Merger Agreement

3 Months Ended

Mar. 30, 2013

Merger Agreement

Note B – Merger Agreement

On February 20, 2013, the Company entered into a merger agreement with OfficeMax Incorporated (“OfficeMax”), pursuant to which the Company and OfficeMax would combine in an all-stock merger transaction (the “Merger Agreement”). At the effective time of the merger, the Company would issue 2.69 shares of common stock for each outstanding share of OfficeMax common stock. A selection committee has been formed with equal representation from the Board of Directors of the Company and OfficeMax to select a successor Chief Executive Officer. If no successor CEO has been selected by the time of closing the then-current CEOs of both the Company and OfficeMax will be appointed as co-CEOs and co-Chairmen and the Board of Directors will be made up of an additional five independent directors appointed by the Company and five independent directors appointed by OfficeMax. If a successor CEO has been selected by the time of closing, and that successor CEO is neither the current CEO of the Company or OfficeMax, the full Board of Directors will have 11 members, including the successor CEO and five independent directors appointed by the Company and five independent directors appointed by OfficeMax. In the event the successor CEO selected by the time of closing is either the current CEO of the Company or OfficeMax, the full Board of Directors will have 12 members with an additional independent director appointed by the company whose CEO was not selected as the successor CEO.

Based on the facts at the date of the Merger Agreement, the Company is considered to be the accounting acquirer. This determination will be finalized at the time of closing. Being the accounting acquirer will result in the purchase consideration being allocated to the fair value of OfficeMax assets and liabilities at the time of closing. The merger is subject to approval by the shareholders of each of the two companies and the receipt of certain regulatory approvals and other customary closing conditions. The Merger Agreement includes certain termination rights for both the Company and OfficeMax, including termination in the event certain antitrust or shareholder approvals are not received. Additionally, a change in recommendation from one of the parties’ Board of Directors may require that party to pay a termination fee of $30 million to the other party.

Concurrent with execution of the Merger Agreement, the Company entered into certain additional agreements with the holders of the Company’s preferred stock (the “Preferred Stockholders”), and with OfficeMax. Under one of these agreements, the Preferred Stockholders agreed to vote all of their voting securities in favor of the merger and against any alternative transactions proposed with respect to the Company. Additionally, immediately following approval of the merger by the Company’s shareholders, the Company has agreed to redeem for cash 50 percent of the preferred stock held by the Preferred Stockholders at the redemption price then applicable to the preferred stock. The remaining 50 percent of the preferred stock held by the Preferred Stockholders will either be redeemed for cash by the Company immediately prior to closing or, in certain circumstances, during the period between shareholder approval and prior to closing, may be converted into the Company’s common stock and subsequently sold by the Preferred Stockholders. The Company also has committed to purchase the amount of the Company’s common stock held by the Preferred Stockholders by virtue of any conversion such that the Preferred Stockholders would not own more than 5% of the aggregate Company common stock immediately following the merger. The current preferred stock redemption price of 107% of the liquidation preference amount will decrease to 106% of the liquidation preference amount on June 23, 2013 and that rate will be effective for the following twelve months. Should the shareholders approve this merger, the payment to the Preferred Stockholders at the current redemption price would be $217.6 million. Of this amount, $24.5 million would be classified as a preferred stock dividend and result in a reduction of net earnings (loss) attributable to common stockholders. In the event the remaining 50 percent of the preferred stock is also redeemed by the Company, a similar reduction of cash and net earnings (loss) attributable to common shareholders will occur immediately prior to closing. Should the Preferred Stockholders convert any allowable portion of the preferred stock to common stock, the net carrying value of this portion of preferred stock will be reclassified into common stock and additional paid-in capital. Any purchase by the Company of Company common stock held by the Preferred Stockholders will be at the preceding trading day’s closing price as listed on the New York Stock Exchange and will be presented in the financial statements as additional purchases of treasury stock.

Transaction costs associated with the merger are being expensed as incurred and are presented in the Condensed Consolidated Statement of Operations as Merger and other expenses. Certain fees are contingent on the transaction closing. Pro forma information and the allocation of purchase price will be provided following completion of the transaction.