Form 8-K/A

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 8-K/A

 

CURRENT REPORT

 

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): February 27, 2004

 


 

R. R. DONNELLEY & SONS COMPANY

(Exact name of Registrant as Specified in Its Charter)

 

Delaware   1-4694   36-1004130
(State or Other Jurisdiction
of Incorporation)
  (Commission File Number)   (IRS Employer
Identification No.)

 

77 West Wacker Drive, Chicago, Illinois

   60601

  (Address of Principal Executive Offices)

   (Zip Code)

 

Registrant’s Telephone Number, Including Area Code:    (312) 326-8000

 

 

 

Not Applicable

(Former Name or Former Address, if Changed Since Last Report)

 



Item 7. Financial Statements and Exhibits.

 

This amended Item 7 contains the same financial statements as filed in the Current Report on Form 8-K filed March 15, 2004, but also includes the independent auditors’ consent attached as Exhibit 23.

 

(a) Financial Statements of Businesses Acquired.

 

2


MOORE WALLACE INCORPORATED

CONSOLIDATED BALANCE SHEETS

AS AT DECEMBER 31,

(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

 

     2003

    2002

 

ASSETS

                

Current Assets

                

Cash and cash equivalents

   $ 148,704     $ 139,630  

Accounts receivable, less allowance for doubtful accounts of $22,295 (2002—$19,538)

     635,187       341,383  

Inventories (Note 4)

     246,440       129,889  

Prepaid expenses

     30,346       17,317  

Deferred income taxes (Note 18)

     61,656       31,912  
    


 


Total Current Assets

     1,122,333       660,131  
    


 


Property, plant and equipment—net (Note 5)

     583,553       255,722  

Assets held for sale (Note 16)

     37,844       —    

Investments (Note 6)

     31,761       32,256  

Prepaid pension cost (Note 14)

     230,049       221,520  

Goodwill (Note 7)

     853,136       106,254  

Other intangibles—net (Note 7)

     187,793       6,434  

Deferred income taxes (Note 18)

     2,438       53,938  

Other assets (Note 8)

     171,101       103,504  
    


 


Total Assets

   $ 3,220,008     $ 1,439,759  
    


 


LIABILITIES

                

Current Liabilities

                

Bank indebtedness

   $ 56,827     $ 18,158  

Accounts payable and accrued liabilities (Note 9)

     668,198       486,507  

Short-term debt (Note 10)

     7,662       2,135  

Income taxes

     85,741       58,562  

Deferred income taxes (Note 18)

     660       3,184  
    


 


Total Current Liabilities

     819,088       568,546  
    


 


Long-term debt (Note 10)

     899,038       187,463  

Postretirement benefits (Note 15)

     261,525       241,344  

Deferred income taxes (Note 18)

     107,190       9,482  

Other liabilities (Note 11)

     103,963       43,776  

Minority interest

     5,045       6,652  
    


 


Total Liabilities

     2,195,849       1,057,263  
    


 


SHAREHOLDERS’ EQUITY

                

Share Capital (Note 12)

                

Authorized: Unlimited number of preference (none outstanding for 2003 and 2002) and common shares without par value Issued: 159,701,411 common shares in 2003 111,842,348 common shares in 2002

     915,500       403,800  

Unearned restricted shares

     (2,457 )     (2,572 )

Retained earnings

     228,777       114,601  

Cumulative translation adjustments (Note 13)

     (117,661 )     (133,333 )
    


 


Total Shareholders’ Equity

     1,024,159       382,496  
    


 


Total Liabilities and Shareholders’ Equity

   $ 3,220,008     $ 1,439,759  
    


 


 

See notes to consolidated financial statements

 

3


MOORE WALLACE INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31,

(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AND PER SHARE DATA)

 

     2003

    2002

    2001

 

Net sales

   $ 2,872,796     $ 2,038,039     $ 2,154,574  
    


 


 


Cost of sales

     2,035,016       1,390,007       1,552,561  

Selling, general and administrative expenses

     525,726       459,613       575,586  

Provision for (recovery of) restructuring costs—net

     6,408       (850 )     129,679  

Depreciation and amortization (includes impairment charges of $7,169 for 2003, $0 for 2002 and $131,393 for 2001)

     125,746       86,746       239,072  
    


 


 


       2,692,896       1,935,516       2,496,898  
    


 


 


Income (loss) from operations

     179,900       102,523       (342,324 )

Investment and other income (expense)

     (5,382 )     3,720       (10,721 )

Interest expense—net

     54,939       12,145       23,758  

Debt settlement and issue costs

     7,493       16,746       11,617  
    


 


 


Earnings (loss) before income taxes and minority interest

     112,086       77,352       (388,420 )

Income tax expense (recovery)

     (3,344 )     2,472       (32,192 )

Minority interest

     1,254       1,622       1,810  
    


 


 


Net earnings (loss)

   $ 114,176     $ 73,258     $ (358,038 )

Distribution to certain convertible debenture holders

     —         —         15,345  
    


 


 


Net earnings (loss) available to common shareholders

   $ 114,176     $ 73,258     $ (373,383 )
    


 


 


Net earnings (loss) per common share:

                        

Basic

   $ 0.81     $ 0.66     $ (4.21 )

Diluted

   $ 0.81     $ 0.64     $ (4.21 )

Average shares outstanding (in thousands):

                        

Basic

     140,854       111,556       88,648  

Diluted

     141,643       114,022       88,648  

 

See notes to consolidated financial statements

 

4


MOORE WALLACE INCORPORATED

CONSOLIDATED STATEMENTS OF RETAINED EARNINGS

YEARS ENDED DECEMBER 31,

(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

 

     2003

   2002

   2001

 

Balance at beginning of the year

   $ 114,601    $ 51,666    $ 431,821  

Net earnings (loss)

     114,176      73,258      (358,038 )
    

  

  


       228,777      124,924      73,783  

Repurchase of common shares (1,069,700 in 2002)

     —        10,323      —    

Subordinated convertible debentures

     —        —        17,694  

Dividends (5¢ per share in 2001)

     —        —        4,423  
    

  

  


Balance at end of year

   $ 228,777    $ 114,601    $ 51,666  
    

  

  


 

See notes to consolidated financial statements

 

5


MOORE WALLACE INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31,

(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)

 

    2003

    2002

    2001

 

OPERATING ACTIVITIES

                       

Net earnings (loss)

  $ 114,176     $ 73,258     $ (358,038 )

Items not affecting cash resources:

                       

Depreciation and amortization

    125,746       86,746       239,072  

Net (gain) loss on sale and write-off of investment and other assets

    (650 )     (5,929 )     5,824  

Acquisition related charges:

                       

Inventory and backlog

    38,590       —         —    

Derivative charges—net

    3,925       —         —    

Write-off of deferred debt issue costs

    7,493       —         —    

Deferred income taxes

    (24,081 )     (25,996 )     (35,103 )

Pension settlement—net

    —         —         96,605  

Provision for (recovery of) restructuring costs—net

    6,408       (850 )     129,679  

Debt settlement and issue costs

    —         16,746       11,617  

Restricted share compensation

    1,027       1,093       —    

Other

    4,887       (10,804 )     3,048  

Changes in operating assets and liabilities:

                       

Accounts receivable—net

    (18,304 )     (638 )     44,684  

Inventories

    (7,835 )     6,026       21,037  

Prepaid expenses

    (4,946 )     (3,777 )     9,148  

Accounts payable and accrued liabilities

    (46,638 )     (9,741 )     (19,378 )

Income taxes

    16,125       32,133       (4,417 )

Other

    (3,343 )     128       (6,657 )
   


 


 


Net cash provided by operating activities

    212,580       158,395       137,121  
   


 


 


INVESTING ACTIVITIES

                       

Property, plant and equipment—net

    (51,500 )     (8,941 )     (37,072 )

Long-term receivables and other investments

    (27,766 )     (5,028 )     (3,489 )

Acquisition of businesses—net of cash acquired

    (870,391 )     (65,966 )     (14,565 )

Proceeds from sale of investment and other assets

    31,417       —         38,495  

Software expenditures

    (5,467 )     (10,958 )     (6,517 )

Other

    3,549       (1,615 )     1,210  
   


 


 


Net cash used by investing activities

    (920,158 )     (92,508 )     (21,938 )
   


 


 


FINANCING ACTIVITIES

                       

Dividends paid

    —         —         (8,846 )

Net change in short-term debt

    527       (15,899 )     15,325  

Proceeds from issuance of long-term debt

    1,010,280       200,000       7,963  

Payments on long-term debt

    (309,372 )     (140,264 )     (104,166 )

Debt issue costs

    (33,972 )     —         —    

Issuance (repurchase) of common shares—net

    11,884       (7,949 )     —    

Other

    (1,678 )     (8,827 )     (3,344 )
   


 


 


Net cash provided (used) by financing activities

    677,669       27,061       (93,068 )
   


 


 


Effect of exchange rate on cash resources

    314       (150 )     (551 )

(Decrease) increase in cash resources

    (29,595 )     92,798       21,564  

Cash resources at beginning of year(a)

    121,472       28,674       7,110  
   


 


 


Cash resources at end of year(a)

  $ 91,877     $ 121,472     $ 28,674  
   


 


 


Supplemental disclosure of cash flow information:

                       

Interest paid—net

  $ 29,154     $ 13,324     $ 26,594  
   


 


 


Income taxes (refunded) paid—net

    (18,926 )     (1,041 )     3,425  
   


 


 


(a) Cash resources are defined as cash and cash equivalents less bank indebtedness.

 

See notes to consolidated financial statements

 

6


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS, UNLESS OTHERWISE INDICATED)

 

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

PRINCIPLES OF CONSOLIDATION

 

Moore Wallace Incorporated is a corporation continued under the Canada Business Corporations Act. The consolidated financial statements, which are prepared in accordance with Canadian generally accepted accounting principles (GAAP), include the accounts of Moore Wallace Incorporated and its subsidiaries. The Corporation does not have any investments in unconsolidated special purpose entities or variable interest entities. All intercompany transactions have been eliminated. Comparative figures have been reclassified in the prior years where appropriate to conform to current year presentation. Significant differences between Canadian and U.S. GAAP are discussed in Note 24.

 

On May 15, 2003, the Corporation acquired (the “Acquisition”) all of 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 year ended December 31, 2003 include the results of Wallace from May 15, 2003 (“the acquisition date”).

 

REVENUE RECOGNITION

 

The Corporation recognizes revenue for the majority of its products upon shipment to the customer and the transfer of title. Under agreements with certain customers, custom forms may be stored by the Corporation for future delivery. In these situations, the Corporation receives a logistics and warehouse management fee for the services provided. In these cases, delivery and billing schedules are outlined with the customer and product revenue is recognized when manufacturing is complete, title transfers to the customer, the order is invoiced and there is reasonable assurance of collectability. Since the majority of products are customized, product returns are not significant; however, the Corporation accrues for the estimated amount of customer credits at the time of sale.

 

Revenue from services is recognized as services are performed. Long-term product contract revenue is recognized based on the completed contract method or percentage of completion method. The percentage of completion method is used only for contracts that will take longer than three months to complete, and project stages are clearly defined and can be invoiced. The contract must also contain enforceable rights by both parties. Revenue related to short-term service contracts and contracts that do not meet the percentage of completion criteria is recognized when the contract is completed.

 

TRANSLATION OF FOREIGN CURRENCIES

 

The consolidated financial statements are expressed in United States dollars because a significant part of the Corporation’s net assets and earnings are located or originate in the United States. Except for the foreign currency financial statements of subsidiaries in countries with highly inflationary economies, Canadian and other foreign currency financial statements are translated into United States dollars on the following bases: all assets and liabilities at the year-end exchange rates; income and expenses at average exchange rates during the year. Net unrealized exchange adjustments arising on translation of foreign currency financial statements are reported as cumulative translation adjustments, a component of shareholders’ equity.

 

The foreign currency financial statements of subsidiaries in countries with highly inflationary economies are translated into United States dollars using the temporal method whereby monetary items are translated at current exchange rates, and non-monetary items are translated at historical exchange rates. In 2001, Venezuela was the only highly inflationary economy in which the Corporation operated. In 2002, Venezuela’s economy was no longer considered highly inflationary and the impact of this change in method of translation was not material to the consolidated financial statements.

 

Exchange losses or gains related to the translation of transactions denominated in foreign currencies are included in earnings. Amounts included in investment and other income for 2003 and 2002 were not material. In 2002, the Corporation adopted the recommendations of the Canadian Institute of Chartered Accountants (“CICA”) amended Handbook Section 1650, Foreign Currency Translation. The impact of the adoption of the standard was not material.

 

7


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

FINANCIAL INSTRUMENTS

 

The Corporation enters into forward exchange contracts to hedge exposures resulting from foreign exchange fluctuations in the ordinary course of business. The contracts are normally for terms of less than one year and are used to mitigate the affect of fluctuations in foreign currencies. The unrealized gains and losses on outstanding contracts are included in investment and other income (expense). The Corporation uses interest rate swap agreements to manage its interest rate risk by balancing its exposure to fixed and variable interest rates while attempting to minimize interest costs (see Note 10).

 

At December 31, 2003, the aggregate amount of forward exchange contracts was $15,769 (2002—$13,648). Gains and losses from foreign exchange contracts for all years presented were not significant.

 

The Corporation may be exposed to losses if the counterparties to the above contracts fail to perform. The Corporation manages this risk by dealing only with what it believes to be financially sound counterparties and by establishing dollar and term limits for each counterparty. The Corporation does not use derivative financial instruments for trading or speculative purposes.

 

Short-term securities are highly liquid and consist of investment grade instruments in governments, financial institutions and corporations.

 

Unless otherwise disclosed in the notes to the consolidated financial statements, the estimated fair value of financial assets and liabilities approximates carrying value.

 

CASH AND CASH EQUIVALENTS

 

Cash and cash equivalents consist of highly liquid investments with a maturity of three months or less.

 

INVENTORIES

 

Inventories of raw materials and work-in-process are valued at the lower of cost or replacement cost and inventories of finished goods at the lower of cost or net realizable value. In the United States, the cost of certain inventories is determined on the last-in, first-out (LIFO) basis. The cost of all other inventories is determined on the first-in, first-out (FIFO) basis.

 

PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION

 

Property, plant and equipment are stated at historical cost and are depreciated over their estimated useful lives using the straight-line method. The estimated useful lives of buildings range from 20 to 50 years and from 3 to 17 years for machinery and equipment. All costs for repairs and maintenance are expensed as incurred. Gains or losses on the disposal of property, plant and equipment are included in investment and other income and the cost and accumulated depreciation related to these assets are removed from the accounts.

 

The Corporation reviews property, plant and equipment for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Corporation then compares expected future undiscounted cash flows to be generated by the asset to its carrying value. If the carrying value exceeds the sum of the future undiscounted cash flows, the asset would be adjusted to its net recoverable amount and an impairment loss would be charged to operations in the period identified.

 

GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill represents the excess cost of an acquired entity over the fair value assigned to the identifiable net assets acquired. Goodwill from acquisitions that occurred prior to July 1, 2001 was amortized over its useful life on a straight-line basis, not to exceed 40 years. Goodwill from acquisitions subsequent to July 1, 2001 is not amortized. Effective January 1, 2002, all goodwill ceased to be amortized.

 

Identifiable intangible assets are recognized apart from goodwill and are amortized over their estimated useful lives, except for identifiable intangible assets with indefinite lives, which are not amortized.

 

Goodwill and identifiable intangible assets are reviewed annually for impairment, or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. In the absence of comparable market valuations, the Corporation compares expected future undiscounted cash flows to be generated by the asset or related reporting unit to its carrying value. If the carrying value exceeds the sum of the future undiscounted cash flows, the Corporation would perform an additional fair value measurement calculation to determine the impairment loss, which would be charged to operations in the period identified.

 

8


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

AMORTIZATION

 

Deferred charges include certain costs to acquire and develop internal-use computer software, which is amortized over its estimated useful life using the straight-line method, up to a maximum of seven years.

 

Deferred debt issue costs are amortized over the term of the related debt.

 

PENSION AND POSTRETIREMENT PLANS

 

The Corporation records annual amounts relating to its pension and postretirement plans based on calculations specified by GAAP, which include various actuarial assumptions, including discount rates, assumed rates of return, compensation increases, turnover rates and healthcare cost trend rates. The Corporation reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. The effect of modifications is generally recorded or amortized over future periods. The Corporation believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market conditions and input from its actuaries and investment advisors.

 

INCOME TAXES

 

The Corporation applies the liability method of tax allocation for accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse. The effect of a change in income tax rates on deferred income tax liabilities and assets is recognized in income in the period that the change occurs. No provision has been made for taxes on undistributed earnings of subsidiaries not currently available for paying dividends as such earnings have been reinvested in the business.

 

STOCK-BASED COMPENSATION

 

The Corporation has stock-based compensation plans as described in Note 12. The Corporation accounts for stock options using the intrinsic value method. Stock options generally do not give rise to compensation expense as they have an exercise price equal to the fair market value at dates of grant. Stock option compensation expense was not significant in 2003. In 2002 and 2001, no compensation expense was recognized. See Notes 12 and 24 for the pro forma effect of accounting for stock options under the fair value method for both Canadian and U.S. GAAP, respectively.

 

The Corporation also awards restricted common shares. Compensation expense is measured based upon the fair value on the date of issue and is recognized as the shares vest (see Note 12).

 

USE OF ESTIMATES

 

The preparation of consolidated financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates. Estimates are used when accounting for items and matters including, but not limited to, allowance for uncollectible accounts receivable, inventory obsolescence, amortization, asset valuations, employee benefits, taxes, restructuring and other provisions and contingencies.

 

9


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

2. CHANGES IN ACCOUNTING POLICIES

 

CICA ACCOUNTING GUIDELINE NO. 14 DISCLOSURE OF GUARANTEES

 

Effective January 1, 2003, the Corporation adopted CICA Accounting Guideline No. 14, Disclosure of Guarantees (AcG-14), which requires financial statement disclosures to be made by a guarantor about its obligations under contracts that contain guarantees. Significant guarantees that have been entered into by the Corporation are disclosed in Notes 10 and 22.

 

CICA SECTION 3062, 3063 AND 3475 IMPAIRMENT OF LONG-LIVED ASSETS, DISPOSAL OF LONG-LIVED ASSETS AND DISCONTINUED OPERATIONS AND GOODWILL AND OTHER ASSETS

 

In 2002, the CICA Handbook Sections 3063, Impairment of Long Lived Assets, and 3475, Disposal of Long Lived Assets and Discontinued Operations, were issued. The standards require an impairment loss to be recognized when the carrying amount of an asset held for use exceeds the sum of undiscounted cash flows. The impairment loss would be measured as the amount by which the carrying amount exceeds the fair value of the asset. An asset held for sale is to be measured at the lower of carrying cost or fair value less cost to sell. In addition, this guidance broadens the concept of a discontinued operation and eliminates the ability to accrue operating losses expected between the measurement date and the disposal date. CICA Handbook Section 3063 is effective for fiscal years beginning on or after April 1, 2003, and CICA Handbook Section 3475 applies to disposal activities initiated by an enterprise’s commitment to a plan on or after May 1, 2003. The Corporation adopted these standards during 2003.

 

On January 1, 2002, the Corporation adopted the recommendations of CICA Handbook Section 3062, Goodwill and Other Intangible Assets. Under this standard goodwill from acquisitions subsequent to July 1, 2001 is not amortized but is subject to an annual impairment test. Effective January 1, 2002, all goodwill ceased to be amortized and is subject to an annual impairment test.

 

This standard requires reclassification of identifiable intangibles separately from previously reported goodwill. This standard also requires goodwill and identifiable intangible assets to be reviewed annually for impairment, and more frequently if events or changes in circumstances indicate their carrying values may not be recoverable.

 

The transitional impairment testing required by this standard had no impact on the Corporation’s consolidated financial position and result of operations since the carrying amounts of goodwill and other intangible assets did not exceed their fair values.

 

CICA SECTION 1581 BUSINESS COMBINATIONS

 

In 2002, the Corporation adopted CICA Handbook Section 1581, Business Combinations. The standard requires that all business combinations be accounted for using the purchase method of accounting. This standard had no material impact on its consolidated financial condition or results of operations.

 

CICA SECTION 1650 FOREIGN CURRENCY TRANSLATION

 

Effective January 1, 2002, the Corporation adopted the provisions amending CICA Handbook Section 1650, Foreign Currency Translation. The amendment eliminates the deferral and amortization of unrealized translation gains and losses on non-current monetary assets and liabilities and requires that exchange gain or loss arising on translation of a foreign currency denominated non-monetary item carried at market be included in income in the current reporting period. The adoption of this standard did not have a material impact on the Corporation’s consolidated financial condition or results of operations.

 

CICA SECTION 3870 STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS

 

Effective January 1, 2002, the Corporation adopted CICA Handbook Section 3870, Stock-Based Compensation and Other Stock-Based Payments. The recommendations establish standards for the recognition, measurement and disclosure of stock-based compensation and other stock-based payments made in exchange for goods and services. It applies to transactions, including non-reciprocal transactions, in which an enterprise grants shares of common stock, stock options, or other equity instruments, or incurs liabilities based on the price of common stock or other equity instruments. Effective January 1, 2004, the standard will require fair value measurement and recognition of equity instruments awarded to employees and the cost of services received as consideration. A pro forma disclosure of net income and earnings per share using the fair value based method of accounting has been presented for the required periods.

 

10


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

3. ACQUISITIONS AND PENDING COMBINATION

 

On May 15, 2003, the Corporation acquired all of 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. The aggregate consideration to the Wallace shareholders was $1.1 billion and was 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 was 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 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 included $218.2 million for the settlement of Wallace debt and other liabilities, and direct acquisition costs to date of $20.2 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 was recorded as goodwill. The purchase price was allocated, based on the Corporation’s estimates, which included valuations and appraisals, as follows:

 

Accounts receivable

   $ 238,321  

Inventory

     137,562  

Customer backlog

     3,790  

Other current assets

     13,350  

Property, plant and equipment—net

     388,266  

Long-term and other assets

     38,583  

Capitalized software

     45,400  

Amortizable intangible assets

     60,454  

Intangible assets with indefinite lives

     89,200  

Goodwill

     698,515  

Accounts payable and accrued liabilities

     (184,479 )

Short-term and long-term debt

     (16,189 )

Postretirement and pension benefits

     (50,915 )

Deferred taxes—net

     (122,929 )

Other long-term liabilities

     (19,031 )
    


Total purchase price—net of cash acquired

   $ 1,319,898  
    


 

PRO FORMA RESULTS (unaudited)

 

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 2003 include the results of Wallace from the acquisition date. The pro forma results for 2003 combine the results of the Corporation for 2003 and the historical results of Wallace from January 1, 2003 through May 15, 2003. Due to the different historical fiscal period-ends for Moore and Wallace, the pro forma results for 2002 combine the historical results of Moore for 2002 and the historical results of Wallace for the twelve months ended October 31, 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 periods presented and should not be taken as indicative of the Corporation’s future consolidated results of operations or financial condition. Pro forma adjustments are tax effected at the Corporation’s statutory tax rate.

 

 

     2003

   2002

Net sales

   $ 3,413,804    $ 3,560,165

Net earnings

     130,200      52,318

Net earnings per share:

             

Basic

   $ 0.83    $ 0.34

Diluted

   $ 0.82    $ 0.33

 

11


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

3. ACQUISITIONS AND PENDING COMBINATION (continued)

 

The unaudited pro forma financial information in both 2003 and 2002 includes $8,752 for the amortization of purchased intangibles. The unaudited pro forma financial information also includes the following non-recurring charges: acquisition related charges of $67,896 for 2003 and 2002; and net restructuring charges of $6,408 and $40,518 for 2003 and 2002, respectively.

 

OTHER ACQUISITIONS

 

On December 31, 2003, the Corporation acquired all of the outstanding shares of Payment Processing Solutions, Inc. (“PPS”), a processor of printed statements, in exchange for total consideration of $82,611, net of cash acquired of $9,338. Consideration was comprised of a cash payment of $5,331 and the issuance of 1,580,213 shares of the Corporation with a fair value of $27,195. The fair value of the Corporation’s common shares was based upon the actual number of shares issued to the PPS 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 acquisition agreement on November 26, 2003. The total purchase price also included $25,625 for the settlement of PPS debt and other liabilities, and direct acquisition costs to date of $583. In addition, at December 31, 2003, the Corporation has recorded a current liability to PPS shareholders for consideration outstanding of $33,215. Under the terms of the PPS acquisition agreement, the majority shareholder of PPS had a right to defer receipt of a portion of the cash consideration owed to them in connection with the sale and request that the Corporation seek the approval of the Corporation’s shareholders to allow settlement in common shares instead of cash. The shareholder vote occurred on February 23, 2004 and the settlement of the liability in common shares instead of cash was approved. On February 25, 2004, the Corporation issued 2,233,989 common shares to the PPS shareholders. 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 the acquisition. The allocation of the purchase price to the assets acquired and liabilities assumed at their fair values at the date of acquisition, based on preliminary valuations and appraisals, was as follows:

 

Working capital, other than cash

   $ 6,378  

Property, plant and equipment

     12,332  

Other assets

     969  

Amortizable intangible assets

     31,542  

Intangible asset with indefinite life

     6,400  

Goodwill

     44,447  

Other liabilities

     (1,364 )

Deferred taxes—net

     (18,093 )
    


Purchase price-net of cash acquired

   $ 82,611  
    


 

The majority shareholder of PPS was Greenwich Street Capital Partners (“GSC Partners”). Alfred C. Eckert III, the chairman and chief executive officer of GSC Partners, is also the chairman of the Corporation’s Board of Directors. Mr. Eckert also holds the following positions with the Greenwich Street Funds: (i) a managing member of Greenwich Street Investments II, L.L.C., which is the general partner of the Greenwich Street Funds, (ii) a senior limited partner of GSCP (NJ), L.P. and (iii) an executive officer of GSCP (NJ), Inc., which is the general partner of GSCP (N.J.), L.P. Due to Mr. Eckert’s affiliation with the Greenwich Street Funds, Mr. Eckert rescued himself from all proceedings of the Corporation’s Board of Directors in connection with the PPS transaction. The Corporation’s Board of Directors formed a special committee of independent directors, who retained independent legal and financial advisors, to evaluate the PPS transaction.

 

On December 31, 2001, and January 31, 2002, the Corporation acquired certain assets relating to the Document Management Services business of IBM Canada Limited and The Nielsen Company, a commercial printer, for total consideration of $14,592 and $57,202, respectively, net of cash acquired. The allocations of the purchase prices to the assets acquired and liabilities assumed based on fair values at the dates of acquisition were as follows:

 

Working capital, other than cash

   $ 10,933  

Property, plant and equipment

     9,475  

Other liabilities

     (15,020 )

Goodwill and other intangibles

     66,406  
    


Purchase price—net of cash received

   $ 71,794  
    


 

12


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

3. ACQUISITIONS AND PENDING COMBINATION (continued)

 

In May 2002, the Corporation purchased the remaining minority interest in its consolidated subsidiary, Quality Color Press, Inc., for total consideration of $6,680. The cost of this acquisition exceeded the fair value of the net assets acquired by $5,437, which was allocated to goodwill and other intangible assets. Management has reclassified this business from the Commercial segment to the Forms and Labels segment in order to reflect the business synergies and integration plans. During August 2002, the Corporation purchased the remaining minority interest of its consolidated subsidiaries located in Central America for consideration of $2,750. The carrying value of the minority interests approximated the purchase price.

 

Pro forma disclosures for the aforementioned acquisitions have been excluded because they are not material to the Corporation’s consolidated financial position or results of operations.

 

PENDING COMBINATION

 

In November 2003, the Corporation entered into a combination agreement with R.R. Donnelley & Sons Company (“RR Donnelley”), a leading provider of printing and publishing services, under which each common share of the Corporation will be exchanged for 0.63 of a share of common stock of RR Donnelley (the “Combination”). The purchase price is approximately $3.6 billion based on approximately 158 million of the Corporation’s shares outstanding, which includes the assumption of the Corporation’s debt of approximately $0.9 billion. The estimated purchase price was derived using the average of the RR Donnelley closing share price on the NYSE during the five-day trading period beginning two trading days before the date of the announcement of the transaction on November 9, 2003. The transaction is expected to close on February 27, 2004. Under certain terms specified in the Combination Agreement, the Corporation or RR Donnelley may terminate the agreement and, as a result, either party may be required to pay a termination fee of up to $85.0 million to the other party. Upon consummation, the Corporation’s outstanding common shares will cease to trade. Unless otherwise indicated, the consolidated financial statements and related notes pertain to the Corporation as a stand-alone entity and do not reflect the impact of the pending business combination transaction with RR Donnelley.

 

4. INVENTORIES

 

     2003

   2002

Raw materials

   $ 67,226    $ 31,883

Work-in-process

     41,885      10,303

Finished goods

     134,077      84,190

Other

     3,252      3,513
    

  

     $ 246,440    $ 129,889
    

  

 

The current cost of these inventories exceeds the last-in, first-out cost by approximately $15,459 at December 31, 2003 (2002—$16,239).

 

5. PROPERTY, PLANT AND EQUIPMENT

 

     2003

   2002

Land

   $ 30,328    $ 9,952

Building

     234,048      155,454

Machinery and equipment

     1,081,711      800,448
    

  

       1,346,087      965,854

Less: Accumulated depreciation

     762,534      710,132
    

  

     $ 583,553    $ 255,722
    

  

 

Depreciation expense for 2003 was $86,124 (2002—$64,832; 2001—$108,436). In 2003 and 2001, the Corporation recognized asset impairment charges of $1,632 and $28,549, respectively, which were included in depreciation and amortization. No impairment charges were recorded in 2002.

 

13


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

6. INVESTMENTS

 

     2003

   2002

Long-term bonds

   $ 31,761    $ 30,556

Cost basis

     —        1,700
    

  

     $ 31,761    $ 32,256
    

  

 

In the fourth quarter of 2002, the Corporation recorded a $2,500 impairment charge against its cost basis investment for a permanent decline in market value. In 2003, the Corporation sold this investment for proceeds, which approximated the carrying value.

 

The fair market value of the long-term bonds at December 31, 2003 is approximately $31,600 (2002—$28,200).

 

7. GOODWILL AND OTHER INTANGIBLES

 

The changes in the carrying value of goodwill by operating segment for the year ended December 31, 2003 are as follows:

 

GOODWILL


   BALANCE AT
JANUARY 1,
2003


   ADDITIONS

   FOREIGN
EXCHANGE


  

BALANCE AT

DECEMBER 31,

2003


Forms and Labels

   $ 45,550    $ 268,465    $ 1,364    $ 315,379

Outsourcing

     11,846      44,447      2,556      58,849

Commercial

     48,858      430,050      —        478,908
    

  

  

  

     $ 106,254    $ 742,962    $ 3,920    $ 853,136
    

  

  

  

 

The changes in the carrying value of goodwill by operating segment for the year ended December 31, 2002 are as follows:

 

GOODWILL


   BALANCE AT
JANUARY 1,
2002


   ADDITIONS

   FOREIGN
EXCHANGE


    BALANCE AT
DECEMBER 31,
2002


Forms and Labels

   $ 41,857    $ 3,773    $ (80 )   $ 45,550

Outsourcing

     —        11,866      (20 )     11,846

Commercial

     —        48,858      —         48,858
    

  

  


 

     $ 41,857    $ 64,497    $ (100 )   $ 106,254
    

  

  


 

 

Other intangibles at December 31, 2003 consist of the following:

 

OTHER INTANGIBLES


  

GROSS
CARRYING
AMOUNT
JANUARY 1,

2003


   ADDITIONS

  

ACCUMULATED

AMORTIZATION and

FOREIGN EXCHANGE


   

BALANCE AT

DECEMBER 31,

2003


  

AMORTIZABLE

LIFE


Trademarks, license and agreements

   $ 3,390    $ 22,896    $ (4,299 )   $ 21,987    2-10 Years

Customer intangibles

     2,729      69,100      (3,652 )     68,177    2-12 Years

Indefinite-lived Trademarks

     1,664      95,600      365       97,629    Indefinite
    

  

  


 

    
     $ 7,783    $ 187,596    $ (7,586 )   $ 187,793     
    

  

  


 

  

 

14


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

7. GOODWILL AND OTHER INTANGIBLES (continued)

 

Other intangibles at December 31, 2002 consisted of the following:

 

OTHER INTANGIBLES


  

GROSS
CARRYING
AMOUNT
JANUARY 1,

2002


   ADDITIONS

  

ACCUMULATED

AMORTIZATION and

FOREIGN EXCHANGE


   

BALANCE AT

DECEMBER 31,

2002


  

AMORTIZABLE

LIFE


Trademarks, license and agreements

   $ 437    $ 2,953    $ (463 )   $ 2,927    4-10 Years

Customer intangibles

     —        2,729      (886 )     1,843    3 Years

Indefinite-lived

     —        1,664      —         1,664    Indefinite
    

  

  


 

    

Trademarks

   $ 437    $ 7,346    $ (1,349 )   $ 6,434     
    

  

  


 

  

 

The total intangible asset amortization expense for the year ended December 31, 2003, was $6,993 (2002 — $1,349), included in the depreciation and amortization expense. Intangible asset amortization expense for the next five years is estimated to be:

 

2004

   $ 13,487

2005

   $ 10,526

2006

   $ 7,627

2007

   $ 7,615

2008

   $ 7,615

 

The table below provides a reconciliation of the reported net loss for 2001 to the pro forma net loss, which excludes previously recorded goodwill amortization on goodwill outstanding at December 31, 2001:

 

     2001 PER SHARE

 
     NET LOSS

    BASIC

    DILUTED

 

Net loss available to common shareholders (as reported)

   $ (373,383 )   $ (4.21 )   $ (4.21 )

Add back: Goodwill amortization—net of tax

     2,265       0.03       0.03  
    


 


 


Pro forma net loss

   $ (371,118 )   $ (4.18 )   $ (4.18 )
    


 


 


 

In 2001, the Corporation recorded charges of $76,808, included in depreciation and amortization, for permanent impairment of goodwill related to dispositions and assets held for disposition (see Note 16). The impairment resulted from a significant sales decline, customer turnover and the decision to classify certain assets as held for sale.

 

15


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

8. OTHER ASSETS

 

     2003

   2002

Computer software—net of accumulated amortization

   $ 106,603    $ 89,208

Cash surrender value of life insurance for deferred compensation plan

     16,273      —  

Assets held in trust for deferred compensation plan

     12,899      —  

Deposit and other receivables

     1,555      3,218

Deferred debt issue costs

     30,692      7,955

Other

     3,079      3,123
    

  

     $ 171,101    $ 103,504
    

  

 

Amortization expense related to computer software was $32,629 in 2003 ($20,553 – 2002; $22,936 – 2001).

 

In 2001, the Corporation recorded a charge of $26,036 included in depreciation and amortization for the write-off of certain computer software costs, primarily related to a component of its ERP system, which would not be deployed.

 

In 2003, the Corporation recorded a charge of $5,537, included in depreciation and amortization for the disposal of redundant enterprise software systems as a result of the Acquisition.

 

Pursuant to the Acquisition, the Corporation funded Wallace’s historical deferred compensation plan liability with the cash surrender value of existing Wallace life insurance contracts and a cash payment into the deferred compensation plan trust.

 

9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

     2003

   2002

Trade accounts payable

   $ 186,511    $ 117,770

Deferred revenue

     28,179      26,718

Other payables

     80,708      40,986
    

  

       295,398      185,474

Payroll costs

     93,019      85,439

Employee benefit costs

     44,570      27,787

Restructuring liabilities (Note 17)

     67,122      81,440

Other

     168,089      106,367
    

  

     $ 668,198    $ 486,507
    

  

 

 

16


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

10. DEBT

 

     2003

   2002

Senior Unsecured Notes, maturing January 15, 2011

   $ 400,460    $ —  

B Term Loan, maturing March 14, 2010

     497,500      —  

Term Loan B Facility

     —        179,500

Other, including capital leases

     8,740      10,098
    

  

Total Debt

     906,700      189,598

Less current portion

     7,662      2,135
    

  

Long-term debt

   $ 899,038    $ 187,463
    

  

 

At December 31, 2003, the maturities of the Corporation’s debt are as follows:

 

2004

   $ 7,662

2005

     7,408

2006

     6,192

2007

     5,510

2008

     5,486

Thereafter

     874,442
    

     $ 906,700
    

 

In March 2003, the Corporation entered into an $850.0 million senior secured credit facility (the “New Facility”) in connection with the Acquisition, which replaced the Term Loan B Facility (the “Old Facility”). The New Facility consists of a seven-year $500.0 million B Term Loan, which was funded in escrow until the Acquisition, and a five-year $350.0 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. At December 31, 2003 the interest rate on the New Facility was 3.19%, which is based on three-month LIBOR plus a 200 basis point margin.

 

Also, in March 2003, the Corporation issued $403.0 million of 7 7/8 % senior unsecured notes (the “Senior Notes”) due 2011 at a $2,825 discount to the principal amount. Interest on the Senior Notes is payable semiannually on January 15 and July 15 commencing on July 15, 2003. 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. At December 31, 2003, the fair market value of the Senior Notes was approximately $450.0 million.

 

A covenant in the Corporation’s New Facility states that the Corporation may not agree to enter into any merger transaction, subject to certain exceptions. These exceptions do not cover agreeing to enter into the Combination with RR Donnelley announced November 9, 2003. The Corporation has advised the lenders under its New Facility of this situation and the lenders have granted a waiver of the covenant. The execution of the Combination Agreement did not breach any of the Senior Notes covenants. Other than the merger covenant under the New Facility, at December 31, 2003 the Corporation was in compliance with all covenants under the New Facility and the indenture for the Senior Notes.

 

 

17


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

10. DEBT (continued)

 

In August 2002, the Corporation entered into the Old Facility which was comprised of a five-year $125.0 million Revolving Credit Facility, a five-year $75.0 million Delayed Draw Term Loan A Facility and a six-year $200.0 million Term Loan B Facility. On September 4, 2002, with proceeds from the Term Loan B Facility, the Corporation redeemed $100.0 million of senior guaranteed notes and incurred a net prepayment charge of $16.7 million.

 

As a result of replacing the Old Facility, the Corporation recorded a net charge in 2003, which is included in Investment and Other Income (Expense), of $3.9 million for the fair value on $150.0 million notional amount fixed rate interest rate swaps that were designated as cash flow hedges of the variable interest on the Old Facility. At December 31, 2003, Other Liabilities includes an amount equal to and resulting from this net charge that will be ratably reduced and recorded as income over the remaining term of the swaps.

 

For 2003, interest expense includes the following acquisition related items: pre-acquisition interest expense of $10.7 million; interest income of $1.3 million on the aforementioned debt proceeds held in escrow; and $4.0 million of bridge financing fees.

 

Debt settlement expense in both 2003 and 2001 represents the write-off of the respective deferred debt issue costs resulting from the extinguishment of the Old Facility in 2003 and the conversion of the convertible subordinated debentures in 2001. Debt settlement expense in 2002 represents the redemption premium paid to early extinguish senior guaranteed notes and the related debt issue costs.

 

At December 31, 2003, the Corporation had $400.0 million notional amount outstanding in swap agreements that exchange variable interest rates (LIBOR) for fixed interest rates over the terms of the agreements. The Corporation has designated these swaps as cash flow hedges of the interest rate risk attributable to forecasted variable interest payments. At December 31, 2003, the Corporation also had $250.0 million notional amount interest rate swaps that exchange the fixed rate interest on the Senior Notes to floating rate six-month LIBOR plus a basis point spread. The swaps are designated as a fair value hedge against $250.0 million of principal on the Senior Notes and mature January 2011.

 

The details of the Corporation’s interest rate swaps at December 31, 2003 are as follows:

 

               Weighted average

    Notional
Amount


   Market Value
Asset (Liability)


    Remaining
Term (yrs)


  

Interest
Pay Rate


  

Interest
Receive Rate


Fixed Rate Swaps

  $ 400,000    $ (2,979 )   1.7    2.29%    Three-month LIBOR

Floating Rate Swaps

  $ 250,000    $ (14,250 )   7.0    Six-month LIBOR +4.19%    7.875%

 

 

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 net book value of assets subject to liens in 2003, other than under the New Facility, which has the benefit of a lien covering virtually all of the Corporation’s assets, is $21,157 (2002 — $26,563, other than under the Old Facility). The liens are primarily mortgages against property, plant and equipment and other current assets.

 

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 $48,699 at December 31, 2003 ($551 outstanding) and may be terminated at any time at the Corporation’s option. The amount available under these facilities at December 31, 2003 was $48,148.

 

The Corporation also had approximately $44,870 in outstanding letters of credit at December 31, 2003, of which $25,190 were issued against the $350.0 million Revolving Credit Facility.

 

 

18


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

10. DEBT (continued)

 

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 (see Note 24). 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 agreed that if at December 31, 2003, the 20 day weighted average trading price of the common shares on the NYSE was less than $10.83 per share, the Corporation must make a payment equal to the lesser of $9.0 million or the value of 6,000,000 of its common shares at such date. As part of the agreement to acquire PPS, GSC waived this right. Certain officers of the Corporation, including the Chairman, the Chief Executive Officer, and the former Chairman, President and Chief Executive Officer, were investors in the Partnership.

 

11. OTHER LIABILITIES

 

     2003

   2002

Unfunded pension obligations

   $ 41,510    $ 28,170

Deferred compensation plan

     35,439      —  

Workers compensation claims payable

     7,243      2,672

Long-term supply agreement

     5,513      10,820

Fair value of derivatives

     3,925      —  

Other

     10,333      2,114
    

  

     $ 103,963    $ 43,776
    

  

 

The deferred compensation plan liability reflects the approximate fair value of the plan obligation assumed pursuant to the Acquisition.

 

During 2000, the Corporation entered into a supply agreement to sell certain paper production assets and simultaneously entered into a long-term supply agreement with the purchaser of the assets. Proceeds received were allocated to the asset sale and supply agreement based on an appraisal. Since the Corporation anticipates making purchases ratably over the term of the supply agreement, the proceeds related to the agreement have been deferred and are being amortized on a straight-line basis over the term of the agreement as a reduction in cost of goods sold. The price terms of the supply agreement were no more favorable than those available from other parties.

 

Included in accounts payable and accrued liabilities at December 31, 2003 is $5,558 (2002—$6,138), representing the current portion of the supply agreement.

 

19


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

12. SHARE CAPITAL

 

The Corporation’s articles of continuance provide that its authorized share capital be divided into an unlimited number of common shares and an unlimited number of preference shares, issuable in one or more series. On February 7, 2002, the Corporation announced a program to repurchase up to $50.0 million of its common shares. No shares were purchased during 2003. The program calls for shares to be purchased on the NYSE from time to time depending upon market conditions, market price of the common shares and the assessment of the cash flow needs by the Corporation’s management.

 

CHANGES IN THE ISSUED COMMON SHARE CAPITAL


   SHARES ISSUED

    AMOUNT

 

Balance, December 31, 2001

   111,803,651     $ 397,761  

Exercise of stock options and other

   723,397       6,195  

Restricted shares issued

   385,000       3,665  

Repurchase of common shares

   (1,069,700 )     (3,821 )
    

 


Balance, December 31, 2002

   111,842,348       403,800  

Shares issued for acquisition of businesses

   46,039,038       498,904  

Exercise of stock options and other

   1,740,025       11,884  

Restricted shares issued—net

   80,000       912  
    

 


Balance, December 31, 2003

   159,701,411     $ 915,500  
    

 


 

The Corporation has a long-term incentive program under which stock options and restricted stock awards may be granted to certain key employees. At December 31, 2003, there were 10,039,700 awards available for grant (2002—583,000; 2001—877,500). Stock options have an exercise price equal to the fair market value at date of grant. Options granted generally vest at 20% or 25% per year from the date of grant. Upon retirement, all options become vested. Options granted prior to 1999 are exercisable for five years after the date of retirement. Options granted after 1998 are exercisable for one year after the date of retirement. The options expire not more than 10 years from the date granted.

 

Restricted shares are approved by the Board of Directors of the Corporation and awarded under the Corporation’s Long-Term Incentive Plans. The restricted shares are subject to repurchase by the Corporation at no cost in the event a holder’s employment is terminated other than as a result of death, retirement or disability. These repurchase rights expire with respect to 25% of the initial restricted share grant each year beginning on the first anniversary of the restricted share award. Upon issuance of the restricted shares, unearned compensation expense equal to the market value is charged to share capital. The unearned compensation of the restricted shares is disclosed as a separate component of shareholders’ equity that will be recognized on a straight-line basis as compensation expense over the vesting period. Compensation expense related to restricted shares was $1,027 in 2003 and $1,093 in 2002.

 

On December 11, 2000, the Board of Directors approved the creation of Series 1 Preference Shares, which were non-voting and entitled the holder to a non-cumulative preferential annual dividend of CDN $0.001 per share and to receive any dividend paid on a common share. In the event of liquidation, dissolution or winding-up of the Corporation, a holder of a Series 1 Preference Share was entitled to receive a preferential amount of CDN $0.001 per share, together with all dividends declared and unpaid thereon. Thereafter, the Series 1 Preference Shares and common shares rank equally with each other on a share-for-share basis. Stock options to acquire 1,580,000 Series 1 Preference Shares were issued on December 11, 2000, and vest at 25% per annum. In April 2002, the shareholders of the Corporation approved the amendment of the options to purchase Series 1 Preference Shares to eliminate the cash-out provision and to make them exercisable for one common share per each Series 1 Preference Share option. The exercise price and the number of Series 1 Preference Share options remained unchanged.

 

20


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

12. SHARE CAPITAL (continued)

 

A summary of the Corporation’s stock option activity for the three years ended December 31, 2003, is presented below:

 

     YEARS ENDED DECEMBER 31,

     2003

   2002

   2001

     SHARES

    WEIGHTED
AVERAGE
EXERCISE
PRICE


   SHARES

    WEIGHTED
AVERAGE
EXERCISE
PRICE


   SHARES

    WEIGHTED
AVERAGE
EXERCISE
PRICE


(EXPRESSED IN CANADIAN CURRENCY)

                                      

Options outstanding at beginning of year

   5,778,918     $ 14.14    7,942,169     $ 13.25    8,089,686     $ 13.96

Options granted

   945,000       14.33    860,000       15.10    1,790,833       13.43

Options exercised

   (1,740,025 )     6.34    (714,069 )     13.24    (4,400 )     7.54

Options forfeited and expired

   (1,036,653 )     18.95    (2,309,182 )     11.70    (1,933,950 )     16.40
    

 

  

 

  

 

Options outstanding at year-end

   3,947,240     $ 16.36    5,778,918     $ 14.14    7,942,169     $ 13.25
    

 

  

 

  

 

Options exercisable at year-end

   2,283,303     $ 18.39    4,068,912     $ 15.00    3,227,715     $ 17.00
    

 

  

 

  

 

 

The following tables summarize information about stock options outstanding at December 31, 2003 (in Canadian currency):

 

     OPTIONS OUTSTANDING

   OPTIONS EXERCISABLE

RANGE OF EXERCISE PRICES


   NUMBER
OUTSTANDING AT
DECEMBER 31,
2003


   WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL
LIFE (YEARS)


   WEIGHTED
AVERAGE
EXERCISE PRICE


   NUMBER
EXERCISABLE AT
DECEMBER 31,
2003


   WEIGHTED
AVERAGE
EXERCISE PRICE


$3.65 to $11.88

   649,425    6.61    $ 6.19    508,425    $ 6.70

$14.12 to $19.15

   2,494,675    7.69      15.61    971,738      17.46

$21.33 to $28.23

   803,140    2.98      26.91    803,140      26.91
    
  
  

  
  

     3,947,240    6.55    $ 16.36    2,283,303    $ 18.39
    
  
  

  
  

 

The weighted average fair value per option granted was $4.48 in 2003 and $4.70 in 2002. The estimated fair values were calculated using the Black-Scholes option pricing model and the following assumptions.

 

     2003

    2002

 

Risk-free interest rates

   3.0 %   3.2 %

Expected lives (in years)

   5     5  

Dividend yield

   —       —    

Volatility

   49 %   49 %

 

21


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

12. SHARE CAPITAL (continued)

 

The Corporation’s 2003 and 2002 net income and earnings per share on a pro forma basis using the fair value method are as follows:

 

     2003

    2002

 

Net earnings, as reported

   $ 114,176     $ 73,258  

Pro forma adjustments, net of taxes

                

Stock compensation recorded

     678       667  

Fair value stock compensation

     (1,650 )     (867 )
    


 


Pro forma net earnings

   $ 113,204     $ 73,058  
    


 


Pro forma earnings per share:

                

Basic

   $ 0.80     $ 0.66  

Diluted

   $ 0.80     $ 0.64  

 

In accordance with the transition rules of CICA Handbook Section 3870, Stock-Based Compensation and Other Stock-Based Payments, the pro forma results include the effect of options granted subsequent to December 31, 2001. This standard does not require pro forma presentation prior to 2002.

 

During 2003 and pursuant to the Share Plan for Non-Employee Directors, the Corporation issued 25,944 (2002—219,069; 2001—14,636) deferred share units as stock-based compensation for members of the Board of Directors. Deferred share units are exercisable for either cash or common shares at the discretion of the holder upon termination of the holder’s service on the Board of Directors. At December 31, 2003, 259,649 deferred share units were outstanding. For 2003, the compensation expense recorded for these deferred share units was $1,089 (2002—$1,994; 2001—$139).

 

13. CUMULATIVE TRANSLATION ADJUSTMENTS

 

     2003

    2002

 

Balance at beginning of year

   $ (133,333 )   $ (128,177 )

Currency translation

     15,672       (5,156 )
    


 


Balance at end of year

   $ (117,661 )   $ (133,333 )
    


 


 

14. RETIREMENT PROGRAMS

 

DEFINED BENEFIT PENSION PLANS

 

During 2000, the Corporation amended the United States pension plan (the “Plan”) to cease all benefit accruals and announced its intention to terminate and wind-up the Plan. In April 2001, the Plan was further amended to terminate effective June 2001. Upon termination, the Corporation sought a determination letter from the Internal Revenue Service (“IRS”) as to the Plan’s tax qualification status. The terms of the April 2001 Plan amendment made the receipt of the IRS determination letter a prerequisite to the wind-up of the Plan and the distribution of the Plan assets. The IRS has imposed a moratorium on issuing such determination letters. Due to the uncertainty regarding the receipt of the determination letter and the effect such uncertainty has on the Corporation’s ability to effectively manage the Plan’s assets, on October 15, 2003, the Board of Directors of the Corporation resolved to take the steps necessary to revoke the amendment terminating the Plan. The Plan, as restored, remains frozen and will continue with no further benefit accruals.

 

During 2001, the Corporation purchased approximately $600.0 million in annuities to partially settle the Plan and recorded a settlement loss of $109.1 million. Pension expense on the unsettled portion of the Plan for 2003, 2002 and 2001 was calculated using a discount rate and expected return on plan assets, which were based upon estimated market rates to settle the remaining portion of the plan. The assumptions for the discount rate and expected return on Plan assets established at November 30, 2003 (the most recent measurement date) reflect the Corporation’s decision to not settle the remainder of the Plan’s obligations and, accordingly, the allocation of the Plan assets at December 31, 2003, which was 66% equity investments and 34% debt investments, reflect a long-term investment strategy.

 

22


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

14. RETIREMENT PROGRAMS (continued)

 

The target asset allocation ranges for both the U.S. and Canadian pension plans is 60% to 70% equity securities and 30% to 40% debt securities. The plan asset allocations may deviate from the target allocations based upon market conditions. The expected long-term return on assets is based from these allocations and the projected rates of return of the respective asset type over approximately a ten-year period. The Corporation uses input from both its actuaries and investment managers in establishing its expected rate of return. The expected returns incorporate long-term historical returns, probability analysis and anticipated future returns under projected economic conditions.

 

During 2001, the Corporation purchased annuities to settle substantially all of the obligation under the United Kingdom pension plan. This settlement reduced the projected benefit obligation and fair value of plan assets by $99,144.

 

In some subsidiaries, where either state or funded retirement plans exist, there are certain small supplementary unfunded plans. Pensionable service prior to establishing funded contributory retirement plans in other subsidiaries, covered by former discretionary non-contributory retirement plans, was assumed as a prior service obligation. In addition, the Corporation has supplemental retirement programs for certain senior executives. These unfunded pension obligations are included in other liabilities and include the unfunded portion of this prior service obligation and the supplementary unfunded plans. All of the retirement plans are non-contributory. Retirement benefits are generally based on years of service and employees’ compensation during the last years of employment.

 

Plan assets and obligations are measured as of November 30 for all years presented. The components of net pension expense are as follows:

 

     UNITED STATES

    CANADA

    INTERNATIONAL

 
     2003

    2002

    2001

    2003

    2002

    2001

    2003

    2002

    2001

 

NET PENSION EXPENSE

                                                                        

Service cost

   $ 36     $ 28     $ 20     $ 2,879     $ 2,871     $ 3,169     $ —       $ —       $ 76  

Interest cost

     14,518       14,962       23,107       6,296       5,232       5,523       388       358       4,382  

Expected return on assets

     (22,542 )     (22,020 )     (37,863 )     (8,171 )     (7,188 )     (7,497 )     (1,286 )     (1,204 )     (5,931 )

Settlement loss

             —         109,115       —         —         —         —         —         —    

Curtailment gain

     —         —         2,154       —         —         —         —         —            

Amortization of net loss (gain)

     3,665       2,560       —         801       429       172       384       335       (209 )
    


 


 


 


 


 


 


 


 


Net pension expense (benefit)

   $ (4,323 )   $ (4,470 )   $ 96,533     $ 1,805     $ 1,344     $ 1,367     $ (514 )   $ (511 )   $ (1,682 )
    


 


 


 


 


 


 


 


 


 

23


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

14. RETIREMENT PROGRAMS (continued)

 

The following provides a reconciliation of the benefit obligation, plan assets and the funded status of the pension plans as of December 31, 2003 and 2002:

 

     UNITED STATES

    CANADA

    INTERNATIONAL

 
     2003

    2002

    2003

    2002

    2003

    2002

 

FUNDED STATUS

                                                

Projected benefit obligation, beginning of year

   $ 247,262     $ 227,730     $ 83,111     $ 82,347     $ 7,646     $ 6,576  

Service cost

     36       28       2,879       2,871       —         —    

Interest cost

     14,518       14,962       6,296       5,232       388       358  

Actuarial loss (gain)

     4,500       15,668       9,533       (2,764 )     183       86  

Foreign currency adjustments

     —         —         18,653       677       881       710  

Benefits paid

     (8,748 )     (11,126 )     (6,974 )     (5,252 )     (8 )     (84 )
    


 


 


 


 


 


Projected benefit obligation, end of year

   $ 257,568     $ 247,262     $ 113,498     $ 83,111     $ 9,090     $ 7,646  
    


 


 


 


 


 


Fair value of plan assets, beginning of year

   $ 382,612     $ 401,882     $ 78,418     $ 85,283     $ 25,303     $ 22,048  

Actual return on assets

     2,336       (8,144 )     9,146       (2,363 )     335       962  

Foreign currency adjustments

     —         —         17,460       750       2,776       2,377  

Benefits paid

     (8,748 )     (11,126 )     (6,974 )     (5,252 )     (8 )     (84 )
    


 


 


 


 


 


Fair value of plan assets, end of year

   $ 376,200     $ 382,612     $ 98,050     $ 78,418     $ 28,406     $ 25,303  
    


 


 


 


 


 


Excess (shortfall) of plan assets over projected benefit obligation

   $ 118,632     $ 135,350     $ (15,448 )   $ (4,693 )   $ 19,316     $ 17,657  

Unrecognized net loss

     71,798       50,756       31,171       19,056       4,580       3,394  
    


 


 


 


 


 


Prepaid pension cost

   $ 190,430     $ 186,106     $ 15,723     $ 14,363     $ 23,896     $ 21,051  
    


 


 


 


 


 


Assumptions:

                                                

Discount rates

     6.0 %     6.0 %     6.2 %     6.5 %     5.0 %     5.0 %

Expected return on plan assets

     7.2 %     6.0 %     8.0 %     8.0 %     5.0 %     5.0 %

Rate of compensation increase

     —         —         4.0 %     4.0 %     —         —    

Allocation Percentage of Plan Assets Security Type:

                                                

Equity

     0 %     0 %     60 %     62 %     0 %     0 %

Debt

     0 %     0 %     39 %     38 %     12 %     12 %

Short-term investments

     100 %     100 %     1 %     0 %     88 %     88 %

 

The Corporation does not expect to be required to make contributions to any of the defined benefit plans during 2004.

 

DEFINED CONTRIBUTION SAVINGS PLANS

 

Defined contribution savings plans are maintained in Canada, the United States and the United Kingdom. Only the savings plan in the United Kingdom requires Corporation contributions for all employees who are eligible to participate in the retirement plans. These annual contributions consist of a retirement savings benefit contributions ranging from 1% to 3% of annual eligible compensation depending upon age. For all savings plans, if an employee contribution is made, a portion of such contribution may be eligible for a contribution match by the Corporation. For 2003, the defined contribution savings plan expense was $9,839 (2002—$8,745; 2001—$6,913).

 

24


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

15. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS

 

The Corporation provides postretirement health care and life insurance benefits to certain grandfathered United States employees and to all eligible Canadian employees. The postretirement benefit obligation is measured as of November 30 for all years presented.

 

On January 12, 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (FSP 106-1). FSP 106-1 permits employers that sponsor postretirement benefit plans (plan sponsors) that provide prescription drug benefits to retirees to make a one-time election to defer the accounting impact, if any, of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the “Act”), which was enacted into law on December 8, 2003. The Corporation has elected to defer recognition of the provisions of the Act as permitted by FSP 106-1 due to uncertainties regarding some of the new Medicare provisions and a lack of authoritative accounting guidance regarding certain matters.

 

The components of net postretirement benefit cost are as follows:

 

     2003

    2002

    2001

 

NET POSTRETIREMENT BENEFIT COST

                        

Service cost

   $ 1,475     $ 2,087     $ 1,638  

Interest cost

     17,046       17,373       13,939  

Amortization of net loss

     1,908       1,846       51  

Amortization of prior service credit

     (6,282 )     (6,282 )     (6,282 )
    


 


 


Net postretirement benefit cost

   $ 14,147     $ 15,024     $ 9,346  
    


 


 


 

25


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

15. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS (continued)

 

The following provides a reconciliation of the benefit obligation and the accrued postretirement benefit cost at December 31, 2003 and 2002:

 

     2003

    2002

 

ACCRUED POSTRETIREMENT BENEFIT COST

                

Projected postretirement benefit obligation, beginning of year

   $ 257,238     $ 247,464  

Service cost

     1,475       2,087  

Interest cost

     17,046       17,373  

Actuarial loss

     23,854       3,169  

Acquisitions

     16,309       —    

Amendments

     8,615       —    

Foreign currency adjustment

     2,585       127  

Benefits paid

     (13,091 )     (12,982 )
    


 


Projected postretirement benefit obligation, end of year

     314,031       257,238  

Contributions paid in December

     (1,118 )     (1,012 )

Unrecognized net (loss)

     (71,522 )     (49,913 )

Unrecognized prior service credit

     20,134       35,031  
    


 


Accrued postretirement benefit cost

   $ 261,525     $ 241,344  
    


 


ASSUMPTIONS

                

Weighted average discount rate

     6.0 %     6.7 %

Weighted average health care cost trend rate:

                

Before age 65

     11.0 %     11.4 %

After age 65

     12.9 %     13.3 %

The healthcare cost trend rate will gradually decline to the ultimate trend rate then remain level thereafter

                

Weighted average ultimate health care cost trend rate

     6.0 %     6.0 %

Year in which ultimate health care cost trend rate will be achieved

                

Canada

     2014       2008  

United States:

                

Before age 65

     2011       2011  

After age 65

     2013       2013  
     2003

    2002

 

The following is the effect of a 1% increase in the assumed health care cost trend rates for each future year on:

                

Accumulated postretirement benefit obligation

   $ 22,697     $ 12,099  

Aggregate of the service and interest cost components of net postretirement benefit cost

     951       910  

The following is the effect of a 1% decrease in the assumed health care cost trend rates for each future year on:

                

Accumulated postretirement benefit obligation

   $ 17,601     $ 10,850  

Aggregate of the service and interest cost components of net postretirement benefit cost

     886       842  

 

26


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

16. BUSINESS DISPOSITIONS AND ASSETS HELD FOR DISPOSITION

 

The Corporation is actively marketing throughout the United States $37,844 of assets classified as held for sale. These assets are primarily land and buildings. The liquidation of these assets is not critical to the Corporation’s ongoing operations. The Corporation’s objective is to dispose of these assets within a reasonable time period, while maximizing the proceeds from the sale of these assets.

 

DISPOSITIONS


 

NATURE OF BUSINESS


 

DISPOSITION DATE


Colleagues Group plc   Provider of direct marketing services in the United Kingdom   March 2001
Phoenix Group, Inc.   Provider of telemarketing customer relationship management in the United States   October 2001

 

In 2001, net sales of $68,251 and losses from operations of $47,465 relating to the divested businesses are included in the Corporation’s Commercial segment results. The Corporation received $28,535 in proceeds on these dispositions and recorded a net loss of $7,540 that is recorded in investment and other income.

 

In the fourth quarter of 2001, the Corporation classified one of its businesses as a non-core business held for disposition, and the carrying value was adjusted to its net recoverable amount. Included in the results of the Commercial segment are net sales of $205,789 (2002—$201,497; 2001—$191,350) and operating income of $10,147 (operating income—$12,947 in 2002; operating loss—$21,491 in 2001) for this business.

 

17. RESTRUCTURING AND RESTRUCTURING RELATED CHARGES

 

During 2003, in connection with the Acquisition, management approved and initiated plans to restructure the operations of both Wallace and Moore 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 recorded approximately $14,638 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 7). The Corporation recorded $17,006 for the year ended December 31, 2003 of similar restructuring costs in connection with exiting of certain Moore activities. These costs have been included as a charge to the results of operations.

 

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 during the allocation period and adjustments to other restructuring liabilities thereafter would be reflected in the results of operations.

 

RESTRUCTURING COSTS CHARGED TO EXPENSE

 

For the years ended December 31, 2003, 2002 and 2001, the Corporation recorded the restructuring provisions as follows:

 

    2003

  2002

  2001

    EMPLOYEE
TERMINATIONS


  OTHER
CHARGES


  TOTAL

  EMPLOYEE
TERMINATIONS


  OTHER
CHARGES


  TOTAL

  EMPLOYEE
TERMINATIONS


  OTHER
CHARGES


  TOTAL

Forms and Labels

  $ 8,036   $ 1,038   $ 9,074   $ 4,395   $  —     $ 4,395   $ 33,597   $ 9,422   $ 43,019

Outsourcing

    590     73     663     —       —       —       4,138     —       4,138

Commercial

    1,481     14     1,495     —       —       —       28,365     7,639     36,004

Corporate

    3,483     2,291     5,774     —       —       —       10,894     48,480     59,374
   

 

 

 

 

 

 

 

 

    $ 13,590   $ 3,416   $ 17,006   $ 4,395   $  —     $ 4,395   $ 76,994   $ 65,541   $ 142,535
   

 

 

 

 

 

 

 

 

 

The 2003 restructuring provision includes $13,590 for workforce reductions (545 employees, substantially all of whom were terminated by December 31, 2003) primarily related to the closure of several plants and the elimination of duplicative corporate administrative functions resulting from the Acquisition, and $3,416 of other charges for lease termination and facility closing costs.

 

27


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

17. RESTRUCTURING AND RESTRUCTURING RELATED CHARGES (continued)

 

The 2002 restructuring provision relates to a workforce reduction of 154 employees primarily for the closure of a plant. Substantially all of the employees were terminated by December 31, 2003.

 

The 2001 restructuring plan was directed at streamlining the Corporation’s processes and significantly reducing its cost structure. The 2001 restructuring provision includes $76,994 for severance and other termination benefits for 3,366 employees (substantially all employees were terminated by December 31, 2002), $52,041 for lease terminations, $9,200 for facility closings, $3,600 for onerous contracts and $700 for other incremental exit costs.

 

During 2003, 2002 and 2001, the Corporation reversed restructuring liabilities of $10,598, $5,245 and $12,856, respectively. The 2003 reversal of the restructuring liability primarily relates to modification to the original restructuring plans due to the Acquisition and favorable settlement of liabilities for obligations and future payments related to the closure of certain facilities. The reversal of the 2002 and 2001 restructuring liabilities is due to the favorable settlement of liabilities for obligations and future payments related to the disposition of the European and Asian forms businesses.

 

RESTRUCTURING COSTS CAPITALIZED AS A COST OF ACQUISITION

 

For the year ended December 31, 2003, the $14,638 of costs that were recorded in connection with restructuring Wallace were recognized as a liability assumed in the purchase business combination and included in the allocation of the cost to acquire Wallace. These costs relate to workforce reductions of 739 employees for the plant closures and elimination of certain duplicative corporate administrative functions. Substantially all employees were terminated by December 31, 2003.

 

The reconciliation of the restructuring liability as of December 31, 2003 and 2002 is as follows:

 

     BALANCE AT
DECEMBER 31,
2002


  

RESTRUCTURING
PROVISION,

NET


    CAPITALIZED
RESTRUCTURING
COSTS


   CASH
PAID


    BALANCE AT
DECEMBER 31,
2003


Employee terminations

   $ 14,319    $ 9,897     $ 12,405    $ (21,962 )   $ 14,659

Other

     67,121      (3,489 )     2,233      (13,402 )     52,463
    

  


 

  


 

     $ 81,440    $ 6,408     $ 14,638    $ (35,364 )   $ 67,122
    

  


 

  


 

 

     BALANCE AT
DECEMBER 31,
2001


  

RESTRUCTURING

PROVISION,

NET


    CASH
PAID


    BALANCE AT
DECEMBER 31,
2002


Employee terminations

   $ 41,955    $ 4,395     $ (32,031 )   $ 14,319

Other

     84,718      (5,245 )     (12,352 )     67,121
    

  


 


 

     $ 126,673    $ (850 )   $ (44,383 )   $ 81,440
    

  


 


 

 

The restructuring liabilities 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 second quarter of 2004.

 

At December 31, 2003, the composition of the restructuring liabilities by plan year is as follows:

 

Restructuring

Plan Years


   2003

   2002

1998

   $ 7,949    $ 13,286

2001

     43,551      63,769

2002

     2,240      4,385

2003

     13,382      —  
    

  

     $ 67,122    $ 81,440
    

  

 

28


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

17. RESTRUCTURING AND RESTRUCTURING RELATED CHARGES (continued)

 

RESTRUCTURING RELATED CHARGES

 

In 2003, the Corporation recorded charges as a result of the Acquisition for asset impairments associated with the disposal of machinery and equipment ($1,632) and the disposal of redundant enterprise software systems ($5,537). These charges are recorded as depreciation and amortization expense.

 

During 2002, the Corporation recorded other charges of $16,746 associated with the redemption of $100.0 million of senior guaranteed notes included in Debt Settlement Expense and an executive separation of $9,202, included in selling, general and administrative expenses.

 

For the year ended December 31, 2001, the Corporation recorded other charges as follows:

 

     Cost of
Sales


   Selling,
General and
Administrative
Expense


   Depreciation
and
Amortization


   Investment
and Other
Expense


   Debt
Settlement
Cost


   Total

Forms and Labels

   $ 861    $ 4,287    $ 21,873    $ —      $ —      $ 27,021

Outsourcing

     —               342      —        —        342

Commercial

     5,685      332      89,551      4,014      —        99,582

Corporate

     61,209      41,212      19,627      928      11,617      134,593
    

  

  

  

  

  

     $ 67,755    $ 45,831    $ 131,393    $ 4,942    $ 11,617    $ 261,538
    

  

  

  

  

  

 

Included in cost of sales and selling, general and administrative expenses is a charge of $11,165 for the write-off of inventory and accounts receivable relating to exiting certain non-core businesses. The Corporation also recorded a net loss of $96,605 (of which $61,209 was included in cost of sales and $35,396 in selling, general and administrative expenses) associated with the partial settlement of the U.S. pension plan, which was curtailed as of December 31, 2000, and other cash charges of $4,816 included in selling, general and administrative expense. A charge of $11,617 related to the partial redemption of the $100.0 million of senior guaranteed notes and the conversion of the subordinated convertible debentures is included in debt settlement cost and $1,000 for legal and other professional fees is in selling, general and administrative expense. Non-cash charges of $131,393 related to the write-down of goodwill of non-core businesses to be disposed of and asset impairments are included in depreciation and amortization. Asset impairments relate to write-offs of property, plant and equipment (see Note 5) and capitalized software (see Note 8). For the write-down of goodwill for non-core businesses to be disposed of, one non-core business was subsequently sold in 2001 and the other non- core business is being held for sale (see Note 16). A loss on disposition of non-core businesses of $4,014 and $928 for the write-down of an investment were charged to investment and other income (see Note 7 and Note 16).

 

18. INCOME TAXES

 

The geographical allocation of earnings (loss) before income taxes and minority interest for the years ended December 31, 2003, 2002 and 2001, are as follows:

 

     2003

    2002

    2001

 

EARNINGS (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST

                        

Canada

   $ (6,528 )   $ (1,182 )   $ (68,232 )

United States

     75,240       32,242       (331,585 )

Other countries

     43,374       46,292       11,397  
    


 


 


     $ 112,086     $ 77,352     $ (388,420 )
    


 


 


 

29


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

18. INCOME TAXES (continued)

 

     2003

    2002

    2001

 
     CURRENT

   DEFERRED

    CURRENT

   DEFERRED

    CURRENT

   DEFERRED

 

INCOME TAX EXPENSE (RECOVERY)

                                             

Canada

   $ 182    $ (2,451 )   $ 66    $ (160 )   $ 469    $ 54  

United States

     3,604      (9,913 )     25,931      (27,879 )     189      (36,826 )

Other countries

     3,841      795       3,585      266       2,933      379  

Withholding taxes

     598      —         663      —         610      —    
    

  


 

  


 

  


     $ 8,225    $ (11,569 )   $ 30,245    $ (27,773 )   $ 4,201    $ (36,393 )
    

  


 

  


 

  


 

The significant components of the deferred income tax expense (recovery) are as follows:

 

     2003

    2002

    2001

 

DEFERRED INCOME TAXES

                        

Depreciation

   $ 1,000     $ (1,940 )   $ (459 )

Pensions

     (1,199 )     1,615       (36,493 )

Unearned revenue

     2,141       2,421       —    

Postretirement benefits

     (411 )     374       —    

Restructuring

     (3,901 )     18,566       —    

Tax benefit of loss carryforward

     (6,704 )     (42,350 )     —    

Other

     (2,495 )     (6,459 )     559  
    


 


 


     $ (11,569 )   $ (27,773 )   $ (36,393 )
    


 


 


 

Temporary differences and tax loss carryforwards, which give rise to deferred income tax assets and liabilities, are as follows:

 

     2003

    2002

 

DEFERRED INCOME TAX ASSETS

                

Postretirement benefits

   $ 101,434     $ 93,647  

Tax benefit of loss carryforwards

     117,696       142,739  

Pensions

     23,373       9,235  

Restructuring

     19,430       20,062  

Other

     77,625       62,162  
    


 


       339,558       327,845  

Valuation allowance

     (78,016 )     (113,917 )
    


 


     $ 261,542     $ 213,928  
    


 


DEFERRED INCOME TAX LIABILITIES

                

Depreciation

   $ 87,639     $ 36,127  

Pensions

     78,812       79,135  

Other

     138,847       25,482  
    


 


     $ 305,298     $ 140,744  
    


 


Net deferred income tax (liability) asset

   $ (43,756 )   $ 73,184  
    


 


 

30


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

18. INCOME TAXES (continued)

 

Distributed as follows:

             

Current deferred income tax asset

   $ 61,656    $ 31,912

Current deferred income tax liability

     660      3,184

Long-term deferred income tax asset

     2,438      53,938

Long-term deferred income tax liability

     107,190      9,482

 

The effective rates of tax for each year compared with the statutory Canadian rates were as follows:

 

     2003

    2002

    2001

 

EFFECTIVE TAX EXPENSE (RECOVERY) RATE

                  

Canada:

                  

Combined federal and provincial statutory rate

   36.4  %   38.4 %   (41.6 )%

Corporate surtax

   1.1     1.1     (1.1 )

Manufacturing and processing rate reduction

   (3.2 )   (4.0 )   5.4  
    

 

 

Expected income tax expense (recovery) rate

   34.3     35.5     (37.3 )

Tax rate differences in other jurisdictions

   (5.0 )   (8.0 )   (2.2 )

Losses for which a benefit (has) has not been provided—net

   (31.4 )   (27.2 )   4.7  

Restructuring costs

   —       (0.4 )   12.2  

Impaired assets

   —       —       6.4  

International divestiture

   —       (0.1 )   5.4  

Amortization and write-downs

   —       1.0     3.0  

Other

   (0.9 )   2.4     (0.5 )
    

 

 

Effective tax expense (recovery) rate

   (3.0 )%   3.2 %   (8.3 )%
    

 

 

 

At December 31, 2003, the Corporation has non-capital tax loss carryforwards totaling approximately $287.0 million. Of this amount, a valuation allowance has been recorded against $157.0 million. Of the $157.0 million, approximately $106.0 million expires between 2004 and 2012 and $51.0 million has no expiration. In addition, the Corporation has recorded a valuation allowance against approximately $50.0 million of temporary differences that are available for utilization in future years. As a result of the Combination the Corporation expects to lose approximately $11.0 million of Canadian non-capital tax loss carryforwards, which have a full valuation allowance, set up against them. At December 31, 2003, the Corporation has Canadian capital loss carryforwards totaling approximately $55.4 million for which a full valuation allowance has been established. As a result of the Combination, the Corporation expects to be able to adjust the tax basis of certain assets by this amount.

 

The valuation allowance at December 31, 2003 and 2002 relates to net operating losses generated in the United States (2002 only), Canada, Latin America and Europe (which have limited carry-forward periods) and future deductible expense. The decrease (increase) in the valuation allowance of approximately $35.9 million, $53.0 million and $(103.0) million for 2003, 2002 and 2001, respectively, primarily relates to amounts recorded against deferred tax assets in the United States.

 

The Corporation has reduced the valuation allowance for a portion of its deferred tax assets to the extent that it believes, based on the weight of available evidence, it is more likely than not that those assets will be realized.

 

31


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

19. EARNINGS PER SHARE

 

     2003

   2002

   2001

 

Net earnings (loss) available to common shareholders

   $ 114,176    $ 73,258    $ (373,383 )

Weighted average number of common shares outstanding (thousands):

                      

Basic

     140,854      111,556      88,648  

Dilutive options and awards (a)

     789      2,219      —    

Contingent shares (b)

     —        247      —    
    

  

  


Diluted

     141,643      114,022      88,648  
    

  

  


Net earnings (loss) per common share:

                      

Basic

   $ 0.81    $ 0.66    $ (4.21 )

Diluted

   $ 0.81    $ 0.64    $ (4.21 )

 

(a) For 2001 the dilutive options are excluded, as their effect would be anti-dilutive.
(b) Dilutive effect of contingent consideration granted in connection with the 2001 conversion of the subordinated convertible debentures (see Note 10).

 

20. SEGMENTED INFORMATION

 

The Corporation operates in the printing industry with three distinct operating segments based on the way management regularly assesses information 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 reported in two operating segments, Forms and Labels and Integrated Graphics. The principal products within the Forms and Labels segment included paper-based forms, electronic data processing and packaging labels and a standard line of office products. The principal products within the Integrated Graphics segment included commercial print and direct mail. After the Acquisition, the Corporation classified the Wallace Forms and Labels operations within the Forms and Labels segment and the Integrated Graphics operations within the Commercial segment. The segment information in the table below includes Wallace from the acquisition date.

 

As a result of acquiring the remaining interest in Quality Color Press, Inc. in May 2002 (see Note 3), management has reclassified this business from the Commercial segment to the Forms and Labels segment in order to reflect the business synergies and integration plans. Certain other minor operations were transferred from the Outsourcing segment to the Forms and Labels segment.

 

FORMS AND LABELS

 

In the Forms and Labels segment, the Corporation derives its revenues from operations in the United States, Canada and Latin America. This segment designs and manufactures business forms, labels and related products, systems and services which include:

 

Custom continuous forms, cut sheets and multipart forms

 

Print services

 

Self mailers

 

Electronic forms and services

 

Integrated form-label application

 

Proprietary label products

 

Pressure sensitive labels

 

Security documents

 

Logistics, warehouse and inventory management

 

32


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

20. SEGMENTED INFORMATION (continued)

 

OUTSOURCING

 

In the Outsourcing segment, the Corporation derives revenues from its Moore Business Communications Services (“BCS”) operations in the United States and Canada by offering outsourcing services for electronic printing, imaging, processing and distribution. BCS also manages custom, high-volume mailing applications. Products include:

 

Bill and service notifications

 

Insurance policies

 

Special notices

 

Telecommunication cards

 

Investment, banking, credit card, tax and year-end financial statements

 

Licenses

 

COMMERCIAL

 

In the Commercial segment, the Corporation derives its revenues from operations in the United States and Europe mainly by producing highly personalized communications and database-driven publications including:

 

Creation and production of personalized mail

 

Database management and segmentation services

 

Direct marketing program development

 

Response analysis services

 

Digital color printing

 

Annual reports

 

Corporate image and product brochures

 

Catalogs

 

Market inserts

 

Promotional materials

 

Other products within the Commercial segment include:

 

Variable-imaged bar codes

 

Printers, applicators and software products and solutions

 

Post processing equipment

 

33


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

20. SEGMENTED INFORMATION (continued)

 

OPERATING SEGMENTS

YEARS ENDED DECEMBER 31,


   FORMS AND
LABELS


    OUTSOURCING

    COMMERCIAL

    CORPORATE

    CONSOLIDATED

 

2003

                                        

Total revenue

   $ 1,554,322     $ 342,318     $ 1,039,575     $ —       $ 2,936,215  

Intersegment revenue

     (19,847 )     (107 )     (43,465 )     —         (63,419 )
    


 


 


 


 


Sale to customers outside the enterprise

     1,534,475       342,211       996,110       —         2,872,796  
    


 


 


 


 


Income (loss) from operations

     161,990       72,209       83,057       (137,356 )     179,900  
    


 


 


 


 


Total assets

     1,293,302       261,116       1,169,650       495,940       3,220,008  

Capital asset depreciation and Amortization

     50,742       13,920       28,017       33,067       125,746  

Capital expenditures

     12,978       25,650       18,565       8,202       65,395  

2002 (RECLASSIFIED)

                                        

Total revenue

   $ 1,135,846     $ 309,766     $ 606,917     $ —       $ 2,052,529  

Intersegment revenue

     (3,636 )     (30 )     (10,824 )     —         (14,490 )
    


 


 


 


 


Sale to customers outside the enterprise

     1,132,210       309,736       596,093       —         2,038,039  
    


 


 


 


 


Income (loss) from operations

     133,968       60,142       50,562       (142,149 )     102,523  
    


 


 


 


 


Total assets

     583,723       112,451       324,533       419,052       1,439,759  

Capital asset depreciation and Amortization

     34,341       14,661       14,966       22,778       86,746  
    


 


 


 


 


Capital expenditures

     4,476       4,359       7,270       15,840       31,945  

2001 (RECLASSIFIED)

                                        

Total revenue

   $ 1,205,414     $ 331,378     $ 636,343     $ —       $ 2,173,135  

Intersegment revenue

     (2,424 )     (420 )     (15,717 )     —         (18,561 )
    


 


 


 


 


Sale to customers outside the enterprise

     1,202,990       330,958       620,626       —         2,154,574  
    


 


 


 


 


Income (loss) from operations

     45,361       47,592       (90,904 )     (344,373 )     (342,324 )
    


 


 


 


 


Total assets

     647,385       115,036       261,486       313,079       1,336,986  

Capital asset depreciation and Amortization

     67,163       19,061       107,814       45,034       239,072  

Capital expenditures

     15,461       15,987       10,376       3,578       45,402  

 

34


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

20. SEGMENTED INFORMATION (continued)

 

GEOGRAPHIC INFORMATION

YEARS ENDED DECEMBER 31,


   CANADA

   UNITED
STATES


   OTHER

   CONSOLIDATED

2003

                           

Sales to customers outside the enterprise

   $ 214,613    $ 2,417,370    $ 240,813    $ 2,872,796

Capital assets, goodwill and intangibles

     58,416      1,617,708      54,961      1,731,085

2002

                           

Sales to customers outside the enterprise

   $ 208,192    $ 1,607,418    $ 222,429    $ 2,038,039

Capital assets, goodwill and intangibles

     51,491      369,544      36,583      457,618

2001

                           

Sales to customers outside the enterprise

   $ 199,628    $ 1,689,954    $ 264,992    $ 2,154,574

Capital assets, goodwill and intangibles

     39,091      356,675      43,931      439,697

 

21. LEASE COMMITMENTS

 

At December 31, 2003, lease commitments require future payments as follows:

 

2004

   $ 47,548

2005

   $ 35,297

2006

   $ 23,370

2007

   $ 17,068

2008

   $ 12,925

2009 and thereafter

   $ 28,141

 

Rent expense amounted to $62,500 in 2003 (2002—$52,137; 2001—$56,499).

 

22. CONTINGENCIES

 

At December 31, 2003, certain lawsuits and other claims were pending against the Corporation. While the outcome of these matters is subject to future resolution, management’s evaluation and analysis of such matters indicates that, individually and in the aggregate, the probable ultimate resolution of such matters will not have a material effect on the Corporation’s consolidated results of operations or consolidated financial condition.

 

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 consolidated results of operations or consolidated financial condition of the Corporation.

 

From time to time, the Corporation enters into contracts that may contain indemnification provisions. Based on current assessments of its contracts, management does not believe that any contain indemnification provisions that would result in a material adverse effect to the Corporation’s consolidated results of operations or cash flows or consolidated financial condition.

 

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 PRPs 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 $26.0 million. The Corporation’s share is not expected to exceed $1.5 million. The Corporation believes that the reserves are sufficient based on the present facts and recent tests performed at this site.

 

As described in Note 3, the Corporation may be required to pay a termination fee of up to $85.0 million if the Corporation terminates its combination agreement with RR Donnelley.

 

35


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

23. CASH FLOW DISCLOSURE

 

For the years ended December 31, 2003 and 2001, the following non-cash transactions are required to be disclosed for both Canadian and U.S. GAAP as follows:

 

     2003

Common shares issued for acquisition of businesses

   $ 498,904
     2001

Subordinated convertible debentures issued

   $ 71,506

Common shares issued for inducement to certain debenture holders

     15,345

 

24. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

 

The continued registration of the common shares of the Corporation with the Securities and Exchange Commission (“SEC”) and listing of the shares on the NYSE require compliance with the integrated disclosure rules of the SEC.

 

The accounting policies in Note 1 and accounting principles generally accepted in Canada are consistent in all material aspects with United States generally accepted accounting principles (U.S. GAAP) with the following exceptions.

 

PENSIONS AND POSTRETIREMENT BENEFITS

 

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 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 cash and cash equivalents. Under U.S. GAAP, net cash provided by (used in) financing activities for 2003, 2002, and 2001 would be $716,338, $(10,962), and $(66,315), respectively. Cash and cash equivalents are the same for both Canadian and U.S. GAAP.

 

INCOME TAXES

 

The liability method of accounting for income taxes is used for both Canadian and U.S. GAAP. However, under U.S. GAAP, temporary differences are tax effected at enacted rates, whereas under Canadian GAAP, temporary differences are tax effected using substantively enacted rates and laws that will be in effect when the differences are expected to reverse (see Note 18). For all periods presented, the tax rates used are the same for both Canadian GAAP and U.S. GAAP.

 

ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES

 

U.S. GAAP requires net unrealized gains (losses) on available-for-sale securities to be reported as a separate component of shareholders’ equity until realized, whereas under Canadian GAAP such investments are carried at cost with no effect on net income or shareholders’ equity. Under both Canadian and U.S. GAAP, impairments deemed to be other than temporary would be charged to earnings.

 

36


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

24. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

(continued)

 

STOCK COMPENSATION

 

The adoption of CICA Handbook Section 3870, Stock-Based Compensation and Other Stock-Based Payments (“CICA 3870”), 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 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 of accounting for stock options. Prior to CICA 3870, recognition of compensation expense was not required for the Corporation’s Series 1 Preference Share options, whereas under U.S. GAAP, the expense is measured at the fair value of the Preference Share options, less the amount the employee is required to pay, and is accrued over the vesting period.

 

In April 2002, the shareholders of the Corporation approved the amendment of the options to purchase Series 1 Preference Shares (the “Preference Shares”) to eliminate the cash-out provision and to make them exercisable for one common share per each Preference Share option. The exercise price and the number of Preference Share options remained unchanged. This amendment effectively made these options common share equivalents for diluted earnings per share computations. The transition rules for CICA Handbook Section 3870 required that these common share equivalents be considered outstanding as of the beginning of the year, whereas for U.S. GAAP purposes, these Preference Share options were not considered common share equivalents until amended. The difference in the weighted average common shares between Canadian and U.S. GAAP relates solely to the amendment of the Preference Share options.

 

Additionally, no compensation expense or pro forma compensation expense is required to be recognized in the current and future periods under Canadian GAAP pursuant to CICA Section 3870, whereas under U.S. GAAP, unearned compensation cost will be recognized over the remaining vesting period (through December 11, 2004) based on the intrinsic value of the option on the date of approval. Pro forma fair value compensation expense will also be recorded under U.S. GAAP for the Preference Shares commencing on the amendment date. Compensation expense for the Preference Shares under U.S. GAAP for 2003, 2002 and 2001, was $602, $11,839 and $2,700, respectively. In accordance with the transition rules for CICA 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, change in fair value of derivatives, minimum pension liability and unrealized gains (losses) on available-for-sale securities. Under Canadian GAAP, there is no standard for reporting comprehensive income.

 

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

For U.S. GAAP purposes the 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 the fair value of the 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 expensing these costs. Prior to October 28, 1998, the Corporation capitalized business process reengineering costs and classified them as computer software. The U.S. GAAP reconciling item for computer software represents the amortization differential of the capitalized amounts. As a result, computer software under Canadian GAAP exceeds the amount capitalized under U.S. GAAP.

 

37


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

24. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

(continued)

 

CONVERTIBLE DEBENTURES

 

Canadian GAAP requires that a portion of the subordinated convertible debentures be classified as equity. The difference between the carrying amount of the debenture and contractual liability is amortized to earnings. U.S. GAAP requires classification of subordinated convertible debentures as a liability.

 

Under U.S. GAAP, when convertible debt is converted to equity securities pursuant to an inducement offer, the debtor is required to recognize in earnings the fair value of all securities and other consideration transferred in excess of the fair value of the securities issuable in accordance with the original conversion terms. Under Canadian GAAP, the fair value of the securities issued is charged to retained earnings. Also under Canadian GAAP, certain other contingent consideration is not recognized until paid.

 

Under U.S. GAAP, when convertible debt is converted to equity securities, unamortized deferred debt issuance costs are charged to share capital. Under Canadian GAAP, these costs are charged to earnings.

 

The components of “Debt conversion costs” included in the U.S. GAAP reconciliation for 2001 are as follows:

 

Inducement shares issued

   $ (15,345 )

Deferred debt issuance costs

     10,396  

Contingent consideration

     (2,000 )
    


Debt conversion costs

   $ (6,949 )
    


 

The value of the inducement shares represents the fair market value of 1,650,000 of the Corporation’s common shares and is based upon the closing price of these shares on the NYSE on December 28, 2001, the date the shares were issued. For Canadian GAAP purposes, the fair value of the inducement shares was charged to equity and additionally shown on the statement of operations as a reduction to the amount available to common shareholders in the calculation of earnings per share. For U.S. GAAP purposes, the fair value of the inducement shares was recognized as an increase to share capital and recognized as a charge to earnings for the period. The deferred debt issuance costs represent the unamortized balance of the deferred issuance costs related to the convertible debentures at conversion. For Canadian GAAP purposes, these costs were recognized in earnings for the period whereas, for U.S. GAAP purposes, these costs were recorded as a component of share capital. The contingent consideration represents the right granted with the inducement shares for the holder to potentially receive additional consideration in the future based on the 20-day weighted average share price of the Corporation’s stock at December 31, 2002 and 2003. No additional consideration was required to be paid at either of these measurement dates. For Canadian GAAP purposes, retained earnings would be charged if and when additional consideration is paid. For U.S. GAAP purposes, the fair value of this contingent consideration is recognized in earnings and recorded at fair market value in subsequent reporting periods. The fair value of the consideration was based upon an independent third party valuation using an option pricing valuation model that includes, but is not limited to, the following factors: the Corporation’s stock price volatility; cost of borrowings; and certain equity valuation multiples.

 

SETTLEMENTS OF PENSION PLANS

 

Under U.S. GAAP, a gain or loss arising upon the settlement of a pension plan is only recognized once responsibility for the pension obligation has been relieved. Under Canadian GAAP, prior to January 1, 2000, an intention to settle or curtail a pension plan that was expected to result in a loss required recognition once the amount was likely and could be reasonably estimated.

 

38


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

24. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

(continued)

 

The following tables provide a reconciliation of net earnings (loss) as reported under Canadian GAAP to net earnings (loss) under U.S. GAAP.

 

     2003

    2002

    2001

 

Net earnings (loss) as reported

   $ 114,176     $ 73,258     $ (358,038 )

U.S. GAAP ADJUSTMENTS:

                        

Pension expense

     4,139       4,199       144,917  

Postretirement benefits

     17,326       17,290       17,275  

Computer software

     6,785       6,764       17,287  

Interest expense

     —         —         258  

Debt conversion costs

     1,169       832       (6,949 )

Stock-based compensation

     (602 )     (11,839 )     (2,700 )

Income taxes

     (11,238 )     (6,726 )     (82,014 )
    


 


 


Net earnings (loss) under U.S. GAAP

   $ 131,755     $ 83,778     $ (269,964 )
    


 


 


Earnings (loss) per share:

                        

Basic

   $ 0.94     $ 0.75     $ (3.05 )

Diluted

   $ 0.93     $ 0.74     $ (3.05 )

Average shares (in thousands):

                        

Basic

     140,677       111,556       88,648  

Diluted

     141,603       113,298       88,648  

 

     2003

    2002

    2001

 
COMPREHENSIVE INCOME (LOSS)                         

Net earnings ( loss) under U.S. GAAP

   $ 131,755     $ 83,778     $ (269,964 )

Other comprehensive income (loss), net of tax:

                        

Currency translation adjustments

     15,672       (5,156 )     (1,817 )

Change in fair value of cash flow derivatives

     3,665       (3,104 )     —    

Minimum pension liability

     (3,290 )     —         —    

Reclassification adjustment for losses included in income

     —         —         (798 )
    


 


 


Total comprehensive income (loss)

   $ 147,802     $ 75,518     $ (272,579 )
    


 


 


 

Gains and (losses) on the disposal of property, plant and equipment were $1,201 in 2003, $8,730 in 2002 and $(792) in 2001. For U.S. GAAP purposes these amounts are recorded in income from operations.

 

Interest expense is net of investment income of $1,812 in 2003, $1,843 in 2002 and $2,895 in 2001.

 

39


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

24. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)

 

BALANCE SHEET ITEMS

 

     AT DECEMBER 31,

 
     2003

    2002

 
     AS REPORTED

    U.S. GAAP

    AS REPORTED

    U.S. GAAP

 

Net pension asset

   $ (188,539 )   $ (123,128 )   $ (193,350 )   $ (129,193 )

Computer software—net

     (106,603 )     (87,852 )     (89,208 )     (63,672 )

Fair value of derivatives-liability

     3,925       17,229       —         5,089  

Postretirement benefits

     261,525       368,932       241,344       366,077  

Deferred income taxes-net

     43,756       (27,821 )     (73,184 )     (156,239 )

Accounts payable and accrued liabilities

     668,198       662,198       486,507       481,676  

Long-term debt

     899,038       884,815       187,463       187,463  

Accumulated other comprehensive income

     (117,661 )     (85,206 )     (133,333 )     (101,253 )

Share capital

     915,500       917,639       403,800       405,337  

Retained earnings (deficit)

     228,777       81,110       114,601       (50,645 )

 

The weighted average fair value per option granted was $4.48 in 2003, $9.26 in 2002 and $3.91 in 2001. The estimated fair values were calculated using the Black-Scholes option pricing model and the following assumptions:

 

     2003

    2002

    2001

 

Risk-free interest rates

   3.0 %   4.1 %   4.5 %

Expected lives (in years)

   5     5     5  

Dividend yield

   —       —       —    

Volatility

   49 %   48 %   46 %

 

The Corporation’s U.S. GAAP net earnings (loss) and earnings per share on a pro forma basis using the fair value method are as follows:

 

     2003

    2002

    2001

 

Net earnings (loss) under U.S. GAAP

   $ 131,755     $ 83,778     $ (269,964 )

Pro forma adjustments, net of tax:

                        

Stock compensation recorded

     1,045       7,889       —    

Fair value stock compensation

     (2,061 )     (11,972 )     (1,949 )
    


 


 


Pro forma net earnings (loss)

   $ 130,739     $ 79,695     $ (271,913 )
    


 


 


Earnings (loss) per share

                        

Basic

   $ 0.93     $ 0.71     $ (3.07 )

Diluted

   $ 0.92     $ 0.70     $ (3.07 )

 

40


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

24. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

(continued)

 

CHANGES IN ACCOUNTING POLICIES

 

In December 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, an amendment of FASB Statements No. 87, 88 and 106, and a revision of FASB Statement No. 132. This standard revises employers’ disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by FASB Statements No. 87, Employers’ Accounting for Pensions, No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. The new rules require additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. The required information should be provided separately for pension plans and for other postretirement benefit plans. The new disclosures are generally effective for 2003 calendar year-end financial statements of public companies, with a delayed effective date for certain disclosures and for foreign plans. See Notes 14 and 15 for the related disclosures as required under this statement. Adoption of this statement had no material impact on the Corporation’s financial position, results of operations or cash flows.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”, which requires certain financial instruments that were previously presented on the consolidated balance sheets as equity to be presented as liabilities. Such instruments include mandatorily redeemable financial instruments and certain options and warrants. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective for the Corporation as of July 1, 2003. Adoption of this standard had no impact on the Corporation’s financial position, results of operations or cash flows.

 

In May 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of 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.

 

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). This statement addresses significant issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force (“EITF”) has set forth in EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The principal difference between SFAS 146 and EITF 94-3 is that SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred versus the EITF 94-3 where a liability was recognized on the date an entity committed to an exit plan. SFAS 146 was adopted January 1, 2003.

 

In January 2003, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” (“SFAS 148”). The Statement provides alternative methods of transitioning to the fair value based method of accounting for stock-based employee compensation. Also, this Statement amends the previous disclosure requirements to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.

 

41


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

24. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

(continued)

 

In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. In general, FIN 45 applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, liability, or equity security of the guaranteed party. Certain guarantee contracts are excluded from both the disclosure and recognition requirements of this interpretation. Other guarantees are subject to the disclosure requirements of FIN 45 but not to the recognition provisions and include, among others, a guarantee accounted for as a derivative instrument under SFAS 133. The disclosure requirements of FIN 45 are effective for the Corporation as of December 31, 2002, and require disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee and the current amount of the liability, if any, for the guarantor’s obligations under the guarantee. The recognition requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002.

 

25. PENDING ACCOUNTING STANDARDS

 

In 2003, the Accounting Standards Board of the CICA issued Accounting Guideline No. 15, Consolidation of Variable Interest Entities (“AcG-15”). This guideline addresses consolidation by business enterprises of certain variable interest entities where there is a controlling financial interest in a variable interest entity or where the variable interest does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties. AcG-15 is effective for both new and pre-existing entities to annual and interim periods beginning on or after November 1, 2004. The Corporation is assessing the impact, if any, of the adoption of ACG-15 on the results of operations and financial condition of the Corporation.

 

In 2002, the Accounting Standards Board of the CICA issued Accounting Guidelines No. 13 that increases the documentation, designation and effectiveness criteria to achieve hedge accounting. The guideline requires the discontinuance of hedge accounting for hedging relationships established that do not meet the conditions at the date it is first applied. It does not change the method of accounting for derivatives in hedging relationships, but requires fair value accounting for derivatives that do not qualify for hedge accounting. The new guideline is applicable for fiscal years commencing July 1, 2003. The Corporation is evaluating the impact this standard might have on its results of operations and financial position.

 

26. SUBSEQUENT EVENTS

 

On February 23, 2004, the shareholders of the Corporation and RR Donnelley voted to approve the Combination. On February 25, 2004, the Ontario Superior Court of Justice issued a final order approving the Combination. The closing of the Combination is expected to occur on February 27, 2004.

 

27. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION

 

Moore North America Finance Inc. (“Finance Inc.”), a wholly owned subsidiary of the Corporation (the “Parent”), is the issuer of the Senior Notes. The Parent and certain of the Corporation’s wholly owned subsidiaries (“Guarantor Subsidiaries”) have guaranteed Finance Inc.’s obligation under the Senior Notes. The Guarantees are joint and several, full, complete and unconditional. Other wholly owned subsidiaries of the Corporation (“Non-guarantor Subsidiaries”) have not guaranteed the obligation under the Senior Notes.

 

The following supplemental condensed consolidating financial data illustrate, in separate columns, the composition of the Parent, Finance Inc., Guarantor Subsidiaries, Non-guarantor Subsidiaries, eliminations and the consolidated total.

 

Investments in subsidiaries are accounted for by the equity method for purposes of the supplemental condensed consolidating financial data. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. The financial data may not necessarily be indicative of the results of operations or financial position had the subsidiaries been operated as independent entities.

 

42


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

27.SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (continued)

 

CONSOLIDATING BALANCE SHEET

AT DECEMBER 31, 2003:

 

    PARENT

    FINANCE
INC.


    GUARANTOR
SUBSIDIARIES


   

NON-

GUARANTOR
SUBSIDIARIES


    ELIMINATIONS

    CONSOLIDATED

 

ASSETS

                                               

Current Assets

                                               

Cash and cash equivalents

  $ 22,052     $ —       $ 110,089     $ 16,563     $ —       $ 148,704  

Accounts receivable—net

    35,547       —         565,804       33,836       —         635,187  

Intercompany receivables

    62,960       16,008       31,426       4,405       (114,799 )     —    

Inventories

    22,855       —         213,536       10,049       —         246,440  

Prepaid expenses

    1,628       —         27,715       1,003       —         30,346  

Deferred income taxes

    —         —         60,999       657       —         61,656  
   


 


 


 


 


 


Total Current Assets

    145,042       16,008       1,009,569       66,513       (114,799 )     1,122,333  
   


 


 


 


 


 


Property, plant and equipment—net

    32,788       —         526,446       24,319       —         583,553  

Assets held for sale

    —         —         37,844       —         —         37,844  

Investments

    —         —         101       31,660       —         31,761  

Investment in subsidiaries

    983,321       —         60,485       230       (1,044,036 )     —    

Prepaid pension cost

    15,723       —         193,723       20,603       —         230,049  

Goodwill

    21,875       —         831,261       —         —         853,136  

Other intangibles—net

    3,240       —         184,553       —         —         187,793  

Intercompany loan receivable

    651       436,078       12,686       1,926       (451,341 )     —    

Deferred income taxes

    691       —         903       844       —         2,438  

Other assets

    592       9,976       160,232       301       —         171,101  
   


 


 


 


 


 


Total Assets

  $ 1,203,923     $ 462,062     $ 3,017,803     $ 146,396     $ (1,610,176 )   $ 3,220,008  
   


 


 


 


 


 


LIABILITIES

                                               

Current Liabilities

                                               

Bank indebtedness

  $ —       $ —       $ 56,675     $ 152     $ —       $ 56,827  

Accounts payable and accrued liabilities

    116,688       15,548       485,201       50,761       —         668,198  

Intercompany payables

    6,773       15,408       87,061       5,557       (114,799 )     —    

Short-term debt

    750       —         6,531       381       —         7,662  

Income taxes

    17,528       (31 )     67,076       1,168       —         85,741  

Deferred income taxes

    —         —         —         660       —         660  
   


 


 


 


 


 


Total Current Liabilities

    141,739       30,925       702,544       58,679       (114,799 )     819,088  
   


 


 


 


 


 


Intercompany loans payable

    10,000       —         438,003       3,338       (451,341 )     —    

Long-term debt

    434       400,460       494,638       3,506       —         899,038  

Postretirement benefits

    13,932       —         247,593       —         —         261,525  

Deferred income taxes

    3,381       —         103,234       575       —         107,190  

Other liabilities

    10,278       —         85,603       8,082       —         103,963  

Minority interest

    —         —         —         5,045       —         5,045  
   


 


 


 


 


 


Total Liabilities

    179,764       431,385       2,071,615       79,225       (566,140 )     2,195,849  
   


 


 


 


 


 


SHAREHOLDERS’ EQUITY

                                               

Share capital

    915,500       60,000       2,104,991       177,193       (2,342,184 )     915,500  

Unearned restricted shares

    (2,457 )     —         —         —         —         (2,457 )

Retained earnings

    228,777       (29,323 )     (1,184,512 )     (64,682 )     1,278,517       228,777  

Cumulative translation adjustments

    (117,661 )     —         25,709       (45,340 )     19,631       (117,661 )
   


 


 


 


 


 


Total Shareholders’ Equity

    1,024,159       30,677       946,188       67,171       (1,044,036 )     1,024,159  
   


 


 


 


 


 


Total Liabilities and Shareholders’ Equity

  $ 1,203,923     $ 462,062     $ 3,017,803     $ 146,396     $ (1,610,176 )   $ 3,220,008  
   


 


 


 


 


 


Shareholders’ Equity as reported

  $ 1,024,159     $ 30,677     $ 946,188     $ 67,171     $ (1,044,036 )   $ 1,024,159  
   


 


 


 


 


 


U.S. GAAP Adjustments:

                                               

Net pension asset

    (5,371 )     —         (60,040 )     —         —         (65,411 )

Computer software—net

    —         —         (18,751 )     —         —         (18,751 )

Fair value of derivatives

    —         —         (13,304 )     —         —         (13,304 )

Postretirement benefits

    (2,362 )     —         (105,045 )     —         —         (107,407 )

Deferred income taxes—net

    2,998       —         70,761       (2,182 )     —         71,577  

Accounts payable and accrued liabilities

    —         —         —         6,000       —         6,000  

Long-term debt

    —         —         14,223       —         —         14,223  

Equity investments

    (108,338 )     —         3,818       —         104,520       —    
   


 


 


 


 


 


      (113,073 )     —         (108,338 )     3,818       104,520       (113,073 )
   


 


 


 


 


 


Shareholders’ Equity under U.S. GAAP

  $ 911,086     $ 30,677     $ 837,850     $ 70,989     $ (939,516 )   $ 911,086  
   


 


 


 


 


 


 

43


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

27. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (continued)

 

CONSOLIDATING BALANCE SHEET

AT DECEMBER 31, 2002:

 

     PARENT

   

FINANCE

INC.


   

GUARANTOR

SUBSIDIARIES


   

NON-

GUARANTOR

SUBSIDIARIES


    ELIMINATIONS

    CONSOLIDATED

 

ASSETS

                                                

Current Assets

                                                

Cash and cash equivalents

   $ 29,127     $ 101     $ 100,338     $ 10,064     $ —       $ 139,630  

Accounts receivable—net

     33,131       —         271,219       37,033       —         341,383  

Intercompany receivables

     —         2,222       60,496       4,571       (67,289 )     —    

Inventories

     21,121       —         99,384       9,384       —         129,889  

Prepaid expenses

     949       —         15,604       764       —         17,317  

Deferred income taxes

     549       —         29,066       2,297       —         31,912  
    


 


 


 


 


 


Total Current Assets

     84,877       2,323       576,107       64,113       (67,289 )     660,131  
    


 


 


 


 


 


Property, plant and equipment—net

     28,503       —         199,457       27,762       —         255,722  

Investments

     —         —         1,784       30,472       —         32,256  

Investment in subsidiaries

     374,237       —         47,917       230       (422,384 )     —    

Prepaid pension cost

     14,363       —         188,605       18,552       —         221,520  

Goodwill

     17,956       —         88,298       —         —         106,254  

Other intangibles—net

     3,354       —         3,080       —         —         6,434  

Intercompany loan receivable

     1,188       5,082       5,223       32,264       (43,757 )     —    

Deferred income taxes

     (202 )     —         54,129       11       —         53,938  

Other assets

     1,756       —         98,456       3,292       —         103,504  
    


 


 


 


 


 


Total Assets

   $ 526,032     $ 7,405     $ 1,263,056     $ 176,696     $ (533,430 )   $ 1,439,759  
    


 


 


 


 


 


LIABILITIES

                                                

Current Liabilities

                                                

Bank indebtedness

   $ 12     $ —       $ 17,673     $ 473     $ —       $ 18,158  

Accounts payable and accrued liabilities

     42,959       1,002       380,567       61,979       —         486,507  

Intercompany payables

     54,939       3,817       —         8,533       (67,289 )     —    

Short-term debt

     401       —         1,414       320       —         2,135  

Income taxes

     14,469       (31 )     43,073       1,051       —         58,562  

Deferred income taxes

     1,219       —         —         1,965       —         3,184  
    


 


 


 


 


 


Total Current Liabilities

     113,999       4,788       442,727       74,321       (67,289 )     568,546  
    


 


 


 


 


 


Intercompany loans payable

     6,479       —         30,976       6,302       (43,757 )     —    

Long-term debt

     1,090       —         183,146       3,227       —         187,463  

Postretirement benefits

     10,869       —         230,475       —         —         241,344  

Deferred income taxes

     3,378       —         5,834       270       —         9,482  

Other liabilities

     7,721       —         32,619       3,436       —         43,776  

Minority interest

     —         —         —         6,652       —         6,652  
    


 


 


 


 


 


Total Liabilities

     143,536       4,788       925,777       94,208       (111,046 )     1,057,263  
    


 


 


 


 


 


SHAREHOLDERS’ EQUITY

                                                

Share capital

     403,800       20,000       1,607,533       204,042       (1,831,575 )     403,800  

Unearned restricted shares

     (2,572 )     —         —         —         —         (2,572 )

Retained earnings

     114,601       (17,383 )     (1,292,916 )     (77,715 )     1,388,014       114,601  

Cumulative translation adjustments

     (133,333 )     —         22,662       (43,839 )     21,177       (133,333 )
    


 


 


 


 


 


Total Shareholders’ Equity

     382,496       2,617       337,279       82,488       (422,384 )     382,496  
    


 


 


 


 


 


Total Liabilities and Shareholders’ Equity

   $ 526,032     $ 7,405       1,263,056     $ 176,696     $ (533,430 )   $ 1,439,759  
    


 


 


 


 


 


Shareholders’ Equity as reported

   $ 382,496     $ 2,617     $ 337,279     $ 82,488     $ (422,384 )   $ 382,496  
    


 


 


 


 


 


U.S. GAAP Adjustments:

                                                

Net pension asset

     (5,536 )     —         (58,621 )     —         —         (64,157 )

Computer software—net

     —         —         (25,536 )     —         —         (25,536 )

Fair value of derivatives

     —         —         (5,089 )     —         —         (5,089 )

Postretirement benefits

     (2,575 )     —         (122,158 )     —         —         (124,733 )

Deferred income taxes—net

     3,590       —         81,647       (2,182 )     —         83,055  

Accounts payable and accrued liabilities

     (1,169 )     —         —         6,000       —         4,831  

Equity investments

     (125,939 )     —         3,818       —         122,121       —    
    


 


 


 


 


 


       (131,629 )     —         (125,939 )     3,818       122,121       (131,629 )
    


 


 


 


 


 


Shareholders’ Equity under U.S. GAAP

   $ 250,867     $ 2,617     $ 211,340     $ 86,306     $ (300,263 )   $ 250,867  
    


 


 


 


 


 


 

44


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

27. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (continued)

 

CONSOLIDATING STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 2003:

 

     PARENT

   

FINANCE

INC.


   

GUARANTOR

SUBSIDIARIES


   

NON-

GUARANTOR

SUBSIDIARIES


    ELIMINATIONS

    CONSOLIDATED

 

Net sales

   $ 217,959     $ —       $ 2,554,075     $ 140,360     $ (39,598 )   $ 2,872,796  
    


 


 


 


 


 


Cost of sales

     159,432       —         1,819,901       95,281       (39,598 )     2,035,016  

Selling, general and administrative expenses

     44,975       —         447,272       33,479       —         525,726  

Restructuring provision—net

     1,115       —         4,982       311       —         6,408  

Depreciation and amortization

     10,479       —         111,427       3,840       —         125,746  
    


 


 


 


 


 


Total operating expenses

     216,001       —         2,383,582       132,911       (39,598 )     2,692,896  
    


 


 


 


 


 


Income from operations

     1,958       —         170,493       7,449       —         179,900  
    


 


 


 


 


 


Equity earnings (loss) of subsidiaries

     118,552       —         (9,055 )     —         (109,497 )     —    

Investment and other income (expense)

     (8,533 )     —         (5,194 )     8,345       —         (5,382 )

Interest expense—net

     (48 )     11,940       43,250       (203 )     —         54,939  

Debt settlement and issue Costs

     —         —         7,493       —         —         7,493  
    


 


 


 


 


 


Earnings (loss) before income taxes and minority interest

     112,025       (11,940 )     105,501       15,997       (109,497 )     112,086  

Income tax expense (recovery)

     (2,151 )     —         (2,903 )     1,710       —         (3,344 )

Minority interest

             —         —         1,254       —         1,254  
    


 


 


 


 


 


Net earnings (loss)

   $ 114,176     $ (11,940 )   $ 108,404     $ 13,033     $ (109,497 )   $ 114,176  
    


 


 


 


 


 


U.S. GAAP Adjustments:

                                                

Pension expense

     165       —         3,974       —         —         4,139  

Postretirement benefits

     213       —         17,113       —         —         17,326  

Computer software

     —         —         6,785       —         —         6,785  

Debt conversion costs

     1,169       —         —         —         —         1,169  

Stock-based compensation

     (602 )     —         —         —         —         (602 )

Income taxes

     (369 )     —         (10,869 )     —         —         (11,238 )

Equity earnings

     17,003       —         —         —         (17,003 )     —    
    


 


 


 


 


 


       17,579       —         17,003       —         (17,003 )     17,579  
    


 


 


 


 


 


Net earnings (loss) under U.S. GAAP

   $ 131,755     $ (11,940 )   $ 125,407     $ 13,033     $ (126,500 )   $ 131,755  
    


 


 


 


 


 


 

45


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

27.SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (continued)

 

CONSOLIDATING STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 2002:

 

    PARENT

    FINANCE INC.

    GUARANTOR
SUBSIDIARIES


   

NON-

GUARANTOR
SUBSIDIARIES


    ELIMINATIONS

    CONSOLIDATED

 

Net sales

  $ 211,949     $ —       $ 1,704,551     $ 131,108     $ (9,569 )   $ 2,038,039  
   


 


 


 


 


 


Cost of sales

    154,921       —         1,164,101       80,554       (9,569 )     1,390,007  

Selling, general and administrative expenses

    45,360       —         382,414       31,839       —         459,613  

Restructuring provision—net

    (2,029 )     —         4,881       (3,702 )     —         (850 )

Depreciation and amortization

    10,082       —         72,409       4,255       —         86,746  
   


 


 


 


 


 


Total operating expenses

    208,334       —         1,623,805       112,946       (9,569 )     1,935,516  
   


 


 


 


 


 


Income from operations

    3,615       —         80,746       18,162       —         102,523  
   


 


 


 


 


 


Equity earnings (loss) of subsidiaries

    48,734       —         (10,951 )     —         (37,783 )     —    

Investment and other income (expense)

    20,570       —         (21,409 )     4,559       —         3,720  

Interest expense—net

    (342 )     (822 )     14,262       (953 )     —         12,145  

Debt settlement and issue costs

    —         16,746       —         —         —         16,746  
   


 


 


 


 


 


Earnings (loss) before income taxes and minority interest

    73,261       (15,924 )     34,124       23,674       (37,783 )     77,352  

Income tax expense

    3       —         800       1,669       —         2,472  

Minority interest

    —         —         —         1,622       —         1,622  
   


 


 


 


 


 


Net earnings (loss)

  $ 73,258     $ (15,924 )   $ 33,324     $ 20,383     $ (37,783 )   $ 73,258  
   


 


 


 


 


 


U.S. GAAP Adjustments:

                                               

Pension expense

    169       —         4,030       —         —         4,199  

Postretirement benefits

    190       —         17,100       —         —         17,290  

Computer software

    —         —         6,764       —         —         6,764  

Debt conversion costs

    832       —         —         —         —         832  

Stock-based compensation

    (11,839 )     —         —         —         —         (11,839 )

Income taxes

    4,153       —         (10,879 )     —         —         (6,726 )

Equity earnings

    17,015       —         —         —         (17,015 )     —    
   


 


 


 


 


 


      10,520       —         17,015       —         (17,015 )     10,520  
   


 


 


 


 


 


Net earnings (loss) under U.S. GAAP

  $ 83,778     $ (15,924 )   $ 50,339     $ 20,383     $ (54,798 )   $ 83,778  
   


 


 


 


 


 


 

46


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2001

 

27.SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (continued)

 

CONSOLIDATING STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 2001:

 

    PARENT

    FINANCE INC.

    GUARANTOR
SUBSIDIARIES


   

NON-

GUARANTOR
SUBSIDIARIES


    ELIMINATIONS

    CONSOLIDATED

 

Net sales

  $ 204,116     $ —       $ 1,768,550     $ 214,908     $ (33,000 )   $ 2,154,574  
   


 


 


 


 


 


Cost of sales

    148,659       —         1,295,470       141,432       (33,000 )     1,552,561  

Selling, general and administrative expenses

    76,247       957       444,031       54,351       —         575,586  

Restructuring provision—net

    10,680       —         107,676       11,323       —         129,679  

Depreciation and amortization

    11,389       —         163,750       63,933       —         239,072  
   


 


 


 


 


 


Total operating expenses

    246,975       957       2,010,927       271,039       (33,000 )     2,496,898  
   


 


 


 


 


 


Loss from operations

    (42,859 )     (957 )     (242,377 )     (56,131 )     —         (342,324 )
   


 


 


 


 


 


Equity earnings (loss) of subsidiaries

    (295,364 )     —         (2,915 )     —         298,279       —    

Investment and other income (expense)

    (2,165 )     —         (8,693 )     137       —         (10,721 )

Interest expense—net

    6,720       (1,591 )     21,498       (2,869 )     —         23,758  

Debt settlement and issue costs

    10,396       1,000       221       —         —         11,617  
   


 


 


 


 


 


Earnings (loss) before income taxes and minority interest

    (357,504 )     (366 )     (275,704 )     (53,125 )     298,279       (388,420 )

Income tax expense (benefit)

    534       —         (34,887 )     2,161       —         (32,192 )

Minority interest

    —         —         —         1,810       —         1,810  
   


 


 


 


 


 


Net loss

  $ (358,038 )   $ (366 )   $ (240,817 )   $ (57,096 )   $ 298,279     $ (358,038 )
   


 


 


 


 


 


U.S. GAAP Adjustments:

                                               

Pension expense

    (239 )     —         173,408       (28,252 )     —         144,917  

Postretirement benefits

    208       —         17,067       —         —         17,275  

Computer software

    —         —         17,287       —         —         17,287  

Interest expense

    258       —         —         —         —         258  

Debt conversion costs

    (6,949 )     —         —         —         —         (6,949 )

Stock-based compensation

    (2,700 )     —         —         —         —         (2,700 )

Income taxes

    3,901       —         (85,915 )     —         —         (82,014 )

Equity earnings

    93,595       —         (28,252 )     —         (65,343 )     —    
   


 


 


 


 


 


      88,074       —         93,595       (28,252 )     (65,343 )     88,074  
   


 


 


 


 


 


Net loss under U.S. GAAP

  $ (269,964 )   $ (366 )   $ (147,222 )   $ (85,348 )   $ 232,936     $ (269,964 )
   


 


 


 


 


 


 

47


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

27. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (continued)

 

CONSOLIDATING STATEMENT OF CASH FLOWS

YEAR ENDED DECEMBER 31, 2003:

 

     PARENT

    FINANCE
INC.


    GUARANTOR
SUBSIDIARIES


   

NON-

GUARANTOR
SUBSIDIARIES


    ELIMINATIONS

    CONSOLIDATED

 

OPERATING ACTIVITIES

                                                

Net earnings (loss)

   $ 114,176     $ (11,940 )   $ 108,404     $ 13,033     $ (109,497 )   $ 114,176  

Adjustments to reconcile net earnings (loss) to cash provided by operating activities:

                                                

Equity (earnings) loss of subsidiaries

     (118,552 )     —         9,055       —         109,497       —    

Depreciation and amortization

     10,479       —         111,427       3,840       —         125,746  

Net (gain) loss on sale of investment and other assets

     (252 )     —         (709 )     311       —         (650 )

Acquisition related charges

                                                

Inventory and backlog

     —         —         38,590       —         —         38,590  

Derivative charges

     —         —         3,925       —         —         3,925  

Debt issue costs

     —         —         7,493       —         —         7,493  

Deferred income taxes

     (1,560 )     —         (22,328 )     (193 )     —         (24,081 )

Restructuring provision—net

     1,115       —         4,982       311       —         6,408  

Other

     1,525       1,092       (2,529 )     5,826       —         5,914  

Changes in operating assets and liabilities:

                                                

Accounts receivable—net

     5,259       —         (28,903 )     5,340       —         (18,304 )

Inventories

     2,661       —         (10,135 )     (361 )     —         (7,835 )

Accounts payable and accrued liabilities

     11,387       14,546       (72,204 )     (367 )     —         (46,638 )

Income taxes

     (763 )     —         16,759       129       —         16,125  

Other

     1,452       —         (9,502 )     (239 )     —         (8,289 )
    


 


 


 


 


 


Net cash provided by operating activities

     26,927       3,698       154,325       27,630       —         212,580  
    


 


 


 


 


 


INVESTING ACTIVITIES

                                                

Property, plant and equipment—net

     (5,675 )     —         (41,880 )     (3,945 )     —         (51,500 )

Long-term receivables and other Investments

     10       —         3,883       (31,659 )     —         (27,766 )

Acquisition of businesses

     —         —         (870,391 )     —         —         (870,391 )

Proceeds from sale of investments And other assets

     1,500       —         —         29,917       —         31,417  

Software expenditures

     —         —         (5,467 )     —         —         (5,467 )

Other

     432       —         3,741       (624 )     —         3,549  
    


 


 


 


 


 


Net cash used by investing activities

     (3,733 )     —         (910,114 )     (6,311 )     —         (920,158 )
    


 


 


 


 


 


FINANCING ACTIVITIES

                                                

Net change in short-term debt

     349       —         117       61       —         527  

Issuance of long-term debt

     —         400,460       609,820       —         —         1,010,280  

Payments on long-term debt

     (346 )     —         (309,026 )     —         —         (309,372 )

Debt issue costs

     —         (10,824 )     (23,148 )     —         —         (33,972 )

Issuance (repurchase) of common shares—net

     11,884       —         —         —         —         11,884  

Intercompany activity

     (42,108 )     (393,435 )     449,478       (13,935 )     —         —    

Other

     (628 )     —         (183 )     (867 )     —         (1,678 )
    


 


 


 


 


 


Net cash provided (used) by financing activities

     (30,849 )     (3,799 )     727,058       (14,741 )     —         677,669  
    


 


 


 


 


 


Effect of exchange rate on cash resources

     592       —         (520 )     242       —         314  
    


 


 


 


 


 


Increase (decrease) in cash resources

     (7,063 )     (101 )     (29,251 )     6,820       —         (29,595 )

Cash resources at beginning of year

     29,115       101       82,665       9,591       —         121,472  
    


 


 


 


 


 


Cash resources at end of year

   $ 22,052     $ —       $ 53,414     $ 16,411     $ —       $ 91,877  
    


 


 


 


 


 


 

48


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

27. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (continued)

 

CONSOLIDATING STATEMENT OF CASH FLOWS

YEAR ENDED DECEMBER 31, 2002:

 

     PARENT

    FINANCE
INC.


    GUARANTOR
SUBSIDIARIES


   

NON-

GUARANTOR
SUBSIDIARIES


    ELIMINATIONS

    CONSOLIDATED

 

OPERATING ACTIVITIES

                                                

Net earnings (loss)

   $ 73,258     $ (15,924 )   $ 33,324     $ 20,383     $ (37,783 )   $ 73,258  

Adjustments to reconcile net earnings (loss) to cash provided (used) by operating activities:

                                                

Equity (earnings) loss of subsidiaries

     (48,734 )     —         10,951       —         37,783       —    

Depreciation and amortization

     10,082       —         72,409       4,255       —         86,746  

Net (gain) loss on sale of investment and other assets

     60       —         (7,293 )     (1,497 )     —         (8,730 )

Deferred income taxes

     11,090       —         (36,998 )     (88 )     —         (25,996 )

Debt settlement costs

     —         16,746       —         —         —         16,746  

Other

     (1,907 )     364       (5,140 )     (1,077 )     —         (7,760 )

Changes in operating assets and liabilities:

                                                

Accounts receivable—net

     71       —         (2,235 )     1,526       —         (638 )

Inventories

     1,752       —         3,895       379       —         6,026  

Accounts payable and accrued liabilities

     (3,917 )     (2,150 )     2,869       (6,543 )     —         (9,741 )

Income taxes

     314       —         32,137       (318 )     —         32,133  

Other

     189       —         (3,965 )     127       —         (3,649 )
    


 


 


 


 


 


Net cash provided (used) by operating activities

     42,258       (964 )     99,954       17,147       —         158,395  
    


 


 


 


 


 


INVESTING ACTIVITIES

                                                

Property, plant and equipment—net

     (893 )     —         (7,802 )     (246 )     —         (8,941 )

Long-term receivables and other investments

     429       —         (1,402 )     (4,055 )     —         (5,028 )

Acquisition of businesses

     (8,764 )     —         (57,202 )     —         —         (65,966 )

Software expenditures

     —         —         (10,958 )     —         —         (10,958 )

Other

     —         —         (1,615 )     —         —         (1,615 )
    


 


 


 


 


 


Net cash used by investing activities

     (9,228 )     —         (78,979 )     (4,301 )     —         (92,508 )
    


 


 


 


 


 


FINANCING ACTIVITIES

                                                

Net change in short-term debt

     (724 )     —         (14,902 )     (273 )     —         (15,899 )

Issuance of long-term debt

     —         —         200,000       —         —         200,000  

Payments on long-term debt

     (1,641 )     (116,746 )     (21,877 )     —         —         (140,264 )

Issuance (repurchase) of common shares—net

     (7,949 )     —         —         —         —         (7,949 )

Intercompany activity

     (6,279 )     117,711       (99,432 )     (12,000 )     —         —    

Other

     —         —         (8,108 )     (719 )     —         (8,827 )
    


 


 


 


 


 


Net cash provided (used) by financing activities

     (16,593 )     965       55,681       (12,992 )     —         27,061  
    


 


 


 


 


 


Effect of exchange rate on cash resources

     (242 )     —         232       (140 )     —         (150 )
    


 


 


 


 


 


Increase (decrease) in cash resources

     16,195       1       76,888       (286 )     —         92,798  

Cash resources at beginning of year

     12,920       100       5,777       9,877       —         28,674  
    


 


 


 


 


 


Cash resources at end of year

   $ 29,115     $ 101     $ 82,665     $ 9,591     $ —       $ 121,472  
    


 


 


 


 


 


 

49


MOORE WALLACE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

27. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (continued)

 

CONSOLIDATING STATEMENT OF CASH FLOWS

YEAR ENDED DECEMBER 31, 2001:

 

     PARENT

    FINANCE
INC.


    GUARANTOR
SUBSIDIARIES


   

NON-

GUARANTOR
SUBSIDIARIES


    ELIMINATIONS

    CONSOLIDATED

 

OPERATING ACTIVITIES

                                                

Net earnings (loss)

   $ (358,038 )   $ (366 )   $ (240,817 )   $ (57,096 )   $ 298,279     $ (358,038 )

Adjustments to reconcile net earnings (loss) to cash provided (used) by operating activities:

                                                

Equity (earnings) loss of subsidiaries

     295,364       —         2,915       —         (298,279 )     —    

Depreciation and amortization

     11,389       —         163,750       63,933       —         239,072  

Net (gain) loss on sale of investment and other assets

     (79 )     —         (1,533 )     7,436       —         5,824  

Deferred income taxes

     (13,729 )     —         (21,511 )     137       —         (35,103 )

Pension settlement—net

     —         —         96,605       —         —         96,605  

Restructuring provision—net

     10,680       —         107,676       11,323       —         129,679  

Debt settlement and issue costs

     10,396       1,000       221       —         —         11,617  

Other

     7,903       373       (8,131 )     2,903       —         3,048  

Changes in operating assets and liabilities:

                                                

Accounts receivable—net

     3,554       —         49,804       (8,674 )     —         44,684  

Inventories

     7,014       —         14,203       (180 )     —         21,037  

Accounts payable and accrued liabilities

     (6,614 )     (1,122 )     (5,297 )     (6,345 )     —         (19,378 )

Income taxes

     885       —         (4,129 )     (1,173 )     —         (4,417 )

Other

     6,850       (155 )     (1,902 )     (2,302 )     —         2,491  
    


 


 


 


 


 


Net cash provided (used) by operating activities

     (24,425 )     (270 )     151,854       9,962       —         137,121  
    


 


 


 


 


 


INVESTING ACTIVITIES

                                                

Property, plant and equipment—net

     (3,320 )     —         (20,451 )     (13,301 )     —         (37,072 )

Long-term receivables and other investments

     484       —         138       (4,111 )     —         (3,489 )

Acquisition of businesses

     (14,565 )     —         —         —         —         (14,565 )

Proceeds from sale of investments and other assets

     —         —         38,495       —         —         38,495  

Software expenditures

     —         —         (6,151 )     (366 )     —         (6,517 )

Other

     5,095       —         (22,249 )     18,364       —         1,210  
    


 


 


 


 


 


Net cash provided (used) by investing activities

     (12,306 )     —         (10,218 )     586       —         (21,938 )
    


 


 


 


 


 


FINANCING ACTIVITIES

                                                

Dividends

     (8,846 )     —         —         —         —         (8,846 )

Net change in short-term debt

     (437 )     —         16,272       (510 )     —         15,325  

Issuance of long-term debt

     364       —         7,476       123       —         7,963  

Payments on long-term debt

     (1,082 )     (100,000 )     (3,084 )     —         —         (104,166 )

Intercompany activity

     60,158       100,667       (153,981 )     (6,844 )     —         —    

Other

     (2,320 )     —         669       (1,693 )     —         (3,344 )
    


 


 


 


 


 


Net cash provided (used) by financing activities

     47,837       667       (132,648 )     (8,924 )     —         (93,068 )
    


 


 


 


 


 


Effect of exchange rate on cash resources

     (439 )     —         (65 )     (47 )     —         (551 )
    


 


 


 


 


 


Increase (decrease) in cash resources

     10,667       397       8,923       1,577       —         21,564  

Cash resources at beginning of year

     2,253       (297 )     (3,146 )     8,300       —         7,110  
    


 


 


 


 


 


Cash resources at end of year

   $ 12,920     $ 100     $ 5,777     $ 9,877     $ —       $ 28,674  
    


 


 


 


 


 


 

50


MOORE WALLACE INCORPORATED

 

INDEPENDENT AUDITORS’ REPORT

 

TO THE SHAREHOLDERS OF MOORE WALLACE INCORPORATED:

 

We have audited the consolidated balance sheets of Moore Wallace Incorporated as at December 31, 2003 and 2002 and the consolidated statements of operations, retained earnings and cash flows for each of the three years ended December 31, 2003. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with Canadian generally accepted auditing standards and auditing standards generally accepted in the United States of America. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as at December 31, 2003 and 2002 and the results of its operations and its cash flows for each of the three years ended December 31, 2003, in accordance with Canadian generally accepted accounting principles.

 

DELOITTE & TOUCHE LLP

 

Toronto, Canada

February 26, 2004

 

51


MOORE WALLACE INCORPORATED

 

COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-UNITED STATES OF AMERICA

REPORTING DIFFERENCE

 

In the United States of America, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when there are changes in accounting principles that have a material effect on the comparability of the Corporation’s financial statements, such as the changes described in Note 2 to the financial statements. Our report to the shareholders dated February 26, 2004 is expressed in accordance with Canadian reporting standards which do not require a reference to such changes in accounting principles in the auditors’ report when the change is properly accounted for and adequately disclosed in the financial statements.

 

DELOITTE & TOUCHE LLP

 

Toronto, Canada

February 26, 2004

 

52


(b) Pro Forma Financial Information.

 

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

 

The following unaudited pro forma condensed combined balance sheet as of December 31, 2003 and the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2003 are based on the historical financial statements of RR Donnelley, Moore Wallace and WCS after giving effect to (i) the transaction as a purchase of Moore Wallace by RR Donnelley (and the earlier merger of Moore Wallace and WCS, effective May 15, 2003) using the purchase method of accounting, (ii) the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements, and (iii) the issuance of $1.0 billion of new RR Donnelley Notes (the “New RR Donnelley Notes”) in this offering.

 

The pro forma information is preliminary, is being furnished solely for informational purposes and is not necessarily indicative of the combined results of operations or financial position that might have been achieved for the periods or dates indicated, nor is it necessarily indicative of the future results of the combined company. The pro forma information is based on preliminary estimates and assumptions set forth in the notes to such information. It does not reflect cost savings expected to be realized from the elimination of certain expenses and from synergies expected to be created or the costs to achieve such cost savings or synergies. Income taxes do not reflect the amounts that would have resulted had RR Donnelley and Moore Wallace filed consolidated income tax returns during the periods presented. No assurance can be given that cost savings and synergies will be realized.

 

Pro forma adjustments are necessary to reflect the purchase price, the new equity structure, the new estimated debt structure and to adjust Moore Wallace’s net tangible and intangible assets and liabilities to preliminary estimated fair values. Pro forma adjustments are also necessary to reflect the amortization expense related to amortizable intangible assets, changes in depreciation and amortization expense resulting from fair value adjustments to net tangible assets, interest expense and the income tax effects related to the pro forma adjustments.

 

The pro forma adjustments and allocation of purchase price are preliminary and are based on our management’s estimates of the fair value of the assets to be acquired and liabilities to be assumed. The preliminary valuations have been considered in our management’s estimates of the fair values reflected in the unaudited pro forma condensed combined financial statements.

 

The final purchase price allocation will be completed after asset and liability valuations are finalized. A final determination of these fair values will include our management’s consideration of final valuations, which will be based on the net tangible and intangible assets of Moore Wallace that existed as of the effective date. Any final adjustments may change the allocation of the purchase price, which could affect the fair value assigned to the assets and liabilities and could result in a change to the unaudited pro forma condensed combined financial statements presented in this offering memorandum. Amounts preliminarily allocated to intangible assets with indefinite and definite lives may change significantly, which could result in a material increase or decrease in amortization of intangible assets. Estimates related to the determination of the lives of the assets acquired may also change, which could result in a material increase or decrease in depreciation or amortization expense.

 

The unaudited pro forma condensed combined balance sheet is presented as if the transaction had been completed on December 31, 2003 and combines the historical balance sheet of RR Donnelley at December 31, 2003 and the historical balance sheet of Moore Wallace at December 31, 2003.

 

The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2003 is presented as if the transaction had been completed on January 1, 2003. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2003 combines the historical results of RR Donnelley and Moore Wallace for the year ended December 31, 2003, as well as the historical

 

53


unaudited results of WCS for the 135-day period prior to the merger of Moore Wallace with WCS (which was completed on May 15, 2003), calculated by adding the historical unaudited results of WCS for the three-month period ended April 30, 2003 and one-half of the historical unaudited results of WCS for the three-month period ended January 31, 2003.

 

The unaudited pro forma condensed combined financial statements should be read in conjunction with the historical consolidated financial statements and accompanying notes contained in RR Donnelley’s Annual Report on Form 10-K for the year ended December 31, 2003; Moore Wallace’s Annual Report on Form 10-K for the year ended December 31, 2003; Moore Wallace’s Current Report on Form 8-K filed May 15, 2003 and amended July 29, 2003 for WCS’s fiscal year ended July 31, 2002; and Moore Wallace’s Current Report on Form 8-K filed September 26, 2003 for WCS’s nine months ended April 30, 2003.

 

The unaudited pro forma condensed combined financial statements are not intended to represent or be indicative of the consolidated results of operations or financial condition of the combined company that would have been reported had the transaction been completed as of the dates presented and should not be considered as representative of the future consolidated results of operations or financial condition of the combined company.

 

Based on a preliminary analysis, RR Donnelley expects to incur in subsequent quarters costs for severance and facility charges related to vacating redundant RR Donnelley and Moore Wallace facilities and other costs associated with exiting activities. Costs related to Moore Wallace severance and certain facility charges will be recorded as an additional cost of the acquisition. Costs related to RR Donnelley severance and facility charges will be recorded in future combined statements of operations. Some of these costs, primarily severance and lease termination costs, will result in future cash payments, the timing of which may exceed one year from the effective date. No adjustment has been made to the pro forma information presented in this offering memorandum to reflect these potential actions, as the costs of employee terminations, facility exit costs, the final valuation of tangible and intangible assets and related liabilities are not currently determinable. RR Donnelley expects to expend a substantial amount of effort evaluating facilities, finalizing valuations of tangible and intangible assets and determining appropriate employment levels. Although preliminary plans are currently being formulated, RR Donnelley has not finalized such estimates. When the costs of such plans become estimable, these amounts will be recorded in the financial statements to reflect the estimated costs of such actions.

 

RR Donnelley is in the process of identifying pre-transaction contingencies, if any, where the related asset, liability or impairment is probable and the amount of the asset, liability or impairment can be reasonably estimated. Prior to the end of the purchase price allocation period, if information becomes available that would indicate it is probable that such events have occurred and the amounts can be reasonably estimated, such items will be included in the final purchase price allocation.

 

As part of the transaction, Moore Wallace’s Term Loan B was liquidated with proceeds from commercial paper. It is anticipated that the proceeds from this offering will liquidate the commercial paper and Moore Wallace’s $403 million Senior Notes. Accordingly, the pro forma financial statements reflect the impact of retirement of the Moore Wallace debt. The amounts required to liquidate the Moore Wallace $403 million Senior Notes may differ materially from the estimated redemption amount reflected in the pro forma financial statements based on movements in interest rates.

 

The income tax rate applied to the pro forma adjustments is 39.5%, the expected statutory rate. All other tax amounts are stated at their historical amounts.

 

Moore Wallace’s historical consolidated financial statements are prepared in accordance with Canadian GAAP, which differs in certain respects from U.S. GAAP. Note 24 to the consolidated financial statements in Moore Wallace’s Annual Report on Form 10-K for the year ended December 31, 2003 provides a description of

 

54


the material differences and a reconciliation between Canadian GAAP and U.S. GAAP. For the purposes of presenting the unaudited pro forma condensed combined financial information, financial information relating to Moore Wallace has been adjusted to conform to U.S. GAAP.

 

Intercompany balances or transactions between the combining companies were not significant for any of the periods presented. No material pro forma adjustments were required to conform Moore Wallace’s accounting policies to RR Donnelley’s accounting policies. Certain reclassifications have been made to conform the RR Donnelley, Moore Wallace and WCS historical amounts to the pro forma presentation in addition to those required to conform the historical amounts of Moore Wallace to U.S. GAAP.

 

On November 26, 2003, Moore Wallace announced its plan to acquire PPS, a Tennessee-based provider of mortgage statement processing solutions to the financial services industry, for approximately $92.5 million in cash and Moore Wallace common shares, including the repayment of PPS debt. The acquisition of PPS was completed on December 31, 2003. Pro forma disclosure of the impact of the PPS acquisition on the statement of operations has been excluded because it is not material to RR Donnelley or Moore Wallace’s consolidated statements of operations.

 

55


Unaudited Pro Forma Condensed Combined Balance Sheet

of RR Donnelley and Moore Wallace

as of December 31, 2003

U.S. GAAP (in thousands of U.S.$)

 

     RR Donnelley
(a)


     Moore
Wallace
(a)(b)


     Pro Forma
Adjustments


    Pro Forma

 

ASSETS

                                  

Cash and cash equivalents

   $ 60,837      $ 148,704      $ (54,143 )(c)   $ 155,398  

Accounts receivable, net

     738,516        635,187        —         1,373,703  

Inventories

     120,374        246,440        60,058 (f)     426,872  

Prepaid expenses and other current assets

     79,783        153,645        —         233,428  
    


  


  


 


Total current assets

     999,510        1,183,976        5,915       2,189,401  
    


  


  


 


Property, plant and equipment, net

     1,297,366        583,553        196,824 (h)     2,077,743  

Assets held for sale

     —          37,844        —         37,844  

Prepaid pension cost

     314,366        165,326        (34,058 )(l)     445,634  

Goodwill

     317,472        853,136        1,575,788 (d)     2,746,396  

Other intangibles, net

     81,702        187,793        464,107 (i)     733,602  

Deferred income taxes

     —          1,747        —         1,747  

Other assets

     178,534        184,111        (55,644 )(j)     307,001  
    


  


  


 


Total assets

   $ 3,188,950      $ 3,197,486      $ 2,152,932     $ 8,539,368  
    


  


  


 


LIABILITIES

                                  

Accounts payable

   $ 303,959      $ 243,338      $ —       $ 547,297  

Short-term debt

     175,873        7,662        (5,000 )(k)     178,535  

Income taxes payable and current deferred income taxes

     10,179        86,401        (13,515 )(g)(l)     83,065  

Accrued liabilities

     393,571        475,687        (4,296 )(k)     864,962  
    


  


  


 


Total current liabilities

     883,582        813,088        (22,811 )     1,673,859  
    


  


  


 


Long-term debt:

                                  

New RR Donnelley Notes

     —          —          997,038 (k)     997,038  

Historical long-term debt

     752,497        884,815        (878,737 )(k)     758,575  

Postretirement benefits

     12,031        368,932        (54,282 )(m)     326,681  

Deferred income taxes

     234,046        96,565        241,093 (g)(l)     571,704  

Other liabilities

     323,642        123,000        (15,022 )(l)(n)     431,620  
    


  


  


 


Total liabilities

     2,205,798        2,286,400        267,279       4,759,477  
    


  


  


 


SHAREHOLDERS’ EQUITY

                                  

Common stock

     308,462        917,639        1,919,449 (e)     3,145,550  

Unearned compensation

     (2,937 )      (2,457 )      (14,510 )(e)     (19,904 )

Retained earnings

     1,641,706        81,110        (104,492 )(e)     1,618,324  

Accumulated comprehensive loss

     (123,684 )      (85,206 )      85,206 (e)     (123,684 )

Treasury stock

     (840,395 )      —          —         (840,395 )
    


  


  


 


Total shareholders’ equity

     983,152        911,086        1,885,653       3,779,891  
    


  


  


 


Total liabilities and shareholders’ equity

   $ 3,188,950      $ 3,197,486      $ 2,152,932     $ 8,539,368  
    


  


  


 


 

See accompanying notes.

 

56


NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

(in thousands of U.S.$)

 

(a) Certain reclassifications have been made to the historical presentation of RR Donnelley and Moore Wallace financial information in order to conform to the pro forma condensed combined presentation.
(b) Historical results of Moore Wallace are prepared in accordance with Canadian GAAP and have been adjusted to conform with RR Donnelley’s presentation under U.S. GAAP. The differences between Canadian GAAP and U.S. GAAP that are material to Moore Wallace’s unaudited consolidated balance sheet as of December 31, 2003 are described in the section entitled “—Differences Between Canadian GAAP and U.S. GAAP.”
(c) Represents estimated sources and uses of funds as follows (in thousands):

 

Sources of funds:

        

Issuance of RR Donnelley common stock and restricted stock

   $ 2,805,073  

Issuance of RR Donnelley stock options upon conversion or exchange of Moore Wallace
stock options

     22,755  

Issuance of New RR Donnelley Notes (see note k)

     997,038  
    


Total sources

   $ 3,824,866  
    


Uses of funds:

        

Exchange of each Moore Wallace common share and restricted share for 0.63 of a share of
RR Donnelley common stock and restricted stock

   $ 2,805,073  

Conversion of Moore Wallace stock options into RR Donnelley stock options

     22,755  

Retirement of Moore Wallace $403 million Senior Notes and Term Loan B (see note k)

     961,696  

Estimated direct financing costs (see note j)

     7,800  

Liquidation of Moore Wallace fair value and cashflow swaps (see note l)

     15,784  

Funding of Moore Wallace SERP plans (see note l)

     20,610  

Payment of Moore Wallace deferred share units (see note n)

     5,141  

Estimated transaction fees and expenses related to equity

     300  

Estimated transaction fees and expenses

     39,850  
    


Total uses

     3,879,009  
    


Net use of historical cash:

   $ (54,143 )
    


 

(d) Under the purchase method of accounting, the total estimated consideration as shown in the table below is allocated to Moore Wallace’s tangible and intangible assets and liabilities based on their estimated fair values as of the effective date. The consideration is preliminarily allocated as follows (in thousands):

 

Calculation of Consideration

 

Exchange of each Moore Wallace common share and restricted share for 0.63 of a share of
RR Donnelley common stock and restricted stock (1)

   $ 2,805,073

Issuance of RR Donnelley stock options upon conversion or exchange of Moore Wallace stock options (2)

     22,755

Estimated redemption premium for Moore Wallace $403 million Senior Notes
(see note k)

     56,900

Estimated direct transaction fees and expenses (3)

     20,500
    

Total consideration

   $ 2,905,228
    

 

57


Preliminary Allocation of Consideration:

 

Moore Wallace book value of net assets (see note e)

   $ 911,086  
    


Initial purchase allocation adjustment

     1,994,142  

Adjustments to historical net book values:

        

Inventories (see note f)

     60,058  

Property, plant and equipment (see note h)

     196,824  

Intangible assets (see note i)

     464,107  

System development cost (see note j)

     (32,752 )

Debt discount and fair value adjustment on Moore Wallace $403 million Senior Notes (see note k)

     (16,763 )

Prepaid pension cost (see note l)

     (34,058 )

Pension liabilities (see note l)

     (18,905 )

Postretirement benefit obligation (see note m)

     54,282  

Deferred debt issue costs (see note j)

     (30,692 )

Current deferred tax liability (see note g)

     5,374  

Non-current deferred tax liability (see note g)

     (236,528 )

Unearned compensation on restricted share and stock option exchange (see note e)

     7,407  
    


Adjustment to goodwill

   $ 1,575,788  
    


 

  (1) Represents the value of RR Donnelley common and restricted stock issued to holders of Moore Wallace common and restricted shares at a price of $27.48 per share, which is calculated using the average of the closing share price on the New York Stock Exchange during the five-day trading period beginning two trading days before the date of announcement of the transaction on November 9, 2003. This amount is based on the actual value of shares of RR Donnelley common and restricted stock received by holders of Moore Wallace common and restricted shares outstanding on the effective date.
  (2) Represents the fair value of approximately 2.3 million RR Donnelley stock options issued in exchange for existing Moore Wallace stock options in connection with the transaction.
  (3) Represents estimated direct transaction costs incurred by RR Donnelley, including financial advisory, legal, accounting and other costs.
(e) Represents adjustments to reflect the elimination of the historical equity of Moore Wallace totaling $911.1 million; the issuance of $2,837.4 million of new RR Donnelley equity less $0.3 million of fees related to the equity issuance (see note c) and less $17.0 million related to unearned compensation for the exchange of Moore Wallace unvested options and restricted shares for RR Donnelley unvested options and restricted stock as well as the issuance of unvested RR Donnelley restricted stock units; a $5.5 million non-recurring charge directly attributable to the funding of a Moore Wallace supplemental executive retirement plan required as a result of the transaction; a $1.4 million non-recurring gain from the liquidation of Moore Wallace’s interest rate swaps; and approximately $19.3 million related to advisory fees paid by Moore Wallace.
(f) Represents the estimated purchase accounting adjustment of $60.1 million to capitalize manufacturing profit in inventory. This amount was estimated as part of the initial assessment of the fair value of assets to be acquired and liabilities to be assumed. This adjustment is preliminary and is based on our management’s estimates and preliminary valuations. The actual adjustment may differ materially and will be based on final valuations.
(g) The current deferred tax liability reflects the estimated impact on the purchase allocation adjustment for inventories and the redemption of the Moore Wallace $403 million Senior Notes (see note f). The non-current deferred tax liability reflects the estimated impact on the purchase allocation adjustments other than that for inventory and the redemption of the Moore Wallace $403 million Senior Notes. These estimates are based on the statutory tax rate of 39.5%.

 

58


(h) Reflects the estimated adjustments of $196.8 million required to record Moore Wallace’s property, plant and equipment at its fair value based on a depreciated replacement value. Real property is recorded at book value and will subsequently be adjusted to its fair value upon the completion of appraisals currently in process. This adjustment is preliminary and is based on our management’s estimates and preliminary valuations. The actual adjustment may differ materially and will be based on final valuations.
(i) Moore Wallace’s $651.9 million of other intangibles represents an increase of $464.1 million as a result of increasing the historical book value to a preliminary estimate of fair value. Of this $651.9 million, amortizable intangible assets consist of $213.8 million allocated to customer relationships to be amortized over 15 years; $17.6 million allocated to non-compete agreements to be amortized over two years; $100.9 million allocated to patents to be amortized over eight years; and $8.7 million allocated to backlog to be amortized over one year. This adjustment is preliminary and is based on our management’s estimates and preliminary valuations. The actual adjustment may differ materially and will be based on final valuations. The customer relationship intangible asset allocation reflects the nature of the markets within which Moore Wallace operates and the price sensitivity of many of its customers. The markets in which Moore Wallace operates are highly competitive, and customers often use multiple vendors to ensure the most favorable pricing. Customers typically encounter minimal switching costs and, due to the transactional nature of the business, these customers’ purchasing decisions are almost entirely governed by pricing considerations, with little consideration given to previous historical business. These facts, coupled with the fact that the nature of Moore Wallace customer contractual relationships typically does not involve purchase minimums or long-term binding contracts, are primary reasons why the valuation of customer relationships is not more significant.

Approximately $310.9 million has been preliminarily allocated to intangible assets with indefinite lives, consisting primarily of the various trade names under which Moore Wallace does business. The assumption used in the preliminary valuation is that the identified trade names will not be amortized and will have indefinite remaining useful lives based on many factors and considerations, including name awareness and the assumption of continued use of the Moore Wallace and related brands as part of the marketing strategy of the combined company. These assumptions and adjustments are preliminary and are based on our management’s estimates and preliminary valuations. The actual adjustment may differ materially and will be based on final valuations.

(j) Reflects the estimated adjustments of ($32.8) million required to record Moore Wallace’s system development costs at fair value based on the estimated cost to reproduce and an estimated remaining life of five years. This adjustment is preliminary and is based on our management’s estimates and preliminary valuations. The actual adjustment may differ materially and will be based on final valuations. Also reflects the adjustment of ($30.7) million required to write-off Moore Wallace deferred financing fees for its retired $403 million Senior Notes and Term Loan B offset by $7.8 million of new deferred financing fees primarily related to the New RR Donnelley Notes.
(k) Represents approximately $997.0 million of gross proceeds from the issuance of the $1.0 billion New RR Donnelley Notes to refinance Moore Wallace’s historical $403 million Senior Notes with an additional redemption premium payment of $56.9 million and to refinance Moore Wallace’s Term Loan B (outstanding balance of $497.5 million, of which approximately $5.0 million was classified as short-term debt, as of December 31, 2003).

Also represents payment of $2.2 million and $2.1 million for accrued interest related to the Moore Wallace $403 Senior Notes and Moore Wallace’s Term Loan B, respectively.

Additionally, represents the write-off of the $2.5 million discount related to the Moore Wallace $403 million Senior Notes, and the $14.2 million non-cash write-off of the fair value adjustment related to these same Senior Notes.

(1) Represents adjustments of $34.1 million and $7.3 million, net of cash paid, necessary to record the prepaid pension cost and pension liability, respectively, of Moore Wallace at estimated fair value. The adjustments incorporate the elimination of previously deferred gains and losses, the fair value of the projected benefit obligations discounted at market rates in effect at December 31, 2003 and the market value of plan assets at December 31, 2003 for the funded plans. The amount ultimately allocated to the fair value of the prepaid pension cost and pension liability may differ materially from this preliminary valuation.

 

59


Additionally, an estimated $20.6 million is required to be funded into a trust pursuant to certain Moore Wallace Supplemental Executive Retirement Plans, of which approximately $5.5 million would result in a non-recurring charge to earnings of Moore Wallace and an estimated increase of $4.6 million in deferred tax liabilities. The amount that will be funded will be based on the accumulated deferred compensation and accrued interest and may differ significantly from these estimates.

Also, represents elimination of the $17.2 million deferred liability relating to Moore Wallace’s interest rate swaps that will be liquidated in conjunction with the transaction resulting in an estimated $1.4 million non-recurring gain upon liquidation.

Represents the adjustments to current income taxes payable of $8.1 million for the funding of the Moore Wallace Supplemental Executive Retirement Plan.

(m) Represents the adjustment of $54.3 million necessary to record the postretirement liability of Moore Wallace at estimated fair value. The adjustment incorporates the elimination of previously deferred gains and losses and the fair value of the projected benefit obligations discounted at market rates in effect at December 31, 2003. The amount ultimately allocated to the fair value of the postretirement liability may differ materially from this preliminary valuation.
(n) Represents a preliminary estimate of $5.1 million for the amount required to be funded pursuant to the Moore Wallace director deferred compensation plan change in control provisions.

 

60


UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

OF RR DONNELLEY AND MOORE WALLACE

Year Ended December 31, 2003

U.S. GAAP (in thousands of U.S. $, except per share data)

 

    RR Donnelley
(a)


    Moore Wallace
(a)(b)


  WCS
Pro Forma
135 Days Ended
April 30, 2003
(a)(c)


    Pro Forma
Adjustments


    Pro
Forma(e)


Net sales

  $ 4,787,162     $ 2,872,796   $ 544,516     $ —       $ 8,204,474
   


 

 


 


 

Cost of sales

    3,683,893       2,022,137     398,160       13,241 (d)     6,117,431

Selling, general and administrative expenses

    539,913       518,943     92,881       13,431 (d)(k)     1,165,168

Provision for (recovery of) restructuring costs, net, and impairment charge ($8,860 and $7,169 at RR Donnelley and WCS, respectively)

    16,427       13,577     (606 )     —         29,398

Depreciation and amortization

    276,136       111,792     22,655       10,378 (f)     420,961
   


 

 


 


 

Total operating expenses

    4,516,369       2,666,449     513,090       37,050       7,732,958
   


 

 


 


 

Income from operations

    270,793       206,347     31,426       (37,050 )     471,516
   


 

 


 


 

Interest expense, net

    50,359       54,939     9,053       (14,213 )(g)     100,138

Debt settlement costs

    —         7,493     —         (7,493 )(h)     —  

Gain on sale of businesses and investments

    5,526       3,598     —         —         9,124

Other expenses (income), net

    17,827       6,610     —         (3,925 )(i)     20,512
   


 

 


 


 

Earnings before taxes and minority interest

    208,133       140,903     22,373       (11,419 )     359,990
   


 

 


 


 

Income tax expenses

    31,768       7,894     13,044       (4,511 )(j)     48,195

Minority interest expense (income)

    (144 )     1,254     —         —         1,110
   


 

 


 


 

Net earnings

  $ 176,509     $ 131,755   $ 9,329     $ (6,908 )   $ 310,685
   


 

 


 


 

Net earnings per share:

                                   

Basic

    $1.56                             $1.44

Diluted

    $1.54                             $1.43

Average shares outstanding (in thousands):

                                   

Basic

    113,285                     103,069 (k)     215,354

Diluted

    114,302                     102,603 (k)     216,905

 

See accompanying notes.

 

61


NOTES TO UNAUDITED PRO FORMA CONDENSED

COMBINED STATEMENT OF OPERATIONS

 

(a) Certain reclassifications have been made to the historical presentation of RR Donnelley, Moore Wallace and WCS financial information in order to conform to the pro forma condensed combined presentation.
(b) Historical results of Moore Wallace are prepared in accordance with Canadian GAAP and have been adjusted to conform with RR Donnelley’s presentation under U.S. GAAP. The differences between Canadian GAAP and U.S. GAAP that are material to Moore Wallace’s unaudited consolidated statements of operations for the year ended December 31, 2003 are described in the section entitled “—Differences Between Canadian GAAP and U.S. GAAP.”
(c) The historical results of WCS for the 135 days prior to Moore Wallace’s merger with WCS were calculated using the unaudited historical results for the quarter ended April 30, 2003 plus one-half of the historical unaudited results for the quarter ended January 31, 2003.
(d) Represents pro forma adjustments required to eliminate amortization of actuarial deferred gains and losses resulting from the fair valuation of the prepaid pension costs, pension liability and postretirement liability of $22.1 million ($13.2 million in cost of sales and $8.8 million in selling, general and administrative expenses) for the year ended December 31, 2003.
(e) The pro forma statement of operations does not reflect the following: an estimated $60.1 million non-recurring charge to cost of sales that will be incurred as the capitalized manufacturing profit added to inventory under purchase accounting is recorded as those inventories are sold following the close of the transaction; the recognition of an $8.7 million charge to intangible assets attributable to backlog for amortization within the year following the completion of the transaction; a $5.5 million non-recurring charge associated with the funding of a Moore Wallace Supplemental Executive Retirement Plan; a $1.4 million non-recurring gain from the liquidation of Moore Wallace’s interest rate swaps; and a charge of approximately $19.3 million related to advisory fees paid by Moore Wallace. These charges are directly attributable to the transaction, are non-recurring in nature and are not expected to have a continuing impact on the results of operations of the combined company.
(f) Represents a pro forma adjustment to reflect incremental depreciation and amortization resulting from fair value adjustments to property, plant and equipment, amortizable intangible assets and system development costs as illustrated below. The amount of this adjustment and the assumptions regarding useful lives are preliminary and based on our management’s estimates and preliminary valuations as they relate to the underlying fair values and useful lives. The actual adjustment may differ materially and will be based on final valuations.

 

    Fair Value

 

Useful Life
(in years)


  Pro Forma
Annual
Depreciation
and
Amortization


  Year Ended
December 31, 2003
Moore Wallace
and WCS
Depreciation and
Amortization


    (in thousands)

Property, plant and equipment

  $ 780,377   3-30   $ 98,140      

Amortizable intangibles:

                     

Customer relationships

  $ 213,800   15   $ 14,253      

Patents

    100,900     8     12,613      

Non-compete agreements

    17,600     2     8,800      
   

 
 

     

Total amortizable intangibles

  $ 332,300                
   

               

System development costs

  $ 55,100     5   $ 11,020      

Tradename

  $ 310,900   Indefinite   $ —        

Backlog (see note e)

  $ 8,700   Less than 1 year   $ —        
             

     

Total depreciation and amortization

            $ 144,826   $ 134,448
             

 

Pro forma adjustment to depreciation and amortization

                  $ 10,378
                   

 

62


NOTES TO UNAUDITED PRO FORMA

CONDENSED COMBINED STATEMENTS OF OPERATIONS—(Continued)

 

(g) Reflects pro forma interest expense adjustment for the year ended December 31, 2003, calculated as follows to reflect the debt structure adjusted for the effects of the transaction:

 

     2003

 
     (in thousands)  

New RR Donnelley Notes due 2009 (1)

   $ 15,000  

New RR Donnelley Notes due 2014(2)

     29,700  

Amortization of deferred financing fees(3)

     1,525  

Commitment fees(4)

     900  

Other interest

     2,654  
    


Pro forma total interest expense

     49,779  

Less historical interest expense—Moore Wallace

     (54,939 )

Less historical interest expense—WCS

     (9,053 )
    


Pro forma adjustment

   $ (14,213 )
    


 
  (1) Reflects pro forma interest expense on the $400 million New RR Donnelley Notes due 2009 using an outstanding balance of $400 million and a coupon interest rate of 3.75%.
  (2) Reflects pro forma interest expense on the $600 million New RR Donnelley Notes due 2014 using an outstanding balance of $600 million and a coupon interest rate of 4.95%.
  (3) Reflects amortization of estimated deferred financing fees and discount on the New RR Donnelley Notes over the term of the related debt.
  (4) Reflects commitment fees of 0.09% on estimated undrawn funds under the revolving credit facility of $1.0 billion.

 

(h) For the year ended December 31, 2003, reflects the elimination of the write-off of non-recurring $7.5 million of debt issuance costs resulting from financing related to Moore Wallace’s merger with WCS on May 15, 2003.
(i) Reflects the pro forma adjustment to eliminate the $3.9 million non-recurring charge incurred for the fair market value adjustment for Moore Wallace’s interest rate swaps directly attributable to the financing of Moore Wallace’s merger with WCS.
(j) Reflects the pro forma tax effect of the above adjustments at an estimated combined statutory tax rate of 39.5%.
(k) Reflects recognition of unearned compensation costs of $4.6 million for the year ended December 31, 2003, related to the exchange of unvested restricted stock and stock options and the issuance of restricted stock units.

 

Differences Between Canadian GAAP and U.S. GAAP

 

The following describes the material adjustments to the unaudited pro forma condensed combined financial statements to reconcile Canadian GAAP and U.S. GAAP and should be read in conjunction with Note 24 to Moore Wallace’s December 31, 2003 consolidated financial statements which are included in or incorporated by reference into this offering memorandum.

 

63


NOTES TO UNAUDITED PRO FORMA

CONDENSED COMBINED STATEMENTS OF OPERATIONS—(Continued)

 

Moore Wallace’s Canadian GAAP accounting is consistent in all material aspects with U.S. GAAP with the following exceptions:

 

Pensions and Postretirement Benefits

 

With the adoption of Canadian Institute of Chartered Accountants (CICA) Handbook Section 3461, Employee Future Benefits, effective January 1, 2000, there is no longer any difference in the method of accounting for these costs. However, the transitional rules for implementing the new Canadian standard continue to result in U.S. GAAP reporting differences. Under CICA Handbook Section 3461, all past net gains (losses), net assets and prior service costs were recognized as of the date of adoption. In contrast, under U.S. GAAP, net gains (losses), net assets and prior service costs that occurred before January 1, 2000 are recognized over the appropriate amortization period.

 

Income Taxes

 

The liability method of accounting for income taxes is used for both Canadian GAAP and U.S. GAAP. However, under U.S. GAAP, temporary differences are tax effected at enacted rates, whereas under Canadian GAAP, temporary differences are tax effected using substantively enacted rates and laws that will be in effect when the differences are expected to reverse.

 

Stock Compensation

 

The adoption of CICA Handbook, Section 3870—Stock-Based Compensation and Other Stock-Based Payments reduced most prospective differences in accounting for these costs between Canadian GAAP and U.S. GAAP. For both Canadian and U.S. GAAP, Moore Wallace uses the intrinsic value method for accounting for stock options. Prior to CICA Handbook Section 3870, recognition of compensation expense was not required for Moore Wallace’s Series 1 Preference Share options (which we refer to in this offering memorandum as 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 Moore Wallace shareholders approved the amendment of the options to purchase Series 1 Preference Shares (which we refer to in this offering memorandum as preference shares) to eliminate the cash-out provision and to make them exercisable for one common share per preference share option. The exercise price and the number of preference share options remained unchanged. This amendment effectively made these options common share equivalents for diluted earnings per share computations. The transition rules for CICA Handbook Section 3870 required that these common share equivalents be considered outstanding as of the beginning of the year, whereas for U.S. GAAP purposes, these preference share options were not considered common share equivalents until amended. The difference in the weighted average common shares between Canadian GAAP and U.S. GAAP relates solely to the amendment of the preference share options.

 

Additionally, no compensation expense is required to be recognized in the current and future periods under Canadian GAAP pursuant to CICA Handbook Section 3870, whereas under U.S. GAAP, unearned compensation cost will be recognized over the remaining vesting period (through December 11, 2004) based on the intrinsic value of the option on the date of approval.

 

Comprehensive Income

 

U.S. GAAP requires disclosure of comprehensive income and its components. Comprehensive income is the change in equity of Moore Wallace 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

 

64


NOTES TO UNAUDITED PRO FORMA

CONDENSED COMBINED STATEMENTS OF OPERATIONS—(Continued)

 

other comprehensive income for Moore Wallace are unrealized foreign currency translation adjustments, the change in fair value of derivatives and unrealized gains (losses) on available-for-sale securities. Under Canadian GAAP, there is no standard for reporting comprehensive income.

 

Accounting for Derivative Instruments and Hedging Activities

 

For U.S. GAAP purposes, Moore Wallace’s interest rate swaps are designated as cash flow hedges, and changes in their fair value are recorded in other comprehensive income. Under Canadian GAAP, there is no standard requiring the recognition of the fair value of derivatives through comprehensive income.

 

Foreign Currency Translation

 

Under U.S. GAAP, foreign currency translation gains or losses are only recognized on the sale or substantial liquidation of a foreign subsidiary. Under Canadian GAAP, a foreign currency gain or loss due to a partial liquidation is recognized in income.

 

Business Process Reengineering

 

Under U.S. GAAP, business process reengineering costs are expensed as incurred. Prior to October 28, 1998, Canadian GAAP permitted these costs to be capitalized or expensed. Subsequent to October 28, 1998, Canadian GAAP requires expensing these costs. Prior to October 28, 1998, Moore Wallace capitalized business process reengineering costs and classified them as computer software. In 2002, the U.S. GAAP reconciling item for computer software relates solely to the amortization differential of the capitalized amounts.

 

Convertible Debentures

 

The debt issue costs disclosed on the U.S. GAAP reconciliation represents the change in the fair value of contingent consideration granted in connection with the December 2001 induced conversion of the Moore Wallace subordinated convertible debentures. The contingent consideration is 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 Moore Wallace share price at December 31, 2003 and 2002. For Canadian GAAP purposes, to the extent that any stock or cash is paid, it will be recorded as a charge to retained earnings. For U.S. GAAP purposes, the fair value of this contingent consideration is recognized in earnings and recorded at fair market value in subsequent reporting periods. The fair value of the consideration was based upon an independent third-party valuation using an option pricing valuation model that includes Moore Wallace’s share price volatility, cost of borrowings and certain equity valuation multiples.

 

The following tables provide a reconciliation of Moore Wallace net earnings as reported under Canadian GAAP to net earnings under U.S. GAAP.

 

     Year Ended
December 31, 2003


 
     (in thousands)  

Net earnings as reported

   $ 114,176  

U.S. GAAP ADJUSTMENTS:

        

Pension expense

     4,139  

Postretirement benefits

     17,326  

Computer software

     6,785  

Debt conversion costs

     1,169  

Stock-based compensation

     (602 )

Income taxes

     (11,238 )
    


Net earnings under U.S. GAAP.

   $ 131,755  
    


 

65


NOTES TO UNAUDITED PRO FORMA

CONDENSED COMBINED STATEMENTS OF OPERATIONS—(Continued)

 

The following table lists the Moore Wallace balance sheet items that would have been materially different had they been presented under U.S. GAAP:

 

     As of December 31, 2003

 
     Canadian GAAP

    U.S. GAAP

 
     (in thousands)  

Net pension asset

   $ (188,539 )   $ (123,128 )

Computer software, net

     (106,603 )     (87,852 )

Fair value derivatives—liability

     3,925       17,229  

Postretirement benefits

     261,525       368,932  

Deferred income taxes, net

     43,756       (27,821 )

Accounts payable and accrued liabilities

     668,198       662,198  

Long-term debt

     899,038       884,815  

Accumulated other comprehensive income

     (117,661 )     (85,206 )

Share capital

     915,500       917,639  

Retained earnings

     228,777       81,110  

 

66


(c) Exhibits:

 

Exhibit Number Description of Exhibit

 

2.1 Combination Agreement, dated as of November 8, 2003, between R. R. Donnelley & Sons Company and Moore Wallace Incorporated is incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by R. R. Donnelley & Sons Company on November 10, 2003
2.2 First Amendment to Combination Agreement, dated as of February 19, 2004, between R. R. Donnelley & Sons Company and Moore Wallace Incorporated is incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by R. R. Donnelley & Sons Company on February 20, 2004
23 Consent of Deloitte & Touche LLP

 

67


SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

R. R. DONNELLEY & SONS COMPANY
     
By:   /S/    SUZANNE S. BETTMAN
   
   

Suzanne S. Bettman

Sr. Vice President, General

Counsel and Assistant Secretary

 

 

Date: March 16, 2004


EXHIBIT INDEX

 

Exhibit
Number


  

Description of Exhibit


2.1    Combination Agreement, dated as of November 8, 2003, between R. R. Donnelley & Sons Company and Moore Wallace Incorporated is incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by
R. R. Donnelley & Sons Company on November 10, 2003
2.2    First Amendment to Combination Agreement, dated as of February 19, 2004, between R. R. Donnelley & Sons Company and Moore Wallace Incorporated is incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by R. R. Donnelley & Sons Company on February 20, 2004
23    Consent of Deloitte & Touche LLP

 

 

69