SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 27, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission file number 1-13380
OFFICEMAX, INC.
---------------
(Exact name of registrant as specified in its charter)
OHIO 34-1573735
---- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3605 WARRENSVILLE CENTER ROAD, SHAKER HEIGHTS, OHIO 44122
---------------------------------------------------------
(Address of principal executive offices)
(zip code)
(216) 471-6900
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Shares outstanding as of
Title of each class November 23, 2001
------------------- -----------------
Common Shares, without par value 113,346,344
OFFICEMAX, INC.
INDEX
Part I - Financial Information Page
- ------------------------------
Item 1. Financial Statements 3-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
Part II - Other Information
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------------------------------
OFFICEMAX, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
OCTOBER 27, JANUARY 27, OCTOBER 21,
2001 2001 2000
------------ ------------ ------------
(Unaudited) (Unaudited)
ASSETS
Current Assets:
Cash and equivalents $ 62,469 $ 127,337 $ 87,272
Accounts receivable, net of allowances
of $1,031, $1,261 and $306, respectively 81,136 105,666 78,191
Merchandise inventories 992,356 1,159,089 1,286,845
Other current assets 150,475 110,821 78,940
------------ ------------ ------------
Total current assets 1,286,436 1,502,913 1,531,248
Property and Equipment:
Buildings and land 35,999 36,180 19,293
Leasehold improvements 186,321 196,088 191,788
Furniture, fixtures and equipment 615,911 599,813 551,549
------------ ------------ ------------
Total property and equipment 838,231 832,081 762,630
Less: Accumulated depreciation and amortization (453,664) (397,757) (373,561)
------------ ------------ ------------
Property and equipment, net 384,567 434,324 389,069
Other assets and deferred charges 46,499 55,680 13,001
Goodwill, net of accumulated amortization
of $87,293, $79,902 and $77,430, respectively 292,959 300,350 302,822
------------ ------------ ------------
$ 2,010,461 $ 2,293,267 $ 2,236,140
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $ 464,058 $ 587,618 $ 647,502
Accrued expenses and other liabilities 288,124 291,795 191,544
Revolving credit facilities 140,400 220,000 180,000
Redeemable preferred shares - Series B 21,750 -- --
Mortgage loan, current portion 121 116 --
------------ ------------ ------------
Total current liabilities 914,453 1,099,529 1,019,046
Mortgage loan 1,564 1,663 --
Other long-term liabilities 127,736 141,245 81,091
------------ ------------ ------------
Total liabilities 1,043,753 1,242,437 1,100,137
Minority interest 18,554 16,211 15,979
Redeemable preferred shares - Series A 32,115 31,269 30,846
Redeemable preferred shares - Series B -- 21,050 20,700
Commitments and contingencies -- -- --
Shareholders' Equity:
Common shares, without par value; 200,000,000 shares
authorized; 124,919,859, 124,969,255 and 124,969,255
shares issued and outstanding, respectively 864,172 865,319 866,269
Deferred stock compensation (91) (321) (204)
Cumulative translation adjustment 428 (417) 377
Retained earnings 155,508 223,415 309,138
Less: Treasury stock, at cost (103,978) (105,696) (107,102)
------------ ------------ ------------
Total shareholders' equity 916,039 982,300 1,068,478
------------ ------------ ------------
$ 2,010,461 $ 2,293,267 $ 2,236,140
============ ============ ============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these balance sheets.
3
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
13 WEEKS ENDED 39 WEEKS ENDED
---------------------------------- ----------------------------------
OCTOBER 27, OCTOBER 21, OCTOBER 27, OCTOBER 21,
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
Sales $ 1,188,847 $ 1,299,454 $ 3,361,577 $ 3,716,600
Cost of merchandise sold, including
buying and occupancy costs 906,129 989,098 2,544,982 2,826,354
--------------- --------------- --------------- ---------------
Gross profit 282,718 310,356 816,595 890,246
Store operating and selling expenses 280,314 301,815 784,382 822,064
Pre-opening expenses 390 892 2,685 5,665
General and administrative expenses 36,018 33,434 111,002 116,462
Goodwill amortization 2,464 2,464 7,391 7,391
--------------- --------------- --------------- ---------------
Total operating expenses 319,186 338,605 905,460 951,582
Operating loss (36,468) (28,249) (88,865) (61,336)
Interest expense, net 2,766 4,686 12,923 10,784
Other (income) expense, net (25) 189 61 413
--------------- --------------- --------------- ---------------
Loss before income taxes (39,209) (33,124) (101,849) (72,533)
Income tax benefit (14,714) (12,045) (37,832) (26,224)
Minority interest 1,285 940 2,344 1,907
--------------- --------------- --------------- ---------------
Net loss $ (25,780) $ (22,019) $ (66,361) $ (48,216)
=============== =============== =============== ===============
LOSS PER COMMON SHARE:
Basic $ (0.23) $ (0.20) $ (0.60) $ (0.44)
=============== =============== =============== ===============
Diluted $ (0.23) $ (0.20) $ (0.60) $ (0.44)
=============== =============== =============== ===============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic 113,218,671 112,804,543 113,161,739 112,726,125
=============== =============== =============== ===============
Diluted 113,218,671 112,804,543 113,161,739 112,726,125
=============== =============== =============== ===============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
39 WEEKS ENDED
------------------------------
OCTOBER 27, OCTOBER 21,
2001 2000
------------ ------------
CASH PROVIDED BY (USED FOR):
OPERATIONS
Net loss $ (66,361) $ (48,216)
Adjustments to reconcile net loss to net cash
provided by (used for) operations:
Depreciation and amortization 76,926 74,379
Deferred income taxes 12,226 (4,602)
Other, net 9,669 10,354
Changes in current assets and current liabilities:
Decrease (increase) in inventories 166,733 (13,001)
Decrease in accounts payable - trade (84,677) (70,630)
Decrease in accounts receivable 26,358 33,543
Decrease in accrued expenses and other liabilities (12,451) (47,183)
Other, net (44,993) 13,374
------------ ------------
Net cash provided by (used for) operations 83,430 (51,982)
------------ ------------
INVESTING
Capital expenditures (32,461) (76,031)
Other, net (1,551) (942)
------------ ------------
Net cash used for investing (34,012) (76,973)
------------ ------------
FINANCING
(Decrease) increase in revolving credit facilities (79,600) 88,200
Payments of mortgage principal (94) (16,425)
(Decrease) increase in overdraft balances (41,067) 16,856
Decrease in advanced payments for leased facilities 2,050 3,429
Proceeds from the issuance of common stock, net 570 1,765
Proceeds from the issuance of preferred stock, net -- 50,000
Other, net 1,054 (39)
------------ ------------
Net cash (used for) provided by financing (117,087) 143,786
------------ ------------
Effect of exchange rate changes on cash and cash equivalents 2,801 (646)
------------ ------------
Net (decrease) increase in cash and equivalents (64,868) 14,185
Cash and equivalents, beginning of the period 127,337 73,087
------------ ------------
Cash and equivalents, end of the period $ 62,469 $ 87,272
============ ============
SUPPLEMENTAL INFORMATION
Interest paid on debt $ 13,650 $ 11,530
============ ============
Taxes paid on income $ 1,070 $ 2,384
============ ============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
OFFICEMAX, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Deferred Cumulative
Common Stock Translation Retained Treasury
Shares Compensation Adjustment Earnings Stock Total
---------- ------------ ---------- ---------- ---------- ----------
BALANCE AT JANUARY 27, 2001 $ 865,319 $ (321) $ (417) $ 223,415 $ (105,696) $ 982,300
Comprehensive income (loss):
Net loss -- -- -- (66,361) -- (66,361)
Cumulative translation adjustment -- -- 845 -- -- 845
----------
Total comprehensive loss (65,516)
Issuance of common shares
under director plan (38) -- -- -- 63 25
Sale of shares under
management share purchase
plan (including tax benefit) -- 26 -- -- -- 26
Sale of shares under employee
share purchase plan
(including tax benefit) (1,109) -- -- -- 1,655 546
Amortization of deferred
compensation -- 204 -- -- -- 204
Preferred Stock Accretion -- -- -- (1,546) -- (1,546)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT OCTOBER 27, 2001 $ 864,172 $ (91) $ 428 $ 155,508 $ (103,978) $ 916,039
========== ========== ========== ========== ========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
6
OFFICEMAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE 13 AND 39 WEEKS ENDED
OCTOBER 27, 2001 AND OCTOBER 21, 2000
Significant Accounting and Reporting Policies
- ---------------------------------------------
1. The accompanying unaudited consolidated financial statements have been
prepared from the financial records of OfficeMax, Inc. and its subsidiaries
(the "Company" or "OfficeMax") and reflect all adjustments which are, in
the opinion of management, necessary to fairly present the results of the
interim periods covered in this report. The results for any interim period
are not necessarily indicative of the results to be expected for the full
fiscal year.
2. The Company's consolidated financial statements for the 13 and 39 weeks
ended October 27, 2001 and October 21, 2000 included in this Quarterly
Report on Form 10-Q, have been prepared in accordance with the accounting
policies described in the Notes to Consolidated Financial Statements for
the fiscal year ended January 27, 2001 which were included in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission (File No. 1-13380) on April 3, 2001. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted in accordance with the
rules and regulations of the Securities and Exchange Commission. These
financial statements should be read in conjunction with the financial
statements, and the notes thereto, included in the Form 10-K referred to
above. Certain reclassifications have been made to prior year amounts to
conform to the current presentation.
3. The Company's fiscal year ends on the Saturday prior to the last Wednesday
in January. Fiscal year 2001 ends on January 26, 2002 and includes 52
weeks. Fiscal year 2000 ended on January 27, 2001 and included 53 weeks.
4. At October 27, 2001, OfficeMax operated a chain of 990 superstores in 49
states, Puerto Rico, the U.S. Virgin Islands and, through joint venture
partnerships, in Mexico and Brazil. In addition to offering office
products, business machines and related items, OfficeMax superstores also
feature CopyMax and FurnitureMax, store-within-a-store modules devoted
exclusively to print-for-pay services and office furniture. Additionally,
the Company reaches customers with an offering of over 30,000 items through
its eCommerce site, "OfficeMax.com," its direct-mail catalogs and its
outside sales force, all of which are serviced by its three PowerMax
distribution facilities, 18 delivery centers and two national call centers.
5. The components of the Company's comprehensive loss are as follows:
(Dollars in thousands)
13 WEEKS ENDED 39 WEEKS ENDED
------------------------------ ----------------------------
October 27, October 21, October 27, October 21,
2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------------
Net loss $(25,780) $(22,019) $(66,361) $(48,216)
Other comprehensive income:
Cumulative translation adjustment 500 273 845 377
-------- -------- -------- --------
Comprehensive loss $(25,280) $(21,746) $(65,516) $(47,839)
======== ======== ======== ========
7
6. Earnings per share are calculated in accordance with the provisions of
Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS 128
requires the Company to report both basic earnings per share, which is
based on the weighted average number of common shares outstanding, and
diluted earnings per share, which is based on the weighted average number
of common shares outstanding and all potentially dilutive common stock
equivalents.
A reconciliation of the basic and diluted per share computations is as
follows:
(Dollars in thousands, except per share data)
13 WEEKS ENDED 39 WEEKS ENDED
----------------------------------- ------------------------------------
October 27, October 21, October 27, October 21,
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Net loss $ (25,780) $ (22,019) $ (66,361) $ (48,216)
Preferred stock accretion -- (773) (1,546) (1,546)
------------- ------------- ------------- -------------
Net loss available
to common shareholders $ (25,780) $ (22,792) $ (67,907) $ (49,762)
============= ============= ============= =============
Weighted average number of common
shares outstanding 113,218,671 112,804,543 113,161,739 112,726,125
Effect of dilutive securities:
Stock options -- -- -- --
Restricted stock units -- -- -- --
------------- ------------- ------------- -------------
Weighted average number of common
shares outstanding and assumed
conversions 113,218,671 112,804,543 113,161,739 112,726,125
============= ============= ============= =============
Loss per common share-Basic $ (0.23) $ (0.20) $ (0.60) $ (0.44)
============= ============= ============= =============
Loss per common share-Diluted $ (0.23) $ (0.20) $ (0.60) $ (0.44)
============= ============= ============= =============
Options to purchase 14,324,664 shares at a weighted average exercise price
of $7.91 and 83,521 restricted stock units were excluded from the
calculation of diluted earnings per share for the 13 and 39 weeks ended
October 27, 2001, because their effect would have been anti-dilutive due to
the net loss recognized in those periods. Options to purchase 12,973,768
shares at a weighted average exercise price of $9.61 and 149,169 restricted
stock units were excluded from the calculation of diluted earnings per
share for the 13 and 39 weeks ended October 21, 2000, because their effect
would have been anti-dilutive due to the net loss recognized in those
periods.
7. During the fourth quarter of fiscal year 2000, the Company announced that
as a result of a review of its real estate portfolio, it elected to close
50 underperforming superstores. In conjunction with this, 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. During the
first 39 weeks of fiscal year 2001, 47 stores completed the liquidation
process and were closed. The remaining stores are expected to begin the
liquidation process by the end of fiscal year 2001. As of October 27, 2001
and January 27, 2001, the Company had a reserve for store closing costs of
$76,400,000 and $97,673,000, respectively, of which $52,711,000 and
$72,314,000 was included in other long-term liabilities.
8
A reconciliation of major components of the store closing reserve is as
follows:
(Dollars in thousands)
BALANCE BALANCE
JANUARY 27, PAYMENT / OCTOBER 27,
2001 USAGE 2001
- --------------------------------------------- -------------------------------------------------------
Lease disposition $91,477 $18,361 $73,116
Other closing costs, including severance, and
asset impairment 6,196 2,912 3,284
------- ------- -------
Total $97,673 $21,273 $76,400
======= ======= =======
8. As of the beginning of fiscal year 2001, OfficeMax completed its previously
announced business integration and aligned its eCommerce business, catalog
operations and outside sales groups with its superstores in order to more
efficiently leverage its various direct businesses. As a result of this
process, management now evaluates performance and allocates resources based
on an integrated view of the business and no longer reports separate
segment information.
Through joint venture partnerships, the Company operates 27 superstores in
Mexico and Brazil. The joint venture superstores are similar to those in
the United States. OfficeMax owns a majority interest in a joint venture in
Mexico, OfficeMax de Mexico. As a result, the Company includes the net
assets, results of operations, and cash flows of OfficeMax de Mexico in its
consolidated financial statements. The Company's investment in a joint
venture in Brazil is accounted for under the cost method. Other than its
investments in joint venture partnerships, the Company has no international
sales or assets.
Sales for the Company's joint venture in Mexico and the minority interest
in the net income of the joint venture were as follows:
(Dollars in thousands)
13 WEEKS ENDED 39 WEEKS ENDED
----------------------------------- ------------------------------------
October 27, October 21, October 27, October 21,
2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------------
Sales $ 36,748 $ 33,315 $100,352 $ 81,001
Minority interest $ 1,285 $ 940 $ 2,344 $ 1,907
The net assets of OfficeMax de Mexico included long-lived assets, primarily
fixed assets, of $19,450,000 and $19,312,000 as of October 27, 2001 and
January 27, 2001, respectively.
9. In accordance with an amended and restated joint venture agreement, the
Company's joint venture partner in Mexico can elect to put its remaining
49% interest in OfficeMax de Mexico to the Company beginning in the first
quarter of fiscal year 2002 if certain earnings targets are achieved. If
the earnings targets are met and the joint venture partner elects to put
its ownership interest to the Company, the purchase price would be
calculated based on the joint venture's earnings before interest, taxes,
depreciation and amortization.
9
10. In fiscal year 2000, Gateway Companies, Inc. ("Gateway") committed to
operate licensed store-within-a-store computer departments within all
OfficeMax superstores in the United States pursuant to a strategic
alliance, which included the terms of a Master License Agreement ("MLA").
In connection with the investment requirements of the strategic alliance,
Gateway invested $50,000,000 in OfficeMax convertible preferred stock.
During the first quarter of fiscal year 2001, Gateway announced its
intentions to discontinue selling computers in non-Gateway stores,
including OfficeMax superstores, and OfficeMax has since announced a
strategic alliance with another computer provider. Gateway's investment in
the Company and the status of discussions between OfficeMax and Gateway
regarding Gateway's performance under the strategic alliance are described
in greater detail in "Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Gateway Alliance."
11. 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 $865,000 and $3,103,000 of shipping and handling fees
previously recorded as a reduction of store operating and selling expenses
for the 13 and 39 weeks ended October 21, 2000. The Company has elected to
continue to record shipping and handling related costs in store operating
and selling expense. Such costs were approximately $14,343,000 and
$43,314,000 for the 13 and 39 weeks ended October 27, 2001, respectively,
compared to $15,069,000 and $47,949,000 for the 13 and 39 weeks ended
October 21, 2000, respectively.
12. During the first quarter of fiscal year 2001, the Company adopted Emerging
Issues Task Force Issue 00-14, "Accounting for Certain Sales Incentives"
("Issue 00-14"), which addresses the timing of recognition for certain
sales incentives and requires that those sales incentives be recorded as a
reduction of sales. Adoption of Issue 00-14 resulted in the
reclassification as a reduction of sales of approximately $8,514,000 and
$16,574,000 of sales incentives previously recognized in store operating
and selling expenses for the 13 and 39 weeks ended October 21, 2000.
13. During the first quarter of fiscal year 2001, the Company adopted FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133"). Adoption of FAS 133 did not have a significant
effect on the earnings or the financial position of the Company.
14. During the second quarter of fiscal year 2001, the FASB issued Statement
No. 141, "Accounting for Business Combinations" ("FAS 141") and Statement
No. 142, "Goodwill and Other Intangibles" ("FAS 142"). These Statements
modify accounting for business combinations and address the accounting for
goodwill and other intangible assets. The provisions of FAS 141 are
effective for business combinations initiated after June 30, 2001. The
provisions of FAS 142 are effective for fiscal years beginning after
December 15, 2001, and are effective for interim periods in the initial
year of adoption. FAS 142 specifies that, among other things, goodwill and
intangible assets with an indefinite useful life will no longer be
amortized. The standard requires goodwill and intangible assets with an
indefinite useful life to be periodically tested for impairment and written
down to fair value if considered impaired. Intangible assets with estimated
useful lives will continue to be amortized over those periods. The Company
is currently assessing the financial statement impact of the adoption of
these Statements.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
RESULTS OF OPERATIONS
Sales for the 13 and 39 weeks ended October 27, 2001 declined to $1,188,847,000
and $3,361,577,000, respectively, from $1,299,454,000 and $3,716,600,000 for the
comparable prior year periods. Sales for the 13-week prior year period included
sales of approximately $31,317,000 from the 46 stores that were closed as of the
first day of the current fiscal year. Sales for the 39-week prior year period
included sales of approximately $190,678,000 from the Company's discontinued
former Computer Business Segment and the 46 stores that were closed as of the
first day of the current fiscal year. Excluding sales from the Computer Business
Segment and the closed stores, current year sales decreased approximately 6% and
5%, respectively, from the comparable 13 and 39-week prior year periods,
primarily as a result of comparable-store sales decreases. Comparable-store
sales decreased approximately 8% and 7% during the 13 and 39 weeks ended October
27, 2001, respectively. The slowing U.S. economy, especially following the
September 11th terrorist attacks, negatively impacted current year
comparable-store sales. Management estimates the sales loss during the period
immediately following the terrorist attacks was approximately $30,000,000 during
the period ended October 27, 2001. The comparable-store sales decreases were
partially offset by additional sales from new superstores opened during the
fourth quarter of fiscal year 2000 and at various points during the 39 weeks
ended October 27, 2001, and sales increases for the Company's joint venture in
Mexico. Sales for OfficeMax de Mexico increased 10% and 24%, respectively,
during the 13 and 39 weeks ended October 27, 2001 as a result of
comparable-store sales increases and additional sales from two (net) new
superstores opened in Mexico since the end of the third quarter last year.
Cost of merchandise sold, including buying and occupancy costs, increased as a
percentage of sales to 76.2% for the 13 weeks ended October 27, 2001, from 76.1%
for the comparable period last year. For the 39 weeks ended October 27, 2001,
cost of merchandise sold, including buying costs, decreased as a percentage of
sales to 75.7%, compared to 76.1% for the comparable period last year. Gross
profit decreased to 23.8% of sales for the 13 weeks ended October 27, 2001, from
23.9% of sales for the comparable prior year period. For the 39 weeks ended
October 27, 2001, gross profit increased to 24.3% of sales, compared to 23.9% of
sales for the comparable period last year. The year-to-date increase in gross
profit as a percentage of sales was primarily due to the phase-out of the
Computer Business Segment that was completed as of the end of the second quarter
last year. Also, gross profit for the third quarter of last year was reduced by
a charge for litigation settlement of $19,465,000. The de-leveraging of certain
fixed occupancy and freight costs on a year-over-year basis reduced gross profit
by approximately 1.1% and 1.3% of sales during the 13 and 39 weeks ended October
27, 2001.
Store operating and selling expenses, which consist primarily of store payroll,
operating and advertising expenses, decreased to $280,314,000 and $784,382,000
for the 13 and 39 weeks ended October 27, 2001, respectively, from $301,815,000
and $822,064,000 for the comparable prior year periods. The decreases in store
operating and selling expenses were primarily due to the elimination of the
Company's former Computer Business Segment and the 46 stores that were closed as
of the first day of the current fiscal year. The decrease in store operating and
selling expenses was partially offset by a reserve for legal matters recorded
during the third quarter of the current fiscal year. As a percentage of sales,
store operating and selling expenses increased to 23.6% and 23.3% for the 13 and
39 weeks ended October 27, 2001, respectively, from 23.2% and 22.1% for the
comparable periods a year earlier, primarily due to the reserve for legal
matters. In addition, the Company continued to devote resources designed to
enhance the customer shopping experience and increase sales, which also
contributed to the increases in store operating and selling expenses as a
percentage of sales.
Pre-opening expenses were $390,000 and $2,685,000 for the 13 and 39 weeks ended
October 27, 2001, respectively, and $892,000 and $5,665,000 for the comparable
periods last year. During the third quarter of the current fiscal year, the
Company opened four new domestic superstores and one new superstore in Mexico
through its joint venture partnership. During the first 39 weeks of the current
fiscal year, the Company opened 16 new domestic superstores, completed expansion
of its PowerMax distribution center in Las Vegas, and opened three new
superstores in Mexico. During the comparable prior year periods, the Company
opened 9 and 47 new domestic superstores, respectively. Also during fiscal year
2000, the Company opened a PowerMax distribution center in
11
Jefferson County, Alabama for which it incurred pre-opening expenses of
approximately $1,000,000. Store pre-opening expenses, which consist primarily of
payroll, supplies and grand opening advertising, are expensed as incurred and
averaged approximately $90,000 per domestic superstore opened in the 13 and
39-week periods ended October 27, 2001 and October 21, 2000. Pre-opening
expenses are expected to average approximately $90,000 per domestic superstore
during the remainder of fiscal year 2001.
General and administrative expenses increased to $36,018,000 during the 13 weeks
ended October 27, 2001, from $33,434,000 during the 13 weeks ended October 21,
2000. The year-over-year increase in third quarter general and administrative
expenses was primarily due to costs for consulting services supporting various
company initiatives. For the 39 weeks ended October 27, 2001, general and
administrative expenses decreased to $111,002,000, from $116,462,000 for the
comparable period last year. The year-to-date decrease in general and
administrative expenses was primarily due to the Company's continued
cost-and-expense control efforts and efficiency gains as a result of the
Company's information technology initiatives. As a percentage of sales, general
and administrative expenses increased to 3.0% and 3.3% for the 13 and 39 weeks
ended October 27, 2001, respectively, as compared to 2.6% and 3.1% for the
comparable periods last year.
Goodwill amortization was $2,464,000 and $7,391,000 for the 13 and 39 weeks
ended October 27, 2001 and the 13 and 39 weeks ended October 21, 2000. Goodwill
is capitalized and amortized over 10 - 40 years using the straight-line method.
Interest expense, net, was $2,766,000 and $12,923,000 for the 13 and 39 weeks
ended October 27, 2001, as compared to $4,686,000 and $10,784,000 for the
comparable periods last year. The year-over-year decrease in interest expense
during the third quarter was due to reduced average outstanding borrowings and
lower interest rates. The increase in interest expense during the 39 weeks ended
October 27, 2001 was primarily due to fees related to the Company's new
revolving credit facility and higher average outstanding borrowings during the
first quarter of the current fiscal year as compared to the same period last
year.
The Company recognized income tax benefits of $14,714,000 and $37,832,000 for
the 13 and 39 weeks ended October 27, 2001, as compared to income tax benefits
of $12,045,000 and $26,224,000 for the same periods a year ago. The effective
tax rates for all periods presented are different from the federal statutory
income tax rate primarily as a result of goodwill amortization, and state and
local taxes.
As a result of the foregoing, the Company had net losses of $25,780,000 and
$66,361,000 for the 13 and 39 weeks ended October 27, 2001, as compared to net
losses of $22,019,000 and $48,216,000 for the comparable periods a year earlier.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations provided $83,430,000 of cash during the 39 weeks ended
October 27, 2001, primarily as a result of a decrease in inventory, partially
offset by a reduction in accounts payable. Inventory decreased $166,733,000
since the end of the prior fiscal year primarily as a result of the Company's
supply-chain management initiatives. Year-over-year, inventory turns increased
to 3.3 times per year from 3.0 in the prior year. Average per-store inventory
decreased 25% on a year over year basis. Accounts payable decreased $84,677,000
during the current year and accounts payable-to-inventory leverage was 46.8% at
October 27, 2001 compared to 50.7% at the end of the prior fiscal year. The
Company's operating activities used $51,982,000 of cash during the 39 weeks
ended October 21, 2000.
Net cash used for investing was $34,012,000 for the 39 weeks ended October 27,
2001 compared to $76,973,000 in the comparable prior year period. Capital
expenditures, primarily for new superstores and the Company's information
technology initiatives, were $32,461,000 during the 39 weeks ended October 27,
2001 and $76,031,000 during the comparable period in the prior year.
Net cash used for financing was $117,087,000 for the 39 weeks ended October 27,
2001. Current year financing activities primarily represent a reduction in
borrowings under the Company's revolving credit facility and a decrease in
overdraft balances. Net cash provided by financing was $143,786,000 in the
comparable prior year period,
12
primarily representing borrowings under the Company's revolving credit
facilities and the proceeds from the issuance of preferred stock.
The Company plans to open one new domestic superstore and, through its joint
venture partnership, two new superstores in Mexico during the remainder of the
current fiscal year.
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 and information technology strategies.
On November 30, 2000, the Company entered into a three-year senior secured
revolving credit facility. The revolving credit facility is secured by a first
priority perfected security interest in the Company's inventory and certain
accounts receivable and provides for borrowings of up to $700,000,000 at the
bank's base rate or Eurodollar Rate plus 1.75% to 2.50% depending on the level
of borrowing. As of October 27, 2001, the Company had outstanding borrowings of
$140,400,000 under the revolving credit facility at a weighted average interest
rate of 4.43%. From this facility, the Company had $112,153,000 of standby
letters of credit outstanding as of October 27, 2001 in connection with its
self-insurance program and two synthetic leases. These letters of credit are
considered outstanding amounts under the 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 revolving credit facility. Also
during the fourth quarter of fiscal year 2000, the Company obtained a one-year
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 October
27, 2001, $15,676,000 of these letters of credit were outstanding. Upon
expiration of the additional $50,000,000 letter of credit facility during the
fourth quarter of fiscal year 2001, the Company expects to issue letters of
credit for its merchandise import program, when required, from its current
revolving credit facility.
On August 13, 1998, the Company's Board of Directors authorized the Company to
repurchase up to $200,000,000 of its common stock on the open market. As of
October 27, 2001, the Company had purchased a total of 12,702,100 shares at a
cost of $113,619,000. No purchases have been made during the current fiscal
year.
The Company's business is seasonal, with sales higher in the third and fourth
fiscal 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 the
slowest of the year primarily because of lower office supplies consumption
during the summer vacation period.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement No. 141, "Accounting for Business
Combinations" ("FAS 141") and Statement No. 142, "Goodwill and Other
Intangibles" ("FAS 142"). These Statements modify accounting for business
combinations and address the accounting for goodwill and other intangible
assets. The provisions of FAS 141 are effective for business combinations
initiated after June 30, 2001. The provisions of FAS 142 are effective for
fiscal years beginning after December 15, 2001, and are effective for interim
periods in the initial year of adoption. FAS 142 specifies that, among other
things, goodwill and intangible assets with an indefinite useful life will no
longer be amortized. The standard requires goodwill and intangible assets with
an indefinite useful life to be periodically tested for impairment and written
down to fair value if considered impaired. Intangible assets with estimated
useful lives will continue to be amortized over those periods. The Company is
currently assessing the financial statement impact of the adoption of these
Statements.
In July 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" ("FAS 143"). This Statement requires that a liability
for an asset retirement obligation be recognized when incurred and the
associated asset retirement costs be capitalized as part of the carrying amount
of the long-lived asset and subsequently allocated to expense over the asset's
useful life. FAS 143 is effective for fiscal years beginning after June 15,
2002. The Company is currently assessing the financial statement impact of the
adoption of this Statement.
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In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FAS 144"). This Statement
supersedes Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of " but retains many of its
fundamental provisions. FAS 144 also expands the scope of discontinued
operations to include more disposal transactions. The provisions of FAS 144 are
effective for fiscal years beginning after December 15, 2001. The Company is
currently assessing the financial statement impact of the adoption of this
Statement.
LEGAL PROCEEDINGS
There are various claims, lawsuits and pending actions against the Company
incidental to the Company's operations. Although litigation is inherently
subject to many uncertainties, it is the opinion of management that the ultimate
resolution of these matters will not have a material effect on the Company's
liquidity and financial position. However, in the event of an unanticipated
adverse final determination, the Company's consolidated net income for the
period in which such determination occurs could be materially affected.
GATEWAY ALLIANCE
In fiscal year 2000, Gateway Companies, Inc. ("Gateway") committed to operate
licensed store-within-a-store computer departments within all OfficeMax
superstores in the United States pursuant to a strategic alliance, which
included the terms of a Master License Agreement (the "MLA"). In connection with
the investment requirements of the strategic alliance, during the second quarter
of fiscal year 2000, Gateway invested $50,000,000 in OfficeMax convertible
preferred stock - $30,000,000 in Series A Voting Preference Shares (the "Series
A Shares") designated for OfficeMax and $20,000,000 in Series B Serial Preferred
Shares (the "Series B Shares") designated for OfficeMax.com.
The Series A Shares, which had a purchase price of $9.75 per share, vote on an
as-converted to Common Shares basis (one vote per share) and do not bear any
interest or coupon. The Series A Shares increase in value from $9.75 per share
to $12.50 per share on a straight-line basis over the five-year term of the
alliance. The Company recognizes the increase in value by a charge directly to
Retained Earnings for Preferred Share Accretion. The Series B Shares, which had
a purchase price of $10 per share, bear a coupon rate of 7% per annum and have
no voting rights.
During the first quarter of fiscal year 2001, Gateway announced its intention to
discontinue selling computers in non-Gateway stores, including OfficeMax
superstores. At that time, OfficeMax and Gateway began discussing legal issues
regarding Gateway's performance under the strategic alliance. In the second
quarter of fiscal year 2001, Gateway ended its rollout of Gateway
store-within-a-store computer departments in the Company's superstores and has
removed its equipment and fixtures from such stores. On July 23, 2001, Gateway
notified the Company of its termination of the MLA and its exercise of its
redemption rights with respect to the Series B Shares. Thereafter, the Company,
which had previously notified Gateway of Gateway's breaches under the MLA and
related agreements, reaffirmed its position that Gateway was in breach of its
obligations under the MLA and related agreements. Litigation and arbitration
proceedings have commenced. OfficeMax does not anticipate redeeming any of the
Company's preferred stock owned by Gateway until all of the issues associated
with the strategic alliance and its wind down have been resolved. Based on
current circumstances, it is unclear when such a resolution will occur. In May
2001, OfficeMax announced a strategic alliance with another computer provider.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Statements made in this Quarterly Report on Form 10-Q, other than those
concerning historical information, constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995, and
are made pursuant to the "safe harbor" provisions of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These statements use such words as "may," "will," "should," "expects," "plans,"
"anticipates," "estimates," "believes," "thinks," "continues," "indicates,"
"outlook," "looks," "goals," "initiatives," "projects," or variations thereof.
Forward-looking statements are based on management's current beliefs and
assumptions regarding future events and operating performance and speak only as
of the date of this report. These statements are likely to address the Company's
growth strategy, future financial performance
14
(including sales and earnings), strategic initiatives, marketing and expansion
plans and the impact of operating initiatives. Forward-looking statements are
subject to a number of risks, uncertainties and other factors, many of which are
outside the control of the Company, that could cause the Company's actual
results to differ materially from those expressed or implied in such statements.
These risks and uncertainties include the following: risks associated with
general economic conditions (including the effects of additional terrorist
attacks and hostilities, continued economic slowdown and declining employment
rate or other changes in our customers' business environments); failure to
adequately execute plans and unforeseen circumstances beyond the Company's
control in connection with the development, implementation and execution of new
business processes, procedures and programs (including cost control programs,
store openings and closings, the Company's supply-chain management program,
enterprise resource planning computer system and new vendor purchasing operating
model); greater than expected expenses associated with the Company's
activities; and other risks and uncertainties described in Exhibit 99.1 of the
Company's Annual Report on 10-K for the fiscal year ended January 27, 2001, and
in other reports and exhibits to reports filed with the Securities and Exchange
Commission (those descriptions are incorporated herein by reference). 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.
The foregoing list of important factors is not exclusive. 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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ITEM 3. 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 are generally at a fixed rate. 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 exchange risk through its joint venture
partnerships in Mexico and Brazil. 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.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits: None
(b) Reports on Form 8-K: None
17
SIGNATURES
Pursuant to the requirements 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: December 11, 2001 By: /s/ Michael A. Weisbarth
------------------------
Michael A. Weisbarth
Senior Vice President, Corporate
Controller (Principal Accounting Officer)
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