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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, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
COMMISSION FILE NUMBER 1-4694
R. R. DONNELLEY & SONS COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-1004130
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
77 WEST WACKER DRIVE,
CHICAGO, ILLINOIS 60601
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER--(312) 326-8000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
----------------------------- --------------------------------------------
COMMON (PAR VALUE $1.25) NEW YORK, CHICAGO AND PACIFIC STOCK
PREFERRED STOCK PURCHASE RIGHTS EXCHANGES
NEW YORK, CHICAGO AND PACIFIC STOCK
EXCHANGES
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO THE
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
------- -------
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO
THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATE-
MENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT
TO THIS FORM 10-K. [_]
AS OF MARCH 1, 1996, 154,005,326 SHARES OF COMMON STOCK WERE OUTSTANDING, AND
THE AGGREGATE MARKET VALUE OF THE SHARES OF COMMON STOCK (BASED ON THE CLOSING
PRICE OF THESE SHARES ON THE NEW YORK STOCK EXCHANGE--COMPOSITE TRANSACTIONS ON
MARCH 1, 1996) HELD BY NONAFFILIATES WAS APPROXIMATELY $5,412,903,000.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT DATED FEBRUARY
20, 1996 ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.
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TABLE OF CONTENTS
FORM 10-K
ITEM NO. NAME OF ITEM PAGE
--------- ------------ ----
Part I
Item 1. Business.......................................... 3
Item 2. Properties........................................ 5
Item 3. Legal Proceedings................................. 8
Item 4. Submission of Matters to a Vote of Security
Holders.......................................... 9
Executive Officers of R. R. Donnelley & Sons
Company.......................................... 9
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................. 10
Item 6. Selected Financial Data........................... 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 12
Item 8. Financial Statements and Supplementary Data....... 15
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............. 15
Part III
Item 10. Directors and Executive Officers of the
Registrant....................................... 16
Item 11. Executive Compensation............................ 16
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................... 16
Item 13. Certain Relationships and Related Transactions.... 16
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.............................. 17
Signatures................................................... 18
Index to Financial Statements and Financial Statement Sched-
ules........................................................ F-1
Index to Exhibits............................................ E-1
2
PART I
ITEM 1. BUSINESS
R. R. Donnelley & Sons Company (the company), incorporated in the state of
Delaware in 1956 as the successor to a business founded in 1864, is a world
leader in distributing, managing and reproducing print and digital information
for the publishing, retailing, merchandising and information technology markets
worldwide. The company is the largest commercial printer headquartered in North
America. It is a major supplier in the United Kingdom and also provides
services in Latin America, other locations in Europe and in Asia. Services
provided to customers include presswork and binding, including on-demand
customized publications; conventional and digital pre-press operations,
including desktop publishing and filmless color imaging necessary to create a
printed image; software manufacturing, marketing and support services (through
Stream International Holdings Inc.); list development, list enhancement,
marketing database, personalization printing and lettershop and reference
services (provided through Metromail Corporation); design and related creative
services (provided through Coris Inc. (formerly Mobium)); electronic
communication networks for simultaneous worldwide product releases; digital
services to publishers; and the planning for and fulfillment of truck, rail,
mail and air distribution for products of the company and its customers, as
well as third parties.
In April, 1995, Stream International Holdings Inc. (formerly Stream
International Inc., hereinafter referred to as Stream International or Stream)
was formed from the merger of the company's Global Software Services business
unit with Corporate Software Inc. Stream International is approximately 80%
owned by the company and is the world's largest software manufacturer, marketer
and technical support and services provider.
The company provides its services to publishers of consumer and trade
magazines, books and telephone and other directories; direct mail (catalog) and
in-store merchandisers; software publishers and computer hardware
manufacturers; financial institutions; corporate users of software products and
related services; and other firms requiring substantial amounts of printing and
other related information services. Due to the range of services it provides,
the company believes it is uniquely positioned to meet the information and
communication needs of its customers.
The relative contribution of each of the company's major product areas to its
total sales for the five-year period ended December 31, 1995, is presented in
the table below.
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
REVENUE BY PRODUCT TYPE
Catalogs, Inserts and Specialty Products............... 27% 31% 32% 35% 39%
Software Products and Services......................... 23 14 12 10 8
Magazines.............................................. 16 18 18 17 17
Directories............................................ 12 12 14 16 16
Books.................................................. 11 13 13 11 11
Financial.............................................. 4 5 6 5 4
Other.................................................. 7 7 5 6 5
In January, 1996, the company announced a reorganization of its business
groups to include the following operating units and subsidiaries:
Commercial Print Sector, which includes catalogs, retail advertising
circulars, direct mail products, and consumer and trade magazines.
Global Commercial Print Sector, which includes the company's commercial print
operations outside the United States--in Europe, Latin America and Asia.
Information Management Sector, which includes Telecommunications, Book
Publishing Services and Financial Services, as well as the Metromail
subsidiary, the company's Digital Division, the company's venture-capital fund,
creative design and communication services and a variety of information
services.
3
Stream International Holdings Inc., the world's largest software
manufacturer, marketer and technical-support and services provider,
approximately 80% owned by the company, formed in April 1995 from the merger of
the company's Global Software Services business with Corporate Software Inc.
At December 31, 1995, the company's operating units, subsidiaries, and global
network of majority- and minority-owned companies were organized into these
principal business groups, which accounted for the following sales results:
Commercial Print, which included catalogs, retail advertising circulars and
direct-mail products ($1.3 billion, 20% of 1995 consolidated sales); consumer
and trade magazines ($1.2 billion, 19% of 1995 consolidated sales); and
directories ($631 million, 10% of 1995 consolidated sales).
Networked Services, which included Book Publishing Services ($783 million,
12% of 1995 consolidated sales) (juvenile and trade books; elementary, high-
school and college textbooks; professional and reference books; religious
books; and book-club and mail-order books); Financial Services ($334 million,
5% of 1995 consolidated sales) (financial printing, electronic information
storage and retrieval, and specialized printing); and international commercial
print operations in Latin America, Europe and Asia ($345 million, 5% of 1995
consolidated sales).
Stream International Holdings Inc. ($1.4 billion, 22% of 1995 consolidated
sales), which is the world's largest software manufacturer, marketer and
technical-support and services provider.
Information Resources, which included the Metromail subsidiary ($247 million,
4% of 1995 consolidated sales); the company's Digital Division, the company's
venture-capital fund, and creative design and communication services ($167
million, 3% of 1995 consolidated sales).
For the fiscal year ended December 31, 1995, international operations
represented approximately 16% of consolidated net sales. See "Geographic
Segments" in the Notes to Consolidated Financial Statements for further
information.
A significant portion of the company's sales are made pursuant to term
contracts with customers, with the remainder being made on a single-order
basis. For some customers, the company prints and provides related services
for several different publications under different contracts. The company's
contracts with its larger customers normally run for a period of years (usually
three to five years, but longer in the case of contracts requiring significant
capital investment) or for an indefinite period subject to termination on
specified notice by either party. Such sales contracts generally provide for
timely price adjustments to reflect price changes for materials, wages and
utilities. No single customer has a relationship with the company that
accounted for 5% or more of the company's sales in 1995. The company's
dependence for sales from its ten largest customers has declined in the past
ten years to approximately 20% of sales in 1995, from 29% of sales in 1985.
The various phases of the information industry in which the company is
involved are highly competitive. While the company has contracts with many of
its customers as discussed above, there are numerous competing companies and
renewal of such contracts is dependent, in part, on the ability of the company
to continue to differentiate itself from the competition. Differentiation
results, in part, from the company's broad range of value-added services, which
include: conventional and digital prepress, computerized printing,
Selectronic(R) imaging and gathering and sophisticated pool shipping and
distribution services for printed products; information content repackaging
into multiple formats, including print, magnetic and optical media; fulfillment
and returned books inventory management; software manufacturing, marketing and
support services; list development, list enhancement, marketing database,
personalization printing and lettershop and reference services; reprographics
and facilities management; and graphic design and editorial services. Although
the company believes it is the largest commercial printer in the United States,
it estimates that its revenues represent approximately 8% of the total sales in
the industry. Although the company's plants are well located for the global,
national or regional distribution of its products, competitors in some areas of
4
the United States have a competitive advantage in some instances due to such
factors as freight rates, wage scales and customer preference for local
services. In addition to location, other important competitive factors are
price and quality as well as the range of available services.
The primary raw materials used by the company are paper and ink. In 1995, the
company spent approximately $3.2 billion on raw materials. The company is a
large purchaser of paper and leverages its volume requirements to improve
materials management and materials performance for its customers and believes
this is a competitive advantage. The company negotiates with leading suppliers
to maximize its purchasing efficiencies, but does not rely on any one supplier.
The company has existing paper supply contracts (at prevailing market prices)
to cover substantially all of the company's requirements through 1996, and
management believes extensions and renewals of these purchase contracts will
provide adequate paper supplies in the future. Ink and ink materials are
currently available in sufficient amounts, and the company believes that it
will have adequate supplies in the future. Purchasing activity at both the
local plant and corporate levels are coordinated to increase economies of
scale. Plant inventories were a focus in 1995 and the company has increased
utilization of existing inventories by successfully managing and tracking those
inventories.
The company estimates that its capital expenditures in 1996 and 1997, to
comply with federal, state and local provisions for environmental controls, as
well as expenditures, if any, for the company's share of costs to clean
hazardous waste sites that have received waste from the company, will not have
a material effect upon its earnings or its competitive position.
The company employed an average of approximately 40,000 persons in 1995
(41,000 persons at December 31, 1995), of whom more than 12,800 had been with
the company for more than 10 years and over 2,600 for 25 years or longer. As of
December 31, 1995, the company employed approximately 34,000 people in the
United States, approximately 1,600, or 5%, of whom were covered by collective
bargaining agreements. In addition, the company employed approximately 7,000
people in its foreign operations, the majority of whom were covered by
collective bargaining agreements, as is customary in those markets.
ITEM 2. PROPERTIES
The company's corporate office is located in leased facilities in Chicago,
Illinois. Production facilities leased by the company and its subsidiaries are
listed in the chart beginning on page 7. Printing and other plants that are
owned and operated by the company (or through subsidiaries) are listed below
and continuing on the next page.
DATE OF
DATE OF ACQUISITION LATEST SQUARE PRINCIPAL PRODUCTS
OWNED LOCATION(S) OR OPERATIONS BEGAN ADDITION FEET OR SERVICES
----------------- ------------------- -------- --------- --------------------
Chicago, IL 1912 1974 240,000 Financial
Crawfordsville, 1923 1992 1,858,000 Books, Software
IN Products and
Services
Willard, OH 1956 1992 1,099,000 Books, Directories
Warsaw, IN 1959 1994 1,300,000 Catalogs, Inserts
Old Saybrook, 1959 1986 296,000
CT Magazines, Catalogs
Lancaster, PA 1959 1995 1,786,000 Directories,
Catalogs, Inserts,
Magazines,
Financial
Mattoon, IL 1968 1995 928,000 Magazines, Catalogs,
Inserts
5
DATE OF
DATE OF ACQUISITION LATEST SQUARE PRINCIPAL PRODUCTS
OWNED LOCATION(S) OR OPERATIONS BEGAN ADDITION FEET OR SERVICES
----------------- ------------------- -------- --------- --------------------
Dwight, IL 1968 1995 434,000 Directories,
Catalogs, Inserts,
Magazines
Glasgow, KY 1970 1994 591,000 Magazines
Gallatin, TN 1975 1987 528,000 Catalogs, Inserts,
Magazines
York, England 1978 1985 291,000 Directories,
Magazines, Catalogs
Torrance, CA 1978 1994 252,000 Magazines, Inserts
Harrisonburg, 1980 1994 620,000
VA Books
Spartanburg, SC 1980 1995 713,400 Catalogs, Inserts,
Magazines
Gateshead, En- 1983 1989 189,000
gland Directories
Danville, KY 1985 1993 548,000 Magazines, Catalogs,
Inserts
Portland, OR 1986 1989 250,000 Directories,
Software Products
and Services
Greeley, CO 1986 1995 283,000 Directories
Reno, NV 1987 1995 502,000 Catalogs, Inserts
Pittsburgh, PA 1987 -- 70,000 Financial
Lincoln, NE 1987 1988 233,000 Lettershop, Data
Center
Rutland, VT 1987 1987 113,000 Lettershop
Mt. Pleasant, 1987 -- 211,000
IA Lettershop
Seward, NE 1987 -- 161,000 Lettershop
Thorp Arch, En- 1989 -- 146,000 Software Products
gland and Services
South Daytona, 1990 1993 237,000 Magazines, Catalogs,
FL Inserts
Des Moines, IA 1990 -- 627,000 Magazines, Catalogs,
Inserts
Lynchburg, VA 1990 1993 504,000 Catalogs, Inserts
Newton, NC 1990 -- 455,000 Catalogs, Inserts,
Magazines
Casa Grande, AZ 1990 -- 316,000 Catalogs, Inserts
Reynosa, Mexico 1990 -- 260,000 Books
Singapore 1990 1994 221,000 Software Products
and Services
Houston, TX 1991 -- 41,000 Financial
6
DATE OF
DATE OF ACQUISITION LATEST SQUARE PRINCIPAL PRODUCTS
OWNED LOCATION(S) OR OPERATIONS BEGAN ADDITION FEET OR SERVICES
----------------- ------------------- -------- --------- --------------------
San Juan 1992 1993 80,000
del Rio,
Mexico Catalogs
Provo, UT 1992 1993 126,000 Software Products
and Services
Mendota, IL 1992 -- 110,000 Magazines
Seymour, IN 1992 1994 95,000 Specialty Products
Allentown, 1993 -- 23,000
PA Books
Bloomsburg, 1993 -- 105,000
PA Books
Pontiac, IL 1993 1994 304,000 Magazines
Scranton, 1993 -- 399,000
PA Books
Senatobia, 1993 -- 137,000
MS Magazines
Newbern, TN 1993 -- 30,000 Books
Krakow, Po- 1994 -- 115,000
land Magazines, Inserts
Memphis, TN 1994 -- 60,000 Books, Catalogs
Shenzhen, 1994 -- 170,000 Directories, Books,
China Magazines
Santiago, 1994 -- 250,000 Magazines, Catalogs,
Chile Books, Directories
SQUARE
LEASED LOCATIONS FEET
- ---------------- ---------
Amsterdam, The Netherlands........................................... 15,000
Apeldoorn, The Netherlands........................................... 54,000
Arlington, VA........................................................ 16,000
Beaverton, OR........................................................ 112,000
Bridgetown, Barbados................................................. 31,000
Canton, MA........................................................... 129,000
Cary, NC............................................................. 108,000
Chicago, IL.......................................................... 28,000
Chuo, Chiba-City 260................................................. 3,000
Columbus, OH......................................................... 5,000
Crawfordsville, IN................................................... 381,000
Cumbernauld, Scotland................................................ 53,000
Dallas, TX........................................................... 248,000
Dublin, Ireland...................................................... 103,000
Elgin, IL............................................................ 77,000
Fremont, CA.......................................................... 275,000
Glasgow, KY.......................................................... 57,000
Gresham, OR.......................................................... 122,000
Houston, TX.......................................................... 21,000
Hudson, MA........................................................... 150,000
Kildare, Ireland..................................................... 97,000
Lancaster, PA........................................................ 62,000
Lehigh Valley, PA.................................................... 3,800
Les Aubrais, France.................................................. 22,000
Lindon, UT........................................................... 338,000
Lombard, IL.......................................................... 128,000
7
SQUARE
LEASED LOCATIONS FEET
- ---------------- -------
London, England........................................................ 10,000
Lynchburg, VA.......................................................... 120,000
Mexico City, Mexico.................................................... 15,000
Middlesex, England..................................................... 35,000
Munich, Germany........................................................ 65,000
New South Wales, Australia............................................. 80,000
New York, NY........................................................... 92,000
Norwood, MA............................................................ 98,000
Orleans, France........................................................ 75,000
Portland, OR........................................................... 90,000
Preston, WA............................................................ 66,000
Raleigh, NC............................................................ 108,000
Richmond, CA........................................................... 72,000
Santa Clara, CA........................................................ 8,000
Scranton, PA........................................................... 97,000
Seattle, WA............................................................ 22,000
Shelby, OH............................................................. 250,000
Sungnam-si, Kyungki-do Korea........................................... 11,000
Torrance, CA........................................................... 45,000
Vinhedo, Brazil........................................................ 21,000
Westwood, MA........................................................... 208,000
Wheeling, IL........................................................... 110,000
Willowbrook, IL........................................................ 55,000
The company has historically followed the practice of adding capacity to meet
customer requirements, and has retained a substantial portion of its earnings
for reinvestment in plant and equipment for this purpose. Management believes
that growth in 1996 will be financed in large part by internally-generated
funds. The amount of capital expenditures in future years will depend upon the
requirements of the company's existing and future customers.
ITEM 3. LEGAL PROCEEDINGS
In January, 1995, an administrative complaint by the U.S. Environmental
Protection Agency Region V seeking $304,500 in penalties was filed against the
company's Warsaw, Indiana facility alleging violations of the Resource
Conservation and Recovery Act. The complaint alleges that filtercake from
wastewater treatment operations was mischaracterized by the company as non-
hazardous waste. The complaint originally also alleged failure of the company
to give certain land disposal restriction notices, but the administrative law
judge granted a motion to dismiss these allegations, reducing the penalties now
sought by the complaint to $210,000.
8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1995.
EXECUTIVE OFFICERS OF R. R. DONNELLEY & SONS COMPANY
NAME, AGE AND OFFICER BUSINESS EXPERIENCE DURING
POSITIONS WITH THE COMPANY SINCE PAST FIVE YEARS(1)
- -------------------------- ------- --------------------------
J. R. Walter 1985 Management responsibilities as Chairman of the
49, Director, Board and Chief Executive Officer. Prior manage-
Chairman of the Board ment responsibilities as Chief Executive Officer
and Chief Executive Offi- and President.
cer(2)
J. R. Donnelley 1983 Management responsibilities as Vice Chairman of
60, Director, Vice Chairman the Board. Prior management responsibility for
of the Board Corporate Development.
S. J. Baumgartner 1993 Management responsibilities for R. R. Donnelley
44, Executive Vice Presi- Europe, R. R. Donnelley Latin America, Editorial
dent and Sector President, Lord Cochrane, Asia Operations, Human Resources,
Global Commercial Print Corporate Affairs and Compensation and Benefits.
Sector(1)(2) Prior management responsibilities for Strategy,
Technology and Information Systems. Prior expe-
rience as a co-owner and member of board of di-
rectors of FRC Management, Inc., a provider of
retirement, consulting and real estate invest-
ment services, and as a Senior Vice President,
Human Resources and Public Affairs at Rhone-
Poulenc Rorer/Rorer Group, Inc., a pharmaceuti-
cal manufacturer.
R. J. Cowan 1988 Management responsibilities as Executive Vice
43, Executive Vice President of R. R. Donnelley & Sons Company and
President, R. R. Donnelley Chief Executive Officer of Stream International
& Sons Company and Chief Holdings Inc. Prior management responsibilities
Executive Officer, Stream for Metromail Corporation, Information Services,
International Holdings Technology, Database Technology Services, Infor-
Inc.(2) mation Systems, Book Publishing Services, Finan-
cial Services and Global Software Services.
B. L. Faber 1989 Management responsibilities as Chairman of
48, Chairman, Metromail Metromail Corporation. Management responsibili-
Corporation and President, ties for Coris,
Information Services(2) R. R. Donnelley Business Services, R. R.
Donnelley Digital Division, 77 Capital Corpora-
tion and Information Services Sales Group. Prior
management responsibility for Corporate Develop-
ment.
C. A. Francis 1995 Management responsibilities for corporate devel-
42, Executive Vice Presi- opment, planning and strategy, investor rela-
dent tions, treasury, financial reporting and ac-
and Chief Financial counting, real estate, internal audit and taxes.
Officer(1)(2) Prior management responsibilities for purchas-
ing. Prior experience as Treasurer at FMC Corpo-
ration, a diversified manufacturer of chemicals
and machinery.
9
NAME, AGE AND OFFICER BUSINESS EXPERIENCE DURING
POSITIONS WITH THE COMPANY SINCE PAST FIVE YEARS(1)
- -------------------------- ------- --------------------------
T. J. Quarles 1995 Management responsibilities for legal services
46, Senior Vice President and office of the corporate secretary. Prior
and General Counsel(1)(2) management responsibilities for Government Rela-
tions and Environmental Affairs. Prior experi-
ence as Vice President and Associate General
Counsel at Ameritech Corporation, a provider of
full-service communications services, and as
Vice President and General Counsel at Ameritech
Publishing, Inc., a publisher of yellow page di-
rectories.
W. E. Tyler 1989 Management responsibilities for Information
43, Executive Vice Presi- Services, Technology, Information Systems, Envi-
dent ronmental Affairs, Financial Services, Telecom-
and Sector President, munications, Book Publishing Services and
Information Management(2) Metromail Corporation. Prior management respon-
sibilities for Global Software Services,
R. R. Donnelley Europe, R. R. Donnelley Latin
America, Editorial Lord Cochrane and Asia Opera-
tions; prior sales and manufacturing responsi-
bility for Global Software Services.
J. P. Ward 1991 Management responsibilities for Retail Services,
41, Executive Vice Presi- Specialized Publishing Services, Catalog Servic-
dent es, Consumer Magazine Services, Sterling Group,
and Sector President, Manufacturing Support and Purchasing. Prior man-
Commercial Print Sector(2) agement responsibilities for Telecommunications;
prior sales and manufacturing responsibility for
Merchandise Media and Financial Services.
(1) Each officer named has carried on his principal occupation and employment
in the company for more than five years with the exception of S. J.
Baumgartner, C. A. Francis and T. J. Quarles as noted in the above table.
(2) Member of the company's management committee.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock is listed and traded on the New York Stock Exchange, Chicago
Stock Exchange and Pacific Stock Exchange.
As of March 1, 1996 there were approximately 11,300 stockholders of record.
Information about the quarterly prices of the common stock, as reported on the
New York Stock Exchange-Composite Transactions, and dividends paid during the
two years ended December 31, 1995, is contained in the chart below:
COMMON STOCK PRICES
-------------------------------
DIVIDENDS
PAID 1995 1994
------------- --------------- ---------------
1995 1994 HIGH LOW HIGH LOW
------ ------ ------- ------- ------- -------
First Quarter..................... $0.160 $0.140 $35 7/8 $28 7/8 $31 3/4 $27 5/8
Second Quarter.................... 0.160 0.140 37 3/8 32 5/8 29 7/8 26 7/8
Third Quarter..................... 0.180 0.160 41 1/4 35 7/8 31 1/4 27 1/2
Fourth Quarter.................... 0.180 0.160 41 35 7/8 32 1/2 27 3/8
Full Year......................... 0.680 0.600 41 1/4 28 7/8 32 1/2 26 7/8
10
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(NOT COVERED BY AUDITORS' REPORT)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
INCOME STATEMENT DATA:
Net sales............... $6,511,786 $4,888,786 $4,387,761 $4,193,072 $3,914,828
Earnings from
operations*............ 559,409 459,431 325,607 405,501 363,128
Net income from
operations before
cumulative effect of
accounting changes..... 298,793 268,603 178,920 234,659 204,919
Net income**............ 298,793 268,603 109,420 234,659 204,919
PER COMMON SHARE:***
Net income from
operations before
cumulative effect of
accounting changes..... 1.95 1.75 1.16 1.51 1.32
Net income**............ 1.95 1.75 0.71 1.51 1.32
Dividends............... 0.68 0.60 0.54 0.51 0.50
DECEMBER 31,
------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Total assets............ $5,384,810 $4,452,143 $3,654,026 $3,410,247 $3,206,826
Noncurrent liabilities.. 2,081,266 1,671,924 1,124,594 949,537 940,544
- --------
* 1993 earnings from operations includes the one-time adjustment for a
restructuring charge ($90 million).
** 1993 net income and net income per common share include one-time adjustments
for the restructuring charge ($60.8 million or $0.39 per share); the net
cumulative effect of accounting changes ($69.5 million or $0.45 per share);
and the deferred income tax charge related to the federal income tax rate
increase ($6.2 million or $0.04 per share).
*** Reflects the 2-for-1 stock split effective September 1, 1992.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Highlights 1995--R.R. Donnelley's 1995 net income rose to $299 million, or
$1.95 per share, compared to 1994 net income of $269 million, or $1.75 per
share. Operating results in the fourth quarter included net income of $95
million, up 9 percent from 1994's fourth quarter, and earnings per share rose
to $0.62.
The company's 1995 fourth-quarter performance improved despite the effects of
higher paper prices, a sluggish fourth-quarter retail environment, and a number
of developments that affected the performance of Stream International, notably
the slower-than-expected corporate demand for new systems and software, as well
as software price competition.
Highlights 1994--The company's 1994 net income of $269 million, or $1.75 per
share, was 9 percent higher than 1993 net earnings of $246 million, or $1.59
per share, excluding the one-time effect of accounting changes, a restructuring
charge and a deferred income tax charge, all reflected in 1993.
NET SALES
1995 Compared to 1994--Net sales increased 33% to $6.5 billion, reflecting
acquisitions and mergers, higher paper prices, continued growth in foreign
operations and strong demand across most business units. Approximately 37%, or
$606 million, of the revenue increase was due to acquisitions and mergers,
primarily Stream International, while higher paper prices accounted for
approximately 28%, or $460 million, of the gain. Excluding acquisitions and
higher paper prices, the 11% increase in net sales was the result of continued
growth in foreign operations and strong demand across most business units.
Significant increases from the prior year were primarily in the manufacturing
and servicing side of Stream International--reflecting the release of Microsoft
Corporation's Windows(R) 95; Telecommunications--reflecting new business with
Southwestern Bell Yellow Pages Inc., and other affiliates of SBC
Communications, Inc.; and Specialized Publishing Services (trade magazines),
Book Publishing Services and Catalog Services--reflecting higher volume from
new and existing customers.
Net sales from foreign operations represented approximately $1.0 billion, or
16% of total net sales in 1995, up 84% from $553 million, or 11% of total net
sales in 1994. The growth in foreign sales reflected acquisitions (primarily
Stream International) and volume increases from established operations in Latin
America, Central Europe and Asia.
1994 Compared to 1993--Net sales increased 11% to $4.9 billion, reflecting
increased global demand and volume growth across most product categories, new
products and services, new customers and acquisitions. Net sales from foreign
operations increased 42% to $553 million, and represented over 11% of
consolidated net sales in 1994. The growth in foreign sales was the result of
volume increases realized from expansions and start-up operations in Europe,
Asia, and Latin America, including the acquisition of Chile-based Editorial
Lord Cochrane, S.A. (then 51% owned by the company), which was consolidated in
operating results beginning July 1, 1994.
EXPENSES
1995 Compared to 1994--Gross profit increased 27%, to $1.2 billion due to the
increase in sales and the impact of favorable by-product prices. This increase
was lower than the sales growth rate due to the impact of the change in revenue
mix associated with the Stream International merger, an increase in the LIFO
provision of $10 million before taxes, or $0.04 per share after taxes, and
higher paper costs (which are generally recovered, but at low margins). In
1995, the company changed its method of calculating its LIFO provision from the
double-extension method of valuing LIFO inventories to the external-index
method. The external-index method includes a blend of several indices and takes
into account the effects of productivity
12
improvements in the company's cost of sales. Had the company not made this
change in accounting method, the 1995 LIFO provision would have been $37
million higher before taxes, or $0.15 per share after taxes.
Selling and administrative expenses increased 32%, to $650 million,
reflecting volume increases and expenses associated with acquisitions and
mergers (primarily Stream International) and new operations. The ratio of
selling and administrative expenses to net sales, at 10% in 1995, remained
unchanged from 1994. Interest expense increased $56 million, reflecting both
higher average interest rates and higher average debt balances associated with
capital spending, acquisitions and increased working capital needs driven by
higher paper quantities and prices.
1994 Compared to 1993--Gross profit grew 9%, to $950 million, slightly lower
than the growth in net sales, as the volume increases were partially offset by
higher paper costs (which are generally recovered, but at low margins),
depreciation, amortization and start-up costs. Selling and administrative
expenses increased 8%, to $491 million, primarily resulting from volume-related
increases. The ratio of selling and administrative expenses to net sales, at
10% in 1994, was unchanged from 1993. Interest expense increased $8 million,
due to higher interest rates and higher debt levels to fund acquisitions and
expansions. Other expense was $7 million above 1993, reflecting lower
investment income and higher minority interest expense. The effective income
tax rate of 32% in 1994 was lower than the 1993 rate, resulting from tax
credits for affordable housing investments and the one-time impact on the
deferred income tax provision in 1993, related to the federal tax rate
increase.
LIQUIDITY AND CAPITAL RESOURCES
1995 Compared to 1994--Working capital continues to be closely controlled and
monitored. Working capital increased $226 million from December 31, 1994, due
to increased accounts receivable, the impact of the tight paper market,
business growth and acquisitions and mergers (primarily Stream International).
For 1995, operating cash flow (net income plus depreciation and amortization)
was $697 million, up 20% from 1994. Management believes that the company's cash
flow and borrowing capacity are sufficient to fund current operations and
growth.
Capital expenditures during 1995 totaled $456 million, including purchases of
equipment to meet the growing needs of present and new customers and expansions
of manufacturing plants. This capital investment reflects the company's
continued program to expand and upgrade operations, targeting specific markets
in the United States, Europe, Asia and Latin America. Along those lines, the
company increased its ownership interest in January of 1996 in Chile-based
Editorial Lord Cochrane, S.A. to 55.3%, up from 51% at year-end 1995.
Management anticipates 1996 capital expenditures to be between $500 million and
$550 million.
At December 31, 1995, the company had an unused revolving credit facility of
$550 million with a number of banks. This credit facility provides support for
the issuance of commercial paper and other credit needs. In addition, certain
subsidiaries of the company had credit facilities with unused borrowing
capacities totaling approximately $100 million at December 31, 1995.
1994 Compared to 1993--In 1994, operating cash flow was $582 million, an
increase of $61 million, or 12%, from 1993 (excluding the restructuring charge
and the deferred income tax charge relating to the increase in the federal
statutory income tax rate recorded in 1993). Working capital increased by $127
million from December 31, 1993, primarily from increased receivables and
inventory reflecting acquisitions and volume increases, partially offset by
higher accounts payable and accrued compensation. The increase in goodwill and
other intangibles reflected acquisitions and costs ($257 million in 1994)
associated with acquiring long-term print contracts and volume guarantees.
Proceeds from debt issuances were used to fund capital expansion, acquisitions
and costs associated with long-term print contracts and volumes.
Capital expenditures during 1994 totaled $425 million ($307 million in 1993)
and an additional $120 million ($178 million in 1993) was invested in
acquisitions and joint ventures.
13
OTHER INFORMATION
Human Resources--As of December 31, 1995, the company employed approximately
34,000 people in the United States, approximately 1,600, or 5%, of whom were
covered by collective bargaining agreements. In addition, the company employed
approximately 7,000 people in its foreign operations, the majority of whom were
covered by collective bargaining agreements, as is customary in those markets.
Technology--Over the past several years, the company has made significant
investments in advanced technology to reduce operating costs, increase
productivity and expand its service range and revenue streams. At year-end
1995, the company had completed 36 computer-to-plate installations at its web-
offset facilities and 20 New Klisch Interface (NKI) installations at its
gravure plants, which the company believes represents approximately 50% of the
U.S. printing industry's total investment in these technologies. At the end of
the year, the company also had six installed M-3000 presses, which the company
believes represents more than 25% of the total number of M-3000 presses
installed in the U.S. In addition to providing added value to customers by
reducing production cycle times and speeding time to market, these investments
will reduce the company's variable production costs going forward.
Investments in digital technologies, including four-color Xeikon presses,
also are helping the company enter new businesses, such as demand printing
through R.R. Donnelley's Digital Division and Title Life ManagementSM in Book
Publishing Services. In many cases, the company cooperates with technology
vendors to develop proprietary processes and customize technologies to create
competitive advantages. At the end of 1995, the company held unexpired patents
on more than 100 proprietary printing and binding technologies.
Purchasing and Raw Materials--The primary raw materials used by the company
are paper and ink. In 1995, the company spent approximately $3.2 billion on raw
materials. The price of paper is volatile and in periods of rising prices and
tight supply, similar to those conditions affecting the industry in 1995, the
company's revenues tend to increase as costs of paper are recovered, but at low
margins. In addition to paper consumed in the manufacturing process, the
company is also affected by the price of by-product paper which it sells. In
the first half of 1995, the price of by-product paper rose substantially, which
benefited the company's financial results. By-product prices declined to 1994
levels during 1995's fourth quarter.
The company is a large purchaser of paper and leverages its volume
requirements to improve materials management and materials performance for its
customers and believes this is a competitive advantage. The company negotiates
with leading suppliers to maximize its purchasing efficiencies, but does not
rely on any one supplier. Purchasing activity at both the local plant and
corporate levels are coordinated to increase economies of scale. Plant
inventories have been a growing focus in 1995 and the company has increased
utilization of existing inventories by successfully managing and tracking those
inventories.
OUTLOOK AND SUBSEQUENT EVENT
The commercial printing business in North America (the company's primary
geographic market) is highly competitive in most product categories and
geographic regions. Industry analysts consider most commercial print markets to
have excess capacity. Competition is largely based on price, quality and
servicing the special needs of customers.
Management believes the company's prospects in 1996 are good. The company's
primary printing markets are relatively strong going into the new year. There
is substantial capacity committed under long-term contracts and the outlook for
advertising seems positive, since 1996 is a major election year and the United
States is hosting the 1996 Olympics. These events tend to increase advertising,
resulting in higher demand for printed materials. Despite slower than expected
corporate demand for software and software price discounting late in 1995, the
company believes Stream International should see improved sales and profits in
1996.
14
The company is a large consumer of paper, acquired for and by customers. As
in 1995, the cost and supply of certain paper grades consumed in the
manufacturing process will continue to affect the company's financial results.
However, management believes that the industry will experience stable paper
prices and balanced supplies in 1996, as signs of price discounting have
surfaced in the first quarter of the year.
There has recently been, and there is likely to be in the future, proposed
legislation before the United States Congress to initially reduce and
eventually eliminate the deduction for interest on loans borrowed against
corporate-owned life insurance (COLI). The company has used this deduction for
several years and is carefully watching any changes in legislation that will
reduce or eliminate it going forward.
On March 7, 1996, the company announced that its Metromail subsidiary had
filed a registration statement with the Securities and Exchange Commission for
a proposed initial public offering of common stock of Metromail. All of the
shares would be offered by Metromail with net proceeds being used to repay
certain indebtedness owed to the company. The company would use the payment
from Metromail to pay down its debt and for general corporate purposes. The
company will retain a significant minority ownership interest in Metromail
following the offering. The company expects that this transaction, if
consummated, will result in a one-time gain, recorded in the company's 1996
income statement.
In summary, the company's competitive strengths of world-wide geographic
coverage, strategic raw materials purchasing (primarily paper and ink),
comprehensive service offerings, technology advantage and economies of scale
should result in strong sales and earnings growth in 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information required by Item 8 is contained in Item 14 of Part
IV and listed on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors and officers of the company is contained
on pages 2-6 and 8 of the company's definitive Proxy Statement dated February
20, 1996 and is incorporated herein by reference. See also the list of the
company's executive officers and related information under "Executive Officers
of R. R. Donnelley & Sons Company" at the end of Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation for the year ended December 31,
1995, and, with respect to certain of such information, prior years, is
contained on pages 8-15 of the company's definitive Proxy Statement dated
February 20, 1996 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the beneficial ownership of the company's common stock
is contained on pages 6-8 of the company's definitive Proxy Statement dated
February 20, 1996 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions for the
year ended December 31, 1995, is contained on pages 5 and 15 of the company's
definitive Proxy Statement dated February 20, 1996 and is incorporated herein
by reference.
16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. Financial Statements
The financial statements listed in the accompanying index (page F-1) to
the financial statements are filed as part of this annual report.
2. Financial Statement Schedule
The financial statement schedule listed in the accompanying index (page
F-1) to the financial statements is filed as part of this annual
report.
3. Exhibits
The exhibits listed on the accompanying index to exhibits (pages E-1
through E-2) are filed as part of this annual report.
(b)Reports on Form 8-K
None
(c)Exhibits
The exhibits listed on the accompanying index (Pages E-1 through E-2)
are filed as part of this annual report.
(d)Financial Statements omitted--
Separate financial statements of the parent company have been omitted
since it is primarily an operating company and the minority interest
and indebtedness to persons other than the parent of the subsidiaries
included in the consolidated financial statements are less than 5% of
total consolidated assets.
Certain schedules have been omitted because the required information is
included in the consolidated financial statements or notes thereto or
because they are not applicable or not required.
17
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 11TH DAY OF
MARCH, 1996.
R. R. DONNELLEY & SONS COMPANY
/s/ Peter F. Murphy
By __________________________________
Peter F. Murphy,
Vice President and Controller
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED, ON THE 11TH DAY OF MARCH, 1996.
SIGNATURE AND TITLE SIGNATURE AND TITLE
/s/ John R. Walter
- ------------------------------------- -------------------------------------
John R. Walter Thomas S. Johnson
Chairman of the Board, Director
Chief Executive Officer and Director
(Principal Executive Officer)
-------------------------------------
/s/ Cheryl A. Francis M. Bernard Puckett
- ------------------------------------- Director
Cheryl A. Francis
Executive Vice President and /s/ John M. Richman
Chief Financial Officer -------------------------------------
(Principal Financial Officer) John M. Richman
Director
/s/ Peter F. Murphy
- ------------------------------------- /s/ William D. Sanders
Peter F. Murphy -------------------------------------
Vice President and Controller William D. Sanders
(Principal Accounting Officer) Director
/s/ Martha Layne Collins /s/ Jerre L. Stead
- ------------------------------------- -------------------------------------
Martha Layne Collins Jerre L. Stead
Director Director
/s/ James R. Donnelley /s/ Bide L. Thomas
- ------------------------------------- -------------------------------------
James R. Donnelley Bide L. Thomas
Director Director
/s/ Charles C. Haffner III /s/ H. Blair White
- ------------------------------------- -------------------------------------
Charles C. Haffner III H. Blair White
Director Director
/s/ Judith H. Hamilton /s/ Stephen M. Wolf
- ------------------------------------- -------------------------------------
Judith H. Hamilton Stephen M. Wolf
Director Director
18
ITEM 14(A). INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE(S)
-------
Consolidated Statements of Income for each of the three years ended
December 31, 1995..................................................... F-2
Consolidated Balance Sheets at December 31, 1995 and 1994.............. F-3
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1995..................................................... F-4
Consolidated Statements of Shareholders' Equity for each of the three
years ended December 31, 1995......................................... F-5
Notes to Consolidated Financial Statements............................. F-6
Report of Independent Public Accountants............................... F-16
Interim Financial Information.......................................... F-17
Report of Independent Public Accountants on Financial Statement
Schedule.............................................................. F-18
Financial Statement Schedule
II--Valuation and Qualifying Accounts................................ F-19
F-1
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THOUSANDS OF DOLLARS
YEAR ENDED DECEMBER 31
--------------------------------
1995 1994 1993
---------- ---------- ----------
Net sales.................................... $6,511,786 $4,888,786 $4,387,761
Cost of sales................................ 5,302,394 3,938,494 3,518,168
---------- ---------- ----------
Gross profit................................. 1,209,392 950,292 869,593
Selling and administrative expenses.......... 649,983 490,861 453,986
Restructuring charge......................... -- -- 90,000
---------- ---------- ----------
Earnings from operations..................... 559,409 459,431 325,607
Interest expense............................. 109,759 53,493 45,436
Other expense--net........................... 10,118 10,934 3,609
---------- ---------- ----------
Earnings before income taxes and cumulative
effect of accounting changes................ 439,532 395,004 276,562
Income taxes................................. 140,739 126,401 97,642
---------- ---------- ----------
Net income from operations before cumulative
effect of accounting changes................ 298,793 268,603 178,920
Cumulative effect of change in accounting
for:
Postretirement benefits other than pensions
(net of $80.1 million in tax benefits).... -- -- (127,700)
Income taxes............................... -- -- 58,200
---------- ---------- ----------
Net Income............................... $ 298,793 $ 268,603 $ 109,420
========== ========== ==========
Income (charge) per common share:
Operations before cumulative effect of
accounting changes........................ $ 1.95 $ 1.75 $ 1.16
Cumulative effect of change in accounting
for:
Postretirement benefits other than pensions
(net of tax benefits)..................... -- -- (0.82)
Income taxes............................... -- -- 0.37
---------- ---------- ----------
Net Income per Share of Common Stock..... $ 1.95 $ 1.75 $ 0.71
========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
F-2
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
THOUSANDS OF DOLLARS
DECEMBER 31
----------------------
1995 1994
---------- ----------
Assets
Cash and equivalents................................. $ 33,122 $ 20,569
Receivables, less allowances for doubtful accounts of
$25,311 in 1995 and $19,168 in 1994................. 1,466,159 987,520
Inventories.......................................... 380,078 311,237
Prepaid expenses..................................... 28,600 34,004
---------- ----------
Total Current Assets............................... 1,907,959 1,353,330
Net property, plant and equipment, at cost, less
accumulated depreciation of $2,111,461 in 1995 and
$1,852,084 in 1994.................................. 2,008,988 1,856,760
Goodwill and other intangibles, net of accumulated
amortization of $178,997 in 1995 and $114,932 in
1994................................................ 1,024,954 887,071
Other noncurrent assets.............................. 442,909 354,982
---------- ----------
Total Assets....................................... $5,384,810 $4,452,143
========== ==========
Liabilities
Accounts payable..................................... $ 601,814 $ 422,703
Accrued compensation................................. 126,483 107,167
Short-term debt...................................... 50,000 32,400
Current and deferred income taxes.................... 86,737 46,912
Other accrued liabilities............................ 265,340 192,668
---------- ----------
Total Current Liabilities.......................... 1,130,374 801,850
---------- ----------
Long-term debt....................................... 1,560,960 1,212,332
Deferred income taxes................................ 300,840 286,904
Other noncurrent liabilities......................... 219,466 172,688
---------- ----------
Total Noncurrent Liabilities....................... 2,081,266 1,671,924
---------- ----------
Shareholders' Equity
Common stock at stated value ($1.25 par value)
Authorized shares: 500,000,000; Issued: 158,608,800
in 1995 and 1994.................................... 330,612 330,612
Retained earnings, net of cumulative translation
adjustments of $29,031 in 1995 and $18,235 in 1994.. 1,994,098 1,802,777
Unearned compensation................................ (9,297) --
Reacquired common stock, at cost..................... (142,243) (155,020)
---------- ----------
Total Shareholders' Equity......................... 2,173,170 1,978,369
---------- ----------
Total Liabilities and Shareholders' Equity........... $5,384,810 $4,452,143
========== ==========
See accompanying Notes to Consolidated Financial Statements.
F-3
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THOUSANDS OF DOLLARS
YEAR ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
Cash flows provided by (used in) operating
activities:
Net income from operations before cumulative
effect of accounting changes............... $ 298,793 $ 268,603 $ 178,920
Depreciation................................ 330,579 285,446 249,124
Amortization................................ 67,619 28,017 25,680
Net change in assets and liabilities........ (294,067) (355,934) (4,342)
Other....................................... (15,679) (38,586) 3,241
--------- --------- ---------
Net Cash Provided By Operating Activities. 387,245 187,546 452,623
--------- --------- ---------
Cash flows used for investing activities:
Capital expenditures........................ (455,662) (425,190) (306,512)
Other investments including acquisitions,
net of cash acquired....................... (34,756) (120,461) (177,743)
--------- --------- ---------
Net Cash Used For Investing Activities.... (490,418) (545,651) (484,255)
--------- --------- ---------
Cash flows from (used for) financing
activities:
Net increase in borrowings.................. 227,774 500,951 143,286
Disposition of reacquired common stock...... 37,857 20,585 19,693
Acquisition of common stock................. (34,429) (57,363) (47,513)
Cash dividends paid......................... (104,364) (92,352) (83,465)
--------- --------- ---------
Net Cash From Financing Activities........ 126,838 371,821 32,001
--------- --------- ---------
Effect of exchange rate changes on cash and
equivalents.................................. (11,112) (3,863) (2,001)
--------- --------- ---------
Net Increase (Decrease) in Cash and
Equivalents.................................. 12,553 9,853 (1,632)
Cash and Equivalents at Beginning of Year..... 20,569 10,716 12,348
--------- --------- ---------
Cash and Equivalents at End of Year........... $ 33,122 $ 20,569 $ 10,716
========= ========= =========
The changes in assets and liabilities, net of balances assumed through
acquisitions, were as follows:
1995 1994 1993
--------- --------- ---------
Decrease (Increase) in Assets:
Receivables--net............................ $(342,899) $(125,001) $ 5,835
Inventories--net............................ (41,833) (53,214) (32,156)
Prepaid expenses............................ 47,142 (601) (8,463)
Other assets................................ (70,577) (275,759) 31,609
Increase (Decrease) in Liabilities:
Accounts payable............................ 17,958 97,439 41,988
Accrued compensation........................ 19,316 28,603 (3,146)
Current and deferred income taxes........... 41,378 6,095 4,773
Other accrued liabilities................... 27,926 (15,448) (1,110)
Noncurrent deferred income taxes............ 20,459 13,574 9,725
Other noncurrent liabilities................ (12,937) (31,622) (53,397)
--------- --------- ---------
Net Change in Assets and Liabilities...... $(294,067) $(355,934) $ (4,342)
========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
F-4
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THOUSANDS OF DOLLARS
REACQUIRED UNEARNED
COMMON STOCK COMMON STOCK COMPENSATION
-------------------- --------------------- RESTRICTED RETAINED
SHARES AMOUNT SHARES AMOUNT STOCK EARNINGS TOTAL
----------- -------- ---------- --------- ------------ ---------- ----------
Balance at December 31,
1992................... 158,608,800 $330,612 (3,579,982) $ (84,036) $ -- $1,602,401 $1,848,977
Net income before
cumulative effect of
accounting changes..... 178,920 178,920
Cumulative effect of
change in accounting
for:
Other postretirement
benefits, net of tax
benefits............. (127,700) (127,700)
Income taxes.......... 58,200 58,200
Treasury stock
purchases.............. (1,601,296) (47,513) (47,513)
Cash dividends.......... (83,465) (83,465)
Cost of common shares
issued under stock
programs............... 730,511 15,255 4,438 19,693
Translation adjustments. (3,121) (3,121)
----------- -------- ---------- --------- ------- ---------- ----------
Balance at December 31,
1993................... 158,608,800 330,612 (4,450,767) (116,294) -- 1,629,673 1,843,991
Net income.............. 268,603 268,603
Treasury stock
purchases.............. (1,958,193) (57,363) (57,363)
Cash dividends.......... (92,352) (92,352)
Cost of common shares
issued under stock
programs............... 885,478 18,637 1,948 20,585
Translation adjustments. (5,095) (5,095)
----------- -------- ---------- --------- ------- ---------- ----------
Balance at December 31,
1994................... 158,608,800 330,612 (5,523,482) (155,020) -- 1,802,777 1,978,369
Net income.............. 298,793 298,793
Treasury stock
purchases.............. (996,464) (34,429) (34,429)
Cash dividends.......... (104,364) (104,364)
Cost of common shares
issued under stock
programs............... 1,863,685 47,206 (9,297) 7,688 45,597
Translation adjustments. (10,796) (10,796)
----------- -------- ---------- --------- ------- ---------- ----------
Balance at December 31,
1995................... 158,608,800 $330,612 (4,656,261) $(142,243) $(9,297) $1,994,098 $2,173,170
=========== ======== ========== ========= ======= ========== ==========
See accompanying Notes to Consolidated Financial Statements.
F-5
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation--The consolidated financial statements include the
accounts of the company and its majority-owned subsidiaries. Intercompany items
and transactions are eliminated in consolidation.
Nature of Operations--The company provides a wide variety of print and print-
related products and services for specific customers, virtually always under
contract. Some contracts provide for progress payments from customers as
certain phases of the work are completed; however, revenue is not recognized
until the earnings process has been completed in accordance with the terms of
the contracts. Some customers furnish paper for their work, while in other
cases the company purchases and sells the paper.
Cash and Equivalents--The company considers all highly liquid debt
instruments purchased with original maturities of three months or less to be
cash equivalents.
Inventories--Inventories include material, labor and factory overhead and are
stated at the lower of cost or market. The cost of approximately 66% and 85% of
the inventories at December 31, 1995 and 1994, respectively, has been
determined using the Last-In, First-Out (LIFO) method. This method reflects the
effect of inventory replacement costs in earnings; accordingly, charges to cost
of sales reflect recent costs of material, labor and factory overhead. The
remaining inventories are valued using the First-In, First-Out (FIFO) or
specific identification methods.
Foreign Currency Translation--Gains and losses arising from the translation
of the company's international subsidiaries' financial statements are reflected
in Retained Earnings.
Net Income Per Share of Common Stock--Net income per share is computed on the
basis of average shares outstanding during each year. No material dilution
would result if effect were given to the exercise of outstanding stock options
and the vesting of stock units.
Benefit Plans--The company's Retirement Benefit Plan (the Plan) is a non-
contributory defined benefit plan covering substantially all domestic
employees. Normal retirement age is 65 but provision is made for earlier
retirement. As required, the company uses the projected unit credit actuarial
cost method to determine pension cost for financial reporting purposes. In
conjunction with this method, the company amortizes deferred gains and losses
(using the corridor method), prior service costs and the transition credit (the
excess of Plan assets plus balance sheet accruals over the projected
obligation, as of January 1, 1987) over 19 years, representing the average
remaining service life of its active employee population. For tax and funding
purposes, the attained age normal actuarial cost method is used. Compared to
the projected unit credit method, the attained age normal method attributes a
greater proportion of the total retirement obligation to an employee's early
years of service.
Capitalization, Depreciation and Amortization--Property, plant and equipment
are stated at cost. Depreciation is computed principally on the straight-line
method based on useful lives of 15 to 33 years for buildings and 3 to 15 years
for machinery and equipment. Maintenance and repair costs are charged to
expense as incurred. Major overhauls are capitalized as reductions to
accumulated depreciation. When properties are retired or disposed, the costs
and accumulated depreciation are eliminated and the resulting profit or loss is
recognized in income. Goodwill ($691 million and $558 million, net of
accumulated amortization, at December 31, 1995 and 1994, respectively) is
amortized over periods ranging from 10 to 40 years. Other intangibles represent
primarily the cost of acquiring print contracts and volume guarantees and are
amortized over the periods in which benefits will be realized.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-6
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ACQUISITIONS
Effective April 1, 1995, the company merged its Global Software Services
business (GSS) with Corporate Software Inc. (CSI) to form Stream International
Inc. (Stream), a software manufacturer, distributor and technical support
organization. The company owns approximately 80% of the capital stock of
Stream, which is not a publicly traded corporation. The remaining 20% is owned
by the former owners of CSI and management. No gain or loss was recognized on
the merger as the book value of GSS approximated its fair market value on the
date of the transaction.
The Stream transaction has been accounted for using the purchase method.
Accordingly, amounts assigned in the accompanying Consolidated Balance Sheets
to the assets and liabilities of CSI were based on their estimated fair market
values. The cost in excess of net assets acquired of $120 million is being
amortized on a straight-line basis over 15 years. The results of operations of
CSI are included in the accompanying Consolidated Income Statements from the
date of the merger.
Certain officers and employees of Stream hold options to buy up to 9% of
Stream at formula-based prices which approximate, on a per share basis, the
book value of the company's investment in Stream. The Stream shares not owned
by the company and the shares to be sold under the aforementioned option
agreements are subject to certain put and call arrangements whereby the company
would acquire the shares based on a multiple of Stream's earnings, as defined.
If all such shares were put to the company at December 31, 1995, the aggregate
purchase price would be less than the minority interest liability recorded in
the accompanying Consolidated Balance Sheets.
The company made several other acquisitions, joint venture and equity
investments in 1995, 1994 and 1993, none of which, either individually or in
the aggregate, were material to the company's financial statements. The
acquisitions were accounted for using the purchase method; accordingly, the
assets and liabilities of the acquired entities have been recorded at their
estimated fair values at their respective dates of acquisition.
Liabilities incurred and assumed in connection with acquisitions totaled
$386.8 million, $87.2 million and $24.1 million for the years ended December
31, 1995, 1994 and 1993, respectively.
RESTRUCTURING CHARGE
On January 25, 1993, Sears, Roebuck and Co., a customer, announced its
decision to discontinue catalog operations during 1993. In response to Sears'
announcement, the company incurred a one-time charge of $60.8 million (net of
the associated tax benefit) in the first quarter of 1993. The charge primarily
covered the costs associated with closing the company's manufacturing facility
in Chicago, Illinois, where the company produced the Sears catalogs.
INVENTORIES
The components of the company's inventories as of December 31, 1995 and 1994,
were as follows:
1995 1994
-------- --------
THOUSANDS OF
DOLLARS
Raw materials and manufacturing supplies.............. $230,694 $185,527
Work in process....................................... 213,741 208,553
Finished goods........................................ 34,041 5,821
Progress billings..................................... (47,549) (45,523)
LIFO reserve ......................................... (50,849) (43,141)
-------- --------
Total............................................. $380,078 $311,237
======== ========
F-7
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The company's cost of sales was increased by LIFO provisions of $7.7 million
in 1995 (and decreased in 1994 by $2.3 million). In the third quarter of 1995,
the company changed from the double-extension method of valuing LIFO
inventories to the external-index method. The company believes that this change
will result in a better measurement of operating results by properly reflecting
the effect of productivity improvements in the company's cost of sales. Because
the cumulative effect of this change on periods prior to 1995 cannot be
determined, the impact has been reflected in current operations. This
accounting change was adopted effective January 1, 1995; however, the effect of
the change on the first two quarters of 1995 was immaterial, and the financial
statements for those periods have not been restated. Net income for 1995 was
approximately $22 million ($0.15 per share) higher than it would have been had
the change not been made.
VOLUNTARY EMPLOYEES' BENEFICIARY ASSOCIATIONS
The company maintains two Voluntary Employees' Beneficiary Associations
(VEBAs), one to fund employee welfare benefits and one to fund postretirement
medical and death benefits. The balances of the VEBAs (net of associated
liabilities) are recorded in the accompanying Consolidated Balance Sheets,
classified as current or noncurrent depending on the ultimate expected payment
date of the underlying liabilities. As of December 31, 1995 and 1994, the
company had a net current liability of $16.3 million and a net current asset of
$11.3 million, respectively, representing the current position of the company's
employee welfare benefit plans funded by one of the VEBAs. The VEBA established
to partially fund the company's liability for postretirement medical and death
benefits ($191 million at December 31, 1995 and $156 million at December 31,
1994) is included in Other Noncurrent Liabilities as an offset to the related
liability. For additional information, refer to the notes on "Other Retirement
Benefits."
PROPERTY, PLANT AND EQUIPMENT
The following table summarizes the components of property, plant and
equipment (at cost) as of December 31, 1995 and 1994:
1995 1994
---------- ----------
THOUSANDS OF DOLLARS
Land................................................ $ 44,438 $ 38,430
Buildings........................................... 622,326 595,460
Machinery and equipment............................. 3,453,685 3,074,954
---------- ----------
Total........................................... $4,120,449 $3,708,844
========== ==========
COMMITMENTS AND CONTINGENCIES
As of December 31, 1995, authorized expenditures on incomplete projects for
the purchase of property, plant and equipment totaled $198.4 million. Of this
total, $123.5 million has been contractually committed. The company has a
variety of commitments with suppliers for the purchase of paper, ink and other
materials for delivery in future years at prevailing market prices.
The company has operating lease commitments totaling $422.2 million extending
through various periods to 2009. The lease commitments total $76.3 million for
1996, range from $33.4 million to $64.3 million in each of the years 1997-2000
and total $158.8 million for years 2001 and thereafter.
The company is not exposed to significant accounts receivable credit risk,
due to the diversity of industry classification, distribution channels and
geographic location of its customers. In addition, the company is a party to
certain litigation arising in the ordinary course of business which, in the
opinion of management, will not have a material adverse effect on the
operations of the company. The company also has future annual commitments
totaling $102.6 million to invest in various affordable housing limited
partnerships which provide annual tax benefits and credits in amounts greater
than the annual investments.
F-8
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
RETIREMENT BENEFIT PLAN
Net pension credits included in operating results for the Retirement Benefit
Plan (the Plan) were:
1995 1994 1993
-------- -------- --------
THOUSANDS OF DOLLARS
Service cost..................................... $ 23,393 $ 28,158 $ 25,097
Interest cost on the projected benefit
obligation...................................... 54,524 51,604 47,295
Actual (return) loss on Plan assets.............. (217,662) 3,858 (106,595)
Amortization of excess Plan net assets at
adoption of SFAS No. 87 and deferrals--net...... 120,698 (97,293) 20,306
-------- -------- --------
Total........................................ $(19,047) $(13,673) $(13,897)
======== ======== ========
The actuarial computations that derived the above amounts assumed a discount
rate on projected benefit obligations of 7.25% (8.5% at December 31, 1994 and
7.5% at December 31, 1993), an expected long-term rate of return on Plan assets
of 9.5% and annual salary increases of 4% for 1995 and 1994 and 5% for 1993.
Plan assets include primarily government and corporate debt securities and
marketable equity securities, and, to a lesser extent, commingled funds, real
estate and a group annuity contract purchased from a life insurance company.
The funded status and prepaid pension cost (included in Other Noncurrent Assets
on the accompanying Consolidated Balance Sheets) are as follows:
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
THOUSANDS OF DOLLARS
Fair value of Plan assets............................ $1,113,505 $ 935,847
---------- ---------
Actuarial present value of benefit obligations:
Vested............................................. 733,920 574,839
Non-vested......................................... 11,726 9,354
---------- ---------
Total accumulated benefit obligations................ 745,646 584,193
Additional amounts related to projected wage
increases........................................... 86,378 80,098
---------- ---------
Projected benefit obligations for services rendered
to date............................................. 832,024 664,291
---------- ---------
Excess of Plan assets over projected benefit
obligations......................................... 281,481 271,556
Unrecognized net deferrals........................... 4,221 4,948
Unrecognized net excess Plan assets to be amortized
through the year 2005............................... (98,497) (108,347)
---------- ---------
Prepaid Pension Costs................................ $ 187,205 $ 168,157
========== =========
In the event of Plan termination, the Plan provides that no funds can revert
to the company and any excess assets over Plan liabilities must be used to fund
retirement benefits.
OTHER RETIREMENT BENEFITS
In addition to pension benefits, the company provides certain health care and
life insurance benefits for retired employees. Substantially all of the
company's domestic, full-time employees become eligible for those benefits upon
reaching age 55 while working for the company and having ten years continuous
service at retirement. The company funds a portion of the liabilities
associated with these plans through a tax-exempt trust. The trust is invested
in various assets, primarily life insurance covering some of the company's
employees.
Effective January 1, 1993, the company adopted Statement of Financial
Accounting Standards No. 106 (SFAS 106), "Employers' Accounting for
Postretirement Benefits Other Than Pensions." SFAS 106 requires
F-9
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
companies to charge to expense the expected costs of postretirement health care
and life insurance (and similar benefits) during the years that the employees
render service. Previously, such costs were expensed as actual claims were
paid. The company elected to immediately recognize the transition obligation
for future benefits to be paid related to past employee services, resulting in
a noncash charge of $207.8 million before deferred income tax benefits ($127.7
million after-tax or $0.82 per share) that represents the cumulative effect of
the change in accounting for the years prior to 1993.
The net accrual-basis expense for postretirement benefits during 1995, 1994
and 1993 included the following components:
1995 1994 1993
-------- -------- -------
THOUSANDS OF DOLLARS
Service cost................................ $ 9,492 $ 11,807 $11,580
Interest cost on the projected benefit
obligations................................ 17,319 18,532 17,486
Actual return on assets..................... (34,626) (1,296) (5,545)
Deferrals--net.............................. 16,503 (11,113) (3,832)
-------- -------- -------
Total................................... $ 8,688 $ 17,930 $19,689
======== ======== =======
The above table does not include a $23 million charge for postretirement
medical benefits associated with the closing of the company's Chicago
manufacturing facility; such amount was included in the 1993 restructuring
charge (see separate note above).
The liability (included in Other Noncurrent Liabilities on the accompanying
Consolidated Balance Sheets) for postretirement benefits, net of the partial
funding, is as follows:
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
THOUSANDS OF DOLLARS
Actuarial present value of benefit obligations:
Retirees........................................... $ 152,981 $ 136,854
Fully eligible active plan participants............ 4,856 7,056
Other active plan participants..................... 93,048 65,595
--------- ---------
Total accumulated benefit obligations................ 250,885 209,505
Fair value of Plan assets............................ (191,042) (156,416)
Unrecognized net deferrals........................... 20,596 37,542
--------- ---------
Excess of Accumulated Benefit Obligations Over Plan
Assets.............................................. $ 80,439 $ 90,631
========= =========
The actuarial computations assumed a discount rate of 7.25% (8.5% at December
31, 1994) to determine the accumulated postretirement benefit obligation, an
expected long-term rate of return on plan assets of 9.0% and a health care cost
trend rate of 8.0% initially, declining gradually to 5.5% in 2023 and
thereafter, to measure the accumulated postretirement benefit obligation.
Effective January 1, 1993, certain features of the plan were amended. For
future retirees, the company introduced retiree cost-sharing and implemented
programs intended to stem rising costs. Also, the company has adopted a
provision which limits its future obligation to absorb health care cost
inflation. The features of the new plan provisions have been reflected in the
assumed health care cost trend rate disclosed above. However, a one percentage
point increase in the assumed health care cost trend rate would increase the
1995 postretirement benefit expense (service cost and interest cost) by $2.1
million and the accumulated postretirement benefit obligation as of December
31, 1995 by $17.6 million.
INCOME TAXES
Effective January 1, 1993, the company adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." SFAS
109 requires, among other things, the application of current statutory income
tax rates in computing deferred income tax balances. In the first quarter of
1993,
F-10
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the company recognized the cumulative effect, through January 1, 1993, of the
accounting change, reflecting the difference between current statutory tax
rates and the generally higher rates that were used to establish the deferred
income tax balances, resulting in noncash income of $58.2 million (equivalent
to $0.37 per share).
Cash payments for income taxes were $98.1 million, $101.6 million and $75.2
million in 1995, 1994 and 1993, respectively. The components of income tax
expense for the years ending December 31, 1995, 1994 and 1993, were as follows:
1995 1994 1993
-------- -------- -------
THOUSANDS OF DOLLARS
Federal
Current....................................... $ 85,225 $ 79,483 $72,049
Deferred*..................................... 31,230 23,218 7,339
State........................................... 24,284 23,700 18,254
-------- -------- -------
Total....................................... $140,739 $126,401 $97,642
======== ======== =======
- --------
*The 1993 deferred income tax expense includes $6.2 million for the one-time
adjustment of previously recorded deferred taxes due to the increase in the
U.S. statutory rate.
The significant deferred tax assets and liabilities at December 31, 1995 and
1994, were as follows:
1995 1994
---------- ----------
THOUSANDS OF DOLLARS
Deferred tax liabilities:
Accelerated depreciation......................... $ 210,564 $ 206,338
Investments in safe harbor leases................ 23,362 37,234
Pensions......................................... 69,869 60,611
Other............................................ 89,584 64,438
---------- ----------
Total deferred tax liabilities................. 393,379 368,621
---------- ----------
Deferred tax assets:
Postretirement benefits.......................... 32,176 36,000
Accrued liabilities.............................. 21,614 24,521
Other............................................ 54,971 37,263
---------- ----------
Total deferred tax assets...................... 108,761 97,784
---------- ----------
Net Deferred Tax Liabilities....................... $ 284,618 $ 270,837
========== ==========
The following table outlines the reconciling differences between the U.S.
statutory tax rates and the rates used by the company in the determination of
net income:
1995 1994 1993
---- ---- ----
Federal statutory rate....................................... 35.0% 35.0% 35.0%
State and local income taxes, net of U.S. federal income tax
benefit..................................................... 3.6 3.9 4.3
Goodwill amortization........................................ 1.7 1.3 2.0
Benefits resulting from corporate-owned life insurance
programs.................................................... (5.8) (4.7) (5.5)
Affordable housing investment credits........................ (3.9) (3.1) (2.5)
Other........................................................ (1.4) (0.4) (0.2)
---- ---- ----
Subtotal..................................................... 32.0 32.0 33.1
Adjustment of deferred taxes for the increase in the U.S.
federal statutory income tax rate........................... -- -- 2.2
---- ---- ----
Total.................................................... 32.0% 32.0% 35.3%
==== ==== ====
F-11
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DEBT FINANCING AND INTEREST EXPENSE
The company's debt at December 31, 1995 and 1994, consisted of the following:
1995 1994
---------- ----------
THOUSANDS OF DOLLARS
Commercial paper......................................... $ 314,264 $ 484,061
Medium-term notes due 1997-2005 at a weighted average
interest rate of 6.93%.................................. 500,000 200,000
9.125% debentures due December 1, 2000................... 199,646 199,574
8.875% debentures due April 15, 2021..................... 149,665 149,652
7.0% notes due January 1, 2003........................... 109,725 109,686
Subsidiary revolving line of credit...................... 162,000 --
Other.................................................... 175,660 101,759
---------- ----------
Total................................................ $1,610,960 $1,244,732
========== ==========
Based upon the interest rates currently available to the company for
borrowings with similar terms and maturities, the fair value of the company's
debt exceeds its book value at December 31, 1995 by approximately $98 million.
The company's notes and debentures are not actively traded and contain no call
provisions.
At December 31, 1995, the company had an available credit facility of $550
million with a group of domestic and foreign banks that expires December 21,
1999. The credit arrangement provides support for the issuance of commercial
paper and other credit needs. Borrowings under the facility (none during the
past two years) bear interest at various rates not exceeding the banks' prime
rates. The company pays an annual fee of 0.07% on the total unused credit
facility.
At December 31, 1995, a subsidiary of the company had an available line of
credit of $200 million with a group of domestic and foreign banks that expires
April 21, 2000. Borrowings under this facility amounted to $162 million at
December 31, 1995 and bear interest at various rates not exceeding the banks'
prime rates. The subsidiary pays an annual fee of 0.10% on the total unused
credit facility.
At December 31, 1995, the company had $599 million of commercial paper and
short-term debt outstanding, of which $50 million represents management's
current estimate of the 1996 net repayment. The remaining $549 million is
classified as long-term since the company has the ability and intent to
maintain such debt on a long-term basis. The weighted average interest rate on
all commercial paper debt outstanding during 1995 was 5.87% (5.93% at December
31, 1995). Annual maturities of long-term debt (excluding commercial paper and
short-term debt) are as follows: 1997--$123 million, 1998--$47 million, 1999--
$107 million, 2000--$236 million, and thereafter $499 million.
The following table summarizes interest expense included in the Consolidated
Statements of Income:
1995 1994 1993
-------- -------- -------
THOUSANDS OF DOLLARS
Interest incurred................................. $120,658 $ 63,726 $51,922
Amount capitalized as property, plant and
equipment........................................ (10,899) (10,233) (6,486)
-------- -------- -------
Total......................................... $109,759 $ 53,493 $45,436
======== ======== =======
Interest paid, net of capitalized interest, was $101.9 million, $51.8 million
and $42.9 million in 1995, 1994 and 1993, respectively.
F-12
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STOCK AND INCENTIVE PROGRAMS FOR MANAGEMENT EMPLOYEES
Restricted Stock Awards--At December 31, 1995 and 1994, the company had
outstanding 461,000 and 328,000, respectively, restricted shares granted to
certain officers. These shares are registered in the names of the recipients,
but are subject to conditions of forfeiture and restrictions on sale or
transfer for five to seven years from the grant date. Dividends on the
restricted shares are paid currently to the recipients and, accordingly, the
restricted shares are treated as outstanding shares. The expense of the grant
is recognized evenly over the vesting period.
The value of the restricted stock awards was $18.1 million and $10.0 million
based upon the closing price of the company's stock at each year end ($39.375
and $29.50 at December 31, 1995 and 1994, respectively). Charges to expense for
this stock plan were $1.0 million, $1.5 million and $1.1 million in 1995, 1994
and 1993, respectively.
Stock Purchase Plan--The company has a stock purchase plan for selected
managers and key staff employees. Under the plan, the company is required to
contribute an amount equal to 70% of participants' contributions, of which 50%
is applied to the purchase of stock and 20% is paid in cash. The number of
shares required for the plan for the year 1995 will depend upon the extent to
which eligible participants subscribe during the subscription period in the
first quarter of 1996 and the price of the stock on March 18, 1996. Amounts
charged to expense for this plan were $6.2 million, $6.1 million, and $6.2
million in 1995, 1994 and 1993, respectively.
Incentive Compensation Plans--The company has incentive compensation plans
covering selected officers. Amounts charged to expense for supplementary
compensation ($4.3 million in 1995, $3.3 million in 1994 and $2.6 million in
1993), are determined from the level of achievement of performance measures
related to earnings, margins and returns applied to the participants' base
salaries. Similar incentive and gain sharing compensation plans exist for other
officers, managers, supervisors and production employees.
Stock Options--The company has granted stock options annually from 1983 to
1995. The employee options vest from three to nine and one-half years and may
be exercised, once vested, up to ten years from the date of grant. Under
authorized Stock Incentive Plans, a maximum of 5.7 million shares were
available for future grants of stock options and restricted stock awards as of
December 31, 1995. Information relating to stock options, which includes 2.3
million and 2.4 million shares granted in 1995 and 1994, respectively, under a
broad base stock option program for non-management employees, is shown below.
Other Information--Under the stock programs, authorized unissued shares or
treasury shares may be used. If authorized unissued shares are used, not more
than 11.3 million shares may be issued in the aggregate. The company intends to
reacquire shares of its common stock to meet the stock requirements of these
programs in the future.
1995 1994
--------------------------- ---------------------------
NUMBER OF PER SHARE OPTION NUMBER OF PER SHARE OPTION
SHARES ON DATE OF GRANT SHARES ON DATE OF GRANT
---------- ---------------- ---------- ----------------
Stock options granted... 4,979,450 $30.44 to $57.70 4,016,500 $28.44 to $30.94
Stock options canceled
or expired............. 551,730 $15.95 to $35.44 274,220 $19.63 to $31.38
Stock options exercised. 1,238,326 $15.66 to $31.38 370,627 $11.44 to $23.94
At end of year:
Stock options
outstanding.......... 14,246,152 $15.66 to $57.70 11,056,758 $15.66 to $31.38
Stock options
exercisable.......... 4,831,856 $15.66 to $31.38 4,764,756 $15.66 to $31.38
F-13
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EMPLOYEE STOCK OWNERSHIP PLAN
Contributions to the company's Employee Stock Ownership Plan were
discontinued in response to the change in tax law that eliminated the
previously available tax credit. Under this plan, 1.2 million shares are held
in trust as of December 31, 1995, for formerly eligible employees. There are no
charges to operations for this plan, except for certain administrative
expenses.
PREFERRED STOCK
The company has two million shares of $1.00 par value preferred stock
authorized for issuance. The Board of Directors may divide the preferred stock
into one or more series and fix the redemption, dividend, voting, conversion,
sinking fund, liquidation and other rights. The company has no present plans to
issue any preferred stock. One million of the shares are reserved for issuance
under the Shareholder Rights Plan discussed below.
SHAREHOLDER RIGHTS PLAN
The company maintains a Shareholder Rights Plan (the Plan) designed to deter
coercive or unfair takeover tactics, to prevent a person or group from gaining
control of the company without offering fair value to all shareholders and to
deter other abusive takeover tactics which are not in the best interest of
shareholders.
Under the terms of the Plan, each share of common stock is accompanied by
one-quarter of a right; each full right entitles the shareholder to purchase
from the company, one one-hundredth of a newly issued share of Series A Junior
Preferred Stock at an exercise price of $225.
The rights become exercisable ten days after a public announcement that an
acquiring person (as defined in the Plan) has acquired 20% or more of the
outstanding common stock of the company (the Stock Acquisition Date) or ten
days after the commencement of a tender offer which would result in a person
owning 30% or more of such shares. The company can redeem the rights for $.05
per right at any time until twenty days following the Stock Acquisition Date
(the 20-day period can be shortened or lengthened by the company). The rights
will expire on August 8, 1996 unless redeemed earlier by the company.
If, subsequent to the rights becoming exercisable, the company is acquired in
a merger or other business combination at any time when there is a 20% or more
holder, the rights will then entitle a holder to buy shares of the acquiring
company with a market value equal to twice the exercise price of each right.
Alternatively, if a 20% holder acquires the company by means of a merger in
which the company and its stock survives, or if any person acquires 30% or more
of the company's common stock, each right not owned by a 20% or more
shareholder would become exercisable for common stock of the company (or, in
certain circumstances, other consideration) having a market value equal to
twice the exercise price of the right.
F-14
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
GEOGRAPHIC SEGMENTS
The following table summarizes the company's results of operations and
identifiable assets, as of and for the years ended December 31, 1995, 1994 and
1993:
1995 1994 1993
---------- ---------- ----------
THOUSANDS OF DOLLARS
Net sales:
Domestic.................................. $5,502,566 $4,343,477 $3,999,367
Foreign................................... 1,018,524 553,395 390,282
Less transfers between geographic areas... (9,304) (8,086) (1,888)
---------- ---------- ----------
Total................................... $6,511,786 $4,888,786 $4,387,761
========== ========== ==========
Earnings from operations:
Domestic*................................. $ 580,410 $ 497,120 $ 362,364
Foreign................................... 19,928 4,118 (598)
Corporate and other expenses--net......... (40,929) (41,807) (36,159)
---------- ---------- ----------
Total................................... $ 559,409 $ 459,431 $ 325,607
========== ========== ==========
Identifiable assets:
Domestic.................................. $4,442,825 $3,719,974 $3,186,229
Foreign................................... 674,387 541,614 307,727
Investment in unconsolidated affiliates... 91,221 80,580 74,188
Corporate and other....................... 176,377 109,975 85,882
---------- ---------- ----------
Total................................... $5,384,810 $4,452,143 $3,654,026
========== ========== ==========
- --------
*1993 domestic earnings from operations includes a $90 million restructuring
charge recorded during the first quarter of 1993 related primarily to the
closing of the company's Chicago manufacturing facility.
Sales to affiliates are at negotiated prices based on specific market
conditions. Earnings from operations is net sales less cost of sales, selling
and administrative expenses, assessments to operating units for various
corporate expenses and goodwill amortization. In computing earnings from
operations, none of the following items has been added or deducted: interest
expense, income taxes and equity in income from unconsolidated investees.
Identifiable assets are those assets of the company that are identified with
the operations in each geographic area. Corporate and other assets are
principally investments.
SUBSEQUENT EVENT
On March 7, 1996, the company announced that its Metromail subsidiary had
filed a registration statement with the Securities and Exchange Commission for
a proposed initial public offering of common stock of Metromail. All of the
shares would be offered by Metromail with net proceeds being used to repay
certain indebtedness owed to the company. The company would use the payment
from Metromail to pay down its debt and for general corporate purposes. The
company will retain a significant minority ownership interest in Metromail
following the offering. The company expects that this transaction, if
consummated, will result in a one-time gain, recorded in the company's 1996
income statement.
F-15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
R. R. Donnelley & Sons Company:
We have audited the accompanying consolidated balance sheets of R. R.
Donnelley & Sons Company (a Delaware corporation) and Subsidiaries as of
December 31, 1995 and 1994, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years ended December
31, 1995. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of R. R. Donnelley & Sons Company
and Subsidiaries as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years ended December 31,
1995, in conformity with generally accepted accounting principles.
As explained in the Notes to Consolidated Financial Statements, effective
January 1, 1995, the company changed its method of accounting for LIFO
inventories and, effective January 1, 1993, the company changed its method of
accounting for postretirement benefits other than pensions and its method of
accounting for income taxes.
Arthur Andersen LLP
Chicago, Illinois
January 25, 1996 (except with
respect to the matter
discussed in the Subsequent
Event footnote, as to which
the date is March 7, 1996)
F-16
UNAUDITED INTERIM FINANCIAL INFORMATION
THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA
YEAR ENDED DECEMBER 31
------------------------------------------------------
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
---------- ---------- ---------- ---------- ----------
1995
Net sales............... $1,318,089 $1,490,633 $1,704,793 $1,998,271 $6,511,786
Gross profit............ 229,815 278,132 338,746 362,699 1,209,392
Net income.............. 46,842 64,461 92,057 95,433 298,793
Net income per common
share.................. 0.31 0.42 0.60 0.62 1.95
1994
Net sales............... $1,070,877 $1,117,338 $1,242,973 $1,457,598 $4,888,786
Gross profit............ 193,853 217,819 255,046 283,574 950,292
Net income.............. 42,796 58,338 80,070 87,399 268,603
Net income per common
share.................. 0.28 0.38 0.52 0.57 1.75
F-17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Shareholders of R. R. Donnelley & Sons Company:
We have audited, in accordance with generally accepted auditing standards,
the financial statements included in the Company's Annual Report to
Shareholders included in this Form 10-K, and have issued our report thereon
dated January 25, 1996 (except with respect to the matter discussed in the
Subsequent Event footnote, as to which the date is March 7, 1996). Our audit
was made for the purpose of forming an opinion on those statements taken as a
whole. The schedule listed in the index to the financial statements and
financial statement schedules is the responsibility of the Company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
January 25, 1996
F-18
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Transactions affecting the allowances for doubtful accounts during the years
ended December 31, 1995, 1994 and 1993 were as follows:
1995 1994 1993
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Allowance for trade receivable losses:
Balance, beginning of year................ $ 19,168 $ 14,795 $ 17,745
Balance, acquired companies at acquisi-
tion..................................... 3,761 5,257 312
Provisions charged to income.............. 22,615 14,047 22,658
-------- -------- --------
45,544 34,099 40,715
Uncollectible accounts written off, net of
recoveries............................... (20,233) (14,931) (25,920)
-------- -------- --------
Balance, end of year...................... $ 25,311 $ 19,168 $ 14,795
======== ======== ========
F-19
INDEX TO EXHIBITS*
DESCRIPTION EXHIBIT NO.
----------- -----------
Certificate of Incorporation(9)................................ 3(i)(a)
Certificate of Stock Designation filed as Exhibit A to the
Rights Agreement dated July 24, 1986 between R. R. Donnelley
& Sons Company and Morgan Shareholder Services Trust Compa-
ny(2)......................................................... 3(i)(b)
By-Laws........................................................ 3(ii)(a)
Amendment to By-Laws adopted January 25, 1996.................. 3(ii)(b)
Form of Rights Agreement, dated as of July 24, 1986 between R.
R. Donnelley & Sons Company and Morgan Shareholder Services
Trust Company(2).............................................. 4(a)
First Amendment to Rights Agreement, dated as of March 24,
1988 between R. R. Donnelley & Sons Company and Morgan Share-
holder Services Trust Company(4).............................. 4(b)
Instruments Defining the Rights of Security Holders(1)......... 4(c)
Indenture dated as of November 1, 1990 between the Company and
Citibank, N.A. as Trustee(7).................................. 4(d)
Credit Agreement dated December 21, 1994 among R. R. Donnelley
& Sons Company, the Banks named therein and Citibank, N.A.,
as Administrative Agent(11)................................... 4(e)
Directors' Retirement Benefit Plan, as amended(5)**............ 10(a)
Directors' Deferred Compensation Agreement(10)**............... 10(b)
Donnelley Shares Stock Option Plan, as amended................. 10(c)
1993 Stock Ownership Plan for Non-Employee Directors(8)**...... 10(d)
Senior Management Annual Incentive Plan, as amended(7)**....... 10(e)
Form of Severance Agreement for Senior Officers, as amend-
ed(10)**...................................................... 10(f)
1993 Stock Purchase Plan for Selected Managers and Key Staff
Employees, as amended**....................................... 10(g)
1986 Stock Incentive Plan, as amended**........................ 10(h)
1991 Stock Incentive Plan, as amended**........................ 10(i)
1995 Stock Incentive Plan, as amended**........................ 10(j)
Form of premium priced option agreement with certain executive
officers(11)**................................................. 10(k)
Unfunded Supplemental Benefit Plan(7)**........................ 10(l)
Amendment to Unfunded Supplemental Benefit Plan adopted on
April 25, 1991(6)**........................................... 10(m)
Agreement with John R. Walter for 1988 award of stock
units(3)**.................................................... 10(n)
Employment Agreement among Stream International Holdings Inc.
(formerly Stream International Inc.), R. R. Donnelley & Sons
Company and Rory Cowan(12)**.................................. 10(o)
Retirement and Release agreement with F. R. Jarc(12)**......... 10(p)
Agreement with F. R. Jarc(13)**................................ 10(q)
Statement of Computation of Ratio of Earnings to Fixed
Charges....................................................... 12
Letter regarding change in accounting principles(13)........... 18
Subsidiaries of R. R. Donnelley & Sons Company................. 21
Consent of Independent Public Accountants dated March 11,
1996.......................................................... 23
Financial Data Schedule........................................ 27
E-1
- --------
*Filed with the Securities and Exchange Commission. Each such exhibit
may be obtained by a shareholder of the Company upon payment of $5.00
per exhibit.
**Management contract or compensatory plan or arrangement.
(1) Instruments, other than that described in 4(d) and 4(e), defining
the rights of holders of long-term debt not registered under the
Securities Exchange Act of 1934 of the registrant and of all
subsidiaries for which consolidated or unconsolidated financial
statements are required to be filed are being omitted pursuant to
paragraph (4)(iii)(A) of Item 601 of Regulation S-K. Registrant agrees
to furnish a copy of any such instrument to the Commission upon
request.
(2) Filed as Exhibit with Form SE filed on July 31, 1986, and
incorporated herein by reference.
(3) Filed as Exhibit with Form SE filed on March 24, 1988, and
incorporated herein by reference.
(4) Filed as Exhibit with Form SE filed on May 10, 1988, and
incorporated herein by reference.
(5) Filed as Exhibit with Form SE filed on March 25, 1991, and
incorporated herein by reference.
(6) Filed as Exhibit with Form SE filed on May 9, 1991 and incorporated
herein by reference.
(7) Filed as Exhibit with Form SE filed on March 26, 1992 and
incorporated herein by reference.
(8) Filed as Exhibit with Form SE filed on March 30, 1993 and
incorporated herein by reference.
(9) Filed on May 14, 1993 as Exhibit to Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1993.
(10) Filed on March 28, 1994 as Exhibit to Annual Report on Form 10-K
for the year ended December 31, 1993.
(11) Filed on March 27, 1995 as Exhibit to Annual Report on Form 10-K
for the year ended December 31, 1994.
(12) Filed on August 11, 1995 as Exhibit to Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1995.
(13) Filed on November 13, 1995 as Exhibit to Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1995.
E-2