Notes to Consolidated Financial StatementsNote 4:
Restructuring, Merger and Other Nonrecurring Costs
Fiscal 1998 Restructuring Charge
In January 1999, the Company adopted a global restructuring plan designed to lower its fixed operating cost structure by reducing the number of its employees and accelerating facility consolidations and closures. The restructuring plan provides for a planned gross reduction of approximately 1,000 employees (including management, warehouse, and administrative employees) and the closure or consolidation of approximately 70 warehouse, sales and administrative offices. As a result of the restructuring, the Company recorded a net pre-tax restructuring charge of $57,935,000, of which $54,805,000 (net of a prior period merger charge revision of $1,122,000) is recorded in operating expenses and $3,130,000 (net of revisions of $590,000) is recorded in cost of sales in the accompanying consolidated statements of operations. The restructuring charge affects North America Office Products ($18,945,000), International Office Products ($13,261,000), Other Products and Services ($5,827,000), as well as Corporate Headquarters ($19,902,000). The total charge of $59,647,000 reflects $36,449,000 in cash payments and $23,198,000 in non-cash payments.
The following table summarizes the fiscal 1998 restructuring charge and its related usage:
(1)Employee severance and terminations costs are related to the elimination of certain management positions, facility closures and consolidations. Of the 1,000 employees planned to be terminated, 270 employees have been terminated in fiscal 1998. Approximately 580 additional employees will be terminated in fiscal 1999 and the remaining employees will be terminated in fiscal 2000.(2)Facility closure and consolidation costs are the estimated costs to close redundant facilities, lease costs and other costs associated with closed facilities. Of the 70 facilities planned to be closed, 18 facilities were closed in fiscal 1998. Approximately 37 additional facilities will be closed in fiscal 1999 and the remaining facilities will be closed in fiscal 2000.
(3)Other asset write-downs and costs of $23,198,000 are recorded as contra assets and include $16,411,000 of warehouse and office equipment, leasehold improvements, and other assets being abandoned or written off, $3,067,000 of intangible assets that have been impaired, and $3,720,000 of inventory which the Company has decided to eliminate from its product line as a result of the exit plans. All amounts are shown at estimated net realizable value; depreciation expense will continue through the asset disposition date. After non-cash usage of $12,562,000, the remaining balance of $10,636,000 primarily reflects the assets to be disposed of in conjunction with the facility closures and will be utilized accordingly.
Merger and Other Nonrecurring Charges
During the fourth quarter of fiscal 1997, the Company recorded a net merger and other nonrecurring charge of $11,337,000. This net charge is comprised of $13,962,000 in merger and other nonrecurring charges in connection with the Company's acquisition of DDI, several acquisitions accounted for as immaterial poolings of interests and certain provisions for reductions in force and facility closures at other locations. The gross charge is offset by $2,625,000 in revisions to the merger and other nonrecurring charges established in previous periods to reflect the final transaction and exit costs incurred. These revisions reflect the finalization of employee contract buyouts and delays in closing certain facilities and disposition of related assets. The 1997 fiscal period charge included the planned closure of 25 facilities and the reduction of 295 employees. As of January 30, 1999, 14 facilities have been closed or consolidated, three regional warehouse will be downsized and converted into breakpoints and four regional sales offices will no longer be closed. Of the four remaining facility closures, one closure began in March 1999 and the remaining three will be closed in 1999. Of the three warehouses to be converted to breakpoints, one is in process and the other two will be completed 1999. Approximately 150 employees remain to be terminated in conjunction with the remaining facility closures and the downsizing of the regional warehouses. Also included in the remaining balance are contracts with periodic payments that will continue into 1999.
During the last half of fiscal 1996, the Company recorded a net merger and other nonrecurring charge of $8,480,000. This net charge is comprised of $13,537,000 in merger and other nonrecurring charges primarily in conjunction with the acquisitions of Nimsa, HMI and Sofco, offset by $5,057,000 in revisions to the merger and other nonrecurring charge established in the fourth quarter of fiscal 1995. In connection with the fiscal 1996 exit plans, the Company evaluated its facility and personnel requirements and identified duplicate facilities consistent with the new plan. As a result of this new plan, the closure of five distribution facilities, incorporated in the original 1995 plan, was superceded. Included in the distribution facilities that were to be retained, was the South Carolina facility which was expected to be merged into the Atlanta and North Carolina facilities. Due to significant new business in the Atlanta area and several unexpected acquisitions, the Atlanta facility is at full capacity and this closure plan was terminated. Additionally, several subsequent acquisitions in fiscal 1995 were completed in the Carolinas and surrounding markets, which eliminated the opportunity to close the South Carolina facility and maintain a high level of customer service.
The fiscal 1996 charges include the actual costs of completing the acquisitions, closing other redundant facilities, and severance for employee terminations. The original charge included the closure of nine facilities and the reduction of 77 employees. To date, eight facilities have been closed or consolidated, 21 employees have been terminated, and 33 employees will no longer be terminated as the result of revised exit plans. The following table summarizes the accrued merger and other nonrecurring charges and their related usage:
(1)Merger transaction costs included the direct costs from the pooling transactions and those direct costs incurred by DDI, and include legal, accounting, investment banking, printing, contract buy-outs and other related costs.(2)The remaining balance of $3,659,000 reflects remaining balances in the fiscal 1995 charge of $768,000, fiscal 1996 charge of $71,000, and fiscal 1997 charge of $2,820,000. The fiscal 1995 charge reflects the remaining severance associated with the centralization of certain shared services which began in the second quarter of fiscal 1997 and will be substantially completed by the end of fiscal 1999. The phased consolidation of these services reflects the Company's objective to maintain a high level of service to its customers and vendors, while reducing its internal cost structure. The remaining balance in the fiscal 1997 charge primarily reflects the consolidation of the Carolina facilities which is expected to be substantially complete by the end of the second quarter of fiscal 1999. The remaining balance reflects the planned terminations of approximately 200 employees.
(3)The remaining balance of $1,831,000 reflects remaining balances in the fiscal 1995 charge of $320,000 and the fiscal 1997 charge of $1,511,000. The fiscal 1995 charge reflects the post closing costs related to the centralization of certain shared services. The remaining balance in the fiscal 1997 charge primarily reflects the consolidation of the Carolina facilities which is expected to be substantially complete by the end of the second quarter of fiscal 1999.
(4)The remaining balance of $797,000 primarily reflects the assets that will be disposed of in conjunction with the facility closures which are expected to be substantially complete by the end of the second quarter of fiscal 1999.