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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
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 (I.R.S. employer identification no.)
incorporation or organization
6100 Vipond Drive L5T 2X1
MISSISSAUGA, ONTARIO, CANADA (Zip code)
(Address of principal executive offices)
905-362-3100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Sections 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.
YES [X] NO [ ]
At April 25, 2003, 113,323,023 shares of the registrant's common shares, without
par value, were issued and outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOORE CORPORATION LIMITED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
MARCH 31, DECEMBER 31,
2003 2002
- ----------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents $ 119,981 $ 139,630
Accounts receivable, less allowance for doubtful
accounts of $18,813 (2002 - $19,538) 344,567 341,383
Inventories (Note 2) 137,372 129,889
Prepaid expenses 38,744 17,317
Deferred income taxes 32,823 31,912
- ----------------------------------------------------------------------------------------
Total Current Assets 673,487 660,131
--------------------------
Restricted cash and cash equivalents (Note 4) 900,175 -
Property, plant and equipment - net 252,549 255,722
Investments 27,976 32,256
Prepaid pension cost 222,147 221,520
Goodwill (Note 3) 107,540 106,254
Other intangibles - net (Note 3) 6,387 6,434
Deferred income taxes 53,678 53,938
Other assets 108,891 103,504
- ----------------------------------------------------------------------------------------
Total Assets $2,352,830 $1,439,759
--------------------------
LIABILITIES
Current Liabilities
Bank indebtedness $ 25,392 $ 18,158
Accounts payable and accrued liabilities 450,779 486,507
Short-term debt 2,642 2,135
Income taxes 55,396 58,562
Deferred income taxes 4,001 3,184
- ----------------------------------------------------------------------------------------
Total Current Liabilities 538,210 568,546
--------------------------
Long-term debt (Note 4) 1,087,106 187,463
Postretirement benefits 242,730 241,344
Deferred income taxes 9,463 9,482
Other liabilities 43,137 43,776
Minority interest 6,365 6,652
- ----------------------------------------------------------------------------------------
Total Liabilities 1,927,011 1,057,263
--------------------------
SHAREHOLDERS' EQUITY
Share Capital
Authorized:
Unlimited number of preference (none outstanding for
2003 and 2002) and common shares without par value
Issued:
113,398,023 common shares in 2003; 111,842,348 common
shares in 2002 413,826 403,800
Unearned restricted shares (3,222) (2,572)
Retained earnings 143,759 114,601
Cumulative translation adjustments (128,544) (133,333)
- ----------------------------------------------------------------------------------------
Total Shareholders' Equity 425,819 382,496
--------------------------
Total Liabilities and Shareholders' Equity $2,352,830 $1,439,759
========================================================================================
(See notes to the consolidated financial statements)
MOORE CORPORATION LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
2003 2002
- -------------------------------------------------------------------------------------
Net sales $ 511,145 $ 529,501
- -------------------------------------------------------------------------------------
Cost of sales 345,452 361,008
Selling, general and administrative expenses 108,658 124,478
Depreciation and amortization 21,175 22,155
- -------------------------------------------------------------------------------------
Total operating expenses 475,285 507,641
------------------------
Income from operations 35,860 21,860
Investment and other income (expense) 839 (1,495)
Interest expense - net (including $3,226 of
pre-acquisition interest, Note 4) 6,499 2,611
------------------------
Earnings before income taxes and minority interest 30,200 17,754
Income tax expense 840 4,794
Minority interest 202 467
- -------------------------------------------------------------------------------------
Net earnings $ 29,158 $ 12,493
=====================================================================================
Net earnings per common share:
Basic $ 0.26 $ 0.11
Diluted $ 0.26 $ 0.11
Average shares outstanding (in thousands):
Basic 112,276 111,848
Diluted 113,229 114,269
- -------------------------------------------------------------------------------------
(See notes to the consolidated financial statements)
MOORE CORPORATION LIMITED
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
2003 2002
- ----------------------------------------------------------------------------------------
Balance at beginning of period $ 114,601 $ 51,666
Net earnings 29,158 12,493
Repurchase of common shares (96,300 shares in 2002) - (870)
- ----------------------------------------------------------------------------------------
Balance at end of period $ 143,759 $ 63,289
========================================================================================
(See notes to the consolidated financial statements)
MOORE CORPORATION LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
2003 2002
- -------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 29,158 $ 12,493
Items not affecting cash resources:
Depreciation and amortization 21,175 22,155
Gain on sale of investment and other assets - net (1,836) (532)
Deferred income taxes 147 4,123
Restricted share compensation 177 -
Other 1,517 1,209
Changes in working capital other than cash resources:
Accounts receivable - net 764 (18,887)
Inventories (5,568) (1,777)
Prepaid expenses (21,427) (5,607)
Accounts payable and accrued liabilities (39,944) (16,375)
Income taxes (4,460) 1,078
Other (2,098) 3,255
- -------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (22,395) 1,135
-----------------------
INVESTING ACTIVITIES
Increase in restricted cash (900,175) -
Property, plant and equipment - net (7,583) (2,083)
Long-term receivables and other investments (177) (1,475)
Acquisition of businesses - (57,202)
Proceeds from sale of investment and other assets 4,947 -
Software expenditures (909) (521)
Other (113) 96
- -------------------------------------------------------------------------------
Net cash used in investing activities (904,010) (61,185)
-----------------------
FINANCING ACTIVITIES
Net change in short-term debt 507 59,860
Proceeds from issuance of long-term debt 900,175 -
Payments on long-term debt (415) (608)
Debt issue costs (10,376) -
Issuance (repurchase) of common shares - net 9,199 (436)
Other (696) (317)
- -------------------------------------------------------------------------------
Net cash provided by financing activities 898,394 58,499
-----------------------
Effect of exchange rate on cash resources 1,128 1,219
Net decrease in cash resources (26,883) (332)
Cash resources at beginning of period (a) 121,472 28,674
- -------------------------------------------------------------------------------
Cash resources at end of period (a) $ 94,589 $ 28,342
- -------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Interest paid (b) $ 17,683 $ 4,345
Income taxes paid - net 1,307 1,649
(a) Cash resources are defined as cash and cash equivalents less bank
indebtedness.
(b) Includes prepaid interest of $15,956 related to the $403 million
senior unsecured notes.
(See notes to the consolidated financial statements)
MOORE CORPORATION LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION
The accompanying consolidated interim financial statements have been prepared by
Moore Corporation Limited in accordance with the recommendations of the Canadian
Institute of Chartered Accountants (CICA) Handbook Section 1751 - Interim
Financial Statements. As permitted by these standards, these interim financial
statements do not include all information required by Canadian generally
accepted accounting principles (GAAP) to be included in annual financial
statements. However, the Corporation considers that the disclosures made are
adequate for a fair presentation. Comparative figures have been reclassified
where appropriate to conform to the current presentation. Net sales and net
earnings for any interim period are not necessarily indicative of results that
may be expected for the entire year.
The consolidated financial statements have been prepared in conformity with
Canadian GAAP, and include estimates and assumptions of management that affect
the amounts reported in the consolidated financial statements. Actual results
could differ from these estimates.
These consolidated interim financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto included in the
Corporation's latest Annual Report on Form 10-K filed on February 13, 2003.
2. INVENTORIES
March 31, December 31,
2003 2002
-------- ------------
Raw materials $ 33,897 $ 31,883
Work-in-process 11,511 10,303
Finished goods 88,543 84,190
Other 3,421 3,513
-------- --------
$137,372 $129,889
======== ========
3. GOODWILL AND OTHER INTANGIBLES
Balance at Foreign Balance at
Goodwill December 31, 2002 Exchange March 31, 2003
- ---------------- ----------------- -------- --------------
Forms and Labels $ 45,550 $ 463 $ 46,013
Outsourcing 11,846 823 12,669
Commercial 48,858 - 48,858
-------- ------ --------
$106,254 $1,286 $107,540
======== ====== ========
Other intangibles at March 31, 2003, include:
Accumulated
Gross Amortization
Carrying Amount and Balance at Amortizable
January 1, 2003 Foreign Exchange March 31, 2003 Life
--------------- ---------------- -------------- -----------
Trademarks, licenses
and agreements $ 3,390 $ (551) $ 2,839 4-10 Years
Customer relationship
Intangibles 2,729 (966) 1,763 3 Years
Indefinite-lived
trademarks 1,664 121 1,785
------- -------- -------
$ 7,783 $ (1,396) $ 6,387
======= ======== =======
MOORE CORPORATION LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. GOODWILL AND OTHER INTANGIBLES (Continued)
The total intangible asset amortization expense for the three months ended March
31, 2003 and 2002, was $0.4 million. Amortization expense for the next five
years is estimated to be:
2004 $1,303
2005 $ 692
2006 $ 240
2007 $ 228
2008 $ 228
4. DEBT
In March 2003, the Corporation entered into an $850 million senior secured
credit facility (the "New Facility") in connection with the pending acquisition
of Wallace Computer Services, Inc. ("Wallace"). The New Facility consists of a
seven-year $500 million B Term Loan (funded in escrow) and a five-year $350
million Revolving Credit Facility (which has not yet been funded), each of which
are subject to a number of restrictive and financial covenants that are similar
in nature to those under the existing $400 million senior secured credit
facility (the "Existing Facility"). The loans under the New Facility will bear
interest based on a variable index, plus an applicable margin. Currently, the
proceeds of the $500 million B Term Loan are being held in an escrow account and
the Corporation will receive these funds and interest earned thereon upon
consummation of the acquisition. If the Wallace acquisition is consummated, the
New Facility will replace the Existing Facility upon closing of the acquisition.
If the acquisition is not consummated, the funds held in escrow will be returned
to the lenders and the Corporation will continue to utilize its Existing
Facility.
Concurrently, in March 2003, the Corporation issued $403 million of 7 7/8 %
senior unsecured notes (the "Senior Notes") due 2011. Interest on the Senior
Notes is payable semiannually on January 15 and July 15 of each year, commencing
on July 15, 2003. The Senior Notes were issued at a $2.8 million discount to the
$403 million principal amount and the proceeds are being held in an escrow
account. The Corporation was also required to prepay interest through September
15, 2003, amounting to $16 million, into the escrow account. If the acquisition
is consummated and the other conditions of release are satisfied by August 31,
2003, all the proceeds will be released to the Corporation and will be used to
fund the acquisition. If the acquisition is not consummated by this date, the
Corporation is required to redeem all the Senior Notes at a redemption price
equal to their initial issue price plus all accrued and unpaid interest. The
Corporation may offset interest earned on funds held in escrow against future
interest payments. The indenture governing the Senior Notes contains certain
restrictive covenants that, among other things, limit additional indebtedness
and the Corporation's ability to engage in certain transactions with affiliates,
create liens on assets, engage in mergers and consolidations, or dispose of
assets. The Corporation, at its option, may redeem up to 40% of the Senior Notes
prior to January 15, 2006, at a pre-determined redemption price with the
proceeds of certain equity offerings. In addition, subsequent to January 15,
2007, the Senior Notes may be redeemed at predetermined redemption prices. On or
prior to January 15, 2007, the Corporation may also redeem the Senior Notes upon
a change of control, at a price equal to 100% of the principal plus an
applicable premium.
The Corporation recorded $3.2 million of interest expense in the consolidated
statement of operations for the quarter ended March 31, 2003, attributable to
interest, deferred issue cost amortization, and discount amortization on the New
Facility and the Senior Notes. As of March 31, 2003, the proceeds from the New
Facility and the Senior Notes being held in escrow are recorded as "restricted
cash and cash equivalents", which may only be used to fund the Wallace
acquisition, with a related liability to "long-term debt" in the consolidated
balance sheet. Subject to consummation of the acquisition, the Corporation will
be required to pay fees of approximately $19.9 million related to the above
financing.
In August 2002, the Corporation entered into the Existing Facility, 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 interest coverage. The Delayed Draw Term Loan A 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 $168 million
revolving credit facility that expired on August 5, 2002, and to fund working
capital requirements as necessary. At March 31, 2003, $179.5 million was
outstanding under the Term Loan B Facility, bearing interest at LIBOR (London
Interbank Offer Rate) plus a 300 basis point spread.
MOORE CORPORATION LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. DEBT (Continued)
The Corporation maintains interest rate swap agreements to manage the exposure
to fluctuations in interest rates on the existing 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 March 31, 2003, 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 March 31, 2003, the fair value of these swap agreements was a $5.5
million liability. Upon consummation of the Wallace acquisition, the Corporation
anticipates recording a charge to earnings for the fair value of these swaps.
The Corporation will maintain the swap agreements to manage the interest rate
fluctuation exposure on the new B Term Loan.
Prior to entering into the New Facility and issuing the Senior Notes, the
Corporation received waivers on covenants of the Existing Facility to waive any
default caused by the financing activities related to the Wallace acquisition.
The Corporation has $19.9 million in outstanding letters of credit at March 31,
2003.
5. RESTRUCTURING AND OTHER CHARGES
In the first quarter of 2003 and 2002, the Corporation did not incur
restructuring or other related charges.
The reconciliation of the restructuring reserve as of March 31, 2003, is as
follows:
December 31, Cash March 31,
2002 Paid 2003
-------- --------- --------
Employee terminations $ 14,319 $ (2,533) $ 11,786
Other 67,121 (1,762) 65,359
-------- -------- --------
$ 81,440 $ (4,295) $ 77,145
======== ======== ========
The restructuring reserves classified as "other", primarily consist of the
estimated remaining payments related to lease terminations and facility closing
costs. Payments on these lease obligations are scheduled to 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.
6. INCOME TAXES
The Corporation's effective tax rate for the three months ended March 31, 2003,
was 2.8%. The difference between the statutory rate and the effective rate
relates to lower tax rates in non-U.S. jurisdictions combined with a $6.3
million reduction of the deferred tax valuation allowance, which is based on
management's best estimate of the amount of deferred tax assets that will more
likely than not be realized. For the same period ended March 31, 2002, the
effective income tax rate was 27% and the valuation allowance remained
unchanged.
7. ASSETS HELD FOR DISPOSITION
In the fourth quarter of 2001, the Corporation classified a non-core business as
an asset held for disposition and the carrying value was adjusted to its net
recoverable amount. Included in the results of the Commercial segment for the
three months ended March 31, 2003 and 2002, are net sales of $49.7 million and
$50.1 million, respectively, relating to this business. Income from operations
for the three months ended March 31, 2003 and 2002, relating to this business
was $3.2 million and $2.8 million, respectively.
8. RECONCILIATION TO U.S. GAAP
The following summarizes the significant accounting differences between Canadian
generally accepted accounting principles (Canadian GAAP) and U.S. generally
accepted accounting principles (U.S. GAAP) that result in the differences
disclosed in the U.S. GAAP reconciliation.
MOORE CORPORATION LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. RECONCILIATION TO U.S. GAAP (Continued)
PENSIONS AND POSTRETIREMENT BENEFITS
The adoption of CICA Handbook Section 3461, Employee Future Benefits, on January
1, 2000, eliminated any material difference in the method of accounting for
these costs. However, the transition rules for the implementation of this
Canadian standard continue to result in a U.S. GAAP reporting difference. 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 disclose the net change in cash
resources, which is defined as cash and cash equivalents less bank indebtedness.
U.S. GAAP requires the disclosure of the net change in cash and cash
equivalents. Under U.S. GAAP, net cash provided by financing activities for the
three months ended March 31, 2003 and 2002, is $905.6 million and $33.3 million,
respectively. Cash and cash equivalents are the same for both Canadian GAAP and
U.S. GAAP.
INCOME TAXES
The liability method of accounting for income taxes is used for both Canadian
GAAP 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.
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 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. 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
U.S. GAAP 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 and the change in fair value of
derivatives. Under Canadian GAAP, there is no standard for reporting
comprehensive income.
MOORE CORPORATION LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. RECONCILIATION TO U.S. GAAP (Continued)
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
the cost of business process reengineering activities to be expensed as
incurred. Prior to October 28, 1998, the Corporation capitalized business
process reengineering costs and classified them as computer software.
CONVERTIBLE DEBENTURES
The debt conversion costs relate to the December 28, 2001 induced conversion of
the Corporation's subordinated convertible debentures and more specifically
represent 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 share at December 31, 2002 and
2003. For Canadian GAAP purposes, to the extent that any shares 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. The fair value of the consideration is 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
share price volatility; cost of borrowings; and certain equity valuation
multiples.
CHANGES IN ACCOUNTING POLICIES
In the first quarter of 2003, the Corporation adopted Statement of Financial
Accounting Standards ("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. The adoption of SFAS No. 145 had no
impact on the financial position or results of operations of the Corporation for
the three months ended March 31, 2003.
In the first quarter of 2003, the Corporation adopted 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. The adoption of SFAS No. 146 had no impact on the
financial position or results of operations of the Corporation for the three
months ended March 31, 2003.
MOORE CORPORATION LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. RECONCILIATION TO U.S. GAAP (Continued)
The following tables provide a reconciliation of net earnings as reported under
Canadian GAAP to net earnings under U.S. GAAP.
Three months ended
March 31,
2003 2002
- --------------------------------------------------------------------------------
Net earnings as reported $ 29,158 $ 12,493
U.S. GAAP Adjustments:
Pension expense 1,011 18
Postretirement benefits 4,328 4,322
Computer software 1,704 1,691
Debt conversion costs 366 1,265
Stock-based compensation (365) (2,596)
Income taxes (2,748) (2,352)
- --------------------------------------------------------------------------------
Net earnings under U.S. GAAP $ 33,454 $ 14,841
- --------------------------------------------------------------------------------
Earnings per share:
Basic $ 0.30 $ 0.13
Diluted $ 0.30 $ 0.13
Average shares (in thousands):
Basic 112,276 111,848
Diluted 113,164 113,014
- --------------------------------------------------------------------------------
Comprehensive income 2003 2002
- --------------------------------------------------------------------------------
Net earnings $ 33,454 $ 14,841
- --------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax:
Currency translation adjustments 4,789 (2,205)
Change in fair value of derivatives 276 -
- --------------------------------------------------------------------------------
Total comprehensive income $ 38,519 $ 12,636
================================================================================
Net gains on the disposal of property, plant and equipment for the three months
ended March 31, 2003 and 2002 were $1,173 and $532, respectively. For U.S. GAAP
purposes these amounts are recorded in income from operations.
Interest expense is net of investment income of $587 and $383 for the three
months ended March 31, 2003 and 2002, respectively.
Balance Sheet Items: March 31, 2003 December 31, 2002
As reported U.S. GAAP As reported U.S. GAAP
- --------------------------------------------------------------------------------------------------------------------
Net pension asset $(193,361) $(130,215) $(193,350) $(129,193)
Computer software - net (84,386) (60,554) (89,208) (63,672)
Fair value of derivatives -liability - 5,541 - 5,089
Postretirement benefits 242,730 363,135 241,344 366,077
Deferred taxes - net (73,037) (153,520) (73,184) (156,239)
Accounts payable and accrued liabilities 450,779 445,582 486,507 481,676
Accumulated other comprehensive income (128,544) (96,740) (133,333) (101,253)
Share capital 413,826 415,728 403,800 405,337
Retained earnings (deficit) 143,759 (17,191) 114,601 (50,645)
MOORE CORPORATION LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. RECONCILIATION TO U.S. GAAP (Continued)
The Corporation's U.S. GAAP net earnings and earnings per share on a pro forma
basis, if compensation expense for employee stock options were determined using
the fair value method are as follows:
Three months ended
March 31,
2003 2002
- --------------------------------------------------------------------------------
Net earnings $ 33,454 $ 14,841
Pro forma adjustments, net of tax:
Stock compensation recorded 223 -
Fair value compensation expense (575) (459)
- --------------------------------------------------------------------------------
Pro forma net earnings $ 33,102 $ 14,382
================================================================================
Earnings per share
Basic $ 0.29 $ 0.13
Diluted $ 0.29 $ 0.13
================================================================================
9. SEGMENT 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. in
May 2002, 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.
Three months ended Forms and
March 31, 2003 Labels Outsourcing Commercial Corporate Consolidated
- ------------------------------------ ---------- ----------- ---------- ----------- ------------
Total revenue $268,303 $ 97,405 $149,971 $ - $ 515,679
Intersegment revenue (1,474) (1) (3,059) - (4,534)
-------- -------- -------- ---------- -----------
Sales to customers outside
the enterprise 266,829 97,404 146,912 - 511,145
Income (loss) from operations 30,462 26,191 13,188 (33,981) 35,860
Total assets 567,872 122,474 327,800 1,334,684 2,352,830
Depreciation and amortization 8,759 3,178 3,756 5,482 21,175
Capital expenditures 2,645 4,624 1,352 1,493 10,114
Three months ended Forms and
March 31, 2002 (Reclassified) Labels Outsourcing Commercial Corporate Consolidated
- ------------------------------------ ---------- ----------- ---------- ----------- ------------
Total revenue $288,503 $ 96,140 $147,807 $ - $ 532,450
Intersegment revenue (945) (12) (1,992) - (2,949)
-------- -------- -------- ---------- -----------
Sales to customers outside
the enterprise 287,558 96,128 145,815 - 529,501
Income (loss) from operations 30,394 20,713 11,961 (41,208) 21,860
Total assets 602,466 125,396 341,191 317,612 1,386,665
Depreciation and amortization 8,846 3,985 3,728 5,596 22,155
Capital expenditures 1,014 896 836 632 3,378
MOORE CORPORATION LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. CONTINGENCIES
At March 31, 2003, certain lawsuits and other claims and assessments 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 million. The
Corporation's share is not expected to exceed $1.5 million. The Corporation
believes that the reserves are sufficient based on the present facts and recent
tests performed at this site.
As described in Note 12, 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.
11. EARNINGS PER SHARE
Three months ended
March 31,
2003 2002
-------- --------
Net earnings $ 29,158 $ 12,493
-------- --------
Weighted average number of common
shares outstanding:
Basic 112,276 111,848
Dilutive options and awards 953 2,421
-------- --------
Diluted 113,229 114,269
-------- --------
Earnings per share
Basic $ 0.26 $ 0.11
Diluted $ 0.26 $ 0.11
12. PENDING ACQUISITION
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 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 $220 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 acquisition is subject to customary
closing conditions that include, among others, receipt of required approval from
Wallace shareholders. If approved, the transaction is expected to close during
the Corporation's second quarter of 2003. Under certain terms specified in the
merger agreement, the Corporation or Wallace may terminate the agreement and
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. The consolidated financial statements, related
notes and "Management's Discussion and Analysis," pertain to the Corporation as
a stand-alone entity and do not reflect the impact of the pending business
combination transaction with Wallace.
MOORE CORPORATION LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. PENDING ACQUISITION (Continued)
In March 2003, the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, expired with respect to the proposed
acquisition of Wallace by the Corporation.
MOORE CORPORATION LIMITED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section provides a review of the financial performance of Moore Corporation
Limited for the three months ended March 31, 2003 and 2002. This analysis is
based on the consolidated financial statements that are presented in Item 1,
prepared in accordance with Canadian generally accepted accounting principles
(GAAP). Differences between Canadian and U.S. GAAP are disclosed in Note 8 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 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
three months ended March 31, 2003, approximately 52%, 19% 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 2003 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 taken during
2002 and 2001. 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 for the first quarter of 2003, relative to the
comparable period in last year.
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 $220 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
acquisition is subject to customary closing conditions that include, among
others, receipt of required approval from Wallace shareholders. If approved, the
transaction is expected to close during the Corporation's second quarter of
2003. Under certain terms specified in the merger agreement, the Corporation or
Wallace may terminate the agreement and 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. The
consolidated financial statements, related notes and "Management's Discussion
and Analysis," pertain to the Corporation as a stand-alone entity and do not
reflect the impact of the pending business combination transaction with Wallace.
In March 2003, the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, expired with respect to the proposed
acquisition of Wallace by the Corporation.
Consistent with the strategy to focus on core printing operations, the
Corporation disposed of various non-core businesses. During the first quarter of
2002, the Corporation 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. On January 31, 2002, the
Corporation completed the acquisition of The Nielsen Company, a commercial
printer, which is complementary to its core operations.
MOORE CORPORATION LIMITED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW (CONTINUED)
During 2002 and 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 2002 and 2001, the Corporation reduced employee base by
approximately 4,000 employees.
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 employee base 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). For the remainder of 2003, the Corporation anticipates
further cost savings in each of these areas.
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 effects these
actions will have on the Corporation's results or financial condition cannot be
predicted.
Consolidated results of operations for the three months ended March 31, 2003 and
2002, are shown in the accompanying consolidated statements of operations.
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. This supplemental discussion should be
read in conjunction with the Corporation's reported consolidated financial
statements.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003 AS
COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2002
CONSOLIDATED
Net sales for the three months ended March 31, 2003, were $511.1 million,
representing an $18.4 million or 3.5% decrease from the same period last year.
The decrease primarily results from sales declines in the U.S. and Canadian
Forms and Labels business ($18.2 million) and domestic direct mail operations
($5.5 million), as customers deferred spending decisions as a result of current
macroeconomic and geopolitical conditions. The decrease was partially offset by
the inclusion of a full quarter of operations of The Nielsen Company ("Nielsen")
($8.0 million), which was acquired January 31, 2002.
Cost of sales decreased $15.6 million to $345.4 million or 67.6% of consolidated
net sales for the first quarter 2003, compared to 68.2% for the first quarter in
2002. The decrease is primarily due to lower volumes and benefits achieved
through production efficiencies and the reduction of vendor costs as a result of
partnering with suppliers.
Selling, general and administrative costs decreased $15.8 million to $108.6
million or 21.2% of consolidated net sales for the three months ended March 31,
2003, compared to $124.4 million or 23.5% in 2002. The improvements in 2003
compared to 2002 are attributable to the benefits achieved from the
Corporation's prior restructuring activities, and continued focus on containment
of discretionary spending.
Depreciation and amortization expense was $21.2 million and $22.2 million for
the three months ended March 31, 2003 and 2002, respectively. The decrease of $1
million is principally due to the financial discipline over capital expenditure
decisions made during fiscal year 2002.
MOORE CORPORATION LIMITED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CONSOLIDATED (CONTINUED)
Income from operations was $35.9 million for the first quarter of 2003 compared
to income from operations of $21.9 million for the same prior year period. This
improvement is principally due to improved operating results across all business
segments as cost savings continue to result from prior restructuring activities
and overall focus on financial discipline.
Included in investment and other income for the three months ended March 31,
2003, are net gains on disposition of certain properties and equipment of $1.2
million.
Net interest expense increased by $3.9 million to $6.5 million for the three
months ended March 31, 2003, compared to 2002, primarily due to $3.2 million of
pre-acquisition related interest expense associated with the pending Wallace
acquisition (see Note 4).
The Corporation's effective tax rate for the three months ended March 31, 2003,
was 2.8%. The difference between the statutory rate and the effective rate
relates to lower tax rates in non-U.S. jurisdictions combined with a $6.3
million reduction of the deferred tax valuation allowance, which is based on
management's best estimate of the amount of deferred tax assets that will more
likely than not be realized. For the same period ended March 31, 2002, the
effective income tax rate was 27% and the valuation allowance remained
unchanged.
Net earnings for the three months ended March 31, 2003, increased $16.7 million
over the prior year to $29.2 million or $0.26 per diluted share. For the same
period in 2002, the Corporation reported net income of $12.5 million or $0.11
per diluted share. This increase primarily relates to the tax benefit recorded
in 2003, benefits achieved from prior restructuring activities, continued focus
on cost containment and production efficiencies achieved at the Corporation's
plants and facilities.
OPERATING RESULTS BY SEGMENT
The following table and management discussion summarizes the operating results
of the Corporation's business segments.
Three months ended March 31, Operating income
(In millions of U.S. dollars) Net sales (loss)
- ----------------------------- ---------------- ------------------
2003 2002 2003 2002
------ ------ ------ ------
Forms and Labels $266.8 $287.6 $ 30.5 $ 30.4
Outsourcing 97.4 96.1 26.2 20.7
Commercial 146.9 145.8 13.2 12.0
Corporate - - (34.0) (41.2)
------ ------ ------ ------
Total $511.1 $529.5 $ 35.9 $ 21.9
====== ====== ====== ======
FORMS AND LABELS
Net sales for the three months ended March 31, 2003, decreased $20.8 million or
7.2%, primarily due to volume declines ($25.8 million) at major print management
customers in the North American Forms and Labels business resulting from current
macroeconomic and geopolitical uncertainty offset, in part, by sales to new
customers ($7.6 million) and favorable foreign currency exchange ($2.2 million).
The Corporation believes the business activity levels at these major print
management customers will continue to be affected until both macroeconomic and
geopolitical conditions improve.
Despite the decline in sales, operating income for the three months ended March
31, 2003, increased $0.1 million over 2002 to $30.5 million, primarily due to
lower variable costs of materials due to improved pricing terms, reduced flawed
and excess production, the continued realization of cost savings from prior
restructuring activities and continued focus on cost management.
MOORE CORPORATION LIMITED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OUTSOURCING
Net sales increased $1.3 million to $97.4 million or 1.4% for the three months
ended March 31, 2003, from the same prior year period. Growth was achieved from
new customers and sales increases with certain existing customers in the
financial and telecommunications markets, partially offset by volume declines as
a result of the overall economic environment.
Operating income for the three months ended March 31, 2003, increased $5.5
million, or 26.6%, due to savings achieved from cost containment initiatives
implemented during 2002 which included the consolidation of administrative
functions and focus on production efficiencies, partially offset by increased
start-up costs associated with new customers.
COMMERCIAL
Net sales increased by $1.1 million or 0.8% primarily due to favorable foreign
currency exchange ($4.9 million) and increased net sales at Nielsen ($11.6
million). The increase at Nielsen is attributable to an incremental thirty-one
days of operations included in the first quarter of 2003 ($8.0 million) compared
to 2002, which included results subsequent to the acquisition closing on January
31, 2002; and increased volumes ($3.6 million) for the period February 1, 2003,
through March 31, 2003, versus the same period in the prior year due to
increased transaction business achieved through the Corporation's cross selling
initiative. This increase was offset by volume declines in the domestic direct
mail business ($5.5 million) due to customers' decisions to defer spending due
to geopolitical uncertainty, volume declines in the Corporation's technical
publications group ($2.6 million) due to lower demands by certain healthcare
customers, and exiting of non-core product lines ($5.2 million).
Operating income for the first quarter 2003 increased $1.2 million or 10.0% to
$13.2 million versus the same prior year period. The increase is primarily due
to the incremental contribution of Nielsen, discussed above, increased control
over discretionary spending, partially offset by declines in the domestic direct
mail business.
CORPORATE
The decrease in operating expenses from $41.2 million in 2002 to $34 million in
2003 is due to overall management of costs, primarily information technology
spending, partially offset by increased benefit costs.
LIQUIDITY AND CAPITAL RESOURCES
In March 2003, the Corporation entered into an $850 million senior secured
credit facility (the "New Facility") in connection with the acquisition of
Wallace. The New Facility consists of a seven-year $500 million B Term Loan
(funded in escrow) and a five-year $350 million Revolving Credit Facility (which
has not yet been funded), each of which are subject to a number of restrictive
and financial covenants that are similar in nature to those under the existing
$400 million senior secured credit facility (the "Existing Facility"). The loans
under the New Facility will bear interest based on a variable index, plus an
applicable margin. Currently, the proceeds of the $500 million B Term Loan are
being held in an escrow account and the Corporation will receive these funds and
interest earned thereon upon consummation of the acquisition. If the Wallace
acquisition is consummated, the New Facility will replace the Existing Facility
upon closing of the acquisition. If the acquisition is not consummated, the
funds held in escrow will be returned to the lenders and the Corporation will
continue to utilize its Existing Facility.
Concurrently, in March 2003, the Corporation issued $403 million of 7 7/8 %
senior unsecured notes (the "Senior Notes") due 2011. Interest on the Senior
Notes is payable semi-annually on January 15 and July 15 of each year,
commencing on July 15, 2003. The Senior Notes were issued at a $2.8 million
discount to the $403 million principal amount and the proceeds are being held in
an escrow account. The Corporation was also required to prepay interest through
September 15, 2003, amounting to $16 million, into the escrow account. If the
acquisition is consummated and the other conditions of release are satisfied by
August 31, 2003, all the proceeds will be released to the Corporation and will
be used to fund the acquisition. If the acquisition is not consummated by this
date, the Corporation is required to redeem all the Senior Notes at a redemption
price equal to their initial issue price plus all accrued and unpaid interest.
The Corporation may offset interest earned on funds held in escrow against
future interest payments. The indenture governing the Senior Notes contains
certain restrictive covenants that, among other things, limit additional
indebtedness and the Corporation's ability to engage in certain transactions
with affiliates, create liens on assets, engage in mergers and consolidations,
or dispose of assets. The Corporation, at its option, may redeem up to 40% of
the Senior Notes prior to January 15, 2006, at a pre-determined redemption price
with the proceeds of certain equity offerings. In addition subsequent to January
15, 2007, the Senior Notes may be redeemed at predetermined redemption prices.
On or prior to January 15, 2007, the Corporation may also redeem the Senior
Notes upon a change of control, at a price equal to 100% of the principal plus
an applicable premium.
MOORE CORPORATION LIMITED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Corporation recorded $3.2 million of interest expense in the consolidated
statement of earnings for the quarter ended March 31, 2003, attributable to
interest, deferred issue cost amortization, and discount amortization of the New
Facility and the Senior Notes. Subject to consummation of the acquisition, the
Corporation will be required to pay fees of approximately $19.9 million related
to the above financing.
The Corporation completed the aforementioned borrowings as expeditiously as
possible in order to mitigate potential negative impact from the aforementioned
geopolitical and macroeconomic conditions would have on the economics of these
borrowings. As a result, these borrowings were completed prior to the pending
closing date of the Wallace acquisition.
In August 2002, the Corporation entered into its Existing Facility, 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
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 $168
million revolving credit facility that expired on August 5, 2002, and to fund
working capital requirements as necessary. At March 31, 2003, 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.
The Corporation maintains interest rate swap agreements to hedge its exposure to
fluctuations in interest rates on the existing 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 March 31, 2003, 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 March 31, 2003, the fair value of these swap
agreements was a $5.5 million liability. Upon consummation of the Wallace
acquisition, the Corporation anticipates recording a charge to earnings for the
fair value of these swaps. The Corporation will maintain the swap agreements to
manage its exposure to interest rate fluctuations on the new B Term Loan.
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 $40.6 million at March 31, 2003
($0.8 million outstanding), and may be terminated at any time at the
Corporation's option. Total availability under these facilities at March 31,
2003, was approximately $39 million. The Corporation has $19.9 million in
outstanding letters of credit at March 31, 2003.
An additional source of liquidity at March 31, 2003, was the Corporation's
short-term investments in the amount of $99 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 March 31, 2003 and 2002, the Corporation was not in violation of its debt
covenants. Prior to entering into the New Facility and issuing the Senior Notes,
the Corporation received waivers on covenants of the Existing Facility to waive
any default caused by the financing activities related to the Wallace
acquisition. 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
million or the value of 6 million 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,
MOORE CORPORATION LIMITED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
subject to regulatory approval. To the extent that shares or cash is paid, it
will be recorded as a charge to retained earnings. The Corporation has no
indication that the 20-day weighted average share price will 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.
In February 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. Since the inception of the program, the Corporation has repurchased
$14.1 million of its common shares (no shares repurchased during the three
months ended March 31, 2003). The New Facility and Senior Notes related to the
pending Wallace acquisition do not prohibit the Corporation from continuing
the repurchase program.
Net cash used by operating activities was $22.4 million for the three months
ended March 31, 2003, compared to net cash provided of $1.1 million for the same
period last year. The change was due to better operating results offset by net
changes in working capital, principally the payment of $16 million of prepaid
interest related to the Senior Notes.
Net cash used by investing activities for the three months ended March 31, 2003,
was $904 million, primarily related to a $900.2 million increase in restricted
cash for the pending Wallace acquisition (see Note 4), versus $61.2 million used
in 2002, of which $57.2 million relates to the acquisition of Nielsen.
Net cash provided by financing activities for the three months ended March 31,
2003, was $898.4 million compared to $58.5 million for the same period in 2002.
The increase relates to the Corporation's $900.2 million of debt related to the
pending Wallace acquisition (see Note 4); offset by decreased borrowings under
the Corporation's Existing Facility compared to 2002.
As of March 31, 2003, the aggregate amount of outstanding forward foreign
currency contracts was $16.1 million. Unrealized gains and losses from these
foreign currency contracts were not significant at March 31, 2003. The
Corporation does not use derivative financial instruments for trading purposes.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains 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 which 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 acquisition with Wallace
- - 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.
MOORE CORPORATION LIMITED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Consequently, readers of this Quarterly 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 Quarterly
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Liquidity and Capital Resources.
ITEM 4. 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 quarterly 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 quarterly
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.
MOORE CORPORATION LIMITED
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K
On January 8, 2003, the Corporation filed a Current Report on Form 8-K,
dated January 8, 2003, disclosing guidance given at a conference for
investors held by CJS Securities on January 8, 2003.
On January 17, 2003, the Corporation filed a Current Report on Form
8-K, dated January 16, 2003, announcing the agreement to merge with
Wallace Computer Services, Inc.
On February 13, 2003, the Corporation filed a Current Report on Form
8-K, containing the 18 U.S.C. Section 1350 certifications of Mark A.
Angelson, Chief Executive Officer and Mark S. Hiltwein, Executive Vice
President, Chief Financial Officer relating to the Corporation's Annual
Report on Form 10-K for the year ended December 31, 2002.
On March 4, 2003, the Corporation filed a Current Report on Form 8-K,
dated February 26, 2003, announcing the Corporation's intention to
offer $403 million principal amount of Senior Notes.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Corporation has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOORE CORPORATION LIMITED
Date: April 29, 2003 by: /s/ Mark S. Hiltwein
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Mark S. Hiltwein
Executive Vice President, Chief Financial Officer
by: /s/ Richard T. Sansone
-------------------------------------------------
Richard T. Sansone
Senior Vice President and Controller
(Chief Accounting Officer)
CERTIFICATIONS
I, Mark A. Angelson, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Moore Corporation
Limited;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly 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
quarterly 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: April 29, 2003
Signature: /s/ Mark A. Angelson
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Mark A. Angelson, Chief Executive Officer
CERTIFICATIONS
I, Mark S. Hiltwein, Executive Vice President, Chief Financial Officer, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Moore Corporation
Limited;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly 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
quarterly 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: April 29, 2003
Signature: /s/ Mark S. Hiltwein
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Mark S. Hiltwein, Executive Vice President, Chief Financial Officer