Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Form 10-K 40 233K
2: EX-2 12/15/97 Agreement Between Rrd & Bain Capital 14 51K
3: EX-10.(Q) Agreement Between Rrd & Steven J. Baumgartner 11 51K
4: EX-10.(R) Agreement Between Rrd & W. Ed Tyler 13 63K
5: EX-21 Rrd Subsidiaries 3 11K
6: EX-23 Consent of Independent Public Accountants 1 6K
7: EX-27 Financial Data Schedule 2 7K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ ----------
COMMISSION FILE NUMBER 1-4694
R. R. DONNELLEY & SONS COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-1004130
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
77 WEST WACKER DRIVE,
CHICAGO, ILLINOIS 60601
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER--(312) 326-8000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
----------------------------- ---------------------------------------------
COMMON (PAR VALUE $1.25) NEW YORK, CHICAGO AND PACIFIC STOCK EXCHANGES
PREFERRED STOCK PURCHASE RIGHTS NEW YORK, CHICAGO AND PACIFIC STOCK EXCHANGES
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO THE
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO
THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATE-
MENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT
TO THIS FORM 10-K. [X]
AS OF JANUARY 30, 1998, 144,870,461 SHARES OF COMMON STOCK WERE OUTSTANDING,
AND THE AGGREGATE MARKET VALUE OF THE SHARES OF COMMON STOCK (BASED ON THE
CLOSING PRICE OF THESE SHARES ON THE NEW YORK STOCK EXCHANGE--COMPOSITE TRANS-
ACTIONS ON JANUARY 30, 1998) HELD BY NONAFFILIATES WAS $5,102,941,328.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT DATED FEBRUARY 18,
1998 ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.
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TABLE OF CONTENTS
[Download Table]
FORM 10-K
ITEM NO. NAME OF ITEM PAGE
--------- ------------ ----
Part I
Item 1. Business................................................. 3
Item 2. Properties............................................... 5
Item 3. Legal Proceedings........................................ 5
Item 4. Submission of Matters to a Vote of Security Holders...... 6
Executive Officers of R. R. Donnelley & Sons Company..... 6
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..................................... 7
Item 6. Selected Financial Data.................................. 7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 8
Item 7A. Quantative and Qualitative Disclosures about Market Risk. 8
Item 8. Financial Statements and Supplementary Data.............. 15
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 15
Part III
Item 10. Directors and Executive Officers of the Registrant....... 15
Item 11. Executive Compensation................................... 15
Item 12. Security Ownership of Certain Beneficial Owners and
Management.............................................. 15
Item 13. Certain Relationships and Related Transactions........... 15
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K................................................ 16
Signatures............................................... 17
Index to Financial Statements and Financial Statement
Item 14(a). Schedules............................................... F-1
Index to Exhibits........................................ E-1
2
PART I
ITEM 1. BUSINESS
R.R. Donnelley & Sons Company operates in a single industry segment as the
largest commercial printer in North America. The company is a leading provider
of printing and related services to the merchandising, magazine, book,
directory and financial markets. The company applies its superior skills,
scale and technology to deliver solutions that efficiently meet customers'
strategic business needs. The company was founded in 1864 in Chicago by
Richard Robert Donnelley, and its common stock has been publicly traded since
1956. Today, the company has approximately 26,000 employees in 19 countries on
four continents.
The United States print industry is a large, fragmented industry with more
than 52,000 firms and over 1 million employees generating approximately $140
billion in revenue. The company has market-leading positions in five
categories of the market served by its business units: Merchandise Media ($1.3
billion or 27% of 1997 consolidated net sales), which serves the catalog,
retail insert and direct-mail markets; Magazine Publishing Services ($1.3
billion or 26% of 1997 consolidated net sales), which serves the consumer and
the trade and specialty magazine markets; Book Publishing Services ($768
million or 16% of 1997 consolidated net sales), which serves the trade and
educational book markets; Telecommunications ($789 million or 16% of 1997
consolidated net sales), which serves the domestic and international directory
markets; and Financial Services ($498 million or 10% of 1997 consolidated net
sales), which serves the communication needs of the capital markets and the
mutual fund and healthcare industries. In addition to its domestic operations,
the company has operations in Europe, Latin America and Asia.
For most of 1997, the company owned approximately 80% of Stream
International Holdings Inc. (SIH), which included three business units: 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). SIH was formed in April 1995
by a merger of the company's Global Software Services business with Corporate
Software Inc.
In December 1997, SIH was reorganized into three separate businesses, and
the company's interest was restructured such that the company now owns 87% of
the common stock of Stream International Inc., 86% of the common stock of
Corporate Software & Technology Holdings, Inc. (CS&T) and non-voting preferred
stock of Modus Media International Holdings, Inc. (MMI). As a result of the
restructuring and the company's intention to dispose of its interest in CS&T,
the company has reported its interests in CS&T and MMI as discontinued
operations and reclassified the prior years' consolidated financial results.
The financial results of Stream International are reported in the consolidated
results of the company's continuing operations.
The commercial print marketplace continues to be competitive. Consolidation
in the company's customer base and in the printing market has resulted in
pressure on pricing and increased competition for market share. These industry
trends are expected to continue. The company will manage these trends by
capitalizing on its market-leading positions, by leveraging its capabilities
and by controlling costs.
A significant portion of the company's sales are made pursuant to term
contracts with customers, with the remainder being made on a single-order
basis. For some customers, the company prints and provides related services
for several different publications under different contracts. The company's
contracts with its larger customers normally run for a period of years
(usually three to five years, but longer in the case of contracts requiring
significant capital investment) or for an indefinite period subject to
termination on specified notice by either party. Such sales contracts
generally provide for timely price adjustments to reflect price changes for
materials, wages and utilities. No single customer has a relationship with the
company that accounted for 5% or more of the company's sales in 1997. The
company's dependence for sales from its ten largest customers has declined in
the past ten years to approximately 22% of sales in 1997, from 27% of sales in
1987.
In each of the fiscal years ended December 31, 1997, 1996 and 1995,
international operations represented less than 9% of consolidated net sales,
less than 4% of earnings from operations (excluding 1997 and 1996
restructuring charges) and approximately 10% of consolidated assets.
3
The various phases of the commercial printing industry in which the company
is involved are highly competitive. While the company has contracts with many
of its customers as discussed above, there are numerous competing companies
and renewal of such contracts is dependent, in part, on the ability of the
company to continue to differentiate itself from the competition.
Differentiation results, in part, from the company's broad range of value-
added services, which include: conventional and digital preproduction,
computerized printing, Selectronic(R) imaging and gathering, and sophisticated
pool shipping and distribution services for printed products; information
content repackaging into multiple formats, including print, magnetic and
optical media; and graphic design and editorial services. Although the company
believes it is the largest commercial printer in the United States, it
estimates that its revenues represent approximately 6% of total sales in the
commercial print industry. Although the company's plants are well located for
the global, national or regional distribution of its products, competitors in
some areas of the United States have a competitive advantage in some instances
due to such factors as freight rates, wage scales and customer preference for
local services. In addition to location, other important competitive factors
are price and quality as well as the range of available services.
The primary raw materials used by the company are paper and ink. In 1997,
the company spent approximately $1.9 billion on raw materials. The company is
a large purchaser of paper and focuses to improve materials performance and
total cost management for its customers and it believes this is a competitive
advantage. The company negotiates with leading suppliers to maximize its
purchasing efficiencies, but does not rely on any one supplier. The company
has existing paper supply contracts (at prevailing market prices) to cover
substantially all of the company's requirements through 1998; and management
believes extensions and renewals of these purchase contracts will provide
adequate paper supplies in the future. Ink and ink materials are currently
available in sufficient amounts, and the company believes that it will have
adequate supplies in the future. Purchasing activity at both the local plant
and corporate levels are coordinated to increase economies of scale.
The company estimates that its capital expenditures in 1998 and 1999, to
comply with federal, state and local provisions for environmental controls, as
well as expenditures, if any, for the company's share of costs to clean
hazardous waste sites that have received waste from the company, will not have
a material effect upon its earnings or its competitive position.
The company employed an average of approximately 25,800 persons in 1997
(26,000 persons at December 31, 1997), of whom more than 9,400 had been with
the company for 10 to 24 years and more than 3,200 for 25 years or longer. As
of December 31, 1997, the company employed approximately 25,000 people in the
United States, approximately 800, or 3%, of whom were covered by collective
bargaining agreements. In addition, the company employed approximately 1,000
people in its foreign operations, the majority of whom were covered by
collective bargaining agreements, as is customary in those markets.
Special Note Regarding Forward-Looking Statements. The company's Annual
Report to Shareholders and this Form 10-K are among certain communications by
the company that contain forward-looking statements, including statements
regarding the company's financial position, results of operations, market
position, product development and regulatory matters. In addition, when used
in such communications, the words "believes," "anticipates," "expects" and
similar expressions are intended to identify forward-looking statements. These
forward-looking statements are based on the company's estimates, assumptions,
projections and current expectations and are subject to a number of risks and
uncertainties. Actual results in the future could differ materially from those
described in the forward-looking statements as a result of many factors
outside the control of the company, including, without limitation, competition
with other printers based on pricing and other factors, fluctuations in the
cost of paper and other raw materials used by the company, changes in postal
rates, seasonal fluctuations in overall demand for printing, changes in
customer demand, changes in the advertising and printing markets, changes in
capital market which affect demand for commercial printing, the financial
condition of the company's customers, the general condition of the United
States economy, changes in the rules and regulations to which the company is
subject, including environmental regulation, and other factors set forth in
this Form 10-K and other company communications generally. The company does
not undertake and specifically declines any obligation to publicly release the
results of any revisions to these forward-looking statements that may be made
to reflect any future events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated
events.
4
ITEM 2. PROPERTIES
The company's corporate office is located in a leased office building in
Chicago, Illinois. As of December 31, 1997, the company and its subsidiaries
operated 8 plants encompassing approximately 6.3 million square feet of
manufacturing and warehouse space and constituting its gravure printing
platform in the United States; 40 other U.S. facilities encompassing
approximately 11.2 million square feet of manufacturing, operations and
warehouse space; and 8 plants encompassing approximately 1.4 million square
feet in Latin America, Europe and Asia. Of the total manufacturing and
warehouse facilities, approximately 17.0 million square feet of space is owned
by the company and its subsidiaries, while the remaining 1.9 million square
feet of space is leased. In addition, the company has sales offices across the
U.S., Latin America, Europe and Asia.
The company has historically followed the practice of adding capacity to
meet customer requirements, and has retained a substantial portion of its
earnings for reinvestment in plant and equipment for this purpose. The company
will continue to manage its assets in order to meet its customers' needs and
growth objectives, while focusing on the generation of maximum value for its
shareholders.
ITEM 3. LEGAL PROCEEDINGS
On November 25, 1996, a purported class action was brought against the
company in federal district court in Chicago, Ill., on behalf of current and
former African-American employees, alleging that the company racially
discriminated against them. The complaint seeks declaratory and injunctive
relief, and asks for actual, compensatory, consequential and punitive damages
in an amount not less than $500 million. Although plaintiffs seek nationwide
class certification, most of the specific factual assertions of the original
complaint related to the closing by the company of its Chicago, Ill., catalog
production operations begun in 1993. Other general claims relate to other
company locations. 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 and plaintiffs have filed a motion for class
certification. Both motions are pending.
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 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 terminating 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. On August 14, 1997, the court
denied plaintiffs' motion and certified classes in both the age discrimination
and ERISA claims limited to former employees of the Chicago catalog
operations.
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 that could
result from an unfavorable outcome of either case.
In February 1998, the company entered into a Consent Agreement and Consent
Order with the U.S. EPA, settling an administrative enforcement action which
was filed against the company in January 1995 for alleged violations of the
Resource Conservation and Recovery Act at its Warsaw, Ind., facility. The
company agreed to pay $29,000 in civil penalties and to complete designated
environmental projects by year end 2000.
5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1997.
EXECUTIVE OFFICERS OF R. R. DONNELLEY & SONS COMPANY
[Enlarge/Download Table]
NAME, AGE AND OFFICER BUSINESS EXPERIENCE DURING
POSITIONS WITH THE COMPANY(1) SINCE PAST FIVE YEARS(2)
----------------------------- ------- --------------------------
William L. Davis 1997 Management responsibilities as Chairman of the
54, Chairman Board and Chief Executive Officer. Prior
of the Board and experience as Senior Executive Vice President of
Chief Executive Officer(2) Emerson Electric Company, manufacturer of
electrical, electronic and related products.
James R. Donnelley 1983 Management responsibilities as Vice Chairman of
62, Director, Vice Chairman the Board and for Corporate Communication,
of the Board Community Relations and Government Affairs.
Prior management responsibility for Corporate
Development.
Cheryl A. Francis 1995 Management responsibilities for Corporate
44, Executive Vice President Development, Investor Relations, Treasury,
and Chief Financial Officer(2) Financial Reporting and Accounting, Real Estate,
Internal Audit and Taxes. Prior management
responsibilities for Purchasing. Prior
experience as Treasurer at FMC Corporation, a
diversified manufacturer of chemicals and
machinery.
W. Ed Tyler 1989 Management responsibilities for Manufacturing
45, Executive Vice President and Information Technologies and Environmental
and Chief Technology Officer Affairs. Prior management responsibilities for
Financial Services, Telecommunications, Book
Publishing Services, Global Software Services,
R.R. Donnelley Europe, R.R. Donnelley Latin
America and R.R. Donnelley Asia Operations;
prior sales and manufacturing responsibility for
Global Software Services.
Jonathan P. Ward 1991 Management responsibilities for Merchandise Me-
43, President and dia, Magazine Publishing Services, Telecommuni-
Chief Operating Officer cations, Financial Services, Book Publishing
Services, Worldwide Procurement, Donnelley Lo-
gistic Services and International Operations.
Prior sales and manufacturing responsibility for
Merchandise Media and Financial Services.
--------
(1) Each officer named is a member of the company's Office of the Chairman.
(2) Each officer named has carried on his principal occupation and employment
in the company for more than five years with the exception of William L.
Davis and Cheryl A. Francis as noted in the table above.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock is listed and traded on the New York Stock Exchange,
Chicago Stock Exchange and Pacific Stock Exchange.
As of January 30, 1998, there were 10,498 stockholders of record.
Information about the quarterly prices of the common stock, as reported on the
New York Stock Exchange-Composite Transactions, and dividends paid during the
two years ended December 31, 1997, is contained in the chart below:
[Download Table]
COMMON STOCK PRICES
--------------------------------
DIVIDENDS
PAID 1997 1996
----------- ---------------- ---------------
1997 1996 HIGH LOW HIGH LOW
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First Quarter...................... $0.19 $0.18 $36 7/8 $29 5/8 $39 5/8 $34 1/2
Second Quarter..................... 0.19 0.18 39 3/4 32 5/8 37 1/2 34 1/8
Third Quarter...................... 0.20 0.19 41 1/16 34 3/8 35 1/8 30 1/4
Fourth Quarter..................... 0.20 0.19 37 5/8 32 5/8 34 1/8 29 5/8
Full Year.......................... 0.78 0.74 41 1/16 29 5/8 39 5/8 29 5/8
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(NOT COVERED BY AUDITORS' REPORT)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
[Download Table]
YEAR ENDED DECEMBER 31
--------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
INCOME STATEMENT DATA:
Net sales............... $4,850,033 $5,033,185 $5,049,597 $4,213,060 $3,861,160
Income (loss) from
continuing operations*. 206,525 (71,483) 275,952 249,327 89,353
Loss on disposal of
discontinued
operations............. (60,000) -- -- -- --
(Loss) income from
discontinued
operations............. (15,894) (86,142) 22,841 19,276 20,067
Net income (loss)*...... 130,631 (157,625) 298,793 268,603 109,420
PER COMMON SHARE:
Income (loss) from
continuing operations*. 1.42 (0.47) 1.80 1.62 0.58
Loss on disposal of
discontinued
operations............. (0.41) -- -- -- --
(Loss) income from
discontinued
operations............. (0.11) (0.57) 0.15 0.13 0.13
Net income (loss)*...... 0.90 (1.04) 1.95 1.75 0.71
Dividends............... 0.78 0.74 0.68 0.60 0.54
DECEMBER 31
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1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Total assets............ $4,134,166 $4,443,828 $5,030,680 $4,318,787 $3,678,100
Noncurrent liabilities.. 1,730,047 2,044,818 2,012,635 1,669,984 1,120,382
--------
* Net income in 1997 includes a $70.7 million restructuring and impairment
charge ($42.4 million after-tax, or $0.29 per share). Net income in 1996
includes restructuring charges of $441.7 million ($374.4 million after
taxes and a minority interest benefit, or $2.47 per share) and gains from
partial divestitures of two subsidiaries of $80.0 million ($48.0 million
after-tax, or $0.32 per share). Net income in 1993 includes the following
one-time items: a restructuring charge primarily related to the closure of
the company's Chicago facility ($60.8 million after-tax, or $0.39 per
share), a deferred income tax charge ($6.2 million, or $0.04 per share) and
the cumulative effect of accounting changes ($69.5 million after-tax, or
$0.45 per share).
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OPERATING RESULTS
Highlights--In conjunction with the company's 1997 restructuring of its
ownership in SIH, the company reported its interests in CS&T and MMI as
discontinued operations and recorded an after-tax provision of $60 million, to
adjust the carrying cost of the businesses to their estimated net realizable
value.
1997 net income was $131 million, or $0.90 per basic share, compared with a
1996 net loss of $158 million, or $1.04 per basic share. 1997 net income
included a $71 million pre-tax impairment and restructuring charge ($42
million after-tax), the $60 million after-tax provision to adjust the carrying
cost of discontinued operations and a $16 million after-tax loss from
discontinued operations.
The 1996 net loss included the effect of two restructuring charges totaling
$442 million ($374 million after taxes and minority interest), $80 million in
gains ($48 million after-tax) resulting from the partial divestitures of
Metromail Corporation and Donnelley Enterprise Solutions Incorporated (DESI)
and an $86 million after-tax loss from discontinued operations. Excluding the
charges and gains, earnings from continuing operations were $249 million, or
$1.71 per share in 1997, compared with 1996 net income from continuing
operations of $255 million, or $1.68 per share. Net sales from continuing
operations were $4.9 billion, down 4% from 1996.
In the fourth quarter of 1997, the company lost $9 million, reflecting the
impairment and restructuring charges and the provision to adjust the carrying
value of discontinued operations discussed above, compared with 1996 earnings
of $97 million, which included a $36 million pre-tax gain ($22 million after-
tax) on the partial divestiture of DESI. Excluding the charges and gains,
earnings from continuing operations were $88 million, a $4 million increase
from 1996's fourth quarter, and earnings per share increased by $0.03, to
$0.60.
In 1996, the company earned $230 million, or $1.51 per share, excluding the
restructuring charges and gains discussed above, compared with 1995 net income
of $299 million, or $1.95 per share. 1996 earnings from continuing operations,
net of restructuring charges and gains, were $255 million, or $1.68 per share,
compared with 1995 net income from continuing operations of $276 million, or
$1.80 per share. Net sales from continuing operations were $5 billion in 1996
and 1995.
In the fourth quarter, excluding the gain from the partial divestiture of
DESI, the company earned $76 million, down 21% from 1995's fourth quarter, and
earnings per share declined to $0.51 cents.
REVENUE
Net sales for 1997 declined 4%, to $4.9 billion. Decreases in the cost of
materials (primarily paper; see discussion of materials below), declines in
international revenue due to the discontinuation of commercial printing in the
United Kingdom ($59 million), and the deconsolidation of Metromail and DESI
due to the company's reduced ownership ($206 million) following the 1996
public offerings, offset revenue gains in most business units of approximately
4%, net of the impact of paper.
Driving the revenue increases in 1997 were increased advertising pages in
magazines, high consumer confidence resulting in increased demand for catalogs
and retail inserts, the adoption cycle for textbooks and the strength of the
capital markets.
Net sales for 1996 were unchanged from 1995 at $5 billion. The impact of
decreased paper prices ($293 million) and the partial divestiture of Metromail
($122 million) offset increases in volume, principally in Telecommunications
and Financial Services.
EXPENSES
Gross profit for 1997 declined 2%, to $951 million. The decline was due to
the company's reduced ownership in Metromail and DESI ($70 million), price and
volume declines in Telecommunications, and
8
expenses associated with developing the company's logistics and fulfillment
businesses and starting up a short-run, four-color book printing facility in
Roanoke, Va. 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 first half of the year. These increased
costs were partially offset by manufacturing cost improvements in most
business units.
Gross profit as a percentage of net sales improved to 19.6% in 1997,
compared with 19.3% in 1996. The improvement was due primarily to declines in
the cost of paper supplied to customers.
Gross profit for 1996 declined 4%, to $971 million, reflecting lower by-
product paper recovery ($60 million) and the company's reduced ownership of
Metromail ($49 million), partially offset by increased volume in Financial
Services and a lower LIFO inventory provision ($15 million). Gross profit as a
percentage of net sales was 19.3% in 1996, compared with 20.0% in 1995.
The company spent $1.9 billion, $2.1 billion and $2.2 billion on raw
materials in 1997, 1996 and 1995, respectively. The primary raw materials used
by the company are paper and ink. Because the price of paper is volatile, in
periods of rising prices, the company's revenues increase, and in periods of
falling prices, revenues decline. Paper used in the printing process is either
purchased by the company or supplied by the customer. Customer-supplied paper
is not reflected in the company's revenue or in the cost of sales. The cost of
paper purchased for customer use is recovered as a pass-through cost, at a
margin that is lower than the margin earned for printing and related services.
In 1997, the average cost of paper for grades used in manufacturing (coated
No. 5, uncoated supercalendered and uncoated white directory, among others)
increased between 5% and 10% per short ton over 1996 prices. However, a larger
portion of paper was supplied directly by the company's customers, causing an
overall decline in the materials component of the cost of sales.
Short-ton prices on paper grades used by the company declined between 5% and
20% in 1996. In 1995, the average cost of paper grades used rose between 20%
and 40% from 1994 short-ton prices. The dramatic swing in price depressed
customer demand for the company's services in 1996 (primarily in its catalog
and magazine businesses).
The company's results are affected by the price of scrap (by-product) paper,
which it sells. In 1997, the company began to record income from the sales of
by-products as a recovery of the cost of materials, and reclassified prior-
years' financial results to more accurately reflect the impact of by-products
on operations. In 1997, by-products recovery declined by $1 million from 1996.
In 1996, by-products recovery declined by $60 million, due to the return to
normal price levels following substantial increase in the price of by-products
experienced during the first half of 1995.
Selling and administrative expenses in 1997 declined 1%, to $511 million.
Declines due to the deconsolidation of Metromail and DESI were partially
offset by volume-related increases in most business units. The ratio of
selling and administrative expenses to net sales increased to 10.5% from 10.3%
in 1996.
In 1996, selling and administrative expenses increased 4% to $518 million,
primarily due to volume-related expenses in Financial Services, partially
offset by the deconsolidation of Metromail. The ratio of selling and
administrative expenses to net sales increased to 10.3% from 9.9% in 1995.
NONOPERATING ITEMS
Net interest expense for 1997 declined 5%, to $91 million, due to lower
average debt balances associated with improvements in balance-sheet
management, resulting in lower working capital and capital investments. In
1996, net interest expense declined 13%, to $95 million, reflecting lower
average interest rates and lower average debt balances.
9
Other income for 1997 increased $9 million, to $26 million. The increase is
due to lower corporate-owned life insurance (COLI) expense, partially offset
by lower gains on the sale of investments in the company's venture capital
portfolio and the decision by Metromail, in which the company has a 37%
ownership interest, to expense as in-process research and development $23
million pre-tax ($14 million after-tax) of the purchase price of Saxe, Inc.,
which Metromail acquired in the third quarter. This charge resulted in a $5
million reduction in the equity earnings reported by the company during 1997.
Other income for 1996 increased by $23 million, primarily due to a $13
million increase in gains on the sale of investments, mainly in the company's
venture capital portfolio.
EVENTS AFFECTING COMPARABILITY
Restructuring/Impairment Charges--On December 16, 1997, the company
announced a $71 million pre-tax restructuring and impairment charge to cover
the cessation of activities no longer aligned with the company's strategic
focus, including the development of certain manufacturing information systems,
the pending sale of its Coris content-management software subsidiary, the
shutdown of its book fulfillment operations and the closing of a development
office in Singapore. Cash outlays associated with this charge are expected to
total approximately $18 million, of which $1 million was incurred in 1997.
During 1996, the company recorded two restructuring charges to continuing
operations, totaling $442 million ($374 million after taxes and minority
interest benefit), to restructure various operations and write down certain
impaired assets, including equipment, intangibles and investments in non-core
businesses. Approximately $195 million of the charges were related to the
restructuring and realignment of gravure operations in North America,
including the costs of closing facilities in Newton, N.C., and Casa Grande,
Ariz. Approximately $122 million was related to other manufacturing
restructuring, including: the discontinuation of catalog and magazine printing
in the United Kingdom, leading to the consolidation of two facilities into a
single directory printing facility; the discontinuation of book prepress
operations in Barbados; and the consolidation of a stand-alone book bindery in
Scranton, Pa., into an existing facility. The charges include $125 million in
write-downs of equipment, intangibles and investments in non-core businesses
in accordance with SFAS 121, Accounting for Impairment of Long-Lived Assets.
Pre-tax cash outlays associated with the 1996 restructuring and realignment
charges are expected to be $110 million (approximately $71 million of this
amount has been paid through December 31, 1997). The remaining $39 million is
expected to be incurred in 1998.
Divestitures--On June 19, 1996, Metromail completed an initial public
offering of its common stock. As a result of the offering, the company's
interest in Metromail was reduced to approximately 38% (37% as of December 31,
1997). The transaction resulted in a pre-tax gain of approximately $44 million
($26 million after-tax). Metromail had net sales and operating earnings of
$126 million and $13 million, respectively, through the date of the public
offering. In 1995, Metromail had net sales and operating earnings of $247
million and $36 million, respectively. As a result of the initial public
offering, the company received $250 million in proceeds that were used to
repurchase its shares.
On November 4, 1996, DESI completed an initial public offering of its common
stock. As a result of the offering, the company's interest in DESI was reduced
to approximately 43%. The transaction resulted in a pre-tax gain of $36
million ($22 million after-tax). DESI's net sales and operating earnings were
not material to the consolidated results of the company.
Prior to the initial public offerings, the company accounted for Metromail
and DESI under the consolidation method. Following these offerings, the
company accounts for them under the equity method. Under the equity method,
the company recognizes its proportionate share of any income or loss from both
entities.
COLI--In 1996, the United States Health Care Reform Act was passed,
eliminating the deduction for interest from loans borrowed against COLI
programs. The company has used COLI to fund employee benefits for several
years and expects the company's effective tax rate to rise over the next two
years.
10
The Internal Revenue Service (IRS) has disallowed the interest deductions
claimed by other corporate taxpayers that have COLI programs similar to the
company's. Although the IRS has not taken an official position regarding the
COLI program of the company, it is expected that it will disallow the
company's past interest deduction. However, the company would challenge such a
position and would expect to resolve the issue in a manner that does not
materially impact its financial position and results of operations.
Share Repurchases--In January 1998, the board of directors authorized a
program to repurchase up to $500 million of the company's common stock in
privately negotiated or open-market transactions over an 18-month period. The
program will include shares purchased for issuance under various stock option
plans.
In 1997, the company purchased approximately 2.3 million shares for issuance
under various stock option plans. The number of shares outstanding at December
31, 1997, was 145 million, with an average outstanding number of shares for
the year of 146 million.
In 1996, the company announced and completed the repurchase of $250 million,
or 7.7 million shares of its common stock, which was in addition to the
company's ordinary purchases of approximately 2.3 million shares for issuance
under various stock option plans. The number of shares outstanding at December
31, 1996, was 146 million, with an average outstanding number of shares for
the year of 152 million. In 1995, the average outstanding number of shares was
153 million.
EARNINGS FROM CONTINUING OPERATIONS
Net income from continuing operations for 1997 was $1.42 per share,
including the effects of the restructuring and impairment charge taken in the
fourth quarter. Excluding the charge, the company earned $249 million, or
$1.71 per share, compared with 1996 net income from continuing operations of
$255 million (excluding restructuring charges and divestiture gains discussed
below), or $1.68 per share.
In 1996, the net loss from continuing operations was $71 million, or $0.47
per share, including the effects of restructuring charges, as well as the
gains resulting from the partial divestitures of Metromail and DESI. Excluding
the restructuring charges and the gains, the company earned $255 million from
continuing operations, or $1.68 per share, compared with 1995 net income from
continuing operations of $276 million, or $1.80 per share.
DISCONTINUED OPERATIONS
The operating results of MMI and CS&T are reported as discontinued
operations in conjunction with the restructuring of the company's ownership
interest in SIH, discussed above. The net assets of CS&T were included in net
assets of discontinued operations as of December 31, 1997 and 1996. The non-
voting preferred stock in MMI was included in other noncurrent assets as of
December 31, 1997; the net assets of MMI were reclassified to net assets of
discontinued operations for periods prior to December 1997.
After-tax losses from discontinued operations in 1997 were $76 million, or
$0.52 per share, including the effects of a $60 million after-tax provision to
adjust the carrying value of the businesses to their estimated net realizable
value. Excluding the provision, losses from discontinued operations were $16
million, or $0.11 per share, compared with a 1996 net loss from continuing
operations of $25 million (net of restructuring charges), or $0.17 per share.
The improvement reflects increased volume in both the MMI and CS&T businesses
and an improved cost structure due to the restructuring activities initiated
in 1996, offset by the increased cost of managing the businesses as separate
entities.
In 1996, losses from discontinued operations were $86 million, or $0.57 per
share, including the effects of two restructuring charges. In March 1996, an
$86 million pre-tax charge ($44 million after taxes and a minority interest
benefit) was recorded to reposition the worldwide operations of MMI and CS&T,
including the closing of a plant in Wetherby, England, as well as MMI's
Crawfordsville, Ind., documentation printing and diskette replication
operations. In July 1996, an additional $33 million pre-tax charge ($17
million after taxes and a
11
minority interest benefit) was taken to further restructure MMI's operations.
Excluding the restructuring charges, losses from discontinued operations in
1996 were $25 million, or $0.17 per share, compared with 1995 net income from
discontinued operations of $23 million, or $0.15 per share.
The 1997 fourth-quarter net income (excluding the provision to adjust the
carrying value of the businesses) from discontinued operations was $6 million,
or $0.04 per share, compared with the 1996 fourth-quarter net loss from
discontinued operations of $8 million, or $0.06 per share.
CASH FLOW
Operating Activities--The company's main source of liquidity is cash from
operating activities. In 1997, cash provided from operating activities was
$742 million, a 31% increase from 1996. The increase was principally due to
favorable changes in working capital, which provided cash of $117 million in
1997, versus using cash of $20 million in 1996.
The decrease in working capital in 1997 was a result of increased focus
throughout the organization. The net cash conversion cycle (days sales
outstanding plus days inventory on hand minus days purchases outstanding)
decreased by four days to 43 days.
In 1996, cash provided by operating activities was $568 million, a 38%
increase from 1995. The improvement was primarily due to favorable changes in
working capital, which used only $20 million of cash in 1996 versus $195
million in 1995.
Investing Activities--The principal recurring investing activities for the
company are capital expenditures to restructure and improve the productivity
of operations and to expand in specific markets. In 1997, capital expenditures
totaled $360 million, an $11 million decline from 1996. Expenditures included
$114 million for the restructuring of the gravure platform and $45 million for
the Roanoke facility. In 1996, capital expenditures were $371 million, a $66
million decline from 1995. In 1998, the company currently expects to spend
between $325 million and $350 million, including capital expenditures
associated with the company's Year 2000 compliance effort.
During 1997 and 1996, the company initiated activities to sell operations
and assets no longer aligned with its strategic priorities. In 1997, the
company generated $51 million from these actions, including $21 million from
the sale of the company's interests in three European joint ventures and $13
million from the disposition of interests from the company's venture capital
portfolio.
In 1996, the company generated $249 million and $52 million from
transactions related to its partial disposition of its ownership in Metromail
and DESI, respectively, and an additional $32 million from other dispositions.
Financing Activities--Financing activities include net borrowings, share
repurchases and dividend payments. The company's net borrowings declined by
$226 million and $160 million in 1997 and 1996, respectively, and increased by
$196 million in 1995. The decline in 1997 was a result of strong working
capital management, lower capital spending and cash generated from the
disposition of assets no longer aligned with the company's strategic
priorities.
Commercial paper is the company's primary source of short-term financing. On
December 31, 1997, the company had $258 million outstanding in commercial
paper borrowings. In addition, at December 31, 1997 and 1996, the company had
an unused revolving credit facility of $550 million with a number of banks.
This facility provides support for the issuance of commercial paper and other
credit needs. Management believes the company's cash flow and borrowing
capacity are sufficient to fund its operations.
Net cash used to purchase common stock for treasury, primarily to cover
options granted to employees, was $36 million in 1997. In 1996, $274 million
net cash was used to repurchase shares.
12
Dividends to shareholders totaled $115 million, $113 million and $104
million in 1997, 1996 and 1995, respectively.
FINANCIAL CONDITION
The financial position of the company is strong, as evidenced by the
December 31, 1997, balance sheet. The company's total assets are $4.1 billion,
a $310 million decline from 1996, due to the increased focus on managing
working capital and reducing capital expenditures, as well as the disposition
of assets no longer aligned with the strategic focus of the organization. 1997
average invested capital (total debt and equity, computed on a 12-month
average) was $3 billion, a $258 million decline from 1996. Increased earnings
from continuing operations (net of impairment and restructuring charges and
one-time gains) in conjunction with decreased invested capital have
contributed to a 180-basis point improvement in return on invested capital to
11.4%.
At year-end 1997, the total debt-to-capital ratio decreased to 43%, from 47%
at year-end 1996, and the overall debt-to-total-market-value of the company
declined to 22% from 27%. Over longer periods of time, the goal of the company
is to manage the ratio within a range of 20% to 25%.
OTHER INFORMATION
Human Resources--As of December 31, 1997, the company employed approximately
26,000 people worldwide in its continuing operations. Of that number,
approximately 96% were employed in the United States, approximately 3% of whom
are covered by collective bargaining agreements. Of the total, the company
employed approximately 1,000 people in its foreign operations, the majority of
whom were covered by collective bargaining agreements, as is customary in
those markets.
From 1996 to 1997, the number of domestic employees in continuing operations
decreased by 8%. Despite this decline, minority representation increased as a
percentage of total employees by 1%, to 14%, and increased as a percentage of
managers and professionals by 2%, to 11%. Females represent 31% of total
employees and 32% of managers and professionals. Minorities represent 16% of
the female workforce and 13% of female managers and professionals.
Technology--The company remains a technology leader, investing not only in
print-related technologies, such as computer-to-plate and digital printing,
but also in areas such as distribution of content and images over the
Internet. Technology is applied to enhance customers' products across the
entire manufacturing process. The company's recent investments have been
focused on a digital infrastructure to support the movement of work from
customers' desktops across the company's manufacturing process, enabling
output in multiple media. The company is focused on investing in technologies
that contribute to its financial performance and help it deliver products,
services and solutions its competitors cannot easily duplicate.
Process control and information systems are becoming increasingly important
to the effective management of the company. Increased spending on new systems
and updating of existing systems will be necessary. In the near term, these
efforts will be focused on ensuring that processes and systems are Year 2000
compliant, and the company will defer other infrastructure and systems
initiatives that would support continuous productivity improvements and
enhanced service capabilities until after the company is Year 2000 compliant.
The Year 2000 compliance issues stem from the computer industry's practice
of conserving data storage by using two digits to represent a year. Systems
and hardware using this format may process data incorrectly or fail with the
use of dates in the next century. These types of failures can influence
applications that rely on dates to perform calculations (such as an accounts
receivable aging report), as well as systems such as building security and
heating.
The company's effort to address Year 2000 compliance issues is under way.
The effort consists of evaluating internal computing infrastructure, business
applications and shop-floor systems for Year 2000 compliance and replacing or
renovating systems and applications as necessary to assure such compliance.
This
13
effort will be completed by mid-1999. In addition, the company will evaluate
compliance by external companies and systems that interact with those of the
company, and test to ensure all systems work together. Company employees,
assisted by the expertise of external consultants where necessary, staff the
Year 2000 compliance effort.
Management believes currently that the cost of the Year 2000 initiative is
not a material issue that would cause reported financial information not to be
indicative of future operating results or financial condition.
Litigation--On November 25, 1996, a purported class action was brought
against the company in federal district court in Chicago, Ill., on behalf of
current and former African-American employees, alleging that the company
racially discriminated against them. The complaint seeks declaratory and
injunctive relief, and asks for actual, compensatory, consequential and
punitive damages in an amount not less than $500 million. Although plaintiffs
seek nationwide class certification, most of the specific factual assertions
of the complaint relate to the closing by the company of its Chicago catalog
production operations begun in 1993. Other general claims relate to other
company locations. 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 and plaintiffs have filed a motion for class
certification. Both motions are pending.
On December 18, 1995, a purported class action was filed against the company
in federal district court in Chicago alleging that older workers were
discriminated against in selection for termination upon closing of the Chicago
catalog operations. The suit also alleges that the company violated the
Employee Retirement Income Security Act (ERISA) in determining benefits
payable to retiring or terminating 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. On August 14, 1997, the court
denied plaintiffs' motion and certified classes in both the age discrimination
and ERISA claims limited to former employees of the Chicago catalog
operations.
Both pending cases relate at least in part to the circumstances surrounding
the closing 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 that
could result from an unfavorable outcome of either pending case.
Environmental Regulations--The company is subject to various laws and
regulations relating to employee health and safety and to environmental
protection. The company's policy is to be in compliance with all such laws and
regulations that govern protection of the environment and employee health and
safety. The company does not anticipate that compliance with such
environmental, safety and health laws and regulations will have a material
adverse effect upon the company's competitive or consolidated financial
position.
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 of the commercial
printing markets to suffer from overcapacity, and competition, therefore, is
fierce. Competition is based largely on price, quality and servicing the
special needs of customers.
The company is a large consumer of paper, acquired for customers and by
customers. The cost and supply of certain paper grades consumed in the
manufacturing process will continue to affect the company's financial results.
However, management currently does not foresee any disruptive conditions
affecting prices and supply of paper in 1998.
Postal costs are a significant component of the cost structure of the
customers of the company. Changes anticipated in postal rates in 1998,
however, are expected to be manageable for most key customer segments, and
favorable U.S. Postal Service financial performance could possibly delay the
implementation of any new rates beyond 1998.
14
Additionally, proposed changes to the Postal Service's legislative charter
also could affect the postal communication and commerce environment. While the
proposed legislative changes are controversial, aspects of the proposal could
strengthen the company's position as a postal intermediary. Even in the
absence of legislative reform, the company's ability to improve the cost
efficiency of mail processing and distribution will enhance its positioning in
the postal business marketplace.
In addition to paper and postage costs, consumer confidence and economic
growth are key drivers of print demand. Most experts expect continued strength
in the domestic economy; however, a significant change in the economic outlook
could affect demand for the company's products, particularly in the financial
printing market.
Management believes the company's competitive strengths--including its
comprehensive service offerings, depth of customer relationships, technology
leadership, management experience and economies of scale--should result in
profitable growth throughout the next year and well into the future.
ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company is exposed to market risk from changes in interest rates and
foreign exchange rates. However, since approximately 70% of the company's debt
is at fixed interest rates, the company's exposure to interest rate
fluctuations is immaterial to the consolidated financial statements of the
company as a whole. The company's exposure to adverse changes in foreign
exchange rates is also immaterial to the consolidated financial statements of
the company as a whole, although the company occasionally enters into
financial instruments to hedge what exposure to foreign exchange rate changes
it may have. The company does not use financial instruments for trading
purposes and is not a party to any leveraged derivatives. Further disclosure
relating to financial instruments is included in the Debt Financing and
Interest Expense note in the Notes to Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information required by Item 8 is contained in Item 14 of Part
IV and listed on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors and officers of the company is
contained on pages 2-6 and 8 of the company's definitive Proxy Statement dated
February 18, 1998, and is incorporated herein by reference. See also the list
of the company's executive officers and related information under "Executive
Officers of R. R. Donnelley & Sons Company" at the end of Part I of this
Report.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation for the year ended December
31, 1997, and, with respect to certain of such information, prior years, is
contained on pages 8-16 of the company's definitive Proxy Statement dated
February 18, 1998, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the beneficial ownership of the company's common
stock is contained on pages 6-8 of the company's definitive Proxy Statement
dated February 18, 1998 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. Financial Statements
The financial statements listed in the accompanying index (page F-1) to
the financial statements are filed as part of this annual report.
2. Financial Statement Schedule
The financial statement schedule listed in the accompanying index (page
F-1) to the financial statements is filed as part of this annual
report.
3. Exhibits
The exhibits listed on the accompanying index to exhibits (pages E-1
through E-2) are filed as part of this annual report.
(b)Reports on Form 8-K
A Current Report on Form 8-K was filed on December 15, 1997, and
included Item 5, "Other Events" and Item 7, "Financial Statements, Pro
Forma Financial Information and Exhibits." An amendment to such Current
Report on Form 8-K/A was filed on February 18, 1998.
(c)Exhibits
The exhibits listed on the accompanying index (Pages E-1 through E-2)
are filed as part of this annual report.
(d)Financial Statements omitted--
Separate financial statements of the parent company have been omitted
since it is primarily an operating company and the minority interest
and indebtedness to persons other than the parent of the subsidiaries
included in the consolidated financial statements are less than 5% of
total consolidated assets.
Certain schedules have been omitted because the required information is
included in the consolidated financial statements or notes thereto or
because they are not applicable or not required.
16
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 4TH DAY OF
MARCH, 1998.
R. R. DONNELLEY & SONS COMPANY
/s/ Peter F. Murphy
By __________________________________
Peter F. Murphy,
Vice President and Controller
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED, ON THE 4TH DAY OF MARCH, 1998.
SIGNATURE AND TITLE SIGNATURE AND TITLE
/s/ William L. Davis /s/ Thomas S. Johnson
------------------------------------- -------------------------------------
William L. Davis Thomas S. Johnson
Chairman of the Board and Director
Chief Executive Officer, Director
(Principal Executive Officer) /s/ George A. Lorch
-------------------------------------
/s/ Cheryl A. Francis George A. Lorch
------------------------------------- Director
Cheryl A. Francis
Executive Vice President and /s/ M. Bernard Puckett
Chief Financial Officer -------------------------------------
(Principal Financial Officer) M. Bernard Puckett
Director
/s/ Peter F. Murphy
------------------------------------- /s/ William D. Sanders
Peter F. Murphy -------------------------------------
Vice President and Controller William D. Sanders
(Principal Accounting Officer) Director
/s/ Martha Layne Collins /s/ Oliver R. Sockwell
------------------------------------- -------------------------------------
Martha Layne Collins Oliver R. Sockwell
Director Director
/s/ James R. Donnelley /s/ Bide L. Thomas
------------------------------------- -------------------------------------
James R. Donnelley Bide L. Thomas
Director Director
/s/ Charles C. Haffner III /s/ Stephen M. Wolf
------------------------------------- -------------------------------------
Charles C. Haffner III Stephen M. Wolf
Director Director
/s/ Judith H. Hamilton
-------------------------------------
Judith H. Hamilton
Director
17
ITEM 14(A). INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
[Download Table]
PAGE(S)
-------
Consolidated Statements of Income for each of the three years ended
December 31, 1997..................................................... F-2
Consolidated Balance Sheets at December 31, 1997 and 1996.............. F-3
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1997..................................................... F-4
Consolidated Statements of Shareholders' Equity for each of the three
years ended December 31, 1997......................................... F-5
Notes to Consolidated Financial Statements............................. F-6
Report of Independent Public Accountants............................... F-18
Unaudited Interim Financial Information................................ F-19
Report of Independent Public Accountants on Financial Statement
Schedule.............................................................. F-20
Financial Statement Schedule
II--Valuation and Qualifying Accounts................................ F-21
F-1
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THOUSANDS OF DOLLARS
[Download Table]
YEAR ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
Net sales................................. $4,850,033 $5,033,185 $5,049,597
Cost of sales............................. 3,899,428 4,062,259 4,037,525
---------- ---------- ----------
Gross profit.............................. 950,605 970,926 1,012,072
Selling and administrative expenses....... 511,115 518,288 497,402
Restructuring and impairment charges...... 70,702 441,709 --
---------- ---------- ----------
Earnings from operations.................. 368,788 10,929 514,670
Other income (expense):
Interest expense........................ (90,765) (95,482) (109,759)
Gain on stock offerings of subsidiaries. -- 80,041 --
Other, net.............................. 25,742 16,821 (5,871)
---------- ---------- ----------
Earnings from continuing operations before
income taxes............................. 303,765 12,309 399,040
Income taxes.............................. 97,240 83,792 123,088
---------- ---------- ----------
Income (loss) from continuing operations.. 206,525 (71,483) 275,952
Loss on disposal of discontinued
operations, net of income taxes.......... (60,000) -- --
(Loss) income from discontinued
operations, net of income taxes.......... (15,894) (86,142) 22,841
---------- ---------- ----------
Net Income (Loss)..................... $ 130,631 $ (157,625) $ 298,793
========== ========== ==========
Income (Loss) from Continuing Operations
per Share of Common Stock
Basic................................... $ 1.42 $ (0.47) $ 1.80
Diluted................................. 1.40 (0.47) 1.77
Net Income (Loss) per Share of Common
Stock
Basic................................... $ 0.90 $ (1.04) $ 1.95
Diluted................................. 0.89 (1.04) 1.92
See accompanying Notes to Consolidated Financial Statements.
F-2
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
THOUSANDS OF DOLLARS
[Download Table]
DECEMBER 31
----------------------
1997 1996
---------- ----------
Assets
Cash and equivalents................................. $ 47,814 $ 21,317
Receivables, less allowances for doubtful accounts of
$16,259 in 1997 and $14,205 in 1996................. 814,664 919,042
Inventories.......................................... 201,402 197,905
Prepaid expenses..................................... 82,691 87,807
---------- ----------
Total Current Assets............................... 1,146,571 1,226,071
Net property, plant and equipment, at cost, less
accumulated depreciation of $2,426,649 in 1997 and
$2,228,378 in 1996.................................. 1,788,116 1,836,620
Goodwill and other intangibles, net of accumulated
amortization of $149,782 in 1997 and $108,194 in
1996................................................ 385,512 436,306
Other noncurrent assets.............................. 659,260 558,698
Net assets of discontinued operations................ 154,707 386,133
---------- ----------
Total Assets....................................... $4,134,166 $4,443,828
========== ==========
Liabilities
Accounts payable..................................... $ 291,666 $ 285,416
Accrued compensation................................. 152,235 121,889
Short-term debt...................................... 45,000 33,296
Current and deferred income taxes.................... 58,888 53,766
Other accrued liabilities............................ 264,833 273,362
---------- ----------
Total Current Liabilities.......................... 812,622 767,729
---------- ----------
Long-term debt....................................... 1,153,226 1,430,671
Deferred income taxes................................ 229,538 256,819
Other noncurrent liabilities......................... 347,283 357,328
---------- ----------
Total Noncurrent Liabilities....................... 1,730,047 2,044,818
---------- ----------
Shareholders' Equity
Common stock at stated value ($1.25 par value)
Authorized shares: 500,000,000; Issued: 150,889,050
in 1997 and 1996.................................... 320,962 320,962
Retained earnings, net of cumulative translation
adjustments of $45,782 in 1997 and $26,580 in 1996.. 1,482,624 1,486,215
Unearned compensation................................ (9,414) (5,402)
Reacquired common stock, at cost..................... (202,675) (170,494)
---------- ----------
Total Shareholders' Equity......................... 1,591,497 1,631,281
---------- ----------
Total Liabilities and Shareholders' Equity......... $4,134,166 $4,443,828
========== ==========
See accompanying Notes to Consolidated Financial Statements.
F-3
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THOUSANDS OF DOLLARS
[Download Table]
YEAR ENDED DECEMBER 31
-------------------------------
1997 1996 1995
--------- --------- ---------
Cash flows provided by (used for) operating
activities:
Net income (loss)........................... $ 130,631 $(157,625) $ 298,793
Loss (income) from discontinued operations,
net of income taxes........................ 15,894 86,142 (22,841)
Loss on disposal of discontinued operations,
net of income taxes........................ 60,000 -- --
Restructuring and impairment charges, net of
tax and minority interest.................. 42,421 374,449 --
Depreciation................................ 327,770 316,290 298,879
Amortization................................ 42,675 43,205 57,798
Gain on stock offerings of subsidiaries..... -- (80,041) --
Gain on sale of assets...................... (16,028) (17,758) --
Net change in operating working capital..... 117,386 (20,355) (194,784)
Net change in other assets and liabilities.. 27,508 36,516 (21,080)
Other....................................... (6,019) (12,856) (5,813)
--------- --------- ---------
Net Cash Provided by Operating Activities. 742,238 567,967 410,952
--------- --------- ---------
Cash flows provided by (used for) investing
activities:
Capital expenditures........................ (360,195) (370,906) (436,730)
Proceeds from collection of advances to
affiliates................................. -- 277,013 --
Proceeds from sale of DESI shares........... -- 23,492 --
Other investments, including acquisitions,
net of cash acquired....................... (47,526) (24,165) (68,216)
Disposition of assets....................... 51,276 31,563 --
--------- --------- ---------
Net Cash Used for Investing Activities.... (356,445) (63,003) (504,946)
--------- --------- ---------
Cash flows provided by (used for) financing
activities:
Net (decrease) increase in borrowings....... (225,967) (160,329) 195,637
Disposition of reacquired common stock...... 45,762 53,058 45,597
Acquisition of common stock................. (82,041) (327,130) (34,429)
Cash dividends paid......................... (114,934) (112,645) (104,364)
--------- --------- ---------
Net Cash (Used for) Provided by Financing
Activities............................... (377,180) (547,046) 102,441
--------- --------- ---------
Effect of exchange rate changes on cash and
equivalents.................................. (775) (395) (230)
--------- --------- ---------
Net Increase (Decrease) in Cash and
Equivalents from Continuing Operations....... 7,838 (42,477) 8,217
Net Increase (Decrease) in Cash from
Discontinued Operations...................... 18,659 41,551 (11,680)
Cash and Equivalents at Beginning of Year..... 21,317 22,243 25,706
--------- --------- ---------
Cash and Equivalents at End of Year........... $ 47,814 $ 21,317 $ 22,243
========= ========= =========
Changes in operating working capital, net of acquisitions and divestitures:
1997 1996 1995
--------- --------- ---------
Decrease (increase) in assets:
Receivables--net............................ $ 103,077 $ 149,048 $(249,372)
Inventories--net............................ (3,496) 42,919 (20,429)
Prepaid expenses............................ 5,116 (78,086) 18,659
Increase (decrease) in liabilities:
Accounts payable............................ 6,249 (81,477) 52,147
Accrued compensation........................ 30,347 17,606 12,562
Other accrued liabilities................... (23,907) (70,365) (8,351)
--------- --------- ---------
Net Change in Operating Working Capital... $ 117,386 $ (20,355) $(194,784)
========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
F-4
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THOUSANDS OF DOLLARS
[Enlarge/Download Table]
REACQUIRED UNEARNED
COMMON STOCK COMMON STOCK COMPENSATION
--------------------- --------------------- RESTRICTED RETAINED
SHARES AMOUNT SHARES AMOUNT STOCK EARNINGS TOTAL
----------- -------- ---------- --------- ------------ ---------- ----------
Balance at December 31,
1994................... 158,608,800 $330,612 (5,523,482) $(155,020) $ -- $1,802,777 $1,978,369
Net income.............. 298,793 298,793
Treasury stock
purchases.............. (996,464) (34,429) (34,429)
Cash dividends.......... (104,364) (104,364)
Cost of common shares
issued under stock
programs............... 1,863,685 47,206 (9,297) 7,688 45,597
Translation adjustments. (10,796) (10,796)
----------- -------- ---------- --------- ------- ---------- ----------
Balance at December 31,
1995................... 158,608,800 330,612 (4,656,261) (142,243) (9,297) 1,994,098 2,173,170
Net loss................ (157,625) (157,625)
Treasury stock
purchases.............. (2,333,691) (77,131) (77,131)
Cash dividends.......... (112,645) (112,645)
Cost of common shares
issued under stock
programs............... 1,654,697 48,880 3,895 283 53,058
Cost of common shares
retired under
repurchase plan........ (7,719,750) (9,650) (240,349) (249,999)
Translation adjustments. 2,453 2,453
----------- -------- ---------- --------- ------- ---------- ----------
Balance at December 31,
1996................... 150,889,050 320,962 (5,335,255) (170,494) (5,402) 1,486,215 1,631,281
Net income.............. 130,631 130,631
Treasury stock
purchases.............. (2,293,757) (82,041) (82,041)
Cash dividends.......... (114,934) (114,934)
Cost of common shares
issued under stock
programs............... 1,857,792 49,860 (4,012) (86) 45,762
Translation adjustments. (19,202) (19,202)
----------- -------- ---------- --------- ------- ---------- ----------
Balance at December 31,
1997................... 150,889,050 $320,962 (5,771,220) $(202,675) $(9,414) $1,482,624 $1,591,497
=========== ======== ========== ========= ======= ========== ==========
See accompanying Notes to Consolidated Financial Statements.
F-5
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation--The consolidated financial statements include the
accounts of the company and its majority-owned subsidiaries. Minority
interests in the income (loss) of consolidated subsidiaries ($6 million of
expense, $2 million of income and $5 million of expense in 1997, 1996 and
1995, respectively) are included in other expense on the Consolidated
Statements of Income. Intercompany items and transactions are eliminated in
consolidation. The company held investments in unconsolidated affiliates of
$275 million and $218 million at Dec. 31, 1997 and 1996, respectively.
Nature of Operations--The company provides a wide variety of print and
print-related services and products for specific customers, virtually always
under contract. Some contracts provide for progress payments from customers as
certain phases of the work are completed; however, revenue is not recognized
until the earnings process has been completed in accordance with the terms of
the contracts. Some customers furnish paper for their work, while in other
cases the company purchases and sells the paper.
Cash and Equivalents--The company considers all highly liquid debt
instruments purchased with original maturities of three months or less to be
cash equivalents.
Inventories--Inventories include material, labor and factory overhead and
are stated at the lower of cost or market. The cost of approximately 80% and
84% of the inventories at Dec. 31, 1997 and 1996, respectively, has been
determined using the Last-In, First-Out (LIFO) method. This method reflects
the effect of inventory replacement costs in earnings; accordingly, charges to
cost of sales reflect recent costs of material, labor and factory overhead.
The remaining inventories are valued using the First-In, First-Out (FIFO) or
specific identification methods.
Foreign Currency Translation--Gains and losses arising from the translation
of the company's international subsidiaries' financial statements are
reflected in retained earnings.
Capitalization, Depreciation and Amortization--Property, plant and equipment
are stated at cost. Depreciation is computed principally on the straight-line
method based on useful lives of 15 to 33 years for buildings and 3 to 15 years
for machinery and equipment. Maintenance and repair costs are charged to
expense as incurred. Major overhauls are capitalized as reductions to
accumulated depreciation. When properties are retired or disposed, the costs
and accumulated depreciation are eliminated and the resulting profit or loss
is recognized in income. Goodwill ($145 million and $147 million, net of
accumulated amortization, at Dec. 31, 1997 and 1996, respectively) is
amortized over periods ranging from 10 to 40 years. Other intangibles
represent primarily the cost of acquiring print contracts and volume
guarantees and are amortized over the periods in which benefits will be
realized.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and of the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
DISCONTINUED OPERATIONS
Effective April 1, 1995, the company merged its Global Software Services
business (GSS) with Corporate Software Inc. (CSI) and formed Stream
International Holdings Inc. (SIH), a software manufacturer, distributor and
technical-support organization. From the date of the merger through Dec. 15,
1997, the company owned
F-6
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
approximately 80% of the capital stock of SIH. The remaining 20% was owned by
the former owners of CSI and management.
During 1996, SIH reorganized into three independent businesses: Stream
International, which provides outsource technical support services; Corporate
Software & Technology (CS&T), a software distribution company; and Modus Media
International (MMI), a global manufacturing and fulfillment business. CS&T and
MMI comprise the majority of the company's investment and net income in SIH.
On Dec. 15, 1997, SIH's businesses became separate companies and the
company's ownership interest in SIH was restructured. The company converted
its equity and debt positions in Stream International into 87% of the common
stock of that business. Additionally, the company converted its equity and
debt positions in CS&T into 86% of the common stock of CS&T and sold its
equity and debt positions in MMI for non-voting preferred stock of MMI. The
disposition of the company's interest in CS&T will be effected through the
sale of the business, which is planned to occur during 1998.
In connection with the planned disposition of CS&T and the restructuring of
the company's interest in MMI, the company has reported its interests in CS&T
and MMI as discontinued operations. The net assets of CS&T were included in
net assets of discontinued operations, as of Dec. 31, 1997. The non-voting
preferred stock in MMI was included in other noncurrent assets as of Dec. 31,
1997; and the net assets of MMI were reclassified to net assets of
discontinued operations for periods prior to December 1997. Additionally, the
company recorded a fourth-quarter 1997 charge for the loss on disposal of
discontinued operations of $60 million ($40 million net of taxes) to adjust
the carrying cost of these businesses to their estimated net realizable
values.
Summary financial information of discontinued operations was as follows:
[Download Table]
1997 1996 1995
---------- ---------- ----------
THOUSANDS OF DOLLARS
Net sales.............................. $1,546,211 $1,526,369 $1,363,616
(Loss) income before income taxes...... (22,216) (122,789) 40,492
(Loss) Income.......................... (15,894) (86,142) 22,841
Net current assets..................... $ 44,269 $ 146,968
Net noncurrent assets.................. 110,438 239,165
---------- ----------
Total Net Assets....................... $ 154,707 $ 386,133
========== ==========
As part of the restructuring program announced in the first half of 1996,
the company recorded pre-tax charges of $119 million ($61 million after-tax)
for discontinued operations. The charges primarily related to the
repositioning of MMI and CS&T's worldwide operations and the restructuring of
its software manufacturing, printing, kitting and fulfillment operations.
The SIH merger, which was effective April 1, 1995, was accounted for using
the purchase method. Accordingly, amounts assigned in the net assets of
discontinued operations to the assets and liabilities of CS&T were based on
their estimated fair market values. The cost in excess of net assets acquired
of $109 million is being amortized on a straight-line basis over 15 years. No
gain or loss was recognized on the merger, as the book value of GSS
approximated its fair market value on the date of the transaction.
Liabilities incurred and assumed in connection with acquisitions totaled
$387 million for the year ended Dec. 31, 1995.
F-7
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DIVESTITURES
On June 19, 1996, Metromail Corporation (the company's previously wholly-
owned subsidiary, which is a leading provider of market-oriented consumer
information and reference services) completed an initial public offering of
13.8 million shares of its common stock at $20.50 per share. As a result of
the offering, the company's interest in Metromail was reduced to approximately
38% (37% as of Dec. 31, 1997). Approximately $250 million of the proceeds from
the completed offering were used by Metromail to retire certain indebtedness
owed to the company. The company in turn used the payment from Metromail to
pay down debt and for general corporate purposes. The transaction resulted in
a pre-tax gain for the company of $44 million and a tax provision of $18
million. As a result of this transaction, the company changed its method of
accounting for Metromail from consolidation to the equity method, effective
July 1, 1996. Under the equity method, the company recognizes in income its
proportionate share of the net income of Metromail. Metromail's 1996 net sales
and operating earnings were $126 million and $13 million, respectively,
through the date of the initial public offering. Metromail had net sales and
operating earnings of $247 million and $36 million, respectively, in 1995.
On Nov. 4, 1996, Donnelley Enterprise Solutions Incorporated (DESI),
formerly a wholly-owned subsidiary of the company and a single-source provider
of integrated information-management services to professional service
organizations, completed an initial public offering of 2.9 million shares of
its common stock at $25.00 per share, of which 1.0 million were offered by the
company. As a result of the offering, the company's interest in DESI was
reduced to approximately 43%. The company received approximately $52 million
from the net proceeds of the shares sold and from repayment of amounts owed by
DESI, which was used for general corporate purposes. The transaction resulted
in a pre-tax gain of $36 million, or $22 million after taxes. As a result of
this transaction, the company changed its method of accounting for DESI from
consolidation to the equity method, effective Nov. 1, 1996. DESI's net sales
and operating earnings were not material to the consolidated operating results
or financial condition of the company.
RESTRUCTURING AND IMPAIRMENT CHARGES
In December 1997, the company provided for the impairment of assets and
restructuring costs related to the elimination of activities that no longer
support the company's strategic focus. These included the development of
certain manufacturing systems, the pending sale of Coris, the company's
content-management software subsidiary and the shutdown of book fulfillment
operations in Crawfordsville, Ind. These actions resulted in pre-tax charges
of $71 million ($42 million after taxes). Pre-tax cash outlays associated with
the charges are expected to total approximately $18 million, of which $1
million was incurred in 1997. The remaining $17 million is expected to be
incurred in 1998.
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 $442 million ($374 million after taxes
and a minority interest benefit). Approximately $195 million of the charges
were related to its gravure platform realignment and approximately $122
million were related to other manufacturing restructuring. The charges also
included $125 million in write-downs of equipment, intangibles and investments
in non-core businesses. Pre-tax cash outlays associated with the restructuring
and realignment charges are expected to total approximately $110 million, of
which $71 million was incurred through 1997 and the remaining $39 million will
be incurred in 1998.
Impairment losses were calculated based on the excess of the carrying amount
of assets over the asset's fair values. The fair value of an asset is
generally determined as the discounted estimate of future cash flows generated
by the asset.
F-8
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents the components of the company's restructuring
reserves along with charges against these reserves, from their establishment
until Dec. 31, 1997:
[Download Table]
WRITE-DOWN OF RESTRUCTURING
INITIAL PROPERTY AND RESERVES AS OF
RESTRUCTURING INVESTMENTS CASH DECEMBER 31,
RESERVES TO FAIR VALUE PAYMENTS 1997
------------- ------------- -------- --------------
THOUSANDS OF DOLLARS
Restructuring loss on
write-down of property,
plant and equipment, and
other assets............ $220,323 $(220,323) $ -- $ --
Restructuring
expenditures to
reposition operations
and close facilities.... 127,922 -- (72,055) 55,867
Impairment loss on
intangible assets and
investments............. 164,166 (164,166) -- --
-------- --------- -------- -------
Total Restructuring
Reserves............ $512,411 $(384,489) $(72,055) $55,867
======== ========= ======== =======
INVENTORIES
The components of the company's inventories were as follows:
[Download Table]
DECEMBER 31
------------------
1997 1996
-------- --------
THOUSANDS OF
DOLLARS
Raw materials and manufacturing supplies.............. $123,280 $128,445
Work in process....................................... 153,142 153,451
Finished goods........................................ 1,047 155
Progress billings..................................... (31,715) (40,132)
LIFO reserve.......................................... (44,352) (44,014)
-------- --------
Total............................................. $201,402 $197,905
======== ========
The company's cost of sales was increased by LIFO provisions of $0.6 million
in 1997 and $7.7 million in 1995, and decreased by $7.5 million in 1996. In
the third quarter of 1995, the company changed from the double-extension
method of valuing LIFO inventories to the external-index method. The company
believes that this change will result in a better measurement of operating
results by properly reflecting the effect of productivity improvements in the
company's cost of sales. Because the cumulative effect of this change on
periods prior to 1995 cannot be determined, the impact has been reflected in
1995 operations. This accounting change was adopted effective Jan. 1, 1995.
Net income for 1995 was approximately $22 million ($0.15 per basic share)
higher than it would have been had the change not been made.
PROPERTY, PLANT AND EQUIPMENT
The following table summarizes the components of property, plant and
equipment (at cost):
[Download Table]
DECEMBER 31
---------------------
1997 1996
---------- ----------
THOUSANDS OF DOLLARS
Land................................................ $ 33,755 $ 34,032
Buildings........................................... 634,114 584,734
Machinery and equipment............................. 3,546,896 3,446,232
---------- ----------
Total........................................... $4,214,765 $4,064,998
========== ==========
F-9
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
COMMITMENTS AND CONTINGENCIES
As of Dec. 31, 1997, authorized expenditures on incomplete projects for the
purchase of property, plant and equipment totaled $161 million. Of this total,
$73 million has been contractually committed. The company has a variety of
commitments with suppliers for the purchase of paper, ink and other materials
for delivery in future years at prevailing market prices.
The company has operating lease commitments totaling $281 million extending
through various periods to 2009. The lease commitments total $42 million for
1998, range from $26 million to $35 million in each of the years 1999-2002 and
total $117 million for years 2003 and thereafter.
The company is not exposed to significant accounts receivable credit risk,
due to the diversity of industry classification, distribution channels and
geographic location of its customers.
On Nov. 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. Although plaintiffs seek nationwide
class certification, most of the specific factual assertions of the complaint
relate to the closing by the company of its Chicago catalog production
operations in 1993. Other general claims relate to other company locations.
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 and plaintiffs have filed a motion for class certification. Both
motions are pending.
On Dec. 18, 1995, a purported class action was filed against the company in
federal district court in Chicago alleging that older workers were
discriminated against in selection for termination upon 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 Oct. 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. On Aug. 14, 1997, the court denied
plaintiff's motion and certified classes in both the age discrimination and
ERISA claims limited to former employees of the Chicago catalog operations.
Both pending 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 that
could result from an unfavorable outcome of either pending case.
In addition, the company is a party to certain litigation arising in the
ordinary course of business which, in the opinion of management, will not have
a material adverse effect on the operations or financial condition of the
company. The company also has future commitments totaling $54 million to
invest in various affordable housing limited partnerships that provide
cumulative annual tax benefits and credits in amounts greater than the
investments.
RETIREMENT BENEFIT PLAN
The company's restated Retirement Benefit Plan (the Plan) is a non-
contributory defined benefit plan. Substantially all U.S. employees age 21 or
older are covered by the Plan. Normal retirement age is 65, but reduced early
retirement benefits are paid to fully vested participants at or after age 55.
As required, the company uses the projected unit credit actuarial cost method
to determine pension cost for financial reporting purposes. In
F-10
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
conjunction with this method, the company amortizes deferred gains and losses
(using the corridor method) and prior service costs over the average remaining
service life of its active employee population. In addition, a transition
credit (the excess of Plan assets plus balance sheet accruals over the
projected obligation as of Jan. 1, 1987) is amortized over 19 years. For tax
and funding purposes, the entry age normal actuarial cost method is used.
Net pension credits included in operating results for the Plan were:
[Download Table]
1997 1996 1995
--------- --------- ---------
THOUSANDS OF DOLLARS
Service cost.................................. $ 31,886 $ 32,619 $ 23,393
Interest cost on the projected benefit
obligation................................... 61,337 58,121 54,524
Actual return on Plan assets.................. (233,509) (169,301) (217,662)
Amortization of excess Plan net assets at
adoption of SFAS 87 and deferrals--net....... 119,546 63,332 120,698
--------- --------- ---------
Net Pension Credit........................ $ (20,740) $ (15,229) $ (19,047)
========= ========= =========
The actuarial computations that derived the above amounts assumed a discount
rate on projected benefit obligations of 7.0% (7.5% at Dec. 31, 1996, and
7.25% at Dec. 31, 1995), an expected long-term rate of return on Plan assets
of 9.5% and annual salary increases averaging 4% for 1997, 1996 and 1995.
Plan assets include primarily government and corporate debt securities and
marketable equity securities, and, to a lesser extent, commingled funds and a
group annuity contract purchased from a life insurance company. The funded
status and prepaid pension cost (included in other noncurrent assets on the
accompanying Consolidated Balance Sheets) are as follows:
[Download Table]
DECEMBER 31
----------------------
1997 1996
---------- ----------
THOUSANDS OF DOLLARS
Fair value of Plan assets.............................. $1,421,849 $1,238,315
Actuarial present value of benefit obligations:
Vested............................................... 853, 986 743,133
Non-vested........................................... 10,022 10,389
---------- ----------
Total accumulated benefit obligations.................. 864,008 753,522
Additional amounts related to projected wage increases. 86,215 84,483
---------- ----------
Projected benefit obligations for services rendered to
date.................................................. 950,223 838,005
---------- ----------
Excess of Plan assets over projected benefit
obligations........................................... 471,626 400,310
Unrecognized net deferrals............................. (169,654) (109,228)
Unrecognized net excess Plan assets to be amortized
through the year 2005................................. (78,798) (88,648)
---------- ----------
Prepaid Pension Costs.................................. $ 223,174 $ 202,434
========== ==========
In the event of Plan termination, the Plan provides that no funds can revert
to the company and any excess assets over Plan liabilities must be used to
fund retirement benefits.
OTHER RETIREMENT BENEFITS
In addition to pension benefits, the company provides certain healthcare and
life insurance benefits for retired employees. Substantially all of the
company's regular full-time U.S. employees become eligible for these benefits
upon reaching age 55 while working for the company and having 10 years
continuous service at
F-11
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
retirement. The company funds a portion of the liabilities associated with
these plans through a tax-exempt trust. The assets of the trust are invested
primarily in life insurance covering some of the company's employees.
The net (credit) expense for postretirement benefits during 1997, 1996 and
1995 included the following components:
[Download Table]
1997 1996 1995
-------- -------- --------
THOUSANDS OF DOLLARS
Service cost..................................... $ 8,585 $ 8,626 $ 9,492
Interest cost on the projected benefit
obligations..................................... 16,010 14,712 17,319
Actual return on assets.......................... (43,094) (28,676) (34,626)
Deferrals--net................................... 18,326 1,247 16,503
-------- -------- --------
Net Post-retirement (Credit) Cost................ $ (173) $ (4,091) $ 8,688
======== ======== ========
The liability (included in Other Noncurrent Liabilities on the accompanying
Consolidated Balance Sheets) for post-retirement benefits, net of the partial
funding, is as follows:
[Download Table]
DECEMBER 31
------------------
1997 1996
-------- --------
THOUSANDS OF
DOLLARS
Actuarial present value of
benefit obligations:
Retirees................ $141,807 $139,341
Fully eligible active
Plan participants...... 45,019 38,819
Other active Plan
participants........... 46,611 42,810
-------- --------
Total Accumulated Benefit
Obligations.............. 233,437 220,970
Fair value of Plan assets. (262,813) (219,719)
Unrecognized net
deferrals................ 68,588 52,155
-------- --------
Excess of Accumulated
Benefit Obligations Over
Plan Assets.............. $ 39,212 $ 53,406
======== ========
The actuarial computations to determine the accumulated post-retirement
benefit obligation assumed a discount rate of 7.0% (7.5% at Dec. 31, 1996), an
expected long-term rate of return on plan assets of 9.0% and a health-care
cost trend rate of 7.8% initially, declining gradually to 5.0% in 2008 and
thereafter. The medical cost trend assumed can have a significant effect on
the amounts reported. A one percentage point increase in the assumed
healthcare cost trend rate would increase the 1997 post-retirement benefit
expense (service cost and interest cost) by $0.5 million and the accumulated
post-retirement benefit obligation as of Dec. 31, 1997, by $6.1 million.
INCOME TAXES
Cash payments for income taxes were $60 million, $76 million and $98 million
in 1997, 1996 and 1995, respectively. The components of income tax expense for
the years ending Dec. 31, 1997, 1996 and 1995, were as follows:
[Download Table]
1997 1996 1995
------- ------- --------
THOUSANDS OF DOLLARS
Federal
Current............................................. $66,609 $84,340 $ 85,225
Deferred............................................ 14,725 (6,664) 16,480
State................................................. 15,906 6,116 21,383
------- ------- --------
Total............................................. $97,240 $83,792 $123,088
======= ======= ========
F-12
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The significant deferred tax assets and liabilities were as follows:
[Download Table]
DECEMBER 31
-----------------
1997 1996
-------- --------
THOUSANDS OF
DOLLARS
Deferred tax liabilities:
Accelerated depreciation................................... $160,779 $207,001
Investments................................................ 61,303 55,471
Pensions................................................... 84,710 86,606
Other...................................................... 42,290 39,451
-------- --------
Total deferred tax liabilities........................... 349,082 388,529
-------- --------
Deferred tax assets:
Post-retirement benefits................................... 15,685 21,362
Accrued liabilities........................................ 78,832 120,773
Investments................................................ 49,036 81
Other...................................................... 49,679 47,529
-------- --------
Total deferred tax assets................................ 193,232 189,745
-------- --------
Valuation allowance.......................................... 15,980 17,112
-------- --------
Net Deferred Tax Liabilities................................. $171,830 $215,896
======== ========
The Internal Revenue Service (IRS) has disallowed the interest deductions
claimed by other corporate taxpayers that have corporate-owned life insurance
(COLI) programs similar to the company's. Although the IRS has not taken an
official position regarding the COLI program of the company, it is expected
that it will disallow the company's past interest deduction. However, the
company would challenge such a position and would expect to resolve the issue
in a manner that does not materially impact its financial position and results
of operations.
The following table outlines the reconciling of differences between the U.S.
statutory tax rates and the rates used by the company in the determination of
income from continuing operations:
[Download Table]
1997 1996 1995
---- ------ ----
Federal statutory rate..................................... 35.0% 35.0% 35.0%
Restructuring and impairment charges....................... -- 696.4 --
Foreign tax rates.......................................... (1.6) 4.0 (1.2)
State and local income taxes, net of U.S. federal income
tax benefit............................................... 3.4 127.1 3.7
Goodwill amortization...................................... 0.2 19.1 1.3
Benefits resulting from corporate-owned life insurance
programs.................................................. (4.4) (67.4) (5.7)
Affordable housing investment credits...................... (6.5) (157.9) (4.3)
Change in valuation allowance.............................. 1.8 10.4 0.8
Other...................................................... 4.1 14.0 1.2
---- ------ ----
Total.................................................. 32.0% 680.7% 30.8%
==== ====== ====
F-13
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DEBT FINANCING AND INTEREST EXPENSE
The company's debt consisted of the following:
[Download Table]
DECEMBER 31
---------------------
1997 1996
---------- ----------
THOUSANDS OF DOLLARS
Commercial paper......................................... $ 258,020 $ 404,500
Medium-term notes due 1998-2005 at a weighted average
interest rate of 6.86%.................................. 409,000 500,000
9.125% debentures due Dec. 1, 2000....................... 199,790 199,718
8.875% debentures due April 15, 2021..................... 149,692 149,678
7.0% notes due Jan. 1, 2003.............................. 109,804 109,764
Other.................................................... 71,920 100,307
---------- ----------
Total................................................ $1,198,226 $1,463,967
========== ==========
Based upon the interest rates currently available to the company for
borrowings with similar terms and maturities, the fair value of the company's
debt exceeds its book value at Dec. 31, 1997, by approximately $68 million.
The company's notes and debentures are not actively traded and contain no call
provisions.
At Dec. 31, 1997, the company had an available credit facility of $550
million with a group of domestic and foreign banks that expires Dec. 21, 1999.
The credit arrangement provides support for the issuance of commercial paper
and other credit needs. Borrowings under the facility (none during the past
two years) bear interest at various rates not exceeding the banks' prime
rates. The company pays an annual fee of 0.08% on the total unused credit
facility.
At Dec. 31, 1997, the company had $345 million of commercial paper and
short-term debt outstanding, of which $300 million is classified as long-term
since the company has the ability and intent to maintain such debt on a long-
term basis. The weighted average interest rate on all commercial paper debt
outstanding during 1997 was 5.48% (5.63% at Dec. 31, 1997). Annual maturities
of long-term debt (excluding commercial paper and short-term debt) are as
follows: 1999--$111 million, 2000--$246 million, 2001--$3 million, 2002--$68
million and thereafter $425 million.
The following table summarizes interest expense included in the Consolidated
Statements of Income:
[Download Table]
1997 1996 1995
-------- -------- --------
THOUSANDS OF DOLLARS
Interest incurred................................ $100,724 $107,198 $120,658
Amount capitalized as property, plant and
equipment....................................... (9,959) (11,716) (10,899)
-------- -------- --------
Total........................................ $ 90,765 $ 95,482 $109,759
======== ======== ========
Interest paid, net of capitalized interest, was $90 million, $93 million and
$102 million in 1997, 1996 and 1995, respectively.
F-14
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EARNINGS PER SHARE
In accordance with SFAS 128, Earnings per Share, the company has computed
basic and diluted earnings per share (EPS), using the treasury stock method:
[Download Table]
1997 1996 1995
-------- --------- --------
IN THOUSANDS (EXCEPT PER
SHARE DATA)
Average shares outstanding....................... 145,929 151,830 153,483
Effect of dilutive securities--options........... 1,579 1,811 2,452
-------- --------- --------
Average shares outstanding, adjusted for dilutive
effects......................................... 147,508 153,641 155,935
======== ========= ========
Income (loss) from continuing operations......... $206,525 $ (71,483) $275,952
Basic EPS...................................... 1.42 (0.47) 1.80
Diluted EPS.................................... 1.40 (0.47) 1.77
(Loss) income from discontinued operations....... $(15,894) $ (86,142) $ 22,841
Loss on disposal of discontinued operations...... (60,000) -- --
Basic EPS...................................... (0.52) (0.57) 0.15
Diluted EPS.................................... (0.51) (0.57) 0.15
Net income (loss)................................ $130,631 $(157,625) $298,793
Basic EPS...................................... 0.90 (1.04) 1.95
Diluted EPS.................................... 0.89 (1.04) 1.92
STOCK AND INCENTIVE PROGRAMS FOR EMPLOYEES
Restricted Stock Awards--At Dec. 31, 1997 and 1996, the company had
outstanding 542,000 and 301,000, respectively, restricted shares of its common
stock granted to certain officers. These shares are registered in the names of
the recipients, but are subject to conditions of forfeiture and restrictions
on sale or transfer for one to seven years from the grant date. Dividends on
the restricted shares are paid currently to the recipients and, accordingly,
the restricted shares are treated as outstanding shares. The expense of the
grant is recognized evenly over the vesting period.
The value of the restricted stock awards was $20 million and $9 million,
based upon the closing price of the company's stock at each year end ($37.25
and $31.38 at Dec. 31, 1997 and 1996, respectively). During 1997, a total of
328,000 shares of restricted stock were issued with a grant date fair value of
$10 million. Charges to expense for this stock plan were $5 million, $2
million and $1 million in 1997, 1996 and 1995, respectively.
Stock Purchase Plan--The company has a stock purchase plan for selected
managers and key staff employees. Under the plan, the company is required to
contribute an amount equal to 70% of participants' contributions, of which 50%
is applied to the purchase of stock and 20% is paid in cash. In 1996 and 1997,
the company failed to meet performance targets required under the plan, and no
contributions were incurred. Amounts charged to expense for this plan were $6
million in 1995.
Incentive Compensation Plans--The company has incentive compensation plans
covering selected officers. Amounts charged to expense for supplementary
compensation ($2 million in 1997, $4 million in 1996 and $4 million in 1995)
are determined from the level of achievement of performance measures related
to earnings, margins and returns applied to the participants' base salaries.
Similar incentive and gainsharing compensation plans exist for other officers,
managers, supervisors and production employees.
Stock Options--The company has incentive stock option plans for its
employees. Under these plans, the options vest from three to nine and one-half
years after date of grant and may be exercised, once vested, up to
F-15
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10 years from the date of grant. Under authorized Stock Incentive Plans, a
maximum of 4.1 million shares were available for future grants of stock
options and restricted stock awards as of Dec. 31, 1997. The company accounts
for employee stock options under APB Opinion No. 25, Accounting for Stock
Issued to Employees, under which no compensation cost has been recognized. Had
compensation cost been determined consistent with SFAS 123, Accounting for
Stock-Based Compensation, the company's net income from continuing operations
and respective earnings per share would have been reduced to the following pro
forma amounts:
[Download Table]
1997 1996 1995
-------- -------- --------
Income (loss) from continuing operations
(thousands):
As reported..................................... $206,525 $(71,483) $275,952
Pro forma....................................... 191,331 (85,191) 267,614
Basic earnings (loss) per share:
As reported..................................... $ 1.42 $ (0.47) $ 1.80
Pro forma....................................... 1.31 (0.56) 1.74
Diluted earnings (loss) per share:
As reported..................................... $ 1.40 $ (0.47) $ 1.77
Pro forma....................................... 1.30 (0.56) 1.72
Because the SFAS 123 method of accounting has not been applied to options
granted prior to Jan. 1, 1995, the pro forma compensation cost may not be
representative of the pro forma cost to be expected in future years.
A summary of the status of the company's stock option plans at Dec. 31,
1997, 1996 and 1995, and changes during the years then ended, is presented in
the following table and narrative:
[Enlarge/Download Table]
1997 1996 1995
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(THOUSANDS) PRICE (THOUSANDS) PRICE (THOUSANDS) PRICE
----------- -------- ----------- -------- ----------- --------
Options outstanding at
beginning of year...... 14,916 $31.68 14,246 $30.98 11,057 $25.79
Options granted......... 1,485 40.28 3,320 34.09 4,979 39.58
Options exercised....... (1,535) 25.25 (1,245) 21.41 (1,238) 19.88
Options forfeited....... (908) 35.60 (1,405) 39.39 (552) 29.57
------ ------ ------ ------ ------ ------
Options outstanding at
end of year............ 13,958 $33.05 14,916 $31.68 14,246 $30.98
====== ====== ====== ====== ====== ======
Options exercisable at
end of year............ 6,397 $28.57 6,618 $27.18 4,832 $23.52
====== ====== ====== ====== ====== ======
Weighted average fair
value of options
granted with:
Exercise price equal
to stock price on
grant date........... $11.20 $11.64 $13.42
Exercise price
exceeding stock price
on grant date........ $ 8.10 $ 7.74 $ 5.81
Of the options outstanding at Dec. 31, 1997, 12.4 million had exercise
prices between $17.72 and $38.06, with a weighted average exercise price of
$31.03 and a weighted average remaining contractual life of 6.8 years; 6.4
million of these options were exercisable at a weighted average exercise price
of $28.57. The remaining 1.6 million options had exercise prices between
$39.00 and $76.96, with a weighted average exercise price of $48.70 and a
weighted average remaining contractual life of 8.5 years; none of these
options were exercisable at Dec. 31, 1997.
F-16
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option pricing model, using the following assumptions for
grants in 1997, 1996 and 1995, respectively: risk-free interest rates of
6.32%, 6.39% and 6.58%; expected dividend yields of 2.24%, 2.16% and 1.89%;
and expected volatility of 25.10%, 22.92% and 21.18%. A 10-year estimated life
was used for all grants.
Other Information--Under the stock programs, authorized unissued shares or
treasury shares may be used. If authorized unissued shares are used, not more
than 11.3 million shares may be issued in the aggregate. The company intends
to reacquire shares of its common stock to meet the stock requirements of
these programs in the future.
PREFERRED STOCK
The company has 2 million shares of $1.00 par value preferred stock
authorized for issuance. The board of directors may divide the preferred stock
into one or more series and fix the redemption, dividend, voting, conversion,
sinking fund, liquidation and other rights. The company has no present plans
to issue any preferred stock. One million of the shares are reserved for
issuance under the Shareholder Rights Plan discussed below.
SHAREHOLDER RIGHTS PLAN
The company maintains a Shareholder Rights Plan (the Plan) designed to deter
coercive or unfair takeover tactics, to prevent a person or group from gaining
control of the company without offering fair value to all shareholders and to
deter other abusive takeover tactics that are not in the best interest of
shareholders.
Under the terms of the Plan, each share of common stock is accompanied by
one right; each right entitles the shareholder to purchase from the company
one one-thousandth of a newly issued share of Series A Junior Preferred Stock
at an exercise price of $140.
The rights become exercisable 10 days after a public announcement that an
acquiring person (as defined in the Plan) has acquired 15% or more of the
outstanding common stock of the company (the Stock Acquisition Date), 10
business days after the commencement of a tender offer that would result in a
person owning 15% or more of such shares or 10 business days after an adverse
person (as defined in the Plan) has acquired 10% or more of such shares and
such ownership interest is likely to have a material adverse impact on the
company. The company can redeem the rights for $0.01 per right at any time
until 10 days following the Stock Acquisition Date (under certain
circumstances, the 10-day period can be shortened or lengthened by the
company). The rights will expire on Aug. 8, 2006, unless redeemed earlier by
the company.
If, subsequent to the rights becoming exercisable, the company is acquired
in a merger or other business combination at any time when there is a 15% or
more holder, the rights will then entitle a holder (other than a 15% or more
shareholder or an adverse person) to buy shares of the acquiring company with
a market value equal to twice the exercise price of each right. Alternatively,
if a 15% holder acquires the company by means of a merger in which the company
and its stock survives, if any person acquires 15% or more of the company's
common stock or if an adverse person acquires 10% or more of the company's
common stock and such ownership is likely to have a material adverse impact on
the company, each right not owned by a 15% or more shareholder or an adverse
person would become exercisable for common stock of the company (or, in
certain circumstances, other consideration) having a market value equal to
twice the exercise price of the right.
F-17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
R. R. Donnelley & Sons Company:
We have audited the accompanying consolidated balance sheets of R. R.
Donnelley & Sons Company (a Delaware corporation) and Subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years ended December
31, 1997. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of R. R. Donnelley & Sons
Company and Subsidiaries as of December 31, 1997 and 1996, and the results of
its operations and its cash flows for each of the three years ended December
31, 1997, in conformity with generally accepted accounting principles.
As explained in the Notes to Consolidated Financial Statements, effective
January 1, 1995, the company changed its method of accounting for LIFO
inventories.
Arthur Andersen LLP
Chicago, Illinois
January 22, 1998
F-18
UNAUDITED INTERIM FINANCIAL INFORMATION
THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31
----------------------------------------------------------
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
---------- ---------- ---------- ---------- ----------
1997
Net sales............... $1,102,647 $1,136,775 $1,208,618 $1,401,993 $4,850,033
Gross profit............ 193,103 208,837 260,529 288,136 950,605
Income from continuing
operations............. 35,078 44,958 81,305 45,184 206,525
Loss from disposal of
discontinued
operations............. -- -- -- (60,000) (60,000)
Loss (income) from
discontinued
operations............. (5,737) (7,282) (9,148) 6,273 (15,894)
Net income (loss)....... 29,341 37,676 72,157 (8,543) 130,631
Per common share:
Income from continuing
operations........... 0.24 0.31 0.56 0.31 1.42
Net income (loss)..... 0.20 0.26 0.49 (0.06) 0.90
1996
Net sales............... $1,177,622 $1,202,153 $1,248,702 $1,404,708 $5,033,185
Gross profit............ 202,144 246,333 250,746 271,703 970,926
(Loss) income from
continuing operations.. (326,323) 73,368 75,893 105,579 (71,483)
(Loss) from discontinued
operations............. (50,596) (19,093) (8,025) (8,428) (86,142)
Net (loss) income....... (376,919) 54,275 67,868 97,151 (157,625)
Per common share:
(Loss) income from
continuing
operations........... (2.12) 0.48 0.50 0.72 (0.47)
Net (loss) income..... (2.45) 0.35 0.45 0.66 (1.04)
F-19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Shareholders of R. R. Donnelley & Sons Company:
We have audited, in accordance with generally accepted auditing standards,
the financial statements included in the Company's Annual Report to
Shareholders included in this Form 10-K, and have issued our report thereon
dated January 22, 1998. Our audit was made for the purpose of forming an
opinion on those statements taken as a whole. The schedule listed in the index
to the financial statements and financial statement schedules is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
January 22, 1998
F-20
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Transactions affecting the allowances for doubtful accounts during the years
ended December 31, 1997, 1996 and 1995 were as follows:
[Download Table]
1997 1996 1995
------- ------- --------
THOUSANDS OF DOLLARS
Allowance for trade receivable losses:
Balance, beginning of year.................. $14,205 $18,059 $ 17,285
Balance, companies (sold) acquired during
year....................................... -- (4,834) 1,055
Provisions charged to income................ 10,676 9,877 16,819
------- ------- --------
24,881 23,102 35,159
Uncollectible accounts written off, net of
recoveries................................. (8,622) (8,897) (17,100)
------- ------- --------
Balance, end of year........................ $16,259 $14,205 $ 18,059
======= ======= ========
F-21
INDEX TO EXHIBITS*
DESCRIPTION EXHIBIT NO.
------- --------
Agreement between R.R. Donnelley & Sons Company and Bain Capi- 2
tal, Inc......................................................
Restated Certificate of Incorporation(1)....................... 3(i)
By-Laws(2)..................................................... 3(ii)
Form of Rights Agreement, dated as of April 25, 1996 between
R. R. Donnelley & Sons Company and First Chicago Trust Com-
pany of New York(3)...........................................
4(a)
Instruments Defining the Rights of Security Holders(4)......... 4(b)
Indenture dated as of November 1, 1990 between the Company and
Citibank, N.A. as Trustee(5)..................................
4(c)
Credit Agreement dated December 21, 1994 among R. R. Donnelley
& Sons Company, the Banks named therein and Citibank, N.A.,
as Administrative Agent(6)....................................
4(d)
Retirement Policy for Directors(7)**........................... 10(a)
Directors' Deferred Compensation Agreement(8)**................ 10(b)
Donnelley Shares Stock Option Plan, as amended(7).............. 10(c)
1993 Stock Ownership Plan for Non-Employee Directors, as 10(d)
amended(9)**...................................................
Senior Management Annual Incentive Plan, as amended(5)**....... 10(e)
Form of Severance Agreement for Senior Officers, as amend- 10(f)
ed(8)**.......................................................
1993 Stock Purchase Plan for Selected Managers and Key Staff
Employees, as amended(9)**....................................
10(g)
1986 Stock Incentive Plan, as amended(9)**..................... 10(h)
1991 Stock Incentive Plan, as amended(9)**..................... 10(i)
1995 Stock Incentive Plan, as amended(10)**.................... 10(j)
Forms of option agreement with certain executive officers and
directors, as amended(11)**...................................
10(k)
Unfunded Supplemental Benefit Plan(5)**........................ 10(l)
Amendment to Unfunded Supplemental Benefit Plan adopted on 10(m)
April 25, 1991(12)**..........................................
Employment Agreement between R. R. Donnelley & Sons Company
and William L. Davis(13)**....................................
10(n)
Premium-Priced Option Agreement between R. R. Donnelley & Sons
Company and William L. Davis(13)**............................
10(o)
Employment Agreement between R. R. Donnelley & Sons Company
and Cheryl A. Francis(7)**....................................
10(p)
Agreement between R. R. Donnelley & Sons Company and Steven J. 10(q)
Baumgartner**.................................................
Agreement between R. R. Donnelley & Sons Company and W. Ed Ty- 10(r)
ler**.........................................................
Subsidiaries of R. R. Donnelley & Sons Company................. 21
Consent of Independent Public Accountants dated March 4, 1998.. 23
Financial Data Schedule........................................ 27
--------
*Filed with the Securities and Exchange Commission. Each such exhibit
may be obtained by a shareholder of the Company upon payment of $5.00
per exhibit.
**Management contract or compensatory plan or arrangement.
(1) Filed as Exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1996, filed on May 3, 1996, and incorporated
herein by reference.
E-1
(2) Filed as Exhibit to Current Report on Form 8-K filed on December
15, 1997, and incorporated herein by reference.
(3) Filed as Exhibit to Form 8-A filed on June 5, 1996, and
incorporated herein by reference.
(4) Instruments, other than that described in 4(c) and 4(d), defining
the rights of holders of long-term debt not registered under the
Securities Exchange Act of 1934 of the registrant and of all
subsidiaries for which consolidated or unconsolidated financial
statements are required to be filed are being omitted pursuant to
paragraph (4)(iii)(A) of Item 601 of Regulation S-K. Registrant agrees
to furnish a copy of any such instrument to the Commission upon
request.
(5) Filed as Exhibit with Form SE filed on March 26, 1992, and
incorporated herein by reference.
(6) Filed as Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1994, filed on March 27, 1995, and incorporated herein by
reference.
(7) Filed as Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1996, filed on March 10, 1997, and incorporated herein by
reference.
(8) Filed as Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1993, filed on March 28, 1994.
(9) Filed as Exhibit to Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1996, filed on November 1, 1996, and
incorporated herein by reference.
(10) Filed as Exhibit to Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997, filed on August 5, 1997, and
incorporated herein by reference.
(11) Filed as Exhibit to Form S-3 filed on January 15, 1998, and
incorporated herein by reference.
(12) Filed as Exhibit with Form SE filed on May 9, 1991 and
incorporated herein by reference.
(13) Filed as Exhibit to Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997, filed on May 7, 1997, and
incorporated herein by reference.
E-2
Dates Referenced Herein and Documents Incorporated by Reference
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