-----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, IgtEXDYRYZlx5hXbB7o4VToiNs5et1RZMprUTsldaE4Q2gzu89+h2c0HGYJSGp9l 9QvIN7uxURUKsdydr3e9UQ== 0000950131-96-003604.txt : 19960805 0000950131-96-003604.hdr.sgml : 19960805 ACCESSION NUMBER: 0000950131-96-003604 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960802 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04694 FILM NUMBER: 96603104 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-Q 1 2ND QUARTER REPORT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM 10-Q ----------- (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-4694 R. R. DONNELLEY & SONS COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 36-1004130 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 77 WEST WACKER DRIVE, CHICAGO, ILLINOIS 60601 (ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE) OFFICES) REGISTRANT'S TELEPHONE NUMBER (312) 326-8000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. X Yes------- No ------- NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF JULY 31, 1996 153,238,963 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
PAGE INDEX NUMBER(S) ----- --------- Condensed Consolidated Statements of Income (Unaudited) for the three and six month periods ended June 30, 1996 and 1995........................................................ 3 Condensed Consolidated Balance Sheets as of June 30, 1996 (Unaudited) and December 31, 1995........................... 4 Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 1996 and 1995............. 5 Notes to Condensed Consolidated Financial Statements (Unaudited)................................................. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations--Comparison of Second Quarter and First Half 1996 to 1995........................................... 8-11 Changes in Financial Condition............................... 11 Other Information............................................ 11-12 Outlook...................................................... 12-13
2 R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES ---------------- CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 1996 1995 1996 1995 ------------ ------------ ------------ ------------ Net sales................ $ 1,577,500 $ 1,490,633 $ 3,124,496 $ 2,808,722 Cost of sales............ 1,287,438 1,212,501 2,593,611 2,300,775 ------------ ------------ ------------ ------------ Gross profit............. 290,062 278,132 530,885 507,947 Selling and administrative expenses. 184,792 155,356 363,273 290,674 Restructuring charge..... 48,084 -- 560,632 -- ------------ ------------ ------------ ------------ Earnings (loss) from operations.............. 57,186 122,776 (393,020) 217,273 Interest expense......... 24,713 27,013 49,796 49,867 Gain on Metromail stock offering................ (44,158) -- (44,158) -- Other (income) expense-- net..................... (2,982) 967 (29,558) 3,725 ------------ ------------ ------------ ------------ Earnings (loss) before income taxes............ 79,613 94,796 (369,100) 163,681 Provision (benefit) for income taxes............ 25,336 30,335 (46,458) 52,378 ------------ ------------ ------------ ------------ Net income (loss)........ $ 54,277 $ 64,461 $ (322,642) $ 111,303 ============ ============ ============ ============ Per common share: Net income (loss)...... $ 0.35 $ 0.42 $ (2.09) $ 0.73 ============ ============ ============ ============ Cash dividends......... $ 0.18 $ 0.16 $ 0.36 $ 0.32 ============ ============ ============ ============ Average shares outstanding............. 154,113,294 153,526,000 154,062,081 153,308,000 ============ ============ ============ ============
See accompanying Notes to Condensed Consolidated Financial Statements. 3 R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES ------------ CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) JUNE 30, 1996 AND DECEMBER 31, 1995 (THOUSANDS OF DOLLARS) ASSETS
1996 1995 ----------- ----------- Cash and equivalents........................... $ 30,693 $ 33,122 Receivables, less allowance for doubtful accounts of $25,134 and $25,311 at June 30, 1996 and December 31, 1995, respectively...... 1,065,759 1,466,159 Inventories.................................... 356,857 380,078 Prepaid expenses............................... 21,058 28,600 ----------- ----------- Total current assets......................... 1,474,367 1,907,959 ----------- ----------- Property, plant and equipment, at cost......... 4,191,238 4,120,449 Accumulated depreciation....................... (2,276,165) (2,111,461) ----------- ----------- Net property, plant and equipment............ 1,915,073 2,008,988 Goodwill and other intangibles--net............ 562,661 1,024,954 Other noncurrent assets........................ 547,766 442,909 ----------- ----------- Total assets................................. $ 4,499,867 $ 5,384,810 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable............................... $ 405,975 $ 601,814 Accrued compensation........................... 86,796 126,483 Short-term debt................................ 50,000 50,000 Current and deferred income taxes.............. 76,131 86,737 Other accrued liabilities...................... 435,796 265,340 ----------- ----------- Total current liabilities.................... 1,054,698 1,130,374 ----------- ----------- Long-term debt................................. 1,228,345 1,560,960 Deferred income taxes.......................... 238,958 300,840 Other noncurrent liabilities................... 187,087 219,466 Shareholders' equity: Common stock, at stated value ($1.25 par value)...................................... 330,612 330,612 Retained earnings, net of cumulative translation adjustments of $33,284 and $29,031 at June 30, 1996 and December 31, 1995, respectively.......................... 1,611,593 1,994,098 Unearned compensation........................ (7,801) (9,297) Reacquired common stock, at cost............. (143,625) (142,243) ----------- ----------- Total shareholders' equity............... 1,790,779 2,173,170 ----------- ----------- Total liabilities and shareholders' equity.................................. $ 4,499,867 $ 5,384,810 =========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements. 4 R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES ------------ CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30 (THOUSANDS OF DOLLARS)
1996 1995 --------- --------- Cash flows provided by (used for) operating activities: Net income (loss)...................................... $(322,642) $ 111,303 Restructuring charge, net of tax and minority interest. 435,380 -- Depreciation........................................... 176,608 159,093 Amortization........................................... 33,155 33,191 Gain on Metromail stock offering....................... (44,158) -- Net change in operating working capital................ 144,747 (255,525) Net change in other assets and liabilities............. (20,221) (24,851) Other.................................................. (7,787) 8,653 --------- --------- Net cash provided by operating activities................ 395,082 31,864 --------- --------- Cash flows provided by (used for) investing activities: Capital expenditures................................... (235,997) (224,739) Proceeds from receivables from Metromail............... 248,510 -- Other investments including acquisitions, net of cash acquired.............................................. (22,368) (23,812) --------- --------- Net cash used for investing activities................... (9,855) (248,551) --------- --------- Cash flows provided by (used for) financing activities: Net increase (decrease) in borrowings.................. (332,616) 249,584 Disposition of reacquired common stock................. 25,849 28,205 Acquisition of common stock............................ (25,831) (20,744) Cash dividends on common stock......................... (55,514) (49,052) --------- --------- Net cash from (used for) financing activities............ (388,112) 207,993 --------- --------- Effect of exchange rate changes on cash and equivalents.. 456 (323) --------- --------- Net decrease in cash and equivalents..................... (2,429) (9,017) --------- --------- Cash and equivalents at beginning of period.............. 33,122 20,569 --------- --------- Cash and equivalents at end of period.................... $ 30,693 $ 11,552 ========= =========
See accompanying Notes to Condensed Consolidated Financial Statements. 5 R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES ------------ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1. The condensed consolidated financial statements included herein are unaudited (although the balance sheet at December 31, 1995 is condensed from the audited balance sheet at that date) and have been prepared by the company to conform with the requirements applicable to this quarterly report on Form 10-Q. Certain information and disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been omitted as permitted by such requirements. However, the company believes that the disclosures made are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in the company's 1995 annual report on Form 10-K. The condensed consolidated financial statements included herein reflect, in the opinion of the company, all adjustments (which include only normal, recurring adjustments) necessary to present fairly the financial information for such periods. Note 2. Components of the company's inventories at June 30, 1996 and December 31, 1995 were as follows:
(THOUSANDS OF DOLLARS) ------------------ 1996 1995 -------- -------- Raw materials and manufacturing supplies.................... $213,493 $230,694 Work in process............................................. 216,159 213,741 Finished goods.............................................. 29,033 34,041 Progress billings........................................... (45,579) (47,549) LIFO reserve................................................ (56,249) (50,849) -------- -------- Total inventories....................................... $356,857 $380,078 ======== ======== Note 3. The following provides supplemental cash flow information: (THOUSANDS OF DOLLARS) ------------------ SIX MONTHS ENDED JUNE 30 ------------------ 1996 1995 -------- -------- Cash flow data: Interest paid, net of capitalized interest................. $50,561 $41,312 Income taxes paid.......................................... $31,847 $31,161
6 Note 4. In the first half of 1996, the company provided for the restructuring and realignment of its gravure printing operations in North America, the repositioning of other businesses, the write-down of certain equipment, and the impairment of intangible assets and investments in non-core businesses. These actions resulted in pre-tax charges of $560 million, or $2.82 per share after tax. Approximately $195 million of the charges related to the gravure platform realignment and approximately $233 million related to other manufacturing restructuring. Pre-tax cash outlays associated with the restructuring and realignment charges are expected to total approximately $177 million and will be incurred in 1996 and 1997. In addition, the company is recognizing the impairment of approximately $133 million in equipment, intangibles and investments in non-core businesses. The impairment loss was calculated based on the excess of the carrying amount of the assets over the assets' fair values. The fair value of an asset is generally determined as the discounted estimates of future cash flows generated by the asset. Reflected in the total charges is $127 million to reposition Stream International's worldwide operations. The following table presents the components of the company's restructuring reserves along with charges against these reserves from their establishment until June 30, 1996 (in thousands of dollars):
WRITEDOWN OF PROPERTY AND ORIGINAL INVESTMENTS RESTRUCTURING RESTRUCTURING TO FAIR CASH RESERVES AS OF RESERVES VALUE PAYMENTS JUNE 30, 1996 ------------- ------------ -------- -------------- Restructuring loss on writedown of property, plant and equipment, and other assets............... $250,731 $(250,731) $ -- $ -- Restructuring expenditures to reposition operations and close facilities................. 176,960 -- (4,545) 172,415 Impairment loss on intangible assets and investments................ 132,941 (132,941) -- -- -------- --------- ------- -------- Total restructuring reserves............... $560,632 $(383,672) $(4,545) $172,415 ======== ========= ======= ========
Note 5. On June 19, 1996, Metromail (the company's previously wholly-owned subsidiary, which is a leading provider of market-oriented consumer information and reference services) completed an initial public offering of 13.8 million shares of its common stock at $20.50 per share. As a result of the offering, the company's interest in Metromail has been reduced to approximately 38%. Approximately $250 million of the proceeds from the completed offering were used by Metromail to retire certain indebtedness owed to the company. The company in turn used the payment from Metromail to pay down debt and for general corporate purposes. The transaction resulted in a pre-tax gain for the company of approximately $44 million and a deferred tax provision of approximately $18 million. As a result of this transaction, the company has changed its method of accounting for Metromail from consolidation to the equity method, effective July 1, 1996. Under the equity method, the company will recognize in income its proportionate share of the net income of Metromail. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS COMPARISON OF SECOND QUARTER 1996 TO SECOND QUARTER 1995 ABOUT THE COMPANY R.R. Donnelley & Sons Company 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, with approximately 38,000 employees in 26 countries on five continents. The company is organized into the following business sectors, which accounted for the following sales results during the second quarter of 1996: Commercial Print Sector, which includes consumer and trade magazines ($275 million, or 17% of 1996 second quarter consolidated net sales), and catalogs, retail advertising circulars and direct mail products ($270 million, or 17% of 1996 second quarter consolidated net sales). Global Commercial Print Sector, which includes the company's commercial print operations outside the United States--in Europe, Latin America and Asia ($75 million, or 5% of 1996 second quarter consolidated net sales). Information Management Sector, which includes Telecommunications ($165 million, or 11% of 1996 second quarter consolidated net sales), Book Publishing Services ($163 million, or 10% of 1996 second quarter consolidated net sales) and Financial Services ($114 million, or 7% of 1996 second quarter consolidated net sales), as well as Metromail ($69 million, or 4% of 1996 second quarter consolidated net sales), the company's Digital Division, the 77 Capital venture-capital fund, creative design and communication services and a variety of information services ($42 million, or 3% of 1996 second quarter consolidated net sales). As described below, on June 19, 1996, the company's interest in Metromail was reduced to approximately 38% as a result of the completion of Metromail's initial public offering of common stock. Stream International, 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. ($404 million, or 26% of 1996 second quarter consolidated net sales). NET SALES BY BUSINESS UNIT AS A PERCENTAGE OF CONSOLIDATED NET SALES
SECOND QUARTER FIRST HALF ENDED JUNE 30, ENDED JUNE 30, -------------- -------------- 1996 1995 1994 1996 1995 1994 ---- ---- ---- ---- ---- ---- Stream International/Global Software Services..... 26 24 13 26 19 13 Consumer & Trade Magazines........................ 17 19 23 19 21 23 Catalogs, Retail, Direct-Mail..................... 17 18 23 17 20 23 Telecommunications................................ 11 10 11 10 10 11 Book Publishing................................... 10 12 14 10 13 14 Financial Services................................ 7 6 7 6 6 7 Global Commercial Print........................... 5 5 3 5 5 3 Other............................................. 7 6 6 7 6 6
CONSOLIDATED RESULTS OF OPERATIONS The company reported second quarter 1996 net income of $54 million, or $0.35 per share, reflecting a $48 million pre-tax restructuring charge recorded in the second quarter of 1996 ($24 million after taxes and a minority interest benefit) which was primarily related to the continued repositioning of Stream International's manufacturing businesses, as well as a $44 million pre-tax gain ($26 million after taxes) related to the June 1996 Metromail IPO. Excluding the restructuring charge and the Metromail gain, net income declined by 19% from last year's second quarter to $52 million and earnings per share decreased $0.08 to $0.34. Second quarter sales of $1.6 billion were up 6% from the year-earlier quarter. 8 For the first half of 1996, the company reported a net loss of $323 million, or $2.09 per share, reflecting the $560 million pre-tax restructuring charges ($435 million after taxes and a minority interest benefit) recorded in the first half of 1996, as well as the Metromail gain recorded in the second quarter of 1996. Excluding the restructuring charges and the Metromail gain, net income declined by 23% from last year's first half to $86 million. Earnings per share decreased $0.17 to $0.56. First half sales of $3.1 billion were up 11% from the year-earlier period. Excluding the restructuring charges and the Metromail gain, the company's 1996 second-quarter and first-half earnings performance declined primarily due to the drop in by-product paper prices (a $30 million impact on a year-to-date basis), and a number of developments that affected the performance of Stream International (notably the slower-than-expected corporate demand for new systems and software and substantially reduced demand for printing and disk replication, as well as software price competition). In addition, higher paper and postage prices in 1995 depressed the demand for magazine pages and circulation in 1996 and the trade book sales environment was sluggish during the first half of 1996 due to excessive retail inventories resulting from the weak 1995 holiday sales season. CONSOLIDATED NET SALES Net sales for the second quarter increased $87 million, or 6%, to $1.6 billion due to higher paper prices and growth across many business units, most notably Stream International, Financial Services and Telecommunications. Higher paper prices accounted for approximately $21 million of the increase. These increases were partially offset by lower volume in Book Publishing, Latin America and Consumer Magazines due to soft market conditions. Net sales from foreign operations represented approximately $258 million, or 16% of total net sales in the second quarter, up 17% from $220 million, or 15% of total net sales in the second quarter of 1995. The growth in foreign sales reflected volume increases from Stream International and operations in Europe and Asia, partially offset by decreased volume in Latin America due to recessionary conditions in Argentina and Brazil. Net sales for the first half increased $316 million, or 11%, to $3.1 billion, reflecting higher paper prices and growth across many business units, most notably Stream International (in part due to the acquisition of Corporate Software Inc. in April 1995), Financial Services, Telecommunications, Information Services and European operations. Higher paper prices accounted for approximately $124 million of the increase. These increases were partially offset by lower volume in Book Publishing Services, Consumer Magazines, Catalog Services and Latin America due to soft market conditions. Net sales from foreign operations represented approximately $525 million, or 17% of total net sales in the first half, up 31% from $402 million, or 14% of total net sales in the first half of 1995. The growth in foreign sales reflected volume increases from Stream International and operations in Europe and Asia, partially offset by decreased volume in Latin America due to recessionary conditions in Argentina and Brazil. CONSOLIDATED EXPENSES Gross profit for the second quarter increased 4% to $290 million due to the sales growth as noted above, partially offset by lower by-product revenue (down $19 million). Selling and administrative expenses increased 19% to $185 million, primarily reflecting increases in Stream International's expenses ($12 million higher than the 1995 second quarter), higher expenses at Metromail and increased volume-related expenses in Financial Services. The ratio of selling and administrative expenses to net sales, at 12% in the quarter, increased from the 1995 ratio of 10%, primarily reflecting the higher expenses at Stream International and Metromail. Interest expense decreased $2 million, reflecting decreased debt balances and lower interest rates. 9 For the first half, gross profit increased 5% to $531 million due to the sales growth as noted above, partially offset by lower by-product revenue (down $30 million). Selling and administrative expenses increased 25% to $363 million, reflecting increases in Stream International's expenses ($44.7 million higher than the 1995 first half), higher expenses at Metromail and increased volume-related expenses in Financial Services. The ratio of selling and administrative expenses to net sales, at 12% in the first half, increased from the 1995 ratio of 10% reflecting higher expenses at Stream International (partially due to the acquisition of Corporate Software Inc. in April 1995) and Metromail. Other income increased $33 million, primarily due to approximately $17 million of minority interest benefits resulting from the restructuring charges and approximately $16 million of gains on the sales of investments in the company's venture-capital portfolio. SUMMARY OF CONSOLIDATED EXPENSE TRENDS
SECOND QUARTER ENDED JUNE 30, % INCREASE % INCREASE (THOUSANDS OF DOLLARS) 1996 (DECREASE) 1995 (DECREASE) 1994 - ------------------------- ---------- ---------- ---------- ---------- -------- Cost of materials........ $743,794 6% $703,960 54% $455,641 Cost of manufacturing.... 442,958 8% 408,435 10% 370,882 Depreciation............. 85,052 10% 79,881 29% 61,859 Amortization............. 15,634 (23)% 20,225 57% 12,905 Selling and administrative.......... 184,793 19% 155,356 31% 118,147 Net interest expense..... 24,713 (9)% 27,013 117% 12,472 FIRST HALF ENDED JUNE 30, % INCREASE % INCREASE (THOUSANDS OF DOLLARS) 1996 (DECREASE) 1995 (DECREASE) 1994 - ------------------------- ---------- ---------- ---------- ---------- -------- Cost of materials........ $1,492,991 16% $1,286,933 44% $894,410 Cost of manufacturing.... 890,857 8% 821,558 12% 734,594 Depreciation............. 176,608 11% 159,093 27% 124,843 Amortization............. 33,155 -- 33,191 27% 26,045 Selling and administrative.......... 363,272 25% 290,674 25% 233,150 Net interest expense..... 49,796 -- 49,867 106% 24,199
RESULTS OF OPERATIONS OF PRINT-RELATED BUSINESSES AND OF STREAM INTERNATIONAL Print-Related Businesses The company's print-related businesses (all business sectors other than Stream International) had net sales of $1.2 billion, a 3% increase over last year's second quarter net sales of $1.1 billion. The increase was attributable primarily to growth in the Information Management sector, most notably Financial Services, Telecommunications and Metromail, due to strong market conditions. Excluding the restructuring charge, the print-related businesses had operating income of $107 million, a 9% decrease from the same quarter in 1995. The decrease was attributable to unfavorable by-products pricing and decreased earnings in Latin America due to recessionary market conditions in Argentina and Brazil. For the first half, the company's print-related businesses had net sales of $2.32 billion, a 3% increase over last year's first half net sales of $2.26 billion. The increase was attributable primarily to increased volume in Financial Services, Telecommunications, Information Services and Metromail, in addition to strong growth in European sales. Excluding the restructuring charges, the print-related 10 businesses had first half operating income of $178 million, a 15% decrease from $209 million in the first half of 1995. The decrease was attributable to the drop in by-product paper prices and decreased earnings in Latin America due to unfavorable market conditions. Stream International Stream International had second quarter 1996 net sales of $404 million, a 13% increase over last year's second quarter net sales of $357 million. The sales growth was primarily due to increased demand for help-desk and other value-added services, partially offset by a substantially decreased demand for printed product and disk replication. Stream International had a second quarter operating loss of $2 million, compared to earnings of $4 million in 1995's second quarter. For the first half, Stream International had net sales of $796 million, a 45% increase over last year's first half net sales of $548 million. This sales growth was attributable in part to the inclusion of Corporate Software Inc. beginning in April 1995, as well as increased demand for help-desk and other value-added services. Stream International had a first half operating loss of $10 million, compared to earnings of $8 million in the first half of 1995. The earnings decrease primarily resulted from the sooner- than-expected drop in demand for printing and disk replication, which is being replaced by demand for electronic ordering and delivery and CD-ROM capability. Stream International is actively pursuing methods to capitalize on these electronic and digital opportunities. Operating earnings were also unfavorably impacted by decreased demand for software updates and software price competition. CHANGES IN FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES For the first half, cash flow from operations totaled $395 million, up $363 million from the first half of 1995. Of this amount, operating working capital reductions provided cash of $145 million during the first half of 1996, compared to a $256 million use of cash during the first half of 1995. This improvement primarily resulted from decreases in receivables and inventories in the first half of 1996 versus increases in these components during the first half of 1995 (largely due to the impact of paper prices). Management believes that the company's cash flow and borrowing capacity are sufficient to fund current operations and growth. Capital expenditures in the first half totaled $236 million, including purchases of equipment to meet the growing needs of customers and purchases related to improving manufacturing productivity and efficiency. Full year capital spending is expected to be between $500 million and $550 million. At June 30, 1996, the company had an available 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 $130 million at June 30, 1996. On July 25, 1996, the company announced its intention to repurchase shares of its common stock having an aggregate purchase price of up to $250 million through June 30, 1997. Shares acquired under this program will be retired. The April 25, 1996 authorization to repurchase up to 1.8 million shares of stock for use under various employee benefit plans will remain in effect. OTHER INFORMATION Metromail--On June 19, 1996, Metromail completed an initial public offering of its common stock. As a result of the offering, the company's interest in Metromail has been reduced to approximately 38%. Approximately $250 million of the proceeds from the completed offering were used by Metromail 11 to retire certain indebtedness owed to the company. The company in turn used the payment from Metromail to pay down debt and for general corporate purposes. The transaction resulted in a pre-tax gain of approximately $44 million ($26 million after taxes). As a result of this transaction, the company has changed its method of accounting for Metromail from consolidation to the equity method. Under the equity method, the company will recognize in income its proportionate share of the net income of Metromail. Restructuring--On March 28, 1996, the company announced a $512 million pre- tax charge to first quarter earnings ($411 million or $2.67 per share after tax) to restructure and realign its gravure operations in North America, reposition other businesses, and write down certain equipment, investments in non-core businesses and intangible assets. Approximately $195 million of the charge is related to the gravure platform realignment. Approximately $189 million is related to other manufacturing restructuring, including approximately $92 million to reposition Stream International's worldwide operations. Additionally, the company wrote down approximately $128 million in equipment, intangibles and investments in non-core businesses, in accordance with FASB 121. On July 25, 1996, the company announced a charge of $48 million before taxes ($24 million or $0.16 per share after tax) primarily to restructure Stream International's software manufacturing, printing, kitting and fulfillment operations. The restructuring reflects changes in customer demand, which is shifting from disk-based media and printed materials to CD-ROM and other forms of electronic media, packaging and delivery. Pre-tax cash outlays associated with the restructuring and realignment charges are expected to total approximately $177 million and will be incurred in 1996 and 1997. The remaining $383 million relates to non-cash items, mainly the write-down of fixed assets and goodwill. Because of this write-down, 1996 depreciation and amortization expenses will be approximately $11 million (before taxes) less than they would have been had the charges not been incurred. Human Resources and Plant Closings--As part of the restructuring during the first half of 1996 as noted above, the company has announced plans to close or consolidate six operations, including gravure-printing plants in Newton, NC and Casa Grande, AZ; Stream International manufacturing facilities in Crawfordsville, IN and Weathersby, England; a book prepress operation in Barbados; and a stand-alone book bindery in Scranton, PA. Through these actions, the Metromail public offering and other streamlining initiatives underway, the company expects to reduce its workforce by approximately 15% over the next year (from the 41,000 employees as of December 31, 1995), with most of the reductions coming in 1996. OUTLOOK The commercial printing business in North America (the company's primary geographic market) is highly competitive in most product categories and geographic regions. Industry analysts consider most 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 will be challenging. Despite weaknesses in the company's primary printing markets during the first half of 1996, demand is beginning to rebound in the book, catalog and magazine businesses and management believes second-half results will improve. In addition, there is substantial capacity committed under long-term contracts. Despite slower than expected corporate demand for software and software price discounting in early 1996, the company believes Stream International should see improved sales and profits for the second half of the year relative to the first half as it actively pursues methods to capitalize on the electronic and digital opportunities in the software market. 12 The company is a large consumer of paper, acquired for and by customers; therefore, the cost and supply of certain paper grades consumed in the manufacturing process will continue to affect the company's financial results. As paper price discounting has surfaced during the first half of 1996, management believes that the industry will continue to experience declining paper prices and balanced supplies during the remainder of the year. In addition to paper consumed in the manufacturing process, the company is also affected by the price of by-product paper which it sells. Financial results in the second half of 1996 will continue to be negatively impacted by decreased by-product prices compared to 1995. Additionally, there is currently legislation before the United States Congress proposing 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 may reduce or eliminate it going forward. In summary, the company's competitive strengths of worldwide geographic coverage, strategic raw materials purchasing (primarily paper and ink), comprehensive service offerings, technology advantage and economies of scale should result in second-half performance that is stronger than the second half of 1995 and the first half of 1996. 13 PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS 10(a) 1986 Stock Incentive Plan, as amended* 10(b) 1991 Stock Incentive Plan, as amended* 10(c) Memorandum of Agreement and Understanding among Stream International Holdings, Inc., R. R. Donnelley & Sons Company and Rory J. Cowan* 27 Financial Data Schedule - ---------- *Management contract or compensatory plan or arrangement (b) No current Report on Form 8-K was filed during the second quarter of 1996. 14 SIGNATURE PURSUANT TO THE REQUIREMENTS 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. R. R. Donnelley & Sons Company /s/ Peter F. Murphy By __________________________________ Peter F. Murphy Corporate Controller (Authorized Officer and Chief Accounting Officer) August 2, 1996 Date __________________________ 15 EX-10.A 2 1986 STOCK INCENTIVE PLAN R. R. DONNELLEY & SONS COMPANY 1986 STOCK INCENTIVE PLAN (As amended on April 24, 1986, July 27, 1989, September 28, 1989, October 26, 1995 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 1 stock bonus, stock option or stock appreciation rights or combination thereof, 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. 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 9. 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. 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 date the obligation to withhold or pay taxes arises (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 (as defined below), the Company may require that the method of satisfying such an obligation be in compliance with Section 16 and the rules and regulations thereunder. Shares of common stock to be delivered or withheld may have an aggregate fair market value in excess of the minimum amount required to be withheld, but not in excess of the amount determined by applying the holder's maximum 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. 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 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. 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 4 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, 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 5 "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. 3. 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: 6 "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; "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. 7 "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. (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. 8 (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 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 9 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. 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.B 3 1991 STOCK INCENTIVE PLAN R.R. DONNELLEY & SONS COMPANY 1991 STOCK INCENTIVE PLAN (as amended on September 1, 1992, October 26, 1995 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. 9. 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. 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 date the obligation to withhold or pay taxes arises (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 (as defined below), the Company may require that the method of satisfying such an obligation be in compliance with Section 16 and the rules and regulations thereunder. Shares of common stock to be delivered or withheld may have an aggregate fair market value in excess of the minimum amount required to be withheld, but not in excess of the amount determined by applying the holder's maximum 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. 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. 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. 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 Change in Control. If while any stock appreciation right granted pursuant to this Article V of this 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.C 4 MEMO OF AGREEMENT AND UNDERSTANDING MEMORANDUM OF AGREEMENT AND UNDERSTANDING dated as of June 21, 1996 Memorandum of Agreement and Understanding made as of this 21st day of June, 1996 by and between RORY J. COWAN of Concord, MA ("Cowan"), on the one hand, and STREAM INTERNATIONAL HOLDINGS INC., a Delaware corporation with its principal offices in Norwood, MA ("Stream") and R.R. DONNELLEY & SONS COMPANY, a Delaware corporation with its principal offices in Chicago, IL ("RRD"), on the other hand. Recitals -------- Cowan is Chief Executive Officer of Stream under an Employment Agreement dated as of April 21, 1995 ("Agreement") and is also serving as Executive Vice President of RRD. The parties have agreed that Cowan's employment by and relationships with Stream and RRD shall terminate. This Memorandum is intended to set forth the terms and conditions of the termination of employment and relationships with each of Stream and RRD with the understanding that, to the extent that further more formal steps and/or documentation are necessary or desirable to effectuate the parties' mutual agreements, the parties shall work together speedily, cooperatively and in good faith to develop any such steps and documentation to effect completion of such separation and termination as well as any collateral and related matters. In consideration of the mutual promises and covenants of the parties and other good and valuable consideration, by each party paid to the other, the receipt and adequacy of which are hereby acknowledged, the parties have agreed and do hereby agree as follows: 1. TERMINATION; SALARY CONTINUATION; BENEFITS, ETC. ------------------------------------------------ (a) Employee Status: Cowan's status as an employee of Stream will continue until midnight, December 31, 1996 ("Termination Date"), at which time such status will formally terminate. During the period from July 1, 1996 through the Termination Date, Cowan shall be on an unpaid leave of absence from Stream which leave of absence shall not affect his eligibility for health and welfare benefits. Similarly, Cowan will be deemed to be an employee of RRD on an unpaid leave of absence (without benefits) during the period from the date hereof through the Termination Date. The parties' sole purpose and intention in continuing Cowan's employment status is to permit the continued vesting of Cowan's options and rights under existing stock plans with Stream and with RRD, the effect of which will permit the following: (i) the vesting of 12.5% of Stream options ("Stream Options") to purchase Class A Common Stock, par value $.01 per share ("Stream Stock") outstanding under a grant dated April 21, 1995; (ii) the vesting of RRD options ("RRD Options") to purchase Common Stock, par value $1.25 per share ("RRD Stock") outstanding under grants dated December 10, 1992, December 9, 1993 and December 12, 1994, in the amounts of 10,400 shares, 5,200 shares and -1- 4,200 shares, respectively; and (iii) the lapse by time of restrictions applicable to, or the possibility of forfeiture of, a grant of restricted RRD Stock under an agreement dated December 12, 1991 between Cowan and RRD. Notwithstanding his employment status, by execution hereof, Cowan resigns from any and all officerships and board memberships he holds in both Stream and RRD, as well as any officerships and board memberships he holds in any entity the majority of the equity of which is owned by either of Stream or RRD, either directly or indirectly. (b) Salary, Benefits, etc.: ---------------------- (i) Cowan shall be paid all accrued base salary, one-half the full bonus which would be paid to Cowan for 1996 (to be calculated and paid at such time in 1997 as bonuses are calculated and paid to other executives of Stream), pension and other benefits, and accrued vacation and reimbursed expenses due from Stream under the Agreement for the period ending June 30, 1996. (ii) Thereafter, in lieu of any other payments of salary and bonus under the Agreement or otherwise, Cowan shall be paid the amount of the "Minimum Guaranteed Severance" provided for in Para. 4.7 of the Agreement for and during the 18-month period July 1, 1996 through December 31, 1997 ("Severance Period"). Cowan may elect to receive prepayment of the entire sum due under said Para. 4.7 for the entire 18-month period, i.e., so much as remains unpaid at his time of election (as hereinafter provided), discounted to the date of prepayment at an annual discount rate equal to the interest rate of The Note (hereinafter defined) of 7.34% by giving Stream two weeks' written notice of such election at any time during the 18-month period. (iii) In addition to the foregoing, Cowan shall also receive the following: a.) Should Cowan elect to continue coverage under Stream's group health plans from and after the Termination Date pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), then for any such coverage provided for benefits provided under COBRA for calendar year 1997, Stream shall either (i) reimburse Cowan for his COBRA expenses, or (ii) pay Cowan's COBRA expenses directly. b.) Stream shall reimburse Cowan for his expenses in securing office and administrative support services in the Boston area for use during the period beginning July 1, 1996 and ending June 30, 1997, up to a maximum reimbursement amount of $20,000. Such expenses shall be reimbursed on receipt of a copy of an invoice, with sufficient supporting documentation, from Cowan. c.) Cowan shall be deemed to have purchased from Stream and/or RRD, all computer, facsimile, office supply and telephonic equipment currently held by Cowan at his permanent residence, and he shall be free to continue to use such -2- equipment; provided that Cowan shall be disconnected from any lines or services furnished by or connected to, either of Stream or RRD. d.) Stream shall pay up to $5,000 of legal and financial planning expenses incurred by Cowan in the negotiation of this Memorandum. Such payment shall be in lieu of any other payment due Cowan for financial planning services from either Stream or RRD, if any and whether or not previously accrued. Cowan shall provide Stream with copies of all invoices received by him for such expenses, and Stream shall pay such invoices directly to the attorneys/planner involved, subject to the dollar limitation set forth above. e.) For so long as Cowan is obligated to file reports with the Securities and Exchange Commission as a result of being an executive officer of RRD, RRD will furnish Stock Max services from Richard M. Sawdey at the expense of RRD. 2. STREAM AND RRD STOCK AND OPTIONS -------------------------------- (a) Recitals: -------- (i) Cowan presently owns certain shares of Stream Stock purchased in conjunction with and at or about the date of execution of the Agreement. Also pursuant to the terms of the Agreement and the Stream 1995 Stock Option Plan, Cowan holds certain Stream Options. Cowan also owns certain shares of RRD Stock (subject in the case of shares received pursuant to grants of restricted shares to certain conditions relating to his continuing employment with RRD) and holds certain RRD Options. (ii) One-third of Cowan's Stream Stock was purchased by Cowan from his own funds and two-thirds Cowan's Stream Stock was purchased through funds borrowed by Cowan from an affiliate of Stream, such borrowing being evidenced by a promissory note ("The Note") in the form of Exhibit C to the Agreement. The Stream Stock is pledged with Stream to secure this loan under a Stock Pledge Agreement in the form of Exhibit D to the Agreement. (b) Vesting, Rights, etc. Prior to Termination Date: Until the Termination Date, all options and rights relating to Stream Stock and Stream Options and RRD Stock and RRD Options shall continue to accrue and vest in Cowan, and any condition to the RRD Stock relating to Cowan's continuing employment which is satisfied prior to the Termination Date shall lapse and terminate on such Date, all as provided under the terms and conditions of the Agreement and any other documentation relating to the Stream Stock, Stream Options, RRD Stock and RRD Options, such as, without limitation, option agreements and plans, Certificates of Incorporation, the Merger Agreement between the two constituent corporations which merged to form Stream, and grants of restricted stock; after giving effect to the foregoing, in addition to any Stream Stock and RRD Stock owned by -3- Cowan, and any Stream Options and RRD Options vested in but unexercised by Cowan as of the date hereof, Cowan will (i) vest in 12.5% of Stream Options outstanding under a grant dated April 21, 1995 as set forth in the Agreement; (ii) vest in RRD Options for 10,400 shares under a grant dated December 10, 1992; 5,200 shares under a grant dated December 9, 1993; and 4,200 shares under a grant dated December 12, 1994; and (iii) own, without restrictions on transfer or possibility of forfeiture, RRD Stock granted under a restricted stock agreement dated December 12, 1991. (c) Vesting, Rights, etc. After Termination Date: -------------------------------------------- (i) From and after the Termination Date, there will be no further vesting in Cowan of any additional Stream Options or RRD Options over and above those that shall have vested prior to that Date, except, however, that 50% of each then unvested Stream Option granted to Cowan under the Agreement shall immediately vest upon the Termination Date. (ii) Pursuant to the terms of the Stream 1995 Stock Option Plan, Stream grants to Cowan a period of up to eighteen months from January 1, 1997 (ending June 30, 1998) in which to exercise any Stream Options vested in Cowan on the Termination Date. During this period, Cowan shall be entitled to all rights (including rights due in the event of an Acquisition Event as defined in the Stream 1995 Stock Option Plan) available to all other Stream Option holders. (iii) Pursuant to the terms of the 1991 and 1995 RRD Stock Incentive Plans, Cowan may exercise his RRD Options at any time during the 90-day period next following the Termination Date. 3. REPURCHASE OF COWAN'S STREAM STOCK ----------------------------------- In lieu of any right Stream may have now or in the future to purchase Cowan's Stream Stock as provided in Para. 4.3.5 of the Agreement (which rights are hereby declared null and void and of no further force or effect), the parties have agreed on the following arrangement whereby Cowan can elect to sell his Purchased Shares (as defined in Para. 4.3.1 of the Agreement) to Stream, failing of which election by Cowan, he shall continue to own such Stock. (a) Stream Obligation to Repurchase Stream Stock, Price: Until such time as there shall have occurred a Trigger Event (as defined in the Agreement) or until the Stream Stock is publicly traded, Cowan shall have the right, exercisable by notice to Stream, to require Stream to buy back up to one- half of his total Purchased Shares on either or both of two occasions ("First Election" and "Second Election," respectively) at Cowan's purchase price for such Shares plus an additional amount representing interest on the purchase price for such Shares. -4- (b) Allocation of Repurchase Price Between Borrowed Funds and Cowan's Own Funds: Cowan may, on each of the First Election and Second Election dates, elect to allocate the Purchase Shares sold to Stream between (i) those Shares purchased for cash and (ii) those Shares purchased using funds borrowed from Stream. Such election shall be in Cowan's own sole and unfettered discretion, and he shall designate such allocation at the time of, and in his notice of exercise of each of, the First Election or the Second Election, as the case may be. Failing and in default of such a designation by Cowan, in any sale of Purchased Shares to Stream, the shares sold shall be deemed to be 50% those purchased by Cowan for cash and 50% those purchased by Cowan using funds borrowed from Stream. (c) How Purchase Effected: As to any Purchased Shares purchased by Cowan using funds borrowed from Stream, a repurchase by Stream shall be effected by crediting against the principal amount of The Note an amount equal to (i) the elected number of Purchased Shares to be sold times (ii) $6 (adjusted for any splits, stock dividends, combination of shares or recapitalization), and credit against interest due on The Note all interest accrued to date of credit on such portion of the principal. As to any Purchased Shares purchased by Cowan for cash, a repurchase shall be effected by a cash payment to Cowan which shall include interest on such funds computed at the rate of interest as provided in The Note, namely 7.34% per annum for the period from the date of original purchase by Cowan until the date of such repurchase by Stream hereunder. Except for reflection of credits against The Note, nothing herein shall be deemed to amend or accelerate any terms contained in The Note. (d) When Cowan Election May be Made: Cowan may exercise the First Election at any time before the later of (i) thirty (30) days after the actual execution and delivery of this Memorandum, and (ii) fifteen (15) business days next following Cowan's receipt of Stream financial statements for the second fiscal quarter of 1996 (the "Financial Statements"). Cowan may exercise the Second Election at any time after April 30, 1997 and before a date fifteen (15) full calendar months next following the end of First Election period, as aforesaid (being the later of October 31, 1997 or a date fifteen (15) full calendar months from the fifteenth business day following Cowan's receipt of the Financial Statements). (e) Stockholder Information/Reports: The parties agree and acknowledge that these agreements with respect to Stream Stock and Stream Options are intended to afford Cowan certain limited participation in any public offerings or stock sales in connection with a purchase of Stream by a third party. Accordingly, so long as Cowan shall hold any Stream Stock or Stream Options and provided that the Stream Stock is not publicly traded, Cowan shall have the right to meet no more frequently than quarterly with the Chief Financial Officer of RRD (currently Cheryl A. Francis), who shall keep him advised of such developments and events as may be appropriate under the described circumstances; provided, however, that Cowan agrees that all such information shall be deemed confidential and proprietary information of Stream and RRD, and Cowan shall -5- be prohibited from discussing such information with, or disclosing such information to, any third party. 4. REFERENCES ---------- Upon request by Cowan, Stream and RRD shall furnish references with respect to Cowan and his accomplishments and achievements during his tenure with them, from among the following persons: Messrs John R. Walter, Robert White, Mark Nunnelley, Morton Rosenthal and Steven Baumgartner. 5. CONFIDENTIALITY AND NON-DISPARAGEMENT ------------------------------------- (a) Cowan, for his part, and Stream and RRD (together the "Companies") for theirs, each agree that the terms of this Memorandum of Agreement shall be and remain confidential and shall not be disclosed except when required by law or government decree, judicial process, court order or the like, or in connection with Cowan's seeking legal or financial planning advice. Cowan acknowledges that this Memorandum of Agreement will be filed by RRD as required by law with the Securities and Exchange Commission, and that such filing shall not constitute a breach of confidentiality. Cowan shall not make, utter or issue any public statements that may be reasonably construed as disparaging to the Companies or placing the Companies in a negative or false light; and likewise, the Companies shall and shall cause their officers, employees and agents, not to make, utter or issue any public statements that may be reasonably construed as disparaging to Cowan or placing Cowan in a negative or false light. (b) In addition to the foregoing, each of Cowan and Stream acknowledge the continuing application to Cowan of Para. 7.1. of the Agreement notwithstanding termination of Cowan's employment with Stream. 6. MODIFICATION OF THE AGREEMENT'S NON-COMPETE RESTRICTIONS -------------------------------------------------------- (a) Recitals: Para. 8. of the Agreement sets forth certain non-compete restrictions to apply in the event of termination of Cowan's employment by Stream. In view of the termination of Cowan's employment relationship approximately a year after beginning his tenure at Stream, the parties have agreed to narrow the scope of non-compete restrictions as follows: (b) Restated Agreement Not to Compete: Cowan agrees that from and after the date hereof and for the Non-Competition Period set forth in the Agreement (ending December 31, 1997), he shall not directly or indirectly own, manage, operate, control or participate in, whether as an officer, employee, partner, director, principal, consultant, agent or -6- otherwise, or aid or assist anyone else in the conduct of, any business in competition with Stream which business involves the manufacture, replication, ordering, fulfillment, distribution or support of software products, through either physical or electronic means, anywhere in the world except in such countries or areas where Stream is neither operating such a business or is proposing to operate such a business as of the date hereof. Nothing herein shall prohibit Cowan from participating in any business involving the creation and publication of software products, provided such business is not involved in competition with Stream in the business of manufacture, replication, ordering, fulfillment, distribution or support of software products. 7. RELEASE ------- (a) Cowan, on behalf of himself, his heirs, executors, attorneys, administrators and assigns, agrees to release from and not to sue either of Stream or RRD (including current and former employees, partners, fiduciaries, directors, agents, divisions, subsidiaries, affiliates or other related entities) for all known or unknown claims, demands, agreements, actions, causes of action, damages or liabilities of any kind, in law or equity or otherwise, which Cowan has, had or may have against either Stream or RRD related to Cowan's employment with either Stream or RRD, resignation from his officerships with each of Stream or RRD or his resignation from his directorship with Stream, including but not limited to, claims which could have been asserted under any fair employment, contract or tort law, or any other federal, state or local law, regulation or ordinance, such as Title VII of the Civil Rights Act of 1964, the Employee Retirement Income Security Act, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Older Workers Benefit and Protection Act, or under any compensation, bonus, severance or other benefit plan. Notwithstanding the foregoing, nothing herein shall release or waive any rights Cowan may have to enforce the provisions of this Agreement. Cowan acknowledges and agrees that the release and covenant not to sue included herein are essential and material terms of this Memorandum and that without such release and covenant not to sue no agreement would have been reached by the parties. Cowan understands and acknowledges the significance and consequences of this release, and further acknowledges the receipt of separate consideration beyond that to which he would otherwise be entitled in exchange for such release and covenant not to sue. (b) Each of Stream and RRD, on behalf of itself, its attorneys, administrators and assigns, directors, agents, divisions, subsidiaries, affiliates or other related entities, agrees to release from and not to sue Cowan for all known or unknown claims, demands, agreements, actions, causes of action, damages or liabilities of any kind, in law or equity or otherwise, which it has, had or may have against Cowan related to Cowan's employment with either Stream or RRD, resignation from his officerships with each of Stream or RRD or his resignation from his directorship with Stream. Notwithstanding the foregoing, nothing herein shall release or waive any rights either of Stream or RRD -7- may have to enforce the provisions of this Agreement or to recover from Cowan any amounts determined to have been wrongfully paid to him under the terms of any compensation, reimbursement or benefit plan if an audit of such plan reveals such wrongful payment. 8. REVOCATION RIGHTS ----------------- Notwithstanding anything in this Memorandum to the contrary, Cowan acknowledges that he has had the opportunity to have at least twenty-one (21) days within which to decide whether or not to sign this Memorandum. Cowan further acknowledges that he has been given the right to revoke this Memorandum by serving, within a seven (7) day period after signing, a written notice of revocation. The Memorandum shall become effective on the eighth day following its execution by Cowan. If Cowan revokes the Memorandum, neither party shall have any obligation under it. 9. MISCELLANEOUS ------------- (a) Notices: Para. 13.4 of the Agreement is hereby incorporated by reference as a part hereof, except that the addresses for notice purposes shall be: Stream International Inc. 2 Edgewater Drive Norwood, MA 02062 Attn: CEO Copy to: Monica M. Fohrman, Esq. Vice President, Law and Assistant General Counsel R.R. Donnelley & Sons Company Corporate Headquarters 77 West Wacker Drive Chicago, IL 60601 Notices to RRD shall be sent to the Chairman, at the foregoing Chicago address, copy to Attorney Fohrman at same. Notices to Cowan shall be sent to: Rory J. Cowan 281 Fairhaven Hill Road Concord, MA 01742 -8- Copy to: Milton Bordwin, Esq. Rubin and Rudman 50 Rowes Wharf - 3rd Fl. Boston, MA 02110 (b) Captions/Headings: The headings and captions in this Memorandum are for convenience only and are not intended to define or describe the scope or content of the substantive provisions hereof. (c) Counterparts: This Memorandum may be executed in any number of counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument. (d) Governing Law: This Memorandum shall be governed by and construed in accordance with the domestic substantive laws of The Commonwealth of Massachusetts without giving effect to any choice or conflict of laws principles or rules that would cause the application of the domestic substantive laws of any other jurisdiction. (e) Consent to Jurisdiction: Para. 13.9 of the Agreement is hereby incorporated by reference as a part hereof, mutatis mutandis, including references to the "Executive" to mean Cowan and references to "Company" to mean RRD and Stream. (f) Withholding: The payments and benefits described in this Memorandum shall be subject to withholding taxes to the extent required by law. (g) Status of Agreement: Except as specifically set forth or incorporated herein by reference and except for the following additional provisions thereof, the Agreement shall be of no further force and effect: Para. 4.3.4; Para 4.3.6; Para. 7.2; Para. 9, which provisions shall continue in full force and effect, as shall The Note, and the Stock Pledge Agreement referred to in the Agreement. This Memorandum embodies the entire agreement and understanding of the parties with regard to the matters described in this Memorandum and supersedes any and all prior or contemporaneous agreements and understandings, oral or written between Cowan, on the one hand, and either of Stream or RRD, on the other hand. The parties agree to execute such other agreements and documents and do such acts and deeds as are reasonably necessary or appropriate to effectuate this agreement and understanding and the mutual purposes of the parties hereto. (h) Legal Advice: In signing below, Cowan expressly acknowledges that he has read this Memorandum carefully, that he fully understands its terms and conditions, that he has been advised of his rights and has been advised to consult an attorney prior to executing this Memorandum. Cowan intends to be legally bound by the terms and conditions of this Memorandum. -9- Executed as a sealed instrument effective as of the date and year first above written, but in fact signed and delivered on the following date for the purposes hereof: June 30, 1996 Stream International Holdings Inc. /s/Rory J. Cowan by /s/Cheryl A. Francis - ----------------------------------- ---------------------------------- Rory J. Cowan Cheryl A. Francis, Director Hereunto duly authorized R.R. Donnelley & Sons Company by /s/Steven J. Baumgartner ------------------------------------- Steven J. Baumgartner, Exec. V.P. & Sector President Hereunto duly authorized -10- EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 30,693 0 1,090,893 25,134 356,857 1,474,367 4,191,238 2,276,165 4,499,867 1,054,698 1,228,345 330,612 0 0 1,460,167 4,499,867 3,124,496 3,124,496 2,593,611 2,593,611 923,905 0 49,796 (369,100) (46,458) (322,642) 0 0 0 (322,642) (2.09) (2.09)
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