UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
(Mark One)
 
xx QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31,June 30, 2000
 OR
OR
 
¨¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 1-4694
 
R. R. DONNELLEY && SONS COMPANY
(Exact name of registrant as specified in its charter)
 Delaware
Delaware
(State or other jurisdiction of
incorporation or organization)
36-1004130
36-1004130
(I.R.S. Employer
Identification No.)
 
77 West Wacker Drive,
Chicago, Illinois
(Address of principal executive offices)
60601
60601
(Zip Code)
 
Registrant’sRegistrant’s Telephone Number (312) 326-8000
 
               Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.
 
üü
Yes
No
 
Number of shares of common stock outstanding
    as of April 30,July 31, 2000
121,906,718121,906,661
 
PART I
 
FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
Index
    
Page
Number(s)
          
                
                                Condensed Consolidated Statements of Income (Unaudited) for the
                                        
                
            three and six months ended March 31,June 30, 2000 and 1999
    
3
 
          
                
                                Condensed Consolidated Balance Sheets as of March 31,June 30, 2000


                
                
                                        (Unaudited) and December 31, 1999
    
4
 
          
                
                                Condensed Consolidated Statements of Cash Flows (Unaudited) for
                                        
                
            the threesix months ended March 31,June 30, 2000 and 1999
    
5
 
          
                
                                Notes to Condensed Consolidated Financial Statements
                                        
                
            (Unaudited)
    
6 - 910
 
Item 2. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
 
          
                 
                                 Comparison of Second Quarter and First QuarterHalf 2000 to First Quarter
      1999
    
1011 - 1417
 
          
                 
                                 Changes in Financial Condition
    
1417 - 1518
 
          
                 
                                 Year 2000 and System Infrastructure
    
1518
 
          
                 
                                 Other Information
18 - 21
    
15 - 18
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk
21
    
18
 
PART II
 
OTHER INFORMATION
 
Item 1. Legal Proceedings
22
    
19
 
Item
        4. Submission of Matters to a Vote of Security
        Holders
    
19
 
Item 5. Other Information
22
    
19
 
Item 6. Exhibits and Reports on Form 8-K
    
2022
R.R. DONNELLEY && SONS COMPANY AND SUBSIDIARIES
 
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
(Thousands of Dollars, Except Per-Share Data)dollars, except per-share data)
 
 
    
Three Months
        Ended
      

      March 31
 
    
2000
    
1999
Net
        sales
    
$1,342,970
 
    
$
        1,231,404
 
Cost of
        sales
    
1,101,947
 
    
988,468
 
  
  
  
  
  
Gross
        profit
    
241,023
 
    
242,936
 
Selling and
        administrative expenses
    
145,882
 
    
151,361
 
  
  
  
  
  
Earnings from
        operations
    
95,141
 
    
91,575
 
Other income
        (expense):
Interest
        expense
    
(22,141
)
    
(19,896
)
Other,
        net
    
2,937
 
    
2,792
 
  
  
  
  
  
Earnings from
        continuing operations before income taxes
    
75,937
 
    
74,471
 
Income
        taxes
    
29,236
 
    
28,671
 
  
  
  
  
  
Income from
        continuing operations 
    
46,701
 
    
45,800
 
Loss from
        discontinued operations, net of income taxes
    
— 
 
    
(1,820
)
  
  
  
  
  
Net
        income
    
$      46,701
 
    
$       
         43,980
 
  
  
  
  
  
Income from
        continuing operations per share of common stock
    
    
     Basic
    
$         
         0.38
 
    
$         
           0.34
 
     Diluted
    
0.38
 
    
0.34
 
Loss from
        discontinued operations per share of common stock
    
 
    
 
     Basic
    
$         
         — 
 
    
$         
         (0.01
)
     Diluted
    
— 
 
    
(0.01
)
Net income per
        share of common stock
    
    
Basic
    
$         
         0.38
 
    
$         
           0.33
 
Diluted
    
0.38
 
    
0.33
 
 
    
Three Months Ended
June 30
    
Six Months Ended
June 30
 
    
2000
    
1999
    
2000
    
1999
Net sales
    
$1,388,805
 
    
$1,247,483
 
    
$2,731,775
 
    
$2,478,887
 
Cost of sales
    
1,119,175
 
    
988,234
 
    
2,221,122
 
    
1,976,702
 
  
  
  
  
  
  
  
  
  
Gross profit
    
269,630
 
    
259,249
 
    
510,653
 
    
502,185
 
Selling and administrative expenses
    
156,983
 
    
156,346
 
    
302,865
 
    
307,707
 
  
  
  
  
  
  
  
  
  
Earnings from operations
    
112,647
 
    
102,903
 
    
207,788
 
    
194,478
 
Other income (expense):
    
    
    
    
Interest expense
    
(24,960
)
    
(23,726
)
    
(47,101
)
    
(43,621
)
Other, net
    
3,922
 
    
8,098
 
    
6,859
 
    
10,889
 
  
  
  
  
  
  
  
  
  
Earnings from continuing operations before income
     taxes
    
91,609
 
    
87,275
 
    
167,546
 
    
161,746
 
Income taxes
    
35,269
 
    
33,601
 
    
64,505
 
    
62,272
 
  
  
  
  
  
  
  
  
  
Income from continuing operations
    
56,340
 
    
53,674
 
    
103,041
 
    
99,474
 
Loss from discontinued operations, net of income
     taxes
    
— 
 
    
(1,187
)
    
— 
 
    
(3,007
)
  
  
  
  
  
  
  
  
  
Net income
    
$      56,340
 
    
$      52,487
 
    
$    103,041
 
    
$      96,467
 
  
  
  
  
  
  
  
  
  
Income from continuing operations per share of
     common stock
    
    
    
    
     Basic
    
$          0.46
 
    
$          0.42
 
    
$          0.84
 
    
$          0.76
 
     Diluted
    
0.46
 
    
0.41
 
    
0.84
 
    
0.75
 
Loss from discontinued operations per share of
     common stock
    
    
    
    
     Basic
    
$          — 
 
    
$        (0.01
)
    
$          — 
 
    
$        (0.02
)
     Diluted
    
— 
 
    
(0.01
)
    
— 
 
    
(0.02
)
Net income per share of common stock
    
    
    
    
Basic
    
$          0.46
 
    
$          0.41
 
    
$          0.84
 
    
$          0.74
 
Diluted
    
0.46
 
    
0.40
 
    
0.84
 
    
0.73
 
 
See accompanying Notes to Condensed Consolidated Financial Statements.
R.R. DONNELLEY && SONS COMPANY AND SUBSIDIARIES
 
 
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
March 31,June 30, 2000 and December 31, 1999
(Thousands of dollars, except share data)
 
ASSETS
 
    
2000
    
1999
Cash and
        equivalents
    
$      48,270
 
    
$      41,873
 
Receivables,
        less allowance for doubtful accounts of $16,844
      

           in 2000 and $15,461 in 1999
    
842,854
 
    
865,305
 
Inventories
    
211,229
 
    
194,312
 
Prepaid
        expenses
    
113,784
 
    
51,781
 
Refundable
        income taxes
    
76,579
 
    
76,579
 
  
  
  
  
  
         
         Total current assets
    
1,292,716
 
    
1,229,850
 
  
  
  
  
  
Net property,
        plant and equipment, at cost, less accumulated depreciation of
      

           $2,883,536 in 2000 and $2,822,737 in
        1999
    
1,706,141
 
    
1,710,669
 
Goodwill and
        other intangibles, net of accumulated amortization
      

           of $229,293 in 2000 and $217,616 in
        1999
    
555,637
 
    
397,983
 
Other noncurrent
        assets
    
558,165
 
    
514,962
 
  
  
  
  
  
         
         Total assets
    
4,112,659
 
    
$3,853,464
 
  
  
  
  
  
 
LIABILITIES
        AND SHAREHOLDERS’ EQUITY
  
 
  
 
Accounts
        payable
    
$    326,239
 
    
$    334,389
 
Accrued
        compensation
    
144,962
 
    
175,590
 
Short-term
        debt
    
674,835
 
    
419,555
 
Current and
        deferred income taxes
    
20,412
 
    
10,894
 
Other accrued
        liabilities
    
308,454
 
    
263,035
 
  
  
  
  
  
         
         Total current liabilities
    
1,474,902
 
    
1,203,463
 
  
  
  
  
  
Long-term
        debt
    
752,231
 
    
748,498
 
Deferred income
        taxes
    
250,284
 
    
252,884
 
Other noncurrent
        liabilities
    
519,595
 
    
510,361
 
  
  
  
  
  
         
         Total noncurrent liabilities
    
1,522,110
 
    
1,511,743
 
  
  
  
  
  
Shareholders’ equity:
    
    
         
         Common stock at stated value ($1.25 par value)
    
    
         
              Authorized shares: 500,000,000;
        Issued 140,889,050 in 2000 and 1999
    
308,462
 
    
308,462
 
         
         Retained earnings
    
1,510,896
 
    
1,521,474
 
         
         Accumulated other comprehensive income
    
(59,181
)
    
(64,154
)
         
         Unearned compensation
    
(8,991
)
    
(6,222
)
         
         Reacquired common stock, at cost
    
(635,539
)
    
(621,302
)
  
  
  
  
  
         
                   
                  Total
        shareholders’ equity
    
1,115,647
 
    
1,138,258
 
  
  
  
  
  
         
                   
                  Total
        liabilities and shareholders’ equity
    
$4,112,659
 
    
$3,853,464
 
  
  
  
  
  
ASSETS
 
    
2000
    
1999
Cash and equivalents
    
$      56,263
 
    
$      41,873
 
Receivables, less allowance for doubtful accounts of $17,296
     in 2000 and $15,461 in 1999
    
795,771
 
    
865,305
 
Inventories
    
209,667
 
    
194,312
 
Prepaid expenses
    
82,924
 
    
51,781
 
Refundable income taxes
    
76,579
 
    
76,579
 
  
  
  
  
  
          Total current assets
    
1,221,204
 
    
1,229,850
 
  
  
  
  
  
Net property, plant and equipment, at cost, less accumulated depreciation of
     $2,927,759 in 2000 and $2,822,737 in 1999
    
1,667,572
 
    
1,710,669
 
Goodwill and other intangibles, net of accumulated amortization
     of $240,326 in 2000 and $217,616 in 1999
    
547,780
 
    
397,983
 
Other noncurrent assets
    
559,689
 
    
514,962
 
  
  
  
  
  
          Total assets
    
$3,996,245
 
    
$3,853,464
 
  
  
  
  
  
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable
    
$    297,888
 
    
$    334,389
 
Accrued compensation
    
165,632
 
    
175,590
 
Short-term debt
    
511,189
 
    
419,555
 
Current and deferred income taxes
    
41,457
 
    
10,894
 
Other accrued liabilities
    
294,371
 
    
263,035
 
  
  
  
  
  
          Total current liabilities
    
1,310,537
 
    
1,203,463
 
  
  
  
  
  
Long-term debt
    
753,955
 
    
748,498
 
Deferred income taxes
    
251,557
 
    
252,884
 
Other noncurrent liabilities
    
518,554
 
    
510,361
 
  
  
  
  
  
          Total noncurrent liabilities
    
1,524,066
 
    
1,511,743
 
  
  
  
  
  
Shareholders’ equity:
    
    
          Common stock at stated value ($1.25 par value)
    
 
    
               Authorized shares: 500,000,000; Issued 140,889,050 in 2000 and 1999
    
308,462
 
    
308,462
 
          Retained earnings
    
1,566,960
 
    
1,521,474
 
          Accumulated other comprehensive income
    
(70,012
)
    
(64,154
)
          Unearned compensation
    
(8,020
)
    
(6,222
)
          Reacquired common stock, at cost
    
(635,748
)
    
(621,302
)
  
  
  
  
  
                               Total shareholders’ equity
    
1,161,642
 
    
1,138,258
 
  
  
  
  
  
                               Total liabilities and shareholders’ equity
    
$3,996,245
 
    
$3,853,464
 
  
  
  
  
  
 
See accompanying Notes to Condensed Consolidated Financial Statements.
R.R. DONNELLEY && SONS COMPANY AND SUBSIDIARIES
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
For the ThreeSix Months Ended March 31June 30
(Thousands of dollars)
 
 
    
2000
    
1999
Cash flows
        provided by (used for) operating activities:
    
  
          Net
        income
    
$    46,701
 
    
$    43,980
 
          Loss
        from discontinued operations, net of tax
    
— 
 
    
1,820
 
         
         Depreciation
    
80,509
 
    
79,328
 
         
         Amortization
    
14,378
 
    
12,234
 
          Gain
        on sale of assets
    
(4,976
)
    
(2,985
)
          Net
        change in operating working capital
    
(85,287
)
    
(43,771
)
          Net
        change in other assets and liabilities
    
8,074
 
    
18,459
 
         
         Other
    
(3,552
)
    
1,862
  
  
  
  
  
Net Cash
        Provided by Operating Activities
    
55,847
 
    
110,927
 
  
  
  
  
  
Cash flows
        provided by (used for) investing activities:
    
    
         
         Capital expenditures
    
(56,101
)
    
 (64,393
)
         
         Other investments including acquisitions, net of cash
        acquired
    
(207,343
)
    
(52,465
)
         
         Dispositions of assets
    
5,222
 
    
— 
 
  
  
  
  
  
Net Cash Used
        For Investing Activities
    
 (258,222
)
    
(116,858
)
  
  
  
  
  
Cash flows
        provided by (used for) financing activities:
    
    
          Net
        increase in borrowings
    
256,042
    
166,450
 
         
         Issuances of common stock
    
860
 
    
1,464
 
         
         Acquisition of common stock
    
 (21,361
)
    
 (123,559
)
          Cash
        dividends paid
    
(26,926
)
    
(28,017
)
  
  
  
  
  
Net Cash
        Provided by Financing Activities
    
208,615
 
    
16,338
  
  
  
  
  
Effect of
        exchange rate changes on cash and equivalents
    
157
 
    
(1,635
)
  
  
  
  
  
Net Increase in
        Cash and Equivalents
    
6,397
 
    
8,772
 
Cash and
        Equivalents at Beginning of Period
    
41,873
 
    
66,226
 
  
  
  
  
  
Cash and
        Equivalents at End of Period
    
$    48,270
 
    
$    74,998
 
  
  
  
  
  
 
    
2000
    
1999
Cash flows provided by (used for) operating activities:
    
  
          Net income
    
$  103,041
 
    
$    96,467
 
          Loss from discontinued operations, net of tax
    
— 
 
    
3,007
 
          Depreciation
    
161,660
 
    
159,320
 
          Amortization
    
28,301
 
    
22,538
 
          Gain on sale of assets
    
(6,045
)
    
(2,985
)
          Net change in operating working capital
    
(13,531
)
    
(8,519
)
          Net change in other assets and liabilities
    
18,776
 
    
27,297
 
          Other
    
8,605
 
    
(17,346
)
  
  
  
  
  
Net Cash Provided by Operating Activities
    
300,807
 
    
279,779
 
  
  
  
  
  
Cash flows provided by (used for) investing activities:
    
    
          Capital expenditures
    
(122,535
)
    
(133,173
)
          Other investments including acquisitions, net of cash acquired
    
(211,529
)
    
(155,966
)
          Dispositions of assets including investments, net of cash
    
22,289
 
    
— 
 
  
  
  
  
  
Net Cash Used for Investing Activities
    
 (311,775
)
    
 (289,139
)
  
  
  
  
  
Cash flows provided by (used for) financing activities:
    
    
          Net increase in borrowings
    
100,565
 
    
291,097
 
          Issuances of common stock
    
1,957
 
    
14,274
 
          Acquisition of common stock
    
(21,878
)
    
(254,520
)
          Cash dividends paid
    
(53,879
)
    
(55,340
)
  
  
  
  
  
Net Cash Provided by (Used for) Financing Activities
    
26,765
 
    
(4,489
)
  
  
  
  
  
Effect of exchange rate changes on cash and equivalents
    
(1,407
)
    
(2,003
)
Net Change in Cash and Equivalents
    
14,390
 
    
(15,852
)
Cash and Equivalents at Beginning of Period
    
41,873
 
    
66,226
 
  
  
  
  
  
Cash and Equivalents at End of Period
    
$    56,263
 
    
$    50,374
 
  
  
  
  
  
 
See accompanying Notes to Condensed Consolidated Financial Statements.
R.R. DONNELLEY && SONS COMPANY AND SUBSIDIARIES
 
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
               NOTE 1. The condensed consolidated financial statements included herein are unaudited (although the balance sheet at December 31, 1999 is condensed from the audited balance sheet at that date) and have been prepared by the company to conform with the requirements applicable to this quarterly report on Form 10-Q. Certain information and disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been omitted as permitted by such requirements. However, the company believes that the disclosures made are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in the company’scompany’s 1999 Annual Report on Form 10-K.
 
               The condensed consolidated financial statements included herein reflect, in the opinion of the company, all adjustments (which include only normal, recurring adjustments) necessary to present fairly the financial information for such periods. Certain prior year amounts have been reclassified to maintain comparability with current year classifications.
 
               NOTE 2. Components of the company’scompany’s inventories at March 31,June 30, 2000, and December 31, 1999, were as follows:
 
    
(Thousands of
Dollars)
 
    
2000
    
1999
Raw materials and manufacturing supplies
    
$124,175
 
    
$125,014
 
Work in process
    
177,072
 
    
150,992
 
Finished goods
    
1,446
 
    
1,388
 
Progress billings
    
(46,544
)
    
(39,901
)
LIFO reserve
    
(46,482
)
    
(43,181
)
  
  
  
  
  
                    Total
    
$209,667
 
    
$194,312
 
  
  
  
  
  
 
        NOTE 3. The following provides supplemental cash flow information:
 
 
    
(Thousands of
Dollars)
 
    
Six Months Ended
June 30
 
    
2000
    
1999
Interest paid
    
$  46,786
 
    
$  37,101
 
Income taxes paid
    
$  25,704
 
    
$  22,016
 
        
 
    
(Thousands of
      

      Dollars)
 
    
2000
    
1999
Raw materials
        and manufacturing supplies
    
$122,108
 
    
$125,014
 
Work in
        process
    
176,386
 
    
150,992
 
Finished
        goods
    
1,813
 
    
1,388
 
Progress
        billings
    
(43,848
)
    
(39,901
)
LIFO
        reserve
    
(45,230
)
    
(43,181
)
  
  
  
  
  
         
                  
         Total
    
$211,229
 
    
$194,312
 
  
  
  
  
  
 
        NOTE
      3. The following provides supplemental cash flow information:
 
 
    
(Thousands of
       

       Dollars)
 
    
Three Months
         Ended
       

       March 31
 
    
2000
    
1999
Interest
         paid
    
$    8,077
 
    
$    5,693
 
Income taxes
         paid
    
$  16,367
 
    
$  10,508
 
 
        NOTE
        4. On November 25, 1996, a purported class action was brought against the company in federal district court in Chicago, Illinois, on behalf of all current and former African-American employees, alleging that the company racially discriminated against them in violation of the Civil Rights Act of 1871, as amended, and the U.S. Constitution (Jones, et al. v. R.R. Donnelley && Sons Co.). The complaint seeks declaratory and injunctive relief, and asks for actual, compensatory, consequential and punitive damages in an amount not less than $500 million. Although plaintiffs seek nationwide class certification, most of the specific factual assertions of the complaint relate to the closing by the company of its Chicago catalog operations in 1993. Other general claims relate to other company locations. On August 10, 1999, the district court judge denied the company’scompany’s motion for partial summary judgment on the basis of timeliness.
 
R.R. DONNELLEY && SONS COMPANY AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS—(Continued)
 

                      On December 18, 1995, a class action was filed against the company in federal district court in Chicago alleging that older workers were discriminated against in selection for termination upon the closing of the Chicago catalog operations (Gerlib, et al. v. R.R. Donnelley && Sons Co.). The suit also alleges that the company violated the Employee Retirement Income Security Act (ERISA) in determining benefits payable to retiring or terminated employees. On August 14, 1997, the court certified classes in both the age discrimination and ERISA claims limited to former employees of the Chicago catalog operations.
 
               On June 30, 1998, a purported class action was filed against the company in federal district court in Chicago on behalf of current and former African-American employees, alleging that the company racially discriminated against them in violation of Title VII of the Civil Rights Act of 1964 (Adams, et al. v. R.R. Donnelley && Sons Co.). While making many of the same general discrimination claims contained in theJonescomplaint, theAdamsplaintiffs are also claiming retaliation by the company for the filing of discrimination charges or otherwise complaining of race discrimination. The complaint seeks the same relief and damages as sought in theJonescase.
        
        Both theJonesandGerlibcases relate primarily to the circumstances surrounding the closing of the Chicago catalog operations. The company believes that it acted properly in the closing of the operations. Further, with regard to all three cases, the company believes it has a number of valid defenses to all of the claims made and will vigorously defend its actions. However, management is unable to make a meaningful estimate of any loss that could result from an unfavorable outcome of any of the pending cases.
 
               In December 1999, the U.S. Environmental Protection Agency, Region 5 (U.S. EPA) issued a Notice of Violation against the company, pursuant to Section 113 of the Clean Air Act (the Act). The notice alleges that the company’scompany’s facility in Willard, Ohio, violated the Act and Ohio’sOhio’s State Implementation Plan in installing and operating certain equipment without appropriate air permits. While the notice does not specify the remedy sought, upon final determination of a violation, U.S. EPA may issue an administrative order requiring the installation of air pollution control equipment, assess penalties, or commence civil or criminal action against the company. The company responded to U.S. EPA on March 10, 2000. The company does not believe that any unfavorable result of this proceeding will have a material impact on the company’scompany’s financial position or results of operations.
 
               In addition, the company is a party to certain litigation arising in the ordinary course of business which, in the opinion of management, will not have a material adverse effect on the operations or financial condition of the company.
        
        NOTE 5. The company adopted Statement of Financial Accounting Standards (SFAS) No. 130,Reporting Comprehensive Incomein 1998. This statement reports changes in shareholders’shareholders’ equity that result from either recognized transactions or other economic events, excluding capital stock transactions, which impact shareholders’shareholders’ equity. For the company, the only difference between net income and comprehensive income was the effect of the change in unrealized foreign currency translation gains (losses) as follows:
 
    
(Thousands of Dollars)
    
(Thousands of Dollars)
 
    
Three Months Ended
June 30
    
Six Months Ended
June 30
 
    
2000
    
1999
    
2000
    
1999
Net income
    
$  56,340
 
    
$52,487
 
    
$103,041
 
    
$96,467
 
Unrealized foreign currency gain (loss)
    
 (10,829
)
    
(846
)
    
(5,856
)
    
(8,134
)
  
    
  
    
  
    
  
    
  
Comprehensive income
    
$  45,511
 
    
$51,641
 
    
$  97,185
 
    
$88,333
 
  
    
  
    
  
    
  
    
  
 
 
    
(Thousands of Dollars)
 
    
Three Months Ended
       

       March 31
 
    
2000
    
1999
Net
         income
    
$46,701
    
$43,980
 
Unrealized
         foreign currency gain (loss)
    
4,973
    
(7,288
)
  
    
    
  
Comprehensive
         income
    
51,674
    
36,692
 
  
    
    
  
 
R.R. DONNELLEY && SONS COMPANY AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS—(Continued)
        

               NOTE 6. The company operates primarily within the commercial print portion of the printing industry, with related service offerings designed to offer customers complete solutions for communicating their messages to target audiences. Substantially all revenues within commercial printing result from the sale of printed products and services to customers in the following end-markets: Long-Run Magazines, Catalogs and Inserts; Book Publishing Services; Financial Services; Telecommunications; Short-Run Magazines and Catalogs (served by our Specialized Publishing Services operation); and International, which provides similar products and services.services outside the United States. The company’scompany’s Premedia services, which include capturing content, converting it to the appropriate format and channeling it to multiple communications media, are included within the reportable segment “Commercial Print”.“Commercial Print.”
 
               R.R. Donnelley Logistics Services (Donnelley Logistics) represents the company’scompany’s logistics and distribution services operation for its print customers and other mailers. Donnelley Logistics serves its customers by consolidating and delivering printed product and parcels to the U.S. Postal Service closer to the final destination, thereby resulting in reduced postage costs and improved delivery performance. Following the company’scompany’s acquisition of certain net assets of CTC Distribution Services LLC (CTC) in February 2000, the combined operations of Donnelley Logistics and CTC are nowhave been included within the reportable segment “Logistics Services”“Logistics Services” for the quarterthree and six months ended March 31,June 30, 2000. Prior year amounts have also been restated to reflect the current year presentation. Refer to Note 89 for additional information regarding the acquisition of CTC.
 
               In connection with the acquisition of CTC, the company has changed its presentation of reported operating results for Donnelley Logistics. Previously, net sales of Donnelley Logistics were classified net of transportation costs. For the quarterthree and six months ended March 31,June 30, 2000, the company reported net sales for Logistics Services on a gross basis, without deducting transportation costs. Cost of sales for Logistics Services now includes the cost of transportation. The effect of this change for the quarterthree and six months ended March 31,June 30, 1999, was to increase both net sales and cost of sales by $52 million;$52.3 million and $103.9 million, respectively; there was no impact on gross profit or earnings (loss) from operations.
 
        Since        For the date of
       acquisition,three and six months ended June 30, 2000, Logistics Services’Services’ operating results include net sales from CTC of $65$86 million and a loss from operations (and loss from
       continuing operations before income taxes) of $2.3 million.$150 million, respectively.
 
               The company has disclosed earnings (loss) from operations as the primary measure of segment earnings (loss). This is the measure of profitability used by the company’scompany’s chief operating decision-maker that is most consistent with the presentation of profitability reported within the consolidated financial 
statements. The accounting policies of the business segments reported are the same as those described in the “Summary“Summary of Significant Accounting Policies”Policies” (F-6 in the 1999 Annual Report on Form 10-K).
R.R. DONNELLEY && SONS COMPANY AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS—(Continued)
 
 
Industry Segment Information
 
In Thousands
         
  
Commercial
       

       Print
  
Logistics
       

       Services
  
Other
         (1)
  
Corporate
  
Discontinued
       

       Operations (2)
  
Consolidated
       

       Total
First
         Quarter Ended March 31,
       

            2000
  
  
  
  
  
  
Net
         sales
  
$1,188,675
  
$149,251
 
  
$  5,044
 
  
$    —  
 
  
$   —  
  
$1,342,970
Earnings (loss)
         from operations
  
94,539
  
(606
)
  
(3,884
)
  
5,092
 
  
—  
  
95,141
Earnings (loss)
         from continuing
       

            operations before income taxes
  
99,287
  
(648
)
  
(3,838
)
  
(18,864
)
  
—  
  
75,937
Assets
  
3,087,910
  
238,888
 
  
14,454
 
  
771,407
 
  
—  
  
4,112,659
 
 
First
         Quarter Ended March 31,
       

            1999
Net
         sales
  
$1,107,891
  
$  62,095
 
  
$61,418
 
  
$        —
           
 
  
$      — 
          
  
$1,231,404
Earnings (loss)
         from operations
  
93,605
  
1,480
 
  
(305
)
  
(3,205
)
  
—  
  
91,575
Earnings (loss)
         from continuing
       

            operations before income taxes
  
93,617
  
1,480
 
  
(681
)
  
(19,945
)
  
—  
  
74,471
Assets
  
2,963,134
  
36,408
 
  
96,950
 
  
 686,985
 
  
 42,517
  
3,825,994
In Thousands
  
Commercial
Print
  
Logistics
Services
  
Other (1)
  
Corporate
  
Discontinued
Operations (2)
  
Consolidated
Total
Second Quarter Ended June 30,
     2000
  
  
  
  
  
  
Net sales
  
1,226,213
  
157,524
 
  
5,068
 
  
— 
 
  
— 
  
1,388,805
Earnings (loss) from operations
  
111,816
  
(467
)
  
(8,938
)
  
10,236
 
  
— 
  
112,647
Earnings (loss) from continuing
     operations before income taxes
  
117,567
  
(500
)
  
(9,998
)
  
(15,460
)
  
— 
  
91,609
 
Second Quarter Ended June 30,
     1999
  
  
  
  
  
  
Net sales
  
1,127,158
  
63,440
 
  
56,885
 
  
— 
 
  
— 
  
1,247,483
Earnings (loss) from operations
  
95,318
  
1,334
 
  
(876
)
  
7,127
 
  
— 
  
102,903
Earnings (loss) from continuing
     operations before income taxes
  
102,834
  
1,334
 
  
(1,011
)
  
(15,882
)
  
— 
  
87,275
 
Six Months Ended June 30,
     2000
  
  
  
 
  
  
  
Net Sales
  
2,414,888
  
306,774
 
  
10,113
 
  
— 
 
  
— 
  
2,731,775
Earnings (loss) from operations
  
206,288
  
(1,073
)
  
(12,755
)
  
15,328
 
  
— 
  
207,788
Earnings (loss) from continuing
     operations before income taxes
  
216,787
  
(1,149
)
  
(13,768
)
  
(34,324
)
  
— 
  
167,546
Assets
  
3,008,302
  
228,420
 
  
22,420
 
  
737,103
 
  
— 
  
3,996,245
 
Six Months Ended June 30,
     1999
  
  
  
  
  
  
Net Sales
  
2,235,049
  
125,535
 
  
118,303
 
  
— 
 
  
— 
  
2,478,887
Earnings (loss) from operations
  
188,923
  
2,813
 
  
(1,180
)
  
3,922
 
  
— 
  
194,478
Earnings (loss) from continuing
     operations before income taxes
  
196,450
  
2,813
 
  
(1,692
)
  
(35,825
)
  
— 
  
161,746
Assets
  
3,057,794
  
35,222
 
  
93,734
 
  
637,906
 
  
40,582
  
3,865,238
(1)
Represents other operating segments of the company, including Red Rover Digital, Inc., the company’s wholly-owned subsidiary and formerly its Online Services division, which assists customers in the delivery of content and commerce online. First quarter 1999 also includes the results of operations and assets of Stream International (refer to “Divestitures”“Divestitures” in Item 2).
(2)
 
(2)
Refer to discussion of “Discontinued Operations”“Discontinued Operations” in Item 2, which describes the separate presentation of the net assets and results of operations of discontinued operations.
        
        NOTE 7. The company has used corporate-owned life insurance (COLI) to fund employee benefits for several years. In 1996, the United States Health Care Reform Act was passed, eliminating the deduction for interest from loans borrowed against COLI programs. 1998 was the final year of the phase-out for deductions. The Internal Revenue Service (IRS), in its routine audit of the company, has disallowed the $34 million of tax benefit that result from the COLI interest deductions claimed by the company in its 1990 to 1992 tax returns. The company has challenged this position in a formal protest filed with the IRS Appeals division.
 
               On October 19, 1999, in a case involving a different corporate taxpayer, the U.S. Tax Court disallowed deductions for loans against that taxpayer’staxpayer’s COLI program. Litigation involving other taxpayers also is pending in other courts. Should the position of the U.S. Tax Court be upheld and applied to others, the company could lose an additional maximum of $152 million in tax benefits for periods from 1993 through 1998. In addition, should all or a portion of the company’scompany’s COLI deductions ultimately be disallowed, the company would be liable for interest on those amounts. The company’scompany’s maximum exposure for interest should all prior COLI deductions be disallowed is approximately $55$58 million after-tax through March 31,June 30, 2000.
 
               The company believes that its circumstances differ from those involved in the recent Tax Court decision. During the fourth quarter of 1999, however, the company recorded an additional tax provision of $51 million ($0.40 per diluted share) related to COLI. The company will continue to examine its position with respect to the Tax Court opinion and resolution of other pending cases. The ultimate resolution of these issues may have a material impact on the company’scompany’s results of operations and financial condition.
        NOTE 8. The following summarizes share information as a basis for both the basic and diluted earnings per share computation in accordance with SFAS No. 128,Earnings per Share:
    
In Thousands
    
Three Months
Ended June 30,
    
Six Months Ended
June 30,
    
2000
    
1999
    
2000
    
1999
Average shares outstanding—basic
    
121,907
    
129,450
    
122,040
    
131,157
Effect of dilutive securities
    
1,211
    
1,151
    
980
    
1,475
  
  
  
  
  
Average shares outstanding—diluted
    
123,118
    
130,601
    
123,020
    
132,632
  
  
  
  
  
               NOTE 8.9. On February 7, 2000, the company acquired certain net assets of CTC, the largest mailer of business-to-home parcels in the U.S.,United States, for approximately $160$161 million, net of cash acquired. CTC, based in Minneapolis, Minnesota,Minn., has 18 facilities nationwide. The acquisition has been accounted for using the purchase method of accounting. The purchase price has been allocated based upon estimated fair values at date of acquisition, pending final determination of acquired balances. Goodwill from this transaction of approximately $150 million (based upon the preliminary purchase price allocation) is being amortized over a 20
       year20-year period.
        NOTE 10. In July 2000, the Emerging Issues Task Force reached a final consensus on the classification of shipping and handling fees (Issue No. 00-10,“Accounting for Shipping and Handling Fees and Costs”). This consensus states that all amounts billed to a customer in a sale transaction related to shipping and handling, if any, represent revenue to the vendor and should be classified as revenue. The implementation date of this standard is fourth quarter 2000. The company does not believe that the new standard will have a material impact on the reporting of its segments.
Item 2
 
Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
 
Comparison of Second Quarter and First QuarterSix Months of 2000 to First Quarter 1999
 
About the Company
 
               R.R. Donnelley && Sons Company is a premier provider ofleading commercial printing,
       informationprinter, communications services and logistics.logistics company. We help our customers communicate more efficiently and effectively as they use words and images to inform, educate, entertain and sell. In each of our businesses, we use our distinctive capabilities to manage and distribute words and images in ways that provide the greatest value to every customer. Our common stock (NYSE: DNY) has been publicly traded since 1956. At the end of MarchJune 2000, we had approximately 34,000 employees on four continents. We have
       55 manufacturing plants withoffer a broadfull range of capabilitiesintegrated service solutions to serve our customers’ needs.customers’ needs from over 100 manufacturing, service and logistics locations. While we have extended our core competencies into selected international markets, 88%89% of our revenue is currently generated in the United States.
 
               Printing in the United States is a large and fragmented industry that generates more than $150 billion in annual revenue. The commercial printing portion of the industry accounts for more than $80 billion in annual revenue. The commercial printing end-markets that we currently serve generate more than $40 billion in annual revenue.
 
               We are first or second in annual revenue in all five of our primary end-markets:
 
               Long-Run Magazines, Catalogs and Inserts——serving the consumer and business-to-business catalog, magazine and advertising markets;
 
               Book Publishing Services——serving the trade, children’s,children’s, religious, professional and educational book markets;
 
               Financial Services——serving the global communication needs of the financial markets and mutual fund companies, as well as the banking, insurance and health care industries;
        
       
        Telecommunications——serving the global directory needs of telecommunications providers; and
 
               Specialized Publishing Services——serving the needs of publishers of short-run magazines and catalogs.
 
        Given the
       competitive nature of the U.S. commercial printing industry, our intent
       is to differentiate ourselves based on our service offerings. Our
       related services, designed to offer our customers complete solutions for
       communicating their messages to target audiences regardless of the means
       of distribution, include:
 
       
        Premedia—capturing content, converting it to the
       appropriate format and channeling it to multiple communications media,
       including print and the Internet;
 
        Online
       Services—helping customers effectively leverage the Internet
       and their established brands by delivering content and commerce online;
       and
 
        Logistics
       Services—delivering parcels and printed products, primarily via
       the U.S. Postal Service, more efficiently, saving significant amounts of
       time and money.
 
               We believe print is a vital component of the communications process and expect the print market to grow due to its unique capabilities, such as portability and high-quality graphics that cannot be duplicated by other communications methods. In addition, we see opportunities to create and expand complementary businesses that leverage our core competencies and help our customers succeed. Our intent is to differentiate ourselves based on our service offerings. Our related services, designed to offer our customers complete solutions for communicating their messages to target audiences regardless of the means of distribution, include:
        Premedia—capturing content, converting it to the appropriate format and channeling it to multiple communications media, including print and the Internet;
               Logistics Services—more efficiently delivering parcels and printed products through a nationwide network and the U.S. Postal Service, as well as expedited delivery capabilities, saving significant amounts of time and money; and
Red Rover Digital, Inc.—helping customers effectively leverage the Internet and their established brands by delivering content and commerce online.
        Our objective is to create above-average shareholder value through our strategies to:
 
··
transform our core printing businesses;businesses through process variability reduction and continuous improvement;
 
··
speed growth in our high-valueservice-oriented businesses; and
 
··
logically extend into complementary businesses.
businesses which leverage our customer relationships and capabilities.
 
               The new business opportunities that we pursue will leverage our established strengths and will further our goal of managing and distributing words and images to help our customers succeed in informing, educating, entertaining and selling.
 
               Our distinctive
       capabilitiesestablished strengths include:
 
··
relationships
         with customers who are the leaders in their respective
         industries;long-standing customer relationships;
 
··
a strong brand and reputation for quality, service and service;reliability;
 
··
standing as a trusted, neutral partner who recognizes the critical importance of
         protecting the confidentially of customer content;partner;
 
··
expertise in handling digital content;content management;
 
··
scale to
         partner with best-of-class providers and deliver economical solutions for our customers; and
 
··
technology to seamlessly help our customers deliver their messages through various communications channels.channels; and
·
diversified portfolio of businesses and platforms to meet the most demanding customer needs.
 
               In addition to our U.S. operations, we operate in Mexico, South America, Europe and China. For reporting purposes, revenues from our facilities in China and England serving primarily the directory market are reported within Telecommunications. One of our facilities in Mexico serves the book market and is reported within Book Publishing Services. Revenue from our other two facilities in Mexico that serve primarily the magazine market, as well as revenues from our facilities in Poland and South America, which serve more than one market, are included in International. The “Other”“Other” classification within Commercial Print includes net sales from Premedia and RRD Direct, which supplies direct mail products and services.
 
               While our manufacturing plants, financial service centersoperations and sales offices are located throughout the United States and selected international markets, the supporting technologies and knowledge base are common. Our locationsmanufacturing plants have a range of production capabilities to serve our customers and end-markets. We manufacture products with the operational goal of
       optimizing the efficiency of the common manufacturingend-markets, and distribution
       platform. Asas a result, most plants produce work for customers in two or
       threemore than one of our end-markets.
 
Net Sales by End-Market
Second Quarter Ended June 30
(Thousands of Dollars)
    
2000
    
% of Total
    
1999
    
% of Total
Long-Run Magazines, Catalogs and Inserts
    
$    423,722
 
    
30.5%
    
$    409,262
 
    
32.8%
Telecommunications
    
192,598
 
    
13.9%
    
192,909
 
    
15.5%
Book Publishing Services
    
195,523
 
    
14.1%
    
177,307
 
    
14.2%
Financial Services
    
206,803
 
    
14.9%
    
173,479
 
    
13.9%
International
    
75,235
 
    
5.4%
    
61,240
 
    
4.9%
Specialized Publishing Services
    
65,474
 
    
4.7%
    
47,941
 
    
3.8%
Other
    
66,858
 
    
4.8%
    
65,020
 
    
5.2%
  
  
  
  
  
  
  
Total Commercial Print
    
1,226,213
 
    
88.3%
    
1,127,158
 
    
90.3%
Logistics Services
    
157,524
 
    
11.3%
    
63,440
 
    
5.1%
Other
    
5,068
 
    
0.4%
    
56,885
 
    
4.6%
  
  
  
  
  
  
  
Total Net Sales
    
$1,388,805
 
    
100.0%
    
$1,247,483
 
    
100.0%
  
  
  
  
  
  
  
  
  
Cost of materials
    
(441,596
)
    
    
(417,049
)
    
Cost of transportation
    
(125,032
)
    
    
(49,883
)
    
  
  
  
  
  
  
  
  
  
          Total Value-Added Revenue
    
$    822,177
 
    
    
$    780,551
 
    
 
  
  
  
  
  
  
  
  
  
Six Months Ended June 30
(Thousands of Dollars)
    
2000
    
% of Total
    
1999
    
% of Total
Long-Run Magazines, Catalogs and Inserts
    
$    874,731
 
    
32.0%
    
$    852,156
 
    
34.4%
Telecommunications
    
402,718
 
    
14.7%
    
400,497
 
    
16.2%
Book Publishing Services
    
377,555
 
    
13.8%
    
347,327
 
    
14.0%
Financial Services
    
342,912
 
    
12.6%
    
304,733
 
    
12.3%
International
    
157,470
 
    
5.8%
    
120,579
 
    
4.9%
Specialized Publishing Services
    
128,461
 
    
4.7%
    
94,645
 
    
3.8%
Other
    
131,041
 
    
4.8%
    
115,112
 
    
4.6%
  
  
  
  
  
  
  
Total Commercial Print
    
2,414,888
 
    
88.4%
    
2,235,049
 
    
90.2%
Logistics Services
    
306,774
 
    
11.2%
    
125,535
 
    
5.1%
Other
    
10,113
 
    
0.4%
    
118,303
 
    
4.7%
  
  
  
  
  
  
  
Total Net Sales
    
$2,731,775
 
    
100.0%
    
$2,478,887
 
    
100.0%
  
  
  
  
  
  
  
  
  
Cost of materials
    
(904,980
)
    
    
(846,063
)
    
Cost of transportation
    
(247,110
)
    
    
(98,882
)
    
  
  
  
  
  
  
  
  
  
          Total Value-Added Revenue
    
$1,579,685
 
    
 
    
$1,533,942
 
    
 
  
  
  
  
  
  
  
  
  
 
First
         Quarter Ended March 31
       

       (Thousands of Dollars)
    
2000
    
% of
         Total
    
1999
    
% of
         Total
Long-Run
         Magazines, Catalogs and Inserts
    
$    451,008
 
    
33.6
%
    
$    442,894
 
    
36.0
%
Telecommunications
    
210,120
 
    
15.6
%
    
207,588
 
    
16.9
%
Book Publishing
         Services
    
182,032
 
    
13.6
%
    
170,019
 
    
13.8
%
Financial
         Services
    
136,109
 
    
10.1
%
    
131,254
 
    
10.6
%
International
    
82,235
 
    
6.1
%
    
59,340
 
    
4.8
%
Specialized
         Publishing Services
    
62,987
 
    
4.7
%
    
47,544
 
    
3.9
%
Other
    
64,184
 
    
4.8
%
    
49,252
 
    
4.0
%
  
  
  
  
  
  
  
  
  
Total
         Commercial Print
    
1,188,675
 
    
88.5
%
    
1,107,891
 
    
90.0
%
Logistics
         Services
    
149,251
 
    
11.1
%
    
62,095
 
    
5.0
%
Other
    
5,044
 
    
0.4
%
    
61,418
 
    
5.0
%
  
  
  
  
  
  
  
  
  
Total Net
         Sales
    
$1,342,970
 
    
100.0
%
    
$1,231,404
 
    
100.0
%
  
  
  
  
  
  
  
  
  
  
  
Cost of
         materials
    
(463,384
)
    
 
    
(429,014
)
    
Cost of
         transportation
    
(122,078
)
    
    
(48,999
)
    
  
  
  
  
  
  
  
  
  
  
  
         
          Total Value-Added Revenue
    
$    757,508
 
    
 
    
$    753,391
 
    
  
  
  
  
  
  
  
  
  
  
  
 
Consolidated Results of Operations
 
               For the firstsecond quarter, we reported net income from continuing operations of $47was $56 million in 2000, or $0.38$0.46 per diluted share, compared with net income$54 million in 1999, or $0.41 per diluted share. The 12% increase over 1999 in earnings per diluted share from continuing operations for the second quarter reflected lower average shares outstanding, as well as an increase in earnings from operations. Earnings per diluted share from continuing operations of $44 million in 1999, or $0.34 per diluted
       share. Earnings per diluted share of $0.34$0.41 in the firstsecond quarter of 1999 included a $0.01 favorable impact from Stream International (Stream); refer to “Divestitures”. The first“Divestitures.”
        Earnings from operations rose $10 million, or 9%, to $113 million in the second quarter effective tax rate
       for both yearsof 2000 from the same period a year ago. This increase was 38.5%. The 12% increase in earnings per share from
       continuing operations reflecteddriven primarily by the benefitstrength of our share repurchase
       activity,Long-Run Magazines, Catalogs and Inserts and Book Publishing Services operations, as well as higher net income from continuing
       operations.
 
        Earnings from
       operations increased 4%lower administrative expenses related to $95 millionYear 2000, partially offset by additional systems investments and growth-related expenditures. Second quarter 2000 also saw a rebound in theFinancial Services’ domestic capital markets after a slower first quarter of 2000.quarter. For comparative purposes, earnings from operations were up 11% in the second quarter of 2000, excluding the impact of Stream in 1999.
        For the first half of the year, net income from continuing operations was $103 million in 2000, or $0.84 per diluted share, compared with net income from continuing operations of $99 million in 1999, increased 6%or $0.75 per diluted share. The 12% increase over 1999 in earnings per diluted share from continuing operations for the first quarterhalf reflected lower average shares outstanding, as well as an increase in earnings from operations. Earnings per diluted share from continuing operations of 2000.$0.75 in the first half of 1999 included a $0.01 favorable impact from Stream. The effective tax rate throughout the first half of both years was 38.5% .
        Earnings from operations rose $13 million, or 7%, to $208 million in the first half of 2000 from the same period a year ago. This first half increase was due toalso driven primarily by the strength of our core commercial printLong-Run Magazines, Catalogs and Inserts and Book Publishing Services operations, during the first
       quarter of 2000, as well as lower administrative expenses from reducedrelated to Year 2000, despite additional systems investments and growth-related expenditures. Higher interest expense duringFor comparative purposes, earnings from operations were up 9% in the first quarterhalf of 2000, reflected our increased borrowings to fund acquisitions and
       working capital.excluding the impact of Stream in 1999.
 
        First quarter
       1999 consolidated        Consolidated earnings per diluted share in 1999 of $0.33$0.40 for the second quarter and $0.73 for the first half included a ($0.01) loss from discontinued operations of $0.01 and $0.02, respectively (refer to “Discontinued
       Operations”“Discontinued Operations”).
 
Consolidated Net Sales and Value-Added Revenue
 
               Net sales, which includes materials such as paper and ink, increased $112$141 million in the firstsecond quarter of 2000, or 9%11%, from a year ago. FirstSecond quarter net sales for the Commercial Print segment were up 7%9% from a year ago. The level of net sales, particularly for our Long-Run Magazine, Catalogs and Inserts market,operations is impacted by the amount of pass-through material sales. Firstsales and paper prices. Second quarter net sales for Long-Run Magazine, Catalogs and Inserts increased 2%4% from the prior year, which reflected increased volume in the retail and magazine markets, and higher paper prices, offset in part by a lower volume of pass-through material sales. Paper prices for the second quarter of 2000 for major grades of paper used within the Long-Run Magazine, Catalogs and Inserts operations were up approximately 6% from a year ago. Second quarter net sales for Telecommunications were essentially flat compared with the prior year, as an increase in domestic and international directory volumes was offset by a reduction in non-directory volumes. Book Publishing Services’ second quarter net sales increased 10%, primarily reflecting higher volumes within the educational market and improved price/mix due to an increase in hardcover books. Financial Services’ second quarter net sales, a record high, were up 19% from a year ago primarily due to volume increases in both the international and domestic capital markets, as well as in investor communications.
        Net sales increased $253 million in the first half of 2000, or 10% from a year ago. Year-to-date net sales for the Commercial Print segment were up 8% from a year ago. Year-to-date net sales for Long-Run Magazine, Catalogs and Inserts increased 3% from the prior year, which reflected volume increases across all major markets and higher paper prices, offset in part by a lower volume of pass-through material sales. Paper prices duringfor the first quarterhalf of 2000 for major grades of paper employed within the Long-Run Magazine, Catalogs and Inserts market were up approximately 1%3% from a year ago. First quarter
       netNet sales for the first half of 2000 for Telecommunications were essentially flat compared with the prior year, as an increase in domestic and international directory volumes was offset by a reduction in non-directory volumes. Book Publishing Services’ first
       quarterServices’ year-to-date net sales increased 7%9%, primarily reflectingdriven by higher volumes within the consumer and educational markets. Financial Services’
       first quarterServices’ year-to-date net sales were up 4%13% from a year ago, primarily due to the strength of its international operations.second quarter volume increases noted above. Financial Services’Services’ domestic net sales were negatively impacted by a slowdown in capital markets activity late in 1999 due to Year 2000 concerns, which affected early first quarter billings, and greater overall market volatility. CapitalDomestic capital market billings rebounded by March 2000.
 
        First        Second quarter and year-to-date net sales in 2000 for the Logistics Services segment more than doubled from a year ago, primarily due to the acquisition of CTC on February 7, 2000 (refer to Note 8)9). Since the date of acquisition, CTC has contributed approximately $65$86 million and $150 million, respectively, in net sales.sales for the three and six months ended June 30, 2000. As discussed in Note 6, first
       quarter net sales in 1999 for Donnelley Logistics have been restated to reflect sales on a gross basis, before deducting transportation costs.
 
               For comparative purposes, firstsecond quarter and year-to-date net sales in 1999 included approximately $59$54 million and $112 million, respectively, of sales related tofrom Stream, which we divested in the fourth quarter of 1999 (refer to “Divestitures”“Divestitures”).
 
               The price of paper can be volatile. In periods of rising prices, our net sales and cost of materials increase; in periods of falling prices, our net sales and material costs decline. For some customers, we purchase paper and pass through this cost at a margin that is lower than print and other related-services; other customers furnish their own paper. Customer-furnished paper is not included in our financial results. With respect to Logistics Services, transportation costs are passed through to our customers and therefore are included in our net sales. Value-added revenue represents net sales, less the cost of materials (principally paper and ink), and less the cost of transportation related to Logistics Services. Value-added revenue eliminates the effects of material prices and transportation costs that are largely beyond our control.
 

                      For the firstsecond quarter of 2000, value-added revenue increased 1%5% from a year ago; excluding Stream in 1999, value-added revenue increased 9%13% from a year ago. Of this 9%13% increase, excluding Stream, 5% was due to acquisitions.
        For the first half of 2000, value-added revenue increased 3% from a year ago; excluding Stream in 1999, value-added revenue increased 11% from a year ago. Of this 11% increase, 5% was due to acquisitions.
 
Consolidated Expenses
 
               Gross profit for the firstsecond quarter of 2000 fellrose by 1%4% to $241$270 million, compared with $243$259 million a year ago. Gross profit as a percentage of net sales fell to 17.9%19.4% from 19.7%20.8% a year ago. The Logistics Services segment, which reflects lower gross margins than commercial print,Commercial Print, represented a higher proportion of consolidated net sales in the firstsecond quarter of 2000 (11% versus 5% a year ago)ago for both the quarter and year-to-date). TheThis decrease in gross margin was also due to a
       decrease within Financial Services because of a slowdown in domestic
       capital markets activity. Withinpartially offset by our core commercial print operations (Long-Run Magazines, Catalogs and Inserts as well as Book Publishing Services) as we continued to realize productivity improvements as a result of our emphasis on Process Variability Reduction and Six Sigma application and training.
 
               Cost of materials is impacted by the price of scrap (by-product) paper that we sell. Income from the sale of by-products is recorded as a reduction in our cost of materials. For the firstsecond quarter of 2000, we recognized a reduction in our cost of materials of $16$17 million from the sale of by-products, which more than doubled from the firstsecond quarter a year ago, primarily as a result of higher by-products prices.
 
               Gross profit for the first half of 2000 rose by 2% to $511 million, compared with $502 million a year ago. Gross profit as a percentage of net sales fell to 18.7% from 20.3% a year ago primarily due to the expansion of our lower margin Logistics Services segment. This decrease in gross profit was partially offset by margin improvements in our core commercial print operations due to productivity improvements and higher by-products pricing. The sale of by-products reduced our cost of materials by $33 million in the first half of 2000, up $18 million from the first half a year ago.
        Selling and administrative expenses for the second quarter of 2000 were $157 million, essentially flat compared with the prior year. This represented 11.3% of net sales compared with 12.5% a year ago. The elimination of Stream expenses ($15 million) and lower Year 2000-related expenses ($9 million) was offset by recent acquisitions ($8 million), higher investment in information systems infrastructure ($6 million) and increased spending to expand into complementary businesses ($7 million).
        Selling and administrative expenses for the first quarterhalf of 2000 fell by 4%2%, or $5 million, to 

     $146$303 million, which represented 10.9%11.1% of net sales compared with 12.3%12.4% a year ago. The decline in the first quarter 2000 declinehalf of the year was primarily a result of lower
       Year 2000-related expenses ($10 million), and the elimination of Stream expenses ($15 million—refer to “Divestitures”),30 million) and lower Year 2000-related expenses ($19 million). This was partially offset by recent acquisitions ($817 million), higher investment in information systems infrastructure ($9 million) and additional information
       technology and growth-related expenditures.increased spending to expand into complementary businesses ($10 million).
 
Summary of Expense Trends
Second Quarter Ended June 30
    
 
    
 
    
% Increase
(Thousands of Dollars)
    
2000
    
1999
    
(Decrease)
Cost of materials
    
$441,596
    
$417,049
    
5.9%
Cost of transportation
    
125,032
    
49,883
    
150.7%
Cost of manufacturing
    
457,473
    
431,005
    
6.1%
Depreciation
    
81,151
    
79,992
    
1.4%
Amortization
    
13,923
    
10,304
    
35.1%
Selling and administrative
    
156,983
    
156,346
    
0.4%
Net interest expense
    
24,960
    
23,726
    
5.2%
Six Months Ended June 30
    
 
    
 
    
% Increase
(Thousands of Dollars)
    
2000
    
1999
    
(Decrease)
Cost of materials
    
$904,980
    
$846,063
    
7.0%
 
Cost of transportation
    
247,110
    
98,882
    
149.9%
 
Cost of manufacturing
    
879,071
    
849,898
    
3.4%
 
Depreciation
    
161,660
    
159,320
    
1.5%
 
Amortization
    
28,301
    
22,538
    
25.6%
 
Selling and administrative
    
302,865
    
307,707
    
(1.6%
)
Net interest expense
    
47,101
    
43,621
    
8.0%
 
 
First
         Quarter, Ended March 31,
    
 
    
 
    
%Increase
(Thousands
         of Dollars)
    
2000
    
1999
    
(Decrease)
Cost of
         materials
    
$463,384
    
$429,014
    
8.0
%
Cost of
         transportation
    
122,078
    
48,999
    
149.1
%
Cost of
         manufacturing
    
421,598
    
418,893
    
0.6
%
Depreciation
    
80,509
    
79,328
    
1.5
%
Amortization
    
14,378
    
12,234
    
17.5
%
Selling and
         administrative
    
145,882
    
151,361
    
(3.6
%)
Net interest
         expense
    
22,141
    
19,896
    
11.3
%
 
Nonoperating Items
 
               Interest expense for the firstsecond quarter of 2000 was approximately $22$25 million, up $2$1.2 million from a year ago due to higher debt levels associated with recentto fund acquisitions and increased working capital.capital and higher commercial paper interest rates.
 
               Other income, net, for the second quarter of 2000 was $3.9 million, down $4.2 million from the same quarter a year ago, primarily due to foreign currency translation losses and lower earnings from equity-based investments.
        Interest expense for the first half of 2000 was approximately $47 million, up $3.5 million from a year ago. This increase was due to higher debt levels to fund acquisitions and working capital and higher commercial paper interest rates.
        Other income, net, for the first quarterhalf of 2000 was $2.9$6.9 million, which is comparabledown $4.0 million from last year primarily due to a year agoforeign currency translation losses.
Discontinued Operations
        For the three and reflected a gain on the sale of real estate ($4.5
       million), offset in part by lower earnings from equity-based
       investments. In 1999, other income, net, reflected a gain of $3 million
       on the sale of real estate.
 
Discontinued
       Operations
 
        In the first
       quarter ofsix months ended June 30, 1999, we recorded a pretax loss from discontinued operations of $3$2 million ($21.2 million after-tax) and $5 million ($3 million after-tax), respectively, related to our remaining 86% investment in Corporate Software && Technology (CS&T)&T), a software distribution business. Our ownership interest in CS&T&T resulted from the restructuring of our 80%-owned investment in Stream International Holdings, Inc. (SIH) in December 1997. In addition to CS&T,&T, SIH held investments in Stream, which provided outsource technical support services, and Modus Media International (MMI), a manufacturing and fulfillment business (refer to “Divestitures”“Divestitures”). As of December 1997, we had converted our equity and debt positions in CS&T&T to 86% of the common stock of CS&T.&T.
 

                      In November 1999, we sold our entire interest in CS&T&T to the management of CS&T&T for cash proceeds of approximately $41 million. We did not recognize any gain or loss from the sale in 1999.
Divestitures
 
Divestitures
 
               At the time our ownership interest in SIH was restructured in December 1997, we converted our debt and equity positions in Stream into 87% of the common stock of that business and sold our equity and debt positions in MMI for nonvoting preferred stock of MMI.
 
               In November 1999, we sold 93% of our investment in the common stock of Stream to a group led by Bain Capital for approximately $96 million in cash. We recognized a pretax gain of $40 million and a tax benefit of $35 million (total of $75 million after-tax) from this transaction. The tax benefit in 1999 was recognized because of our ability to carry back the capital tax losses generated from the sale of Stream to years 1996 through 1998. We now have a 6% investment in Stream, representing the remaining 7% of our original 87% interest, that has been reflected in other noncurrent assets as of March 31,June 30, 2000 and December 31, 1999. For reporting purposes, Stream was consolidated in our financial results until November 1999.
 
               For comparison purposes, our 87% ownership interest in Stream for the first quarter ofthree and six months ended June 30, 1999 represented approximately $59$54 million and $112 million, respectively, in net sales/value-added revenue,revenue; $17 million and $34 million, respectively, in gross profit,profit; and $2 million and $3 million, respectively, in income from operations. The impact on net income for the first quarter ofthree and six months ended June 30, 1999 from Stream was approximately $1 million and $2 million, respectively, or $0.01 per diluted share.
 
               In October 1999, we sold our remaining investment in nonvoting preferred stock of MMI for approximately $60 million ($47 million in cash and a $13 million promissory note due no later than October 2002). The promissory note is interest-bearing at 9.5% per annum, payable quarterly. We recognized both a pretax and after-tax gain of $3 million from this transaction.
 
               As a result of these divestitures and the sale of CS&T&T (refer to “Discontinued
       Operations”“Discontinued Operations”), we generated approximately $77 million in refundable income taxes from the carryback of tax losses, expected to be received in 2000.
        In June 2000, we sold our interest in RRD India and its wholly-owned subsidiary, Tata Donnelley Ltd., to Tata Sons Limited for approximately $12.5 million in cash; there was no gain or loss recognized from this transaction.
 
Changes in Financial Condition
 
Liquidity and Capital Resources
 
               Net cash provided by operating activities in the first quarterhalf of 2000 totaled $56$301 million, down $55up $21 million from a year ago, primarily due to a higher
       investment in operating working capital. The increase in operating
       working capital was driven primarily by higher receivables and
       inventories to support increased sales volume.the prior year.
 
               Capital expenditures in the first quarterhalf of 2000 totaled $56$123 million compared with $64$133 million a year ago. Spending was directed principally to investments in productivity.productivity and international expansion. Full-year 2000 capital spending is expected to range from $300 million to $350 million in support of selected opportunities, including expansion of our Poland operations, a new directory plant in York,Flaxby, England, as well as investments to standardize and upgrade systems company-wide.
 
               In February 2000, we purchased CTC, which approximately doubled the size of our Logistics Services business and expanded our distribution capabilities (refer to Note 8)9). During the first quarterhalf of 2000, we also acquired Dallas-based Omega Studios, known for producing high-quality digital photography, turnkey creative concept, layout design and desktop publishing services; the Florida financial printer EVACO; and the Seattle-based premedia provider Iridio, Inc. In addition, we invested in Noosh, Inc., a business-to-business Internet-based service designed to improve the process of buying, selling and managing print.
 

                      In March 1999, we purchased the financial printing unit of Cadmus Communications. The purchase included the assets and operations of five service centers in Baltimore, Charlotte, Raleigh, Richmond and New York, as well as a print-on-demand and fulfillment facility in Charlotte and selected software products. In April 1999, we purchased the net assets of the Communicolor division of the Standard Register Company. In May 1999, we purchased the net assets of the Brazilian book printer Hamburg Gráfica Editora.
 
               Net cash provided by borrowings during the first quarterhalf of 2000 increased $90decreased $191 million over the same period for the priorfrom a year ago due to a debenture issuance of $200 million in April 1999 to finance recent acquisitions and working
       capital needs.our share repurchase programs. At March 31,June 30, 2000, we had an unused revolving credit facility of $400$425 million with a number of banks. This credit facility provides support for the issuance of commercial paper and other credit needs.
 
Year 2000 and System Infrastructure
 
               Process control and information systems are increasingly important to the effective management of the company. The upgrade and standardization of our systems is necessary for us to succeed in using information technology to our strategic advantage. In 1999, we focused our efforts on ensuring that processes and systems were Year 2000 compliant. In addition, we began ongoing initiatives to upgrade and standardize our information technology infrastructure. In 1999, we deferred a number of other infrastructure and systems initiatives that would support continuous productivity improvements and enhance service capabilities, while we completed our Year 2000 efforts.
 
               During the transition from 1999 to 2000, all operations were fully supported by trained personnel. Key efforts were focused on four business-critical factors: safety of employees, continuity of production, environmental compliance and reporting, and continuity of systems to support the ability of personnel to continue working (such as the availability of utilities or operation of payroll systems). At the end of the transition, no Year 2000 issues affecting any business-critical factors were reported by any operation. To the extent that date-related issues were reported, they were limited to instances where personnel available at the site were able to promptly correct the issue without disruption to our operations.
 
               For the first
       quarter ofthree and six months ended June 30, 2000, spending on our Year 2000 initiative was $2.4$1.3 million and $3.7 million, respectively, of which $1.1$0.4 million and $1.4 million, respectively, was reflected in administrative expense and the remainder in cost of sales. We spent $15.5 million and $31.1 million, respectively, on Year 2000 costs infor the first quarter ofthree and six months ended June 30, 1999, of which $11.2$9.3 million and $20.5 million, respectively, was reflected in administrative expense and the remainder in cost of sales. These expenses do not include costs capitalized with respect to our information and technology infrastructure upgrade and standardization initiatives. As internal resources completecompleted their Year 2000 assignments, they have beenwere reallocated to technology projects that had been deferred, as well as to other productivity projects. These projects are expected to improve our ability to share information across the company, make informed decisions rapidly and enhance future productivity.
 
Other Information
 
               Share Repurchase——In September 1999, the board of directors authorized a share repurchase program for up to $300 million of the company’scompany’s common stock in privately negotiated or open-market transactions. The program includes shares purchased for issuance under various stock option plans. During the first quarterhalf of 2000, we slowed our share repurchase activity asto allow for a resultbroad review of increased acquisition
       activity.
 
        During the first
       quarter of 2000, weour investment opportunities, and purchased approximately 0.9 million shares, at an average price of $23.75. This program extends through September 2000.
        
       
        Technology—Technology—We remain a technology leader, investing in print-related technologies such as computer-to-plate and digital printing, in Internet-based business models such as Online Services,Red Rover Digital, and in Internet-enabled services such as SENDD™SENDD™ and ImageMerchant™ImageMerchant™ (see belowpage 19 for a description of these services). We are focused on investing in technologies that contribute to our financial performance and help us deliver products, services and solutions that are valued by our customers.
        

               During 1999 and the first half of 2000, we received recognition for our technology leadership from botheWeek(formerlyPC Week) andInformation Week.Among all U.S. companies, we were named:
 
··
#6 of the top 100 in Enterprise Solutions (PC Week,September 13, 1999)
 
··
#19 of the top 100 Innovators in E-Business Networking (eWeek,May 8, 2000)
·
#25 of the top 100 in Internet Technology (PC Week,May 11, 1999)
 
··
#36 of the top 100 in Desktop and Mobile Technology (PC Week,June 21, 1999)
 
··
#66 of the top 500 e-business leaders (PC Week,November 15, 1999)
 
··
#88 of the top 500 leading IT innovators (Information Week,September 27, 1999)
        
        Online
       Services,Red Rover Digital, SENDD, ImageMerchant, Digital Print and E-Books—Online Services offers solutions to meet all—During the second quarter of our
       customers’ Internet needs. Online Services provides2000, we launched Red Rover Digital, Inc. (Red Rover), a full suite of
       scalable e-commerce solutions including consulting, Web site design and
       development, content production services to “stock the
       shelves” or populate the site with content, and marketing services
       to effectively drive site traffic. The markets that Online Services
       currently serves include:
 
·
eCommerce—to help catalogers and retailers showcase their
         products on the Internet and drive sales
 
·
ePublish—to help magazine publishers extend and enhance
         their brands online by offering content as well as commerce and
         community
 
·
eDirectory—to help businesses navigate and use the
         Internet to gain exposure and streamline their business
         processes.
 
        Our recent
       partnerships and investments in this arena strengthenwholly-owned subsidiary formerly our Online Services offering, expand ourdivision. Red Rover is a leading Internet professional services firm that delivers a full spectrum of integrated solutions to enhance its clients’ business, brands and helpcustomer relationships. Red Rover provides digital communications and commerce solutions to merchants and publishers, helping them maximize content to foster enduring, profitable customer relationships. Content is more than text. It is the words, images, product information, sound and video that capture and convey our customers leveragebrand to the power of the Internet to communicatemarket place.
        Red Rover has helped numerous merchants and publishers enhance business and relationships with their customers. From strategic positioning, through site development and production, to the continuous support of e-business, Red Rover’s comprehensive services are a potent tool for growing successful online brands.
 
               To meet our Financial Services customers’customers’ needs for speed, convenience, confidentiality and accuracy, we developed SENDD. The software allows work groups around the world to simultaneously proof a document securely via the Internet. Financial Services is also working closely with the Securities and Exchange Commission (SEC) on the modernization efforts under way for EDGAR (Electronic Data Gathering and Retrieval). We currently provide EDGAR electronic filing services for our customers, enabling them to communicate with their target audiences while meeting tight time frames and stringent filing requirements. We will continue to develop our offerings and educate our clients as the SEC enhances EDGAR in the future.
 
               In our premedia production process, increased digitization allows us to capture customer content and distribute it via various communication media, including print and the Internet. We have developed technology that allows a customer to securely archive its digital content in an R.R. Donnelley database and access it via the Internet so that it can be repurposed for multiple uses. This ImageMerchant software allows customers to more effectively manage their media assets. Customer benefits include lower costs, faster production times and consistent quality because images are repurposed rather than recreated. Analysis tools further enhance the value of ImageMerchant.
 
               Additionally, we are a leading provider of digital print, which allows customized marketing to an audience of one. With digital printing, images can be varied as they are printed, allowing for each piece to be highly personalized.
 
               Book Publishing Services also applies technology to create solutions that enable our customers to manage and distribute content in multiple media formats. We currently convert content for many major e-book vendors.
        

              
        Litigation—Litigation—In 1996, a purported class action was brought against us in federal district court in Chicago, Illinois, on behalf of all current and former African-American employees, alleging that we racially discriminated against them in violation of the Civil Rights Act of 1871, as amended, and the U.S. Constitution (Jones, et al. v. R.R. Donnelley && Sons Co.). The complaint seeks declaratory and injunctive relief, and asks for actual, compensatory, consequential and punitive damages in an amount not less than $500 million. Although plaintiffs seek nationwide class certification, most of the specific factual assertions of the complaint relate to the closing of our Chicago catalog operations in 1993. Other general claims relate to other company locations. In August 1999, the district court judge denied our motion for partial summary judgment on the basis of timeliness.
 
               In 1995, a purported class action was filed against us in federal district court in Chicago alleging that older workers were discriminated against in selection for termination upon the closing of the Chicago catalog operations (Gerlib, et al. v. R.R. Donnelley && Sons Co.). The suit also alleges that we violated the Employee Retirement Income Security Act (ERISA) in determining benefits payable to retiring or terminated employees. In August 1997, the court certified classes in both the age discrimination and ERISA claims limited to former employees of the Chicago catalog operations.
 
               In 1998, a purported class action was filed against us in federal district court in Chicago on behalf of current and former African-American employees, alleging that the company racially discriminated against them in violation of Title VII of the Civil Rights Act of 1964 (Adams, et al. v. R.R. Donnelley && Sons Co.). While making many of the same general discrimination claims contained in the 1996 case, the plaintiffs in this case also claim retaliation by the company for the filing of discrimination charges or otherwise complaining of race discrimination. The complaint seeks the same relief and damages as sought in the 1996 case.
 
        The 1996 and 1995 cases relate primarily to the circumstances surrounding the closing of the Chicago catalog operations. We believe we acted properly in the closing of the operations. We also believe we have a number of valid defenses to all of the claims made and will vigorously defend our actions. However, because the cases are in the preliminaryearly stages, we cannot make a meaningful estimate of any loss that could result from an unfavorable outcome of any of the pending cases.
 
               In December 1999, the U.S. Environmental Protection Agency, Region 5 (U.S. EPA) issued a Notice of Violation against us, pursuant to section 113 of the Clean Air Act (the Act). The notice alleges that our facility in Willard, Ohio, violated the Act and Ohio’sOhio’s State Implementation Plan in installing and operating certain equipment without appropriate air permits. While the notice does not specify the remedy sought, upon final determination of a violation, U.S. EPA may issue an administrative order requiring the installation of air pollution control equipment, assess penalties, or commence civil or criminal action against us. We responded to U.S. EPA on March 10, 2000. We do not believe that any unfavorable result of this proceeding will have a material impact on our financial position or results of operations.
 
               In addition, we are a party to certain litigation arising in the ordinary course of business which, in the opinion of management, will not have a material adverse effect on the operations or financial condition of the company.
 
               Environmental Regulations—Regulations—Our business is subject to various laws and regulations relating to employee health and safety and to environmental protection. Our policy is to comply with all laws and regulations that govern protection of the environment and employee health and safety. We do not anticipate that compliance will have a material adverse effect on our competitive or consolidated financial positions.
        
       
        Outlook—Outlook—Our primary business remains commercial printing and our primary geographic market is the United States. The environment remains highly competitive in most of our product categories and geographic regions. Competition is based largely on price, quality and servicing the special needs of customers. Industry analysts believe that there is overcapacity in most commercial printing markets. Therefore, competition is intense. Our intent is to differentiate our service offering so that we are viewed by our customers as a partner who can help them more effectively use words and images in a variety of ways, whether through print or the Internet, to reach their target audiences.
 
               We are a large user of paper, bought by us or supplied to us by our customers. The cost and supply of certain paper grades used in the manufacturing process will continue to affect our financial results. However, management currently does not see any disruptive conditions affecting prices and supply of paper in 2000.
 
               Postal costs are a significant component of our customers’customers’ cost structures. Changes in postal rates, which are anticipated early in 2001, may negatively affect the demand for our core print capabilities, but the proposed postal rate increases will enhance the value of Logistics Services to our customers, as we are able to improve the cost efficiency of mail processing and distribution.
 
               In addition to paper and postage costs, consumer confidence and economic growth are key drivers of print demand. A significant change in the economic outlook could affect demand for our products, particularly in the financial printing market.
 
               In the longer term, technological changes, including the electronic distribution of information, present both risks and opportunities for the company. Many of our new business initiatives are designed to leverage our distinctive capabilities to participate in the rapid growth in electronic communications. Our goal remains to manage and distribute words and images, regardless of the means of distribution, to help our customers succeed in informing, educating, entertaining and selling. We believe that with our competitive strengths, including our comprehensive service offerings, technology leadership, depth of management experience, customer relationships and economies of scale, we can develop the most valuable solutions for our customers, which should result in increased shareholder value.
 
Item 3
 
Quantitative and Qualitative Disclosures About Market Risk
 
               We are exposed to market risk from changes in interest rates and foreign exchange rates. However, we generally maintain more than half of our debt at fixed rates (approximately 51%58% at March 31,June 30, 2000), and our exposure to short-term interest rate fluctuations is not material to the consolidated financial statements as a whole. Our exposure to adverse changes in foreign exchange rates also is immaterial to our consolidated financial statements as a whole, and we occasionally use financial instruments to hedge exposures to foreign exchange rate changes. We do not use financial instruments for trading purposes and are not a party to any leveraged derivatives. Further disclosure relating to financial instruments is included in the Debt Financing and Interest Expense note in the Notes to Consolidated Financial Statements included in our 1999 Annual Report on Form 10-K.
 
PART II
 
OTHER INFORMATION
 
Item 1. Legal Proceedings
 
               On each of November 25, 1996, and June 30, 1998, purported class actions were brought against the company alleging racial discrimination and seeking actual, compensatory, consequential and punitive damages in an amount not less than $500 million. On December 18, 1995, a class action was brought against the company alleging age discrimination in connection with the 1993 closing of the company’scompany’s Chicago catalog operations, and violation of the Employee Retirement Income Security Act. These actions are described in part I of this quarterly report on Form 10-Q.
 
Item 4.
       Submission of Matters to a Vote of Security Holders
 
(a) The company
         held its Annual Meeting of Stockholders on March 23, 2000.
 
(b) The
         following matters were voted upon at the Annual Meeting of
         Stockholders:
 
        1. The election
         of the nominees for Directors of Class 3, who will serve for a term to
         expire at the Annual Meeting of Stockholders to be held in 2003, was
         voted on by the stockholders. The nominees, all of whom were elected,
         were James R. Donnelley, Thomas S. Johnson and George A. Lorch. The
         Inspectors of Election certified the following vote
         tabulations:
 
 
    
For
    
Withheld
James R.
         Donnelley
    
104,230,650
    
815,312
Thomas S.
         Johnson
    
104,208,723
    
837,239
George A.
         Lorch
    
104,191,250
    
854,712
 
        2. A proposal
         to adopt a new stock incentive plan was approved by the stockholders.
         The Inspectors of Election certified the following vote
         tabulations:
 
For
  
%
  
Against
  
%
  
Abstain
  
%
  
Non-Vote
  
%
66,585,386
  
63%
  
31,614,656
  
30%
  
831,187
  
1%
  
6,014,733
  
6%
 
         
                3. A stockholder proposal
         regarding pay equity was rejected by the stockholders. The Inspectors
         of Election certified the following vote tabulations:
 
For
  
%
  
Against
  
%
  
Abstain
  
%
  
Non-Vote
  
%
6,234,321
  
6%
  
89,524,283
  
85%
  
3,272,625
  
3%
  
6,014,733
  
6%
 
         
                 4. A stockholder proposal
          regarding global corporate standards was rejected by the
          stockholders. The Inspectors of Election certified the following vote
          tabulations:
 
For
  
%
  
Against
  
%
  
Abstain
  
%
  
Non-Vote
  
%
4,088,254
  
4%
  
89,199,355
  
85%
  
5,743,620
  
5%
  
6,014,733
  
6%
 
Item 5. Other Information
 
               Certain statements in this filing, including the discussions of management expectations for 2000, constitute ““ forward-looking statements”statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from the future results expressed or implied by those statements. Refer to Part I, Item 1 of the company’scompany’s 1999 Annual Report on Form 10-K for a description of such factors.
 
Item 6. Exhibits and Reports on Form 8-K.
        
        (a)Exhibits
1012
    
Consulting
           Agreement between Cheryl A. Francis and R.R. Donnelley & Sons
         

         Company
 
 
12
    
Ratio of Earnings to Fixed Charges
 
 
27
    
Financial Data Schedule
 
               (b) No current report on Form 8-K was filed during the firstsecond quarter of 2000.
SIGNATURE
 
SIGNATURE
 
               Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
R.R. DONNELLEY && SONS COMPANY
 
           /S /       GVREGORY IRGINIA A.L. STOKLOSAEGGERMAN
By 
Acting Chief
           Financial Officer
Corporate Controller
(Authorized Officer and
Chief Accounting Officer)
August 14, 2000
 
May 12,
           2000
Date