SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002.
Commission file number 1-8014.
MOORE CORPORATION LIMITED
(Exact name of registrant as specified in its charter)
CANADA 98-0154502
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
6100 Vipond Drive
MISSISSAUGA, ONTARIO, CANADA L5T 2X1
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (905) 362-3100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS
Common Shares
NAME OF EACH EXCHANGE ON WHICH REGISTERED:
New York Stock Exchange
The Toronto Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference, in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). [X] YES [ ] NO
The aggregate market value of the voting common shares without par value held by
non-affiliates of the registrant as computed by reference to the closing price
on the New York Stock Exchange on February 10, 2003 was $1,296,871,390.
The number of common shares outstanding as of February 10, 2003 was 111,992,348.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Management Information Circular and Proxy Statement to be filed
with the Commission pursuant to Regulation 14A within 120 days from the end of
the fiscal year covered by this Form 10-K, are incorporated by reference into
Part III.
MOORE CORPORATION LIMITED
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
PAGE
----
PART I
Item 1: Business.................................................................................... 4
Item 2: Properties ................................................................................. 11
Item 3: Legal Proceedings........................................................................... 12
Item 4: Submission of Matters to a Vote of Security Holders......................................... 13
Executive Officers of the Registrant........................................................ 13
PART II
Item 5: Market for Registrant's Common Shares and Related Shareholder Matters....................... 14
Item 6: Selected Financial Data..................................................................... 15
Item 7: Management's Discussion and Analysis of Results of Operations and Financial Condition....... 18
Item 7A: Quantitative and Qualitative Disclosures about Market Risk.................................. 27
Item 8: Financial Statements and Supplementary Data................................................. 29
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 64
PART III
Item 10: Directors and Executive Officers of the Registrant.......................................... 64
Item 11: Executive Compensation...................................................................... 64
Item 12: Security Ownership of Management............................................................ 64
Item 13: Certain Relationships and Related Transactions.............................................. 64
Item 14: Controls and Procedures..................................................................... 64
PART IV
Item 15: Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 65
Signatures ............................................................................................ 66
Certifications............................................................................................ 67
2
CAUTIONARY STATEMENT
This Annual Report on Form 10-K and portions of the documents incorporated by
reference herein contain statements relating to the future results of Moore
(including certain "anticipated", "believed", "expected", and "estimated
results") and Moore's outlook concerning statements as to acquisitions being
accretive, continued improvement in Moore's cost structure and achievement of
revenue growth from the cross-selling initiative are "forward-looking
statements" as defined in the U.S. Private Securities Litigation Reform Act of
1995. Readers are cautioned not to place undue reliance on these forward-looking
statements and any such forward-looking statements are qualified in their
entirety by reference to the following cautionary statements. All
forward-looking statements speak only as of the date hereof and are based on
current expectations and involve a number of assumptions, risks and
uncertainties that could cause the actual results to differ materially from such
forward-looking statements. Factors that could cause such material differences
include, without limitation, the following:
- - dependence on key management personnel
- - the effect of competition
- - the effects of paper and other raw material price fluctuations and
shortages of supply
- - successful execution of cross-selling, cost containment and other key
strategies
- - the successful negotiation, execution and integration of acquisitions
- - the ability to renegotiate or terminate unprofitable contracts
- - the ability to divest non-core businesses
- - the rate of migration from paper-based forms to digital formats
- - future growth rates in Moore's core businesses
- - the impact of currency fluctuations in the countries in which Moore
operates
- - the potential impact of the merger with Wallace Computer Services, Inc.
- - general economic and other factors beyond Moore's control
- - the possibility of future terrorist activity or the outbreak of war or
other hostilities in the United States, Canada or abroad
- - other risks and uncertainties detailed from time to time in the
Corporation's filings with United States and Canadian securities
authorities.
Consequently, readers of this Annual Report should consider these
forward-looking statements only as our current plans, estimates and beliefs. We
do not undertake and specifically decline any obligation to publicly release the
results of any revisions to these forward-looking statements that may be made to
reflect future events or circumstances after the date of such statements or to
reflect the occurrence of anticipated or unanticipated events. We undertake no
obligation to update or revise any forward-looking statements in this Annual
Report to reflect any new events or any change in conditions or circumstances.
Even if these plans, estimates or beliefs change because of future events or
circumstances after the date of these statements, or because anticipated or
unanticipated events occur, we decline and cannot be required to accept an
obligation to publicly release the results of revisions to these forward-looking
statements.
3
UNLESS OTHERWISE INDICATED, ALL DOLLAR AMOUNTS IN THIS ANNUAL REPORT ON FORM
10-K ARE EXPRESSED IN UNITED STATES CURRENCY AND ALL REFERENCES TO "MOORE" OR
THE "CORPORATION" IN THIS ANNUAL REPORT ON FORM 10-K REFER TO MOORE CORPORATION
LIMITED AND ITS SUBSIDIARIES.
PART I.
ITEM 1. BUSINESS
A) GENERAL DEVELOPMENT OF BUSINESS
Moore Corporation Limited, a corporation continued under the Canada Business
Corporations Act was established in 1882. According to Printing Impressions, a
leading industry publication, Moore is the third largest diversified printing
company in North America based on revenues. In 2001, we initiated a major
realignment of our business units, and we now operate in three complementary
segments: Forms and Labels, Outsourcing and Commercial. We offer our products
and services principally in the United States and Canada, but we also have
operations in Latin America, primarily in Mexico and Brazil, and in Europe.
Through our Forms and Labels segment, we provide a wide array of products and
services, including the design and production of business forms, labels and
related products, print fulfillment, print-on-demand, warehousing, packaging, or
"kitting," and fulfillment services as well as electronic print management
solutions. Our Outsourcing segment provides fully integrated
business-to-business and business-to-consumer solutions involving high quality,
variably-imaged print and mail, electronic statement and database management
services. Our Commercial segment provides high quality multi-color personalized
business communications and direct marketing services, including project,
database and list management services.
In 2002, Moore had net sales of $2,038 million and had approximately 11,800
employees worldwide. Moore has its registered office at 6100 Vipond Drive,
Mississauga, Ontario, Canada L5T 2X1 and its executive offices are located at
One Canterbury Green, Stamford, Connecticut 06901. The Moore internet address is
www.moore.com. You may view our filings with Securities regulators in Canada and
the U.S., including our Annual Report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and any amendments thereto, free of charge
through our website located at www.moore.com.
Beginning in late 2000, a new executive management team assumed leadership at
Moore, with substantial experience in the printing industry and with
"turn-around" businesses and pursuing acquisition strategies. In 2001, this team
began implementing a new business strategy to increase revenues and margins and
capitalize on our core competencies. The key elements of this strategy are:
FOCUS ON QUALITY AND ACCOUNTABILITY. We have taken several actions to improve
the quality and accountability of our management and employees. Our senior
management, for example, has extensive experience in the printing industry. We
have realigned our employee compensation and performance incentives with
shareholder objectives.
AGGRESSIVE COST REDUCTIONS. Since 2001, we have achieved significant cost
savings through various initiatives, including the elimination of approximately
4,000 positions, the consolidation of purchasing to improve pricing and terms,
the rationalization of capital expenditures and spending on research and
development, and the reduction of information technology spending.
SALE OF NON-CORE ASSETS. We have assessed our operations worldwide with a view
to eliminating assets that are not aligned with our core print operations or our
strategic plan. In 2001, we sold Colleagues, our U.K.-based advertising agency,
our investment in an on-line real estate listing company, and Phoenix, a
Detroit-based telemarketing customer relationship management business. We plan
to continue to review our operations with a view to divesting assets and
operations that no longer meet our strategic goals or performance targets.
PARTNERING WITH OUR SUPPLIERS TO REDUCE COSTS AND INCREASE EFFICIENCY. In 2001,
we began consolidating our purchasing with a few key suppliers to improve our
pricing and payment terms and inventory management as well as to ensure a stable
source of supply.
IMPROVED CROSS-SELLING EFFORTS. We view cross-selling as a key component of our
competitive strategy. In the fourth quarter of 2001, we launched a strategic
corporate accounts and cross-selling initiative to improve incremental net sales
and profit growth within our current customer base. This "one-stop shopping"
strategy offers our customers the full array of our products and services,
including forms, labels, outsourced statement printing, print fulfillment and
kitting services and commercial print capability.
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STRATEGIC ACQUISITIONS. We continuously review acquisition opportunities and
will pursue acquisitions to increase our margins and profitability. We have
focused on opportunities that permit us to expand our product and service
offerings, particularly commercial print services, or achieve operating
efficiencies such as increased utilization of our print assets. In December
2001, we acquired Document Management Services, the print and mail operation of
IBM Canada Limited, to supplement our Canadian Outsourcing business. In January
2002, we acquired The Nielsen Company, a commercial printer that specializes in
high quality multi-color printing of collateral marketing materials, consumer
product and financial services marketing materials and other products, such as
annual reports. In January 2003, we announced that we had entered into a
definitive merger agreement with Wallace Computer Services, Inc. Upon closing,
the combined company Moore Wallace Incorporated will be one of the largest
printers in North America. Completion of the Wallace merger is subject to
customary closing conditions that include, among others, receipt of required
approval from Wallace shareholders, required regulatory approvals and closing of
the required financing. The transaction, while expected to close in the first
half of 2003, may not be completed if any of the conditions to the closing are
not satisfied or waived. Unless otherwise indicated, the discussion and
financial results disclosed in this Annual Report on Form 10-K relate to Moore
as a stand-alone entity and do not reflect the impact of the pending business
combination transaction with Wallace. For more details about this acquisition,
see "Management's Discussion and Analysis of Results of Operations and Financial
Condition - Overview."
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B) FINANCIAL INFORMATION ABOUT SEGMENTS
As a result of acquiring the remaining interest in Quality Color Press, Inc.
(see Note 3 to the Consolidated Financial Statements), management has
reclassified this business from the Commercial segment to the Forms and Labels
segment in order to reflect the business synergies and integration plans.
OPERATING SEGMENTS
Years ended December 31,
Expressed in thousands of U.S. Dollars
Forms and Labels Outsourcing Commercial Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
2002
Total revenue $1,129,483 $317,848 $606,917 $ 2,054,248
Intersegment revenue (3,636) (1,749) (10,824) (16,209)
- ----------------------------------------------------------------------------------------------------------------------------
Sale to customers outside the enterprise 1,125,847 316,099 596,093 2,038,039
- ----------------------------------------------------------------------------------------------------------------------------
Segment operating income 132,736 61,374 50,562 244,672
- ----------------------------------------------------------------------------------------------------------------------------
Non-operating expenses (142,149)
---------------
Income from operations 102,523
- ----------------------------------------------------------------------------------------------------------------------------
Segment assets 581,660 114,514 324,533 1,020,707
Corporate assets including investments 419,052
---------------
Total assets 1,439,759
- ----------------------------------------------------------------------------------------------------------------------------
Capital asset depreciation and amortization 56,811 14,969 14,966 86,746
- ----------------------------------------------------------------------------------------------------------------------------
Capital expenditures 20,256 4,416 7,273 31,945
- ----------------------------------------------------------------------------------------------------------------------------
2001 (Reclassified)
Total revenue $1,198,173 $341,485 $636,343 $ 2,176,001
Intersegment revenue (3,704) (2,006) (15,717) (21,427)
- ----------------------------------------------------------------------------------------------------------------------------
Sale to customers outside the enterprise 1,194,469 339,479 620,626 2,154,574
- ----------------------------------------------------------------------------------------------------------------------------
Segment operating income (loss) 43,445 49,508 (90,904) 2,049
- ----------------------------------------------------------------------------------------------------------------------------
Non-operating expenses (344,373)
---------------
Loss from operations (342,324)
- ----------------------------------------------------------------------------------------------------------------------------
Segment assets 645,178 117,243 261,486 1,023,907
Corporate assets including investments 313,079
---------------
Total assets 1,336,986
- ----------------------------------------------------------------------------------------------------------------------------
Capital asset depreciation and amortization 111,875 19,383 107,814 239,072
- ----------------------------------------------------------------------------------------------------------------------------
Capital expenditures 18,902 16,124 10,376 45,402
- ----------------------------------------------------------------------------------------------------------------------------
2000 (Reclassified)
Total revenue $1,246,800 $297,851 $730,896 $ 2,275,547
Intersegment revenue (690) (1,082) (15,357) (17,129)
- ----------------------------------------------------------------------------------------------------------------------------
Sale to customers outside the enterprise 1,246,110 296,769 715,539 2,258,418
- ----------------------------------------------------------------------------------------------------------------------------
Segment operating income (loss) 72,105 43,126 (10,706) 104,525
- ----------------------------------------------------------------------------------------------------------------------------
Non-operating expenses (150,759)
---------------
Loss from operations (46,234)
- ----------------------------------------------------------------------------------------------------------------------------
Segment assets 856,457 109,847 428,692 1,394,996
Corporate assets including investments 348,591
---------------
Total assets 1,743,587
- ----------------------------------------------------------------------------------------------------------------------------
Capital asset depreciation and amortization 84,264 19,276 47,978 151,518
- ----------------------------------------------------------------------------------------------------------------------------
Capital expenditures 61,677 10,651 32,253 104,581
- ----------------------------------------------------------------------------------------------------------------------------
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C) NARRATIVE DESCRIPTION OF BUSINESS
FORMS AND LABELS
OVERVIEW
Our Forms and Labels segment composes, manufactures, warehouses and delivers a
wide range of printed and electronic communications and print related services,
including print fulfillment, print-on-demand, warehousing, kitting and
fulfillment services. This segment is comprised of four businesses: Forms,
Labels, Supplies and Print Fulfillment. This segment had $1,125.8 million or 55%
of consolidated net sales in 2002 (2001 - 55%; 2000 - 55%). We seek to be a
single-source supplier of a customized, "one-stop shopping" solution for our
customers' print and digital communication needs through a multi-site,
state-of-the-art print distribution and warehousing network. Our Forms and
Labels segment has historically accounted for the largest proportion of our net
sales.
We have sought to improve our margins in this segment by offering a range of
value-added services, which include warehousing and distribution capabilities,
print management services and fulfillment and kitting services, in which we
assemble various print and non-print items in a customized package for delivery
to our customer or directly to consumers. The importance of fulfillment and
distribution capabilities in the U.S. market has increased significantly in
recent years, as customers have sought printing services companies, such as
Moore, that have broad geographical coverage and sufficient manufacturing
capacity to satisfy customers' requirements on short notice.
PRODUCTS AND SERVICES
Many of the products and services that we offer in this segment have evolved to
reflect the efficiency of the internet as a means of business-to-business
communication. For example, we provide our customers with print-enabling
solutions, including e-procurement, inventory management, personalized printing
(such as business cards and stationery products), variable imaging and
integrated print fulfillment services. Our proprietary digital content
management system allows us to manage our customers' electronic data in a fully
integrated and secure digital repository. We have coupled our ability to manage
our customers' data with a capability to customize the "front-end" applications
viewed by consumers to provide a readily accessible platform for automated
document production. Using this approach, we are able to deliver to our
customers a high quality product at a low cost.
FORMS
We are recognized as a leading manufacturer of forms and forms-related products.
The forms business produces pressure seal forms, tax forms, custom continuous
forms, Speediset(R) multi-part forms, and dual purpose bond and custom printed
laser cut sheets. In 2002, forms in the United States, Canada, Mexico and Latin
America comprised approximately 46% of total net sales for this segment.
LABELS
We are a leading provider of thermal and cut sheet labels. Cut sheet labels are
a combination of a liner, glue and paper and are die cut in a variety of ways.
Cut sheet labels are fed through a laser printer and come in two types -- paper
and film. Our thermal label business is focused on servicing the inventory
tracking, shipping/receiving and other bar code industries. In 2002, labels
comprised approximately 16% of total net sales for this segment.
SUPPLIES
We also offer our customer base such products as business cards, envelopes,
stationery, and computer paper. In 2002, supplies comprised approximately 17% of
total net sales for this segment.
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PRINT FULFILLMENT
Our print fulfillment services business offers a value added business solution
that incorporates technology, re-engineering, and outsourcing to address key
supply chain issues and emerging business trends. One component of this business
is the storage and distribution of products, such as documents, brochures,
binders, CDs and related items. We assemble these items into a single custom kit
which is then shipped to a customer or stored for future distribution. Examples
of kit packaging include health maintenance organization or financial enrollment
kits, new employee kits, training courses and sales kits. We also produce
digital documents that may be printed "on demand" by the customer at the times
and in the quantities that it deems appropriate from time to time. In 2002,
print fulfilment comprised approximately 21% of total net sales for this
segment.
CUSTOMERS
Our customer base in this segment is highly diversified. No customer accounted
for more than 5% of our net sales in this segment for 2002. Approximately 625
salespersons service this segment, with a view to cross-selling our full array
of products and services. While we continue to focus our sales efforts on key
"Fortune 500" companies, we believe that middle market companies are an
underserved market. We have increased our sales efforts to this market, where we
believe we can achieve significant increases in net sales.
Contracts in this segment tend to be longer-term, generally of three to five
years in duration. Most of these contracts have fixed pricing schedules subject
to adjustment based on an index published in Pulp and Paper Weekly, an
independent publication serving the printing industry, and the consumer price
index in the case of contracts solely for production of forms; specified
sub-indices of the producer price index (in the U.S. and Canada) in the case of
contracts for label production; or the consumer price index (in the U.S. and
Canada) in the case of print fulfillment contracts and print management
services. Our contracts typically do not provide for volume discounts and are
generally subject to minimum order quantities. The typical sales cycle is
approximately 30 days in the case of orders for forms or labels, and four to six
months, in the case of print fulfillment and print management contracts. Most of
our contracts in this segment are terminable at will by us or our customer upon
specified notice.
FACILITIES
We own 16 material locations (i.e., more than 35,000 square feet in size) that
are used in our Forms and Labels segment in the United States, eight in Canada,
four in Brazil, and one in each of Mexico, Venezuela, El Salvador and Costa
Rica. We also lease nine material locations in the United States and three in
Canada. Most of these locations include both production and warehousing
facilities.
OUTSOURCING
OVERVIEW
Our Outsourcing segment includes principally the operations of Moore Business
Communications Services, which we call "BCS", which provides high quality,
customized variably-imaged customer communications, primarily for financial
services, telecommunications, insurance and healthcare companies in North
America. BCS had $316.1 million of net sales or 16% of consolidated net sales in
2002 (2001 - 16%; 2000 - 13%). We believe that outsourcing will represent an
increasing proportion of our consolidated net sales, as customers seek cost
efficiencies through the elimination of in-house printing facilities.
PRODUCTS AND SERVICES
Our product and service offering in this segment permits our customers the
ability to reach consumers using multiple communication methods, including
print, mail, e-mail, fax, CD-ROM and internet-based and other wireless
solutions. Examples of our products and services include daily securities
transaction confirmations, periodic account statements, checks, consumer
invoices, insurance policies, stored value cards such as prepaid telephone and
gift cards, enrollment kits for financial services, insurance and health care
companies, periodic mailings of privacy and similar notices and periodic tax
reporting statements. In some cases, we acquire customer equipment and/or
facilities in connection with a new customer contract.
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CUSTOMERS
As in the case of our other operating segments, our Outsourcing customers are
highly diversified, with no customer accounting for more than 5% of our net
sales in this segment for 2002 other than Verizon Communications, which
accounted for approximately 8% of net sales in 2002. Outsourcing relationships
involve a high degree of coordination with our customers, and this segment is
supported by industry-focused project managers, programmers, customer service
and sales professionals who manage customer projects from inception to
completion. Through this "total management" approach, we seek to provide our
customers with significant flexibility, enabling them to modify their
requirements as rapidly as consumer preferences or market demands may dictate.
Customer contracts in this segment are typically longer-term, generally of three
to five years in duration. These contracts generally have one-year automatic
renewal provisions and permit termination for cause, subject to an obligation to
provide the customer with transition support services. Most of these contracts
contain fixed pricing schedules subject to adjustment based on the U.S. producer
price index and the Statistics Canada Industrial Product Price, Pulp and Paper
Index, and the volume of products and services purchased. Because our services
in this segment are highly tailored to customer requirements, the sales cycle
tends to be significant, generally ranging up to nine months. Our salesforce of
approximately 60 people is engaged both in marketing our services, as well as
providing ongoing relationship management and coordination with our print
professionals.
FACILITIES
BCS has four material production facilities in the United States and three in
Canada. These facilities are strategically located to provide geographic
production and distribution access for our customers. Of these facilities, three
facilities in the United States and one in Canada are owned and one facility in
the United States and two in Canada are leased.
COMMERCIAL
OVERVIEW
Our Commercial segment serves the printing, direct marketing, delivery and
warehouse management requirements of a highly diversified, international
customer base. This segment had $596.1 million of net sales or 29% of
consolidated net sales in 2002 (2001 - 29%; 2000 - 32%). We plan to expand our
Commercial segment through internal growth as well as through acquisitions, such
as our January 2002 acquisition of The Nielsen Company. This acquisition has
permitted us to expand our product line to include high quality, multi-color
annual reports and a wide variety of marketing materials. Nielsen's commercial
print capabilities have also enabled us to attract customers who want a single
source for all their printing needs.
PRODUCTS AND SERVICES
Our product and service offering in this segment typically involves highly
customized, variably-imaged print communications. Examples of these print
products include glossy annual reports, corporate image and product brochures,
catalogs, marketing inserts, as well as pharmaceutical inserts and other
marketing, retail point-of-sale and promotional materials and technical
publications.
Our Commercial segment includes Moore Response Marketing Services, which we call
"RMS". RMS's business involves highly customized direct mail communications as a
significant component. We believe that direct mail marketing services will
constitute an increasing proportion of the marketing expenditures of our
customers as they seek to maximize the impact of their marketing efforts. Using
proprietary imaging technology and data provided by our customers, RMS is able
to create personalized direct mail offers designed to achieve a higher response
rate from targeted consumer segments. These offers may take the form, for
example, of product advertisements printed directly on a consumer's invoice that
reflect that consumer's historical purchasing profile. We assist our customers
in designing these communications. We are able to produce more than a billion
pieces of secure, personalized direct mail communications annually.
Through our Publications and Directory group, we also provide print products and
digital services for customers that produce data-intensive publications such as
business-to-business catalogs, parts and price lists, telephone directories and
professional, reference and trade books.
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CUSTOMERS
Our customer base in this segment is highly diversified. No customer accounted
for more than 5% of our net sales in this segment for 2002. Due to the
project-oriented nature of this business, our customer base may vary
significantly from year to year and depend on the number, size and complexity of
a customer's projects in a given period, as well as their overall printing and
marketing budgets. Our customer relationships tend to be highly
service-oriented, with a focus on the production and timely delivery of a high
quality product. Because these services require a high degree of interaction
with our customers, our salesforce of approximately 200 people is active not
only in soliciting business, but, along with approximately 125 sales support
employees, also in coordinating ongoing execution of each customer order.
Customer contracts in this segment are typically entered into on a
project-by-project basis, although we are seeking to enter into master contracts
with customers that regularly engage our services. These master contracts
typically prescribe all of the terms, including price that will govern any
particular printing project, without any volume commitments.
FACILITIES
We own three material locations that are used by our Commercial segment in the
United States and one in Belgium. We also lease three material locations in the
United States and one in France. All of these locations include both production
and warehousing facilities.
COMPETITION
We compete on the basis of product quality, service and price, the range of
products offered, distribution capabilities, customer relationships and customer
service.
The environment in each operating segment in which we operate is highly
competitive, both in terms of product category and geographic region, as
customers focus on cost reduction, vendor reduction and improved total cost of
ownership for print communications programs. Consolidation in other industries
has also led to increased purchasing power among our customers, which has
increased downward pricing pressure in the industry. We encounter competition
from both larger and smaller companies that offer the same or similar products
and services. Some of our competitors are larger than we are and have greater
financial and technical resources. In some areas, due primarily to factors
including freight rates and customer preferences for local providers, regional
printers may have a competitive advantage. While we have a large number of
competitors in each operating segment, the markets in which each of our
operating segments operates are highly fragmented and the majority of our
competitors compete with us in only one business segment.
RAW MATERIALS
The primary raw materials required in our operations are paper and ink. The
price of paper and ink represents a significant portion of our cost of sales.
Increases in price or a lack of availability of these raw materials could have a
material adverse effect on our consolidated financial position and results of
operations.
While we generally pass on increases and decreases in the cost of paper and ink
to our customers, these adjustments take place only at certain times during the
year and are subject to certain limitations. We have reduced the number of paper
and ink vendors in order to leverage our purchasing power and have negotiated
long-term supply contracts that we believe provide favorable price, terms,
quality and service.
We have not experienced any difficulties in obtaining supplies of any raw
material in any recent period and we believe that our long-term supply contracts
for paper and strong relationships with our paper vendors will enable us to
receive adequate supplies in the event of tight markets; however, there can be
no assurance that we will not be adversely affected by a tight paper market.
INTELLECTUAL PROPERTY
Moore is the holder of a significant number of patents in the United States and
throughout the world as well as a large number of patent applications in process
for its four key technologies. In the Forms and Labels segment, we believe that
our pressure seal-related patents, linerless label-related patents and its radio
frequency identification-related patents are material to the segment. We also
believe that our Midax variable imaging-related patents are material to our
Outsourcing segment as well as to the direct mail business of the Commercial
segment. The duration of these patents range from between 17 and 20 years. Other
than as set forth below, there are no material patents that will expire within
the next five years.
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We are the exclusive licensee of U.S. patent No. 4,918,128 relating to TN-124
and TN124F pressure seal cohesive, which is material to our pressure seal
business. This patent expires in 2008. We developed and in 2002 received a
patent for a new and improved formulation of pressure seal cohesive that we
believe will offset any adverse impact that may result from the expiration of
the `128 patent.
Moore also has a large number of trademarks in the United States and throughout
the world. The "Moore(R)" and Moore Logo(R) trademarks are material to each of
our operating segments. There are not any other trademarks that are material to
any of the operating segments.
BACKLOG
At December 31, 2002, the backlog of firm customer orders to be handled in the
next 120 days was approximately $100 million. The backlog was approximately $103
million at December 31, 2001.
EMPLOYEES
At December 31, 2002, Moore employed approximately 11,800 employees. Of these,
approximately 1,200 are covered by collective bargaining agreements with eleven
unions (four in Canada, one in Mexico, one in Venezuela, one in Barbados and
four in Brazil). These agreements expire in 2003, 2004 and 2005. There have been
no significant interruptions or curtailments of our operations in recent years
due to labor disputes.
ENVIRONMENTAL REGULATIONS
Moore is subject to laws and regulations relating to the protection of the
environment. We provide for expenses associated with the environmental
remediation obligations when such amounts are probable and can be reasonably
estimated. Such accruals are adjusted as new information develops or
circumstances change and are not discounted. While it is not possible to
quantify with certainty the potential impact of actions regarding environmental
matters, particularly remediation and other compliance efforts that our
subsidiaries may undertake in the future, in the opinion of management,
compliance with present environmental protection laws, before taking into
account estimated recoveries from third parties, will not have a material
adverse effect upon our consolidated results of operations or financial
condition. See also, "Legal Proceedings" below.
D.) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
Years ended December 31,
Expressed in thousands of U.S. Dollars
UNITED
CANADA STATES INTERNATIONAL CONSOLIDATED
- ----------------------------------------------------------------------------------------------------------------------------
2002
Sale to customers outside the enterprise $208,192 $ 1,607,418 $ 222,429 $ 2,038,039
Capital assets, goodwill and intangibles 51,491 369,544 36,583 457,618
2001
Sale to customers outside the enterprise $199,628 $ 1,689,954 $ 264,992 $ 2,154,574
Capital assets, goodwill and intangibles 39,091 356,675 43,931 439,697
2000
Sale to customers outside the enterprise $222,311 $ 1,685,680 $ 350,427 $ 2,258,418
Capital assets, goodwill and intangibles 49,736 540,649 77,243 667,628
ITEM 2. PROPERTIES
As of December 31, 2002, Moore owned or leased facilities for manufacturing,
distribution and sales offices in 46 states and 13 foreign countries. Moore
believes that its facilities are suitable and adequate for its business. Moore
continually evaluates its facilities to ensure they are consistent with its
needs and business strategy.
11
A summary of material locations (over 35,000 square feet) that are owned by
Moore and its subsidiaries is set forth below:
FORMS AND LABELS
Angola, Indiana; Brea, California; Carol Stream, Illinois; Elkridge, Maryland;
Grand Island, New York; Greenwood, South Carolina; Iowa City, Iowa; Jerome,
Idaho; Lewisburg, Pennsylvania; Manchester, New Hampshire; Monroe, Wisconsin;
Nacogdoches, Texas; Niagara Falls, New York; Portland, Oregon; Quakertown,
Pennsylvania; Temecula, California; Visalia, California; Fergus, Ontario;
Oshawa, Ontario; Trenton, Ontario; Cowansville, Quebec; Winnipeg, Manitoba;
Recife (Abreu Lima), Brazil; Blumenau, Brazil; Santa Rita, Brazil; Gravatai,
Brazil; Osasco, Brazil; Tlalnepantia, Mexico; Mexico City, Mexico; Maracay,
Venezuela; San Salvador, El Salvador; and Heredia, Costa Rica.
OUTSOURCING
Logan, Utah; Mundelein, Illinois; and Thurmont, Maryland.
COMMERCIAL
Albany, New York; DePere, Wisconsin; Green Bay, Wisconsin; and Erembodegem,
Belgium.
A summary of material locations (over 35,000 square feet) that are leased by
Moore and its subsidiaries are set forth below:
FORMS AND LABELS
Austell, Georgia; Bridgewater, Massachusetts; Cranbury, New Jersey; Edmonton,
Alberta; Lenexa, Kansas; Lewisville, Texas; Manchester, New Hampshire;
Mississauga, Ontario; Perrysburg, Ohio; and San Salvador, El Salvador; and
Vancouver, British Columbia.
OUTSOURCING
Windsor, Connecticut; and Mississauga, Ontario; St. Laurent, Quebec.
COMMERCIAL
Cincinnati, Ohio; Columbia, Maryland; Durham, North Carolina; Florence,
Kentucky; Green Bay, Wisconsin; San Diego, California; and Cosne, France.
In addition, the Corporation has three leased corporate office facilities in
Stamford, Connecticut and Bannockburn and Libertyville, Illinois that are
material facilities.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, Moore is involved in various lawsuits, claims
and administrative proceedings. While the outcome of these matters is subject to
future resolution, management's evaluation and analysis of such matters
indicates that, individually and in the aggregate, the probable ultimate
resolution of such matters will not have a material effect on Moore's
consolidated financial condition and results of operations.
The Corporation has been identified as a Potentially Responsible Party ("PRP")
at the Dover, New Hampshire Municipal Landfill, a United States Environmental
Protection Agency Superfund Site. The Corporation has been participating with a
group of approximately 26 other PRP'S to fund the study of and implement
remedial activities at the site. Remediation at the site has been on-going and
is anticipated to continue for at least several years. The total cost of the
remedial activity was estimated to be approximately $26 million. The
Corporation's share is not expected to exceed $1.5 million. We believe our
reserves are sufficient based on the present facts and recent tests performed at
this site. We will continue to monitor this exposure.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the shareholders of the Corporation
during the fourth quarter of 2002.
EXECUTIVE OFFICERS OF THE REGISTRANT
Mark A. Angelson 51 Chief Executive Officer of the Corporation since January 2003; Lead Independent
Director of the Corporation from April 2002 until December 2002; Non-Executive
Chairman of the Board from November 2001 until April 2002. From December 1999
through January 2002, Mr. Angelson served as the Deputy Chairman of Chancery
Lane Capital LLC (a private equity investment firm); and from March 1996 until
March 2001, Mr. Angelson served in various executive capacities at Big Flower
Holdings Inc., including as Deputy Chairman.
Dean E. Cherry 42 President, Commercial and Subsidiary Operations since October 2001 and Executive
Vice President, International and Subsidiary operations from January 2001 to
October 2001; from August 1998 to January 2001, Mr. Cherry served as an industry
consultant, private investor and director for several industry related
companies; from June 1997 to August 1998, Mr. Cherry was the Executive Vice
President, Investor Relations and Corporate Communications of World Color Press,
Inc.; and from January 1995 to June 1997, Mr. Cherry was the Executive Vice
President Operations of World Color Press, Inc.
Mark S. Hiltwein 39 Executive Vice President and Chief Financial Officer since February 2002 and
Senior Vice President and Controller from December 2000 to February 2002; from
July 2000 to November 2000, Mr. Hiltwein was Senior Vice President, Controller
of Walter Industries, Inc.; from November 1997 to July 2000, Mr. Hiltwein was
the Chief Financial Officer of L.P. Thebault; and prior to November 1997, Mr.
Hiltwein was the Director, Finance of L.P. Thebault.
Thomas W. Oliva 45 President and Chief Operating Officer since January 2003; President, Forms and
Labels from January 2001 until December 2002. From 1999 to December 2000, Mr.
Oliva was the President of Gravure Catalog and Magazine Group of Quebecor World;
from 1998 to 1999, Mr. Oliva served as the Co-President of the Catalog and
Magazine Group at World Color Press and was President of World Color's National
Sales Group from 1997 to 1998.
Thomas J. Quinlan, III 40 Executive Vice President - Office of the Chief Executive since January 2003;
Executive Vice President, Treasurer and Corporate Operations from July 2002
until December 2002; Executive Vice President and Treasurer from December 2000
until July 2002; from April 2000 to September 2000, Mr. Quinlan was Executive
Vice President, Treasurer of Walter Industries, Inc.; from July 1998 to November
l999, Mr. Quinlan was the Senior Vice President, Treasurer of World Color Press,
Inc.; from July 1997 to July 1998, Mr. Quinlan was the Vice President, Treasurer
of World Color Press, Inc.; and from February 1994 to July 1997, he was the
Assistant Treasurer of World Color Press. Inc.
13
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS
There were 3,818 shareholders of record at December 31, 2002.
The following table sets forth the high and low prices of the common shares of
the Corporation on The Toronto Stock Exchange and the New York Stock Exchange.
The Toronto Stock Exchange (C$) New York Stock Exchange (US$)
Source: www.tse.com Source: Bloomberg
HIGH LOW HIGH LOW
- ----------------------------------------------------------------------------------------------------
2002
4th quarter 18.25 12.05 11.72 7.85
3rd quarter 19.18 13.65 12.34 8.70
2nd quarter 22.15 16.50 14.45 10.87
1st quarter 21.18 14.51 13.38 9.18
2001
4th quarter 15.30 10.88 9.50 6.90
3rd quarter 12.95 8.00 8.30 5.25
2nd quarter 9.25 5.67 5.95 3.67
1st quarter 7.70 4.55 5.19 3.06
- ----------------------------------------------------------------------------------------------------
RECENT SALES OF UNREGISTERED SECURITIES
Not applicable.
DIVIDENDS
In 2000, Moore paid a dividend of $0.05 per common share each quarter. In the
first quarter of 2001, Moore paid a dividend of $0.05 per common share. On April
25, 2001, the Board of Directors decided to suspend future dividends. Moore does
not anticipate declaring and paying cash dividends on the common shares at any
time in the foreseeable future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information as of December 31, 2002, regarding
compensation plans (including individual compensation arrangements) under which
equity securities of Moore are authorized for issuance.
EQUITY COMPENSATION PLAN INFORMATION
-----------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO FUTURE ISSUANCE UNDER
BE ISSUED UPON EXERCISE WEIGHTED-AVERAGE EXERCISE EQUITY COMPENSATION
OF OUTSTANDING OPTIONS, PRICE OF OUTSTANDING OPTIONS, PLANS (EXCLUDING SECURITIES
WARRANTS AND RIGHTS WARRANTS AND RIGHTS (C$) REFLECTED IN COLUMN (a))
PLAN CATEGORY (a) (b) (c)
- -------------------------------------------------------------------------------------------------------------
Equity Compensation
Plans Approved by
Security Holders 5,778,918 14.14 582,992
- -------------------------------------------------------------------------------------------------------------
Equity Compensation
Plans Not Approved 233,705 14.62 --(1)
By Security Holders
- -------------------------------------------------------------------------------------------------------------
Total 6,012,623 14.16 582,992(1)
- -------------------------------------------------------------------------------------------------------------
(1) The Share Plan for Non-Employee Directors does not contain a limitation on
the number of securities issued under the plan.
See Note 12 to the Consolidated Financial Statements for information regarding
the material features of the above plans.
CANADIAN CAPITAL IMPORT - EXPORT AND WITHHOLDING TAX REGULATIONS
There are no charter or contractual provisions expressly limiting either the
amount of cash dividends which the Corporation may declare and pay on its common
shares or the right of non-residents of Canada, as such, to hold or vote any of
the common shares of the Corporation. There are, however, certain restraints on
the holding of the Corporation's voting equity securities. The Investment Canada
Act (the "Act") limits the number of common shares of the Corporation which may
be acquired by a non-Canadian without approval under the Act. The effect of the
Act is to prohibit the acquisition of control by a non-Canadian of certain
Canadian businesses, such as the Corporation, unless such acquisition is found
by the responsible Minister of the Government of Canada to be of net benefit to
Canada.
Canadian federal tax legislation, in conjunction with applicable tax treaties,
generally requires a 15 percent withholding from dividends paid to the
Corporation's shareholders resident in the United States, the United Kingdom and
most western European countries. Similarly, depending upon applicable tax
treaties, dividends paid to other non-residents of Canada are subject to a
withholding tax at a maximum rate of 25 percent. Stock dividends paid to
non-residents of Canada will be subject to withholding tax at the same rate as
cash dividends. The amount of a stock dividend (for tax purposes) would
generally be equal to the amount by which the stated capital of the Corporation
has increased by reason of the payment of such dividend. The Corporation will
furnish additional tax information to shareholders in the event of such
dividend. Interest payable on the Corporation's debt securities held by
non-Canadian residents may also be subject to Canadian withholding tax,
depending upon the terms and provisions of such securities and any applicable
tax treaties. Under regulations presently in effect in the United States, the
Corporation is generally not subject to United States backup withholding rules,
which would require withholding at a rate of 31 percent on dividends and
interest paid to certain United States persons who have not provided the
Corporation with a taxpayer identification number.
14
ITEM 6. SELECTED FINANCIAL DATA
The following information summarizes certain selected consolidated financial
data that should be read in conjunction with "Management's Discussion and
Analysis of Financial Results of Operations and Financial Condition" and our
consolidated financial statements and related notes included elsewhere herein.
Differences between Canadian and U.S. generally accepted accounting principles
are disclosed in Note 25 to the Consolidated Financial Statements.
FIVE-YEAR SUMMARY
Years ended December 31,
Expressed in thousands of U.S. Dollars,
Except share and per share data
2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME STATISTICS
Net sales $2,038,039 $ 2,154,574 $ 2,258,418 $2,425,116 $ 2,717,702
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 102,523 (342,324) (46,234) 141,681 (630,500)
- -----------------------------------------------------------------------------------------------------------------------------------
Income tax expense (recovery) 2,472 (32,192) (17,377) 35,286 (94,330)
- -----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) 73,258 (358,038) (66,372) 92,599 (547,866)
Per common share - basic $ 0.66 $ (4.21) $ (0.75) $ 1.05 $ (6.19)
Per common share - diluted $ 0.64 $ (4.21) $ (0.75) $ 1.04 $ (6.19)
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends -- 4,423 17,594 17,692 34,057
Per common share -- 5.0(cent) 20.0(cent) 20.0(cent) 38.5(cent)
Earnings retained in (losses and dividends
funded by) the business $ 62,935 $ (380,155) $ (83,966) $ 74,907 $ 581,923
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET AND OTHER STATISTICS
Current assets $ 660,131 $ 576,539 $ 690,888 $ 750,860 $ 894,343
Current liabilities 568,546 588,842 468,247 622,464 941,034
- -----------------------------------------------------------------------------------------------------------------------------------
Working capital 91,585 (12,303) 222,641 128,396 (46,691)
- -----------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment - net 255,722 307,640 409,099 458,808 466,198
- -----------------------------------------------------------------------------------------------------------------------------------
Long-term debt 187,463 111,062 272,465 201,686 4,841
- -----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 382,496 321,250 624,685 672,674 610,145
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $1,439,759 $ 1,336,986 $ 1,743,587 $1,630,293 $ 1,726,135
===================================================================================================================================
Average shares outstanding (in thousands) 111,556 88,648 88,457 88,457 88,456
Number of shareholders of record at year-end 3,818 4,194 4,455 5,074 5,506
Number of employees (rounded) 11,800 12,300 16,200 15,800 17,100
- -----------------------------------------------------------------------------------------------------------------------------------
On January 1, 2002, the Corporation adopted the recommendations of CICA Handbook
Section 3062, Goodwill and Other Intangible Assets. Under this standard goodwill
from acquisitions, subsequent to July 1, 2001 is not amortized but is subject
to an annual impairment test. Effective January 1, 2002, all goodwill ceased to
be amortized and is subject to an annual impairment test. Previously, goodwill
from acquisitions prior to July 1, 2001, was amortized on a straight-line basis
over its useful life, not to exceed 40 years, or was written down when a
permanent impairment in value occurred.
The table below provides a reconciliation of the reported net loss for 2001 and
2000, to the pro forma net loss, which excludes previously recorded goodwill
amortization, on goodwill outstanding at December 31, 2001 and 2000:
2001 2000
---------------------------- ---------------------------
Loss per share Loss per share
---------------- ----------------
Loss Basic Diluted Loss Basic Diluted
---------- ---------------- --------- ----------------
Net loss available to common shareholders (as reported) $(373,383) $(4.21) $(4.21) $(66,372) $(0.75) $(0.75)
Add back: Goodwill amortization - net of tax 2,265 0.03 0.03 6,628 0.07 0.07
- ------------------------------------------------------- ---------- ---------------- --------- ----------------
Pro forma net loss $(371,118) $(4.18) $(4.18) $(59,744) $(0.68) $(0.68)
======================================================= ========== ================ ========= ================
15
SELECTED FINANCIAL DATA REQUIRED AND ADJUSTED FOR U.S. GAAP
Years ended December 31,
Expressed in thousands of U.S. Dollars,
Except per share data
2002 2001 2000
- ----------------------------------------------------------------------------------------------------
INCOME STATISTICS
Income (loss) from operations $ 127,667 $ (166,337) $ (14,068)
Income tax expense (recovery) 9,198 49,822 (3,649)
Net earnings (loss) 83,778 (269,964) (45,304)
Per common share - basic 0.75 (3.05) (0.51)
Per common share - diluted 0.74 (3.05) (0.51)
- ----------------------------------------------------------------------------------------------------
BALANCE SHEET STATISTICS
Current assets $ 656,947 $ 576,539
Current liabilities 565,620 587,541
- --------------------------------------------------------------------------------------
Working capital 91,327 (11,002)
- --------------------------------------------------------------------------------------
Shareholders' equity 250,867 167,666
- --------------------------------------------------------------------------------------
Total assets 1,337,470 1,291,719
- --------------------------------------------------------------------------------------
16
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Expressed in thousands of U.S. Dollars,
Except per share data
2002
- ----------------------------------------------------------------------------------------------------------------------------
Fourth Quarter Third Quarter Second Quarter First Quarter
- ----------------------------------------------------------------------------------------------------------------------------
Net sales $ 521,980 $ 486,767 $ 499,791 $ 529,501
Cost of sales 353,335 333,900 341,764 361,008
Income from operations 29,431 28,581 22,651 21,860
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings 28,021 17,498 15,246 12,493
Per common share - basic $ 0.25 $ 0.16 $ 0.14 $ 0.11
Per common share - diluted $ 0.24 $ 0.15 $ 0.13 $ 0.11
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings based on U.S. GAAP (Note 25) 28,256 22,247 18,434 14,841
Per common share - basic $ 0.25 $ 0.20 $ 0.17 $ 0.13
Per common share - diluted $ 0.25 $ 0.20 $ 0.16 $ 0.13
- ----------------------------------------------------------------------------------------------------------------------------
2001
- ----------------------------------------------------------------------------------------------------------------------------
Fourth Quarter Third Quarter Second Quarter First Quarter
- ----------------------------------------------------------------------------------------------------------------------------
Net sales $ 537,249 $ 510,603 $ 532,526 $ 574,196
Cost of sales 373,008 349,864 368,757 460,932
Loss from operations (59,716) (1,773) (51,521) (229,314)
- ----------------------------------------------------------------------------------------------------------------------------
Net loss (84,041) (12,171) (60,366) (201,460)
Per common share - basic $ (1.11) $ (0.14) $ (0.68) $ (2.28)
Per common share - diluted $ (1.11) $ (0.14) $ (0.68) $ (2.28)
- ----------------------------------------------------------------------------------------------------------------------------
Net loss based on U.S. GAAP (Note 25) (116,781) (8,335) (53,211) (91,637)
Per common share - basic $ (1.32) $ (0.09) $ (0.60) $ (1.04)
Per common share - diluted $ (1.32) $ (0.09) $ (0.60) $ (1.04)
- ----------------------------------------------------------------------------------------------------------------------------
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This section provides a review of the financial performance of Moore Corporation
Limited during the three years ended December 31, 2002. The analysis is based on
the consolidated financial statements that are presented in Item 8, prepared in
accordance with Canadian generally accepted accounting principles (GAAP).
Differences between Canadian and U.S. GAAP are disclosed in Note 25 to the
consolidated financial statements. Where appropriate, comparative figures have
been reclassified to conform to the current presentation in the Corporation's
consolidated financial statements.
OVERVIEW
Moore Corporation Limited, established in 1882, is a diversified printing
company that operates in three distinct operating segments. The three segments
are Forms and Labels, Outsourcing and Commercial. According to Printing
Impressions, a leading industry publication, Moore is the third largest
diversified printing company in North America based on revenues. The Corporation
offers its products and services principally in the United States and Canada,
but it also has operations in Europe and in Latin America, primarily in Mexico
and Brazil.
The Forms and Labels segment provides a wide array of products and services,
including the design and production of business forms, labels and related
products, as well as electronic print management solutions. The Outsourcing
segment provides fully integrated business-to-business and business-to-consumer
solutions involving high quality variable image print and mail, electronic
statement and database management services. The Commercial segment provides high
quality multi-color personalized business communications and direct marketing
services, including project, database and list management services. For the year
ended December 31, 2002, approximately 55%, 16% and 29% of consolidated net
sales were attributable to the Forms and Labels, Outsourcing and Commercial
segments, respectively.
Like many other companies, net sales in 2001 and 2002 have been affected by the
economic downturn in the United States. Historically, net sales have not been
materially affected by seasonal factors.
The Corporation's financial results for the periods discussed herein have been
affected by changes in business strategy and restructuring actions. In early
2001, the management team initiated a business strategy to maximize margins and
capitalize on the Corporation's core competencies. As a result, management
realigned the operating segments, restructured the operations, disposed of
non-core businesses, exited unprofitable accounts and product lines and acquired
complementary businesses. These initiatives have resulted in improved
performance during 2002, relative to last year.
Consistent with the strategy to focus on core printing operations, the
Corporation disposed of various non-core businesses. In the first quarter of
2001, the Corporation sold Colleagues, its U.K.-based advertising agency and its
investment in an on-line real estate listing company. In the fourth quarter of
2001, the Corporation disposed of Phoenix, its Detroit-based telemarketing
customer relationship management business. In 2001 and during 2002, the
Corporation also disposed of several of its interests in non-U.S. investments
that were no longer strategic or where the Corporation lacked sufficient control
to achieve its objectives. The Corporation has completed various acquisitions
complementary to its core operations. In December 2001, the Corporation acquired
Document Management Services, the print and mail business of IBM Canada Limited.
In January 2002, the Corporation acquired The Nielsen Company, a commercial
printer. The Corporation also purchased the remaining minority interests in its
consolidated subsidiary, Quality Color Press, Inc. in May 2002 and certain of
its subsidiaries in Central America in August 2002.
On January 16, 2003, the Corporation signed a definitive merger agreement with
Wallace Computer Services, Inc. ("Wallace"), a leading provider of printed
products and print management services, to acquire all of the outstanding share
of Wallace in exchange for average consideration of $14.40 in cash and 1.05
shares of the Corporation for each outstanding share of Wallace. The purchase
price is approximately $1.3 billion based on approximately 42 million Wallace
shares outstanding, which includes the assumption of approximately $210 million
in debt, but does not include any direct transaction costs. The estimated
purchase price was derived using the closing trading price of the Corporation's
common shares on the New York Stock Exchange ("NYSE") at January 16, 2003, which
approximates the average closing price of Moore shares two trading days before
and after January 17, 2003, the announcement date. Completion of the Wallace
merger is subject to customary closing conditions that include, among others,
receipt of required approval from Wallace shareholders, required regulatory
approvals and closing of the required financing. The transaction, while expected
to close in the first half of 2003, may not be completed if any of the closing
conditions are not satisfied. Under certain terms specified in the merger
agreement, the Corporation or Wallace may terminate the agreement, and as a
result, either party may be required to pay a termination fee of up to $27.5
million to the other party. Upon consummation, the transaction will be recorded
by allocating the cost of the assets acquired, including intangible assets and
liabilities assumed based on their estimated fair values at the date of
acquisition. The excess of the cost of the acquisition over the net of amounts
assigned to the fair value of the assets acquired and the liabilities assumed
will be recorded as goodwill. Unless otherwise indicated, the consolidated
financial statements and related notes pertain to the Corporation as a
stand-alone entity and do not reflect the impact of the pending business
combination transaction with Wallace.
18
During 2001, the Corporation undertook restructuring actions, mainly related to
workforce reductions and the exiting of facilities. The Corporation's results
for the periods discussed hereafter are affected by those restructuring actions.
In 2001 and 2002, the Corporation reduced headcount by approximately 4,000
employees. In 2001, the Corporation also recorded charges for the impairment of
assets and goodwill associated with non-core businesses that the Corporation
planned to sell. In the fourth quarter of 2002, the Corporation recorded a
restructuring charge related to workforce reductions primarily due to a plant
closure.
The Corporation has also consolidated its vendors to improve pricing, payment
terms and inventory management. While the Corporation does not anticipate
additional significant reductions in the number of its suppliers, it will pursue
additional opportunities to achieve cost savings with these suppliers. The
Corporation has evaluated its capital expenditure and research and development
requirements and has significantly reduced spending in these areas. In addition,
cost reductions were achieved in the area of information technology, principally
attributable to reductions in headcount and in utilization of consultants.
Additional cost savings are expected to result from the implementation of a
company-wide system for processing customer orders and payments. The principal
benefits from this system are expected to be improved control, reduction in
cycle time and the elimination of the costs associated with maintaining
redundant systems. The Corporation has also reduced waste (i.e., flawed or
excess production) and improved printing throughput (i.e., increased the speed
at which equipment runs).
The following discussion includes information on a consolidated basis presented
in accordance with Canadian GAAP. This discussion is supplemented by a
discussion of segment operating income before deductions for restructuring and
other charges. This supplemental discussion should be read in conjunction with
the Corporation's reported consolidated financial statements presented in Item
8.
The Corporation's results during the period discussed have also been affected by
industry-wide trends, mainly downward pricing pressure associated with the high
degree of competition resulting in part from excess capacity in the industry and
fragmentation in the printing market. While the Corporation believes that
continued consolidation in the industry will result in greater pricing
discipline within the industry and greater opportunities for cross-selling,
other trends may have a countervailing effect. The eventual effect, for example,
of electronic substitution on the printing industry cannot be predicted. The
Corporation has not experienced any material adverse effect from electronic
substitution. The Corporation continues to adapt its product line to the
evolving demands of the digital products and services market. The effect these
actions will have on the Corporation's results or financial condition cannot be
predicted.
Consolidated results of operations for the years ended December 31, 2002, 2001,
and 2000, are shown in the accompanying consolidated statements of operations.
CONSOLIDATED
2002 COMPARED TO 2001
Net sales were $2,038 million, representing a $116.6 million or a 5.4 % decrease
from last year. The decrease primarily resulted from sales declines in the U.S.
and Canadian Forms and Labels business principally related to the decision to
exit certain non-core product lines and unprofitable customer contracts ($64.3
million); divestitures ($110.7 million); and the devaluation of certain foreign
currencies ($30.2 million). The decrease was partially offset by sales from new
acquisitions ($102.1 million).
Cost of sales decreased $162.6 million to $1,390 million or 68.2% of net sales
compared to 72.1% in 2001. The decrease was primarily due to charges of $61.2
million for the partial settlement of the U.S. pension plan and $6.6 million
non-cash write-offs of obsolete inventory included in cost of sales for 2001 and
lower 2002 sales volumes. Excluding these charges, cost of sales would have been
68.9% of net sales in 2001. The Corporation has achieved and anticipate further
cost reductions resulting from additional production efficiencies and reduction
of vendor costs as a result of partnering with suppliers.
Selling, general and administrative expenses decreased $116 million to $459.6
million or 22.6% of net sales, compared to $575.6 million or 26.7% in 2001.
Included in selling, general and administrative expenses for 2002 was $9.2
million related to an executive separation, versus 2001 which included charges
of $35.4 million related to the partial settlement of the U.S. pension plan
settlement and $10.4 million of other costs. Excluding these charges in 2002 and
2001, selling, general and administrative expenses would have been 22.1% and
24.6% of net sales, respectively. The remaining $79.4 million of selling,
general and administrative expense reduction in 2002 compared to 2001 is
attributable to the benefits achieved from the Corporation's 2001 restructuring
activities and an overall focus on efficiencies and cost containment.
19
Depreciation and amortization expense was $86.7 million and $239.1 million in
2002 and 2001, respectively. The decrease of $152.4 million is primarily due to
2001 non-cash charges of $76.8 million related to goodwill written down to its
net recoverable amount for assets held for disposition and $54.6 million for
asset impairments, including plant closures and abandoned information technology
projects. Commencing in 2002, in accordance with Canadian Institute of Chartered
Accountants' (CICA) Handbook Section 3062, Goodwill and Other Intangible Assets,
goodwill is no longer amortized (see Note 7 to Consolidated Financial
Statements).
Income from operations was $102.5 million in 2002, compared to a loss from
operations of $342.3 million in 2001. This improvement resulted from the
restructuring and other charges that were included in 2001 results. Excluding
these charges, income from operations increased $78.6 million for 2002 due to
improved operating results across all business segments and the benefits
achieved from the restructuring actions, as described below.
Other income (expense) increased $14.4 million from expense of $10.7 million in
2001 to income of $3.7 million in 2002, primarily because of gains on
dispositions of fixed assets.
Interest expense decreased by $11.7 million to $12.1 million in 2002. This
decrease is attributable to the redemption of $100 million of senior guaranteed
notes and the conversion of the Corporation's $70.5 million subordinated
convertible debentures, both of which occurred in December 2001. The remaining
$100 million of senior guaranteed notes were redeemed in September 2002 and the
Corporation incurred a $16.7 million debt settlement cost.
The effective income tax rate was 3.2% in 2002. The 2002 difference between the
statutory rate and the effective rate relates to lower tax rates in non-U.S.
jurisdictions offset by the inability to recognize the tax benefit from certain
foreign operating losses, combined with a partial reduction in the deferred tax
valuation allowance (which is based on estimates of future taxable income), the
resolution of an income tax refund, partially offset by required tax reserves.
In 2001, the effective income tax benefit resulted from the partial recognition
of operating losses.
Net earnings in 2002 increased $431.3 million over the prior year to $73.3
million or $0.64 per diluted share, primarily as a result of cost savings
generated by the 2001 restructuring activities and other charges included in
2001 as described below.
2001 COMPARED TO 2000
Net sales were $2,154.6 million, representing a decrease of $103.8 million, or
4.6% over 2000, primarily resulting from the divestitures of the Colleagues and
Phoenix business units, the decision to exit certain unprofitable accounts, the
devaluation of certain foreign currencies and weak demand in non-core businesses
due to the challenging economic environment.
Cost of goods sold increased as a percent of sales for 2001 to 72.1% versus
70.8% in 2000. The increase was primarily attributable to competitive pricing
pressures, $6.6 million of non-cash write-offs of obsolete inventory related to
abandoned product lines and a $61.2 million charge related to the partial
settlement of the U.S. pension plan associated with plant production employees.
Selling, general and administrative expenses decreased $3 million to $575.6
million, or 26.7% of net sales for 2001 versus 25.6% in 2000. Several one-time
items significantly affected this category, primarily charges related to the
partial settlement of the U.S. pension plan related to non-plant production
employees of $35.4 million, and $10.4 million of other costs.
Depreciation and amortization increased by $87.6 million, or 57.8%, due to the
write-down of goodwill of non-core businesses of $76.8 million, as well as $54.6
million for impairment of certain assets no longer in use. The Corporation
recorded the charge of $76.8 million for permanent impairment of goodwill
related to the divestiture of the Phoenix business and a non-core business held
for disposition. These impairment charges were recorded based on management's
decisions during 2001 to sell the businesses based on significant sales
declines, customer turnover and the Corporation's decision to dispose of
non-print related businesses. The charges were based on independent third party
valuations.
Loss from operations increased $296.1 million to a loss of $342.3 million in
2001 as a result of the $374.6 million in restructuring and other charges. These
charges were partially offset by improved operating results in the Forms and
Labels and Outsourcing businesses, of $74.1 million.
Interest expense for the year ended December 31, 2001, increased $2.8 million or
13.3% over the same prior year period, primarily due to an increase in debt
resulting from the issuance of $70.5 million subordinated convertible debentures
in December 2000, partially offset by lower borrowings under the Corporation's
bank credit facility.
20
Included in the loss before taxes and minority interest, is a charge of $11.6
million, which primarily represents accelerated amortization of the deferred
issuance costs on the $70.5 million subordinated convertible debentures, which
were converted during the fourth quarter of 2001.
The decrease in the 2001 effective tax recovery rate from 2000 was primarily
attributable to the inability to currently recognize future income tax benefits
on certain current operating losses and the write-down of goodwill relating to
non-core businesses.
Net loss available to common shareholders for the year ended December 31, 2001,
increased by $307 million to $373.3 million or $(4.21) per diluted share,
primarily due to the Corporation's restructuring actions. Included in the loss
available to common shareholders was approximately $15.3 million, which
primarily represents the fair value at December 28, 2001, of the 1,650,000
shares given to the Class A limited partners of the partnership that owned the
$70.5 million subordinated convertible debentures as inducement for early
conversion.
RESTRUCTURING AND OTHER CHARGES
The following table summarizes restructuring and other charges recorded by the
Corporation:
Years ended December 31,
Expressed in millions of U.S. Dollars
- ---------------------------------------------------------------------
2002 2001 2000
- ---------------------------------------------------------------------
Workforce reduction $ 4.4 $ 77.0 $ -
Lease terminations and other facility costs - 65.5 -
Recovery of restructuring costs (5.3) (12.8) (24.0)
Asset and goodwill impairment - 131.4 34.7
Pension settlement (curtailment) - net - 96.6 (6.6)
Debt conversion and extinguishment 16.7 12.6 -
Inventory write-off - 6.6 -
Asset dispositions and investments - net - 4.9 12.0
Accounts receivable write-off - 4.6 -
Other 9.2 4.8 4.8
- ---------------------------------------------------------------------
$25.0 $ 391.2 $ 20.9
=====================================================================
For the year ended December 31, 2002, the Corporation recorded restructuring and
other charges of $25 million (see Note 17 to Consolidated Financial Statements).
These charges include a restructuring provision in the Forms and Labels segment
of $4.4 million for workforce reductions (154 positions) primarily related to
the closure of a plant; a charge of $16.7 million associated with the redemption
of $100 million of its senior guaranteed notes and an executive separation of
$9.2 million included in selling, general and administrative expenses. These
charges were offset by the reversal of a portion of its 1998 ($3.6 million) and
2001 ($1.7 million) restructuring reserves as a result of favorable
settlements in 2002 as compared to estimates and assumptions used by
management at the time the charges were recorded.
For the year ended December 31, 2001, the Corporation recorded net restructuring
and other charges of $391.2 million (see Note 17 to Consolidated Financial
Statements). These charges include a restructuring provision of $142.5 million
primarily related to workforce reductions and lease terminations; non-cash
charges of $131.4 million that are included in depreciation and amortization
related to the write-down of goodwill of non-core businesses and asset
impairments; non-cash charges for inventory and accounts receivable, relating to
exiting certain non-core businesses, of $11.2 million included in cost of sales
and selling, general and administrative expenses loss on disposal of non-core
assets that were included in investment and other income of $4.9 million; other
charges of $12.6 million related to the early redemption of $100 million of
senior guaranteed notes and the conversion of the $70.5 million subordinated
convertible debentures; and other cash charges of $4.8 million, included in
selling, general and administrative expenses partially offset by a $12.8 million
reversal of restructuring reserves related to the 1998 restructuring program
that are no longer required due to favorable settlements.
The Corporation also recorded a net charge of $96.6 million in 2001 associated
with the partial settlement of the U.S. pension plan, which was curtailed as of
December 31, 2000. In March 2001, the Corporation purchased approximately $600
million of annuity contracts settling approximately 70% of the outstanding
obligation. The Corporation expects to settle the remainder of the plan upon
anticipated regulatory approval and expects to incur an additional settlement
loss.
21
Included in the 2001 restructuring charge was $48 million related to lease
termination costs associated with the Corporation's obligation for its office
facility in Bannockburn, Illinois. This charge was based upon management's
estimates and assumptions at the time the charge was recorded. Actual results
could vary based upon market conditions and the Corporation's ability to
sublease the aforementioned property. Any potential recovery or additional
charge may affect amounts reported in the consolidated financial statements of
future periods.
For the year ended December 31, 2000, the Corporation recorded net other charges
of $20.9 million, related to non-cash charges of $34.7 million for the
write-down of a non-core asset held for disposal and the impairment of a
component of the Enterprise Resource Planning Software System ("ERP"), both
included in depreciation and amortization; loss on disposal of investment in
JetForm Corporation of $8.5 million; the write-down of a permanently impaired
investment of $3.5 million; and $4.8 million of other charges. These charges
were offset by the reversal of a restructuring reserve of $24 million and a gain
on the curtailment of the Corporation's U.S. pension plan of $6.6 million
discussed above.
OPERATING RESULTS BY SEGMENT
The following table and management discussion summarizes the operating results
of the Corporation's operating segments and corporate overhead expenses
excluding the impact of restructuring and other charges previously discussed.
- ---------------------------------------------------------------------------------------------------
Years ended December 31, NET SALES OPERATING INCOME (LOSS)
Expressed in millions of U.S.
Dollars 2002 2001 2000 2002 2001 2000
- ---------------------------------------------------------------------------------------------------
Forms and Labels $1,125.8 $1,194.5 $1,246.1 $ 136.1 $ 110.2 $ 50.4
Outsourcing 316.1 339.5 296.8 61.4 54.3 40.0
Commercial 596.1 620.6 715.5 49.1 30.7 6.4
Corporate - - - (135.7) (162.9) (134.1)
- ---------------------------------------------------------------------------------------------------
Total $2,038.0 $2,154.6 $2,258.4 $ 110.9 $ 32.3 $ (37.3)
====================================================================================================
FORMS AND LABELS
2002 COMPARED TO 2001
Net sales in 2002 decreased $68.7 million or 5.8% to $1,125.8 million, primarily
due to declines in the North American Forms and Labels business, as a result of
the Corporation's decision in 2001 to exit non-core product lines and
unprofitable customer contracts and volume declines due to lower transaction
levels among major print management customers ($64.3 million) partially offset
by sales to new customers ($19.6 million). In Latin America, sales declined by
$25.7 million primarily as a result of the devaluation of various foreign
currencies (principally, the Brazilian real and Venezuelan bolivar).
Operating income in 2001 increased by $25.9 million to $136.1 million in 2002,
primarily due to the Corporation's decision to streamline its Forms and Labels
operations. Major factors contributing to the operating income improvement
included the continued benefit from the elimination of non-customer critical
positions, the consolidation of the Canadian and U.S. management teams and
administrative infrastructures, the realignment of incentive plans, and
productivity improvements (waste reductions and higher throughput.)
2001 COMPARED TO 2000
Net sales in 2001 decreased $51.6 million, or 4.1% to $1,194.5 million, due to
foreign currency devaluation of $28.5 million and lower volumes at the Canadian
Forms and Labels business as a result of the Corporation's decision to exit
certain unprofitable customer accounts. Net sales declined in North America by
$28.9 million, or 2.7%, due to the decision to exit certain unprofitable
accounts and lower volumes. In Latin America, sales declined by $22.7 million,
or 12.6%, primarily due to the devaluation of the Brazilian real.
Operating income increased $59.8 million, or 118.7% to $110.2 million, primarily
due to the Corporation's decision to streamline its Forms and Labels operations
including the elimination of non-customer critical positions in support of the
goal to significantly reduce costs. Cost of goods sold as a percent of sales
remained constant despite volume decline, due to waste reduction programs,
reduced headcount, the initial impact of purchasing synergies and exiting of
certain lower margin customer contracts. Selling, general and administrative
expenses in 2001 decreased $40.4 million or 14.7%, also as an immediate result
of the 2001 cost containment initiatives.
22
OUTSOURCING
2002 COMPARED TO 2001
Net sales decreased $23.4 million from $339.5 million to $316.1 million in 2002
from the prior year. Growth achieved from new and existing customers in the
financial, insurance, and telecommunications markets, combined with the
acquisition of the Document Management Services business of IBM Canada Limited
($18.9 million), was more than offset by volume declines in the prepaid
telephone card market ($24.5 million). Net sales growth was also offset by the
impact of the decision to cease manufacturing the packaging for certain
non-secured stored value cards.
Operating income in 2002 increased $7.1 million, or 13.1%, due to cost savings
achieved through workforce reductions, cost containment and the acquisition
discussed above.
2001 COMPARED TO 2000
Net sales increased $42.7 million, or 14.4% to $339.5 million, due to strong
volume growth of 11.3% resulting from increased service offerings and the
benefits achieved from a sharper focus on leveraging core capabilities with
existing customers.
Operating income increased by $14.3 million, or 35.8% to $54.3 million, due to
increased revenues, improved gross margins and cost savings achieved through
workforce reductions. Selling, general and administrative expenses remained
almost flat despite incremental costs associated with increased sales volume due
to cost reduction initiatives implemented throughout the year.
COMMERCIAL
2002 COMPARED TO 2001
Net sales declined by $24.5 million or 3.9% to $596.1 million, due to the
divestiture of the Phoenix business unit ($64.3 million), Colleagues and a
European investment ($15.4 million), volume declines of $44.6 million in the
directory publications, as well as the printer and peripherals businesses,
offset by the acquisition of The Nielsen Company on January 31, 2002 ($83.2
million) and increased volumes in the domestic direct mail business ($16.6
million).
Operating income in 2002 increased $18.4 million to $49.1 million over the prior
year. The increase was driven by strong volume growth in the domestic direct
mail business ($5.6 million), cost reductions resulting from the 2001
restructuring activities, and the acquisition of The Nielsen Company ($9.5
million).
2001 COMPARED TO 2000
Net sales declined by $94.9 million, or 13.3% to $620.6 million, primarily due
to a $55.6 million decline in revenues as a result of the divestiture of
Colleagues, a $21.7 million revenue decline in non-core businesses and $8.8
million decline in revenues related to the disposition of Phoenix.
Commercial contributed $30.7 million to consolidated operating income in 2001, a
379.7% increase due to aggressive cost containment, which included a $33.8
million or 22.4% decrease in selling, general and administrative expenses.
CORPORATE
2002 COMPARED TO 2001
Corporate operating expenses declined by $27.2 million, or 16.7% to $135.7
million, due to overall cost controls and a focus on discretionary spending.
2001 COMPARED TO 2000
Corporate operating expenses increased by $28.8 million, or 21.5% to $162.9
million, primarily due to the reduction of pension income resulting from the
pension settlement and additional retirement savings plan contributions,
partially offset by a reduction in corporate overhead.
23
LIQUIDITY AND CAPITAL RESOURCES
In August 2002, the Corporation entered into a $400 million secured credit
facility. The facility is comprised of a five-year $125 million Revolving Credit
Facility, a five-year $75 million Delayed Draw Term Loan A Facility, and a
six-year $200 million Term Loan B Facility, all of which are subject to a number
of financial and restrictive covenants that, among other things, limit
additional indebtedness and limit the ability of the Corporation to engage in
certain transactions with affiliates, create liens on assets, engage in mergers
and consolidations, or dispose of assets. The financial covenants calculated on
a quarterly basis include, but are not limited to, tests of leverage and fixed
charges coverage. The Delayed Draw Term Loan A Facility is to be used for
acquisitions and related initial working capital requirements. The facility must
be drawn within 18 months of the closing in a maximum of two drawings. Proceeds
from the Term Loan B Facility were used in part to refinance the existing $168
million revolving credit facility that expired on August 5, 2002, and to fund
working capital requirements as necessary. At December 31, 2002, there was
$179.5 million outstanding under the Term Loan B Facility bearing interest at
LIBOR (London Interbank Offer Rate) plus a 300 basis point spread. At December
31, 2002, three-month LIBOR was 1.38%.
The Corporation intends to enter into a new senior secured facility if it
consummates the Wallace acquisition as described above. The Corporation has
entered into a commitment letter, dated January 16, 2003, with certain financial
institutions. In that letter, the financial institutions have agreed, subject to
certain specified conditions discussed below, to enter into definitive
agreements to provide the Corporation with an $850 million senior secured credit
facility and a $400 million senior unsecured credit facility. In lieu of
entering into definitive agreements for the $400 million senior unsecured credit
facility, the Corporation may instead decide to sell $400 million in bonds,
which may be guaranteed by certain assets of the Corporation. The proceeds of
the financing will be used in part to pay the total cash consideration that will
be paid in the merger, expenses related to the merger and to refinance certain
existing debt of the Corporation, Wallace and their respective subsidiaries.
The obligation of the financial institutions to provide the financing is subject
to certain customary closing and/or borrowing conditions, including the absence
of material adverse changes and agreement as to final documentation.
In September 2002, the Corporation entered into interest rate swap agreements to
hedge exposure to fluctuations in interest rates on the Term Loan B Facility as
required by the Facility. These swap agreements exchange the variable interest
rates (LIBOR) on this facility for fixed interest rates over the terms of the
agreements. The resulting fixed interest rates will be the contracted swap rate
plus the LIBOR basis spread on the Term Loan B Facility. At December 31, 2002,
the notional amount of the swap agreements was $150 million comprised as
follows: a $100 million 3.78% fixed rate agreement that expires in August 2006;
and a $50 million 2.56% fixed rate agreement that expires in September 2004. The
interest rate differential received or paid on these agreements is recognized as
an adjustment to interest expense. These swap agreements are designated as cash
flow hedges for U.S. GAAP. At December 31, 2002, the fair value of these swap
agreements was a $5.1 million liability.
The Corporation also maintains uncommitted bank operating lines in the majority
of the domestic markets in which it operates. These lines of credit are
maintained to cover temporary cash shortfalls. Maximum allowable borrowings
under these uncommitted facilities amounted to $40.2 million at December 31,
2002 ($1.4 million outstanding), and may be terminated at any time at the
Corporation's option. Total availability under these facilities at December 31,
2002, was approximately $38.8 million. The Corporation has $19.9 million in
outstanding letters of credit at December 31, 2002.
On September 4, 2002, the Corporation redeemed the remaining $100 million of
senior guaranteed notes at a redemption price that includes a net prepayment
charge of $16.7 million with proceeds from the Term Loan B Facility.
An additional source of liquidity at year-end was the Corporation's short-term
investments in the amount of $125.6 million, which primarily consist of
certificate and term deposits, treasury bills and bank notes. These investments
are with financial institutions of sound credit rating and are highly liquid as
the majority mature within one to seven days and are classified as "cash and
cash equivalents".
At December 31, 2002 and 2001, the Corporation met its financial covenants. The
Corporation believes it has sufficient liquidity to complete the remaining
restructuring activities and effectively manage the operating needs of the
businesses.
24
On December 28, 2001, the $70.5 million subordinated convertible debentures held
by Chancery Lane/GSC Investors L.P. (the "Partnership") were converted into
21,692,311 common shares. The Corporation issued 1,650,000 additional common
shares ("additional shares") as an inducement to the Partnership's Class A
limited partners to convert prior to December 22, 2005, the date the Corporation
could have redeemed the debentures. The right to receive the additional shares
was assigned by the Partnership to its Class A limited partners. Under the terms
of the partnership agreement, the Class A limited partners were entitled to all
the interest paid on the subordinated convertible debentures. As part of the
inducement agreement, the Corporation has agreed that if at December 31, 2003,
the 20 day weighted average trading price of the common shares on the NYSE is
less than $10.83, the Corporation must make a payment equal to the lesser of $9
million or the value of 6,000,000 of its common shares at such date. The $9
million payment may be reduced under certain circumstances. At the option of the
Corporation, these payments may be made in common shares, subject to regulatory
approval. To the extent that shares or cash is paid, it will be recorded as a
charge to retained earnings. At December 31, 2002, on the Corporation's 20-day
weighted average trading price was less than the $10.83 measurement price. The
Corporation has no indication that the 20-day weighted average share price will
continue to trade below the measurement price. Certain officers of the
Corporation, including the Chairman and the Chief Executive Officer, and the
former Chairman, President and Chief Executive Officer, were investors in the
Partnership.
On February 7, 2002, the Corporation announced a program to repurchase up to $50
million of its common shares. The program allows for shares to be purchased on
the NYSE from time to time depending upon market conditions, market price of the
common shares and the assessment of the cash flow needs by the Corporation's
management. As of December 31, 2002, the Corporation had repurchased 1,069,700
shares.
Net cash provided from operating activities was $158.4 million in 2002, compared
to $137.1 million for the same period last year. The change was primarily due to
improved profitability.
Net cash used by investing activities in 2002 was $92.5 million versus $21.9
million in 2001. The increased expenditures relate to the aforementioned
acquisitions of businesses of $66 million.
Net cash provided from financing activities in 2002 was $27.1 million compared
to net cash used of $93.1 million in 2001. The increase relates to long-term
borrowings from the Term Loan B Facility, offset by the redemption of the
remaining $100 million of senior guaranteed notes.
As of December 31, 2002, the aggregate amount of outstanding forward foreign
currency contracts was $13.6 million. Unrealized gains and losses from these
foreign currency contracts were not significant at December 31, 2002. The
Corporation does not use derivative financial instruments for trading purposes.
The following table represents contractual obligations of the Corporation at
December 31, 2002:
- -----------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
2-3 4-5 5 YEARS
Expressed in thousands of U.S. Dollars TOTAL 1 YEAR YEARS YEARS THEREAFTER
- -----------------------------------------------------------------------------------------------------
Long-term debt $179,829 $ 219 $ 110 $ 84,500 $ 95,000
Capital lease obligations 9,769 2,280 4,430 1,263 1,796
Operating leases 140,029 32,789 44,881 27,486 34,873
Workforce reductions 14,319 12,978 1,341 -- --
Other cash obligations 7,326 3,324 4,002 -- --
- -----------------------------------------------------------------------------------------------------
Total Contractual Cash Obligations $351,272 $ 51,590 $54,764 $113,249 $131,669
=====================================================================================================
Note: Above amounts exclude bank indebtedness of $18,158, which represents
bank overdrafts.
COST INITIATIVES
The Corporation continuously evaluates ways to reduce its cost structure, and
improve the productivity of its operations. Future cost reduction initiatives
may include the reorganization of operations or the consolidation of
manufacturing facilities. Implementing such initiatives may result in future
charges, which may be substantial.
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 2002, the Corporation adopted various accounting standards
as described in Note 2 to the consolidated financial statements, none of which
had a material effect on the consolidated financial statements.
Pending standards and their estimated effect on the Corporation's consolidated
financial statements are described in Note 26 to the Consolidated Financial
Statements.
25
CRITICAL ACCOUNTING POLICIES
The Corporation's significant accounting policies are more fully described in
Note 1 to the consolidated financial statements. Certain accounting policies
require the application of significant judgment by management in selecting the
appropriate assumptions for calculating financial estimates. By their nature,
these judgments are subject to an inherent degree of uncertainty. These
judgments are based on historical experience, terms of existing contracts,
observance of trends in the industry, information provided by customers and
information available from other outside sources, as appropriate. Significant
policies that the Corporation believes involves the application of significant
judgment as described by management include:
REVENUE RECOGNITION
The Corporation typically recognizes revenue for the majority of its products
upon shipment to the customer and the transfer of title. Under agreements with
certain customers, custom forms may be stored by the Corporation for future
delivery. In these situations, the Corporation receives a logistics and
warehouse management fee for the services it provides. In these cases, delivery
and billing schedules are outlined with the customer and product revenue is
recognized when manufacturing is complete, title transfers to the customer, the
order is invoiced and there is reasonable assurance as to collectability. Since
the majority of products are customized, product returns are not significant;
however, the Corporation accrues for the estimated amount of customer credits at
the time of sale.
Revenue from services is recognized as services are performed. Long-term product
contract revenue is recognized based on the completed contract method or
percentage of completion method. The percentage of completion method is used
only for product contracts that will take longer than three months to complete,
and project stages are clearly defined and can be invoiced. The contract must
also contain enforceable rights by both parties. Revenue related to short-term
service contracts and contracts that do not meet the percentage of completion
criteria is recognized when the contract is completed.
ACCOUNTS RECEIVABLE
The Corporation maintains an allowance for doubtful accounts, which is reviewed
at least quarterly for estimated losses resulting from the inability of its
customers to make required payments for product and services. Additional
allowances may be necessary in the future if the ability of its customers to pay
deteriorates.
PENSION AND POSTRETIREMENT PLANS
The Corporation records annual amounts relating to its pension and
postretirement plans based on calculations specified by generally accepted
accounting principles, which include various actuarial assumptions, including
discount rates, assumed rates of return, compensation increases, turnover rates
and health care cost trend rates. The Corporation reviews its actuarial
assumptions on an annual basis and makes modifications to the assumptions based
on current rates and trends when it is deemed appropriate to do so. The effect
of modifications is generally recorded or amortized over future periods. The
Corporation believes that the assumptions utilized in recording its obligations
under its plans are reasonable based on its experience, market conditions and
input from its actuaries.
The plan assumptions for both the United States and International qualified
pension plans, which comprise approximately 75% of the projected benefit
obligation at December 31, 2002, are based on current estimated market rates to
settle the remaining portion of the plan as both plans have been terminated.
The health care cost trend rates used in valuing the Corporation postretirement
benefit obligation are established based upon actual health care cost trends and
consultation with our actuaries.
The following is the 2002 effect of a 1% increase in the assumed health care
cost trend rates for each future year on (Expressed in thousands of U.S.
Dollars):
Accumulated postretirement benefit obligation $12,099
Aggregate of the service and interest cost components of
net postretirement benefit cost 910
The following is the effect of a 1% decrease in the assumed health care cost
trend rates for each future year on:
Accumulated postretirement benefit obligation $10,850
Aggregate of the service and interest cost components of
net postretirement benefit cost 842
26
In reaction to the significant increase in health care costs in recent years,
the Corporation increased this assumption at the November 30, 2001 valuation
date. The discount rate assumption is based upon published long-term bond
indices at each measurement date. Changes in the discount rate do not have a
significant effect on the postretirement benefit cost due to the maturity of the
plan participants.
INCOME TAXES
The valuation allowance at December 31, 2002, relates to net operating losses
generated in the United States, Canada, Latin America, and Europe(which have
limited carry-forward periods), and future deductible expenses.
The Corporation has maintained a valuation allowance to reduce its deferred tax
assets based on an evaluation of the amount of deferred tax assets that
management believes are more likely than not to be ultimately realized in the
foreseeable future. The valuation allowance was reduced in 2002 based on
management's best estimate of the amount of deferred tax assets that will more
likely than not be realized.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK DISCLOSURE
The risks inherent in the Corporation's market risk sensitive instruments and
positions is summarized as: the potential loss arising from adverse changes in
interest rates, credit worthiness, foreign currency exchange rates and certain
commodity prices. There have been no material changes in market risk from the
prior year.
INTEREST RATES AND FOREIGN CURRENCY
The Corporation is exposed to interest rate risk arising from fluctuations in
interest rates on its borrowings under its credit facilities. Interest rate swap
agreements were entered into to hedge the Corporation's exposure to fluctuations
in interest rates on its Term Loan B Facility. These swap agreements exchange
the variable interest rates (LIBOR) on this facility for fixed interest rates
over the terms of the agreements. The Corporation is also exposed to price risk
in respect of its fixed rate financial instruments (see Note 10 to Consolidated
Financial Statements).
The Corporation is exposed to the impact of foreign currency fluctuations in
certain countries in which it operates. The exposure to foreign currency
movements is limited because the operating revenues and expenses of its various
subsidiaries and business units are substantially in the local currency of the
country in which they operate. To the extent revenues and expenses are not in
the local currency of the operating unit, the Corporation enters into foreign
currency forward contracts to hedge the currency risk. As of December 31, 2002,
the aggregate amount of outstanding forward contracts was $13.6 million. Gains
and losses from these foreign currency contracts were not significant at
December 31, 2002. The Corporation does not use derivative financial instruments
for trading or speculative purposes.
The Corporation assessed market risk based on changes in interest rates and
foreign currency rates utilizing a sensitivity analysis that measures the
potential loss in earnings, fair values and cash flows based on a 10%
hypothetical change in prevailing interest and foreign currency rates. Using
this sensitivity analysis, the Corporation determined such changes would not
have a material effect on earnings, fair values and cash flows.
CREDIT RISK
The Corporation is exposed to credit risk on accounts receivable balances. This
risk is limited due to the Corporation's large, diverse customer base, dispersed
over various geographic regions and industrial sectors. No single customer
comprised more than 5% of the Corporation's consolidated net sales in 2002, 2001
and 2000. The Corporation maintains provisions for potential credit losses, and
any such losses to date have been within the Corporation's expectations.
COMMODITIES
The primary raw materials used by the Corporation are paper and ink. The cost of
paper and ink represents a significant portion of costs of sales. Increases in
price or a lack of availability of supply of these raw materials could have a
material adverse effect on the consolidated financial condition and results of
operations. The Corporation uses its significant purchasing volume to negotiate
long-term supply contracts that give favorable prices, terms, quality and
service. While the Corporation believes that these long-term contracts will
enable the Corporation to receive adequate supplies of paper in the event of a
tight paper supply, there can be no assurance in this regard.
27
To reduce price risk caused by market fluctuations, the Corporation has
incorporated price adjustment clauses in certain sales contracts. The
Corporation does not think it is practicable to measure the impact of a
hypothetical 10% change in the price of paper and other raw materials on its
earnings and cash flows. Management believes such a change would not have a
significant effect on the Corporation since these costs are generally passed
through to its customers.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
As at December 31,
Expressed in thousands of U.S. Dollars,
Except share data
2002 2001
- ----------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 139,630 $ 84,855
Accounts receivable, less allowance for doubtful
accounts of $19,538 (2001 - $22,057) 341,383 336,153
Inventories (Note 4) 129,889 128,421
Prepaid expenses 17,317 13,544
Deferred income taxes (Note 18) 31,912 13,566
- ----------------------------------------------------------------------------------------
Total Current Assets 660,131 576,539
------------------------
Property, plant and equipment - net (Note 5) 255,722 307,640
Investments (Note 6) 32,256 32,204
Prepaid pension cost (Note 14) 221,520 215,752
Goodwill - net (Note 7) 106,254 41,857
Other intangibles - net (Note 7) 6,434 437
Deferred income taxes (Note 18) 53,938 47,651
Other assets (Note 8) 103,504 114,906
- ----------------------------------------------------------------------------------------
Total Assets $1,439,759 $ 1,336,986
------------------------
LIABILITIES
Current Liabilities
Bank indebtedness $ 18,158 $ 56,181
Accounts payable and accrued liabilities (Note 9) 486,507 486,626
Short-term debt (Note 10) 2,135 18,034
Income taxes 58,562 27,677
Deferred income taxes (Note 18) 3,184 324
- ----------------------------------------------------------------------------------------
Total Current Liabilities 568,546 588,842
------------------------
Long-term debt (Note 10) 187,463 111,062
Postretirement benefits (Note 15) 241,344 239,664
Deferred income taxes (Note 18) 9,482 13,705
Other liabilities (Note 11) 43,776 51,263
Minority interest 6,652 11,200
- ----------------------------------------------------------------------------------------
Total Liabilities 1,057,263 1,015,736
------------------------
SHAREHOLDERS' EQUITY
Share Capital (Note 12)
Authorized:
Unlimited number of preference (none outstanding for
2002 and 2001) and common shares without par value
Issued:
111,842,348 common shares in 2002; 111,803,651 common
shares in 2001 403,800 397,761
Unearned restricted shares (Note 12) (2,572) -
Retained earnings 114,601 51,666
Cumulative translation adjustments (Note 13) (133,333) (128,177)
- ----------------------------------------------------------------------------------------
Total Shareholders' Equity 382,496 321,250
------------------------
Total Liabilities and Shareholders' Equity $1,439,759 $1,336,986
========================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
29
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
Expressed in thousands of U.S. Dollars
Except share and per share data
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
Net sales $ 2,038,039 $ 2,154,574 $ 2,258,418
- ---------------------------------------------------------------------------------------------------------
Cost of sales 1,390,007 1,552,561 1,598,525
Selling, general and administrative expenses 459,613 575,586 578,642
Provision for (recovery of) restructuring costs - net (850) 129,679 (24,033)
Depreciation and amortization (includes impairment
charges of $131,393 for 2001 and $36,621 for 2000) 86,746 239,072 151,518
- --------------------------------------------------------------------------------------------------------
1,935,516 2,496,898 2,304,652
--------------------------------------
Income (loss) from operations 102,523 (342,324) (46,234)
Investment and other income (expense) 3,720 (10,721) (14,342)
Interest expense - net 12,145 23,758 21,016
Debt settlement and issue costs 16,746 11,617 -
--------------------------------------
Earnings (loss) before income taxes and minority interest 77,352 (388,420) (81,592)
Income tax expense (recovery) 2,472 (32,192) (17,377)
Minority interest 1,622 1,810 2,157
- ---------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 73,258 $ (358,038) $ (66,372)
Distribution to certain convertible debenture holders (Note 10) - 15,345 -
- ---------------------------------------------------------------------------------------------------------
Net earnings (loss) available to common shareholders $ 73,258 $ (373,383) $ (66,372)
=========================================================================================================
Net earnings (loss) per common share:
Basic $ 0.66 $ (4.21) $ (0.75)
Diluted 0.64 (4.21) (0.75)
Average shares outstanding (in thousands):
Basic 111,556 88,648 88,457
Diluted 114,022 88,648 88,457
- ---------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Years ended December 31,
Expressed in thousands of U.S. Dollars
Except share and per share data
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
Balance at beginning of the year, as previously reported $ 51,666 $ 431,821 $ 480,049
Change in accounting policy:
Income taxes (Note 2) - - 2,443
Employee future benefits (Note 2) - - 33,295
- ---------------------------------------------------------------------------------------------------------
Balance at beginning of the year, as restated 51,666 431,821 515,787
Net earnings (loss) 73,258 (358,038) (66,372)
- ---------------------------------------------------------------------------------------------------------
124,924 73,783 449,415
Repurchase of common shares (1,069,700 in 2002) 10,323 - -
Subordinated convertible debentures - 17,694 -
Dividends (5(cent) per share in 2001 and
20(cent) per share in 2000) - 4,423 17,594
- ----------------------------------------------------------------------------------------------------------
Balance at end of year $ 114,601 $ 51,666 $ 431,821
==========================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
Expressed in thousands of U.S. Dollars
2002 2001 2000
- --------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings (loss) $ 73,258 $(358,038) $ (66,372)
Items not affecting cash resources:
Depreciation and amortization (a) 86,746 239,072 152,546
Net (gain) loss on sale of assets (8,730) 5,824 2,630
Net loss on write-off and sale of investments 2,801 -- 11,974
Deferred income taxes (25,996) (35,103) (13,027)
Pension settlement - net -- 96,605 --
Provision for (recovery of) restructuring costs - net (850) 129,679 (24,033)
Debt settlement and issue cost 16,746 11,617 --
Restricted share compensation 1,093 --
Other (10,804) 3,048 12,367
Changes in working capital other than cash resources:
Accounts receivable - net (638) 44,684 69,780
Inventories 6,026 21,037 24,181
Accounts payable and accrued liabilities (9,741) (19,378) (134,989)
Income taxes 32,133 (4,417) (639)
Other (3,649) 2,491 2,902
- --------------------------------------------------------------------------------------------
Net cash provided by operating activities 158,395 137,121 37,320
-----------------------------------
INVESTING ACTIVITIES
Property, plant and equipment - net (8,941) (37,072) (39,543)
Long-term receivables and other investments (5,028) (3,489) 527
Acquisition of businesses (65,966) (14,565) (3,351)
Proceeds from sale of investment and other assets -- 38,495 13,178
Software expenditures (10,958) (6,517) (28,795)
Other (1,615) 1,210 (842)
- --------------------------------------------------------------------------------------------
Net cash used by investing activities (92,508) (21,938) (58,826)
-----------------------------------
FINANCING ACTIVITIES
Dividends paid -- (8,846) (17,594)
Net change in short-term debt (15,899) 15,325 (37,431)
Proceeds from issuance of long-term debt 200,000 7,963 6,003
Payments on long-term debt (140,264) (104,166) (1,776)
Issuance (conversion) of convertible debentures -- (1,600) 58,660
Issuance (repurchase) of common shares - net (7,949) -- --
Other (8,827) (1,744) (5,753)
- --------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 27,061 (93,068) 2,109
-----------------------------------
Effect of exchange rate on cash (150) (551) 1,414
Increase (decrease) in cash resources 92,798 21,564 (17,983)
Cash resources at beginning of year (b) 28,674 7,110 25,093
- --------------------------------------------------------------------------------------------
Cash resources at end of year (b) $ 121,472 $ 28,674 $ 7,110
- --------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
- --------------------------------------------------------------------------------------------
Interest paid $ 13,324 $ 26,594 $ 25,288
- --------------------------------------------------------------------------------------------
Income taxes paid (refunded) - net (1,041) 3,425 5,314
- --------------------------------------------------------------------------------------------
(a) Includes depreciation of $1,028 that has been classified in cost of sales
in 2000.
(b) Cash resources are defined as cash and cash equivalents less bank
indebtedness.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS, UNLESS OTHERWISE INDICATED)
1. SUMMARY OF ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Moore Corporation Limited is a corporation continued under the Canada Business
Corporation Act. The consolidated financial statements, which are prepared in
accordance with Canadian generally accepted accounting principles (GAAP),
include the accounts of Moore Corporation Limited and its subsidiaries. Entities
that are not controlled and over which the Corporation has significant influence
are accounted for under the equity method. All other investments are accounted
for on the cost basis. The Corporation does not have any transactions with
unconsolidated special purpose entities or variable interest entities. All
intercompany transactions have been eliminated. Comparative figures have been
reclassified where appropriate to conform to the current presentation.
Significant differences between Canadian and U.S. GAAP are discussed in Note 25.
REVENUE RECOGNITION
The Corporation typically recognizes revenue for the majority of its products
upon shipment to the customer and the transfer of title. Under agreements with
certain customers, custom forms may be stored by the Corporation for future
delivery. In these situations, the Corporation receives a logistics and
warehouse management fee for the services provided. In these cases, delivery and
billing schedules are outlined with the customer and product revenue is
recognized when manufacturing is complete, title transfers to the customer, the
order is invoiced and there is reasonable assurance of collectability. Since the
majority of products are customized, product returns are not significant,
however, the Corporation accrues for the estimated amount of customer credits at
the time of sale.
Revenue from services is recognized as services are performed. Long-term product
contract revenue is recognized based on the completed contract method or
percentage of completion method. The percentage of completion method is used
only for contracts that will take longer than three months to complete, and
project stages are clearly defined and can be invoiced. The contract must also
contain enforceable rights by both parties. Revenue related to short-term
service contracts and contracts that do not meet the percentage of completion
criteria is recognized when the contract is completed.
TRANSLATION OF FOREIGN CURRENCIES
The consolidated financial statements are expressed in United States dollars
because a significant part of the Corporation's net assets and earnings are
located or originate in the United States. Except for the foreign currency
financial statements of subsidiaries in countries with highly inflationary
economies, Canadian and other foreign currency financial statements are
translated into United States dollars on the following bases: all assets and
liabilities at the year-end exchange rates; income and expenses at average
exchange rates during the year. Net unrealized exchange adjustments arising on
translation of foreign currency financial statements are charged or credited
directly to shareholders' equity and shown as cumulative translation
adjustments.
The foreign currency financial statements of subsidiaries in countries with
highly inflationary economies are translated into United States dollars using
the temporal method whereby monetary items are translated at current exchange
rates, and non-monetary items are translated at historical exchange rates. In
2001, Venezuela was the only highly inflationary economy in which the
Corporation operated. In 2002, Venezuela's economy was no longer considered
highly inflationary, and the impact of this change in method of translation was
not material to the consolidated financial statements.
Exchange losses or gains are included in earnings. In 2001, a loss of $2,936 is
included in investment and other income. Amounts included in investment and
other income for 2002 and 2000 were not material. In 2002, the Corporation
adopted the recommendations of the Canadian Institute of Chartered Accountants'
(CICA) amended Handbook Section 1650, Foreign Currency Translation. The impact
of the adoption of the standard was not material.
FINANCIAL INSTRUMENTS
The Corporation enters into forward exchange contracts to hedge exposures
resulting from foreign exchange fluctuations in the ordinary course of business.
The contracts are normally for terms of less than one year and are used as
hedges of foreign denominated revenue streams, costs and loans. The unrealized
gains and losses on outstanding contracts are offset against the gains and
losses of the hedged item. In 2002, the Corporation entered into interest rate
swap agreements to hedge its exposure to fluctuations in interest rates on its
Term Loan B Facility. The interest rate differential received or paid on these
agreements is recognized as an adjustment to interest expense.
Short-term securities are highly liquid and consist of investment grade
instruments in governments, financial institutions and corporations.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unless disclosed otherwise in the notes to the consolidated financial
statements, the estimated fair value of financial assets and liabilities
approximates carrying value.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments with a purchased
maturity of three months or less.
INVENTORIES
Inventories of raw materials and work-in-process are valued at the lower of cost
or replacement cost and inventories of finished goods at the lower of cost or
net realizable value. In the United States, the cost of the principal raw
material inventories and the raw material content of work-in-process and
finished goods inventories is determined on the last-in, first-out basis. The
cost of all other inventories is determined on the first-in, first-out basis.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
Property, plant and equipment are stated at historical cost and are depreciated
over their estimated useful lives using the straight-line method. The estimated
useful lives of buildings range from 20 to 50 years and from 3 to 17 years for
machinery and equipment. All costs for repairs and maintenance are expensed as
incurred. Gains or losses on the disposal of property, plant and equipment are
included in investment and other income, and the cost and accumulated
depreciation related to these assets are removed from the accounts.
The Corporation reviews property, plant and equipment for impairment whenever
events or changes in circumstances indicate the carrying value may not be
recoverable. The Corporation then compares expected future undiscounted cash
flows to be generated by the asset to its carrying value. If the carrying value
exceeds the sum of the future undiscounted cash flows, the asset would be
adjusted to its net recoverable amount and an impairment loss would be charged
to operations in the period identified.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess cost of an acquired entity over the fair value
assigned to the identifiable net assets acquired. Goodwill from acquisitions
that occurred prior to July 1, 2001 was amortized over its useful life on a
straight-line basis, not to exceed 40 years. Goodwill from acquisitions
subsequent to July 1, 2001 was not amortized. Effective January 1, 2002, all
goodwill ceased to be amortized.
Identifiable intangible assets are recognized apart from goodwill and are
amortized over their estimated useful lives.
Goodwill and identifiable intangible assets are reviewed annually for
impairment, unless events or changes in circumstances indicate that the carrying
value may not be recoverable. In the absence of comparable market valuations,
the Corporation compares expected future discounted cash flows to be generated
by the asset or related business to its carrying value. If the carrying value
exceeds the sum of the future discounted cash flows, the asset would be adjusted
to its fair value and an impairment loss would be charged to operations in the
period identified (see Note 7).
AMORTIZATION OF DEFERRED CHARGES
Deferred charges include certain costs to acquire and develop internal-use
computer software, which is amortized over its estimated useful life using the
straight-line method, up to a maximum of seven years.
Deferred debt issue costs are amortized over the term of the related debt.
PENSION AND POSTRETIREMENT PLANS
The Corporation records annual amounts relating to its pension and
postretirement plans based on calculations specified by GAAP, which include
various actuarial assumptions, including discount rates, assumed rates of
return, compensation increases, turnover rates and health care cost trend rates.
The Corporation reviews its actuarial assumptions on an annual basis and makes
modifications to the assumptions based on current rates and trends when it is
deemed appropriate to do so. The effect of modifications is generally recorded
or amortized over future periods. The Corporation believes that the assumptions
utilized in recording its obligations under its plans are reasonable based on
its experience, market conditions and input from its actuaries.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
The Corporation applies the liability method of tax allocation for accounting
for income taxes. Under the liability method, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax bases of assets and liabilities and are measured using the substantively
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. The effect of a change in income tax rates on deferred
income tax liabilities and assets is recognized in income in the period that the
change occurs. No provision has been made for taxes on undistributed earnings of
subsidiaries not currently available for paying dividends as such earnings have
been reinvested in the business.
STOCK-BASED COMPENSATION
The Corporation has stock-based compensation plans as described in Note 12. The
Corporation accounts for stock options using the intrinsic value method. No
compensation expense was recognized in 2002, 2001 or 2000 as the options have an
exercise price equal to the fair market value at dates of grant. See Notes 12
and 25 for the pro forma effect of accounting for stock options under the fair
value method for both Canadian and U.S. GAAP, respectively.
In October 2002, the Corporation awarded 385,000 restricted common shares under
its 2001 Long-Term Incentive Plan. Compensation expense is measured based upon
the fair value on the date of issue and is recognized as the shares vest (see
Note 12).
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with Canadian
GAAP requires management to make estimates and assumptions that affect the
reported assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results could differ
from these estimates. Estimates are used when accounting for items and matters
including but not limited to allowance for uncollectible accounts receivable,
inventory obsolescence, amortization, asset valuations, employee benefits,
taxes, restructuring and other provisions and contingencies.
2. CHANGES IN ACCOUNTING POLICIES
CICA SECTION 3062 GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Corporation adopted the recommendations of the
CICA Handbook Section 3062, Goodwill and Other Intangible Assets (see Note 7).
The transitional impairment testing required by this standard had no impact on
the Corporation's consolidated financial position and result of operations since
the carrying amounts of goodwill and other intangible assets did not exceed
their fair values.
CICA SECTION 1581 BUSINESS COMBINATIONS
In 2002, the Corporation adopted the recommendations of the CICA Handbook
Section 1581, Business Combinations. The standard requires that all business
combinations be accounted for using the purchase method of accounting. This
standard had no material impact on its consolidated financial condition or
results of operations.
CICA SECTION 1650 FOREIGN CURRENCY TRANSLATION
Effective January 1, 2002, the Corporation adopted the recommendations of the
CICA to amended Handbook Section 1650, Foreign Currency Translation. The
amendment eliminates the deferral and amortization of unrealized translation
gains and losses on non-current monetary assets and liabilities and requires
that exchange gain or loss arising on translation of a foreign currency
denominated non-monetary item carried at market be included in income in the
current reporting period. The adoption of this standard did not have a material
impact on the Corporation's consolidated financial position or results of
operations.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CICA SECTION 3870 STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS
Effective January 1, 2002, the Corporation adopted the recommendations of the
CICA Handbook Section 3870, Stock-Based Compensation and Other Stock-Based
Payments. The recommendations establish standards for the recognition,
measurement and disclosure of stock-based compensation and other stock-based
payments made in exchange for goods and services. It applies to transactions,
including non-reciprocal transactions, in which an enterprise grants shares of
common stock, stock options, or other equity instruments, or incurs liabilities
based on the price of common stock or other equity instruments. The standard
encourages, but does not require, fair value measurement and recognition of
equity instruments awarded to employees and cost of services received as
consideration. A pro forma disclosure of net income and earnings per share using
the fair value based method of accounting has been presented for the required
period.
CICA SECTION 3500 EARNINGS PER SHARE
Effective January 1, 2001, the Corporation adopted the recommendations of the
CICA Handbook Section 3500, Earnings Per Share. The standard requires the
disclosure of the calculation of basic and diluted earnings per share and the
use of the treasury stock method for calculating the dilutive impact of stock
options. The impact on prior reported amounts was not material.
CICA SECTION 3461 EMPLOYEE FUTURE BENEFITS
Effective January 1, 2000, the Corporation adopted the recommendations of the
CICA Handbook Section 3461, Employee Future Benefits. Under past Canadian
standards, the Corporation recognized the cost of postretirement benefits other
than pensions as an expense when paid. This standard requires that the expected
costs of the employees' postretirement benefits be expensed during the years
that the employees render services to the Corporation. In addition, the new
standard changes the accounting for recognition of involuntary termination
benefits.
The standard was applied retroactively without restatement of prior year
financial statements. The cumulative effect of this change, as of January 1,
2000, resulted in a $33,295 increase to opening retained earnings.
CICA SECTION 3465 ACCOUNTING FOR INCOME TAXES
Effective January 1, 2000, the Corporation adopted the new recommendations of
the CICA Handbook Section 3465, Accounting for Income Taxes. This represented a
change from the deferral method of tax allocation to the liability method of tax
allocation.
The new standard was applied retroactively without restatement of prior year
financial statements. The cumulative effect of the change as of January 1, 2000
resulted in a $2,443 increase to opening retained earnings.
3. ACQUISITIONS AND PENDING ACQUISITIONS
On December 31, 2001, and January 31, 2002, the Corporation acquired certain
assets relating to the Document Management Services business of IBM Canada
Limited and The Nielsen Company, a commercial printer, for total consideration
of $14,592 and $57,202, respectively, net of cash acquired. The allocation of
the purchase prices to the assets acquired and liabilities assumed based on fair
values at the dates of acquisition were as follows:
<Caption>
Working capital, other than cash $ 10,933
Property, plant and equipment 9,475
Other liabilities (15,020)
Goodwill and other intangibles 66,406
--------
Purchase price, net of cash received $ 71,794
========
In May 2002, the Corporation purchased the remaining minority interest in its
consolidated subsidiary, Quality Color Press, Inc., for total consideration of
$6,680. The cost of this acquisition exceeded the fair value of the net assets
acquired by $5,437 allocated to goodwill and other intangible assets. Management
has reclassified this business from the Commercial segment to the Forms and
Labels segment in order to reflect the business synergies and integration plans.
During August 2002, the Corporation purchased the remaining minority interest of
its consolidated subsidiaries located in Central America for consideration of
$2,750 ($2,000 in cash and $750 payable within the next twelve months). The
carrying value of the minority interests approximated the purchase price.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pro forma disclosures for the aforementioned acquisitions have been excluded
because they are not material to the Corporation's consolidated financial
position or results of operations.
On January 16, 2003, the Corporation signed a definitive merger agreement with
Wallace, a leading provider of printed products and print management services,
to acquire all of the outstanding share of Wallace in exchange for average
consideration of $14.40 in cash and 1.05 shares of the Corporation for each
outstanding share of Wallace. The purchase price is approximately $1.3 billion
based on approximately 42 million Wallace shares outstanding, which includes the
assumption of approximately $210 million in debt, but does not include any
direct transaction costs. The estimated purchase price was derived using the
closing trading price of the Corporation's common shares on the New York Stock
Exchange ("NYSE") at January 16, 2003, which approximates the average closing
price of Moore shares two trading days before and after January 17, 2003, the
announcement date. Completion of the Wallace merger is subject to customary
closing conditions that include, among others, receipt of required approval from
Wallace shareholders, required regulatory approvals and closing of the required
financing. The transaction, while expected to close in the first half of 2003,
may not be completed if any of the closing conditions are not satisfied. Under
certain terms specified in the merger agreement, the Corporation or Wallace may
terminate the agreement, and as a result, either party may be required to pay a
termination fee of up to $27.5 million to the other party. Upon consummation,
the transaction will be recorded by allocating the cost of the assets acquired,
including intangible assets and liabilities assumed based on their estimated
fair values at the date of acquisition. The excess of the cost of the
acquisition over the net of amounts assigned to the fair value of the assets
acquired and the liabilities assumed will be recorded as goodwill. Unless
otherwise indicated, the consolidated financial statements and related notes
pertain to the Corporation as a stand-alone entity and do not reflect the
impact of the pending business combination transaction with Wallace.
4. INVENTORIES
2002 2001
-------- --------
Raw materials $ 31,883 $ 39,452
Work-in-process 10,303 10,048
Finished goods 84,190 75,149
Other 3,513 3,772
-------- --------
$129,889 $128,421
======== ========
The current cost of these inventories exceeds the last-in, first-out cost by
approximately $16,239 at December 31, 2002 (2001-- $17,152).
5. PROPERTY, PLANT AND EQUIPMENT
2002 2001
---------- ----------
Land $ 9,952 $ 9,973
Building 155,454 162,660
Machinery and equipment 800,448 857,452
---------- ----------
965,854 1,030,085
Less: Accumulated depreciation 710,132 722,445
---------- ----------
$ 255,722 $ 307,640
========== ==========
Depreciation expense for the year was $64,832 (2001 -- $108,436; 2000 --
$84,355).
In 2001 and 2000, the Corporation wrote off assets that were permanently
impaired amounting to $28,549 and $1,904, respectively, which were included in
depreciation and amortization (see Note 16).
6. INVESTMENTS
2002 2001
------- -------
Equity basis $ -- $ 1,201
Cost basis 1,700 4,200
Long-term bonds 30,556 26,803
------- -------
$32,256 $32,204
======= =======
In the fourth quarter of 2002, the Corporation recorded a $2,500 impairment
charge against its cost basis investment for a permanent decline in market
value.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair market value of the long-term bonds at December 31, 2002, is
approximately $28,200 (2001 - $27,200).
7. GOODWILL AND OTHER INTANGIBLES
On January 1, 2002, the Corporation adopted the recommendations of CICA Handbook
Section 3062, Goodwill and Other Intangible Assets. Under this standard goodwill
from acquisitions, subsequent to July 1, 2001 is not amortized but is subject to
an annual impairment test. Effective January 1, 2002, all goodwill ceased to be
amortized and is subject to an annual impairment test. Previously, goodwill from
acquisitions prior to July 1, 2001 was amortized on a straight-line basis over
its useful life, not to exceed 40 years, or was written down when a permanent
impairment in value occurred.
This standard requires reclassification of identifiable intangibles separately
from previously reported goodwill. This standard also requires goodwill and
identifiable intangible assets to be reviewed annually for impairment, unless
events or changes in circumstances indicate their carrying values may not be
recoverable.
The changes in the carrying value of goodwill by operating segment for the year
ended December 31, 2002, are as follows:
Balance at Balance at
January 1, Foreign December 31,
Goodwill 2002 Additions Exchange 2002
- ---------------- --------- --------- --------- ----------
Forms and Labels $ 41,857 $ 3,773 $ (80) $ 45,550
Outsourcing -- 11,866 (20) 11,846
Commercial -- 48,858 -- 48,858
--------- --------- --------- ---------
$ 41,857 $ 64,497 $ (100) $ 106,254
========= ========= ========= =========
The changes in other intangibles for the year ended December 31, 2002, are as
follows:
Balance at Balance at
January 1, Accumulated December 31, Amortizable
Other Intangibles 2002 Additions Amortization 2002 Life
- ----------------- ----------- --------- ------------ ------------ -----------
Trademarks, license and agreements $ 437 $ 2,953 $ (463) $ 2,927 4-10 Years
Customer intangibles -- 2,729 (886) 1,843 3 Years
Indefinite-lived trademarks -- 1,664 -- 1,664 Indefinite
----------- --------- ------------ ------------ -----------
$ 437 $ 7,346 $(1,349) $ 6,434
=========== ========= ============ ============ ===========
The total intangible asset amortization expense for the year ended December 31,
2002, was $1,349, included in the depreciation and amortization expense.
Amortization expense for the next five years is estimated to be:
- --------------------
2003 $1,303
2004 $1,303
2005 $ 692
2006 $ 240
2007 $ 228
- --------------------
The table below provides a reconciliation of the reported net loss for 2001 and
2000, to the pro forma net loss, which excludes previously recorded goodwill
amortization, on goodwill outstanding at December 31, 2001 and 2000:
2001 2000
---------------------------------- ------------------------------------
Loss per share Loss per share
------------------- --------------------
Loss Basic Diluted Loss Basic Diluted
------------- ------------------- --------------- -------------------
Net loss available to common shareholders (as reported) $(373,383) $ (4.21) $(4.21) $ (66,372) $(0.75) $(0.75)
Add back: Goodwill amortization - net of tax 2,265 0.03 0.03 6,628 0.07 0.07
- --------------------------------------------------------- ------------- ------------------- --------------- -------------------
Pro forma net loss $(371,118) $ (4.18) $(4.18) $ (59,744) $(0.68) $(0.68)
========================================================= ============= =================== =============== ===================
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In 2001 and 2000, the Corporation recorded charges of $76,808 and $20,965,
respectively, included in depreciation and amortization, for permanent
impairment of goodwill related to dispositions and assets held for disposition
(see Note 16). The impairment resulted from a significant sales decline,
customer turnover and the decision to hold certain assets for sale.
8. OTHER ASSETS
2002 2001
-------- --------
Computer software - net of accumulated amortization $ 89,208 $ 89,763
Deposit and other receivables 3,218 2,361
Deferred debt issue costs 7,955 --
Purchase of assets -- 14,565
Other 3,123 8,217
-------- --------
$103,504 $114,906
======== ========
Amortization expense related to computer software for 2002, 2001, and 2000 was
$20,553, $22,936, and $26,846, respectively.
In 2001 and 2000, the Corporation recorded a charge of $26,036 and $13,752,
respectively, included in depreciation and amortization, for the write-off of
certain computer software costs, primarily related to a component of its ERP
system, which would not be deployed.
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
2002 2001
--------- ---------
Trade accounts payable $117,770 $ 89,840
Deferred revenue 26,718 22,652
Other payables 40,986 36,711
--------- ---------
185,474 149,203
Payroll costs 85,439 63,896
Employee benefit costs 27,787 19,037
Restructuring reserve (Note 17) 81,440 126,673
Other 106,367 127,817
--------- ---------
$ 486,507 $ 486,626
========= =========
10. DEBT
2002 2001
-------- --------
Senior guaranteed notes:
Series A, 7.84%, maturing March 25, 2006 $ -- $ 42,750
Series B, 8.05%, maturing March 25, 2009 -- 57,250
Term Loan B Facility, maturing 2004 and 2006 179,500 --
Revolving term credit facility -- 15,000
Other debt, including capitalized leases 10,098 14,096
-------- --------
Total 189,598 129,096
Less current portion 2,135 18,034
-------- --------
Long-term debt $187,463 $111,062
======== ========
In August 2002, the Corporation entered into a $400 million secured credit
facility. The facility is comprised of a five-year $125 million Revolving Credit
Facility, a five-year $75 million Delayed Draw Term Loan A Facility, and a
six-year $200 million Term Loan B Facility, all of which are subject to a number
of financial and restrictive covenants that, among other things, limit
additional indebtedness and the ability of the Corporation to engage in certain
transactions with affiliates, create liens on assets, engage in mergers and
consolidations, or dispose of assets. The financial covenants calculated on a
quarterly basis include, but are not limited to, tests of leverage and fixed
charges coverage. The Delayed Draw Term Loan A Facility is to be used for
acquisitions and related initial working capital requirements. The facility must
be drawn within 18 months of the closing in a maximum of two drawings. Proceeds
from the Term Loan B Facility were used in part to refinance the existing $168
million revolving credit facility that expired on August 5, 2002, and to fund
working capital requirements as necessary. The Term Loan B Facility bears
interest at LIBOR (London Interbank Offer Rate) plus a 300 basis point spread.
Three-month LIBOR at December 31, 2002, was 1.38%.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 2002 and 2001, the Corporation was in
compliance with all debt covenants.
During 2002, the Corporation entered into interest rate swap agreements to hedge
exposure to fluctuations in interest rates on the Term Loan B Facility. These
swap agreements exchange the variable interest rates (LIBOR) on this facility
for fixed interest rates over the terms of the agreements. The resulting fixed
interest rates will be the contracted swap rate plus the LIBOR basis spread on
the Term Loan B Facility. At December 31, 2002, the notional amount of the swap
agreements was $150 million comprised as follows: a $100 million, 3.78% fixed
rate agreement that expires in August 2006; and a $50 million, 2.56% fixed rate
agreement that expires in September 2004. The interest rate differential
received or paid on these agreements is recognized as an adjustment to interest
expense. At December 31, 2002, the fair value of these swap agreements was a
$5,089 liability.
On December 27, 2001, the Corporation redeemed $100 million of its senior
guaranteed notes. On September 4, 2002, the Corporation redeemed the remaining
$100 million of these senior guaranteed notes and incurred a net prepayment
charge of $16,746.
On December 28, 2001, the $70.5 million subordinated convertible debentures held
by Chancery Lane/GSC Investors L.P. (the "Partnership") were converted into
21,692,311 common shares. The Corporation issued 1,650,000 additional common
shares ("additional shares") as an inducement to the Partnership's Class A
limited partners to convert prior to December 22, 2005, the date the Corporation
could have redeemed the debentures. The right to receive the additional shares
was assigned by the Partnership to its Class A limited partners. Under the terms
of the partnership agreement, the Class A limited partners were entitled to all
the interest paid on the subordinated convertible debentures. As part of the
inducement agreement, the Corporation has agreed that if at December 31, 2003,
the 20 day weighted average trading price of the common shares on the NYSE is
less than $10.83, the Corporation must make a payment equal to the lesser of $9
million or the value of 6,000,000 of its common shares at such date. The $9
million payment may be reduced under certain circumstances. At the option of the
Corporation, these payments may be made in common shares, subject to regulatory
approval. To the extent that shares or cash is paid, it will be recorded as a
charge to retained earnings. At December 31, 2002, on the Corporation's 20-day
weighted average trading price was less than the $10.83 measurement price. The
Corporation has no indication that the 20-day weighted average share price will
continue to trade below the measurement price. Certain officers of the
Corporation, including the Chairman and the Chief Executive Officer, and the
former Chairman, President and Chief Executive Officer, were investors in the
Partnership.
For financial reporting purposes, the subordinated convertible debentures had a
liability component and an equity component. The liability component was
classified as long-term debt, representing the present value of interest and
principal payments discounted at a rate of interest applicable to a debt only
instrument of comparable term and risk. The equity component at December 28,
2001, was $8,343 representing the value of the conversion option, calculated as
the difference between the proceeds and liability component.
Upon conversion, the Corporation allocated the consideration given to extinguish
subordinated convertible debentures to the liability and equity components based
on fair values on the date of conversion, which approximated their carrying
values. As such, no gain or loss was recorded. The inducement payment of the
additional shares issued was allocated to the equity component and, accordingly,
charged to retained earnings. Professional fees of $1,600 incurred for the
conversion were also charged to retained earnings.
Deferred issue costs of $10,396 in 2001 relating to the subordinated convertible
debentures were charged to earnings upon extinguishment.
Other long-term debt, including capital leases, bears interest rates ranging
from 3.4% to 14.2% and matures on various dates through 2012. Loans (excluding
leases) amounting to $329 (2001 - $4,000) are payable in currencies other than
United States dollars.
The net book value of assets subject to liens in 2002 is $26,563 (2001 --
$27,485). The liens are primarily mortgages against property, plant and
equipment and other current assets.
Payments required on long-term debt (excluding capital lease obligations) are as
follows: 2003 -- $219; 2004 -- $110; no repayments required for 2005 and 2006;
2007-- $84,500; and thereafter -- $95,000.
39
\
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Corporation also maintains uncommitted bank operating lines in the majority
of the domestic markets in which it operates. These lines of credit are
maintained to cover temporary cash shortfalls. Maximum allowable borrowings
under these uncommitted facilities amounted to $40,221 at December 31, 2002
($1,397 outstanding), and may be terminated at any time at the Corporation's
option. Total availability under these facilities at December 31, 2002, was
$38,824.
11. OTHER LIABILITIES
2002 2001
------- -------
Unfunded pension obligations $28,170 $27,728
Long-term supply agreement 10,820 16,934
Other 4,786 6,601
------- -------
$43,776 $51,263
======= =======
During 2000, the Corporation entered into a supply agreement to sell certain
paper production assets and simultaneously entered into a long-term supply
agreement with the purchaser of the assets. Proceeds received were allocated to
the asset sale and supply agreement based on an independent appraisal. Since the
Corporation anticipates making purchases ratably over the term of the supply
agreement, the proceeds related to the agreement have been deferred and are
being amortized on a straight-line basis over the term of the agreement as a
reduction in cost of goods sold. The price terms of the supply agreement were no
more favorable than those available from other parties.
Included in accounts payable and accrued liabilities at December 31, 2002, is
$6,138 (2001 -- $6,918) representing the current portion of the supply
agreement.
12. SHARE CAPITAL
The Corporation's articles of continuance provide that its authorized share
capital be divided into an unlimited number of common shares and an unlimited
number of preference shares, issuable in one or more series. On February 7,
2002, the Corporation announced a program to repurchase up to $50 million of its
shares. The program calls for shares to be purchased on the NYSE from time to
time depending upon market conditions, market price of the common shares and the
assessment of the cash flow needs by the Corporation's management.
Changes in the Issued Common Share Capital Shares Issued Amount
- ------------------------------------------ -------------- ------------
Balance, December 31, 1999 and 2000 88,456,940 $ 310,881
Conversion of subordinated convertible debentures 21,692,311 71,506
Inducement for convertible debentures 1,650,000 15,345
Exercise of stock options 4,400 29
-------------- ------------
Balance, December 31, 2001 111,803,651 397,761
Exercise of stock options and other 723,397 6,195
Restricted shares issued 385,000 3,665
Repurchase of common shares (1,069,700) (3,821)
-------------- ------------
Balance, December 31, 2002 111,842,348 $ 403,800
============== ============
The Corporation has a long-term incentive program under which stock options and
restricted stock awards may be granted to certain key employees. At December 31,
2002, there were 583,000 common shares available for grants (2001 - 877,500;
2000 - 171,700). Stock options have an exercise price equal to the fair market
value at date of grant. Options granted generally vest at 20% or 25% per year
from the date of grant. Upon retirement, all options become vested. Options
granted prior to 1999 are eligible for exercise for five years after the date of
retirement. Options granted after 1998 are eligible for exercise for one year
after the date of retirement. The options expire not more than 10 years from the
date granted.
On October 17, 2002, the Board of Directors of the Corporation approved the
award of 385,000 restricted shares under the Corporation's 2001 Long-Term
Incentive Plan. The effective grant date of the restricted shares was October
17, 2002. The restricted shares are subject to repurchase by the Corporation at
no cost in the event employment is terminated other than as a result of death,
retirement or disability. These repurchase rights expire with respect to 25% of
the initial restricted share grant each year beginning on the first anniversary
of the restricted share award. Upon issuance of the restricted shares, unearned
compensation expense equal to the market value was charged to share capital. The
unearned compensation of the restricted shares is disclosed as a separate
component of
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
shareholders' equity that will be recognized as compensation expense over the
vesting period. Compensation expense for 2002 was $1,093.
On December 11, 2000, the Board of Directors approved the creation of Series 1
Preference Shares, which are non-voting and entitle the holder to a
non-cumulative preferential annual dividend of CDN $0.001 and to receive any
dividend paid on a common share. In the event of liquidation, dissolution or
winding-up of the Corporation, a holder of a Series 1 Preference Share is
entitled to receive a preferential amount of CDN $0.001, together with all
dividends declared and unpaid thereon. Thereafter, the Series 1 Preference
Shares and common shares rank equally with each other on a share-for-share
basis. Stock options to acquire 1,580,000 Series 1 Preference Shares were issued
on December 11, 2000, and vest at 25% per annum. In April 2002, the shareholders
of the Corporation approved the amendment of the options to purchase Series 1
Preference Shares to eliminate the cash-out provision and to make them
exercisable for one common share per each Series 1 Preference Share option. The
exercise price and the number of Series 1 Preference Share options remained
unchanged.
A summary of the Corporation's stock option activity for the three years ended
December 31, 2002, is presented below:
Years ended December 31,
Expressed in Canadian Currency 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------------------------------------------
COMMON SHARES
Options outstanding at beginning of year 6,362,169 $15.63 6,509,686 $16.46 6,352,486 $18.73
Options granted 860,000 15.10 1,790,833 13.43 1,068,000 4.10
Options exercised (714,069) 13.24 (4,400) 7.54 -- --
Options forfeited and expired (2,109,182) 12.47 (1,933,950) 16.40 (910,800) 17.81
- --------------------------------------------------------------------------------------------------------------------
Options outstanding at year-end 4,398,918 $17.43 6,362,169 $15.63 6,509,686 $16.46
- --------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 2,778,912 $20.26 2,832,715 $18.86 3,383,646 $19.84
- --------------------------------------------------------------------------------------------------------------------
SERIES 1 PREFERENCE SHARES
Options outstanding at beginning of year 1,580,000 $ 3.65 1,580,000 $ 3.65 -- $ --
Options granted -- -- -- -- 1,580,000 3.65
Options forfeited (200,000) 3.65 -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Options outstanding at year-end 1,380,000 $ 3.65 1,580,000 $ 3.65 1,580,000 $ 3.65
- --------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 1,290,000 $ 3.65 395,000 $ 3.65 -- --
- --------------------------------------------------------------------------------------------------------------------
The following tables summarize information about stock options outstanding at
December 31, 2002 (in Canadian currency):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------------------------------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding at Remaining Contractual Average Exercisable at Average
Exercise Prices December 31, 2002 Life (Years) Exercise Price December 31, 2002 Exercise Price
- ------------------------------------------------------------------------------------------------------------------------
$3 to 8 556,383 7.9 $ 4.40 258,608 $ 4.33
$9 to 15 1,766,975 8.9 14.01 444,744 12.90
$16 to 23 851,900 5.5 19.32 851,900 19.32
$24 to 30 1,223,660 3.2 26.96 1,223,660 26.96
- ------------------------------------------------------------------------------------------------------------------------
4,398,918 6.5 $ 17.43 2,778,912 $ 20.26
- ------------------------------------------------------------------------------------------------------------------------
Series 1 Preference Shares
$3.65 1,380,000 8.0 $ 3.65 1,290,000 $ 3.65
- ------------------------------------------------------------------------------------------------------------------------
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The weighted average fair value per option granted in 2002 was $4.70. The
estimated fair values were calculated using the Black-Scholes option pricing
model and the following assumptions.
2002
-----------
Risk-free interest rates 3.2%
Expected lives (in years) 5
Dividend yield --
Volatility 49%
The Corporation's 2002 net income and earnings per share on a pro forma basis
using the fair value method are as follows:
Net income, as reported $73,258
Fair value compensation expense, net of taxes 200
-----------
Pro forma net income $73,058
===========
Pro forma earnings per share:
Basic $ 0.66
Diluted $ 0.64
In accordance with the transition rules of CICA Handbook Section 3870,
Stock-Based Compensation and Other Stock-Based Payments, the pro forma results
include the effect of options granted during 2002. This standard does not
require previous year pro forma presentation.
During the year, the Corporation issued 219,069 (2001 -- 14,636) share units as
stock-based compensation for members of the Board of Directors. Share units are
exercisable for either cash or common shares at the discretion of the holder. At
December 31, 2002, 233,705 share units were outstanding and exercisable. For the
years ended December 31, 2002 and 2001, the Corporation recorded compensation
expense of $1,994 and $139 related to the issuance of these share units,
respectively.
13. CUMULATIVE TRANSLATION ADJUSTMENTS
2002 2001 2000
--------- --------- ---------
Balance at beginning of year $(128,177) $(126,360) $(118,256)
Currency translation (5,156) (2,461) (8,104)
Amounts recognized on dispositions -- 644 --
--------- --------- ---------
Balance at end of year $(133,333) $(128,177) $(126,360)
========= ========= =========
14. RETIREMENT PROGRAMS
DEFINED BENEFIT PENSION PLANS
During 2000, the Corporation amended its United States pension plan to cease all
benefit accruals effective December 31, 2000, and announced the Corporation's
intention to terminate and wind-up the plan. The 2000 net pension expense
includes a curtailment gain of $6,630 for this amendment. In March 2001, the
Corporation partially settled this plan by purchasing approximately $600 million
in annuities. This settlement reduced the projected benefit obligation and fair
value of plan assets by $608,323 and $611,057, respectively, and resulted in a
settlement loss of $109,115. Pension expense for 2002 and 2001 on the unsettled
portion of the plan was calculated using a discount rate and rate of return on
plan assets, which were based upon estimated market rates to settle the
remaining portion of the plan. The Corporation anticipates settling the
remainder of the plan upon receiving anticipated regulatory approval and expects
to incur an additional settlement loss. Since the Corporation has no control
over the timing of the regulatory approval, the amount of settlement loss cannot
be determined.
During 2001, the Corporation purchased annuities to settle substantially all of
the obligation under the United Kingdom pension plan. This settlement reduced
the projected benefit obligation and fair value of plan assets by $99,144.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In some subsidiaries, where either state or funded retirement plans exist, there
are certain small supplementary unfunded plans. Pensionable service prior to
establishing funded contributory retirement plans in other subsidiaries, covered
by former discretionary non-contributory retirement plans, was assumed as a
prior service obligation. In addition, the Corporation has supplemental
retirement programs for certain senior executives. These unfunded pension
obligations are included in other liabilities and include the unfunded portion
of this prior service obligation and the supplementary unfunded plans.
All of the retirement plans are non-contributory. Retirement benefits are
generally based on years of service and employees' compensation during the last
years of employment. At December 31, 2002, none of the United States or
International plans' assets and about 62% of the Canadian plan's assets were
held in equity securities with the remaining portion of the assets being mainly
fixed income securities.
The components of net pension expense are as follows:
UNITED STATES CANADA INTERNATIONAL
-------------------------------- --------------------------------- ---------------------------------
2002 2001 2000 2002 2001 2000 2002 2001 2000
--------- --------- --------- --------- --------- --------- --------- --------- ---------
PENSION EXPENSE
Service cost $ 28 $ 20 $ 13,287 $ 2,871 $ 3,169 $ 3,076 $ -- $ 76 $ 133
Interest cost 14,962 23,107 52,658 5,232 5,523 5,761 358 4,382 9,277
Expected return
on assets (22,020) (37,863) (82,523) (7,188) (7,497) (7,691) (1,204) (5,931) (10,780)
Settlement loss -- 109,115 -- -- -- -- -- -- --
Curtailment gain -- 2,154 (6,630) -- -- -- -- -- --
Amortization of net
loss (gain) 2,560 -- (128) 429 172 -- 335 (209) (208)
Amortization of prior
service cost -- -- 832 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Net pension expense
(credit) $ (4,470) $ 96,533 $ (22,504) $ 1,344 $ 1,367 $ 1,146 $ (511) $ (1,682) $ (1,578)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
The following provides a reconciliation of the benefit obligation, plan assets
and the funded status of the pension plans as of December 31, 2002 and 2001:
UNITED STATES CANADA INTERNATIONAL
---------------------- --------------------- --------------------
2002 2001 2002 2001 2002 2001
--------- --------- -------- -------- -------- --------
FUNDED STATUS
Projected benefit obligation, beginning of year $ 227,730 $ 657,678 $ 82,347 $ 82,202 $ 6,576 $100,406
Service cost 28 20 2,871 3,169 - 76
Interest cost 14,962 23,107 5,232 5,523 358 4,382
Actuarial loss (gain) 15,668 181,673 (2,764) 699 86 (511)
Effect of settlement - (608,323) - - - (99,144)
Foreign currency adjustments - - 677 (3,030) 710 1,367
Benefits paid (11,126) (26,425) (5,252) (6,216) (84) -
--------- --------- -------- -------- -------- --------
Projected benefit obligation, end of year $ 247,262 $ 227,730 $ 83,111 $ 82,347 $ 7,646 $ 6,576
--------- --------- -------- -------- -------- --------
Fair value of plan assets, beginning of year $ 401,882 $ 935,729 $ 85,283 $ 96,690 $ 22,048 $118,932
Actual return on assets (8,144) 103,635 (2,363) (1,959) 962 503
Foreign currency adjustments - - 750 (3,232) 2,377 1,757
Effect of settlement - (611,057) - - - (99,144)
Benefits paid (11,126) (26,425) (5,252) (6,216) (84) -
--------- --------- -------- -------- -------- --------
Fair value of plan assets, end of year $ 382,612 $ 401,882 $ 78,418 $ 85,283 $ 25,303 $ 22,048
--------- --------- -------- -------- -------- --------
Excess (shortfall) of plan assets over projected
benefit obligation $ 135,350 $ 174,152 $ (4,693) $ 2,936 $ 17,657 $ 15,472
Unrecognized net loss 50,756 7,486 19,056 12,634 3,394 3,072
--------- --------- -------- -------- -------- --------
Prepaid pension cost $ 186,106 $ 181,638 $ 14,363 $ 15,570 $ 21,051 $ 18,544
--------- --------- -------- -------- -------- --------
Assumptions:
Discount rates 6.8% 6.8% 6.5% 7.0% 5.0% 5.0%
Expected return on plan assets 6.0% 6.8% 8.0% 8.0% 5.0% 8.3%
Rate of compensation increase - - 4.0% 4.0% - 5.0%
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DEFINED CONTRIBUTION SAVINGS PLANS
Savings plans are maintained in Canada, the United States and the United
Kingdom. Only the savings plan in the United Kingdom requires Corporation
contributions for all employees who are eligible to participate in the
retirement plans. These annual contributions consist of a retirement savings
benefit contributions ranging from 1% to 3% of annual eligible compensation
depending upon age. For all savings plans, if an employee contribution is made,
a portion of such contribution may be eligible for a contribution match by the
Corporation. For 2002, the defined contribution savings plan expense was $8,745
(2001 -- $6,913; 2000 -- $4,667).
15. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
The Corporation provides postretirement health care and life insurance benefits
to certain grandfathered United States employees and to all eligible Canadian
employees.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of net postretirement benefit cost are as follows:
2002 2001 2000
-------- -------- --------
POSTRETIREMENT BENEFIT COST
Service cost $ 2,087 $ 1,638 $ 1,450
Interest cost 17,373 13,939 13,430
Amortization of net loss 1,846 51 --
Amortization of prior service credit (6,282) (6,282) (6,282)
-------- -------- --------
Net postretirement benefit cost $ 15,024 $ 9,346 $ 8,598
======== ======== ========
The following provides a reconciliation of the benefit obligation and the
accrued postretirement benefit cost at December 31, 2002 and 2001:
2002 2001
--------- ---------
ACCRUED POSTRETIREMENT BENEFIT COST
Projected postretirement benefit obligation, beginning of year $ 247,464 $ 181,085
Service cost 2,087 1,638
Interest cost 17,373 13,939
Actuarial loss 3,169 64,485
Foreign currency adjustment 127 (468)
Benefits paid (12,982) (13,215)
--------- ---------
Projected postretirement benefit obligation, end of year $ 257,238 $ 247,464
Contributions paid in December (1,012) (587)
Unrecognized net (loss) (49,913) (48,526)
Unrecognized prior service credit 35,031 41,313
--------- ---------
Accrued postretirement benefit cost $ 241,344 $ 239,664
--------- ---------
ASSUMPTIONS
Weighted average discount rate 6.7% 7.2%
Weighted average health care cost trend rate:
Before age 65 11.4% 11.8%
After age 65 13.3% 13.7%
The healthcare cost trend rate will gradually decline to the
ultimate trend rate then remain level thereafter
Weighted average ultimate health care cost trend rate 6.0% 6.0%
Year in which ultimate health care cost trend rate will be achieved
Canada 2008 2008
United States:
Before age 65 2011 2011
After age 65 2013 2013
The following is the effect of a 1% increase in the assumed health
care cost trend rates for each future year on:
Accumulated postretirement benefit obligation $ 12,099 $ 13,905
Aggregate of the service and interest cost components of net
postretirement benefit cost 910 1,182
The following is the effect of a 1% decrease in the assumed health care
cost trend rates for each future year on:
Accumulated postretirement benefit obligation $ 10,850 $ 12,244
Aggregate of the service and interest cost components of net
postretirement benefit cost 842 1,055
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. DISPOSITIONS AND ASSETS HELD FOR DISPOSITION
COMPANY NATURE OF BUSINESS DISPOSITION DATE
------- ------------------ ----------------
DISPOSITIONS
Colleagues Group plc Provider of direct marketing services in the United Kingdom March 2001
Phoenix Group, Inc. Provider of telemarketing customer relationship management in the United States October 2001
In 2001, net sales of $68,251(2000 -- $132,728) and losses from operations of
$47,465 (2000 - - $25,998) relating to the divested businesses, are included in
the Corporation's Commercial segment results. The Phoenix Group was sold for
cash proceeds of $26,009 and $2,526 was received for the Colleagues Group. The
net loss of $7,540 on these dispositions was recorded in investment and other
income.
In the fourth quarter of 2001, based on a current valuation of a non-core
business held for disposition, the Corporation wrote-off the remaining goodwill
amounting to $28,528 recorded in the Commercial business segment. The valuation
criteria includes in part, earnings potential, revenue and operating multiples,
and other industry standards. Included in the results of the Commercial segment
are net sales of $201,497 (2001 -- $191,350; 2000 -- $213,889) and operating
income of $12,947 (operating losses of $21,491 in 2001, and income of $358 in
2000) for this business.
17. RESTRUCTURING AND OTHER CHARGES
For the years ended December 31, 2002 and 2001, the Corporation recorded
restructuring provisions as follows:
2002 2001
------------------------------------- ------------------------------------
Employee Other Employee Other
Terminations Charges Total Terminations Charges Total
------------ ----------- -------- ------------- -------- --------
Forms and Labels $ 4,395 $ -- $ 4,395 $ 33,597 $ 9,422 $ 43,019
Outsourcing -- -- -- 4,138 -- 4,138
Commercial -- -- -- 28,365 7,639 36,004
Corporate -- -- -- 10,894 48,480 59,374
-------- --------- -------- -------- -------- --------
$ 4,395 $ -- $ 4,395 $ 76,994 $ 65,541 $142,535
======== ========= ======== ======== ======== ========
In the fourth quarter of 2002, the Corporation recorded a restructuring
provision of $4,395 for workforce reduction of 154 employees, primarily related
to the closure of a plant.
The 2001 restructuring plan was directed at streamlining the Corporation's
processes and significantly reducing its cost structure. The restructuring
provision included $76,994 for severance and other termination benefits for
3,366 employees (substantially all employees were terminated by December 31,
2002), $52,041 for lease terminations, $9,200 for facility closings, $3,600 for
onerous contracts and $700 for other incremental exit costs.
In the fourth quarter of 2002 and 2001, the Corporation reversed $5,245 and
$12,856, respectively, of the restructuring reserve due to the favorable
settlement of liabilities for obligations and future payments related to the
disposition of the European and Asian forms business. The Corporation recorded a
net reversal of $24,033 of restructuring charges under the 1998 restructuring
plan during the fourth quarter of 2000. In 2000, the reversals resulted from
facility closing costs that were lower than originally estimated and subleasing
these facilities on more favorable terms than originally estimated.
The reconciliation of the restructuring reserve at December 31, 2002, is as
follows:
Balance at Balance at
December 31, Provision, December 31,
2001 Net Cash Paid 2002
--------- --------- --------- ---------
Employee terminations $ 41,955 $ 4,395 $ (32,031) $ 14,319
Other 84,718 (5,245) (12,352) 67,121
--------- ---------- --------- ---------
$ 126,673 $ (850) $ (44,383) $ 81,440
========= ========== ========== =========
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The restructuring reserves classified as "other" of $67,121 at December 31,
2002, primarily consist of the estimated remaining payments related to lease
terminations and facility closing costs. Payments on these lease obligations
continue until 2010. Market conditions and the Corporation's ability to sublease
these properties may affect the ultimate charge related to its lease
obligations. Any potential recovery or additional charge may affect amounts
reported in the consolidated financial statements of future periods. The
Corporation anticipates that payments associated with employee terminations will
be substantially completed by the end of 2003.
At December 31, 2002, the restructuring reserve includes approximately $63,769
and $13,286 related to the 2001 and 1998 restructuring plans, respectively,
primarily related to lease payments.
During 2002, the Corporation recorded a other charges of $16,746 associated with
the redemption of $100 million of senior guaranteed notes and an executive
separation of $9,202, included in selling, general and administrative expenses.
For the year ended December 31, 2001, the Corporation recorded other
charges as follows:
Selling,
General and Depreciation Investment Interest, Debt
Cost of Administrative and and Other Settlement,
Sales Expense Amortization Income and Issue Cost Total
------- -------------- -------------- ---------- -------------- --------
Forms and Labels $ 861 $ 4,287 $ 21,873 $ - $ - $ 27,021
Outsourcing - - 342 - - 342
Commercial 5,685 332 89,551 4,014 - 99,582
Corporate 61,209 41,212 19,627 928 11,617 134,593
------- -------------- -------------- ---------- -------------- --------
$67,755 $45,831 $131,393 $ 4,942 $11,617 $261,538
======= ============== ============== ========== ============== ========
Included in cost of sales and selling, general and administrative expenses is a
charge of $11,165 for the write-off of inventory and accounts receivable
relating to exiting certain non-core businesses. The Corporation also recorded a
net loss of $96,605 (of which $61,209 was included in cost of sales and $35,396
in selling, general and administrative expenses) associated with the partial
settlement of the U.S. pension plan, which was curtailed as of December 31,
2000, and other cash charges of $4,816 included in selling, general and
administrative expense. A charge of $11,617 related to the partial redemption of
the $100 million of senior guaranteed notes and the conversion of the
subordinated convertible debentures is included in debt settlement cost and
$1,000 for legal and other professional fees is in selling, general and
administrative expense. Non-cash charges of $131,393 related to the write-down
of goodwill of non-core businesses to be disposed of and asset impairments are
included in depreciation and amortization. Asset impairments relate to
write-offs of property, plant and equipment (see Note 5) and capitalized
software (see Note 8). For the write-down of goodwill for non-core businesses to
be disposed of, one non-core business was subsequently sold in 2001 and the
other non-core business is being held for sale (see Note 16). A loss on
disposition of non-core businesses of $4,014 and $928 for the write-down of
investments were charged to investment and other income (see Note 7 and Note
16).
During 2000, the Corporation recorded net other charges of $20,913, related to
non-cash charges of $34,717 for write-down of a non-core asset held for disposal
and the impairment of a component of the ERP asset, both included in
depreciation and amortization; loss on disposal of investment in JetForm
Corporation of $8,474; the write-down of a permanently impaired investment of
$3,500; and $4,885 of other charges. These charges were offset by the reversal
of a restructuring reserve of $24,033 and a gain on the curtailment of the
Corporation's U.S. pension plan of $6,630.
18. INCOME TAXES
The components of earnings (loss) before income taxes and minority interest for
the three years ended December 31, 2002, 2001 and 2000, are as follows:
2002 2001 2000
--------- --------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST
Canada $ (1,182) $ (68,232) $ (40,787)
United States 32,242 (331,585) (78,991)
Other countries 46,292 11,397 38,186
--------- --------- ---------
$ 77,352 $(388,420) $ (81,592)
========= ========= =========
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2002 2001 2000
------------------- ------------------- ---------------------
Current Deferred Current Deferred Current Deferred
-------- -------- -------- -------- -------- --------
PROVISION (RECOVERY) FOR INCOME TAXES
Canada $ 66 $ (160) $ 469 $ 54 $ 73 $ 364
United States 25,931 (27,879) 189 (36,826) (158) (21,706)
Other countries 3,585 266 2,933 379 5,631 (2,352)
Withholding taxes 663 -- 610 -- 771 --
-------- -------- -------- -------- -------- --------
$ 30,245 $(27,773) $ 4,201 $(36,393) $ 6,317 $(23,694)
======== ======== ======== ======== ======== ========
Deferred income taxes result from a number of temporary differences in the
jurisdictions in which the Corporation and its subsidiaries operate. These
differences and the tax effects of each are as follows:
2 0 0 2 2 0 0 1 2 0 0 0
-------- -------- --------
DEFERRED INCOME TAXES
Depreciation $ (1,940) $ (459) $ 319
Pensions 1,615 (36,493) 6,151
Unearned revenue 2,421 -- (10,847)
Postretirement benefits 374 -- 1,869
Restructuring 18,566 -- 16,548
Tax benefit of loss carryforward (42,350) -- (38,244)
Other (6,459) 559 510
-------- -------- --------
$(27,773) $(36,393) $(23,694)
======== ======== ========
Temporary differences and tax loss carryforwards, which give rise to deferred
income tax assets and liabilities are as follows:
2002 2001
--------- ---------
DEFERRED INCOME TAX ASSETS
Postretirement benefits $ 93,647 $ 94,092
Tax benefit of loss carryforwards 142,739 154,605
Pensions 9,235 672
Restructuring 20,062 45,736
Other 62,162 57,648
--------- ---------
327,845 352,753
Valuation allowance (113,917) (166,695)
--------- ---------
$ 213,928 $ 186,058
========= =========
DEFERRED INCOME TAX LIABILITIES
Depreciation $ 36,127 $ 50,561
Pensions 79,135 77,968
Other 25,482 10,341
--------- ---------
$ 140,744 $ 138,870
--------- ---------
Net deferred income tax asset $ 73,184 $ 47,188
========= =========
Distributed as follows:
Current deferred income tax asset 31,912 13,566
Current deferred income tax liability 3,184 324
Long-term deferred income tax asset 53,938 47,651
Long-term deferred income tax liability 9,482 13,705
========= =========
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effective rates of tax for each year compared with the statutory Canadian
rates were as follows:
2002 2001 2000
---- ----- -----
EFFECTIVE TAX EXPENSE (RECOVERY) RATE
Canada:
Combined federal and provincial statutory rate 38.4% (41.6)% (43.2)%
Corporate surtax 1.1 (1.1) (1.1)
Manufacturing and processing rate reduction (4.0) 5.4 6.0
---- ----- -----
Expected income tax expense (recovery) rate 35.5 (37.3) (38.3)
Tax rate differences in other jurisdictions (8.0) (2.2) (18.1)
Losses for which a benefit (has) has not been provided - net (27.2) 4.7 17.8
Restructuring costs (0.4) 12.2 (1.6)
Impaired assets -- 6.4 --
International divestiture (0.1) 5.4 --
Non-deductible goodwill amortization and write-downs 1.0 3.0 17.1
Other 2.4 (0.5) 1.8
---- ----- -----
Total consolidated effective tax expense (recovery) rate 3.2% (8.3)% (21.3)%
==== ===== =====
At December 31, 2002, the Corporation has tax loss carryforwards totaling $353
million. Of this amount, a valuation allowance has been recorded against $239
million. Of the $239 million, approximately $106 million expires between 2003
and 2012 and $133 million has no expiration. In addition, the Corporation has
recorded a valuation allowance against approximately $55 million of temporary
differences that are available for utilization in future years.
The 2002 difference between the statutory rate and the effective rate relates to
lower tax rates in non-U.S. jurisdictions offset by the inability to recognize
the tax benefit from certain foreign operating losses, combined with a partial
reduction in the deferred tax valuation allowance (which is based on estimates
of future taxable income), the resolution of an income tax refund, partially
offset by required tax reserves. In 2001, the effective income tax benefit
resulted from the partial recognition of operating losses.
The valuation allowance at December 31, 2002, relates to net operating losses
generated in the United States, Canada, Latin America and Europe (which have
limited carry-forward periods), and future deductible expense. The decrease
(increase) in the valuation allowance of approximately $53 million and $(103)
million for 2002 and 2001, respectively, primarily relates to amounts recorded
against deferred tax assets in the United States.
The Corporation has reduced the valuation allowance for a portion of its
deferred tax assets to the extent that it believes based on the weight of
available evidence, it is more likely than not that those assets will be
realized.
19. EARNINGS PER SHARE
2002 2001 2000
--------- --------- ---------
Net earnings (loss) available to common shareholders $ 73,258 $(373,383) $ (66,372)
Weighted average number of common shares outstanding:
Basic 111,556 88,648 88,457
Dilutive options (a) 2,219 -- --
Contingent shares (see Note 10) 247 -- --
--------- --------- ---------
Diluted 114,022 88,648 88,457
--------- --------- ---------
Earnings (loss) per share
Basic $ 0.66 $ (4.21) $ (0.75)
Diluted $ 0.64 $ (4.21) $ (0.75)
(a) For 2001 and 2000, the diluted options are excluded as their effect would be
anti-dilutive.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. SEGMENTED INFORMATION
The Corporation operates in the printing industry with three distinct operating
segments based on the way management assesses information on a regular basis for
decision-making purposes. The three segments are Forms and Labels, Outsourcing
and Commercial. These segments market print and print related products and
services to a geographically diverse customer base.
As a result of acquiring the remaining interest in Quality Color Press, Inc.
(see Note 3), management has reclassified this business from the Commercial
segment to the Forms and Labels segment in order to reflect the business
synergies and integration plans.
FORMS AND LABELS
In this segment, the Corporation derives its revenues from operations in the
United States, Canada and Latin America. This segment designs and manufactures
business forms, labels and related products, systems and services which include:
- - Custom continuous forms, cut sheets and multipart forms
- - Print services
- - Self mailers
- - Electronic forms and services
- - Integrated form-label application
- - Proprietary label products
- - Pressure sensitive labels
- - Security documents
- - Logistics, warehouse and inventory management
OUTSOURCING
In this segment, the Corporation derives revenues from its Business
Communications Services ("BCS") operations in the United States and Canada by
offering outsourcing services for electronic printing, imaging, processing and
distribution. BCS also manages custom, high-volume mailing applications.
Products include:
- - Bill and service notifications
- - Insurance policies
- - Special notices
- - Telecommunication cards
- - Investment, banking, credit card, tax and year-end financial statements
- - Licenses
COMMERCIAL
In this segment, the Corporation derives its revenues from operations in the
United States and Europe mainly by producing highly personalized communications
and database driven publications including:
- - Creation and production of personalized mail
- - Database management and segmentation services
- - Direct marketing program development
- - Response analysis services
- - Digital color printing
- - Annual reports
- - Corporate image and product brochures
- - Catalogs
- - Market inserts
- - Promotional materials
Other products within the Commercial segment include:
- - Variable-imaged bar codes
- - Printers, applicators and software products and solutions
- - Post processing equipment
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OPERATING SEGMENTS
Years ended December 31,
Expressed in thousands of U.S. Dollars
Forms and Labels Outsourcing Commercial Consolidated
- ----------------------------------------------------------------------------------------------------------------
2002
Total revenue $ 1,129,483 $ 317,848 $ 606,917 $ 2,054,248
Intersegment revenue (3,636) (1,749) (10,824) (16,209)
- ----------------------------------------------------------------------------------------------------------------
Sale to customers outside the enterprise 1,125,847 316,099 596,093 2,038,039
- ----------------------------------------------------------------------------------------------------------------
Segment operating income 132,736 61,374 50,562 244,672
- ----------------------------------------------------------------------------------------------------------------
Non-operating expenses (142,149)
-----------
Income from operations 102,523
- ----------------------------------------------------------------------------------------------------------------
Segment assets 581,660 114,514 324,533 1,020,707
Corporate assets including investments 419,052
-----------
Total assets 1,439,759
- ----------------------------------------------------------------------------------------------------------------
Capital asset depreciation and amortization 56,811 14,969 14,966 86,746
- ----------------------------------------------------------------------------------------------------------------
Capital expenditures 20,256 4,416 7,273 31,945
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
2001 (Reclassified)
Total revenue $ 1,198,173 $ 341,485 $ 636,343 $ 2,176,001
Intersegment revenue (3,704) (2,006) (15,717) (21,427)
- ----------------------------------------------------------------------------------------------------------------
Sale to customers outside the enterprise 1,194,469 339,479 620,626 2,154,574
- ----------------------------------------------------------------------------------------------------------------
Segment operating income (loss) 43,445 49,508 (90,904) 2,049
- ----------------------------------------------------------------------------------------------------------------
Non-operating expenses (344,373)
-----------
Loss from operations (342,324)
- ----------------------------------------------------------------------------------------------------------------
Segment assets 645,178 117,243 261,486 1,023,907
Corporate assets including investments 313,079
-----------
Total assets 1,336,986
- ----------------------------------------------------------------------------------------------------------------
Capital asset depreciation and amortization 111,875 19,383 107,814 239,072
- ----------------------------------------------------------------------------------------------------------------
Capital expenditures 18,902 16,124 10,376 45,402
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
2000 (Reclassified)
Total revenue $ 1,246,800 $ 297,851 $ 730,896 $ 2,275,547
Intersegment revenue (690) (1,082) (15,357) (17,129)
- ----------------------------------------------------------------------------------------------------------------
Sale to customers outside the enterprise 1,246,110 296,769 715,539 2,258,418
- ----------------------------------------------------------------------------------------------------------------
Segment operating income (loss) 72,105 43,126 (10,706) 104,525
- ----------------------------------------------------------------------------------------------------------------
Non-operating expenses (150,759)
-----------
Loss from operations (46,234)
- ----------------------------------------------------------------------------------------------------------------
Segment assets 856,457 109,847 428,692 1,394,996
Corporate assets including investments 348,591
-----------
Total assets 1,743,587
- ----------------------------------------------------------------------------------------------------------------
Capital asset depreciation and amortization 84,264 19,276 47,978 151,518
- ----------------------------------------------------------------------------------------------------------------
Capital expenditures 61,677 10,651 32,253 104,581
- ----------------------------------------------------------------------------------------------------------------
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
GEOGRAPHIC INFORMATION
Years ended December 31,
Expressed in thousands of U.S. Dollars
UNITED
CANADA STATES INTERNATIONAL CONSOLIDATED
- -------------------------------------------------------------------------------------------------------
2002
Sale to customers outside the enterprise $ 208,192 $1,607,418 $ 222,429 $2,038,039
Capital assets, goodwill and intangibles 51,491 369,544 36,583 457,618
2001
Sale to customers outside the enterprise $ 199,628 $1,689,954 $ 264,992 $2,154,574
Capital assets, goodwill and intangibles 39,091 356,675 43,931 439,697
2000
Sale to customers outside the enterprise $ 222,311 $1,685,680 $ 350,427 $2,258,418
Capital assets, goodwill and intangibles 49,736 540,649 77,243 667,628
21. LEASE COMMITMENTS
At December 31, 2002, lease commitments require future payments as follows:
2003 $35,069
2004 $28,073
2005 $21,238
2006 $16,185
2007 $12,564
2008 and thereafter $36,669
Rent expense amounted to $52,137 in 2002 (2001 - $56,499; 2000 - $69,897).
22. CONTINGENCIES
At December 31, 2002, certain lawsuits and other claims were pending against the
Corporation. While the outcome of these matters is subject to future resolution,
management's evaluation and analysis of such matters indicates that,
individually and in the aggregate, the probable ultimate resolution of such
matters will not have a material effect on the Corporation's consolidated
financial statements.
The Corporation is subject to laws and regulations relating to the protection of
the environment. The Corporation provides for expenses associated with
environmental remediation obligations when such amounts are probable and can be
reasonably estimated. Such accruals are adjusted as new information develops or
circumstances change and are not discounted. While it is not possible to
quantify with certainty the potential impact of actions regarding environmental
matters, particularly remediation and other compliance efforts that the
Corporation's subsidiaries may undertake in the future, in the opinion of
management, compliance with the present environmental protection laws, before
taking into account estimated recoveries from third parties, will not have a
material adverse effect upon the results of operations or consolidated financial
condition of the Corporation.
The Corporation has been identified as a Potentially Responsible Party ("PRP")
at the Dover, New Hampshire Municipal Landfill, a United States Environmental
Protection Agency Superfund Site. The Corporation has been participating with a
group of approximately 26 other PRP'S to fund the study of and implement
remedial activities at the site. Remediation at the site has been on-going and
is anticipated to continue for at least several years. The total cost of the
remedial activity was estimated to be approximately $26,000. The Corporation's
share is not expected to exceed $1,500. The Corporation believes that the
reserves are sufficient based on the present facts and recent tests performed at
this site.
As described in Note 3, the Corporation may be required to pay a termination fee
of up to $27.5 million if the Corporation terminates its merger agreement with
Wallace.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
23. FINANCIAL INSTRUMENTS
At December 31, 2002, the aggregate amount of forward exchange contracts used as
hedges was approximately $13,600 (2001- $13,700). Gains and losses from these
contracts, for all years presented, were not significant.
The notional amount of interest rate swaps at December 31, 2002, use to hedge
exposure to fluctuations in interest rates on the Term Loan B Facility was
$150 million (see Note 10).
The Corporation may be exposed to losses if the counterparties to the above
contracts fail to perform. The Corporation manages this risk by dealing only
with financially sound counterparties and by establishing dollar and term limits
for each counterparty. The Corporation does not use derivative financial
instruments for trading or speculative purposes.
24. CASH FLOW DISCLOSURE
For the year ended December 31, 2001, the following non-cash transactions are
required to be disclosed for both Canadian and U.S. GAAP as follows:
- ---------------------------------------------------
Subordinated convertible debentures $71,506
Inducement to certain debenture holders 15,345
- ---------------------------------------------------
25. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
The continued registration of the common shares of the Corporation with the
Securities and Exchange Commission ("SEC") and listing of the shares on the NYSE
require compliance with the integrated disclosure rules of the SEC.
The accounting policies in Note 1 and accounting principles generally accepted
in Canada are consistent in all material aspects with United States generally
accepted accounting principles (U.S. GAAP) with the following exceptions.
PENSIONS AND POSTRETIREMENT BENEFITS
With the adoption of CICA Handbook Section 3461, Employee Future Benefits,
effective January 1, 2000, there is no longer any difference in the method of
accounting for these costs. However, the transitional rules for implementing the
new Canadian standard continue to result in U.S. GAAP reporting differences.
Under CICA Handbook Section 3461, all past net gains (losses), net assets and
prior service costs were recognized as of the date of adoption. Under U.S. GAAP,
net gains (losses), net assets and prior service costs which occurred before
January 1, 2000 are recognized over the appropriate amortization period.
STATEMENT OF CASH FLOWS
For Canadian GAAP the Statements of Cash Flows discloses the net change in cash
resources, which is defined as cash and cash equivalents less bank indebtedness.
U.S. GAAP requires the disclosure of cash and cash equivalents. Under U.S. GAAP,
net cash provided by (used in) financing activities for 2002, 2001, and 2000
would be $(10,962), $(66,315), and $18,451, respectively. Cash and cash
equivalents are the same for both Canadian and U.S. GAAP.
INCOME TAXES
The liability method of accounting for income taxes is used for both Canadian
and U.S. GAAP. However, under U.S. GAAP, temporary differences are tax effected
at enacted rates, whereas under Canadian GAAP, temporary differences are tax
effected using substantively enacted rates and laws that will be in effect when
the differences are expected to reverse (see Note 18).
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES
U.S. GAAP requires net unrealized gains (losses) on available-for-sale
securities to be reported as a separate component of shareholders' equity until
realized, whereas under Canadian GAAP such investments are carried at cost with
no effect on net income or shareholders' equity. Under both Canadian and U.S.
GAAP, impairments deemed to be other than temporary would be charged to
earnings.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCK COMPENSATION
The adoption of CICA Handbook, Section 3870 - Stock-Based Compensation and Other
Stock-Based Payments, reduced most prospective differences in accounting for
these costs between Canadian GAAP and U.S. GAAP. The pro forma disclosures of
net income and earnings per share under the fair value method of accounting for
stock options will continue to differ as CICA Handbook Section 3870 is
applicable for awards granted on or after January 1, 2002. For both Canadian and
U.S. GAAP the Corporation uses the intrinsic value method for accounting for
stock options. Prior to CICA Handbook Section 3870, recognition of compensation
expense was not required for the Corporation's Series 1 Preference Share
options, whereas under U.S. GAAP, the expense is measured at the fair value of
the Preference Share options, less the amount the employee is required to pay,
and is accrued over the vesting period.
In April 2002, the shareholders of the Corporation approved the amendment of the
options to purchase Series 1 Preference Shares (the "Preference Shares") to
eliminate the cash-out provision and to make them exercisable for one common
share per each Preference Share option. The exercise price and the number of
Preference Share options remained unchanged. This amendment effectively made
these options common share equivalents for diluted earnings per share
computations. The transition rules for CICA Handbook Section 3870 required that
these common share equivalents be considered outstanding as of the beginning of
the year, whereas for U.S. GAAP purposes, these Preference Share options were
not considered common share equivalents until amended. The difference in the
weighted average common shares between Canadian and U.S. GAAP relates solely to
the amendment of the Preference Share options.
Additionally, no compensation expense or pro forma compensation expense is
required to be recognized in the current and future periods under Canadian GAAP
pursuant to CICA Handbook Section 3870, whereas under U.S. GAAP, unearned
compensation cost will be recognized over the remaining vesting period (through
December 11, 2004) based on the intrinsic value of the option on the date of
approval. Pro forma fair value compensation expense will also be recorded under
U.S. GAAP for the Preference Shares commencing on the amendment date.
Compensation expense under U.S. GAAP for 2002 and 2001, was $11,839 and $2,700,
respectively. In accordance with the transition rules for CICA Handbook Section
3870, no compensation expense was recorded for the Preference Shares for
Canadian GAAP.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130 requires
disclosure of comprehensive income and its components. Comprehensive income is
the change in equity of the Corporation from transactions and other events other
than those resulting from transactions with owners, and is comprised of net
income and other comprehensive income. The components of other comprehensive
income for the Corporation are unrealized foreign currency translation
adjustments, change in fair value of derivatives and unrealized gains (losses)
on available-for-sale securities. Under Canadian GAAP, there is no standard for
reporting comprehensive income.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
For U.S. GAAP purposes the Corporation's interest rate swaps are designated as
cash flow hedges and changes in their fair value are recorded in other
comprehensive income. Under Canadian GAAP, there is no standard requiring the
recognition of the fair value of derivatives through comprehensive income.
FOREIGN CURRENCY TRANSLATION
Under U.S. GAAP, foreign currency translation gains or losses are only
recognized on the sale or substantial liquidation of a foreign subsidiary. Under
Canadian GAAP, a foreign currency gain or loss due to a partial liquidation is
recognized in income.
BUSINESS PROCESS REENGINEERING
Under U.S. GAAP, business process reengineering activities are expensed as
incurred. Prior to October 28, 1998, Canadian GAAP permitted these costs to be
capitalized or expensed. Subsequent to October 28, 1998, Canadian GAAP requires
expensing these costs. Prior to October 28, 1998, the Corporation capitalized
business process reengineering costs and classified them as computer software.
In 2000, certain deployment and training costs related to the implementation of
the Corporation's ERP system were expensed for U.S. GAAP purposes and
capitalized for Canadian GAAP purposes. In those years, such expenses exceeded
the amortization differential since the ERP system was not placed in service
until 2000. In 2002 and 2001, the U.S. GAAP reconciling item for computer
software relates solely to the amortization differential of the capitalized
amounts.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONVERTIBLE DEBENTURES
Canadian GAAP requires that a portion of the subordinated convertible debentures
be classified as equity. The difference between the carrying amount of the
debenture and contractual liability is amortized to earnings. U.S. GAAP requires
classification of subordinated convertible debentures as a liability.
Under U.S. GAAP, when convertible debt is converted to equity securities
pursuant to an inducement offer, the debtor is required to recognize in
earnings, the fair value of all securities and other consideration transferred
in excess of the fair value of the securities issuable in accordance with the
original conversion terms. Under Canadian GAAP, the fair value of the securities
issued is charged to retained earnings. Also under Canadian GAAP, certain other
contingent consideration is not recognized until paid.
Under U.S. GAAP, when convertible debt is converted to equity securities,
unamortized deferred debt issuance costs are charged to share capital. Under
Canadian GAAP, these costs are charged to earnings.
The components of "Debt conversion costs" included in the U.S. GAAP
reconciliation for 2001 are as follows:
Inducement shares issued $(15,345)
Deferred debt issuance costs
10,396
Contingent consideration (2,000)
--------
Debt conversion costs $ (6,949)
========
The value of the inducement shares represents the fair market value of 1,650,000
of the Corporation's common shares and is based upon the closing price of these
shares on the NYSE on December 28, 2001, the date the shares were issued. For
Canadian GAAP purposes, the fair value of the inducement shares was charged to
equity and additionally shown on the statement of operations as a reduction to
the amount available to common shareholders in the calculation of earnings per
share. For U.S. GAAP purposes, the fair value of the inducement shares was
recognized as an increase to share capital and recognized as a charge to
earnings for the period. The deferred debt issuance costs represent the
unamortized balance of the deferred issuance costs related to the convertible
debentures at conversion. For Canadian GAAP purposes, these costs were
recognized in earnings for the period, whereas for U.S. GAAP purposes, these
costs were recorded as a component of share capital. The contingent
consideration represents the right granted with the inducement shares for the
holder to potentially receive additional consideration in the future based on
the 20-day weighted average share price of the Corporation's stock at December
31, 2002 and 2003 (see Note 10). For Canadian GAAP purposes, to the extent that
any stock or cash is paid, it will be recorded as a charge to retained earnings.
For U.S. GAAP purposes, the fair value of this contingent consideration is
recognized in earnings and recorded at fair market value in subsequent reporting
periods. The fair value of the consideration was based upon an independent third
party valuation using an option pricing valuation model that includes, but is
not limited to the following factors: the Corporation's stock price volatility;
cost of borrowings; and certain equity valuation multiples.
SETTLEMENTS OF PENSION PLANS
Under U.S. GAAP, a gain or loss arising upon the settlement of a pension plan is
only recognized once responsibility for the pension obligation has been
relieved. Under Canadian GAAP, prior to January 1, 2000, an intention to settle
or curtail a pension plan that was expected to result in a loss, required
recognition once the amount was likely and could be reasonably estimated.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables provide a reconciliation of net earnings (loss) as reported
under Canadian GAAP to net earnings (loss) under U.S. GAAP.
2002 2001 2000
- -------------------------------------------------------------------------------
Net earnings (loss) as reported $ 73,258 $(358,038) $ (66,372)
U.S. GAAP ADJUSTMENTS:
Pension expense 4,199 144,917 18,263
Postretirement benefits 17,290 17,275 18,833
Computer software 6,764 17,287 (2,300)
Interest expense -- 258 --
Debt conversion costs 832 (6,949) --
Stock-based compensation (11,839) (2,700) --
Income taxes (6,726) (82,014) (13,728)
- -------------------------------------------------------------------------------
Net earnings (loss) under U.S. GAAP $ 83,778 $(269,964) $ (45,304)
Earnings (loss) per share:
Basic $ 0.75 $ (3.05) $ (0.51)
Diluted $ 0.74 $ (3.05) $ (0.51)
Average shares (in thousands):
Basic 111,556 88,648 88,457
Diluted 113,298 88,648 88,457
- -------------------------------------------------------------------------------
Comprehensive Income (loss) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 83,778 $(269,964) $ (45,304)
- -----------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax:
Currency translation adjustments (5,156) (1,817) (8,104)
Change in fair value of derivatives (3,104) -- --
Reclassification adjustment for losses included in income -- (798) 11,092
Unrealized losses on available-for-sale securities -- -- (6,041)
- -----------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) $ 75,518 $(272,579) $ (48,357)
===========================================================================================================
For U.S. GAAP purposes, the costs related to the early extinguishment of debt
are classified as an extraordinary item. On September 4, 2002, the Corporation
redeemed $100 million of the senior guaranteed notes at a redemption price that
includes a net prepayment charge of $16,746 or $10,215 net of taxes. Net
earnings before extraordinary items for 2002 is $93,993. Basic and diluted
earnings per share before extraordinary items for 2002 are $0.84 and $0.83,
respectively.
Gains and (losses) on the disposal of property, plant and equipment for 2002,
2001 and 2000 were $8,730, $(792) and $(2,630), respectively. For U.S. GAAP
purposes these amounts are recorded in income from operations.
Interest expense is net of investment income of $1,843, $2,895 and $4,545
for 2002, 2001 and 2000, respectively.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BALANCE SHEET ITEMS
As at December 31, 2002 2001
------------------------ -------------------------
AS AS
REPORTED U.S. GAAP REPORTED U.S. GAAP
------------------------ -------------------------
Net pension asset $(193,350) $(129,193) $(188,024) $(119,668)
Computer software - net (89,208) (63,672) (89,763) (57,463)
Fair value of derivatives-liability -- 5,089 -- --
Postretirement benefits 241,344 366,077 239,664 381,687
Deferred income taxes-net (73,184) (156,239) (47,188) (134,982)
Accounts payable and accrued liabilities 486,507 481,676 486,626 485,325
Accumulated other comprehensive income (133,333) (101,253) (128,177) (92,993)
Share capital 403,800 405,337 397,761 384,759
Retained earnings (deficit) 114,601 (50,645) 51,666 (124,100)
The weighted average fair value per option granted in 2002, 2001 and 2000 was
$9.26, $3.91 and $0.67, respectively. The estimated fair values were calculated
using the Black-Scholes option pricing model and the following assumptions.
<Caption>
2002 2001 2000
- ----------------------------------------------------------
Risk-free interest rates 4.1% 4.5% 5.5%
Expected lives (in years) 5 5 6
Dividend yield -- -- 7.6%
Volatility 48.1% 46.0% 39.0%
The Corporation's U.S. GAAP net income and earnings per share on a pro forma
basis using the fair value method are as follows:
2002 2001 2000
- --------------------------------------------------------------------------------
Net income (loss) $ 83,778 $(269,964) $ (45,304)
Pro forma adjustments, net of tax:
Stock compensation recorded 7,222 -- --
Fair value compensation expense (11,305) (1,949) (1,746)
- --------------------------------------------------------------------------------
Pro forma net income (loss) $ 79,695 $(271,913) $ (47,050)
================================================================================
Income (loss) per share
Basic $ 0.71 $ (3.07) $ (0.53)
Diluted $ 0.70 $ (3.07) $ (0.53)
================================================================================
26. PENDING ACCOUNTING STANDARDS
In May 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." Among other things, under the
provision of SFAS No. 145, gains and losses from the early extinguishment of
debt are no longer classified as an extraordinary item, net of income taxes, but
are included in the determination of pretax earnings. The effective date for
SFAS No. 145 is for fiscal years beginning after May 15, 2002, with early
application encouraged. Upon adoption, all gains and losses from the
extinguishment of debt previously reported as an extraordinary item shall be
reclassified to pretax earnings. It is anticipated that the adoption of SFAS No.
145 will have no impact on the financial position or results of operations of
the Corporation.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). This statement addresses
significant issues regarding the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the
guidance that the Emerging Issues Task Force ("EITF") has set forth in EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The principal difference between SFAS 146 and EITF 94-3 is that
SFAS 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred versus the EITF
94-3 where a liability was recognized on the date an entity committed to an exit
plan. SFAS 146 is effective for exit and disposal activities that are initiated
after December 31, 2002.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In January 2003, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148"). The Statement provides
alternative methods of transitioning to the fair value based method of
accounting for stock-based employee compensation. Also, this Statement amends
the previous disclosure requirements to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. This interpretation expands the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees and requires the guarantor to recognize a
liability for the fair value of an obligation assumed under a guarantee. In
general, FIN 45 applies to contracts or indemnification agreements that
contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying that is related to an asset, liability, or
equity security of the guaranteed party. Certain guarantee contracts are
excluded from both the disclosure and recognition requirements of this
interpretation. Other guarantees are subject to the disclosure requirements of
FIN 45 but not to the recognition provisions and include, among others, a
guarantee accounted for as a derivative instrument under SFAS 133. The
disclosure requirements of FIN 45 are effective for the Corporation as of
December 31, 2002, and require disclosure of the nature of the guarantee, the
maximum potential amount of future payments that the guarantor could be required
to make under the guarantee, and the current amount of the liability, if any,
for the guarantor's obligations under the guarantee. The recognition
requirements of FIN 45 are to be applied prospectively to guarantees issued or
modified after December 31, 2002. Significant guarantees that have been entered
into by the Corporation are disclosed in Note 10. The Corporation does not
expect the requirements of FIN 45 to have a material impact on results of
operations, financial position or liquidity.
In 2002, the CICA Handbook Sections 3063 - Impairment of Long Lived Assets and
3475 - Disposal of Long Lived Assets and Discontinued Operations were issued to
harmonize with SFAS No. 144. The standards will require an impairment loss to be
recognized when the carrying amount of an asset held for use exceeds the sum of
undiscounted cash flows. The impairment loss would be measured as the amount by
which the carrying amount exceeds the fair value of the asset. An asset held for
sale is to be measured at the lower of carrying cost or fair value less cost to
sell. In addition, this guidance broadens the concept of a discontinued
operations and eliminates the ability to accrue operating losses expected
between the measurement date and the disposal date. CICA Section 3063 is
effective for fiscal years beginning on or after April 1, 2003, and CICA Section
3475 applies to disposal activities initiated by an enterprise's commitment to a
plan on or after May 1, 2003. The sections will be applied prospectively with
early adoption encouraged.
In 2002, the Accounting Standards Board of the CICA issued Accounting Guidelines
No. 13 that increases the documentation, designation and effectiveness criteria
to achieve hedge accounting. The guideline requires the discontinuance of hedge
accounting for hedging relationships established that do not meet the conditions
at the date it is first applied. It does not change the method of accounting for
derivatives in hedging relationships, but requires fair value accounting for
derivatives that do not qualify for hedge accounting. The new guideline is
applicable for fiscal years commencing July 1, 2003. The Corporation is
evaluating the impact this standard might have on its results of operations and
financial position.
27. SUBSEQUENT EVENT
As previously stated in Note 3 on January 16, 2003, the Corporation entered into
a definitive merger agreement with Wallace.
58
MANAGEMENT REPORT
All of the information in this annual report is the responsibility of management
and has been approved by the Board of Directors. The financial information
contained herein conforms to the accompanying consolidated financial statements,
which have been prepared and presented in accordance with accounting principles
generally accepted in Canada and necessarily include amounts that are based on
judgments and estimates applied consistently and considered appropriate in the
circumstances.
The consolidated financial statements as of and for the two year period ended
December 31, 2002, have been audited by the Corporation's independent auditors,
Deloitte & Touche LLP, and their report is included herein. The consolidated
financial statements for the year ended December 31, 2000, have been audited by
PricewaterhouseCoopers LLP.
The Corporation maintains a system of internal control that is designed to
provide reasonable assurance that assets are safeguarded, that accurate
accounting records are maintained, and that reliable financial information is
prepared on a timely basis.
To monitor compliance with the system of internal controls and to evaluate its
effectiveness, management employs individuals in an ongoing program of internal
auditing.
The Audit Committee of the Board of Directors is composed entirely of
independent directors and meets quarterly with management and Deloitte & Touche
LLP to review management's evaluation of internal controls, approve the scope of
the program of internal auditing, and discuss the scope and results of audit
examinations. Deloitte & Touche LLP has unrestricted access to the Audit
Committee including the ability to meet without management representatives
present.
/s/ Mark A. Angelson /s/ Alfred C. Eckert III
- ------------------------------------- ------------------------------------
Mark A. Angelson Alfred C. Eckert III
Chief Executive Officer Chairman of the Board
February 13, 2003 February 13, 2003
59
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF MOORE CORPORATION LIMITED:
We have audited the consolidated balance sheets of Moore Corporation Limited as
at December 31, 2002 and 2001 and the consolidated statements of operations,
retained earnings and cash flows for the years then ended. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards and auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Corporation as at December 31,
2002 and 2001 and the results of its operations and its cash flows for the years
then ended in accordance with Canadian generally accepted accounting principles.
The financial statements for the year ended December 31, 2000, prior to the
change in accounting policy for earnings per share as described in Note 2, the
reclassification of segmented information in Note 20 to conform with
management's process for making decisions with regard to resource allocation and
performance evaluation and reclassification of various amounts to conform to the
current year's presentation and disclosure of net loss and net loss per share
adjusted to exclude amortization expense related to goodwill as described in
Note 7, were audited by other auditors who expressed an opinion without
reservation on those statements in their report dated February 22, 2001. We have
audited the adjustments and reclassifications to the 2000 financial statements
and, in our opinion, such adjustments and reclassifications, in all material
respects, are appropriate and have been properly applied.
(signed)
DELOITTE & TOUCHE LLP
Toronto, Canada
February 12, 2003
60
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-UNITED STATES OF AMERICA
REPORTING DIFFERENCE
In the United States of America, reporting standards for auditors require the
addition of an explanatory paragraph (following the opinion paragraph) when
there are changes in accounting principles that have a material effect on the
comparability of the Corporation's financial statements, such as the changes
described in Note 2 to the financial statements. Our report to the shareholders
dated February 12, 2003 is expressed in accordance with Canadian reporting
standards which do not require a reference to such changes in accounting
principles in the auditors' report when the change is properly accounted for and
adequately disclosed in the financial statements.
(signed)
DELOITTE & TOUCHE LLP
Toronto, Canada
February 12, 2003
61
AUDITORS' REPORT
TO THE SHAREHOLDERS OF MOORE CORPORATION LIMITED:
We have audited the consolidated statements of operations, retained earnings and
cash flows of Moore Corporation Limited for the year ended December 31, 2000.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in Canada and the United States of America. Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the results of the Corporation's operations, the changes in
its retained earnings and cash flows for the year ended December 31, 2000 in
accordance with generally accepted accounting principles in Canada.
/s/ PricewaterhouseCoopers LLP
- ----------------------------------------
PRICEWATERHOUSECOOPERS LLP
CHARTERED ACCOUNTANTS
Toronto, Canada
February 22, 2001
62
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when there is a
change in accounting principles that has a material effect on the comparability
of the Corporation's financial statements, such as the changes for employee
future benefits and accounting for income taxes described in Note 2 to the
financial statements. Our report to the shareholders dated February 22, 2001 is
expressed in accordance with Canadian reporting standards which do not require a
reference to such changes in accounting principles in the auditors' report when
the change is properly accounted for and adequately disclosed in the financial
statements.
/s/ PricewaterhouseCoopers LLP
- ----------------------------------------
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Canada
February 22, 2001
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with the independent auditors on accounting and
financial disclosure.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding the Corporation's Executive Officers appears in the
"Executive Officers" section of the end of Part I of this report. In addition,
the information regarding the directors of the Corporation appearing in the
Management Information Circular and Proxy Statement for the Annual and Special
Meeting of Shareholders to be held on April 23, 2003 is incorporated herein by
reference. Each director will hold office until the next annual meeting of
shareholders or until a successor is elected or appointed.
The information appearing under the caption "Section 6(a) Beneficial Ownership
Reporting Compliance" in the Management Information Circular and Proxy Statement
for the Annual and Special Meeting of the Shareholders to be held on April 23,
2003, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information regarding the Directors' and Executive Officers' compensation
appearing in the Management Information Circular and Proxy Statement for the
Annual and Special Meeting of Shareholders to be held on April 23, 2003, is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
See "Item 5. Market for Registrant's Common Shares and Related Shareholder
Matters - Securities Authorized for Issuance Under Equity Compensation Plans"
for information relating to securities authorized for issuance under equity
compensation plans.
The information captioned "Security Ownership of Certain Beneficial Owners and
Management" appearing in the Management Information Circular and Proxy
Statements for the Annual and Special Meeting of Shareholders to be held on
April 23, 2003, is incorporated herein by reference.
Certain officers of the Corporation, including the Chairman, the Chief Executive
Officer and the former Chairman, President and Chief Executive Officer, and
members of the Board of Directors, were investors in Chancery Lane/GSC Investors
L.P., the partnership that owned the $70.5 million aggregate principal amount of
8.70% subordinated convertible debentures due June 30, 2009. The debentures were
converted into 21,692,311 common shares on December 28, 2001.
In 2000, Moore paid a dividend of $0.05 per common share each quarter. In the
first quarter of 2001, Moore paid a dividend of $0.05 per common share. On April
25, 2001, the Board of Directors decided to suspend future dividends. Moore does
not anticipate declaring and paying cash dividends on the common shares at any
time in the foreseeable future.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information captioned "Certain Relationships and Related Transactions"
appearing in the Management Information Circular and Proxy Statement for the
Annual and Special Meeting of Shareholders to be held on April 23, 2003, is
incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
The Corporation's Chief Executive Officer and Chief Financial Officer have
conducted an evaluation of the effectiveness of disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as
amended, as of a date within 90 days of the filing of this annual report. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures are effective in ensuring
that all material information required to be filed in this annual report has
been made known to them in a timely fashion. There have been no significant
changes in internal controls, or in factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer and Chief
Financial Officer completed their evaluation.
64
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
15 (a) Index to documents filed as part of this report:
1. Financial Statements:
The following consolidated financial statements and reports of the
independent auditors of the Corporation and its subsidiaries are set
forth in Item 8:
Consolidated Balance Sheets at December 31, 2002 and 2001
Consolidated Statements of Operations for years ended December 31, 2002,
2001 and 2000
Consolidated Statements of Retained Earnings for the years ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
SCHEDULE II - ALLOWANCE FOR DOUBTFUL ACCOUNTS on page 71.
3. Exhibits
See Exhibit Index on page 72.
15 (b) The following reports on Form 8-K were filed during the last quarter of
the period covered by this report:
Date of Report Items Reported
-------------- --------------
November 1, 2002 Furnishing the 18 U.S.C.
Section 1350 certifications of
Robert G. Burton, Chairman,
President and Chief Executive
Officer and Mark S. Hiltwein,
Executive Vice President, Chief
Financial Officer relating to
the Corporation's Quarterly
Report on Form 10-Q for the
quarter ended September 30,
2002.
December 9, 2002 Announcing the resignation of
Robert G. Burton as Chairman,
President and Chief Executive
Officer effective December 31,
2002, and the election of Mark
A. Angelson as Chief Executive
Officer, Alfred C. Eckert III
as Chairman of the Board of
Directors, Thomas W. Oliva as
President and Chief Operating
Officer and Thomas J. Quinlan,
III as Executive Vice President
- Office of the Chief
Executive.
December 19, 2002 Announcing the appointment of
Robert F. Cummings, Jr. to
serve as a director of the
Corporation effective January
2, 2003.
15 (c) See Exhibit Index on page 72.
15 (d) The response to this portion of Item 15 is submitted as a separate
section of this report (see page 71).
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MOORE CORPORATION LIMITED
By: M.S. Hiltwein
----------------------------------------------------------------
M.S. Hiltwein, Executive Vice President, Chief Financial Officer
By: R.T. Sansone
----------------------------------------------------------------
R.T. Sansone, Senior Vice President, Controller
(Chief Accounting Officer)
Dated: February 13, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Alfred C. Eckert III Chairman of the Board and Director February 13, 2003
-----------------------------
Alfred C. Eckert III
/s/ Mark A. Angelson Chief Executive Officer and Director February 13, 2003
-----------------------------
Mark A. Angelson
/s/ Robert F. Cummings, Jr. Director February 13, 2003
-----------------------------
Robert F. Cummings, Jr.
/s/ Ronald J. Daniels Director February 13, 2003
-----------------------------
Ronald J. Daniels
/s/ Joan D. Manley Director February 13, 2003
-----------------------------
Joan D. Manley
/s/ Lionel H. Schipper Director February 13, 2003
-----------------------------
Lionel H. Schipper
/s/ John W. Stevens Director February 13, 2003
-----------------------------
John W. Stevens
66
CERTIFICATIONS
I, Mark A. Angelson, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Moore Corporation Limited;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 13, 2003
Signature: /s/ Mark A. Angelson
---------------------------------------------
Mark A. Angelson, Chief Executive Officer
67
CERTIFICATIONS
I, Mark S. Hiltwein, Executive Vice President, Chief Financial Officer, certify
that:
1. I have reviewed this annual report on Form 10-K of Moore Corporation Limited;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 13, 2003
Signature: /s/ Mark S. Hiltwein
-------------------------------------------------------------------
Mark S. Hiltwein, Executive Vice President, Chief Financial Officer
68
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Shareholders of Moore Corporation Limited:
Our audit of the consolidated financial statements referred to in our report
dated February 22, 2001 appearing on page 62 of this Annual Report on Form 10-K
also included an audit of the financial statement schedule listed in Item
15(a)(2) of this Form 10-K. In our opinion, the financial statement schedule
presents fairly in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
CHARTERED ACCOUNTANTS
Toronto, Canada
February 22, 2001
69
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Moore Corporation Limited:
We have audited the consolidated financial statements of Moore Corporation
Limited as at and for the years ended December 31, 2002 and 2001, and have
issued our report thereon dated February 12, 2003 (which audit report expresses
an unqualified opinion and includes an additional paragraph regarding the audit
procedures we applied to certain adjustments made to Moore Corporation Limited's
2000 financial statements for the change in accounting policy related to
earnings per share, restatement of the segmented information, and the
reclassifications to conform to the current year's presentation but does not
express an opinion or any form of assurance on the 2000 financial statements
taken as a whole). Our audits also included the consolidated financial statement
schedule of Moore Corporation Limited, listed in Item 15. This consolidated
financial statement schedule is the responsibility of the Corporation's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Toronto, Canada
February 12, 2003
70
MOORE CORPORATION LIMITED
SCHEDULE II - ALLOWANCE FOR DOUBTFUL ACCOUNTS
(Expressed in thousands of U.S. Dollars)
Balance at Additions Balance
Beginning of Year Charged to Expense Deductions (1) at End of Year
----------------- ------------------ -------------- --------------
2000 13,924 7,149 (5,799) 15,274
2001 15,274 11,102 (4,319) 22,057
2002 22,057 5,395 (7,914) 19,538
(1) Primarily write-offs, net recoveries and foreign currency translation
adjustments.
71
MOORE CORPORATION LIMITED
ANNUAL REPORT ON FORM 10-K
EXHIBIT LIST
3.1 Articles of Continuance (incorporated by reference from Exhibit 3.1 to the
Registration Statement on Form S-3 No. 333-82728)
3.2 By-Laws (incorporated by reference from Exhibit 3.2 to the Registration
Statement on Form S-3 No. 333-82728)
4.1 Debenture Purchase Agreement, dated as of December 12, 2000, between Moore
Corporation Limited and Chancery Lane/GSC Investors L.P. (incorporated by
reference from Exhibit 4.2 to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001)
4.2 8.70% subordinated convertible debentures due June 30, 2009 issued to
Chancery Lane/GSC Investors L.P. (incorporated by reference from Exhibit
4.3 to the Quarterly Report on Form 10-Q for the quarter ended September
30, 2001)
4.3 Standstill Agreement, dated December 21, 2000, among Moore Corporation
Limited, Chancery Lane/GSC Investors L.P. and CLGI, Inc. (incorporated by
reference from Exhibit 4.4 to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001)
4.4 Registration Rights Agreement, dated as of December 21, 2000, between
Moore Corporation Limited and Chancery Lane/GSC Investors L.P.
(incorporated by reference from Exhibit 4.5 to the Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001)
4.5 Registration Rights Agreement, dated as of December 28, 2001, between
Moore Corporation Limited, the GSC Investors listed on a schedule thereto
and Chancery Lane/GSC Investors L.P.
10.1 Supplemental Executive Retirement Plan for Designated Executives - B
(incorporated by reference from Exhibit 10.1 to the Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001)*
10.2 2001 Long Term Incentive Plan (incorporated by reference to Exhibit 10.2
to the Annual Report on Form 10-K for the year ended December 31, 2001,
filed on March 29, 2002.)*
10.3 Employment Agreement, dated December 11, 2000, between Moore Corporation
Limited and Robert G. Burton (incorporated by reference from Exhibit 10.2
to the Quarterly Report on Form 10-Q for the quarter ended September 30,
2001)*
10.4 Employment Agreement, dated as of December 11, 2000, between Moore
Corporation Limited and Robert B. Lewis (incorporated by reference from
Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001)*
10.5 Employment Agreement, dated as of December 11, 2000, between Moore
Corporation Limited and James E. Lillie (incorporated by reference from
Exhibit 10.4 to the Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001)*
10.6 Amended and Restated Employment Agreement, dated as of November 5, 2002,
between Moore Corporation Limited and Mark S. Hiltwein*
10.7 Amended and Restated Employment Agreement, dated as of November 5, 2002,
between Moore Corporation Limited and Thomas J. Quinlan, III*
10.8 Amended and Restated Employment Agreement, dated as of November 5, 2002,
between Moore Corporation Limited and Thomas W. Oliva*
10.9 Amended and Restated Employment Agreement, dated as of November 5, 2002,
between Moore Corporation Limited and Dean E. Cherry*
10.10 Employment Agreement, dated December 9, 2002, between Moore Corporation
Limited and Mark A. Angelson*
10.11 Credit Agreement, dated as of August 2, 2002, among Moore North America,
Inc., the Guarantors named therein, the several lenders from time to time
party thereto and Citicorp USA, Inc., as administrative agent for the
Lenders (incorporated by reference from Exhibit 10.1 to the Quarterly
Report on Form 10-Q for the quarter ended September 30, 2002)
10.12 Share Plan for Non-Employee Directors*
21 Subsidiaries of the Registrant
23.1 Consent of PriceWaterhouseCoopers LLP Chartered Accountants
23.2 Consent of Deloitte & Touche LLP Chartered Accountants
* Management contract or compensation plan or arrangement
72