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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, 1993
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 1-4694
R. R. DONNELLEY & SONS COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-1004130
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
77 WEST WACKER DRIVE,
CHICAGO, ILLINOIS 60601
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER--(312) 326-8000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON
----------------------------- WHICH REGISTERED
COMMON (PAR VALUE $1.25) --------------------------------------------
PREFERRED STOCK PURCHASE RIGHTS NEW YORK, CHICAGO AND PACIFIC STOCK
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. [X]
AS OF MARCH 1, 1994, 154,221,434 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, 1994) HELD BY NONAFFILIATES WAS APPROXIMATELY $4,490,393,042.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT DATED FEBRUARY
17, 1994 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........................................ 4
Item 3. Legal Proceedings................................. 7
Item 4. Submission of Matters to a Vote of Security
Holders.......................................... 7
Executive Officers of R. R. Donnelley & Sons
Company.......................................... 7
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................. 9
Item 6. Selected Financial Data........................... 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 10
Item 8. Financial Statements and Supplementary Data....... 12
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............. 13
Part III
Item 10. Directors and Executive Officers of the
Registrant....................................... 13
Item 11. Executive Compensation............................ 13
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................... 13
Item 13. Certain Relationships and Related Transactions.... 13
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.............................. 13
Signatures................................................... 14
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 major
participant in the information industry, providing a broad range of services in
print and digital media. The company believes it is the largest supplier of
commercial print and print-related services in the United States. It is a major
supplier in the United Kingdom and also provides services in Mexico, 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
replication, translation and localization; list, list enhancement, database
management and mail production services (provided primarily through Metromail);
design and related creative services (provided through Mobium); cartographic
services; electronic communication networks for simultaneous worldwide product
releases; digital services to publishers; and, through R. R. Donnelley Logistic
Services, 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. The company's pre-press, presswork and binding operations have
accounted for over 90% of the company's revenues for each of the last five
years. In 1990, the company acquired the Meredith/Burda companies, thereby
enhancing the company's service capabilities by adding four printing plants.
The company provides these services to more than 4,000 customers, including
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; and financial institutions 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, 1993, is presented in
the table below. In 1993, international printing operations represented less
than 9% of consolidated results and assets.
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
REVENUE BY PRODUCT TYPE
Catalogs, Inserts and Specialty Products............... 32% 35% 39% 37% 33%
Magazines.............................................. 18 17 17 18 20
Directories............................................ 14 16 16 17 18
Books.................................................. 13 11 11 11 13
Computer Documentation Services........................ 12 10 8 7 6
Financial.............................................. 6 5 4 4 4
Other.................................................. 5 6 5 6 6
Most 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 3% or
more of the company's sales in 1993. The company's dependence for sales from
its ten largest customers has declined in the past eleven years to
approximately 22% of sales in 1993, down from 35% of sales in 1983.
3
The various phases of the information industry in which the company is
involved are highly competitive. While the company has contracts with its
customers as indicated 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 Selectronic(R) imaging and gathering; list maintenance, database
management and targeted mail programs; expansive mailing and distribution
services; in-plant reception from customer desktop publishing systems;
fulfillment and returned books inventory management; replication of magnetic
media products; electronic data management and distribution; and design.
Although the company believes it is the largest commercial printer in the
United States, it estimates that its revenues represent approximately 7% of the
total sales in the industry. Although the company's plants are well located for
the national or regional distribution of its products, competitors in some
areas of the United States have a competitive advantage in some instances due
to such factors as freight rates, wage scales and customer preference for local
services. In addition to location, other important competitive factors are
price and quality as well as the range of available services.
An excess of supply versus demand exists for most grades of paper. The list
price of paper remains stable, although discounting is prevalent for certain
grades of paper. Existing paper supply contracts (at prevailing market prices)
will cover the company's requirements through 1994, and management believes
that 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.
The company estimates that its capital expenditures in 1994 and 1995 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 be
material and will not have a material effect upon its earnings or its
competitive position.
The company employed an average of approximately 32,100 persons in 1993
(34,000 persons at December 31, 1993), of whom more than 11,000 had been with
the company for more than 10 years and over 2,700 for 25 years or longer.
ITEM 2. PROPERTIES
R. R. Donnelley & Sons Company's corporate office is located in leased
facilities in Chicago, Illinois. Production facilities leased by the company
are listed in the chart beginning on page 6. Printing and other plants that are
owned and operated by the company (or through wholly owned 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 1,190,000 Magazines, Financial
Crawfordsville, IN 1923 1992 1,838,000 Books, Computer
Documentation
Services
Willard, OH 1956 1987 912,000 Books, Directories,
Computer
Documentation
Services
4
DATE OF
DATE OF ACQUISITION LATEST SQUARE PRINCIPAL PRODUCTS
OWNED LOCATION(S) OR OPERATIONS BEGAN ADDITION FEET OR SERVICES
----------------- ------------------- -------- --------- --------------------
Warsaw, IN 1959 1987 881,000 Catalogs, Inserts
Old Saybrook, CT 1959 1986 292,000 Magazines, Catalogs
Lancaster, PA 1959 1987 1,437,000 Directories,
Catalogs, Inserts,
Magazines,
Financial
Mattoon, IL 1968 1989 668,000 Magazines, Catalogs,
Inserts
Dwight, IL 1968 1987 434,000 Directories,
Catalogs, Inserts,
Magazines
Glasgow, KY 1970 1987 461,000 Magazines, Catalogs,
Inserts
Gallatin, TN 1975 1987 528,000 Catalogs, Inserts,
Magazines
York, England 1978 1985 291,000 Directories,
Magazines, Catalogs
Los Angeles, CA 1978 1986 252,000 Magazines, Catalogs,
Inserts, Financial
Harrisonburg, VA 1980 1993 613,000 Books
Spartanburg, SC 1980 1989 545,000 Catalogs, Inserts,
Magazines
Gateshead, England 1983 1989 189,000 Directories
Danville, KY 1985 1992 361,000 Magazines, Catalogs,
Inserts
Portland, OR 1986 1989 247,000 Directories,
Computer
Documentation
Services
Greeley, CO 1986 -- 165,000 Directories
Reno, NV 1987 -- 393,000 Catalogs, Inserts
Pittsburgh, PA 1987 -- 70,000 Financial
Lincoln, NE 1987 1988 233,000 Mail Production,
Data Center
Rutland, VT 1987 1987 113,000 Mail Production
Mt. Pleasant, IA 1987 -- 211,000 Mail Production
Seward, NE 1987 -- 161,000 Mail Production
Thorp Arch, En- 1989 -- 146,000 Computer
gland Documentation
Services
South Daytona, FL 1990 1993 237,000 Magazines, Catalogs,
Inserts
Des Moines, IA 1990 -- 627,000 Magazines, Catalogs,
Inserts
Lynchburg, VA 1990 -- 412,000 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 1993 160,000 Computer
Documentation
Services
Houston, TX 1991 -- 41,000 Financial
San Juan del Rio, 1992 1993 80,000
Mexico Catalogs
Provo, UT 1992 -- 126,000 Computer
Documentation
Services
Mendota, IL 1992 -- 110,000 Magazines
Seymour, IN 1992 -- 45,000 Specialty Products
Allentown, PA 1993 -- 23,000 Books
Bloomsburg, PA 1993 -- 105,000 Books
Pontiac, IL 1993 -- 240,000 Magazines
Scranton, PA 1993 -- 399,000 Books
Senatobia, MS 1993 -- 140,000 Magazines
Newbern, TN 1993 -- 33,000 Books
5
LEASED LOCATIONS SQUARE FEET
---------------- -----------
R. R. DONNELLEY & SONS COMPANY
------------------------------
Columbus, OH................................................ 15,000
Crawfordsville, IN.......................................... 48,000
Elgin, IL................................................... 65,000
Fremont, CA................................................. 183,000
Glasgow, KY................................................. 25,000
Hudson, MA.................................................. 141,000
Lancaster, PA............................................... 41,000
Los Angeles, CA............................................. 45,000
New York, NY................................................ 92,000
Newark, CA.................................................. 52,000
Orem, UT.................................................... 33,000
Raleigh, NC................................................. 58,000
Wheeling, IL................................................ 65,000
Willowbrook, IL............................................. 55,000
R. R. DONNELLEY NEDERLAND, B.V.
-------------------------------
Apeldoorn, The Netherlands.................................. 60,000
Amsterdam, The Netherlands.................................. 15,000
R. R. DONNELLEY NORWEST INC.
----------------------------
Beaverton, OR............................................... 50,000
Seattle, WA................................................. 89,000
Tigard, OR.................................................. 140,000
Preston, WA................................................. 70,000
LABORATORIO LITO COLOR, S.A. DE C.V.
------------------------------------
Mexico City, Mexico......................................... 15,000
R. R. DONNELLEY PRINTING COMPANY
--------------------------------
Lynchburg, VA............................................... 22,000
METROMAIL CORPORATION
---------------------
Lincoln, NE................................................. 28,000
Lombard, IL................................................. 100,000
St. Louis, MO............................................... 13,000
R. R. DONNELLEY (U.K.) LIMITED
------------------------------
London, England............................................. 20,000
Cumbernauld, Scotland....................................... 53,000
MOBIUM CORPORATION FOR DESIGN AND COMMUNICATION
-----------------------------------------------
Chicago, IL................................................. 10,000
IRISH PRINTERS HOLDINGS
-----------------------
Dublin, Ireland............................................. 104,000
Kildare, Ireland............................................ 63,000
DONNELLEY CARIBBEAN GRAPHICS, INC.
----------------------------------
Bridgetown, Barbados........................................ 29,000
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 1994 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.
6
ITEM 3. LEGAL PROCEEDINGS
On July 13, 1990, the Federal Trade Commission ("FTC") filed a complaint in
the U.S. District Court for the District of Columbia ("District Court") seeking
a preliminary injunction enjoining the company from consummating its
acquisition of the Meredith/Burda companies. The complaint alleged that
consummation of the acquisition might substantially lessen competition in
certain alleged rotogravure printing markets. The District Court denied the
motion of the FTC for an injunction as well as a further motion for injunction
pending appeal. The acquisition was closed on September 4, 1990.
On October 11, 1990, the FTC Staff initiated its administrative action
challenging the acquisition of the Meredith/Burda companies. The complaint
alleged the same issues as did the complaint before the District Court. Trial
before an administrative law judge ("ALJ") of the FTC concluded in June, 1993.
On December 30, 1993, the FTC's ALJ issued his initial decision upholding the
position of the FTC Staff. The ALJ found that the acquisition by the company of
the Meredith/Burda companies created a "dominant firm" and significantly
increased concentration in a "high-volume publication rotogravure market," thus
increasing the likelihood of anti-competitive conduct and actual or tacit
collusion among the firms participating in that market. The ALJ ordered the
divestiture of the Meredith/Burda companies and prohibited the acquisition by
the company of any other firms participating in the U.S. "rotogravure market"
without FTC approval for a period of ten years.
The company has filed its appeal of the ALJ's decision, asking the FTC
Commissioners to dismiss the FTC complaint. The appeal has the effect of
staying the ALJ's order. If the appeal by the company is not granted, the
company intends to file a further appeal to a U.S. Court of Appeals.
The company continues to believe that the acquisition of the Meredith/Burda
companies was legally proper and will ultimately be upheld.
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, 1993.
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
47, 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
58, Director, Vice Chairman the Board. Prior management responsibility for
of the Board Corporate Development.
R. J. Cowan 1988 Management responsibilities for Information
41, Executive Vice Services, Technology, Database Technology Serv-
President, and Director, ices, Information Systems and Metromail. Prior
Information Resources management responsibilities for Book, Financial
Sector(2) Services, Global Software Services, Information
Services and Technology; prior sales
and manufacturing responsibility for Global
Software Services.
7
NAME, AGE AND OFFICER BUSINESS EXPERIENCE DURING
POSITIONS WITH THE COMPANY SINCE PAST FIVE YEARS(1)
- -------------------------- ------- --------------------------
F. R. Jarc 1987 Management responsibilities for treasury,
51, Executive Vice controller, corporate development, internal au-
President and dit and taxes.
Chief Financial Officer(2)
W. E. Tyler 1989 Management responsibilities for Financial Serv-
41, Sector President, ices, Global Software Services, Book Publishing
Networked Services Sec- Services and Europe. Prior sales and manufactur-
tor(2) ing responsibility for Global Software Services;
prior management responsibility for Technology.
J. P. Ward 1991 Management responsibilities for Telecommunica-
39, Sector President, tions, Merchandise Media and Magazine Publishing
Commercial Print Sector(2) Services. Prior sales and manufacturing respon-
sibility for Merchandise Media; prior sales and
manufacturing responsibility for Financial Serv-
ices.
J. D. Butler 1991 Sales and manufacturing responsibility for Book
56, President, Publishing Services. Prior sales and marketing
Book Publishing Services responsibilities in Book Publishing Services.
E. P. Duffy 1990 Sales and manufacturing responsibility for Tele-
52, President, communications. Prior sales and manufacturing
Telecommunications(1) responsibility for Merchandise Media; prior ex-
perience as Senior Vice President, Marketing, of
the Meredith/Burda companies which were acquired
by the company in 1990.
B. L. Faber 1989 Sales and manufacturing responsibility for In-
46, President, formation Services. Prior management responsi-
Information Services(2) bility for Corporate Development.
E. E. Lane 1991 Sales responsibility for Magazine Publishing
42, President, Services and sales and manufacturing responsi-
Magazine Publishing Serv- bility for Europe. Prior sales and manufacturing
ices responsibility for Magazine Publishing Services.
T. M. Leahy 1994 Sales and manufacturing responsibility for
38, President, Global Software Services. Prior manufacturing
Global Software Services responsibility for Global Software Services;
prior sales experience in Global Software Serv-
ices.
R. S. MacQueen 1993 Sales and manufacturing responsibility for Fi-
41, President, nancial Services. Prior responsibilities in Fi-
Financial Services nancial Services.
J. D. McQuaid 1991 Management responsibilities as Chairman of the
56, Chairman of the Board, Board, President and Chief Executive Officer of
President and Chief Execu- Metromail Corporation, a wholly owned subsidi-
tive Officer, Metromail ary.
Corporation
R. J. Weir 1990 Management responsibility for Technology, Data-
38, President, Technology base Technology Services and Information Sys-
tems. Prior responsibilities in Technology.
8
NAME, AGE AND OFFICER BUSINESS EXPERIENCE DURING
POSITIONS WITH THE COMPANY SINCE PAST FIVE YEARS(1)
- -------------------------- ------- --------------------------
S. J. Baumgartner 1993 Management responsibilities for Human Resources,
42, Senior Vice Compensation and Benefits. Prior experience as a
President, Human Resources, co-owner and member of board of directors of FRC
Compensation and Management Inc., and as a Senior Vice President,
Benefits(1)(2) Human Resources and Public Affairs at Rhone-
Poulenc Rorer/Rorer Group, Inc.
J. S. Oberhill 1988 Management responsibilities for Purchasing,
52, Senior Vice President, Donnelley Logistic Services and certain manufac-
Corporate Manufacturing turing operations. Prior management responsibil-
Services(2) ities for Europe and Chairman of the Board of R.
R. Donnelley Limited; prior sales and manufac-
turing responsibility for Telecommunications;
prior sales and manufacturing responsibility for
Magazine.
F. J. Uvena 1975 Management responsibilities for legal services,
60, Senior Vice President, corporate relations, environmental functions and
Law and Corporate Staffs corporate real estate. Prior responsibility as
General Counsel.
(1) Each officer named has carried on his principal occupation and employment
in R. R. Donnelley & Sons Company for more than five years with the exception
of S. J. Baumgartner and E. P. Duffy 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 and is accorded unlisted trading
privileges on the Boston and Cincinnati Stock Exchanges.
As of March 1, 1994 there were approximately 10,400 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, 1993, is contained in the chart below:
COMMON STOCK PRICES
--------------------------------
DIVIDENDS
PAID 1993 1992
------------- --------------- ----------------
1993 1992 HIGH LOW HIGH LOW
------ ------ ------- ------- ------- --------
First Quarter.................... $0.130 $0.125 $32 3/4 $27 1/8 $26 1/8 $23 7/8
Second Quarter................... 0.130 0.125 31 3/4 26 1/8 29 23 3/4
Third Quarter.................... 0.140 0.130 31 3/8 27 3/4 30 1/2 27 1/16
Fourth Quarter................... 0.140 0.130 31 1/8 27 3/8 33 3/4 28 7/8
Full Year........................ 0.540 0.510 32 3/4 26 1/8 33 3/4 23 3/4
1992 reflects the 2 for 1 stock split effective September 1, 1992.
9
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(NOT COVERED BY AUDITORS' REPORT)
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
YEAR ENDING DECEMBER 31,
------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
INCOME STATEMENT DATA:
Net sales............... $4,387,761 $4,193,072 $3,914,828 $3,497,943 $3,122,331
Earnings from opera-
tions*................. 325,607 405,501 363,128 361,836 332,701
Net income from opera-
tions before cumulative
effect of accounting
changes................ 178,920 234,659 204,919 225,846 221,857
Net income**............ 109,420 234,659 204,919 225,846 221,857
PER COMMON SHARE***
Net income from opera-
tions before cumulative
effect of accounting
changes................ 1.16 1.51 1.32 1.45 1.43
Net income**............ 0.71 1.51 1.32 1.45 1.43
Dividends............... 0.54 0.51 0.50 0.48 0.44
DECEMBER 31,
------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Total assets............. $3,654,026 $3,410,247 $3,206,826 $3,147,486 $2,311,981
Noncurrent liabilities... 1,124,594 949,537 940,544 1,064,333 454,189
- --------
* 1993 earnings from operations includes the one-time adjustment for a
restructuring charge ($90 million).
** 1993 net income and net income per 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
COMPARISON OF 1993 WITH 1992
Net sales grew at a rate of 4.6% (first half growth was 0.5%; second half
growth was 8.2%). The year-to-year growth was due to an increased volume of
services provided to customers, including volume added through the company's
global expansion into new areas. Strong demand for global software services,
financial printing services and services for book publishers and volume
increases associated with recent acquisitions in new product areas, including
specialty products and special interest magazines, were partially offset by the
negative effects of a stronger dollar (lower translation of foreign revenues,
particularly those of the company's U.K. operations) and lower catalog volume
primarily associated with the decision by Sears, Roebuck & Co., a customer, to
discontinue its catalog operations.
Gross profit grew at a greater rate than net sales, 6.3%, reflecting better
coverage of fixed costs through higher volume, a more favorable mix of sales
and a favorable LIFO inventory credit. Earnings from operations included a $90
million restructuring charge recorded during the first quarter (an after-tax
charge of $0.39 per share) related primarily to the closing of the company's
Chicago manufacturing facility following the decision by Sears to discontinue
its catalog operations. Excluding this charge, earnings from operations would
have been $415.6 million, a 2.5% increase over the prior year, reflecting the
gross profit improvement
10
partially offset by higher selling and administrative expenses (10.1% increase)
resulting primarily from the additional costs associated with newly acquired
and start-up operations and the expansion of the company's global sales
presence.
The $4.6 million increase in total other expense-net resulted from higher
interest expense (higher outstanding debt balances due to recent acquisitions,
investments in joint ventures and additional VEBA funding for employee
benefits) and increased expenses associated with life insurance programs, which
were partially offset by improved earnings on investments.
The 1993 provision for income taxes included the one-time effect of the new,
higher federal statutory income tax rate on deferred taxes, which reduced net
income $6.2 million (equivalent to $0.04 per share); excluding this one-time
charge, the 1993 effective tax rate of 33.1% would have been lower than the
1992 rate of 35.0%, reflecting the benefits associated with life insurance
programs and credits associated with affordable housing investments, partially
offset by the impact of the higher federal statutory income tax rate on current
year earnings ($2.8 million). Net income from operations before cumulative
effects of accounting changes reflected the restructuring charge and increased
selling and administrative expenses partially offset by the favorable factors
discussed above with respect to gross profit. Excluding the restructuring
charge and deferred income tax charge, net income from operations before
cumulative effects of accounting changes would have been $245.9 million
(equivalent to $1.59 per common share).
During the first quarter of 1993, the company adopted two new accounting
standards for postretirement benefits and income taxes. The one-time charge for
postretirement benefits, net of associated tax benefits of $80.1 million, was
$127.7 million (equivalent to $0.82 per share). Ongoing annual expense
increases resulting from this new accounting requirement have been mitigated
through an investment program to partially prefund the related postretirement
liabilities. Nevertheless, in 1993, the new accounting standard for
postretirement benefits resulted in additional expenses which reduced operating
income by $0.05 per share. The new accounting standard for income taxes
resulted in a one-time credit of $58.2 million (equivalent to $0.37 per share).
As discussed above, the new income tax standard also required the company to
increase its 1993 income tax provision by $6.2 million. This new standard will
not have an ongoing material effect as long as statutory income tax rates
remain at current levels.
COMPARISON OF 1992 WITH 1991
The growth in net sales (7.1% higher than 1991) is represented by an
increased volume of services provided to customers, including volume added
through the company's global expansion into new markets. A large portion of
this increase was due to the introduction of new products by documentation
services customers and the strong demand for financial printing services
resulting from favorable capital market conditions in 1992.
Gross profit grew at a greater rate than net sales, 12.5%, reflecting several
factors: higher volume, a more favorable mix of sales, improved productivity
and cost control, lower start-up costs and a LIFO inventory credit. Higher
depreciation expense, increased reserve provisions and expenses related to the
companywide stock purchase plan and incentive compensation plans partially
offset the favorable factors. Selling and administrative expenses increased
13.4% over 1991 as a result of higher volume-related commission expenses, a
higher provision for doubtful accounts receivable, the increased costs of
expanding the company's global sales presence and expenses related to the
companywide stock purchase plan and incentive compensation plans. Earnings from
operations also grew at a rate greater than net sales, 11.7%, reflecting the
gross profit improvement partially offset by the higher selling and
administrative expenses.
The $1.5 million increase in total other expense-net resulted from lower
interest expense (lower interest rates and outstanding debt balances) which was
more than offset by start-up expenses associated with recent international and
domestic joint venture investments. The effective tax rate of 35.0% in 1992 was
lower than the 36.0% in 1991 reflecting the benefits associated with a life
insurance program. Net income for the full year increased 14.5%, as a
consequence of the net favorable factors discussed above.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
The Consolidated Balance Sheet presents the company's financial position at
the end of each of the last two years. The statement lists the company's assets
and liabilities, and the equity of its shareholders. Major changes in the
company's financial position are summarized in the Consolidated Statement of
Cash Flows which appears on page F-4. The Cash Flows Statement summarizes the
changes in the Company's cash and equivalents balance for each of the last
three years and helps to show the relationship between operations (presented in
the Consolidated Statement of Income) and liquidity and financial resources
(presented in the Consolidated Balance Sheet).
With the growth in cash flow and the credit facilities and shelf registration
discussed below, management believes the company has the financial flexibility
to fund current operations and growth. In 1993, net income from operations
before cumulative effect of accounting changes plus depreciation and
amortization represented $453.7 million of the net cash provided by operating
activities. Excluding the restructuring charge and the charge related to the
impact of higher income tax rates on deferred income tax balances, net income
from operations before cumulative effect of accounting changes plus
depreciation and amortization would have been $520.7 million, compared to
$492.8 million in 1992. Cash flow from operations was used primarily to fund
capital investments and pay dividends.
The company's working capital continued to be adequate for the operation and
expansion of the business. Working capital--particularly cash, accounts
receivable and inventories--is closely controlled and continually monitored.
Emphasis continues on overall balance sheet management. Working capital
increased by $14.6 million from December 31, 1992, due to working capital
balances of newly acquired businesses, the additional funding of the Voluntary
Employee's Beneficiary Associations, increase in inventory resulting from the
reduced LIFO reserve, as well as increased inventory quantities to support
revenue growth and the reclassification of short-term debt (which reflects
management's estimate of near-term repayments). Other noncurrent liabilities
and deferred income tax balances at December 31, 1993 reflect the impacts of
the adoption of new accounting standards for postretirement benefits and income
taxes. A valuation allowance has not been provided on deferred tax asset
balances due to the company's projection of future taxable income (supported by
existing long-term customer contracts that are expected to provide future
revenues and earnings) in excess of such tax assets.
In 1993, capital expenditures totaled $307 million ($228 million in 1992) and
an additional $178 million ($84 million in 1992) was invested in various
acquisitions and joint ventures. This capital investment reflects the company's
continued program to expand and upgrade operations, including new equipment and
operations to meet the growing needs of present and new customers. The
expenditures were financed by internally generated funds and the issuance of
debt. Management currently estimates capital investment in 1994 will be
approximately $375 million, and, once again, capital investment will be
substantially financed through operating cash flows. Other expenditures in 1994
are expected to be in line with the growth in sales, earnings and cash flows.
At December 31, 1993, the company had revolving credit facilities totaling
$550 million with a number of banks (see the Notes to Consolidated Financial
Statements). These credit facilities provide support for the issuance of
commercial paper and other credit needs. Under an effective shelf registration,
in January, 1993, the company issued $110 million of 7.0% (7.2% effective rate
after consideration of placement costs and discounts) notes due January, 2003.
As of December 31, 1993, the company had effective shelf registration
statements permitting it to issue, from time to time, up to $500 million in
additional debt securities.
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.
12
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors and officers of the company is contained
on pages 2-5 and 8 of the company's definitive Proxy Statement dated February
17, 1994 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,
1993, and, with respect to certain of such information, prior years, is
contained on pages 8-14 of the company's definitive Proxy Statement dated
February 17, 1994 and is incorporated herein by reference (excluding the
information on page 14 under the caption, "Compensation Committee Report on
Executive Compensation").
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 5-8 of the company's definitive Proxy Statement dated
February 17, 1994 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, 1993, is contained on pages 5 and 14 of the company's
definitive Proxy Statement dated February 17, 1994 and is incorporated herein
by reference (excluding the information on page 14 under the caption,
"Compensation Committee Report on Executive Compensation").
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 Schedules
The financial statement schedules listed in the accompanying index
(page F-1) to the financial statements are 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.
13
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 28TH DAY OF
MARCH, 1994.
R. R. DONNELLEY & SONS COMPANY
William L. White
By __________________________________
William L. White,
Vice President, 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 28TH DAY OF MARCH, 1994.
SIGNATURE AND TITLE SIGNATURE AND TITLE
John R. Walter Robert A. Hanson
- ------------------------------------- -------------------------------------
John R. Walter Robert A. Hanson
Chairman of the Board, Director
Chief Executive Officer and Director
(Principal Executive Officer) Thomas S. Johnson
-------------------------------------
Frank R. Jarc Thomas S. Johnson
- ------------------------------------- Director
Frank R. Jarc
Executive Vice President and Richard M. Morrow
Chief Financial Officer -------------------------------------
(Principal Financial Officer) Richard M. Morrow
Director
William L. White
- ------------------------------------- John M. Richman
William L. White -------------------------------------
Vice President, Controller John M. Richman
(Principal Accounting Officer) Director
Martha Layne Collins William D. Sanders
- ------------------------------------- -------------------------------------
Martha Layne Collins William D. Sanders
Director Director
James R. Donnelley Jerre L. Stead
- ------------------------------------- -------------------------------------
James R. Donnelley Jerre L. Stead
Director Director
Charles C. Haffner III Bide L. Thomas
- ------------------------------------- -------------------------------------
Charles C. Haffner III Bide L. Thomas
Director Director
H. Blair White
-------------------------------------
H. Blair White
Director
ITEM 14(A). INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE(S)
-------
Consolidated Statement of Income for each of the three years ended De-
cember 31, 1993....................................................... F-2
Consolidated Balance Sheet at December 31, 1993 and 1992............... F-3
Consolidated Statement of Cash Flows for each of the three years ended
December 31, 1993..................................................... F-4
Consolidated Statement of Shareholders' Equity for each of the three
years ended December 31, 1993......................................... F-5
Notes to Consolidated Financial Statements............................. F-6
Report of Independent Public Accountants on Financial Statements....... F-16
Interim Financial Information.......................................... F-17
Report of Independent Public Accountants on Financial Statement Sched-
ules.................................................................. F-18
Financial Statement Schedules
V--Property, Plant and Equipment..................................... F-19
VI--Accumulated Depreciation and Amortization of Property, Plant and
Equipment........................................................... F-20
VIII--Valuation and Qualifying Accounts.............................. F-20
IX--Short-Term Borrowings............................................ F-21
X--Supplementary Income Statement Information........................ F-21
F-1
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDING DECEMBER 31,
----------------------------------
1993 1992 1991
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
Net sales.................................. $4,387,761 $4,193,072 $3,914,828
Cost of sales.............................. 3,518,168 3,375,214 3,187,925
---------- ---------- ----------
Gross profit............................... 869,593 817,858 726,903
Selling and administrative expenses........ 453,986 412,357 363,775
Restructuring charge....................... 90,000 -- --
---------- ---------- ----------
Earnings from operations................... 325,607 405,501 363,128
---------- ---------- ----------
Interest expense........................... (45,436) (38,659) (46,660)
Other income (expense)--net................ (3,609) (5,828) 3,718
---------- ---------- ----------
Total other expense--net................... (49,045) (44,487) (42,942)
---------- ---------- ----------
Earnings before income taxes and cumulative
effect of accounting changes.............. 276,562 361,014 320,186
Income taxes............................... 97,642 126,355 115,267
---------- ---------- ----------
Net income from operations before cumula-
tive effect of accounting changes......... 178,920 234,659 204,919
Cumulative effect of change in accounting
for:
Postretirement benefits other than pen-
sions (net of $80.1 million in tax bene-
fits)................................... (127,700) -- --
Income taxes............................. 58,200 -- --
---------- ---------- ----------
Net Income................................. $ 109,420 $ 234,659 $ 204,919
========== ========== ==========
Income (charge) per common share:
Operations before cumulative effect of ac-
counting changes.......................... $ 1.16 $ 1.51 $ 1.32
Cumulative effect of change in accounting
for:
Postretirement benefits other than pen-
sions (net of in tax benefits).......... (0.82) -- --
Income taxes............................. 0.37 -- --
---------- ---------- ----------
Net Income per Share of Common Stock....... $ 0.71 $ 1.51 $ 1.32
========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
F-2
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
Assets
DECEMBER 31,
----------------------
1993 1992
---------- ----------
(THOUSANDS OF
DOLLARS)
Cash and equivalents................................... $ 10,716 $ 12,348
Receivables, less allowances for doubtful accounts of
$14,795 in 1993 and $17,745 in 1992................... 825,207 791,869
Inventories, principally at LIFO cost.................. 243,714 197,961
Prepaid expenses....................................... 30,277 19,419
---------- ----------
Total Current Assets............................... 1,109,914 1,021,597
---------- ----------
Net property, plant and equipment, at cost, less accu-
mulated depreciation of $1,686,779 in 1993 and
$1,490,683 in 1992.................................... 1,674,476 1,532,248
---------- ----------
Goodwill, net of accumulated amortization of $67,735 in
1993 and $53,448 in 1992.............................. 493,672 448,486
Other.................................................. 375,964 407,916
---------- ----------
Total Other Assets................................. 869,636 856,402
---------- ----------
Total Assets....................................... $3,654,026 $3,410,247
========== ==========
Liabilities
Accounts payable....................................... $ 333,862 $ 254,608
Accrued compensation................................... 78,284 79,764
Short-term debt........................................ 37,428 45,001
Current and deferred income taxes...................... 40,698 35,925
Other accrued liabilities.............................. 195,169 196,435
---------- ----------
Total Current Liabilities.......................... 685,441 611,733
---------- ----------
Long-term debt......................................... 673,422 522,563
Deferred income taxes.................................. 272,959 400,796
Other noncurrent liabilities........................... 178,213 26,178
---------- ----------
Total Noncurrent Liabilities....................... 1,124,594 949,537
---------- ----------
Shareholders' equity
Common stock at stated value ($1.25 par value)
Authorized shares: 500,000,000; Issued: 158,608,800
in 1993 and 1992.................................... 330,612 330,612
Retained earnings, including ($13,140) in 1993 and
($10,019) in 1992 of cumulative translation
adjustments......................................... 1,629,673 1,602,401
Reacquired common stock, at cost..................... (116,294) (84,036)
---------- ----------
Total Shareholders' Equity......................... 1,843,991 1,848,977
---------- ----------
Total Liabilities and Shareholders' Equity......... $3,654,026 $3,410,247
========== ==========
See accompanying Notes to Consolidated Financial Statements.
F-3
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDING DECEMBER 31
-------------------------------
1993 1992 1991
--------- --------- ---------
(THOUSANDS OF DOLLARS)
Cash flows provided by (used in) operating
activities:
Net income from operations before cumulative
effect of accounting changes................ $ 178,920 $ 234,659 $ 204,919
Depreciation and amortization................ 274,804 258,169 241,166
Net change in assets and liabilities......... (4,342) (41,530) (30,797)
Other........................................ 3,241 743 3,490
--------- --------- ---------
Net Cash Provided By Operating Activities.... 452,623 452,041 418,778
--------- --------- ---------
Cash flows from (used for) investing activi-
ties:
Capital expenditures......................... (306,512) (228,002) (286,880)
Other capital investments including acquisi-
tions....................................... (177,743) (83,771) (20,891)
Proceeds from sale/leaseback transaction..... -- -- 8,526
--------- --------- ---------
Net Cash Used For Investing Activities....... (484,255) (311,773) (299,245)
--------- --------- ---------
Cash flows from (used for) financing activi-
ties:
Net increase (decrease) in borrowings........ 143,286 (56,275) (84,930)
Disposition of reacquired common stock....... 19,693 13,068 18,532
Acquisition of common stock.................. (47,513) (28,298) (12,365)
Cash dividends on common stock............... (83,465) (79,242) (77,683)
--------- --------- ---------
Net Cash From (Used For) Financing Activi-
ties........................................ 32,001 (150,747) (156,446)
--------- --------- ---------
Net effect of foreign currency transactions.. (2,001) (1,313) 1,107
--------- --------- ---------
Net Decrease in Cash and Equivalents......... (1,632) (11,792) (35,806)
--------- --------- ---------
Cash and Equivalents at Beginning of Year.... 12,348 24,140 59,946
--------- --------- ---------
Cash and Equivalents at End of Year.......... $ 10,716 $ 12,348 $ 24,140
========= ========= =========
The changes in assets and liabilities, net of
balances assumed through acquisitions, were
as follows:
1993 1992 1991
--------- --------- ---------
Decrease (Increase) in Assets:
Receivables--net........................... $ 5,835 $ (87,970) $ (3,453)
Inventories--net........................... (32,156) (32,568) (1,184)
Prepaid expenses........................... (8,463) 80,133 (12,426)
Other assets............................... 31,609 (125,065) (23,234)
Increase (Decrease) in Liabilities:
Accounts payable........................... 41,988 37,079 9,667
Accrued compensation....................... (3,146) 22,108 6,265
Current and deferred income taxes.......... 4,773 (3,859) 1,069
Deferred income taxes...................... 9,725 18,821 1,195
Other accrued liabilities.................. (1,110) 53,748 (3,231)
Other noncurrent liabilities............... (53,397) (3,957) (5,465)
--------- --------- ---------
Net Change in Assets and Liabilities..... $ (4,342) $ (41,530) $ (30,797)
========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
F-4
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(THOUSANDS OF DOLLARS)
REACQUIRED COMMON
COMMON STOCK STOCK
-------------------- --------------------- RETAINED
SHARES AMOUNT SHARES AMOUNT EARNINGS TOTAL
----------- -------- ---------- --------- ---------- ----------
Balance at
December 31, 1990...... 79,304,400 $231,481 (1,839,562) $ (71,737) $1,435,872 $1,595,616
Net income.............. 204,919 204,919
Treasury stock pur-
chases................. (272,135) (12,365) (12,365)
Cash dividends.......... (77,683) (77,683)
Cost of common shares
issued under stock pro-
grams.................. 482,148 17,587 945 18,532
Translation adjustments. 1,367 1,367
----------- -------- ---------- --------- ---------- ----------
Balance at
December 31, 1991...... 79,304,400 231,481 (1,629,549) (66,515) 1,565,420 1,730,386
Net income.............. 234,659 234,659
Par value of common
shares issued for stock
split effective Septem-
ber 1, 1992............ 79,304,400 99,131 (1,629,549) (99,131) --
Treasury stock pur-
chases................. (967,370) (28,298) (28,298)
Cash dividends.......... (79,242) (79,242)
Cost of common shares
issued under stock pro-
grams.................. 646,486 10,777 2,291 13,068
Translation adjustments. (21,596) (21,596)
----------- -------- ---------- --------- ---------- ----------
Balance at
December 31, 1992...... 158,608,800 330,612 (3,579,982) (84,036) 1,602,401 1,848,977
Net income before cumu-
lative effects of ac-
counting 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 pur-
chases................. (1,601,296) (47,513) (47,513)
Cash dividends.......... (83,465) (83,465)
Cost of common shares
issued under stock pro-
grams.................. 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
=========== ======== ========== ========= ========== ==========
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 subsidiaries. Intercompany items and transactions are eliminated in
consolidation.
Nature of Operations--
The operations of the company are in the information industry. The company
produces a wide variety of print and print-related 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 production 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.
International operations represent less than 9% of consolidated results and of
consolidated assets.
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
substantially carried at Last-In, First-Out (LIFO) cost. 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.
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 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.
F-6
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Capitalization, Depreciation and Amortization--
Property, plant and equipment are stated at cost. Depreciation is computed
principally on the straight-line method. 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 related depreciation reserves are eliminated and the resulting profit or
loss is recognized in income. Goodwill and other intangible assets are
amortized principally over periods ranging from 10 to 40 years.
Income Taxes--
Deferred income taxes relate principally to the use of accelerated
depreciation methods for tax reporting purposes, the investment in safe harbor
leases, pension costs, net postretirement medical and death benefit costs and
contributions to fund the Voluntary Employees' Beneficiary Associations
(VEBAs).
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 printed the Sears catalogs. The loss of
this work will have no ongoing material effect on operating results.
INVENTORIES
The components of the company's inventories as of December 31, 1993 and 1992,
were as follows:
1993 1992
-------- --------
(THOUSANDS OF
DOLLARS)
Raw materials......................................... $142,739 $141,294
Work in process....................................... 154,477 158,178
Operating supplies.................................... 32,192 25,350
Progress billings..................................... (40,299) (53,479)
LIFO reserve.......................................... (45,395) (73,382)
-------- --------
Total............................................. $243,714 $197,961
======== ========
VOLUNTARY EMPLOYEES' BENEFICIARY ASSOCIATIONS
The company maintains two Voluntary Employees' Beneficiary Associations to
fund employee welfare benefits and postretirement medical and death benefits.
The balances of the VEBAs (net of associated liabilities) in the accompanying
Consolidated Balance Sheet are classified as either current or noncurrent
depending on the ultimate expected payment date of the underlying liabilities.
As of December 31, 1993, a net current asset of $9.8 million was included in
Prepaid Assets representing the current position of the company's employee
welfare benefit plans funded by one of the VEBAs ($33.2 million included in
Other Accrued Liabilities at December 31, 1992). The VEBA established to
partially fund the company's liability for postretirement medical and death
benefits ($135 million at December 31, 1993) is included in other noncurrent
liabilities as an offset to the related liability. (The initial VEBA fund of
$104 million was recorded as a Noncurrent Asset at December 31, 1992). For
additional information, refer to the notes on "Other Retirement Benefits."
F-7
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
The following table summarizes the components of Property, Plant and
Equipment (at cost):
1993 1992
---------- ----------
(THOUSANDS OF
DOLLARS)
Land................................................ $ 39,033 $ 34,807
Buildings........................................... 551,103 493,113
Machinery and equipment............................. 2,771,119 2,495,011
---------- ----------
Total........................................... $3,361,255 $3,022,931
========== ==========
COMMITMENTS AND CONTINGENCIES
Authorized expenditures on incomplete projects for the purchase of property,
plant and equipment, as of December 31, 1993, totaled $418.8 million. Of this
total, $143.9 million has been paid and an additional $120.7 million has been
committed for payment upon completion of the contracts. 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 approximating $390.2 million
extending through various periods to 2066. The lease commitment is $60.8
million for 1994, and ranges from $26.8 million to $47.4 million in each of the
years 1995-1998 and totals $186.1 million for future periods.
The company does not believe an accounts receivable credit risk exists 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 (other than the FTC matter described below) 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 to invest in various affordable housing limited
partnerships which provide annual tax benefits and credits in amounts greater
than the annual investments.
The company has appealed a recent decision in the Federal Trade Commission
(FTC) challenge to the company's 1990 acquisition of the Meredith/Burda
companies. An FTC administrative law judge found the acquisition has or may
substantially lessen competition in an alleged "high-volume publication gravure
printing" market and ordered the divestiture of the Meredith/Burda companies.
The company's appeal has the effect of staying the divestiture order. The
ruling is contrary to an earlier ruling by a Federal District Court which
allowed the acquisition to be consummated. Company management continues to
believe this acquisition was legally proper.
RETIREMENT BENEFIT PLAN
Net pension credits included in operating results for the Retirement Benefit
Plan (the Plan) were:
1993 1992 1991
--------- -------- ---------
(THOUSANDS OF DOLLARS)
Service cost................................... $ 25,097 $ 20,455 $ 14,940
Interest cost on the projected benefit obliga-
tion.......................................... 47,295 43,252 41,117
Actual return on Plan assets................... (106,595) (85,115) (174,208)
Amortization of excess Plan net assets at adop-
tion of SFAS No. 87 and deferrals--net........ 20,306 5,127 98,846
--------- -------- ---------
Total...................................... $ (13,897) $(16,281) $ (19,305)
========= ======== =========
F-8
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For financial reporting purposes the actuarial computations that derived the
above amounts assumed a discount rate on projected benefit obligations of 7.5%
(7.8% at December 31, 1992 and December 31, 1991), an expected long-term rate
of return on Plan assets of 9.5% and annual salary increases of 5%.
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 Assets on the
accompanying Consolidated Balance Sheet) are as follows:
DECEMBER 31, JANUARY 1,
1993 1993
------------ ----------
(THOUSANDS OF DOLLARS)
Fair value of Plan assets.............................. $962,153 $890,297
-------- --------
Actuarial present value of benefit obligations:
Vested............................................... 590,214 535,640
Non-vested........................................... 10,488 8,325
-------- --------
Total accumulated benefit obligations.................. 600,702 543,965
Additional amounts related to projected wage increases. 95,155 79,746
-------- --------
Projected benefit obligations for services rendered to
date.................................................. 695,857 623,711
-------- --------
Excess of Plan assets over projected benefit obliga-
tions................................................. 266,296 266,586
Unrecognized net deferrals............................. 6,385 2,047
Unrecognized net excess Plan assets to be amortized
through the year 2005................................. (118,197) (128,046)
-------- --------
Prepaid pension costs.............................. $154,484 $140,587
======== ========
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. Beginning in 1992, the company began a program to
partially fund 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 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 (cash
basis). 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.
F-9
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The net accrual-basis expense for postretirement benefits during 1993
included the following components:
1993
----------
(THOUSANDS
OF
DOLLARS)
Service cost................................................... $11,580
Interest cost on the projected benefit obligations............. 17,486
Actual return on assets........................................ (5,545)
Deferrals--net................................................. (3,832)
-------
Total...................................................... $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 restructuring charge
(see separate note above). The expense for postretirement medical and death
benefits for 1992 and 1991 (recognized on a cash basis) was $12.4 million and
$9.8 million, respectively.
The liability (included in Other Noncurrent Liabilities on the accompanying
Consolidated Balance Sheet at December 31, 1993) for postretirement benefits,
net of the partial funding, is as follows:
DECEMBER 31, JANUARY 1,
1993 1993
------------ ----------
(THOUSANDS OF DOLLARS)
Actuarial present value of benefit obligations:
Retirees.......................................... $ 152,334 $ 137,733
Fully eligible active plan participants........... 4,413 6,711
Other active plan participants.................... 87,077 63,376
--------- ---------
Total accumulated benefit obligations............... 243,824 207,820
Fair value of Plan assets........................... (134,731) (104,186)
Unrecognized net deferrals.......................... (805) --
--------- ---------
Excess of accumulated benefit obligation over
plan assets.................................... $ 108,288 $ 103,634
========= =========
For financial reporting purposes the 1993 actuarial computations assumed a
discount rate of 7.5% 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 8.4% initially, declining gradually to 5.4% in
2053, 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
1993 postretirement benefit expense (service cost and interest cost) by $1.6
million and the accumulated postretirement benefit obligations as of December
31, 1993 by $10.4 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 to deferred income tax balances. In the first quarter of 1993, 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).
F-10
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash payments for income taxes were $75.2 million, $105.9 million and $106.2
million in 1993, 1992 and 1991, respectively. The components of income tax
expense for the years ending December 31, 1993, 1992 and 1991, were as follows:
1993 1992 1991
------- -------- --------
(THOUSANDS OF DOLLARS)
Federal
Current...................................... $72,049 $108,494 $ 93,186
Deferred*.................................... 7,339 (5,966) 1,269
State.......................................... 18,254 23,827 20,812
------- -------- --------
Total...................................... $97,642 $126,355 $115,267
======= ======== ========
- --------
*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, 1993 and
January 1, 1993, were as follows:
DECEMBER 31, JANUARY 1,
1993 1993
------------ ----------
(MILLIONS OF DOLLARS)
Deferred tax liabilities:
Accelerated depreciation........................ $176 $165
Investments in safe harbor leases............... 46 56
Pensions........................................ 57 51
Other........................................... 72 76
---- ----
Total Deferred Tax Liabilities................ 351 348
---- ----
Less deferred tax assets:
Postretirement benefits......................... 43 40
Purchase accounting............................. 30 27
Other........................................... 19 31
---- ----
Total Deferred Tax Assets..................... 92 98
---- ----
Net deferred tax liabilities................ $259 $250
==== ====
The following table reconciles the difference between the U.S. statutory tax
rates and the rates used by the company in the determination of net income:
1993 1992 1991
---- ---- ----
Federal statutory rate....................................... 35.0% 34.0% 34.0%
State and local income taxes, net of U.S. federal income tax
benefit..................................................... 4.3 4.4 4.3
Differences resulting from purchase accounting............... 2.0 1.1 1.3
Benefits resulting from life insurance program............... (5.5) (3.2) (2.1)
Affordable housing investment credits........................ (2.5) -- --
Other........................................................ (0.2) (1.3) (1.5)
---- ---- ----
Subtotal..................................................... 33.1 35.0 36.0
Adjustment of deferred taxes for the increase in the U.S.
federal
statutory income tax rate................................... 2.2 -- --
---- ---- ----
Total.................................................... 35.3% 35.0% 36.0%
==== ==== ====
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, consisted of the following:
1993 1992
-------- --------
(THOUSANDS OF
DOLLARS)
9.125% Debentures due December 1, 2000....................... $199,502 $199,430
7.0% Notes due January 1, 2003............................... 109,647 --
8.875% Debentures due April 15, 2021......................... 149,638 149,625
Commercial paper............................................. 218,664 175,978
Other........................................................ 33,399 42,531
-------- --------
Total.................................................... $710,850 $567,564
======== ========
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 is approximately $788 million. The company's debentures are not actively
traded and contain no call provisions. The company's other financial
instruments are either carried at fair value or do not materially differ from
fair value.
At December 31, 1993, the company had available credit facilities of $550
with a group of domestic and foreign banks. The credit arrangements provide
support for the issuance of commercial paper and other credit needs. Borrowings
under the facilities (none during the past three years) bear interest at
various rates not exceeding the banks' prime rates. The company pays annual
fees ranging from 0.1% to 0.15% on the total unused credit facilities.
At December 31, 1993, the company had $233.0 million of commercial paper and
short-term debt outstanding, of which $37.4 million represents management's
current estimate of 1994 net repayment. The remaining $195.6 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 1993 was 3.2% (3.3% at December
31, 1993).
The following table summarizes interest expenses included in the Consolidated
Statement of Income:
1993 1992 1991
------- ------- -------
(THOUSANDS OF DOLLARS)
Interest incurred........... $51,922 $43,882 $55,889
Amount capitalized as prop-
erty, plant and equipment.. (6,486) (5,223) (9,229)
------- ------- -------
Total................... $45,436 $38,659 $46,660
======= ======= =======
Interest paid, net of capitalized interest, was $42.9 million, $38.4 million,
$51.8 million in 1993, 1992 and 1991, respectively. As of December 31, 1993,
the company had effective shelf registrations permitting it to issue, from time
to time, up to $500 million of debt securities. The proceeds of any debt
securities issued would be used for general corporate purposes.
F-12
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STOCK AND INCENTIVE PROGRAMS FOR MANAGEMENT EMPLOYEES
Stock Unit Awards and Restricted Stock Awards--At December 31, 1993 and 1992,
the company had outstanding 80,000 and 171,000 stock units, respectively, which
had been granted to officers and selected managers prior to 1990. Certain of
these units are payable upon or subsequent to termination of employment and
others are payable upon vesting, normally five years after the date of grant.
Payment of these awards will be made in shares of common stock equal to the
number of units awarded, in cash equal to the market value at the date of
distribution, or a combination thereof, at the company's option. The expense
for these grants was recognized in the year granted. When an award of stock
units is paid, the recipient will receive an additional amount in cash equal to
dividends paid on an equivalent number of shares of common stock during the
vesting period, plus interest. The values of the dividends and interest
accounts, were $232 thousand and $409 thousand at December 31, 1993 and 1992,
respectively.
At December 31, 1993 and 1992, the company had outstanding 275,000 and
223,000, 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 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 stock units and restricted stock awards was $11.0 million
and $12.9 million based upon the closing price of the company's stock price at
each year end ($31.13 and $32.75 at December 31, 1993 and 1992, respectively).
Charges to expense for both stock plans were $1.1 million, $1.2 million, and
$0.9 million in 1993, 1992 and 1991, 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 1993 will depend upon the extent to which eligible
participants subscribe during the subscription period in the first quarter of
1994 and the price of the stock on March 16, 1994. Amounts charged to expense
for this plan were $6.2 million in 1993 and $5.8 million in 1992. No amounts
were charged to expense for the 1991 plan year since participation was not
allowed according to the plan terms because the company's earnings did not meet
the required performance goal under the plan.
Incentive Compensation Plans--
The company has incentive compensation plans covering selected officers.
Amounts charged to expense for supplementary compensation, which is determined
from participants' base salaries and factors relating to various performance
measures, were $2.6 million in 1993, $2.7 million in 1992 and $0.7 million in
1991.
Stock Options--
The company has granted stock options annually from 1983 to 1993. Exercise
prices are 100% of the market price of common stock on the date of grant. The
options vest over four or five years and may be exercised, once vested, up to
ten years from the date of grant. Under the 1991 Stock Incentive Plan, a
maximum of 2.9 million shares were available for future grants of stock options
and restricted stock awards as of December 31, 1993. Information relating to
stock options for the years ended December 31 is shown on the following table.
F-13
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1993 1992
-------------------------- --------------------------
NUMBER PER SHARE OPTION NUMBER PER SHARE OPTION
OF SHARES ON DATE OF GRANT OF SHARES ON DATE OF GRANT
--------- ---------------- --------- ----------------
Stock options granted.... 1,399,200 $28.94 to $30.19 1,261,800 $25.31 to $31.38
Stock options canceled or
expired................. 17,040 $19.63 to $31.38 50,460 $17.72 to $23.94
Stock options exercised.. 248,201 $11.00 to $23.94 548,348 $11.30 to $23.94
At end of year
Stock options outstand-
ing................... 7,685,105 $11.44 to $31.38 6,551,146 $11.00 to $31.38
Stock options exercis-
able.................. 3,850,079 $11.44 to $31.38 2,936,312 $11.00 to $23.94
========= ================ ========= ================
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.
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, 1993, for formerly eligible employees. There are no
charges to operations for this plan, except for certain administrative
expenses.
STOCK SPLIT
On July 23, 1992, the Board of Directors declared a 2-for-1 common stock
split. The split was completed on September 1, 1992, by the distribution of one
share of common stock, par value $1.25 per share, for each share held by
stockholders of record on August 7, 1992. Information relating to stock
options, stock units rights, reacquired common stock, the Shareholders Rights
Plan, and the net income and dividends per share included in the Consolidated
Financial Statements and related footnotes reflect the stock split.
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.
F-14
R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
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 of 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.
ACQUISITIONS
The company made several acquisitions, joint venture and equity investments
in 1993, 1992 and 1991, 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.
F-15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders 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, 1993 and 1992, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years ended December
31, 1993. 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, 1993 and 1992, and the results of its
operations and its cash flows for each of the three years ended December 31,
1993, in conformity with generally accepted accounting principles.
As explained in the Notes to Consolidated Financial Statements, 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 & Co.
Chicago, Illinois
January 27, 1994
F-16
UNAUDITED INTERIM FINANCIAL INFORMATION
THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA
YEAR ENDING DECEMBER 31
-----------------------------------------------------
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
-------- ---------- ---------- ---------- ----------
1993
Net sales............... $960,341 $ 993,964 $1,123,848 $1,309,608 $4,387,761
Gross profit............ 174,835 195,351 232,022 267,385 869,593
Net income (loss) from
operations before cumu-
lative effect of ac-
counting changes....... (22,108) 52,771 69,451 78,806 178,920
Cumulative effect of ac-
counting changes....... (69,500) -- -- -- (69,500)
Net income (loss)....... (91,608) 52,771 69,451 78,806 109,420
Per common share
Net income (loss) from
operations before cu-
mulative effect of
accounting changes... (0.14) 0.34 0.45 0.51 1.16
Cumulative effect of
accounting changes... (0.45) -- -- -- (0.45)
Net income (loss)..... (0.59) 0.34 0.45 0.51 0.71
1992
Net sales............... $938,172 $1,006,856 $1,038,781 $1,209,263 $4,193,072
Gross profit............ 162,644 190,158 219,128 245,928 817,858
Net income.............. 35,514 53,693 72,360 73,092 234,659
Net income per common
share.................. 0.23 0.34 0.47 0.47 1.51
F-17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Stockholders 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 27, 1994. Our audit was made for the purpose of forming an
opinion on those statements taken as a whole. The schedules listed in the index
to the financial statements and financial statement schedules are the
responsibility of the Company's management and are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly state 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 & Co.
Chicago, Illinois,
January 27, 1994
F-18
SCHEDULE V
PROPERTY, PLANT AND EQUIPMENT
Depreciation of plant and equipment is computed principally on the straight-
line basis primarily at the following rates: buildings, 3%-5% and machinery and
equipment, 6 2/3%-33 1/3%.
BALANCE AT ACQUI- RETIRE- TRANSLATION BALANCE
BEGINNING SITIONS ADDITIONS MENTS OR AND OTHER AT END
OF YEAR AT COST AT COST SALES ADJUSTMENTS OF YEAR
---------- ------- --------- -------- ----------- ----------
(IN THOUSANDS OF DOLLARS)
1993--
Land................... $ 34,807 $ 3,251 $ 1,104 $ (97) $ (32) $ 39,033
Buildings.............. 493,113 28,600 34,465 (4,887) (188) 551,103
Machinery & equipment.. 2,495,011 59,564 286,652 (66,884) (3,224) 2,771,119
---------- ------- -------- -------- -------- ----------
$3,022,931 $91,415 $322,221 $(71,868) $ (3,444) $3,361,255
========== ======= ======== ======== ======== ==========
1992--
Land................... $ 53,678 $ 1,756 $ 322 $(20,836) $ (113) $ 34,807
Buildings.............. 474,566 7,633 26,325 (12,786) (2,625) 493,113
Machinery & equipment.. 2,317,897 35,871 199,420 (49,268) (8,909) 2,495,011
---------- ------- -------- -------- -------- ----------
$2,846,141 $45,260 $226,067 $(82,890) $(11,647) $3,022,931
========== ======= ======== ======== ======== ==========
1991--
Land................... $ 53,283 $ -- $ 1,122 $ (1,583) $ 856 $ 53,678
Buildings.............. 465,021 -- 20,260 (11,824) 1,186 474,643
Machinery & equipment.. 2,117,824 -- 257,081 (55,772) (1,313) 2,317,820
---------- ------- -------- -------- -------- ----------
$2,636,128 $ -- $278,463 $(69,179) $ 729 $2,846,141
========== ======= ======== ======== ======== ==========
F-19
SCHEDULE VI
ACCUMULATED DEPRECIATION AND
AMORTIZATION OF PROPERTY, PLANT
AND EQUIPMENT
BALANCE AT TRANSLATION BALANCE AT
BEGINNING RETIREMENTS AND OTHER END OF
OF YEAR ADDITIONS OR SALES ADJUSTMENTS YEAR
---------- --------- ----------- ----------- ----------
(IN THOUSANDS OF DOLLARS)
1993--
Buildings.............. $ 178,495 $ 21,673 $ (482) $ (114) $ 199,572
Machinery & equipment.. 1,312,188 230,853 (48,205) (7,629) 1,487,207
---------- -------- -------- ------- ----------
$1,490,683 $252,526 $(48,687) $(7,743) $1,686,779
========== ======== ======== ======= ==========
1992--
Buildings.............. $ 163,091 $ 20,158 $ (6,078) $ 1,324 $ 178,495
Machinery & equipment.. 1,139,021 215,188 (49,195) 7,174 1,312,188
---------- -------- -------- ------- ----------
$1,302,112 $235,346 $(55,273) $ 8,498 $1,490,683
========== ======== ======== ======= ==========
1991--
Buildings.............. $ 145,659 $ 19,721 $ (2,152) $ (137) $ 163,091
Machinery & equipment.. 1,008,289 189,036 (56,866) (1,438) 1,139,021
---------- -------- -------- ------- ----------
$1,153,948 $208,757 $(59,018) $(1,575) $1,302,112
========== ======== ======== ======= ==========
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
Transactions affecting the allowances for doubtful accounts during the years
ended December 31, 1993, 1992 and 1991 were as follows:
1993 1992 1991
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Allowance for trade receivable losses:
Balance, beginning of year................ $ 17,745 $ 23,928 $ 29,514
Balance, acquired companies at acquisi-
tion..................................... 312 1,066 --
Provisions charged to income.............. 22,658 12,931 8,995
-------- -------- --------
40,715 37,925 38,509
Uncollectible accounts written off, net of
recoveries............................... (25,920) (20,180) (14,581)
-------- -------- --------
Balance, end of year...................... $ 14,795 $ 17,745 $ 23,928
======== ======== ========
F-20
SCHEDULE IX
SHORT-TERM BORROWINGS
1993 1992 1991
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
Commercial Paper*:
As of December 31......................... $ 23,120 $ 29,620 $75,137
-------- -------- --------
Weighted average interest rate at December
31................................... 3.3% 3.6% 5.0%
Maximum balance during the year........... 32,500 79,882 75,137
Average amount outstanding over the pe-
riods
the indebtedness was outstanding......... 29,150 75,305 47,409
Weighted average interest rate during the
period................................... 3.2% 3.9% 5.7%
Other, as of December 31.................... 14,308 15,381 21,160
-------- -------- --------
Total short-term debt as of December 31... $ 37,428 $ 45,001 $96,297
======== ======== ========
- --------
*At December 31, 1993 the Company had $218.7 million of commercial paper
($176.0 million and $215.7 million at December 31, 1992 and December 31,
1991, respectively) of which the $23.1 million represents management's
current estimate of 1994 repayments. The remaining $195.6 million, at
December 31, 1993, is classified as long term since the Company has the
ability and intent to maintain such debt on a long term basis.
SCHEDULE X
SUPPLEMENTARY INCOME STATEMENT INFORMATION
Amounts charged to expense for the years ended December 31, 1993, 1992 and
1991 were as follows:
1993 1992 1991
-------- -------- -------
(IN THOUSANDS OF DOLLARS)
Maintenance and repairs......................... $102,990 $100,850 $92,345
F-21
INDEX TO EXHIBITS*
DESCRIPTION EXHIBIT NO.
----------- -----------
Certificate of Incorporation(10)............................... 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)
Amendments to By-Laws adopted January 27, 1994................. 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(8)..................................
4(d)
Directors' Retirement Benefit Plan, as amended(6)**............ 10(a)
Directors' Deferred Compensation Agreement**................... 10(b)
Donnelley Shares Stock Option Plan............................. 10(c)
1993 Stock Ownership Plan for Non-Employee Directors(9)**...... 10(d)
Senior Management Annual Incentive Plan, as amended(8)**....... 10(e)
Form of Severance Agreement for Senior Officers, as amended**.. 10(f)
1993 Stock Purchase Plan for Selected Managers and Key Staff 10(g)
Employees(9)**.................................................
1981 Stock Incentive Plan(5)**................................. 10(h)
1986 Stock Incentive Plan(5)**................................. 10(i)
1991 Stock Incentive Plan, as amended(11)**.................... 10(j)
Unfunded Supplemental Benefit Plan(8)**........................ 10(k)
Amendment to Unfunded Supplemental Benefit Plan adopted on 10(l)
April 25, 1991(7)**...........................................
Agreement with John R. Walter for 1988 award of stock 10(m)
units(3)**....................................................
Agreement with C. K. Doty (11)**............................... 10(n)
Statement of Computation of Ratio of Earnings to Fixed 12
Charges.......................................................
Subsidiaries of R. R. Donnelley & Sons Company................. 21
Consent of Independent Public Accountants dated March 28, 23
1994..........................................................
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*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), 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.
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(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 23, 1990, and
incorporated herein by reference.
(6) Filed as Exhibit with Form SE filed on March 25, 1991, and
incorporated herein by reference.
(7) Filed as Exhibit with Form SE filed on May 9, 1991 and incorporated
herein by reference.
(8) Filed as Exhibit with Form SE filed on March 26, 1992 and
incorporated herein by reference.
(9) Filed as Exhibit with Form SE filed on March 30, 1993 and
incorporated herein by reference.
(10) Filed on May 14, 1993 as Exhibit to Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1993.
(11) Filed on November 12, 1993 as Exhibit to Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1993.
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