-----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, TUge5cfq6YXNyCWR0shy245fex6na5iW1fPfnBulglLqoMa5ZgNCLJMvYgrKPBRV gU0CMUJ9SvXooAMGZzArMA== 0000950131-00-002240.txt : 20000331 0000950131-00-002240.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950131-00-002240 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DONNELLEY R R & SONS CO CENTRAL INDEX KEY: 0000029669 STANDARD INDUSTRIAL CLASSIFICATION: COMMERCIAL PRINTING [2750] IRS NUMBER: 361004130 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-04694 FILM NUMBER: 586750 BUSINESS ADDRESS: STREET 1: 77 W WACKER DR CITY: CHICAGO STATE: IL ZIP: 60601 BUSINESS PHONE: 3123268000 MAIL ADDRESS: STREET 1: 77 W WACKER DRIVE CITY: CHICAGO STATE: IL ZIP: 60601 10-K405 1 FORM 10-K405 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-4694 R. R. DONNELLEY & SONS COMPANY (Exact name of registrant as specified in its charter) Delaware 36-1004130 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 77 West Wacker Drive, Chicago, Illinois 60601 (Address of principal executive (ZIP Code) offices) Registrant's telephone number--(312) 326-8000 Securities registered pursuant to Section 12(b) of the Act: Title of each Class Name of each exchange on which registered ----------------------------- ---------------------------------------------- Common (Par Value $1.25) New York, Chicago and Pacific Stock Exchanges Preferred Stock Purchase Rights New York, Chicago and Pacific Stock Exchanges Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information state- ments incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of January 31, 2000, 122,348,993 shares of common stock were outstanding, and the aggregate market value of the shares of common stock (based on the closing price of these shares on the New York Stock Exchange--Composite Trans- actions on January 31, 2000) held by nonaffiliates was $2,543,137,451. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement dated February 22, 2000, are incorporated by reference into Part III of this Form 10-K. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS
Form 10-K Item No. Name of Item Page --------- ------------ ---- Part I Item 1. Business................................................. 3 Item 2. Properties............................................... 6 Item 3. Legal Proceedings........................................ 6 Item 4. Submission of Matters to a Vote of Security Holders...... 7 Executive Officers and Other Principal Officers of R.R. Donnelley & Sons Company................................ 8 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................................... 10 Item 6. Selected Financial Data.................................. 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 10 Item 7A. Quantitative and Qualitative Disclosures about Market Risk.................................................... 22 Item 8. Financial Statements and Supplementary Data.............. 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................... 22 Part III Item 10. Directors and Executive Officers of the Registrant....... 22 Item 11. Executive Compensation................................... 22 Item 12. Security Ownership of Certain Beneficial Owners and Management.............................................. 22 Item 13. Certain Relationships and Related Transactions........... 23 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................................ 23 Signatures............................................... 24 Index to Financial Statements and Financial Statement Item 14(a). Schedules............................................... F-1 Index to Exhibits........................................ E-1
2 PART I ITEM 1. BUSINESS Industry and Company Overview R.R. Donnelley & Sons Company is a premier provider of commercial printing, information services and logistics. We help our customers communicate more efficiently and effectively as they use words and images to inform, educate, entertain and sell. In each of our businesses, we use our distinctive capabilities to manage and distribute words and images in ways that provide the greatest value to every customer. Our common stock (NYSE:DNY) has been publicly traded since 1956. Today, the company has approximately 34,000 employees on four continents. We have 55 manufacturing plants with a broad range of capabilities to serve our customers' needs. While we have extended our core competencies into selected international markets, 89% of our revenue is currently generated in the United States. Printing in the United States is a large and fragmented industry that generates more than $150 billion in annual revenue. The commercial printing portion of the industry generates more than $80 billion in annual revenue. The commercial printing end-markets that we currently serve generate more than $40 billion in annual revenue. We are first or second in annual revenue in all five of our primary end- markets: . Merchandise Media--serving the consumer and business-to-business catalog, advertising insert and direct mail markets; . Magazine Publishing Services--serving the consumer, trade and specialty magazine markets; . Telecommunications--serving the global directory needs of telecommunications providers; . Book Publishing Services--serving the trade, children's, religious, professional and educational book markets; and . Financial Services--serving the global communication needs of the financial markets and mutual fund companies, as well as the banking, insurance and health care industries. Given the competitive nature of the U.S. commercial printing industry, our intent is to differentiate ourselves based on our service offerings. Our related services, designed to offer our customers complete solutions for communicating their messages to a target audience regardless of the means of distribution, include: . Premedia--capturing content, converting it to the appropriate format and channeling it to multiple communications media, including print and the Internet; . Online Services--helping customers effectively leverage the Internet and their established brands by delivering content and commerce online; and . R.R. Donnelley Logistics Services (Donnelley Logistics)--delivering printed products, primarily via the U.S. Postal Service, more efficiently, saving significant amounts of time and money. While we believe print is a vital component of the communications process and we expect the print market to grow given its unique capabilities, such as portability and high-quality graphics that cannot be duplicated by other communications methods, we see opportunities to create and expand complementary businesses that leverage our core competencies and help our customers succeed. Our objective is to create above-average shareholder value through our strategies to: . transform our core printing businesses; . speed growth in our high-value businesses; and . logically extend into complementary businesses. 3 The new business opportunities that we pursue will leverage our established strengths and will further our goal of managing and distributing words and images to help our customers succeed in informing, educating, entertaining and selling. Our distinctive capabilities include: . relationships with customers who are the leaders in their respective industries; . a reputation for quality and service; . standing as a trusted, neutral partner who recognizes the critical importance of protecting the confidentiality of customer content; . expertise in handling digital content; . scale to partner with best-of-class providers and deliver economical solutions for our customers; and . technology to seamlessly help our customers communicate their messages through various communications channels. Geographically, our business is concentrated in the United States, where we have 44 manufacturing plants that generated $4.6 billion in revenue in 1999. In addition to our U.S. facilities, we operate 11 plants in Mexico, South America, Europe and China. Our international strategy is to create value for our stakeholders by extending our core competencies into new geographic markets that have a need for high-quality print and related services, with no local solution. These markets tend to be emerging, with favorable demographic trends such as rising education levels and increasing disposable income. International operations represented 11%, 9% and 8% of consolidated net sales, 7%, 6% and 2% of earnings from operations and 16%, 15% and 13% of consolidated assets in 1999, 1998 and 1997, respectively. For reporting purposes, revenues from our facilities in China and England serving primarily the directory market are reported within Telecommunications. Revenues from our two Mexico facilities that serve primarily the magazine market are reported within Magazine Publishing Services. Our third Mexico facility serves the book market and is reported within Book Publishing Services. Revenues from other international facilities in Poland and South America serving more than one market are included in "Other." The "Other" classification also includes net sales from Donnelley Logistics, our logistics and distribution operation. Donnelley Logistics serves our print customers and other mailers by consolidating and transporting mail so that it is delivered to the U.S. Postal Service closer to the final destination, resulting in reduced postage costs and improved delivery performance. Finally, revenue from Stream International, Inc. (Stream International), which provides technical and help-line computer support to its customers, is included in "Other," through its disposition date of November 23, 1999 (see the "Divestitures" section on page 15 for additional details). For reporting purposes, premedia revenue is reflected in each of the markets for which services are performed. Online Services revenue is reported within Merchandise Media. While our manufacturing plants, financial service centers and sales offices are located throughout the United States and selected international markets, the supporting technologies and knowledge base are common. Our locations have a range of production capabilities to serve our customers and end-markets. We manufacture products with the operational goal of optimizing the efficiency of the common manufacturing and distribution platform. As a result, most plants produce work for customers in two or three of our end-markets. Commercial printing remains a competitive industry. Consolidation among our customers and in the printing industry has put pressure on prices and increased competition among printers. We expect these industry trends to continue. We will perform in this environment by leveraging our market-leading position, generating continued productivity improvements and enhancing the value we deliver to our customers by offering them products and services that improve their effectiveness and reduce their total delivered cost. While we have contracts with many of our customers as discussed below, there are many competing companies and renewal of these contracts is 4 dependent, in part, on our ability to continue to differentiate ourself from the competition. While our manufacturing facilities are well located for the global, national or regional distribution of our products, competitors in some areas of the United States have a competitive advantage in some instances due to such factors as freight rates, wage scales and customer preference for local services. In addition to location, other important competitive factors are price and quality, as well as the range of available services. Approximately 70% of our sales are under contracts with customers, with the remainder on a single-order basis. For some customers, we print and provide related services for different publications under different contracts. Contracts with our larger customers normally run for a period of years (usually three to five years, but longer in the case of contracts requiring significant capital investment) or for an indefinite period subject to termination on specified notice by either party. These sales contracts generally provide for price adjustments to reflect price changes for materials, wages and utilities. No single customer has a relationship with the company that accounted for 10% or more of our sales in 1999. The primary raw materials we use are paper and ink. In 1999, we spent approximately $1.9 billion on raw materials. We are a large purchaser of paper and our focus is to improve materials performance and total cost management for our customers, which we believe is a competitive advantage. We negotiate with leading suppliers to maximize our purchasing efficiencies, but we do not rely on any one supplier. We have existing paper supply contracts (at prevailing market prices) to cover substantially all of our requirements through 2000, and management believes extensions and renewals of these purchase contracts will provide adequate paper supplies in the future. Ink and ink materials are currently available in sufficient amounts, and we believe that we will have adequate supplies in the future. We also coordinate purchasing activity at the local plant and corporate levels to increase economies of scale. Our overriding principles in the environmental arena are to create sustainable compliance and an injury-free workplace. Our estimated capital expenditures for environmental controls to comply with federal, state and local provisions, as well as expenditures, if any, for our share of costs to clean hazardous waste sites that have received our waste, will not have a material effect upon our earnings or our competitive position. As of December 31, 1999, we had approximately 34,000 employees, of whom more than 7,200 had been our employees for 10 to 24 years and more than 2,600 for 25 years or longer. As of December 31, 1999, we employed approximately 28,400 people in the United States, approximately 1,025, or 4%, of whom were covered by collective bargaining agreements. In addition, we employed approximately 5,400 people in our international operations, 24% of whom were covered by collective bargaining agreements. We made five strategic acquisitions in 1999 consistent with our strategy to speed growth in our high-value businesses. In March, we purchased Cadmus Financial, a financial printer in Charlotte, North Carolina. In April, we purchased the Communicolor division of the Standard Register Company, a provider of personalization services and printer of innovative direct-mail campaigns with two plants located in Hebron, Ohio and Eudora, Kansas. In May, we purchased Hamburg Grafica Editora, a Brazilian book printer. In July, we purchased Freight Systems, Inc., a California-based transportation company. In December, we purchased Penton Press, a short-run magazine printing facility in Berea, Ohio. In addition to these acquisitions, we acquired a 30% interest in MultiMedia Live, an Internet Web site design firm, and increased our ownership position in Editorial Lord Cochrane S.A. (Cochrane), the largest printer in Chile, to 99% from 78%. Cochrane also increased its ownership interest in Atlantida Cochrane (located in Argentina) from 50% to 100%. See discussion on page 17 for more information. We made two small strategic acquisitions in 1998. In October, we purchased Ediciones Eclipse S.A. de C.V., a Mexico City-based printer of retail inserts. In December, we purchased GTE's St. Petersburg, Florida, directory-printing plant. In addition, we increased our investment in two other international operations. In July, we purchased additional outstanding shares of Cochrane to increase our ownership position to 78% from 55%. In November, we purchased the interests of our partner in our Poland operation, the Polish-American Printing Company, to take 100% ownership. 5 During the fourth quarter of 1999, we divested our interest in Modus Media International (MMI), Stream International and Corporate Software & Technology Holdings, Inc. (CS&T). In October 1999, we sold our investment in MMI for a total of approximately $60 million ($47 million in cash and a $13 million promissory note). In November 1999, we sold 93% of our investment in the common stock of Stream International to a group led by Bain Capital for approximately $96 million in cash. Also, in November 1999, we sold our entire interest in CS&T to the management of CS&T for cash proceeds of approximately $41 million. In April 1998, we sold our remaining interest in Metromail Corporation for $297 million in cash. In July 1998, we sold our remaining interest in Donnelley Enterprise Solutions Incorporated (DESI) for $45 million in cash. Special Note Regarding Forward-Looking Statements. Our Annual Report to Shareholders and this Form 10-K are among certain communications that contain forward-looking statements, including statements regarding our financial position, results of operations, market position, product development and regulatory matters. When used in such communications, the words "believes," "anticipates," "expects" and similar expressions are intended to identify forward-looking statements. These forward-looking statements are based on our estimates, assumptions, projections and current expectations and are subject to a number of risks and uncertainties. Actual results in the future could differ materially from those described in the forward-looking statements as a result of many factors outside our control, including competition with other printers based on pricing and other factors, fluctuations in the cost of paper and other raw materials we use, changes in postal rates and postal regulations, seasonal fluctuations in overall demand for printing, changes in customer demand, changes in the advertising and printing markets, changes in the capital markets that affect demand for commercial printing, the financial condition of our customers, the general condition of the United States economy, changes in the rules and regulations to which we are subject, including environmental regulation, and other factors set forth in this Form 10-K and other company communications generally. We do not undertake and specifically decline any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. ITEM 2. PROPERTIES Our corporate office is located in a leased office building in Chicago, Illinois. In addition, we lease or own 58 U.S. facilities, which may have multiple buildings and warehouses. These facilities encompass approximately 18.3 million square feet. We have 11 plants encompassing approximately 1.6 million square feet in South America, Mexico, Europe and Asia. Of the total manufacturing and warehouse facilities, approximately 18.0 million square feet of space is owned, while the remaining 1.9 million square feet of space is leased. In addition, we have sales offices across the United States, South America, Mexico, Europe and Asia. ITEM 3. LEGAL PROCEEDINGS In November 1996, a purported class action was brought against the company in federal district court in Chicago, Illinois, on behalf of current and former African-American employees, alleging that the company racially discriminated against them. The complaint seeks declaratory and injunctive relief, and asks for actual, compensatory, consequential and punitive damages in an amount not less than $500 million. Although the plaintiffs seek nationwide class certification, most of the specific factual assertions of the complaint relate to the closing of our Chicago catalog operations in 1993. Other general claims relate to other company locations. In August 1999, the district court denied our motion for partial summary judgment on the basis of timeliness. In December 1995, a purported class action was filed against the company in federal district court in Chicago, alleging that older workers were discriminated against in selection for termination upon closing of the Chicago catalog operations. The suit also alleges that we violated the Employee Retirement Income Security Act (ERISA) in determining benefits payable to retiring or terminating employees. In August 1997, the court certified classes in each of the age discrimination and ERISA claims limited to former employees of the Chicago operation. 6 In June 1998, a purported class action was filed against the company in federal district court in Chicago on behalf of current and former African- American employees, alleging that the company racially discriminated against them. While making many of the same general discrimination claims contained in the 1996 case, the plaintiffs in this case also claim retaliation by the company for filing discrimination charges or otherwise complaining of race discrimination. The complaint seeks the same relief and damages as sought in the 1996 case. The 1996 and 1995 cases relate primarily to the circumstances surrounding the closing of the Chicago catalog operations. The company believes that it acted properly in the closing of the operations. The company also believes that it has a number of valid defenses to all of the claims made in all three cases and it will vigorously defend its actions. However, because the cases are in the preliminary stages, management cannot make a meaningful estimate of any loss that could result from an unfavorable outcome of any of the pending cases. In December 1999, the U.S. Environmental Protection Agency, Region 5 (U.S. EPA) issued a Notice of Violation against the company, pursuant to Section 113 of the Clean Air Act (the Act). The notice alleges that the company's facility in Willard, Ohio, violated the Act and Ohio's State Implementation Plan in installing and operating certain equipment without appropriate air permits. While the notice does not specify the remedy sought, upon final determination of a violation, U.S. EPA may issue an administrative order requiring the installation of air pollution control equipment, assess penalties, or commence civil or criminal action against the company. The company responded to U.S. EPA on March 10, 2000. The company does not believe that any unfavorable result of this proceeding will have a material impact on the company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended December 31, 1999. 7 EXECUTIVE OFFICERS AND OTHER PRINCIPAL OFFICERS OF R.R. DONNELLEY & SONS COMPANY Name, Age and Officer Business Experience During Positions with the Company(1) Since Past Five Years(2) ----------------------------- ------- -------------------------- Haven E. Cockerham, 1998 Management responsibilities for Compensation; 52, Senior Vice President, Benefits; Employee Relations, Diversity and Human Resources Corporate Human Resources; Recruiting; and Management and Organizational Development. Prior experience as Vice President, Human Resources, at Detroit Edison Company, a provider of electrical utilities, from May 1994 until March 1998, and as President, Cockerham, McCain & Associates, Inc., a provider of management consulting services, from October 1991 until August 1994. William L. Davis 1997 Management responsibilities as Chairman of the 56, Chairman of the Board and Chief Executive Officer. Prior experience Board and Chief as Senior Executive Vice President at Emerson Executive Officer(1) Electric Company, manufacturer of electrical, electronic and related products, from January 1993 until March 1997. James R. Donnelley 1983 Management responsibilities as Vice Chairman of the 64, Director, Vice Board and for Corporate Communication, Community Chairman of the Board Relations and Government Affairs. Prior management responsibility for Corporate Development. Monica M. Fohrman 1988 Management responsibilities for Legal Department 50, Senior Vice President, and Secretary's Office. General Counsel and Secretary(1) Cheryl A. Francis 1995 Management responsibilities for Corporate 46, Executive Vice President Development, Investor Relations, Treasury, and Chief Financial Officer(1)(3) Financial Reporting and Accounting, Real Estate, Internal Audit and Taxes. Prior management responsibilities for Purchasing. Prior experience as Treasurer at FMC Corporation, a diversified manufacturer of chemicals and machinery from 1993 until September 1995. Gary L. Sutula, 1997 Management responsibilities for Technology Planning 55, Senior Vice President and Operations and Applications Solutions Delivery. and Chief Information Officer Prior experience as Senior Vice President and Chief Information Officer at Transamerica Financial Services, a provider of international consumer lending services, from June 1994 until November 1997. Jonathan P. Ward 1985 Management responsibilities for Commercial Print 45, President and Operations, including Worldwide Procurement and Chief Operating Officer(1) Paper Services, Merchandise Media, Magazine Publishing Services, Telecommunications, Financial Services, Book Publishing Services, R.R. Donnelley Logistics Services, RRD Direct, Premedia Technologies, Specialized Publishing Services and International Operations. Prior sales and manufacturing responsibility for Merchandise Media and Financial Services.
8 Name, Age and Positions with the Officer Business Experience During Company(1) Since Past Five Years(2) ------------------ ------- -------------------------- Michael W. Winkel 1999 Management responsibilities for Strategy Planning, 54, Executive R.R. Donnelley Online Services and new e-business Vice President, opportunities. Prior experience as Corporate Vice Strategy(1) President responsible for corporate planning and global operations, and Senior Vice President of the Chemicals Group responsible for operations at Monsanto Company, a diversified manufacturer of chemicals, pharmaceuticals and agricultural products, from 1993 until March 1999. Gregory A. Stoklosa, 1993 Management responsibilities for Financial 44; Vice President and Reporting; International Finance; Finance Process Controller(3) Control; Financial Strategy and Analysis; Financial Planning and Analysis; and Shared Services Center. Prior management responsibility for Treasury.
- -------- (1) Executive officer of the Company. (2) Each officer named has carried on his or her principal occupation and employment in the company for more than five years with the exception of Haven E. Cockerham, William L. Davis, Gary L. Sutula and Michael W. Winkel as noted in the table above. (3) Mr. Stoklosa will assume responsibility as Acting Chief Financial Officer in conjunction with the resignation of Ms. Francis effective April 1, 2000. 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock is listed and traded on the New York Stock Exchange, Chicago Stock Exchange and Pacific Exchange, Inc. As of January 27, 2000, there were 10,155 stockholders of record. Information about the quarterly prices of the common stock, as reported on the New York Stock Exchange-Composite Transactions, and dividends paid during the two years ended December 31, 1999, is contained in the chart below:
Common Stock Prices --------------------------------------- Dividends Paid 1999 1998 ----------- ------------------- ------------------- 1999 1998 High Low High Low ----- ----- --------- --------- --------- --------- First Quarter............... $0.21 $0.20 $43 13/16 $32 1/8 $42 1/8 $35 1/8 Second Quarter.............. 0.21 0.20 37 15/16 31 3/8 46 1/4 42 1/16 Third Quarter............... 0.22 0.21 36 15/16 27 3/4 47 3/4 34 13/16 Fourth Quarter.............. 0.22 0.21 30 1/4 22 13/16 44 11/16 34 Full Year................... 0.86 0.82 43 13/16 22 13/16 47 3/4 34
ITEM 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA (Not Covered by Auditors' Report) (Thousands of dollars, except per-share data)
1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- Net sales............... $5,183,408 $5,018,436 $4,892,944 $5,063,821 $5,080,775 Income (loss) from continuing operations.. 311,515 374,647 206,525 (71,483) 275,952 Loss on disposal of discontinued operations............. -- -- (60,000) -- -- (Loss) income from discontinued operations............. (3,201) (80,067) (15,894) (86,142) 22,841 Net income (loss)*...... 308,314 294,580 130,631 (157,625) 298,793 Net income (loss) per diluted common share*.. 2.38 2.08 0.89 (1.04) 1.92 Total assets............ 3,853,464 3,798,117 4,134,166 4,443,828 5,030,680 Noncurrent liabilities.. 1,511,743 1,447,852 1,730,047 2,044,818 2,012,635 Cash dividends per common share........... 0.86 0.82 0.78 0.74 0.68
- -------- * Net income (loss) includes the following one-time items: 1999 gains on the sale of businesses and investments ($27 million after-tax, or $0.20 per diluted share); 1998 gains on the sale of the company's remaining interests in two former subsidiaries of $169 million ($101 million after-tax, or $0.71 per diluted share); 1997 restructuring and impairment charges of $71 million ($42 million after-tax, or $0.29 per diluted share); 1996 restructuring and impairment charges of $442 million ($374 million after taxes and minority interest, or $2.45 per diluted share), and gains on partial divestitures of subsidiaries of $80 million ($48 million after-tax, or $0.31 per diluted share). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Results Highlights--Excluding the one-time items detailed below, 1999 net income from continuing operations rose to $285 million, or $2.20 per diluted share, from $273 million, or $1.93 per diluted share, a year ago. The improved results reflect the benefits of our productivity initiatives as well as share repurchases supported by our strong cash flows. 10 One-Time Items In 1999, net income from continuing operations included: . a gain on the sale of 93% of our interest in Stream International ($40 million pretax and $75 million after-tax due to tax benefits from associated tax loss carrybacks); . a gain on the sale of our interest in MMI ($3 million both pretax and after-tax); and . a provision for income taxes related to corporate-owned life insurance ($51 million) (see "Corporate-Owned Life Insurance" section on page 15 for additional details). In 1998, net income from continuing operations included: . a gain on the sale of our remaining interest in Metromail ($146 million pretax and $87 million after-tax); and . a gain on the sale of our remaining interest in DESI ($23 million pretax and $14 million after-tax). In 1997, net income from continuing operations included: . an impairment and restructuring charge ($71 million pretax and $42 million after-tax). Discontinued Operations In 1999, reported net income included: . a loss from discontinued operations ($5 million pretax and $3 million after-tax). In 1998, reported net income included: . a loss from discontinued operations of $80 million (with no associated tax benefit), reflecting an impairment charge to write down the goodwill of CS&T. In 1997, reported net income included: . a loss on disposal of discontinued operations to adjust the carrying values of CS&T and MMI ($100 million pretax and $60 million net of income tax benefit); and . a loss from discontinued operations ($14 million pretax and $16 million after-tax). Including the one-time items and discontinued operations detailed above, in 1999 we earned $308 million in net income compared with $295 million in 1998. Excluding all one-time items, the $100 million earned from continuing operations in the fourth quarter of 1999 compared with $92 million in the same period of 1998, and on a diluted per-share basis, $0.80 in the fourth quarter of 1999 compared with $0.67 in the fourth quarter of 1998. Including fourth- quarter one-time items and discontinued operations, reported net income of $126 million in 1999 compared with $92 million of net income in the fourth quarter of 1998. In 1997, reported net income of $131 million was reduced by $118 million of one-time items and losses related to discontinued operations as detailed above. Excluding these amounts, 1997 net income was $249 million, or $1.69 per diluted share. An after-tax earnings summary is presented below:
Full Year Results Per Diluted Share ---------------------------- ---------------------- 1999 1998 1997 1999 1998 1997 -------- -------- -------- ------ ------ ------ In Thousands Income from continuing operations before one- time items.............. $285,171 $273,305 $248,946 $ 2.20 $ 1.93 $ 1.69 Restructuring and impairment charges...... -- -- (42,421) -- -- (0.29) Gain on sale of businesses and investments............. 77,532 101,342 -- 0.60 0.71 -- COLI tax provision....... (51,188) -- -- (0.40) -- -- -------- -------- -------- ------ ------ ------ Income from continuing operations.............. $311,515 $374,647 $206,525 $ 2.40 $ 2.64 $ 1.40 Loss from discontinued operations.............. (3,201) (80,067) (75,894) (0.02) (0.56) (0.51) -------- -------- -------- ------ ------ ------ Net income............... $308,314 $294,580 $130,631 $ 2.38 $ 2.08 $ 0.89 ======== ======== ======== ====== ====== ======
11 Revenue and Value-Added Revenue Net sales in 1999 were $5.2 billion, up 3% from 1998's net sales of $5.0 billion. Value-added revenue, or net sales less the cost of materials (primarily paper and ink), was $3.3 billion, up 7% from 1998. Because paper prices as well as the amount of paper we purchase on behalf of our customers affect our revenue, value-added revenue is a better indicator of our growth. Because the price of paper can be volatile, in periods of rising prices the company's revenues and costs for materials increase; in periods of falling prices, revenues and material costs decline. While we do not assume the risk for fluctuations in paper prices, our revenues are affected from year to year by changes in paper prices. In 1999, the price of paper for grades employed in our Magazine Publishing Services and Merchandise Media markets declined approximately 8% from prior year levels due to oversupply and price competition. We purchase or customers supply paper used in the printing process. Customer-supplied paper is reflected neither in our revenues nor our cost of materials. If we purchase paper for a customer, we recover the cost as a pass- through cost, at a margin that is lower than the margin we earn for printing and related services. In 1999, we continued our focus on controlling the quality of paper used in the manufacturing process through our Paper Services organization, which is setting industry standards for paper specifications. We are working with customers to ensure that all paper, regardless of whether it is customer-supplied or purchased by us, meets our performance specifications. Ideally, we would like to select the source and manage the delivery process for all paper so that we can control the quality of the paper, optimize the manufacturing process and minimize the amount of working capital tied up in production. In some cases where we do not have input on the source or control over the inventory, we have encouraged customers to buy materials directly rather than through us. In these instances, neither the sales nor expense are reflected in our financials. Because of these factors with respect to paper prices and paper sales, which primarily affect Merchandise Media and Magazine Publishing Services, value-added revenue is a better indicator of growth. Volume in most of our end-markets was higher than a year ago. During 1999 we benefited from strong magazine advertising; high consumer confidence, which created more demand for catalogs and advertising inserts; and strong capital markets. Independent directory publishers also generated additional titles in 1999. The book market had increased demand as the industry successfully worked through some of its inventory management issues. Acquisitions and investments made during the year contributed 40% of the growth in value-added revenue from 1998 (see "Investments" section on page 17 for additional details). Favorable factors were offset partially by tight labor conditions in the United States, which affected productivity through turnover, and poor economic conditions in much of South America. While our operations in South America remain profitable, financial results are down from a year ago. The trends toward targeting and versioning in many of our end-markets accelerated and resulted in increased complexity in the manufacturing process. We are continuing to upgrade our equipment to be more flexible, while we simultaneously work with customers to redesign products for manufacturing efficiencies and ensure adequate compensation for our services. While our productivity initiatives continue to generate improved results, the rate of improvement is expected to slow as future initiatives require more initial investment. Net sales in 1998 were $5.0 billion, up 3% from 1997's net sales of $4.9 billion. Value-added revenue was $3.1 billion, up 4% from 1997. Most of our end markets had higher volume in 1998 as compared with 1997. During most of 1998, we benefited from strong magazine advertising; higher demand for catalogs and retail inserts; and strong capital markets. Also, a directory customer moved production from late 1997 into early 1998. These favorable factors were partially offset by lower book sales as the industry continued to work through inventory management issues caused by publishers overstocking quantities in 1997. Pricing pressure continued in many of our markets, but to a lesser degree than in past years as we continued to differentiate our services. In addition to the growth in 1998 sales, the composition of revenue was also more favorable. Compared with 1997, fewer pass-through sales, or sales of materials and services purchased on our customers' behalf, 12 reduced revenue in 1998 but enhanced margins. We also reduced the amount of paper purchased on behalf of customers in selected cases where the markup recovered on the paper did not cover our associated costs. The following table shows the trends in net sales by end-market and consolidated value-added revenue:
1999 Change 1998 Change 1997 ----------- ------ ----------- ------ ----------- In Thousands Merchandise Media........ $ 1,255,054 (1.2)% $ 1,269,789 1.2% $ 1,254,918 Magazine Publishing Services................ 1,166,551 (1.8) 1,187,403 3.9 1,142,818 Telecommunications....... 865,682 5.3 822,095 5.8 776,746 Book Publishing Services. 775,262 3.8 746,987 (7.5) 807,392 Financial Services....... 639,935 19.4 536,101 8.4 494,547 Other*................... 480,924 5.5 456,061 9.5 416,523 ----------- ---- ----------- ---- ----------- Total net sales.......... $ 5,183,408 3.3% $ 5,018,436 2.6% $ 4,892,944 Cost of materials........ (1,888,764) (1,929,991) (1,917,977) ----------- ---- ----------- ---- ----------- Total Value-Added Revenue................. $ 3,294,644 6.7% $ 3,088,445 3.8% $ 2,974,967 =========== ==== =========== ==== ===========
- -------- * Other includes Stream International through its disposition, Donnelley Logistics and international revenue from Poland and South America. Expenses Our cost of materials of $1.9 billion in 1999 declined as a percentage of net sales to 36.4% from 38.5% in 1998. This reflects our focus on delivering higher value-added products and services. The reduced paper prices and paper sales in 1999, discussed on page 12, also were contributing factors. In 1998, our cost of materials of $1.9 billion declined as a percentage of net sales to 38.5% from 39.2% in 1997. This reflected our focus on the composition of revenue as discussed on page 12. Gross profit in 1999 and 1998 grew by $101 million and $107 million, respectively. The 10% increase in 1999 and the 11% increase in 1998 came from our focus on productivity initiatives as discussed below, as well as higher volume. Gross profit as a percentage of net sales improved to 22.4% in 1999 compared with 21.1% in 1998 and 19.4% in 1997. Selling and administrative expense increased by 10% to $629 million in 1999, compared with the prior year. In addition to volume-related increases, our consolidated results included some acquisitions (see "Investments" section on page 17 for more details) that carried higher selling and administrative expense ratios. A higher mix of service-oriented businesses, such as Financial Services, that have higher operating margins in addition to higher selling and administrative expenses also was a factor. Our investments to build new businesses, such as Online Services and digital content services, increased our selling and administrative expense ratios. In addition, we continued to build corporate capabilities in areas such as marketing, procurement and manufacturing productivity through Six Sigma and Process Variability Reduction. We also continued to invest to standardize and enhance our technology and systems capabilities to improve our connectivity internally and with our customers and markets. The ratio of selling and administrative expense to net sales was 12.1% in 1999 compared with 11.4% in 1998. We were able to deliver improved operating margins while investing for future growth. Selling and administrative expense increased by 11% to $570 million in 1998 compared with 1997. In addition to volume-related increases and higher consolidated Stream International expenses, most of the increase was related to information systems-related expenditures. The ratio of selling and administrative expense to net sales was 11.4% in 1998 compared with 10.4% in 1997. 13 Earnings from operations increased by $42 million, or 9%, from a year earlier to reach $530 million in 1999. Operating margins were 10.2% in 1999 compared with 9.7% in 1998. In 1998, earnings from operations increased by $49 million, or 11%, from 1997 (excluding the 1997 restructuring and impairment charge) to reach $488 million. The increase reflected the company's focus on productivity in our core business. Operating margins were 9.7% in 1998 compared with 9.0% in 1997. A summary analysis of expense trends is presented below:
1999 Change 1998 Change 1997 ---------- ------ ---------- ------ ---------- In Thousands Cost of materials.............. $1,888,764 (2.1)% $1,929,991 0.6% $1,917,977 Cost of manufacturing.......... 1,761,255 6.5 1,654,177 0.1 1,653,251 Depreciation................... 323,009 0.1 322,680 0.9 319,730 Amortization................... 51,373 (3.8) 53,391 3.9 51,381 Selling and administrative..... 628,580 10.3 569,779 11.5 511,115 Net interest expense........... 88,164 12.8% 78,166 (13.9)% 90,765
Non-Operating Items Net interest expense for 1999 increased 13% to $88 million due to higher average debt balances associated with acquisitions and share repurchase programs. In 1998, net interest expense declined 14% from 1997, reflecting lower average interest rates and lower average debt balances due to improvements in balance sheet management. Other income for 1999 increased to $21 million from $10 million in 1998. The increase was related primarily to lower corporate-owned life insurance expense due to plan experience (see "COLI" discussion on page 15), and lower minority interest expense as we increased our ownership percentage in two majority- owned subsidiaries. Other income for 1998 decreased to $10 million from $26 million in 1997, due to non-recurring 1997 gains on the sale of investments in our venture-capital portfolio. Events Affecting Comparability Restructuring/Impairment Charges for Continuing Operations--In December 1997, we announced a $71 million ($42 million after-tax) restructuring and impairment charge to cover, in large part, the discontinuation of activities no longer aligned with our strategic focus, including: . the sale of our Coris content-management software operation; . the shut-down of our Crawfordsville, Indiana, book fulfillment operations; . the closing of a development office in Singapore; and . the termination of development of certain manufacturing information systems. As of December 31, 1998, we had substantially completed our restructuring programs. Restructuring/Impairment Charges for Discontinued Operations--In the second quarter of 1998, we recorded an $80 million (with no associated tax benefit) impairment charge related to the write-down of goodwill on the books of CS&T remaining from the 1995 transaction that created Stream International Holdings. In the fourth quarter of 1997, we recognized a $100 million ($60 million after-tax) provision to adjust the carrying costs of CS&T and MMI to their estimated net realizable values. 14 The following summarizes information about restructuring and impairment charges after taxes and minority benefit:
1999 1998 1997 -------- ------- -------- In Thousands Restructuring charges for continuing operations....... $ -- $ -- $ 42,421 Restructuring charges for discontinued operations..... -- 80,067 60,000 -------- ------- -------- Total restructuring charges....................... $ -- $80,067 $102,421 ======== ======= ========
Divestitures Stream, CS&T and MMI--Consistent with our previously stated intent, we divested our interest in CS&T and MMI in the fourth quarter of 1999. We also sold 93% of our interest in Stream International. The three transactions resulted in a pretax accounting gain of $43 million. Net cash proceeds from the dispositions totaled $176 million and were used to pay down debt and for other corporate purposes. For reporting purposes, Stream International was consolidated in our financial results until the transaction closed on November 23, 1999. CS&T's net (loss) income was reported as discontinued operations through the disposition date of November 12, 1999. MMI's net (loss) income was reported as discontinued operations through December 15, 1997, when our interest was restructured to non-voting preferred stock. We now have a 6% investment in Stream International, representing the remaining 7% of our original 87% interest, that has been reflected in other noncurrent assets. For comparability purposes, summary income statement results for Stream International based on our 87% ownership interest are shown in the table below:
1999* 1998 1997 -------- -------- -------- In Thousands Net sales.......................................... $212,387 $213,612 $186,846 Value-added revenue................................ 212,387 213,612 186,846 Gross profit....................................... 64,434 56,172 53,210 Selling and administrative expense................. 57,448 56,292 45,874 Earnings (loss) from operations.................... 6,986 (1,673) 7,336
- -------- * Results are through disposition date of November 23, 1999. Metromail Metromail, which had been wholly owned by us, completed an initial public offering of its common stock in June 1996, reducing our interest to approximately 38%. In March 1998, Metromail entered into a merger agreement with The Great Universal Stores, P.L.C., and in April 1998, we received approximately $297 million, or $238 million after-tax, for our remaining interest in Metromail. Donnelley Enterprise Solutions DESI, which had been wholly owned by us, completed an initial public offering of its common stock in November 1996, reducing our interest to approximately 43%. In May 1998, DESI entered into a merger agreement with Bowne & Co., Inc., and in July 1998 we received approximately $45 million, or $36 million after-tax, for our remaining interest in DESI. We used proceeds from the Metromail and DESI transactions to repurchase shares (see "Share Repurchase" discussion on page 16). Corporate-Owned Life Insurance (COLI) and Effective Tax Rate We have used COLI to fund employee benefits for several years. In 1996, the United States Health Care Reform Act was passed, eliminating the deduction for interest from loans borrowed against COLI programs. Without the COLI deduction, which was phased out after 1998, our effective tax rate (excluding one-time items) increased from 35.0% in 1998 to 38.5% in 1999. 15 The Internal Revenue Service (IRS), in its routine audit of the company, has disallowed the $34 million COLI interest deductions we claimed in our 1990 through 1992 tax returns. We have challenged this position in a formal protest filed with the IRS Appeals division. Litigation involving other taxpayers also is pending. In October 1999, in a case involving a different company, the U.S. Tax Court disallowed deductions for loans against that taxpayer's COLI program. Should this position be upheld and applied to others, we could lose an additional maximum of $152 million in tax benefits for the period from 1993 to 1998. Interest on these amounts also may be due and our exposure for interest, should all prior COLI deductions be disallowed, is approximately $51 million after-tax through December 31, 1999. We believe our circumstances differ from those involved in the recent Tax Court decision. During the fourth quarter of 1999, however, we recorded an additional tax provision of $51 million ($0.40 per diluted share) related to COLI. We will continue to examine our position with respect to the Tax Court opinion and resolution of other pending cases. The ultimate resolution of these issues may take several years and may have a material impact on our results of operations and financial condition. Share Repurchase In 1999, we purchased 11.8 million shares of our stock for approximately $379 million in open-market transactions. These repurchases were part of two share repurchase programs undertaken in 1999. In September 1998, the Board of Directors supplemented an earlier repurchase program with authorization to purchase shares with a value up to an additional $300 million. This program was under way at the beginning of 1999 and continued through mid-year. In September 1999, a new repurchase program of $300 million was announced and includes shares we ordinarily purchase for issuance under our various stock plans. This program extends through September 2000, but may be completed sooner depending on the market price of our stock. The recent weakness in our stock price led us to accelerate our repurchase activity in the fourth quarter of 1999. During first quarter 2000, we have slowed our share repurchase activity as a result of increased acquisition activity, primarily the closing of the purchase of CTC Distribution Direct (see discussion on page 18). The number of diluted shares outstanding as of December 31, 1999, was 123 million, while the full-year average number of diluted shares outstanding was 130 million. In 1998, we purchased 13.2 million shares of our stock for approximately $544 million. The number of diluted shares outstanding as of December 31, 1998 was 137 million, while the full-year average number of diluted shares outstanding was 142 million. In 1997, we purchased approximately 2.3 million shares to issue under various stock plans. The number of diluted shares outstanding as of December 31, 1997, was 147 million, while the full-year average number of diluted shares outstanding was similar. Since our first repurchase program was initiated in 1996 through 1999, we have repurchased $1.2 billion in stock and reduced the number of shares outstanding by 21%. A summary of the shares outstanding is presented below:
1999 1998 1997 ------- ------- ------- In Thousands As of December 31 Basic................................................. 123,237 134,322 145,118 Dilutive effect....................................... 125 2,754 2,103 ------- ------- ------- Total............................................... 123,362 137,076 147,221 ======= ======= ======= Full Year Average Basic................................................. 128,872 139,624 145,929 Dilutive effect....................................... 694 2,241 1,579 ------- ------- ------- Total............................................... 129,566 141,865 147,508 ======= ======= =======
Cash Flow Operating Activities--Our main source of liquidity is cash from operating activities. In 1999, cash provided from operating activities was $635 million, down from 1998's $733 million. The decrease was due to higher working capital requirements to support higher volumes. While the absolute level of working capital increased 16 in 1999, the ratio of working capital to sales continued to improve to 6.6% in 1999 from 7.0% in 1998 and 9.3% in 1997. Strong cash flow results in 1998 and 1997 were driven by the success of our program to reduce working capital. Investing Activities--Our principal recurring investing activities are capital expenditures to improve the productivity of operations, expand in specific markets and establish complementary businesses that leverage our distinctive capabilities. In 1999, capital expenditures totaled $276 million, a $51 million increase from 1998, but still well below past years. Spending levels in 1999 continued to reflect our disciplined investment process, which includes evaluating a broad range of alternatives and optimizing the overall manufacturing platform, and our focus on productivity, which tends to result in less costly process-enhancement investments. In 1999, we also invested in expanding into selected international markets. We opened a dedicated directory plant in Brazil and expanded our operations in Poland based on the strong market potential that we see in these regions. We also made systems-related and other improvements that were capitalized. In 2000, we expect capital spending to be between $300 million and $350 million, still well below levels of recent years, reflecting the improved discipline supporting our investment activities. During 1999, we continued our initiative to sell operations and assets no longer aligned with our strategic priorities. In 1999, we generated $176 million of cash net of taxes from our divestitures of Stream International, CS&T and MMI. We generated an additional $8 million from the sale of other assets. In 1998, we generated $301 million of cash net of taxes from divestitures, which included selling our remaining interests in Metromail and DESI, in addition to $26 million associated with the sale of other assets. In 1997, we generated $51 million of cash net of taxes from selling our interest in three European joint ventures and disposing of interests from our venture capital portfolio. Investments--During 1999, other investments including acquisitions totaled $222 million, net of cash acquired. In 1999, we increased our ownership position in Editorial Lord Cochrane S.A. (Cochrane), to 99% from 78%, after having increased our ownership position from 55% in 1998. In the third quarter of 1999, Cochrane took 100% control of Atlantida Cochrane in Argentina. Results from this operation are now consolidated in our financial results. These actions strengthen our position as the largest printer in South America and give us the ability to grow independently in the region to further our strategy of providing networked services for our customers. Our Online Services group made two equity investments in firms that offer best-of-class services to expand our offering to our customers (see "Online Services" discussion on page 19 for a description of this business). In September, we made an equity investment in MultiMedia Live (MML), after having established a partnership with it in March 1999. MML is a West Coast-based, leading Web site design and development firm that provides customized e- commerce solutions. In October, we made an equity investment in B2BWorks, the first and largest online business-to-business advertising network. B2BWorks uses an affiliate model to connect business-to-business marketers with appropriate Internet sites. Acquisitions in 1999 included: . Cadmus Financial (March 1999)--The acquisition of the leading financial printer in the Southeast, and the fourth-largest in the United States, allowed us to rapidly establish our presence in several major financial centers, including Charlotte, North Carolina, the second-largest banking and financial center in the country, and Raleigh, North Carolina. . Communicolor (April 1999)--The acquisition of Standard Register's direct- mail marketing group expanded our capabilities to include high-quality, four-color, shorter-run, highly personalized direct mail. RRD Direct (reported within Merchandise Media) now has a full range of production capabilities to serve the direct-mail business, a faster-growing market than general commercial print. . Hamburg Grafica Editora (May 1999)--Our acquisition of the largest independent Brazilian book printer expands our service offering so that we can provide customers with magazines, inserts, catalogs, books and telephone directories, through our coordinated operations in Argentina, Chile and Brazil. Book printing in Brazil is growing rapidly as the country has begun emphasizing the importance of secondary education. . Freight Systems, Inc. (July 1999)--The acquisition of this West Coast distribution company allows us to expand its innovative programs to deliver mail closer to its final distribution point, reducing delivery costs and 17 improving timeliness for our customers. We intend to leverage our scale as the largest private user of the U.S. Postal Service to expand these programs, as well as to enhance our industry-leading mail and newsstand distribution network. . Penton Press (December 1999)--Our acquisition of Penton Press, the printing division of Penton Media, included a long-term printing contract for more than 30 of Penton's magazine titles, as well as its Ohio plant and equipment. The plant specializes in short-run titles, which are generally defined as those with quantities between 10,000 and 150,000. This market, which has a different manufacturing focus due to its more transactional nature, is growing faster than the overall magazine market. Our strategy is to have a manufacturing platform focused on short-run production to better leverage our assets, and this facility, the fourth in this platform, will allow us to redistribute work to optimize production and distribution. During the first quarter of 2000 through March 30, other investments totaled $201 million, net of cash acquired. In January 2000, we acquired Omega Studios, one of the largest dedicated photography studios in the United States. This acquisition expands our premedia offering to include digital photography and creative services, in addition to our established content management, prepress, Internet, print and distribution solutions. In January 2000, we also made an equity investment in Noosh, Inc., a business-to-business Internet-based service designed to improve the process of buying, selling and managing print. In February 2000, we acquired CTC Distribution Direct, the largest mailer of business-to-home parcels in the U.S. The purchase more than doubled the revenues of Donnelley Logistics and gives us even more scale to deliver printed products and parcels, leveraging the U.S. Postal Service for final home delivery. Our expanded size and service offering, which now includes parcel delivery, gives our customers more economical delivery options and improved delivery performance. We also acquired Iridio, Inc., a Seattle-based full-service premedia provider of digital photography, prepress, digital print and online services; and EVACO, a leading financial printer in Florida. Each of these investments has strengthened our position by expanding our capabilities or geographic reach in our high-value businesses. Financing Activities--Financing activities include net borrowings, dividend payments and share repurchases. Our net borrowings increased by $117 million in 1999. Debt levels decreased by $156 million in 1998 and $226 million in 1997. The increase in 1999 was a result of acquisitions, higher capital spending, higher working capital needs based on the higher volume and share repurchase activity, partially offset by cash generated from the disposition of assets no longer aligned with our strategic priorities. In April 1999, we issued $200 million of 6 5/8% debentures due in 2029. Proceeds were used to reduce outstanding commercial paper borrowings, with the remainder used for general corporate purposes. Commercial paper is our primary source of short-term financing. On December 31, 1999, we had $142 million outstanding in commercial paper borrowings. In addition, at December 31, 1999, we had a $400 million unused revolving credit facility with a number of banks. This facility provides support for issuing commercial paper and other credit needs. We believe our cash flow and borrowing capability are sufficient to fund operations. Net cash used to repurchase common stock, defined as cash used for share repurchases net of proceeds from stock options exercised, was $356 million in 1999 (see "Share Repurchase" discussion on page 16). In 1998, $457 million of net cash was used for share repurchase while $36 million of net cash was used in 1997 to purchase common stock, primarily to cover options granted to employees. Dividends to shareholders totaled $111 million in 1999, $115 million in 1998 and $115 million in 1997. Financial Condition--Our financial position remains strong as evidenced by our year-end balance sheet. Our total assets were $3.9 billion, $55 million higher than in 1998, due to investments made to speed growth in our high-value businesses. Average invested capital (total debt and equity, computed on a beginning-and-end of year 18 average) was $2.3 billion in 1999, a $164 million decline from 1998. Increased earnings from continuing operations, excluding one-time items, in conjunction with the decrease in invested capital, raised return on invested capital to 14.6%. At year-end 1999, the debt-to-capital ratio increased to 51% from 45% in 1998 and year-end debt-to-total-market-value increased to 33% from 19% a year ago. Our ratio of earnings before interest, taxes, depreciation and amortization (EBITDA), excluding one-time items, to interest expense, was 10.5 at year-end. Other Information Human Resources--As of December 31, 1999, approximately 34,000 employees worked for the company. Approximately 84% of our employees work in the United States, and approximately 4% of those are covered by collective bargaining agreements. Of the approximately 5,400 people working in our international operations, 24% are covered by collective bargaining agreements. Minority and female representation among U.S. professionals, officials and managers increased by 11% and 2%, respectively. Minority representation is now 13% among our U.S. professionals, officials and managers while female representation is now 34%. Minorities represent 16% of our U.S. workforce and females represent 33%. A portion of executives' compensation is tied to their performance in achieving inclusiveness objectives. In 1999, our five-part Diversity at Work Program (employment, education and training, workplace quality, supplier relationships and community involvement) was designated best-of-class by Watson Wyatt Worldwide, a global human resources management consulting firm. Technology--We remain a technology leader, investing not only in print- related technologies such as computer-to-plate and digital printing, but also in Internet-based business models such as our Online Services, and Internet- enabled services such as SENDD(TM) and ImageMerchant(TM) (see below for a description of these services). We are focused on investing in technologies that contribute to our financial performance and help us deliver products, services and solutions that are valued by our customers. We have invested human and capital resources to upgrade our systems infrastructure companywide. These investments in common systems improve our ability to share information across the company and make informed decisions rapidly. During 1999, we received recognition for our technology leadership from both PC Week and Information Week. Among all U.S. companies, we were named: . #6 of the top 100 in Enterprise Solutions (PC Week, September 13, 1999) . #25 of the top 100 in Internet Technology (PC Week, May 11, 1999) . #36 of the top 100 in Desktop and Mobile Technology (PC Week, June 21, 1999) . #66 of the top 500 e-business leaders (PC Week, November 15, 1999) . #88 of the top 500 leading IT innovators (Information Week, September 27, 1999) Online Services, SENDD, ImageMerchant, Digital Print and E-Books--Online Services offers solutions to meet all of our customers' Internet needs. Online Services provides a full suite of scalable e-commerce solutions including consulting, Web site design and development, content production services to "stock the shelves" or populate the site with content, and marketing services to effectively drive site traffic. The markets that Online Services currently serves include: . eCommerce--to help catalogers and retailers showcase their products on the Internet and drive sales . ePublish--to help magazine publishers extend and enhance their brands online by offering content as well as commerce and community . eDirectory--to help businesses navigate and use the Internet to gain exposure and streamline their business processes. 19 Our recent partnerships and investments in this arena strengthen our Online Services offering, expand our solutions and help our customers leverage the power of the Internet to communicate with their customers. To meet our Financial Services customers' needs for speed, convenience, confidentiality and accuracy, we developed SENDD. The software allows work groups around the world to simultaneously proof a document securely via the Internet. Financial Services is also working closely with the Securities and Exchange Commission (SEC) on the modernization efforts under way for EDGAR (Electronic Data Gathering and Retrieval). We currently provide EDGAR electronic filing services for our customers, enabling them to use this option to communicate with their target audiences while meeting tight time frames and stringent filing requirements. We will continue to develop our offerings and educate our clients as the SEC enhances EDGAR in the future. In our premedia production process, increased digitization allows us to capture customer content and distribute it via various communication media, including print and the Internet. We have developed technology that allows a customer to securely archive its digital content in an R.R. Donnelley database and access it via the Internet so that it can be repurposed for multiple uses. This ImageMerchant software allows customers to more effectively manage their media assets. Customer benefits include lower costs, faster production times and consistent quality because images are repurposed rather than recreated. Analysis tools further enhance the value of ImageMerchant. Additionally, we are a leading provider of digital print, which allows customized marketing to an audience of one. With digital printing, images can be varied as they are printed, allowing for each piece to be highly personalized. Book Publishing Services also applies technology to create solutions that enable our customers to manage and distribute content in multiple media formats. We currently convert content for many major e-book vendors. Year 2000 and System Infrastructure Process control and information systems are becoming increasingly important to the effective management of the company. The upgrade and standardization of our systems is necessary for us to succeed in using information technology to our strategic advantage. In 1999, we focused our efforts on ensuring that processes and systems were Year 2000 compliant. In addition, we began ongoing initiatives to upgrade and standardize our information technology infrastructure. In 1999, we deferred a number of other infrastructure and systems initiatives that will support continuous productivity improvements and enhance service capabilities, while we completed our Year 2000 efforts. Company employees, assisted by the expertise of external consultants where necessary, staffed the Year 2000 compliance efforts, which were executed globally across all operations of our company. During the transition from 1999 to 2000, all operations were fully supported by trained personnel. Key efforts were focused on four business-critical factors: safety of employees, continuity of production, environmental compliance and reporting, and continuity of systems to support the ability of personnel to continue working (such as the availability of utilities or operation of payroll systems). At the end of the transition, no Year 2000 issues affecting any business-critical factors were reported by any operation. To the extent that date-related issues were reported, they were limited to instances where personnel available at the site were able to promptly correct the issue without disruption to our operations. In 1999, spending on our Year 2000 initiative was $49 million, which is reflected in cost of sales and administrative expense. Expenses in 1998 were $45 million and were reflected in administrative expense. These expenses do not include costs capitalized with respect to our information and technology infrastructure upgrade and standardization initiatives. As internal resources complete their Year 2000 assignments, they are being reallocated to technology projects that have been deferred, as well as other productivity projects. These projects will improve our ability to share information across the company and make informed decisions rapidly, enhancing future productivity. 20 Litigation In 1996, a purported class action was brought against the company in federal district court in Chicago, Illinois, on behalf of current and former African- American employees, alleging that the company racially discriminated against them. The complaint seeks declaratory and injunctive relief, and asks for actual, compensatory, consequential and punitive damages in an amount not less than $500 million. Although the plaintiffs seek nationwide class certification, most of the specific factual assertions of the complaint relate to the closing of our Chicago catalog operations in 1993. Other general claims relate to other company locations. In August 1999, the district court denied our motion for partial summary judgment on the basis of timeliness. In 1995, a purported class action was filed against the company in federal district court in Chicago alleging that older workers were discriminated against in selection for termination upon closing of the Chicago catalog operations. The suit also alleges that we violated the Employee Retirement Income Security Act (ERISA) in determining benefits payable to retiring or terminating employees. In August 1997, the court certified classes in each of the age discrimination and ERISA claims limited to former employees of the Chicago operation. In 1998, a purported class action was filed against the company in federal district court in Chicago on behalf of current and former African-American employees, alleging that the company racially discriminated against them. While making many of the same general discrimination claims contained in the 1996 case, the plaintiffs in this case also claim retaliation by the company for the filing of discrimination charges or otherwise complaining of race discrimination. The complaint seeks the same relief and damages as sought in the 1996 case. The 1996 and 1995 cases relate primarily to the circumstances surrounding the closing of the Chicago catalog operations. We believe we acted properly in the closing of the operations. We also believe we have a number of valid defenses to all of the claims made in all three cases and we will vigorously defend our actions. However, because the cases are in the preliminary stages, we cannot make a meaningful estimate of any loss that could result from an unfavorable outcome of any of the pending cases. Environmental, Health and Safety Regulations Our business is subject to various laws and regulations relating to employee health and safety and to environmental protection. Our policy is to comply with all laws and regulations that govern protection of the environment and employee health and safety. Our overriding principles are to create sustainable compliance and an injury-free workplace. We do not anticipate that compliance will have a material adverse effect on our competitive or consolidated financial positions. Outlook Our primary business remains commercial printing and our primary geographic market is the United States. The environment remains highly competitive in most of our product categories and geographic regions. Competition is based largely on price, quality and servicing the special needs of customers. Industry analysts believe that there is overcapacity in most commercial printing markets. Therefore, competition is intense. Our intent is to differentiate our service offering so that we are viewed by our customers as a partner that can help them more effectively use words and images in a variety of ways, whether through print or the Internet, to reach their target audience. We are a large user of paper, bought by us or supplied to us by our customers. The cost and supply of certain paper grades used in the manufacturing process will continue to affect our financial results. However, management currently does not see any disruptive conditions affecting prices and supply of paper in 2000. Postal costs are a significant component of our customers' cost structures. Changes in postal rates, which are anticipated early in 2001, may negatively affect the demand for our core print capabilities, but postal rate increases enhance the value of Donnelley Logistics to our customers, as we are able to improve the cost efficiency of mail processing and distribution. 21 In addition to paper and postage costs, consumer confidence and economic growth are key drivers of print demand. A significant change in the economic outlook could affect demand for our products, particularly in the financial printing market. In the longer term, technological changes, including the electronic distribution of information, present both risks and opportunities for the company. Many of our new business initiatives are designed to leverage our distinctive capabilities to participate in the rapid growth in electronic communications. Our goal remains to manage and distribute words and images, regardless of the means of distribution, to help our customers succeed in informing, educating, entertaining and selling. We believe that with our competitive strengths, including our comprehensive service offerings, technology leadership, depth of management experience, customer relationships and economies of scale, we can develop the most valuable solutions for our customers, which should result in increased shareholder value. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company is exposed to market risk from changes in interest rates and foreign exchange rates. However, the company generally maintains more than half of its debt at fixed rates (approximately 60% at December 31, 1999), and therefore its exposure to short-term interest rate fluctuations is immaterial to the consolidated financial statements of the company as a whole. The company's exposure to adverse changes in foreign exchange rates also is immaterial to the consolidated financial statements of the company as a whole, and the company occasionally uses financial instruments to hedge exposures to foreign exchange rate changes. The company does not use financial instruments for trading purposes and is not a party to any leveraged derivatives. Further disclosure relating to financial instruments is included in the Debt Financing and Interest Expense note in the Notes to Consolidated Financial Statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial information required by Item 8 is contained in Item 14 of Part IV and listed on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning the directors and officers of the company is contained on pages 6 and 20-21 of the company's definitive Proxy Statement dated February 22, 2000, and is incorporated herein by reference. See also the list of the company's officers and related information under "Executive Officers and Principal Officers of R.R. Donnelley & Sons Company" at the end of Part I of this annual report. ITEM 11. EXECUTIVE COMPENSATION Information concerning director and executive compensation for the year ended December 31, 1999, and, with respect to certain of such information, prior years, is contained on pages 23 and 27-36 of the company's definitive Proxy Statement dated February 22, 2000, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning the beneficial ownership of the company's common stock is contained on pages 24-26 of the company's definitive Proxy Statement dated February 22, 2000, and is incorporated herein by reference. 22 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)1. Financial Statements The financial statements listed in the accompanying index (page F-1) to the financial statements are filed as part of this annual report. 2. Financial Statement Schedule The financial statement schedule listed in the accompanying index (page F-1) to the financial statements is filed as part of this annual report. 3. Exhibits The exhibits listed on the accompanying index to exhibits (pages E-1 through E-2) are filed as part of this annual report. (b)Reports on Form 8-K No current Report on Form 8-K was filed during the quarter ended December 31, 1999. (c)Exhibits The exhibits listed on the accompanying index (pages E-1 through E-2) are filed as part of this annual report. (d)Financial Statements omitted-- Certain schedules have been omitted because the required information is included in the consolidated financial statements or notes thereto or because they are not applicable or not required. 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 30th day of March 2000. R.R. DONNELLEY & SONS COMPANY /s/ Gregory A. Stoklosa By __________________________________ Gregory A. Stoklosa Vice President and Controller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on the 30th day of March 2000. Signature and Title Signature and Title /s/ William L. Davis /s/ Thomas S. Johnson - ------------------------------------- ------------------------------------- William L. Davis Thomas S. Johnson Chairman of the Board and Director Chief Executive Officer, Director (Principal Executive Officer) /s/ George A. Lorch ------------------------------------- /s/ Cheryl A. Francis George A. Lorch - ------------------------------------- Director Cheryl A. Francis Executive Vice President and Oliver R. Sockwell Chief Financial Officer ------------------------------------- (Principal Financial Officer) Oliver R. Sockwell Director /s/ Gregory A. Stoklosa - ------------------------------------- /s/ Bide L. Thomas Gregory A. Stoklosa ------------------------------------- Vice President and Controller Bide L. Thomas (Principal Accounting Officer) Director Joseph B. Anderson, Jr. /s/ Stephen M. Wolf - ------------------------------------- ------------------------------------- Joseph B. Anderson, Jr. Stephen M. Wolf Director Director Martha Layne Collins - ------------------------------------- Martha Layne Collins Director /s/ James R. Donnelley - ------------------------------------- James R. Donnelley Director /s/ Judith H. Hamilton - ------------------------------------- Judith H. Hamilton Director 24 ITEM 14(a). INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page(s) ------- Consolidated Statements of Income for each of the three years ended December 31, 1999..................................................... F-2 Consolidated Balance Sheets at December 31, 1999 and 1998.............. F-3 Consolidated Statements of Cash Flows for each of the three years ended December 31, 1999..................................................... F-4 Consolidated Statements of Shareholders' Equity for each of the three years ended December 31, 1999......................................... F-5 Notes to Consolidated Financial Statements............................. F-6 Report of Independent Public Accountants............................... F-22 Unaudited Interim Financial Information, Dividend Summary and Financial Summary............................................................... F-23 Report of Independent Public Accountants on Financial Statement Schedule.............................................................. F-25 Financial Statement Schedule II--Valuation and Qualifying Accounts................................ F-26
F-1 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Thousands of Dollars, Except Per-Share Data
Year Ended December 31 ---------------------------------- 1999 1998 1997 ---------- ---------- ---------- Net sales.................................. $5,183,408 $5,018,436 $4,892,944 Cost of sales.............................. 4,024,401 3,960,239 3,942,339 ---------- ---------- ---------- Gross profit............................... 1,159,007 1,058,197 950,605 Selling and administrative expenses........ 628,580 569,779 511,115 Restructuring and impairment charge........ -- -- 70,702 ---------- ---------- ---------- Earnings from operations................... 530,427 488,418 368,788 Other income (expense): Interest expense......................... (88,164) (78,166) (90,765) Gain on sale of businesses and investments............................. 42,835 168,903 -- Other, net............................... 21,431 10,217 25,742 ---------- ---------- ---------- Earnings from continuing operations before income taxes.............................. 506,529 589,372 303,765 Income taxes............................... 195,014 214,725 97,240 ---------- ---------- ---------- Income from continuing operations...... 311,515 374,647 206,525 Loss on disposal of discontinued operations, net of income taxes........... -- -- (60,000) Loss from discontinued operations, net of income taxes.............................. (3,201) (80,067) (15,894) ---------- ---------- ---------- Net Income............................. $ 308,314 $ 294,580 $ 130,631 ========== ========== ========== Income from Continuing Operations per Share of Common Stock Basic.................................... $ 2.41 $ 2.68 $ 1.42 Diluted.................................. 2.40 2.64 1.40 Loss from Discontinued Operations per Share of Common Stock Basic.................................... $ (0.02) $ (0.57) $ (0.52) Diluted.................................. (0.02) (0.56) (0.51) Net Income per Share of Common Stock Basic.................................... $ 2.39 $ 2.11 $ 0.90 Diluted.................................. 2.38 2.08 0.89
See accompanying Notes to Consolidated Financial Statements. F-2 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Thousands of Dollars, Except Share Data
December 31 ---------------------- 1999 1998 ---------- ---------- Assets Cash and equivalents................................. $ 41,873 $ 66,226 Receivables, less allowances for doubtful accounts of $15,461 in 1999 and $14,279 in 1998................. 865,305 843,094 Inventories.......................................... 194,312 182,931 Prepaid expenses..................................... 51,781 63,040 Refundable income taxes.............................. 76,579 -- ---------- ---------- Total Current Assets............................... 1,229,850 1,155,291 ========== ========== Net property, plant and equipment, at cost, less accumulated depreciation of $2,822,737 in 1999 and $2,667,827 in 1998.................................. 1,710,669 1,700,927 Goodwill and other intangibles, net of accumulated amortization of $217,616 in 1999 and $183,589 in 1998................................................ 397,983 381,394 Other noncurrent assets.............................. 514,962 515,029 Net assets of discontinued operations ............... -- 45,476 ---------- ---------- Total Assets....................................... $3,853,464 $3,798,117 ========== ========== Liabilities Accounts payable..................................... $ 334,389 $ 331,257 Accrued compensation................................. 175,590 188,187 Short-term debt...................................... 419,555 285,429 Current and deferred income taxes.................... 10,894 2,263 Other accrued liabilities............................ 263,035 242,251 ---------- ---------- Total Current Liabilities.......................... 1,203,463 1,049,387 ========== ========== Long-term debt....................................... 748,498 773,549 Deferred income taxes................................ 252,884 260,692 Other noncurrent liabilities......................... 510,361 413,611 ---------- ---------- Total Noncurrent Liabilities....................... 1,511,743 1,447,852 ========== ========== Shareholders' Equity Common stock at stated value ($1.25 par value) Authorized shares: 500,000,000; Issued: 140,889,050 in 1999 and 1998.................................... 308,462 308,462 Retained earnings.................................... 1,521,474 1,325,634 Accumulated other comprehensive income............... (64,154) (55,050) Unearned compensation................................ (6,222) (6,118) Reacquired common stock, at cost..................... (621,302) (272,050) ---------- ---------- Total Shareholders' Equity......................... 1,138,258 1,300,878 ---------- ---------- Total Liabilities and Shareholders' Equity......... $3,853,464 $3,798,117 ========== ==========
See accompanying Notes to Consolidated Financial Statements. F-3 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Thousands of Dollars
Year Ended December 31 ------------------------------- 1999 1998 1997 --------- --------- --------- Cash flows provided by (used for) operating activities: Net income.................................. $ 308,314 $ 294,580 $ 130,631 Loss from discontinued operations, net of tax........................................ 3,201 80,067 15,894 Loss on disposal of discontinued operations, net of tax................................. -- -- 60,000 Gain on sale of businesses and investments, net of tax................................. (77,532) (101,342) -- Restructuring and impairment charges, net of tax........................................ -- -- 42,421 Depreciation................................ 323,009 322,680 319,730 Amortization................................ 51,373 53,391 51,381 Gain on sale of assets...................... (6,524) (13,446) (16,028) Net change in operating working capital..... (27,915) 68,848 117,386 Net change in other assets and liabilities.. 41,829 47,935 18,802 Other....................................... 19,562 (19,878) 2,021 --------- --------- --------- Net Cash Provided by Operating Activities. 635,317 732,835 742,238 ========= ========= ========= Cash flows provided by (used for) investing activities: Capital expenditures........................ (275,826) (225,222) (360,195) Other investments including acquisitions, net of cash acquired....................... (222,066) (91,184) (47,526) Disposition of assets....................... 7,837 26,498 51,276 Disposition of business and investments, net of tax..................................... 135,664 274,079 -- --------- --------- --------- Net Cash Used For Investing Activities.... (354,391) (15,829) (356,445) ========= ========= ========= Cash flows provided by (used for) financing activities: Net increase (decrease) in borrowings....... 116,621 (155,545) (225,967) Disposition of reacquired common stock...... 22,591 82,710 45,762 Acquisition of common stock................. (372,403) (539,434) (82,041) Cash dividends paid......................... (111,133) (114,898) (114,934) --------- --------- --------- Net Cash Used for Financing Activities.... (344,324) (727,167) (377,180) ========= ========= ========= Effect of exchange rate changes on cash and equivalents.................................. (1,460) (592) (775) --------- --------- --------- Net (Decrease) Increase in Cash and Equivalents from Continuing Operations....... (64,858) (10,753) 7,838 --------- --------- --------- Net Increase in Cash from Discontinued Operations................................... 40,505 29,165 18,659 --------- --------- --------- Net (Decrease) Increase in Cash and Equivalents.................................. (24,353) 18,412 26,497 --------- --------- --------- Cash and Equivalents at Beginning of Year..... 66,226 47,814 21,317 --------- --------- --------- Cash and Equivalents at End of Year........... $ 41,873 $ 66,226 $ 47,814 ========= ========= ========= Changes in operating working capital, net of acquisitions and divestitures: 1999 1998 1997 --------- --------- --------- Decrease (increase) in assets: Receivables--net............................ $ (15,860) $ (27,041) $ 103,077 Inventories--net............................ (1,814) 18,846 (3,496) Prepaid expenses............................ 7,664 19,674 5,116 Increase (decrease) in liabilities: Accounts payable............................ (7,651) 37,352 6,249 Accrued compensation........................ (10,274) 30,049 30,347 Other accrued liabilities................... 20 (10,032) (23,907) --------- --------- --------- Net Change in Operating Working Capital....... $ (27,915) $ 68,848 $ 117,386 ========= ========= =========
See accompanying Notes to Consolidated Financial Statements. F-4 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Thousands of Dollars, Except Share Data
Reacquired Common Unearned Common Stock Stock Compensation Other --------------------- ---------------------- Restricted Retained Comprehensive Shares Amount Shares Amount Stock Earnings Income Total ----------- -------- ----------- --------- ------------ ---------- ------------- ---------- Balance at December 31, 1996................... 150,889,050 $320,962 (5,335,255) $(170,494) $(5,402) $1,512,795 $(26,580) $1,631,281 Net income.............. 130,631 130,631 Translation adjustments. (19,202) (19,202) ---------- Comprehensive income.... 111,429 Treasury stock purchases.............. (2,293,757) (82,041) (82,041) Cash dividends.......... (114,934) (114,934) Common shares issued under stock programs 1,857,792 49,860 (4,012) (86) 45,762 ----------- -------- ----------- --------- ------- ---------- -------- ---------- Balance at December 31, 1997................... 150,889,050 $320,962 (5,771,220) $(202,675) $(9,414) $1,528,406 $(45,782) $1,591,497 Net income.............. 294,580 294,580 Translation adjustments. (9,268) (9,268) ---------- Comprehensive income.... 285,312 Treasury stock purchases.............. (13,196,393) (543,743) (543,743) Cash dividends.......... (114,898) (114,898) Common shares issued under stock programs 2,400,991 78,444 3,296 970 82,710 Common shares retired... (10,000,000) (12,500) 10,000,000 395,924 (383,424) -- ----------- -------- ----------- --------- ------- ---------- -------- ---------- Balance at December 31, 1998................... 140,889,050 $308,462 (6,566,622) $(272,050) $(6,118) $1,325,634 $(55,050) $1,300,878 Net income.............. 308,314 308,314 Translation adjustments. (8,613) (8,613) Minimum pension liability adjustment... (491) (491) ---------- Comprehensive income.... 299,210 Treasury stock purchases.............. (11,850,254) (379,074) (379,074) Cash dividends.......... (110,078) (110,078) Common shares issued under stock programs... 765,231 29,822 (104) (2,396) 27,322 ----------- -------- ----------- --------- ------- ---------- -------- ---------- Balance at December 31, 1999................... 140,889,050 $308,462 (17,651,645) $(621,302) $(6,222) $1,521,474 $(64,154) $1,138,258 =========== ======== =========== ========= ======= ========== ======== ==========
See accompanying Notes to Consolidated Financial Statements. F-5 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Summary of Significant Accounting Policies Basis of Consolidation--The consolidated financial statements include the accounts of the company and its majority-owned subsidiaries. Minority interests in the income (loss) of consolidated subsidiaries ($1 million of expense, $4 million of expense and $6 million of expense in 1999, 1998 and 1997, respectively) are included in other expense in the Consolidated Statements of Income. Intercompany items and transactions are eliminated in consolidation. The company held investments in unconsolidated affiliates of $39 million and $87 million at December 31, 1999 and 1998, respectively. Nature of Operations--The company provides a wide variety of print and print-related services and products for specific customers, of which approximately 70% was under contract in 1999. Some contracts provide for progress payments from customers as certain phases of the work are completed; however, revenue is not recognized until the earnings process has been completed in accordance with the terms of the contracts. Some customers furnish paper for their work, while in other cases the company purchases the paper and resells it to the customer. Cash and Equivalents--The company considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents. Inventories--Inventories include material, labor and factory overhead and are stated at the lower of cost or market. The cost of approximately 74% and 78% of the inventories at December 31, 1999 and 1998, respectively, has been determined using the Last-In, First-Out (LIFO) method. This method reflects the effect of inventory replacement costs in earnings; accordingly, charges to cost of sales reflect recent costs of material, labor and factory overhead. The remaining inventories are valued using the First-In, First-Out (FIFO) or specific identification methods. Capitalization, Depreciation and Amortization--Property, plant and equipment are stated at cost. Depreciation is computed principally on the straight-line method based on useful lives of 15 to 33 years for buildings and 3 to 15 years for machinery and equipment. Maintenance and repair costs are charged to expense as incurred. Major overhauls which extend the useful lives of existing assets are capitalized. When properties are retired or disposed, the costs and accumulated depreciation are eliminated and the resulting profit or loss is recognized in income. Goodwill ($212 million and $174 million, net of accumulated amortization, at December 31, 1999 and 1998, respectively) is amortized over periods ranging from 10 to 40 years. Other intangibles represent primarily the cost of acquiring print contracts and volume guarantees and are amortized over the periods in which benefits will be realized. 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, 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. Comprehensive Income--In 1998, the company adopted Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income. This statement establishes rules for the reporting of comprehensive income and its components. Comprehensive income consists of net income, minimum pension liability adjustments and foreign currency translation adjustments and is presented in the Consolidated Statements of Shareholders' Equity. The adoption of SFAS No. 130 had no impact on total shareholders' equity. Reclassifications--Certain prior-year amounts have been reclassified to conform to the 1999 presentation. F-6 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Discontinued Operations During 1996, Stream International Holdings, Inc. (SIH), an 80%-owned equity investment of the company, reorganized into three independent businesses: Stream International, which provides outsource technical support services; Corporate Software & Technology (CS&T), a software distribution business; and Modus Media International (MMI), a global manufacturing and fulfillment business. CS&T and MMI comprised substantially all of the company's investment and net income in SIH. On December 15, 1997, SIH's businesses became separate companies and the company's ownership interest in SIH was restructured. The company converted its equity and debt positions in Stream International into 87% of the common stock of that business. Additionally, the company converted its equity and debt positions in CS&T into 86% of the common stock of CS&T and sold its equity and debt positions in MMI for nonvoting preferred stock of MMI. In connection with the company's planned disposition of CS&T, the company reported its interest in CS&T as discontinued operations at December 31, 1997. The company's interest in MMI was reported as discontinued operations through December 15, 1997, when its interest was restructured. Thereafter, the company's investment in MMI was classified in other noncurrent assets. The company also recorded a fourth quarter 1997 impairment charge of $100 million ($60 million after-tax) to adjust the carrying costs of CS&T and MMI to their estimated net realizable values. The $60 million after-tax charge was classified as a loss on disposal of discontinued operations in 1997. During 1998, the company recorded an $80 million (with no associated tax benefit) impairment charge related to the write-down of goodwill at CS&T. The $80 million charge was classified as a loss from discontinued operations in 1998. The net assets of CS&T were classified as net assets of discontinued operations at December 31, 1998. During 1999, the company recorded a pretax loss from discontinued operations of $5 million ($3 million after-tax). In November 1999, the company sold its entire interest in CS&T to the management of CS&T for cash proceeds of approximately $41 million. There was no gain or loss recognized from this transaction in 1999. As of December 31, 1999, the company has reclassified the net assets and results of operations of CS&T for 1999 and prior years as a discontinued operation (from businesses held for sale), since the sale of CS&T was finally completed in 1999. During the fourth quarter of 1998, since the company had not sold its investment in CS&T (which was classified as a discontinued operation) within one year, the net assets and results of operations of CS&T were reclassified at that time as businesses held for sale. Refer to "Divestitures" footnote below for additional information with respect to MMI and Stream International. Also included in the "Divestitures" footnote is a discussion of the tax impact from the sale of the three Stream- related businesses and investments. Divestitures In October 1999, the company sold its investment in Modus Media International (MMI), which consisted of 9.50% Series Senior Cumulative Preferred shares, for a total of approximately $60 million ($47 million in cash and a $13 million promissory note due no later than October 2002). The promissory note is interest bearing at 9.5% per annum, payable quarterly. The company's investment in MMI was classified in other noncurrent assets at December 31, 1998. The company recognized both a pretax and after-tax gain of $3 million from this transaction. F-7 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In November 1999, the company sold 93% of its investment in the common stock of Stream International to a group led by Bain Capital for approximately $96 million in cash. The company recognized a pretax gain of $40 million and a tax benefit of $35 million (total of $75 million after-tax) from this transaction. The tax benefit in 1999 was recognized because of the company's ability to carry back the capital tax losses generated from the sale of Stream International to years 1996 through 1998. The total pretax gain in 1999 from the sales of the company's investments in MMI and Stream International ($43 million) is included in gain on sale of businesses and investments. These sales resulted in an after-tax gain of $78 million ($0.60 per diluted share), prior to a $51 million charge ($0.40 per diluted share) in the fourth quarter of 1999 to record an additional tax provision related to the company's corporate-owned life insurance (COLI) program. Refer to "Income Taxes" on page F-14 for further information. As a result of the company's sales in 1999 of CS&T (refer to "Discontinued Operations" on page F-7) and Stream International and the sale of its investment in MMI, the company generated approximately $77 million in refundable income taxes from the carryback of associated capital losses for tax purposes, expected to be received in 2000. In 1996, Metromail Corporation (Metromail), the company's previously wholly owned subsidiary and provider of market-oriented consumer information and reference services, completed an initial public offering of shares of its common stock. As a result of the offering, the company's interest in Metromail was reduced to approximately 38%. In March 1998, Metromail entered into a merger agreement with The Great Universal Stores, P.L.C. (GUS), pursuant to which GUS initiated a tender offer for the outstanding shares of Metromail. In April 1998, the company received $297 million in cash, or approximately $238 million after-tax, for its remaining interest in Metromail. The company recognized a pretax gain in 1998 of $146 million ($87 million after-tax) from this transaction. Also in 1996, Donnelley Enterprise Solutions Incorporated (DESI), the company's previously wholly owned subsidiary and a single-source provider of integrated information-management services, completed an initial public offering of shares of its common stock. As a result of the offering, the company's interest in DESI was reduced to approximately 43%. In May 1998, DESI entered into a merger agreement with Bowne & Co., Inc. (Bowne), pursuant to which Bowne initiated a tender offer to acquire all outstanding shares of DESI. In July 1998, the company received $45 million in cash, or approximately $36 million after-tax, for its remaining interest in DESI. The company recognized a pretax gain of $23 million ($14 million after-tax) from this transaction. Acquisitions During 1999, the company acquired certain net assets of Cadmus Financial, a financial printer; the Communicolor division of the Standard Register Company, a provider of personalization services and printer of innovative direct-mail campaigns; Hamburg Grafica Editora, a Brazilian book printer; Freight Systems, Inc., a California-based transportation company; and Penton Press, a short-run magazine printing facility. All of these acquisitions have been accounted for as purchases. In 1999, the company also acquired a 30% interest in MultiMedia Live, an Internet Web site design firm, and increased its ownership position in Editorial Lord Cochrane S.A. (Cochrane) to 99% from 78%. In addition, Cochrane also increased its ownership interest in Atlantida Cochrane (Argentina) in 1999 from 50% to 100% through the assumption of its debt. The aggregate cost of these acquisitions and investments in 1999 was $199 million. During 1998, the company acquired Ediciones Eclipse S.A. de C.V., a Mexico City-based printer of retail inserts; and a directory-printing plant in St. Petersburg, Florida. Both of these acquisitions have been accounted for as purchases. In 1998, the company also increased its ownership position in Cochrane to 78% from 55% and increased its ownership position in the Polish- American Printing Company to 100% from 51%. The aggregate cost of these acquisitions and investments was $69 million in 1998. F-8 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The company also increased its investment in affordable housing by $23 million and $22 million in 1999 and 1998, respectively (refer to "Commitments and Contingencies" on page F-10 for further information). Subsequent Event In February 2000, the company paid approximately $161 million, net of cash acquired, to acquire CTC Distribution Direct (CTC), the largest mailer of business-to-home parcels in the U.S. This acquisition will be accounted for as a purchase. Restructuring and Impairment Charges In December 1997, the company provided for the impairment of assets and restructuring costs related primarily to the elimination of activities that no longer supported the company's strategic focus. These included the impaired development costs of certain manufacturing systems; the sale of Coris, the company's content-management software operation; the closing of a development office in Singapore; and the shutdown of book fulfillment operations in Crawfordsville, Indiana. Impairment losses related to the 1997 charges totaled $57 million pretax and were calculated based on the excess of the carrying amount of assets over the assets' fair values. The fair value of an asset is generally determined as the discounted estimate of future cash flows generated by the asset. As of December 31, 1998, the company's restructuring programs were substantially complete. Inventories The components of the company's inventories were as follows:
December 31 ------------------ 1999 1998 -------- -------- In thousands Raw materials and manufacturing supplies.................... $125,014 $121,490 Work in process............................................. 150,992 150,775 Finished goods.............................................. 1,388 1,220 Progress billings........................................... (39,901) (42,217) LIFO reserve................................................ (43,181) (48,337) -------- -------- Total................................................... $194,312 $182,931 ======== ========
The company recognized a LIFO benefit of $5.2 million in 1999 due to declining prices and lower inventories subject to LIFO, which reduced 1999 cost of sales. The company's cost of sales was increased by LIFO provisions of $4.5 million and $0.6 million in 1998 and 1997, respectively. The company uses the external-index method of valuing LIFO inventories. Property, Plant and Equipment The following table summarizes the components of property, plant and equipment (at cost):
December 31 --------------------- 1999 1998 ---------- ---------- In thousands Land...................................................... $ 31,779 $ 32,336 Buildings................................................. 582,868 617,029 Machinery and equipment................................... 3,918,759 3,719,389 ---------- ---------- Total................................................. $4,533,406 $4,368,754 ========== ==========
F-9 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Commitments and Contingencies As of December 31, 1999, authorized expenditures on incomplete projects for the purchase of property, plant and equipment totaled $411 million. Of this total, $97 million has been contractually committed. The company has a variety of commitments with suppliers for the purchase of paper, ink and other materials for delivery in future years at prevailing market prices. The company has operating lease commitments totaling $251 million extending through various periods to 2009. The lease commitments total $49 million for 2000, range from $28 million to $38 million in each of the years 2001-2004 and total $69 million for years 2005 and thereafter. The company also has future annual commitments totaling $11 million to invest in various affordable housing limited partnerships that provide cumulative annual tax benefits and credits in amounts greater than the investments. The company is not exposed to significant accounts receivable credit risk, due to its customer diversity with respect to industry classification, distribution channels and geographic locations. On November 25, 1996, a purported class action was brought against the company in federal district court in Chicago, Illinois, on behalf of all current and former African-American employees, alleging that the company racially discriminated against them in violation of the Civil Rights Act of 1871, as amended, and the U.S. Constitution (Jones, et al. v. R.R. Donnelley & Sons Co.). The complaint seeks declaratory and injunctive relief, and asks for actual, compensatory, consequential and punitive damages in an amount not less than $500 million. Although plaintiffs seek nationwide class certification, most of the specific factual assertions of the complaint relate to the closing by the company of its Chicago catalog operations in 1993. Other general claims relate to other company locations. On August 10, 1999, the district court judge denied the company's motion for partial summary judgment on the basis of timeliness. On December 18, 1995, a class action was filed against the company in federal district court in Chicago alleging that older workers were discriminated against in selection for termination upon the closing of the Chicago catalog operations (Gerlib, et al. v. R.R. Donnelley & Sons Co.). The suit also alleges that the company violated the Employee Retirement Income Security Act (ERISA) in determining benefits payable to retiring or terminated employees. On August 14, 1997, the court certified classes in both the age discrimination and ERISA claims limited to former employees of the Chicago catalog operations. On June 30, 1998, a purported class action was filed against the company in federal district court in Chicago on behalf of current and former African- American employees, alleging that the company racially discriminated against them in violation of Title VII of the Civil Rights Act of 1964 (Adams, et al. v. R.R. Donnelley & Sons Co.). While making many of the same general discrimination claims contained in the Jones complaint, the Adams plaintiffs are also claiming retaliation by the company for the filing of discrimination charges or otherwise complaining of race discrimination. The complaint seeks the same relief and damages as sought in the Jones case. Both the Jones and Gerlib cases relate primarily to the circumstances surrounding the closing of the Chicago catalog operations. The company believes that it acted properly in the closing of the operations. Further, with regard to all three cases, the company believes it has a number of valid defenses to all of the claims made and will vigorously defend its actions. However, management is unable to make a meaningful estimate of any loss that could result from an unfavorable outcome of any of the pending cases. F-10 R.R. DONNELLEY & SONS COMPANY 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. Retirement Plans The company has seven principal retirement plans: the Retirement Benefit Plan of R.R. Donnelley & Sons Company; an unfunded Supplemental Benefit Plan; the Merged Retirement Income Plan for Employees at R.R. Donnelley Printing Company, L.P. and R.R. Donnelley Printing Company; the Supplemental Unfunded Retirement Income Plan for Employees of Meredith-Burda Corporation Limited Partnership; the Supplemental Unfunded Retirement Income Plan for Employees of Meredith-Burda Corporation; the Haddon Craftsman, Inc. Retirement Plan; and the R.R. Donnelley UK Pension Plan. The company's restated Retirement Benefit Plan (the Plan) is a noncontributory defined benefit plan. Substantially all U.S. employees age 21 or older are covered by the Plan. Normal retirement age is 65, but reduced early retirement benefits are paid to fully vested participants at or after age 55. As required, the company uses the projected unit credit actuarial cost method to determine pension cost for financial reporting purposes. In conjunction with this method, the company amortizes deferred gains and losses (using the corridor method) and prior service costs over the average remaining service life of its active employee population. In addition, a transition credit (the excess of Plan assets plus balance sheet accruals over the projected obligation as of January 1, 1987) is amortized over 19 years. For tax and funding purposes, the entry age normal actuarial cost method is used. Plan assets include primarily government and corporate debt securities, marketable equity securities, commingled funds and group annuity contracts purchased from a life insurance company. In the event of Plan termination, the Plan provides that no funds can revert to the company and any excess assets over Plan liabilities must be used to fund retirement benefits. In addition to pension benefits, the company provides certain health care and life insurance benefits for retired employees. Most of the company's regular full-time U.S. employees become eligible for these benefits upon reaching age 55 while working for the company and having 10 years of continuous service at retirement. The company funds a portion of the liabilities associated with these plans through a tax-exempt trust. The assets of the trust are invested primarily in life insurance covering some of the company's employees. F-11 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following represents the obligations and plan assets at fair value for the company's pension and postretirement benefit plans at the respective year- ends:
Postretirement Pension Benefits Benefits ---------------------- ------------------ 1999 1998 1999 1998 ---------- ---------- -------- -------- In Thousands Benefit obligation at beginning of year................................ $1,239,266 $1,109,098 $240,654 $233,437 Service cost......................... 54,220 42,979 7,742 9,508 Interest cost........................ 80,570 76,037 12,067 15,626 Plan participants' contribution...... 659 872 1,592 1,848 Amendments........................... 10,638 13,103 (4,223) -- Actuarial (gain) loss................ (100,892) 52,473 8,565 (1,894) Acquisitions/plan initiations/curtailments............ -- 3,008 -- 244 Expected benefits paid............... (51,658) (58,304) (14,683) (18,115) ---------- ---------- -------- -------- Benefit obligation at end of year............................ $1,232,803 $1,239,266 $251,714 $240,654 ========== ========== ======== ========
Postretirement Pension Benefits Benefits ---------------------- ----------------- 1999 1998 1999 1998 ---------- ---------- -------- -------- In Thousands Fair value of plan assets at beginning of year................... $1,671,693 $1,582,806 $317,586 $262,813 Actual return on plan assets......... 83,776 139,693 13,761 54,773 Acquisition.......................... -- 4,099 -- -- Employer contribution................ 1,621 2,527 -- -- Plan participants' contributions..... 659 872 -- -- Expected benefits paid............... (51,658) (58,304) -- -- ---------- ---------- -------- -------- Fair value of plan assets at end of year......................... $1,706,091 $1,671,693 $331,347 $317,586 ========== ========== ======== ========
The funded status of the plans reconcile with amounts on the consolidated balance sheet as follows:
Postretirement Pension Benefits Benefits -------------------- ------------------ 1999 1998 1999 1998 --------- --------- -------- -------- In Thousands Funded status........................ $ 473,288 $ 432,427 $ 79,633 $ 76,933 Unrecognized transition obligation... (64,484) (75,407) -- -- Unrecognized net actuarial (gain) loss................................ (185,183) (140,141) (65,817) (77,739) Unrecognized prior service cost...... 44,610 37,774 (16,093) (18,215) Fourth quarter contribution (payment)........................... 956 N/A (13,092) N/A --------- --------- -------- -------- Net amount recognized............ $ 269,187 $ 254,653 $(15,369) $(19,021) ========= ========= ======== ========
Amounts recognized in the consolidated statements of financial position consist of:
Postretirement Pension Benefits Benefits ------------------ ------------------ 1999 1998 1999 1998 -------- -------- -------- -------- In Thousands Prepaid benefit cost..................... $291,853 $254,653 $ -- $ -- Accrued benefit cost..................... (29,100) -- (15,369) (19,021) Intangible asset......................... 5,943 -- -- -- Minimum pension liability adjustment..... 491 -- -- -- -------- -------- -------- -------- Net amount recognized................ $269,187 $254,653 $(15,369) $(19,021) ======== ======== ======== ========
F-12 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The weighted average assumptions used in the actuarial computation that derived the above amounts were as follows:
Pension Postretirement Benefits Benefits ---------------- ---------------- 1999 1998 1997 1999 1998 1997 ---- ---- ---- ---- ---- ---- Discount rate............................... 7.25% 6.75% 7.00% 7.25% 6.75% 7.00% Expected return on plan assets.............. 9.50% 9.50% 9.50% 9.00% 9.00% 9.00% Average rate of compensation increase....... 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
For measuring other retirement benefits, a 6.6% annual rate of increase in the per-capita cost of covered health care benefits was assumed for 2001 (the trend rate occurring during 2000 to arrive at 2001 levels). The rate was assumed to decrease gradually to 5.0% for 2008 and remain at that level thereafter. The components of the net periodic benefit cost and total income and expense were as follows:
Pension Benefits Postretirement Benefits -------------------------------- ---------------------------- 1999 1998 1997 1999 1998 1997 ---------- --------- --------- -------- -------- -------- In Thousands Service cost............ $ 54,220 $ 42,979 $ 36,950 $ 10,322 $ 9,508 $ 8,584 Interest cost........... 80,570 76,037 71,548 16,089 15,626 16,010 Expected return on plan assets................. (141,237) (130,140) (117,100) (23,734) (20,671) (18,304) Amortization of transition obligation.. (10,840) (10,863) (10,856) -- -- -- Amortization of prior service cost........... 3,541 2,888 2,258 (6,345) (6,345) (6,463) Amortization of actuarial loss (gain).. 1,011 227 143 15 -- -- ---------- --------- --------- -------- -------- -------- Net periodic benefit cost............... $ (12,735) $ (18,872) $ (17,057) $ (3,653) $ (1,882) $ (173) Curtailment loss (gain). 6 -- (1,281) -- 244 -- Settlement (income) expense................ 688 -- 683 -- -- -- ---------- --------- --------- -------- -------- -------- Total (income) expense............ $ (12,041) $ (18,872) $ (17,655) $ (3,653) $ (1,638) $ (173) ========== ========= ========= ======== ======== ========
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for all pension plans with accumulated benefit obligations in excess of plan assets were $50 million, $37 million and $8 million, respectively, in 1999, and $150 million, $137 million and $107 million, respectively, in 1998. Assumed health care cost trend rates have a significant effect on the amounts reported for postretirement benefits. A one-percentage-point change in assumed health care cost trend rates would have the following effects in 1999:
1% Increase 1% Decrease ----------- ----------- In Thousands Effect on total of service and interest cost components..................................... $ 170 $ (234) Effect on postretirement benefit obligation..... $1,282 $(1,843)
Employee 401(k) Savings Plan--The company has maintained a savings plan that is qualified under Section 401(k) of the Internal Revenue Code. Substantially all of the company's domestic employees are eligible for this plan. Under provisions for this plan, employees may contribute up to 15% of eligible compensation on a before-tax basis and up to 10% of eligible compensation on an after-tax basis. During 1999, the company introduced a company match. The company matches 50% of a participating employee's first 3% of before-tax contributions. The total expense attributable to the match was $4.9 million in 1999. F-13 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Income Taxes Cash payments for income taxes were $122 million, $152 million and $60 million in 1999, 1998 and 1997, respectively. The components of income tax expense for the years ending December 31, 1999, 1998 and 1997, were as follows:
1999 1998 1997 -------- -------- ------- In Thousands Federal Current............................................. $102,086 $139,180 $66,609 Deferred............................................ 56,610 35,222 14,725 State................................................. 36,318 40,323 15,906 -------- -------- ------- Total............................................. $195,014 $214,725 $97,240 ======== ======== =======
The significant deferred tax assets and liabilities were as follows:
December 31 ----------------- 1999 1998 -------- -------- In Thousands Deferred tax liabilities: Accelerated depreciation................................... $171,086 $181,589 Investments................................................ 45,081 71,653 Pensions................................................... 108,464 102,600 Other...................................................... 52,766 60,195 -------- -------- Total deferred tax liabilities........................... 377,397 416,037 -------- -------- Deferred tax assets: Postretirement benefits.................................... 6,563 8,122 Accrued liabilities........................................ 69,765 82,391 Net operating loss and other tax carryforwards............. 23,949 18,683 Investments................................................ 9,981 78,249 Other...................................................... 52,427 31,158 -------- -------- Total deferred tax assets................................ 162,685 218,603 Valuation allowance.......................................... 23,966 44,949 -------- -------- Net deferred tax liabilities................................. $238,678 $242,383 ======== ========
The company has used corporate-owned life insurance (COLI) to fund employee benefits for several years. In 1996, the United States Health Care Reform Act was passed, eliminating the deduction for interest from loans borrowed against COLI programs. 1998 was the final year of the phase-out for deductions. The Internal Revenue Service (IRS), in its routine audit of the company, has disallowed the $34 million of tax benefit that resulted from the COLI interest deductions claimed by the company in its 1990 to 1992 tax returns. The company has challenged this position in a formal protest filed with the IRS Appeals division. On October 19, 1999, in a case involving a different corporate taxpayer, the U.S. Tax Court disallowed deductions for loans against that taxpayer's COLI program. Litigation involving other taxpayers also is pending in other courts. Should the position of the U.S. Tax Court be upheld and applied to others, the company could lose an additional maximum of $152 million in tax benefits for periods from 1993 through 1998. In addition, should all or a portion of the company's COLI deductions ultimately be disallowed, the company would be liable for interest on those amounts. The company's maximum exposure for interest should all prior COLI deductions be disallowed is approximately $51 million after-tax through December 31, 1999. F-14 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The company believes that its circumstances differ from those involved in the recent Tax Court decision. During the fourth quarter of 1999, however, the company recorded an additional tax provision of $51 million ($0.40 per diluted share) related to COLI. The company will continue to examine its position with respect to the Tax Court opinion and resolution of other pending cases. The ultimate resolution of these issues may have a material impact on the company's results of operations and financial condition. Also during the fourth quarter of 1999, the company recognized a tax benefit of $35 million related to the sale of Stream International (refer to "Divestitures" on page F-7 for additional information). The following table outlines the reconciliation of differences between the U.S. statutory tax rates and the rates used by the company in determining net income:
1999 1998 1997 ---- ---- ---- Federal statutory rate....................................... 35.0% 35.0% 35.0% Sale of Stream International................................. (7.1) -- -- Foreign tax rates over (under) U.S. statutory rate........... 0.6 -- (1.6) State and local income taxes, net of U.S. federal income tax benefit..................................................... 4.7 4.4 3.4 Goodwill amortization........................................ 0.2 0.2 0.2 Expense (benefit) resulting from corporate-owned life insurance programs.......................................... 10.9 (1.3) (4.4) Affordable housing investment credits........................ (4.0) (3.4) (6.5) Change in valuation allowance................................ (2.1) (0.1) 1.8 Other........................................................ 0.3 1.6 4.1 ---- ---- ---- Total.................................................... 38.5% 36.4% 32.0% ==== ==== ====
Debt Financing and Interest Expense The company's debt consisted of the following:
December 31 --------------------- 1999 1998 ---------- ---------- In Thousands Commercial paper and extendable commercial notes......... $ 141,521 $ 121,500 Medium-term notes due 2000-2005 at a weighted average interest rate of 6.58%.................................. 266,000 370,000 9.125% debentures due December 1, 2000................... 199,934 199,862 8.875% debentures due April 15, 2021..................... 80,814 80,807 6.625% debentures due April 15, 2029..................... 198,886 -- 8.820% debentures due April 15, 2031..................... 68,902 68,898 7.000% notes due January 1, 2003......................... 109,882 109,843 Other.................................................... 102,114 108,068 ---------- ---------- Total................................................ $1,168,053 $1,058,978 ========== ==========
Based upon the interest rates currently available to the company for borrowings with similar terms and maturities, the book value of the company's debt exceeded its fair value at December 31, 1999, by approximately $18 million. The company's notes and debentures are not actively traded and all but $200 million cannot be called, with the remainder callable by the company at a premium. At December 31, 1999, the company had available credit facilities of $400 million with a group of domestic and foreign banks, of which $200 million expires October 14, 2000. The remaining $200 million is a five-year facility that expires December 10, 2003. The credit arrangements provide support for the issuance of commercial F-15 R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) paper and other credit needs. As of December 31, 1999, there has been no borrowing under these credit facilities. The company pays an annual commitment fee on the total unused credit facilities of 0.06% for the 364-day facility and 0.08% for the five-year facility. In 1999, the company changed its classification of short-term debt to represent maturities within one year and restated the prior year to conform to the current year presentation. Previously, commercial paper and certain short- term debt were classified as long-term to the extent the company had the ability and intent to maintain such debt on a long-term basis. The weighted average interest rate on all commercial paper and extendable commercial notes outstanding during 1999 was 5.12% (5.25% at December 31, 1999). Annual maturities of long-term debt (excluding commercial paper and short-term debt) are as follows: 2001--$12 million, 2002--$81 million, 2003-- $134 million, 2004--$4 million, and $517 million thereafter. The following table summarizes interest expense included in the Consolidated Statements of Income:
1999 1998 1997 ------- ------- -------- In Thousands Interest incurred.................................. $95,176 $83,162 $100,724 Amount capitalized as property, plant and equipment......................................... (7,012) (4,996) (9,959) ------- ------- -------- Total.......................................... $88,164 $78,166 $ 90,765 ======= ======= ========
Interest paid, net of capitalized interest, was $86 million, $79 million and $90 million in 1999, 1998 and 1997, respectively. Earnings per Share In accordance with SFAS No. 128, Earnings per Share, the company has computed basic and diluted earnings per share (EPS), using the treasury stock method.
1999 1998 1997 -------- -------- -------- In Thousands, Except Per- Share Data Average shares outstanding....................... 128,872 139,624 145,929 Effect of dilutive securities--options........... 694 2,241 1,579 -------- -------- -------- Average shares outstanding, adjusted for dilutive effects......................................... 129,566 141,865 147,508 ======== ======== ======== Income from continuing operations................ $311,515 $374,647 $206,525 Basic EPS...................................... $ 2.41 $ 2.68 $ 1.42 Diluted EPS.................................... 2.40 2.64 1.40 ======== ======== ======== Loss from discontinued operations................ $ (3,201) $(80,067) $(15,894) Loss on disposal of discontinued operations...... $ -- $ -- $(60,000) Basic EPS...................................... $ (0.02) $ (0.57) $ (0.52) Diluted EPS.................................... (0.02) (0.56) (0.51) ======== ======== ======== Net income....................................... $308,314 $294,580 $130,631 Basic EPS...................................... $ 2.39 $ 2.11 $ 0.90 Diluted EPS.................................... 2.38 2.08 0.89 ======== ======== ========
F-16 Stock and Incentive Programs for Employees Restricted Stock Awards--At December 31, 1999 and 1998, respectively, the company had outstanding 424,000 and 400,000 restricted shares of its common stock granted to certain officers. These shares are registered in the names of the recipients, but are subject to conditions of forfeiture and restrictions on sale or transfer for one to five years from the grant date. Dividends on the restricted shares are paid currently to the recipients and, accordingly, the restricted shares are treated as outstanding shares. The expense of the grant is recognized evenly over the vesting period. The value of the restricted stock awards was $11 million and $18 million based upon the closing price of the company's stock at each year-end ($24.81 and $43.81 at December 31, 1999 and 1998, respectively). During 1999, a total of 89,000 shares of restricted stock were issued with a grant date fair value of $3 million. Charges to expense for this stock plan were $3 million, $4 million and $5 million in 1999, 1998 and 1997, respectively. Stock Purchase Plan--Prior to 1999, the company had a stock purchase plan for selected managers and key staff employees. Under the plan, the company was required to contribute an amount equal to 70% of participants' contributions, of which 50% was applied to the purchase of stock and 20% was paid in cash. The amount charged to expense for this plan was $9 million in 1998. In 1997, the company failed to meet performance targets required under the plan, and no expenses were incurred. Incentive Compensation Plans--In 1998, the company implemented a new management incentive plan designed to provide incentive compensation to executive officers that is closely tied to the creation of value for company shareholders. Awards under the new plan have been based largely on the achievement of Economic Value Added (EVA) improvement targets, along with earnings-per-share objectives and other individual and strategic targets. The new plan combines aspects of both an annual and long-term plan by adding a "banking" feature, in which a portion of the amount earned in the year is paid out to participants and a portion is deferred for payout in subsequent years. The company has accrued for both the portion currently payable and the deferred component. Prior to 1998, the company had both an annual incentive plan and a long-term incentive plan for its executive officers. The company's incentive compensation plans for other officers, managers and supervisors are based primarily on annual improvements in EVA. Stock Options--The company had two authorized stock incentive plans that expired in 1999. Under these plans, there were 3.2 million shares and 2.1 million shares, respectively, that were authorized but not granted as of the respective plan expiration dates of January 24, 1999, and December 31, 1999. None of these authorized but ungranted shares may be awarded after the respective plan expiration dates. Options granted prior to plan expiration remain outstanding subject to the terms of the awards. Options under these plans vest from one to nine and one-half years after date of grant and may be exercised, once vested, up to 10 years from the date of grant. The company accounts for employee stock options under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, under which no compensation cost has been recognized. Had compensation cost been determined consistent with SFAS No. 123, Accounting for Stock-Based Compensation, the company's net income from continuing operations and respective earnings per share would have been reduced to the following pro forma amounts:
1999 1998 1997 -------- -------- -------- In Thousands, Except Per- Share Data Income from continuing operations: As reported....................................... $311,515 $374,647 $206,525 Pro forma......................................... 297,131 358,991 191,331 Basic earnings per share: As reported....................................... $ 2.41 $ 2.68 $ 1.42 Pro forma......................................... 2.31 2.57 1.31 Diluted earnings per share: As reported....................................... $ 2.40 $ 2.64 $ 1.40 Pro forma......................................... 2.29 2.53 1.30
F-17 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The fair value of each option granted during the year is estimated on the date of grant using the Black Scholes option-pricing model with the following range of assumptions:
1999 1998 1997 -------- -------- -------- Dividend yield.................................... 2.66% 1.98% 2.24% Expected volatility............................... 34.13% 26.51% 25.10% Risk-free interest rate........................... 5.85% 5.28% 6.32% Expected life..................................... 10 Years 10 Years 10 Years
A summary of the status of the company's option activity is presented below:
1999 1998 1997 -------------------- -------------------- -------------------- Weighted Weighted Weighted Average Average Average Shares Exercise Shares Exercise Shares Exercise (Thousands) Price (Thousands) Price (Thousands) Price ----------- -------- ----------- -------- ----------- -------- Options outstanding at beginning of year...... 12,398 $34.80 13,958 $33.04 14,916 $31.68 Options granted......... 1,863 34.23 1,627 41.81 1,485 40.28 Options exercised....... (257) 26.18 (2,387) 29.77 (1,535) 25.25 Options forfeited....... (572) 38.29 (800) 33.47 (908) 35.60 ------ ------ ------ ------ ------ ------ Options outstanding at end of year............ 13,432 $34.73 12,398 $34.80 13,958 $33.05 ====== ====== ====== ====== ====== ====== Options exercisable at end of year............ 8,980 $33.10 7,344 $31.93 6,397 $28.57 ====== ====== ====== ====== ====== ====== Weighted average fair value of options granted with: Exercise price equal to stock price on grant date........... $13.21 $15.01 $11.20 Exercise price exceeding stock price on grant date........ N/A N/A $ 8.10
The following summarizes information about stock options outstanding at December 31, 1999:
Options Outstanding Options Exercisable -------------------------------- -------------------- Average Weighted Weighted Remaining Average Average Shares Contractual Exercise Shares Exercise (Thousands) Life Price (Thousands) Price ----------- ----------- -------- ----------- -------- $19.63-$38.06............. 10,530 5.83 $31.88 7,854 $31.53 $38.07-$76.96............. 2,902 7.51 $45.07 1,126 $44.09 ------ ---- ------ ----- ------ $19.63-$76.96............. 13,432 6.19 $34.73 8,980 $33.10 ====== ==== ====== ===== ======
Other Information--Under the stock programs, authorized unissued shares or treasury shares may be used. The company intends to reacquire shares of its common stock to meet the stock requirements of these programs in the future. F-18 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Preferred Stock The company has two million shares of $1.00 par value preferred stock authorized for issuance. The Board of Directors may divide the preferred stock into one or more series and fix the redemption, dividend, voting, conversion, sinking fund, liquidation and other rights. The company has no present plans to issue any preferred stock. One million of the shares are reserved for issuance under the "Shareholder Rights Plan" discussed below. Shareholder Rights Plan The company maintains a Shareholder Rights Plan (the Plan) designed to deter coercive or unfair takeover tactics, to prevent a person or group from gaining control of the company without offering fair value to all shareholders and to deter other abusive takeover tactics that are not in the best interest of shareholders. Under the terms of the Plan, each share of common stock is accompanied by one right; each right entitles the shareholder to purchase from the company one one-thousandth of a newly issued share of Series A Junior Preferred Stock at an exercise price of $140. The rights become exercisable 10 days after a public announcement that an acquiring person (as defined in the Plan) has acquired 15% or more of the outstanding common stock of the company (the Stock Acquisition Date), 10 business days after the commencement of a tender offer that would result in a person owning 15% or more of such shares or 10 business days after an adverse person (as defined in the Plan) has acquired 10% or more of such shares and such ownership interest is likely to have a material adverse impact on the company. The company can redeem the rights for $0.01 per right at any time until 10 days following the Stock Acquisition Date (under certain circumstances, the 10-day period can be shortened or lengthened by the company). The rights will expire on August 8, 2006, unless redeemed earlier by the company. If, subsequent to the rights becoming exercisable, the company is acquired in a merger or other business combination at any time when there is a 15% or more holder, the rights will then entitle a holder (other than a 15% or more shareholder or an adverse person) to buy shares of the acquiring company with a market value equal to twice the exercise price of each right. Alternatively, if a 15% holder acquires the company by means of a merger in which the company and its stock survives, if any person acquires 15% or more of the company's common stock or if an adverse person acquires 10% or more of the company's common stock and such ownership is likely to have a material adverse impact on the company, each right not owned by a 15% or more shareholder or an adverse person would become exercisable for common stock of the company (or, in certain circumstances, other consideration) having a market value equal to twice the exercise price of the right. Industry Segment Information The company operates exclusively in the commercial printing industry. Substantially all revenues result from the sale of printed products to customers in the following end-markets: Book Publishing Services, Financial Services, Magazine Publishing Services, Merchandise Media and Telecommunications. The company's management has aggregated its commercial print businesses as one reportable segment because of strong similarities in the economic characteristics, nature of products and services, production processes, class of customer and distribution methods used. The company's investment in discontinued operations has been disclosed as a separate reportable segment, as the revenues generated from these businesses are unrelated to the commercial printing industry (refer to the "Discontinued Operations" footnote on page F-7 for additional information). F-19 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The company has disclosed earnings (loss) from operations as the primary measure of segment earnings (loss). This is the measure of profitability used by the company's chief operating decision-maker that is most consistent with the presentation of profitability reported within the consolidated financial statements. The accounting policies of the business segments reported are the same as those described in the "Summary of Significant Accounting Policies" (page F-6).
Commercial Discontinued Consolidated Print Operations(1) Corporate(2) Other(3) Total ---------- ------------- ------------ -------- ------------ In Thousands 1999 Sales................... $4,971,021 $ -- $ -- $212,387 $5,183,408 Restructuring and impairment charges..... -- -- -- -- -- Earnings from operations............. 518,848 -- 4,593 6,986 530,427 Earnings (loss) from continuing operations before income taxes.... 537,595 -- (37,189) 6,123 506,529 Assets.................. 3,179,418 -- 674,046 -- 3,853,464 Depreciation and amortization........... 339,975 -- 19,288 15,119 374,382 Capital expenditures.... 209,120 -- 56,346 10,360 275,826 1998 Sales................... $4,804,824 $ -- $ -- $213,612 $5,018,436 Restructuring and impairment charges..... -- -- -- -- -- Earnings (loss) from operations............. 488,126 -- 1,965 (1,673) 488,418 Earnings (loss) from continuing operations before income taxes.... 508,390 -- 82,343 (1,361) 589,372 Assets.................. 3,055,084 45,476 606,471 91,086 3,798,117 Depreciation and amortization........... 342,318 -- 16,507 17,246 376,071 Capital expenditures.... 169,748 -- 38,916 16,558 225,222 1997 Sales................... $4,706,098 -- $ -- $186,846 $4,892,944 Restructuring and impairment charges..... 56,979 -- 13,723 -- 70,702 Earnings from operations............. 339,723 -- 21,729 7,336 368,788 Earnings (loss) from continuing operations before income taxes.... 366,631 -- (69,162) 6,296 303,765 Assets.................. 3,120,615 154,707 771,695 87,149 4,134,166 Depreciation and amortization........... 336,176 -- 20,526 14,409 371,111 Capital expenditures.... 309,390 -- 31,359 19,446 360,195
- -------- 1 Refer to "Discontinued Operations" footnote (page F-7). 2 Corporate earnings consist primarily of the following unallocated items: net earnings of benefit plans (excluding service costs) of $83 million, $84 million and $70 million in 1999, 1998 and 1997, respectively, which were offset by general corporate, management and information technology costs. In addition to earnings from operations, corporate earnings before income taxes include: 1999 net interest expense of $80 million and gains on the sale of businesses and investments of $43 million; 1998 net interest expense of $79 million and gains on the sale of the company's remaining interests in two former subsidiaries of $169 million; and 1997 net interest expense of $90 million and gains on the sale of assets of $14 million. Corporate assets consist primarily of the following unallocated items at December 31: 1999--benefit plan assets of $298 million, investments in affordable housing of $139 million, fixed assets of $95 million and refundable income taxes of $77 million; 1998--benefit plan assets of $285 million, investments in affordable housing of $120 million and fixed assets of $118 million; and 1997--benefit plan assets of $288 million, the investment in Metromail of $145 million, investments in affordable housing of $102 million and fixed assets of $90 million. 3 Represents other operating segments of the company. F-20 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Geographic Area Information
Domestic International Combined ---------- ------------- ---------- In Thousands 1999 Sales....................................... $4,600,986 $582,422 $5,183,408 Long-lived assets(1)........................ 2,310,581 313,033 2,623,614 1998 Sales....................................... 4,517,882 500,554 5,018,436 Long-lived assets(1)........................ 2,362,042 280,784 2,642,826 1997 Sales....................................... 4,436,620 456,324 4,892,944 Long-lived assets(1)........................ 2,735,464 252,131 2,987,595
- -------- (1) Includes net property, plant and equipment, goodwill and other intangibles, net assets of discontinued operations and other noncurrent assets. F-21 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS We have audited the accompanying consolidated balance sheets of R.R. Donnelley & Sons Company (a Delaware corporation) and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits 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 audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of R.R. Donnelley & Sons Company and Subsidiaries as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. Arthur Andersen LLP Chicago, Illinois January 27, 2000 (except with respect to the matter discussed in the subsequent event footnote, as to which the date is February 7, 2000) F-22 UNAUDITED INTERIM FINANCIAL INFORMATION, DIVIDEND SUMMARY AND FINANCIAL SUMMARY In Thousands, Except Per-Share Data
Year Ended December 31 -------------------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Full Year ---------- ---------- ---------- ---------- ---------- 1999 Net sales............... $1,179,816 $1,195,170 $1,340,143 $1,468,279 $5,183,408 Gross profit............ 242,936 259,250 321,655 335,166 1,159,007 Income from continuing operations............. 45,800 53,674 85,587 126,454 311,515 Loss from discontinued operations, net of income taxes........... (1,820) (1,187) -- (194) (3,201) Net income.............. 43,980 52,487 85,587 126,260 308,314 Net income per diluted share.................. 0.33 0.40 0.67 1.01 2.38 Stock market high....... 43 13/16 37 15/16 36 15/16 30 1/4 43 13/16 Stock market low........ 32 1/8 31 3/8 27 3/4 22 13/16 22 13/16 Stock market closing price.................. 32 3/16 37 1/16 28 7/8 24 13/16 24 13/16 1998 Net sales............... $1,173,598 $1,155,963 $1,274,479 $1,414,396 $5,018,436 Gross profit............ 218,059 240,748 294,020 305,370 1,058,197 Income from continuing operations............. 44,206 138,804 99,244 92,393 374,647 Loss from discontinued operations, net of income taxes........... -- (80,067) -- -- (80,067) Net income.............. 44,206 58,737 99,244 92,393 294,580 Net income per diluted share.................. 0.30 0.41 0.71 0.67 2.08 Stock market high....... 42 1/8 46 1/4 47 3/4 44 11/16 47 3/4 Stock market low........ 35 1/8 42 1/16 34 13/16 34 34 Stock market closing price.................. 41 1/16 45 3/4 35 3/16 43 13/16 43 13/16
Stock prices reflect New York Stock Exchange composite quotes. Dividend Summary
1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ Quarterly rate per common share*............ $0.215 $0.205 $0.195 $0.185 $0.170 Yearly rate per common share................ 0.86 0.82 0.78 0.74 0.68
- -------- * Averages (1999--$0.21 first two quarters and $0.22 last two quarters; 1998--$0.20 first two quarters and $0.21 last two quarters; 1997--$0.19 first two quarters and $0.20 last two quarters; 1996--$0.18 first two quarters and $0.19 last two quarters; 1995--$0.16 first two quarters and $0.18 last two quarters). F-23 Financial Summary
1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- In Thousands, Except Per-Share Data Net sales............... $5,183,408 $5,018,436 $4,892,944 $5,063,821 $5,080,775 Income (loss) from continuing operations.. 311,515 374,647 206,525 (71,483) 275,952 Loss on disposal of discontinued operations............. -- -- (60,000) -- -- (Loss) income from discontinued operations............. (3,201) (80,067) (15,894) (86,142) 22,841 Net income (loss)**..... 308,314 294,580 130,631 (157,625) 298,793 Per diluted common share**................ 2.38 2.08 0.89 (1.04) 1.92 Total assets............ 3,853,464 3,798,117 4,134,166 4,443,828 5,030,680 Noncurrent liabilities.. 1,511,743 1,447,852 1,730,047 2,044,818 2,012,635
- -------- ** Net income (loss) includes the following one-time items: 1999 gains on the sale of businesses and investments ($27 million after-tax, or $0.20 per diluted share); 1998 gains on the sale of the company's remaining interests in two former subsidiaries of $169 million ($101 million after-tax, or $0.71 per diluted share); 1997 restructuring and impairment charges of $71 million ($42 million after-tax, or $0.29 per diluted share); 1996 restructuring and impairment charges of $442 million ($374 million after taxes and minority interest, or $2.45 per diluted share), and gains on partial divestiture of subsidiaries of $80 million ($48 million after-tax, or $0.31 per diluted share). F-24 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Shareholders of R.R. Donnelley & Sons Company: We have audited, in accordance with generally accepted auditing standards, the financial statements included in the Company's Annual Report to Shareholders included in this Form 10-K, and have issued our report thereon dated January 27, 2000 (except with respect to the matter discussed in the subsequent event footnote, as to which the date is February 7, 2000). Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index to the financial statements and financial statement schedules 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 audit 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. Arthur Andersen LLP Chicago, Illinois January 27, 2000 (except with respect to the matter discussed in the subsequent event footnote, as to which the date is February 7, 2000) F-25 SCHEDULE II Valuation and Qualifying Accounts Transactions affecting the allowances for doubtful accounts during the years ended December 31, 1999, 1998 and 1997, were as follows:
1999 1998 1997 -------- -------- ------- Thousands of dollars Allowance for trade receivable losses: Balance, beginning of year................. $ 14,279 $ 16,259 $14,205 Balance, companies (sold) acquired during year...................................... 1,768 -- -- Provisions charged to income............... 11,259 12,551 10,676 -------- -------- ------- 27,306 28,810 24,881 Uncollectible accounts written off, net of recoveries................................ (11,845) (14,531) (8,622) -------- -------- ------- Balance, end of year....................... $ 15,461 $ 14,279 $16,259 ======== ======== =======
F-26 INDEX TO EXHIBITS*
Description Exhibit No. ------- -------- Restated Certificate of Incorporation(1)....................... 3(1) By-Laws........................................................ 3(ii)(a) Amendment to By-Laws adopted January 27, 2000 ................. 3(ii)(b) Form of Rights Agreement, dated as of April 25, 1996 between R.R. Donnelley & Sons Company and First Chicago Trust Company of New York(2)................................................ 4(a) Instruments Defining the Rights of Security Holders(3)......... 4(b) Indenture dated as of November 1, 1990 between the Company and Citibank, N.A. as Trustee(4).................................. 4(c) Five-Year Credit Agreement dated December 11, 1998 among R.R. Donnelley & Sons Company, the Banks named therein and The First National Bank of Chicago, as Administrative Agent(5).... 4(d) 364-Day Credit Agreement dated October 14, 1999 among R.R. Donnelley & Sons Company, the Banks named therein and The First National Bank of Chicago, as Administrative Agent....... 4(e) Donnelley Deferred Compensation and Voluntary Savings Plan(6).. 4(f) Amendment to Donnelley Deferred Compensation and Voluntary Savings Plan adopted June 30, 1999............................ 4(g) Retirement Policy for Directors, as amended**.................. 10(a) Directors' Deferred Compensation Agreement, as amended(7)**.... 10(b) Donnelley Shares Stock Option Plan, as amended(8).............. 10(c) 1993 Stock Ownership Plan for Non-Employee Directors, as 10(d) amended(9)**................................................... Senior Management Annual Incentive Plan, as amended(7)**....... 10(e) Form of Severance Agreement for Senior Officers, as amended**.. 10(f) 1986 Stock Incentive Plan, as amended(9)**..................... 10(g) 1991 Stock Incentive Plan, as amended(9)**..................... 10(h) 1995 Stock Incentive Plan, as amended(7)**..................... 10(i) Forms of option agreement with certain executive officers and directors, as amended(10)**................................... 10(j) Form of option agreement with non-employee directors, as amended(7)**.................................................. 10(k) Unfunded Supplemental Benefit Plan(4)**........................ 10(l) Amendment to Unfunded Supplemental Benefit Plan adopted on April 25, 1991(11)**.......................................... 10(m) Employment Agreement between R.R. Donnelley & Sons Company and William L. Davis(12)**........................................ 10(n) Premium-Priced Option Agreement between R.R. Donnelley & Sons Company and William L. Davis(12)**............................ 10(o) Employment Agreement between R.R. Donnelley & Sons Company and Cheryl A. Francis(7)**........................................ 10(p) Computation of Ratio of Earnings to Fixed Charges.............. 12 Subsidiaries of R.R. Donnelley & Sons Company.................. 21 Consent of Independent Public Accountants dated March 30, 23 2000.......................................................... Financial Data Schedule........................................ 27
E-1 - -------- *Filed with the Securities and Exchange Commission. Each such exhibit may be obtained by a shareholder of the Company upon payment of $5.00 per exhibit. **Management contract or compensatory plan or arrangement. (1) Filed as Exhibit to Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996, filed on May 3, 1996, and incorporated herein by reference. (2) Filed as Exhibit to Form 8-A filed on June 5, 1996, and incorporated herein by reference. (3) Instruments, other than that described in 4(c) and 4(d), defining the rights of holders of long-term debt not registered under the Securities Exchange Act of 1934 of the registrant and of all subsidiaries for which consolidated or unconsolidated financial statements are required to be filed are being omitted pursuant to paragraph (4)(iii)(A) of Item 601 of Regulation S-K. Registrant agrees to furnish a copy of any such instrument to the Commission upon request. (4) Filed as Exhibit with Form SE filed on March 26, 1992, and incorporated herein by reference. (5) Filed as Exhibit to Annual Report on Form 10-K for the year ended December 31, 1998 filed on March 31, 1999 and incorporated herein by reference. (6) Filed as Exhibit to Form S-8, filed on June 18, 1999 and incorporated herein by reference. (7) Filed as Exhibit to Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998, filed on November 12, 1998, and incorporated herein by reference. (8) Filed as Exhibit to Annual Report on Form 10-K for the year ended December 31, 1996, filed on March 10, 1997, and incorporated herein by reference. (9) Filed as Exhibit to Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996, filed on November 1, 1996, and incorporated herein by reference. (10) Filed as Exhibit to Form S-3 filed on January 15, 1998, and incorporated herein by reference. (11) Filed as Exhibit with Form SE filed on May 9, 1991 and incorporated herein by reference. (12) Filed as Exhibit to Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997, filed on May 7, 1997, and incorporated herein by reference. E-2 EX-3.(II)(A) 2 BY-LAWS Form 10-K Year Ended 12/31/99 Exhibit 3(ii)(a) As Amended through March 23, 2000 BY-LAWS OF R. R. DONNELLEY & SONS COMPANY ARTICLE I --------- Section 1.1. Principal Office. The principal office in the State of ------------ ----------------- Delaware shall be in the City of Wilmington, County of New Castle, State of Delaware, and the name of the resident agent in charge thereof is The Corporation Trust Company. Section 1.2. Other Offices. The corporation may also have offices at such ------------ -------------- other places both within and 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 on the fourth Thursday in March of each year for the purpose of electing Directors of the class for which the term expires on that date and for the transaction of such other business as may properly be brought before the meeting. Such meeting shall be held at eight o'clock in the morning or such other time during normal business hours as may be fixed by the Board of Directors and stated in the notice of the meeting. If the day fixed for the annual meeting shall be a legal holiday, the Board of Directors may, subject to the provisions of Article X hereof, designate another day on which such meeting shall be held. If the election of Directors shall not be held on the date designated for any annual meeting, or any adjournment thereof, the Board of Directors shall cause the election to be held at a special meeting of the stockholders as soon thereafter as conveniently may be. Except as otherwise provided by statute or the certificate of incorporation, the only business which properly shall be conducted at any annual meeting of the stockholders shall (i) have been specified in the written notice of the meeting (or any supplement thereto) given as provided in Section 2.4, (ii) be brought before the meeting by or at the direction of the Board of Directors or the officer of the corporation presiding at the meeting or (iii) have been specified in a written notice (a "Stockholder Meeting Notice") given to the corporation, in accordance with all of the following requirements, by or on behalf of any stockholder who is entitled to vote at such meeting. Each Stockholder Meeting Notice must be delivered personally to, or be mailed to and received by, the Secretary of the corporation at the principal executive offices of the corporation in the City of Chicago, State of Illinois, not less than 60 days nor more than 90 days prior to the annual meeting; provided, however, that in the event that less than 75 days' notice or prior public disclosure of the date of the annual meeting is given or made to stockholders, notice by the stockholder to be timely must be received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made, whichever first occurs. Each Stockholder Meeting Notice shall set forth: (i) a description of each item of business proposed to be brought before the meeting and the reasons for conducting such business at the annual meeting; (ii) the name and record address of the stockholder proposing to bring such item of business before the meeting and the reasons for conducting such business at the annual meeting; (iii) the class and number of shares of stock held of record, owned beneficially and represented by proxy by such stockholder as of the record date for the meeting (if such date shall then have been made publicly available) and as of the date of such Stockholder Meeting Notice and (iv) all other information which would be required to be included in a proxy statement filed with the Securities and Exchange Commission if, with respect to any such item of business, such stockholder were a participant in a solicitation subject to Section 14 of the Securities Exchange Act of 1934. No business shall be brought before any annual meeting of stockholders of the corporation otherwise than as provided in this Section; provided, however, that nothing contained in this Section shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting. The officer of the corporation presiding at the annual meeting of stockholders shall, if the facts so warrant, determine that business was not properly brought before the meeting in accordance with the provisions of this Section and, if he should so determine, he should so declare to the meeting and any such business so determined to be not properly brought before the meeting shall not be transacted. (Amended 10/27/94) Section 2.2. Special Meetings. Special meetings of the stockholders, for ------------ ----------------- any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, may be called by the Chief Executive Officer, President, or the Chairman of the Board, and shall be called by the Secretary pursuant to a resolution 2 duly adopted by the affirmative vote of a majority of the whole Board of Directors. Such call shall state the purposes of the proposed meeting. Business transacted at any special meeting shall be limited to the general objectives stated in the call. (Amended 12/15/88) Section 2.3. Place of Meeting. All meetings of stockholders for the ------------ ----------------- election of Directors shall be held in the City of Chicago, County of Cook, State of Illinois and the Board of Directors is authorized to fix the place within the City of Chicago for the holding of such meeting. Meetings of stockholders for any other purpose may be held at such place, within or without the State of Delaware, and time as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. (Amended 1/9/57) Section 2.4. Notice of Meetings. Written or printed notice stating the ------------ ------------------- place, day and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten nor more than fifty days before the date of the meeting, either personally or by mail, by or at the direction of the Board of Directors, the Chief Executive Officer, the Chairman of the Board or the President, to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail in a sealed envelope addressed to the stockholder at his address as it appears on the records of the corporation, with postage thereon prepaid. (Amended 12/15/88) Section 2.5. Closing Transfer Books or Fixing Record Date. The Board of ------------ --------------------------------------------- Directors may close the stock transfer books of the corporation for a period not exceeding fifty (50) days preceding the date of any meeting of stockholders, or the date for 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 for a period of not exceeding fifty (50) days in connection with obtaining the consent of stockholders for any purpose. In lieu of closing the stock transfer books as aforesaid, the Board of Directors may fix in advance a date, not exceeding fifty (50) days preceding the date of any meeting of the stockholders, or the date for 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 such consent, as a record date for the determination of the stockholders entitled to notice of, and to vote at, any such meeting and any 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 stock, or to give such 3 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 such notice of and to vote at, such meeting and any adjournment thereof, or to receive payments 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 2.6. Voting List. At least ten days before every election of ------------ ------------ Directors, a complete list of the stockholders entitled to vote at such election, arranged in alphabetical order with the residence of and the number of voting shares held by each, shall be prepared by the Secretary. Such list shall be open at the place where said election is to be held for ten days, to the examination of any stockholders, and shall be produced and kept at the time and place of election during the whole time thereof, and subject to the inspection of any stockholder who may be present. Section 2.7. Quorum. The holders of a majority of the stock issued and ------------ ------- outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at any meeting of stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of 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, without notice other than announcement at the meeting, 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 2.8. Proxies. At all meetings of stockholders a stockholder may ------------ -------- vote by proxy properly submitted by the stockholder or his duly authorized attorney-in-fact. Such proxy shall be filed with the Secretary of the corporation before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. (Amended 1/28/99) Section 2.9. Voting. When a quorum is present at any meeting of ------------ ------- stockholders, the affirmative vote of the holders of a majority of the shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall decide any question brought before such meeting, unless the question is one upon which, by express provision of the statutes, the certificate of incorporation or these by-laws, a 4 different vote is required, in which case such express provision shall govern and control the decision of such question. Every stockholder having the right to vote shall be entitled to vote in person, or by proxy appointed by an instrument in writing subscribed by such stockholder and bearing a date not more than eleven months prior to voting, unless such instrument provides for a longer period. Every such stockholder shall have one vote for each share of stock having voting power registered in his name on the books of the corporation. Except where the transfer books of the corporation shall have been closed or a date shall have been fixed as a record date for the determination of its stockholders entitled to vote, no share of stock shall be voted on at any election for Directors which has been transferred on the books of the corporation within twenty days next preceding such election of Directors. (Amended 1/28/93) Section 2.10. Voting of Stock of Certain Holders. Shares standing in the ------------- ----------------------------------- name of another corporation, domestic or foreign, may be voted by such officer, agent or proxy as the by-laws of such corporation may prescribe or, in the absence of such provision, as the Board of Directors of such corporation may determine. Shares standing in the name of a deceased person may be voted by executor or administrator of such deceased person, either in person or by proxy. Shares standing in the name of a guardian, conservator or trustee may be voted by such fiduciary, either in person or by proxy, but no such fiduciary shall be entitled to vote shares held in such fiduciary capacity without a transfer of such shares into the name of such fiduciary. Shares standing in the name of a receiver may be voted by such receiver. A stockholder whose shares are pledged shall be entitled to vote such shares, unless in the transfer by the pledger or on the books of the corporation, he has expressly empowered the pledgee to vote thereon, in which case only the pledgee, or his proxy, may represent the stock and vote thereon. Section 2.11. Treasury Stock. The corporation shall not vote shares of its ------------- --------------- own stock directly or indirectly; and such shares shall not be counted in determining the total number of outstanding shares. Section 2.12. Election of Directors. When a quorum is present at any ------------ --------------------- meeting of stockholders, directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at such meeting of stockholders and entitled to vote on the election of directors. (New Section 10/22/92) ARTICLE III ----------- Directors --------- 5 Section 3.1. General Powers. The property and business of the corporation ------------ --------------- shall be managed by 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 by-laws directed or required to be exercised or done by the stockholders. (Amended 9/28/90) Without limiting the generality of the foregoing, it shall be the responsibility of the Board of Directors to establish broad objectives and the general course of the business, determine basic policies, appraise the adequacy of overall results, and generally represent and further the interests of the Company's stockholders and insure the most effective use of the Company's assets. Several examples of the responsibilities of the Board are as follows: 1. Establish broad Company objectives and basic policies and maintain overall control of the business. 2. Make necessary revisions of the by-laws (in accordance with Article X). 3. Determine dividend action (in accordance with Article VIII). 4. Authorize necessary action with respect to issuance of new securities and listing securities for trading on exchanges. 5. Fix time and place and take other necessary action with respect to stockholders meetings (in accordance with Article II). 6. Approve issuance of stock certificates to replace those lost or destroyed (in accordance with Section 7.2). 7. Fill Vacancies in the Board of Directors (in accordance with Section 3.8). 8. Elect the officers of the corporation (in accordance with Section 4.2.) and appraise their performance. 9. Determine the basic organization structure of the business. 10. Authorize any necessary action with respect to loans and pledging of assets (in accordance with Section 6.2.). 6 11. Designate officers authorized to buy or sell corporate investment securities. 12. Designate persons authorized to execute contracts and other documents requiring signatures of officers or specific individuals (in accordance with Section 6.1). 13. Select, or designate those authorized to select, depositaries for corporate funds and investment securities and designate check signatories and persons authorized to have access to safe deposit boxes (in accordance with Sections 6.3 and 6.4). 14. Approve proposals to convey corporate-owned land or buildings or designate those authorized to take such action. 15. Designate the person or persons authorized to appoint proxies to vote stock in subsidiary and other concerns in which the corporation has a significant interest and the person or persons authorized to determine who shall serve as Directors in representing the parent corporation in such concerns. 16. Designate stock transfer agents, registrars, and paying agents with respect to corporate securities and other special purpose agents. 17. Procure special professional services required by and for the Board. 18. Provide for issuance of an annual report to stockholders and such other reports and notices as the Board deems advisable. 19. Employ, upon recommendation of the Audit Committee (in accordance with Section 3.13), public accountants to audit the corporation's financial statements. 20. Review and approve new employee benefit plans and major revisions of employee stock incentive plans. 21. Review and approve the actions of the Executive Committee as reported in the minutes of their meetings. 22. Approve the annual operating budget. 23. Review and approve the annual capital budget. 24. Direct the manner of handling matters outside the ordinary course of business of the corporation. 7 Section 3.2. Number, Election and Term. The number of Directors which shall ------------ -------------------------- constitute the whole Board shall be ten (10) of whom four (4) shall be Directors of the First Class, three (3) shall be Directors of the Second Class and three (3) shall be Directors of the Third Class. The term of office of each class shall be three years, with the term of one class expiring in each year, and the successors to the class of Directors whose terms shall expire shall be elected at each annual election or adjournment thereof. Each Director shall hold office until his successor shall be elected and shall qualify or until his earlier resignation or removal. Directors need not be residents of Delaware or stockholders. (Amended 9/29/95, 11/7/96, 3/18/97, 12/1/97, 3/25/99, 3/23/00) Section 3.3. Meetings. The Board of Directors may hold meetings, both ------------ --------- regular and special, either within or without the State of Delaware. Regular meetings of the Board of Directors may be held without notice at such time and such place as may from time to time be determined by the Board. Special meetings of the Board of Directors may be called by or at the request of the Chief Executive Officer, the Chairman of the Board, a Vice Chairman, President, or any two directors. (Amended 12/15/88) Section 3.4. Notice. Notice of any special meeting of the Board of ------------ ------- Directors stating the place, date and hour of the special meeting shall be given in writing to each director, either personally, or by mail, telex, telegram or cable, addressed to the director's residence or usual place of business, not less than two days before the date of such meeting, or by such other means, whether or not in writing, and within such lesser period, as circumstances require in the reasonable judgment of the person calling the meetings. If mailed, such notice shall be deemed to be given at the time when it is deposited in the United States mail with first class postage prepaid. Notice by telegram or cable shall be deemed given when the notice is delivered to the telegraph or cable company; notice by telex shall be deemed given when the notice is transmitted by telex. Any director may waive notice of any meeting. The attendance of a director at any meeting shall constitute a waiver of notice at such meeting, except where the director attends the meeting for the express purpose of objecting 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 special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting, unless otherwise provided by statute, the Certificate of Incorporation or these By-Laws. (Amended 6/24/76) 8 Section 3.5. Quorum. A majority of the Board of Directors shall constitute ------------ ------- a quorum for the transaction of business at any meeting of the Board of Directors, provided, that if less than a majority of the Directors are present at said meeting, a majority of the Directors present may adjourn the meeting from time to time without further notice. (Renumbered 6/24/76) Section 3.6. Manner of Acting. The act of the majority of the Directors ------------ ----------------- present at a meeting at which a quorum is present shall be the act of the Board of Directors. (Renumbered 6/24/76) Section 3.7. Use of Communications Equipment. Members of the Board of ------------ -------------------------------- Directors, or any committee thereof, may participate in a meeting of the Board of 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 pursuant to this section shall constitute presence in person at such meeting. (New Section 6/24/76) Section 3.8. Vacancies and Additional Directors. Any director may resign at ------------ ----------------------------------- any time upon written notice to the corporation. If any vacancy occurs in the Board of Directors caused by death, resignation, retirement, disqualification or removal from office of any Director, or otherwise, or if any new directorship is created by any increase in the authorized number of Directors, a majority of the Directors then in office, though less than a quorum may choose a successor or fill the newly created directorship; and a Director so chosen shall hold office until the next annual election at which Directors of the class to which he was chosen are elected and until his successor shall be duly elected and shall qualify or until his earlier resignation or removal. (Amended 3/26/70) Section 3.9. Compensation. Directors who are not full-time employees of the ------------ ------------- Company shall receive a stated salary and may receive options to purchase shares of the Company's stock as provided under the Company's stock plans, for their services, and, in addition thereto, shall receive a fixed fee and expenses, if any, for attendance at each regular or special meeting of the Board of Directors from time to time. Directors who are full-time employees of the Company shall not receive any compensation for their services as such; provided that nothing herein contained shall be construed to preclude any Director from serving the corporation in any other capacity and receiving compensation thereof. (Amended 3/28/91) Section 3.10. Executive Committee. The Board of Directors, by resolution ------------- -------------------- adopted by a majority of the 9 whole Board, may designate not fewer than three nor more than seven Directors to constitute an Executive Committee. The Chairman of the Executive Committee shall be the Chief Executive Officer. The Executive Committee shall have and exercise all of the authority of the Board of Directors in the management of the corporation, except that such Committee shall not have the power to take specific actions which have been delegated to other committees of the Board and shall not be empowered to take action with respect to: declaring dividends; issuing bonds, debentures, or the borrowing of moneys except within limits expressly approved by the Board of Directors; amending by-laws; filling vacancies and newly created directorships in the Board of Directors; removing Directors of the corporation; mergers or consolidations; the sale, lease or exchange of all or substantially all of the assets of the corporation; dissolution; or any other action requiring the approval of stockholders. The designation of such Committee and the delegation thereto of authority shall not operate to relieve the Board of Directors or any member thereof of any responsibility imposed upon it or him by law. (Amended 9/28/90, 10/26/95) Section 3.11. Finance Committee. The Board of Directors, by resolution ------------- ------------------ adopted by a majority of the whole Board, may designate not fewer than three nor more than seven Directors, a majority of whom shall not be employees of the Company, to constitute a Finance Committee, which Committee is charged with reviewing the overall financial policies of the Company and making recommendations to the Board regarding the Company's financial condition and requirements for and disposition of funds, including: capital structure, raising long-term capital, dividend policy, and material changes in the Company's financial position with respect to cash, investments, debt and accounts receivable. The Committee shall review the performance and management of the Company's Retirement Benefit Plan including the investment policy, the performance of the Investment Trustee on a regular periodic basis, the reasonableness of the actuarial assumptions in relation to investment performance, the funding status of the Plan and shall make recommendations with respect to the selection of one or more investment trustees or other investment agencies, and undertake such other studies and make such other recommendations to the Board as it may deem desirable with respect to the Investment Trust of the Retirement Benefit Plan. (Amended and Renamed 9/28/90, 10/26/95) Section 3.12. Human Resources Committee. The Board of Directors, by ------------- -------------------------- resolution adopted by a majority of the whole Board, may designate not fewer than three nor more than seven Directors who are not employees of the Company, to constitute a Human Resources Committee. The Human Resources Committee shall determine the annual 10 salary, bonus and other benefits of selected senior officers and key management employees of the Company and review, as appropriate, performance standards under compensation programs for key employees. The Human Resources Committee shall also recommend to the Board candidates for election as corporate officers. The Human Resources Committee shall recommend new employee benefit plans and changes to stock incentive plans to the Board, approve amendments to the non- stock employee benefit plans of the Company and oversee the administration of all of the Company's employee benefit plans. The Human Resources Committee may delegate to one or more officers of the Company the power to approve any amendment of any non-stock employee benefit plan of the Company or the Donnelley Tax Credit Stock Ownership Plan which in the reasonable opinion of such officer will not materially affect the costs to the Company of, or benefits under, such plans. (Amended 7/22/93, 10/26/95, 1/25/96) Section 3.13. Audit Committee. The Board of Directors, by resolution ------------- ---------------- adopted by a majority of the whole Board, may designate not fewer than three nor more than seven Directors who are not employees of the Company to constitute an Audit Committee, which Committee shall review on behalf of the stockholders of the Company: the qualifications and services of the independent public accountants employed by the Company from time to time to audit the books of the Company, the scope of their audits, the adequacy of their audit reports, and recommendations made by them. The Committee may also make such reviews of internal financial audits and controls as the Committee considers desirable. The Audit Committee will recommend to the Board the selection of the independent public accountants. The Audit Committee shall review the Company's financial disclosure documents, management perquisites, significant developments in accounting principles and significant proposed changes in financial statements. The Audit Committee shall also review and monitor the Company's codes of conduct to guard against significant conflicts of interest and dishonest, unethical or illegal activities. The Audit Committee shall review periodically the performance of the Company's accounting and financial personnel, and shall review material litigation and regulatory proceedings and other issues relating to potentially significant corporate liability. (Amended 9/28/90, 10/26/95) Section 3.14. Corporate Responsibility and Governance Committee. The Board ------------- -------------------------------------------------- of Directors, by resolution adopted by a majority of the whole Board, may designate not fewer than three nor more than seven Directors to constitute a Corporate Responsibility and Governance Committee, which 11 Committee shall oversee the Company's commitment to employee health and safety, equal employment opportunity and the environment. The Committee shall also recommend to the Board nominees for election to the Board of Directors in connection with any meeting of stockholders at which directors are to be elected and persons for appointment to fill any Board vacancy which the Board of Directors is authorized under the By-Laws to fill, and may also recommend to the Board policies or guidelines concerning criteria for Board membership, the structure and composition of Board Committees, the size and composition of the Board and the selection, tenure and retirement of Directors and matters related thereto. (Amended 9/28/90, 10/26/95, 1/25/96, 9/25/97) Section 3.15. Other Committees. The Board of Directors, by resolution ------------- ----------------- adopted by a majority of the whole Board, may designate two or more Directors to constitute committees other than the Executive Committee, Finance Committee, Human Resources Committee, Audit Committee and Corporate Responsibility and Governance Committee, which committees shall have and exercise such authority as may be provided for in the resolution creating such committee. (Amended 9/28/90, 1/25/96, 9/25/97) Section 3.16. Honorary Directors. The Board of Directors may select from ------------- ------------------- time to time, and for such periods of time as it may deem appropriate, one or more past Chairmen of the Board, Presidents or Chief Executive Officers elected a Director prior to September 28, 1990, to serve as Honorary Directors. Honorary Directors shall be entitled to receive notice of and to attend all meetings of the Board of Directors, to receive copies of all reports or other communications made to the Board of Directors, to give counsel and advice on any subject, to receive such fees and expense reimbursements as may be provided from time to time by the Board of Directors. The Board of Directors, Chief Executive Officer, Chairman of the Board or President may invite an Honorary Director to attend meetings of any committee of the Board of Directors or to undertake temporary assignments, but this shall not preclude any other arrangements, consulting or otherwise, between the corporation and an Honorary Director. The presence or absence of an Honorary Director shall not be counted for purposes or determining the existence of a quorum. Honorary Directors shall not have the right to vote on any matters voted on by the Board of Directors or any of the rights, duties, privileges, or responsibilities of Directors of the corporation. (Amended 9/28/90) Section 3.17. Nomination of Directors. Except as otherwise fixed pursuant ------------- ------------------------ to the certificate of incorporation relating to the rights of the holders of 12 any one or more classes or series of Preferred Stock issued by the corporation, acting separately by class or series, to elect, under specified circumstances, directors at a meeting of stockholders, nominations for the election of directors may be made by the Board of Directors or a committee appointed by the Board of Directors pursuant to Section 3.14 or by any stockholder entitled to vote in the election of directors generally. However, any stockholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at a meeting at which directors are to be elected only if written notice of such stockholder's intent to make such nomination or nominations has been delivered personally to, or been mailed to and received by, the Secretary of the corporation at the principal executive offices of the corporation in the City of Chicago, State of Illinois, not less than 60 days nor more than 90 days prior to the meeting; provided, however, that, in the event that less than 75 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs. Each such notice shall set forth: (i) the name and record address of the stockholder who intends to make the nomination; (ii) the name, age, principal occupation or employment, business address and residence address of the person or persons to be nominated; (iii) the class and number of shares of stock held of record, owned beneficially and represented by proxy by such stockholder and by the person or persons to be nominated as of the record date for the meeting (if such date shall then have been made publicly available) and of the date of such notice; (iv) a representation that the stockholder intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (v) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such stockholder; (vi) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the Securities Exchange Act of 1934 and the proxy rules of the Securities and Exchange Commission; and (vii) the consent of each nominee to serve as a director of the corporation if so elected. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as a director of the corporation. The officer of the corporation presiding at the annual meeting of stockholders shall, if the facts so warrant, determine 13 that a nomination was not made in accordance with the provisions of this Section, and if he should so determine, he should so declare to the meeting and the defective nomination shall be disregarded. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth herein. (Added 3/24/88) ARTICLE IV ---------- Officers of the Corporation --------------------------- Section 4.1. Officers and Number. The officers of the corporation shall be ------------ -------------------- a Chief Executive Officer, a Chairman of the Board, one or more Vice Chairmen, a President, one or more Executive Vice Presidents, one or more Business Unit Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, a Secretary, a Treasurer, a Controller, a General Counsel, one or more Assistant Secretaries, one or more Assistant General Counsels, one or more Assistant Treasurers and one or more Assistant Controllers. Any two or more offices may be held by the same person except the offices of President and Secretary. The Board of Directors may distinguish among officers bearing the same title by the addition of other designations, such as Chief Financial Officer or the like. The Chief Executive Officer shall be either the Chairman, a Vice Chairman or the President, as designated by the Board of Directors. The Board of Directors may elect an Honorary Director to the office of Honorary Chairman of the Board. (Amended 1/27/94, 11/20/97) Section 4.2. Election and Term of Office. The officers of the corporation ------------ ---------------------------- shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of the stockholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as conveniently may be. Vacancies may be filled or new offices created and filled at any meeting of the Board of Directors. Each officer shall hold office until his successor shall have been duly elected and shall have qualified or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. (Adopted 10/21/60) Section 4.3. Removal. Any officer elected by the Board of Directors may be ------------ -------- removed by the Board of Directors whenever in its judgment the best interests of the corporation would be served thereby. (Amended 12/15/88) Section 4.4. Vacancies. A vacancy in any office because of death, ------------ ---------- resignation, removal, disqualification 14 or otherwise, may be filled by the Board of Directors for the unexpired portion of the term. (Adopted 10/21/60) Section 4.5. Salaries. No officer shall be prevented from receiving a ------------ --------- salary for his services as an officer by reason of the fact that he is also a Director of the corporation. Section 4.6. Chief Executive Officer. The Chief Executive Officer shall ------------ ------------------------ have overall supervision of, and responsibility for, the business, and shall direct the affairs and policies of the corporation. (Adopted 12/15/88) Section 4.7. Chairman of the Board. The Chairman of the Board shall ------------ ---------------------- preside at all meetings of the stockholders and Board of Directors. The Chairman of the Board shall perform such other duties and responsibilities as may be assigned to him by the Board of Directors. (Amended 9/28/90) Section 4.8. Vice Chairmen of the Board. The Vice Chairmen of the Board ------------ --------------------------- shall, in the absence of the Chairman of the Board (in the order prescribed by the Board), preside at all meetings of the stockholders and Board of Directors, and shall perform such other duties as may be assigned to them by the Board of Directors. (Amended 12/15/88) Section 4.9. Honorary Chairman of the Board. The Honorary Chairman of the ------------ ------------------------------- Board shall consult with the Chief Executive Officer and other officers of the corporation, as he or they shall determine, with respect to the general policies and affairs of the corporation, and shall have such authority and perform such duties as from time to time may be prescribed by the Board of Directors or as may be granted by the Chief Executive Officer. (Renumbered 9/28/90) Section 4.10. President. Subject to the supervision and direction of the ------------- ---------- Chief Executive Officer, the President shall have responsibility for such of the operations and other functions of the corporation as may be assigned to him. The President shall perform such other duties and responsibilities as may be assigned to him by the Chief Executive Officer. In the absence of the Chairman of the Board and Vice Chairmen of the Board, the President shall preside at meetings of the stockholders and Board of Directors. (Renumbered and Amended 9/28/90) Section 4.11. Vice Presidents. Each Vice President shall have such ------------- ---------------- corporate powers, if any, as may be assigned to him from time to time by the Board of Directors, Chief Executive Officer, Chairman of the Board or the President. (Renumbered 9/28/90) 15 Section 4.12. Senior Vice Presidents. Each Senior Vice President shall ------------ ----------------------- have such corporate powers, if any, as may be assigned to him by the Board of Directors, Chief Executive Officer, Chairman of the Board or the President. (Renumbered 9/28/90) Section 4.13. Business Unit Presidents. The Board of Directors may from ------------- ------------------------- time to time designate as Business Unit President one or more of the individuals who occupies the position of senior officer heading a business unit consisting of one or more divisions and/or one or more sales units and who reports to one or more of the senior officers of the corporation. (Added 1/27/94; Amended and Renumbered 11/20/97; Amended 1/28/00) Section 4.14. Executive Vice Presidents. The Board of Directors may ------------- -------------------------- designate as an Executive Vice President the officer to whom one or more other senior officers of this corporation reports. (Amended and Renumbered 1/27/94; Renumbered 11/20/97) Section 4.15. Order of Succession. Such of the directors of the ------------- ------------------- corporation as shall be designated by resolution of the Board of Directors, and in the order of such designation, shall in the absence of the Chairman of the Board perform the duties of the Chairman of the Board and shall have all of the powers and shall be subject to any restrictions imposed upon the Chairman. Such of the officers of the corporation as may be designated by resolution of the Board of Directors, and in the order of such designation, shall in the absence of the Chief Executive Officer, perform the duties of the Chief Executive Officer and when so acting shall have all the powers of and be subject to any restrictions imposed upon the Chief Executive Officer. Such of the officers of the corporation as may be designated by resolution of the Board of Directors, and in the order of such designation, shall in the absence of the President perform the duties of the President and when so acting shall have all the powers of and be subject to any restrictions imposed upon the President. (Renumbered 1/27/94, 11/20/97) Section 4.16. Secretary. The Secretary shall keep the minutes of all ------------- ---------- meetings of the stockholders and Board of Directors of the corporation, shall have charge of the corporate records and the corporate seal, and shall have the power to attach the seal to all instruments which shall require sealing after the same shall have been signed as authorized by the Board of Directors. (Renumbered 1/27/94, 11/20/97) Section 4.17. Treasurer. The Treasurer shall be responsible for the ------------- ---------- receipt, custody and disbursement of 16 all funds of the corporation in the form of both cash and securities. He may delegate the details of his office to someone in his stead, but this shall nowise relieve him of the responsibilities and liability of his office. The Treasurer shall have the power to attach the seal to all instruments which shall require sealing after the same shall have been signed as authorized by the Board of Directors. (Renumbered 1/27/94, 11/20/97) Section 4.18. Controller. The Controller reports to the Chief Executive ------------- ----------- Officer directly or through such other management executives as the Chief Executive Officer may direct. The Controller, however, may directly submit any matter to the Board of Directors for their consideration. The Controller shall maintain adequate records of all assets, liabilities, and transactions of the corporation, and in conjunction with other officers and department heads, shall initiate and enforce measures and procedures whereby the business of the corporation shall be conducted with the maximum of safety, efficiency and economy. He shall attend that part of the meetings of the Board of Directors which is concerned with the review of the financial and operating reports of the business, except when, in the discretion of the Board, he shall be asked not to attend. (Renumbered 1/27/94, 11/20/97) Section 4.19. General Counsel. The General Counsel shall be the chief ------------- ---------------- legal officer of the corporation and have legal responsibility for all aspects of the business. The General Counsel shall have the power to attach the seal to all instruments which shall require sealing after the same shall have been signed as authorized by the Board of Directors. (Renumbered 1/27/94, 11/20/97) Section 4.20. Assistant Treasurers. The Assistant Treasurers 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 nowise relieve the Treasurer of the responsibilities and liability of his office. (Renumbered 1/27/94, 11/20/97) Section 4.21. Assistant Secretaries. The Assistant Secretaries 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 nowise relieve the Secretary of the responsibilities and liability of his office. (Renumbered 1/27/94, 11/20/97) Section 4.22. Assistant General Counsels. The Assistant General Counsels ------------- --------------------------- shall in the absence of the General Counsel perform all functions and duties of the General Counsel and in addition shall assume such 17 functions and duties as the General Counsel may delegate, but this shall in nowise relieve the General Counsel of the responsibilities and liabilities of his office. (Renumbered 1/27/94, 11/20/97) Section 4.23. Assistant Controllers. The Assistant Controllers shall in ------------- ---------------------- the absence of the Controller perform all functions and duties of the Controller and in addition shall assume such functions and duties as the Controller may delegate, but this shall in nowise relieve the Controller of the responsibilities and liabilities of such office. (Renumbered 1/27/94, 11/20/97) ARTICLE V --------- Appointed Officers ------------------ The Chief Executive Officer may appoint any individual an officer having such title as he shall deem appropriate, provided such officer is not a participant in the Senior Officer Incentive Plan administered by the Board of Directors or its Committees. Any such officer appointed by the Chief Executive Officer may be removed by the Chief Executive Officer whenever in his judgment the best interests of the corporation would be served thereby. The term of office, compensation, powers and duties and other terms of employment of appointed officers shall be such as the Chief Executive Officer may from time to time deem proper, and the authority of such officers shall be limited to acts pertaining to the business of the unit, operation or function to which they are assigned. (Amended 1/27/94, 11/20/97, 1/28/00) 18 ARTICLE VI ---------- Contracts, Loans, Checks and Deposits ------------------------------------- Section 6.1. Contracts. 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, 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 its name unless authorized by a resolution of the Board of Directors (or a resolution of a committee of Directors pursuant to authority conferred upon that committee). Such authority may be general or confined to specific instances. Section 6.3. Checks, 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 shall be signed by such officer or officers or such agent or agents of the corporation, and in such manner, as may be designated by the Board of Directors or by one or more officers of the corporation named by the Board of Directors for such purpose. 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 and other depositaries as the Board of Directors may select. (Entire Article Renumbered 6/28/84) ARTICLE VII ----------- Certificates of Stock and Their Transfer ---------------------------------------- Section 7.1. Certificates of Stock. 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 Chief Executive Officer, Chairman of the Board or President or a Vice President and by the Secretary or Assistant Secretary or the Treasurer or an Assistant Treasurer. If any stock certificate is signed manually (a) by a transfer agent other than the corporation or its employee or (b) by a registrar other than the corporation or its employee, any other signature on the certificate may be a facsimile. 19 In case any officer, transfer agent, or registrar who has signed or whose facsimile has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, such certificate may nevertheless be issued by the corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. All certificates properly surrendered to the corporation for transfer shall be cancelled and no new certificates shall be issued to evidence transferred shares until the former certificate for at least a like number 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 such indemnification (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. Certificates shall not be issued representing fractional shares of stock. (Amended 12/15/88) Section 7.2. Lost Certificates. The Board of Directors 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 or destroyed upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost 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 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 or destroyed. Section 7.3. Transfers. 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, it shall be the duty of the corporation to 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 thereunto authorized by power of attorney and filed with the Secretary or transfer agent of the corporation. Section 7.4. Registered Stockholders. The corporation shall be entitled to ------------ ------------------------ treat the holder of record of any share or shares of stock as the holder in 20 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. (Entire Article Renumbered 6/28/84) ARTICLE VIII ------------ Dividends --------- Section 8.1. Declaration. Dividends upon the capital stock of the ------------ ------------ corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation. Section 8.2. Reserve. Before payment of any dividend, there may be set ------------ -------- aside out of any funds of the corporation available for dividends such sum or sums as the Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or such other purposes as the Directors shall think conducive to the interest of the corporation, and the Directors may modify or abolish any such reserve in the manner in which it was created. (Entire Article Renumbered 6/28/84) ARTICLE IX ---------- Miscellaneous ------------- Section 9.1. Fiscal Year. Unless otherwise fixed by the resolution of the ------------ ------------ Board of Directors, the fiscal year of the corporation shall be the calendar year. Section 9.2. Seal. The corporate seal shall have inscribed thereon the ------------ ----- name of the corporation and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or otherwise reproduced. Section 9.3. Books. The books of the corporation may be kept (subject to ------------ ------ any provision contained in the statutes) outside the State of Delaware at the offices of the corporation at Chicago, Illinois, or at such other place or places as may be designated from time to time by the Board of Directors. 21 (Entire Article Renumbered 6/28/84) ARTICLE X --------- Amendment --------- These by-laws may be altered or repealed at any regular meeting of the Board of Directors or at any special meeting of the Board of Directors if notice of such alteration or repeal be contained in the notice of such special meeting, provided that no amendment of these by-laws shall conflict with the provisions of the Certificate of Incorporation, whether relating to the number of Directors which shall constitute the whole Board or the number of Directors of any class or otherwise. (Renumbered 6/28/84) 22 EX-3.(II)(B) 3 AMENDMENT TO BY-LAWS Form 10-K Year Ended 12/31/99 Exhibit 3(ii)(b) RESOLUTION OF THE BOARD OF DIRECTORS OF R.R. DONNELLEY & SONS COMPANY January 27, 2000 RESOLVED, that the By-Laws of the corporation be and hereby are amended as follows: That, effective immediately, Section 4.13 is deleted and the following is substituted therefor: "Business Unit Presidents. The Board of Directors ------------------------ may from time to time designate as Business Unit President one or more of the individuals who occupies the position of senior officer heading a business unit consisting of one or more divisions and/or one or more sales units, and who reports to one or more of the senior officers of the corporation." That, effective immediately, the first sentence of ARTICLE V is deleted and the following is substituted therefor: "The Chief Executive Officer may appoint any individual an officer having such title as he shall deem appropriate, provided such officer is not a participant in the Senior Officer Incentive Plan administered by the Board of Directors or its committees." That, effective immediately, the last phrase of the last sentence of ARTICLE V is amended to read as follows: "...shall be limited to acts pertaining to the business of the unit, operation or function to which they are assigned." That, effective on March 23, 2000, the first sentence of Section 3.2 of ARTICLE III is deleted and the following is substituted therefor: "The number of Directors which shall constitute the whole Board shall be ten (10) of whom four (4) shall be Directors of the First Class, three (3) shall be Directors of the Second Class and three (3) shall be Directors of the Third Class." EX-4.(D) 4 364 CREDIT AGREEMENT Form 10-K Year Ended 12/31/99 Exhibit 4(d) EXECUTION COPY 364-DAY CREDIT AGREEMENT Dated as of October 14, 1999 R.R. DONNELLEY & SONS COMPANY, a Delaware corporation (the "Company"), the banks listed on the signature pages hereof, and BANK ONE, NA, as Administrative Agent (as hereinafter defined), agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS -------------------------------- SECTION 1.01. Certain Defined Terms. As used in this Agreement, the --------------------- following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Acceptance Deadline" has the meaning specified in Section ------------------- ------- 2.03(a)(iii). ------------ "Administrative Agent" means Bank One, in its capacity as the -------------------- contractual representative for all of the Banks for purposes of this Agreement, as designated and appointed in accordance with Article VIII, and ------------- any successor thereto as provided herein. "Advance" means a Committed Advance or an Uncommitted Advance. ------- "Affiliate" means, with respect to any Person, any other Person that, --------- directly or indirectly, controls, is controlled by or is under common control with such Person. "Affordable Housing Debt" means Debt of the Company or of any of its ----------------------- Subsidiaries which is associated with the direct or indirect investment by the Company or such Subsidiary in affordable housing where the expected tax benefits of such investment exceed the total amount of the future annual payments required as part of such investment. "Agreement" shall mean this 364-Day Credit Agreement, as the same may --------- be amended, modified, supplemented or restated from time to time. -1- "Alternative Currency" means Sterling, German Marks, Swiss Francs, Yen -------------------- and any other currency (other than Dollars) (i) which is readily available, freely transferable and convertible into Dollars in the international currency and exchange markets, (ii) in which deposits are customarily offered to banks in the London interbank market and (iii) as to which an equivalent amount in Dollars may be readily calculated, including the Euro. "Applicable Lending Office" means, with respect to each Bank, such ------------------------- Bank's Domestic Lending Office in the case of a Base Rate Advance, and such Bank's Eurocurrency Lending Office in the case of a Eurocurrency Rate Advance and, in the case of an Uncommitted Advance, the office of such Bank notified by such Bank to the Administrative Agent as its Applicable Lending Office with respect to such Uncommitted Advance. "Applicable Margin" means on any day 0.19%. ----------------- "Arranger" means Banc One Capital Markets, Inc. -------- "Assignment and Acceptance" means an Assignment and Acceptance --------------------------- executed by a Bank (other than a Designated Bidder) and an Eligible Assignee and accepted by the Administrative Agent and the Company, substantially in the form of Exhibit A hereto. ---------- "Assumption Letter" means a letter of a Subsidiary of the Company ----------------- addressed to the Banks in substantially the form of Exhibit B hereto --------- pursuant to which such Subsidiary agrees to become a "Borrowing Subsidiary" and agrees to be bound by the terms and conditions hereof. "Available Commitment" has the meaning specified in Section 2.01. -------------------- ------------ "Bank One" means Bank One, NA, a national banking association having -------- its headquarters in Chicago, Illinois, in its individual capacity, and its successors. "Banks" means the banks listed on Schedule I hereto and each ----- ---------- Person that becomes a party hereto pursuant to Section 9.07(a), (b) and --------------- - (c), and, except when used in reference to a Committed Advance, a Committed - Borrowing, a Committed Note, a Commitment or a related term, each Designated Bidder. "Base Rate" means a fluctuating interest rate per annum in effect from --------- time to time, which rate per annum shall at all times be equal to the higher of: (a) the corporate base rate of interest announced by Bank One from time to time, changing when and as said corporate base rate changes; and (b) 1/2 of 1% per annum above the Federal Funds Rate. -2- "Base Rate Advance" means a Committed Advance which bears interest at ----------------- a rate based upon the Base Rate, as provided in Section 2.07(a). --------------- "Borrower" means the Company or any Borrowing Subsidiary. -------- "Borrowing" means a Committed Borrowing or an Uncommitted Borrowing. --------- "Borrowing Subsidiary" means any Subsidiary of the Company duly -------------------- designated by the Company pursuant to Section 2.17 hereof to make ------------ Borrowings hereunder, which Subsidiary shall have delivered an Assumption Letter to the Administrative Agent in accordance with Section 2.17. ------------ "Business Day" means a day of the year (other than a Saturday or ------------ Sunday) on which banks are not required or authorized by law to close in New York City and Chicago and, if the applicable Business Day relates to any Eurocurrency Rate Advances, on which dealings are carried on in the London interbank market (and, if such Eurocurrency Rate Advances are denominated in the Euro, a day upon which such clearing system as is determined by the Administrative Agent to be suitable for clearing or settlement of the Euro is open for business). "Category Status" means Category 1 Status, Category 2 Status, Category --------------- 3 Status, Category 4 Status or Category 5 Status, as appropriate. "Category 1 Status" exists at any date if at such date the Public Debt ----------------- Rating announced by S&P is AA- (or the equivalent) or better or the Public -- Debt Rating announced by Moody's is Aa3 (or the equivalent) or better. "Category 2 Status" exists at any date if at such date (i) the Public ----------------- Debt Rating announced by S&P is A (or the equivalent) or better or the -- Public Debt Rating announced by Moody's is A2 (or the equivalent) or better, and (ii) Category 1 Status does not exist. "Category 3 Status" exists at any date if at such date (i) the Public ----------------- Debt Rating announced by S&P is A- (or the equivalent) or better or the -- Public Debt Rating announced by Moody's is A3 (or the equivalent) or better, and (ii) neither Category 1 Status nor Category 2 Status exists. "Category 4 Status" exists at any date if at such date (i) the Public ----------------- Debt Rating announced by S&P is BBB (or the equivalent) or better or the -- Public Debt Rating announced by Moody's is Baa2 (or the equivalent) or better, and (ii) none of Category 1 Status, Category 2 Status or Category 3 Status exists. "Category 5 Status" exists at any date if at such date (i) the Public ----------------- Debt Rating announced by S&P is lower than BBB (or the equivalent) and --- -3- the Public Debt Rating announced by Moody's is lower than Baa2 (or the equivalent), or (ii) neither S&P nor Moody's shall have a Public Debt -- Rating in effect at such date. "Commission" means the Securities and Exchange Commission or any ---------- federal body succeeding to its functions. "Commitment" has the meaning specified in Section 2.01. ---------- ------------ "Committed Advance" means an advance by a Bank to a Borrower as part ----------------- of a Committed Borrowing and refers to a Base Rate Advance or a Eurocurrency Rate Advance, each of which shall be a "Type" of Committed ---- Advance. "Committed Borrowing" means a borrowing consisting of simultaneous ------------------- Committed Advances of the same Type made by each of the Banks to a Borrower pursuant to Section 2.01. ------------ "Committed Note" means a promissory note, in substantially the form of -------------- Exhibit D-1 hereto, duly executed by the Company or a Borrowing Subsidiary ----------- and payable to the order of a Bank in the amount of its Commitment, including any amendment, modification, renewal or replacement of such promissory note. "Consolidated EBIT" means, for any period, on a consolidated basis for ----------------- the Company and its Consolidated Subsidiaries, the sum of the amounts for such period of (a) Consolidated Net Income (excluding non-recurring or extraordinary gains, losses, expenses and charges but including cash charges and payments during such period related to extraordinary or non- recurring gains, losses, charges and expenses), plus (b) charges against ---- income for foreign, federal, state and local taxes, plus (c) Consolidated ---- Interest Expense plus (or minus) (d) pre-tax income (or loss) from ---- ----- discontinued operations. "Consolidated Interest Expense" means, for any period, the sum of ----------------------------- total interest expense of the Company and its Consolidated Subsidiaries, whether paid or accrued, as determined in accordance with GAAP. "Consolidated Net Income" means, for any period, the consolidated net ----------------------- earnings (or loss) after taxes of the Company and its Consolidated Subsidiaries for such period, determined in accordance with GAAP. "Consolidated Subsidiary" means at any date any Subsidiary the ----------------------- accounts of which would be consolidated with those of the Company in its consolidated financial statements at such date in accordance with GAAP; provided, that for purposes of Sections 5.02 and 5.03, "Consolidated --------- ------------- ---- Subsidiary" shall mean any subsidiary the accounts of which would be consolidated with those of the Company in its consolidated financial statements at such date in accordance with GAAP. -4- "Consolidated Tangible Net Worth" means, as of any date, an amount ------------------------------- equal to the sum of (i) the par or stated value of the outstanding shares of all classes of capital stock of the Company, (ii) paid-in capital and capital surplus of the Company and (iii) retained earnings of the Company, as each of which would appear on a consolidated balance sheet of the Company and its Consolidated Subsidiaries prepared as of the last day of the most recently completed fiscal quarter in accordance with GAAP, less ---- the aggregate net amount of (i) all assets so appearing which in accordance with GAAP are deemed intangible, such intangible assets to specifically include, but not be limited to, licenses, copyrights, trademarks, tradenames, patents and goodwill, and (ii) any write-up in the book value of assets made after December 31, 1997, other than any such write-up to an appraised fair market value in accordance with the purchase accounting requirements of GAAP. "Continuation Notice" has the meaning specified in Section 2.23. ------------------- ------------ "Continuing Bank" has the meaning specified in Section 2.23. --------------- ------------ "Debt" means (but without duplication of any item) (i) indebtedness ---- for borrowed money, (ii) obligations evidenced by bonds, debentures, notes or other similar instruments, (iii) obligations as lessee under leases which shall have been or should be, in accordance with generally accepted accounting principles, recorded as capital leases, and (iv) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clause (i), (ii) or (iii) above. "Defaulted Advance" means, with respect to any Bank at any time, the ----------------- amount of any Advance required to be made by such Bank to the Borrower pursuant to Section 2.01 or Section 2.03(a) at or prior to such time that ------------ --------------- has not been so-made as of such time; provided, however, that any Advance made by the Administrative Agent for the account of such Bank pursuant to Section 2.02(e) shall not be considered a Defaulted Advance even if, at --------------- such time, such Bank shall not have reimbursed the Administrative Agent therefor as provided in Section 2.02(e). If part of a Defaulted Advance --------------- shall be deemed made pursuant to Section 2.20(a), the remaining part of --------------- such Defaulted Advance shall be considered a Defaulted Advance originally required to be made pursuant to Section 2.01 or Section 2.03(a) on the same ------------ --------------- date as the Defaulted Advance so deemed made in part. "Defaulted Amount" means, with respect to any Bank at any time, any ---------------- amount required to be paid by such Bank to the Administrative Agent or any other Bank hereunder at or prior to such time that has not been so paid as of such time, including, without limitation, any amount required to be paid by such Bank to (a) the Administrative Agent pursuant to Section 2.02(e) to --------------- reimburse the Administrative Agent for the amount of any Advance made by -5- the Administrative Agent for the account of such Bank, (b) any other Bank pursuant to Section 2.15 to purchase any participation in Advances owing to ------------ such other Bank and (c) the Administrative Agent pursuant to Section 8.06 ------------ to reimburse the Administrative Agent for such Bank's ratable share of any amount required to be paid by the Banks to the Administrative Agent as provided therein. If part of a Defaulted Amount shall be deemed paid pursuant to Section 2.20(b), the remaining part of such Defaulted Amount --------------- shall be considered a Defaulted Amount originally required to be made hereunder on the same date as the Defaulted Amount so deemed paid in part. "Defaulting Bank" means, at any time, any Bank that, at such time, --------------- (a) owes a Defaulted Advance or a Defaulted Amount or (b) shall take or be the subject of any action or proceeding of a type described in Section 6.01(f). --------------- "Designated Bidder" means (a) an Eligible Assignee or (b) a special ----------------- purpose corporation that is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business and that issues (or the parent of which issues) commercial paper rated at least "Prime-1" (or the then equivalent grade) by Moody's or "A-1" (or the then equivalent grade) by S&P that, in the case of either clause (a) or clause (b), (i) is organized under the laws of the United States or any State thereof, (ii) shall have become a party hereto pursuant to Section 9.07(d), --------------- (e) and (f), and (iii) is not otherwise a Bank. --- --- ----- "Designation Agreement" means a designation agreement entered into --------------------- by a Bank (other than a Designated Bidder) and a Designated Bidder, and accepted by the Administrative Agent and the Company, in substantially the form of Exhibit C hereto. --------- "Dollar Amount" means, for any date of determination: ------------- (a) with respect to any amount denominated in Dollars, such amount; and (b) with respect to an amount denominated in any Alternative Currency, the amount of Dollars into which the Administrative Agent could, in accordance with its practice from time to time in the London interbank foreign exchange market, convert such amount of Alternative Currency at its spot rate of exchange applicable to the relevant transaction at or about 11:00 a.m., London time, on the date of such determination, for the delivery of Dollars two Business Days thereafter. For purposes of this Agreement, the Dollar Amount of any amount received by a Bank hereunder shall be determined as of the date of such receipt. "Dollars" and the sign "$" each means the lawful currency of the ------- - United States. -6- "Domestic Lending Office" means, with respect to any Bank, the office ----------------------- of such Bank specified as its "Domestic Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which ---------- it became a Bank, as the case may be, or such other office of such Bank as such Bank may from time to time specify to the Company and the Administrative Agent. "Effective Date" has the meaning specified in Section 3.01. -------------- ------------ "Eligible Assignee" means (i) a Bank (other than a Designated Bidder); ----------------- (ii) an Affiliate of a Bank (other than a Designated Bidder); (iii) a commercial bank organized under the laws of the United States or any State thereof, and having a combined capital and surplus of at least $500,000,000; (iv) a commercial bank organized under the laws of any other country that is a member of the Organization for Economic Cooperation and Development, has a combined capital and surplus of at least $500,000,000 and is acting through a branch or agency located in the United States, and (v) any other Person approved by the Company and the Administrative Agent, such approvals not to be unreasonably withheld or delayed (it being understood that the Company may reasonably withhold its approval of any such other Person if at the time it would become a Bank hereunder payments to it would not be exempt from United States withholding tax). "Environmental Action" means any administrative, regulatory or -------------------- judicial action, suit, demand, demand letter, claim, notice of noncompliance or violation, notice of liability or potential liability, investigation, proceeding, consent order or consent agreement relating in any way to any Environmental Law, Environmental Permit or Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the environment, including, without limitation, (a) by any governmental or regulatory authority for enforcement, cleanup, removal, response, remedial or other actions or damages and (b) by any governmental or regulatory authority or any third party for damages, contribution, indemnification, cost recovery, compensation or injunctive relief. "Environmental Law" means any federal, state, local or foreign ----------------- statute, law, ordinance, rule, regulation, code, order, judgment, decree or judicial interpretation relating to the environment, health, safety or Hazardous Materials. "Environmental Permit" means any permit, approval, indemnification -------------------- number, license or other authorization required under any Environmental Law. "ERISA" means the Employee Retirement Income Security Act of 1974 as ----- amended from time to time, and the regulations promulgated and the rulings issued thereunder. -7- "ERISA Affiliate" means any Person that for purposes of Title IV of --------------- ERISA is a member of the Company's controlled group, or under common control with the Company, as determined under Section 414 of the Internal Revenue Code. "ERISA Event" means (a) the occurrence of a reportable event, within ----------- the meaning of Section 4043 of ERISA, with respect to any Plan unless the 30-day notice requirement with respect to such event has been waived by the PBGC; (b) the application for a minimum funding waiver with respect to a Plan; (c) the provision by the administrator of any Plan of a notice of intent to terminate such Plan pursuant to Section 4041(a)(2) of ERISA (including any such notice with respect to a plan amendment referred to in Section 4041(e) of ERISA); (d) the cessation of operations at a facility of the Company or any of its ERISA Affiliates in the circumstances described in Section 4062(e) of ERISA; (e) the withdrawal by the Company or any of its ERISA Affiliates from a Multiple Employer Plan during a plan year for which it was a substantial employer, as defined in Section 4001(a)(2) of ERISA; (f) the failure by the Company or any of its ERISA Affiliates to make a payment to a Plan if the conditions for the imposition of a lien under Section 302(f)(1) of ERISA are satisfied; (g) the adoption of an amendment to a Plan requiring the provision of security to such Plan, pursuant to Section 307 of ERISA; or (h) the institution by the PBGC of proceedings to terminate a Plan, pursuant to Section 4042 of ERISA, or the occurrence of any event or condition described in Section 4042 of ERISA that could constitute grounds for the termination of, or the appointment of trustee to administer, a Plan. "Euro" and/or "EUR" means the euro referred to in Council Regulation ---- --- (EC) No. 1103/97 dated June 17, 1997 passed by the Council of the European Union, or, if different, the then lawful currency of the member states of the European Union that participate in the third stage of Economic and Monetary Union. "Eurocurrency Lending Office" means, with respect to any Bank, the --------------------------- office of such Bank specified as its "Eurocurrency Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant ---------- to which it became a Bank (or, if no such office is specified, its Domestic Lending Office), or such other office of such Bank as such Bank may from time to time specify to the Company and the Administrative Agent. "Eurocurrency Liabilities" has the meaning assigned to that term in ------------------------ Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Eurocurrency Rate" means, with respect to any Eurocurrency Rate ----------------- Advance for any specified Interest Period or for the term of any Uncommitted Advance with respect to which interest is calculated by reference to the Eurocurrency Rate, either: -8- (i) the rate of interest per annum equal to the rate for deposits in Dollars or the applicable Alternative Currency of such Eurocurrency Rate Advance with a maturity approximately equal to such Interest Period which appears on Dow Jones Markets (Telerate) Page 3740 or 3750, as applicable, or, if there is more than one such rate, the average of such rates rounded to the nearest 1/100 of 1% (if such average is not a multiple of 1/16 of 1%), as of 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (ii) if no such rate of interest appears on Dow Jones Markets (Telerate) Page 3740 or 3750, as applicable, for any specified Interest Period, or if Dow Jones Markets (Telerate) Page 3740 or 3750 is unavailable for any reason, the applicable per annum London interbank offered rate for deposits in Dollars or the applicable Alternative Currency appearing on Reuters Screen FRBD as of 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, and having a maturity equal to such Interest Period. "Eurocurrency Rate Advance" means a Committed Advance which bears ------------------------- interest at a rate based upon the Eurocurrency Rate, as provided in Section ------- 2.07(c). ------- "Eurocurrency Rate Reserve Percentage" of any Bank (other than a ------------------------------------ Designated Bidder) for any Interest Period for a Eurocurrency Rate Advance means the reserve percentage applicable two Business Days before the first day of such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for such Bank with respect to liabilities or assets consisting of or including Eurocurrency Liabilities (or with respect to any other category of liabilities that includes deposits by reference to which the interest rate on Eurocurrency Rate Advances of such currency is determined) having a term equal to such Interest Period. "Eurocurrency Rate Uncommitted Borrowing" means an Uncommitted --------------------------------------- Borrowing comprised of Uncommitted Advances denominated in Dollars, bearing interest based upon the Eurocurrency Rate. "Events of Default" has the meaning specified in Section 6.01. ----------------- ------------ "Extension Request" has the meaning specified in Section 2.23. ----------------- ------------ "Facility Fee" has the meaning specified in Section 2.04. ------------ ------------ -9- "Federal Funds Rate" means, for any period, a fluctuating interest ------------------ rate per annum equal for each day during such period to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day for such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by it. "Fixed Rate Uncommitted Borrowing" means an Uncommitted Borrowing -------------------------------- consisting of Uncommitted Advances bearing interest at a fixed percentage rate per annum (expressed in the form of a decimal to no more than four decimal places) specified by the respective Banks making such Uncommitted Advances pursuant to the procedure described in Section 2.03. ------------ "GAAP" has the meaning specified in Section 1.03. ---- ------------ "German Marks" means the lawful currency of the Federal Republic of ------------ Germany. "Hazardous Materials" means petroleum and petroleum products, ------------------- breakdown products, radioactive materials, asbestos-containing materials, radon gas and any other chemicals, materials or substances designated, classified or regulated as being "hazardous" or "toxic", or words of similar import, under any federal, state, local or foreign statute, law, ordinance, rule, regulation, code, order, judgment, decree or judicial interpretation. "Insurance Policy Debt" means Debt of the Company or any of its --------------------- Subsidiaries under policies of life insurance now or hereafter owned by the Company or any of its Subsidiaries under which policies the sole recourse for such borrowing is against such policies. "Interest Coverage Ratio" means the ratio, determined on a ----------------------- consolidated basis for the Company and its Consolidated Subsidiaries in accordance with GAAP as of the end of any fiscal quarter, of Consolidated EBIT to Consolidated Interest Expense, in each case determined as of the last day of such fiscal quarter for the four-quarter period then ended. "Interest Period" means, for each Eurocurrency Rate Advance --------------- comprising part of the same Committed Borrowing, the period commencing on the date of such Eurocurrency Rate Advance or the date of any conversion or continuation thereof, and ending on the last day of the period selected by a Borrower pursuant to the provisions below. The duration of each such Interest Period shall be one, two, three or six months, in each case as a Borrower may select, upon notice received by the Administrative Agent pursuant to Section 2.02 or 2.06; provided, however, that ------------ ----- -------- ------- -10- (i) Interest Periods commencing on the same date for Eurocurrency Rate Advances comprising part of the same Committed Borrowing shall be of the same duration; (ii) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided that if such extension would cause the last day -------- of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; (iii) whenever the first day of any Interest Period occurs on a day in an initial calendar month for which there is no numerically corresponding day in the calendar month that succeeds such initial calendar month by the number of months equal to the number of months in such Interest Period, such Interest Period shall end on the last Business Day of such succeeding calendar month; and (iv) no Interest Period may terminate later than the Termination Date (or, if the Company has made the Term Loan Election, the Maturity Date). "Lien" means, with respect to any asset, any security interest, ---- mortgage, pledge, lien, claim, charge or encumbrance of any kind in respect of such asset. "Majority Banks" means at any time Banks holding more than 50% -------------- aggregate unpaid principal amount of the Committed Advances held by the Banks, or, if no such principal amount is then outstanding, Banks having more than 50% of the Commitments. "Margin Stock" has the meaning specified in Regulation U issued ------------ by the Board of Governors of the Federal Reserve System. "Material Adverse Effect" means a material adverse effect on (i) ----------------------- the business, financial condition, operations, properties or performance of the Company and its Subsidiaries, taken as a whole, (ii) the legality, validity or enforceability of this Agreement or the Notes or (iii) the ability of the Company to perform its obligations under this Agreement and the Notes. "Material Subsidiary" means a Subsidiary of the Company which, ------------------- at the time of determination, (i) shall own assets comprising in excess of 10% of all of the assets of the Company and its consolidated Subsidiaries on a consolidated basis, or (ii) has operating income for the four fiscal quarters -11- most recently ended in excess of 10% of the operating income of the Company and its consolidated Subsidiaries on a consolidated basis. "Maturity Date" means the earlier of (a) the first anniversary ------------- of the Termination Date and (b) the date on which all amounts payable hereunder have become due and payable pursuant to Section 6.01. ------------ "Moody's" means Moody's Investors Service, Inc. ------- "Multiemployer Plan" means a multiemployer plan, as defined in ------------------ Section 4001(a)(3) of ERISA, to which the Company or any of its ERISA Affiliates is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions. "Multiple Employer Plan" means a single employer plan, as ---------------------- defined in Section 4001(a)(15) of ERISA, that (a) is maintained for employees of the Company or any of its ERISA Affiliates and at least one Person other than the Company and its ERISA Affiliates or (b) was so maintained and in respect of which the Company or any of its ERISA Affiliates could have liability under Section 4064 or 4069 of ERISA in the event such plan has been or were to be terminated. "National Currency Unit" means the unit of currency (other than ---------------------- a Euro unit) of each member state of the European Union that participates in the third stage of Economic and Monetary Union. "Non-Extending Bank" has the meaning specified in Section 2.23. ------------------ ------------ "Note" means a Committed Note or an Uncommitted Note. ---- "Notice of Committed Borrowing" has the meaning specified in ----------------------------- Section 2.02(a). --------------- "Notice of Conversion or Continuation" has the meaning specified ------------------------------------ in Section 2.06(b). --------------- "Notice of Uncommitted Borrowing" has the meaning specified in ------------------------------- Section 2.03(a). --------------- "PBGC" means the Pension Benefit Guaranty Corporation and its ---- successors and assigns. "Person" means an individual, partnership, corporation ------ (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof. -12- "Plan" means a Single Employer Plan or a Multiple Employer Plan. ---- "Pro Rata Share" means, at any time with respect to any Bank, -------------- the ratio (expressed as a percentage) that such Bank's Commitment bears to the aggregate Commitments of all Banks at such time or, at any time after the Commitments have been terminated, the ratio (expressed as a percentage) that such Bank?s outstanding Committed Advances bears to the aggregate outstanding Committed Advances of all Banks at such time. "Public Debt Rating" means, on any date, the rating that has been most ------------------ recently announced by S&P or Moody's, as the case may be, for any class of long-term senior non-credit-enhanced unsecured debt issued by the Company, changing when and as the applicable rating agency publicly announces a change in its Public Debt Rating. "Quote Deadline" has the meaning specified in Section 2.03(a)(ii). -------------- ------------------- "Register" has the meaning specified in Section 9.07(g). -------- --------------- "Replacement Bank" has the meaning specified in Section 2.23(b). ---------------- --------------- "Request Deadline" has the meaning specified in Section 2.03(a)(i). ---------------- ------------------ "Responsible Officer" means the Executive Vice President and Chief ------------------- Financial Officer of the Company, the Vice President and Treasurer of the Company, or any other officer of the Company or any other Borrower responsible for overseeing or reviewing compliance with this Agreement or any Note. "S&P" means Standard & Poor's Ratings Group, a division of The --- McGraw-Hill Companies, Inc. "Single Employer Plan" means a single employer plan, as defined in -------------------- Section 4001(a)(15) of ERISA, that (a) is maintained for employees of the Company or any of its ERISA Affiliates and no Person other than the Company and its ERISA Affiliates or (b) was so maintained and in respect of which the Company or any of its ERISA Affiliates could have liability under Section 4069 of ERISA in the event such plan has been or were to be terminated. "Sterling" means the lawful currency of the United Kingdom. -------- "Subsidiary" means, with respect to any Person, any corporation, ---------- partnership, limited liability company, association or other business entity of which securities or other ownership interests having (a) ordinary voting power to elect a majority of the board of directors or other persons performing similar functions or (b) having the ability to direct the management of such corporation, partnership, limited liability company, -13- association or other business entity, are at the time directly or indirectly owned or controlled by such Person, by such Person and one or more of its other Subsidiaries or by one or more of such Person's other Subsidiaries; provided however, that Stream International Inc., a Delaware -------- corporation ("Stream"), shall not be considered a "Subsidiary" of the ------ Company until the earlier of (i) the date of the first regularly scheduled annual meeting of Stream after such time as the Company has gained ordinary voting power to elect a majority of the board of directors of Stream and (ii) the date on which the Company elects the majority of a new board of directors of Stream. "Swiss Francs" means the lawful currency of Switzerland. ------------ "Termination Date" means the earlier of (i) October 12, 2000 (or such ---------------- later date as is established pursuant to Section 2.23(d)) or (ii) the --------------- date the Commitments are terminated in whole pursuant to Section 2.05 or ------------ 6.01. ---- "Term Loan Election" has the meaning specified in Section 2.06. ------------------ ------------ "Uncommitted Advance" means an advance by a Bank to a Borrower as ------------------- part of an Uncommitted Borrowing resulting from the auction bidding procedure described in Section 2.03. ------------ "Uncommitted Borrowing" means a borrowing consisting of simultaneous --------------------- Uncommitted Advances from each of the Banks whose offer to make one or more Uncommitted Advances as part of such borrowing has been accepted by a Borrower under the auction bidding procedure described in Section 2.03. ------------ "Uncommitted Borrowing Margin" means, with respect to any ---------------------------- Eurocurrency Rate specified by a Borrower in a Notice of Uncommitted Borrowing and any offer made by a Bank in response to such Notice of Uncommitted Borrowing, the margin (expressed as a percentage rate per annum) to be added to or subtracted from such Eurocurrency Rate in order to determine the interest rate per annum at which such Bank is willing to, and offers to, make an Uncommitted Advance to such Borrower as part of a Eurocurrency Rate Uncommitted Borrowing. "Uncommitted Note" means a promissory note, in substantially the form ---------------- of Exhibit D-2 hereto, duly executed by the Company or a Borrowing ----------- evidencing an Uncommitted Advance made by such Bank, including any amendment, modification, renewal or replacement of such promissory note. "Utilization Fee" has the meaning specified in Section 2.04. --------------- ------------ "Withdrawal Liability" has the meaning specified in Part 1 of -------------------- Subtitle E of Title IV of ERISA. -14- "Year 2000 Problem" means anticipated costs, problems and ----------------- uncertainties associated with the inability of certain computer applications to effectively handle data including dates on and after January 1, 2000. "Yen" means the lawful currency of Japan. --- "1998 364-Day Credit Agreement" means that certain 364-Day Credit ----------------------------- Agreement dated as of December 11, 1998, among the Company, the banks listed on the signature pages thereto, and Bank One (f/k/a The First National Bank of Chicago), as Administrative Agent, as amended, modified, restated or supplemented from time to time. SECTION 1.02. Computation of Time Periods. In this Agreement in the --------------------------- computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding." SECTION 1.03. Accounting Terms; Modifications due to Implementation of -------------------------------------------------------- Euro. (a) All accounting terms not specifically defined herein shall be - ---- construed in accordance with generally accepted accounting principles consistent with those applied in the preparation of the financial statements then most recently delivered by the Company to the Banks in accordance with Section 5.03 ------------ ("GAAP"); provided, however, that, if any changes in accounting principles from those used in the preparation of the consolidated financial statements of the Company and its Subsidiaries for the fiscal year of the Company ended December 31, 1998 (as delivered to the Lenders pursuant to Section 4.01(e)) occur by --------------- reason of the promulgation of rules, regulations, pronouncements, opinions or other requirements of the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or successors thereto or agencies with similar functions) and such changes would affect (or would result in a change in the method of calculation of) the covenant set forth in Section 5.02, ------------ or any of the defined terms related thereto contained in Section 1.01, then upon ------------ the request of any party hereto, the Company, the Administrative Agent and the Banks shall enter into negotiations in good faith, if and to the extent necessary, to amend such covenant or such terms as would be affected by such changes in GAAP, in accordance with Section 9.01, in such manner as would ------------ maintain the economic terms of such covenant as in effect under this Agreement, prior to giving effect to the occurrence of any such changes; and provided further, however, that until the amendment of the covenant and the defined terms referred to in the immediately preceding proviso becomes effective, such covenant and defined terms shall be performed, observed and determined, and any determination of compliance with such covenant shall be made, as though no such changes in accounting principles had been made and the Company shall deliver to the Banks, in addition to the consolidated financial statements otherwise required to be delivered to the Banks under Sections 5.03(a) or 5.03(b) during ---------------- ------- such period, a statement of reconciliation conforming such consolidated financial statements to GAAP prior to such changes. (b) If the Administrative Agent determines that modifications to this Agreement are necessary as a result of the commencement of the third stage of European Economic and Monetary Union, then the Company, the Administrative Agent and the Banks shall enter -15- into negotiations in good faith to amend this Agreement in such manner as to put the parties in the same position as if the Euro Implementation Date had not occurred. No such modifications shall become effective until this Agreement has been amended in accordance with Section 9.01 to incorporate such modifications. ARTICLE II AMOUNTS AND TERMS OF THE ADVANCES --------------------------------- SECTION 2.01. The Committed Advances. Each Bank severally agrees, on the ---------------------- terms and conditions hereinafter set forth, to make Committed Advances to the Borrowers from time to time on any Business Day during the period from the Effective Date until the Termination Date in an aggregate amount with respect to all Borrowers not to exceed at any time outstanding an amount (such Bank's "Available Commitment") equal to (i) the amount set forth opposite such Bank's name on Schedule I hereto or, if such Bank has entered into any Assignment and ---------- Acceptance, set forth for such Bank in the Register, as such amount may be reduced pursuant to Section 2.05 (such Bank's "Commitment") minus (ii) such ------------ ----- Bank's Pro Rata Share of the aggregate amount of the Uncommitted Advances then outstanding. Each Committed Borrowing shall be in an aggregate amount of not less than $20,000,000 or an integral multiple of $1,000,000 in excess thereof or, if the requested currency for such Committed Advance is not Dollars, an equivalent amount (determined in accordance with Section 2.16) and multiple in ------------ the requested Alternative Currency, and, subject to Section 2.02, shall consist ------------ of Committed Advances of the same Type made on the same day to the same Borrower by the Banks ratably according to their respective Commitments in the currency so requested. Within the limits of each Bank's Available Commitment, a Borrower may borrow under this Section 2.01, prepay pursuant to Section 2.10, and ------------ ------------ reborrow under this Section 2.01. ------------ SECTION 2.02. Making the Committed Advances. (a) Each Committed ----------------------------- Borrowing shall be made on notice by the Company (or, if such Borrower is a Borrowing Subsidiary, by the Company on behalf of such Borrowing Subsidiary) to the Administrative Agent (which shall give each Bank prompt notice thereof by telecopy), given not later than 10:00 A.M. (Chicago time) on (i) the date of a proposed Committed Borrowing comprised of Base Rate Advances, (ii) the third Business Day prior to the date of a proposed Committed Borrowing comprised of Eurocurrency Rate Advances to be denominated in Dollars, and (iii) the fourth Business Day prior to the date of a proposed Committed Borrowing comprised of Eurocurrency Rate Advances to be denominated in an Alternative Currency. Each such notice of a Committed Borrowing (a "Notice of Committed Borrowing") shall be by telecopy confirmed immediately in writing, in substantially the form of Exhibit E-1 hereto, specifying therein the requested (i) date of such Committed - ----------- Borrowing, (ii) Type of Committed Advances comprising such Committed Borrowing, which, in the case of a Committed Borrowing denominated in an Alternative Currency, shall be Eurocurrency Rate Advances, (iii) currency for such Committed Borrowing, which shall be in Dollars or an Alternative Currency, (iv) aggregate amount of such Committed Borrowing, (v) in the case of a Committed Borrowing consisting of Eurocurrency Advances, the initial Interest Period for each Committed Advance comprising such Committed Borrowing, and (vi) whether such Committed Borrowing is to be made by the Company or by a specified Borrowing -16- Subsidiary. The Administrative Agent shall, promptly after such time as the Company or such Borrower may no longer revoke the Notice of Committed Borrowing without any liability to the Banks, notify each Bank and the Company or such Borrower of the applicable interest rate under Section 2.07(a) or (b). Each --------------- --- Bank shall, before 12:00 P.M. (Chicago time) on the date of such Committed Borrowing, make available for the account of its Applicable Lending Office to the Administrative Agent at the Domestic Lending Office of the Bank then acting as Administrative Agent, in federal or otherwise immediately available funds, such Bank's Pro Rata Share of such Committed Borrowing. After the Administrative Agent receives such funds and upon fulfillment of the applicable conditions set forth in Article III, the Administrative Agent will make such ----------- funds available to the applicable Borrower at the Administrative Agent's aforesaid address. (b) Anything in subsection (a) above to the contrary notwithstanding: (i) If with respect to a request for a Committed Borrowing of an Alternative Currency other than Sterling, German Marks, Swiss Francs or Yen, any Bank shall, prior to 10:00 A.M. (Chicago time) on the second Business Day before the requested date of such Committed Borrowing, notify the Administrative Agent that the requested Alternative Currency is not practically available to such Bank in the amount required to make its Committed Advance in connection therewith; or (ii) If any Bank shall, prior to making any requested Committed Borrowing consisting of Eurocurrency Rate Advances in an Alternative Currency, notify the Administrative Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or that any central bank or other governmental authority asserts that it is unlawful, for such Bank or its Eurocurrency Lending Office or any other Applicable Lending Office to perform its obligations hereunder to make Eurocurrency Rate Advances in such currency or to fund or maintain Eurocurrency Rate Advances in such currency hereunder; or (iii) If the Majority Banks shall, prior to making any requested Committed Borrowing of an Alternative Currency other than Sterling, German Marks, Swiss Francs, Yen or the Euro, notify the Administrative Agent or the Administrative Agent shall reasonably determine that currency control or other exchange regulations are imposed in the country in which such currency is issued which result in the introduction of different types of such currency or that there is a change in national or international financial, political or economic conditions or currency exchange rates or exchange controls which would make it impracticable for such Advance to be denominated in the Alternative Currency; then, upon receipt of such notice, the Administrative Agent shall so notify the Company and the applicable Borrower (if other than the Company) and the Company or such Borrower may, without incurring an obligation to indemnify for losses, costs or expenses under Section 2.02(d), by notice to the Administrative Agent --------------- (which shall promptly notify each Bank), either -17- (x) withdraw the applicable Notice of Committed Borrowing, in which case the Committed Borrowing shall not occur; (y) request that such Committed Borrowing be made by the Banks in Dollars as a Committed Borrowing comprised of either Eurocurrency Rate Advances or Base Rate Advances, in which case the original Notice of Committed Borrowing shall be deemed to be a Notice of Committed Borrowing which requests a Committed Borrowing in an aggregate principal amount in Dollars equivalent, on the date the Company or such Borrower so notifies the Administrative Agent, to the amount of the originally requested currency for such Type of Committed Advances (determined in accordance with Section 2.16); provided that such request may not ------------- -------- be made by the Company or such Borrower if the requested Type of Committed Advances is Eurocurrency Rate Advances and the request by the Company or such Borrower is not given to the Administrative Agent prior to 2:00 P.M. (London time) on the second Business Day before the requested date of such Committed Borrowing; or (z) only in the case of a Bank giving a notice described in Section 2.02(b)(ii) above, request that such Committed Borrowing ------------------- be made by the Banks (other than the notifying Bank) and that no Committed Advance be made by the notifying Bank in connection with such Committed Borrowing. In the case of any notice given under clause (y) above, the Company or such Borrower shall specify in such notice the amount and type of Committed Advance to be made by each Bank in connection therewith. Any notice under this subsection (b) shall be given no later than 2:00 P.M. (London time) two Business Days before the date of the requested Committed Borrowing, may be given by telephone and, if by telephone, shall be confirmed promptly in writing. If neither the Company nor the applicable Borrower shall provide a timely notice as contemplated in clause (x), (y) or (z) above in response to a notice by any Bank under clause (i) or (ii) above, the applicable Notice of Committed Borrowing shall be deemed withdrawn. (c) Anything in subsection (a) above to the contrary notwithstanding, if the Majority Banks shall, no later than 5:00 P.M. (Chicago time) three Business Days before the date of any requested Committed Borrowing, continuation or conversion consisting of Eurocurrency Rate Advances, or any continuation thereof or conversion thereto, notify the Administrative Agent that the Eurocurrency Rate for any Interest Period for such Eurocurrency Rate Advances, plus additional interest, if any, payable under Section 2.08, will not adequately ------------ reflect the cost to such Majority Banks of making, funding, converting to or continuing their respective Eurocurrency Rate Advances for such Committed Borrowing for such Interest Period, then the Administrative Agent shall promptly notify the Company, the applicable Borrower (if other than the Company) and the Banks of such circumstances and upon receipt of such notice, the Company or such Borrower may, without incurring an obligation to indemnify for losses, costs or expenses under Section 2.02(d), by notice to the Administrative Agent (which --------------- shall promptly notify each Bank), either: -18- (i) withdraw the applicable Notice of Committed Borrowing, in which case the Committed Borrowing shall not occur; (ii) withdraw the applicable Notice of Conversion or Continuation, in which case the conversion or continuation of such Committed Borrowing shall not occur; or (iii) request that such Committed Borrowing, continuation or conversion be made by the Banks in Dollars as a Committed Borrowing, continuation or conversion, in which case the original Notice of Committed Borrowing, or Notice of Conversion or Continuation shall be deemed to be a Notice of Committed Borrowing, or Notice of Conversion or Continuation which requests a Committed Borrowing, continuation or conversion in an aggregate principal amount in Dollars equivalent, on the date the Company or such Borrower so notifies the Administrative Agent, to the amount of the originally-requested currency for such Committed Advances; provided that -------- such request may not be made by the Company or such Borrower if the request by the Company or such Borrower is not given to the Administrative Agent prior to 2:00 P.M. (London time) on the second Business Day before the requested date of such Committed Borrowing, continuation or conversion. In the case of any notice given under clause (iii) above, the Company or such Borrower shall specify in such notice the amount and Type of Committed Advances to be made, continued or converted by the Banks in connection therewith. Any notice under this subsection (c) shall be given no later than 2:00 P.M. (London time) two Business Days before the date of the requested Committed Borrowing, may be given by telephone, and, if by telephone, shall be confirmed promptly in writing. From and after the date the Administrative Agent receives the notice described in Section 2.02(c), the Banks' obligation to make Eurocurrency --------------- Advances for any affected Interest Period shall be suspended until the Majority Banks notify the Administrative Agent that the circumstances giving rise to such notice no longer exist. If neither the Company nor the applicable Borrower shall provide a timely notice as contemplated in clauses (i), (ii) or (iii) above with respect to a Notice of Committed Borrowing, the applicable Notice of Committed Borrowing shall be deemed withdrawn. If neither the Company nor the applicable Borrower shall provide timely a notice as contemplated in clauses (i), (ii) or (iii) above with respect to a Notice of Continuation or Conversion, the Company or such applicable Borrower shall be deemed to have made the request described in clause (iii). (d) Each Notice of Committed Borrowing and Notice of Conversion or Continuation may be revoked by the Company or, if other than the Company, the applicable Borrower, by notice to the Administrative Agent without any liability on the part of the Company or such Borrower at any time prior to (i) 10:00 A.M. (Chicago time) on the date of a proposed Committed Borrowing, continuation or conversion comprised of Base Rate Advances, (ii) 11:00 A.M. (London time) on the second Business Day prior to the date of a proposed Committed Borrowing, continuation or conversion comprised of Eurocurrency Rate Advances to be denominated in Dollars, and (iii) 11:00 A.M. (London time) on the third Business Day prior to the date of a proposed Committed Borrowing, continuation or conversion comprised of Eurocurrency Rate Advances to be denominated in an Alternative -19- Currency. In the case of any Committed Borrowing, continuation or conversion which the related Notice of Committed Borrowing, or Notice of Conversion or Continuation, specifies is to be comprised of Eurocurrency Rate Advances, unless the Company or the applicable Borrower revokes such Notice of Committed Borrowing or Notice of Conversion or Continuation in accordance with the preceding sentence and except as otherwise provided in Sections 2.02(b) and ---------------- (c), the Company or such Borrower shall indemnify each Bank against any loss, - --- cost or expense reasonably incurred by such Bank as a result of any failure to fulfill on or before the date specified in such Notice of Borrowing or Notice of Conversion or Continuation for such Committed Borrowing, conversion or continuation, the applicable conditions set forth in Article III, including, ----------- without limitation, any loss (excluding loss of anticipated profits), cost or expense reasonably incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Bank to fund the Committed Advance to be made by such Bank as part of such Committed Borrowing, conversion or continuation, when such Committed Advance, as a result of such failure, is not made, continued or converted on such date. (e) Unless the Administrative Agent shall have received notice from a Bank prior to the date of any Committed Borrowing that such Bank will not make available to the Administrative Agent such Bank's Pro Rata Share of such Committed Borrowing, the Administrative Agent may assume that such Bank has made such Pro Rata Share available to the Administrative Agent on the date of such Committed Borrowing in accordance with subsection (a) of this Section 2.02 and ------------ the Administrative Agent may, in reliance upon such assumption, make a corresponding amount available to the applicable Borrower on such date. If and to the extent that such Bank shall not have so made such Pro Rata Share available to the Administrative Agent, such Bank and such Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to such Borrower until the date such amount is repaid to the Administrative Agent, at (i) in the case of such Borrower, the interest rate applicable at the time to Committed Advances comprising such Committed Borrowing and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay such corresponding amount to the Administrative Agent, such amount so repaid shall constitute such Bank's Committed Advance as part of such Committed Borrowing for purposes of this Agreement. (f) A Bank's failure to make the Committed Advance to be made by it as part of any Committed Borrowing shall not relieve any other Bank of its obligation, if any, hereunder to make its Committed Advance on the date of such Committed Borrowing. No Bank shall be responsible for the failure of any other Bank to make the Committed Advance to be made by such other Bank on the date of any Committed Borrowing. SECTION 2.03. The Uncommitted Advances. (a) Each Bank severally agrees ------------------------ that any Borrower may make Uncommitted Borrowings in Dollars from time to time on any Business Day during the period from the date hereof until 30 days before the Termination Date in the manner set forth below; provided that, following the -------- making of each Uncommitted Borrowing, the aggregate amount with respect to all Borrowers of the Advances then outstanding shall not exceed the aggregate amount of the Commitments of the Banks. -20- (i) A Borrower may request, and the Company may request for the benefit of any Borrowing Subsidiary, an Uncommitted Borrowing to be made by such Borrower under this Section 2.03 by delivering to the Administrative ------------ Agent, by telecopier not later than the applicable Request Deadline a notice of an Uncommitted Borrowing (a "Notice of Uncommitted Borrowing"), in substantially the form of Exhibit E-2 hereto, specifying therein (A) the ----------- requested date of the proposed Uncommitted Borrowing, (B) the aggregate amount of the proposed Uncommitted Borrowing, (C) that each Bank submitting an offer shall quote an Uncommitted Borrowing Margin, or that each Bank submitting an offer shall quote a fixed interest rate per annum without reference to the Eurocurrency Rate, (D) maturity date for repayment of each Uncommitted Advance to be made as part of such Uncommitted Borrowing (which maturity date may not be earlier than seven (7) days, or later than 180 days after the date of the proposed Uncommitted Borrowing or later than the Termination Date) and whether such Uncommitted Advance may be prepaid, and if so, whether with or without penalty, (E) interest payment date or dates relating thereto, (F) Borrower and (G) other material terms to be applicable to such Uncommitted Borrowing. The Administrative Agent shall promptly notify each Bank of its receipt of each such Notice of Uncommitted Borrowing by sending each Bank a copy thereof. "Request Deadline" ---------------- means (x) in the case of a Fixed Rate Uncommitted Borrowing, 4:00 P.M. (Chicago time) on the Business Day prior to the date of such proposed Uncommitted Borrowing and (y) in the case of a Eurocurrency Rate Uncommitted Borrowing, 4:00 P.M. (Chicago time) four (4) Business Days prior to the date of such proposed Uncommitted Borrowing. (ii) Each Bank shall, if, in its sole discretion, it elects to do so, irrevocably offer to make one or more Uncommitted Advances to such Borrower as part of such proposed Uncommitted Borrowing at a rate or rates of interest specified by such Bank, in its sole discretion, by notifying the Administrative Agent not later than the applicable Quote Deadline of the minimum amount (if any) and maximum amount of each Uncommitted Advance which such Bank would be willing to make as part of such proposed Uncommitted Borrowing (which amounts may, subject to the proviso to the first sentence of this Section 2.03(a), exceed such Bank's Commitment, if --------------- any), the Uncommitted Borrowing Margin or Margins to be applied in the determination of the rate or rates of interest therefor (or, if the Notice of Uncommitted Borrowing shall have requested that fixed rates per annum be quoted, the fixed rate or rates per annum therefor) and such Bank's Applicable Lending Office with respect to such Uncommitted Advance. If any Bank shall elect not to make such an offer, such Bank shall so notify the Administrative Agent before the applicable Quote Deadline, and such Bank shall not be obligated to, and shall not, make any Uncommitted Advance as part of such Uncommitted Borrowing; provided that the failure by any Bank -------- to give such notice shall not cause such Bank to be obligated to make any Uncommitted Advance as part of such proposed Uncommitted Borrowing. The Administrative Agent shall promptly notify the Company and, if applicable, the applicable Borrowing Subsidiary of each Bank's response -21- pursuant to this paragraph (ii); provided, that if Bank One shall elect to -------- make an offer under this paragraph (ii), such offer shall be delivered to the Company and, if applicable, the Borrowing Subsidiary not later than one-half hour prior to the applicable Quote Deadline. Each Borrower shall be entitled to assume that each quote of an Uncommitted Borrowing Margin or a fixed rate per annum by a Bank includes, and such Bank shall not be entitled to claim as additional interest or costs under Section 2.08 or ------------ otherwise, any costs to such Bank in the nature of a reserve requirement, assessment or other charge in connection with the Uncommitted Advance to which such quote relates, except that such Bank shall be entitled to claim increased costs and additional compensation under Section 2.12(a) and (b) --------------- and Section 2.19, but solely with respect to the changes described in such ------------ provisions that occur after the date such Uncommitted Advance is made. "Quote Deadline" means, (x) in the case of a Fixed Rate Uncommitted -------------- Borrowing, 9:00 A.M. (Chicago time) on the date of such proposed Uncommitted Borrowing and (y) in the case of a Eurocurrency Rate Uncommitted Borrowing, 9:00 A.M. (Chicago time) three Business Days prior to the date of such proposed Uncommitted Borrowing. (iii) Such Borrower, or the Company on behalf of such Borrower, shall, in turn, before the applicable Acceptance Deadline, either (A) cancel, without incurring an obligation on the part of such Burrower or the Company to indemniy for losses, costs or expenses under Section 2.02(d), such Uncommitted Borrowing by giving the --------------- Administrative Agent notice to that effect, in which case such Uncommitted Borrowing shall not be made, or (B) accept one or more of the offers made by any Bank or Banks pursuant to paragraph (ii) above, in its sole discretion but in any event in ascending order of the fixed rates of interest or Uncommitted Borrowing Margins (as applicable) offered by all of the Banks responding to such Notice of Uncommitted Borrowing, by giving notice to the Administrative Agent of the relevant Banks and the respective amounts of each Uncommitted Advance (each of which amounts shall be equal to or greater than the minimum amount, and equal to or less than the maximum amount, offered to be made by the respective Bank for such Uncommitted Advance pursuant to Section 2.02(a)(ii) above) and reject ------------------- any remaining offers made by Banks pursuant to such Section by giving the Administrative Agent notice to that effect. The Company (either for itself or on behalf of a Borrowing Subsidiary) may not accept offers which, in the aggregate, exceed the requested Uncommitted Borrowing specified in the applicable Notice of Uncommitted Borrowing. If two or more Banks bid at the same Uncommitted Borrowing -22- Margin or fixed rate of interest, as the case may be, and the amount of accepted offers is less than the aggregate amount of such offers, the amount to be borrowed from such Banks as part of such Uncommitted Borrowing shall be allocated pro rata on the basis of the maximum -------- amount offered by each such Bank at such fixed rates or Uncommitted Borrowing Margins in connection with such Uncommitted Borrowing. The Administrative Agent shall promptly notify the Banks of each notice it receives pursuant to this paragraph (iii). "Acceptance Deadline" means, (x) ------------------- in the case of an Uncommitted Borrowing to be denominated in Dollars, 10:00 A.M. (Chicago time) on the date of such proposed Uncommitted Borrowing and (y) in the case of an Uncommitted Borrowing to be denominated in an Alternative Currency, 4:00 P.M. (Chicago time) three Business Days prior to the date of such proposed Uncommitted Borrowing. (iv) If such Borrower accepts, or the Company accepts on such Borrower's behalf, one or more of the offers made by any Bank or Banks pursuant to Section 2.03(a)(iii)(B) above, the Administrative Agent shall ----------------------- in turn promptly notify (A) each Bank that has made an offer pursuant to Section 2.03(a)(ii) of the date and aggregate amount of such Uncommitted ------------------- Borrowing and whether or not any offer or offers so made by such Bank have been accepted by such Borrower, (B) each Bank that is to make an Uncommitted Advance as a part of such Uncommitted Borrowing, of the amount of each Uncommitted Advance to be made by such Bank as part of such Uncommitted Borrowing, and (C) each Bank that is to make an Uncommitted Advance as part of such Uncommitted Borrowing, upon receipt, that the Administrative Agent has received forms of documents appearing to fulfill the applicable conditions set forth in Article III. Each Bank that is to ----------- make an Uncommitted Advance as part of such Uncommitted Borrowing shall, before 1:00 P.M. (Chicago time) on the date of such Uncommitted Borrowing specified in the notice received from the Administrative Agent pursuant to clause (A) of the preceding sentence or any later time when such Bank shall have received notice from the Administrative Agent pursuant to subclause (C) of the preceding sentence, make available to the Administrative Agent at the Administrative Agent's Domestic Lending Office, in federal or otherwise immediately available funds, such Bank's portion of such Uncommitted Borrowing. After the Administrative Agent receives such funds and when the applicable conditions set forth in Article III have been ----------- fulfilled, the Administrative Agent will make such funds available to the applicable Borrower at the Administrative Agent's aforesaid address. Promptly after (x) each Uncommitted Borrowing, the Administrative Agent will notify each Bank of the amount and date of the Uncommitted Borrowing and the maturity date thereof and the Available Commitment of each Bank after giving effect to such Uncommitted Borrowing and (y) the prepayment of any Uncommitted Borrowing by or on behalf of such Borrower, the Administrative Agent will notify each Bank of the amount and date of each -23- such prepayment and the Available Commitment of each Bank after giving effect thereto. (b) Each Uncommitted Borrowing shall be in an aggregate amount of not less than $25,000,000 or an integral multiple of $1,000,000 in excess thereof, or if the requested currency for such Advance is not Dollars, the equivalent of such amount (determined in accordance with Section 2.16) or multiple in the requested ------------ Alternative Currency. (c) Within the limits and on the conditions set forth in this Section ------- 2.03, each Borrower may from time to time borrow under this Section 2.03, repay ------------ pursuant to subsection (d) below, and reborrow under this Section 2.03; provided ------------ -------- that an Uncommitted Borrowing shall not be made within three Business Days of any other Uncommitted Borrowing. (d) Each Borrower shall repay to the Administrative Agent, for the account of each Bank which has made an Uncommitted Advance to such Borrower, on the maturity date of each such Uncommitted Advance (such maturity date being that specified for repayment of such Uncommitted Advance in the related Notice of Uncommitted Borrowing delivered pursuant to Section 2.03(a)(i) above) the then ------------------ unpaid principal amount of such Uncommitted Advance. A Borrower shall not have the right to prepay any principal amount of any Uncommitted Advance without the consent of the Bank making such Advance. (e) Each Borrower shall pay interest on the unpaid principal amount of each Uncommitted Advance made to it, from the date of such Uncommitted Advance to the date the principal amount of such Uncommitted Advance is repaid in full, at the rate of interest for such Uncommitted Advance specified by the Bank making such Uncommitted Advance in its notice with respect thereto delivered pursuant to Section 2.03(a)(ii) above, payable on the interest payment date or ------------------- dates specified for such Uncommitted Advance in the related Notice of Uncommitted Borrowing delivered pursuant to Section 2.03(a)(i) above. ------------------ (f) The Borrower of any Uncommitted Advance shall, promptly upon request by the Bank making such Uncommitted Advance (either in the quote delivered by such Bank pursuant to Section 2.03(a)(ii) or by notice to the Administrative ------------------- Agent), execute and deliver to the Administrative Agent an Uncommitted Note payable to the order of such Bank in a principal amount equal to the principal amount of such Uncommitted Advance and otherwise on such terms as were agreed to for such Uncommitted Advance in accordance with Section 2.03. ------------ SECTION 2.04. Facility Fee and Utilization Fee. (a) The Company and each -------------------------------- Borrowing Subsidiary jointly and severally agree to pay to the Administrative Agent, for the account of each Bank other than a Designated Bidder, a facility fee ("Facility Fee") on the average daily Commitment of such Bank from the date hereof until the Termination Date (or, if the Company has made the Term Loan Election, until the Maturity Date), payable in arrears on the first Business Day of each January, April, July and October during the term of such Bank's Commitment, commencing January 3, 2000, and on the Termination Date (or, if the Company has made the Term Loan Election, on the Maturity Date), at a rate per annum equal to 0.06%. -24- (b) To the extent, and for so long as, (i) the average daily aggregate outstanding principal amount of Advances at any time exceeds one-half of the aggregate Commitments at such time, and (ii) Category 3 Status, Category 4 --- Status or Category 5 Status exists, the Company and each Borrowing Subsidiary, jointly and severally, agree to pay to each Bank other than a Designated Bidder a utilization fee (the "Utilization Fee") equal to 0.05% per annum of the aggregate principal amount of such Bank's Advances at such time. The Utilization Fee shall be payable on each date the Facility Fee is payable. (c) Notwithstanding the foregoing, (i) any Facility Fee or Utilization Fee accrued with respect to any Commitment of a Defaulting Bank during the period prior to the time such Bank became a Defaulting Bank and unpaid at such time shall not be payable by the Borrowers so long as such Bank shall be a Defaulting Bank, except to the extent such Facility Fee or Utilization Fee was due and payable prior to such time, and (ii) no Facility Fee or Utilization Fee shall accrue on the Commitment of a Defaulting Bank so long as such Bank is a Defaulting Bank. SECTION 2.05. Reduction and Termination of the Commitments. (a) The -------------------------------------------- Company shall have the right, upon at least four (4) days' notice to the Administrative Agent to terminate in whole or reduce ratably in part the unused portions of the respective Commitments of the Banks, provided that the aggregate -------- amount of the Commitments of the Banks shall not be reduced to an amount which is less than the aggregate principal amount of the Uncommitted Advances then outstanding and provided, further, that each partial reduction shall be in an -------- ------- aggregate amount of $10,000,000 or any integral multiple of $1,000,000 in excess thereof. (b) Provided that no Event of Default shall have occurred and be continuing, the Company may at any time replace any Bank, in whole but not in part, by (i) giving such Bank and the Administrative Agent not less than ten (10) Business Days' prior notice thereof, which notice shall be irrevocable and effective only when received by such Bank and the Administrative Agent and shall specify the effective date of such replacement, and (ii) effecting an assignment of all of the Bank's Commitment and Advances in accordance with Section 9.07. ------------ (c) On the Termination Date, if the Company has made the Term Loan Election in accordance with Section 2.06(a) prior to such date, and from time to --------------- time thereafter upon each prepayment of the Advances, the aggregate Commitments of the Banks shall be automatically and permanently reduced on a pro rata basis --- ---- by an amount equal to the amount by which (i) the aggregate Commitments immediately prior to such reduction exceeds (ii) the aggregate unpaid principal ------- amount of all Advances (determined in the case of any Advances denominated in an Alternative Currency by reference to the Dollar Amount) outstanding at such time. SECTION 2.06. Payment; Conversion and Continuation. (a) On the ------------------------------------ Termination Date, the Borrowers shall, subject to the next succeeding sentence, repay to the Administrative Agent for the ratable account of the Banks, the entire unpaid principal amount of the Advances made by each Bank. The Company may, upon not less than 15 days' notice to the Administrative Agent, elect (the "Term Loan Election") to convert all of the Advances outstanding on the ------------------ Termination Date in effect at such time into a term loan -25- which the Borrowers shall repay in full, together with all accrued interest, ratably to the Banks on the Maturity Date, with any prepayment thereof subject to Section 2.11; provided that the Term Loan Election may not be exercised if an ------------ -------- event shall have occurred and be continuing which constitutes an Event of Default or which would constitute an Event of Default but for the requirement that notice be given or time elapse or both on the date of notice of the Term Loan Election or on the date on which the Term Loan Election is to be effected. All Advances converted to a term loan pursuant to this Section 2.06(a) shall continue to constitute Advances except that the Borrowers may not reborrow pursuant to Section 2.01 after all or any portion of the Advances have been prepaid pursuant to Section 2.10. (b) Any Borrower may elect (x) to convert Base Rate Advances or any portion thereof to Eurocurrency Rate Advances, (y) to convert Eurocurrency Rate Advances or any portion thereof into Base Rate Advances, or (z) to continue any Eurocurrency Rate Advance or any portion thereof for an additional Interest Period; provided, however, that the aggregate amount of Base Rate Advances being -------- ------- converted into Eurocurrency Rate Advances or of Eurocurrency Rate Advances being continued shall, in the aggregate, equal $20,000,000 or an integral multiple of $1,000,000 in excess thereof. The applicable Interest Period for the continuation of any Eurocurrency Rate Advance shall commence on the day on which the immediately-preceding Interest Period expires. Each conversion or continuation shall be allocated among the Committed Advances of each Bank in accordance with its Pro Rata Share of the amount so converted or continued. Each such election shall be in substantially the form of Exhibit F (a "Notice of --------- Conversion or Continuation") and shall be made by giving the Administrative Agent notice by 10:00 a.m. (Chicago time) on the date of such conversion or continuation, in the case of a conversion to a Base Rate Advance, giving the Administrative Agent at least three Business Days' prior written notice thereof in the event of a conversion to or continuation of a Eurocurrency Advance specifying, in each case (i) whether a conversion or continuation is to take place, (ii) what Advances are to be converted or continued, and if converted, the Type of Advance to which it is to be converted, (iii) the amount of the conversion or continuation, (iv) the Interest Period therefor and (v) in the case of a conversion, the date of conversion (which date shall be a Business Day). The Administrative Agent shall promptly notify each Bank of its receipt of a Notice of Conversion or Continuation by sending such Bank a copy thereof. If, within the time period required under the terms of this Section 2.06(b), the --------------- Administrative Agent does not receive a Notice of Conversion or Continuation from the applicable Borrower containing an election to continue or convert any Advances for an additional Interest Period, then, upon the expiration of the Interest Period therefor, such Advances will be automatically converted to Base Rate Advances. SECTION 2.07. Interest on Committed Advances. Each Borrower shall pay ------------------------------ interest on the unpaid principal amount of each Committed Advance made by each Bank to it from the date of such Committed Advance until such principal amount shall be paid in full, at the following rates per annum: (a) Base Rate Advances. During such period as such Committed Advance is a ------------------ Base Rate Advance, a rate per annum equal at all times to the Base Rate in effect from time to time, payable quarterly in arrears on the first Business Day of each January, April, July and October, commencing January 3, 2000, and on the Termination Date (or, if the Company -26- has made the Term Loan Election, on the Maturity Date). The Administrative Agent shall give notice to the Company and the applicable Borrower (if other than the Company) and each Bank of any change in the Base Rate promptly after such change occurs, but the Administrative Agent's failure to give such notice shall not affect the obligation of the Company or such Borrower to pay interest at such rate when it becomes due and payable. (b) Eurocurrency Rate Advances. During such period as such Committed -------------------------- Advance is a Eurocurrency Rate Advance, a rate per annum equal at all times during each Interest Period for such Committed Advance to the sum of the Eurocurrency Rate for such Interest Period plus the Applicable Margin, payable on the last day of such Interest Period and, if such Interest Period has a duration of more than three months, on each day which occurs during such Interest Period every three months from the first day of such Interest Period and on the date such Eurocurrency Rate Advance shall be converted or paid in full. (c) Default Interest. Notwithstanding the foregoing provisions of this ---------------- Section 2.07, any amount of principal and fees and, to the extent permitted by - ------------ law, interest, that is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest, from the date on which such amount is due until such amount is paid in full, payable in arrears on the date such amount shall be paid in full and on demand, at a rate per annum equal at all times to 1% per annum above (i) in the case of principal, the rate of interest otherwise thereto from time to time in accordance with the terms hereof, and (ii) in the case of interest and fees, the Base Rate in effect from time to time. SECTION 2.08. Additional Interest on Eurocurrency Rate Advances. Each ------------------------------------------------- Borrower shall pay to each Bank other than Designated Bidders, so long as and to the extent such Bank shall be required under regulations of the Board of Governors of the Federal Reserve System (or any similar authority outside the United States, in the case of Committed Advances in Alternative Currencies) to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency Liabilities (or any other category of liabilities that includes deposits by reference to which the interest rate on Eurocurrency Rate Advances in the applicable Alternative Currency is determined) and such Bank's performance under this Agreement (and other like agreements) shall have given rise to additional reserve requirements for such Bank thereunder, additional interest on the unpaid principal amount of each Committed Advance constituting a Eurocurrency Rate Advance of such Bank made to such Borrower, from the date of such Committed Advance until such principal amount is paid in full, at an interest rate per annum equal at all times to the remainder obtained by subtracting (i) the Eurocurrency Rate for the applicable Interest Period for such Committed Advance from (ii) the rate obtained by dividing such Eurocurrency Rate by a percentage equal to 100% minus the Eurocurrency Rate Reserve Percentage of such Bank for such Interest Period, payable on each date on which interest is payable on such Committed Advance. Such Bank shall, not later than the last day of the applicable Interest Period, provide notice to the Administrative Agent, the Company and, if other than the Company, the applicable Borrower of any such additional interest arising in connection with such Committed Advance. Such additional interest so notified on a timely basis by any Bank shall be payable to the Administrative Agent for the account of such Bank on the dates specified for payment of interest for such Committed Advance in Section 2.07. ------------ SECTION 2.09. Interest Rate Determination. (a) Reserved. --------------------------- -27- (b) The Administrative Agent shall give prompt notice to the Company and the applicable Borrower (if other than the Company) and each of the Banks (other than the Designated Bidders) of the applicable interest rate determined by the Administrative Agent for purposes of Section 2.07(a) or (b). --------------- --- (c) On the date on which the aggregate unpaid principal amount of Eurocurrency Rate Advances comprising any Committed Borrowing shall be reduced, by payment, prepayment or otherwise, to less than $20,000,000, such Advances shall automatically convert into Base Rate Advances and such conversion shall be subject to Section 2.11. ------------ SECTION 2.10. Prepayments. A Borrower may prepay, on any Business Day ----------- following notice by 11:00 a.m. (Chicago time) on such Business Day to the Administrative Agent (in the case of Base Rate Advances) and on three Business Days' prior notice to the Administrative Agent (in the case of Eurocurrency Rate Advances), each Committed Borrowing made to such Borrower, in whole or in part. Such notice shall include the proposed date and aggregate principal amount of such prepayment, and if such notice is given, such Borrower shall prepay such principal amount, together with accrued interest to the date of such prepayment on the principal amount prepaid. Any amounts payable, if any, pursuant to Section 2.11 hereof in connection with any prepayment shall be paid on the date - ------------ of such prepayment; provided, however, that each partial prepayment shall be in -------- ------- an aggregate principal amount of not less than $10,000,000 or an integral multiple of $1,000,000 in excess thereof. Subject to Sections 2.12 and 2.13, ------------- ---- each prepayment of a Committed Borrowing shall be made to each Bank in accordance with such Bank's Pro Rata Share thereof. The Company shall, on the first Business Day of each January, April, July and October, if the aggregate outstanding principal Dollar Amount of all Advances, calculated by the Administrative Agent on the seventh Business Day prior to such payment date and reported to the Company by the fifth Business Day prior to such payment date, exceeds (as the result of fluctuations in applicable foreign exchange rates or otherwise) 105% of the then aggregate amount of the Banks' Commitments (calculated as aforesaid), prepay a Committed Borrowing or Borrowings (in whole or in part, and in any case as selected by the Company) in an aggregate Dollar Amount (calculated as aforesaid, and rounded upward, if necessary, to the nearest $1,000,000) equal to the excess of: (i) the aggregate principal Dollar Amount (calculated as aforesaid) of Advances outstanding, over (ii) the then aggregate amount of the Banks' Commitments (calculated as aforesaid). Each prepayment of any Committed Borrowing (in whole or in part) made pursuant to this Section 2.10 shall be without premium or penalty, but shall be subject ------------ to the provisions of Section 2.11. Any mandatory prepayment of a Committed ------------ Borrowing shall be made to the Administrative Agent for the account of each Bank based on such Bank's Pro Rata Share of such Committed Borrowing and shall include accrued and unpaid interest on the principal amount prepaid and all amounts owing under Section 2.11. ------------ -28- SECTION 2.11. Funding Indemnification. If any payment of principal of any ----------------------- Advance (other than a Base Rate Advance) is made other than on the last day of an Interest Period for such Advance, as a result of acceleration of the maturity of the Advances pursuant to Section 6.01 or for any other reason, or if any ------------ Eurocurrency Rate Advance is converted to a Base Rate Advance pursuant to Section 2.13(b) on any day other than the last day of an Interest Period for - --------------- such Eurocurrency Rate Advance, the applicable Borrower shall, upon demand by any Bank (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Bank any amounts required to compensate such Bank for any additional losses, costs or expenses which it may reasonably incur as a result of such payment or conversion, including without limitation any loss (excluding loss of anticipated profits), cost or expense reasonably incurred as a result of the liquidation or re-employment of deposits or other funds acquired by such Bank to fund or maintain such Advance. SECTION 2.12. Increased Costs and Reduced Return. (a) Subject to the ---------------------------------- limitation in Section 2.03(a)(ii), if, due to either (i) the introduction of or ------------------- any change (other than any change by way of imposition or increase of reserve requirements, in the case of Eurocurrency Rate Advances, included in the Eurocurrency Rate Reserve Percentage), after the date hereof, in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law) issued after the date hereof, there shall be any increase in the cost to any Bank of agreeing to make, making, funding or maintaining Eurocurrency Rate Advances (including, without limitation, any conversion of any Advance denominated in an Alternative Currency other than the Euro into an Advance denominated in Euro), by an amount reasonably deemed by such Bank to be material, then from time to time, within ten days after demand by such Bank (with a copy of such demand to the Administrative Agent), such Borrower shall pay to the Administrative Agent for the account of such Bank additional amounts sufficient to compensate such Bank for such increased cost; provided that no Borrower shall be obligated to pay any -------- such amount to the extent such amount results from a change, guideline or request which took effect more than 90 days prior to the date of such demand. (b) Subject to the limitation in Section 2.03(a)(ii), if any Bank shall ------------------- have determined that the adoption, after the date hereof, of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive issued after the date hereof regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Bank's capital as a consequence of its obligations hereunder to a level below that which such Bank could have achieved but for such adoption, change or compliance by an amount reasonably deemed by such Bank to be material, then from time to time, within ten days after demand by such Bank (with a copy of such demand to the Administrative Agent), the Company shall pay to the Administrative Agent for the account of such Bank such additional amount or amounts as will compensate such Bank, in light of such circumstances, to the extent such Bank reasonably determines such reduction to be allocable to the existence of such Bank's Commitment; provided that no Borrower shall be -------- obligated to pay -29- any such amount to the extent such amount results from an adoption, change, request or directive which took effect or was issued more than 90 days prior to the date of such demand. (c) Each Bank will promptly notify the Administrative Agent and the Company of any event of which it has knowledge, occurring after the date hereof, which would entitle such Bank to compensation pursuant to this Section 2.12. A ------------ certificate of any Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall create a rebuttable presumption as to the correctness of such additional amount or amounts. Each Bank agrees not to request any payment under this Section 2.12 ------------ unless similar requests are then generally being made by such Bank of other borrowers similarly situated, and to use a reasonable basis for calculating amounts allocable to its Commitment hereunder. SECTION 2.13. Illegality. (a) If any Bank shall determine (which ---------- determination shall be rebuttably presumed correct as to all parties) at any time that the making or continuance of its Eurocurrency Rate Advances has become unlawful because of the introduction of or any change in or in the interpretation of any law or regulation or because of the assertion of unlawfulness by any central bank or other governmental authority, then, in any such event, such Bank shall give prompt notice (by telephone confirmed in writing) to the Administrative Agent of such determination (which notice the Administrative Agent shall promptly transmit to each Borrower and the other Banks). (b) Upon the giving of the notice to the Company referred to in subsection (a) above, if the affected Advances are then outstanding, each Borrower shall, upon at least one Business Day's written notice to the Administrative Agent and the affected Bank, or if permitted by applicable law no later than the date permitted thereby, in such Borrower's sole discretion, either (i) prepay the principal amount of all outstanding Advances of such Bank to which such notice relates, together with accrued interest thereon to the date of payment, or (ii) convert each such Advance into a Base Rate Advance denominated in Dollars and, in each case, be obligated to reimburse the Banks in respect thereof pursuant to Section 2.11 hereof. If more than one Bank gives notice pursuant to Section - ------------ ------- 2.13(a) at any time, then all outstanding Advances of the affected Type or - ------- currency of such Banks must be treated in the same manner by the Borrowers pursuant to this subsection 2.13(b) and the Banks' obligations to make, convert ------------------ or continue Eurocurrency Rate Advances shall be suspended until the Administrative Agent notifies the Borrowers that the circumstances causing such suspension no longer exist. SECTION 2.14. Payments and Computations. (a) The Company and each ------------------------- Borrowing Subsidiary shall make each payment hereunder and under the Notes without set-off, counterclaim or other deduction by causing a wire transfer of immediately-available funds to be initiated to the Administrative Agent in an amount equal to such payment not later than 12:00 noon (Chicago time) on the day when due from the Company or such Borrowing Subsidiary. The Administrative Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal or interest or fees ratably (other than amounts payable pursuant to Sections 2.03, 2.05(b), 2.08, 2.11, 2.12, 2.15, 2.19 or 2.20) to the ------------- ------- ---- ---- ---- ---- ---- ---- Banks for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Bank to such Bank for the -30- account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. All such payments shall be made in Dollars, except that payments of principal of and interest on Borrowings in an Alternative Currency shall be made in such Alternative Currency or, where such Alternative Currency has converted to the Euro, in the Euro; provided that if the applicable Borrower fails to make any payment of principal or interest with respect to any Borrowing in an Alternative Currency (including the Euro) on the due date thereof because such Alternative Currency has ceased to be freely transferable and convertible into Dollars in the international currency and exchange markets, such failure shall not constitute an Event of Default or an event which would constitute an Event of Default but for the requirement that notice be given or time elapse or both, if such Borrower pays the equivalent in Dollars of such payment on the due date thereof. In addition to any such Dollar payment, such Borrower agrees to pay to each affected Bank an indemnity payment within five Business Days after such Borrower shall have received a certificate from such Bank setting forth in reasonable detail the amount of any loss, cost, damage or expense suffered by such Bank as a consequence of such inability to make any such payment in such Alternative Currency on the due date thereof. Each Bank agrees to use reasonable efforts to avoid or minimize all such loss, cost, damage or expense. (b) All computations of interest based on the Base Rate, or the Eurocurrency Rate applicable to Borrowings denominated in Sterling, shall be made by the Administrative Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurocurrency Rate (as to all other currencies) or the Federal Funds Rate, all computations of interest pursuant to Section 2.08 and all computations of the Facility Fee and ------------ the Utilization Fee shall be made by the Administrative Agent on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or fees are payable. Each determination by the Administrative Agent (or, in the case of Section 2.08, by a Bank) of an interest rate or fee owing ------------ hereunder shall create a rebuttable presumption as to the correctness of such determination. (c) Whenever any payment hereunder or under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fee, as the case may be; provided, however, if such extension would cause payment of interest on or - -------- ------- principal of Eurocurrency Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. (d) Unless the Administrative Agent shall have received notice from the applicable Borrower prior to the date on which any payment is due to the Banks hereunder that such Borrower will not make such payment in full, the Administrative Agent may assume that such Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent such Borrower shall not have so made such payment in full to the Administrative Agent, each Bank shall repay to the Administrative Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such -31- amount is distributed to such Bank until the date such Bank repays such amount to the Administrative Agent, at the Federal Funds Rate. SECTION 2.15. Sharing of Payments, Etc. If any Bank shall obtain any ------------------------- payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Committed Advances made by it (other than pursuant to Sections 2.08, 2.11, 2.12, 2.13(b), 2.19 or 2.20) in excess of ------------- ---- ---- ------- ---- ---- its ratable share of payments on account of the Committed Advances obtained by all the Banks, such Bank shall forthwith purchase from the other Banks such participations in the Committed Advances made by them as shall be necessary to cause such purchasing Bank to share the excess payment ratably with each of them, provided, however, that if all or any portion of such excess payment is -------- ------- thereafter recovered from such purchasing Bank, such purchase from each Bank shall be rescinded and such Bank shall repay to the purchasing Bank the purchase price to the extent of such recovery together with an amount equal to such Bank's ratable share (according to the proportion of (i) the amount of such Bank's required repayment to (ii) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. Each Borrower agrees that any Bank so purchasing a participation from another Bank with respect to Advances made to such Borrower pursuant to this Section 2.15 may, to ------------ the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Bank were the direct creditor of such Borrower in the amount of such participation. SECTION 2.16. Currency Equivalents. (a) For purposes of this Article II, -------------------- ---------- (i) the equivalent in Dollars of any Alternative Currency shall be determined by using the arithmetical mean of the buy and sell spot rates at which Bank One's principal office in London exchanges Dollars for such Alternative Currency in the interbank market in London at 11:00 A.M. (London time) two Business Days prior to the date on which such equivalent is to be determined, (ii) the equivalent in any Alternative Currency of any other Alternative Currency shall be determined by using the arithmetical mean of the buy and sell spot rates at which Bank One's principal office in London exchanges such Alternative Currency for the equivalent in such other Alternative Currency in London at 11:00 A.M. (London time) two Business Days prior to the date on which such equivalent is to be determined, and (iii) the equivalent in any Alternative Currency of Dollars shall be determined by using the arithmetical mean of the buy and sell spot rates at which Bank One's principal office in London exchanges such Alternative Currency for Dollars in London at 11:00 A.M. (London time) two Business Days prior to the date on which such equivalent is to be determined. The equivalent in Dollars of each Eurocurrency Rate Advance made in an Alternative Currency shall be recalculated hereunder on each day that it is necessary to determine the unused portion of each Bank's Commitment, or any or all of the Advances on such date. (b) If for the purpose of obtaining a judgment in any court with respect to any obligation of a Borrower hereunder, it shall become necessary for the Administrative Agent or any Bank entitled to receive payments hereunder to convert any amount into a currency other than the currency denominated hereunder for such obligation, then such conversion shall be made on the basis of rates (the "Exchange Rates") determined in the manner described in subsection (a) above (or, if the applicable currency to be converted is not at the time of conversion available in the interbank market in London, then in such other interbank -32- market as the Administrative Agent shall determine to have adequate availability of such currency) and the date with respect to which such an equivalent is to be determined shall be the first Business Day preceding the date on which final judgment is entered. If pursuant to any such judgment conversion is to be made with respect to a date other than the date referred to above, and there shall occur a change between the Exchange Rates in effect on such date and the Exchange Rates in effect on the date of payment, (i) the applicable Borrower agrees to pay such additional amounts (if any) as may be necessary to ensure that the amount paid is the amount in such other currency which, when converted at the Exchange Rates as in effect on the date of payment or distribution, is the amount then due hereunder in the relevant currency and (ii) such Borrower shall not be required to pay any amount in excess of the amount determined to be payable in connection with such obligation, calculated on the basis of the Exchange Rates in effect on the first Business Day preceding the date on which final judgment is entered. Any amount due from a Borrower under this subsection (b) shall be due as a separate debt and is not to be affected by or merged into any judgment being obtained for any other sums due hereunder. SECTION 2.17. Borrowing Subsidiaries. The Company may at any time or from ---------------------- time to time add as a party to this Agreement any Subsidiary of the Company to be a "Borrowing Subsidiary" hereunder by causing such Subsidiary to execute and deliver a duly completed Assumption Letter to the Administrative Agent, with the written consent of the Company at the foot thereof. Upon such execution, delivery and consent such Subsidiary shall for all purposes be a party hereto as a Borrowing Subsidiary as fully as if it had executed and delivered this Agreement. So long as the principal of and interest on all Advances made to any Borrowing Subsidiary under this Agreement shall have been paid in full and all other obligations of such Borrowing Subsidiary shall have been fully performed, such Borrowing Subsidiary may, by not less than five Business Days' prior notice to the Administrative Agent (which shall promptly notify the Banks thereof), terminate its status as a "Borrowing Subsidiary." SECTION 2.18. Reserved. -------- SECTION 2.19. Taxes. (a) Any and all payments by a Borrower hereunder or ----- under the Notes shall be made in accordance with Section 2.14, free and clear of ------------ and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Bank and the Administrative Agent, taxes imposed - --------- on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Bank or the Administrative Agent is organized or any political subdivision thereof and taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction of such Bank's Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If any Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note to any Bank or the Administrative Agent, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section ------- 2.19) such Bank or the Administrative Agent (as the case may be) receives an - ---- amount equal to the sum it would have received had no deductions been made, (ii) such Borrower shall make such -33- deductions and (iii) such Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) In addition, each Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or under the Notes or from the execution, delivery or registration of, or otherwise with respect to, this Agreement (hereinafter referred to as "Other Taxes"). (c) Each Borrower will indemnify each Bank and the Administrative Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.19) paid by such Bank or the Administrative Agent and any liability - ------------ (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted; provided, that the Borrowers shall have no obligation under this -------- subsection (c) to indemnify any Bank or the Administrative Agent if a Borrower shall have performed its obligations under subsection (a) and (b), thereby providing such Bank or the Administrative Agent (as the case may be) the wherewithal to make payment, or demonstrate that payment has been made, of any such Taxes or Other Taxes, and such Bank or the Administrative Agent (as the case may be) shall not have effected such payment or made such demonstration of payment on a timely basis to the relevant taxing authorities. This indemnification shall be made to the Administrative Agent for the account of such Bank or the Administrative Agent (as the case may be) within 30 days from the date such Bank or the Administrative Agent makes written demand therefor (with a copy, in the case of a demand by a Bank, of such demand to the Administrative Agent). (d) Notwithstanding the foregoing, unless, prior to the date of the initial Committed Borrowing (in the case of a Bank listed on Schedule I hereto), ---------- and prior to the effective date of the Assignment and Acceptance by which it became a Bank (in the case of bank that became a Bank pursuant to such Assignment and Acceptance), and in each case from time to time thereafter, if requested by any Borrower, (i) each Bank organized under the laws of a jurisdiction outside the United States shall have provided the Company with the forms prescribed by the Internal Revenue Service of the United States certifying as to such Bank's status for purposes of determining exemption from United States withholding taxes with respect to all payments to be made to such Bank hereunder or other documents satisfactory to the Company which shall indicate that all payments to be made to such Bank hereunder are not subject to United States withholding tax or are subject to such taxes at a rate reduced to zero by an applicable tax treaty, neither the Company nor any other Borrower shall have any obligation under the last sentence of Section 2.19(a) to make any payments to or for the benefit of such Bank in --------------- excess of the amounts otherwise payable under this Agreement, and (ii) each Bank organized under the laws of a jurisdiction outside the jurisdiction where any Borrowing Subsidiary is incorporated shall have taken -34- all steps prescribed by the applicable governmental authority in the jurisdiction where such Borrowing Subsidiary is located so that such Bank is exempt from applicable withholding taxes with respect to all payments to be made to such Bank hereunder or so that all payments to be made to such Bank hereunder are not subject to applicable withholding taxes or are subject to such taxes at a rate reduced to zero by an applicable tax treaty, neither the Company nor any other Borrower shall have any obligation under the last sentence of Section 2.19(a) to make any payments --------------- to or for the benefit of such Bank in excess of the amounts otherwise payable under this Agreement; provided, however, that the applicable -------- ------- Borrower shall make the payments required by the last sentence of Section ------- 2.19(a) if the obligation to withhold arises from a change in applicable ------- law after the date hereof (or, with respect to payments to a new Applicable Lending Office designated pursuant to Section 2.21, after the date such ------------ Bank designates such new Applicable Lending Office). Unless the applicable Borrower has received forms or other documents, including Form 1001, Form 4224 or any other applicable tax forms from the United States or any other applicable jurisdiction, such forms to be satisfactory to the Company, indicating that payments hereunder are not subject to any withholding tax or are subject to such tax at a rate reduced to zero by an applicable tax treaty, the applicable Borrower shall withhold taxes from such payments at the applicable statutory rate in the case of payments to or for any Bank organized under the laws of a jurisdiction outside the United States (or in the case of a Borrowing Subsidiary incorporated outside the United States, any Bank organized under the laws outside of the jurisdiction where such Borrowing Subsidiary is incorporated). Should a Bank become subject to Taxes because of its failure or inability to deliver a form required hereunder, the Company shall take such steps not requiring the expenditure of money as the Bank shall reasonably request to assist the Bank to recover such Taxes. SECTION 2.20. Defaulting Banks. (a) If at any time (i) any Bank shall be ---------------- a Defaulting Bank, (ii) such Defaulting Bank shall owe a Defaulted Advance to the Borrower and (iii) the Borrower shall be required to make any payment hereunder or under any Note to or for the account of such Defaulting Bank, then the Borrower may, so long as no Event of Default shall have occurred and be continuing at such time and to the fullest extent permitted by applicable law, set off and otherwise apply the amount owed by the Borrower to or for the account of such Defaulting Bank against the obligation of such Defaulting Bank to make such Defaulted Advance. If the Borrower shall so set off and otherwise apply the amount owed by the Borrower to or for the account of such Defaulting Bank against the obligation of such Defaulting Bank to make any such Defaulted Advance on any date, the amount so set off and otherwise applied by the Borrower shall constitute for all purposes of this Agreement and the Notes an Advance by such Defaulting Bank made on the date of such setoff. Such Advance shall be a Base Rate Advance and shall be considered, for all purposes of this Agreement, to comprise part of the Borrowing in connection with which such Defaulted Advance was originally required to have been made pursuant to Section 2.01 or ------------ Section 2.03(a), as the case may be, even if the other Advances comprising such - --------------- Borrowing shall be Eurocurrency Rate Advances on the date such Advance is deemed to be made pursuant to this Section 2.20(a). The Borrower shall notify the --------------- Administrative Agent at any time the Borrower makes a setoff under this Section ------- 2.20(a) and shall specify in such - ------- -35- notice (A) the name of the Defaulting Bank and the Defaulted Advance required to be made by such Defaulting Bank and (B) the amount set off and otherwise applied in respect of such Defaulted Advance pursuant to this Section 2.20(a). Any part --------------- of such payment otherwise required to be made by the Borrower to or for the account of such Defaulting Bank that is paid by the Borrower, after giving effect to the amount set off and otherwise applied by the Borrower pursuant to this Section 2.20(a), shall be applied by the Administrative Agent as specified --------------- in Section 2.20(b) or 2.20(c). --------------- ------- (b) If at any time (i) any Bank shall be a Defaulting Bank, (ii) such Defaulting Bank shall owe a Defaulted Amount to the Administrative Agent or any of the other Banks and (iii) the Borrower shall make any payment hereunder or under any Note to the Administrative Agent for the account of such Defaulting Bank, then the Administrative Agent may, on its behalf or on behalf of such other Banks and to the fullest extent permitted by applicable law, apply at such time the amount so paid by the Borrower to or for the account of such Defaulting Bank to the payment of each such Defaulted Amount to the extent required to pay such Defaulted Amount. If the Administrative Agent shall so apply any such amount to the payment of any such Defaulted Amount on any date, the amount so applied by the Administrative Agent shall constitute for all purposes of this Agreement and the Notes payment to such extent of such Defaulted Amount on such date. Any such amount so applied by the Administrative Agent shall be retained by the Administrative Agent or distributed by the Administrative Agent to such other Banks, ratably in accordance with their respective portions of such Defaulted Amounts payable at such time to the Administrative Agent and such other Banks and, if the amount of such payment made by the Borrower shall at any time be insufficient to pay all Defaulted Amounts owing at such time to the Administrative Agent and the other Banks, in the following order of priority: (A) first, to the Administrative Agent for any Defaulted Amounts ----- owing to the Administrative Agent (solely in its capacity as Administrative Agent) at such time; and (B) second, to the other Banks for any Defaulted Amounts owing to the ------ other Banks (solely in their capacity as Banks) at such time, ratably in accordance with such respective Defaulted Amounts owing to each other Bank (solely in its capacity as a Bank) at such time. Any part of such payment made by the Borrower for the account of such Defaulting Bank remaining, after giving effect to the amount applied by the Administrative Agent pursuant to this Section 2.20(b), shall be applied by the Administrative --------------- Agent as specified in Section 2.20(c). --------------- (c) If at any time, (i) any Bank shall be a Defaulting Bank, (ii) such Defaulting Bank shall not owe a Defaulted Advance or a Defaulted Amount and (iii) the Borrower, the Administrative Agent or any other Bank shall be required to pay or to distribute any amount hereunder or under any Note to or for the account of such Defaulting Bank, then the Borrower or such other Bank shall pay such amount to the Administrative Agent to be held by the Administrative Agent, to the fullest extent permitted by applicable law, in escrow or the Administrative Agent shall, to the fullest extent permitted by applicable law, hold in escrow such amount otherwise held by it. Any funds held by the Administrative Agent in -36- escrow under this Section 2.20(c) shall be deposited by the Administrative Agent --------------- in an account with Bank One, in the name and under the control of the Administrative Agent, but subject to the provisions of this Section 2.20(c). The --------------- terms applicable to such account, including the rate of interest payable with respect to the credit balance of such account from time to time, shall be Bank One's standard terms applicable to escrow accounts maintained with it. Any interest credited to such account from time to time shall be held by the Administrative Agent in escrow under, and applied by the Administrative Agent from time to time in accordance with the provisions of, this Section 2.20(c). --------------- The Administrative Agent shall, to the fullest extent permitted by applicable law, apply all funds so held in escrow from time to time to the extent necessary to make any Advances required to be made by such Defaulting Bank and to pay any amount payable by such Defaulting Bank hereunder to the Administrative Agent or any other Bank, as and when such Advances or such amounts are required to be made or paid and, if the amount so held in escrow shall any time be insufficient to make and pay all such Advances and all such amounts required to be made or paid at such time, in the following order of priority: (A) first, to the Administrative Agent for any amounts due and ----- payable by such Defaulting Bank to the Administrative Agent hereunder (solely in its capacity as Administrative Agent) at such time; (B) second, to the other Banks for any amounts due and payable by ------ such Defaulting Bank to the other Banks hereunder (solely in their capacity as Banks) at such time, ratably in accordance with such respective amounts due and payable to each other Bank (solely in its capacity as Bank) at such time; and (C) third, to the Borrower for any Advances required to be made by ----- such Defaulting Bank pursuant to the Commitment of such Defaulting Bank at such time. If such Defaulting Bank shall, at any time, cease to be a Defaulting Bank, any funds held by the Administrative Agent in escrow at such time with respect to such Defaulting Bank shall be distributed by the Administrative Agent to such Defaulting Bank and applied by such Defaulting Bank to the amounts owing to such Defaulting Bank at such time under this Agreement in accordance with the terms of this Agreement. (d) The rights and remedies against a Defaulting Bank under this Section ------- 2.20 are in addition to other rights and remedies that the Borrower may have - ---- against such Defaulting Bank with respect to any Defaulted Advance and that the Administrative Agent or any other Bank may have against such Defaulting Bank with respect to any Defaulted Amount. SECTION 2.21. Mitigation. Any Bank claiming any additional amounts ---------- payable pursuant to Sections 2.12 or 2.19 or subject to Section 2.13 shall use ------------- ---- ------------ its reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its Applicable Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts which may thereafter accrue under Sections 2.12 or 2.19 or would avoid the unavailability of Eurocurrency Rate - ------------- ---- -37- Advances under Section 2.13 and would not, in any such case, in the judgment of ------------ such Bank, be otherwise disadvantageous to such Bank. SECTION 2.22. European Economic and Monetary Union. (a) Advances in the ------------------------------------ --------------- Euro. If any Advance is capable of being made in either the Euro or in a - ---- National Currency Unit, then such Advance shall be made in the Euro. (b) Rounding and Other Consequential Changes. Without prejudice to any ---------------------------------------- method of conversion or rounding prescribed by any legislative measures of the Council of the European Union, each reference in this Agreement to a fixed amount or to fixed amounts in a National Currency Unit to be paid to or by the Administrative Agent shall, notwithstanding any other provision of this Agreement and to the extent the Euro has replaced such National Currency Unit, be replaced by a reference to such comparable and convenient fixed amount or fixed amounts of the Euro as the Administrative Agent may from time to time reasonably specify. SECTION 2.23. Extension of Termination Date. (a) The Company may, by ----------------------------- written notice to the Administrative Agent (each such notice being an "Extension Request") given no more than 59 days nor less than 30 days prior to each anniversary date of this Agreement, extend the then applicable Termination Date to a date 364 days after the then- applicable Termination Date; provided, however, that such extension shall be effective only with respect to a Bank which, by a written notice (a "Continuation Notice") to the Company and the Administrative Agent given no more than 30 days and no less than 15 days before such anniversary date, consents to such extension (each Bank giving a Continuation Notice thereafter being referred to as a "Continuing Bank" and each Bank other than a Continuing Bank being a "Non-Extending Bank"); provided further, however, that the Borrowers shall not have made the Term Loan Election for Advances outstanding on such Termination Date prior to such time; provided further, however, that such extension shall be effective only if the aggregate Commitments of the Continuing Banks are not less than 51% of the aggregate Commitments in effect at the date the Company gives the applicable Extension Request. Within five Business Days after the Administrative Agent receives an Extension Request it shall notify each Bank thereof. If any Bank fails to notify the Administrative Agent in writing of its consent to, or refusal of, any such Extension Request at least 15 days prior to such anniversary date, such Bank shall be deemed to be a Non-Extending Bank with respect to such Extension Request. The Commitment of each Non-Extending Bank shall terminate on the Termination Date in effect for such Non-Extending Bank immediately prior to such Extension Request, and on such Termination Date the Company shall pay the Administrative Agent, for the account of such Non-Extending Banks, an amount equal to such Non-Extending Banks' Advances plus accrued but unpaid interest and fees thereon; provided that the Company has not replaced such Non-Extending -------- Banks pursuant to Section 2.23(b) below. --------------- (b) A Non-Extending Bank shall be obligated, at the request of the Company and subject to the Non-Extending Bank receiving payment in full of (i) the principal amount of all Advances owing to such Non-Extending Bank, and (ii) all accrued interest and fees owing to such Non-Extending Bank and all other amounts owing to such Non-Extending Bank hereunder, to assign without recourse, representation, warranty (other than good title to its Advances) or expense to such Non-Extending Bank, at any time prior to the -38- Termination Date applicable to such Non-Extending Bank, all of its rights (other than rights that would survive the termination of this Agreement pursuant to Section 9.13) and obligations hereunder to one or more Eligible Assignees (the - ------------ "Replacement Banks") nominated by the Company and willing to take the place of such Non-Extending Bank; provided that each such Replacement Bank satisfies all -------- the requirements of this Agreement and the Administrative Agent shall have consented to such assignment, which consent shall not be unreasonably withheld. Each such Replacement Bank shall become a Continuing Bank hereunder in replacement for the Non-Extending Bank. (c) If the Termination Date shall have been extended in respect of Continuing Banks in accordance with Section 2.23(a), any notice of borrowing --------------- specifying a date for the borrowing of an Advance occurring after the Termination Date applicable to a Non-Extending Bank or requesting an Interest Period extending beyond such date shall (a) have no effect in respect of such Non-Extending Bank and (b) not specify a requested aggregate principal amount exceeding the Aggregate Commitment excluding the Commitments of all such Non- Extending Banks. (d) If the Termination Date shall have been extended in respect of Continuing Banks in accordance with this Section 2.23, all references herein to ------------ the "Termination Date" shall, with respect to all parties hereto other than Non- Extending Banks, refer to the Termination Date as so extended. SECTION 2.24. Increase of Aggregate Commitments. (a) The Company may from --------------------------------- time to time, on the terms set forth below, request that the aggregate amount of the Commitments be increased to an amount which does not exceed $400,000,000; provided, however, that an increase in the Commitments hereunder may only be - -------- ------- made at a time when (i) no Event of Default or event which, with notice or the passage of time or both, would constitute an Event of Default shall have occurred and be continuing or would result therefrom and (ii) the Public Debt Rating from S&P is at least BBB- and the Public Debt Rating from Moody's is at least Baa3. (b) If the Company requests an increase in the aggregate Commitments: (i) each of the Banks shall be given the opportunity to participate in the increased aggregate Commitments (x) initially, ratably in accordance with its Pro Rata Share, and (y) next, to the extent that the requested increase in the aggregate Commitments is not fulfilled pursuant to the preceding clause (x) and subject to Section 2.24(d) below, in such --------------- additional amounts as any Bank and the Company agree, and (ii) if, after each Bank has been afforded an opportunity to increase its Commitment to satisfy the Company's requested increase, the aggregate increase in the Commitments offered by the Banks is less than the Company's requested increase, then the Company shall consult with the Administrative Agent as to the number, identity and requested Commitments of additional financial institutions which the Company may, with the written consent of the Administrative Agent (which consent shall not be unreasonably withheld) invite to participate in the aggregate Commitments. -39- (c) No Bank shall have any obligation to increase its Commitment pursuant to a request by the Company hereunder. No Bank shall be deemed to have approved an increase in its Commitment unless such approval is in writing. Failure on the part of any Bank to respond to a request by the Company within 30 days of such Bank's receipt of notice of such request hereunder shall be deemed a rejection of such request. (d) In no event shall any Bank's Commitment, after giving effect to an increase in its Commitment hereunder, exceed 25% of the aggregate Commitments under this Agreement. (e) If the Company and one or more of the Banks (or other financial institutions) shall agree upon such an increase in the aggregate Commitments hereunder (i) the Company, the Administrative Agent and each Bank or other financial institution increasing its Commitment or extending a new Commitment shall enter into a consent in a mutually satisfactory form and (ii) the Company shall furnish new Notes to each financial institution that is extending a new Commitment and to each Bank which is increasing its Commitment. Notwithstanding anything else to the contrary contained in Section 2.06(b), if an increase in --------------- the aggregate Commitments pursuant to this Section 2.24 occurs during an ------------ Interest Period for an outstanding Committed Borrowing, (a) such Committed Borrowing may not be continued or converted pursuant to Section 2.06(b) and (b) --------------- such Committed Borrowing shall be due and payable at the end of the current Interest Period applicable thereto, without prejudice to the Company's right, subject to the terms and conditions of this Agreement, to reborrow all or any portion of the amount of such Committed Borrowing. ARTICLE III CONDITIONS PRECEDENT SECTION 3.01. Conditions Precedent to Effectiveness of Sections 2.01 and ---------------------------------------------------------- 2.03. Sections 2.01 and 2.03 shall become effective on the first day (the - ---- ------------- ---- "Effective Date") on which all of the following conditions precedent have been satisfied: (a) The Administrative Agent shall have received the following, in form and substance reasonably satisfactory to the Administrative Agent and (except for the Committed Notes) in sufficient copies for the Banks: (i) This Agreement, executed by the Company, the Administrative Agent and each of the Banks; (ii) A Committed Note executed by the Company, payable to each Bank; (iii) A certificate of the Secretary of the Company certifying (A) copies attached thereto of the resolutions of the Board of Directors of the Company authorizing and empowering certain officers of the Company to effect such borrowings as such officers may deem necessary or desirable -40- for proper corporate purposes, subject to the limitations set forth in such resolutions, (B) copies attached thereto of the Certificate of Incorporation and by-laws of the Company, and (C) the names and true signatures of the officers of the Company authorized to sign this Agreement and the Notes and other documents to be executed and delivered by the Company hereunder; (iv) A certificate of a duly authorized officer of the Company, dated the Effective Date, certifying that as of such date, (A) the representations and warranties contained in Section 4.01 are correct on and as of the ------------ Effective Date and (B) no event shall have occurred and be continuing that constitutes an Event of Default or which would constitute an Event of Default but for the requirement that notice be given or time elapse or both; (v) A favorable opinion of counsel for the Company, substantially in the form of Exhibit H hereto; and --------- (vi) Evidence that all amounts owing under the 1998 364-Day Credit Agreement are being paid in full, and that the 1998 364-Day Credit Agreement is being terminated, no later than the Effective Date; (b) The Company shall have paid all accrued fees and expenses of the Arranger, the Administrative Agent and the Banks which are due and payable on the Effective Date (including, without limitation, the reasonable fees and expenses of counsel for the Arranger and the Administrative Agent); (c) There shall have occurred no material adverse change in the business, financial condition, operations, properties or performance of the Company and its Subsidiaries, taken as a whole, since December 31, 1998; (d) There shall exist no action, suit or proceeding (investigative, judicial or otherwise) against the Company or any of its Subsidiaries pending before any court or arbitrator or any governmental body, agency or official, or to the knowledge of any Responsible Officer of the Company, threatened, that could reasonably be expected (i) to have a Material Adverse Effect or (ii) to materially and adversely affect the legality, validity or enforceability of this Agreement or any Note; (e) The representations and warranties contained in Section 4.01 ------------ shall be correct on and as of the Effective Date, as though made on and as of such date; and -41- (f) No event shall have occurred and be continuing which constitutes an Event of Default or which would constitute an Event of Default but for the requirement that notice be given or time elapse or both. For purposes of determining compliance with the conditions specified above, each Bank shall be deemed to have consented to, approved and accepted, and to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to the Banks unless the officer of the Administrative Agent responsible for the transactions contemplated by this Agreement shall have received notice from such Bank prior to the proposed Effective Date, as notified by the Administrative Agent to the Banks, specifying its objection thereto. The Administrative Agent shall promptly notify the Banks of the occurrence of the Effective Date. SECTION 3.02. Conditions Precedent to Initial Advance to Each Borrowing --------------------------------------------------------- Subsidiary. The obligation of each Bank to make its initial Advance hereunder - ---------- to any Borrowing Subsidiary is subject to the conditions precedent that the Effective Date shall have occurred and the Administrative Agent shall have received on or before the day of the initial Borrowing by such Borrowing Subsidiary the following, each in form and substance reasonably satisfactory to the Administrative Agent and in sufficient copies for the Banks: (a) The Assumption Letter executed and delivered by such Borrowing Subsidiary and containing the written consent of the Company at the foot thereof, as contemplated by Section 2.17 hereof; ------------ (b) A Committed Note executed by such Borrowing Subsidiary, payable to each Bank; (c) Certified copies of the resolutions of the Board of Directors of such Borrowing Subsidiary approving the Assumption Letter and all other documents evidencing corporate action and governmental approvals, if any, required with respect to the Assumption Letter; (d) A certificate of the Secretary or an Assistant Secretary of such Borrowing Subsidiary certifying the names and true signatures of the officers of such Borrowing Subsidiary authorized to sign the Assumption Letter and the other documents to be executed and delivered by such Borrowing Subsidiary hereunder; and (e) An opinion of counsel to such Borrowing Subsidiary, substantially in the form of Exhibit I hereto and as to such other matters as the --------- Administrative Agent shall reasonably request. SECTION 3.03. Conditions Precedent to Each Committed Borrowing. The ------------------------------------------------ obligation of each Bank to make a Committed Advance on the occasion of each Committed Borrowing (including the initial Committed Borrowing) shall be subject to the further conditions precedent that the Effective Date shall have occurred and on the date of such Committed Borrowing the following statements shall be true (and each of the giving of the applicable Notice of Committed Borrowing and the acceptance by the applicable Borrower -42- of the proceeds of such Committed Borrowing shall constitute a representation and warranty by such Borrower that on the date of such Committed Borrowing such statements are true): (i) The representations and warranties contained in subsections (a), (b), (c), (d), (f)(ii) and (h) through (q) of Section 4.01 are correct on ------------ and as of the date of such Committed Borrowing, before and after giving effect to such Committed Borrowing and to the application of the proceeds therefrom, as though made on and as of such date; (ii) No event has occurred and is continuing, or would result from such Committed Borrowing or from the application of the proceeds therefrom, which constitutes an Event of Default or which would constitute an Event of Default but for the requirement that notice be given or time elapse or both; and (iii) The aggregate principal amount (or, in the case of securities issued at a discount from the principal amount at maturity, the accreted amount) of indebtedness for borrowed money (after giving effect to such Committed Borrowing and the application of the proceeds thereof) of the Company and its Subsidiaries does not exceed the maximum amount then authorized by the Company's Board of Directors. SECTION 3.04. Conditions Precedent to Each Uncommitted Borrowing. Each -------------------------------------------------- bidding Bank's obligation to make an Uncommitted Advance as part of an Uncommitted Borrowing (including the initial Uncommitted Borrowing) is subject to the conditions precedent that on the date of such Uncommitted Borrowing the following statements shall be true (and each of the giving of the applicable Notice of Uncommitted Borrowing and the acceptance by such Borrower of the proceeds of such Uncommitted Borrowing shall constitute a representation and warranty by such Borrower that on the date of such Uncommitted Borrowing such statements are true): (a) The representations and warranties contained in subsections (a), (b), (c), (d), f(ii) and (h) through (q) of Section 4.01 are correct on and ------------ as of the date of such Uncommitted Borrowing, before and after giving effect to such Uncommitted Borrowing and to the application of the proceeds therefrom, as though made on and as of such date, (b) No event has occurred and is continuing, or would result from such Uncommitted Borrowing or from the application of the proceeds therefrom, which constitutes an Event of Default or which would constitute an Event of Default but for the requirement that notice be given or time elapse or both, and (c) The aggregate principal amount (or, in the case of securities issued at a discount from the principal amount at maturity, the accreted amount) of indebtedness for borrowed money (after giving effect to the application of the proceeds of such Uncommitted Borrowing) of the -43- Company and its Subsidiaries does not exceed the maximum amount thereof then authorized by the Company's Board of Directors. ARTICLE IV REPRESENTATIONS AND WARRANTIES ------------------------------ SECTION 4.01. Representations and Warranties of the Company. The Company ---------------------------------------------- represents and warrants to the Banks as follows: (a) The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction indicated at the beginning of this Agreement. (b) The execution, delivery and performance by the Company of this Agreement and the Notes are within the Company's corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (i) the Company's certificate of incorporation, as amended, or by-laws or (ii) law or any contractual restriction binding on or affecting the Company. (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Company of this Agreement. (d) This Agreement has been, and each of the Notes when delivered hereunder will have been, duly executed and delivered by the applicable Borrower. This Agreement is, and each of the Notes when delivered hereunder will be, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with their respective terms, subject to any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and to general principles of equity. (e) The consolidated balance sheets of the Company and its Consolidated Subsidiaries as of December 31, 1998, and the related consolidated statements of income, cash flow and shareholders' equity of the Company and its Consolidated Subsidiaries for the fiscal year then ended, copies of which have been furnished to each Bank, fairly present the financial condition of the Company and its Consolidated Subsidiaries as at such date and the consolidated results of the operations of the Company and its Consolidated Subsidiaries for the period ended on such date, all in accordance with generally accepted accounting principles, and since December 31, 1998, there has been no material adverse change in the business, financial condition, operations, properties or performance of the Company and its Subsidiaries, taken as a whole. -44- (f) There are no actions, suits or proceedings (investigative, judicial or otherwise) against the Company or any of its Subsidiaries pending before any court or arbitrator or any governmental body, agency or official, or, to the knowledge of any Responsible Officer of the Company, threatened, that could reasonably be expected (i) to have a Material Adverse Effect or (ii) to materially and adversely affect the legality, validity or enforceability of this Agreement or any Note. (g) Reserved. (h) Following application of the proceeds of each Advance to the Company, not more than 25% of the value of the assets (either of the Company only or of the Company and its Consolidated Subsidiaries) will be Margin Stock subject to any restriction contained in any agreement or instrument between the Company and any Bank or any affiliate of any Bank relating to Debt within the scope of Section 6.01(e). --------------- (i) The Company is not principally engaged in the business of extending credit for the purpose of purchasing or carrying Margin Stock. (j) The Advances to each Borrower, and all related obligations of such Borrower under this Agreement, rank pari passu with all other ---- ----- unsecured indebtedness for money borrowed or raised by such Borrower that is not, by its terms, expressly subordinated to other such indebtedness of such Borrower. (k) No Borrower is an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. (l) (i) All necessary Environmental Permits have been obtained and are in effect for the operations and properties of the Company and its Subsidiaries, and the Company and its Subsidiaries are in compliance with all such Environmental Permits, except to the extent that the failure to so obtain or comply could not reasonably be expected to have a Material Adverse Effect; and (ii) no circumstances exist that could reasonably be expected to (A) form the basis of an Environmental Action against the Company or any of its Subsidiaries or any of their properties that could reasonably be expected to have a Material Adverse Effect or (B) cause any such property to be subject to any restrictions on ownership, occupancy, use or transferability under any Environmental Law that could reasonably be expected to have a Material Adverse Effect. (m) None of the properties owned or leased by the Company or any of its Subsidiaries is the subject of any investigation or cleanup, whether voluntary or required pursuant to any Environmental Law or ordered by any governmental authority, that could reasonably be expected to have a Material Adverse Effect. -45- (n) No ERISA Event has occurred or is reasonably expected to occur with respect to any Plan. (o) Neither the Company nor any of its ERISA Affiliates (i) has incurred or is reasonably expected to incur any Withdrawal Liability with respect to any Multiemployer Plan or (ii) has been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or has been terminated, within the meaning of Title IV of ERISA, and no such Multiemployer Plan is reasonably expected to be in reorganization or to be terminated, within the meaning of Title IV of ERISA. (p) As of the last annual actuarial valuation date, the aggregate current liability (as defined in Section 412 of the Internal Revenue Code) under the Plans does not exceed the aggregate fair market value of the assets of such Plans by more than $50,000,000. (q) The Company's effort to address the problems which may arise in connection with the Year 2000 Problem in its core business includes (i) evaluating internal computing infrastructure, business applications and shop-floor systems for issues related to the Year 2000 Problem, (ii) replacing or renovating systems and applications as necessary to resolve such issues, and (iii) testing the replaced or renovated systems and applications. As of the date of this Agreement, the Company expects that all phases of such efforts will be completed before December 31, 1999. In addition to its internal remediation activities, the Company is continuing to evaluate the Year 2000 Problem with respect to key suppliers and vendors and other external companies, including customers whose systems interact with those of the Company. As of the date of this Agreement, the Company expects to complete this evaluation before December 31, 1999. ARTICLE V COVENANTS OF THE COMPANY ------------------------ So long as any Advance shall remain unpaid or any Bank shall have any Commitment hereunder, unless the Majority Banks shall otherwise consent in writing: SECTION 5.01. Compliance with Laws, Etc. The Company will comply, and -------------------------- cause each of its Subsidiaries to comply, in all material respects with all applicable laws, rules, regulations and orders, except for laws, rules, regulations and orders the violation of which, in the aggregate, could not reasonably be expected to have a Material Adverse Effect. SECTION 5.02. Interest Coverage Ratio. The Company will, as of the end of ----------------------- each fiscal quarter after the Effective Date, maintain an Interest Coverage Ratio of not less than 2.0 to 1. -46- SECTION 5.03. Reporting Requirements. The Company will furnish to the ---------------------- Banks: (a) within 60 days after the end of each of the first three quarters of each fiscal year of the Company, but in no case earlier than when such report shall be required to be filed with the Commission, a copy of the Company's Form 10-Q filed with the Commission for such quarter, or any similar quarterly report required to be filed by the Company with the Commission; provided that if the Company shall no longer be required to so -------- file with the Commission, the Company will nonetheless thereafter continue to furnish to the Banks such financial statements and related materials as would have comprised such filings, at such times as the Company would have otherwise delivered the same to the Commission; (b) within 120 days after the end of each fiscal year of the Company, but in no case earlier than when such report shall be required to be filed with the Commission, a copy of the Company's Form 10-K filed with the Commission for such year, or any similar annual report required to be filed by the Company with the Commission; provided that if the Company shall no -------- longer be required to so file with the Commission, the Company will nonetheless thereafter continue to furnish to the Banks such financial statements and related materials as would have comprised such filings, at such times as the Company would have otherwise delivered the same to the Commission; (c) simultaneously with the delivery of the reports referred to in clauses (a) and (b) above, a certificate of a designated financial officer of the Company (i) setting forth in reasonable detail the calculations required to establish whether the Company was in compliance with the requirements of Section 5.02 on the date of such financial statements and ------- ---- (ii) stating whether there exists on the date of such certificate any Event of Default or condition or event which with notice or lapse of time or both would become an Event of Default and, if any Event of Default or any such condition or event then exists, setting forth the details thereof and the action which the Company is taking with respect thereto; (d) promptly after the sending or filing thereof, copies of all reports which the Company sends to any of its security holders, and copies of all reports and registration statements (other than Form S-8 or any similar form) which the Company or any Borrowing Subsidiary files with the Commission or any national securities exchange; (e) promptly following any Responsible Officer's knowledge thereof, notice in writing of (i) the occurrence of any Event of Default or condition or event which with notice or lapse of time or both would become an Event of Default and, if any Event of Default or any such condition or event then exists, setting forth the details thereof and the action which the Company is taking with respect thereto, or (ii) the institution of, or any adverse final judgment in, any litigation, arbitration proceeding or governmental -47- proceeding which, in the Company's judgment, if adversely determined, could reasonably be expected to have a Material Adverse Effect; and (f) such other pertinent information (including information relating to the Company's plan to address the Year 2000 Problem) as any Bank may reasonably request. SECTION 5.04. Use of Proceeds. The Borrowers will use the proceeds of the --------------- Advances made under this Agreement only for general corporate purposes otherwise permitted under this Agreement, including, without limitation, mergers and acquisitions, the purchase of stock of other Persons, the repurchase of shares of capital stock of the Company, the repayment of indebtedness, the funding of employee benefit plans of the Company or its Subsidiaries and for other lawful purposes; provided that, no Borrower shall use the proceeds of any Advances made -------- hereunder to acquire 20% or more of the outstanding shares of the capital stock of any Person unless (a) at the time of such acquisition, such Person shall have consented to such acquisition either by having entered into an agreement with the Company or a subsidiary of the Company contemplating a merger of such Person with or into the Company or such subsidiary or by its Board of Directors having authorized, approved or consented to such acquisition, or (b) such Borrower shall have obtained the prior written consent with respect thereto of (i) in the case of any Committed Borrowing the proceeds of which shall be used to facilitate such acquisition, the Banks and (ii) in the case of any Uncommitted Borrowing the proceeds of which shall be used to facilitate such acquisition, the Banks extending Uncommitted Advances in connection therewith; provided -------- further that if the applicable Borrower shall have specified the intended use of - ------- proceeds of an Uncommitted Borrowing in the Notice of Uncommitted Borrowing with respect thereto, each Bank electing to offer to make one or more Uncommitted Advances in response thereto shall be deemed to have provided the written consent required under this Section 5.04 for such use of the proceeds of such ------------ Uncommitted Advances. SECTION 5.05. Limitation on Liens, Etc. The Company will not create or ------------------------- suffer to exist, or permit any of its Consolidated Subsidiaries to create or suffer to exist, any Lien, upon or with respect to any of its properties (other than Margin Stock), whether now owned or hereafter acquired, or assign, or permit any of its Consolidated Subsidiaries to assign, any right to receive income, in each case to secure any Debt of any Person or entity, other than: (a) Liens arising in connection with the obligations of the Company or any Subsidiary under industrial revenue bonds; (b) Liens on assets of a Subsidiary of a Borrower to secure Debt of such Subsidiary to any Borrower; (c) Purchase money Liens claimed by sellers of goods on ordinary trade terms provided that no financing statement has been filed to perfect such Liens, and provided that no such Lien shall extend to assets of any character other than the goods being acquired; (d) Liens securing Debt existing as of December 31, 1997; -48- (e) Liens securing Debt on property of a corporation or firm (or division thereof) that becomes a Subsidiary of the Company or of any of its Subsidiaries after the date hereof in accordance with Section 5.06 and ------------ existing at the time such corporation is merged or consolidated with the Company or any Subsidiary, at the time such corporation or firm (or division thereof) becomes a Subsidiary of the Company or any of its Subsidiaries, or at the time of a sale, lease or other disposition of the properties of a corporation or a firm (or division thereof) as an entirety or substantially as an entirety to the Company or a Subsidiary, provided that such Liens were not created in contemplation of such merger, consolidation, acquisition, sale, lease or disposition and do not extend to assets other than those of the Person merged into or consolidated with the Company or such Subsidiary or acquired by the Company or such Subsidiary; (f) Liens on life insurance policies owned by the Company or any Subsidiary, securing Insurance Policy Debt; (g) Purchase money Liens constituting the interest of a lessor under a lease that would be capitalized on the lessee's balance sheet in accordance with GAAP, or under a sale-leaseback transaction, in each case relating to equipment, provided that after giving effect thereto, no Event of Default under Section 5.02 shall exist; ------- ---- (h) Any extension, renewal or replacement (or successive extensions, renewals or replacements) in whole or in part of any Liens referred to in the foregoing subsections (a) through (g); provided that, in the case of -------- Liens referred to in the foregoing subsections (c), (d), (e), (f) and (g), the principal amount of Debt secured thereby shall not exceed the principal amount of Debt so secured at the time of such extension, renewal or replacement, and that such extension, renewal or replacement Lien shall be limited to all or a part of the property which is subject to the Lien so extended, renewed or replaced (plus improvements on such property); and (i) Additional Liens securing Debt other than as may be included in the foregoing subsections (a) through (h), provided, that the aggregate -------- outstanding principal amount of such Debt shall not at any time exceed 10% of Consolidated Tangible Net Worth at such time. SECTION 5.06. Merger; Sale of Assets. The Company will not, and will not ---------------------- permit its Material Subsidiaries to, merge or consolidate with or into any other Person, or sell, transfer, lease or otherwise dispose of all or substantially all of its assets (whether now owned or hereafter required), except that: (i) the Company or a Material Subsidiary may acquire another corporation by merger, provided that, if the Company is a party to such merger, the Company is the surviving corporation, and provided further that after giving effect to such merger, no Event of Default (or event which, with -49- the giving of notice or the passing of time or both would constitute an Event of Default) shall exist; and (ii) any Material Subsidiary may merge or consolidate with or into, or sell or otherwise dispose of any or all of its assets to, the Company or another Subsidiary, and any Material Subsidiary that is not a Borrowing Subsidiary may sell all or substantially all of its assets; provided that (a) after giving effect to such merger, consolidation, sale or other disposition, no Event of Default (or any event which, with the giving of notice or the passing of time or both would constitute an Event of Default) shall exist, and (b) in the case of an asset sale by such a Material Subsidiary, the assets to be sold do not constitute all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole. SECTION 5.07. Books and Records; Inspection. The Company will, and will ----------------------------- cause each of its Subsidiaries to, (a) maintain complete and accurate books and records, in which full and correct entries shall be made of all financial transactions of the Company and each such Subsidiary in accordance with generally accepted accounting principles, and (b) permit any Bank, the Administrative Agent and their respective employees and agents, at such reasonable times during normal business hours and as often as may be reasonably requested, to inspect any of the properties of the Company or any of its Subsidiaries and to inspect and make copies of the material books and records of the Company and its Subsidiaries and to discuss the affairs and finances of the Company and its Subsidiaries with their officers; provided that such Bank or the -------- Administrative Agent shall have delivered a written request for such inspection to the Company prior to the date of any such inspection. SECTION 5.08. Corporate Existence. Subject to the Company's rights under ------------------- Section 5.06, the Company will, and will cause each of its Material Subsidiaries - ------------ to, at all times maintain its corporate existence and preserve and keep, or cause to be preserved and kept, in full force and effect its rights and franchises material to its businesses. SECTION 5.09. Conduct of Business. The Company shall not, and shall not ------------------- permit any Material Subsidiary to, engage in any line of business other than (A) the businesses engaged in by the Company and its Subsidiaries on the date hereof and (B) any business or activities substantially similar or related thereto (which shall include, without limitation, other businesses related to the handling and/or distribution of data used or processed in the businesses engaged in by the Company and its Subsidiaries on the date hereof). SECTION 5.10. Payment of Taxes. The Company will pay and discharge, and ---------------- cause each of its Material Subsidiaries to pay and discharge, before the same shall become delinquent, all material taxes, assessments and governmental charges or levies imposed upon it or its property; provided, however, that -------- ------- neither the Company nor any of its Material Subsidiaries shall be required to pay or discharge any such tax, assessment, charge or levy that is being contested in good faith and by proper proceedings and as to which appropriate reserves are being maintained in accordance with GAAP, as long as no action has been commenced to enforce any Lien securing any such tax, assessment, charge or levy. -50- ARTICLE VI EVENTS OF DEFAULT ----------------- SECTION 6.01. Events of Default. If any of the following events ("Events ----------------- of Default") shall occur and be continuing: (a) A Borrower shall fail to pay when due any installment of principal of any Advance; or (b) A Borrower shall fail to pay any fee under this Agreement, or any installment of interest on any Advance, within ten (10) days after the due date thereof; or (c) Any written representation or warranty made by a Borrower herein or in connection with this Agreement shall prove to have been incorrect in any material respect when made; or (d) The Company shall fail to perform or observe (i) any term, covenant or agreement contained in Section 5.02, 5.03(a), (b) or (e), 5.04, ---- ------- --- --- ---- 5.05, 5.06, 5.07, 5.08, 5.09 or 5.10, or (ii) any other term, covenant or ---- ---- ---- ---- ---- ---- agreement contained in this Agreement, other than in (a) or (b) above, on its part to be performed or observed if such failure shall remain unremedied for 30 days after written notice thereof shall have been given to the Company by the Majority Banks through the Administrative Agent; or (e) The Company or any Material Subsidiary shall fail to pay any principal of or premium or interest on any Debt, or any obligations in respect of acceptances, letters of credit or other similar instruments, of the Company or such Material Subsidiary which is outstanding in a principal amount of at least $50,000,000 in the aggregate (but excluding Debt arising under this Agreement), when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt or other obligation; or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Debt or other obligation and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate, or permit the acceleration of, the maturity of such Debt or other obligation; or any Debt or other such obligation in which the outstanding principal exceeds $50,000,000 shall be otherwise declared to be due and payable (by acceleration or otherwise) or required to be prepaid, redeemed, defeased or otherwise repurchased by the Company or any Material Subsidiary (other than by a regularly-scheduled required prepayment), or any offer to prepay, redeem, defease or purchase such Debt shall be required to be made, prior to the stated maturity thereof; or -51- (f) The Company or any Material Subsidiary shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Company or any Material Subsidiary seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property, and in the event of any such proceeding instituted against the Company or any Material Subsidiary (but not instituted by it), such proceeding shall remain undismissed or unstayed for a period of 60 days or shall result in the entry of an order for relief, the appointment of a trustee or receiver, or other action in such proceeding or result adverse to the Company or such Material Subsidiary, as applicable, or the Company or any Material Subsidiary shall take any corporate action to authorize any of the actions set forth above in this subsection (f); or (g) Any Person, or a group of Persons acting in concert, shall at any time acquire, directly or indirectly, in excess of 51% of the securities having ordinary voting power to elect members of the board of directors of the Company; or (h) The Company shall incur liability in excess of $50,000,000 in the aggregate as a result of one or more of the following: (i) the occurrence of any ERISA Event; (ii) the partial or complete withdrawal of the Company or any of its ERISA Affiliates from a Multiemployer Plan; or (iii) the reorganization or termination of a Multiemployer Plan; or (i) One or more final judgments or orders for the payment of money, in an aggregate amount exceeding $50,000,000 at any one time outstanding (exclusive of judgment amounts fully covered by insurance, to the extent the insurer has admitted liability in respect thereof), shall be rendered against the Company or any Material Subsidiary and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order, or (ii) such judgments or orders shall not be discharged (or provision shall not have been made for such discharge), a stay of execution thereof shall not be obtained, or such judgments or orders shall not be paid or bonded, within 60 days from the date of entry thereof, and the Company or such Material Subsidiary, as the case may be, shall not, within such 60-day period, appeal therefrom and cause the execution thereof to be stayed pending such appeal; then, and in any such event, the Administrative Agent shall at the request, or may with the consent, of the Majority Banks, by notice to the Company, (i) declare the obligation of each Bank to make Advances to any Borrower to be terminated, whereupon the same shall forthwith terminate, and (ii) declare the Notes, all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the Notes, all -52- such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Company; provided, however, that in -------- ------- the event of an actual or deemed entry of an order for relief with respect to the Company under the Federal Bankruptcy Code, (A) the obligation of each Bank to make Advances to any Borrower shall automatically be terminated and (B) the Notes, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Company. ARTICLE VII GUARANTEE --------- SECTION 7.01. Unconditional Guarantee. For valuable consideration, ----------------------- receipt whereof is hereby acknowledged, and to induce the Banks to make Advances to each Borrowing Subsidiary, the Company unconditionally guarantees to the Banks and the Administrative Agent that the principal of and interest on each Advance and all other amounts payable by each Borrowing Subsidiary hereunder shall be promptly paid in full when due (whether at stated maturity, by acceleration or otherwise) in accordance with the terms hereof and thereof, and, in the case of any extension of time of payment, in whole or in part, that all such amounts shall be promptly paid when due (whether at stated maturity, by acceleration or otherwise) in accordance with the terms of such extension. In addition, the Company unconditionally agrees that upon default in the payment when due (whether at stated maturity, by acceleration or otherwise) of any of such principal, interest or other amounts, the Company shall forthwith pay the same. Without limiting the generality of the foregoing, the Company's liability shall extend to all amounts that constitute part of the obligations of any Borrowing Subsidiary guaranteed by the Company under this Article VII and would ----------- be owed by any such Borrowing Subsidiary to any Bank or the Administrative Agent under this Agreement or the Notes but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving such Borrowing Subsidiary. SECTION 7.02. Validity. The obligations of the Company under this Article -------- ------- VII are independent of the obligations of the Borrowing Subsidiaries guaranteed - --- hereunder, and a separate action or actions may be brought and prosecuted against the Company to enforce its obligations under this Article VII, ----------- irrespective of whether any action is brought against any Borrowing Subsidiary or whether any Borrowing Subsidiary is joined in any such action or actions. The obligations of the Company under this Article VII shall be unconditional ----------- irrespective of (i) the genuineness, validity, regularity or enforceability of the obligations of the Borrowing Subsidiaries under this Agreement, any Note or any Assumption Letter, (ii) any law, regulation or order of any jurisdiction affecting any term of any obligation of any Borrowing Subsidiary under this Agreement or the rights of any Bank or the Administrative Agent with respect thereto, (iii) any change in the time, manner or place of payment of, or in any other term of, all or any of the obligations of any Borrowing Subsidiary guaranteed by the Company under this Article VII, or any other amendment or ----------- waiver of or any consent to departure from this Agreement or the Notes, (iv) any change, restructuring or termination of the corporate structure or existence of any Borrowing -53- Subsidiary or any of its Subsidiaries, or (v) to the fullest extent permitted by applicable law, any other circumstance which might otherwise constitute a legal or equitable discharge of a surety or guarantor. SECTION 7.03. Waivers. The Company expressly waives promptness, ------- diligence, presentment, protest and any other notice with respect to the obligations of the Company under this Article VII and any requirement that any ----------- right or power be exhausted or any action be taken against any Borrowing Subsidiary and all notices and demands whatsoever. SECTION 7.04. Subrogation. The Company shall be subrogated to the rights ----------- of the Banks or the Administrative Agent against any Borrowing Subsidiary hereunder only after the Banks and the Administrative Agent shall have been paid in full all such amounts, with interest thereon, for which such Borrowing Subsidiary shall have become indebted hereunder. SECTION 7.05. Acceleration. The Company agrees that, as between the ------------ Company on the one hand, and the Banks and the Administrative Agent, on the other hand, the obligations of each Borrowing Subsidiary guaranteed under this Article VII may be declared to be forthwith due and payable, or may be deemed - ----------- automatically to have been accelerated, as provided in Section 6.01 hereof for ------------ purposes of this Article VII, notwithstanding any stay, injunction or other ----------- prohibition (whether in a bankruptcy proceeding affecting such Borrowing Subsidiary or otherwise) preventing such declaration as against such Borrowing Subsidiary and that, in the event of such declaration or automatic acceleration, such obligations (whether or not due and payable by such Borrowing Subsidiary) shall forthwith become due and payable by the Company for purposes of this Article VII. - ----------- SECTION 7.06. Reinstatement. The Company's obligations under this Article ------------- ------- VII shall be reinstated if at any time any payment received by any Bank or the - --- Administrative Agent from any Borrowing Subsidiary hereunder is required to be repaid or returned by such Bank or the Administrative Agent, all as though such payment had not been made. SECTION 7.07. Continuing Guaranty; Assignments. This guarantee of the -------------------------------- Company shall (a) remain in full force and effect until the later of (i) the cash payment in full of the obligation of any Borrowing Subsidiary guaranteed by the Company under this Article VII and (ii) the Termination Date (or, if the ----------- Company has made the Term Loan Election, the Maturity Date), (b) be binding upon the Company, its successors and assigns and (c) inure to the benefit of, and be enforceable by, the Banks and the Administrative Agent and their successors, transferees and assigns (provided that the applicable transfers and assignments are made in accordance with the terms of this Agreement). ARTICLE VIII THE ADMINISTRATIVE AGENT; DOCUMENTATION AGENTS; CO-AGENTS --------------------------------------------------------- SECTION 8.01. Reserved. -54- SECTION 8.02. Authorization and Action. Each Bank appoints and authorizes ------------------------ Bank One to act as the Administrative Agent hereunder, and each Bank irrevocably authorizes the Administrative Agent (for so long as the Administrative Agent remains in such capacity under this Agreement) to act as the contractual representative of such Bank with only the rights and duties expressly set forth herein. The Administrative Agent agrees to act as such contractual representative upon the express conditions contained in this Article VIII. Notwithstanding the use of the defined term "Administrative Agent," it is expressly understood and agreed that the Administrative Agent shall not have any fiduciary responsibilities to any Bank by reason of this Agreement and that the Administrative Agent is merely acting as the representative of the Banks with only those duties as are expressly set forth in this Agreement. In its capacity as the Banks' contractual representative, the Administrative Agent (i) does not assume any fiduciary duties to any of the Banks, (ii) is a "representative" of the Lenders within the meaning of Section 9-105 of the Uniform Commercial Code and (iii) is acting as an independent contractor, the rights and duties of which are limited to those expressly set forth in this Agreement. Each Bank agrees to assert no claim against the Administrative Agent on any agency theory or any other theory of liability for breach of fiduciary duty, all of which claims each Bank waives. The Administrative Agent shall have and may exercise such powers under this Agreement as are specifically delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental hereto. The Administrative Agent shall have no implied duties to the Banks, or any obligation to the Banks to take any action hereunder, except any action specifically provided by this Agreement to be taken by the Administrative Agent. As to any matters not expressly provided for by this Agreement (including, without limitation, enforcement or collection of the Notes), the Administrative Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Banks, and such instructions shall be binding upon all Banks and all holders of the Notes; provided, however, that the Administrative Agent shall not be -------- ------- required to take any action which exposes the Administrative Agent to personal liability or which is contrary to this Agreement or applicable law. The Administrative Agent agrees to give to each Bank prompt notice of each notice given to it by any Borrower pursuant to the terms of this Agreement. The Administrative Agent may execute any of its duties as Administrative Agent hereunder and under any other instrument, document or agreement executed in connection herewith by or through employees, agents, and attorney-in-fact and shall not be answerable to the Banks, except as to money or securities received by it or its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Without limiting the foregoing, the Administrative Agent may appoint any Affiliate as its agent for all matters relating to Advances made in Alternative Currencies. Each such agent shall be entitled to all of the rights and benefits granted to the Administrative Agent hereunder, and each Bank shall treat any notice given by any such agent as if it had been given directly by the Administrative Agent. SECTION 8.03. Administrative Agent's Reliance, Etc. Neither the ------------------------------------- Administrative Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement, except for its or their own gross negligence or willful misconduct. Without limiting the generality of the foregoing, the Administrative Agent: (i) may treat the payee of any Note as the holder thereof until the Administrative Agent receives and accepts an Assignment and -55- Acceptance entered into by the Bank that is the payee of such Note, as assignor, and an Eligible Assignee, as assignee, as provided in Section 9.07; (ii) may ------------ consult with legal counsel (including counsel for any Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (iii) makes no warranty or representation to any Bank and shall not be responsible to any Bank for any statements, warranties or representations (whether written or oral) made in or in connection with this Agreement; (iv) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement on the part of any Borrower or to inspect the property (including the books and records) of any Borrower; (v) shall not be responsible to any Bank for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (vi) shall not have any duty to ascertain, inquire into or verify the financial condition of the Company or any of its Subsidiaries; (vii) shall have no duty to disclose to the Banks information that is not required to be furnished by the Company to the Administrative Agent at such time, but is voluntarily furnished by the Company to the Administrative Agent (either in its capacity as Administrative Agent or in its individual capacity); and (viii) shall incur no liability under or in respect of this Agreement by acting upon any notice, consent, certificate or other instrument or writing (which may be by telegram) believed by it to be genuine and signed or sent by the proper party or parties. The Administrative Agent shall be entitled to advice of counsel concerning the contractual arrangement between the Administrative Agent and the Banks and all matters pertaining to the Administrative Agent's duties hereunder. SECTION 8.04. The Administrative Agent and Affiliates. With respect to --------------------------------------- any financial institution which shall become the Administrative Agent hereunder, and with respect to such financial institution's Commitment and the Advances made by it, such financial institution shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not the Administrative Agent; and the term "Bank" or "Banks" shall, unless otherwise expressly indicated, include such financial institution in its individual capacity, if applicable. Each such financial institution and its affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, any Borrower, any of their respective Subsidiaries and any Person who may do business with or own securities of any Borrower or any such Subsidiary, all as if such financial institution were not the Administrative Agent and without any duty to account therefor to the Banks. SECTION 8.05. Bank Credit Decision; Notice of Default. Each Bank --------------------------------------- acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Bank and based on the financial statements referred to in Section 4.01 and such other documents and information as it has ------------ deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Event of Default, or an event which would constitute an Event of Default but for the requirement that notice be given or time elapse or both, unless the Agent has received -56- written notice from a Bank or the Company referring to this Agreement describing such Event of Default, or such event which would constitute an Event of Default but for the requirement that notice be given or time elapse or both, and stating that such notice is a "notice of default". In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give prompt notice thereof to the Banks. SECTION 8.06. Indemnification. The Banks (other than the Designated --------------- Bidders) agree to indemnify the Administrative Agent (to the extent not reimbursed by the Borrowers), ratably according to the respective principal amounts of the Notes held by each of them (or, if no Notes are outstanding at the time or if any Notes are held by Persons that are not Banks, ratably according to the respective amounts of their Commitments) from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Administrative Agent in any way relating to or arising out of this Agreement or any action taken or omitted by the Administrative Agent under this Agreement; provided that no Bank shall be liable for any portion of such liabilities, - -------- obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements to the extent any of the foregoing is found in a final non-appealable judgment by a court of competent jurisdiction to have resulted from the Administrative Agent's gross negligence or willful misconduct. Without limiting the foregoing, each Bank (other than the Designated Bidders) agrees to reimburse the Administrative Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including counsel fees) incurred by the Administrative Agent in connection with the administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, to the extent that the Administrative Agent is not reimbursed for such expenses by the Borrowers. The obligation of the Banks under this Section 8.06 shall survive payment of the Obligations and the termination of - ------------ this Agreement. SECTION 8.07. Successor Administrative Agent. The Administrative Agent ------------------------------ may resign at any time by giving written notice thereof to the Banks and the Company and may be removed at any time with or without cause by the Majority Banks. Upon any such resignation or removal, the Majority Banks shall have the right to appoint another Bank as successor Administrative Agent or, if acceptable to the Company, any other commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $500,000,000. If no successor Administrative Agent shall have been so appointed by the Majority Banks, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent gives notice of resignation or the Majority Banks remove the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the Banks, appoint a successor Administrative Agent, which shall be a commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $500,000,000 and otherwise acceptable to the Company. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Administrative Agent's resignation or removal hereunder as -57- Administrative Agent, the provisions of this Article VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent. SECTION 8.08. Documentation Agents; Co-Agents. The Banks identified in ------------------------------- this Agreement as the Documentation Agents or Co-Agents shall not have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Banks as such. Without limiting the foregoing, such Banks shall not have or be deemed to have a fiduciary relationship with any Bank. Each Bank hereby makes the same acknowledgments with respect to such Banks as it makes with respect to the Administrative Agent in Section 8.05. ARTICLE IX MISCELLANEOUS ------------- SECTION 9.01. Amendments, Etc. No amendment or waiver of any provision of ---------------- this Agreement or the Notes, nor any consent to any departure by any Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Majority Banks, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in -------- ------- writing and signed by all the Banks (other than the Designated Bidders), directly do any of the following: (i) waive any of the conditions specified in Section 3.01 or 5.04, (ii) increase the Commitments of the Banks or subject the - ------------ ---- Banks to any additional obligations, (iii) reduce the principal of, or the stated rate at which interest accrues on, the Notes or reduce the stated rate at which the Facility Fee and the Utilization Fee are calculated, (iv) postpone any date fixed for any payment of principal of, or interest on, the Committed Advances or any fees or other amounts payable hereunder, (v) change the percentage of the Commitments, or of the aggregate unpaid principal amount of the Notes, or the number of Banks which shall be required for the Banks or any of them to take any action hereunder or (vi) amend this Section 9.01; provided, ------------ -------- further, that no amendment, waiver or consent shall, unless in writing and - ------- signed by the Administrative Agent in addition to the Banks required above to take such action, affect the rights or duties of the Administrative Agent under this Agreement or any Note. SECTION 9.02. Notices, Etc. (a) All notices and other communications ------------- provided for hereunder shall be in writing (including telegraphic or telecopy communication) and mailed, telegraphed, telecopied or delivered, (i) if to the Company, at its address at 77 West Wacker Drive, Chicago, Illinois 60601 Attention: Treasurer, telecopy number (312) 326- 8557; (ii) if to any Borrowing Subsidiary, at the address specified in the Assumption Letter pursuant to which it became a Borrowing Subsidiary, with a copy to the Company at the address specified herein; provided that any -------- such notice may be given solely to the Company, at the option of the party giving such notice; -58- (iii) if to any bank listed on the signature pages hereof, at its Domestic Lending Office specified opposite its name on Schedule I hereto; ---------- (iv) if to any other Bank, at its Domestic Lending Office specified in the Assignment and Acceptance or Designation Agreement pursuant to which it became a Bank; (v) if to the Administrative Agent, at the Domestic Lending Office specified opposite its name on Schedule I hereto; ---------- or as to the Borrowers and the Administrative Agent, at such other address as shall be designated by such party in a written notice to the other parties, and as to each such other party, at such other address as shall be designated by such party in a written notice to the Company and the Administrative Agent. All such notices and communications shall, when sent by overnight courier, mailed or telecopied, be effective when delivered to such courier, deposited in the mails, or telecopied and confirmed by return telecopy, respectively, except that notices and communications to the Administrative Agent pursuant to Articles II, ----------- III and VIII shall not be effective until received by the Administrative Agent. - --- ---- (b) If any notice required under this Agreement is permitted to be made, and is made, by telephone, actions taken or omitted to be taken in reliance thereon by the Administrative Agent or by any Bank shall be binding upon the Company and each other Borrower notwithstanding any inconsistency between the notice provided by telephone and any subsequent writing in confirmation thereof provided to the Administrative Agent or such Bank; provided that any such action -------- taken or omitted to be taken by the Administrative Agent or such Bank shall have been in good faith and in accordance with the terms of this Agreement. SECTION 9.03. No Waiver; Remedies. No failure on the part of any Bank or ------------------- the Administrative Agent to exercise, and no delay in exercising, any right hereunder or under any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 9.04. Costs and Expenses. (a) The Company agrees to pay on ------------------ demand all reasonable, documented out-of-pocket costs and expenses of the Arranger and the Administrative Agent (including, without limitation, reasonable fees and expenses of counsel), in connection with any amendments, modifications or waivers of the provisions hereof, or in determining the rights and obligations of the parties hereto under this Agreement and the Notes, or the enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement and the other documents to be delivered hereunder; provided that -------- if, in the event of any enforcement undertaken by the Banks hereunder, it shall be determined that sufficient conflicts exist such that a single law firm engaged by the Administrative Agent or the Majority Banks is precluded by law or by standards of conduct from representing the Banks as a group, and such conflicts would exist with respect to any other law firm representing the Banks as a group, the Company agrees to pay on demand all reasonable, documented out- of-pocket costs and expenses of each Bank, -59- if any (including, without limitation, reasonable fees and expenses of counsel), in connection with such enforcement undertaking. (b) The Company agrees to pay to the Administrative Agent such fees as shall have been agreed to by the Administrative Agent and the Company in a separate agreement regarding the provision by the Administrative Agent of services as Administrative Agent under this Agreement. SECTION 9.05. Right of Set-off. Upon (i) the occurrence and during the ---------------- continuance of any Event of Default and (ii) the declaration that the Advances are due and payable pursuant to the provisions of Section 6.01, each Bank is ------------ authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Bank to or for the credit or the account of any Borrower against any and all of the obligations of such Borrower now or hereafter existing under this Agreement and the Notes held by such Bank, irrespective of whether or not such Bank shall have made any demand under this Agreement or such Notes and although such obligations may be unmatured. Each Bank shall promptly notify the Company after any such set-off and application made by such Bank, provided that the failure to give such notice shall not affect the validity of - -------- such set-off and application. The rights of each Bank under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which such Bank may have. SECTION 9.06. Binding Effect. This Agreement (other than Sections 2.01 -------------- ------------- and 2.03, which shall only become effective upon satisfaction of the conditions ---- set forth in Section 3.01) shall become effective when it shall have been ------------ executed by the Company and the Administrative Agent and when the Administrative Agent shall have been notified by each bank listed on the signature pages hereof that it has executed this Agreement and thereafter shall be binding upon and inure to the benefit of the Company, the Administrative Agent and each Bank and their respective successors and assigns, except that neither the Company nor any Borrowing Subsidiary shall have the right to assign its rights hereunder or any interest herein without the prior written consent of the Banks. SECTION 9.07. Assignments, Designations and Participations. (a) Each -------------------------------------------- Bank (other than the Designated Bidders) may, upon obtaining the prior written consent of the Company and the Administrative Agent (which consents shall not be unreasonably withheld or delayed), and each Bank (including, without limitation, the Designated Bidders) shall, if demanded by the Company in accordance with Section 2.05(b), assign to one or more Eligible Assignees all or a portion of - --------------- its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment and the Committed Advances owing to it and the Committed Notes held by it); provided, however, that: -------- ------- (i) each such assignment shall be of a constant, and not a varying, percentage of all rights and obligations under this Agreement (other than any right to make Uncommitted Advances, Uncommitted Advances owing to it and Uncommitted Notes owing to it); -60- (ii) except in the case of an assignment to a Person that, immediately prior to such assignment, was a Bank or an assignment of all of a Bank's rights and obligations under this Agreement, the amount of the Commitment of the assigning Bank being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $20,000,000 (or an integral multiple of $1,000,000 in excess thereof); (iii) each such assignment made as a result of a demand by the Company pursuant to Section 2.05(b) and this Section 9.07(a) shall be arranged by --------------- --------------- the Company with the approval of the Administrative Agent, which approval shall not be unreasonably withheld or delayed, and shall be either an assignment of all of the rights and obligations of the assigning Bank under this Agreement or an assignment of a portion of such rights and obligations made concurrently with another such assignment or other such assignments that, in the aggregate, cover all of the rights and obligations of the assigning Bank under this Agreement; (iv) no Bank shall be obligated to make any such assignment as a result of a demand by the Company pursuant to this Section 9.07(a) unless --------------- and until such Bank shall have received one or more payments from one or more Eligible Assignees in an aggregate amount equal to the aggregate outstanding principal amount of the Advances owing to such Bank, together with accrued interest thereon to the date of payment of such principal amount and from the Company or one or more Eligible Assignees in an aggregate amount equal to all other amounts payable to such Bank under this Agreement and the Notes (including, without limitation, any amounts owing under Sections 2.12, 2.13 or 2.19); and ------------------- ---- (v) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with any Note subject to such assignment and a processing and recordation fee of $3,500; and provided, further, that the consent of the Company and the Administrative -------- ------- Agent shall not be required with respect to an assignment to an Eligible Assignee which is a Bank or an Affiliate thereof. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Bank hereunder and (y) the Bank assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Bank's rights and obligations under this Agreement, such Bank shall cease to be a party hereto). Notwithstanding the foregoing, each Bank may, without the Company's or the Administrative Agent's consent, assign all or a portion of its rights and obligations -61- under this Agreement (including, without limitation, all or a portion of its Commitment and the Advances owing to it) to an affiliate of such Bank or to another Bank. (b) By executing and delivering an Assignment and Acceptance, the Bank assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such assigning Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company or any Borrowing Subsidiary or the performance or observance by the Company or any Borrowing Subsidiary of any of their respective obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.01 and such other ------------ documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Administrative Agent, such assigning Bank or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Administrative Agent to take such action as contractual representative on its behalf and to exercise such powers and discretion under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers and discretion as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as a Bank. (c) Upon its receipt of an Assignment and Acceptance executed by an assigning Bank and an assignee representing that it is an Eligible Assignee, and consented to by the Company, together with any Note or Notes subject to such assignment, the Administrative Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit A hereto, (i) --------- accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Company. Within ten Business Days after its receipt of such notice, the Company shall execute and deliver to the Administrative Agent in exchange for the surrendered Note a new Note to the order of such Eligible Assignee in an amount equal to the Commitment assumed by it (in the case of a Committed Note) or the Uncommitted Advance or part thereof purchased by it (in the case of an Uncommitted Note) pursuant to such Assignment and Acceptance and, if the assigning Bank has retained a Commitment or a part of such Uncommitted Advance hereunder, a new Note to the order of the assigning Bank in an amount equal to the Commitment or of such Uncommitted Advance retained by it hereunder. Such new Note or Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note or Notes, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of Exhibit D-1 or Exhibit D-2 hereto (as the case may be). ----------- ----------- -62- (d) Each Bank (other than the Designated Bidders) may, upon obtaining the prior written consent of the Company and the Administrative Agent (which consents shall not be unreasonably withheld or delayed), designate one or more banks or other entities to have a right to make Uncommitted Advances as a Bank pursuant to Section 2.03; provided, however, that (i) no such Bank shall be ------------ -------- ------- entitled to make more than one such designation, (ii) each such Bank making such a designation shall retain the right to make Uncommitted Advances as a Bank pursuant to Section 2.03, (iii) each such designation shall be to a Designated ------------ Bidder and (iv) the parties to each such designation shall execute and deliver a Designation Agreement to the Administrative Agent, for its acceptance and recording in the Register, together with the consent thereto executed by the Company. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Designation Agreement, the designee thereunder shall be a party hereto with a right to make Uncommitted Advances as a Bank pursuant to Section 2.03 and the obligations related thereto. ------------ (e) By executing and delivering a Designation Agreement, the Bank making the designation thereunder and its designee thereunder confirm and agree with each other and the other parties hereto as follows: (i) such Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company or any Borrowing Subsidiary or the performance or observance by the Company or any Borrowing Subsidiary of any of their respective obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such designee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.01 and ------------ such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Designation Agreement; (iv) such designee will, independently and without reliance upon the Administrative Agent, such designating Bank or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such designee confirms that it is a Designated Bidder; (vi) such designee appoints and authorizes the Administrative Agent to take such action as contractual representative on its behalf and to exercise such powers and discretion under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers and discretion as are reasonably incidental thereto; and (vii) such designee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Bank. (f) Upon its receipt of a Designation Agreement executed by a designating Bank and a designee representing that it is a Designated Bidder, and consented to by the Company, the Administrative Agent shall, if such Designation Agreement has been completed and is substantially in the form of Exhibit C hereto, (i) --------- accept such Designation Agreement, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Company. -63- (g) The Administrative Agent shall maintain at its address referred to in Section 9.02 a copy of each Assignment and Acceptance and each Designation - ------------ Agreement delivered to and accepted by it and a register for the recordation of the names and addresses of the Banks and, with respect to Banks other than Designated Bidders, the Commitment of, and principal amount of the Advances owing to, each Bank from time to time (the "Register"). The entries in the -------- Register shall be conclusive and binding for all purposes, absent manifest error, and the Company, the Administrative Agent and the Banks may treat each Person whose name is recorded in the Register as a Bank hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Company or any Bank at any reasonable time and from time to time upon reasonable prior notice. (h) Each Bank (other than a Designated Bidder) may sell participations to one or more banks or other entities in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it and the Note or Notes held by it); provided, however, that (i) such Bank's obligations under this Agreement -------- ------- (including, without limitation, its Commitment hereunder) shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Bank shall remain the holder of any such Note for all purposes of this Agreement, (iv) the Company, the Administrative Agent and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement and (v) no participant under any such participation shall have any right to approve any amendment or waiver of any provision of this Agreement or any Note, or any consent to any departure by the Company or any Borrowing Subsidiary therefrom, except to the extent that such amendment, waiver or consent would reduce the principal of the Notes or the stated rate at which interest, the Facility Fee or the Utilization Fee is calculated, in each case to the extent subject to such participation, or postpone any date fixed for any payment of principal of, or interest on, the Notes or any fees or other amounts payable hereunder, in each case to the extent subject to such participation. (i) Any Bank may, in connection with any assignment, designation or participation or proposed assignment, designation or participation pursuant to this Section 9.07, disclose to the assignee, designee or participant or proposed ------------ assignee, designee or participant, any information relating to the Company or any other Borrower furnished to such Bank by or on behalf of the Company or such other Borrower; provided that, prior to any such disclosure of non-public -------- information, such Bank shall have obtained the Company's consent and the assignee or participant or proposed assignee or participant shall agree in a manner satisfactory to the Company to preserve the confidentiality of any confidential information relating to the Company received by it from such Bank. (j) Notwithstanding any other provision set forth in this Agreement, any Bank may at any time create a security interest in all or any portion of its rights under this Agreement (including, without limitation, the Advances owing to it and the Note or Notes held by it) in favor of any Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve System. SECTION 9.08. Governing Law. This Agreement and the Notes shall be ------------- governed by, and construed in accordance with, the laws of the State of Illinois. -64- SECTION 9.09. Execution in Counterparts. This Agreement may be executed ------------------------- in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. SECTION 9.10. Confidentiality. Each Bank agrees that it will use --------------- reasonable efforts to keep confidential any information from time to time supplied to it by the Company which the Company designates in writing at the time of its delivery to the Bank is to be treated confidentially; provided, -------- however, that nothing herein shall affect the disclosure of any such information - ------- to: (i) the extent required by statute, rule, regulation or judicial process; (ii) counsel for any Bank or to their respective accountants; (iii) bank examiners and auditors; (iv) any Affiliate of such Bank; (v) any other Bank, or, subject to Section 9.07(c), any transferee or prospective transferee of any --------------- Advance, any Note or any Commitment; or (vi) any other Person in connection with any litigation to which any one or more of the Banks is a party; provided -------- further, however, that each Bank agrees that it will use reasonable efforts to - ------- ------- promptly notify the Company of any request for information under this clause (vi) or with respect to any request for information not enumerated in this Section 9.10, if not otherwise prohibited from doing so. - ------------ SECTION 9.11. Non-Reliance by the Banks. Each Bank by its signature to ------------------------- this Agreement represents and warrants that (i) it has not relied in the extension of the credit contemplated by this Agreement, nor will it rely in the maintenance thereof, upon any assets of the Company or its Subsidiaries consisting of Margin Stock as collateral and (ii) after reviewing the financial statements of the Company and its Consolidated Subsidiaries referred to in Section 4.01(e), such Bank has concluded therefrom that the consolidated cash - --------------- flow of the Company and its Consolidated Subsidiaries is sufficient to support the credit extended to the Company pursuant to this Agreement. SECTION 9.12. No Indirect Security. Notwithstanding any Section or -------------------- provision of this Agreement to the contrary, nothing in this Agreement shall (i) restrict or limit the right or ability of the Company or any of its Subsidiaries to pledge, mortgage, sell, assign, or otherwise encumber or dispose of any Margin Stock, or (ii) create an Event of Default arising out of or relating to any such pledge, mortgage, sale, assignment or other encumbrance or disposition. SECTION 9.13. Indemnification. The Company agrees to indemnify and hold --------------- harmless the Administrative Agent, each Bank, and their respective officers, directors, employees and agents (any one of the foregoing being an "Indemnified Party" and any two or more of the foregoing being "Indemnified Parties") from and against, and pay the Indemnified Parties the amount of, any and all claims, damages, liabilities, and reasonable, documented out-of-pocket costs and expenses (including, without limitation, reasonable fees and expenses of counsel) that may be incurred by or asserted or awarded against an Indemnified Party relating in whole or in part to this Agreement, the Notes, any documents delivered in connection herewith and the transactions contemplated hereby, and in connection with or arising out of or by reason of, or in connection with the preparation of a defense of, any investigation, litigation or proceeding brought by a Person other than the Indemnified Parties or the Company and its Subsidiaries, arising out of, related to or in -65- connection with (i) this Agreement, the Notes, any of the transactions contemplated herein or the use or proposed use of the proceeds of any Advances, (ii) any acquisition or proposed acquisition by the Company or any of its Subsidiaries of all or any portion of the stock or all or substantially all of the assets of any Person, or (iii) the actual or alleged presence of Hazardous Materials on any property of the Company or any of its Subsidiaries or any Environmental Action relating to any of them, in each case whether or not such investigation, litigation or proceeding is brought by the Company, any other Borrower, their respective shareholders or creditors, an Indemnified Party or any other Person, and whether or not an Indemnified Party is otherwise a party thereto, provided, however, that this indemnification shall not apply to any -------- ------- claim, damage, liability, cost or expense that is found in a final, nonappealable judgment by a court of competent jurisdiction to have resulted from an Indemnified Party's gross negligence or willful misconduct. The covenants of the Company contained in this Section 9.13 and in Sections 9.04, ------------ ------------- 2.11, 2.12 and 2.19 shall survive the repayment of all amounts due and payable - ---- ---- ---- under this Agreement and the termination of this Agreement. SECTION 9.14. Partial Invalidity. Wherever possible, each provision ------------------ hereof shall be interpreted in such manner as to be effective and valid under applicable law, but in case any one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such provision shall be ineffective to the extent, but only to the extent, of such invalidity, illegality or unenforceability without invalidating the remainder of such invalid, illegal or unenforceable provision or provisions or any other provisions hereof, unless such a construction would be unreasonable. SECTION 9.15. WAIVER OF JURY TRIAL. Each of the parties hereto -------------------- irrevocably waives any right to have a jury participate in resolving any dispute, whether sounding in contract, tort or otherwise, arising out of, connected with, related to or incidental to the relationship established among them in connection with this Agreement or the transactions contemplated hereby or the actions of the Company, any Borrowing Subsidiary, the Administrative Agent or any Bank in the negotiation, administration, performance or enforcement thereof. Each of the parties hereto agrees that any such claim, demand, action or cause of action shall be decided by bench trial without a jury and that any party hereto may file an original counterpart or a copy of this Agreement with any court as written evidence of the consent of the parties hereto to the waiver of their right to trial by jury. SECTION 9.16. Jurisdiction, Etc. (a) Each of the parties hereto ------------------ irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any Illinois state court or federal court of the United States of America sitting in Chicago, Illinois, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the Notes, or for recognition or enforcement of any judgment, and each of the parties hereto irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such Illinois state court or, to the extent permitted by law, in such federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any -66- party may otherwise have to bring any action or proceeding relating to this Agreement or the Notes in the courts of any jurisdiction. (b) Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the Notes in any Illinois state or federal court. Each of the parties hereto irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. SECTION 9.17. Termination of Existing Credit Agreement. The Company and ---------------------------------------- each of the Banks hereunder that is a party to the 1998 364-Day Credit Agreement consents to the termination of the "Commitments" thereunder, effective on the Effective Date, notwithstanding the notice requirements for such termination set forth in Section 2.05 of the 1998 364-Day Credit Agreement. Because such Banks hereunder constitute the "Majority Banks" (as defined in the 1998 364-Day Credit Agreement) under the 1998 364-Day Credit Agreement, the 1998 364-Day Credit Agreement shall terminate and all amounts payable thereunder shall be due and payable on the Effective Date. SECTION 9.18. Nonliability of Banks. The relationship between the --------------------- Borrowers on the one hand and the Banks and the Administrative Agent on the other hand shall be solely that of borrower and lender. Neither the Administrative Agent, the Arranger nor any Bank shall have any fiduciary responsibilities to the Borrower. Neither the Administrative Agent, the Arranger nor any Bank undertakes any responsibility to the Borrowers to review or inform the Borrowers of any matter in connection with any phase of the Borrowers' business or operations. Neither the Administrative Agent, the Arranger nor any Bank shall have any liability with respect to, and the Borrowers waive, release and agree not to sue for, any special, indirect or consequential damages suffered by the Borrowers in connection with, arising out of, or in any way related to this Agreement or the transactions contemplated thereby. Remainder of page intentionally left blank -67- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. R.R. DONNELLEY & SONS COMPANY By:__________________________________ Title: ________________________________ BANK ONE, NA, as Administrative Agent and as a Bank By:__________________________________ Title: ________________________________ -68- BANK OF MONTREAL, as a Documentation Agent and as a Bank By:____________________________________ Title: ________________________________ -69- FIRST UNION NATIONAL BANK, as a Documentation Agent and as a Bank By:____________________________________ Title: ________________________________ -70- BANK OF AMERICA, N.A., as a Co-Agent and as a Bank By:____________________________________ Title: ________________________________ -71- CITIBANK N.A., as a Co-Agent and as a Bank By:____________________________________ Title: ________________________________ -72- THE NORTHERN TRUST COMPANY, as a Co- Agent and as a Bank By:____________________________________ Title: ________________________________ -73- THE INDUSTRIAL BANK OF JAPAN, LIMITED, CHICAGO BRANCH, as a Bank By:__________________________________ Title: -74- WACHOVIA BANK, N.A., as a Bank By:__________________________________ Title: -75- SEAWAY NATIONAL BANK OF CHICAGO, as a Bank By:__________________________________ Title: SCHEDULE I
Domestic Eurocurrency Name of Bank Commitment Lending Office Lending Office - ------------ ---------- -------------- ------------- Bank One, NA $39,500,000 1 Bank One Plaza same 14th Floor, Suite 0088 Chicago, IL 60670 Attn: Deborah Stevens Phone: (312) 732-2532 FAX: (312) 732-1117 Bank of Montreal $32,000,000 115 S. LaSalle Street same 12th Floor Chicago, IL 60690 Attn: Leon Sinclair Phone: (312) 750-4371 FAX: (312) 750-6057 First Union National Bank $32,000,000 301 S. College Street same TW-10 Charlotte, NC 28288 Attn: Peter Steffen Phone: (704) 383-9214 FAX: (704) 383-7236
Bank of America, N.A. $25,000,000 Bank of America Corporate same Center NC1-077-1715 100 N. Tryon Street Charlotte, NC 28255-0001 Attn: Jack Williams Phone: (704) 388-3234 FAX: (704) 388-0960 Citibank N.A. $25,000,000 500 West Madison Street same 35th Floor Chicago, IL 60606 Attn: Carrie Stead Phone: (312) 627-3983 FAX: (312) 627-3990 The Northern Trust Company $25,000,000 50 South LaSalle Street same 11th Floor Chicago, IL 60675 Attn: Mark Taylor Phone: (312) 557-1626 FAX: (312) 444-5055 The Industrial Bank of $10,000,000 227 West Monroe Street same Japan, Limited, Chicago Suite 2600 Branch Chicago, IL 60606 Attn: Steve Ryan Phone: (312) 855-8494 FAX: (312) 855-8200
Wachovia Bank, N.A. $10,000,000 70 West Madison Street same Suite 2440 Chicago, IL 60602 Attn: James Kinoshita Phone: (312) 795-4331 FAX: (312) 853-0693 Seaway National Bank of $ 1,500,000 645 East 87th Street same Chicago Chicago, IL 60619 Attn: Lorette Yamini Phone: (773) 487-4800 FAX (773) 487-1850
EXHIBIT A FORM OF ASSIGNMENT AND ACCEPTANCE Reference is made to the 364-Day Credit Agreement dated as of October 14, 1999 (as amended or modified from time to time, the "364-Day Credit Agreement") ------------------------ among R.R. Donnelley & Sons Company, a Delaware corporation (the "Company"), the ------- Banks (as defined in the 364-Day Credit Agreement) parties thereto and Bank One, NA, as Administrative Agent for the Banks (the "Administrative Agent"). Terms -------------------- defined in the 364-Day Credit Agreement are used herein with the same meaning. The "Assignor" and the "Assignee" referred to on Schedule I hereto agree as follows: 1. The Assignor sells and assigns to the Assignee, and the Assignee purchases and assumes from the Assignor, an interest in and to the Assignor's rights and obligations under the 364-Day Credit Agreement as of the date hereof (other than in respect of Uncommitted Advances and Uncommitted Notes) equal to the percentage interest specified on Schedule 1 hereto of all outstanding rights and obligations under the 364-Day Credit Agreement (other than in respect of Uncommitted Advances and Uncommitted Notes). After giving effect to such sale and assignment, the Assignee's Commitment and the amount of the Committed Advances owing to the Assignee will be as set forth on Schedule 1 hereto. 2. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the 364-Day Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the 364-Day Credit Agreement or any other instrument or document furnished pursuant thereto; (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company or any Borrowing Subsidiary or the performance or observance by the Company or any Borrowing Subsidiary of any of their respective obligations under the 364-Day Credit Agreement or any other instrument or document furnished pursuant thereto; and (iv) attaches the Committed Note held by the Assignor and requests that the Administrative Agent exchange such Committed Note for a new Committed Note payable to the order of the Assignee in an amount equal to the Commitment assumed by the Assignee pursuant hereto or new Committed Notes payable to the order of the Assignee in an amount equal to the Commitment assumed by the Assignee pursuant hereto and the Assignor in an amount equal to the Commitment retained by the Assignor under the 364-Day Credit Agreement, respectively, as specified on Schedule 1 hereto. 3. The Assignee (i) confirms that it has received a copy of the 364-Day Credit Agreement, together with copies of the financial statements referred to in Section 4.01 thereof and such other documents and information as it has ------------ deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees A-1 that it will, independently and without reliance upon the Administrative Agent, the Assignor or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the 364-Day Credit Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Administrative Agent to take such action as contractual representative on its behalf and to exercise such powers and discretion under the 364-Day Credit Agreement as are delegated to the Administrative Agent by the terms thereof; (v) agrees that it will perform in accordance with their terms all of the obligations that by the terms of the 364-Day Credit Agreement are required to be performed by it as a Bank; and (vi) attaches any U.S. Internal Revenue Service forms required under Section 2.19 of the 364-Day Credit Agreement. - ------------ 4. Following the execution of this Assignment and Acceptance, it will be delivered to the Company for acceptance and then to the Administrative Agent for acceptance and recording. The effective date for this Assignment and Acceptance (the "Effective Date") shall be the date of acceptance hereof by the -------------- Administrative Agent, unless otherwise specified on Schedule 1 hereto. 5. Upon such acceptance and recording by the Administrative Agent, as of the Effective Date, (i) the Assignee shall be a party to the 364-Day Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Bank thereunder and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the 364-Day Credit Agreement. 6. Upon such acceptance and recording by the Administrative Agent, from and after the Effective Date, the Administrative Agent shall make all payments under the 364-Day Credit Agreement and the Notes in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest and facility fees with respect thereto) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the 364- Day Credit Agreement and the Notes for periods prior to the Effective Date directly between themselves. 7. This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of Illinois. 8. This Assignment and Acceptance may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of Schedule 1 to this Assignment and Acceptance by telecopier shall be effective as delivery of a manually executed counterpart of this Assignment and Acceptance. A-2 IN WITNESS WHEREOF, the Assignor and the Assignee have caused Schedule 1 to this Assignment and Acceptance to be executed by their officers thereunto duly authorized as of the date specified thereon. A-3 SCHEDULE I to Assignment and Acceptance dated _______________ Percentage interest assigned: ___% Assignee's Commitment: $_____________ Aggregate outstanding principal amount of Committed Advances assigned: $_____________ Principal amount of Committed Note payable to Assignee: $_____________ Principal amount of Committed Note payable to Assignor: $_____________ Effective Date: _____________, ____ [NAME OF ASSIGNOR], as Assignor By:___________________ Title: Dated: [NAME OF ASSIGNEE], as Assignee By:___________________ Title: Dated: Applicable Lending Offices: Domestic: [address] Eurocurrency: [address] Uncommitted Advances: [address] A-4 Accepted and approved, _____________, ____ BANK ONE, NA, as Administrative Agent By:_____________________ Title: Accepted and approved, ______________, ____ R.R. DONNELLEY & SONS COMPANY By:_____________________ Title: A-5 EXHIBIT B [Form of Assumption Letter] _____________________, ____ To the Banks parties to the 364-Day Credit Agreement referred to below Ladies and Gentlemen: Reference is made to the 364-Day Credit Agreement dated as of October 14, 1999 among R.R. Donnelley & Sons Company, the Banks named therein and Bank One, NA, as Administrative Agent for such Banks (as amended and in effect from time to time, the "364-Day Credit Agreement"). Terms defined in the 364-Day Credit Agreement and capitalized herein are used herein as defined therein. The undersigned, ___________ (the "Subsidiary"), a _________________ corporation, proposes to become a "Borrowing Subsidiary" under the 364-Day Credit Agreement, and accordingly agrees that from the date hereof it shall become a "Borrowing Subsidiary" under the 364-Day Credit Agreement and agrees that from the date hereof and until the payment in full of the principal of and interest on all Advances made to it under the 364-Day Credit Agreement and performance of all of its other obligations thereunder, and termination hereunder of its status as a "Borrowing Subsidiary" as provided below, it shall perform, comply with and be bound by each of the provisions of the 364-Day Credit Agreement which are stated to apply to the "Company", a "Borrowing Subsidiary" or a "Borrower". Without limiting the generality of the foregoing, that Subsidiary represents and warrants that: (i) each of the representations and warranties set forth in Sections 4(a), (b), (c) and (d) of the 364-Day ------------- --- --- --- Credit Agreement is hereby made by such Subsidiary on and as of the date hereof as if made on and as of the date hereof and as if such Subsidiary is the "Company", this Assumption Letter is the "Agreement" referenced therein and each Note issued by such Borrowing Subsidiary is the "Note" referenced therein, and (ii) it has heretofore received a true and correct copy of the 364-Day Credit Agreement (including any modifications thereof or supplements or waivers thereto) as in effect on the date hereof. So long as the principal of and interest on all Advances made to the Subsidiary under the 364-Day Credit Agreement shall have been paid in full and all other obligations of the Subsidiary shall have been fully performed, the Subsidiary may by not less than five Business Days' prior notice to the Banks terminate its status as a "Borrowing Subsidiary." B-1 The Subsidiary irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any Illinois state court or federal court of the United States of America sitting in Chicago, Illinois, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Assumption Letter, the 364-Day Credit Agreement or the Notes, or for recognition or enforcement of any judgment, and the Subsidiary irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such Illinois state court or, to the extent permitted by law, in such federal court. The Subsidiary agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Assumption Letter shall affect any right that any Bank or the Administrative Agent may otherwise have to bring any action or proceeding relating to this Assumption Letter, the 364-Day Credit Agreement or the Notes in the courts of any jurisdiction. The Subsidiary irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Assumption Letter, the 364-Day Credit Agreement or the Notes in any Illinois state or federal court. The Subsidiary irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. This Assumption Letter shall be governed by, and construed in accordance with, the laws of the State of Illinois. B-2 IN WITNESS WHEREOF, the Subsidiary has duly executed and delivered this Assumption Letter as of the date and year first above written. [NAME OF BORROWING SUBSIDIARY] By _______________________________ Title: Address for Notices under the 364-Day Credit Agreement: Consented to: R.R. DONNELLEY & SONS COMPANY By:_______________________ Title: B-3 EXHIBIT C FORM OF DESIGNATION AGREEMENT Dated _______________, ____ Reference is made to the 364-Day Credit Agreement dated as of October 14, 1999 (as amended or modified from time to time, the "364-Day Credit Agreement") ------------------------ among R.R. Donnelley & Sons Company, a Delaware corporation (the "Company"), the ------- Banks (as defined in the 364-Day Credit Agreement) parties thereto and Bank One, NA, as Administrative Agent for the Banks (the "Administrative Agent"). Terms -------------------- defined in the 364-Day Credit Agreement are used herein with the same meaning. __________________ (the "Designor") and _________________ (the "Designee") -------- -------- agree as follows: 1. The Designor designates the Designee, and the Designee accepts such designation, to have a right to make Competitive Bid Advances pursuant to Section 2.03 of the 364-Day Credit Agreement. - ------------ 2. The Designor makes no representation or warranty and assumes no responsibility with respect to (i) any statements, warranties or representations made in or in connection with the 364-Day Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of, the 364-Day Credit Agreement or any other instrument or document furnished pursuant thereto; and (ii) the financial condition of the Company or any Borrowing Subsidiary or the performance or observance by the Company or any Borrowing Subsidiary of any of their respective obligations under the 364-Day Credit Agreement or any other instrument or document furnished pursuant thereto. 3. The Designee (i) confirms that it has received a copy of the 364-Day Credit Agreement, together with copies of the financial statements referred to in Section 4.01 thereof and such other documents and information as it has ------------ deemed appropriate to make its own credit analysis and decision to enter into this Designation Agreement; (ii) agrees that it will, independently and without reliance upon the Administrative Agent, the Designor or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the 364-Day Credit Agreement; (iii) confirms that it is a Designated Bidder; (iv) appoints and authorizes the Administrative Agent to take such action as contractual representative on its behalf and to exercise such powers and discretion under the 364-Day Credit Agreement as are delegated to the Administrative Agent by the terms thereof, together with such powers and discretion as are reasonably incidental thereto; and (v) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the 364-Day Credit Agreement are required to be performed by it as a Bank. C-1 4. Following the execution of this Designation Agreement by the Designor and its Designee, it will be delivered to the Company for acceptance and then to the Administrative Agent for acceptance and recording. The effective date for this Designation Agreement (the "Effective Date") shall be the date of -------------- acceptance hereof by the Administrative Agent, unless otherwise specified on the signature page hereto. 5. Upon such acceptance and recording by the Administrative Agent, as of the Effective Date, the Designee shall be a party to the 364-Day Credit Agreement with a right to make Competitive Bid Advances as a Bank pursuant to Section 2.03 of the 364-Day Credit Agreement and the rights and obligations of a - ------------ Bank related thereto. 6. This Designation Agreement shall be governed by, and construed in accordance with, the laws of the State of Illinois. 7. This Designation Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Designation Agreement by telecopier shall be effective as delivery of a manually executed counterpart of this Designation Agreement. C-2 IN WITNESS WHEREOF, the Designor and Designee have caused this Designation Agreement to be executed by their officers thereunto duly authorized as of the date specified thereon. Effective Date: ____________________, ____ [NAME OF DESIGNOR], as Designor By:_______________________________ Title: [NAME OF DESIGNEE], as Designee By:_______________________________ Title: Applicable Lending Office (and address for notices): C-3 Accepted and approved, _____________, ____ BANK ONE, NA, as Administrative Agent By:_____________________ Title: Accepted and approved, ______________, ____ R.R. DONNELLEY & SONS COMPANY By:_____________________ Title: C-4 EXHIBIT D-1 FORM OF COMMITTED NOTE Dated: _______________, ____ FOR VALUE RECEIVED, the undersigned, [R.R. DONNELLEY & SONS COMPANY, a Delaware corporation] [NAME OF APPLICABLE BORROWING SUBSIDIARY, a_______________ corporation] (the "Company"), PROMISES TO PAY to the order of___________________ ------- (the "Bank") for the account of its Applicable Lending Office on the Termination ---- Date (or, if the Company has made the Term Loan Election, the Maturity Date) (each as defined in the 364-Day Credit Agreement referred to below) the aggregate principal amount of the Committed Advances made by the Bank to the Company pursuant to the 364-Day Credit Agreement dated as of October 14, 1999 among [the Company] [R.R. Donnelley & Sons Company], the Bank and certain other banks parties thereto, and Bank One, NA, as Administrative Agent for the Bank and such other banks (as amended or modified from time to time, the "364-Day ------- Credit Agreement"); the terms defined therein being used herein as therein - ---------------- defined) outstanding on the Termination Date (or, if the Company has made the Term Loan Election, the Maturity Date). The Company promises to pay interest on the unpaid principal amount of each Committed Advance made to it from the date of such Committed Advance until such principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the 364-Day Credit Agreement. Both principal and interest are payable in lawful money of the United States of America to Bank One, NA, as Administrative Agent, at the address specified pursuant to Article II of the 364-Day Credit Agreement, in same day funds. Each Committed Advance owing to the Bank by the Company pursuant to the 364-Day Credit Agreement, and all payments made on account of principal thereof, shall be recorded by the Bank and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Promissory Note. This Promissory Note is one of the Committed Notes referred to in, and is entitled to the benefits of, the 364-Day Credit Agreement. The 364-Day Credit Agreement, among other things, (i) provides for the making of Committed Advances by the Bank to the Company from time to time, the indebtedness of the Company resulting from each such Committed Advance being evidenced by this Promissory Note, and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. D-1-1 This Promissory Note shall be governed by, and construed in accordance with, the laws of the State of Illinois. [R.R. DONNELLEY & SONS COMPANY] [NAME OF APPLICABLE BORROWING SUBSIDIARY] By:____________________________ Title: D-1-2 ADVANCES AND PAYMENTS OF PRINCIPAL
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D-1-3 EXHIBIT D-2 FORM OF UNCOMMITTED NOTE U.S. $_______________ Dated: _______________, ____ FOR VALUE RECEIVED, the undersigned, [R.R. DONNELLEY & SONS COMPANY, a Delaware corporation] [NAME OF APPLICABLE BORROWING SUBSIDIARY, a_______________ corporation] (the "Company"), PROMISES TO PAY to the order of___________________ ------- (the "Bank") for the account of its Applicable Lending Office (as defined in the ---- 364-Day Credit Agreement dated as of October 14, 1999 among [the Company] [R.R. Donnelley & Sons Company], the Bank and certain other banks parties thereto, and Bank One, NA, as Administrative Agent for the Bank and such other banks (as amended or modified from time to time, the "364-Day Credit Agreement"; the terms ------------------------ defined therein being used herein as therein defined) on _______________, 19__, the principal amount of U.S.$______________. The Company promises to pay interest on the unpaid principal amount hereof from the date hereof until such principal amount is paid in full, at the interest rate and payable on the interest payment date or dates provided below: Interest Rate: ____% per annum (calculated on the basis of a year of _____ days for the actual number of days elapsed). Interest Payment Date(s): Both principal and interest are payable in lawful money of the United States of America to Bank One, NA, for the account of the Bank, at the address specified pursuant to Article II of the 364-Day Credit Agreement, in same day funds. This Promissory Note is one of the Uncommitted Notes referred to in, and is entitled to the benefits of, the 364-Day Credit Agreement. The 364-Day Credit Agreement, among other things, contains provisions for acceleration of the maturity hereupon upon the happening of certain stated events. The Company waives presentment, demand, protest and notice of any kind. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights. D-2-1 This Promissory Note shall be governed by, and construed in accordance with, the laws of the State of Illinois. [R.R. DONNELLEY & SONS COMPANY] [NAME OF APPLICABLE BORROWING SUBSIDIARY] By:____________________________ Title: D-2-2 EXHIBIT E-1 NOTICE OF COMMITTED BORROWING [Administrative Agent's name and address] [Date] Ladies and Gentlemen: The undersigned, ________________, refers to the 364-Day Credit Agreement dated as of October 14, 1999 (as amended, modified or supplemented from time to time, the "364-Day Credit Agreement", the terms defined therein being used herein as therein defined), among [the undersigned,] [R.R. Donnelley & Sons Company (the "Company"], certain Banks parties thereto and Bank One, NA, as Administrative Agent for such Banks, and notifies you, pursuant to Section ------- 2.02 of the 364-Day Credit Agreement, that the undersigned requests a Committed - ---- Borrowing under the 364-Day Credit Agreement, and in that connection sets forth below the information relating to such Committed Borrowing (the "Proposed Committed Borrowing") as required by Section 2.02(a) of the 364-Day Credit --------------- Agreement: (i) The Business Day of the Proposed Committed Borrowing is __________, ____. (ii) The Type of Committed Advances comprising the Proposed Committed Borrowing is [Base Rate Advances] [Eurocurrency Rate Advances]. (iii) The currency for the Proposed Committed Borrowing is [Dollars] [type of Alternative Currency]. (iv) The aggregate amount of the Proposed Committed Borrowing is $__________. (v) The Interest Period for each Eurocurrency Rate Advance made as part of the Proposed Committed Borrowing is ______ month[s]. The undersigned certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Committed Borrowing: (a) the representations and warranties contained in subsections (a), (b), (c), (d), (f)(ii) and (h) through (p) of Section ------- 4.01 of the 364-Day Credit Agreement are correct, before and after ---- giving effect to the Proposed Committed Borrowing and to the application of the proceeds therefrom, as though made on and as of such date; (b) no event has occurred and is continuing, or would result from the Proposed Committed Borrowing or from the application of the proceeds E-1-1 therefrom, that constitutes an Event of Default or that would constitute an Event of Default but for the requirement that notice be given or time elapse or both; and (c) the aggregate principal amount (or, in the case of securities issued at a discount from the principal amount at maturity, the accreted amount) of indebtedness for borrowed money (after giving effect to the Proposed Committed Borrowing and the application of the proceeds thereof) of [the undersigned] [the Company] and its Subsidiaries does not exceed the maximum amount thereof presently authorized by [the undersigned's] [the Company's] Board of Directors. Very truly yours, [NAME OF BORROWER] By: __________________________ Title: E-1-2 EXHIBIT E-2 NOTICE OF UNCOMMITTED BORROWING _________________________ _________________________ _________________________ [Date] Attention: ____________________ Ladies and Gentlemen: The undersigned, _____________, refers to the 364-Day Credit Agreement, dated as of October 14, 1999 ( as amended, modified or supplemented from time to time, the "364-Day Credit Agreement", the terms defined therein being used herein as therein defined), among [the undersigned] [R.R. Donnelley & Sons Company (the "Company")], certain Banks parties thereto and Bank One, NA, as Administrative Agent for such Banks, and notifies you pursuant to Section 2.03 ------------ of the 364-Day Credit Agreement that the undersigned requests an Uncommitted Borrowing under the 364-Day Credit Agreement, and in that connection sets forth the terms on which such Uncommitted Borrowing (the "Proposed Uncommitted Borrowing") is requested to be made: (A) Date: ________________________ (B) Amount: $_______________________ (C) Type of Quote Requested:/1/ Uncommitted Borrowing Margin ___ Fixed Rate ___ (D) Maturity Date: ________________________ Prepayment terms: May [not] be prepaid, [with] [without] penalty Prepayment penalty:/2/ ________________________ (E) Interest Payment Date(s): ________________________ ________________ /1/Select one. /2/Include if applicable. E-2-1 (F) Borrower: ________________________ (G) Other terms: The undersigned certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Uncommitted Borrowing: (a) the representations and warranties contained in subsections (a), (b), (c), (d), (f)(ii) and (h) through (p) of Section 4.01 are correct, before and after giving effect to the Proposed Uncommitted Borrowing and to the application of the proceeds therefrom, as though made on and as of such date; (b) no event has occurred and is continuing, or would result from the Proposed Uncommitted Borrowing or from the application of the proceeds therefrom, that constitutes an Event of Default or that would constitute an Event of Default but for the requirement that notice be given or time elapse or both; (c) the aggregate principal amount (or, in the case of securities issued at a discount from the principal amount at maturity, the accreted amount) of indebtedness for borrowed money (after giving effect to the Proposed Uncommitted Borrowing and to the application of proceeds therefrom) of [the undersigned] [the Company] and its Subsidiaries does not exceed the maximum amount thereof presently authorized by the Board of Directors of [the undersigned] [the Company]; The undersigned confirms that the Proposed Uncommitted Borrowing is to be made available to it in accordance with Section 2.03(a)(iv) of the 364-Day ------------------- Credit Agreement. [NAME OF BORROWER] By: __________________________ Title: E-2-2 EXHIBIT F FORM OF NOTICE OF CONVERSION OR CONTINUATION TO: Bank One, NA, as Administrative Agent (the "Administrative Agent") under that certain 364-Day Credit Agreement dated as of October 14, 1999 (the "364-Day Credit Agreement") by and among R.R. Donnelley & Sons Company (the "Company"), the Administrative Agent and the Banks parties thereto. Pursuant to the terms and conditions of the 364-Day Credit Agreement, this Notice of Conversion or Continuation ("Notice") represents the election of the Company to [insert one of the following]: /1/convert $__________ in aggregate principal amount of Base Rate Advances to Eurocurrency Rate Advances on __________, _____. The initial Interest Period for such Eurocurrency Rate Advances is requested to be a __________ (_____) month period. [and]/2/ /3/convert $__________ in aggregate principal amount of Eurocurrency Rate Advances with a current Interest Period ending _____________ to Base Rate Advances on __________, _____. /4/continue as Eurocurrency Rate Advances $__________ in aggregate principal amount of presently outstanding Eurocurrency Rate Advances with a current Interest Period ending __________, for a _____ month period commencing on __________, _____. Unless otherwise defined herein, terms defined in the 364-Day Credit Agreement shall have the same meanings in this Notice. Dated: __________, ____. /1/Use if converting Base Rate Advances to Eurocurrency Rate Advances. /2/Use if converting only a portion of Eurocurrency Rate Advances and continuing the balance as Eurocurrency Rate Advances. /3/Use if converting Eurocurrency Rate Advances to Base Rate Advances. /4/Use if continuing Eurocurrency Rate Advances. F-1 [NAME OF BORROWER] By____________________________ Title:________________________ F-2 EXHIBIT H Opinion of Counsel to the Company October 14, 1999 To each of the Banks parties to the "364-Day Credit Agreement" (as defined below), and to Bank One, NA, as Administrative Agent Re: R.R. Donnelley & Sons Company ----------------------------- Ladies and Gentlemen: We have acted as counsel to R.R. Donnelley & Sons Company, a Delaware corporation (the "Company"), in connection with the 364-Day Credit Agreement of even date herewith (the "364-Day Credit Agreement") among the Company, the financial institutions parties thereto (the "Banks") and Bank One, NA, as Administrative Agent, and the transactions contemplated thereby. This opinion is furnished to you at the request of the Company pursuant to Section 3.01(a)(v) of the 364-Day Credit Agreement. Capitalized terms used herein and not otherwise defined are used as defined in the 364-Day Credit Agreement. In connection with this opinion, we have examined originals or copies, certified or otherwise identified to our satisfaction, of the 364-Day Credit Agreement and the promissory notes delivered on the date hereof to the Banks signatory to the 364-Day Credit Agreement (the "Notes"). In rendering the opinions set forth herein, we have also examined originals or copies, certified to our satisfaction, of such (i) certificates of public officials, (ii) certificates of officers and representatives of the Company, and (iii) other documents and records, and we have made such inquiries of officers and representatives of the Company, as we have deemed relevant or necessary as the basis for such opinions. We have relied as to factual matters upon, and assumed the accuracy of, such certificates, the representations and warranties of the Company made in the 364-Day Credit Agreement, and other statements, documents and records supplied to us by the Company, and we have assumed the genuineness of all signatures (other than signatures of officers of the Company) and the authenticity of all documents submitted to us as originals and the conformity to original documents of all documents submitted to us as certified or photostatic copies. In rendering the opinions set forth herein, we have assumed that: H-1 Bank One, NA, et al. October 14, 1999 Page 2 (i) all the parties to the 364-Day Credit Agreement, other than the Company, are duly organized, validly existing, and in good standing under the laws of their respective jurisdictions of organization and have the requisite corporate power to enter into the 364-Day Credit Agreement; and (ii) the execution and delivery of the 364-Day Credit Agreement have been duly authorized by all necessary corporate action and proceedings on the part of all parties thereto other than the Company; the 364-Day Credit Agreement has been duly executed and delivered by all parties thereto and constitutes the valid and binding obligation of all parties thereto other than the Company, enforceable against such parties in accordance with its terms. Based upon the foregoing and subject to the qualifications stated herein, we are of the opinion that, as of the date hereof: 1. The Company has been duly organized and is validly existing and in good standing under the laws of the State of Delaware. The Company has the requisite corporate power and authority to conduct its business as currently conducted. 2. The Company has the requisite corporate power and authority to execute, deliver and perform its obligations under the 364-Day Credit Agreement and the Notes. Such execution, delivery and performance: (a) have been duly authorized by all necessary and proper corporate action of the Company, (b) do not violate any provision of the certificate of incorporation or by-laws of the Company or require any approval of the Company's stockholders, (c) do not violate the General Corporation Law of the State of Delaware, any law or regulation of the State of Illinois (including, without limitation, any usury laws) or of the United States of America applicable to the Company, (d) do not contravene that certain Indenture dated as of November 1,1990, between the Company and Citibank, N.A., as Trustee, or, to our knowledge, any other material agreement or instrument binding on the Company. 3. The 364-Day Credit Agreement constitutes, and from and after the initial Committed Borrowing the Committed Notes will constitute, the valid and binding obligations of the Company, enforceable in accordance with their respective terms. G-2 Bank One, NA, et al. October 14, 1999 Page 3 4. No approval, consent or authorization of, or filing or registration with, any governmental department, agency or instrumentality is necessary for the Company's execution or delivery of the 364-Day Credit Agreement or the Notes, or for the Company's performance of any of the terms thereof. Our opinions above are subject to the following qualifications: (a) Our opinions relating to validity, binding effect and enforceability in Paragraph 3 above are subject to limitations imposed by any applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium and similar laws affecting creditors' rights generally. In addition, our opinions relating to enforceability in paragraph 3 above are subject to (i) the effect of general principles of equity (regardless of whether considered in a proceeding in equity or at law) and (ii) limitations imposed by public policy under certain circumstances on the enforceability of provisions indemnifying a party against liability for its own wrongful or negligent acts. In applying principles of equity referred to in clause (i) above, a court, among other things, might not allow a creditor to accelerate maturity of a debt upon the occurrence of a default deemed immaterial. Such principles applied by a court might include a requirement that a creditor act reasonably and in good faith. (b) Certain remedial and waiver provisions of the 364-Day Credit Agreement may be unenforceable in whole or in part, but the inclusion of such provisions does not affect the validity of the 364-Day Credit Agreement; however, the unenforceability of such provisions may result in delays in the enforcement of the Administrative Agent's and the Banks' rights and remedies under the 364-Day Credit Agreement (and we express no opinion as to the economic consequences, if any, of such delays). (c) We express no opinion as to the effect of the compliance or noncompliance of the Administrative Agent or any of the Banks with any state or federal laws or regulations applicable to the Administrative Agent or any of the Banks because of the Administrative Agent's or any of the Banks' legal or regulatory status, the nature of the business of the Administrative Agent or any of the Banks or the qualification of any such party to conduct business in any jurisdiction. The foregoing opinions are limited to the laws of the United States, the State of Illinois and the General Corporation Law of the State of Delaware, and we express no opinion with respect to the laws of any other state or jurisdiction. The opinions expressed herein are being delivered to you as of the date hereof and are solely for your benefit in connection with the transactions contemplated in the 364-Day Credit Agreement and may not be relied on in any manner or for any purpose by any other person, nor any copies published, communicated or otherwise made available in whole or in part to any other person or entity without our express prior written consent, except that you may furnish copies G-3 Bank One, NA, et al. October 14, 1999 Page 4 thereof to each party that becomes a Bank after the date hereof pursuant to the 364-Day Credit Agreement, and such parties may rely on this opinion as if it had been originally addressed to them. We do not express any opinion, either implicitly or otherwise, on any issue not expressly addressed in numbered Paragraphs 1 through 4. The opinions expressed above are based solely on facts, laws and regulations existing and in effect on the date hereof, and we assume no obligation to revise or supplement this opinion should such facts change or should such laws or regulations be changed by legislative or regulatory action, judicial decision or otherwise, notwithstanding that such changes may affect the legal analysis or conclusions contained in this opinion. Very truly yours, G-4 EXHIBIT I Opinion of Counsel to a Borrowing Subsidiary [Date] To each of the Banks parties to the "364-Day Credit Agreement" (as defined below), and to Bank One, NA, as Administrative Agent Re: [Borrowing Subsidiary] ---------------------- Ladies and Gentlemen: We have acted as counsel to R.R. Donnelley & Sons Company, a Delaware corporation (the "Company") and __________________, a ___________ corporation and Subsidiary of the Company (the "Borrowing Subsidiary"), in connection with the 364-Day Credit Agreement dated as of October 14, 1999 (as the same has been or may be amended, modified or supplemented, the "364-Day Credit Agreement") among the Company, the financial institutions parties thereto (the "Banks") and Bank One, NA, as Administrative Agent, and the transactions contemplated thereby. This opinion is furnished to you at the request of the Company pursuant to Section 3.02(e) of the 364-Day Credit Agreement. Capitalized terms used herein and not otherwise defined are used as defined in the 364-Day Credit Agreement. In connection with this opinion, we have examined originals or copies, certified or otherwise identified to our satisfaction, of the 364-Day Credit Agreement, the Assumption Letter of even date herewith executed by the Borrowing Subsidiary and delivered to the Banks (the "Assumption Letter") and the promissory notes executed by the Borrowing Subsidiary on the date hereof and delivered to the Banks (the "Notes"). In rendering the opinions set forth herein, we have also examined originals or copies, certified to our satisfaction, of such (i) certificates of public officials, (ii) certificates of officers and representatives of the Company and the Borrowing Subsidiary (including the certificate attached hereto (the "Certificate")), and (iii) other documents and records, and we have made such inquiries of officers and representatives of the Company and the Borrowing Subsidiary, as we have deemed relevant or necessary as the basis for such opinions. We have relied as to factual matters upon, and assumed the accuracy of, such certificates, the representations and warranties of the Company and the Borrowing Subsidiary made (or deemed made) in the 364-Day Credit Agreement and the Assumption Letter, and other statements, documents and records supplied to us by the Company and the Borrowing Subsidiary, and we have assumed the I-1 Bank One, NA, et al. October 14, 1999 Page 2 genuineness of all signatures (other than signatures of officers of the Borrowing Subsidiary) and the authenticity of all documents submitted to us as originals and the conformity to original documents of all documents submitted to us as certified or photostatic copies. In rendering the opinions set forth herein, we have assumed that: (i) all the parties to the 364-Day Credit Agreement and the Assumption Letter, other than the Borrowing Subsidiary, are duly organized, validly existing and in good standing under the laws of their respective jurisdictions of organization and have the requisite corporate power to enter into the 364-Day Credit Agreement and the Assumption Letter; and (ii) the execution and delivery of the 364-Day Credit Agreement have been duly authorized by all necessary corporate action and proceedings on the part of all parties thereto; the 364-Day Credit Agreement has been duly executed and delivered by all parties thereto and constitutes the valid and binding obligation of all parties thereto, other than the Borrowing Subsidiary, enforceable against such parties in accordance with its terms. Based upon the foregoing and subject to the qualifications stated herein, we are of the opinion that, as of the date hereof: 1. The Borrowing Subsidiary has been duly organized and is validly existing and in good standing under the laws of _____________. The Borrowing Subsidiary has the requisite corporate power and authority to conduct its business as currently conducted. 2. The Borrowing Subsidiary has the requisite corporate power and authority to execute, deliver and perform its obligations under the Assumption Letter, the 364-Day Credit Agreement and the Notes. Such execution, delivery and performance: (a) have been duly authorized by all necessary and proper corporate action of the Borrowing Subsidiary, (b) do not violate any provision of the certificate of incorporation or by-laws of the Borrowing Subsidiary or require any approval of the Borrowing Subsidiary's stockholders, (c) will not violate any law or regulation of ____________, the State of Illinois (including, without limitation, any usury laws) or of the United States of America applicable to the Borrowing Subsidiary,/1/ and - ---------------- /1/To be revised if the Borrowing Subsidiary is not a domestic corporation. H-2 Bank One, NA, et al. October 14, 1999 Page 3 (d) do not contravene any agreement set forth on the Certificate, or, to our knowledge, any other material agreement or instrument binding on the Borrowing Subsidiary. 3. The Assumption Letter constitutes, and from and after the initial Committed Borrowing to the Borrowing Subsidiary, the Notes will constitute, the valid and binding obligations of the Borrowing Subsidiary, enforceable in accordance with their respective terms. 4. No approval, consent or authorization of, or filing or registration with, any governmental department, agency or instrumentality is necessary for the Borrowing Subsidiary's execution or delivery of the Assumption Letter or the Notes, or for the Borrowing Subsidiary's performance of any of the terms thereof. Our opinions above are subject to the following qualifications: (a) Our opinions relating to validity, binding effect and enforceability in Paragraph 3 above are subject to limitations imposed by any applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium and similar laws affecting creditors' rights generally. In addition, our opinions relating to enforceability in paragraph 3 above are subject to (i) the effect of general principles of equity (regardless of whether considered in a proceeding in equity or at law) and (ii) limitations imposed by public policy under certain circumstances on the enforceability of provisions indemnifying a party against liability for its own wrongful or negligent acts. In applying principles of equity referred to in clause (i) above, a court, among other things, might not allow a creditor to accelerate maturity of a debt upon the occurrence of a default deemed immaterial. Such principles applied by a court might include a requirement that a creditor act reasonably and in good faith. (b) Certain remedial and waiver provisions of the 364-Day Credit Agreement applicable to the Borrowing Subsidiary pursuant to the Assumption Letter may be unenforceable in whole or in part, but the inclusion of such provisions does not affect the validity of the Assumption Letter; however, the unenforceability of such provisions may result in delays in the enforcement of the Administrative Agent's and the Banks' rights and remedies under the Assumption Letter (and we express no opinion as to the economic consequences, if any, of such delays). (c) We express no opinion as to the effect of the compliance or noncompliance of the Administrative Agent or any of the Banks with any state or federal laws or regulations applicable to the Administrative Agent or any of the Banks because of the Administrative Agent's or any of the Banks' legal or regulatory status, the nature of the business of the Administrative Agent or any of the Banks or the qualification of any such party to conduct business in any jurisdiction. H-3 Bank One, NA, et al. October 14, 1999 Page 4 The foregoing opinions are limited to the laws of the United States, the State of Illinois and the corporate law of [jurisdiction where the Borrowing Subsidiary is incorporated] and we express no opinion with respect to the laws of any other state or jurisdiction. [Whenever in this opinion reference is made to our knowledge, such reference is to the conscious awareness of [insert appropriate names] of information regarding factual matters. With respect to such matters, such persons have not, with your express permission and consent, undertaken any investigation or inquiry either of other lawyers, files maintained by the firm, or officers or employees of the Company or any of its Subsidiaries (including without limitation the Borrowing Subsidiary). The reference to "conscious awareness" as used in this paragraph has the meaning given that phrase in the Third-Party Legal Opinion Report, Including the Legal Opinion Accord, of the - ---------------------------------------------------------------------------- Section of Business Law, American Bar Association, 47 Bus. Law. 167, 192 - ------------------------------------------------- (1991).] The opinions expressed herein are being delivered to you as of the date hereof and are solely for your benefit in connection with the transactions contemplated in the 364-Day Credit Agreement and may not be relied on in any manner or for any purpose by any other person, nor any copies published, communicated or otherwise made available in whole or in part to any other person or entity without our express prior written consent, except that you may furnish copies thereof to each party that becomes a Bank after the date hereof pursuant to the 364-Day Credit Agreement, and such parties may rely on this opinion as if it had been originally addressed to them. We do not express any opinion, either implicitly or otherwise, on any issue not expressly addressed in numbered Paragraphs 1 through 4. The opinions expressed above are based solely on facts, laws and regulations existing and in effect on the date hereof, and we assume no obligation to revise or supplement this opinion should such facts change or should such laws or regulations be changed by legislative or regulatory action, judicial decision or otherwise, notwithstanding that such changes may affect the legal analysis or conclusions contained in this opinion. Very truly yours, H-4 CERTIFICATE I, ___________________, am the _____________ ___________________ of [Borrowing Subsidiary], a __________ corporation (the "Borrowing Subsidiary"). The Borrowing Subsidiary is entering into an Assumption Letter dated as of _____________, 19__, pursuant to which it will become a party to the 364-Day Credit Agreement dated as of October 14, 1999 among R.R. Donnelley & Sons Company (the "Company"), the banks party thereto ("Banks") and Bank One, NA, as Administrative Agent ("Administrative Agent") for such Banks (the "364-Day Credit Agreement"). The 364-Day Credit Agreement requires that [name of law firm] issue a legal opinion to the Administrative Agent and the Banks. In connection with such legal opinion, the Company certifies to [name of law firm] that: 1. Not more than twenty-five percent (25%) of the value of the assets subject to any "arrangement" (as such term is used in Section 221.2(g)(1) of Regulation U of the Board of Governors of the Federal Reserve System) under the 364-Day Credit Agreement is represented by "margin stock" (as such term is defined in Regulation U of the Board of Governors of the Federal Reserve System). 2. The Borrowing Subsidiary has not granted to the Administrative Agent or the Banks any direct security for the Company's or the Borrowing Subsidiary's obligations to the Administrative Agent and the Banks under the 364-Day Credit Agreement. 3. There is no material agreement or instrument binding on the Borrowing Subsidiary that governs or evidences indebtedness for borrowed money or would affect the Borrowing Subsidiary's ability to perform its obligations under the Assumption Letter, the 364-Day Credit Agreement or the Notes, except: a. _______________________ b. _______________________ c. _______________________ [BORROWING SUBSIDIARY] By:_______________________ Title: Dated: _____________________ -5- EX-4.(G) 5 AMD. DEFERRED COMPENSATION PLAN Form 10-K Year Ended 12/31/99 Exhibit 4(g) R.R. DONNELLEY & SONS COMPANY APPROVAL BY SENIOR VICE PRESIDENT, HUMAN RESOURCES ADOPTING AMENDMENT NUMBER ONE to the FEBRUARY 9, 1999 RESTATEMENT ----------------------------- of the DONNELLEY DEFERRED COMPENSATION AND ----------------------------------- VOLUNTARY SAVINGS PLAN ---------------------- Pursuant to Section 3.12 of the By-Laws of R.R. Donnelley & Sons Company (the "Company") and authority delegated pursuant thereto by the Human Resources Committee of the Board of Directors of the Company, the undersigned Senior Vice President, Human Resources (the "Senior Vice President") hereby adopts the document attached hereto entitled "Amendment Number One to the February 9, 1999 Restatement of the Donnelley Deferred Compensation and Voluntary Savings Plan." Executed by the Senior Vice President this 30th of June, 1999. /s/ Haven E. Cockerham ---------------------- Haven E. Cockerham Senior Vice President, Human Resources R.R. DONNELLEY & SONS COMPANY AMENDMENT NUMBER ONE -------------------- to the February 9, 1999 Restatement of the DONNELLEY DEFERRED COMPENSATION AND ----------------------------------- VOLUNTARY SAVINGS PLAN ---------------------- Providing for Automatic Enrollment in the Plan, ---------------------------------------------- Matching Contributions and a Match Equalization Feature ------------------------------------------------------- WHEREAS, R.R. Donnelley & Sons Company (the "Company") maintains for the benefit of certain of its employees and certain employees of its participating subsidiaries the Donnelley Deferred Compensation and Voluntary Savings Plan (the "Plan"); WHEREAS, the Company desires to automatically enroll newly hired employees in the Plan; WHEREAS, certain employees of the Company's Wheeling Division and certain employees of R.R. Donnelley Seymour, Inc. currently receive a match under Section 4.3(b) of the Plan; WHEREAS, the Company desires to provide matching contributions to certain Members who are not currently receiving matching contributions under the Plan; WHEREAS, pursuant to Section 7.1(a) of the Plan, an investment fund will be established for the purposes of (i) holding matching contributions and (ii) permitting Members to invest in Company Stock under the Plan (the "Company Stock Fund"); and WHEREAS, the Company desires to allow Members to direct voting with respect to shares of Company Stock represented by units of the Company Stock Fund credited to Members' Accounts under the Plan. NOW, THEREFORE, pursuant to the power of amendment in Section 18.1 of the Plan, the Plan is amended, effective July 1, 1999, in the following respects: 1. Section 2(1) (the definition of "Account") is amended by adding "Donnelley Matching Account," after "Matching Account," where it appears therein. 2. The following new Section 2(13) is added and the remaining subsections are renumbered accordingly: Company Stock Fund. The "Company Stock Fund" is an investment fund ------------------ established by the Company pursuant to Section 7.1(a) which consists of shares of Company Stock, cash and cash equivalents. 3. The following new Section 2(17) is added and the remaining subsections are renumbered accordingly: Donnelley Matching Account. A Member's "Donnelley Matching Account" is -------------------------- the account maintained for a Member to which are allocated the matching contributions made pursuant to Sections 4.3(a) and 4.3(b), if any, made on such Member's behalf, plus earnings and net of any withdrawals or losses. 4. Section 2(26) (the definition of "Matching Account") is amended by adding "made pursuant to Section 4.3(d)" after "matching contributions" where it appears therein. 5. Section 2(27) (the definition of "Member") is amended in its entirety to read as follows: A "Member" is an Eligible Employee who has elected, or who is deemed to have elected, to make deferred compensation contributions under the Plan as described in Section 4.1 on a before-tax basis, voluntary savings contributions under the Plan as described in Section 3.1 on an after-tax basis, a rollover contribution to the Plan as described in Section 3.5 or on whose behalf a TRASOP Account is established pursuant to Section 4.5. An Employee shall cease to be a Member as of the date on which he receives a full and final distributions equal to his entire Account balance. 6. Section 3.2 is amended by adding the following proviso at the end of the first sentence thereof: "; provided, however, that the aggregate amount of a Member's voluntary savings contribution under this Section, together with his deferred compensation contribution made under Section 4.1, if any, shall not exceed 23% of his Compensation per pay period." 7. Section 4.1 is amended by adding the following proviso at the end of the first sentence of the second paragraph thereof: "; provided further, however, that the aggregate amount of a Member's deferred compensation contribution under this Section, together with his voluntary savings contribution made under Section 3.2, if any, shall not exceed 23% of his Compensation per pay period." 8. Section 4.1 is further amended to add a new paragraph at the end thereof to read as follows: With respect to an Eligible Employee who commences or recommences employment on or after July 1, 1999, such Employee shall be deemed to have elected to have deferred compensation contributions made on the Employee's behalf at a rate of 3 percent of the Employee's -2- Compensation and to have his or her Compensation reduced by the same amount (a "deemed deferred compensation contribution election") . An Eligible Employee's deemed deferred compensation contribution election shall become effective on the first day of the second month following the date of the correspondence containing the Employee's personal identification number (or as soon as administratively practicable thereafter). Until the twentieth day of the month preceeding the effective date of a Member's deemed deferred compensation contribution election (or, if such twentieth day is not a trading day on the New York Stock Exchange, such earlier day as is the last trading day on the New York Stock Exchange prior to such twentieth day), such an Employee shall have the right to file an application, in the manner prescribed by the Applicable Named Fiduciary, specifying a different rate of deferred compensation contributions from that described above, or an election specifying the Employee's desire to have no deferred compensation contributions made on his or her behalf. Such Employee also shall have the right to change or terminate such contributions, at the same time and in the same manner as prescribed for voluntary savings contributions in Section 3.3. Notwithstanding anything contained herein to the contrary, no deemed deferred compensation contribution election shall be made pursuant to this paragraph on behalf of any Eligible Employee who is (i) classified by his Employer as a "task-force employee" or collectively bargained employee, and in either case, is employed in Haddon Craftsman Inc.'s Bloomsburg facility or (ii) an Employee of the Company's Wheeling Division or R.R. Donnelley Seymour, Inc. 9. Paragraph (b) of Section 4.3 is redesignated paragraph (d) of such Section, paragraph (a) is amended in its entirety, and new paragraphs (b) and (c) are added to Section 4.3 as follows: Section 4.3. Matching Contributions. (a) In General. Subject to ----------- ---------------------- ---------- the limitations of Section 4.4 and Article 5, each Employer shall contribute for each Member for whom such Employer makes deferred compensation contributions pursuant to Section 4.1 a matching contribution equal to 50% of such deferred compensation contributions up to the first 3% of Compensation. Deferred compensation contributions made on behalf of a Member for any payroll period which exceed 3% of the Member's Compensation for such payroll period shall not be considered for purposes of this paragraph. Notwithstanding anything herein to the contrary, no matching contributions shall be made pursuant to this paragraph on behalf of any Member who is (i) classified by his Employer as a "task-force employee" or collectively bargained employee, and in either case, is employed in Haddon Craftsman Inc.'s Bloomsburg facility or (ii) entitled to matching contributions under subsection (d) below. -3- (b) Supplemental Matching Contributions. Subject to the ----------------------------------- limitations of Section 4.4 and Article 5, each Employer shall make a supplemental matching contribution for each Member (i) who is an Eligible Employee of such Employer on the last day of such Plan Year or who (x) died, (y) became disabled or (z) terminated employment with his Employer on or after attaining age 55 during such Plan Year, (ii) for whom such Employer made deferred compensation contributions for any payroll period during such Plan Year, and (iii) in the following sentence, (A) is greater than (B). Such supplemental matching contributions shall be in an amount equal to the difference, if any, between (A) 50% of the deferred compensation contributions made on behalf of such Member up to 1 1/2% of the Member's total Compensation for such Plan Year and (B) the amount of matching contributions contributed for the Member under paragraph (a) above with respect to payroll periods ending in such Plan Year. Notwithstanding anything herein to the contrary, no matching contributions shall be made pursuant to this paragraph on behalf of any Member who is (i) classified by his Employer as a "task-force employee" or collectively bargained employee, and in either case, is employed in Haddon Craftsman Inc.'s Bloomsburg facility or (ii) entitled to matching contributions under subsection (d) below. Notwithstanding anything contained herein to the contrary (but subject to the limitations of Section 4.4 and Article 5), for the 1999 Plan Year, each Employer shall make a supplemental matching contribution for each Member (i) who is an Eligible Employee of such Employer on the last day of such Plan Year or who, during the period beginning July 1, 1999 and ending December 31, 1999 (the "applicable period"), (x) died, (y) became disabled or (z) terminated employment with his Employer on or after attaining age 55, (ii) for whom such Employer made deferred compensation contributions for any payroll period during the Plan Year and (iii) in the following sentence, (A) exceeds (B). Such supplemental matching contributions shall be in an amount equal to the difference, if any, between (A) 50% of the deferred compensation contributions made during the Plan Year on behalf of such Member up to 1 1/2% of the Member's total Compensation for the applicable period and (B) the amount of matching contributions contributed for the Member under paragraph (a) above with respect to payroll periods ending in such applicable period. Notwithstanding anything herein to the contrary, no matching contributions shall be made pursuant to this paragraph on behalf of any Member who is (i) classified by his Employer as a "task-force employee" or collectively bargained employee, and in either case, is employed in Haddon Craftsman Inc.'s Bloomsburg facility or (ii) entitled to matching contributions under subsection (d) below. (c) Form of Matching Contributions. All matching contributions ------------------------------ made pursuant to paragraphs (a) and (b) shall be made in the form of shares of Company Stock or in cash which the Trustee shall apply to purchase Company Stock, unless it holds all or part in the cash portion of the Company Stock Fund to fulfil the liquidity guidelines established by the Asset Manager pursuant to Section 14.4(e) -4- of the Trust, all as more particularly set forth below. In the case of a Member who is entitled to receive matching contributions pursuant to paragraph (a) above, each time the Employer of such Member makes a deferred compensation contribution on behalf of such Member pursuant to Section 4.1, such Member shall accrue a right to a corresponding matching contribution subject to the limitation on the amount of such matching contributions prescribed by paragraph (a). All matching contributions made pursuant to paragraph (a) shall be funded by the Company no later than the last day of the month following the month in which a Member's right to such matching contributions arises. All matching contributions made pursuant to paragraph (b) shall be funded by the Company prior to the due date, including extensions thereof, of the Company's federal income tax return for the taxable year of the Company with or within which such Plan Year ends. To fund matching contributions, the Company shall (i) contribute shares of Company Stock then held by the Company as treasury stock with a Fair Market Value (as hereinafter defined) equal to the aggregate amount of matching contributions to be made to the Plan, (ii) contribute an amount of cash equal to the sum of such matching contributions, which the Trustee shall apply to purchase Company Stock as soon after receipt as is practicable unless it holds all or part in the cash portion of the Company Stock Fund to fulfil the liquidity guidelines established by the Asset Manager pursuant to Section 14.4(e) of the Trust or (iii) contribute a combination of cash and shares as described in the preceding clauses (i) and (ii). For purposes of the preceding sentence, "Fair Market Value" shall be the closing price (as reported in the New York Stock Exchange-Composite Transactions) of Company Stock on the last trading day prior to the day such shares are transferred. Company Stock which is purchased by the Trustee shall either be purchased on a national securities exchange, or elsewhere, by a person who is a broker or dealer registered under Section 15 of the Securities Exchange Act of 1934, as amended, who also shall be an "agent independent of the issuer" as defined in Rule 10b-18(a)(6) under such Act. Any cash dividends paid with respect to shares of Company Stock represented by units of the Company Stock Fund credited to a Member's Donnelley Matching Account shall be applied to purchase additional shares of Company Stock, unless all or part of such cash dividends are held in the cash portion of the Company Stock Fund to fulfil the liquidity guidelines established by the Asset Manager pursuant to Section 14.4(e) of the Trust or invested in such other manner as the Asset Manager may prescribe. Such additional shares of Company Stock purchased pursuant to the foregoing sentence shall either be purchased on a national securities exchange, or elsewhere, by a person who is a broker or dealer registered under Section 15 of the Securities Exchange Act of 1934, as amended, who also shall be an "agent independent of the issuer" as defined in Rule 10b-18(a)(6) under such Act. 10. Section 7.1(a)(3) is amended by adding at the end thereof: "and/or a Donnelley Matching Account" -5- 11. Section 7.1(d) is amended in its entirety to read as follows: (d) Special Rule for TRASOP Account and Donnelley Matching ------------------------------------------------------ Account. Notwithstanding subsections (b) and (c) above, a Member's ------- TRASOP Account shall be invested primarily in shares of Company Stock. To the extent provided by Section 4.3, all of a Member's Donnelley Matching Account shall be invested in units of the Company Stock Fund. Notwithstanding anything herein to the contrary, a Member shall not be permitted to provide any investment direction with respect to the balance of his TRASOP Account or the balance of his Donnelley Matching Account. Any cash dividends paid with respect to shares of Company Stock credited to a Member's TRASOP Account shall be held uninvested in such account until such accumulated dividends are distributed in accordance with Section 8.5. Any cash dividends paid with respect to units of the Company Stock Fund credited to a Member's Donnelley Matching Account shall be invested in accordance with Section 4.3. 12. Section 7.2(c) is amended in its entirety to read as follows: (c) Allocation of Matching Contributions. All matching contributions ------------------------------------ made pursuant to Section 4.3(a) and supplemental matching contributions made pursuant to Section 4.3(b) shall be allocated to the Donnelley Matching Account of each Member for whom such contributions are made as of the last day of the payroll period with respect to which such Member's Employer makes the deferred compensation contribution to which the Matching Contribution relates. 13. Section 7.3(b) is amended by adding "other" before "portions" where it appears therein and by deleting "Matching" therefrom. 14. Section 7.3(c) is amended by adding "Donnelley Matching Account," after "Matching Account," where it appears therein. 15. The first paragraph of Section 8.3(a) is amended by adding ", Donnelley Matching Account" after "Matching Account" where it appears therein. 16. Section 8.3(d) is amended by deleting "and" from the end of clause (4) thereof, adding a new clause (5) thereto which reads as follows: "Donnelley Matching Account and", and renumbering the existing clause (5) as clause (6). 17. Section 8.3(d) is further amended by adding ", Donnelley Matching Account" after "Matching Account" where it appears in the last paragraph thereof. 18. Clause (1) of Section 9.1(b) is amended by adding ", Donnelley Matching Account" after "Matching Account" where it appears therein. -6- 19. The second sentence of paragraph (c) of Section 9.1 is amended by inserting the word "TRASOP" prior to the word "Account" and by changing the last word thereof from "date" to "Valuation Date." 20. The first sentence of Section 9.3 is amended by deleting the phrase ", and the portion of the Member's Matching Account that is invested in Company Stock,". 21. Clause (b) of Section 9.4 is amended by deleting the phrase ", and the portion of the Member's Matching Account that is invested in Company Stock,". 22. Section 11.3(b) is amended by adding "or Donnelley Matching Account" after "Matching Account" where it appears therein. 23. Sections 12.1 and 12.2 are amended in their entireties to read as follows: Section 12.1. Voting Rights. Each Member, as a named fiduciary ------------ ------------- within the meaning of section 403(a)(1) of ERISA, shall be entitled to direct the Trustee with respect to the vote of the shares of Company Stock held by the Trustee and allocated to his Account or represented by units of the Company Stock Fund credited to his Account (including fractional shares or units as the case may be) as of the shareholder record date for such vote, and the Trustee shall follow the directions of such Member. To the extent that the Trustee does not receive timely instructions from a Member who has the authority pursuant to the preceding sentence to instruct the Trustee to vote the shares allocated or units of the Company Stock Fund credited to his Account, such Member, as a named fiduciary within the meaning of Section 403(a)(1) of ERISA, shall be deemed to have timely instructed the Trustee to vote such shares, or the shares represented by such units, as the case may be, against the proposal on which the vote is being taken as such proposal is set forth in the proxy or other materials distributed to stockholders of the Company. The Trustee shall vote all unallocated shares of Company Stock, and shares of Company Stock represented by units of the Company Stock Fund which are not credited to Members' Accounts, to the extent permitted by law, against the proposal on which the vote is being taken as such proposal is set forth in the proxy or other materials distributed to stockholders of the Company. Written notice of any meeting of stockholders of the Company or other occasion for the exercise of voting or other rights and a request for voting instructions, together with a description of the consequences of a Member failing to provide timely instructions with respect to the exercise of such voting or other rights, shall be given by the Administrator in such manner as the Trustee shall determine, to each Member entitled to give instructions for voting such shares of Company Stock on such occasion, within the time for furnishing such notice to stockholders of the Company. -7- Section 12.2. Shareholder Rights in the Event of a Tender Offer. ------------ ------------------------------------------------- In the event a tender offer is made generally to the shareholders of the Company to transfer all or a portion of their shares of stock in return for valuable consideration, including but not limited to, offers regulated by Section 14(d) of the Securities Exchange Act of 1934, each Member, as a named fiduciary within the meaning of Section 403(a)(1) of ERISA, shall be entitled to direct the Trustee with respect to the sale, exchange or transfer of shares of Company Stock held by the Trustee and allocated to such Member's Account or represented by units of the Company Stock Fund credited to such Member's Account (including fractional shares or units, as the case may be), and the Trustee shall follow the directions of such Member. To the extent that the Trustee does not receive timely instructions from a Member who has the authority pursuant to the preceding sentence to instruct the Trustee to tender or exchange either the shares allocated to his Account or the shares represented by the units of the Company Stock Fund credited to his Account, such Member, as a named fiduciary within the meaning of Section 403(a)(1) of ERISA, shall be deemed to have timely instructed the Trustee not to tender or exchange such shares of Company Stock allocated to his Account or such shares represented by the units of the Company Stock Fund credited to such Member's Account. Written notice of any tender offer and a request for tender instructions, together with written notice of the consequences of a Member failing to provide timely instructions with respect to the sale, exchange or transfer of such shares of Company Stock, shall be given by the Administrator, in such manner as the Trustee shall determine, to each Member entitled to give tender instructions for such shares of Company Stock, within the time for furnishing such notice to stockholders of the Company. With respect to the tender or exchange of all unallocated shares of Company Stock, and shares of Company Stock represented by units of the Company Stock Fund which are not credited to Members' Accounts, to the extent permitted by law, the Trustee shall not tender or exchange such shares of Company Stock. A Member shall not be limited in the number of instructions to tender or withdraw from tender which he can give but a Member shall not have the right to give instructions to tender or withdraw from tender after a reasonable time established by the Trustee. Notwithstanding Section 7.1(d), with respect to proceeds from the sale of any shares of Company Stock sold pursuant to this paragraph, the Trustee shall invest the proceeds as directed by the Member among the investment options then available under the Plan. 24. Supplement Number One to the Plan is hereby deleted in its entirety. -8- EX-10.(A) 6 RETIREMENT POLICY FOR DIRECTORS Form 10-K Year Ended 12/31/99 Exhibit 10 (a) RETIREMENT POLICY FOR DIRECTORS (As revised, effective March 23, 2000) 1. An outside director will retire from the Board as of the first day of the month following his or her attaining age 70. An outside director, for the purposes of this policy, is one who has never been an employee of the Company. 2. Any employee director who was first elected to the Board prior to September 28, 1990 will tender his or her resignation from the Board to be effective no later than the effective date of his or her retirement from the Company and such resignation will be accepted absent a determination by the Board that the services of the director are unique and essential for such period as the Board may determine. 3. Any employee director who was first elected to the Board on or after September 28, 1990 will retire from the Board no later than the effective date of his or her termination of employment for any reason or at the age of 65, whichever occurs first. However, an employee director who is serving as Chief Executive Officer will retire from the Board at the end of his or her current term after retirement as an employee from the Company or no later than the effective date of his or her termination of employment for any reason other than retirement. If desired by the Board, such a retiring Chief Executive Officer may serve as a consultant to the Board. 4. Nothing in this policy shall be construed to restrict the stockholders' right to elect any person a director of the Company in accordance with the Certificate of Incorporation and By-Laws. RETIREMENT BENEFITS, PHANTOM STOCK GRANTS AND STOCK OPTIONS FOR DIRECTORS (Effective January 1, 1997, as revised September 24, 1998; November 18, 1999; March 23, 2000) No retirement benefit will be paid to any director whose service begins on or after November 18, 1999. Retirement benefits for directors whose service began prior to November 18, 1999, will be determined as follows: . A director who is retired as of January 1, 1997 will receive an annual retirement benefit equal to 10% of the annual retainer fee payable to active directors at the time such benefit is actually paid for each year or fraction thereof of service as a director (with a maximum of ten years). . Each director who was active as of January 1, 1997 shall have elected, prior to February 15, 1997, to: (1) receive an annual retirement benefit equal to 10% of the annual retainer fee payable to active directors at the time such benefit is actually paid for each year or fraction thereof of service as a director (with a maximum of ten years); or (2) have an amount equal to the present value of that director's earned annual retirement benefit at December 31, 1996 credited as of January 1, 1997 to a book-entry account of that director pursuant to a Deferred Compensation Agreement; or (3) convert the present value of that director's earned annual retirement benefit at December 31, 1996 to the number of shares of phantom stock (carried to four decimal places) determined by dividing such present value by the fair market value of a share of common stock on the most recent trading day of the common stock on the NYSE, which shares will be credited as of January 1, 1997 to a book-entry phantom stock account. . A non-employee director who (i) was active as of January 1, 1997 with less than ten years of service as a director and who chose alternative (2) or (3) in the preceding paragraph or (ii) is first elected to the Board on or after January 1, 1997, but prior to November 18, 1999, will be credited as of January 1 of each year beginning January 1, 1997 with the number of shares of phantom stock (carried to four decimal places) determined by dividing an amount equal to 35% of the annual retainer fee payable to active directors for such year by the fair market value of a share of common stock on the most recent trading day of the common stock; provided that a non-employee director shall be credited with phantom shares only until the commencement of the tenth year of service as a non-employee director; provided, further, that a non-employee director may elect, as set forth in and pursuant to the applicable Stock Incentive Plan of the Company, to receive in lieu of crediting all or some of such shares of phantom stock, an option to purchase shares of common stock. Page 2 PAYMENT OF ANNUAL RETIREMENT BENEFITS, DEFERRED COMPENSATION AND PHANTOM STOCK AND TREATMENT OF STOCK OPTIONS Annual Retirement Benefits - -------------------------- Annual retirement benefits will be paid quarterly in advance as follows: . The annual retirement benefit of a director whose service on the Board terminates at or after age 65 for any reason will begin with the first calendar quarter following the effective date of retirement. . The annual retirement benefit of a director whose service on the Board terminates prior to age 65 for any reason except disability that ends the director's active business career or employment will begin with the first calendar quarter following the attainment of age 65. . The annual retirement benefit of a director whose service on the Board terminates prior to age 65 by reason of disability that ends the director's active business career or employment will begin with the first calendar quarter following the effective date of retirement. . In all cases, no payment of an annual retirement benefit will occur following the date of death. . A former director who is receiving an annual retirement benefit will receive any future increases in annual retirement benefits from and after the time such increases are put into effect. Deferred Compensation - --------------------- . A director who was active as of January 1, 1997 who elected to have an amount equal to the present value of that director's earned annual retirement benefit at December 31, 1996 credited as of January 1, 1997 to a book-entry account pursuant to a Deferred Compensation Agreement will be paid in accordance with the terms and conditions of that Agreement. Phantom Stock - ------------- . On each dividend payment date in respect of the common stock, a director's phantom stock account shall be credited with the number of shares of phantom stock (carried to four decimal places) determined by dividing (i) the product of the number of shares of phantom stock credited to that director's phantom stock account as of the record date for such dividend multiplied by the per share amount of the dividend by (ii) the fair market value of a share of common stock on the dividend payment date (or if the dividend payment date is not a trading day on the NYSE, the most recent trading day of the common stock on the NYSE). Page 3 . In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of common stock other than a regular cash dividend, the number and class of phantom securities credited to a director's account shall be appropriately adjusted by a committee designated by the Board. . In connection with termination of service on the Board for any reason other than death, the director may elect as of the effective date of such cessation of service (and if the director's cessation of service is by reason of death, the director shall be deemed to elect as of the date of death), to convert the value of that director's phantom stock account (determined by multiplying the number of shares of phantom stock by the fair market value of the common stock on the effective date of such cessation of service) to a cash amount to be credited to a book-entry cash account. Such cash account shall be credited quarterly (beginning on the last day of the calendar quarter in which the termination of service occurred) with an amount of interest on the balance (including interest previously credited) at an annual rate equal to the then current yield obtainable on United States government bonds having a maturity date of approximately five years. Failure to make an election under this clause shall result in the continuation of the director's phantom stock account. . If, as a result of any merger, consolidation, exchange, reclassification, sale of assets or similar transaction or event, the common stock ceases, or as a result of a transaction or event is intended to cease, to be listed for trading on the NYSE (and is not otherwise publicly traded), the director or any former director may elect at any time after the Company has entered into an agreement providing for such transaction or event, as of a date designated by the director or former director (and in the absence of such an election and designation the director or former director shall be deemed to elect as of the effective date of such transaction or event), to convert the value of that director's phantom stock account (determined by multiplying the number of shares of phantom stock by the fair market value of the common stock on the effective date of such cessation of service) to a cash amount to be credited to a book-entry cash account. Such cash account shall be credited quarterly (beginning on the last day of the calendar quarter in which the termination of service occurred) with an amount of interest on the balance (including interest previously credited) at an annual rate equal to the then current yield obtainable on United States government bonds having a maturity date of approximately five years. A director's cash account or phantom stock account will be paid as follows: . A director whose service on the Board terminates at or after age 65 for any reason except death shall elect to receive, as of the first day of the first calendar quarter following the effective date of such cessation of service, either (1) an annual amount in cash for a number of years not exceeding ten determined by dividing the value of the director's phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the date of such cessation of service), but not the director's cash account, as of the effective date of such cessation of service by the number of annual payments to be made; provided that the last payment made shall be for Page 4 100% of the value of the director's account as of the date of the last payment, (2) an annual amount in cash for a number of years not exceeding ten determined by dividing the value of the director's cash account or phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the effective date of the distribution and after giving effect to the crediting of shares of phantom stock on each dividend payment date on or prior to the date of the distribution) as of the effective date of the distribution by the number of annual payments remaining to be made; provided that the last payment made shall be for 100% of the value of the director's cash account or phantom stock account, as the case may be, as of the date of the last payment, or (3) a lump sum amount in cash equal to the value of the director's cash account or phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the effective date of such cessation of service). In the absence of a timely election, a director shall be deemed to have elected option (1) with ten annual payments with respect to his phantom stock account, and option (2) with ten annual payments with respect to his cash account. . A director whose service on the Board terminates prior to age 65 for any reason except death shall elect to receive (1) as of the first day of the first calendar quarter following the attainment of age 65, an annual amount in cash a number of years not exceeding ten determined by dividing the value of the director's cash account or phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the effective date of the distribution and after giving effect to the crediting of shares of phantom stock on each dividend payment date on or prior to the date of the distribution) as of the effective date of the distribution by the number of annual payments remaining to be made; provided that the last payment made shall be for 100% of the value of the director's account as of the date of the last payment, or (2) shall elect to receive, as of the first day of the first calendar quarter following the effective date of such cessation of service, either (i) an annual amount in cash for a number of years not exceeding ten determined by dividing the value of the director's phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the date of such cessation of service), but not the director's cash account, as of the effective date of such cessation of service by the number of annual payments to be made; provided that the last payment made shall be for 100% of the value of the director's account as of the date of the last payment, (ii) an annual amount in cash for a number of years not exceeding ten determined by dividing the value of the director's cash account or phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the effective date of the distribution and after giving effect to the crediting of shares of phantom stock on each dividend payment date on or prior to the date of the distribution) as of the effective date of the distribution by the number of annual payments remaining to be made; provided that the last payment made shall be for 100% of the value of the director's cash account or phantom stock account, as the case may be, as of the date of the last payment, or (iii) a lump sum amount in cash equal to the value of the director's cash account or phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the effective date of such cessation of service). In the absence of a timely election, a director shall be deemed to Page 5 have elected option (2)(i) with ten annual payments with respect to his phantom stock account, and (2)(ii) with ten annual payments with respect to his cash account. . In all cases, if a director's cessation of service as a director is by reason of death or if a director dies while retired and amounts remain to be paid under the director's cash account or phantom stock account, 100% of the value of the director's cash account or phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the date of death) as of the date of death shall be paid as soon as practicable after the date of death to the director's estate or any beneficiaries designated by the director. . If, as a result of any recapitalization, reorganization, merger, consolidation, combination, exchange of shares or similar transaction or event, the common stock will cease, or as a result of a transaction or event is intended to cease, to be listed for trading on the NYSE (and is not otherwise publicly traded), any former director who has amounts remaining to be paid under the former director's cash account or phantom stock account, may elect at any time after the Company has entered into an agreement providing for such transaction or event, as of a date designated by the former director to receive a lump sum amount in cash equal to the value of the director's cash account or phantom stock account (the value of the phantom stock is to be determined by reference to the fair market value of the common stock on the date designated by the former director). Stock Options - ------------- . Each option to purchase shares of common stock held by a non-employee director shall be governed by the terms and conditions of the applicable stock option agreement and stock incentive plan. MISCELLANEOUS To be entitled to receive any benefits under this policy, a former director must agree to consult with and render advice to the Company as requested at times that do not unreasonably interfere with his personal or other business activities. Conduct detrimental to the Company, as determined by the Board of Directors, will result in forfeiture of all benefits under this policy. These provisions on benefits will apply to all living, former directors effective January 1, 1997, regardless of when they were first elected or ceased to serve, to all active, non-employee directors as of January 1, 1997 whose service on the Board terminates after January 1, 1997 and to all non-employee directors who are first elected to the Board on or after January 1, 1997. . A director's rights to receive benefits shall be no greater than the rights of any unsecured general creditor of the Company. . A director shall not have any rights as a stockholder of the Company with respect to any shares of phantom stock. Page 6 . This policy and all determinations made and actions taken pursuant hereto, to the extent not governed by the Internal Revenue Code or the laws of the United States, shall be governed by the laws of the State of Delaware and construed in accordance therewith without giving effect to principles of conflict of laws. . Benefits described herein may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. For the purposes of these provisions on retirement benefits and phantom stock grants: . A non-employee director is a director who is not currently an employee of the Company and/or its subsidiaries and who never has been an employee of the Company and/or its subsidiaries. . The fair market value of the common stock shall be determined by reference to the average of the high and low trading prices as reported in the New York Stock Exchange Composite Transactions in The Wall Street Journal for ----------------------- the relevant trading day. Page 7 EX-10.(F) 7 FORM OF SEVERENCE AGREEMENT Form 10-K Year Ended 12/31/99 Exhibit 10(f) AGREEMENT THIS AGREEMENT dated as of _______________ , is made by and between R.R. Donnelley & Sons Company, a Delaware corporation ("Donnelley"; Donnelley and its Subsidiaries being hereafter referred to as the "Company"), and ____________ (the "Executive"). WHEREAS the Company considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel; and WHEREAS the Board of Directors of Donnelley (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control (as defined in the last Section hereof) exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and WHEREAS the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of 1 members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; NOW THEREFORE, in consideration of the promises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Defined Terms. The definition of capitalized terms used in this ------------- Agreement is provided in the last Section hereof. 2. Term of Agreement. This Agreement shall commence on the date ----------------- hereof and shall continue in effect through December 31, 199X; provided, however, that commencing on January 1, 199X and each January 1 there-after, the term of this Agreement shall automatically be extended for one additional year unless, not later than September 30 of the preceding year, the Company or the Executive shall have given notice not to extend this Agreement or a Change in Control shall have occurred prior to such January 1; provided, however, if a Change in Control shall have occurred during the term of this Agreement, this Agreement shall continue in effect for a period of not less than twenty-four (24) months beyond the month in which such Change in Control occurred. 2 3. Company's Covenants Summarized. In order to induce the Executive to ------------------------------ remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein in the event the Executive's employment with the Company is terminated following a Change in Control and during the term of this Agreement. No amount or benefit shall be payable under this Agreement unless there shall have been (or, under the terms hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. The Executive's Covenants. The Executive agrees that, subject to ------------------------- the terms and conditions of this Agreement, in the event of a Potential Change in Control during the term of this Agreement, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six (6) months from the date of such Potential Change of Control, (ii) the date of a Change in 3 Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason (determined by treating the Potential Change in Control as a Change in Control in applying the definition of Good Reason), by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. ------------------------------------------ 5.01 Following a Change in Control and during the term of this Agreement, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period, until the Executive's employment is terminated by the Company for Disability. 5.02 If the Executive's employment shall be terminated for any reason following a Change in Control and during the term of this Agreement, the Company shall pay the Executive's full salary to the Executive through 4 the Date of Termination at the rate in effect at the time the Notice of Termination is given, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period. 5.03 If the Executive's employment shall be terminated for any reason following a Change in Control and during the term of this Agreement, the Company shall pay the Executive's normal post-termination compensation and benefits to the Executive as such payments become due; provided that, in no event shall any severance pay which might be payable to the Executive pursuant to the Company's Standard Practice Manual or Special Severance Plan be paid if the Executive is entitled to the Severance Payments as a result of such termination. Such post- termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements. 6. Severance Payments. ------------------ 6.01 The Company shall pay the Executive the payments described in this Section 6.01 (the "Severance Payments") upon the termination of the Executive's employment following a Change in Control and during the 5 term of this Agreement, in addition to the payments and benefits described in Section 5 hereof, unless such termination is (i) by the Company for Cause, (ii) by reason of death or Disability or (iii) by the Executive without Good Reason. The Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason if the Executive's employment is terminated prior to a Change in Control without Cause at the direction of a Person who has entered into an agreement with the Company the consummation of which will constitute a Change in Control or if the Executive terminates his employment with Good Reason prior to a Change in Control (determined by treating a Potential Change in Control as a Change in Control in applying the definition of Good Reason) if the circumstance or event which constitutes Good Reason occurs at the direction of such Person. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to an amount equal to three (3), or, if less, the number of years, 6 including fractional parts thereof, from the Date of Termination until the Executive reaches Normal Retirement Age, times the Executive's Planned Compensation; (B) Notwithstanding any provision of any Bonus Plan, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any incentive compensation which has been allocated or awarded to the Executive for a completed year or other measuring period preceding the Date of Termination under any such Bonus Plan but has not yet been paid (pursuant to Section 5.02 hereof or otherwise), and (ii) the aggregate value of all contingent incentive compensation awards to the Executive for all uncompleted periods under any such Bonus Plan, assuming (a) any and all target levels of achievement for the period with respect to which such awards have been made have been met and (b) any period of continued employment specified in such awards upon which such awards are contingent have been completed; (C) Notwithstanding any provision of the Stock Plans, the Company shall pay to the Executive, in lieu of any stock bonus awards granted to the Executive under the Stock Plans, a lump sum payment, 7 in cash, equal to the sum of (i) the amount determined by multiplying the number of outstanding stock units granted at any time to the Executive under the Stock Plan, whether or not vested, by the higher of the Exchange Price and the Transaction Price and (ii) the amount of any dividends and interest credited to the Executive's cash account in connection with the grant of such units; (D) In lieu of Company Shares issuable upon exercise of outstanding Options (which Options shall be canceled upon the making of the payment referred to below), the Company shall pay the Executive a lump sum amount, in cash, equal to the product of (i) the excess of (x) in the case of ISOs granted after the date hereof, the Exchange Price, or in the case of all other Options, the higher of the Exchange Price and the Transaction Price, over (y) the per share exercise price of each such Option held by the Executive (whether or not then fully exercisable), times (ii) the number of Company Shares covered by each such Option; (E) In addition to the retirement benefits to which the Executive is entitled under the Pension Plan or any successor plans thereto, the Company shall pay the Executive a lump sum amount, 8 in cash, equal to the actuarial equivalent of the excess of (i) the retirement pension (determined as a straight life annuity commencing at Normal Retirement Age) which the Executive would have accrued under the terms of the Pension Plan (without regard to any amendment to the Pension Plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if the Executive were fully vested thereunder and had accumulated (after the Date of Termination) thirty-six (36) (or, if less, a number equal to the number of months, including fractional parts thereof, from the Date of Termination until the Executive reaches Normal Retirement Age) additional months of service credit thereunder at the Executive's highest annual rate of compensation during the twelve (12) months immediately preceding the Date of Termination, and (ii) the retirement pension (determined as a straight life annuity commencing at Normal Retirement Age) which the Executive had then accrued pursuant to the provisions of the Pension Plan. For purposes of this Section 6.01(E), "actuarial equiva- 9 lent" shall be determined using the same assumptions utilized under the Pension Plan immediately prior to the Date of Termination. F. For a twenty-four (24) month period after the Date of Termination, the Company shall arrange to provide the Executive with life, disability, accident and health insurance benefits substantially similar to those which the Executive is receiving immediately prior to the Notice of Termination (without giving effect to any reduction in such benefits subsequent to a Change in Control which reduction constitutes Good Reason); provided, however, that, in the event the date upon which the Executive attains Normal Retirement Age occurs during such twenty-four month period, the Executive shall thereafter receive such life, disability, accident and health insurance benefits as would be provided to him as a retiree. Benefits otherwise receivable by the Executive pursuant to this Section 6.01(F) shall be reduced to the extent comparable benefits are actually received by or made available to the Executive without cost during the twenty-four (24) month period following the Executive's termination of employment (and any such benefits 10 actually received by the Executive shall be reported to the Company by the Executive). 6.02 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any of the Total Payments will be subject to the Excise Tax, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income tax and Excise Tax upon the payment provided for by this Section 6.02, shall be equal to the excess of the Total Payments over the payment provided for by this Section 6.02. (B) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) any payments or benefits received or to be received by the Executive in connection with a Change in Control or the Executive's 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 or any Person affiliated with the Company or such Person) (the "Total Payments") shall be treated as "parachute 11 payments" (within the meaning of section 280G(b)(2) of the Code) unless, in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the Executive, such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, and all "excess parachute payments" (within the meaning of section 280G(b)(1) of the Code) shall be treated as subject to the Excise Tax unless, in the opinion of such tax counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of section 280G(b)(4)(B) of the Code), or are otherwise not subject to the Excise Tax, and (ii) the value of any noncash 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, the Executive 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 12 marginal rate of taxation in the state and locality of the Executive's 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. (C) 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 the Executive's employment, the Executive 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 that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by the Executive to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or 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 the Executive's employment (including increases in the Excise Tax resulting 13 from any payment the existence or amount of which could not 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, penalties or additions payable by the Executive with respect to such excess) at the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 6.03 The payments provided for in Section 6.01 (other than Section 6.01(F)) and 6.02 hereof shall be made not later than the fifth (5th) day following the Date of Termination; provided, however, that, if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments to which the Executive is clearly entitled 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 14 but in no event later than the thirtieth (30th) 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 the Executive, payable on the fifth (5th) business day after demand by the Company (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Section, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from outside counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.04 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive as a result of a termination which entitles the Executive to the Severance Payments (including all such fees and expenses, if any, incurred in disputing any such termination or in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of 15 the Code to any payment or benefit provided hereunder). Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. ------------------------------------------------------ 7.01 Notice of Termination. After a Change in Control and during the --------------------- term of this Agreement, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after 16 reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.02 Date of Termination. "Date of Termination," with respect to any ------------------- purported termination of the Executive's employment after a Change in Control and during the term of this Agreement, shall mean (i) if the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty (30) day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 17 7.03 Dispute Concerning Termination. 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 Section 7.03), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected) of a court of competent jurisdiction; provided, however, 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. 7.04 Compensation During Dispute. If a purported termination --------------------------- occurs following a Change in Control and during the term of this Agreement, and such termination is disputed in accordance with Section 7.03 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant 18 in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with Section 7.03 hereof. Amounts paid under this Section 7.04 are in addition to all other amounts due under this Agreement (other than those due under Section 5.02 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. The Company agrees that, if the Executive's ------------- employment by the Company is terminated during the term of this Agreement, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 or Section 7.04 hereof. Further, the amount of any payment or benefit provided for in Section 6 (other than Section 6.01(F)) or Section 7.04 hereof shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. Successors; Binding Agreement. ----------------------------- 9.01 In addition to any obligations imposed by law upon any successor to Donnelley, Donnelley will 19 require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of Donnelley to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Donnelley would be required to perform it if no such succession had taken place. Failure of Donnelley to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 9.02 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all 20 such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and ------- all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: R.R. Donnelley & Sons Company 77 West Wacker Drive Chicago, IL 60601 Attention: General Counsel To the Executive: _________________________ _________________________ _________________________ 11. Miscellaneous. No provision of this Agreement may be ------------- modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver 21 by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Illinois. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under Sections 6 and 7 hereof shall survive the expiration of the term of this Agreement. 12. Validity. The invalidity or unenforceability or any -------- provision of this Agreement shall not affect the validity or enforceability of any other 22 provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several ------------ counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes; Arbitration. All claims by the ----------------------------------- Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within sixty (60) days after notification by the Board that the Executive's claim has been denied. Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Chicago, Illinois, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's 23 award in any court having jurisdiction; provided, however, that the Executive shall be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 15. Definitions. For purposes of this Agreement, the ----------- following terms shall have the meanings indicated below: (A) "Base Amount" shall have the meaning defined in section 280G(b)(3) of the Code. (B) "Beneficial Owner" shall have the meaning defined in Rule 13d-3 under the Exchange Act. (C) "Board" shall mean the Board of Directors of Donnelley. (D) "Bonus Plan" shall mean the Senior Management Annual Incentive Plan or other supplementary compensation plan or bonus plan or arrangement, or any similar successor plan or arrangement, applicable to the Executive, other than the 1991 Stock Incentive Plan. (E) "Cause" for termination by the Company of the Executive's employment, after any Change in Control, shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company 24 (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.01 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company. (F) A "Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (I) any Person is or becomes the 25 Beneficial Owner, directly or indirectly, of securities of Donnelley (not including in the securities beneficially owned by such Person any securities acquired directly from Donnelley or its affiliates) representing 50% or more of the combined voting power of Donnelley's then outstanding securities; or (II) during any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with Donnelley to effect a transaction described in clause (I), (III) or (IV) of this paragraph) whose election by the Board or nomination for election by Donnelley's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved (a "Continuing Director"), cease for any reason to constitute a majority thereof; or 26 (III) the stockholders of Donnelley approve a merger or consolidation of Donnelley with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of Donnelley outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 50% of the combined voting power of the voting securities of Donnelley or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of Donnelley (or similar transaction) in which no Person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (IV) the stockholders of Donnelley approve a plan of complete liquidation of Donnelley or an agreement for the sale or 27 disposition by Donnelley of all or substantially all Donnelley's assets. The foregoing to the contrary notwithstanding, a Change in Control shall not be deemed to have occurred with respect to the Executive if (i) the event first giving rise to the Potential Change in Control involves a publicly announced transaction or publicly announced proposed transaction which at the time of the announcement has not been previously approved by the Board and (ii) the Executive is "part of a purchasing group" proposing the transaction. A Change in Control shall also not be deemed to have occurred with respect to the Executive if the Executive is part of a purchasing group which consummates the Change in Control transaction. The Executive shall be deemed "part of a purchasing group" for purposes of the two preceding sentences if the Executive is an equity participant or has agreed to become an equity participant in the purchasing company or group (except for (i) passive ownership of less than 5% of the stock of the purchasing company or (ii) ownership of equity participation in the purchasing company or group which is otherwise not deemed to be significant, as determined prior to the Change in Control by a majority of the nonemployee Continuing Directors). 28 (G) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (H) "Company" shall mean Donnelley and its Subsidiaries. (I) "Company Shares" shall mean shares of common stock of Donnelley or any equity securities into which such shares have been converted. (J) "Date of Termination" shall have the meaning stated in Section 7.02 hereof. (K) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six (6) consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (L) "Donnelley" shall mean R.R. Donnelley & Sons Company and any successor to its business or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise (except 29 in determining, under Section 15(F) hereof, whether or not any Change in Control of Donnelley has occurred in connection with such succession). (M) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (N) "Exchange Price" shall mean the higher of the closing price of Company Shares reported on the New York Stock Exchange--Composite Tape on or nearest the Date of Termination (or, if not listed on such exchange, on the nationally recognized exchange or quotation system on which trading volume in Company Shares is highest). (O) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (P) "Executive" shall mean the individual named in the first paragraph of this Agreement. (Q) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (V), (VI), (VII), or (VIII) below, such act or failure to act is 30 corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of any duties inconsistent with the Executive's status as a senior officer of the Company or a substantial adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control; (II) a reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (III) the Company's requiring that the Executive's principal place of business be at an office located more than 25 miles from the site of the Executive's principal place of business immediately prior to the Change in Control except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company, 31 without the Executive's consent, to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due; (V) the failure by the Company to continue in effect any compensation plan in which the Executive participates immediately prior to the Change in Control which is material to the Executive's total compensation, including but not limited to the Company's Senior Officers Supplementary Compensation Plan and the Stock Plans, or any substitute plans adopted 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, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of 32 benefits provided and the level of the Executive's participation relative to other participants, as existed at the time of the Change in Control; (VI) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Executive was 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 deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is 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; or (VII) any purported termination of 33 the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 9.01 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (R) "Gross-Up Payment" shall have the meaning given in Section 6.02 hereof. (S) "ISOs" shall mean options qualifying as incentive stock options under section 422A of the Code. (T) "Normal Retirement Age" shall mean the earliest age at which the Executive may commence Retirement and become entitled to an unreduced pension under the Pension Plan. (U) "Notice of Termination" shall have the meaning stated in Section 7.01 hereof. (V) "Options" shall mean options for 34 Company Shares granted to the Executive under any Stock Plan, other than ISOs granted on or before the date of this Agreement and ISOs which have not become exercisable on the Date of Termination. (W) "Pension Plan" shall mean the Company's Retirement Benefit Plan. (X) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; provided, however, that a Person shall not include (i) Donnelley or any of its Subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of Donnelley in substantially the same proportions as their ownership of stock of Donnelley. (Y) "Planned Compensation" shall mean the annual "planned compensation" approved by the Executive Committee of the Board to be paid to the Executive (or, if the Executive's "planned compensation" is not presented for approval at the Executive Committee level, then as otherwise 35 established by Donnelley or one of its Subsidiaries) with respect to the year in which the Date of Termination occurs, or with respect to either of the previous two (2) calendar years, whichever is highest, such "planned compensation" being a gross amount comprised of base salary plus any bonus payable to the Executive under any Bonus Plan for the calendar year in question, assuming any and all target levels of achievement for the period with respect to which such bonus was paid have been met. (Z) a "Potential Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (I) Donnelley enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) Donnelley or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person who is or becomes 36 the Beneficial Owner, directly or indirectly, of securities of Donnelley representing at least 9-1/2% or more of the combined voting power of Donnelley's then outstanding securities increases such Person's beneficial ownership of such securities by 5% or more over the percentage so owned by such Person on the date hereof; or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (AA) "Retirement" shall be deemed the reason for the termination by the Company or the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, not including early retirement, generally applicable to its salaried employees, as in effect immediately prior to the Change in Control, or in accordance with any retirement arrangement established with the Executive's consent with respect to the Executive. (BB) "Severance Payments" shall mean those payments described in Section 6.01 hereof. 37 (CC) "Stock Plans" shall mean the Company's 1981 Stock Incentive Plan, 1986 Stock Incentive Plan, 1991 Stock Incentive Plan and any other stock compensation plan applicable to the Executive, or any similar successor plan or arrangement. (DD) "Subsidiary" shall mean any corporation, partnership or other entity, at least a majority of the outstanding voting shares or controlling interest of which is at the time directly or indirectly owned or controlled (either alone or through Subsidiaries or together with Subsidiaries) by Donnelley or another Subsidiary. (EE) "Total Payments" shall mean those payments described in Section 6.02 hereof. (FF) "Transaction Price" shall mean the highest per share price for Company Shares actually paid in connection with any Change in Control. R.R. DONNELLEY & SONS COMPANY By ____________________________ Authorized Officer ____________________________ 38 EX-12 8 COMPUTATION RATIO OF EARNINGS EXHIBIT 12 R.R. Donnelley & Sons Company Ratio of Earnings to Fixed Charges
Period Ending 31-Dec-99 ------------- (in thousands except ratios) Earnings available for fixed charges: Earnings (loss) from continuing operations before income taxes. $506,529 Less: Equity earnings of minority-owned companies.............. (1,989) Add: Dividends received from investees under the equity method. 2,757 Add: Minority interest expense in majority-owned subsidiaries.. 588 Add: Fixed charges before capitalized interest................. 106,026 Add: Amortization of capitalized interest...................... 8,127 -------- Total earnings available for fixed charges................... $622,036 ======== Fixed charges: Interest expense............................................... $ 88,164 Interest portion of rental expense............................. 17,077 Amortization of discount and capitalized expenses related to indebtedness.................................................. 785 -------- Total fixed charges before capitalized interest................ 106,026 Capitalized interest........................................... 5,500 -------- Total fixed charges.......................................... $111,526 ======== Ratio of earnings to fixed charges............................... 5.58 ========
EX-21 9 SUBSIDIARIES OF RR DONNELLEY & SONS Form 10-K Year Ended 12/31/99 Exhibit 21 SUBSIDIARIES OF R. R. DONNELLEY & SONS COMPANY (As of March 15, 2000) Subsidiaries of R. R. Donnelley & Sons Company Place of Incorporation - ---------------------------------------------- ---------------------- Freight Systems, Inc. California Caslon Incorporated Delaware CTC Direct, Inc. Delaware Donnelley Caribbean Graphics, Inc. Delaware Haddon Craftsmen, Inc. Delaware Mobium Corporation Delaware R. R. Donnelley Far East Limited Delaware R. R. Donnelley Mendota, Inc. Delaware R. R. Donnelley Printing Company Delaware R. R. Donnelley Printing Company, L. P. Delaware R. R. Donnelley (Europe) Limited Delaware 77 Capital Partners II, L. P. Delaware Housenet, Inc. Maryland R. R. Donnelley Receivables, Inc. Nevada R. R. Donnelley Seymour, Inc. New Jersey R. R. Donnelley Norwest Inc. Oregon Heritage Preservation Corporation South Carolina Omega Studios-Southwest, Inc. Texas Iridio, Inc. Washington Donnelley Cochrane Argentina S. A. Argentina Donnelley Cochrane Editora y Grafica Limitada Brazil Editorial Lord Cochrane, S. A. Chile Shenzhen Donnelley Bright Sun Printing Co. Republic of China Donnelley Information Systems Limited India R. R. Donnelley Printing (France) SARL France R. R. Donnelley Deutschland GmbH Germany (Frankfort) R. R. Donnelley Financial Asia Limited Hong Kong Editorial Eclipse, S. A. de C. V. Mexico Laboratorio Lito Color S. A. de C. V. Mexico R. R. Donnelley (Mexico) S. A. de C. V. Mexico Impresora Donneco Internacional, S. A. de C. V. Mexico DPA Printing Company, sp. zo. o Poland R. R. Donnelley Poland, sp. zo. o Poland R. R. Donnelley U. K. Directory Ltd. United Kingdom R. R. Donnelley (U. K.) Limited United Kingdom R. R. Donnelley Limited United Kingdom EX-27 10 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from R.R. Donnelley and Sons Company and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 41,873 0 880,766 15,461 194,312 1,229,850 4,533,406 2,822,737 3,853,464 1,203,463 748,498 0 0 308,462 829,796 3,853,464 5,183,408 5,183,408 4,024,401 4,652,981 (21,431) 9,095 88,164 506,529 195,014 311,515 3,201 0 0 308,314 2.39 2.38
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