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MAPLEBY HOLDINGS MERGER Corp 10-Q 2005

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

 

AMENDMENT NO. 1

 

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended September 30, 2004

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from                         to                         

 

Commission File Number: 1-5057

 

OFFICEMAX INCORPORATED

(Exact name of registrant as specified in its charter)

 

Delaware

 

82-0100960

(State or other jurisdiction of incorporation or
organization)

 

(I.R.S. Employer Identification No.)

 

 

 

150 Pierce Road

 

 

Itasca, Illinois

 

60143

(Address of principal executive offices)

 

(Zip Code)

 

(630) 773-5000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes   ý                              No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).       Yes   ý                              No  o

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Shares Outstanding
as of October 31, 2004

Common Stock, $2.50 par value

 

88,042,269

 

 



 

OFFICEMAX INCORPORATED

FORM 10-Q/A

INTRODUCTORY NOTE

 

This Amendment No. 1 to quarterly report on Form 10-Q/A (“Form 10-Q/A”) is being filed to amend the company’s quarterly report on Form 10-Q for the quarter ended September 30, 2004, which was originally filed on November 9, 2004 (“Original Form 10-Q”).  Accordingly, pursuant to rule 12b-15 under the Securities Exchange Act of 1934, as amended, this Form 10-Q/A contains the complete text of Items 1, 2 and 4 of Part I and Item 6 of Part II, as amended, as well as certain currently dated certifications.  Unaffected items have not been repeated in this Amendment No. 1.

 

Based on the results of an investigation into the company’s accounting for vendor income that began in the fourth quarter of 2004, the company concluded in February 2005 that it overstated operating income in the first quarter of 2004 by $7.1 million and understated operating income by $1.1 million and $1.7 million in the second and third quarters of 2004, respectively. Net income was overstated by $4.3 million in the first quarter of 2004 and understated by $0.7 million and $1.0 million in the second and third quarters of 2004. For the nine months ended September 30, 2004, operating income was overstated by $4.3 million and net income was overstated by $2.6 million. The company’s financial statements as of and for the year ended December 31, 2003, were not materially impacted.  See Note 24 to the accompanying consolidated financial statements for a discussion of the adjustment.

 

This Amendment No. 1 does not reflect events occurring after the filing of the Original Form 10-Q, which was filed on November 9, 2004.  Such events include, among others, the events described in the company’s current reports on Form 8-K filed after the filing of the Original Form 10-Q. This Amendment No. 1 is effective for all purposes as of November 9, 2004.

 

2



 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

4

 

 

 

 

Item 1.

 

Financial Statements (Restated)

4

 

 

Notes to Quarterly Consolidated Financial Statements (Restated and Unaudited)

9

 

 

1.

Basis of Presentation

9

 

 

2.

OfficeMax, Inc., Acquisition

9

 

 

3.

OfficeMax, Inc., Integration

11

 

 

4.

Net Income (Loss) Per Common Share

13

 

 

5.

Stock-Based Compensation

15

 

 

6.

Other (Income) Expense, Net

16

 

 

7.

Income Taxes

16

 

 

8.

Comprehensive Income

17

 

 

9.

Accounting Changes

17

 

 

10.

Receivables

17

 

 

11.

Investments in Equity Affiliates

18

 

 

12.

Inventories

18

 

 

13.

Deferred Software Costs

18

 

 

14.

Goodwill and Intangible Assets

19

 

 

15.

Debt

20

 

 

16.

Financial Instruments

22

 

 

17.

Retirement and Benefit Plans

23

 

 

18.

2003 Cost-Reduction Program

24

 

 

19.

Recently Adopted Accounting Standards

24

 

 

20.

Segment Information

25

 

 

21.

Commitments and Guarantees

27

 

 

22.

Legal Proceedings and Contingencies

28

 

 

23.

Subsequent Events

28

 

 

24.

Restatement of Previously Issued Financial Statements

28

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Restated)

31

 

 

Sale of Paper, Forest Products and Timberland Assets

31

 

 

Summary and Outlook

31

 

 

Results of Operations, Consolidated

37

 

 

OfficeMax, Contract

39

 

 

OfficeMax, Retail

41

 

 

Boise Building Solutions

42

 

 

Boise Paper Solutions

43

 

 

Liquidity and Capital Resources

44

 

 

Environmental Issues

49

 

 

Critical Accounting Estimates

50

 

 

Cautionary and Forward-Looking Statements

51

 

 

 

 

Item 4.

 

Controls and Procedures

52

 

 

 

 

PART II - OTHER INFORMATION

53

 

 

 

 

Item 6.

 

Exhibits

53

 

3



 

PART I - FINANCIAL INFORMATION

 

ITEM 1.                         FINANCIAL STATEMENTS

 

OfficeMax Incorporated and Subsidiaries
Consolidated Statements of Income
(thousands, except per-share amounts)

 

 

Three Months Ended
September 30

 

 

 

2004

 

2003

 

 

 

(Restated)

 

 

 

 

 

(unaudited)

 

Sales

 

$

3,650,930

 

$

2,110,601

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

Materials, labor and other operating expenses

 

2,833,329

 

1,695,809

 

Depreciation, amortization and cost of company timber harvested

 

102,130

 

78,019

 

Selling and distribution expenses

 

496,229

 

224,405

 

General and administrative expenses

 

77,745

 

38,576

 

Other (income) expense, net

 

(1,161

)

1,133

 

 

 

 

 

 

 

 

 

3,508,272

 

2,037,942

 

 

 

 

 

 

 

Equity in net income of affiliates

 

 

4,038

 

 

 

 

 

 

 

Income from operations

 

142,658

 

76,697

 

 

 

 

 

 

 

Interest expense

 

(39,945

)

(31,657

)

Interest income

 

455

 

221

 

Foreign exchange gain

 

1,072

 

133

 

 

 

 

 

 

 

 

 

(38,418

)

(31,303

)

 

 

 

 

 

 

Income before income taxes and minority interest

 

104,240

 

45,394

 

Income tax provision

 

(40,926

)

(12,510

)

 

 

 

 

 

 

Income before minority interest

 

63,314

 

32,884

 

Minority interest, net of income tax

 

(1,145

)

 

 

 

 

 

 

 

Net income

 

62,169

 

32,884

 

Preferred dividends

 

(3,242

)

(3,191

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income applicable to common shareholders

 

$

58,927

 

$

29,693

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

Basic

 

$

0.68

 

$

0.51

 

 

 

 

 

 

 

Diluted

 

$

0.64

 

$

0.48

 

 

See accompanying notes to consolidated financial statements.

 

4



 

OfficeMax Incorporated and Subsidiaries
Consolidated Statements of Income
(thousands, except per-share amounts)

 

 

Nine Months Ended September 30

 

 

 

2004

 

2003

 

 

 

(Restated)

 

 

 

 

 

(unaudited)

 

Sales

 

$

10,581,773

 

$

5,892,828

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

Materials, labor and other operating expenses

 

8,275,205

 

4,789,443

 

Depreciation, amortization and cost of company timber harvested

 

301,172

 

227,331

 

Selling and distribution expenses

 

1,480,676

 

656,039

 

General and administrative expenses

 

224,373

 

109,246

 

Other (income) expense, net

 

(91,768

)

14,121

 

 

 

 

 

 

 

 

 

10,189,658

 

5,796,180

 

 

 

 

 

 

 

Equity in net income of affiliates

 

6,311

 

4,453

 

 

 

 

 

 

 

Income from operations

 

398,426

 

101,101

 

 

 

 

 

 

 

Interest expense

 

(121,029

)

(94,911

)

Interest income

 

1,389

 

653

 

Foreign exchange gain

 

728

 

2,949

 

 

 

 

 

 

 

 

 

(118,912

)

(91,309

)

 

 

 

 

 

 

Income before income taxes, minority interest and cumulative effect of accounting changes

 

279,514

 

9,792

 

Income tax (provision) benefit

 

(104,758

)

415

 

 

 

 

 

 

 

Income before minority interest and cumulative effect of accounting changes

 

174,756

 

10,207

 

Minority interest, net of income tax

 

(2,393

)

 

 

 

 

 

 

 

Income before cumulative effect of accounting changes

 

172,363

 

10,207

 

Cumulative effect of accounting changes, net of income tax

 

 

(8,803

)

 

 

 

 

 

 

Net income

 

172,363

 

1,404

 

Preferred dividends

 

(9,776

)

(9,744

)

 

 

 

 

 

 

Net income (loss) applicable to common shareholders

 

$

162,587

 

$

(8,340

)

 

 

 

 

 

 

Net income (loss) per common share

 

 

 

 

 

Basic before cumulative effect of accounting changes

 

$

1.88

 

$

0.01

 

Cumulative effect of accounting changes, net of income tax

 

 

(0.15

)

 

 

 

 

 

 

Basic

 

$

1.88

 

$

(0.14

)

 

 

 

 

 

 

Diluted before cumulative effect of accounting changes

 

$

1.78

 

$

0.01

 

Cumulative effect of accounting changes, net of income tax

 

 

(0.15

)

 

 

 

 

 

 

Diluted

 

$

1.78

 

$

(0.14

)

 

See accompanying notes to consolidated financial statements.

 

5



 

OfficeMax Incorporated and Subsidiaries
Consolidated Balance Sheets

(thousands)

 

 

 

September 30

 

December 31

 

 

 

2004

 

2003

 

2003

 

 

 

(Restated)

 

 

 

 

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

168,306

 

$

94,544

 

$

124,879

 

Receivables, less allowances of $10,360, $14,349 and $10,865

 

1,006,283

 

576,817

 

574,219

 

Inventories

 

1,511,476

 

643,391

 

1,609,811

 

Deferred income taxes

 

144,436

 

59,073

 

132,235

 

Other

 

72,392

 

36,943

 

60,148

 

 

 

 

 

 

 

 

 

 

 

2,902,893

 

1,410,768

 

2,501,292

 

 

 

 

 

 

 

 

 

Property

 

 

 

 

 

 

 

Property and equipment

 

 

 

 

 

 

 

Land and land improvements

 

84,347

 

75,309

 

87,703

 

Buildings and improvements

 

908,248

 

758,515

 

890,871

 

Machinery and equipment

 

5,048,437

 

4,731,788

 

4,905,012

 

 

 

 

 

 

 

 

 

 

 

6,041,032

 

5,565,612

 

5,883,586

 

Accumulated depreciation

 

(3,283,711

)

(3,060,970

)

(3,058,527

)

 

 

 

 

 

 

 

 

 

 

2,757,321

 

2,504,642

 

2,825,059

 

Timber, timberlands and timber deposits

 

296,595

 

319,470

 

330,667

 

 

 

 

 

 

 

 

 

 

 

3,053,916

 

2,824,112

 

3,155,726

 

 

 

 

 

 

 

 

 

Goodwill

 

1,148,787

 

420,715

 

1,107,292

 

Intangible assets, net

 

210,249

 

25,056

 

218,196

 

Investments in equity affiliates

 

85

 

39,992

 

44,335

 

Other assets

 

514,361

 

346,187

 

349,318

 

 

 

 

 

 

 

 

 

Total assets

 

$

7,830,291

 

$

5,066,830

 

$

7,376,159

 

 

See accompanying notes to consolidated financial statements.

 

6



 

OfficeMax Incorporated and Subsidiaries
Consolidated Balance Sheets
(thousands, except share amounts)

 

 

 

September 30

 

December 31

 

 

 

2004

 

2003

 

2003

 

 

 

(Restated)

 

 

 

 

 

 

 

(unaudited)

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

Short-term borrowings

 

$

452,429

 

$

7,167

 

$

5,188

 

Current portion of long-term debt

 

437,237

 

77,949

 

83,016

 

Income taxes payable

 

 

6,181

 

694

 

Accounts payable

 

1,098,342

 

555,843

 

1,255,303

 

Accrued liabilities

 

 

 

 

 

 

 

Compensation and benefits

 

308,585

 

235,959

 

317,934

 

Interest payable

 

40,173

 

25,204

 

34,130

 

Other

 

440,641

 

131,387

 

280,646

 

 

 

 

 

 

 

 

 

 

 

2,777,407

 

1,039,690

 

1,976,911

 

 

 

 

 

 

 

 

 

Debt

 

 

 

 

 

 

 

Long-term debt, less current portion

 

1,416,673

 

1,517,049

 

1,999,876

 

Adjustable conversion-rate equity securities (ACES)

 

172,500

 

172,500

 

172,500

 

Guarantee of ESOP debt

 

 

40,504

 

19,087

 

 

 

 

 

 

 

 

 

 

 

1,589,173

 

1,730,053

 

2,191,463

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Deferred income taxes

 

134,069

 

157,682

 

43,311

 

Compensation and benefits

 

567,489

 

655,529

 

564,331

 

Other long-term liabilities

 

228,685

 

55,459

 

256,355

 

 

 

 

 

 

 

 

 

 

 

930,243

 

868,670

 

863,997

 

Minority interest

 

22,523

 

 

20,154

 

 

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

Preferred stock — no par value; 10,000,000 shares authorized;

 

 

 

 

 

 

 

Series D ESOP: $.01 stated value; 3,907,702, 4,131,343 and 4,117,827 shares outstanding

 

175,847

 

185,910

 

185,302

 

Deferred ESOP benefit

 

 

(40,504

)

(19,087

)

Common stock — $2.50 par value; 200,000,000 shares authorized; 88,152,900, 59,548,948 and 87,137,306 shares outstanding

 

217,378

 

146,120

 

214,805

 

Additional paid-in capital

 

1,275,422

 

480,044

 

1,228,694

 

Retained earnings

 

1,026,932

 

926,039

 

907,738

 

Accumulated other comprehensive loss

 

(184,634

)

(269,192

)

(193,818

)

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

2,510,945

 

1,428,417

 

2,323,634

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

7,830,291

 

$

5,066,830

 

$

7,376,159

 

 

See accompanying notes to consolidated financial statements.

 

7



 

OfficeMax Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
(thousands)

 

 

 

Nine Months Ended
September 30

 

 

 

2004

 

2003

 

 

 

(Restated)

 

 

 

 

 

(unaudited)

 

Cash provided by (used for) operations

 

 

 

 

 

Net income

 

$

172,363

 

$

1,404

 

Items in net income not using (providing) cash

 

 

 

 

 

Equity in net income of affiliates

 

(6,311

)

(4,453

)

Depreciation, amortization and cost of company timber harvested

 

301,172

 

227,331

 

Deferred income tax provision (benefit)

 

86,186

 

(12,056

)

Minority interest, net of income tax

 

2,393

 

 

Gain on sale of assets

 

(106,660

)

 

Pension and other postretirement benefits expense

 

71,011

 

62,044

 

Cumulative effect of accounting changes, net of income tax

 

 

8,803

 

Other

 

17,354

 

(875

)

Receivables

 

(426,003

)

(143,732

)

Inventories

 

97,177

 

66,824

 

Accounts payable and accrued liabilities

 

(21,474

)

26,249

 

Current and deferred income taxes

 

(16,476

)

(10,218

)

Pension and other postretirement benefits payments

 

(239,010

)

(91,583

)

Other

 

(52,094

)

37,723

 

 

 

 

 

 

 

Cash provided by (used for) operations

 

(120,372

)

167,461

 

 

 

 

 

 

 

Cash provided by (used for) investment

 

 

 

 

 

Expenditures for property and equipment

 

(228,141

)

(148,379

)

Expenditures for timber and timberlands

 

(6,056

)

(6,682

)

Proceeds from equity affiliates

 

21

 

102

 

Sale of assets

 

186,946

 

 

Other

 

14,469

 

(7,861

)

 

 

 

 

 

 

Cash used for investment

 

(32,761

)

(162,820

)

 

 

 

 

 

 

Cash provided by (used for) financing

 

 

 

 

 

Cash dividends paid

 

 

 

 

 

Common stock

 

(38,832

)

(26,233

)

Preferred stock

 

(6,809

)

(7,019

)

 

 

 

 

 

 

 

 

(45,641

)

(33,252

)

Short-term borrowings

 

447,241

 

(20,833

)

Additions to long-term debt

 

142

 

173,613

 

Payments of long-term debt

 

(226,784

)

(91,713

)

Other

 

21,602

 

(3,064

)

 

 

 

 

 

 

Cash provided by financing

 

196,560

 

24,751

 

 

 

 

 

 

 

Increase in cash and cash equivalents

 

43,427

 

29,392

 

Balance at beginning of the year

 

124,879

 

65,152

 

 

 

 

 

 

 

Balance at September 30

 

$

168,306

 

$

94,544

 

 

See accompanying notes to consolidated financial statements.

 

8



 

Notes to Quarterly Consolidated Financial Statements (Restated and Unaudited - See Note 24, Restatement of Previously Issued Financial Statements, for a discussion of the Restatement.)

 

1.                                      Basis of Presentation

 

On October 29, 2004, we completed the sale of our paper, forest products and timberland assets (the sale) for approximately $3.7 billion to affiliates of Boise Cascade, L.L.C., a new company formed by Madison Dearborn Partners LLC. In connection with the sale, 2004, Boise Cascade Corporation changed its company name to OfficeMax Incorporated (“OfficeMax” or “we”). We will continue to operate our office products distribution business as our principal business. We trade on the New York Stock Exchange under the ticker symbol OMX, and our corporate headquarters is in Itasca, Illinois. The new OfficeMax website address is www.officemax.com.

 

In connection with the name change, we changed the names of our office products segments to OfficeMax, Contract and OfficeMax, Retail. The Boise Cascade Corporation and Boise Office Solutions names were used in documents furnished to or filed with the Securities and Exchange Commission prior to the sale. References made to the OfficeMax, Inc., Acquisition and OfficeMax, Inc., Integration in these notes to quarterly consolidated financial statements refer to Boise Cascade Corporation’s acquisition of OfficeMax, Inc., in December 2003 and the related integration activities. The financial data included in this report include the results of the paper, forest products and timberland assets through September 30, 2004, and our future reports will continue to include the results of these assets through October 28, 2004. On October 29, 2004, we invested $175 million in the securities of Boise Cascade, L.L.C., and affiliates. This investment represents continuing involvement as defined in Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Accordingly, we do not show the historical results of the sold paper, forest products and timberland assets as discontinued operations.

 

We have prepared the quarterly consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Some information and footnote disclosures, which would normally be included in financial statements prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted pursuant to those rules and regulations. These statements should be read together with the consolidated statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2003.

 

The quarterly consolidated financial statements have not been audited by an independent registered public accounting firm, but in the opinion of management, we have included all adjustments necessary to present fairly the results for the periods. Net income for the three and nine months ended September 30, 2004 and 2003, involved estimates and accruals. Actual results may vary from those estimates. Except as may be disclosed within these “Notes to Quarterly Consolidated Financial Statements,” the adjustments made were of a normal, recurring nature. Quarterly results are not necessarily indicative of results that may be expected for the year.

 

Certain amounts in prior years’ financial statements have been reclassified to conform with the current year’s presentation. These reclassifications did not affect net income.

 

2.                                      OfficeMax, Inc., Acquisition

 

On December 9, 2003, we completed our acquisition of OfficeMax, Inc. We acquired 100% of the voting equity interest. The results of OfficeMax, Inc.’s, operations after December 9, 2003, are included in our consolidated financial statements.

 

9



 

The aggregate consideration paid for the acquisition was as follows:

 

 

 

(thousands)

 

Fair value of common stock issued

 

$

808,172

 

Cash consideration for OfficeMax, Inc., common shares exchanged

 

486,738

 

Transaction costs

 

20,000

 

 

 

 

 

 

 

1,314,910

 

Debt assumed

 

81,627

 

 

 

 

 

 

 

$

1,396,537

 

 

We summarized the estimated fair values of assets acquired and liabilities assumed for the OfficeMax, Inc., acquisition in Note 2, OfficeMax, Inc., Acquisition, in “Item 8. Financial Statements and Supplementary Data” in our 2003 Annual Report on Form 10-K. The initial purchase price allocations may be adjusted within one year of the purchase date for changes in estimates of the fair value of assets acquired and liabilities assumed. During the nine months ended September 30, 2004, we recorded $39.5 million of purchase price adjustments that increased the recorded amount of goodwill. The adjustments were related to adjustments to the recorded amounts of accounts receivable, fair value adjustments, liability accruals, accruals related to facility closures and consolidation of headquarters administrative staff.

 

Pro Forma Financial Information

 

The following table summarizes unaudited pro forma financial information assuming we had acquired OfficeMax, Inc., on January 1, 2003. The unaudited pro forma financial information uses OfficeMax, Inc., data for the months corresponding to our September 30 period-end. This unaudited pro forma financial information does not necessarily represent what would have occurred if the transaction had taken place on the dates presented and should not be taken as representative of our future consolidated results of operations or financial position. We have not finalized our integration plans. Accordingly, this pro forma information does not include all costs related to the integration. When the costs are determined, they either increase the amount of goodwill recorded or decrease net income, depending on the nature of the costs. We are realizing operating synergies. Synergies come from offering more products and services across more customer channels, purchasing leverage from increased scale and reduced costs in logistics, marketing and administration. The pro forma information does not reflect these expenses and synergies.

 

10



 

 

 

Three Months
Ended September 30,
2003

 

Nine Months
Ended
September 30,
2003

 

 

 

(thousands, except per-share amounts)

 

Sales

 

$

3,360,188

 

$

9,531,933

 

 

 

 

 

 

 

Net income before cumulative effect of accounting changes

 

$

29,329

 

$

960

 

Cumulative effect of accounting changes, net of income tax

 

 

(8,803

)

 

 

 

 

 

 

Net income (loss)

 

$

29,329

 

$

(7,843

)

 

 

 

 

 

 

Net income (loss) per common share

 

 

 

 

 

Basic before cumulative effect of accounting changes

 

$

0.30

 

$

(0.11

)

Cumulative effect of accounting changes, net of income tax

 

 

(0.10

)

 

 

 

 

 

 

Basic

 

$

0.30

 

$

(0.21

)

 

 

 

 

 

 

Diluted before cumulative effect of accounting changes

 

$

0.29

 

$

(0.11

)

Cumulative effect of accounting changes, net of income tax

 

 

(0.10

)

 

 

 

 

 

 

Diluted

 

$

0.29

 

$

(0.21

)

 

3.                                      OfficeMax, Inc., Integration

 

Integration Charges

 

Increased scale as a result of the OfficeMax, Inc., acquisition has allowed us to evaluate the combined office products business to determine what opportunities for consolidating operations may be appropriate. Closures and consolidation of acquired facilities identified in the integration planning process are accounted for as exit activities in connection with the acquisition and charged to goodwill. Charges for all other closures and consolidations have been recognized in our Consolidated Statements of Income.

 

During the three and nine months ended September 30, 2004, we charged approximately $6.9 million and $24.1 million of integration costs to our Consolidated Statements of Income. Integration costs occurred primarily in the contract segment as the business consolidated distribution centers, customer service centers and administrative staff. For the three and nine months ended September 30, 2004, approximately $1.1 million and $9.3 million of the costs are included in “Other (income) expense, net,” and $5.8 million and $14.8 million are included in “Selling and distribution expenses.” Integration costs are as follows:

 

11



 

 

 

Three Months
Ended
September 30,
2004

 

Nine Months
Ended
September 30,
2004

 

 

 

(thousands)

 

Severance

 

$

925

 

$

6,717

 

Lease termination costs

 

(8

)

1,041

 

Vendor transition costs

 

1,924

 

3,158

 

Professional fees

 

1,226

 

4,840

 

Payroll, benefits and travel

 

1,188

 

3,408

 

Write-down of long-lived assets

 

138

 

1,582

 

Other integration costs

 

1,506

 

3,360

 

 

 

 

 

 

 

 

 

$

6,899

 

$

24,106

 

 

Facility Closure Reserves

 

During the nine months ended September 30, 2004, we closed six U.S. distribution centers, two customer service centers and two retail stores (in addition to the 45 retail stores discussed below), eliminating approximately 470 employee positions. We expect to close two more distribution centers during fourth quarter 2004. At September 30, 2004, we had accrued for approximately $7.0 million of costs associated with these closures in our Consolidated Balance Sheet. We are working on a plan to reduce the total number of continental U.S. distribution centers from 55 at December 31, 2003, to 25 to 30 by the end of 2006. We will account for the additional closures when management formalizes its plans. When the costs are determined, they will either increase the amount of goodwill recorded if the closures relate to acquired OfficeMax, Inc., operations, or decrease net income.

 

Prior to our acquisition, OfficeMax, Inc., had identified and closed underperforming facilities. As part of our purchase price allocation, at December 31, 2003, we had $58.7 million of reserves recorded for the estimated fair value of future liabilities associated with these closures. These reserves related primarily to future lease termination costs, net of estimated sublease income. Most of the expenditures for these facilities will be made over the remaining lives of the operating leases, which range from three to 16 years. At September 30, 2004, the remaining reserve in our Consolidated Balance Sheet was $52.3 million.

 

In addition to these store closures, at December 31, 2003, we identified 45 OfficeMax retail facilities that were no longer strategically or economically viable. In accordance with the provisions of Emerging Issues Task Force (EITF) 95-3, Recognition of Liabilities in Connection With a Purchase Business Combination, at December 31, 2003, we had $69.4 million of reserves recorded in our Consolidated Balance Sheet. We closed these stores during first quarter 2004, eliminating approximately 995 employee positions, of which approximately 310 people were offered transfers to other stores. These charges were accounted for as exit activities in connection with the acquisition, and we did not recognize a charge to income in our Consolidated Statements of Income. Most of the cash expenditures for the facilities described above will be made over the remaining lives of the operating leases, which range from four months to 12 years. At September 30, 2004, the remaining reserve in our Consolidated Balance Sheet was $50.6 million.

 

12



 

At September 30, 2004, approximately $36.0 million of the facility closure reserve liability was included in “Accrued liabilities, other,” and $73.9 million was included in “Other long-term liabilities.” Facility closure reserve account activity was as follows:

 

 

 

Lease
Termination
Costs

 

Severance

 

Other

 

Total

 

 

 

(thousands)

 

Facility closure reserve at December 31, 2003

 

$

126,922

 

$

794

 

$

412

 

$

128,128

 

Costs incurred and charged to expense/goodwill

 

5,644

 

4,690

 

245

 

10,579

 

Charges against the reserve

 

(25,452

)

(3,098

)

(248

)

(28,798

)

 

 

 

 

 

 

 

 

 

 

Facility closure reserve at September 30, 2004

 

$

107,114

 

$

2,386

 

$

409

 

$

109,909

 

 

4.                                      Net Income (Loss) Per Common Share

 

Net income (loss) per common share was determined by dividing net income (loss), as adjusted, by weighted average shares outstanding. For the nine months ended September 30, 2003, the computation of diluted loss per share was antidilutive; therefore, the amounts reported for basic and diluted loss were the same.

 

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

(Restated)

 

 

 

(Restated)

 

 

 

 

 

(thousands, except per-share amounts)

 

Basic

 

 

 

 

 

 

 

 

 

Income before cumulative effect of accounting changes

 

$

62,169

 

$

32,884

 

$

172,363

 

$

10,207

 

Preferred dividends (a)

 

(3,242

)

(3,191

)

(9,776

)

(9,744

)

 

 

 

 

 

 

 

 

 

 

Basic income before cumulative effect of accounting changes

 

58,927

 

29,693

 

162,587

 

463

 

Cumulative effect of accounting changes, net of income tax

 

 

 

 

(8,803

)

 

 

 

 

 

 

 

 

 

 

Basic income (loss)

 

$

58,927

 

$

29,693

 

$

162,587

 

$

(8,340

)

 

 

 

 

 

 

 

 

 

 

Average shares used to determine basic income (loss) per common share

 

86,864

 

58,411

 

86,472

 

58,334

 

 

 

 

 

 

 

 

 

 

 

Basic income per common share before cumulative effect of accounting changes

 

$

0.68

 

$

0.51

 

$

1.88

 

$

0.01

 

Cumulative effect of accounting changes, net of income tax

 

 

 

 

(0.15

)

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per common share

 

$

0.68

 

$

0.51

 

$

1.88

 

$

(0.14

)

 

13



 

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

(Restated)

 

 

 

(Restated)

 

 

 

 

 

(thousands, except per-share amounts)

 

Diluted

 

 

 

 

 

 

 

 

 

Basic income before cumulative effect of accounting changes

 

$

58,927

 

$

29,693

 

$

162,587

 

$

463

 

Preferred dividends eliminated

 

3,242

 

3,191

 

9,776

 

 

Supplemental ESOP contribution

 

(2,971

)

(2,891

)

(8,903

)

 

 

 

 

 

 

 

 

 

 

 

Diluted income before cumulative effect of accounting changes

 

59,198

 

29,993

 

163,460

 

463

 

Cumulative effect of accounting changes, net of income tax

 

 

 

 

(8,803

)

 

 

 

 

 

 

 

 

 

 

Diluted income (loss) (b)

 

$

59,198

 

$

29,993

 

$

163,460

 

$

(8,340

)

 

 

 

 

 

 

 

 

 

 

Average shares used to determine basic income (loss) per common share

 

86,864

 

58,411

 

86,472

 

58,334

 

Restricted stock, stock options and other

 

1,982

 

956

 

1,947

 

 

Series D Convertible Preferred Stock

 

3,170

 

3,330

 

3,244

 

 

 

 

 

 

 

 

 

 

 

 

Average shares used to determine diluted income (loss) per common share (b) (c)

 

92,016

 

62,697

 

91,663

 

58,334

 

 

 

 

 

 

 

 

 

 

 

Diluted income per common share before cumulative effect of accounting changes

 

$

0.64

 

$

0.48

 

$

1.78

 

$

0.01

 

Cumulative effect of accounting changes, net of income tax

 

 

 

 

(0.15

)

 

 

 

 

 

 

 

 

 

 

Diluted income (loss) per common share

 

$

0.64

 

$

0.48

 

$

1.78

 

$

(0.14

)

 


(a)                                  The dividend attributable to our Series D Convertible Preferred Stock held by our employee stock ownership plan (ESOP) is net of a tax benefit.

 

(b)                                 Adjustments totaling $0.9 million for the nine months ended September 30, 2003, which would have reduced the basic loss to arrive at diluted loss, were excluded because the calculation of diluted loss per share was antidilutive. Also, for the nine months ended September 30, 2003, potentially dilutive common shares of 3.8 million were excluded from average shares because they were antidilutive.

 

(c)                                  Options to purchase 3.8 million and 7.3 million shares of common stock were outstanding during the three months ended September 30, 2004 and 2003, but were not included in the computation of diluted income per share because the exercise prices of the options were greater than the average market price of the common shares. Forward contracts to purchase 5.3 million and 5.4 million shares of common stock were outstanding during the three months ended September 30, 2004 and 2003, but were not included in the computation of diluted income per share because the securities were not dilutive under the treasury stock method. These forward contracts are related to our adjustable conversion-rate equity securities.

 

Options to purchase 3.6 million and 8.1 million shares of common stock were outstanding during the nine months ended September 30, 2004 and 2003, but were not included in the computation of diluted income (loss) per share because the exercise prices of the options were greater than the average market price of the common shares. Forward contracts to purchase 5.1 million and 5.4 million shares of common stock were outstanding during the nine months ended September 30, 2004 and 2003, but were not included in the computation of diluted income (loss) per share because the securities were not dilutive under the treasury stock method. These forward contracts are related to our adjustable conversion-rate equity securities.

 

14



 

5.                                      Stock-Based Compensation

 

In 2003, we adopted the fair-value-based method of accounting for stock-based employee compensation under the provisions of SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. We used the prospective method of transition for all employee awards granted on or after January 1, 2003. Awards under our plans vest over periods up to three years. Therefore, the cost related to stock-based employee compensation included in the determination of net income for the three and nine months ended September 30, 2003, is less than that which would have been recognized if the fair-value-based method had been applied to all awards since the original effective date of SFAS No. 123, Accounting for Stock-Based Compensation. During the three and nine months ended September 30, 2004, in our Consolidated Statements of Income, we recognized $5.8 million and $18.8 million of pretax compensation expense, of which $5.7 million and $18.4 million related to restricted stock.

 

The following table illustrates the effect on net income (loss) and net income (loss) per share if we had applied the fair-value-based method to all outstanding and unvested awards in 2003.

 

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

(Restated)

 

 

 

(Restated)

 

 

 

 

 

(thousands, except per-share amounts)

 

Reported net income

 

$

62,169

 

$

32,884

 

$

172,363

 

$

1,404

 

 

 

 

 

 

 

 

 

 

 

Add: Total stock-based employee compensation expense included in reported net income, net of related tax effects

 

3,550

 

1,306

 

11,467

 

1,398

 

 

 

 

 

 

 

 

 

 

 

Deduct: Total stock-based employee compensation expense determined under the fair value method, for all awards, net of related tax effects

 

(3,550

)

(2,057

)

(11,467

)

(6,471

)

 

 

 

 

 

 

 

 

 

 

Pro forma net income (loss)

 

62,169

 

32,133

 

172,363

 

(3,669

)

Preferred dividends

 

(3,242

)

(3,191

)

(9,776

)

(9,744

)

 

 

 

 

 

 

 

 

 

 

Pro forma net income (loss) applicable to common shareholders

 

$

58,927

 

$

28,942

 

$

162,587

 

$

(13,413

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted income (loss) per share

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

As reported

 

$

0.68

 

$

0.51

 

$

1.88

 

$

(0.14

)

Pro forma

 

0.68

 

0.50

 

1.88

 

(0.23

)

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

As reported

 

$

0.64

 

$

0.48

 

$

1.78

 

$

(0.14

)

Pro forma

 

0.64

 

0.47

 

1.78

 

(0.23

)

 

To calculate stock-based employee compensation expense under SFAS No. 123, we estimated the fair value of each option grant on the date of grant, using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2003 and 2002: risk-free interest rates of 4.0%, expected dividends of 15 cents per share per quarter, expected lives of 4.3 years in both periods and expected stock price volatility of 40%. No options were granted during the three and nine months ended September 30, 2004.

 

We calculate compensation expense for restricted stock awards based on the fair value of our stock on the date of grant. We recognize the expense over the vesting period.

 

15



 

6.                                      Other (Income) Expense, Net

 

“Other (income) expense, net” includes miscellaneous income and expense items. The components of “Other (income) expense, net” in the Consolidated Statements of Income are as follows:

 

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

(thousands)

 

Sale of interest in Voyageur Panel (Note 11)

 

$

 

$

 

$

(46,498

)

$

 

Sale of Louisiana timberlands (a)

 

 

 

(59,915

)

 

OfficeMax, Inc., integration costs (Note 3)

 

1,055

 

 

9,340

 

 

Costs related to sale of paper, forest products and timberland assets

 

8,796

 

 

10,825

 

 

Sale of other timberlands

 

(13,163

)

(5,614

)

(16,059

)

(6,620

)

Sale of plywood and lumber operations (b)

 

 

 

7,123

 

 

2003 cost-reduction program (Note 18)

 

 

 

(278

)

10,114

 

Sales of receivables (Note 10)

 

1,425

 

752

 

3,325

 

2,442

 

Loss on sale of assets

 

1,153

 

2,088

 

3,111