SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 15, 2003
Moore Wallace Incorporated
--------------------------
(Exact name of registrant as specified in its charter)
Canada 1-8014 98-0154502
------ ------ ----------
(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Identification No.)
6100 Vipond Drive
Mississauga, Ontario, Canada L5T 2X1
---------------------------- -------
(Address of principal executive offices) (Zip Code)
(905) 362-3100
--------------
(Registrant's telephone number, including area code)
N/A
---------
(Former name or former address, if changed since last report)
This Form 8-K/A is being filed to amend the Form 8-K filed on May 15, 2003
by Moore Wallace Incorporated (formerly Moore Corporation Limited) ("Parent") to
include the financial statements and pro forma financial information referred to
in Item 7 below relating to the Merger (as defined below). At the time of the
filing of the Form 8-K, it was impractical for Parent to provide these financial
statements and pro forma financial information. Pursuant to the instructions to
Item 7 of Form 8-K, Parent hereby amends Item 7 to the Form 8-K to include the
previously omitted information.
On May 15, 2003, the merger (the "Merger") of M-W Acquisition, Inc.
("Merger Sub"), a wholly owned subsidiary of Parent, with and into Wallace
Computer Services, Inc. (the "Company"), and the subsequent merger of the
surviving corporation with and into a subsidiary of Moore Holdings U.S.A. Inc.,
a wholly owned subsidiary of Parent, as contemplated by the Agreement and Plan
of Merger, dated as of January 16, 2003 (and as amended and restated as of April
14, 2003) (the "Merger Agreement"), among Parent, Moore Holdings U.S.A. Inc.,
Merger Sub and the Company, were consummated. In the Merger, each share of
common stock, par value $1.00 per share, of the Company was converted into
either, at the stockholder's election and subject to proration, (A) a number of
common shares of Parent ("Parent Common Stock") equal to (i) 1.05 plus (ii) the
quotient of (x) 14.40 divided by (y) the average of the daily high and low sales
price per share of Parent Common Stock on the last trading day immediately
preceding the closing date or (B) an amount in cash, without interest, equal to
(i) $14.40 plus (ii) the product of (x) 1.05 multiplied by (y) the average of
the daily high and low sales price per share of Parent Common Stock on the last
trading day immediately preceding the closing date. The Merger Agreement and the
transactions contemplated thereby were adopted and approved at a meeting of the
stockholders of the Company on May 15, 2003.
The foregoing description of the Merger Agreement is qualified in its
entirety by reference to the full text of such agreement and is incorporated
herein by reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
WALLACE COMPUTER SERVICES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Public Accountants
Consolidated Statements of Operations for the Years Ended July 31,
2002, 2001 and 2000
Consolidated Balance Sheets as of July 31, 2002 and 2001
Consolidated Statements of Cash Flows for the Years Ended July 31,
2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity for the Years Ended
July 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
Quarterly Information:
Condensed Consolidated Statements of Operations for the Three Months
Ended January 31, 2003 and 2002 (Unaudited)
Condensed Consolidated Statements of Operations for the Six Months
Ended January 31, 2003 and 2002 (Unaudited)
Condensed Consolidated Balance Sheets as of January 31, 2003 and
July 31, 2002 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended January 31, 2003 and 2002 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders
Wallace Computer Services, Inc.
Lisle, Illinois
We have audited the accompanying consolidated balance sheet of Wallace
Computer Services, Inc. and Subsidiaries ("the Company") as of July 31, 2002,
and the related consolidated statements of operations, stockholder's equity, and
of cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The consolidated
financial statements of the Company as of July 31, 2001 and for each of the two
years then ended were audited by other auditors, who have ceased operations.
Those auditors expressed an unqualified opinion on those financial statements in
their report dated September 11, 2001.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about 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 audit provides a
reasonable basis for our opinion.
In our opinion, based on our audit, such consolidated financial statements
present fairly, in all material respects, the financial position of Wallace
Computer Services, Inc. and Subsidiaries as of July 31, 2002, and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
As discussed above, the financial statements of Wallace Computer Services,
Inc. and Subsidiaries as of July 31, 2001 and 2000, and for the year then ended
were audited by other auditors who have ceased operations. As described in Note
8, these financial statements have been revised to include the transitional
disclosures required by Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets," which was adopted by the Company as
of August 1, 2001. Our audit procedures with respect to the disclosures in Note
8 with respect to 2001 and 2000 included (i) agreeing the previously reported
net income to the previously issued financial statements and the adjustments to
reported net income representing amortization expense (including any related tax
effects) recognized in those periods related to goodwill, to the Company's
underlying records obtained from management, and (ii) testing the mathematical
accuracy of the reconciliation of adjusted net income to reported net income,
and the related earnings per share amounts. In our opinion, the disclosures for
2001 and 2000 in Note 8 are appropriate. However, we were not engaged to audit,
review, or apply any procedures to the 2001 or 2000 consolidated financial
statements of the Company other than with respect to such disclosures and,
accordingly, we do not express an opinion or any other form of assurance on the
2001 or 2000 consolidated financial statements taken as a whole.
Deloitte & Touche LLP
Chicago, Illinois
September 9, 2002
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31,
------------------------------------------
2002 2001 2000
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales................................................ $1,545,629 $1,689,534 $1,641,889
---------- ---------- ----------
Cost and expenses:
Cost of goods sold..................................... 1,134,394 1,236,589 1,181,403
Selling and administrative expenses.................... 234,943 255,604 263,654
Provision for depreciation and amortization............ 66,407 78,848 77,573
Restructuring charges.................................. 43,285 513 41,551
---------- ---------- ----------
Total costs and expenses................................. 1,479,029 1,571,554 1,564,181
---------- ---------- ----------
Operating income......................................... 66,600 117,980 77,708
Interest income........................................ (772) (829) (2,408)
Interest expense, net of capitalized interest.......... 21,615 29,102 33,598
Other income........................................... -- -- (3,190)
---------- ---------- ----------
Income before income taxes and the cumulative effect of a
change in accounting principle......................... 45,757 89,707 49,708
---------- ---------- ----------
Provision (benefit) for income taxes:
Current:
Federal............................................. 21,723 37,363 20,728
State............................................... 1,222 5,199 3,673
Deferred............................................... (6,610) (6,051) 2,690
---------- ---------- ----------
Total income taxes............................. 16,335 36,511 27,091
---------- ---------- ----------
Income before the cumulative effect of a change in
accounting principle -- net of tax..................... 29,422 53,196 22,617
Cumulative effect of a change in accounting
principle -- net of tax................................ (144,078) -- --
---------- ---------- ----------
Net (loss) income........................................ $ (114,656) $ 53,196 $ 22,617
---------- ---------- ----------
Basic earnings per share before the cumulative effect of
a change in accounting principle....................... $ 0.71 $ 1.31 $ 0.55
Cumulative effect of a change in accounting
principle........................................... (3.49) -- --
---------- ---------- ----------
Basic (Loss) Earnings per Share........................ $ (2.77) $ 1.31 $ 0.55
Diluted earnings per share before the cumulative effect
of a change in accounting principle.................... $ 0.71 $ 1.30 $ 0.55
Cumulative effect of a change in accounting
principle........................................... (3.46) -- --
---------- ---------- ----------
Diluted (Loss) Earnings per Share...................... $ (2.75) $ 1.30 $ 0.55
========== ========== ==========
The accompanying notes are an integral part of these statements.
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS AT AS AT
JULY 31, 2002 JULY 31, 2001
------------- -------------
(IN THOUSANDS, EXCEPT PAR
VALUE AND SHARE AMOUNTS)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 25,178 $ --
Accounts receivable, less allowance for doubtful accounts
of $9,434 in 2002 and $10,139 in 2001................... 245,141 280,456
Inventories............................................... 85,437 100,922
Assets held for sale...................................... 12,467 1,215
Current and deferred income taxes......................... 31,363 27,498
Advances and prepaid expenses............................. 5,329 4,948
--------- ----------
Total current assets.................................... 404,915 415,039
--------- ----------
Property, plant and equipment, at cost:
Land and buildings........................................ 160,053 180,724
Machinery, equipment, furniture and fixtures.............. 654,988 706,641
Leasehold improvements.................................... 5,892 5,908
--------- ----------
Total property, plant and equipment....................... 820,933 893,273
Less: accumulated depreciation and amortization........... (502,595) (502,107)
--------- ----------
Net property, plant and equipment....................... 318,338 391,166
Goodwill.................................................... 139,098 284,664
Cash surrender value of life insurance...................... 15,861 15,201
System development costs, net of accumulated amortization... 49,003 55,516
Other assets................................................ 2,779 2,836
--------- ----------
Total Assets............................................ $ 929,994 $1,164,422
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt...................... $ 1,233 $ 997
Short-term notes payable.................................. -- 3,003
Accounts payable.......................................... 78,403 74,087
Dividends payable......................................... 6,862 6,765
Accrued compensation and related expenses................. 37,983 46,964
Other accrued expenses.................................... 38,484 44,320
Contribution to profit sharing and retirement fund........ 6,511 13,466
--------- ----------
Total current liabilities............................... 169,476 189,602
--------- ----------
Deferred compensation and retirement benefits............... 43,130 39,128
Deferred income taxes....................................... 49,525 60,385
Long-term debt.............................................. 209,303 284,087
Other long-term liabilities................................. 9,431 10,603
Commitments and contingencies (Note 6)...................... -- --
Stockholders' equity:
Preferred stock, $50 par value, authorized 500,000 shares,
none issued............................................. -- --
Common stock, $1.00 par value, authorized 100,000,000
shares, 45,674,055 shares issued and outstanding........ 45,764 45,764
Additional capital........................................ 41,355 39,770
Deferred compensation..................................... 3,095 3,301
Retained earnings......................................... 426,067 570,507
Treasury stock, at cost: 2002: 4,117,653 shares; 2001:
4,785,511 shares........................................ (66,471) (78,403)
Accumulated other comprehensive loss...................... (681) (322)
--------- ----------
Total stockholders' equity.............................. 449,129 580,617
--------- ----------
Total Liabilities and Stockholders' Equity.............. $ 929,994 $1,164,422
========= ==========
The accompanying notes are an integral part of these statements.
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31,
--------------------------------------
2002 2001 2000
-------------- --------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Net (loss) income..................................... $(114,656) $ 53,196 $ 22,617
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Cumulative effect of a change in accounting
principle........................................ 144,078 -- --
Depreciation....................................... 54,804 61,513 62,841
Amortization....................................... 11,603 17,335 14,732
Restructuring charges, non-cash.................... 24,304 87 31,828
Debt cost amortization............................. 1,747 1,603 1,472
Deferred taxes..................................... (10,427) (9,527) 4,908
Loss (gain) on disposal of property................ 44 48 (344)
Gain on sale of investments........................ -- -- (3,190)
Changes in assets and liabilities, net of effect of
acquisitions and divestitures:
Accounts receivable................................ 35,963 13,897 1,090
Inventories........................................ 15,202 7,211 (387)
Prepaid taxes...................................... (4,087) 453 8,940
Advances and prepaid expenses...................... (1,859) 1,947 (1,676)
Other assets....................................... 985 13,481 (6,475)
Accounts payable and other liabilities............. (18,581) 11,596 9,451
Deferred compensation and retirement benefits...... 2,433 2,863 4,273
--------- --------- ---------
Net cash provided by operating activities............... 141,553 175,703 150,080
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures.................................. (23,251) (41,310) (53,945)
Proceeds from sales of short-term investments......... -- -- 3,190
Proceeds from disposal of property.................... 7,837 1,671 6,086
Payments for acquisitions, net of cash acquired....... (4,858) -- (10,067)
--------- --------- ---------
Net cash used in investing activities.............. (20,272) (39,639) (54,736)
--------- --------- ---------
Cash flows from financing activities:
Cash dividends paid................................... (27,264) (26,844) (27,016)
Net retirements of short-term debt.................... (3,044) (11,582) (8,067)
Amounts paid on long-term debt........................ (96,292) (211,887) (130,170)
Proceeds from issuance of long-term debt.............. 19,723 105,000 96,487
Proceeds from issuance of common stock................ 15,255 11,850 11,347
Purchase of treasury stock............................ (4,481) (7,106) (41,453)
--------- --------- ---------
Net cash used in financing activities................. (96,103) (140,569) (98,872)
--------- --------- ---------
Net changes in cash and cash equivalents................ 25,178 (4,505) (3,528)
Cash and cash equivalents at beginning of year.......... -- 4,505 8,033
--------- --------- ---------
Cash and cash equivalents at end of year................ $ 25,178 $ -- $ 4,505
========= ========= =========
Supplemental disclosure:
Interest paid (net of interest capitalized)........... $ 17,205 $ 25,494 $ 28,155
Income taxes paid..................................... $ 26,333 $ 38,028 $ 14,680
========= ========= =========
The accompanying notes are an integral part of these statements.
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SHARES OF COMMON STOCK
-----------------------
ISSUED IN TREASURY
------- ------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Balance, July 31, 1999...................................... 45,764 (3,546)
====== ======
Comprehensive income:
Net earnings.............................................. -- --
Comprehensive income
Cash dividends ($.66 per share)........................... -- --
Sale of stock under employee stock purchase plan.......... -- 869
Stock options exercised net of shares exchanged in lieu of
cash................................................... -- 110
Deferred compensation liability for change in shares held
in grantor trust....................................... -- --
Tax benefit from early disposition by employees of stock
issued under stock option plans and exercise of
non-qualified stock options............................ -- --
Amortization of difference between market price and option
price for 1997 option plan............................. -- --
Treasury stock purchased.................................. -- (2,510)
====== ======
Balance, July 31, 2000...................................... 45,764 (5,077)
====== ======
Comprehensive income:
Net earnings.............................................. -- --
Other comprehensive income, net of tax:
Cash flow hedge........................................ -- --
Comprehensive income
Cash dividends ($.66 per share)........................... -- --
Sale of stock under employee stock purchase plan.......... -- 643
Stock options exercised net of shares exchanged in lieu of
cash................................................... -- 277
Deferred compensation liability for change in shares held
in grantor trust....................................... -- --
Tax benefit from early disposition by employees of stock
issued under stock option plans and exercise of
non-qualified stock options............................ -- --
Amortization of difference between market price and option
price for 1997 option plan............................. -- --
Treasury stock purchased.................................. -- (629)
====== ======
Balance, July 31, 2001...................................... 45,764 (4,786)
====== ======
The accompanying notes are an integral part of these statements.
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
SHARES OF COMMON STOCK
-----------------------
ISSUED IN TREASURY
------- ------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Comprehensive loss:
Net loss.................................................. -- --
Other comprehensive income, net of tax:
Cash flow hedge........................................ -- --
Minimum pension liability adjustment................... -- --
Comprehensive loss
Cash dividends ($.66 per share)........................... -- --
Sale of stock under employee stock purchase plan.......... -- 444
Stock options exercised net of shares exchanged in lieu of
cash................................................... -- 524
Deferred compensation liability for change in shares held
in grantor trust....................................... -- --
Tax benefit from early disposition by employees of stock
issued under stock option plans and exercise of
non-qualified stock options............................ -- --
Amortization of difference between market price and option
price for 1997 option plan................................ -- --
Treasury stock purchased.................................... -- (300)
====== ======
Balance, July 31, 2002...................................... 45,764 (4,118)
====== ======
The accompanying notes are an integral part of these statements.
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
ACCUMULATED
COMMON COST OF OTHER
STOCK ADDITIONAL DEFERRED RETAINED TREASURY COMPREHENSIVE
PAR VALUE CAPITAL COMPENSATION EARNINGS STOCK LOSS TOTAL
--------- ---------- ------------ --------- -------- ------------- ---------
(IN THOUSANDS)
Balance July 31, 1999................ $45,764 $37,528 $3,883 $ 581,392 $(85,000) $ -- $ 583,567
======= ======= ====== ========= ======== ===== =========
Comprehensive income:
Net earnings....................... -- -- -- 22,617 -- -- 22,617
------- ------- ------ --------- -------- ----- ---------
Comprehensive income................. 22,617
Cash dividends ($.66 per share)...... -- -- -- (26,682) -- -- (26,682)
Sale of stock under employee stock
purchase plan.................... -- -- -- (16,763) 26,166 -- 9,403
Stock options exercised net of
shares exchanged in lieu of
cash............................. -- -- -- (1,631) 3,482 -- 1,851
Deferred compensation liability for
change in shares held in grantor
trust............................ -- -- (724) -- -- -- (724)
Tax benefit from early disposition
by employees of stock issued
under stock option plans and
exercise of non-qualified stock
options.......................... -- 541 -- -- -- -- 541
Amortization of difference between
market price and option price for
1997 option plan................. -- 417 -- -- -- -- 417
Treasury stock purchased........... -- -- -- -- (41,453) -- (41,453)
======= ======= ====== ========= ======== ===== =========
Balance, July 31, 2000............... 45,764 38,486 3,159 558,933 (96,805) -- 549,537
======= ======= ====== ========= ======== ===== =========
Comprehensive income:
Net earnings....................... -- -- -- 53,196 -- -- 53,196
Other comprehensive income, net of
tax:
Cash flow hedge.................. -- -- -- -- -- (322) (322)
------- ------- ------ --------- -------- ----- ---------
Comprehensive income................. 52,874
Cash dividends ($.66 per share)...... -- -- -- (26,831) -- -- (26,831)
Sale of stock under employee stock
purchase plan.................... -- -- -- (11,271) 18,230 -- 6,959
Stock options exercised net of
shares exchanged in lieu of
cash............................. -- -- -- (3,520) 7,278 -- 3,758
Deferred compensation liability for
change in shares held in grantor
trust............................ -- -- 142 -- -- -- 142
Tax benefit from early disposition
by employees of stock issued
under stock option plans and
exercise of non-qualified stock
options.......................... -- 1,151 -- -- -- -- 1,151
Amortization of difference between
market price and option price for
1997 option plan................. -- 133 -- -- -- -- 133
Treasury stock purchased........... -- -- -- -- (7,106) -- (7,106)
======= ======= ====== ========= ======== ===== =========
Balance, July 31, 2001............... 45,764 39,770 3,301 570,507 (78,403) (322) 580,617
======= ======= ====== ========= ======== ===== =========
The accompanying notes are an integral part of these statements.
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONCLUDED)
ACCUMULATED
COMMON COST OF OTHER
STOCK ADDITIONAL DEFERRED RETAINED TREASURY COMPREHENSIVE
PAR VALUE CAPITAL COMPENSATION EARNINGS STOCK LOSS TOTAL
--------- ---------- ------------ --------- -------- ------------- ---------
(IN THOUSANDS)
Comprehensive loss:
Net loss........................... -- -- -- (114,656) -- -- (114,656)
Other comprehensive income, net of
tax:
Cash flow hedge.................. -- -- -- -- -- 322 322
Minimum pension liability
adjustment..................... -- -- -- -- -- (681) (681)
------- ------- ------ --------- -------- ----- ---------
Comprehensive loss................... (115,015)
Cash dividends ($.66 per share)...... -- -- -- (27,248) -- -- (27,248)
Sale of stock under employee stock
purchase plan.................... -- -- -- (610) 7,378 -- 6,768
Stock options exercised net of
shares exchanged in lieu of
cash............................. -- -- -- (1,926) 9,035 -- 7,109
Deferred compensation liability for
change in shares held in grantor
trust............................ -- -- (206) -- -- -- (206)
Tax benefit from early disposition
by employees of stock issued
under stock option plans and
exercise of non-qualified stock
options.......................... -- 1,483 -- -- -- -- 1,483
Amortization of difference between
market price and option price for
1997 option plan................. -- 102 -- -- -- -- 102
Treasury stock purchased............. -- -- -- -- (4,481) -- (4,481)
======= ======= ====== ========= ======== ===== =========
Balance, July 31, 2002............... $45,764 $41,355 $3,095 $ 426,067 $(66,471) $(681) $ 449,129
======= ======= ====== ========= ======== ===== =========
The accompanying notes are an integral part of these statements.
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: Wallace Computer Services Inc. ("the Company") is a
provider of Total Print Management products and services to FORTUNE(R) 1,000 and
other customers, producing and distributing forms, labels, targeted
communications and commercial print. The Company operates in two business
segments which are Integrated Graphics and Forms and Labels.
BASIS OF CONSOLIDATION: The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries, which are
wholly-owned. All significant intercompany transactions have been eliminated.
USE OF ESTIMATES: The financial statements of the Company have been
prepared in conformity with generally accepted accounting principles in the
United States of America. The preparation of the financial statements requires
the Company to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses, and the disclosure of contingent
assets and liabilities. The Company reviews its estimates on a regular basis.
Estimates made by the Company are based on historical experience and other
assumptions management believes are reasonable under the current circumstances.
Actual results may differ from these estimates under different assumptions or
conditions.
During fiscal year 2001, the Company changed its method of estimating
workers' compensation reserves from the case reserve method to a fully developed
loss method, a more conservative method. This change in accounting estimate
resulted in a one-time, pre-tax charge of $3.0 million or $0.04 per fully
diluted share.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to
conform to the current year presentation.
REVENUE RECOGNITION: The Company recognizes revenue for the majority of
its products upon shipment to the customer and the transfer of title. Revenue
from services is recognized when the services are performed. In some cases and
upon customer request, the Company prints and stores custom print product for
customer specified future delivery, generally within six months. In this case,
risk of loss passes to the customer, the customer is invoiced under normal
credit terms and revenue is recognized when manufacturing is complete.
CASH AND CASH EQUIVALENTS: The Company invests excess cash balances in
short-term securities, including commercial paper, money market funds, and
municipal bonds whose original maturities are less than three months.
CAPITALIZED INTEREST COSTS: Interest costs are capitalized based upon the
cost of capital projects in progress during the year. Interest incurred, before
interest capitalization, and the amount of interest capitalized as of the last
three fiscal year ends is as follows:
INTEREST INCURRED INTEREST CAPITALIZED
----------------- --------------------
(IN THOUSANDS)
2002.................................................. $22,026 $ 411
2001.................................................. $31,102 $2,000
2000.................................................. $36,272 $2,674
Amortization expense related to interest capitalized was $1,330,000 in
fiscal year 2002; $1,223,000 in fiscal year 2001; and $1,106,000 in fiscal year
2000.
LONG-LIVED ASSETS: Long-lived assets are comprised of property, plant and
equipment and goodwill.
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT: Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. An estimate of undiscounted
future cash flows produced by the asset, or the appropriate grouping of assets,
is compared with the carrying value to determine whether an impairment exists,
pursuant to the provisions of Statement of Financial Accounting Standards (SFAS)
No.121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." If an asset is determined to be impaired, the loss is
measured based on quoted market prices in active markets, if available. If
quoted market prices are not available, the estimate of fair value is based on
various valuation techniques, including a discounted value of estimated future
cash flows and fundamental analysis. The Company reports an asset to be disposed
of at the lower of its carrying value or its estimated net realizable value. The
Company will follow the guidance in SFAS 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" beginning in fiscal year 2003.
In fiscal years 2002 and 2000, the Company wrote down certain long-lived
assets in connection with its restructuring activities. See Note 7.
Property, plant and equipment is recorded at historical cost. Depreciation
for financial statement purposes is computed using the straight-line method over
the estimated useful lives of the various classes of property, plant and
equipment.
Buildings........................................ 40 years
Building equipment............................... 10-15 years
Machinery, equipment, furniture and fixtures..... 3-10 years
Leasehold improvements........................... Lesser of the lease period or useful life
GOODWILL: Goodwill represents the excess of cost over the assigned value
of the net assets in connection with all acquisitions. The Company has elected
early adoption of Statement of Financial Accounting Standard ("SFAS") No. 142
"Goodwill and Intangible Assets" and, accordingly, has stopped amortization of
goodwill effective August 1, 2001. The Company has and will annually perform a
goodwill impairment test which requires the Company to make assumptions
regarding estimated future cash flows, capital market and economic conditions
and other factors to determine the fair value of the asset. This test will be
performed in the fourth quarter of each year. Goodwill amortization in 2001 and
2000 amounted to $7,582,000 and $8,116,000, respectively, based on a
straight-line basis over 40 years. See Note 8 "Change in Accounting Principle"
for disclosure of the impact of the adoption.
SYSTEM DEVELOPMENT COSTS: In accordance with Statement of Position 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," computer software that is either purchased or developed for use
by the Company is amortized over a useful life of three to seven years.
Amortization of internal use software was $11,495,000 in fiscal year 2002;
$9,625,000 in fiscal year 2001; and $6,395,000 in fiscal year 2000. The
unamortized balance of all capitalized computer software was $49,003,000 at July
31, 2002 and $55,516,000 at July 31, 2001.
INCOME TAXES: The Company accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes." Under that standard, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
statutory tax rates applicable to future years to differences between the
financial statement carrying amount and the tax basis of existing assets and
liabilities. Investment tax credits are amortized to income over the lives of
the applicable assets. The unamortized investment tax credit amounted to
$109,000 at July 31, 2002 and $125,000 at July 31, 2001.
NET INCOME (LOSS) PER SHARE: The Company computes earnings per share in
accordance with SFAS No. 128, "Earnings per Share." Accordingly, basic earnings
per share amounts are computed based on the weighted-average number of common
shares outstanding. Diluted earnings per share amounts are
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
based on the increased number of common shares that would be outstanding
assuming the exercise of certain outstanding stock options, when such conversion
would have the effect of reducing earnings per share. See Note 13 for the
computation of earnings (loss) per share.
COMPREHENSIVE INCOME: Under SFAS No. 130, "Reporting Comprehensive
Income," comprehensive income for the Company consists of net income (loss),
minimum pension liability adjustments and derivative activity and is presented
in the Consolidated Statements of Stockholders' Equity.
RECENTLY IMPLEMENTED ACCOUNTING PRONOUNCEMENTS: In June 2001, the
Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business
Combinations," which addresses financial accounting and reporting for business
combinations. SFAS No. 141, which requires that all business combinations be
accounted for by a single method, the purchase method, modifies the criteria for
recognizing intangible assets, and expands disclosure requirements. The
provisions of SFAS No. 141 apply to all business combinations initiated after
June 30, 2001 and, as such, will be utilized on an ongoing basis.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which addresses financial accounting and reporting for acquired
goodwill and other intangible assets. In the second quarter, retroactive to and
effective August 1, 2001, the Company adopted SFAS 142, resulting in the
cessation of amortization of goodwill and the recording of the cumulative effect
of a change in accounting principle. See Note 8 "Change in Accounting Principle"
for a discussion of goodwill accounting changes.
In August 2001, the Emerging Issue Task Force reached a consensus on Issue
01-09 "Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendors' Products" requiring that certain marketing and
promotional expenditures be reflected as a reduction of revenue rather than a
selling expense. The consensus was effective for interim periods beginning after
December 15, 2001. While the effect of adopting the provisions of Issue 01-09
was not significant with no effect on net income or earnings per share, prior
period financial statements have been reclassified to comply with this EITF
guidance. The reclassification reduced sales, with a corresponding decrease to
selling and administrative expenses, in the amounts of $3,040,000, $3,258,000
and $3,694,000 for the fiscal years ended July 31, 2002, 2001 and 2000,
respectively.
NEW ACCOUNTING PRONOUNCEMENTS: In June 2001, the FASB issued SFAS No. 143,
"Accounting for Asset Retirement Obligations" ("SFAS 143"), which is effective
for financial statements issued for fiscal years beginning after June 15, 2002.
SFAS 143 addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. This Statement requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. It is anticipated that the adoption of
SFAS 143 will have no impact on the financial position or results of operations
of the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 establishes
a single accounting model, based on the framework established in SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121"), for long-lived assets to be disposed of by sale,
and resolves implementation issues related to SFAS 121. Additionally, SFAS 144
modifies the procedures to be used to define discontinued operations. The
Company is required to adopt SFAS 144 no later than the first quarter of fiscal
year 2003. It is anticipated that the adoption of SFAS 144 will not have a
significant impact on the financial position or results of operations of the
Company.
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"). Under the provisions of SFAS 145, gains and losses from the early
extinguishment of debt are no longer classified as
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. It
is anticipated that the adoption of SFAS 145 will have no impact on the
financial position or results of operations of the Company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires
that a liability for costs associated with an exit or disposal activity be
recognized and measured initially at fair value only when the liability is
incurred. SFAS 146 is effective for exit or disposal activities that are
initiated after December 31, 2002, as such, the provisions of SFAS 146 will be
applied prospectively only if the Company undertakes relevant restructuring
activities or other disposal or exit activities.
2. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective August 1, 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and
SFAS No. 138. This standard requires that an entity recognize derivatives as
either assets or liabilities on its balance sheet and measure those instruments
at fair value.
In the second quarter of fiscal year 2001, the Company entered into two
interest rate swap agreements ("Swaps") which effectively converted $75 million
of floating rate debt under the revolving Credit Facility ("Credit Facility") to
fixed rate debt. The purpose for entering into the Swaps was to better match the
Company's assets and liabilities and reduce its exposure to interest rate risk.
As required by the Company's hedging and derivative use policy, such Swaps were
entered into with high quality, independent counterparties at market pricing.
These parties were rated A1 and/or A+ or higher by Moody's and Standard &
Poor's. The Swaps had a term that was one year or less from the date of
inception. These Swaps were considered cash flow hedges and, accordingly, the
fair market value of the Swaps was recorded as a liability in "other accrued
expenses" in the current liabilities section of the balance sheet. "Accumulated
other comprehensive loss" in the equity section of the balance sheet reflected
the after-tax charge to equity corresponding to the fair market value of the
Swaps. The accumulated other comprehensive loss related to the Swaps is included
in comprehensive income (loss). Any net gain or loss on the Swaps, which is not
significant in fiscal year 2001 or 2002, is reflected in interest expense in the
statement of operations. In the second quarter of fiscal year 2002, the Company
settled the Swaps and has no other derivative financial instruments outstanding.
3. INVENTORIES
Inventories are stated at cost which does not exceed market and include
material, labor and overhead. Cost is determined on the last-in, first-out
("LIFO") basis for certain inventories, and on the first-in, first-out ("FIFO")
basis for other inventories.
Inventories at July 31 were as follows:
2002 2001
------- --------
(IN THOUSANDS)
Raw materials............................................... $12,365 $ 15,623
Work in process............................................. 17,978 16,531
Finished products........................................... 55,094 68,768
------- --------
$85,437 $100,922
======= ========
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At July 31, 2002 and 2001, the cost of inventories aggregating $46,047,000
and $55,572,000, respectively, was determined using the LIFO method. Inventories
would have been $12,942,000 higher in fiscal year 2002 and $14,825,000 higher in
fiscal year 2001, if the FIFO method had been used for all inventories.
4. FINANCING ARRANGEMENTS
SHORT-TERM DEBT: Unsecured money market lines of $25 million were
available as of July 31, 2002. There were no borrowings outstanding as of that
date.
LONG-TERM DEBT: Long-term debt consisted of the following at July 31:
2002 2001
-------- --------
(IN THOUSANDS)
Average 3.1% in fiscal year 2002 and 6.21% in fiscal year
2001 revolving credit agreement........................... $ -- $ 75,000
8.93% senior term notes due 2009............................ 124,847 123,727
8.31% senior term notes due 2006............................ 62,385 61,758
Average 1.66% in fiscal year 2002 and 3.80% in fiscal year
2001 floating rate industrial revenue bonds due 2007...... 7,000 7,000
Average 1.61% in fiscal year 2002 and 3.70% in fiscal year
2001 floating rate industrial revenue bonds due 2010...... 8,000 8,000
5.10% promissory note due 2004.............................. 870 870
6.00% promissory note due 2003.............................. 450 900
3.00% promissory note due 2004.............................. 554 --
Average 8.22% property mortgages due 2003 -- 2012........... 6,430 7,824
Other....................................................... -- 5
-------- --------
$210,536 $285,084
Less-current portion................................... 1,233 997
-------- --------
Total long-term debt........................................ $209,303 $284,087
======== ========
In fiscal year 1999, the Company offered $200 million of Senior Notes to
institutional investors in a private placement. The transaction closed and was
funded on January 15, 1999. The proceeds of the notes were used to pay down
borrowings under the revolving credit agreement ("Credit Facility"). At that
time, the Company settled a treasury rate lock agreement related to the issuance
of the $200.0 million Senior Notes for $18.3 million plus related fees which are
being amortized using the effective interest method over the term of the seven-
and ten-year Senior Notes. The impact of the amortization has been included in
the interest rates above. The Company has several debt covenants related to the
Senior Notes. Under the most restrictive of the covenants, the Company must
maintain a debt to capitalization ratio not greater than 65% and must maintain
minimum net worth levels. As a result of adopting SFAS No. 142 and subsequently
recording the $144.1 million charge for goodwill impairment (net of tax), the
Company obtained an amendment to the Senior Note Indenture to provide additional
flexibility under the minimum consolidated net worth covenant. This amendment
allows for an exclusion of up to $75 million of the charge for goodwill
impairment from the definition of net worth for purposes of meeting the minimum
net worth test.
Based upon the interest rates currently available to the Company for
borrowings with similar terms and maturities, the fair value of the Company's
debt and other financial instruments, after adjusting for the deferred expense
related to the treasury lock, is approximately $233.5 million at July 31, 2002.
The
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
balance of the deferred expense related to the treasury lock on the Senior Notes
was $12.8 million as of July 31, 2002 and $14.5 million as of July 31, 2001.
The industrial revenue bonds due 2007 and 2010 may be tendered at the
option of the holders on dates specified in the agreements. The Company
maintains arrangements with agents to remarket any bonds tendered before the
final maturity dates. The bonds are also supported by letters of credit.
Principal payments due on long-term debt, exclusive of the treasury lock of
$12.8 million, are as follows: $1,233,000 in 2003, $1,712,000 in 2004, $617,000
in 2005, $65,625,000 in 2006, $7,598,000 in 2007 and $146,519,000 in 2008 and
beyond.
As of July 31, 2002, the Company has a $250 million revolving Credit
Facility. There were no borrowings under the Credit Facility as of July 31, 2002
and $75 million as of July 31, 2001. The Company has several debt covenants
related to the Credit Facility. Under the most restrictive of the covenants, the
Company must maintain a minimum interest coverage of 2.5 to 1 and a funded debt
to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio
not greater than 3 to 1. The Credit Facility and the Senior Notes maintain cross
default provisions in which a violation of debt covenants in either debt
instrument automatically triggers a default in the other. The Credit Facility
will expire on October 31, 2002.
The Company is currently in compliance with all debt covenants.
5. STOCK OPTIONS
The Company has three stock option plans, the 2001 Stock Incentive Plan
(the "2001 Plan"), the 1997 Stock Incentive Plan (the "1997 Plan") and the 1989
Stock Option Plan (the "1989 Plan"), and an Employee Stock Purchase Plan adopted
in 1974 (the "1974 Plan"). The 1989 Plan expired on September 12, 1999. All of
these plans are stockholder approved.
Under the terms of the 2001 Plan, which expires December 5, 2011, options,
stock appreciation rights (SARs), stock awards and performance shares may be
granted to officers, other employees and directors. As of July 31, 2002, no
SARs, stock awards or performance shares have been issued under the 2001 Plan.
Under the 2001 Plan, 1,635,735 shares of common stock are available for awards.
Two types of options to purchase common stock may be granted: Incentive Options
and Non-Qualified Options. The option price for these options may not be less
than 100% of the market value of the common stock at the date of the option
grant. The option price may be paid in cash or by exchanging previously acquired
Company common stock with a market value equal to the purchase price of the
options. Options generally become exercisable as to 33% of the shares one year
after grant, 33% of the shares two years after grant and the remaining 34% of
the shares three years after grant. Options expire 10 years after grant. The
exercisability of options may be further restricted by one or more of the
following performance measures: common stock value, earnings per share, return
to stockholders (including dividends), return on assets, return on equity,
earnings of the Company, revenues, market share, cash flow, cost reduction
goals, or any combination of the above.
The 2001 Plan additionally provides for option grants to non-employee
Directors. Immediately following the Company's annual meeting, each non-employee
Director is to be granted an option to purchase 2,000 shares at a purchase price
equal to 100% of the fair market value of a share of common stock on the date of
grant of such option. The non-employee Director options vest at a rate of 25%
every three months, such that they will be fully vested within one year, or by
the next annual meeting, whichever occurs first.
Under the terms of the 1997 Plan, which expires September 4, 2006, options
may be granted to employees, as well as to non-employee Directors. Two types of
options to purchase common stock may be
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
granted to officers and other employees: Incentive Options and Non-Qualified
Options (non-employee Directors may only receive grants of Non-Qualified
Options). In the case of Incentive Options, the option price may not be less
than 100% of the market value of the common stock at the date the option is
granted. For Non-Qualified Options, the grant price may not be less than 85% of
the market value. To date, no options have been granted at less than 100% of
market value of the common stock. The option price may be paid in cash or by
exchanging previously acquired Company common stock with a market value equal to
the purchase price of the options. Option vesting, option life and
exercisability have similar terms to the 2001 Plan.
In fiscal year 1997, 567,000 options were granted with performance measure
vesting provisions that are outlined in the 1997 Plan. The performance measures
for the options are based on revenues, pretax income, return on equity, and
return on assets. Based on the performance measures, 37.5% of the options vested
on September 4, 1999 and the remaining options will vest March 4, 2006. These
options were granted with stockholder approval on February 28, 1997, with a
grant date of September 4, 1996. The difference between market price on February
28, 1997 and market price on the grant date is being reflected as an expense in
the Company's statement of operations over the vesting period. This expense of
$102,000 in fiscal year 2002, $133,000 in fiscal year 2001 and $417,000 in
fiscal year 2000 is included in the results of operations.
The Employee Stock Purchase Plan, adopted in 1974, expires on December 31,
2004. A total of 6,600,000 shares of common stock have been reserved for
purchase by employees through semi-annual offerings. The option price is the
lower of 85% of the market price of the shares of common stock on the
commencement date or the termination date of each offering period. Employees
participate in the plan through payroll deductions and the plan qualifies for
certain tax advantages under section 423 of the Internal Revenue Code of 1986,
as amended. Options were exercised to purchase 444,321 shares at $15.32 in
fiscal year 2002, 643,066 shares at $11.45 in fiscal year 2001 and 869,136
shares at $11.18 in fiscal year 2000. There were 1,587,541 shares available at
July 31, 2002 and 2,031,862 shares available at July 31, 2001 for future
issuance under this plan.
The Company maintains a grantor trust, a "Rabbi Trust," for the benefit of
certain employees in which previously earned and accrued deferred bonus amounts
are held on behalf of the employee. There were 172,938 and 182,977 shares held
by the Rabbi Trust at July 31, 2002 and 2001, respectively. The value of these
shares is included as treasury stock within the equity section of the
consolidated financial statements. However, the shares are considered
outstanding and incorporated into the computation of both basic and diluted
earnings per share. The weighted-average number of these shares included in the
earnings per share calculation was 176,000, 172,000 and 211,000 at July 31,
2002, 2001 and 2000, respectively. The deferred compensation liability is
included in the equity section of the balance sheet for both fiscal years 2002
and 2001. Dividends accrued on these Rabbi Trust shares are recognized as
compensation expense in the statement of operations. These shares will be
remitted to the executives upon retirement or termination, or to their
beneficiaries upon death.
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the activity under the stock option plans
for the last three years:
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
Outstanding at July 31, 1999.............................. 2,138,863 $24.41
--------- ------
Granted................................................... 1,183,204 15.98
Forfeited................................................. (328,723) 24.15
Exercised................................................. (41,400) 14.59
--------- ------
Outstanding at July 31, 2000.............................. 2,951,944 $21.13
--------- ------
Granted................................................... 771,500 14.02
Forfeited................................................. (311,525) 24.15
Exercised................................................. (241,613) 12.93
--------- ------
Outstanding at July 31, 2001.............................. 3,170,306 $19.72
--------- ------
Granted................................................... 895,000 16.21
Forfeited................................................. (513,438) 25.34
Exercised................................................. (483,814) 13.44
--------- ------
Outstanding at July 31, 2002.............................. 3,068,054 $18.83
========= ======
JULY 31 JULY 31 JULY 31
2002 2001 2000
--------- --------- ---------
Options available for future grants................. 2,237,913 1,343,857 1,803,832
Options exercisable at end of year.................. 1,630,692 1,729,552 1,358,406
Weighted average exercise price of exercisable
options........................................... $20.53 $22.73 $24.46
The following summarizes information about stock options outstanding at
July 31, 2002:
OUTSTANDING EXERCISABLE
---------------------------------- --------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
------------------------ --------- ----------- -------- --------- --------
$11.19-$15.88.................... 910,454 7.75 $12.94 528,148 $12.39
$15.88-$25.00.................... 1,484,300 8.11 17.76 597,968 19.88
$25.00-$39.19.................... 673,300 4.23 29.17 504,576 29.82
--------- ---- ------ --------- ------
$11.19-$39.19.................... 3,068,054 7.11 $18.83 1,630,692 $20.53
========= ==== ====== ========= ======
The Company accounts for employee stock options under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company
has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been recognized
for the stock option plans. Pro forma net income and earnings per share
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
calculated in conformance with the provisions of SFAS No. 123, which includes
stock option expense, would be reduced as follows:
2002 2001 2000
------------ ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (loss):
As reported....................................... $(114,656) $53,196 $22,617
Compensation expense, net of tax.................. (3,271) (4,827) (2,666)
Pro forma......................................... $(117,927) $48,369 $19,951
Basic earnings (loss) per share:
As reported....................................... $ (2.77) $ 1.31 $ 0.55
Compensation expense, net of tax.................. (0.07) (0.11) (0.06)
Pro forma......................................... $ (2.84) $ 1.20 $ 0.49
Diluted earnings (loss) per share:
As reported....................................... $ (2.75) $ 1.30 $ 0.55
Compensation expense, net of tax.................. (0.06) (0.11) (0.06)
Pro forma......................................... $ (2.81) $ 1.19 $ 0.49
Basic Shares
As reported....................................... 41,326 40,699 41,151
Pro forma......................................... 41,581 40,364 40,535
Diluted Shares
As reported....................................... 41,699 40,951 41,338
Pro forma......................................... 41,954 40,616 40,721
These pro forma amounts may not be representative of future disclosures
because the estimated fair value of stock options is amortized to expense over
the vesting period, and additional options may be granted in future years.
For SFAS No. 123 disclosure purposes, the fair value of each option grant
is estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions used for options granted through
the stock option plans:
2002 2001 2000
---------- ---------- ----------
Risk-free interest rate......................... 3.5%-4.5% 4.8%-6.0% 6.0%-6.7%
Dividend yield.................................. 3.0%-4.2% 3.6%-5.3% 2.9%-7.4%
Expected life................................... 4.3 4.8 5.3
Volatility...................................... 44.4%-45.5% 39.7%-43.0% 30.6%-39.1%
The weighted average fair value of the options granted in 2002, 2001 and
2000 was $6.86, $4.19 and $4.62, respectively.
The following weighted-average assumptions were used for options granted
through the employee stock purchase plan:
2002 2001 2000
----------- ----------- -----------
Risk-free interest rate.................... 1.7%-3.3% 5.4%-6.2% 4.6%-5.0%
Dividend yield............................. 3.5%-4.0% 3.8%-4.0% 4.1%-7.0%
Expected life.............................. .5 .5 .5
Volatility................................. 36.0%-37.6% 40.0%-50.3% 43.4%-71.4%
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average fair value of the options granted in 2002, 2001 and
2000 was $3.06, $2.27 and $1.90, respectively.
6. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Total rent expense for manufacturing facilities, sales offices and
equipment amounted to $19,094,000 in 2002, $19,410,000 in 2001 and $17,799,000
in 2000. The minimum future rental commitments under non-cancelable lease
arrangements are $11,960,000 in 2003; $10,001,000 in 2004; $8,089,000 in 2005;
$4,914,000 in 2006; $3,367,000 in 2007; and $8,258,000 in 2008 and beyond.
CONTRACTUAL DISPUTES
Subsequent to year end, the Company received notice of termination of a
contract with a third party at one of the Company's plants. The Company is
working to resolve matters surrounding the termination; however a claim could be
made against the Company. While the ultimate outcome of such a claim cannot be
ascertained on the basis of present information and advice received from
counsel, the Company believes it would have adequate defenses to any such claim.
LEGAL MATTERS
The Company and its subsidiaries may from time to time be involved in
claims or lawsuits that arise in the ordinary course of business. Accruals for
claims or lawsuits have been provided for to the extent that losses are deemed
probable and estimable. Although the ultimate outcome of these claims or
lawsuits cannot be ascertained on the basis of present information and advice
received from counsel, it is the opinion of management that the disposition or
ultimate determination of such claims or lawsuits will not have a material
adverse effect on the Company's financial position or future operating results.
7. RESTRUCTURING CHARGES
2002 RESTRUCTURING
In the first quarter of fiscal year 2002, the Company began a restructuring
initiative aimed at improving the overall level of organizational efficiency and
effectiveness, consolidating and rationalizing existing facilities and
processes, and reducing the overall cost base of the Company. The fiscal year
2002 results include a pretax charge of $43.3 million which includes asset
write-downs, employee severance costs, equipment moving costs, consulting
charges directly related to the restructuring and other miscellaneous costs. The
restructuring charge is presented separately as a component of income from
operations in the statement of operations.
The following table summarizes the activity in the restructuring reserve
during fiscal year 2002:
ASSET EMPLOYEE OTHER TOTAL
WRITE-DOWNS TERMINATION CHARGES RESTRUCTURING
----------- ----------- ------- -------------
(AMOUNTS IN THOUSANDS)
Restructuring provision................. $ 24,303 $ 8,840 $10,142 $ 43,285
-------- ------- ------- --------
Cash payments........................... -- (8,556) (8,353) (16,909)
Non-cash items.......................... (24,303) -- -- (24,303)
-------- ------- ------- --------
Reserve balance July 31, 2002........... $ -- $ 284 $ 1,789 $ 2,073
-------- ------- ------- --------
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Asset Write-downs
The 2002 restructuring plan included the closing or sale of six
manufacturing facilities, one distribution and fulfillment center, and one
multi-use facility. Due to these closures, management performed an impairment
review in accordance with SFAS 121, "Accounting for the Impairment of Long-
Lived Assets and Long-Lived Assets to be Disposed Of." Certain assets that had
no long-term strategic value were considered held for disposal and either
written off or written down to net realizable value determined through the use
of third party and/or management estimates. The amount of non-cash write offs
was $24,303,000 with the majority related to facilities within the Integrated
Graphics segment. Approximately $15,387,000 was related to facility closures and
$8,916,000 related to other assets. As of July 31, 2002, all of these facilities
have been closed and approximately $12,467,000 is recorded as "assets held for
sale" in the current asset portion of the balance sheet. Cash proceeds are being
derived through the sale of these assets which include manufacturing facilities,
equipment and buildings. During fiscal year 2002, approximately $9.6 million of
cash proceeds were received. The Company anticipates the remaining assets will
be sold within fiscal year 2003.
Employee Termination
The 2002 restructuring plan included workforce reductions in excess of 10%
of the total workforce and resulted in a total charge of $8,840,000 which
includes severance pay and related benefits and outplacement costs. As of July
31, 2002, 797 employees had been terminated or notified of termination, 753 of
which were from plant locations and 44 from the corporate headquarters. The
Company expects that the terminations are substantially complete.
Other Charges
Other charges totaled $10.1 million and include cost to move equipment,
closing costs for the facilities and consulting fees related to the
restructuring. These items were expensed as incurred.
2000 RESTRUCTURING
In February 2000, the Company announced a plan to restructure its
operations, which resulted in non-recurring pretax expense totaling $41.6
million for fiscal year 2000. In fiscal year 2001, additional restructuring
costs of $0.5 million were incurred primarily relating to plant closing
activities and restructuring administrative functions that had not previously
been accrued in accordance with EITF 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." At July 31, 2001, the Company had
completed all activities related to the fiscal year 2000 restructuring and did
not incur any additional costs for this restructuring in the current fiscal
year.
8. CHANGE IN ACCOUNTING PRINCIPLE
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which addresses financial accounting and reporting for acquired
goodwill and other intangible assets. The Company was required to adopt the
provisions of SFAS No. 142 on August 1, 2002, but had the option of adopting
early, as of August 1, 2001. Under SFAS No. 142, goodwill is no longer
amortized, and the rules for measuring goodwill impairment use a
fair-value-based test. Under the new rules, a fair value of each of the
Company's reporting units with assigned goodwill must be calculated using either
market comparables or a discounted cash flow approach, or a combination thereof.
Once the fair value of the reporting unit has been determined, the book value of
net assets, including intangibles, of that reporting unit must be compared to
the total market value derived in the first step to determine impairment.
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company elected early adoption of SFAS No. 142. Accordingly, the
Company has stopped amortization of goodwill effective August 1, 2001. Goodwill
amortization continues to be reflected in historical periods presented.
In completing the transitional impairment test required under SFAS No. 142,
the Company determined the carrying amount of each of its various reporting
units and compared that amount to its fair value. The reporting units for
purposes of SFAS No. 142 are defined as the Company divisions which are one
level below the segment level. Fair value was determined with the assistance of
an outside professional services firm using a combination of market comparables
and discounted cash flow approaches. The carrying amount of the Company's
Commercial Print division was above its fair value and, as a result, impairment
existed. The amount of impairment was determined using the "implied fair value"
of the Commercial Print division reporting unit as required by SFAS No. 142. As
a result of the impairment test, the Company recognized an impairment charge to
write-off goodwill in the amount of $147.5 million ($144.1 million net of tax)
relating to the Commercial Print division in the Integrated Graphics segment.
The impairment loss, net of tax, is recognized in the statement of operations
under the caption "cumulative effect of a change in accounting principle." In
accordance with SFAS No. 142, this charge was recorded as of the beginning of
fiscal year 2002. Had the provisions of SFAS No. 142 related to amortization of
goodwill been applied for the years ended July 31, 2001 and 2000, the Company's
net income, before the cumulative effect of a change in accounting principle,
and net earnings per share would have been as follows:
FOR THE YEARS ENDED JULY 31
---------------------------
2002 2001 2000
------- ------- -------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Net income before the cumulative effect of a change in
accounting principle, as reported..................... $29,422 $53,196 $22,617
Add:
Goodwill amortization.............................. -- 7,582 8,116
Tax effect......................................... -- (43) (50)
------- ------- -------
Adjusted net income before the cumulative effect of a
change in accounting principle..................... $29,422 $60,735 $30,683
======= ======= =======
Basic earnings per share before the cumulative effect of
a change in accounting principle, as reported......... $ 0.71 $ 1.31 $ 0.55
Effect of SFAS No. 142.................................. -- 0.18 0.20
------- ------- -------
Adjusted basic earnings per share before the cumulative
effect of a change in accounting principle............ $ 0.71 $ 1.49 $ 0.75
======= ======= =======
Diluted earnings per share before the cumulative effect
of a change in accounting principle, as reported...... $ 0.71 $ 1.30 $ 0.55
Effect of SFAS No. 142.................................. -- 0.18 0.19
------- ------- -------
Adjusted diluted earnings per share before the
cumulative effect of a change in accounting
principle............................................. $ 0.71 $ 1.48 $ 0.74
======= ======= =======
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Apart from goodwill, the Company has no other material, identified
intangible assets resulting from acquisitions recorded on the balance sheet.
Changes in the carrying amount of goodwill, by segment, for the year ended July
31, 2002, were as follows:
FORMS AND LABELS INTEGRATED GRAPHICS
SEGMENT SEGMENT TOTAL
---------------- ------------------- ---------
(DOLLARS IN THOUSANDS)
Balance as of July 31, 2001.............. $23,360 $ 261,304 $ 284,664
Pretax Impairment adjustment -- adoption
of SFAS No. 142........................ -- (147,500) (147,500)
Thomas Packaging acquisition............. 3,184 -- 3,184
Reduction in purchase accounting
reserve................................ -- (1,250) (1,250)
------- --------- ---------
Balance as of July 31, 2002.............. $26,544 $ 112,554 $ 139,098
======= ========= =========
On March 18, 2002, the Company acquired Thomas Packaging Corp., a
manufacturer of regulatory labels and inserts as well as packaging labels for
the pharmaceutical industry. This acquisition was made for $5.0 million in cash
and a note payable of $0.6 million and resulted in $3.2 million in goodwill.
During fiscal year 2002, accruals established in conjunction with certain
acquisitions were deemed not required and, as such, the Company reduced the
accrual and the resulting goodwill.
The Company completed its annual goodwill impairment review in the fourth
quarter of fiscal year 2002 and no additional impairment charge was required.
9. INCOME TAXES
The significant deferred tax assets and liabilities at July 31 were as
follows:
2002 2001
------- -------
(IN THOUSANDS)
Deferred tax liabilities:
Accelerated depreciation.................................. $46,703 $53,744
Software development...................................... 17,992 20,664
Other..................................................... 7,961 7,431
------- -------
Total deferred tax liabilities.............................. 72,656 81,839
------- -------
Deferred tax assets:
Deferred compensation, postretirement and employee
benefits............................................... 23,053 21,682
Accrued liabilities....................................... 7,822 9,092
Restructuring accruals.................................... 762 256
Inventory capitalization and reserves..................... 4,231 4,515
Bad debt allowance........................................ 2,926 2,991
State loss and credit carryovers.......................... 1,151 --
Other..................................................... 495 911
------- -------
Total deferred tax assets................................... 40,440 39,447
Valuation allowance for deferred tax assets................. (349) --
------- -------
Net deferred tax assets..................................... 40,091 39,447
------- -------
Net deferred tax liabilities................................ $32,565 $42,392
======= =======
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the current year, the Company recorded the tax benefit of state
carryovers, net of a valuation allowance, to reflect the increased likelihood
that these carryovers will now be utilized due in part to the effects of the
restructuring.
The provision for income taxes is comprised of the following:
2002 2001 2000
---- ---- ----
Statutory federal income tax rate........................... 35.0% 35.0% 35.0%
State and local income taxes................................ 2.8 2.6 3.5
Goodwill amortization....................................... -- 2.9 5.9
Goodwill written off in restructuring....................... -- -- 6.8
Refunds of prior year taxes................................. (2.0) -- --
Other....................................................... (0.1) 0.2 3.3
---- ---- ----
Effective tax rate.......................................... 35.7% 40.7% 54.5%
==== ==== ====
10. EMPLOYEE BENEFITS
All employees at least 55 years old with 20 or more years of service as of
December 31, 1993 and certain grandfathered employees who retired as of December
31, 1998 were entitled to postretirement health care coverage. These benefits
are subject to the same deductibles and co-payment provisions which apply to
active employees. All other employees who retire after December 31, 1998 pay
100% of their retirement medical coverage. The Company may amend or change the
plan periodically.
The expense for postretirement benefits as of July 31 was as follows:
2002 2001 2000
------ ------ ------
(IN THOUSANDS)
Components of net periodic postretirement benefit costs:
Interest cost............................................ $ 736 $ 591 $ 500
Loss due to change in actuarial assumptions.............. 796 2,727 5,322
------ ------ ------
Net periodic postretirement benefit cost................. $1,532 $3,318 $5,822
====== ====== ======
The fiscal year 2002 loss due to changes in actuarial assumption related
primarily to the reduction in discount rate from 7.5% in fiscal year 2001 to
7.0% in fiscal year 2002.
The fiscal year 2001 loss due to changes in actuarial assumption was caused
by the adoption of the 1983 group annuity mortality table for calculating the
net periodic postretirement benefit cost. Because the 1983 group annuity
mortality table uses more conservative mortality assumptions than the previously
used 1984 unisex pension mortality table, the actuarial loss for fiscal year
2001 was higher than it would have been historically.
The fiscal year 2000 loss due to change in actuarial assumptions is
primarily related to the impact of employees between the ages of 50 and 54 who
had 20 years of service as of December 31, 1993 who elected to retire as of
December 31, 1998. The number of employees that elected to retire was greater
than the estimate used to calculate the accumulated postretirement benefit.
Additionally, actual claims cost information was used for the fiscal year 2000
valuation which was higher than the estimated claims cost information used in
fiscal year 1999. Fiscal year 2000 experienced the first full year impact of
actual claims costs incurred by the group of employees that elected to retire on
December 31, 1998.
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The liability at July 31 (included in "Deferred Compensation and Retirement
Benefits" on the accompanying consolidated balance sheet) for postretirement
benefits is as follows:
2002 2001
------- -------
(IN THOUSANDS)
Change in benefit obligation:
Projected benefit obligation, beginning of year........... $10,380 $ 8,173
Interest cost............................................. 736 591
Actuarial loss............................................ 796 2,727
Benefits paid............................................. (1,342) (1,111)
------- -------
Projected benefit obligation, end of year................... $10,570 $10,380
------- -------
Change in plan assets
Plan assets at fair value, beginning of year.............. $ -- $ --
Employer contribution..................................... 1,342 1,111
Benefits paid............................................. (1,342) (1,111)
------- -------
Plan assets at fair value, end of year...................... $ -- $ --
------- -------
Funded status of plan:
Unfunded status........................................... $10,570 $10,380
------- -------
Net amount recognized on balance sheet...................... $10,570 $10,380
------- -------
For financial reporting purposes, the actuarial computations assumed a
discount rate of 7.0% in 2002, 7.50% in 2001 and 7.75% in 2000. The assumed
health care cost trend rate used in measuring the benefit obligations for
pre-and post-age 65 employees is 7.0% in 2002, 6.0% in 2003 and 5.0% thereafter.
A one percentage point increase in the assumed health care cost trend would
increase the interest cost component of the annual post-retirement expense by
$63,000 and the post-retirement benefit obligation as of July 31, 2002 by
$893,000. A one percentage point decrease in the assumed health care cost trend
would decrease the aggregate of the service cost and interest cost components of
the annual post-retirement expense by $54,000 and the post-retirement benefit
obligation as of July 31, 2002 by $770,000.
In addition to the post-retirement benefits described above, the Company
also has retirement plans covering several former employees and certain
executives ("Executive Retirement Plans"). The Executive Retirement Plans are
accounted for in accordance with SFAS 87 "Employers' Accounting for Pensions",
with a total pension expense for 2002 of $391,000. A total accumulated pension
benefit obligation of $3,954,000 as of July 31, 2002, is included in "Deferred
Compensation and Retirement Benefits" in the consolidated balance sheet. In
conjunction with recording the accumulated pension benefit obligation, the
Company recorded a charge to equity of $681,000, net of tax.
The majority of the remaining amount in "Deferred Compensation and
Retirement Benefits" in the consolidated balance sheet represents the liability
for the Company's Deferred Compensation/Capital Accumulation Plan. The plan
permits certain officers and management employees to defer portions of their
compensation and earn interest on the deferred amounts.
11. PROFIT SHARING AND RETIREMENT PLAN
The Company has a contributory profit sharing and retirement plan ("PSRP")
covering most employees, but excluding the employees that were part of the
Graphic Industries Inc. and subsequent commercial print acquisitions. The plan
provides for Company contributions based on an amount determined by the Board of
Directors, subject to the minimum required contribution of plan participants.
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Those employees not covered by the PSRP are covered under separate profit
sharing and retirement plan agreements. Substantially all of the employees not
covered by the PSRP are covered under a plan that provides for Company
contributions based on 50% of the first 4% of the covered employees'
contribution.
Company contributions to all plans charged to operations were $8,285,000 in
fiscal year 2002, $15,479,000 in fiscal year 2001 and $8,554,000 in fiscal year
2000.
12. INVESTMENTS IN DEBT AND EQUITY SECURITIES
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires securities that are available-for-sale to be carried at
fair value, with changes in net unrealized gains and losses recorded as a
separate component of stockholders' equity. This statement has had no impact on
stockholders' equity at July 31, 2002 or July 31, 2001.
During fiscal year 2000, proceeds on the sale of securities of $3.2 million
were recorded in other income on the statement of operations and represents the
amount received from the sale of stock that the Company received in John Hancock
Mutual Life Insurance Company's ("John Hancock") conversion from a policyholder
owned company to a stockholder based company. The Company received shares in
relation to the amount of corporate owned life insurance policies held with John
Hancock.
13. EARNINGS PER SHARE
Below is the computation of basic and diluted earnings per share for the
fiscal years ended July 31, 2002, 2001, and 2000.
2002 2001 2000
--------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
COMPUTATION OF BASIC EARNINGS PER SHARE
Net income before the cumulative effect of a change in
accounting principle................................ $ 29,422 $53,196 $22,617
Cumulative effect of a change in accounting
principle........................................... (144,078) -- --
--------- ------- -------
Net (loss) income..................................... $(114,656) $53,196 $22,617
--------- ------- -------
Weighted-average number of shares outstanding......... 41,150 40,527 40,940
Weighted-average number of shares held in grantor
trust (Note 5)...................................... 176 172 211
--------- ------- -------
Shares applicable to basic earnings................... 41,326 40,699 41,151
--------- ------- -------
Basic earnings per share before the cumulative effect
of a change in accounting principle................. $ 0.71 $ 1.31 $ 0.55
Cumulative effect of a change in accounting
principle........................................... (3.49) -- --
--------- ------- -------
Basic (loss) earnings per share....................... $ (2.77) $ 1.31 $ 0.55
--------- ------- -------
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2002 2001 2000
--------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
COMPUTATION OF DILUTED EARNINGS
PER SHARE
Net income before the cumulative effect of a change in
accounting principle................................ $ 29,422 $53,196 $22,617
Cumulative effect of a change in accounting
principle........................................... (144,078) -- --
--------- ------- -------
Net (loss) income..................................... $(114,656) $53,196 $22,617
--------- ------- -------
Shares applicable to basic earnings................... 41,326 40,699 41,151
Add net shares from assumed exercise of options....... 373 252 187
--------- ------- -------
Shares applicable to diluted earnings................. 41,699 40,951 41,338
--------- ------- -------
Diluted earnings per share before the cumulative
effect of a change in accounting principle.......... $ 0.71 $ 1.30 $ 0.55
Cumulative effect of a change in accounting
principle........................................... (3.46) -- --
--------- ------- -------
Diluted (loss) earnings per share..................... $ (2.75) $ 1.30 $ 0.55
========= ======= =======
Options to purchase 1,093,800 shares of common stock at a price range of
$18.88 -- $39.19 per share were outstanding during fiscal year 2002 but were not
included in the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares.
The options, which expire between 2005 and 2011, were still outstanding as of
July 31, 2002.
14. SEGMENT REPORTING:
The Company operates in two business segments, the Forms and Labels segment
and the Integrated Graphics segment.
The Forms and Labels segment is made up of forms, label and office products
operations. The principal products and services supplied by the Forms and Labels
segment include the design and manufacture of paper based forms, the manufacture
of both electronic data processing (EDP) labels and packaging labels, and the
manufacture and distribution of a standard line of office products. The
Integrated Graphics segment is made up of a nationwide network of commercial
print and targeted communications facilities. The principal products and
services supplied by the Integrated Graphics segment include the design,
manufacture, kitting and distribution of high color marketing and promotional
printed materials, variable imaging, digital printing, and the manufacture of
direct response printed materials. The Company's management has aggregated the
divisions within the reportable segments because of strong similarities in the
economic characteristics, nature of products and services, production processes,
class of customer and distribution methods used. Both segments offer services to
customers including warehousing and distribution, kitting and fulfillment, print
on demand and contract outsourcing.
The Company's accounting policies for the segments are the same as those
described in the "Summary of Significant Accounting Policies". Management
evaluates segment performance based on segment profit or loss before interest
and income taxes. Net interest expense and income taxes are not allocated to
segments. Transfers between segments, which are not significant, are accounted
for at standard cost. The Company has no significant non-cash items other than
depreciation, amortization and restructuring write-downs.
Segment data excludes one-time charges related to the cumulative effect of
a change in accounting principle from the adoption of SFAS No. 142, "Goodwill
and Other Intangible Assets".
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
Summarized segment data and a reconciliation to the consolidated totals for
fiscal years 2002, 2001 and 2000 are as follows:
EXTERNAL DEPRECIATION & INCOME BEFORE SEGMENT CAPITAL
FISCAL YEAR 2002 SALES AMORTIZATION INCOME TAXES ASSETS(B) RESTRUCTURING EXPENDITURES
---------------- ---------- -------------- ------------- --------- ------------- ------------
(AMOUNTS IN THOUSANDS)
Forms and Labels
Segment............... $ 780,939 $27,563 $82,090 $335,030 $ 5,987 $ 9,814
Integrated Graphics
Segment............... 764,690 38,844 27,795 466,124 32,396 13,437
Segment total........... 1,545,629 66,407 109,885 801,154 38,383 23,251
---------- ------- ------- -------- ------- -------
Corporate(A)............ -- -- -- 128,840 4,902 --
Restructuring........... -- -- (43,285) -- -- --
Net interest expense.... -- -- (20,843) -- -- --
---------- ------- ------- -------- ------- -------
Consolidated............ $1,545,629 $66,407 $45,757 $929,994 $43,285 $23,251
========== ======= ======= ======== ======= =======
EXTERNAL DEPRECIATION & INCOME BEFORE SEGMENT CAPITAL
FISCAL YEAR 2001 SALES AMORTIZATION INCOME TAXES ASSETS RESTRUCTURING EXPENDITURES
---------------- ---------- -------------- ------------- ---------- ------------- ------------
(AMOUNTS IN THOUSANDS)
Forms and Labels
Segment.............. $ 832,062 $29,640 $85,377 $ 423,931 $ 42 $18,293
Integrated Graphics
Segment.............. 857,472 49,208 33,116 626,677 340 23,017
---------- ------- ------- ---------- ---- -------
Segment total.......... 1,689,534 78,848 118,493 1,050,608 382 41,310
---------- ------- ------- ---------- ---- -------
Corporate(A)........... -- -- -- 113,814 131 --
Restructuring.......... -- -- (513) -- -- --
Net interest expense... -- -- (28,273) -- -- --
---------- ------- ------- ---------- ---- -------
Consolidated........... $1,689,534 $78,848 $89,707 $1,164,422 $513 $41,310
========== ======= ======= ========== ==== =======
EXTERNAL DEPRECIATION & INCOME BEFORE SEGMENT CAPITAL
FISCAL YEAR 2000 SALES AMORTIZATION INCOME TAXES ASSETS RESTRUCTURING EXPENDITURES
---------------- ---------- -------------- ------------- ---------- ------------- ------------
(AMOUNTS IN THOUSANDS)
Forms and Labels
Segment.............. $ 816,065 $30,982 $78,965 $ 461,986 $ 5,251 $14,689
Integrated Graphics
Segment.............. 825,824 46,591 40,294 637,918 23,010 39,256
---------- ------- ------- ---------- ------- -------
Segment total.......... 1,641,889 77,573 119,259 1,099,904 28,261 53,945
---------- ------- ------- ---------- ------- -------
Corporate(A)........... -- -- -- 148,487 13,290 --
Restructuring.......... -- -- (41,551) -- -- --
Net interest expense... -- -- (31,190) -- -- --
Other income........... -- -- 3,190 -- -- --
---------- ------- ------- ---------- ------- -------
Consolidated........... $1,641,889 $77,573 $49,708 $1,248,391 $41,551 $53,945
========== ======= ======= ========== ======= =======
---------------
(A) Corporate represents general corporate assets that are not allocated to the
segments. This amount includes items such as cash, prepaid taxes, cash
surrender value of life insurance and system development costs.
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
(B) Segment assets, particularly the Integrated Graphics segment, have been
impacted by restructuring and SFAS No. 142. The adoption of SFAS No. 142 and
the related goodwill impairment charge reduced Integrated Graphics goodwill
by $147.5 million.
Geographic Information
The Company attributes substantially all of its revenues to customers
within the United States. Long-lived assets are domiciled within the United
States.
Major Customer Information
The Company is not dependent upon any customer or a group of customers
under common control. No single customer or group of customers accounts for more
than 10% of consolidated net sales.
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED JANUARY 31
-------------------------------------------
% %
2003 SALES 2002 SALES
---------- ------- ---------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net Sales................................................ $379,958 100.0 $396,380 100.0
Cost and Expenses
Cost of goods sold..................................... 277,271 73.0 292,908 73.9
Selling and administrative expenses.................... 58,957 15.5 62,347 15.7
Provision for depreciation and amortization............ 15,273 4.0 16,976 4.3
Restructuring charges.................................. -- 0.0 30,272 7.6
-------- ----- -------- -----
Total costs and expenses............................ 351,501 92.5 402,503 101.5
-------- ----- -------- -----
Operating income (loss)................................ 28,457 7.5 (6,123) (1.5)
-------- ----- -------- -----
Interest income........................................ (422) (0.1) (204) (0.0)
Interest expense....................................... 4,990 1.3 5,875 1.5
-------- ----- -------- -----
Income (loss) before income taxes...................... 23,889 6.3 (11,794) (3.0)
Provision (benefit) for income taxes................... 9,078 2.4 (4,447) (1.1)
-------- ----- -------- -----
Net Income (Loss)........................................ $ 14,811 3.9 $ (7,347) (1.9)
======== ===== ======== =====
Basic earnings (loss) per share.......................... $ 0.35 $ (0.18)
======== ========
Diluted earnings (loss) per share........................ $ 0.35 $ (0.18)
======== ========
Average common shares outstanding........................ 41,917 41,098
======== ========
Diluted common shares outstanding........................ 42,483 41,098
======== ========
Dividends declared per share............................. $ 0.165 $ 0.165
======== ========
The accompanying notes are an integral part of these statements.
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JANUARY 31
----------------------------------------
% %
2003 SALES 2002 SALES
--------- ------ ---------- ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net Sales............................................... $764,888 100.0 $ 804,813 100.0
Cost and Expenses
Cost of goods sold................................. 555,959 72.7 596,266 74.1
Selling and administrative expenses................ 124,751 16.3 122,091 15.2
Provision for depreciation and amortization........ 30,848 4.0 34,751 4.3
Restructuring charges.............................. 643 0.1 32,832 4.1
-------- ----- --------- -----
Total costs and expenses......................... 712,201 93.1 785,940 97.7
-------- ----- --------- -----
Operating income...................................... 52,687 6.9 18,873 2.3
-------- ----- --------- -----
Interest income....................................... (806) (0.1) (535) (0.1)
Interest expense...................................... 9,723 1.3 12,064 1.5
-------- ----- --------- -----
Income before income taxes and the cumulative effect
of a change in accounting principle................ 43,770 5.7 7,344 0.9
Provision for income taxes............................ 16,633 2.2 2,864 0.3
-------- ----- --------- -----
Income before the cumulative effect of a change in
accounting principle............................... 27,137 3.5 4,480 0.6
Cumulative effect of a change in accounting principle
-- net of tax...................................... -- -- (144,078) (17.9)
-------- ----- --------- -----
Net Income (Loss)....................................... $ 27,137 3.5 $(139,598) (17.3)
======== ===== ========= =====
Basic earnings per share before the cumulative effect of
a change in accounting principle...................... $ 0.65 $ 0.11
Cumulative effect of a change in accounting principle
-- net of tax...................................... -- (3.51)
-------- ---------
Basic earnings (loss) per share....................... $ 0.65 $ (3.40)
======== =========
Diluted earnings per share before the cumulative effect
of a change in accounting principle................... $ 0.64 $ 0.11
Cumulative effect of a change in accounting principle
-- net of tax...................................... -- (3.47)
-------- ---------
Diluted earnings (loss) per share..................... $ 0.64 $ (3.36)
======== =========
Average common shares outstanding....................... 41,872 41,103
======== =========
Diluted common shares outstanding....................... 42,309 41,466
======== =========
Dividends declared per share............................ $ 0.330 $ 0.330
======== =========
The accompanying notes are an integral part of these statements.
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JANUARY 31, JULY 31,
2003 2002
------------- -----------
(IN THOUSANDS, EXCEPT SHARE
AND PAR VALUE INFORMATION)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 58,777 $ 25,178
Accounts receivable....................................... 239,148 254,575
Less: allowance for doubtful accounts..................... (9,266) (9,434)
--------- ---------
Net receivables...................................... 229,882 245,141
Inventories............................................... 89,799 85,437
Assets held for sale...................................... 7,342 12,467
Current and deferred income taxes......................... 24,471 31,363
Advances and prepaid expenses............................. 9,253 5,329
--------- ---------
Total current assets................................. 419,524 404,915
--------- ---------
Property, plant and equipment, at cost...................... 830,217 820,933
Less: accumulated depreciation and amortization............. (522,472) (502,595)
--------- ---------
Net property, plant and equipment......................... 307,745 318,338
--------- ---------
Goodwill.................................................... 139,101 139,098
Cash surrender value of life insurance...................... 16,304 15,861
System development costs, net of accumulated amortization... 45,523 49,003
Other assets................................................ 3,050 2,779
--------- ---------
Total assets......................................... $ 931,247 $ 929,994
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 679 $ 1,233
Accounts payable.......................................... 68,942 78,403
Accrued salaries, wages, profit sharing and other......... 86,241 89,840
--------- ---------
Total current liabilities............................ 155,862 169,476
--------- ---------
Long-term debt.............................................. 208,228 209,303
Deferred income taxes....................................... 46,264 49,525
Deferred compensation and retirement benefits............... 42,687 43,130
Other long-term liabilities................................. 9,223 9,431
Commitments and contingencies...............................
Stockholders' equity
Preferred stock, $50 par value, authorized 500,000 shares,
none issued............................................ -- --
Common stock, $1.00 par value, authorized 100,000,000
shares; issued 45,764,055 shares; and outstanding
41,993,771 shares at January 31, 2003 and 41,646,402
shares at July 31, 2002................................ 45,764 45,764
Additional capital........................................ 42,095 41,355
Deferred compensation..................................... 3,152 3,095
Retained earnings......................................... 438,703 426,067
Treasury stock, at cost, 3,770,284 shares at January 31,
2003 and 4,117,653 shares at July 31, 2002............. (60,050) (66,471)
Accumulated other comprehensive loss...................... (681) (681)
--------- ---------
Total stockholders' equity................................ 468,983 449,129
--------- ---------
Total liabilities and stockholders' equity................ $ 931,247 $ 929,994
========= =========
The accompanying notes are an integral part of these statements.
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JANUARY 31
------------------------
2003 2002
---------- -----------
(IN THOUSANDS)
Cash Flows from Operating Activities:
Net income (loss)......................................... $ 27,137 $(139,598)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of a change in accounting principle,
net of tax............................................ -- 144,078
Depreciation........................................... 25,264 29,123
Amortization........................................... 5,584 5,628
Restructuring charges, non-cash........................ (946) 21,791
Debt cost amortization................................. 931 855
Deferred taxes......................................... (3,261) (3,415)
Tax benefit-stock option exercises..................... 740 --
Loss on disposal of property........................... 196 47
Changes in assets and liabilities, net of effects of
acquisitions and divestitures
Accounts receivable.................................... 15,259 28,476
Inventories............................................ (4,362) 2,873
Advances and prepaid expenses.......................... (4,191) (2,897)
Prepaid taxes.......................................... 6,893 (14,936)
Other assets........................................... (2,418) 1,563
Accounts payable and other liabilities................. (13,284) (14,240)
Deferred compensation and retirement benefits.......... (443) 1,952
-------- ---------
Net cash provided by operating activities................. 53,099 61,300
-------- ---------
Cash Flows from Investing Activities:
Capital expenditures...................................... (15,067) (11,603)
Proceeds from disposal of property........................ 6,134 3,069
-------- ---------
Net cash used in investing activities..................... (8,933) (8,534)
-------- ---------
Cash Flows from Financing Activities:
Cash dividends paid....................................... (13,805) (13,567)
Net retirements of short-term debt........................ (554) (1,298)
Amounts paid on long-term debt............................ (2,006) (61,067)
Proceeds from issuance of long-term debt.................. -- 20,000
Proceeds from issuance of common stock.................... 5,798 7,647
Purchase of treasury stock................................ -- (4,481)
-------- ---------
Net cash used in financing activities..................... (10,567) (52,766)
-------- ---------
Net Changes in Cash and Cash Equivalents.................... 33,599 --
Cash and Cash Equivalents at Beginning of Year.............. 25,178 --
-------- ---------
Cash and Cash Equivalents at January 31..................... $ 58,777 $ --
======== =========
Supplemental Disclosure:
Interest paid, net of interest capitalized................ $ 7,188 $ 9,372
Income taxes paid, net of refunds received................ $ 12,426 $ 18,115
The accompanying notes are an integral part of these statements.
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2003
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Wallace
Computer Services, Inc and its Subsidiaries ("Company") as of January 31, 2003
and for the three and six months ended January 31, 2003 and 2002 have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the U.S. Securities and Exchange Commission ("SEC"). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations.
The July 31, 2002 consolidated balance sheet as presented in this 10-Q was
condensed from the audited financial statements and as such does not include all
disclosures required by generally accepted accounting principles. However, the
Company believes that the disclosures are adequate to make the information
presented not misleading. These consolidated financial statements should be read
in conjunction with the condensed consolidated financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended July 31, 2002.
In the opinion of management, the Company has made all adjustments (which
include normal recurring adjustments except as disclosed herein) necessary to
present a fair statement of the Company's financial position as of January 31,
2003, results of operations, cash flows and stockholders' equity for the three
and six months ended January 31, 2003 and January 31, 2002. The results of
operations for the three and six month periods ended January 31, 2003 are not
necessarily indicative of the operating results for the full fiscal year or any
future periods. Certain prior year amounts have been reclassified to conform to
the current year presentation.
NOTE 2 -- ACCOUNTING POLICIES
During the first quarter of fiscal year 2003, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 provides a single
accounting model for long-lived assets to be disposed of and replaces SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed Of." The adoption of SFAS 144 had no effect on the Company's
results of operations, financial position or cash flows.
In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."
SFAS 146 requires that a liability for costs associated with an exit or disposal
activity be recognized and measured initially at fair value only when the
liability is incurred. SFAS 146 is effective for exit or disposal activities
that are initiated after December 31, 2002, and as such, the provisions of SFAS
146 will be applied prospectively when it impacts the Company through relevant
restructuring activities or other disposal or exit activities.
In November 2002, the FASB issued FASB Interpretation No. (FIN) 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under that guarantee and
must disclose that information in its interim and annual financial statements.
The initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The adoption of FIN 45 had no effect on the Company's results of
operations, financial position, cash flows or disclosure requirements.
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure." SFAS 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS 148 amends
the disclosure requirements of SFAS 123 "Accounting for Stock-Based
Compensation," to require more prominent and more frequent disclosures in
financial statements about the effects of stock-based compensation. The
increased disclosure requirements will apply to the Company's interim and annual
financial statements beginning in the third quarter of the current fiscal year.
At the present time, the Company does not intend to transition to the use of a
fair value method of accounting for stock-based compensation and will continue
to apply the disclosure-only provisions.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." FIN 46 requires that if an entity has a controlling
financial interest in a variable interest entity, the assets, liabilities and
results of activities of the variable interest entity should be included in the
consolidated financial statements of the entity. FIN 46 requires that its
provisions are effective immediately for all arrangements entered into after
January 31, 2003. The Company does not have any variable interest entities, thus
FIN 46 has no effect on the Company.
NOTE 3 -- INVENTORIES
Inventories at January 31, 2003, and July 31, 2002, were as follows:
JANUARY 31, JULY 31,
2003 2002
----------- --------
(IN THOUSANDS)
Raw materials............................................... $11,810 $12,365
Work in process............................................. 19,237 17,978
Finished products........................................... 58,752 55,094
------- -------
$89,799 $85,437
======= =======
Certain inventories are stated on the last-in, first-out ("LIFO") basis for
their labor and material content, and other inventories are stated on the
first-in, first-out ("FIFO") basis.
Because the inventory determination under the LIFO method can only be made
at the end of each fiscal year based on the inventory levels and costs at that
time, interim period LIFO determinations must be based upon management's
estimates of expected year-end inventory levels and costs.
NOTE 4 -- DEBT
On September 30, 2002, the Company entered into a new $150 million Senior
Credit Facility that replaced the previous $200 million Credit Facility. The
decrease in the size of the Credit Facility is due to lower future expected
needs for such borrowings. The new Credit Facility expires on September 30,
2005. Under the terms of the Credit Facility, the Company may borrow at the
London Interbank Offered Rate plus a margin based upon the Company's credit
rating. As of January 31, 2003 this margin was 82.5 basis points. At January 31,
2003, there were no borrowings under this Senior Credit Facility.
NOTE 5 -- SEGMENT REPORTING
The Company operates in two business segments: the Forms and Labels segment
and the Integrated Graphics segment.
The Forms and Labels segment is made up of forms, labels and office product
operations. The principal products and services supplied by the Forms and Labels
segment include the design and
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
manufacture of paper-based forms, the manufacture of both electronic data
processing ("EDP") labels and packaging labels, and the manufacture and
distribution of a standard line of office products. The Integrated Graphics
segment is made up of a nationwide network of commercial print and targeted
communications facilities. The principal products and services supplied by the
Integrated Graphics segment include the design, manufacture, kitting and
distribution of high color marketing and promotional printed materials, annual
reports, variable imaging, digital printing, and the manufacture of direct
response printed materials. The Company's management has aggregated the
divisions within the reportable segments because of strong similarities in the
economic characteristics, nature of products and services, production processes,
class of customer and distribution methods used. Both segments offer services to
customers, including warehousing and distribution, kitting and fulfillment,
print on demand and contract outsourcing.
The Company's accounting policies for the segments are the same as those
described in the "Summary of Significant Accounting Policies" in the Company's
Fiscal Year 2002 Annual Report on Form 10-K. Management evaluates segment
performance based on segment profit or loss before interest, income taxes and
certain items as described below not allocated to the segments. Transfers
between segments, which are not significant, are accounted for at standard cost.
The Company has no significant non-cash items other than depreciation,
amortization, asset impairments related to the restructuring and the one-time
charge related to the adoption of SFAS 142, "Goodwill and Other Intangible
Assets."
Segment data excludes one-time charges related to the cumulative effect of
a change in accounting principle due to the adoption of SFAS 142, "Goodwill and
Other Intangible Assets," contract settlement costs, merger costs, and
restructuring charges.
Summarized segment data and a reconciliation to the consolidated totals for
the three and six month periods ended January 31, 2003 and 2002 are as follows:
THREE MONTHS ENDED
-----------------------------------------------------
INCOME (LOSS) BEFORE
NET SALES INCOME TAXES
------------------------- -------------------------
JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,
2003 2002 2003 2002
----------- ----------- ----------- -----------
(IN THOUSANDS)
Forms and Labels......................... $200,184 $199,358 $19,913 $ 20,005
Integrated Graphics...................... 179,774 197,022 9,362 4,144
Restructuring charge..................... -- -- -- (30,272)
Merger costs............................. -- -- (818) --
Net interest expense..................... -- -- (4,568) (5,671)
-------- -------- ------- --------
Consolidated............................. $379,958 $396,380 $23,889 $(11,794)
======== ======== ======= ========
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SIX MONTHS ENDED
-----------------------------------------------------
INCOME BEFORE INCOME
TAXES AND THE CUMULATIVE
EFFECT OF A CHANGE IN
NET SALES ACCOUNTING PRINCIPLE
------------------------- -------------------------
JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,
2003 2002 2003 2002
----------- ----------- ----------- -----------
(IN THOUSANDS)
Forms and Labels......................... $403,095 $402,804 $44,933 $ 39,919
Integrated Graphics...................... 361,793 402,009 18,109 11,786
Restructuring charge..................... -- -- (643) (32,832)
Merger costs............................. -- -- (2,112) --
Contract settlement...................... -- -- (7,600) --
Net interest expense..................... -- -- (8,917) (11,529)
-------- -------- ------- --------
Consolidated............................. $764,888 $804,813 $43,770 $ 7,344
======== ======== ======= ========
The restructuring charges, merger costs and the contract settlement are not
allocated to the segments for internal management reporting purposes.
Restructuring charges for the six months ended January 31, 2003 and 2002 related
to the segments is as follows:
JANUARY 31, JANUARY 31,
2003 2002
----------- -----------
(IN MILLIONS)
Forms and Labels....................................... $0.1 $ 4.6
Integrated Graphics.................................... 0.3 24.8
Corporate.............................................. 0.2 3.4
---- -----
$0.6 $32.8
==== =====
Segment assets as of January 31, 2003 were $446.1 million for Integrated
Graphics, $326.9 million for Forms and Labels, and $158.2 million for Corporate.
Segment assets as of July 31, 2002 were $466.1 million for Integrated Graphics,
$335.0 million for Forms and Labels, and $128.9 million for Corporate.
NOTE 6 -- RESTRUCTURING
In the first quarter of fiscal year 2002, the Company began a restructuring
initiative ("2002 restructuring plan") aimed at improving the overall level of
organizational efficiency and effectiveness, including consolidating and
rationalizing existing facilities and processes, and reducing the overall cost
base of the Company. The first six months of fiscal year 2003 and 2002 results
include pretax charges of $0.6 million and $32.8 million, respectively, related
to this restructuring initiative. The charges included asset write-downs,
employee severance costs, equipment moving costs, consulting charges directly
related to the restructuring and other miscellaneous costs. The activities
related to this restructuring were completed in the first quarter of 2003, and
the Company does not expect any additional restructuring expense in future
quarters related to this initiative.
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the activity in the restructuring reserve
during the first six months of fiscal year 2003:
ASSET EMPLOYEE OTHER TOTAL
WRITE-DOWNS TERMINATION CHARGES RESTRUCTURING
----------- ----------- ------- -------------
(IN THOUSANDS)
Reserve balance at July 31, 2002....... $ -- $ 284 $ 1,789 $ 2,073
----- ----- ------- -------
Restructuring charges................ -- 438 1,017 1,455
Adjustments.......................... (812) -- -- (812)
Cash payments........................ -- (549) (1,334) (1,883)
Non-cash items....................... 812 -- 134 946
----- ----- ------- -------
Reserve balance at October 31, 2002.... -- 173 1,606 1,779
Cash payments........................ -- (126) (403) (529)
----- ----- ------- -------
Reserve balance at January 31, 2003.... $ -- $ 47 $ 1,203 $ 1,250
===== ===== ======= =======
ASSET WRITE-DOWNS
The 2002 restructuring plan included the closing or sale of six
manufacturing facilities, one distribution and fulfillment center, and one
multi-use facility. As of January 31, 2003, approximately $7.3 million is
recorded as "assets held for sale" in the current asset portion of the balance
sheet. Cash proceeds will be derived by the sale of these assets, which is
comprised of three buildings. During the first quarter of fiscal year 2003, the
Company recorded adjustments to reflect a gain realized on the sale of an asset.
This gain was partially offset by additional reductions in the estimated
recovery values of the remaining assets held for sale to reflect current market
conditions. The Company anticipates the remaining assets will be sold within
nine months.
EMPLOYEE TERMINATION
The 2002 restructuring plan included workforce reductions in excess of 10%
of the total workforce. During the first quarter of fiscal year 2003, an
additional $0.4 million was charged to restructuring for 43 employees who were
severed. The charge includes severance pay and related benefits and outplacement
costs. As of January 31, 2003, 840 employees had been terminated as part of the
2002 restructuring plan, 792 of whom were from plant locations and 48 of whom
were from the corporate headquarters. The terminations related to the 2002
restructuring plan are complete.
OTHER CHARGES
Other charges totaled $1.0 million during the first quarter of fiscal year
2003 and included approximately $0.5 million in costs to move equipment that
were expensed as incurred and approximately $0.5 million in additional costs
related to ongoing maintenance of the facilities held for sale and other
miscellaneous items.
NOTE 7 -- CHANGE IN ACCOUNTING PRINCIPLE
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which addresses financial accounting and reporting for acquired
goodwill and other intangible assets. The Company was required to adopt the
provisions of SFAS 142 on August 1, 2002, but had the option of adopting early,
as of August 1, 2001. The Company elected early adoption of SFAS 142.
Accordingly, the Company has stopped amortization of goodwill effective August
1, 2001. Under SFAS 142, goodwill is no longer amortized, and the rules for
measuring goodwill impairment use a fair-value-based test. Under the
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
new rules, a fair value of each of the Company's reporting units with assigned
goodwill must be calculated using either market comparables or a discounted cash
flow approach, or a combination thereof. Once the fair value of the reporting
unit has been determined, the book value of net assets, including intangibles,
of that reporting unit must be compared to the total market value derived in the
first step to determine impairment.
In completing the transitional impairment test required under SFAS 142, the
Company determined the carrying amount of each of its various reporting units
and compared that amount to its fair value. The reporting units for purposes of
SFAS 142 are defined as the Company divisions which are one level below the
segment level. Fair value was determined with the assistance of an outside
professional services firm using a combination of market comparables and
discounted cash flow approaches. The carrying amount of the Company's Commercial
Print division was above its fair value and, as a result, impairment existed.
The amount of impairment was determined using the "implied fair value" of the
Commercial Print division reporting unit as required by SFAS 142. As a result of
the impairment test, the Company recognized an impairment charge to write-off
goodwill in the amount of $147.5 million ($144.1 million net of tax) relating to
the Commercial Print division in the Integrated Graphics segment. The impairment
loss, net of tax, is recognized in the statement of operations under the caption
"cumulative effect of a change in accounting principle." In accordance with SFAS
142, this charge was recorded as of the beginning of fiscal year 2002.
NOTE 8 -- EARNINGS PER SHARE
Below is the computation of basic and diluted earnings per share for the
three months ended January 31, 2003 and 2002:
2003 2002
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net income (loss)........................................... $14,811 $(7,347)
======= =======
Weighted-average number of shares........................... 41,744 40,920
Add: Weighted-average number of shares held in grantor
trust..................................................... 173 178
------- -------
Shares applicable to basic earnings......................... 41,917 41,098
Add: net shares from assumed exercise of options............ 566 --
------- -------
Shares applicable to diluted earnings....................... 42,483 41,098
======= =======
Basic earnings (loss) per share............................. $ 0.35 $ (0.18)
======= =======
Diluted earnings (loss) per share........................... $ 0.35 $ (0.18)
======= =======
Shares assumed from the exercise of options were not added to the 2002
calculation as they would have had an antidilutive effect.
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Below is the computation of basic and diluted earnings per share for the
six months ended January 31, 2003 and 2002:
2003 2002
---------- ------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Net income before the cumulative effect of a change in
accounting principle...................................... $27,137 $ 4,480
Cumulative effect of a change in accounting principle, net
of tax.................................................... -- (144,078)
------- ---------
Net income (loss)........................................... $27,137 $(139,598)
======= =========
Weighted-average number of shares........................... 41,699 40,924
Add: Weighted-average number of shares held in grantor
trust..................................................... 173 179
------- ---------
Shares applicable to basic earnings......................... 41,872 41,103
Add: net shares from assumed exercise of options............ 437 363
------- ---------
Shares applicable to diluted earnings....................... 42,309 41,466
======= =========
Basic earnings per share before the cumulative effect of a
change in accounting principle............................ $ 0.65 $ 0.11
Cumulative effect of a change in accounting principle per
share, net of tax......................................... -- (3.51)
------- ---------
Basic earnings (loss) per share............................. $ 0.65 $ (3.40)
======= =========
Diluted earnings per share before the cumulative effect of a
change in accounting principle............................ $ 0.64 $ 0.11
Cumulative effect of a change in accounting principle per
share, net of tax......................................... -- (3.47)
------- ---------
Diluted earnings (loss) per share........................... $ 0.64 $ (3.36)
======= =========
Options to purchase shares of common stock within certain price ranges were
outstanding during the each of the reported periods of fiscal year 2003 and 2002
but were not included in the computation of diluted earnings per share because
the options' exercise prices were greater than the average market price of the
common shares. The period, number of option shares, price ranges and expiration
dates are noted below.
PERIOD SHARES PRICE RANGE EXPIRATION DATE
------ --------- ------------- ---------------
Three Months Ended January 31, 2003.......... 1,030,031 21.44 - 39.19 2003 - 2012
Three Months Ended January 31, 2002.......... 1,447,338 18.88 - 39.19 2003 - 2011
Six Months Ended January 31, 2003............ 1,033,128 21.44 - 39.19 2003 - 2012
Six Months Ended January 31, 2002............ 1,501,258 17.55 - 39.19 2003 - 2011
NOTE 9 -- CONTRACTUAL DISPUTE
On November 4, 2002, the Company announced the settlement of a previously
disclosed contract dispute with a third party. The settlement, plus other
related expenses, resulted in a one-time pre-tax charge to selling and
administrative expenses during the first quarter of fiscal year 2003 of
approximately $7.6 million.
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- PROPOSED MERGER
On January 17, 2003, the Company announced a merger agreement under which
the Company will be acquired by Moore Corporation Limited ("Moore"). Based on
the closing price of Moore's common stock on January 16, 2003, the transaction
is valued at approximately $1.3 billion. Each share of Company common stock
outstanding immediately prior to the merger will be converted into, at the
election of the Company's stockholders and subject to proration, either (i) a
number of common shares of Moore equal to 1.05 plus the quotient of 14.40
divided by the average of the high and low sales prices per share of Moore on
the New York Stock Exchange Composite Tape on the last trading day before the
closing of the merger, or (ii) cash in an amount equal to $14.40 plus the
product of 1.05 multiplied by the average of the high and low sales prices per
share of Moore on the New York Stock Exchange Composite Tape on the last trading
day before the closing of the merger. No Company stockholder, however, will be
assured of receiving either all Moore common shares or all cash, notwithstanding
his or her choice. In any case, for each share of Company common stock owned by
a Company stockholder, he or she will receive value, as determined on the last
trading day before the closing of the merger, equal to $14.40 in cash and 1.05
Moore common shares. The merger was unanimously approved by the Boards of
Directors of the Company and of Moore but remains subject to customary closing
conditions that include, among others, receipt of required approval from the
Company's stockholders, required regulatory approvals and closing of the
required financing. The transaction may not be completed if any of the closing
conditions are not satisfied. Under certain terms specified in the merger
agreement, the Company or Moore may terminate the agreement, and as a result,
either party may be required to pay a termination fee of up to $27.5 million to
the other party.
(B) PRO FORMA FINANCIAL INFORMATION.
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined balance sheet as of
March 31, 2003 and the unaudited pro forma condensed combined statement of
operations for the year ended December 31, 2002 and the three-month period ended
March 31, 2003 are based on the historical financial statements of Moore
Corporation Limited ("Moore") and Wallace Computer Services, Inc. ("Wallace")
after giving effect to the merger as a purchase of Wallace by Moore using the
purchase method of accounting and the assumptions and adjustments described in
the accompanying notes to the unaudited pro forma condensed combined financial
statements.
The pro forma information is based on preliminary estimates and assumptions
set forth in the notes to such information. The pro forma information is
preliminary and 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 future results that may occur. It does not
reflect cost savings expected to be realized from the elimination of certain
expenses and from the synergies to be created or the costs to implement such
cost savings or synergies, and income taxes do not reflect the amounts that
would have resulted had Moore and Wallace filed consolidated income tax returns
during the periods presented. No assurance can be given that operating cost
savings and synergies will be realized.
Pro forma adjustments are necessary to reflect the estimated purchase
price, the new debt and equity structure and to adjust amounts related to
Wallace's net tangible and intangible assets to a preliminary estimate of their
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 effect related to the
pro forma adjustments.
The pro forma adjustments and allocation of purchase price are preliminary
and are based on management's estimates of the fair value of the assets acquired
and liabilities assumed. The preliminary work performed by independent valuation
specialists has been considered in management's estimates of the fair values
reflected in these 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 management's consideration of a final valuation prepared by the
independent valuation specialists. This final valuation will be based on the
actual net tangible and intangible assets of Wallace that exist as of the date
of the completion of the merger. Any final adjustments may change the
allocations of 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. Amounts preliminarily allocated to
intangible assets with indefinite lives may significantly decrease or be
eliminated and amounts allocated to intangible assets with definite lives may
increase significantly, which could result in a material increase in
amortization of intangible assets. In addition, the impact of ongoing
integration activities and other changes in Wallace's net tangible and
intangible assets between the reporting periods presented and the completion of
the merger could cause material
differences in the information presented.
The unaudited pro forma condensed combined balance sheet is presented as if
the merger had been completed on March 31, 2003 and, due to different fiscal
period ends, combines the historical balance sheet of Moore at March 31, 2003
and the historical balance sheet of Wallace at January 31, 2003.
The unaudited pro forma condensed combined statements of operations of
Moore and Wallace for the year ended December 31, 2002 and for the three-month
period ended March 31, 2003 are presented as if the merger had been completed on
January 1, 2002. Due to different fiscal period ends, the historical results of
Moore for the year ended December 31, 2002 and the historical results of Wallace
for the twelve months ended October 31, 2002 were combined for the year ended
December 31, 2002 statement of operations. The historical results of Moore for
the three months ended March 31, 2003 and the historical results of Wallace for
the three months ended January 31, 2003 were combined for the three-month period
ended March 31, 2003 statement of operations.
The historical results of Wallace for the twelve month period ended October
31, 2002 were calculated as the historical results of Wallace for its fiscal
year ended July 31, 2002, plus the results of the three month period ended
October 31, 2002, less the results of the three month period ended October 31,
2001. The historical results of Wallace for the three-month period ended March
31, 2003 were the historical results of Wallace for its quarter ended January
31, 2003, as reported in its Quarterly Report on Form 10-Q.
The unaudited pro forma condensed combined financial statements should be
read in conjunction with the historical consolidated financial statements and
accompanying notes contained in Moore's Annual Report on Form 10-K for its
fiscal year ended December 31, 2002 and Quarterly Report on Form 10-Q for the
three months ended March 31, 2003 and Wallace's Annual Report on Form 10-K for
its fiscal year ended July 31, 2002 and Quarterly Reports on Form 10-Q for each
of the three month periods ended October 31, 2002 and January 31, 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 merger been completed as of the dates presented, and should not be taken as
representative of the future consolidated results of operations or financial
condition of the combined company.
Based on a preliminary analysis, the new merged entity, Moore Wallace
Incorporated ("Moore Wallace"), expects to incur costs for severance and
facility charges related to vacating redundant Moore and Wallace facilities, and
other costs associated with exiting activities. Exiting costs related to Wallace
severance and facilities charges will be recorded as an additional cost of the
acquisition. Those exiting costs related to Moore severance and facility charges
will be recorded in future Moore Wallace statements of operations. Certain 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 merger
date. No adjustment has been made to the pro forma information to reflect these
potential actions, as the costs of employee terminations, facility exit costs
and the final valuation of tangible and intangible assets and related
liabilities are not currently determinable. Moore Wallace expects to expend a
substantial amount of effort evaluating facilities, finalizing valuations of
tangible and intangible assets and determining
headcount rationalizations. Although preliminary plans are currently being
formulated, Moore Wallace does not expect such estimates and plans to be
finalized until sometime prior to the close of Moore Wallace's fiscal year. If
and when costs of such exiting plans become estimable, a pro forma adjustment
would be recorded to the pro forma condensed combined balance sheet to reflect
the estimated costs of such actions.
Moore's historical consolidated financial statements are prepared in
accordance with Canadian GAAP, which differs in certain respects from U.S. GAAP.
Note 25 to the consolidated financial statements in Moore's Annual Report on
Form 10-K for its fiscal year ended December 31, 2002 and Note 8 to Moore's
Quarterly Report on Form 10-Q for the three months ended March 31, 2003 provide
a description of the material differences between Canadian GAAP and U.S. GAAP.
For the purposes of presenting the selected unaudited pro forma combined
financial information, financial information relating to Wallace has been
adjusted to conform to Canadian GAAP.
Intercompany balances or transactions between Moore and Wallace were not
significant. No material pro forma adjustments were required to conform
Wallace's accounting policies to Moore's accounting policies. Certain
reclassifications have been made to conform Wallace's historical amounts to
Moore's presentation in addition to those required to conform Wallace to
Canadian GAAP.
Moore Wallace is currently in the process of identifying any premerger
contingencies 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 which 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.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
OF MOORE CORPORATION LIMITED AND WALLACE COMPUTER SERVICES, INC.
AS OF MARCH 31, 2003
CANADIAN GAAP -- (U.S.$ IN THOUSANDS)
WALLACE
MOORE ----------------
-------------- JANUARY 31, 2003 PRO FORMA
MARCH 31, 2003 (a) (b) ADJUSTMENTS PRO FORMA
-------------- ---------------- ------------ ------------
ASSETS
Cash and cash equivalents $ 119,981 $ 58,777 $ (128,758)(c) $ 50,000
Accounts receivable - net 344,567 229,882 - 574,449
Inventories 137,372 89,799 34,788 (f) 261,959
Prepaid expenses and other current assets 38,744 16,595 (5,255)(s) 50,084
Deferred income taxes 32,823 13,900 (b1) 8,296 (g) 55,019
-------------- ------------ ----------- ------------
TOTAL CURRENT ASSETS 673,487 408,953 (90,929) 991,511
-------------- ------------ ----------- ------------
Restricted cash and cash equivalents 900,175 - (900,175)(q) -
Property, plant and equipment - net 252,549 307,745 98,085 (h) 658,379
Prepaid pension cost 222,147 - - 222,147
Goodwill - net 107,540 139,101 544,717 (d) 791,358
Other intangibles - net 6,387 - 156,650 (i) 163,037
Deferred income taxes 53,678 - 2,189 (g) 55,867
Other assets 136,867 76,270 (b2) 13,798 (k) 226,935
-------------- ------------ ----------- ------------
TOTAL ASSETS $ 2,352,830 $ 932,069 $ (175,665) $ 3,109,234
============== ============ =========== ============
LIABILITIES
Bank indebtedness $ 25,392 $ - $ - $ 25,392
Accounts payable and accrued liabilities 450,779 155,183 (8,180)(l) 597,782
Short-term debt 2,642 679 4,311 (c) 7,632
Income taxes 55,396 - - 55,396
Deferred income taxes 4,001 - - 4,001
-------------- ------------ ----------- ------------
TOTAL CURRENT LIABILITIES 538,210 155,862 (3,869) 690,203
-------------- ------------ ----------- ------------
Long-term debt:
Revolving Credit Facility - - 122,248 (c) 122,248
Term Loan B - - 495,000 (c) 495,000
Senior Notes - - 400,175 (c) 400,175
Historical debt 1,087,106 220,065 (1,286,558)(c,q) 20,613
Deferred compensation - 29,014 13,159 (m,p) 42,173
Postretirement benefits 242,730 5,599 (b3) 4,741 (n) 253,070
Deferred income taxes 9,463 38,010 (b1, b2, b3) 84,572 (g) 132,045
Other liabilities 43,137 10,987 (b2) 7,110 (o) 61,234
Minority interest 6,365 - - 6,365
-------------- ------------ ----------- ------------
TOTAL LIABILITIES 1,927,011 459,537 (163,422) 2,223,126
-------------- ------------ ----------- ------------
SHAREHOLDERS' EQUITY
Share capital 413,826 87,859 382,807 (e) 884,492
Unearned restricted shares (3,222) - - (3,222)
Deferred compensation - 3,152 (1,170)(e) 1,982
Retained earnings 143,759 441,571 (b3) (451,948)(e) 133,382
Cumulative translation adjustments (128,544) - - (128,544)
Treasury stock - (60,050) 58,068 (e) (1,982)
-------------- ------------ ----------- ------------
TOTAL SHAREHOLDERS' EQUITY 425,819 472,532 (12,243) 886,108
-------------- ------------ ----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,352,830 $ 932,069 $ (175,665) $ 3,109,234
============== ============ =========== ============
See accompanying notes.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET
(a) Certain reclassifications have been made to the historical presentation
of Wallace in order to conform to the pro forma condensed combined
presentation.
(b) The differences between Canadian GAAP and U.S. GAAP which are material
to Wallace's unaudited consolidated balance sheet as of January 31,
2003 in their Quarterly Report on Form 10-Q for the three months ended
January 31, 2003 to comply with Moore's accounting policies under
Canadian GAAP are described below.
(b1) Under Canadian GAAP, deferred income taxes are classified as
current or long-term based on the expected timing of the reversal
of temporary differences. Under U.S. GAAP, deferred income taxes
are classified according to the current or long-term nature of the
corresponding asset or liability. Accordingly, a reclassification
of $10.6 million from a current deferred tax asset to a long-term
deferred tax liability was required.
(b2) U.S. GAAP requires that $1.6 million excess unfunded accumulated
benefit obligation be reflected as an additional minimum pension
liability with an offsetting $0.4 million adjustment to intangible
assets to the extent of unrecognized prior service costs, and the
remaining $0.7 million, net of a $0.5 million deferred tax
liability be recorded as a component of accumulated other
comprehensive loss. There are no similar requirements under
Canadian GAAP. This reclassification had no material impact on
Wallace's net income.
(b3) Wallace recognizes actuarial gains and losses on postretirement
benefits immediately for U.S. GAAP purposes. For Canadian GAAP
purposes, such gains and losses are amortized. As such, the
liability for postretirement benefits is reduced by $4.7 million,
with offsetting increases of $2.8 million to retained earnings and
$1.9 million to long-term deferred tax liabilities.
(c) Represents estimated sources and uses of funds as follows (U.S.$ in
thousands):
SOURCES OF FUNDS:
Revolving Credit Facility (1) $ 122,248
Term Loan B (2) 500,000
Senior Notes 400,175
Issuance of Moore common shares 470,819
-------------
TOTAL SOURCES: $ 1,493,242
=============
USES OF FUNDS:
Purchase of Wallace -- cash component at $14.40 per share $ 609,721
Purchase of Wallace -- stock component at 1.05 Moore shares 470,819
Refinance historical debt (3) 431,767
Estimated direct financing fees 20,268
Purchase of Wallace stock options 29,061
Funding of Wallace employee capital accumulation plans (4) 11,121
Funding of certain Wallace executive employment and change
of control obligations (5) 23,257
Estimated fees related to equity 153
Estimated direct transaction fees and other fees 25,833
-------------
TOTAL USES: $ 1,622,000
=============
NET USE OF HISTORICAL CASH: $ 128,758
=============
(1) The revolving credit facility provides for borrowings up to $350.0 million.
(2) $5.0 million of Term Loan B is reflected in short-term debt and the balance
is reflected in long-term debt.
(3) Represents debt refinancing of $387.1 million of existing Moore and Wallace
debt ($0.7 million is classified as short-term), $8.9 million of accrued
interest and the liability assumed for an estimated cash "make-whole"
payment of $35.8 million related to the historical Wallace notes.
(4) Represents the cash amount required to be funded into the Wallace Benefit
Trust pursuant to Wallace's employee capital accumulation plans.
(5) Represents the cash amount required to be paid pursuant to executive
employment and change of control obligations for certain terminated Wallace
senior executives.
(d) Under the purchase method of accounting, the total estimated
consideration as shown in the table below is allocated to Wallace's
tangible and intangible assets and liabilities based on their estimated
fair values as of the date of the completion of the merger. The
preliminary estimated consideration is allocated as follows (U.S.$ in
thousands):
CALCULATION OF CONSIDERATION:
Purchase of Wallace -- cash component at $14.40 per share (1) $ 609,721
Purchase of Wallace -- stock component at 1.05 Moore shares (2) 470,819
Purchase of Wallace stock options (3) 29,061
Estimated direct transaction costs (4) 63,043
------------
Total consideration $ 1,172,644
------------
PRELIMINARY ALLOCATION OF CONSIDERATION:
Wallace book value of net assets (see note e) $ 472,532
------------
Initial purchase allocation adjustment 700,112
Less adjustments to historical net book values:
Inventories (see note f) 34,788
Current deferred tax asset (see note g) 3,709
Property, plant and equipment (see note h) 98,085
Intangible assets (see note i) 156,650
System development cost (see note j) (124)
Historical deferred financing fees of Wallace (see note k) (13,425)
Change of control obligations (see note r) (23,257)
Capital accumulation plan liability (see note m) (10,593)
Postretirement benefit obligation (see note n) (4,741)
Pension liability (see note o) (1,125)
Non-current deferred tax liability (see note g) (84,572)
------------
Adjustment to goodwill $ 544,717
============
(1) Represents cash consideration of $14.40 per common share to Wallace common
stockholders based on approximately 42.3 million Wallace common shares
outstanding as of the date of the merger, May 15, 2003.
(2) Represents the value of the approximately 44.5 million shares of Moore
common stock issued to Wallace common stockholders at an assumed price of
$10.59 per share, the average of the high and low share price during the
five day period beginning two days before the date of announcement of the
merger agreement on January 17, 2003.
(3) Represents cash consideration paid to purchase certain Wallace stock
options. The actual cash consideration paid was based on the Moore common
share price on the last trading day prior to the completion of the merger,
the number of Wallace stock options outstanding and the exercise price of
outstanding Wallace stock options at the completion of the merger.
(4) Represents estimated direct merger costs, including financial advisory,
legal, accounting, and other costs. This estimate also includes the
liability assumed for a cash "make-whole" payment of approximately $35.8
million related to historical Wallace debt.
(e) Represents adjustments to reflect the elimination of the components of
the historical equity of Wallace totaling $472.5 million; the issuance
of $470.8 million of new Moore equity less $0.2 million of fees related
to the equity issuance (see note c); the write-off against retained
earnings of $4.6 million, net of tax, of deferred financing fees
related to historical Moore debt to be refinanced; the charge of $3.4
million, net of tax, related to historical Moore interest rate swaps
(see note g); the charge of $2.4 million, net of tax, related to bridge
financing fees and the conversion of Wallace shares held by the Wallace
Benefit Trust into Moore shares (see note p).
(f) Represents the estimated purchase accounting adjustment to capitalized
manufacturing profit in inventory. This amount was estimated as part of
the initial assessment of the fair value of assets acquired and
liabilities assumed. The amount ultimately allocated to inventory may
differ materially from this preliminary allocation.
(g) Reflects the estimated impact on deferred tax assets and liabilities of
purchase accounting adjustments (see note d), the write-off of Moore
deferred financing fees, the charge related to bridge financing fees
and the required charge to mark Moore's interest rate swaps to market
resulting from the extinguishment, upon consummation of the
acquisition, of the underlying hedged debt. This estimate is based on
the statutory tax rate of 39.5%.
(h) Reflects the estimated adjustments required to record Wallace's
property, plant and equipment at its fair value based on a depreciated
replacement value. This adjustment is preliminary and is based on
management's estimates and the preliminary work of independent
appraisers. The actual adjustment may differ materially and will be
based on final valuations.
(i) Of the total estimated purchase price, a preliminary estimate of
approximately $64.3 million has been allocated to amortizable
intangible assets acquired. Amortizable intangible assets consists of
$40.0 million allocated to customer relationships to be amortized over
12 years; $7.5 million allocated to non-compete agreements to be
amortized over 2 years; $13.0 million allocated to patents to be
amortized over 8 years; and $3.8 million allocated to backlog to be
amortized over 1 year. This adjustment is preliminary and is based on
management's estimates and the preliminary work of independent
appraisers. 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 Wallace
operates and the price sensitivity of many of its customers. The
markets in which Wallace operates are highly competitive and customers
often use numerous 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 customer contractual
relationships in the printing industry typically does not involve
purchase minimums or long term binding contracts, are primary reasons
why the valuation of customer relationships is not a significant
consideration in the evaluation of an acquisition target in the
printing industry. In addition, with respect to the merger, there is a
significant overlap in the customer base of Moore and Wallace, and the
ability of the combined company to maintain the current aggregate level
of sales may be limited by the desire of these customers to minimize
their dependence on a single supplier.
Approximately $92.3 million has been allocated to intangibles with
indefinite lives, consisting primarily of the Wallace trade name. The
assumption used in the preliminary valuation is that the Wallace trade
name will not be amortized and will have an indefinite remaining useful
life based on many factors and considerations, including the length of
time that the Wallace name has been in use, the Wallace name awareness,
and the assumption of continued use of the Wallace brand as part of the
marketing strategy of the combined company. This adjustment is
preliminary and is based on management's estimates and the preliminary
work of independent appraisers. The actual adjustment may differ
materially and will be based on final valuations.
(j) Reflects the estimated adjustments required to record Wallace's system
development costs at fair value based on the estimated cost to
reproduce and an estimated remaining life of 7 years. This adjustment
is preliminary and is based on management's estimates and the
preliminary work of independent appraisers. The actual adjustment may
differ materially and will be based on final valuations.
(k) Includes the following adjustments to other non-current assets (U.S.$
in thousands):
New deferred financing fees (see note (s)...................... $ 20,828
Write off existing Wallace deferred financing fees related
to debt to be refinanced..................................... (13,425)
Write off existing Moore deferred financing fees related to
debt to be refinanced........................................ (7,612)
Convert Wallace Benefit Trust to cash (see note p)............. 2,566
Fund employee capital accumulation plans (see note m).......... 11,121
Write down software development costs (see note j)............. (124)
Adjustment to pension asset (see note o)....................... 444
-----------
Net adjustment to other non-current assets............... $ 13,798
===========
(l) This adjustment reflects the payment of $8.9 million of accrued
interest related to debt being refinanced (see note c) and $0.7 of
accrued transaction fees.
(m) Reflects a preliminary estimated adjustment of $10.6 million to record
the liability for Wallace's capital accumulation plans at their fair
value. This estimate is based on an assumed average guaranteed rate of
return of 12% that is payable at various payout dates in accordance
with the plan in effect during the year of the initial deferral. An
assumed discount rate of 6.5% and estimated rates for turnover,
mortality and retirement were utilized for this calculation. The
valuation of the capital accumulation plan obligations is preliminary
and has not yet been finalized. The final amount will be based on
actuarially determined valuations. The amount ultimately allocated to
the capital accumulation plan obligation may differ significantly from
this preliminary allocation.
A portion of this liability is required to be funded in cash upon
completion of the merger pursuant to Wallace's employee capital
accumulation plans. The cash funding requirement of $11.1 million was
based on Wallace's accumulated deferred compensation and accrued
interest through January 31, 2003.
(n) Reflects a preliminary estimate to record Wallace's liability for
postretirement benefits at its projected benefit obligation. The
valuation of employee benefit obligations has not yet been completed.
The final amount will be based on actuarially determined valuations.
The amount ultimately allocated to postretirement benefits other than
pensions may differ significantly from this preliminary allocation.
(o) Reflects a preliminary estimate of $1.6 million to record Wallace's
pension liability at its projected benefit obligation and to adjust the
pension asset. The valuation of employee benefit obligations has not
yet been completed. The final amount will be based on actuarially
determined valuations. The amount ultimately allocated to the pension
liability may differ significantly from this preliminary allocation.
The adjustment also reflects an estimated liability of $5.5 million, to
mark Moore's interest rate swaps to fair value as of March 31, 2003
related to the extinguishment, upon consummation of the acquisition, of
the underlying hedged debt.
(p) Reflects the conversion of 178 thousand Wallace common shares, which
are held in the Wallace Benefit Trust and are related to deferred
compensation plans, into cash and Moore common shares pursuant to the
merger agreement. The cash portion, estimated at $2.6 million, is
reflected as an increase in the Wallace Benefit Trust included in other
non-current assets with an offsetting increase in the deferred
compensation liability. The stock portion, estimated at $2.0 million,
is reflected in treasury stock with an offsetting liability in
shareholders' equity.
(q) In March of 2003, Moore entered into an $850 million senior secured
credit facility and issued $403 million of 7 7/8% senior unsecured
notes in connection with the acquisition of Wallace. Proceeds of the
$500 million Term Loan B portion of the $850 million senior secured
credit facility and the net proceeds of the senior unsecured notes were
held in escrow and were presented as restricted cash in Moore's
Quarterly Report on Form 10-Q for the three months ended March 31,
2003. Upon consummation of the merger and the satisfaction of the other
conditions of release, all of the proceeds were released and the
Restricted Cash classification on the March 31, 2003 combined condensed
pro forma balance sheet was no longer applicable and was adjusted
accordingly.
(r) Reflects change of control payments to certain terminated Wallace
senior executives. This amount does not reflect the purchase of stock
options.
(s) Reflects the reclassification of prepaid direct transaction fees to
goodwill and prepaid deferred financing fees to other assets.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF
OPERATIONS
OF MOORE CORPORATION LIMITED AND WALLACE COMPUTER SERVICES,
INC.
YEAR ENDED DECEMBER 31, 2002
CANADIAN GAAP -- (U.S.$ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
WALLACE
MOORE 12 MONTHS ENDED PRO FORMA
DECEMBER 31, 2002 OCTOBER 31, 2002 (a) ADJUSTMENTS PRO FORMA (b)
----------------- -------------------- ---------- -------------
NET SALES $ 2,038,039 $ 1,522,126 $ - $ 3,560,165
------------ ------------ ---------- -----------
Cost of sales 1,390,007 1,109,724 - 2,499,731
Selling, general and administrative 459,613 240,993 - 700,606
Provision for (recovery of) restructuring costs - net (850) 17,868 - 17,018
Depreciation and amortization (includes impairment
charges of $23,500 at Wallace) 86,746 87,707 11,824 (c) 186,277
------------ ------------ ---------- -----------
Total operating expenses 1,935,516 1,456,292 11,824 3,403,632
------------ ------------ ---------- -----------
INCOME (LOSS) FROM OPERATIONS 102,523 65,834 (11,824) 156,533
------------ ------------ ---------- -----------
Investment and other income 3,720 - 3,720
Interest expense - net 12,145 19,334 32,642 (d) 64,121
Debt settlement costs 16,746 - (16,746)(e) -
------------ ------------ ---------- -----------
EARNINGS (LOSS) BEFORE TAXES AND MINORITY INTEREST 77,352 46,500 (27,720) 96,132
------------ ------------ ---------- -----------
Income tax expense (recovery) 2,472 16,579 (10,949)(f) 8,102
Minority interest 1,622 - - 1,622
------------ ------------ ---------- -----------
NET EARNINGS $ 73,258 $ 29,921 $ (16,771) $ 86,408
------------ ------------ ---------- -----------
NET EARNINGS PER SHARE:
Basic $ 0.66 $ 0.55
Diluted $ 0.64 $ 0.55
AVERAGE SHARES OUTSTANDING (IN THOUSANDS):
Basic 111,556 156,015 (g)
Diluted 114,022 158,481 (g)
See accompanying notes.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF
OPERATIONS
OF MOORE CORPORATION LIMITED AND WALLACE COMPUTER SERVICES,
INC.
THREE MONTHS ENDED MARCH 31, 2003
CANADIAN GAAP -- (U.S.$ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
WALLACE
MOORE 3 MONTHS ENDED PRO FORMA
MARCH 31, 2003 JANUARY 31, 2003 (a) ADJUSTMENTS PRO FORMA (b)
-------------- -------------------- ----------- -------------
NET SALES $ 511,145 $ 379,958 $ - $ 891,103
---------- ---------- ---------- -------------
Cost of sales 345,452 277,271 - 622,723
Selling, general and administrative 108,658 58,957 - 167,615
Provision for (recovery of) restructuring costs - net - - - -
Depreciation and amortization 21,175 15,273 3,484 (c) 39,932
---------- ---------- ---------- -------------
Total operating expenses 475,285 351,501 3,484 830,270
---------- ---------- ---------- -------------
INCOME (LOSS) FROM OPERATIONS 35,860 28,457 (3,484) 60,833
---------- ---------- ---------- -------------
Investment and other income 839 - - 839
Interest expense - net 6,499 4,568 5,145 (d) 16,212
Debt settlement costs - - - (e) -
---------- ---------- ---------- -------------
EARNINGS (LOSS) BEFORE TAXES AND MINORITY INTEREST 30,200 23,889 (8,629) 45,460
---------- ---------- ---------- -------------
Income tax expense (recovery) 840 9,078 (3,408)(f) 6,510
Minority interest 202 - - 202
---------- ---------- ---------- -------------
NET EARNINGS $ 29,158 $ 14,811 $ (5,221) $ 38,748
---------- ---------- ---------- -------------
NET EARNINGS PER SHARE:
Basic $ 0.26 $ 0.25
Diluted $ 0.26 $ 0.25
AVERAGE SHARES OUTSTANDING (IN THOUSANDS):
Basic 112,276 156,735(g)
Diluted 113,229 157,688(g)
See accompanying notes.
NOTES TO UNAUDITED CONDENSED COMBINED PRO FORMA
STATEMENTS OF OPERATIONS
(a) The historical results of Wallace for the twelve months ended October
31, 2002 were calculated as the historical results for its fiscal year
ended July 31, 2002 plus the results of the three month period ended
October 31, 2002 less the results of the three month period ended
October 31, 2001. There are no material adjustments to Wallace's
historical U.S. GAAP statements of operations required to conform them
to Canadian GAAP.
Reclassifications have been made to the historical presentation of
Wallace in order to conform to the pro forma combined presentation.
(b) The pro forma statements of operations do not reflect the impact of an
estimated $34.8 million charge to cost of sales that will be incurred
as the capitalized manufacturing profit is added to inventory under
purchase accounting. The pro forma statements of operations do not
reflect an estimated $5.5 million charge to investment and other income
related to marking Moore's interest rate swaps to market resulting from
the extinguishment, upon consummation of the acquisition, of the
underlying hedged debt and the amortization of $3.8 million of
intangible assets related to backlog with an amortization period of
less than 1 year. The charges identified above are nonrecurring in
nature and are not expected to have a continuing impact on the results
of operations of the combined company.
(c) Represents pro forma adjustment to reflect incremental depreciation and
amortization resulting from fair value adjustments to property, plant
and equipment, amortizable intangible assets and system development
costs as illustrated below. This adjustment is preliminary and based on
management's estimates of the fair value. The actual adjustment may
differ materially and will be based on final valuations.
For the 12 months ended December 31, 2002:
ANNUAL WALLACE HISTORICAL
USEFUL DEPRECIATION AND DEPRECIATION AND INCREASE/
(U.S.$ IN THOUSANDS) FAIR VALUE LIFE AMORTIZATION AMORTIZATION (DECREASE)
-------------------- ---------- ---------- ---------------- ------------------ ----------
PROPERTY, PLANT AND
EQUIPMENT.......... $ 405,831 Various $ 60,824 $ 52,848 $ 7,976
AMORTIZABLE
INTANGIBLES
Customer
Relationships...... 40,000 12 3,333 -- 3,333
Patents............. 13,030 8 1,629 -- 1,629
Non-Compete
Agreements........ 7,520 2 3,760 -- 3,760
---------- ---------- ---------- ----------
Total amortizable
intangibles.... 60,550 8,722 -- 8,722
---------- --------- ---------- ----------
SYSTEM DEVELOPMENT
COSTS.............. 45,400 7 6,486 11,360 (4,874)
----------
TRADENAME........... 92,310 Indefinite -- -- --
---------- --------- ---------- ----------
NET ADJUSTMENT TO
DEPRECIATION AND
AMORTIZATION...... $ 11,824
----------
BACKLOG............. 3,790 1
----------
For the 3 months ended March 31, 2003:
QUARTERLY WALLACE HISTORICAL
FAIR USEFUL DEPRECIATION AND DEPRECIATION AND INCREASE/
(U.S.$ IN THOUSANDS) VALUE LIFE AMORTIZATION AMORTIZATION (DECREASE)
--------------------- ---------- ---------- ---------------- ------------------ ----------
PROPERTY, PLANT AND
EQUIPMENT......... $ 405,831 Various $ 14,956 $ 12,637 $ 2,319
AMORTIZABLE
INTANGIBLES
Customer
Relationships..... 40,000 12 833 -- 833
Patents............. 13,030 8 407 -- 407
Non-Compete
Agreements........ 7,520 2 940 -- 940
---------- ---------- ---------- ---------
Total amortizable
intangibles.. 60,550 2,180 -- 2,180
---------- ---------- ---------- ---------
SYSTEM DEVELOPMENT
COSTS............. 45,400 7 1,621 2,636 (1,015)
TRADENAME........... 92,310 Indefinite -- -- --
---------- ---------- ---------- ---------
NET ADJUSTMENT TO
DEPRECIATION AND
AMORTIZATION...... $ 3,484
---------
BACKLOG............. 3,790 1
----------
(d) Reflects pro forma interest expense, net of $3.1 and $1.0 million of
historical interest income for the twelve months ended December 31,
2002 and the three months ended March 31, 2003, respectively, resulting
from the new capital structure based on a three-month LIBOR rate of
1.28% as of May 19, 2003 ("LIBOR"), as follows (U.S.$ in thousands):
12 MONTHS ENDED 3 MONTHS ENDED
DECEMBER 31, 2002 MARCH 31, 2003
Revolving Credit Facility (1) $ 4,619 $ 1,155
Term Loan B (2) 21,287 5,288
Senior Notes (3) 31,736 7,934
Commitment fees (4) 1,389 348
----------- ------------
Cash interest expense on new debt 59,031 14,725
Amortization of deferred financing fees (5) 4,647 1,162
Amortization of discount on Senior Notes (6) 353 88
----------- ------------
Pro forma total interest expense on new debt 64,031 15,975
Less pre-acquisition interest expense - (3,226)
Less interest expense on existing debt being refinanced (31,389) (7,604)
----------- ------------
Pro forma adjustment $ 32,642 $ 5,145
=========== ============
(1) Reflects pro forma interest expense on the revolving credit facility using
an assumed average outstanding balance of $122.2 million and an interest
rate of LIBOR plus 2.5%.
(2) Reflects pro forma interest expense on the Term Loan B assuming an initial
outstanding balance of $500 million, quarterly principal payments of $1.25
million and an interest rate of LIBOR plus 3.0%.
(3) Reflects pro forma interest expense on the Senior Notes assuming an
outstanding balance of $403 million issued at a price of 99.299% and an
interest rate of 7.875%.
(4) Reflects commitment fees of 0.50% on estimated undrawn funds under the
revolving credit facility of $227.8 million plus additional annual fees of
approximately $0.25 million.
(5) Reflects amortization of deferred financing fees over the term of the
related facility (5 years for the revolving credit facility, 7 years for
Term Loan B, and 8 years for the Senior Notes). Pro forma interest expense
does not reflect a one-time charge to operating expenses of $7.6 million
that will be incurred to write-off deferred financing fees related to
existing Moore debt being refinanced or $4.0 million of one-time bridge
financing commitment fees.
(6) Reflects the amortization of the discount on the Senior Notes.
A 0.125% change in interest rates would result in a change in the pro forma
interest expense as follows (U.S.$ in thousands):
12 MONTHS ENDED 3 MONTHS ENDED
DECEMBER 31, 2002 MARCH 31, 2003
Revolving Credit Facility... $ 153.3 $ 38.0
Term Loan B................. 621.7 154.5
--------- ------------
Total....................... $ 775.0 192.5
========= ============
(e) Reflects elimination of debt settlement costs related to refinanced
debt.
(f) Reflects the pro forma tax effect of the above adjustments at an
estimated combined statutory tax rate of 39.5%.
(g) The pro forma basic weighted average number of shares for the 12 month
period ended December 31, 2002 are calculated by adding Moore's
weighted average basic shares outstanding as of December 31, 2002 and
the number of shares of Wallace common shares outstanding as of the
merger date multiplied by the exchange ratio of 1.05. The pro forma
diluted weighted average number of shares for the 12 months ended
December 31, 2002 is calculated by adding Moore's weighted average
diluted shares outstanding as of December 31, 2002 and the number of
Wallace common shares outstanding as of the merger date multiplied by
the exchange ratio of 1.05. The pro forma basic and diluted average
number of shares outstanding as of March 31, 2003 were calculated in
the same manner except for the Moore historical average shares
outstanding which were for the three months ended March 31, 2003.
DIFFERENCES BETWEEN CANADIAN GAAP AND U.S. GAAP
The following sets out 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 25 to Moore's December 31, 2002
consolidated financial statements and Note 8 to Moore's Quarterly Report on Form
10-Q for the three months ended March 31, 2003, which are incorporated by
reference herein.
Moore'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 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, whereas, under
U.S. GAAP, net gains (losses), net assets and prior service costs which occurred
before January 1, 2000 are recognized over the appropriate amortization period.
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.
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 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'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 Moore approved the amendment of the
options to purchase Series 1 Preference Shares "Preference Shares" to eliminate
the cash-out provision and to make them exercisable for one common share per
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 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 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 Moore are unrealized foreign currency translation
adjustments, change in fair value of derivatives and unrealized gains (losses)
on available-for-sale securities. Under Canadian GAAP, there is no standard for
reporting comprehensive income.
Accounting for Derivative Instruments and Hedging Activities
For U.S. GAAP purposes, Moore's interest rate swaps are designated as cash
flow hedges and changes in their fair value are recorded in other comprehensive
income. Under Canadian GAAP, there is no standard requiring the recognition of
the fair value of derivatives through comprehensive income.
Foreign Currency Translation
Under U.S. GAAP, foreign currency translation gains or losses are only
recognized on the sale or substantial liquidation of a foreign subsidiary. Under
Canadian GAAP, a foreign currency gain or loss due to a partial liquidation is
recognized in income.
Business Process Reengineering
Under U.S. GAAP, business process reengineering activities are expensed as
incurred. Prior to October 28, 1998, Canadian GAAP permitted these costs to be
capitalized or expensed. Subsequent to October 28, 1998, Canadian GAAP requires
expensing these costs. Prior to October 28, 1998, Moore 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 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 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, but is not limited to, the
following factors: Moore's share price volatility; cost of borrowings; and
certain equity valuation multiples.
The following tables provide a reconciliation of unaudited pro forma net
earnings as reported under Canadian GAAP to unaudited pro forma net earnings
under U.S. GAAP.
12 MONTHS ENDED 3 MONTHS ENDED
DECEMBER 31, 2002 MARCH 31, 2003
(U.S. $ IN THOUSANDS EXCEPT PER SHARE)
Pro Forma net earnings........................ $ 86,408 $ 38,748
U.S. GAAP ADJUSTMENTS:
Pension expense............................... 4,199 1,011
Postretirement benefits....................... 17,290 4,328
Computer software............................. 6,764 1,704
Debt conversion costs......................... 832 366
Stock-based compensation...................... (11,839) (365)
Income taxes.................................. (6,812) (2,782)
----------- ------------
Pro Forma net earnings under U.S. GAAP........ $ 96,842 $ 43,010
=========== ============
Pro Forma Earnings per share:
Basic....................................... $ 0.62 $ 0.27
Diluted..................................... $ 0.61 $ 0.27
Average shares (in thousands):
Basic....................................... 156,015 156,735
Diluted..................................... 157,757 157,623
On September 4, 2002, Moore redeemed $100 million of senior guaranteed
notes at a redemption price that includes a prepayment charge of $16.7 million
or $10.2 million net of taxes. For U.S. GAAP purposes the costs related to the
early extinguishment of debt are classified as an extraordinary item.
The following table lists the pro forma balance sheet items that would have
been materially different had they been presented under U.S. GAAP:
MARCH 31, 2003
------------------------
PRO FORMA PRO FORMA
CANADIAN U.S.
GAAP GAAP
------------------------
(U.S.$ IN THOUSANDS)
Net pension asset.......................... $(189,407) $(126,261)
Computer software -- net................... (129,786) (105,954)
Postretirement benefits.................... 253,070 373,475
Deferred income taxes, net................. 25,610 (53,134)
Accounts payable and accrued liabilities... 597,782 592,585
Accumulated other comprehensive loss....... (128,544) (96,740)
Share capital.............................. 884,492 886,394
Retained earnings (deficit)................ 133,382 (24,216)
(C) EXHIBITS
Exhibit
Number Description
------ -----------
2.1 Agreement and Plan of Merger, dated as of January 16, 2003 (and as
amended and restated as of April 14, 2003), among Moore Corporation
Limited, Moore Holdings U.S.A. Inc., M-W Acquisition, Inc. and
Wallace Computer Services, Inc. (incorporated by reference to
Exhibit 2.1 to the Form 8-K of the Parent, filed on May 15, 2003,
Commission File No. 1-8014).
SIGNATURE
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 hereunto duly authorized.
MOORE WALLACE INCORPORATED
Date: July 29, 2003 By: /s/ Theodore J. Theophilos
---------------------------
Name: Theodore J. Theophilos
Title: Executive Vice President,
Business and Legal Affairs,
and Secretary
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
2.1 Agreement and Plan of Merger, dated as of January 16, 2003 (and as
amended and restated as of April 14, 2003), among Moore Corporation
Limited, Moore Holdings U.S.A. Inc., M-W Acquisition, Inc. and
Wallace Computer Services, Inc. (incorporated by reference to
Exhibit 2.1 to the Form 8-K of the Parent, filed on May 15, 2003,
Commission File No. 1-8014).