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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended JANUARY 26, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 1-13380
OFFICEMAX, INC.
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(Exact name of registrant as specified in its charter)
OHIO 34-1573735
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(State or other jurisdiction of incorporation or organization) (I.R.S. employer identification no.)
3605 WARRENSVILLE CENTER ROAD, SHAKER HEIGHTS, OHIO 44122
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 471-6900
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Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
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COMMON SHARES, WITHOUT PAR VALUE NEW YORK STOCK EXCHANGE
PREFERRED SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of April 5, 2002 was approximately $717,270,415.
The number of Common Shares, without par value, of the Registrant outstanding,
net of treasury shares, as of April 5, 2002 was 123,667,313.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for use at the 2002 Annual Meeting
of Shareholders to be held on May 21, 2002, are incorporated by reference in
Part III of this report.
TABLE OF CONTENTS
Item No. Page No.
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Part I
1. Business 3
2. Properties 9
3. Legal Proceedings 10
4. Submission of Matters to a Vote of Security Holders 10
Part II
5. Market for Registrant's Common Shares and Related Shareholder Matters 13
6. Selected Financial Data 14
7. Management's Discussion and Analysis of Financial Condition and 15
Results of Operations
7A. Quantitative and Qualitative Disclosures About Market Risk 28
8. Financial Statements and Supplementary Data 28
9. Changes in and Disagreements with Accountants on Accounting and 28
Financial Disclosure
Part III
10. Directors and Executive Officers of the Registrant 29
11. Executive Compensation 29
12. Security Ownership of Certain Beneficial Owners and Management 29
13. Certain Relationships and Related Transactions 29
Part IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 30
Signatures 31
Exhibit Index 32
2
PART I
ITEM 1. BUSINESS
GENERAL
OfficeMax, Inc. ("OfficeMax" or the "Company"), which was incorporated
in Ohio in 1988, operates a chain of high-volume, deep-discount office products
superstores. As of January 26, 2002, OfficeMax owned and operated 993
superstores in 49 states, Puerto Rico, 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(R) and FurnitureMax(R), in-store modules devoted exclusively to
print-for-pay services and office furniture. Additionally, the Company reaches
customers with over 30,000 items through its award winning eCommerce site,
OfficeMax.com(R), 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 customer call/contact centers.
The typical full-size OfficeMax superstore is approximately 20,000 to
23,500 square feet and offers over 10,000 office products and related items.
During the first quarter of fiscal year 2002, the Company launched a major
initiative designed to enhance its domestic retail superstore presentation. A
key aspect of this program is strategically focused on the enhanced in-store
presentation of higher profit margin products including supplies, furniture and
the Company's print-for-pay services. The initiative is designed to capitalize
on the Company's improved replenishment network and reduced per-store inventory
by lowering the height of certain store fixtures, enhancing in-store signage and
improving merchandise adjacencies. At OfficeMax.com (www.officemax.com), the
Company offers over 30,000 items, with free, fast delivery on orders over $50
for most locations, and a credit card security guarantee. OfficeMax.com also
provides a variety of services targeted at small business and home office
customers such as express orders for frequently purchased products, usage
reporting, online order tracking, convenient order-by-number features and an
informational resource center. OfficeMax.com also offers an expanding array of
integrated business services targeted to small business and home office
customers, including communications, eBusiness utilities, marketing, travel,
virtual learning and financial services.
The Company markets its merchandise primarily to small- and medium-size
businesses, home office customers and individual consumers. By extending and
integrating its marketing channels to include direct-mail catalog and an outside
sales force, OfficeMax also serves the medium and larger corporate customer.
The following table summarizes the Company's domestic superstore real
estate activity by fiscal year, including Puerto Rico and the U.S. Virgin
Islands:
FISCAL STORES STORES STORES
YEAR OPENED CLOSED ACQUIRED TOTAL
- -------------------------------------------------------------------------------
1988 3 - - 3
1989 8 - - 11
1990 23 - 12 46
1991 33 - - 79
1992 61 2 41 179
1993 53 9 105 328
1994 70 10 - 388
1995 80 - - 468
1996 96 - - 564
1997 150 1 - 713
1998 120 1 - 832
1999 115 1 - 946
2000 54 5 - 995
2001 17 48 - 964
As of January 26, 2002, through joint venture partnerships, OfficeMax
operated 27 stores in Mexico and 2 stores in Brazil.
3
BUSINESS SEGMENTS
The Company has two business segments: Domestic and International. The
Company's operations in the United States comprise its retail stores, eCommerce
operations, catalog business and outside sales groups all of which are included
in the Domestic segment. The operations of the Company's joint venture in
Mexico, OfficeMax de Mexico, are now included in the International segment. As
of the beginning of fiscal year 2001, OfficeMax completed its previously
announced business integration and aligned its domestic eCommerce business,
catalog operations and outside sales groups with its superstores in order to
more efficiently leverage its various direct business channels. As a result of
this process, management now evaluates performance and allocates resources based
on an integrated view of its domestic operations.
BUSINESS STRATEGY
The Company's strategy is to gain market share, to be a leading
provider of office products, supplies and services in each of the markets in
which it competes and to continue to take advantage of expansion opportunities
in existing and new markets, including international expansion with a focus on
Latin America. The key elements of this strategy are as follows:
- Extensive Merchandise and Service Offering. Each OfficeMax
superstore offers over 10,000 stock keeping units ("SKUs") of quality,
name-brand and private-label merchandise. This offering represents a
breadth and depth of in-stock items that are not available from
traditional office products retailers, mass merchandisers or wholesale
clubs. During fiscal year 2001, the Company launched several major
initiatives with its vendor partners to expand its service and product
offerings, including agreements with Hewlett-Packard and Earthlink.
Through its strategic alliance with Hewlett-Packard, the Company offers
configure-to-order computers which can be purchased from customer
action kiosks located in all domestic OfficeMax superstores. Through
its partnership with Earthlink, OfficeMax offers its customers a full
suite of Internet solutions, including traditional ISP services and
high-speed DSL, cable and satellite connectivity. The Company has also
announced a strategic partnership with Airborne Express, whereby the
Company will offer full-service shipping services in its domestic
superstores. During the first quarter of fiscal year 2002, the Company
launched a select-market test of the Airborne Express services and
expects a national roll-out to all of its superstores beginning in the
second quarter of fiscal year 2002. Additionally, the Company has
formed strategic partnerships with various vendor partners to provide
direct vendor fulfillment to OfficeMax customers which will enable the
Company to significantly expand its product offering without any
incremental inventory risk or working capital requirements. These
strategic alliances are expected to increase sales and build additional
customer loyalty with the Company's target customers, particularly
small business operators.
- New Store Prototype. The Company's merchandise presentation
is highlighted by wide aisles with open ceilings, bright lighting,
colorful signage and bold graphics. This easy-to-shop presentation is
designed to enhance customer convenience, create an enjoyable shopping
experience and promote impulse buying. During the first quarter of
fiscal year 2002, the Company launched a major initiative designed to
improve its domestic retail superstore presentation. The initiative is
designed to capitalize on the Company's improved replenishment network
and reduced per-store inventory by lowering the height of certain store
fixtures, enhancing in-store signage and improving merchandise
adjacencies. Beginning in fiscal year 2001, the Company's revised
prototype store size is approximately 20,000 square feet, approximately
15% less than previous prototypes of 23,500 square feet. The majority
of leases for new stores now being executed are for approximately
20,000 square feet. During fiscal year 2001, the Company began the
process of right-sizing existing superstores, a process whereby the
Company attempts to reduce the size of its older larger superstores
closer to the new prototype square footage as leases are renewed.
Currently, the Company has plans to right-size approximately 10
existing superstores and intends to pursue additional selective and
strategic opportunities to right-size existing, non-prototype
superstores to approximately 20,000 square feet.
- Guaranteed Everyday Low Prices. The Company maintains an
everyday low price policy. The Company guarantees its low prices by
matching any advertised price or refunding the difference between a
lower advertised price and the price paid at OfficeMax within 14 days,
subject to certain exclusions. The Company is testing the promotion of
an additional 15% merchandise credit to be issued if the lower price is
from an office products superstore such as Office Depot(TM) and
Staples(TM).
4
- Customer Service. To develop and maintain customer loyalty,
OfficeMax is fostering a customer-centric sales culture that focuses
associates on making customer service their number one priority. The
Company views the quality of its associates' interaction with its
customers as critical to its success. To this end, the Company
emphasizes training and personnel development and seeks to attract and
retain well-qualified, highly motivated associates. Additionally, the
Company has centralized most administrative functions at its corporate
office and customer call/contact centers and automated many store-level
tasks or shifted such tasks to off hours to enable in-store associates
to focus on effective customer service. Effective customer service is a
fundamental element of the Company's "Seek and Sell" initiative
designed to maximize add-on sales.
- Marketing Concepts. OfficeMax's in-store marketing concepts
are designed to complement its core office supply merchandise
assortment by providing additional products and services to the
Company's customers and an opportunity for incremental store traffic.
These concepts include the departments or "in-store modules" CopyMax
and FurnitureMax. CopyMax offers customers a wide range of
"print-for-pay" services from self-service black and white copying to
full-service digital printing and publishing. FurnitureMax provides a
full line of office furniture and related accessories and a variety of
specialized services such as office layout and design and professional
set-up and installation.
- OfficeMax.com. The Company believes that the Internet is an
increasingly important medium for the sale of office products and the
provision of business services. OfficeMax.com offers over 30,000 office
products coupled with free, fast delivery on orders over $50 for most
locations. OfficeMax.com also offers an expanding array of integrated
business services targeted at small business and home office customers,
including communications, eBusiness utilities, marketing, travel,
virtual learning and financial services.
- Catalog and Commercial Outside Sales. The Company's strategy
for its catalog and outside sales businesses is to capitalize on the
OfficeMax brand name awareness by providing other channels that give
the OfficeMax customer more purchasing options. A full assortment
catalog of all the items available in OfficeMax superstores plus a
variety of merchandise from a third party provider allows customers the
convenience of catalog ordering and fast delivery. The Company also
provides special order catalogs containing more than 30,000 items and a
commissioned outside sales force to meet its customers' needs.
- Focused Domestic Expansion. The Company opened 17 new
domestic superstores during fiscal year 2001 and intends to open less
than that number during fiscal year 2002. The Company will focus on
opening new superstores in markets where it already has a major
presence which will enable it to better leverage advertising,
distribution and management and supervisory costs. Prospective new
superstore locations are evaluated using on-site surveys conducted by
real estate specialists and field operations personnel coupled with a
proprietary real estate selection model, which assesses potential store
locations and incorporates computer-generated mapping. The model
analyzes a number of factors that have contributed to the success of
existing OfficeMax locations including the location's size, visibility,
accessibility and parking capacity, potential sales transfer effects on
existing OfficeMax superstores and relevant demographic information,
such as the number of businesses and the income and education levels in
the area.
During fiscal years 2001 and 2000, the Company, as a result of
extensive reviews of its real estate portfolio, elected to close 77
underperforming superstores. During the first quarter of fiscal 2002,
29 of these superstores were closed and liquidated. The other 48
superstores were closed and liquidated during fiscal year 2001.
- International Expansion. During fiscal year 2001, the
Company opened five OfficeMax superstores in Mexico through its
majority-owned joint venture with Grupo Oprimax, S.A. de C.V., a
Mexican corporation, ending the year with 27 superstores. In fiscal
2002, this joint venture plans to open up to ten additional superstores
in Mexico. OfficeMax stores operated by this joint venture are similar
to those operated by the Company domestically. See Note 12 of Notes to
Consolidated Financial Statements of the Company for financial
information regarding the Company's joint venture in Mexico. The
Company believes additional future international expansion
opportunities will exist in Latin America. Ultimately, the Company's
international expansion will depend upon general economic and business
conditions affecting consumer spending in these markets, the
availability of desirable store locations, the negotiation of
acceptable terms and the availability of adequate capital.
The Company also has a 19% interest in a joint venture that
operated two superstores in Brazil. The Company accounts for the joint
venture on the cost basis and wrote-off its remaining investment in the
joint venture as well as receivables from the joint venture in the
fourth quarter of fiscal year 2001. The write-off, which was a result
of the
5
majority partner's inability to secure additional financing and a
difficult economic environment in Brazil, totaled $5,631,000 and was
included in the charge for store closing and asset impairment.
MARKETING, PROMOTIONS AND ADVERTISING
The Company's marketing efforts are directed at small-and medium-size
businesses, home office customers, and individual consumers. A multimedia
approach is used to attract new customers and emphasize the Company's "Max Means
More" marketing theme which is designed to position OfficeMax as the retailer
that gives small business more of what it needs to succeed in terms of
selection, service and value. The Company's advertising campaigns utilize
network, local and cable television commercials, newspaper ads, seasonal spot
television and radio commercials, direct mail promotions, circulars, outdoor
billboards, mass transit cards, sports arena and online advertising as well as
other promotional and public/community relation vehicles.
Special marketing programs are developed to target the small business
customer and to support seasonal events such as the back-to-school selling
period, the Christmas holiday season, and the January "re-stocking"
back-to-business period. Additionally, the Company utilizes "micro-marketing,"
or market specific advertising, to leverage its advertising spend and to target
certain key markets in a cost-effective manner.
MANAGEMENT INFORMATION SYSTEMS
The Company uses a platform of Unix-based parallel processors, which
supports a wide variety of mission critical applications, ranging from
merchandise replenishment to order fulfillment, electronic commerce and
financial systems. During fiscal year 2000, the Company completed the conversion
to its new SAP Enterprise Resource Planning computer system, a flexible,
consolidated, enterprise-wide system. OfficeMax believes the SAP system is
enabling the Company to grow and operate the business more effectively. During
fiscal year 2001, the Company began the process to upgrade SAP to the R/3 4.6c
release. The Company completed testing and the successful final implementation
of the upgrade during the first quarter of fiscal year 2002. The upgraded system
will give OfficeMax the ability to integrate additional legacy systems under the
SAP umbrella. The upgrade will also facilitate the decentralization of
OfficeMax's warehouse management systems which will improve their reliability
and performance.
The Company operates a proprietary, in-store computer system called
"StoreMax" that allows the daily tracking of inventory through the use of
portable, handheld, radio frequency terminals. These terminals permit store
managers to scan a product on the shelf and instantly retrieve specific product
information, such as recent sales history, gross profit margin and inventory
levels. In-store, point-of-sale registers capture sales information at the time
of each transaction, at the category and SKU level, by the use of bar-code
scanners that update store-level perpetual inventory records. This information
is transmitted on a daily basis to corporate headquarters, where it is evaluated
and used in merchandising and replenishment decisions.
The Company utilizes an online advanced "frame-relay" network, which
supports data communication between headquarters and its stores, delivery and
customer call/contact centers. This technology is employed to centralize credit
card and check authorization and validate transactions. In addition, the network
enhances intra-Company communication and supports electronic maintenance of
in-store technology. The Company also utilizes its own intranet, know as @MaxSM,
which provides information on demand to all of the Company's corporate and field
management associates, including online product knowledge and management
training.
The Company employs a variety of scalable and reliable software and
hardware systems that provide transaction processing, administration, product
searching, customer support, fulfillment and order tracking for OfficeMax.com.
The transaction processing systems are integrated with the Company's order
management, payment processing, distribution, accounting and financial systems.
The Company's eCommerce systems are based on industry standard architectures.
The backbone of the technology structure consists of Oracle database servers
with Sun Microsystems hardware. The Company's Internet systems are hosted at an
independently operated third party facility, which provides high-speed,
redundant communications lines, emergency power backup and continuous systems
monitoring. Load balancing systems and redundant servers provide for fault
tolerance and for no single point of failure in the event of outages or
catastrophic events.
6
MERCHANDISING
The Company's merchandising strategy focuses on offering an extensive
selection of quality, name-brand and OfficeMax private-label products. The
following table sets forth the approximate percentage of net sales attributable
to each merchandise group for the periods presented:
- ----------------------------------------------------------- ---------------------------------------------------------
JANUARY 26, JANUARY 27, JANUARY 22,
FISCAL YEAR ENDED 2002 2001 2000
- ----------------------------------------------------------- ---------------------------------------------------------
Office supplies, including print-for-pay services 39.4% 39.2% 38.4%
Electronics and business machines 33.1 32.1 30.9
Office furniture 11.0 13.0 12.5
Computers, printers, software, peripherals and related
consumable products 12.2 12.2 17.5
International segment 3.0 2.3 -
Other 1.3 1.2 0.7
--------------- --------------- ---------------
Total Company 100.0% 100.0% 100.0%
=============== =============== ===============
The Company offers a wide selection of name-brand office products,
packaged and sold in multi-unit packages for the business customer and in single
units for the individual consumer. The Company also offers private-label
products under the OfficeMax(R) label in order to provide customers additional
savings on a wide variety of commodity products for which management believes
national brand recognition is not a key determinant of customer selection and
satisfaction. These commodity items include various paper products such as
computer and copy paper, legal pads, notebooks, envelopes and similar items.
Despite lower selling prices, these items typically carry higher gross margins
than comparable branded items and help build consumer recognition for the
OfficeMax family of Max-brand products.
PURCHASING AND DISTRIBUTION
OfficeMax maintains a centralized group of merchandise and product
category managers who utilize a detailed merchandise planning system to select
the product mix for each store and delivery center in conjunction with
systematic, frequent input from field management.
The Company believes that it has good relationships with its vendors
and does not consider itself dependent on any single source for its merchandise.
The Company believes that it will be able to continue to obtain sufficient
merchandise on a timely basis.
The Company has two national customer call/contact centers and 18
delivery centers located throughout the United States and Puerto Rico and,
through a joint venture partnership, a call and delivery center in Mexico. The
Company operates three PowerMax inventory distribution facilities located in
Alabama, Pennsylvania and Nevada. The first PowerMax facility was opened in
fiscal year 1998. The Company completed its PowerMax network by opening one
facility in each of fiscal years 1999 and 2000. Prior to the development of the
PowerMax network, the Company's superstores and delivery centers received
inventory shipments directly from each individual vendor. Currently,
approximately 95% of the Company's merchandise offering is replenished from its
PowerMax facilities. Development of the PowerMax network, coupled with the
Company's state-of-the-art computer systems, has enabled the Company to reduce
per-store inventory and improve its working capital management and in-stock
positions by permitting a shorter lead time for reordering at the stores and
delivery centers, while meeting the minimum order requirements of the Company's
vendors. Additionally, the PowerMax network has resulted in more efficient
inventory receiving processes and allowed the Company to devote more of its
store-level personnel resources to customer service. The Company considers its
PowerMax network to be a key component of its business strategies and expects
the network to contribute significantly to improved profitability in future
periods.
7
COMPETITION
The domestic and international office products industries, which
include superstore chains, "e-tailers" and numerous other competitors, are
highly competitive. Businesses in the office products industry compete on the
basis of pricing, product selection, convenience, customer service and ancillary
business offerings.
As a result of consolidation in the office products superstore
industry, OfficeMax currently has only two direct domestic superstore-type
competitors, Office Depot and Staples, which are similar to the Company in terms
of store format, pricing strategy and product selection. The Company's other
competitors include traditional office products retailers and direct mail
operators. During recent years, OfficeMax has experienced increased competition
from electronics superstore retailers, mass merchandisers and wholesale clubs.
In particular, mass merchandisers and wholesale clubs have increased their
assortment of office products in order to attract home office customers and
individual consumers. Further, various other retailers that have not
historically competed with OfficeMax, such as drug stores and grocery chains,
have begun carrying at least a limited assortment of paper products and other
basic office supplies. Management expects this trend towards a proliferation of
retailers offering a limited assortment of office supplies to continue.
The Company believes it competes favorably with its competitors and
differentiates itself based on the breadth and depth of its in-stock merchandise
offering along with specialized services offerings, its everyday low prices, the
quality of its customer service and the efficiencies and convenience of its
integrated channels. OfficeMax does not compete in the contract commercial
business, however, it utilizes an outside sales force to support growth in sales
to small-and medium-size companies.
Some of OfficeMax's competitors may have greater financial resources
than the Company. There can be no assurance that increased competition will not
have an adverse effect on the Company.
SEASONALITY
The Company's business is seasonal with sales and operating income
higher in the third and fourth quarters, which include the Back-to-School period
and the holiday selling season, respectively, followed by the traditional new
year office supply restocking month of January. Sales in the second quarter's
summer months are historically the slowest of the year primarily because of
lower office supply consumption during the summer vacation period.
ASSOCIATES
As of April 5, 2002, the Company had approximately 30,500 domestic
employees, including 16,500 full time and 14,000 part-time associates, 1,800 of
whom were employed at its corporate headquarters and customer call/contact
centers and 28,700 of whom were employed at OfficeMax stores, delivery centers
and inventory distribution centers.
8
ITEM 2. PROPERTIES
As of April 5, 2002, OfficeMax had 939 superstores in 49 states, Puerto
Rico and the U.S. Virgin Islands. The following table details OfficeMax's
domestic superstores by state and territory:
Alabama 13 Nebraska 7
Alaska 3 Nevada 13
Arkansas 2 New Hampshire 3
Arizona 33 New Jersey 17
California 83 New Mexico 9
Colorado 25 New York 40
Connecticut 10 North Carolina 28
Delaware 2 North Dakota 3
Florida 57 Ohio 51
Georgia 31 Oklahoma 4
Hawaii 4 Oregon 10
Idaho 6 Pennsylvania 31
Illinois 53 Rhode Island 2
Indiana 19 South Carolina 9
Iowa 10 South Dakota 3
Kansas 11 Tennessee 25
Kentucky 8 Texas 74
Louisiana 7 Utah 15
Maine 2 Virginia 22
Maryland 2 Washington 22
Massachusetts 18 West Virginia 6
Michigan 43 Wisconsin 27
Minnesota 33 Wyoming 2
Mississippi 6 Puerto Rico 8
Missouri 23 U.S. Virgin Islands 1
Montana 3
The Company occupies all of its stores under long-term lease
agreements. These leases generally have terms ranging from 10 to 25 years plus
renewal options. Most of these leases require the Company to pay minimum rents,
subject to periodic adjustments, plus other charges including utilities, real
estate taxes, common area maintenance and, in limited cases, contingent rentals
based on sales.
The Company's international corporate headquarters are located in two
buildings in the greater Cleveland, Ohio area. The Company owns both of these
facilities, one of which is subject to a mortgage secured loan.
The Company operates 18 delivery centers in 17 states and Puerto Rico
and two national customer call/contact centers in Ohio and Texas. The Company
occupies all of these facilities under various long-term leases. The Company
also operates three PowerMax distribution facilities located in Alabama, Nevada
and Pennsylvania. The Company leases two of these distribution facilities under
synthetic operating leases, financial structures that qualify under generally
accepted accounting principles as operating leases for financial reporting
purposes and as debt financing for income tax purposes, from non-OfficeMax
affiliated special purpose entities ("SPEs") which have been established by
nationally prominent, creditworthy commercial lessors to facilitate the
financing of those assets for the Company. The synthetic operating leases expire
in fiscal year 2004. One of the synthetic operating leases can be extended at
the Company's option until fiscal year 2006. The Company occupies the third
PowerMax distribution facility under a long-term lease.
9
Several of the Company's store leases are guaranteed by Kmart
Corporation (Kmart), which from 1990 to 1995 was an equity investor in OfficeMax
during the Company's early stage development. Kmart sold the balance of its
equity position in OfficeMax in 1995. The Company and Kmart are parties to a
Lease Guaranty, Reimbursement and Indemnification Agreement, pursuant to which
Kmart has agreed to maintain existing guarantees and provide a limited number of
additional guarantees, and the Company has agreed, among other things, to
indemnify Kmart against liabilities incurred in connection with those
guarantees.
As of April 5, 2002, OfficeMax de Mexico had 27 superstores located
throughout Mexico and a call and delivery center located in Mexico City.
OfficeMax de Mexico occupies all of these facilities under various long-term
operating leases.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to previously disclosed securities litigation
in the United States District Court for the Northern District of Ohio, Eastern
Division and the Cuyahoga County, Ohio Court of Common Pleas. On March 27,
2002, the United States District Court for the Northern District of Ohio,
Eastern Division, granted the Company's motion to dismiss all claims against
it and its officers and directors in BERNARD FIDEL, ET AL. VS. OFFICEMAX, INC.,
ET AL., Case No. 1:00CV2432, and the four related cases consolidated with the
FIDEL case (i.e., Case Nos. 1:00CV2558, 1:00CV2562, 1:00CV2606, and 1:00CV2720).
The court thereby dismissed, in their entirety, these putative class action
cases against the Company and certain of its officers and directors.
Plaintiffs have filed a motion requesting the court to reconsider its
dismissal of these cases. The Company will file a brief in opposition to
plaintiffs' motion. As previously disclosed, these lawsuits involve claims
against the Company and certain of its officers and directors for violations
of the federal securities laws for allegedly making false and misleading
statements that served to artificially inflate the value of the Company's
stock and/or relating to the Company's shareholder rights plan. There has
been no change in the status of the remaining previously disclosed securities
cases (i.e., CORRAO, MILLER 3, and the consolidated cases GREAT NECK CAPITAL
APPRECIATION and CRANDON CAPITAL PARTNERS), which were stayed.
In addition, there are various claims, lawsuits and pending actions
against the Company incident to the Company's operations. It is the opinion of
management that the ultimate resolution of these matters will not have a
material effect on the Company's liquidity, financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of fiscal year 2001.
10
EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below are the names, present positions and ages of the executive
officers of the Company as of April 5, 2002 as well as prior positions held by
each during the past five years and the date when each was first elected or
appointed to serve as an executive officer. Executive officers hold office until
their successors are elected or until the earlier of their death, resignation or
removal.
DATE FIRST
ELECTED OR
NAME POSITION AGE APPOINTED
---- -------- --- ---------
Michael Feuer Chairman of the Board and 57 1988
Chief Executive Officer
Gary J. Peterson President, Chief Operating Officer 51 2000
Michael F. Killeen Senior Executive Vice President, 58 2001
Chief Financial Officer
Harold L. Mulet Executive Vice President, 50 1999
Retail Sales and Store Productivity
Eugene O'Donnell Executive Vice President, 55 1999
Merchandising and Inventory Planning
Ross H. Pollock Executive Vice President, General 46 1997
Counsel and Secretary
Ryan T. Vero Executive Vice President, Merchandising, 32 2000
Marketing and OfficeMax.com/Direct
Michael A. Weisbarth Senior Vice President, 37 2001
Corporate Controller
Mr. Feuer is the Company's co-founder, Chairman of the Board and Chief
Executive Officer. He has served as a Director of the Company since its
inception in April 1988. Prior to becoming Chairman in March 1995, Mr. Feuer
served as President. From May 1970 through March 1988, Mr. Feuer was associated
with Jo-Ann Stores, Inc. (formerly Fabri-Centers of America, Inc.), a publicly
held, New York Stock Exchange-listed, national retail chain which then had over
600 stores. In his most recent capacity prior to his departure from Jo-Ann
Stores, Mr. Feuer served as Senior Vice President and a member of that company's
executive committee.
Mr. Peterson has served as the President, Chief Operating Officer of
the Company since March 2000. From July 1996 to February 2000, Mr. Peterson
served as an executive officer and COO of Blockbuster Entertainment, the world's
largest operator of video stores with over 4,000 stores. From August 1993 to
July 1996, Mr. Peterson served as Chief Operating Officer of Southeast Frozen
Foods L.P., a distributor to retail grocery stores. Mr. Peterson has also held
various management positions with Wal-Mart Stores, Inc., Carter Hawley Hale
Department Stores and Thrifty Drug Stores.
Mr. Killeen joined the Company in December 2001, as Senior Executive
Vice President, Financial and Corporate Strategies, and assumed the duties of
Chief Financial Officer in January 2002. From January 2000 until December 2001,
Mr. Killeen was a business consultant. From 1978 until December 1999, Mr.
Killeen was a partner with the accounting firm of Arthur Andersen LLP.
Mr. Mulet has served as Executive Vice President, Retail Sales and
Store Productivity of the Company since May 1999. From August 1995 to May 1999,
Mr. Mulet served as Senior Vice President, Stores at Service Merchandise
Company. Prior to August 1995, Mr. Mulet served as Regional Vice President of
Target Corporation.
11
Mr. O'Donnell has served as Executive Vice President, Merchandise and
Inventory Planning of the Company since October 2001. From September 1999 to
October 2001, Mr. O'Donnell served as Executive Vice President, Merchandising
and Marketing of the Company. From July 1997 to June 1999, Mr. O'Donnell served
as an Executive Vice President at TruServ Corporation (a hardware co-op formed
by the merger of ServiStar and True Value). Prior to July 1997, Mr. O'Donnell
served as an Executive Vice President of ServiStar.
Mr. Pollock has served as Executive Vice President, General Counsel and
Secretary of the Company since March 2001. From March 1998 to March 2001, Mr.
Pollock served as Senior Vice President, General Counsel and Secretary of the
Company. From January 1997 to March 1998, Mr. Pollock served as Vice President,
General Counsel and Secretary of the Company. From September 1988 to December
1996, Mr. Pollock practiced law with the law firm of Benesch, Friedlander,
Coplan & Aronoff in its Cleveland, Ohio office.
Mr. Vero has served as Executive Vice President, Merchandising,
Marketing and OfficeMax.com/Direct since October 2001. From August 2000 to
October 2001, Mr. Vero served as Executive Vice President, eCommerce/Direct of
the Company. From February 1999 to August 2000, Mr. Vero served as Vice
President, eCommerce of the Company. From October 1996 to February 1999, Mr.
Vero served as Divisional Vice President, OfficeMax Online, and from January
1996 to October 1996, he served in a variety of management positions with the
Company.
Mr. Weisbarth has served as Senior Vice President, Corporate Controller
of the Company since April 2001. From July 2000 to April 2001, Mr. Weisbarth
served as Vice President, Assistant Controller of the Company. From November
1998 to July 2000, Mr. Weisbarth served as Vice President, Investor Relations
and Corporate Communications of the Company. From April 1997 to November 1998,
Mr. Weisbarth served as Divisional Vice President, Investor Relations and
Corporate Communications of the Company. From January 1996 to April 1997, Mr.
Weisbarth served as Director of Financial Planning and Analysis of the Company.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS
OfficeMax common shares are listed on the New York Stock Exchange and
traded under the symbol OMX. The high and low sales prices of the Company's
Common Shares during each quarter of fiscal year 2001 and fiscal year 2000, as
reported on the New York Stock Exchange Consolidated Transaction reporting
system, are listed below:
Fiscal 2000 High Low
- ----------- ---- ---
1st Quarter (ended April 22, 2000) $ 7.06 $ 5.25
2nd Quarter (ended July 22, 2000) 5.49 4.69
3rd Quarter (ended October 21, 2000) 5.19 2.38
4th Quarter (ended January 27, 2001) 4.13 1.56
Fiscal 2001 High Low
- ----------- ---- ---
1st Quarter (ended April 28, 2001) $ 4.22 $ 2.75
2nd Quarter (ended July 28, 2001) 3.94 3.06
3rd Quarter (ended October 27, 2001) 4.95 2.60
4th Quarter (ended January 26, 2002) 4.91 2.50
The Company has never paid cash dividends on its Common Shares. The
Company does not anticipate paying any cash dividends on its Common Shares in
the foreseeable future because it intends to retain its earnings to finance the
expansion of its business and for general corporate purposes. The declaration
and payment of any dividends in the future will be at the discretion of the
Company's Board of Directors and will depend on, among other things, the
Company's earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions with respect to payment of dividends and
other factors deemed relevant by the Company's Board of Directors.
As of April 5, 2002, the Company had approximately 3,837 shareholders
of record. On April 5, 2002, the closing price of the Company's Common Shares
was $5.80.
13
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data as of, and for the fiscal years ended, January
26, 2002, January 27, 2001, January 22, 2000, January 23, 1999 and January 24,
1998 is set forth below:
(Dollars in millions, except per share data)
- --------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal Fiscal Fiscal
2001 (1) 2000 (2) 1999 (3) 1998 (4) 1997
- --------------------------------------------------------------------------------------------------------------------
FINANCIAL DATA (5)
Sales $ 4,636.0 $ 5,133.9 $ 4,822.7 $ 4,334.1 $ 3,760.7
Cost of merchandise sold, including
buying and occupancy costs 3,546.2 3,905.0 3,653.8 3,284.6 2,895.0
Inventory liquidation 3.7 8.2 - - -
Inventory markdown charge for
item rationalization - - 77.4 - -
Computer segment asset write-off - - - 80.0 -
Gross profit 1,086.1 1,220.7 1,091.5 969.5 865.7
Store closing and asset impairment 76.8 109.6 - - -
Operating income (loss) (201.9) (193.6) 32.4 86.7 145.9
Net income (loss) (309.5) (133.2) 10.0 48.6 89.6
Earnings (loss) per common share:
Basic (2.72) (1.20) 0.09 0.40 0.73
Diluted (2.72) (1.20) 0.09 0.39 0.72
OTHER FINANCIAL AND OPERATING DATA
Percentage increase (decrease) in sales (9.7%) 6.5% 11.3% 15.2% 18.3%
Comparable-store sales
increase (decrease) (6) (5.9%) (1.1%) (0.4%) 0.4% 1.1%
End of period domestic superstores 964 995 946 832 713
FINANCIAL POSITION
Working capital $ 240.0 $ 403.4 $ 469.1 $ 501.1 $ 561.5
Total assets 1,755.0 2,293.3 2,275.0 2,231.9 1,960.2
Total long-term debt 1.5 1.7 15.1 16.4 17.7
Redeemable preferred shares 21.8 52.3 - - -
Shareholders' equity 705.9 982.3 1,116.0 1,138.1 1,160.6
(1) In the fourth quarter of fiscal year 2001, the Company recorded a valuation
allowance for its deferred tax assets and net operating loss carryforwards
of $170,616,000. The valuation allowance reduced net income by $1.49 per
diluted share. In the fourth quarter of fiscal year 2001, in conjunction
with its decision to close 29 underperforming superstores, the Company
recorded net, pre-tax charges of $76,761,000 for store closing and asset
impairment and $3,680,000 for inventory liquidation. These charges reduced
net income by $49,955,000, or $0.44 per diluted share. The charge for store
closing and asset impairment was net of expected future sublease income for
the closing stores of $42,344,000. See Note 2 of Notes to Consolidated
Financial Statements of the Company for additional information regarding
these charges.
(2) In conjunction with its decision to close 50 underperforming superstores,
the Company recorded, in the fourth quarter of fiscal year 2000, pre-tax
charges of $109,578,000 for store closing and asset impairment and
$8,244,000 for inventory liquidation. These charges reduced net income by
$71,789,000, or $0.64 per diluted share. The charge for store closing and
asset impairment was net of expected future sublease income for the closing
stores of $83,981,000. See Note 2 of Notes to Consolidated Financial
Statements of the Company for additional information regarding these
charges. In the third quarter of fiscal year 2000, the Company recorded a
$19,465,000 pre-tax charge for a litigation settlement. The litigation
settlement charge was included in cost of merchandise sold and reduced net
income by $11,679,000, or $0.10 per diluted share.
14
(3) In order to effect the acceleration of its supply-chain management
initiative and the implementation of the Company's new warehouse management
system, the Company decided to eliminate select current products on hand as
part of its program of merchandise and vendor rationalization. In connection
with this decision, the Company recorded a pre-tax markdown charge of
$77,372,000 in fiscal year 1999. The charge reduced net income by
$49,518,000, or $0.43 per diluted share. See Note 3 of Notes to Consolidated
Financial Statements of the Company for additional information regarding
this charge.
(4) In conjunction with its decision to realign its former Computer Business
segment, the Company recorded a pre-tax charge of $79,950,000 in the third
quarter of fiscal year 1998. The charge provided for the liquidation of
discontinued computer inventory and the write-off of other assets directly
related to the Company's discontinued former Computer Business segment. The
charge reduced net income by $49,889,000, or $0.41 per diluted share.
(5) Fiscal year 2000 included 53 weeks. Fiscal years 2001, 1999, 1998, and 1997
included 52 weeks.
(6) For fiscal year 2000, comparable-store sales excludes the impact of the
Company's discontinued former Computer Business segment.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company has two business segments: Domestic and International. The
Company's operations in the United States comprise its retail stores, eCommerce
operations, catalog business and outside sales groups all of which are included
in the Domestic segment. The Domestic segment also includes the operations of
the Company's former Computer Business segment, which was phased out during
fiscal year 2000, and international joint ventures accounted for under the cost
or equity methods. During fiscal years 2001, 2000 and 1999, the Company
accounted for its joint venture in Brazil under the cost method. Prior to the
Company's acquisition of a majority interest in OfficeMax de Mexico, as of the
end of fiscal year 1999, the Company accounted for this joint venture under the
equity method. The operations of the Company's joint venture in Mexico,
OfficeMax de Mexico, are now included in the International segment. Accordingly,
the Company does not report segment information for the International segment
for periods prior to fiscal year 2000. As of the beginning of fiscal year 2001,
OfficeMax completed its previously announced business integration and aligned
its domestic eCommerce business, catalog operations and outside sales groups
with its superstores in order to more efficiently leverage its various direct
business channels. As a result of this process, management now evaluates
performance and allocates resources based on an integrated view of its domestic
operations and no longer reports segment information for any of its non-retail
business channels.
During fiscal years 2001, 2000 and 1999, the Company recorded charges
related to its store closing program and supply-chain management initiatives as
well as charges related to various legal matters and to provide a valuation
allowance for its net deferred tax assets and net operating loss carryforwards.
All of these charges are included in the results of operations of the Company's
Domestic segment. Additional information regarding these charges is included
under the caption "Charges and Reserves" below.
FISCAL YEAR 2001 (52 WEEKS) COMPARED TO FISCAL YEAR 2000 (53 WEEKS)
CONSOLIDATED OPERATIONS
Sales in fiscal year 2001 decreased 9.7% to $4,636,024,000 from
$5,133,925,000 in fiscal year 2000. Fiscal year 2000 included sales of
approximately $224,026,000 from the Company's discontinued former Computer
Business segment and 46 superstores that were closed as of the first day of
fiscal year 2001. Sales for the 53rd week included in fiscal year 2000 for the
Company's Domestic segment were approximately $104,220,000. Excluding prior year
sales from the former Computer Business segment, the closed stores and the 53rd
week in fiscal year 2000, sales decreased approximately 3.5% year over year.
This sales decrease was primarily due to a 5.9% comparable-store sales (sales
for stores that have been open for more than one year) decrease, partially
offset by sales from new superstores opened in fiscal years 2001 and 2000.
Fiscal year 2001 comparable-store sales primarily reflect a 6.3%
comparable-store sales decrease experienced by the Company's Domestic segment.
Fiscal year 2001 comparable-store sales for the Domestic segment were negatively
impacted by the recession in the U.S. and uncertain consumer and business
sentiment following the September 11th terrorist attacks. These factors
contributed to a decline in small business capital purchases and the formation
of new company start-ups, as well as reduced consumer spending, particularly for
technology and furniture products. Sales for the Company's International segment
increased 21% during fiscal year 2001 to $140,584,000 from $116,269,000
primarily as a result of a 6.8% comparable-store sales increase and sales from
the new superstores opened during fiscal years 2001 and 2000.
15
Gross profit was $1,086,128,000, or 23.4% of sales, in fiscal year 2001
and $1,220,728,000, or 23.8% of sales, in fiscal year 2000. The Company's
Domestic segment recorded inventory liquidation charges related to its store
closing program in fiscal years 2001 and 2000 and a charge for a legal
settlement in fiscal year 2000. Excluding these charges, gross profit was
$1,089,808,000, or 23.5% of sales, in fiscal year 2001 and $1,248,437,000, or
24.3% of sales, in fiscal year 2000. Certain fixed costs, such as occupancy
costs for the Company's superstores, delivery centers and inventory distribution
facilities, are included in cost of merchandise sold. The de-leveraging
(increasing as a percentage of sales) of these costs, primarily as a result of
the comparable-store sales decrease experienced by the Company's Domestic
segment, reduced gross profit by approximately 1.3% of sales during fiscal year
2001. The phase-out of the Company's low-margin former Computer Business
segment, which was completed during fiscal year 2000, partially offset the
impact of de-leveraging fixed costs included in cost of merchandise sold.
Store operating and selling expenses, which consist primarily of store
payroll, operating and advertising expenses, decreased $78,493,000 to
$1,052,958,000 in fiscal year 2001 from $1,131,451,000 in fiscal year 2000. This
decrease was primarily a result of the phase-out of the former Computer Business
segment, store closings and the 53rd week included in the prior fiscal year's
result for the Company's Domestic segment. As a percentage of sales, store
operating and selling expenses increased to 22.7% in fiscal year 2001 from 22.0%
in fiscal year 2000. The increase as a percentage of sales was primarily due to
the de-leveraging of certain operating expenses in the Company's Domestic
segment and a $10,000,000 reserve for legal matters recorded by the Company's
domestic segment during the third quarter of fiscal year 2001. Personnel costs,
which represent nearly 50% of the Domestic segment's store operating and selling
expenses, decreased approximately 6.9% year over year. As a percentage of sales,
these costs increased by approximately 0.3% of sales as the Company continued to
devote resources designed to enhance the customer shopping experience. Most
other store operating and selling expenses decreased in fiscal year 2001 in
proportion to sales. Store operating and selling expenses for the Company's
International segment were $22,738,000, or 16.2% of sales, in fiscal year 2001
and $21,951,000, or 18.9% of sales, in fiscal year 2000. The decrease in these
expenses as a percentage of sales was primarily due to effective expense
controls and improved leverage as a result of the comparable-store sales
increase experienced by the International segment.
General and administrative expenses decreased $10,593,000 to $145,680,000
in fiscal year 2001 from $156,273,000 in fiscal year 2000. The decrease in
general and administrative expenses was primarily due to the Company's continued
cost-and-expense control initiatives, efficiency gains as a result of the
Company's information technology initiatives and the 53rd week included in the
Domestic segment's fiscal year 2000 results. Corporate payroll costs for the
Domestic segment decreased approximately 6.1% year over year. As a percentage of
sales, general and administrative expenses increased to 3.1% in fiscal year 2001
from 3.0% in fiscal year 2000. The increase as a percentage of sales reflects
the de-leveraging of certain fixed costs in the Company's Domestic segment,
including depreciation expense related to the Company's information technology
initiatives.
Goodwill amortization was $9,855,000 in fiscal year 2001 and $9,863,000 in
fiscal year 2000. During those fiscal years, goodwill was capitalized and
amortized over 10 to 40 years using the straight-line method. As a result of a
new accounting standard that is effective for the Company as of the beginning of
fiscal year 2002, goodwill will no longer be amortized, but will be tested for
impairment at least annually. The Company is assessing the financial statement
impact of adopting this new standard, which could include an impairment loss, or
write-off, of some portion of the Company's intangible assets, including
goodwill. See "Recently Issued Accounting Pronouncements" below for additional
information regarding this new standard.
Pre-opening expenses were $2,790,000 and $7,113,000 in fiscal years 2001
and 2000, respectively. The Company's Domestic segment opened 17 new superstores
in fiscal year 2001 and 54 new superstores in fiscal year 2000. This segment
also incurred pre-opening expenses of approximately $1,000,000 during fiscal
year 2000 to open a PowerMax inventory distribution facility. Total pre-opening
expenses for the Domestic segment were $1,801,000 in fiscal year 2001 and
$6,061,000 in fiscal year 2000. Pre-opening expenses for this segment, which
consist primarily of payroll, supplies and grand opening advertising for new
superstores, averaged approximately $90,000 per superstore during fiscal years
2001 and 2000. Pre-opening expenses increase when certain enhanced CopyMax or
FurnitureMax features are included in a domestic superstore. The Company's
International segment opened five and eight new superstores in Mexico during
fiscal years 2001 and 2000, respectively, and incurred pre-opening expenses of
approximately $989,000 and $1,052,000 during those years.
Interest expense, net was $14,804,000 and $16,493,000 in fiscal years 2001
and 2000, respectively. The decrease in net interest expense during fiscal year
2001 was primarily due to reduced average outstanding borrowings for the
Company's Domestic segment and lower interest rates. As of January 26, 2002, the
Domestic segment had reduced the outstanding
16
borrowings under its revolving credit facility by $200,000,000 on a
year-over-year basis. Interest income for the International segment decreased
year over year, primarily as a result of lower interest earned on this segment's
short-term investments.
Other expense (net) was $61,000 in fiscal year 2001 and $60,000 in fiscal
year 2000. Other expense (net) consists primarily of amounts related to the
Company's joint venture partnership in Brazil.
The Company recognized income tax benefit of $80,912,000 in fiscal year
2001, excluding a charge recorded by the Domestic segment to establish a
valuation allowance for the Company's net deferred tax assets and net operating
loss carryforwards, as compared to income tax benefit of $79,076,000 in fiscal
year 2000. The effective tax rates for those fiscal years, excluding the
valuation allowance, were 37.3% and 37.6%, respectively. The effective tax rates
for both years were different from the statutory income tax rate as a result of
state and local income taxes and non-deductible goodwill amortization. Including
the valuation allowance, the Company recognized income tax expense of
$89,704,000 during fiscal year 2001. The Company's International segment was not
required to recognize any income tax expense during fiscal years 2001 and 2000
because of inventory investment deductions and certain other tax strategies. The
Company does not expect that this segment will be required to record any income
tax expense in the foreseeable future.
As a result of the foregoing factors, the net loss for fiscal year 2001,
excluding the charges for inventory liquidation, store closing and asset
impairment and the valuation allowance, was $88,887,000. These charges increased
the fiscal year 2001 net loss by $2,227,000, $47,728,000 and $170,616,000,
respectively. The net loss for fiscal year 2000, excluding charges for
litigation settlement, inventory liquidation and store closing and asset
impairment, was $49,698,000. These charges increased the fiscal year 2000 net
loss by $11,679,000, $4,946,000 and $66,843,000, respectively. Net loss,
including all charges, was $309,458,000 and $133,166,000 for fiscal years 2001
and 2000, respectively.
DOMESTIC SEGMENT
Sales for the Domestic segment in fiscal year 2001 decreased 10.4% to
$4,495,440,000 from $5,017,656,000 in fiscal year 2000. Fiscal year 2000
included sales of approximately $224,026,000 from the Company's discontinued
former Computer Business segment and 46 superstores that were closed as of the
first day of fiscal year 2001. Sales for the 53rd week included in fiscal year
2000 were approximately $104,220,000. Excluding prior year sales from the former
Computer Business segment, the closed stores and the 53rd week in fiscal year
2000, sales decreased approximately 4.1% year over year. This sales decrease was
primarily due to a 6.3% comparable-store sales decrease, partially offset by
sales from new superstores opened in fiscal years 2001 and 2000. Fiscal year
2001 comparable-store sales were negatively impacted by the recession in the
U.S. and uncertain consumer and business sentiment following the September 11th
terrorist attacks. These factors contributed to a decline in both small business
capital purchases and the formation of new company startups, as well as reduced
consumer spending, particularly for technology and furniture products. Sales for
certain items, such as furniture and certain technology products were also
impacted by declines in average sales prices. This segment opened 17 and 54 new
superstores in fiscal years 2001 and 2000, respectively.
Gross profit for the Domestic segment was $1,052,544,000, or 23.4% of
sales, in fiscal year 2001 and $1,188,739,000, or 23.7% of sales, in fiscal year
2000. The Domestic segment recorded inventory liquidation charges related to its
store closing program in fiscal years 2001 and 2000 and a charge for a legal
settlement in fiscal year 2000. Excluding these charges, gross profit was
$1,056,224,000, or 23.5% of sales, in fiscal year 2001 and $1,216,448,000, or
24.2% of sales, in fiscal year 2000. Certain fixed costs, such as occupancy
costs for the segment's superstores, delivery centers and inventory distribution
facilities, are included in cost of merchandise sold. The de-leveraging of these
costs, primarily as a result of the comparable-store sales decrease, reduced
gross profit by approximately 1.3% of sales during fiscal year 2001. The
phase-out of the Company's low-margin former Computer Business segment, which
was completed during fiscal year 2000, partially offset the impact of
de-leveraging fixed costs included in cost of merchandise sold.
Operating results for the Domestic segment were a loss of $207,045,000 in
fiscal year 2001 and a loss of $198,493,000 in fiscal year 2000. Excluding
charges recorded for inventory liquidation and store closing and asset
impairment recorded in fiscal years 2001 and 2000 and the charge for legal
settlement recorded in fiscal year 2000, operating results of this segment were
a loss of $126,604,000 in fiscal year 2001 and a loss of $61,206,000 in fiscal
year 2000. The increase in the operating loss for the Domestic segment was
primarily due to the overall sales decrease experienced by this segment and the
related decrease in gross profit. The decrease in gross profit was partially
offset by reduced store operating and selling and general and administrative
expenses.
17
The net loss for the Domestic segment in fiscal year 2001, excluding the
charges for inventory liquidation, store closing and asset impairment and the
valuation allowance, was $91,983,000. These charges increased the fiscal year
2001 net loss by $2,227,000, $47,728,000 and $170,616,000, respectively. The net
loss for fiscal year 2000, excluding charges for litigation settlement,
inventory liquidation and store closing and asset impairment, was $53,720,000.
These charges increased the fiscal year 2000 net loss by $11,679,000, $4,946,000
and $66,843,000, respectively. The net loss for the Domestic segment, including
all charges, was $312,554,000 and $137,188,000 for fiscal years 2001 and 2000,
respectively.
INTERNATIONAL SEGMENT
Sales for the International segment in fiscal year 2001 increased 20.9% to
$140,584,000 from $116,269,000 in fiscal year 2000. This sales increase was
primarily due to a 6.8% comparable-store sales increase and new superstores
opened in fiscal years 2001 and 2000. This segment opened four (net) and seven
new superstores in fiscal years 2001 and 2000, respectively. The
comparable-store sales increase experienced by this segment was primarily due to
growth in the sales of computers and related peripherals. These items accounted
for approximately 54% of this segment's sales in fiscal year 2001 as compared to
51% of this segment's sales in fiscal year 2000.
Gross profit for the International segment was $33,584,000, or 23.9% of
sales, in fiscal year 2001 and $31,989,000, or 27.5% of sales, in fiscal year
2000. The decrease in gross profit as a percentage of sales was primarily due to
the growth in the low-margin computer and peripheral product categories which
generate lower margins than sales of supply products.
Operating income for the International segment was $5,129,000, or 3.7% of
sales, in fiscal year 2001 and $4,943,000, or 4.3% of sales, in fiscal year
2000. The decrease in operating income as a percentage of sales was primarily
due to the decrease in gross profit as a percentage of sales, partially offset
by improved leverage of store operating and selling expenses.
Minority interest in the net income of the International segment was
$2,973,000 and $2,139,000 in fiscal years 2001 and 2000, respectively.
Net income for the International segment was $3,096,000, or 2.2% of sales,
in fiscal year 2001 and $4,022,000, or 3.5% of sales, in fiscal year 2000.
FISCAL YEAR 2000 (53 WEEKS) COMPARED TO FISCAL YEAR 1999 (52 WEEKS)
Prior to the Company's acquisition of a majority interest in OfficeMax de
Mexico as of the end of fiscal year 1999, the Company accounted for this joint
venture under the equity method. Accordingly, the Company does not report
segment information for the International segment for periods prior to fiscal
year 2000. The comparable information for fiscal years 2000 and 1999 is
presented below for the Company's consolidated results of operations only. The
Company's consolidated results for fiscal year 1999 include $594,000 of income
related to the Company's equity investment in OfficeMax de Mexico. This income
was included in other income.
CONSOLIDATED OPERATIONS
Sales in fiscal year 2000 increased 6.5% to $5,133,925,000 from
$4,822,673,000 in fiscal year 1999. The fiscal year 2000 increase in
consolidated sales was primarily due to the 53rd week included in fiscal year
2000 and new superstores opened during fiscal years 2000 and 1999. The Company
opened 54 new domestic superstores in fiscal year 2000 and 115 new domestic
superstores in fiscal year 1999. Sales of $116,269,000 from the Company's joint
venture in Mexico, OfficeMax de Mexico, were included in consolidated sales for
fiscal year 2000 due to the Company's majority interest in the joint venture
which was purchased as of the end of fiscal year 1999. Prior to fiscal year
2000, the Company accounted for the joint venture under the equity method and,
accordingly, did not consolidate OfficeMax de Mexico's sales. The effects of the
additional week in fiscal year 2000, new store openings and the consolidation of
OfficeMax de Mexico were partially offset by the phase-out of the Company's
former Computer Business segment and by a 1.1% comparable-store sales decline
experienced by the Company's continuing business. During the second half of
fiscal year 2000, comparable-store sales were negatively impacted by a difficult
overall retail environment resulting from a precipitous slowdown in consumer
spending.
Gross profit was $1,220,728,000, or 23.8% of sales, in fiscal year 2000
and $1,091,518,000, or 22.6% of sales, in fiscal year 1999. Fiscal year 2000
gross profit was reduced by charges recorded for inventory liquidation and a
legal settlement.
18
Fiscal year 1999 gross profit was reduced by a charge related to the Company's
supply-chain management initiatives. Excluding these charges, gross profit was
$1,248,437,000, or 24.3% of sales, in fiscal year 2000 and $1,168,890,000, or
24.2% of sales, in fiscal year 1999. During fiscal year 2000, gross profit was
positively impacted by the phase-out of the Company's former Computer Business
segment and improved margins in the Company's continuing business, however,
these improvements were offset by lost leverage of certain fixed occupancy costs
as a result of the overall comparable-store sales decrease.
Store operating and selling expenses, which consist primarily of store
payroll, operating and advertising expenses, increased to $1,131,451,000, or
23.8% of sales, in fiscal year 2000 from $910,032,000, or 18.9% of sales, in
fiscal year 1999. The increase in fiscal year 2000 was primarily due to costs
associated with the Company's operating improvement initiatives, including
reduced vendor income from vendor support programs eliminated as part of the
Company's program of merchandise and vendor rationalization.
General and administrative expenses were $156,273,000 and $128,708,000 in
fiscal year 2000 and 1999, respectively. General and administrative expenses
increased as a percentage of sales to 3.0% in fiscal year 2000 from 2.7% in
fiscal year 1999. The increase reflects the costs for consulting services
supporting the Company's supply-chain management and operating improvement
initiatives, continued investment in the Company's organizational structure and
increased depreciation expense as a result of the Company's information
technology initiatives. During fiscal year 2000, the Company completed the
conversion to its new SAP Enterprise Resource Planning computer system.
Goodwill amortization was $9,863,000 in fiscal year 2000 and $9,418,000 in
fiscal year 1999. During those fiscal years, goodwill was capitalized and
amortized over 10 to 40 years using the straight-line method. The increase in
amortization expense in fiscal year 2000 was due to increased goodwill resulting
from the acquisition of a majority interest in OfficeMax de Mexico as of the end
of fiscal year 1999. As a result of a new accounting standard that is effective
for the Company as of the beginning of fiscal year 2002, goodwill will no longer
be amortized, but will be tested for impairment at least annually. The Company
is assessing the financial statement impact of adopting this new standard, which
could include an impairment loss, or write-off, of some portion of the Company's
intangible assets, including goodwill. See "Recently Issued Accounting
Pronouncements" below for additional information regarding this new standard.
Pre-opening expenses were $7,113,000 and $10,974,000 in fiscal years 2000
and 1999, respectively. The Company opened 54 new domestic superstores in fiscal
year 2000 and 115 new domestic superstores in fiscal year 1999. The Company
incurred pre-opening expenses of approximately $1,000,000 in each fiscal year
related to the Company's PowerMax inventory distribution facilities in Alabama
(fiscal year 2000) and Pennsylvania (fiscal year 1999). Additionally, OfficeMax
de Mexico's pre-opening expenses were $1,052,000 during fiscal year 2000.
Pre-opening expenses, which consist primarily of payroll, supplies and grand
opening advertising for new stores, averaged approximately $90,000 per domestic
superstore during fiscal year 2000 and $85,000 per domestic superstore during
fiscal year 1999. Pre-opening expenses increase when certain enhanced CopyMax or
FurnitureMax features are included in a superstore.
Interest expense was $16,493,000 and $10,146,000 in fiscal years 2000 and
1999, respectively. The increase in interest expense during fiscal year 2000 was
primarily due to additional borrowings used to fund the Company's expansion
plans, seasonal inventory requirements and stock repurchase program.
Other expense (net) was $60,000 in fiscal year 2000, as compared to other
income (net) of $59,000 in fiscal year 1999. Other income and expense (net)
consists primarily of amounts related to the Company's joint venture
partnerships.
The Company recognized income tax benefit of $79,076,000 in fiscal year
2000, as compared to income tax expense of $12,258,000 in fiscal year 1999. The
effective tax rates for those fiscal years were 37.6% and 55.0%, respectively.
The effective tax rates for both years were different from the statutory income
tax rate as a result of state and local income taxes and non-deductible goodwill
amortization expense.
As a result of the foregoing factors, the net loss for fiscal year 2000,
excluding the charges for litigation settlement, inventory liquidation and store
closing and asset impairment, was $49,698,000. These charges increased the
fiscal year 2000 net loss by $11,679,000, $4,946,000 and $66,843,000,
respectively. Net income for fiscal year 1999, excluding the inventory markdown
charge for item rationalization, was $59,559,000. The inventory markdown charge
reduced fiscal year 1999 net income by $49,518,000. Including all charges, the
Company had a net loss of $133,166,000 in fiscal year 2000 and net income of
$10,041,000 in fiscal year 1999.
19
CHARGES AND RESERVES
Store Closing Program - Fiscal Year 2001
During the fourth quarter of fiscal year 2001, the Company announced that
it had completed a review of its real estate portfolio and elected to close 29
underperforming superstores. In conjunction with the store closings, the Company
recorded a pre-tax charge for store closing and asset impairment of $79,838,000
during the fourth quarter of fiscal year 2001. Major components of the charge
included lease disposition costs of $53,646,000, asset impairment and
disposition of $20,674,000 and other closing costs, including severance, of
$5,518,000. Estimated lease disposition costs in the charge included the
aggregate straight-line rent expense for the closing stores, net of
approximately $42,344,000 of expected future sublease income. The Company
estimated future sublease income for the closing stores based on real estate
studies prepared by independent industry experts. During the fourth quarter of
fiscal year 2001, certain portions of the reserve for store closing costs
established during fiscal year 2000 were deemed no longer necessary and
reversed. This reversal reduced the fiscal year 2001 charge by approximately
$3,077,000. The net charge of $76,761,000 reduced fiscal year 2001 net income by
$47,728,000, or $0.42 per diluted share. See "Significant Accounting Policies -
Facility Closure Costs" below.
Included in the charge for store closing and asset impairment was
$5,631,000 of expense related to the write-off of the Company's investment in a
joint venture in Brazil as well as receivables from that joint venture.
Also during the fourth quarter of fiscal year 2001, the Company recorded
an additional pre-tax charge of $3,680,000 as a result of the inventory
liquidation at the closing stores. The inventory liquidation charge reduced
fiscal year 2001 net income by $2,227,000, or $0.02 per diluted share.
The 29 stores closed during the first quarter of fiscal year 2002 upon
completion of the liquidation process that began as of the first day of fiscal
year 2002. The results of operations for the 29 closing stores were assumed by a
third-party liquidator and, accordingly, will not be included in the Company's
consolidated results of operations beginning January 27, 2002.
See Note 2 of Notes to Consolidated Financial Statements of the Company
for additional information regarding these charges.
Income Taxes - Fiscal Year 2001
In the fourth quarter of fiscal year 2001, the Company recorded a
$170,616,000 charge to establish a valuation allowance for its net deferred tax
assets and net operating loss carryforwards. The valuation allowance was
calculated in accordance with the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109") which
places primary importance on the Company's operating results in the most recent
three-year period when assessing the need for a valuation allowance. Although
management believes the Company's results for those periods were heavily
affected by deliberate and planned infrastructure improvements, including its
PowerMax distribution network and state-of-the-art SAP computer system as well
as an aggressive store closing program, the Company's cumulative loss in the
most recent three-year period, including the net loss reported for the fourth
quarter of fiscal year 2001, represented negative evidence sufficient to require
a full valuation allowance under the provisions of FAS 109. The Company intends
to maintain a full valuation allowance for its net deferred tax assets and net
operating loss carryforwards until sufficient positive evidence exists to
support reversal of the remaining reserve. Until such time, except for minor
state, local and foreign tax provisions, the Company will have no reported tax
provision, net of valuation allowance adjustments. The charge reduced fiscal
year 2001 net income by $1.49 per diluted share. See Note 8 of Notes to
Consolidated Financial Statements of the Company for additional information
regarding this charge.
On March 9, 2002, President Bush signed into law the "Job Creation and
Worker Assistance Act" (H.R. 3090). This new tax law temporarily extends the
carryback period for net operating losses incurred during the Company's taxable
years ended in 2001 and 2000 to five years from two years. Although it is still
evaluating the effect of this new tax law, the Company expects additional
carryback of net operating losses in excess of $50,000,000. These net operating
losses were fully reserved during the fourth quarter of fiscal year 2001. The
Company expects to reverse a portion of the valuation allowance equal to the
additional carryback and report income tax benefit of an equal amount in the
first quarter of fiscal year 2002. The Company anticipates receiving the cash
refund for the additional carryback during fiscal year 2002. See Note 8 of Notes
to Consolidated Financial Statements of the Company for additional information
regarding income taxes.
20
Store Closing Program - Fiscal Year 2000
During fiscal year 2000, the Company announced that it had completed a
review of its real estate portfolio and elected to close 50 underperforming
superstores. In conjunction with the store closings, the Company recorded a
pre-tax charge for store closing and asset impairment of $109,578,000 during the
fourth quarter of fiscal year 2000. Major components of the charge included
lease disposition costs of $89,815,000, asset impairment and disposition costs
of $13,071,000 and other closing costs, including severance, of $6,692,000.
Estimated lease disposition costs in the charge included the aggregate
straight-line rent expense for the closed stores, net of approximately
$83,981,000 of expected future sublease income. The Company estimated future
sublease income for the closed stores based on real estate studies prepared by
independent industry experts. The charge reduced net income by $66,843,000, or
$0.59 per diluted share, during fiscal year 2000.
Also during the fourth quarter of fiscal year 2000, the Company recorded
an additional pre-tax charge of $8,244,000 as a result of the inventory
liquidation at the closed stores. The inventory liquidation charge reduced
fiscal year 2000 net income by $4,946,000, or $0.05 per diluted share.
Of the 50 superstores originally expected to close, 48 were liquidated and
closed during fiscal year 2001. During the fourth quarter of fiscal year 2001,
the Company elected not to close the remaining two stores due to changes in
competitive and market conditions and reversed the charge originally recorded to
close those stores. In total, approximately $3,077,000 of the original charge
recorded in fiscal year 2000 was reversed during the fourth quarter of fiscal
year 2001, primarily as a result of the two stores management elected not to
close and certain equipment lease termination costs that were lower than
expected.
See Note 2 of Notes to Consolidated Financial Statements of the Company
for additional information regarding these charges.
Legal Settlement - Fiscal Year 2000
During the third quarter of fiscal year 2000, the Company, based on
changes in circumstances and the advice of outside legal counsel, elected to
settle its lawsuit with Ryder Integrated Logistics prior to trial. As a result
of the settlement, the Company recorded a pre-tax charge of $19,465,000, which
was included in cost of merchandise sold. The charge reduced fiscal year 2000
net income by $11,679,000, or $0.10 per diluted share.
Inventory Markdown Charge for Item Rationalization - Fiscal Year 1999
In order to effect the acceleration of the Company's supply-chain
management initiative, which included the development and opening of a
nationwide network of 600,000 to 750,000-square-feet, PowerMax inventory
distribution facilities and the implementation of the Company's new warehouse
management system, the Company decided to eliminate select current products on
hand as part of its program of merchandise and vendor rationalization. In
connection with this decision, the Company recorded a pre-tax markdown charge of
$83,257,000 during the third quarter of fiscal year 1999. The charge provided
for the liquidation of merchandise that was not expected to be part of the
Company's ongoing product offering. The charge reduced the third quarter net
income by $53,284,000, or $0.47 per diluted share. During the fourth quarter of
fiscal year 1999, the Company reversed $5,885,000 of the charge based on the
actual sell-through and merchandise margin rates of discontinued products, which
exceeded original expectations during the execution of the related clearance
event. The reversal increased fourth quarter net income by $3,766,000, or $0.03
per diluted share. In total, the charge reduced fiscal year 1999 net income by
$49,518,000, $0.43 per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations provided $231,021,000 of cash during fiscal year
2001 primarily as a result of a reduction in inventory, partially offset by a
decrease in accounts payable. Inventory was reduced $274,261,000 or
approximately 24% on a year-over-year basis. The reduction in inventory was the
result of the Company's supply-chain management initiatives. On a per-store
basis, inventory was reduced by nearly 29% year over year. Accounts payable
decreased $57,035,000 year over year, however, accounts payable-to-inventory
leverage (a measure of inventory financed by accounts payable to vendors)
improved to 56.0% as of January 26, 2002, from 50.7% as of January 27, 2001. The
improvement in accounts payable-to-inventory leverage was primarily a result of
improved inventory turnover. The Company's operations used $13,930,000 of cash
during fiscal year 2000, primarily as a result of a decrease in accounts
payable-to-inventory leverage. Inventory decreased $114,755,000 during fiscal
year 2000 despite adding inventory for new superstores and a PowerMax
distribution facility opened during the year. Same-store inventory levels
decreased nearly 22% in fiscal year 2000 as a result of the Company's
supply-chain management initiatives. Accounts payable decreased $141,213,000
during fiscal year 2000
21
and accounts payable-to-inventory leverage decreased to 50.7% as of January 27,
2001, from 55.1% as of January 22, 2000. Net cash provided by operations was
$267,946,000 in fiscal year 1999.
Net cash used for investing activities, primarily capital expenditures for
new and remodeled superstores and information technology initiatives, was
$50,377,000 in fiscal year 2001, as compared to $141,134,000 in fiscal year 2000
and $111,744,000 in fiscal year 1999. Capital expenditures were $49,228,000,
$134,812,000 and $117,154,000 in fiscal years 2001, 2000 and 1999, respectively.
Net cash used for financing was $232,263,000 in fiscal year 2001. Fiscal
year 2001 financing activities primarily represented a reduction of outstanding
borrowings under the Company's revolving credit facility of $200,000,000 and a
decrease in overdraft balances of $36,740,000. Net cash provided by financing
was $209,880,000 in fiscal year 2000. Fiscal year 2000 financing activities
primarily represented borrowings under the Company's revolving credit facility,
the issuance of $50,000,000 of redeemable preferred shares and an increase in
overdraft balances. Net cash used by financing activities was $150,597,000 in
fiscal year 1999. Fiscal year 1999 financing activities primarily represented a
decrease in outstanding borrowings under the Company's revolving credit
facilities, a decrease in overdraft balances and the payment of $34,841,000 for
treasury stock purchases. The Company made advanced payments for leased
facilities of $21,237,000 during fiscal year 1999. The majority of these
advanced payments were reimbursed in fiscal year 2000.
The Company opened 17 new superstores in the United States and four new
superstores in Mexico in fiscal year 2001 and plans to open fewer domestic
superstores and up to ten new superstores in Mexico during fiscal year 2002.
Management estimates that the Company's cash requirements for opening a domestic
superstore, exclusive of pre-opening expenses, will be approximately $900,000,
including approximately $425,000 for leasehold improvements, fixtures,
point-of-sale terminals and other equipment, and approximately $400,000 for the
portion of store inventory that is not financed by accounts payable to vendors.
Pre-opening expenses are expected to average approximately $90,000 per domestic
superstore in fiscal year 2002.
The Company expects capital expenditures for fiscal year 2002, primarily
for information technology initiatives and new store openings, to total
$60,000,000 to $65,000,000.
On March 9, 2002, President Bush signed into law the "Job Creation and
Worker Assistance Act" (H.R. 3090). This new tax law temporarily extends the
carryback period for net operating losses incurred during the Company's taxable
years ended in 2001 and 2000 to five years from two years. Although it is still
evaluating the effect of this new tax law, the Company expects additional
carryback of net operating losses in excess of $50,000,000. These net operating
losses were fully reserved during the fourth quarter of fiscal year 2001. The
Company expects to reverse a portion of the valuation allowance equal to the
additional carryback and report income tax benefit of an equal amount in the
first quarter of fiscal year 2002. The Company anticipates receiving the cash
refund for the additional carryback during fiscal year 2002. See Note 8 of Notes
to Consolidated Financial Statements of the Company for additional information
regarding income taxes.
Due to the decline in Kmart's debt rating, the Company was required to
purchase, during the first quarter of fiscal year 2002, the mortgage notes on
two of its store properties for an aggregate amount of $5,085,000. Both of the
properties are occupied by the Company. Principal and interest payments to the
Company under the mortgage notes are secured by the Company's rent payments
under the related lease agreements. Interest on the mortgage notes accrues to
the Company at an average rate of approximately 10% per annum which exceeds the
Company's current borrowing rate. The Company does not expect the decline in
Kmart's debt rating or Kmart's subsequent bankruptcy filing to have a material
adverse impact on OfficeMax's financial position or the results of its
operations.
On August 13, 1998, the Company's Board of Directors authorized the
Company to repurchase up to $200,000,000 of its common shares on the open
market. At the end of fiscal year 1999, the Company had purchased a total of
12,702,100 shares at a cost of $113,619,000. The Company did not repurchase any
common shares during fiscal year 2001 or fiscal year 2000. Treasury stock
purchases to-date included systematic purchases of shares to cover potential
dilution from the future issuance of shares under the Company's equity-based
incentive plans.
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.
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%
22
depending on the level of borrowing. As of January 26, 2002, the Company had
outstanding borrowings of $20,000,000 under the revolving credit facility at a
weighted average interest rate of 4.75%. As of January 27, 2001, the Company had
outstanding borrowings of $220,000,000 under the revolving credit facility at a
weighted average interest rate of 8.61%. Also from this facility, the Company
had $111,580,000 of standby letters of credit outstanding as of January 26,
2002, in connection with its insurance programs and two synthetic operating
leases related to the Company's PowerMax inventory distribution facilities.
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. As of January 27,
2001, the Company had $122,325,000 of standby letters of credit issued in
connection with its insurance programs and two synthetic operating leases
related to its PowerMax inventory distribution facilities, outstanding under the
revolving credit facility and an additional facility that expired in fiscal year
2001.
The Company pays quarterly fees of 0.25% per annum on the unused portion
of the revolving credit facility. Available borrowing capacity under the
revolving credit facility is calculated as a percentage of the Company's
inventory and certain accounts receivable. As of January 26, 2002, the Company
had unused and available borrowings under the revolving credit facility in
excess of $412,600,000.
During the fourth quarter of fiscal year 2000, the Company assumed an
eleven-year $1,800,000 mortgage loan secured by real estate previously leased by
the Company. As of January 26, 2002, $1,652,000 of the mortgage loan was
outstanding. The mortgage loan bears interest at a rate of 5.0% per annum.
Maturities of the mortgage loan including interest will be approximately
$213,000 for each of the next five years.
Significant Contractual Obligations. The Company is obligated to make
future payments under various contracts such as its revolving credit facility,
operating leases and other contractual obligations. The following table
summarizes the Company's significant contractual obligations as of January 26,
2002:
(Dollars in thousands)
Payments Due by Period
------------------------------------------------------------------------------------------
Less than After
Contractual Obligations Total 1 year 1-3 years 4-5 years 5 years
--------------- --------------- --------------- --------------- ---------------
Long-term Debt $ 1,652 $ 122 $ 286 $ 317 $ 927
Operating Leases 2,980,492 356,123 629,439 519,191 1,475,739
Unconditional Purchase
Obligations 2,000 2,000 - - -
Other Obligations 21,750 21,750 - - -
--------------- --------------- --------------- --------------- ---------------
Total Contractual Obligations $ 3,005,894 $ 379,995 $ 629,725 $ 519,508 $ 1,476,666
=============== =============== =============== =============== ===============
Long-term Debt. Amount represents a mortgage loan secured by real
estate previously leased by the Company.
Operating Leases. Amount represents rents due under the Company's
operating leases and includes future lease payments under two synthetic
operating lease agreements of approximately $11,467,000. The Company occupies
two of its PowerMax inventory distribution facilities under synthetic operating
leases, financial structures that qualify under generally accepted accounting
principles as operating leases for financial reporting purposes and as debt
financing for income tax purposes, from non-OfficeMax affiliated special purpose
entities ("SPEs") which have been established by nationally prominent,
creditworthy commercial lessors to facilitate the financing of those assets for
the Company. The use of SPEs allows the parties providing the financing to
isolate particular assets in a single entity and thereby syndicate the financing
to multiple parties. This is a conventional financing technique used to lower
the cost of borrowing and, thus, the lease cost to the Company. The SPEs finance
the cost of the property through the issuance of commercial paper which is
redeemed with the proceeds from the Company's rent payments. The Company has
provided standby letters of credit of approximately $81,000,000 in support of
the commercial paper. In the event that the Company defaults on its obligations
under the lease, the SPEs would draw on the letters of credit in order to redeem
the commercial paper. These letters of credit are considered outstanding amounts
under the Company's revolving credit facility. The Company has not established
any SPEs. All of the SPEs are owned by institutions which are completely
independent of, and not affiliated with, the Company. No officers, directors or
employees of the Company hold any direct or indirect equity interest in such
SPEs. The provisions of the synthetic operating lease agreements also contain
purchase options and fair value guarantees. See "Guarantees" below for
additional information regarding these provisions.
23
Unconditional Purchase Obligations. Amount represents $2,000,000 due to
the Company's joint venture in Mexico, OfficeMax de Mexico, as a result of the
Company's acquisition of a majority interest in that joint venture as of the end
of fiscal year 1999. The Company expects to convert a note receivable from the
joint venture to an equity investment in OfficeMax de Mexico during fiscal year
2002 in satisfaction of this obligation. See Note 4 of Notes to Consolidated
Financial Statements of the Company for additional information regarding the
acquisition of a majority interest in OfficeMax de Mexico.
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. Currently, the
minority partner has indicated that it has no intentions to exercise this right
in fiscal year 2002. If the earnings targets are achieved and the joint venture
partner elects to put its ownership interest to the Company, the purchase price
would be calculated based on a multiple of the joint venture's earnings before
interest, taxes, depreciation and amortization and would not be expected to
exceed $40,000,000. The Company and its minority partner have begun preliminary
negotiations regarding amending the joint venture agreement in order to
establish a longer-term commitment from the minority partner. Currently, the
Company is unable to estimate its obligation under the put option, if any.
Accordingly, no amount related to the put option is included in the table above.
Other Obligations. This amount represents the full value of the Company's
outstanding Series B Serial Preferred Shares (the "Series B Shares") of
$21,750,000. See "Gateway Alliance" below and Note 14 of Notes to Consolidated
Financial Statements of the Company for additional information regarding the
Series B Shares.
Other Significant Commercial Commitments. The following table summarizes
the Company's significant commercial commitments as of January 26, 2002:
(Dollars in thousands)
Amount of Commitment Expiration Per Period
--------------------------------------------------------------------------------------
Less than After
Other Commercial Commitments Total 1 year 1-3 years 4-5 years 5 years
-------------- -------------- -------------- -------------- --------------
Lines of Credit $ 20,000 $ - $ 20,000 $ - $ -
Standby Letters of Credit 111,580 - 111,580 - -
Guarantees 5,085 5,085 - - -
-------------- -------------- -------------- -------------- --------------
Total Commercial Commitments $ 136,665 $ 5,085 $ 131,580 $ - $ -
============== ============== ============== ============== ==============
Lines of Credit. Amount represents the outstanding borrowings on the
Company's revolving credit facility as of January 26, 2002, exclusive of letters
of credit. The revolving credit facility expires in November 2003.
Standby Letters of Credit. Amount represents outstanding letters of credit
issued in connection with the Company's insurance programs and two synthetic
operating leases related to the Company's PowerMax inventory distribution
facilities. These letters of credit are issued under the Company's revolving
credit facility. The revolving credit facility expires in November 2003.
Guarantees. Due to a decline in Kmart's debt rating, the Company was
required to purchase, during the first quarter of fiscal year 2002, the mortgage
notes on two of its store properties for an aggregate amount of $5,085,000. Both
of the properties are occupied by the Company. Principal and interest payments
to the Company under the mortgage notes are secured by the Company's rent
payments under the related lease agreements. Interest on the mortgage notes
accrues to the Company at an average rate of approximately 10% per annum which
exceeds the Company's current borrowing rate.
The Company operates two of its PowerMax inventory distribution facilities
under synthetic operating leases with initial lease terms expiring in fiscal
year 2004. One of the synthetic operating leases can be extended at the
Company's option until fiscal year 2006. Upon expiration of the synthetic
operating leases, the Company can elect to purchase the related assets of both
facilities at a total cost specified in the lease agreement of approximately
$80,000,000. If the Company does not elect to purchase the related assets, the
Company is required to honor certain fair value guarantees. These guarantees
require the Company to reimburse the lessor any shortfall to a fair value
specified in the lease agreement. Currently, the Company expects to purchase the
related assets upon expiration of the synthetic operating leases and is unable
to estimate its obligation, if any, under the fair value provisions of these
leases. Accordingly, no amount is included in the table above.
24
SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Company are prepared in
conformity with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires the use of
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the periods presented. Management of the Company
uses historical information and all available information to make these
estimates and assumptions. Actual amounts could differ from these estimates and
different amounts could be reported using different assumptions and estimates.
The Company's significant accounting policies are described in the Notes
to Consolidated Financial Statements. Management believes that of its
significant accounting policies, its policies concerning inventory, income
taxes, impairment of long-lived assets, goodwill and facility closure costs
involve a high degree of judgments, estimates, and complexity. The estimates and
judgments made by management in regards to these policies have the most
significant impact on the Company's reported financial position and operating
results. Additional information regarding these policies is included below.
Inventory. Inventories are valued at weighted average cost or market.
Throughout the year, the Company performs annual physical inventories at all of
its locations. For periods subsequent to the date of each location's last
physical inventory, a reserve for estimated shrinkage is provided based on
various factors including sales volume, the location's historical shrink results
and current trends. If actual losses as a result of inventory shrink are
different than management's estimates, adjustments to the Company's reserve for
inventory shrink may be required.
The Company records a reserve for future inventory cost markdowns to be
taken for inventory not expected to be part of its ongoing merchandise offering.
This reserve was $4,500,000 and $4,000,000 as of January 26, 2002 and January
27, 2001, respectively. Management estimates the required reserve for future
inventory cost markdowns based on historical information regarding product sell
through and gross margin rates for similar products. If actual sell through or
gross margin rates for discontinued inventory are different than management's
estimates, additional inventory markdowns may be required and the Company's
gross margin could be significantly impacted.
Income Taxes. The Company uses the liability method whereby income
taxes are recognized during the fiscal year in which transactions enter into the
determination of financial statement income. Deferred tax assets and liabilities
are recognized for the expected future tax consequences of temporary differences
between financial statement and tax basis of assets and liabilities. The Company
assesses the recoverability of its deferred tax assets in accordance with the
provisions of FAS 109. In accordance with that standard, the Company recorded a
valuation allowance for its net deferred tax assets and net operating loss
carryforwards of $170,616,000 as of January 26, 2002. The Company intends to
maintain a full valuation allowance for its net deferred tax assets and net
operating loss carryforwards until sufficient positive evidence exists to
support the reversal of the remaining reserve. Until such time, except for minor
state, local and foreign tax provisions, the Company will have no reported tax
provision, net of valuation allowance adjustments. In the event the Company was
to determine, based on the existence of sufficient positive evidence, that it
would be able to realize its deferred tax assets in the future in excess of its
net recorded amount, an adjustment to the valuation allowance would increase
income in the period such determination was made. See Note 8 of Notes to
Consolidated Financial Statements of the Company for additional information
regarding income taxes.
Impairment of Long-Lived Assets. The Company reviews its long-lived
assets for possible impairment at least annually and whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable by the undiscounted future cash flows to be generated by the asset
over its remaining useful life. If impairment exists, the carrying amount of the
asset is reduced. The Company evaluates possible impairment of long-lived assets
for each of its retail stores individually based management's estimate of the
store's future earnings before interest, taxes, depreciation and amortization.
Long-lived assets for which the Company cannot specifically identify cash flows
that are largely independent of the cash flows of other long-lived assets, such
as its corporate and distribution facilities, are evaluated based on
management's estimate of the Company's future consolidated operating cash flows.
During fiscal years 2001 and 2000, the Company recorded impairment losses of
$8,325,000 and $2,399,000, respectively. If actual future operating results or
cash flows are different than management's estimates, additional impairment
losses may be required.
Goodwill. Goodwill represents the excess of cost over the fair value of
the net identifiable assets acquired in a business combination accounted for
under the purchase method. Through the end of fiscal year 2001, the Company
amortized its goodwill over 10 to 40 years using the straight-line method. The
Company evaluated the recoverability of its goodwill and reviewed the
amortization period on an annual basis by determining whether the remaining
balance could be recovered through the undiscounted future cash flows of the
related assets over the remaining life of the goodwill. Based on its review,
25
the Company does not believe that an impairment of its goodwill had occurred as
of, and through the period ended, January 26, 2002.
As a result of a new accounting standard that is effective for the
Company as of the beginning of fiscal year 2002, goodwill will no longer be
amortized, but will be tested for impairment at least annually (see "Recently
Issued Accounting Pronouncements" below). The Company is assessing the financial
statement impact of the adoption of the new standard, which could include an
impairment loss, or write-off, of some portion of the Company's intangible
assets, including goodwill.
Facility Closure Costs. The Company continuously reviews its real
estate portfolio to identify underperforming facilities and closes those
facilities that are no longer strategically or economically viable. The Company
accrues estimated closure costs in the period in which management approves a
plan to close a facility. The accrual for estimated closure costs is net of
expected future sublease income, which is estimated by management based on real
estate studies prepared by independent industry experts. If actual future
sublease income is different than management's estimate, adjustments to the
Company's store closing reserves may be necessary.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (including information incorporated by
reference) contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Any information in this report
that is not historical information is a forward-looking statement which may be
identified by the use of language such as "may," "will," "should," "expects,"
"plans," "anticipates," "estimates," "believes," "thinks," "continues,"
"indicates," "outlook," "looks," "goals," "initiatives," "projects," or similar
expressions. These statements are likely to address the Company's growth
strategy, future financial performance (including sales and earnings), strategic
initiatives, marketing and expansion plans, and the impact of operating
initiatives. The forward-looking statements, which speak only as of the date the
statement was made, are subject to risks, uncertainties and other factors that
could cause actual results to differ materially from those stated, projected or
implied in the forward-looking statements. These risks and uncertainties include
those described in Exhibit 99.1 to this Form 10-K, and in other reports and
exhibits to those reports filed with the Securities and Exchange Commission. You
are strongly urged to review such filings for a more detailed discussion of such
risks and uncertainties. The Company's SEC filings are available at no charge at
www.sec.gov and www.freeedgar.com, as well as on a number of other web sites
including OfficeMax.com, under the investor information section. These risks and
uncertainties include, but are not limited to, the following: risks associated
with general economic conditions (including the effects of the general economic
slowdown in 2001 and early 2002); and failure to adequately execute plans and
unforeseen circumstances beyond the Company's control in connection with
development, implementation and execution of new business processes, procedures
and programs. The Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events, or otherwise.
SIGNIFICANT TRENDS AND DEVELOPMENTS
During fiscal year 2001 and the second half of fiscal year 2000, the
operations of the Company's Domestic segment were significantly impacted by the
recession in the United States and uncertain consumer and business sentiment
following the September 11th terrorist attacks. These factors contributed to a
decline in both small business capital purchases and the formation of new
company startups as well as reduced consumer and business spending, particularly
for technology and furniture products. Many economic forecasts expect the
recession in the U.S. economy to continue during the first half of 2002.
During recent years, the Company has experienced increased competition
from mass merchandisers and wholesale clubs. These retailers have increased
their assortment of office products in order to attract home office customers
and individual consumers. Further, various other retailers that have not
historically competed with OfficeMax, such as drug stores and grocery chains,
have begun carrying at least a limited assortment of paper products and basic
office supplies. Management expects this trend towards a proliferation of
retailers offering a limited assortment of office supplies to continue. This
increased competition is likely to result in additional competitive pressures on
pricing and gross profits.
LEGAL PROCEEDINGS
There are various claims, lawsuits and pending actions against the Company
incident to the Company's operations. It is the opinion of management that the
ultimate resolution of these matters will not have a material adverse effect on
the Company's liquidity, financial position or results of operations.
GATEWAY ALLIANCE
26
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, voted
on an as-converted to Common Shares basis (one vote per share) and did not bear
any interest or coupon. The Series A Shares were to 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 recognized 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 and a coupon rate of 7% per
annum, had 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
since removed its equipment and fixtures from such stores. On July 23, 2001,
Gateway notified the Company of its termination of the MLA and its desire to
exercise 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.
During the fourth quarter of fiscal year 2001, Gateway elected to convert
its Series A Shares, plus accrued preferred share accretion of $2,115,000, into
9,366,109 common shares of the Company.
OfficeMax does not anticipate redeeming any of the Series B Shares 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.
SEASONALITY AND INFLATION
The Company's business is seasonal with sales and operating income higher
in the third and fourth quarters, which include the Back-to-School period and
the holiday selling season, respectively, followed by the traditional new year
office supply restocking month of January. Sales in the second quarter's summer
months are historically the slowest of the year primarily because of lower
office supplies consumption during the summer vacation period. Management
believes inflation has not had a material effect on the Company's financial
condition or operating results for the periods presented and, in fact, has
experienced decreasing selling prices for items such as furniture, fax machines,
printers, copiers and various other electronics merchandise.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("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 using the two-step test specified in the standard and
written down to fair value if considered impaired. Intangible assets with
estimated useful lives will continue to be amortized over those periods. FAS 142
is effective for the Company for fiscal year 2002. Accordingly, the Company is
required to complete the first step in the two-step test for impairment prior to
the end of its second fiscal quarter on July 27, 2002. The first step of the
goodwill impairment test, used to identify potential impairment, compares the
fair value of a reporting unit with its carrying amount, including goodwill. If
the carrying amount of the reporting unit exceeds its fair value, the second
step of the goodwill impairment test shall be performed to measure the amount of
the impairment loss, if any. The Company is assessing the financial statement
impact of the adoption of these Statements, which could include an impairment
loss, or write-off, of some portion of the Company's intangible assets,
including goodwill.
27
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. Adoption of FAS 143 is not expected to have a material impact on the
Company's financial position or the results of its operations.
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 Company adopted FAS 144
during the first quarter of fiscal year 2002. Adoption of the new standard did
not have a material effect on earnings or the financial position of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, principally interest rate risk and
foreign exchange risk.
Interest earned on the Company's cash equivalents and short-term
investments, as well as interest paid on its debt and lease obligations, are
sensitive to changes in interest rates. The interest rate for the Company's
revolving credit facility is variable, while the Company's long-term debt and
the interest component of its operating leases is generally fixed. The Company
manages its interest rate risk by maintaining a combination of fixed and
variable rate debt. The Company believes its potential exposure to interest rate
risk is not material to the Company's financial position or the results of its
operations.
The Company is exposed to foreign currency exchange risk through its joint
venture partnership in Mexico. The Company has not entered into any derivative
financial instruments to hedge this exposure, and believes its potential
exposure is not material to the Company's financial position or the results of
its operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements on page F-1. Supplementary
quarterly financial information for the Company is included in Note 13 of Notes
to Consolidated Financial Statements of the Company.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 regarding Directors will be
contained under the caption "Election of Directors" in the Proxy Statement which
will be filed with the Securities and Exchange Commission pursuant to Regulation
14A, not later than 120 days after the end of the fiscal year, which information
under such caption is incorporated herein by reference.
The information required by this Item 10 regarding executive officers is
contained under the caption "Executive Officers of the Registrant" in Part I of
this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be contained under the
captions "How are Directors Compensated?" and "Compensation Committee Interlocks
and Insider Participation" in the Proxy Statement which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year, which information under such captions
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 will be contained under the
captions "Security Ownership of Certain Beneficial Owners" and "Security
Ownership of Management" in the Proxy Statement which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year, which information under such captions
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 will be contained under the
caption "Certain Relationships and Related Transactions" in the Proxy Statement
which will be filed with the Securities and Exchange Commission pursuant to
Regulation 14A, not later than 120 days after the end of the fiscal year, which
information under such caption is incorporated herein by reference.
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements:
See Index to Consolidated Financial Statements on page F-1.
(a)(2) Financial Statement Schedules:
Valuation and Qualifying Accounts (see page S-1)
(a)(3) Exhibits:
See Exhibit Index on pages 32 and 33 of this report.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the fourth
quarter of fiscal year 2001.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OFFICEMAX, INC.
DATE: April 17, 2002 By: /s/ Michael Feuer
---------------------
Michael Feuer, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
/s/ Michael Feuer April 17, 2002
- -------------------
Michael Feuer, Chairman and Chief Executive
Officer (Principal Executive Officer)
/s/ Michael F. Killeen April 17, 2002
- -----------------------
Michael F. Killeen, Senior Executive Vice President,
Chief Financial Officer (Principal Financial Officer)
/s/ Michael A. Weisbarth April 17, 2002
- -------------------------
Michael A. Weisbarth, Senior Vice President, Corporate
Controller (Principal Accounting Officer)
/s/ Raymond L. Bank April 17, 2002
- --------------------
Raymond L. Bank, Director
/s/ Burnett W. Donoho April 16, 2002
- ----------------------
Burnett W. Donoho, Director
/s/ Philip D. Fishbach April 12, 2002
- ----------------------
Philip D. Fishbach, Director
/s/ James F. McCann April 15, 2002
- -------------------
James F. McCann, Director
/s/ Sydell L. Miller April 12, 2002
- --------------------
Sydell L. Miller, Director
/s/ Jerry Sue Thornton April 17, 2002
- ----------------------
Jerry Sue Thornton, Director
/s/ Ivan J. Winfield April 15, 2002
- --------------------
Ivan J. Winfield, Director
31
EXHIBIT INDEX
-------------
Incorporation
Exhibit No. Description of Exhibit by Reference
- ----------- ---------------------- ----------------
3.1 Second Amended and Restated Articles of Incorporation of the Company, as amended. (6)
3.2 Code of Regulations of the Company. (3)
4.1 Specimen Certificate for the Common Shares. (1)
4.2 Rights Agreement Dated as of March 17, 2000 between the Company and First Chicago (7)
Trust Company of New York, as Rights Agent.
10.1 Loan and Security Agreement dated as of November 30, 2000, by and among Fleet (8)
Retail Finance, Inc., as administrative agent, Fleet National Bank, as issuer,
Chase Business Credit Corp. and The Chase Manhattan Bank, as co-agents, GMAC
Business Credit, LLC and GMAC Commercial Credit, LLC, as documentation agents,
The CIT Group/Business Credit, Inc., as syndication agent, Fleet Securities,
Inc., as arranger, and the Company, as lead borrower for OfficeMax, Inc.,
BizMart, Inc., BizMart (Texas), Inc. and OfficeMax Corp., as borrowers.
10.2 Mortgage Loan Agreement dated November 6, 1996 by and between the Company and (4)
KeyBank National Association.
* 10.3 Amended and Restated Employment Agreement dated as of January 2, 2000 by and (6)
between Michael Feuer and the Company.
* 10.4 OfficeMax Employee Share Purchase Plan. (1)
* 10.5 OfficeMax Management Share Purchase Plan. (1)
* 10.6 OfficeMax Director Share Plan, as amended and restated February 28, 2002 (filed herewith). (8)
* 10.7 OfficeMax Amended and Restated Equity-Based Award Plan. (8)
* 10.8 OfficeMax Annual Incentive Bonus Plan. (5)
10.9 Lease Guaranty, Indemnification and Reimbursement Agreement dated November 9, 1994 (2)
between the Company and Kmart Corporation.
* 10.10 Forms of Severance Agreements. (6)
* 10.11 Schedule of certain executive officers who are parties to the Severance Agreements in
the forms referred to in Exhibit 10.10 (filed herewith).
21.1 List of Subsidiaries. (6)
23.1 Consent of Independent Accountants (filed herewith).
99.1 Statement Regarding Forward Looking Information (filed herewith).
32
(1) Included as an exhibit to the Company's Registration Statement on
Form S-1 (No. 33-83528) and incorporated herein by reference.
(2) Included as an exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended October 22, 1994 (File No. 1-3380), and incorporated
herein by reference.
(3) Included as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended January 21, 1995 (File No. 13380), and incorporated
herein by reference.
(4) Included as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended January 25, 1997 (File No. 1-3380), and incorporated
herein by reference.
(5) Included as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended January 24, 1998 (File No. 1-3380), and incorporated
herein by reference.
(6) Included as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended January 22, 2000 (File No. 1-3380), and incorporated
herein by reference.
(7) Included as an exhibit to the Company's Form 8-A filed on March 20, 2000,
and incorporated herein by reference.
(8) Included as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended January 27, 2001 (File No. 1-3380), and incorporated
herein by reference.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
33
OFFICEMAX, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Management F - 2
Report of Independent Accountants F - 2
Consolidated Statements of Income - Fiscal years ended January 26, 2002,
January 27, 2001 and January 22, 2000 F - 3
Consolidated Balance Sheets - January 26, 2002 and
January 27, 2001 F - 4
Consolidated Statements of Cash Flows - Fiscal years ended January 26,
2002, January 27, 2001 and January 22, 2000 F - 5
Consolidated Statements of Changes in Shareholders' Equity - Fiscal
years ended January 26, 2002, January 27, 2001 and January 22,
2000 F - 6
Notes to Consolidated Financial Statements F - 7
F-1
REPORT OF MANAGEMENT
Responsibility for the integrity and objectivity of the financial
information presented in this Annual Report on Form 10-K rests with OfficeMax
management. The financial statements of OfficeMax, Inc. and its subsidiaries
were prepared in conformity with accounting principles generally accepted in the
United States of America, applying certain estimates and assumptions as
required.
OfficeMax has established and maintains a system of internal controls
designed to provide reasonable assurance that its books and records reflect the
transactions of the Company and that its established policies and procedures are
carefully followed. This system is based on written procedures, policies and
guidelines, organizational structures that provide an appropriate division of
responsibility, a program of internal audit and the careful selection and
training of qualified personnel.
PricewaterhouseCoopers LLP (PWC), independent accountants, examined the
financial statements and their report is presented below. PWC's opinion is based
on an examination which provides an independent, objective review of the way
OfficeMax fulfills its responsibility to publish statements which present fairly
its financial position and operating results. PWC obtains and maintains an
understanding of the Company's accounting and reporting controls, tests
transactions and performs related auditing procedures as they consider necessary
to arrive at an opinion on the fairness of the financial statements. While the
independent accountants make extensive reviews of procedures, it is neither
practicable nor necessary for them to test a large portion of the daily
transactions.
The Board of Directors pursues its oversight responsibility for the
financial statements through its Audit Committee, composed of Directors who are
not associates of the Company. The Committee meets periodically with the
independent accountants, representatives of management and internal auditors to
assure that all are carrying out their responsibilities. To assure independence,
PricewaterhouseCoopers and the internal auditors have full and free access to
the Audit Committee, without Company representatives present, to discuss the
results of their examinations and their opinions on the adequacy of internal
controls and the quality of financial reporting.
/s/Michael Feuer /s/Michael F. Killeen
------------- ------------------
Michael Feuer Michael F. Killeen
Chairman of the Board & Senior Executive Vice President,
Chief Executive Officer Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders of OfficeMax, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of OfficeMax,
Inc. and its subsidiaries (the "Company") at January 26, 2002 and January 27,
2001, and the results of their operations and their cash flows for each of the
three years in the period ended January 26, 2002 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PRICEWATERHOUSECOOPERS LLP
Cleveland, Ohio
April 15, 2002
F-2
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------------------
52 Weeks Ended 53 Weeks Ended 52 Weeks Ended
Jan. 26, Jan. 27, Jan. 22,
Fiscal Year Ended 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
Sales $ 4,636,024 $ 5,133,925 $ 4,822,673
Cost of merchandise sold, including buying and
occupancy costs 3,546,216 3,904,953 3,653,783
Inventory liquidation 3,680 8,244 -
Inventory markdown for item rationalization - - 77,372
--------------------------------------------------------------
3,549,896 3,913,197 3,731,155
Gross profit 1,086,128 1,220,728 1,091,518
Store operating and selling expenses 1,052,958 1,131,451 910,032
General and administrative expenses 145,680 156,273 128,708
Goodwill amortization 9,855 9,863 9,418
Pre-opening expenses 2,790 7,113 10,974
Store closing and asset impairment 76,761 109,578 -
--------------------------------------------------------------
Total operating expenses 1,288,044 1,414,278 1,059,132
--------------------------------------------------------------
Operating income (loss) (201,916) (193,550) 32,386
Interest expense, net 14,804 16,493 10,146
Other expense (income), net 61 60 (59)
--------------------------------------------------------------
Income (loss) before income taxes (216,781) (210,103) 22,299
Income tax expense (benefit) 89,704 (79,076) 12,258
Minority interest 2,973 2,139 -
--------------------------------------------------------------
Net income (loss) $ (309,458) $ (133,166) $ 10,041
==============================================================
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ (2.72) $ (1.20) $ 0.09
==============================================================
Diluted $ (2.72) $ (1.20) $ 0.09
==============================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic 114,308,000 112,738,000 113,578,000
==============================================================
Diluted 114,308,000 112,738,000 114,248,000
==============================================================
See accompanying Notes to Consolidated Financial Statements.
F-3
OFFICEMAX, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------------------
JANUARY 26, JANUARY 27,
2002 2001
- -------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and equivalents $ 76,751 $ 127,337
Accounts receivable, net of allowances
of $974 and $1,261, respectively 87,511 105,666
Merchandise inventories 884,827 1,159,089
Other current assets 43,834 110,821
-------------------- ---------------------
Total current assets 1,092,923 1,502,913
Property and Equipment:
Buildings and land 35,725 36,180
Leasehold improvements 185,998 196,088
Furniture, fixtures and equipment 616,768 599,813
-------------------- ---------------------
Total property and equipment 838,491 832,081
Less: Accumulated depreciation (479,204) (397,757)
-------------------- ---------------------
Property and equipment, net 359,287 434,324
Other assets and deferred charges 12,302 55,680
Goodwill, net of accumulated amortization
of $89,757 and $79,902, respectively 290,495 300,350
-------------------- ---------------------
$ 1,755,007 $ 2,293,267
==================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $ 495,505 $ 587,618
Accrued expenses and other liabilities 196,297 179,034
Accrued salaries and related expenses 50,705 45,197
Taxes other than income taxes 68,509 67,564
Credit facilities 20,000 220,000
Redeemable preferred shares - Series B 21,750 -
Mortgage loan, current portion 122 116
-------------------- ---------------------
Total current liabilities 852,888 1,099,529
Mortgage loan 1,530 1,663
Other long-term liabilities 175,456 141,245
-------------------- ---------------------
Total liabilities 1,029,874 1,242,437
-------------------- ---------------------
Commitments and contingencies - -
Minority interest 19,184 16,211
Redeemable preferred shares - Series A - 31,269
Redeemable preferred shares - Series B - 21,050
Shareholders' Equity:
Common stock without par value;
200,000,000 shares authorized;
134,284,054 and 124,969,255 shares
issued and outstanding, respectively 895,466 865,319
Deferred stock compensation (29) (321)
Cumulative translation adjustment 616 (417)
Retained earnings (deficit) (87,589) 223,415
Less: Treasury stock, at cost (102,515) (105,696)
-------------------- ---------------------
Total shareholders' equity 705,949 982,300
-------------------- ---------------------
$ 1,755,007 $ 2,293,267
==================== =====================
See accompanying Notes to Consolidated Financial Statements.
F-4
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
JANUARY 26, JANUARY 27, JANUARY 22,
Fiscal Year Ended 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net income (loss) $ (309,458) $ (133,166) $ 10,041
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Store closing and asset impairment 19,836 11,905 -
Depreciation and amortization 105,310 101,526 89,064
Income taxes 89,704 (55,401) 15,023
Other - net 16,329 389 1,825
Changes in current assets and current liabilities,
excluding the effects of acquisitions:
Decrease (increase) in inventories 274,261 114,755 (838)
(Decrease) increase in accounts payable (57,035) (141,213) 101,329
Decrease in accounts receivable 19,598 6,895 31,281
Increase in accrued liabilities 29,072 2,082 33,395
Store closing and asset impairment 31,849 97,673 -
Other - net 11,555 (19,375) (13,174)
--------------------------------------------------------------
Net cash provided by (used for) operations 231,021 (13,930) 267,946
--------------------------------------------------------------
INVESTING
Capital expenditures (49,228) (134,812) (117,154)
Consolidation of majority interest in
OfficeMax de Mexico - - 5,384
Other - net (1,149) (6,322) 26
--------------------------------------------------------------
Net cash used for investing (50,377) (141,134) (111,744)
--------------------------------------------------------------
FINANCING
(Decrease) increase in revolving credit facilities (200,000) 128,200 (52,900)
Payments of mortgage principal, net (127) (14,646) (1,300)
(Decrease) increase in overdraft balances (36,740) 25,792 (43,018)
Purchase of treasury stock - - (34,841)
Decrease (increase) in advance payments for
leased facilities 2,449 19,672 (21,237)
Proceeds from issuance of common stock, net 1,213 2,220 2,699
Proceeds from issuance of preferred stock, net - 50,000 -
Other - net 942 (1,358) -
--------------------------------------------------------------
Net cash (used for) provided by financing (232,263) 209,880 (150,597)
--------------------------------------------------------------
Effect of exchange rate changes on cash and
cash equivalents 1,033 (566) -
Net (decrease) increase in cash and equivalents (50,586) 54,250 5,605
Cash and equivalents, beginning of period 127,337 73,087 67,482
--------------------------------------------------------------
Cash and equivalents, end of period $ 76,751 $ 127,337 $ 73,087
==============================================================
See accompanying Notes to Consolidated Financial Statements.
F-5
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative
Common Deferred Stock Translation Retained Treasury
Stock Compensation Adjustment Earnings Stock Total
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 23, 1999 $ 868,321 $ (260) $ - $ 348,859 $ (78,778) $ 1,138,142
Comprehensive income:
Net income - - - 10,041 - 10,041
--------------
Total comprehensive income 10,041
Shares issued under director plan (226) (150) - - 403 27
Exercise of stock options
(including tax benefit) 122 - - - 593 715
Sale of shares under management share
purchase plan (including tax
benefit) 125 (153) - - 751 723
Sale of shares under employee share
purchase plan (including tax
benefit) (476) - - - 1,407 931
Amortization of deferred compensation - 259 - - - 259
Treasury stock purchased - - - - (34,841) (34,841)
------------ --------------- ------------- ------------ ------------ -------------
BALANCE AT JANUARY 22, 2000 867,866 (304) - 358,900 (110,465) 1,115,997
Comprehensive loss:
Net loss - - - (133,166) - (133,166)
Cumulative translation adjustment - - (417) - - (417)
--------------
Total comprehensive loss (133,583)
Shares issued under director plan (502) (220) - - 751 29
Exercise of stock options
(including tax benefit) (466) - - - 1,009 543
Sale of shares under management share
purchase plan (including tax
benefit) (168) (70) - - 668 430
Sale of shares under employee share
purchase plan (including tax
benefit) (1,411) - - - 2,341 930
Amortization of deferred compensation - 273 - - - 273
Preferred stock accretion - - - (2,319) - (2,319)
------------ --------------- ------------- ------------ ------------ ------------
BALANCE AT JANUARY 27, 2001 865,319 (321) (417) 223,415 (105,696) 982,300
Comprehensive income (loss):
Net loss - - - (309,458) - (309,458)
Cumulative translation adjustment - - 1,033 - - 1,033
-------------
Total comprehensive loss (308,425)
Shares issued under director plan (46) - - - 78 32
Exercise of stock options
(including tax benefit) (555) - - - 1,072 517
Sale of shares under management share
purchase plan (including tax
benefit) (43) 26 - - - (17)
Sale of shares under employee share
purchase plan (including tax
benefit) (1,324) - - - 2,031 707
Amortization of deferred compensation - 266 - - - 266
Preferred stock accretion - - - (1,546) - (1,546)
Conversion of Series A Preference Shares 32,115 - - - - 32,115
------------ -------------- ------------- ----------- ----------- -------------
BALANCE AT JANUARY 26, 2002 $ 895,466 $ (29) $ 616 $ (87,589) $(102,515) $ 705,949
============ ============== ============= =========== =========== =============
See accompanying Notes to Consolidated Financial Statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OfficeMax, Inc. ("OfficeMax" or the "Company") operates a chain of
high-volume, deep-discount office products superstores. At January 26, 2002, the
Company owned and operated 993 superstores in 49 states, Puerto Rico, 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, in-store modules
devoted exclusively to print-for-pay services and office furniture.
Additionally, the Company reaches customers with over 30,000 items through its
award winning 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 customer
call/contact centers.
BASIS OF PRESENTATION
The Company's consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. Affiliates in which the Company
owns a controlling majority interest are included in the Company's consolidated
financial statements. Investments in affiliates representing 50% or less of the
ownership of such companies for which the Company has the ability to exercise
significant influence over operating and financial policies are accounted for
under the equity method. All other investments in affiliates are accounted for
under the cost method and loans, which the Company makes from time to time to
these affiliates, are recorded in other assets or accounts receivable.
Intercompany accounts and transactions have been eliminated in consolidation.
The Company has two business segments: Domestic and International. The
Company's operations in the United States comprise its retail stores, eCommerce
operations, catalog business and outside sales groups all of which are included
in the Domestic segment. The operations of the Company's joint venture in
Mexico, OfficeMax de Mexico, are included in the International segment. See Note
12 of Notes to Consolidated Financial Statements for additional information
regarding the Company's business segments.
The Company's fiscal year ends on the Saturday prior to the last
Wednesday in January. Fiscal years 2001 and 1999 ended on January 26, 2002 and
January 22, 2000, respectively, and included 52 weeks. Fiscal year 2000 ended on
January 27, 2001 and included 53 weeks.
Certain reclassifications have been made to prior year amounts to
conform to the current presentation.
ACCOUNTING ESTIMATES
The consolidated financial statements of the Company are prepared in
conformity with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires the use of
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the periods presented. Management of the Company
uses historical information and all available information to make these
estimates and assumptions. Actual results could differ from these estimates and
different amounts could be reported using different assumptions and estimates.
CASH AND EQUIVALENTS
Cash and equivalents includes short-term investments with original
maturities of 90 days or less.
F-7
ACCOUNTS RECEIVABLE
Accounts receivable consists primarily of amounts due from vendors
under purchase rebate, cooperative advertising and other contractual programs
and trade receivables not financed through outside programs. The Company has an
arrangement with a financial services company (the "Issuer") whereby the Issuer
manages the Company's private label credit card programs. The credit card
accounts, and receivables generated thereby, are owned by the Issuer. Under the
terms of the agreement, the Issuer charges the Company a fee to cover the
Issuer's cost of providing credit and collecting the receivables which are
non-recourse to the Company. The Company's agreement with the Issuer permits the
Issuer to terminate the agreement at anytime if the Company does not maintain a
minimum tangible net worth as defined in the agreement. As of January 26, 2002,
the Company's tangible net worth exceeded the minimum tangible net worth
required by the agreement with the Issuer by approximately $25,210,000. The
Company believes that if it did not maintain the required minimum tangible net
worth and the Issuer terminated the agreement, it would be able to find another
financial services company to manage its private label credit card programs.
INVENTORIES
Inventories are valued at the lower of weighted average cost or market.
Throughout the year, the Company performs annual physical inventories at all of
its locations. For periods subsequent to the date of each location's last
physical inventory, a reserve for estimated shrinkage is provided based on
various factors including sales volume, the location's historical shrink results
and current trends.
The Company records a reserve for future inventory cost markdowns to be
taken for inventory not expected to be part of its ongoing merchandise offering.
This reserve was $4,500,000 and $4,000,000 as of January 26, 2002 and January
27, 2001, respectively. The reserve is estimated based on historical information
regarding sell through and gross margin rates for similar products.
ADVERTISING
Advertising costs are either expensed or capitalized and amortized in
proportion to related revenues. The total amount capitalized in accordance with
the provisions of Statement of Position 93-7 issued by the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants
was $3,805,000 and $3,400,000 as of January 26, 2002 and January 27, 2001,
respectively. These amounts relate to the Company's catalog and other direct
response advertising and are amortized in proportion to the related sales during
the period in which the merchandise contents and pricing are valid. The Company
and its vendors participate in cooperative advertising programs in which the
vendors reimburse the Company for a portion of its advertising costs.
Advertising expense, net of vendor reimbursements, was $130,102,000,
$150,099,000, and $98,901,000 for fiscal years 2001, 2000 and 1999,
respectively. Net advertising expense is included in store operating and
selling expenses.
INCOME TAXES
The Company uses the liability method whereby income taxes are
recognized during the fiscal year in which transactions enter into the
determination of financial statement income. Deferred tax assets and liabilities
are recognized for the expected future tax consequences of temporary differences
between financial statement and tax basis of assets and liabilities. The Company
assesses the recoverability of its deferred tax assets in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("FAS 109"). In accordance with that standard, the Company
recorded a valuation allowance for its net deferred tax assets and net operating
loss carryforwards of $170,616,000 as of January 26, 2002. See Note 8 of Notes
to Consolidated Financial Statements for additional information regarding income
taxes.
PROPERTY AND EQUIPMENT
F-8
Components of property and equipment are recorded at cost and
depreciated over their estimated useful lives using the straight-line method for
financial statement purposes and accelerated methods for income tax purposes.
All store properties are leased, and improvements are amortized over the lesser
of the term of the lease or 20 years. The estimated useful lives of other
depreciable assets are generally as follows: buildings and improvements - 10 to
40 years; and furniture, fixtures and equipment, including information
technology equipment and software - 3 to 10 years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for possible impairment at
least annually and whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable by the undiscounted future
cash flows of the asset over its remaining useful life. If impairment exists,
the carrying amount of the asset is reduced. The Company evaluates possible
impairment of long-lived assets for each of its retail stores individually based
on the store's estimated future earnings before interest, taxes, depreciation
and amortization. Long-lived assets for which the Company cannot specifically
identify cash flows that are largely independent of the cash flows of other
long-lived assets, such as its corporate and distribution facilities, are
evaluated based on the Company's estimated future consolidated operating cash
flows. During fiscal years 2001 and 2000, the Company recorded impairment losses
of $8,325,000 and $2,399,000, respectively. These losses were included in the
charges for store closing and asset impairment recorded in both years. See Note
2 of Notes to Consolidated Financial Statements for additional information
regarding the charges for store closing and asset impairment.
GOODWILL
Goodwill represents the excess of cost over the fair value of the net
identifiable assets acquired in a business combination accounted for under the
purchase method and was amortized over 10 to 40 years using the straight-line
method during the fiscal years presented. The Company evaluated the
recoverability of its goodwill and reviewed the amortization period on an annual
basis by determining whether the remaining balance could be recovered through
the undiscounted future cash flows of the related assets over the remaining life
of the goodwill. Based on its review, the Company does not believe that an
impairment of its goodwill had occurred as of, and through the period ended,
January 26, 2002.
As a result of a new accounting standard that is effective for the
Company as of the beginning of fiscal year 2002, goodwill will no longer be
amortized, but will be tested for impairment at least annually. See "Recently
Issued Accounting Pronouncements" below.
INSURANCE PROGRAMS
The Company maintains insurance coverage, and is self-insured when
economically beneficial, for certain losses relating to workers' compensation
claims, employee medical benefits and general and auto liability claims.
Liabilities for these losses are based on claims filed and actuarial estimates
of claims incurred but not yet reported and totaled $28,719,000 and $24,448,000
as of January 26, 2002 and January 27, 2001, respectively, including accrued
liabilities for the related insurance premiums and other expenses. The Company
has purchased stop-loss coverage in order to limit its exposure for self-insured
losses. The Company has issued, when required, standby letters of credit to
support its insurance programs.
CURRENT LIABILITIES
Under the Company's cash management system, checks issued pending
clearance that result in overdraft balances for accounting purposes are included
in the accounts payable balance and totaled $79,457,000 and $116,197,000 as of
January 26, 2002 and January 27, 2001, respectively.
F-9
FINANCIAL INSTRUMENTS
The recorded value of the Company's financial instruments, which
includes its short-term investments, accounts receivable, accounts payable,
revolving credit facilities and mortgage loan, approximates fair value.
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of cash investments. The Company invests its
excess cash in high-quality securities placed with major banks and financial
institutions. The Company has established guidelines relative to diversification
and maturities to mitigate risk and maintain liquidity.
REVENUE RECOGNITION
The Company recognizes revenue when the earnings process is complete,
generally at either the point-of-sale to a customer or upon delivery to a
customer or third party delivery service, less an appropriate provision for
returns and net of coupons and other sales incentives. Revenue from certain
sales transactions in which the Company effectively acts as an agent or broker
is reported on a net or commission basis. Revenue from the sale of extended
warranty contracts is either reported at the point-of-sale to a customer or
ratably over the warranty period. The performance obligations and risk of loss
associated with extended warranty contracts sold by the Company are assumed by a
third-party administrator.
SHIPPING AND HANDLING FEES AND COSTS
During the fourth quarter of fiscal year 2000, the Company adopted
Emerging Issues Task Force Issue 00-10, "Accounting for Shipping and Handling
Fees and Costs," which requires that fees charged to customers in a sales
transaction for shipping and handling be classified as revenue. The Company has
elected to continue to record shipping and handling related costs in store
operating and selling expense. Such costs were approximately $56,006,000,
$64,774,000 and $56,774,000 in fiscal years 2001, 2000 and 1999, respectively.
VENDOR INCOME RECOGNITION
The Company participates in various purchase rebate, cooperative
advertising and other marketing programs with its vendors. The Company
recognizes purchase rebates as a reduction of cost of merchandise sold as the
related inventory is sold. Income for cooperative advertising and other
marketing programs is recognized as a reduction of advertising expense or cost
of merchandise sold, respectively, in the period in which the related expenses
are recognized.
FACILITY CLOSURE COSTS
The Company continuously reviews its real estate portfolio to identify
underperforming facilities and closes those facilities that are no longer
strategically or economically viable. The Company accrues estimated closure
costs in the period in which management approves a plan to close a facility. The
accrual for estimated closure costs is net of expected future sublease income,
which is estimated by management based on real estate studies prepared by
independent industry experts. If actual future sublease income is different than
management's estimate, adjustments to the Company's store closing reserves may
be necessary. See Note 2 of Notes to Consolidated Financial Statements for
additional information regarding facility closure costs.
PRE-OPENING EXPENSES
Pre-opening expenses, which consist primarily of payroll, supplies and
grand opening advertising for new stores, are expensed as incurred.
F-10
STOCK-BASED COMPENSATION
As provided for under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("FAS 123"), the Company has
elected to continue to account for stock-based compensation under the provisions
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of grant over
the amount an employee must pay to acquire the stock. Pro forma disclosures of
net earnings (loss) and earnings (loss) per common share, as if the fair-value
based method of accounting defined in FAS 123 had been applied, are presented in
Note 11 of Notes to Consolidated Financial Statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board 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
using the two-step test specified in the standard and written down to fair value
if considered impaired. Intangible assets with estimated useful lives will
continue to be amortized over those periods. FAS 142 is effective for the
Company for fiscal year 2002. Accordingly, the Company is required to complete
the first step in the two-step test for impairment prior to the end of its
second fiscal quarter on July 27, 2002. The first step of the goodwill
impairment test, used to identify potential impairment, compares the fair value
of a reporting unit with its carrying amount, including goodwill. If the
carrying amount of the reporting unit exceeds its fair value, the second step of
the goodwill impairment test shall be performed to measure the amount of the
impairment loss, if any. The Company is assessing the financial statement impact
of adoption of these Statements, which could include an impairment loss, or
write-off, of some portion of the Company's intangible assets, including
goodwill.
NOTE 2. STORE CLOSING AND ASSET IMPAIRMENT
FISCAL YEAR 2001 STORE CLOSINGS
During the fourth quarter of fiscal year 2001, the Company announced
that it had completed a review of its real estate portfolio and elected to close
29 underperforming superstores. In conjunction with the store closings, the
Company recorded a pre-tax charge for store closing and asset impairment of
$79,838,000 during the fourth quarter of fiscal year 2001. Also during the
fourth quarter of fiscal year 2001, the Company reversed $3,077,000 of the store
closing reserve established in fiscal year 2000 when that portion of the reserve
was deemed no longer necessary. See "Fiscal Year 2000 Store Closings" below for
additional information regarding the reversal of the prior year reserve. The net
charge of $76,761,000 reduced fiscal year 2001 net income by $47,728,000, or
$0.42 per diluted share.
F-11
Major components of the fiscal year 2001 charge for store closing and
asset impairment and the reserve for fiscal year 2001 store closings costs as of
January 26, 2002 are as follows:
- ------------------------------------------------------------------------------------------------
CHARGES PAYMENT / BALANCE
(Dollars in thousands) INCURRED USAGE JANUARY 26, 2002
- ------------------------------------------------------------------------------------------------
Lease disposition costs, net of
sublease income $ 53,646 $ - $ 53,646
Asset impairment and disposition 20,674 20,674 -
Other closing costs, including severance 5,518 - 5,518
----------------- ----------------- ----------------
Total $ 79,838 $ 20,674 $ 59,164
================= ================= ================
Lease disposition costs in the charge included the aggregate
straight-line rent expense for the closing stores, net of approximately
$42,344,000 of expected future sublease income. Included in the fiscal year 2001
charge for store closing and asset impairment was $5,631,000 of expense related
to the write-off of the Company's investment in a joint venture in Brazil as
well as receivables from that joint venture.
As of January 26, 2002, $43,135,000 of the reserve for fiscal year 2001
store closings costs was included in other long-term liabilities.
Also during the fourth quarter, the Company recorded an additional
pre-tax charge of $3,680,000 as a result of the inventory liquidation at the
closing stores. The inventory liquidation charge reduced fiscal year 2001 net
income by $2,227,000, or $0.02 per diluted share. The 29 stores closed during
the first quarter of fiscal year 2002 upon completion of the liquidation process
that began as of the first day of fiscal year 2002. The results of operations
for the 29 stores were assumed by a third-party liquidator and, accordingly,
will not be included in the Company's consolidated results of operations
beginning January 27, 2002.
FISCAL YEAR 2000 STORE CLOSINGS
During the fourth quarter of fiscal year 2000, the Company elected to
close 50 underperforming superstores and recorded a pre-tax charge for store
closing and asset impairment of $109,578,000. Major components of the charge
included lease disposition costs of $89,815,000, asset impairment and
disposition of $13,071,000 and other closing costs, including severance, of
$6,692,000. Lease disposition costs in the charge included the aggregate
straight-line rent expense for the closed stores, net of approximately
$83,981,000 of expected future sublease income. The charge reduced net income by
$66,843,000, or $0.59 per diluted share, during fiscal year 2000.
Also during the fourth quarter of fiscal year 2000, the Company
recorded an additional pre-tax charge of $8,244,000 as a result of the inventory
liquidation at the closing stores. The inventory liquidation charge reduced
fiscal year 2000 net income by $4,946,000, or $0.05 per diluted share.
Of the 50 superstores originally expected to close, 48 were liquidated
and closed during fiscal year 2001. During the fourth quarter of fiscal year
2001, the Company elected not to close the two remaining stores due to changes
in competitive and market conditions and reversed the charge originally recorded
to close those stores. In total, approximately $3,077,000 of the original charge
recorded in fiscal year 2000 was reversed during the fourth quarter of fiscal
year 2001, primarily as a result of the two stores management elected not to
close and certain equipment lease termination costs that were lower than
expected.
F-12
A reconciliation of major components of the reserve for fiscal year
2000 store closing costs is as follows:
- ------------------------------------------------- ---- ----------------- -- ----------------- -- -----------------
BALANCE REVERSAL / BALANCE
(Dollars in thousands) JANUARY 27, 2001 USAGE JANUARY 26, 2002
- ------------------------------------------------- ---- ----------------- -- ----------------- -- -----------------
Lease disposition costs, net of
sublease income $ 91,477 $ 22,819 $ 68,658
Other closing costs, including severance, and
asset impairment 6,196 4,496 1,700
----------------- ----------------- ----------------
Total $ 97,673 $ 27,315 $ 70,358
================= ================= ================
As of January 26, 2002 and January 27, 2001, $54,900,000 and
$72,314,000 of the reserve for fiscal year 2000 store closings costs was
included in other long-term liabilities.
NOTE 3. INVENTORY MARKDOWN CHARGE FOR ITEM RATIONALIZATION
In order to effect the acceleration of the Company's supply-chain
management initiative, which included the development and opening of a
nationwide network of 600,000 to 750,000-square-feet, "PowerMax" inventory
distribution facilities and the implementation of the Company's new warehouse
management system, the Company decided to eliminate select current products on
hand as part of its program of merchandise and vendor rationalization. In
connection with this decision, the Company recorded a non-cash, pre-tax markdown
charge of $83,257,000 during the third quarter of fiscal year 1999. The charge
provided for the liquidation of merchandise that was not expected to be part of
the Company's ongoing product offering. The charge reduced third quarter net
income by $53,284,000, or $0.47 per diluted share. During the fourth quarter of
fiscal year 1999, the Company reversed $5,885,000 of the charge based on the
actual sell-through and merchandise margin rates of discontinued products, which
exceeded original expectations during the execution of the related clearance
event. The reversal increased fourth quarter net income by $3,766,000, or $0.03
per diluted share. In total, the charge reduced fiscal year 1999 net income by
$49,518,000, or $0.43 per diluted share.
NOTE 4. ACQUISITION OF MAJORITY INTEREST IN OFFICEMAX DE MEXICO
Effective January 1, 2000, the Company purchased for $14,000,000 an
additional 12% of OfficeMax de Mexico, its joint venture in Mexico that operates
OfficeMax superstores similar to those in the United States. The excess of the
purchase price over the net assets of the joint venture was approximately
$4,700,000, which was allocated to goodwill and is being amortized over 10
years. During the first quarter of fiscal year 2000, the Company paid OfficeMax
de Mexico $10,000,000 of the $14,000,000 purchase price. During the second
quarter of fiscal year 2001, the Company converted a $2,000,000 note receivable
from the joint venture to an equity investment as part of the purchase price.
The Company intends to convert an additional $2,000,000 note receivable from the
joint venture to an equity investment in fiscal year 2002 in satisfaction of its
remaining obligation for the original purchase price. As a result of the
purchase, the Company owns 51% of OfficeMax de Mexico and includes the net
assets of the joint venture and related minority interest in its consolidated
balance sheets. Beginning in fiscal year 2000, the Company also included
OfficeMax de Mexico's results of operations and cash flows in its consolidated
financial statements. OfficeMax de Mexico's fiscal year ends on December 31. Due
to statutory audit requirements, OfficeMax de Mexico will maintain its calendar
year end and the Company will consolidate OfficeMax de Mexico's calendar year
results of operations with its fiscal year results.
F-13
NOTE 5. RELATIONSHIP WITH KMART CORPORATION
Kmart Corporation ("Kmart"), which previously owned an equity interest
in the Company, continues to guarantee certain of the Company's leases. Such
lease guarantees are provided by Kmart at no cost to the Company. The Company
has agreed to indemnify Kmart for any losses incurred by Kmart as a result of
actions, omissions or defaults on the part of OfficeMax, as well as for all
amounts paid by Kmart pursuant to Kmart's guarantees of the Company's leases.
The agreement contains certain financial and operating covenants, including
restrictions on the Company's ability to pay dividends, incur indebtedness,
incur liens or merge with another entity.
During the first quarter of fiscal year 2002, due to a decline in
Kmart's debt rating, the Company was required to purchase the mortgage notes on
two of its stores properties. See Note 7 of Notes to Consolidated Financial
Statements for more information regarding these mortgage notes. The Company does
not expect the decline in Kmart's debt rating or Kmart's subsequent bankruptcy
filing to have a material adverse impact on OfficeMax's financial position or
the results of its operations.
NOTE 6. DEBT
REVOLVING CREDIT FACILITIES
On November 30, 2000, the Company entered into a three-year senior
secured revolving credit facility in which 19 lenders participate (the
"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. Proceeds from the new revolving credit facility were used to
repay all outstanding borrowings under the Company's previous revolving credit
facility.
As of January 26, 2002, the Company had outstanding borrowings of
$20,000,000 under the revolving credit facility at a weighted average interest
rate of 4.75%. As of January 27, 2001, the Company had outstanding borrowings of
$220,000,000 under the revolving credit facility at a weighted average interest
rate of 8.61%. Also from this facility, the Company had $111,580,000 of standby
letters of credit outstanding as of January 26, 2002 in connection with its
insurance programs and two synthetic operating leases related to its PowerMax
inventory distribution facilities. 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. As of January 27, 2001, the Company had $122,325,000
of standby letters of credit, issued in connection with its insurance programs
and two synthetic operating leases related to its PowerMax inventory
distribution facilities, outstanding under the revolving credit facility and an
additional facility that expired in fiscal year 2001.
The Company pays quarterly fees of 0.25% per annum on the unused
portion of the revolving credit facility. Available borrowing capacity under the
revolving credit facility is calculated as a percentage of the Company's
inventory and certain accounts receivable. As of January 26, 2002, the Company
had unused and available borrowings under the revolving credit facility in
excess of $412,600,000.
MORTGAGE LOAN
During the second quarter of fiscal year 2000, the Company repaid the
outstanding balance of its mortgage loan in the amount of $16,100,000. The
mortgage loan was secured by the Company's international corporate headquarters
and had an original maturity of January 2007.
During the fourth quarter of fiscal year 2000, the Company assumed an
eleven-year $1,800,000 mortgage loan secured by real estate previously leased by
the Company. The mortgage loan bears interest at a rate of 5.0% per annum.
Maturities of the mortgage loan, including interest, will be approximately
$213,000 for each of the next five years.
F-14
NOTE 7. COMMITMENTS AND CONTINGENCIES
During the first quarter of fiscal year 2002, the Company was required,
due to a decline in Kmart's debt rating, to purchase the mortgage notes on two
of its store properties. Both of the properties are occupied by the Company.
Principal and interest payments to the Company under the mortgage notes are
secured by the Company's rent payments under the related lease agreements.
Interest on the mortgage notes accrues to the Company at an average rate of
approximately 10% per annum, which exceeds the Company's current borrowing rate.
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. Currently, the
minority partner has indicated that it has no intentions to exercise this right
in fiscal year 2002. If the earnings targets are achieved and the joint venture
partner elects to put its ownership interest to the Company, the purchase price
would be calculated based on a multiple of the joint venture's earnings before
interest, taxes, depreciation and amortization and would not be expected to
exceed $40,000,000. The Company and its minority partner have begun preliminary
negotiations regarding amending the joint venture agreement in order to
establish a longer-term commitment from the minority partner.
There are various claims, lawsuits and pending actions against the
Company incident to the Company's operations. It is the opinion of management
that the ultimate resolution of these matters will not have a material adverse
effect on the Company's liquidity, financial position or results of operations.
NOTE 8. INCOME TAXES
The Company recorded a $170,616,000 charge to establish a valuation
allowance for its net deferred tax assets and net operating loss carryforwards
in the fourth quarter of fiscal year 2001. The valuation allowance was
calculated in accordance with the provisions of FAS 109 which places primary
importance on the Company's operating results in the most recent three-year
period when assessing the need for a valuation allowance. Although management
believes the Company's results for those periods were heavily affected by
deliberate and planned infrastructure improvements, including its PowerMax
inventory distribution network and state-of-the-art SAP computer system as well
as an aggressive store closing program, the Company's cumulative loss in the
most recent three-year period, including the net loss reported in the fourth
quarter of fiscal year 2001, represented negative evidence sufficient to require
a full valuation allowance under the provisions of FAS 109. The Company intends
to maintain a full valuation allowance for its net deferred tax assets and net
operating loss carryforwards until sufficient positive evidence exists to
support reversal of the remaining reserve. Until such time, except for state,
local and foreign tax provisions, the Company will have no reported tax
provision, net of valuation allowance adjustments.
The provision (benefit) for income taxes consists of:
- ---------------------------------------------------------------------- -- ----------------- -- -----------------
FISCAL YEAR ENDED JANUARY 26, JANUARY 27, JANUARY 22,
(Dollars in thousands) 2002 2001 2000
- ---------------------------------------------------------------------- -- ----------------- -- -----------------
Current federal $ (4,863) $ (21,317) $ (4,731)
State and local 8,037 (4,084) 1,280
Foreign 112 1,727 686
Deferred (84,198) (55,402) 15,023
Valuation allowance 170,616 - -
----------------- ----------------- -----------------
Total income tax expense (benefit) $ 89,704 $ (79,076) $ 12,258
================= ================= =================
F-15
A reconciliation of the federal statutory rate to the Company's
effective tax rate is as follows:
- --------------------------------------------------------------------------------------------------------
JANUARY 26, JANUARY 27, JANUARY 22,
FISCAL YEAR ENDED 2002 2001 2000
- --------------------------------------------------------------------------------------------------------
Federal statutory rate (35.0)% (35.0)% 35.0%
State and local taxes, net of
federal tax benefit (4.1)% (4.0)% 3.7%
Goodwill amortization 4.5% 1.7% 14.8%
Valuation allowance 76.0% - -
Other - (0.3)% 1.5%
----------------- ----------------- -----------------
Total income tax expense (benefit) 41.4% (37.6)% 55.0%
================= ================= =================
The Company's net deferred tax assets resulted from the following:
- -------------------------------------------------------------------------------
FISCAL YEAR ENDED JANUARY 26, JANUARY 27,
(Dollars in thousands) 2002 2001
- -------------------------------------------------------------------------------
Inventory $ 5,402 $ 9,864
Property and equipment (22,154) (15,291)
Escalating rent 26,133 22,769
Store closing reserve 57,678 43,810
Accrued expenses not currently deductible 28,657 25,299
Net operating loss carryforwards and other 74,900 -
Valuation allowance (170,616) -
--------------------------------
Total deferred tax assets $ - $ 86,451
================================
On March 9, 2002, President Bush signed into law the "Job Creation and
Worker Assistance Act" (H.R. 3090). This new tax law temporarily extends the
carryback period for net operating losses incurred during the Company's taxable
years ended in 2001 and 2000 to five years from two years. Although it is still
evaluating the effect of this new tax law, the Company expects additional
carryback of net operating losses in excess of $50,000,000. These net operating
losses were fully reserved during the fourth quarter of fiscal year 2001. The
Company expects to reverse a portion of the valuation allowance equal to the
additional carryback and report income tax benefit of an equal amount in the
first quarter of fiscal year 2002. The Company anticipates receiving the cash
refund for the additional carryback during fiscal year 2002.
NOTE 9. LEASES
DESCRIPTION OF LEASING ARRANGEMENTS
The Company occupies all of its stores, delivery centers and customer
call/contact centers under various long-term lease agreements. These leases
generally have initial terms ranging from 10 to 25 years plus renewal options.
Most of these leases require the Company to pay minimum rents, subject to
periodic adjustments, plus other charges including utilities, real estate taxes,
common area maintenance and, in limited cases, contingent rentals based on
sales.
The Company leases two of its three PowerMax inventory distribution
centers under synthetic operating leases with initial lease terms expiring in
fiscal year 2004. One of the synthetic operating leases can be extended at the
Company's option until fiscal year 2006. The Company occupies its third PowerMax
inventory distribution facility under a long-term lease.
Other long-term liabilities as of January 26, 2002 and January 27, 2001
included approximately $66,319,000 and $57,788,000, respectively, related to
future rent escalation clauses under certain operating leases that is recognized
on a straight-line basis over the term of the respective lease.
F-16
LEASE COMMITMENTS
Future minimum lease payments and future minimum rentals, net of
sublease income, as of January 26, 2002 were as follows:
- ------------------------------------------------------------
FISCAL YEAR OPERATING
(Dollars in thousands) LEASES
- ------------------------------------------------------------
2002 $ 356,123
2003 330,098
2004 299,341
2005 269,029
2006 250,162
Thereafter 1,475,739
----------------
Total minimum lease payments $2,980,492
================
RENTAL EXPENSE
A summary of operating lease rental expense and short-term rentals, net
of sublease income, is as follows:
- ------------------------------------------------------- -- ----------------- -- ----------------- -- -----------------
FISCAL YEAR ENDED JANUARY 26, JANUARY 27, JANUARY 22,
(Dollars in thousands) 2002 2001 2000
- ------------------------------------------------------- -- ----------------- -- ----------------- -- -----------------
Minimum rentals $ 366,288 $ 365,586 $ 319,451
Percentage rentals 188 249 254
----------------- ----------------- -----------------
Total $ 366,476 $ 365,835 $ 319,705
================= ================= =================
NOTE 10. SUPPLEMENTAL CASH FLOW INFORMATION
Additional supplemental information related to the Consolidated
Statements of Cash Flows is as follows:
- ------------------------------------------------------- -- ----------------- -- ----------------- -- -----------------
FISCAL YEAR ENDED JANUARY 26, JANUARY 27, JANUARY 22,
(Dollars in thousands) 2002 2001 2000
- ------------------------------------------------------- -- ----------------- -- ----------------- -- -----------------
Cash transactions:
Cash paid for interest $ 15,115 $ 15,819 $ 11,013
Cash paid for income taxes 2,166 6,742 4,402
Cash paid for acquisition of majority interest in
OfficeMax de Mexico - 10,000 -
Non-cash transactions:
Liabilities accrued for property and
equipment acquired 11,818 24,290 20,066
Tax benefit related to exercise of
stock options 36 70 282
Note receivable converted to
equity investment 2,000 - -
Payable recorded for acquisition of majority
interest in OfficeMax de Mexico - - 14,000
F-17
NOTE 11. EMPLOYEE BENEFIT PLANS
STOCK PURCHASE PLANS
The Company has adopted a Management Share Purchase Plan (the
"Management Plan"), an Employee Share Purchase Plan (the "Employee Plan") and a
Director Share Plan (the "Director Plan"). Under the Management Plan, the
Company's officers are required to use at least 20%, and may use up to 100%, of
their annual incentive bonuses to purchase restricted common shares of the
Company at a 20% discount from the fair value of the same number of unrestricted
common shares. Restricted common shares purchased under the Management Plan are
generally restricted from sale or transfer for three years from date of
purchase. The maximum number of common shares reserved for issuance under the
Management Plan is 1,242,227. The Company recognized compensation expense for
the discount on the restricted common shares of $66,000, $103,000 and $112,000
in fiscal years 2001, 2000 and 1999, respectively.
The Employee Plan is available to all full-time employees of the
Company who are not covered under the Management Plan and who have worked at
least 1,000 hours during a period of 12 consecutive months. Each eligible
employee has the right to purchase, on a quarterly basis, the Company's common
shares at a 15% discount from the fair market value per common share. Shares
purchased under the Employee Plan are generally restricted from sale or transfer
for one year from date of purchase. The maximum number of shares eligible for
purchase under the Employee Plan is 2,958,761. The Company is not required to
record compensation expense with respect to shares purchased under the Employee
Plan.
The Director Plan covers all directors of the Company who are not
officers or employees of the Company. Participants receive their entire annual
retainer in the form of restricted common shares paid at the beginning of the
relevant calendar year and all of their meeting fees in the form of unrestricted
common shares paid at the end of the calendar quarter in which the meetings
occurred. The restrictions on such shares generally lapse one year from the date
of grant. The maximum number of shares reserved for issuance under the Director
Plan is 750,000.
SAVINGS PLANS
Employees of the Company who meet certain service requirements are
eligible to participate in the Company's 401(k) Savings Plan. Participants may
contribute 2% to 15% of their annual earnings, subject to statutory limitations.
The Company matches 50% of the first 3% of the employee's contribution. Such
matching Company contributions are invested in shares of the Company's common
stock and become vested 50% after two years of service and 100% after three
years of service. Highly compensated employees (as defined by the Employee
Retirement Income Security Act of 1974, as amended) are eligible to participate
in the Company's Executive Savings Deferral Plan ("ESDP") if their contributions
to the 401(k) Savings Plan are limited. The provisions of the ESDP are similar
to those of the Company's 401(k) Savings Plan. The charge to operations for the
Company's matching contributions to these plans amounted to $1,477,000,
$1,290,000 and $1,050,000 for fiscal years 2001, 2000 and 1999, respectively.
F-18
STOCK OPTION PLANS
The Company's Equity-Based Award Plan provides for the issuance of up
to 26,000,000 share appreciation rights, restricted shares and options to
purchase common shares. Options granted under the Equity-Based Award Plan become
exercisable from one to seven years after the date of grant and expire ten years
from date of grant. Options may be granted only at option prices not less than
the fair market value per common share on the date of the grant. There was no
compensation expense related to Equity-Based Award Plan grants during fiscal
years 2001, 2000 and 1999.
Exercisable options outstanding were 6,303,979 as of January 26, 2002,
3,996,544 as of January 27, 2001 and 3,904,106 as of January 22, 2000.
Option activity for each of the last three fiscal years was as follows:
- ---------------------------------------------------- ---- ------------------
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
- ---------------------------------------------------- ---- ------------------
Outstanding at January 23, 1999 11,101,587 $ 11.57
Granted 4,042,354 8.35
Exercised (73,292) 5.79
Forfeited (2,982,302) 11.52
---------------- -----------------
Outstanding at January 22, 2000 12,088,347 10.56
Granted 5,485,993 3.62
Exercised (112,822) 4.01
Forfeited (2,604,895) 10.30
---------------- -----------------
Outstanding at January 27, 2001 14,856,623 8.09
Granted 2,549,562 3.17
Exercised (119,870) 4.01
Forfeited (3,470,525) 7.44
---------------- -----------------
Outstanding at January 26, 2002 13,815,790 $ 7.88
================ =================
The following table summarizes information about options outstanding as
of January 26, 2002:
Options Outstanding Options Exercisable
------------------ -------------------- ----------------- -------------------
Range of Weighted Average Weighted Average Weighted Average
Exercise Prices Options Exercise Price Remaining Life (Years) Options Exercise Price
------------------ -------------------- ----------------- -------------------
$2.38 to $5.63 4,130,454 $ 3.10 8.8 191,270 $ 4.39
$6.06 to $8.69 5,333,017 $ 7.15 7.3 2,398,368 $ 7.13
$10.19 to $11.75 2,134,070 $ 11.51 4.4 1,996,744 $ 11.57
$13.88 to $18.13 2,218,249 $ 15.04 5.3 1,717,597 $ 15.01
F-19
STOCK-BASED COMPENSATION
Under FAS 123, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model. The weighted average
fair value at the date of grant of options granted in fiscal years 2001, 2000
and 1999 was $2.15, $2.16 and $3.37, respectively. The weighted average
assumptions used for grants in fiscal years 2001, 2000 and 1999, respectively,
were an expected volatility of 50.4%, 37.4% and 36.9% and a risk-free interest
rate of 5.0%, 6.2% and 5.7%. A dividend yield of zero and an expected life of
five years were used in the model for all three fiscal years.
The following table illustrates pro forma net earnings and pro forma
earnings per common share, giving effect to compensation costs calculated using
the fair value method prescribed by FAS 123. The pro forma amounts listed below
do not take into consideration the pro forma compensation expense related to
grants made prior to fiscal year 1995.
- ----------------------------------------------------- --- ----------------- -- ----------------- -- -----------------
Fiscal Year Ended JANUARY 26, JANUARY 27, JANUARY 22,
(Dollars in thousands, except per share data) 2002 2001 2000
- ----------------------------------------------------- --- ----------------- -- ----------------- -- -----------------
Pro forma net income (loss) $ (310,597) $ (133,790) $ 5,961
Pro forma earnings (loss) per common share
Basic $ (2.73) $ (1.21) $ 0.05
Diluted $ (2.73) $ (1.21) $ 0.05
NOTE 12. BUSINESS SEGMENTS
The Company has two business segments: Domestic and International. The
Company's operations in the United States comprise its retail stores, eCommerce
operations, catalog business and outside sales groups all of which are included
in the Domestic segment. The Domestic segment also includes the operations of
the Company's former Computer Business segment, which was phased-out during
fiscal year 2000, and international joint ventures accounted for under the cost
or equity methods. During fiscal years 2001, 2000 and 1999, the Company
accounted for its joint venture in Brazil under the cost method. Prior to the
Company's acquisition of a majority interest in OfficeMax de Mexico as of the
end of fiscal year 1999, the Company accounted for this joint venture under the
equity method. The operations of the Company's joint venture in Mexico,
OfficeMax de Mexico are now included in the International segment. Accordingly,
the Company does not report segment information for the International segment
for periods prior to fiscal year 2000. Included in the Domestic segment's
results for fiscal year 1999 is $594,000 of income related to the Company's
equity investment in OfficeMax de Mexico. As of the beginning of fiscal year
2001, OfficeMax completed its previously announced business integration and
aligned its domestic eCommerce operations, catalog business and outside sales
groups with its superstores in order to more efficiently leverage its various
direct business channels. As a result of this process, management now evaluates
performance and allocates resources based on an integrated view of its domestic
operations and no longer reports segment information for any of its non-retail
business channels. All prior year amounts have been restated to include
OfficeMax.com and the former Computer Business segment within the Company's
Domestic segment and reflect the separate presentation of the Company's
International segment.
The accounting policies of the Company's business segments are the same
as those described in the Summary of Significant Accountings Policies (Note 1 of
Notes to Consolidated Financial Statements). The combined results of operations
and assets of the Company's business segments are equal to the Company's
consolidated results of operations and assets.
F-20
The following table summarizes the results of operations for the
Company's business segments: (Dollars in thousands)
- ------------------------------------------------- ---- ----------------- -- ----------------- -- -----------------
FISCAL YEAR 2001 TOTAL COMPANY DOMESTIC INTERNATIONAL
- ------------------------------------------------- ---- ----------------- -- ----------------- -- -----------------
Sales $4,636,024 $4,495,440 $ 140,584
Cost of merchandise sold, including buying and
occupancy 3,546,216 3,439,216 107,000
Inventory liquidation 3,680 3,680 -
Gross profit 1,086,128 1,052,544 33,584
Store closing and asset impairment 76,761 76,761 -
Operating income (loss) (201,916) (207,045) 5,129
Interest expense (income), net 14,084 15,744 (940)
Other, net 61 61 -
Income tax benefit (80,912) (80,912) -
Valuation allowance 170,616 170,616 -
Minority interest 2,973 - 2,973
Net income (loss) $ (309,458) $ (312,554) $ 3,096
================= == ================= == =================
FISCAL YEAR 2000
- ------------------------------------------------- ---- ----------------- -- ----------------- -- -----------------
Sales $5,133,925 $5,017,656 $ 116,269
Cost of merchandise sold, including buying and
occupancy 3,904,953 3,820,673 84,280
Inventory liquidation 8,244 8,244 -
Gross profit 1,220,728 1,188,739 31,989
Store closing and asset impairment 109,578 109,578 -
Operating income (loss) (193,550) (198,493) 4,943
Interest expense (income), net 16,493 17,711 (1,218)
Other, net 60 60 -
Income tax benefit (79,076) (79,076) -
Minority interest 2,139 - 2,139
Net income (loss) $ (133,166) $ (137,188) $ 4,022
================= == ================= == =================
The total assets of the International segment were approximately
$72,540,000 and $68,008,000 as of January 26, 2002 and January 27, 2001,
respectively. The total assets of the International segment included long-lived
assets, primarily fixed assets, of approximately $26,405,000 and $19,312,000 as
of January 26, 2002 and January 27, 2001, respectively. Depreciation expense for
the International segment was approximately $2,641,000 for fiscal year 2001 and
$2,029,000 for fiscal year 2000. Goodwill and the related amortization are
included in the Domestic segment.
The Company has a 19% interest in a joint venture that operated two
superstores in Brazil as of January 26, 2002. The Company accounts for the joint
venture on the cost basis and wrote-off its remaining investment in the joint
venture as well as receivables from the joint venture in the fourth quarter of
fiscal year 2001. The write-off totaled $5,631,000 and was included in the
charge for store closing and asset impairment reported in the Domestic segment.
During the first quarter of fiscal year 2002, the Company's joint venture in
Brazil closed its two superstores.
Other than its investments in joint venture partnerships, the Company
has no international sales or assets.
F-21
NOTE 13. QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS
Unaudited quarterly consolidated results of operations for the fiscal
years ended January 26, 2002 and January 27, 2001 are summarized as follows:
(Dollars in thousands, except per share data)
FISCAL YEAR 2001
(UNAUDITED)
- ------------------------------------------- -- ---------------- -- --------------- -- --------------- -- ---------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------- -- ---------------- -- --------------- -- --------------- -- ---------------
Sales $1,193,971 $ 978,759 $ 1,188,847 $1,274,447
Cost of merchandise sold,
including buying and
occupancy costs 903,683 735,170 906,129 1,001,234
Inventory liquidation - - - 3,680
---------------- --------------- --------------- ---------------
Gross profit 290,288 243,589 282,718 269,533
Store closing and asset impairment - - - 76,761
Operating loss (19,526) (32,871) (36,468) (113,051)
Loss before income taxes (24,913) (37,727) (39,209) (114,932)
Income tax benefit (9,134) (13,984) (14,714) (43,080)
Deferred tax valuation allowance - - - 170,616
Net loss $ (16,585) $ (23,996) $ (25,780) $(243,097)
Loss per common share:
Basic $ (0.15) $ (0.22) $ (0.23) $ (2.06)
Diluted $ (0.15) $ (0.22) $ (0.23) $ (2.06)
FISCAL YEAR 2000
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------- --- -------------- --- -------------- --- -------------- --- ---------------
Sales $ 1,341,078 $ 1,076,068 $ 1,299,454 $ 1,417,325
Cost of merchandise sold,
including buying and
occupancy costs 1,016,696 820,560 989,098 1,078,599
Inventory liquidation
- - - 8,244
-------------- -------------- -------------- ---------------
Gross profit 324,382 255,508 310,356 330,482
Store closing and asset impairment
- - - 109,578
Operating income (loss) 708 (33,795) (28,249) (132,214)
Loss before income taxes (1,141) (38,268) (33,124) (137,570)
Income tax expense (benefit) 253 (14,432) (12,045) (52,852)
Net loss $ (2,083) $(24,114) $(22,019) $(84,950)
Loss per common share:
Basic $ (0.02) $ (0.22) $ (0.20) $ (0.76)
Diluted $ (0.02) $ (0.22) $ (0.20) $ (0.76)
The results for the fourth quarter of fiscal 2001 include the finalization
of estimates for inventory shrink expense including the effects of the now
completed implementation of certain supply chain initiatives. Accordingly, the
Company reduced its year-end inventory balance by approximately $13,629,000 and
recorded additional cost of merchandise sold of an equal amount during the
fourth quarter of fiscal year 2001. Also during the fourth quarter of fiscal
year 2001, the Company recorded a $170,616,000 charge to establish a valuation
for its net deferred tax assets and net operating loss carryforwards.
F-22
NOTE 14. SHAREHOLDERS' EQUITY
SHAREHOLDER RIGHTS PLAN
During the first quarter of fiscal year 2000, the Company adopted a
Shareholder Rights Plan designed to protect its shareholders against "abusive
takeover tactics", by providing certain rights to its shareholders if any group
or person acquires more than 15 percent of the Company's common stock. The plan
was implemented by issuing one preferred share purchase right for each share of
common stock outstanding at the close of business on March 17, 2000, or issued
thereafter until the rights become exercisable. Each right will entitle the
holder to buy one one-thousandth of a participating preferred share at a $30
initial exercise price. Each fraction of a participating preferred share will be
equivalent to a share of the Company's common stock. The rights become
exercisable if any group acquires more than 15% of the outstanding OfficeMax
common stock or if a person or group begins a tender or exchange offer that
could result in such an acquisition.
REDEEMABLE PREFERRED SHARES
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,
voted on an as-converted to Common Shares basis (one vote per share) and did not
bear any interest or coupon. The Series A Shares were to 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 recognized 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 and a coupon rate of 7% per
annum, 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
since 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.
During the fourth quarter of fiscal year 2001, Gateway elected to
convert its Series A Shares, plus accrued preferred share accretion of
$2,115,000, into 9,366,109 common shares of the Company.
OfficeMax does not anticipate redeeming any of the Series B Shares
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.
F-23
NOTE 15. EARNINGS PER COMMON SHARE
Earnings per common share are calculated in accordance with the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("FAS 128"). FAS 128 requires the Company to report both basic earnings
per common share, which is based on the weighted average number of common shares
outstanding, and diluted earnings per common 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:
- ----------------------------------------------------- ----------------- -- ----------------- -- ----------------
FISCAL YEAR ENDED JANUARY 26, JANUARY 27, JANUARY 22,
(Dollars in thousands, except per share data) 2002 2001 2000
- ----------------------------------------------------- ----------------- -- ----------------- -- ----------------
Net income (loss) $ (309,458) $ (133,166) $ 10,041
Preferred stock accretion (1,546) (2,319) -
----------------- ----------------- ----------------
Net income (loss)
available to common $ (311,004) $ (135,485) $ 10,041
shareholders
Weighted average number of common shares
outstanding 114,308 112,738 113,578
Effect of dilutive securities:
Stock options - - 569
Restricted stock units - - 101
----------------- ----------------- ----------------
Weighted average number of common shares
outstanding and assumed
conversions 114,308 112,738 114,248
================= ================= ================
Basic earnings (loss) per common share $ (2.72) $ (1.20) $ 0.09
================= ================= ================
Diluted earnings (loss) per common share $ (2.72) $ (1.20) $ 0.09
================= ================= ================
All potentially dilutive common stock equivalents were excluded from
the calculation of diluted earnings per common share for fiscal years 2001 and
2000, because their effect would have been anti-dilutive due to the net loss
recognized in those periods. Options to purchase 13,815,790 common shares at a
weighted average exercise price of $7.88 and 81,607 restricted stock units were
excluded from the calculation of diluted earnings per common share for fiscal
year 2001. Options to purchase 14,856,623 common shares at a weighted average
exercise price of $8.09 and 148,463 restricted stock units were excluded from
the calculation of diluted earnings per common share for fiscal year 2000.
Options to purchase 7,470,000 common shares were excluded from the
calculation of diluted earnings per common share in fiscal year 1999, because
the exercise prices of the options were greater than the average market price.
These shares had a weighted average exercise price of $12.74.
F-24
OFFICEMAX, INC.
VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- ----------------------------- ----------------- --------------- ------------------------ ----------------
Deductions -
Balance Additions - Write-offs, Balance
at Beginning Charged to Payments and at End
(Dollars in thousands) of Period Expense Other Adjustments of Period
- ----------------------------- ----------------- --------------- ------------------------ ----------------
Valuation Allowance:
2001 $ - $ 170,616 $ - $ 170,616
2000 - - - -
1999 - - - -
S-1