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 June 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 July 31, 2004
 

Common Stock, $2.50 par value

 

88,041,342

 

 



 

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 June 30, 2004, which was originally filed on August 5, 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, respectively.  For the six months ended June 30, 2004, operating income was overstated by $6.0 million and net income was overstated by $3.6 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.

 

Other than the change in our company name, as mentioned below, this Amendment No. 1 does not reflect events occurring after the filing of the Original Form 10-Q, which was filed on August 5, 2004.  Such events include, among others, the events described in the company’s quarterly report on Form 10-Q for the quarter ended September 30, 2004, and 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 August 5, 2004.

 

On October 29, 2004, we sold our paper, forest products and timberland assets to affiliates of Boise Cascade, L.L.C., a new company formed by Madison Dearborn Partners LLC.  In connection with the sale, we changed our company’s name from Boise Cascade Corporation to OfficeMax Incorporated, and the names of our office products segments were changed from Boise Office Solutions 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.  The new names of our company and of our office products segments have been used in this Form 10-Q/A, where applicable.

 

2



 

TABLE OF CONTENTS

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

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

 

10

 

 

4.       Net Income (Loss) Per Common Share

 

12

 

 

5.       Stock-Based Compensation

 

14

 

 

6.       Other (Income) Expense, Net

 

15

 

 

7.       Income Taxes

 

15

 

 

8.       Comprehensive Income (Loss)

 

16

 

 

9.       Accounting Changes

 

16

 

 

10.     Receivables

 

17

 

 

11.     Investments in Equity Affiliates

 

17

 

 

12.     Inventories

 

17

 

 

13.     Deferred Software Costs

 

17

 

 

14.     Goodwill and Intangible Assets

 

18

 

 

15.     Debt

 

19

 

 

16.     Financial Instruments

 

20

 

 

17.     Retirement and Benefit Plans

 

21

 

 

18.     2003 Cost-Reduction Program

 

22

 

 

19.     Recently Adopted Accounting Standards

 

23

 

 

20.     Segment Information

 

24

 

 

21.     Commitments and Guarantees

 

25

 

 

22.     Legal Proceedings and Contingencies

 

26

 

 

23.     Subsequent Event

 

26

 

 

24.     Restatement of Previously Issued Financial Statements

 

26

 

 

 

 

 

Item 2.

 

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

 

29

 

 

Summary and Outlook

 

29

 

 

Results of Operations, Consolidated

 

34

 

 

OfficeMax, Contract

 

36

 

 

OfficeMax, Retail

 

38

 

 

Boise Building Solutions

 

39

 

 

Boise Paper Solutions

 

40

 

 

Liquidity and Capital Resources

 

41

 

 

Timber Supply and Environmental Issues

 

44

 

 

Critical Accounting Estimates

 

45

 

 

Cautionary and Forward-Looking Statements

 

45

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

47

 

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

 

Item 6.

 

Exhibits and Reports on Form 8-K

 

48

 

3



 

PART I - FINANCIAL INFORMATION

ITEM 1.             FINANCIAL STATEMENTS

 

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

 

 

Three Months Ended
June 30

 

 

 

2004

 

2003

 

 

 

(Restated)

 

 

 

 

 

(unaudited)

 

 

 

 

 

 

 

Sales

 

$

3,401,189

 

$

1,928,984

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

Materials, labor, and other operating expenses

 

2,672,317

 

1,578,445

 

Depreciation, amortization, and cost of company timber harvested

 

100,693

 

73,730

 

Selling and distribution expenses

 

478,015

 

217,472

 

General and administrative expenses

 

73,739

 

35,297

 

Other (income) expense, net

 

(43,946

)

1,836

 

 

 

 

 

 

 

 

 

3,280,818

 

1,906,780

 

 

 

 

 

 

 

Equity in net income of affiliates

 

1,244

 

474

 

 

 

 

 

 

 

Income from operations

 

121,615

 

22,678

 

 

 

 

 

 

 

Interest expense

 

(40,432

)

(31,063

)

Interest income

 

450

 

318

 

Foreign exchange gain (loss)

 

(524

)

1,860

 

 

 

 

 

 

 

 

 

(40,506

)

(28,885

)

 

 

 

 

 

 

Income (loss) before income taxes and minority interest

 

81,109

 

(6,207

)

Income tax (provision) benefit

 

(29,632

)

2,273

 

 

 

 

 

 

 

Income (loss) before minority interest

 

51,477

 

(3,934

)

Minority interest, net of income tax

 

(406

)

 

 

 

 

 

 

 

Net income (loss)

 

51,071

 

(3,934

)

Preferred dividends

 

(3,168

)

(3,287

)

 

 

 

 

 

 

Net income (loss) applicable to common shareholders

 

$

47,903

 

$

(7,221

)

 

 

 

 

 

 

Net income (loss) per common share

 

 

 

 

 

Basic

 

$

0.55

 

$

(0.12

)

 

 

 

 

 

 

Diluted

 

$

0.53

 

$

(0.12

)

 

See accompanying notes to consolidated financial statements.

 

4



 

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

 

 

Six Months Ended
June 30

 

 

 

2004

 

2003

 

 

 

(Restated)

 

 

 

 

 

(unaudited)

 

 

 

 

 

 

 

Sales

 

$

6,930,843

 

$

3,782,227

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

Materials, labor, and other operating expenses

 

5,441,876

 

3,093,634

 

Depreciation, amortization, and cost of company timber harvested

 

199,042

 

149,312

 

Selling and distribution expenses

 

984,447

 

431,634

 

General and administrative expenses

 

146,628

 

70,670

 

Other (income) expense, net

 

(90,607

)

12,988

 

 

 

 

 

 

 

 

 

6,681,386

 

3,758,238

 

 

 

 

 

 

 

Equity in net income of affiliates

 

6,311

 

415

 

 

 

 

 

 

 

Income from operations

 

255,768

 

24,404

 

 

 

 

 

 

 

Interest expense

 

(81,084

)

(63,254

)

Interest income

 

934

 

432

 

Foreign exchange gain (loss)

 

(344

)

2,816

 

 

 

 

 

 

 

 

 

(80,494

)

(60,006

)

 

 

 

 

 

 

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

 

175,274

 

(35,602

)

Income tax (provision) benefit

 

(63,832

)

12,925

 

 

 

 

 

 

 

Income (loss) before minority interest and cumulative effect    of accounting changes

 

111,442

 

(22,677

)

Minority interest, net of income tax

 

(1,248

)

 

 

 

 

 

 

 

Income (loss) before cumulative effect of accounting changes

 

110,194

 

(22,677

)

Cumulative effect of accounting changes, net of income tax

 

 

(8,803

)

 

 

 

 

 

 

Net income (loss)

 

110,194

 

(31,480

)

Preferred dividends

 

(6,534

)

(6,553

)

 

 

 

 

 

 

Net income (loss) applicable to common shareholders

 

$

103,660

 

$

(38,033

)

 

 

 

 

 

 

Net income (loss) per common share

 

 

 

 

 

Basic before cumulative effect of accounting changes

 

$

1.20

 

$

(0.50

)

Cumulative effect of accounting changes, net of income tax

 

 

(0.15

)

 

 

 

 

 

 

Basic

 

$

1.20

 

$

(0.65

)

 

 

 

 

 

 

Diluted before cumulative effect of accounting changes

 

$

1.14

 

$

(0.50

)

Cumulative effect of accounting changes, net of income tax

 

 

(0.15

)

 

 

 

 

 

 

Diluted

 

$

1.14

 

$

(0.65

)

 

See accompanying notes to consolidated financial statements.

 

5



 

OfficeMax Incorporated and Subsidiaries
Consolidated Balance Sheets

(thousands)

 

 

 

June 30

 

December 31

 

 

 

2004

 

2003

 

2003

 

 

 

(Restated)

 

 

 

 

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

180,194

 

$

98,240

 

$

124,879

 

Receivables, less allowances of $9,839, $14,338, and $10,865

 

747,927

 

503,264

 

574,219

 

Inventories

 

1,591,822

 

648,831

 

1,609,811

 

Deferred income taxes

 

138,542

 

62,262

 

132,235

 

Other

 

68,868

 

41,485

 

60,148

 

 

 

 

 

 

 

 

 

 

 

2,727,353

 

1,354,082

 

2,501,292

 

 

 

 

 

 

 

 

 

Property

 

 

 

 

 

 

 

Property and equipment

 

 

 

 

 

 

 

Land and land improvements

 

87,145

 

72,887

 

87,703

 

Buildings and improvements

 

909,404

 

749,141

 

890,871

 

Machinery and equipment

 

4,996,946

 

4,717,286

 

4,905,012

 

 

 

 

 

 

 

 

 

 

 

5,993,495

 

5,539,314

 

5,883,586

 

Accumulated depreciation

 

(3,214,651

)

(3,008,395

)

(3,058,527

)

 

 

 

 

 

 

 

 

 

 

2,778,844

 

2,530,919

 

2,825,059

 

Timber, timberlands, and timber deposits

 

303,052

 

321,414

 

330,667

 

 

 

 

 

 

 

 

 

 

 

3,081,896

 

2,852,333

 

3,155,726

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

1,135,016

 

421,648

 

1,107,292

 

Intangible assets, net

 

210,353

 

25,557

 

218,196

 

Investments in equity affiliates

 

85

 

35,980

 

44,335

 

Other assets

 

335,678

 

300,265

 

349,318

 

 

 

 

 

 

 

 

 

Total assets

 

$

7,490,381

 

$

4,989,865

 

$

7,376,159

 

 

 

See accompanying notes to consolidated financial statements.

 

6



 

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

 

 

 

June 30

 

December 31

 

 

 

2004

 

2003

 

2003

 

 

 

(Restated)

 

 

 

 

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

Short-term borrowings

 

$

49,547

 

$

1,000

 

$

5,188

 

Current portion of long-term debt

 

667,257

 

75,485

 

83,016

 

Income taxes payable

 

 

8,586

 

694

 

Accounts payable

 

1,100,138

 

558,896

 

1,255,303

 

Accrued liabilities

 

 

 

 

 

 

 

Compensation and benefits

 

292,058

 

205,700

 

317,934

 

Interest payable

 

30,572

 

25,167

 

34,130

 

Other

 

387,243

 

124,864

 

280,646

 

 

 

 

 

 

 

 

 

 

 

2,526,815

 

999,698

 

1,976,911

 

 

 

 

 

 

 

 

 

Debt

 

 

 

 

 

 

 

Long-term debt, less current portion

 

1,419,457

 

1,494,410

 

1,999,876

 

Adjustable conversion-rate equity security units

 

172,500

 

172,500

 

172,500

 

Guarantee of ESOP debt

 

 

40,504

 

19,087

 

 

 

 

 

 

 

 

 

 

 

1,591,957

 

1,707,414

 

2,191,463

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Deferred income taxes

 

92,656

 

153,654

 

43,311

 

Compensation and benefits

 

573,677

 

672,411

 

564,331

 

Other long-term liabilities

 

245,057

 

57,133

 

256,355

 

 

 

 

 

 

 

 

 

 

 

911,390

 

883,198

 

863,997

 

 

 

 

 

 

 

 

 

Minority interest

 

21,674

 

 

20,154

 

 

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Series D ESOP: $.01 stated value; 4,002,031,
4,146,255, and 4,117,827 shares outstanding

 

180,091

 

186,581

 

185,302

 

Deferred ESOP benefit

 

 

(40,504

)

(19,087

)

Common stock — $2.50 par value; 200,000,000
shares authorized; 87,914,957; 58,313,553,
and 87,137,306 shares outstanding

 

216,786

 

145,784

 

214,805

 

Additional paid-in capital

 

1,263,912

 

475,215

 

1,228,694

 

Retained earnings

 

979,023

 

905,308

 

907,738

 

Accumulated other comprehensive loss

 

(201,267

)

(272,829

)

(193,818

)

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

2,438,545

 

1,399,555

 

2,323,634

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

7,490,381

 

$

4,989,865

 

$

7,376,159

 

 

See accompanying notes to consolidated financial statements.

 

7



 

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

 

 

 

Six Months Ended
June 30

 

 

 

2004

 

2003

 

 

 

(Restated)

 

 

 

 

 

(unaudited)

 

 

 

 

 

 

 

Cash provided by (used for) operations

 

 

 

 

 

Net income (loss)

 

$

110,194

 

$

(31,480

)

Items in net income (loss) not using (providing) cash Equity in net income of affiliates

 

(6,311

)

(415

)

Depreciation, amortization, and cost of company timber harvested

 

199,042

 

149,312

 

Deferred income tax provision (benefit)

 

51,109

 

(19,971

)

Minority interest, net of income tax

 

1,248

 

 

Gain on sale of assets

 

(106,660

)

 

Pension and other postretirement benefits expense

 

48,971

 

41,092

 

Cumulative effect of accounting changes, net of income tax

 

 

8,803

 

Other

 

13,055

 

(2,816

)

Receivables

 

(165,063

)

(68,899

)

Inventories

 

16,831

 

61,384

 

Accounts payable and accrued liabilities

 

(91,986

)

18,912

 

Current and deferred income taxes

 

(12,557

)

(7,499

)

Pension and other postretirement benefits payments

 

(32,481

)

(24,488

)

Other

 

(42,226

)

24,905

 

 

 

 

 

 

 

Cash provided by (used for) operations

 

(16,834

)

148,840

 

 

 

 

 

 

 

Cash provided by (used for) investment

 

 

 

 

 

Expenditures for property and equipment

 

(146,772

)

(108,001

)

Expenditures for timber and timberlands

 

(4,569

)

(4,264

)

Proceeds from equity affiliates

 

20

 

76

 

Sale of assets

 

186,946

 

 

Other

 

(330

)

(3,460

)

 

 

 

 

 

 

Cash provided by (used for) investment

 

35,295

 

(115,649

)

 

 

 

 

 

 

Cash provided by (used for) financing

 

 

 

 

 

Cash dividends paid

 

 

 

 

 

Common stock

 

(25,825

)

(17,486

)

Preferred stock

 

(6,773

)

(7,006

)

 

 

 

 

 

 

 

 

(32,598

)

(24,492

)

Short-term borrowings

 

44,359

 

(27,000

)

Additions to long-term debt

 

70,098

 

147,363

 

Payments of long-term debt

 

(64,418

)

(90,568

)

Other

 

19,413

 

(5,406

)

 

 

 

 

 

 

Cash provided by (used for) financing

 

36,854

 

(103

)

 

 

 

 

 

 

Increase in cash and cash equivalents

 

55,315

 

33,088

 

Balance at beginning of the year

 

124,879

 

65,152

 

 

 

 

 

 

 

Balance at June 30

 

$

180,194

 

$

98,240

 

 

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

 

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 (loss) for the three and six months ended June 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 (loss).

 

2.         OfficeMax, Inc. Acquisition

 

On December 9, 2003, we completed our acquisition of OfficeMax, Inc.  We acquired 100% of the voting equity interest.  OfficeMax, Inc. is now a subsidiary of OfficeMax Incorporated, and the results of OfficeMax, Inc.’s operations after December 9, 2003, are included in our consolidated financial statements.  OfficeMax, Inc. is a retail distributor of office supplies and paper, technology products, and office furniture.  Our OfficeMax, Inc. superstores feature CopyMax® and FurnitureMax® in-store modules devoted to print-for-pay services and office furniture.  OfficeMax, Inc. has operations in the United States, Puerto Rico, and the U.S. Virgin Islands and a 51%-owned joint venture in Mexico.

 

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 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 six months ended June 30, 2004, we recorded $34.9 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 and liability accruals as well as severance accruals for the consolidation of one OfficeMax, Inc. customer service center and consolidation of headquarters administrative staff.

 

9



 

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.’s data for the months corresponding to our June 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 will either increase the amount of goodwill recorded or decrease net income, depending on the nature of the costs.  We also expect to realize operating synergies.  Synergies will 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 potential expenses and synergies.

 

 

 

Three Months
Ended
June 30, 2003

 

Six Months
Ended
June 30, 2003

 

 

 

(thousands, except per-share amounts)

 

 

 

 

 

 

 

Sales

 

$

3,018,410

 

$

6,171,745

 

 

 

 

 

 

 

Net loss before cumulative effect of accounting changes

 

$

(19,523

)

$

(28,369

)

Cumulative effect of accounting changes, net of income tax

 

 

(8,803

)

 

 

 

 

 

 

Net loss

 

$

(19,523

)

$

(37,172

)

 

 

 

 

 

 

Net loss per common share

 

 

 

 

 

Basic and diluted before cumulative effect of accounting changes

 

$

(0.27

)

$

(0.41

)

Cumulative effect of accounting changes, net of income tax

 

 

(0.10

)

 

 

 

 

 

 

Basic and diluted

 

$

(0.27

)

$

(0.51

)

 

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 or 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 six months ended June 30, 2004, we charged approximately $8.3 million and $17.2 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 six months ended June 30, 2004, approximately $2.2 million and $8.3 million of the costs are included in “Other (income) expense, net,” and $6.1 million and $8.9 million are included in “Selling and distribution expenses.”  They are as follows:

 

10



 

 

 

Three Months
Ended
June 30, 2004

 

Six Months
Ended
June 30, 2004

 

 

 

(thousands)

 

 

 

 

 

 

 

Severance

 

$

1,170

 

$

5,792

 

Lease termination costs

 

1,049

 

1,049

 

Vendor transition costs

 

1,234

 

1,234

 

Professional fees

 

2,181

 

3,614

 

Payroll, benefits, and travel

 

1,295

 

2,220

 

Write-down of long-lived assets

 

 

1,444

 

Other integration costs

 

1,398

 

1,854

 

 

 

 

 

 

 

 

 

$

8,327

 

$

17,207

 

 

Facility Closure Reserves

 

During second quarter 2004, we closed three U.S. distribution centers and two customer service centers, eliminating approximately 345 employee positions.  We expect to close three more distribution centers during third quarter 2004.  At June 30, 2004, we had accrued for approximately $6.3 million of costs associated with these closures in our Consolidated Balance Sheet.  We are working on a plan to reduce the total number of U.S. distribution centers from 59 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 or decrease net income.

 

Prior to our acquisition of OfficeMax, Inc., 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 June 30, 2004, the remaining reserve in our Consolidated Balance Sheet was $57.4 million.

 

In addition to these store closures, at December 31, 2003, we identified 45 OfficeMax, Inc. 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 one month to 12 years.  At June 30, 2004, the remaining reserve in our Consolidated Balance Sheet was $58.1 million.

 

11



 

At June 30, 2004, approximately $36.1 million of the facility closure reserve liability was included in “Accrued liabilities, other,” and $85.7 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

 

4,075

 

3,440

 

 

7,515

 

Charges against the reserve

 

(12,799

)

(1,043

)

(2

)

(13,844

)

 

 

 

 

 

 

 

 

 

 

 

 

$

118,198

 

$

3,191

 

$

410

 

$

121,799

 

 

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 three and six months ended June 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
June 30

 

Six Months Ended
June 30

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

(Restated)

 

 

 

(Restated)

 

 

 

 

 

(thousands, except per-share amounts)

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

Income (loss) before cumulative effect of accounting changes

 

$

51,071

 

$

(3,934

)

$

110,194

 

$

(22,677

)

Preferred dividends (a)

 

(3,168

)

(3,287

)

(6,534

)

(6,553

)

 

 

 

 

 

 

 

 

 

 

Basic income (loss) before cumulative effect of accounting changes

 

47,903

 

(7,221

)

103,660

 

(29,230

)

Cumulative effect of accounting changes, net of income tax

 

 

 

 

(8,803

)

 

 

 

 

 

 

 

 

 

 

Basic income (loss)

 

$

47,903

 

$

(7,221

)

$

103,660

 

$

(38,033

)

 

 

 

 

 

 

 

 

 

 

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

 

86,474

 

58,300

 

86,275

 

58,295

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per common share before cumulative effect of accounting changes

 

$

0.55

 

$

(0.12

)

$

1.20

 

$

(0.50

)

Cumulative effect of accounting changes, net of income tax

 

 

 

 

(0.15

)

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per common share

 

$

0.55

 

$

(0.12

)

$

1.20

 

$

(0.65

)

 

12



 

 

 

Three Months Ended June 30

 

Six Months Ended June 30

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

(Restated)

 

 

 

(Restated)

 

 

 

 

 

(thousands, except per-share amounts)

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

Basic income (loss) before cumulative effect of accounting changes

 

$

47,903

 

$

(7,221

)

$

103,660

 

$

(29,230

)

Preferred dividends eliminated

 

3,168

 

 

6,534

 

 

Supplemental ESOP contribution

 

(2,869

)

 

(5,932

)

 

 

 

 

 

 

 

 

 

 

 

Diluted income (loss) before cumulative effect of accounting changes

 

48,202

 

(7,221

)

104,262

 

(29,230

)

Cumulative effect of accounting changes, net of income tax

 

 

 

 

(8,803

)

Diluted income (loss) (b)

 

$

48,202

 

$

(7,221

)

$

104,262

 

$

(38,033

)

 

 

 

 

 

 

 

 

 

 

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

 

86,474

 

58,300

 

86,275

 

58,295

 

Restricted stock, stock options, and other

 

1,976

 

 

1,929

 

 

Series D Convertible Preferred Stock

 

3,252

 

 

3,281

 

 

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

 

91,702

 

58,300

 

91,485

 

58,295

 

Diluted income (loss) per common share before cumulative effect of accounting changes

 

$

0.53

 

$

(0.12

)

$

1.14

 

$

(0.50

)

Cumulative effect of accounting changes, net of income tax

 

 

 

 

(0.15

)

Diluted income (loss) per common share

 

$

0.53

 

$

(0.12

)

$

1.14

 

$

(0.65

)

 


(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 $0.3 million for the three months ended June 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 three months ended June 30, 2003, potentially dilutive common shares of 3.5 million were excluded from average shares because they were antidilutive.

 

Adjustments totaling $0.6 million for the six months ended June 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 six months ended June 30, 2003, potentially dilutive common shares of 3.6 million were excluded from average shares because they were antidilutive.

 

(c)                                  Options to purchase 3.2 million and 8.6 million shares of common stock were outstanding during the three months ended June 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 4.9 million and 5.4 million shares of common stock were outstanding during the three months ended June 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 security units.

 

13



 

Options to purchase 3.5 million and 8.5 million shares of common stock were outstanding during the six months ended June 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 5.0 million and 5.4 million shares of common stock were outstanding during the six months ended June 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 security units.

 

5.                                      Stock-Based Compensation

 

In 2003, we adopted the fair-value-based method of accounting for stock-based employee compensation under the provisions of Statement of Financial Accounting Standards (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 our net loss in 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 six months ended June 30, 2004, in our Consolidated Statements of Income, we recognized $7.2 million and $13.0 million of pretax compensation expense, of which $7.0 million and $12.7 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 June 30

 

Six Months Ended June 30

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

(Restated)

 

 

 

(Restated)

 

 

 

 

 

(thousands, except per-share amounts)

 

 

 

 

 

 

 

 

 

 

 

Reported net income (loss)

 

$

51,071

 

$

(3,934

)

$

110,194

 

$

(31,480

)

 

 

 

 

 

 

 

 

 

 

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

 

4,380

 

57

 

7,917

 

92

 

 

 

 

 

 

 

 

 

 

 

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

 

(4,380

)

(2,218

)

(7,917

)

(4,414

)

Pro forma net income (loss)

 

51,071

 

(6,095

)

110,194

 

(35,802

)

Preferred dividends

 

(3,168

)

(3,287

)

(6,534

)

(6,553

)

Pro forma net income (loss) applicable to common shareholders

 

$

47,903

 

$

(9,382

)

$

103,660

 

$

(42,355

)

Basic and diluted income (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

As reported

 

$

0.55

 

$

(0.12

)

$

1.20

 

$

(0.65

)

Pro forma

 

0.55

 

(0.16

)

1.20

 

(0.73

)

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

As reported

 

$

0.53

 

$

(0.12

)

$

1.14

 

$

(0.65

)

Pro forma

 

0.53

 

(0.16

)

1.14

 

(0.73

)

 

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

 

14



 

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 six months ended June 30, 2004.

 

We calculate compensation expense for restricted stock awards based on the fair value of OfficeMax’s stock on the date of grant.  We recognize the expense over the vesting period.  For more information, see Note 14, Shareholders’ Equity, in our 2003 Annual Report on Form 10-K.

 

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 (Loss) are as follows:

 

 

 

Three Months Ended
June 30

 

Six Months Ended
June 30

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

(thousands)

 

 

 

 

 

 

 

 

 

 

 

Sale of interest in Voyageur Panel (Note 11)

 

$

(46,498

)

$

 

$

(46,498

)

$

 

OfficeMax integration costs (Note 3)

 

2,219

 

 

8,285

 

 

Sale of timberlands (a)

 

 

 

(59,915

)

 

Sale of plywood and lumber operations (b)

 

 

 

7,123

 

 

Cost-reduction program (Note 18)

 

 

 

 

10,114

 

Sales of receivables

 

956

 

832

 

1,900

 

1,691

 

Other, net

 

(623

)

1,004

 

(1,502

)

1,183

 

 

 

$

(43,946

)

$

1,836

 

$

(90,607

)

$

12,988

 

 


(a)                                  In March 2004, we sold approximately 79,000 acres of timberland in western Louisiana for $84 million and recorded a $59.9 million pretax gain in our Consolidated Statement of Income for the six months ended June 30, 2004. 

(b)                                 In February 2004, we sold our plywood and lumber facilities in Yakima, Washington.  In connection with the sale, we recorded $7.1 million of costs in “Other (income) expense, net” in our Consolidated Statement of Income for the six months ended June 30, 2004.  However, the sale also resulted in a $7.4 million reduction in our estimated LIFO reserve, which we recorded in “Materials, labor, and other operating expenses.” 

 

7.                                      Income Taxes

 

Our estimated tax provision rate for the six months ended June 30, 2004, was 36.4%, compared with an effective tax benefit rate of 36.3% for the six months ended June 30, 2003.  Changes in estimated tax rates are due to the sensitivity of the rates to changing income levels and the mix of domestic and foreign sources of income.

 

For the three and six months ended June 30, 2004, we paid income taxes, net of refunds received, of $9.8 million and $15.7 million.  We paid $5.3 million and $22.4 million for the same periods in 2003.

 

15



 

8.                                      Comprehensive Income (Loss) 

 

Comprehensive income (loss) for the periods included the following:

 

 

 

Three Months Ended
June 30

 

Six Months Ended
June 30

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

(Restated)

 

 

 

(Restated)

 

 

 

 

 

(thousands)

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

51,071

 

$

(3,934

)

$

110,194

 

$

(31,480

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

Cumulative foreign currency translation adjustment

 

(14,331

)

13,950

 

(9,853

)

24,523

 

Cash flow hedges

 

1,705

 

1,719

 

2,404

 

1,385

 

Comprehensive income (loss), net of income taxes

 

$

38,445

 

$

11,735

 

$

102,745

 

$

(5,572

)

 

9.                                      Accounting Changes

 

Asset Retirement Obligations

 

Effective January 1, 2003, we adopted the provisions of SFAS No. 143, Accounting for Asset Retirement Obligations, which affects the way we account for landfill closure costs.  This statement requires us to record an asset and a liability (discounted) for estimated closure and closed-site monitoring costs and to depreciate the asset over the landfill’s expected useful life.  Previously, we accrued for the closure costs over the life of the landfill and expensed monitoring costs as incurred.  Effective January 1, 2003, we recorded a one-time after-tax charge of $4.1 million, or 7 cents per share, as a cumulative-effect adjustment for the difference between the amounts recognized in our consolidated financial statements prior to the adoption of this statement and the amount recognized after adopting the provisions of SFAS No. 143.

 

We record liabilities when assessments and/or remedial efforts are probable and the cost can be reasonably estimated.  These liabilities are based on the best estimate of current costs and are updated periodically to reflect current technology, laws and regulations, inflation, and other economic factors.

 

Vendor Rebates and Allowances

 

We participate in various cooperative advertising and other vendor marketing programs with our vendors.  We also participate in various volume purchase rebate programs.  Effective January 1, 2003, we adopted an accounting change for vendor allowances to comply with the guidelines issued by the Financial Accounting Standards Board’s (FASB) EITF 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received From a Vendor.  Under EITF 02-16, consideration received from a vendor is presumed to be a reduction of the cost of the vendor’s products or services, unless it is for a specific incremental cost to sell the product.  In addition, under the new guidance, vendor allowances reside in inventory with the product and are recognized when the product is sold, changing the timing of our recognition of these items.  For the six months ended June 30, 2003, this change resulted in a one-time, noncash, after-tax charge of $4.7 million, or 8 cents per share.

 

16



 

10.                               Receivables

 

We have sold fractional ownership interests in a defined pool of trade accounts receivable.  At June 30, 2004, $300 million of sold accounts receivable were excluded from “Receivables” in our Consolidated Balance Sheet, compared with $200 million excluded at June 30, 2003, and $250 million excluded at December 31, 2003.  The portion of fractional ownership interest we retain is included in “Receivables” in the Consolidated Balance Sheets.  The increase at June 30, 2004, in sold accounts receivable of $50 million over the amount at December 31, 2003, provided cash from operations in 2004.  This program consists of a revolving sale of receivables for 364 days and is subject to renewal.  Costs related to the program are included in “Other (income) expense, net” in the Consolidated Statements of Income (Loss); see Note 6, Other (Income) Expense, Net.  Under the accounts receivable sale agreements, the maximum amount available from time to time may not exceed $300 million and is subject to change based on the level of eligible receivables, restrictions on concentrations of receivables, and the historical performance of the receivables.

 

11.                               Investments in Equity Affiliates

 

In May 2004, we sold our 47% interest in Voyageur Panel, which owned an oriented strand board (OSB) plant in Barwick, Ontario, Canada, to Ainsworth Lumber Co. Ltd. for $91.2 million in cash.  We recorded a $46.5 million pretax gain in “Other (income) expense, net” in our Boise Building Solutions segment.  This item increased net income $28.4 million after taxes for the three and six months ended June 30, 2004.

 

Prior to the sale, we accounted for the joint venture under the equity method.  Accordingly, segment results do not include the joint venture’s sales but do include $1.2 million and $6.3 million of equity in earnings during the three and six months ended June 30, 2004, and $0.4 million of equity in earnings during each of the same periods in 2003.  Our investment in this venture was $35.9 million at June 30, 2003, and $44.2 million at December 31, 2003.  We had an agreement with Voyageur Panel under which we operated the plant and marketed its product.  During the three months ended June 30, 2004 and 2003, Voyageur Panel paid us sales commissions of $0.7 million.  During the six months ended June 30, 2004 and 2003, they paid us sales commissions of $2.1 million and $1.3 million, respectively.  Management fees paid to us by Voyageur Panel were $0.2 million and $0.5 million during the three and six months ended June 30, 2004, and $0.3 million and $0.6 million during the same periods in 2003.

 

12.                               Inventories

 

Inventories include the following:

 

 

 

June 30

 

December 31

 

 

 

2004

 

2003

 

2003

 

 

 

(Restated)

 

 

 

 

 

 

 

(thousands)

 

 

 

 

 

 

 

 

 

Merchandise inventories

 

$

1,261,481

 

$

313,164

 

$

1,246,058

 

Finished goods and work in process

 

204,659

 

201,541

 

210,956

 

Logs

 

19,607

 

24,048

 

51,572

 

Other raw materials and supplies

 

148,844

 

151,932

 

145,390

 

LIFO reserve

 

(42,769

)

(41,854

)

(44,165

)

 

 

 

 

 

 

 

 

 

 

$

1,591,822

 

$

648,831

 

$

1,609,811

 

 

13.                               Deferred Software Costs

 

We defer internal-use software costs that benefit future years.  These costs are amortized on the straight-line method over the expected life of the software, typically three to five years.  “Other assets” in

 

17



 

the Consolidated Balance Sheets includes deferred software costs of $63.1 million, $57.2 million, and $69.1 million at June 30, 2004 and 2003, and December 31, 2003.  Amortization of deferred software costs totaled $6.1 million and $12.0 million for the three and six months ended June 30, 2004, and $5.7 million and $11.4 million for the three and six months ended June 30, 2003.

 

14.                               Goodwill and Intangible Assets

 

Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and intangible assets of businesses acquired.  In accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, we assess our acquired goodwill and intangible assets with indefinite lives for impairment at least annually in the absence of an indicator of possible impairment and immediately upon an indicator of possible impairment.  We completed our annual assessment in accordance with the provisions of the standard during first quarter 2004, and there was no impairment.

 

Changes in the carrying amount of goodwill by segment are as follows:

 

 

 

OfficeMax,
Contract

 

OfficeMax,
Retail

 

Boise
Building
Solutions

 

Total

 

 

 

 

 

(Restated)

 

 

 

(Restated)

 

 

 

(thousands)

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2003

 

$

487,997

 

$

607,656

 

$

11,639

 

$

1,107,292

 

 

 

 

 

 

 

 

 

 

 

Effect of foreign currency translation

 

(5,707

)

 

 

(5,707

)

Purchase price adjustments

 

 

 

 

 

 

 

 

 

OfficeMax, Inc. acquisition (Note 2)

 

690

 

34,241

 

 

34,931

 

Other

 

(1,500

)

 

 

(1,500

)

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2004

 

$

481,480

 

$

641,897

 

$

11,639

 

$

1,135,016

 

 

Intangible assets represent the values assigned to trade names, customer lists and relationships, noncompete agreements, and exclusive distribution rights of businesses acquired.  The trade name assets have an indefinite life and are not amortized.  All other intangible assets are amortized on a straight-line basis over their expected useful lives.  Customer lists and relationships are amortized over three to 20 years, noncompete agreements over three to five years, and exclusive distribution rights over ten years.  Intangible assets consisted of the following:

 

 

 

Six Months Ended
June 30, 2004

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

 

 

(thousands)

 

 

 

 

 

 

 

 

 

Trade names

 

$

173,100

 

$

 

$

173,100

 

Customer lists and relationships

 

31,808

 

(8,072

)

23,736

 

Noncompete agreements

 

13,005

 

(1,763

)

11,242

 

Exclusive distribution rights

 

3,266

 

(991

)

2,275

 

 

 

 

 

 

 

 

 

 

 

$

221,179

 

$

(10,826

)

$

210,353

 

 

18



 

 

 

Six Months Ended
June 30, 2003

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

 

 

(thousands)

 

 

 

 

 

 

 

 

 

Customer lists and relationships

 

$

28,036

 

$

(5,531

)

$

22,505

 

Noncompete agreements

 

5,157

 

(4,542

)

615

 

Exclusive distribution rights

 

3,017

 

(580

)

2,437

 

 

 

 

 

 

 

 

 

 

 

$

36,210

 

$

(10,653

)

$

25,557

 

 

 

 

Year Ended
December 31, 2003

 

 

 

Gross Carrying Amount

 

Accumulated Amortization

 

Net Carrying Amount

 

 

 

(thousands)

 

 

 

 

 

 

 

 

 

Trade names

 

$

177,000

 

$

 

$

177,000

 

Customer lists and relationships

 

32,692

 

(6,936

)

25,756

 

Noncompete agreements

 

17,894

 

(4,984

)

12,910

 

Exclusive distribution rights

 

3,363

 

(833

)

2,530

 

 

 

 

 

 

 

 

 

 

 

$

230,949

 

$

(12,753

)

$

218,196

 

 

Intangible asset amortization expense totaled $1.5 million and $2.9 million for the three and six months ended June 30, 2004, and $0.8 million and $1.6 million for the three and six months ended June 30, 2003.  The estimated amortization expense is $5.5 million, $5.5 million, $5.4 million, $5.3 million, $3.9 million, and $1.5 million in 2004, 2005, 2006, 2007, 2008, and 2009, respectively.

 

15.                               Debt

 

In March 2002, we entered into a three-year, unsecured revolving credit agreement.  The agreement permits us to borrow as much as $560 million at variable interest rates based on either the London Interbank Offered Rate (LIBOR) or the prime rate.  Borrowings under the agreement were $280 million at June 30, 2004, and were classified in current portion of long-term debt.  In addition to these borrowings, $76.5 million of letters of credit reduced our borrowing capacity at June 30, 2004, to $203.5 million.  At June 30, 2004, our borrowing rate under the revolving credit agreement, including fees, was 3.5%.  We have entered into interest rate swaps to hedge the cash flow risk from the variable interest payments on $50 million of LIBOR-based debt, which gave us an effective interest rate of 4.0% for outstanding borrowings under the revolving credit agreement at June 30, 2004.  The revolving credit agreement contains customary conditions to borrowing, including compliance with financial covenants relating to minimum net worth, minimum interest coverage ratio, and ceiling ratio of debt to capitalization.  At June 30, 2004, we were in compliance with these covenants.  Under this agreement, the payment of dividends depends on the existence and amount of net worth in excess of the defined minimum.  Our net worth at June 30, 2004, exceeded the defined minimum by $1,096.9 million.  When the agreement expires in June 2005, any amount outstanding will be due and payable.

 

In December 2003, we entered into a 19-month, unsecured credit agreement with 13 major financial institutions.  Under the agreement, we borrowed $150 million at variable interest rates based on either the LIBOR or the prime rate.  Borrowings under the agreement were $128 million at June 30, 2004.  At June 30, 2004, our borrowing rate under the agreement was 3.4%.  The credit agreement contains financial covenants that are essentially the same as those in our revolving credit agreement discussed

 

19



 

above, except that the terms require that the net proceeds of asset sales in excess of the first $100 million be used to reduce the loan balance.  The agreement also states that a lien of two times the outstanding balance will be applied to our inventory if our credit ratings fall to either BB- or Ba3 or lower.  When the agreement expires in June 2005, any amount outstanding will be due and payable.

 

In December 2003, the FASB issued a revised FASB Interpretation No. 46, Consolidation of Variable Interest Entities.  Interpretation No. 46, as revised, required us to reclassify $172.5 million of “Adjustable conversion-rate equity security units” from “Minority Interest” to “Debt” in our Consolidated Balance Sheets and recognize distributions on these securities as “Interest expense” rather than “Minority interest, net of income tax” in our Consolidated Statements of Income (Loss).  As allowed by the FASB’s revised Interpretation No. 46, prior years’ financial statements were reclassified to conform with the current year’s presentation.  In all periods presented, there was no net effect on earnings, and the reclassification of these securities to debt did not affect our financial covenants.

 

In April and May 2004, we entered into two interest rate swaps with notional amounts of $50 million each.  These swaps convert $100 million of fixed-rate $150 million 7.50% debentures to variable-rate debt based on six-month LIBOR plus approximately 3.9% for the April swap and 3.8% for the May swap.  The effective interest rate on the $150 million 7.50% debentures, including the swaps, was 5.9% at June 30, 2004.  The swaps expire in February 2008.

 

In March 2002, we entered into an interest rate swap with a notional amount of $50 million.  This swap converts $50 million of fixed-rate $150 million 7.05% debentures to variable-rate debt based on six-month LIBOR plus approximately 2.2%.  The effective interest rates on the $150 million 7.05% debentures, including the swaps, were 5.9% at both June 30, 2004 and 2003.  This swap expires in May 2005.

 

At June 30, 2004 and 2003, we had $49.5 million and $1.0 million of short-term borrowings outstanding.  Changes in short-term borrowings primarily reflect the addition of two $20 million floating rate term loans entered into during second quarter 2004.  The interest rates on the term loans are variable rates based on either the LIBOR or the prime rate.  The term loans expire in May 2005.  The minimum and maximum amounts of combined short-term borrowings outstanding were $6.2 million and $70.9 million during the six months ended June 30, 2004, and were $0 and $117.4 million during the six months ended June 30, 2003.  The average amounts of short-term borrowings outstanding during the six months ended June 30, 2004 and 2003, were $22.0 million and $52.0 million.  The average interest rates for these borrowings were 1.3% for 2004 and 2.1% for 2003.

 

At June 30, 2004, we had $143.0 million of unused borrowing capacity registered with the SEC for additional debt securities.

 

Cash payments for interest, net of interest capitalized, were $50.3 million and $84.6 million for the three and six months ended June 30, 2004, and $30.6 million and $68.2 million for the three and six months ended June 30, 2003.  The difference between the payments made in 2004, compared with 2003, was due to higher debt levels in 2004 related to additional borrowings to provide cash for the OfficeMax, Inc. acquisition.

 

16.                               Financial Instruments

 

Changes in interest and currency rates expose us to financial market risk.  Our debt is predominantly fixed-rate.  We experience only modest changes in interest expense when market interest rates change.  Most foreign currency transactions have been conducted in local currencies, limiting our exposure to changes in currency rates.  Consequently, our market risk-sensitive instruments do not subject us to material market risk exposure.  Changes in our debt and continued international expansion could increase these risks.  To manage volatility relating to these exposures, we may enter into various derivative transactions, such as interest rate swaps, rate hedge agreements, forward purchase contracts, and forward exchange contracts.  We do not use derivative financial instruments for trading purposes.

 

In November 2003, we entered into a natural gas swap to hedge the variable cash flow risk on 25,000 MMBtu per day of natural gas usage to a fixed price.  The swap expired in March 2004.  In April