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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 JUNE 30, 2003
COMMISSION FILE NUMBER 1-8014
MOORE WALLACE INCORPORATED
(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 [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
At July 30, 2003, 157,900,273 shares of the registrant's common shares, without
par value, were issued and outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOORE WALLACE INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
JUNE 30, DECEMBER 31,
2003 2002
- -------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents $ 65,932 $ 139,630
Accounts receivable, less allowance for doubtful
accounts of $18,982 (2002 - $19,538) 578,826 341,383
Inventories (Note 2) 231,466 129,889
Prepaid expenses 25,888 17,317
Deferred income taxes 24,748 31,912
- -------------------------------------------------------------------------------------------
Total Current Assets 926,860 660,131
-----------------------------
Property, plant and equipment - net 632,970 255,722
Investments 27,722 32,256
Prepaid pension cost 224,591 221,520
Goodwill (Note 4) 784,321 106,254
Other intangibles - net (Note 4) 158,334 6,434
Deferred income taxes 3,339 53,938
Other assets 194,146 103,504
- -------------------------------------------------------------------------------------------
Total Assets $ 2,952,283 $ 1,439,759
-----------------------------
LIABILITIES
Current Liabilities
Bank indebtedness $ 31,279 $ 18,158
Accounts payable and accrued liabilities 584,114 486,507
Short-term debt 19,533 2,135
Income taxes 51,186 58,562
Deferred income taxes 2,102 3,184
- -------------------------------------------------------------------------------------------
Total Current Liabilities 688,214 568,546
-----------------------------
Long-term debt (Note 5) 933,269 187,463
Postretirement benefits 260,515 241,344
Deferred income taxes 38,531 9,482
Other liabilities 102,140 43,776
Minority interest 4,397 6,652
- -------------------------------------------------------------------------------------------
Total Liabilities 2,027,066 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:
157,923,523 common shares in 2003
111,842,348 common shares in 2002 885,990 403,800
Unearned restricted shares (2,882) (2,572)
Retained earnings 162,652 114,601
Cumulative translation adjustments (120,543) (133,333)
- -------------------------------------------------------------------------------------------
Total Shareholders' Equity 925,217 382,496
-----------------------------
Total Liabilities and Shareholders' Equity $ 2,952,283 $ 1,439,759
===========================================================================================
(SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS)
MOORE WALLACE INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------
Net sales $ 650,071 $ 499,791 $1,161,216 $1,029,292
- ---------------------------------------------------------------------------------------------------------------------------
Cost of sales 485,639 341,764 831,091 702,772
Selling, general and administrative expenses 121,613 112,869 230,271 237,347
Restructuring provision - net 1,697 - 1,697 -
Depreciation and amortization
(includes impairment charge of $2,132 for 2003) 32,590 22,507 53,765 44,662
- ---------------------------------------------------------------------------------------------------------------------------
Total operating expenses 641,539 477,140 1,116,824 984,781
--------------------------------------------------------
Income from operations 8,532 22,651 44,392 44,511
Investment and other income (expense) (6,166) 849 (5,327) (646)
Interest expense - net 27,377 2,741 33,876 5,352
--------------------------------------------------------
Earnings(loss) before income taxes
and minority interest (25,011) 20,759 5,189 38,513
Income tax expense (benefit) (44,284) 5,486 (43,444) 10,280
Minority interest 380 27 582 494
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings $ 18,893 $ 15,246 $ 48,051 $ 27,739
===========================================================================================================================
Net earnings per common share:
Basic $ 0.14 $ 0.14 $ 0.39 $ 0.25
Diluted $ 0.14 $ 0.13 $ 0.38 $ 0.24
Average shares outstanding (in thousands):
Basic 136,049 111,481 124,163 111,664
Diluted 136,686 114,169 124,957 114,217
- ---------------------------------------------------------------------------------------------------------------------------
(See notes to the consolidated financial statements)
MOORE WALLACE INCORPORATED
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
2003 2002
- ---------------------------------------------------------------------------------------
Balance at beginning of period $ 114,601 $ 51,666
Net earnings 48,051 27,739
Repurchase of common shares (1,069,700 shares in 2002) - (10,323)
- ---------------------------------------------------------------------------------------
Balance at end of period $ 162,652 $ 69,082
=======================================================================================
(See notes to the consolidated financial statements)
MOORE WALLACE INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 18,893 $ 15,246 $ 48,051 $ 27,739
Adjustments to reconcile net earnings to cash provided
by operating activities:
Depreciation and amortization 32,590 22,507 53,765 44,662
(Gain) loss on sale of investment and other assets - net 1,307 (1,847) (529) (2,379)
Acquisition related charges:
Inventory and backlog 38,590 - 38,590 -
Derivative charges 4,950 - 4,950 -
Write-off of deferred debt issue costs 7,493 - 7,493 -
Deferred income taxes (45,722) (25,483) (45,575) (21,360)
Restructuring provision - net 1,697 - 1,697 -
Restricted share compensation 340 - 517 -
Other 1,277 (2,136) 2,794 (927)
Changes in operating assets and liabilities:
Accounts receivable - net 11,537 35,918 12,301 17,031
Inventories 7,672 5,166 2,104 3,389
Prepaid expenses 20,189 1,262 (1,238) (4,345)
Accounts payable and accrued liabilities (22,626) (3,499) (62,570) (19,874)
Income taxes (98) 30,155 (4,558) 31,233
Other (3,018) (4,954) (5,116) (1,699)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 75,071 72,335 52,676 73,470
---------------------------------------------------------
INVESTING ACTIVITIES
Decrease in restricted cash and cash equivalents 900,175 - - -
Property, plant and equipment - net (12,063) (2,428) (19,646) (4,511)
Long-term receivables and other investments (26,419) (1,249) (26,596) (2,724)
Acquisition of businesses - net of cash acquired (846,943) (6,764) (846,943) (63,966)
Proceeds from sale of investment and other assets 26,470 - 31,417 -
Software expenditures (2,218) (4,359) (3,127) (4,880)
Other (321) (43) (434) 53
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 38,681 (14,843) (865,329) (76,028)
---------------------------------------------------------
FINANCING ACTIVITIES
Net change in short-term debt 16,891 (29,877) 17,398 29,983
Proceeds from issuance of long-term debt 110,105 - 1,010,280 -
Payments on long-term debt (279,912) (728) (280,327) (1,336)
Debt issue costs (20,140) - (30,516) -
Issuance (repurchase) of common shares - net 456 (7,895) 9,655 (8,331)
Other (686) (468) (1,382) (785)
- --------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (173,286) (38,968) 725,108 19,531
---------------------------------------------------------
Effect of exchange rate on cash resources (402) 136 726 1,355
Net (decrease) increase in cash resources (59,936) 18,660 (86,819) 18,328
Cash resources at beginning of period (a) 94,589 28,342 121,472 28,674
- --------------------------------------------------------------------------------------------------------------------------
Cash resources at end of period (a) $ 34,653 $ 47,002 $ 34,653 $ 47,002
- --------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Interest paid (refund) - net $ (11,743)(b) $ 691 $ 5,940 $ 5,036
Income taxes paid - net 5,020 790 6,327 2,439
Non-cash activity:
Shares issued for acquisition of business 471,708 - 471,708 -
(a) Cash resources are defined as cash and cash equivalents less bank
indebtedness.
(b) Includes refund of prepaid interest of $15,956 related to the $403 million
senior unsecured notes.
(See notes to the consolidated financial statements)
MOORE WALLACE INCORPORATED
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 Wallace Incorporated (the "Corporation"), formerly Moore Corporation
Limited ("Moore"), 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.
On May 15, 2003, the Corporation acquired all the outstanding shares of Wallace
Computer Services, Inc. ("Wallace"), a leading provider of printed products and
print management services (see Note 3). The Corporation's results of operations
for the three and six months ended June 30, 2003 include the results of Wallace
from May 15, 2003. The allocation of the purchase price is preliminary and
subject to change, based upon the determination and receipt of additional
information, including the finalization of the fair value of real and personal
property acquired and the recognition of certain liabilities in connection with
an acquisition.
The consolidated financial statements of the Corporation 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
both Moore's and Wallace's latest Annual Report on Form 10-K filed on February
13, 2003 and October 23, 2002, respectively.
2. INVENTORIES
June 30, December 31,
2003 2002
------------------------------------------------
Raw materials $ 64,187 $ 31,883
Work-in-process 24,272 10,303
Finished goods 139,479 84,190
Other 3,528 3,513
------------------------------------------------
$231,466 $129,889
================================================
3. ACQUISITION
On May 15, 2003, the Corporation acquired all the outstanding shares of Wallace,
a leading provider of printed products and print management services, in
exchange for consideration of $14.40 in cash and 1.05 shares of the Corporation
for each outstanding share of Wallace. Management believes the acquisition of
Wallace (the "Acquisition") will enhance the Corporation's combined competitive
position within the industry and establish the Corporation as a leading provider
of integrated print management services across multiple industries. Management
also believes the Acquisition will enable the Corporation to improve
profitability, achieve significant cost synergies, leverage complementary
products and services and augment cross-selling opportunities across a more
diverse platform. The aggregate consideration to the Wallace shareholders was
$1.1 billion and is comprised of a cash payment of $609.7 million and 44,458,825
common shares of the Corporation with a fair value of $471.7 million. The fair
value of the Corporation's shares is based upon the actual number of shares
issued to the Wallace shareholders using the average closing trading price of
the Corporation's common shares on the New York Stock Exchange ("NYSE") during a
five-day trading period beginning two days prior to the announcement of the
merger agreement on January 17, 2003. The total purchase price of $1.3 billion
also includes $218.2 million for the settlement of Wallace debt and other
liabilities, and direct acquisition costs to date of $19 million.
The transaction was 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 is recorded as goodwill. Based on the
Corporation's preliminary independent valuation, which is subject to further
refinement, the purchase price is allocated as follows:
MOORE WALLACE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITION (continued)
Accounts receivable $ 238,321
Inventory 137,562
Customer backlog 3,790
Other current assets 13,350
Property, plant and equipment - net 390,536
Long-term and other assets 38,583
Capitalized software 45,400
Amortizable intangible assets 60,824
Intangible assets with indefinite lives 92,310
Goodwill 675,163
Accounts payable and accrued liabilities (158,178)
Short-term and long-term debt (16,189)
Postretirement benefits and pension (52,484)
Deferred taxes - net (131,306)
Other long-term liabilities (19,031)
-----------
Total purchase price - net of cash acquired $ 1,318,651
===========
INTANGIBLE ASSETS
Of the total purchase price, approximately $156.9 million has been allocated to
intangible assets including customer backlog, trade names, customer
relationships, patents and covenants not to compete. Trade names of $92.3
million are not subject to amortization as the useful lives are considered
indefinite. Trade names are subject to impairment testing annually or when a
significant change in circumstances occurs that may require testing during an
interim period. The remaining intangible assets are also subject to impairment
testing, however, the fair values are amortized over their respective remaining
useful lives ranging from 2-12 years.
PRO FORMA RESULTS
The following unaudited pro forma financial information presents the combined
results of operations of the Corporation and Wallace as if the Acquisition had
occurred as of the beginning of the periods presented. The historical results
for the three and six months ended June 30, 2003 include the results of Wallace
from May 15, 2003 (the acquisition date). The pro forma results for the three
and six months ended June 30, 2003 combine the results of the Corporation for
the three and six months ended June 30, 2003, respectively, and the historical
results of Wallace from April 1, 2003 through May 15, 2003 and January 1, 2003
through May 15, 2003, respectively. Due to the different historical fiscal
period-ends for Moore and Wallace, the pro forma results for the three and six
months ended June 30, 2002 combine the historical results of Moore for the three
and six months ended June 30, 2002 and the historical quarterly results of
Wallace for the three and six months ended April 30, 2002. The unaudited pro
forma financial information is not intended to represent or be indicative of the
Corporation's consolidated results of operations or financial condition that
would have been reported had the acquisition been completed as of the beginning
of the years presented and should not be taken as indicative of the
Corporation's future consolidated results of operations or financial condition.
Three months ended Six months ended
June 30, June 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------
Net sales $827,874 $868,989 $1,702,224 $1,795,595
Net income (loss) 49,059 20,175 59,014 (6,931)
Net income (loss) per share:
Basic 0.31 0.13 0.38 (0.04)
Diluted 0.31 0.13 0.37 (0.04)
The three and six month periods in both 2003 and 2002 includes adjustments of
$0.7 million and $1.4 million, respectively, net of tax, for the amortization of
purchased intangibles. The unaudited pro forma financial information also
includes the following non-recurring charges: acquisition related charges of
$55.3 million and $38.6 million for the three and six months ended June 30, 2003
and 2002, respectively, and restructuring charges of $1.7 million for the three
and six months end June 30, 2003 and $5.4 million and $35.6 million for the
three and six months ended June 30, 2002, respectively.
MOORE WALLACE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. GOODWILL AND OTHER INTANGIBLES
Balance at Foreign Balance at
Goodwill December 31, 2002 Additions Exchange June 30, 2003
- --------------------------------------------------------------------------------
Forms and Labels $ 45,550 $348,947 $ 1,016 $395,513
Outsourcing 11,846 - 1,888 13,734
Commercial 48,858 326,216 - 375,074
- --------------------------------------------------------------------------------
$106,254 $675,163 $ 2,904 $784,321
================================================================================
The allocation of goodwill from the Acquisition between the segments is
preliminary and based upon management's best estimate at June 30, 2003. The
allocation is subject to further refinement upon finalization of the independent
valuation.
Other intangibles at June 30, 2003, include:
Gross Accumulated
Carrying Amount Additions Amortization and Balance at Amortizable
January 1, 2003 During the Year Foreign Exchange June 30, 2003 Life
- -------------------------------------------------------------------------------------------------------------
Trademarks, licenses
and agreements $ 3,390 $ 20,824 $ (1,323) $ 22,891 4-10 Years
Customer relationship
intangibles 2,729 40,000 (1,531) 41,198 2-12 Years
Indefinite-lived
trade names 1,664 92,310 271 94,245
- -------------------------------------------------------------------------------------------------------------
$ 7,783 $ 153,134 $ (2,583) $ 158,334
=============================================================================================================
The total intangible asset amortization expense for the three and six months
ended June 30, 2003, was $1.4 million and $1.8 million, respectively.
Amortization expense for the next five years is estimated to be:
2004 $10,025
2005 $ 7,064
2006 $ 5,202
2007 $ 5,190
2008 $ 5,190
5. DEBT
In March 2003, the Corporation entered into an $850 million senior secured
credit facility (the "New Facility") in connection with the Acquisition. The New
Facility consists of a seven-year $500 million B Term Loan, which was funded
into escrow until the consummation of the Acquisition on May 15, 2003, and a
five-year $350 million Revolving Credit Facility, each of which is subject to a
number of restrictive and financial covenants that, in part, 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 are calculated
quarterly and include, in part, tests of leverage and interest coverage. The
loans under the New Facility bear interest based on a variable index (LIBOR),
plus an applicable margin. Three-month LIBOR at June 30, 2003, was 1.1%. The New
Facility replaced the Corporation's $400 million senior secured credit facility
(the "Existing Facility"). At June 30, 2003 $510 million is outstanding under
the New Facility.
Concurrently, in March 2003, the Corporation issued $403 million of 7 7/8 %
senior unsecured notes (the "Senior Notes") due 2011 at a $2.8 million discount
to the principal amount. Interest on the Senior Notes is payable semiannually on
January 15 and July 15 of each year, commencing on July 15, 2003. The proceeds
from the Senior Notes along with $16 million in prepaid interest through
September 15, 2003 were held in escrow until the consummation of the
Acquisition. 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 predetermined redemption price with the proceeds
of certain equity offerings. In addition, subsequent to January 15, 2007, the
Senior Notes may be redeemed at predetermined
MOORE WALLACE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. DEBT (continued)
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.
In August 2002, the Corporation entered into the Existing Facility, which 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. The Existing Facility was replaced with the proceeds from the New
Facility upon the consummation of the Acquisition. At December 31, 2002 $179.5
million was outstanding under this facility.
For the three and six months ended June 30, 2003, interest expense includes the
following acquisition related items: pre-acquisition interest expense of $7.5
million and $10.7 million, respectively; the write-off of deferred financing
fees of $7.5 million; interest income of $1.3 million on aforementioned proceeds
held in escrow; and $4 million of bridge financing fees.
As a result of replacing the Existing Facility, the Corporation recorded a
charge of $5.2 million during the quarter for the fair value on $150 million
notional amount fixed rate interest rate swaps that were designated as cash flow
hedges of the variable interest on the Existing Facility. The $5.2 million
liability resulting from this charge will be ratably reduced and recorded as
income over the remaining term of the swaps. These swap agreements, which have a
weighted average rate of 2.29%, exchange the variable interest rates (LIBOR) for
fixed interest rates over the terms of the agreements. During the quarter, the
Corporation designated these swaps as cash flow hedges of the interest rate risk
attributable to the forecasted variable interest payments. Also during the
quarter, the Corporation entered into an additional $250 million notional amount
fixed rate interest rate swaps that are designated as cash flow hedges of the
interest rate risk attributable to the forecasted variable interest payments on
the New Facility. These swaps, which become effective and interest will begin
accruing on October 7, 2003, exchange the LIBOR interest on the New Facility to
fixed rate over the term of the swaps. At June 30, 2003, the notional amount of
all fixed rate swaps outstanding was $400 million and their fair market value
was a $6.9 million liability.
During the quarter, the Corporation also entered into $250 million notional
amount interest rate swaps that exchange the interest on the 7 7/8% fixed rate
Senior Notes to floating rate six-month LIBOR plus a basis point spread. The
swaps are designated as a fair value hedge against $250 million of principal on
the Senior Notes and mature January 2011. At June 30, 2003, the fair market
value of these floating rate swaps was a $2.7 million liability.
The interest rate differential received or paid on both the cash flow and fair
value hedges is recognized as an adjustment to interest expense.
The Corporation has approximately $42 million in outstanding letters of credit
at June 30, 2003.
6. RESTRUCTURING AND OTHER CHARGES
During the second quarter of 2003, in connection with the Acquisition,
management approved and initiated plans to restructure the operations of both
Wallace and Moore ("restructuring plans") to eliminate certain duplicative
functions, to close certain facilities and to dispose of redundant software
systems, underutilized assets and real estate holdings in order to reduce the
combined cost structure of the organization. As a result, the Corporation
accrued approximately $2.5 million of costs to exit certain Wallace activities,
such as severance, costs of vacating redundant facilities (leased or owned) and
other costs associated with exiting these activities. These costs are recognized
as a liability assumed in the purchase business combination and are included in
the allocation of the cost to acquire Wallace and are included in goodwill (see
Note 3). The Corporation accrued approximately $3.3 million of similar
restructuring costs in connection with exiting certain Moore activities. These
changes were partially offset by the reversal of a portion of its 2001
restructuring reserves ($1.6 million) as a result of favorable settlements in
2003, as compared to estimates and assumptions used by management at the time
the charges were recorded. These costs have been included as a charge to the
results of operations for the three and six months ended June 30, 2003.
The restructuring charges recorded are based on the aforementioned restructuring
plans that have been committed to by management and are in part based upon
management's best estimates of future events. Changes to the estimates could
require adjustments to the restructuring liabilities. Adjustments to the Wallace
restructuring liability will be recorded through goodwill and adjustments to
other restructuring liabilities would be reflected in the results of operations.
RESTRUCTURING COSTS CAPITALIZED AS A COST OF ACQUISITION
At June 30, 2003, the $2.5 million in costs that were accrued in connection with
restructuring Wallace, and recognized as a liability assumed in the purchase
business combination and included in the allocation of the cost to acquire
Wallace, relate to workforce reductions of 146 employees for the plant closures
and elimination of certain duplicative corporate administrative functions.
MOORE WALLACE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. RESTRUCTURING AND OTHER CHARGES (continued)
The reconciliation of the restructuring reserve as of June 30, 2003, capitalized
as part of the acquisition is as follows:
December 31, Cash June 30,
2002 Additions Paid 2003
- --------------------------------------------------------------------------------
Employee terminations $ - $2,480 $ 544 $1,936
Other - - - -
- --------------------------------------------------------------------------------
$ - $2,480 $ 544 $1,936
================================================================================
For the three months ended June 30, 2003, the Corporation recorded the following
restructuring provisions:
Employee Other
Terminations Charges Total
- --------------------------------------------------------------------------------
Forms and Labels $1,042 $ 10 $1,052
Outsourcing - - -
Commercial - - -
Corporate 2,254 - 2,254
- --------------------------------------------------------------------------------
$3,296 $ 10 $3,306
================================================================================
For the three months ended June 30, 2003, the Corporation recorded a
restructuring provision of $3.3 million for workforce reductions of 41
employees, primarily related to the closure of a plant and the elimination of
duplicative corporate administrative functions resulting from the Acquisition.
The Corporation reversed $1.6 million of restructuring reserve related to its
2001 program due to favorable settlements of liabilities for obligations and
future payments primarily related to the European operations within the
Commercial segment.
There was no restructuring provision recorded for the three and six months ended
June 30, 2002.
The reconciliation of the restructuring reserve as of June 30, 2003 is as
follows:
Balance at Balance at
December 31, Restructuring Cash June 30,
2002 Provision - Net Paid 2003
- --------------------------------------------------------------------------------
Employee terminations $ 14,319 $ 2,959 $ (4,498) $12,780
Other 67,121 (1,262) (6,583) 59,276
- --------------------------------------------------------------------------------
$ 81,440 $ 1,697 $(11,081) $72,056
================================================================================
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.
For the three months ended June 30, 2003, the Corporation recorded a charge of
$2.1 million, in the Forms and Labels segment for asset impairments associated
with the disposal of redundant enterprise software systems as a result of the
Acquisition.
7. INCOME TAXES
The difference between the statutory rate and the effective rate relates to
lower tax rates in non-U.S. jurisdictions combined with a 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.
The 2003 rate was also affected by a loss generated in the U.S. as a result of
expenses
MOORE WALLACE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES (continued)
incurred from the Acquisition. For the three and six months ended June 30, 2003
the valuation allowance was reduced $34.2 million and $40.4 million,
respectively. For the three and six months ended June 30, 2002, the valuation
allowance was reduced by $36.1 million.
8. 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 and six months ended June 30, 2003 are net sales of $51.2 million and
$100.9 million, respectively, relating to this business. For the three and six
months ended June 30, 2003 income from operations relating to this business was
$2.9 million and $6.1 million, respectively. For the three months ended June 30,
2002 net sales and income from operations relating to this business were $49.5
million and $3.4 million, respectively. Net sales relating to this business for
the six months ended June 30, 2002 were $99.6 million and income from operations
relating to this business was $6.2 million.
9. 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.
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
six months ended June 30, 2003 is $738.2 million. Net cash used by financing
activities for the six months ended June 30, 2002 was $1.5 million. 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. For all periods presented,
the tax rates used are the same for both Canadian GAAP and U.S. GAAP.
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 ("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
MOORE WALLACE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. RECONCILIATION TO U.S. GAAP (continued)
U.S. GAAP purposes, these Preference Share options were not considered common
share equivalents until amended. The difference in the diluted 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 options 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.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
For U.S. GAAP purposes the changes in the fair value of the Corporation's
interest rate swaps that are designated as cash flow hedges are recorded in
other comprehensive income. For U.S. GAAP purposes the changes in their fair
value Corporation's interest rate swaps that are designated as fair value hedges
are recorded as an adjustment to the Senior Notes. Under Canadian GAAP, there is
no standard requiring the recognition of the fair value of derivatives either
through comprehensive income or the hedged item.
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 Financial Accounting Standards Board ("FASB") Statement No.
13, and Technical Corrections" ("SFAS 145"). Among other things, under the
provision of SFAS 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
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 145 had no impact on the financial position or
results of operations of the Corporation for the six months ended June 30, 2003.
In the first quarter of 2003, the Corporation adopted SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal
MOORE WALLACE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. RECONCILIATION TO U.S. GAAP (continued)
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. In Canada, the
Emerging Issues Committee ("EIC") issued EIC-134, "Accounting for Severance and
Termination Benefits" and EIC-135, "Accounting for Costs Associated with Exit
and Disposal Activities (Including Costs Incurred in a Restructuring)" in March
2003, which harmonize Canadian GAAP with SFAS 146.
In April 2003, FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). In particular, it clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative, clarifies when
a derivative contains a financing component, amends the definition of an
underlying, and amends certain other existing pronouncements. SFAS 149 is
generally effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. The Corporation
does not expect that the adoption of SFAS 149 will have a material impact on the
results of operation or financial conditions.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. Some of the provisions of this Statement
are consistent with the current definition of liabilities in FASB Concepts
Statement No. 6, Elements of Financial Statements. The remaining provisions of
this Statement are consistent with the proposal to revise that definition to
encompass certain obligations that a reporting entity can or must settle by
issuing its own equity shares, depending on the nature of the relationship
established between the holder and the issuer. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The Corporation does not expect the adoption of SFAS 150 to have a
material impact on its results of operations results or financial condition.
The following tables provide a reconciliation of net earnings as reported under
Canadian GAAP to net earnings under U.S. GAAP:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Net earnings as reported $ 18,893 $ 15,246 $ 48,051 $ 27,739
U.S. GAAP Adjustments:
Pension expense 1,014 20 2,025 38
Postretirement benefits 4,332 4,325 8,660 8,647
Computer software 1,694 1,691 3,398 3,382
Debt conversion costs 704 (114) 1,070 1,151
Stock-based compensation expense (79) (1,547) (444) (4,143)
Income taxes (2,988) (1,187) (5,736) (3,539)
- --------------------------------------------------------------------------------------------------------------------
Net earnings under U.S. GAAP $ 23,570 $ 18,434 $ 57,024 $ 33,275
- --------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 0.17 $ 0.17 $ 0.46 $ 0.30
Diluted $ 0.17 $ 0.16 $ 0.46 $ 0.29
Average shares (in thousands):
Basic 136,049 111,481 124,163 111,664
Diluted 136,651 113,926 124,910 113,468
Comprehensive income:
Net earnings $ 23,570 $ 18,434 $ 57,024 $ 33,275
Other comprehensive income (loss) - net of tax:
Currency translation adjustments 8,001 (1,685) 12,790 (3,890)
Fair value adjustment on derivatives 2,144 - 1,868 -
- --------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 33,715 $ 16,749 $ 71,682 $ 29,385
====================================================================================================================
MOORE WALLACE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net gains on the disposal of property, plant and equipment for the six months
ended June 30, 2003 and 2002 were $1.1 million and $2.4 million, respectively.
For U.S. GAAP purposes these amounts are recorded in income from operations.
Interest expense is net of investment income of $1 million and $0.8 million for
the six months ended June 30, 2003 and 2002, respectively.
Balance Sheet Items: June 30, 2003 December 31, 2002
As reported U.S. GAAP As reported U.S. GAAP
- ----------------------------------------------------------------------------------------------------------------------
Net pension asset $(183,348) $(121,216) $(193,350) $(129,193)
Computer software - net (123,442) (101,304) (89,208) (63,672)
Fair value of derivatives - liability 4,950 9,614 - 5,089
Postretirement benefits 260,515 376,588 241,344 366,077
Deferred taxes - net 12,546 (63,578) (73,184) (156,239)
Accounts payable and accrued liabilities 584,114 578,213 486,507 481,676
Long-term debt 933,269 930,631 187,463 187,463
Accumulated other comprehensive income (120,543) (86,595) (133,333) (101,253)
Share capital 855,990 887,971 403,800 405,337
Retained earnings (deficit) 162,652 6,379 114,601 (50,645)
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 Six Months Ended
June 30, June 30,
2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------------
Net earnings $ 23,570 $ 18,434 $ 57,024 $ 33,275
Pro forma adjustments - net of tax:
Stock compensation recorded 99 2,527 322 2,527
Fair value compensation expense (608) (3,424) (1,183) (3,883)
- -------------------------------------------------------------------------------------------------------------------------
Pro forma net earnings $ 23,061 $ 17,537 $ 56,163 $ 31,919
=========================================================================================================================
Earnings per share
Basic $ 0.17 $ 0.16 $ 0.45 $ 0.29
Diluted $ 0.17 $ 0.15 $ 0.45 $ 0.28
=========================================================================================================================
10. 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. Management has aggregated
divisions within the reportable segments due to strong similarities in the
economic characteristics, nature of products and services, production processes,
class of customer and distribution methods used.
Wallace historically operated in two business segments, Forms and Labels and
Integrated Graphics. The principal products within the Forms and Labels segment
include paper-based forms, electronic data processing and packaging labels and a
standard line of office products. The principal products within the Integrated
Graphics segment include commercial print and direct mail. The Corporation has
classified the Wallace historical Forms and Labels operations within the Forms
and Labels segment and the historical Integrated Graphics operations within the
Commercial segment in the table below. Prior periods have not been restated to
reflect the acquisition.
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.
MOORE WALLACE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SEGMENT INFORMATION (continued)
Three months ended Forms and
June 30, 2003 Labels Outsourcing Commercial Corporate Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenue $ 351,702 $ 76,361 $ 229,875 $ - $ 657,938
Intersegment revenue (1,213) (12) (6,642) - (7,867)
- ----------------------------------------------------------------------------------------------------------------------------------
Sales to customers outside 350,489 76,349 223,233 - 650,071
the enterprise
Income (loss) from operations 10,772 12,685 8,110 (23,035) 8,532
Depreciation and amortization 13,228 3,409 7,515 8,438 32,590
Capital expenditures 3,845 6,987 5,231 3,379 19,442
Six months ended Forms and
June 30, 2003 Labels Outsourcing Commercial Corporate Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenue $ 620,005 $ 173,766 $ 379,846 $ - $ 1,173,617
Intersegment revenue (2,687) (13) (9,701) - (12,401)
- ----------------------------------------------------------------------------------------------------------------------------------
Sales to customers outside 617,318 173,753 370,145 - 1,161,216
the enterprise
Income (loss) from operations 41,234 38,876 21,298 (57,016) 44,392
Total assets 1,213,151 126,419 1,015,380 597,333 2,952,283
Depreciation and amortization 21,987 6,587 11,271 13,920 53,765
Capital expenditures 6,490 11,611 6,583 4,872 29,556
Three months ended Forms and
June 30, 2002 (Reclassified) Labels Outsourcing Commercial Corporate Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenue $ 286,252 $ 71,151 $ 145,957 $ - $ 503,360
Intersegment revenue (744) (15) (2,810) - (3,569)
- ----------------------------------------------------------------------------------------------------------------------------------
Sales to customers outside 285,508 71,136 143,147 - 499,791
the enterprise
Income (loss) from operations 31,884 8,822 10,785 (28,840) 22,651
Depreciation and amortization 8,980 3,839 4,064 5,624 22,507
Capital expenditures 911 961 2,293 5,670 9,835
Six months ended Forms and
June 30, 2002 (Reclassified) Labels Outsourcing Commercial Corporate Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenue $ 574,755 $ 167,291 $ 293,764 $ - $ 1,035,810
Intersegment revenue (1,689) (27) (4,802) - (6,518)
- ----------------------------------------------------------------------------------------------------------------------------------
Sales to customers outside 573,066 167,264 288,962 - 1,029,292
the enterprise
Income (loss) from operations 62,278 29,535 22,746 (70,048) 44,511
Total assets 608,351 106,787 333,943 338,781 1,387,862
Depreciation and amortization 17,826 7,824 7,792 11,220 44,662
Capital expenditures 1,925 1,857 3,129 6,302 13,213
MOORE WALLACE INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. CONTINGENCIES
At June 30, 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 indicate 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 its reserves are sufficient based on the present facts and recent
tests performed at this site.
12. EARNINGS PER SHARE
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------------
Net earnings $ 18,893 $ 15,246 $ 48,051 $ 27,739
- -------------------------------------------------------------------------------------------------------------------------
Weighted average number of common
shares outstanding:
Basic 136,049 111,481 124,163 111,664
Dilutive options and awards 637 2,688 794 2,553
- -------------------------------------------------------------------------------------------------------------------------
Diluted 136,686 114,169 124,957 114,217
- -------------------------------------------------------------------------------------------------------------------------
Earnings per share
Basic $ 0.14 $ 0.14 $ 0.39 $ 0.25
Diluted $ 0.14 $ 0.13 $ 0.38 $ 0.24
=========================================================================================================================
13. SUBSEQUENT EVENTS
On August 5, 2003, the Corporation entered into an agreement with the lender of
its New Facility to amend the New Facility to reduce the basis point spread.
Management expects this reduction to result in annualized pretax cash interest
savings of approximately $2.5 million.
MOORE WALLACE INCORPORATED
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 Wallace
Incorporated (the "Corporation"), formerly Moore Corporation Limited ("Moore"),
for the three and six months ended June 30, 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 9 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.
As discussed further hereafter, on May 15, 2003, the Corporation acquired all
the outstanding shares of Wallace Computer Services, Inc. ("Wallace"), a leading
provider of printed products and print management services. The results of
operations for the three and six months ended June 30, 2003 include the results
of Wallace from May 15, 2003. The differences in operating results in 2003
versus 2002 are primarily due to this acquisition (the "Acquisition").
OVERVIEW
The Corporation is a diversified printing company that operates in three
distinct operating segments: Forms and Labels, Outsourcing, and Commercial. 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 six
months ended June 30, 2003, approximately 53%, 15% and 32% 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. In addition to general economic
conditions, the Corporation's financial results for the periods discussed herein
have been affected by a number of strategic factors including acquisitions of
complementary businesses, the restructuring of operations, the disposal of
non-core businesses and the exiting of unprofitable accounts and product lines.
These initiatives have resulted in improved performance in 2003, relative to the
comparable periods last year. Historically, net sales have not been materially
affected by seasonal factors.
On May 15, 2003, the Corporation acquired all the outstanding shares of Wallace
for consideration of $14.40 in cash and 1.05 shares of the Corporation for each
outstanding share of Wallace. Management believes the Acquisition will enhance
the Corporation's combined competitive position within the industry and
establish the Corporation as a leading provider of integrated print management
services across multiple industries. Management also believes the Acquisition
will enable the Corporation to improve profitability, achieve significant cost
synergies, leverage complementary products and services and augment
cross-selling opportunities across a more diverse platform. The aggregate
consideration to the Wallace shareholders was $1.1 billion and is comprised of a
cash payment of $609.7 million and 44,458,825 common shares of the Corporation
with a fair value of $471.7 million. The fair value of the Corporation's shares
is based upon the actual number of shares issued to the Wallace shareholders
using the average closing trading price of the Corporation's common shares on
the New York Stock Exchange ("NYSE") during a five-day trading period beginning
two days prior to the announcement of the merger agreement on January 17, 2003.
The total purchase price of $1.3 billion also includes $218.2 million for the
settlement of Wallace debt and other liabilities, and direct acquisition costs
to date of $19 million.
On January 31, 2002, the Corporation completed the acquisition of The Nielsen
Company ("Nielsen"), a commercial printer, which is complementary to its core
operations.
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.
During the second quarter 2003, in connection with the Acquisition, management
approved and initiated plans to restructure the operations of both Wallace and
Moore ("restructuring plans") to eliminate certain duplicative functions, to
close certain facilities, to dispose of redundant software systems and
underutilized assets and rationalize real estate holdings in order to reduce the
combined cost structure of the organization. As a result, the Corporation
accrued approximately $2.5 million of costs to exit certain Wallace activities,
such as severance, costs of vacating redundant facilities (leased or owned) and
other costs associated with exiting these activities. These costs are accounted
and are recognized as a liability assumed in the purchase business combination
and are included
MOORE WALLACE INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
in the allocation of the cost and are recorded in goodwill (see Note 3). The
Corporation accrued approximately $3.3 million of similar restructuring costs in
connection with exiting certain Moore activities. These costs have been included
as a charge to the results of operations for the three and six months ended June
30, 2003.
The Corporation's results during the periods 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
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
effects these actions will have on the Corporation's results or financial
condition cannot be predicted.
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.
MOORE WALLACE INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003 AS
COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2002
CONSOLIDATED
Net sales for the three months ended June 30, 2003 increased $150.3 million to
$650.1 million, representing a 30.1% increase versus the same period last year.
The inclusion of the operations of Wallace ($174.4 million) for the 46 days
after the close of the Acquisition on May 15, 2003, more than offset the sales
declines in the U.S. and Canadian Forms and Labels business ($34.5 million) as
customers continue to defer spending decisions as a result of macroeconomic
conditions.
Cost of sales increased $144 million to $485.7 million or 74.7% of consolidated
net sales for the quarter ended June 30, 2003 versus 68.3% for the same period
in the prior year. Included in cost of sales for the second quarter of 2003 was
an acquisition related charge for the fair value of the inventory and backlog
($38.6 million). Also, included in cost of sales was a $3 million charge for
certain obsolete Wallace inventory and a benefit related to the recognition of
vendor rebates earned.
Selling, general and administrative costs increased $8.7 million to $121.6
million or 18.7% of consolidated net sales for the three months ended June 30,
2003, compared to $112.9 million or 22.6% of consolidated net sales versus the
same period last year. The margin improvement is primarily due to benefits
achieved from the Corporation's prior restructuring activities, continued focus
on cost containment of discretionary spending and early benefits recognized as a
result of reducing duplicative employee functions subsequent to the Acquisition.
During the three months ended June 30, 2003 the Corporation recorded a
restructuring provision of $3.3 million for workforce reductions (41 positions)
primarily related to the closure of a plant and the elimination of certain
redundant administrative and corporate functions. These charges were partially
offset by the reversal of a portion of its 2001 restructuring reserves ($1.6
million) as a result of favorable settlements in 2003 as compared to estimates
and assumptions used by management at the time the charge was recorded. There
was no restructuring provision recorded during the three months ended June 30,
2002.
Depreciation and amortization increased $10.1 million to $32.6 million versus
the June 30, 2002 period, primarily as a result of the Acquisition ($11.7
million). Also, included in depreciation and amortization is $1.7 million of
depreciation reflecting the fair value adjustment of Wallace property, plant and
equipment acquired, $1.1 million of intangible asset amortization of purchased
intangibles and $2.1 million of asset impairments associated with the disposal
of redundant enterprise software systems as a result of the Acquisition.
Income from operations declined $14.2 million to $8.5 million for the three
months ended June 30, 2003, versus 2002. The results were unfavorably affected
by acquisition related items ($38.6 million) and net restructuring and
restructuring related actions ($3.8 million) as previously discussed.
Included in investment and other income (expense) is the write-off of the fair
value of interest rate swaps ($5.2 million) as a result of extinguishing Moore's
historical debt on the date of Acquisition (see Note 5).
Net interest expense increased by $24.7 million to $27.4 million for the three
months ended June 30, 2003, compared to 2002, primarily due to $6.2 million
(pre-acquisition interest expense, deferred issue cost amortization and discount
amortization) related to the financing of the Acquisition before closing on May
15, 2003. Additionally, the Corporation paid $4 million of bridge financing
commitment fees related to the Acquisition. The Corporation also recorded a
charge ($7.5 million) to write off the deferred financing fees related to the
Corporation's historical debt in connection with the financing of the
Acquisition. Excluding these items, net interest expense increased $7 million
primarily due to the increased debt outstanding as a result of the Acquisition
(see Note 5).
Net earnings for the three months ended June 30, 2003, includes $34.2 million
reduction of the deferred tax valuation allowance and the benefit of the loss
generated in the U.S. as a result of expenses incurred from the Acquisition. Net
earnings for the three months ended June 30, 2003, increased $3.7 million over
the prior year to $18.9 million, or $0.14 per diluted share. Included in net
income for the quarter were acquisition related charges of $61.5 million ($35.6
million net of taxes) or $0.26 per diluted share, and restructuring and other
charges of $3.8 million ($2.6 million net of taxes) or $0.02 per diluted share.
The following table below summarizes the acquisition related and restructuring
and other charges (credits):
MOORE WALLACE INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003 AS
COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2002
CONSOLIDATED (continued)
Three Months Ended
June 30, 2003
-------------
(In millions of U.S. dollars)
Inventory and backlog $ 38.6
Pre-acquisition interest - net 6.2
Deferred financing fees 7.5
Fair value of interest rate swaps 5.2
Bridge financing fees 4.0
--------------
Total acquisition related charges $ 61.5
==============
Restructuring $ 3.3
Reversal of prior restructuring (1.6)
Asset impairment 2.1
--------------
Total restructuring and other charges $ 3.8
==============
For the same period in 2002, the Corporation reported net income of $15.2
million, or $0.13 per diluted share. The increase relates to the tax benefit
recorded in the three months ended June 30, 2003, partially offset by
acquisition related charges and restructuring and restructuring related charges.
OPERATING RESULTS BY SEGMENT
The following table and management discussion summarizes the operating results
of the Corporation's business segments:
Three months ended June 30, Operating income
(In millions of U.S. dollars) Net sales (loss)
- -------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------
Forms and Labels $ 350.5 $ 285.5 $ 10.7 $ 31.9
Outsourcing 76.4 71.1 12.7 8.8
Commercial 223.2 143.2 8.1 10.8
Corporate - - (23.0) (28.8)
- -------------------------------------------------------------------------------------------------------------
Total $ 650.1 $ 499.8 $ 8.5 $ 22.7
=============================================================================================================
FORMS AND LABELS
Net sales for the three months ended June 30, 2003 increased $65 million or
22.8%. The inclusion of the Acquisition ($95.4 million), more than offset the
volume declines at major print management customers in the North American Forms
and Labels business. The Corporation believes the business activity levels at
these major print management customers will continue to be adversely affected
until macroeconomic conditions improve.
Operating income for the three months ended June 30, 2003 decreased $21.2
million or 66.5% versus 2002 to $10.7 million primarily due to the fair market
value charge for inventory and backlog acquired from Wallace ($27.2 million), a
restructuring charge of $1.1 million, an asset impairment charge of $2.1
million, depreciation on the fair market value adjustment for the property,
plant and equipment acquired ($0.6 million) and volume declines in the North
American Forms and Labels, as previously discussed, partially offset by the
operating results of Wallace.
MOORE WALLACE INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003 AS
COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2002
OUTSOURCING
Net sales increased $5.3 million or 7.5% to $76.4 million for the three months
ended June 30, 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 June 30, 2003 increased $3.9
million, or 44.3% versus 2002, due to increased sales activity and 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 $80 million or 55.9% for the three months ended June 30,
2003 primarily due to the Acquisition ($79 million), increased commercial print
transaction business at Nielsen ($3.4 million) achieved through the
Corporation's cross-selling initiatives, favorable foreign currency exchange
($4.3 million) and increased domestic direct mail business ($0.9 million) as
some abatement of geopolitical uncertainty helped to increase mailing volumes.
These increases were partially offset by volume declines in the Corporation's
technical publications group ($4.6 million) due to lower demand by certain
healthcare customers.
Operating income for the three months ended June 30, 2003 decreased $2.7 million
or 25%, to $8.1 million versus 2002, primarily due to the fair market value
charge for inventory and backlog acquired from Wallace ($11.4 million),
depreciation on the fair market value adjustment for the property, plant and
equipment acquired ($0.9 million) and volume declines in the technical
publications group ($1 million), partially offset by the operating results of
Wallace, the reversal of a prior restructuring reserve in its European
operations, increased volumes at Nielsen ($1.3 million) and manufacturing
efficiencies achieved at the domestic direct mail operations ($1.6 million).
CORPORATE
Corporate operating expenses decreased from $28.8 million to $23 million for the
quarter ended June 30, 2003 versus the same period in 2002, primarily due to
overall financial management, including information technology spending,
partially offset by increased healthcare benefit costs, the inclusion of Wallace
corporate costs for the 46-day period subsequent to the close and a provision
for restructuring for duplicative administrative functions.
MOORE WALLACE INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AS
COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2002
CONSOLIDATED
Net sales for the six months ended June 30, 2003 increased $131.9 million to
$1,161.2 million, representing a 12.8% increase versus the same period last
year. The inclusion of Wallace ($174.4 million) for the 46 days after the close
of the Acquisition on May 15, 2003, more than offset the sales declines in the
U.S. and Canadian Forms and Labels business ($52.7 million) as customers
continue to defer spending decisions as a result of macroeconomic conditions.
Cost of sales increased $128.4 million to $831.1 million or 71.6% of
consolidated net sales for the period ended June 30, 2003 versus 68.3% for the
same period in the prior year. Included in cost of sales for the second quarter
of 2003 was an acquisition related charge for the fair value of the inventory
and backlog ($38.6 million). Also, included in cost of sales was a $3 million
charge for certain obsolete Wallace inventory and a benefit related to the
recognition of vendor rebates earned.
Selling, general and administrative costs decreased $7.1 million to $230.2
million or 19.8% of consolidated net sales for the six months ended June 30,
2003, compared to $237.3 million or 23.1% of consolidated net sales versus the
same period last year. The margin improvement is primarily due to benefits
achieved from the Corporation's prior restructuring activities, continued focus
on cost containment of discretionary spending and early benefits recognized as a
result of reducing duplicative employee functions subsequent to the Acquisition.
During the six months ended June 30, 2003 the Corporation recorded a
restructuring provision of $3.3 million for workforce reductions (41 positions)
primarily related to the closure of a plant and the elimination of certain
redundant administrative and corporate functions. These charges were partially
offset by the reversal of a portion of its 2001 restructuring reserves ($1.6
million) as a result of favorable settlements in 2003, as compared to estimates
and assumptions used by management at the time the charge was recorded. There
was no restructuring provision recorded during the six months ended June 30,
2002.
Depreciation and amortization increased $9.1 million to $53.8 million versus the
June 30, 2002 period, primarily as a result of the Acquisition ($11.7 million).
Also, included in depreciation and amortization is $1.7 million of depreciation
reflecting the fair value adjustment of Wallace property, plant and equipment
acquired, $1.1 million of intangible asset amortization of purchased intangibles
and $2.1 million of asset impairments associated with the disposal of redundant
enterprise software systems as a result of the Acquisition.
Income from operations declined $0.2 million to $44.4 million for the six months
ended June 30, 2003, versus June 30, 2002. The results were unfavorably affected
by acquisition related items ($38.6 million) and net restructuring and
restructuring related actions ($3.8 million) as previously discussed.
Included in investment and other income (expense) is the write-off of the fair
value of interest rate swaps ($5.2 million) as a result of extinguishing Moore's
historical debt on the date of Acquisition (see Note 5).
Net interest expense increased by $28.6 million to $33.9 million for the six
months ended June 30, 2003, compared to 2002, primarily due to $9.4 million
(pre-acquisition interest expense, deferred issue cost amortization and discount
amortization) related to the financing of the Acquisition before closing on May
15, 2003. Additionally, the Corporation paid $4 million of bridge financing
commitment fees related to the Acquisition. The Corporation also recorded a
charge ($7.5 million) to write off the deferred financing fees related to the
Corporation's historical debt in connection with the financing of the
Acquisition. Excluding these items, net interest expense increased $7.7 million
primarily due to the increased debt outstanding as a result of the Acquisition
(see Note 5).
The difference between the statutory rate and the effective rate relates to
lower tax rates in non-U.S. jurisdictions combined with a 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.
The 2003 rate was also affected by a loss generated in the U.S. as a result of
expenses incurred from the Acquisition. For the three and six months ended June
30, 2003, the valuation allowance was reduced $34.2 million and $40.4 million,
respectively. For the three and six months ended June 30, 2002, the valuation
allowance was reduced by $36.1 million.
Net earnings for the six months ended June 30, 2003 includes $40.4 million
reduction of the deferred tax valuation allowance and the benefit of the loss
generated in the U.S. as a result of expenses incurred from the Acquisition. Net
earnings for the six months ended June 30, 2003, increased $20.4 million over
the prior year to $48.1 million, or $0.38 per diluted share. Included in net
income for the first six months were acquisition related charges of $64.7
million ($37.6 million net of taxes) or $0.27 per diluted share, restructuring
and other charges of $3.8 million ($2.6 million net of taxes) or $0.02 per
diluted share and a gain on the disposition of a real estate holding of $1.2
million ($0.8 million net of taxes) or $0.01 per diluted share. The following
table below summarizes the acquisition related and restructuring and other
charges (credits):
MOORE WALLACE INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AS
COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2002
CONSOLIDATED (continued)
Six Months Ended
June 30, 2003
-------------
(In millions of U.S. dollars)
Fair value of acquired inventory and backlog $ 38.6
Pre-acquisition interest - net 9.4
Deferred financing fees 7.5
Fair value of interest rate swaps 5.2
Bridge financing fees 4.0
--------
Total acquisition related charges $ 64.7
========
Restructuring $ 3.3
Reversal of prior restructuring (1.6)
Asset impairment 2.1
--------
Total restructuring and other charges $ 3.8
========
Gain on disposition of property $ 1.2
========
For the same period in 2002, the Corporation reported net income of $27.7
million, or $0.24 per diluted share. The increase relates to the tax benefit
recorded in the three-month period ended June 30, 2003, partially offset by
acquisition related charges and restructuring and restructuring related charges.
OPERATING RESULTS BY SEGMENT
The following table and management discussion summarizes the operating results
of the Corporation's business segments:
Six months ended June 30, Operating income
(In millions of U.S. dollars) Net Sales (loss)
- --------------------------------------------------------------------------------------------
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------
Forms and Labels $ 617.3 $ 573.1 $ 41.2 $ 62.3
Outsourcing 173.8 167.2 38.9 29.5
Commercial 370.1 289.0 21.3 22.7
Corporate - - (57.0) (70.0)
- --------------------------------------------------------------------------------------------
Total $ 1,161.2 $ 1,029.3 $ 44.4 $ 44.5
============================================================================================
FORMS AND LABELS
Net sales for the six months ended June 30, 2003 increased $44.2 million or 7.7%
to $617.3 million, versus 2002. The inclusion of the Acquisition ($95.4
million), more than offset the volume declines at major print management
customers in the North American Forms and Labels business. The Corporation
believes the business activity levels at these major print management customers
will continue to be adversely affected until macroeconomic conditions improve.
Operating income for the six months ended June 30, 2003 decreased $21.1 million
or 33.9% to $41.2 million versus 2002, primarily due to the fair market value
charge for inventory and backlog acquired from Wallace ($27.2 million), a
restructuring charge of $1.1 million, an asset impairment charge of $2.1
million, depreciation on the fair market value adjustment for the property,
plant and equipment acquired ($0.6 million) and the volume declines in the North
American Forms and Labels, as previously discussed, partially offset by
operating results of Wallace.
MOORE WALLACE INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AS
COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2002
OUTSOURCING
Net sales increased $6.6 million or 3.9% to $173.8 million for the six months
ended June 30, 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 six months ended June 30, 2003, increased $9.4 million,
or 31.9%, versus 2002, due to increased sales activity and 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 $81.1 million or 28.1% for the six months ended June 30,
2003, primarily due to the Acquisition ($79 million), increased commercial print
transaction business at Nielsen ($15 million) achieved through the Corporation's
cross-selling initiatives and favorable foreign currency exchange ($9.2
million). These increases were partially offset by volume declines in the
Corporation's technical publications group ($7.2 million) due to lower demand by
certain healthcare customers and the exiting of non-core businesses ($7.7
million).
Operating income for the six months ended June 30, 2003, decreased $1.4 million
or 6.2%, to $21.3 million versus 2002, primarily due to the fair market value
charge for inventory and backlog acquired from Wallace ($11.4 million), and
depreciation on the fair market value adjustment for the property, plant and
equipment acquired ($0.9 million), partially offset by the operating results of
Wallace and the reversal of a prior restructuring reserve in its European
operations and increased volumes at Nielsen ($2.1 million).
CORPORATE
Corporate operating expenses decreased $13 million to $57 million for the
quarter ended June 30, 2003, versus the same period in 2002, primarily due to
overall financial management, including information technology spending,
partially offset by increased healthcare benefit costs, the inclusion of Wallace
corporate costs for the 46-day period subsequent to the close and a provision
for restructuring related to duplicative administrative functions.
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. The New
Facility consists of a seven-year $500 million B Term Loan, which was funded in
escrow until the consummation of the Acquisition on May 15, 2003, and a
five-year $350 million Revolving Credit Facility, each of which are subject to a
number of restrictive and financial covenants that, in part, 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 are calculated
quarterly and include, in part, tests of leverage and interest coverage. The
loans under the New Facility bear interest based on a variable index (LIBOR),
plus an applicable margin. Three-month LIBOR at June 30, 2003, was 1.1%. The New
Facility replaced the Corporation's $400 million senior secured credit facility
(the "Existing Facility"). At June 30, 2003, $510 million is outstanding under
the New Facility.
Concurrently, in March 2003, the Corporation issued $403 million of 7 7/8 %
senior unsecured notes (the "Senior Notes") due 2011 at a $2.8 million discount
to the principal amount. Interest on the Senior Notes is payable semiannually on
January 15 and July 15 of each year, commencing on July 15, 2003. The proceeds
from the Senior Notes along with $16 million in prepaid interest through
September 15, 2003 were held in escrow until the consummation of the
Acquisition. 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 predetermined 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.
In August 2002, the Corporation entered into the Existing Facility, which 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. The Existing Facility was replaced with the proceeds from the New
Facility upon the consummation of the Acquisition. At December 31, 2002, $179.5
million was outstanding under this facility.
MOORE WALLACE INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (continued)
As a result of replacing the Existing Facility, the Corporation recorded a
charge of $5.2 million during the quarter for the fair value on $150 million
notional amount fixed rate interest rate swaps that were designated as cash flow
hedges of the variable interest on the Existing Facility. The $5.2 million
liability resulting from this charge will be ratably reduced and recorded as
income over the remaining term of the swaps. These swap agreements exchange the
variable interest rates (LIBOR) for fixed interest rates over the terms of the
agreements. During the quarter, the Corporation designated these swaps as cash
flow hedges of the interest rate risk attributable to the forecasted variable
interest payments on the New Facility. Also during the quarter, the Corporation
entered into an additional $250 million notional amount fixed rate interest rate
swaps that are designated as cash flow hedges of the interest rate risk
attributable to the forecasted variable interest payments. These swaps, which
become effective and interest will begin accruing on October 7, 2003, exchange
the LIBOR interest on the New Facility to fixed rate over the term of the swaps.
At June 30, 2003, the notional amount of all fixed rate swaps outstanding was
$400 million and their fair market value was a $6.9 million liability.
During the quarter, the Corporation also entered into $250 million notional
amount interest rate swaps that exchange the interest on the 7.78% fixed rate
Senior Notes to floating rate six-month LIBOR plus a basis point spread. The
swaps are designated as a fair value hedge against $250 million of principal on
the Company's Senior Notes and mature January 2011. At June 30, 2003, fair
market value of these floating rate swaps was a $2.7 million liability.
On August 5, 2003, the Corporation entered into an agreement with the lender of
its New Facility to amend the New Facility to reduce the basis point spread.
Management expects this reduction to result in annualized pretax cash interest
savings of approximately $2.5 million.
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 $43.6 million at June 30, 2003
($0.8 million outstanding), and may be terminated at any time at the
Corporation's option. Total availability under these facilities at June 30,
2003, was approximately $43 million. The Corporation has approximately $42
million in outstanding letters of credit at June 30, 2003.
An additional source of liquidity at June 30, 2003 was the Corporation's
short-term investments in the amount of $46.5 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 June 30, 2003 and 2002 the Corporation was not in violation of its debt
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
million or the value of 6,000,000 of its common shares at such date. The $9
million payment may be reduced under certain circumstances. At the option of the
Corporation, these payments may be made in common shares, subject to regulatory
approval. To the extent that shares or cash is paid, it will be recorded as a
charge to retained earnings. 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 were repurchased during the six
months ended June 30, 2003). The New Facility and Senior Notes related to the
Acquisition do not prohibit the Corporation from continuing the repurchase
program.
Net cash provided by operating activities was $52.7 million for the six months
ended June 30, 2003, compared to net cash provided of $73.5 million for the same
period last year. The change was due to net changes in working capital offset by
better operating results.
Net cash used by investing activities for the six months ended June 30, 2003,
was $865.3 million, primarily related to the Acquisition (see Note 3), versus
$76 million used in 2002, of which $57.2 million relates to the acquisition of
Nielsen.
Net cash provided by financing activities for the six months ended June 30,
2003, was $725.1 million compared to $19.5 million for the same period in 2002.
The increase relates to the Corporation's $910.3 million of debt related to the
Acquisition (see Note 3); offset by decreased borrowings under the Corporation's
Existing Facility compared to 2002.
MOORE WALLACE INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (continued)
As of June 30, 2003, the aggregate amount of outstanding forward foreign
currency contracts was $15.3 million. Unrealized gains and losses from these
foreign currency contracts were not significant at June 30, 2003. The
Corporation does not use derivative financial instruments for trading purposes.
FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this quarterly report on Form 10-Q
that are subject to risks and uncertainties. These statements are based on the
beliefs and assumptions of the Corporation's management. Generally,
forward-looking statements include information concerning possible or assumed
future actions, events or results of operations of the Corporation.
Forward-looking statements may include, among other things, statements
regarding:
- management forecasts;
- efficiencies, cost avoidance and cost savings;
- income and margins;
- earnings per share;
- growth;
- the economy;
- future economic performance;
- future acquisitions and dispositions;
- litigation;
- potential and contingent liabilities;
- management's plans;
- business portfolios;
- taxes; and
- merger and integration-related expenses.
These statements may include, or be proceeded or followed by, the words "may,"
"will," "should," "potential," "possible," "believe," "expect," "anticipate,"
"intend," "plan," "estimate," "hope" or similar expressions. We claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995 for all forward-looking
statements.
Forward-looking statements are not guarantees of performance. You should
understand that the following important factors, in addition to those "Risk
Factors" set forth in documents we have filed with the Securities and Exchange
Commission, could affect the future results of the Corporation, and could cause
those results or other outcomes to differ materially from those expressed or
implied in our forward-looking statements:
- the effect of economic and political conditions on a regional, national
or international basis;
- the possibility of future terrorist activities or the possibility of an
outbreak of hostilities in the Middle East or elsewhere;
- the effect of inflation, changes in currency exchange rates and change in
interest rates;
- the effect of changes in laws and regulations, including changes in
accounting standards, trade, tax, price controls and other regulatory
matters;
- the performance of the Corporation's businesses following the acquisition
of Wallace and the ability of the companies to integrate their operations
successfully;
- the financial resources of, and products available to the Corporation's
competitors;
- competitive pressures in the commercial printing, forms and labels,
electronic print management, business marketing, business communications,
office supplies, imaging, digital printing and computer software
industries;
- the ability to secure and defend intellectual property rights and, when
appropriate, license required technology;
- customers' budgetary constraints;
- customer changes in short-range and long-range plans;
- the ability to gain customer acceptance of the Corporation's new products
and technologies;
- product performance and customer expectations;
- performance issues with key suppliers;
- changes in the availability or costs of key supplies (such as ink and
paper);
- the ability to generate cash flows or obtain financing to fund growth;
- contingencies related to actual or alleged environmental contamination;
and
- adverse outcomes of pending or threatened litigation.
MOORE WALLACE INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS (continued)
Because forward-looking statements are subject to assumptions and uncertainties,
actual results may differ materially from those expressed or implied by such
forward-looking statements. Stockholders are cautioned not to place undue
reliance on such statements, which speak only as of the date of this document or
the date of any document incorporated by reference.
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 the end of the period covered by 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
At June 30, 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 indicate 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 ongoing and
is anticipated to continue for at least several years. The toal 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 its reserves are sufficient based on the present facts and recent
tests performed at this site.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In March 2003, the Corporation's Board of Directors issued a restricted share
grant of 75,000 common shares of the Corporation to an executive officer of the
Corporation which is scheduled to vest annually over a four year period. The
Corporation has utilized its restricted share as an incentive to attract and
keep qualified experienced key personnel. Under the terms of the restricted
share grant, the Corporation has a right to repurchase any unvested shares at
the original exercise price of the shares upon termination of employment. No
underwriters were involved and there were no underwriting discounts or
commissions. The issuance of the restricted shares by the Corporation was a
transaction "not involving a public offering" and therefore was an exempt
transaction under Section 4(2) of the Securities Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were voted on at the Corporation's Annual and Special
Shareholders Meeting held on April 23, 2003:
1. The appointment of Deloitte & Touche, LLP as the Corporation's independent
auditor for a term expiring at the annual meeting of shareholders in 2004 and to
authorize the directors to fix the remuneration to be paid to the independent
auditor.
Shares For Shares Withheld
--------------------------------
83,435,244 134,096
2. The election of a total of ten directors of the Corporation, seven directors
to begin their terms of office effective the date of the shareholders' meeting
Shares For Shares Withheld
----------------------------------
Mark A. Angelson 83,568,469 92,682
Robert F. Cummings, Jr. 83,575,853 85,325
Ronald Daniels 83,577,902 83,276
Alfred C. Eckert III 83,569,006 92,172
Joan D. Manley 83,534,604 126,574
Lionel Schipper 83,574,206 86,972
John Stevens 83,579,280 81,898
and the election of three additional directors to begin their terms of office
effective upon the date of the closing of the merger with Wallace Computer
Services, Inc.:
Shares For Shares Withheld
--------------------------------
Michael T. Riordan 83,571,356 89,822
John C. Pope 83,572,691 88,487
Andrew J. McKenna 83,415,221 245,957
3. The approval of the 2003 Long Term Incentive Plan (the "Plan") which reserves
10,000,000 common shares of the Corporation for issuance pursuant to the Plan:
Shares For Shares Against
-----------------------------
40,662,578 21,315,767
4. The approval of Bylaw 1A:
Shares For Shares Against
-------------------------------
81,690,424 1,800,861
5. The approval of a name change of the Company from Moore Corporation Limited
to Moore Wallace Incorporated effective upon the completion of the merger with
Wallace Computer Services, Inc.:
Shares For Shares Against
------------------------------
61,691,722 92,678
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1* Certificate of Amendment of Articles of Continuance effective May 21,
2003
10.1* 2003 Long Term Incentive Plan
10.2* Employment Agreement dated April 7, 2003 between the Corporation and
James R. Sulat
10.3* Amendment No. 2 and Waiver dated August 5, 2003 to the Credit
Agreement, dated as of March 14, 2003, among Moore Holdings U.S.A.
Inc., Moore Wallace Incorporated (formerly known as Moore Corporation
Limited), the Lenders from time to time party thereto, Bank One, NA,
Fleet National Bank and the Bank of Nova Scotia, as Co-Documentation
Agents, Citicorp North America, Inc., as Administrative Agent, and
Deutsche Bank Securities Inc., as Syndication Agent 31* Rule
13a-14(a)/15d-14(a) Certifications 32* Section 1350 Certifications
* filed herewith
(b) Reports on Form 8-K
On April 29, 2003, the Corporation filed a Current Report on Form 8-K, dated
April 28, 2003, announcing its financial results for the quarter ended March 31,
2003.
On May 15, 2003, the Corporation filed a Current Report on Form 8-K, dated May
15, 2003, announcing the merger (the "Merger") of M-W Acquisition, Inc. ("Merger
Sub"), a wholly owned subsidiary of Moore Corporation Limited ("Parent"), with
and into Wallace Computer Services, Inc. (the "Company"), and the subsequent
merger of the surviving corporation with and into a subsidiary of Moore Holdings
U.S.A. Inc., a wholly owned subsidiary of Parent, as contemplated by the
Agreement and Plan of Merger, dated as of January 16, 2003 (and as amended and
restated as of April 14, 2003).
On May 19, 2003, the Corporation filed a Current Report on Form 8-K, dated May
19, 2003, announcing final election results as to the form of merger
consideration that Wallace Computer Services, Inc. ("Wallace") stockholders
elected to receive in the merger of a wholly owned subsidiary of Moore with and
into Wallace.
On May 28, 2003, the Corporation filed a Current Report on Form 8-K, dated May
28, 2003, disclosing guidance given at an investor meeting hosted by Morgan
Stanley on May 28, 2003, and on May 29, 2003, the Corporation filed a Current
Report on Form 8-K, dated May 28, 2003, clarifying the disclosure in the Form
8-K furnished by the Corporation on May 28, 2003.
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 WALLACE INCORPORATED
Date: August 7, 2003 by: /s/ Mark S. Hiltwein
-------------------------------------------------
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)