1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended JANUARY 22, 2000
OR
[_] 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 1-13380
OFFICEMAX, INC.
(Exact name of registrant as specified in its charter)
OHIO 34-1573735
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(State or other jurisdiction of incorporation or organization) (I.R.S. employer identification no.)
3605 WARRENSVILLE CENTER ROAD, SHAKER HEIGHTS, OHIO 44122
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 921-6900
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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COMMON SHARES, WITHOUT PAR VALUE NEW YORK STOCK EXCHANGE
PREFERRED SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
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. X Yes No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of April 10, 2000 was approximately $675,761,892.
The number of Common Shares, without par value, of the registrant outstanding as
of April 10, 2000 was 112,626,982.
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TABLE OF CONTENTS
Item No. Page No.
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Part I
1. Business 3
2. Properties 14
3. Legal Proceedings 15
4. Submission of Matters to a Vote of Security Holders 15
Part II
5. Market for Registrant's Common Shares and Related Shareholder Matters 16
6. Selected Financial Data 17
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
7A. Quantitative and Qualitative Disclosures About Market Risk 24
8. Financial Statements and Supplementary Data 24
9. Changes in and Disagreements with Accountants on Accounting and 24
Financial Disclosures
Part III
10. Directors and Executive Officers of the Registrant 25
11. Executive Compensation 27
12. Security Ownership of Certain Beneficial Owners and Management 30
13. Certain Relationships and Related Transactions 31
Part IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 32
Signatures 33
Exhibit Index 34
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Portions of this Annual Report on Form 10-K (including information
incorporated by reference) include "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The words
"believe," "expect," "anticipate," "project," "plan," "intend," "forecast," and
similar expressions, among others, identify "forward-looking statements," which
speak only as of the date the statement was made. Such forward-looking
statements are subject to risks, uncertainties and other factors which could
cause actual results to materially differ from those made, projected or implied
in such statements. The most significant of such risks, uncertainties and other
factors are described in this report and Exhibit 99.1 to this Form 10-K. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
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PART I
ITEM 1. BUSINESS
GENERAL
OfficeMax, Inc. ("OfficeMax" or the "Company") is the largest operator
of high-volume, deep-discount office products superstores in the United States
in terms of the number of stores and breadth of geographic coverage. As of
January 22, 2000, OfficeMax operated 946 superstores in over 370 markets in 49
states, Puerto Rico and the U.S. Virgin Islands. OfficeMax also operates smaller
format OfficeMax PDQ(SM) stores. Additionally, the Company operates
OfficeMax.com(SM), its eCommerce business, primarily a business-to-business
Internet site, (at http://www.officemax.com) which offers a broad selection of
office products and business services via the Internet. Through joint venture
partnerships, OfficeMax operates international locations in Brazil, Japan and
Mexico. The Company has two national call centers and 19 delivery centers
throughout the United States and Puerto Rico to serve OfficeMax.com and the
Company's catalog and direct marketing business.
The typical full-size OfficeMax superstore is approximately 23,500
square feet and offers over 8,000 office products and related items. The layout
of the Company's eighth superstore iteration since inception, known within the
Company as "Millennium 8.0", focuses on the higher profit margin items of the
Company's office supply business. Within each superstore, prominent signage
highlights the Company's marketing concepts: Supplies (office supplies),
TechMax(R) (electronics, business machines, computers and related items),
CopyMax(SM) (print-for-pay services), and FurnitureMax(R) (office furniture).
OfficeMax.com, offers over 20,000 office products and an expanding
selection of business services. OfficeMax.com targets small business and home
office customers and offers many features to add to the site's convenience and
functionality such as express orders for frequently purchased products, usage
reporting, online order tracking, convenient order-by-number features and an
informational resource center. Additionally, OfficeMax.com visitors can take
advantage of @MaxSolutions, a small business resource center offering customers
an array of communications, eBusiness services, marketing and financial
services.
The Company markets its merchandise primarily to tiny, small and
medium-size businesses, home office customers and individual consumers. By
extending its marketing channels to include direct catalog and a commercial
sales force, OfficeMax also serves the larger corporate customer.
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The following table summarizes the Company's domestic superstore
opening activity by fiscal year, including Puerto Rico and the U.S. Virgin
Islands:
FISCAL STORES STORES STORES
YEAR OPENED CLOSED ACQUIRED TOTAL
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1988 3 - - 3
1989 8 - - 11
1990 23 - 12 46
1991 33 - - 79
1992 61 2 41 179
1993 53 9 105 328
1994 70 10 - 388
1995 80 - - 468
1996 96 - - 564
1997 150 1 - 713
1998 120 1 - 832
1999 115 1 - 946
Through its joint venture partnerships, the company has expanded
internationally by opening two superstores in fiscal year 1996, eight
superstores in fiscal year 1997, seven superstores in fiscal year 1998 and
seven superstores in fiscal year 1999.
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INDUSTRY OVERVIEW
Over the past approximately 12 years, the office products industry has
experienced rapid growth which the Company believes is attributable primarily to
a shift in the United States economy to become more service oriented and the
increasing utilization of technology, such as fax machines, cellular phones,
computers and the Internet. The Company believes that these trends will continue
to expand the office products industry and will create opportunities for
continued growth for operators of high-volume office products superstores such
as OfficeMax and for eCommerce sites offering office products and business
services such as OfficeMax.com.
Tiny, Small and Medium-Size Businesses and Consumer Markets. The
Company's target customers are tiny (one to four employees), small (five to 99
employees) and medium (100 to 300 employees) size businesses, along with home
office customers and individual consumers. Prior to the advent of the office
products superstore concept in the mid to late 1980's, these markets were served
primarily by traditional office products retailers which typically operated
small stores offering limited services and a limited selection of in-stock
merchandise purchased from wholesalers or other distributors and sold to the
ultimate consumer at manufacturers' suggested retail or catalog list prices.
Conversely, office products superstores, such as OfficeMax, feature a wide
selection of name-brand and private-label merchandise purchased directly from
manufacturers and sold at deep-discount prices that are typically 30% to 70%
below manufacturers' suggested retail and catalog list prices. As a result of
their ability to offer selection, service and discount prices, office products
superstores are capturing an increasing percentage of the retail office products
market in the United States.
Large Business Market. Large businesses, employing over 300 people,
have historically been served primarily by traditional commercial office
suppliers, known as "contract stationers," which provide their large business
customers with a wide variety of office products purchased from manufacturers
and intermediate wholesalers, generally for next business day delivery. Contract
stationers typically utilize an in-house, commissioned sales force to solicit
orders from the purchasing departments of their customers, which order
merchandise from the contract stationer's or an intermediate wholesaler's
catalog at a "contracted" rate.
BUSINESS SEGMENTS
The Company has three business segments: the Core Business Segment, the
Computer Business Segment and the OfficeMax.com Segment. The operations of the
Company's retail stores, call centers and outside sales force are included in
either the Core Business Segment or the Computer Business Segment. The Core
Business Segment includes office supplies, business machines, peripherals,
print-for-pay services and office furniture. The Computer Business Segment
includes desktop and laptop personal computers and computer monitors. The
OfficeMax.com Segment represents the operations of the Company's Internet site.
CORE AND COMPUTER BUSINESS SEGMENTS
Business Strategy
-----------------
Core Business Segment. The Company's strategy for its Core Business Segment is
to enhance market share, be a leading provider of office products, supplies and
services in each of the markets in which it competes and continue expanding into
new markets, including international expansion. The key elements of this
strategy are as follows:
- Extensive Selection of Merchandise in an Easy-to-Shop
Presentation. Each OfficeMax superstore offers over 8,000 stock keeping
units ("SKUs") of quality, name-brand and private-label merchandise.
This offering represents a breadth and depth of in-stock items that are
not available from traditional office products retailers, mass
merchandisers or wholesale clubs. The Company's merchandise
presentation is highlighted by wide aisles with open ceilings, bright
lighting, colorful signage and bold graphics. This easy-to-shop
presentation is designed
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to enhance customer convenience, create an enjoyable shopping
experience and promote impulse buying, thereby increasing sales.
- Everyday Low Prices. The Company's everyday low price policy
is to offer deep-discount prices that are typically 30% to 70% below
manufacturers' suggested retail and catalog list prices. In addition,
the Company guarantees its low prices up to 155%. OfficeMax will match
any advertised price or refund the difference between a lower
advertised price and the price paid at OfficeMax within seven days of
the original purchase. An additional 55% merchandise credit (up to
$55.00) will be issued if the lower price is from an office products
superstore such as Staples, Inc. ("Staples") or Office Depot, Inc.
("Office Depot"). The 155% Low Price Guarantee does not apply to a
variety of electronic and digital products such as printers, digital
photography and computers.
- Customer Service. To develop and maintain customer loyalty,
OfficeMax emphasizes a customer-centric culture that focuses associates
on making customer service their number one priority. The Company views
the quality of its customers' interaction with its associates as
critical to its success. To this end, the Company emphasizes training
and personnel development, seeks to attract and retain well-qualified,
highly motivated associates, and has centralized most administrative
functions at its corporate office and call centers to enable in-store
associates to focus on serving customers.
- Focused Expansion. The Company enters United States markets
that provide multi-store opportunities as well as markets in which the
Company believes a single OfficeMax superstore can be one of the
dominant office products suppliers. Prospective locations are evaluated
using on-site surveys conducted by real estate consultants and field
operations personnel coupled with a proprietary real estate selection
model, which assesses potential store locations and incorporates
computer-generated mapping. The model analyzes a number of factors that
have contributed to the success of existing OfficeMax locations
including the location's size, visibility, accessibility and parking
capacity, potential sales transfer effects on existing OfficeMax
superstores and relevant demographic information, such as the number of
businesses and the income and education levels in the area.
- Marketing Concepts. During the last five years, OfficeMax
has launched in-store marketing concepts that complement the Company's
supplies "module" by providing additional products and services to the
Company's customers and an opportunity for incremental store traffic.
These concepts include the departments or "in-store modules", TechMax,
CopyMax and FurnitureMax. TechMax features the latest in communication
and electronics products. CopyMax offers customers a wide range of
"print-for-pay" services, from self-service black and white copying to
full service digital printing and publishing. FurnitureMax provides an
expanded furniture selection and specialized services.
During fiscal year 1998, the Company opened and began testing
its first OfficeMax PDQ store. Three additional OfficeMax PDQ stores
were opened during fiscal year 1999. This unique "quick-shop" format
includes a reduced Supplies module of over 3,000 commodity-type office
products and a full-service CopyMax module. The OfficeMax PDQ format is
designed to allow the Company to more economically penetrate urban
locations in both domestic and international markets and is appropriate
for office park complexes, office buildings and on, or near, college
campuses. These concepts are discussed in greater detail under the
headings "Stores" and "Expansion."
- Non-Store Retailing. The Company's strategy for its catalog
business is to capitalize on the OfficeMax brand name awareness by
providing other channels giving the OfficeMax customer more purchasing
options. A full assortment catalog of all the items found in OfficeMax
superstores plus a variety of merchandise available from a third party
distributor allows customers the convenience of catalog ordering and
next business day delivery. The Company also provides special order
catalogs containing more than 20,000 items to meet our customers'
needs. As many of the OfficeMax small business customers grow, they
take advantage of these purchasing options. In conjunction with its
catalog business, OfficeMax has a commissioned sales force focusing on
the medium-size business customer.
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- International Opportunities. During fiscal year 1999, the
Company opened four OfficeMax superstores in Mexico through its
majority-owned joint venture with Grupo Oprimax, S.A. de C.V., a Mexico
corporation, ending the year with 16 superstores in Mexico. In fiscal
year 2000, this joint venture plans to open up to nine more superstores
and one OfficeMax PDQ store in Mexico. During fiscal year 1999, the
Company opened two superstores in Brazil through a joint venture with
Max Empreendimentos E Participacoes S/C Ltda., a Brazil company. The
Brazilian joint venture plans to open as many as six superstores during
fiscal year 2000. OfficeMax owns a 19% interest in the Brazilian joint
venture. OfficeMax superstores and OfficeMax PDQ stores operated by
these joint ventures are similar to those operated by the Company
domestically. The Company plans to begin the process of establishing
additional joint venture partnerships in Asia and South America during
fiscal year 2000. Ultimately, the Company's international expansion
will depend upon general economic and business conditions affecting
consumer spending in these markets, the availability of desirable store
locations, the negotiation of acceptable terms and the availability of
adequate capital.
The Company's joint venture with JUSCO Company Ltd., a Japan
corporation, operated six superstores and one OfficeMax PDQ store at
January 22, 2000. Because of very difficult economic conditions in
Japan, financial considerations and operational strategy changes by
JUSCO, the Company's Japanese joint venture partner presently does not
plan to open any new stores during fiscal year 2000 and the Company is
in discussions with JUSCO regarding the future of the existing stores.
The Company owns a 19% interest in the Japanese joint venture. During
fiscal year 1999, the Company wrote-off its investment of approximately
$1,700,000 in the joint venture.
Computer Business Segment. In response to dramatic declines in retail
prices of computers and reduced and limited gross margin resulting from the
promotional nature of the computer business, the Company is developing a new
operating model for its Computer Business Segment.
- Realigning the Computer Business Segment/the Gateway
Alliance. During fiscal year 1999, the Company reduced its number of
computer vendors to two sources and began a seven-market test with IBM,
in which the Company exclusively offered IBM personal computers,
laptops, monitors and servers. During the first quarter of fiscal year
2000, the Company terminated its relationship with IBM and announced
its plans to enter into a strategic alliance with Gateway Companies
Inc., ("Gateway"). Under the terms of a master license agreement,
Gateway will operate a licensed "store-within-a-store" computer
department inside all OfficeMax superstores in the United States, an
industry exclusive. The department will offer products consistent with
the Company's current Computer Business Segment, including computers,
monitors and related products and services. Accordingly, the Company
will phase out operations of its Company owned and operated computer
departments. The store-within-a-store rollout began in March 2000 and
is expected to be complete by the end of the first quarter of fiscal
year 2001. This alliance is described in greater detail in Note 15 of
the Notes to Consolidated Financial Statements.
Marketing, Promotions and Advertising
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The marketing efforts of the Company's Core and Computer Business
Segments are directed at tiny, small and medium-size businesses, home office
customers, and individual consumers. A multimedia approach is used to attract
new customers while re-emphasizing the Company's value, service and selection
message to existing customers. These campaigns include national television
commercials, newspaper ads, seasonal spot television and radio commercials,
direct mail promotions, circulars, and outdoor billboards, sports arena and
similar signage.
Advertising campaigns and promotions are conducted continuously
throughout the year to reach new and existing customers. To further increase
sales, OfficeMax takes advantage of seasonal selling opportunities. Special
marketing programs are developed to support the Back-To-School selling period,
the Christmas holiday season, plus the January "re-stocking" Back-To-Business
period.
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OfficeMax also conducts extensive customer research to gauge the
appropriateness of the products and services the Company offers. This research
is utilized to develop innovative solutions for OfficeMax's tiny, small business
and home office customers while tailoring specific product messages to
communicate with each of its target customer groups.
Stores
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The typical full-size OfficeMax superstore is approximately 23,500 square
feet. OfficeMax superstores are generally destination oriented locations in
high-traffic, suburban strip-mall shopping centers that provide customers easy
access and ample store-front parking. Each superstore displays merchandise in
accordance with a corporate developed plan-o-gram to ensure that it utilizes
optimal display techniques and provides a consistent and attractive shopping
environment for customers. The Company continuously evaluates the attributes of
its prototype store model and periodically makes adjustments to the store
layout. These changes are integrated into new stores as they are opened and are
also considered when the Company remodels existing units. The Company's latest
prototype, "Millennium 8.0", is characterized by a heightened merchandise focus
on the core Supplies module along with enhanced visual acuity throughout the
store. Within each superstore, prominent signage highlights the Company's
marketing concepts: Supplies (office supplies), TechMax (communication and
electronics products), CopyMax (print-for-pay services), and FurnitureMax
(office furniture). Management believes that attractive and up-to-date stores
contribute to customer satisfaction and loyalty, leading to increased sales. The
Company plans to remodel approximately twenty superstores during fiscal year
2000.
The Company's Supplies modules feature office products, including writing
instruments, paper, filing supplies, business forms and other supplies.
TechMax showcases the latest in communications and electronics products
and features specially trained associates to assist the customer.
Introduced in July 1995, the in-store CopyMax modules feature a broad
assortment of "print-for-pay" services for businesses and consumers ranging from
self-service copying to digital printing and desktop publishing as well as
color copying, custom printing and related specialty services. Approximately
4,000 to 6,000 square feet are devoted to a full-service CopyMax "hub"
location, which utilizes the latest digital printing equipment and technology
and serves as a centralized production facility. The mini-CopyMax or "spoke"
locations are smaller in-store modules averaging approximately 900 square feet.
Today, these spoke locations are served by a hub utilizing the "CopyMax Link"
software. This software, a modem-based solution that provides the capability to
transmit documents to any CopyMax location, creates a "hub-and-spoke" concept
that optimizes equipment in the CopyMax hubs. The Company is currently piloting
a web-based solution for remote document submission that is expected to be
installed in all of the Company's locations by the end of fiscal year 2000.
Another in-store module, FurnitureMax, features an extensive selection of
office furniture ranging from ready-to-assemble products to a broader assortment
of office chairs, dividers, filing cabinets and higher-end case goods, desks and
credenzas. FurnitureMax also offers specialized services such as customized
space planning, on site consultation, installation, furniture setup and free
delivery. Full-size FurnitureMax hubs are an approximately 4,000 to 8,000 square
foot addition to an existing OfficeMax superstore while mini-FurnitureMax
modules contain approximately 2,000 square feet.
Expansion
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Tiny, Small and Medium-Size Business Market. The Company's expansion
strategy primarily focuses on new store growth and its marketing concepts. The
Company opened 115 superstores in fiscal year 1999 and intends to continue its
rapid growth by opening approximately 50 to 75 additional full-size superstores,
an additional distribution facility in the United States and will continue to
test the OfficeMax PDQ concept in fiscal year 2000. The Company's fiscal year
2000 international expansion plans may include opening up to 20 superstores in
Brazil and Mexico plus launching the process of establishing additional joint
ventures in Asia and South America.
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Large Business Market. OfficeMax has undertaken several initiatives to
better serve the needs of its larger customers, predominately through its
commercial sales group. The Company serves the needs of large businesses through
its expanded full-color catalogs featuring approximately 5,000 items and with
other specialized catalogs. These catalogs, which are distributed periodically
to businesses and individual customers, feature toll-free telephone ordering
and typically offer free next business day delivery on orders over $50. In
addition, the Company employs a commercial sales force to attract new customers
as well as maintain existing customer relationships. The Company continues to
develop a network of delivery centers in the major markets OfficeMax serves. In
contrast to the tiny, small business, home office and individual consumer
customer focus of OfficeMax's retail superstores, the Company's expanded
catalogs, commercial sales force and delivery centers enable larger businesses,
municipalities and school systems to purchase from OfficeMax on much the same
basis as they could from contract stationers and other traditional office
product suppliers.
Customer Service
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The Company believes that a fundamental element of its success is its
customer-centric culture that demands a high level of customer service from each
of its associates. The Company views the quality of its customers' interaction
with its associates as critical to maintaining customer confidence and loyalty.
Through its emphasis on training and personnel development, the Company strives
to attract and retain well-qualified, highly motivated associates committed to
providing superior levels of customer service.
Management has undertaken a number of initiatives that demonstrate its
commitment to in-store customer service. For example, by centralizing most
administrative functions at its corporate offices and call centers, OfficeMax
enables its in-store associates to focus primarily on customer service. In
addition, the Company implemented ServiceMax, a training program that details
customer service standards to be met by each store-level associate and assigns
to each superstore one or more associates whose primary responsibility is to
ensure that each customer receives prompt, courteous and knowledgeable service.
Management Information Systems
------------------------------
During fiscal year 1998, OfficeMax began the implementation of SAP, a
leading Enterprise Resource Planning ("ERP") system being used by approximately
15,000 companies worldwide, including many Fortune 500 companies. As OfficeMax
has grown substantially and rapidly over the past 12 years, the legacy
information systems necessary to support such growth have become outmoded. SAP
will provide a flexible, consolidated, enterprise-wide system that will provide
real-time information necessary to make informed and strategic business
decisions and to react quickly to critical store-level information. The Company
believes an integrated system will enable the Company to grow and operate the
business more effectively.
At its headquarters, the Company uses a platform of Unix-based parallel
processors, which supports a wide variety of mission critical applications,
ranging from merchandise replenishment to order fulfillment, electronic commerce
and financial systems. With the availability and price performance advantage of
larger Sun Microsystems Servers, as well as the implementation of SAP, the
Company will consolidate its systems and simplify systems management with fewer,
larger systems. This technology also provides "scalability," the ability to
support growth within the same platform.
The Company converted to the SAP Human Resource and Finance modules
during fiscal year 1998 and fiscal year 1999, respectively. During fiscal year
2000, OfficeMax expects to convert to the SAP Retail and Merchandising System.
OfficeMax has made significant investments in the last several years to upgrade
systems and processes and intends to continue investing aggressively in this
area to support the Company's growth.
The Company operates a proprietary, in-store computer system called
"StoreMax" that allows the daily tracking of inventory receipts through the use
of portable, handheld, radio frequency terminals. These terminals permit store
managers to scan a product on the shelf and instantly retrieve specific product
information, such as recent sales history, gross profit margin and inventory
levels. In-store, point-of-sale registers capture sales information at the time
of each transaction at the category and SKU level by the use of bar-code
scanners that update store-level perpetual inventory records. This information
is transmitted on a daily basis to corporate headquarters, where it is evaluated
and used in merchandising and
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replenishment decisions. In addition, StoreMax is used to transmit data to each
store providing information that is key for day-to-day operations.
The Company utilizes an online advanced "frame-relay" network, which
supports data communication between headquarters and its stores, delivery and
call centers. This technology is employed to centralize credit card and check
authorization and validate transactions. In addition, the network enhances
intra-Company communication and supports electronic maintenance of in-store
technology. The Company also utilizes its own intranet, known as @MaxSM, which
provides information on demand to all of the Company's Corporate and Field
Management associates.
OfficeMax is currently developing a program to network its entire chain
of superstores via the Internet. In addition to providing a medium through which
the organization may internally communicate, the test also calls for the
installation of in-store kiosks through which OfficeMax retail superstore
customers can conveniently access OfficeMax.com's more than 20,000 office
products and business services.
OFFICEMAX.COM SEGMENT
Launched in March 1995, OfficeMax.com, located on the Internet at
http://www.officemax.com, is the Company's electronic marketplace for office
products as well as services tailored specifically for businesses with fewer
than 100 employees and income-generating home offices.
Business Strategy
-----------------
The Company believes that the Internet is an increasingly important
medium for the sale of office products and the provision of business services.
OfficeMax.com offers over 20,000 office products coupled with free next
business day delivery on orders over $50 for most locations. OfficeMax.com also
offers an expanding range of integrated business services targeted at small
business and home office customers. OfficeMax.com visitors can also take
advantage of the SoftwareSupersite@OfficeMax, which offers over 17,000 Windows,
Macintosh and Palm Top software titles available for immediate purchase via
electronic downloading as well as regular delivery.
@MaxSolutions offers OfficeMax.com customers an array of Internet-enabled
services and solutions targeted at small businesses. This offering includes
communications, eBusiness utilities, marketing and financial services.
As part of the alliance between the Company and Gateway,
OfficeMax.com's web site will be featured through an icon and hot link on
personal computers sold by Gateway to small businesses and consumers in the
United States during the next five years. Gateway will also have the exclusive
right to market and sell computers and related products on OfficeMax.com.
Marketing, Promotion and Advertising
------------------------------------
OfficeMax.com utilizes marketing initiatives aimed at acquiring small
business customers, increasing traffic and site awareness. These initiatives
include traditional, offline advertising mediums including national broadcast
media, billboards, targeted print advertising and direct mail. Online marketing
efforts include MaxMail, a permission-marketing program distributed weekly via
the Internet, and Netcentives, a loyalty program offering "ClickMiles"
redeemable for airline frequent flier miles. OfficeMax.com is also marketed
through affiliate partnerships with numerous portals and small business portals
as well as through OfficeMax retail stores.
Web Site Design
---------------
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OfficeMax.com is available 24 hours a day, 7 days-a-week, from anywhere
with Internet access, enabling customers to shop at their convenience. The web
site is designed for easy navigation by product category, vendor serial number,
or customer's previous purchases. Furthermore, customers can track orders, check
product availability and receive e-mail confirmation of orders placed.
Within the first half of fiscal year 2000, the site will be converted to
Broadvision's One-to-One Enterprise Platform. This enhancement in technology
will allow OfficeMax.com to conduct more tailored, one-to-one marketing with its
online customers providing for a more personalized online shopping experience.
Customer Service
----------------
OfficeMax.com customers receive 24 hours a day, 7 days-a-week customer
service and support through its dedicated personnel at the Company's call
centers located in Cleveland, Ohio and Dallas, Texas. Customer service
representatives communicate with customers via e-mail and toll-free telephone
lines. In addition, OfficeMax.com customers can address their questions to the
Company's store associates or delivery personnel and can return merchandise to
any of the Company's retail stores.
Management Information Systems
------------------------------
OfficeMax.com employs a variety of scalable and reliable software and
hardware systems for transaction processing, administration, searching, customer
support, fulfillment and order tracking. The transaction processing systems are
integrated with the Company's order management, payment processing,
distribution, accounting and financial systems. Internal development efforts are
focused on creating, enhancing and integrating proprietary software and services
delivered through the web site.
OfficeMax.com's systems are based on industry standard architectures.
The backbone of the technology structure consists of Oracle database servers
with Sun Microsystem's hardware. OfficeMax.com's Internet systems are hosted at
an Exodus Communications facility, which provides high-speed, redundant
communications lines, emergency power backup and continuous systems monitoring.
Load balancing systems and redundant servers have been put in place to provide
for fault tolerance and fully redundant systems providing for no single point of
failure in the event of outages or catastrophic events.
MERCHANDISING
The Company's merchandising strategy focuses on offering an extensive
selection of quality, name-brand and private-label office products at
deep-discount prices. The following table sets forth the approximate percentage
of net sales attributable to each merchandise group for the periods presented:
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FISCAL YEAR ENDED JANUARY 22, JANUARY 23, JANUARY 24,
2000 1999 1998
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Office supplies, including "print-for-pay" services 38.1% 37.7% 37.4%
Electronics and business machines 22.6 23.2 23.3
Office furniture 12.8 12.6 11.8
Printers, software, peripherals and related consumable 20.6 18.7 15.9
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products such as printer cartridges and ribbons
--------------- --------------- ---------------
Total Core Business and OfficeMax.com Segments 94.1 92.2 88.4
Desktop and laptop personal computers and computer
monitors (Computer Business Segment) 5.9 7.8 11.6
--------------- --------------- ---------------
Total Company 100.0% 100.0% 100.0%
=============== =============== ===============
The Company emphasizes a wide selection of name-brand office products,
packaged and sold in multi-unit packages for the business customer and single
units for the individual consumer. The Company also offers private-label
products under the OfficeMax(R) label in order to provide customers additional
savings on selected commodity products for which management believes national
brand recognition is not a key determinant of customer satisfaction. These
commodity items include various paper products such as computer and copy paper,
legal pads and notebooks, envelopes and similar items. Despite lower selling
prices, these items typically carry higher gross margins than comparable branded
items and help build consumer recognition for the OfficeMax family of Max-brand
products. The Company's merchandising staff regularly evaluates new name-brand
and private-label merchandise opportunities to maximize profits and to provide
customers with enhanced values. The Company also includes its toll-free
telephone number on the packaging of certain commodity and private label goods
to increase repeat sales as commodity goods are used and replenished.
In addition to the office products offered on the OfficeMax.com site,
OfficeMax.com offers an expanding range of business services targeted at small
businesses. OfficeMax.com is able to offer these services through alliances with
numerous strategic partners. In fiscal year 2000, OfficeMax.com expects to add
new services for its business customers through additional strategic alliances
and to integrate them with existing services to create value added solutions for
its customers.
PURCHASING AND DISTRIBUTION
OfficeMax maintains a centralized group of merchandise and category
managers who average approximately 20 years of retail buying and merchandising
experience. Using a detailed merchandise planning system, this group selects the
product mix for each store in conjunction with systematic, frequent input from
field management and store personnel.
The Company believes that it has good relationships with its vendors
and does not consider itself dependent on any single source for its merchandise.
As the number of stores increases pursuant to OfficeMax's store expansion plan,
the Company believes that it will be able to continue to obtain sufficient
merchandise for all of its stores on a timely basis. As the Company owned and
operated computer departments are converted to Gateway licensed
store-within-a-store departments, the Company will no longer maintain an
inventory of computers.
The Company has two national call centers and 19 delivery centers
throughout the United States and Puerto Rico to serve OfficeMax.com and its
catalog and direct marketing business. During fiscal year 1999, the Company
opened its PowerMax distribution facility in Hazelton, Pennsylvania. The
facility is the second in a planned national network of 600,000 to
750,000-square-feet, supply-chain distribution centers. The first PowerMax
facility, a smaller concept facility, was opened in Las Vegas, Nevada in fiscal
year 1998. The third facility in the network is scheduled to open in the second
quarter of fiscal year 2000 in Bessimer, Alabama.
COMPETITION
The office products industry, which includes national superstore
chains, "e-tailers" and other indirect competitors, is highly competitive.
Businesses in the office products industry compete on the basis of pricing,
product selection, convenience, customer service and ancillary business
offerings.
As a result of the consolidation of the office products superstore
industry, OfficeMax currently has only two direct superstore-type
competitors, Staples and Office Depot, which are similar to the Company in terms
of store format, pricing strategy and
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product selection. Of the approximately 20 office products superstore chains
that were launched in the U.S. between 1986 and 1994, all but OfficeMax, Staples
and Office Depot have either been acquired or gone out of business.
Although not all OfficeMax stores currently compete with either Staples
or Office Depot stores, the Company believes it will face increased competition
from Staples and Office Depot as all three office product superstore chains
expand their operations in the same markets. The Company believes that its
stores compete favorably with Staples and Office Depot through consistent
execution of its business strategy, the components of which are designed to
differentiate OfficeMax from Staples and Office Depot.
OfficeMax.com competes with the eCommerce sites of its direct
competitors as well as other e-tailers, such as Office.com,
Onlineofficesupplies.com and Atyouroffice.com. The Company believes it competes
favorably with these sites due to its strong brand name and innovative product
and service offerings as well as economies of scale and other advantages it has
from the Company's existing stores and customer service infrastructure,
including 19 delivery centers and two national call centers.
OfficeMax's indirect competitors include traditional office product
retailers, electronics superstore retailers, mass merchandisers, wholesale
clubs, and direct mail operators in respect to various product categories. The
Company believes these non-superstore competitors do not provide all of the
customer benefits that an office products superstore has to offer such as
one-stop shopping convenience, discount prices and a full range of ancillary
business services.
OfficeMax's Computer Business Segment competes with electronic
superstore retailers, such as CompUSA, Circuit City and Best Buy, and
direct-to-customer manufacturers, such as Dell. During the first quarter of
fiscal year 2000, the Company announced a strategic alliance whereby Gateway
will operate a licensed "store-within-a-store" computer department in all
OfficeMax stores. The department will offer products consistent with the
Company's current Computer Business Segment, including computers, monitors and
related products and services. Accordingly, the Company will phase out
operations of its Computer Business Segment over the next approximately one year
as the Company's in-store computer departments are converted to Gateway
store-within-a-store modules.
Some of OfficeMax's direct and indirect competitors may have greater
financial resources than the Company. There can be no assurance that increased
competition will not have an adverse effect on the Company.
ASSOCIATES
As of April 10, 2000, the Company had approximately 41,000 employees,
including 22,000 full time and 19,000 part-time associates, 1,600 of whom were
employed at its Corporate headquarters, divisional offices and call centers and
39,400 of whom were employed at OfficeMax stores and distribution and delivery
centers. None of the Company's associates is subject to a collective bargaining
agreement. Management believes that its relationship with its associates is
satisfactory.
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ITEM 2. PROPERTIES
OfficeMax superstores are relatively immature. As of April 10, 2000,
the Company's stores had been open an average of 4.3 years operating under the
OfficeMax name and format. Of the Company's 969 superstores, 409 have been
opened by OfficeMax within the last three years. Management believes that the
Company's young stores represent an opportunity for future sales growth as they
proceed through the maturation cycle.
The Company occupies almost all of its stores under long-term lease
agreements. These leases generally have terms ranging from 10 to 25 years plus
renewal options. Most of these leases require the Company to pay minimum rents,
subject to periodic adjustments, plus other charges including utilities, real
estate taxes, common area maintenance and, in limited cases, contingent rentals
based on sales. Several of the Company's store leases are guaranteed by Kmart.
The Company and Kmart are parties to a Lease Guaranty, Reimbursement and
Indemnification Agreement, pursuant to which Kmart has agreed to maintain
existing guarantees and provide a limited number of additional guarantees, and
the Company has agreed, among other things, to indemnify Kmart against
liabilities incurred in connection with those guarantees.
As of April 10, 2000, OfficeMax had 969 superstores in 49 states,
Puerto Rico and the U.S. Virgin Islands. The following table details OfficeMax
superstores by state and territory:
Alabama 13 Nebraska 7
Alaska 3 Nevada 12
Arkansas 4 New Hampshire 4
Arizona 25 New Jersey 18
California 94 New Mexico 10
Colorado 21 New York 47
Connecticut 10 North Carolina 27
Delaware 2 North Dakota 3
Florida 60 Ohio 55
Georgia 31 Oklahoma 6
Hawaii 4 Oregon 13
Idaho 6 Pennsylvania 36
Illinois 49 Rhode Island 3
Indiana 21 South Carolina 10
Iowa 10 South Dakota 3
Kansas 11 Tennessee 25
Kentucky 10 Texas 77
Louisiana 12 Utah 14
Maine 2 Washington 19
Maryland 2 Virginia 21
Massachusetts 17 West Virginia 6
Michigan 47 Wisconsin 27
Minnesota 29 Wyoming 2
Mississippi 7 Puerto Rico 7
Missouri 23 U.S. Virgin Islands 1
Montana 3
The Company operates 19 delivery centers in 18 states and Puerto Rico,
two national call centers in Texas and Ohio and two PowerMax distribution
facilities in Nevada and Pennsylvania. The Company expects to begin operations
at a third PowerMax facility in Alabama during fiscal year 2000. The Company
occupies all of these facilities under various long-term leases.
The Company's corporate offices are located in two buildings in
Cleveland, Ohio. The Company owns one of these facilities subject to a mortgage-
secured loan and leases the second under a long-term lease. The Company believes
that its facilities are adequate to meet its current needs.
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ITEM 3. LEGAL PROCEEDINGS
The Company is a party to litigation it initiated in October 1997 in
the United States District Court for the Northern District of Ohio against Ryder
Integrated Logistics, Inc. ("Ryder") arising out of Ryder's failure to fulfill
certain payment guarantees pursuant to the terms of the Company's logistics
service agreement with Ryder. The Company terminated the logistics service
agreement in June 1997 based on numerous claims against Ryder under the
agreement including, among others, Ryder's refusal to honor its cost guarantees
and its failure to return overpayments to the Company. During the course of the
agreement, the Company recorded receivables from Ryder of approximately
$19,000,000 representing overpayments due from Ryder pursuant to the terms of
the agreement. In January 1998, Ryder filed a counterclaim against the Company
alleging damages arising from the Company's termination of the agreement in the
amount of approximately $75,000,000. The Company believes the counterclaim is
without merit and continues to vigorously defend against such counterclaim.
Management is of the opinion that, although the ultimate resolution of
the Ryder litigation cannot be forecasted with certainty, final disposition of
this matter should not materially affect the Company's liquidity, financial
position or results of operations. However, in the event of an unanticipated
adverse final determination in this matter, the Company's consolidated net
income for the period in which such determination occurs could be materially
affected.
On March 24, 2000, Charles Miller and Great Neck Capital Appreciation,
L.P. initiated two separate, but virtually identical, purported class actions
against the Company and its directors. The cases, both filed in the Court of
Common Pleas for Cuyahoga County, Ohio, allege claims for interference with
shareholders' franchise rights against the Company and its directors and breach
of fiduciary duty against the directors relating to the adoption of a
shareholder rights plan on March 17, 2000. The cases are at their earliest
stages and discovery has not yet commenced. The Company believes that the cases
are without merit and intends to vigorously defend against the allegations set
forth in both complaints.
On April 7, 2000, Crandon Capital Partners initiated a purported class
action against the Company and its directors. The case, filed in the Court of
Common Pleas for Cuyahoga County, Ohio, also alleges claims for interference
with shareholders' franchise rights against the Company and its directors and
breach of fiduciary duty against the directors relating to the adoption of the
shareholder rights plan. The case is at its earliest stages and discovery has
not yet commenced. The Company believes that the case is without merit and
intends to vigorously defend against the allegations set forth in the complaint.
In addition, there are various claims, lawsuits and pending actions
against the Company incident to the Company's operations. It is the opinion of
management that the ultimate resolution of these matters will not have a
material effect on the Company's liquidity, financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The high and low sales prices of the Company's Common Shares during
each quarter of fiscal year 1998 and fiscal year 1999, as reported on the New
York Stock Exchange Consolidated Transaction reporting system, are listed below:
Fiscal Year 1998 High Low
---------------- ---- ---
1st Quarter (ended April 25, 1998) $19.625 $14.063
2nd Quarter (ended July 25, 1998) 19.563 13.875
3rd Quarter (ended October 24, 1998) 15.438 6.625
4th Quarter (ended January 23, 1999) 12.500 8.875
Fiscal Year 1999 High Low
---------------- ---- ---
1st Quarter (ended April 24, 1999) $10.813 $ 7.563
2nd Quarter (ended July 24, 1999) 12.125 9.000
3rd Quarter (ended October 23, 1999) 10.875 4.500
4th Quarter (ended January 22, 2000) 7.375 4.438
The Company has never paid cash dividends on its Common Shares. The
Company does not anticipate paying any cash dividends on its Common Shares in
the foreseeable future because it intends to retain its earnings to finance the
expansion of its business and for general corporate purposes. The declaration
and payment of any dividends in the future will be at the discretion of the
Company's Board of Directors and will depend on, among other things, the
Company's earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions with respect to payment of dividends and
other factors deemed relevant by the Company's Board of Directors.
As of April 10, 2000, the Company had 4,037 shareholders of record. On
April 10, 2000, the closing price of the Company's Common Shares was $6.00.
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ITEM 6. SELECTED FINANCIAL DATA
Selected financial data as of and for the fiscal years ended January
22, 2000, January 23, 1999, January 24, 1998, January 25, 1997 and January 27,
1996 is set forth below:
(Dollars in millions, except per share data)
- -------------------------------------------------------------------------------------------------------------------------------
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR
1999 (1) 1998 (2) 1997 1996 1995 (3)
- -------------------------------------------------------------------------------------------------------------------------------
FINANCIAL DATA
Sales $4,842.7 $4,337.8 $3,765.4 $3,179.3 $2,542.5
Cost of merchandise sold, including
buying and occupancy costs 3,653.8 3,284.6 2,895.0 2,489.0 1,970.5
Inventory markdown charge for item 77.4 -- -- -- --
rationalization
Computer segment asset write-off -- 80.0 -- -- --
Gross profit 1,111.5 973.2 870.4 690.3 572.0
Operating income 32.3 86.7 145.9 105.5 86.3
Net income 10.0 48.6 89.6 68.8 125.8
Earnings per common share:
Basic 0.09 0.40 0.73 0.56 1.06
Diluted 0.09 0.39 0.72 0.55 1.04
OTHER FINANCIAL AND OPERATING DATA
Percentage increase in sales 11.6% 15.2% 18.4% 25.0% 38.1%
Comparable-store sales increase (decrease) (0.4%) 0.4% 1.1% 11.0% 16.7%
End of period superstores 946 832 713 564 468
FINANCIAL POSITION
Working capital $ 469.1 $ 501.1 $ 561.5 $ 473.4 $ 499.4
Total assets 2,275.0 2,231.9 1,960.2 1,867.3 1,587.9
Total long-term debt, including capital
lease obligations 16.4 17.7 19.0 20.0 __
Shareholders' equity 1,116.0 1,138.1 1,160.6 1,063.6 990.9
(1) In order to effect the acceleration of its supply-chain management
initiative and the implementation of the Company's new warehouse
management system, the Company decided to eliminate select current
products on hand as part of its program of merchandise and vendor
rationalization. In connection with this decision, the Company recorded a
non-cash, pre-tax markdown charge of $77,372,000 during fiscal year 1999.
For the year, the charge reduced net income by $49,518,000 or $0.43 per
diluted share.
(2) In conjunction with its decision to realign the Computer Business
Segment, the Company recorded a, non-cash, pre-tax charge of $79,950,000
during fiscal year 1998. The charge reduced after-tax, net income by
$49,889,000 or $0.41 per diluted share.
(3) Net income and earnings per common share in fiscal year 1995 includes a
$69.1 million, or $0.57 per diluted share, after-tax gain from the sale
of the Company's interest in Corporate Express, Inc.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Consolidated Results
Consolidated sales in fiscal year 1999 advanced 11.6% to $4,842,698,000
from $4,337,768,000 in fiscal year 1998. This followed a 15.2% increase in
fiscal year 1998 from $3,765,444,000 in fiscal year 1997. The fiscal year 1999
increase in consolidated sales was primarily due to the full year's sales from
the 120 superstores opened during fiscal year 1998 and the additional partial
year's sales from 115 superstores opened during fiscal year 1999. Consolidated
comparable store sales decreased 0.4% during fiscal year 1999, primarily due to
a 21.9% decrease in the average selling prices of fax machines, printers and
copiers and a 31.2% comparable store sales decline experienced by the Company's
Computer Business Segment. The comparable store sales decrease experienced by
the Computer Business Segment was primarily due to a 15.2% decline in average
selling prices and less aggressive promotions. Consolidated comparable store
sales in fiscal year 1998 increased 0.4% from fiscal year 1997. The Company
opened 150 new superstores during fiscal year 1997.
Cost of merchandise sold, including buying and occupancy costs and
excluding the inventory markdown charge for item rationalization recorded during
fiscal year 1999 and the computer segment asset write-off recorded during fiscal
year 1998, decreased as a percentage of sales to 75.4% in fiscal year 1999 from
75.7% in fiscal year 1998 and 76.9% in fiscal year 1997. Correspondingly, gross
profit, excluding inventory markdown charge for item rationalization, was 24.6%
in fiscal year 1999, 24.3% excluding the computer segment asset write-off in
fiscal year 1998, and 23.1% in fiscal year 1997. The gross profit increases in
fiscal years 1999 and 1998 were primarily due to enhanced marketing of higher
margin office supply items in the Company's Core Business Segment. Including the
inventory markdown charge for item rationalization and the computer segment
asset write-off, cost of merchandise sold, including buying and occupancy costs,
was $3,731,155,000 or 77.0% of sales and $3,364,532,000 or 77.6% of sales for
fiscal years 1999 and 1998, respectively. Gross profit, including inventory
markdown charge for item rationalization and the computer segment asset
write-off was 23.0% of sales and 22.4% of sales for fiscal years 1999 and 1998,
respectively.
Store operating and selling expenses, which consist primarily of store
payroll, operating and advertising expense, increased to 19.2% of sales in
fiscal year 1999 from 17.6% of sales in fiscal year 1998 and 16.5% of sales in
fiscal year 1997. The increase in fiscal year 1999 was primarily due to costs
associated with the Company's decision to accelerate its supply-chain management
initiative. These costs include reduced income from vendor support programs and
increased costs related to the opening of the Company's PowerMax supply-chain
distribution facility in Hazelton, Pennsylvania. The Company also made a
decision to make an additional investment in payroll in order to increase
training for associates and improve customer service. The increase in fiscal
year 1998 was primarily due to the increase in the number of stores opened for
less than one year. New stores typically begin to leverage various fixed cost
components during their second or third year of operations as sales increase.
The increase in fiscal year 1998 was also attributable to costs incurred to
upgrade the Company's fleet of self-service copiers throughout all of the
Company's stores with enhanced CopyMax features.
Pre-opening expenses were $10,974,000, $11,851,000 and $15,512,000 in
fiscal years 1999, 1998 and 1997, respectively, primarily reflecting 115, 120
and 150 new superstore openings and pre-opening expenses of $1,000,000 and
$980,000 during fiscal years 1999 and 1998, respectively to open the Company's
PowerMax distribution facilities in Pennsylvania and Nevada. Pre-opening
expenses, which consist primarily of store payroll, supplies and grand opening
advertising, averaged approximately $85,000 per OfficeMax superstore during each
fiscal year presented. Pre-opening expenses increase when certain enhanced
CopyMax or FurnitureMax features are included in a superstore. During fiscal
year 1999, nine superstores were opened with enhanced CopyMax or FurnitureMax
features versus 12 and 103 superstores opened with enhanced CopyMax or
FurnitureMax features during fiscal years 1998 and 1997, respectively.
Pre-opening expenses for these enhanced features averaged approximately $30,000
per unit in the fiscal years presented.
General and administrative expenses increased as a percentage of sales to
2.7% in fiscal year 1999 from 2.3% and 2.1% in fiscal years 1998 and 1997,
respectively. This increase reflects the Company's continuing efforts to enhance
its
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infrastructure to support planned growth both in the United States and
internationally, as well as costs for consulting services supporting the
Company's supply-chain management and operating productivity improvement
initiatives. The infrastructure enhancements include efforts to strengthen the
Company's management team and the Company's information technology ("IT")
initiatives. The Company is in the process of implementing the SAP system, a
fully integrated Enterprise Resource Planning platform that will automate and
integrate many of the Company's business processes. The Company converted to the
SAP Human Resource and Finance modules during fiscal years 1998 and 1999,
respectively. During fiscal year 2000, OfficeMax expects to convert to the SAP
Retail and Merchandising System.
Goodwill amortization was $9,418,000 in fiscal year 1999 and $9,390,000 in
fiscal years 1998 and 1997. Goodwill is capitalized and amortized over 10 to 40
years using the straight-line method.
As a result of the foregoing factors, operating income for fiscal year
1999, excluding the inventory markdown charge for item rationalization, was
$109,758,000 or 2.3% of sales, as compared to operating income for fiscal year
1998, excluding the computer segment asset write-off, of $166,642,000 or 3.8% of
sales. Including the inventory markdown charge for item rationalization recorded
in fiscal year 1999 and the computer segment asset write-off recorded in fiscal
year 1998, operating income was $32,386,000 or 0.7% of sales and $86,692,000 or
2.0% of sales in fiscal year 1999 and fiscal year 1998, respectively. Operating
income was $145,917,000 or 3.9% of sales in fiscal year 1997.
Interest expense was $10,146,000 and $5,971,000 in fiscal years 1999 and
1998, respectively, as compared to interest income of $518,000 in fiscal year
1997. The increase in interest expense in fiscal years 1999 and 1998 was
primarily due to increased borrowings used to fund the Company's expansion
plans, seasonal inventory requirements and stock repurchase program. Interest
income in fiscal year 1997 was primarily due to interest earned on cash received
from the Company's July 20, 1995 public offering and the sale of its interest in
the contract stationer, Corporate Express, Inc. on September 10, 1995.
Other income (net), which consists primarily of royalty and equity income
from the Company's joint venture partnerships was $59,000 in fiscal year 1999
and $290,000 in fiscal year 1998, as compared to other expense (net) of $4,000
in fiscal year 1997. Other income (net) in fiscal year 1999 includes expense of
$1,700,000 to write-down the Company's investment in its Japanese joint venture
to its net realizable value.
Income taxes were $12,258,000 in fiscal year 1999, $32,391,000 in fiscal
year 1998 and $56,811,000 in fiscal year 1997 with effective tax rates of 55.0%,
40.0% and 38.8%, respectively. The effective tax rates for all three fiscal
years were different from the statutory income tax rate as a result of tax
exempt interest, state and local income taxes, and non-deductible goodwill
amortization expense.
As a result of the foregoing factors, net income for fiscal year 1999,
excluding the inventory markdown charge for item rationalization, was
$59,559,000 or 1.2% or sales. Net income for fiscal year 1998, excluding the
computer segment asset write-off, was $98,509,000 or 2.3% of sales. The
inventory markdown charge for item rationalization recorded during fiscal year
1999 reduced net income by $49,518,000. The computer segment asset write-off
recorded in fiscal year 1998 reduced net income by $49,889,000. Net income was
$89,620,000 in fiscal year 1997.
BUSINESS SEGMENTS
Core Business Segment
Sales for the Core Business Segment increased 13.1% to $4,518,514,000 in
fiscal year 1999 from $3,994,500,000 in fiscal year 1998. Sales for this
business segment increased 20.0% in fiscal year 1998 from $3,327,972,000 in
fiscal year 1997. The increase in fiscal year 1999 was due to the additional
stores opened in fiscal years 1999 and 1998 and a comparable-store sales
increase of 1.3%. Declines in average selling prices for fax machines, printers
and copiers reduced the Core Business Segment's comparable sales increase by
2.1%.
Cost of merchandise sold, including buying and occupancy costs and
excluding the inventory markdown charge for item rationalization, recorded
during fiscal year 1999, was 73.9% of sales in fiscal years 1999 and 1998, as
compared to 74.0% of sales in fiscal year 1997. Gross profit for the Core
Business Segment, excluding the inventory markdown
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20
charge for item rationalization, was $1,180,052,000 and $1,042,208,000 or 26.1%
of sales in fiscal years 1999 and 1998, respectively, as compared to
$864,467,000 or 26.0% of sales in fiscal year 1997. The gross profit increase in
fiscal year 1998 was primarily due to the Company's chain-wide space
reallocation program which provided for expanding the office supply merchandise
assortment by nearly 1,000 SKUs and moving these products to a more prominent
position within the store. The decline in average selling price of fax machines,
printers and copiers partially offset the gains from the space reallocation
program. Gross profit including the inventory markdown charge for item
rationalization was $1,102,680,000 or 24.4% of sales in fiscal year 1999.
Operating income for the Core Business Segment, excluding the inventory
markdown charge for item rationalization, was $154,361,000 in fiscal year 1999
compared to $183,456,000 in fiscal year 1998. The decrease in operating income
in fiscal year 1999 was primarily due to costs associated with the Company's
decision to accelerate its supply-chain management initiative. These costs
include reduced income from vendor support programs and increased costs related
to the opening of the Company's PowerMax distribution facility in Hazelton,
Pennsylvania. Operating income for the Core Business Segment, including the
inventory markdown charge was $76,989,000 in fiscal year 1999. Operating income
for this segment was $151,843,000 in fiscal year 1997.
Net income for the Core Business Segment, excluding the inventory markdown
charge for item rationalization, decreased to $88,782,000 in fiscal year 1999
from $111,684,000 in fiscal year 1998 and $95,986,000 in fiscal year 1997.
Including the inventory markdown charge for item rationalization, net income was
$39,264,000 in fiscal year 1999.
Prior to fiscal year 1999, the OfficeMax.com Segment was reported in the
Core Business Segment. All prior year Core Business Segment amounts have been
restated to reflect the separate presentation of the OfficeMax.com Segment.
Computer Business Segment
Sales for the Computer Business Segment decreased 15.7% to $284,013,000 in
fiscal year 1999 from $336,922,000 in fiscal year 1998. An average selling price
decline of 15.2% for the Computer Business Segment contributed to a 31.2%
comparable-store sales decrease in fiscal year 1999. The comparable-store sales
decrease was partially offset by the additional sales from stores opened during
fiscal years 1999 and 1998. Total sales for this business segment decreased
22.8% in fiscal year 1998 from $436,468,000 in fiscal year 1997.
Cost of merchandise sold, including buying and occupancy costs, was
$285,051,000 or 100.4% of sales in fiscal year 1999. Cost of merchandise sold,
including buying and occupancy costs and excluding the computer segment asset
write-off, was $327,590,000 or 97.2% of sales in fiscal year 1998.
Correspondingly, gross profit was a loss of $1,038,000 in fiscal year 1999, as
compared to gross profit, excluding the computer segment asset write-off of
$9,332,000 in fiscal year 1998. The decrease in gross profit in fiscal year 1999
was due to lost leverage on certain fixed components of cost of merchandise
sold. Cost of merchandise sold, including buying and occupancy costs was
$430,706,000 or 98.7% of sales in fiscal year 1997. Gross profit was $5,762,000
in fiscal year 1997. The gross profit improvement from fiscal year 1997 to
fiscal year 1998 was primarily due to the Company's decision to forgo low-margin
computer promotions compared to prior years.
In conjunction with its decision to realign the Computer Business Segment,
the Company recorded a non-cash, pre-tax charge of $79,950,000 during fiscal
year 1998. The charge accounted for the liquidation of existing, discontinued
computer inventory. In addition, the charge provided for the impairment of
prepaid expenses and other assets directly related to the Computer Business
Segment. Including the charge, cost of merchandise sold, including buying and
occupancy costs, was 121.0% of sales for fiscal year 1998.
Operating loss for the Computer Business Segment was $38,364,000 in fiscal
year 1999, as compared to an operating loss of $16,521,000 in fiscal year 1998,
excluding the computer segment asset write-off and an operating loss of
$6,161,000 in fiscal year 1997. Including the asset write-off, the operating
loss was $96,471,000 in fiscal year 1998.
Net loss for the Computer Business Segment was $25,317,000 in fiscal year
1999. Excluding the computer segment asset write-off, the net loss for this
segment was $12,987,000 in fiscal year 1998. The asset write-off increased the
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Computer Business Segment net loss by $49,889,000 in fiscal year 1998. Net loss
for the Computer Business Segment was $6,510,000 in fiscal year 1997.
During the first quarter of fiscal year 2000, the Company announced its
plans to enter into a strategic alliance with Gateway Companies Inc.,
("Gateway"). Under the terms of a master license agreement, Gateway will operate
a licensed "store-within-a-store" computer department inside all OfficeMax
superstores in the United States. The department will offer products consistent
with the Company's current Computer Business Segment, including computers,
monitors and related products and services. Accordingly, the Company plans to
phase out operations of this segment. The store-within-a-store rollout began in
March 2000 and is expected to be complete by the end of the first quarter of
fiscal year 2001. This alliance is described in greater detail in Note 15 of the
Notes to Consolidated Financial Statements.
OfficeMax.com Segment
Sales for the OfficeMax.com Segment increased 533% to $40,171,000 in
fiscal year 1999 from $6,346,000 in fiscal year 1998. The increase in fiscal
year 1999 followed another increase of 532% in fiscal year 1998 from $1,004,000
in fiscal year 1997. The sales increases for this segment are due primarily to
the Company's aggressive marketing program aimed at capturing a larger share of
the online business market, new online partnerships launched during the years
presented and an overall national increase in online business-to-business
commerce. This segment's marketing program includes a multi-media campaign that
began in the fourth quarter of fiscal year 1999.
Cost of merchandise sold including buying costs for the OfficeMax.com
Segment was $30,270,000 or 75.4% of sales in fiscal year 1999, $4,700,000 or
74.1% of sales in fiscal year 1998 and $873,000 or 87.0% of sales in fiscal year
1997. Gross profit for the OfficeMax.com Segment was $9,901,000 or 24.6% of
sales in fiscal year 1999, $1,646,000 or 25.9% of sales in fiscal year 1998 and
$131,000 or 13.0% of sales in fiscal year 1997. The decrease in gross profit as
a percentage of sales for fiscal year 1999 was due primarily to a shift in sales
mix towards lower margin paper products. The increase in gross profit in fiscal
year 1998 was due primarily to improved leverage of certain costs and enhanced
marketing of the Company's higher margin office supply and furniture
merchandise.
Operating income for the OfficeMax.com Segment was a loss of $6,239,000 in
fiscal year 1999 and $293,000 in fiscal year 1998, as compared to operating
income of $235,000 in fiscal year 1997. The net operating losses in fiscal years
1999 and 1998 were primarily due to the segment's aggressive advertising and
marketing program focused on customer acquisition in the small business market
space.
Net income for the OfficeMax.com Segment was a loss of $3,906,000 in
fiscal year 1999 and $188,000 in fiscal year 1998 versus net income of $144,000
in fiscal year 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities generated $267,946,000 of cash
during fiscal year 1999, which is an increase of $236,935,000 over the prior
fiscal year. A decrease in accounts receivable and improved leverage of
inventory and accounts payable were the primary source of the year-over-year
increase. Inventory increased only $838,000 during fiscal year 1999 despite
adding inventory for 114 net new superstores, three OfficeMax PDQ stores, two
delivery centers and the Company's second PowerMax distribution facility.
Same-store inventory levels decreased approximately 5% in fiscal year 1999,
excluding the effects of the inventory markdown for item rationalization.
Further, accounts payable leverage as a percentage of inventory increased to 55%
at January 22, 2000 from 50% at January 23, 1999. The decrease in
comparable-store inventory and the improvement in accounts payable leverage are
primarily due to the Company's supply-chain management initiatives. Net cash
used by operations was $93,635,000 in fiscal year 1997.
Net cash used for investing activities, primarily capital expenditures for
new and remodeled superstores, was $111,744,000 in fiscal year 1999 as compared
to $125,063,000 in fiscal year 1998 and $103,217,000 in fiscal year 1997.
Capital expenditures were $117,154,000, $120,760,000 and $125,804,000 in fiscal
years 1999, 1998 and 1997, respectively.
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Net cash used by financing was $150,597,000 in fiscal year 1999. Current
year financing activities primarily represent a decrease in outstanding
borrowings under the Company's revolving credit facility, a decrease in
overdraft balances and the payment of $34,841,000 for treasury stock purchases.
Additionally, the Company made advanced payments for leased facilities of
$21,237,000 during fiscal year 1999. Net cash provided by financing was
$94,733,000 and $5,542,000 during fiscal year 1998 and fiscal year 1997,
respectively. Fiscal year 1998 financing activities primarily represent
borrowing under the Company's revolving credit facility, partially offset by the
payment of $77,499,000 for treasury stock purchases.
In fiscal year 2000, the Company plans to open approximately 50 to 75 new
OfficeMax superstores and an additional distribution facility in the United
States and continue to test the OfficeMax PDQ concept. The Company also expects
to remodel approximately 20 existing superstores. Management estimates that the
Company's cash requirements for opening or remodeling a superstore, exclusive of
pre-opening expenses, will be approximately $1,075,000 and $210,000,
respectively. For an OfficeMax superstore, the requirements include an average
of approximately $425,000 for leasehold improvements, fixtures, point-of-sale
terminals and other equipment, and approximately $650,000 for the portion of
store inventory that is not financed by accounts payable to vendors. Pre-opening
expenses are expected to average approximately $90,000 for an OfficeMax
superstore. In select cases, that average is expected to increase by
approximately $30,000 when certain enhanced CopyMax or FurnitureMax features are
included.
On August 13, 1998, the Company's Board of Directors authorized the Company
to repurchase up to $200,000,000 of its common shares on the open market,
doubling its previous authorization. At the end of fiscal year 1999, the Company
had purchased a total of 12,702,100 shares at a cost of $113,619,000. This
included systematic purchases of shares to cover potential dilution from the
future issuance of shares under the Company's equity-based incentive plans.
Future purchases of common shares are limited, by financial covenants related to
the Company's revolving credit facility, to purchases to satisfy the Company's
obligation under its equity-based incentive plans.
The Company is a party to litigation it initiated in October 1997 in the
United States District Court for the Northern District of Ohio against Ryder
arising out of Ryder's failure to fulfill certain payment guarantees pursuant to
the terms of the Company's logistics service agreement with Ryder. The Company
terminated the logistics service agreement in June 1997 based on numerous claims
against Ryder under the agreement including, among others, Ryder's refusal to
honor its cost guarantees and its failure to return overpayments to the Company.
During the course of the agreement, the Company recorded receivables from Ryder
of approximately $19,000,000 representing overpayments due from Ryder pursuant
to the terms of the agreement. In January 1998, Ryder filed a counterclaim
against the Company alleging damages arising from the Company's termination of
the agreement in the amount of approximately $75,000,000. The Company believes
the counterclaim is without merit and continues to vigorously defend against
such counterclaim.
Management is of the opinion that, although the ultimate resolution of the
Ryder litigation cannot be forecasted with certainty, final disposition of this
matter should not materially affect the Company's liquidity, financial position
or results of operations. However, in the event of an unanticipated adverse
final determination in this matter, the Company's consolidated net income for
the period in which such determination occurs could be materially affected.
In addition, there are various claims, lawsuits and pending actions against
the Company incident to the Company's operations. It is the opinion of
management that the ultimate resolution of these matters will not have a
material effect on the Company's liquidity, financial position or results of
operations.
The Company expects its funds generated from operations as well as its
current cash reserves, and, when necessary, seasonal short-term borrowings will
be sufficient to finance its retail operations and capital requirements. In
December 1999, the Company's Board of Directors authorized the Company to
explore alternative capital structures for its eCommerce business,
OfficeMax.com. The Company is evaluating various alternatives including a sale
of shares tracking its OfficeMax.com business. The Company's marketing and
expansion plans for OfficeMax.com could be limited if it is unable to obtain
additional equity.
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During the first quarter of fiscal year 2000, the Company amended its
revolving credit facility. The Company now has a $400,000,000 revolving credit
facility available through June 2002, under which $91,800,000 of borrowings were
outstanding as of January 22, 2000. In addition, the Company has uncommitted
bank lines of credit of up to $30,000,000. There were no borrowings outstanding
under these uncommitted bank lines as of January 22, 2000.
SEASONALITY AND INFLATION
The Company's business is seasonal with sales and operating income higher
in the third and fourth quarters, which include the Back-to-School period and
the holiday selling season, respectively, followed by the traditional new year
office supply restocking month of January. Sales in the second quarter's summer
months are historically the slowest of the year primarily because of lower
office supplies consumption during the summer vacation period. Management
believes inflation has not had a material effect on the Company's financial
condition or operating results for the periods presented and, in fact, has
experienced deflation for items such as fax machines, printers, copiers and
computers.
YEAR 2000 READINESS
The Company completed its company-wide project to prepare its business for
the change in date from 1999 to 2000. The Company has not experienced any
significant business interruptions related to the Year 2000 issue. In addition,
the Company is not aware of any significant Year 2000 business interruptions
experienced by key third parties, including product or service providers or
financial institutions. The total cost of the project was approximately
$5,000,000, including internal costs, third-party consultants involved in the
project and software costs. All costs and expenses incurred to address the Year
2000 issue were charged against income on a current basis. These costs did not
have a material adverse effect on the Company's operating results, financial
condition or cash flows.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("FAS
133") which is required to be adopted in fiscal years beginning after June 15,
2000. Due to the Company's minimal use of derivatives, management does not
anticipate that the adoption of the new Statement will have a significant effect
on earnings or the financial position of the Company.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, principally interest rate risk and
foreign exchange risk.
Interest earned on the Company's cash equivalents and short-term
investments, as well as interest paid on its debt and lease obligations, are
sensitive to changes in interest rates. The interest rate for the Company's
revolving credit facility is variable, while the Company's long-term debt and
the interest component of its operating leases is generally fixed. The Company
manages its interest rate risk by maintaining a combination of fixed and
variable rate debt. The Company believes its potential exposure to interest rate
risk is not material to the Company's financial position or the results of its
operations.
The Company is exposed to foreign currency exchange risk through its joint
venture partnerships in Brazil, Japan and Mexico. The Company has not entered
into any derivative financial instruments to hedge this exposure, and believes
its potential exposure is not material to the Company's financial position or
the results of its operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements on page F-1.
Supplementary quarterly financial information for the Company is included in
Note 13 of Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
The Company's Board of Directors (the "Board") currently consists of seven
members, divided into one class of three members and one class of four members.
Listed below is the name of each person currently serving as a Director of
the Company, each Director's age, his or her principal occupation, membership on
the board of directors of other public companies (which is shown
parenthetically), the year in which he or she first became a Director of the
Company and the year in which each Director's term as a Director will expire:
TERM EXPIRING IN 2000
DIRECTOR TERM
NAME AGE PRINCIPAL OCCUPATION (1) SINCE EXPIRES
- ---- --- ------------------------ ----- -------
Burnett W. Donoho 60 Chairman and Chief Executive Officer 1995 2000
of Wellbridge (fka Club Sports International),
a privately held group of upscale health clubs
and spas; former Vice Chairman, Chief Operating
Officer of Macy's East, a chain of 60 department
stores and a then division of
R.H. Macy & Co., Inc.; former Vice Chairman
and Chief Operating Officer of Montgomery
Ward & Co., Inc., a major retailer (Gtech Corporation)
James F. McCann 48 President of 1-800-FLOWERS.com, Inc., a national retail 1996 2000
florist (Gateway, Inc. and Petco Animal
Supplies, Inc.)
Sydell L. Miller 62 Private investor and consultant; former Chairman 1994 2000
of the Board and Chief Executive Officer of
Matrix Essentials, Inc., a subsidiary of Bristol-
Myers Squibb Company
Ivan J. Winfield 66 Retired Managing Partner of Coopers & Lybrand; 1998 2000
currently Associate Professor at Baldwin-Wallace
College, Cleveland, Ohio; and Business Consultant
(Boykin Lodging Co., HMI Industries, Inc., Rainbow
Rentals, Inc.)
TERM EXPIRING IN 2001
DIRECTOR TERM
NAME AGE PRINCIPAL OCCUPATION (1) SINCE EXPIRES
- ---- --- ------------------------ ----- -------
Raymond L. Bank 46 President and Chief Operating Officer of 1994 2001
Merchant Development Corporation, a venture
capital and buy-out firm focusing on
consumer retail, direct marketing and
service companies (Regency Realty, Inc.)
Michael Feuer 55 Chairman and Chief Executive Officer of the Company 1988 2001
Carl D. Glickman 73 President, The Glickman Organization, private 1995 2001
investing (The Bear Stearns Companies, Inc.,
Alliance Tire & Rubber Company Ltd., Jerusalem
Economic Corporation Ltd., Lexington Corporate
Properties Trust)
(1) Each of the foregoing, except Ms. Miller and Messrs. Bank, Donoho and
Winfield, either has had the positions shown or has had other executive
positions with the same employer for more than five years. Ms. Miller
has been a private investor and consultant since September 1995. Prior
to September 1995, Ms. Miller served as Chairman of the Board and Chief
Executive Officer of Matrix Essentials, Inc., a manufacturer of
professional hair care, skin
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care and cosmetic products and a subsidiary of Bristol-Myers Squibb
Company. Mr. Bank also served as a Director of the Company from May
1990 until the acquisition by Kmart Corporation of 92.7% of the Company
in November 1991. For approximately 11 months in 1997, Mr. Donoho
served as Vice Chairman and Chief Operating Officer of Montgomery Ward
& Co., Inc. Mr. Donoho was an independent retail consultant from
January 1995 to February 1997. Mr. Donoho served as Vice Chairman,
Chief Operating Officer of Macy's East, a chain of 60 department stores
and a then division of R.H. Macy & Co., Inc. from July 1992 until
December 1994. Mr. Winfield has held his current position since
September 1995. From 1970 until October 1994, Mr. Winfield was a
partner with the accounting firm of Coopers & Lybrand. Mr. Winfield
served as a Managing Partner of Coopers & Lybrand from July 1978 to
October 1994.
How often did the Board meet during fiscal year 1999?
During the fiscal year ended January 22, 2000, the Board held five
meetings. Each Director attended at least 75% of the meetings of the Board and
committees on which he or she served.
What committees has the Board established?
Audit Committee. Messrs. Bank (Chairman), Donoho, Glickman and Winfield
are the current members of the Board's Audit Committee, which is empowered to
exercise all powers and authority of the Board with respect to the Company's
annual audit, accounting policies, financial reporting and internal controls.
The Audit Committee met twice and consulted informally on other occasions during
the last fiscal year.
Compensation Committee. Messrs. Glickman (Chairman) and Bank and Ms.
Miller are the current members of the Board's Compensation Committee (the
"Compensation Committee"), which is empowered to exercise all powers and
authority of the Board with respect to compensation of the officers of the
Company. The Compensation Committee met three times and consulted informally on
other occasions during the last fiscal year.
The Board does not have a nominating committee.
How are Directors compensated?
Directors who are not officers or employees of the Company receive an
annual retainer fee of $25,000 payable in restricted common shares of the
Company, and a fee of $1,000 for each quarterly meeting of the Board attended
and a fee of $500 for each Committee meeting of the Board attended, each of
which is payable in common shares of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee is or has been an
officer or employee of the Company.
EXECUTIVE OFFICERS
Listed below are the names, positions and ages of the executive
officers of the Company as of April 10, 2000. Each executive officer will serve
until his successor is elected by the Board of Directors or until his earlier
resignation or removal.
NAME POSITION AGE
---- -------- ---
Michael Feuer Chairman of the Board and 55
Chief Executive Officer
Gary J. Peterson President, Chief Operating Officer 49
Jeffrey L. Rutherford Senior Executive Vice President, 39
Chief Financial Officer
Edward L. Cornell Executive Vice President, Non-Retail 51
Stores and International Development
Harold L. Mulet Executive Vice President, 48
Retail Sales and Store Productivity
Eugene O'Donnell Executive Vice President, 53
Merchandising and Marketing
Mark L. Race Executive Vice President, Store Planning, 51
Real Estate and Project Development
Ross H. Pollock Senior Vice President, General 44
Counsel and Secretary
Mr. Feuer is the Company's co-founder, Chairman of the Board and Chief
Executive Officer. He has served as a Director of the Company since its
inception in April 1988. Prior to becoming Chairman in March 1995, Mr. Feuer
served as President. From May 1970 through March 1988, Mr. Feuer was associated
with Jo-Ann Stores, Inc. (formerly Fabri-Centers of America, Inc.), a publicly
held, New York Stock Exchange-listed, national retail chain which then had over
600 stores. In his most recent capacity prior to his departure from
Fabri-Centers, Mr. Feuer served as Senior Vice President and a member of that
company's executive committee.
Mr. Peterson has served as the President, Chief Operating Officer of
the Company since March 2000. From July 1996 to February 2000, Mr. Peterson
served as an executive officer and COO of Blockbuster Entertainment, the world's
largest operator of video stores with over 4,000 locations worldwide. From
August 1993 to July 1996, Mr. Peterson served as Chief Operating Officer of
Southeast Frozen Foods L.P., a distributor to retail grocery stores. Mr.
Peterson has also held various management positions with Wal-Mart Stores, Inc.,
Carter Hawley Hale Department Stores and Thrifty Drug Stores.
Mr. Rutherford has been associated with the Company for three years,
currently serving as Senior Executive Vice President, Chief Financial Officer of
the Company since November 1999. From March 1998 to November 1999, Mr.
Rutherford served as Executive Vice President, Chief Financial Officer of the
Company. From June 1997 to March 1998, Mr. Rutherford served as Senior Vice
President, Chief Financial Officer of the Company. From February 1997 to June
1997, Mr. Rutherford served as Senior Vice President, Finance and Treasurer of
the Company. From January 1984 to January 1997, Mr. Rutherford was associated
with Arthur Andersen LLP, a large public accounting firm.
Mr. Cornell has served as Executive Vice President, Non-Retail Stores
and International Development of the Company since December 1995. From February
1993 to December 1995, Mr. Cornell served as Executive Vice President, Chief
Financial Officer of the Company. From February 1992 to February 1993, Mr.
Cornell served as Senior Vice President and Chief Financial Officer of the
Company. From March 1983 to February 1992, Mr. Cornell was employed by Things
Remembered, a specialty retail subsidiary of Cole National Corporation, serving
most recently as Executive Vice President and Chief Financial Officer. Mr.
Cornell has also held various management positions with Wal-Mart Stores, Inc.
and Zayre Corporation.
Mr. Mulet has served as Executive Vice President, Retail Sales and
Store Productivity of the Company since May 1999. From August 1995 to May 1999,
Mr. Mulet served as Senior Vice President, Stores at Service Merchandise
Company. Prior to August 1995, Mr. Mulet served as Regional Vice President of
Target Corporation.
Mr. O'Donnell has served as Executive Vice President, Merchandising and
Marketing of the Company since September 1999. From July 1997 to June 1999, Mr.
O'Donnell served as an Executive Vice President at TruServ Corporation (a
hardware co-op formed by the merger of ServiStar and True Value). Prior to July
1997, Mr. O'Donnell served as an Executive Vice President of ServiStar.
Mr. Race has served as Executive Vice President, Store Planning, Real
Estate and Project Development of the Company since March 2000. From April 1996
to March 2000, Mr. Race served as Senior Vice President, Store Planning and
Project Development of the Company. From September 1992 to April 1996, Mr. Race
served as Vice President, Store Planning of the Company.
Mr. Pollock has served as Senior Vice President, General Counsel and
Secretary of the Company since March 1998. From January 1997 to March 1998, Mr.
Pollock served as Vice President, General Counsel and Secretary of the Company.
From September 1988 to December 1996, Mr. Pollock practiced law with the law
firm of Benesch, Friedlander, Coplan & Aronoff in its Cleveland, Ohio office.
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ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- AWARDS
------- ALL
RESTRICTED SECURITIES OTHER
STOCK UNDERLYING COMPEN-
NAME AND FISCAL SALARY BONUS AWARDS OPTIONS SATION
PRINCIPAL POSITION YEAR(1) ($) ($) ($)(2) (#) ($)(3)
- ------------------ ------- --- --- ------ --- ------
Michael Feuer 1999 $950,000 $475,000 $(4,530) 400,000 $1,965
Chairman and 1998 $950,000 $712,500 $73,101 700,000 $5,000
Chief Executive Officer 1997 $851,923 $712,000 -- 300,000 $4,750
Jeffrey L. Rutherford 1999 $306,154 $78,542 $(4,034) 175,000 $23,602
Senior Executive Vice
President 1998 $253,462 $126,880 $41,143 275,000 --
Chief Financial Officer 1997 $158,173 $80,150 -- 75,000 --
Edward L. Cornell 1999 $300,445 -- $(855) 75,000 $1,600
Executive Vice President 1998 $274,785 $134,493 $11,222 125,000 $2,128
Non-Retail Stores and 1997 $259,998 $87,450 -- 50,000 $2,256
International Development
Robert S. Islinger (4) 1999 $275,000 $57,475 -- 150,000 --
Senior Vice President 1998 $31,731 -- -- -- --
Marketing and Advertising 1997 -- -- -- -- --
Harold L. Mulet (5) 1999 $249,039 $79,476 -- 200,000 --
Executive Vice President 1998 -- -- -- -- --
Retail Sales and Store
Productivity 1997 -- -- -- -- --
(1) Includes compensation earned, awarded or paid for the fiscal years
ended January 22, 2000 (fiscal 1999), January 23, 1999 (fiscal 1998)
and January 24, 1998 (fiscal 1997), respectively.
(2) Amounts shown reflect the difference between the closing market price
for the common shares on the date of purchase and the purchase price
paid by each of the named executive officers for the purchase of
restricted shares under the Company's Management Share Purchase Plan.
Amounts for fiscal year 1999 were negative. The aggregate restricted
share holdings and values (net of consideration paid) at January 22,
2000 for the named executive officers are as follows: (i) Mr. Feuer--
44,323 shares, $(184,856); (ii) Mr. Rutherford-- 21,674 shares,
$(63,473); (iii) Mr. Cornell-- 5,201 shares, $(15,499); (iv) Mr.
Islinger -- no shares, $(0); and (v) Mr. Mulet -- no shares, $(0). With
respect to the restricted shares so purchased, if employment is
terminated by the executive (other than as a result of death,
disability or retirement after age 65) or if employment is terminated
by the Company for "cause" before the third anniversary of the purchase
date, the executive will receive unrestricted shares having a value
equal to the lesser of the current fair market value for the common
shares or the price paid initially for such restricted shares. If the
executive's employment is terminated by the Company without cause
before the third anniversary of the purchase date, the executive will
receive unrestricted shares, having a value equal to (i) the then
current fair market value of a percentage of the restricted shares
(based on the number of months of employment completed during the
restricted period), plus (ii) as to the balance of the restricted
shares the lesser in value of the restricted shares at their current
fair market value or the price paid initially for such restricted
shares. Dividends, if any, will be paid on restricted shares at the
same rate as common shares.
(3) The Company provides the named executive officers with certain group
life, health, medical and other non-cash benefits generally available
to all salaried employees and not included in this column pursuant to
SEC rules. The amounts shown in this column for fiscal year 1999
include the following: (a) matching contributions by the Company under
the OfficeMax 401(k) Savings Plan and the OfficeMax Executive Savings
Deferral Plan for Messrs. Feuer and Cornell, all of which are invested
in common shares of the Company (Messrs. Rutherford, Islinger and Mulet
did not participate in the plans); and (b) forgiveness of a portion of
the principal and accrued interest on a collateralized loan provided to
Mr. Rutherford.
(4) Mr. Islinger joined the Company in December 1998.
(5) Mr. Mulet joined the Company in May 1999.
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OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS(1)
--------------------
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES
NUMBER OF TOTAL OPTIONS OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM(4)
OPTIONS IN FISCAL PRICE EXPIRATION -------------
NAME GRANTED(#) YEAR(3) ($/SHARE) DATE 5%($) 10%($)
---- ---------- ------- --------- ---- ----- ------
MICHAEL FEUER 400,000(1) 10.4% $7.5625 8/31/09 $1,902,406 $4,821,071
JEFFREY L. RUTHERFORD 175,000(1) 4.6% $7.5625 8/31/09 $832,303 $2,109,219
EDWARD L. CORNELL 75,000(1) 2.0% $7.5625 8/31/09 $356,701 $903,951
ROBERT S. ISLINGER 75,000(2) 3.9% $8.6875 3/3/09 $409,764 $1,038,423
75,000(1) $7.5625 8/31/09 $356,701 $903,951
HAROLD L. MULET 100,000(1) 5.2% $10.1875 5/10/09 $640,686 $1,623,625
100,000(1) $7.5625 8/31/09 $475,602 $1,205,268
(1) These options vest 50% on the second anniversary of the date of grant,
plus an additional 25% on each of the third and fourth anniversary of
the date of grant. The options are transferable to members of the
executive's family, to a trust or trusts for the benefit of members of
the executive's family or to a partnership or partnerships of members
of the executive's family.
(2) These options vest 25% per year beginning on March 3, 2001.
(3) Based on approximately 3.85 million options granted to all employees
during the fiscal year ended January 22, 2000.
(4) The dollar amounts under these columns are the result of the
calculations at the 5% and 10% rates set by the Securities and Exchange
Commission and, therefore, are not intended to forecast possible future
appreciation, if any, of the Company's stock price.
AGGREGATED OPTION EXERCISES DURING FISCAL 1999
AND FISCAL YEAR-END OPTION VALUES
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES JANUARY 22, 2000 JANUARY 22, 2000(1)
ACQUIRED ---------------- -------------------
ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
- ---- -------- -------- ------------- -------------
Michael Feuer -- -- 1,482,916/1,400,000 $0/$0
Jeffrey L. Rutherford -- -- 50,000/475,000 $0/$0
Edward L. Cornell -- -- 225,463/357,167 $313,460/$0
Robert S. Islinger -- -- 0/150,000 $0/$0
Harold L. Mulet -- -- 0/200,000 $0/$0
(1) The value of unexercised in-the-money options is based on the
difference between the fair market value of the Company's common shares
on January 22, 2000 ($6.625) and the option exercise price.
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EMPLOYMENT AGREEMENT WITH MICHAEL FEUER
The Company and Mr. Feuer executed an Amended and Restated Employment
Agreement on January 3, 2000 (the "Employment Agreement"). The Employment
Agreement provides for the employment of Mr. Feuer on a rolling five-year
"evergreen" basis. Mr. Feuer's current salary is $950,000 per year and is
subject to increase at the discretion of the Compensation Committee.
If Mr. Feuer's employment is terminated for any reason (other than for
"cause" or death), Mr. Feuer is entitled to payment of his base salary and bonus
amounts equal to the highest bonus compensation paid or payable to him in
respect of the three fiscal years immediately preceding the fiscal year during
which such termination occurred, plus continuation of all other rights and
benefits, for the remainder of the term. The Employment Agreement also provides
for the payment of a "gross-up" payment with respect to excise taxes on the
foregoing payments. "Cause" is defined as fraud, commission of a felony or act
that results in material injury to the business reputation of the Company,
willful and repeated failure to perform duties under the Employment Agreement or
material breach of the agreement.
In the event of a material change in Mr. Feuer's position, duties or
reporting relationship or a "change in control" of the Company, Mr. Feuer is
entitled to terminate the agreement and to treat the termination as a
termination by the Company without cause. "Change in control," as defined in the
Employment Agreement, may occur when any person or group of commonly controlled
persons controls 30% or more of the Company or any transaction results in a
change in ownership of 30% or more of the outstanding common shares or a sale or
disposition of all, or substantially all, of the Company's assets.
The Employment Agreement also contains provisions prohibiting Mr. Feuer
from competing with the Company, soliciting or hiring officers of the Company or
disclosing confidential information of the Company during the term of the
agreement, including any periods during which he is not providing services but
is receiving salary and bonus payments under the agreement.
SEVERANCE AGREEMENTS WITH OTHER KEY EXECUTIVES
To ensure continuity and the continued dedication of key executives during
any period of uncertainty caused by the possible threat of a takeover, the
Company has entered into severance agreements with certain key executives,
including each of the executive officers named in the Summary Compensation Table
(other than Mr. Feuer). In the event there is a Change in Control (as that term
is defined in the agreements) of the Company and the employment of the executive
terminates under certain conditions described in the agreements at any time
during the 24 months following the Change in Control, the executive will
continue to receive the executive's monthly base pay for an agreed upon amount
of time. Each agreement also contains a covenant by the executive not to compete
with the Company for 12 months following termination of employment. If an
executive violates the covenant not to compete, the executive is no longer
entitled to receive the monthly severance payments described below.
For Messrs. Rutherford and Mulet, the severance agreements provide that
upon termination of employment by the Company (other than for Cause or
Disability (as such terms are defined in the agreements)) or by the executive
for Good Reason (as defined in the agreements), they will continue to receive
their monthly base salary as of such date for (i) 24 months if such termination
occurs within 24 months following a Change in Control or (ii) 12 months if such
termination does not occur within 24 months of a Change in Control.
For Messrs. Cornell and Islinger, the severance agreement provides that
upon termination of employment by the Company (other than for Cause or
Disability) or by the executive for Good Reason within 24 months following a
Change in Control, he will continue to receive his monthly base salary as of
such date for 12 months.
-29-
30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Except as set forth below, the Company knows of no single person or
group that is the beneficial owner of more than 5% of the Company's common
shares.
NUMBER OF
COMMON SHARES
NAME AND ADDRESS BENEFICIALLY PERCENT
OF BENEFICIAL OWNER OWNED OF CLASS
- ------------------- ----- --------
Orient Star Holdings LLC 9,400,000(1) 8.3%
1000 Louisiana Street
Suite 565
Houston, TX 77002
Mellon Financial Corporation
c/o Mellon Financial Corporation 6,482,004(2) 5.8%
One Mellon Center
Pittsburgh, PA 15258
(1) Based on information obtained from a Schedule 13G filed on January 18,
2000, by the following: Carlos Slim Helu, Carlos Slim Domit, Marco
Antonio Slim Domit, Patrick Slim Domit, Maria Soumaya Slim Domit,
Vanessa Paola Slim Domit, Johanna Monique Slim Domit, Inmobiliaria
Carso, S.A. do C.V., a Mexican corporation, and Orient Star Holdings
LLC, a Delaware limited liability company.
(2) Based on information obtained from a Schedule 13G filed on January 27,
2000, by Mellon Financial Corporation, Boston Group Holdings, Inc., and
The Boston Company, Inc.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as to each Director, each executive officer
named in the Summary Compensation Table and the Directors and executive officers
as a group, information regarding the amount and nature of common shares
beneficially owned (unless otherwise indicated) at April 10, 2000.
NUMBER OF
COMMON SHARES ACQUIRABLE
BENEFICIALLY WITHIN 60 PERCENT OF SHARES
NAME OWNED (1)(2) DAYS (3) OUTSTANDING
- ---- ------------ -------- -----------
Michael Feuer 2,419,220 1,682,916 3.6%
Carl D. Glickman 65,547 -- *
Sydell L. Miller 38,954 -- *
James F. McCann 33,404 -- *
Burnett W. Donoho 20,568 -- *
Raymond L. Bank 20,515 -- *
Ivan J. Winfield 10,523 -- *
Jeffrey L. Rutherford 21,924 90,625 *
Edward L. Cornell 58,988 254,630 *
Harold L. Mulet 19,000 -- *
Robert S. Islinger 46 -- *
All executive officers and directors
as a group (15 persons) 2,737,511 2,219,204 4.4%
* Less than 1%.
-30-
31
(1) The number of shares shown includes shares that are individually or
jointly owned, as well as shares over which the individual has either
sole or shared investment or voting authority. Certain of the Company's
executive officers disclaim beneficial ownership of some of the shares
included in the table as follows:
- Mr. Feuer - 3,225 shares owned by a trust for the
benefit of Mr. Feuer's son and 3,000 shares owned by
a trust for the benefit of Mr. Feuer's daughter, as
to each of which trust Mr. Feuer's wife is the
trustee, and 1,500 shares owned directly by his wife.
(2) For executive officers, includes interests in the Company's 401(k)
Plan: Mr. Feuer - 1,053 shares; Mr. Cornell - 642 shares; Mr. Islinger
- 46 shares; and all current executive officers as a group 2,834
shares.
(3) Reflects the number of shares that could be purchased by exercise of
options available at March 27, 2000 or within 60 days thereafter under
the Company's Equity-Based Award Plan.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and Directors to file reports of beneficial
ownership and changes in beneficial ownership with the SEC and the New York
Stock Exchange. The Company believes that during fiscal year 1999, its executive
officers and Directors complied with the applicable Section 16(a) reporting
requirements. This conclusion is based solely on a review of filing with the SEC
and certain written representations received by the Company from its executive
officers and Directors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In fiscal year 1999, the Company provided a $100,000 collateralized loan
to Harold Mulet, Executive Vice President, Retail Stores and Store Productivity,
in connection with his acquisition of 19,000 common shares of the Company.
Interest is charged on the loan at the federal short-term interest rate
published by the Internal Revenue Service. As of April 10, 2000, the outstanding
principal amount of Mr. Mulet's loan was $100,000.
-31-
32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements:
See Index to Consolidated Financial Statements on page F-1.
(a)(2) Financial Statement Schedules:
None
(a)(3) Exhibits:
See Exhibit Index on pages 34 and 35 of this report.
(b) Reports on Form 8-K:
None
-32-
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OFFICEMAX, INC.
DATE: April 21, 2000 By: /s/ Michael Feuer
-------------------
Michael Feuer, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
/s/ Michael Feuer Chairman and Chief April 21, 2000
- ------------------ Executive Officer and Director
Michael Feuer (Principal Executive Officer)
/s/ Jeffrey L. Rutherford Senior Executive Vice President, April 21, 2000
- -------------------------- Chief Financial Officer (Principal
Jeffrey L. Rutherford Financial and Accounting Officer)
/s/ Raymond L. Bank Director April 21, 2000
- -------------------
Raymond L. Bank
/s/ Burnett W. Donoho Director April 21, 2000
- ----------------------
Burnett W. Donoho
/s/ Carl D. Glickman Director April 21, 2000
- ---------------------
Carl D. Glickman
/s/ James F. McCann Director April 21, 2000
- -------------------
James F. McCann
/s/ Sydell L. Miller Director April 21, 2000
- --------------------
Sydell L. Miller
/s/ Ivan J. Winfield Director April 21, 2000
- --------------------
Ivan J. Winfield
-33-
34
EXHIBIT INDEX
Incorporation
Exhibit No. Description of Exhibit by Reference
- ----------- ---------------------- ------------
3.1 Second Amended and Restated Articles of Incorporation of the Company, as amended (filed
herewith).
3.2 Code of Regulations of the Company. (3)
4.1 Specimen Certificate for the Common Shares. (1)
4.2 Rights Agreement dated as of March 17, 2000 between the Company and First Chicago Trust (7)
Company of New York, as Rights Agent.
10.1 Credit Agreement dated as of July 3, 1997 by and among the Company, the lenders party (5)
thereto, the co-agents party thereto, KeyBank National Association, as documentation
agent, and The Bank of New York, as administrative agent and as swing line lender.
10.2 Amendment to the Credit Agreement (filed herewith).
10.3 Mortgage Loan Agreement dated November 6, 1996 by and between the Company and KeyBank (4)
National Association.
10.4 Amended and Restated Employment Agreement dated as of January 2, 2000 by and between
Michael Feuer and the Company (filed herewith).
* 10.5 OfficeMax Employee Share Purchase Plan. (1)
* 10.6 OfficeMax Management Share Purchase Plan. (1)
* 10.7 OfficeMax Director Share Plan. (1)
* 10.8 OfficeMax Amended and Restated Equity-Based Award Plan. (6)
* 10.9 OfficeMax Annual Incentive Bonus Plan. (6)
10.10 Year 2000 Equity Incentive Plan (filed herewith).
10.11 Lease Guaranty, Indemnification and Reimbursement Agreement dated November 9, 1994 (2)
between the Company and Kmart Corporation.
10.12 Forms of Severance Agreements (filed herewith).
10.13 Schedule of certain executive officers who are parties to the Severance Agreements in
the forms referred to in Exhibit 10.12 (filed herewith).
21.1 List of Subsidiaries (filed herewith).
23 Consent of Independent Accountants (filed herewith).
27.1 Financial Data Schedule for fiscal year ended January 22, 2000 (filed herewith).
99.1 Statement Regarding Forward Looking Information (filed herewith).
-34-
35
(1) Included as an exhibit to the Company's Registration Statement on Form S-1
(No. 33-83528) and incorporated herein by reference.
(2) Included as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended October 22, 1994, and incorporated herein by reference.
(3) Included as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended January 21, 1995, and incorporated herein by reference.
(4) Included as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended January 25, 1997, and incorporated herein by reference.
(5) Included as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended October 25, 1997, and incorporated herein by reference.
(6) Included as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended January 24, 1998, and incorporated herein by reference.
(7) Included as an exhibit to the Company's Form 8-A filed on March 20, 2000,
and incorporated herein by reference.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
-35-
36
OFFICEMAX, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Management F - 2
Report of Independent Accountants F - 2
Consolidated Statements of Income - Fiscal years ended January 22, 2000,
January 23, 1999 and January 24, 1998 F - 3
Consolidated Balance Sheets - January 22, 2000 and January 23, 1999 F - 4
Consolidated Statements of Cash Flows - Fiscal years ended January 22,
2000, January 23, 1999 and January 24, 1998 F - 5
Consolidated Statements of Changes in Shareholders' Equity - Fiscal
years ended January 22, 2000, January 23, 1999 and January 24, F - 6
1998
Notes to Consolidated Financial Statements F - 7
37
REPORT OF MANAGEMENT
Responsibility for the integrity and objectivity of the financial
information presented in this Annual Report on Form 10-K rests with OfficeMax
management. The financial statements of OfficeMax, Inc. and its subsidiaries
were prepared in conformity with accounting principles generally accepted in the
United States, applying certain estimates and judgements as required.
OfficeMax has established and maintains a system of internal controls
designed to provide reasonable assurance that the books and records reflect the
transactions of the Company and that its established policies and procedures are
carefully followed. This system is based on written procedures, policies and
guidelines, organizational structures that provide an appropriate division of
responsibility, a program of internal audit and the careful selection and
training of qualified personnel.
PricewaterhouseCoopers LLP, independent accountants, examined the
financial statements and their report is presented below. Their opinion is based
on an examination which provides an independent, objective review of the way
OfficeMax fulfills its responsibility to publish statements which present fairly
its financial position and operating results. They obtain and maintain an
understanding of the Company's accounting and reporting controls, test
transactions and perform related auditing procedures as they consider necessary
to arrive at an opinion on the fairness of the financial statements. While the
independent accountants make extensive reviews of procedures, it is neither
practicable nor necessary for them to test a large portion of the daily
transactions.
The Board of Directors pursues its oversight responsibility for the
financial statements through its Audit Committee, composed of Directors who are
not associates of the Company. The Committee meets periodically with the
independent accountants, representatives of management and internal auditors to
assure that all are carrying out their responsibilities. To assure independence,
PricewaterhouseCoopers and the internal auditors have full and free access to
the Audit Committee, without Company representatives present, to discuss the
results of their examinations and their opinions on the adequacy of internal
controls and the quality of financial reporting.
/s/Michael Feuer /s/Jeffrey L. Rutherford
------------- ---------------------
Michael Feuer Jeffrey L. Rutherford
Chairman of the Board & Senior Executive Vice President,
Chief Executive Officer Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders of OfficeMax, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of OfficeMax, Inc. and its subsidiaries (the "Company") at January 22,
2000 and January 23, 1999, and the results of their operations and their cash
flows for each of the three years in the period ended January 22, 2000 in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PRICEWATERHOUSECOOPERS LLP
Cleveland, Ohio
April 21, 2000
F-2
38
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------------------
January 22, January 23, January 24,
Fiscal Year Ended 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
Sales $ 4,842,698 $ 4,337,768 $ 3,765,444
Cost of sales, including buying and
occupancy costs 3,653,783 3,284,582 2,895,084
Inventory markdown charge for
item rationalization 77,372 - -
Computer segment asset write-off - 79,950 -
--------------------------------------------------------------
3,731,155 3,364,532 2,895,084
Gross profit 1,111,543 973,236 870,360
Store operating and selling expenses 930,057 765,922 619,690
Pre-opening expenses 10,974 11,851 15,512
General and administrative expenses 128,708 99,381 79,851
Goodwill amortization 9,418 9,390 9,390
--------------------------------------------------------------
Total operating expenses 1,079,157 886,544 724,443
--------------------------------------------------------------
Operating income 32,386 86,692 145,917
Interest income (expense), net (10,146) (5,971) 518
Other, net 59 290 (4)
--------------------------------------------------------------
Income before income taxes 22,299 81,011 146,431
Income taxes 12,258 32,391 56,811
--------------------------------------------------------------
Net income $ 10,041 $ 48,620 $ 89,620
==============================================================
EARNINGS PER COMMON SHARE DATA:
Basic earnings per common share $ 0.09 $ 0.40 $ 0.73
==============================================================
Diluted earnings per common share $ 0.09 $ 0.39 $ 0.72
==============================================================
Weighted average number of common shares outstanding:
Basic number of common shares outstanding 113,578,000 122,240,000 123,213,000
==============================================================
Diluted number of common shares outstanding 114,248,000 123,751,000 125,196,000
==============================================================
See accompanying Notes to Consolidated Financial Statements.
F-3
39
OFFICEMAX, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------
JANUARY 22, JANUARY 23,
2000 1999
- -----------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and equivalents $ 73,087 $ 67,482
Accounts receivable, net of allowances
of $687 and $824, respectively 111,734 141,800
Merchandise inventories 1,273,844 1,254,761
Other current assets 69,344 39,600
--------------------- ---------------------
Total current assets 1,528,009 1,503,643
Property and Equipment:
Buildings and land 19,292 19,223
Leasehold improvements 188,900 183,320
Furniture, fixtures and equipment 505,345 381,151
--------------------- ---------------------
Total property and equipment 713,537 583,694
Less: Accumulated depreciation and amortization
(311,069) (230,446)
--------------------- ---------------------
Property and equipment, net 402,468 353,248
Other assets and deferred charges 34,333 60,040
Goodwill, net of accumulated amortization
of $70,039 and $60,621, respectively 310,168 314,965
--------------------- ---------------------
$ 2,274,978 $ 2,231,896
===================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $ 702,416 $ 625,810
Accrued expenses and other liabilities 140,094 121,441
Accrued salaries and related expenses 50,313 50,704
Taxes other than income taxes 72,966 58,638
Credit facilities 91,800 144,700
Mortgage loan, current portion 1,300 1,300
--------------------- ---------------------
Total current liabilities 1,058,889 1,002,593
Mortgage loan 15,125 16,425
Other long-term liabilities 70,895 74,736
--------------------- ---------------------
Total liabilities 1,144,909 1,093,754
--------------------- ---------------------
Commitments and contingencies - -
Minority interest 14,072 -
Shareholders' Equity:
Common stock without par value;
200,000,000 shares authorized;
124,985,364 and 124,988,442 shares
issued and outstanding, respectively 867,866 868,321
Deferred stock compensation (304) (260)
Retained earnings 358,900 348,859
Less: Treasury stock, at cost (110,465) (78,778)
--------------------- ---------------------
Total shareholders' equity 1,115,997 1,138,142
--------------------- ---------------------
$ 2,274,978 $ 2,231,896
===================== =====================
See accompanying Notes to Consolidated Financial Statements.
F-4
40
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
January 22, January 23, January 24,
Fiscal Year Ended 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net income $ 10,041 $ 48,620 $ 89,620
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 89,064 73,863 67,320
Deferred income taxes 15,023 (16,235) 3,804
Other - net 1,825 79 (3,090)
Changes in current assets and current liabilities,
excluding the effects of acquisitions:
(Increase) in inventories (838) (168,533) (191,821)
Increase in accounts payable 101,329 106,689 2,598
Decrease (increase) in accounts receivable 31,281 (49,350) (68,378)
Increase in accrued liabilities 29,829 21,799 8,007
Other - net (9,608) 14,079 (1,695)
-------------------- -------------------- --------------------
Net cash provided by (used for) operations 267,946 31,011 (93,635)
-------------------- -------------------- --------------------
INVESTING
Capital expenditures (117,154) (120,760) (125,804)
Proceeds from the sale of equipment - - 27,675
Consolidation of majority interest in
OfficeMax de Mexico 5,384 - -
Other - net 26 (4,303) (5,088)
-------------------- -------------------- --------------------
Net cash (used for) investing (111,744) (125,063) (103,217)
-------------------- -------------------- --------------------
FINANCING
(Decrease) increase in revolving credit facilities (52,900) 144,700 -
Payments of mortgage principal (1,300) (1,300) (975)
(Decrease) increase in overdraft balances (43,018) 22,502 3,604
Purchase of treasury stock (34,841) (77,499) (1,279)
Advance payment for leased facilities (21,237) - -
Proceeds from issuance of common stock, net 2,699 6,330 4,192
-------------------- -------------------- --------------------
Net cash provided by (used for) financing (150,597) 94,733 5,542
-------------------- -------------------- --------------------
Net increase (decrease) in cash and equivalents 5,605 681 (191,310)
Cash and equivalents, beginning of period 67,482 66,801 258,111
-------------------- -------------------- --------------------
Cash and equivalents, end of period $ 73,087 $ 67,482 $ 66,801
==================== ==================== ====================
See accompanying Notes to Consolidated Financial Statements.
F-5
41
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------------------
Common Shares
----------------------------- Deferred Stock Retained Treasury
Shares Amount Compensation Earnings Stock Total
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 25, 1997 123,766,614 $ 854,094 $ (1,149) $ 210,619 $ - $ 1,063,564
Issuance of common shares under
director plan 12,445 176 (150) - - 26
Exercise of stock options
(including tax benefit) 526,167 5,071 - - - 5,071
Sale of shares under management
share purchase plan (including
tax benefit) (13,236) 1,692 - - - 1,692
Sale of shares under employee
share purchase plan (including
tax benefit) 78,219 958 - - - 958
Amortization of deferred
compensation - - 993 - - 993
Treasury stock purchased
(100,000 Shares) - - - - (1,279) (1,279)
Net income - - - 89,620 - 89,620
-------------- -------------- ---------------- ------------- ------------ -------------
BALANCE AT JANUARY 24, 1998 124,370,209 861,991 (306) 300,239 (1,279 1,160,645
Issuance of common shares under
director plan 14,114 175 (141) - - 34
Exercise of stock options
(including tax benefit) 472,988 4,550 - - - 4,550
Sale of shares under management
share purchase plan (including
tax benefit) 45,572 652 (113) - - 539
Sale of shares under employee
share purchase plan (including
tax benefit) 85,559 953 - - - 953
Amortization of deferred
compensation - - 300 - - 300
Treasury stock purchased
(8,135,000 Shares) - - - - (77,499) (77,499)
Net income - - - 48,620 - 48,620
-------------- -------------- ---------------- ------------- ------------ -------------
BALANCE AT JANUARY 23, 1999 124,988,442 868,321 (260) 348,859 (78,778) 1,138,142
Issuance of common shares under
director plan (12,778) (226) (150) - 403 27
Exercise of stock options
(including tax benefit) 9,700 122 - - 593 715
Sale of shares under management
share purchase plan (including
tax benefit) - 125 (153) - 751 723
Sale of shares under employee
share purchase plan (including
tax benefit) - (476) - - 1,407 931
Amortization of deferred
compensation - - 259 - - 259
Treasury stock purchased
(4,467,100 shares) - - - - (34,841) (34,841)
Net income - - - 10,041 - 10,041
-------------- -------------- ---------------- ------------- ------------ -------------
BALANCE AT JANUARY 22, 2000 124,985,364 $ 867,866 $ (304) $ 358,900 $ (110,465) $ 1,115,997
============== ============== ================ ============= ============ =============
See accompanying Notes to Consolidated Financial Statements.
F-6
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OfficeMax, Inc. ("OfficeMax" or the "Company") operates a chain of
high-volume, deep-discount office products superstores. At January 22, 2000, the
Company owned and operated 946 superstores in 49 states, Puerto Rico and the
U.S. Virgin Islands. In addition to offering office products, business machines,
computers and related items, OfficeMax also features CopyMax and FurnitureMax,
in-store modules devoted exclusively to print-for-pay services and office
furniture. The Company also operates four smaller format OfficeMax PDQ stores.
Through joint venture partnerships, OfficeMax operates international locations
in Brazil, Japan and Mexico. Additionally, the Company operates two national
call centers and 19 delivery centers located throughout the United States to
serve its catalog and direct marketing business, including OfficeMax.com.
OfficeMax.com offers, via the Internet, over 20,000 items and certain services
to help small business and home office customers.
BASIS OF PRESENTATION
The Company's consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. As of January 22, 2000, the
consolidated balance sheet also includes the accounts of OfficeMax de Mexico,
the Company's majority owned joint venture (also see Note 4). Affiliates in
which the Company owns a controlling majority interest are included in the
Company's consolidated financial statements. Investments in affiliates
representing 50% or less of the ownership of such companies for which the
Company has the ability to exercise significant influence over operating and
financial policies are accounted for under the equity method. All other
investments in affiliates are accounted for under the cost method and loans,
which the Company makes from time to time to these affiliates, are recorded in
other assets or accounts receivable. Intercompany accounts and transactions have
been eliminated in consolidation.
The Company has three reportable business segments: the Core Business
Segment, the Computer Business Segment and the OfficeMax.com Segment. The
operations of the Company's retail stores, call centers and outside sales force
are included in either the Core Business Segment or the Computer Business
Segment. The Core Business Segment includes office supplies, business machines,
peripherals, print-for-pay services and office furniture. The Computer Business
Segment includes desktop and laptop personal computers and computer monitors.
The OfficeMax.com Segment represents the operations of the Company's Internet
site.
The Company's fiscal year ends on the Saturday prior to the last
Wednesday in January. Fiscal years 1999, 1998 and 1997 ended on January 22,
2000, January 23, 1999 and January 24, 1998, respectively.
Certain reclassifications have been made to prior year amounts to
conform to the current presentation.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.
CASH AND EQUIVALENTS
Cash and equivalents includes short-term investments with
original maturities of 90 days or less.
INVENTORIES
Inventories are valued at the lower of average cost or market.
ACCOUNTS RECEIVABLE
Accounts receivable consists primarily of amounts due from vendors
under rebate, cooperative advertising and other contractual programs and trade
receivables not financed through outside programs. The Company has an
arrangement with a financial services company (the "Issuer") whereby the Issuer
manages the Company's private label credit card programs. The credit card
accounts, and receivables generated thereby, are owned by the Issuer. Under the
terms of the agreement, the Issuer charges the Company a fee to cover the
Issuer's cost of providing credit and collecting the receivables which are
non-recourse to the Company.
F-7
43
ADVERTISING
Advertising costs are either expensed or capitalized and amortized in
proportion to related revenues. The total amount capitalized in accordance with
the provisions of Statement of Position 93-7 issued by the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants
was $7,566,000 and $5,891,000 at January 22, 2000 and January 23, 1999,
respectively. These amounts relate to the Company's catalog and other direct
response advertising and are amortized over the six month period during which
the merchandise contents and pricing are valid. The Company and its vendors
participate in cooperative advertising programs in which the vendors reimburse
the Company for a portion of certain advertising costs. Advertising expense, net
of vendor reimbursements, was $123,250,000, $88,769,000 and $87,590,000 for
fiscal years 1999, 1998 and 1997, respectively.
INCOME TAXES
The Company uses the liability method whereby income taxes are
recognized during the fiscal year in which transactions enter into the
determination of financial statement income. Deferred tax assets and liabilities
are recognized for the expected future tax consequences of temporary differences
between financial statement and tax basis of assets and liabilities.
PROPERTY AND EQUIPMENT
Components of property and equipment are recorded at cost and
depreciated over their respective estimated useful lives using the straight-line
method for financial statement purposes and accelerated methods for income tax
purposes. All store properties are leased, and improvements are amortized over
the lesser of the term of the lease or 20 years. Other annual rates used in
computing depreciation are 13%-20% for store furniture, fixtures and equipment
and 14%-33% for other furniture, fixtures and equipment.
GOODWILL
Goodwill is amortized over 10-40 years using the straight-line method.
The Company evaluates the recoverability of goodwill and reviews the
amortization period on an annual basis. Based on its review, the Company does
not believe that an impairment of its goodwill has occurred.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses the recoverability of its long-lived assets,
including goodwill, by determining whether the amortization of the remaining
balance of an asset over its remaining useful life can be recovered through
undiscounted future operating cash flows. If impairment exists, the carrying
amount of the asset would be reduced.
CURRENT LIABILITIES
Under the Company's cash management system, checks issued pending
clearance that result in overdraft balances for accounting purposes are included
in the accounts payable balance. The amounts reclassified were $90,405,000 and
$133,423,000 for fiscal years 1999 and 1998, respectively.
FINANCIAL INSTRUMENTS
The recorded value of the Company's financial instruments, which
includes short term securities, accounts receivable, accounts payable, revolving
credit facilities and mortgage payable, approximates fair value. Financial
instruments, which potentially subject the Company to concentration of credit
risk, consist principally of cash investments. The Company invests its excess
cash in high-quality securities placed with major banks and financial
institutions. The Company has established guidelines relative to diversification
and maturities to maintain safety and liquidity.
REVENUE RECOGNITION
The Company recognizes revenue when the earnings process is complete,
generally at either the point-of-sale to a customer or upon delivery to a
customer or third party delivery service.
PRE-OPENING EXPENSES
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting Costs of Start-up Activities"
("SOP") 98-5, which requires that costs related to start-up activities be
expensed as incurred. Prior to fiscal year 1998, the Company expensed costs
associated with the opening of a new store during the first month of the store's
operations. The Company adopted the provisions of SOP 98-5 in its financial
statements for the fiscal year ended January 23, 1999. The effect of adoption
was not significant to the Company's results of operations.
F-8
44
STOCK-BASED COMPENSATION
As provided for under Statement of Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation" ("FAS 123"), the Company has
elected to continue to account for stock-based compensation under the provisions
of Accounting Principles Boards Opinion No. 25, "Accounting for Stock Issued to
Employees." Compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. Pro forma disclosures
of net earnings and earnings per share, as if the fair value based method of
accounting defined in FAS 123 had been applied, are presented in Note 11 of
Notes to Consolidated Financial Statements.
EARNINGS PER COMMON SHARE
Earnings per share are calculated in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS
128"). FAS 128 requires the Company to report both basic earnings per share,
which is based on the weighted average number of common shares outstanding, and
diluted earnings per share, which is based on the weighted average number of
common shares outstanding and all potentially dilutive common stock equivalents.
A reconciliation of the basic and diluted per share computations is as
follows:
PER SHARE
INCOME SHARES AMOUNT
---------------------------------------------------
(000's) (000's)
FISCAL YEAR 1999
Earnings per share of common stock - Basic $ 10,041 113,578 $ 0.09
Effect of dilutive securities:
Stock options 569
Restricted stock units 101
-------------- -------------- --------------
Earnings per share of common stock - Diluted $ 10,041 114,248 $ 0.09
============== ============== ==============
FISCAL YEAR 1998
Earnings per share of common stock - Basic $ 48,620 122,240 $ 0.40
Effect of dilutive securities:
Stock options 714
Restricted stock units 797
-------------- -------------- --------------
Earnings per share of common stock - Diluted $ 48,620 123,751 $ 0.39
============== ============== ==============
FISCAL YEAR 1997
Earnings per share of common stock - Basic $ 89,620 123,213 $ 0.73
Effect of dilutive securities:
Stock options 1,224
Restricted stock units 759
-------------- -------------- --------------
Earnings per share of common stock - Diluted $ 89,620 125,196 $ 0.72
============== ============== ==============
Options to purchase 7,470,000, 4,794,000 and 3,218,000 common shares were
excluded from the calculation of diluted earnings per share in fiscal years
1999, 1998 and 1997, respectively, because the exercise prices of the options
were greater than the average market price. These shares had weighted average
exercise prices of $12.74, $14.89 and $14.47, respectively.
F-9
45
NOTE 2. INVENTORY MARKDOWN CHARGE FOR ITEM RATIONALIZATION
In order to effect the acceleration of the Company's supply-chain
management initiative, which includes the development and opening of a
nationwide network of 600,000 to 750,000-square-feet, "PowerMax" supply-chain
distribution centers and the implementation of the Company's new SAP warehouse
management system, the Company decided to eliminate select current products on
hand as part of its program of merchandise and vendor rationalization. In
connection with this decision, the Company recorded a non-cash markdown charge
of $83,257,000 pre-tax during the third quarter of fiscal year 1999. The charge
provided for the liquidation of merchandise that is not expected to be part of
the Core Business Segment's ongoing product offering. The charge reduced third
quarter net income by $53,284,000 or $0.47 per diluted share. During the fourth
quarter of fiscal year 1999, the Company reversed $5,885,000 of the charge based
on the actual sell-through and merchandise margins of discontinued products,
which exceeded original expectations during the execution of the related
clearance event. The reversal increased fourth quarter net income $3,766,000 or
$0.03 per diluted share. For the fiscal year, the charge reduced net income by
$49,518,000 or $0.43 per diluted share.
NOTE 3. COMPUTER SEGMENT ASSET WRITE-OFF
In conjunction with its decision to realign its Computer Business
Segment, the Company recorded a non-cash, pre-tax charge of $79,950,000 during
January 1999. The non-cash charge accounted for the liquidation of existing,
discontinued computer inventory. In addition, the charge provided for the
impairment of prepaid expenses and other assets directly related to the Computer
Business Segment. The charge reduced net income by $49,889,000 or $0.41 per
diluted share in fiscal year 1998.
NOTE 4. ACQUISITION OF MAJORITY INTEREST IN OFFICEMAX DE MEXICO
Effective January 1, 2000, the Company purchased for $14 million an
additional 12% of OfficeMax de Mexico, its joint venture in Mexico that operates
OfficeMax superstores similar to those in the United States. As a result of the
purchase, the Company owns 51% of OfficeMax de Mexico and included the net
assets of the joint venture and related minority interest in its consolidated
balance sheet as of January 22, 2000. Beginning in fiscal year 2000, the Company
will also include OfficeMax de Mexico's results of operations and cash flows in
its consolidated financial statements. OfficeMax de Mexico's fiscal year ends on
December 31. Due to statutory audit requirements, OfficeMax de Mexico will
maintain its calendar year end and the Company will consolidate OfficeMax de
Mexico's calendar year results of operations with its fiscal year results. The
excess of the purchase price over the net assets of the joint venture is
approximately $4.7 million, which was allocated to goodwill and is being
amortized over 10 years. During the first quarter of fiscal year 2000, the
Company paid OfficeMax de Mexico $10,000,000 of the $14,000,000 purchase price.
The remainder of the purchase price is due in two equal installments in fiscal
years 2001 and 2002.
The following unaudited pro forma consolidated results of operations
are presented as if the purchase of a majority interest in OfficeMax de Mexico
had occurred at the beginning of the fiscal years presented.
- --------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JANUARY 22, JANUARY 23,
(In thousands except per share data) 2000 1999
- --------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Sales $ 4,916,149 $ 4,389,149
Net income $ 10,064 $ 48,027
Basic earnings per share $ 0.09 $ 0.39
Diluted earnings per share $ 0.09 $ 0.39
The unaudited pro forma consolidated results of operations include
adjustments to give effect to amortization of goodwill and related income tax
effects. The unaudited pro forma information is not necessarily indicative of
the results of operations that would have occurred had the purchase occurred at
the beginning of the fiscal years presented or of future consolidated results.
F-10
46
NOTE 5. RELATIONSHIP WITH KMART CORPORATION
Kmart Corporation ("Kmart"), which previously owned an equity interest
in the Company, continues to guarantee certain of the Company's leases. Such
lease guarantees are provided by Kmart at no cost to the Company. The Company
has agreed to indemnify Kmart for any losses incurred by Kmart as a result of
actions, omissions or defaults on the part of OfficeMax, as well as for all
amounts paid by Kmart pursuant to Kmart's guarantees of the Company's leases.
The agreement contains certain financial and operating covenants, including
restrictions on the Company's ability to pay dividends, incur indebtedness,
incur liens or merge with another entity.
NOTE 6. DEBT
CREDIT FACILITIES
On July 3, 1997, the Company entered into a five year, $500,000,000
revolving credit facility (the "revolving credit facility") in which 19 banks
participate. The revolving credit facility provides for borrowings bearing
interest at the banks' prime or Eurodollar rate plus .1450% to .3125%. The
Company must also pay quarterly fees on the full amount of the revolving credit
facility varying between .08% and .1875% per annum. Standby letters of credit
issued in connection with the Company's self insurance program and a synthetic
lease are considered outstanding amounts under the revolving credit facility and
totaled $41,777,414 and $19,800,000 as of January 22, 2000 and January 23, 1999,
respectively. As of January 22, 2000 and January 23, 1999, the Company had
outstanding borrowings of $91,800,000 and $135,000,000 under the revolving
credit facility at weighted average interest rates of 5.98% and 5.21%,
respectively.
During the first quarter of fiscal year 2000, the Company amended the
revolving credit facility to provide for financial covenants more appropriate
for the Company as its expands the Internet segment of its business,
OfficeMax.com. For the remainder of the five-year term, outstanding borrowings
of up to $400,000,000, will bear interest at the bank's prime or Eurodollar rate
plus 0.7% to 1.25%. The Company must also pay quarterly fees of 0.3% to 0.5% of
the full amount of the revolving credit facility.
In addition to the revolving credit facility, the Company has
uncommitted bank lines which provide for unsecured borrowings of up to
$30,000,000. There were no outstanding borrowings under the uncommitted bank
lines as of January 22, 2000. As of January 23, 1999, $9,700,000 was outstanding
under these lines at a weighted average interest rate of 5.06%. There are no
commitment fees or compensating balances associated with these arrangements.
MORTGAGE
On January 16, 1997, the Company entered into a $20,000,000 mortgage
agreement (the "Mortgage") secured by its international corporate headquarters.
The Mortgage has a fixed term of 10 years, quarterly amortization payments of
$325,000 plus interest with a final payment of $7,000,000 due at maturity. The
mortgage bears interest at LIBOR plus .90%. As of January 22, 2000 and January
23, 1999, the interest rate for the Mortgage was 6.73% and 6.99%, respectively.
Maturities of long-term borrowings will be $1,300,000 over each of the next five
years.
The revolving credit facility and the Mortgage contain similar
financial covenants with respect to fixed charge coverage and consolidated
leverage ratios.
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Company is a party to litigation it initiated in October 1997 in
the United States District Court for the Northern District of Ohio against Ryder
Integrated Logistics, Inc. ("Ryder") arising out of Ryder's failure to fulfill
certain payment guarantees pursuant to the terms of the Company's logistics
service agreement with Ryder. The Company terminated the logistics service
agreement in June 1997 based on numerous claims against Ryder under the
agreement including, among others, Ryder's refusal to honor its cost guarantees
and its failure to return overpayments to the Company. During the course of the
agreement the Company recorded receivables from Ryder of approximately
$19,000,000 representing overpayments due from Ryder pursuant to the terms of
the agreement. In January 1998, Ryder filed a counterclaim against the Company
alleging damages arising from the Company's termination of the agreement in the
F-11
47
amount of approximately $75,000,000. The Company believes the counterclaim is
without merit and continues to vigorously defend against such counterclaim.
Management is of the opinion that, although the ultimate resolution of
the Ryder litigation cannot be forecasted with certainty, final disposition of
this matter should not materially affect the Company's liquidity, financial
position or results of operations. However, in the event of an unanticipated
adverse final determination in this matter, the Company's consolidated net
income for the period in which such determination occurs could be materially
affected.
In addition, there are various claims, lawsuits and pending actions
against the Company incident to the Company's operations. It is the opinion of
management that the ultimate resolution of these matters will not have a
material effect on the Company's liquidity, financial position or results of
operations.
NOTE 8. INCOME TAXES
The provision (benefit) for income taxes consists of:
- ----------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JANUARY 22, JANUARY 23, JANUARY 24,
(In thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Current federal $ (4,731) $ 44,574 $ 45,694
State and local 1,280 3,304 5,900
Foreign 686 748 1,413
Deferred 15,023 (16,235) 3,804
-------------- -------------- ---------------
Total income taxes $ 12,258 $ 32,391 $ 56,811
============== ============== ===============
A reconciliation of the federal statutory rate to the Company's
effective tax rate follows:
- ----------------------------------------------------------------------------------------------------------------
JANUARY 22, JANUARY 23, JANUARY 24,
FISCAL YEAR ENDED 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
State and local taxes net of federal tax benefit 3.7% 2.7% 2.6%
Goodwill amortization 14.8% 4.1% 2.2%
Tax exempt interest - (0.1)% (0.2)%
Other 1.5% (1.7)% (0.8)%
-------------- -------------- ---------------
Total income taxes 55.0% 40.0% 38.8%
============== ============== ===============
Deferred tax assets (liabilities) resulted from the following:
- --------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JANUARY 22, JANUARY 23,
(In thousands) 2000 1999
- --------------------------------------------------------------------------------------------
Inventory $ 6,973 $ 5,248
Property and equipment (12,764) (8,943)
Escalating rent 18,256 20,516
Accrued expenses not currently deductible 18,584 29,251
-------------- --------------
Total deferred tax assets $ 31,049 $ 46,072
============== ==============
F-12
48
NOTE 9. LEASES
DESCRIPTION OF LEASING ARRANGEMENTS
The Company conducts operations primarily in leased facilities. Store
leases are generally for terms of 10 to 25 years with multiple five to 10 year
renewal options which allow the Company the option to extend the life of the
lease up to 20 years beyond the initial noncancellable term at escalated rents.
Certain leases provide for additional rental payments based on a
percent of sales in excess of a specified base. Also, certain leases provide for
payment by the Company of executory costs (taxes, maintenance and insurance).
LEASE COMMITMENTS
Future minimum lease payments and future minimum rentals at January 22,
2000 were as follows:
- -------------------------------------------------------------------------
FISCAL YEAR OPERATING
(In thousands) LEASES
- -------------------------------------------------------------------------
2000 $ 333,242
2001 321,091
2002 297,420
2003 269,097
2004 241,438
Thereafter 1,741,807
--------------
Total minimum lease payments $3,204,095
==============
RENTAL EXPENSE
A summary of operating lease rental expense and short-term rentals
follows:
- ----------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JANUARY 22, JANUARY 23, JANUARY 24,
(In thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Minimum rentals $ 321,158 $ 264,858 $ 218,271
Percentage rentals 254 478 428
-------------- -------------- ---------------
Total $ 321,412 $ 265,336 $ 218,699
============== ============== ===============
NOTE 10. SUPPLEMENTAL CASH FLOW INFORMATION
- ----------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JANUARY 22, JANUARY 23, JANUARY 24,
(In thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Cash transactions:
Cash paid for interest $ 11,013 $ 6,640 $ 2,269
Cash paid for income taxes $ 4,402 $ 9,117 $ 48,649
Non-cash transactions:
Liabilities accrued for property and
equipment acquired $ 20,066 $ - $ 18,148
Note receivable converted to equity investment $ - $ 4,000 $ -
Tax benefit related to stock options $ 282 $ 500 $ 3,705
Payable recorded for the acquisition of
majority interest in OfficeMax de Mexico $ 14,000 $ - $ -
F-13
49
NOTE 11. EMPLOYEE BENEFIT PLANS
STOCK PURCHASE PLANS
In connection with its initial public offering, the Company adopted a
Management Share Purchase Plan (the "Management Plan"), an Employee Share
Purchase Plan (the "Employee Plan") and a Director Share Plan (the "Director
Plan"). Under the Management Plan, the Company's officers are required to use at
least 20%, and may use up to 100%, of their annual incentive bonuses to purchase
restricted common shares of the Company at a 20% discount from the fair value of
the same number of unrestricted common shares. Restricted common shares
purchased under the Management Plan are generally restricted from sale or
transfer for three years from date of purchase. The maximum number of common
shares reserved for issuance under the Management Plan is 1,242,227. The Company
recognized compensation expense for the discount on the restricted common shares
of $112,000, $160,000 and $623,000 for fiscal years 1999, 1998 and 1997,
respectively.
The Employee Plan is available to all full-time employees of the
Company who are not covered under the Management Plan and who have worked at
least 1,000 hours during a period of 12 consecutive months. Each eligible
employee has the right to purchase, on a quarterly basis, the Company's common
shares at a 15% discount from the fair market value per common share. Shares
purchased under the Employee Plan are generally restricted from sale or transfer
for one year from date of purchase. The maximum number of shares eligible for
purchase under the Employee Plan is 2,958,761. The Company is not required to
record compensation expense with respect to shares purchased under the Employee
Plan.
The Director Plan covers all directors of the Company who are not
officers or employees of the Company. Participants receive all of their annual
retainer in the form of restricted common shares paid at the beginning of the
relevant calendar year and all of their meeting fees in the form of unrestricted
common shares paid at the end of the calendar quarter in which the meetings
occurred. The restrictions on such shares generally lapse one year from the date
of grant. The maximum number of shares reserved for issuance under the Director
Plan is 112,929.
SAVINGS PLAN
Employees of the Company who meet certain service requirements are
eligible to participate in the Company's 401(k) savings plan. Participants may
contribute 2% to 15% of their annual earnings, subject to statutory limitations.
The Company matches 50% of the first 3% of the employee's contribution. Such
matching Company contributions are invested in shares of the Company's common
stock and become vested 50% after two years of service and 100% after three
years of service. The charge to operations for the Company's matching
contribution amounted to $1,050,000, $950,000 and $794,000 in fiscal years 1999,
1998 and 1997, respectively.
STOCK OPTION PLANS
The Company's Equity-Based Award Plan provides for the issuance of
share appreciation rights, restricted shares and up to 17,000,000 options to
purchase common shares. Options granted under the Equity-Based Award Plan become
exercisable from one to seven years after the date of grant and expire either
five or ten years from date of grant. Options may be granted only at option
prices not less than the fair market value per common share on the date of the
grant. There was no compensation expense related to Equity-Based Award Plan
grants during fiscal years 1999 and 1998. The Company recognized compensation
expense on grants under a previous plan of $233,000 in fiscal year 1997.
Exercisable options outstanding were 3,904,106 at January 22, 2000,
3,209,432 at January 23, 1999, and 2,318,018 at January 24, 1998.
F-14
50
Option activity for each of the last three fiscal years was as follows:
- ---------------------------------------------------- ---- ---------------- ---- -----------------
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
- ---------------------------------------------------- ---- ---------------- ---- -----------------
OUTSTANDING AT JANUARY 25, 1997 6,811,292 $ 11.46
Granted 3,416,130 12.26
Exercised (491,802) 5.77
Forfeited (1,586,530) 13.22
---------------- -----------------
OUTSTANDING AT JANUARY 24, 1998 8,149,090 11.78
Granted 4,910,266 11.66
Exercised (472,989) 8.60
Forfeited (1,484,780) 13.98
---------------- -----------------
OUTSTANDING AT JANUARY 23, 1999 11,101,587 11.57
Granted 4,042,354 8.35
Exercised (73,292) 5.79
Forfeited (2,982,302) 11.52
---------------- -----------------
OUTSTANDING AT JANUARY 22, 2000 12,088,347 $ 10.56
================ =================
STOCK-BASED COMPENSATION
Under FAS 123, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model. The weighted average
assumptions used for grants in fiscal years 1999, 1998 and 1997, respectively,
were expected volatility of 36.9%, 30.9% and 34.5% and risk-free interest rates
of 5.7%, 4.9% and 6.3%. A dividend yield of zero and an expected life of five
years were used in the model for all three fiscal years.
The following table summarizes information about options outstanding at
January 22, 2000:
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------------------------
Range of Weighted Average Weighted Average Weighted Average
Exercise Prices Options Exercise Price Remaining Life (Years) Options Exercise Price
- -------------------------------------------------------------------------------------------------------------------------------
$4.01 to $4.63 420,533 $ 4.01 2.72 420,233 $ 4.01
$6.06 to $8.69 5,252,050 $ 7.57 8.67 649,330 $ 8.08
$10.19 to $11.75 2,864,770 $ 11.54 6.57 1,897,867 $ 11.63
$13.88 to $14.75 2,799,519 $ 14.54 7.10 749,838 $ 14.52
$15.29 to $18.13 751,475 $ 16.51 7.84 185,063 $ 16.49
F-15
51
Consistent with the method prescribed by FAS 123, the following table
summarizes the weighted average fair value at the date of grant for options
granted in fiscal years 1999, 1998 and 1997. The table also illustrates pro
forma net earnings and pro forma earnings per share, giving effect to such
compensation costs. The pro forma amounts listed below do not take into
consideration the pro forma compensation expense related to grants made prior to
fiscal year 1995.
- ------------------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JANUARY 22, JANUARY 23, JANUARY 24,
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Weighted average fair value $ 3.37 $ 4.28 $ 5.08
Pro forma net earnings $ 5,961,000 $ 44,200,000 $ 84,822,000
Pro forma earnings per share:
Basic earnings per share $ 0.05 $ 0.36 $ 0.69
Diluted earnings per share $ 0.05 $ 0.36 $ 0.68
NOTE 12. BUSINESS SEGMENTS
The Company has three reportable business segments: the Core Business
Segment, the Computer Business Segment and the OfficeMax.com Segment. The
operations of the Company's retail stores, call centers and outside sales force
are included in either the Core Business Segment or the Computer Business
Segment. The Core Business Segment includes office supplies, business machines,
peripherals, print-for-pay services and office furniture. The Computer Business
Segment includes desktop and laptop personal computers and computer monitors.
The OfficeMax.com Segment represents the operations of the Company's Internet
site. Prior to fiscal year 1999, the OfficeMax.com Segment was reported in the
Core Business Segment. All prior year amounts have been restated to reflect the
separate presentation of the OfficeMax.com Segment. The Company evaluates
performance and allocates resources based on the operations of these segments.
The accounting policies of the reportable business segments are the same as
those described in the Summary of Significant Accounting Policies (Note 1).
There are no intersegment sales or expense allocations. The Company
does not allocate fixed assets or depreciation to the Computer Business Segment.
The total assets of the Computer Business Segment, primarily inventory and
accounts receivable, were approximately $65,850,000 and $60,280,000 as of
January 22, 2000 and January 23, 1999, respectively. This segment also had
accounts payable of $3,605,000 and $14,274,000 as of January 22, 2000 and
January 23, 1999, respectively. The total assets of the OfficeMax.com segment,
primarily fixed assets, were approximately $1,695,000 and $316,000 as of January
22, 2000 and January 23, 1999, respectively. This segment also had accrued
expenses of $5,645,000 and $360,000 as of January 22, 2000 and January 23, 1999,
respectively. Depreciation expense for the OfficeMax.com segment was $258,000,
$119,000 and $101,000 for fiscal years 1999, 1998 and 1997, respectively.
Goodwill and the related amortization are included in the Core Business Segment.
Included in the Company's consolidated balance sheet as of January 22,
2000 are the net assets and related minority interest in the Company's majority
owned joint venture, OfficeMax de Mexico. The net assets of OfficeMax de Mexico,
which are included in the Core Business Segment, include inventory of
$18,245,000, fixed assets of $14,084,000 and accounts payable of $18,295,000.
The Company also has investments in joint venture partnerships in Brazil and
Japan. Other than its investments in joint venture partnerships, the Company has
no international sales or assets.
F-16
52
The following table summarizes the results of operations for the
Company's reportable business segments: (Dollars in thousands)
TOTAL
FISCAL YEAR 1999 COMPANY COMPUTERS OFFICEMAX.COM CORE
- ----------------------------------------------------------------------------------------------------
Sales $ 4,842,698 $ 284,013 $ 40,171 $ 4,518,514
Cost of merchandise sold, including
buying and occupancy costs 3,653,783 285,051 30,270 3,338,462
Inventory markdown charge for
item rationalization 77,372 -- -- 77,372
----------- ----------- ----------- -----------
3,731,155 285,051 30,270 3,415,834
Gross profit (loss) 1,111,543 (1,038) 9,901 1,102,680
Operating income (loss) 32,386 (38,364) (6,239) 76,989
Interest expense (10,146) (3,207) (175) (6,764)
Other, net 59 -- -- 59
Income tax expense (benefit) 12,258 (16,254) (2,508) 31,020
----------- ----------- ----------- -----------
Net income (loss) $ 10,041 $ (25,317) $ (3,906) $ 39,264
=========== =========== =========== ===========
FISCAL YEAR 1998
- ----------------------------------------------------------------------------------------------------
Sales $ 4,337,768 $ 336,922 $ 6,346 $ 3,994,500
Cost of merchandise sold, including
Buying and occupancy costs 3,284,582 327,590 4,700 2,952,292
Computer segment asset write-off
79,950 79,950 -- --
----------- ----------- ----------- -----------
3,364,532 407,540 4,700 2,952,292
Gross profit (loss) 973,236 (70,618) 1,646 1,042,208
Operating income (loss) 86,692 (96,471) (293) 183,456
Interest expense (5,971) (4,700) (14) (1,257)
Other, net 290 -- -- 290
Income tax expense (benefit) 32,391 (38,295) (119) 70,805
----------- ----------- ----------- -----------
Net income (loss) $ 48,620 $ (62,876) $ (188) $ 111,684
=========== =========== =========== ===========
FISCAL YEAR 1997
- ----------------------------------------------------------------------------------------------------
Sales $ 3,765,444 $ 436,468 $ 1,004 $ 3,327,972
Cost of merchandise sold, including
Buying and occupancy costs 2,895,084 430,706 873 2,463,505
----------- ----------- ----------- -----------
Gross profit 870,360 5,762 131 864,467
Operating income (loss) 145,917 (6,161) 235 151,843
Interest income (expense)
518 (4,476) -- 4,994
Other, net (4) -- -- (4)
Income tax expense (benefit) 56,811 (4,127) 91 60,847
----------- ----------- ----------- -----------
Net income (loss) $ 89,620 $ (6,510) $ 144 $ 95,986
=========== =========== =========== ===========
F-17
53
NOTE 13. QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS
Unaudited quarterly consolidated results of operations for the years
ended January 22, 2000 and January 23, 1999 are summarized as follows:
(Dollars in thousands, except per share data)
FISCAL YEAR 1999
(unaudited)
- ---------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------------------------------------------------------
Sales $1,179,410 $ 970,463 $1,301,774 $1,391,051
Cost of merchandise sold, including
buying and occupancy costs 900,958 732,713 990,711 1,029,401
Inventory markdown for
item rationalization - - 83,257 (5,885)
Gross profit 278,452 237,750 227,806 367,535
Net income (loss) $ 22,016 $ 2,427 $ (37,440) $ 23,038
Earnings per common share:
Basic $ 0.19 $ 0.02 $ (0.33) $ 0.20
Diluted $ 0.19 $ 0.02 $ (0.33) $ 0.20
FISCAL YEAR 1998
(unaudited)
- ---------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------------------------------------------------------
Sales $1,061,074 $ 874,470 $1,152,359 $1,249,865
Cost of merchandise sold, including
Buying and occupancy costs 818,736 666,131 869,080 930,635
Computer segment asset write-off - - - 79,950
Gross profit 242,338 208,339 283,279 239,280
Net income (loss) $ 19,074 $ 2,625 $ 33,578 $ (6,657)
Earnings per common share:
Basic $ 0.15 $ 0.02 $ 0.27 $ (0.06)
Diluted $ 0.15 $ 0.02 $ 0.27 $ (0.06)
NOTE 14. SHAREHOLDER RIGHTS PLAN
During the first quarter of fiscal year 2000, the Company adopted a
Shareholder Rights Plan designed to protect its shareholders against "abusive
takeover tactics", by providing certain rights to its shareholders if any group
or person acquires 15 percent or more of the Company's common stock. The plan
will be implemented by issuing one preferred share purchase right for each share
of common stock outstanding at the close of business on March 17, 2000, or
issued thereafter until the rights become exercisable. Each right will entitle
the holder to buy one one-thousandth of a participating preferred share at a $30
initial exercise price. Each fraction of a participating preferred share will be
equivalent to a share of the Company's common stock. The rights become
exercisable if any group acquires more than 15% of the outstanding OfficeMax
common stock or if a person or group begins a tender or exchange offer that
could result in such as acquisition.
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NOTE 15. STRATEGIC ALLIANCE WITH GATEWAY COMPANIES, INC.
In the first quarter of fiscal year 2000, the Company announced its
plans to enter into a multi-channel strategic alliance with Gateway Companies,
Inc. ("Gateway"). Under this alliance, Gateway plans to install and operate a
licensed "store-within-a-store" computer department inside all OfficeMax
superstores in the United States. The department will offer products consistent
with the Company's current Computer Business Segment, including computers,
monitors and related products and services. Accordingly, the Company plans to
phase out operations of that segment. The store-within-a-store rollout began in
March 2000 and is expected to be complete by the end of the first quarter of
fiscal year 2001.
Also, under this alliance, OfficeMax.com will be the exclusive office
supply partner on Gateway's Internet site, Gateway.com, and will have its icon
and hot link featured on the computer desktop of Gateway systems sold to small
businesses and consumers in the United States over the next five years. Gateway
will have the exclusive right to market and sell computers and related products
on OfficeMax.com.
This alliance also contemplates significant cross marketing and
promotional opportunities, as well as a $50 million investment by Gateway in
OfficeMax convertible preferred stock, of which $20 million is designated for
OfficeMax.com.
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