10-K405

UNITED  STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2000

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 (State or other jurisdiction of incorporation or organization) 36-1004130 (I.R.S. Employer Identification No.)

77 West Wacker Drive, Chicago, Illinois (Address of principal executive offices) 60601 (ZIP Code)

Registrant’s telephone number—(312) 326-8000

Securities registered pursuant to Section 12(b) of the Act:

 
Title of each Class Common (Par Value $1.25) Preferred Stock Purchase Rights Name of each exchange on
which registered 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          ^ü

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 statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     [ü]

        As of February 28, 2001, 119,040,062 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 February 28, 2001) held by nonaffiliates was $3,377,025,443.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the registrant’s definitive Proxy Statement dated February 26, 2001, are incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

Form 10-K Item No.	Name of Item	Page
Part I
Item  1.	Business	3
Item  2.	Properties	8
Item  3.	Legal Proceedings	8
Item  4.	Submission of Matters to a Vote of Security Holders	9
	Executive Officers and Other Principal Officers of R.R. Donnelley & Sons Company	10
Part II
Item  5.	Market for R.R. Donnelley & Sons Company’s Common Equity and Related       Stockholder Matters	12
Item  6.	Selected Financial Data	12
Item  7.	Management’s Discussion and Analysis of Financial Condition and Results of       Operations	12
Item  7A.	Quantitative and Qualitative Disclosures about Market Risk	23
Item  8.	Financial Statements and Supplementary Data	23
Item  9.	Changes in and Disagreements with Accountants on Accounting and Financial       Disclosure	23
Part III
Item 10.	Directors and Executive Officers of R.R. Donnelley & Sons Company	24
Item 11.	Executive Compensation	24
Item 12.	Security Ownership of Certain Beneficial Owners and Management	24
Item 13.	Certain Relationships and Related Transactions	24
Part IV
Item 14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	24
	Signatures	25
Item 14(a).	Index to Financial Statements and Financial Statement Schedules	F-1
	Index to Exhibits	E-1

PART I

ITEM 1.    BUSINESS

Industry and Company Overview

        R.R. Donnelley & Sons Company (NYSE:DNY) provides comprehensive, integrated communications services that efficiently and effectively produce, manage and deliver our customers’ content, regardless of the communications medium. While our superior print capabilities remain the foundation of the company, our recent focus on expanding our range of offerings with value-added services allows us to create additional value.

        We provide solutions designed to enhance the effectiveness of our customers’ communications. Our services include:

· Content creation—to provide creative design services to maximize the impact of communications and improve response rates. In addition to in-house capabilities, alliances with best-in-class providers complement our service offerings.

· Digital asset management—to help our customers leverage their content to reach end-users through multiple marketing channels. Through our premedia services, we digitally capture content, convert it to the appropriate format and channel it to multiple communications media, including print and the Internet.

· Production—to drive results for our customers cost-effectively through print or the Internet. Our manufacturing operations around the world offer a full range of capabilities and are networked to produce quickly large printing jobs with identical specifications. We also are able to version printed content to reach targeted audiences. Our Internet services include website production to extend our customers’ brands to the Internet by delivering content and commerce online through our Red Rover Digital (Red Rover) subsidiary.

· Distribution—to deliver our customers’ words and images efficiently and reliably through print or the Internet. R.R. Donnelley Logistics (Donnelley Logistics) delivers printed products and packages to the U.S. Postal Service (USPS), saving our customers significant time and money. Red Rover offers a full range of services to deliver value, maximize content effectiveness, enhance our clients’ businesses and build their customer relationships via the Internet.

        Our 136-year history as a printing industry leader positions us well for the future. The printing industry is projected to grow along with the communications industry. Print advertising is expected to remain among the most cost-effective ways for our customers to deliver their messages and generate revenue as they use words and images to inform, educate, entertain and sell to their audiences.

        We are confident that print will remain integral to successful marketing given its unique capabilities, such as portability and high-quality graphics that cannot be duplicated by other communications methods. We also believe that the nature of print will evolve. The ability of print to be targeted, timely, flexible and integrated with other communications media will become more critical.

End-Market Descriptions

        We operate primarily in the commercial print portion of the printing industry, with related service offerings designed to offer customers complete solutions for communicating their messages to targeted audiences. While our manufacturing plants, financial service centers and sales offices are located throughout the United States and selected international markets, the supporting technologies and knowledge base are common. Our locations have a range of production capabilities to serve our customers and end-markets. We manufacture products with the operational goal of optimizing the efficiency of the common manufacturing and distribution platform. As a result, most plants produce work for customers in two or three of our end-markets.

        The following describes the end-markets we serve:

Long-run Magazines, Catalogs and Inserts    R.R. Donnelley is a leader in the North American magazine, catalog and advertising insert markets. These markets are characterized by demand for large, cost-effective print runs with excellent opportunity for differentiation among competitors through services such as premedia and Donnelley Logistics. Our U.S. customers include seven of the top 10 magazine titles, eight of the top 10 consumer catalog companies and eight of the top 10 retailers. Contracts typically span from three to five years.

Telecommunications    R.R. Donnelley is the worldwide leader in the directory market. We serve the global directory needs of telecommunications providers, including three of the four U.S. Regional Bell Operating Companies, independent telephone companies such as Sprint, independent directory publishers such as McCleod and Yellow Book, and leading international telecommunications providers such as British Telecom and Shanghai Telephone.

        Directory contracts typically span five to 10 years, with our current major contracts expiring between 2004 and 2009. Deregulation and substantial investment in the global telecommunications industry provide significant growth opportunities. In addition, growth opportunities arise as we work with directory publishers to introduce innovations such as targeted printed directories, website development for small businesses, content for online directories and solutions for the technology and government markets, and as we extend our capabilities worldwide.

Book Publishing Services    R.R. Donnelley, the leader in the North American book market, serves the trade, children’s, religious and educational book segments. We are a key supplier for all of the top 10 U.S. book publishers and we print more than 50% of The New York Times’ adult best-seller titles. We also print one-third of all textbooks used in classrooms in the United States.

        We are one of the leading converters of book publishers’ content to electronic format for electronic books, or e-books, providing services for all major e-book formats. We have converted approximately 1,500 titles to date, including Stephen King’s novella Riding the Bullet, which was distributed only online.

Financial Services    R.R. Donnelley Financial, a leader in the U.S. and international financial services markets, supports the communications needs of corporations and their investment banks as they access the global capital markets. We also are a leading provider of customized communications solutions for investment management, banking, insurance, managed care and pharmaceutical companies.

        Our global service network, manufacturing platform and distribution system give us unique advantages in servicing the capital markets, particularly for large financial deals. For example, the four largest transactions of the 1990s used R.R. Donnelley Financial to communicate their deals. Additionally, we are a leading provider of mutual fund compliance communications. To meet our clients’ needs for accuracy, speed, confidentiality and convenience, we have developed technology for virtual deal management and Internet-enabled inventory management, are experts in EDGAR HTML filings and have integrated database management with content assembly, digital output and multiple-media delivery.

        Our customized communications solutions provide an integrated suite of information management, content assembly and delivery solutions designed to give our clients closer and longer-lasting relationships with their customers. In markets that increasingly see demand for more precise communication with individuals, we believe customized communications solutions are and will continue to be a significant growth opportunity for the company.

International    We have extended our core competencies for high quality print and related services into non-U.S. geographic markets with no pre-existing local solution. These markets tend to be emerging, with favorable demographic trends such as rising education levels and increasing disposable income. Our international operations in Poland, Mexico and South America, where we produce magazines, books and telephone directories, are reported as “International.” Financial Services’ international revenue is included in Financial Services. Directory revenues from China and England are included in Telecommunications.

Specialized Publishing Services    R.R. Donnelley is a leader in providing short-run publishers, catalogers and associations with comprehensive communications solutions. We serve customers with highly targeted audiences and typical production runs from 10,000 to 200,000 copies. We offer full-service and cost-effective solutions for business-to-business and consumer magazine and catalog publishers, as well as journal, association and academic publishers.

RRD Direct    R.R. Donnelley is a leader in the U.S. direct-mail market, offering expertise and a range of services to guide customers smoothly and cost-effectively through direct-marketing projects. Our full-service solutions include content creation, database management, premedia, printing, personalization, finishing and distribution. We produce highly personalized and sophisticated direct mail pieces that generate results for our customers.

Premedia    In our premedia services, we leverage digital technologies to effectively create, manage and prepare customer content and distribute it via various communications media, including print and the Internet. We have developed technology that allows customers to securely access their digital content in an Internet-enabled database and repurpose it for multiple uses. These technologies include our ImageMerchant ^SM ASP (Application Service Provider) service for merchandisers and AdSpring ^SM ASP service for magazine publishers.

R.R. Donnelley Logistics    R.R. Donnelley is one of the largest users of the USPS, handling approximately 25% of the ground packages and 15% of the magazines delivered by the USPS. No other business partner of the USPS approaches our volume levels in these combined categories. Distribution costs are a significant component of our customers’ cost structures, and our ability to deliver mail and packages more predictably and cost-effectively is a key differentiator for us.

        Our February 2000 acquisition of CTC Distribution Services L.L.C. (CTC) extended our services by adding package delivery to our established business of delivering printed material (freight services). By leveraging the USPS infrastructure to make the final delivery to households and businesses, we are able to provide more economical logistics services. Through “zone skipping” we are able to obtain greater postal discounts and provide more timely, reliable delivery for our customers. As we complete the integration of CTC and further develop our processes for zone skipping, we are able to bring together our scale, systems and expertise to create logistics services that are valuable to our customers.

        In addition to delivering packages and printed material, we also provide returns management and expedited distribution of time-sensitive and secure material (expedited services). Together, these services help merchandisers and other businesses manage their supply chains more effectively and at a lower cost.

Red Rover Digital    This subsidiary (included in the operating segment “Other”) can meet our customers’ Internet needs using a range of services including a full suite of scalable communications and e-commerce solutions. Red Rover implements solutions that deliver value, maximize content effectiveness, enhance our clients’ businesses and build their customer relationships. Services such as strategy, design, editorial, development and production populate sites with content, and provide the end-to-end solutions necessary for businesses to survive on the Internet today. Our partnerships and investments in this arena strengthen our online services offering, expand our solutions and help our customers leverage the power of the Internet to communicate with their audiences.

        R.R. Donnelley operates in two business segments: commercial print and logistics services. Financial and other information relating to these business segments is included in Item 7 and in the “Industry Segment Information” footnote to the consolidated financial statements on page F-19. Geographically, our business is concentrated in the United States, where we have 41 manufacturing plants as of December 31, 2000 that generated $5.1 billion in revenue in 2000. In addition to our U.S. facilities, we operate 13 plants in Mexico, South America, Europe and China. Our international strategy is to create value for our stakeholders by extending our core competencies into new geographic markets that have a need for high-quality print and related services, with no local solution. Information relating to our international operations is included in the “Geographic Area Information” footnote to the consolidated financial statements on page F-21.

        Commercial printing remains a competitive industry. Consolidation among our customers and in the printing industry has put pressure on prices and increased competition among printers. We expect these industry trends to continue. We will perform in this environment by leveraging our market-leading position, generating continued productivity improvements and enhancing the value we deliver to our customers by offering them products and services that improve their effectiveness and reduce their total delivered cost. While we have contracts with many of our customers as discussed below, there are many competing companies and renewal of these contracts is dependent, in part, on our ability to continue to differentiate ourself from the competition. While our manufacturing facilities are well located for the global, national or regional distribution of our 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.

        Approximately 70% of our total sales are under contracts with customers, with the remainder on a single-order basis.  For some customers, we print and provide related services for different publications under different contracts.  Contracts with our 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. These sales contracts generally provide for price adjustments to reflect price changes for materials, wages and utilities. No single customer has a relationship with the company that accounted for 10% or more of our sales in 2000.

        The primary raw materials we use in our print businesses are paper and ink. In 2000, we spent approximately $1.9 billion on raw materials. We are a large purchaser of paper and our focus is to improve materials performance and total cost management for our customers, which we believe is a competitive advantage. We negotiate with leading suppliers to maximize our purchasing efficiencies, but we do not rely on any one supplier. We have existing paper supply contracts (at prevailing market prices) to cover substantially all of our requirements through 2001, and management believes extensions and renewals of these purchase contracts will provide adequate paper supplies in the future. Ink and ink materials are currently available in sufficient amounts, and we believe that we will have adequate supplies in the future. We also coordinate purchasing activity at the local plant and corporate levels to increase economies of scale.

        Our overriding principles in the environmental arena are to create sustainable compliance and an injury-free workplace. Our estimated capital expenditures for environmental controls to comply with federal, state and local provisions, as well as expenditures, if any, for our share of costs to clean hazardous waste sites that have received our waste, will not have a material effect upon our earnings or our competitive position.

        As of December 31, 2000, we had approximately 34,000 employees, of whom more than 9,200 had been our employees for 10 to 24 years and more than 3,200 for 25 years or longer. As of December 31, 2000, we employed approximately 28,000 people in the United States, approximately 1,000, or 3%, of whom were covered by collective bargaining agreements. In addition, we employed approximately 6,000 people in our international operations, 33% of whom were covered by collective bargaining agreements. Of the 28,000 U.S. employees, approximately 1,600 or 6% were employed within our logistics operations.

        We made six acquisitions in 2000 to extend our geographic reach and expand our range of capabilities. In January, we purchased Omega Studios-Southwest, Inc., a photography studio offering digital photography and creative services. In February, we purchased CTC, a consolidator of business-to-home packages; Iridio, Inc., a Seattle-based full-service premedia company; and Evaco Inc., a Florida-based leading financial printer. In July, we purchased Circulo do Livro, a leading Brazilian book printer. In December, we purchased Interactive Dataflow Technology, a Maryland-based application service provider. All of these acquisitions have been accounted for using the purchase method of accounting. We also acquired minority interests in Noosh, Inc., an Internet communications services company, and in several additional start-up businesses. See “Acquisitions and Investments” footnote to the consolidated financial statements on page F-8 for details.

        We made five strategic acquisitions in 1999 consistent with our strategy to speed growth in our high-value businesses. In March, we purchased Cadmus Financial, a financial printer in Charlotte, North Carolina. In April, we purchased the Communicolor division of the Standard Register Company, a provider of personalization services and printer of innovative direct-mail campaigns with two plants located in Hebron, Ohio, and Eudora, Kansas. In May, we purchased Hamburg Gráfica Editora, a Brazilian book printer. In July, we purchased Freight Systems, Inc., a California-based transportation company. In December, we purchased Penton Press, a short-run magazine printing facility in Berea, Ohio. In addition to these acquisitions, we acquired a 30% interest in MultiMedia Live, an Internet Web site design firm, and increased our ownership position in Editorial Lord Cochrane S.A. (Cochrane), the largest printer in Chile, to 99% from 78%. Cochrane also increased its ownership interest in Atlántida Cochrane (located in Argentina) from 50% to 100%.

        We made two small strategic acquisitions in 1998. In October, we purchased Ediciones Eclipse S.A. de C.V., a Mexico City-based printer of retail inserts. In December, we purchased GTE’s St. Petersburg, Florida, directory-printing plant. In addition, we increased our investment in two other international operations. In July, we purchased additional outstanding shares of Cochrane to increase our ownership position to 78% from 55%. In November, we purchased the interests of our partner in our Poland operation, the Polish-American Printing Company, to take 100% ownership.

        In June 2000, we sold our 100% interest in R.R. Donnelley (India) Ltd. and its 25.37%-owned subsidiary, Tata Donnelley Limited, to Tata Sons Limited for approximately $12.5 million in cash.

        During the fourth quarter of 1999, we divested our interest in Modus Media International (MMI), Stream International and Corporate Software & Technology Holdings, Inc. (CS&T). In October 1999, we sold our investment in MMI for a total of approximately $60 million ($47 million in cash and a $13 million promissory note). In November 1999, we sold 93% of our investment in the common stock of Stream International to a group led by Bain Capital for approximately $96 million in cash. Also, in November 1999, we sold our entire interest in CS&T to the management of CS&T for cash proceeds of approximately $41 million.

        In April 1998, we sold our interest in Metromail Corporation for $297 million in cash. In July 1998, we sold our interest in Donnelley Enterprise Solutions Incorporated (DESI) for $45 million in cash.

        Special Note Regarding Forward-Looking Statements. Our Annual Report to Shareholders and this Form 10-K are among certain communications that contain forward-looking statements, including statements regarding our financial position, results of operations, market position, product development and regulatory matters. When used in such communications, the words “believes,” “anticipates,” “expects” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are based on our estimates, assumptions, projections and current expectations and are subject to a number of risks and uncertainties. Actual results in the future could differ materially from those described in the forward-looking statements as a result of many factors outside our control, including competition with other communications services providers based on pricing and other factors; fluctuations in the cost of paper, other raw materials and fuel we use; changes in postal rates and postal regulations; seasonal fluctuations in overall demand for services; changes in customer demand; changes in the advertising and printing markets; changes in the capital markets that affect demand for financial printing; the financial condition of our customers; our ability to continue to obtain improved operating efficiencies; the general condition of the U.S. economy and the economies of other countries in which we operate; changes in the rules and regulations to which we are subject, including environmental regulation; and other factors set forth in this Form 10-K and other company communications generally. We do not undertake and specifically decline any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

ITEM 2.    PROPERTIES

        Our corporate office is located in leased office space in a building in Chicago, Illinois. In addition, as of December 31, 2000, we lease or own 50 U.S. facilities, some of which have multiple buildings and warehouses. These facilities encompass approximately 15.7 million square feet. We have 13 plants encompassing approximately 2.0 million square feet in South America, Mexico, Europe and Asia. Of the total manufacturing and warehouse facilities, approximately 17.7 million square feet of space is owned, while the remaining 1.1 million square feet of space is leased. In addition, we have sales offices across the United States, South America, Mexico, Europe and Asia.

ITEM 3.    LEGAL PROCEEDINGS

        On November 25, 1996, a class action was brought against the company in federal district court in Chicago, Illinois, on behalf of all current and former African-American employees, alleging that the company racially discriminated against them in violation of the Civil Rights Act of 1871, as amended, and the U.S. Constitution (Jones, et al. v. R.R. Donnelley & Sons Co.). The complaint seeks declaratory and injunctive relief, and asks for actual, compensatory, consequential and punitive damages in an amount not less than $500 million. Although plaintiffs sought nationwide class certification, most of the specific factual assertions of the complaint relate to the closing by the company of its Chicago catalog operations in 1993. Other general claims relate to other company locations.

        On June 30, 1998, a class action was filed against the company in federal district court in Chicago on behalf of current and former African-American employees, alleging that the company racially discriminated against them in violation of Title VII of the Civil Rights Act of 1964 (Adams, et al. v. R.R. Donnelley & Sons Co.). While making many of the same general discrimination claims contained in the Jones complaint, the Adams plaintiffs are also claiming retaliation by the company for the filing of discrimination charges or otherwise complaining of race discrimination. The complaint seeks the same relief and damages as sought in the Jones case.

        On March 7, 2001, the district court judge in the Jones and Adams cases certified three plaintiff classes in the actions: a class consisting of African-American employees discharged in connection with the shutdown of the Chicago catalog operations; a class consisting of African-American employees of the Chicago catalog operations after November 1992 who were other than permanent employees; and a class consisting of African-Americans subjected to an allegedly hostile working environment at the Chicago catalog operations, the Chicago financial or Dwight, Illinois, manufacturing operations. The judge also consolidated the Jones and Adams cases for pretrial purposes. On March 16, 2001, plaintiffs filed a motion seeking reconsideration of the court’s class certification order.

        On December 18, 1995, a class action was filed against the company in federal district court in Chicago alleging that older workers were discriminated against in selection for termination upon the closing of the Chicago catalog operations (Gerlib, et al. v. R.R. Donnelley & Sons Co.). The suit also alleges that the company violated the Employee Retirement Income Security Act (ERISA) in determining benefits payable to retiring or terminated employees. On August 14, 1997, the court certified classes in both the age discrimination and ERISA claims limited to former employees of the Chicago catalog operations.

        On December 28, 2000, a purported class action was brought against the company and certain of its benefit plans in federal district court in Chicago, Illinois, on behalf of certain former employees of the Chicago catalog operations (Jefferson, et al. v. R.R. Donnelley & Sons Co., et al.). The suit alleges that enhanced pension benefits were not paid to plaintiffs and that plaintiffs are being required to contribute to the costs of retiree medical coverage, both in violation of plan documents and ERISA. The complaint seeks recalculation of pension benefits due plaintiffs since their retirement dates, reimbursement of any amounts paid by plaintiffs for medical coverage, interest on the foregoing amounts, as well as a declaration as to the benefits due plaintiffs in the future.

        The Jones, Gerlib and Jefferson cases relate primarily to the circumstances surrounding the closing of the Chicago catalog operations. The company believes that it acted properly in the closing of the operations, and that certain claims of the classes of former employees of the Chicago catalog operations are untimely. On December 20, 2000, in the Jones case the company filed a renewed motion for partial summary judgment on the basis of timeliness, which is pending. Further, with regard to all cases, the company believes it has a number of valid defenses to all of the claims made and will vigorously defend its actions. However, management is unable to make a meaningful estimate of any loss that could result from an unfavorable outcome of any of the pending cases.

        In December 1999, the U.S. Environmental Protection Agency, Region 5 (U.S. EPA) issued a Notice of Violation against the company, pursuant to Section 113 of the Clean Air Act (the Act). The notice alleges that the company’s facility in Willard, Ohio, violated the Act and Ohio’s State Implementation Plan in installing and operating certain equipment without appropriate air permits. While the notice does not specify the remedy sought, upon final determination of a violation, the U.S. EPA may issue an administrative order requiring the installation of air pollution control equipment, assess penalties, or commence civil or criminal action against the company. The company responded to the U.S. EPA on March 10, 2000. The company does not believe that any unfavorable result of this proceeding will have a material impact on the company’s financial position or results of operations.

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, 2000.

EXECUTIVE OFFICERS AND OTHER PRINCIPAL OFFICERS OF R.R. DONNELLEY & SONS COMPANY

Name, Age and Positions with the Company(2)	Officer Since	Business Experience During Past Five Years(2)
Michael B. Allen 41, Executive Vice President(1)	1989	Management responsibilities for Commercial Print Manufacturing Operations; Strategic Sourcing; Magazine Publishing Services; and Merchandise Media. Prior experience as President, Retail Services; President, Information Services; and President, Book Publishing Services.
Haven E. Cockerham 53, Senior Vice President, Human Resources	1998	Management responsibilities for Compensation; Benefits; Employee Relations, Diversity and Corporate Human Resources; Recruiting; and Organizational Capability. Prior experience as Vice President, Human Resources, at Detroit Edison Company, a provider of electrical utilities, from May 1994 until March 1998.
William L. Davis 57, Chairman of the Board, President and Chief Executive Officer(1)	1997	Management responsibilities as Chairman of the Board, President and Chief Executive Officer. Prior experience as Senior Executive Vice President at Emerson Electric Company, manufacturer of electrical, electronic and related products, from January 1993 until March 1997.
Monica M. Fohrman 51, Senior Vice President, General Counsel and Secretary(1)	1988	Management responsibilities for Legal Department, Secretary’s Office and Community Relations.
Joseph C. Lawler 51, Executive Vice President(1)	1995	Management responsibilities for R.R. Donnelley Logistics Services; RRD Direct; Premedia Technologies; Specialized Publishing Services; and International Operations. Prior experience as President, Catalog Services; and President, Merchandise Media.
Gregory A. Stoklosa 45, Executive Vice President and Chief Financial Officer(1)	1993	Management responsibilities for Investor Relations; Treasury; Financial Reporting and Accounting; Financial Planning and Analysis; Internal Audit; Strategic Cost Management; and Taxes. Prior management responsibility for Treasury and Financial Reporting and Accounting.
Gary L. Sutula 56, Senior Vice President and Chief Information Officer	1997	Management responsibilities for Technology Planning and Operations and Applications Solutions Delivery. Prior experience as Senior Vice President and Chief Information Officer at Transamerica Financial Services, a provider of international consumer lending services, from June 1994 until November 1997.
Michael W. Winkel 55, Executive Vice President, Strategy and Planning(1)	1999	Management responsibilities for Strategy and Planning; Corporate Development; Red Rover Digital, Inc.; and new e-business opportunities. Prior experience as Corporate Vice President responsible for corporate planning and global operations, and Senior Vice President of the Chemicals Group responsible for operations at Monsanto Company, a diversified manufacturer of chemicals, pharmaceuticals and agricultural products, from 1993 until March 1999.

(1) Executive officer of the Company.

(2) Each officer named has carried on his or her principal occupation and employment in the company for more than five years with the exception of Haven E. Cockerham, William L. Davis, Gary L. Sutula and Michael W. Winkel as noted in the table above.

PART II

ITEM 5.    MARKET FOR R.R. DONNELLEY & SONS COMPANY’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 Exchange, Inc.

        As of January 31, 2001, there were 9,458 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, 2000, is contained in the chart below:

			Common Stock Prices
	Dividends Paid		2000		1999
	2000	1999	High	Low	High	Low
First Quarter	$0.22	$0.21	24.31	19.00	43.81	32.13
Second Quarter	0.22	0.21	26.69	20.13	37.94	31.38
Third Quarter	0.23	0.22	26.75	22.13	36.94	27.75
Fourth Quarter	0.23	0.22	27.00	21.38	30.25	22.81
Full Year	0.90	0.86	27.00	19.00	43.81	22.81

ITEM 6.    SELECTED FINANCIAL DATA

SELECTED FINANCIAL DATA

(Not Covered by Auditors’ Report)

(Thousands of dollars, except per-share data)

	2000	1999	1998		1997		1996
Net sales	$5,764,335	$5,415,642	$5,217,953		$5,085,811		$5,209,169
Income (loss) from continuing operations	266,900	311,515	374,647		206,525		(71,483	)
Loss on disposal of discontinued      operations	—	—	—		(60,000	)	—
Loss from discontinued operations	—	(3,201)	(80,067	)	(15,894	)	(86,142	)
Net income (loss)*	266,900	308,314	294,580		130,631		(157,625	)
Net income (loss) per diluted common      share*	2.17	2.38	2.08		0.89		(1.04	)
Total assets	3,914,202	3,853,464	3,798,117		4,134,166		4,443,828
Noncurrent liabilities	1,491,093	1,511,743	1,447,852		1,730,047		2,044,818
Cash dividends per common share	0.90	0.86	0.82		0.78		0.74

           * Net income (loss) includes the following one-time items: 2000 gain related to the sale of shares received from the demutualization of the company’s basic life insurance carrier of $13 million ($8 million after-tax, or $0.06 per diluted share); 1999 gains on the sale of businesses and investments of $43 million ($27 million after-tax, or $0.20 per diluted share); 1998 gains on the sale of the company’s remaining interests in two former subsidiaries of $169 million ($101 million after-tax, or $0.71 per diluted share); 1997 restructuring and impairment charges of $71 million ($42 million after-tax, or $0.29 per diluted share); 1996 restructuring and impairment charges of $442 million ($374 million after taxes and minority interest, or $2.45 per diluted share), and gains on partial divestitures of subsidiaries of $80 million ($48 million after-tax, or $0.31 per diluted share).

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Financial Review

In the financial review that follows, we discuss our results of operations, financial condition and certain other information. This discussion should be read in conjunction with our consolidated financial statements and related notes that begin on page F-1.

        In November 1999, we disposed of our entire interest in Corporate Software and Technology Inc. (CS&T). The operating results of this business are shown as a discontinued operation. During November 1999, we also sold 93% of our investment in the common stock of Stream International Inc. (Stream). Stream is consolidated in our financial results prior to the date of disposition. For comparision purposes, summary results of operations for Stream are included in the table below:

Stream Summary Income Statement

IN MILLIONS	2000	1999*	1998
Net sales**	$—	$212	$214
Value-added revenue (VAR)**	—	212	214
Gross profit	—	64	56
Selling and administrative expenses	—	57	56
Earnings (loss) from operations	—	7	(2	)

 * Results are through disposition in November 1999.

** Included in “Other” for End-Market discussion.

        One-Time Items    The following nonrecurring items also affect comparability between years:

        In 2000, income from continuing operations included a one-time non-operating gain related to the sale of shares received from the demutualization of our basic life insurance carrier ($13 million pretax and $8 million after-tax; $0.06 per diluted share).

        In 1999, income from continuing operations included:

· a gain on the sale of 93% of our interest in Stream ($40 million pretax and $75 million after-tax due to tax benefits from associated tax loss carrybacks; $0.59 per diluted share);

· a gain on the sale of our interest in Modus Media International (MMI) ($3 million both pretax and after-tax; $0.01 per diluted share); and

· a provision for income taxes related to corporate-owned life insurance (COLI) ($51 million; $(0.40) per diluted share) (see “Income Taxes” and “Subsequent Events” footnotes to the consolidated financial statements on pages F-14 and F-21, respectively, for more details on COLI).

        In 1998, income from continuing operations included:

· a gain on the sale of our remaining interest in Metromail Corporation (Metromail) ($146 million pretax and $87 million after-tax; $0.61 per diluted share); and

· a gain on the sale of our remaining interest in Donnelley Enterprise Solutions Incorporated (DESI) ($23 million pretax and $14 million after-tax; $0.10 per diluted share).

        The following table summarizes the impact of these one-time items:

	Full Year Results					Per Diluted Share
	2000	1999		1998		2000	1999		1998
	In Thousands
Income from continuing operations before one- time items	$258,992	$285,171		$273,305		$2.11	$  2.20		$  1.93
Gain from demutualization	7,908	—		—		0.06	—		—
Gain on sale of businesses and investments	—	77,532		101,342		—	0.60		0.71
COLI tax provision	—	(51,188	)	—		—	(0.40	)	—
Income from continuing operations	$266,900	$311,515		$374,647		$2.17	$  2.40		$  2.64
Loss from discontinued operations	—	(3,201	)	(80,067	)	—	(0.02	)	(0.56	)
Net income	$266,900	$308,314		$294,580		$2.17	$  2.38		$  2.08

        A summary analysis of expense trends is presented below:

	2000	% Change		1999	% Change		1998
	In Millions
Cost of materials	$1,891	0.1	%	$1,889	(2.1	)%	$1,930
Cost of transportation	568	158.9		220	11.6		197
Cost of manufacturing	1,876	1.6		1,847	7.6		1,716
Depreciation	326	1.0		323	0.1		323
Amortization	64	24.7		51	(3.8	)	53
Selling and administrative expenses	598	(4.9	)	629	10.3		570
Net interest expense	90	1.7		88	12.8		78

Results of Operations—2000 compared with 1999

Continuing Operations    Net sales increased $349 million, or 6.4%, to $5.8 billion compared with $5.4 billion in 1999. Excluding Stream, net sales increased $561 million, or 10.8%, from 1999. Acquisitions contributed $476 million of the increase in net sales excluding Stream between years. Our most significant acquisition during the year was the purchase of certain net assets of CTC in February 2000. CTC, which is reported as part of our Logistics Services segment, contributed $365 million of net sales in 2000.

        For our Commercial Print segment, value-added revenue represents net sales less the cost of materials. For some customers, we purchase paper used in the printing process and pass through this cost (referred to as “pass-through material sales”) at a margin that is lower than print and related services; other customers furnish their own paper. Customer-furnished paper is not reflected in our financial results. For our Logistics Services segment, value-added revenue represents net sales less the cost of transportation. By measuring value-added revenue, we eliminate the effects of material prices and transportation costs that are largely beyond our control.

        Consolidated value-added revenue was flat between years; excluding Stream, value-added revenue increased $210 million, or 6.8%, to $3.3 billion compared with $3.1 billion in 1999. Acquisitions contributed $136 million of the increase in value-added revenue between years. Value-added revenue is affected by the price of scrap (by-product) paper we sell. Income from the sale of by-products is recorded as a reduction in our cost of materials. During 2000, we recognized a reduction in our cost of materials of $66 million from by-product revenues, which represents an increase of $28 million from 1999.

        Gross profit as a percentage of net sales was 19.1% in 2000 compared with 21.4% in 1999. Excluding Stream, gross margin in 1999 was 21.0%. Our Logistics Services segment, which has lower gross margins than our Commercial Print segment, represented a higher proportion of net sales in 2000 (12% versus 5% in 1999), primarily as a result of the acquisition of CTC. Logistics Services’ gross margin was down significantly in 2000 related to the performance of CTC, as well as higher transportation costs and other operational issues discussed below. Commercial Print’s gross margin increased between years due to the impact of continued productivity initiatives and higher by-products revenues.

        Selling and administrative expenses decreased $31 million, or 4.9%, to $598 million compared with $629 million in 1999. Selling and administrative expenses as a percentage of net sales was 10.4% in 2000 compared with 11.6% in 1999. Spending reductions and cost containment of $10 million, coupled with the elimination of Stream expenses ($57 million) and lower Year 2000-related expenses ($30 million), were partially offset by increased spending to grow new complementary businesses ($23 million), information systems development ($21 million) and recent acquisitions ($22 million).

        Net interest expense increased 1.7% to $90 million in 2000, due to higher average short-term borrowing rates. Other income, net, in 2000 of $23 million included a one-time pretax gain of $13 million from the sale of shares received from the demutualization of our basic life insurance carrier. Excluding one-time items, other income, net, decreased $12 million between years primarily due to lower equity income on investments ($7 million) and foreign currency transaction losses ($5 million). Gain on sale of businesses and investments of $43 million in 1999 included one-time pretax gains on the disposition of Stream ($40 million) and the sale of our interest in MMI ($3 million).

        The following comparisons exclude the impact of one-time items and Stream. Income from continuing operations before income taxes of $421 million decreased 8.0% from 1999. The effective tax rate in both years was 38.5%. Income from continuing operations per diluted share of $2.11 decreased $0.06, or 2.8%, from 1999. The rate of decrease was lower on a per-share basis due to fewer average shares outstanding during 2000. Including one-time items and Stream, income from continuing operations and related diluted earnings per share decreased 14.3% and 9.6%, respectively, from 1999.

Discontinued Operations    Operating results of CS&T were classified as a discontinued operation as of the date of disposal (November 1999), with prior periods restated. In 1999, the pretax loss from this segment was $5 million, or $3 million after-tax ($0.02 per diluted share). There was no gain or loss on sale.

Consolidated Net Income    Excluding one-time items and Stream, net income of $259 million in 2000 decreased 7.0% from $279 million in 1999, while diluted earnings per share decreased 1.9% to $2.11. The rate of decrease was lower on a per-share basis due to fewer average shares outstanding during 2000. Including one-time items and Stream, net income decreased 13.4% while diluted earnings per share decreased 8.8%.

        The following table shows the trends in net sales and value-added revenue by end-market (in millions):

	Net Sales				Value-Added Revenue
	2000	1999	% Change		2000	1999	% Change
Long-run Magazines, Catalogs, and Inserts	$1,873	$1,861	0.7	%	$1,158	$1,114	4.0	%
Telecommunications	868	869	(0.1	)	407	398	2.2
Book Publishing Services	780	775	0.7		533	515	3.5
Financial Services	638	632	1.0		540	526	2.8
International	327	280	16.6		157	134	17.3
Specialized Publishing Services	263	206	27.8		159	129	23.3
RRD Direct	198	192	3.0		107	114	(5.9	)
Premedia	111	89	25.0		107	85	25.7
Total Commercial Print	$5,058	$4,904	3.1		$3,168	$3,015	5.1
Logistics Services	691	282	144.7		122	62	97.5
Other	15	230	(93.6	)	15	230	(93.6	)
Total Net Sales	$5,764	$5,416	6.4		$3,305	$3,307	(0.1	)

Operating Results by Continuing Business Segment—2000 Compared with 1999    As discussed more fully in the “Industry Segment Information” footnote to the consolidated financial statements on page F-19, we have two reportable segments: Commercial Print and Logistics Services. Following our acquisition of CTC in February 2000, we now report results from our logistics businesses as a separate business segment within Logistics Services. Previously, results for logistics were included within the Commercial Print segment. Refer to the section “End-Market Descriptions” on page 3 for a discussion of the end markets served by each of these business segments.

        Net sales of our Commercial Print segment increased $154 million in 2000, or 3.1%, from 1999. Net sales for Long-run Magazines, Catalogs and Inserts were up less than 1% from 1999, which reflected strong volume increases and higher paper prices in 2000, offset by a lower volume of pass-through material sales. Paper prices for major grades of paper employed by our long-run market increased an average of 5% between years. Net sales for Telecommunications were flat to 1999, as an increase in directory volumes was offset by a reduction in nondirectory work (for example, the platform produced work for Financial Services in 1999). Net sales for Book Publishing were flat to 1999, driven by higher volumes within the consumer and educational markets, offset by lower pass-through material sales. Net sales for Financial Services were up 1.0% in 2000, driven by increased volume in international capital markets. During 2000, we derived 25% of our capital markets sales from international; our international capital markets volume increased 56% from 1999. Due to weakness in the U.S. capital markets for much of 2000, our U.S. capital markets sales were down 12% from 1999.

        Net sales of our Logistics Services segment of $691 million in 2000 included $365 million from the acquisition of CTC, which added package delivery to our established business of delivering printed materials. Excluding CTC, net sales of our print logistics business increased $44 million, or 15.6%, from 1999, driven almost entirely by higher freight services volume, despite a small decline in expedited services volume.

        Value-added revenue for the Commercial Print segment increased $153 million, or 5.1%, from 1999. Excluding the impact of acquisitions, value-added revenue for Commercial Print increased 2.6%, primarily due to strong volume increases in Long-run Magazines, Catalogs and Inserts and higher by-product revenues. Incremental revenues from by-products for Commercial Print increased value-added revenue by 1.0% between years. Value-added revenue for the Logistics Services segment of $122 million in 2000 included $59 million from CTC. Excluding CTC, value-added revenue of our print logistics business increased 2.9% from 1999.

        Earnings from operations for the Commercial Print segment were down less than 1% between years. Our traditional print businesses (long-run and book) had strong volume increases and productivity gains in 2000, particularly during the first half, and higher income from by-products. Earnings from operations were hurt during the second half by escalating energy and healthcare costs, and higher employee turnover at several of our plants. For the full year, earnings from operations were affected negatively by Financial Services and RRD Direct, our direct mail operation. Financial Services was hard hit by the U.S. capital markets slow-down. RRD Direct’s volume declined as a result of a decrease in sweepstakes and credit card solicitations.

        In both Financial Services and RRD Direct, we have taken direct action to address these earnings shortfalls. This included closing two unprofitable production facilities in 2000 for which we incurred a pretax charge of $9 million. In the fourth quarter, we reorganized RRD Direct’s sales and marketing efforts. We also made substantial progress addressing operational issues that arose following a consolidation of two of our direct mail facilities. We are continuing to review the cost structure of Financial Services in light of uncertainty in U.S. capital markets.

        Our Logistics Services segment incurred a loss from operations of $14 million in 2000, equal to CTC’s loss for the year. CTC was affected negatively in 2000 by low price levels in response to competition, the impact of low-margin work and new facility start-up costs. In order to increase volume and drive deeper penetration of the postal system (closer to the final destination), CTC delivered packages for a number of large mailers at price levels that proved to be unprofitable. Levels of this low-margin work peaked during the fourth quarter and negatively affected results. We will be taking actions in 2001 to adjust work mix and begin to restore profitability to these operations.

        Excluding CTC, earnings from operations of our print logistics business were break-even in 2000, down
$8 million from 1999, with the majority of the shortfall occurring in the fourth quarter of 2000. This decrease was driven by higher transportation costs, primarily due to increased carrier and fuel costs and start-up problems following expansion of our Northeast distribution facility. Despite higher freight services volume, transportation costs were up 7% between years on an average per-unit basis. We have taken actions to resolve the start-up issues noted, and will be instituting price increases and other measures to improve profitability.

        Earnings (loss) from operations within the “Other” operating segment include losses of $28 million and
$8 million in 2000 and 1999, respectively, to grow complementary businesses, including Red Rover.

Results of Operations—1999 compared with 1998

Continuing Operations    Net sales increased $198 million, or 3.8%, to $5.4 billion in 1999 compared with $5.2 billion in 1998. Acquisitions contributed $162 million of the increase in net sales between years. Significant acquisitions in 1999 included the Communicolor division of the Standard Register Company and certain net assets of Cadmus Financial (Cadmus), both included in the Commercial Print segment.

        Consolidated value-added revenue increased $216 million, or 7.0%, to $3.3 billion in 1999 compared with $3.1 billion in 1998. Acquisitions contributed $101 million of the increase in value-added revenue between years. Value-added revenue is affected by the price of scrap (by-product) paper we sell. Income from the sale of by-products is recorded as a reduction in our cost of materials. During 1999, we recognized a reduction in our cost of materials of $38 million from by-product revenues, which represents an increase of $8 million, or 26%, from 1998.

        Gross profit as a percentage of net sales was 21.4% in 1999 compared with 20.3% in 1998. The improved gross margin between years reflected primarily the impact of our productivity programs such as six sigma and process variability reduction within the Commercial Print segment.

        Selling and administrative expenses increased $59 million, or 10.3%, to $629 million in 1999 compared with $570 million in 1998. Selling and administrative expenses as a percentage of net sales was 11.6% in 1999 compared with 10.9% in 1998. In addition to volume-related increases, the majority of the increase in expense was due to acquisitions ($17 million), increases in Financial Services to build its sales force ($15 million), Premedia expansion ($7 million) and corporate initiatives to build capabilities ($17 million), partially offset by lower Year 2000 expenses ($9 million).

        Net interest expense increased $10 million, or 12.8%, to $88 million in 1999 due to higher average debt balances associated with acquisitions and share repurchase programs. Excluding one-time items, other income, net, increased $11 million between years to $21 million in 1999 related to lower COLI expense due to plan experience ($5 million) and lower minority interest expense ($4 million) as we increased our ownership percentage in two majority-owned subsidiaries in 1999. Gain on sale of businesses and investments of
$43 million in 1999 and $169 million in 1998 represents one-time items described above.

        The following comparisons exclude the impact of one-time items: Income from continuing operations before income taxes of $464 million increased 10.3% from 1998. The effective tax rate increased to 38.5% in 1999 from 35.0% due to the phase-out of deductions for interest related to our COLI programs. Income from continuing operations per share of $2.20 increased $0.27, or 14%, from 1998. The rate of increase was higher on a per-share basis due to fewer shares outstanding during 1999. Including one-time items, income from continuing operations and related diluted earnings per share decreased 16.9% and 9.1%, respectively, from 1998.

Discontinued Operations    In 1998, the loss from discontinued operations reflected a pretax impairment charge of $80 million (with no tax benefit, or $0.56 per diluted share) for CS&T.

Consolidated Net Income    Excluding one-time items, net income increased $89 million, or 46%, to $282 million in 1999, while diluted earnings per share increased 59% to $2.18. The rate of increase was higher on a per-share basis due to fewer average shares outstanding. Including one-time items, net income increased 4.7% while diluted earnings per share increased 14.4%.

        The following table shows the trends in net sales and value-added revenue by end-market (in millions):

	Net Sales				Value-Added Revenue
	1999	1998	% Change		1999	1998	% Change
Long-run Magazines, Catalogs, and Inserts	$1,861	$2,036	(8.6	)%	$1,114	$1,152	(3.3	)%
Telecommunications	869	825	5.3		398	367	8.6
Book Publishing Services	775	746	3.9		515	486	5.9
Financial Services	632	531	19.1		526	445	18.2
International	280	237	18.3		134	118	13.4
Specialized Publishing Services	206	199	3.8		129	130	(0.8	)
RRD Direct	192	116	65.2		114	64	77.4
Premedia	89	54	65.2		85	52	65.1
Total Commercial Print	$4,904	$4,744	3.4		$3,015	$2,814	7.2
Logistics Services	282	251	12.6		62	54	14.6
Other	230	223	3.0		230	223	3.0
Total Net Sales	$5,416	$5,218	3.8		$3,307	$3,091	7.0

Operating Results by Continuing Business Segment—1999 compared with 1998    Net sales of our Commercial Print segment increased $160 million in 1999, or 3.4%, from 1998. Excluding the impact of acquisitions, net sales were essentially flat year over year. Net sales for Long-run Magazine, Catalogs and Inserts decreased 8.6% from 1998, which reflected lower paper prices in 1999 and fewer pass-through material sales, partially offset by higher magazine volume. Paper prices for major grades of paper employed by our long-run market decreased an average of 6% between years. Net sales for Telecommunications increased 5.3% between years based on higher directory and nondirectory volume. Net sales for Book Publishing increased 3.9% between years driven by volume increases within the consumer, education and religious markets across both our one-color and four-color platforms, partially offset by lower fulfillment and distribution revenues. Net sales for Financial Services increased 19.1%, due to the Cadmus acquisition (5.6%) and increased capital markets activity, including international.

        Net sales for our Logistics Services segment increased $31 million, or 12.6%, from 1998 driven by volume increases in both freight services and expedited services, which included increased print logistics volume from our Financial Services sector.

        Value-added revenue for the Commercial Print segment increased $201 million, or 7.2%, from 1998. Excluding the impact of acquisitions, value-added revenue for Commercial Print increased 3.6% primarily due to improved volume for Financial Services, Telecommunications, Book Publishing and Premedia. Excluding acquisitions, Financial Services generated strong value-added revenue growth of 12.7% from 1998 driven by increased capital markets activity, including international. Value-added revenue for Logistics Services increased 14.6% from 1998 due to higher volumes and decreased transportation costs through improved carrier management, including more cost-effective routing of deliveries.

        Earnings from operations for the Commercial Print segment increased 5.9% from 1998, driven primarily by higher volume and productivity improvements in our Telecommunications and Book Publishing Services businesses.

        Earnings from operations for the Logistics Services segment increased 24.0% from 1998, driven by higher volumes and more efficient use of our existing transportation and consolidation facility network.

Financial Condition, Liquidity and Capital Resources

        Because of our scale, manufacturing experience and strong customer base, we enjoy stable to growing market share and very strong cash flow from our printing businesses. We will use these cash flows to grow our value-added services and invest in future growth through complementary businesses. If we do not have investment opportunities that generate returns above our cost of capital, we intend to return excess cash to shareholders through share repurchase programs.

Cash Flows from Operating Activities

        Cash flow from operations was $741 million, an increase of $105 million from 1999, primarily due to a tax refund and reduced investment in operating working capital as compared with 1999. The decrease in operating working capital between years was driven primarily by an increase in accrued liabilities in 2000, in part due to our share repurchase activity at year-end ($30 million). The decrease in refundable income taxes between years reflects the receipt of a $69 million tax refund during 2000 related to our fourth-quarter 1999 sales of our investments in Stream, CS&T and MMI. Our cash conversion cycle (days’ sales outstanding plus days’ inventory on hand minus days’ payable outstanding) continued to improve to 48 days from 50 days a year ago and 55 days in 1998. The ratio of operating working capital to sales also has continued to improve to 6.1% in 2000 from 6.9% in 1999 and 8.4% in 1998.

        Cash flows from operations decreased by $98 million in 1999 due to higher working capital requirements to support higher volume.

Cash Used in Investing Activities

        Our principal recurring investing activities are capital expenditures to improve the productivity of operations, expand in specific markets and establish new businesses that leverage our distinctive capabilities. In 2000, capital expenditures totaled $237 million, a $39 million decrease from 1999. Spending levels in 2000 continued to reflect our disciplined investment process, which includes evaluating a broad range of alternatives and optimizing the overall manufacturing platform, and our focus on productivity, which tends to result in less costly process-enhancement investments. In 2000, we invested in expanding in selected international markets. We expanded our operations in Poland based on the strong market potential that we see in Eastern and Central Europe. We began operations in a new directory plant in Flaxby, England. We also made systems-related and other improvements throughout the company, which were capitalized. We expect capitalized spending to be below $350 million in 2001.

Acquisitions

        In 2000, we made acquisitions and investments to extend our geographic reach and expand our range of capabilities.

        Acquisitions completed in 2000 included:

· Omega Studios—Southwest, Inc. (January 2000)—This dedicated photography studio expanded our premedia offerings in digital photography and creative services, and extended our geographic reach to the Southwest.

· CTC (February 2000)—This mailer of business-to-home packages in the United States more than doubled the revenue of our Logistics Services segment, enhanced our scale and expanded our service offering to include the delivery of packages in addition to printed products.

· Iridio, Inc. (February 2000)—This full-service premedia company, which provides digital photography, prepress, digital asset management and digital print services, brought us a significant presence in the Pacific Northwest.

· Evaco, Inc. (February 2000)—This financial printer based in Florida expanded our Financial Services operations in the Southeast, one of our fastest-growing geographic regions.

· Circulo do Livro (July 2000)—This Brazilian book printer expanded our capabilities to serve the book publishing market and, together with expansion of our Hamburg Gráfica Editora division, made us the largest book printer in South America.

· Interactive Dataflow Technology, Inc. (December 2000)—This application service provider based in Lanham, Maryland, provides the federal government with secure, customized Internet-based solutions that can help automate print procurement processes.

Divestitures

        See “Divestitures” footnote to the consolidated financial statements on page F-8 for details.

Cash Used for Financing Activities

        Financing activities include net borrowings, dividend payments and share repurchases. Our net borrowings decreased by $153 million in 2000 as we paid down debt with excess cash flow. This included repayment of our 9.125% debentures for $200 million in December 2000. Debt levels increased by $117 million in 1999 as a result of acquisitions, higher capital spending and share repurchase activity, partially offset by strong working capital management and cash generated from the disposition of assets no longer aligned with our strategic priorities.

        Commercial paper is our primary source of short-term financing. On December 31, 2000, we had $195 million outstanding in commercial paper borrowing. In addition, at December 31, 2000, we had a $438 million unused revolving credit facility with a number of banks. This facility provides support for issuing commercial paper and other credit needs. Management believes our cash flow and borrowing capability are sufficient to fund operations.

Share Repurchase

        We purchased 2.5 million, 11.9 million and 13.2 million shares of our stock in 2000, 1999 and 1998, respectively, for $63 million, $379 million and $544 million, respectively, in privately negotiated or open market transactions. Since 1996, we have spent $1.2 billion to repurchase stock and reduced the number of shares outstanding by 23%.

        Net cash used to repurchase common stock, defined as cash used for share repurchases net of proceeds from stock options exercised, was $22 million in 2000. In 1999, we used $350 million of net cash for share repurchase. In 1998, we used $457 million of net cash for share repurchase.

        A summary of the shares outstanding is presented below:

	2000	1999	1998
	In Thousands
As of December 31
Basic	121,055	123,237	134,322
Dilutive effect	1,629	125	2,754
Total	122,684	123,362	137,076
Full Year Average
Basic	122,323	128,872	139,624
Dilutive effect	770	694	2,241
Total	123,093	129,566	141,865

Dividends

        Dividends to shareholders totaled $110 million in 2000, $111 million in 1999 and $115 million in 1998. In 2000, we increased our dividend by 5%, representing our 30th consecutive annual dividend increase. We have consistently paid a dividend since becoming a public company in 1956.

Financial Condition

        Our financial position remains strong as evidenced by our year-end balance sheet. Our total assets in 2000 were $3.9 billion unchanged from 1999. Average invested capital (total debt and equity, computed on a 13-month average) was $2.4 billion in 2000, unchanged from 1999. Lower income from continuing operations, excluding one-time items, reduced the return on average invested capital to 13.2% from 14.3% a year ago.

        At year-end 2000, the debt-to-capital ratio decreased to 45% from 51% in 1999 and year-end debt-to-total market value decreased to 24% from 28% a year ago. We also consider interest coverage ratios when reviewing our capital structure. Our ratio of earnings before interest, taxes, depreciation and amortization (EBITDA), excluding one-time items, to interest expense, was 10.1 at year-end, compared with 10.5 a year ago.

Other Information

Human Resources

        As of December 31, 2000, approximately 34,000 full-time employees worked for the company. Approximately 82% of our employees work in the United States, and approximately 3% of those are covered by collective bargaining agreements. Of the approximately 6,000 people working in our international operations, 33% are covered by collective bargaining agreements as is customary in those locations.

        Minority and female representation among U.S. professionals, officials and managers during 2000 increased by 7% and 3%, respectively, based on our governmental reporting. Minority representation was 14% among our U.S. professionals, officials and managers while female representation was 35%. Minorities represented 17% of our U.S. workforce and females represented 33%.

Environmental, Health and Safety

        Our business is subject to various laws and regulations governing employee health and safety and environmental protection. Our policy is to comply with all laws and regulations. Our overriding principles are to create sustainable compliance and an injury-free workplace. We do not anticipate that compliance will have a material adverse effect on our competitive or consolidated financial position.

Year 2000 and System Infrastructure

        Process control and information systems are increasingly important to the effective management of the company. The upgrade and standardization of our systems is necessary for us to succeed in using information technology to our strategic advantage. In 1999, we focused our efforts on ensuring that processes and systems were Year 2000 compliant. In addition, we began ongoing initiatives to upgrade and standardize our information technology infrastructure. In 1999, we deferred a number of other infrastructure and systems initiatives that would support continuous productivity improvements and enhance service capabilities, while we completed our Year 2000 efforts.

        During the transition from 1999 to 2000, all operations were fully supported by trained personnel. Key efforts were focused on four business-critical factors: safety of employees, continuity of production, environmental compliance and reporting, and continuity of systems to support the ability of personnel to continue working (such as the availability of utilities or operation of payroll systems). At the end of the transition, no Year 2000 issues affecting any business-critical factors were reported by any operation. To the extent that date-related issues were reported, they were limited to instances where personnel available at the site were able to promptly correct the issue without interruption to our operations.

        In 2000, we spent $3 million on our Year 2000 initiatives, of which $1 million was reflected in administrative expense and the remainder in cost of sales. In 1999, we spent $49 million, of which $31 million was reflected in administrative expense and the remainder in cost of sales. These expenses do not include costs capitalized with respect to our information and technology infrastructure upgrade and standardization initiatives. As internal resources completed their Year 2000 assignments, they were reallocated to technology projects that had been deferred, as well as to other productivity projects.

Technology

        We remain a technology leader and hold 180 patents in print-related technology, including 20 patents in the emerging area of digital printing. We are a leader in technologies such as computer-to-plate, customer connectivity and digital imaging capabilities, as well as Internet-based services.

        Public recognition from eWeek and Information Week for our technology efforts in 2000 include the following rankings among all U.S. companies:

· #3 of the most innovative media and entertainment company users of information technology (Information Week, September 11, 2000);

· #82 of the top 500 leading IT innovators (Information Week, September 11, 2000); and

· #19 of the top 100 in e-business networking (eWeek, May 8, 2000).

Litigation and Contingent Liabilities

        For a discussion of certain litigation involving the company, see “Commitments and Contingencies” and “Subsequent Events” footnotes to the consolidated financial statements on pages F-10 and F-21, respectively. For a discussion of our corporate-owned life insurance programs, see “Income Taxes” and “Subsequent Events” footnotes to the consolidated financial statements on pages F-14 and F-21, respectively.

New Accounting Pronouncements

        In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, subsequently amended in June 1999 by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133—An Amendment of FASB Statement No. 133 and in June 2000 by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities—An Amendment of FASB Statement No. 133, which requires that all freestanding derivatives and many derivatives embedded in other contracts be recognized on the balance sheet as either an asset or liability measured at fair value. Changes in the derivative instrument’s fair value will be recognized currently in earnings or in other comprehensive income if specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative instrument’s gains and losses to offset related results on the hedged item in the income statement, to the extent effective, and requires that we formally document, designate and assess the effectiveness of transactions that receive hedge accounting.

        We have limited transactions that fall under the accounting rules of SFAS No. 133. From time to time we enter into forward contracts to minimize potential transaction losses in non-U.S. entities with nonfunctional currency denominated borrowings, sales or expenses. We also have entered into foreign currency option contracts to minimize potential exchange rate risk due to currency fluctuations on certain non-U.S. dollar denominated purchases.

        The implementation date for accounting for these transactions under SFAS No. 133 is January 1, 2001. We will record the effect of the transition to the new accounting requirements as a change in accounting in the first quarter of 2001. The effect of this change in accounting will not be material to our results of operations or financial position.

Outlook

        The environment is highly competitive in most of our product categories and geographic regions. Competition is based largely on price, quality and servicing the special needs of customers. Industry analysts believe that there is overcapacity in most commercial printing markets. Therefore, competition is intense. Our intent is to differentiate our service offerings so that we are viewed by our customers as a partner that can help them deliver effective and targeted communications in the right format to the right audience at the right time.

        We are a large user of paper, supplied to us by our customers or bought by us. The cost and supply of certain paper grades used in the manufacturing process will continue to affect our financial results. However, management currently does not see any disruptive conditions affecting prices or supply of paper in 2001.

        Postal costs are a significant component of our customers’ cost structures. Changes in postal rates that went into effect in January 2001 are not expected to negatively affect the company. In fact, postal rate increases enhance the value of Donnelley Logistics to our customers, as we are able to improve the cost efficiency of mail processing and distribution. This ability to deliver mail on a more precise schedule and at a lower relative cost should enhance our position in the marketplace.

        The cost of energy affects our operating costs in the Commercial Print segment and transportation costs in Logistics Services. In Logistics Services, increases in fuel costs can be offset by fuel surcharges passed on to customers, but continuing increases in other energy costs could affect our consolidated financial results.

        In addition, consumer confidence and economic growth are key drivers of demand for our services and a significant change in economic outlook could affect us. The slowdown experienced in U.S. capital markets in the fourth quarter of 2000 has continued into 2001, negatively affecting our Financial Services business. However, growth in demand for customized communications solutions for investment management, banking, insurance, managed care and pharmaceutical companies provides opportunities for our Financial Services business to partially offset the U.S. capital markets slowdown. As we enter 2001, uncertainty in the economy has led certain of our customers in other businesses to indicate that they anticipate flat demand in their end markets.

        In the longer term, technological changes, including the electronic distribution of information, present both risks and opportunities for the company. Many of our new business initiatives are designed to leverage our distinctive capabilities to participate in the rapid growth in electronic communications. We are a leader in emerging digital printing technologies. Our goal remains to help our customers succeed by delivering effective and targeted communications in the right format to the right audience at the right time. We believe that with our competitive strengths, including our comprehensive service offerings, technology leadership, depth of management experience, customer relationships and economies of scale, we can develop the most valuable solutions for our customers, which should result in growth in shareholder value.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The company is exposed to market risk from changes in interest rates and foreign exchange rates. However, the company generally maintains more than half of its debt at fixed rates (approximately 70% at December 31, 2000), and therefore its exposure to short-term interest rate fluctuations is immaterial to the consolidated financial statements of the company as a whole. The company’s exposure to adverse changes in foreign exchange rates also is immaterial to the consolidated financial statements of the company as a whole, and the company occasionally uses financial instruments to hedge exposures to foreign exchange rate changes. The company does not use financial instruments for trading purposes and is not a party to any leveraged derivatives. For further disclosure relating to financial instruments see “Debt Financing and Interest Expense” footnote to the consolidated financial statements on page F-15.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The financial information required by Item 8 is contained in Item 14 of Part IV and listed on page F-1.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None

PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF R.R. DONNELLEY & SONS

        Information concerning the directors and officers of the company is contained on pages 6 and 10–11 of the company’s definitive Proxy Statement dated February 26, 2001, and is incorporated herein by reference. See also the list of the company’s officers and related information under “Executive Officers and Principal Officers of R.R. Donnelley & Sons Company” at the end of Part I of this annual report.

ITEM 11.    EXECUTIVE COMPENSATION

        Information concerning director and executive compensation for the year ended December 31, 2000, and, with respect to certain of such information, prior years, is contained on pages 13, 17–20 and 24–26 of the company’s definitive Proxy Statement dated February 26, 2001, and is incorporated herein by reference.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        Information concerning the beneficial ownership of the company’s common stock is contained on pages

14–16 of the company’s definitive Proxy Statement dated February 26, 2001, and is incorporated herein by reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        None

PART IV

ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) 1. Financial Statements

The financial statements listed in the accompanying index (page F-1) to the financial statements are filed as part of this annual report.

        2. Financial Statement Schedule

The financial statement schedule listed in the accompanying index (page F-1) to the financial statements is filed as part of this annual report.

        3. Exhibits

The exhibits listed on the accompanying index to exhibits (pages E-1 through E-2) are filed as part of this annual report.

(b) Reports on Form 8-K

No current Report on Form 8-K was filed during the quarter ended December 31, 2000.

(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—

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.

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 30 ^th day of March 2001.

R.R. DONNELLEY & SONS COMPANY

/S /    VIRGINIA L. SEGGERMAN         

By 

 Virginia L. Seggerman 

Vice President and Controller

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on the 30 ^th day of March 2001.

Signature and Title /S /    WILLIAM L. DAVIS William L. Davis Chairman of the Board, President and Chief Executive Officer, Director (Principal Executive Officer) /S /    GREGORY A. STOKLOSA Gregory A. Stoklosa Executive Vice President and Chief Financial Officer (Principal Financial Officer) /S /    VIRGINIA L. SEGGERMAN Virginia L. Seggerman Vice President and Controller (Principal Accounting Officer) /S /    JOSEPH B. ANDERSON , JR .         Joseph B. Anderson, Jr. Director /S /    MARTHA LAYNE COLLINS          Martha Layne Collins Director /S /    JAMES R. DONNELLEY James R. Donnelley Director /S /    JUDITH H. HAMILTON Judith H. Hamilton Director Signature and Title /S /    THOMAS S. JOHNSON Thomas S. Johnson Director /S /    GEORGE A. LORCH George A. Lorch Director /S /    OLIVER R. SOCKWELL          Oliver R. Sockwell Director /S /    BIDE L. THOMAS Bide L. Thomas Director /S /    STEPHEN M. WOLF        Stephen M. Wolf Director

ITEM 14(a). INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

	Page(s)
Consolidated Statements of Income for each of the three years ended December 31, 2000	F-2
Consolidated Balance Sheets at December 31, 2000 and 1999	F-3
Consolidated Statements of Cash Flows for each of the three years ended December 31, 2000	F-4
Consolidated Statements of Shareholders’ Equity for each of the three years ended December 31,      2000	F-5
Notes to Consolidated Financial Statements	F-6
Report of Independent Public Accountants	F-22
Unaudited Interim Financial Information, Dividend Summary and Financial Summary	F-23
Report of Independent Public Accountants on Financial Statement Schedule	F-25
Financial Statement Schedule
II—Valuation and Qualifying Accounts	F-26

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Thousands of Dollars, Except Per-Share Data

	Year Ended December 31
	2000		1999		1998
Net sales	$5,764,335		$5,415,642		$5,217,953
Cost of sales	4,665,472		4,256,635		4,159,756
Gross profit	1,098,863		1,159,007		1,058,197
Selling and administrative expenses	597,823		628,580		569,779
Earnings from operations	501,040		530,427		488,418
Other income (expense):
Interest expense	(89,639	)	(88,164	)	(78,166	)
Gain on sale of businesses and investments	—		42,835		168,903
Other, net	22,583		21,431		10,217
Earnings from continuing operations before income taxes	433,984		506,529		589,372
Income taxes	167,084		195,014		214,725
Income from continuing operations	266,900		311,515		374,647
Loss from discontinued operations, net of income taxes	—		(3,201	)	(80,067	)
Net Income	$    266,900		$    308,314		$    294,580
Income from Continuing Operations per Share of Common Stock
Basic	$          2.18		$          2.41		$          2.68
Diluted	2.17		2.40		2.64
Loss from Discontinued Operations per Share of Common Stock
Basic	$          —		$        (0.02	)	$        (0.57	)
Diluted	—		(0.02	)	(0.56	)
Net Income per Share of Common Stock
Basic	$          2.18		$          2.39		$          2.11
Diluted	2.17		2.38		2.08

See accompanying Notes to Consolidated Financial Statements.

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Thousands of Dollars, Except Share Data

	December 31
	2000		1999
Assets
Cash and equivalents	$      60,873		$      41,873
Receivables, less allowances for doubtful accounts of $20,016 in 2000 and                $15,461 in 1999	882,486		865,305
Inventories	188,745		194,312
Prepaid expenses	74,345		51,781
Refundable income taxes	—		76,579
Total Current Assets	1,206,449		1,229,850
Net property, plant and equipment, at cost, less accumulated depreciation of                $3,040,871 in 2000 and $2,822,737 in 1999	1,620,592		1,710,669
Goodwill and other intangibles, net of accumulated amortization of $266,014 in                2000 and $217,616 in 1999	520,242		397,983
Other noncurrent assets	566,919		514,962
Total Assets	$3,914,202		$3,853,464
Liabilities
Accounts payable	$    387,495		$    334,389
Accrued compensation	184,668		175,590
Short-term debt	271,640		419,555
Current and deferred income taxes	43,484		10,894
Other accrued liabilities	303,274		263,035
Total Current Liabilities	1,190,561		1,203,463
Long-term debt	739,190		748,498
Deferred income taxes	233,505		252,884
Other noncurrent liabilities	518,398		510,361
Total Noncurrent Liabilities	1,491,093		1,511,743
Shareholders’ Equity
Common stock at stated value ($1.25 par value)                Authorized shares: 500,000,000; Issued: 140,889,050 in 2000 and 1999	308,462		308,462
Retained earnings	1,666,936		1,521,474
Accumulated other comprehensive income	(74,126	)	(64,154	)
Unearned compensation	(6,752	)	(6,222	)
Reacquired common stock, at cost	(661,972	)	(621,302	)
Total Shareholders’ Equity	1,232,548		1,138,258
Total Liabilities and Shareholders’ Equity	$3,914,202		$3,853,464

See accompanying Notes to Consolidated Financial Statements.

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Thousands of Dollars

	Year Ended December 31
	2000		1999		1998
Cash flows provided by (used for) operating activities:
Net income	$  266,900		$  308,314		$  294,580
Loss from discontinued operations, net of tax	—		3,201		80,067
Gain on sale of businesses and investments, net of tax	—		(77,532	)	(101,342	)
Depreciation	326,349		323,009		322,680
Amortization	64,053		51,373		53,391
Gain on sale of assets	(5,952	)	(6,524	)	(13,446	)
Net change in operating working capital	(16,533	)	(27,915	)	68,848
Net change in other assets and liabilities	107,426		41,829		47,935
Other	(1,658	)	19,562		(19,878	)
Net Cash Provided by Operating Activities	740,585		635,317		732,835
Cash flows provided by (used for) investing activities:
Capital expenditures	(237,107	)	(275,826	)	(225,222	)
Other investments including acquisitions, net of cash acquired	(224,511	)	(222,066	)	(91,184	)
Disposition of assets	23,401		7,837		26,498
Disposition of business and investments, net of tax	—		135,664		274,079
Net Cash Used For Investing Activities	(438,217	)	(354,391	)	(15,829	)
Cash flows provided by (used for) financing activities:
Net increase (decrease) in borrowings	(152,946	)	116,621		(155,545	)
Disposition of reacquired common stock	10,314		22,591		82,710
Acquisition of common stock	(32,421	)	(372,403	)	(539,434	)
Cash dividends paid	(110,268	)	(111,133	)	(114,898	)
Net Cash Used for Financing Activities	(285,321	)	(344,324	)	(727,167	)
Effect of exchange rate changes on cash and equivalents	1,953		(1,460	)	(592	)
Net Increase (Decrease) in Cash and Equivalents from Continuing      Operations	19,000		(64,858	)	(10,753	)
Net Increase in Cash from Discontinued Operations	—		40,505		29,165
Net Increase (Decrease) in Cash and Equivalents	19,000		(24,353	)	18,412
Cash and Equivalents at Beginning of Year	41,873		66,226		47,814
Cash and Equivalents at End of Year	$    60,873		$    41,873		$    66,226

Changes in operating working capital, net of acquisitions and divestitures:

	2000		1999		1998
Decrease (increase) in assets:
Receivables—net	$  (8,889	)	$(15,860	)	$(27,041	)
Inventories—net	3,761		(1,814	)	18,846
Prepaid expenses	(21,857	)	7,664		19,674
Increase (decrease) in liabilities:
Accounts payable	10,850		(7,651	)	37,352
Accrued compensation	9,146		(10,274	)	30,049
Other accrued liabilities	(9,544	)	20		(10,032	)
Net Change in Operating Working Capital	$(16,533	)	$(27,915	)	$  68,848

See accompanying Notes to Consolidated Financial Statements.

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Thousands of Dollars, Except Share Data

	Common Stock				Reacquired Common Stock				Unearned Compensation Restricted Stock		Retained Earnings		Other Comprehensive Income		Total
	Shares		Amount		Shares		Amount
Balance at      December 31, 1997	150,889,050		$320,962		(5,771,220	)	$(202,675	)	$(9,414	)	$1,528,406		$(45,782	)	$1,591,497
Net income											294,580				294,580
Translation adjustments													(9,268	)	(9,268	)
Comprehensive income															285,312
Treasury stock      purchases					(13,196,393	)	(543,743	)							(543,743	)
Cash dividends											(114,898	)			(114,898	)
Common shares issued      under stock      programs					2,400,991		78,444		3,296		970				82,710
Common shares retired	(10,000,000	)	(12,500	)	10,000,000		395,924				(383,424	)			—
Balance at      December 31, 1998	140,889,050		$308,462		(6,566,622	)	$(272,050	)	$(6,118	)	$1,325,634		$(55,050	)	$1,300,878
Net income											308,314				308,314
Translation adjustments													(8,613	)	(8,613	)
Minimum pension      liability adjustment													(491	)	(491	)
Comprehensive income															299,210
Treasury stock      purchases					(11,850,254	)	(379,074	)							(379,074	)
Cash dividends											(110,078	)			(110,078	)
Common shares issued      under stock      programs					765,231		29,822		(104	)	(2,396	)			27,322
Balance at      December 31, 1999	140,889,050		$308,462		(17,651,645	)	$(621,302	)	$(6,222	)	$1,521,474		$(64,154	)	$1,138,258
Net income											266,900				266,900
Translation adjustments													(8,696	)	(8,696	)
Minimum pension      liability adjustment													(1,276	)	(1,276	)
Comprehensive income															256,928
Treasury stock      purchases					(2,502,003	)	(62,684	)							(62,684	)
Cash dividends											(110,268	)			(110,268	)
Common shares issued      under stock      programs					320,018		22,014		(530	)	(11,170	)			10,314
Balance at      December 31, 2000	140,889,050		$308,462		(19,833,630	)	$(661,972	)	$(6,752	)	$1,666,936		$(74,126	)	$1,232,548

See accompanying Notes to Consolidated Financial Statements.

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summary of Significant Accounting Policies

        Basis of Consolidation—The consolidated financial statements include the accounts of the company and its majority-owned subsidiaries. Minority interests in the income (loss) of consolidated subsidiaries ($0.2 million, $0.6 million, and $4.5 million of expense in 2000, 1999 and 1998, respectively) are included in other expense in the Consolidated Statements of Income. Intercompany items and transactions are eliminated in consolidation. The company held investments in unconsolidated affiliates of $39 million at both December 31, 2000 and 1999.

        Nature of Operations—The company provides a wide variety of print and print-related services and products for customers. The company also provides logistics and distribution services for its print customers and other mailers. Approximately 70% of the company’s business was under contract in 2000. Some contracts provide for progress payments from customers as certain phases of the work are completed; however, revenue is not recognized until the earnings process has been completed in accordance with the terms of the contracts. Some customers furnish paper for their work, while in other cases the company purchases the paper and resells it to the customer.

        Cash and Equivalents—The company considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents.

        Inventories—Inventories include material, labor and factory overhead and are stated at the lower of cost or market. The cost of approximately 81% and 74% of the inventories at December 31, 2000 and 1999, respectively, has been determined using the Last-In, First-Out (LIFO) method. This method reflects the effect of inventory replacement costs in earnings; accordingly, charges to cost of sales reflect recent costs of material, labor and factory overhead. The remaining inventories are valued using the First-In, First-Out (FIFO) or specific identification methods.

        Long-lived Assets—Long-lived assets are comprised of property, plant and equipment and intangible assets. Long-lived assets, including certain identifiable intangibles and goodwill related to those assets to be held and used, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An estimate of undiscounted future cash flows produced by the asset, or the appropriate grouping of assets, is compared with the carrying value to determine whether an impairment exists, pursuant to the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows and fundamental analysis. The company reports an asset to be disposed of at the lower of its carrying value or its estimated net realizable value.

Ÿ Property, plant and equipment—Property, plant and equipment are carried at cost and depreciated primarily on a straight-line basis over their estimated useful lives. Useful lives range from 15 to 33 years for buildings and from three to 15 years for machinery and equipment. Maintenance and repair costs are charged to expense as incurred. Major overhauls that extend the useful lives of existing assets are capitalized. When properties are retired or disposed, the costs and accumulated depreciation are eliminated and the resulting profit or loss is recognized in income.

Ÿ Intangibles—Goodwill ($370 million and $212 million, net of accumulated amortization, at December 31, 2000 and 1999, respectively) is amortized on a straight-line basis over periods ranging from 10 to 40 years. Other intangibles represent primarily the costs of acquiring print contracts and volume guarantees and are amortized over the periods in which benefits will be realized.

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

        Software Costs—Software development costs for internal use are accounted for in accordance with Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.

        Use of Estimates—The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

        Comprehensive Income—In 1998, the company adopted SFAS No. 130, Reporting Comprehensive Income. This statement establishes rules for the reporting of comprehensive income and its components. Comprehensive income consists of net income, minimum pension liability adjustments and foreign currency translation adjustments and is presented in the Consolidated Statements of Shareholders’ Equity. The adoption of SFAS No. 130 had no impact on total shareholders’ equity.

        Reclassifications—Certain prior-year amounts have been reclassified to conform to the 2000 presentation. This includes a restatement of net sales to reflect Donnelley Logistics’ sales on a gross basis in accordance with the Emerging Issues Task Force (EITF) Issue 00-10, Accounting for Shipping and Handling Fees and Costs, with transportation costs being included as a component of cost of sales. Previously, net sales were shown net of transportation costs. The effect of this change was to increase both net sales and cost of sales by $232 million and $200 million in 1999 and 1998, respectively. There was no impact on gross profit or earnings from operations.

Discontinued Operations

        During 1996, Stream International Holdings, Inc. (SIH), an 80%-owned equity investment of the company, reorganized into three independent businesses: Stream International, a provider of outsource technical support services; Corporate Software & Technology (CS&T), a software distribution business; and Modus Media International (MMI), a global manufacturing and fulfillment business. CS&T and MMI comprised substantially all of the company’s investment and net income in SIH.

        On December 15, 1997, SIH’s businesses became separate companies and the company’s ownership interest in SIH was restructured. The company converted its equity and debt positions in Stream International into 87% of the common stock of that business. Additionally, the company converted its equity and debt positions in CS&T into 86% of the common stock of CS&T and sold its equity and debt positions in MMI for nonvoting preferred stock of MMI.

        In connection with the company’s planned disposition of CS&T, the company reported its interest in CS&T as discontinued operations at December 31, 1997. The company’s interest in MMI was reported as discontinued operations through December 15, 1997, when its interest was restructured. Thereafter, the company’s investment in MMI was classified in other noncurrent assets through its date of disposition in October 1999.

        During 1998, the company recorded an $80 million impairment charge (with no associated tax benefit) related to the write-down of goodwill at CS&T. The $80 million charge was classified as a loss from discontinued operations in 1998. The net assets of CS&T were classified as net assets of discontinued operations at December 31, 1998.

        During 1999, the company recorded a pretax loss from discontinued operations of $5 million ($3 million after-tax). In November 1999, the company sold its entire interest in CS&T to the management of CS&T for cash proceeds of approximately $41 million. There was no gain or loss recognized from this transaction in 1999.

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

        See “Divestitures” footnote below for more details with respect to MMI and Stream International. Also included in the “Divestitures” footnote is a discussion of the tax impact from the sale of the three Stream-related businesses and investments.

Divestitures

        In June 2000, the company sold its 100% interest in R.R. Donnelley (India) Ltd. and its 25.37%-owned subsidiary, Tata Donnelley Limited, to Tata Sons Limited for approximately $12.5 million in cash; there was no gain or loss recognized from this transaction.

        In October 1999, the company sold its investment in MMI, which consisted of 9.50% Series Senior Cumulative Preferred shares, for a total of approximately $60 million ($47 million in cash and a $13 million promissory note due no later than October 2002). The promissory note is interest-bearing at 9.5% per annum, payable quarterly. The company recognized both a pretax and after-tax gain of $3 million from this transaction.

        In November 1999, the company sold 93% of its investment in the common stock of Stream International to a group led by Bain Capital for approximately $96 million in cash. The company recognized a pretax gain of $40 million and a tax benefit of $35 million (total of $75 million after-tax) from this transaction. The tax benefit in 1999 was recognized because of the company’s ability to carry back the capital tax losses generated from the sale of Stream International to years 1996 through 1998.

        The total pretax gain ($43 million) in 1999 from the sales of the company’s investments in MMI and Stream International is included in gain on sale of businesses and investments. These sales resulted in an after-tax gain of $78 million ($0.60 per diluted share), prior to a $51 million charge ($0.40 per diluted share) in the fourth quarter of 1999 to record an additional tax provision related to the company’s corporate-owned life insurance (COLI) program. See “Income Taxes” on page F-14 for more details.

        As a result of the company’s sales in 1999 of CS&T (see “Discontinued Operations”footnote on page F-7 for more details) and Stream International and the sale of its investment in MMI, the company generated approximately $77 million in refundable income taxes, of which $69 million was received in July 2000, from the carryback of tax losses. The remainder will be applied as a reduction to future federal and state tax payments.

         In April 1998, the company received $297 million in cash, or approximately $238 million after-tax, from the sale of its remaining 38% interest in Metromail Corporation. The company recognized a pretax gain of $146 million ($87 million after-tax) from this transaction.

        In July 1998, the company received $45 million in cash, or approximately $36 million after-tax, from the sale of its remaining interest in Donnelley Enterprise Solutions Incorporated. The company recognized a pretax gain of $23 million ($14 million after-tax) from this transaction.

Acquisitions and Investments

        During February 2000, the company acquired certain net assets of CTC Distribution Services L.L.C. (CTC), one of the largest shippers of business-to-home packages in the United States, for approximately $160 million, net of cash acquired. CTC, formerly headquartered in Minneapolis, Minnesota, has 18 facilities nationwide. The acquisition has been accounted for using the purchase method of accounting. The purchase price has been allocated based upon estimated fair values at the date of the acquisition. Goodwill from this transaction of approximately $153 million, based upon the preliminary purchase price allocation, is being amortized over a
20-year period.

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

        During 2000, the company also acquired certain net assets of Omega Studios-Southwest, Inc., a photography studio offering digital photography and creative services; Iridio, Inc., a Seattle-based full-service premedia company; Evaco, Inc., a Florida-based leading financial printer; Circulo do Livro, a leading Brazilian book printer; and Interactive Dataflow Technology, Inc., a Maryland-based application service provider. All of these acquisitions have been accounted for using the purchase method of accounting. In 2000, the company also acquired minority interests in Noosh, Inc., an Internet communications services company, and in several additional start-up businesses. Excluding CTC, the aggregate cost of these acquisitions and investments in 2000 was $57 million.

        During 1999, the company acquired certain net assets of Cadmus Financial, a financial printer; the Communicolor division of the Standard Register Company, a provider of personalization services and printer of innovative direct-mail campaigns; Hamburg Gráfica Editora, a Brazilian book printer; Freight Systems, Inc., a California-based transportation company; and Penton Press, a short-run magazine printing facility. All of these acquisitions have been accounted for using the purchase method of accounting. In 1999, the company also acquired a 30% interest in MultiMedia Live, an Internet consulting firm, and increased its ownership position in Editorial Lord Cochrane S.A. (Cochrane) to 99% from 78%. In addition, Cochrane also increased its ownership interest in Atlántida Cochrane (Argentina) in 1999 from 50% to 100% through the assumption of its debt. The aggregate cost of these acquisitions and investments in 1999 was $199 million. Upon finalization of the purchase price allocation, these acquisitions resulted in goodwill of $58 million, which is being amortized over periods of up to 20 years.

         During 1998, the company acquired Ediciones Eclipse S.A. de C.V., a Mexico City-based printer of retail inserts; and a directory-printing plant in St. Petersburg, Florida. Both of these acquisitions have been accounted for using the purchase method of accounting. In 1998, the company also increased its ownership position in Cochrane to 78% from 55% and increased its ownership position in the Polish-American Printing Company to 100% from 51%. The aggregate cost of these acquisitions and investments was $69 million in 1998.

        The company also increased its investment in affordable housing by $8 million, $23 million and $22 million in 2000, 1999 and 1998, respectively.

Inventories

        The components of the company’s inventories were as follows:

	December 31
	2000		1999
	In thousands
Raw materials and manufacturing supplies	$131,803		$125,014
Work in process	144,927		150,992
Finished goods	2,069		1,388
Progress billings	(39,450	)	(39,901	)
LIFO reserve	(50,604	)	(43,181	)
Total	$188,745		$194,312

        For financial reporting purposes, the company recognized LIFO expense of $7.4 million in 2000, LIFO income of $5.2 million in 1999 and LIFO expense of $4.5 million in 1998. The LIFO benefit in 1999 was due to declining costs and lower inventories subject to LIFO, which reduced 1999 cost of sales. The company uses the external-index method of valuing LIFO inventories.

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):

	December 31
	2000	1999
	In thousands
Land	$            38,669	$      31,779
Buildings	634,524	582,868
Machinery and equipment	3,988,270	3,918,759
Total	$4,661,463	$4,533,406

Commitments and Contingencies

        As of December 31, 2000, authorized expenditures on incomplete projects for the purchase of property, plant and equipment totaled $249 million. Of this total, $106 million has been contractually committed. The company has a variety of commitments with suppliers for the purchase of paper, ink and other materials for delivery in future years at prevailing market prices.

        The company has operating lease commitments totaling $240 million extending through various periods to 2009. The lease commitments total $49 million for 2001, range from $29 million to $43 million in each of the years 2002-2005 and total $48 million for years 2006 and thereafter.

        The company is not exposed to significant accounts receivable credit risk, due to its customer diversity with respect to industry classification, distribution channels and geographic locations.

        On November 25, 1996, a purported class action was brought against the company in federal district court in Chicago, Illinois, on behalf of all current and former African-American employees, alleging that the company racially discriminated against them in violation of the Civil Rights Act of 1871, as amended, and the U.S. Constitution (Jones, et al. v. R.R. Donnelley & Sons Co.). The complaint seeks declaratory and injunctive relief, and asks for actual, compensatory, consequential and punitive damages in an amount not less than $500 million. Although plaintiffs seek nationwide class certification, most of the specific factual assertions of the complaint relate to the closing by the company of its Chicago catalog operations in 1993. Other general claims relate to other company locations. On August 10, 1999, the district court judge denied the company’s motion for partial summary judgment, holding that the prediscovery record raised a question of fact as to the plaintiffs’ failure to timely file the action. Following discovery, on December 20, 2000, the company filed a renewed motion for partial summary judgment on the basis of timeliness, which is pending.

        On December 18, 1995, a class action was filed against the company in federal district court in Chicago alleging that older workers were discriminated against in selection for termination upon the closing of the Chicago catalog operations (Gerlib, et al. v. R.R. Donnelley & Sons Co.). The suit also alleges that the company violated the Employee Retirement Income Security Act (ERISA) in determining benefits payable to retiring or terminated employees. On August 14, 1997, the court certified classes in both the age discrimination and ERISA claims limited to former employees of the Chicago catalog operations.

        On December 28, 2000, a purported class action was brought against the company and certain of its benefit plans in federal district court in Chicago, Illinois, on behalf of certain former employees of the Chicago catalog operations (Jefferson, et al. v. R.R. Donnelley & Sons Co., et al.). The suit alleges that enhanced pension benefits were not paid to plaintiffs and that plaintiffs are being required to contribute to the costs of retiree medical coverage, both in violation of plan documents and ERISA. The complaint seeks recalculation of pension benefits due plaintiffs since their retirement dates, reimbursement of any amounts paid by plaintiffs for medical coverage, interest on the foregoing amounts, as well as a declaration as to the benefits due plaintiffs in the future.

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

        On June 30, 1998, a purported class action was filed against the company in federal district court in Chicago on behalf of current and former African-American employees, alleging that the company racially discriminated against them in violation of Title VII of the Civil Rights Act of 1964 (Adams, et al. v. R.R. Donnelley & Sons Co.). While making many of the same general discrimination claims contained in the Jones complaint, the Adams plaintiffs are also claiming retaliation by the company for the filing of discrimination charges or otherwise complaining of race discrimination. The complaint seeks the same relief and damages as sought in the Jones case.

        The Jones, Gerlib and Jefferson cases relate primarily to the circumstances surrounding the closing of the Chicago catalog operations. The company believes that it acted properly in the closing of the operations. Further, with regard to all four cases, the company believes it has a number of valid defenses to all of the claims made and will vigorously defend its actions. However, management is unable to make a meaningful estimate of any loss that could result from an unfavorable outcome of any of the pending cases.

        In December 1999, the U.S. Environmental Protection Agency, Region 5 (U.S. EPA) issued a Notice of Violation against the company, pursuant to Section 113 of the Clean Air Act (the Act). The notice alleges that the company’s facility in Willard, Ohio, violated the Act and Ohio’s State Implementation Plan in installing and operating certain equipment without appropriate air permits. While the notice does not specify the remedy sought, upon final determination of a violation, the U.S. EPA may issue an administrative order requiring the installation of air pollution control equipment, assess penalties, or commence civil or criminal action against the company. The company responded to the U.S. EPA on March 10, 2000. The company does not believe that any unfavorable result of this proceeding will have a material impact on the company’s financial position or results of operations.

        In addition, the company is a party to certain litigation arising in the ordinary course of business that, in the opinion of management, will not have a material adverse effect on the operations or financial condition of the company.

Retirement Plans

        The company has seven principal retirement plans: the restated Retirement Benefit Plan of R.R. Donnelley & Sons Company (the main R.R. Donnelley retirement plan); an unfunded Supplemental Benefit Plan; the Merged Retirement Income Plan for Employees at R.R. Donnelley Printing Company, L.P. and R.R. Donnelley Printing Company; the Supplemental Unfunded Retirement Income Plan for Employees of Meredith-Burda Corporation Limited Partnership; the Supplemental Unfunded Retirement Income Plan for Employees of Meredith-Burda Corporation; the Haddon Craftsman, Inc. Retirement Plan; and the R.R. Donnelley UK Pension Plan.

        The company’s restated Retirement Benefit Plan (the Plan) is a noncontributory defined benefit plan. Substantially all U.S. employees age 21 or older are covered by the Plan. Normal retirement age is 65, but reduced early retirement benefits are paid to fully vested participants at or after age 55. As required, the company uses the projected unit credit actuarial cost method to determine pension cost for financial reporting purposes. In conjunction with this method, the company amortizes deferred gains and losses (using the corridor method) and prior service costs over the average remaining service life of its active employee population. In addition, a transition credit (the excess of Plan assets plus balance sheet accruals over the projected obligation as of January 1, 1987) is amortized over 19 years. For tax and funding purposes, the entry age normal actuarial cost method is used. Plan assets include primarily government and corporate debt securities, marketable equity securities, commingled funds and group annuity contracts purchased from a life insurance company. 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.

        In addition to pension benefits, the company provides certain healthcare and life insurance benefits for retired employees. Most of the company’s regular full-time U.S. employees become eligible for these benefits upon reaching age 55 while working for the company and having 10 years of continuous service at retirement. The company funds a portion of the liabilities associated with these plans through a tax-exempt trust. The assets of the trust are invested primarily in life insurance covering some of the company’s employees.

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

        The following represents the obligations and plan assets at fair value for the company’s pension and postretirement benefit plans at the respective year-ends:

	Pension Benefits				Postretirement Benefits
	2000		1999		2000		1999
	In Thousands
Benefit obligation at beginning of year	$1,232,803		$1,239,266		$251,714		$240,654
Service cost	53,068		54,220		10,162		7,742
Interest cost	85,309		80,570		17,600		12,067
Plan participants’ contribution	800		659		2,129		1,592
Amendments	—		10,638		(14,679	)	(4,223	)
Actuarial loss (gain)	32,107		(100,892	)	3,699		8,565
Acquisitions/plan initiations/curtailments	—		—		1,791		—
Expected benefits paid	(68,868	)	(51,658	)	(23,036	)	(14,683	)
Benefit obligation at end of year	$1,335,219		$1,232,803		$249,380		$251,714

	Pension Benefits				Postretirement Benefits
	2000		1999		2000		1999
	In Thousands
Fair value of plan assets at beginning of year	$1,706,091		$1,671,693		$331,347		$317,586
Actual return on plan assets	193,175		83,776		40,448		13,761
Employer contribution	3,767		1,621		—		—
Plan participants’ contributions	800		659		—		—
Expected benefits paid	(68,868	)	(51,658	)	(32,881	)	—
Fair value of plan assets at end of year	$1,834,965		$1,706,091		$338,914		$331,347

        The funded status of the plans reconcile with amounts on the consolidated balance sheets as follows:

	Pension Benefits				Postretirement Benefits
	2000		1999		2000		1999
	In Thousands
Funded status	$ 499,746		$  473,288		$89,535		$  79,633
Unrecognized transition obligation	(53,345	)	(64,484	)	—		—
Unrecognized net actuarial gain	(192,892	)	(185,183	)	(75,680	)	(65,817	)
Unrecognized prior service cost	41,083		44,610		(21,241	)	(16,093	)
Fourth quarter contribution (payment)	377		956		(666	)	(13,092	)
Net asset (liability) recognized	$294,969		$  269,187		$(8,052)		$(15,369	)

        Amounts recognized in the consolidated balance sheets consist of:

	Pension Benefits				Postretirement Benefits
	2000		1999		2000		1999
	In Thousands
Prepaid benefit cost	$323,235		$291,853		$    —		$   —
Accrued benefit cost	(34,882	)	(29,100	)	(8,052	)	(15,369	)
Intangible asset	4,849		5,943		—		—
Minimum pension liability adjustment	1,767		491		—		—
Net asset (liability) recognized	$294,969		$269,187		$(8,052	)	$(15,369	)

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

        The weighted average assumptions used in the actuarial computation that derived the above amounts were as follows:

	Pension Benefits			Postretirement Benefits
	2000	1999	1998	2000	1999	1998
Discount rate	7.25%	7.25%	6.75%	7.25%	7.25%	6.75%
Expected return on plan assets	9.50%	9.50%	9.50%	9.00%	9.00%	9.00%
Average rate of compensation increase	4.00%	4.00%	4.00%	4.00%	4.00%	4.00%

        For measuring other retirement benefits, a 6.1% annual rate of increase in the per-capita cost of covered healthcare benefits was assumed for 2002 (the trend rate occurring during 2001 to arrive at 2002 levels). The rate was assumed to decrease gradually to 5.0% for 2008 and remain at that level thereafter.

        The components of the net periodic benefit cost and total income and expense were as follows:

	Pension Benefits						Postretirement Benefits
	2000		1999		1998		2000		1999		1998
	In Thousands
Service cost	$    53,068		$    54,220		$    42,979		$  10,162		$  10,322		$    9,508
Interest cost	85,309		80,570		76,037		17,600		16,089		15,626
Expected return on plan assets	(153,683	)	(141,237	)	(130,140	)	(26,042	)	(23,734	)	(20,671	)
Amortization of transition obligation	(10,763	)	(10,840	)	(10,863	)	—		—		—
Amortization of prior service cost	3,527		3,541		2,888		(7,740	)	(6,345	)	(6,345	)
Amortization of actuarial (gain) loss	(763	)	1,011		227		(845	)	15		—
Net periodic benefit cost	$  (23,305	)	$  (12,735	)	$  (18,872	)	$ (6,865	)	$  (3,653	)	$  (1,882	)
Curtailment loss	—		6		—		—		—		244
Settlement expense	—		688		—		—		—		—
Total income	$  (23,305	)	$  (12,041	)	$  (18,872	)	$ (6,865	)	$  (3,653	)	$  (1,638	)

        The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for all pension plans with accumulated benefit obligations in excess of plan assets were $57 million, $40 million and $6 million, respectively, in 2000 and $50 million, $37 million and $8 million, respectively, in 1999.

        Assumed health care cost trend rates have a significant effect on the amounts reported for postretirement benefits. A one-percentage-point change in assumed healthcare cost trend rates would have the following effects in 2000:

	1% Increase	1% Decrease
	In Thousands
Effect on total of service and interest cost components	$  102	$  (154)
Effect on postretirement benefit obligation	$1,139	$(1,453)

        Employee 401(k) Savings Plan—The company has maintained a savings plan that is qualified under Section 401(k) of the Internal Revenue Code. Substantially all of the company’s U.S. employees are eligible for this plan. Under provisions for this plan, employees may contribute up to 15% of eligible compensation on a before-tax basis and up to 10% of eligible compensations on an after-tax basis. During 1999, the company introduced a company match. The company generally matches 50% of a participating employee’s first 3% of before-tax contributions. The total expense attributable to the match was $11 million and $5 million in 2000 and 1999, respectively.

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Income Taxes

        Cash payments for income taxes were $55 million (net of a $69 million refund related to the 1999 sale of our investment in Stream International, CS&T and MMI), $122 million and $152 million in 2000, 1999 and 1998, respectively. The components of income tax expense for the years ending December 31, 2000, 1999 and 1998, were as follows:

	2000	1999	1998
	In Thousands
Federal
Current	$134,008	$102,086	$139,180
Deferred	1,959	56,610	35,222
State	31,117	36,318	40,323
Total	$167,084	$195,014	$214,725

        The significant deferred tax assets and liabilities were as follows:

	December 31
	2000	1999
	In Thousands
Deferred tax liabilities:
Accelerated depreciation	$156,818	$171,086
Investments	45,751	45,081
Pensions	126,618	108,464
Other	55,013	52,766
Total deferred tax liabilities	384,200	377,397
Deferred tax assets:
Postretirement benefits	3,438	6,563
Accrued liabilities	82,061	69,765
Net operating loss and other tax carryforwards	37,167	41,145
Investments	10,606	9,981
Other	79,388	52,427
Total deferred tax assets	212,660	179,881
Valuation allowance	39,818	41,162
Net deferred tax liabilities	211,358	$238,678

        The company has used COLI to fund employee benefits for several years. In 1996, the United States Health Care Reform Act was passed, eliminating the deduction for interest from loans borrowed against COLI programs. 1998 was the final year of the phase-out for deductions. The Internal Revenue Service (IRS), in its routine audit of the company, has disallowed the $34 million of tax benefit that resulted from the COLI interest deductions claimed by the company in its 1990 to 1992 tax returns.

        In two federal trial court decisions involving different corporate taxpayers, the courts disallowed deductions for loans against those taxpayers’ COLI programs. A decision involving a taxpayer in another court is imminent, and appeals from the first two decisions have been or are expected to be taken. While the company believes its COLI program differs from those involved in the earlier litigation, should the reasoning of these cases be upheld and applied to others, the company could lose an additional maximum of $151 million in tax benefits for periods from 1993 through 1998. In addition, should all or a portion of the company’s COLI deductions ultimately be disallowed, the company would be liable for interest on those amounts. The company’s maximum exposure for interest should all prior COLI deductions be disallowed is approximately $67 million after-tax through December 31, 2000.

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

        The company will continue to examine its position with respect to the final resolution of pending cases. During the fourth quarter of 1999, the company recorded an additional tax provision of $51 million ($0.40 per diluted share) related to COLI. The ultimate resolution of these issues may have a material impact on the company’s results of operations and financial condition.

        Also during the fourth quarter of 1999, the company recognized a tax benefit of $35 million related to the sale of Stream International (see “Divestitures” footnote on page F-8 for more details).

        The following table outlines the reconciliation of differences between the U.S. statutory tax rates and the rates used by the company in determining net income:

	2000		1999		1998
Federal statutory rate	35.0	%	35.0	%	35.0	%
Sale of Stream International	—		(7.1	)	—
Foreign tax rates over U.S. statutory rate	—		0.6		—
State and local income taxes, net of U.S. federal income tax benefit	4.7		4.7		4.4
Goodwill amortization	0.5		0.2		0.2
Expense (benefit) resulting from corporate-owned life insurance programs	1.4		10.9		(1.3	)
Affordable housing investment credits	(4.5	)	(4.0	)	(3.4	)
Change in valuation allowance	(0.6	)	(2.1	)	(0.1	)
Other	2.0		0.3		1.6
Total	38.5	%	38.5	%	36.4	%

Debt Financing and Interest Expense

        The company’s debt consisted of the following:

	December 31
	2000	1999
	In Thousands
Commercial paper and extendable commercial notes	$    195,327	$    141,521
Medium-term notes due 2001–2005 at a weighted average interest rate of 6.61%	232,345	266,000
9.125% debentures due December 1, 2000	—	199,934
8.875% debentures due April 15, 2021	80,821	80,814
6.625% debentures due April 15, 2029	198,924	198,886
8.820% debentures due April 15, 2031	68,906	68,902
7.000% notes due January 1, 2003	109,921	109,882
Other	124,586	102,114
Total	$1,010,830	$1,168,053

        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 exceeded its book value at December 31, 2000, by approximately $2 million.

        At December 31, 2000, the company had available credit facilities of $438 million with a group of U.S. and foreign banks, of which $225 million expires October 10, 2001. The remaining $213 million is a five-year facility that expires December 10, 2003. The credit arrangements provide support for the issuance of commercial paper and other credit needs. As of December 31, 2000, there has been no borrowing under these credit facilities. The company pays an annual commitment fee on the total unused credit facilities of 0.06% for the 364-day facility and 0.08% for the five-year facility.

        The weighted average interest rate on all commercial paper and extendable commercial notes outstanding during 2000 was 6.21% (6.54% at December 31, 2000). Annual maturities of long-term debt (excluding commercial paper and short-term debt) are as follows: 2002—$80 million, 2003—$136 million, 2004—$5 million, 2005—$166 million and $352 million thereafter.

        The following table summarizes interest expense included in the Consolidated Statements of Income:

	2000		1999		1998
	In Thousands
Interest incurred	$94,193		$95,176		$83,162
Amount capitalized as property, plant and equipment	(4,554	)	(7,012	)	(4,996	)
Total	$89,639		$88,164		$78,166

        Interest paid, net of capitalized interest, was $91 million, $86 million and $79 million in 2000, 1999 and 1998, respectively.

Earnings per Share

        In accordance with SFAS No. 128, Earnings per Share, the company has computed basic and diluted earnings per share (EPS), using the treasury stock method.

	2000	1999		1998
	In Thousands, Except Per-Share Data
Average shares outstanding	122,323	128,872		139,624
Effect of dilutive securities—options and nonvested restricted shares	770	694		2,241
Average shares outstanding, adjusted for dilutive effects	123,093	129,566		141,865
Income from continuing operations	$266,900	$311,515		$374,647
Basic EPS	$      2.18	$      2.41		$      2.68
Diluted EPS	2.17	2.40		2.64
Loss from discontinued operations	$      —	$  (3,201	)	$(80,067	)
Basic EPS	$      —	$    (0.02	)	$    (0.57	)
Diluted EPS	—	(0.02	)	(0.56	)
Net income	$266,900	$308,314		$294,580
Basic EPS	$      2.18	$      2.39		$      2.11
Diluted EPS	2.17	2.38		2.08

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stock and Incentive Programs for Employees

        Restricted Stock Awards—At December 31, 2000 and 1999, respectively, the company had 457,000 and 424,000 unvested restricted shares of its common stock granted to certain officers. These shares are registered in the names of the recipients, but are subject to conditions of forfeiture and restrictions on sale or transfer for one to five years from the grant date. Dividends on the restricted shares are paid currently to the recipients. The expense of the grant is recognized evenly over the vesting period.

        The value of the restricted stock awards was $12 million and $11 million based upon the closing price of the company’s stock at each year-end ($27.00 and $24.81 at December 31, 2000 and 1999, respectively). During 2000, a total of 209,000 shares of restricted stock were issued with a grant date fair value of $5 million. Charges to expense for these grants were $4 million, $3 million and $4 million in 2000, 1999 and 1998, respectively.

        Stock Purchase Plan—Prior to 1999, the company had a stock purchase plan for selected managers and key staff employees. Under the plan, the company was required to contribute an amount equal to 70% of participants’ contributions, of which 50% was applied to the purchase of stock and 20% was paid in cash. The amount charged to expense for this plan was $9 million in 1998.

        Incentive Compensation Plans—In 1998, the company implemented a new management incentive plan designed to provide incentive compensation to senior officers that is closely tied to the creation of value for company shareholders. Awards under the plan are largely based on the achievement of relative total shareholder return and Economic Value Added (EVA®) improvement targets, along with earnings-per-share objectives and other individual and strategic targets. The plan combines aspects of both an annual and long-term plan by using a “banking” feature, in which a portion of the amount earned in the year is paid out to participants and a portion is deferred for payout in subsequent years. The company has accrued for both the portion currently payable and the deferred component. Prior to 1998, the company had both an annual incentive plan and a long-term incentive plan for its senior officers. The company’s incentive compensation plans for other officers, managers and supervisors are based primarily on annual improvements in EVA, along with relative total shareholder return and earnings-per-share targets.

        Stock Options—The company has incentive stock plans for its employees. Under these plans, options vest from one to nine and one-half years after date of grant and may be exercised, once vested, up to 10 years from the date of grant. Under authorized stock incentive plans, a maximum of 3.6 million shares were available for future grants of stock options, stock units and restricted stock awards as of December 31, 2000. The company accounts for employee stock options under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, under which no compensation cost has been recognized. Had compensation cost been determined consistent with SFAS No. 123, Accounting for Stock Based Compensation, the company’s net income from continuing operations and respective earnings per share would have been reduced to the following pro forma amounts:

	2000	1999	1998
	In Thousands, Except Per-Share Data
Income from continuing operations:
As reported	$266,900	$311,515	$374,647
Pro forma	251,508	297,131	358,991
Basic earnings per share:
As reported	$      2.18	$      2.41	$      2.68
Pro forma	2.06	2.31	2.57
Diluted earnings per share:
As reported	$      2.17	$      2.40	$      2.64
Pro forma	2.04	2.29	2.53

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

        The fair value of each option granted during the year is estimated on the date of grant using the Black-Scholes option-pricing model with the following range of assumptions:

	2000		1999		1998
Dividend yield	3.88	%	2.66	%	1.98	%
Expected volatility	68.86	%	34.13	%	26.51	%
Risk-free interest rate	6.38	%	5.85	%	5.28	%
Expected life	10 Years		10 Years		10 Years

        A summary of the status of the company’s option activity is presented below:

	2000			1999			1998
	Shares (Thousands)		Weighted Average Exercise Price	Shares (Thousands)		Weighted Average Exercise Price	Shares (Thousands)		Weighted Average Exercise Price
Options outstanding at beginning of      year	13,432		$34.73	12,398		$34.80	13,958		$33.04
Options granted	6,507		21.38	1,863		34.23	1,627		41.81
Options exercised	(316	)	19.79	(257	)	26.18	(2,387	)	29.77
Options forfeited	(1,591	)	35.28	(572	)	38.29	(800	)	33.47
Options outstanding at end of year	18,032		$30.13	13,432		$34.73	12,398		$34.80
Options exercisable at end of year	9,239		$33.71	8,980		$33.10	7,344		$31.93
Weighted average fair value of options      granted during the year			$10.90			$13.21			$15.01

        The following summarizes information about stock options outstanding at December 31, 2000:

	Options Outstanding			Options Exercisable
Range of Exercise Prices	Shares (Thousands)	Average Remaining Contractual Life	Weighted Average Exercise Price	Shares (Thousands)	Weighted Average Exercise Price
$20.88–$30.94	10,438	7.18	$24.35	4,065	$28.83
$30.95–$76.96	7,594	5.93	$38.07	5,174	$37.54
$20.88–$76.96	18,032	6.65	$30.13	9,239	$33.71

        Other Information—Under the stock programs, authorized unissued shares or treasury shares may be used. The company intends to reacquire shares of its common stock to meet the stock requirements of these programs in the future.

Preferred Stock

        The company has 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 that are not in the best interest of shareholders.

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

        Under the terms of the Plan, each share of common stock is accompanied by one right; each right entitles the shareholder to purchase from the company one one-thousandth of a newly issued share of Series A Junior Preferred Stock at an exercise price of $140.

        The rights become exercisable 10 days after a public announcement that an acquiring person (as defined in the Plan) has acquired 15% or more of the outstanding common stock of the company (the Stock Acquisition Date), 10 business days after the commencement of a tender offer that would result in a person owning 15% or more of such shares or 10 business days after an adverse person (as defined in the Plan) has acquired 10% or more of such shares and such ownership interest is likely to have a material adverse impact on the company. The company can redeem the rights for $0.01 per right at any time until 10 days following the Stock Acquisition Date (under certain circumstances, the 10-day period can be shortened or lengthened by the company). The rights will expire on August 8, 2006, unless redeemed earlier by the company.

        If, subsequent to the rights becoming exercisable, the company is acquired in a merger or other business combination at any time when there is a 15% or more holder, the rights will then entitle a holder (other than a 15% or more shareholder or an adverse person) to buy shares of the acquiring company with a market value equal to twice the exercise price of each right. Alternatively, if a 15% holder acquires the company by means of a merger in which the company and its stock survives, if any person acquires 15% or more of the company’s common stock or if an adverse person acquires 10% or more of the company’s common stock and such ownership is likely to have a material adverse impact on the company, each right not owned by a 15% or more shareholder or an adverse person would become exercisable for common stock of the company (or, in certain circumstances, other consideration) having a market value equal to twice the exercise price of the right.

Industry Segment Information

        The company operates primarily in the commercial print portion of the printing industry, with related service offerings designed to offer customers complete solutions for communicating their messages to target audiences. Substantially all revenues within commercial printing result from the sale of printed products and services to customers in the following end-markets: Long-run Magazines, Catalogs and Inserts; Telecommunications; Book Publishing Services; Financial Services; Specialized Publishing Services; RRD Direct; Premedia; and International, which provides similar products and services outside the United States. The company’s management has aggregated its commercial print businesses as one reportable segment because of strong similarities in the economic characteristics, nature of products and services, production processes, class of customer and distribution methods used.

        R.R. Donnelley Logistics (Donnelley Logistics) represents the company’s logistics and distribution services operation for its print customers and other mailers. Donnelley Logistics serves its customers by consolidating and delivering printed product and packages to the U.S. Postal Service closer to the final destination, resulting in reduced postage costs and improved delivery performance. Following the company’s acquisition of certain net assets of CTC in February 2000, the combined operations of Donnelley Logistics and CTC have been included within the reportable segment “Logistics Services” for the year ended December 31, 2000. Prior-year amounts have been restated to reflect the current year presentation (see the “Acquisitions and Investments” footnote on page F-8 for more details regarding the acquisition of CTC).

        In connection with the acquisition of CTC, the company has changed its presentation of reported operating results for Donnelley Logistics. Previously, net sales of Donnelley Logistics were classified net of transportation costs. For the year ended December 31, 2000, the company reported net sales for Donnelley Logistics on a gross basis, with transportation costs being included as a component of cost of sales. The effect of this change was to increase both net sales and cost of sales by $232 million and $200 million in 1999 and 1998, respectively. There was no impact on gross profit or earnings from operations.

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

        For the year ended December 31, 2000, Donnelley Logistics’ operating results include net sales from CTC of $365 million.

        The company has disclosed earnings (loss) from operations as the primary measure of segment earnings (loss). This is the measure of profitability used by the company’s chief operating decision-maker that is most consistent with the presentation of profitability reported within the consolidated financial statements. The accounting policies of the business segments reported are the same as those described in the “Summary of Significant Accounting Policies” footnote on page F-6.

	Commercial Print	Logistics Services		Other(1)		Corporate(2)		Discontinued Operations(3)	Consolidated Total
	In Thousands
2000
Sales	$5,058,400	$691,167		$  14,768		$      —		$	$5,764,335
Earnings (loss) from operations	519,688	(13,918	)	(30,532	)	25,802		—	501,040
Earnings (loss) from continuing     operations before income taxes	532,826	(14,001	)	(34,386	)	(50,455	)	—	433,984
Assets	2,963,837	246,784		31,517		672,064		—	3,914,202
Depreciation and amortization	347,644	13,267		1,512		27,979		—	390,402
Capital expenditures	203,234	3,478		540		29,855		—	237,107
1999
Sales	$4,904,014	$281,468		$230,160		$      —		$    —	$5,415,642
Earnings (loss) from operations	521,803	8,989		(4,957	)	4,592		—	530,427
Earnings (loss) from continuing     operations before income taxes	537,835	8,916		(5,775	)	(34,447	)	—	506,529
Assets	3,122,111	46,253		10,964		674,136		—	3,853,464
Depreciation and amortization	332,514	1,121		16,866		23,881		—	374,382
Capital expenditures	205,630	1,783		12,067		56,346		—	275,826
1998
Sales	$4,743,715	$250,749		$223,489		$      —		$    —	$5,217,953
Earnings (loss) from operations	492,741	7,250		(13,538	)	1,965		—	488,418
Earnings (loss) from continuing     operations before income taxes	506,878	7,251		(13,688	)	88,931		—	589,372
Assets	3,022,631	28,715		94,774		606,521		45,476	3,798,117
Depreciation and amortization	335,739	997		18,126		21,209		—	376,071
Capital expenditures	167,917	1,310		17,079		38,916		—	225,222

1 Represents other operating segments of the company, including Stream International in 1999 and 1998 (see “Divestitures” footnote on page F-8 for more details).

2 Corporate earnings consist primarily of the following unallocated items: net earnings of benefit plans (excluding service costs) of $86 million, $83 million and $84 million in 2000, 1999 and 1998, respectively, which were partially offset by general corporate, management and information technology costs. In addition to earnings from operations, corporate earnings before income taxes include: 2000 net interest expense of $76 million and a gain on the sale of shares received from the demutualization of the company’s basic life insurance carrier of $13 million; 1999 net interest expense of $77 million and gains on the sale of businesses and investments of $43 million; and 1998 net interest expense of $72 million and gains on the sale of the company’s remaining interests in two former subsidiaries of $169 million

           Corporate assets consist primarily of the following unallocated items at December 31: 2000—benefit plan assets of $342 million, investments in affordable housing of $143 million and fixed assets of $92 million; 1999— benefit plan assets of $298 million, investments in affordable housing of $139 million and fixed assets of $95 million and refundable income taxes of $77 million; and 1998—benefit plan assets of $285 million, investments in affordable housing of $120 million and fixed assets of $118 million.

3 See the “Discontinued Operations” footnote on page F-7 for more details.

R.R. DONNELLEY & SONS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Geographic Area Information

	U.S.	International	Combined
	In Thousands
2000
Sales	$5,135,718	$628,617	$5,764,335
Long-lived assets(1)	2,287,908	419,845	2,707,753
1999
Sales	$4,833,220	$582,422	$5,415,642
Long-lived assets(1)	2,310,581	313,033	2,623,614
1998
Sales	$4,717,399	$500,554	$5,217,953
Long-lived assets(1)	2,362,042	280,784	2,642,826

(1) Includes net property, plant and equipment, goodwill and other intangibles, net assets of discontinued operations and other noncurrent assets.

Subsequent Events (Unaudited)

        On February 20, 2001, a third federal trial court disallowed deductions for loans taken by a corporate taxpayer against its COLI program. See “Income Taxes” footnote on page F-14 above for additional information.

        On March 7, 2001, the district court judge in the Jones and Adams cases certified three plaintiff classes in the actions: a class consisting of African-American employees discharged in connection with the shutdown of the Chicago catalog operations; a class consisting of African-American employees of the Chicago catalog operations after November, 1992 who were other than permanent employees; and a class consisting of African-Americans subjected to an allegedly hostile working environment at the Chicago catalog operations, the Chicago financial or Dwight, Illinois manufacturing operations. The judge also consolidated the Jones and Adams cases for pretrial purposes. On March 16, 2001, plaintiffs filed a motion seeking reconsideration of the court’s class certification order. See “Commitments and Contingencies” footnote on page F-10 above for additional information.

        On March 26, 2001, the company announced it will invest up to $300 million over the next two years to improve the efficiency of its long-run printing and binding operations serving magazine, catalog and retail customers. As part of this investment program, the company will also retire several older presses and related binding equipment. The company also announced it will close its manufacturing facility in South Daytona, Florida, by the end of the second quarter of 2001, and is considering closing its Des Moines, Iowa, manufacturing facility. The company expects to make a final decision with respect to the closing of its Des Moines facility during the second quarter of 2001.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

        We have audited the accompanying consolidated balance sheets of R.R. Donnelley & Sons Company (a Delaware corporation) and Subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States. 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, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.

ARTHUR ANDERSEN LLP

Chicago, Illinois

January 25, 2001

UNAUDITED INTERIM FINANCIAL INFORMATION, DIVIDEND

SUMMARY AND FINANCIAL SUMMARY

In Thousands, Except Per-Share Data

	Year Ended December 31
	First Quarter		Second Quarter		Third Quarter	Fourth Quarter		Full Year
2000
Net sales	$1,342,970		$1,388,805		$1,433,000	$1,599,560		$5,764,335
Gross profit	239,435		267,721		304,146	287,561		1,098,863
Income from continuing operations	46,701		56,340		92,308	71,551		266,900
Net income	46,701		56,340		92,308	71,551		266,900
Net income per diluted share	0.38		0.46		0.75	0.58		2.17
Stock market high	24.31		26.69		26.75	27.00		27.00
Stock market low	19.00		20.13		22.13	21.38		19.00
Stock market closing price	20.94		22.56		24.56	27.00		27.00
1999
Net sales	$1,231,404		$1,247,483		$1,399,400	$1,537,355		$5,415,642
Gross profit	242,936		259,250		321,655	335,166		1,159,007
Income from continuing operations	45,800		53,674		85,587	126,454		311,515
Loss from discontinued operations, net of      income taxes	(1,820	)	(1,187	)	—	(194	)	(3,201	)
Net income	43,980		52,487		85,587	126,260		308,314
Net income per diluted share	0.33		0.40		0.67	1.01		2.38
Stock market high	43.81		37.94		36.94	30.25		43.81
Stock market low	32.13		31.38		27.75	22.81		22.81
Stock market closing price	32.19		37.06		28.88	24.81		24.81

Stock prices reflect New York Stock Exchange composite quotes.

Dividend Summary

	2000	1999	1998	1997	1996
Quarterly rate per common share*	$0.225	$0.215	$0.205	$0.195	$0.185
Yearly rate per common share	0.90	0.86	0.82	0.78	0.74

           * Averages (2000—$0.22 first two quarters and $0.23 last two quarters; 1999—$0.21 first two quarters and $0.22 last two quarters; 1998—$0.20 first two quarters and $0.21 last two quarters; 1997—$0.19 first two quarters and $0.20 last two quarters; 1996—$0.18 first two quarters and $0.19 last two quarters).

UNAUDITED INTERIM FINANCIAL INFORMATION, DIVIDEND

SUMMARY AND FINANCIAL SUMMARY—(Continued)

In Thousands, Except Per-Share Data

Financial Summary

	2000	1999		1998		1997		1996
	In Thousands, Except Per-Share Data
Net sales	$5,764,335	$5,415,642		$5,217,953		$5,085,811		$5,209,169
Income (loss) from continuing      operations	266,900	311,515		374,647		206,525		(71,483	)
Loss on disposal of discontinued      operations	—	—		—		(60,000	)	—
Loss from discontinued operations	—	(3,201	)	(80,067	)	(15,894	)	(86,142	)
Net income (loss)**	266,900	308,314		294,580		130,631		(157,625	)
Per diluted common share**	2.17	2.38		2.08		0.89		(1.04	)
Total assets	3,914,202	3,853,464		3,798,117		4,134,166		4,443,828
Noncurrent liabilities	1,491,093	1,511,743		1,447,852		1,730,047		2,044,818

         ** Net income includes the following one-time items: 2000 gain related to the sale of shares received from the demutualization of the company’s basic life insurance carrier of $13 million ($8 million after-tax, or $0.06 per diluted share); 1999 gains on the sale of businesses and investments of $43 million ($27 million after-tax, or $0.20 per diluted share); 1998 gains on the sale of the company’s remaining interests in two former subsidiaries of $169 million ($101 million after-tax, or $0.71 per diluted share); 1997 restructuring and impairment charges of $71 million ($42 million after-tax, or $0.29 per diluted share); 1996 restructuring and impairment charges of $442 million ($374 million after taxes and minority interest, or $2.45 per diluted share), and gains on partial divestiture of subsidiaries of $80 million ($48 million after-tax, or $0.31 per diluted share).

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON

FINANCIAL STATEMENT SCHEDULE

To the Shareholders of

R.R. Donnelley & Sons Company:

        We have audited, in accordance with generally accepted auditing standards, the financial statements included in the R.R. Donnelley & Sons Company Annual Report to Shareholders included in this Form 10-K, and have issued our report thereon dated January 25, 2001. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index to the financial statements is the responsibility of the Company’s management and is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Chicago, Illinois

January 25, 2001

SCHEDULE II

Valuation and Qualifying Accounts

        Transactions affecting the allowances for doubtful accounts during the years ended December 31, 2000, 1999 and 1998, were as follows:

	2000		1999		1998
	Thousands of dollars
Allowance for trade receivable losses:
Balance, beginning of year	$15,461		$  14,279		$  16,259
Balance, companies (sold) acquired during year	35		1,768		—
Provisions charged to income	10,352		11,259		12,551
	25,848		27,306		28,810
Uncollectible accounts written off, net of           recoveries	(5,832	)	(11,845	)	(14,531	)
Balance, end of year	$20,016		$  15,461		$  14,279

INDEX TO EXHIBITS*

Description

Exhibit No.

Restated Certificate of Incorporation(1)

 3(1)

By-Laws(2)

 3(ii)(a)

Form of Rights Agreement, dated as of April 25, 1996 between R.R. Donnelley & Sons Company and First Chicago Trust Company of New York(3)

 4(a)

Instruments Defining the Rights of Security Holders(4)

 4(b)

Indenture dated as of November 1, 1990 between the Company and Citibank, N.A. as Trustee(5)

 4(c)

Five-Year Credit Agreement dated December 11, 1998 among R.R. Donnelley & Sons Company, the Banks named therein and The First National Bank of Chicago, as Administrative Agent(6)

 4(d)

364-Day Credit Agreement dated October 12, 2000 among R.R. Donnelley & Sons Company, the Banks named therein and BankOne, N.A., as Administrative Agent(7)

 4(e)

Donnelley Deferred Compensation and Voluntary Savings Plan(8)..

 4(f)

Amendment to Donnelley Deferred Compensation and Voluntary Savings Plan adopted June 30, 1999(2)..

 4(g)

Policy on Retirement Benefits, Phantom Stock Grants and Stock Options for Directors..

10(a)

Directors’ Deferred Compensation Agreement, as amended(9)**

10(b)

Donnelley Shares Stock Option Plan, as amended(10)

10(c)

1993 Stock Ownership Plan for Non-Employee Directors, as amended(11)**

10(d)

Senior Management Annual Incentive Plan, as amended(9)**

10(e)

Amendment to Senior Management Annual Incentive Plan**..

10(f)

Senior Management Annual Incentive Plan—2001**..

10(g)

2001 Senior Management Long Term Incentive Award**..

10(h)

Form of Severance Agreement for Senior Officers, as amended(2)**

10(i)

1991 Stock Incentive Plan, as amended(11)**

10(j)

1995 Stock Incentive Plan, as amended(9)**

10(k)

2000 Stock Incentive Plan(12)**

10(l)

Unfunded Supplemental Benefit Plan(5)**

10(m)

Amendment to Unfunded Supplemental Benefit Plan adopted on April 25, 1991(13)**

10(n)

Employment Agreement between R.R. Donnelley & Sons Company and William L. Davis(14)**

10(o)

Premium-Priced Option Agreement between R.R. Donnelley & Sons Company and William L. Davis(14)**

10(p)

Consulting Agreement between R.R. Donnelley & Sons Company and Cheryl A.
Francis(15)**

10(q)

Agreement between R.R. Donnelley & Sons Company and Jonathan P. Ward**..

10(r)

Agreement between R.R. Donnelley & Sons Company and Michael W. Winkel**..

10(s)

Computation of Ratio of Earnings to Fixed Charges

12

Subsidiaries of R.R. Donnelley & Sons Company

21

Consent of Independent Public Accountants dated March 29, 2001

23

*Filed with the Securities and Exchange Commission.  Each such exhibit may be obtained by a shareholder of the Company upon payment of $5.00 per exhibit.

**Management contract or compensatory plan or arrangement.

(1) Filed as Exhibit to Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996, filed on May 3, 1996, and incorporated herein by reference.

(2) Filed as Exhibit to Annual Report on Form 10-K for the year ended December 31, 1999, filed on March 30, 2000, and incorporated herein by reference.

(3) Filed as Exhibit to Form 8-A filed on June 5, 1996, and incorporated herein by reference.

(4) Instruments, other than that described in 4(c) and 4(d), defining the rights of holders of long-term debt not registered under the Securities Exchange Act of 1934 of the registrant and of all subsidiaries for which consolidated or unconsolidated financial statements are required to be filed are being omitted pursuant to paragraph (4)(iii)(A) of Item 601 of Regulation S-K. Registrant agrees to furnish a copy of any such instrument to the Commission upon request.

(5) Filed as Exhibit with Form SE filed on March 26, 1992, and incorporated herein by reference.

(6) Filed as Exhibit to Annual Report on Form 10-K for the year ended December 31, 1998 filed on March 31, 1999 and incorporated herein by reference.

(7) Filed as Exhibit to Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000, filed on November 13, 2000, and incorporated herein by reference.

(8) Filed as Exhibit to Form S-8, filed on June 18, 1999 and incorporated herein by reference.

(9) Filed as Exhibit to Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998, filed on November 12, 1998, and incorporated herein by reference.

(10) Filed as Exhibit to Annual Report on Form 10-K for the year ended December 31, 1996, filed on March 10, 1997, and incorporated herein by reference.

(11) Filed as Exhibit to Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996, filed on November 1, 1996, and incorporated herein by reference.

(12) Filed as Exhibit to Form S-8, filed on May 15, 2000, and incorporated herein by reference.

(13) Filed as Exhibit with Form SE filed on May 9, 1991 and incorporated herein by reference.

(14) Filed as Exhibit to Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997, filed on May 7, 1997, and incorporated herein by reference.

(15) Filed as Exhibit to Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000, filed on May 12, 2000, and incorporated herein by reference.

EX-10.A

                                                                       Form 10-K
                                                             Year Ended 12/31/00
                                                                     Exhibit 10a

              POLICY ON RETIREMENT BENEFITS, PHANTOM STOCK GRANTS
                        AND STOCK OPTIONS FOR DIRECTORS
        (Effective January 1, 1997, as revised as of September 24, 1998;
              November 18, 1999; March 23, 2000; January 1, 2001)

Retirement Benefits
- -------------------

     No retirement benefit will be paid to any director whose service begins on
     or after November 18, 1999.  Retirement benefits for directors whose
     service began prior to November 18, 1999, will be determined as follows:

 .    A director who is retired as of January 1, 1997 will receive an annual
     retirement benefit equal to 10% of the annual retainer fee payable to
     active directors at the time such benefit is actually paid for each year or
     fraction thereof of service as a director (with a maximum of ten years).

 .    Each director who was active as of January 1, 1997 shall have elected,
     prior to February 15, 1997, to:

     (1) receive an annual retirement benefit equal to 10% of the annual
     retainer fee payable to active directors at the time such benefit is
     actually paid for each year or fraction thereof of service as a director
     (with a maximum of ten years); or

     (2) have an amount equal to the present value of that director's earned
     annual retirement benefit at December 31, 1996 credited as of January 1,
     1997 to a book-entry account of that director pursuant to a Deferred
     Compensation Agreement; or

     (3) convert the present value of that director's earned annual retirement
     benefit at December 31, 1996 to the number of shares of phantom stock
     (carried to four decimal places) determined by dividing such present value
     by the fair market value of a share of common stock on the most recent
     trading day of the common stock on the NYSE, which shares will be credited
     as of January 1, 1997 to a book-entry phantom stock account.

 .    A non-employee director who (i) was active as of January 1, 1997 with less
     than ten years of service as a director and who chose alternative (2) or
     (3) in the preceding paragraph or (ii) is first elected to the Board on or
     after January 1, 1997, but prior to November 18, 1999, will be credited as
     of January 1 of each year beginning January 1, 1997 through January 1, 2000
     with the number of shares of phantom stock (carried to four decimal places)
     determined by dividing an amount equal to 35% of the annual retainer fee
     payable to active directors for such year by the fair market value of a
     share of common stock on the most recent trading day of the common stock;
     provided that a non-employee director

                                                                          Page 1


     may elect, as set forth in and pursuant to the applicable Stock Incentive
     Plan of the Company, to receive in lieu of crediting all or some of such
     shares of phantom stock, an option to purchase shares of common stock.

Annual Phantom Stock Award
- --------------------------

 .    January 1, 2001, and on each January 1 thereafter, a director shall be
     credited with the number of shares of phantom stock (carried to four
     decimal places) determined by dividing 65% of the annual retainer fee
     payable for such year by the fair market value of a share of common stock
     on the most recent trading day of the common stock; provided, further, that
     a non-employee director may elect as set forth in and pursuant to the
     applicable Stock Incentive Plan of the Company, to receive in lieu of
     crediting all or some of such shares of phantom stock, an option to
     purchase shares of common stock.

                                    Page 2


PAYMENT OF ANNUAL RETIREMENT BENEFITS, DEFERRED COMPENSATION AND PHANTOM STOCK
AND TREATMENT OF STOCK OPTIONS

Annual Retirement Benefits
- --------------------------

Annual retirement benefits will be paid quarterly in advance as follows:

 .    The annual retirement benefit of a director whose service on the Board
     terminates at or after age 65 for any reason will begin with the first
     calendar quarter following the effective date of retirement.

 .    The annual retirement benefit of a director whose service on the Board
     terminates prior to age 65 for any reason except disability that ends the
     director's active business career or employment will begin with the first
     calendar quarter following the attainment of age 65.

 .    The annual retirement benefit of a director whose service on the Board
     terminates prior to age 65 by reason of disability that ends the director's
     active business career or employment will begin with the first calendar
     quarter following the effective date of retirement.

 .    In all cases, no payment of an annual retirement benefit will occur
     following the date of death.

 .    A former director who is receiving an annual retirement benefit will
     receive any future increases in annual retirement benefits from and after
     the time such increases are put into effect.

Deferred Compensation
- ---------------------

 .    A director who was active as of January 1, 1997 who elected to have an
     amount equal to the present value of that director's earned annual
     retirement benefit at December 31, 1996 credited as of January 1, 1997 to a
     book-entry account pursuant to a Deferred Compensation Agreement will be
     paid in accordance with the terms and conditions of that Agreement.

Phantom Stock
- -------------

 .    On each dividend payment date in respect of the common stock, a director's
     phantom stock account shall be credited with the number of shares of
     phantom stock (carried to four decimal places) determined by dividing (i)
     the product of the number of shares of phantom stock credited to that
     director's phantom stock account as of the record date for such dividend
     multiplied by the per share amount of the dividend by (ii) the fair market
     value of a share of common stock on the dividend payment date (or if the
     dividend payment date is

                                    Page 3


     not a trading day on the NYSE, the most recent trading day of the common
     stock on the NYSE).

 .    In the event of any stock split, stock dividend, recapitalization,
     reorganization, merger, consolidation, combination, exchange of shares,
     liquidation, spin-off or other similar change in capitalization or event,
     or any distribution to holders of common stock other than a regular cash
     dividend, the number and class of phantom securities credited to a
     director's account shall be appropriately adjusted by a committee
     designated by the Board.

 .    In connection with termination of service on the Board for any reason
     other than death, the director may elect as of the effective date of such
     cessation of service (and if the director's cessation of service is by
     reason of death, the director shall be deemed to elect as of the date of
     death), to convert the value of that director's phantom stock account
     (determined by multiplying the number of shares of phantom stock by the
     fair market value of the common stock on the effective date of such
     cessation of service) to a cash amount to be credited to a book-entry cash
     account.  Such cash account shall be credited quarterly (beginning on the
     last day of the calendar quarter in which the termination of service
     occurred) with an amount of interest on the balance (including interest
     previously credited) at an annual rate equal to the then current yield
     obtainable on United States government bonds having a maturity date of
     approximately five years.  Failure to make an election under this clause
     shall result in the continuation of the director's phantom stock account.

 .    If, as a result of any merger, consolidation, exchange, reclassification,
     sale of assets or similar transaction or event, the common stock ceases, or
     as a result of a transaction or event is intended to cease, to be listed
     for trading on the NYSE (and is not otherwise publicly traded), the
     director or any former director may elect at any time after the Company has
     entered into an agreement providing for such transaction or event, as of a
     date designated by the director or former director (and in the absence of
     such an election and designation the director or former director shall be
     deemed to elect as of the effective date of such transaction or event), to
     convert the value of that director's phantom stock account (determined by
     multiplying the number of shares of phantom stock by the fair market value
     of the common stock on the effective date of such cessation of service) to
     a cash amount to be credited to a book-entry cash account.  Such cash
     account shall be credited quarterly (beginning on the last day of the
     calendar quarter in which the termination of service occurred) with an
     amount of interest on the balance (including interest previously credited)
     at an annual rate equal to the then current yield obtainable on United
     States government bonds having a maturity date of approximately five years.

A director's cash account or phantom stock account will be paid as follows:

 .    A director whose service on the Board terminates at or after age 65 for
     any reason except death shall elect to receive, as of the first day of the
     first calendar quarter following the effective date of such cessation of
     service, either (1) an annual amount in cash for a number of years not
     exceeding ten determined by dividing the value of the director's phantom
     stock account (the value of the phantom stock is to be determined by
     reference to the fair market value of the common stock on the date of such
     cessation of service), but

                                    Page 4


     not the director's cash account, as of the effective date of such cessation
     of service by the number of annual payments to be made; provided that the
     last payment made shall be for 100% of the value of the director's account
     as of the date of the last payment, (2) an annual amount in cash for a
     number of years not exceeding ten determined by dividing the value of the
     director's cash account or phantom stock account (the value of the phantom
     stock is to be determined by reference to the fair market value of the
     common stock on the effective date of the distribution and after giving
     effect to the crediting of shares of phantom stock on each dividend payment
     date on or prior to the date of the distribution) as of the effective date
     of the distribution by the number of annual payments remaining to be made;
     provided that the last payment made shall be for 100% of the value of the
     director's cash account or phantom stock account, as the case may be, as of
     the date of the last payment, or (3) a lump sum amount in cash equal to the
     value of the director's cash account or phantom stock account (the value of
     the phantom stock is to be determined by reference to the fair market value
     of the common stock on the effective date of such cessation of service). In
     the absence of a timely election, a director shall be deemed to have
     elected option (1) with ten annual payments with respect to his phantom
     stock account, and option (2) with ten annual payments with respect to his
     cash account.

 .    A director whose service on the Board terminates prior to age 65 for any
     reason except death shall elect to receive (1) as of the first day of the
     first calendar quarter following the attainment of age 65, an annual amount
     in cash a number of years not exceeding ten determined by dividing the
     value of the director's cash account or phantom stock account (the value of
     the phantom stock is to be determined by reference to the fair market value
     of the common stock on the effective date of the distribution and after
     giving effect to the crediting of shares of phantom stock on each dividend
     payment date on or prior to the date of the distribution) as of the
     effective date of the distribution by the number of annual payments
     remaining to be made; provided that the last payment made shall be for 100%
     of the value of the director's account as of the date of the last payment,
     or (2) shall elect to receive, as of the first day of the first calendar
     quarter following the effective date of such cessation of service, either
     (i) an annual amount in cash for a number of years not exceeding ten
     determined by dividing the value of the director's phantom stock account
     (the value of the phantom stock is to be determined by reference to the
     fair market value of the common stock on the date of such cessation of
     service), but not the director's cash account, as of the effective date of
     such cessation of service by the number of annual payments to be made;
     provided that the last payment made shall be for 100% of the value of the
     director's account as of the date of the last payment, (ii) an annual
     amount in cash for a number of years not exceeding ten determined by
     dividing the value of the director's cash account or phantom stock account
     (the value of the phantom stock is to be determined by reference to the
     fair market value of the common stock on the effective date of the
     distribution and after giving effect to the crediting of shares of phantom
     stock on each dividend payment date on or prior to the date of the
     distribution) as of the effective date of the distribution by the number of
     annual payments remaining to be made; provided that the last payment made
     shall be for 100% of the value of the director's cash account or phantom
     stock account, as the case may be, as of the date of the last payment, or
     (iii) a lump sum amount in cash equal to the value of the director's cash
     account or phantom stock account (the value of the phantom stock is to be
     determined by reference to the fair

                                    Page 5


     market value of the common stock on the effective date of such cessation of
     service). In the absence of a timely election, a director shall be deemed
     to have elected option (2)(i) with ten annual payments with respect to his
     phantom stock account, and (2)(ii) with ten annual payments with respect to
     his cash account.

 .    In all cases, if a director's cessation of service as a director is by
     reason of death or if a director dies while retired and amounts remain to
     be paid under the director's cash account or phantom stock account, 100% of
     the value of the director's cash account or phantom stock account (the
     value of the phantom stock is to be determined by reference to the fair
     market value of the common stock on the date of death) as of the date of
     death shall be paid as soon as practicable after the date of death to the
     director's estate or any beneficiaries designated by the director.

 .    If, as a result of any recapitalization, reorganization, merger,
     consolidation, combination, exchange of shares or similar transaction or
     event, the common stock will cease, or as a result of a transaction or
     event is intended to cease, to be listed for trading on the NYSE (and is
     not otherwise publicly traded), any former director who has amounts
     remaining to be paid under the former director's cash account or phantom
     stock account, may elect at any time after the Company has entered into an
     agreement providing for such transaction or event, as of a date designated
     by the former director to receive a lump sum amount in cash equal to the
     value of the director's cash account or phantom stock account (the value of
     the phantom stock is to be determined by reference to the fair market value
     of the common stock on the date designated by the former director).

Stock Options
- -------------

 .    Each option to purchase shares of common stock held by a non-employee
     director shall be governed by the terms and conditions of the applicable
     stock option agreement and stock incentive plan.

MISCELLANEOUS

To be entitled to receive any benefits under this policy, a former director must
agree to consult with and render advice to the Company as requested at times
that do not unreasonably interfere with his personal or other business
activities.  Conduct detrimental to the Company, as determined by the Board of
Directors, will result in forfeiture of all benefits under this policy.

These provisions on benefits will apply to all living, former directors
effective January 1, 1997, regardless of when they were first elected or ceased
to serve, to all active, non-employee directors as of January 1, 1997 whose
service on the Board terminates after January 1, 1997 and to all non-employee
directors who are first elected to the Board on or after January 1, 1997.

 .    A director's rights to receive benefits shall be no greater than the
     rights of any unsecured general creditor of the Company.

                                    Page 6


 .    A director shall not have any rights as a stockholder of the Company with
     respect to any shares of phantom stock.

 .    This policy and all determinations made and actions taken pursuant hereto,
     to the extent not governed by the Internal Revenue Code or the laws of the
     United States, shall be governed by the laws of the State of Delaware and
     construed in accordance therewith without giving effect to principles of
     conflict of laws.

 .    Benefits described herein may not be sold, transferred, assigned, pledged,
     hypothecated, encumbered or otherwise disposed of (whether by operation of
     law or otherwise) or be subject to execution, attachment or similar
     process.

For the purposes of these provisions on retirement benefits and phantom stock
grants:

 .    A non-employee director is a director who is not currently an employee of
     the Company and/or its subsidiaries and who never has been an employee of
     the Company and/or its subsidiaries.

 .    The fair market value of the common stock shall be determined by reference
     to the average of the high and low trading prices as reported in the New
     York Stock Exchange Composite Transactions in The Wall Street Journal for
     the relevant trading day.

                                    Page 7

EX-10.F

                                                                       Form 10-K
                                                             Year Ended 12/31/00
                                                                     Exhibit 10f
                        R. R. DONNELLEY & SONS COMPANY
                                 AMENDMENT TO
                       SENIOR MANAGEMENT INCENTIVE PLAN


This Amendment to the Senior Management Incentive Plan adopted by the Committee
as of January 1, 1998 (the "Banking Plan"), is made effective as of the 1st day
of January, 2001 (the "Effective Date").  All capitalized terms used herein
shall have the meanings specified in the Banking Plan unless otherwise specified
herein.

1.  Termination of Banking Plan.  The Banking Plan shall be terminated as of
December 31, 2000.  Performance Awards for fiscal year 2000 shall be calculated
and credited to each participant's Bank Balance as soon as practicable after the
first Committee meeting held in 2001.

2.  Final Payments.  Following the first Committee meeting held in 2001, each
participant who the Committee determines is eligible to receive a Performance
Award shall be paid such Performance Award as determined by the Committee.
Following the first Committee meeting held in 2002, each participant shall be
paid one-half (50%) of the participant's then-remaining Bank Balance in excess
of such participant's Administrative Credit.  Following the first Committee
meeting held in 2003, each participant shall be paid the remainder of such
participant's Bank Balance in excess of such participant's Administrative
Credit.  Notwithstanding the foregoing, should following calculation of the
amount to be paid a participant in either 2001 or 2002, the Bank Balance
thereafter remaining in excess of such participant's Administrative Credit be
less than $20,000, then such excess shall be paid to participant in conjunction
with the payment otherwise to be paid such participant for the year and no other
payments shall be thereafter made to such participant hereunder.  Each and every
payment specified herein shall be subject to forfeiture in the event of
termination of the participant's employment other than as specified in
paragraphs 7(a), (b), (c) or (d) of the Banking Plan unless the Committee
specifically authorizes otherwise.  In the event of termination due to
circumstances described in paragraphs 7(a), (b), (c) or (d) of the Banking Plan,
the provisions of those subparagraphs shall govern payment of the participant's
Bank Balance, notwithstanding the provisions of this paragraph 2.

3.  Miscellaneous.  Except as specifically set forth in this Amendment, all
provisions of the Banking Plan shall remain in full force and effect as
originally written.

EX-10.G

                                                                       Form 10-K
                                                             Year Ended 12/31/00
                                                                     Exhibit 10g

                         R.R. DONNELLEY & SONS COMPANY
                  SENIOR MANAGEMENT ANNUAL INCENTIVE PLAN-2001


     1.  Purpose.  To promote the growth and profitability of R.R. Donnelley &
Sons Company and its subsidiaries (the "Company"), and to provide senior
officers and other key executives of the Company and its subsidiaries with
incentives to achieve corporate objectives, and to attract and retain officers
and other key management employees of outstanding competence, all with a view
towards enhancing shareholder value, the Committee hereinafter designated may
grant Incentive Awards in addition to annual salaries to eligible officers and
other key management employees on the terms and subject to the conditions stated
in this Plan.  Definitions of terms used in the Plan are set forth in Exhibit A.

     2.  Eligibility.  Senior officers and other key management employees of the
Company and its subsidiaries, under selection guidelines to be established by
the Committee, shall be eligible, upon selection by the Committee, to receive
Incentive Awards as the Committee, in its discretion, shall determine.

     3.  Administration of the Plan.  The Plan shall be administered by the
Human Resources Committee of the Board of Directors (the "Committee").  The
Committee shall, subject to the terms of the Plan, establish selection
guidelines; select eligible officers and key management employees for
participation; and determine the terms and conditions of the Incentive Awards.
The Committee may establish rules and regulations for the administration of the
Plan, interpret the Plan, and impose, incidental to the grant of a Incentive
Award, conditions with respect to competitive employment or other activities not
inconsistent with or conflicting with the Plan.  All such rules, regulations and
interpretations relating to the Plan adopted by the Committee shall be
conclusive and binding on all parties.  All Incentive Awards under this Plan
shall be evidenced by written instruments issued by the Company to the
participants, and no such award shall be valid unless so evidenced.

     4.  Effective Date and Term of Plan.  The Plan shall become effective as of
January 1, 2001 upon approval of the Committee and shall continue in effect
until terminated by the Committee.

     5.  Amendments.  The Plan may be amended or terminated by the Committee in
any respect except that no amendment may be made which would adversely affect
the rights of a participant under an Incentive Award granted and outstanding
prior to the date such amendment is adopted.

     6.  Form of Award.  Incentive Awards shall be made in terms of a stated
potential performance target determined by reference to the level of achievement
of corporate, group, division, individual or other specific Performance Factors
over a period of one calendar year


of the Company, or a portion of a calendar year for participants selected for a
period beginning after January 1 of any year, as determined by the Committee in
its sole discretion. When multiple Performance Goals are used, the determined
percentage achievement of each Goal=s target level will be multiplied by the
percentage weighting assigned to that Goal and the resulting percentages then
added together. Performance of all Performance Goals at the target level shall
result in payment of the Target Award amount. Any Incentive Award may be
increased or decreased, in the discretion of the Committee, to reflect any
special circumstances that the Committee deems significant, and each Award
hereunder shall so state. The maximum amount payable each fiscal year under the
Plan for performance beyond target shall be twice the Target Award amount, and
depending on performance, payments may be less than the Target Award amount to
as low as zero. Except as set forth in paragraph 8 of this Plan, no rights or
interests of any kind shall be vested in an individual receiving an Incentive
Award until the conclusion of the period and the determination of the level of
achievement specified in the Award.

     7.  Calculation and Payment of Incentive Awards.  Following the end of each
calendar year, the Chief Executive Officer shall submit to the Committee a
statement of the proposed Incentive Award to be paid to each participant.  The
Committee shall determine and certify the degree of achievement of the relevant
Performance Goals and shall make the final Incentive Award for each such
participant, which determination shall be binding and conclusive on the
participant.  Incentive Awards shall be paid as soon as practicable following
determination and certification by the Committee.

     8.  Treatment upon Separation or Termination.  (a)  Death.  If a
participant shall cease to be employed by the Company at any time while a
participant in this Plan by reason of death, the Company shall pay to the
participant's executor, administrator, personal representative or beneficiary
such participant's Incentive Award which would have been earned during the
fiscal year in which death occurred pro rated through the date of death, as
estimated by the Committee.  The foregoing payment shall be made at the first
Committee meeting held following the date of death.

(b) Disability. If a participant shall cease to be employed by the Company at
any time while a participant in this Plan by reason of total and permanent
disability, the Company shall pay to the participant an amount equal to the
Incentive Award which would have been earned during the fiscal year in which the
disability occurred, pro rated through the date of disability. The foregoing
payment shall be made at the time specified in paragraph 7 above.


(c) Retirement. If a participant shall cease to be employed by the Company at
any time while a participant in this Plan by reason of retirement on or after
age 65 or retirement on or after age 55 with the consent of the Company, the
Company shall pay the participant the Incentive Award which would have been
earned during the fiscal year in which retirement occurred pro rated through the
date of retirement; provided, however, that such Incentive Award shall be
forfeited if the participant directly or indirectly accepts employment by or
serves as a consultant, agent, stockholder, corporate officer or director of, or
in any other representative capacity for, any entity which is engaged in a line
of business in a geographic area in which the Company (either directly or
through a subsidiary or affiliate) is engaged on the date of such participant's
retirement and which is a competitor of the Company or any of its subsidiaries.
The foregoing payment shall be made at the time specified in paragraph 7 above.

(d) Change in Control. If a "Change in Control" as defined in the R.R. Donnelley
& Sons Company 2000 Stock Incentive Plan and successor plans thereto shall occur
while a participant is employed by the Company and while this Plan is in effect,
the participant=s Incentive Award shall be paid pursuant to the terms of such
participant=s change in control agreement.

(e) Other Separations. If a participant shall cease to be employed by the
Company at any time prior to a change in control while a participant in this
Plan for any reason other than death, total and permanent disability, retirement
on or after age 65 or retirement on or after age 55 with the consent of the
Company, any Incentive Award for a completed calendar year earned but not yet
paid and any Incentive Award for the calendar year in which such cessation of
employment occurs shall be forfeited unless the Committee specifically
authorizes otherwise.

     9.  Miscellaneous.  (a) Award Confers No Right to Employment. Nothing in
this Plan or any Incentive Award granted hereunder shall be construed as an
employment contract or as otherwise conferring upon a participant any right to
remain in the employ of the Company or any of its subsidiaries.

(b) Withholding Taxes. The Company may, in its discretion, deduct any required
withholding taxes from the amount to be paid under any Incentive Award granted
hereunder or from any other amount then or thereafter payable by the Company to
a participant.

(c) Successors. Awards granted hereunder shall be binding upon and inure to the
benefit of any successor or successors to the Company.

(d) Governing Law. This Plan and the Incentive Awards granted hereunder shall be
governed in accordance with the laws of the State of Illinois.


                                   EXHIBIT A
                                   ---------

                   AWARD UNDER R.R. DONNELLEY & SONS COMPANY
                   -----------------------------------------
                    SENIOR MANAGEMENT ANNUAL INCENTIVE PLAN
                    ---------------------------------------

As used in an award issued under the above-captioned plan (an "Incentive
Award"), the following terms when capitalized shall have the following
respective meanings:

Base Annual Salary.  The base salary established by the Committee for a
participant for the calendar year covered by an Incentive Award, provided that
in the case that an Award is granted as of a date subsequent to the first day of
a calendar year, there shall be included as Base Annual Salary only that pro
rata portion of such base salary applicable to the period included in the
calendar year subsequent to the effective date of the Award.

Target Award.  A percentage of the participant=s Base Annual Salary to be paid
to the participant to the extent that all Performance Goals established for the
participant in an Incentive Award are fully satisfied but not exceeded.

Performance Period.  The calendar year for which an Incentive Award is granted
as set forth in the Award.

Performance Factor.  Free Cash Flow (CF), Economic Value Added (EVA), Earnings
Per Share (EPS), MBOs and Strategic Inclusion Plan (SIPs), Value Added Revenue
(VAR), each as defined below, or such other factor as shall be determined by the
Committee.

Performance Goal.  The performance goals set forth in the Incentive Award in
respect of a Performance Factor.

Free Cash Flow.  CF is defined to be Net Operating Profit After Tax (see EVA
definition) plus depreciation and goodwill less investments in assets and
working capital.

Economic Value Added.  EVA is defined as Earnings after the Cost of Capital
calculated as follows:
           Revenues
          - Operating Costs
          - Depreciation
          - Taxes
            -----
          = Net Operating Profit After Tax
          - *c% x Net Capital
            -----------------
          = EVA

          *c = Weighted Average Cost of Capital

The Committee has the authority to exclude from the EVA calculation such
extraordinary, unusual or non-recurring charges as the Committee in its
discretion deems appropriate.

Earnings Per Share.  EPS is defined as the income per basic share of common
stock of the Company for the Performance Period as determined for purposes of
reporting in the Company=s annual report to shareholders for the Performance
Period.  The Committee has authority to exclude from the EPS calculation such
extraordinary, unusual or non-recurring charges as the Committee in its
discretion deems appropriate.

MBOs.  MBOs are defined as personal objectives approved by the Chairman of the
Company.

Strategic Inclusion Plan.  SIPs are defined as objectives related to the
Company's Diversity Initiative.

Value Added Revenue.  VAR is sales minus the cost of materials (primarily paper
and ink and costs of transportation) over the Performance Period.

EX-10.H

                                                                       Form 10-K
                                                             Year Ended 12/31/00
                                                                     Exhibit 10h

                         R.R. DONNELLEY & SONS COMPANY
                2001 SENIOR MANAGEMENT LONG TERM INCENTIVE AWARD


1.  Award. (a) To promote the growth and profitability of R.R. Donnelley & Sons
Company, and its subsidiaries (the "Company"), and to provide incentives to
achieve long term corporate objectives, all with a view towards enhancing
shareholder value, this Long Term Incentive Award ("Award") is granted as of
this ___ day of _____, 2001, by the Company to _____________________
("Participant").  This Award is made pursuant to the provisions of the R. R.
Donnelley & Sons Company 2000 Stock Incentive Plan ("2000 SIP").  Capitalized
terms not defined herein shall have the meanings specified in the 2000 SIP.

(b)  The Company hereby credits to Participant ___ stock units (the "Original
Award Amount"), subject to the restrictions and on the terms and conditions set
forth herein. Participant shall indicate acceptance of this Award by signing and
returning a copy hereof. These stock units represent ___ percent (___ %) of your
2001 base salary midpoint divided by the average of the closing price of one
share of the Company's common stock on the New York Stock Exchange ("NYSE") for
the last forty (40) trading days of 2000 multiplied by a factor of two (2).

2.  Form of Award.  This Award is made subject to the level of achievement of a
Relative Total Shareholder Return ("RTSR") goal as set forth in Exhibit A hereto
over a period of three fiscal years of the Company (a "Performance Period"), as
determined by the Committee in its sole discretion.  The Performance Period
shall begin January 1, 2001 and end December 31, 2003.  Common stock shall not
be issued at the time of this Award but the Award shall represent the right to
receive stock and/or cash (as determined herein) if the RTSR goal set forth in
Exhibit A hereto is achieved.  Except as set forth in paragraph 5 of this Award,
no rights or interests of any kind shall be vested in Participant until the
conclusion of the Performance Period and the determination of the level of
achievement specified in the Award.  The Committee retains sole discretion to
reduce the amount of or eliminate any payment otherwise payable to Participant
with respect to this Award to reflect any special circumstances the Committee
deems significant.  Subject to the terms and conditions of the 2000 SIP and this
Award, each stock unit is substantially the equivalent of a share of common
stock.

3.  Determination of Achievement; Distribution of Award. (a) As of the last day
of the Performance Period, Participant may earn up to four (4) times the
Original Award Amount depending upon the extent to which the RTSR goal is met or
exceeded as of such date.  The Committee shall make the determination as to
whether the goal has been met. The Committee, at its first meeting following
completion of the Performance Period, shall certify the achievement of the RTSR
goal and shall further certify the amount of the Award to be distributed as a
result of such achievement.


(b)  RTSR is defined as the sum of (i) appreciation in the common stock of the
Company plus (ii) dividends declared on the common stock of the Company, as
compared to the total return for the S&P 500 Index for the same measurement
period. Appreciation in the common stock of the Company for any Performance
Period shall be measured using the average closing price of one share of common
stock on the NYSE during the last forty (40) trading days of 2000 versus the
last forty (40) trading days of the Performance Period. Should the Company's
RTSR at the end of the Performance Period be less than the 40th percentile of
the S&P 500, then the RTSR goal shall not be deemed achieved. Should the
Company's RTSR at the end of the Performance Period be equal to the 50th
percentile of the S&P 500, the RTSR Performance Factor shall be fully achieved
at an Award level of 100%. Should the Company's RTSR at the end of the
Performance Period be equal to the 75th percentile of the S&P 500, then the
Award level hereunder shall be 200%, and should RTSR at the end of the
Performance Period be at the 100th percentile of the S&P 500, then the Award
level hereunder shall be 400%. For any Company RTSR between the 40th and 100th
percentiles, the Committee shall determine the percentage of achievement to be
applied to the Award.

(c)  Distribution of the Award shall be made as soon as practicable following
the certification described in (a) above. Distribution of this Award may be made
in stock, cash or any combination thereof as determined by the Committee.

4.  Dividends; Voting. (a)  Dividends which are declared and payable during the
Performance Period on a like number of shares of common stock as are equal to
the Original Award Amount shall be credited to Participant as though reinvested
in additional shares of common stock and shall be compounded for purposes of
determining future dividend credits (which together shall be called "Dividend
Equivalents").  Should the Company's RTSR performance as calculated pursuant to
the provisions of paragraph 3(b) above be less than the 50th percentile but
greater than the 40th percentile, then the Committee shall determine the
percentage of Dividend Equivalents to distribute in conjunction with
distribution of the Award hereunder.  In the event that the Company's RTSR
equals or exceeds the 50th percentile, however, Participant shall receive the
actual Dividend Equivalents credited during the term of this Award without
regard to the level of RTSR achievement.

(b)  Participant shall have no rights to vote shares of common stock represented
by the Original Award Amount or the Dividend Equivalents which are the subject
of this Award unless and until distribution of the Award pursuant to paragraph
3(b) above.

5.  Treatment upon Separation or Termination. (a)  Death.  Unless otherwise
determined by the Committee, if Participant shall cease to be employed by the
Company at any time prior to December 31, 2003 by reason of death, the Company
shall distribute to Participant's executor, administrator, personal
representative or beneficiary Participant's Award plus Dividend Equivalents
which would have been earned during the Performance Period in which death
occurred pro rated through the date of death, as estimated by the Committee.
The foregoing distribution shall be made following the first Committee meeting
held following the date of death.

(b)  Disability. Unless otherwise determined by the Committee, if Participant
shall cease to be employed by the Company at any time prior to December 31,
2003, by reason of total


and permanent disability, the Company shall distribute to Participant an amount
equal to the Award which would have been earned during the Performance Period in
which the disability occurred, pro rated through the date of disability, plus
Dividend Equivalents. The foregoing distribution shall be made at the time
specified in paragraph 3 above.

(c)  Retirement. Unless otherwise determined by the Committee, if Participant
shall cease to be employed by the Company at any time prior to December 31,
2003, by reason of retirement on or after age 65 or retirement on or after age
55 with the consent of the Company, the Company shall distribute to Participant
the Award which would have been earned during the Performance Period in which
retirement occurred pro rated through the date of retirement, plus Dividend
Equivalents; provided, however, that such Award and Dividend Equivalents shall
be forfeited if Participant directly or indirectly accepts employment by or
serves as a consultant, agent, stockholder, corporate officer or director of, or
in any other representative capacity for, any entity which is engaged in a line
of business in a geographic area in which the Company (either directly or
through a subsidiary or affiliate) is engaged on the date of Participant's
retirement and which is a competitor of the Company or any of its subsidiaries.
The foregoing distribution shall be made at the time specified in paragraph 3
above.

(d)  Change in Control.  If a "Change in Control" as defined in the 2000 SIP and
successor plans thereto shall occur while Participant is employed by the Company
and prior to determination and distribution of this Award, this Award and any
Dividend Equivalents shall be paid pursuant to the terms of the 2000 SIP.

(e)  Other Separations.  If Participant shall cease to be employed by the
Company at any time prior to the earlier of (i) a change in control and (ii) the
date of determination and distribution of the Award described herein, for any
reason other than death, total and permanent disability, retirement on or after
age 65 or retirement on or after age 55 with the consent of the Company, any
Award for the Performance Period in which such cessation of employment occurs
shall be forfeited unless the Committee specifically authorizes otherwise.

6.  Administration of the Award.  The Award shall be administered by the
Committee designated in the 2000 SIP.  The Committee may establish rules and
regulations for the administration and interpretation of Award.  All such rules,
regulations and interpretations relating to the Award adopted by the Committee
shall be conclusive and binding on all parties.

7.  Miscellaneous.

(a)  Award Confers No Right to Employment. Nothing in this Award shall be
construed as an employment contract or as otherwise conferring upon Participant
any right to remain in the employ of the Company or any of its subsidiaries.

(b)  Withholding Taxes.  The Company may, in its discretion, deduct any such
required withholding taxes from the amount to be distributed under this Award or
from any other amount then or thereafter payable by the Company to Participant.


(c)  Interest.  No interest shall accrue at any time on this Award or any
dividend, distribution or other part thereof.

(d)  Successors.  This Award shall be binding upon and inure to the benefit of
any successor or successors to the Company.

(e)  Governing Law.  This Award shall be governed in accordance with the laws of
the State of Illinois.

(f)  Restrictions on Transfer.  Neither this Award nor any rights hereunder may
be transferred or assigned by Participant other than by will or by the laws of
descent and distribution or pursuant to beneficiary designation procedures
approved by the Company. Any transfer or any attempted assignment, pledge or
hypothecation, whether or not by operation of law, shall be void.

(g)  It is anticipated that any shares of common stock delivered pursuant to
this Award will be Treasury shares of the Company acquired prior to or during
the term of the Award, and issued subject to the terms of this Award, the 2000
SIP and such rules as determined by the Committee.

IN WITNESS WHEREOF, the Company has caused this Award to be duly executed by its
duly authorized officer.


R. R. DONNELLEY & SONS COMPANY



By:___________________________________
     Authorized Officer



Accepted:_____________________________
         _________________(Participant)

EX-10.R

                                                                Form 10-K
                                                                Year Ended
                                                                12/31/00
                                                                Exhibit 10(r)

                       NON-COMPETE, NON-SOLICITATION AND
                          NON-DISPARAGEMENT AGREEMENT

  This Agreement dated as of February 1, 2001, is made by and between Jonathan
P. Ward ("Ward") and R. R. Donnelley & Sons Company, a Delaware corporation
(the "Company").

                                  WITNESSETH:

  Whereas, Ward resigned from his position as President and Chief Operating
Officer of the Company as of January 9, 2001 (the "Resignation Date"); and

  Whereas, the Company desires to enter into this Agreement to clarify certain
of its obligations to Ward and to receive from Ward certain agreements as to
his future activities;

  Now, Therefore, Ward and the Company, in consideration of the agreements,
covenants and conditions contained herein, hereby agree as follows:

    1. Effects of Resignation.

      (1) Ward has received salary for the period ending on the Resignation
    Date and the Company has paid to Ward a cash lump sum for all days of
    vacation accrued but unused by him as of the Resignation Date. These
    payments fully satisfy all obligations of the Company to Ward for
    salary, bonus, vacation and other benefit-related amounts.

      (2) As soon as practical after the Resignation Date, Ward shall
    submit all expense account records and vouchers relating to his
    employment with the Company, and the Company shall reimburse Ward in
    accordance with its standard practices and procedures for such
    expenses.

      (3) The rights with respect to Ward's outstanding option awards shall
    be as provided by the respective plans and agreements under which they
    were granted. All outstanding restricted stock awards shall be canceled
    as of the Resignation Date.

      (4) Ward shall have the option, as (sic) his personal expense, to
    continue in effect policies providing disability and life insurance
    previously paid for on his behalf by the Company. The Company shall
    forward to Ward statements for premiums due on such policies in a
    manner which provides Ward sufficient time to make such premium
    payments, should he so elect.

    2. Confidentiality, Non-Solicitation, Non-Disparagement and Non-
  Competition.

      (1) Ward reaffirms and agrees to comply with the terms of the
    Agreement Regarding Confidential Information, Intellectual Property and
    Non-Solicitation of Employees signed by Ward on November 14, 1988, a
    copy of which is attached as Exhibit A hereto and is incorporated
    herein by reference. Ward acknowledges that he has returned to the
    Company all Company papers, books, records, computer programs, or like
    materials which were in his possession or control at the Resignation
    Date, except for such copies of documents describing the terms and
    conditions of arrangements between Ward and the Company which survive
    termination of employment.

      (2) In consideration of the payments to be made by the Company
    pursuant to Section 3 of this Agreement, the positions of trust and
    confidence Ward has occupied and the information of a highly sensitive
    and confidential nature he has received as a result of his previous
    position with the Company, Ward agrees that he will not, during the
    period commencing on the Resignation Date and ending on December 31,
    2003, without the prior written consent of the Company, either directly
    or indirectly own, manage, operate, control or participate in any
    manner in the ownership, management, operation


    or control of, or be connected as an officer, employee, partner,
    director, principal, consultant, agent or otherwise with, or have any
    financial interest in, or aid or assist any entity whose primary
    business is in competition with any of the Company's businesses in
    either the Long Run Print or High Value sectors of the Company as of
    the Resignation Date, including but not limited to the following
    entities: QuebWorld (Quebecor Printing Inc.), Quad-Graphics, Bowne &
    Co., Inc., Merrill Corporation, Big Flower Holdings, Banta Corp., Moore
    Corporation, United Parcel Service or Applied Graphics Technologies. It
    is understood and agreed that, for the purposes of the foregoing
    provisions of this Section 2 ownership of not more than five percent
    (5%) of the voting stock of any of the above entities that are publicly
    held shall not, of itself, constitute a violation of this Section 2.

      (3) In consideration of the covenants and agreements of the parties
    herein contained and the payments to be made by the Company pursuant to
    Section 3 of this Agreement, each party agrees not to disparage the
    other, including in the case of the Company, its officers, employees
    and directors. If any prospective employer of Ward requests a
    reference, the Company shall report only the fact that Ward worked for
    the Company, the positions held and salary earned.

      (4) The following additional provisions shall apply to the covenants
    of Ward contained in this Section 2:

        (1.) It is the intent and understanding of each party hereto that
      if, in an action before any court or agency legally empowered to
      enforce the covenants contained in this Section 2, any terms,
      restriction, covenant or promise contained herein is found to be
      unreasonable and for that reason unenforceable, then such term,
      restriction, covenant or promise shall be deemed modified to the
      extent necessary to make it enforceable by such court or agency.

        (2.) A breach by either party of the agreements contained in this
      Section 2 would cause irreparable harm to the other party which is
      not adequately measurable by money damages and that, accordingly, in
      the event of such breach, in addition to any and all other rights
      the non-breaching party may have, including without limitation,
      rights at law and in equity, and in the case of the Company any
      right to terminate and/or recover payments previously made to Ward,
      the non-breaching party shall be entitled to equitable remedies in
      the nature of injunctive relief to stop any existing breaches and to
      prohibit any future breaches.

        (3.) In the event of any material breach by Ward of any provision
      of this Section 2, the Company may, by written notice, elect to
      terminate its obligations under this Agreement; provided, however,
      that Ward shall have the opportunity to cure, within fifteen (15)
      business days after such notice, any inadvertent or unwillful breach
      by Ward, and in the event of such a cure by Ward, the termination by
      the Company pursuant to this paragraph (iii) shall not take effect.
      In the event of termination by the Company, all payments to Ward
      otherwise required to be provided by the Company under the
      provisions of Section 3 shall cease, and Ward shall be required to
      return any payments previously received but relating to periods
      after the date of such breach; provided that Ward shall be entitled
      to receive or retain any payment of a benefit which had fully
      accrued as of the date of such breach.

    3. Consideration. As consideration for the agreements of Ward set forth
  in Section 2 above, the Company agrees to pay Ward the sum of $300,000.00
  on March 2, 2001, $216,468.00 on April 6, 2001, and the further sum of
  $214,594.00 on June 1, 2002. Ward shall be responsible for payment of all
  taxes due on the payments made by the Company hereunder, and shall furnish
  the Company with a copy of IRS Form 4669 filed by him in 2002 evidencing
  payment of taxes by him.

    4. Notices. All notices or other communications required or permitted
  hereunder shall be sufficient if in writing and delivered personally, by
  reputable commercial delivery service, by registered mail, return receipt
  requested, or by facsimile to the address designated by the relevant party.
  Such notice shall be deemed to have been given upon such delivery or three
  (3) days after deposit in the U.S. mail, as the case may be.


    5. Assignment and Succession. The rights and obligations of the Company
  under this Agreement shall inure to the benefit of and be binding upon its
  successors and assigns, and Ward's rights and obligations hereunder shall
  inure to the benefit of and be binding upon Ward's legal representatives or
  designated beneficiaries.

    6. Entire Agreement. This Agreement contains the entire agreement between
  the parties with respect to the subject matter contained herein and
  supersedes all prior oral or written communications relating thereto. This
  Agreement may not be changed or amended orally.

    7. Applicable Law. This Agreement shall at all times be construed,
  interpreted and enforced in accordance with the laws of the State of
  Illinois as applicable to agreements entered into in, and to be performed
  entirely within, the State of Illinois.

  In Witness Whereof, the Company has caused this Agreement to be signed by
its duly authorized officer and Ward has signed this Agreement as of the day
and year first above written.

                                          /s/ Jonathan P. Ward
                                          -------------------------------------
                                          Jonathan P. Ward

                                          R. R. DONNELLEY & SONS COMPANY

                                             /s/ Monica M. Fohrman
                                          By: _________________________________

EX-10.S

                                                                       Form 10-K
                                                             Year Ended 12/31/00
                                                                   Exhibit 10(s)

February 23, 1999

Mr. Michael Winkel
12814 Dubon Lane
St. Louis, MO 63131

Dear Mike:

I am pleased to confirm our offer of employment as Executive Vice President,
Strategic Planning.  Your start date will be March 1st.  The terms set forth
below are subject to approval of the Human Resources Committee of our Board of
Directors which we will obtain upon your agreement to those terms.

                        BASE AND INCENTIVE COMPENSATION
                        -------------------------------

Your base salary will be paid at the rate of $29,167 per month.  This level of
pay will provide annualized compensation of $350,000 per year.  You will be
placed on our Company's Senior Officer Bonus Plan, which provides a bonus at
target of 85% of base pay.  Your 1999 target bonus will be prorated based upon
1999 base salary paid to you. The plan is a typical EVA type banking plan; it is
based primarily on a pre-established year over year improvement target and the
results are uncapped but can be negative.  A portion of the bonus may also be
tied to Corporate EPS, personal objectives and the Company's Strategic Inclusion
Plan.  The bonus earned for a year is put into a bank.  Annually, in February,
one-third of the bank is paid to the Executive.  There is initial funding of the
bank of one times the annual bonus at target to make the payouts nearer to the
earned bonus.

                                 EQUITY GRANTS
                                 -------------

We have a Stock Incentive Plan for officers under which participants are
selected periodically and awarded the option to purchase stock at the value at
the time of the award throughout the option period.  The exercise price is the
average of the high and low R. R. Donnelley stock price on the grant date.
Selection of participants is determined on a discretionary basis by the Human
Resources Committee of the Board.

You will be granted 50,000 stock options on your start date.

In the future, you will be considered for additional stock option grants
commensurate with your position, responsibilities and individual performance
(the current grant range for your position is 18,750-31,250 options).  Your next
scheduled grant is in March 2000.


Page 2

                                RETIREMENT PLAN
                                ---------------

We have a fully funded non-contributory Retirement Plan in which you become a
member on your first day of employment.  The plan has a 5-year cliff-vesting
feature, which we will modify as follows:

     (a) If after completion of three years' employment but prior to becoming
         100% vested under the Retirement Plan's normal vesting provisions you
         are separated for reasons other than cause, and such separation is
         consented to by the company, you will be 100% vested in all benefits
         accrued in your first three years' employment. You will, however,
         forfeit any benefits accrued after the first three years' employment.

     (b) If you are separated prior to becoming vested under the Retirement
         Plan's normal vesting provision for reasons of cause, or if your
         separation is not consented to by the company, you will not vest in any
         portion of your retirement benefits, including the benefits accrued in
         your first three years' employment.

     (c) For purposes of determining your accrued benefits in the first three
         years' employment, we will use covered compensation (as defined in the
         Retirement Plan) paid from your first day worked through the day
         preceding your 4th anniversary of employment, and the Retirement Plan's
         normal benefit formula.

     (d) If you are separated after satisfying the normal vesting provisions of
         the Retirement Plan, you will be 100% vested in all accrued benefits.
         Your benefits, of course, will be paid in accordance with, and subject
         to provisions of the Retirement Plan. You should be aware that
         currently the Retirement Plan restricts early benefit commencement for
         violation of our competitive employment practice. Further,
         discretionary pension increases are not paid to persons who violate
         this practice.

Some or all of the benefits described above may be paid through the company's
nonqualified retirement plan.

                              SEVERANCE AGREEMENT
                              -------------------

You will receive 12 month's base pay if, within 12 months of your hire date,
your employment is terminated by R.R. Donnelley for reasons other than cause.


         FINANCIAL PLANNING, SUPPLEMENTAL LIFE AND DISABILITY INSURANCE
         --------------------------------------------------------------

You will be provided with an $8,000 Financial Planning reimbursement annually as
well as supplemental life and disability insurance (which is provided at your
option).  If you decide to accept the supplemental life or disability insurance,
the Company pays the premiums on the policies and the premiums are taxable
income to you.  You are the owner of these policies and the policies are
portable.


Page 3


R. R. Donnelley group-provided life insurance is term insurance for two times
base salary with a maximum of $240,000.  Senior Officer Supplemental Life
Insurance is a variable life policy.  The supplemental coverage is calculated as
follows:

     Base salary ($350,000) X 2          $700,000
     Less:  Group coverage               (240,000)
                                         --------

     Supplemental coverage               $460,000
                                         ========

You will become eligible for R. R. Donnelley's group-provided Long-Term
Disability Insurance on the first day following your completion of six months of
service.  You are eligible for the Senior Officer Supplemental Disability
Insurance upon employment.

The life and disability coverages are effective subject to medical underwriting
and insurance company discretion.  If you elect coverage, you have to fulfill
underwriting requirements (physical, etc.).

                              RELOCATION ALLOWANCE
                              --------------------

You will receive the enhanced R. R. Donnelley relocation package, details of
which will be sent to you under separate cover.  The package includes the
following:

     .  Payment of $10,000 to cover miscellaneous expenses
     .  Existing home buy-out
     .  Reimbursement of purchase expenses for a new mortgage (points,
        application fee, etc.)
     .  Reimbursement of moving costs
     .  Temporary living expenses


                      ADDITIONAL TEMPORARY LIVING EXPENSES
                      ------------------------------------

You will be reimbursed for additional temporary living expenses through July
2000.  These expenses include apartment rental (up to $3,100/month) and weekly
coach class airfare to/from St. Louis.  These reimbursements will be grossed up
for taxes.

                             OTHER FRINGE BENEFITS
                             ---------------------

Your position entitles you to five weeks vacation.  Our vacation year runs from
March 1st through February 28th.  You will have five weeks vacation to use from
your start date through February 28, 2000.

You will be eligible to participate in our Medical, Dental, Group Life
Insurance, Optional Life Insurance, Accidental Death and Dismemberment (AD&D),
and Dependent Life Insurance and AD&D Plans on the first day of the month after
you have worked at Donnelley for one full calendar month.

Eligibility for participation in the other benefit programs occurs after varying
periods of service as provided in the individual plans which are summarized in
the materials I have included.


Page 4

                          CHANGE IN CONTROL AGREEMENT
                          ---------------------------

You will be covered under the Company's Senior Officer Change in Control
Agreement.

                                     OTHER
                                     -----

Because we are committed to provide a safe and healthy workplace for all
employees, successful completion of a drug screen is required.  Therefore, this
offer is contingent upon and any employment relationship is probationary pending
successful completion of a drug screen.  The Company will not be responsible for
any expenses or liabilities incurred if you do not pass the drug screen.

Also, you will be required to sign the following documents when you begin your
employment.  I have included copies of these documents for your review:

     .  Company Policies on Use of Customer Information and Taking Customer
        Property

     .  An Agreement Regarding Confidential Information, Intellectual Property
        and Non-Solicitation of employees

Finally, we are required by law to document proof that all employees are
authorized to work in the United States.  Therefore, you need to provide, at the
time of your employment, any of the documents listed on the enclosed I-9 form
that will prove identity and employment eligibility.

If you have any questions regarding this letter, please give me a call.  I am
confident that if you decide to accept our offer, you will find a successful and
personally rewarding career with Donnelley.

Sincerely,

/s/ Haven E. Cockerham


/nm
Enclosures:
     .  Highlights of Our Benefits Program
     .  Company Policies on Use of Customer Information and Taking of Customer
        Property
     .  Agreement Regarding Confidential Information, Intellectual Property and
        Non-Solicitation of Employees
     .  I-9



Accepted: /s/ Michael Winkel          Dated: 2/23/99


May 11, 2000


Mr. Michael W. Winkel
R.R. Donnelley & Sons Company
77 West Wacker Drive
Chicago, IL 60601


Dear Mike:

Under the terms of your employment letter dated February 23, 1999, R. R.
Donnelley & Sons Company (the "Company") agreed to provide you with the standard
enhanced company relocation package upon your move from the St. Louis to the
Chicago area.  This letter will serve to supplement the terms of that enhanced
relocation package.

The Company understands that you have entered into an agreement for the purchase
of a house in Hinsdale and that you expect to close on that purchase in June,
2000.  You are purchasing this home solely in order to satisfy the requirements
of your position with the Company.  Therefore, in addition to the enhanced
relocation package being provided to you, the Company agrees as follows:

(i)  In the event that there should occur at any time prior to June 30, 2001 a
     "change in control" as that term is defined in the R. R. Donnelley 2000
     Stock Incentive Plan, and should as a result of such change in control (and
     not for reasons within your control, including performance related reasons)
     your employment be terminated within twelve months of the effective date of
     such change in control, the Company shall reimburse you for the brokerage
     expenses associated with any sale of your Chicago-area home provided such
     sale occurs on or prior to a date not more than twelve months after
     termination of your employment, and further provided such brokerage fees
     are not otherwise reimbursed by any other employer's relocation package.

(ii) In the event that there should occur at any time prior to June 30, 2001 a
     change in control of the Company and if within twelve months of the
     effective date of such change in control your job is relocated to a Company
     location outside the Chicago land area, the Company shall reimburse you for
     the brokerage expenses on any sale of your Chicago area home even if such
     expenses would not otherwise be payable under the Company's then-current
     relocation package.


Sincerely,

/s/ William L. Davis

EX-12

                                                                       Form 10-K
                                                             Year Ended 12/31/00
                                                                      Exhibit 12

                         R.R. Donnelley & Sons Company

                       Ratio of Earnings to Fixed Charges



                                                                  Period Ending
                                                                    31-Dec-00
                                                                  -------------
                                                                  (in thousands
                                                                  except ratio)
                                                               
Earnings available for fixed charges:
  Earnings from continuing operations before income taxes........   $433,984
  Less: earnings of minority-owned companies.....................      3,122
  Add: Dividends received from investees under the equity method.      1,763
  Add: Minority interest expense in majority-owned subsidiaries..        208
  Add: Fixed charges before capitalized interest.................    108,493
  Add: Amortization of capitalized interest......................      7,735
                                                                    --------
    Total earnings available for fixed charges...................   $555,305
                                                                    ========
Fixed charges:
  Interest expense...............................................   $ 89,639
  Interest portion of rental expense.............................     18,393
  Amortization of discount and capitalized expenses related to
   indebtedness..................................................        461
                                                                    --------
  Total fixed charges before capitalized interest................    108,493
  Capitalized interest...........................................      4,554
                                                                    --------
    Total fixed charges..........................................   $113,047
                                                                    ========
Ratio of earnings to fixed charges...............................       4.91
                                                                    ========

EX-21

                                                                Form 10-K
                                                             Year Ended 12/31/00
                                                                Exhibit 21

                 SUBSIDIARIES OF R. R. DONNELLEY & SONS COMPANY
                             (As of March 2, 2001)



                                                             Place of
Subsidiaries of R. R. Donnelley & Sons Company               Incorporation
- ----------------------------------------------               -------------
                                                          
Freight Systems, Inc........................................ California
Caslon Incorporated......................................... Delaware
CTC Direct, Inc............................................. Delaware
Donnelley Caribbean Graphics, Inc........................... Delaware
Haddon Craftsmen, Inc....................................... Delaware
Mobium Corporation.......................................... Delaware
Red Rover Digital, Inc...................................... Delaware
R. R. Donnelley Far East Limited............................ Delaware
R. R. Donnelley Mendota, Inc................................ Delaware
R. R. Donnelley Printing Company............................ Delaware
R. R. Donnelley Printing Company, L. P...................... Delaware
R. R. Donnelley (Europe) Limited............................ Delaware
77 Capital Partners II, L. P................................ Delaware
R. R. Donnelley Receivables, Inc............................ Nevada
R. R. Donnelley Seymour, Inc................................ New Jersey
R. R. Donnelley Norwest Inc................................. Oregon
Heritage Preservation Corporation........................... South Carolina
Omega Studios-Southwest, Inc................................ Texas
Iridio, Inc................................................. Washington
Donnelley Cochrane Argentina S. A........................... Argentina
Donnelley Cochrane Editora y Grafica Limitada............... Brazil
Editorial Lord Cochrane, S. A............................... Chile
Estudio y Laboratorio Fotographico Taller Uno S. A.......... Chile
Sociedad Productora de Directorios S. A..................... Chile
Taller Uno S. A............................................. Chile
Shenzhen Donnelley Bright Sun Printing Co................... Republic of China
Donnelley Information Systems Limited....................... India
R. R. Donnelley Printing (France) SARL...................... France
R. R. Donnelley Deutschland GmbH............................ Germany (Frankfort)
R. R. Donnelley Financial Asia Limited...................... Hong Kong
Ediciones Eclipse, S. A. de C. V............................ Mexico
Laboratorio Lito Color S. A. de C. V........................ Mexico
R. R. Donnelley (Mexico) S. A. de C. V...................... Mexico
Impresora Donneco Internacional, S. A. de C. V.............. Mexico
DPA Printing Company, sp. zo. o............................. Poland
R. R. Donnelley Poland, sp. zo. o........................... Poland
R. R. Donnelley U. K. Directory Ltd......................... United Kingdom
R. R. Donnelley (U. K.) Limited............................. United Kingdom
R. R. Donnelley Limited..................................... United Kingdom

EX-23

                                                             Form 10-K
                                                             Year Ended 12/31/00
                                                             EXHIBIT 23


                   CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS



As independent public accountants, we hereby consent to the incorporation of
our reports, included in this form 10K, into the Company's previously filed
Registration Statements on Form S-8 (File Nos. 33-43642, 33-49431, 33-49809,
33-52805, 33-61387, 333-80995, 333-37042 and 333-55788) and Form S-3
(File Nos. 33-57807 and 333-44303) and previously filed post-effective
amendments thereto.




Chicago, Illinois
March 29, 2001