-----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, CqLy2rZwBu6mnADZ0CFiBoNvqIqsv3mJifqq40/yCcLc07BSYpJL1Wn5xptY9bCx Una7uuCi+nc7OkcKKX72rg== 0000950131-96-001033.txt : 19960312 0000950131-96-001033.hdr.sgml : 19960312 ACCESSION NUMBER: 0000950131-96-001033 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960311 SROS: NYSE 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04694 FILM NUMBER: 96533650 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-K 1 FORM 10-K ================================================================================ 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, 1995 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: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ----------------------------- -------------------------------------------- COMMON (PAR VALUE $1.25) NEW YORK, CHICAGO AND PACIFIC STOCK PREFERRED STOCK PURCHASE RIGHTS EXCHANGES 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. [_] AS OF MARCH 1, 1996, 154,005,326 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 TRANSACTIONS ON MARCH 1, 1996) HELD BY NONAFFILIATES WAS APPROXIMATELY $5,412,903,000. DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT DATED FEBRUARY 20, 1996 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........................................ 5 Item 3. Legal Proceedings................................. 8 Item 4. Submission of Matters to a Vote of Security Holders.......................................... 9 Executive Officers of R. R. Donnelley & Sons Company.......................................... 9 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............................. 10 Item 6. Selected Financial Data........................... 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 12 Item 8. Financial Statements and Supplementary Data....... 15 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 15 Part III Item 10. Directors and Executive Officers of the Registrant....................................... 16 Item 11. Executive Compensation............................ 16 Item 12. Security Ownership of Certain Beneficial Owners and Management................................... 16 Item 13. Certain Relationships and Related Transactions.... 16 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................. 17 Signatures................................................... 18 Index to Financial Statements and Financial Statement Sched- ules........................................................ F-1 Index to Exhibits............................................ E-1
2 PART I ITEM 1. BUSINESS R. R. Donnelley & Sons Company (the company), incorporated in the state of Delaware in 1956 as the successor to a business founded in 1864, is a world leader in distributing, managing and reproducing print and digital information for the publishing, retailing, merchandising and information technology markets worldwide. The company is the largest commercial printer headquartered in North America. It is a major supplier in the United Kingdom and also provides services in Latin America, other locations in Europe and in Asia. Services provided to customers include presswork and binding, including on-demand customized publications; conventional and digital pre-press operations, including desktop publishing and filmless color imaging necessary to create a printed image; software manufacturing, marketing and support services (through Stream International Holdings Inc.); list development, list enhancement, marketing database, personalization printing and lettershop and reference services (provided through Metromail Corporation); design and related creative services (provided through Coris Inc. (formerly Mobium)); electronic communication networks for simultaneous worldwide product releases; digital services to publishers; and the planning for and fulfillment of truck, rail, mail and air distribution for products of the company and its customers, as well as third parties. In April, 1995, Stream International Holdings Inc. (formerly Stream International Inc., hereinafter referred to as Stream International or Stream) was formed from the merger of the company's Global Software Services business unit with Corporate Software Inc. Stream International is approximately 80% owned by the company and is the world's largest software manufacturer, marketer and technical support and services provider. The company provides its services to publishers of consumer and trade magazines, books and telephone and other directories; direct mail (catalog) and in-store merchandisers; software publishers and computer hardware manufacturers; financial institutions; corporate users of software products and related services; and other firms requiring substantial amounts of printing and other related information services. Due to the range of services it provides, the company believes it is uniquely positioned to meet the information and communication needs of its customers. The relative contribution of each of the company's major product areas to its total sales for the five-year period ended December 31, 1995, is presented in the table below.
1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- REVENUE BY PRODUCT TYPE Catalogs, Inserts and Specialty Products............... 27% 31% 32% 35% 39% Software Products and Services......................... 23 14 12 10 8 Magazines.............................................. 16 18 18 17 17 Directories............................................ 12 12 14 16 16 Books.................................................. 11 13 13 11 11 Financial.............................................. 4 5 6 5 4 Other.................................................. 7 7 5 6 5
In January, 1996, the company announced a reorganization of its business groups to include the following operating units and subsidiaries: Commercial Print Sector, which includes catalogs, retail advertising circulars, direct mail products, and consumer and trade magazines. Global Commercial Print Sector, which includes the company's commercial print operations outside the United States--in Europe, Latin America and Asia. Information Management Sector, which includes Telecommunications, Book Publishing Services and Financial Services, as well as the Metromail subsidiary, the company's Digital Division, the company's venture-capital fund, creative design and communication services and a variety of information services. 3 Stream International Holdings Inc., the world's largest software manufacturer, marketer and technical-support and services provider, approximately 80% owned by the company, formed in April 1995 from the merger of the company's Global Software Services business with Corporate Software Inc. At December 31, 1995, the company's operating units, subsidiaries, and global network of majority- and minority-owned companies were organized into these principal business groups, which accounted for the following sales results: Commercial Print, which included catalogs, retail advertising circulars and direct-mail products ($1.3 billion, 20% of 1995 consolidated sales); consumer and trade magazines ($1.2 billion, 19% of 1995 consolidated sales); and directories ($631 million, 10% of 1995 consolidated sales). Networked Services, which included Book Publishing Services ($783 million, 12% of 1995 consolidated sales) (juvenile and trade books; elementary, high- school and college textbooks; professional and reference books; religious books; and book-club and mail-order books); Financial Services ($334 million, 5% of 1995 consolidated sales) (financial printing, electronic information storage and retrieval, and specialized printing); and international commercial print operations in Latin America, Europe and Asia ($345 million, 5% of 1995 consolidated sales). Stream International Holdings Inc. ($1.4 billion, 22% of 1995 consolidated sales), which is the world's largest software manufacturer, marketer and technical-support and services provider. Information Resources, which included the Metromail subsidiary ($247 million, 4% of 1995 consolidated sales); the company's Digital Division, the company's venture-capital fund, and creative design and communication services ($167 million, 3% of 1995 consolidated sales). For the fiscal year ended December 31, 1995, international operations represented approximately 16% of consolidated net sales. See "Geographic Segments" in the Notes to Consolidated Financial Statements for further information. A significant portion of the company's sales are made pursuant to term contracts with customers, with the remainder being made on a single-order basis. For some customers, the company prints and provides related services for several different publications under different contracts. The company's contracts with its 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. Such sales contracts generally provide for timely price adjustments to reflect price changes for materials, wages and utilities. No single customer has a relationship with the company that accounted for 5% or more of the company's sales in 1995. The company's dependence for sales from its ten largest customers has declined in the past ten years to approximately 20% of sales in 1995, from 29% of sales in 1985. The various phases of the information industry in which the company is involved are highly competitive. While the company has contracts with many of its customers as discussed above, there are numerous competing companies and renewal of such contracts is dependent, in part, on the ability of the company to continue to differentiate itself from the competition. Differentiation results, in part, from the company's broad range of value-added services, which include: conventional and digital prepress, computerized printing, Selectronic(R) imaging and gathering and sophisticated pool shipping and distribution services for printed products; information content repackaging into multiple formats, including print, magnetic and optical media; fulfillment and returned books inventory management; software manufacturing, marketing and support services; list development, list enhancement, marketing database, personalization printing and lettershop and reference services; reprographics and facilities management; and graphic design and editorial services. Although the company believes it is the largest commercial printer in the United States, it estimates that its revenues represent approximately 8% of the total sales in the industry. Although the company's plants are well located for the global, national or regional distribution of its products, competitors in some areas of 4 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. The primary raw materials used by the company are paper and ink. In 1995, the company spent approximately $3.2 billion on raw materials. The company is a large purchaser of paper and leverages its volume requirements to improve materials management and materials performance for its customers and believes this is a competitive advantage. The company negotiates with leading suppliers to maximize its purchasing efficiencies, but does not rely on any one supplier. The company has existing paper supply contracts (at prevailing market prices) to cover substantially all of the company's requirements through 1996, 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 the company believes that it will have adequate supplies in the future. Purchasing activity at both the local plant and corporate levels are coordinated to increase economies of scale. Plant inventories were a focus in 1995 and the company has increased utilization of existing inventories by successfully managing and tracking those inventories. The company estimates that its capital expenditures in 1996 and 1997, to comply with federal, state and local provisions for environmental controls, as well as expenditures, if any, for the company's share of costs to clean hazardous waste sites that have received waste from the company, will not have a material effect upon its earnings or its competitive position. The company employed an average of approximately 40,000 persons in 1995 (41,000 persons at December 31, 1995), of whom more than 12,800 had been with the company for more than 10 years and over 2,600 for 25 years or longer. As of December 31, 1995, the company employed approximately 34,000 people in the United States, approximately 1,600, or 5%, of whom were covered by collective bargaining agreements. In addition, the company employed approximately 7,000 people in its foreign operations, the majority of whom were covered by collective bargaining agreements, as is customary in those markets. ITEM 2. PROPERTIES The company's corporate office is located in leased facilities in Chicago, Illinois. Production facilities leased by the company and its subsidiaries are listed in the chart beginning on page 7. Printing and other plants that are owned and operated by the company (or through subsidiaries) are listed below and continuing on the next page.
DATE OF DATE OF ACQUISITION LATEST SQUARE PRINCIPAL PRODUCTS OWNED LOCATION(S) OR OPERATIONS BEGAN ADDITION FEET OR SERVICES ----------------- ------------------- -------- --------- -------------------- Chicago, IL 1912 1974 240,000 Financial Crawfordsville, 1923 1992 1,858,000 Books, Software IN Products and Services Willard, OH 1956 1992 1,099,000 Books, Directories Warsaw, IN 1959 1994 1,300,000 Catalogs, Inserts Old Saybrook, 1959 1986 296,000 CT Magazines, Catalogs Lancaster, PA 1959 1995 1,786,000 Directories, Catalogs, Inserts, Magazines, Financial Mattoon, IL 1968 1995 928,000 Magazines, Catalogs, Inserts
5
DATE OF DATE OF ACQUISITION LATEST SQUARE PRINCIPAL PRODUCTS OWNED LOCATION(S) OR OPERATIONS BEGAN ADDITION FEET OR SERVICES ----------------- ------------------- -------- --------- -------------------- Dwight, IL 1968 1995 434,000 Directories, Catalogs, Inserts, Magazines Glasgow, KY 1970 1994 591,000 Magazines Gallatin, TN 1975 1987 528,000 Catalogs, Inserts, Magazines York, England 1978 1985 291,000 Directories, Magazines, Catalogs Torrance, CA 1978 1994 252,000 Magazines, Inserts Harrisonburg, 1980 1994 620,000 VA Books Spartanburg, SC 1980 1995 713,400 Catalogs, Inserts, Magazines Gateshead, En- 1983 1989 189,000 gland Directories Danville, KY 1985 1993 548,000 Magazines, Catalogs, Inserts Portland, OR 1986 1989 250,000 Directories, Software Products and Services Greeley, CO 1986 1995 283,000 Directories Reno, NV 1987 1995 502,000 Catalogs, Inserts Pittsburgh, PA 1987 -- 70,000 Financial Lincoln, NE 1987 1988 233,000 Lettershop, Data Center Rutland, VT 1987 1987 113,000 Lettershop Mt. Pleasant, 1987 -- 211,000 IA Lettershop Seward, NE 1987 -- 161,000 Lettershop Thorp Arch, En- 1989 -- 146,000 Software Products gland and Services South Daytona, 1990 1993 237,000 Magazines, Catalogs, FL Inserts Des Moines, IA 1990 -- 627,000 Magazines, Catalogs, Inserts Lynchburg, VA 1990 1993 504,000 Catalogs, Inserts Newton, NC 1990 -- 455,000 Catalogs, Inserts, Magazines Casa Grande, AZ 1990 -- 316,000 Catalogs, Inserts Reynosa, Mexico 1990 -- 260,000 Books Singapore 1990 1994 221,000 Software Products and Services Houston, TX 1991 -- 41,000 Financial
6
DATE OF DATE OF ACQUISITION LATEST SQUARE PRINCIPAL PRODUCTS OWNED LOCATION(S) OR OPERATIONS BEGAN ADDITION FEET OR SERVICES ----------------- ------------------- -------- --------- -------------------- San Juan 1992 1993 80,000 del Rio, Mexico Catalogs Provo, UT 1992 1993 126,000 Software Products and Services Mendota, IL 1992 -- 110,000 Magazines Seymour, IN 1992 1994 95,000 Specialty Products Allentown, 1993 -- 23,000 PA Books Bloomsburg, 1993 -- 105,000 PA Books Pontiac, IL 1993 1994 304,000 Magazines Scranton, 1993 -- 399,000 PA Books Senatobia, 1993 -- 137,000 MS Magazines Newbern, TN 1993 -- 30,000 Books Krakow, Po- 1994 -- 115,000 land Magazines, Inserts Memphis, TN 1994 -- 60,000 Books, Catalogs Shenzhen, 1994 -- 170,000 Directories, Books, China Magazines Santiago, 1994 -- 250,000 Magazines, Catalogs, Chile Books, Directories
SQUARE LEASED LOCATIONS FEET - ---------------- --------- Amsterdam, The Netherlands........................................... 15,000 Apeldoorn, The Netherlands........................................... 54,000 Arlington, VA........................................................ 16,000 Beaverton, OR........................................................ 112,000 Bridgetown, Barbados................................................. 31,000 Canton, MA........................................................... 129,000 Cary, NC............................................................. 108,000 Chicago, IL.......................................................... 28,000 Chuo, Chiba-City 260................................................. 3,000 Columbus, OH......................................................... 5,000 Crawfordsville, IN................................................... 381,000 Cumbernauld, Scotland................................................ 53,000 Dallas, TX........................................................... 248,000 Dublin, Ireland...................................................... 103,000 Elgin, IL............................................................ 77,000 Fremont, CA.......................................................... 275,000 Glasgow, KY.......................................................... 57,000 Gresham, OR.......................................................... 122,000 Houston, TX.......................................................... 21,000 Hudson, MA........................................................... 150,000 Kildare, Ireland..................................................... 97,000 Lancaster, PA........................................................ 62,000 Lehigh Valley, PA.................................................... 3,800 Les Aubrais, France.................................................. 22,000 Lindon, UT........................................................... 338,000 Lombard, IL.......................................................... 128,000
7
SQUARE LEASED LOCATIONS FEET - ---------------- ------- London, England........................................................ 10,000 Lynchburg, VA.......................................................... 120,000 Mexico City, Mexico.................................................... 15,000 Middlesex, England..................................................... 35,000 Munich, Germany........................................................ 65,000 New South Wales, Australia............................................. 80,000 New York, NY........................................................... 92,000 Norwood, MA............................................................ 98,000 Orleans, France........................................................ 75,000 Portland, OR........................................................... 90,000 Preston, WA............................................................ 66,000 Raleigh, NC............................................................ 108,000 Richmond, CA........................................................... 72,000 Santa Clara, CA........................................................ 8,000 Scranton, PA........................................................... 97,000 Seattle, WA............................................................ 22,000 Shelby, OH............................................................. 250,000 Sungnam-si, Kyungki-do Korea........................................... 11,000 Torrance, CA........................................................... 45,000 Vinhedo, Brazil........................................................ 21,000 Westwood, MA........................................................... 208,000 Wheeling, IL........................................................... 110,000 Willowbrook, IL........................................................ 55,000
The company has historically followed the practice of adding capacity to meet customer requirements, and has retained a substantial portion of its earnings for reinvestment in plant and equipment for this purpose. Management believes that growth in 1996 will be financed in large part by internally-generated funds. The amount of capital expenditures in future years will depend upon the requirements of the company's existing and future customers. ITEM 3. LEGAL PROCEEDINGS In January, 1995, an administrative complaint by the U.S. Environmental Protection Agency Region V seeking $304,500 in penalties was filed against the company's Warsaw, Indiana facility alleging violations of the Resource Conservation and Recovery Act. The complaint alleges that filtercake from wastewater treatment operations was mischaracterized by the company as non- hazardous waste. The complaint originally also alleged failure of the company to give certain land disposal restriction notices, but the administrative law judge granted a motion to dismiss these allegations, reducing the penalties now sought by the complaint to $210,000. 8 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, 1995. EXECUTIVE OFFICERS OF R. R. DONNELLEY & SONS COMPANY
NAME, AGE AND OFFICER BUSINESS EXPERIENCE DURING POSITIONS WITH THE COMPANY SINCE PAST FIVE YEARS(1) - -------------------------- ------- -------------------------- J. R. Walter 1985 Management responsibilities as Chairman of the 49, Director, Board and Chief Executive Officer. Prior manage- Chairman of the Board ment responsibilities as Chief Executive Officer and Chief Executive Offi- and President. cer(2) J. R. Donnelley 1983 Management responsibilities as Vice Chairman of 60, Director, Vice Chairman the Board. Prior management responsibility for of the Board Corporate Development. S. J. Baumgartner 1993 Management responsibilities for R. R. Donnelley 44, Executive Vice Presi- Europe, R. R. Donnelley Latin America, Editorial dent and Sector President, Lord Cochrane, Asia Operations, Human Resources, Global Commercial Print Corporate Affairs and Compensation and Benefits. Sector(1)(2) Prior management responsibilities for Strategy, Technology and Information Systems. Prior expe- rience as a co-owner and member of board of di- rectors of FRC Management, Inc., a provider of retirement, consulting and real estate invest- ment services, and as a Senior Vice President, Human Resources and Public Affairs at Rhone- Poulenc Rorer/Rorer Group, Inc., a pharmaceuti- cal manufacturer. R. J. Cowan 1988 Management responsibilities as Executive Vice 43, Executive Vice President of R. R. Donnelley & Sons Company and President, R. R. Donnelley Chief Executive Officer of Stream International & Sons Company and Chief Holdings Inc. Prior management responsibilities Executive Officer, Stream for Metromail Corporation, Information Services, International Holdings Technology, Database Technology Services, Infor- Inc.(2) mation Systems, Book Publishing Services, Finan- cial Services and Global Software Services. B. L. Faber 1989 Management responsibilities as Chairman of 48, Chairman, Metromail Metromail Corporation. Management responsibili- Corporation and President, ties for Coris, Information Services(2) R. R. Donnelley Business Services, R. R. Donnelley Digital Division, 77 Capital Corpora- tion and Information Services Sales Group. Prior management responsibility for Corporate Develop- ment. C. A. Francis 1995 Management responsibilities for corporate devel- 42, Executive Vice Presi- opment, planning and strategy, investor rela- dent tions, treasury, financial reporting and ac- and Chief Financial counting, real estate, internal audit and taxes. Officer(1)(2) Prior management responsibilities for purchas- ing. Prior experience as Treasurer at FMC Corpo- ration, a diversified manufacturer of chemicals and machinery.
9
NAME, AGE AND OFFICER BUSINESS EXPERIENCE DURING POSITIONS WITH THE COMPANY SINCE PAST FIVE YEARS(1) - -------------------------- ------- -------------------------- T. J. Quarles 1995 Management responsibilities for legal services 46, Senior Vice President and office of the corporate secretary. Prior and General Counsel(1)(2) management responsibilities for Government Rela- tions and Environmental Affairs. Prior experi- ence as Vice President and Associate General Counsel at Ameritech Corporation, a provider of full-service communications services, and as Vice President and General Counsel at Ameritech Publishing, Inc., a publisher of yellow page di- rectories. W. E. Tyler 1989 Management responsibilities for Information 43, Executive Vice Presi- Services, Technology, Information Systems, Envi- dent ronmental Affairs, Financial Services, Telecom- and Sector President, munications, Book Publishing Services and Information Management(2) Metromail Corporation. Prior management respon- sibilities for Global Software Services, R. R. Donnelley Europe, R. R. Donnelley Latin America, Editorial Lord Cochrane and Asia Opera- tions; prior sales and manufacturing responsi- bility for Global Software Services. J. P. Ward 1991 Management responsibilities for Retail Services, 41, Executive Vice Presi- Specialized Publishing Services, Catalog Servic- dent es, Consumer Magazine Services, Sterling Group, and Sector President, Manufacturing Support and Purchasing. Prior man- Commercial Print Sector(2) agement responsibilities for Telecommunications; prior sales and manufacturing responsibility for Merchandise Media and Financial Services.
(1) Each officer named has carried on his principal occupation and employment in the company for more than five years with the exception of S. J. Baumgartner, C. A. Francis and T. J. Quarles as noted in the above table. (2) Member of the company's management committee. 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 Stock Exchange. As of March 1, 1996 there were approximately 11,300 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, 1995, is contained in the chart below:
COMMON STOCK PRICES ------------------------------- DIVIDENDS PAID 1995 1994 ------------- --------------- --------------- 1995 1994 HIGH LOW HIGH LOW ------ ------ ------- ------- ------- ------- First Quarter..................... $0.160 $0.140 $35 7/8 $28 7/8 $31 3/4 $27 5/8 Second Quarter.................... 0.160 0.140 37 3/8 32 5/8 29 7/8 26 7/8 Third Quarter..................... 0.180 0.160 41 1/4 35 7/8 31 1/4 27 1/2 Fourth Quarter.................... 0.180 0.160 41 35 7/8 32 1/2 27 3/8 Full Year......................... 0.680 0.600 41 1/4 28 7/8 32 1/2 26 7/8
10 ITEM 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA (NOT COVERED BY AUDITORS' REPORT) (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- INCOME STATEMENT DATA: Net sales............... $6,511,786 $4,888,786 $4,387,761 $4,193,072 $3,914,828 Earnings from operations*............ 559,409 459,431 325,607 405,501 363,128 Net income from operations before cumulative effect of accounting changes..... 298,793 268,603 178,920 234,659 204,919 Net income**............ 298,793 268,603 109,420 234,659 204,919 PER COMMON SHARE:*** Net income from operations before cumulative effect of accounting changes..... 1.95 1.75 1.16 1.51 1.32 Net income**............ 1.95 1.75 0.71 1.51 1.32 Dividends............... 0.68 0.60 0.54 0.51 0.50 DECEMBER 31, ------------------------------------------------------ 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA: Total assets............ $5,384,810 $4,452,143 $3,654,026 $3,410,247 $3,206,826 Noncurrent liabilities.. 2,081,266 1,671,924 1,124,594 949,537 940,544
- -------- * 1993 earnings from operations includes the one-time adjustment for a restructuring charge ($90 million). ** 1993 net income and net income per common share include one-time adjustments for the restructuring charge ($60.8 million or $0.39 per share); the net cumulative effect of accounting changes ($69.5 million or $0.45 per share); and the deferred income tax charge related to the federal income tax rate increase ($6.2 million or $0.04 per share). *** Reflects the 2-for-1 stock split effective September 1, 1992. 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Highlights 1995--R.R. Donnelley's 1995 net income rose to $299 million, or $1.95 per share, compared to 1994 net income of $269 million, or $1.75 per share. Operating results in the fourth quarter included net income of $95 million, up 9 percent from 1994's fourth quarter, and earnings per share rose to $0.62. The company's 1995 fourth-quarter performance improved despite the effects of higher paper prices, a sluggish fourth-quarter retail environment, and a number of developments that affected the performance of Stream International, notably the slower-than-expected corporate demand for new systems and software, as well as software price competition. Highlights 1994--The company's 1994 net income of $269 million, or $1.75 per share, was 9 percent higher than 1993 net earnings of $246 million, or $1.59 per share, excluding the one-time effect of accounting changes, a restructuring charge and a deferred income tax charge, all reflected in 1993. NET SALES 1995 Compared to 1994--Net sales increased 33% to $6.5 billion, reflecting acquisitions and mergers, higher paper prices, continued growth in foreign operations and strong demand across most business units. Approximately 37%, or $606 million, of the revenue increase was due to acquisitions and mergers, primarily Stream International, while higher paper prices accounted for approximately 28%, or $460 million, of the gain. Excluding acquisitions and higher paper prices, the 11% increase in net sales was the result of continued growth in foreign operations and strong demand across most business units. Significant increases from the prior year were primarily in the manufacturing and servicing side of Stream International--reflecting the release of Microsoft Corporation's Windows(R) 95; Telecommunications--reflecting new business with Southwestern Bell Yellow Pages Inc., and other affiliates of SBC Communications, Inc.; and Specialized Publishing Services (trade magazines), Book Publishing Services and Catalog Services--reflecting higher volume from new and existing customers. Net sales from foreign operations represented approximately $1.0 billion, or 16% of total net sales in 1995, up 84% from $553 million, or 11% of total net sales in 1994. The growth in foreign sales reflected acquisitions (primarily Stream International) and volume increases from established operations in Latin America, Central Europe and Asia. 1994 Compared to 1993--Net sales increased 11% to $4.9 billion, reflecting increased global demand and volume growth across most product categories, new products and services, new customers and acquisitions. Net sales from foreign operations increased 42% to $553 million, and represented over 11% of consolidated net sales in 1994. The growth in foreign sales was the result of volume increases realized from expansions and start-up operations in Europe, Asia, and Latin America, including the acquisition of Chile-based Editorial Lord Cochrane, S.A. (then 51% owned by the company), which was consolidated in operating results beginning July 1, 1994. EXPENSES 1995 Compared to 1994--Gross profit increased 27%, to $1.2 billion due to the increase in sales and the impact of favorable by-product prices. This increase was lower than the sales growth rate due to the impact of the change in revenue mix associated with the Stream International merger, an increase in the LIFO provision of $10 million before taxes, or $0.04 per share after taxes, and higher paper costs (which are generally recovered, but at low margins). In 1995, the company changed its method of calculating its LIFO provision from the double-extension method of valuing LIFO inventories to the external-index method. The external-index method includes a blend of several indices and takes into account the effects of productivity 12 improvements in the company's cost of sales. Had the company not made this change in accounting method, the 1995 LIFO provision would have been $37 million higher before taxes, or $0.15 per share after taxes. Selling and administrative expenses increased 32%, to $650 million, reflecting volume increases and expenses associated with acquisitions and mergers (primarily Stream International) and new operations. The ratio of selling and administrative expenses to net sales, at 10% in 1995, remained unchanged from 1994. Interest expense increased $56 million, reflecting both higher average interest rates and higher average debt balances associated with capital spending, acquisitions and increased working capital needs driven by higher paper quantities and prices. 1994 Compared to 1993--Gross profit grew 9%, to $950 million, slightly lower than the growth in net sales, as the volume increases were partially offset by higher paper costs (which are generally recovered, but at low margins), depreciation, amortization and start-up costs. Selling and administrative expenses increased 8%, to $491 million, primarily resulting from volume-related increases. The ratio of selling and administrative expenses to net sales, at 10% in 1994, was unchanged from 1993. Interest expense increased $8 million, due to higher interest rates and higher debt levels to fund acquisitions and expansions. Other expense was $7 million above 1993, reflecting lower investment income and higher minority interest expense. The effective income tax rate of 32% in 1994 was lower than the 1993 rate, resulting from tax credits for affordable housing investments and the one-time impact on the deferred income tax provision in 1993, related to the federal tax rate increase. LIQUIDITY AND CAPITAL RESOURCES 1995 Compared to 1994--Working capital continues to be closely controlled and monitored. Working capital increased $226 million from December 31, 1994, due to increased accounts receivable, the impact of the tight paper market, business growth and acquisitions and mergers (primarily Stream International). For 1995, operating cash flow (net income plus depreciation and amortization) was $697 million, up 20% from 1994. Management believes that the company's cash flow and borrowing capacity are sufficient to fund current operations and growth. Capital expenditures during 1995 totaled $456 million, including purchases of equipment to meet the growing needs of present and new customers and expansions of manufacturing plants. This capital investment reflects the company's continued program to expand and upgrade operations, targeting specific markets in the United States, Europe, Asia and Latin America. Along those lines, the company increased its ownership interest in January of 1996 in Chile-based Editorial Lord Cochrane, S.A. to 55.3%, up from 51% at year-end 1995. Management anticipates 1996 capital expenditures to be between $500 million and $550 million. At December 31, 1995, the company had an unused revolving credit facility of $550 million with a number of banks. This credit facility provides support for the issuance of commercial paper and other credit needs. In addition, certain subsidiaries of the company had credit facilities with unused borrowing capacities totaling approximately $100 million at December 31, 1995. 1994 Compared to 1993--In 1994, operating cash flow was $582 million, an increase of $61 million, or 12%, from 1993 (excluding the restructuring charge and the deferred income tax charge relating to the increase in the federal statutory income tax rate recorded in 1993). Working capital increased by $127 million from December 31, 1993, primarily from increased receivables and inventory reflecting acquisitions and volume increases, partially offset by higher accounts payable and accrued compensation. The increase in goodwill and other intangibles reflected acquisitions and costs ($257 million in 1994) associated with acquiring long-term print contracts and volume guarantees. Proceeds from debt issuances were used to fund capital expansion, acquisitions and costs associated with long-term print contracts and volumes. Capital expenditures during 1994 totaled $425 million ($307 million in 1993) and an additional $120 million ($178 million in 1993) was invested in acquisitions and joint ventures. 13 OTHER INFORMATION Human Resources--As of December 31, 1995, the company employed approximately 34,000 people in the United States, approximately 1,600, or 5%, of whom were covered by collective bargaining agreements. In addition, the company employed approximately 7,000 people in its foreign operations, the majority of whom were covered by collective bargaining agreements, as is customary in those markets. Technology--Over the past several years, the company has made significant investments in advanced technology to reduce operating costs, increase productivity and expand its service range and revenue streams. At year-end 1995, the company had completed 36 computer-to-plate installations at its web- offset facilities and 20 New Klisch Interface (NKI) installations at its gravure plants, which the company believes represents approximately 50% of the U.S. printing industry's total investment in these technologies. At the end of the year, the company also had six installed M-3000 presses, which the company believes represents more than 25% of the total number of M-3000 presses installed in the U.S. In addition to providing added value to customers by reducing production cycle times and speeding time to market, these investments will reduce the company's variable production costs going forward. Investments in digital technologies, including four-color Xeikon presses, also are helping the company enter new businesses, such as demand printing through R.R. Donnelley's Digital Division and Title Life ManagementSM in Book Publishing Services. In many cases, the company cooperates with technology vendors to develop proprietary processes and customize technologies to create competitive advantages. At the end of 1995, the company held unexpired patents on more than 100 proprietary printing and binding technologies. Purchasing and Raw Materials--The primary raw materials used by the company are paper and ink. In 1995, the company spent approximately $3.2 billion on raw materials. The price of paper is volatile and in periods of rising prices and tight supply, similar to those conditions affecting the industry in 1995, the company's revenues tend to increase as costs of paper are recovered, but at low margins. In addition to paper consumed in the manufacturing process, the company is also affected by the price of by-product paper which it sells. In the first half of 1995, the price of by-product paper rose substantially, which benefited the company's financial results. By-product prices declined to 1994 levels during 1995's fourth quarter. The company is a large purchaser of paper and leverages its volume requirements to improve materials management and materials performance for its customers and believes this is a competitive advantage. The company negotiates with leading suppliers to maximize its purchasing efficiencies, but does not rely on any one supplier. Purchasing activity at both the local plant and corporate levels are coordinated to increase economies of scale. Plant inventories have been a growing focus in 1995 and the company has increased utilization of existing inventories by successfully managing and tracking those inventories. OUTLOOK AND SUBSEQUENT EVENT The commercial printing business in North America (the company's primary geographic market) is highly competitive in most product categories and geographic regions. Industry analysts consider most commercial print markets to have excess capacity. Competition is largely based on price, quality and servicing the special needs of customers. Management believes the company's prospects in 1996 are good. The company's primary printing markets are relatively strong going into the new year. There is substantial capacity committed under long-term contracts and the outlook for advertising seems positive, since 1996 is a major election year and the United States is hosting the 1996 Olympics. These events tend to increase advertising, resulting in higher demand for printed materials. Despite slower than expected corporate demand for software and software price discounting late in 1995, the company believes Stream International should see improved sales and profits in 1996. 14 The company is a large consumer of paper, acquired for and by customers. As in 1995, the cost and supply of certain paper grades consumed in the manufacturing process will continue to affect the company's financial results. However, management believes that the industry will experience stable paper prices and balanced supplies in 1996, as signs of price discounting have surfaced in the first quarter of the year. There has recently been, and there is likely to be in the future, proposed legislation before the United States Congress to initially reduce and eventually eliminate the deduction for interest on loans borrowed against corporate-owned life insurance (COLI). The company has used this deduction for several years and is carefully watching any changes in legislation that will reduce or eliminate it going forward. On March 7, 1996, the company announced that its Metromail subsidiary had filed a registration statement with the Securities and Exchange Commission for a proposed initial public offering of common stock of Metromail. All of the shares would be offered by Metromail with net proceeds being used to repay certain indebtedness owed to the company. The company would use the payment from Metromail to pay down its debt and for general corporate purposes. The company will retain a significant minority ownership interest in Metromail following the offering. The company expects that this transaction, if consummated, will result in a one-time gain, recorded in the company's 1996 income statement. In summary, the company's competitive strengths of world-wide geographic coverage, strategic raw materials purchasing (primarily paper and ink), comprehensive service offerings, technology advantage and economies of scale should result in strong sales and earnings growth in 1996. 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 15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning the directors and officers of the company is contained on pages 2-6 and 8 of the company's definitive Proxy Statement dated February 20, 1996 and is incorporated herein by reference. See also the list of the company's executive officers and related information under "Executive Officers of R. R. Donnelley & Sons Company" at the end of Part I of this Report. ITEM 11. EXECUTIVE COMPENSATION Information concerning executive compensation for the year ended December 31, 1995, and, with respect to certain of such information, prior years, is contained on pages 8-15 of the company's definitive Proxy Statement dated February 20, 1996 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 6-8 of the company's definitive Proxy Statement dated February 20, 1996 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions for the year ended December 31, 1995, is contained on pages 5 and 15 of the company's definitive Proxy Statement dated February 20, 1996 and is incorporated herein by reference. 16 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 None (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-- Separate financial statements of the parent company have been omitted since it is primarily an operating company and the minority interest and indebtedness to persons other than the parent of the subsidiaries included in the consolidated financial statements are less than 5% of total consolidated assets. 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. 17 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 11TH DAY OF MARCH, 1996. R. R. DONNELLEY & SONS COMPANY /s/ Peter F. Murphy By __________________________________ Peter F. Murphy, 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 11TH DAY OF MARCH, 1996. SIGNATURE AND TITLE SIGNATURE AND TITLE /s/ John R. Walter - ------------------------------------- ------------------------------------- John R. Walter Thomas S. Johnson Chairman of the Board, Director Chief Executive Officer and Director (Principal Executive Officer) ------------------------------------- /s/ Cheryl A. Francis M. Bernard Puckett - ------------------------------------- Director Cheryl A. Francis Executive Vice President and /s/ John M. Richman Chief Financial Officer ------------------------------------- (Principal Financial Officer) John M. Richman Director /s/ Peter F. Murphy - ------------------------------------- /s/ William D. Sanders Peter F. Murphy ------------------------------------- Vice President and Controller William D. Sanders (Principal Accounting Officer) Director /s/ Martha Layne Collins /s/ Jerre L. Stead - ------------------------------------- ------------------------------------- Martha Layne Collins Jerre L. Stead Director Director /s/ James R. Donnelley /s/ Bide L. Thomas - ------------------------------------- ------------------------------------- James R. Donnelley Bide L. Thomas Director Director /s/ Charles C. Haffner III /s/ H. Blair White - ------------------------------------- ------------------------------------- Charles C. Haffner III H. Blair White Director Director /s/ Judith H. Hamilton /s/ Stephen M. Wolf - ------------------------------------- ------------------------------------- Judith H. Hamilton Stephen M. Wolf Director Director 18 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, 1995..................................................... F-2 Consolidated Balance Sheets at December 31, 1995 and 1994.............. F-3 Consolidated Statements of Cash Flows for each of the three years ended December 31, 1995..................................................... F-4 Consolidated Statements of Shareholders' Equity for each of the three years ended December 31, 1995......................................... F-5 Notes to Consolidated Financial Statements............................. F-6 Report of Independent Public Accountants............................... F-16 Interim Financial Information.......................................... F-17 Report of Independent Public Accountants on Financial Statement Schedule.............................................................. F-18 Financial Statement Schedule II--Valuation and Qualifying Accounts................................ F-19
F-1 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME THOUSANDS OF DOLLARS
YEAR ENDED DECEMBER 31 -------------------------------- 1995 1994 1993 ---------- ---------- ---------- Net sales.................................... $6,511,786 $4,888,786 $4,387,761 Cost of sales................................ 5,302,394 3,938,494 3,518,168 ---------- ---------- ---------- Gross profit................................. 1,209,392 950,292 869,593 Selling and administrative expenses.......... 649,983 490,861 453,986 Restructuring charge......................... -- -- 90,000 ---------- ---------- ---------- Earnings from operations..................... 559,409 459,431 325,607 Interest expense............................. 109,759 53,493 45,436 Other expense--net........................... 10,118 10,934 3,609 ---------- ---------- ---------- Earnings before income taxes and cumulative effect of accounting changes................ 439,532 395,004 276,562 Income taxes................................. 140,739 126,401 97,642 ---------- ---------- ---------- Net income from operations before cumulative effect of accounting changes................ 298,793 268,603 178,920 Cumulative effect of change in accounting for: Postretirement benefits other than pensions (net of $80.1 million in tax benefits).... -- -- (127,700) Income taxes............................... -- -- 58,200 ---------- ---------- ---------- Net Income............................... $ 298,793 $ 268,603 $ 109,420 ========== ========== ========== Income (charge) per common share: Operations before cumulative effect of accounting changes........................ $ 1.95 $ 1.75 $ 1.16 Cumulative effect of change in accounting for: Postretirement benefits other than pensions (net of tax benefits)..................... -- -- (0.82) Income taxes............................... -- -- 0.37 ---------- ---------- ---------- Net Income per Share of Common Stock..... $ 1.95 $ 1.75 $ 0.71 ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements. F-2 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS THOUSANDS OF DOLLARS
DECEMBER 31 ---------------------- 1995 1994 ---------- ---------- Assets Cash and equivalents................................. $ 33,122 $ 20,569 Receivables, less allowances for doubtful accounts of $25,311 in 1995 and $19,168 in 1994................. 1,466,159 987,520 Inventories.......................................... 380,078 311,237 Prepaid expenses..................................... 28,600 34,004 ---------- ---------- Total Current Assets............................... 1,907,959 1,353,330 Net property, plant and equipment, at cost, less accumulated depreciation of $2,111,461 in 1995 and $1,852,084 in 1994.................................. 2,008,988 1,856,760 Goodwill and other intangibles, net of accumulated amortization of $178,997 in 1995 and $114,932 in 1994................................................ 1,024,954 887,071 Other noncurrent assets.............................. 442,909 354,982 ---------- ---------- Total Assets....................................... $5,384,810 $4,452,143 ========== ========== Liabilities Accounts payable..................................... $ 601,814 $ 422,703 Accrued compensation................................. 126,483 107,167 Short-term debt...................................... 50,000 32,400 Current and deferred income taxes.................... 86,737 46,912 Other accrued liabilities............................ 265,340 192,668 ---------- ---------- Total Current Liabilities.......................... 1,130,374 801,850 ---------- ---------- Long-term debt....................................... 1,560,960 1,212,332 Deferred income taxes................................ 300,840 286,904 Other noncurrent liabilities......................... 219,466 172,688 ---------- ---------- Total Noncurrent Liabilities....................... 2,081,266 1,671,924 ---------- ---------- Shareholders' Equity Common stock at stated value ($1.25 par value) Authorized shares: 500,000,000; Issued: 158,608,800 in 1995 and 1994.................................... 330,612 330,612 Retained earnings, net of cumulative translation adjustments of $29,031 in 1995 and $18,235 in 1994.. 1,994,098 1,802,777 Unearned compensation................................ (9,297) -- Reacquired common stock, at cost..................... (142,243) (155,020) ---------- ---------- Total Shareholders' Equity......................... 2,173,170 1,978,369 ---------- ---------- Total Liabilities and Shareholders' Equity........... $5,384,810 $4,452,143 ========== ==========
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 ------------------------------- 1995 1994 1993 --------- --------- --------- Cash flows provided by (used in) operating activities: Net income from operations before cumulative effect of accounting changes............... $ 298,793 $ 268,603 $ 178,920 Depreciation................................ 330,579 285,446 249,124 Amortization................................ 67,619 28,017 25,680 Net change in assets and liabilities........ (294,067) (355,934) (4,342) Other....................................... (15,679) (38,586) 3,241 --------- --------- --------- Net Cash Provided By Operating Activities. 387,245 187,546 452,623 --------- --------- --------- Cash flows used for investing activities: Capital expenditures........................ (455,662) (425,190) (306,512) Other investments including acquisitions, net of cash acquired....................... (34,756) (120,461) (177,743) --------- --------- --------- Net Cash Used For Investing Activities.... (490,418) (545,651) (484,255) --------- --------- --------- Cash flows from (used for) financing activities: Net increase in borrowings.................. 227,774 500,951 143,286 Disposition of reacquired common stock...... 37,857 20,585 19,693 Acquisition of common stock................. (34,429) (57,363) (47,513) Cash dividends paid......................... (104,364) (92,352) (83,465) --------- --------- --------- Net Cash From Financing Activities........ 126,838 371,821 32,001 --------- --------- --------- Effect of exchange rate changes on cash and equivalents.................................. (11,112) (3,863) (2,001) --------- --------- --------- Net Increase (Decrease) in Cash and Equivalents.................................. 12,553 9,853 (1,632) Cash and Equivalents at Beginning of Year..... 20,569 10,716 12,348 --------- --------- --------- Cash and Equivalents at End of Year........... $ 33,122 $ 20,569 $ 10,716 ========= ========= ========= The changes in assets and liabilities, net of balances assumed through acquisitions, were as follows: 1995 1994 1993 --------- --------- --------- Decrease (Increase) in Assets: Receivables--net............................ $(342,899) $(125,001) $ 5,835 Inventories--net............................ (41,833) (53,214) (32,156) Prepaid expenses............................ 47,142 (601) (8,463) Other assets................................ (70,577) (275,759) 31,609 Increase (Decrease) in Liabilities: Accounts payable............................ 17,958 97,439 41,988 Accrued compensation........................ 19,316 28,603 (3,146) Current and deferred income taxes........... 41,378 6,095 4,773 Other accrued liabilities................... 27,926 (15,448) (1,110) Noncurrent deferred income taxes............ 20,459 13,574 9,725 Other noncurrent liabilities................ (12,937) (31,622) (53,397) --------- --------- --------- Net Change in Assets and Liabilities...... $(294,067) $(355,934) $ (4,342) ========= ========= =========
See accompanying Notes to Consolidated Financial Statements. F-4 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY THOUSANDS OF DOLLARS
REACQUIRED UNEARNED COMMON STOCK COMMON STOCK COMPENSATION -------------------- --------------------- RESTRICTED RETAINED SHARES AMOUNT SHARES AMOUNT STOCK EARNINGS TOTAL ----------- -------- ---------- --------- ------------ ---------- ---------- Balance at December 31, 1992................... 158,608,800 $330,612 (3,579,982) $ (84,036) $ -- $1,602,401 $1,848,977 Net income before cumulative effect of accounting changes..... 178,920 178,920 Cumulative effect of change in accounting for: Other postretirement benefits, net of tax benefits............. (127,700) (127,700) Income taxes.......... 58,200 58,200 Treasury stock purchases.............. (1,601,296) (47,513) (47,513) Cash dividends.......... (83,465) (83,465) Cost of common shares issued under stock programs............... 730,511 15,255 4,438 19,693 Translation adjustments. (3,121) (3,121) ----------- -------- ---------- --------- ------- ---------- ---------- Balance at December 31, 1993................... 158,608,800 330,612 (4,450,767) (116,294) -- 1,629,673 1,843,991 Net income.............. 268,603 268,603 Treasury stock purchases.............. (1,958,193) (57,363) (57,363) Cash dividends.......... (92,352) (92,352) Cost of common shares issued under stock programs............... 885,478 18,637 1,948 20,585 Translation adjustments. (5,095) (5,095) ----------- -------- ---------- --------- ------- ---------- ---------- Balance at December 31, 1994................... 158,608,800 330,612 (5,523,482) (155,020) -- 1,802,777 1,978,369 Net income.............. 298,793 298,793 Treasury stock purchases.............. (996,464) (34,429) (34,429) Cash dividends.......... (104,364) (104,364) Cost of common shares issued under stock programs............... 1,863,685 47,206 (9,297) 7,688 45,597 Translation adjustments. (10,796) (10,796) ----------- -------- ---------- --------- ------- ---------- ---------- Balance at December 31, 1995................... 158,608,800 $330,612 (4,656,261) $(142,243) $(9,297) $1,994,098 $2,173,170 =========== ======== ========== ========= ======= ========== ==========
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. Intercompany items and transactions are eliminated in consolidation. Nature of Operations--The company provides a wide variety of print and print- related products and services for specific customers, virtually always under contract. 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 and sells the paper. 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 66% and 85% of the inventories at December 31, 1995 and 1994, 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. Foreign Currency Translation--Gains and losses arising from the translation of the company's international subsidiaries' financial statements are reflected in Retained Earnings. Net Income Per Share of Common Stock--Net income per share is computed on the basis of average shares outstanding during each year. No material dilution would result if effect were given to the exercise of outstanding stock options and the vesting of stock units. Benefit Plans--The company's Retirement Benefit Plan (the Plan) is a non- contributory defined benefit plan covering substantially all domestic employees. Normal retirement age is 65 but provision is made for earlier retirement. 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), prior service costs and the transition credit (the excess of Plan assets plus balance sheet accruals over the projected obligation, as of January 1, 1987) over 19 years, representing the average remaining service life of its active employee population. For tax and funding purposes, the attained age normal actuarial cost method is used. Compared to the projected unit credit method, the attained age normal method attributes a greater proportion of the total retirement obligation to an employee's early years of service. 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 are capitalized as reductions to accumulated depreciation. When properties are retired or disposed, the costs and accumulated depreciation are eliminated and the resulting profit or loss is recognized in income. Goodwill ($691 million and $558 million, net of accumulated amortization, at December 31, 1995 and 1994, 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-6 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) ACQUISITIONS Effective April 1, 1995, the company merged its Global Software Services business (GSS) with Corporate Software Inc. (CSI) to form Stream International Inc. (Stream), a software manufacturer, distributor and technical support organization. The company owns approximately 80% of the capital stock of Stream, which is not a publicly traded corporation. The remaining 20% is owned by the former owners of CSI and management. No gain or loss was recognized on the merger as the book value of GSS approximated its fair market value on the date of the transaction. The Stream transaction has been accounted for using the purchase method. Accordingly, amounts assigned in the accompanying Consolidated Balance Sheets to the assets and liabilities of CSI were based on their estimated fair market values. The cost in excess of net assets acquired of $120 million is being amortized on a straight-line basis over 15 years. The results of operations of CSI are included in the accompanying Consolidated Income Statements from the date of the merger. Certain officers and employees of Stream hold options to buy up to 9% of Stream at formula-based prices which approximate, on a per share basis, the book value of the company's investment in Stream. The Stream shares not owned by the company and the shares to be sold under the aforementioned option agreements are subject to certain put and call arrangements whereby the company would acquire the shares based on a multiple of Stream's earnings, as defined. If all such shares were put to the company at December 31, 1995, the aggregate purchase price would be less than the minority interest liability recorded in the accompanying Consolidated Balance Sheets. The company made several other acquisitions, joint venture and equity investments in 1995, 1994 and 1993, none of which, either individually or in the aggregate, were material to the company's financial statements. The acquisitions were accounted for using the purchase method; accordingly, the assets and liabilities of the acquired entities have been recorded at their estimated fair values at their respective dates of acquisition. Liabilities incurred and assumed in connection with acquisitions totaled $386.8 million, $87.2 million and $24.1 million for the years ended December 31, 1995, 1994 and 1993, respectively. RESTRUCTURING CHARGE On January 25, 1993, Sears, Roebuck and Co., a customer, announced its decision to discontinue catalog operations during 1993. In response to Sears' announcement, the company incurred a one-time charge of $60.8 million (net of the associated tax benefit) in the first quarter of 1993. The charge primarily covered the costs associated with closing the company's manufacturing facility in Chicago, Illinois, where the company produced the Sears catalogs. INVENTORIES The components of the company's inventories as of December 31, 1995 and 1994, were as follows:
1995 1994 -------- -------- THOUSANDS OF DOLLARS Raw materials and manufacturing supplies.............. $230,694 $185,527 Work in process....................................... 213,741 208,553 Finished goods........................................ 34,041 5,821 Progress billings..................................... (47,549) (45,523) LIFO reserve ......................................... (50,849) (43,141) -------- -------- Total............................................. $380,078 $311,237 ======== ========
F-7 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The company's cost of sales was increased by LIFO provisions of $7.7 million in 1995 (and decreased in 1994 by $2.3 million). In the third quarter of 1995, the company changed from the double-extension method of valuing LIFO inventories to the external-index method. The company believes that this change will result in a better measurement of operating results by properly reflecting the effect of productivity improvements in the company's cost of sales. Because the cumulative effect of this change on periods prior to 1995 cannot be determined, the impact has been reflected in current operations. This accounting change was adopted effective January 1, 1995; however, the effect of the change on the first two quarters of 1995 was immaterial, and the financial statements for those periods have not been restated. Net income for 1995 was approximately $22 million ($0.15 per share) higher than it would have been had the change not been made. VOLUNTARY EMPLOYEES' BENEFICIARY ASSOCIATIONS The company maintains two Voluntary Employees' Beneficiary Associations (VEBAs), one to fund employee welfare benefits and one to fund postretirement medical and death benefits. The balances of the VEBAs (net of associated liabilities) are recorded in the accompanying Consolidated Balance Sheets, classified as current or noncurrent depending on the ultimate expected payment date of the underlying liabilities. As of December 31, 1995 and 1994, the company had a net current liability of $16.3 million and a net current asset of $11.3 million, respectively, representing the current position of the company's employee welfare benefit plans funded by one of the VEBAs. The VEBA established to partially fund the company's liability for postretirement medical and death benefits ($191 million at December 31, 1995 and $156 million at December 31, 1994) is included in Other Noncurrent Liabilities as an offset to the related liability. For additional information, refer to the notes on "Other Retirement Benefits." PROPERTY, PLANT AND EQUIPMENT The following table summarizes the components of property, plant and equipment (at cost) as of December 31, 1995 and 1994:
1995 1994 ---------- ---------- THOUSANDS OF DOLLARS Land................................................ $ 44,438 $ 38,430 Buildings........................................... 622,326 595,460 Machinery and equipment............................. 3,453,685 3,074,954 ---------- ---------- Total........................................... $4,120,449 $3,708,844 ========== ==========
COMMITMENTS AND CONTINGENCIES As of December 31, 1995, authorized expenditures on incomplete projects for the purchase of property, plant and equipment totaled $198.4 million. Of this total, $123.5 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 $422.2 million extending through various periods to 2009. The lease commitments total $76.3 million for 1996, range from $33.4 million to $64.3 million in each of the years 1997-2000 and total $158.8 million for years 2001 and thereafter. The company is not exposed to significant accounts receivable credit risk, due to the diversity of industry classification, distribution channels and geographic location of its customers. 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 of the company. The company also has future annual commitments totaling $102.6 million to invest in various affordable housing limited partnerships which provide annual tax benefits and credits in amounts greater than the annual investments. F-8 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) RETIREMENT BENEFIT PLAN Net pension credits included in operating results for the Retirement Benefit Plan (the Plan) were:
1995 1994 1993 -------- -------- -------- THOUSANDS OF DOLLARS Service cost..................................... $ 23,393 $ 28,158 $ 25,097 Interest cost on the projected benefit obligation...................................... 54,524 51,604 47,295 Actual (return) loss on Plan assets.............. (217,662) 3,858 (106,595) Amortization of excess Plan net assets at adoption of SFAS No. 87 and deferrals--net...... 120,698 (97,293) 20,306 -------- -------- -------- Total........................................ $(19,047) $(13,673) $(13,897) ======== ======== ========
The actuarial computations that derived the above amounts assumed a discount rate on projected benefit obligations of 7.25% (8.5% at December 31, 1994 and 7.5% at December 31, 1993), an expected long-term rate of return on Plan assets of 9.5% and annual salary increases of 4% for 1995 and 1994 and 5% for 1993. Plan assets include primarily government and corporate debt securities and marketable equity securities, and, to a lesser extent, commingled funds, real estate and a group annuity contract purchased from a life insurance company. The funded status and prepaid pension cost (included in Other Noncurrent Assets on the accompanying Consolidated Balance Sheets) are as follows:
DECEMBER 31, DECEMBER 31, 1995 1994 ------------ ------------ THOUSANDS OF DOLLARS Fair value of Plan assets............................ $1,113,505 $ 935,847 ---------- --------- Actuarial present value of benefit obligations: Vested............................................. 733,920 574,839 Non-vested......................................... 11,726 9,354 ---------- --------- Total accumulated benefit obligations................ 745,646 584,193 Additional amounts related to projected wage increases........................................... 86,378 80,098 ---------- --------- Projected benefit obligations for services rendered to date............................................. 832,024 664,291 ---------- --------- Excess of Plan assets over projected benefit obligations......................................... 281,481 271,556 Unrecognized net deferrals........................... 4,221 4,948 Unrecognized net excess Plan assets to be amortized through the year 2005............................... (98,497) (108,347) ---------- --------- Prepaid Pension Costs................................ $ 187,205 $ 168,157 ========== =========
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. OTHER RETIREMENT BENEFITS In addition to pension benefits, the company provides certain health care and life insurance benefits for retired employees. Substantially all of the company's domestic, full-time employees become eligible for those benefits upon reaching age 55 while working for the company and having ten years continuous service at retirement. The company funds a portion of the liabilities associated with these plans through a tax-exempt trust. The trust is invested in various assets, primarily life insurance covering some of the company's employees. Effective January 1, 1993, the company adopted Statement of Financial Accounting Standards No. 106 (SFAS 106), "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS 106 requires F-9 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) companies to charge to expense the expected costs of postretirement health care and life insurance (and similar benefits) during the years that the employees render service. Previously, such costs were expensed as actual claims were paid. The company elected to immediately recognize the transition obligation for future benefits to be paid related to past employee services, resulting in a noncash charge of $207.8 million before deferred income tax benefits ($127.7 million after-tax or $0.82 per share) that represents the cumulative effect of the change in accounting for the years prior to 1993. The net accrual-basis expense for postretirement benefits during 1995, 1994 and 1993 included the following components:
1995 1994 1993 -------- -------- ------- THOUSANDS OF DOLLARS Service cost................................ $ 9,492 $ 11,807 $11,580 Interest cost on the projected benefit obligations................................ 17,319 18,532 17,486 Actual return on assets..................... (34,626) (1,296) (5,545) Deferrals--net.............................. 16,503 (11,113) (3,832) -------- -------- ------- Total................................... $ 8,688 $ 17,930 $19,689 ======== ======== =======
The above table does not include a $23 million charge for postretirement medical benefits associated with the closing of the company's Chicago manufacturing facility; such amount was included in the 1993 restructuring charge (see separate note above). The liability (included in Other Noncurrent Liabilities on the accompanying Consolidated Balance Sheets) for postretirement benefits, net of the partial funding, is as follows:
DECEMBER 31, DECEMBER 31, 1995 1994 ------------ ------------ THOUSANDS OF DOLLARS Actuarial present value of benefit obligations: Retirees........................................... $ 152,981 $ 136,854 Fully eligible active plan participants............ 4,856 7,056 Other active plan participants..................... 93,048 65,595 --------- --------- Total accumulated benefit obligations................ 250,885 209,505 Fair value of Plan assets............................ (191,042) (156,416) Unrecognized net deferrals........................... 20,596 37,542 --------- --------- Excess of Accumulated Benefit Obligations Over Plan Assets.............................................. $ 80,439 $ 90,631 ========= =========
The actuarial computations assumed a discount rate of 7.25% (8.5% at December 31, 1994) to determine the accumulated postretirement benefit obligation, an expected long-term rate of return on plan assets of 9.0% and a health care cost trend rate of 8.0% initially, declining gradually to 5.5% in 2023 and thereafter, to measure the accumulated postretirement benefit obligation. Effective January 1, 1993, certain features of the plan were amended. For future retirees, the company introduced retiree cost-sharing and implemented programs intended to stem rising costs. Also, the company has adopted a provision which limits its future obligation to absorb health care cost inflation. The features of the new plan provisions have been reflected in the assumed health care cost trend rate disclosed above. However, a one percentage point increase in the assumed health care cost trend rate would increase the 1995 postretirement benefit expense (service cost and interest cost) by $2.1 million and the accumulated postretirement benefit obligation as of December 31, 1995 by $17.6 million. INCOME TAXES Effective January 1, 1993, the company adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." SFAS 109 requires, among other things, the application of current statutory income tax rates in computing deferred income tax balances. In the first quarter of 1993, F-10 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) the company recognized the cumulative effect, through January 1, 1993, of the accounting change, reflecting the difference between current statutory tax rates and the generally higher rates that were used to establish the deferred income tax balances, resulting in noncash income of $58.2 million (equivalent to $0.37 per share). Cash payments for income taxes were $98.1 million, $101.6 million and $75.2 million in 1995, 1994 and 1993, respectively. The components of income tax expense for the years ending December 31, 1995, 1994 and 1993, were as follows:
1995 1994 1993 -------- -------- ------- THOUSANDS OF DOLLARS Federal Current....................................... $ 85,225 $ 79,483 $72,049 Deferred*..................................... 31,230 23,218 7,339 State........................................... 24,284 23,700 18,254 -------- -------- ------- Total....................................... $140,739 $126,401 $97,642 ======== ======== =======
- -------- *The 1993 deferred income tax expense includes $6.2 million for the one-time adjustment of previously recorded deferred taxes due to the increase in the U.S. statutory rate. The significant deferred tax assets and liabilities at December 31, 1995 and 1994, were as follows:
1995 1994 ---------- ---------- THOUSANDS OF DOLLARS Deferred tax liabilities: Accelerated depreciation......................... $ 210,564 $ 206,338 Investments in safe harbor leases................ 23,362 37,234 Pensions......................................... 69,869 60,611 Other............................................ 89,584 64,438 ---------- ---------- Total deferred tax liabilities................. 393,379 368,621 ---------- ---------- Deferred tax assets: Postretirement benefits.......................... 32,176 36,000 Accrued liabilities.............................. 21,614 24,521 Other............................................ 54,971 37,263 ---------- ---------- Total deferred tax assets...................... 108,761 97,784 ---------- ---------- Net Deferred Tax Liabilities....................... $ 284,618 $ 270,837 ========== ==========
The following table outlines the reconciling differences between the U.S. statutory tax rates and the rates used by the company in the determination of net income:
1995 1994 1993 ---- ---- ---- Federal statutory rate....................................... 35.0% 35.0% 35.0% State and local income taxes, net of U.S. federal income tax benefit..................................................... 3.6 3.9 4.3 Goodwill amortization........................................ 1.7 1.3 2.0 Benefits resulting from corporate-owned life insurance programs.................................................... (5.8) (4.7) (5.5) Affordable housing investment credits........................ (3.9) (3.1) (2.5) Other........................................................ (1.4) (0.4) (0.2) ---- ---- ---- Subtotal..................................................... 32.0 32.0 33.1 Adjustment of deferred taxes for the increase in the U.S. federal statutory income tax rate........................... -- -- 2.2 ---- ---- ---- Total.................................................... 32.0% 32.0% 35.3% ==== ==== ====
F-11 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DEBT FINANCING AND INTEREST EXPENSE The company's debt at December 31, 1995 and 1994, consisted of the following:
1995 1994 ---------- ---------- THOUSANDS OF DOLLARS Commercial paper......................................... $ 314,264 $ 484,061 Medium-term notes due 1997-2005 at a weighted average interest rate of 6.93%.................................. 500,000 200,000 9.125% debentures due December 1, 2000................... 199,646 199,574 8.875% debentures due April 15, 2021..................... 149,665 149,652 7.0% notes due January 1, 2003........................... 109,725 109,686 Subsidiary revolving line of credit...................... 162,000 -- Other.................................................... 175,660 101,759 ---------- ---------- Total................................................ $1,610,960 $1,244,732 ========== ==========
Based upon the interest rates currently available to the company for borrowings with similar terms and maturities, the fair value of the company's debt exceeds its book value at December 31, 1995 by approximately $98 million. The company's notes and debentures are not actively traded and contain no call provisions. At December 31, 1995, the company had an available credit facility of $550 million with a group of domestic and foreign banks that expires December 21, 1999. The credit arrangement provides support for the issuance of commercial paper and other credit needs. Borrowings under the facility (none during the past two years) bear interest at various rates not exceeding the banks' prime rates. The company pays an annual fee of 0.07% on the total unused credit facility. At December 31, 1995, a subsidiary of the company had an available line of credit of $200 million with a group of domestic and foreign banks that expires April 21, 2000. Borrowings under this facility amounted to $162 million at December 31, 1995 and bear interest at various rates not exceeding the banks' prime rates. The subsidiary pays an annual fee of 0.10% on the total unused credit facility. At December 31, 1995, the company had $599 million of commercial paper and short-term debt outstanding, of which $50 million represents management's current estimate of the 1996 net repayment. The remaining $549 million is classified as long-term since the company has the ability and intent to maintain such debt on a long-term basis. The weighted average interest rate on all commercial paper debt outstanding during 1995 was 5.87% (5.93% at December 31, 1995). Annual maturities of long-term debt (excluding commercial paper and short-term debt) are as follows: 1997--$123 million, 1998--$47 million, 1999-- $107 million, 2000--$236 million, and thereafter $499 million. The following table summarizes interest expense included in the Consolidated Statements of Income:
1995 1994 1993 -------- -------- ------- THOUSANDS OF DOLLARS Interest incurred................................. $120,658 $ 63,726 $51,922 Amount capitalized as property, plant and equipment........................................ (10,899) (10,233) (6,486) -------- -------- ------- Total......................................... $109,759 $ 53,493 $45,436 ======== ======== =======
Interest paid, net of capitalized interest, was $101.9 million, $51.8 million and $42.9 million in 1995, 1994 and 1993, respectively. F-12 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) STOCK AND INCENTIVE PROGRAMS FOR MANAGEMENT EMPLOYEES Restricted Stock Awards--At December 31, 1995 and 1994, the company had outstanding 461,000 and 328,000, respectively, restricted shares 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 five to seven 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 $18.1 million and $10.0 million based upon the closing price of the company's stock at each year end ($39.375 and $29.50 at December 31, 1995 and 1994, respectively). Charges to expense for this stock plan were $1.0 million, $1.5 million and $1.1 million in 1995, 1994 and 1993, respectively. Stock Purchase Plan--The company has a stock purchase plan for selected managers and key staff employees. Under the plan, the company is required to contribute an amount equal to 70% of participants' contributions, of which 50% is applied to the purchase of stock and 20% is paid in cash. The number of shares required for the plan for the year 1995 will depend upon the extent to which eligible participants subscribe during the subscription period in the first quarter of 1996 and the price of the stock on March 18, 1996. Amounts charged to expense for this plan were $6.2 million, $6.1 million, and $6.2 million in 1995, 1994 and 1993, respectively. Incentive Compensation Plans--The company has incentive compensation plans covering selected officers. Amounts charged to expense for supplementary compensation ($4.3 million in 1995, $3.3 million in 1994 and $2.6 million in 1993), are determined from the level of achievement of performance measures related to earnings, margins and returns applied to the participants' base salaries. Similar incentive and gain sharing compensation plans exist for other officers, managers, supervisors and production employees. Stock Options--The company has granted stock options annually from 1983 to 1995. The employee options vest from three to nine and one-half years and may be exercised, once vested, up to ten years from the date of grant. Under authorized Stock Incentive Plans, a maximum of 5.7 million shares were available for future grants of stock options and restricted stock awards as of December 31, 1995. Information relating to stock options, which includes 2.3 million and 2.4 million shares granted in 1995 and 1994, respectively, under a broad base stock option program for non-management employees, is shown below. Other Information--Under the stock programs, authorized unissued shares or treasury shares may be used. If authorized unissued shares are used, not more than 11.3 million shares may be issued in the aggregate. The company intends to reacquire shares of its common stock to meet the stock requirements of these programs in the future.
1995 1994 --------------------------- --------------------------- NUMBER OF PER SHARE OPTION NUMBER OF PER SHARE OPTION SHARES ON DATE OF GRANT SHARES ON DATE OF GRANT ---------- ---------------- ---------- ---------------- Stock options granted... 4,979,450 $30.44 to $57.70 4,016,500 $28.44 to $30.94 Stock options canceled or expired............. 551,730 $15.95 to $35.44 274,220 $19.63 to $31.38 Stock options exercised. 1,238,326 $15.66 to $31.38 370,627 $11.44 to $23.94 At end of year: Stock options outstanding.......... 14,246,152 $15.66 to $57.70 11,056,758 $15.66 to $31.38 Stock options exercisable.......... 4,831,856 $15.66 to $31.38 4,764,756 $15.66 to $31.38
F-13 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) EMPLOYEE STOCK OWNERSHIP PLAN Contributions to the company's Employee Stock Ownership Plan were discontinued in response to the change in tax law that eliminated the previously available tax credit. Under this plan, 1.2 million shares are held in trust as of December 31, 1995, for formerly eligible employees. There are no charges to operations for this plan, except for certain administrative expenses. 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 which are not in the best interest of shareholders. Under the terms of the Plan, each share of common stock is accompanied by one-quarter of a right; each full right entitles the shareholder to purchase from the company, one one-hundredth of a newly issued share of Series A Junior Preferred Stock at an exercise price of $225. The rights become exercisable ten days after a public announcement that an acquiring person (as defined in the Plan) has acquired 20% or more of the outstanding common stock of the company (the Stock Acquisition Date) or ten days after the commencement of a tender offer which would result in a person owning 30% or more of such shares. The company can redeem the rights for $.05 per right at any time until twenty days following the Stock Acquisition Date (the 20-day period can be shortened or lengthened by the company). The rights will expire on August 8, 1996 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 20% or more holder, the rights will then entitle a holder to buy shares of the acquiring company with a market value equal to twice the exercise price of each right. Alternatively, if a 20% holder acquires the company by means of a merger in which the company and its stock survives, or if any person acquires 30% or more of the company's common stock, each right not owned by a 20% or more shareholder 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. F-14 R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) GEOGRAPHIC SEGMENTS The following table summarizes the company's results of operations and identifiable assets, as of and for the years ended December 31, 1995, 1994 and 1993:
1995 1994 1993 ---------- ---------- ---------- THOUSANDS OF DOLLARS Net sales: Domestic.................................. $5,502,566 $4,343,477 $3,999,367 Foreign................................... 1,018,524 553,395 390,282 Less transfers between geographic areas... (9,304) (8,086) (1,888) ---------- ---------- ---------- Total................................... $6,511,786 $4,888,786 $4,387,761 ========== ========== ========== Earnings from operations: Domestic*................................. $ 580,410 $ 497,120 $ 362,364 Foreign................................... 19,928 4,118 (598) Corporate and other expenses--net......... (40,929) (41,807) (36,159) ---------- ---------- ---------- Total................................... $ 559,409 $ 459,431 $ 325,607 ========== ========== ========== Identifiable assets: Domestic.................................. $4,442,825 $3,719,974 $3,186,229 Foreign................................... 674,387 541,614 307,727 Investment in unconsolidated affiliates... 91,221 80,580 74,188 Corporate and other....................... 176,377 109,975 85,882 ---------- ---------- ---------- Total................................... $5,384,810 $4,452,143 $3,654,026 ========== ========== ==========
- -------- *1993 domestic earnings from operations includes a $90 million restructuring charge recorded during the first quarter of 1993 related primarily to the closing of the company's Chicago manufacturing facility. Sales to affiliates are at negotiated prices based on specific market conditions. Earnings from operations is net sales less cost of sales, selling and administrative expenses, assessments to operating units for various corporate expenses and goodwill amortization. In computing earnings from operations, none of the following items has been added or deducted: interest expense, income taxes and equity in income from unconsolidated investees. Identifiable assets are those assets of the company that are identified with the operations in each geographic area. Corporate and other assets are principally investments. SUBSEQUENT EVENT On March 7, 1996, the company announced that its Metromail subsidiary had filed a registration statement with the Securities and Exchange Commission for a proposed initial public offering of common stock of Metromail. All of the shares would be offered by Metromail with net proceeds being used to repay certain indebtedness owed to the company. The company would use the payment from Metromail to pay down its debt and for general corporate purposes. The company will retain a significant minority ownership interest in Metromail following the offering. The company expects that this transaction, if consummated, will result in a one-time gain, recorded in the company's 1996 income statement. F-15 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of R. R. Donnelley & Sons Company: We have audited the accompanying consolidated balance sheets of R. R. Donnelley & Sons Company (a Delaware corporation) and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years ended December 31, 1995. 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, 1995 and 1994, and the results of its operations and its cash flows for each of the three years ended December 31, 1995, in conformity with generally accepted accounting principles. As explained in the Notes to Consolidated Financial Statements, effective January 1, 1995, the company changed its method of accounting for LIFO inventories and, effective January 1, 1993, the company changed its method of accounting for postretirement benefits other than pensions and its method of accounting for income taxes. Arthur Andersen LLP Chicago, Illinois January 25, 1996 (except with respect to the matter discussed in the Subsequent Event footnote, as to which the date is March 7, 1996) F-16 UNAUDITED INTERIM FINANCIAL INFORMATION THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA
YEAR ENDED DECEMBER 31 ------------------------------------------------------ FIRST SECOND THIRD FOURTH FULL QUARTER QUARTER QUARTER QUARTER YEAR ---------- ---------- ---------- ---------- ---------- 1995 Net sales............... $1,318,089 $1,490,633 $1,704,793 $1,998,271 $6,511,786 Gross profit............ 229,815 278,132 338,746 362,699 1,209,392 Net income.............. 46,842 64,461 92,057 95,433 298,793 Net income per common share.................. 0.31 0.42 0.60 0.62 1.95 1994 Net sales............... $1,070,877 $1,117,338 $1,242,973 $1,457,598 $4,888,786 Gross profit............ 193,853 217,819 255,046 283,574 950,292 Net income.............. 42,796 58,338 80,070 87,399 268,603 Net income per common share.................. 0.28 0.38 0.52 0.57 1.75
F-17 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 25, 1996 (except with respect to the matter discussed in the Subsequent Event footnote, as to which the date is March 7, 1996). 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 25, 1996 F-18 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS Transactions affecting the allowances for doubtful accounts during the years ended December 31, 1995, 1994 and 1993 were as follows:
1995 1994 1993 -------- -------- -------- (IN THOUSANDS OF DOLLARS) Allowance for trade receivable losses: Balance, beginning of year................ $ 19,168 $ 14,795 $ 17,745 Balance, acquired companies at acquisi- tion..................................... 3,761 5,257 312 Provisions charged to income.............. 22,615 14,047 22,658 -------- -------- -------- 45,544 34,099 40,715 Uncollectible accounts written off, net of recoveries............................... (20,233) (14,931) (25,920) -------- -------- -------- Balance, end of year...................... $ 25,311 $ 19,168 $ 14,795 ======== ======== ========
F-19 INDEX TO EXHIBITS*
DESCRIPTION EXHIBIT NO. ----------- ----------- Certificate of Incorporation(9)................................ 3(i)(a) Certificate of Stock Designation filed as Exhibit A to the Rights Agreement dated July 24, 1986 between R. R. Donnelley & Sons Company and Morgan Shareholder Services Trust Compa- ny(2)......................................................... 3(i)(b) By-Laws........................................................ 3(ii)(a) Amendment to By-Laws adopted January 25, 1996.................. 3(ii)(b) Form of Rights Agreement, dated as of July 24, 1986 between R. R. Donnelley & Sons Company and Morgan Shareholder Services Trust Company(2).............................................. 4(a) First Amendment to Rights Agreement, dated as of March 24, 1988 between R. R. Donnelley & Sons Company and Morgan Share- holder Services Trust Company(4).............................. 4(b) Instruments Defining the Rights of Security Holders(1)......... 4(c) Indenture dated as of November 1, 1990 between the Company and Citibank, N.A. as Trustee(7).................................. 4(d) Credit Agreement dated December 21, 1994 among R. R. Donnelley & Sons Company, the Banks named therein and Citibank, N.A., as Administrative Agent(11)................................... 4(e) Directors' Retirement Benefit Plan, as amended(5)**............ 10(a) Directors' Deferred Compensation Agreement(10)**............... 10(b) Donnelley Shares Stock Option Plan, as amended................. 10(c) 1993 Stock Ownership Plan for Non-Employee Directors(8)**...... 10(d) Senior Management Annual Incentive Plan, as amended(7)**....... 10(e) Form of Severance Agreement for Senior Officers, as amend- ed(10)**...................................................... 10(f) 1993 Stock Purchase Plan for Selected Managers and Key Staff Employees, as amended**....................................... 10(g) 1986 Stock Incentive Plan, as amended**........................ 10(h) 1991 Stock Incentive Plan, as amended**........................ 10(i) 1995 Stock Incentive Plan, as amended**........................ 10(j) Form of premium priced option agreement with certain executive officers(11)**................................................. 10(k) Unfunded Supplemental Benefit Plan(7)**........................ 10(l) Amendment to Unfunded Supplemental Benefit Plan adopted on April 25, 1991(6)**........................................... 10(m) Agreement with John R. Walter for 1988 award of stock units(3)**.................................................... 10(n) Employment Agreement among Stream International Holdings Inc. (formerly Stream International Inc.), R. R. Donnelley & Sons Company and Rory Cowan(12)**.................................. 10(o) Retirement and Release agreement with F. R. Jarc(12)**......... 10(p) Agreement with F. R. Jarc(13)**................................ 10(q) Statement of Computation of Ratio of Earnings to Fixed Charges....................................................... 12 Letter regarding change in accounting principles(13)........... 18 Subsidiaries of R. R. Donnelley & Sons Company................. 21 Consent of Independent Public Accountants dated March 11, 1996.......................................................... 23 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) Instruments, other than that described in 4(d) and 4(e), 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. (2) Filed as Exhibit with Form SE filed on July 31, 1986, and incorporated herein by reference. (3) Filed as Exhibit with Form SE filed on March 24, 1988, and incorporated herein by reference. (4) Filed as Exhibit with Form SE filed on May 10, 1988, and incorporated herein by reference. (5) Filed as Exhibit with Form SE filed on March 25, 1991, and incorporated herein by reference. (6) Filed as Exhibit with Form SE filed on May 9, 1991 and incorporated herein by reference. (7) Filed as Exhibit with Form SE filed on March 26, 1992 and incorporated herein by reference. (8) Filed as Exhibit with Form SE filed on March 30, 1993 and incorporated herein by reference. (9) Filed on May 14, 1993 as Exhibit to Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1993. (10) Filed on March 28, 1994 as Exhibit to Annual Report on Form 10-K for the year ended December 31, 1993. (11) Filed on March 27, 1995 as Exhibit to Annual Report on Form 10-K for the year ended December 31, 1994. (12) Filed on August 11, 1995 as Exhibit to Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995. (13) Filed on November 13, 1995 as Exhibit to Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995. E-2 EX-3.II.A 2 BY-LAWS Exhibit 3(ii)(a) As Amended through January 25, 1996 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 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 2 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 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. 3 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 executed in writing by the stockholder or by 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. 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 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 4 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 --------- 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). 5 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.). 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. 6 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. SECTION 3.2. NUMBER, ELECTION AND TERM. The number of Directors which shall constitute the whole Board shall be fourteen (14) of whom five (5) shall be Directors of the First Class, five (5) shall be Directors of the Second Class and four (4) 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) 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 7 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) 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) 8 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 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 9 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 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 10/26/95) SECTION 3.14. NOMINATING 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 Nominating and Governance Committee, which Committee shall 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. The Committee 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) 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 Nominating 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) 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 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 11 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 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 ---------- 12 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 Sector 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 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 one or more Vice Chairmen of the Board and one or more Executive Vice Presidents. The Board of Directors may elect an Honorary Director to the office of Honorary Chairman of the Board. (Amended 1/27/94) 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) 13 SECTION 4.4. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification 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) 14 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. SECTOR PRESIDENTS. The Board of Directors may from time to time designate as Sector President one or more of the individuals who occupies the position of senior officer heading a Sector consisting of one or more business units and to whom one or more of the Business Unit Presidents reports. (Amended 1/27/94) SECTION 4.14. 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 one or more sales units and who reports to one or more of the Sector Presidents or other senior officers of the corporation. (Added 1/27/94) SECTION 4.15. 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) SECTION 4.16. 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) 15 SECTION 4.17. 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) SECTION 4.18. TREASURER. The Treasurer shall be responsible for the receipt, custody and disbursement of 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) SECTION 4.19. 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) SECTION 4.20. 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) SECTION 4.21. 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) 16 SECTION 4.22. 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) SECTION 4.23. 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 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) SECTION 4.24. 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) ARTICLE V --------- Appointed Officers ------------------ The Chief Executive Officer may appoint officials assigned to a particular Sector or other business unit as such officers of such Sector or business unit and having such titles as he shall deem appropriate. 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 such Sector or business unit. (Amended 1/27/94) 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. 17 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. 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 18 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 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) 19 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. (Entire Article Renumbered 6/28/84) 20 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) 21 EX-3.II.B 3 AMENDMENT TO BY-LAWS ADOPTED 1/25/96 Exhibit 3(ii)(b) R.R. DONNELLEY & SONS COMPANY AMENDMENT TO BY-LAWS ADOPTED JANUARY 25, 1996 RESOLVED, that Sections 3.12 and 3.15 of the Company's By-Laws be and hereby are amended, effective immediately, to substitute "Human Resources Committee" for the term "Compensation Committee" wherever it appears in the aforesaid Sections; and RESOLVED, that Sections 3.14 and 3.15 of the Company's By-Laws be and hereby are amended, effective immediately, to substitute "Nominating and Governance Committee" for the term "Nominating Committee" wherever it appears in the aforesaid Sections. EX-10.C 4 DONNELLEY SHARES STOCK OPTION PLAN Exhibit 10(c) DONNELLEY SHARES STOCK OPTION PLAN (as amended on July 18, 1994, January 25, 1996) 1. Plan. The purpose of this Donnelley Shares Stock Option Plan (the "Plan") is to provide incentives to employees through rewards based upon the ownership and performance of the common stock of R. R. Donnelley & Sons Company (the "Company"). The Committee hereinafter designated shall grant options to purchase shares of common stock, par value $1.25 per share, of the Company (the "Common Stock") to eligible employees on the terms and subject to the conditions stated in the Plan. 2. Eligibility. All employees (other than officers) of the Company and all of its direct or indirect wholly-owned subsidiaries (the "Employers") shall be eligible, upon selection by the Committee, to receive options under the Plan; provided, however, that an otherwise eligible employee whose terms and conditions of employment are covered by a collective bargaining agreement shall be eligible to receive options under the Plan only if expressly provided for in a collective bargaining agreement or supplemental letter of understanding signed by such employee's Employer and the recognized representative of the collective bargaining unit in which the employee is a member; provided further, that the preceding proviso shall not apply to employees who are not subject to the United States labor laws. An employee granted an option pursuant to the Plan shall be referred to herein from time to time as an "Optionee". 3. Limitation on Shares Available. Subject to adjustment as provided in Section 5 of the Plan, the maximum number of shares of Common Stock available for all grants made under the Plan shall be 6,000,000. Shares of Common Stock subject to grants made hereunder which, by reason of the expiration, cancellation, forfeiture or other termination of such grants prior to purchase, are not purchased shall again be available for future grants. Shares of Common Stock to be delivered may be authorized and unissued shares of stock, treasury stock or a combination thereof. The Company reserves the right to purchase shares of Common Stock for the Plan in the open market. 4. Administration of the Plan. The Plan shall be administered by a committee (the "Committee") designated by the Board of Directors of the Company (the "Board"). Except as otherwise set forth in the Plan, the Committee shall, subject to the terms of the Plan, select groups of eligible employees for participation in the Plan and, with respect to such groups of eligible employees, shall determine the number of shares of Common Stock subject to each option granted hereunder, the terms and conditions of exercise of such option and all other terms and conditions of such option. The Committee shall, subject to the terms of the Plan, have the authority to interpret the Plan, establish rules and regulations for the administration of the Plan and impose, incidental to the grant of an option, conditions with respect to the grant. All such rules, regulations and interpretations adopted by the Committee shall be conclusive and binding on all parties. The Committee may delegate its authority to interpret all or part of the Plan to designated officers of the Company. 5. Adjustments for Changes in Capitalization. The Committee shall make appropriate adjustments to the number of shares available under the Plan, the option exercise price and the number of shares subject to any option granted hereunder in order to give effect to any stock split, stock dividend, merger, consolidation, reorganization, spin-off, liquidation or other similar change in capitalization or event that occurs after the effective date of the Plan, such adjustments to be made in the case of outstanding options without a change in the aggregate purchase price. If any adjustment would result in a fractional security being available under the Plan or subject to a grant under the Plan, such fractional security shall be disregarded. 6. Effective Date and Term of Plan. The Plan shall become effective on January 27, 1994 (the "Effective Date"). The Plan shall terminate five (5) years after the Effective Date unless terminated prior thereto by action of the Board. No further grants shall be made under the Plan after termination, but termination shall not affect the rights of any Optionee under any grants made prior to termination. 7. Amendments. The Plan may be amended or terminated by the Board in any respect and at any time, provided that such action shall not adversely affect any rights or obligations with respect to any outstanding grants under the Plan. 8. Grants. (a) Options to purchase 100 shares of Common Stock shall be granted on March 24, 1994 to eligible employees employed on such date who had completed at least two (2) years of continuous service with any one or more of the Employers as of December 31, 1993; provided, however, that employees who, as of March 24, 1994, are members of a collective bargaining unit shall be deemed eligible employees for purposes of this paragraph 8(a) only if a collective bargaining agreement or supplemental letter of understanding providing for the receipt of such options by such employees was fully executed by such employee's Employer and the recognized representative of the collective bargaining unit prior to March 1, 1994; and provided further, that eligible employees who are not employed in the United States of America as of March 24, 1994 shall not receive such options. All options granted on March 24, 1994 shall become exercisable in full on December 31, 1996. (b) Additional options may be granted, in the sole and absolute discretion of the Committee, to groups of eligible employees at any time. -2- (c) The option price per share of Common Stock purchasable upon the exercise of any option granted pursuant to the Plan shall be the fair market value of a share of Common Stock on the date of grant of such option. For purposes of the Plan, the fair market value shall be determined by reference to the average of the high and low transaction prices in trading of the Common Stock as reported in the New York Stock Exchange-Composite Transactions on the date of grant. (d) All options granted hereunder shall be evidenced by a certificate substantially in the form of Exhibit A hereto. Each certificate shall be dated and signed by an officer of the Company as of the date of the grant. 9. Terms of Options. (a) No option shall be exercisable earlier than one (1) year, nor more than ten (10) years, after the date of grant. Each option granted hereunder shall become exercisable in full on the third anniversary of the date of the grant, unless otherwise determined by the Committee and except as otherwise set forth in Section 8(a). Notwithstanding the foregoing, if an Optionee is no longer employed by at least one of the Employers for any reason (including due to death or long-term disability but excluding due to termination of employment upon retirement at normal retirement age or early retirement at or after age 55 with the consent of the Company), each option held by such Optionee which is not exercisable on the date of termination of employment shall terminate automatically on such date. Options held by an Optionee who retires at normal retirement age or who takes early retirement at or after age 55 with the consent of the Company, regardless of whether or not such options are exercisable at the date of retirement, shall not terminate as a result of such retirement but shall continue to remain outstanding and subject to the terms and conditions of the Plan; provided, however, that in the event that such an Optionee dies, each option held by such Optionee which is not exercisable on the date of death of such Optionee shall terminate automatically upon the death of such Optionee. Additionally, after an option held by an Optionee has become exercisable, if such Optionee is no longer employed by at least one of the Employers for any reason (other than retirement at normal retirement age or early retirement at or after age 55 with the consent of the Company or for any of the reasons specified in Section 9(c)) and/or such Optionee dies, then such Optionee (or in the case of death, such Optionee's executor, administrator, personal representative, beneficiary or similar person) may exercise such exercisable option until ninety (90) days from the date of such termination of employment and/or the date of death, as the case may be, or until the expiration of the term of such option, whichever is earlier. (b) No option hereunder shall be transferable other than by will, the laws of descent and distribution or pursuant to the beneficiary designation procedures approved by the Committee. Each option shall be exercisable during the Optionee's lifetime only by the Optionee or the Optionee's guardian, legal representative or similar person, provided that evidence of such person's identity and rights with respect to such exercise are acceptable to the Committee. Except as permitted by the first sentence of Section 9(b) of the Plan, no option hereunder shall 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. Any -3- such attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of any option hereunder shall be null and void and no person shall be entitled to any rights hereunder by virtue of any attempted execution, attachment or similar process. In the event of the death of an Optionee, any unexercised portion of an option that, but for the death of the Optionee, would have been exercisable on the date of such Optionee's death by such Optionee may be exercised by the executor, administrator, personal representative, beneficiary or similar person of such deceased Optionee within ninety (90) days of the death of such Optionee, but not after the expiration of the term of the option; provided that evidence of such person's identity and rights with respect to such exercise are acceptable to the Committee. (c) Notwithstanding anything contained herein to the contrary, in the event the Committee shall determine that an Optionee's employment was terminated by the Optionee's Employer on account of (i) an unauthorized disclosure of confidential information or trade secrets of any Employer, (ii) unlawful trading in the securities of the Company or any customers of any of the Employers, or (iii) fraud, theft or embezzlement with respect to any of the Employers or any breach of the Optionee's duties to the Optionee's Employer or any of the other Employers, then such Optionee shall forfeit all rights to the unexercised portion of any option held by the Optionee under the Plan, and all such options shall automatically terminate. (d) Options must be exercised in full. No partial exercise is permitted. No shares of Common Stock may be purchased under any option granted under the Plan unless prior to or simultaneously with the purchase, the Optionee shall have delivered by such means as have been identified by the Committee notice to the Company, accompanied by payment therefor in full of the option price, any brokerage fees associated with the exercise of the options (the "Brokerage Fees"), and any local, state, federal or other taxes required to be withheld and paid over to governmental taxing authorities by the Company due to such exercise ("Taxes") (or arrangement made for such payment to the satisfaction of the Company). Upon exercise, the option price, the Brokerage Fees and the Taxes may be paid according to procedures established by the Committee as follows: (i) in cash or (ii) by electing to sell, through an agent or broker designated by the Company, whole shares of Common Stock issuable upon exercise of the option having a fair market value determined on the date of exercise as close as is practicable to the sum of (A) the option price for shares of Common Stock subject to such exercise, (B) the Brokerage Fees associated with such exercise and (C) the Taxes associated with such exercise, provided that the number of whole shares sold shall be sufficient to pay in full the option price, the Brokerage Fees and the Taxes. No option may be exercised by an Optionee through any agent or broker other than an agent or broker designated by the Company. Notwithstanding the foregoing, in the event that an Optionee has notified the Company through the Company's electronic system that such Optionee is exercising an option and is paying cash for the option price and the Taxes and such cash is not received within 30 calendar days following such notice, then the Company may automatically order the sale, through the designated agent or broker, of whole shares of Common Stock to pay in full the option price, the Brokerage Fees and the Taxes and deliver any whole shares of Common Stock not so applied to the Optionee, plus any cash owed in lieu of fractional shares. The Committee shall have sole discretion to disapprove of an election pursuant to clause -4- (ii). No shares of Common Stock shall be delivered to the Optionee until the full option price, the Brokerage Fees and the Taxes have been paid. Optionees shall be required to receive all shares acquired under an option in the form of stock certificates; cash shall not be paid to an Optionee in lieu of the delivery of stock certificates upon the exercise of any option, except to the extent necessary to compensate for fractional shares. (e) Optionees shall be entitled to the privilege of ownership with respect to shares of Common Stock subject to options granted hereunder only as to shares of Common Stock purchased and delivered to an Optionee upon exercise of an option. 10. Miscellaneous. ------------- (a) Effect of Leaves of Absence. Leaves of absence for periods and purposes conforming to the personnel policies of the Company and approved by the Employer shall not be deemed terminations of employment or interruptions of continuous service. (b) Restrictions on Shares. Notwithstanding any provision of the Plan to the contrary, unless a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), is in effect as to the shares purchasable under any option granted under the Plan, no shares of Common Stock may be purchased under such option. In addition, notwithstanding any provision of this Plan to the contrary, any option granted under the Plan is subject to the condition that if at any time the Company determines that the listing, registration or qualification of the shares of Common Stock subject to such option upon any securities exchange or under any law, the consent or approval of any regulatory body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the delivery of the shares thereunder, such shares shall not be delivered unless such listing, registration, qualification, consent, approval or other action shall have been effected or obtained, free of any conditions not acceptable to the Company. (c) No Right to Employment. Neither the Plan nor the grant of options hereunder shall be construed as giving any employee any right to be retained in the employ of any Employer. (d) Governing Law. The Plan shall be governed by and interpreted in accordance with the laws of the State of Delaware. (e) Nature of Option. The options granted under the Plan shall not be treated as incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. 11. Acceleration of Options Upon a Change in Control. If while any option remains unexercised and outstanding under the Plan: -5- (a) any "person", as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as modified and used in Section 13(d) and 14(d) thereof (but not including (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company) (hereinafter a "Person") is or becomes the beneficial owner, as defined in Rule 13d-3 of the Exchange Act, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 50% or more of the combined voting power of the Company's then outstanding securities; or (b) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into any agreement with the Company to effect a transaction described in clause (a), (c) or (d) of this Section) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (c) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (d) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets; (any of such events being hereinafter referred to as a "Change in Control"), then from and after the date on which public announcement of the acquisition of such percentage shall have been made, or the date on which the change in composition of the Board set forth above shall have occurred, or the date of any such stockholder approval of a merger, consolidation, plan of -6- complete liquidation or an agreement for the sale of the Company's assets as described above occurs (the applicable date being hereinafter referred to as the "Acceleration Date"), all such outstanding and unexercised options, whether or not then exercisable, shall be fully and immediately exercisable. -7- Exhibit A Donnelley Shares STOCK OPTION PLAN This is to certify that (OPTIONEE NAME) was granted on (DATE), an option to purchase (NUMBER) SHARES of R. R. Donnelley & Sons Company common stock at a fixed option price of (PRICE) per share. This option is subject to the terms and conditions of the Donnelley Shares Stock Option Plan. This certificate has been [logo] RR Donnelley executed as of (DATE), & Sons Company on behalf of R. R. Donnelley & Sons Company by (FACSIMILE SIGNATURE) John R. Walter Chairman and Chief Executive Officer -8- EX-10.G 5 1993 STOCK PURCHASE PLAN Exhibit 10(g) R. R. DONNELLEY & SONS COMPANY 1993 STOCK PURCHASE PLAN FOR SELECTED MANAGERS AND KEY STAFF EMPLOYEES (AS AMENDED ON SEPTEMBER 22, 1994, OCTOBER 26, 1995 AND JANUARY 25, 1996) 1. Purpose. The purpose of the Stock Purchase Plan (the "Plan") of R. R. Donnelley & Sons Company (the "Company") is to align the interests of the Company's stockholders and selected managers and key staff employees of the Company and its majority-owned subsidiaries eligible to participate in the Plan by granting incentives to such managers and key staff employees to increase their proprietary interest in the Company's growth and success. 2. Administration. The Plan will be administered by a Committee (the "Committee") of three or more directors designated by the Board of Directors of the Company (the "Board). No member of the Committee, during the one year prior to service on the Committee or during service on the Committee, shall have been or be granted or awarded shares of common stock, par value $1.25 per share, of the Company ("Common Stock"), options to purchase shares of Common Stock or other equity securities of the Company pursuant to the Plan or any other plan of the Company or any affiliate of the Company, except for any grant or award which would not result in such member ceasing to be a "disinterested person" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Committee may adopt such rules and regulations and make such determinations and interpretations and provide for all terms and conditions of the Plan and participation thereunder as it shall deem desirable and not inconsistent with the limitations herein provided. All such rules, regulations, determinations and interpretations relating to the Plan adopted by the Committee shall be conclusive and binding upon all parties. 3. Eligibility. (a) The Committee shall determine the classes (or portions thereof) of managers and key staff employees of the Company and any of its subsidiaries that are eligible to participate in the Plan (each such class determined to be so eligible being referred to herein as an "Eligible Class"); provided that the Committee may direct that the determination of such classes (or portions thereof) be made by the Chief Executive Officer, either alone or together with one or more designated officers of the Company, except that the determination of the eligibility of any class in which there is an "officer" within the meaning of Rule 16a-1 under the Exchange Act shall be made by the Committee. The determination of Eligible Classes shall remain in effect unless and until changed in accordance with the following. No elimination of an Eligible Class or portion thereof may be made with respect to any calendar year after February 1 of such year. Additions of Eligible Classes or portions thereof may be made at any time by the Committee, or by the Chief Executive Officer, either alone or together with one or more designated officers of the Company, if the Committee has delegated the authority to determine such Eligible Classes to the Chief Executive Officer. (b) An employee of the Company or a subsidiary of the Company who either (i) is employed in an Eligible Class on a Purchase Date (as hereinafter defined), or (ii) was employed in an Eligible Class on the December 31 next preceding a Purchase Date and who retired at age 55 or over on or after such December 31 and on or prior to such Purchase Date, shall be eligible to purchase shares of Common Stock in accordance with the Plan on such Purchase Date (each such employee being referred to herein as an "Eligible Employee"); provided that any Eligible Employee who disposes of Common Stock purchased under the Plan in contravention of Section 7 hereof shall not be an Eligible Employee (and therefore not entitled to purchase shares of Common Stock under the Plan) on either of the two Purchase Dates next following the date on which the Company becomes aware of the most recent such disposition and with respect to which the condition set forth in Section 4(c) is satisfied. 4. Eligible Employee's and Company's Contributions for Purchase of Shares of Common Stock. (a) Subject to subsection (c) below, each Eligible Employee may, with respect to each Purchase Date, contribute up to 5% of the Compensation (as hereinafter defined) of such Eligible Employee for the calendar year next preceding such Purchase Date; provided that the amount, if any, contributed by an Eligible Employee (the "Eligible Employee's Contribution Amount") shall in no event be less than $100. The Eligible Employee's Contribution Amount shall, subject to the conditions contained herein, be applied, together with a Company contribution equal to 50% of the Eligible Employee's Contribution Amount, to the purchase of Common Stock as provided in Section 5. The Company will contribute an additional amount equal to 20% of the Eligible Employee's Contribution Amount, which amount will be paid in cash to the Eligible Employee in the last pay period in the month of April next following the Purchase Date. (b) The election of an Eligible Employee to contribute with respect to a Purchase Date and the designation by such Eligible Employee of such Eligible Employee's Contribution Amount for such Purchase Date must be made no later than the March 15 next preceding such Purchase Date; provided that in the case of an Eligible Employee who is subject to Section 16 of the Exchange Act, such election and designation with respect to a Purchase Date shall be made no later than the September 15 next preceding such Purchase Date and shall be irrevocable after such September 15. An Eligible Employee shall pay such Eligible Employee's Contribution Amount in full on or before the March 15 next preceding a Purchase Date. (c) No Eligible Employee may make a contribution under the Plan following any calendar year of the Company, unless the consolidated net earnings of the Company for such year, before provision for Federal, state and other income taxes, shall equal or exceed 6.5% of the consolidated net sales of the Company, as determined in accordance with generally accepted accounting principles as in effect for such year (the "Performance Threshold"); provided, however, that the Committee may, in its sole discretion exercised at any time, exclude from the calculation of the Performance Threshold for any year the effect of any extraordinary, non-recurring or unusual charge or credit, any change in accounting policy or any other factors (including, without limitation, acquisitions or dispositions) deemed by the Committee to warrant such exclusion or change the Performance Threshold as it deems appropriate. (d) The "Compensation" of an Eligible Employee for a calendar year shall mean the sum of (i) the base pay (before reduction on account of any election by the Eligible Employee pursuant to a "qualified cash or deferred arrangement," as defined in Section 401(k) of the Internal Revenue Code of 1986 (the "Code")), or pursuant to a "cafeteria plan," as defined in Section 125 of the Code), and overtime paid to such Eligible Employee by the Company and its subsidiaries during such calendar year and (ii) the annual incentive compensation amount paid to such Eligible Employee by the Company and its subsidiaries during such calendar year, prorated, if necessary, for the portion of such calendar year during which such employee was in an Eligible Class. Notwithstanding the foregoing, Compensation shall not include expatriate benefits paid under the Company's expatriate policy (as amended from time to time), including, without limitation, any foreign service or hardship premium. 5. Purchase of Shares of Common Stock. The Eligible Employee's Contribution Amount and the Company contribution equal to 50% of such Eligible Employee's Contribution Amount shall be applied on the first trading day following March 15 in any year when purchases may be made (a "Purchase Date") to the purchase from the Company of whole shares of Common Stock for the Eligible Employee's account at the average of the high and low transaction prices reported in the New York Stock Exchange Composite Transactions report for such Purchase Date. Any amount in excess of the amount so applied to the purchase of whole shares of Common Stock shall be paid to the Eligible Employee. 6. Certificate or other evidence of ownerships Representing Shares of Common Stock. Shares purchased under the Plan for the account of an Eligible Employee will be represented by a certificate or other evidence of ownership registered in the name of such Eligible Employee or, if such Eligible Employee shall so specify, in the name of such Eligible Employee and such Eligible Employee's spouse as joint tenants, and the certificate or other evidence of ownership shall be delivered to the Eligible Employee as soon as practicable following the Purchase Date. 7. Disposition of Shares of Common Stock. An Eligible Employee who purchases shares of Common Stock under the Plan may sell, assign, transfer or otherwise dispose of such shares at any time; provided that the sale, assignment, transfer or other disposition of any shares of Common Stock which are purchased under the Plan within three years of the date of purchase of such shares under the Plan (other than a transfer into the name of the Eligible Employee and such employee's spouse as joint tenants or a transfer from joint tenancy into the name of the Eligible Employee individually) shall automatically terminate the right of such Eligible Employee to participate in the Plan on the two Purchase Dates next following the date on which the Company becomes aware of the most recent such disposition and with respect to which the condition set forth in Section 4(c) is satisfied. An Eligible Employee who transfers shares to a trust or brokerage account may restore such Eligible Employee's right to participate in the Plan by re-registering such shares in such Eligible Employee's name (or registering such shares in joint tenancy with such Eligible Employee's spouse) within three months of notice from the Company and delivering a copy of the certificate representing such re-registered shares to the Compensation and Employee Benefits department of the Company. 8. Number of Shares of Common Stock. The maximum number of shares of Common Stock available for purchase under the Plan shall be 7,000,000 shares of Common Stock; provided that such maximum number shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a split-up or consolidation of shares or like capital adjustment or the payment of any stock dividend or other increase or decrease in the number of such issued shares effected without receipt of consideration by the Company. Shares of Common Stock purchased under the Plan shall, at the election of the Company, be authorized and unissued shares of Common Stock or shares of Common Stock held as treasury shares or a combination thereof. 9. Effective Date. The Plan shall be submitted to the stockholders of the Company for approval at the 1993 annual meeting of stockholders and, if approved, shall become effective as of January 1, 1993. 10. Termination and Amendment. The Plan shall terminate with respect to Compensation paid to employees after December 31, 2002 unless terminated earlier by the Board. The Board may suspend the Plan at any time. Any termination or suspension shall not affect the rights of an Eligible Employee with respect to shares of Common Stock theretofore purchased under the Plan. The Board may amend the Plan at any time, but no amendment may be made without the approval of stockholders if such amendment would increase the Company's total contribution to a percent greater than 70% of an Eligible Employee's Contribution Amount, increase the maximum percentage to more than 5% of an Eligible Employee's Compensation, reduce the purchase price of shares of Common Stock under the Plan, or increase the aggregate number of shares of Common Stock which may be purchased under the Plan. EX-10.H 6 1986 STOCK INCENTIVE PLAN Exhibit 10(h) R. R. DONNELLEY & SONS COMPANY 1986 STOCK INCENTIVE PLAN (As amended on April 24, 1986, July 27, 1989, September 28, 1989 and January 25, 1996) I. GENERAL 1. Plan. To provide incentives to management through rewards based upon the ownership and performance of the common stock of R. R. Donnelley & Sons Company (the "Company"), the Committee hereinafter designated, with the approval of the Board of Directors, may grant stock bonus awards, stock options, stock appreciation rights, or combinations thereof, to eligible officers and other key management personnel, on the terms and subject to the conditions stated in this Plan. 2. Eligibility. Officers and other key management employees of the Company, its subsidiaries, and any other entity designated by the Board of Directors or the Committee in which the Company has a direct or indirect equity interest, shall be eligible, upon selection by the Committee, to receive stock bonus awards, stock options or stock appreciation rights, either singly or in combination, as the Committee, in its discretion, shall determine. For purposes of the Plan, references to employment by the Company also mean employment by a majority-owned subsidiary of the Company and employment by any other entity designated by the Board or the Committee in which the Company has a direct or indirect equity interest. 3. Limitation on Shares to be Issued. The maximum number of shares of common stock, par value $1.25 per share, to be issued pursuant to all grants made under the Plan shall be 3,200,000 of which no more than 1,200,000 shares shall be issued pursuant to stock bonus awards granted under the Plan. Shares awarded pursuant to grants which, by reason of the expiration, cancellation or other termination of the grants prior to issuance are not issued, shall again be available for future grants. Shares of common stock to be issued may be authorized and unissued shares of common stock, treasury stock or a combination thereof. 4. Administration of the Plan. The Plan shall be administered by a Committee designated by the Board of Directors (the "Committee"). No member of the Committee shall be eligible to participate in, or within one year prior to appointment to the Committee have participated in, this Plan or any other stock purchase, stock bonus, stock option, stock appreciation rights or other stock incentive plan of the Company. The Committee shall, within the limits of the Plan and subject to the approval of the Board of Directors, establish selection guidelines; select eligible persons for participation; and determine the form of grant, either as stock bonus, stock option or stock appreciation rights or combination thereof, determine the form 1 of stock option, the number of shares subject to the grant, the fair market value of the common stock when necessary, the time and conditions of vesting or exercise, and all other terms and conditions of the grant. The Committee may establish rules and regulations for the administration of the Plan, interpret the Plan, and impose, incidental to a grant, conditions with respect to competitive employment or other activities not inconsistent with or conflicting with the Plan. All such rules, regulations, and interpretations relating to the Plan adopted by the Committee shall be conclusive and binding on all parties. 5. Adjustments for Changes in Capitalization. Appropriate adjustments shall be made by the Committee in the maximum number of shares to be issued under the Plan, the maximum number of shares to be issued pursuant to stock bonus awards, and in the number of shares the subject of any grant, to give effect to any stock splits, stock dividends and other relevant changes in capitalization occurring after the effective date of the Plan. 6. Effective Date and Term of Plan. The Plan shall be submitted to the stockholders of the Company for approval at the 1986 annual meeting scheduled to be held on March 27, 1986, and if approved shall become effective on that date. The Plan shall terminate five years after it becomes effective unless terminated prior thereto by action of the Board of Directors. No further grants shall be made under the Plan after termination, but termination shall not affect the rights of any participant under any grants made prior to termination. 7. Amendments. The Plan may be amended or terminated by the Board of Directors in any respect except that no amendment may be made without stockholder approval if such amendment would (a) increase the maximum number of shares available for issuance under the Plan or stock bonus awards; (b) modify the class of eligible employees; or (c) extend the period during which any option or other right may be exercised under the Plan. 8. Prior Plans. Upon the effectiveness of this Plan, no further grants shall be made under the Company's 1976 Stock Option Plan, as amended, and the 1981 Stock Incentive Plan, as amended, except that stock appreciation rights may be granted with respect to options previously granted and outstanding under these Plans. Bonuses awarded under the 1981 Stock Incentive Plan, as amended, and options granted under the 1976 Stock Option Plan, as amended, and the 1981 Stock Incentive Plan, as amended, prior to the effectiveness of this Plan shall continue in accordance with their terms. 2 II. STOCK BONUS AWARDS 1. Form of Award. Stock bonus awards, whether Performance Awards or Fixed Awards, may be made to eligible officers and other key management personnel in the form of stock units, each of which is the equivalent of a share of common stock but for the power to vote and the entitlement to current dividends, or in the form of shares of common stock issued to the employee but forfeitable and with restrictions on transfer in any form as hereinafter provided. 2. Performance Awards. Awards may be made in terms of a stated potential maximum number of units or shares, with the actual number to be determined by reference to the level of achievement of corporate, group, division, individual or other specific objectives over a period of not less than three nor more than ten years. No rights or interests of any kind shall be vested in an individual receiving a performance award until the conclusion of the period and the determination of the level of achievement specified in the award, and the time of vesting thereafter shall be as specified in the award. 3. Fixed Awards. Awards may be made which are not contingent on the performance of objectives, but are contingent on the participant's continuing in the Company's employ for a period to be specified in the award, which period shall be not less than five nor more than ten years from the date of award. 4. Rights with Respect to Restricted Shares. If shares of restricted common stock are issued pursuant to an award, the participant shall have the right to vote the shares and to receive dividends thereon from the date of issuance, unless and until forfeited. 5. Rights with Respect to Stock Units. If stock units are credited to a participant pursuant to an award, amounts equal to dividends otherwise payable on a like number of shares of common stock after the crediting of the units shall be credited to an account for the participant and held until the award is forfeited or paid out. Interest shall be credited on the account annually at a rate equal to the return on five year U.S. Treasury obligations. 6. Vesting and Resultant Events. The Committee may, in its discretion provide for early vesting of an award in the event of the participant's death, permanent and total disability or retirement. At the time of vesting, the award, if in units, shall be paid to the participant either in shares of common stock equal to the number of units, in cash equal to the fair market value of such shares, or in such combination thereof as the Committee shall determine, and the participant's account to which dividends and interest have been credited shall be paid in cash. Shares of restricted common stock issued pursuant to an award shall, at the time of vesting, be released from the restrictions. 3 7. Acceleration Upon Change in Control. If while any Performance Award or Fixed Award remains outstanding under this Plan-- (a) any "person," as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act"), as modified and used in Section 13(d) and 14(d) thereof (but not including (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company) (hereinafter a "Person") is or becomes the beneficial owner, as defined in Rule 13d-3 of the Exchange Act, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 50% or more of the combined voting power of the Company's then outstanding securities; or (b) during any period of two (2) consecutive years (not including any period prior to the execution of this Amendment), individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into any agreement with the Company to effect a transaction described in Clause (a), (c) or (d) of this Section) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (c) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or 4 (d) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets, any of such events being hereinafter referred to as a "Change in Control") then from and after the date on which public announcement of the acquisition of such percentage shall have been made, or the date on which the change in the composition of the Board set forth above shall have occurred, or the date of any such stockholder approval of a merger, consolidation, plan of complete liquidation or an agreement for the sale of the Company's assets as described above occurs (the applicable date being hereinafter referred to as the "Acceleration Date"), (i) with respect to such Performance Awards, all levels of achievement specified in the award shall be deemed met and the award shall be immediately and fully vested, and (ii) with respect to such Fixed Awards, the period of continued employment specified in the award upon which the award is contingent shall be deemed completed and the award shall be immediately and fully vested. III. STOCK OPTIONS 1. Grants. Options to purchase shares of common stock of the Company may be granted to such eligible officers and other key management personnel as may be selected by the Committee and approved by the Board of Directors. These options may, but need not, constitute "incentive stock options" under Part II of subchapter D of the Internal Revenue Code of 1986, as amended, or any other form of option under the Code as hereafter amended. 2. Terms of Options. No option shall be exercisable less than one nor more than ten years after the date of grant. The per share option price shall be not less than 100% of the fair market value at the time the option is granted. Upon exercise, the option price may be paid in cash, in shares of common stock of the Company having a fair market value equal to the option price, or in a combination thereof. Options shall not be transferable, except that in the event of the death of an optionee during employment or within a period not in excess of five years after termination of employment by reason of retirement or total and permanent disability or within ninety days after termination of employment for any other reason, outstanding options may be exercised by the executor, administrator or personal representative of such deceased optionee within ninety days of the death of such optionee. Options may be exercised during the individual's continued employment with the Company and for a period not in excess of ninety days following termination of employment and only within the original term of that option; provided, however, that if employment of the optionee by the Company and its subsidiaries shall have terminated by reason of retirement or total and permanent disability, then the option may be exercised for a period not in excess of five years following termination of employment but not after the expiration of the term of the option. 5 3. Withholding Tax. An option may provide that the optionee may elect to deliver to the Company (or authorize the Company to retain from the shares purchased upon such exercise) whole shares of common stock of the Company to satisfy the Company's obligation, if any, to withhold federal, state and local income tax required to be withheld in respect of such exercise, provided, however, that in the case of an optionee who is an officer or director of the Company (within the meaning of Section 16 of the Securities Exchange Act of 1934), such election may not be made during the six-month period beginning on the date of grant of such option (except in the case of the death or disability of such optionee) and must be made either (i) at least six months prior to the date on which the amount of such withholding tax is determined or (ii) during the ten business day period beginning on the third business day following each release of the Company's quarterly or annual summary of sales and earnings. Any such election shall be irrevocable, but subject to disapproval by the Committee. 4. Acceleration of Stock Options Upon a Change in Control. If while any stock option granted pursuant to this Article III of the Plan remains unexercised and outstanding, a Change in Control (as defined in Article II, Section 7, above) occurs, then from and after the Acceleration Date (as defined in Article II, Section 7, above) all such outstanding and unexercised options, whether or not then vested, shall be fully and immediately exercisable. IV. UK STOCK OPTION SUB-PLAN 1. GENERAL (a) Sub-Plan. The UK Stock Option Sub-Plan ("the Sub-Plan") has been established in order to vary the terms on which options may be given to officers and key management personnel who are employed in the United Kingdom by the Company or any of its subsidiaries. Stock options granted under the Sub-Plan shall be deemed granted under this Stock Incentive Plan and shall comply in all respects with the terms and conditions applicable to options granted under Article III of this Stock Incentive Plan. (b) Definitions. In the Sub-Plan the following terms shall have the following meanings: "the Subsidiaries" shall mean all companies which are controlled by the Company (as defined in Section 534 of the Income and Corporation Taxes Act 1970) and which are an affiliate controlled by the Company directly or indirectly through one or more intermediaries for the purposes of rule 12b -2 of the U.S. Securities Exchange Act of 1934; "the Group" shall mean the Company and the Subsidiaries; 6 "Associated Company" shall have the meaning attributed to it in section 302 of the Income and Corporation Taxes Act 1970; "the Committee" shall mean the committee designated to administer this Stock Incentive Plan; "Full Time Employee" shall mean any director or employee of the Group who is required to devote to his duties not less than 25 hours (or in the case of an employee who is not a director of any company in the Group, 20 hours) per week (excluding meal breaks) and is not precluded by paragraph 4(1)(b) of Schedule 10 from participating in the Sub-Plan; "Relevant Emoluments" shall have the meaning which the term bears in sub- paragraph (2) of paragraph 5 of Schedule 10 by virtue of sub-paragraph 5 of that paragraph; "Year of Assessment" shall mean a year beginning on any 6 April and ending on the following 5 April; "Market Value" shall mean on any day the average of high and low transaction prices in trading in the common stock of the Company as reported on the New York Stock Exchange - Composite Transaction compiled by Associated Press or if no trading occurred on such date then on the next preceding date on which such trading occurred; "Schedule 10" shall mean Schedule 10 of the United Kingdom Finance Act of 1984. "Share" or "Shares" shall mean a share or shares of common stock of par value $1.25 which satisfy the conditions specified in Paragraphs 7 to 11 inclusive of Schedule 10. (c) Sub-Plan. The Committee, with the approval of the Board of Directors of the Company, may grant stock options to officers and other key management personnel eligible to participate in the Sub-Plan on the terms and subject to the conditions stated in this Sub-Plan. 7 (d) Eligibility. Full time employees who are officers or key management personnel employed by the Group in the United Kingdom under selection guidelines to be established by the Committee, shall be eligible, upon selection by the Committee, to receive stock options. (e) Shares to be Issued. Shares to be issued shall be authorized and unissued shares of common stock, treasury stock or a combination thereof. The issue of shares of common stock, par value $1.25 per share shall be subject to the maximum specified in this Stock Incentive Plan. (f) Administration. The Sub-Plan shall be administered by the Committee in accordance with the provisions set out in this Stock Incentive Plan. (g) Effective Date and Term of the Sub-Plan. The Sub-Plan shall be submitted to the stockholders of the Company for approval at the 1986 annual meeting scheduled to be held on March 27, 1986, and if approved shall become effective on that date. The Sub-Plan shall terminate five years after it becomes effective unless terminated prior thereto by action of the Board of Directors. No further grants shall be made under the Sub-Plan after termination but termination shall not affect the right of any participation under the grants made prior to termination. (h) Amendments. The Sub-Plan may be amended or terminated by the Board of Directors subject to the conditions specified in this Stock Incentive Plan. No amendment may be made which will put the Sub-Plan in breach of conditions for approval set out in Schedule 10 and no amendment to the Sub-Plan or any provision in this Stock Incentive Plan which applies to options granted under the Sub-Plan shall be made without prior approval of the Board of UK Inland Revenue. 2. STOCK OPTIONS (a) Grants. Options to purchase shares of common stock of the Company may be granted to such eligible officers and eligible key management personnel as may be selected by the Committee and approved by the Board of Directors. (b) Variations in Options. Variations may not be made to options granted under the Sub-Plan pursuant to Article I clause 5 of this Stock Incentive Plan without prior consent of the Board of UK Inland Revenue. (c) Terms of Options. No options shall be exercisable less than one nor more than ten years after the date of the grant. The per share option price shall be stated at the time the option is granted and shall be not less than 100% of the Market Value of the share on the date on which the optionee is offered options under the Sub-Plan. Upon exercise, the option price shall be paid in cash. Options shall not be transferable except that such options may be exercised by the personal representative of a deceased optionee within ninety days of the death of the optionee. Options may be exercised during the individual's continued employment with the Group and for a period not in excess of ninety days following termination of employment. No option may be exercised by 8 an individual at any time when he is precluded by Paragraph 4(1)(b) of Schedule 10 from participating in the Sub-Plan. (d) Exercise of Option. An option may be exercised by delivery of written notice to the Company specifying the number of shares to be purchased and accompanied by payment in full of the option price for the number of shares so purchased. The Company shall within 30 days post to the optionee certificates representing the number of shares specified, and shall pay all original issue or transfer taxes and all other fees and expenses incidental to such delivery. (e) Limits on Options. No person shall be granted options under this Sub- Plan which would, at the time that they are obtained, cause the aggregate Market Value of the shares which he may acquire in pursuant of rights obtained under the Sub-Plan or under any other scheme established by the Group or by any Associated Company of the Company and approved by the Revenue under Schedule 10 (and not exercised) to exceed or further exceed the greater of: (1) 100,000 British Pounds Sterling or (2) Four times the Relevant Emoluments of the optionee for the current or preceding Year of Assessment (whichever of those years gives the greater amount) or if there were no Relevant Emoluments for the preceding Year of Assessment four times the amount of the Relevant Emoluments for the period of twelve months beginning with the first day during the current Year of Assessment in respect of which there are Relevant Emoluments. For the purposes of this clause the Market Value of the shares shall be converted from US Dollars to sterling at the middle rate for the buying and selling of that amount of sterling for US Dollars as quoted by the Barclays Bank PLC at the opening of business on the day on which the optionee is offered options under the Sub-Plan. V. STOCK APPRECIATION RIGHTS 1. Grants. Rights entitling the grantee to receive cash or shares of common stock having a fair market value equal to the appreciation in market value of a stated number of shares of common stock of the Company from the date of grant, or in the case of rights granted in tandem with or by reference to a stock option granted prior to the grant of such rights, from the date of grant of the related stock option to the date of exercise may be granted to such eligible officers and other key management personnel as may be selected by the Committee and approved by the Board of Directors. 9 2. Terms of Grant. Such rights may be granted in tandem with or with reference to a related stock option, in which event the grantee may elect to exercise either the option or the right, but not both, as to the same share of common stock subject to the option and the right, or the right may be granted independently of a related stock option. In either event, the right shall be exercisable not more than ten years after the date of grant. Stock appreciation rights shall not be transferable, except that in the event of the death of a grantee during employment or within a period not in excess of five years after termination of employment by reason of retirement or total and permanent disability or within ninety days after termination of employment for any other reason, outstanding rights may be exercised by the executor, administrator or personal representative of such deceased grantee within ninety days of the death of such grantee. Stock appreciation rights may be exercised during the individual's continued employment with the Company and for a period not in excess of ninety days following termination of employment and only within the original term of that grant; provided, however, that if employment of the grantee by the Company and its subsidiaries shall have terminated by reason of retirement or total and permanent disability, then the grant may be exercised for a period not in excess of five years following termination of employment but not after the expiration of the term of the grant. 3. Payment on Exercise. Upon exercise of a right, the grantee shall be paid the excess of the then fair market value of the number of shares to which the right relates over the fair market value of such number of shares at the date of grant of the right or of the related stock option, as the case may be. Such excess shall be paid in cash or in shares of common stock having a fair market value equal to such excess or in such combination thereof as the Committee shall determine. 10 EX-10.I 7 1991 STOCK INCENTIVE PLAN Exhibit 10(i) R.R. DONNELLEY & SONS COMPANY 1991 STOCK INCENTIVE PLAN (as amended on September 1, 1992 and January 25, 1996) I. GENERAL 1. Plan. To provide incentives to management through rewards based upon the ownership or performance of the common stock of R.R. Donnelley & Sons Company (the "Company"), the Committee hereinafter designated, may grant cash or stock bonus awards, stock options, stock appreciation rights, or combinations thereof, to eligible officers and other key management employees, on the terms and subject to the conditions stated in this Plan. In addition, to provide incentives to members of the Board of Directors ("Board") who are not employees of the Company ("non-employee directors"), such non-employee directors are hereby granted options on the terms and subject to the conditions set forth in this Plan. 2. Eligibility. Officers and other key management employees of the Company, its subsidiaries, and any other entity designated by the Board or the Committee in which the Company has a direct or indirect equity interest, shall be eligible, upon selection by the Committee, to receive cash or bonus awards, stock options or stock appreciation rights, either singly or in combination, as the Committee, in its discretion, shall determine. Non-employee directors shall receive stock options on the terms and subject to the conditions stated in the Plan. For purposes of the Plan, references to employment by the Company also mean employment by a majority-owned subsidiary of the Company and employment by any other entity designated by the Board or the Committee in which the Company has a direct or indirect equity interest. 3. Limitation on Shares to be Issued. The maximum number of shares of common stock, par value $1.25 per share, to be issued pursuant to all grants made under the Plan shall be 3,600,000. Shares awarded pursuant to grants (other than shares of restricted common stock) which, by reason of the expiration, cancellation or other termination of the grants prior to issuance, are not issued, shall again be available for future grants. Shares of common stock to be issued may be authorized and unissued shares of common stock, treasury stock or a combination thereof. 4. Administration of the Plan. The Plan shall be administered by a Committee consisting of two or more members of the Board of Directors designated by the Board of Directors (the "Committee"). No member of the Committee, during the one year prior to service on the Committee or during such service, shall have been or be granted or awarded shares of common stock, options to purchase shares of common stock, or other equity securities of the Company pursuant to the Plan or any other plan of the Company or any affiliate of the Company, except as provided in Article III, Section 1(b) and except for a grant or award which would not result in such member ceasing to be a "disinterested person" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Committee shall, subject to the terms of the Plan, establish selection guidelines; select eligible officers and key management employees for participation; determine the form of grant, either as a bonus award, or as stock option or stock appreciation rights or combination thereof; and determine the form of stock option, the number of shares subject to the grant, the fair market value of the common stock when necessary, the time and conditions of vesting or exercise, and all other terms and conditions of the grant. The Committee may establish rules and regulations for the administration of the Plan, interpret the Plan, and impose, incidental to a grant, conditions with respect to competitive employment or other activities not inconsistent with or conflicting with the Plan. All such rules, regulations, and interpretations relating to the Plan adopted by the Committee shall be conclusive and binding on all parties. All grants and awards under this Plan shall be evidenced by written instruments delivered by the Company to the participants, and no such grant or award shall be valid until so evidenced. Notwithstanding the foregoing, neither the Board nor the Committee shall have any discretion to alter the number of shares granted to non-employee directors pursuant to Article III, Section 1(b) or the terms or conditions under which such shares are granted. 5. Adjustments for Changes in Capitalization. Appropriate adjustments shall be made by the Committee in the class and maximum number of shares to be issued under the Plan, the class and maximum number of shares to be issued pursuant to bonus awards, and the class and number of shares the subject of any grant and the option price therefor, if applicable, to give effect to any stock splits, stock dividends and other relevant changes in capitalization occurring after the effective date of the Plan. 6. Effective Date and Term of Plan. The Plan shall be submitted to the stockholders of the Company for approval at the 1991 annual meeting scheduled to be held on March 28, 1991, and if approved shall become effective on that date. The Plan shall terminate five years after it becomes effective unless terminated prior thereto by action of the Board. No further grants shall be made under the Plan after termination, but termination shall not affect the rights of any participant under any grants made prior to termination. 7. Amendments. The Plan may be amended or terminated by the Board in any respect, except that (i) no amendment may be made without stockholder approval if such amendment would increase the maximum number of shares available for issuance under the Plan or otherwise require stockholder approval, (ii) Article III, Section 1(b) shall not be amended more than once every six months, other than amendments to comport with changes in the Internal Revenue Code of 1986, as amended, the Employee Retirement Income Security Act of 1974, as amended, or the rules and regulations thereunder, and (iii) notwithstanding the foregoing clause (ii), no amendment may be made without stockholder approval if such amendment would change the number of shares to be granted, pursuant to stock options, to non- employee directors. 8. Prior Plans. Upon the effectiveness of this Plan, no further grants shall be made under the Company's 1981 Stock Incentive Plan, as amended, and the 1986 Stock Incentive Plan, as amended, except that stock appreciation rights may be granted with respect to options previously granted and outstanding under such Plans. Bonuses awarded under the 1986 Stock Incentive Plan, as amended, and options granted under the 1981 Stock Incentive Plan, as amended, and the 1986 Stock Incentive Plan, as amended, prior to the effectiveness of this Plan shall continue in effect in accordance with their terms. II. BONUS AWARDS 1. Form of Award. Bonus awards, whether Performance Awards or Fixed Awards, may be made to eligible officers and other key management employees in the form of (i) cash, whether in an absolute amount or as a percentage of compensation, (ii) stock units, each of which is substantially the equivalent of a share of common stock but for the power to vote and the entitlement to current dividends, (iii) in the form of shares of common stock issued to the employee but forfeitable and with restrictions on transfer in any form as hereinafter provided or (iv) any combination of the foregoing. 2. Performance Awards. Awards may be made in terms of a stated potential maximum dollar amount, percentage of compensation or number of units or shares, with the actual such amount, percentage or number to be determined by reference to the level of achievement of corporate, group, division, individual or other specific objectives over a performance period of not less than one nor more than ten years, as determined by the Committee. No rights or interests of any kind shall be vested in an individual receiving a Performance Award until the conclusion of the performance period and the determination of the level of achievement specified in the award, and the time of vesting, if any, thereafter shall be as specified in the award. 3. Fixed Awards. Awards may be made which are not contingent on the performance of objectives, but are contingent on the participant's continuing in the Company's employ for a period to be specified in the award, which period shall be not less than one nor more than ten years from the date of award. 4. Rights with Respect to the Restricted Shares. If shares of restricted common stock are issued pursuant to an award, the participant shall have the right to vote the shares and to receive dividends thereon from the date of issuance, unless and until forfeited. 5. Rights with Respect to Stock Units. If stock units are credited to a participant pursuant to an award, amounts equal to dividends otherwise payable on a like number of shares of common stock after the crediting of the units shall be credited to an account for the participant and held until the award is forfeited or paid out. Interest shall be credited on the account annually at a rate equal to the return on five year U.S. Treasury obligations. 6. Vesting and Resultant Events. The Committee may, in its discretion, provide for early vesting of an award in the event of the participant's death, permanent and total disability or retirement. At the time of vesting, (i) the award, if in units, shall be paid to the participant either in shares of common stock equal to the number of units, in cash equal to the fair market value of such shares, or in such combination thereof as the Committee shall determine, and the participant's account to which dividends and interest have been credited shall be paid in cash, (ii) the award, if a cash bonus award, shall be paid to the participant either in cash, or in shares of common stock with a then fair market value equal to the amount of such award, or in such combination thereof as the Committee shall determine and (iii) shares of restricted common stock issued pursuant to an award shall be released from the restrictions. A Bonus Award is not transferable other than by will or the laws of descent and distribution. 7. Withholding Tax. A Performance Award or a Fixed Award may provide that the participant may elect to deliver to the Company (or authorize the Company to retain from any shares of common stock of the Company to be delivered in payment thereof) whole shares of common stock of the Company to satisfy the Company's obligation, if any, to withhold federal, state, local or other taxes required to be withheld in respect of such award; provided, however, that in the case of a participant who is an officer or director of the Company (within the meaning of Section 16 of the Exchange Act), such election and the execution thereof shall be in compliance with Rule 16b-3 under the Exchange Act. 8. Acceleration Upon Change in Control. If while any Performance Award or Fixed Award remains outstanding under this Plan-- (a) any "person," as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act"), as modified and used in Section 13(d) and 14(d) thereof (but not including (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company) (hereinafter a "Person") is or becomes the beneficial owner, as defined in Rule 13d-3 of the Exchange Act, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 50% or more of the combined voting power of the Company's then outstanding securities; or (b) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into any agreement with the Company to effect a transaction described in Clause (a), (c) or (d) of this Section) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (c) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (d) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets, (any of such events being hereinafter referred to as a "Change in Control"), then from and after the date on which public announcement of the acquisition of such percentage shall have been made, or the date on which the change in the composition of the Board set forth above shall have occurred, or the date of any such stockholder approval of a merger, consolidation, plan of complete liquidation or an agreement for the sale of the Company's assets as described above occurs (the applicable date being hereinafter referred to as the "Acceleration Date"), (i) with respect to such Performance Awards, the highest level of achievement specified in the award shall be deemed met and the award shall be immediately and fully vested, and (ii) with respect to such Fixed Awards, the period of continued employment specified in the award upon which the award is contingent shall be deemed completed and the award shall be immediately and fully vested. III. STOCK OPTIONS 1. Grants. (a) Options for Officers and Key Management Employees. Options to purchase shares of common stock of the Company may be granted to such eligible officers and key management employees as may be selected by the Committee. These options may, but need not, constitute "incentive stock options" under Section 422A of the Internal Revenue Code of 1986, as amended, or any other form of option under the Code as hereafter amended. (b) Options for Non-Employee Directors. An option to purchase 2,000 shares of common stock of the Company shall be granted on March 28, 1991 and, thereafter, annually on the date of the Company's annual meeting of stockholders to each individual who immediately following such meeting on such date is a non- employee director. 2. Terms of Options. No option shall be exercisable earlier than one, nor more than ten years after, the date of grant. The per share option price shall be not less than 100% of the fair market value of a share of common stock of the Company at the time the option is granted; provided that options granted to non- employee directors shall be 100% of the fair market value of a share of common stock of the Company at the time the option is granted. Upon exercise, the option price may be paid in cash, in shares of common stock of the Company having a fair market value equal to the option price, or in a combination thereof. Options may be exercised during the individual's continued employment with the Company or service on the Board, as the case may be, and for a period not in excess of ninety days following termination of employment or service on the Board and only within the original term of that option; provided, however, that if employment of the optionee by the Company and its subsidiaries or service on the Board, as the case may be, shall have terminated by reason of retirement or total and permanent disability, then the option may be exercised for a period not in excess of five years following termination of employment or service on the Board, but not after the expiration of the term of the option. Options shall not be transferable, except that in the event of the death of an optionee (i) during employment or service on the Board, as the case may be, (ii) within a period not in excess of five years after termination of employment or service on the Board, as the case may be, by reason of retirement or total and permanent disability or (iii) within ninety days after termination of employment or service on the Board, as the case may be, for any other reason, outstanding options may be exercised by the executor, administrator or personal representative of such deceased optionee within ninety days of the death of such optionee. 3. Withholding Tax. An option may provide that the optionee may elect to deliver to the Company (or authorize the Company to retain from any shares of common stock of the Company to be delivered in payment thereof) whole shares of common stock of the Company to satisfy the Company's obligation, if any, to withhold federal, state, local or other taxes required to be withheld in respect of such award; provided, however, that in the case of an optionee who is an officer or director of the Company (within the meaning of Section 16 of the Exchange Act), such election and the execution thereof shall be in compliance with Rule 16b-3 under the Exchange Act. 4. Acceleration of Stock Options Upon a Change in Control. If while any stock option granted pursuant to this Article III of the Plan remains unexercised and outstanding, a Change in Control (as defined in Article II, Section 8, above) occurs, then from and after the Acceleration Date (as defined in Article II, Section 8, above) all such outstanding and unexercised options, whether or not then vested, shall be fully and immediately exercisable. IV. UK STOCK OPTION SUB-PLAN 1. GENERAL (a) Sub-Plan. The UK Stock Option Sub-Plan ("the Sub-Plan") has been established in order to vary the terms on which options may be given to officers and other key management employees who are employed in the United Kingdom by the Company or any of its subsidiaries. Stock options granted under the Sub-Plan shall be deemed granted under this Stock Incentive Plan and shall comply in all respects with the terms and conditions applicable to options granted under Article III of this Stock Incentive Plan. (b) Definitions. In the Sub-Plan the following terms shall have the following meanings: "the Subsidiaries" shall mean all companies which are controlled by the Company (as defined in Section 840 of the Income and Corporation Taxes Act 1988) and which are affiliates controlled by the Company directly or indirectly through one or more intermediaries for the purposes of rule 12b-2 of the U.S. Securities Exchange Act of 1934; "the Group" shall mean the Company and the Subsidiaries; "Associated Company" shall have the meaning attributed to it in Section 416(1) of the Income and Corporation Taxes Act 1988; "the Committee" shall mean the committee designated to administer this Stock Incentive Plan; "Full Time Employee" shall mean any director or employee who is employed by the Group in the United Kingdom and who is required to devote to his duties not less than 25 hours (or in the case of an employee who is not a director of any company in the Group, 20 hours) per week (excluding meal breaks) and is not precluded by paragraph 8 of Schedule 9 from participating in the Sub-Plan; "Relevant Emoluments" shall have the meaning which the term bears in sub- paragraph (2) of paragraph 28 of Schedule 9 by virtue of sub-paragraph (4) of that paragraph; "Year of Assessment" shall mean a year beginning on any 6 April and ending on the following 5 April; "Market Value" shall mean on any day the average of high and low transaction prices in trading in the common stock of the Company as reported on the New York Stock Exchange--Composite Transaction compiled by Associated Press or if no trading occurred on such date then on the next preceding date on which such trading occurred; "Schedule 9" shall mean Schedule 9 of the United Kingdom Income and Corporation Taxes Act 1988. "Share" or "Shares" shall mean a share or shares of common stock of par value $1.25 which satisfy the conditions specified in Paragraphs 10 to 14 inclusive of Schedule 9. (c) Sub-Plan. The Committee may grant stock options to officers and other key management employees eligible to participate in the Sub-Plan on the terms and subject to the conditions stated in this Sub-Plan. (d) Eligibility. Full Time Employees who are officers or other key management employees employed by the Group in the United Kingdom under selection guidelines to be established by the Committee, shall be eligible, upon selection by the Committee, to receive stock options. (e) Shares to be Issued. Shares to be issued shall be authorized and unissued shares of common stock, treasury stock or a combination thereof. The issue of shares of common stock, par value $1.25 per share, shall be subject to the maximum specified in this Stock Incentive Plan. (f) Administration. The Sub-Plan shall be administered by the Committee in accordance with the provisions set out in this Stock Incentive Plan and varied by the terms of this Sub-Plan. (g) Effective Date and Term of the Sub-Plan. The Sub-Plan shall be submitted to the stockholders of the Company for approval at the 1991 annual meeting scheduled to be held on March 28, 1991, and if approved shall become effective on that date. The Sub-Plan shall terminate five years after it becomes effective unless terminated prior thereto by action of the Board. No further grants shall be made under the Sub-Plan after termination but termination shall not affect the right of any participation under the grants made prior to termination. (h) Amendments. The Sub-Plan may be amended or terminated by the Board subject to the conditions specified in this Stock Incentive Plan. No amendment may be made which will put the Sub-Plan in breach of conditions for approval set out in Schedule 9 and no amendment to the Sub-Plan or any provision in this Stock Incentive Plan which applies to options granted under the Sub-Plan shall be made without prior approval of the Board of UK Inland Revenue. 2. STOCK OPTIONS (a) Grants. Options to purchase shares of common stock of the Company may be granted to such eligible Full-Time Employees as may be selected by the Committee. (b) Variations in Options. Variations may not be made to options granted under the Sub-Plan pursuant to Article I clause 5 of this Stock Incentive Plan without prior consent of the Board of UK Inland Revenue. (c) Terms of Options. No options shall be exercisable less than one nor more than ten years after the date of the grant. The per share option price shall be stated at the time the option is granted and shall be not less than 100% of the Market Value of the share on the date on which the optionee is offered options under the Sub-Plan. Upon exercise, the option price shall be paid in cash. Options shall not be transferable except that such options may be exercised by the personal representative of a deceased optionee within ninety days of the death of the optionee. Options may be exercised during the individual's continued employment with the Group and for a period not in excess of ninety days following termination of employment and only within the original term of the option. No option may be exercised by an individual at any time when he is precluded by Paragraph 8 of Schedule 9 from participating in the Sub-Plan. (d) Exercise of Option. An option may be exercised by delivery of written notice to the Company specifying the number of shares to be purchased and accompanied by payment in full of the option price for the number of shares so purchased. The Company shall within thirty days post to the optionee certificates representing the number of shares specified, and shall pay all original issue or transfer taxes and all other fees and expenses incidental to such delivery. (e) Limits on Options. No person shall be granted options under this Sub-Plan which would, at the time that they are obtained, cause the aggregate Market Value of the shares which he may acquire in pursuance of rights obtained under the Sub-Plan or under any other scheme established by the Group or by any Associated Company of the Company and approved by the Board of U.K. Inland Revenue under Schedule 9 (and not exercised) to exceed or further exceed the greater of: (1) 100,000 British Pounds Sterling or (2) Four times the Relevant Emoluments of the optionee for the current or preceding Year of Assessment (whichever of those years gives the greater amount) or if there were no Relevant Emoluments for the preceding Year of Assessment four times the amount of the Relevant Emoluments for the period of twelve months beginning with the first day during the current Year of Assessment in respect of which there are Relevant Emoluments. For the purposes of this clause the Market Value of the shares shall be converted from US Dollars to sterling at the middle rate for the buying and selling of that amount of sterling for US Dollars as quoted by the Barclays Bank PLC at the opening of business on the day on which the optionee is offered options under the Sub-Plan. (f) Withholding Tax. Article III Clause 3 of this Stock Incentive Plan shall not apply to the Sub-Plan. V. STOCK APPRECIATION RIGHTS 1. Grants. Rights entitling the grantee to receive cash or shares of common stock having a fair market value equal to the appreciation in market value of a stated number of shares of common stock of the Company from the date of grant, or in the case of rights granted in tandem with or by reference to a stock option granted prior to the grant of such rights, from the date of grant of the related stock option to the date of exercise may be granted to such eligible officers and other key management employees as may be selected by the Committee. 2. Terms of Grant. Such rights may be granted in tandem with or with reference to a related stock option, in which event the grantee may elect to exercise either the option or the right, but not both, as to the same share of common stock subject to the option and the right, or the right may be granted independently of a related stock option. In either event, the right shall be exercisable not more than ten years after the date of grant. In the case of a participant who is an officer or director of the Company (within the meaning of Section 16 of the Exchange Act), the election to exercise a stock appreciation right, and the exercise of such stock appreciation right, shall be in compliance with Rule 16b-3 under the Exchange Act. Stock appreciation rights shall not be transferable, except that in the event of the death of a grantee during employment or within a period not in excess of five years after termination of employment by reason of retirement or total and permanent disability or within ninety days after termination of employment for any other reason, outstanding rights may be exercised by the executor, administrator or personal representative of such deceased grantee within ninety days of the death of such grantee. Stock appreciation rights may be exercised during the individual's continued employment with the Company and for a period not in excess of ninety days following termination of employment and only within the original term of that grant; provided, however, that if employment of the grantee by the Company and its subsidiaries shall have terminated by reason of retirement or total and permanent disability, then the grant may be exercised for a period not in excess of five years following termination of employment but not after the expiration of the term of the grant. 3. Payment on Exercise. Upon exercise of a right, the grantee shall be paid the excess of the then fair market value of the number of shares to which the right relates over the fair market value of such number of shares at the date of grant of the right or of the related stock option, as the case may be. Such excess shall be paid in cash or in shares of common stock having a fair market value equal to such excess or in such combination thereof as the Committee shall determine. 4. Withholding Tax. A stock appreciation right may provide that the holder thereof may elect to deliver to the Company (or authorize the Company to retain from any shares of common stock of the Company to be delivered in payment thereof) whole shares of common stock of the Company to satisfy the Company's obligation, if any, to withhold federal, state, local or other taxes required to be withheld in respect of such award; provided, however, that in the case of a holder who is an officer or director of the Company (within the meaning of Section 16 of the Exchange Act), such election and the execution thereof shall be in compliance with Rule 16b-3 under the Exchange Act. 5. Acceleration Upon on Change in Control. If while any stock appreciation right granted pursuant to this Article V of the Plan remains unexercised and outstanding, a Change in Control (as defined in Article II, Section 8, above) occurs, then from and after the Acceleration Date (as defined in Article II, Section 8, above) all such outstanding and unexercised stock appreciation rights, whether or not then vested, shall be fully and immediately exercisable. EX-10.J 8 1995 STOCK INCENTIVE PLAN Exhibit 10(j) R.R. DONNELLEY & SONS COMPANY 1995 STOCK INCENTIVE PLAN (AS AMENDED ON JANUARY 25, 1996) I. GENERAL 1. Plan. To provide incentives to management through rewards based upon the ownership or performance of the common stock of R.R. Donnelley & Sons Company (the "Company"), the Committee hereinafter designated, may grant cash or bonus awards, stock options, stock appreciation rights ("SARs"), or combinations thereof, to eligible officers and other key management employees, on the terms and subject to the conditions stated in the Plan. In addition, to provide incentives to members of the Board of Directors ("Board") who are not employees of the Company ("non-employee directors"), such non-employee directors are hereby granted options on the terms and subject to the conditions set forth in the Plan. For purposes of the Plan, references to employment by the Company also mean employment by a majority-owned subsidiary of the Company and employment by any other entity designated by the Board or the Committee in which the Company has a direct or indirect equity interest. 2. Eligibility. Officers and other key management employees of the Company, its subsidiaries, and any other entity designated by the Board or the Committee in which the Company has a direct or indirect equity interest, shall be eligible, upon selection by the Committee, to receive cash or bonus awards, stock options or SARs, either singly or in combination, as the Committee, in its discretion, shall determine. Non-employee directors shall receive stock options on the terms and subject to the conditions stated in the Plan. 3. Limitation on Shares to be Issued. Subject to adjustment as provided in Section 5 of this Article I, 7,500,000 shares of common stock, par value $1.25 per share ("common stock"), shall be available under the Plan, reduced by the aggregate number of shares of common stock which become subject to outstanding bonus awards, stock options and SARs which are not granted in tandem with or by reference to a stock option ("free-standing SARs"). Shares subject to a grant or award which for any reason are not issued or delivered, including by reason of the expiration, termination, cancellation or forfeiture of all or a portion of the grant or award or by reason of the delivery or withholding of shares to pay all or a portion of the exercise price or to satisfy tax withholding obligations, shall again be available for future grants and awards; provided, however, that for purposes of this sentence, stock options and SARs granted in tandem with or by reference to a stock option granted prior to the grant of such SARs ("tandem SARs") shall be treated as one grant. For the purpose of complying with Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), and the rules and regulations thereunder, the maximum number of shares of common stock with respect to which options or SARs or a combination thereof may be granted during any three-year period to any person shall be 1,000,000, subject to adjustment as provided in Section 5 of this Article I. The maximum number of shares of common stock with respect to which fixed awards in the form of restricted stock may be granted hereunder is 500,000 in the aggregate, subject to adjustment as provided in Section 5 of this Article I. Shares of common stock to be issued may be authorized and unissued shares of common stock, treasury stock or a combination thereof. 4. Administration of the Plan. The Plan shall be administered by a Committee designated by the Board of Directors (the "Committee"). Each member of the Committee shall be (i) an "outside director" within the meaning of Section 162(m) of the Code, subject to any transitional rules applicable to the definition of outside director, and (ii) a "disinterested person" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Committee shall, subject to the terms of the Plan, select eligible officers and key management employees for participation; determine the form of each grant and award, either as cash, a bonus award, stock options or SARs or a combination thereof; and determine the number of shares or units subject to the grant or award, the fair market value of the common stock or units when necessary, the time and conditions of vesting, exercise or settlement, and all other terms and conditions of each grant and award, including, without limitation, the form of instrument evidencing the grant or award. The Committee may establish rules and regulations for the administration of the Plan, interpret the Plan, and impose, incidental to a grant or award, conditions with respect to competitive employment or other activities not inconsistent with the Plan. All such rules, regulations, interpretations and conditions shall be conclusive and binding on all parties. Each grant and award shall be evidenced by a written instrument and no grant or award shall be valid until an agreement is executed by the Company and the recipient thereof and, upon execution by each party and delivery of the agreement to the Company, such grant or award shall be effective as of the effective date set forth in the agreement. The Committee may delegate some or all of its power and authority hereunder to the Chief Executive Officer or other executive officer of the Company as the Committee deems 8appropriate; provided, however, that the Committee may not delegate its power and authority with regard to (i) the selection for participation in the Plan of (A) an employee who is a "covered employee" within the meaning of Section 162(m) of the Code or who, in the Committee's judgment, is likely to be a covered employee at any time during the period a grant or award hereunder to such employee would be outstanding or (B) an officer or other person subject to Section 16 of the Exchange Act or (ii) decisions concerning the timing, pricing or amount of a grant or award to such an employee, officer or other person. A majority of the Committee shall constitute a quorum. The acts of the Committee shall be either (i) acts of a majority of the members of the Committee present at any meeting at which a quorum is present or (ii) acts approved in writing by a majority of the members of the Committee without a meeting. 5. Adjustments. In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of common stock other than a regular cash dividend, the number and class of securities available under the Plan, the number and -2- class of securities subject to each outstanding bonus award, the number and class of securities subject to each outstanding stock option and the purchase price per security, the number of securities subject to each stock option to be granted to non-employee directors pursuant to Article III and the terms of each outstanding SAR shall be appropriately adjusted by the Committee, such adjustments to be made in the case of outstanding stock options and SARs without a change in the aggregate purchase price or base price. If any such adjustment would result in a fractional security being (i) available under the Plan, such fractional security shall be disregarded, or (ii) subject to an outstanding grant or award under the Plan, the Company shall pay the holder thereof, in connection with the first vesting, exercise or settlement of such grant or award, in whole or in part, occurring after such adjustment, an amount in cash determined by multiplying (i) the fraction of such security (rounded to the nearest hundredth) by (ii) the excess, if any, of (A) the fair market value on the vesting, exercise or settlement date over (B) the exercise or base price, if any, of such grant or award. 6. Effective Date and Term of Plan. The Plan shall be submitted to the stockholders of the Company for approval at the 1995 annual meeting of stockholders and, if approved, shall become effective on January 1, 1995. The Plan shall terminate on December 31, 1999 unless terminated prior thereto by action of the Board. No further grants or awards shall be made under the Plan after termination, but termination shall not affect the rights of any participant under any grants or awards made prior to termination. 7. Amendments. The Plan may be amended or terminated by the Board in any respect except that no amendment may be made without stockholder approval if stockholder approval is required by applicable law, rule or regulation, including Rule 16b-3 under the Exchange Act and Section 162(m) of the Code, or such amendment would increase (subject to Section 5 of this Article I) the maximum number of shares available under the Plan; provided, however, that subject to Section 5 of this Article I, the number of shares subject to stock options granted to non-employee directors, the purchase price therefor, the date of grant of any such option, the termination provisions relating to such options and the category of persons eligible to be granted such options shall not be amended more than once every six months, other than to comply with changes in the Code or the Employee Retirement Income Security Act of 1974, as amended, or the rules and regulations thereunder. No amendment may impair the rights of a holder of an outstanding grant or award without the consent of such holder. 8. Prior Plans. Upon approval of the Plan by the stockholders of the Company, no further grants or awards shall be made under the Company's 1981 Stock Incentive Plan, as amended (the "1981 Plan"), the 1986 Stock Incentive Plan, as amended (the "1986 Plan"), or the 1991 Stock Incentive Plan, as amended (the "1991 Plan"), except that SARs may be granted with respect to options previously granted and outstanding under such Plans. Grants and awards made under the 1981 Plan, the 1986 Plan and the 1991 Plan prior to approval of the Plan by the stockholders of the Company shall continue in effect in accordance with their terms. -3- II. BONUS AWARDS 1. Form of Award. Bonus awards, whether performance awards or fixed awards, may be made to eligible officers and other key management employees in the form of (i) cash, whether in an absolute amount or as a percentage of compensation, (ii) stock units, each of which is substantially the equivalent of a share of common stock but for the power to vote and, subject to the Committee's discretion, the entitlement to an amount equal to dividends or other distributions otherwise payable on a like number of shares of common stock, (iii) shares of common stock issued to the employee but forfeitable and with restrictions on transfer in any form as hereinafter provided or (iv) any combination of the foregoing. 2. Performance Awards. Awards may be made in terms of a stated potential maximum dollar amount, percentage of compensation or number of units or shares, with the actual such amount, percentage or number to be determined by reference to the level of achievement of corporate, sector, business unit, division, individual or other specific objectives over a performance period of not less than one nor more than ten years, as determined by the Committee. No rights or interests of any kind shall be vested in an individual receiving a performance award until the conclusion of the performance period and the determination of the level of achievement specified in the award, and the time of vesting, if any, thereafter shall be as specified in the award. 3. Fixed Awards. Awards may be made which are not contingent on the achievement of specific objectives, but are contingent on the participant's continuing in the Company's employ for a period specified in the award. 4. Rights with Respect to Restricted Shares. If shares of restricted common stock are subject to an award, the participant shall have the right, unless and until such award is forfeited or unless otherwise determined by the Committee at the time of grant, to vote the shares and to receive dividends thereon from the date of grant and the right to participate in any capital adjustment applicable to all holders of common stock; provided, however, that a distribution with respect to shares of common stock, other than a regular quarterly cash dividend, shall be deposited with the Company and shall be subject to the same restrictions as the shares of common stock with respect to which such distribution was made. During the restriction period, a certificate or certificates representing restricted shares shall be registered in the holder's name and may bear a legend, in addition to any legend which may be required under applicable laws, rules or regulations, indicating that the ownership of the shares of common stock represented by such certificate is subject to the restrictions, terms and conditions of the Plan and the agreement relating to the restricted shares. All such certificates shall be deposited with the Company, together with stock powers or other instruments of assignment (including a power of attorney), each endorsed in blank with a guarantee of signature if deemed necessary or appropriate, which would permit transfer to the Company of all or a portion of the shares of common stock subject to the award in the event such award is forfeited in whole or in part. Upon termination of any applicable restriction period, including, if applicable, the satisfaction or achievement of applicable objectives, and subject to the Company's right to -4- require payment of any taxes, a certificate or certificates evidencing ownership of the requisite number of shares of common stock shall be delivered to the holder of such award. 5. Rights with Respect to Stock Units. If stock units are credited to a participant pursuant to an award, then, subject to the Committee's discretion, amounts equal to dividends and other distributions otherwise payable on a like number of shares of common stock after the crediting of the units (unless the record date for such dividends or other distributions precedes the date of grant of such award) shall be credited to an account for the participant and held until the award is forfeited or paid out. Interest shall be credited on the account annually at a rate equal to the return on five year U.S. Treasury obligations. 6. Vesting and Resultant Events. The Committee may, in its discretion, provide for early vesting of an award in the event of the participant's death, permanent and total disability or retirement. At the time of vesting, (i) the award, if in units, shall be paid to the participant either in shares of common stock equal to the number of units, in cash equal to the fair market value of such shares, or in such combination thereof as the Committee shall determine, and the participant's account to which dividend equivalents, other distributions and interest have been credited shall be paid in cash, (ii) the award, if a cash bonus award, shall be paid to the participant either in cash, or in shares of common stock with a then fair market value equal to the amount of such award, or in such combination thereof as the Committee shall determine and (iii) shares of restricted common stock issued pursuant to an award shall be released from the restrictions. III. STOCK OPTIONS 1. Grants. (a) Options for Officers and Key Management Employees. Options to purchase shares of common stock of the Company may be granted to such eligible officers and key management employees as may be selected by the Committee. These options may, but need not, constitute "incentive stock options" under Section 422 of the Code or any other form of option under the Code. To the extent that the aggregate fair market value (determined as of the date of grant) of shares of common stock with respect to which options designated as incentive stock options are exercisable for the first time by a participant during any calendar year (under the Plan or any other plan of the Company, or any parent or subsidiary) exceeds the amount (currently $100,000) established by the Code, such options shall not constitute incentive stock options. (b) Options for Non-Employee Directors. An option to purchase 4,000 shares of common stock of the Company shall be granted on the date of the 1995 annual meeting of stockholders and, thereafter, annually on the date of the Company's annual meeting of stockholders to each individual who immediately following such meeting on such date is a non-employee director. An option granted to a non- employee director pursuant to this Section 1(b) (a "Director Option") shall become exercisable in whole or in part on the earlier to occur of (i) the date which is the first anniversary of the date the Director Option is granted (the date of grant being hereafter referred to as the "Option Date") or (ii) the day immediately preceding the date of the first annual meeting of stockholders of the Company next following the Option Date; provided, however, that the date -5- of such annual meeting is at least three hundred fifty-five (355) days after the Option Date, and Director Options shall not be exercisable more than ten years after the Option Date. 2. Number of Shares and Purchase Price. The number of shares of common stock subject to an option and the purchase price per share of common stock purchasable upon exercise of the option shall be determined by the Committee; provided, however, that the purchase price per share of common stock shall not be less than 100% of the fair market value of a share of common stock on the date of grant of the option; provided further, that if an incentive stock option shall be granted to any person who, on the date of grant of such option, owns capital stock possessing more than ten percent of the total combined voting power of all classes of capital stock of the Company (or of any parent or subsidiary) (a "Ten Percent Holder"), the purchase price per share of common stock shall be the price (currently 110% of fair market value) required by the Code in order to constitute an incentive stock option; and provided further, that the purchase price per share of common stock subject to a Director Option shall be 100% of the fair market value of a share of common stock on the date of grant of such option. 3. Exercise of Options. The period during which options granted hereunder (other than options granted to non-employee directors) may be exercised shall be determined by the Committee; provided, however, that no incentive stock option shall be exercised later than ten years after its date of grant; provided further, that if an incentive stock option shall be granted to a Ten Percent Holder, such option shall not be exercisable more than five years after its date of grant. The Committee may, in its discretion, establish performance measures which shall be satisfied or met as a condition to the grant of an option or to the exercisability of all or a portion of an option. The Committee shall determine whether an option shall become exercisable in cumulative or non- cumulative installments and in part or in full at any time. An exercisable option, or portion thereof, may be exercised only with respect to whole shares of common stock. An option may be exercised (i) by giving written notice to the Company specifying the number of whole shares of common stock to be purchased and accompanied by payment therefor in full (or arrangement made for such payment to the Company's satisfaction) either (A) in cash, (B) in previously owned whole shares of common stock (which the optionee has held for at least six months prior to delivery of such shares or which the optionee purchased on the open market and for which the optionee has good title free and clear of all liens and encumbrances) having a fair market value, determined as of the date of exercise, equal to the aggregate purchase price payable by reason of such exercise, (C) in cash by a broker-dealer acceptable to the Company to whom the optionee has submitted an irrevocable notice of exercise or (D) a combination of (A) and (B), (ii) if applicable, by surrendering to the Company any SARs which are cancelled by reason of the exercise of the option and (iii) by executing such documents as the Company may reasonably request. The Committee shall have sole discretion to disapprove of an election pursuant to any of clauses (B)-(D) and, in the case of an optionee who is subject to Section 16 of the Exchange Act, the Company may require that the method of making such payment be in compliance with Section 16 and the rules and regulations thereunder. Any fraction of a share of common stock which would be required to pay such purchase price shall be disregarded and the remaining amount due shall be paid in cash by the optionee. No certificate representing common stock shall be delivered until the full purchase price therefor has been paid. -6- 4. Termination of Employment or Service. An option may be exercised during the optionee's continued employment with the Company or service on the Board, as the case may be, and, unless otherwise determined by the Committee as set forth in the agreement relating to the option, for a period not in excess of ninety days following termination of employment or service on the Board and only within the original term of the option; provided, however, that if employment of the optionee by the Company or service on the Board, as the case may be, shall have terminated by reason of retirement or total and permanent disability, then the option may be exercised to the extent set forth in the agreement relating to the option for a period not in excess of five years following termination of employment or service on the Board, but not after the expiration of the term of the option. In the event of the death of an optionee (i) during employment or service on the Board, as the case may be, (ii) within a period not in excess of five years after termination of employment or service on the Board, as the case may be, by reason of retirement or total and permanent disability or (iii) within ninety days after termination of employment or service on the Board, as the case may be, for any other reason, outstanding options held by such optionee at the time of death may be exercised to the extent set forth in the agreement relating to the option by the executor, administrator, personal representative, beneficiary or similar persons of such deceased optionee within ninety days of the date of death. IV. UK STOCK OPTION SUB-PLAN 1. GENERAL (a) Sub-Plan. The UK Stock Option Sub-Plan ("the Sub-Plan") has been established in order to vary the terms on which options may be given to officers and other key management employees who are employed in the United Kingdom by the Company or any of its subsidiaries. Stock options granted under the Sub-Plan shall be deemed granted under the Plan and shall, unless otherwise stated or implied in this Article IV, comply in all respects with the terms and conditions applicable to options granted under Article III of the Plan. Articles II and V and Clause 2 of Article VI shall not apply to options granted under the Sub- Plan. (b) Definitions. In the Sub-Plan the following terms shall have the following meanings: "the Subsidiaries" shall mean all companies which are controlled by the Company (as defined in Section 840 of the Income and Corporation Taxes Act 1988) and which are affiliates controlled by the Company directly or indirectly through one or more intermediaries for the purposes of Rule 12b-2 of the Exchange Act; "the Group" shall mean the Company and the Subsidiaries; "Associated Company" shall have the meaning attributed to it in Section 416(1) of the Income and Corporation Taxes Act 1988; "the Committee" shall mean the committee designated to administer the Plan; -7- "Full Time Employee" shall mean any director or employee who is employed by the Group in the United Kingdom and who is required to devote to his duties not less than 25 hours (or in the case of an employee who is not a director of any company in the Group, 20 hours) per week (excluding meal breaks) and is not precluded by paragraph 8 of Schedule 9 from participating in the Sub-Plan; "Relevant Emoluments" shall have the meaning which the term bears in sub- paragraph (2) of paragraph 28 of Schedule 9 by virtue of sub-paragraph (4) of that paragraph; "Year of Assessment" shall mean a year beginning on any 6 April and ending on the following 5 April; "Market Value" shall mean on any day the average of high and low transaction prices in trading in the common stock of the Company as reported on the New York Stock Exchange--Composite Transactions compiled by Associated Press or if no trading occurred on such date then on the next preceding date on which such trading occurred; "Schedule 9" shall mean Schedule 9 of the United Kingdom Income and Corporation Taxes Act 1988; "Share" or "Shares" shall mean a share or shares of common stock of par value $1.25 which satisfy the conditions specified in Paragraphs 10 to 14 inclusive of Schedule 9. (c) Sub-Plan. The Committee may grant stock options to officers and other key management employees eligible to participate in the Sub-Plan on the terms and subject to the conditions stated in the Sub-Plan. (d) Eligibility. Full Time Employees who are officers or other key management employees employed by the Group in the United Kingdom under selection guidelines to be established by the Committee, shall be eligible, upon selection by the Committee, to receive stock options. (e) Shares to be Issued. Shares to be issued shall be authorized and unissued shares of common stock, treasury stock or a combination thereof. The issue of shares of common stock shall be subject to the maximum specified in the Plan. (f) Administration. The Sub-Plan shall be administered by the Committee in accordance with the provisions set out in the Plan and varied by the terms of the Sub-Plan. -8- (g) Effective Date and Term of the Sub-Plan. The Sub-Plan shall be submitted to the stockholders of the Company for approval at the 1995 annual meeting of stockholders and, if approved, shall become effective on January 1, 1995. Options shall not be granted until the Sub-Plan has been approved by the Board of UK Inland Revenue under the provisions of paragraph 1 of Schedule 9. Any change required to be made to the Plan by the Board of UK Inland Revenue in order to obtain its approval may be made without stockholder approval, except as otherwise provided in Clause 7 of Article I. The Sub-Plan shall terminate on December 31, 1999 unless terminated prior thereto by action of the Board. No further grants shall be made under the Sub-Plan after termination, but termination shall not affect the rights of any participant under the grants made prior to termination. (h) Amendments. The Sub-Plan may be amended or terminated by the Board subject to the conditions specified in the Plan. No amendment may be made which will put the Sub-Plan in breach of conditions for approval set out in Schedule 9 and no amendment to the Sub-Plan or any provision in the Plan which applies to options granted under the Sub-Plan shall be made without prior approval of the Board of UK Inland Revenue. 2. STOCK OPTIONS (a) Grants. Options to purchase shares of common stock may be granted to such eligible Full-Time Employees as may be selected by the Committee. No variation shall be made in relation to a spin-off nor to any class of securities available under the Sub-Plan. (b) Variations in Options. Variations may not be made to options granted under the Sub-Plan pursuant to Article I clause 5 of the Plan without prior consent of the Board of UK Inland Revenue. (c) Terms of Options. Terms attaching to options shall be contained in a stock option agreement, the form of which must be approved in advance by the Board of UK Inland Revenue. If any performance targets are attached to the exercisability of an option, these shall be objectively determined and subject to the prior approval of the Board of UK Inland Revenue. No option shall be exercisable more than ten years after its date of grant. The per share option price shall be stated at the time the option is granted and shall be not less than 100% of the Market Value of the share on the date on which the optionee is offered options under the Sub-Plan. Upon exercise, the option price shall be paid in cash. The provisions in Clause 3 of Article III for the exercise of options by payment in whole shares of common stock or in cash by a broker-dealer to whom the optionee has submitted an irrevocable notice of exercise will not apply for the purposes of the Sub-Plan unless, in the case of the latter, approved by the Board of UK Inland Revenue. Options shall not be transferable except that such options may be exercised by the personal representative of a deceased optionee or a beneficiary of such deceased optionee who has been designated pursuant to beneficiary designation procedures approved by the Company, in each case within ninety days of the death of the optionee. Options may be exercised during the individual's continued employment with the Group and for a period not in excess of ninety days following termination of employment and only within the original term of the option. No option may be -9- exercised by an individual at any time when he is precluded by Paragraph 8 of Schedule 9 from participating in the Sub-Plan. (d) Exercise of Option. An option may be exercised by delivery of written notice to the Company specifying the number of shares to be purchased and accompanied by payment in full of the option price for the number of shares so purchased. The Company shall within thirty days post to the optionee certificates representing the number of shares specified, and shall pay all original issue or transfer taxes and all other fees and expenses incidental to such delivery. (e) Limits on Options. No person shall be granted options under the Sub-Plan which would, at the time that they are obtained, cause the aggregate Market Value of the shares which such person may acquire in pursuance of rights obtained under the Sub-Plan or under any other scheme established by the Group or by any Associated Company of the Company and approved by the Board of UK Inland Revenue under Schedule 9 (and not exercised) to exceed or further exceed the greater of: (1) 100,000 British Pounds Sterling or (2) Four times the Relevant Emoluments of the optionee for the current or preceding Year of Assessment (whichever of those years gives the greater amount) or if there were no Relevant Emoluments for the preceding Year of Assessment four times the amount of the Relevant Emoluments for the period of twelve months beginning with the first day during the current Year of Assessment in respect of which there are Relevant Emoluments. For the purposes of this clause the Market Value of the shares shall be converted from US Dollars to sterling at the middle rate for the buying and selling of that amount of sterling for US Dollars as quoted by the Barclays Bank PLC at the opening of business on the day on which the optionee is offered options under the Sub-Plan. V. STOCK APPRECIATION RIGHTS 1. Grants. Free-standing SARs entitling the grantee to receive cash or shares of common stock having a fair market value equal to the appreciation in market value of a stated number of shares of common stock from the date of grant to the date of exercise of such SARs, or in the case of tandem SARs, from the date of grant of the related stock option to the date of exercise of such tandem SARs, may be granted to such eligible officers and other key management employees as may be selected by the Committee. The holder of a tandem SAR may elect to exercise either the option or the SAR, but not both. 2. Number of SARs and Base Price. The number of SARs subject to a grant shall be determined by the Committee. Any tandem SAR related to an incentive stock option shall be granted at the same time that such incentive stock option is granted. The base price of a tandem SAR shall be the purchase price per share of common stock of the related option. The base price of a free-standing SAR shall be determined by the Committee; provided, however, that such base price shall -10- not be less than 100% of the fair market value of a share of common stock on the date of grant of such SAR. 3. Exercise of SARs. The agreement relating to a grant of SARs may specify whether such grant shall be settled in shares of common stock (including restricted shares of common stock) or cash or a combination thereof. Upon exercise of an SAR, the grantee shall be paid the excess of the then fair market value of the number of shares of common stock to which the SAR relates over the fair market value of such number of shares at the date of grant of the SAR or of the related stock option, as the case may be. Such excess shall be paid in cash or in shares of common stock having a fair market value equal to such excess or in such combination thereof as the Committee shall determine. The period during which SARs granted hereunder may be exercised shall be determined by the Committee; provided, however, that no tandem SAR shall be exercised if the related option has expired or has been cancelled or forfeited or has otherwise terminated. The Committee may, in its discretion, establish performance measures which shall be satisfied or met as a condition to the grant of an SAR or to the exercisability of all or a portion of an SAR. The Committee shall determine whether an SAR may be exercised in cumulative or non-cumulative installments and in part or in full at any time. An exercisable SAR, or portion thereof, may be exercised, in the case of a tandem SAR, only with respect to whole shares of common stock and, in the case of a free-standing SAR, only with respect to a whole number of SARs. If an SAR is exercised for restricted shares of common stock, a certificate or certificates representing such restricted shares shall be issued in accordance with Section 4 of Article II and the holder of such restricted shares shall have such rights of a stockholder of the Company as determined pursuant to such Section. Prior to the exercise of an SAR for shares of common stock, including restricted shares, the holder of such SAR shall have no rights as a stockholder of the Company with respect to the shares of common stock subject to such SAR. A tandem SAR may be exercised (i) by giving written notice to the Company specifying the number of whole SARs which are being exercised, (ii) by surrendering to the Company any options which are cancelled by reason of the exercise of such SAR and (iii) by executing such documents as the Company may reasonably request. A free-standing SAR may be exercised (i) by giving written notice to the Company specifying the whole number of SARs which are being exercised and (ii) by executing such documents as the Company may reasonably request. In the case of the holder of an SAR who is subject to Section 16 of the Exchange Act, the Company may require that the exercise of an SAR be in compliance with Section 16 and the rules and regulations thereunder. 4. Termination of Employment. An SAR may be exercised during the grantee's continued employment with the Company and, unless otherwise determined by the Committee as set forth in the agreement relating to the SAR, for a period not in excess of ninety days following termination of employment and only within the original term of the SAR; provided, however, that if employment of the grantee by the Company shall have terminated by reason of retirement or total and permanent disability, then the SAR may be exercised to the extent set forth in the agreement relating to the SAR for a period not in excess of five years following termination of employment but not after the expiration of the term of the SAR. In the event of the death of a holder of an SAR (i) during employment, (ii) within a period not in excess of five years after termination of -11- employment by reason of retirement or total and permanent disability or (iii) within ninety days after termination of employment for any other reason, outstanding SARs held by such holder at the time of death may be exercised to the extent set forth in the agreement relating to the SAR by the executor, administrator, personal representative, beneficiary or similar persons of such deceased holder within ninety days of the date of death. VI. OTHER 1. Non-Transferability of Options and Stock Appreciation Rights. No option or SAR shall be transferable other than (i) by will, the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company or (ii) as otherwise permitted under Rule 16b-3 under the Exchange Act as determined by the Committee and set forth in the agreement relating to such option or SAR. Each option or SAR may be exercised during the participant's lifetime only by the participant or the participant's guardian, legal representative or similar person. Except as permitted by the second preceding sentence, no option or SAR may be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of any option or SAR, such award and all rights thereunder shall immediately become null and void. 2. Tax Withholding. The Company shall have the right to require, prior to the issuance or delivery of any shares of common stock or the payment of any cash pursuant to a grant or award hereunder, payment by the holder thereof of any Federal, state, local or other taxes which may be required to be withheld or paid in connection therewith. An agreement may provide that (i) the Company shall withhold whole shares of common stock which would otherwise be delivered to a holder, having an aggregate fair market value determined as of the date the obligation to withhold or pay taxes arises in connection therewith (the "Tax Date"), or withhold an amount of cash which would otherwise be payable to a holder, in the amount necessary to satisfy any such obligation or (ii) the holder may satisfy any such obligation by any of the following means: (A) a cash payment to the Company, (B) delivery to the Company of previously owned whole shares of common stock (which the holder has held for at least six months prior to the delivery of such shares or which the holder purchased on the open market and for which the holder has good title, free and clear of all liens and encumbrances) having an aggregate fair market value determined as of the Tax Date, (C) authorizing the Company to withhold whole shares of common stock which would otherwise be delivered having an aggregate fair market value determined as of the Tax Date or withhold an amount of cash which would otherwise be payable to a holder, (D) in the case of the exercise of an option, a cash payment by a broker-dealer acceptable to the Company to whom the optionee has submitted an irrevocable notice of exercise or (E) any combination of (A), (B) and (C); provided, however, that the Committee shall have sole discretion to disapprove of an election pursuant to any of clauses (B)-(E) and that in the case of a holder who is subject to Section 16 of the Exchange Act, the Company may require that the method of satisfying such an obligation be in compliance with Section 16 and the rules and regulations thereunder. An agreement relating to a grant or award hereunder may provide for shares of common stock to be delivered or withheld having an aggregate fair market value in excess of the minimum amount -12- required to be withheld, but not in excess of the amount determined by applying the holder's maximum marginal tax rates. Any fraction of a share of common stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the holder. 3. Acceleration Upon Change in Control. If while (i) any performance award or fixed award granted under Article II is outstanding or (ii) any stock option granted under Article III or IV of the Plan or SAR granted under Article V of the Plan is outstanding -- (a) any "person," as such term is defined in Section 3(a)(9) of the Exchange Act, as modified and used in Section 13(d) and 14(d) thereof (but not including (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company) (hereinafter a "Person") is or becomes the beneficial owner, as defined in Rule 13d-3 of the Exchange Act, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates, excluding an acquisition resulting from the exercise of a conversion or exchange privilege in respect of outstanding convertible or exchangeable securities) representing 50% or more of the combined voting power of the Company's then outstanding securities; or (b) during any period of two (2) consecutive years (not including any period prior to the effective date of the Plan), individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into any agreement with the Company to effect a transaction described in Clause (a), (c) or (d) of this Section) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (c) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or -13- (d) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets, (any of such events being hereinafter referred to as a "Change in Control"), then from and after the date on which public announcement of the acquisition of such percentage shall have been made, or the date on which the change in the composition of the Board set forth above shall have occurred, or the date of any such stockholder approval of a merger, consolidation, plan of complete liquidation or an agreement for the sale of the Company's assets as described above occurs (the applicable date being hereinafter referred to as the "Acceleration Date"), (i) with respect to such performance awards, the highest level of achievement specified in the award shall be deemed met and the award shall be immediately and fully vested, (ii) with respect to such fixed awards, the period of continued employment specified in the award upon which the award is contingent shall be deemed completed and the award shall be immediately and fully vested and (iii) with respect to such options and SARs, all such options and SARs, whether or not then exercisable in whole or in part, shall be fully and immediately exercisable. 4. Restrictions on Shares. Each grant and award made hereunder shall be subject to the requirement that if at any time the Company determines that the listing, registration or qualification of the shares of common stock subject thereto upon any securities exchange or under any law, or the consent or approval of any governmental body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the delivery of shares thereunder, such shares shall not be delivered unless such listing, registration, qualification, consent, approval or other action shall have been effected or obtained, free of any conditions not acceptable to the Company. The Company may require that certificates evidencing shares of common stock delivered pursuant to any grant or award made hereunder bear a legend indicating that the sale, transfer or other disposition thereof by the holder is prohibited except in compliance with the Securities Act of 1933, as amended, and the rules and regulations thereunder. 5. No Right of Participation or Employment. No person (other than non-employee directors to the extent provided in Article III) shall have any right to participate in the Plan. Neither the Plan nor any grant or award made hereunder shall confer upon any person any right to continued employment by the Company, any subsidiary or any affiliate of the Company or affect in any manner the right of the Company, any subsidiary or any affiliate of the Company to terminate the employment of any person at any time without liability hereunder. 6. Rights as Stockholder. No person shall have any right as a stockholder of the Company with respect to any shares of common stock or other equity security of the Company which is subject to a grant or award hereunder unless and until such person becomes a stockholder of record with respect to such shares of common stock or equity security. 7. Governing Law. The Plan, each grant and award hereunder and the related agreement, and all determinations made and actions taken pursuant thereto, to the extent not otherwise governed by the Code or the laws of the United States, shall be governed by the laws of the State of Delaware and construed in accordance therewith without giving effect to principles of conflicts of laws. -14- 8. Approval of Plan. The Plan and all grants and awards made hereunder shall be null and void if the adoption of the Plan is not approved by the affirmative vote of a majority of the shares of common stock present in person or represented by proxy at the 1995 annual meeting of stockholders. -15- EX-12 9 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12 R.R. DONNELLEY & SONS COMPANY STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLAR AMOUNTS IN THOUSANDS)
Twelve months ended 12/31/95 ------------------- Earnings Earnings before Income Taxes $439,532 Interest Expense 109,759 Interest factor in operating leases (1) 16,400 Amortization capitalized interest 6,731 -------- Earnings available for fixed charges $572,422 ======== Fixed Charges Interest expense $109,759 Capitalized interest 10,899 -------- Interest incurred 120,658 Interest factor in operating leases (1) 16,400 -------- Total fixed charges $137,058 ======== Ratio of earnings to fixed charges 4.18 ========
(1) Management estimates one-third of current year operating lease payments to be the interest factor in such rentals. EX-21 10 DONNELLEY SUBSIDIARIES Form 10-K Year-Ended 12/31/95 Exhibit 21 SUBSIDIARIES OF R. R. DONNELLEY & SONS COMPANY (As of March 7, 1996) Subsidiaries of Place of R. R. Donnelley & Sons Company Incorporation ------------------------------ ------------- 77 Capital Corporation Delaware 77 Capital Partners L.P. Delaware Allentown S.H. Leasing Company Delaware C & E Transport, Inc. Delaware CWH Supply Company Delaware Caslon Incorporated Delaware Chemical Equipment S.H. Leasing Company Delaware Coris Inc. Delaware Customer Insight Company Delaware DPA Printing Company, SP. Zo.o. Poland Donnelley Caribbean Graphics, Inc. Delaware Donnelley Enterprise Solutions, Inc. Delaware Donnelley Holdings, Limited Delaware Donnelley International, Inc. Delaware Donnelley Satellite Services, Limited Delaware Donnelley Satellite Graphics, Limited Delaware Editorial Lord Cochrane, S.A. Chile European-American Ink Sales Corporation Iowa FFH Corporation Delaware HCI Holdings Delaware Haddon Craftsmen, Inc. Delaware Heritage Preservation Corporation South Carolina Impresora Donneco Internacional, S.A. de C.V. Mexico Kittyhawk S.H. Leasing Company Delaware Laboratorio Lito Color S.A. de C.V. Mexico Page 2 Form 10-K Year-Ended 12/31/95 Exhibit 21 Subsidiaries of Place of R. R. Donnelley & Sons Company Incorporation ------------------------------ ------------- Lombard Information Resources Incorporated Delaware M/B Companies, Inc. Iowa Metromail Corporation Delaware Mailing List Research of Canada, Limited Canada Pan Associates L.P. Delaware R. R. Donnelley Far East, Limited Delaware R. R. Donnelley Deutschland GmbH Frankfort R. R. Donnelley Printing (France) SARL France R. R. Donnelley International, Inc. Delaware R. R. Donnelley Financial(Hong Kong) Limited Hong Kong R. R. Donnelley Limited United Kingdom R. R. Donnelley Mendota, Inc. Delaware R. R. Donnelley Marketing Services Group Limited United Kingdom R. R. Donnelley Nederland B.V. The Netherlands R. R. Donnelley Norwest Inc. Oregon R. R. Donnelley Printing Company Delaware R. R. Donnelley Printing Company L.P. Delaware R. R. Donnelley Receivables, Inc. Nevada R. R. Donnelley Sales Corporation Barbados R. R. Donnelley Seymour, Inc. New Jersey R. R. Donnelley U.K. Marketing Services Limited United Kingdom R. R. Donnelley (Canada) Limited Ontario R. R. Donnelley (Chile) Holdings, Inc. Delaware R. R. Donnelley (Europe) Limited Delaware R. R. Donnelley (India) Pvt Ltd India R. R. Donnelley (Mauritius) Holdings Ltd Mauritius R. R. Donnelley (Mexico) S.A. de C.V. Mexico R. R. Donnelley (Santiago), Inc. Delaware R. R. Donnelley (U.K.) Limited United Kingdom Shenzhen Donnelley Bright Sun Printing Co. Republic of China Page 3 Form 10-K Year-Ended 12/31/95 Exhibit 21 Subsidiaries of Place of R. R. Donnelley & Sons Company Incorporation ------------------------------ ------------- Siegwerk Sales & Services L.P. Delaware Wyoming Avenue Holdings, Inc. Delaware Winfield Avenue Holdings, Inc. Delaware Stream International Holdings Inc. Delaware Software Holdings, Inc. Delaware Stream International Inc. Delaware Software Intermediate Holdings, Inc. Delaware Corporate Software Limited K.K. Japan Corporate Software Integration Virginia Services, Inc. Corporate Software Securities Corporation Massachusetts 800 Software, Inc. California Stream International Canada Ltd Canada Corporate Software GmbH Germany Corporate Software Limited United Kingdom International Software Limited United Kingdom Corporate Software Europe B.V. Netherlands Corporate Software SA France Stream International Limited United Kingdom Stream International Ltda. Brazil R. R. Donnelley Japan Co., Ltd. Japan Stream International S.A. de C.V. Mexico R. R. Donnelley Holdings (Australia) Limited Delaware R. R. Donnelley Australia PTY Ltd Australia Donnelley Korea Korea Stream International K.K. Japan Page 4 Form 10-K Year-Ended 12/31/95 Exhibit 21 Subsidiaries of Place of R. R. Donnelley & Sons Company Incorporation ------------------------------ ------------- Stream International PTE LTD. Singapore Donnelley Documentation Services (Ireland) Delaware Limited R. R. Donnelley Leinster Unlimited British Virgin Islands R. R. Donnelley (Ireland) Limited Delaware Stream International Ireland (Holdings) Ireland Stream International Dublin Ireland Stream International Kildare Ireland Disk Duplicating Ireland Ireland Stream International Language Solutions Ireland Fulfill: Plus PTE LTD Singapore Stream International Fulfillment Services Ireland Europe Eurotel Marketing Ireland Stream International B.V. Dutch R. R. Donnelley Language Solutions Dutch International B.V. R. R. Donnelley Deutschland Gmbh Germany R. R. Donnelley Language Solutions Belgium Belgium N.V. R. R. Donnelley Language Solutions France France Sarl Ink Nederland B.V. Netherlands R. R. Donnelley France, S.A. France EX-23 11 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports dated January 25, 1996 (except with respect to the matter discussed in the Subsequent Event Footnote, as to which the date is March 7, 1996) included in this Annual Report of R. R. Donnelley & Sons Company on Form 10-K for the year ended December 31, 1995, into the Company's previously filed Registration Statements on Form S-8 (File Nos. 33-19803, 33-43632, 33-49431, 33-49809, 33-52805 and 33-61387), Form S-3 (33-57807) and previously filed post-effective amendments thereto. Chicago, Illinois, March 11, 1996 EX-27 12 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 33,122 0 1,491,470 25,311 380,078 1,907,959 4,120,449 2,111,461 5,384,810 1,130,374 1,560,960 330,612 0 0 1,842,558 5,384,810 6,511,786 6,511,786 5,302,394 5,952,377 10,118 0 109,759 439,532 140,739 298,793 0 0 0 298,793 1.95 0
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