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EXHIBIT 99.2
THE THOMSON CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS AND RETAINED EARNINGS
(unaudited)
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(millions of U.S. dollars, except per common share amounts) | ||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||
| | (notes 4 and 5) | | (notes 4 and 5) | ||||||||||
Revenues | 2.223 | 2,044 | 5,771 | 5,305 | ||||||||||
Cost of sales, selling, marketing, general and administrative expenses | (1,488 | ) | (1,373 | ) | (4,261 | ) | (3,972 | ) | ||||||
Depreciation | (173 | ) | (162 | ) | (454 | ) | (430 | ) | ||||||
Amortization | (70 | ) | (69 | ) | (210 | ) | (210 | ) | ||||||
Operating profit | 492 | 440 | 846 | 693 | ||||||||||
Net other (expense) income | (1 | ) | 23 | 28 | 79 | |||||||||
Net interest expense and other financing costs | (63 | ) | (64 | ) | (176 | ) | (192 | ) | ||||||
Income taxes | (100 | ) | (101 | ) | (148 | ) | (133 | ) | ||||||
Equity in net losses of associates, net of tax | — | (3 | ) | (1 | ) | (12 | ) | |||||||
Earnings from continuing operations | 328 | 295 | 549 | 435 | ||||||||||
Earnings from discontinued operations, net of tax | 16 | 12 | 24 | 34 | ||||||||||
Net earnings | 344 | 307 | 573 | 469 | ||||||||||
Dividends declared on preference shares | — | (1 | ) | (2 | ) | (8 | ) | |||||||
Net gain on redemption of Series V preference shares | — | — | — | 21 | ||||||||||
Earnings attributable to common shares | 344 | 306 | 571 | 482 | ||||||||||
Retained earnings at beginning of period | 6,276 | 5,832 | 6,295 | 6,191 | ||||||||||
Remove net gain on redemption of Series V preference shares recorded in Capital | — | — | — | (21 | ) | |||||||||
Dividends declared on common shares | (124 | ) | (117 | ) | (370 | ) | (631 | ) | ||||||
Retained earnings at end of period | 6,496 | 6,021 | 6,496 | 6,021 | ||||||||||
Basic and diluted earnings per common share: | ||||||||||||||
From continuing operations | $ | 0.50 | $ | 0.45 | $ | 0.83 | $ | 0.69 | ||||||
From discontinued operations | $ | 0.02 | $ | 0.02 | $ | 0.04 | $ | 0.05 | ||||||
Basic and diluted earnings per common share | $ | 0.52 | $ | 0.47 | $ | 0.87 | $ | 0.74 |
The related notes form an integral part of these consolidated financial statements.
1
THE THOMSON CORPORATION
CONSOLIDATED BALANCE SHEET
(millions of U.S. dollars) | September 30, 2004 | December 31, 2003 | |||
---|---|---|---|---|---|
| (unaudited) | (notes 4 and 5) | |||
Assets | |||||
Cash and cash equivalents | 374 | 683 | |||
Accounts receivable, net of allowances | 1,389 | 1,497 | |||
Inventories | 324 | 309 | |||
Prepaid expenses and other current assets | 303 | 307 | |||
Deferred income taxes | 181 | 181 | |||
Current assets of discontinued operations | 30 | 67 | |||
Current assets | 2,601 | 3,044 | |||
Property and equipment | 1,579 | 1,538 | |||
Identifiable intangible assets, net | 4,499 | 4,334 | |||
Goodwill | 8,594 | 8,089 | |||
Other non-current assets | 1,316 | 1,247 | |||
Non-current assets of discontinued operations | 202 | 433 | |||
Total assets | 18,791 | 18,685 | |||
Liabilities and shareholders' equity | |||||
Liabilities | |||||
Short-term indebtedness | 19 | 87 | |||
Accounts payable and accruals | 1,407 | 1,520 | |||
Deferred revenue | 871 | 939 | |||
Current portion of long-term debt | 211 | 484 | |||
Current liabilities of discontinued operations | 54 | 115 | |||
Current liabilities | 2,562 | 3,145 | |||
Long-term debt | 4,106 | 3,684 | |||
Other non-current liabilities | 1,028 | 998 | |||
Deferred income taxes | 1,602 | 1,608 | |||
Non-current liabilities of discontinued operations | 29 | 57 | |||
Total liabilities | 9,327 | 9,492 | |||
Shareholders' equity | |||||
Capital | 2,683 | 2,639 | |||
Cumulative translation adjustment | 285 | 259 | |||
Retained earnings | 6,496 | 6,295 | |||
Total shareholders' equity | 9,464 | 9,193 | |||
Total liabilities and shareholders' equity | 18,791 | 18,685 | |||
The related notes form an integral part of these consolidated financial statements.
2
THE THOMSON CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW
(unaudited)
| Three months ended September 30, | Nine months ended September 30, | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
(millions of U.S. dollars) | ||||||||||
2004 | 2003 | 2004 | 2003 | |||||||
| | (notes 4 and 5) | | (notes 4 and 5) | ||||||
Cash provided by (used in): | ||||||||||
Operating activities | ||||||||||
Net earnings | 344 | 307 | 573 | 469 | ||||||
Remove earnings from discontinued operations | (16 | ) | (12 | ) | (24 | ) | (34 | ) | ||
Add back (deduct) items not involving cash: | ||||||||||
Amortization of development costs and capitalized software for sale | 9 | 7 | 24 | 31 | ||||||
Depreciation | 173 | 162 | 454 | 430 | ||||||
Amortization | 70 | 69 | 210 | 210 | ||||||
Net losses (gains) on disposals of businesses and investments | 1 | (1 | ) | (4 | ) | (57 | ) | |||
Deferred income taxes | (9 | ) | 85 | 4 | 99 | |||||
Equity in net losses of associates, net of tax | — | 3 | 1 | 12 | ||||||
Other, net | 12 | 18 | 102 | 83 | ||||||
Voluntary pension contribution | — | (50 | ) | — | (50 | ) | ||||
Changes in working capital and other items | (68 | ) | (162 | ) | (205 | ) | (294 | ) | ||
Cash provided by operating activities — discontinued operations | 15 | 27 | 30 | 46 | ||||||
Net cash provided by operating activities | 531 | 453 | 1,165 | 945 | ||||||
Investing activities | ||||||||||
Acquisitions, net of cash acquired | (155 | ) | (64 | ) | (810 | ) | (186 | ) | ||
Proceeds from disposals | — | — | 11 | 284 | ||||||
Additions to property and equipment, less proceeds from disposals | (159 | ) | (147 | ) | (430 | ) | (368 | ) | ||
Other investing activities | (12 | ) | (14 | ) | (40 | ) | (61 | ) | ||
Additions to property and equipment of discontinued operations | — | (3 | ) | (2 | ) | (6 | ) | |||
Proceeds from disposals of discontinued operations | — | — | 137 | 2 | ||||||
Cash used in investing activities — discontinued operations | — | 2 | (5 | ) | (15 | ) | ||||
Net cash used in investing activities | (326 | ) | (226 | ) | (1,139 | ) | (350 | ) | ||
Financing activities | ||||||||||
Proceeds from debt | — | 450 | 434 | 451 | ||||||
Repayments of debt | (332 | ) | (250 | ) | (332 | ) | (250 | ) | ||
Net borrowings (repayments) of short-term loan facilities | 13 | (257 | ) | (75 | ) | 4 | ||||
Redemption of Series V preference shares | — | — | — | (311 | ) | |||||
Dividends paid on preference shares | — | (2 | ) | (2 | ) | (9 | ) | |||
Dividends paid on common shares | (122 | ) | (115 | ) | (362 | ) | (540 | ) | ||
Other financing activities, net | 1 | (2 | ) | 2 | (1 | ) | ||||
Net cash used in financing activities | (440 | ) | (176 | ) | (335 | ) | (656 | ) | ||
Translation adjustments | — | 7 | — | 8 | ||||||
(Decrease) increase in cash and cash equivalents | (235 | ) | 58 | (309 | ) | (53 | ) | |||
Cash and cash equivalents at beginning of period | 609 | 598 | 683 | 709 | ||||||
Cash and cash equivalents at end of period | 374 | 656 | 374 | 656 | ||||||
The related notes form an integral part of these consolidated financial statements.
3
The Thomson Corporation
Notes to Consolidated Financial Statements (unaudited)
(unless otherwise stated, all amounts are in millions of U.S. dollars)
Note 1: Consolidated Financial Statements
Principles of Consolidation
The unaudited interim consolidated financial statements of The Thomson Corporation ("Thomson" or the "Company") include all controlled companies and are prepared in accordance with accounting principles generally accepted in Canada ("Canadian GAAP"). All intercompany transactions and balances are eliminated on consolidation.
Note 2: Accounting Principles and Methods
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the requirements of the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1751,Interim Financial Statements. Accordingly, certain information and footnote disclosure normally included in annual financial statements prepared in accordance with Canadian GAAP have been omitted or condensed. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements as at and for the year ended December 31, 2003, as set out in the Company's 2003 Annual Report.
In the opinion of management, the unaudited interim consolidated financial statements include all adjustments (consisting of normal recurring accruals) considered necessary by management to present a fair statement of the results of operations, financial position and cash flows. Except for the changes in accounting policies described in Note 4, the consolidated financial statements were prepared using the same accounting policies and methods as those used in the Company's financial statements for the year ended December 31, 2003.
Where necessary, certain amounts for 2003 have been reclassified to conform to the current period's presentation.
Note 3: Seasonality
Typically, a greater portion of the Company's operating profit and operating cash flow is derived in the second half of the year. Customer buying patterns are concentrated in the second half of the year, particularly in the learning and regulatory markets, while costs are incurred more evenly throughout the year. As a result, operating margins generally increase as the year progresses. For these reasons, the performance of the Company's businesses may not be comparable quarter to consecutive quarter and should be considered on the basis of results for the whole year or by comparing results in a quarter with the results in the same quarter for the previous year.
Note 4: Changes in Accounting Policies
Derivatives and Hedging Activity
Effective January 1, 2004, Thomson adopted Accounting Guideline AcG-13, Hedging Relationships, and Emerging Issues Committee ("EIC") Abstract 128, Accounting for Trading, Speculative or Non-Hedging Derivative Financial Instruments. AcG-13 addresses the conditions for applying hedge accounting, including the identification, designation, documentation and effectiveness of hedging relationships. EIC Abstract 128 requires that, with certain exceptions, a freestanding derivative financial instrument that does not qualify for hedge accounting under AcG-13, be recognized in the balance sheet and measured at fair value, with changes in fair value recognized in income.
As a result of the new guidance, certain derivatives previously accounted for as hedges no longer qualify for such treatment under AcG-13. In accordance with AcG-13, the deferred loss on these instruments as of January 1, 2004 of $26 million will be recognized in "Net interest expense and other financing costs" as the hedged items to which these derivatives formerly related are recognized in earnings. The change in the fair value of these derivative instruments subsequent to January 1, 2004 will also be recognized within "Net interest expense and other financing costs". For the three-months ended September 30, 2004, $3 million of expense was recognized within "Net interest expense and other financing costs" relative to this new guidance, which was comprised of amortization of the deferred loss incurred prior to January 1, 2004 of $3 million, and an immaterial change in the fair value of the derivatives. For the nine-month period ended September 30, 2004, $1 million of income was recognized within "Net interest expense and other financing costs" relative to this new guidance, which was comprised of amortization of the deferred loss incurred prior to January 1, 2004 of $8 million, offset by a $9 million favorable change in the fair value of the derivatives.
4
Asset Retirement Obligations
Effective January 1, 2004, the Company adopted CICA Handbook Section 3110,Asset Retirement Obligations, with restatement of prior periods. The new guidance describes how to recognize and measure obligations associated with the retirement of property, plant and equipment when those obligations result from the acquisition, construction, development or normal operation of the assets.
The Company's only asset retirement obligations are obligations to restore leased facilities upon termination of the leases. For the nine months ended September 30, 2004, the Company recorded expense of $2 million (2003 — $2 million) related to these obligations. For the three months ended September 30, 2004, the Company recorded expense of $1 million (2003 — $1 million) related to these obligations. The following details the restatements related to adoption of CICA Handbook Section 3110 made to the previously reported consolidated financial statements, after taking into account reclassifications related to discontinued operations:
| Three months ended September 30, 2003 | Nine months ended September 30, 2003 | ||||||
---|---|---|---|---|---|---|---|---|
Consolidated statement of earnings and retained earnings | As reported | As restated | As reported | As restated | ||||
Depreciation | 161 | 162 | 428 | 430 | ||||
Income taxes | 102 | 101 | 134 | 133 | ||||
Net earnings | 307 | 307 | 470 | 469 | ||||
Retained earnings at beginning of period | 5,838 | 5,832 | 6,196 | 6,191 | ||||
| December 31, 2003 | |||
---|---|---|---|---|
Consolidated balance sheet | As reported | As restated | ||
Property and equipment | 1,533 | 1,538 | ||
Other-non current liabilities | 982 | 998 | ||
Net long-term deferred income tax liabilities | 1,612 | 1,608 | ||
Retained earnings | 6,302 | 6,295 | ||
| Three months ended September 30, 2003 | Nine months ended September 30, 2003 | ||||||
---|---|---|---|---|---|---|---|---|
Consolidated statement of cash flow | As reported | As restated | As reported | As restated | ||||
Net earnings | 307 | 307 | 470 | 469 | ||||
Depreciation | 161 | 162 | 428 | 430 | ||||
Deferred income taxes | 86 | 85 | 100 | 99 | ||||
Accounting for Income Taxes in Interim Periods
In the first quarter of 2004, the Company refined the calculation by which it allocates estimated full year income tax expense among interim periods. Previously, the estimated full year effective tax rate for the consolidated results was applied to the relevant interim period's consolidated pre-tax income. Beginning in 2004, the Company estimates separate annual effective income tax rates for each taxing jurisdiction and individually applies such rates to the interim period's pre-tax income of each jurisdiction. This change was accounted for as a change in estimate.
5
Revenue Recognition
Effective January 1, 2004, the Company must apply the guidance in EIC Abstract 141, Revenue Recognition, which incorporates the principles and summarizes the guidance in the U.S. Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") 104,Revenue Recognition. The Abstract also provides interpretive guidance on the application of CICA Handbook Section 3400,Revenue. Because the Company has previously applied the provisions of SAB 104, the adoption of EIC Abstract 141 did not impact the consolidated financial statements.
Also effective January 1, 2004 was EIC Abstract 142,Revenue Arrangements with Multiple Deliverables. This Abstract addresses the accounting by vendors for arrangements in which the vendor will perform multiple revenue-generating activities. The Abstract conforms Canadian GAAP to U.S. GAAP set forth in Emerging Issues Task Force ("EITF") Issue 00-21, also entitledRevenue Arrangements with Multiple Deliverables. Because the Company has previously applied EITF Issue 00-21, the adoption of EIC Abstract 142 did not impact the consolidated financial statements.
Generally Accepted Accounting Principles
Effective for the Company's fiscal year beginning January 1, 2004 was CICA Handbook Section 1100, Generally Accepted Accounting Principles. This Handbook Section establishes standards for financial reporting in accordance with generally accepted accounting principles and clarifies the relative authority of various accounting pronouncements and other sources within Canadian GAAP. This Handbook Section did not impact the consolidated financial statements.
Note 5: Discontinued Operations
The following four businesses, along with one other small business from Thomson Learning, which was sold in June 2003, are classified as discontinued operations within the consolidated financial statements for all periods presented. None of these businesses is or was considered fundamental to the integrated information offerings of Thomson.
In October 2003, the Company sold its portfolio of healthcare magazines for $135 million and recorded the related post-tax gain of $63 million in the fourth quarter of 2003. The magazines had previously been managed within its scientific and healthcare group.
In February 2004, the Company sold DBM, a provider of human resource solutions, which had been managed within its learning group. Based on the status of negotiations at December 31, 2003, an impairment charge relating to goodwill of $62 million before income taxes was recorded in the fourth quarter of 2003. The Company recorded a post-tax loss of $6 million in 2004 related to the completion of the sale.
In the second quarter of 2004, the Company sold Sheshunoff Information Services Inc., a provider of critical data, compliance and management tools to financial institutions, which had been managed within Thomson Media. Based on estimates of fair value, an impairment charge relating to identifiable intangible assets and goodwill of $24 million before income taxes was recorded in the fourth quarter of 2003. Based on the status of negotiations at March 31, 2004, the Company recorded a further pre-tax impairment charge of $6 million relating to intangible assets in the first quarter of 2004. The Company recorded a post-tax gain of $3 million in the second quarter of 2004 related to the completion of the sale.
In June 2004, the Company announced its intention to sell the Thomson Media group. Thomson Media is a provider of information products focused on the banking, financial services and related technology markets. The results of Thomson Media had previously been reported in the Corporate and other segment. In October 2004, the Company announced that it had agreed to sell Thomson Media for $350 million. The Company expects to record a gain on the disposal and anticipates completion of the sale by the end of the year.
6
The carrying amounts of assets and liabilities related to these discontinued businesses as of September 30, 2004 and December 31, 2003 are as follows:
Balance Sheet
| September 30, 2004 | December 31, 2003 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Thomson Media | DBM | Sheshunoff | Thomson Media | Total | |||||
Current assets: | ||||||||||
Accounts receivable, net of allowances | 23 | 30 | 1 | 24 | 55 | |||||
Other current assets | 7 | 3 | 2 | 7 | 12 | |||||
Total current assets | 30 | 33 | 3 | 31 | 67 | |||||
Non-current assets: | ||||||||||
Property and equipment | 6 | 17 | 3 | 6 | 26 | |||||
Identifiable intangible assets | 129 | 63 | 38 | 133 | 234 | |||||
Goodwill | 67 | 95 | — | 66 | 161 | |||||
Other non-current assets | — | 5 | 7 | — | 12 | |||||
Total non-current assets | 202 | 180 | 48 | 205 | 433 | |||||
Current liabilities: | ||||||||||
Accounts payable and accruals | 18 | 14 | 1 | 22 | 37 | |||||
Deferred revenue | 36 | 34 | 12 | 32 | 78 | |||||
Total current liabilities | 54 | 48 | 13 | 54 | 115 | |||||
Non-current liabilities: | ||||||||||
Other non-current liabilities | 3 | — | — | 4 | 4 | |||||
Deferred income taxes | 26 | 27 | — | 26 | 53 | |||||
Total non-current liabilities | 29 | 27 | — | 30 | 57 | |||||
Earnings from discontinued operations for the periods ended September 30, 2004 and 2003 are summarized below:
| Three months ended September 30, 2004 | ||||||||
---|---|---|---|---|---|---|---|---|---|
| DBM | Thomson Media | Other | Total | |||||
Revenues from discontinued operations | — | 42 | — | 42 | |||||
Earnings from discontinued operations before income taxes | — | 6 | — | 6 | |||||
Loss on sale of discontinued operations | (2 | ) | — | — | (2 | ) | |||
Income taxes | — | (2 | ) | 14 | 12 | ||||
Earnings from discontinued operations | (2 | ) | 4 | 14 | 16 | ||||
| Three months ended September 30, 2003 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| DBM | Sheshunoff | Healthcare Magazines | Thomson Media | Total | ||||||
Revenues from discontinued operations | 59 | 9 | 22 | 38 | 128 | ||||||
Earnings (loss) from discontinued operations before income taxes | 12 | 1 | 3 | — | 16 | ||||||
Income taxes | (3 | ) | — | (1 | ) | — | (4 | ) | |||
Earnings (loss) from discontinued operations | 9 | 1 | 2 | — | 12 | ||||||
| Nine months ended September 30, 2004 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| DBM | Sheshunoff | Thomson Media | Other | Total | ||||||
Revenues from discontinued operations | 28 | 11 | 128 | — | 167 | ||||||
Earnings (loss) from discontinued operations before income taxes | 3 | (4 | ) | 21 | — | 20 | |||||
Loss on sale of discontinued operations | (34 | ) | — | — | — | (34 | ) | ||||
Income taxes | 27 | 5 | (8 | ) | 14 | 38 | |||||
Earnings (loss) from discontinued operations | (4 | ) | 1 | 13 | 14 | 24 | |||||
7
| Nine months ended September 30, 2003 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| DBM | Sheshunoff | Healthcare Magazines | Thomson Media | Other | Total | |||||||
Revenues from discontinued operations | 186 | 25 | 63 | 120 | 2 | 396 | |||||||
Earnings (loss) from discontinued operations before income taxes | 30 | 3 | 11 | 5 | (1 | ) | 48 | ||||||
Income taxes | (7 | ) | (1 | ) | (4 | ) | (2 | ) | — | (14 | ) | ||
Earnings (loss) from discontinued operations | 23 | 2 | 7 | 3 | (1 | ) | 34 | ||||||
In conjunction with the expiration of certain tax audit periods for Thomson Newspapers, which were sold in 2000 and 2001, the Company adjusted its related tax liabilities, which resulted in a tax benefit of $12 million in the three and nine months ended September 30, 2004. This amount is included in "Other" above.
Proceeds from disposals of discontinued operations within the consolidated statement of cash flow in the nine months ended September 30, 2004 includes taxes paid related to the 2003 sale of the portfolio of healthcare magazines.
Note 6: Earnings per Common Share
Basic earnings per common share are calculated by dividing earnings attributable to common shares by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share are calculated using the weighted-average number of common shares outstanding adjusted to include the potentially dilutive effect of outstanding stock options and other securities. The Company uses the treasury stock method to calculate diluted earnings per common share.
Earnings used in determining earnings per common share from continuing operations are presented below. Earnings used in determining earnings per common share from discontinued operations are the earnings from discontinued operations as reported within the consolidated statement of earnings and retained earnings.
| Three months ended September 30, | Nine months ended September 30, | |||||||
---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | |||||
Earnings from continuing operations | 328 | 295 | 549 | 435 | |||||
Dividends declared on preference shares | — | (1 | ) | (2 | ) | (8 | ) | ||
Net gain on redemption of Series V preference shares | — | — | — | 21 | |||||
Earnings from continuing operations attributable to common shares | 328 | 294 | 547 | 448 | |||||
The weighted-average number of common shares outstanding, as well as a reconciliation of the weighted-average number of common shares outstanding used in the basic earnings per common share computation to the weighted-average number of common shares outstanding used in the diluted earnings per common share computation, is presented below.
| Three months ended September 30, | Nine months ended September 30, | ||||||
---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | ||||
Basic | 655,377,297 | 654,768,063 | 655,216,373 | 653,396,713 | ||||
Effect of stock and other incentive plans | 704,312 | 360,515 | 595,157 | 254,204 | ||||
Diluted | 656,081,609 | 655,128,578 | 655,811,530 | 653,650,917 | ||||
8
Note 7: Employee Benefit Plans
The Company's net defined benefit plan expense (income) is comprised of the following elements:
| Three months ended September 30, | |||||||
---|---|---|---|---|---|---|---|---|
| Pensions | Other post-retirement plans | ||||||
| 2004 | 2003 | 2004 | 2003 | ||||
Current service cost | 12 | 11 | — | — | ||||
Interest cost | 31 | 28 | 1 | 2 | ||||
Expected return on plan assets | (39 | ) | (37 | ) | — | — | ||
Amortization of net transition obligation | — | — | — | — | ||||
Amortization of net actuarial losses | 6 | 2 | 1 | — | ||||
Amortization of prior service cost | 1 | 2 | — | — | ||||
Net defined benefit plan expense | 11 | 6 | 2 | 2 | ||||
| Nine months ended September 30, | |||||||
---|---|---|---|---|---|---|---|---|
| Pensions | Other post-retirement plans | ||||||
| 2004 | 2003 | 2004 | 2003 | ||||
Current service cost | 38 | 33 | 2 | 2 | ||||
Interest cost | 93 | 86 | 7 | 6 | ||||
Expected return on plan assets | (117 | ) | (111 | ) | — | — | ||
Amortization of net transition obligation | — | 2 | — | — | ||||
Amortization of net actuarial losses | 18 | 6 | 3 | — | ||||
Amortization of prior service cost | 3 | 2 | — | — | ||||
Net defined benefit plan expense | 35 | 18 | 12 | 8 | ||||
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the Act") was signed into law in the United States. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The Company has determined the portions of its U.S. benefit plan that are actuarially equivalent and anticipates that it will be eligible to receive a subsidy beginning in 2006. The Company assessed and quantified this benefit in the second quarter of 2004 and in accordance with CICA Handbook Section 3461,Employee Future Benefits and U.S. Financial Accounting Standards Board ("FASB") Staff Position No. FAS 106-2,Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, has prospectively apply the expected benefit from the subsidy in its determination of benefit plan expense. This benefit reduces the employee benefit plans expense by $1 million in 2004. The impact of this application on expense in 2004 for any interim period is not material.
9
Note 8: Business Interruption Insurance
In June 2004, the Company received $14 million of a total $19 million insurance recovery related to the events of September 11, 2001 in New York City. The $14 million related to a recovery of lost revenues due to business interruption, while the remaining $5 million was for a property claim. The $14 million business interruption portion, as well as the $5 million property claim, was recorded as a reduction of "Cost of sales, selling, marketing, general and administrative expenses" within the consolidated statement of earnings and retained earnings for the nine months ended September 30, 2004, and is included in the financial group.
Note 9: Net Other (Expense) Income
Net other (expense) income includes:
| Three months ended September 30, | Nine months ended September 30, | ||||||
---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | ||||
Other income | — | 22 | 24 | 22 | ||||
Net (losses) gains on disposals of businesses and investments | (1 | ) | 1 | 4 | 57 | |||
(1 | ) | 23 | 28 | 79 | ||||
Other income
Other income for the nine months ended September 30, 2004 primarily relates to a $22 million legal settlement from a competitor that was received in July 2004. In July 2003, Thomson reached a settlement with Skillsoft PLC, a competitor of Thomson Learning, regarding the Company's claims of breach of fiduciary duty, appropriation of trade secrets and patent infringement. Under the terms of the settlement, Skillsoft PLC paid Thomson $44 million in two equal installments, the first of which was received in July 2003.
Net (losses) gains on disposals of businesses and investments
The most significant item in 2003 is a $55 million gain recorded upon completion of the sale of the Company's 20% interest in Bell Globemedia Inc. in March 2003. See Note 14.
Note 10: Income Taxes
As a result of new tax legislation in the United Kingdom that was enacted in the third quarter of 2004, valuation allowances of $40 million that had previously been established against the related UK tax assets were released. Of this amount, $35 million will be used to offset taxable income in future periods and was treated as a discrete credit in the three and nine month periods ended September 30, 2004, while the remainder will be used to offset taxable income in the current year and was factored into the full year effective tax rate.
Note 11: Acquisitions
The number of transactions completed during the three-month and nine-month periods ended September 30, 2004 and 2003 was as follows:
| Three months ended September 30, | Nine months ended September 30, | ||||||
---|---|---|---|---|---|---|---|---|
Number of transactions | ||||||||
2004 | 2003 | 2004 | 2003 | |||||
Businesses and identifiable intangible assets acquired | 16 | 9 | 45 | 21 | ||||
Investments in businesses | — | 1 | 1 | 1 |
The cash consideration for those acquisitions is as follows:
| Three months ended September 30, | Nine months ended September 30, | ||||||
---|---|---|---|---|---|---|---|---|
Cash consideration | ||||||||
2004 | 2003 | 2004 | 2003 | |||||
Businesses and identifiable intangible assets acquired | 155 | 61 | 807 | 183 | ||||
Investments in businesses | — | 3 | 3 | 3 | ||||
Total acquisitions | 155 | 64 | 810 | 186 | ||||
10
Included in these acquisitions were the purchases of:
- •
- in September 2004, KnowledgeNet Inc. KnowledgeNet offers a learning technology platform that utilizes a combination of self-paced, instructor-led and mobile learning.
- •
- in May 2004, TradeWeb LLC for $385 million plus contingent payments of up to approximately $150 million over the next three years based on the achievement of growth targets. TradeWeb is an online global trading platform for fixed income securities.
- •
- In May 2004, the Information Services division of the Banking and Investment Group of CGI, including the Starquote software solution. Starquote provides the Canadian retail equity market with an overview of the North American financial markets with news, information and real-time quotes.
- •
- in March 2004, the 90% of CCBN.com, Inc. ("CCBN") that the Company did not previously own. CCBN provides web-based solutions for the investment community, offering services to enhance the way companies communicate and meet disclosure requirements, and assists investors in managing and leveraging this information.
- •
- in January 2004, the publishing assets of Biological Abstracts, Inc. and BIOSIS. BIOSIS offers both custom and standard information resources designed to fit the information needs of researchers, students and information professionals worldwide.
Goodwill and identifiable intangible assets acquired are detailed below.
| Three months ended September 30, | Nine months ended September 30, | ||||||
---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | ||||
Goodwill | 104 | 81 | 498 | 115 | ||||
Identifiable intangible assets with finite lives | 57 | 91 | 368 | 123 |
All acquisitions have been accounted for using the purchase method and the results of acquired businesses are included in the consolidated financial statements from the dates of acquisition. For acquisitions made during the three-month period ended September 30, 2004, the majority of the acquired goodwill is not deductible for tax purposes. For acquisitions made during the nine-month period ended September 30, 2003, approximately half of the acquired goodwill is deductible for tax purposes. Allocations related to certain acquisitions may be subject to adjustment pending completion of final valuations.
As of September 30, 2004, the balance of the reserves for exit costs related to business acquisitions consummated during 2001 through 2004 totaled $25 million. Reserves recorded in connection with businesses acquired during the nine-month period ended September 30, 2004 were $23 million. The following table presents the activity in these acquisition reserve accounts, which are included within "Accounts payable and accruals" and "Other non-current liabilities" in the consolidated balance sheet.
Type of cost | Balance December 31, 2003 | 2004 Utilization | 2004 Additions | Balance September 30, 2004 | ||||
---|---|---|---|---|---|---|---|---|
Severance and other employee-related costs | 1 | (3 | ) | 9 | 7 | |||
Lease cancellation and idle facility costs | 4 | (1 | ) | 13 | 16 | |||
Other exit costs | 1 | — | 1 | 2 | ||||
Total | 6 | (4 | ) | 23 | 25 | |||
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Note 12: Capital
The following table details the activity in Capital for the nine months ended September 30, 2004:
Balance, December 31, 2003 | 2,639 | |
Common shares issued under dividend reinvestment plan | 8 | |
Increase to contributed surplus related to stock based compensation | 31 | |
Other common share issuances | 5 | |
Balance, September 30, 2004 | 2,683 | |
Note 13: Preference Share Capital Redemption
On April 14, 2003, Thomson redeemed all of its outstanding Series V Cumulative Redeemable Preference Shares for $308 million, which represented a price of Cdn$25.50 per share plus accrued dividends. The $21 million gain recognized on the redemption represents a foreign exchange gain of $30 million less the premium paid on redemption of $6 million, and taxes of $3 million. This gain was recorded as an increase to contributed surplus, a component of "Capital", and was included in the calculation of earnings attributable to common shares.
Note 14: Bell Globemedia Inc.
On March 17, 2003, the Company sold its 20% interest in Bell Globemedia Inc. ("BGM") to a company that is owned by the Thomson family for $279 million. In the event that BGM is subsequently sold to a third party for a gain prior to February 7, 2005, the Company is entitled to receive half of the gain relative to its former interest, subject to certain adjustments. If no such gains are recognized from a subsequent sale to a third party, the Company is not required to reimburse the former owner for any losses. The Company's Board of Directors appointed a committee of independent directors to review the transaction. The committee retained a financial advisor to provide an opinion to the Company as to the fairness of the transaction from a financial point of view. One of the directors of the Company is also a director of the parent company of the financial advisor, but was not a member of the committee.
In connection with the sale, the Company paid a special dividend, equal to the proceeds received, of $0.428 per common share on March 17, 2003. During the fourth quarter of 2002, the Company had reduced the carrying amount of this investment by $67 million, reflecting its share of a writedown of goodwill recorded by BGM. Upon completion of the sale of the Company's interest, it recognized a gain of $55 million recorded in "Net other (expense) income" within the consolidated statement of earnings and retained earnings, largely offsetting the previous non-cash writedown.
Note 15: Long Term Debt
In May 2004, Thomson completed an offering of US$250 million, 4.75% global notes due 2010. In June 2004, Thomson completed an offering of Cdn$250 million, 4.50% notes due 2009. The Company entered into two currency swaps to convert the obligation to US$184 million at a floating rate of interest.
The Company used the net proceeds of $432 million from these offerings to repay other existing indebtedness and for other general corporate purposes.
In July 2004, the Company repaid Cdn$250 million of 9.15% notes for US$182 million. Additionally, in July 2004, the Company repaid US$150 million of private placement debt.
In August 2003, the Company completed an offering of $450 million of global unsecured notes. The net proceeds of $445 million were used to repurchase $250 million of preferred shares issued to a subsidiary of Woodbridge, repay other outstanding indebtedness and for general corporate purposes.
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Note 16: Related Party Transactions
As at September 30, 2004, Kenneth R. Thomson, through The Woodbridge Company Limited ("Woodbridge") and its affiliates, controlled approximately 69% of the Company's common shares.
In the normal course of business, a Woodbridge-owned company rents office space from one of the Company's subsidiaries. Additionally, a number of the Company's subsidiaries charge a Woodbridge-owned company fees for various administrative services. In the full year of 2003, the total amount charged to Woodbridge for these rentals and services was approximately $2 million.
The employees of Jane's Information Group, a business sold by the Company to Woodbridge in April 2001, continue to participate in the Company's United States and United Kingdom pension plans as well as the defined contribution plan in the United States. Jane's makes proportional contributions to the pension plans as required, and makes matching contributions in accordance with the provisions of the defined contribution plan.
In 2004, the Company renewed its agreement with Woodbridge to reduce the cost of the Company's directors' and officers' insurance coverage. Under the terms of the agreement, the Company maintains standard directors' and officers' insurance for any amount up to $15 million with a third party insurance company. A separate third party insurer is responsible for the next $75 million of coverage. Woodbridge indemnifies this second insurer. For its agreement to indemnify the insurer, the Company pays Woodbridge an annual premium of $685,000, which is less than the premium that the Company would have paid for commercial insurance.
In July 2003, the Company announced that Woodbridge had agreed to discontinue its commitment to participate in the Company's dividend reinvestment plan (DRIP). Previously, Woodbridge had agreed to reinvest at least 50% of the quarterly dividends received by it and its subsidiaries in common shares through June 2005.
In March 2003, the Company sold its 20% interest in BGM to a company that is owned by the Thomson family for $279 million. See Note 14.
Note 17: Recently Issued Accounting Standards
The Accounting Standards Board and the EIC of the CICA have recently issued the following accounting standard that is applicable to the Company's activities in future periods.
Accounting Guideline AcG-15, Consolidation of Variable Interest Entities. In June 2003, the CICA issued AcG-15, which requires the consolidation of certain entities that are subject to control on a basis other than the ownership of voting interest. This Guideline provides guidance for determining when an enterprise includes the assets, liabilities and results of operations of a variable interest entity in its consolidated financial statements. The guidance related to consolidation requirements is effective for periods beginning on or after November 1, 2004.
The Company has assessed the impact of AcG-15 and does not expect the adoption to have a material impact on the consolidated financial statements.
Note 18: Segment Information
Thomson is a global provider of integrated information solutions for business and professional customers. Thomson operates in four reportable market segments worldwide. The reportable segments of Thomson are strategic business groups that offer products and services to target markets. The accounting policies applied by the segments are the same as those applied by the Company. The Company's four reportable segments are:
Legal & Regulatory
Providing integrated information solutions to legal, tax, accounting, intellectual property, compliance and other business professionals, as well as government agencies.
Learning
Providing tailored learning solutions to colleges, universities, professors, students, libraries, reference centers, government agencies, corporations and professionals.
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Providing financial products and information solutions to the global financial services industry, including brokers, financial planners and corporate executives.
Scientific & Healthcare
Providing information and services to researchers, physicians and other professionals in the healthcare, academic, scientific, corporate and government marketplaces.
Business Segments
| Three months ended September 30, 2004 | Three months ended September 30, 2003 | |||||||
---|---|---|---|---|---|---|---|---|---|
| Revenues | Adjusted operating profit | Revenues | Adjusted operating profit | |||||
Legal & Regulatory | 840 | 223 | 793 | 215 | |||||
Learning | 752 | 237 | 714 | 218 | |||||
Financial | 455 | 80 | 372 | 62 | |||||
Scientific & Healthcare | 187 | 43 | 169 | 33 | |||||
Corporate and other(1) | — | (21 | ) | — | (19 | ) | |||
Eliminations | (11 | ) | — | (8 | ) | — | |||
Ongoing businesses | 2,223 | 562 | 2,040 | 509 | |||||
Disposals(2) | — | — | 4 | — | |||||
Total | 2,223 | 562 | 2,044 | 509 | |||||
Business Segments
| Nine months ended September 30, 2004 | Nine months ended September 30, 2003 | |||||||
---|---|---|---|---|---|---|---|---|---|
| Revenues | Adjusted operating profit | Revenues | Adjusted operating profit | |||||
Legal & Regulatory | 2,447 | 606 | 2,236 | 523 | |||||
Learning | 1,531 | 194 | 1,438 | 170 | |||||
Financial | 1,260 | 206 | 1,127 | 170 | |||||
Scientific & Healthcare | 564 | 113 | 519 | 97 | |||||
Corporate and other(1) | — | (60 | ) | — | (60 | ) | |||
Eliminations | (33 | ) | — | (30 | ) | — | |||
Ongoing businesses | 5,769 | 1,059 | 5,290 | 900 | |||||
Disposals(2) | 2 | (3 | ) | 15 | 3 | ||||
Total | 5,771 | 1,056 | 5,305 | 903 | |||||
- (1)
- Corporate and other includes corporate costs and costs associated with the Company's stock-related compensation expense.
(2)- Disposals include the results of businesses sold or held for sale that do not qualify as discontinued operations.
In accordance with CICA Handbook Section 1701,Segment Disclosures, the Company discloses information about its reportable segments based upon the measures used by management in assessing the performance of those reportable segments. The Company uses adjusted operating profit, which is operating profit before amortization of intangible assets, to measure the operating performance of its segments. The Company uses this measure because management does not consider amortization of intangible assets to be a controllable operating cost for purposes of assessing the current performance of its segments. Adjusted operating profit does not have any standardized meaning prescribed by Canadian GAAP.
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The following table reconciles adjusted operating profit per the business segment information to operating profit per the consolidated statement of earnings and retained earnings.
| Three months ended September 30, | Nine months ended September 30, | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | ||||||
Adjusted operating profit | 562 | 509 | 1,056 | 903 | ||||||
Less: | ||||||||||
Amortization | (70 | ) | (69 | ) | (210 | ) | (210 | ) | ||
Operating profit | 492 | 440 | 846 | 693 | ||||||
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Note 19: Reconciliation of Canadian to U.S. Generally Accepted Accounting Principles
The consolidated financial statements have been prepared in accordance with Canadian GAAP, which differs in some respects from U.S. GAAP. The following schedules present the material differences between Canadian and U.S. GAAP.
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | |||||||||||
Net earnings under Canadian GAAP | 344 | 307 | 573 | 469 | |||||||||||
Differences in GAAP increasing (decreasing) reported earnings: | |||||||||||||||
Development costs | — | — | — | 12 | |||||||||||
Business combinations | 4 | 5 | 11 | 10 | |||||||||||
Related party transactions | — | — | — | (55 | ) | ||||||||||
Derivative instruments and hedging activities | 3 | 5 | 6 | 11 | |||||||||||
Income taxes | 21 | (2 | ) | (26 | ) | (8 | ) | ||||||||
Equity in net losses of associates, net of tax | — | — | (6 | ) | — | ||||||||||
Net income under U.S. GAAP | 372 | 315 | 558 | 439 | |||||||||||
Earnings under U.S. GAAP from continuing operations | 356 | 303 | 534 | 405 | |||||||||||
Earnings under U.S. GAAP from discontinued operations | 16 | 12 | 24 | 34 | |||||||||||
Net income under U.S. GAAP | 372 | 315 | 558 | 439 | |||||||||||
Basic and diluted earnings (loss) per common share, under U.S. GAAP, from: | |||||||||||||||
Continuing operations | $ | 0.55 | $ | 0.46 | $ | 0.81 | $ | 0.64 | |||||||
Discontinued operations, net of tax | $ | 0.02 | $ | 0.02 | $ | 0.04 | $ | 0.05 | |||||||
Basic and diluted earnings per common share(1) | $ | 0.57 | $ | 0.48 | $ | 0.85 | $ | 0.69 | |||||||
- (1)
- Earnings per common share is calculated after taking into account dividends declared on preference shares and the gain recognized in connection with the redemption of the Series V preference shares in 2003.
Descriptions of the nature of the reconciling differences are provided below:
Development Costs
Under Canadian GAAP, certain costs classified as development are deferred and amortized over their estimated useful lives. Under U.S. GAAP, all development costs are expensed as incurred.
Business Combinations
Prior to January 1, 2001, various differences existed between Canadian and U.S. GAAP for the accounting for business combinations, including the establishment of acquisition-related liabilities. The net increase to income primarily relates to (i) costs that are required to be recorded as operating expenses under U.S. GAAP which, prior to January 1, 2001, were capitalized under Canadian GAAP; (ii) overall decreased amortization charges due to basis differences; and (iii) differences in gain or loss calculations on business disposals resulting from the above factors.
Related Party Transactions
During the nine-month period ended September 30, 2003, in accordance with Canadian GAAP, the Company recognized a gain of $55 million from the sale of its 20% interest in BGM to a company that is owned by the Thomson family. See Note 14. Under U.S. GAAP, such related party gains are not recognizable in net earnings, but must be reflected as equity transactions.
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Derivative Instruments and Hedging Activities
Prior to January 1, 2004, in accordance with Canadian GAAP, the Company disclosed the fair values of derivative instruments in the notes to the annual consolidated financial statements, but did not record such fair values in the consolidated balance sheet. Effective January 1, 2004, Canadian GAAP requires that derivative instruments that do not qualify as hedges be recorded in the balance sheet at fair value, and the change in fair value subsequent to January 1, 2004 be recorded in the income statement. The fair value as of January 1, 2004 is deferred and amortized into earnings in conjunction with the item it previously hedged. Under U.S. Statement of Financial Accounting Standards ("SFAS") No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS 138,Accounting for Certain Derivative Instruments and Certain Hedging Activities, all derivative instruments are recognized in the balance sheet at their fair values, and changes in fair value are recognized either immediately in earnings or, if the transaction qualifies for hedge accounting, when the transaction being hedged affects earnings.
Income Taxes
As discussed in Note 4, in the first quarter of 2004, the Company refined the calculation by which it allocates estimated full year income tax expense among interim periods. Under Canadian GAAP, the Company estimates separate annual effective income tax rates for each taxing jurisdiction and individually applies such rates to the interim period's pre-tax income of each jurisdiction. Under U.S. GAAP, the Company estimates the average annual effective income tax rate, excluding jurisdictions that generate net losses where the Company does not expect to receive a tax benefit, and applies that rate to the Company's interim period pre-tax income excluding the interim period pre-tax loss of those loss jurisdictions.
The income tax adjustment consists of the following:
| Three months ended September 30, | Nine months ended September 30, | |||||||
---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | |||||
Reduced (additional) provision due to different accounting principles described above | 23 | — | (22 | ) | — | ||||
Tax effect of U.S. GAAP pre-tax reconciling items | (2 | ) | (2 | ) | (4 | ) | (8 | ) | |
Total income taxes per reconciliation | 21 | (2 | ) | (26 | ) | (8 | ) | ||
Equity in Net Losses of Associates, Net of Tax
Under Canadian GAAP, investments in joint ventures are proportionally consolidated. Impairments for long-lived joint venture assets are recognized when the assets are not recoverable. Under U.S. GAAP, investments in joint ventures are accounted for as an equity investment. Impairments for equity investments are recognized when the decline of their fair value below carrying value is considered to be other than temporary. The adjustment relates to a joint venture investment that has long-lived assets that are recoverable, but whose carrying value is greater than its fair value.
Note 20: Pending Acquisition
In June 2004, Thomson announced that it had signed a definitive merger agreement with Information Holdings Inc. ("IHI"), a provider of intellectual property and regulatory information for the scientific, legal and corporate markets. Under this agreement, Thomson plans to acquire all of the outstanding common stock of IHI for $28 per share, for an aggregate cost of approximately $441 million, net of cash and investments currently held by IHI. The transaction is expected to close later this year and is subject to approval by regulatory authorities.
Note 21: Subsequent Events
The following events occurred subsequent to the conclusion of the third quarter and were announced in October 2004:
The Company signed a definitive agreement to sell the Thomson Media group for $350 million in cash. The transaction is expected to close by the end of the year, subject to regulatory approvals and other customary closing conditions. The Company expects to recognize a gain on the transaction in the fourth quarter financial statements.
17
The Company completed its previously announced acquisition of Capstar and its subsidiary businesses from Educational Testing Service ("ETS"). Capstar develops competency assessment, learning and measurement, and testing solutions for corporations, national associations and state and federal governments. Capstar will be included in the learning group. Additionally, the Company announced a 12 year contract extension under which its Prometric business will continue to provide computer-based testing services to ETS. The contract extension period, which runs to December 2017, provides for the delivery of computer-based assessments utilizing Prometric's extensive global network of testing centers and assessment and research expertise from ETS, a private educational testing and measurement organization.
The Company announced it exercised its option to redeem four outstanding issuances of debt securities with an aggregate book value of approximately Cdn$1.2 billion (US$0.8 billion). The redemption will occur on November 26, 2004 and will be funded from the issuance of new debt securities, the issuance of commercial paper, funds available under the Company's revolving credit facilities and/or cash balances. Related to this redemption, the Company has entered into certain derivative arrangements to minimize its exposure to changes in foreign currency exchange rates and interest rates. The Company expects to recognize a loss of approximately $50 million in the fourth quarter of 2004 associated with the redemption.
The Company received a subpoena from the U.S. Securities and Exchange Commission ("SEC") for certain documents related to the operations of its Capital Markets Intelligence ("CMI") business. The Company is cooperating fully with the SEC and has been informed that the inquiry should not be construed as an indication by the SEC or its staff that any violation of law has occurred. CMI is one of several companies providing market intelligence services. CMI collects stock ownership data solely as an appointed agent of its public company clients seeking a better understanding of their institutional shareholder base. In 2003, approximately $33 million of the financial group's CMI revenues were related to the identification of institutional investors for its clients.
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THE THOMSON CORPORATION CONSOLIDATED STATEMENT OF EARNINGS AND RETAINED EARNINGS (unaudited)
THE THOMSON CORPORATION CONSOLIDATED BALANCE SHEET
THE THOMSON CORPORATION CONSOLIDATED STATEMENT OF CASH FLOW (unaudited)