspect Telecommunication Corporation's automatic call distribution system and Scopus Technology, Inc.'s call tracking system. The inability of the Company to continue to license such software on commercially reasonable terms could have a material adverse effect on the Company. In addition, due to the nature of the Company's business, while the Company has 10 implemented numerous policies and procedures to safeguard the confidential information of its clients, there can be no assurance that the Company will not be subject to a claim that it improperly used or disclosed proprietary client information. See "Business--Intellectual Property." Antitakeover Provisions. The Company's Certificate of Incorporation, as in effect upon the closing of this offering (the "Certificate of Incorporation"), requires that any action required or permitted to be taken by stockholders of the Company must be effected at a duly called annual or special meeting of stockholders and requires reasonable advance notice by a stockholder of a proposal or director nomination which such stockholder desires to present at any annual or special meeting of stockholders. Special meetings of stockholders may be called only by the Chairman of the Board of Directors, the Chief Executive Officer or, if none, the President of the Company or by the Board of Directors. The Certificate of Incorporation also provides for a classified Board of Directors. The authorized but unissued capital stock of the Company includes 1,000,000 shares of preferred stock. The Board of Directors is authorized without further action by the stockholders to provide for the issuance of such preferred stock in one or more series and to fix the designations, preferences, powers and relative, participating, optional or other rights and restrictions thereof. Accordingly, the Company may issue a series of preferred stock in the future that will have preference over the Common Stock with respect to the payment of dividends and upon liquidation, dissolution or winding-up or that could otherwise adversely affect holders of the Common Stock or discourage or make difficult any attempt to obtain control of the Company. Also, Section 203 of the Delaware General Corporation Law, as amended from time to time (the "DGCL"), which is applicable to the Company following this offering, prohibits certain business combinations with certain stockholders for a period of three years after they acquire 15% or more of the outstanding voting stock of a corporation. The Company has exempted R.R. Donnelley and its affiliates (and direct transferees who acquire up to a 25% equity interest in the Company) from this restriction. These provisions, and other provisions of the Certificate of Incorporation, the Company's By-laws and the DGCL, may have the effect of deterring hostile takeovers or delaying or preventing changes in control or changes in management of the Company, including transactions in which stockholders might otherwise receive a premium for their shares over then-current market prices. In addition, these provisions may limit the ability of stockholders to approve transactions that they may deem to be in their best interests. See "Description of Capital Stock--Preferred Stock" and "Description of Capital Stock--Delaware Law and Certain Charter and By-Law Provisions." Shares Eligible for Future Sale. Sales of a substantial number of shares of the Company's Common Stock in the public market after this offering, or the perception that such sales could occur, could adversely affect the market price of the shares of the Company's Common Stock. Of the shares of Common Stock to be outstanding upon completion of this offering, the shares offered hereby will be freely tradeable without restriction. All of the remaining shares of Common Stock are "restricted securities" as that term is defined in Rule 144 promulgated under the Securities Act of 1933, as amended (the "Act"). Of these restricted securities, approximately shares that are not subject to the lock-up agreements described below will become eligible for sale in the public market immediately after this offering pursuant to Rule 144(k) under the Act and approximately shares which are not subject to such lock-up agreements will become eligible for sale in the public market 90 days following the date of this Prospectus pursuant to Rule 144 or Rule 701 under the Act. Taking into consideration the effect of lock-up agreements entered into by all officers and directors and certain stockholders of the Company, an additional shares will become eligible for sale in the public market upon expiration of the lock-up agreements 180 days after the date of this Prospectus, subject to the provisions of Rules 144 and 701. In addition, shares of Common Stock subject to outstanding options and not subject to lock-up agreements will become eligible for public sale 90 days after the date of this Prospectus. The Company intends to file a Registration Statement on Form S-8 enabling option holders to sell shares for 11 which options are exercisable and which do not qualify for an exemption under Rule 701 under the Act. The holders of approximately shares of Common Stock to be outstanding upon the closing of this offering are entitled to certain rights with respect to registration of such shares for sale to the public beginning 181 days after the closing of this offering. See "Management--Compensation of Directors," "Management--Executive Compensation," "Management--Employee Benefit Plans," "Description of Capital Stock" and "Shares Eligible for Future Sale." No Prior Market; Potential Volatility of Stock Price. Prior to this offering, there has been no public market for the Common Stock of the Company, and there can be no assurance that an active public market will develop or be sustained after this offering. The initial public offering price will be determined by negotiations between the Company, R.R. Donnelley and the Representatives of the Underwriters. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The market price of the Common Stock may be volatile and may be significantly affected by factors such as actual or anticipated fluctuations in the Company's operating results, announcements of new services by the Company or its competitors, developments with respect to conditions and trends in the technical support industry, governmental regulation, changes in estimates by securities analysts of the Company's future financial performance, general market conditions and other factors. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have adversely affected the market prices of securities of companies for reasons unrelated or disproportionate to their operating performance. These broad market fluctuations may adversely affect the market price of the Common Stock. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such a company. Such litigation could result in substantial costs and a diversion of management's attention and resources, which would have a material adverse effect on the Company. Dilution; Potential Need for Additional Financing. Purchasers of shares of Common Stock in this offering will experience an immediate and substantial dilution in the net tangible book value of the Common Stock from the initial public offering price. Additional dilution is likely to occur upon exercise of outstanding options. In addition, the Company could in the future require additional financing. There can be no assurance such financing would be available on acceptable terms, if at all, and any future equity financing could cause additional dilution to stockholders of the Company. See "Dilution" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 12 THE COMPANY The Company was incorporated in Delaware in February 1995 and changed its name to "Stream International Holdings Inc." in February 1996. Prior to and after the Reorganization, the Company's outsource technical support business has been and will be operated as a subsidiary of Stream International Holdings Inc. The only business conducted by the Company after the Reorganization will be the outsource technical support business. In connection with the Reorganization, Stream International Holdings Inc. will change its name to "Stream International Inc." Unless the context otherwise requires, references in this Prospectus to "Stream" or the "Company" refer to Stream International Holdings Inc. and its subsidiaries after giving effect to the foregoing name change and the Reorganization, and references to the "Parent Company" refer to Stream International Holdings Inc. prior to the Reorganization. The Company's executive offices are located at 275 Dan Road, Canton, Massachusetts 02021, and its telephone number is (617) 575-6800. "Stream" is a service mark of the Company. All other service marks, trademarks and trade names used in this Prospectus are the property of their respective owners. USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered by the Company hereby are estimated to be $ after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company and assuming an initial public offering price of $ per share. The Company will not receive any proceeds from the sale of shares by the Selling Stockholders in this offering. The Company currently plans to use the net proceeds of this offering (i) to repay approximately $50 million of indebtedness to R.R. Donnelley assumed by the Company in connection with the Reorganization and (ii) to fund capital expenditures primarily for the expansion of operations. For information regarding the loans from R.R. Donnelley to be assumed by the Company, see "Certain Transactions" and "The Reorganization." Any remaining net proceeds of this offering are expected to be used for working capital and general corporate purposes. A portion of the proceeds of this offering may also be used to fund potential acquisitions, although the Company is currently not a party to any commitments or negotiations with respect to any such transaction. Pending application of the proceeds of this offering, the Company intends to invest the net proceeds of this offering in short-term, investment-grade, interest-bearing instruments. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its capital stock. The Company currently intends to retain earnings, if any, to finance the operations and development of the business and does not anticipate paying cash dividends in the foreseeable future. Payment of future dividends, if any, will be at the discretion of the Company's Board of Directors after taking into account various factors, including the Company's financial condition, operating results, current and anticipated cash needs and plans for expansion. In addition, any bank credit facility entered into by the Company may contain certain restrictions on the payment of cash dividends. 13 CAPITALIZATION The following table sets forth as of December 31, 1996 (i) the actual capitalization of the Company, (ii) the capitalization of the Company giving pro forma effect to the conversion of Class B Common Stock into shares of Class A Common Stock and the reclassification of all shares of Class A Common Stock as Common Stock, the assumption of approximately $50 million in indebtedness to R.R. Donnelley and the exercise in full of the Incentive Option prior to or upon the closing of this offering and (iii) such pro forma capitalization of the Company as adjusted to reflect the receipt and application by the Company of the estimated net proceeds to the Company from the sale of shares in this offering based upon an assumed initial public offering price of $ per share. See "Use of Proceeds." This table should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus.
DECEMBER 31, 1996 ----------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- (IN THOUSANDS) Short-term obligations........................... $ 2,112 $ $ ======= ===== ===== Long-term obligations, net of current portion.... $ 3,952 $ $ ------- ----- ----- Stockholders' equity (1): Net Parent Company investment.................. 52,584 Preferred Stock, $.01 par value; 1,000,000 shares authorized, no shares issued or outstanding pro forma and pro forma as adjusted...................................... -- ------- ----- ----- Common Stock, $.01 par value; shares authorized, shares issued and outstanding pro forma, shares issued and outstanding pro forma as adjusted......................... -- ------- ----- ----- Additional paid-in capital..................... -- Cumulative translation adjustments ............ 79 ------- ----- ----- Total stockholders' equity..................... 52,663 ------- ----- ----- Total capitalization........................... $56,615 $ $ ======= ===== =====
- -------- (1) Excludes shares of Common Stock reserved for issuance pursuant to the Company's stock plans, under which options to purchase shares were outstanding at March 1, 1997. See "Management--Compensation of Directors," "Management--Executive Compensation" and "Management-- Employee Benefit Plans." 14 DILUTION The net tangible book value of the Company as of December 31, 1996, giving pro forma effect to the Reorganization and the assumption by the Company, in connection with the Reorganization, of approximately $50 million of indebtedness to R.R. Donnelley, was $ . Net tangible book value per share represents the amount of the Company's total tangible assets reduced by the amount of its total liabilities and divided by the total number of shares of Common Stock outstanding, giving pro forma effect to the conversion of all shares of Class B Common Stock into Class A Common Stock and the reclassification of Class A Common Stock as Common Stock, the one-for- reverse stock split of the Common Stock and the exercise of the Incentive Option, in each case prior to or upon the closing of this offering. Without taking into account any other changes in such net tangible book value after December 31, 1996, other than to give effect to the receipt and application by the Company of the net proceeds from the sale of the shares of Common Stock offered hereby by the Company at an assumed initial public offering price of $ per share after deducting the underwriting discounts and commissions and estimated offering expenses, the pro forma net tangible book value of the Company as of December 31, 1996 would have been $ or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $ per share to purchasers of Common Stock in this offering, as illustrated in the following table: Assumed initial public offering price per share....................... $ Pro forma net tangible book value per share at December 31, 1996.... $ Increase per share attributable to new investors.................... ---- Pro forma net tangible book value per share after the offering........ ---- Dilution per share to new investors................................... $ ====
The following table summarizes, on a pro forma basis as set forth above, as of December 31, 1996, the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price paid per share by the existing stockholders and by the investors purchasing shares of Common Stock offered hereby (at an assumed initial public offering price of $ per share):
SHARES PURCHASED TOTAL CONSIDERATION ---------------------- ------------------------ AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------- --------- --------- ---------- ------------- Existing stockholders... (1) % $ % $ New investors........... (2) $ ------- --------- --------- ---------- Total................... 100.0% $ 100.0% ======= ========= ========= ==========
- -------- (1) Sales by the Selling Stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to shares or % of the total number of shares of Common Stock outstanding after this offering, and will increase the number of shares held by new investors to or % of the total number of shares of Common Stock outstanding after this offering. See "Principal and Selling Stockholders." (2) Before deducting the underwriting discounts and commissions and estimated offering expenses. As of December 31, 1996 there were shares of Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $ per share. The issuance of shares upon exercise of these options is not reflected in the preceding tables. If all of the options outstanding as of December 31, 1996 were exercised in full, the dilution per share to purchasers of Common Stock in this offering would be $ . Such exercises would increase the number of shares held by existing stockholders to shares, or % of the total number of shares of Common Stock to be outstanding after this offering, and would (i) decrease the number of shares held by the purchasers of Common Stock in this offering to % of the total number of shares of Common Stock to be outstanding after this offering, (ii) increase the total consideration paid to the Company by existing stockholders to $ , or % of the total consideration paid to the Company, and (iii) increase the average price per share paid by existing stockholders to $ . 15 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA The selected consolidated financial data presented below as of December 31, 1995 and 1996, and for each of the three years in the period ended December 31, 1996, are derived from the Company's Consolidated Financial Statements, included elsewhere in this Prospectus, and have been audited by Arthur Andersen LLP, independent public accountants. The selected consolidated financial data presented below as of December 31, 1993 and 1994 and for each of the two years in the period ended December 31, 1993 are derived from internal company records and are unaudited. The historical consolidated financial data give effect to the Reorganization and exclude the results of the Spin-Off Subsidiaries, may not be indicative of the Company's future performance and do not necessarily reflect what the financial position and results of operations of the Company would have been had the Company operated as a separate, stand-alone entity during the periods covered. See "Consolidated Financial Statements." These data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related Notes included elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31, ---------------------------------------- 1992 1993 1994 1995 1996 ------ ------- ------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) STATEMENT OF OPERATIONS DATA: Revenues........................... $2,842 $14,074 $37,388 $78,243 $155,498 Operating expenses: Cost of services................. 1,560 9,905 22,891 57,338 117,309 Selling, general and administrative expenses......... 872 3,661 10,646 23,994 39,110 Nonrecurring charges (1)......... -- -- -- -- 4,500 ------ ------- ------- ------- -------- Income (loss) from operations...... 410 508 3,851 (3,089) (5,421) Interest expense................... -- -- -- -- 188 Provision (benefit) for income taxes............................. 183 224 1,724 (817) (924) ------ ------- ------- ------- -------- Net income (loss).................. $ 227 $ 284 $ 2,127 $(2,272) $ (4,685) ====== ======= ======= ======= ======== Pro forma net income (loss) per common share (2).................. Pro forma weighted average common shares outstanding (2)............ OPERATING DATA (AT PERIOD END): Call centers....................... 1 5 6 10 11
DECEMBER 31, ------------------------------ 1993 1994 1995 1996 ------ ------- ------- ------- (IN THOUSANDS) BALANCE SHEET DATA (3): Cash and cash equivalents..................... $ 2 $ 162 $ 21 $ 1,142 Working capital .............................. 34 3,469 13,350 19,910 Total assets.................................. 7,559 20,593 53,598 76,987 Long-term obligations, net of current portion. 938 2,505 1,734 3,952 Total stockholders' equity.................... 3,198 12,603 40,964 52,663
- -------- (1) During the fiscal year ended December 31, 1996, the Company recorded a pre-tax charge of $4.5 million associated with the consolidation of certain European facilities, recruiting certain members of management and establishing new compensation and benefit plans. Excluding such charges, operating income (loss), net income (loss) and pro forma net income (loss) per common share would have been $(921), $(1,385) and $ , respectively. See Note 5 of Notes to Consolidated Financial Statements. (2) Gives effect to (i) the automatic conversion of all outstanding shares of Class B Common Stock into shares of Class A Common Stock, and the reclassification of all shares of Class A Common Stock as Common Stock, upon the closing of this offering, (ii) a one-for- reverse stock split of the Company's Common Stock effective prior to the closing of this offering and (iii) the exercise in full of the Incentive Option prior to the closing of this offering. (3) Balance sheet data is not available for 1992 since the Company was treated as a cost center of CSI. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company's outsource support business began in 1992 as a unit of CSI, which sold and licensed software products and services to major corporations. CSI began providing technical support in the mid-1980s as part of a bundled product offering. In response to demands from key clients that were seeking to outsource technical support, CSI established a separate business unit to provide such support. In 1995, CSI and the Outsource Manufacturing Services Division of R.R. Donnelley combined to form the Stream family of companies, consisting of the Company's outsource technical support business, the MMI Business and the Corporate Software & Technology Business. Prior to the closing of this offering, the Company will spin-off the MMI Business and Corporate Software & Technology Business to its stockholders. See "The Reorganization." From its inception, the Company's primary strategic focus has been to grow revenues and increase market share. The Company has made significant investments in its infrastructure, including investments in call centers, workstations, divisional and corporate personnel, management and systems. In late 1996, the Company implemented a number of initiatives designed to improve profitability, particularly with respect to its cost of services. These included aligning management compensation plans with profitability targets, reorganizing call center supervisor and management structures to improve efficiency and eliminating an employee home computer reimbursement plan. Future initiatives that the Company plans to undertake include the implementation of a new workforce management system in late 1997, which is designed to increase the utilization of service agents through improved scheduling. In 1997, the Company plans to open one new call center and has closed one small call center in the U.S. The Company also plans to consolidate two of its call centers into one new center in Europe during the remainder of 1997. The Company's European operations, which began in 1994, are less mature than its U.S. operations and have incurred operating losses since inception. The Company is reorganizing certain of its European operations and recorded a restructuring charge of $3.0 million in 1996 in connection with this reorganization. The Company will record an additional charge of approximately $1.0 million in the first quarter of 1997 in connection with this reorganization. The Company seeks to develop long term relationships with its clients and expects that a substantial portion of its revenue growth will be generated by existing clients. In 1996, revenues from existing clients (companies that were clients of the Company in both 1995 and 1996) increased approximately 85%. The Company's revenues are recognized as services are rendered. These services are generally billed on a per-minute, per-incident, per-call or per-agent basis. In connection with the Reorganization, the Company will enter into agreements pursuant to which it will obtain certain transitional services from the Spin-Off Subsidiaries and provide certain transitional services to the Spin-Off Subsidiaries. See "The Reorganization." 17 RESULTS OF OPERATIONS The following table sets forth statement of operations data as a percentage of revenues for the periods indicated:
YEAR ENDED DECEMBER 31, -------------------------- 1994 1995 1996 ------- ------- ------- Revenues......................................... 100.0% 100.0% 100.0% Operating expenses: Cost of services............................... 61.2 73.3 75.4 Selling, general and administrative expenses... 28.5 30.7 25.2 Nonrecurring charges........................... -- -- 2.9 ------- ------- ------- Income (loss) from operations.................... 10.3 (4.0) (3.5) Interest expense................................. -- -- 0.1 Provision (benefit) for income taxes............. 4.6 (1.1) (0.6) ------- ------- ------- Net income (loss)................................ 5.7% (2.9)% (3.0)% ======= ======= =======
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995 Revenues. Revenues increased $77.3 million, or 98.9%, to $155.5 million in 1996 from $78.2 million in 1995. This increase consisted of $66.4 million of revenues from existing clients and $10.9 million of revenues from new clients. International revenues increased $13.0 million, or 166.7%, to $20.8 million in 1996 from $7.8 million in 1995. The Company increased its capacity through the opening of a call center in North America in the fourth quarter of 1995 and two call centers in Europe in 1996. The Company closed one call center in Europe in 1996. Cost of Services. Cost of services includes primarily labor wages and benefits and communications expenses directly related to technical support activities. Cost of services increased $60.0 million, or 104.7%, to $117.3 in 1996 from $57.3 in 1995. As a percentage of revenues, cost of services increased to 75.4% in 1996 from 73.3% in 1995. This increase was due in part to the addition of service agents and other employees associated with the expansion of call center capacity in Europe. The European call centers were not fully utilized throughout the year, and as a result, cost of services were incurred without a commensurate increase in revenues. Selling, General and Administrative ("SG&A") Expenses. SG&A expenses include all other costs associated with supporting the Company's business including management, sales and marketing, facilities cost, depreciation and human resource management. SG&A expenses increased $15.1 million, or 62.9%, to $39.1 million in 1996 from $24.0 million in 1995. As a percentage of revenues, these expenses decreased to 25.2% in 1996 from 30.7% in 1995. This decrease was due primarily to the leveraging of these expenses over a larger revenue base. Nonrecurring Charges. During the fiscal year ended December 31, 1996, the Company recorded a pre-tax charge of $4.5 million associated with the consolidation of certain European locations, recruitment of certain members of management and establishment of new compensation and benefit plans. See Note 5 of Notes to Consolidated Financial Statements. Income (Loss) from Operations. Loss from operations increased $2.3 million to $5.4 million in 1996 from $3.1 million in 1995, as the result of the foregoing factors. Excluding the nonrecurring charge recorded in 1996, loss from operations in 1996 was $0.9 million. Net Income (Loss). Net loss increased to $4.7 million in 1996 from $2.3 million in 1995. The Company recorded a tax benefit of $0.9 million in 1996 as compared to $0.8 million in 1995. Excluding the nonrecurring charge incurred in 1996, the net loss was $1.4 million. 18 YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994 Revenues. Revenues increased $40.8 million, or 109.1%, to $78.2 million in 1995 from $37.4 million in 1994. This increase consisted of $26.7 million of revenues from existing clients and $14.1 million of revenues from new clients. International revenues increased $5.4 million, or 225.0%, to $7.8 million in 1995 from $2.4 million in 1994. The Company increased its capacity through the opening of a call center in North America in the fourth quarter of 1994 and three call centers in North America and two in Europe in 1995. The Company closed one call center in Europe in 1995. Cost of Services. Cost of services increased $34.4 million, or 150.2%, to $57.3 million in 1995 from $22.9 million in 1994. As a percentage of revenues, cost of services increased to 73.3% in 1995 from 61.2% in 1994. This increase was due primarily to the addition of service agents and call center management associated with the expansion of call center capacity in both domestic and European operations. The new call centers were not fully utilized throughout the year, and as a result, cost of services were incurred without a commensurate increase in revenues. SG&A Expenses. SG&A expenses increased $13.4 million, or 126.4%, to $24.0 million in 1995 from $10.6 million in 1994. As a percentage of revenues, these expenses increased to 30.7% in 1995 from 28.5% in 1994. This increase was due primarily to increased expenses incurred following the CSI-MMI Merger and costs associated with the addition of two new call centers in the second half of 1995. Income (Loss) from Operations. Loss from operations increased $7.0 million to a loss of $3.1 million in 1995 from income of $3.9 million in 1994, as the result of the foregoing factors. Net Income (Loss). Net loss increased to $2.3 million in 1995 from net income of $2.1 million in 1994. The Company recorded a tax benefit of $0.8 million in 1995 as compared to a tax provision of $1.7 million in 1994. QUARTERLY RESULTS AND SEASONALITY The following table sets forth certain unaudited financial data of the Company for each of the quarters in 1995 and 1996. This information has been derived from unaudited financial statements that, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such quarterly information. The operating results for any quarter are not necessarily indicative of results to be expected for any future period.
QUARTER ENDED -------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1995 1995 1995 1995 --------- -------- --------- -------- (IN THOUSANDS) Revenues............................. $13,215 $14,423 $20,258 $30,347 Operating expenses: Cost of services................... 8,297 10,344 15,692 23,005 Selling, general and administrative expenses.......................... 4,049 4,743 6,356 8,846 Nonrecurring charges............... -- -- -- -- ------- ------- ------- ------- Income (loss) from operations........ 869 (664) (1,790) (1,504) Interest expense..................... -- -- -- -- Net income (loss).................... $ 422 $ (479) $(1,162) $(1,053) ======= ======= ======= =======
QUARTER ENDED ------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1996 1996 1996 1996 --------- -------- --------- -------- (IN THOUSANDS) Revenues............................. $33,729 $37,154 $38,516 $46,099 Operating expenses: Cost of services................... 26,841 27,102 29,637 33,729 Selling, general and administrative expenses.......................... 8,204 9,411 10,035 11,460 Nonrecurring charges............... -- -- -- 4,500 ------- ------- ------- ------- Income (loss) from operations........ (1,316) 641 (1,156) (3,590) Interest expense..................... 51 49 45 43 Net income (loss).................... $ (969) $ 370 $ (890) $(3,196) ======= ======= ======= =======
19 The Company's revenues in the fourth quarter of 1995 and 1996 increased in part due to the seasonally higher volume of calls attributable to its hardware manufacturer clients. The Company expects that increased revenues from software publishers and online service providers will lessen this seasonal effect in future periods. The Company could experience quarterly variations in revenues and operating income as a result of many factors, including the introduction of new products, platforms or technologies by clients or potential clients, the introduction of new services by the Company, actions taken by competitors, the timing of the establishment or termination of client agreements, the allocation of support requests by clients among various support providers, the timing of additional selling, general and administrative expenses incurred to acquire and support new or additional business and changes in the Company's revenue mix among its various service offerings. Many of the factors that could cause such variations are outside of the control of the Company. In connection with certain contracts, the Company could incur costs in periods prior to recognizing revenues under those contracts. The Company must plan its operating expenditures based on revenue forecasts, and a revenue shortfall below such forecasts in any quarter would likely adversely affect the Company's operating results for that quarter. The Company's revenues may be difficult to forecast because the Company's sales cycle is relatively long and may depend on factors such as the size and scope of assignments, the degree of penetration of clients' new products and general economic conditions. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has been operated as a division, and since the CSI-MMI Merger in 1995 its primary source of liquidity has been investments from the Parent Company. The Company expects to seek to establish a bank line of credit for up to $30 million following the closing of this offering. Net cash provided by operating activities increased $6.7 million to $1.4 million in 1996 compared to a use of $5.3 million in 1995. This increase was the result of an increase of $7.3 million in net income before depreciation and other non-cash charges to $11.5 million in 1996, excluding a nonrecurring charge of $4.5 million, compared to $4.2 million in 1995, offset somewhat by changes in working capital. Net cash used in investing activities decreased $4.4 million to $19.7 million in 1996 compared to $24.1 million in 1995, principally due to less rapid expansion of call center facilities. In 1996, the Company opened two new call centers while closing one call center in Europe. In 1995, the Company opened three new call centers in North America and two new call centers in Europe while closing one call center in Europe. Net cash provided by financing decreased $9.9 million to $19.3 million in 1996 compared to $29.2 million in 1995. These amounts represent primarily transfers from the Parent Company. The decrease was the result of lower cash requirements necessary to fund the Company's expansion. Net cash used by operating activities increased $5.4 million to a use of $5.3 million in 1995 compared to cash provided by operating activities of $0.1 million in 1994. The increase in cash used by operating activities was the result of a decrease of $0.2 million in net income before depreciation and other non-cash charges to $4.2 million in 1995 from $4.4 million in 1994, as well as changes in working capital associated with the Company's growth. Net cash used in investing activities increased by $18.0 million in 1995 to $24.1 million compared to $6.1 million in 1994, principally due to the Company's accelerated expansion in call center facilities. In 1995, the Company opened three new call centers in North America and two new call centers in Europe while closing one in Europe. Net cash provided by financing increased $23.1 million to $29.2 million in fiscal 1995 compared to $6.1 million in 1994. These amounts represent primarily transfers from the Parent Company necessary to fund the Company's expansion. 20 Capital expenditures were $20.0 million, $24.1 million and $7.7 million in 1996, 1995 and 1994, respectively. Historically, capital expenditures have been, and future expenditures are anticipated to be, primarily for facilities and equipment to support expansion of the Company's operations and additions to the Company's call and data management systems. The Company plans to make capital expenditures of approximately $20 million in 1997, of which approximately $2.5 million has been incurred through March 31, 1997. The Company believes that funds generated from operations, the net proceeds of this offering, and credit expected to be available under a bank facility will be sufficient to finance its current operations, planned capital expenditures and internal growth for at least 12 months. However, if the Company were to make any significant acquisitions for cash, it may be necessary to obtain additional debt or equity financing. 21 BUSINESS Stream is a leading worldwide provider of outsource technical support services. The Company provides support services via the telephone, e-mail and the Internet primarily to customers of leading software publishers, hardware manufacturers and online service providers. The Company's service agents answer questions, diagnose problems and resolve technical difficulties, ranging from simple error messages to wide area network failures. The Company employs more than 4,300 service agents, who resolve inquiries in 11 languages at ten call centers located in the U.S., Germany, France, the U.K. and the Netherlands. By focusing on technical support, a more complex activity than traditional teleservices, Stream believes that it is able to differentiate itself from its competitors and provide its clients with high quality service and a cost-effective solution to their technical support needs. Stream's clients include software publishers such as Microsoft, Netscape, SunSoft and Symantec; hardware manufacturers such as Apple Computer and Hewlett-Packard; and online service providers such as CompuServe, The Microsoft Network ("MSN") and Sprint. The Company also provides support for companies in emerging market segments such as online financial services and interactive video services. In addition, the Company provides corporate help desk services to major corporations, including Norell Services and Shell. The Company has recently begun to offer its services directly to end users in the consumer/small office/home office ("SOHO") market. Stream's corporate client base has grown from three clients in 1992 to 137 clients as of February 1, 1997, and the Company currently supports over 70 products for its top ten clients. INDUSTRY BACKGROUND Information technology continues to proliferate due in part to increased usage of computers and peripherals, growth in the mobile workforce, increased international demand and popularization of the Internet. With growing product complexity, shorter product life cycles and an increasing number of products and multi-vendor computer and network configurations, users need greater levels of assistance to more effectively utilize their technology. As a result, the demand for technical support services via the telephone, e-mail and the Internet is increasing. As the volume and complexity of technical support increases, software publishers, hardware manufacturers, online service providers and other organizations are finding it increasingly difficult and expensive to service all their support needs in-house. It is estimated that one in six employees of software publishers performs technical support functions, up from one in twelve employees in 1989, and that the cost of technical support now amounts to approximately 4% and 8% of the revenues of hardware manufacturers and software publishers, respectively. In addition, technical support is especially challenging to undertake as a non-core function because of the need for ongoing capital investment in specialized equipment, the attendant workforce management challenge and the inherent need for scale. As a result, companies are increasingly outsourcing technical support services to third- party technical support providers as part of an overall effort to focus internal resources on core competencies, improve operating efficiencies and reduce costs. Through the development of sophisticated computer and telecommunications technologies, including advanced call management, call tracking, and database management systems, these outsource providers have increased the efficiency and effectiveness of their technical support programs. Outsource technical support services have three primary components: (i) managing product support for technology vendors, including software publishers, hardware manufacturers and online service providers; (ii) providing help desk services to large corporations; and (iii) providing support services directly to consumers. New applications for technical support services are expected to develop as technology is increasingly used in consumer products and services, such as online banking and personal digital systems. Dataquest estimates that outsource technical support services provided by third parties to software publishers, hardware manufacturers and online service providers totaled approximately $2 billion 22 in 1996. In addition, corporations are increasingly seeking to outsource their internal help desk functions. The Gartner Group predicts that more than 40% of companies with internal help desks will outsource a portion of this function by 1998, compared to 15% in 1995. BUSINESS STRATEGY Stream believes that it is well-positioned to capitalize on the accelerating trend toward outsourcing technical support services. Key elements of the Company's business strategy include the following: Leverage Leading Market Position. The Company believes that it has developed a scale of operations and technical support expertise that differentiate it from its competitors. The Company's expertise, reputation and position as a leading worldwide provider of outsource technical support services have helped it build a client base that includes many leading information technology providers. The Company believes it is involved in most major support proposal requests, from both established information technology companies and companies developing emerging technology applications. The Company believes that its scale of operations and infrastructure enable it to implement effectively and in a timely manner large support programs for new products and clients. The Company plans to leverage its reputation, scale and expertise to continue to effectively service its existing clients as well as attract new clients. Focus on Technical Support Services. By focusing on technical support, a more complex activity than traditional teleservices, Stream believes that it is able to differentiate itself from its competitors and provide its clients with high quality service and a cost-effective solution to their technical support needs. Currently, the Company's clients include principally software publishers, hardware manufacturers, online service providers and, to a lesser extent, major corporations outsourcing corporate help desk functions. As new uses for technology continue to develop, such as online banking and personal digital systems, the Company expects to leverage its technical support expertise to expand its client base and service offerings. Emphasize Quality Service. Stream's commitment to quality service is critical to its clients and has contributed to the Company's reputation as a preferred vendor of technical support services. Accordingly, the Company encourages its clients to include quality assurance procedures and performance requirements in their agreements with the Company. The Company has won numerous awards for its services, including Software Support Professionals Association Star Awards for Software Technical Assistance for the last four years and EuroChannel's Innovator Award in 1996. Stream was also recently given special recognition by Microsoft for Excellence in Client Satisfaction. Utilize Sophisticated Technology Infrastructure. The Company utilizes sophisticated telecommunications and computer technology, open systems architecture and knowledgebase management, which enable it to offer high quality technical support. Through the use of this advanced technology, support requests and related information are relayed seamlessly between Stream and its clients, allowing for a connection that is transparent to the end user. Stream's use of an open architecture-based system allows the Company to add new capacity and technology as needed. The Company also uses sophisticated in-house and client database technology to capture and utilize information gathered from the millions of support requests it receives annually. Expand Multinational Presence. The Company believes that the trend toward outsourcing technical support occurring in the U.S. is also occurring in international markets. In addition, Stream believes that many companies, including certain of its existing clients, are seeking large and sophisticated technical support providers with international support capabilities. To address these opportunities, Stream has expanded geographically, with five call centers in Europe, the establishment of a joint venture in Japan with Fujitsu Limited ("Fujitsu") and support capabilities in 11 languages. In order to better serve its clients, Stream has grown its call center network internally, rather than through acquisitions, which has 23 enabled the Company to maintain its quality standards and use compatible technology throughout its network of call centers. Maintain Excellence in Human Resource Management. Because of the complex nature of its services, Stream devotes significant resources to attract, retain and manage a well-trained and stable work force. The Company located its initial call centers in metropolitan areas near colleges and universities in order to have access to a large number of skilled employees. Over two- thirds of the Company's 4,300 service agents are permanent full-time employees, and the Company employs experts in numerous products and platforms, ranging from advanced programming languages such as C++, JAVA and VisualBasic to common desktop applications. GROWTH STRATEGY Stream's objective is to expand and enhance its position as a leading provider of outsource technical support services via the telephone, e-mail and the Internet. Key elements of the Company's growth strategy include the following: Expand Relationships with Existing Clients. Stream believes there is a significant opportunity to increase sales to its core client base of software publishers, hardware manufacturers and online service providers as these clients increasingly outsource technical support activities. To date, a large portion of the Company's growth has been attributable to increased sales to existing clients. For example, revenues from companies that were clients of the Company in both 1995 and 1996 increased approximately 85% in 1996. The Company targets opportunities to increase the size of its current technical support programs and also seeks to support additional products on behalf of its clients. For example, since 1992 the number of products supported by the Company for a large software publisher has increased from three to 25. In addition, during 1996 the number of products supported for a large hardware manufacturer increased from one to eight. Establish New Client Relationships. The Company seeks to establish new client relationships, particularly in emerging segments of the information technology market. For example, the Company began supporting Netscape's Internet browser in 1994. The Company believes there are also opportunities to add new clients in the corporate help desk market as a result of the continuing trend of large corporations to outsource their internal technical support activities. Stream believes its reputation for quality service and existing support capabilities provide it with the opportunity to become a preferred provider of these services. In addition, the Company believes that it will benefit from any future growth in the consumer/SOHO market. As a result of its efforts to diversify its client base, Stream has increased its number of corporate clients from three clients in 1992 to 137 as of February 1, 1997. Capitalize on Growth of Technology-Enabled Products. The Company believes that advances in information technology will create opportunities to sell new services to existing clients and to serve emerging client segments. In particular, Stream believes that companies in all industries will increasingly incorporate information technology into their products and services and consequently will need to provide technical support services for new applications, including online banking and interactive video services such as the digital satellite system. Pursue Strategic Alliances and Acquisitions. While the Company's growth to date has been through the internal establishment of additional call centers, the Company may in the future selectively pursue strategic alliances and acquisitions that extend its presence into new markets or industries, expand its client base, add new services or expand its operations. In particular, the Company believes there will be domestic and international acquisition opportunities as the industry consolidates. The Company may also seek to establish additional strategic alliances, such as the Company's joint venture with Fujitsu that gives the Company a presence in Japan. 24 SERVICES The Company provides telephone-based and electronic support services to end users of hardware and software products and online services. Assistance is delivered through direct interaction with end users and corporate help desk personnel. Services include resolution of problems relating to the configuration and set-up, installation and interoperability of different products, and the level of support requests ranges from simple error messages to complex wide area network failures. These services cover a broad set of technologies, including operating environments, applications, databases, communication and network products, systems tools, development environments and Internet/intranet products. The Company provides support for multiple stages of a product's life cycle, including alpha and beta support, initial release, upgrade introduction and sunset product support. The Company's technical support services are provided 24 hours a day, seven days a week, primarily through telephone dialogues with Company service agents. Technical support is also offered through online connections and e- mail. In response to the growing demand for electronic support, the Company anticipates that it will expand its electronic support offerings and, in 1997, offer support via its site on the World Wide Web. The Company offers the following technical support packages: Custom Outsource Support. Stream provides custom outsource support services to large clients with substantial support demands. The Company tailors these programs to meet the needs of a specific client and will typically provide a dedicated team of service agents, interface with the client's systems and adhere to the client's queue times and other service requirements. Clients that use custom outsource support generally commit to purchase a minimum support request volume. While custom outsource support typically involves support of multiple client products under various agreements that often contain initial terms of one year, the Company's overall relationships with its custom outsource support clients tend to be longer-term in nature. The Company negotiates each custom outsource support agreement individually. Pricing is typically on a per-minute, per-incident, per-call or, for certain low-volume applications, per-agent basis. Custom outsource support accounted for a substantial majority of the Company's revenues in 1996. Multi-Client Support. Multi-client support is offered primarily to clients whose call volume does not warrant custom outsource support and to corporate help desk clients. Multi-client support is "cross-queued" so that a single service agent is trained to handle products of multiple clients. This permits small and medium-sized companies and corporate help desk clients to utilize the Company's expertise and infrastructure on a more cost-effective basis. As with custom outsource support, the Company negotiates each multi-client support contract individually, and pricing is typically on a per-minute, per- incident, per call or per-agent basis. Individual End User Support. End user support services are offered through packages of telephone support sold directly to end users. In 1997, the Company plans to launch its Internet-based electronic support service, which will provide end users with a variety of ways to obtain answers to technical support questions on the World Wide Web, including Web responses and online chat. Individual end user support services are currently priced on a per- incident basis depending on response time and service level. CLIENTS The Company's clients include leading software publishers, hardware manufacturers, online service providers and Fortune 1000 corporations. In 1996, each of Microsoft (including MSN), Hewlett Packard, Compaq and CompuServe accounted for over 10% of the Company's revenues. The Company's ten largest clients accounted for approximately 92% of the Company's revenues in 1996. See "Risk Factors--Dependence on Key Clients." The Company sells its technical support services to four client segments: 25 Information Technology Companies. A substantial majority of the Company's revenues to date have been derived from support services provided to information technology companies. The Company believes there is a significant opportunity to increase sales to this core client base as these clients increasingly outsource technical support activities. The Company's information technology clients include software publishers such as Microsoft, Netscape, SunSoft and Symantec; hardware manufacturers such as Apple Computer and Hewlett-Packard; and online service providers such as CompuServe, MSN and Sprint. The Company also provides support for companies in emerging market segments such as online financial services and interactive video services. Corporate Help Desks. A segment targeted by the Company for future growth is the corporate help desk support market. Currently, only a small percentage of the Company's revenues are generated from large corporations that outsource hardware and software help desks to third parties or use third party providers to augment their internal support staff. The Company plans to increase its focus on this market with targeted marketing programs and a variety of pricing options. The Company's corporate help desk clients include Norell Services and Shell. Individual End Users. An additional segment targeted by the Company for growth is the consumer/SOHO market. In order to reduce costs, the Company believes hardware manufacturers and software publishers will over time begin to shift a portion of their increasing support burden directly to individual end users. Although these end users are expected to continue to represent a small percentage of the Company's business, the Company believes the aggregate number of support requests from individual end users will increase. The Company intends to market support services to individual end users through VARs, systems integrators, retail establishments and direct-to-consumer programs. Other. Along with continued focus on its traditional client base, the Company intends to pursue new areas of technical assistance for specific vendors in other technology-enabled industry segments, including financial services, consumer electronics, entertainment products, cable television, insurance and health care. Microsoft Relationship Stream has been providing technical support for Microsoft, the Company's largest client, since 1992. While revenues from Microsoft have increased each year since 1992, the Microsoft relationship accounted for approximately 40% of the Company's total revenues in 1996 as compared to 57% in 1995 and 73% in 1994. The Company's relationship with Microsoft is multi-faceted and includes support for many of Microsoft's desktop and language products and MSN. The primary Microsoft agreement, which relates to support of desktop and language products, continues to be subject to periodic renewal by Microsoft, and the current term will expire on September 1, 1997 unless renewed by Microsoft. OPERATIONS AND QUALITY ASSURANCE Call Center Operations End users of the Company's services dial a technical support number, which is often listed in the product manual, and are connected by the client, or in some cases directly, to an appropriate Stream service agent. The service agent answers the call and in many cases simultaneously receives on his or her computer screen information regarding the caller. The service agent may collect supplemental information from the caller such as location, company, product or other information relevant for client billing. The service agent is specially trained in the applicable product and acts as a transparent extension of the client in answering questions, diagnosing problems and resolving technical difficulties. Using a variety of tools, including linked workstations that give each service agent access to common databases of acquired knowledge, peer support and proprietary materials, the agent resolves the support request. Following the 26 resolution of the call, the agent will typically log information regarding the call into the Company's call tracking system. Every service agent is equipped with one or more personal computers with relevant desktop application software releases. Call centers are outfitted with software libraries where agents can test new versions of a client's product or view client product demonstrations. Agents use advanced labs and mini-labs equipped with hardware, software and network configurations that enable them to replicate the clients' systems when diagnosing problems. The Company's call centers contain emergency protection, including power backup in the event of electrical failure, call routing through alternative offices of its long distance telecommunications carriers, backup servers and files, halon-protected computer rooms, sprinkler systems and 24-hour security. Call centers in the U.S. are connected through multiple fiber optic voice/data T1 and T3 circuits provided by third parties to form an integrated and redundant wide area network, allowing rerouting of telephone calls to other call centers in the event of a local telecommunications failure. The Company also maintains tape backups and offsite storage to assure the integrity of its reporting systems and databases. See "Risk Factors--Risk of Emergency Interruption of Call Center Operations." Quality Assurance The Company monitors and measures the quality and accuracy of its end user interactions through quality assurance procedures that are currently implemented at each call center and, in some cases, by its clients. The Company continuously monitors call pickup time, length of call queue and other support request information. This data is used for both internal and client reporting. Stream and its clients also track client satisfaction using surveys and periodic call monitoring. This monitoring allows the Company to measure service levels and resource commitments. In addition, mandatory coaching by consultants, managers, mentors and peers helps teach new ways to approach technical problems and provides constructive feedback, and employees are incented to meet internal quality goals. The Company encourages its clients to include quality assurance procedures and performance requirements in their agreements with the Company. Accordingly, many of the Company's client agreements contain provisions defining specific levels of service performance and satisfaction. The Company's commitment to quality service has been critical to its ability to establish and maintain client relationships. The Company has won numerous awards for its services, including Software Support Professionals Association Star Awards for Software Technical Assistance for the last four years and EuroChannel's Innovator Award in 1996. The Company was also recently given special recognition by Microsoft for Excellence in Client Satisfaction. The Company intends to supplement its quality assurance procedures through the establishment in 1997 of a central quality assurance department, which the Company believes will further increase the efficiency and effectiveness of the quality assurance process. Personnel and Training Because of the complex nature of its services, Stream devotes significant resources to attract, retain and manage a well-trained and stable work force. The Company located its initial call centers in metropolitan areas near colleges and universities in order to have access to a large number of skilled employees. Over two-thirds of the Company's 4,300 service agents are permanent full-time employees. Service agents receive two to four weeks of initial training before interacting with end users plus a minimum of one to three weeks per year of on-going training. The Company employs experts in numerous products and platforms, ranging from advanced programming languages such as C++, JAVA and VisualBasic to common desktop applications. The Company has an established career path for its service agents, who over time gain more responsibility and a broader, more sophisticated product portfolio. See "Risk Factors--Attraction and Retention of Employees and Key Executives." 27 FACILITIES The Company currently maintains ten call centers in the U.S. and abroad, ranging in size from approximately 14,400 to 150,000 square feet. The following table sets forth certain information as of February 28, 1997 with respect to each call center:
APPROXIMATE NUMBER OF FULL-TIME APPROXIMATE APPROXIMATE LEASE SERVICE NUMBER OF SITE LOCATION SQUARE FOOTAGE EXPIRATION DATE AGENTS (1) WORKSTATIONS - ------------- -------------- --------------- ----------- ------------ U.S. Centers Beaverton, Oregon (Gemini Facility).... 22,600 3/31/99 268 234 Beaverton, Oregon (Murray Facility).... 89,000 9/30/00 823 721 Canton, Massachusetts. 99,900 1/31/00 573 745 Dallas, Texas (LBJ Fa- cility).............. 97,900 10/31/00 794 718 Dallas, Texas (Trinity Facility)............ 150,000 9/30/01 1,338 1,188 Westwood, Massachu- setts (2)............ N/A N/A 105 155 International Centers Amsterdam, the Nether- lands (3)............ 19,800 12/31/99 231 220 Apeldoorn, the Nether- lands (3)............ 15,300 N/A 30 50 Munich, Germany....... 15,500 10/15/06 86 100 Londonderry, Northern Ireland (4).......... 30,000 N/A 47 250 Velizy, France........ 14,400 11/15/04 74 95 ------- ----- ----- Total............... 554,400 4,369 4,476
- -------- (1) Includes full-time temporary service agents. (2) This facility has been shared among various Stream business units. In March 1997, the Company relocated employees at this facility to its Canton, Massachusetts facility. (3) In 1997, the Company plans to consolidate these facilities into a new approximately 50,400 square foot facility in the Netherlands. (4) A written lease is presently being negotiated between the landlord of this facility and the Company. The Company's multiple time-zone operations permit flexible service scheduling and more efficient telecommunications management, as work loads can be shifted from one geographic area to another to aid call handling during peak periods. The telecommunications and computing networks of each site are linked, allowing certain cross-site information sharing. In addition to the consolidation of two call centers in the Netherlands into a new larger facility, the Company anticipates that it will open at least one new call center in the U.S. in 1997. See "Risk Factors--Ability to Manage Growth." New site locations are selected based on access to a well-educated and technically proficient labor market and on labor and infrastructure costs. Additionally, in order to minimize start-up costs associated with a new center, the Company attempts to identify sites where local, state or federal land or training grants are available. The Company plans to limit the size of new call centers to 80,000 square feet, which translates into a maximum of approximately 700 service agent workstations. The Company may also seek to establish multiple site support locations within certain defined geographic areas, allowing for improved "fault-tolerance" and disaster recovery management. This will help ensure consistent service levels across the Company's sites in case of emergency, an important ingredient for client support excellence. 28 TECHNOLOGY Stream believes that the effective integration of sophisticated telecommunications and computer technology is essential to providing rapid, cost-effective deployment of its technical support services. The Company's call centers use advanced automatic call distributor systems and a variety of commercially available and proprietary software to provide effective client service. The Company's call centers are connected by a worldwide frame relay network for routing data. In addition, the Company uses a combination of public (virtual private networks) and private voice facilities to interconnect its call centers. These worldwide data and voice facilities provide sophisticated and reliable routing capabilities that enable both data and voice traffic to be routed around network and facilities failures. Stream's advanced client/server architecture is closely integrated with its telecommunications systems and allows (i) rapid deployment of software for technical support activities, (ii) a high degree of flexibility for modifying network architecture when required to support client needs and (iii) knowledge capture and analysis for support service improvement. The Company believes these systems provide a competitive advantage in retaining existing clients and attracting new business. As of February 28, 1997, the Company had approximately 40 employees dedicated to information systems management and maintenance. To provide support for its clients in a timely and cost-effective manner, Stream also relies on its extensive in-house knowledgebase as well as the knowledgebases of its clients. The data acquired from many of the millions of support requests received annually by the Company are captured, processed and added to the client's database or, in some cases, into the Company's in-house database. Using linked workstations, many service agents have access to these common databases of acquired knowledge, often allowing support requests to be solved quickly without additional research. In this way, Stream's service agents do not have to continually "reinvent the wheel," which the Company believes affords a higher level of client satisfaction and increased productivity. See "Risk Factors--Dependence on Key Clients" and "Risk Factors--Risks Associated with Rapidly Changing Technology." INTERNATIONAL OPERATIONS The Company believes that the trend toward outsourcing technical support occurring in the U.S. is also occurring in international markets. In addition, Stream believes that many companies, including certain of its existing clients, are seeking large and sophisticated technical support providers with international support capabilities. To address these opportunities, Stream has expanded geographically, with five call centers in Europe, the establishment of a joint venture in Japan with Fujitsu and support capabilities in 11 languages. As of February 28, 1997, the Company had approximately 470 permanent and 60 temporary full-time employees located outside of the U.S. and sold its services to clients in seven countries. In order to better serve its clients, Stream has grown its call center network internally, rather than through acquisitions, which has enabled the Company to maintain its quality standards and use compatible technology throughout its network of call centers. The Company has entered into a Joint Venture Agreement with Fujitsu pursuant to which Stream and Fujitsu have become joint owners of a Japanese corporation that sells and licenses software products and provides computer consulting and support services. The joint venture licenses certain technology and know-how from Stream and gives Stream a presence in Japan. In 1996, revenues from the Company's services outside the U.S. totaled approximately $21 million, representing 13% of the Company's total revenues. International revenues have increased in absolute dollars and as a percentage of revenues in each year since 1993, and the Company anticipates that international revenues will continue to account for an increasing percentage of its total revenues. The Company may encounter difficulties in marketing, selling and delivering its services outside of the U.S. due to differences in cultures, languages and labor and employment policies and differing political, social and economic systems, and the Company is subject to risks associated with international operations and sales. See "Risk Factors--Risks Relating to International Operations." 29 SALES AND MARKETING The Company's sales objective is to develop long-term relationships with existing and potential clients to become the preferred supplier of their technical support requirements. As a result of the Company's expertise and reputation, the Company's client base includes leading information technology providers, and the Company believes it is involved in most major support proposal requests, both from established information technology companies and companies developing emerging technology applications. The Company sells its services through a direct sales organization, including new business account managers dedicated to accounts according to client segment. Account managers are assigned to a limited number of accounts in order to develop a complete understanding of each client's particular needs and to form strong client relationships. Account managers are also encouraged to sell additional services offered by the Company. Both custom outsource support services and multi-client support services are sold through dedicated new business account managers, and corporate help desk services are sold through telesales agents. In 1997, the Company plans to offer Internet-based electronic support via its site on the World Wide Web. Stream invests significant resources during the development of a client relationship to understand the client's technical support processes, systems and requirements. The Company assesses the client's needs and goals and, with input from the client, develops a technical support solution. As part of its marketing efforts, the Company invites potential and existing clients to visit its call centers, where the Company can demonstrate its sophisticated telecommunications and call tracking technology, its quality assurance procedures and the specialized knowledge of its service agents. The Company may also emphasize its ability to rapidly accommodate a new client or a significant increase in business from an existing client through its linked telecommunications and computing networks and its ability to establish new call centers in under three months. In addition to the Vice President, Sales, as of February 28, 1997 the Company employed five sales account managers responsible for new accounts as well as three business unit directors and three product managers who are responsible for maintaining existing client relationships on a day-to-day basis. The Company plans to add additional sales personnel as necessary to obtain new information technology clients, better sell additional services to existing clients and address emerging market segments such as corporate help desks and companies outside the technology industry offering information technology products and services. COMPETITION The industry in which the Company competes is extremely competitive and highly fragmented. The Company believes many of its clients purchase technical support services primarily from a limited number of preferred vendors. The Company's competitors include corporations that may possess greater resources, greater name recognition and a more established client base than the Company. The Company believes its principal competitors are currently National TechTeam, SITEL, Sykes and TeleTech. In addition, the Company competes with organizations that provide technical support through in-house personnel. As a result of this competition, client agreements may be subject to pricing pressure, and competition for contracts for certain of the Company's services may take the form of competitive bidding in response to requests for proposals. In addition, clients may require vendors to provide services in multiple locations and meet client volume and satisfaction thresholds. Such pricing pressures and contract terms could have a material adverse effect on the Company. The Company believes that the principal competitive factors in the technical support services industry are pricing structure, reputation for quality, ability to support a wide range of products from a variety of suppliers, wide geographic coverage and the capability to deliver tailored client solutions. While the Company believes it competes favorably based on these factors, there can be no assurance that the Company will be able to compete effectively with existing or future competitors or in-house technical support operations. See "Risk Factors--Competition" and "Risk Factors--Dependence on Growth of Outsource Technical Support Services Market." 30 INTELLECTUAL PROPERTY The Company relies upon a combination of contractual provisions and trade secret laws to protect the proprietary information used in connection with its support services. The Company attempts to protect its trade secrets and other proprietary information through agreements with employees, consultants and clients. The Company does not hold any patents and does not have any patent applications pending. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate to deter misappropriation of its proprietary rights or third party development of comparable proprietary technology. The Company also licenses third party software that is important to its operations and the provision of its services, such as Aspect Telecommunication Corporation's automatic call distribution system and Scopus Technology, Inc.'s call tracking system. The inability of the Company to continue to license such software on commercially reasonable terms could have a material adverse effect on the Company. In addition, due to the nature of the Company's business, while the Company has implemented numerous policies and procedures to safeguard the confidential information of its clients, there can be no assurance that the Company will not be subject to a claim that it improperly used or disclosed proprietary client information. See "Risk Factors--Intellectual Property Risks." EMPLOYEES As of February 28, 1997, the Company had approximately 3,407 permanent full- time employees, consisting of 3,065 service agents, 330 management, administration and finance personnel and 12 sales and marketing personnel. As of such date, the Company also had approximately 1,304 temporary and 53 part- time service agents. The Company's employees are not represented by any labor union, and the Company believes its relationship with its employees is good. See "Risk Factors--Attraction and Retention of Employees and Key Executives." 31 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY EMPLOYEES POST-REORGANIZATION. The executive officers, directors and key employees of the Company effective upon the consummation of the Reorganization and the closing of this offering and their ages as of December 31, 1996 are as follows:
EXECUTIVE OFFICERS AND DIRECTORS AGE POSITION - -------------------------------- --- -------- Stephen D.R. Moore.................. 45 Chief Executive Officer and Chairman of the Board Judith G. Salerno................... 43 President, Chief Operating Officer and Director Director Director Director Director Director OTHER KEY EMPLOYEES - ------------------- Alicia T. Brophey................... 49 Vice President, General Counsel and Corporate Secretary Robert M. Johnson................... 38 Vice President, Marketing and Business Development Lloyd R. Linnell.................... 43 Vice President, Information Technology, and Chief Information Officer Julie M. Schoenfeld................. 39 Vice President, Sales Joseph P. Texeira................... 39 Corporate Controller
- -------- (1) Member of the Compensation Committee. (2) Member of the Audit Committee. Mr. Moore will serve as Chief Executive Officer and Chairman of the Board of the Company upon the closing of this offering. He has served as Chief Executive Officer of the Parent Company's outsource technical support business unit since 1996, President and Chief Operating Officer and a Director of the Parent Company since 1996 and Co-President of the Parent Company from 1995 to 1996. Mr. Moore was President of CSI from 1992 to 1995, and Vice President of European Operations of CSI from 1989 to 1992. From 1986 to 1989, Mr. Moore served as Managing Director of Softsel Computer Products, Inc., a U.K.-based distributor. Ms. Salerno will serve as President and Chief Operating Officer and a Director of the Company upon the closing of this offering. She has served as President and Chief Operating Officer of the Parent Company's outsource technical support business unit since 1996. Ms. Salerno served as the Parent Company's Senior Vice President, Service Operations, from 1995 to 1996, Vice President, Support Services, of CSI from 1993 to 1995 and Director, Support Services, of CSI from 1990 to 1993. Ms. Salerno has also held management positions with Ashton-Tate, SoftBridge Microsystems Corporation, G.E. Software International and Chase Econometrics/Interactive Data Corp. Ms. Brophey will serve as Vice President, General Counsel and Corporate Secretary of the Company upon the closing of this offering. She served as Vice President and General Counsel of CSI from 1994 to 1995 and has served as Vice President and General Counsel of the Parent Company since 1995. From 1986 to 1994, Ms. Brophey served as Corporate Counsel of Wang Laboratories, Inc. Mr. Johnson will serve as Vice President, Marketing and Business Development, of the Company upon the closing of this offering. He has served as Vice President, Marketing and Business Development, of the Parent Company since 1996. From 1992 to 1996, Mr. Johnson served as Director and Principal Analyst of Software Services Research at Dataquest. He was also previously employed by Computer Associates International and CSI as Manager, Service Marketing. 32 Mr. Linnell will serve as Vice President, Information Technology, and Chief Information Officer of the Company upon the closing of this offering. He has served as Vice President, Information Technology, of the Parent Company since 1996. From 1991 to 1995, Mr. Linnell held various positions at U.S. West Technologies Division, most recently as Vice President, Billing and Corporate Data. He was also previously employed by Bell Communications Research, Inc. and Bell Telephone Laboratories, Inc. Ms. Schoenfeld will serve as Vice President, Sales, of the Company upon the closing of this offering. She has served as Vice President, Sales, of the Parent Company since 1995. From 1994 to 1995, she managed the corporate end user help desk business unit of CSI. Ms. Schoenfeld was Regional Sales Director for Interbase Database Products at Borland International from 1989 to 1993 and was also previously employed by Avant-Garde Computing, Inc., Hewlett- Packard and Procter & Gamble Company Inc. Mr. Texeira will serve as the Corporate Controller of the Company upon the closing of this offering. He has served as Director, Finance for Support Services, of the Parent Company since 1996. From 1988 to 1995, Mr. Texeira held various positions at New England Business Service, Inc., most recently as Controller, Computer Forms and Software Division. He was previously employed by Deloitte & Touche LLP. Each officer serves at the discretion of the Board of Directors. There are no family relationships among any of the directors and executive officers of the Company. PRE-REORGANIZATION. The executive officers and directors of the Parent Company prior to the consummation of the Reorganization and the closing of this offering and their ages as of December 31, 1996 are as follows:
NAME AGE POSITION - ---- --- -------- Terence M. Leahy.......... 41 Chief Executive Officer and Director Gene S. Morphis........... 48 Senior Vice President and Chief Financial Officer Morton H. Rosenthal....... 43 Chairman of the Board of Directors Stephen J. Baumgartner.... 46 Director Cheryl A. Francis......... 43 Director Morton H. Meyerson........ 58 Director Stephen D.R. Moore........ 45 Director Mark E. Nunnelly.......... 38 Director Robert F. White........... 42 Director
Mr. Leahy has served as Chief Executive Officer and a Director of the Parent Company since 1996. He served as the Co-President of the Parent Company from 1995 to 1996. Prior to the CSI-MMI Merger, Mr. Leahy was employed by R.R. Donnelley, including as the President of the MMI Business from 1994 to 1995, as the Operations President, Americas, of the Documentation Services Group from 1993 to 1994 and as the Senior Vice President and Director of Software Sales, of the Documentation Services Group from 1990 to 1993. Mr. Morphis has served as the Senior Vice President and Chief Financial Officer of the Parent Company since 1995. He served as Chief Financial Officer of CVS, a chain drugstore retailer, from 1992 to 1995. Mr. Morphis held various positions at American Woodmark from 1989 to 1992, at Curtis Mathis from 1987 to 1988 and at Zale Corp. from 1980 to 1987. Mr. Rosenthal has served as Chairman of the Board of Directors of the Parent Company since 1995 and served as Chief Executive Officer in 1995. He was a founder of CSI and served as its Chairman and Chief Executive Officer. 33 Mr. Baumgartner has served as a Director of the Parent Company since 1996. He has been an officer of R.R. Donnelley since 1993, serving as Executive Vice President and Sector President, Global Commercial Print Sector, since 1996, Executive Vice President and Chief Administrative Officer from 1995 to 1996 and Senior Vice President, Human Resources, Compensation and Benefits, from 1993 to 1995. Prior to joining R.R. Donnelley he was employed by FRC Management, Inc., a real estate development company, from 1991 to 1993. Ms. Francis has served as a Director of the Parent Company since 1995. She has served as Executive Vice President and Chief Financial Officer of R.R. Donnelley since 1995. Previously, she served as Treasurer of FMC Corporation, a diversified manufacturing company, from 1993 to 1995 and as Adjunct Faculty Member, University of Chicago Graduate School of Business, from 1991 to 1993. Mr. Meyerson has served as a Director of the Parent Company since 1995. He has served as Chairman of the Board of Directors of Perot Systems Corp., an outsourcing technical services and consulting company, since 1992. Mr. Meyerson serves on the Board of Directors of Crescent Real Estate Equities, Co. and Ensco International Incorporated. Mr. Moore's business experience is discussed above. Mr. Nunnelly has served as a Director of the Parent Company since 1995. Mr. Nunnelley has been a Managing Director of Bain Capital, Inc. since 1992, and a General Partner of Bain Venture Capital since 1990. Prior to joining Bain Venture Capital, Mr. Nunnelly was a Partner at Bain & Company, where he managed several relationships in the manufacturing sector, and he also was employed by Procter & Gamble Company Inc. in product management. He is a Director of several companies, including Dade International Inc. Mr. White has served as a Director of the Parent Company since 1995. Mr. White has been a Managing Director of Bain Capital, Inc. since 1993, and a General Partner of Bain Venture Capital since 1987. Prior to joining Bain Venture Capital, Mr. White was a Manager at Bain & Company and a Senior Accountant with Price Waterhouse LLP. He is a Director of Brookstone, Inc. BOARD CLASSES AND COMMITTEES The Board of Directors will be divided into three classes, each of whose members serve for a staggered three-year term. The Board will be comprised of Class I Directors ( , and ), Class II Directors ( , and ), and Class III Directors ( , , and ). At each annual meeting of stockholders, a class of directors is elected for a three-year term to succeed the directors of the same class whose terms are then expiring. The terms of the Class I Directors, Class II Directors and Class III Directors will expire upon the election and qualification of successor directors at the annual meeting of stockholders held following the end of calendar years 1997, 1998 and 1999, respectively. The Board of Directors will appoint a Compensation Committee, which will establish and approve salaries and incentive compensation for certain senior officers and employees and administer and grant stock options pursuant to the Company's stock option plans. The Board of Directors will also appoint an Audit Committee, which will review the results and scope of the audit and other services provided by the Company's independent public accountants. COMPENSATION OF DIRECTORS Members of the Board of Directors may be paid for attendance at Board or committee meetings and will be reimbursed for travel expenses. 34 In 1997, the Company adopted the 1997 Director Stock Option Plan (the "Director Plan"). Under the terms of the Director Plan, options to purchase shares of Common Stock will be granted to each non-employee director upon the closing of this offering at the closing price of the Common Stock on the Nasdaq National Market on the date of the closing. Thereafter, options to purchase shares of Common Stock will be granted to each new non-employee director upon his or her initial election to the Board of Directors. Annual options to purchase shares of Common Stock will be granted to each non- employee director on the date of each annual meeting of stockholders. The options will vest in four equal annual installments beginning on the first anniversary of the date of grant; provided that the exercisability of these options will be accelerated upon the occurrence of an Acquisition Event (as defined in the Director Plan). A total of shares of Common Stock may be issued upon the exercise of stock options granted under the Director Plan. The exercise price of options granted under the Director Plan will equal the closing price of the Common Stock on the date of grant. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Company's Compensation Committee upon the closing of this offering will be . See "Certain Transactions." EXECUTIVE COMPENSATION Summary Compensation Table. The following table sets forth the compensation earned by the Company in the fiscal year ended December 31, 1996 by the Company's Chief Executive Officer and its one other executive officer whose total annual salary and bonus exceeded $100,000 in fiscal 1996 (the Chief Executive Officer and such other executive officer are hereinafter referred to as the "Named Executive Officers"):
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS ------------------- ------------ SECURITIES UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION (1) SALARY BONUS OPTIONS (2) COMPENSATION - ------------------------------- ------------------- ------------ ------------ Stephen D.R. Moore.............. $372,561 $187,501 -- $ -- Chief Executive Officer Judith G. Salerno............... 227,147 81,440 6,500 (3) President and Chief Operating Officer
- -------- (1) Excludes Messrs. Rory J. Cowan, Terence M. Leahy, Gene S. Morphis and Morton H. Rosenthal, who were executive officers of the Parent Company in 1996, but whose compensation is not included in the historical financial statements of the Company. See "Executive Officers, Directors and Other Key Employees--Pre-Reorganization." (2) The share number below has been adjusted to reflect the reverse stock split of the Common Stock to be effected prior to the closing of this offering. (3) Includes a $2,250 matching contribution made by the Company on behalf of Ms. Salerno pursuant to the Company's 401(k) Plan and $4,250 in life insurance premiums payed on behalf of Ms. Salerno. Does not include $7,251 cash value on life insurance policy. 35 Option Grants in Last Fiscal Year. The following table sets forth certain information concerning grants of stock options for Common Stock made during fiscal 1996 to each of the Named Executive Officers:
INDIVIDUAL GRANTS (2) ----------------------------------------------- POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL NUMBER OF PERCENT RATES OF STOCK SHARES OF TOTAL PRICE APPRECIATION UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERM (4)(6) OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION -------------------------- NAME (1) GRANTED FISCAL YEAR (3) SHARE (4) DATE (5) 5% 10% - -------- ---------- --------------- --------- ---------- -- --- Stephen D.R. Moore -- -- -- -- -- -- Judith G. Salerno $ $ $ $ $ $
- -------- (1) Excludes Messrs. Cowan, Leahy, Morphis and Rosenthal, who were executive officers of the Parent Company in 1996, but whose compensation is not included in the historical financial statements of the Company. See "Executive Officers, Directors and Other Key Employees--Pre- Reorganization." (2) These stock options are exercisable in eight equal semi-annual installments commencing on the date of grant. (3) Represents percentage of total options granted to employees of the Parent Company in fiscal 1996. (4) These numbers have been adjusted to reflect the Spin-Off Distribution, as described below. (5) The expiration date of an option is the tenth anniversary of the date on which the option was originally granted. (6) The amounts shown in this table represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. These gains are based on assumed rates of stock appreciation of 5% and 10%, compounded annually from the date the respective options were granted to their expiration date. The gains shown are net of the option exercise price, but do not include deductions for taxes or other expenses associated with the exercise. Actual gains, if any, on stock option exercises will depend on the future performance of the Common Stock, the optionholders' continued employment through the option period, and the date on which the options are exercised. In connection with the Reorganization, the Company will adjust the exercise prices of all outstanding employee options to reflect the Spin-Off Distribution and will grant to each optionee new options ("New Options") for a number of equity units in PLEX equal to the number of shares covered by his or her option to purchase Common Stock of the Company (the "Original Option"). The exercise prices of both options will, in the aggregate, equal the exercise price of the Original Option, and the exercise price of each option will be determined based on the relative values of the MMI Business, the Corporate Software & Technology Business and the Company's outsource technical support business, as determined by the Board of Directors of the Parent Company prior to the closing of this offering. The allocation of such options is intended to preserve in the options the amount of gain inherent in the Original Option prior to the Reorganization. Employees of the Company after the Reorganization will therefore retain their Original Options, with an adjusted exercise price, and will receive New Options to purchase equity units in PLEX. Such New Options, which will have vesting schedules equivalent to that of the Original Option, will continue to vest as long as the optionee is employed by the Company. Similarly, all employees of the Parent Company who become employees of one of the Spin-Off Subsidiaries after the Reorganization will retain their Original Options for shares of Common Stock of the Company, with an adjusted exercise price, and receive New Options in PLEX, and will continue to vest with respect to all of such options as long as they remain in the employ of the particular Spin-Off Subsidiary to which they are assigned in the Reorganization. As a result of the foregoing, Mr. Moore and Ms. Salerno and will receive options to purchase and equity units in PLEX, respectively. 36 Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values. The following table sets forth certain information concerning each stock option exercise during fiscal 1996 by each of the Named Executive Officers and the number and value of unexercised options held by each of the Named Executive Officers on December 31, 1996:
NUMBER OF SHARES NUMBER UNDERLYING VALUE OF UNEXERCISED OF SHARES OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT ACQUIRED VALUE YEAR-END FISCAL YEAR-END (2) NAME (1) ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - -------- ----------- -------- ------------------------- ------------------------- Stephen D.R. Moore...... -- -- / / Judith G. Salerno....... -- -- / /
- -------- (1) Excludes Messrs. Cowan, Leahy, Morphis and Rosenthal, who were executive officers of the Parent Company in 1996, but whose compensation is not included in the historical financial statements of the Company. See "Executive Officers, Directors and Other Key Employees--Pre- Reorganization." (2) Based on the fair market value of the Common Stock as of December 17, 1996 ($ per share), as determined by the Board of Directors, less the option exercise price, multiplied by the number of shares underlying the options. Based on a fair market value of $ (the midpoint of the range set forth on the cover page of this Prospectus), the value of the exercisable and unexercisable options held as of December 31, 1996 by Mr. Moore would have been $ and $ , respectively, and the value of the exercisable and unexercisable options held by Ms. Salerno would have been $ and $ , respectively. Other Arrangements The Company expects to enter into employment agreements with Mr. Moore and Ms. Salerno prior to the closing of this offering. In addition, the Company and each of Mr. Moore and Ms. Salerno have entered into a management retention agreement pursuant to which such person will receive severance payments equal to two times his or her annual base salary plus bonus, and certain other benefits, if he or she is terminated without cause or resigns for good reason following a change of control of the Company, and pursuant to which his or her unvested options will accelerate in the event of a change in control. The Reorganization may constitute a change in control under these agreements. EMPLOYEE BENEFIT PLANS 1997 Stock Incentive Plan. The Company's 1997 Stock Incentive Plan (the "1997 Incentive Plan") was adopted by the Company in 1997. The 1997 Incentive Plan provides for the grant of stock-based awards to employees, officers and directors of, and consultants or advisors to, the Company and its subsidiaries. Under the 1997 Incentive Plan, the Company may grant options that are intended to qualify as incentive stock options ("incentive stock options") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), options not intended to qualify as incentive stock options ("non-statutory options"), restricted stock and other stock- based awards. Incentive stock options may be granted only to employees of the Company. A total of shares of Common Stock may be issued upon the exercise of options or other awards granted under the 1997 Incentive Plan. The maximum number of shares with respect to which awards may be granted to any employee under the 1997 Incentive Plan shall not exceed shares of Common Stock during any calendar year. The 1997 Incentive Plan is administered by the Board of Directors and the Compensation Committee. Subject to the provisions of the 1997 Incentive Plan, the Board of Directors and the Compensation Committee each has the authority to select the persons to whom awards are granted and determine the terms of each award, including the number of shares of Common Stock subject to the award. Payment of the exercise price of an award may be made in cash, shares of Common Stock, a combination of cash or stock or by any other method approved by the Board or Compensation Committee, consistent with Section 422 of the Code and Rule 16b-3 ("Rule 16b-3") under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Unless otherwise permitted by the Company, awards are not assignable or transferable except by will or the laws of descent and distribution. 37 The Board of Directors or Compensation Committee may, in its sole discretion, include additional provisions in any award granted or made under the 1997 Incentive Plan, including, without limitation, restrictions on transfer, repurchase rights, commitments to pay cash bonuses, to make, arrange for or guaranty loans or to transfer other property to optionees upon exercise of options, or such other provisions as shall be determined by the Board of Directors or Compensation Committee, so long as not inconsistent with the 1997 Incentive Plan or applicable law. The Board or Compensation Committee may also, in its sole discretion, accelerate or extend the date or dates on which all or any particular option or options granted under the 1997 Incentive Plan may be exercised. The Company plans to grant, upon the closing of this offering, options to employees to purchase up to approximately shares of Common Stock under the 1997 Incentive Plan, at an exercise price equal to the initial public offering price. 1997 Employee Stock Purchase Plan. The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Company in 1997 and becomes effective upon the closing of this offering. The Purchase Plan authorizes the issuance of up to a total of shares of Common Stock to participating employees. All employees of the Company, including directors of the Company who are employees, and all employees of any participating subsidiaries whose customary employment is more than 20 hours per week and for more than five months in any calendar year are eligible to participate in the Purchase Plan. Employees who would immediately after the grant own 5% or more of the total combined voting power or value of the stock of the Company or any subsidiary are not eligible to participate. As of , 1997, the Company had approximately employees eligible to participate in the Purchase Plan. On the first day of a designated payroll deduction period (the "Offering Period"), the Company will grant to each eligible employee who has elected to participate in the Purchase Plan an option to purchase shares of Common Stock as follows: the employee may authorize an amount at a rate of 2%, 4%, 6%, 8% or 10% to be deducted by the Company from the employee's pay during the Offering Period. On the last day of the Offering Period, the employee is deemed to have exercised the option, at the option exercise price, to the extent of accumulated payroll deductions. Under the terms of the Purchase Plan, the option price is an amount equal to 85% of the fair market value per share of the Common Stock on either the first day or the last day of the Offering Period, whichever is lower. In no event may an employee purchase in any one Offering Period a number of shares which is more than 15% of the employee's annualized base pay for the prior six month period divided by 85% of the market value of a share of Common Stock on the commencement date of the Offering Period. The Board of Directors may, in its discretion, choose an Offering Period of 12 months or less for each of the offerings and choose a different Offering Period for each offering. If an employee is not a participant on the last day of the Offering Period, such employee is not entitled to exercise any option, and the amount of such employee's accumulated payroll deductions will be refunded. An employee's rights under the Purchase Plan terminate upon voluntary withdrawal from the Purchase Plan at any time, or when such employee ceases to be employed for any reason, except that upon termination of employment because of death, the employee's beneficiary has certain rights to elect to exercise the option to purchase the shares with the accumulated payroll deductions in the participant's account. 1995 Stock Option Plans. In connection with the CSI-MMI Merger, the Parent Company adopted the 1995 Stock Option Plan (the "1995 Plan"), covering shares of Common Stock, the 1995 Replacement Stock Option Plan, covering shares of Common Stock (the "1995 Replacement Plan"), and the 1995 California Stock Option Plan (the "1995 California Plan"), covering shares of Common Stock. As of , 1997, options for a total of shares of Common Stock were outstanding under these plans. After the Reorganization, no further options will be granted under these plans. 38 The 1995 Plan, 1995 Replacement Plan and 1995 California Plan (collectively, the "1995 Plans") provide for the grant of options to employees, officers and directors of, and consultants or advisors to, the Parent Company and its subsidiaries. Under the 1995 Plans, the Parent Company may grant options that are intended to qualify as incentive stock options and non-statutory options. Payment of the exercise price of an option may be made in cash, shares of Common Stock, a combination of cash or stock or by delivery of an unconditional undertaking by a broker to pay the exercise price upon settlement of a sale of the option shares. Options are not assignable or transferable except by will or the laws of descent and distribution. Savings and Retirement Program. In July 1995, the Company adopted a Savings and Retirement Program (the "401(k) Plan"), a tax-qualified plan covering all of its employees, into which the plan of CSI and a portion of the plan of R.R. Donnelley were previously merged. Each employee may elect to reduce his or her current compensation by up to 15%, subject to the statutory limit (a maximum of $9,500 in 1996), and have the amount of the reduction contributed to the 401(k) Plan. The Plan provides that the Company shall make matching contributions equal to fifty percent (50%) of the employee's contributions to the 401(k) Plan, not to exceed 3% of the employee's annual compensation. The 401(k) Plan also provides that the Company may, as determined from time to time by the Board of Directors, provide (i) a discretionary cash contribution, which will be allocated based on the proportion of the employee's compensation for the plan year to the aggregate compensation for the plan year for all eligible employees, and (ii) a profit based contribution, which will be allocated to those employees working in an operating division that has met its profitability goals for the year. All employee contributions to the 401(k) Plan are fully vested at all times and all Company contributions to the 401(k) Plan vest at a rate of twenty-five (25%) a year over a period of four years. Upon termination of employment, a participant may elect a lump sum distribution or payments in cash in annual installments not to exceed ten (10) years. The Company may amend certain provisions of the 401(k) Plan in connection with the Reorganization. 39 CERTAIN TRANSACTIONS CSI-MMI Merger In December 1993, Software Holdings, Inc. ("SHI"), which was organized by members of management of CSI (including Messrs. Moore and Rosenthal), certain affiliates of Bain Capital, Inc. ("Bain") and certain other investors, purchased CSI from its public stockholders. In April 1995, CSI and the MMI Business of R.R. Donnelley were combined in a transaction pursuant to which SHI, which owned all of the outstanding capital stock of CSI, merged with a wholly-owned subsidiary of the Parent Company, to which R.R. Donnelley had contributed the MMI Business (the "CSI-MMI Merger"). As a result of the CSI- MMI Merger, R.R. Donnelley acquired all of the outstanding shares of Class A Common Stock of the Parent Company, then representing approximately 80% of the outstanding capital stock of the Parent Company, and the former stockholders of SHI acquired all of the outstanding shares of Class B-V and Class B-N Common Stock (collectively, "Class B Common Stock") of the Parent Company, then representing approximately 20% of the outstanding capital stock of the Parent Company. In connection with the CSI-MMI Merger, the stockholders of SHI received cash distributions totaling approximately $27 million, including approximately $12.3 million distributed to certain affiliates of Bain, $4.2 million to Mr. Rosenthal and $165,000 to Mr. Moore. In addition, as part of the CSI-MMI Merger, the Parent Company granted to the former stockholders and optionees of SHI (the "SHI Stockholders"), on a pro rata basis, an option (the "Incentive Option") to acquire, for $.01 per share, a number of shares of Common Stock of the Parent Company representing, after exercise, up to 5% of the then outstanding capital stock of the Parent Company (on a fully-diluted basis including shares issued in any public offering) to the extent that the value of the Parent Company exceeded certain levels upon either a public offering or acquisition of the Parent Company occurring prior to June 30, 1997. As a result of an amendment to the Incentive Option entered into in connection with this offering, the Incentive Option will become exercisable and be exercised as to shares prior to the closing of this offering, and all share data in this Prospectus gives effect to the issuance of such shares. Pursuant to the Restated Certificate of Incorporation of the Parent Company, as in effect upon the closing of the CSI-MMI Merger, R.R. Donnelley had certain rights to call all of the outstanding shares of Class B Common Stock for purchase during specified periods at prices based on a formula, and the holders of Class B Common Stock had the right to put their shares of Class B Common Stock to R.R. Donnelley during specified periods at prices based on a formula. The Restated Certificate of Incorporation also contained certain rights of first refusal restricting the transfer of shares of Class B Common Stock; certain rights of holders of Class B Common Stock to participate in transfers of shares by R.R. Donnelley; certain rights of R.R. Donnelley to require that holders of Class B Common Stock participate in a sale of shares to a third party; and certain covenants requiring the approval of the directors elected by R.R. Donnelley and/or the holders of Class B Common Stock for specified corporate actions. All of these provisions will terminate upon the closing of this offering. In connection with the CSI-MMI Merger, the Parent Company assumed an incentive plan of SHI (the "TARSAP Plan") pursuant to which the Parent Company deposited shares of its Common Stock into an escrow account for distribution either to certain members of management of CSI upon payment of an exercise price of $ per share or to the Class B Common stockholders, depending upon the values realized upon any sale of shares of Common Stock of the Parent Company by the principal stockholders of the Parent Company. As a result of an amendment to the TARSAP Plan entered into in connection with this offering, prior to the closing of this offering such members of management will receive (upon payment of the exercise price) of the shares held in such escrow account (including shares to Mr. Rosenthal and shares to Mr. Moore) and such account shall be terminated. The remaining shares will be distributed to the holders of Class B Common Stock of the Parent Company (including shares to Mr. Rosenthal and shares to Mr. Moore) on a pro rata basis. All share data in this Prospectus gives effect to the exercise of such options upon the closing of this offering and the distribution of the remaining shares to the holders of Class B Common Stock of the Parent Company in accordance with the TARSAP Plan. 40 Pursuant to the terms of the CSI-MMI Merger, the holders of Class B Common Stock, voting as a group, and R.R. Donnelley were each entitled to elect three members of the Parent Company's Board of Directors, and together they were entitled to elect up to two independent directors. Prior to the Reorganization, the members of the Board elected by the holders of Class B Common Stock are Mr. Moore, Mr. Nunnelly and Mr. White and the members elected by R.R. Donnelley are Mr. Baumgartner, Ms. Francis and Mr. Leahy. The arrangements with respect to the election of directors will terminate upon the closing of this offering. Relationship with R.R. Donnelley In connection with the CSI-MMI Merger, in April 1995 the Parent Company and R.R. Donnelley entered into various agreements and subleases pursuant to which the Parent Company purchased certain services from R.R. Donnelley. The amount paid by the Parent Company to R.R. Donnelley pursuant to these agreements was $4.1 million and $3.4 million in 1995 and 1996, respectively. In addition, the Parent Company shares certain facilities with R.R. Donnelley. See "The Reorganization" for information concerning the continuation of certain of these arrangements after the closing of this offering. Since April 1995, the Parent Company has borrowed an aggregate of approximately $ million from R.R. Donnelley. These loans bear interest at the LIBOR rate at the time of borrowing plus 35 basis points per annum. Approximately $50 million of such loans will be assumed by the Company in connection with the Reorganization. The remaining amount of these loans will be retained by PLEX, and R.R. Donnelley will release the Company from the obligation to pay the amount retained by PLEX. The Company has engaged R.R. Donnelley to provide the financial printing services in connection with this offering. The Company believes that the cost of such services is comparable to the cost that the Company would incur if obtaining such printing services from an unrelated party. See "Risk Factors-- Ownership by R.R. Donnelley." Other In April 1995, the Parent Company and Bain entered into a management services agreement pursuant to which Bain agreed to provide to the Parent Company general executive and management services at a cost to the Parent Company of $350,000 per year. This arrangement terminated as of July 1996. In addition, in connection with the CSI-MMI Merger the Parent Company paid to Bain a fee of $1.5 million. In September 1995, the Parent Company sold and shares of Common Stock to Terence M. Leahy, then the Co-President of the Parent Company, and Rory J. Cowan, then the Chairman of the Board of the Company, respectively, at a purchase price of per share. In June 1996, the Parent Company sold shares of Common Stock to an affiliate of Morton H. Meyerson, a director of the Parent Company, at a purchase price of per share. In August 1994 and April 1996, Mr. Moore received loans from the Company in the amounts of $100,000 and $150,000, respectively, relating to certain tax obligations in connection with his exercise of options and the payment of income taxes. The loans bear interest at the rates of 5.8% and 7.34%, respectively, and are due on April 21, 2000. The full principal amount of these loans is currently outstanding. Messrs. Cowan, Leahy, Morphis and Rosenthal, each of whom is or was a director or executive officer of the Parent Company prior to the Reorganization, have entered into various employment and other agreements with the Parent Company. Such agreements are being assigned to or assumed by the Spin-Off Subsidiaries in connection with the Reorganization and are not reflected in the historical financial statements of the Company. 41 THE REORGANIZATION Prior to the closing of this offering, the Company will effect the Reorganization pursuant to which the Company will (i) contribute to the Spin- Off Subsidiaries its Corporate Software & Technology and MMI Businesses, (ii) contribute to PLEX the capital stock of the Spin-Off Subsidiaries and (iii) distribute to the Company's stockholders all of the equity interests in PLEX. Accordingly, upon consummation of the Reorganization, the only business conducted by the Company will be the outsource technical support business. The consummation of the Reorganization is a condition to the closing of this offering. Purchasers of Common Stock in this offering will not receive any part of the Spin-Off Distribution. R.R. Donnelley and certain of its affiliates, who are Selling Stockholders in this offering, own approximately % of the outstanding Common Stock of the Company. Upon the closing of this offering, R.R. Donnelley and its affiliates will own up to 39.9% of the outstanding Common Stock of the Company ( % if the Underwriters' over-allotment option is exercised in full). Following the Reorganization, R.R. Donnelley and its affiliates will also indirectly own (through ownership interests in PLEX) approximately 48.0% of the outstanding capital stock of each of the Spin-Off Subsidiaries. R.R. Donnelley has agreed that for a period of three years following the closing of this offering it will not purchase any additional shares of Common Stock that would result in it and its affiliates owning over 49.9% of the Company's outstanding Common Stock. In connection with the Reorganization and prior to the closing of this offering, the Company will enter into the following arrangements with the Spin-Off Subsidiaries, PLEX and R.R. Donnelley: Contribution Agreements. The Company will enter into a Contribution Agreement with each of the Spin-Off Subsidiaries and PLEX (collectively, the "Contribution Agreements") providing for the contribution of the Corporate Software & Technology Business to one Spin-Off Subsidiary (the "Corporate Software & Technology Subsidiary") and the MMI Business to the other Spin-Off Subsidiary (the "MMI Subsidiary"), including the assets and liabilities of such respective businesses, and the contribution of the capital stock of the Spin-Off Subsidiaries to PLEX. The Contribution Agreements contain general indemnities between the Company and the Spin-Off Subsidiaries and the procedures by which indemnification may be claimed. The Contribution Agreements provide for, on the one hand, each of the Spin-Off Subsidiaries to indemnify the Company against any losses, liabilities or damages (including attorneys' fees) incurred in connection with any of the liabilities to be assumed by such Spin-Off Subsidiary pursuant to the Contribution Agreements and, on the other hand, the Company to similarly indemnify the Spin-Off Subsidiaries in respect of any liabilities retained by the Company. In addition, in the event the Spin-Off Subsidiaries fail to provide the required indemnification and a claim for payment is made within three years of the date of this offering, R.R. Donnelley has agreed to provide such indemnification to the Company, up to an aggregate indemnity of $100 million. The Company will generally remain contingently liable for all liabilities assumed by the Spin- Off Subsidiaries. There can be no assurance that claims relating to such liabilities will not be asserted against the Company or that, if any such claim is successfully asserted, that the Company will be able to collect any indemnified amounts from the Spin-Off Subsidiaries or R.R. Donnelley. Any failure to do so could have a material adverse effect on the Company. In connection with the Reorganization, PLEX will retain its obligation to repay the total amount, other than approximately $50 million, of the loans from R.R. Donnelley to the Parent Company, and R.R. Donnelley will release the Company from such amounts retained by PLEX. The Company currently plans to use approximately $50 million of the net proceeds from this offering to repay in full the amount of the loans from R.R. Donnelley that it will assume. Transitional Service Agreements. The Company has historically depended on the businesses being transferred to the Spin-Off Subsidiaries and on R.R. Donnelley for certain financial, tax, insurance, payroll, employee benefits, information technology and other services. In connection with the Reorganization, the 42 Company will enter into agreements with the Spin-Off Subsidiaries (collectively, the "Transitional Service Agreements") for the continued provision after the Reorganization of certain services formerly shared among such entities or provided by R.R. Donnelley. Pursuant to the Transitional Service Agreements, the Company will receive from the Spin-Off Subsidiaries certain financial, tax, insurance, payroll, employee benefits, information technology and other services, and the Company will provide to the Spin-Off Subsidiaries certain legal services, outsource technical support for certain clients of the Spin-Off Subsidiaries and information technology services. The Company estimates that annual payments under the Transitional Service Agreements will total approximately $2.0 million from the Company to the Spin- Off Subsidiaries and approximately $1.0 million to the Company from the Spin- Off Subsidiaries. Each party to the Transitional Service Agreements is generally prohibited from hiring the employees of the other party and from using or disclosing the other party's confidential information other than in connection with the performance of its obligations under such agreements. The Transitional Service Agreements generally terminate on the one-year anniversary of the closing of this offering, provided that the party receiving the services may terminate the agreement with respect to some or all of such services upon 90 days' notice at any time after , 1997. After such termination, the Company will be required to provide the services it is receiving under such agreements internally or find a third-party provider of such services. There can be no assurance that the Company will be able to secure the provision of such services on acceptable terms, and the failure to do so could have a material adverse effect on the Company. The Company's historical financial statements reflect an allocation of expenses in connection with the services covered by the Transitional Service Agreements. Tax Sharing Agreement. The Company and the Spin-Off Subsidiaries will enter into a tax sharing agreement (the "Tax Sharing Agreement") that will define the parties' rights and obligations with respect to filing of returns, payments, deficiencies and refunds of federal, state and other income or franchise taxes relating to the Parent Company's business for tax years prior to and including the year in which the Reorganization occurs. In general, with respect to periods ending on or before the last day of the taxable year in which the Reorganization occurs, is responsible for (i) filing consolidated state and federal tax returns for the Stream affiliated group and (ii) paying the taxes relating to such returns. The Company and the Spin-Off Subsidiaries have agreed to cooperate with each other and to share information in preparing such tax returns and in dealing with other tax matters. Until the expiration of the applicable statutes of limitations, R.R. Donnelley has agreed to indemnify the Company in respect of any tax payable by the Company with respect to (i) any gain realized by the Company as a result of the Reorganization or the Spin-Off Distribution, which is not intended to be tax-free to the stockholders of the Company or to the Company, and (ii) any other income tax liabilities of the Company relating to the Spin-Off Subsidiaries' businesses, after taking into account the net operating loss carryforwards and other tax attributes of the Company. The Company will, however, remain contingently liable for all such taxes and liabilities, and there can be no assurance any indemnified amounts will be collected from R.R. Donnelley. Subcontracts. The Company and the Corporate Software & Technology Subsidiary will enter into subcontracts pursuant to which the Company will provide support services to several customer clients of the Corporate Software & Technology Subsidiary and the Corporate Software & Technology Subsidiary will provide certain services in connection with the Company's joint venture with Fujitsu. The Company and the Spin-Off Subsidiaries may also enter into additional subcontracts relating to bundled products and services. Subleases. The Company will enter into subleases pursuant to which the Company will sublease call center space in Apeldoorn from the MMI Subsidiary and will sublease space in Amsterdam to R.R. Donnelley. 43 Legal Proceedings. The Company is subject to certain legal proceedings relating to businesses other than the outsource technical support business. In connection with the transaction pursuant to which SHI acquired CSI for a cash payment of $15.00 per share to the public stockholders of CSI, the State of Wisconsin Investment Board and certain other former holders of an aggregate of 605,180 shares of Common Stock of CSI (and 136,750 shares that the Parent Company contends have not properly perfected their appraisal rights) are currently parties to an appraisal proceeding under Delaware law against CSI. Certain of the shares subject to this proceeding have subsequently been redeemed by the Parent Company for $15.00 per share, and the holders thereof are expected to be removed as parties. While the Company will remain the named defendant in such proceeding and remain contingently liable for the outcome, in connection with the Reorganization, the Company will assign this potential liability to the Corporate Software & Technology Subsidiary, which will agree to defend such proceeding and indemnify the Company for any costs and damages incurred as a result thereof. In February 1997, The Learning Company ("TLC") commenced legal proceedings against the Parent Company seeking an unspecified amount of damages in connection with the business relationship between TLC and the MMI Business. This proceeding is in the early stages of discovery. The Parent Company has denied all liability under TLC's complaint and has counterclaimed for an amount in excess of $26 million which it claims TLC owes to the Parent Company. While the Company will remain the named defendant in such proceeding and contingently liable for the outcome, in connection with the Reorganization, the Company will assign this potential liability (as well as any recovery on its counterclaim) to the MMI Subsidiary, which will agree to defend such proceeding and indemnify the Company for any costs and damages incurred as a result thereof. Pursuant to the Contribution Agreements, any liability relating to these legal proceedings will be transferred to the Spin-Off Subsidiaries and will be subject to the indemnification obligations of the Spin-Off Subsidiaries and R.R. Donnelley that are described above. See "Risk Factors--Ownership by R.R. Donnelley," "Risk Factors--Risks Relating to the Reorganization," "Certain Transactions" and "Principal and Selling Stockholders." 44 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock of the Company as of March 1, 1997, and as adjusted to reflect the sale of the shares of Common Stock offered hereby, by (i) each person or entity known to the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each of the Company's directors before and after the Reorganization, (iii) each of the Named Executive Officers, (iv) all directors and executive officers after the Reorganization as a group, (v) the Parent Company's Chief Financial Officer and (vi) the other selling stockholders.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR OWNED AFTER TO OFFERING (1) OFFERING (1) NAME AND ADDRESS OF --------------------- SHARES ------------------------ BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT ------------------- --------- ---------- ------- --------- ---------- 5% STOCKHOLDERS R.R. Donnelley & Sons (3) (3) (3) Company (2) .......... 77 West Wacker Drive Chicago, Illinois 60601 Bain Capital Funds (4). c/o Bain Capital, Inc. Two Copley Place Boston, Massachusetts 02116 DIRECTORS AND NAMED EX- ECUTIVE OFFICERS Stephen D.R. Moore (5). Judith G. Salerno (6).. Terence M. Leahy (7)... Morton H. Rosenthal (8)................... Gene S. Morphis (9).... Steven J. Baumgartner.. Cheryl A. Francis...... Morton H. Meyerson (10).................. Mark E. Nunnelly (11).. Robert F. White (12)... All directors and executive officers after the Reorganization as a group ( persons) (13).......
OTHER SELLING STOCKHOLDERS - -------- *Less than 1% 45 (1) Each stockholder possesses sole voting and investment power with respect to the shares listed, except as otherwise noted. Amounts shown in the above table and the following notes include shares issuable within the 60- day period following March 1, 1997 pursuant to the exercise of options. All share amounts give effect to (i) the issuance of shares of Common Stock upon exercise of the Incentive Option and (ii) the distribution of shares of Common Stock pursuant to the TARSAP Plan. See "Certain Transactions." (2) Includes shares of Common Stock held by R.R. Donnelley & Sons Company, shares of Common Stock held by R.R. Donnelley International, Inc. and shares of Common Stock held by R.R. Donnelley Norwest Inc. (3) R.R. Donnelley has granted to the Underwriters a 30-day option to purchase up to additional shares of Common Stock solely to cover over- allotments, if any. This table assumes no exercise of such over-allotment option. (4) Includes shares of Common Stock held by Bain Capital Fund IV L.P., shares of Common Stock held by Bain Capital Fund IV-B L.P., shares of Common Stock held by Information Partners Capital Fund L.P., shares of Common Stock held by BCIP Associates and shares of Common Stock held by BCIP Trust Associates. Bain Capital, Inc. exercises investment and voting power with respect to each of these funds. (5) Includes shares subject to outstanding stock options that are exercisable within the 60-day period following March 1, 1997 and shares of Common Stock held by Mr. Moore's minor children. Mr. Moore has investment and voting power over the shares held by his children but disclaims beneficial ownership of such shares. (6) Includes shares subject to outstanding stock options that are exercisable within the 60-day period following March 1, 1997. (7) Includes shares subject to outstanding stock options that are exercisable within the 60-day period following March 1, 1997. (8) Includes shares subject to outstanding stock options that are exercisable within the 60-day period following March 1, 1997. (9) Includes shares subject to outstanding stock options that are exercisable within the 60-day period following March 1, 1997. (10) Includes shares of Common Stock held by Big Bend Investments, L.P., a limited partnership, of which Mr. Meyerson is a general and limited partner. (11) Includes the shares described in Note (4) above, over which Mr. Nunnelly shares voting and investment power. Mr. Nunnelly disclaims beneficial ownership of such shares. (12) Includes the shares described in Note (4) above, over which Mr. White shares voting and investment power. Mr. White disclaims beneficial ownership of such shares. (13) Includes an aggregate of shares issuable upon the exercise of outstanding options exercisable within the 60-day period following March 1, 1997. Does not include shares of Common Stock which all executive officers and directors have the right to acquire upon the exercise of outstanding options not exercisable within the 60-day period following March 1, 1997. 46 DESCRIPTION OF CAPITAL STOCK Effective upon the closing of this offering, the Company's Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") will authorize the issuance of up to 84,675,000 shares of Common Stock, $.01 par value per share, and 1,000,000 shares of Preferred Stock, $.01 par value per share. The following summary describes the Company's capital stock as in effect upon the closing of this offering, after giving effect to the conversion of all outstanding shares of Class B Common Stock into Class A Common Stock, the reclassification of the Class A Common Stock as Common Stock and the filing of the Certificate of Incorporation reflecting such reclassification. COMMON STOCK Holders of Common Stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Accordingly, holders of a majority of the shares of Common Stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor, subject to any preferential dividend rights of outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to receive ratably the net assets of the Company available after the payment of all debts and other liabilities and subject to the prior rights of any outstanding Preferred Stock. Holders of Common Stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of Common Stock are, and the shares offered by the Company in this offering will be, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock which the Company may designate and issue in the future. PREFERRED STOCK Under the terms of the Certificate of Incorporation, the Board of Directors is authorized, subject to any limitations prescribed by law, without stockholder approval, to issue shares of Preferred Stock in one or more series. Each such series of Preferred Stock shall have such rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be determined by the Board of Directors. The purpose of authorizing the Board of Directors to issue Preferred Stock and determine its rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding voting stock of the Company. The Company has no present plans to issue any shares of Preferred Stock. See "Risk Factors--Antitakeover Provisions." DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS The Company is subject to the provisions of Section 203 of the Delaware General Corporation Law (the "DGCL"). Section 203 prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. The Company has exempted R.R. Donnelley and its affiliates (and direct transferees who acquire up to a 25% equity interest in the Company) from this restriction. The Company has agreed that if it adopts any stockholders' rights plan within three years after the closing of this offering, it will exempt from the plan R.R. Donnelley and its affiliates (and direct transferees who acquire up to a 25% equity interest in the Company). 47 The Certificate of Incorporation provides for the division of the Board of Directors into three classes as nearly equal in size as possible with staggered three-year terms. Under the Certificate of Incorporation, any vacancy on the Board of Directors, however occurring, including a vacancy resulting from an enlargement of the Board, may only be filled by vote of a majority of the directors then in office. The classification of the Board of Directors and the limitations on the removal of directors and filling of vacancies could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, control of the Company. See "Management." The Certification of Incorporation also provides that after the closing of this offering, any action required or permitted to be taken by the stockholders of the Company at an annual meeting or special meeting of stockholders may only be taken if it is properly brought before such meeting and may not be taken by written action in lieu of a meeting. The Certificate of Incorporation further provides that special meetings of the stockholders may only be called by the Chairman of the Board of Directors, the Chief Executive Officer or, if none, the President of the Company or by the Board of Directors. Under the Company's Amended and Restated By-Laws to be effective upon the closing of this offering (the "By-Laws"), in order for any matter to be considered "properly brought" before a meeting, a stockholder must comply with certain requirements regarding advance notice to the Company. The foregoing provisions could have the effect of delaying until the next stockholders' meeting stockholder actions which are favored by the holders of a majority of the outstanding voting stock of the Company. These provisions may also discourage another person or entity from making a tender offer for the Company's Common Stock, because such person or entity, even if it acquired a majority of the outstanding voting stock of the Company, would be able to take action as a stockholder (such as electing new directors or approving a merger) only at a duly called stockholders' meeting, and not by written consent. See "Risk Factors--Antitakeover Provisions." The DGCL provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation's certificate of incorporation or by-laws, unless a corporation's certificate of incorporation or by-laws, as the case may be, requires a greater percentage. The Certificate of Incorporation and the By-Laws require the affirmative vote of the holders of at least two-thirds of the shares of capital stock of the Company issued and outstanding and entitled to vote to amend or repeal any of the provisions described in the prior two paragraphs. The Certificate of Incorporation contains certain provisions permitted under the DGCL relating to the liability of directors. The provisions eliminate a director's liability for monetary damages for a breach of fiduciary duty, except in certain circumstances involving wrongful acts, such as the breach of a director's duty of loyalty or acts or omissions which involve intentional misconduct or a knowing violation of law. Further, the Certificate of Incorporation contains provisions to indemnify the Company's directors and officers to the fullest extent permitted by the DGCL. The Company believes that these provisions will assist the Company in attracting and retaining qualified individuals to serve as directors. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is Boston Equiserve L.P. 48 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have shares of Common Stock outstanding (assuming no exercise of outstanding options other than the Incentive Option). Of these shares, the shares ( shares if the over-allotment option is exercised in full) to be sold in this offering will be freely tradeable by persons other than "affiliates" of the Company (as defined in Rule 144 under the Act, "Affiliates") without restriction or further registration under the Act. All of the remaining shares of Common Stock outstanding will be "restricted securities" (the "Restricted Securities") within the meaning of Rule 144 under the Act and may not be sold in the absence of registration under the Act, unless an exemption from registration is available. SALES OF RESTRICTED SECURITIES Of the Restricted Securities, approximately shares of Common Stock will be eligible for sale in the public market immediately after this offering pursuant to Rule 144(k); of these, approximately shares are subject to Lock-up Agreements (as described below). Approximately additional Restricted Securities not subject to Lock-up Agreements will become eligible for sale in the public market in accordance with Rule 144 or Rule 701 under the Act beginning 90 days after the date of this Prospectus. Following the expiration of or release from the Lock-up Agreements, approximately additional Restricted Securities will become eligible for immediate sale, subject, generally, to compliance with Rule 144 or Rule 701. The remainder of the Restricted Securities held by existing stockholders (including those subject to Lock-up Agreements) will become eligible for sale at various times over a period of less than two years. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), including an Affiliate, who has beneficially owned Restricted Securities for at least one year is entitled to sell, within any three-month period, a number of such shares that does not exceed the greater of (i) one percent of the then outstanding shares of Common Stock (approximately shares immediately after this offering) or (ii) the average weekly trading volume in the Common Stock in the over-the-counter market during the four calendar weeks preceding the date on which notice of such sale is filed, provided certain requirements concerning availability of public information, manner of sale and notice of sale are satisfied. In addition, Affiliates must comply with the restrictions and requirements of Rule 144, other than the one-year holding period requirement, in order to sell shares of Common Stock which are not Restricted Securities. Under Rule 144(k), a person who is not an Affiliate and has not been an Affiliate for at least three months prior to the sale and who has beneficially owned Restricted Securities for at least two years may resell such shares without compliance with the foregoing requirements. In meeting the one and two year holding periods described above, a holder of Restricted Securities can include the holding periods of a prior owner who was not an Affiliate. OPTIONS Rule 701 provides that Restricted Securities which were acquired under the Company's stock plans may be resold by persons, other than Affiliates, beginning 90 days after the date of this Prospectus, subject only to the manner of sale provisions of Rule 144, and by Affiliates under Rule 144 without compliance with its one-year minimum holding period, subject to certain limitations. Rule 701 also provides that the shares of Common Stock acquired on the exercise of currently outstanding options issued under the Company's stock plans may be resold by persons, other than Affiliates, beginning 90 days after the date of this Prospectus, subject only to the manner of sale provisions of Rule 144, and by Affiliates under Rule 144 without compliance with its one-year minimum holding period, subject to certain limitations. shares of Common Stock which may be acquired upon the exercise of outstanding stock options exercisable within 90 days of the date of this Prospectus may be eligible for resale under Rule 701 beginning 90 days after the date of this Prospectus; of these shares are subject to Lock-up Agreements. 49 The Company intends to file one or more registration statements on Form S-8 under the Act to register all shares of Common Stock subject to outstanding stock options and Common Stock otherwise issuable pursuant to the Company's various stock plans that do not qualify for an exemption under Rule 701 from the registration requirements of the Act. Such registration statements are expected to become effective upon filing. Shares covered by these registration statements will thereupon be eligible for sale in the public markets to the extent applicable. LOCK-UP AGREEMENTS Subject to certain limited exceptions, the Company's executive officers and directors, the Selling Stockholders and certain other stockholders, who in aggregate hold shares of Common Stock and options to purchase shares of Common Stock within 90 days of the date of this Prospectus, have agreed, pursuant to Lock-up Agreements, not to sell or otherwise dispose of, directly or indirectly, any shares of Common Stock (or any security convertible into or exchangeable or exercisable for Common Stock) without the prior written consent of Alex. Brown & Sons Incorporated and Lehman Brothers Inc. for a period of 180 days from the date of this Prospectus. In addition, the Company has agreed pursuant to the Underwriting Agreement not to sell or otherwise dispose of, directly or indirectly, any shares of Common Stock (or any security convertible into or exchangeable or exercisable for Common Stock) without the prior written consent of Alex. Brown & Sons Incorporated and Lehman Brothers Inc. for a period of 180 days from the date of this Prospectus, other than pursuant to the Company's stock plans. See "Underwriting." REGISTRATION RIGHTS After the completion of this offering, certain stockholders of the Company (the "Rightsholders") will be entitled to require the Company to register under the Act up to a total of shares of outstanding Common Stock (the "Registrable Shares") under the terms of a certain agreement among the Company and the Rightsholders (as amended, the "Registration Agreement"). The Registration Agreement provides that in the event the Company proposes to register any of its securities under the Act at any time or times, the Rightsholders, subject to certain exceptions, shall be entitled to include Registrable Shares in such registration. However, the managing underwriter of any such offering may exclude for marketing reasons some of such Registrable Shares from such registration. The Rightsholders have, subject to certain conditions and limitations, additional rights to require the Company to prepare and file registration statements with respect to their Registrable Shares beginning 181 days after this offering. Furthermore, such holders may require the Company to file additional registration statements on Form S-3 subject to certain conditions and limitations. The Company is generally required to bear the expenses of all such registrations, except underwriting discounts and commissions. Prior to this offering, there has been no public market for the Common Stock of the Company, and no predictions can be made as to the effect, if any, that market sales of shares of Common Stock or the availability of shares for future sale may have on the market price for the Common Stock. Sales of substantial amounts of Common Stock, or the perception that such sales could occur, could adversely effect prevailing market prices for the Common Stock and could impair the Company's future ability to obtain capital through an offering of equity securities. See "Risk Factors--Ownership of R.R. Donnelley" and "Risk Factors--Shares Eligible for Future Sale." 50 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below (the "Underwriters"), through their Representatives, Alex. Brown & Sons Incorporated, Lehman Brothers Inc., J.P. Morgan Securities Inc., Salomon Brothers Inc and Smith Barney Inc., have severally agreed to purchase from the Company and the Selling Stockholders the following respective numbers of shares of Common Stock at the initial public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus:
NUMBER OF UNDERWRITERS SHARES ------------ --------- Alex. Brown & Sons Incorporated.................................... Lehman Brothers Inc................................................ J.P. Morgan Securities Inc. ....................................... Salomon Brothers Inc............................................... Smith Barney Inc................................................... ------ Total.......................................................... ======
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will purchase all shares of the Common Stock offered hereby if any of such shares are purchased. The Company and the Selling Stockholders have been advised by the Representatives of the Underwriters that the Underwriters propose to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the initial public offering, the offering price and other selling terms may be changed by the Representatives of the Underwriters. R.R. Donnelley and its affiliates have granted to the Underwriters an option, exercisable not later than 30 days after the date of this Prospectus, to purchase up to additional shares of Common Stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by it shown in the above table bears to , and R.R. Donnelley and its affiliates will be obligated, pursuant to the option, to sell such shares to the Underwriters. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of Common Stock offered hereby. If purchased, the Underwriters will offer such additional shares on the same terms as those on which the shares are being offered. The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. The Company and certain stockholders of the Company have agreed pursuant to certain agreements that, subject to certain limited exceptions, they will not, without the prior written consent of Alex. Brown & Sons Incorporated and Lehman Brothers Inc., offer, sell or otherwise dispose of any shares of Common Stock for a period of 180 days from the date of this Prospectus. See "Shares Eligible for Future Sale." 51 Certain of the Underwriters from time to time have performed various services for the Company and its affiliates and R.R. Donnelley, including in connection with the Reorganization. Until the distribution of the Common Stock is completed, rules of the Securities and Exchange Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase shares of Common Stock. As an exception to these rules, the Representatives are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions may consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. In addition, if the Representatives over-allot (i.e., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus), and thereby create a short position in the Common Stock in connection with this offering, the Representatives may reduce that short position by purchasing Common Stock in the open market. The Representatives also may elect to reduce any short position by exercising all or part of the over-allotment option described herein. The Representatives also may impose a penalty bid on certain Underwriters and selling group members. This means that if the Representatives purchase shares of Common Stock in the open market to reduce the Underwriters' short position or to stabilize the price of the Common Stock, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those shares as part of this offering. In general, purchases of a security for the purpose of stabilization or to reduce a syndicate short position could cause the price of the security to be higher than it might otherwise be in the absence of such purchases. The imposition of a penalty bid might have an effect on the price of a security to the extent that it were to discourage resales of the security by purchasers in this offering. Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. The Representatives of the Underwriters have advised the Company and the Selling Stockholders that the Underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. Prior to this offering, there has been no public market for the Common Stock of the Company. Consequently, the initial public offering price for the Common Stock will be determined by negotiation between the Company, R.R. Donnelley and the Representatives of the Underwriters. Among the factors to be considered in such negotiations will be prevailing market conditions, the results of operations of the Company in recent periods, the market capitalizations and stages of development of other companies which the Company, R.R. Donnelley and the Representatives of the Underwriters believe to be comparable to the Company, estimates of the business potential of the Company, the present state of the Company's development and other factors deemed relevant. LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Hale and Dorr LLP, Boston, Massachusetts, and for the Underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. 52 EXPERTS The Consolidated Financial Statements and Schedule included in this Prospectus have been audited by Arthur Andersen LLP, independent public accountants, as stated in their reports appearing in this Prospectus and elsewhere in the Registration Statement, and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (which term shall include all amendments, exhibits and schedules thereto) on Form S-1 under the Act with respect to the shares of Common Stock offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission, to which Registration Statement reference is hereby made. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Registration Statement and the exhibits thereto may be inspected and copied at prescribed rates at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Such material may also be accessed electronically by means of the Commission's home page on the Internet at http://www.sec.gov. The Company intends to distribute to its stockholders annual reports containing audited consolidated financial statements and will make available copies of quarterly reports for the first three quarters of each fiscal year containing unaudited consolidated financial information. 53 STREAM INTERNATIONAL INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ------ Report of Independent Public Accountants......................... F-2 Consolidated Balance Sheets as of December 31, 1995 and 1996..... F-3 Consolidated Statements of Income for Each of the Three Years in the Period Ended December 31, 1996 .............................................. F-4 Consolidated Statements of Stockholders' Investment for Each of the Three Years in the Period Ended December 31, 1996........... F-5 Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 1996............................................... F-6 Notes to Consolidated Financial Statements....................... F-7
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Stream International Inc.: We have audited the accompanying consolidated balance sheets of Stream International Inc. and subsidiaries as of December 31, 1995 and 1996, and the related consolidated statements of income, stockholders' investment and cash flows for the years ended December 31, 1994, 1995 and 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Stream International Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for the years ended December 31, 1994, 1995 and 1996 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP _____________________________________ ARTHUR ANDERSEN LLP Boston, Massachusetts April 30, 1997 F-2 STREAM INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1996 (IN THOUSANDS)
DECEMBER 31, --------------- 1995 1996 ------- ------- ASSETS CURRENT ASSETS: Cash and cash equivalents.................................... $ 21 $ 1,142 Accounts receivable, less allowance for doubtful accounts of $156 in 1995 and $304 in 1996............................... 21,981 35,636 Deferred income taxes........................................ 190 1,323 Prepaid expenses............................................. 1,706 1,345 Other current assets......................................... 64 339 ------- ------- Total current assets....................................... 23,962 39,785 ------- ------- PROPERTY AND EQUIPMENT: Building and leasehold improvements.......................... 1,454 5,455 Equipment and furniture...................................... 34,856 53,695 Construction in process...................................... 2,893 82 ------- ------- 39,203 59,232 Accumulated depreciation..................................... 9,962 22,415 ------- ------- Net property and equipment................................... 29,241 36,817 OTHER ASSETS................................................... 395 385 ------- ------- Total assets............................................... $53,598 $76,987 ======= ======= LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES: Current portion of long-term debt............................ -- $ 837 Accounts payable............................................. $ 2,708 1,344 Other accrued liabilities.................................... 7,079 11,919 Nonrecurring charge accrual.................................. -- 4,500 Current portion of capital lease obligation.................. 825 1,275 ------- ------- Total current liabilities.................................. 10,612 19,875 ------- ------- LONG-TERM DEBT................................................. -- 3,348 DEFERRED INCOME TAXES.......................................... 288 497 LONG-TERM PORTION OF CAPITAL LEASE OBLIGATION.................. 1,734 604 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' INVESTMENT: Net parent company investment................................ 40,947 52,584 Cumulative translation adjustment............................ 17 79 ------- ------- Total stockholders' investment............................. 40,964 52,663 ------- ------- Total liabilities and stockholders' investment............. $53,598 $76,987 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-3 STREAM INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------- 1994 1995 1996 ------- ------- -------- Revenues............................................. $37,388 $78,243 $155,498 Operating expenses: Cost of services................................... 22,891 57,338 117,309 Selling, general and administrative expenses....... 10,646 23,994 39,110 Nonrecurring charges............................... -- -- 4,500 ------- ------- -------- 33,537 81,332 160,919 Income (loss) from operations........................ 3,851 (3,089) (5,421) Interest expense..................................... -- -- 188 ------- ------- -------- Income (loss) before income taxes.................... 3,851 (3,089) (5,609) Provision (benefit) for income taxes................. 1,724 (817) (924) ------- ------- -------- Net income (loss).................................... $ 2,127 $(2,272) $ (4,685) ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 STREAM INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (IN THOUSANDS)
NET PARENT COMMON STOCK ADDITIONAL CUMULATIVE COMPANY ---------------- PAID-IN RETAINED ADJUSTMENT INVESTMENT SHARES PAR VALUE CAPITAL EARNINGS TRANSLATION TOTAL ---------- ------ --------- ---------- -------- ----------- ----- BALANCES AT DECEMBER 31, 1993................... $ 3,198 0 $0 $ 0 $ 0 $ 0 $ 3,198 Net income.............. 2,127 2,127 Translation adjustment.. (3) (3) Net transfers from parent company......... 7,281 7,281 ------- --- --- --- --- --- ------- BALANCES AT DECEMBER 31, 1994................... 12,606 0 0 0 0 (3) 12,603 Net loss................ (2,272) (2,272) Translation adjustment.. 20 20 Net transfers from parent company......... 30,613 30,613 ------- --- --- --- --- --- ------- BALANCES AT DECEMBER 31, 1995................... 40,947 0 0 0 0 17 40,964 Net loss................ (4,685) (4,685) Translation adjustment.. 62 62 Net transfers from parent company......... 16,322 16,322 ------- --- --- --- --- --- ------- BALANCES AT DECEMBER 31, 1996................... $52,584 0 $0 $ 0 $ 0 $79 $52,663 ======= === === === === === =======
The accompanying notes are an integral part of these consolidated financial statements. F-5 STREAM INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------- 1994 1995 1996 ------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............................... $ 2,127 $ (2,272) $ (4,685) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activ- ities: Depreciation and amortization................. 2,600 6,233 12,624 (Gain) loss on disposal of fixed assets....... (175) -- 14 Deferred income taxes......................... (187) 285 (924) Changes in assets and liabilities: Accounts receivable--net...................... (4,581) (14,052) (13,655) Prepaid expenses.............................. (475) (1,125) 361 Other current assets.......................... (125) 61 (275) Other noncurrent assets....................... (223) (154) 10 Accounts payable.............................. 254 2,001 (1,364) Accrued liabilities........................... 908 3,735 4,840 Nonrecurring charge accrual................... -- -- 4,500 ------- -------- -------- Net cash provided by (used in) operating activi- ties........................................... 123 (5,288) 1,446 ------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment.............. (7,748) (24,053) (20,014) Proceeds from sale of fixed assets.............. 1,640 -- 280 ------- -------- -------- Net cash used in investing activities............. (6,108) (24,053) (19,734) ------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments under capital lease obligations........ (1,133) (1,433) (1,160) Net transfers from parent company............... 7,281 30,613 16,322 Net proceeds from long-term borrowings.......... -- -- 4,185 ------- -------- -------- Net cash provided by financing activities....... 6,148 29,180 19,347 ------- -------- -------- Effect of exchange rate changes on cash and cash equivalents...................................... (3) 20 62 ------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVA- LENTS............................................ 160 (141) 1,121 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.... 2 162 21 ------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR.......... $ 162 $ 21 $ 1,142 ======= ======== ======== Supplemental disclosure of noncash financing ac- tivities: Assets acquired through capital lease............. $ 3,601 $ 53 $ 480 Supplemental disclosure of cash flow information: Cash paid during the year for interest............ -- -- $ 188
The accompanying notes are an integral part of these consolidated financial statements. F-6 STREAM INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS Stream International Inc. (the "Company") is a worldwide provider of outsource technical support services over the telephone, e-mail and the Internet. The Company provides support services primarily to customers of leading software publishers, hardware manufacturers and online service providers. The Company operates call centers in the U.S., Germany, France, the United Kingdom and the Netherlands. 2. THE REORGANIZATION The Company's outsource technical support business began in 1992 as a unit of Corporate Software Incorporated ("CSI"), which sold and licensed software products and services to major corporations (to be known as the "Corporate Software & Technology Business"). CSI established its technical support business unit in response to demands from key clients that were increasingly seeking to outsource technical support. In 1995, CSI and the Outsource Manufacturing Services Division (to be known as "Modus Media International" or the "MMI Business") of R.R. Donnelley & Sons Company ("R.R. Donnelley") combined to form the Stream family of companies (the "CSI-MMI Merger"). Modus Media International is a leading provider of outsource manufacturing services to major software publishers and OEMs. Historically, the Company conducted its business as a unit of its parent company, Stream International Holdings Inc. (prior to the Reorganization described below, the "Parent Company"). Prior to the closing of the proposed initial public offering (see Note 13), the Parent Company will effect a reorganization (the "Reorganization"), pursuant to which the Parent Company will (i) contribute to two wholly-owned subsidiaries (the "Spin-Off Subsidiaries") its Corporate Software & Technology Business and MMI Business, (ii) contribute to PLEX LLC ("PLEX"), a limited liability company wholly owned by the Parent Company, the capital stock of the Spin-Off Subsidiaries and (iii) distribute to the Parent Company's stockholders all of the equity interests in PLEX (the "Spin-Off Distribution"). Upon consummation of the Reorganization, the only business conducted by the Company will be the outsource technical support business. Accordingly, these financial statements exclude the results of the Spin-Off Subsidiaries and include only the results of the outsource technical support business, the business to be conducted by the Company after the Reorganization. In connection with the Reorganization, Stream International Holdings Inc. will change its name to "Stream International Inc." As used herein, the "Company" and "Stream" refer to Stream International Holdings Inc. after giving effect to the foregoing name change and the Reorganization. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying financial statements include the accounts of the Company and its foreign operations. The accounts of the Company's foreign operations have been translated into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain costs and expenses presented in these financial statements have been allocated based on management's estimates of the cost of services provided to the Company by the Parent Company. Management believes that these allocations are based on assumptions that are reasonable under existing circumstances. The historical operating impact may not be indicative of future results. F-7 STREAM INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Operating results through the consummation of the Reorganization are recorded as a return of capital to or contributions from the Parent Company. CASH AND CASH EQUIVALENTS The Company considers all cash and investments with an original maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets ranging from 3 to 7 years. Leasehold improvements are amortized over the shorter of the related lease term or the useful life of the asset. Maintenance and repair costs are charged to expense as incurred. The cost and the related accumulated depreciation of assets retired or disposed of are eliminated and any resulting gains or losses are recognized in income. DEFERRED START-UP COSTS Deferred start-up costs include costs associated with the hiring and training of employees for significant new contracts. Deferred start-up costs are charged to operations over a six month period upon the commencement of the new contract. DEFERRED GRANTS The Company periodically receives grants for the hiring and training of new employees. These grants are deferred and recognized in the period the related expense was incurred. REVENUE RECOGNITION The Company recognizes revenues at the time services are performed. The Company has certain contracts which are billed in advance. Amounts billed but not earned under these contracts are excluded from revenues and included in deferred income. INCOME TAXES The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Income taxes are determined based on income reported in the financial statements, regardless of when such taxes are payable. In addition, tax assets and liabilities are adjusted to reflect changes in the U.S. and applicable foreign tax laws when enacted. Future tax benefits are recognized to the extent realization of such benefits is more likely to occur than not. Valuation allowances are established when necessary to reduce deferred tax assets to the amount that is realizable, based upon the realization criteria defined in SFAS 109. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates; however, management does not believe these differences would have a material effect on operating results. F-8 STREAM INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NEW ACCOUNTING PRONOUNCEMENTS The Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121") effective January 1, 1996. In accordance with the requirements of SFAS 121, the Company periodically assessed whether events or circumstances have occurred that may indicate the carrying value of its long-lived assets may not be recoverable. When such events or circumstances indicate the carrying value of an asset may be impaired, the Company uses an estimate of the future undiscounted cash flows to be derived from the asset over the remaining useful life of the asset to assess whether or not the asset is recoverable. If the future undiscounted cash flows to be derived over the life of the asset do not exceed the asset's net book value, the Company recognizes an impairment loss for the amount by which the net book value of the asset exceeds its estimated fair market value. 4. SIGNIFICANT CLIENTS AND CONCENTRATIONS OF CREDIT RISK A majority of the Company's revenues are attributable to clients operating in the information technology industry. Revenues from significant clients are defined as revenues in excess of 10% of total revenues. In 1994, one client accounted for 73% of revenue, in 1995 two clients accounted for 67% of revenue and in 1996 four clients accounted for 77% of the Company's revenue. The loss of one or more of its significant clients could have a material adverse effect on the Company's business, operating results or financial condition. Financial instruments which potentially subject the Company to concentrations of credit risk are limited to trade accounts receivable. The Company does not require collateral or other security to support client receivables. The Company performs periodic credit evaluations of its clients to minimize collection risks on trade accounts receivable and maintains allowances for potentially uncollectible accounts. 5. NONRECURRING CHARGE During the year ended December 31, 1996, the Company recorded a charge associated with the consolidation of certain European locations, including the accrual of remaining lease obligations and the write-off of leasehold improvements and certain other assets not expected to be utilized after the Reorganization. The Company also recorded a one-time charge for costs associated with recruiting certain members of management and establishing new compensation and benefit plans. 6. RELATED PARTY TRANSACTIONS Historically, certain treasury, legal, tax, financial, accounting, information technology and other services were performed centrally. Costs of those services have been allocated among the Company and the Spin-Off Subsidiaries using allocation methods that management believes are reasonable. Total expenses allocated to the Company were $3,170,000 in 1994, $5,208,000 in 1995 and $7,722,000 in 1996, respectively. In connection with the Reorganization, the Company and the Spin-Off Subsidiaries will enter into agreements (collectively, the "Transitional Service Agreements") for the continued provision after the Reorganization of certain services formerly shared among such entities or provided by R.R. Donnelley. Pursuant to the Transitional Service Agreements, the Company will receive from the Spin-Off Subsidiaries certain financial, tax, insurance, payroll, employee benefits, information technology and other services and will provide to the Spin-Off Subsidiaries certain legal services, outsource technical support for certain clients of the Spin-Off Subsidiaries and information technology services. F-9 STREAM INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company and the Spin-Off Subsidiaries will enter into a tax sharing agreement (the "Tax Sharing Agreement") that will define the parties' rights and obligations with respect to filing of returns, payments, deficiencies and refunds of federal, state and other income or franchise taxes relating to the parties' businesses for tax years prior to and including the year in which the Reorganization occurs. The Company and the Spin-Off Subsidiaries will agree to cooperate with each other and to share information in preparing required tax returns and in dealing with other tax matters. 7. INCOME TAXES The components of income/(loss) before income taxes are as follows:
1994 1995 1996 ------ ------- ------- (IN THOUSANDS) Domestic.......................................... $3,974 $(1,863) $ (185) Foreign........................................... (123) (1,226) (5,424) ------ ------- ------- $3,851 $(3,089) $(5,609) ====== ======= ======= The components of the provision for income taxes are as follows: 1994 1995 1996 ------ ------- ------- Current provision: Federal.......................................... $1,436 $ (833) $ 686 State............................................ 338 (196) 162 Foreign.......................................... 137 (73) (848) ------ ------- ------- $1,911 $(1,102) $ -- ------ ------- ------- Deferred provision: Federal.......................................... $ (151) $ 231 $ (748) State............................................ (36) 54 (176) ------ ------- ------- (187) 285 (924) ------ ------- ------- $1,724 $ (817) $ (924) ====== ======= ======= The following reconciles the Company's effective tax rate to the federal statutory rate for the years ended December 31, 1994, 1995 and 1996: 1994 1995 1996 ------ ------- ------- Federal statutory rate............................ 35.0% 35.0% 35.0% State income taxes, net of federal deduction...... 5.1 3.0 0.2 Change in valuation allowance..................... 4.7 (11.6) (18.7) ------ ------- ------- 44.8% 26.4% 16.5% ====== ======= =======
F-10 STREAM INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company's deferred income tax assets and liabilities are summarized as follows:
1994 1995 1996 ----- ----- ------ (IN THOUSANDS) Deferred tax assets: Allowance for doubtful accounts..................... $ 34 $ 62 $ 121 Accrued liabilities................................. 295 491 1,495 Foreign operating losses not benefited and other items.............................................. 180 356 1,050 ----- ----- ------ 509 909 2,666 Valuation allowance................................. (180) (356) (1,050) ----- ----- ------ Total deferred tax asset......................... $ 329 $ 553 $1,616 ===== ===== ====== Deferred tax liabilities: Property, plant & equipment......................... $(142) $(651) $ (790) ----- ----- ------ Net deferred tax asset (liability).................. $ 187 $ (98) $ 826 ===== ===== ======
8. DEBT During 1996, a foreign subsidiary of the Company entered into a Debt Agreement with a bank to finance capital purchases for the Northern Ireland facility. The original loan balance of 2.5 million pounds sterling accrues interest at the London Interbank Market Rate plus .65% per annum. The loan is to be repaid in equal annual installments of 500,000 pounds sterling commencing October 1997. Under the terms of the agreement, the foreign subsidiary is required to comply with a number of affirmative and negative covenants. As of December 31, 1996 the foreign subsidiary is in compliance with the covenants of the agreement. 9. STOCKHOLDERS' INVESTMENT CSI--MMI OPTIONS In connection with the CSI--MMI Merger in 1995, the Parent Company established the Stream 1995 Stock Option Plan (the "1995 Stock Option Plan"), the 1995 California Stock Option Plan (the "1995 California Plan") and the 1995 Replacement Option Plan. The 1995 Stock Option Plan and the 1995 California Plan provided for the issuance of up to an aggregate of 4,000,000 shares at exercise prices not less than fair market value on the date of grant. The 1995 Replacement Option Plan provided for the issuance of 838,125 shares granted to replace options previously granted by CSI. This latter plan terminated on December 31, 1995 except with respect to outstanding options. At the effective date of the Reorganization, outstanding awards under the Parent Company's stock option plans will be replaced by substitute awards such that for each option currently held, the option holder will receive an option in the Company and an option in PLEX. The substitute awards will have the same ratio of the exercise price per option to the market value per share, the same aggregate difference between market value and exercise price and the same vesting provisions, option periods and other terms and conditions of the options that they will replace. 10. EMPLOYEE BENEFIT PLANS SAVINGS AND RETIREMENT PROGRAM Substantially all domestic employees who meet certain requirements are eligible to participate in the Parent Company's defined contribution (401(k)) plan. Participants may make contributions to the plan F-11 STREAM INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) from 1% to 15% of their compensation, as defined. The Company contributes an amount equal to 50% of the employee's contributions to the 401(k) plan, not to exceed 3% of the employee's annual compensation. Company contributions are fully vested after four years of service. 11. COMMITMENTS AND CONTINGENCIES The Company leases office space and various equipment. These leases are mainly accounted for as operating leases. Rental costs under operating lease agreements were approximately $2,173,000, $4,000,000, and $5,765,000 for the years ended December 31, 1994, 1995 and 1996, respectively. The Company leases certain equipment used at its call centers. The leases are mainly accounted for as capital leases. The gross amounts of property and equipment representing capital leases in the accompanying consolidated balance sheets at December 31, 1995 and 1996 were approximately $3,614,000 and $4,094,000, respectively. Similar amounts of accumulated depreciation were $2,069,000 and $3,071,000, respectively. Depreciation of capital lease assets is included in depreciation and amortization expenses of property and equipment. Minimum future lease obligations at December 31, 1996 are as follows:
OPERATING CAPITAL LEASES LEASES ----------- ---------- Year ended December 31: 1997............................................... $ 5,488,000 $1,354,000 1998............................................... 5,468,000 581,000 1999............................................... 4,959,000 50,000 2000............................................... 3,142,000 11,000 2001............................................... 1,240,000 -- Thereafter......................................... 1,339,000 -- ----------- ---------- Total minimum payments............................... $21,636,000 1,996,000 =========== Less: Amount representing interest................... (117,000) ---------- Present value of minimum lease payments.............. $1,879,000 ==========
The Company has a 40% ownership interest in a joint venture accounted for under the equity method. As of December 31, 1996, the Company's share of the joint venture's cumulative losses exceeded its investment by approximately $460,000. This amount has not been recorded as the Company has no commitment to fund the joint venture or guarantee of the joint venture's debt. In connection with the Reorganization, the Company and the Spin-Off Subsidiaries will enter into agreements which contain general indemnities between the Company and the Spin-Off Subsidiaries. Under the agreements each of the Spin-Off Subsidiaries will indemnify the Company for any losses, liabilities or damages (including legal fees) in connection with any liability, claim or action assumed by such Spin-Off Subsidiary and the Company will indemnify the Spin-Off Subsidiaries in connection with any liability, claim or action retained by the Company. In May 1994, certain former stockholders of CSI commenced appraisal proceedings against CSI in Delaware seeking appraisal rights for their shares under Section 262 of the Delaware General Corporation Law. One of the Spin-Off Subsidiaries will agree to indemnify the Company for any liability incurred as a result of the proceedings. F-12 STREAM INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In addition, the Company is a party to certain litigation arising in the ordinary course of business which, in the opinion of management, will not have a material adverse effect on the operations or financial condition of the Company. With respect to such matters not involving the outsource technical support business, the Spin-Off Subsidiaries and R.R. Donnelley have agreed to indemnify the Company for any liability incurred as a result of the proceedings, subject to certain limitations. 12. GEOGRAPHIC INFORMATION The Company predominantly provides outsource technical support services to the information technology industry. A summary of the Company's operations by geographic area are as follows:
DECEMBER 31, -------------------------- 1994 1995 1996 ------- ------- -------- (IN THOUSANDS) Revenue: United States.................................... $35,029 $70,406 $134,741 Europe........................................... 2,359 7,837 20,757 ------- ------- -------- $37,388 $78,243 $155,498 ======= ======= ======== Income (loss) from operations: United States.................................... $ 3,974 $(1,863) $ (185) Europe........................................... (123) (1,226) (5,236) ------- ------- -------- $ 3,851 $(3,089) $ (5,421) ======= ======= ======== Identifiable assets at December 31: United States.................................... $19,003 $47,491 $ 65,084 Europe........................................... 1,590 6,107 11,903 ------- ------- -------- $20,593 $53,598 $ 76,987 ======= ======= ========
13. INITIAL PUBLIC OFFERING (SUBSEQUENT EVENT) The Company filed a Form S-1 for an initial public offering ("IPO") of common stock on April 30, 1997. A portion of the shares to be sold are being sold by certain stockholders of the Company. In addition, the Company will become liable for approximately $50 million of indebtedness to R.R. Donnelley, and such debt will be paid out of the proceeds of the IPO. The remaining net proceeds will be used for general corporate purposes, including working capital requirements and capital expenditures. F-13 [INSIDE BACK COVER PAGE OF PROSPECTUS] "INDUSTRY RECOGNITION AS LEADER IN CLASS." ABOVE THE STATEMENT ARE GRAPHICAL IMAGES OF THE FOLLOWING AWARDS ALONG WITH THE WRITTEN TITLE OF EACH AWARD: SOFTWARE SUPPORT PROFESSIONALS ASSOCIATION STAR AWARDS FOR SOFTWARE TECHNICAL ASSISTANCE IN THE LAST FOUR YEARS AND EUROCHANNEL'S INNOVATOR AWARD IN 1996. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PRO- SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEI- THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 6 The Company............................................................... 13 Use of Proceeds........................................................... 13 Dividend Policy........................................................... 13 Capitalization............................................................ 14 Dilution.................................................................. 15 Selected Consolidated Financial and Operating Data........................ 16 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 17 Business.................................................................. 22 Management................................................................ 32 Certain Transactions...................................................... 40 The Reorganization........................................................ 42 Principal and Selling Stockholders........................................ 45 Description of Capital Stock.............................................. 47 Shares Eligible for Future Sale........................................... 49 Underwriting.............................................................. 51 Legal Matters............................................................. 52 Experts................................................................... 53 Additional Information.................................................... 53 Index to Consolidated Financial Statements................................ F-1
------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF- FECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PAR- TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACT- ING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Shares [Stream logo] Common Stock ------------ PROSPECTUS ------------ Alex. Brown & Sons INCORPORATED Lehman Brothers J.P. Morgan & Co. Salomon Brothers Inc Smith Barney Inc. , 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses in connection with the sale and distribution of the securities being registered, other than the underwriting discounts and commissions. All amounts shown are estimates except for the Securities and Exchange Commission registration fee and the NASD filing fee. SEC Registration Fee................................................ $45,455 NASD Filing Fee..................................................... 15,500 NASD Expenses....................................................... * Nasdaq Listing Fee.................................................. * Blue Sky Fees and Expenses.......................................... * Transfer Agent and Registrar Fees................................... * Accounting Fees and Expenses........................................ * Legal Fees and Expenses............................................. * Printing, Engraving and Mailing Expenses............................ * Miscellaneous....................................................... * ------- Total............................................................. $ * =======
- -------- * To be completed by amendment ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Article SEVENTH of the Registrant's Amended and Restated Certificate of Incorporation, as in effect upon the closing of this offering (the "Certificate of Incorporation"), provides that no director of the Registrant shall be personally liable for any monetary damages for any breach of fiduciary duty as a director, except to the extent that the Delaware General Corporation Law prohibits the elimination or limitation of liability of directors for breach of fiduciary duty. Article EIGHTH of the Registrant's Certificate of Incorporation provides that a director or officer of the Registrant (a) shall be indemnified by the Registrant against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with any litigation or other legal proceeding (other than an action by or in the right of the Registrant) brought against him or her by virtue of his or her position as a director or officer of the Registrant if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Registrant, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful and (b) shall be indemnified by the Registrant against all expenses (including attorneys' fees) and amounts paid in settlement actually and reasonably incurred in connection with any action by or in the right of the Registrant brought against him or her by virtue of his or her position as a director or officer of the Registrant if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Registrant, except that no indemnification shall be made with respect to any matter as to which such person shall have been adjudged to be liable to the Registrant, unless and only to the extent that a court determines that, despite such adjudication but in view of all of the circumstances, he or she is entitled to indemnification of such expenses. Notwithstanding the foregoing, to the extent that a director or officer has been successful, on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, he or she is required to be indemnified by the Registrant against all expenses (including attorneys' fees) actually and reasonably incurred in connection therewith. Expenses shall be advanced to a director or officer at his or her request, provided that he or she undertakes to repay the amount advanced if it is ultimately determined that he or she is not entitled to indemnification for such expenses. Indemnification is required to be made unless the Registrant determines by clear and convincing evidence that the applicable standard of conduct required for indemnification has not been met. In the event of a determination by the Registrant that the director or officer did not meet the applicable II-1 standard of conduct required for indemnification, or if the Registrant fails to make an indemnification payment within 60 days after such payment is claimed by such person, such person is permitted to petition the court to make an independent determination as to whether such person is entitled to indemnification. As a condition precedent to the right of indemnification, the director or officer must give the Registrant notice of the action for which indemnity is sought and the Registrant has the right to participate in such action or assume the defense thereof. Article EIGHTH of the Registrant's Certificate of Incorporation further provides that the indemnification provided therein is not exclusive, and provides that in the event that the Delaware General Corporation Law is amended to expand the indemnification permitted to directors or officers the Registrant must indemnify those persons to the full extent permitted by such law as so amended. Under Section 8 of the Underwriting Agreement, the Underwriters are obligated, under certain circumstances, to indemnify directors and officers of the Registrant against certain liabilities, including liabilities under the Act. Reference is made to the form of Underwriting Agreement filed as Exhibit 1.1 hereto. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Set forth in chronological order below is information regarding the number of shares of capital stock and other securities granted as options or issued by the Registrant since the Registrant's inception in February 1995. Further included is the consideration, if any, received by the Registrant for such shares of capital stock and other securities, as well as information relating to the section of the Act or rule of the Commission under which exemption from registration was claimed. All awards of options did not involve any sale under the Act and none of the securities issued by the Registrant were registered under the Act. The information presented in this Item 15 has not been adjusted to reflect the reverse stock split of the Company's Common Stock to be effected prior to the consummation of this offering. (a) Issuances of Capital Stock 1. In April 1995, the Registrant issued in connection with the CSI-MMI Merger an aggregate of 7,280,000 shares of Class A Common Stock, 119,992 shares of Class B-N Common Stock ( shares on an as-converted basis) and 1,623,696 shares of Class B-V Common Stock ( shares on an as-converted basis). 2. In September 1995, the Registrant issued in connection with a five-for- one stock split authorized by the Board of Directors an aggregate of 29,120,000 shares of Class A Common Stock, 479,968 shares of Class B-N Common Stock ( shares on an as-converted basis) and 6,494,784 shares of Class B-V Common Stock ( shares on an as-converted basis). 3. In September 1995, the Registrant sold 500,000 shares of Class A Common Stock to its Chairman of the Board at a purchase price of $6.00 per share and sold 83,333 shares of Class A Common Stock to its Co-President at a purchase price of $6.00 per share. 4. In October 1995, the Registrant issued to an employee 900 shares of Class B-V Common Stock ( shares on an as-converted basis). 5. In June 1996, the Registrant sold an aggregate of 460,133 shares of Class A Common Stock to employees at a purchase price of $6.00 per share. 6. In June 1996, the Registrant sold to an affiliate of one of its directors an aggregate of 166,666 shares of Class A Common Stock at a purchase price of $6.00 per share. 7. In August 1996, the Registrant sold to an employee of the Registrant an aggregate of 33,500 shares of Class A Common Stock at a purchase price of $6.00 per share. II-2 (b) Grants and Exercises of Stock Options Since its incorporation in February 1995, the Registrant has issued options to purchase an aggregate of 4,538,250 shares of Class A Common Stock at a weighted average exercise price of $ per share and 838,125 shares of Class B-V Common Stock ( shares on an as-converted basis) at a weighted average exercise price of $ per share ($ per share on an as-converted basis). During the same time period, the Registrant has issued a total of 1,981 shares of Class A Common Stock and 79,752 of Class B-V Common Stock ( shares on an as-converted basis) pursuant to the exercise of options. The securities issued in the above transactions were offered and sold in reliance upon the exemptions from registration under Sections 3(b) and 4(2) of the Act, and Regulation D and Rule 701 thereunder, relative to sales by an issuer not involving any public offering. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
EXHIBIT NO. DESCRIPTION ------- ----------- 1.1* Form of Underwriting Agreement. 3.1 Certificate of Incorporation of the Registrant. 3.2 By-Laws of the Registrant. 3.3* Form of Amended and Restated Certificate of Incorporation of the Registrant. 3.4* Form of Amended and Restated By-Laws of the Registrant. 4.1* Specimen Certificate for shares of Common Stock, $.01 par value, of the Registrant. 5* Opinion of Hale and Dorr llp with respect to the validity of the securities being offered. 10.1+ Microsoft Corporation Product Service Vendor Agreement dated as of December 14, 1995 between the Registrant and Microsoft Corporation, as amended. 10.2* 1997 Stock Incentive Plan. 10.3* 1997 Director Stock Option Plan. 10.4 1995 Stock Option Plan, as amended. 10.5 1995 Replacement Stock Option Plan. 10.6 1995 California Stock Option Plan, as amended. 10.7* Form of Contribution Agreement to be entered into among the Registrant, the MMI Subsidiary and PLEX. 10.8* Form of Contribution Agreement to be entered into among the Registrant, the Corporate Software and Technology Subsidiary and PLEX. 10.9* Form of Contribution Agreement to be entered into among the Registrant, the MMI Subsidiary, the Corporate Software and Technology Subsidiary and PLEX. 10.10* Form of Transitional Service Agreement to be entered into between the Registrant and the MMI Subsidiary. 10.11* Form of Transitional Service Agreement to be entered into between the Registrant and the Corporate Software and Technology Subsidiary. 10.12* Form of Tax Sharing Agreement to be entered into among the Registrant, the Spin-Off Subsidiaries, PLEX and R.R. Donnelley.
II-3
EXHIBIT NO. DESCRIPTION ------- ----------- 10.13* Forms of Indemnification Agreements to be entered into between the Registrant and R.R. Donnelley. 10.14* Registration Rights Agreement dated as of April 21, 1995 among the Registrant and the Stockholders named therein, as amended. 10.15* Employment Agreement between the Registrant and Stephen D.R. Moore. 10.16* Employment Agreement between the Registrant and Judith G. Salerno. 10.17 Form of Management Retention Agreement entered into by the Registrant with Stephen D. R. Moore and Judith G. Salerno. 10.18 Promissory Note and Stock Pledge Agreement dated April 15, 1996 between Judith G. Salerno and the Registrant. 10.19* Promissory Notes and Stock Pledge Agreement between Stephen D.R. Moore and the Registrant. 11* Calculation of shares used in determining pro forma net income per common share. 21* Subsidiaries of the Registrant. 23.1* Consent of Hale and Dorr llp (included in Exhibit 5). 23.2 Consent of Arthur Andersen llp. 23.3* Consents of Certain Persons Named as Post-Reorganization Directors. 24 Powers of Attorney (included on the signature page of this Registration Statement). 27 Financial Data Schedule.
- -------- *To be filed by amendment. +Confidential treatment requested as to certain portions, which portions are omitted and filed separately with the Commission. (b) Financial Statement Schedules Schedule II--Valuation and Qualifying Accounts All other schedules have been omitted because they are not required or because the required information is given in the Consolidated Financial Statements or Notes thereto. II-4 ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions contained in the Certificate of Incorporation and By-Laws of the Registrant and the laws of the State of Delaware, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Act, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Canton, Massachusetts, on this 30th day of April, 1997. STREAM INTERNATIONAL HOLDINGS INC. /s/ Terence M. Leahy By: _________________________________ TERENCE M. LEAHY, CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY AND SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. Each person whose signature appears below hereby authorizes Stephen D. R. Moore, Judith G. Salerno, and Mark G. Borden, and each of them, with full power of substitution, to execute in the name and on behalf of such person any amendment (including any post-effective amendment) to this Registration Statement (or any other registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act) and to file the same, with exhibits thereto, and other documents in connection therewith, making such changes in this Registration Statement as the person(s) so acting deems appropriate, and appoints each of such persons, each with full power of substitution, attorney- in-fact to sign any amendment (including any post-effective amendment) to this Registration Statement (or any other registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act) and to file the same, with exhibits thereto, and other documents in connection therewith. Pursuant to the requirements of the Act, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Terence M. Leahy Chief Executive April 30, 1997 - ------------------------------------- Officer and TERENCE M. LEAHY Director (Principal Executive Officer) /s/ Gene S. Morphis Senior Vice April 30, 1997 - ------------------------------------- President GENE S. MORPHIS and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Steven J. Baumgartner Director April 30, 1997 - ------------------------------------- STEVEN J. BAUMGARTNER II-6 SIGNATURE TITLE DATE /s/ Cheryl A. Francis Director April 30, 1997 - ------------------------------------- CHERYL A. FRANCIS /s/ Morton H. Meyerson Director April 30, 1997 - ------------------------------------- MORTON H. MEYERSON /s/ Stephen D. R. Moore Director April 30, 1997 - ------------------------------------- STEPHEN D. R. MOORE /s/ Mark E. Nunnelly Director April 30, 1997 - ------------------------------------- MARK E. NUNNELLY /s/ Morton H. Rosenthal Director April 30, 1997 - ------------------------------------- MORTON H. ROSENTHAL /s/ Robert F. White Director April 30, 1997 - ------------------------------------- ROBERT F. WHITE II-7 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTARY SCHEDULE STREAM INTERNATIONAL INC. We have audited, in accordance with generally accepted auditing standards, the financial statements of Stream International Inc. as of December 31, 1995 and 1996 and for each of the three years in the period ended December 31, 1996, included in the Registration Statement, and have issued our report thereon dated April 30, 1997. Our audit was made for the purpose of forming an opinion on those financial statements taken as a whole. The schedule listed in Item 16(b) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein, in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Arthur Andersen LLP Boston, Massachusetts April 30, 1997 S-1 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGE TO BEGINNING OF COST AND BALANCE AT DESCRIPTION PERIOD EXPENSES WRITEOFFS END OF PERIOD - ----------- ------------ --------- --------- ------------- Allowance for Doubtful Accounts, for the year ended December 31, 1995........................... $ 86,000 81,000 (11,000) $156,000 Allowance for Doubtful Accounts, for the year ended December 31, 1996........................... $156,000 148,000 -- $304,000
S-2 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ------- ----------- 1.1* Form of Underwriting Agreement. 3.1 Certificate of Incorporation of the Registrant. 3.2 By-Laws of the Registrant. 3.3* Form of Amended and Restated Certificate of Incorporation of the Registrant. 3.4* Form of Amended and Restated By-Laws of the Registrant. 4.1* Specimen Certificate for shares of Common Stock, $.01 par value, of the Registrant. 5* Opinion of Hale and Dorr llp with respect to the validity of the securities being offered. 10.1+ Microsoft Corporation Product Service Vendor Agreement dated as of December 14, 1995 between the Registrant and Microsoft Corporation, as amended. 10.2* 1997 Stock Incentive Plan. 10.3* 1997 Director Stock Option Plan. 10.4 1995 Stock Option Plan, as amended. 10.5 1995 Replacement Stock Option Plan. 10.6 1995 California Stock Option Plan, as amended. 10.7* Form of Contribution Agreement to be entered into among the Registrant, the MMI Subsidiary and PLEX. 10.8* Form of Contribution Agreement to be entered into among the Registrant, the Corporate Software and Technology Subsidiary and PLEX. 10.9* Form of Contribution Agreement to be entered into among the Registrant, the MMI Subsidiary, the Corporate Software and Technology Subsidiary and PLEX. 10.10* Form of Transitional Service Agreement to be entered into between the Registrant and the MMI Subsidiary. 10.11* Form of Transitional Service Agreement to be entered into between the Registrant and the Corporate Software and Technology Subsidiary. 10.12* Form of Tax Sharing Agreement to be entered into among the Registrant, the Spin-Off Subsidiaries, PLEX and R.R. Donnelley. 10.13* Forms of Indemnification Agreements to be entered into between the Registrant and R.R. Donnelley. 10.14* Registration Rights Agreement dated as of April 21, 1995 among the Registrant and the Stockholders named therein, as amended. 10.15* Employment Agreement between the Registrant and Stephen D.R. Moore. 10.16* Employment Agreement between the Registrant and Judith G. Salerno. 10.17 Form of Management Retention Agreement entered into by the Registrant with Stephen D. R. Moore and Judith G. Salerno. 10.18 Promissory Note and Stock Pledge Agreement dated April 15, 1996 between Judith G. Salerno and the Registrant. 10.19* Promissory Notes and Stock Pledge Agreement between Stephen D.R. Moore and the Registrant. 11* Calculation of shares used in determining pro forma net income per common share. 21* Subsidiaries of the Registrant. 23.1* Consent of Hale and Dorr llp (included in Exhibit 5). 23.2 Consent of Arthur Andersen llp. 23.3* Consents of Certain Persons Named as Post-Reorganization Directors. 24 Powers of Attorney (included on the signature page of this Registration Statement). 27 Financial Data Schedule.
- -------- *To be filed by amendment. +Confidential treatment requested as to certain portions, which portions are omitted and filed separately with the Commission. EX-3.1 2 CERTIFICATE OF INCORPORATION OF THE REGISTRANT EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF R.R. DONNELLEY GLOBAL SOFTWARE SERVICES CORP. R.R. Donnelley Global Software Services Corp., a Delaware corporation, the original Certificate of Incorporation of which was filed with the Secretary of State of Delaware on February 16, 1995, hereby certifies that this Restated Certificate of Incorporation restating, integrating and amending its Certificate of Incorporation was duly proposed by its board of directors and adopted unanimously by its stockholders in accordance with Sections 228, 242 and 245 of the Delaware General Corporation Law. FIRST: The name of the corporation (the "Corporation") is Stream ----------- International Inc. SECOND: The registered office of the Corporation is located at Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle in the State of Delaware. The name of its registered agent at such address is The Corporation Trust Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the Delaware General Corporation Law (the "GCL"). --- FOURTH: A. Authorized Shares. The total number of shares of stock which ----------------- the Corporation shall have authority to issue is 17,135,000, consisting of three classes: (i) 15,000,000 shares of Class A Common Stock, $.01 par value ("A - Common"), (ii) 2,000,000 shares of Class B-V Common Stock, $.01 par value ("BV - ------ -- Common") and (iii) 135,000 shares of Class B-N Common Stock, $.01 par value ("BN - ------ -- Common" and, together with the BV Common, "B Common"). All of the foregoing - ------ -------- classes of stock are collectively referred to as "Common Stock", each of the A ------------ Common, the BV Common and the BN Common being a "Class of Common Stock"). A ---------------------- holder of record of Common Stock is referred to herein as a "Stockholder". ----------- B. Voting. The holders of record of A Common shall have the sole right to ------ vote in the election or upon the removal of Class A Directors, and the holders of record of BV Common shall have the sole right to vote in the election or upon the removal of Class B Directors, in each case as provided in and subject to Article SIXTH. The holders of record of A Common, BV Common and BN Common, voting together as a single class, shall have full voting rights on all other matters submitted to a vote of Stockholders, provided that no amendment or repeal of any provision of this Restated Certificate of Incorporation which adversely affects the rights of the holders of any Class of Common Stock shall be adopted without the affirmative vote of the holders of at least a majority of the outstanding shares of such Class, in addition to any other vote required by law or this Restated Certificate of Incorporation, and provided that no amendment to the By-laws of the Company in effect immediately prior to the issuance of any B Common shall be adopted without the affirmative vote of the holders of at least a majority of the holders of the BV Common and the BN Common, voting together as a single class, and the affirmative vote of the holders of at least a majority of the holders of the A Common. Subject to the foregoing provisions of this Section B, each share of A Common, BV Common and BN Common shall entitle the holder thereof to one vote. C. Distributions. 1. As used in this Article FOURTH, "Distribution" ------------- ------------ means any dividend or distribution declared and paid on the Common Stock or any Class thereof in cash or property other than shares of Common Stock. No Distribution shall be declared or paid on any Class of Common Stock unless a per share Distribution of like kind and amount is concurrently declared and paid on all other Classes of Common Stock. 2. No dividend shall be declared or paid on any Class of Common Stock payable in any other Class of Common Stock. No dividend payable in shares of a Class of Common Stock shall be declared or paid on the same Class of Common Stock, nor shall the shares of any Class of Common Stock be subdivided or combined into a different number of shares, unless concurrently therewith a dividend of equal proportionate amount is declared and paid on each other Class of Common Stock in shares of such Class, or the shares of each other Class of Common Stock are similarly subdivided or combined, so that the proportion which the number of issued and outstanding shares of each Class of Common Stock bears to the total number of issued and outstanding shares of Common Stock will not change as a result of such dividend, subdivision or combination. D. Liquidation; Merger, Etc. 1. Upon the liquidation, dissolution or ------------------------- winding up of the Corporation, whether voluntary or involuntary, the holders of Common Stock shall be entitled to receive equal per share distributions of the assets of the Corporation remaining after payment or provision for payment of all liabilities; provided, however, that in the event of any such liquidation, -------- ------- dissolution or winding up of the Corporation during the Sharing Period, if and to the extent any Excess Return Sharing Payments are required to be paid by or on behalf of the B Holders under the TARSAP Replacement Plan (as defined in Article ELEVENTH), and the Corporation shall facilitate the satisfaction of such payment obligation by deducting and directing to the Specified Executives the per share distributions owned by the B Holders in respect to their shares of B Common. 2. Subject to Article Eleventh, the Company shall not enter into or consummate any merger, consolidation or recapitalization of the Corporation or similar transaction in which shares of any Class of Common Stock are converted into cash or other securities or property unless all holders of Common Stock (regardless of Class) shall be entitled to receive per share consideration of like kind and amount. The approval of any merger or consolidation with or into RRD or an Affiliate of RRD in which shares of any Class of Common Stock are converted into cash or other securities or property shall require, in addition to any other vote required by this Restated Certificate of Incorporation or the GCL, the affirmative vote of the holders of at least a majority of the outstanding shares of B Common, voting together as a single class, unless, in the case of any transaction described in this sentence which is to be consummated during a Call Period, each share of Common Stock is to be converted into or exchanged for either: (i) cash in an amount not less than the Call Price applicable to such Call Period or (ii) any combination of cash or Marketable Securities having an aggregate, Fair Value not less than such Call Price. E. Conversion. 1. Subject to Paragraph 4, effective at the earlier of ---------- (a) the time of payment for and delivery of shares of Common Stock sold to underwriters (the "Closing") in the first public offering registered under the ------- Securities Act of 1933, as amended (the "Securities Act") (the "Initial Public -------------- -------------- Offering") or (b) immediately prior to the first distribution of the remaining - -------- assets of the Corporation upon the liquidation, dissolution or winding up of the Corporation, each share of B Common shall automatically be converted into one share of A Common plus a fraction of a share of A Common of which the numerator is the number of shares of BV Common issuable upon exercise of all options to purchase BV Common granted by the Corporation after the time of filing this Restated Certificate of Incorporation with the Secretary of State of Delaware (the "Filing Time") which have lapsed or expired prior to such conversion ----------- (calculated immediately prior to such lapse or expiration) and the denominator is the sum of (i) the number of shares of BV Common outstanding immediately prior to such conversion and (ii) the number of shares of BV Common issuable upon exercise of all outstanding options to purchase BV Common immediately prior to such conversion. 2. Subject to Paragraph 4, each share of B Common which is purchased by the Corporation or the Designee pursuant to Section F or G of Article FIFTH shall, immediately prior to such purchase, automatically be converted into the number of full and fractional shares of A Common which would be issuable if such shares were then being converted pursuant to Paragraph 1. Subject to Paragraph 4, immediately prior to any (i) merger or consolidation of the Corporation with any other corporation as a result of which a majority of the Common Stock of the Corporation or any other surviving corporation would be owned by any person other than RRD or any Affiliate of RRD, (ii) sale of all or substantially all of the common stock or assets of the Corporation (including any Total Disposition), each share of B Common shall automatically be converted into the number of full and fractional shares of A Common which would be issuable if such shares were then being converted pursuant to Paragraph 1. 3. Each holder of shares of BN Common shall be entitled to convert any or all of such shares of BN Common into the same number of shares of BV Common immediately prior to the effectiveness of any merger, consolidation or similar transaction involving the Corporation if after consummation of such transaction a Person or group of Persons (within the meaning of the Securities Exchange Act of 1934) in the aggregate would own or control securities which possess in the aggregate the ordinary voting power to elect a majority of the surviving corporation's board of directors. Any holder of shares of BN Common desiring to elect to so convert shall deliver notice to the Corporation at its principal executive office at any time prior to the close of business on the last business day preceding the effectiveness of such transaction, specifying the number of shares to be so converted. 4. No fractional shares of A Common shall be issued upon any conversion pursuant to Paragraph 1 or 2. The number of full and fractional shares of A Common to which a B Holder is entitled upon conversion shall be determined on the basis of the total number of shares of B Common being converted held by such B Holder. Any remaining fraction of a share of A Common shall be settled by a cash payment made by the Corporation in an amount equal to such fraction multiplied by (a) in the case of a conversion described in clause (a) of Paragraph 1, the initial public offering price in the prospectus first filed pursuant to Rule 424 under the Securities Act after the date of the registration statement for the Initial Public Offering, (b) in the case of a conversion described in clause (b) of Paragraph 1, the Fair Value of such fraction determined by the Board, or (c) in the case of a conversion described in Paragraph 2, the applicable Put Price or Call Price, as the case may be. 5. From and after the conversion of B Common or BN Common pursuant to this Section E, the certificates representing the shares so converted shall be deemed for all purposes to represent the number of shares of Common stock into which such shares have been converted, but (unless the Common Stock issued upon such conversion will cease to be outstanding) the holder thereof shall be entitled to a new certificate or certificates for the shares of Common Stock into which the shares formerly evidenced by such outstanding certificate have been converted, upon surrender to the Corporation of such certificate duly endorsed or accompanied by proper instruments of transfer. The Corporation shall pay any documentary stamp or similar tax due on the issuance of Common Stock upon conversion of B Common, and the holder of any shares so converted shall pay to the Corporation the amount of any tax which is due (or shall establish to the satisfaction of the Corporation that no such tax is due) if the shares of Common Stock issuable upon conversion are to be issued in a name other than the name of such holder. 6. The Corporation shall at all times reserve sufficient shares of A Common and BV Common out of its authorized but unissued Common Stock to permit all conversions contemplated by this Section E. All shares of Common Stock issued upon conversion shall be deemed validly issued, fully paid and non- assessable. The Corporation will endeavor to comply with all applicable federal and state securities laws and to list the shares of Common Stock issued upon conversion on each securities exchange on which the Class so issued is then listed. F. Reclassification of Existing Stock. At the Filing Time each share of ---------------------------------- Common Stock, $.01 par value, of the Corporation issued and outstanding immediately prior to the Filing Time shall be reclassified into 2,994.638 shares of A Common. Pending the surrender of certificates representing the Common Stock reclassified pursuant to the preceding sentence, each certificate therefor shall, from and after the Filing Time, be deemed to represent the shares of A Common into which the shares evidenced thereby were so reclassified. FIFTH: A. Restrictions on Transfer. 1. As used in this Restated ------------------------ Certificate of Incorporation: (a) "Affiliate" has the meaning assigned to it in Rule 405 under the --------- Securities Act, except that RRD shall not be deemed an Affiliate of the Corporation and its subsidiaries; (b) "B Holder" means a holder of record of B Common (or of A Common -------- issued upon conversion of B Common pursuant to Paragraph 2 of Section E of Article FOURTH), but references to Common Stock owned or held by a B Holder include any A Common owned or held by such B Holder; (c) "Board" means the Board of Directors of the Corporation; ----- (d) "Business Day" means a day, other than a Saturday, Sunday or legal ------------ holiday, on which banks are open for business in the city where the Corporation's principal executive office is located; (e) "Consolidated Debt" means, as of any date, the sum of (i) the long- ----------------- term debt of the Corporation and its subsidiaries outstanding on such date, plus (ii) the average of the short-term debt of the Corporation and its subsidiaries minus the amount of cash and cash equivalents of the Corporation and its subsidiaries on the last day of each of the 12 months ending on such date, each determined on a consolidated basis; provided that, -------- for purposes of such calculations, indebtedness of the Corporation and its subsidiaries under any revolving credit facility shall (A) to the extent such indebtedness is not greater than the equity of the Corporation and its subsidiaries on a consolidated basis on the date as of which such determination is made, be deemed to be short term debt and (B) to the extent such indebtedness exceeds such equity value, be deemed to be long-term debt; (f) "Designee" means R.R. Donnelley & Sons Company, a Delaware -------- corporation, or R.R. Donnelley Norwest Inc., an Oregon corporation, or R.R. Donnelley International, Inc., a Delaware corporation, (provided that R.R. Donnelley & Sons Company deliver a guaranty of the obligations of such corporation) if (i) for any reason (other than the lack of funds legally available therefor) the Corporation fails or refuses to exercise any right granted to the Corporation pursuant to Section B, C or G to purchase shares of Common Stock and the Class A Directors had approved the exercise of such rights, or (ii) for any reason the Corporation is unable to purchase shares of Common Stock it has the right or obligation to purchase pursuant to Section B, C, F or G; (g) "EBITA" means, without duplication (i) consolidated earnings of the ----- Corporation and its subsidiaries; plus or minus (ii) any provision or credit ---- -- ----- or franchise taxes included in the determination of consolidated earnings; plus (iii) net interest expenses, including deferred financing fee ---- amortization deducted in determination of consolidated earnings; plus (iv) ---- amortization deducted in the determination of consolidated earnings; plus or ---- -- minus (v) the amount that charges to the Corporation by RRD under the ----- Transition Services Agreement between RRD and the Corporation are greater than or less than $5,500,000, except to the extent such charges are increased to reflect changes in the Consumer Price Index (as defined therein) or are increased or decreased as a result of arms-length negotiations between Newco and RRD with respect to changes in the scope or cost of services provided to Newco by RRD; plus or minus (vi) extraordinary ---- -- ----- losses or gains, or any one-time unusual or non-recurring charges or credits in each case discussed under generally accepted accounting principles, included in the determination of consolidated earnings such as, but not all inclusive, of the following types: (1) Charge or credit on disposal of a part of a business which does not meet the APB 30, par. 13 criteria under generally accepted accounting principles for a segment of a business which has been reported as a separate component of income from continuing operations; (2) Charge or credit associated with a one-time employee termination program or plan; (3) Charge or credit on the impairment, disposal or abandonment of a fixed asset; (4) Charge or credit on the impairment, disposal or abandonment of an investment (or joint venture) accounted for under the equity method; (5) Charge or credit associated with the efforts of a strike, including those against competitors and major suppliers; (6) Charge or credit associated with the discontinuance of certain product lines; (7) Casualty charges or credits net of insurance recoveries, related to infrequent occurrences not qualify for extraordinary charge criteria as defined under generally accepted accounting principles; (8) Charge or credit associated with the guarantee of the loan of a supplier; (9) Charge or credit associated with plant relocation; (10) Charge or credit associated with litigation and environmental issues; (11) Charge or credit associated with loan prepayments and refinancings; (12) Charge or credit associated with changes in compensation programs; (13) Charge or credit associated with the write-off of deferred pre- production, deferred research and development and deferred start-up costs for new locations and facilities; (14) Charge or credit associated with future acquisition activities; (15) Charge or credit associated with merger or acquisition or IPO activities; (16) Costs associated with the consummation of this transaction; and (17) Charge or credit on disposal of marketable securities; provided that, in order to be excluded from the EBITA calculation under clause - -------- (vi) above, (A) each charge or credit must be extraordinary, one-time, unusual or non-recurring and of an amount greater than $50,000 and (B) the cumulative effect of the charges and credits must be of sufficient magnitude to cause a 2% change in EBITA. To the extent a charge or credit which is excluded from the EBITA calculation under clause (vi) above is associated with a change in the Corporation's business (such as a plant closing, major customer defection, product discontinuance, etc.), EBITA will also be adjusted for the pro-forma impact of such changes. For purposes of calculating "EBITA," generally accepted accounting principles as used in the preparation of the audited financial statements of the GSS Business and Software Holdings, Inc., respectively, as of and for the year ended December 31, 1994 shall be frozen; such generally accepted accounting principles are summarized in Exhibit U to the Contribution Agreement dated as of April 21, 1995 among the Corporation, RRD and Software Holdings, Inc. Any subsequent changes in accounting principles, whether or not promulgated by the Financial Accounting Standards Board, shall be excluded. Also, in calculating "EBITA" with respect to any period other than at year end, EBITA shall be determined on the basis of interim financial statements prepared on the same basis as the annual financial statements. A copy of the Transition Services Agreement, the audited financial statements of the GSS Business and of Software Holdings, Inc. and the exhibit referred to above is maintained by the Corporation at its headquarters and copies of which will be made available to any stockholder upon request. (h) "Fair Value" means (i) with respect to any shares of Common Stock or ---------- other security, the fair value of such shares (or other securities) as of the applicable date on the basis of a sale of such shares (or other securities) in an arms length private sale between a willing buyer and a willing seller, neither acting under compulsion, without any discount for any lack of liquidity of such shares (or other securities) or the fact that such shares (or other securities) may represent a minority interest or that there may be restrictions on the voting rights of such shares (or such securities), and (ii) with respect to any other assets or property, the fair market value; (i) "Marketable Securities" means securities which are listed on a national --------------------- securities exchange or granted in the NASDAQ Stock Market and can be resold in a public offering in compliance with the Securities Act without further regulation thereunder. (j) "Person" means any natural person, corporation, general or limited ------ partnership, limited liability company, trust, association, joint venture, government or other entity or organization; (k) "Principal B Holder" means one or more B Holders owning, in the ------------------ aggregate, at least 7.5% of the then issued and outstanding shares of Common Stock; (l) "Prohibited Holder" means any Person (other than RRD or an Affiliate of ----------------- RRD) that (i) competes with RRD and has sales in the businesses in which it so competes with RRD in excess of 5% of the consolidated net sales of RRD, or (ii) competes with the Corporation and has sales in the businesses in which it so competes with the Corporation in excess of 10% of the consolidated net sales of the Corporation; provided, that neither Resource Holdings, Inc., a Delaware -------- corporation, nor any Affiliate thereof shall constitute a Prohibited Holder; (m) "RRD" means, collectively, R.R. Donnelley & Sons Company, a Delaware --- corporation, and its subsidiaries (other than the Corporation and its subsidiaries); and (n) "Transfer" means sell, assign, exchange, pledge, encumber, give, -------- dispose of or otherwise transfer (and when used as a noun means any of the foregoing acts), and includes any Transfer by operation of law and any indirect Transfer through the Transfer of ownership of an entity more than 50% of the assets of which consist of shares of Common Stock. Certain other terms used in this Restated Certificate of Incorporation are defined generally in the Section or Paragraph where first used. Reference is made to Section C of Article NINTH. 2. Subject to Paragraphs 6 and 7, until the termination of the provisions of this Article FIFTH in accordance with Paragraph 8: (a) no Stockholder shall Transfer, offer to Transfer or solicit any offer to acquire any shares of Common Stock held by such Stockholder (regardless of how or when acquired) unless such Transfer complies with the provisions of this Article FIFTH; (b) each Person (other than the Corporation) acquiring shares of Common Stock (a "Transferee"), whether from a Stockholder or from the Corporation ---------- and regardless of the method of Transfer, shall execute and deliver to the Corporation, as a condition precedent to such acquisition, an instrument in form and substance satisfactory to the Corporation confirming that such Transferee takes such shares of Common Stock subject to, and such Transferee shall be bound by, the terms and conditions of this Article FIFTH; and (c) each certificate for shares of Common Stock shall bear the following legend: "The sale, assignment, pledge, encumbrance or other transfer of the shares represented by this certificate is subject to restrictions, and such shares are subject to certain mandatory transfers, as provided in the Restated Certificate of Incorporation of the Corporation, a copy of which is on file at the principal executive offices of the Corporation." 3. Until the Corporation has received an opinion of counsel reasonably satisfactory to it that shares of Common Stock may be Transferred in a transaction involving a public offering within the meaning of the Securities Act without registration thereunder, or are being sold pursuant to a registration statement thereunder, each certificate for shares of Common Stock shall bear the following legend: "The shares represented by this certificate were issued without registration under the Securities Act of 1933, as amended, and may not be sold, assigned, pledged, encumbered or otherwise transferred unless such shares have been registered under that Act or the Corporation has received an opinion of counsel reasonably satisfactory to it that such registration is not required." Appropriate stop transfer notations shall be entered in the books of the Corporation, and no Transfer shall be recorded therein except upon compliance with the conditions of the foregoing legend. 4. Any attempted Transfer of shares of Common Stock which does not comply with the applicable provisions of this Article FIFTH shall be null and void. The Corporation shall not cooperate with or record on its books any Transfer of shares of Common Stock not Transferred in accordance with this Article FIFTH, nor shall the Corporation be liable to any Stockholder or Transferee for any damages, losses or expenses, or be subject to any other remedy, as a consequence of any actions taken or not taken by the Corporation pursuant to this Section A. 5. If any Stockholder which is obligated to Transfer shares of Common Stock pursuant to any provision of this Article FIFTH fails or refuses to do so at the time and place required, the Secretary of the Corporation is hereby authorized and directed to affect such Transfer by recording the same on the books of the Corporation and issuing and delivering a certificate representing the shares required to be Transferred to the Transferee against payment of the required purchase price therefor. The Secretary shall hold such purchase price, as bailee but without any obligation to pay or account for interest thereon, for payment to the defaulting Stockholder upon surrender of the certificate representing the shares of Common Stock required to be transferred by such Stockholder. 6. None of the restrictions contained in this Article FIFTH with respect to Transfers of shares of Common Stock (other than those set forth in paragraph 3 and in Section C), nor any right or option to purchase or obligation to sell Common Stock pursuant to any provision of this Article FIFTH except Section C, shall apply to any Transfer: (a) by a Stockholder to a spouse, child, parent, sibling or grandchild of such Stockholder or to a trust of which there are no beneficiaries other than such Stockholder or one or more of such relatives; (b) by gift to a bona fide charity or foundation approved by the Board (such approval not to be unreasonably withheld); (c) by will or the laws of descent or to a legal representative in the event a Stockholder becomes mentally incompetent; (d) by a Stockholder which is a corporation, partnership or limited liability company to an Affiliate thereof or by a Stockholder which is a partnership to its partners; (e) by a Stockholder to any other Person who, prior to such Transfer, is a Stockholder; and (f) by RRD to any Person of any or all shares of Common Stock owned by RRD; provided that in each of the Transfers described in clauses (a) through (e) each Transferee, donee or distributee (a "Permitted Transferee") is not a Prohibited -------------------- Holder and agrees to take subject to and to be bound by the provisions of this Article FIFTH, and that a Stockholder making a Transfer pursuant to clause (d) shall remain subject to the provisions relating to indirect Transfers contained in the definition of that term; and provided, further, that in a Transfer by RRD -------- ------- to any Person of any shares of Common Stock which, when added to all other shares of Common Stock Transferred by RRD after the Filing Time and prior to such Transfer (other than Transfers described in clause (b), (d) and (m)) would exceed 20% of the issued and outstanding shares of Common Stock at the date of such Transfer, such Person agrees to take subject to and be bound by the provisions of this Restated Certificate of Incorporation as they apply to RRD. For purposes of this Article FIFTH, the Permitted Transferees of a Stockholder include the Permitted Transferees of such Stockholder's Permitted Transferees. None of the restrictions contained in this Article FIFTH (other than those set forth in Paragraph 3) shall apply to (i) a Transfer of shares of B Common if such Transfer has been approved in advance by the Class A Directors and, if and to the extent so required by the Class A Directors, the Transferee has agreed to take subject to and to be bound by the provisions of this Article FIFTH or (ii) a Transfer of shares of A Common by a Stockholder other than RRD if such Transfer has been approved in advance by the Class A Directors and by the Class B Directors and, if and to the extent so required by the Class A Directors or the Class B Directors, the Transferee has agreed to take subject to and to be bound by the provisions of this Article FIFTH. None of the restrictions contained in this Article FIFTH shall apply to a Transfer to the Corporation. 7. Notwithstanding any other provision of this Article FIFTH to the contrary: (a) the Corporation and any Stockholder may Transfer shares of Common Stock pursuant to a public offering registered under the Securities Act; and (b) the Corporation may enter into an agreement to consolidate with or merge with or into any other Person if such agreement is approved by the Board and by the requisite vote of the Stockholders in accordance with this Restated Certificate of Incorporation and the GCL and any other applicable laws. In either such event, the shares of Common Stock may be sold in such public offering or exchanged pursuant to such merger or consolidation for the consideration provided thereunder without compliance with the provisions of this Article FIFTH. A Transfer to (i) the Corporation or a Designee pursuant to Section B, C, F or G, (ii) a Stockholder pursuant to Section C or (iii) a Purchaser pursuant to Section E shall not be subject to any right or option to purchase, or obligation to sell, Common Stock pursuant to any other provision of this Article FIFTH. 8. The provisions of this Article FIFTH, other than Paragraph 3 of this Section A, shall terminate and be of no further force or effect upon the Closing of the Initial Public Offering. B. First Offer Rights. 1. Except as provided in Paragraphs 6 and 7 of ------------------ Section A and Sections C, E and F, any B Holder who desires to Transfer any shares of Common Stock (the "Selling Holder") shall first give 30 days' prior -------------- written notice (a "Seller's Notice") to the Corporation and RRD stating the --------------- Selling Holder's desire to make such Transfer, the number and Class of shares of Common Stock to be Transferred (the "Offered Shares") and the cash price which -------------- the Selling Holder proposes to be paid for the Offered Shares (the "First Offer ----------- Price"). No Selling Holder shall Transfer any shares of Common Stock pursuant - ----- to this Section B, except in a sale for cash. 2. Upon receipt of the Seller's Notice, the Corporation shall have the irrevocable and exclusive option to purchase all, but not less than all, of the Offered Shares at the First Offer Price, unless the Selling Holder consents to the purchase of less than all of the Offered Shares; provided that the Class A Directors may cause the Corporation to assign such option to a Designee in accordance with the definition of that term. The Corporation's (or the Designee's) option under this Paragraph 2 shall be exercisable by a written notice to the Selling Holder given on or before the 30th day after the date that the Seller's Notice was actually received by the Corporation and RRD. Delivery of a written notice of exercise shall constitute an irrevocable obligation on the part of the Corporation or the Designee, whichever exercises the option, to purchase the Offered Shares at the First Offer Price as contemplated by this Section B. 3. If the Seller's Notice has been duly given and the Corporation or the Designee does not exercise the option and purchase all of the Offered Shares at the First Offer Price (unless a purchase of less than all such shares is consented to by the Selling Holder), the Selling Holder shall be free, for a period of 180 days from the date of the expiration of the 30-day acceptance period, to sell all of the Offered Shares (not purchased by the Corporation or the Designee) to a Transferee (other than a Prohibited Holder) at a cash price not less than 95% of the First Offer Price and on the other material terms set forth in the First Offer Notice, provided that such sale complies with the provisions of Section A. 4. If the proposed purchase price of a Transferee for the Offered Shares is less than 95% of the First Offer Price, the Selling Holder shall not Transfer any of the Offered Shares unless the Selling Holder first reoffers the Offered Shares at such lesser cash price to the Corporation (or the Designee) by giving 15 days' prior written notice (the "Reoffer Notice") thereof, stating the Selling Holder's intention to make such Transfer at such lower cash price (the "Reoffer ------- Price"). The Corporation or the Designee shall then have the irrevocable and - ----- exclusive option to purchase the Offered Shares at the Reoffer Price, exercisable by written notice to the Selling Holder given on or before the 15th day after the date that the Reoffer Notice was actually received by the Corporation or the Designee. If the Corporation or the Designee does not then purchase all the Offered Shares (or a lesser number consented to by the Selling Holder), such Offered Shares may be sold by the Selling Holder to a Transferee (other than a Prohibited Holder) within 60 days following the date of the expiration of the 15-day reoffer acceptance period, at a cash price equal to or greater than the Reoffer Price, provided that such sale complies with the provisions of Section A. 5. If the Corporation or the Designee does not exercise the option to purchase the Offered Shares at the First Offer Price or at the Reoffer Price, and the Selling Holder has not sold the Offered Shares to a Transferee (other than a Prohibited Holder) for any reason before the expiration of the 60-day period described in Paragraph 4 in the event of a Reoffer or, if no Reoffer Notice is given, the 180-day period described in Paragraph 3, the Selling Holder shall not give a Seller's Notice with respect to a transaction which would require compliance with this Section B for a period of 180 days from the expiration of such 60-day or 180-day period, as the case may be. 6. The closing of all purchases pursuant to the first offer rights granted under this Section B shall take place at the principal executive office of the Corporation at 10 a.m. local time on the later of (a) the tenth Business Day following the delivery to the Selling Holder of the notice exercising such first offer right with respect to all of the Offered Shares to be sold by the Selling Holder or (b) the fifth Business Day following the expiration or termination of all waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR"), applicable to such purchase, or at such other time --- and/or place as the parties to such purchase may agree. At such closing, (i) the Selling Holder shall Transfer to the Corporation or the Designee good and marketable title to the shares of Common Stock being purchased, free and clear of any lien, claim or encumbrance, by delivery of the certificates representing the shares of Common Stock to be Transferred, duly endorsed in blank, with any required stock transfer tax stamps attached, together with such stock powers, certificates, legal opinions and other instruments of transfer as the Corporation or the Designee shall reasonably request; and (ii) the Corporation or the Designee shall pay to the Selling Holder the purchase price for the shares of Common Stock being purchased in cash, by delivery of a certified or bank check or by wire transfer of immediately available funds to such account as the Selling Holder shall direct by written notice delivered to the Corporation or the Designee not later than two Business Days before such closing. C. First Refusal Rights. 1. Notwithstanding anything to the -------------------- contrary in this Article FIFTH, if a B Holder desires to Transfer any shares of Common Stock to a Prohibited Holder (which Transfer may only be made by way of a sale for cash), and has received a bona fide offer by a Prohibited Holder to --------- purchase the shares of Common Stock (the "First Refusal Offer"), the following ------------------- procedures shall apply. The Selling Holder shall first give 30 days' prior written notice (a "First Refusal Notice") to the Corporation, which shall -------------------- promptly send a copy thereof to all other Stockholders (the Corporation and all other Stockholders being referred to herein as the "First Refusal Offerees") ---------------------- stating the Selling Holder's desire to make such Transfer to a Prohibited Holder, the number and Class of shares of Common Stock to be Transferred (the "First Refusal Shares"), the name of the Prohibited Holder and the cash price to - --------------------- be paid by the Prohibited Holder. An offer shall not be deemed bona fide unless ---- ---- the Selling Holder has informed the prospective Prohibited Holder of such Selling Holder's obligations under this Article FIFTH, and the prospective Prohibited Holder has agreed to be bound by the provisions of this Article FIFTH. The Corporation and the other First Refusal Offerees may take such steps as they reasonably deem necessary to determine the validity or the bona fide ---- ---- nature of the offer. 2. Upon receipt of the First Refusal Notice the Corporation or the Designee shall have the irrevocable and exclusive option to purchase up to all of the First Refusal Shares at the cash price set forth therein; provided that the Class A Directors may cause the Corporation to assign such option to a Designee in accordance with the definition of that term; and provided further that either: (a) the Corporation or the Designee purchases all such First Refusal Shares, (b) if the Corporation or the Designee elects to purchase less than all the First Refusal Shares, the other First Refusal Offerees elect to purchase all the remaining First Refusal Shares pursuant to Paragraph 3, or (c) the Selling Holder consents to the purchase of less than all of the First Refusal Shares. The Corporation's or Designee's option under this Paragraph 2 shall be exercisable by a written notice to the Selling Holder and the Corporation (and the Corporation shall promptly send a copy thereof to each of the other First Refusal Offerees), given on or before the 15th day after the date the First Refusal Notice was actually received by the Corporation and RRD. Delivery of such a written notice of exercise shall constitute an irrevocable obligation on the part of the Corporation or the Designee, whichever exercises the option, to purchase the First Refusal Shares at the cash price set forth in the First Refusal Notice as contemplated by this Section C. 3. If the Corporation or the Designee does not elect to purchase all of the First Refusal Shares, then each of the other First Refusal Offerees shall have the irrevocable and exclusive option to purchase up to that percentage of the First Refusal Shares not purchased by the Corporation or the Designee determined by dividing the number of shares of Common Stock owned by Stockholder by the total number of shares of Common Stock owned by such Stockholders who elect to purchase First Refusal Shares Shares hereunder, without reference to either the First Refusal Shares or the number of shares of Common Stock held by any Stockholder who elects not to purchase any First Refusal Shares (the "Proportionate Share"). To - -------------------- the extent that any Stockholder does not fully subscribe for its Proportionate Share of the First Refusal Shares, each other fully subscribing Stockholder shall have an option to purchase that percentage of the First Refusal Shares not purchased by non-fully subscribing Stockholders determined by dividing the number of shares of Common Stock owned by such fully subscribing Stockholder by the total number of shares of Common Stock owned by all fully subscribing Stockholders electing to purchase additional shares. Unless the Selling Holder consents to the purchase of less than all the First Refusal Shares, no Stockholder may purchase any shares of Common Stock (irrespective of whether it is prepared to subscribe fully for its Proportionate Share) unless all First Refusal Shares are to be purchased. The option of each of the First Refusal Offerees participating in the purchase under this Paragraph 3 shall be exercisable by written notice to the Selling Holder, with copies to the Corporation, given on or before the 30th day after the date the First Refusal Notice was actually received by such Stockholder. Each delivery of such a written notice of exercise shall constitute an irrevocable obligation on the part of the applicable First Refusal Offeree to purchase the First Refusal Shares at the cash price set forth in the First Refusal Notice as contemplated by this Section C. 4. If the First Refusal Notice has been duly given and the Corporation or the Designee and all the First Refusal Offerees do not exercise their options and purchase all of the First Refusal Shares (or a lesser number consented to by the Selling Holder), the Selling Holder shall be free, for a period of 30 days from the expiration of the first refusal acceptance period, to sell the First Refusal Shares to the Prohibited Holder named in the First Refusal Notice at the same cash price and on the same terms as set forth in the First Refusal Notice, provided that such sale complies with the provisions of Section A. 5. If the Corporation or the Designee and the other First Refusal Offerees do not exercise their option to purchase the First Refusal Shares and the Selling Holder has not sold the First Refusal Shares as set forth in the First Refusal Notice for any reason before the expiration of the 30-day period described in Paragraph 4, then the Selling Holder shall not give a First Refusal Notice with respect to a transaction which would require compliance with this Section C for a period of 180 days from the expiration of such 30-day period. 6. The closing of all purchases pursuant to the first refusal rights granted under this Section C shall take place at the principal executive office of the Corporation at 10 a.m. local time on the later of (a) the tenth Business Day following the delivery to the Selling Holder of all notices exercising such first refusal rights with respect to all of the First Refusal Shares to be sold by the Selling Holder or (b) the fifth Business Day following the expiration or termination of all waiting periods under HSR applicable to such purchase, or at such other time and/or place as the parties to such purchase may agree. At such closing, (i) the Selling Holder shall Transfer to the Corporation or the Designee and each Stockholder purchasing shares of Common Stock good and marketable title to the shares of Common Stock being purchased by each of them, free and clear of any lien, claim or encumbrance, by delivery of the certificates representing the shares of Common Stock to be Transferred, duly endorsed in blank, with any required stock transfer tax stamps attached, together with such stock powers, certificates, legal opinions and other instruments of transfer as the Corporation or the Designee or the accepting Stockholder(s) shall reasonably request; and (ii) the Corporation or the Designee and each Stockholder purchasing shares of Common Stock shall pay to the Selling Holder the purchase price for the shares of Common Stock being purchased in cash, by delivery of a certified or bank check or by wire transfer or immediately available funds to such account as the Selling Holder shall direct by written notice delivered to the Corporation or the Designee and each such Stockholder not later than two Business Days before such closing. D. Involuntary Transfers. 1. If a Stockholder involuntarily Transfers --------------------- any or all of its shares of Common Stock for any reason, except to a Permitted Transferee, the Transferee of such shares of Common Stock held by such Transferee to the Corporation or the Designee in accordance with the procedures set forth in Section B or, if the Transferee is a Prohibited Holder, to the Corporation or the Designee and the other Stockholders in accordance with the procedures set forth in Section C. 2. For purposes of such offer, the cash price for such shares of Common Stock shall be the Fair Value of such shares of Common Stock as of the date of such involuntary Transfer, appropriately adjusted to reflect the Fair Value of any dividends or distributions received or to be received by the holder of such shares of Common Stock subsequent to the date of such involuntary Transfer. The Board shall make or obtain a determination of the Fair Value of such shares of Common Stock no later than 90 days following the date the Corporation receives written notice of their involuntary Transfer (but the receipt of such notice shall not be a prerequisite to the exercise of any rights granted under this Section D), and the Seller's Notice or First Refusal Notice, as the case may be, with respect to such shares of Common Stock shall be given by such Stockholder or by the Corporation on behalf of such Stockholder as promptly as practicable following such determination. 3. For purposes of this Section D, the Fair Value of shares of Common Stock shall be determined in good faith by the Board, in its reasonable discretion, provided, that, if requested by any Stockholder who, alone or together with one or more other Stockholders making such request, holds at least 7.5% of the outstanding shares of Common Stock, such Fair Value shall be determined by a nationally-recognized investment banking or business valuation firm, which is not an Affiliate of the Corporation or any Stockholder (an "Evaluator"), selected by the Board. - ---------- E. Tag Along, Drag Along Rights. 1. In the event that RRD proposes to ---------------------------- Transfer to a Person (a "Purchaser") other than an Affiliate of RRD shares of --------- Common Stock which, when added to all other shares of Common Stock Transferred by RRD after the Filing Time and prior to such proposed Transfer (other than Transfers permitted under clauses (b), (d) and (e) of Paragraph 6 of Section A of Article FIFTH) would exceed 20% of the issued and outstanding shares of Common Stock at the date of such proposed Transfer (a "Disposition"), RRD shall, not later than 30 ----------- days before the closing of such Disposition, give written notice (a "Proposal -------- Notice") of such proposed Disposition to the Corporation, which shall promptly - ------ send a copy thereof to each B Holder, and each B Holder shall have the right (a "Tag Along Right") to require RRD to reduce the number of shares of Common Stock --------------- to be sold by RRD, if necessary, and to require the Purchaser to purchase from each of the B Holders electing to exercise a Tag Along Right that number of shares of Common Stock equal to the product obtained by multiplying (a) the total number of shares of Common Stock to be purchased by the Purchaser by (b) the electing B Holder's Fractional Interest, rounded up to the nearest whole number; such purchase to be upon the same terms and conditions and at the same time and place, as the sale of Common Stock by RRD in the Disposition. In order to exercise any Tag Along Right, an electing B Holder must be able to transfer good and marketable title to such B Holder's shares of Common Stock to the Purchaser, free and clear of any lien, claim or other encumbrance. For purposes of this Section E, the term "Fractional Interest" means the quotient obtained by ------------------- dividing (i) the total number of shares of Common Stock owned by the electing B Holder, by (ii) the sum of the total number of shares of Common Stock owned by all electing B Holders and RRD. Each electing B Holder shall give written notice of its election to RRD no later than ten Business Days after its receipt of a Proposal Notice. Neither Section B nor Section C shall apply to sales of shares of Common Stock by Stockholders pursuant to the exercise of a Tag Along Right in accordance with this Paragraph 1. 2. Subject to Paragraph 3, in the event that at any time RRD owns a majority of all the outstanding shares of Common Stock RRD proposes to sell or otherwise dispose of all of the shares of Common Stock then owned by RRD to a Purchaser other than an Affiliate of RRD (a "Total Disposition"), RRD shall have ----------------- the right (a "Drag Along Right") to require each of the other Stockholders to ---------------- sell and deliver good and marketable title to all of the shares of Common Stock held by such Stockholder to the Purchaser, free and clear of any lien, claim or other encumbrance, upon the same terms and conditions, and at the same time and place, as RRD sells shares of Common Stock pursuant to the Total Disposition. RRD may exercise the Drag Along Right by giving written notice (a "Total ----- Disposition Notice") of such proposed Total Disposition, no later than 30 days - ------------------ before the proposed closing of such Total Disposition, identifying the Purchaser and describing the consideration to be paid and the other material terms thereof, to the Corporation, which shall promptly send a copy thereof to each other Stockholder. Neither Section B nor Section C shall apply to sales of shares of Common Stock by Stockholders pursuant to the exercise of RRD's Drag Along Right in accordance with this Paragraph 2. 3. If requested by any Stockholder who, alone or together with one or more other Stockholders making such request, holds at least 7.5% of the outstanding shares of Common Stock, within ten days after a Total Disposition Notice has been given, the Board shall select an Evaluator which shall determine whether the Fair Value of the consideration to be paid for Common Stock described in the Total Disposition Notice is at least equal to 95% of the Fair Value of the Common Stock. If, in the opinion of the Evaluator, the Fair Value of such consideration is less than 95% of the Fair Value of the Common Stock, (a) no Stockholder shall be obligated to sell and deliver Common Stock pursuant to such exercise of the Drag Along Right and (b) the fees and expenses of the Evaluator shall be paid by RRD. If, in the opinion of the Evaluator, the Fair Value of such consideration is at least equal to 95% of the Fair Value of the Common Stock, (i) each other Stockholder shall be obligated to sell and deliver all shares of Common Stock held by such Stockholder pursuant to such exercise of the Drag Along Right, and (ii) the fees and expenses of the Evaluator shall be paid by the Stockholder or Stockholders requesting the valuation pursuant to this Paragraph 3. 4. In the event of any Disposition or Total Disposition occurring during the Sharing Period each of RRD and each B Holder selling shares in such Disposition or Total Disposition shall make appropriate arrangements to comply with any obligations to pay Excess Return Sharing Payments pursuant to the TARSAP Replacement Plan (including arrangements pursuant to which the Purchaser agrees to deduct from payments otherwise due to B Holders in respect of their shares and pay to the Specified Executives and to the Corporation appropriate portions of such proceeds to the extent required to satisfy the payment obligations (including tax withholding payment obligations) specified in Article ELEVENTH and in the TARSAP Replacement Plan). F. Put Rights. 1. Subject to the terms and conditions of this Section F, ---------- during each Put Period, any Principal B Holder shall have the right (the "Put --- Right") to sell to the Corporation, and upon exercise of the Put Right in - ----- accordance with this Section F, the Corporation (to the extent funds are legally available therefor) shall purchase from the B Holder exercising the Put Right, all, but not less than all, of the shares of Common Stock owned by such B Holder. If the Put Right has been exercised, each other B Holder shall have a similar put exercisable during the time period specified below to sell to the Corporation or the Designee, and upon proper notice to the Corporation or the Designee in accordance with this Section F, the Corporation (to the extent funds are legally therefor) shall purchase from each other B Holder giving such notice, all, but not less than all, of the shares of Common Stock owned by each such B Holder. The Class A Directors may permit a Designee to perform the obligations of the Corporation under this Section F in accordance with the definition of Designee. 2. As used in this Section F, "Put Period" means: (a) the second ---------- calendar quarter of each year commencing in 1998 (each such quarter, an "Annual ------ Put Period"), and (b) in the event the Class A Directors increase the number of - ---------- directors in accordance with Section A of Article SIXTH, the period (referred to herein as an "Expansion Put Period") commencing with the day on which the number -------------------- of directors is increased and ending on the last day of the third full calendar month following the month in which such expansion occurred. 3. The Put Right may be exercised by any Principal B Holder by giving written notice to the Corporation during the Put Period (the "Put Notice"). The ---------- Corporation shall promptly send a copy of the Put Notice to each other Stockholder. Thereupon, each other B Holder shall have the right to sell all, but not less than all, of such B Holder's shares of Common Stock to the Corporation or the Designee at the same price and upon the same terms and conditions, by giving written notice thereof to the Corporation on or before the 30th day after the date of the Put Notice. If the holders of 95% or more of the outstanding shares of B Common exercise the Put Right and the subsequent put granted in this Section F, then each B Holder who did not exercise the Put Right or subsequent put shall be required to sell all of such holder's Common Stock to the Corporation or the Designee (the "Mandatory Put"). The B Holders exercising ------------- the Put Right and the subsequent put granted in this Section F and the B Holders subject to the Mandatory Put are referred to herein collectively as the "Put --- Holders". - ------- 4. The per share price (the "Put Price") for the shares of Common --------- Stock to be purchased upon exercise of the Put Right and each subsequent put by any other B Holder giving proper notice and under the Mandatory Put (the "Put --- Shares") shall be the quotient obtained by dividing: - ------ (a) if the Put Right is exercised during an Annual Put Period, the remainder of (i) the product of eight times EBITA for the 12 months ending on the December 31 immediately preceding the exercise of the Put Right, as set forth in the audited financial statements of the Corporation, minus (ii) Consolidated Debt as of such December 31, by (b) the number of shares of Common Stock issued and outstanding as of such December 31; and (c) if the Put Right is exercised during an Expansion Put Period, the remainder of (iii) the product of eight times EBITA for the 12 months ending on the last day of the month immediately preceding the first day of the Expansion Put Period as set forth in the unaudited financial statements of the Corporation, minus (iv) Consolidated Debt as of such day, by (d) the number of shares of Common Stock issued and outstanding as of such day. 5. Notwithstanding any contrary provision of this Section F, if during any twelve month period ending December 31, the Corporation shall effectuate, through any individual transaction or series of related transactions (including by way of merger), any acquisition of the equity securities or assets of any other Person for a price (including assumed liabilities) in excess of $5,000,000 which acquisition is not in the ordinary course of business consistent with past practice, that has not been approved or ratified by the Class B Directors, the Put Price for the Annual Put Period next following consummation of such acquisition shall be determined after excluding the effects of such acquisition (including the incurrence of any indebtedness to finance the acquisition). 6. The closing of all purchases of Put Shares shall take place at the principal executive office of the Corporation at 10 a.m. local time on the later of (a) the 45th day after the last day of the Put Period (or if such day is not a Business Day, the next succeeding Business Day) or (b) the fifth Business Day following the expiration or termination of all waiting periods under HSR applicable to such purchases, or at such other time and/or place as the parties to such purchases may agree. At such closing, (i) each Put Holder shall Transfer to the Corporation or the Designee good and marketable title to the Put Shares being sold by such Put Holder, free and clear of any lien, claim or encumbrance, by delivery of the certificates representing the Put Shares to be Transferred, duly endorsed in blank, with any required stock transfer tax stamps attached, together with such stock powers, certificates, legal opinions and other instruments of transfer as the Corporation or the Designee shall reasonably request; and (ii) the Corporation or Designee shall pay to each Put Holder the purchase price for the Put Shares being sold by such Put Holder (calculated as provided in Paragraph 4 or 5, as applicable) in cash, by delivery of a certified or bank check or by wire transfer of immediately available funds to such account as each such Put Holder shall direct by written notice delivered to the Corporation or the Designee not later than two Business Days before such closing. 7. In the event the Put Right is exercised during the Sharing Period, the Corporation (or, if applicable, the Designee) shall (i) deduct from the purchase price paid for the Put Shares being sold by each Put Holder pursuant to this Section F such amount, if any, as is then required to be paid by such Put Holder with respect to such Put Holder's shares of Common Stock for payment of Excess Return Sharing Payments pursuant to the TARSAP Replacement Plan and (ii) pay to each Specified Executive who qualifies therefor the appropriate Excess Return Sharing Payment on the terms and subject to the conditions of the TARSAP Replacement Plan; all subject to withholding for taxes as provided in Article ELEVENTH. 8. The Put Right may only be exercised once and shall expire as to all remaining B Holders upon the first closing of any purchase of Put Shares. G. Call Rights. 1. Subject to the terms and conditions of this Section ----------- G, during a Call Period, the Corporation shall have the right (the "Call Right") ---------- to purchase all, but not less than all, of the shares of Common Stock owned by each of the B Holders, and upon exercise of a Call Right in accordance with this Section G, each B Holder shall sell all, but not less than all, of the shares of Common Stock owned by such B Holder to the Corporation; provided that the Class A Directors may cause the Corporation to assign such option to a Designee in accordance with the definition of that term. As used in this Section G, "Call ---- Period" means (a) the third calendar quarter of 1998 and (b) the second calendar - ------ quarter of each year, commencing in 1999. 2. The per share price (the "Call Price") for all shares of Common Stock ---------- to be purchased upon exercise of the Call Right (the "Call Shares") shall be the ----------- quotient obtained by dividing: (a) the remainder of (i) the product of nine times EBITA for the 12 months ending on the December 31 (March 31, in the case of the first Call Period) immediately preceding the exercise of the Call Right, as set forth in the financial statements of the Corporation, minus (ii) Consolidated Debt as of such day, by (b) the number of shares of Common Stock outstanding as of such day. 3. The Call Right may be exercised by giving written notice (the "Call ---- Notice") to each B Holder during the Call Period. The Corporation shall give - ------ such notice at the request of a Designee exercising the Call Right. The closing of all purchases of Call Shares shall take place at the principal executive office of the Corporation at 10 a.m. local time on the later of (a) the Business Day following the delivery to the B Holders of the Call Notice or (b) the fifth Business Day following the expiration or termination of all waiting periods under HSR applicable to such purchases, or at such other time and/or place as the parties to such purchases may agree. At such closing, (i) each B Holder shall Transfer to the Corporation or the Designee good and marketable title to all Call Shares owned by such holder, free and clear of any lien, claim or encumbrance, by delivery of the certificates representing the Call Shares to be Transferred, duly endorsed in blank, with any required stock transfer tax stamps attached, together with such stock powers, certificates and other instruments of transfer as the Corporation or the Designee shall reasonably request; and (ii) the Corporation or the Designee shall pay to each B Holder the purchase price for the Call Shares being sold by such B Holder (calculated as provided in Paragraph 2) in cash, by delivery of a certified or bank check or by wire transfer of immediately available funds to such account as such B or C Holder shall direct by written notice delivered to the Corporation or the Designee not later than two Business Days before such closing. 4. In the event the Call Right is exercised during the Sharing Period, the Corporation (or, if applicable, the Designee) shall (i) deduct from the purchase price paid for the Call Shares being sold by each B Holder pursuant to this Section G such amount, if any, as is then required to be paid by such B Holder from the proceeds of the shares sold by such B Holder as payment of Excess Return Sharing Payments pursuant to Article ELEVENTH and (ii) pay to each Specified Executive who qualifies therefor the appropriate Excess Return Sharing Payment on the terms and subject to the conditions of the TARSAP Replacement Plan; all subject to withholding for taxes as provided in Article ELEVENTH. 5. Notwithstanding any contrary provision of this Section G, if during any twelve month period ending December 31 (March 31 in the case of the first Call Period), the Corporation shall effectuate, through any individual transaction or series of related transactions (including by way of merger), any acquisition of the equity securities or assets of any other Person for a price (including assumed liabilities) in excess of $5,000,000 which acquisition is not in the ordinary course of business consistent with past practice, that has not been approved or ratified by the Class B Directors, the Call Price for the Call Period next following such acquisition shall be the greater of (i) the Call Price for such Call Period, determined after excluding the effects of such acquisition (including the incurrence of any indebtedness to finance the acquisition) or (ii) the Call Price for such Call Period without excluding such effects. H. Determination of Put Price and Call Price. Promptly following the ----------------------------------------- commencement of a Put Period or a Call Period, the Corporation shall, upon the request of, in the case of Put Period, any Principal B Holder or, in the case of a Call Period, RRD, calculate the Put Price or Call Price, as the case may be, for such Put Period or Call Period. The calculation of such Put Price or Call Price shall be subject to the approval in good faith of the Board and the Put Price or Call Price approved by the Board shall be final and binding, providing that if such calculation is not approved by a majority of the Class A Directors and a majority of the Class B Directors, then the calculation shall be made by an independent accounting firm of nationally recognized standing selected by the Class I Directors (with the Class A Directors and the Class B Directors each having the right to veto one such accounting firm selected by the Class I Directors). The calculation made by such independent accounting firm shall be final and binding. SIXTH: A. Number and Classes of Directors. 1. Except to the extent ------------------------------- otherwise provided in this Restated Certificate of Incorporation, the business and affairs of the Corporation shall be managed by or under the direction of the Board, which shall consist of not less than eight nor more than 12 directors. Election of directors need not be by written ballot unless the By-laws of the Corporation so provide. Effective at the Filing Time, the number of directors which shall constitute the whole Board shall be eight but such number may be increased at any time to not more than 12 only by action of the Class A Directors. Subject to Section E, the Board shall be divided into three classes as follows: (a) Not less than three nor more than seven Class A Directors (the "Class A Directors") who shall be elected and may only be removed ---------------- without cause by vote of the holders of A Common; (b) Three Class B Directors (the "Class B Directors") who shall be ----------------- elected and may only be removed without cause by vote of the holders of BV Common; and (c) Two Class I Directors (the "Class I Directors") who shall not ----------------- be Affiliates of any Stockholder and shall be elected and may only be removed without cause by vote of the holders of A Common and BV Common voting together as a single class, except that the initial Class I Directors may only be removed by vote of the holders of the A Common and by vote of the holders of BV Common. Each Class A Director and Class B Director shall be elected to serve until the next annual meeting of Stockholders and the election and qualification of his or her successor. Each initial Class I Director shall serve until the third annual meeting of Stockholders following his or her initial election, and thereafter each Class I Director shall be elected to serve until the next succeeding annual meeting of Stockholders, and, in each case, the election and qualification of his or her successor. B. Vacancies. Vacancies in the Class A Directors may be filled --------- by the remaining Class A Directors then in office or by vote of the holders of A Common. Vacancies in the Class B Directors may be filled by the remaining Class B Directors then in office or by a vote of the holders of BV Common. Vacancies in Class I Directors may be filled by action of the Class A Directors and the Class B Directors or by the holders of A Common and BV Common voting together as a single class. C. Quorum and Acts of Directors. 1. Directors comprising at ---------------------------- least 66-2/3% of the Board (including at least one Class A Director and one Class B Director) must be present, in person or by telephone, at every meeting of the Board to constitute a quorum, except that in the case of any meeting of the Board at which approval of any of the actions described in Paragraph 2 is to be sought, directors comprising at least 66-2/3% of the Board including directors comprising a majority of the Class A Directors and directors comprising a majority of the Class B Directors must be present in person or by telephone to constitute a quorum. Subject to Paragraph 2, the act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board unless otherwise provided by law, this Restated Certificate of Incorporation or the By-Laws of the Corporation. References in this Restated Certificate of Incorporation to an action, request, approval or ratification of a class of directors means either the affirmative vote of a majority of the directors of such class at a duly called and held meeting of the Board or the unanimous written consent of the directors of such class. 2. Notwithstanding that no vote may be required or that a lesser percentage vote may be specified by law, by the provisions of this Restated Certificate of Incorporation or the By-Laws of the Corporation or otherwise: (a) the Corporation shall not take, and shall not cause or permit any subsidiary of the Corporation to take, any of the actions specified in clauses (i) through (x), in a single transaction or a series of related transactions, without the approval of the Class A Directors; (i) amend this Restated Certificate of Incorporation or the By-laws of the Corporation or the certificate or articles of incorporation or by-laws of any subsidiary of the Corporation; (ii) authorize or issue, or obligate itself to issue, any equity security (including any security convertible into or exercisable or exchangeable for any equity security) except for sales or issuances of shares of capital stock of a wholly-owned subsidiary of the Corporation to the Corporation or to another wholly-owned subsidiary of the Corporation; (iii) redeem, retire, purchase or otherwise acquire, directly or indirectly, through any of its subsidiaries or otherwise, shares of its capital stock or warrants or options with respect to such capital stock, except as provided in the Restated Certificate of Incorporation; (iv) voluntarily dissolve or liquidate; (v) register any security under the Securities Act (except pursuant to any agreement granting Securities Act registration rights approved by the Board in accordance with this Paragraph 2), grant Securities Act registration rights to any person, or withdraw, reduce, expand or otherwise modify the Securities Act registration rights granted to any Person; (vi) enter into or engage in, or amend or modify the terms of, any material transaction or arrangement between the Corporation or any of its subsidiaries and any director or officer of the Corporation, any stockholder, or any partner or family member of any such Person, or any Affiliate of any of the foregoing Persons, except a purchase of Common Stock pursuant to Section B, C, F or G of Article FIFTH; (vii) declare or pay any cash or other dividend or make any other distribution of any kind (including any Distribution, as defined in Section C or Article FOURTH) on its capital stock; (viii) purchase, lease, exchange or otherwise acquire any equity securities or assets of any other Person, except for acquisitions in the ordinary course of business consistent with past practice; (ix) incur, create, assume, become or be liable in any manner with respect to, or permit to exist, any indebtedness (including capitalized leases) or for the deferred purchase price for the acquisition of property, other than (1) accounts payable incurred in the ordinary course of business or (2) indebtedness for borrowed money not to exceed in the aggregate at any one time 110% of the amount of indebtedness for money borrowed contemplated in any applicable operating plan that has been approved by the Board (including a majority of the Class A Directors and a majority of the Class B Directors); or (x) sell, lease, exchange, transfer or otherwise dispose of (by merger, consolidation or otherwise), any assets (including the capital stock of subsidiaries), having a Fair Value in excess of 10% of the consolidated net assets of the Corporation and its subsidiaries, other than in the ordinary course of business, provided that this limitation shall not apply to transfers to the Corporation or any of its wholly-owned subsidiaries; and (b) the Corporation shall not take, and shall not permit any subsidiary of the Corporation to take, any of the actions specified in clause (i), (ii), (iii), (v) or (vi) of subparagraph (a) of this Paragraph 2, in a single transaction or a series of related transactions, without the approval of the Class B Directors. D. Board Committees. Any committee of the Board designated ---------------- pursuant to Section 141 of the GCL shall have (i) at least one member each from among the Class A Directors and the Class B Directors, and (ii) the same proportion, as nearly as may be, of members who are Class A Directors and Class B Directors as the number of Class A Directors and Class B Directors on the Board. No action of any such committee shall be taken without the approval of at least one member who is a Class A Director and at least one member who is a Class B Director. E. Termination. The provisions of the Article SIXTH shall ----------- terminate and be of no further force and effect, and thereafter the Board shall consist of a single class of directors comprising initially the then incumbent directors, upon the earliest to occur of: (a) the merger or consolidation of the Corporation with or into another Person, if immediately thereafter the holders of Common Stock immediately before the effective date of such merger or consolidation and their Affiliates own less than 50% of the capital stock having ordinary voting rights in the election of directors of the surviving or resulting Person or its parent; or the sale of all or substantially all of the business and assets of the Corporation; (b) the Closing of the Initial Public Offering; (c) the purchase of Common Stock upon the exercise of the Put Right or the Call Right pursuant to article FIFTH; or (d) at any time that the Stockholders who received the initial issuance of B Common own of record in the aggregate less than 10% of the sum of (i) the then outstanding shares of Common Stock and (ii) all shares of Common Stock issuable upon exercise of any then outstanding options or rights to acquire shares of Common Stock or conversion of any then outstanding convertible securities (excluding conversions pursuant to Section E of Article FOURTH). SEVENTH: A. Indemnification. 1. The Corporation shall --------------- indemnify and hold harmless to the fullest extent permitted under the GCL, as it exists at the Filing Time or as it may thereafter be amended, any Person who was or is made a party to or is threatened to be made a party to or is otherwise involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was or has agreed to become a director or officer of the Corporation, or is or was a director or officer of the Corporation serving (or who has agreed to serve) at the request of the Corporation as a director, officer, trustee, employee or agent of or in any other capacity with respect to another Person (in any of the foregoing capacities, a "Representative of the --------------------- Corporation"), or by reason of any action alleged to have been taken or omitted - ----------- in such capacity, and may indemnify to the same extent any person who was or is a party to or is threatened to be made a party to any such action, suit or proceeding by reason of the fact that he or she is or was or has agreed to become an employee or agent of the Corporation serving (or who has agreed to serve) at the request of the Corporation as a Representative of the Corporation, against expenses (including attorneys' and other professional or expert's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding. 2. Expenses (including attorney's and other professional or expert's fees) incurred in defending any civil, criminal, administrative or investigative action, suit or proceeding shall (in the case of any action, suit or proceeding against a director or officer of the Corporation) or may (in the case of any action, suit or proceeding against an employee, agent or Representative of the Corporation) be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board upon receipt of an undertaking by or on behalf of the indemnified Person to repay such amount if it shall ultimately be determined that such Person is not entitled to be indemnified by the Corporation as authorized in this Article SEVENTH. The Corporation may require security for any such undertaking. 3. The indemnification and the rights set forth in this Article SEVENTH shall not be exclusive of any provisions with respect thereto in the By- Laws of the Corporation or any other contract or agreement between the Corporation and any officer, director, trustee, employee or agent or Representative of the Corporation, and shall inure to the benefit of the estate or personal representative of any Person indemnified hereunder. 4. The Corporation's obligation, if any, to indemnify any Person who was or is serving at its request as a director, officer, trustee, employee, partner or agent of another Person shall be reduced by any amount such Person may collect as indemnification from such other corporation, partnership, joint venture or other enterprise, as the case may be. The Corporation shall not be required to indemnify a Person in connection with a proceeding initiated by such Person, including a counterclaim or crossclaim, unless the proceeding was authorized by the Board. 5. For purposes of this Article SEVENTH: (a) any reference to "other enterprise" shall include all plans, programs, policies, agreements, contracts and payroll practices and related trusts for the benefit of or relating to employees of the Corporation and its related entities ("Employee Benefit ---------------- Plans"); (b) any reference to "fines", "penalties", "liability" and "expenses" - ----- shall include any excise taxes, penalties, claims, liabilities and reasonable expenses (including reasonable legal fees and related expenses) assessed against or incurred by a Person with respect to any Employee Benefit Plan; (c) any reference to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation or trustee or administrator of any Employee Benefit Plan which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an Employee Benefit Plan, its participants, beneficiaries, fiduciaries, administrators and service providers; (d) any reference to serving at the request of the Corporation as a director, officer, employee or agent of a partnership or trust shall include service as a partner or trustee; and (e) a Person who acted in good faith and in a manner he or she reasonably believed to be in the interest of the participants and beneficiaries of an Employee Benefit Plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" for purposes of this Article SEVENTH. B. Limitation of Liability. No director of the Corporation shall be ----------------------- personally liable to the Corporation or any Stockholder for monetary damages for breach of fiduciary duty as a director, except for liability (a) for any breach of the director's duty of loyalty to the Corporation or the Stockholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) under Section 174 of the GCL, or (d) for any transaction from which the director derived an improper personal benefit. If the GCL is amended after the Filing Time to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the GCL as so amended. C. Effect of Amendment of Repeal. Neither the amendment nor ----------------------------- repeal of any provision of this article SEVENTH nor the adoption of any provision of this Restated Certificate of Incorporation inconsistent with this Article SEVENTH shall eliminate or reduce the effect of this Article SEVENTH in respect of any matter arising or relating to any actions or omissions occurring prior to such amendment, repeal or adoption of an inconsistent provision or in respect of any cause of action, suit or claim relating to any such matter that would have given rise to a right of indemnification or right to receive payments of expenses pursuant to Section A of this Article SEVENTH if such provision had not been so amended or repealed or if a provision inconsistent therewith had not been so adopted. EIGHTH: A. Relations with RD. 1. In anticipation that the ----------------- Corporation and RRD may engage in the same or similar activities or lines of business and have an interest in the same areas of corporate opportunities, and in recognition of (a) the benefits to be derived by the Corporation through its continued contractual, corporate and business relations with RRD (including service of officers and directors of RRD as officers and directors of the Corporation) and (b) the difficulties attendant to any director, who desires and endeavors fully to satisfy such director's fiduciary duties, in determining the full scope of such duties in any particular situation, the provisions of this Article EIGHTH are set forth to regulate, define and guide the conduct of certain affairs of the Corporation as they may involve RRD and its officers and directors, and the powers, rights, duties and liabilities of the Corporation and its officers, directors and Stockholders in connection therewith. 2. In anticipation that (a) RRD will have continued contractual, corporate and business relations with the Corporation, and in anticipation that the Corporation and RRD may enter into contracts or otherwise transact business with each other and that the Corporation may derive benefits therefrom and (b) the Corporation may from time to time enter into contractual, corporate or business relations with RRD, and the provisions of this Article EIGHTH are set forth to regulate and guide certain contractual, corporate and other business relations of the Corporation as they may involve RRD, and the powers, rights, duties and liabilities of the Corporation and its officers, directors and Stockholders in connection therewith. 3. The provisions of this Article EIGHTH are in addition to, and not in limitation of, the provisions of the GCL and the other provisions of this Restated Certificate of Incorporation. Any contract, activity or business relation which does not comply with procedures set forth in this Article EIGHTH shall not by reason thereof be deemed void or voidable or result in any breach of any fiduciary duty or duty of loyalty or failure to act in good faith or in the best interests of the Corporation or the derivation of any improper personal benefit, but shall be governed by the provisions of this Restated Certificate of Incorporation, the By-Laws, the GCL and other applicable law. B. Corporation Opportunities; Competition. 1. Except as RRD may -------------------------------------- otherwise agree in writing, (a) RRD shall have the right to, and shall have no duty not to, (i) engage in the same or similar business activities or lines of business as the Corporation, including those competing with the Corporation, and (ii) do business with any client or customer of the Corporation, and (b) notwithstanding any provision of this Restated Certificate of Incorporation to the contrary, either RRD nor any officer, director or Affiliate thereof shall be liable to the Corporation or the Stockholders for breach of any fiduciary duty by reason of any such activities of or of such Person's participation therein. Except as RRD may otherwise agree in writing, in the event that RRD acquires knowledge of a potential transaction or matter that may be a corporate opportunity for both RRD and the Corporation, RRD shall have no duty to communicate or present such corporate opportunity to the Corporation and, notwithstanding any provision of this Restated Certificate of Incorporation to the contrary, shall not be liable to the Corporation or the Stockholders for breach of any fiduciary duty as a Stockholder by reason of the fact that RRD pursues or acquires such corporate opportunity for itself, directs such corporation opportunity to another Person, or does not present such corporate opportunity to the Corporation. 2. In the event that a director or officer of the Corporation who is also a director or officer of RRD acquires knowledge of a potential transaction or matter that may be a corporate opportunity for both the Corporation and RRD, such director or officer of the Corporation shall act in good faith in a manner consistent with the following policy: (a) a corporate opportunity offered to any Person who is a director, officer or employee of both the Corporation and RRD shall belong to RRD or to the Corporation, as the case may be, if such opportunity is expressly offered to such Person primarily in his capacity as a director, officer or employee of RRD or of the Corporation, respectively; (b) otherwise, such opportunity shall belong to either RRD or the Corporation as a majority of the Independent Directors (as defined in Section D) shall determine in their good faith judgment, taking into account all the facts and circumstances with respect to such opportunity. 3. For the purposes of this Section B, "corporate opportunities" shall not include any business opportunities that are, from their nature, not in the line of the Corporation's business or are of no practical advantage to it or that are ones in which the Corporation has no interest or reasonable expectancy. C. Interested Transactions. 1. No contract, agreement, arrangement ----------------------- or transaction between the Corporation and RRD, or between the Corporation and one or more of the directors or officers of the Corporation, or any amendment, modification or termination thereof, shall be void or voidable solely for the reason that RRD or any one or more of the officers of directors of the Corporation are parties thereto, or have a financial interest therein, or solely because any such directors or offices are present at or participate in the meeting of the Board or committee thereof which authorizes the contract, agreement, arrangement, transaction, amendment, modification or termination or solely because his or their votes are counted for such purpose, if: (a) the material facts as to the relationship or interest and as to the contract, agreement, arrangement, transaction, amendment, modification or termination are disclosed or are known to the Board or the committee thereof that authorized the contract, agreement, arrangement, transaction, amendment, modification or termination and the Board or such committee in good faith authorizes or approves the contract, agreement, arrangement, transaction, amendment, modification or termination by the affirmative vote of a majority of the Independent Directors; (b) such contract, agreement, arrangement, transaction, amendment, modification or termination is effected pursuant to, and consistent with, terms and conditions specified in any arrangements, standards, guidelines or protocols (contemplating multiple transactions), which arrangements, standards, guidelines or protocols are in good faith authorized or approved, after disclosure or knowledge of the material facts related thereto (including any interest of RRD), by the affirmative vote of a majority of the Independent Directors (such authorization or approval or such arrangements, standards, guidelines or protocols constituting or being deemed to constitute authorization or approval of such contract, agreement, arrangement, transaction, amendment modification or termination); or (c) such conract, agreement, arrangement, transaction, amendment, modification or termination is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board. 2. Each contract, agreement, arrangement, transaction, amendment, modification or termination authorized, approved or effected, and each of such arrangements, standards, guidelines or protocols so authorized or approved, as described in clause (a) or (b) of Paragraph 1 shall be deemed to be entirely fair to the Corporation and the Stockholders; provided that if such authorization or approval is not obtained, or such contract, agreement, arrangement, transaction, amendment, modification or termination is not so effected, no presumption shall arise that such contract, agreement, arrangement, transaction, amendment, modification or termination, or such arrangements, standards, guidelines or protocols, is or are not fair to the Corporation and its stockholders. 3. Directors of the Corporation who are also directors or officers of RRD may be counted in determining the presence of a quorum at a meeting of the Board or Committee thereof that authorizes or approves any such contract, agreement, arrangement, transaction, amendment, modification or termination or any such arrangements, guidelines, standards or protocols. 4. RRD shall not be liable to the Corporation or the Stockholders for breach of any fiduciary duty by reason of the fact that RRD in good faith and in compliance with this Section C takes any action or exercises any rights or gives or withholds any consent in connection with any agreement or contract between RRD and the Corporation. No vote cast or other action taken by any Person who is an officer, director or other representative of RRD, which vote is cast or action is taken in his or her capacity as a director of this Corporation, shall constitute an action of or the exercise of a right by or a consent of RRD for the purpose of any such agreement or contract. D. Certain Definitions. For purposes of this Article EIGHTH only: ------------------- (a) the "Corporation" shall mean the Corporation and all Persons in ----------- which the Corporation beneficially owns (directly or indirectly) more than 50% of the outstanding voting stock, voting power or similar voting interests; (b) any contract, agreement, arrangement or transaction with any Person in which the Corporation beneficially owns (directly or indirectly) more than 50% of the outstanding voting stock, voting power or similar voting interests, or with any officer or director thereof, shall be deemed to be a contract, agreement, arrangement or transaction with the Corporation; (c) References to RRD include its Affiliates as well as its subsidiaries; and (d) "Independent Director" means a director of the Corporation -------------------- (i) who has no relationship to the Corporation other than as director and a holder of Common Stock or an option to purchase Common Stock, in an aggregate amount not exceeding one percent of the outstanding Common Stock, and (ii) is not a director, officer, employee, partner, trustee or Affiliate of, or otherwise financially interested in, any other Stockholder or Affiliate thereof. A vote or determination of the Independent Directors or a majority of them shall be effective for purposes of this Article EIGHTH even though the number of Independent Directors is less than a quorum. E. Consent to Provisions. Any Person purchasing or otherwise --------------------- acquiring any interest in any shares of capital stock of the Corporation shall be deemed to have notice of and to have consented to the provisions of this Article EIGHTH. F. Amendment or Repeal. In addition to any vote of the ------------------- Stockholders required by this Restated Certificate of Incorporation or the GCL, the affirmative vote of the holders of at least 60% of the Common Stock then outstanding, voting together as a single class, shall be required to alter, amend or repeal, or adopt any provision inconsistent with, any provision of this Article EIGHTH. Neither the alteration, amendment or repeal of this Article EIGHTH nor the adoption of any provision inconsistent with this Article EIGHTH shall eliminate or reduce the effect of this Article EIGHTH in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article EIGHTH, would accrue or arise, prior to such alteration, amendment, repeal or adoption. NINTH: A. By-laws. In furtherance and not in limitation of the ------- powers conferred by statute, the Board of Directors is expressly authorized to make, alter or repeal the By-laws of the Corporation, subject to any specific limitation on such power contained in any By-laws adopted by the stockholders and subject to the provisions in this Restated Certificate of Incorporation. B. Amendment. The Corporation reserves the right to amend or --------- repeal any provision contained in this Restated Certificate of Incorporation in the manner now or hereafter prescribed by the GCL and this Restated Certificate of Incorporation, and all rights herein conferred upon Stockholders or directors are granted subject to this reservation. C. Interpretation. Terms defined herein apply to the plural as -------------- well as the singular. Accounting terms have the meanings assigned to them under generally accepted accounting principles in the United States unless the context otherwise requires. An index of definitions is attached to this Restated Certificate of Incorporation for convenience of reference but shall not be deemed to be a part thereof. References to the neuter gender include the masculine or feminine, where appropriate. The word "including" means without limitation and the word "or" is not exclusive. Section captions are inserted for convenience of reference and shall not affect the meaning or interpretation of any provision. References to Sections without more are to Sections of the same Article, and references to Paragraphs without more are to Paragraphs within the same Section. TENTH: This Corporation hereby expressly elects, pursuant to Sections 203(b)(3) of the GCL, not to be governed by Section 203 of the GCL. ELEVENTH: A. Sharing Obligations. If, during the Sharing Period, ------------------- any Triggering Acquisition is consummated, the Corporation shall notify the SHI Representative in the manner provided in the TARSAP Replacement Plan, to permit it to calculate whether any Excess Return Sharing Payments are required to be paid to any Specified Executive and, if so, the amounts thereof, all in the manner provided in TARSAP Replacement Plan. If the Corporation is notified by the SHI Representative (as provided in the TARSAP Replacement Plan) that any such Excess Return Sharing Payments are owed hereunder, there shall be deducted from the proceeds to each B Holder an amount per share of Common Stock sold by such B Holder in the Triggering Acquisition, determined in accordance with the TARSAP Replacement Plan, sufficient to cover, in the aggregate, such B Holder's obligation to pay or cause to be paid Excess Return Sharing Payments, which amounts shall then be paid to the Specified Executives who qualify for such payments (subject to withholding by the Corporation of any and all amounts required to be withheld therefrom by the Corporationto satisfy any applicable tax withholding requirements of federal, state or local law) on the terms and subject to the conditions of the TARSAP Replacement Plan. B. Certain Definitions. As used in this Restated Certificate of ------------------- Incorporation: "Excess Return Sharing Payments" has the meaning specified in the ------------------------------ TARSAP Replacement Plan. "Sharing Period" has the meaning specified in the TARSAP Replacement -------------- Plan. "SHI Representative" has the meaning specified in the TARSAP ------------------ Replacement Plan. "Specified Executive" shall have the meaning ascribed to "Plan ------------------- Participant" in the TARSAP Replacement Plan. "TARSAP Replacement Plan" shall mean the TARSAP Replacement Plan and ----------------------- Agreement dated as of April 21, 1995 among the Corporation, the SHI Representative and the other parties thereto, as amended and in effect from time to time, a copy of which is maintained by the Corporation at its headquarters and copies of which will be made available to any Stockholder upon request. "Triggering Acquisition" has the meaning specified in the TARSAP ---------------------- Replacement Plan. IN WITNESS WHEREOF, R.R. Donnelley Global Software Services Corp. has caused this Certificate to be signed on this 21st day of April, 1995 in its name by a duly authorized officer. R.R. DONNELLEY GLOBAL SOFTWARE SERVICES CORP. By: /s/ Robert E. Logan --------------------- Vice President CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF STREAM INTERNATIONAL INC. Pursuant to Section 242 to the General Corporation Law of the State of Delaware --------------------------------------- Stream International Inc. (hereinafter called the "Corporation"), organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify as follows: At a meeting of the Board of Directors of the Corporation, a resolution was duly adopted, pursuant to Section 242 of the General Corporation Law of the State of Delaware, setting forth an amendment to the Certificate of Incorporation of the Corporation and declaring said amendment to be advisable. The stockholders of the Corporation duly approved said proposed amendment by unanimous written consent, and notice has been given to non-consenting stockholders, in accordance with Sections 228 and 242 of the General Corporation Law of the State of Delaware. The resolution setting forth the amendment is as follows: RESOLVED: That Article FOURTH of the Certificate of Incorporation of the -------- Corporation be and hereby is deleted in its entirety and the following Article FOURTH is inserted in lieu thereof: "A. Authorized Shares. The total number of shares of stock which the ----------------- Corporation shall have authority to issue is 85,675,000 shares, consisting of three classes: (1) 75,000,000 shares of Class A Common Stock, $.01 par value ("A Common"), (ii) 10,000,000 shares of Class B-V Common Stock, $.01 par value ("B-V Common") and (iii) 675,000 shares of Class B-N Common Stock, $.01 par value ("B-N Common" and, together with the B-V Common, "B Common"). All of the foregoing classes of stock are collectively referred to as "Common Stock," each of the A Common, the B-V Common and the B-N Common a "Class of Common Stock." A holder of record of Common Stock is referred to herein as a "stockholder." IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be affixed hereto and this Certificate of Amendment to be signed by its Chairman of the Board and attested by its Secretary this 29th day of August, 1995 -------- Stream International Inc. By: /s/ Rory J. Cowan ------------------------- Chairman of the Board ATTEST: /s/ Alicia T. Brophy - -------------------------------- Secretary [Corporate Seal] CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION Stream International Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify: FIRST: that the Board of Directors of Stream International Inc. (the "Corporation") adopted by unanimous written consent resolutions setting forth proposed amendments to Restated Certificate of Incorporation of the Corporation, declaring said amendments to be advisable and directing that such amendments be submitted to the stockholders of the Corporation for their consideration. The amendments proposed in the resolutions amend the Restated Certificate of Incorporation as follows: 1. Paragraph 2 of Section E of Article FOURTH is hereby amended to read in its entirety as follows: 2. Subject to Paragraph 4, each share of B Common which is purchased by RRD pursuant to Section F of Article FIFTH or the Corporation or the Designee pursuant to Section G of Article FIFTH shall, immediately prior to such purchase, automatically be converted into the number of full and fractional shares of A Common which would be issuable if such shares were then being converted pursuant to Paragraph 1. Subject to Paragraph 4, immediately prior to any (i) merger or consolidation of the Corporation with any other corporation as a result of which a majority of the Common Stock of the Corporation or any other surviving corporation would be owned by any person other than RRD or any Affiliate of RRD, (ii) sale of all or substantially all of the common stock or assets of the Corporation (including any Total Disposition), each share of B Common shall automatically be converted into the number of full and fractional shares of A Common which would be issuable if such shares were then being converted pursuant to Paragraph 1. 2. Subparagraph (f) of Paragraph 1 of Section A of Article FIFTH is hereby amended to read in its entirety as follows: (f) "Designee" means R.R. Donnelley & Sons Company, a Delaware -------- corporation, or R.R. Donnelley Norwest Inc., an Oregon corporation, or R.R. Donnelley International, Inc., a Delaware corporation, (provided that R.R. Donnelley & Sons Company deliver a guaranty of the obligations of such corporation) if (i) for any reason (other than the lack of funds legally available therefor) the Corporation fails or refuses to exercise any right granted to the Corporation pursuant to Section B, C or G to purchase shares of Common Stock and the Class A Directors had approved the exercise of such rights, or (ii) for any reason the Corporation is unable to purchase shares of Common Stock it has the right or obligation to purchase pursuant to Section B, C or G; 3. Subparagraph (m) of Paragraph 1 of Section A of Article FIFTH is hereby amended to read in its entirety as follows: (m) "RRD" means, collectively, R.R. Donnelley & Sons Company, a --- Delaware Corporation, and its subsidiaries (other than the Corporation, and its subsidiaries; provided, that for purposes of Section F of Article -------- FIFTH, "RRD" means only R.R. Donnelley & Sons Company, a Delaware corporation; and 4. Paragraph 7 of Section A of Article FIFTH is hereby amended to read in its entirety as follows: 7. Notwithstanding any other provision of this Article FIFTH to the contrary: (a) the corporation and any Stockholder may Transfer shares of Common Stock pursuant to a public offering registered under the Securities Act; and (b) the Corporation may enter into an agreement to consolidate with or merge with or into any other Person if such agreement is approved by the Board and by the requisite vote of the Stockholders in accordance with this Restated Certificate of Incorporation and the GCL and any other applicable laws. In either such event, the shares of Common Stock may be sold in such public offering or exchanged pursuant to such merger or consolidation for the consideration provided thereunder without compliance with the provisions of this Article FIFTH. A Transfer to (i) the corporation or a Designee pursuant to Section B, C or G, (ii) a Stockholder pursuant to Section C, (iii) a Purchaser pursuant to Section E or (iv) RRD pursuant to Section F shall not be subject to any right or option to purchase, or obligation to sell, Common Stock Pursuant to any other provision of this Article FIFTH. 5. Section F of Article FIFTH is hereby amended to read in its entirety as follows: F. Put Rights. 1. Subject to the terms and conditions of this ---------- Section F, during each Put Period, and Principal B Holder shall have the right (the "Put Right") to sell to RRD, and upon exercise of the Put --------- Right in accordance with this Section F, RRD shall purchase from the B Holder exercising the Put Right, all, but not less than all, of the shares of Common Stock owned by such B Holder. If the Put Right has been exercised, each other B Holder shall have a similar put exercisable during the time period specified below to sell to RRD, and upon proper notice to the Corporation and RRD in accordance with this Section F, RRD shall purchase from each other B Holder giving such notice, all, but not less than all, of the shares of Common Stock owned by each such B Holder. 2. As used in this Section F, "Put Period" means: (a) the ---------- second calendar quarter of each year commencing in 1998 (each such quarter, an "Annual Put Period"), and (b) in the event the Class A Directors increase the - ------------------ number of directors in accordance with Section A of Article SIXTH, the period (referred to herein as an "Expansion Put Period") commencing with the day on -------------------- which the number of directors is increased and ending on the last day of the third full calendar month following the month in which such expansion occurred. 3. The Put Right may be exercised by any Principal B Holder by giving written notice to the Corporation and to RRD during the Put Period (the "Put Notice"). The Corporation shall promptly send a copy of the ---------- Put Notice to each other Stockholder. Thereupon, each other B Holder shall have the right to sell all, but not less than all, of such B Holder's shares of Common Stock to RRD at the same price and upon the same terms and conditions, by giving written notice thereof to the Corporation and RRD on or before the 30th day after the date of the Put Notice. If the holders of 95% or more of the outstanding shares of B Common exercise the Put Right and the subsequent put granted in this Section F, then each B Holder who did not exercise the Put Right or subsequent put shall be required to sell all of such holder's Common Stock to RRD (the "Mandatory Put"). The B Holders exercising the Put Right and the ------------- subsequent put granted in this Section F and the B Holders subject to the Mandatory Put are referred to herein collectively as the "Put Holders". ----------- 4. The per share price (the "Put Price") for the shares of Common --------- Stock to be purchased upon exercise of the Put Right and each subsequent put by any other B Holder giving proper notice and under the Mandatory Put (the "Put --- Shares") shall be the quotient obtained by dividing: - ------ (a) if the Put Right is exercised during an Annual Put Period, the remainder of (i) the product of eight times EBITA for the 12 months ending on the December 31 immediately preceding the exercise of the Put Right, as set forth in the audited financial statements of the Corporation, minus (ii) Consolidated Debt as of such December 31, by (b) the number of shares of Common Stock issued and outstanding as of such December 31; and (c) if the Put Right is exercised during an Expansion Put Period, the remainder of (iii) the product of eight times EBITA for the 12 months ending on the last day of the month immediately preceding the first day of the Expansion Put Period as set forth in the unaudited financial statements of the Corporation, minus (iv) Consolidated Debt as of such day, by (d) the number of shares of Common Stock issued and outstanding as of such day. 5. Notwithstanding any contrary provision of this Section F, if during any twelve month period ending December 31, the Corporation shall effectuate, through any individual transaction or series of related transactions (including by way of merger), any acquisition of the equity securities or assets of any other Person for a price (including assumed liabilities) in excess of $5,000,000 which acquisition is not in the ordinary course of business consistent with past practice, that has not been approved or ratified by the Class B Directors, the Put Price for the Annual Put Period next following consummation of such acquisition shall be determined after excluding the effects of such acquisition (including the incurrence of any indebtedness to finance the acquisition). 6. The closing of all purchases of Put Shares shall take place at the principal executive office of the Corporation at 10 a.m. local time on the later of (a) the 45th day after the last day of the Put Period (or if such day is not a Business Day, the next succeeding Business Day) or (b) the fifth Business Day following the expiration or termination of all waiting periods under HSR applicable to such purchases, or at such other time and/or place as the parties to such purchases may agree. At such closing, (i) each Put Holder shall Transfer to RRD good and marketable title to the Put Shares being sold by such Put Holder, free and clear of any lien, claim or encumbrance, by delivery of the certificates representing the Put Shares to be Transferred, duly endorsed in blank, with any required stock transfer tax stamps attached, together with such stock powers, certificates, legal opinions and other instruments of transfer as RRD shall reasonably request; and (ii) RRD shall pay to each Put Holder the purchase price for the Put Shares being sold by such Put Holder, (calculated as provided in Paragraph 4 or 5, as applicable) in cash, by delivery of a certified or bank check or by wire transfer of immediately available funds to such account as each such Put Holder shall direct by written notice delivered to RRD not later than two Business Days before such closing. 7. In the event the Put Right is exercised during the Sharing Period, RRD shall (i) deduct from the purchase price paid for the Put Shares being sold by each Put Holder pursuant to this Section F such amount, if any, as is then required to be paid by such Put Holder with respect to such Put Holder's shares of Common Stock for payment of Excess Return Sharing Payments pursuant to the TARSAP Replacement Plan and (ii) pay to each Specified Executive who qualifies therefor the appropriate Excess Return Sharing Payment on the terms and subject to the conditions of the TARSAP Replacement Plan; all subject to withholding for taxes as provided in Article ELEVENTH. 8. The Put Right may only be exercised once and shall expire as to all remaining B Holders upon the first closing of any purchase of Put Shares. 9. The agreement of RRD to perform its obligations as provided in this Section F are set forth in an agreement dated as of December 22, 1995 among RRD, the Corporation and certain other parties, a copy of which is maintained by the Corporation at its headquarters and copies of which will be made available to any Stockholder upon request. SECOND: that the stockholders of the Corporation, by written consent of the holders of more than a majority of the outstanding shares of each class of stock entitled to vote thereon given pursuant to Section 228(c) of the General Corporation Law of the State of Delaware, a copy of which has been filed with the minutes of the Corporation, adopted the foregoing amendments to the Restated Certificate of Incorporation of the Corporation. Written notice of such consent has been given as provided in Section 228(c) of the General Corporation Law of the State of Delaware. THIRD: that said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, Stream International Inc. has caused this Certificate to be signed on this 29th day of December, 1995 in its name by a -------- duly authorized officer. STREAM INTERNATIONAL INC. By: /s/ Rory J. Cowan ------------------------------------ Name: Title: Chief Executive Officer CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION Stream International Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That the Board of Directors of Stream International Inc., by unanimous written consent, duly adopted resolutions setting forth a proposed amendment to the Restated Certificate of Incorporation of said corporation, declaring said amendment to be advisable and directing consideration thereof by the stockholders of said corporation. The resolution setting forth the proposed amendment is as follows: RESOLVED, that Article FIRST of the Restated Certificate of Incorporation of Stream International Inc., be and hereby is, amended to read as follows: "FIRST. The name of the Corporation is Stream International Holdings Inc." SECOND: The Board of Directors of Stream International Inc. directed that such amendment be submitted to the stockholders of the Corporation for their consent and approval and, in lieu of a meeting and vote of stockholders, the stockholders have given written consent to said amendment in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware. THIRD: That said amendment was duly adopted in accordance with the provisions of Sections 242 and 228 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said Stream International Inc. has caused its corporate seal to be hereunto affixed and this Certificate to be signed by its President and attested by its Secretary this 6th day of February, 1996. STREAM INTERNATIONAL INC. By /s/ Stephen D.R. Moore ------------------------------ Stephen D.R. Moore President ATTEST By /s/ Alicia T. Brophey ----------------------- Alicia T. Brophey Secretary CORRECTED CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF STREAM INTERNATIONAL HOLDINGS INC. (formerly Stream International Inc.) Pursuant to Section 103(f) of the General Corporation Law of the State of Delaware --------------------------------------- Stream International Holdings Inc. (hereinafter called the "Corporation"), organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify as follows: At a meeting of the Board of Directors of the Corporation, a resolution was duly adopted, pursuant to Section 242 of the General Corporation Law of the State of Delaware, setting forth an amendment to the Certificate of Incorporation of the Corporation and declaring said amendment to be advisable. The stockholders of the Corporation duly approved said proposed amendment by written consent, and notice has been given to non-consenting stockholders, in accordance with Sections 228 and 242 of the General Corporation Law of the State of Delaware. The Certificate of Amendment filed on August 30, 1995 with respect to such amendment was incorrect in that the references to the portion of the Certificate of Incorporation being amended should have been to Section A of Article FOURTH rather than to Article FOURTH. The correct resolution setting forth the amendment is as follows: RESOLVED: That Section A of Article FOURTH of the Certificate of -------- Incorporation of the Corporation be and hereby is deleted in its entirety and the following Section A is inserted in lieu thereof: "A. Authorized Shares. The total number of shares of stock which the ----------------- Corporation shall have authority to issue is 85,675,000 shares, consisting of three classes: (i) 75,000,000 shares of Class A Common Stock, $.01 par value ("A Common"), (ii) 10,000,000 shares of Class B-V Common Stock, $.01 par value ("B-V Common") and (iii) 675,000 shares of Class B-N Common Stock, $.01 par value ("B-N Common" and, together with the B-V Common, "B Common"). All of the foregoing classes of stock are collectively referred to as "Common Stock"; each of the A Common, the B-V Common and the B-N Common, a "Class of Common Stock." A holder of record of Common Stock is referred to herein as a "Stockholder." IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be affixed hereto and this Corrected Certificate of Amendment to be signed by its Senior Vice President and attested by its Secretary this 14th day of March, 1996. Stream International Holdings Inc. By: /s/ Gene Morphis ----------------------------------- Senior Vice President ATTEST: /s/ Alicia T. Brophey - ----------------------------- Secretary [Corporate Seal] CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF STREAM INTERNATIONAL HOLDINGS INC. Stream International Holdings Inc. (the "Corporation"), organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify as follows: The Board of Directors of the Corporation, by unanimous written consent, pursuant to Section 242 of the General Corporation Law of the State of Delaware, has approved an amendment to Certificate of Incorporation of the Corporation and declared such amendment to be advisable. The stockholders of the Corporation have duly approved such amendment by written consent, and notice has been given to non-consenting stockholders in accordance with Sections 228 and 242 of the General Corporation Law of the State of Delaware. Such amendments amend the Certificate of Incorporation of the Corporation as follows: 1. Paragraph 1 of Section E of Article FIFTH of the Certificate of Incorporation be and hereby is amended to read in its entirety as follows: "1. In the event that RRD proposes to Transfer to a Person (a "Purchaser") other than an Affiliate of RRD shares of Common Stock --------- which, when added to all other shares of Common Stock Transferred by RRD after the Filing Time and prior to such proposed Transfer (other than Transfers permitted under clauses (b), (d) and (e) of Paragraph 6 of Section A of Article FIFTH) would exceed 20% of the issued and outstanding shares of Common Stock at the date of such proposed Transfer (a "Disposition"), RRD shall, not later than 30 days before ----------- the closing of such Disposition give written notice (a "Proposal -------- Notice") of such proposed Disposition to the Corporation, which shall ------ promptly send a copy thereof to each B Holder and to each holder of shares of Class A Common Stock who is contractually entitled to participate in the rights granted under this Section E (an "Eligible A ---------- Holder"), and each B Holder and Eligible A Holder shall have the right ------ (a "Tag Along Right") to require RRD to reduce the number of shares of --------------- Common Stock to be sold by RRD, if necessary, and to require the Purchaser to purchase from each of the B Holders and Eligible A Holders electing to exercise a Tag Along Right that number of shares of Common Stock equal to the product obtained by multiplying (a) the total number of shares of Common Stock to be purchased by the Purchaser by (b) the electing B Holder's or Eligible A Holder's Fractional Interest, as the case may be, rounded up to the nearest whole number; such purchase to be upon the same terms and conditions and at the same time and place, as the sale of Common Stock by RRD in the Disposition. In order to exercise any Tag Along Right, an electing B Holder and Eligible A Holder must be able to transfer good and marketable title to such B Holder's or Eligible A Holder's shares of Common Stock to the Purchaser, free and clear of any lien, claim or other encumbrance. For purposes of this Section E, the term "Fractional Interest" means the quotient obtained by dividing ------------------- (i) the total number of shares of Common Stock owned by the electing B Holder or Eligible A Holder, as the case may be, by (ii) the sum of the total number of shares of Common Stock owned by all electing B Holders, Eligible A Holders and RRD. Each electing B Holder and Eligible A Holder shall give written notice of its election to RRD no later than ten (10) Business Days after its receipt of a Proposal Notice. Neither Section B nor Section C shall apply to sales of shares of Common Stock by Stockholders pursuant to the exercise of the Tag Along Right in accordance with this Paragraph 1." IN WITNESS WHEREOF, this Certificate of Amendment has been executed by a duly authorized officer of Stream International Holdings Inc. on October 31 , ------ 1996. STREAM INTERNATIONAL HOLDINGS INC. By: /s/ Eugene Morphis --------------------------------------- Eugene Morphis, Senior Vice President ATTEST: /s/Alicia T. Brophey - -------------------------------- Alicia T. Brophey, Secretary EX-3.2 3 BY-LAWS OF THE REGISTRANT EXHIBIT 3.2 AMENDED AND RESTATED BY-LAWS OF STREAM INTERNATIONAL INC. ARTICLE I Offices ------- SECTION 1.1. Registered Office. The registered office of the corporation ----------------- in the State of Delaware shall be located at Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle and the name of its registered agent is The Corporation Trust Company. SECTION 1.2. Other Offices. The corporation may also have offices at such ------------- other places both within or without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II Meetings of Stockholders ------------------------ SECTION 2.1. Annual Meeting. The annual meeting of the stockholders shall -------------- be held at 1:00 p.m. on the third Thursday in April in each year, if not a legal holiday, or, if a legal holiday, then on the next succeeding business day, or in any case on such other day as the Board of Directors shall designate, for the purpose of electing directors of each class for which the term expires on that date and for the transaction of such other business as properly be brought before the meeting. If the election of directors shall not be held on the day hereinbefore designated for the annual meeting, or at any adjournment thereof, the Board of Directors shall cause such election to be held at a special meeting of stockholders as soon thereafter as convenient. SECTION 2.2. Special Meetings. Except as otherwise prescribed by statute, ---------------- special meetings of the stockholders for any purpose or purposes, may be called and the location thereof designated by the Chairman at the request in writing of (i) a majority of the Board of Directors, or (ii) stockholders owning not less than a majority of the issued and outstanding shares of Class A Common Stock, Class BV Common Stock and Class BN Common Stock of the corporation. Such request shall state the purposes of the proposed meeting. SECTION 2.3. Place of Meetings. Each meeting of the stockholders for the ----------------- election of directors shall be held at such place within or without the State of Delaware, as the Board of Directors shall designate as the place for such meeting. Meetings of stockholders for any other purpose may be held at such place, within or without the State of Delaware and at such time as shall be determined pursuant to Section 2.2 and stated in the notice of the meeting or in a duly executed waiver of notice thereof. SECTION 2.4. Notice of Meetings. Written or printed notice stating the ------------------ place and time of each annual or special meeting of the stockholders and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given not less than ten (10) days nor more than sixty (60) days before the date of the meeting. (See also Articles IV and IX.) When a meeting is adjourned to another time or place, no notice of the adjourned meeting other than an announcement at the meeting need be given unless the adjournment is for more than thirty (30) days or a new record date is fixed for the adjourned meeting after such adjournment. SECTION 2.5. Quorum. The holders of a majority of the stock of the ------ corporation issued and outstanding and entitled to vote thereat present in person or represented by proxy, shall be requisite for, and shall constitute, a quorum at all meetings of the stockholders of the corporation for the transaction of business, except as otherwise provided by statute, the certificate of incorporation or these bylaws. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat present in person or represented by proxy shall have power to adjourn the meeting from time to time until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. SECTION 2.6. Proxies. At every meeting of the stockholders, each ------- stockholder having the right to vote thereat shall be entitled to vote in person or by proxy. Such proxy shall be appointed by an instrument in writing subscribed by such stockholder and bearing a date not more than three (3) years prior to such meeting, unless such proxy provides for a longer period; and it shall be filed with the Secretary of the corporation before, or at the time of, the meeting. SECTION 2.7. Voting. Unless the certificate of incorporation provides ------ otherwise, at every meeting of stockholders, each stockholder shall be entitled to one (1) vote for each share of stock of the corporation entitled to vote thereat and registered in the name of such stockholder on the books of the corporation on the pertinent record date. When a quorum is present at any meeting of the stockholders, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which, by provision of the statutes, the certificate of incorporation or these bylaws, a different vote is required, in which case -2- such provision shall govern and control the decision of such question. If the certificate of incorporation provides for more or less than one vote for any share on any matter, every reference in these bylaws to a majority or other proportion of stock shall refer to such majority or other proportion of the votes of such stock. SECTION 2.8. Action Without Meeting. Unless otherwise restricted by the ---------------------- certificate of incorporation or these bylaws, whenever the vote of stockholders at a meeting thereof is required or permitted to be taken for or in connection with any corporate action, the meeting and vote of stockholders may be dispensed with if a consent in writing setting forth the action so taken shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented thereto in writing. Such consent shall be filed with the minutes of the stockholders and shall have the same force and effect as a unanimous vote of stockholders. SECTION 2.9. Treasury Stock. Shares of its own stock belonging to the -------------- corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held by this corporation, shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares for the purpose of determining whether a quorum is present. Nothing in this section shall be construed to limit the right of this corporation to vote shares of its own stock held by it in a fiduciary capacity. ARTICLE III Directors --------- SECTION 3.1. Number and Election. As provided in the certificate of ------------------- incorporation, the number of directors which will constitute the whole Board of Directors shall be eight, but such number may be increased at any time to not more than twelve by action of the Class A Directors. The Board of Directors shall be divided into three classes: not less than three nor more than seven Class A Directors; three Class B Directors; and two Class I Directors. Each Class A Director and each Class B Director shall be elected to serve until the next annual meeting of stockholders and the election or qualification of his successor or until his death or resignation or until he shall have been removed in the manner hereinafter provided. Each initial Class I Director shall serve until the third annual meeting of stockholders following his initial election, and thereafter each Class I Director shall be elected to serve until the next succeeding annual meeting of stockholders, and, in each case, the election and qualification of his successor or until his death or resignation or until he -3- shall have been removed in the manner hereinafter provided. Directors need not be residents of the State of Delaware or stockholders of the corporation. SECTION 3.2. Resignations and Vacancies. Any director may resign at any -------------------------- time by giving written notice to the Board of Directors, the Chairman or the Chief Executive Officer. Any such resignation shall take effect at the date of the receipt of such notice or at any time later specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. If, at any time other than the annual meeting of the stockholders, any vacancy occurs in the Board of Directors caused by resignation, death, retirement, disqualification or removal from office of any director or otherwise, or any new directorship is created by an increase in the authorized number of directors, such vacancy shall be filled as provided in the certificate of incorporation, and the director so chosen to fill such vacancy shall hold office until the next annual election of directors of the class to which he was chosen and until his successor shall be duly elected and qualified, unless sooner removed. SECTION 3.3. Removal. Any Class A director may only be removed without ------- cause by the affirmative vote of the holders of a majority of the Class A Common Stock. Any Class B director may only be removed without cause by the affirmative vote of the holders of a majority of the Class BV Common Stock. Any Class I director may only be removed without cause by the affirmative vote of the holders of a majority of Class A Common Stock and Class BV Common Stock voting together as a single class. SECTION 3.4. Management of Affairs of Corporation. The property and ------------------------------------ business of the corporation shall be managed by or under the direction of its Board of Directors, which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these bylaws directed or required to be exercised or done by stockholders. SECTION 3.5. Dividends and Reserves. Except as otherwise provided in the ---------------------- certificate of incorporation and to the extent permitted by law, dividends upon stock of the corporation (i) may be declared by the Board of Directors at any regular or special meeting, and (ii) may be paid in cash, in property, in shares of stock or otherwise. SECTION 3.6. Regular Meetings. An annual meeting of the Board of ---------------- Directors shall be held, without other notice than these bylaws, immediately after, and at the same place as, the annual meeting of the stockholders. The Board of Directors may provide, by resolution, the time and place, either within or without the State of -4- Delaware, for the holding of additional regular meetings without other notice than such resolution. SECTION 3.7. Special Meetings. Special meetings of the Board of Directors ---------------- may be called by the Chairman or the Chief Executive Officer, and shall be called by the Secretary at the request of any one director, to be held at such time and place, either within or without the State of Delaware, as shall be designated by the call and specified in the notice of such meeting; and notice thereof shall be given as provided in Section 3.8 of these bylaws. SECTION 3.8. Notice of Special Meetings. Except as otherwise prescribed -------------------------- by statute, written notice of the time and place of each special meeting of the Board of Directors shall be given at least two (2) days prior to the time of holding the meeting. Any director may waive notice of any meeting. (See also Articles IV and IX.) SECTION 3.9. Quorum. The rules for quorum and acts of directors shall be ------ as provided in the certificate of incorporation. If a quorum shall not be present at any meeting of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Unless otherwise restricted by the certificate of incorporation, any member of the Board of Directors or of any committee designated by the Board of Directors may participate in a meeting of the directors or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by means of such equipment shall constitute presence in person at such meeting. SECTION 3.10. Presumption of Assent. Unless otherwise provided by --------------------- statute, a director of the corporation who is present at a meeting of the Board of Directors at which action is taken on any corporate matter shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless, he shall file his written dissent to such action with the person acting as Secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. SECTION 3.11. Action Without Meeting. Unless otherwise restricted by the ---------------------- certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting, if a written consent thereto is signed by all members of the Board of Directors or of such committee, as the case may be, and such written -5- consent is filed with the minutes of proceedings of the Board of Directors or committee. SECTION 3.12. Committees. The Board of Directors may, by resolution ---------- passed by a majority of the number of directors fixed by these bylaws, designate such committees as it may from time to time determine. Each such committee shall consist of such number and class of directors as provided in the certificate of incorporation. SECTION 3.13. Quorum and Manner of Acting - Committees. The presence of a ---------------------------------------- majority of members of any committee shall constitute a quorum for the transaction of business at any meeting of such committee, provided, however, that the approval of at least one member who is a Class A Director and at least one member who is a Class B Director shall be necessary for the taking of any action thereat. SECTION 3.14. Committee Chairman-Books and Records. The chairman of each ------------------------------------ committee shall be selected from among the members of the committee by the Board of Directors. Each committee shall keep a record of its acts and proceedings, and all actions of each committee shall be reported to the Board of Directors at its next meeting. Each committee shall fix its own rules of procedure not inconsistent with these bylaws or the resolution of the Board of Directors designating such committee and shall meet at such times and places and upon such call or notice as shall be provided by such rules. SECTION 3.15. Fees and Compensation of Directors. Directors shall not ---------------------------------- receive any stated salary for their services as such; but, by resolution of the Board of Directors, a fixed fee for Class I Directors, with or without expenses of attendance, may be allowed for attendance at each regular or special meeting of the Board of Directors. All members of the Board of Directors shall be allowed their reasonable traveling expenses when actually engaged in the business of the corporation. Members of any committee may be allowed like fees and expenses for attending committee meetings. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. ARTICLE IV Notices ------- SECTION 4.1. Manner of Notice. Whenever under the provisions of the ---------------- statutes, the certificate of incorporation or these bylaws notice is required to be given to any stockholder, director or member of any committee designated by the Board of -6- Directors, it shall not be construed to require personal delivery and such notice may be given in writing by depositing it, in a sealed envelope, in the United States mail, air mail or first class, postage prepaid, addressed or by delivering it via facsimile transmission to such stockholder, director or member either at the address of such stockholder, director or member as it appears on the books of the corporation or, in the case of such a director or member, at his business address; and such notice shall be deemed to be given at the time when it is thus deposited in the United States mail or delivered by facsimile transmission. SECTION 4.2. Waiver of Notice. Whenever any notice is required to be ---------------- given under the provisions of the statutes, the certificate of incorporation, or these bylaws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before, at or after the time stated therein, shall be deemed equivalently to such notice. Attendance by a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or committee of directors need be specified in any written waiver of notice unless so required by statute, the certificate of incorporation or these bylaws. ARTICLE V Officers -------- SECTION 5.1. Offices and Official Positions. The officers of the ------------------------------ corporation shall be a Chairman, a Chief Executive Officer, a Secretary and Treasurer. In addition, the Board of Directors may elect one or more divisional Presidents, Vice Presidents and such other officers as the Board of Directors deems necessary, and may prescribe their duties. None of the officers need be a director, a stockholder of the corporation or a resident of the State of Delaware. SECTION 5.2. Election and Term of Office. The officers of the corporation --------------------------- shall be elected annually by the Board of Directors at their first meeting held after each annual meeting of the stockholders. If the election of officers shall not be held at such meeting of the Board of Directors, such election shall be held at a regular or special meeting of the Board of Directors as soon thereafter as may be convenient. Each officer shall hold office until his successor is elected and qualified or until his death or resignation or until he shall have been removed in the manner hereinafter provided. SECTION 5.3. Removal and Resignation. Any officer may be removed, either ----------------------- with or without cause, by a majority of the directors then in office at any regular or -7- special meeting of the Board of Directors. Any officer may resign at any time by giving written notice to the Board of Directors, the Chairman, the Chief Executive Officer or the Secretary of the corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 5.4. Vacancies. A vacancy in any office because of death, --------- resignation, removal, or any other cause may be filled for the unexpired portion of the term by the Board of Directors. SECTION 5.5. Chairman. The Chairman shall be responsible for the overall -------- coordination of the Company's strategic direction and external relations between the corporation and its stockholders and lenders, subject to the policies and directions as may be provided by the Board of Directors. The Chairman shall preside at all meetings of the stockholders and Board of Directors at which he is present. The Chairman shall also have power to execute deeds, mortgages, bonds, contracts or other instruments of the corporation except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the corporation. The Chairman in general shall perform all other duties which may be prescribed by the Board of Directors from time to time. SECTION 5.6. Chief Executive Officer. The Chief Executive Officer of the ----------------------- corporation will be responsible for the corporation's operations and financial performance and, together with the Chairman, the coordination of the corporation's strategic direction, subject to the direction of the Board of Directors. The Chief Executive Officer shall have authority to designate the duties and powers of other officers and delegate special powers and duties to specified officers, so long as such designation shall not be inconsistent with the statutes, these bylaws or action of the Board of Directors. The Chief Executive Officer may execute, in the name and on behalf of the corporation, any deeds, mortgages, bonds, contracts or other instruments which the Board of Directors or a committee thereof has authorized to be executed, except in cases where the execution shall have been expressly delegated by the Board of Directors or a committee thereof to some other officer or agent of the corporation. The Chief Executive Officer may sign with the Secretary or an Assistant Secretary certificates for shares of stock of the corporation, the issuance of which shall have been duly authorized by the Board of Directors, and shall vote, or give a proxy to any other person to vote, all shares of the stock of any corporation standing in the name of the corporation. The Chief Executive Officer in general shall have all other powers and shall perform all other duties which are incident to the chief executive office of a corporation or as may be prescribed by the Board of Directors from time to time or provided in these bylaws. -8- SECTION 5.7. Divisional Presidents. The Divisional Presidents, if any are --------------------- elected, shall have such powers and duties as shall be prescribed by the Board of Directors, assigned by the Chief Executive Officer or provided in these bylaws. SECTION 5.8. Senior Vice Presidents and Vice Presidents. The Senior Vice ------------------------------------------ Presidents and Vice Presidents, if any are elected, shall have such powers and duties as shall be prescribed by the Board of Directors, assigned by the Chief Executive Officer or provided in these bylaws. SECTION 5.9. Secretary. The Secretary shall have the duty to record the --------- proceedings of the meetings of the stockholders and directors in a book to be kept for that purpose. The Secretary shall have the power to affix the seal of the corporation to all instruments requiring or calling for the corporate seal when such instruments have been signed on behalf of the corporation by a duly authorized officer. The Secretary shall have other powers and duties as may be assigned from time to time by the Chief Executive Officer or the Board of Directors, or provided in these Bylaws. SECTION 5.10. Treasurer. The Treasurer shall be responsible for the --------- receipt, custody and disbursement of all funds of the corporation, whether in the form of cash or securities. The Treasurer shall have the power to affix the seal of the corporation to all instruments requiring or calling for the corporate seal when such instruments have been signed on behalf of the corporation by a duly authorized officer. The Treasurer shall have such other powers and duties as may be assigned from time to time by the Chief Executive Officer or the Board of Directors, or provided in these By-Laws. SECTION 5.11. Assistant Treasurers. The Assistant Treasurers, if any are -------------------- elected, shall in the absence of the Treasurer perform all functions and duties of the Treasurer and in addition shall perform such functions and duties as the Treasurer may delegate, but this shall in no way relieve the Treasurer of the responsibilities and liability of his office. SECTION 5.12. Assistant Secretaries. The Assistant Secretaries, if any --------------------- are elected, shall in the absence of the Secretary perform all functions and duties of the Secretary and in addition shall assume such functions and duties as the Secretary may delegate, but this shall in no way relieve the Secretary of the responsibilities and liability of his office. ARTICLE VI Contracts, Loans, Checks and Deposits ------------------------------------- -9- SECTION 6.1. Contracts and Other Instruments. The Board of Directors may ------------------------------- authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, or of any division thereof, and such authority may be general or confined to specific instances. SECTION 6.2. Loans. No loans shall be contracted on behalf of the ----- corporation, and no evidence of indebtedness shall be issued in the name of the corporation, unless authorized by a resolution of the Board of Directors. Such authority may be general or confined to specific instances. SECTION 6.3. Checks, Drafts, etc. All checks, demands, drafts or other ------------------- orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation, or any division thereof, shall be signed by such officer or officers, agent or agents of the corporation, and in such manner, as shall from time to time be authorized by the Board of Directors. SECTION 6.4. Deposits. All funds of the corporation not otherwise -------- employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositories as the Board of Directors may select. ARTICLE VII Certificates of Stock and Their Transfer ---------------------------------------- SECTION 7.1. Certificates of Stock. The certificates of stock of the --------------------- corporation shall be in such form as may be determined by the Board of Directors, shall be numbered and shall be entered in the books of the corporation as they are issued. They shall exhibit the holder's name and number of shares and shall be signed by the Chairman or the Chief Executive Officer or by any Vice President and by the Secretary or an Assistant Secretary. If any stock certificate is signed (a) by a transfer agent or an assistant transfer agent or (b) by a transfer clerk acting on behalf of the corporation and a registrar, the signature of any officer of the corporation may be facsimile. In case any such officer whose facsimile signature has thus been used on any such certificate shall cease to be such officer, whether because of death, resignation or otherwise, before such certificate has been delivered by the corporation, such certificate may nevertheless be delivered by the corporation, as though the person whose facsimile signature has been used thereon had not ceased to be such officer. All certificates properly surrendered to the corporation for transfer shall be cancelled and no new certificate shall be issued to evidence transferred shares until the former certificate for at least a like number and class of shares shall have been surrendered and cancelled and the corporation reimbursed for any applicable taxes on the transfer, except that in the case of a lost, destroyed or mutilated certificate a new one may be issued therefor upon such terms, and with -10- such indemnity (if any) to the corporation, as the Board of Directors may prescribe specifically or in general terms or by delegation to a transfer agent for the corporation. (See Section 7.2). SECTION 7.2. Lost, Stolen or Destroyed Certificates. The Board of -------------------------------------- Directors in individual cases, or by general resolution of by delegation to the transfer agent, may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. SECTION 7.3. Transfers of Stock. Upon surrender to the corporation or the ------------------ transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, and upon payment of applicable taxes with respect to such transfer, and in compliance with any restrictions on transfer applicable to the certificate or shares represented thereby contained in the certificate of incorporation or of which the corporation shall have notice and subject to such rules and regulations as the Board of Directors may from time to time deem advisable concerning the transfer and registration of certificates for shares of capital stock of the corporation, the corporation shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Transfers of shares shall be made only on the books of the corporation by the registered holder thereof or by his attorney or successor duly authorized as evidenced by documents filed with the Secretary or transfer agent of the corporation. SECTION 7.4. No Fractional Share Certificates. Certificates shall not be -------------------------------- issued representing fractional shares of stock. SECTION 7.5. Fixing Record Date. The Board of Directors may fix in ------------------ advance a date, not exceeding sixty (60) days, nor less than ten (10) days, preceding the date of any meeting of stockholders, or the date for the payment of any dividend, or the date for the allotment of rights or the date when any change or conversion or exchange of capital stock shall go into effect, or a date in connection with obtaining any consent, as a record date for the determination of the stockholders entitled to notice of, and to vote at, any such meeting, or adjournment thereof, or entitled to receive payment of any such dividend, or to any such allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of capital -11- stock, or to give such consent, and in such case such stockholders and only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to notice of, and to vote at, such meeting and any adjournment thereof, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, or to give such consent, as the case may be, notwithstanding any transfer of any stock on the books of the corporation after any such record date fixed as aforesaid. SECTION 7.6. Stockholders of Record. The corporation shall be entitled to ---------------------- treat the holder of record of any share or shares of stock as the holder in fact thereof and accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VIII General Provisions ------------------ SECTION 8.1. Fiscal year. The fiscal year of the corporation shall be ----------- determined by resolution of the Board of Directors. SECTION 8.2. Seal. The corporate seal shall have inscribed thereon the ---- name of the corporation, and the words "CORPORATE SEAL" and "DELAWARE;" and it shall otherwise be in the form approved by the Board of Directors. Such seal may be used by causing it, or a facsimile thereof, to be impressed or affixed or otherwise reproduced. ARTICLE IX Amendments ---------- SECTION 9.1. In General. Any provision of these bylaws may be altered, ---------- amended or repealed from time to time by the requisite vote the stockholders of the corporation as provided in the certificate of incorporation, present in person or by proxy at any annual meeting of stockholders at which a quorum is present, or at any special meeting of stockholders at which a quorum is present, if notice of the proposed alteration, amendment or repeal be contained in the notice of such special meeting, or, subject to the certificate of incorporation, by the directors then qualified and acting at any regular or special meeting of the Board of Directors; provided, however, that the stockholders may provide specifically for limitations on the power -12- of directors to amend particular bylaws and, in such event, the directors' power of amendment shall be so limited. -13- EX-10.1 4 MICROSOFT CORPORATION PRODUCT SERVICE AGREEMENT EXHIBIT 10.1 Confidential material omitted and filed separately with the Securities and Exchange Commission. Asterisks denote such omissions. MICROSOFT CORPORATION PRODUCT SUPPORT SERVICE VENDOR AGREEMENT This Product Support Services Vendor Agreement (the "Agreement") is entered into by and between Microsoft Corporation, a Washington corporation ("MS"), and Stream International, Inc., a Massachusetts Corporation ("Company") to be effective as of 12/14/95 ("Effective Date"). In consideration of the mutual covenants herein, the parties hereby agree as follows: 1. Services. -------- (a) Company agrees to provide product support services (the "Services") identified in Exhibit A to end users of certain Microsoft Corporation products identified in Exhibit B (the "Product(s)"), on the terms and conditions provided herein in accordance with MS standard support policies and procedures as detailed in documentation provided by MS to Company (including, without limitation, MS policies set forth in Exhibit E), which may be modified by MS from time to time in its sole discretion, and in accordance with the performance requirements set forth in Exhibit C. In the event that any modification causes an increase in the cost of performance for Company, Company will advise MS and provided Company can prove such increased cost, the parties will negotiate a mutually-agreeable amendment to this Agreement addressing that issue. *********************************************************************** *********************************************************and Company will be responsible for maintaining all necessary telecommunications equipment and services at the Facility to handle all calls ***************************** including all costs associated therewith. Other facilities may be added as mutually agreed by amendment of this Agreement.********************************* ******************************************************************************** ****************************** to the******************************************. The technology to be provided by each party is set forth in Exhibit F. (i) Special terms and conditions of support for localized versions of Products are set forth in Exhibit G, which is incorporated herein by this reference. (b) Company agrees to use its best efforts and most capable technical expertise to resolve customer support problems, meeting or exceeding the performance requirements as set forth in Exhibit C. In the event Company is unable to resolve a problem, Company may escalate the problem to MS designated representative(s). Company and Microsoft will mutually agree on the identity of Company designated representative(s). The initial designated representatives of the Company and MS are listed on Exhibit C. Either party may redesignate its representative(s) upon written notice at any time during the term of this Agreement. (c) Company will maintain its current Automatic Call Distribution ("ACD") system. If Company changes its current ACD system or adds facilities, Company will need to ensure that any such new ACD system is capable of providing the information set forth in Exhibit H. (d) Company will ensure that its current backup and disaster recovery procedures are adequate to ensure that Company is in full compliance with the terms of this Agreement; any changes or additions to such procedures shall be made upon mutual agreement of the parties. (e) When and if the Company changes its ACD such that MS can no longer access appropriate data on its own, Company shall provide MS with reports on the Services provided by Company under this Agreement as specified in Exhibit H. (f) At MS's discretion, with reasonable advance notice, MS reserves the right to make onsite visits to all sites where Company supports Products. In connection with said visits, Company will provide to MS, as and when required by MS, access to office premises at the Facility equipped with standard office equipment as available to personnel of Company in proximate offices, at no charge. (g) "Company agrees that any support personnel of Company while they are supporting the Product(s) identified in Exhibits B & C shall be dedicated to supporting only the Product(s) designated as their respective obligation, and other MS products pursuant to this Agreement and/or other similar agreements between MS and Company, and shall not accept telephone calls or other communications or provide any Services for any third party product(s) without the express written consent of MS. However, Company may reassign staff at its sole discretion subject to forgoing provisions. (h) Company will not subcontract any of its obligations hereunder without the prior written approval of MS. -2- Confidential material omitted and filed separately with the Securities and Exchange Commission. Asterisks denote such omissions. 2. Ownership and License Grants. ---------------------------- (a) Knowledge Base and Notes. MS grants to Company a non-exclusive, ------------------------ personal, non-transferable, non-assignable, royalty-free license for the term of this Agreement to reproduce and use data from the MS product support service database ("Knowledge Base") and application notes ("Notes") for the Product(s) for the sole purpose of providing Services hereunder. Company shall maintain all disclaimers, copyright notices, trademarks, and other protective notices on all copies of the Knowledge Base and Notes and all data contained therein. MS grants to Company a non-exclusive, personal, non-transferable, non-assignable, royalty-free license for the term of this Agreement to reproduce and distribute unmodified articles from the Knowledge Base and Notes solely to support customers for the purpose of providing Services hereunder. Upon the expiration or termination of this Agreement, Company's license rights with respect to the Knowledge Base and Notes will automatically terminate, and Company shall within ten (10) days thereafter provide written certification to MS signed by an authorized representative of Company that Company has destroyed all copies of the Knowledge Base and Notes (including all related documentation) in its possession. (b) Product(s). MS will provide Company ************ with copies of ---------- the Product(s) identified in Exhibit B. Effective upon the delivery of the Products to Company, MS shall be deemed to have granted to Company a non- exclusive, personal, non-transferable, non-assignable, royalty-free license to use the Products at the Facility under the terms of the End User License Agreement ("EULA") accompanying each of the Products for the sole purpose of providing Services for the Product(s) *************************** as provided for under the terms of this Agreement. Notwithstanding the terms of the EULAs accompanying the Products, Company shall be entitled to reproduce a number of copies of the Products (including all related documentation) equal to the number of computers used by Company at the Facility to provide the Services for the Product(s), provided that such copies may only be used to provide product support for the Product(s) to MS customers as provided for under the terms of this Agreement. Upon the expiration or termination of this Agreement, Company's license to use and reproduce such Products will automatically terminate, and Company shall within ten (10) days thereafter either (i) return all copies of the Products (including all related documentation) licensed to Company pursuant to this Agreement in its possession to MS, or (ii) provide written certification to MS signed by an authorized representative of Company that Company has destroyed all copies of the Products (including all related documentation) licensed to Company pursuant to this Agreement in its possession. -3- Confidential material omitted and filed separately with the Securities and Exchange Commission. Asterisks denote such omissions. (c) **************. At the****************************************** -------------- ***************************************************************************** ***************************************************************************** as *********************************************************************** and ******. Upon the ************************************************************ ********and*************************************and*************************** ****************************************************************************** ***********************************************that*************************** and***************************************************. (d) MS Intellectual Property Rights. Company hereby agrees and ------------------------------- acknowledges that any and all works or processes developed by Company in the course of its delivery of Services under this Agreement which are protectible as copyrights, trade secrets or any other form of intellectual property have been specially ordered and commissioned by MS. Company understands and agrees that such works shall be deemed to be "works-made-for-hire" for copyright purposes. All patents and other proprietary rights resulting from the Services shall be owned by MS to the extent any and/or all of the works do not qualify as "works- made-for-hire." **************************************Company shall*************************** ************************in the************************************************** **************and********************************************************** ***********************and/or***********************************************such ****************************************************************************from *****at any***********************************************in its***********it ************************************************************************its ************************************************ Company (a) hereby irrevocably sells, assigns, transfers and conveys to MS, its successors and assigns, irrevocably and perpetually, Company's entire right, title and interest in the work(s) and/or process(es) resulting from or developed for the Services, (b) agrees to do such further acts and execute and deliver to MS such instruments as may be required to perfect, register or enforce MS's ownership of the rights conveyed under this Agreement or to carry out the intent and purpose of this Agreement, and (c) agrees that if Company fails or refuses to execute any such instruments, Company hereby appoints MS as Company's attorney-in-fact to act on Company's behalf solely for the purpose of executing such instruments. Any such appointment shall be irrevocable and deemed to be a power coupled with an interest. "In addition, notwithstanding the foregoing the parties hereby acknowledge and agree that Company shall be the owner of all software tools developed by Company, -4- Confidential material omitted and filed separately with the Securities and Exchange Commission. Asterisks denote such omissions. as well as methods and techniques of doing business, including patents, trade secrets and other proprietary rights associated therewith (collectively, "Company Tools"), during the term of this Agreement for use in providing the Services. Company hereby grants to MS a perpetual, royalty-free, non-exclusive, worldwide license to reproduce, modify use, and create derivative works from such Company Tools for internal MS use; MS agrees not to distribute such Company Tools to any third parties. Company agrees to provide copies of the object code and source code versions of all Company Tools and all related documents to MS for such purposes. (e) ********************. ***********************Company -------------------- acknowledges and agrees that *********************************************** with the ***************************************************************** ********************************************************************** ********************************************************************** ****************************shall be ************************************* ***************************in the *************************************** Company shall **********************************************************the *************************with this Agreement and shall********************** ***********************************with the ******************************** ********Company shall********************************************************** **********************************************************of this ************************************************************with all *********************************************************with all other ********************which are***********************************. (f) Training. Company agrees to undertake and successfully -------- complete all training programs provided by MS with respect to the Product(s) and subsequent versions Company is currently supporting for ****************in its sole discretion deems necessary to prepare Company to provide the Services outlined in this Agreement, provided that such training shall not exceed *********** days per year for any one product support personnel unless the parties mutually agree otherwise. Training will be conducted at a mutually agreed upon facility *********************************************************** *************************************************** except that all travel, accommodation and related expenses for Company employees shall be the responsibility of Company. Company acknowledges and agrees that it shall be responsible for internal and ongoing training of its product support personnel on the Product(s) after receivinginitial training. Company will designate ****** ongoing trainer per Product supported. **************************************** ************* to be *********************************************************** the terms of this Agreement. -5- (g) ACD System Documentation. Company shall provide MS with ------------------------ standard specifications and documentation from its ACD system with respect to the Services provided by Company under this Agreement. (h) LAN Security. Company shall physically isolate the local area ------------ network (LAN) used by Company personnel in the provision of the Services under this Agreement (the "Support LAN") from other LANs maintained by the Company. Company shall restrict use of the Support LAN solely to Company personnel providing Services for the Product(s) under this Agreement or similar agreements between MS and Company. Company agrees to notify MS promptly upon discovery of any breach of security in the Support LAN. (i) ******************** As of the Effective Date, *************** -------------------- ******************************************************************************* **************in conjunction with ******************************** *******************************************************pursuant to ***********pursuant to the terms of this Agreement. ******************* ********************************************************at the ************************of this Agreement. *************************** ************************to this ******************************which is incorporated herein by this reference. Company shall***************** ***********************************************. 3. Price. MS will pay Company the amounts specified in Exhibit D ----- each month subject to adjustments, deductions or credits to such amounts as provided for in this Agreement or any Exhibit hereto. Payment terms are net thirty (30) days after receipt of invoice. 4. Warranties. Company warrants that: ---------- (a) It possesses all necessary authority to enter into this Agreement, and that by so doing it does not violate any other agreements to which it is a party; (b) The Services will conform in all material respects with the service requirements set forth in this Agreement, including, without limitation, those set forth in Exhibits A and C; (c) The Services will be performed by (i) employees of Company within the scope of their employment who have signed confidentiality agreements with the Company that require such employees to comply with obligations substantially similar to those imposed by Company by Section 2(e) above and Section 8 below, or (iii) by temporary employees and/or MS-permitted subcontractors under written contractual obligations to Company ("Contractor Agreement") that require independent contractors to sign confidentiality agreements to comply with obligations -6- Confidential material omitted and filed separately with the Securities and Exchange Commission. Asterisks denote such omissions. substantially similar to those imposed on Company by Section 2(e) above and Section 8 below; further, any such Contractor Agreement shall expressly provide that MS is a third party beneficiary of the Contractor Agreement with rights to enforce such agreement. Finally, Company warrants and represents that it will ensure that any such temporary employees and/or MS-permitted subcontractors it utilizes to fulfill its obligations under this Agreement will perform them in accordance with the service and performance requirements set forth this in this Agreement including, without limitation, those set forth in Exhibits A, C, E, F, G and H. (d) In providing Services to end users, Company shall make no representations or undertake any obligations on behalf of MS concerning the Product(s) and/or any other Microsoft Corporation products beyond those expressly made or undertaken by Microsoft Corporation in written product warranty statements and other written materials, including but not limited to end user licenses prepared by Microsoft Corporation accompanying the Product(s). Company shall also conform to all applicable and valid laws and government rules and regulations; (e) Any and all materials Company publishes as part of its Services for Product(s) do not and will not infringe any intellectual property rights owned by MS or Microsoft Corporation including, but not limited to, any copyright, patent, or trade secret; and (f) *********************************************Company will not ****************************************************************** ****************************************************in connection with its ************************************************************* *************************************for the purpose of**************** ************************************. THE WARRANTIES ABOVE ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE AND ALL IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR THAT A PRODUCT WILL OPERATE ERROR-FREE. 5. Indemnification and Limitation of Liability. (a) Company General Indemnification. Company agrees to indemnify, ------------------------------- defend, and hold MS harmless from and against any and all claims, actions, demands, and costs, including reasonable attorneys' fees and expenses arising out of or in connection with any negligent or willful act or omission of Company or its employees, independent contractors and agents in connection with the Services -7- Confidential material omitted and filed separately with the Securities and Exchange Commission. Asterisks denote such omissions. provided under this Agreement ("Claims"). Acts for which Company shall indemnify MS include, but shall not be limited to, representations or obligations undertaken on behalf of MS concerning the Product(s) and/or any other Microsoft Corporation products made to customers which exceed the scope of the warranties or end user licenses which accompany the Product(s) and/or other Microsoft Corporation products. MS shall have the right to assume the defense of any claim indemnified hereunder. Should MS exercise this right to defend any indemnified claim, Company shall have no liability for such claim and MS shall agree to fully indemnify Company from and against any liability or damage that may ultimately be assessed against Company in connection with such proceeding, regardless of any comparative negligence or liability on the part of Company. Company agrees to cooperate fully with MS and MS's counsel in any matter where MS elects to defend, provided MS shall promptly reimburse Company for reasonable costs and expenses incurred by same in connection with its duty to cooperate. In addition to the foregoing option to defend, MS shall have the right to participate in the defense of any claim being defended by Company pursuant to its obligation hereunder, at MS's own cost and expense. Company shall pay any and all expenses and other reasonable costs incurred by MS arising in connection with its obligations under this Section 5(a) promptly upon demand. (b) ********************** ******************************* ---------------------- *********************************************************** ************************************************************in connection with any******************************************* *****in connection with any******************************************** ************************************************************************ *************************************. (c) ******************************** *************************** -------------------------------- ***************************************************************** ****************************************************************and *************************************************************provided to the *************************************************************** ********************************************provided that ********** ******************************************************************* *****to which*********************************************************** *****to the**********of this Section 5(c), *************************** *****************************************************************and the ********************************************************************** ********with the ***************at the*********************************** -8- Confidential material omitted and filed separately with the Securities and Exchange Commission. Asterisks denote such omissions. **********in connection with*************************************************** *****************************************of any*************************** and to *********************************************provided that **************************************************************** *****************shall****************************************** *********shall be***********************************************by the **************************************************************** ***********************************************************and***** and*********by the ***************. (d) ******************** EXCEPT FOR INDEMNIFICATION CLAIMS -------------------- PURSUANT TO SECTION 5(a) and 5(b) ABOVE IN******************************* ************to the ********************************************** ***************************************************************** ******from******************************************************** *******************************to this*********************of the ***************************************************************** ***************************************************************** ***************************and********of the************************ ***************************. 6. Term and Default. ---------------- (a) This Agreement shall commence as of the Effective Date, and shall continue in force for a period of twelve (12) months from the date on which the first customer calls are routed by MS unless earlier terminated by MS as provided in this Agreement or Exhibits hereto. There will be ninety (90) day reviews of Company performance, beginning upon the Effective Date. (b) If Company is not in material default under the terms of this Agreement, and provided Company has met its performance requirements as of the anniversary of the Effective Date, then MS shall have the option of renewing this Agreement for a further period of one (1) year provided MS gives the Company notice thereof in writing not less than two (2) months before the date of expiration of the term hereof. Any renewal pursuant to this Section shall be on the same terms and conditions contained in this Agreement save and except that the prices payable by MS to Company for the renewal term shall be in accordance with fair market prices payable for similar services in the market generally and ***************************************************************** ************************************************************************ ******************************************************************************* *****************************. -9- Confidential material omitted and filed separately with the Securities and Exchange Commission. Asterisks denote such omissions. (c) This Agreement may be terminated by either party in the event the other party (the "Other Party" for the purposes of this subsection) assigns its rights or interest in the Agreement in contravention of Section 11(f) or the Other Party suspends performance of its obligations as described in Section 11(i) or if the Other Party becomes insolvent or admits in writing its inability to pay its debts as they become due or makes an assignment for the benefit of creditors or if a petition under any bankruptcy act, receivership statute or the like, as they now exist or as they may be amended, is filed by the Other Party or by any third party or an application for a receiver is made by anyone and such application is not resolved favorably to the Other Party within sixty (60) days. (d) This Agreement may further be terminated by MS pursuant to the provisions of Section 7. (e) The ("Measurement Interval") for all Services will be measured by MS as prescribed in Exhibits C&D, ********************************. Quality bonuses/deductions will only be awarded or deducted once a statistically valid sample of surveys is achieved. During the term of this Agreement, if the Services provided by Company hereunder do not conform to any of the performance requirements set forth in Exhibit C for any Measurement Interval, the Services may be deemed unacceptable by MS and this Agreement may be terminated by written notification if company has not brought its performance into conformance with the applicable standards within ************ subsequent to the date notice of such unacceptability is given to Company; however, if Company provides MS an acceptable correction plan by the end of that ********** period, then termination of Company shall be governed by the provisions in Section 7 below. (f) Company acknowledges MS's right to require immediate removal and prompt replacement of any Company employee, MS-permitted independent contractor, or agent performing Company's obligations under this Agreement who engages in any conduct prohibited by law or inconsistent with MS policy as set forth in Exhibit E. (g) Sections 2 (d), (e), 3, 4, 5, 6 (h) 8, 9, 10 and 11 of this Agreement shall survive termination for any reason. (h) Upon the expiration or earlier termination of this Agreement, Company shall cooperate with MS to assist in the orderly transition of Services to MS, or as MS may direct, in a professional manner, with no disruption to customer service. -10- Confidential material omitted and filed separately with the Securities and Exchange Commission. Asterisks denote such omissions. 7. Default in Performance and Remedies. During the term of this Agreement: ----------------------------------- (a) In the event Company fails to meet the performance requirements as specified in this Agreement and in Exhibit C (the "Performance Requirements"), the payments will be modified as set forth in Exhibit D. Company and MS agree that such amount will represent a fair and reasonable pre-estimate of damages incurred by MS as a result of such non-performance; provided that the Performance Requirements will be waived for an initial grace as described in Exhibits C & D ****************************************************************. (b) In the event there is a continued failure by Company to meet the Performance Requirements for more than ******* Measurement Interval(s), and MS has not terminated Company for its first failure to meet performance standards during the first Measurement Interval, Company shall, at MS's request, provide a corrective action plan, including training and staffing plans, to MS for approval. MS shall review and approve or provide required changes to Company on such corrective action plan within ******** business days from its receipt of such plan. (c) In the event the Performance Requirements are not met within *********** days following MS's approval of any corrective action plan, MS shall have the right to terminate this Agreement. (d) All remedies set forth in this section shall be in addition to and not in lieu of all other remedies available to MS under this Agreement at law or in equity. 8. Confidentiality and Publicity. ----------------------------- (a) Except as otherwise provided herein, the parties expressly undertake to retain in confidence the terms and conditions of this Agreement and all other non-public information and know-how disclosed to each other during the term of this Agreement that has been designated as proprietary and/or confidential or that, by the terms of this Agreement and/or the nature of the circumstances surrounding the disclosure, ought in good faith to be treated as proprietary and/or confidential (the "Confidential Information"), and will make no use of such information and know-how except under the terms and during the existence of this Agreement; provided that each party may disclose the terms and conditions of this Agreement to its immediate legal and financial consultants as required in the ordinary course of its business. Information disclosed by MS regarding new products or new product releases shall be presumed confidential, however disclosed. Each of the parties shall use its best efforts to protect the Confidential Information, which precautions shall be at least as great as the precautions it takes to protect its own confidential information. -11- Each of the parties may disclose Confidential information only to its employees on a "need-to-know" basis. The parties may disclose Confidential Information as required by government or judicial order, provided that the disclosing party gives the other party prompt notice of such order and complies with any protective order (or equivalent) imposed on such disclosure. The parties shall notify each other promptly upon the discovery of any unauthorized use or disclosure of Confidential Information, and will cooperate with each other in every reasonable way to assist the disclosing party in regaining possession of such Confidential Information and to prevent future unauthorized use or disclosures. (b) The parties acknowledge that monetary damages may not be a sufficient remedy for unauthorized disclosure or use of Confidential Information and that the parties may seek, without waiving any other rights or remedies, such injunctive or equitable relief as may be deemed proper by a court of competent jurisdiction. (c) Company shall not issue any press release or advertising concerning Company's relationship with MS and the Services hereunder, without MS's written pre-approval. 9. Notices and Requests. All notices, authorizations, and requests in -------------------- connection with this Agreement shall be deemed given on the day they are (i) deposited in the mail, postage prepaid, certified or registered, return receipt requested; or (ii) sent by air courier, charges prepaid, with a confirming telefax; or (iii) transmitted, if transmitted by facsimile, and addressed as follows: Notices to Company: - ------------------ Stream International, Inc. Attn: Vice President, Support Services Phone: 617-575-6800 Fax: 617-575-6999 copy to General Counsel Notices to MS: - ------------- MICROSOFT CORPORATION One Microsoft Way Redmond, WA 98052-6399 Attn: Vice President, Product Support Services Phone: Fax: (206) 936-7329 With a copy to: Law & Corporate Affairs -12- or to such other address as the party to receive the notice or request so designates by written notice to the other. 10. Audit. Company shall keep all usual and proper records relating to its ----- compliance with the terms of this Agreement. MS reserves the right to audit Company's systems and records during the term of this Agreement and for a period of two years thereafter, provided that such audit(s) shall be conducted during normal business hours in such a manner as not to interfere unreasonably with the operations of Company and provided further that such audit(s) shall only be conducted in circumstances where (i) MS has reasonable grounds to suspect Company's non-compliance with any terms of this Agreement, (ii) MS communicates any such concern to Company in writing, and (iii) Company either does not respond to such concern within five (5) business days or Company's response does not alleviate MS's concern to its satisfaction. Audit expenses shall be paid by MS unless material discrepancies are disclosed by the audit, in which case audit expenses shall be paid by Company. MS's audit rights referred to in this section shall be reasonable in scope, but will be of an expansive scope if MS's audit reveals material discrepancies. 11. General. ------- (a) This Agreement shall be construed and controlled by the laws of the State of Washington, and Company consents to jurisdiction and venue in the state and federal courts sitting in the State of Washington. Process may be served on either party by US Mail, postage prepaid, certified or registered, return receipt requested, or by such other method as is authorized by law. (b) Neither this Agreement, nor any terms or conditions contained herein, shall be construed as creating a partnership, joint venture, agency relationship or franchise. (c) This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements or communications with respect to the subject matter hereof. This Agreement shall not be modified except by a written agreement dated subsequent to the date of this Agreement and signed on behalf of Company and MS by their respective duly authorized representative. (d) No waiver of any breach of any provision of this Agreement shall constitute a waiver of any prior, concurrent, or subsequent breach of the same or any other provisions hereof, and no waiver shall be effective unless made in writing and signed by an authorized representative of the waiving party. -13- (e) If any provision of this Agreement shall be held by a court of competent jurisdiction to be illegal, invalid, or unenforceable, the remaining provisions shall remain in full force and effect. (f) The rights and obligations hereunder shall be binding upon and inure to the benefit of the successors and assigns of the parties hereto, provided any rights or obligations hereunder shall not be assigned by either party without the prior written consent of the other party, which consent shall not be unreasonably withheld. (g) In any suit or action to enforce any right or remedy under this Agreement or to interpret any provision of this Agreement, the prevailing party will be entitled to recover its costs, including reasonable attorneys' fees. (h) The section headings herein are for the convenience of the parties and shall not be deemed to supersede or modify any provisions. (i) If either party is unable to perform under this Agreement due to circumstances or causes beyond its control, and which could not by reasonable diligence have been avoided, such party shall have the option, without liability, of suspending performance of its obligations under this Agreement for the duration of such contingency upon written notice to the other party. However, either party may terminate this Agreement upon written notice to the other party in the event that such other party has suspended performance of its obligations under this Agreement for more than thirty (30) days. (j) The parties agree that wherever and whenever one party has the right to exercise its discretion under this Agreement, such discretion shall be exercised with reasonableness. -14- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. MICROSOFT CORPORATION Stream International, Inc. One Microsoft Way 275-Dan Road Redmond, WA 98052-6399 Canton, MA 02021 By: D.N. Willingham By: S.D.R. Moore ---------------------- --------------------- Deborah N. Willingham S.D.R. Moore - -------------------------- --------------------- Name (Print) Name (Print) VP, Support President - -------------------------- --------------------- Title Title -15- Confidential material omitted and filed separately with the Securities and Exchange Commission. Asterisks denote such omissions. EXHIBIT A - --------- Services - -------- Company will provide the following product support services (the "Services") for those products listed in Exhibit B: Service Description - ------- ----------- ******************** ********************* ******************** ********************* ********************* ********************* ********************* ******************** ********************* ********************* ********************* ********************* ******************** ********************* ********************* ******************** ********************* ********************* ********************* ******************** ********************* ********************* ********************* ******************** ********************* ********************* ********************* ********************* ******************** ********************* ********************* ********************* A-1 Confidential material omitted and filed separately with the Securities and Exchange Commission. Asterisks denote such omissions. ******************** ********************* ********************* ********************* ********************* ********************* ********************* ********************* ********************* ********************* ******************** ********************* ********************* ********************* ********************* A-2 Confidential material omitted and filed separately with the Securities and Exchange Commission Asterisks denote such omissions. EXHIBIT B - --------- Supported Product(s) - -------------------- Company will supply product support services for the following Product(s): Desktop: - ------- **************** **************** **************** **************** Consumer: - -------- **************** **************** **************** POS: - --- **************** **************** **************** Developer: - --------- **************** **************** **************** **************** **************** **************** Business Systems: - ---------------- **************** B-1 Confidential material omitted and filed separately with the Securities and Exchange Commission. EXHIBIT C - --------- Pages C-1 through C-5 of Exhibit C contain confidential materials which have been omitted and filed separately with the Securities and Exchange Commission C-1 Confidential material omitted and filed separately with the Securities and Exchange Commission. EXHIBIT D - --------- Pages D-1 through D-6 of Exhibit D contain confidential materials which have been omitted and filed separately with the Securities and Exchange Commission D-1 EXHIBIT E - --------- MS Policies Introduction The following code of conduct is not a contract. It is intended solely to provide general guidance to vendors and their representatives to assist them in functioning smoothly and efficiently while performing work for Microsoft. Microsoft is committed to promoting a positive work environment. We expect our vendors and their employees, agents, and subcontractors (collectively, "representatives") to adhere to the same standards of conduct and behavior that we expect from our own employees while you and your representatives are on Microsoft property or doing business with Microsoft. The information outlined below is important and should be read carefully. All third party vendors will be required to educate and, when appropriate, train their representatives to ensure they are aware of Microsoft's expectations regarding their behavior and the consequences of any breaches of Microsoft policies. The policies summarized below are non-exhaustive, and there may be other conduct not specifically listed that would be unacceptable. Microsoft expects that vendors and their representatives will conduct themselves in a professional manner at all times while on Microsoft property or while doing business with Microsoft. Microsoft may require the immediate removal of any vendor representative who behaves in a manner that is unlawful or inconsistent with any Microsoft policy, or that is otherwise deemed harmful to Microsoft's business. E-mail Electronic mail, or e-mail, provides an easy-to-use, efficient means of communicating. The following guidelines for preparing and sending e-mail are designed to ensure that each vendor and its representatives use the e-mail system in an appropriate manner. E-mail may not be used as a forum for political, religious, or other debates, or as a form of entertainment (for example, chain letters). Use of e-mail must be limited to Microsoft business. All e-mail group aliases (a pre-defined group of users) must be for Microsoft business. To informally exchange information over the computer on a variety of topics, use the Microsoft Bulletin Board system. E-1 Microsoft e-mail names are confidential. Do not give e-mail names to anyone outside of Microsoft. Do not share your password with anyone, attempt to gain access to anyone else's e-mail account, or use another's e-mail account without permission. Microsoft prohibits obscene, profane, or otherwise offensive material from being broadcast across the Microsoft network. Non-solicitation Policy Microsoft wants to provide a work environment that allows all employees, and all vendors and their representatives to complete their tasks with the least amount of disruption. Accordingly, vendors, their representatives, and any other non- Microsoft employees are not allowed (while on Microsoft property or while using Microsoft owned equipment) to engage in solicitation or distribution of literature. This policy prohibits soliciting or handing out materials for any purpose. Company Access to Information and Property E-mail and its contents, as well as any other data stored on or transmitted by Microsoft-owned equipment, is the property of Microsoft and may be accessed by Microsoft at any time. Accordingly, the content of e-mail, voice mail, and similar data should not be regarded as protected by any personal right of privacy. Additionally, in order to evaluate and improve customer service, Microsoft may monitor, as necessary, the telephone calls of vendors and their representatives who work in customer service positions. Any facilities or equipment, including but not limited to offices, desks, computers, electronic media, motor vehicles, or lockers used by vendors and their representatives while on Microsoft property or while conducting Microsoft related business, may be accessed by Microsoft as needed. Accordingly, you should not consider protected by any personal right of privacy anything brought onto or stored on Microsoft property stored on Microsoft equipment, or used while working on Microsoft related business. Any Microsoft property used by vendors and their representatives while performing Microsoft related business remains the property of Microsoft. Gifts Microsoft employees cannot accept payments of any amount or gifts or favors valued in excess of $ 100 from persons or firms with which we have business dealings, unless prior approval is obtained from a vice president or more senior company official. Accordingly, you and your representatives should refrain from giving to Microsoft employees gifts with a value of more than $ 100. E-2 Insider Trading All Microsoft employees, agency temporaries, independent contractors, and vendor representatives are considered "insiders" for the purposes of state or federal securities laws that prohibit insider trading. As an insider, no vendor nor vendor representative may buy or sell Microsoft's or another company's stock when in possession of information about Microsoft or another company that is not available to the investing public and that could influence an investor's decision to buy stock. New insider-trading laws carry stiff penalties, and the Securities and Exchange Commission (SEC) has a mandate to enforce these laws aggressively. Because of Microsoft's visibility and the volatility of our stock, Microsoft is carefully watched by the SEC. The company can be negatively affected by insider trading and may terminate the services of, or refuse to do further business with, anyone found to have engaged in illegal insider trading. Proper Use of Software The unauthorized duplication and use of software and/or documentation by Microsoft vendors or contractors is a violation of the copyright laws of the United States and all the other countries in which Microsoft Corporation and its subsidiaries maintain offices. This applies equally to Microsoft software, whether a Beta or a final version, and to non-Microsoft software. Violation of copyright laws can subject vendors and Microsoft to liability for significant civil and criminal penalties. In addition, Microsoft devotes considerable resources around the world to educate software users about their obligation to use and manage software properly. In order for this effort to be effective and benefit the software industry, Microsoft must lead by example. The following practices, unless granted by a specific license, are among those prohibited by this policy: Making additional copies of third-party software Products for your use on other computers. Making copies of software (third-party or Microsoft) for friends or associates. Distributing software over a network. Providing copies of software to bulletin board services. Helpdesk maintains a list of software Products that have been licensed to Microsoft for network use or on a site-license basis. Each department that acquires third-party software is responsible for retaining proof of proper licensing of that software, such as end user license agreements, original disks and manuals, and receipts. If you have questions regarding the terms of any third-party license agreement, contact Law and Corporate Affairs. E-3 Failure to follow this policy can result in action against the vendor and its representative, including termination of the vendor representative's services and/or termination of Microsoft's contract with the vendor. Confidentiality All information supplied by Microsoft to vendors and their representatives should be regarded as confidential unless otherwise notified. Vendors and their representatives are not authorized to speak to the press on Microsoft's behalf, unless expressly authorized to do so by Microsoft's Public Relations group. Prior to performing any work for Microsoft, all vendors will be required to sign a contract that includes a nondisclosure agreement. Vendor Standards Microsoft expects its chosen vendors to operate in the best interest of the company at all times. It is expected that all equipment, manpower & services will be provided at the highest quality level while maintaining flexibility and cost effectiveness. It is the responsibility of the vendor to inform its Microsoft contact (or a member of Microsoft management) when situations develop that require the vendor to operate in direct violation of the guidelines set forth in this document. Additionally, in the event a Microsoft employee has a relationship (spouse or other family relation, friend, domestic partner, etc.) with a vendor that might create a conflict of interest or the appearance of a conflict of interest, Microsoft senior management approval is required prior to contracting for the services of said vendor. E-4 Confidential material omitted and filed separately with the Securities and Exchange Commission. Asterisks denote such omissions. EXHIBIT F - --------- Equipment MS agrees to provide the following equipment: . ************************************************************ . Other equipment as mutually agreed to between the parties, depending on networking solutions. Company agrees to provide the following equipment: . Telecommunications equipment to handle all calls to Company. . DHCP and Windows NT domain services - Windows NTAS 3.5 capable PC, 1 GB hard drive and a CD ROM drive. . MS Mail compatible SMTP gateway for e-mail connectivity. . Server for Knowledge Base and Notes. . **************************************************** . Required Desktop Support Machines will be as follows: Product Cluster Primary Machine Secondary Comments Machine - ------------------------------------------------------------------------------- Desktop 486/66, 16 MB 486/33, 8 MB Word/Works for RAM, 500 MB HD, RAM, 170 MB HD DOS need 1 CD-ROM machine only. - -------------------------------------------------------------------------------- POS 486/66, 16 MB 486/33, 8 MB Windows: no 2/nd/ RAM, 500 MB HD RAM, 170 MB HD machine - -------------------------------------------------------------------------------- Dev. Tools 486/66, 20 MB use 2/nd/ machine WinSDK, Fortran: RAM, 500 MB HD, configuration in no 2/nd/ machine CD-ROM use today - -------------------------------------------------------------------------------- Bus. Systems 486/66, 32 MB use 2nd machine Mail: ***** server RAM, 500 MB HD configuration in and 12 paired use today modems needed. - -------------------------------------------------------------------------------- . Other equipment as mutually agreed to between the parties, depending on networking solutions. F-1 Confidential material omitted and filed separately with the Securities and Exchange Commission. EXHIBIT G - --------- (Support for Localized Versions) Pages G-1 through G-3 of Exhibit G contain confidential materials which have been omitted and filed separately with the Securities and Exchange Commission G-1 Confidential material omitted and filed separately with the Securities and Exchange Commission. Asterisks denote such omissions. Exhibit H - --------- Company Reporting Requirements Company shall provide MS with data and reporting as specified below. Company agrees to provide sample data and reporting prior to implementation as requested by MS. ******************************************************* ******************************************************* ******************************************************* ******************************************************* ******************************************************* ******************************************************* ******************************************************* ******************************************************* ******************************************************* ******************************************************* ******************************************************* ******************************************************* ******************************************************* ******************************************************* ******************************************************* ******************************************************* ******************************************************* ******************************************************* H-1 Confidential material omitted and filed separately with the Securities and Exchange Commission. EXHIBIT I - --------- Pages I-1 and I-2 of Exhibit I contain confidential materials which have been omitted and filed separately with the Securities and Exchange Commission I-1 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote such omissions. Amendment Number 1 Amendment Date: October 28, 1996 to: Product Support Service Vendor Agreement effective December 14, 1995 between: MICROSOFT CORPORATION, a Washington USA Corporation, and Stream International, Inc., a Massachusetts, USA Corporation Effective as of the Amendment Date indicated above, the below signed parties agree that the indicated portions of the above-referenced Product Support Service Vendor Agreement (hereinafter the "Agreement") are hereby amended by this instrument (hereinafter the "Amendment"), as follows: 1. All references to ************************************* in Section 2, Ownership and License Grants, item c, shall be changed to **********. 2. Exhibit B,******************* shall be deleted in its entirety and replaced with the following: Company will supply product support services for the following Product(s): Desktop: - ------- **************** **************** **************** **************** Consumer: - -------- **************** **************** **************** POS: - --- **************** **************** **************** Developer: - --------- **************** **************** **************** Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote such omissions. **************** **************** **************** Business Systems: - ---------------- **************** 3. The following provisions in Exhibit C, ************************ are hereby modified as follows: *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote such omissions. *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** 4. The ********* subsection of Exhibit C shall be amended as follows: (i) The ******************* shall be deleted in its entirety and replaced by the following: **************************************************** **************************************************** **************************************************** **************************************************** **************************************************** **************************************************** **************************************************** **************************************************** **************************************************** **************************************************** Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote such omissions. **************************************************** **************************************************** **************************************************** **************************************************** **************************************************** **************************************************** **************************************************** **************************************************** **************************************************** **************************************************** **************************************************** ******************************************************************* **************************************************** 5. The ************************* table shall be amended as follows: ********** ************************************************** ************************************************** **************** ************************************************** ************************************************** ************************************************** ************************************************** ******* ************************************************** ************************************************** ************************************************** ************************************************** ******** ************************************************** ************************************************** ************************************************** ************************************************** **************************************** ************************************************** ********** Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote such omissions. ********** ************************************************** ************************************************** ************************************************** ************************************************** ********** ************************************************** ************************************************** ************************************************** **************************** ********** ************************************************** ********** ************************************************** ************************************************** ************************************************** ************************************************** ************************************************** ************************************************** ************************************************** ************************************************** ******************* ************************************************** ************************************************** ************************************************** ************************************************** ************************************************** ************************************************** ************************************************** ************************************************** ************************************************** ************************************************** ************************************************** ************************************************** ********** ************************************************** ************************************************** ************************************************** ************************************************** ************************************************** ************************************************** ************************************************** Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote such omissions. ************************************************** *** ********** ************************************************** ********** ************************************************** ********** ********** ************************************************** ********** ************************************************** ********** ************************************************** ************************************************** ********** ************************************************** ********** ************************************************** ********** ************************************************** ************************************************** ************************************************** ************************************************** ************************************************** ************************************************** ************************************************** ********** ************************************************** ************************************************** ************************************************** *********************** ********** ************************************************** ************************************************** ************************************************** ************************************************** ***** ********** ************************************************** ********** ************************************************** ************************************************** ************************************************** ************************************************** ************************************************** ************************************************** ***** Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote such omissions. 6. The following provisions in Exhibit D, ****** are hereby modified as follows: (a) The following sentence shall be added to the beginning of Exhibit D, Payments: *************************************************************************** *************************************************************************** *************************************************************************** (b) Phase I shall be deleted in its entirety and replaced with the following: *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** **************************************************** (c) Phase 2 shall be amended as follows: (i) *************************************************************** ************** *************************************************************** *************************************************************** *************************************************************** ****************************** (ii) *************************************************************** ****************************** **************************************************** ********** ********** **************************************************** **************************************************** **************************************************** Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote such omissions. **************************************************** (iii) **************************************************** ****************************** **************************************************** **************************************************** **************************************************** **************************************************** **************************************************** **************************************************** **************************************************** **************************************************** **************************************************** ************ ********** ******* ***** ******* ********** **** ****** ******* ********** **** ****** ******* ********** **** ****** ******* ****** (iv) ******************************************* **************************************************** **************************************************** **************************************************** ************ *********** ********* *********** ********* ** ********** ** ********** ******** ***** (d) Section 2, **********************, shall be amended as follows: (i) Item b shall be deleted in its entirety and replaced with the: ************************************************ ************************************************ ************************************************ Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote such omissions. (ii) Item e shall be replaced in its entirety. (e) Section 3, *******************, shall be amended as follows: (i) Item a shall be deleted in its entirety and replace with the following: ************************************************ ************************************************ ************************************************ ************************************************ ********************************* (ii) Item b, *********, shall be deleted in its entirety and replace with the following: ************************************************ ************************************************ ************************************************ ********************************* ************************************************ ************************************************ ************************************************ ************************************************ ************************************************ ***************** ************************************************ ************************************************ ************************************************ ************************************************ ************************************************ ************************************************ ************************************************ ************************************************ ************************************************ ************************************************ ************************************************ ************************************************ ************************************************ ************************************************ ************************************************ *********************** Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote such omissions. ************************************************ ************************************************ ************************************************ (f) Section 4, ************************* shall be amended as follows: (i) The first, second and third bulleted items and the ***************** shall be deleted in their entirety and replaced with the following language: ************************************************ ************************************************ ************************************************ *********** ************************************************ ************************************************ ************************************************ ************************ ********************** ****************** ***** *************** ********* ***** ****** ***** ****** ****** ************************************************ ************************************************ ******************************* ************************************************ ************************************* Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote such omissions. ********************** ****************** ***** *************** ********* ***** ****** ***** ****** ********************** ****************** ***** ********* ***** ****** ***** ****** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote such omissions. *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** *************************************************************************** 5. The terms of this Amendment shall supersede any inconsistent terms contained in the Agreement. 6. Defined terms used and not defined herein shall have the meanings assigned to them in the Agreement. 7. This Amendment shall not be interpreted or construed as waiving any rights, obligations, remedies or claims the parties may otherwise have under the Agreement. 8. Except as expressly modified herein, all terms and conditions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment in duplicate as of the date first written above. All signed copies of this Amendment shall be deemed originals. ACCEPTED AND AGREED TO: MICROSOFT CORPORATION STREAM INTERNATIONAL INC. /s/ Linda Glenicki /s/ J. G. Salerno - ------------------------------- --------------------------------- By (signature) Linda Glenicki Judith G. Salerno - ------------------------------- --------------------------------- Name (print) General Manager, MTS President - ------------------------------- --------------------------------- Title Title December 20, 1996 - ------------------------------- --------------------------------- Date Date MICROSOFT Amendment No. 2 December 19, 1996 Stream International, Inc. 105 Rosemont Road Worcester, MA 02090-2318 Attention: Ms. Judith Salerno, President Subject: Microsoft Corporation Product Support Service Vendor Agreement between Microsoft Corporation and Stream International, Inc., effective December 14, 1995 (the "Agreement"). Dear Ms. Salerno: This letter is intended to serve as a letter amendment to Section 6(a) of the Agreement. The period of time in which Stream is to provide services under the Agreement shall be extended through February 28, 1997. Sincerely, MISCROSOFT CORPORATION By: /s/Linda Glenicki -------------------------------- Linda Glenicki General Manager, Microsoft Technical Support Date: December 19, 1996 AGREED TO BY STREAM INTERNATIONAL, INC. BY SIGNATURE OF ITS DULY AUTHORIZED - --------------------------------------------------------------------------- REPRESENTATIVE BELOW: - -------------------- STREAM INTERNATIONAL, INC. By: /s/J. G. Salerno -------------------------------- Judith Salerno President Date January 2, 1997 ------------------------------- Please remit to: Kevin Kennedy, Microsoftsoft Corporation, One Microsoft Way, Redmond, WA 98052-6399 Stream International Inc. February 28, 1997 Ms. Linda Glenicki General Manager, End User Support The Microsoft Network Microsoft Corporation One Microsoft Way Redmond, WA 98052-6399 Dear Linda: The purpose of this letter is to confirm the extension of the product Support Services Vendor Agreement ("Agreement") through September 1, 1997. Microsoft plans to extend the Agreement through December 31, 1997 upon completion of the Amendment which realigns some of the Service Delivery terms, which though not material, are necessary to reflect our current operating environment. Sincerely, /s/ Judith G. Salerno Judith G. Salerno President & Chief Operating Officer Outsource Technical Support JGS/dlr AGREED TO: MICROSOFT CORPORATION By: /s/ Linda Glenicki -------------------------- Title: General Manager ----------------------- Date: March 3, 1997 ------------------------ EX-10.4 5 1995 STOCK OPTION PLAN EXHIBIT 10.4 STREAM INTERNATIONAL INC. 1995 STOCK OPTION PLAN 1. PURPOSE ------- The purpose of this 1995 Stock Option Plan (the "Plan") is to advance the interests of Stream International Inc. (the "Company") by enhancing the ability of the Company and its subsidiaries to attract and retain employees, consultants, directors or advisers who are in a position to make significant contributions to the success of the Company and its subsidiaries; to reward such individuals for their contributions; and to encourage such individuals to take into account the long-term interests of the Company through interests in shares of the Company's Class A Common Stock (the "Stock"). Any employee, consultant, director or adviser designated to participate in the Plan is referred to as a "participant." Options granted pursuant to the Plan may be incentive stock options as defined in section 422 of the Internal Revenue Code of 1986 (as from time to time amended, the "Code") (any option that is intended so to qualify as an incentive stock option being referred to herein as an "incentive option"), or options that are not incentive options, or both. Non-incentive options shall be granted in the form of Exhibit A hereto (as it may be amended or modified from time to time by the Board of Directors (the "Board") of the Company), and incentive options shall be granted in the form of Exhibit B hereto (as it may be amended or modified from time to time by the Board). Except as otherwise expressly provided with respect to an option grant, no option granted pursuant to the Plan shall be an incentive option. 2. ADMINISTRATION -------------- The Plan shall be administered by the Board. The Board shall have authority, not inconsistent with the express provisions of the Plan, (a) to grant awards consisting of options or stock appreciation rights ("SARs"), or both, to such employees, consultants, directors and advisers as the Board may select; (b) to determine the time or times when awards shall be granted and the number of shares of Stock subject to each award; (c) to determine which options are, and which options are not, incentive options; (d) to determine the terms and conditions of each award; (e) to prescribe the form or forms of any instruments evidencing awards and any other instruments necessary or advisable under the Plan and to change such forms from time to time; (f) to adopt, amend and rescind rules and regulations for the administration of the Plan; and (g) to interpret the Plan and to decide any questions and settle all controversies and disputes that may arise in connection with the Plan. Such determinations of the Board shall be conclusive and shall bind all parties. Subject to Section 8, the Board shall also have the authority, both generally and in particular instances, to waive compliance by a participant with any obligation to be performed by him under an award, to waive any condition or provision of an award, and to amend or cancel any award (and if an award is canceled, to grant a new award on such terms as the Board shall specify) except that the Board may not take any action with respect to an outstanding award that would adversely affect the rights of the participant under such award without such participant's consent. Nothing in the preceding sentence shall be construed as limiting the power of the Board to make adjustments required by Section 4(c) and Section 6(j). The Board may, in its discretion, delegate some or all of its powers with respect to the Plan to a committee (the "Committee"), in which event all references (as appropriate) to the Board hereunder shall be deemed to refer to the Committee. The Committee, if one is appointed, shall consist of at least two directors. A majority of the members of the Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members. Any determination of the Committee under the Plan may be made without notice or meeting of the Committee by a writing signed by a majority of the Committee members. From and after registration of the Stock under the Securities Exchange Act of 1934, as amended (the "Exchange Act") the Board shall delegate the power to select directors and officers to receive awards under the Plan and the timing, pricing and amount of such awards to a committee, all members of which shall be disinterested persons within the meaning of Rule 16b-3 under that Act. 3. EFFECTIVE DATE AND TERM OF PLAN ------------------------------- The Plan shall become effective on the date on which it is approved by the shareholders of the Company. Grants of awards under the Plan may be made prior to that date (but after Board adoption of the Plan), subject to approval of the Plan by such shareholders. No awards shall be granted under the Plan after the completion of ten years from the date on which the Plan was adopted by the Board, but awards previously granted may extend beyond that date. 4. SHARES SUBJECT TO THE PLAN -------------------------- (a) Number of Shares. Subject to adjustment as provided in Section 4(c), ---------------- an aggregate of 800,000 shares of Stock may be delivered upon the exercise of awards granted under the Plan, reduced by the sum of the aggregate number of shares of Stock which become subject to outstanding options and SARs. To the extent that shares of Stock subject to an outstanding option (except to the extent shares of Stock are issued or delivered by the Company in connection with the exercise of a tandem SAR) or independent SAR are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such option or SAR or by reason of the delivery or withholding of shares of Stock to pay all or a portion of the exercise price of an option, or to satisfy all or a portion of the tax withholding obligations relating 2 to such option or SAR, then such shares of Stock shall again be available under the Plan. (b) Shares to be Delivered. Shares delivered under the Plan shall be ---------------------- authorized but unissued Stock or, if the Board so decides in its sole discretion, previously issued Stock acquired by the Company and held in its treasury. No fractional shares of Stock shall be delivered under the Plan. (c) Changes in Stock. In the event of a stock dividend, stock split or ---------------- combination of shares, recapitalization or other change in the Company's capital stock, the number and kind of shares of Stock or securities of the Company subject to awards then outstanding or subsequently granted under the Plan, the exercise price of such awards, the maximum number of shares or securities that may be delivered under the Plan, and other relevant provisions shall be appropriately adjusted by the Board, whose determination shall be binding on all persons. The Board may also adjust the number of shares subject to outstanding awards, the exercise price of outstanding awards and the terms of outstanding awards, to take into consideration material changes in accounting practices or principles, extraordinary dividends, consolidations or mergers, acquisitions or dispositions of stock or property or any other event if it is determined by the Board that such adjustment is appropriate to avoid distortion in the operation of the Plan, provided that no such adjustment shall be made in the case of an incentive option, without the consent of the participant, if it would constitute a modification, extension or renewal of the option within the meaning of section 424(h) of the Code. 5. ELIGIBILITY FOR AWARDS ---------------------- Persons eligible to receive awards under the Plan shall be those employees, consultants, directors or advisers who, in the opinion of the Board, are in a position to make a significant contribution to the success of the Company and its subsidiaries. A subsidiary for purposes of the Plan shall be a corporation in which the Company owns, directly or indirectly, stock possessing 50% or more of the total combined voting power of all classes of stock. Incentive options shall be granted only to "employees" as defined in the provisions of the Code or regulations thereunder applicable to incentive stock options. 6. TERMS AND CONDITIONS OF OPTIONS AND SARs ---------------------------------------- (a) Exercise Price of Options. The exercise price of each option shall be ------------------------- determined by the Board but in the case of an incentive option shall not be less than 100% (110%, in the case of an incentive option granted to a ten-percent shareholder) 3 of the fair market value of the Stock at the time the option is granted; nor shall the exercise price be less, in the case of an original issue of authorized stock, than par value. For this purpose, "fair market value" in the case of incentive options shall have the same meaning as it does in the provisions of the Code and the regulations thereunder applicable to incentive options; and "ten-percent shareholder" shall mean any participant' who at the time of grant owns directly, or by reason of the attribution rules set forth in section 424(d) of the Code is deemed to own, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any of its parent or subsidiary corporations. (b) Duration of Options. The latest date on which an option may be ------------------- exercised (the "Final Exercise Date") shall be the date which is ten years (five years, in the case of an incentive option granted to a "ten-percent shareholder" as defined in (a) above) from the date the option was granted or such earlier date as may be specified in the instrument evidencing such option. (c) Exercise of Options. ------------------- (1) An option shall be exercisable at such time or times and upon such terms and conditions as the Board shall specify. In the case of an option not immediately exercisable in full, the Board may at any time accelerate the time at which all or any part of the option may be exercised. (2) Any exercise of an option shall be in writing, signed by the proper person and furnished to the Company, accompanied by (i) such documents as may be required by the Company and (ii) payment in full as specified below in Section 6(d) for the number of whole shares for which the option is exercised. (3) In the case of an option that is not an incentive option, the Company shall have the right to require, prior to the delivery of any Stock pursuant to the exercise of the option, that the participant exercising the option remit to the Company an amount in cash or by personal check, certified check, bank draft or money order payable to the order of the Company sufficient to satisfy any federal, state or local withholding tax requirements arising in connection with the exercise of the option (the date such obligation arises being referred to as the "Tax Date") (or make other arrangements satisfactory to the Company with regard to such taxes). If specified in the instrument evidencing an option or permitted by the Board, either at the time of the grant of the option or the time of exercise, the participant may elect, at such time and in such manner as the Board may 4 prescribe, to satisfy such withholding obligation by (i) delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay such withholding obligation, (ii) delivering to the Company whole shares of Stock (which the participant has held for at least six months prior to the delivery of such shares or acquired on the open market and for which the participant has good title, free and clear of all liens and encumbrances) having a fair market value, determined as of the Tax Date, equal to such withholding obligation, or (iii) requesting that the Company withhold from the shares of Stock to be delivered upon exercise of the option a number of whole shares of Stock having a fair market value, determined as of the Tax Date, equal to such withholding obligation; provided, however, that the Company shall have sole discretion to disapprove of an election pursuant to any of clauses (i), (ii) or (iii) and that in the case of a participant who is subject to Section 16 of the Exchange Act, the Company may require that the method of satisfying such an obligation be in compliance with Section 16 of the Exchange Act and the rules and regulations thereunder. Stock may 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 participant's maximum marginal tax rate. Any fraction of a share of 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 participant. In the case of an incentive option, if at the time the option is exercised the Company determines that under applicable law and regulations the Company could be liable for the withholding of any federal, state or other tax with respect to a disposition of the Stock received upon exercise, the Board may require as a condition of exercise that the participant exercising the option agree (i) to inform the Company promptly of any disposition (within the meaning of section 424(c) of the Code and the regulations thereunder) of Stock received upon exercise, and (ii) to give such security as the Company deems adequate to meet the potential liability of the Company for the withholding of tax, and to augment such security from time to time in any amount reasonably deemed necessary by the Company to preserve the adequacy of such security. (4) If an option is exercised by the executor or administrator of a deceased participant, or by the person or persons to whom the 5 option has been transferred by the participant's will or applicable laws of descent and distribution or pursuant to any beneficiary designation procedures established by the Company, the Company shall be under no obligation to deliver Stock pursuant to such exercise until the Company is satisfied as to the authority of the person or persons exercising the option. (d) Payment for and Delivery of Stock. Stock purchased upon exercise of an --------------------------------- option under the Plan shall be paid for as follows: (i) in cash or by personal check, certified check, bank draft or money order payable to the order of the Company or (ii) if specified in the instrument evidencing an option or permitted by the Board (which, in the case of an incentive option, shall specify such method of payment in the instrument evidencing the option), (A) through the delivery of whole shares of Stock (which the participant has held for at least six months prior to the delivery of such shares or acquired on the open market and for which the participant has good title, free and clear of all liens and encumbrances) having a fair market value on the last business day preceding the date of exercise equal to the purchase price or (B) by delivery of a full recourse promissory note of the participant to the Company, such note to be payable on such terms as are specified by the Company or (C) by delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay the exercise price or (D) by any combination of the permissible forms of payment. The Company shall have sole discretion to disapprove of an election pursuant to any of clauses (A) - (D) and in the case of a participant who is subject to Section 16 of the Exchange Act, the Company may require that the method of making such payment be in compliance with Section 16 and the rules and regulations thereunder. Any fraction of a share of 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 participant. No certificate representing Stock shall be delivered until the full purchase price therefor has been paid. (e) Stock Appreciation Rights. The Board in its discretion may grant SARs ------------------------- either in tandem with or independent of options awarded under the Plan. Except as hereinafter provided, each SAR will entitle the participant to receive upon exercise, with respect to each share of Stock to which the SAR relates, the excess of (i) the share's value on the date of exercise, over (ii) the share's fair market value on the date the SAR was granted. For purposes of clause (i), "value" shall mean fair market value; provided, that the Board may adjust such -------- value to take into account dividends on the Stock and may also grant SARs that provide, in such limited circumstances following a change in control of the Company (as determined by the Board) as the Board may specify, that "value" for purposes of clause (i) is to be determined by reference to an average value for the Stock during a period immediately preceding the change in control, all as determined by the Board. The amount payable to a participant upon exercise of an SAR shall be paid either in cash or in shares of Stock, 6 as set forth in the instrument evidencing such SAR or as the Board may otherwise determine. An SAR shall be exercisable at such time or times and upon such terms and conditions as the Board shall specify. The latest date on which an SAR may be exercised shall be the date which is ten years from the date the SAR was granted or such earlier date as may be specified in the instrument evidencing such SAR; provided, however, that no tandem SAR shall be exercised later than the exercise, expiration, cancellation, forfeiture or other termination of the related option. (f) Delivery of Stock. A participant shall not have the rights of a ----------------- shareholder with regard to awards under the Plan except as to Stock actually received by him under the Plan. The Company shall not be obligated to deliver any shares of Stock (i) until, in the opinion of the Company's counsel, all applicable federal and state laws and regulations have been complied with, and (ii) if the outstanding Stock is at the time listed on any stock exchange, until the shares to be delivered have been listed or authorized to be listed on such exchange upon official notice of issuance, and (iii) until all other legal matters in connection with the issuance and delivery of such shares have been approved by the Company's counsel. If the sale of Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the award, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such Act and may require that the certificates evidencing such Stock bear an appropriate legend restricting transfer. (g) Nontransferability of Awards. No award may be transferred other than ---------------------------- (i) by will or by the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company or (ii) as otherwise permitted under Rule 16b-3 under the Exchange Act as set forth in the instrument evidencing such award. Except as permitted by the foregoing sentence, during a participant's lifetime an award may be exercised only by him. 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. (h) Death. If a participant dies, each award held by the participant ----- immediately prior to death may be exercised, to the extent it was exercisable immediately prior to death, by his executor or administrator, or by the person or persons to whom the award is transferred by will or applicable laws of descent and distribution or pursuant to any beneficiary designation procedures established by the Company, at any time within the period ending with the first anniversary of the 7 participant's death but in no event beyond the Final Exercise Date or, in the case of an independent SAR, the expiration date of such SAR. All awards held by a participant immediately prior to death that are not then exercisable shall terminate on the date of death. (i) Other Termination of Service. If an employee's employment with the ---------------------------- Company and its subsidiaries terminates for any reason, other than death, all awards held by the employee that are not then exercisable shall terminate; provided, that the Board in its sole discretion may provide (either prior to or following termination) that any or all of such portion of an award which is not exercisable immediately prior to termination shall be treated as having become exercisable immediately prior to termination. Awards that are exercisable on the date employment terminates for any reason other than death shall continue to be exercisable for a period of three months (or such longer period as the Company may determine, but in no event beyond the Final Exercise Date, or in the case of an independent SAR, the expiration date of such SAR) unless the employee was terminated for cause which in the opinion of the Board casts such discredit on him as to justify termination of his awards. Subject to Section 6(h), after completion of that three-month period such awards shall terminate to the extent not previously exercised, expired or terminated. For purposes of this Section 6(i), employment shall not be considered terminated (i) in the case of sick leave or other bona fide leave of absence approved for purposes of the Plan by the Company, or (ii) in the case of a transfer of employment between the Company and a subsidiary or between subsidiaries, or to the employment of a corporation (or a parent or subsidiary corporation of such corporation) issuing or assuming an award in a transaction to which section 424(a) of the Code applies. In the case of a participant who is not an employee, provisions relating to the exercisability of awards following termination of service for any reason other than death shall be specified in the award. If not so specified, all awards held by such participant that are not exercisable immediately prior to termination of service for any reason other than death shall terminate upon termination of service. Awards that are exercisable immediately prior to termination of service as a consultant, director or adviser for any reason other than death shall continue to be exercisable for a period of three months (or such longer period as the Company may determine, but in no event beyond the Final Exercise Date or, in the case of an independent SAR, the expiration date of such SAR) unless the participant was terminated for cause, which in the opinion of the Board casts such discredit on him as to justify termination of his awards. Subject to Section 6(h), after completion of that three-month period such awards shall terminate to the extent not previously exercised, expired or terminated. (j) Acquisition Events. Upon the occurrence of an Acquisition Event (as ------------------ defined below), all outstanding awards shall terminate, provided that at least 10 days prior to the effective date of such Acquisition Event, the Board shall either (i) make all outstanding awards exercisable immediately prior to consummation of such 8 Acquisition Event or (ii) if there is a surviving or acquiring corporation, arrange, subject to consummation of the Acquisition Event, to have that corporation or an affiliate of that corporation grant to participants replacement awards which in the case of incentive options satisfy, in the determination of the Board, the requirements of section 424(a) of the Code. An "Acquisition Event" shall mean (i) any merger or consolidation involving the Company other than a merger or consolidation after the consummation of which the shareholders of the Company immediately prior to such merger or consolidation own more than 50% of the outstanding voting securities of the surviving corporation or of a corporation that owns, directly or indirectly, all of the capital stock of such surviving corporation, (ii) any sale of all or substantially all of the assets of the Company or (iii) the acquisition of more than 50% of the outstanding voting securities of the Company by a single person or entity or group of persons and/or entities acting in concert; provided, however, that the following acquisitions shall not constitute an Acquisition Event: (A) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (B) any acquisition by R.R. Donnelley & Sons Company or any affiliate (as defined under Regulation 12B under the Exchange Act) of R.R. Donnelley & Sons Company. The Board may grant awards under the Plan in substitution for awards held by employees, consultants or advisers of another corporation who concurrently become employees, consultants, directors or advisers of the Company or a subsidiary of the Company as the result of a merger or consolidation of that corporation with the Company or a subsidiary of the Company, or as the result of the acquisition by the Company or a subsidiary of the Company of property or stock of that corporation. The Company may direct that substitute awards be granted on such terms and conditions as the Board considers appropriate in the circumstances. (k) Put and Call Rights. In the event of any (i) exercise by any ------------------- stockholder of the Company of the Put Right set forth in the Company's Restated Certificate of Incorporation or (ii) exercise by the Company of its Call Right set forth in the Company's Restated Certificate of Incorporation, the following provisions should apply to options then outstanding under this Plan. All capitalized terms used in this Section 6(k) not otherwise defined in this Plan shall have the respective meanings set forth in the Company's Restated Certificate of Incorporation. (A) Upon the exercise of the Put Right, holders of options and holders ------------------ of shares of Stock issued upon exercise of options shall be entitled to sell all of the shares underlying such options or issued upon exercise thereof, whether or not then vested (the "Option Shares"), to the Company or the Designee at the Put Price and shall be subject to the rights of the Company or the Designee to require the sale of the Option Shares pursuant to the Mandatory Put, provided -------- that the amount of the aggregate option price of such options shall be subtracted from the aggregate Put Price payable to the holder of such options, and any amounts payable with respect to 9 then unvested Option Shares shall be deposited in escrow pursuant to clause (C) below. The procedures relating to the exercise of the Put Right and Mandatory Put, as set forth in the Company's Restated Certificate of Incorporation, shall apply to the holders of options under this Plan and to Option Shares to the same extent as they apply to B Holders and shares of Common Stock under the Company's Restated Certificate of Incorporation. (B) Upon the exercise of the Call Right, holders of options and holders of shares of Stock issued upon exercise of options shall be required and entitled to sell all of their Option Shares to the Company or the Designee at the Call Price, provided that the amount of the aggregate option price of such -------- options shall be subtracted from the aggregate Call Price payable to the holder of such options, and any amounts payable with respect to then unvested Option Shares shall be deposited in escrow pursuant to clause (C) below. The procedures relating to the exercise of the Call Right, as set forth in the Company's Restated Certificate of Incorporation, shall apply to the holders of options under this Plan and to Option Shares to the same extent as they apply to B Holders and shares of Common Stock under the Company's Restated Certificate of Incorporation. (C) The aggregate amount of the Put Price or Call Price, as the case may be, that is payable to optionees with respect to then unvested Option Shares shall be deposited, in cash, in a non-interest bearing escrow account for the benefit of such optionees. Such escrow account shall be subject to the claims of the Company's creditors. The amounts deposited in escrow for the benefit of each optionee with respect to each unvested installment of his option shall be released to such optionee, subject to the continued employment of the optionee with the Company or any subsidiary thereof, at the time such unvested installment would have become vested in accordance with the vesting schedule of such option as in effect prior to the exercise of the Put Right or Call Right, as the case may be (as such schedule may be modified by the terms of any employment agreement between the Company and such optionee). 7. REPURCHASE RIGHTS ----------------- (a) Upon any termination of employment or service of an optionee with the Company and its subsidiaries, the Company shall have the right to purchase, for cash, shares of Stock issued or issuable upon exercise of awards granted hereunder to the extent such awards were previously exercised or are exercisable at the time of termination ("Vested Shares"), upon the terms set forth below: (i) Termination for Any Reason Other Than Cause. If the termination ------------------------------------------- of employment or service of the optionee is for any reason other than Cause (as defined below), the Company shall have the right to purchase: (A) from any holder of an award granted hereunder and covering less than 10 2,000 shares of Stock (as adjusted for stock splits, stock dividends and similar events), all then Vested Shares, and (B) from any other holder of an award granted hereunder, no Vested Shares if termination occurs on or prior to the second anniversary of the date of grant; up to 45% of the Vested Shares if termination occurs after the second anniversary and prior to or on the third anniversary of the date of grant; up to 35% of the Vested Shares if termination occurs after the third anniversary of the date of grant and prior to or on the fourth anniversary of the date of grant; and up to 25% of the Vested Shares if termination occurs thereafter. The purchase price for the Vested Shares purchased by the Company shall equal the Fair Value (as defined below) thereof at the time of termination. (ii) Termination for Cause. If the termination of employment or --------------------- service of the optionee is by the Company for Cause (as defined below), the Company shall have the right to purchase all of the then Vested Shares at a price equal to the amount paid by the optionee for the Vested Shares (less, in the case of unexercised options, the exercise price) (b) The repurchase rights of the Company set forth in Section 7(a) shall terminate upon the earlier of (i) the registration of any class of Common Stock of the Company under the Securities Exchange Act of 1934, or (ii) the closing of the initial public offering of shares of Common Stock of the Company under the Securities Act of 1933. (c) The Company must exercise its purchase rights under this Section 7, by written notice to the optionee, within 90 days after the termination of employment or service. The closing of any purchase pursuant to this Section 7 shall take place as soon as reasonably practicable at the principal office of the Company, or at such other time and location as the parties to such purchase may mutually determine. At the closing, the holder of the Vested Shares, or award therefor, to be sold shall deliver to the Company a certificate representing such Vested Shares or award, duly endorsed for transfer, and the Company shall pay the purchase price therefor, by check or wire transfer. (d) As used in this Section 7, the following terms shall have the following meanings: (i) "Cause" shall mean: (i) fraud, embezzlement or other act of ----- dishonesty by the optionee with respect to the Company that causes material injury to the Company, or (ii) conviction of, or plea of nolo contendere to, any felony involving dishonesty or moral turpitude. (ii) "Fair Value" shall have the meaning set forth in the Restated ---------- Certificate of Incorporation of the Company, as in effect on the date of 11 adoption of this Plan, as determined in good faith by the Board of Directors of the Company; provided, however, that in the event of a -------- ------- repurchase by the Company of Vested Shares from any holder of an award granted hereunder and initially covering 2,000 or more shares of Stock (as adjusted for stock splits, stock dividends and similar events) (a "Major Holder"), the determination of Fair Value shall be subject to mutual agreement of the Company and such Major Holder. Absent such an agreement, Fair Value shall be determined by calculating the average of the sum of the determinations of Fair Value made by two independent nationally recognized investment banking firms, one of which shall be retained by the Company and one of which shall be retained by the Major Holder. However, if the determinations of Fair Value of such two firms differ from one another by more than 15%, the Company and such Major Holder shall mutually select a third independent investment banking firm to make a final determination of Fair Value with respect to the Vested Shares then being repurchased by the Company. 8. EMPLOYMENT RIGHTS ----------------- Neither the adoption of the Plan nor the grant of awards shall confer upon any participant any right to continue as an employee or director of, or consultant or adviser to, the Company or any parent or subsidiary or affect in any way the right of the Company or parent or subsidiary to terminate such participant at any time. Except as specifically provided by the Board in any particular case, the loss of existing or potential profit in awards granted under this Plan shall not constitute an element of damages in the event of termination of the relationship of a participant even if the termination is in violation of an obligation of the Company to the participant by contract or otherwise. 9. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION --------------------------------------------------------------- Neither adoption of the Plan nor the grant of awards to a participant shall affect the Company's right to make awards to such participant that are not subject to the Plan, to issue to such participant Stock as a bonus or otherwise, or to adopt other plans or arrangements under which Stock may be issued. The Board may at any time discontinue granting awards under the Plan. With the consent of the participant, the Board may at any time cancel an existing award in whole or in part and grant another award for such number of shares as the Board specifies. The Board may at any time or times amend the Plan or any outstanding award for the purpose of satisfying the requirements of section 422 of the Code or of any changes in applicable laws or regulations or for any other purpose that may at 12 the time be permitted by law, or may at any time terminate the Plan as to any further grants of awards, provided that (except to the extent expressly permitted by the Plan) no such amendment shall, without the approval of the shareholders of the Company, effectuate a change for which shareholder approval is required by law, rule or regulation or in order for the Plan to continue to qualify under Rule 16b-3 (if applicable), and no such amendment shall adversely affect the rights of any participant (without his consent) under any award previously granted. 13 EXHIBIT A to 1995 Stock Option Plan ------------------------- STREAM INTERNATIONAL INC. 1995 STOCK OPTION PLAN Non-Incentive Option Certificate -------------------------------- Stock option granted by Stream International Inc., a Delaware corporation (the "Company"), to [NAME OF OPTIONEE] (the "Optionee"), pursuant to the Company's 1995 Stock Option Plan (the "Plan"). All initially capitalized terms not otherwise defined herein shall have the meaning provided in the Plan. 1. Grant of Option --------------- This certificate evidences the grant by the Company on _____________, 199_ to the Optionee of an option to purchase, in whole or in part, on the terms provided herein and in the Plan, a total of _________ shares of Class A Common Stock of the Company (the "Shares") at a purchase price of $[____] per Share. The latest date on which this option may be exercised (the "Final Exercise Date") is [_______]. The option evidenced by this certificate is not an incentive stock option. This option is exercisable in the installments indicated on Schedule 1 hereto. This option shall become null and void unless the Optionee shall accept this certificate by executing it in the space provided below and returning such original execution copy to the Secretary of the Company. 2. Exercise of Option. ------------------ Each election to exercise this option shall be in writing, signed by the Optionee or by his/her executor or administrator or by the person or persons to whom this option is transferred by will or applicable laws of descent and distribution or pursuant to any beneficiary designation procedures established by the Company (the "Legal Representative"), and received by the Secretary of the Company at its principal office, accompanied by payment in full and by such additional documentation evidencing the right to exercise (or, in the case of a Legal Representative, of the authority of such person) as the Company may require. The purchase price may be paid (i) in cash or by personal check, certified check, bank draft or money order payable to the order of the Company, (ii) through the delivery of whole shares of Class A Common Stock of the Company (which the Optionee has held for at least six months prior to the delivery of such shares or acquired on the open market and for which the participant has good title, free and clear of all liens and encumbrances) having a fair market value on the last business day preceding the date of exercise equal to the exercise price, (iii) by delivery of an unconditional and irrevocable undertaking by a broker to deliver to the Company promptly upon the settlement of the sale of the Shares to be issued sufficient funds to pay the exercise price, or (iv) by any combination of the permissible forms of payment. The Company shall have sole discretion to disapprove of an election pursuant to any of clauses (ii), (iii) or (iv) and in the event the Optionee is subject to Section 16 of the Exchange Act, the Company may require that the method of making such payment be in compliance with Section 16 and the rules and regulations thereunder. Any fraction of a share of Class A 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 Shares shall be delivered until the full purchase price therefor has been paid. 3. Restrictions on Transfer ------------------------ Certificates evidencing any Shares purchased by the Optionee upon exercise of options granted hereby shall bear the legends required by the Company's Restated Certificate of Incorporation, and the following legend: "The shares of stock represented by this certificate are subject to repurchase rights of the Company set forth in its 1995 Stock Option Plan. 4. Withholding ----------- No Shares will be transferred pursuant to the exercise of this option unless and until the person exercising this option shall have remitted to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements arising in connection with the option, or shall have made other arrangements satisfactory to the Company with respect to such taxes. Any such withholding tax requirements may be satisfied by (i) making a payment in cash or by personal check, certified check, bank draft or money order payable to the order of the Company, (ii) delivery of an unconditional and irrevocable undertaking by a broker to deliver to the Company promptly upon the settlement of the sale of the Shares to be issued sufficient funds to pay the exercise price, (iii) delivery of whole shares of Class A Common Stock of the Company (which the Optionee has held for at least six months prior to the delivery of such shares or acquired on the open market and which the participant has good title, free and clear of all liens and encumbrances) having a fair market value, determined as of the Tax Date, equal to such withholding obligation or (iv) requesting that the Company withhold from the Shares to be delivered upon the exercise a number of Shares having a fair market value, determined as of the Tax Date, equal to such withholding obligation; provided, however, that the Company shall have sole discretion to disapprove of an election pursuant to any of clauses (ii), A-2 (iii) or (iv) and that in event the Optionee is subject to Section 16 of the Exchange Act, the Company may require that the method of satisfying such an obligation be in compliance with Section 16 of the Exchange Act and the rules and regulations thereunder. Stock may 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 Optionee's maximum marginal tax rate. Any fraction of a Share which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the Optionee. 5. Status Change ------------- Upon the Optionee's termination of employment with the Company or any subsidiary thereof for any reason, this option shall terminate as to any Shares for which it was not exercisable immediately prior to termination; provided, -------- that the Board or Committee in its sole discretion may provide (either prior to or following termination) that any or all of such portion of this option which is not exercisable immediately prior to termination shall be treated as having become exercisable immediately prior to termination. As to that number of Shares for which this option was exercisable (or deemed exercisable by action of the Board or Committee) immediately prior to termination, it shall remain exercisable as follows: (i) if termination occurs for any reason other than death, for a period of three months following the date of termination, except as provided in clause (ii) below (but in no event beyond the Final Exercise Date), or (ii) following death, including death during the three-month period following termination of employment for any reason other than death, for a period of twelve months thereafter, but not beyond the Final Exercise Date. Notwithstanding the foregoing, if the Optionee is terminated for cause (as provided in the Plan), this option shall immediately terminate as to all Shares subject to this option. 6. Nontransferability of Option. ---------------------------- This option is not transferable by the Optionee other than by will or the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company. During the Optionee's lifetime this option may be exercised only by the Optionee. Except as permitted by the second preceding sentence, this 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, A-3 transfer, assign, pledge, hypothecate, encumber or otherwise dispose of this option, any and all rights hereunder shall immediately become null and void. 7. Provisions of the Plan. ---------------------- This option is subject in its entirety to the provisions of the Plan, a copy of which is furnished to the Optionee with this option. 8. Notices. ------- All notices, requests or other communications provided for in this certificate shall be made, if to the Company, to 2 Edgewater Drive, Norwood, Massachusetts 02062 (Fax No.: (617) 440-7070) and if to the Optionee, at his or her address on the records of the Company. All notices, requests or other communications provided for in this certificate shall be made in writing either (a) by personal delivery to the party entitled thereto, (b) by facsimile with confirmation of receipt, (c) by mailing in the United States mails to the last known address of the party entitled thereto or (d) by express courier service. The notice, request or other communication shall be deemed to be received upon personal delivery, upon confirmation of receipt of facsimile transmission or upon receipt by the party entitled thereto if by United States mail or express courier service; provided, however, that if a notice, request or other communication is not received during regular business hours, it shall be deemed to be received on the next succeeding business day of the Company. 9. Governing Law. ------------- This option, this certificate, 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. A-4 IN WITNESS WHEREOF, the Company has caused this option to be executed under its corporate seal by its duly authorized officer. This option shall take effect as a sealed instrument. STREAM INTERNATIONAL INC. By:__________________________________ [NAME AND TITLE] Date:________________________________ Accepted: __________________________________ Print Name of Employee __________________________________ (Signature) A-5 Schedule 1 to Non-Incentive Option Certificate under 1995 Stock Option Plan ---------------------- A-6 EXHIBIT B to 1995 Stock Option Plan ------------------------- STREAM INTERNATIONAL INC. 1995 STOCK OPTION PLAN Incentive Option Certificate ---------------------------- Stock option granted by Stream International Inc., a Delaware corporation (the "Company"), to [NAME OF OPTIONEE] (the "Optionee"), pursuant to the Company's 1995 Stock Option Plan (the "Plan"). All initially capitalized terms not otherwise defined herein shall have the meaning provided in the Plan. 1. Grant of Option --------------- This certificate evidences the grant by the Company on _________, 199_, to the Optionee of an option to purchase, in whole or in part, on the terms provided herein and in the Plan, a total of _________ shares of Class A Common Stock of the Company (the "Shares") at a purchase price of $[_____] per Share. The latest date on which this option may be exercised (the "Final Exercise Date") is [______]. The option evidenced by this certificate is an incentive stock option. This option is exercisable in the installments indicated on Schedule 1 hereto. This option shall become null and void unless the Optionee shall accept this certificate by executing it in the space provided below and returning such original execution copy to the Secretary of the Company. 2. Exercise of Option. ------------------ Each election to exercise this option shall be in writing, signed by the Optionee or by his/her executor or administrator or by the person or persons to whom this option is transferred by will or the applicable laws of descent and distribution or pursuant to any beneficiary designation procedures established by the Company (the "Legal Representative"), and received by the Secretary of the Company at its principal office, accompanied by payment in full and by such additional documentation evidencing the right to exercise (or, in the case of a Legal Representative, of the authority of such person) as the Company may require. The purchase price may be paid (i) in cash or by personal check, certified check, bank draft or money order payable to the order of the Company, (ii) through the delivery of whole shares of Class A Common Stock of the Company (which the Optionee has held for at least six months prior to the delivery of such shares or acquired on the open market and for which the participant has good title, free and clear of all liens and encumbrances) having a fair market value on the last business day preceding the date of exercise equal to the exercise price, (iii) by delivery of an unconditional and irrevocable undertaking by a broker to deliver to the Company promptly upon the settlement of the sale of the Shares to be issued sufficient funds to pay the exercise price, or (iv) by any combination of the permissible forms of payment. The Company shall have sole discretion to disapprove of an election pursuant to any of clauses (ii), (iii) or (iv) and in the event the Optionee is subject to Section 16 of the Exchange Act, the Company may require that the method of making such payment be in compliance with Section 16 and the rules and regulations thereunder. Any fraction of a share of Class A 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 Shares shall be delivered until the full purchase price therefor has been paid. 3. Restrictions on Transfer ------------------------ Certificates evidencing any Shares purchased by the Optionee upon exercise of options granted hereby shall bear the legends required by the Company's Restated Certificate of Incorporation, and the following legend: "The shares of stock represented by this certificate are subject to repurchase rights of the Company set forth in its 1995 Stock Option Plan." 4. Withholding ----------- No Shares will be transferred pursuant to the exercise of this option unless and until the person exercising this option shall have satisfied all conditions established by the Board pursuant to Section 6(c) (3) of the Plan. 5. Status Change ------------- Upon the Optionee's termination of employment with the Company or any subsidiary thereof for any reason, this option shall terminate as to any Shares for which it was not exercisable immediately prior to termination; provided, that the Board or Committee in its sole discretion may provide (either prior to or following termination) that any or all of such portion of this option which is not exercisable immediately prior to termination shall be treated as having become exercisable immediately prior to termination. As to that number of Shares for which this option was exercisable (or deemed exercisable by action of the Board or Committee) immediately prior to termination, it shall remain exercisable as follows: B-2 (i) if termination occurs for any reason other than death for a period of three months following the date of termination, except as provided in clause (ii) below (but in no event beyond the Final Exercise Date), or (ii) following death, including death during the three-month period following termination of employment for any reason other than death, for a period of twelve months thereafter, but not beyond the Final Exercise Date. Notwithstanding the foregoing, if the Optionee is terminated for cause (as provided in the Plan), this option shall immediately terminate as to all Shares subject to this option. 6. Nontransferability of Option. ---------------------------- This option is not transferable by the Optionee other than by will or the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company. During the Optionee's lifetime this option may be exercised only by the Optionee. Except as permitted by the second preceding sentence, this 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 this option and all rights hereunder shall immediately become null and void. 7. Provisions of the Plan. ---------------------- This option is subject in its entirety to the provisions of the Plan, a copy of which is furnished to the Optionee with this option. 8. Notices. ------- All notices, requests or other communications provided for in this certificate shall be made, if to the Company, to 2 Edgewater Drive, Norwood, Massachusetts 02062 (Fax No.: (617) 440-7070) and if to the Optionee, at his or her address on the records of the Company. All notices, requests or other communications provided for in this certificate shall be made in writing either (a) by personal delivery to the party entitled thereto, (b) by facsimile with confirmation of receipt, (c) by mailing in the United States mails to the last known address of the party entitled thereto or (d) by express courier service. The notice, request or other communication shall be deemed to be received upon personal delivery, upon confirmation of receipt of facsimile transmission or upon receipt by the party entitled thereto if by United States mail or express courier service; provided, however, that if a notice, request or other B-3 communication is not received during regular business bonus, it shall be deemed to be received on the next succeeding business day of the Company. 9. Governing Law. ------------- This option, this certificate, 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, the Company has caused this option to be executed under its corporate seal by its duly authorized officer. This option shall take effect as a sealed instrument. STREAM INTERNATIONAL INC. By:_______________________________ Name: Title: Date:_____________________________ Accepted: _______________________________ Print Name of Employee _______________________________ (Signature) B-4 Schedule 1 to Incentive Option Certificate under 1995 Stock Option Plan ---------------------- B-5 STREAM INTERNATIONAL INC. FIRST AMENDMENT TO 1995 STOCK OPTION PLAN RESOLVED: That the 1995 Stock Option Plan of Stream International, Inc. is - -------- hereby amended as follows: 1. Section 6(k) of the Plan is hereby amended to read in its entirety as follows: "(k) Put and Call Rights. In the event of any (i) exercise by any stockholder of the Company of the Put Right set forth in the Company's Restated Certificate of Incorporation or (ii) exercise by the Company of its Call Right set forth in the Company's Restated Certificate of Incorporation, the following provisions should apply to options then outstanding under this Plan. All capitalized terms used in this Section 6(k) not otherwise defined in this Plan shall have the respective meanings set forth in the Company's Restated Certificate of Incorporation. (A) Upon the exercise of the Put Right, holders of options and holders of shares of Stock issued upon exercise of options shall be entitled to sell all of the shares underlying such options or issued upon exercise thereof, whether or not then vested (the "Option Shares"), to R.R. Donnelley & Sons Company ("RRD") or the Designee at the Put Price and shall be subject to the rights of RRD or the Designee to require the sale of the Option Shares pursuant to the Mandatory Put, provided that the amount of the aggregate option price of such options shall be subtracted from the aggregate Put Price payable to the holder of such options, and any amounts payable with respect to then unvested Option Shares shall be deposited in escrow pursuant to clause (c) below. The procedures relating to the exercise of the Put Right and Mandatory Put, as set forth in the Company's Restated Certificate of Incorporation, shall apply to the holders of options under this Plan and to Option Shares to the same extent as they apply to B Holders and shares of Common Stock under the Company's Restated Certificate of Incorporation. (B) Upon the exercise of the Call Right, holders of options and holders of shares of Stock issued upon exercise of options shall be required and entitled to sell all of their Option Shares to the Company or the Designee at the Call Price, provided that the amount of the aggregate option price of such options shall be subtracted from the 1 aggregate Call Price payable to the holder of such options, and any amounts payable with respect to then unvested Option Shares shall be deposited in escrow pursuant to clause (C) below. The procedures relating to the exercise of the Call Right, as set forth in the Company's Restated Certificate of Incorporation, shall apply to the holders of options under this Plan and to Option Shares to the same extent as they apply to B Holders and shares of Common Stock under the Company's Restated Certificate of Incorporation. (C) The aggregate amount of the Put Price or Call Price, as the case may be, that is payable to optionees with respect to then unvested Option Shares shall be deposited, in cash, in a non-interest bearing escrow account for the benefit of such optionees. Such escrow account shall be subject to the claims of the Company's creditors. The amounts deposited in escrow for the benefit of each optionee with respect to each unvested installment of his option shall be released to such optionee, subject to the continued employment of the optionee with the Company or any subsidiary thereof, at the time such unvested installment would have become vested in accordance with the vesting schedule of such option as in effect prior to the exercise of the Put Right or Call Right, as the case may be (as such schedule may be modified by the terms of any employment agreement between the Company and such optionee)." 2. The following Section 10 is added to the Plan: "10. Certain Restrictions. If an optionee desires to Transfer (as defined in the Certificate of Incorporation of the Company) or Involuntarily Transfers any shares of Stock issued upon exercise of options granted under this Plan, the optionee shall comply with, and be subject to, the restrictions on transfer, first offer rights and first refusal rights set forth in Sections A, B, C and D of Article FIFTH of the Certificate of Incorporation of the Company. For purposes of such Sections A, B, C and D, the optionee shall be considered a "B Holder." EFFECTIVE DECEMBER 31, 1995. 2 EX-10.5 6 1995 REPLACEMENT STOCK OPTION PLAN EXHIBIT 10.5 STREAM INTERNATIONAL INC. 1995 REPLACEMENT STOCK OPTION PLAN 1. PURPOSE ------- The purpose of this 1995 Replacement Stock Option Plan (the "Plan") is to enable Stream International Inc. (the "Company") to grant options to purchase shares of Class B-V Common Stock of the Company ("Stock") and an interest in the Stream Incentive Option (as defined below) in replacement of options previously granted by Software Holdings, Inc. ("SHI") under the 1993 Stock Option Plan of SHI (the "1993 Plan"). Any employee, consultant, director or adviser of the Company or any of its subsidiaries designated to participate in the Plan is referred to as a "participant." Options granted pursuant to the Plan may be incentive stock options as defined in section 422 of the Internal Revenue Code of 1986 (as from time to time amended, the "Code") (any option that is intended so to qualify as an incentive stock option being referred to herein as an "incentive option"), or options that are not incentive options, or both. Non-incentive options shall be granted in the form of Exhibit A hereto (as it may be amended or modified from time to time by the Board of Directors (the "Board") of the Company), and incentive options shall be granted in the form of Exhibit B hereto (as it may be amended or modified from time to time by the Board). Except as otherwise expressly provided with respect to an option grant, no option granted pursuant to the Plan shall be an incentive option. 2. ADMINISTRATION -------------- The Plan shall be administered by the Board. The Board shall have authority, not inconsistent with the express provisions of the Plan, (a) to grant options in replacement of options previously granted by SHI under the 1993 Plan (the "SHI Options"); (b) to determine which options are, and which options are not, incentive options; (c) to determine the terms and conditions of each option; (d) to prescribe the form or forms of any instruments evidencing options and any other instruments necessary or advisable under the Plan and to change such forms from time to time; (e) to adopt, amend and rescind rules and regulations for the administration of the Plan; and (f) to interpret the Plan and to decide any questions and settle all controversies and disputes that may arise in connection with the Plan. Such determinations of the Board shall be conclusive and shall bind all parties. Subject to Section 8, the Board shall also have the authority, both generally and in particular instances, to waive compliance by a participant with any obligation to be performed by him under an option, to waive any condition or provision of an option, and to amend or cancel any option except that the Board may not take any action with respect to an outstanding option that would adversely affect the rights of the 1 participant under such option without such participant's consent. Nothing in the preceding sentence shall be construed as limiting the power of the Board to make adjustments required by Section 4(a), Section 4(c) and Section 6(i) The Board may, in its discretion, delegate some or all of its powers with respect to the Plan to a committee (the "Committee"), in which event all references (as appropriate) to the Board hereunder shall be deemed to refer to the Committee. The Committee, if one is appointed, shall consist of at least two directors. A majority of the members of the Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members. Any determination of the Committee under the Plan may be made without notice or meeting of the Committee by a writing signed by a majority of the Committee members. 3. EFFECTIVE DATE AND TERM OF PLAN ------------------------------- The Plan shall become effective on April 21, 1995. No options shall be granted under the Plan other than in replacement of SHI Options. This Plan shall terminate on December 31, 1995, but options previously granted may extend beyond that date. 4. SHARES SUBJECT TO THE PLAN -------------------------- (a) Number of Shares. Subject to adjustment as provided in Section 4(c), ---------------- an aggregate of 167,624 shares of Class B-V Common Stock may be delivered upon the exercise of options granted under the Plan, plus the number of shares of ---- Class A Common Stock of the Company delivered upon exercise of any portion of the Newco Incentive Option in which optionees under this Plan have an interest, as set forth in Section 6. From and after the mandatory conversion of all shares of Class B-V Common Stock of the Company into Class A Common Stock of the Company pursuant to the Restated Certificate of Incorporation of the Company, as it may be amended, the terms "Class B-V Common Stock" and "Stock," as used in this Plan, shall refer to the Class A Common Stock of the Company, and the number of shares available under this Plan and the number of shares subject to each option granted under this Plan, including the purchase price therefor, shall be appropriately adjusted by the Board, pursuant to Section 4(c), to reflect the rate of such conversion. (b) Shares to be Delivered. Shares delivered under the Plan shall be ---------------------- authorized but unissued Stock or, if the Board so decides in its sole discretion, previously issued Stock acquired by the Company and held in its treasury. No fractional shares of Stock shall be delivered under the Plan. (c) Changes in Stock. In the event of a stock dividend, stock split or ---------------- combination of shares, recapitalization or other change in the Company's capital 2 stock, the number and kind of shares of Stock or securities of the Company subject to options then outstanding, the exercise price of such options, the maximum number of shares or securities that may be delivered under the Plan, and other relevant provisions shall be appropriately adjusted by the Board, whose determination shall be binding on all persons. The Board may also adjust the number of shares subject to outstanding options, the exercise price of outstanding options and the terms of outstanding options, to take into consideration material changes in accounting practices or principles, extraordinary dividends, consolidations or mergers, acquisitions or dispositions of stock or property or any other event if it is determined by the Board that such adjustment is appropriate to avoid distortion in the operation of the Plan, provided that no such adjustment shall be made in the case of an incentive option, without the consent of the participant, if it would constitute a modification, extension or renewal of the option within the meaning of section 424(h) of the Code. 5. ELIGIBILITY FOR OPTIONS ----------------------- Persons eligible to receive options under the Plan shall be limited to holders of SHI Options. Options shall be granted under the Plan only to the extent an SHI Option is concurrently cancelled. 6. TERMS AND CONDITIONS OF OPTIONS ------------------------------- (a) Exercise Price; Number of Shares and Interest in Newco Incentive ---------------------------------------------------------------- Option. The exercise price of each option granted under the Plan shall be equal to the exercise price of the SHI Option replaced by such option (the "Replaced Option"), multiplied by 2.22224 (rounded to the nearest hundredth), and the number of shares of Stock covered by such option shall equal the number of shares of Class A Common Stock of SHI covered by the Replaced Option, multiplied by .4499965 (rounded up or down to the nearest whole number). In addition, upon any exercise of an option granted under the Plan prior to the exercise of the Newco Incentive Option (as defined in the Agreement and Plan of Merger dated as of April 21, 1995 [the "Merger Agreement"] among the Company, R.R. Donnelley Merger Company and SHI), the Company shall issue to the participant exercising such option an interest in the Newco Incentive Option. Such interest in the Newco Incentive Option shall be evidenced by a certificate in the form attached as Annex B to the Merger Agreement. To the extent an option granted under the ----------------------------------------- Plan is exercised after the Exercise Date, no interest in the Newco Incentive - ----------------------------------------------------------------------------- Option shall be granted with respect to such option. - --------------------------------------------------- (b) Duration of Options. Except as otherwise agreed between the Company ------------------- and a participant, each option granted to such participant shall be exercisable during the same period or periods during which the Replaced Option was exercisable. 3 (c) Exercise of Options. ------------------- (1) Except as otherwise agreed between the Company and any participant, each option granted under the Plan shall be exercisable at such time or times and upon such terms and conditions as specified in the Replaced Option. In the case of an option not immediately exercisable in full, the Board may at any time accelerate the time at which all or any part of the option may be exercised. (2) Any exercise of an option shall be in writing, signed by the proper person and furnished to the Company, accompanied by (i) such documents as may be required by the Company and (ii) payment in full as specified below in Section 6(d) for the number of whole shares for which the option is exercised. (3) In the case of an option that is not an incentive option, the Company shall have the right to require, prior to the delivery of any Stock pursuant to the exercise of the option, that the participant exercising the option remit to the Company an amount in cash or by personal check, certified check, bank draft or money order payable to the order of the Company sufficient to satisfy any federal, state or local withholding tax requirements arising in connection with the exercise of the option (the date such obligation arises being referred to as the "Tax Date") (or make other arrangements satisfactory to the Company with regard to such taxes). If specified in the instrument evidencing an option or permitted by the Board, either at the time of the grant of the option or the time of exercise, the participant may elect, at such time and in such manner as the Board may prescribe, to satisfy such withholding obligation by (i) delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay such withholding obligation, (ii) delivering to the Company whole shares of Stock (which the participant has held for at least six months prior to the delivery of such shares or acquired on the open market and for which the participant has good title, free and clear of all liens and encumbrances) having a fair market value, determined as of the Tax Date, equal to such withholding obligation, or (iii) requesting that the Company withhold from the shares of Stock to be delivered upon exercise of the option a number of whole shares of Stock having a fair market value equal, determined as of the Tax Date, to such withholding obligation; provided, however, that the Company shall have sole 4 discretion to disapprove of an election pursuant to any of clauses (i), (ii) or (iii) and that in the case of a participant who is subject to Section 16 of the Exchange Act, the Company may require that the method of satisfying such an obligation be in compliance with Section 16 of the Exchange Act and the rules and regulations thereunder. Stock may 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 participant's maximum marginal tax rate. Any fraction of a share of 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 participant. In the case of an incentive option, if at the time the option is exercised the Company determines that under applicable law and regulations the Company could be liable for the withholding of any federal, state or other tax with respect to a disposition of the Stock received upon exercise, the Board may require as a condition of exercise that the participant exercising the option agree (i) to inform the Company promptly of any disposition (within the meaning of section 424(c) of the Code and the regulations thereunder) of Stock received upon exercise, and (ii) to give such security as the Company deems adequate to meet the potential liability of the Company for the withholding of tax, and to augment such security from time to time in any amount reasonably deemed necessary by the Company to preserve the adequacy of such security. (4) If an option is exercised by the executor or administrator of a deceased participant, or by the person or persons to whom the option has been transferred by the participant's will or applicable laws of descent and distribution or pursuant to any beneficiary designation procedures established by the Company, the Company shall be under no obligation to deliver Stock pursuant to such exercise until the Company is satisfied as to the authority of the person or persons exercising the option. (d) Payment for and Delivery of Stock. Stock purchased upon exercise of an --------------------------------- option under the Plan shall be paid for as follows: (i) in cash or by personal check, certified check, bank draft or money order payable to the order of the Company or (ii) if specified in the instrument evidencing an option or permitted by the Board (which, in the case of an incentive option, shall specify such method of payment in the instrument evidencing the option), (A) through the delivery of whole shares of Stock (which the participant has held for at least six months prior to the 5 delivery of such shares or acquired on the open market and for which the participant has good title, free and clear of all liens and encumbrances) having a fair market value on the last business day preceding the date of exercise equal to the purchase price or (B) by delivery of a full recourse promissory note of the participant to the Company, such note to be payable on such terms as are specified by the Company or (C) by delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay the exercise price or (D) by any combination of the permissible forms of payment. The Company shall have sole discretion to disapprove of an election pursuant to any of clauses (A)-(D) and in the case of a participant who is subject to Section 16 of the Exchange Act, the Company may require that the method of making such payment be in compliance with Section 16 and the rules and regulations thereunder. Any fraction of a share of 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 participant. No Certificate representing Stock shall be delivered until the full purchase price therefor has been paid. (e) Delivery of Stock. A participant shall not have the rights of a ----------------- shareholder with regard to options under the Plan except as to Stock actually received by him under the Plan. The Company shall not be obligated to deliver any shares of Stock (i) until, in the opinion of the Company's counsel, all applicable federal and state laws and regulations have been complied with, and (ii) if the outstanding Stock is at the time listed on any stock exchange, until the shares to be delivered have been listed or authorized to be listed on such exchange upon official notice of issuance, and (iii) until all other legal matters in connection with the issuance and delivery of such shares have been approved by the Company's counsel. If the sale of Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the option, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such Act and may require that the certificates evidencing such Stock bear an appropriate legend restricting transfer. (f) Nontransferability of Options. No option may be transferred other than ----------------------------- by will or by the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company or (ii) as otherwise permitted under Rule 16b-3 under the Exchange Act as set forth in the instrument evidencing such option. Except as permitted by the foregoing sentence, during a participant's lifetime an option may be exercised only by him. Except as permitted by the second preceding sentence, no option 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 6 dispose of any option, such option and all rights thereunder shall immediately become null and void. (g) Death. If a participant dies, each option held by the participant ----- immediately prior to death may be exercised, to the extent it was exercisable immediately prior to death, by his executor or administrator, or by the person or persons to whom the option is transferred by will or applicable laws of descent and distribution or pursuant to beneficiary designation procedures established by the Company, at any time within the period ending with the first anniversary of the participant's death but in no event beyond the "Final Exercise Date" (as specified in the option). All options held by a participant immediately prior to death that are not then exercisable shall terminate on the date of death. (h) Other Termination of Service. If an employee's employment with the ---------------------------- Company and its subsidiaries terminates for any reason, other than death, all options held by the employee that are not then exercisable shall terminate; provided, that the Board in its sole discretion may provide (either prior to or following termination) that any or all of such portion of an option which is not exercisable immediately prior to termination shall be treated as having become exercisable immediately prior to termination. Options that are exercisable on the date employment terminates for any reason other than death shall continue to be exercisable for a period of three months (or such longer period as the Company may determine, but in no event beyond the Final Exercise Date) unless the employee was terminated for cause which in the opinion of the Board casts such discredit on him as to justify termination of his options. Subject to Section 6(g), after completion of that three-month period such options shall terminate to the extent not previously exercised, expired or terminated. For purposes of this Section 6(h), employment shall not be considered terminated (i) in the case of sick leave or other bona fide leave of absence approved for purposes of the Plan by the Company or (ii) in the case of a transfer of employment between the Company and a subsidiary or between subsidiaries, or to the employment of a corporation (or a parent or subsidiary corporation of such corporation) issuing or assuming an option in a transaction to which Section 424(a) of the Code applies. In the case of a participant who is not an employee, provisions relating to the exercisability of options following termination of service for any reason other than death shall be specified in the option. If not so specified, all options held by such participant that are not exercisable immediately prior to termination of service for any reason other than death shall terminate upon such termination of service. Options that are exercisable immediately prior to termination of service as a consultant, director or adviser for any reason other than death shall continue to be exercisable for period of three months (or such longer period as the Company may determine, but in no event beyond the Final Exercise Date) unless the participant was terminated for cause which in the opinion of the Board casts such discredit on him as to justify termination of his options. Subject to Section 6(g), after completion of that 7 three-month period such options shall terminate to the extent not previously exercised, expired or terminated. (i) Acquisition Events. Upon the occurrence of an Acquisition Event (as ------------------ defined below), all outstanding options shall terminate, provided that at least 10 days prior to the effective date of such Acquisition Event, the Board shall either (i) make all outstanding options exercisable immediately prior to consummation of such Acquisition Event or (ii) if there is a surviving or acquiring corporation, arrange, subject to consummation of the Acquisition Event, to have that corporation or an affiliate of that corporation grant to participants replacement options which in the case of incentive options satisfy, in the determination of the Board, the requirements of section 424(a) of the Code. An "Acquisition Event" shall mean (i) any merger or consolidation involving the Company other than a merger or consolidation after the consummation of which the shareholders of the Company immediately prior to such merger or consolidation own more than 50% of the outstanding voting securities of the surviving corporation or of a corporation that owns, directly or indirectly, all of the capital stock of such surviving corporation, (ii) any sale of all or substantially all of the assets of the Company or (iii) the acquisition of more than 50% of the outstanding voting securities of the Company by a single person or entity or group of persons and/or entities acting in concert; provided, however, that the following acquisitions shall not constitute an Acquisition Event: (A) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (B) any acquisition by R.R. Donnelley & Sons Company or any affiliate (as defined under Regulation 12B under the Exchange Act) of R.R. Donnelley & Sons Company. (j) Put and Call Rights, Etc. In the event of any (i) Disposition or Total ------------------------ Disposition (as such terms are defined in the Company's Restated Certificate of Incorporation) by R.R. Donnelley & Sons Company ("RRD") that triggers certain Tag Along or Drag Along Rights (as such rights are defined in the Company's Restated Certificate of Incorporation), (ii) exercise by any stockholder of the Company of the Put Right set forth in the Company's Restated Certificate of Incorporation, or (iii) exercise by the Company of its Call Right set forth in the Company's Restated Certificate of Incorporation (in each case, a "Trigger Event"), the exercisability of all then outstanding options under this Plan shall accelerate so that such options shall immediately be exercisable in full. The holders of such options, to the same extent as B Holders (as such term is defined in the Company's Restated Certificate of Incorporation), (A) upon a Disposition or Total Disposition, shall be entitled to participate in the Tag Along or Drag Along Rights, as the case may be, and shall be subject to the Drag Along Rights, (B) upon the exercise of the Put Right, shall be entitled to participate in the Put Right and shall be subject to the Mandatory Put (as defined in the Company's Restated Certificate of Incorporation) and (C) upon the exercise of the Call Right, shall be subject to, and entitled to participate in the sale of shares pursuant to, the Call Right; provided, that in each such case -------- any amounts 8 payable to an optionee in connection with such Tag Along, Drag Along, Put Right, Mandatory Put or Call Right shall, to the extent the options then held by such optionee have not been exercised, be net of the aggregate option exercise price of such options. 7. EMPLOYMENT RIGHTS ----------------- Neither the adoption of the Plan nor the grant of options shall confer upon any participant any right to continue as an employee or director of, or consultant or adviser to, the Company or any parent or subsidiary or affect in any way the right of the Company or parent or subsidiary to terminate such participant at any time. Except as specifically provided by the Board in any particular case, the loss of existing or potential profit in options granted under this Plan shall not constitute an element of damages in the event of termination of the relationship of a participant even if the termination is in violation of an obligation of the Company to the participant by contract or otherwise. 8. AMENDMENT --------- With the consent of the participant, the Board may at any time cancel an existing option in whole or in part and grant another option for such number of shares as the Board specifies. The Board may at any time or times amend the Plan or any outstanding option for the purpose of satisfying the requirements of section 422 of the Code or of any changes in applicable laws or regulations or for any other purpose that may at the time be permitted by law, provided that, except to the extent expressly permitted by the Plan, no such amendment shall, without the approval of the shareholders of the Company, effectuate a change for which shareholder approval is required in order for the Plan to continue to qualify under Rule 16b-3 (if applicable). No such amendment shall adversely affect the rights of any participant, without his consent, under any option previously granted (except as permitted by the terms of the Stream Incentive Option). 9 EXHIBIT A --------- to 1995 Replacement Stock Option Plan ------------------------------------- STREAM INTERNATIONAL INC. 1995 REPLACEMENT STOCK OPTION PLAN Non-Incentive Option Certificate -------------------------------- Stock option granted by Stream International Inc., a Delaware corporation (the "Company"), to [NAME OF OPTIONEE] (the "Optionee"), pursuant to the Company's 1995 Replacement Stock Option Plan (the "Plan") in replacement for options previously granted to the Optionee under the 1993 Stock Option Plan (the "1993 Plan") of Software Holdings, Inc. ("SHI"). All initially capitalized terms not otherwise defined herein shall have the meaning provided in the Plan. 1. Grant of Option --------------- (a) This certificate evidences the grant by the Company on April 21, 1995 to the Optionee of an option to purchase, in whole or in part, on the terms provided herein and in the Plan, a total of _________ shares of Class B-V Common Stock of the Company (the "Shares") at a purchase price of $[____] per Share. In addition, upon any exercise of this option prior to the exercise of the Newco Incentive Option (as defined in the Agreement and Plan of Merger dated as of April 21, 1995 [the "Merger Agreement"] among the Company, R.R. Donnelley Merger Company and SHI), the Company shall issue to the Optionee an interest in the Newco Incentive Option. Such interest in the Newco Incentive Option shall be evidenced by a certificate in the form attached as Annex B to the Merger Agreement and shall be subject to change as set forth in the Newco Incentive Option. To the extent this option is exercised after the Exercise Date, no ------------------------------------------------------------------ interest in the Newco Incentive Option shall be granted with respect to this - ---------------------------------------------------------------------------- option. - ------ (b) The latest date on which this option may be exercised (the "Final Exercise Date") is [__________]. The option evidenced by this certificate is not an incentive stock option. (c) This option is exercisable in the installments indicated on Schedule 1 hereto. (d) This option shall become null and void unless the Optionee shall accept this certificate by executing it in the space provided below and returning such original execution copy to the Secretary of the Company. 1 2. Exercise of Option. ------------------ Each election to exercise this option shall be in writing, signed by the Optionee or by his/her executor or administrator or by the person or persons to whom this option is transferred by will or applicable laws of descent and distribution or pursuant to any beneficiary designation procedures established by the Company (the "Legal Representative"), and received by the Secretary of the Company at its principal office, accompanied by payment in full and by such additional documentation evidencing the right to exercise (or, in the case of a Legal Representative, of the authority of such person) as the Company may require. The purchase price may be paid (i) in cash or by personal check, certified check, bank draft or money order payable to the order of the Company, (ii) through the delivery of whole shares of Class B-V Common Stock of the Company (which the Optionee has held for at least six months prior to the delivery of such shares or acquired on the open market and for which the participant has good title, free and clear of all liens and encumbrances) having a fair market value on the last business day preceding the date of exercise equal to the exercise price, (iii) by delivery of an unconditional and irrevocable undertaking by a broker to deliver to the Company promptly upon the settlement of the sale of the Shares to be issued sufficient funds to pay the exercise price, or (iv) by any combination of the permissible forms of payment. The Company shall have sole discretion to disapprove of an election pursuant to any of clauses (ii), (iii) or (iv) and in the event the Optionee is subject to Section 16 of the Exchange Act, the Company may require that the method of making such payment be in compliance with Section 16 and the rules and regulations thereunder. Any fraction of a share of Class B-V 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 Shares shall be delivered until the full purchase price therefor has been paid. 3. Restrictions on Transfer ------------------------ Certificates evidencing any Shares purchased by the Optionee upon exercise of options granted hereby shall bear the legends required by the Company's Restated Certificate of Incorporation. 4. Withholding ----------- No Shares will be transferred pursuant to the exercise of this option unless and until the person exercising this option shall have remitted to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements arising in connection with the option, or shall have made other arrangements satisfactory to the Company with respect to such taxes. Any such withholding tax requirements may be satisfied by (i) making a payment in cash or by personal check, certified check, bank draft or money order payable to the order of the Company, (ii) delivery of an 2 unconditional and irrevocable undertaking by a broker to deliver to the Company promptly upon the settlement of the sale of the Shares to be issued sufficient funds to pay the exercise price, (iii) delivery of whole shares of Class B-V Common Stock of the Company (which the Optionee has held for at least six months prior to the delivery of such shares or acquired on the open market and which the participant has good title, free and clear of all liens and encumbrances) having a fair market value, determined as of the Tax Date, equal to such withholding obligation or (iv) requesting that the Company withhold from the Shares to be delivered upon the exercise a number of Shares having a fair market value, determined as of the Tax Date, equal to such withholding obligation; provided, however, that the Company shall have sole discretion to disapprove of an election pursuant to any of clauses (ii), (iii) or (iv) and that in event the Optionee is subject to Section 16 of the Exchange Act, the Company may require that the method of satisfying such an obligation be in compliance with Section 16 of the Exchange Act and the rules and regulations thereunder. Stock may 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 Optionee's maximum marginal tax rate. Any fraction of a Share which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the Optionee. 5. Status Change ------------- Upon the Optionee's termination of employment with the Company or any subsidiary thereof for any reason, this option shall terminate as to any Shares for which it was not exercisable immediately prior to termination; provided, -------- that the Board or Committee in its sole discretion may provide (either prior to or following termination) that any or all of such portion of this option which is not exercisable immediately prior to termination shall be treated as having become exercisable immediately prior to termination. As to that number of Shares for which this option was exercisable (or deemed exercisable by action of the Board or Committee) immediately prior to termination, it shall remain exercisable as follows: (i) if termination occurs for any reason other than death, for a period of three months following the date of termination, except as provided in clause (ii) below (but in no event beyond the Final Exercise Date), or (ii) following death, including death during the three-month period following termination of employment for any reason other than death for a period of twelve months thereafter, but not beyond the Final Exercise Date. Notwithstanding the foregoing, if the Optionee is terminated for cause (as provided in the Plan), the option shall immediately terminate as to all Shares subject to the option. 3 6. Nontransferability of Option. ---------------------------- This option is not transferable by the Optionee other than by will or the laws of descent and distribution, or pursuant to beneficiary designation procedures approved by the Company. During the Optionee's lifetime, this option may be exercised only by the Optionee. Except as permitted by the second preceding sentence, this 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 this option and all rights hereunder shall immediately become null and void. 7. Provisions of the Plan. ---------------------- This option is subject in its entirety to the provisions of the Plan, a copy of which is furnished to the Optionee with this option. 8. Registration Rights Agreement. ----------------------------- Upon exercise of this option, the Optionee shall be entitled to become a party to the Registration Rights Agreement dated April 21, 1995 among the Company, certain stockholders of the Company and the former stockholders of SHI. 9. 1993 Plan Options. ----------------- Pursuant to the provisions of the 1993 Plan, all options granted to the Optionee under the 1993 Plan, to the extent not exercised prior to the Effective Time (as defined in the Plan), are cancelled and shall be null and void. 10. Notices. ------- All notices, requests or other communications provided for in this certificate shall be made, if to the Company, to Stream International Inc., 2 Edgewater Drive, Norwood, Massachusetts 02062 (Fax No.: (617) 440-7070) and if to the Optionee at his or her address on the records of the Company. All notices, requests or other communications provided for in this certificate shall be made in writing either (a) by personal delivery to the party entitled thereto, (b) by facsimile with confirmation of receipt, (c) by mailing in the United States mails to the last known address of the party entitled thereto or (d) by express courier service. The notice, request or other communication shall be deemed to be received upon personal delivery, upon confirmation of receipt of facsimile transmission or upon receipt by the party entitled thereto if by United States mail or express courier service; provided, however, that if a notice, request or other communication is not received during regular business 4 bonus, it shall be deemed to be received on the next succeeding business day of the Company. 11. Governing Law. ------------- This option, this certificate, 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, the Company has caused this option to be executed under its corporate seal by its duly authorized officer. This option shall take effect as a sealed instrument. STREAM INTERNATIONAL INC. By:__________________________________ Date:________________________________ Accepted: _______________________________ Print Name of Employee _______________________________ (Signature) 5 Schedule 1 to Non-Incentive Option Certificate under 1995 Replacement Stock Option Plan [Same vesting schedule as vesting schedule for Replaced Option.] 1 EXHIBIT B --------- to 1995 Stock Option Plan ------------------------- STREAM INTERNATIONAL INC. 1995 REPLACEMENT STOCK OPTION PLAN Incentive Option Certificate ---------------------------- Stock option granted by Stream International Inc., a Delaware corporation (the "Company"), to [NAME OF OPTIONEE] (the "Optionee"), pursuant to the Company's 1995 Replacement Stock Option Plan (the "Plan") in replacement for options previously granted to Optionee under the 1993 Stock Option Plan (the "1993 Plan") of Software Holdings, Inc. ("SHI"). All initially capitalized terms not otherwise defined herein shall have the meaning provided in the Plan. 1. Grant of Option --------------- (a) This certificate evidences the grant by the Company on April 21, 1995 to the Optionee of an option to purchase, in whole or in part, on the terms provided herein and in the Plan, a total of _________ shares of Class B-V Common Stock of the Company (the "Shares") at a purchase price of $[_____] per Share. In addition, upon any exercise of this option prior to the exercise of the Newco Incentive Option (as defined in the Agreement and Plan of Merger dated as of April 21, 1995 [the "Merger Agreement"] among the Company, SHI and others), the Company shall issue to the Optionee an interest in the Newco Incentive Option. Such interest in the Newco Incentive Option shall be evidenced by a certificate in the form attached as Annex B to the Merger Agreement and shall be subject to change as set forth in the Newco Incentive Option. To the extent this option is ---------------------------- exercised after the Exercise Date, no interest on the Newco Incentive Option - ---------------------------------------------------------------------------- shall be granted with respect to this option. - -------------------------------------------- (b) The latest date on which this option may be exercised (the "Final Exercise Date") is [_____]. The option evidenced by this certificate is an incentive stock option. (c) This option is exercisable in the installments indicated on Schedule 1 hereto. (d) This option shall become null and void unless the Optionee shall accept this certificate by executing it in the space provided below and returning such original execution copy to the Secretary of the Company. 1 2. Exercise of Option. ------------------ Each election to exercise this option shall be in writing, signed by the Optionee or by his/her executor or administrator or by the person or persons to whom this option is transferred by will or applicable laws of descent and distribution or pursuant to any beneficiary designation procedures established by the Company (the "Legal Representative"), and received by the Secretary of the Company at its principal office, accompanied by payment in full and by such additional documentation evidencing the right to exercise (or, in the case of a Legal Representative, of the authority of such person) as the Company may require. The purchase price may be paid (i) in cash or by personal check, certified check, bank draft or money order payable to the order of the Company, (ii) through the delivery of whole shares of Class B-V Common Stock of the Company (which the Optionee has held for at least six months prior to the delivery of such shares or acquired on the open market and for which the participant has good title, free and clear of all liens and encumbrances) having a fair market value on the last business day preceding the date of exercise equal to the exercise price, (iii) by delivery of an unconditional and irrevocable undertaking by a broker to deliver to the Company promptly upon the settlement of the sale of the Shares to be issued sufficient funds to pay the exercise price, or (iv) by any combination of the permissible forms of payment. The Company shall have sole discretion to disapprove of an election pursuant to any of clause's (ii), (iii) or (iv) and in the event the Optionee is subject to Section 16 of the Exchange Act, the Company may require that the method of making such payment be in compliance with Section 16 and the rules and regulations thereunder. Any fraction of a share of Class B-V 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 Shares shall be delivered until the full purchase price therefor has been paid. 3. Restrictions on Transfer ------------------------ Certificates evidencing any Shares purchased by the Optionee upon exercise of options granted hereby shall bear the legends required by the Company's Restated Certificate of Incorporation. 4. Withholding ----------- No Shares will be transferred pursuant to the exercise of this option unless and until the person exercising this option shall have satisfied all conditions established by the Board pursuant to Section 6(c) (3) of the Plan. 2 5. Status Change ------------- Upon the Optionee's termination of employment with the Company or any subsidiary thereof for any reason, this option shall terminate as to any Shares for which it was not exercisable immediately prior to termination; provided, that the Board or Committee in its sole discretion may provide (either prior to or following termination) that any or all of such portion of this option which is not exercisable immediately prior to termination shall be treated as having become exercisable immediately prior to termination. As to that number of Shares for which this option was exercisable (or deemed exercisable by action of the Board or Committee) immediately prior to termination, it shall remain exercisable as follows: (i) if termination occurs for any reason other than death for a period of three months following the date of termination, except as provided in clause (ii) below (but in no event beyond the Final Exercise Date), or (ii) following death, including death during the three-month period following termination of employment for any reason other than death, for a period of twelve months thereafter, but not beyond the Final Exercise Date. Notwithstanding the foregoing, if the Optionee is terminated for cause (as provided in the Plan), the option shall immediately terminate as to all Shares subject to the option. 6. Nontransferability of Option. ---------------------------- This option is not transferable by the Optionee other than by will or the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company. During the Optionee's lifetime this option may be exercised only by the Optionee. Except as permitted by the second preceding sentence, this 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 this option and all rights hereunder shall immediately become null and void. 7. Provisions of the Plan. ---------------------- This option is subject in its entirety to the provisions of the Plan, a copy of which is furnished to the Optionee with this option. 3 8. Registration Rights Agreement. ----------------------------- Upon exercise of this option, the Optionee shall be entitled to become a party to the Registration Rights Agreement dated April 21, 1995 among the Company, certain stockholders of the Company and the former stockholders of SHI. 9. 1993 Plan Options. ----------------- Pursuant to the provisions of the 1993 Plan, all options granted to the Optionee under the 1993 Plan, to the extent not exercised prior to the Effective Time (as defined in the Plan), are cancelled and shall be null and void. 10. Notices. ------- All notices, requests or other communications provided for in this certificate shall be made, if to the Company, to Stream International Inc., 2 Edgewater Drive, Norwood, Massachusetts 02062, (Fax No.: (617) 440-7070) and if to the Optionee at his or her address on the records of the Company. All notices, requests or other communications provided for in this certificate shall be made in writing either (a) by personal delivery to the party entitled thereto, (b) by facsimile with confirmation of receipt, (c) by mailing in the United States mails to the last known address of the party entitled thereto or (d) by express courier service. The notice, request or other communication shall be deemed to be received upon personal delivery, upon confirmation of receipt of facsimile transmission or upon receipt by the party entitled thereto if by United States mail or express courier service; provided, however, that if a notice, request or other communication is not received during regular business bonus, it shall be deemed to be received on the next succeeding business day of the Company. 11. Governing Law. ------------- This option, this certificate, 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. 4 IN WITNESS WHEREOF, the Company has caused this option to be executed under its corporate seal by its duly authorized officer. This option shall take effect as a sealed instrument. STREAM INTERNATIONAL INC. By:__________________________________ Date:________________________________ Accepted: _______________________________ Print Name of Employee _______________________________ (Signature) 5 Schedule 1 to Incentive Option Certificate under 1995 Replacement Stock Option Plan ---------------------------------- [Same vesting schedule as vesting schedule for Replaced Option.] 1 EX-10.6 7 1995 CALIFORNIA STOCK OPTION PLAN EXHIBIT 10.6 STREAM INTERNATIONAL INC. 1995 CALIFORNIA STOCK OPTION PLAN 1. PURPOSE ------- The purpose of this 1995 California Stock Option Plan (the "Plan") is to advance the interests of Stream International Inc. (the "Company") by enhancing the ability of the Company and its subsidiaries to attract and retain employees, consultants, directors or advisers who reside in California and who are in a position to make significant contributions to the success of the Company and its subsidiaries; to reward such individuals for their contributions; and to encourage such individuals to take into account the long-term interests of the Company through interests in shares of the Company' 5 Class A Common Stock (the "Stock"). Any employee, consultant, director or adviser designated to participate in the Plan is referred to as a "participant." Options granted pursuant to the Plan may be incentive stock options as defined in section 422 of the Internal Revenue Code of 1986 (as from time to time amended, the "Code") (any option that is intended so to qualify as an incentive stock option being referred to herein as an "incentive option"), or options that are not incentive options, or both. Non-incentive options shall be granted in the form of Exhibit A hereto (as it may be amended or modified from time to time by the Board of Directors (the "Board") of the Company), and incentive options shall be granted in the form of Exhibit B hereto (as it may be amended or modified from time to time by the Board). Except as otherwise expressly provided with respect to an option grant, no option granted pursuant to the Plan shall be an incentive option. 2. ADMINISTRATION -------------- The Plan shall be administered by the Board. The Board shall have authority, not inconsistent with the express provisions of the Plan, (a) to grant awards consisting of options or stock appreciation rights ("SARs"), or both, to such employees, consultants, directors and advisers as the Board may select; (b) to determine the time or times when awards shall be granted and the number of shares of Stock subject to each award; (c) to determine which options are, and which options are not, incentive options; (d) to determine the terms and conditions of each award; (e) to prescribe the form or forms of any instruments evidencing awards and any other instruments necessary or advisable under the Plan and to change such forms from time to time; (f) to adopt, amend and rescind rules and regulations for the administration of the Plan; and (g) to interpret the Plan and to decide any questions and settle all controversies and disputes that may arise in connection with the Plan. Such determinations of the Board shall be conclusive and shall bind all parties. Subject to Section 8, the Board shall also have the authority, both generally and in particular instances, to waive compliance by a participant with any obligation to be performed by him under an award, to waive any condition or provision of an award, and to amend or cancel any award (and if an award is canceled, to grant a new award on such terms as the Board shall specify) except that the Board may not take any action with respect to an outstanding award that would adversely affect the rights of the participant under such award without such participant's consent. Nothing in the preceding sentence shall be construed as limiting the power of the Board to make adjustments required by Section 4(c) and Section 6(j). The Board may, in its discretion, delegate some or all of its powers with respect to the Plan to a committee (the "Committee"), in which event all references (as appropriate) to the Board hereunder shall be deemed to refer to the Committee. The Committee, if one is appointed, shall consist of at least two directors. A majority of the members of the Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members. Any determination of the Committee under the Plan may be made without notice or meeting of the Committee by a writing signed by a majority of the Committee members. From and after registration of the Stock under the Securities Exchange Act of 1934, as amended (the "Exchange Act") the Board shall delegate the power to select directors and officers to receive awards under the Plan and the timing, pricing and amount of such awards to a committee, all members of which shall be disinterested persons within the meaning of Rule 16b-3 under that Act. 3. EFFECTIVE DATE AND TERM OF PLAN ------------------------------- The Plan shall become effective on the date on which it is approved by the shareholders of the Company. Grants of awards under the Plan may be made prior to that date (but after Board adoption of the Plan), subject to approval of the Plan by such shareholders. No awards shall be granted under the Plan after the completion of ten years from the date on which the Plan was adopted by the Board, but awards previously granted may extend beyond that date. 4. SHARES SUBJECT TO THE PLAN -------------------------- (a) Number of Shares. Subject to adjustment as provided in Section 4(c), ---------------- an aggregate of 35,000 shares of Stock may be delivered upon the exercise of ------ awards granted under the Plan, reduced by the sum of the aggregate number of shares of Stock which become subject to outstanding options and SARs. To the extent that shares of Stock subject to an outstanding option (except to the extent shares of Stock are issued or delivered by the Company in connection with the exercise of a tandem SAR) or independent SAR are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such option or SAR or by reason of the delivery or withholding of shares of Stock to pay all or a portion of the exercise price of an option, or to satisfy all or a portion of the tax withholding obligations relating -2- to such option or SAR, then such shares of Stock shall again be available under the Plan. (b) Shares to be Delivered. Shares delivered under the Plan shall be ---------------------- authorized but unissued Stock or, if the Board so decides in its sole discretion, previously issued Stock acquired by the Company and held in its treasury. No fractional shares of Stock shall be delivered under the Plan. (c) Changes in Stock. In the event of a stock dividend, stock split or ---------------- combination of shares, recapitalization or other change in the Company's capital stock, the number and kind of shares of Stock or securities of the Company subject to awards then outstanding or subsequently granted under the Plan, the exercise price of such awards, the maximum number of shares or securities that may be delivered under the Plan, and other relevant provisions shall be appropriately adjusted by the Board, whose determination shall be binding on all persons. The Board may also adjust the number of shares subject to outstanding awards, the exercise price of outstanding awards and the terms of outstanding awards, to take into consideration material changes in accounting practices or principles, extraordinary dividends, consolidations or mergers, acquisitions or dispositions of stock or property or any other event if it is determined by the Board that such adjustment is appropriate to avoid distortion in the operation of the Plan, provided that no such adjustment shall be made in the case of an incentive option, without the consent of the participant, if it would constitute a modification, extension or renewal of the option within the meaning of section 424(h) of the Code. 5. ELIGIBILITY FOR AWARDS ---------------------- Persons eligible to receive awards under the Plan shall be those employees, consultants, directors or advisers who reside in California and who, in the opinion of the Board, are in a position to make a significant contribution to the success of the Company and its subsidiaries. A subsidiary for purposes of the Plan shall be a corporation in which the Company owns, directly or indirectly, stock possessing 50% or more of the total combined voting power of all classes of stock. Incentive options shall be granted only to "employees" as defined in the provisions of the Code or regulations thereunder applicable to incentive stock options. 6. TERMS AND CONDITIONS OF OPTIONS AND SARs ---------------------------------------- (a) Exercise Price of Options. The exercise price of each option shall be ------------------------- determined by the Board but in the case of an incentive option shall not be less than 100% (110%, in the case of an incentive option granted to a ten-percent shareholder) -3- of the fair market value of the Stock at the time the option is granted; nor shall the exercise price be less, in the case of an original issue of authorized stock, than par value. For this purpose, "fair market value" in the case of incentive options shall have the same meaning as it does in the provisions of the Code and the regulations thereunder applicable to incentive options; and "ten-percent shareholder" shall mean any participant who at the time of grant owns directly, or by reason of the attribution rules set forth in section 424(d) of the Code is deemed to own, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any of its parent or subsidiary corporations. (b) Duration of Options. The latest date on which an option may be ------------------- exercised (the "Final Exercise Date") shall be the date which is ten years (five years, in the case of an incentive option granted to a "ten-percent shareholder" as defined in (a) above) from the date the option was granted or such earlier date as may be specified in the instrument evidencing such option. (c) Exercise of Options. ------------------- (1) An option shall be exercisable at such time or times and upon such terms and conditions as the Board shall specify. In the case of an option not immediately exercisable in full, the Board may at any time accelerate the time at which all or any part of the option may be exercised. (2) Any exercise of an option shall be in writing, signed by the proper person and furnished to the Company, accompanied by (i) such documents as may be required by the Company and (ii) payment in full as specified below in Section 6(d) for the number of whole shares for which the option is exercised. (3) In the case of an option that is not an incentive option, the Company shall have the right to require, prior to the delivery of any Stock pursuant to the exercise of the option, that the participant exercising the option remit to the Company an amount in cash or by personal check, certified check, bank draft or money order payable to the order of the Company sufficient to satisfy any federal, state or local withholding tax requirements arising in connection with the exercise of the option (the date such obligation arises being referred to as the "Tax Date") (or make other arrangements satisfactory to the Company with regard to such taxes). If specified in the instrument evidencing an option or permitted by the Board, either at the time of the grant of the option or the time of exercise, the participant may elect, at such time and in such manner as the Board may prescribe, to satisfy such withholding obligation by (i) delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay such -4- withholding obligation, (ii) delivering to the Company whole shares of Stock (which the participant has held for at least six months prior to the delivery of such shares or acquired on the open market and for which the participant has good title, free and clear of all liens and encumbrances) having a fair market value, determined as of the Tax Date, equal to such withholding obligation, or (iii) requesting that the Company withhold from the shares of Stock to be delivered upon exercise of the option a number of whole shares of Stock having a fair market value, determined as of the Tax Date, equal to such withholding obligation; provided, however, that the Company shall have sole discretion to disapprove of an election pursuant to any of clauses (i), (ii) or (iii) and that in the case of a participant who is subject to Section 16 of the Exchange Act, the Company may require that the method of satisfying such an obligation be in compliance with Section 16 of the Exchange Act and the rules and regulations thereunder. Stock may 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 participant's maximum marginal tax rate. Any fraction of a share of 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 participant. In the case of an incentive option, if at the time the option is exercised the Company determines that under applicable law and regulations the Company could be liable for the withholding of any federal, state or other tax with respect to a disposition of the Stock received upon exercise, the Board may require as a condition of exercise that the participant exercising the option agree (i) to inform the Company promptly of any disposition (within the meaning of section 424(c) of the Code and the regulations thereunder) of Stock received upon exercise, and (ii) to give such security as the Company deems adequate to meet the potential liability of the Company for the withholding of tax, and to augment such security from time to time in any amount reasonably deemed necessary by the Company to preserve the adequacy of such security. (4) If an option is exercised by the executor or administrator of a deceased participant, or by the person or persons to whom the option has been transferred by the participant's will or applicable laws of descent and distribution or pursuant to any beneficiary designation procedures established by the Company, the Company shall be under no obligation to deliver Stock pursuant to such exercise until the Company is satisfied as to the authority of the person or persons exercising the option. -5- (d) Payment for and Delivery of Stock. Stock purchased upon exercise of --------------------------------- an option under the Plan shall be paid for as follows: (i) in cash or by personal check, certified check, bank draft or money order payable to the order of the Company or (ii) if specified in the instrument evidencing an option or permitted by the Board (which, in the case of an incentive option, shall specify such method of payment in the instrument evidencing the option), (A) through the delivery of whole shares of Stock (which the participant has held for at least six months prior to the delivery of such shares or acquired on the open market and for which the participant has good title, free and clear of all liens and encumbrances) having a fair market value on the last business day preceding the date of exercise equal to the purchase price or (B) by delivery of a full recourse promissory note of the participant to the Company, such note to be payable on such terms as are specified by the Company or (C) by delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay the exercise price or (D) by any combination of the permissible forms of payment. The Company shall have sole discretion to disapprove of an election pursuant to any of clauses (A) - (D) and in the case of a participant who is subject to Section 16 of the Exchange Act, the Company may require that the method of making such payment be in compliance with Section 16 and the rules and regulations thereunder. Any fraction of a share of 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 participant. No certificate representing Stock shall be delivered until the full purchase price therefor has been paid. (e) Stock Appreciation Rights. The Board in its discretion may grant SARs ------------------------- either in tandem with or independent of options awarded under the Plan. Except as hereinafter provided, each SAR will entitle the participant to receive upon exercise, with respect to each share of Stock to which the SAR relates, the excess of (i) the share's value on the date of exercise, over (ii) the share's fair market value on the date the SAR was granted. For purposes of clause (i), "value" shall mean fair market value; provided that the Board may adjust such value to take into account dividends on the Stock and may also grant SARs that provide, in such limited circumstances following a change in control of the Company (as determined by the Board) as the Board may specify, that "value" for purposes of clause (i) is to be determined by reference to an average value for the Stock during a period immediately preceding the change in control, all as determined by the Board. The amount payable to a participant upon exercise of an SAR shall be paid either in cash or in shares of Stock, as set forth in the instrument evidencing such SAR or as the Board may otherwise determine. An SAR shall be exercisable at such time or times and upon such terms and conditions as the Board shall specify. The latest date on which an SAR may be exercised shall be the date which is ten years from the date the SAR was granted or such earlier date as may be specified in the instrument evidencing such SAR; provided, however, that no tandem SAR shall be exercised later than the exercise, expiration, cancellation, forfeiture or other termination of the related option. -6- (f) Delivery of Stock. A participant shall not have the rights of a ----------------- shareholder with regard to awards under the Plan except as to Stock actually received by him under the Plan. The Company shall not be obligated to deliver any shares of Stock (i) until, in the opinion of the Company's counsel, all applicable federal and state laws and regulations have been complied with, and (ii) if the outstanding Stock is at the time listed on any stock exchange, until the shares to be delivered have been listed or authorized to be listed on such exchange upon official notice of issuance, and (iii) until all other legal matters in connection with the issuance and delivery of such shares have been approved by the Company's counsel. If the sale of Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the award, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such Act and may require that the certificates evidencing such Stock bear an appropriate legend restricting transfer. (g) Nontransferability of Awards. No award may be transferred other than ---------------------------- (i) by will or by the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company or (ii) as otherwise permitted under Rule 16b-3 under the Exchange Act as set forth in the instrument evidencing such award. Except as permitted by the foregoing sentence, during a participant's lifetime an award may be exercised only by him. 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. (h) Death. If a participant dies, each award held by the participant ----- immediately prior to death may be exercised, to the extent it was exercisable immediately prior to death, by his executor or administrator, or by the person or persons to whom the award is transferred by will or applicable laws of descent and distribution or pursuant to any beneficiary designation procedures established by the Company, at any time within the period ending with the first anniversary of the participant's death but in no event beyond the Final Exercise Date or, in the case of an independent SAR, the expiration date of such SAR. All awards held by a participant immediately prior to death that are not then exercisable shall terminate on the date of death. (i) Other Termination of Service. If an employee's employment with the ---------------------------- Company and its subsidiaries terminates for any reason, other than death, all awards held by the employee that are not then exercisable shall terminate; provided, that the -7- Board in its sole discretion may provide (either prior to or following termination) that any or all of such portion of an award which is not exercisable immediately prior to termination shall be treated as having become exercisable immediately prior to termination. Awards that are exercisable on the date employment terminates for any reason other than death shall continue to be exercisable for a period of three months (or such longer period as the Company may determine, but in no event beyond the Final Exercise Date, or in the case of an independent SAR, the expiration date of such SAR) unless the employee was terminated for cause which in the opinion of the Board casts such discredit on him as to justify termination of his awards. Subject to Section 6(h), after completion of that three-month period such awards shall terminate to the extent not previously exercised, expired or terminated. For purposes of this Section 6(i), employment shall not be considered terminated (i) in the case of sick leave or other bona fide leave of absence approved for purposes of the Plan by the Company, or (ii) in the case of a transfer of employment between the Company and a subsidiary or between subsidiaries, or to the employment of a corporation (or a parent or subsidiary corporation of such corporation) issuing or assuming an award in a transaction to which section 424(a) of the Code applies. In the case of a participant who is not an employee, provisions relating to the exercisability of awards following termination of service for any reason other than death shall be specified in the award. If not so specified, all awards held by such participant that are not exercisable immediately prior to termination of service for any reason other than death shall terminate upon termination of service. Awards that are exercisable immediately prior to termination of service as a consultant, director or adviser for any reason other than death shall continue to be exercisable for a period of three months (or such longer period as the Company may determine, but in no event beyond the Final Exercise Date or, in the case of an independent SAR, the expiration date of such SAR) unless the participant was terminated for cause which in the opinion of the Board casts such discredit on him as to justify termination of his awards. Subject to Section 6(h), after completion of that three-month period such awards shall terminate to the extent not previously exercised, expired or terminated. (j) Acquisition Events. Upon the occurrence of an Acquisition Event (as ------------------ defined below), all outstanding awards shall terminate, provided that at least 10 days prior to the effective date of such Acquisition Event, the Board shall either (i) make all outstanding awards exercisable immediately prior to consummation of such Acquisition Event or (ii) if there is a surviving or acquiring corporation, arrange, subject to consummation of the Acquisition Event, to have that corporation or an affiliate of that corporation grant to participants replacement awards which in the case of incentive options satisfy, in the determination of the Board, the requirements of section 424(a) of the Code. An "Acquisition Event" shall mean (i) any merger or consolidation involving the Company other than a merger or consolidation after the consummation of which the shareholders of the Company immediately prior to such merger or consolidation own more than 50% of the outstanding voting securities of -8- the surviving corporation or of a corporation that owns, directly or indirectly, all of the capital stock of such surviving corporation, (ii) any sale of all or substantially all of the assets of the Company or (iii) the acquisition of more than 50% of the outstanding voting securities of the Company by a single person or entity or group of persons and/or entities acting in concert; provided, however, that the following acquisitions shall not constitute an Acquisition Event: (A) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (B) any acquisition by R.R. Donnelley & Sons Company or any affiliate (as defined under Regulation 12B under the Exchange Act) of R.R. Donnelley & Sons Company. The Board may grant awards under the Plan in substitution for awards held by employees, consultants or advisers of another corporation who concurrently become employees, consultants, directors or advisers of the Company or a subsidiary of the Company as the result of a merger or consolidation of that corporation with the Company or a subsidiary of the Company, or as the result of the acquisition by the Company or a subsidiary of the Company of property or stock of that corporation. The Company may direct that substitute awards be granted on such terms and conditions as the Board considers appropriate in the circumstances. (k) Put and Call Rights. In the event of any (i) exercise by any ------------------- stockholder of the Company of the Put Right set forth in the Company's Restated Certificate of Incorporation or (ii) exercise by the Company of its Call Right set forth in the Company's Restated Certificate of Incorporation, the following provisions should apply to options then outstanding under this Plan. All capitalized terms used in this Section 6(k) not otherwise defined in this Plan shall have the respective meanings set forth in the Company's Restated Certificate of Incorporation. (A) Upon the exercise of the Put Right, holders of options shall be entitled to sell all of the shares underlying such options, whether or not then vested (the "Option Shares"), to the Company or the Designee at the Put Price and shall be subject to the rights of the Company or the Designee to require the sale of the Option Shares pursuant to the Mandatory Put, provided that the -------- amount of the aggregate option price of such options shall be subtracted from the aggregate Put Price payable to the holder of such options, and any amounts payable with respect to then unvested Option Shares shall be deposited in escrow pursuant to clause (C) below. The procedures relating to the exercise of the Put Right and Mandatory Put, as set forth in the Company's Restated Certificate of Incorporation, shall apply to the holders of options under this Plan and to Option Shares to the same extent as they apply to B Holders and shares of Common Stock under the Company's Restated Certificate of Incorporation. (B) Upon the exercise of the Call Right, holders of options shall be required and entitled to sell all of their Option Shares to the Company or the Designee at the -9- Call Price, provided that the amount of the aggregate option price of such -------- options shall be subtracted from the aggregate Call Price payable to the holder of such options, and any amounts payable with respect to then unvested Option Shares shall be deposited in escrow pursuant to clause (C) below. The procedures relating to the exercise of the Call Right, as set forth in the Company's Restated Certificate of Incorporation, shall apply to the holders of options under this Plan and to Option Shares to the same extent as they apply to B Holders and shares of Common Stock under the Company's Restated Certificate of Incorporation. (C) The aggregate amount of the Put Price or Call Price, as the case may be, that is payable to optionees with respect to then unvested Option Shares shall be deposited, in cash, in a non-interest bearing escrow account for the benefit of such optionees. Such escrow account shall be subject to the claims of the Company's creditors. The amounts deposited in escrow for the benefit of each optionee with respect to each unvested installment of his option shall be released to such optionee, subject to the continued employment of the optionee with the Company or any subsidiary thereof, at the time such unvested installment would have become vested in accordance with the vesting schedule of such option as in effect prior to the exercise of the Put Right or Call Right, as the case may be (as such schedule may be modified by the terms of any employment agreement between the Company and such optionee). 7. REPURCHASE RIGHTS ----------------- (a) Upon any termination of employment or service of an optionee with the Company and its subsidiaries, the Company shall have the right to purchase, for cash, shares of Stock issued or issuable upon exercise of awards granted hereunder to the extent such awards were previously exercised or are exercisable at the time of termination ("Vested Shares"), upon the terms set forth below: (i) Termination for Any Reason Other Than Cause. If the termination ------------------------------------------- of employment or service of the optionee is for any reason other than Cause (as defined below), the Company shall have the right to purchase: (A) from any holder of an award granted hereunder and covering less than 2,000 shares of Stock (as adjusted for stock splits, stock dividends and similar events), all then Vested Shares, and (B) from any other holder of an award granted hereunder, no Vested Shares if termination occurs on or prior to the second anniversary of the date of grant; up to 45% of the Vested Shares if termination occurs after the second anniversary and prior to or on the third anniversary of the date of grant; up to 35% of the Vested Shares if termination occurs after the third anniversary of the date of grant and prior to or on the fourth anniversary of the date of grant; and up to 25% of the Vested Shares if termination occurs thereafter. The purchase price for the Vested Shares purchased by the Company shall equal the Fair Value (as defined below) -10- thereof at the time of termination. (ii) Termination for Cause. If the termination of employment or --------------------- service of the optionee is by the Company for Cause (as defined below), the Company shall have the right to purchase all of the then Vested Shares at a price equal to the amount paid by the optionee for the Vested Shares (less, in the case of unexercised options, the exercise price). (b) The repurchase rights of the Company set forth in Section 7(a) shall terminate upon the earlier of (i) the registration of any class of Common Stock of the Company under the Securities Exchange Act of 1934, or (ii) the closing of the initial public offering of shares of Common Stock of the Company under the Securities Act of 1933. (c) The Company must exercise its purchase rights under this Section 7, by written notice to the optionee, within 90 days after the termination of employment or service. The closing of any purchase pursuant to this Section 7 shall take place as soon as reasonably practicable at the principal office of the Company, or at such other time and location as the parties to such purchase may mutually determine. At the closing, the holder of the Vested Shares, or award therefor, to be sold shall deliver to the Company a certificate representing such Vested Shares or award, duly endorsed for transfer, and the Company shall pay the purchase price therefor, by check or wire transfer. (d) As used in this Section 7, the following terms shall have the following meanings: (i) "Cause" shall mean: (i) fraud, embezzlement or other act of dishonesty ----- by the optionee with respect to the Company that causes material injury to the Company, or (ii) conviction of, or plea of nolo contendere to, any felony involving dishonesty or moral turpitude. (ii) "Fair Value" shall have the meaning set forth in the Restated ---------- Certificate of Incorporation of the Company, as in effect on the date of adoption of this Plan, as determined in good faith by the Board of Directors of the Company; provided, however, that in the event of a ----------------- repurchase by the Company of Vested Shares from any holder of an award granted hereunder and initially covering 2,000 or more shares of Stock (as adjusted for stock splits, stock dividends and similar events) (a "Major Holder"), the determination of Fair Value shall be subject to mutual agreement of the Company and such Major Holder. Absent such an agreement, Fair Value shall be determined by calculating the average of the sum of the determinations of Fair Value made by two independent nationally recognized investment banking firms, one of which shall be retained by the Company and one of which shall be retained by -11- the Major Holder. However, if the determinations of Fair Value of such two firms differ from one another by more than 15%, the Company and such Major Holder shall mutually select a third independent investment banking firm to make a final determination of Fair Value with respect to the Vested Shares then being repurchased by the Company. 8. EMPLOYMENT RIGHTS ----------------- Neither the adoption of the Plan nor the grant of awards shall confer upon any participant any right to continue as an employee or director of, or consultant or adviser to, the Company or any parent or subsidiary or affect in any way the right of the Company or parent or subsidiary to terminate such participant at any time. Except as specifically provided by the Board in any particular case, the loss of existing or potential profit in awards granted under this Plan shall not constitute an element of damages in the event of termination of the relationship of a participant even if the termination is in violation of an obligation of the Company to the participant by contract or otherwise. 9. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION --------------------------------------------------------------- Neither adoption of the Plan nor the grant of awards to a participant shall affect the Company's right to make awards to such participant that are not subject to the Plan, to issue to such participant Stock as a bonus or otherwise, or to adopt other plans or arrangements under which Stock may be issued. The Board may at any time discontinue granting awards under the Plan. With the consent of the participant, the Board may at any time cancel an existing award in whole or in part and grant another award for such number of shares as the Board specifies. The Board may at any time or times amend the Plan or any outstanding award for the purpose of satisfying the requirements of section 422 of the Code or of any changes in applicable laws or regulations or for any other purpose that may at the time be permitted by law, or may at any time terminate the Plan as to any further grants of awards, provided that (except to the extent expressly permitted by the Plan) no such amendment shall, without the approval of the shareholders of the Company, effectuate a change for which shareholder approval is required by law, rule or regulation or in order for the Plan to continue to qualify under Rule 16b-3 (if applicable), and no such amendment shall adversely affect the rights of any participant (without his consent) under any award previously granted. -12- EXHIBIT A to 1995 California Stock Option Plan --------------------------------- STREAM INTERNATIONAL INC. 1995 CALIFORNIA STOCK OPTION PLAN Non - Incentive Option Certificate ---------------------------------- Stock option granted by Stream International Inc., a Delaware corporation (the "Company"), to [NAME OF OPTIONEES] (the "Optionee"), pursuant to the Company's 1995 California Stock Option Plan (the "Plan"). All initially capitalized terms not otherwise defined herein shall have the meaning provided in the Plan. 1. Grant of Option --------------- This certificate evidences the grant by the Company on _____________ 199__ to the Optionee of an option to purchase, in whole or in part, on the terms provided herein and in the Plan, a total of _________ shares of Class A Common Stock of the Company (the "Shares") at a purchase price of $[____] per Share. The latest date on which this option may be exercised (the "Final Exercise Date") is [_______]. The option evidenced by this certificate is not an incentive stock option. This option is exercisable in the installments indicated on Schedule 1 hereto. This option shall become null and void unless the Optionee shall accept this certificate by executing it in the space provided below and returning such original execution copy to the Secretary of the Company. 2. Exercise of Option. ------------------ Each election to exercise this option shall be in writing, signed by the Optionee or by his/her executor or administrator or by the person or persons to whom this option is transferred by will or applicable laws of descent and distribution or pursuant to any beneficiary designation procedures established by the Company (the "Legal Representative"), and received by the Secretary of the Company at its principal office, accompanied by payment in full and by such additional documentation evidencing the right to exercise (or, in the case of a Legal Representative, of the authority of such person) as the Company may require. The purchase price may be paid (i) in cash or by personal check, certified check, bank draft or money order payable to the order of the Company, (ii) through the delivery of whole shares of Class A Common Stock of the Company (which the Optionee has held for at least six months prior to the delivery of such shares or acquired on the open market and for which the participant has good title, free and clear of all liens and encumbrances) having a fair market value on the last business day preceding the date of exercise equal to the exercise price, (iii) by delivery of an unconditional and irrevocable undertaking by a broker to deliver to the Company promptly upon the settlement of the sale of the Shares to be issued sufficient funds to pay the exercise price, or (iv) by any combination of the permissible forms of payment. The Company shall have sole discretion to disapprove of an election pursuant to any of clauses (ii), (iii) or (iv) and in the event the Optionee is subject to Section 16 of the Exchange Act, the Company may require that the method of making such payment be in compliance with Section 16 and the rules and regulations thereunder. Any fraction of a share of Class A 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 Shares shall be delivered until the full purchase price therefor has been paid. 3. Restrictions on Transfer ------------------------ Certificates evidencing any Shares purchased by the Optionee upon exercise of options granted hereby shall bear the legends required by the Company's Restated Certificate of Incorporation, and the following legend: "The shares of stock represented by this certificate are subject to repurchase rights of the Company set forth in its 1995 California Stock Option Plan." 4. Withholding ----------- No Shares will be transferred pursuant to the exercise of this option unless and until the person exercising this option shall have remitted to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements arising in connection with the option, or shall have made other arrangements satisfactory to the Company with respect to such taxes. Any such withholding tax requirements may be satisfied by (i) making a payment in cash or by personal check, certified check, bank draft or money order payable to the order of the Company, (ii) delivery of an unconditional and irrevocable undertaking by a broker to deliver to the Company promptly upon the settlement of the sale of the Shares to be issued sufficient funds to pay the exercise price, (iii) delivery of whole shares of Class A Common Stock of the Company (which the Optionee has held for at least six months prior to the delivery of such shares or acquired on the open market and which the participant has good title, free and clear of all liens and encumbrances) having a fair market value, determined as of the Tax Date, equal to such withholding obligation or (iv) requesting that the Company withhold from the Shares to be delivered upon the exercise a number of Shares having a fair market value, determined as of the Tax Date, equal to such withholding obligation; provided, however, that the Company shall have sole discretion to disapprove of an election pursuant to any of clauses (ii), (iii) or (iv) and that in event the Optionee is subject to Section 16 of the Exchange A-2 Act, the Company may require that the method of satisfying such an obligation be in compliance with Section 16 of the Exchange Act and the rules and regulations thereunder. Stock may 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 Optionee's maximum marginal tax rate. Any fraction of a Share which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the Optionee. 5. Status Change ------------- Upon the Optionee's termination of employment with the Company or any subsidiary thereof for any reason, this option shall terminate as to any Shares for which it was not exercisable immediately prior to termination; provided -------- that the Board or Committee in its sole discretion may provide (either prior to or following termination) that any or all of such portion of this option which is not exercisable immediately prior to termination shall be treated as having become exercisable immediately prior to termination. As to that number of Shares for which this option was exercisable (or deemed exercisable by action of the Board or Committee) immediately prior to termination, it shall remain exercisable as follows: (i) if termination occurs for any reason other than death, for a period of three months following the date of termination, except as provided in clause (ii) below (but in no event beyond the Final Exercise Date), or (ii) following death, including death during the three-month period following termination of employment for any reason other than death, for a period of twelve months thereafter, but not beyond the Final Exercise Date. Notwithstanding the foregoing, if the Optionee is terminated for cause (as provided in the Plan), this option shall immediately terminate as to all Shares subject to this option. 6. Nontransferability of Option. ---------------------------- This option is not transferable by the Optionee other than by will or the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company. During the Optionee's lifetime this option may be exercised only by the Optionee. Except as permitted by the second preceding sentence, this 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 this option, any and all rights hereunder shall immediately become null and void. A-3 7. Provisions of the Plan. ---------------------- This option is subject in its entirety to the provisions of the Plan, a copy of which is furnished to the Optionee with this option. 8. Notices. ------- All notices, requests or other communications provided for in this certificate shall be made, if to the Company, to 2 Edgewater Drive, Norwood, Massachusetts 02062 (Fax No.: (617) 440-7070) and if to the Optionee, at his or her address on the records of the Company. All notices, requests or other communications provided for in this certificate shall be made in writing either (a) by personal delivery to the party entitled thereto, (b) by facsimile with confirmation of receipt, (c) by mailing in the United States mails to the last known address of the party entitled thereto or (d) by express courier service. The notice, request or other communication shall be deemed to be received upon personal delivery, upon confirmation of receipt of facsimile transmission or upon receipt by the party entitled thereto if by United States mail or express courier service; provided, however, that if a notice, request or other communication is not received during regular business hours, it shall be deemed to be received on the next succeeding business day of the Company. 9. Governing Law. ------------- This option, this certificate, 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. A-4 IN WITNESS WHEREOF, the Company has caused this option to be executed under its corporate seal by its duly authorized officer. This option shall take effect as a sealed instrument. STREAM INTERNATIONAL INC. By: __________________________________ [NAME AND TITLE] Date:_________________________________ Accepted: __________________________ Print Name of Employee __________________________ (Signature) A-5 Schedule 1 to Non-Incentive Option Certificate under 1995 California Stock Option Plan --------------------------------- A-6 EXHIBIT B to 1995 California Stock Option Plan --------------------------------- STREAM INTERNATIONAL INC. 1995 CALIFORNIA STOCK OPTION PLAN Incentive Option Certificate ---------------------------- Stock option granted by Stream International Inc., a Delaware corporation (the "Company"), to [NAME OF OPTIONEE] (the "Optionee"), pursuant to the Company's 1995 California Stock Option Plan (the "Plan"). All initially capitalized terms not otherwise defined herein shall have the meaning provided in the Plan. 1. Grant of Option --------------- This certificate evidences the grant by the Company on __________, 199__, to the Optionee of an option to purchase, in whole or in part, on the terms provided herein and in the Plan, a total of _________ shares of Class A Common Stock of the Company (the "Shares") at a purchase price of $[_____] per Share. The latest date on which this option may be exercised (the "Final Exercise Date") is [______]. The option evidenced by this certificate is an incentive stock option. This option is exercisable in the installments indicated on Schedule 1 hereto. This option shall become null and void unless the Optionee shall accept this certificate by executing it in the space provided below and returning such original execution copy to the Secretary of the Company. 2. Exercise of Option. ------------------ Each election to exercise this option shall be in writing, signed by the Optionee or by his/her executor or administrator or by the person or persons to whom this option is transferred by will or the applicable laws of descent and distribution or pursuant to any beneficiary designation procedures established by the Company (the "Legal Representative"), and received by the Secretary of the Company at its principal office, accompanied by payment in full and by such additional documentation evidencing the right to exercise (or, in the case of a Legal Representative, of the authority of such person) as the Company may require. The purchase price may be paid (i) in cash or by personal check, certified check, bank draft or money order payable to the order of the Company, (ii) through the delivery of whole shares of Class A Common Stock of the Company (which the Optionee has held for at least six months prior to the delivery of such shares or acquired on the open market and for which the participant has good title, free and clear of all liens and encumbrances) having a fair market value on the last business day preceding the date of exercise equal to the exercise price, (iii) by delivery of an unconditional and irrevocable undertaking by a broker to deliver to the Company promptly upon the settlement of the sale of the Shares to be issued sufficient funds to pay the exercise price, or (iv) by any combination of the permissible forms of payment. The Company shall have sole discretion to disapprove of an election pursuant to any of clauses (ii), (iii) or (iv) and in the event the Optionee is subject to Section 16 of the Exchange Act, the Company may require that the method of making such payment be in compliance with Section 16 and the rules and regulations thereunder. Any fraction of a share of Class A 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 Shares shall be delivered until the full purchase price therefor has been paid. 3. Restrictions on Transfer ------------------------ Certificates evidencing any Shares purchased by the Optionee upon exercise of options granted hereby shall bear the legends required by the Company's Restated Certificate of Incorporation, and the following legend: "The shares of stock represented by this certificate are subject to repurchase rights of the Company set forth in its 1995 California Stock Option Plan." 4. Withholding ----------- No Shares will be transferred pursuant to the exercise of this option unless and until the person exercising this option shall have satisfied all conditions established by the Board pursuant to Section 6(c)(3) of the Plan. 5. Status Change ------------- Upon the Optionee's termination of employment with the Company or any subsidiary thereof for any reason, this option shall terminate as to any Shares for which it was not exercisable immediately prior to termination; provided, that the Board or Committee in its sole discretion may provide (either prior to or following termination) that any or all of such portion of this option which is not exercisable immediately prior to termination shall be treated as having become exercisable immediately prior to termination. As to that number of Shares for which this option was exercisable (or deemed exercisable by action of the Board or Committee) immediately prior to termination, it shall remain exercisable as follows: B-2 (i) if termination occurs for any reason other than death for a period of three months following the date of termination, except as provided in clause (ii) below (but in no event beyond the Final Exercise Date), or (ii) following death, including death during the three-month period following termination of employment for any reason other than death, for a period of twelve months thereafter, but not beyond the Final Exercise Date. Notwithstanding the foregoing, if the Optionee is terminated for cause (as provided in the Plan), this option shall immediately terminate as to all Shares subject to this option. 6. Nontransferability of Option. ---------------------------- This option is not transferable by the Optionee other than by will or the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company. During the Optionee's lifetime this option may be exercised only by the Optionee. Except as permitted by the second preceding sentence, this 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 this option and all rights hereunder shall immediately become null and void. 7. Provisions of the Plan. ---------------------- This option is subject in its entirety to the provisions of the Plan, a copy of which is furnished to the Optionee with this option. 8. Notices. ------- All notices, requests or other communications provided for in this certificate shall be made, if to the Company, to 2 Edgewater Drive, Norwood, Massachusetts 02062 (`Fax No.: (617) 440-7070) and if to the Optionee, at his or her address on the records of the Company. All notices, requests or other communications provided for in this certificate shall be made in writing either (a) by personal delivery to the party entitled thereto, (b) by facsimile with confirmation of receipt, (c) by mailing in the United States mails to the last known address of the party entitled thereto or (d) by express courier service. The notice, request or other communication shall be deemed to be received upon personal delivery, upon confirmation of receipt of facsimile transmission or upon receipt by the party entitled thereto if by United States mail or express courier service; provided, however, that if a notice, request or other communication is not received during regular business bonus, it shall be deemed to B-3 be received on the next succeeding business day of the Company. 9. Governing Law. ------------- This option, this certificate, 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, the Company has caused this option to be executed under its corporate seal by its duly authorized officer. This option shall take effect as a sealed instrument. STREAM INTERNATIONAL INC. By: _____________________ Name: Title: Date:_________________________ Accepted: __________________________ Print Name of Employee __________________________ (Signature) B-4 Schedule 1 to Incentive Option Certificate under 1995 California Stock Option Plan --------------------------------- B-5 STREAM INTERNATIONAL, INC. FIRST AMENDMENT TO 1995 CALIFORNIA STOCK OPTION PLAN RESOLVED: That the 1995 California Stock Option Plan of Stream International, Inc. be amended as follows: 1. Section 6(k) of the Plan is hereby amended to read in its entirety as follows: "(k) Put and Call Rights. In the event of any (i) exercise by any stockholder of the Company of the Put Right set forth in the Company's Restated Certificate of Incorporation or (ii) exercise by the Company of its Call Right set forth in the Company's Restated Certificate of Incorporation, the following provisions should apply to options then outstanding under this Plan. All capitalized terms used in this Section 6(k) not otherwise defined in this Plan shall have the respective meanings set forth in the Company's Restated Certificate of Incorporation. (A) Upon the exercise of the Put Right, holders of options and holders of shares of Stock issued upon exercise of options shall be entitled to sell all of the shares underlying such options or issued upon exercise thereof, whether or not then vested (the "Option Shares"), to R.R. Donnelley & Sons Company ("RRD") or the Designee at the Put Price and shall be subject to the rights of RRD or the Designee to require the sale of the Option Shares pursuant to the Mandatory Put, provided that the amount of the aggregate option price of such options shall be subtracted from the aggregate Put Price payable to the holder of such options, and any amounts payable with respect to then unvested Option Shares shall be deposited in escrow pursuant to clause (c) below. The procedures relating to the exercise of the Put Right and Mandatory Put, as set forth in the Company's Restated Certificate of Incorporation, shall apply to the holders of options under this Plan and to Option Shares to the same extent as they apply to B Holders and shares of Common Stock under the Company's Restated Certificate of Incorporation. (B) Upon the exercise of the Call Right, holders of options and holders of shares of Stock issued upon exercise of options shall be required and entitled to sell all of their Option Shares to the Company or the Designee at the Call Price, provided that the amount of the aggregate option price of such options shall be subtracted from the B-6 aggregate Call Price payable to the holder of such options, and any amounts payable with respect to then unvested Option Shares shall be deposited in escrow pursuant to clause (C) below. The procedures relating to the exercise of the Call Right, as set forth in the Company's Restated Certificate of Incorporation, shall apply to the holders of options under this Plan and to Option Shares to the same extent as they apply to B Holders and shares of Common Stock under the Company's Restated Certificate of Incorporation. (C) The aggregate amount of the Put Price or Call Price, as the case may be, that is payable to optionees with respect to then unvested Option Shares shall be deposited, in cash, in a non-interest bearing escrow account for the benefit of such optionees. Such escrow account shall be subject to the claims of the Company's creditors. The amounts deposited in escrow for the benefit of each optionee with respect to each unvested installment of his option shall be released to such optionee, subject to the continued employment of the optionee with the Company or any subsidiary thereof, at the time such unvested installment would have become vested in accordance with the vesting schedule of such option as in effect prior to the exercise of the Put Right or Call Right, as the case may be (as such schedule may be modified by the terms of any employment agreement between the Company and such optionee)." 2. The following Section 10 added to the Plan: "10. Certain Restrictions. If an optionee desires to Transfer (as defined in the Certificate of Incorporation of the Company) or Involuntarily Transfers any shares of Stock issued upon exercise of options granted under this Plan, the optionee shall comply with, and be subject to, the restrictions on transfer, first offer rights and first refusal rights set forth in Sections A, B, C and D of Article FIFTH of the Certificate of Incorporation of the Company. For purposes of such Sections A, B, C and D, the optionee shall be considered a "B Holder." EFFECTIVE DECEMBER 31, 1995. B-7 EX-10.17 8 MANAGEMENT RETENTION AGREEMENT Exhibit 10.17 STREAM INTERNATIONAL HOLDINGS INC. Form of Management Retention Agreement -------------------------------------- [ADDRESS OF MANAGEMENT PERSON APPEARS HERE] Dear _____: Stream International Holdings Inc. (the "Company") recognizes that, as is the case with many corporations, the possibility of a change in control may exist and that such possibility, and the uncertainty and questions which it may raise among key personnel, may result in the departure or distraction of key personnel to the detriment of the Company, its stockholders and its customers. The Board of Directors of the Company (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of the Company's key personnel, including yourself, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control of the Company. In order to induce you to remain in its employ, the Company agrees that you shall receive the severance benefits set forth in this letter agreement (the "Agreement") in the event your employment with the Company is terminated under the circumstances described below subsequent to a "Change in Control" of the Company (as defined below). 1. Certain Definitions. ------------------- As used herein, the following terms shall have the following respective meanings: (a) A "Change in Control" shall occur or be deemed to have occurred only if ----------------- any of the following events occur: (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, any corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of stock of the Company or an Exempt Person) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; (ii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (A) 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) more than 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 (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (as hereinabove defined), other than a person holding more than 50% of the combined voting power of the Company's then outstanding securities immediately prior to such recapitalization, acquires more than 50% of the combined voting power of the Company's then outstanding securities; (iii) 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 of the Company's assets, excluding any disposition to a corporation of which 50% or more of the voting securities are held by the Company or the stockholders of the Company immediately prior to the disposition. (iv) RRD, together with its affiliates, ceases to be beneficial owner of at least 30% of the combined voting power of the Company's then outstanding securities provided that such event is not the result of an initial public offering of the Company's stock. (v) the closing of any of the events referred to in clauses (i), (ii) or (iii) below regardless of what sequence: (i) sale or other disposition of outsourced technical support business; (ii) sale or other disposition of the outsourced manufacturing business, including a joint venture in which the Company or the stockholders of the Company hold less than 60% of the voting interest immediately prior to the disposition; and (iii) sale or other disposition of Corporate Technologies business. (vi) RRD, together with affiliates, becomes the beneficial owner of at least 90% of the combined voting power of the Company's then outstanding securities provided that such event is not the result of an initial public offering of the Company's stock. 2 (b) "Cause" shall mean (i) an intentional act of fraud, embezzlement or ----- theft in connection with your duties to the Company or in the course of your employment with the Company, or (ii) your willful engaging in gross misconduct which is demonstrably and materially injurious to the Company. For purposes of this Subsection, no act or failure to act on your part shall be deemed "willful" unless done or omitted to be done by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company. (c) "Date of Termination" shall have the meanings set forth in Section ------------------- 3(c). (d) "Disability" shall be deemed to have occurred if, as a result of ---------- incapacity due to physical or mental illness, you shall have been absent from the full-time performance of your duties with the Company for six (6) consecutive months and, within thirty (30) days after written Notice of Termination by reason of disability is given to you, you shall not have returned to the full-time performance of your duties. (e) "Exempt Person" means RRD or any affiliate thereof, provided that RRD ------------- shall cease to be an Exempt Person if and when, following a Change in Control (as defined in Section 1(a) but substituting RRD for the "Company" as used therein) of RRD directly or indirectly, acquires beneficial ownership of any additional shares of the Company's capital stock. (f) "Good Reason" shall mean, without your express written consent, the ----------- occurrence after a Change in Control of the Company of any of the following circumstances unless, in the case of paragraphs (A), (C), (D), (F) or (G), such circumstances are fully corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (A) any significant diminution in your position, duties, responsibilities, power, title or office as in effect immediately prior to a Change in Control; (B) any reduction in your annual base salary as in effect on the date hereof or as the same may be increased from time to time; (C) the failure by the Company to (i) continue in effect any material compensation or benefit plan in which you participate immediately prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, (ii) continue your participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed at the time of the Change in Control or (iii) award cash bonuses to you in amounts and in a manner 3 substantially consistent with past practice in light of the Company's financial performance; (D) the failure by the Company to continue to provide you with benefits substantially similar to those enjoyed by you under any of the Company's life insurance, medical, health and accident, or disability plans in which you were participating at the time of the Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits, or the failure by the Company to provide you with the number of paid vacation days to which you are entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; (E) any requirement by the Company or of any person in control of the Company that (i) the location at which you perform your principal duties for the Company be changed to a new location that is outside a radius of 35 miles from your principal residence at the time of the Change in Control or (ii) you travel on an overnight basis more than 90 days in any consecutive 12-month period; (F) the failure of the Company to obtain a reasonably satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 5; (G) any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 3(b), which purported termination shall not be effective for purposes of this Agreement. (g) "Notice of Termination" shall have the meaning set forth in Section --------------------- 3(b). (h) "Severance Payments" shall have the meaning set forth in Section ------------------ 4(c)(ii). (i) "Term" shall have the meaning set forth in Section 2. ---- 2. Term of the Agreement. --------------------- The term of this Agreement (the "Term") shall commence as of the date hereof and shall continue in effect through December 31, 1998; provided, however, that commencing on January 1, 1999 and each January 1 thereafter, the Term shall be automatically extended for one additional year unless, not later than November 30 of the preceding calendar year, the Company shall have given you written notice that the Term will not be extended; and provided further that, if a Change in Control of the Company shall have occurred during the original or extended Term, this Agreement shall continue in effect for a period of not less than twenty-four (24) 4 months beyond the month in which such Change in Control occurred. 3. Employment Status; Termination Following Change in Control. ---------------------------------------------------------- (a) No benefits shall be payable under this Agreement unless there has been a Change in Control of the Company during the Term. You acknowledge that this Agreement does not constitute a contract of employment or impose on the Company any obligation to retain you as an employee. You may terminate your employment at any time, with or without Good Reason. If your employment with the Company terminates for any reason and subsequently a Change in Control shall have occurred, you shall not be entitled to any benefits hereunder. (b) Any termination of your employment by the Company or by you following a Change in Control of the Company during the Term shall be communicated by written notice of termination that indicates that specific provision in this Agreement relied upon and sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated ("Notice of Termination"). A Notice of Termination shall be delivered to the other party hereto in accordance with Section 6. (c) The "Date of Termination" shall mean (i) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty (30) day period), and (ii) if your employment is terminated by the Company for Cause, by you for Good Reason or for any other reason (other than Disability), the date specified in the Notice of Termination (which, in the case of a termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given and in the case of a termination for Good Reason shall not be less than fifteen (15) nor more than sixty (60) days from the date such Notice of Termination is given); provided, however, that if within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this proviso), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, then the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); and provided, further, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company will continue to pay you for your full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue you as a participant in all compensation, benefit and 5 insurance plans in which you were participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Subsection. (d) You shall be entitled to the benefits provided in Section 4 if a Change in Control shall have occurred during the Term and your employment with the Company is subsequently terminated or terminates within twenty-four (24) months after such Change in Control, unless such termination is (A) because of your death, (B) by the Company for Disability or Cause, or (C) by you other than for Good Reason. (e) Your right to terminate your employment for Good Reason shall not be affected by your incapacity due to physical or mental illness. Your continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason under this Agreement. 4. Compensation Upon Termination. Following a Change in Control of the ----------------------------- Company, you shall be entitled to the following benefits during a period of disability, or upon termination of your employment, as the case may be, provided that such period or termination occurs during the Term and provided that this compensation is in lieu of and not in addition to any compensation otherwise available to you under a Company Severance Policy or an Employment Agreement, as the case may be: (a) Disability. During any period that you fail to perform your full-time ---------- duties with the Company as a result of incapacity due to physical or mental illness, you shall continue to receive base salary and all other earned compensation at the rate in effect at the commencement of any such period (offset by all compensation payable to you under the Company's disability plan or program or other similar plan during such period) until your employment is terminated by reason of Disability. Thereafter, or in the event your employment is terminated by reason of death, your benefits shall be determined under the Company's long-term disability, retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs. (b) Cause and Voluntary Termination other than for Good Reason. If your ---------------------------------------------------------- employment shall be terminated by the Company for Cause or by you other than for Good Reason following a Change in Control, the Company shall pay you your full base salary and all other compensation through the Date of Termination at the rate in effect at the time the Notice of Termination is given, plus all other amounts to which you are entitled under any compensation plan of the Company at the time such payments are due, and the Company shall have no further obligations to you under this Agreement. 6 (c) Termination Without Cause; Voluntary Termination for Good Reason. If ---------------------------------------------------------------- your employment with the Company is terminated by the Company (other than for Cause, Disability or your death) or by you for Good Reason within twenty-four (24) months after a Change in Control, then you shall be entitled to the benefits below: (i) the Company shall pay to you (A) your full base salary and all other compensation through the Date of Termination at the rate in effect at the time the Notice of Termination is given, no later than the full fifth day following the Date of Termination, plus all other amounts to which you are entitled under any compensation plan of the Company at the time such payments are due and (B) if you so elect, in lieu of your right to continue to receive deferred compensation under any deferred compensation plan of the Company then in effect, no later than the fifth full day following the Date of Termination, a lump-sum amount, in cash, equal to the deferred amounts together with any earnings credited on such amounts under such plan; (ii) the Company will pay as severance pay to you, at the time specified in Subsection (e) below, a lump sum severance payment (together with the payments provided in paragraph (iii) below, the "Severance Payments") in an amount equal to the sum of (A) two (2) times the higher of (x) your annual base salary in effect on the Date of Termination or (y) your annual base salary in effect immediately prior to the Change in Control, plus (B) the higher of (x) your incentive bonus at target payout for the year in which the Date of Termination occurs, or (y) your incentive bonus at target payout for the year in which the Change in Control occurred; (iii) the Company shall pay to you all legal fees and expenses incurred by you in seeking to obtain or enforce any right or benefit provided by this Agreement; and (iv) for a twenty-four (24) month period after such termination, the Company shall arrange to provide you with life, dental, accident and group health insurance benefits substantially similar to those which you were receiving immediately prior to the Notice of Termination. Notwithstanding the foregoing, the Company shall not provide any benefit otherwise receivable by you pursuant to this paragraph (iv) if an equivalent benefit is actually received by you from another employer during the 24-month period following your termination, and any such benefit actually received by you shall be reported to the Company; and (v) all options and shares of restricted stock granted or issued to you under the Company's 1995 Stock Option Plan, 1995 California Stock Option Plan and 1995 Replacement Stock Option Plan or any other stock option incentive plan of the Company shall become exercisable or vested in full on the Date of Termination provided that if such Date of Termination occurs prior to the closing of any of the 7 events referred to in Section 1(a)(v), then there shall be no such acceleration of exercisability or vesting. (d) In the event that you become entitled to the Severance Payments, if any of the Severance Payments will be subject to the tax imposed by Section 4999 of the Code, (or any similar tax that may hereafter be imposed)(the "Excise Tax") the Company shall pay to you at the time specified in Subsection (e), below, an additional amount (the "Gross-Up Payment") such that the net amount retained by you, after deduction of any Excise Tax on the Total Payments (as hereinafter defined) and any federal, state and local income tax and Excise Tax upon the payment provided for by this Subsection, shall be equal to the Total Payments. For purposes of determining whether any of the Severance Payments will be subject to the Excise Tax and the amount of such Excise Tax, (a) any other payments or benefits received or to be received by you in connection with a Change in Control of the Company or your termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control of the Company or any person affiliated with the Company or such person)(which together with the Severance Payments, constitute the "Total Payments") shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors and acceptable to you such other payments or benefits (in whole or in part) do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code in excess of the base amount within the meaning of Section 280G(b)(3) of the Code, or are otherwise not subject to the Excise Tax, (b) the amount of the Total Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (1) the total amount of the Total Payments or (2) the amount of excess parachute payments within the meaning of Section 280G(b)(1) (after applying paragraph (a), above, and (c) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, you shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of your residence on the Date of Termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of your employment, you shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment 8 attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by you if such repayment results in a reduction in Excise Tax and/or a federal, state and local income tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of your employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional gross-up payment in respect of such excess (plus any interest payable with respect to such excess) at the time that the amount of such excess is finally determined. (e) The payments provided for in Subsections 4(b), (c) and (d) shall be made not later than the fifth day following the Date of Termination, unless otherwise specified; provided, however, that, if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to you on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to you, payable on the fifth day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). (f) Except as provided in the second sentence of Subsection 4(c)(v) hereof, you shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by you as a result of employment by another employer, by retirement benefits or by offset against any amount claimed to be owed by you to the Company or otherwise. 5. Successors; Binding Agreement. ----------------------------- (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain an assumption of this Agreement at or prior to the effectiveness of any succession shall be a breach of this Agreement and shall constitute Good Reason if you elect to terminate your employment, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, the Company shall mean the Company as 9 defined above and any successor to its business or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (b) As used in this Agreement, each of the businesses referred to in clauses (i), (ii) and (iii) of Section 1(a)(v) is referred to as a "Business." Notwithstanding anything to the contrary herein, the transfer of your employment from the Company to any entity that acquires or succeeds to a Business shall not be considered a termination of your employment with the Company for the purposes of this Agreement, provided that such acquiring or successor entity agrees to be bound by this Agreement to the same extent as the Company. (c) This Agreement shall insure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or if there is no such designee, to your estate. 6. Notice. For the purposes of this Agreement, notices and all other ------ communications provided for in this Agreement shall be in writing and shall be duly given when delivered or when mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the Company, at 105 Rosemont Road, Westwood, Massachusetts 02090-2318 Attention: President and General Counsel, and to you at the address shown above or to such other address as either the Company or you may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 7. Miscellaneous. ------------- (a) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. (b) The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware. (c) No waiver by you at any time of any breach of, or compliance with, any provision of this Agreement to be performed by the Company shall be deemed a waiver of that or any other provision at any subsequent time. (d) This Agreement may be executed in counterparts, each of which shall be deemed to be an original but both of which together will constitute one and the same instrument. 10 (e) Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. (f) This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto; and any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and cancelled. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter, which will then constitute our agreement on this subject. Sincerely, STREAM INTERNATIONAL HOLDINGS INC. By: ------------------------------------ Agreed to this ____ day __________ of 199_ - -------------------------------------- Name of Management Person Print Name: --------------------------- Address: ------------------------------ ------------------------------ 11 EX-10.18 9 PROMISSORY NOTE AND STOCK PLEDGE AGREEMENT EXHIBIT 10.18 SECURED NON-RECOURSE PROMISSORY NOTE ("SECURED NON-RECOURSE NOTE") --------------------------- (April 15, 1996) FOR VALUE RECEIVED, the undersigned, Judith Salerno (the "Borrower"), -------- hereby promises to pay to Stream International Inc., a Delaware corporation (the "Company"), or to the legal holder of this Secured Non-Recourse Note at the time ------- of payment, the principal sum of forty-three thousand dollars ($43,000) in lawful money of the United States of America, and to pay simple interest (computed on the basis of a 365 or 366 day year, as the case may be) on the principal amount hereof from and after the date of this Secured Non-Recourse Note until the entire principal amount hereof has been paid in full, at the rate of 6% per annum. The entire principal amount of indebtedness evidenced by this note, to the extent not theretofore prepaid as provided herein, shall be repaid on the Maturity Date. Each payment of principal shall be accompanied by payment of any accrued and unpaid interest thereon. If the date set for any payment or prepayment of principal or interest hereunder is a Saturday, Sunday or legal holiday, then such payment or prepayment shall be made on the next preceding business day. This Secured Non-Recourse Note has been delivered to evidence indebtedness of the Borrower to the Company arising out of a loan made to the Borrower to cover certain of the Borrower's tax obligations in connection with the 1995 strategic alliance between Software Holdings, Inc. and the GSS Division of R.R. Donnelley & Sons Company. Payment of the principal of and interest on this Secured Non-Recourse Note is secured pursuant to the terms of a Stock Pledge Agreement, dated as of April 15, 1996, between the Borrower and the Company (the "Pledge Agreement"), reference to which is made for a description of the ---------------- collateral provided thereby and the rights of the Company and any subsequent holder of this Secured Non-Recourse Note in respect of such collateral. Recourse of the holder of this Note for payment of the principal of and interest on this Note or any claim based thereon shall be limited solely to the collateral held pursuant to the Pledge Agreement, and the holder of this Note shall have no recourse to any other assets of the Borrower for such payment, whether before or after an Event of Default. As used in this Note: (a) the term "Maturity Date" means the earliest of (i) April 15, 1999 ------------- or, at the election of the Board of Directors of Stream International Holdings Inc. (the "Parent") and as a result of the completion of any public offering of shares of the Parent registered under the Securities Act of 1933, as amended, in connection with which the Borrower is given an opportunity to sell shares having a value equal to or greater than the amount of borrowings evidenced by this Secured Non-Recourse Note outstanding at the time of such offering, provided, that, such offering is completed prior to April 15, -------------- 1999, and (ii) the first date on which a Liquidity Event (as defined below) shall occur; (iii) the date of termination of Borrower's employment with the Company; and (b) the term "Liquidity Event" means any of the following: (i) any --------------- sale of a majority of the capital stock or assets of the Parent (including without limitation a sale of a majority of the capital stock resulting from a Disposition (as defined in the Parent's Restated Certificate of Incorporation) or Total Disposition (as defined in the Parent's Restated Certificate of Incorporation) by R.R. Donnelley & Sons which triggers certain Tag Along (as defined in the Parent's Restated Certificate of Incorporation) and Drag Along Rights (as defined in the Parent's Restated Certificate of Incorporation), the exercise by any stockholder of the Put Right (as defined in the Parent's Restated Certificate of Incorporation) or the exercise by the Parent of its Call Right (as defined in the Parent's Restated Certificate of Incorporation) all in accordance with the provisions of Article Fifth of the Parent's Restated Certificate of Incorporation), (ii) any liquidation or winding-up of the Parent or distribution of a majority of the Parent's assets, other than to an Affiliate of the Parent or (iii) any merger, consolidation or similar business combination with or into any entity other than an entity controlled by Bain Capital Fund IV, L.P., Bain Capital Fund IV-B, L.P. and Information Partners Capital Fund, L.P. (collectively, the "Funds") or by R.R. Donnelley & Sons Company. Interest on the principal amount hereof outstanding from time to time shall be calculated quarterly on the last business day of March, June, September and December of each year commencing June 30, 1996 and on the Maturity Date. This Secured Non-Recourse Note is subject to the following further terms and conditions: 1. Mandatory Prepayments. If at any time the Borrower receives any --------------------- proceeds from the sale by the Borrower of Shares to anyone (including the Company), the proceeds from such sale of Shares shall be applied first, to the prepayment of the accrued and unpaid interest hereon and then to the unpaid principal hereof. For purposes of this Section 1, the term "sale" in the context of a sale of Shares shall include, in addition to any direct sale of Shares, any transaction (including, without limitation, a merger, consolidation or recapitalization) pursuant to which Shares are converted into a right to receive, in whole or partial exchange or substitution for Shares, cash or cash equivalents. In addition, until such time as the entire principal amount of this Secured Non-Recourse Note is paid in full, together with all accrued and unpaid interest, the Borrower shall pay to the Company, for application against such principal and interest, 25% of any and all bonus amounts that become payable in 1997 to the Borrower under any bonus plan of Company or Parent, 50% of any and all bonus amounts that become payable in 1998 to the Borrower under any bonus plan of Company or Parent and 100% -2- of any and all bonus amounts that become payable in 1999 to Borrower under any bonus plan of Company or Parent. These moneys should be used first to pay any accrued and unpaid interest and any left over amounts will be applied to reduce the principal. The right of the Borrower to receive proceeds upon the sale of Shares is subject to the prior right of the Company (or other holder of this Secured Non- Recourse Note) (i) in the case of a sale of Shares to the Company (or other holder of this Secured Non-Recourse Note), in lieu of the Company (or such other holder) paying the proceeds from such sale to the Borrower or his heirs, successors or permitted assigns to set off against this Secured Non-Recourse Note an amount equal to the Net Proceeds of such sale, or (ii) in the case of a sale of Shares to any other person or entity (collectively, the "Transfer -------- Parties"), in lieu of any of such Transfer Parties paying the purchase price - ------- therefor to the Borrower or his heirs, successors or permitted assigns, to direct such Transfer Parties to pay an amount equal to the Net Proceeds of such sale to the Company (or other holder of this Secured Non-Recourse Note) which shall set off such amount against this Secured Non-Recourse Note. Concurrently with any prepayment (including by set-off) of any portion of the principal amount of this Secured Non-Recourse Note pursuant to this Section 1 or Section 2 hereof, the Company (or other holder of this Secured Non-Recourse Note) shall make a notation of such payment hereon. If full payment of the principal of and accrued and unpaid interest on this Secured Non-Recourse Note is made, this Secured Non-Recourse Note shall be cancelled. Any partial prepayment (including by reason of set-off) shall be applied first to accrued and unpaid interest hereon and then to the unpaid principal hereof. If at any time, or from time to time, after the date hereof and following the occurrence and during the continuance of an Event of Default (as hereinafter defined), the Borrower shall receive or shall otherwise become entitled to receive from the Company (or other holder of this Secured Non-Recourse Note) any cash payments, cash dividends or other cash distributions in respect of any Shares, then and in each case, the Borrower or any of his heirs, successors or permitted assigns to whom such distribution may be made shall, upon the receipt thereof, return to the Company (or other holder of this Secured Non-Recourse Note) such payments, dividends and distributions, and the Company (or other holder of this Secured Non-Recourse Note) shall apply such amount to the prepayment of the accrued and unpaid interest on and unpaid principal of this Secured Non-Recourse Note in the manner set forth in the first paragraph of this Section 1, and the Company (or other holder of this Secured Non-Recourse Note) shall not be obligated to make any such cash payment, cash dividend or other cash distribution not theretofore made to which the Borrower or any of his heirs, successor or permitted assigns are otherwise entitled in respect of their Shares and may, in lieu of paying such amount to the Borrower, set off the amount of such cash payment, cash dividend or other cash distribution against the accrued and unpaid interest on and unpaid principal -3- of this Secured Non-Recourse Note in the manner set forth in the third paragraph of this Section 1. 2. Payment and Prepayment. All payments and prepayments of principal of ---------------------- and interest on this Secured Non-Recourse Note shall be made to the Company or its order, or to the legal holder of this Secured Non-Recourse Note or such holder's order, in lawful money of the United States of America at the principal offices of the Company (or at such other place as the holder hereof shall notify the Borrower in writing). The Borrower may, at his option, prepay this Secured Non-Recourse Note in whole or in part at any time or from time to time without penalty or premium. Any prepayments of any portion of the principal amount of this Secured Non-Recourse Note shall be accompanied by payment of all interest accrued but unpaid hereunder. Upon final payment of principal of and interest on this Secured Non-Recourse Note it shall be surrendered for cancellation. The Pledge Agreement requires payment or prepayment of all obligations under this Secured Promissory Note as a condition precedent to the release of, or transfer of the Borrower's interests in, the collateral subject to the Pledge Agreement, all as described more fully in the Pledge Agreement. 3. Events of Default. Upon the occurrence of any of the following events ----------------- ("Events of Default"): ------------------ (a) Failure to pay the principal of this Secured Non-Recourse Note, including any prepayments required hereunder or under the Pledge Agreement, when due; (b) Failure to pay any interest installment due under this Secured Non-Recourse Note which shall remain unremedied for ten days following the date when such installment was originally due hereunder; or (c) Failure of the Borrower to perform the Borrower's obligations under the Pledge Agreement; (d) Failure of the Borrower to pay back in full all moneys owed under this Secured Non-Recourse Promissory Note including both principal and interest immediately upon the date of voluntary resignation or termination of Borrower's employment with the Company or within six (6) months from the date of Borrower' s involuntary resignation or termination of employment with the Company. then, and in any such event, the holder of this Secured Non-Recourse Note may declare, by notice of default given to the Borrower, the entire principal amount of this Secured Non-Recourse Note to be forthwith due and payable, whereupon the entire principal amount of this Secured Non-Recourse Note outstanding and any accrued and unpaid interest hereunder shall become due and payable without presentment, demand, protest, notice of dishonor and all other demands and notices of any kind, all of which are -4- hereby expressly waived. Upon the occurrence of an Event of Default, the accrued and unpaid interest hereunder shall thereafter bear the same rate of interest as on the principal hereunder, but in no event shall such interest be charged which would violate any applicable usury law. If an Event of Default shall occur hereunder, the Borrower shall pay costs of collection, including reasonable attorneys' fees, incurred by the holder in the enforcement hereof. No delay or failure by the holder of this Secured Non-Recourse Note in the exercise of any right or remedy shall constitute a waiver thereof, and no single or partial exercise by the holder hereof of any right or remedy shall preclude other or future exercise thereof or the exercise of any other right or remedy. 4. Miscellaneous. ------------- (a) The provisions of this Secured Non-Recourse Note shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without regard to the conflicts of law rules thereof. (b) All notices and other communications hereunder shall be in writing and will be deemed to have been duly given if delivered or mailed in accordance with the Employment Agreement. (c) The headings contained in this Secured Non-Recourse Note are for reference purposes only and shall not affect in any way the meaning or interpretation of the provisions hereof. -5- IN WITNESS WHEREOF, this Secured Non-Recourse Note has been duly executed and delivered by the Borrower on the date first above written. /s/ Judith Salerno -------------------- (Signature of Borrower) Witness /s/ Alicia Brophey - ----------------------- -6- (Please furnish taxpayer identification number for each assignee) FOR VALUE RECEIVED, hereby sell, assign and ----------------------------- transfer unto ---------------------------------------------------------------- - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- ( ) shares of the Capital Stock of the - ------------------ ------------------------- standing in name of the - ------------------ ----------------------------------- books of said represented by ------------------------------------------ Certificate(s) No. herewith, and do hereby irrevocably constitute --------- and appoint ------------------------------------------------------------------ attorney to transfer the said stock on the books - ----------------------------- of the within named Company and full power of substitution in the premises. Dated April 17, 1996 --------------- IN PRESENCE OF /s/ Alicia Brophey /s/ Judith Salerno - -------------------- -------------------- NOTICE: The signature(s) to this assignment must correspond with the name as written upon the face of the certificate, in every particular, without alternation or enlargement, or any change whatever and must be guaranteed by a commercial bank, trust company or member firm of the Boston, New York or Midwest Stock Exchange. -7- STOCK PLEDGE AGREEMENT STOCK PLEDGE AGREEMENT dated as of April 15, 1996 (this "Stock Pledge Agreement"), between Judith Salerno (the "Pledgor") and Stream International Inc., a Delaware corporation (the "Company"). WITNESSETH ---------- WHEREAS, the Company has agreed to make advances to the Pledgor to cover certain tax obligations of the Pledgor and the Pledgor has agreed to deliver to the Company a duly executed Secured Promissory Note (the "Tax Loan Note") on the date the Tax Loan is advanced; WHEREAS, the Pledgor wishes to grant security and assurance to the Company in order to secure the payment of the principal of and interest on the Tax Loan Note (the "Note Obligation") to pledge to the Company certain shares of the capital stock of Stream International Holdings Inc. (the "Parent") and/or certain Publicly Traded Securities described as to issuer, type and number of shares on Exhibit A hereto, all as more particularly described herein; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. Pledge. As collateral security for the full and timely payment of the ------ principal of and interest on the Note Obligation and all other amounts payable by the Pledgor thereunder or under this Stock Pledge Agreement (including, without limitation, any and all reasonable fees and expenses, including reasonable legal fees and expenses, incurred by the Company in connection with any exercise of its rights under the Note Obligation or hereunder), the Pledgor hereby delivers, deposits, pledges, transfers and assigns to the Company, in form transferable for delivery, and creates in the Company a security interest in: (a) 23,024 shares of Class B Common Stock of the Parent (collectively, the "Owned Shares") and all certificates evidencing the Owned Shares and other instruments or documents evidencing the same and all dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Owned Shares; and (b) The Publicly Traded Securities described on Exhibit A hereto (the "Additional Securities") and all certificates evidencing the Additional --------------------- Securities and other instruments or documents evidencing the same and all dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Additional Securities. -8- The Owned Shares and Additional Securities (together with any securities or property delivered to the Pledgor pursuant to Section 2(b) hereof) are hereinafter collectively referred to as the "Pledged Securities". The Pledgor hereby delivers to the Company appropriate undated security transfer powers duly executed in blank for the Pledged Securities set forth above and will deliver appropriate undated security transfer powers duly executed in blank for the Pledged Securities to be pledged hereunder from time to time hereafter. The Pledgor agrees that all certificates evidencing the Pledged Securities shall be marked with the following legend: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE PROVISIONS OF A STOCK PLEDGE AGREEMENT DATED AS OF APRIL 15,1996 BY AND BETWEEN STREAM INTERNATIONAL INC., A DELAWARE CORPORATION AND A WHOLLY-OWNED SUBSIDIARY OF STREAM INTERNATIONAL HOLDINGS INC., A DELAWARE CORPORATION, AND THE BORROWER NAMED THEREIN, A COPY OF WHICH IS ON FILE AT THE OFFICES OF THE CORPORATION. The Pledgor agrees to deliver to the Company all Pledged Securities currently held by him in order that such legend may be placed thereon. The Pledgor further agrees, with respect to the Additional Securities, to deliver written notice to each issuer of an Additional Security of the pledge of such security to the Company. 2. Administration of Security. The following provisions shall govern the -------------------------- administration of the Pledged Securities: (a) So long as no Event of Default has occurred and is continuing (as used herein, "Event of Default" shall mean the occurrence of any Event of Default as defined in the Note Obligation), the Pledgor shall be entitled to act with respect to the Pledged Securities in any manner not inconsistent with this Stock Pledge Agreement or the Note Obligation. (b) If while this Stock Pledge Agreement is in effect, the Pledgor shall become entitled to receive or shall receive any debt or equity security certificate (including, without limitation, any certificates representing shares of stock received in connection with the exercise of any Option, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital, or issued in connection with any reorganization), option or right, whether as a dividend or distribution in respect of, in substitution of, or in exchange for any Pledged Securities, the Pledgor agrees to accept the same as the Company agent and to hold the same in trust on behalf of and for the benefit of the Company and to deliver the same forthwith to the Company in the exact form received, with the endorsement of the Pledgor when necessary and/or appropriate undated security transfer powers duly executed in blank, to be held by the Company, subject to the terms of this Stock Pledge Agreement, as -9- additional collateral security for the Note Obligation. Notwithstanding the foregoing, it is agreed that the Pledgor may exercise any option or right received as contemplated in the preceding sentence, and the Company will exercise any such option or right upon receipt of written instructions to that effect and any required payments or documents from the Pledgor, and the securities received upon such exercise of any such option or right shall thereafter be held by the Pledgor or the Company as contemplated by the preceding sentence. (c) The Pledgor shall immediately upon request by the Company and in confirmation of the security interests hereby created, execute and deliver to the Company such further instruments, deeds, transfers, assurances and agreements, in form and substance as the Company shall request, including any financing statements and amendments thereto, or any other documents, as required under Massachusetts law and any other applicable law to protect the security interests created hereunder. (d) Subject to any sale by the Company or other disposition by the Company of the Pledged Securities or other property pursuant to this Stock Pledge Agreement and subject to Sections 5 and 6 below, the Pledged Securities shall be returned to the Pledgor upon payment in full of the principal of and accrued and unpaid interest on the Note Obligation. 3. Remedies in Case of an Event of Default. --------------------------------------- (a) In case an Event of Default shall have occurred and be continuing, the Company shall have in each case all of the remedies of a secured party under the Massachusetts Uniform Commercial Code, and, without limiting the foregoing, shall have the right, in its sole discretion, to sell, resell, assign and deliver all or, from time to time, any part of the Pledged Securities, or any interest in or option or right to purchase any part thereof; on any securities exchange on which the Pledged Securities or any of them may be listed, at any private sale or at public auction, with or without demand of performance or other demand, advertisement or notice of the time or place of sale or adjournment thereof or otherwise (except that the Company shall give ten days' notice to the Pledgor of the time and place of any sale pursuant to this Section 3), for cash, on credit or for other property, for immediate or future delivery, and for such price or prices and on such terms as the Company shall, in its sole discretion, determine, the Pledgor hereby waiving and releasing any and all right or equity of redemption whether before or after sale hereunder. At any such sale the Company may bid for and purchase the whole or any part of the Pledged Securities so sold free from any such right or equity of redemption. The Company shall apply the proceeds of any such sale first to the payment of ----- all costs and expenses, including reasonable attorneys' fees, incurred by the Company in enforcing its rights under this Stock Pledge Agreement and second to ------ the payment of accrued and unpaid interest on the Tax Loan Note and third to the ----- payment of unpaid principal of the Tax Loan Note. -10- (b) The Pledgor recognizes that the Company may be unable to effect a public sale of all or a part of the Pledged Securities by reason of certain prohibitions contained in the Securities Act of 1933, as amended (the "Securities Act"), or in the rules and regulations promulgated thereunder or in applicable state securities or "blue sky" laws, but may be compelled to resort to one or more private sales to a restricted group of purchasers who will be obliged to agree, among other things, to acquire the Pledged Securities for their own account, for investment and not with a view to the distribution or resale thereof. The Pledgor understands that private sales so made may be at prices and on other terms less favorable to the seller than if the Pledged Securities were sold at public sale, and agrees that the Company has no obligation to delay the sale of the Pledged Securities for the period of time necessary to permit the registration of the Pledged Securities for public sale under the Securities Act and under applicable state securities or "blue sky" laws. The Pledgor agrees that a private sale or sales made under the foregoing circumstances shall be deemed to have been made in a commercially reasonable manner. (c) If any consent, approval or authorization of any state, municipal or other governmental department, agency or authority should be necessary to effectuate any sale or disposition by the Company pursuant to this Section 3 of the Pledged Securities, the Pledgor will execute all such applications and other instruments as may be required in connection with securing any such consent, approval or authorization, and will otherwise use his or her best efforts to secure the same. (d) Neither failure nor delay on the part of the Company to exercise any right, remedy, power or privilege provided for herein or by statute or at law or in equity shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, remedy, power or privilege preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. 4. Pledgor's Obligations Not Affected. The obligations of the Pledgor ---------------------------------- under this Stock Pledge Agreement shall remain in full force and effect without regard to, and shall not be impaired or affected by: (a) any exercise or non- exercise by the Company of any right, remedy, power or privilege under or in respect of this Stock Pledge Agreement or the Note Obligation, or any waiver of any such right, remedy, power or privilege; (b) any waiver, consent, extension, indulgence or other action or inaction in respect of this Stock Pledge Agreement or the Note Obligation, or any assignment or transfer of any thereof; or (c) any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or the like, of the Company, whether or not the Pledgor shall have notice or knowledge of any of the foregoing. 5. Transfer by Pledgor. The Pledgor will not sell, assign, transfer or ------------------- otherwise dispose of, grant any option with respect to, or mortgage, pledge or otherwise encumber (collectively, a "Disposition") the Pledged Securities or any interest therein except as permitted by the Company's Restated Certificate of Incorporation (the "Charter"), and -11- any Stockholders Agreement to which Pledgor and the Company or its stockholders may be or become bound. In the event of any Disposition of Pledged Securities pursuant to and in accordance with the terms and conditions of the Charter and any Stockholders Agreement, the Company shall release such Pledged Securities from the pledge hereunder to permit consummation of such transaction solely to the extent that, after such release, the sum (the "Coverage Amount") of (i) the product of the number of shares of Class A Common Stock owned by the Pledgor and subject to this Stock Pledge Agreement multiplied by $6 (the "Class A Calculated Value") plus (ii) the product of the number of shares of Class B Common Stock owned by the Pledgor and subject to this Stock Pledge Agreement multiplied by $6 (the "Class B Calculated Value") exceeds 150% of the aggregate principal amount of the Note Obligation then outstanding (the "Note Amount") is greater than zero. Notwithstanding the foregoing, (i) upon the written request of the Pledgor, the Company shall release Additional Securities from the pledge hereunder to permit consummation of a Disposition solely to the extent that, after such release, the Value (as defined below) of the Additional Securities subject to this Stock Pledge Agreement exceeds 125% of the difference between the Note Amount and a fraction, the numerator of which is the Coverage Amount and the denominator of which is 1.5, and (ii) in the case of any Disposition in connection with the occurrence of a trigger event, the Company shall release such Pledged Securities regardless of whether the Coverage Amount is greater than zero, provided, that any proceeds received upon such Disposition are either pledged to the Company as additional collateral and/or used to reduce the Note Amount so that the foregoing collateral coverage test continues to be satisfied after giving effect to such Disposition. For purposes of this Section 5, the Value of the Additional Securities shall be the market value of such securities determined by reference to the per share closing price on the date prior to the requested release of such securities as reported by the New York Stock Exchange, American Stock Exchange or the National Association of Securities Dealers Automatic Quotation National Market System, as the case may be. 6. Adjustments to Calculated Value. In the event of any stock dividend, ------------------------------- stock split, stock issuance, reverse stock split, subdivision, combination, recapitalization, reclassification, merger, consolidation or other change in any class of common stock of the Company, the dollar value used to determine the Calculated Value applicable to such class of common stock shall be appropriately adjusted to reflect such dividend, split, issuance, subdivision, combination, recapitalization, reclassification, merger, consolidation or other change. 7. Attorney-in-Fact. The Company is hereby appointed the attorney-in- ---------------- fact of the Pledgor and the Pledgor's transferees for the purpose of carrying out the provisions of this Stock Pledge Agreement and taking any action and executing any instrument which the Company reasonably may deem necessary or advisable to accomplish the purposes hereof, including without limitation, the execution of the applications and other -12- instruments described in Section 3(c) hereof, which appointment as attorney-in- fact is irrevocable as one coupled with an interest. 8. Termination. Upon payment in full of the principal of and accrued ----------- and unpaid interest on the Note Obligation and upon the due performance of and compliance with all the provisions of the Note Obligation, this Stock Pledge Agreement shall terminate and the Pledgor shall be entitled to the return of such of the Pledged Securities as have not theretofore been sold, released pursuant to Sections 5 and 6 hereof or otherwise applied pursuant to the provisions of this Stock Pledge Agreement. 9. Notices. All notices or other communications required or ------- permitted to be given hereunder shall be delivered as provided in the Employment Agreement. 10. Binding Effect, Successors and Assigns. This Stock Pledge -------------------------------------- Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns and nothing herein is intended or shall be construed to give any other person any right, remedy or claim under, to or in respect of this Stock Pledge Agreement. 11. Miscellaneous. The Company and its assigns shall have no ------------- obligation in respect of the Pledged Securities, except to hold and dispose of the same in accordance with the terms of this Stock Pledge Agreement. Neither this Stock Pledge Agreement nor any provision hereof may be amended, modified, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the amendment, modification, waiver, discharge or termination is sought. The provisions of this Stock Pledge Agreement shall be binding upon the heirs, representatives, successors and permitted assigns of the Pledgor. The captions in this Stock Pledge Agreement are for convenience of reference only and shall not define or limit the provisions hereof. This Stock Pledge Agreement shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Massachusetts, without regard to the conflicts of law rules thereof. This Stock Pledge Agreement may be executed simultaneously in several counterparts, each of which is an original, but all of which together shall constitute one instrument. -13- IN WITNESS WHEREOF, the parties hereto have caused this Stock Pledge Agreement to be executed and delivered as of the date first above written. STREAM INTERNATIONAL INC. By /s/ Terence Leahy ------------------- Title: PLEDGOR /s/ Judith Salerno --------------------- Judith Salerno -14- EXHIBIT A --------- Judy Salerno Stream International Holdings Inc. Class B-V Certificate #V-118 23,024 shares -15- EX-23.2 10 CONSENT OF ARTHUR ANDERSEN LLP INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of Stream International Holdings Inc. on Form S-1 of our report dated April 30, 1997, appearing in the Prospectus, which is part of this Registration Statement, and of our report dated April 30, 1997 relating to the financial statement schedule appearing elsewhere in this Registration Statement. We also consent to the reference to us under the headings "Selected Consolidated Financial and Operating Data" and "Experts" in such Prospectus. /s/ Arthur Andersen LLP Arthur Andersen LLP Boston, Massachusetts April 30, 1997 EX-27 11 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STREAM INTERNATIONAL INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS 12-MOS DEC-31-1995 DEC-31-1996 JAN-01-1995 JAN-01-1996 DEC-31-1995 DEC-31-1996 21 1,142 0 0 22,137 35,940 (156) (304) 0 0 23,962 39,785 39,203 59,232 (9,962) (22,415) 53,598 76,987 10,612 19,875 0 0 0 0 0 0 0 0 40,964 52,663 53,598 76,987 0 0 78,243 155,498 57,338 117,309 81,332 160,919 0 0 0 0 0 188 (3,089) (5,609) (817) (924) (2,272) (4,685) 0 0 0 0 0 0 (2,272) (4,685) 0 0 0 0
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