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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 27, 2001
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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
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OFFICEMAX, INC.
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(Exact name of registrant as specified in its charter)
OHIO 34-1573735
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
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) 471-6900
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class 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 March 14, 2001 was approximately $353,101,155.
The number of Common Shares, without par value, of the Registrant outstanding as
of March 14, 2001 was 113,173,447.
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TABLE OF CONTENTS
Item No. Page No.
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Part I
1. Business 3
Executive Officers of the Registrant 11
2. Properties 13
3. Legal Proceedings 14
4. Submission of Matters to a Vote of Security Holders 14
Part II
5. Market for Registrant's Common Shares and Related
Shareholder Matters 15
6. Selected Financial Data 16
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
7A. Quantitative and Qualitative Disclosures About
Market Risk 23
8. Financial Statements and Supplementary Data 23
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 23
Part III
10. Directors and Executive Officers of the Registrant 24
11. Executive Compensation 24
12. Security Ownership of Certain Beneficial Owners
and Management 24
13. Certain Relationships and Related Transactions 24
Part IV
14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 25
Signatures 26
Exhibit Index 27
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (including information incorporated by
reference) contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Any information in this report
that is not historical information is a forward-looking statement which may be
identified by the use of language such as "may," "will," "should," "expects,"
"plans," "anticipates," "estimates," "believes," "thinks," "continues,"
"indicates," "outlook," "looks," "goals," "initiatives," "projects," or
variations thereof. These statements are likely to address the Company's growth
strategy, future financial performance (including sales and earnings), strategic
initiatives, marketing and expansion plans, and the impact of operating
initiatives. The forward-looking statements, which speak only as of the date the
statement was made, are subject to risks, uncertainties and other factors that
could cause actual results to differ materially from those stated, projected or
implied in the forward-looking statements. These risks and uncertainties include
those described in Exhibit 99.1 to this Form 10-K, and in other reports and
exhibits to those reports filed with the Securities and Exchange Commission. You
are strongly urged to review such filings for a more detailed discussion of such
risks and uncertainties. The Company's SEC filings are available at no charge at
www.sec.gov and www.freeEDGAR.com, as well as on a number of other web sites.
These risks and uncertainties include, but are not limited to, the following:
risks associated with general economic conditions (including the widely
anticipated general economic slowdown in 2001 which could negatively impact
future performance); and failure to adequately execute plans and unforeseen
circumstances beyond the Company's control in connection with development,
implementation and execution of new business processes, procedures and programs.
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") operates a chain of
high-volume, deep-discount office products superstores. As of January 27, 2001,
OfficeMax owned and operated 995 superstores in 49 states, Puerto Rico and the
U.S. Virgin Islands. In addition to offering office products, business-machines
and related items, OfficeMax superstores also feature CopyMax(SM) and
FurnitureMax(R), in-store modules devoted exclusively to print-for-pay services
and office furniture. Additionally, the Company reaches customers with over
20,000 items through its award winning eCommerce site, OfficeMax.com(SM), its
direct-mail catalogs and its outside sales force, all of which are serviced by
its 19 delivery centers and two national call/customer contact centers. Through
joint venture partnerships, OfficeMax operates stores internationally in
Mexico and Brazil.
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 and related items), CopyMax and
FurnitureMax.
The Company offers, at OfficeMax.com (http://www.officemax.com), over
20,000 items, free next business day delivery on orders over $50 for most
locations, and a credit card security guarantee. OfficeMax.com also provides a
variety of services targeted at small business and home office customers such as
express orders for frequently purchased products, usage reporting, online order
tracking, convenient order-by-number features and an informational resource
center. OfficeMax.com also offers an expanding array of integrated business
services targeted to small business and home office customers, including
communications, eBusiness utilities, marketing, travel, virtual learning and
financial services.
The Company markets its merchandise primarily to small-and medium-size
businesses, home office customers and individual consumers. By extending its
marketing channels to include direct-mail catalog and an outside sales force,
OfficeMax also serves the medium and larger corporate customer.
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
- -------------- -- ------------ -- ----------- --- ----------- --- -----------
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
2000 54 5 - 995
Through joint venture partnerships, OfficeMax operates internationally
with 23 stores in Mexico and 2 stores in Brazil as of January 27, 2001.
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INDUSTRY OVERVIEW
Over the past approximately 13 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 in market share for operators of high-volume office products
superstores such as OfficeMax and for office products eCommerce sites such as
OfficeMax.com.
Small-and Medium-Size Businesses and Consumer Markets. The Company's
target customers are small (one 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
As of January 27, 2001, the Company had two reportable business
segments: the Core Business Segment and the OfficeMax.com Segment. The
operations of the Company's retail stores, customer contact centers and outside
sales force are included in the Core Business Segment. The OfficeMax.com Segment
represents the operations of the Company's Internet site. Until July 23, 2000,
the Company also operated a Computer Business Segment, which included desktop
and laptop personal computers sold via the Company's retail stores and its
catalog and direct marketing operations. The Company elected to phase out
operations of the Computer Business Segment in conjunction with a strategic
alliance with a third-party computer provider.
BUSINESS STRATEGY
The Company's strategy is to enhance market share, to be a leading provider of
office products, supplies and services in each of the markets in which it
competes and to 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 to enhance customer convenience, create an
enjoyable shopping experience and promote impulse buying, thereby
increasing sales.
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- 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 by matching any advertised price
or refunding the difference between a lower advertised price and the
price paid at OfficeMax within seven days of the original purchase.
- Customer Service. To develop and maintain customer loyalty,
OfficeMax is fostering 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 customer
contact centers to enable in-store associates to focus on serving
customers.
- Focused Expansion. Primarily as a result of current
uncertain economic conditions, the Company reduced its number of
planned domestic superstore openings for fiscal 2001 to less than
approximately 25 superstores. The Company intends to focus on opening
new superstores in markets where it already has a major presence which
will enable it to better leverage advertising, distribution and
supervision costs. Additionally, the Company intends, as soon as
practicable, to reduce the size of all new superstores by approximately
15% to 20,000 square feet, down from 23,500 square feet. Prospective
new superstore 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.
During fiscal year 2000, the Company completed an extensive
review of its real estate portfolio and, as a result of that review,
elected to close 50 underperforming superstores. During the first
quarter of fiscal year 2001, 46 of the closing stores began the
liquidation process and are expected to close during the second quarter
of fiscal year 2001. The remaining stores are expected to begin the
liquidation process by the end of fiscal year 2001.
- Marketing Concepts. 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.
- OfficeMax.com. 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 array of
integrated business services targeted to small business and home office
customers, including communications, eBusiness utilities, marketing,
travel, virtual learning and financial services.
- Catalog and Commercial Outside Sales. The Company's strategy
for its catalog and outside sales businesses is to capitalize on the
OfficeMax brand name awareness by providing other channels that give
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 outside sales force focusing on the medium-sized
business customer.
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- International Opportunities. During fiscal year 2000, the
Company opened seven OfficeMax superstores in Mexico through its
majority-owned joint venture with Grupo Oprimax, S.A. de C.V., a
Mexican corporation, ending the year with 23 superstores. In fiscal
2001, this joint venture plans to open approximately five more
superstores in Mexico. The Company plans to open up to five new
superstores in Brazil during fiscal year 2001 through a joint venture
with a Brazilian company. OfficeMax stores operated by these joint
ventures are similar to those operated by the Company domestically.
OfficeMax owns a majority interest in the Mexican joint venture and a
19% interest in the Brazilian joint venture. The Company is in ongoing
negotiations with its Brazilian joint venture partner to purchase an
additional interest in the joint venture that would increase the
Company's total ownership interest in the joint venture to greater than
51%. 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.
- Gateway Alliance. During the first quarter of fiscal year
2000, the Company entered into a strategic alliance with Gateway
Companies Inc., ("Gateway") providing for Gateway to operate a licensed
"store-within-a-store" computer department inside all OfficeMax
superstores in the United States. The departments offer products
consistent with the Company's previous Computer Business Segment,
including computers, monitors and related products and services.
Accordingly, the Company completed its phase-out of its Computer
Business Segment as of July 23, 2000. The Gateway store-within-a-store
rollout began in March 2000 and was originally expected to be complete
by the end of the first quarter of fiscal year 2001. Currently,
approximately one half of the Company's superstores have full-sized,
staffed Gateway computer departments and the remaining superstores
feature an on-line kiosk, which enables customers to browse and
purchase electronically. The Company is currently evaluating
alternative options relating to this joint business relationship in
light of the precipitous decline in personal computer sales and the
seemingly longer term, negative outlook for personal computers. The
Company anticipates that should the Gateway departments close,
OfficeMax's operating results would not be materially adversely
affected and an alternative computer manufacturer's brand could be
substituted in some form.
MARKETING, PROMOTIONS AND ADVERTISING
The Company's marketing efforts are directed at 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 network, local and cable television commercials, newspaper ads, seasonal
spot television and radio commercials, direct mail promotions, circulars, and
outdoor billboards, mass transit cards, sports arena and online advertising.
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.
OfficeMax conducts customer research to gauge the appropriateness of
the products and services it offers. This research is utilized to develop
innovative solutions for OfficeMax's small-and medium-sized business, home
office and individual consumer customer while tailoring specific product
messages to communicate with each of its target customer groups.
RETAIL STORES
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
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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). The Company believes that attractive and up-to-date stores
contribute to customer satisfaction and loyalty leading to increased sales.
The Company's Supplies modules feature office products, including
writing instruments, paper, filing supplies, business forms and other supplies.
TechMax showcases the latest in communication and electronics products
and features specially trained associates to assist the customer.
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.
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 and on-site consultation as well as 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
utilize approximately 2,000 square feet.
EXPANSION
Small-and Medium-Size Business Market. The Company's expansion strategy
primarily focuses on new store growth, line extensions of existing product
categories and new product offerings. The Company opened 54 superstores in
fiscal year 2000 and intends to open less than approximately 25 new domestic
superstores and up to eight new superstores internationally during fiscal year
2001.
Large Business Market. OfficeMax has undertaken several initiatives to
better serve the needs of its larger customers, predominately through its
outside sales group and network of delivery centers, in addition to its retail
stores and eCommerce site. The Company's full-color catalogs feature
approximately 5,000 items. These catalogs and other specialized 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 an outside commercial sales
force to attract new customers as well as maintain existing customer
relationships. 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
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 customer contact centers,
OfficeMax enables its in-store associates to focus primarily on customer
service. In addition, the Company implemented ServiceMax, a training
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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.
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. The
Company provides its online customers 24 hours a day, 7 days-a-week customer
service and support through dedicated personnel at the its customer contact
centers located in Ohio and 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. During fiscal year 2000, the Company converted its
OfficeMax.com web site to a sophisticated enterprise platform which allows
OfficeMax.com to conduct customized, one-to-one marketing with its online
customers providing for a more personalized shopping experience.
MANAGEMENT INFORMATION SYSTEMS
During fiscal year 2000, the Company completed the conversion to its
new SAP Enterprise Resource Planning computer system. As OfficeMax has grown
substantially and rapidly over the past 13 years, the legacy information systems
necessary to support such growth had become outmoded. SAP is providing a
flexible, consolidated, enterprise-wide system and the 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 continue to 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 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 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
customer contact 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, know as
@Max(SM), which provides information on demand to all of the Company's
Corporate and Field Management associates. The Company 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 program 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.
The Company employs a variety of scalable and reliable software and
hardware systems that provide transaction processing, administration, product
searching, customer support, fulfillment and order tracking for OfficeMax.com.
The transaction processing systems are integrated with the Company's order
management, payment processing, distribution, accounting and financial systems.
The Company's web site development efforts are focused on creating, enhancing
and integrating proprietary software and services delivered through its web
site.
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The Company's eCommerce systems are based on industry standard
architectures. The backbone of the technology structure consists of Oracle
database servers with Sun Microsystem's hardware. The Company'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:
- -------------------------------------------------------------------------------------------------------------------
JANUARY 27, JANUARY 22, JANUARY 23,
FISCAL YEAR ENDED 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Office supplies, including print-for-pay services 39.3% 38.1% 37.7%
Electronics and business machines 19.4 22.6 23.2
Office furniture 12.6 12.8 12.6
Printers, software, peripherals and related consumable
products such as printer cartridges and ribbons 24.5 20.6 18.7
Desktop and laptop personal computers and computer
monitors (Computer Business Segment) 1.9 5.9 7.8
Other 2.3 - -
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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 gross margin and
operating results 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.
The Company, through its OfficeMax.com public Internet web site, offers
customers an expanding array of integrated business services targeted to small
business and home office customers. The Company is able to provide these
services by developing alliances with numerous strategic partners.
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.
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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.
The Company does not maintain an inventory of computers, rather it
provides a computer offering for customers through an alliance with Gateway. The
Company is currently evaluating alternative options relating to this joint
business relationship in light of the precipitous decline in personal computer
sales and the seemingly longer term, negative outlook for personal computers.
The Company anticipates that should the Gateway departments close, OfficeMax's
operating results would not be materially adversely affected and an alternative
computer manufacturer's brand could be substituted in some form.
During the first quarter of fiscal year 2001, the Company completed
expansion of its PowerMax distribution facility in Las Vegas. During fiscal
years 1999 and 2000, the Company opened PowerMax distribution facilities in
Pennsylvania and Alabama, respectively. The Company has two national customer
contact centers and 19 delivery centers throughout the United States and Puerto
Rico.
COMPETITION
The office products industry, which includes national superstore
chains, "e-tailers" and numerous other 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(TM) and Office Depot(TM), which are similar to the Company in terms of
store format, pricing strategy and product selection. OfficeMax's other
competitors include traditional office product retailers, electronics superstore
retailers, mass merchandisers, wholesale clubs, and direct mail operators in
respect to limited product categories.
The Company also competes with the eCommerce sites of its direct
competitors as well as other e-tailers, such as Office.com,
Onlineofficesupplies.com and Atyouroffice.com.
Some of OfficeMax's 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 March 24, 2001, the Company had approximately 35,000 employees,
including 20,000 full time and 15,000 part-time associates, 2,000 of whom were
employed at its Corporate headquarters, divisional offices and customer contact
centers and 33,000 of whom were employed at OfficeMax stores, delivery centers
and distribution centers. None of the Company's associates is subject to a
collective bargaining agreement. Management believes that it has good relations
with its associates.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below are the names, positions and ages of the executive
officers of the Company as of March 24, 2001. 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 56
Chief Executive Officer
Gary J. Peterson President, Chief Operating Officer 50
Jeffrey L. Rutherford Senior Executive Vice President, 40
Chief Financial Officer
Edward L. Cornell Executive Vice President, Non-Retail 52
Stores and International Development
Harold L. Mulet Executive Vice President, 49
Retail Sales and Store Productivity
Eugene O'Donnell Executive Vice President, 54
Merchandising and Marketing
Ross H. Pollock Executive Vice President, General 45
Counsel and Secretary
Ryan T. Vero Executive Vice President, eCommerce/Direct 31
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 Jo-Ann
Stores, 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 stores. 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.
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Mr. Rutherford has been associated with the Company for four 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. Pollock has served as Executive Vice President, General Counsel and
Secretary of the Company since March 2001. From March 1998 to March 2000, Mr.
Pollock served as Senior Vice President, General Counsel and Secretary of the
Company. 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.
Mr. Vero has served as Executive Vice President, eCommerce/Direct of
the Company since August 2000. From February 1999 to August 2000, Mr. Vero
served as Vice President, eCommerce of the Company. From October 1996 to
February 1999, Mr. Vero served as Divisional Vice President, OfficeMax Online
and from January 1996 to October 1996, he served as Manager, OfficeMax Online.
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ITEM 2. PROPERTIES
OfficeMax superstores are relatively immature. As of March 24, 2001,
the Company's stores had been open an average of 5.1 years operating under the
OfficeMax name and format. 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
Corporation (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 March 24, 2001, OfficeMax had 953 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 3 New Hampshire 3
Arizona 30 New Jersey 18
California 85 New Mexico 9
Colorado 24 New York 42
Connecticut 10 North Carolina 28
Delaware 2 North Dakota 3
Florida 58 Ohio 53
Georgia 32 Oklahoma 5
Hawaii 4 Oregon 11
Idaho 6 Pennsylvania 34
Illinois 52 Rhode Island 3
Indiana 19 South Carolina 10
Iowa 10 South Dakota 3
Kansas 12 Tennessee 27
Kentucky 8 Texas 73
Louisiana 8 Utah 14
Maine 2 Virginia 22
Maryland 3 Washington 22
Massachusetts 18 West Virginia 6
Michigan 44 Wisconsin 26
Minnesota 31 Wyoming 2
Mississippi 7 Puerto Rico 8
Missouri 24 U.S. Virgin Islands 1
Montana 3
The Company operates 19 delivery centers in 18 states and Puerto Rico,
two national customer contact centers in Ohio and Texas and three PowerMax
distribution facilities in Alabama, Nevada and Pennsylvania. The Company
occupies all of these facilities under various long-term leases.
The Company's corporate offices are located in three buildings in
Cleveland, Ohio. The Company owns two of these facilities, one of which is
subject to a mortgage secured loan. The Company leases the third facility. The
Company believes that its facilities are adequate to meet its current needs.
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ITEM 3. LEGAL PROCEEDINGS
During the third quarter of fiscal year 2000, the Company, based on
changes in circumstances and the advice of outside legal counsel, elected to
settle its lawsuit with Ryder Integrated Logistics prior to trial. As a result
of the settlement, the Company recorded a pre-tax charge of $19,465,000, which
was included in cost of merchandise sold.
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, CHARLES MILLER V. MICHAEL
FEUER, ET AL., Case No. 404791 and GREAT NECK CAPITAL APPRECIATION, L.P. V.
MICHAEL FEUER, ET AL., Case No. 404792, both pending in the Court of Common
Please for Cuyahoga County, Ohio, involve claims for interference with
shareholders' franchise rights against the Company and its Directors and breach
of fiduciary duty against the Directors in connection with the adoption of a
shareholders' rights plan. On April 7, 2000, Crandon Capital Partners initiated
a purported class action against the Company and its Directors. The case,
CRANDON CAPITAL PARTNERS V. MICHAEL FEUER, ET AL., Case No. 405832, pending in
the Court of Common Pleas for Cuyahoga County, Ohio, also involves claims for
interference with shareholders' franchise rights against the Company and its
Directors and breach of fiduciary duty against the Directors related to the
adoption of a shareholders' rights plan. Plaintiffs seek injunctive relief as
well as an unspecified amount of money damages. All of the cases were
consolidated before Judge Christine McMonagle. On January 24, 2001, pursuant to
a Joint Motion, the cases were stayed. The Company intends to vigorously contest
these claims.
BERNARD FIDEL, ET AL. VS. OFFICEMAX, INC. ET AL., Case No. 1:00CV2432,
was filed on September 22, 2000, in the United States District Court for the
Northern District of Ohio, Eastern Division. Subsequently, four related cases
(Case Nos. 1:00CV2558, 1:00CV2562, 1:00CV2606, and 1:00CV2720) were also filed
in the same court and were transferred to Judge Kathleen M. O'Malley. In the
complaints, the plaintiffs assert securities claims against the Company and two
of its officers, Michael Feuer and Jeffrey L. Rutherford, alleging
misrepresentations and omissions concerning the Company's business and financial
condition. The plaintiffs seek to represent a class of all persons who purchased
Company stock and/or publicly traded options between March 2, 1999 and September
20, 1999, and seek to recover an unspecified amount of money damages on behalf
of all putative class members. The Company intends to vigorously contest these
claims.
WALKER, ET AL. VS. OFFICEMAX, INC., Case No. 00CC04470, was filed on
April 11, 2000 in the California Superior Court in the County of Orange.
Plaintiffs allege that the Company has improperly failed to pay them, and other
members of an alleged class, premium pay for overtime hours. The alleged class
is comprised of persons employed in current and former in-store assistant
manager classifications since 1996. Plaintiffs seek damages, restitution,
penalties, interest and attorneys' fees. The Company is vigorously contesting
these claims.
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 SHARES AND RELATED SHAREHOLDER MATTERS
The high and low sales prices of the Company's Common Shares during
each quarter of fiscal year 2000 and fiscal year 1999, as reported on the New
York Stock Exchange Consolidated Transaction reporting system, are listed below:
Fiscal 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
Fiscal 2000 High Low
- ----------- ---- ---
1st Quarter (ended April 22, 2000) $ 7.063 $ 5.250
2nd Quarter (ended July 22, 2000) 5.938 4.688
3rd Quarter (ended October 21, 2000) 5.188 2.375
4th Quarter (ended January 27, 2001) 4.125 1.563
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 March 14, 2001, the Company had approximately 4,020 shareholders
of record. On March 14, 2001, the closing price of the Company's Common Shares
was $3.12.
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ITEM 6. SELECTED FINANCIAL DATA
Selected financial data as of, and for the fiscal years ended, January
27, 2001, January 22, 2000, January 23, 1999, January 24, 1998 and January 25,
1997 is set forth below:
(Dollars in millions, except per share data)
- ---------------------------------------------- ------------- ------------- ------------- ------------- -------------
Fiscal Fiscal Fiscal Fiscal Fiscal
2000 (1) 1999 (3) 1998 (4) 1997 1996
- ---------------------------------------------- ------------- ------------- ------------- ------------- -------------
FINANCIAL DATA (2)
Sales $ 5,156.4 $ 4,847.0 $ 4,342.6 $ 3,769.1 $ 3,182.4
Cost of merchandise sold, including
buying and occupancy costs 3,905.0 3,653.8 3,284.6 2,895.0 2,489.0
Inventory markdown 8.2 77.4 -- -- --
Computer segment asset write-off -- -- 80.0 -- --
Gross profit 1,243.2 1,115.8 978.0 874.1 693.4
Store closing and asset impairment 109.6 -- -- -- --
Operating income (loss) (193.6) 32.4 86.7 145.9 105.5
Net income (loss) (133.2) 10.0 48.6 89.6 68.8
Earnings (loss) per common share:
Basic (1.20) 0.09 0.40 0.73 0.56
Diluted (1.20) 0.09 0.39 0.72 0.55
OTHER FINANCIAL AND OPERATING DATA
Percentage increase in sales 6.4% 11.6% 15.2% 18.4% 25.0%
Comparable-store sales increase
(decrease) (5) (1.1%) (0.4%) 0.4% 1.1% 11.0%
End of period superstores 995 946 832 713 564
FINANCIAL POSITION
Working capital $ 403.4 $ 469.1 $ 501.1 $ 561.5 $ 473.4
Total assets 2,293.3 2,275.0 2,231.9 1,960.2 1,867.3
Total long-term debt, including capital
lease obligations 1.8 16.4 17.7 19.0 20.0
Shareholders' equity 982.3 1,116.0 1,138.1 1,160.6 1,063.6
(1) In conjunction with closing 50 underperforming superstores, the Company
recorded pre-tax charges of $109,578,000 for store closing and asset
impairment (included in operating expense) and $8,244,000 for inventory
liquidation (included in cost of merchandise sold). These charges reduced
net income by $71,789,000, or $0.64 per diluted share. Also during fiscal
year 2000, the Company recorded a $19,465,000 pre-tax charge for a
litigation settlement (included in cost of merchandise sold). The
litigation settlement charge reduced net income by $11,679,000, or $0.10
per diluted share.
(2) Fiscal year 2000 included 53 weeks. Fiscal years 1999, 1998, 1997 and 1996
included 52 weeks.
(3) 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. The charge reduced
net income by $49,518,000, or $0.43 per diluted share.
(4) 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 net income by $49,889,000, or $0.41
per diluted share.
(5) For fiscal year 2000, comparable-store sales excludes the impact of the
phased-out Computer Business Segment.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF CONSOLIDATED OPERATIONS
Consolidated sales in fiscal year 2000 increased 6.4% to $5,156,392,000
from $4,847,022,000 in fiscal year 1999. This followed an 11.6% increase in
fiscal year 1999 from $4,342,554,000 in fiscal year 1998. The fiscal year 2000
increase in consolidated sales was primarily due to full year sales from the 115
superstores opened during fiscal year 1999, the additional partial year's sales
from 54 superstores opened during fiscal 2000 and the 53rd week included in
fiscal year 2000. Additionally, $116,269,000 of sales for the Company's joint
venture in Mexico, OfficeMax de Mexico, were included in consolidated sales for
fiscal year 2000 due to the Company's majority interest in the joint venture
which was purchased as of the end of fiscal year 1999. Previously, the Company
accounted for the joint venture under the equity method and, accordingly, did
not consolidate OfficeMax de Mexico's sales. The effects of new store openings,
the additional week in fiscal year 2000 and the consolidation of OfficeMax de
Mexico were partially offset by the phase-out of the Computer Business Segment
and by a 1.1% comparable-store sales decline experienced by the Company's Core
and OfficeMax.com segments.
During the second half of fiscal year 2000, comparable-store sales were
negatively impacted by a difficult overall retail environment resulting from a
precipitous slowdown in consumer spending. 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
along with less aggressive promotions compared to fiscal year 1998. Consolidated
comparable-store sales in fiscal year 1998 increased 0.4% from fiscal year 1997.
The Company opened 120 new stores during fiscal year 1998.
Cost of merchandise sold, including buying and occupancy costs, was 75.4%
of sales in fiscal years 2000 and 1999 and 75.6% of sales in fiscal year 1998.
These costs exclude a charge recorded during fiscal year 2000 related to a
litigation settlement, the inventory markdown charges recorded during fiscal
years 2000 and 1999 and the Computer Business Segment asset write-off recorded
during fiscal year 1998. Correspondingly, gross profit, excluding the litigation
settlement and the inventory markdown charges, was 24.6% of sales in fiscal
years 2000 and 1999 and 24.4% of sales, excluding the Computer Business Segment
asset write-off, in fiscal year 1998. During fiscal year 2000, gross profit was
positively impacted by the phase-out of the Computer Business Segment and
improved margins in the Company's OfficeMax.com Segment, however, these
improvements were offset by lost leverage of certain fixed occupancy costs. The
gross profit increase in fiscal year 1999 was primarily due to enhanced
marketing of higher margin office supply items in the Company's Core Business
Segment.
During the third quarter of fiscal year 2000, the Company, based on
changes in circumstances and the advice of outside legal counsel, elected to
settle its lawsuit with Ryder Integrated Logistics prior to trial. As a result
of the settlement, the Company recorded a pre-tax charge of $19,465,000, which
was included in cost of merchandise sold. Also during fiscal year 2000, in
conjunction with its decision to close 50 underperforming superstores, the
Company recorded a pre-tax inventory markdown charge of $8,244,000 for inventory
liquidation at the closing stores. During fiscal year 1999, in order to effect
the acceleration of the Company's supply-chain management initiative, the
Company decided to eliminate select current products on hand as part of its
program of merchandise and vendor rationalization. As a result, the Company
recorded a pre-tax inventory markdown charge of $77,372,000. During fiscal year
1998, the Company recorded a pre-tax charge of $79,950,000 that provided for the
liquidation of existing, discontinued computer inventory and the impairment of
prepaid expenses and other assets directly related to the Computer Business
Segment. Including the charge for litigation settlement, the inventory markdown
charges and the Computer Business Segment asset write-off, cost of merchandise
sold, including buying and occupancy costs, was $3,913,197,000, or 75.9% of
sales, $3,731,155,000, or 77.0% of sales, and $3,364,532,000, or 77.5% of sales,
for fiscal years 2000, 1999 and 1998, respectively. Gross profit as a percentage
of sales, including the charge for litigation settlement, the inventory markdown
charges and the Computer Business Segment asset write-off was 24.1%, 23.0% and
22.5% for fiscal years 2000, 1999 and 1998, respectively.
17
18
Store operating and selling expenses, which consist primarily of store
payroll, operating and advertising expense, increased to 22.4% of sales in
fiscal year 2000 from 19.3% of sales in fiscal year 1999 and 17.7% of sales in
fiscal year 1998. The increase in fiscal year 2000 was primarily due to costs
associated with the Company's operating improvement initiatives, including
reduced vendor income from vendor support programs eliminated as part of the
Company's program of merchandise and vendor rationalization. The increase in
fiscal 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 deliberate decision to make an additional
investment in payroll beginning in fiscal year 1999 in order to increase
training for associates and improve customer service.
Pre-opening expenses were $7,113,000, $10,974,000 and $11,851,000 in
fiscal years 2000, 1999 and 1998, respectively, primarily reflecting 54, 115 and
120 new superstore openings and pre-opening expenses of approximately $1,000,000
in each of those three fiscal years to open the Company's PowerMax distribution
facilities in Alabama, Pennsylvania and Nevada. Additionally, OfficeMax de
Mexico's pre-opening expenses were $1,052,000 during fiscal year 2000.
Pre-opening expenses, which consist primarily of store payroll, supplies and
grand opening advertising, averaged approximately $90,000 per OfficeMax
superstore during fiscal year 2000 and $85,000 per OfficeMax superstore during
fiscal years 1999 and 1998. Pre-opening expenses increase when certain enhanced
CopyMax or FurnitureMax features are included in a superstore. 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
3.0% in fiscal year 2000 from 2.7% and 2.3% in fiscal years 1999 and 1998,
respectively. The increases reflect the costs for consulting services supporting
the Company's supply-chain management and operating improvement initiatives,
continued investment in the Company's organizational structure and increased
depreciation expense as a result of the Company's information technology
initiatives. During fiscal year 2000, the Company completed the conversion to
its new Enterprise Resource Planning computer system.
Goodwill amortization was $9,863,000 in fiscal year 2000, $9,418,000 in
fiscal year 1999 and $9,390,000 in fiscal year 1998. Goodwill is capitalized and
amortized over 10 to 40 years using the straight-line method. The increase in
amortization expense in fiscal year 2000 was due to increased goodwill resulting
from the acquisition of a majority interest in OfficeMax de Mexico as of the end
of fiscal year 1999.
During fiscal year 2000, the Company announced that it had completed a
review of its real estate portfolio and, as a result of that review, elected to
close 50 underperforming superstores. In conjunction with the store closings,
the Company recorded a pre-tax charge for store closing and asset impairment of
$109,578,000 during the fourth quarter of fiscal year 2000. Major components of
the charge included lease disposition costs of $89,815,000, asset impairment and
disposition of $13,071,000 and other closing costs, including severance, of
$6,692,000. During the first quarter of fiscal year 2001, 46 of the closing
stores began the liquidation process and are expected to close during the second
quarter of fiscal year 2001. The results of operations for the 46 closing stores
were assumed by a third-party liquidator and, accordingly, will not be included
in the Company's consolidated results of operations beginning January 28, 2001.
The remaining stores are expected to begin the liquidation process by the end of
fiscal year 2001.
As a result of the foregoing factors, operating loss, excluding the
charges for litigation settlement, inventory markdown and store closing and
asset impairment, was $56,263,000 for fiscal year 2000, as compared to operating
income of $109,758,000 for fiscal year 1999, excluding the inventory markdown.
Operating income, excluding the Computer Business Segment asset write-off, was
$166,642,000 for fiscal year 1998. Including all of the charges, operating
results were a loss of $193,550,000 for fiscal year 2000, as compared to
operating income of $32,386,000 and $86,692,000 for fiscal years 1999 and 1998,
respectively.
Interest expense was $16,493,000, $10,146,000 and $5,971,000 in fiscal
years 2000, 1999 and 1998, respectively. The increase in interest expense during
fiscal years 2000 and 1999 was primarily due to additional borrowings used to
fund the Company's expansion plans, seasonal inventory requirements and stock
repurchase program.
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19
Other expense (net) was $60,000 in fiscal year 2000, as compared to other
income (net) of $59,000 and $290,000 in fiscal years 1999 and 1998,
respectively. Other income and expense (net) consists primarily of amounts
related to the Company's joint venture partnerships.
The Company recognized income tax benefit of $79,076,000 for fiscal year
2000, as compared to income tax expense of $12,258,000 in fiscal year 1999 and
$32,391,000 in fiscal year 1998 with effective tax rates of 37.6%, 55.0% and
40.0%, respectively. The effective tax rates for all three 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 loss for fiscal year 2000,
excluding the charges for litigation settlement, inventory markdown and store
closing and asset impairment was $49,698,000. The charges for litigation
settlement, inventory markdown and store closing and asset impairment reduced
net income by $11,679,000, $4,946,000 and $66,843,000, respectively. Net income
for fiscal year 1999, excluding the inventory markdown charge for item
rationalization was $59,559,000. The inventory markdown charge recorded during
fiscal year 1999 reduced net income by $49,518,000. Net income for fiscal year
1998, excluding the Computer Business Segment asset write-off was $98,509,000.
The Computer Business Segment asset write-off recorded in fiscal year 1998
reduced net income by $49,889,000.
BUSINESS SEGMENTS
Core Business Segment
Sales for the Core Business Segment, which primarily consists of office
supplies, furniture, business machines, peripherals and CopyMax printing
services, increased 9.2% to $4,939,030,000 in fiscal year 2000 from
$4,522,579,000 in fiscal year 1999. The increase in fiscal year 2000 was
primarily due to new store openings, the additional week included in fiscal year
2000 and the consolidation of OfficeMax de Mexico. The increase was partially
offset by a comparable-store sales decrease of 2.7% for the Core Business
Segment in fiscal year 2000, primarily as a result of the precipitous slowdown
in consumer spending during the second half of the fiscal year. Sales for this
business segment increased 13.1% in fiscal year 1999 from $3,999,235,000 in
fiscal year 1998. The increase in fiscal year 1999 was due to new store openings
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-store sales increase by 2.1% in fiscal year 1999.
Cost of merchandise sold, including buying and occupancy costs and
excluding the litigation settlement charge recorded during fiscal year 2000 and
the inventory markdown charges recorded in fiscal years 2000 and 1999, was 74.9%
of sales in fiscal year 2000, as compared to 73.8% of sales in both fiscal years
1999 and 1998. Gross profit for the Core Business Segment, excluding the
litigation settlement and the inventory markdown charges, was $1,240,388,000, or
25.1% of sales, in fiscal year 2000, $1,184,117,000, or 26.2% of sales, in
fiscal year 1999 and $1,046,943,000, or 26.2% of sales, in fiscal year 1998.
Gross profit as a percentage of sales decreased in fiscal year 2000 due to lost
leverage of certain fixed occupancy costs as a result of a comparable-store
sales decrease. Gross profit including the litigation settlement recorded during
fiscal year 2000 and the inventory markdown charges recorded in fiscal year 2000
and 1999 was $1,212,679,000, or 24.6% of sales, in fiscal year 2000 and
$1,106,745,000, or 24.5% of sales, in fiscal year 1999. Gross profit was
$1,046,943,000, or 26.2% of sales, in fiscal year 1998.
During fiscal year 2000, the Company announced that it had completed a
review of its real estate portfolio and, as a result of that review, elected to
close 50 underperforming superstores. In conjunction with the store closings,
the Company recorded a pre-tax charge for store closing and asset impairment of
$109,578,000 during the fourth quarter of fiscal year 2000. Major components of
the charge included lease disposition costs of $89,815,000, asset impairment and
disposition of $13,071,000 and other closing costs, including severance of
$6,692,000.
Operating results for the Core Business Segment were a loss of $2,231,000
in fiscal year 2000, as compared to income of $154,361,000 in fiscal year 1999.
These results exclude the inventory markdown charges recorded in fiscal years
2000 and 1999 and the charges for litigation settlement and store closing and
asset impairment recorded in fiscal year 2000. Operating income for the Core
Business Segment was $183,456,000 in fiscal year 1998. The decrease in operating
income in fiscal year 2000 was primarily due to lost leverage of certain fixed
occupancy costs included in cost of merchandise sold and increased store
operating and selling expenses as a result of costs associated with the
Company's operating improvement initiatives.
19
20
The decrease in fiscal year 1999 operating income was primarily due to costs
associated with the Company's decision to accelerate its supply-chain management
initiative. Operating results for the Core Business Segment, including all of
the charges, was a loss of $139,518,000 in fiscal year 2000 and income of
$76,989,000 in fiscal year 1999.
Net loss for the Core Business Segment, excluding the charges for
litigation settlement, inventory markdown and store closing and asset
impairment, was $15,229,000 in fiscal year 2000, as compared to net income of
$88,782,000, excluding the inventory markdown charge, in fiscal year 1999 and
$111,684,000 in fiscal year 1998. Including all of the charges, the net loss for
the Core Business Segment was $98,697,000 in fiscal year 2000, as compared to
net income of $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.
OfficeMax.com Segment
Sales for the OfficeMax.com Segment increased 192% to $118,080,000 in
fiscal year 2000 from $40,430,000 in fiscal year 1999. The increase in fiscal
year 2000 followed another increase of 532% in fiscal 1999 from $6,397,000 in
fiscal year 1998. 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, an overall national increase in online business-to-business commerce
and an increase in repeat-customer purchases along with an additional week of
sales in fiscal year 2000. This segment's marketing program included a
multi-media marketing campaign that began in the fourth quarter of fiscal year
1999.
Cost of merchandise sold including buying costs for the OfficeMax.com
Segment was $84,451,000, or 71.5% of sales, in fiscal year 2000, $30,270,000, or
74.9% of sales, in fiscal year 1999 and $4,700,000, or 73.5% of sales, in fiscal
year 1998. The improvement in cost of merchandise sold as a percentage of sales
in fiscal year 2000 was due primarily to a more disciplined pricing strategy and
additional higher margin revenue related to business services and advertising.
The increase in cost of merchandise sold as a percentage of sales in fiscal year
1999 was due primarily to a shift in sales mix towards lower margin paper
products.
Operating results for the OfficeMax.com Segment was a loss of $38,293,000
in fiscal year 2000, $6,239,000 in fiscal year 1999 and $293,000 in fiscal year
1998. The net operating losses in the fiscal years presented were primarily due
to the segment's aggressive advertising and marketing program focused on
customer acquisition in the small business market space and establishing the
OfficeMax.com brand with its target small business customer.
Net loss for the OfficeMax.com Segment was $24,901,000 in fiscal year
2000, $3,906,000 in fiscal year 1999 and $188,000 in fiscal year 1998.
Computer Business Segment
During the first quarter of fiscal 2000, the Company entered into a
strategic alliance with Gateway Companies Inc., ("Gateway") providing for
Gateway to operate a licensed "store-within-a-store" computer department inside
all OfficeMax superstores in the United States. The departments offer products
consistent with the Company's previous Computer Business Segment, including
computers, monitors and related products and services. Accordingly, the Company
completed its phase-out of its Computer Business Segment as of July 23, 2000.
The Gateway store-within-a-store rollout began in March 2000 and was originally
expected to be complete by the end of the first quarter of fiscal year 2001.
Currently, approximately half of the Company's superstores have full-sized,
staffed Gateway computer departments and the remaining superstores feature an
on-line kiosk, which enables customers to browse and purchase electronically.
The Company is currently evaluating alternative options relating to this joint
business relationship in light of the precipitous decline in personal computer
sales and the seemingly longer term, negative outlook for personal computers.
The Company anticipates that should the Gateway departments close, OfficeMax's
operating results would not be materially adversely affected and an alternative
computer manufacturer's brand could be substituted in some form.
20
21
The fiscal year 2000 results of operations for Computer Business Segment
represent the phase-out of this segment as of July 23, 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations used $13,930,000 of cash during fiscal year 2000
and provided $267,946,000 of cash during fiscal year 1999. In addition to the
net loss, a decrease in the leverage of accounts payable to inventory
contributed to the cash usage in fiscal year 2000. Inventory decreased
$114,755,000 during fiscal year 2000 despite adding inventory for new
superstores and a mega PowerMax distribution facility in Alabama opened during
the year. Further, same-store inventory levels decreased nearly 22% in fiscal
year 2000 primarily due to the Company's supply-chain management initiatives.
Accounts payable leverage decreased to 50.7% as of January 27, 2001 from 55.1%
as of January 22, 2000. Net cash provided by operations was $31,011,000 in
fiscal year 1998.
Net cash used for investing activities, primarily capital expenditures for
new and remodeled superstores and information technology initiatives, was
$141,134,000 in fiscal year 2000, as compared to $111,744,000 in fiscal year
1999 and $125,063,000 in fiscal year 1998. Capital expenditures were
$134,812,000, $117,154,000 and $120,760,000 in fiscal years 2000, 1999 and 1998,
respectively.
Net cash provided by financing was $209,880,000 in fiscal year 2000.
Fiscal year 2000 financing activities primarily represented borrowings under the
Company's revolving credit facility, the issuance of $50,000,000 of redeemable
preferred shares and an increase in overdraft balances. Net cash used by
financing activities was $150,597,000 in fiscal year 1999. Fiscal year 1999
financing activities primarily represented a decrease in outstanding borrowings
under the Company's revolving credit facilities, 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. The majority of these advanced payments
were reimbursed in fiscal year 2000. Net cash provided by financing was
$94,733,000 during fiscal year 1998. Fiscal year 1998 financing activities
primarily represented borrowings under the Company's revolving credit facilities
partially offset by the payment of $77,499,000 for treasury stock purchases.
In fiscal 2001, the Company plans to open less than 25 new OfficeMax
superstores in the United States. Management estimates that the Company's cash
requirements for opening a superstore, exclusive of pre-opening expenses, will
be approximately $1,000,000, including approximately $425,000 for leasehold
improvements, fixtures, point-of-sale terminals and other equipment, and
approximately $550,000 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. The Company plans, as soon as
practicable, to reduce the size of its new superstores by approximately 15% to
approximately 20,000 square-feet.
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. 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. The Company did not repurchase any
common shares during fiscal year 2000. Treasury stock purchases to-date included
systematic purchases of shares to cover potential dilution from the future
issuance of shares under the Company's equity-based incentive plans.
During the third quarter of fiscal year 2000, the Company, based on
changes in circumstances and the advice of outside legal counsel, elected to
settle its lawsuit with Ryder Integrated Logistics prior to trial. As a result
of the settlement, the Company recorded a pre-tax charge of $19,465,000, which
was included in cost of merchandise sold. The charge reduced fiscal year 2000
net income by $11,679,000, or $0.10 per diluted share.
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 adverse effect on
the Company's liquidity, financial position or results of operations.
21
22
The Company expects its funds generated from operations as well as its
current cash reserves, and, when necessary, seasonal short-term borrowings to be
sufficient to finance its operations and capital requirements, including its
expansion strategy. During the fourth quarter of fiscal year 2000, the Company
entered into a new three-year revolving credit facility that provides for
borrowings of up to $700,000,000. Borrowings of $220,000,000 were outstanding
under the revolving credit facility at a weighted average interest rate of 8.61%
as of January 27, 2001, as well as $107,432,000 of standby letters of credit
that are considered outstanding amounts under the revolving credit facility. The
Company pays a quarterly usage fee of between 1.62% and 1.87% per annum on the
outstanding standby letters of credit. Also during the fourth quarter of fiscal
year 2000, the Company obtained a commitment from a financial institution for an
additional $50,000,000 in letters of credit to be used for the Company's
merchandise import program. As of January 27, 2001, $14,893,000 of these
additional letters of credit were outstanding.
During the second quarter of fiscal year 2000, the Company repaid the
outstanding balance of its mortgage loan in the amount of $16,100,000. The
mortgage loan was secured by the Company's international corporate headquarters
and had an original maturity of January 2007.
During the second quarter of fiscal year 2000, in connection with the
strategic alliance, Gateway invested $50,000,000 in two newly created series of
redeemable preferred shares of the Company. The redeemable preferred shares are
described in greater detail in Note 15 of Notes to Consolidated Financial
Statements.
During the fourth quarter of fiscal year 2000, the Company assumed an
11-year, $1,800,000 mortgage loan secured by real estate previously leased by
the Company. The mortgage loan bears interest at a rate of 5.0% per annum.
Maturities of long-term borrowings will be approximately $213,000 for each of
the next five years.
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During July 2001, the Financial Accounting Standards Board Emerging Issues
Task Force issued EITF Issue 00-14, "Accounting for Certain Sales Incentives,"
("Issue 00-14") which addresses the timing of recognition for certain sales
incentives and requires that these sales incentives be recognized as a reduction
of sales. The Company adopted Issue 00-14 during the first quarter of fiscal
year 2001. Prior to adoption, the Company recognized sales incentives in store
operating and selling expenses. Adoption of Issue 00-14 did not have a
significant effect on earnings or the financial position of the Company.
During June 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("FAS 133") which, as amended, is required to be adopted in fiscal
years beginning after June 15, 2000. The Company adopted FAS 133 during the
first quarter of fiscal year 2001. Adoption of the new Statement did not have a
significant effect on earnings or the financial position of the Company.
22
23
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 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 14 of Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
23
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 regarding Directors will be
contained under the caption "Election of Directors" in the Proxy Statement which
will be filed with the Securities and Exchange Commission pursuant to Regulation
14A, not later than 120 days after the end of the fiscal year which information
under such caption is incorporated herein by reference.
The information required by this Item 10 regarding executive officers
is contanined under the caption "Executive Officers of the Registrant" in Part
I, Item 1 of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be contained under the
captions "Compensation of Directors" and "Compensation Committee Interlocks and
Insider Participation" in the Proxy Statement which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year which information under such captions
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 will be contained under the
captions "Security Ownership of Certain Beneficial Owners" and "Security
Ownership of Management" in the Proxy Statement which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year which information under such captions
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 will be contained under the
caption "Certain Relationships and Related Transactions" in the Proxy Statement
which will be filed with the Securities and Exchange Commission pursuant to
Regulation 14A, not later than 120 days after the end of the fiscal year which
information under such caption is incorporated herein by reference.
24
25
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 27 and 28 of this report.
(b) Reports on Form 8-K:
None
25
26
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 2, 2001 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 2, 2001
- -------------------- Executive Officer and Director
Michael Feuer (Principal Executive Officer)
/s/ Jeffrey L. Rutherford Senior Executive Vice President, April 2, 2001
- --------------------------- Chief Financial Officer (Principal
Jeffrey L. Rutherford Financial and Accounting Officer)
/s/ Raymond L. Bank Director April 2, 2001
- --------------------
Raymond L. Bank
/s/ Burnett W. Donoho Director April 2, 2001
- -----------------------
Burnett W. Donoho
/s/ Philip D. Fishbach Director April 2, 2001
- ----------------------
Philip D. Fishbach
/s/ Carl D. Glickman Director April 2, 2001
- -----------------------
Carl D. Glickman
/s/ James F. McCann Director April 2, 2001
- -------------------
James F. McCann
/s/ Sydell L. Miller Director April 2, 2001
- --------------------
Sydell L. Miller
Director April __, 2001
- ----------------------
Jerry Sue Thornton
Director April __, 2001
- --------------------
Ivan J. Winfield
26
27
EXHIBIT INDEX
Incorporation
Exhibit No. Description of Exhibit by Reference
- ----------- ---------------------- ------------
3.1 Second Amended and Restated Articles of Incorporation of the Company, as amended. (6)
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 Loan and Security Agreement dated as of November 30, 2000, by and among Fleet Retail
Finance, Inc., as administrative agent, Fleet National Bank, as issuer, Chase Business
Credit Corp. and The Chase Manhattan Bank, as co-agents, GMAC Business Credit, LLC and
GMAC Commercial Credit, LLC, as documentation agents, The CIT Group/Business Credit,
Inc., as syndication agent, Fleet Securities, Inc., as arranger, and the Company, as
lead borrower for OfficeMax, Inc., BizMart, Inc., BizMart (Texas), Inc. and OfficeMax
Corp., as borrowers (filed herewith).
10.2 Mortgage Loan Agreement dated November 6, 1996 by and between the Company and KeyBank (4)
National Association.
10.3 Amended and Restated Employment Agreement dated as of January 2, 2000 by and between (6)
Michael Feuer and the Company.
* 10.4 OfficeMax Employee Share Purchase Plan. (1)
* 10.5 OfficeMax Management Share Purchase Plan. (1)
* 10.6 OfficeMax Director Share Plan. (1)
* 10.7 OfficeMax Amended and Restated Equity-Based Award Plan (filed herewith).
* 10.8 OfficeMax Annual Incentive Bonus Plan. (5)
10.9 Lease Guaranty, Indemnification and Reimbursement Agreement dated November 9, 1994 (2)
between the Company and Kmart Corporation.
10.10 Forms of Severance Agreements. (6)
10.11 Schedule of certain executive officers who are parties to the Severance Agreements in
the forms referred to in Exhibit 10.10 (filed herewith).
21.1 List of Subsidiaries. (6)
23.1 Consent of Independent Accountants (filed herewith).
99.1 Statement Regarding Forward Looking Information (filed herewith).
27
28
(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 Annual Report on Form 10-K for the
fiscal year ended January 24, 1998, 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 22, 2000, 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.
28
29
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 27, 2001, January 22, F - 3
2000 and January 23, 1999
Consolidated Balance Sheets - January 27, 2001 and January 22, 2000 F - 4
Consolidated Statements of Cash Flows - Fiscal years ended January 27, 2001, January 22, F - 5
2000 and January 23, 1999
Consolidated Statements of Changes in Shareholders' Equity - Fiscal years ended January F - 6
27, 2001, January 22, 2000 and January 23, 1999
Notes to Consolidated Financial Statements F - 7
F-1
30
REPORT OF MANAGEMENT
Responsibility for the integrity and objectivity of the financial
information presented in this annual report 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 of
America, 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 included in this annual report. 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
Chief Executive Officer Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders of OfficeMax, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of OfficeMax,
Inc. and its subsidiaries at January 27, 2001 and January 22, 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended January 27, 2001 in conformity with accounting principles
generally accepted in the United States of America. 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 of America, 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 our opinion.
/s/ PricewaterhouseCoopers LLP
--------------------------
PRICEWATERHOUSECOOPERS LLP
Cleveland, Ohio
March 6, 2001
F-2
31
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------------------
January 27, January 22, January 23,
Fiscal Year Ended 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
Sales $ 5,156,392 $ 4,847,022 $ 4,342,554
Cost of merchandise sold, including buying and
occupancy costs 3,904,953 3,653,783 3,284,582
Inventory markdown 8,244 77,372 --
Computer segment asset write-off -- -- 79,950
-----------------------------------------------------------
3,913,197 3,731,155 3,364,532
Gross profit 1,243,195 1,115,867 978,022
Store operating and selling expenses 1,153,918 934,381 770,708
Pre-opening expenses 7,113 10,974 11,851
General and administrative expenses 156,273 128,708 99,381
Goodwill amortization 9,863 9,418 9,390
Store closing and asset impairment 109,578 -- --
-----------------------------------------------------------
Total operating expenses 1,436,745 1,083,481 891,330
-----------------------------------------------------------
Operating income (loss) (193,550) 32,386 86,692
Interest expense, net (16,493) (10,146) (5,971)
Other income (expense), net (60) 59 290
-----------------------------------------------------------
Income (loss) before income taxes (210,103) 22,299 81,011
Income tax expense (benefit) (79,076) 12,258 32,391
Minority interest (2,139) -- --
-----------------------------------------------------------
Net income (loss) $ (133,166) $ 10,041 $ 48,620
===========================================================
Earnings (loss) per common share:
Basic $ (1.20) $ 0.09 $ 0.40
===========================================================
Diluted $ (1.20) $ 0.09 $ 0.39
===========================================================
Weighted average number of common shares
outstanding:
Basic 112,738,000 113,578,000 122,240,000
===========================================================
Diluted 112,738,000 114,248,000 123,751,000
===========================================================
See accompanying Notes to Consolidated Financial Statements.
F-3
32
OFFICEMAX, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------------------
January 27, January 22,
2001 2000
- -------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and equivalents $ 127,337 $ 73,087
Accounts receivable, net of allowances
of $2,766 and $687, respectively 105,666 111,734
Merchandise inventories 1,159,089 1,273,844
Other current assets 110,821 72,910
----------- -----------
Total current assets 1,502,913 1,531,575
Property and Equipment:
Buildings and land 36,180 19,292
Leasehold improvements 196,088 188,900
Furniture, fixtures and equipment 599,813 505,345
----------- -----------
Total property and equipment 832,081 713,537
Less: Accumulated depreciation and amortization (397,757) (311,069)
----------- -----------
Property and equipment, net 434,324 402,468
Other assets and deferred charges 55,680 34,333
Goodwill, net of accumulated amortization
of $79,902 and $70,039, respectively 300,350 310,168
----------- -----------
$ 2,293,267 $ 2,278,544
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $ 587,618 $ 702,416
Accrued expenses and other liabilities 179,034 143,660
Accrued salaries and related expenses 45,197 50,313
Taxes other than income taxes 67,564 72,966
Revolving credit facilities 220,000 91,800
Mortgage loan, current portion 116 1,300
----------- -----------
Total current liabilities 1,099,529 1,062,455
Mortgage loan 1,663 15,125
Other long-term liabilities 141,245 70,895
----------- -----------
Total liabilities 1,242,437 1,148,475
----------- -----------
Commitments and contingencies -- --
Minority interest 16,211 14,072
Redeemable preferred shares 52,319 --
Shareholders' Equity:
Common stock without par value;
200,000,000 shares authorized;
124,969,255 and 124,985,364 shares
issued and outstanding, respectively 865,319 867,866
Deferred stock compensation (321) (304)
Cumulative translation adjustment (417) --
Retained earnings 223,415 358,900
Less: Treasury stock, at cost (105,696) (110,465)
----------- -----------
Total shareholders' equity 982,300 1,115,997
----------- -----------
$ 2,293,267 $ 2,278,544
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
F-4
33
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------------
January 27, January 22, January 23,
Fiscal Year Ended 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net income (loss) $(133,166) $ 10,041 $ 48,620
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Store closing and asset impairment 11,905 -- --
Depreciation and amortization 101,526 89,064 73,863
Deferred income taxes (55,401) 15,023 (16,235)
Other - net 389 1,825 79
Changes in current assets and current liabilities,
excluding the effects of acquisitions:
Decrease (increase) in inventories 114,755 (838) (168,533)
(Decrease) increase in accounts payable (141,213) 101,329 106,689
Decrease (increase) in accounts receivable 6,895 31,281 (49,350)
Increase in accrued liabilities 2,082 33,395 21,799
Store closing reserve 97,673 -- --
Other - net (19,375) (13,174) 14,079
---------------------------------------------------
Net cash (used for) provided by operations (13,930) 267,946 31,011
---------------------------------------------------
INVESTING
Capital expenditures (134,812) (117,154) (120,760)
Consolidation of majority interest in
OfficeMax de Mexico -- 5,384 --
Other - net (6,322) 26 (4,303)
---------------------------------------------------
Net cash used for investing (141,134) (111,744) (125,063)
---------------------------------------------------
FINANCING
Increase (decrease) in revolving credit facilities 128,200 (52,900) 144,700
Payments of mortgage principal, net (14,646) (1,300) (1,300)
Increase (decrease) in overdraft balances 25,792 (43,018) 22,502
Purchase of treasury stock -- (34,841) (77,499)
Decrease (increase) in advanced payments for
leased facilities 19,672 (21,237) --
Proceeds from issuance of common stock, net 2,220 2,699 6,330
Proceeds from issuance of preferred stock, net 50,000 -- --
Other - net (1,358) -- --
---------------------------------------------------
Net cash provided by (used for) financing 209,880 (150,597) 94,733
---------------------------------------------------
Effect of exchange rate changes on cash and
cash equivalents (566) -- --
Net increase in cash and equivalents 54,250 5,605 681
Cash and equivalents, beginning of period 73,087 67,482 66,801
---------------------------------------------------
Cash and equivalents, end of period $ 127,337 $ 73,087 $ 67,482
===================================================
See accompanying Notes to Consolidated Financial Statements.
F-5
34
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative
Common Deferred Stock Translation Retained Treasury
Stock Compensation Adjustment Earnings Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 24, 1998 $ 861,991 $ (306) $ -- $ 300,239 $ (1,279) $ 1,160,645
Comprehensive Income:
Net income -- -- -- 48,620 -- 48,620
-----------
Total comprehensive income 48,620
Shares issued under director plan 175 (141) -- -- -- 34
Exercise of stock options
(including tax benefit) 4,550 -- -- -- -- 4,550
Sale of shares under management
share purchase plan
(including tax benefit) 652 (113) -- -- -- 539
Sale of shares under employee share
purchase plan (including tax
benefit) 953 -- -- -- -- 953
Amortization of deferred compensation -- 300 -- -- -- 300
Treasury stock purchased
(8,135,000 shares) -- -- -- -- (77,499) (77,499)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT JANUARY 23, 1999 868,321 (260) -- 348,859 (78,778) 1,138,142
Comprehensive Income:
Net income -- -- -- 10,041 -- 10,041
-----------
Total comprehensive income 10,041
Shares issued under director plan (226) (150) -- -- 403 27
Exercise of stock options
(including tax benefit) 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)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT JANUARY 22, 2000 867,866 (304) -- 358,900 (110,465) 1,115,997
Comprehensive Income:
Net loss -- -- -- (133,166) -- (133,166)
Cumulative translation
adjustment -- -- (417) -- -- (417)
-----------
Total comprehensive income (133,583)
Shares issued under director plan (502) (220) -- -- 751 29
Exercise of stock options
(including tax benefit) (466) -- -- -- 1,009 543
Sale of shares under management
share purchase plan
(including tax benefit) (168) (70) -- -- 668 430
Sale of shares under employee share
purchase plan (including tax
benefit) (1,411) -- -- -- 2,341 930
Amortization of deferred compensation -- 273 -- -- -- 273
Preferred Stock Accretion -- -- -- (2,319) -- (2,319)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT JANUARY 27, 2001 $ 865,319 $ (321) $ (417) $ 223,415 $ (105,696) $ 982,300
=========== =========== =========== =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
F-6
35
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 27, 2001, the
Company owned and operated 995 superstores in 49 states, Puerto Rico and the
U.S. Virgin Islands. In addition to offering office products, business machines
and related items, OfficeMax superstores also feature CopyMax and FurnitureMax,
in-store modules devoted exclusively to print-for-pay services and office
furniture. 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 business services targeted to small
business and home office customers. Through joint venture partnerships OfficeMax
operates stores internationally in Mexico and Brazil.
BASIS OF PRESENTATION
The Company's consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. 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.
As of January 27, 2001, the Company had two reportable business
segments: the Core Business Segment and the OfficeMax.com Segment. The
operations of the Company's retail stores, call centers and outside sales force
are included in the Core Business Segment. The OfficeMax.com Segment represents
the operations of the Company's Internet site. Prior to July 23, 2000, the
Company also operated a Computer Business Segment, which included desktop and
laptop personal computers sold via the Company's retail stores and its catalog
and direct marketing operations. The Company elected to phase-out operations of
the Computer Business Segment in conjunction with a strategic alliance with a
third-party computer provider.
The Company's fiscal year ends on the Saturday prior to the last
Wednesday in January. Fiscal year 2000 ended on January 27, 2001 and included 53
weeks. Fiscal years 1999 and 1998 ended on January 22, 2000 and January 23,
1999, respectively, and included 52 weeks.
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.
F-7
36
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.
INVENTORIES
Inventories are valued at the lower of average cost or market.
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 $3,400,000 and $7,566,000 at January 27, 2001 and January 22, 2000,
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 $172,566,000, $123,250,000 and $88,769,000 for
fiscal years 2000, 1999 and 1998, 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,
14%-33% for other furniture, fixtures and equipment, 5%-10% for building and
land improvements and 2.5% for buildings.
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 remaining balance of an asset can
be recovered through undiscounted future operating cash flows over the remaining
useful life of the asset. If impairment exists, the carrying amount of the asset
is 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 $116,197,000 and
$90,405,000 for fiscal years 2000 and 1999, respectively.
F-8
37
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 mitigate risk and maintain 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, less an appropriate provision for
returns.
SHIPPING AND HANDLING FEES AND COSTS
During the fourth quarter of fiscal year 2000, the Company adopted
Emerging Issues Task Force Issue 00-10, "Accounting for Shipping and Handling
Fees and Costs," ("Issue 00-10"), which requires that fees charged to customers
in a sales transaction for shipping and handling be classified as revenue.
Adoption of Issue 00-10 resulted in the reclassification to sales of
approximately $3,576,000, $4,324,000 and $4,786,000 of shipping and handling
fees previously recorded as a reduction of store operating and selling expenses
in fiscal years 2000, 1999 and 1998, respectively. The Company has elected to
continue to record shipping and handling related costs in store operating and
selling expense. Such costs were approximately $64,774,000, $56,774,000 and
$45,961,000 in fiscal years 2000, 1999 and 1998, respectively.
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 Board 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 12 of
Notes to Consolidated Financial Statements.
COMPREHENSIVE INCOME
The components of the Company's comprehensive income (loss) are as
follows:
- ----------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JANUARY 27, JANUARY 22, JANUARY 23,
(Dollars in thousands) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) $ (133,166) $ 10,041 $ 48,620
Other comprehensive income:
Cumulative translation adjustment (417) - -
----------------- ----------------- ----------------
Comprehensive income (loss) $ (133,583) $ 10,041 $ 48,620
================= ================= ================
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.
F-9
38
A reconciliation of the basic and diluted per share computations is as
follows:
- ----------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JANUARY 27, JANUARY 22, JANUARY 23,
(Dollars in thousands, except per share data) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) $ (133,166) $ 10,041 $ 48,620
Preferred stock accretion (2,319) - -
--------- -------- --------
Net income (loss) available
to common shareholders $ (135,485) $ 10,041 $ 48,620
Weighted average number of
common shares outstanding 112,738 113,578 122,240
Effect of dilutive securities:
Stock options - 569 714
Restricted stock units - 101 797
--------- -------- --------
Weighted average number of
common shares outstanding
and assumed conversions 112,738 114,248 123,751
========= ======== ========
Basic earnings (loss) per common share $ (1.20) $ 0.09 $ 0.40
========= ======== ========
Diluted earnings (loss) per common share $ (1.20) $ 0.09 $ 0.39
========= ======== ========
Options to purchase 14,856,623 common shares at a weighted average
exercise price of $8.09 and 148,463 restricted stock units were excluded from
the calculation of diluted earnings per share for the fiscal year ended January
27, 2001, because their effect would have been anti-dilutive due to the net loss
recognized in that period.
Options to purchase 7,470,000 and 4,794,000 common shares were excluded
from the calculation of diluted earnings per share in fiscal years 1999 and
1998, 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 and $14.89, respectively.
NOTE 2. STORE CLOSING AND ASSET IMPAIRMENT
During the fourth quarter of fiscal year 2000, the Company announced
that it had completed a review of its real estate portfolio and, as result of
this review, elected to close 50 underperforming superstores. In conjunction
with the store closings, the Company recorded a pre-tax charge for store closing
and asset impairment of $109,578,000 during the fourth quarter of fiscal year
2000. Major components of the charge included lease disposition costs of
$89,815,000, asset impairment and disposition of $13,071,000 and other closing
costs, including severance, of $6,692,000. The charge reduced net income by
$66,843,000, or $0.59 per diluted share, during fiscal year 2000. As of January
27, 2001, the Company had a reserve for store closing costs of $97,673,000, of
which $72,314,000 is included in other long-term liabilities. Also during the
fourth quarter, the Company recorded a pre-tax inventory markdown charge of
$8,244,000 as a result of the inventory liquidation at the closing stores. The
inventory markdown reduced net income by $4,946,000, or $0.05 per diluted share,
during fiscal year 2000. During the first quarter of fiscal year 2001, 46 of the
closing stores began the liquidation process and are expected to close during
the second quarter of fiscal year 2001. The results of operations for the 46
closing stores were assumed by a third-party liquidator and, accordingly, will
not be included in the Company's consolidated results of operations beginning
January 28, 2001. The remaining stores are expected to begin the liquidation
process by the end of fiscal year 2001.
F-10
39
NOTE 3. 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 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 was 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. The charge reduced net income by $49,518,000, or $0.43
per diluted share, in fiscal year 1999.
NOTE 4. COMPUTER BUSINESS 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
the fourth quarter of fiscal year 1998. 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 5. ACQUISITION OF MAJORITY INTEREST IN OFFICEMAX DE MEXICO
Effective January 1, 2000, the Company purchased for $14,000,000 an
additional 12% of OfficeMax de Mexico, its joint venture in Mexico that operates
OfficeMax superstores similar to those in the United States. The excess of the
purchase price over the net assets of the joint venture was approximately
$4,700,000, 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.
As a result of the purchase, the Company owns 51% of OfficeMax de Mexico and
includes the net assets of the joint venture and related minority interest in
its consolidated balance sheets. In fiscal year 2000, the Company also included
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.
NOTE 6. 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.
F-11
40
NOTE 7. DEBT
REVOLVING CREDIT FACILITIES
On November 30, 2000, the Company entered into a new three-year
revolving credit facility (the "revolving credit facility") in which 22 lenders
participate. The revolving credit facility is secured by a first priority
perfected security interest in the inventory and certain accounts receivable of
the Company and provides for borrowings of up to $700,000,000 at the bank's base
rate or Eurodollar rate plus 1.75% to 2.5% depending on the level of borrowing.
Proceeds from the new revolving credit facility were used to repay all
outstanding borrowings under the Company's previous revolving credit facilities.
As of January 27, 2001, the Company had outstanding borrowings of $220,000,000
under the new revolving credit facility at a weighted average interest rate of
8.61%. As of January 22, 2000, the Company had outstanding borrowings of
$91,800,000 under the Company's previous revolving credit facilities at a
weighted average interest rate of 5.98%. The Company had $107,432,000 of standby
letters of credit outstanding as of January 27, 2001 in connection with its
self-insurance program and two synthetic leases. These letters of credit are
considered outstanding amounts under the new revolving credit facility. The
Company pays quarterly usage fees of between 1.62% and 1.87% per annum on the
outstanding standby letters of credit. The Company must also pay quarterly fees
of 0.25% per annum on the unused portion of the new revolving credit facility.
Also during the fourth quarter of fiscal year 2000, the Company
obtained a commitment from a financial institution for an additional $50,000,000
in letters of credit to be used for the Company's merchandise import program. As
of January 27, 2001, $14,893,000 of these letters of credit were outstanding.
MORTGAGE
During the second quarter of fiscal year 2000, the Company repaid the
outstanding balance of its mortgage loan in the amount of $16,100,000. The
mortgage loan was secured by the Company's international corporate headquarters
and had an original maturity of January 2007. As of January 22, 2000, the
outstanding balance of the mortgage loan was $16,425,000 with an interest rate
of 6.73% per annum.
During the fourth quarter of fiscal year 2000, the Company assumed an
eleven-year $1,800,000 mortgage loan secured by real estate previously leased by
the Company. The mortgage loan bears interest at a rate of 5.0% per annum.
Maturities of long-term borrowings will be approximately $213,000 for each of
the next five years.
NOTE 8. COMMITMENTS AND CONTINGENCIES
During the third quarter of fiscal year 2000, the Company, based on
changes in circumstances and the advice of outside legal counsel, elected to
settle its lawsuit with Ryder Integrated Logistics prior to trial. As a result
of the settlement, the Company recorded a pre-tax charge of $19,465,000, which
was included in cost of merchandise sold. The charge reduced fiscal year 2000
net income by $11,679,000, or $0.10 per diluted share.
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 adverse
effect on the Company's liquidity, financial position or results of operations.
F-12
41
NOTE 9. INCOME TAXES
The provision (benefit) for income taxes consists of:
- ------------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JANUARY 27, JANUARY 22, JANUARY 23,
(Dollars in thousands) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Current federal $ (21,317) $ (4,731) $ 44,574
State and local (4,084) 1,280 3,304
Foreign 1,727 686 748
Deferred (55,402) 15,023 (16,235)
---------- --------- ---------
Total income taxes $ (79,076) $ 12,258 $ 32,391
========== ========= =========
A reconciliation of the federal statutory rate to the Company's
effective tax rate follows:
- ----------------------------------------------------------------------------------------------------------------
JANUARY 27, JANUARY 22, JANUARY 23,
FISCAL YEAR ENDED 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
State and local taxes net of
federal tax benefit 4.0% 3.7% 2.7%
Goodwill amortization (1.7)% 14.8% 4.1%
Tax exempt interest - - (0.1)%
Other 0.3% 1.5% (1.7)%
---- ---- ----
Total income taxes 37.6% 55.0% 40.0%
==== ==== ====
Deferred tax assets resulted from the following:
- -----------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JANUARY 27, JANUARY 22,
(Dollars in thousands) 2001 2000
- -----------------------------------------------------------------------------------------------
Inventory $ 9,864 $ 6,973
Property and equipment (15,291) (12,764)
Escalating rent 22,769 18,256
Store closing reserve 43,810 -
Accrued expenses not currently deductible 25,299 18,584
-------- --------
Total deferred tax assets $ 86,451 $ 31,049
======== ========
NOTE 10. 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).
F-13
42
LEASE COMMITMENTS
Future minimum lease payments and future minimum rentals at January 27,
2001 were as follows:
- -------------------------------------------------------------------------
FISCAL YEAR OPERATING
(Dollars in thousands) LEASES
- -------------------------------------------------------------------------
2001 $ 348,212
2002 325,638
2003 300,259
2004 270,582
2005 247,447
Thereafter 1,637,746
----------
Total minimum lease payments $3,129,884
==========
RENTAL EXPENSE
A summary of operating lease rental expense and short-term rentals
follows:
- ---------------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JANUARY 27, JANUARY 22, JANUARY 23,
(Dollars in thousands) 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Minimum rentals $ 355,785 $ 321,158 $ 264,858
Percentage rentals 249 254 478
--------- --------- ---------
Total $ 356,034 $ 321,412 $ 265,336
========= ========= =========
NOTE 11. SUPPLEMENTAL CASH FLOW INFORMATION
- ----------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JANUARY 27, JANUARY 22, JANUARY 23,
(Dollars in thousands) 2001 2000 1999
- ----------------------------------------------------------------------------------------------
Cash transactions:
Cash paid for interest $15,819 $11,013 $ 6,640
Cash paid for income taxes $ 6,742 $ 4,402 $ 9,117
Cash paid for acquisition of majority
interest in OfficeMax de Mexico $10,000 $ - $ -
Non-cash transactions:
Liabilities accrued for property and
equipment acquired $24,290 $20,066 $ -
Note receivable converted to
equity investment $ - $ - $ 4,000
Tax benefit related to stock options $ 70 $ 282 $ 500
Payable recorded for acquisition of majority
interest in OfficeMax de Mexico $ - $14,000 $ -
F-14
43
NOTE 12. EMPLOYEE BENEFIT PLANS
STOCK PURCHASE PLANS
The Company has 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 $103,000, $112,000 and $160,000
for fiscal years 2000, 1999 and 1998, 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 PLANS
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. In addition, highly compensated employees (as defined by the
Employee Retirement Income Security Act of 1974, as amended) are eligible to
participate in the Company's Executive Savings Deferral Plan (ESDP) if their
contributions to the 401(k) savings plan are limited. The provisions of the ESDP
are similar to those of the Company's 401(k) savings plan. The charge to
operations for the Company's matching contributions to these plans amounted to
$1,290,000, $1,050,000 and $950,000 in fiscal years 2000, 1999 and 1998,
respectively.
STOCK OPTION PLANS
The Company's Equity-Based Award Plan provides for the issuance of up
to 26,000,000 share appreciation rights, restricted shares and 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 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 2000, 1999 and 1998.
Exercisable options outstanding were 3,996,544 at January 27, 2001,
3,904,106 at January 22, 2000 and 3,209,432 at January 23, 1999.
F-15
44
Option activity for each of the last three fiscal years was as follows:
[CAPTION]
- -------------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
- -------------------------------------------------------------------------------------------------
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
Granted 5,485,993 3.62
Exercised (112,822) 4.01
Forfeited (2,604,895) 10.30
----------- --------
OUTSTANDING AT JANUARY 27, 2001 14,856,623 $ 8.09
=========== ========
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 2000, 1999 and 1998, respectively,
were expected volatility of 37.4%, 36.9% and 30.9% and risk-free interest rates
of 6.2%, 5.7% and 4.9%. 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 27, 2001:
Options Outstanding Options Exercisable
--------------------------------------- ------------------------------------
Range of Weighted Average Weighted Average Weighted Average
Exercise Prices Options Exercise Price Remaining Life (Years) Options Exercise Price
------------------ -------------------- --------------- --------------------
$2.38 to $2.69 2,174,650 $ 2.55 9.8 - $ -
$4.01 to $6.69 4,485,538 $ 6.30 8.3 275,905 $ 4.04
$7.56 to $8.69 3,008,876 $ 7.91 7.7 461,428 $ 8.04
$10.19 to $11.75 2,343,293 $ 11.52 5.5 1,936,130 $ 11.62
$13.88 to $18.13 2,844,266 $ 14.93 6.2 1,323,081 $ 14.95
F-16
45
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 2000, 1999 and 1998. 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.
- -------------------------------------------------------------------------------------------------------------------
JANUARY 27, JANUARY 22, JANUARY 23,
Fiscal Year Ended 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Weighted average fair value $ 2.16 $ 3.37 $ 4.28
Pro forma net income (loss) $ (133,173,000) $ 5,961,000 $ 44,200,000
Pro forma earnings (loss) per
common share
Basic $ (1.26) $ 0.05 $ 0.36
Diluted $ (1.26) $ 0.05 $ 0.36
NOTE 13. BUSINESS SEGMENTS
As of January 27, 2001, the Company had two reportable business
segments: the Core Business Segment and the OfficeMax.com Segment. The
operations of the Company's retail stores, call centers and outside sales force
are included in the Core Business Segment. 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. Prior to July 23, 2000, the Company
also operated a Computer Business Segment, which included desktop and laptop
personal computers sold via the Company's retail stores and its catalog and
direct marketing operations. The Company elected to phase-out operations of the
Computer Business Segment in conjunction with a strategic alliance with a
third-party computer provider. The accounting policies of the reportable
business segments are the same as those described in the Summary of Significant
Accounting Policies (Note 1). The combined results of operations and assets of
the Company's reportable business segments are equal to the Company's
consolidated results of operations and assets. Certain centrally incurred costs
are allocated to the business segments based on each segment's estimated usage
and/or benefit. There is no profit on intersegment transactions or allocations.
Goodwill and the related amortization are included in the Core Business Segment.
Through joint venture partnerships, the Company operates stores
internationally similar to those in the United States. Since OfficeMax has a
majority interest in its joint venture in Mexico, OfficeMax de Mexico, which was
purchased as of the end of fiscal year 1999, the Company consolidates the net
assets, results of operations and cash flows of OfficeMax de Mexico within the
Core Business Segment. Sales for OfficeMax de Mexico were $116,269,000 for
fiscal year 2000. Minority interest in the net income of OfficeMax de Mexico was
$2,139,000 for fiscal year 2000. The net assets of OfficeMax de Mexico included
long-lived assets, primarily fixed assets, of $19,312,000 and $14,084,000 as of
January 27, 2001 and January 22, 2000, respectively. The Company's other
investments in joint ventures are accounted for under the cost method and are
also reported within the Core Business Segment. Other than its investments in
joint venture partnerships, the Company has no international sales or assets.
The total assets of the OfficeMax.com segment, primarily fixed assets,
were approximately $4,901,000 and $1,695,000 as of January 27, 2001 and January
22, 2000, respectively. This segment also had accrued expenses of $1,334,000 and
$786,000 as of January 27, 2001 and January 22, 2000, respectively. Depreciation
expense for the OfficeMax.com segment was $734,000, $258,000 and $119,000 for
fiscal years 2000, 1999 and 1998, respectively.
The total assets of the Computer Business Segment, primarily inventory
and accounts receivable, were approximately $65,850,000 as of January 22, 2000.
This segment also had accounts payable of $3,605,000 as of January 22, 2000. The
Company did not allocate fixed assets or depreciation to the Computer Business
Segment.
F-17
46
The following table summarizes the results of operations for the
Company's reportable business segments including the phased-out Computer
Business Segment:
(Dollars in thousands)
TOTAL
FISCAL YEAR 2000 COMPANY COMPUTER OFFICEMAX.COM CORE
- ---------------------------------------------------------------------------------------------------------------------
Sales $ 5,156,392 $ 99,282 $ 118,080 $ 4,939,030
Cost of merchandise sold, including
buying and occupancy costs 3,904,953 102,395 84,451 3,718,107
Inventory markdown 8,244 -- -- 8,244
--------------------------------------------------------------------
3,913,197 102,395 84,451 3,726,351
Gross profit (loss) 1,243,195 (3,113) 33,629 1,212,679
Store closing and asset impairment 109,578 -- -- 109,578
Operating loss (193,550) (15,739) (38,293) (139,518)
Interest expense, net (16,493) (208) (3,210) (13,075)
Other, net (60) -- -- (60)
Income tax benefit (79,076) (6,379) (16,602) (56,095)
Minority interest (2,139) -- -- (2,139)
--------------------------------------------------------------------
Net loss $ (133,166) $ (9,568) $ (24,901) $ (98,697)
====================================================================
FISCAL YEAR 1999
- ---------------------------------------------------------------------------------------------------------------------
Sales $ 4,847,022 $ 284,013 $ 40,430 $ 4,522,579
Cost of merchandise sold, including
buying and
occupancy costs 3,653,783 285,051 30,270 3,338,462
Inventory markdown 77,372 -- -- 77,372
--------------------------------------------------------------------
3,731,155 285,051 30,270 3,415,834
Gross profit (loss) 1,115,867 (1,038) 10,160 1,106,745
Operating income (loss) 32,386 (38,364) (6,239) 76,989
Interest expense, net (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 $ 4,342,554 $ 336,922 $ 6,397 $ 3,999,235
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) 978,022 (70,618) 1,697 1,046,943
Operating income (loss) 86,692 (96,471) (293) 183,456
Interest expense, net (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
====================================================================
F-18
47
NOTE 14. QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS
Unaudited quarterly consolidated results of operations for the years
ended January 27, 2001 and January 22, 2000 are summarized as follows:
(Dollars in thousands, except per share data)
FISCAL YEAR 2000
(unaudited)
- -----------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
- -----------------------------------------------------------------------------------------------------------------------
Sales $ 1,345,342 $ 1,079,864 $ 1,307,968 $ 1,423,218
Cost of merchandise sold, including
buying and
occupancy costs 1,016,696 820,560 989,098 1,078,599
Inventory markdown -- -- -- 8,244
----------- ----------- ----------- -----------
Gross profit 328,646 259,304 318,870 336,375
Store closing and asset impairment -- -- -- 109,578
----------- ----------- ----------- -----------
Net loss $ (2,083) $ (24,114) $ (22,019) $ (84,950)
=========== =========== =========== ===========
Loss per common share:
Basic $ (0.02) $ (0.22) $ (0.20) $ (0.76)
Diluted $ (0.02) $ (0.22) $ (0.20) $ (0.76)
FISCAL YEAR 1999
(unaudited)
- ---------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------------------------------------------------------
Sales $ 1,180,508 $ 971,526 $ 1,302,882 $ 1,392,106
Cost of merchandise sold, including
buying and
occupancy costs 900,958 732,713 990,711 1,029,401
Inventory markdown -- -- 83,257 (5,885)
------------------------------------------------------------------------
Gross profit 279,550 238,813 228,914 368,590
Net income (loss) $ 22,016 $ 2,427 $ (37,440) $ 23,038
========================================================================
Earnings (loss) per common share:
Basic $ 0.19 $ 0.02 $ (0.33) $ 0.20
Diluted $ 0.19 $ 0.02 $ (0.33) $ 0.20
NOTE 15. SHAREHOLDERS' EQUITY
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 more than 15 percent of the Company's common stock. The plan
was 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 an acquisition.
REDEEMABLE PREFERRED SHARES
During the first quarter of fiscal year 2000, the Company entered into
a five-year, multi-channel alliance with Gateway. In accordance with the
alliance, Gateway has invested $50,000,000 in OfficeMax convertible preferred
stock - $30,000,000 designated for OfficeMax and $20,000,000 designated for
OfficeMax.com.
F-19
48
Gateway's investment in OfficeMax is in the form of a newly created
series of convertible preferred shares of the Company, the Series A Voting
Preference Shares (the "Series A Shares"), at a purchase price of $9.75 per
share. The Series A Shares vote on an as-converted to Common Shares basis (one
vote per share) and do not bear any interest or coupon. After two years, the
Series A Shares are convertible into Common Shares of the Company on a 1:1 basis
provided that Gateway store-within-a-store modules are opened in accordance with
the terms of the Master License Agreement and the fair value of the Company's
Common Shares is at least $12.50 per share. If after two years Gateway
store-within-a-store modules are not opened in accordance with the terms of the
Master License Agreement, the Series A Shares are redeemable by Gateway at face
value. If at the end of the alliance Gateway store-within-a-store modules are
opened in accordance with the terms of the Master License Agreement, each Series
A Share is convertible into $12.50 of the Company's Common Shares. In addition,
the Company can elect to convert the Series A Shares into Common Shares on a 1:1
basis at any time if the fair value of the Company's Common Stock is at least
$12.50 per share, subject to certain "make-whole" or fair value guarantees. The
increase in fair value of the Series A Shares, from $9.75 per share to $12.50
per share, is being recognized on a straight-line basis by the Company over the
term of the alliance by a charge directly to Retained Earnings for Preferred
Stock Accretion.
Gateway's investment in OfficeMax.com is also in the form of a newly
created series of convertible preferred shares of the Company, the Series B
Serial Preferred Shares (the "Series B Shares"), at a purchase price of $10 per
share. The Series B Shares bear a coupon rate of 7% per annum and have no voting
rights. The 7% per annum coupon rate is being recognized by the Company by a
charge directly to Retained Earnings for Preferred Stock Accretion. The Series B
Shares are convertible into a tracking stock that tracks the performance of
OfficeMax.com (the "Tracking Stock") at a 30% discount to the initial price of
the Tracking Stock determined by a public market. The Series B Shares are
redeemable at Gateway's option at face value plus dividends, if no such Tracking
Stock is registered under the Securities Act of 1933 and the Securities Exchange
Act of 1934 and listed for trading on a national securities exchange by June 30,
2001, or Gateway elects not to convert the Series B Shares into a Tracking
Stock. The June 30, 2001 conversion or redemption deadline can be extended to
June 30, 2002, if Gateway elects to extend certain dates in the Master License
Agreement.
During the second quarter of fiscal year 2000, Gateway paid the Company
$50,000,000 in cash in satisfaction of the investment requirements of the
strategic alliance. Accordingly, the Company issued Gateway 3,076,923 Series A
Shares and 2,000,000 Series B Shares.
F-20