EXHIBIT 99.1
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 on Form 10-K,
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 shares
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 $210.0 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.
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 results. This supplemental discussion should be
read in conjunction with the Corporation's reported consolidated financial
statements.
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 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 $2,038.0 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 $1,390.0 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. The Corporation has achieved and anticipates 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 $116.0 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. 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.
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 $391.2
million of restructuring and other charges that were included in 2001 results as
well as 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 $100.0 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 $100.0 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) and
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 $3.0 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 primarily as a result of the $374.6 million in restructuring and other
charges.
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.
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 $307.0 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 $25.0 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 $100.0 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 $100.0 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 $600.0
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.
Included in the 2001 restructuring charge was $48.0 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 $24.0 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.
Included in the operating results are the aforementioned restructuring and other
charges.
- ---------------------------------------------------------------------------------------------------------------
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 $ 132.7 $ 43.4 $ 72.1
Outsourcing 316.1 339.5 296.8 61.4 49.5 43.1
Commercial 596.1 620.6 715.5 50.5 (90.9) (10.7)
Corporate - - - (142.1) (344.3) (150.7)
- ---------------------------------------------------------------------------------------------------------------
Total $2,038.0 $2,154.6 $2,258.4 $ 102.5 $(342.3) $ (46.2)
===============================================================================================================
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 increased by $89.3 million or 205.8% to $132.7 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.) Included in
2002 results is a net restructuring charge of $3.4 million primarily related to
a plant closure. In 2001, restructuring and other charges of $66.8 million were
recorded primarily relating to headcount reductions ($33.6 million) and asset
impairment charges ($21.9 million).
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 decreased $28.7 million, or 39.8% to $43.4 million, primarily
due to the aforementioned restructuring and other charges of $66.8 million
recorded in 2001 offset by 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. In 2000, the
Corporation recorded the reversal of restructuring charges of $21.8 million no
longer required due to favorable settlement of its obligations. 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.
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 $11.9 million, or 24.0% to $61.4 million, due
to cost savings achieved through workforce reductions, cost containment and the
acquisition discussed above. Included in 2001 results are $4.8 million of net
restructuring and other charges relating to the aforementioned initiatives.
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 $6.4 million, or 14.8% to $49.5 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. In 2001, the
Corporation recorded net restructuring and other charges of $4.8 million, as
discussed above. In 2000, a reversal of the restructuring reserve of $0.3
million relating to the favorable settlement of liabilities for obligations was
recorded.
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 $141.4 million to $50.5 million from a loss
of $90.9 million in the prior year. The increase was primarily due to net
restructuring and other charges of $121.6 million recorded in 2001. These
charges mostly related to workforce reductions ($28.4 million) and the write
down of goodwill associated with non-core assets ($76.8 million). Also,
contributing to the increase were 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 recorded an operating loss in 2001 of $90.9 million versus a loss of
$10.7 million recorded in 2000 primarily due to net restructuring and other
charges recorded in 2001, as discussed above, partially offset by aggressive
cost containment initiatives, which included a $33.8 million or 22.4% decrease
in selling, general and administrative expenses. In 2000, the Corporation
reversed a restructuring charge of $3.8 million as a result of favorable
settlements of obligations as compared to estimates and assumptions used by
management at the time the charges were recorded.
CORPORATE
2002 COMPARED TO 2001
Corporate operating expenses declined by $202.2 million, or 58.7% to $142.1
million, due to net restructuring and other charges totaling $181.4 million
recorded in 2001 as well as overall cost controls and a focus on discretionary
spending. The 2001 net restructuring and other charges primarily related to
lease termination and other facility costs ($48.5 million) and the curtailment
of the pension plan ($96.6 million).
2001 COMPARED TO 2000
Corporate operating expenses increased by $193.6 million to $344.3 million,
primarily due to net restructuring and other charges discussed above and the
reduction of pension income resulting from the pension settlement and additional
retirement savings plan contributions, partially offset by a reduction in
corporate overhead. In 2000, the Corporation recorded other charges of $16.6
million.
LIQUIDITY AND CAPITAL RESOURCES
In August 2002, the Corporation entered into a $400.0 million secured credit
facility. The facility is comprised of a five-year $125.0 million Revolving
Credit Facility, a five-year $75.0 million Delayed Draw Term Loan A Facility,
and a six-year $200.0 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 $168.0 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 $850.0 million senior secured
credit facility and a $400.0 million senior unsecured credit facility. In lieu
of entering into definitive agreements for the $400.0 million senior unsecured
credit facility, the Corporation may instead decide to sell $400.0 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 $150.0 million comprised as
follows: a $100.0 million 3.78% fixed rate agreement that expires in August
2006; and a $50.0 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 $100.0 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.
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 $9.0 million or the value
of 6,000,000 of its common shares at such date. The $9.0 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
$50.0 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 $66.0 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 $100.0 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:
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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.
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
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.