MANAGEMENT'S DISCUSSION AND ANALYSIS
(unless otherwise stated, all amounts are in US dollars)
OVERVIEW
We are a global leader in providing integrated information solutions to business
and professional customers. We serve customers in the following sectors: law,
tax, accounting, financial services, higher education, reference information,
corporate training and assessment, scientific research and healthcare. We
believe these sectors are fundamental to economic development globally and
consequently have potential for consistent long-term growth. We organize our
operations in four market groups that are structured on the basis of the
customers they serve:
o Thomson Legal and Regulatory,
o Thomson Learning,
o Thomson Financial, and
o Thomson Scientific and Healthcare.
We report the financial results of our four market groups together with those of
a corporate and other reporting category. Corporate and other includes
principally corporate costs, costs associated with our stock appreciation rights
and the results of Thomson Media, which was previously designated for sale but
subsequently retained.
SEASONALITY
Typically, a much greater portion of our operating profit and operating cash
flow arises 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 spread more evenly throughout the year. As a
result, our operating margins generally increase as the year progresses. For
these reasons, the performance of our business 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 results in the same
quarter for the previous year.
USE OF EBITDA, ADJUSTED OPERATING PROFIT AND ADJUSTED EARNINGS FROM CONTINUING
OPERATIONS
Earnings before interest, tax, depreciation, amortization and restructuring
charges ("EBITDA"), and operating profit before amortization and restructuring
charges ("adjusted operating profit"), are used by us to measure our operating
performance, including our ability to generate cash flow. Among other things,
EBITDA eliminates the differences that arise between businesses due to the
manner in which they were acquired, funded or recorded. In particular, EBITDA
excludes the effects of amortization of identifiable intangible assets and
goodwill, which is a non-cash charge arising from acquisitions accounted for
under the purchase method of accounting. Adjusted operating profit reflects
depreciation expense, but eliminates the effects of amortization of identifiable
intangible assets and goodwill and restructuring charges. Because we do not
consider these items to be operating costs, we exclude them from the measurement
of our operating performance. We also measure our earnings from continuing
operations to adjust for non-recurring items ("adjusted earnings from continuing
operations") to assist in comparing them from one period to another. EBITDA,
adjusted operating profit, adjusted earnings from
continuing operations and related measures do not have any standardized meaning
prescribed by generally accepted accounting principles ("GAAP") and therefore
are unlikely to be comparable with the calculation of similar measures for other
companies, and should not be viewed as alternatives to operating profit, cash
flow from operations, net income or other measures of financial performance
calculated in accordance with GAAP. EBITDA and adjusted operating profit are
included in our income statement, which allows you to reconcile them with
standard GAAP measures. We reconcile our adjusted earnings from continuing
operations to our earnings from continuing operations under GAAP in the
following discussion of results of operations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
CONSOLIDATED OPERATIONS
Our results from continuing operations exclude the results of our discontinued
newspaper operations, discussed under "Discontinued Operations" below. Our
results from ongoing businesses for each of our market groups exclude the
results of businesses sold or held for sale which do not qualify as discontinued
operations ("disposals"). The principal businesses included in disposals were
Jane's Information Group and various businesses in our financial group in 2001
and various businesses in our financial group in the three months ended March
31, 2002.
Our total revenues for the three months ended March 31, 2002 increased by 11% to
$1,662 million. Revenues from our ongoing businesses in the three months ended
March 31, 2002 increased by 13% to $1,658 million. All of our market groups,
except our financial group, experienced growth in their existing businesses,
while the Harcourt acquisition made a significant contribution to overall
growth. In the three months ended March 31, 2002, revenues from products and
services delivered electronically accounted for 61% of our revenues, which is
comparable to the first three months of 2001 but greater than the 54% for the
full year ended December 31, 2001. This percentage is generally higher for the
first three months of the year than for the full year primarily because of the
seasonality of our learning business. Customer buying patterns in our learning
business, which has a higher percentage of print-based revenues than our other
market groups, are concentrated in the second half of the year. Therefore, as
revenues in our learning business increase throughout the year, the percentage
of revenues from products and services delivered electronically would be
expected to decrease.
Our EBITDA in the three months ended March 31, 2002 was $228 million, compared
with $227 million in 2001, a margin of 13.7%, a decrease from 15.2% in 2001. Our
EBITDA from ongoing businesses in the three months ended March 31, 2002 was $229
million, compared to $228 million in 2001, a margin of 13.8%, a decrease from
15.6% in 2001. EBITDA was virtually unchanged as growth from existing businesses
was offset by higher expenses incurred in connection with our stock appreciation
rights reflecting an increase in the trading price of our common shares during
the period. Contributions from acquisitions were reduced by the seasonal loss
from the Harcourt academic businesses, as well as certain one-time integration
charges related to the Harcourt acquisition. The decrease in our margins was
primarily due to the increased expenses incurred in connection with our stock
appreciation rights.
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Our total adjusted operating profit in the three months ended March 31, 2002
decreased 7% to $109 million, a margin of 6.6%, a decrease from 7.8% in 2001.
Adjusted operating profit from ongoing businesses in the three months ended
March 31, 2002 decreased 7% to $111 million, a margin of 6.7%, a decrease from
8.1% in 2001. The decreases were primarily attributable to increased
depreciation expense and the increased expenses incurred in connection with our
stock appreciation rights.
Depreciation in the three months ended March 31, 2002 increased 8% to $119
million as a result of our recent acquisitions and increased capital
expenditures in 2001. Amortization in the three months ended March 31, 2002
decreased 35% to $66 million. The decrease was a result of the adoption of a new
accounting standard which requires that goodwill and identifiable intangible
assets with indefinite useful lives no longer be amortized. Therefore,
amortization of those balances is not reflected in the results for the three
months ended March 31, 2002, but is included in the results for 2001.
We incurred restructuring charges in the three months ended March 31, 2002 of $6
million, which related to strategic initiatives in our legal and regulatory
group and Thomson Media.
Our net gains on disposals of businesses and investments in the three months
ended March 31, 2002 was $3 million, compared to $273 million in the three
months ended March 31, 2001. The net gain in 2001 related primarily to the $307
million gain on the disposal of The Globe and Mail.
Our interest expense in the three months ended March 31, 2002 increased 57% to
$72 million. The increase reflects increased borrowings to finance our
acquisitions, in particular the acquisition of selected Harcourt businesses.
In the three months ended March 31, 2002, we recognized an income tax benefit of
$7 million, compared to an expense of $69 million in 2001. The income tax
expense recognized in 2001 included a $75 million charge related to the gain on
the disposal of The Globe and Mail.
Our loss attributable to common shares in the three months ended March 31, 2002
was $34 million, compared to earnings attributable to common shares of $167
million in 2001. Our loss from continuing operations in the three months ended
March 31, 2002 was $34 million, compared to earnings from continuing operations
of $151 million in 2001. These results are not directly comparable because of
the adoption of the new accounting standard related to goodwill and identifiable
intangible assets in 2002. If the new accounting standard had been in effect in
2001, earnings from continuing operations would have been $200 million for the
three months ended March 31, 2001. These results are still not comparable with
the results from the three months ended March 31, 2002, however, because of
certain material transactions that occurred in the first quarter of 2001.
The following table presents a summary of our (loss) earnings and our (loss)
earnings per common share from continuing operations, which excludes one-time
items from both periods and adjusts the 2001 results as if the new accounting
standard related to goodwill and identifiable intangible assets had been in
effect during that period.
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(LOSS) EARNINGS (LOSS) EARNINGS
PER COMMON SHARE
- ----------------------------------------------------------------- ------------------------ -----------------------
(unaudited)
(in millions of US dollars except per common share amounts) 2002 2001 2002 2001
- ----------------------------------------------------------------- ------------- ---------- ----------- -----------
(Loss) earnings from continuing operations (34) 151 ($0.05) $0.24
Effect of new accounting standard, net of tax -- 49 -- 0.08
- ----------------------------------------------------------------- ------------- ---------- ----------- -----------
Adjusted (loss) earnings from continuing operations after new
accounting standard (34) 200 ($0.05) $0.32
Adjust for one-time items:
Net gains on disposals of businesses and investments (3) (273) (0.01) (0.44)
Restructuring charges 6 5 0.01 0.01
Tax on above items (1) 75 -- 0.12
- ----------------------------------------------------------------- ------------- ---------- ----------- -----------
Adjusted (loss) earnings from continuing operations (32) 7 ($0.05) $0.01
- ----------------------------------------------------------------- ------------- ---------- ----------- -----------
On a comparable basis, the adjusted loss from continuing operations in the three
months ended March 31, 2002 was $32 million, compared to adjusted earnings from
continuing operations of $7 million for 2001. This change primarily reflects
higher interest and amortization costs as well as one-time integration costs
from the acquisition of the Harcourt businesses. Increased expenses in
connection with our stock appreciation rights plan arising from an increase in
our common share price during the period also contributed to the adjusted loss
from continuing operations.
Our capital expenditures in the three months ended March 31, 2002 decreased 22%
to $111 million. Higher capital expenditures in 2001 reflected certain one-time
expenditures in our legal and regulatory and financial groups.
THOMSON LEGAL AND REGULATORY
Revenues from our ongoing businesses for the three months ended March 31, 2002
increased 7% to $665 million. The increase in revenues was primarily
attributable to increased sales of Westlaw, which grew by 8% in the United
States, improved customer retention rates within certain tax and accounting
businesses and the contributions from recent acquisitions. These increases were
partially offset by adverse currency translation effects and reduced demand for
trademark searches as a result of the continuing weak economic climate.
EBITDA from our ongoing businesses in the three months ended March 31, 2002
increased 7% to $138 million and our adjusted operating profit from ongoing
businesses in the three months ended March 31, 2002 increased 9% to $99 million.
Our EBITDA margin in the three months ended March 31, 2002 was 20.8% compared to
20.7% in 2001 and our adjusted operating profit margin in the three months ended
March 31, 2002 increased to 14.9% compared to 14.6% in 2001. These margin
improvements were the result of increased revenues and effective cost-control
efforts across the group.
Our capital expenditures in the three months ended March 31, 2002 decreased 46%
to $26 million. Higher capital expenditures in 2001 reflected one-time
expenditures on a new enterprise resource planning system at West.
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THOMSON LEARNING
Revenues from our ongoing businesses in the three months ended March 31, 2002
increased 65% to $397 million. The increase primarily reflected revenues from
the businesses of Harcourt which were acquired in July 2001 and therefore not
included in our first quarter results in 2001. Revenues from our existing
businesses also grew reflecting higher revenues in our academic publishing
business and our international operations.
EBITDA from our ongoing businesses in the three months ended March 31, 2002 was
a loss of $12 million, compared to a loss of $10 million in 2001 and our
adjusted operating profit from ongoing businesses for the three months ended
March 31, 2002 was a loss of $41 million, compared to a loss of $35 million in
2001. Our learning group typically records a loss in the first quarter of each
year due to the seasonal nature of the academic publishing business. The
acquisition of the Harcourt businesses significantly increased the scale of our
academic publishing business, and accordingly, increased the first quarter loss.
In addition, the first quarter loss was increased by one-time integration costs
related to the Harcourt acquisition.
Our capital expenditures in the three months ended March 31, 2002 increased 50%
to $42 million. This increase was a result of spending related to our textbook
distribution center and additional spending within the acquired Harcourt
businesses.
THOMSON FINANCIAL
Revenues from our ongoing businesses in the three months ended March 31, 2002
decreased 2% to $388 million. The decrease in revenues was attributable to the
continued slowdown in the global financial markets and merger and acquisition
activity, which resulted in lower revenues in our investment banking and sales
and trading businesses.
EBITDA from our ongoing businesses in the three months ended March 31, 2002
increased 2% to $96 million and our adjusted operating profit from ongoing
businesses in the three months ended March 31, 2002 was $57 million, unchanged
from 2001. Our EBITDA margin in the three months ended March 31, 2002 increased
to 24.7% compared to 23.7% in 2001 and our adjusted operating profit margin in
the three months ended March 31, 2002 increased to 14.7% compared to 14.4% in
2001. These margin improvements reflect benefits from the ongoing integration of
Primark and Carson which were acquired in 2000.
Our capital expenditures in the three months ended March 31, 2002 decreased 40%
to $36 million. Higher capital expenditures in 2001 included one-time
expenditures on the group's new headquarters in New York.
THOMSON SCIENTIFIC AND HEALTHCARE
Revenues from our ongoing businesses for the three months ended March 31, 2002
increased 8% to $169 million. Revenue growth reflected contribution from
Gardiner-Caldwell, which was acquired late in 2001, increased drug information
subscriptions within Micromedex, increased patent subscriptions at Derwent World
Patent Index and increased sales of citation, patent and genetic information
through ISI Web of Science. Revenue growth was offset partially by lower
5
sales of the Physicians' Desk Reference, as well as lower advertising revenues
from our healthcare magazine business.
EBITDA from our ongoing businesses in the three months ended March 31, 2002
increased 18% to $33 million and our adjusted operating profit from ongoing
businesses in the three months ended March 31, 2002 increased 29% to $27
million. Our EBITDA margin in the three months ended March 31, 2002 increased to
19.5% compared to 17.8% in 2001 and our adjusted operating profit margin in the
three months ended March 31, 2002 increased to 16.0% compared to 13.4% in 2001.
The increases in EBITDA and adjusted operating profit and corresponding
improvements in related margins were attributable to higher revenues as well as
benefits arising from restructuring efforts undertaken in 2001.
Our capital expenditures in the three months ended March 31, 2002 were $6
million, compared to $4 million in 2001.
CORPORATE AND OTHER
Revenues in the three months ended March 31, 2002, which relate solely to
Thomson Media, decreased 11% to $48 million primarily as a result of reduced
advertising revenue across our publications.
EBITDA in the three months ended March 31, 2002 was a loss of $26 million,
compared to a loss of $13 million in 2001 and our adjusted operating profit in
the three months ended March 31, 2002 was a loss of $31 million, compared to a
loss of $15 million in 2001. These decreases were primarily attributable to
increased expense incurred in connection with our stock appreciation rights
resulting from the increase in the trading price of our common shares during the
period.
DISCONTINUED OPERATIONS
In February 2000, we announced our intention to sell our newspaper interests.
The primary activities of this group were the publishing of newspapers and other
advertising and specialty publications in the United States and Canada. We
completed the disposition of our newspaper group during 2001. Accordingly, our
results for the three months ended March 31, 2002 do not contain discontinued
operations.
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL POSITION
Our total assets at March 31, 2002 were $17,966 million, a decrease of 2% from
December 31, 2001. The decrease in assets resulted from a reduction in accounts
receivable of $307 million, reflecting the seasonality of our businesses,
depreciation and amortization, adverse currency translation effects and the
reduction of goodwill and identifiable intangible assets resulting from a
transitional impairment charge of $76 million, before tax, in connection with
the adoption of the new accounting standard related to goodwill and identifiable
intangible assets.
6
Our total assets at March 31, 2002 were distributed across our market groups and
corporate and other as follows.
TOTAL ASSETS PERCENTAGE OF TOTAL ASSETS
------------- --------------------------
(in millions)
Thomson Legal and Regulatory $ 7,085 39%
Thomson Learning 5,030 28
Thomson Financial 3,196 18
Thomson Scientific and Healthcare 851 5
Corporate and other 1,804 10
--------- ----
$ 17,966 100%
========= ====
Our total debt at March 31, 2002 was $4,875 million, compared to $4,744 million
at December 31, 2001. Total debt consists of short-term indebtedness, the
current portion of long-term debt and long-term debt. After adding $236 million
for the total liability for related currency swaps, our total debt was $5,111
million.
After deducting cash and cash equivalents of $577 million, our total net debt
was $4,534 million. At the same date, total shareholders' equity, including $442
million of preference share capital redeemable only at our option, was $7,994
million. Our ratio of net debt to shareholders' equity at March 31, 2002 was
0.57:1. This compares to a ratio at December 31, 2001 of 0.54:1. The change in
the ratio was due to the increase in net debt and the reduction in shareholders'
equity reflecting the first quarter net loss, changes in currency exchange
rates, common dividend payments and the adjustment to opening retained earnings
from the recognition of a transitional impairment charge.
CASH FLOW
Our principal sources of liquidity are cash provided by our operations,
borrowings under our revolving bank credit facilities and our commercial paper
program, the issuance of public debt and the reinvestment of dividends primarily
by The Woodbridge Company Limited, our principal shareholder. Our principal uses
of cash have been to finance working capital, debt servicing costs, capital
expenditures, acquisitions and dividend payments.
Cash provided by our operating activities in the three months ended March 31,
2002 was $163 million compared to $179 million in the three months ended March
31, 2001. The decrease was primarily attributable to increased interest costs
related to higher borrowings.
Cash used in our investing activities in the three months ended March 31, 2002
was $178 million, compared to a net use of cash of $303 million in the three
months ended March 31, 2001. The decrease was primarily attributable to our
lower acquisition activity and lower capital expenditures in the first quarter
of 2002 compared to the first quarter of 2001.
Cash provided by our financing activities in the three months ended March 31,
2002 was $62 million, compared to a use of cash of $6 million in the three
months ended March 31, 2001. The increase reflects lower repayments of debt in
the first quarter of 2002 compared to the first quarter of 2001.
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NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, we adopted the Canadian Institute of Chartered
Accountants ("CICA") Handbook Section 3062, "Goodwill and Other Intangible
Assets," which requires that goodwill and identifiable intangible assets with
indefinite lives no longer be amortized. Instead, those assets are subject to
annual impairment tests. We have recently completed our initial impairment
review and have recognized an impairment charge in the first quarter of 2002 of
$67 million, after tax. In accordance with the requirements of the new handbook
section, the transitional impairment charge was recorded to the opening balance
of retained earnings in our consolidated balance sheet. We anticipate recording
an additional impairment charge of up to $100 million in the second quarter of
2002 in connection with the application of the new rule by our equity method
investees which will also be reported as a reduction to the opening balance of
our retained earnings.
Effective January 1, 2002, we adopted CICA Handbook Section 3870, "Stock-Based
Compensation and Other Stock-Based Payments," which requires that if an entity
does not use the fair value-based method of accounting for non-direct
stock-based transactions with employees, the entity must disclose pro forma net
income and earnings per share as if the fair value-based method was used.
Additionally, the section provides specific rules for accounting for stock
appreciation rights and stock-based payments to employees, as well as
non-employees. We do not use the fair value-based method and, therefore, will
disclose the required pro forma information in the notes to our accompanying
consolidated financial statements.
OUTLOOK
Our long-term financial targets are to achieve average annual revenue growth of
between 7% to 9% and to expand our EBITDA margin. We expect that for 2002 our
revenue growth and our EBITDA margin, excluding one-time costs we will incur in
connection with the integration of the Harcourt businesses, will meet these
targets.
CERTAIN INFORMATION IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS, PARTICULARLY
UNDER THE HEADING "OUTLOOK," ARE FORWARD-LOOKING STATEMENTS THAT ARE NOT
HISTORICAL FACTS BUT REFLECT OUR CURRENT EXPECTATION REGARDING FUTURE RESULTS.
THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A NUMBER OF RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS OR EVENTS TO DIFFER MATERIALLY
FROM CURRENT EXPECTATIONS. SOME OF THE FACTORS THAT COULD CAUSE ACTUAL RESULTS
OR EVENTS TO DIFFER MATERIALLY FROM CURRENT EXPECTATIONS ARE: ACTIONS OF OUR
COMPETITORS; FAILURE OF OUR SIGNIFICANT INVESTMENTS IN TECHNOLOGY TO INCREASE
OUR REVENUES OR DECREASE OUR OPERATING COSTS; FAILURE TO FULLY DERIVE
ANTICIPATED BENEFITS FROM OUR ACQUISITIONS; FAILURE TO DEVELOP ADDITIONAL
PRODUCTS AND SERVICES TO MEET OUR CUSTOMERS' NEEDS, ATTRACT NEW CUSTOMERS OR
EXPAND INTO NEW GEOGRAPHIC MARKETS; FAILURE TO MEET THE SPECIAL CHALLENGES
INVOLVED IN EXPANSION OF OUR OPERATIONS OUTSIDE NORTH AMERICA; FAILURE TO
RECRUIT AND RETAIN HIGH QUALITY MANAGEMENT AND KEY EMPLOYEES; CONSOLIDATION OF
OUR CUSTOMERS; INCREASED SELF-SUFFICIENCY OF OUR CUSTOMERS; INCREASED
ACCESSIBILITY TO FREE OR RELATIVELY INEXPENSIVE INFORMATION SOURCES; FAILURE TO
MAINTAIN THE AVAILABILITY OF INFORMATION OBTAINED THROUGH LICENSING ARRANGEMENTS
AND CHANGES IN THE TERMS OF OUR LICENSING ARRANGEMENTS; CHANGES IN THE GENERAL
ECONOMY; INADEQUATE PROTECTION OF OUR INTELLECTUAL PROPERTY RIGHTS; AN INCREASE
IN OUR EFFECTIVE INCOME TAX RATE; IMPAIRMENT OF GOODWILL AND IDENTIFIABLE
INTANGIBLE ASSETS; AND FAILURES OR DISRUPTIONS OF OUR ELECTRONIC DELIVERY
SYSTEMS OR THE INTERNET. ADDITIONAL FACTORS ARE DISCUSSED IN OUR MATERIALS FILED
WITH THE SECURITIES REGULATORY AUTHORITIES IN CANADA AND THE UNITED STATES FROM
TIME TO TIME. WE DISCLAIM ANY INTENTION OR OBLIGATION TO UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.
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CONSOLIDATED STATEMENT OF EARNINGS AND RETAINED EARNINGS (unaudited)
THREE MONTHS ENDED MARCH 31,
- -------------------------------------------------------------------------------------- -----------------------------------
(millions of US dollars, except per common share amounts) 2002 2001
- -------------------------------------------------------------------------------------- ----------------- -----------------
Revenues 1,662 1,497
Cost of sales, selling, marketing, general and administrative expenses (1,434) (1,270)
- -------------------------------------------------------------------------------------- ----------------- -----------------
Earnings before interest, tax, depreciation, amortization and restructuring charges 228 227
Depreciation (119) (110)
- -------------------------------------------------------------------------------------- ----------------- -----------------
Operating profit before amortization and restructuring charges 109 117
Amortization (note 4) (66) (102)
Restructuring charges (note 7) (6) (5)
- -------------------------------------------------------------------------------------- ----------------- -----------------
Operating profit after amortization and restructuring charges 37 10
Net gains on disposals of businesses and investments (note 14) 3 273
Net interest expense and other financing costs (72) (46)
Income taxes 7 (69)
Equity in net losses of associates, net of tax (6) (10)
- -------------------------------------------------------------------------------------- ----------------- -----------------
(Loss) earnings before dividends declared on preference shares (31) 158
Dividends declared on preference shares (3) (7)
- -------------------------------------------------------------------------------------- ----------------- -----------------
(Loss) earnings from continuing operations (34) 151
Earnings from discontinued operations (note 11) -- 16
- -------------------------------------------------------------------------------------- ----------------- -----------------
(Loss) earnings attributable to common shares (34) 167
Retained earnings at beginning of period 6,253 5,943
Effect of adoption of accounting standard, net of tax (note 4) (67) --
Dividends declared on common shares (110) (110)
- -------------------------------------------------------------------------------------- ----------------- -----------------
Retained earnings at end of period 6,042 6,000
- -------------------------------------------------------------------------------------- ----------------- -----------------
Basic and diluted (loss) earnings per common share (note 5):
From continuing operations $ (0.05) $ 0.24
From discontinued operations -- 0.03
- -------------------------------------------------------------------------------------- ----------------- -----------------
Basic and diluted (loss) earnings per common share $ (0.05) $ 0.27
- -------------------------------------------------------------------------------------- ----------------- -----------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
9
CONSOLIDATED BALANCE SHEET
MARCH 31, DECEMBER 31,
(millions of US dollars ) 2002 2001
- -------------------------------------------------------------------------------------- ----------------- -----------------
(unaudited)
ASSETS
Cash and cash equivalents 577 532
Accounts receivable, net of allowances 1,355 1,662
Inventories 266 256
Prepaid expenses and other current assets 322 313
- -------------------------------------------------------------------------------------- ----------------- -----------------
Current assets 2,520 2,763
Property and equipment 1,539 1,552
Identifiable intangible assets (notes 4 and 8) 4,750 4,921
Goodwill (notes 4 and 9) 7,897 7,903
Other non-current assets (note 14) 1,260 1,263
- -------------------------------------------------------------------------------------- ----------------- -----------------
Total assets 17,966 18,402
- -------------------------------------------------------------------------------------- ----------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Short-term indebtedness 582 620
Accounts payable and accruals 1,552 1,855
Deferred revenue 928 882
Current portion of long-term debt 594 473
- -------------------------------------------------------------------------------------- ----------------- -----------------
Current liabilities 3,656 3,830
Long-term debt 3,699 3,651
Other non-current liabilities 1,207 1,262
Deferred income taxes 1,410 1,439
- -------------------------------------------------------------------------------------- ----------------- -----------------
Total liabilities 9,972 10,182
- -------------------------------------------------------------------------------------- ----------------- -----------------
SHAREHOLDERS' EQUITY
Share capital 2,238 2,198
Cumulative translation adjustment (286) (231)
Retained earnings 6,042 6,253
- -------------------------------------------------------------------------------------- ----------------- -----------------
Total shareholders' equity 7,994 8,220
- -------------------------------------------------------------------------------------- ----------------- -----------------
Total liabilities and shareholders' equity 17,966 18,402
- -------------------------------------------------------------------------------------- ----------------- -----------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
10
CONSOLIDATED STATEMENT OF CASH FLOW (unaudited)
THREE MONTHS ENDED MARCH 31,
- -------------------------------------------------------------------------------------- -----------------------------------
(millions of US dollars ) 2002 2001
- -------------------------------------------------------------------------------------- ----------------- -----------------
CASH PROVIDED BY (USED IN):
Operating activities
(Loss) earnings from continuing operations (34) 151
Add back (deduct) items not involving cash:
Amortization of development costs and capitalized software 12 21
Depreciation 119 110
Amortization (note 4) 66 102
Net gains on disposals of businesses and investments (note 14) (3) (273)
Deferred income taxes (20) 48
Equity in net losses of associates, net of tax 6 10
Other, net 21 19
Changes in working capital and other items (4) (11)
Cash provided by operating activities - discontinued operations -- 2
- -------------------------------------------------------------------------------------- ----------------- -----------------
Net cash provided by operating activities 163 179
- -------------------------------------------------------------------------------------- ----------------- -----------------
INVESTING ACTIVITIES
Acquisitions of businesses and investments (note 6) (11) (87)
Proceeds from disposals of businesses and investments -- 2
Additions to property and equipment (111) (143)
Other investing activities, net (56) (101)
Proceeds from disposal of newspaper businesses (note 11) -- 26
- -------------------------------------------------------------------------------------- ----------------- -----------------
Net cash used in investing activities (178) (303)
- -------------------------------------------------------------------------------------- ----------------- -----------------
FINANCING ACTIVITIES
Proceeds from debt 400 416
Net repayments of short-term loan facilities (268) (352)
Dividends paid on common shares (70) (70)
- -------------------------------------------------------------------------------------- ----------------- -----------------
Net cash provided by (used in) financing activities 62 (6)
- -------------------------------------------------------------------------------------- ----------------- -----------------
47 (130)
Translation adjustments (2) (5)
- -------------------------------------------------------------------------------------- ----------------- -----------------
Increase (decrease) in cash and cash equivalents 45 (135)
Cash and cash equivalents at beginning of period 532 337
- -------------------------------------------------------------------------------------- ----------------- -----------------
Cash and cash equivalents at end of period 577 202
- -------------------------------------------------------------------------------------- ----------------- -----------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
11
BUSINESS SEGMENT INFORMATION (unaudited)
CONTINUING OPERATIONS
THREE MONTHS ENDED MARCH 31,
- -------------------------------------------------------------------------------------- -----------------------------------
(millions of US dollars) 2002 2001
- -------------------------------------------------------------------------------------- ----------------- -----------------
Revenues:
Legal and Regulatory 665 623
Learning 397 241
Financial 388 396
Scientific and Healthcare 169 157
Corporate and other 1 48 54
Intergroup (9) (9)
- -------------------------------------------------------------------------------------- ----------------- -----------------
Total ongoing operations 1,658 1,462
Disposals 2 4 35
- -------------------------------------------------------------------------------------- ----------------- -----------------
Total revenues 1,662 1,497
- -------------------------------------------------------------------------------------- ----------------- -----------------
EBITDA: 3
Legal and Regulatory 138 129
Learning (12) (10)
Financial 96 94
Scientific and Healthcare 33 28
Corporate and other 1 (26) (13)
- -------------------------------------------------------------------------------------- ----------------- -----------------
Total ongoing operations 229 228
Disposals 2 (1) (1)
- -------------------------------------------------------------------------------------- ----------------- -----------------
Total EBITDA 228 227
- -------------------------------------------------------------------------------------- ----------------- -----------------
Adjusted operating profit: 4
Legal and Regulatory 99 91
Learning (41) (35)
Financial 57 57
Scientific and Healthcare 27 21
Corporate and other 1 (31) (15)
- -------------------------------------------------------------------------------------- ----------------- -----------------
Total ongoing operations 111 119
Disposals 2 (2) (2)
- -------------------------------------------------------------------------------------- ----------------- -----------------
Total adjusted operating profit 109 117
- -------------------------------------------------------------------------------------- ----------------- -----------------
1 Corporate and other includes the results of Thomson Media, a non-reportable
segment, as well as corporate costs and costs associated with the Company's
stock appreciation rights. Results of Thomson Media include revenues of $48
million (2001 - $54 million); EBITDA of $(1) million (2001 - $(2) million);
and adjusted operating profit of $(3) million (2001 - $(4) million).
2 Disposals consist of the results of businesses sold or held for sale, which
do not qualify as discontinued operations.
3 EBITDA is earnings before interest, tax, depreciation, amortization and
restructuring charges.
4 Adjusted operating profit excludes amortization and restructuring charges.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(unless otherwise stated, all amounts are in millions of US dollars)
NOTE 1: CONSOLIDATED FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements of The Thomson
Corporation ("Thomson" or the "Company") include all controlled companies and
the proportionate share in joint venture interests, and are prepared in
accordance with accounting principles generally accepted in Canada. 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 generally
accepted accounting principles in Canada 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, 2001, as set out in the 2001 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 adoption of the
new accounting standards on goodwill and other intangible assets discussed in
note 4 and the new standard discussed below, 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, 2001.
Effective January 1, 2002, the Company adopted the provisions of CICA Handbook
Section 3870, "Stock-Based Compensation and Other Stock-Based Payments" ("CICA
3870"). This handbook section requires that if an entity does not use the fair
value-based method of accounting for non-direct stock-based transactions with
employees, the entity must disclose pro forma net income and earnings per share
as if the fair value-based method of accounting applied. Additionally, this
section provides specific rules for accounting for stock appreciation rights and
stock-based payments to employees, as well as non-employees. Thomson has
historically accounted for its stock appreciation rights and stock based
payments as outlined in the provisions of CICA 3870. As such, this standard did
not change the Company's method of accounting, nor was there any impact on its
financial position or results of operations. As Thomson does not use the fair
value-based method, the required pro forma information has been disclosed in
note 12.
Where necessary, certain amounts for 2001 have been reclassified to conform to
the current year's presentation.
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NOTE 3: SEASONALITY
Typically, a much greater portion of the Company's operating profit and
operating cash flows arises 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 spread more evenly throughout
the year. As a result, operating margins generally increase as the year
progresses. For these reasons, the performance of the Company 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 results
in the same quarter for the previous year.
NOTE 4: EFFECT OF ADOPTION OF ACCOUNTING STANDARDS ON GOODWILL AND OTHER
INTANGIBLE ASSETS
In July 2001, the CICA issued Handbook Section 1581, "Business Combinations"
("CICA 1581") and CICA Handbook Section 3062, "Goodwill and Other Intangible
Assets" ("CICA 3062"). CICA 1581 requires the use of the purchase method of
accounting for all business combinations, and also refines the definition of
intangible assets acquired in a business combination. As a result, the purchase
price allocation of future business combinations may be different than the
allocation that would have resulted under the old rules. The Company has adopted
CICA 1581 for all business combinations that have occurred subsequent to June
30, 2001.
CICA 3062, effective January 1, 2002, eliminates the amortization of goodwill
and identifiable intangible assets with indefinite useful lives. Such assets,
however, will be subject to tests for impairment, with such tests based upon
comparing carrying values to their fair values at least annually or when certain
conditions arise. This fair value-based approach to impairment differs from the
previous approach, under which impairment was determined by comparing net
carrying amounts to net recoverable amounts. The transitional provisions of CICA
3062 require that for business combinations that occurred before July 1, 2001,
the carrying amount of acquired intangible assets that do not meet the criteria
of CICA 1581 be reclassified to goodwill. Accordingly, in connection with the
adoption of CICA 3062, the Company has reclassified $66 million of intangible
assets, previously identified as workforce, to goodwill (see note 9).
The transitional provisions of CICA 3062 also require that the Company perform
an initial impairment test as of January 1, 2002. As a result of this
transitional impairment test and the adoption provisions of this new accounting
standard, the Company recorded reductions in the carrying amounts of
identifiable intangible assets with indefinite useful lives of $26 million and
goodwill of $50 million related to a unit in its scientific and healthcare
segment. This non-cash charge, which was $67 million after taxes, was applied to
the opening balance of retained earnings. The Company anticipates recording an
additional transitional impairment charge to opening retained earnings of up to
$100 million in the second quarter of 2002 in connection with the application of
CICA 3062 by its equity method investees.
Fair value was determined for the Company's reporting units based on a
combination of various techniques, including the present value of future cash
flows and earnings multiples of competitors. Fair value for identifiable
intangible assets with indefinite useful lives was determined using an income
approach, the relief from royalties method.
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In accordance with CICA 3062, effective January 1, 2002, Thomson no longer
amortizes goodwill or identifiable intangible assets with indefinite useful
lives and reevaluated the remaining useful lives of identifiable intangible
assets with finite lives. The following presents the pro forma effect of CICA
3062 as if it had been adopted as of January 1, 2001.
FOR THE THREE MONTHS ENDED MARCH 31, 2001
---------------------------------------------------
EARNINGS FROM BASIC AND DILUTED EARNINGS
CONTINUING FROM CONTINUING OPERATIONS
OPERATIONS PER COMMON SHARE
- ------------------------------------------------------------------ --------------------- -----------------------------
Reported amounts 151 $0.24
Adjust:
Amortization 47 0.08
Tax effect of amortization reduction (3) (0.01)
Reduction in equity in net losses of associates, net of tax 5 0.01
- ------------------------------------------------------------------ --------------------- -----------------------------
Adjusted amounts 200 $0.32
- ------------------------------------------------------------------ --------------------- -----------------------------
NOTE 5: EARNINGS PER COMMON SHARE
Basic earnings per common share are calculated using 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 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.
FOR THE THREE MONTHS ENDED MARCH 31,
- -------------------------------------------------------------------- -----------------------------------------------
2002 2001
- -------------------------------------------------------------------- ------------------------- ---------------------
Basic 630,987,019 625,970,300
Effect of stock and other incentive plans -- 501,576
- -------------------------------------------------------------------- ------------------------- ---------------------
Diluted 630,987,019 626,471,876
- -------------------------------------------------------------------- ------------------------- ---------------------
For the period ended March 31, 2002, approximately 600,000 common shares
attributable to the assumed exercise of outstanding options were excluded from
the calculation of diluted earnings per share because the effect was
antidilutive.
As of May 1, 2002, 632,113,974 common shares were outstanding, as well as
options to purchase 7,137,013 common shares under the Thomson stock incentive
plan.
NOTE 6: ACQUISITIONS OF BUSINESSES AND INVESTMENTS
During the quarter ended March 31, 2002, businesses and investments were
acquired for an aggregate cash consideration of $11 million (quarter ended March
31, 2001 - $87 million). This amount includes the acquisition of three
businesses, primarily within the learning segment,
15
totaling $8 million and investments in businesses totaling $3 million. Goodwill
and identifiable intangible assets acquired with businesses purchased during the
period ended March 31, 2002 was $7 million.
All acquisitions of businesses 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.
In January 2001, as a consequence of a non-cash asset exchange, Thomson became
the holder of a 20% investment in Bell Globemedia Inc. ("BGM"), a Canadian
multimedia company. The investment was initially recorded at $431 million. This
transaction is discussed further in note 14.
As of March 31, 2002, the balance of the reserves related to business
acquisitions consummated during 2001 totaled $42 million. Additional reserves
recorded in connection with businesses acquired during the period ended March
31, 2002 were not material. The following table presents the activity in, and
the balances of the acquisition reserve accounts related to 2001 acquisitions
included within "Accounts payable and accruals" and "Other non-current
liabilities" in the consolidated balance sheet from January 1, 2002 through
March 31, 2002.
AS AT DECEMBER 31, AS AT MARCH 31,
TYPE OF COST 2001 UTILIZATION 2002
- ---------------------------------------------------- ------------------- ------------------ ----------------------
Severance and other employee-related costs 28 (8) 20
Lease cancellation and idle facility costs 18 -- 18
Other exit costs 5 (1) 4
- ---------------------------------------------------- ------------------- ----------------- ----------------------
Total 51 (9) 42
- ---------------------------------------------------- ------------------- ----------------- ----------------------
NOTE 7: RESTRUCTURING CHARGES
During 2002 and 2001, management undertook restructuring activities representing
the completion of prior year plans and the initiation of new plans within the
framework of original strategic initiatives of Thomson to improve operational
and administrative efficiencies. Such restructuring activities are ongoing and
additional charges will be incurred in the current year. The following table
presents an analysis of the total charges incurred by group.
FOR THE THREE MONTHS ENDED MARCH 31,
- ---------------------------------------------------------------------- ---------------------------------------------
2002 2001
- ---------------------------------------------------------------------- ---------------------- ----------------------
Legal and Regulatory 4 5
Corporate and other 2 --
- ---------------------------------------------------------------------- ---------------------- ----------------------
Total 6 5
- ---------------------------------------------------------------------- ---------------------- ----------------------
The following table presents the activity and balances of the restructuring
liability account, included in "Accounts payable and accruals" and "Other
non-current liabilities" in the interim consolidated balance sheet, as at and
for the three months ended March 31, 2002.
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AS AT DECEMBER 31, 2002 ACTIVITY AS AT MARCH 31,
----------------------------
TYPE OF COST 2001 CHARGES UTILIZATION 2002
- ------------------------------------ ------------------- --------------- ----------------- ----------------------
Severance 11 6 (6) 11
Contract cancellation costs 12 -- (2) 10
Other 4 -- (1) 3
- ------------------------------------ ------------------- --------------- ----------------- ----------------------
Total 27 6 (9) 24
- ------------------------------------ ------------------- --------------- ----------------- ----------------------
NOTE 8: IDENTIFIABLE INTANGIBLE ASSETS
The following table presents the detail of identifiable intangible assets for
the periods ended March 31, 2002 and December 31, 2001.
- --------------------------------------------- ---------------------- ------------------------ ------------------------
AS AT MARCH 31, 2002 GROSS IDENTIFIABLE ACCUMULATED NET IDENTIFIABLE
INTANGIBLE ASSETS AMORTIZATION INTANGIBLE ASSETS
- --------------------------------------------- ---------------------- ------------------------ ------------------------
Finite useful lives:
Trade names 195 (36) 159
Customer relationships 1,614 (322) 1,292
Databases and content 1,101 (221) 880
Publishing rights 1,724 (416) 1,308
Other 136 (49) 87
- --------------------------------------------- ---------------------- ------------------------ ------------------------
4,770 (1,044) 3,726
Indefinite useful lives:
Trade names 1,192 (168) 1,024
- --------------------------------------------- ---------------------- ------------------------ ------------------------
5,962 (1,212) 4,750
- --------------------------------------------- ---------------------- ------------------------ ------------------------
- --------------------------------------------- ---------------------- ------------------------ ------------------------
AS AT DECEMBER 31, 2001 GROSS IDENTIFIABLE ACCUMULATED NET IDENTIFIABLE
INTANGIBLE ASSETS AMORTIZATION INTANGIBLE ASSETS
- --------------------------------------------- ---------------------- ------------------------ ------------------------
Finite useful lives:
Trade names 195 (33) 162
Customer relationships 1,615 (299) 1,316
Databases and content 1,100 (200) 900
Publishing rights 1,732 (401) 1,331
Other 219 (59) 160
- --------------------------------------------- ---------------------- ------------------------ ------------------------
4,861 (992) 3,869
Indefinite useful lives:
Trade names 1,220 (168) 1,052
- --------------------------------------------- ---------------------- ------------------------ ------------------------
6,081 (1,160) 4,921
- --------------------------------------------- ---------------------- ------------------------ ------------------------
As at March 31, 2002, the weighted average amortization life based upon the
gross balance of the identifiable intangible assets with finite useful lives is
18 years.
Publishing rights relate to certain historical acquisitions and are comprised of
the cumulative value of trade names, imprints and titles, databases and other
intangible assets. These intangible assets are amortized over a weighted average
useful life, which approximates 30 years.
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NOTE 9: GOODWILL
The following table presents net goodwill by business segment for the period
ended March 31, 2002.
- ------------------------------------ ------------ ------------- ------------- --------------- ------------ -----------
LEGAL AND LEARNING FINANCIAL SCIENTIFIC AND CORPORATE TOTAL
REGULATORY HEALTHCARE AND OTHER
- ------------------------------------ ------------ ------------- ------------- --------------- ------------ -----------
Balance at December 31, 2001 3,078 2,900 1,557 304 64 7,903
Transfer assembled workforce 57 9 -- -- -- 66
Transitional impairment -- -- -- (50) -- (50)
Translation and other, net (20) 1 (3) -- -- (22)
- ------------------------------------ ------------ ------------- ------------- --------------- ------------ -----------
Balance at March 31, 2002 3,115 2,910 1,554 254 64 7,897
- ------------------------------------ ------------ ------------- ------------- --------------- ------------ -----------
NOTE 10: FINANCIAL INSTRUMENTS
LONG-TERM DEBT
In January 2002, Thomson issued $400 million US dollar denominated unsecured
notes due February 1, 2008 bearing an annual interest rate of 5.75%, payable
semi-annually. The net proceeds of $397 million were used principally to repay
existing indebtedness.
NOTE 11: DISCONTINUED OPERATIONS
In February 2000, Thomson announced its intention to sell the newspaper
interests of Thomson Newspapers ("TN"). The primary activities of TN were the
publishing of daily and non-daily newspapers, and other advertising and
specialty publications in the US and Canada. During 2001 and 2000, Thomson sold
all properties that had been identified for sale. During the three-month period
ended March 31, 2001, one publication was sold in Canada for proceeds of $26
million, resulting in a net gain of $10 million.
The results, cash flows, and assets and liabilities of TN have been accounted
for as a discontinued operation in the 2001 interim consolidated financial
statements.
The earnings from discontinued operations for the period ended March 31, 2001
are summarized below.
THREE MONTHS ENDED MARCH 31, 2001
- ---------------------------------------------------------------------------- ----------------------------------------
Revenues from discontinued operations 46
- ---------------------------------------------------------------------------- ----------------------------------------
Earnings from operations before income taxes 9
Income taxes (3)
- ---------------------------------------------------------------------------- ----------------------------------------
Earnings from operations 6
- ---------------------------------------------------------------------------- ----------------------------------------
Gain on sale of discontinued operations 15
Tax on gain (5)
- ---------------------------------------------------------------------------- ----------------------------------------
Net gain on sale of discontinued operations 10
- ---------------------------------------------------------------------------- ----------------------------------------
Earnings from discontinued operations 16
- ---------------------------------------------------------------------------- ----------------------------------------
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NOTE 12: STOCK-BASED COMPENSATION
Effective January 1, 2002, the Company adopted CICA 3870. As permitted by CICA
3870, the Company has continued to use the intrinsic-value based method to
account for its stock incentive plan and therefore no compensation expense has
been recognized under the plan.
Below is a summary of activity in the stock incentive plan since January 1,
2002.
NUMBER OF SHARES CANADIAN $ WEIGHTED-AVERAGE
EXERCISE PRICE
- ------------------------------------------------------ -------------------------- ----------------------------------
Granted 20,000 48.55
Exercised (9,800) 41.00
The options granted during the period vest over four years, with a maximum term
of ten years from the date of grant.
If compensation cost had been determined based on the fair value-based method of
accounting for the stock incentive plan, the Company's loss from continuing
operations and loss per common share from continuing operations for the three
months ended March 31, 2002 would have been unchanged. The pro forma calculation
does not include the effect of awards granted before January 1, 2002.
Using the Black-Scholes option pricing model the weighted average fair value of
options granted at the date of grant was estimated to be Canadian $13.38 for the
period. The Black-Scholes model was developed for use in estimating the fair
value of traded options that have no vesting restrictions. In addition, such
models require the use of subjective assumptions, including expected stock price
volatility. In management's opinion, such valuation models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options. The principal assumptions used in applying the Black-Scholes option
pricing model were as follows.
Risk-free interest rate 4.8%
Dividend yield 2.1%
Volatility factor 26.4%
Expected life 6 Years
Other information related to the Company's stock incentive plan and stock
appreciation rights plan can be found in note 19 of the Company's consolidated
financial statements for the year ended December 31, 2001.
NOTE 13: TRANSACTIONS WITH RELATED PARTIES
Through The Woodbridge Company Limited ("Woodbridge") and its affiliates, the
Thomson family owns approximately 73% of the common shares of Thomson.
As discussed in note 14, on January 9, 2001 Thomson completed a transaction with
BCE Inc. and Woodbridge in which Thomson exchanged its interest in The Globe and
Mail and other
19
related assets for a 20% equity interest in a new multimedia company, BGM.
Woodbridge holds a 9.9% interest in BGM.
In February 2001, a subsidiary of Woodbridge subscribed for $250 million of
preferred shares of a subsidiary of Thomson. Subsequently, in February 2002, the
shares were exchanged for a separate preferred issuance in the same face amount.
These new shares pay a fixed annual dividend at 4.5% and are redeemable at the
option of either Woodbridge or the Company beginning February 2006 and annually
thereafter. The shares are included within "Long-term debt" in the consolidated
balance sheet.
NOTE 14: BELL GLOBEMEDIA INC.
In January 2001, Thomson exchanged its interest in The Globe and Mail for a 20%
interest in BGM. This transaction was recorded at 80% of the estimated fair
value of net assets received, as Thomson continued to maintain a 20% indirect
interest in The Globe and Mail. The resulting net gain was included within "Net
gains on disposals of businesses and investments" in the interim consolidated
statement of earnings and retained earnings for the three months ended March 31,
2001. The investment was initially recorded at $431 million and included in
"Other non-current assets" in the consolidated balance sheet. The investment is
being accounted for using the equity method of accounting. Included in "Income
taxes" for the three months ended March 31, 2001 in the interim consolidated
statement of earnings and retained earnings was a charge of $75 million related
to the transaction. The Company currently maintains an associated liability for
certain lands to be contributed to BGM on or before May 30, 2002. There will be
no impact on consolidated earnings in connection with this future contribution.
As discussed in note 13, Woodbridge is an investor in BGM. Other information
related to the BGM transaction can be found in note 17 of the Company's
consolidated financial statements for the year ended December 31, 2001.
NOTE 15: RECENTLY ISSUED ACCOUNTING STANDARDS
In 2001, CICA issued Accounting Guideline AcG13, "Hedging Relationships." The
guideline addresses the identification, designation, documentation and
effectiveness of hedging relationships. It establishes conditions for applying
hedge accounting. The guideline applies to hedging relationships in effect in
fiscal years beginning on or after July 1, 2002.
Additionally, in 2001, CICA amended Handbook Section 1650, "Foreign Currency
Translation." The amended section, which becomes effective for fiscal periods
beginning on or after January 1, 2002, eliminates the deferral and amortization
of unrealized translation gains and losses on long-term monetary items.
Thomson has not completed its assessment of the impact of adopting Accounting
Guideline AcG13. The Company has determined that the adoption of Handbook
Section 1650 will have no material effect on the Company's financial position or
results of operations.
NOTE 16: EARNINGS RECONCILIATION TO U.S. GAAP
The following table reconciles the (loss) earnings, which is prepared in
accordance with accounting principles generally accepted in Canada ("Canadian
GAAP"), to a (loss) earnings
20
amount that is prepared in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP").
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------------
2002 2001
- ------------------------------------------------------------------------------------ ----------------- ---------------
(Loss) earnings attributable to common shares under Canadian GAAP (34) 167
Differences in GAAP increasing (decreasing) reported earnings:
Dividends declared on preference shares 3 7
Development costs 5 29
Identifiable intangible assets and goodwill (3) (49)
Derivative instruments and hedging activities 7 (19)
Income taxes (1) 9
- ------------------------------------------------------------------------------------ ----------------- ---------------
(Loss) earnings under U.S. GAAP,
before cumulative effect of change in accounting principle (23) 144
Cumulative effect of change in accounting principle, net of tax (66) --
- ------------------------------------------------------------------------------------ ----------------- ---------------
Net (loss) income under U.S. GAAP (89) 144
- ------------------------------------------------------------------------------------ ----------------- ---------------
Basic and diluted (loss) earnings per common share from*:
Continuing operations under U.S. GAAP,
before cumulative effect of change in accounting principle $ (0.04) $ 0.19
Cumulative effect of change in accounting principle, net of tax $ (0.11) --
Discontinued operations, net of tax -- $ 0.03
- ------------------------------------------------------------------------------------ ----------------- ---------------
Basic and diluted (loss) earnings per common share under U.S. GAAP $ (0.15) $ 0.22
- ------------------------------------------------------------------------------------ ----------------- ---------------
* (Loss) earnings per common share is calculated after deducting dividends
declared on preference shares from net (loss) income.
Descriptions of the nature of the reconciling differences are provided below.
DIVIDENDS DECLARED ON PREFERENCE SHARES
Under Canadian GAAP, dividends declared on preference shares are a component of
net earnings. Under U.S. GAAP, dividends declared on preference shares are not a
component of net income, but are deducted prior to the calculation of earnings
per common share.
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.
IDENTIFIABLE INTANGIBLE ASSETS AND GOODWILL
Under U.S. GAAP, the allocation of the purchase price of acquisitions prior to
January 1, 2001, and amortization of intangibles differs from Canadian GAAP.
These historical differences primarily relate 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) a gain resulting from a 1997
disposal mandated by the U.S. Department of Justice which has been treated as a
reduction of goodwill under Canadian GAAP; (iii) overall increased amortization
21
charges; and (iv) differences in gain or loss calculations on business disposals
resulting from the above factors.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Under Canadian GAAP, the fair values of derivative instruments are disclosed in
the notes to the Company's consolidated financial statements as at and for the
year ended December 31, 2001, but not recorded in the Company's consolidated
balance sheet. In order to reconcile to U.S. GAAP, effective January 1, 2001,
the Company adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as
amended by SFAS 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." Under SFAS 133, all derivative instruments are recognized
on 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
The income tax adjustment for each period is comprised of the tax effect of the
U.S. GAAP reconciling items.
CHANGE IN ACCOUNTING PRINCIPLE
The cumulative effect of change in accounting principle represents the
transitional impairment charge related to adopting the U.S. GAAP equivalent of
CICA 3062, SFAS 142, "Goodwill and Other Intangible Assets." Under U.S. GAAP,
this charge is required to be recorded net of tax as a cumulative effect of a
change in accounting principle, which is a component of net income as compared
with a charge to opening retained earnings under Canadian GAAP. See note 4.
The effect of SFAS 142, as if it had been adopted as of January 1, 2001, would
be to increase net income by $54 million, to $198 million, and earnings per
share by $0.09, to $0.31, for the three months ended March 31, 2001.
NOTE 17: SUBSEQUENT EVENTS
On May 2, 2002, the Company filed a preliminary prospectus with securities
regulatory authorities in Canada, and, pursuant to the Canada/United States of
America multi-jurisdictional disclosure system, a registration statement with
the U.S. Securities and Exchange Commission, in connection with a proposed
public offering of common shares in the United States by Thomson and its
principal shareholder, Woodbridge. The Company will not receive any proceeds
from the sale of shares by Woodbridge. Proceeds received by Thomson will be used
for general corporate purposes including the repayment of existing indebtedness.
The Company expects this offering to be completed by the end of the second
quarter of 2002 and, in connection with the offering, has applied to list its
common shares on the New York Stock Exchange.
Concurrent with the U.S. listing, the Company will redeem the related common
shares of The Thomson Corporation PLC ("Thomson PLC"), its wholly-owned UK
subsidiary. Holders of the Thomson PLC common shares, with a par value of one
sterling penny each, will receive a notice
22
specifying how these shares will be redeemed. This decision reflects the
comparatively few Thomson PLC shares outstanding and the administrative and
other costs required to maintain this share structure. The anticipated impact of
this redemption on the consolidated financial statements is not expected to be
material.
Additionally, on May 2, 2002, Woodbridge announced the extension of its
commitment to reinvest at least 50% of the dividends received by it and its
subsidiaries in newly issued common shares under the Thomson dividend
reinvestment plan for a further three years to June 2005. The commitment was
originally made in June 1989, has since been extended twice, and was scheduled
to expire in June 2002.
23