-----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, CYkCcKqVjnJpD5IniCxcUtk1/IRTwUAxP1EVieHExaJ5AQnRhShQsk/VH7uxwIyI W3tM00HML2oGiZqv5QJTkA== 0000950131-97-004766.txt : 19970806 0000950131-97-004766.hdr.sgml : 19970806 ACCESSION NUMBER: 0000950131-97-004766 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970805 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-04694 FILM NUMBER: 97651862 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/A 1 AMENDMENT #1 TO FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1997 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, 1997 146,296,724 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1997 and 1996........................................................ 3 Condensed Consolidated Balance Sheets as of June 30, 1997 (Unaudited) and December 31, 1996........................... 4 Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 1997 and 1996............. 5 Notes to Condensed Consolidated Financial Statements (Unaudited)................................................. 6-7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Comparison of Second Quarter and First Half 1997 to 1996..... 8-12 Changes in Financial Condition............................... 12 Other Information............................................ 12-13 Outlook...................................................... 14 PART II OTHER INFORMATION Item 1. Legal Proceedings.................................... 15 Item 6. Exhibits and Reports on Form 8-K..................... 15
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 -------------------------- -------------------------- 1997 1996 1997 1996 ------------ ------------ ------------ ------------ Net sales............... $ 1,504,997 $ 1,569,114 $ 2,980,235 $ 3,104,526 Cost of sales........... 1,255,522 1,279,052 2,496,975 2,573,641 ------------ ------------ ------------ ------------ Gross profit............ 249,475 290,062 483,260 530,885 Selling and administrative expenses............... 181,079 184,792 353,725 363,273 Restructuring charges... -- 48,084 -- 560,632 ------------ ------------ ------------ ------------ Earnings (loss) from operations............. 68,396 57,186 129,535 (393,020) Other income (expense): Interest expense...... (22,622) (24,713) (45,182) (49,796) Gain on Metromail stock offering....... -- 44,158 -- 44,158 Other income (expense)--net....... 12,638 2,982 19,548 29,558 ------------ ------------ ------------ ------------ Earnings (loss) before income taxes........... 58,412 79,613 103,901 (369,100) Provision (benefit) for income taxes........... 20,736 25,336 36,885 (46,458) ------------ ------------ ------------ ------------ Net income (loss)....... $ 37,676 $ 54,277 $ 67,016 $ (322,642) ============ ============ ============ ============ Per common share: Net income (loss)..... $ 0.26 $ 0.35 $ 0.46 $ (2.09) ============ ============ ============ ============ Cash dividends........ $ 0.19 $ 0.18 $ 0.38 $ 0.36 ============ ============ ============ ============ Average shares outstanding............ 146,431,909 154,113,294 146,076,430 154,062,081 ============ ============ ============ ============
See accompanying Notes to Condensed Consolidated Financial Statements. 3 R. R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES ------------ CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) JUNE 30, 1997 AND DECEMBER 31, 1996 (THOUSANDS OF DOLLARS) ASSETS
1997 1996 ---------- ---------- Cash and equivalents............................. $ 70,669 $ 31,142 Receivables, less allowance for doubtful accounts of $44,849 and $24,735 at June 30, 1997 and December 31, 1996, respectively................. 1,058,241 1,324,252 Inventories...................................... 257,983 288,506 Prepaid expenses................................. 145,745 108,957 ---------- ---------- Total current assets........................... 1,532,638 1,752,857 ---------- ---------- Property, plant and equipment, at cost........... 4,424,978 4,289,101 Less accumulated depreciation.................... 2,430,604 2,344,374 ---------- ---------- Net property, plant and equipment.............. 1,994,374 1,944,727 ---------- ---------- Goodwill and other intangibles--net.............. 513,232 541,319 Other noncurrent assets.......................... 633,748 610,101 ---------- ---------- Total assets................................... $4,673,992 $4,849,004 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable................................. $ 388,001 $ 487,914 Accrued compensation............................. 159,971 131,644 Short-term debt.................................. 33,296 33,296 Current and deferred income taxes................ 56,977 56,163 Other accrued liabilities........................ 407,303 438,530 ---------- ---------- Total current liabilities...................... 1,045,548 1,147,547 ---------- ---------- Long-term debt................................... 1,334,682 1,430,671 Deferred income taxes............................ 251,981 253,850 Other noncurrent liabilities..................... 391,720 385,655 Shareholders' equity: Common stock, at stated value ($1.25 par value)........................................ 320,962 320,962 Retained earnings, net of cumulative translation adjustments of $29,219 and $26,580 at June 30, 1997 and December 31, 1996, respectively.................................. 1,489,146 1,486,215 Unearned compensation.......................... (12,419) (5,402) Reacquired common stock, at cost............... (147,628) (170,494) ---------- ---------- Total shareholders' equity................. 1,650,061 1,631,281 ---------- ---------- Total liabilities and shareholders' equity. $4,673,992 $4,849,004 ========== ==========
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)
1997 1996 --------- --------- Cash flows provided by (used for) operating activities: Net income (loss)...................................... $ 67,016 $(322,642) Restructuring charges, net of tax and minority interest.............................................. -- 435,380 Depreciation........................................... 171,844 176,608 Amortization........................................... 19,739 33,155 Gain on Metromail stock offering....................... -- (44,158) Gain on sale of assets................................. (11,770) (16,310) Net change in operating working capital................ 160,460 144,746 Net change in other assets and liabilities............. 11,778 (21,979) Other.................................................. (3,254) (7,786) --------- --------- Net cash provided by operating activities................ 415,813 377,014 --------- --------- Cash flows provided by (used for) investing activities: Capital expenditures................................... (242,691) (235,997) Proceeds from receivables from Metromail............... -- 248,510 Other investments including acquisitions, net of cash acquired.............................................. (37,333) (22,368) Dispositions of assets................................. 45,381 18,068 --------- --------- Net cash provided by (used for) investing activities..... (234,643) 8,213 --------- --------- Cash flows provided by (used for) financing activities: Net increase (decrease) in borrowings.................. (95,989) (332,616) Disposition of reacquired common stock................. 25,086 25,849 Acquisition of common stock............................ (14,081) (25,831) Cash dividends on common stock......................... (56,603) (55,514) --------- --------- Net cash used for financing activities................... (141,587) (388,112) --------- --------- Effect of exchange rate changes on cash and equivalents.. (55) 455 --------- --------- Net increase (decrease) in cash and equivalents.......... 39,528 (2,429) --------- --------- Cash and equivalents at beginning of period.............. 31,142 33,122 --------- --------- Cash and equivalents at end of period.................... $ 70,670 $ 30,693 ========= =========
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, 1996 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 1996 annual report on Form 10-K. The condensed consolidated financial statements included herein reflect, in the opinion of the company, all adjustments (which include only normal, recurring adjustments) necessary to present fairly the financial information for such periods. Certain immaterial prior year amounts have been reclassified to maintain comparability with current year classifications. Note 2. Components of the company's inventories at June 30, 1997 and December 31, 1996 were as follows:
(THOUSANDS OF DOLLARS) ------------------ 1997 1996 -------- -------- Raw materials and manufacturing supplies.................... $127,016 $154,734 Work in process............................................. 180,317 183,248 Finished goods.............................................. 36,656 34,325 Progress billings........................................... (41,680) (40,475) LIFO reserve................................................ (44,326) (43,326) -------- -------- Total inventories....................................... $257,983 $288,506 ======== ========
Note 3. The following provides supplemental cash flow information:
(THOUSANDS OF DOLLARS) --------------- SIX MONTHS ENDED JUNE 30 --------------- 1997 1996 ------- ------- Cash flow data: Interest paid, net of capitalized interest.................... $44,546 $50,561 Income taxes paid............................................. $31,168 $31,847
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 $561 million ($435 million after taxes and a minority interest benefit). Approximately $195 million of the charges related to its 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, of which $69 million was incurred through June 1997, with the remainder expected to be incurred through the first half of 1998. In addition, the company recognized 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. The following table presents the components of the company's restructuring reserves along with charges against these reserves from their establishment until June 30, 1997 (in thousands of dollars):
WRITEDOWN OF PROPERTY AND ORIGINAL INVESTMENTS RESTRUCTURING RESTRUCTURING TO FAIR CASH RESERVES AS OF CHARGES VALUE PAYMENTS JUNE 30, 1997 ------------- ------------ -------- -------------- 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 -- (68,952) 108,008 Impairment loss on intangible assets and investments............... 132,941 (132,941) -- -- -------- --------- -------- -------- Total restructuring reserves.............. $560,632 $(383,672) $(68,952) $108,008 ======== ========= ======== ========
Note 5. On November 25, 1996, a purported class action was brought against the company in federal district court in Chicago, Ill., on behalf of all current and former African-American employees, alleging that the company racially discriminated against them. The complaint seeks declaratory and injunctive relief, and asks for actual, compensatory, consequential and punitive damages in an amount not less than $500 million. Most of the specific factual assertions of the original complaint were related to the closing by the company of its Chicago, Ill., catalog production operations begun in 1993. The complaint was amended on February 7, 1997, to reflect more general claims applicable to other company locations. Plaintiffs have filed a motion seeking nationwide class certification. The company has filed a motion for partial summary judgment as to all claims relating to its Chicago catalog operations on the grounds that those claims are untimely. On December 18, 1995, a purported class action was filed against the company in federal district court in Chicago, Ill., alleging that older workers were discriminated against in selection for termination upon the closing of the Chicago catalog operations. The suit also alleges that the company violated the Employee Retirement Income Security Act (ERISA) in determining benefits payable to retiring or terminated employees. On October 8, 1996, plaintiffs filed a motion to maintain the ERISA claims as a class action on behalf of all company retirement plan participants who were eligible for early retirement benefits at the time of their termination. The company's position is that the proper ERISA class is limited to the former Chicago employees. Both cases relate at least in part to the circumstances surrounding the closure of the Chicago catalog operations. The company believes that it acted properly in the closing of the operations, has a number of valid defenses to all of the claims made and is vigorously defending its actions. However, management is unable to make a meaningful estimate of any loss which could result from an unfavorable outcome of either case. 7 MANAGEMENT DISCUSSION AND ANALYSIS COMPARISON OF SECOND QUARTER AND FIRST HALF 1997 TO 1996 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 in North America, with approximately 38,000 employees in 26 countries on five continents. The company is organized into sectors, which include the following business units and subsidiaries: Commercial Print Sector, which includes Merchandise Media (catalogs, retail advertising circulars and direct mail products) and Magazine Publishing Services (consumer and trade magazines). These businesses share common requirements in scale, equipment, services and distribution. Information Management Sector, which includes Book Publishing Services, Telecommunications (domestic directories) and Financial Services (financial printing and communications process services). These businesses serve customers that need to reproduce and distribute information in a variety of formats globally and share requirements for speed, flexibility and integrated manufacturing. This sector also includes Information Services, which includes the 77 Capital venture-capital fund, creative design and communication services, and a variety of information services. These operations provide direct marketing, graphics-management and graphic-design services. Global Commercial Print Sector, which includes the company's directory, book, magazine and catalog operations outside North America--in Europe, Latin America and Asia. Stream International Holdings, Inc. (SIH), which includes Modus Media International (software replication, documentation and kitting and assembly), Corporate Software & Technology (licensing and fulfillment, customized documentation, license administration and user training) and Stream International (technical and help-line support). The business was formed in April 1995 by a merger of the company's Global Software Services business with Corporate Software Inc. Approximately 80% owned by the company, it is the world's largest software manufacturer, marketer and technical support and service provider. On April 30, 1997, SIH announced that a registration statement had been filed with the Securities and Exchange Commission for the proposed initial public offering of the common shares of Stream International. Immediately prior to the closing of the proposed offering, SIH would be reorganized such that the only business it conducts would be the outsource technical support business, which has changed its name to Stream International Inc. SIH's two other business units, Corporate Software & Technology and Modus Media International, would be spun off as two subsidiaries of a separate entity, the equity of which would be distributed to the current SIH stockholders. After completion of the reorganization and public offering, the company would own less than 40% of the outstanding shares of Stream International and less than a majority interest in the remaining two business units, and would thereafter account for these interests using the equity method. Proceeds to the company from the completed offering would be used to pay down debt and for general corporate purposes. The planned offering of Stream International shares will be made only by means of a prospectus. 8 Sales results by business unit for the second quarter and first half of 1997 and 1996 are presented below: NET SALES BY BUSINESS UNIT--SECOND QUARTER
SECOND QUARTER ENDED JUNE 30, % OF % OF (THOUSANDS OF DOLLARS) 1997 SALES 1996 SALES - ----------------------------- ------- ----- ------- ----- Stream International Holdings, Inc. ................ 414,879 28% 404,115 26% Merchandise Media................................... 275,598 18% 288,056 18% Magazine Publishing Services........................ 263,050 17% 251,778 16% Book Publishing Services............................ 182,116 12% 161,369 10% Telecommunications.................................. 132,655 9% 164,602 11% Financial Services.................................. 132,308 9% 114,279 7% Global Commercial Print............................. 84,557 6% 74,600 5% Metromail........................................... -- -- 69,383 4% Other............................................... 19,834 1% 40,932 3% NET SALES BY BUSINESS UNIT--YEAR TO DATE FIRST HALF ENDED JUNE 30, % OF % OF (THOUSANDS OF DOLLARS) 1997 SALES 1996 SALES - ------------------------- ------- ----- ------- ----- Stream International Holdings, Inc.................. 836,823 28% 795,633 26% Merchandise Media................................... 553,727 19% 579,495 19% Magazine Publishing Services........................ 530,605 18% 529,747 17% Book Publishing Services............................ 353,165 12% 317,509 10% Telecommunications.................................. 268,894 9% 313,216 10% Financial Services.................................. 247,587 8% 202,393 6% Global Commercial Print............................. 155,596 5% 157,107 5% Metromail........................................... -- -- 125,522 4% Other............................................... 33,838 1% 83,904 3%
CONSOLIDATED RESULTS OF OPERATIONS The company reported second quarter 1997 net income of $38 million, or $0.26 per share. In the previous year's second quarter, the company reported net income of $54 million, or $0.35 per share, reflecting a $48 million pre-tax restructuring charge recorded in the period ($24 million after taxes and a minority interest benefit) that was primarily related to the repositioning of Modus Media International, as well as a $44 million pre-tax gain ($26 million after taxes) related to the June 1996 initial public offering of shares of Metromail Corporation (Metromail). Excluding the restructuring charge and the Metromail gain, net income for the second quarter of 1996 totaled $52 million, or $0.34 per share. Second quarter 1997 net income declined 28%, and earnings per share declined 24%, from the comparable quarter in 1996, excluding the restructuring charge and the Metromail gain. For the first half of 1997, the company reported net income of $67 million, or $0.46 per share. In the previous year's first half, the company reported a net loss of $323 million, or $2.09 per share, reflecting the $512 million pre- tax restructuring charge ($411 million after taxes and a minority interest benefit) recorded in the first quarter of 1996, as well as the above-mentioned restructuring charge and Metromail gain recorded in the second quarter of 1996. Excluding the restructuring charges and the Metromail gain, net income for the first half of 1996 totaled $86 million, or $0.56 per share. First half net income declined 22%, and earnings per share declined 18%, from last year's first half, excluding the restructuring charges and the Metromail gain. The company's performance in the second quarter of 1997 was impacted by declines in the Telecommunications business unit due to volume and price reductions corresponding to contract renewals, increased losses in SIH due to declines in demand at Modus Media International and 9 increased costs of operating SIH as three separate businesses. In addition, performance in the second quarter and first half of 1997 was impacted by higher expenses associated with the continued development of the company's logistics and fulfillment businesses and the startup of a short-run, four-color book printing facility in Roanoke, Virginia (Roanoke facility). CONSOLIDATED NET SALES Net sales for the second quarter of 1997 decreased approximately $64 million, or 4%, to approximately $1.5 billion. The decline was primarily due to price and volume declines in Telecommunications (down approximately $32 million) and the company's deconsolidation of Metromail due to reduced ownership following the second quarter 1996 public offering (down $69 million). These declines were partially offset by increased revenues in most business units, particularly in Book Publishing Services and Financial Services. Net sales from foreign operations represented approximately $254 million, or 17% of total net sales, in the second quarter, down 6% from $269 million, or 17% of total net sales, in the year earlier quarter. The decline in foreign sales principally reflects the discontinuation of magazine and catalog printing in the United Kingdom and the worldwide repositioning of Modus Media International's foreign manufacturing operations, partially offset by increased volume in Global Commercial Print. Net sales for the first half decreased $124 million, or 4%, to approximately $3.0 billion. The decline was primarily due to: lower paper prices in the first quarter compared with the first quarter of 1996 (down approximately $50 million); price and volume declines in Telecommunications (down approximately $44 million); and the company's deconsolidation of Metromail (down $126 million). These declines were partially offset by increased revenues primarily in SIH, Financial Services and Book Publishing Services. Net sales from foreign operations represented approximately $503 million, or 17% of total net sales, in the first half, down 4% from $525 million, or 17% of total net sales, in the first half of 1996. The decline in foreign sales for the first half reflects the factors identified above for the second quarter. CONSOLIDATED EXPENSES Gross profit declined 14% to $249 million and 9% to $483 million in the second quarter and first half of 1997, respectively, from the comparable 1996 periods. The declines reflect the company's reduced ownership of Metromail (down $32 million for the second quarter and $51 million for the first half), price and volume declines in Telecommunications, and higher expenses associated with the continued development of the company's logistics and fulfillment businesses and the startup of the Roanoke facility. In addition, the indirect costs of restructuring activities led to temporarily higher manufacturing costs in the company's gravure platform and in the United Kingdom during the periods. These declines were partially offset by manufacturing cost improvements in most business units. Selling and administrative expenses in the second quarter of 1997 declined 2% to $181 million, due to the company's reduced ownership of Metromail (down $21 million), partially offset by volume-related increases primarily in the Financial Services and Book Publishing Services business units. The ratio of selling and administrative expense to net sales, at 12%, was the same in both the second quarters of 1997 and 1996. Interest expense decreased approximately $2 million, due to lower average debt balances associated with improvements in operating working capital and the reduction of debt using a portion of the proceeds of the fourth quarter 1996 public offering of Donnelley Enterprise Solutions Incorporated (DESI). Other income in the second quarter 1997 decreased $35 million, primarily due to non-recurring events in the second quarter of 1996, including a $44 million gain on the June 1996 Metromail public offering and a $4 million minority interest benefit arising from SIH's portion of the second quarter restructuring charge. These non-recurring events were partially offset by 1997 gains on the sale of investments in the company's venture-capital portfolio. 10 Selling and administrative expenses in the first half of 1997 declined 3% to $354 million, due to the company's reduced ownership of Metromail (down $39 million), partially offset by volume-related increases primarily in the Financial Services and Book Publishing Services business units. The ratio of selling and administrative expenses to net sales, at 12%, was the same in both the first half of 1997 and 1996. Interest expense decreased approximately $5 million, due to lower average debt balances associated with improvements in operating working capital and the reduction of debt using a portion of the proceeds of the public offering of DESI. Other income for the half decreased $54 million, primarily due to non-recurring events in the first half of 1996, including a $14 million gain on the sale of investments in the company's venture-capital portfolio, a $44 million gain on the June 1996 Metromail public offering and a $17 million minority interest benefit arising from SIH's portion of the restructuring charges. These non-recurring events were partially offset by a $6 million gain on the sale of the company's interest in a magazine distribution venture in the United Kingdom and gains on the sale of investments in the company's venture-capital portfolio. SUMMARY OF EXPENSE TRENDS
SECOND QUARTER ENDED JUNE 30, % INCREASE (THOUSANDS OF DOLLARS) 1997 1996 (DECREASE) - ----------------------------- ---------- ---------- ---------- Cost of materials.............................. $707,045 $729,429 (3)% Cost of manufacturing.......................... 446,590 448,937 (1)% Depreciation................................... 90,227 85,052 6% Amortization................................... 11,660 15,634 (25)% Selling and administrative..................... 181,079 184,792 (2)% Net interest expense........................... 22,622 24,713 (8)% FIRST HALF ENDED JUNE 30, % INCREASE (THOUSANDS OF DOLLARS) 1997 1996 (DECREASE) - ------------------------- ---------- ---------- ---------- Cost of materials.............................. $1,400,475 $1,461,235 (4)% Cost of manufacturing.......................... 904,917 902,643 3% Depreciation................................... 171,844 176,608 (3)% Amortization................................... 19,739 33,155 (40)% Selling and administrative..................... 353,725 363,273 (3)% Net interest expense........................... 45,182 49,796 (9)%
RESULTS OF OPERATIONS OF PRINT-RELATED BUSINESSES AND OF SIH Print-Related Businesses Net sales for the company's print-related businesses (all consolidated business units other than SIH and excluding Metromail in 1996) in the second quarter of 1997 remained consistent with second quarter 1996 at $1.1 billion. Increased demand primarily in the Book Publishing Services and Financial Services business units was offset by price and volume declines in Telecommunications. Print-related businesses had operating income of $78 million, a 19% decline from the same quarter in 1996, excluding the restructuring charge. The decrease was attributable to higher expenses associated with the continued development of the company's logistics and fulfillment businesses, the startup of the Roanoke facility, and price and volume declines in Telecommunications. For the first half of 1997, net sales declined $40 million to $2.1 billion, primarily reflecting lower paper prices, in addition to the factors identified above. Operating income was $148 million, an 11% decline from the first half of 1996, excluding the 1996 restructuring charges. The decrease is attributable to the factors identified above. 11 Stream International Holdings, Inc. Net sales for SIH in the second quarter of 1997 increased by $11 million, or 3%, to $415 million. SIH had an operating loss of approximately $10 million, an $8 million decline from the second quarter of 1996. The higher operating losses reflect declines in demand in Modus Media International, and the increased costs of operating SIH as three separate businesses. For the first half of 1997, net sales for SIH increased by $41 million, or 5%, to $837 million. For the first half SIH had an operating loss of $18 million, an $8 million decline from the first half of 1996. The higher operating loss is attributable to the factors identified above for the second quarter and an additional bad debt reserve recorded in the first quarter of 1997. CHANGES IN FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES For the first half of 1997, net cash flow provided by operating activities increased by $39 million, or 10%, to $416 million. The increase is primarily related to improvements in operating working capital. Operating working capital (defined as inventories, accounts receivable and prepaid expenses, minus accounts payable, accrued compensation and other accrued liabilities, including the restructuring reserve) decreased $160 million in the first half of 1997. The decrease is due primarily to lower inventory and accounts receivable, compared with a $145 million decrease during the first half of 1996. 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 $243 million, including purchases for the Roanoke facility and purchases related to revamping the company's gravure manufacturing platform. Full-year capital spending is expected to be between $450 million and $500 million. At June 30, 1997, the company had an unused revolving credit facility of $550 million with a number of banks. This credit facility provides support for the issuance of commercial paper and other credit needs. In addition, certain subsidiaries of the company had credit facilities with unused borrowing capacities totaling approximately $100 million at June 30, 1997. OTHER INFORMATION Metromail--On June 19, 1996, Metromail completed an initial public offering of its common stock, resulting in the company's interest in Metromail being reduced to approximately 38% and the company changing its method of accounting for Metromail from consolidation to the equity method. Under the equity method, the company recognizes in income its proportionate share of net income of Metromail. Metromail had net sales and operating earnings of $69 million and $11 million, respectively, in the second quarter of 1996 and $126 million and $12 million, respectively, in the first half of 1996. DESI--On November 4, 1996, DESI completed an initial public offering of its common stock, resulting in the company's interest in DESI being reduced to approximately 43% and the company changing its method of accounting for DESI from consolidation to the equity method. Under the equity method, the company recognizes in income its proportionate share of net income of DESI. DESI's net sales and operating earnings were not material to the consolidated results of the company in 1996. Restructurings--On March 28, 1996, the company announced a $512 million pre- tax charge to first quarter earnings ($411 million after taxes and a minority interest benefit) 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 was related to the gravure platform realignment. Approximately $189 million was related to other manufacturing restructuring, including approximately $92 million to reposition SIH's worldwide operations. Additionally, the company wrote down approximately $128 million in equipment, intangibles and investments in non-core businesses, in accordance with SFAS 121. 12 On July 25, 1996, the company announced a $48 million pre-tax restructuring charge ($24 million after taxes and a minority interest benefit) primarily to restructure SIH'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 through the first half of 1998 ($69 million of this amount has been paid through June 30, 1997). The remaining $383 million relates to non-cash items, mainly the write-down of fixed assets and goodwill. Human Resources and Plant Closings--As part of the first-half 1996 restructuring discussed above, the company has discontinued catalog and magazine printing operations in the United Kingdom, closed SIH's Crawfordsville, Ind., documentation printing and diskette replication operations, consolidated a stand-alone book bindery in Scranton, Pa., closed a book prepress operation in Barbados and closed a gravure-printing plant in Casa Grande, Ariz. In addition, as part of the first-half 1996 restructuring, the company announced plans to close a gravure-printing plant in Newton, N.C., which is expected to occur by the end of 1997. Subsequent to the second quarter, on July 7th, 1997, the company announced plans to close a fulfillment and distribution center in Crawfordsville, Ind. In addition, on July 23, 1997, the company announced plans to close CORIS, a content management software subsidiary in Willowbrook, Ill. Both closings are expected to occur by the end of 1997. Costs associated with the closings are not expected to have a material effect on the financial statements. Litigation--On November 25, 1996, a purported class action was brought against the company in federal district court in Chicago, Ill., on behalf of all current and former African-American employees, alleging that the company racially discriminated against them. The complaint seeks declaratory and injunctive relief, and asks for actual, compensatory, consequential and punitive damages in an amount not less than $500 million. Most of the specific factual assertions of the original complaint were related to the closing by the company of its Chicago, Ill., catalog production operations begun in 1993. The complaint was amended on February 7, 1997, to reflect more general claims applicable to other company locations. Plaintiffs have filed a motion seeking nationwide class certification. The company has filed a motion for partial summary judgment as to all claims relating to its Chicago catalog operations on the grounds that those claims are untimely. On December 18, 1995, a purported class action was filed against the company in federal district court in Chicago, Ill., alleging that older workers were discriminated against in selection for termination upon the closing of the Chicago catalog operations. The suit also alleges that the company violated the Employee Retirement Income Security Act (ERISA) in determining benefits payable to retiring or terminated employees. On October 8, 1996, plaintiffs filed a motion to maintain the ERISA claims as a class action on behalf of all company retirement plan participants who were eligible for early retirement benefits at the time of the termination. The company's position is that the proper ERISA class is limited to the former Chicago employees. Both cases relate at least in part to the circumstances surrounding the closure of the Chicago catalog operations. The company believes that it acted properly in the closing of the operations, has a number of valid defenses to all of the claims made and is vigorously defending its actions. However, management is unable to make a meaningful estimate of any loss which could result from an unfavorable outcome of either case. Corporate-Owned Life Insurance--As a part of the Health Insurance Portability and Accountability Act enacted in August 1996, the income tax deduction for interest on loans from corporate-owned life insurance (COLI) policies is being phased out and then eliminated, effective in 13 1999. The company has used loans from COLI to finance certain employee benefits liabilities, and the loss of the interest deduction may cause the company's effective tax rate to rise as the deduction is phased out over the next few years. Share Repurchase--The company announced and completed the repurchase of $250 million of its common stock in 1996, which was in addition to its ordinary purchase of 1.8 million shares for issuance under various employee stock plans. The number of shares outstanding at June 30 1997, was 146 million, with an average outstanding number of shares for the half of 146 million. In the first half of 1996, the average outstanding number of shares was 154 million. 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 suffer from overcapacity, leading to fierce competition. Competition is based largely on price, quality and servicing the special needs of customers. The company believes that demand for most product categories should continue to improve over comparable periods in 1996. This belief may be affected by a number of factors including: increased utilization of customer supplied paper, which creates difficult top-line comparisons without the corresponding impact on earnings; and movement toward increased versioning and target marketing, which favors shorter run counts that have traditionally been more cost effective on an offset platform. The company continues to evaluate these factors and position of its platform configuration to ensure that it responds to customer needs. Recent high stock valuations and market volatility have created uncertainty in the capital markets. The uncertainty has affected transaction flow, which may impact results in the Financial Services business unit. Moreover, a significant customer of the Telecommunications business unit has modified its production cycle to move work that has been traditionally produced in the fourth quarter into the first quarter of next year. In the short term, this action will affect revenue and earnings comparisons in the current year. In the long term, it should create manufacturing efficiencies as the work is moved to slower production periods. The company anticipates that because information systems are becoming increasingly important to the effective management of the company, increased spending will likely be necessary to update systems and ensure that the company effectively manages the transition to the year 2000. Over the past three years, the company has adopted the principles of Economic Value Added (EVA) as its primary financial framework. The objective of this system is to put in place a system of value-based metrics that measures periodic progress toward improved shareholder value creation. To enhance value, the company moved to improve its manufacturing efficiencies in 1996 by initiating the restructuring of its U.S. gravure printing platform; the closure of its commercial print operations in the United Kingdom; and integration of its Digital Division assets into other operations. These actions should generate sustainable cost savings in the long-run. During 1997, as the restructuring continues, operating efficiency will decline temporarily due to the movement of equipment, retraining of people and movement of printing among facilities. This short-term disruption will continue to occur through 1997, but should provide tangible benefits in future years. Over time, the application of the EVA financial framework to the company's decision-making process is likely to produce slower revenue growth, enhanced free cash flow, a stronger competitive position and improved return on invested capital. 14 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On November 25, 1996, a purported class action was brought against the company alleging racial discrimination and seeking actual, compensatory, consequential and punitive damages in an amount not less than $500 million. On December 18, 1995, a purported class action was brought against the company alleging age discrimination in connection with the 1993 closing of the company's Chicago, Ill. catalog operations, and violation of the Employee Retirement Income Security Act. These actions are described in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS 10(a)1995 Stock Incentive Plan, as amended* 10(b)Donnelley Shares Stock Option Plan, as amended* 27Financial Data Schedule - -------- *Management contract or compensatory plan or arrangement (b) No current Report on Form 8-K was filed during the second quarter of 1997. 15 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 5, 1997 Date __________________________ 16 EX-10.(A) 2 1995 STOCK INCENTIVE PLAN, AS AMENDED R.R. DONNELLEY & SONS COMPANY 1995 STOCK INCENTIVE PLAN (as amended on January 25, 1996, September 1, 1996, November 7, 1996 and July 24, 1997) I. GENERAL 1. Plan. To provide incentives to management through rewards based upon the ownership or performance of the common stock of R.R. Donnelley & Sons Company (the "Company"), the Committee hereinafter designated, may grant cash or bonus awards, stock options, stock appreciation rights ("SARs"), or combinations thereof, to eligible officers and other key management employees, on the terms and subject to the conditions stated in the Plan. In addition, to provide incentives to members of the Board of Directors ("Board") who are not employees of the Company ("non-employee directors"), such non-employee directors are hereby granted options on the terms and subject to the conditions set forth in the Plan. For purposes of the Plan, references to employment by the Company also means employment by a majority-owned subsidiary of the Company and employment by any other entity designated by the Board or the Committee in which the Company has a direct or indirect equity interest. 2. Eligibility. Officers and other key management employees of the Company, its subsidiaries, and any other entity designated by the Board or the Committee in which the Company has a direct or indirect equity interest, shall be eligible, upon selection by the Committee, to receive cash or bonus awards, stock options or SARs, either singly or in combination, as the Committee, in its discretion, shall determine. Non-employee directors shall receive stock options on the terms and subject to the conditions stated in the Plan. 3. Limitation on Shares to be Issued. Subject to adjustment as provided in Section 5 of this Article I, 7,500,000 shares of common stock, par value $1.25 per share ("common stock"), shall be available under the Plan, reduced by the aggregate number of shares of common stock which become subject to outstanding bonus awards, stock options and SARs which are not granted in tandem with or by reference to a stock option ("free-standing SARs"). Shares subject to a grant or award which for any reason are not issued or delivered, including by reason of the expiration, termination, cancellation or forfeiture of all or a portion of the grant or award or by reason of the delivery or withholding of shares to pay all or a portion of the exercise price or to satisfy tax withholding obligations, shall again be available for future grants and awards; provided, however, that for purposes of this sentence, stock options and SARs granted in tandem with or by reference to a stock option granted prior to the grant of such SARs ("tandem SARs") shall be treated as one grant. For the purpose of complying with Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), and the rules and regulations thereunder, the maximum number of shares of common stock with respect to which options or SARs or a combination thereof may be granted during any three-year period to any person shall be 1,000,000, subject to adjustment as provided in Section 5 of this Article I. The maximum number of shares of common stock with respect to which fixed awards in the form of restricted stock may be granted hereunder is 500,000 in the aggregate, subject to adjustment as provided in Section 5 of this Article I. Shares of common stock to be issued may be authorized and unissued shares of common stock, treasury stock or a combination thereof. 4. Administration of the Plan. The Plan shall be administered by a Committee designated by the Board of Directors (the "Committee"). Each member of the Committee shall be (i) an "outside director" within the meaning of Section 162(m) of the Code and (ii) a "Non-Employee Director" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Committee shall, subject to the terms of the Plan, select eligible officers and key management employees for participation; determine the form of each grant and award, either as cash, a bonus award, stock options or SARs or a combination thereof; and determine the number of shares or units subject to the grant or award, the fair market value of the common stock or units when necessary, the time and conditions of vesting, exercise or settlement, and all other terms and conditions of each grant and award, including, without limitation, the form of instrument evidencing the grant or award. The Committee may establish rules and regulations for the administration of the Plan, interpret the Plan, and impose, incidental to a grant or award, conditions with respect to competitive employment or other activities not inconsistent with the Plan. All such rules, regulations, interpretations and conditions shall be conclusive and binding on all parties. Each grant and award shall be evidenced by a written instrument and no grant or award shall be valid until an agreement is executed by the Company and the recipient thereof and, upon execution by each party and delivery of the agreement to the Company, such grant or award shall be effective as of the effective date set forth in the agreement. The Committee may delegate some or all of its power and authority hereunder to the Chief Executive Officer or other executive officer of the Company as the Committee deems appropriate; provided, however, that the Committee may not delegate its power and authority with regard to (i) the selection for participation in the Plan of (A) an employee who is a "covered employee" within the meaning of Section 162(m) of the Code or who, in the Committee's judgment, is likely to be a covered employee at any time during the period a grant or award hereunder to such employee would be outstanding or (B) an officer or other person subject to Section 16 of the Exchange Act or (ii) decisions concerning the timing, pricing or amount of a grant or award to such an employee, officer or other person. -2- A majority of the Committee shall constitute a quorum. The acts of the Committee shall be either (i) acts of a majority of the members of the Committee present at any meeting at which a quorum is present or (ii) acts approved in writing by a majority of the members of the Committee without a meeting. 5. Adjustments. In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of common stock other than a regular cash dividend, the number and class of securities available under the Plan, the number and class of securities subject to each outstanding bonus award, the number and class of securities subject to each outstanding stock option and the purchase price per security, the number of securities subject to each stock option to be granted to non-employee directors pursuant to Article III and the terms of each outstanding SAR shall be appropriately adjusted by the Committee, such adjustments to be made in the case of outstanding stock options and SARs without a change in the aggregate purchase price or base price. If any such adjustment would result in a fractional security being (i) available under the Plan, such fractional security shall be disregarded, or (ii) subject to an outstanding grant or award under the Plan, the Company shall pay the holder thereof, in connection with the first vesting, exercise or settlement of such grant or award, in whole or in part, occurring after such adjustment, an amount in cash determined by multiplying (i) the fraction of such security (rounded to the nearest hundredth) by (ii) the excess, if any, of (A) the fair market value on the vesting, exercise or settlement date over (B) the exercise or base price, if any, of such grant or award. 6. Effective Date and Term of Plan. The Plan shall be submitted to the stockholders of the Company for approval at the 1995 annual meeting of stockholders and, if approved, shall become effective on January 1, 1995. The Plan shall terminate on December 31, 1999 unless terminated prior thereto by action of the Board. No further grants or awards shall be made under the Plan after termination, but termination shall not affect the rights of any participant under any grants or awards made prior to termination. 7. Amendments. The Plan may be amended or terminated by the Board in any respect except that no amendment may be made without stockholder approval if stockholder approval is required by applicable law, rule or regulation, including Section 162(m) of the Code, or such amendment would increase (subject to Section 5 of this Article I) the maximum number of shares available under the Plan. No amendment may impair the rights of a holder of an outstanding grant or award without the consent of such holder. 8. Prior Plans. Upon approval of the Plan by the stockholders of the Company, no further grants or awards shall be made under the Company's 1981 Stock Incentive Plan, as amended (the "1981 Plan"), the 1986 Stock Incentive Plan, as amended (the "1986 Plan"), or the 1991 Stock Incentive Plan, as amended (the "1991 Plan"), except that SARs may be granted with respect to options previously granted and outstanding under such Plans. Grants and awards made under the 1981 -3- Plan, the 1986 Plan and the 1991 Plan prior to approval of the Plan by the stockholders of the Company shall continue in effect in accordance with their terms. II. BONUS AWARDS 1. Form of Award. Bonus awards, whether performance awards or fixed awards, may be made to eligible officers and other key management employees in the form of (i) cash, whether in an absolute amount or as a percentage of compensation, (ii) stock units, each of which is substantially the equivalent of a share of common stock but for the power to vote and, subject to the Committee's discretion, the entitlement to an amount equal to dividends or other distributions otherwise payable on a like number of shares of common stock, (iii) shares of common stock issued to the employee but forfeitable and with restrictions on transfer in any form as hereinafter provided or (iv) any combination of the foregoing. 2. Performance Awards. Awards may be made in terms of a stated potential maximum dollar amount, percentage of compensation or number of units or shares, with the actual such amount, percentage or number to be determined by reference to the level of achievement of corporate, sector, business unit, division, individual or other specific objectives over a performance period of not less than one nor more than ten years, as determined by the Committee. No rights or interests of any kind shall be vested in an individual receiving a performance award until the conclusion of the performance period and the determination of the level of achievement specified in the award, and the time of vesting, if any, thereafter shall be as specified in the award. 3. Fixed Awards. Awards may be made which are not contingent on the achievement of specific objectives, but are contingent on the participant's continuing in the Company's employ for a period specified in the award. 4. Rights with Respect to Restricted Shares. If shares of restricted common stock are subject to an award, the participant shall have the right, unless and until such award is forfeited or unless otherwise determined by the Committee at the time of grant, to vote the shares and to receive dividends thereon from the date of grant and the right to participate in any capital adjustment applicable to all holders of common stock; provided, however, that a distribution with respect to shares of common stock, other than a regular quarterly cash dividend, shall be deposited with the Company and shall be subject to the same restrictions as the shares of common stock with respect to which such distribution was made. During the restriction period, a certificate or certificates representing restricted shares shall be registered in the holder's name and may bear a legend, in addition to any legend which may be required under applicable laws, rules or regulations, indicating that the ownership of the shares of common stock represented by such certificate is subject to the restrictions, terms and conditions of the Plan and the agreement relating to the restricted shares. All such certificates shall be deposited with the Company, together with stock powers or other instruments of -4- assignment (including a power of attorney), each endorsed in blank with a guarantee of signature if deemed necessary or appropriate, which would permit transfer to the Company of all or a portion of the shares of common stock subject to the award in the event such award is forfeited in whole or in part. Upon termination of any applicable restriction period, including, if applicable, the satisfaction or achievement of applicable objectives, and subject to the Company's right to require payment of any taxes, a certificate or certificates evidencing ownership of the requisite number of shares of common stock shall be delivered to the holder of such award. 5. Rights with Respect to Stock Units. If stock units are credited to a participant pursuant to an award, then, subject to the Committee's discretion, amounts equal to dividends and other distributions otherwise payable on a like number of shares of common stock after the crediting of the units (unless the record date for such dividends or other distributions precedes the date of grant of such award) shall be credited to an account for the participant and held until the award is forfeited or paid out. Interest shall be credited on the account annually at a rate equal to the return on five year U.S. Treasury obligations. 6. Vesting and Resultant Events. The Committee may, in its discretion, provide for early vesting of an award in the event of the participant's death, permanent and total disability or retirement. At the time of vesting, (i) the award, if in units, shall be paid to the participant either in shares of common stock equal to the number of units, in cash equal to the fair market value of such shares, or in such combination thereof as the Committee shall determine, and the participant's account to which dividend equivalents, other distributions and interest have been credited shall be paid in cash, (ii) the award, if a cash bonus award, shall be paid to the participant either in cash, or in shares of common stock with a then fair market value equal to the amount of such award, or in such combination thereof as the Committee shall determine and (iii) shares of restricted common stock issued pursuant to an award shall be released from the restrictions. III. STOCK OPTIONS 1. Grants. (a) Options for Officers and Key Management Employees. Options to purchase shares of common stock of the Company may be granted to such eligible officers and key management employees as may be selected by the Committee. These options may, but need not, constitute "incentive stock options" under Section 422 of the Code or any other form of option under the Code. To the extent that the aggregate fair market value (determined as of the date of grant) of shares of common stock with respect to which options designated as incentive stock options are exercisable for the first time by a participant during any calendar year (under the Plan or any other plan of the Company, or any parent or subsidiary) exceeds the amount (currently $100,000) established by the Code, such options shall not constitute incentive stock options. (b) Options for Non-Employee Directors. An option to purchase 4,000 shares of common stock of the Company shall be granted on the date of the 1995 annual meeting of stockholders and, thereafter, annually on the date of the Company's annual meeting of stockholders to each -5- individual who immediately following such meeting on such date is a director but not an employee (hereinafter, a "non-employee director"). An option granted to a non-employee director pursuant to this Section 1(b) (a "Director Option") shall become exercisable in whole or in part on the earlier to occur of (i) the date which is the first anniversary of the date the Director Option is granted (the date of grant being hereafter referred to as the "Option Date") or (ii) the day immediately preceding the date of the first annual meeting of stockholders of the Company next following the Option Date. 2. Number of Shares and Purchase Price. The number of shares of common stock subject to an option and the purchase price per share of common stock purchasable upon exercise of the option shall be determined by the Committee; provided, however, that the purchase price per share of common stock shall not be less than 100% of the fair market value of a share of common stock on the date of grant of the option; provided further, that if an incentive stock option shall be granted to any person who, on the date of grant of such option, owns capital stock possessing more than ten percent of the total combined voting power of all classes of capital stock of the Company (or of any parent or subsidiary) (a "Ten Percent Holder"), the purchase price per share of common stock shall be the price (currently 110% of fair market value) required by the Code in order to constitute an incentive stock option; and provided further, that the purchase price per share of common stock subject to a Director Option shall be 100% of the fair market value of a share of common stock on the date of grant of such option. 3. Exercise of Options. The period during which options granted hereunder (other than options granted to non-employee directors) may be exercised shall be determined by the Committee; provided, however, that no incentive stock option shall be exercised later than ten years after its date of grant; provided further, that if an incentive stock option shall be granted to a Ten Percent Holder, such option shall not be exercisable more than five years after its date of grant. The Committee may, in its discretion, establish performance measures which shall be satisfied or met as a condition to the grant of an option or to the exercisability of all or a portion of an option. The Committee shall determine whether an option shall become exercisable in cumulative or non- cumulative installments and in part or in full at any time. An exercisable option, or portion thereof, may be exercised only with respect to whole shares of common stock. An option may be exercised (i) by giving written notice to the Company specifying the number of whole shares of common stock to be purchased and accompanied by payment therefor in full (or arrangement made for such payment to the Company's satisfaction) either (A) in cash, (B) in previously owned whole shares of common stock (which the optionee has held for at least six months prior to delivery of such shares or which the optionee purchased on the open market and for which the optionee has good title free and clear of all liens and encumbrances) having a fair market value, determined as of the date of exercise, equal to the aggregate purchase price payable by reason of such exercise, (C) in cash by a broker-dealer acceptable to the Company to whom the optionee has submitted an irrevocable notice of exercise or (D) a combination of (A) and (B), (ii) if applicable, by surrendering to the Company any SARs which are cancelled by reason of the exercise of the option and (iii) by executing such documents as the Company may -6- reasonably request. The Committee shall have sole discretion to disapprove of an election pursuant to any of clauses (B)-(D). Any fraction of a share of common stock which would be required to pay such purchase price shall be disregarded and the remaining amount due shall be paid in cash by the optionee. No certificate representing common stock shall be delivered until the full purchase price therefor has been paid. 4. Termination of Employment or Service. An option may be exercised during the optionee's continued employment with the Company or service on the Board, as the case may be, and, unless otherwise determined by the Committee as set forth in the agreement relating to the option, for a period not in excess of ninety days following termination of employment or service on the Board and only within the original term of the option; provided, however, that if employment of the optionee by the Company or service on the Board, as the case may be, shall have terminated by reason of retirement or total and permanent disability, then the option may be exercised to the extent set forth in the agreement relating to the option for a period not in excess of five years (or such other period (not to exceed the original term of the option) as is set forth in the agreement relating to the option) following termination of employment or service on the Board, but not after the expiration of the term of the option. In the event of the death of an optionee (i) during employment or service on the Board, as the case may be, (ii) within a period not in excess of five years (or such other period (not to exceed the original term of the option) as is set forth in the agreement relating to the option) after termination of employment or service on the Board, as the case may be, by reason of retirement or total and permanent disability or (iii) within ninety days (or such other period (not to exceed the original term of the option) as is set forth in the agreement relating to the option) after termination of employment or service on the Board, as the case may be, for any other reason, outstanding options held by such optionee at the time of death may be exercised to the extent set forth in the agreement relating to the option by the executor, administrator, personal representative, beneficiary or similar persons of such deceased optionee within ninety days of the date of death (or such other period (not to exceed the original term of the option) as is set forth in the agreement relating to the option). IV. UK STOCK OPTION SUB-PLAN 1. GENERAL (a) Sub-Plan. The UK Stock Option Sub-Plan ("the Sub-Plan") has been established in order to vary the terms on which options may be given to officers and other key management employees who are employed in the United Kingdom by the Company or any of its subsidiaries. Stock options granted under the Sub-Plan shall be deemed granted under the Plan and shall, unless otherwise stated or implied in this Article IV, comply in all respects with the terms and conditions applicable to options granted under Article III of the Plan. Articles II and V and Clause 2 of Article VI shall not apply to options granted under the Sub-Plan. -7- (b) Definitions. In the Sub-Plan the following terms shall have the following meanings:
"the Subsidiaries" shall mean all companies which are controlled by the Company (as defined in Section 840 of the Income and Corporation Taxes Act 1988) and which are affiliates controlled by the Company directly or indirectly through one or more intermediaries for the purposes of Rule 12b-2 of the Exchange Act; "the Group" shall mean the Company and the Subsidiaries; "Associated Company" shall have the meaning attributed to it in Section 416(1) of the Income and Corporation Taxes Act 1988; "the Committee" shall mean the committee designated to administer the Plan; "Full Time Employee" shall mean any director or employee who is employed by the Group in the United Kingdom and who is required to devote to his duties not less than 25 hours (or in the case of an employee who is not a director of any company in the Group, 20 hours) per week (excluding meal breaks) and is not precluded by paragraph 8 of Schedule 9 from participating in the Sub-Plan; "Relevant Emoluments" shall have the meaning which the term bears in sub-paragraph (2) of paragraph 28 of Schedule 9 by virtue of sub-paragraph (4) of that paragraph; "Year of Assessment" shall mean a year beginning on any 6 April and ending on the following 5 April; "Market Value" shall mean on any day the average of high and low transaction prices in trading in the common stock of the Company as reported on the New York Stock Exchange-- Composite Transactions compiled by Associated Press or if no trading occurred on such date then on the next preceding date on which such trading occurred; "Schedule 9" shall mean Schedule 9 of the United Kingdom Income and Corporation Taxes Act 1988; "Share" or "Shares" shall mean a share or shares of common stock of par value $1.25 which satisfy the conditions specified in Paragraphs 10 to 14 inclusive of Schedule 9.
-8- (c) Sub-Plan. The Committee may grant stock options to officers and other key management employees eligible to participate in the Sub-Plan on the terms and subject to the conditions stated in the Sub-Plan. (d) Eligibility. Full Time Employees who are officers or other key management employees employed by the Group in the United Kingdom under selection guidelines to be established by the Committee, shall be eligible, upon selection by the Committee, to receive stock options. (e) Shares to be Issued. Shares to be issued shall be authorized and unissued shares of common stock, treasury stock or a combination thereof. The issue of shares of common stock shall be subject to the maximum specified in the Plan. (f) Administration. The Sub-Plan shall be administered by the Committee in accordance with the provisions set out in the Plan and varied by the terms of the Sub-Plan. (g) Effective Date and Term of the Sub-Plan. The Sub-Plan shall be submitted to the stockholders of the Company for approval at the 1995 annual meeting of stockholders and, if approved, shall become effective on January 1, 1995. Options shall not be granted until the Sub-Plan has been approved by the Board of UK Inland Revenue under the provisions of paragraph 1 of Schedule 9. Any change required to be made to the Plan by the Board of UK Inland Revenue in order to obtain its approval may be made without stockholder approval, except as otherwise provided in Clause 7 of Article I. The Sub-Plan shall terminate on December 31, 1999 unless terminated prior thereto by action of the Board. No further grants shall be made under the Sub-Plan after termination, but termination shall not affect the rights of any participant under the grants made prior to termination. (h) Amendments. The Sub-Plan may be amended or terminated by the Board subject to the conditions specified in the Plan. No amendment may be made which will put the Sub-Plan in breach of conditions for approval set out in Schedule 9 and no amendment to the Sub-Plan or any provision in the Plan which applies to options granted under the Sub-Plan shall be made without prior approval of the Board of UK Inland Revenue. 2. STOCK OPTIONS (a) Grants. Options to purchase shares of common stock may be granted to such eligible Full-Time Employees as may be selected by the Committee. No variation shall be made in relation to a spin-off nor to any class of securities available under the Sub-Plan. (b) Variations in Options. Variations may not be made to options granted under the Sub-Plan pursuant to Article I clause 5 of the Plan without prior consent of the Board of UK Inland Revenue. -9- (c) Terms of Options. Terms attaching to options shall be contained in a stock option agreement, the form of which must be approved in advance by the Board of UK Inland Revenue. If any performance targets are attached to the exercisability of an option, these shall be objectively determined and subject to the prior approval of the Board of UK Inland Revenue. No option shall be exercisable more than ten years after its date of grant. The per share option price shall be stated at the time the option is granted and shall be not less than 100% of the Market Value of the share on the date on which the optionee is offered options under the Sub-Plan. Upon exercise, the option price shall be paid in cash. The provisions in Clause 3 of Article III for the exercise of options by payment in whole shares of common stock or in cash by a broker-dealer to whom the optionee has submitted an irrevocable notice of exercise will not apply for the purposes of the Sub-Plan unless, in the case of the latter, approved by the Board of UK Inland Revenue. Options shall not be transferable except that such options may be exercised by the personal representative of a deceased optionee or a beneficiary of such deceased optionee who has been designated pursuant to beneficiary designation procedures approved by the Company, in each case within ninety days of the death of the optionee. Options may be exercised during the individual's continued employment with the Group and for a period not in excess of ninety days following termination of employment and only within the original term of the option. No option may be exercised by an individual at any time when he is precluded by Paragraph 8 of Schedule 9 from participating in the Sub-Plan. (d) Exercise of Option. An option may be exercised by delivery of written notice to the Company specifying the number of shares to be purchased and accompanied by (i) payment in full of the option price in the form of cash, cheque or credit transfer for the number of shares so purchased or (ii) if permitted by the Committee in its sole discretion, irrevocable written instructions to an agent or broker to effect the immediate sale of purchased whole shares of Common Stock and remit to the Company, out of the proceeds from such sale, sufficient funds to cover (A) the aggregate option price payable for the shares subject to the exercise and (B) the taxes if any associated with such exercise, and to pay to the optionee the balance (if any after payment of any brokerage fees) remaining after the remission of such funds to the Company. The Company shall within thirty days post to the optionee certificates representing the number of shares over which the option has been exercised (less any sold by the agent or broker referred to above) and shall pay all original issue or transfer taxes and all other fees and expenses incidental to such delivery. (e) Limits on Options. No person shall be granted options under the Sub-Plan which would, at the time that they are obtained, cause the aggregate Market Value of the shares which such person may acquire in pursuance of rights obtained under the Sub-Plan or under any other scheme established by the Group or by any Associated Company of the Company and approved by the Board of UK Inland Revenue under Schedule 9 (and not exercised) to exceed or further exceed the greater of: (1) 100,000 British Pounds Sterling or -10- (2) Four times the Relevant Emoluments of the optionee for the current or preceding Year of Assessment (whichever of those years gives the greater amount) or if there were no Relevant Emoluments for the preceding Year of Assessment four times the amount of the Relevant Emoluments for the period of twelve months beginning with the first day during the current Year of Assessment in respect of which there are Relevant Emoluments. For the purposes of this clause the Market Value of the shares shall be converted from US Dollars to sterling at the middle rate for the buying and selling of that amount of sterling for US Dollars as quoted by the Barclays Bank PLC at the opening of business on the day on which the optionee is offered options under the Sub-Plan./(1)/ V. STOCK APPRECIATION RIGHTS 1. Grants. Free-standing SARs entitling the grantee to receive cash or shares of common stock having a fair market value equal to the appreciation in market value of a stated number of shares of common stock from the date of grant to the date of exercise of such SARs, or in the case of tandem SARs, from the date of grant of the related stock option to the date of exercise of such tandem SARs, may be granted to such eligible officers and other key management employees as may be selected by the Committee. The holder of a tandem SAR may elect to exercise either the option or the SAR, but not both. 2. Number of SARs and Base Price. The number of SARs subject to a grant shall be determined by the Committee. Any tandem SAR related to an incentive stock option shall be granted at the same time that such incentive stock option is granted. The base price of a tandem SAR shall be the purchase price per share of common stock of the related option. The base price of a free-standing SAR shall be determined by the Committee; provided, however, that such base price shall not be less than 100% of the fair market value of a share of common stock on the date of grant of such SAR. 3. Exercise of SARs. The agreement relating to a grant of SARs may specify whether such grant shall be settled in shares of common stock (including restricted shares of common stock) or cash or a combination thereof. Upon exercise of an SAR, the grantee shall be paid the excess of the then fair market value of the number of shares of common stock to which the SAR relates over the fair market value of such number of shares at the date of grant of the SAR or of the related stock option, as the case may be. Such excess shall be paid in cash or in shares of common stock having a fair market value equal to such excess or in such combination thereof as the Committee shall determine. The period during which SARs granted hereunder may be exercised shall be determined by the Committee; provided, however, that no tandem SAR shall be exercised if the related option has expired or has been cancelled or forfeited or has otherwise terminated. The Committee may, in its discretion, establish performance measures which shall be satisfied or met as a condition to the grant of an SAR or to the exercisability of all or a portion of an SAR. The Committee shall determine whether an SAR may be exercised in cumulative or non-cumulative installments and in part or in full at any time. An exercisable SAR, or portion thereof, may be -11- exercised, in the case of a tandem SAR, only with respect to whole shares of common stock and, in the case of a free-standing SAR, only with respect to a whole number of SARs. If an SAR is exercised for restricted shares of common stock, a certificate or certificates representing such restricted shares shall be issued in accordance with Section 4 of Article II and the holder of such restricted shares shall have such rights of a stockholder of the Company as determined pursuant to such Section. Prior to the exercise of an SAR for shares of common stock, including restricted shares, the holder of such SAR shall have no rights as a stockholder of the Company with respect to the shares of common stock subject to such SAR. A tandem SAR may be exercised (i) by giving written notice to the Company specifying the number of whole SARs which are being exercised, (ii) by surrendering to the Company any options which are cancelled by reason of the exercise of such SAR and (iii) by executing such documents as the Company may reasonably request. A free-standing SAR may be exercised (i) by giving written notice to the Company specifying the whole number of SARs which are being exercised and (ii) by executing such documents as the Company may reasonably request. 4. Termination of Employment. An SAR may be exercised during the grantee's continued employment with the Company and, unless otherwise determined by the Committee as set forth in the agreement relating to the SAR, for a period not in excess of ninety days following termination of employment and only within the original term of the SAR; provided, however, that if employment of the grantee by the Company shall have terminated by reason of retirement or total and permanent disability, then the SAR may be exercised to the extent set forth in the agreement relating to the SAR for a period not in excess of five years following termination of employment but not after the expiration of the term of the SAR. In the event of the death of a holder of an SAR (i) during employment, (ii) within a period not in excess of five years after termination of employment by reason of retirement or total and permanent disability or (iii) within ninety days after termination of employment for any other reason, outstanding SARs held by such holder at the time of death may be exercised to the extent set forth in the agreement relating to the SAR by the executor, administrator, personal representative, beneficiary or similar persons of such deceased holder within ninety days of the date of death. VI. OTHER 1. Non-Transferability of Options and Stock Appreciation Rights. No option or SAR shall be transferable other than (i) by will, the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company or (ii) as otherwise set forth in the agreement relating to such option or SAR. Each option or SAR may be exercised during the participant's lifetime only by the participant or the participant's guardian, legal representative or similar person. Except as permitted by the second preceding sentence, no option or SAR may be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon -12- any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of any option or SAR, such award and all rights thereunder shall immediately become null and void. 2. Tax Withholding. The Company shall have the right to require, prior to the issuance or delivery of any shares of common stock or the payment of any cash pursuant to a grant or award hereunder, payment by the holder thereof of any Federal, state, local or other taxes which may be required to be withheld or paid in connection therewith. An agreement may provide that (i) the Company shall withhold whole shares of common stock which would otherwise be delivered to a holder, having an aggregate fair market value determined as of the date the obligation to withhold or pay taxes arises in connection therewith (the "Tax Date"), or withhold an amount of cash which would otherwise be payable to a holder, in the amount necessary to satisfy any such obligation or (ii) the holder may satisfy any such obligation by any of the following means: (A) a cash payment to the Company, (B) delivery to the Company of previously owned whole shares of common stock (which the holder has held for at least six months prior to the delivery of such shares or which the holder purchased on the open market and for which the holder has good title, free and clear of all liens and encumbrances) having an aggregate fair market value determined as of the Tax Date, (C) authorizing the Company to withhold whole shares of common stock which would otherwise be delivered having an aggregate fair market value determined as of the Tax Date or withhold an amount of cash which would otherwise be payable to a holder, (D) in the case of the exercise of an option, a cash payment by a broker-dealer acceptable to the Company to whom the optionee has submitted an irrevocable notice of exercise or (E) any combination of (A), (B) and (C); provided, however, that the Committee shall have sole discretion to disapprove of an election pursuant to any of clauses (B)-(E). An agreement relating to a grant or award hereunder may provide for shares of common stock to be delivered or withheld having an aggregate fair market value in excess of the minimum amount required to be withheld, but not in excess of the amount determined by applying the holder's maximum marginal tax rates. Any fraction of a share of common stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the holder. 3. Acceleration Upon Change in Control. If while (i) any performance award or fixed award granted under Article II is outstanding or (ii) any stock option granted under Article III or IV of the Plan or SAR granted under Article V of the Plan is outstanding -- (a) any "person," as such term is defined in Section 3(a)(9) of the Exchange Act, as modified and used in Section 13(d) and 14(d) thereof (but not including (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company) (hereinafter a "Person") is or becomes the beneficial owner, as defined in Rule 13d-3 of the Exchange Act, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the -13- Company or its affiliates, excluding an acquisition resulting from the exercise of a conversion or exchange privilege in respect of outstanding convertible or exchangeable securities) representing 50% or more of the combined voting power of the Company's then outstanding securities; or (b) during any period of two (2) consecutive years (not including any period prior to the effective date of the Plan), individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into any agreement with the Company to effect a transaction described in Clause (a), (c) or (d) of this Section) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (c) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (d) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets, (any of such events being hereinafter referred to as a "Change in Control"), then from and after the date on which public announcement of the acquisition of such percentage shall have been made, or the date on which the change in the composition of the Board set forth above shall have occurred, or the date of any such stockholder approval of a merger, consolidation, plan of complete liquidation or an agreement for the sale of the Company's assets as described above occurs (the applicable date being hereinafter referred to as the "Acceleration Date"), (i) with respect to such performance awards, the highest level of achievement specified in the award shall be deemed met and the award shall be immediately and fully vested, (ii) with respect to such fixed awards, the period of continued employment specified in the award upon which the award is contingent shall be deemed completed and the award shall be immediately and fully vested and (iii) with respect to such options and SARs, all such options and SARs, whether or not then exercisable in whole or in part, shall be fully and immediately exercisable. -14- 4. Restrictions on Shares. Each grant and award made hereunder shall be subject to the requirement that if at any time the Company determines that the listing, registration or qualification of the shares of common stock subject thereto upon any securities exchange or under any law, or the consent or approval of any governmental body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the delivery of shares thereunder, such shares shall not be delivered unless such listing, registration, qualification, consent, approval or other action shall have been effected or obtained, free of any conditions not acceptable to the Company. The Company may require that certificates evidencing shares of common stock delivered pursuant to any grant or award made hereunder bear a legend indicating that the sale, transfer or other disposition thereof by the holder is prohibited except in compliance with the Securities Act of 1933, as amended, and the rules and regulations thereunder. 5. No Right of Participation or Employment. No person (other than non-employee directors to the extent provided in Article III) shall have any right to participate in the Plan. Neither the Plan nor any grant or award made hereunder shall confer upon any person any right to continued employment by the Company, any subsidiary or any affiliate of the Company or affect in any manner the right of the Company, any subsidiary or any affiliate of the Company to terminate the employment of any person at any time without liability hereunder. 6. Rights as Stockholder. No person shall have any right as a stockholder of the Company with respect to any shares of common stock or other equity security of the Company which is subject to a grant or award hereunder unless and until such person becomes a stockholder of record with respect to such shares of common stock or equity security. 7. Governing Law. The Plan, each grant and award hereunder and the related agreement, and all determinations made and actions taken pursuant thereto, to the extent not otherwise governed by the Code or the laws of the United States, shall be governed by the laws of the State of Delaware and construed in accordance therewith without giving effect to principles of conflicts of laws. 8. Approval of Plan. The Plan and all grants and awards made hereunder shall be null and void if the adoption of the Plan is not approved by the affirmative vote of a majority of the shares of common stock present in person or represented by proxy at the 1995 annual meeting of stockholders. /(1)/Note: Options granted on or after April 29, 1996 are subject to (Pounds)30,000 limit instead of the (Pounds)100,000 limit set out in Article IV, Section 2(e). For purposes of calculating whether this limit would be exceeded by a subsequent option grant, it is necessary to include the value of shares subject to unexercised options granted in the past (whether or not they were granted before April 29, 1996) as well as the value of the shares which would be subject to the proposed grant. The calculation would include unexercised options granted under the UK Sub-Plans of the 1991 Stock Incentive Plan, the 1986 Stock Incentive Plan and the Donnelley Shares Stock Option Plan. The -15- value of shares subject to unexercised options should be calculated on the basis of their fair market value at the original dates of grant (that is, their exercise price), converted into pounds Sterling at the exchange rates in effect on such dates. -16- EX-10.(B) 3 DONNELLEY SHARES STOCK OPTION PLAN, AS AMENDED Exhibit 10(b) DONNELLEY SHARES STOCK OPTION PLAN (as amended on July 28, 1994, January 25, 1996, November 21, 1996) 1. Plan. The purpose of this Donnelley Shares Stock Option Plan (the "Plan") is to provide incentives to employees through rewards based upon the ownership and performance of the common stock of R. R. Donnelley & Sons Company (the "Company"). The Committee hereinafter designated shall grant options to purchase shares of common stock, par value $1.25 per share, of the Company (the "Common Stock") to eligible employees on the terms and subject to the conditions stated in the Plan. 2. Eligibility. All employees (other than officers) of the Company and all of its direct or indirect wholly-owned subsidiaries (the "Employers") shall be eligible, upon selection by the Committee, to receive options under the Plan; provided, however, that an otherwise eligible employee whose terms and conditions of employment are covered by a collective bargaining agreement shall be eligible to receive options under the Plan only if expressly provided for in the collective bargaining agreement or supplemental letter of understanding signed by such employee's Employer and the recognized representative of the collective bargaining unit in which the employee is a member; provided further, that the preceding proviso shall not apply to employees who are not subject to the United States labor laws. An employee granted an option pursuant to the Plan shall be referred to herein from time to time as an "Optionee". 3. Limitation on Shares Available. Subject to adjustment as provided in Section 5 of the Plan, the maximum number of shares of Common Stock available for all grants made under the Plan shall be 6,000,000. Shares of Common Stock subject to grants made hereunder which, by reason of the expiration, cancellation, forfeiture or other termination of such grants prior to purchase, are not purchased shall again be available for future grants. Shares of Common Stock to be delivered may be authorized and unissued shares of stock, treasury stock or a combination thereof. The Company reserves the right to purchase shares of Common Stock for the Plan in the open market. 4. Administration of the Plan. The Plan shall be administered by a committee (the "Committee") designated by the Board of Directors of the Company (the "Board"). Except as otherwise set forth in the Plan, the Committee shall, subject to the terms of the Plan, select groups of eligible employees for participation in the Plan and, with respect to such groups of eligible employees, shall determine the number of shares of Common Stock subject to each option granted hereunder, the terms and conditions of exercise of such option and all other terms and conditions of such option. The Committee shall, subject to the terms of the Plan, have the authority to interpret the Plan, establish rules and regulations for the administration of the Plan and impose, incidental to the grant of an option, conditions with respect to the grant. All such rules, regulations and interpretations adopted by the Committee shall be conclusive and binding on all parties. The Committee may delegate its authority to interpret all or part of the Plan to designated officers of the Company. 5. Adjustments for Changes in Capitalization. The Committee shall make appropriate adjustments to the number of shares available under the Plan, the option exercise price and the number of shares subject to any option granted hereunder in order to give effect to any stock split, stock dividend, merger, consolidation, reorganization, spin-off, liquidation or other similar change in capitalization or event that occurs after the effective date of the Plan, such adjustments to be made in the case of outstanding options without a change in the aggregate purchase price. If any adjustment would result in a fractional security being available under the Plan or subject to a grant under the Plan, such fractional security shall be disregarded. 6. Effective Date and Term of Plan. The Plan shall become effective on January 27, 1994 (the "Effective Date"). The Plan shall terminate five (5) years after the Effective Date unless terminated prior thereto by action of the Board. No further grants shall be made under the Plan after termination, but termination shall not affect the rights of any Optionee under any grants made prior to termination. 7. Amendments. The Plan may be amended or terminated by the Board in any respect and at any time, provided that such action shall not adversely affect any rights or obligations with respect to any outstanding grants under the Plan. 8. Grants. (a) Options to purchase 100 shares of Common Stock shall be granted on March 24, 1994 to eligible employees employed on such date who had completed at least two (2) years of continuous service with any one or more of the Employers as of December 31, 1993; provided, however, that employees who, as of March 24, 1994, are members of a collective bargaining unit shall be deemed eligible employees for purposes of this paragraph 8(a) only if a collective bargaining agreement or supplemental letter of understanding providing for the receipt of such options by such employees was fully executed by such employee's Employer and the recognized representative of the collective bargaining unit prior to March 1, 1994; and provided further, that eligible employees who are not employed in the United States of America as of March 24, 1994 shall not receive such options. All options granted on March 24, 1994 shall become exercisable in full on December 31, 1996. (b) Additional options may be granted, in the sole and absolute discretion of the Committee, to groups of eligible employees at any time. (c) The option price per share of Common Stock purchasable upon the exercise of any option granted pursuant to the Plan shall be the fair market value of a share of Common Stock on the date of grant of such option. For purposes of the Plan, the fair market value shall be -2- determined by reference to the average of the high and low transaction prices in trading of the Common Stock as reported in the New York Stock Exchange-Composite Transactions on the date of grant. (d) All options granted hereunder shall be evidenced by a certificate substantially in the form of Exhibit A hereto. Each certificate shall be dated and signed by an officer of the Company as of the date of the grant. 9. Terms of Options. (a) No option shall be exercisable earlier than one (1) year, nor more than ten (10) years, after the date of grant. Each option granted hereunder shall become exercisable in full on the third anniversary of the date of the grant, unless otherwise determined by the Committee and except as otherwise set forth in Section 8(a). Notwithstanding the foregoing, if an Optionee is no longer employed by at least one of the Employers for any reason (including due to death or long-term disability but excluding due to termination of employment upon retirement at normal retirement age or early retirement at or after age 55 with the consent of the Company), each option held by such Optionee which is not exercisable on the date of termination of employment shall terminate automatically on such date. Options held by an Optionee who retires at normal retirement age or who takes early retirement at or after age 55 with the consent of the Company, regardless of whether or not such options are exercisable at the date of retirement, shall not terminate as a result of such retirement but shall continue to remain outstanding and subject to the terms and conditions of the Plan; provided, however, that in the event that such an Optionee dies, each option held by such Optionee which is not exercisable on the date of death of such Optionee shall terminate automatically upon the death of such Optionee. Additionally, after an option held by an Optionee has become exercisable, if such Optionee is no longer employed by at least one of the Employers for any reason (other than retirement at normal retirement age or early retirement at or after age 55 with the consent of the Company or for any of the reasons specified in Section 9(c)) and/or such Optionee dies, then such Optionee (or in the case of death, such Optionee's executor, administrator, personal representative, beneficiary or similar person) may exercise such exercisable option until ninety (90) days from the date of such termination of employment and/or the date of death, as the case may be, or until the expiration of the term of such option, whichever is earlier. (b) No option hereunder shall be transferable other than by will, the laws of descent and distribution or pursuant to the beneficiary designation procedures approved by the Committee. Each option shall be exercisable during the Optionee's lifetime only by the Optionee or the Optionee's guardian, legal representative or similar person, provided that evidence of such person's identity and rights with respect to such exercise are acceptable to the Committee. Except as permitted by the first sentence of Section 9(b) of the Plan, no option hereunder shall be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Any such attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of any option hereunder shall be null and void and no person shall be entitled to any rights hereunder by virtue of any attempted execution, attachment or similar process. In the event of the death of -3- an Optionee, any unexercised portion of an option that, but for the death of the Optionee, would have been exercisable on the date of such Optionee's death by such Optionee may be exercised by the executor, administrator, personal representative, beneficiary or similar person of such deceased Optionee within ninety (90) days of the death of such Optionee, but not after the expiration of the term of the option; provided that evidence of such person's identity and rights with respect to such exercise are acceptable to the Committee. (c) Notwithstanding anything contained herein to the contrary, in the event the Committee shall determine that an Optionee's employment was terminated by the Optionee's Employer on account of (i) an unauthorized disclosure of confidential information or trade secrets of any Employer, (ii) unlawful trading in the securities of the Company or any customers of any of the Employers, or (iii) fraud, theft or embezzlement with respect to any of the Employers or any breach of the Optionee's duties to the Optionee's Employer or any of the other Employers, then such Optionee shall forfeit all rights to the unexercised portion of any option held by the Optionee under the Plan, and all such options shall automatically terminate. (d) Options must be exercised in full. No partial exercise is permitted. No shares of Common Stock may be purchased under any option granted under the Plan unless prior to or simultaneously with the purchase, the Optionee shall have delivered by such means as have been identified by the Committee notice to the Company, accompanied by payment therefor in full of the option price, any brokerage fees associated with the exercise of the options (the "Brokerage Fees"), and any local, state, federal or other taxes required to be withheld and paid over to governmental taxing authorities by the Company due to such exercise ("Taxes") (or arrangement made for such payment to the satisfaction of the Company). Upon exercise, the option price, the Brokerage Fees and the Taxes may be paid according to procedures established by the Committee as follows: (i) in cash or (ii) by electing to sell, through an agent or broker designated by the Company, whole shares of Common Stock issuable upon exercise of the option having a fair market value determined on the date of exercise as close as is practicable to the sum of (A) the option price for shares of Common Stock subject to such exercise, (B) the Brokerage Fees associated with such exercise and (C) the Taxes associated with such exercise, provided that the number of whole shares sold shall be sufficient to pay in full the option price, the Brokerage Fees and the Taxes. No option may be exercised by an Optionee through any agent or broker other than an agent or broker designated by the Company. Notwithstanding the foregoing, in the event that an Optionee has notified the Company through the Company's electronic system that such Optionee is exercising an option and is paying cash for the option price and the Taxes and such cash is not received within 30 calendar days following such notice, then the Company may automatically order the sale, through the designated agent or broker, of whole shares of Common Stock to pay in full the option price, the Brokerage Fees and the Taxes and deliver any whole shares of Common Stock not so applied to the Optionee, plus any cash owed in lieu of fractional shares. The Committee shall have sole discretion to disapprove of an election pursuant to clause (ii). No shares of Common Stock shall be delivered to the Optionee until the full option price, the Brokerage Fees and the Taxes have been paid. Optionees shall be required to receive all shares acquired under an option in the form of stock certificates (or other evidence of stock ownership); -4- cash shall not be paid to an Optionee in lieu of the delivery of stock certificates (or other evidence of stock ownership) upon the exercise of any option, except to the extent necessary to compensate for fractional shares. (e) Optionees shall be entitled to the privilege of ownership with respect to shares of Common Stock subject to options granted hereunder only as to shares of Common Stock purchased and delivered to an Optionee upon exercise of an option. 10. Miscellaneous. (a) Effect of Leaves of Absence. Leaves of absence for periods and purposes conforming to the personnel policies of the Company and approved by the Employer shall not be deemed terminations of employment or interruptions of continuous service. (b) Restrictions on Shares. Notwithstanding any provision of the Plan to the contrary, unless a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), is in effect as to the shares purchasable under any option granted under the Plan, no shares of Common Stock may be purchased under such option. In addition, notwithstanding any provision of this Plan to the contrary, any option granted under the Plan is subject to the condition that if at any time the Company determines that the listing, registration or qualification of the shares of Common Stock subject to such option upon any securities exchange or under any law, the consent or approval of any regulatory body, or the taking of any other actions necessary or desirable as a condition of, or in connection with, the delivery of the shares thereunder, such shares shall not be delivered unless such listing, registration, qualification, consent, approval or other action shall have been effected or obtained, free of any conditions not acceptable to the Company. (c) No Right to Employment. Neither the Plan nor the grant of options hereunder shall be construed as giving any employee any right to be retained in the employ of any Employer. (d) Governing Law. The Plan shall be governed by and interpreted in accordance with the laws of the State of Delaware. (e) Nature of Option. The options granted under the Plan shall not be treated as incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. 11. Acceleration of Options Upon a Change in Control. If while any option remains unexercised and outstanding under the Plan: (a) any "person", as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as modified and used in Section 13(d) and 14(d) thereof (but not including (i) the Company or any of its subsidiaries, (ii) a -5- trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company) (hereinafter a "Person") is or becomes the beneficial owner, as defined in Rule 13d-3 of the Exchange Act, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 50% or more of the combined voting power of the Company's then outstanding securities; or (b) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into any agreement with the Company to effect a transaction described in clause (a), (c) or (d) of this Section) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (c) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (d) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets; (any of such events being hereinafter referred to as a "Change in Control"), then from and after the date on which public announcement of the acquisition of such percentage shall have been made, or the date on which the change in composition of the Board set forth above shall have occurred, or the date of any such stockholder approval of a merger, consolidation, plan of complete liquidation or an agreement for the sale of the Company's assets as described above occurs (the applicable date being hereinafter referred to as the "Acceleration Date"), all such outstanding and unexercised options, whether or not then exercisable, shall be fully and immediately exercisable. -6- Exhibit A Donnelley Shares STOCK OPTION PLAN This is to certify that (OPTIONEE NAME) was granted on (DATE), an option to purchase (NUMBER) SHARES of R. R. Donnelley & Sons Company common stock at a fixed option price of (PRICE) per share. This option is subject to the terms and conditions of the Donnelley Shares Stock Option Plan. [logo] RR Donnelley This certificate has been & Sons Company executed as of (DATE), on behalf of R. R. Donnelley & Sons Company by (FACSIMILE SIGNATURE) John R. Walter Chairman and Chief Executive Officer -7- DONNELLEY SHARES STOCK OPTION PLAN ---------------------------------- FOR UK EMPLOYEES ---------------- (as adopted July 28, 1994 and amended September 6, 1994 and July 24, 1997) 1. Introduction. R. R. Donnelley & Sons Company ("the Company") has established its Donnelley Shares Stock Option Plan ("the US Plan") for the benefit of employees of it and its subsidiaries under which it may grant stock options to such employees. The Company intends to grant Options to employees in the United Kingdom under a UK sub-plan of the US Plan to be known as the Donnelley Shares Stock Option Plan for UK Employees ("the UK Plan"). The UK Plan shall be governed by these Rules ("the Rules"). The UK Plan is intended to qualify as an approved share option plan under Schedule 9 to the Income and Corporation Taxes Act 1988. 2. The Appendix. The US Plan attached as an Appendix to these Rules shall apply to the UK Plan subject to the additional restrictions and amendments specified below. References to Schedule 9 are to Schedule 9 to the Income and Corporation Taxes Act 1988. 3. Exclusion. Section 8(a) of the US Plan relating to Option Grants on 24 March 1994 will not apply to the UK Plan. 4. Subsidiaries. The direct and indirect wholly-owned subsidiaries of the Company referred to in Section 2 of the US Plan shall include, for purposes of the UK Plan, only those companies of which the Company has control within the meaning of Section 840 of the Income and Corporation Taxes Act 1988. 5. Shares. The shares of common stock of the Company in respect of which Options may be granted under the UK Plan must satisfy the conditions specified in paragraphs 10 to 14 inclusive of Schedule 9. 6. Eligibility. 6.1. For the avoidance of doubt, it is hereby clarified that directors of the Company and its subsidiaries are not eligible to receive Options under the UK or US Plans. The description of eligible employees in Section 2 of the US Plan shall also be subject to the additional requirement that an employee must, in order to be eligible to receive Options, be an employee of the Company or a subsidiary of the Company who is required to devote to his duties not less than 20 hours per week excluding meal breaks and who is not precluded by paragraph 8 of Schedule 9 from participating in the UK Plan. 6.2. The proviso in Section 2 of the US Plan relating to eligible employees covered by collective bargaining agreements will not apply to the UK Plan. -8- 6.3. Persons who are not eligible employees, as described in Section 2 of the US Plan and qualified by Rules 6.1 and 6.2 above, shall not be eligible to receive Options under the UK Plan. 6.4. Any Option granted to an eligible employee shall be limited and take effect so that the aggregate Fair Market Value of Common Stock subject to that Option, when aggregated with the Fair Market Value of Common Stock subject to subsisting Options, shall not exceed the greater of : 6.4.1. (Pounds)100,000; and 6.4.2. four times the amount of the individual's Relevant Emoluments 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./(1)/ For the purposes of this restriction: (i) "Options" includes all Options granted under the UK Plan and all options granted under any other plan approved under Schedule 9 (not being a savings-related share option scheme) and established by the Company or any associated company thereof (within the meaning of Section 416 of the Income and Corporation Taxes Act 1988); (ii) "Relevant Emoluments" means such of the emoluments of the office or employment by virtue of which an individual is eligible to receive Options under the UK Plan as are liable to be paid in that year under deduction of tax pursuant to Section 203 of the Income and Corporation Taxes Act 1988 ("Pay As You Earn") after deducting therefrom amounts included by virtue of Chapter II of Part V of the Income and Corporation Taxes Act 1988 (benefits derived by directors and others from their employment); (iii) "Year of Assessment" means a year beginning on any 6 April and ending on the following 5 April; and (iv) The "Fair Market Value" of the Common Stock shall be calculated in accordance with Section 8(c) of the US Plan as at the dates when the Options in relation to the Common Stock were granted or such earlier time as may have been agreed in writing with the Board of Inland Revenue./(1)/ 7. Exercise of Options. 7.1 The provisions of Section 9(a) to (d) of the US Plan relating to the exercise of Options shall be subject to the additional restriction that no Option may be exercised by an Optionee at any time when he is precluded by paragraph 8 of Schedule 9 from participating in the UK Plan. -9- 7.2 The provision in Section 9(d) (ii) of the US Plan for Optionees to pay the option price by electing to sell whole shares of Common Stock through an agent or broker designated by the Company will not apply for purposes of the UK Plan. Instead, an Optionee may, upon exercise, pay the option price, the Brokerage Fees and the Taxes in accordance with procedures established by the Committee as follows: (i) by payment in full in the form of cash, cheque or credit transfer or (ii) by providing, if permitted by the Committee at its sole discretion, irrevocable written instructions to an agent or broker designated by the Company to effect the immediate sale of purchased whole shares of Common Stock and remit to the Company, out of the proceeds from such sale, sufficient funds to cover (A) the aggregate option price payable for the shares subject to the exercise and (B) the taxes if any associated with such exercise, and to pay to the Optionee the balance (if any after payment of any brokerage fees) remaining after the remission of such funds to the Company. 7.3 No cash payments may be made to Optionees pursuant to the final sentence of Section 9(d) of the US Plan. 7.4 Shares must be allotted within 30 days after the date of exercise. 8. Conditions. No conditions may be imposed by the Committee pursuant to the third sentence in Section 4 of the US Plan to the extent that they affect the UK Plan without the prior approval of the Board of Inland Revenue. If such conditions involve the satisfaction of performance criteria, those criteria must be of an objective nature. 9. Adjustments Upon Changes in Capitalisation. The provisions of Section 5 of the US Plan concerning the adjustment of Options shall be subject to the requirement that all such adjustments must be certified in writing by the Auditors as being fair and reasonable and that no adjustment in respect of subsisting Options and of Options to be granted under the UK Plan shall take effect without the prior approval of the Board of Inland Revenue. Also, no adjustment may be made under the UK Plan in relation to a spin-off. For the purposes of this restriction, "Auditors" means the auditors for the time being of the Company (acting as experts and not as arbitrators). 10. Amendment of the Plan. Any amendment of the US or UK Plans which is made under the provisions of Section 7 of the US Plan and which affects the UK Plan shall only take effect in respect of the UK Plan with the prior approval of the Board of Inland Revenue. -10- /(1)/Note: Options granted on or after 29 April 1996 are subject to the new (Pounds)30,000 limit set out in Rule 6.4. For purposes of calculating whether this limit would be exceeded by a new Option grant, it is necessary to include the value of shares subject to subsisting (unexercised) Options granted in the past (whether or not they were granted before 29 April 1996) as well as the value of the shares which would be subject to the proposed new Option. This would include subsisting Options granted under the UK Sub-Plans of the 1991 Stock Incentive Plan and the 1995 Stock Incentive Plan. The value of shares subject to subsisting Options should be worked out on the basis of their value at the original dates of grant, converted into pounds Sterling at the exchange rates in effect on such dates. -11- EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 70,669 0 1,103,090 44,849 257,983 1,532,638 4,424,978 2,430,604 4,673,992 1,045,548 1,334,682 0 0 320,962 1,329,099 4,673,992 1,504,997 1,504,997 1,255,522 1,436,601 12,638 0 (22,622) 58,412 20,736 37,676 0 0 0 37,676 .26 .26
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