1
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 23, 1999
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.
---------------
(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) 921-6900
--------------
(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.
Title of Class Shares Outstanding as of
-------------- December 1, 1999
Common Shares ----------------
(without par value) 125,215,633
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OFFICEMAX, INC.
INDEX
Part I - Financial Information Page
------------------------------ ----
Item 1. Financial Statements 3-8
Item 2. Management's Discussion and Analysis of Financial 9-15
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 16
Market Risk
Part II - Other Information
---------------------------
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
OFFICEMAX, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
October 23, January 23,
1999 1999
----------- -----------
ASSETS (Unaudited)
Current Assets:
Cash and equivalents $ 70,480 $ 67,482
Accounts receivable, net of allowances
of $600 and $824, respectively 80,288 141,800
Merchandise inventories 1,221,177 1,254,761
Other current assets 62,244 39,600
----------- -----------
Total current assets 1,434,189 1,503,643
Property and Equipment:
Buildings and land 19,292 19,223
Leasehold improvements 183,405 183,320
Furniture and fixtures 440,353 381,151
----------- -----------
Total property and equipment 643,050 583,694
Less: Accumulated depreciation and amortization (284,865) (230,446)
----------- -----------
Property and equipment, net 358,185 353,248
Other assets and deferred charges 55,928 60,040
Goodwill, net of accumulated amortization
of $67,663 and $60,621, respectively 307,923 314,965
----------- -----------
$ 2,156,225 $ 2,231,896
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $ 650,843 $ 625,810
Accrued expenses and other liabilities 56,316 121,441
Accrued salaries and related expenses 47,866 50,704
Taxes other than income taxes 66,865 58,638
Revolving credit facility 154,700 144,700
Mortgage loan, current portion 1,300 1,300
----------- -----------
Total current liabilities 977,890 1,002,593
Mortgage loan 15,450 16,425
Other long-term liabilities 70,412 74,736
----------- -----------
Total liabilities 1,063,752 1,093,754
Commitments and contingencies -- --
Shareholders' Equity:
Common shares, without par value; 200,000,000 shares
authorized; 125,215,633 and 124,988,442 shares issued
and outstanding, respectively 869,119 868,321
Deferred stock compensation (220) (260)
Retained earnings 335,862 348,859
Less: Treasury stock (112,288) (78,778)
----------- -----------
Total shareholders' equity 1,092,473 1,138,142
----------- -----------
$ 2,156,225 $ 2,231,896
=========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these balance sheets.
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OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
13 Weeks Ended 39 Weeks Ended
-------------------------------- --------------------------------
October 23, October 24, October 23, October 24,
1999 1998 1999 1998
------------- ------------- ------------- -------------
Sales $ 1,301,774 $ 1,152,359 $ 3,451,647 $ 3,087,903
Cost of merchandise sold, including
buying and occupancy costs 990,711 869,080 2,624,382 2,353,947
Inventory markdown charge for
item rationalization 83,257 - 83,257 -
------------- ------------- ------------- -------------
Gross profit 227,806 283,279 744,008 733,956
Store operating and selling expenses 244,145 195,924 647,701 552,317
Pre-opening expenses 3,726 3,382 8,223 8,018
General and administrative expenses 32,091 25,283 90,888 72,869
Goodwill amortization 2,348 2,347 7,042 7,042
------------- ------------- ------------- -------------
Total operating expenses 282,310 226,936 753,854 640,246
Operating income (loss) (54,504) 56,343 (9,846) 93,710
Interest expense, net (1,899) (1,478) (6,405) (3,389)
------------- ------------- ------------- -------------
Income (loss) before income taxes (56,403) 54,865 (16,251) 90,321
Income taxes (18,963) 21,287 (3,254) 35,044
------------- ------------- ------------- -------------
Net income (loss) (37,440) 33,578 (12,997) 55,277
============= ============= ============= =============
EARNINGS (LOSS) PER COMMON SHARE DATA:
Basic (0.33) 0.27 (0.11) 0.45
============= ============= ============= =============
Diluted (0.33) 0.27 (0.11) 0.45
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic 113,118,570 122,701,610 113,564,059 122,513,410
============= ============= ============= =============
Diluted 113,589,313 123,311,526 114,544,747 124,071,245
============= ============= ============= =============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
39 Weeks Ended
--------------------------
October 23, October 24,
1999 1998
---------- -----------
CASH PROVIDED BY (USED FOR):
OPERATIONS
Net income (loss) $ (12,997) $ 55,277
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 62,826 53,696
Deferred income taxes 5,808 85
Increase (decrease) in other long-term liabilities (4,324) 881
Other, net 536 (116)
Change in current assets and current liabilities:
Decrease (increase) in inventories 33,584 (146,517)
Increase in accounts payable 70,265 155,625
Decrease (increase) in accounts receivable 61,512 (46,124)
(Decrease) in accrued liabilities (39,053) (9,934)
Other, net (2,679) (9,352)
--------- ---------
Net cash provided by operations 175,478 53,521
--------- ---------
INVESTING
Capital expenditures (81,787) (82,614)
Other, net (398) (6,928)
--------- ---------
Net cash used for investing (82,185) (89,542)
--------- ---------
FINANCING
Payments of mortgage principal (975) (975)
Increase in revolving credit facilities 10,000 83,700
Advanced payment for leased facility (21,376) -
Decrease in overdraft balances (45,232) (14,417)
Purchase of treasury stock (34,841) (56,999)
Proceeds from issuance of common stock, net 2,129 5,636
--------- ---------
Net cash (used for) provided by financing (90,295) 16,945
--------- ---------
CASH AND CASH EQUIVALENTS
Net increase (decrease) for the period 2,998 (19,076)
Balance, beginning of period 67,482 66,801
--------- ---------
Balance, end of period $ 70,480 $ 47,725
========= =========
SUPPLEMENTAL INFORMATION
Interest paid on debt $ 8,240 $ 4,208
========= =========
Taxes paid on income $ 24,731 $ 36,427
========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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OFFICEMAX, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Common Shares Deferred
--------------------------- Stock Retained Treasury
Shares Amount Compensation Earnings Stock Total
----------- ----------- ----------- ----------- ----------- -----------
Balance at January 23, 1999 124,988,442 $ 868,321 $ (260) $ 348,859 $ (78,778) $ 1,138,142
Issuance of common shares
under director plan 2,713 (125) -- -- 147 22
Exercise of stock options
(including tax benefit) 55,769 124 -- -- 437 561
Sale of shares under
management share purchase
plan (including tax benefit) 70,496 125 (175) -- 747 697
Sale of shares under employee
share purchase plan
(including tax benefit) 98,213 674 -- -- -- 674
Amortization of deferred
compensation -- -- 215 -- -- 215
Treasury stock purchased
(4,467,100 shares) -- -- -- -- (34,841) (34,841)
Net loss -- -- -- (12,997) -- (12,997)
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 23, 1999 125,215,633 $ 869,119 $ (220) $ 335,862 $ (112,288) $ 1,092,473
=========== =========== =========== =========== =========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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OFFICEMAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE 13 AND 39 WEEKS ENDED
OCTOBER 23, 1999 AND OCTOBER 24, 1998
Significant Accounting and Reporting Policies
- ---------------------------------------------
1. The accompanying consolidated financial statements have been prepared from
the financial records of OfficeMax, Inc. and its subsidiaries (the
"Company" or "OfficeMax") without audit 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 23, 1999 and October 24, 1998 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 23, 1999 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 8, 1999. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles 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.
4. At October 23, 1999, OfficeMax operated a chain of 922 full-size
superstores in over 370 markets, 49 states, Puerto Rico and the U.S. Virgin
Islands, as well as three smaller format, OfficeMax PDQ stores, two
national call centers and 19 delivery centers. Through joint venture
partnerships, the Company also operated 21 international locations in
Brazil, Japan and Mexico. The joint ventures operate OfficeMax superstores
similar to those in the United States.
5. The average common and common equivalent shares utilized in computing
diluted earnings per share for the 13 and 39 weeks ended October 23, 1999
include 470,743 and 980,688 shares, respectively, resulting from the
application of the treasury stock method to outstanding stock options. The
average common and common equivalent shares utilized in computing diluted
earnings per share for the 13 and 39 weeks ended October 24, 1998 include
609,917 and 1,557,835 such shares, respectively. Options to purchase
10,275,419 and 6,400,721 shares were excluded from the calculation of
diluted earnings per share for the 13 and 39 weeks ended October 23, 1999,
respectively, because the exercise prices of the options were greater than
the average market price. These shares had weighted average exercise prices
of $11.43 and $13.54, respectively. Options to purchase 7,764,307 and
887,530 shares were excluded from the calculation of diluted earnings per
share for the 13 and 39 weeks ended October 24, 1998, respectively, because
the exercise prices of the options were greater than the average market
price. These shares had weighted average exercise prices of $13.68 and
$16.50, respectively.
6. In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
is required to be adopted in fiscal years beginning after June 15, 2000.
Because of the Company's minimal use of derivatives, management does not
anticipate the adoption of the new Statement to have a significant effect
on earnings or the financial position of the Company.
7. The Company has two reportable business segments: the Core Business Segment
and the Computer Business Segment. The Core Business Segment includes
office supplies, business machines, peripherals, print-for-pay services and
office furniture. The Computer Business Segment includes desktop and laptop
personal computers and computer monitors. The Company evaluates performance
and allocates resources based on the
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operations of these two segments. The accounting policies of the reportable
business segments are the same as those described above and in the Summary
of Significant Accounting Policies (Note 1) included in the Company's
Annual Report on Form 10-K for the year ended January 23, 1999.
The following tables summarize the results of the Company's reportable
business segments:
(Unaudited)
13 WEEKS ENDED 39 WEEKS ENDED
----------------------------- ----------------------------
CORE BUSINESS SEGMENT OCTOBER 23, OCTOBER 24, OCTOBER 23, OCTOBER 24,
(Dollars in thousands) 1999 1998 1999 1998
---------------------------------------------------------- ------------- ----------- ------------
Sales $ 1,219,356 $ 1,061,374 $ 3,254,098 $ 2,848,369
Cost of merchandise sold, including buying
and occupancy costs 908,261 778,077 2,424,525 2,111,715
Inventory markdown charge for
item rationalization 83,257 - 83,257 -
----------- ----------- ----------- -----------
Gross profit 227,838 283,297 746,316 736,654
Operating income (loss) (44,795) 62,493 19,785 114,484
Net income (loss) $ (30,899) $ 38,126 $ 6,432 $ 70,084
=========== =========== =========== ===========
Included in net income (loss) of the Core Business Segment is net interest
expense of $867,000 and $197,000 for the 13 weeks ended October 23, 1999
and October 24, 1998, respectively. During the 39 weeks ended October 23,
1999 and October 24, 1998, this segment had net interest expense of
$4,133,000 and net interest income of $30,000, respectively. Income taxes
for the Core Business Segment were a net benefit of $14,763,000 and expense
of $24,170,000 for the 13 weeks ended October 23, 1999 and October 24,
1998, respectively, and an expense of $9,220,000 and $44,430,000 for the 39
weeks ended October 23, 1999 and October 24, 1998, respectively.
13 WEEKS ENDED 39 WEEKS ENDED
-------------------------- -------------------------
COMPUTER BUSINESS SEGMENT OCTOBER 23, OCTOBER 24, OCTOBER 23, OCTOBER 24,
(Dollars in thousands) 1999 1998 1999 1998
---------------------------------------------------------- ----------- ----------- -----------
Sales $ 82,418 $ 90,985 $ 197,549 $ 239,534
Cost of merchandise sold, including buying
and occupancy costs 82,450 91,003 199,857 242,232
--------- --------- --------- ---------
Gross loss (32) (18) (2,308) (2,698)
Operating loss (9,709) (6,150) (29,631) (20,774)
Net loss $ (6,541) $ (4,548) $ (19,429) $ (14,807)
========= ========= ========= =========
Included in the net loss of the Computer Business Segment is net interest
expense of $1,032,000 and $2,272,000 for the 13 and 39 weeks ended October
23, 1999, respectively. During the 13 and 39 weeks ended October 24, 1998,
this segment had net interest expense of $1,281,000 and $3,419,000,
respectively. The Computer Business Segment recognized income tax benefit
of $4,200,000 and $2,883,000 for the 13 weeks ended October 23, 1999 and
October 24, 1998, respectively, and $12,474,000 and $9,386,000 for the 39
weeks ended October 23, 1999 and October 24, 1998, respectively. The total
assets of the Computer Business Segment, primarily inventory and accounts
receivable, were approximately $89,279,000 and $60,280,000 as of October
23, 1999 and January 23, 1999, respectively. This segment also had accounts
payable of $24,625,000 and $14,274,000 as of October 23, 1999 and January
23, 1999, respectively.
There are no intersegment sales or expense allocations. There are no
differences between the combined results of the Core and Computer Business
Segments and the total Company's results. The Company does not allocate
fixed assets or depreciation to the Computer Business Segment. Other than
its investments in Brazil, Japan and Mexico, the Company has no
international sales or assets.
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ITEM 2. MANAGEMENT'S DISSCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
RESULTS OF OPERATIONS
- ---------------------
Consolidated Results
Consolidated sales for the 13 and 39 weeks ended October 23, 1999 increased 13%
and 12%, respectively, to $1,301,774,000 and $3,451,647,000, respectively, from
$1,152,359,000 and $3,087,903,000 for the comparable periods last year. The
increase in consolidated sales was attributable to a full period of sales from
the 120 full-size superstores opened during fiscal 1998 and additional sales
from 90 (net) new full-size superstores and two smaller format OfficeMax PDQ
stores opened at various points during the 39 weeks ended October 23, 1999.
Consolidated same-store sales increased by 1% for the third quarter of fiscal
1999 reflecting the impact of a decline of approximately 16% in the average
retail prices of fax machines, printers and copiers experienced by the Company's
Core Business Segment and a decline of approximately 19% in the average selling
prices for computers experienced by the Company's Computer Business Segment.
Consolidated cost of merchandise sold, including buying and occupancy costs and
excluding the $83,257,000 inventory markdown charge recorded by the Company's
Core Business Segment related to the Company's program of merchandise and vendor
rationalization, increased as a percentage of sales to 76.1% for the 13 weeks
ended October 23, 1999, from 75.4% for the comparable period last year.
Consolidated cost of merchandise sold, including buying and occupancy costs and
excluding the inventory markdown charge, decreased as a percentage of sales to
76.0% for the 39 weeks ended October 23, 1999, from 76.2% for the comparable
period last year. Correspondingly, consolidated gross profit, excluding the
inventory markdown charge, was 23.9% and 24.0% for the 13 and 39 weeks ended
October 23, 1999, respectively, as compared to 24.6% and 23.8% for the
comparable prior year periods. The current quarter decrease in gross profit was
primarily due to decreased leverage of costs from the Company's current
supply-chain process as well as reduced income from vendor support programs
eliminated through the Company's merchandise and vendor rationalization
programs. The year-to-date gross profit increase was primarily due to the
Company's deliberate decision to modify its computer assortment and continue to
reduce its low or no profit computer promotions. Including the inventory
markdown charge, consolidated cost of merchandise sold, including buying and
occupancy costs was 82.5% and 78.4% of sales for the 13 and 39 weeks ended
October 23, 1999, respectively. Consolidated gross profit, including the
inventory markdown charge, was 17.5% and 21.6% of sales for the 13 and 39 weeks
ended October 23, 1999, respectively.
Consolidated store operating and selling expenses, which consist primarily of
store payroll, operating and advertising expenses, increased as a percentage of
sales to 18.8% for the 13 and 39 weeks ended October 23, 1999 from 17.0% and
17.9% for the comparable periods a year earlier. Store operating and selling
expenses were impacted by costs associated with the Company's decision to
accelerate its supply-chain management initiative. These costs include
additional advertising expense incurred in connection with the product clearance
event that began in the third quarter, as well as reduced income from vendor
support programs eliminated through the Company's merchandise and vendor
rationalization programs. Further, the Company experienced a decrease in
leverage of store operating and selling expenses primarily due to deflationary
retail pricing for business machines and computers along with costs incurred for
its accelerated store openings.
Pre-opening expenses were $3,726,000 and $8,223,000 for the 13 and 39 weeks
ended October 23, 1999, reflecting the opening of 39 and 91 full-size
superstores, respectively. During the comparable prior year periods, pre-opening
expenses were $3,382,000 and $8,018,000, reflecting the opening of 38 and 79
full-size superstores, respectively. Also, during the first half of fiscal 1998,
the Company opened its PowerMax I merchandise distribution facility for which
the Company incurred pre-opening expenses of $980,000. Pre-opening expenses,
which consist primarily of store payroll, supplies and grand opening
advertising, averaged approximately $85,000 per full-size superstore in the
current and prior year. Pre-opening expenses increase approximately $25,000 per
unit when certain enhanced CopyMax or FurnitureMax features are included in a
superstore. As a result of adopting Statement of Position 98-5, "Reporting Costs
of Start-up Activities", in its financial statements for the year ended January
23, 1999, the
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Company's pre-opening expenses for the 13 and 39 weeks ended October 23, 1999
include pre-opening expenses for stores that are not yet opened. Such amounts
are not included in the comparable prior year periods.
General and administrative expenses were 2.5% and 2.6% of sales for the 13 and
39 weeks ended October 23, 1999, as compared to 2.2% and 2.4% of sales for the
comparable prior year periods. These increases reflect the Company's continuing
efforts to enhance its infrastructure to support planned growth both in the
United States and internationally. The infrastructure enhancements include
efforts to strengthen the Company's management team and information technology
("IT") initiatives. The Company is in the process of implementing the SAP
system, a fully integrated Enterprise Resource Planning platform that will
automate and integrate various business processes of the Company. Conversion to
the SAP Human Resources and Finance modules occurred in November 1998 and May
1999, respectively. Conversion to the SAP Retail and Merchandising system is
expected to occur at the beginning of fiscal year 2000.
Goodwill amortization was $2,348,000 and $7,042,000 for the 13 and 39 weeks
ended October 23, 1999, respectively, versus $2,347,000 and $7,042,000 for same
periods a year earlier. Goodwill is capitalized and amortized over 40 years
using the straight-line method.
As a result of the foregoing factors, consolidated operating income, excluding
the inventory markdown charge, decreased to $28,753,000 and $73,411,000 or 2.2%
and 2.1% of sales for the 13 and 39 weeks ended October 23, 1999, respectively,
as compared to $56,343,000 and $93,710,000 or 4.9% and 3.0% of sales, for the
comparable periods a year earlier. Including the inventory markdown charge,
consolidated operating income was a loss of $54,504,000 and $9,846,000 for the
13 and 39 weeks ended October 23, 1999, respectively.
Interest expense, net, was $1,899,000 and $6,405,000 for the 13 and 39 weeks
ended October 23, 1999, respectively, as compared to $1,478,000 and $3,389,000
for the comparable periods a year earlier. The increase in interest expense
during fiscal 1999 was primarily due to increased borrowings to fund the
Company's stock repurchase program and accelerated expansion plans.
Income tax expense for the 13 and 39 weeks ended October 23, 1999 was a net
benefit of $18,963,000 and $3,254,000, respectively. For the comparable prior
year periods, income tax expense was $21,287,000 and 35,044,000, respectively.
The effective tax rates for both periods are different from the federal
statutory income tax rate primarily as a result of goodwill amortization, tax
exempt interest, and state and local taxes. The Company expects the effective
tax rate for fiscal 1999, excluding the inventory markdown charge, to be
approximately 40%. The Company recognized income tax benefit on the inventory
markdown charge at a 36% effective rate.
As a result of the foregoing factors, net income for the 13 and 39 weeks ended
October 23, 1999, excluding the inventory markdown charge, was $15,844,000 and
$40,287,000, respectively, or 1.2% of sales. Net income was $33,578,000 and
$55,277,000 or 2.9% and 1.8% of sales for the 13 and 39 weeks ended October 24,
1998, respectively. The inventory markdown charge reduced net income for the 13
and 39 weeks ended October 23, 1999 by $53,284,000 resulting in a net loss of
$37,440,000 and $12,997,000, respectively.
BUSINESS SEGMENTS
- -----------------
Core Business Segment
Sales for the Core Business Segment increased 15% to $1,219,356,000 for the 13
weeks ended October 23, 1999 from $1,061,374,000 for the comparable period last
year. The increase in the third quarter of fiscal 1999 was due to the additional
sales from 131 (net) new full-size superstores and two smaller format OfficeMax
PDQ stores opened since the end of the third quarter of fiscal 1998 and a
comparable-store sales increase of 3%. Declines in average selling prices for
fax machines, printers and copiers reduced the Core Business Segment's
comparable-store sales increase by approximately 1% during the quarter. Sales
for the Core Business Segment increased 14% to $3,254,098,000 for the 39 weeks
ended October 23, 1999 from $2,848,369,000 for the comparable prior year period,
primarily as a result of new store openings and a comparable-store sales
increase of 2%.
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Cost of merchandise sold, including buying and occupancy costs and excluding the
inventory markdown charge for the Core Business Segment increased as a
percentage of sales to 74.5% for the 13 and 39 weeks ended October 23, 1999,
from 73.3% and 74.1% for the comparable prior year periods. Gross profit for
this segment, excluding the inventory markdown charge, was $311,095,000 and
$829,573,000 or 25.5% of sales for the 13 and 39 weeks ended October 23, 1999,
respectively, as compared to $283,297,000 and $736,654,000 or 26.7% and 25.9% of
sales for the like periods last year.
In order to effect the acceleration of the Company's supply-chain management
initiative, which includes the development and opening of four mega, 600,000 to
750,000-square-feet, "PowerMax" supply-chain distribution centers and the
implementation of the Company's new SAP software 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. The charge provided for the liquidation of merchandise that is not
expected to be part of the Core Business Segment's ongoing product offering.
Including the inventory markdown charge, gross profit was $227,838,000 and
$746,316,000 or 18.7% and 22.9% of sales for the 13 and 39 weeks ended October
23, 1999, respectively.
Operating income for the Core Business Segment, excluding the inventory markdown
charge, decreased to $38,462,000 and $103,042,000 or 3.2% of sales for the 13
and 39 weeks ended October 23, 1999, respectively, from $62,493,000 and
$114,484,000 or 5.9% and 4.0% of sales for the like periods last year. The
decrease in operating income was primarily due to increased store operating and
selling expenses related to the Company's decision to accelerate its
supply-chain management initiative, including increased advertising expenses and
reduced vendor income. Including the inventory markdown charge, operating income
for the Core Business Segment was a loss of $44,795,000 and income of
$19,785,000 for the 13 and 39 weeks ended October 23, 1999, respectively.
Net income for the Core Business Segment, excluding the inventory markdown
charge, decreased to $22,385,000 and $59,716,000 or 1.8% of sales for the 13 and
39 weeks ended October 23, 1999, respectively, from $38,126,000 and $70,084,000
or 3.6% and 2.5% of sales for the comparable periods last year. The inventory
markdown charge reduced the net income of the Core Business Segment by
$53,284,000 resulting in a net loss of $30,899,000 for the 13 weeks ended
October 23, 1999 and net income of $6,432,000 for the 39 weeks ended October 23,
1999.
Computer Business Segment
Sales for the Computer Business Segment decreased 9% to $82,418,000 for the 13
weeks ended October 23, 1999 from $90,985,000 for the comparable period last
year. Same-store sales for the Computer Business Segment declined 26% for the
13 weeks. The reduction in comparable-store sales was due primarily to a
reduction of approximately 19% in the average selling prices for computers
along with the Company's deliberate decision to modify its computer assortment
and continue to reduce its low or no profit computer promotions compared to a
year ago. Sales for the Computer Business Segment decreased 18% to $197,549,000
for the 39 weeks ended October 23, 1999 from $239,534,000 for the comparable
prior year period.
Cost of merchandise sold, including buying and occupancy costs, for the
Computer Business Segment as a percentage of sales was 100.0% for the 13 weeks
ended October 23, 1999 and October 24, 1998. Cost of merchandise sold,
including buying and occupancy costs, for this segment increased as a
percentage of sales for the 39 weeks ended October 23, 1999 to 101.2% from
101.1% for the comparable prior year period. The increase in the cost of
merchandise sold as a percentage of sales was due primarily to decreased
leverage of certain occupancy costs. The decline in leverage was the result of
the Company's decision to modify this segment's product assortment and
promotions. Gross profit for the Computer Business Segment was a loss of
$32,000 and $2,308,000 for the 13 and 39 weeks ended October 23, 1999,
respectively, as compared to a loss of $18,000 and $2,698,000 for the
comparable prior year periods.
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Operating loss for the Computer Business Segment was $9,709,000 and $29,631,000
for the 13 and 39 weeks ended October 23, 1999, respectively, as compared to
$6,150,000 and $20,774,000 for the like periods a year earlier. During the prior
year, various computer vendor programs reduced advertising expense and minimized
the operating loss. Many of these programs were discontinued in conjunction with
the Company's decision to realign its Computer Business Segment and modify its
computer assortment during the fourth quarter of fiscal 1998.
Net loss for the Computer Business Segment was $6,541,000 and $19,429,000 for
the 13 and 39 weeks ended October 23, 1999, respectively, as compared to a net
loss of $4,548,000 and $14,807,000 for the comparable periods last year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's operating activities generated $175,478,000 of cash during the 39
weeks ended October 23, 1999, which was an increase of $121,957,000 over the
prior year. A decrease in accounts receivable was the primary source of the
year-over-year cash increase, partially offset by a lesser increase in accounts
payable during the first nine months of fiscal 1999. Consolidated inventory
decreased $33,584,000 since the year ended January 23, 1999. The effect of the
inventory markdown was offset by the merchandise added for the 90 (net) new
full-size superstores, two smaller format OfficeMax PDQ stores and a delivery
center that were opened during the first 39 weeks of fiscal 1999. Consolidated
inventory decreased 10% year-over-year on a per store basis, excluding the
effects of the inventory markdown charge recorded in the current year. The per
store inventory decrease was primarily a result of the Company's continued
focus on its supply-chain management initiatives. Major uses of working capital
included accrued expenses and other liabilities, which decreased $39,053,000
during the 39 weeks ended October 23, 1999.
Net cash used for investing activities was $82,185,000 for the 39 weeks ended
October 23, 1999, versus $89,542,000 in the comparable prior year period.
Capital expenditures, primarily for new and remodeled stores and the Company's
IT initiatives, were $81,787,000 during the 39 weeks ended October 23, 1999 and
$82,614,000 during the comparable period in the prior year.
Net cash used for financing was $90,295,000 for the 39 weeks ended October 23,
1999. Current year financing activities primarily represent borrowings under the
Company's revolving credit facilities, a decrease in overdraft balances and
receivables for advanced payment for leased facilities, and the payment of
$34,841,000 for treasury stock purchases. Net cash provided by financing in the
comparable prior year period primarily represented borrowings on the Company's
revolving credit facilities and the payment of $56,999,000 for treasury stock
purchases.
Since the end of the third quarter, the Company opened 24 new full-size
superstores and expects to remodel approximately 20 existing superstores during
the remainder of the year. Management estimates that the Company's cash
requirements for opening or remodeling a superstore, exclusive of pre-opening
expenses, will be approximately $1,075,000 and $210,000 respectively. For
opening a full-size superstore, the requirements include an average of
approximately $425,000 for leasehold improvements, fixtures, point-of-sale
terminals and other equipment, and approximately $650,000 for the portion of
store inventory that is not financed by accounts payable to vendors. Pre-opening
expenses are expected to average approximately $85,000 per full-size OfficeMax
superstore. In select cases, that average is expected to increase by
approximately $25,000 when certain enhanced CopyMax or FurnitureMax features are
included.
The Company expects its funds generated from operations as well as its current
cash reserves, and, when necessary, seasonal short-term borrowings will be
sufficient to finance its operations and capital requirements, including its
expansion strategy. The Company has $500,000,000 of revolving credit facilities
available through June 2002. As of October 23, 1999, the Company had outstanding
borrowings of $154,700,000 under its revolving credit facilities at a weighted
average interest rate of 5.58%
During the third quarter of fiscal 1999, the Company began operations at its
PowerMax facility in Hazleton, Pennsylvania, which is part of a planned network
of up to four 600,000 to 750,000- square-foot supply-chain
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distribution centers. The Company is financing the Hazleton facility, including
the land, building and equipment as an operating lease utilizing a commercial
paper conduit funding source. During the fourth quarter of fiscal 1999 the
Company expects to finalize similar financing for a PowerMax facility located in
the Southeast, which is scheduled to open in June 2000. The Company is
evaluating various financing alternatives for the remaining facilities,
including other operating lease structures. If the Company elects to finance the
remaining facilities by means other than an operating lease, it expects the cash
requirements for opening a PowerMax supply-chain distribution center, exclusive
of pre-opening expenses, would be approximately $50,000,000, including land,
buildings and equipment.
On August 13, 1998, the Company's Board of Directors increased the Company's
authorization to repurchase its common stock on the open market to $200,000,000.
As of October 23, 1999, the Company had purchased a total of 12,702,100 shares
at a cost of $113,619,000. This included systematic purchases to cover potential
dilution from the issuance of shares under the Company's equity-based incentive
plans. Future purchases of common shares will depend on the Company's obligation
under its equity-based incentive plans, its cash position and market conditions.
The Company's business is somewhat 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 back-to-business
selling season in 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.
LEGAL PROCEEDINGS
- -----------------
The Company is a party to litigation it initiated in October 1997 in the United
States District Court for the Northern District of Ohio against Ryder Integrated
Logistics, Inc. ("Ryder") arising out of Ryder's failure to fulfill certain
payment guarantees pursuant to the terms of the Company's logistics service
agreement with Ryder. The Company terminated the logistics service agreement in
June 1997 based on numerous claims against Ryder under the agreement including,
among others, Ryder's refusal to honor its cost guarantees and its failure to
return overpayments to the Company. During the course of the agreement, the
Company recorded receivables from Ryder of approximately $19,000,000
representing overpayments due from Ryder pursuant to the terms of the agreement.
In January 1998, Ryder filed a counterclaim against the Company alleging damages
arising from the Company's termination of the agreement in the amount of
approximately $75,000,000. The Company believes the counterclaim is without
merit and intends to vigorously defend against such counterclaim.
Management is of the opinion that, although the ultimate resolution of the Ryder
litigation cannot be forecasted with certainty, final disposition of this matter
should not materially affect the Company's liquidity, financial position or
results of operations. However, in the event of an unanticipated adverse final
determination in this matter, the Company's consolidated net income for the
period in which such determination occurs could be materially affected.
In addition, there are various claims, lawsuits and pending actions against the
Company incident to the Company's operations. It is the opinion of management
that the ultimate resolution of these matters will not have a material effect on
the Company's liquidity, financial position or results of operations.
YEAR 2000 READINESS
- -------------------
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to identify the applicable year. Time-sensitive computer
programs may recognize "00" as the year 1900 rather than the year 2000, which
could result in miscalculations or system failures. The Company is engaged in a
company-wide project to address the Year 2000 issue. The scope of the Company's
Year 2000 project includes: (a) identifying and taking appropriate corrective
action to remedy the Company's software, hardware and imbedded technology; (b)
working with key third parties with which the Company does business
electronically to ensure that such business is not adversely affected by the
Year 2000 issue; and (c) contacting other third parties and requesting
assurances that
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such parties and their products will be Year 2000 ready on a timely basis. The
Company has assembled a Year 2000 project team that is responsible for the
Company's Year 2000 readiness process and ensuring that there are no major
interruptions in the Company's operations as a result of the Year 2000 issue.
The project team, which includes members of the Company's senior management, has
retained an outside contractor to serve as the "Year 2000 Czar". The Year 2000
Czar is responsible for coordinating the Company's Year 2000 project and
reporting to management. The Year 2000 Czar provides weekly progress reports to
the project team and periodic status reports to the Board of Directors.
The Company has identified both mission critical Year 2000 issues (primarily
hardware, operating systems and application systems used in day-to-day
operations) and non-mission critical Year 2000 issues related to facilities and
product support. Although testing will continue, the Company has completed its
readiness process for mission critical systems. The Company has determined that
it will be required to modify or replace other portions of its software,
hardware and imbedded technology, which are not considered mission critical
systems, so that they will function properly with respect to the Year 2000 and
thereafter. Currently, the Company estimates it has completed 95% of its
readiness process for non-mission critical systems and issues. The Company
expects to complete its readiness process for non-mission critical systems by
the end of 1999. The Company has developed contingency plans in the event that
any of its non-mission critical Year 2000 issues are not resolved in a timely
manner.
While the Company continues to focus on solutions for Year 2000 issues, and
expects to complete its project in a timely manner, the Company has identified
potential major business interruptions that could reasonably likely result from
Year 2000 issues and is developing contingency plans to address such potential
interruptions, as well as general plans to address unforeseen problems. The
Company is directly working with key third parties with which the Company does
business electronically to remediate and test affected systems. The Company is
also in the process of contacting other third parties, including product
suppliers, to identify other potential Year 2000 issues. The Company intends to
either resolve any issues identified or develop appropriate contingency plans.
Contingency plans are anticipated to include for example, identification of
alternative suppliers or service providers and the development of alternative
procedures. Regardless of the contingency plans developed, there can be no
assurance that the implementation of these plans will be successful.
All costs and expenses incurred relating to the Year 2000 issue are charged
against income on a current basis. Based on the Company's most recent
evaluation, including internal expenses, the total cost of the Company's Year
2000 project is expected to be approximately $5,000,000, of which approximately
$3,200,000 has been incurred through October 30, 1999.
Management's estimates regarding the expected completion dates and cost involved
in the Company's Year 2000 project are based on various assumptions regarding
future events, including the availability of resources, the success of third
parties in addressing their own Year 2000 issues, and other factors. There are
significant risks to the Company if the actual completion dates or costs differ
materially from expected completion dates and costs. These risks include the
need to process transactions manually at increased costs to the Company,
potential delays in obtaining key operational data for analysis, and the
inability to process customer orders, pay vendors, collect receivables or
procure merchandise for resale on a timely basis, and to perform other critical
business functions which could have a material adverse effect on the Company's
financial position and the results of its operations. Further, the Company
cannot reasonably estimate the impact on the Company of key third parties not
successfully addressing their own Year 2000 issues. However, the Company's
results from operations could be materially adversely affected if third parties
(e.g., suppliers, utilities, banks and government entities) have not adequately
addressed their respective Year 2000 issues. The most reasonably likely worst
case scenario which could result from the failure of the Company or its
suppliers or other key third parties to adequately address Year 2000 issues
would include a temporary closing of one or more of the Company's stores or
distribution facilities or interruption of the Company's ability to receive and
process telephone, facsimile or internet orders.
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Regarding products it sells, the Company believes that the vendors that supply
products to the Company for resale are solely responsible for the Year 2000
functionality of those products. The Company has encouraged its merchandise
vendors to disclose any potential effect that the Year 2000 change might have on
their products. The Company also encourages its customers to contact the
manufacturers directly for specific up-to-date information on individual
products. Brochures and other references to our suppliers web sites, phone
numbers, etc. have been placed in all of our stores.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
- ----------------------------------------------------------
Portions of this Quarterly Report on Form 10-Q include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The words "believe," "expect," "anticipate," "plan," "intend," and
similar expressions, among others, identify "forward-looking statements," which
speak only as of the date the statement was made. Such forward-looking
statements are subject to risks, uncertainties and other factors which could
cause actual results to materially differ from those made, projected or implied
in such statements. The most significant of such risks, uncertainties and other
factors are described in Exhibit 99.1 to the Company's Annual Report on Form
10-K for the year ended January 23, 1999 as filed with the Securities and
Exchange Commission. 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 Company's long-term debt is principally variable
rate debt, while 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 exchange risk through its joint venture
partnerships in Brazil, Japan and Mexico. The Company believes its potential
exposure to foreign exchange risk is not material.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
Exhibits:
(a) Exhibits:
27.0 Financial Data Schedule for the period ended
October 23, 1999
(b) Reports on Form 8-K: None
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SIGNATURE
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 6, 1999 By: /s/ Jeffrey L. Rutherford
----------------------------------------
Jeffrey L. Rutherford
Senior Executive Vice President, Chief
Financial Officer (Principal Financial
Officer and Principal Accounting
Officer)
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