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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 27, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission file number 1-13380
-------
OFFICEMAX, INC.
---------------
(Exact name of registrant as specified in its charter)
OHIO 34-1573735
---- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3605 WARRENSVILLE CENTER ROAD, SHAKER HEIGHTS, OHIO 44122
---------------------------------------------------------
(Address of principal executive offices)
(zip code)
(216) 471-6900
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Shares outstanding as of
Title of each class September 9, 2002
------------------- -----------------
Common Shares, without par value 113,118,284
OFFICEMAX, INC.
INDEX
Part I - Financial Information Page
------------------------------
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 25
Part II - Other Information
---------------------------
Item 1. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
OFFICEMAX, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
JULY 27, JANUARY 26,
2002 2002
----------- -----------
(Unaudited)
ASSETS
Current Assets:
Cash and equivalents $ 60,722 $ 76,751
Accounts receivable, net of allowances
of $933 and $974, respectively 81,589 87,511
Merchandise inventories 948,758 884,827
Other current assets 53,170 43,834
----------- -----------
Total current assets 1,144,239 1,092,923
Property and Equipment:
Buildings and land 35,933 35,725
Leasehold improvements 179,450 185,998
Furniture, fixtures and equipment 633,915 616,768
----------- -----------
Total property and equipment 849,298 838,491
Less: Accumulated depreciation (523,041) (479,204)
----------- -----------
Property and equipment, net 326,257 359,287
Other assets and deferred charges 11,997 8,799
Trademarks 3,541 3,503
Goodwill, net of accumulated amortization of $89,757 290,495 290,495
----------- -----------
$ 1,776,529 $ 1,755,007
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $ 406,952 $ 495,505
Accrued expenses and other liabilities 163,345 196,297
Accrued salaries and related expenses 53,455 50,705
Taxes other than income taxes 71,748 68,509
Credit facility 130,000 20,000
Redeemable preferred shares - Series B 21,750 21,750
Mortgage loan, current portion 125 122
----------- -----------
Total current liabilities 847,375 852,888
Mortgage loan 1,461 1,530
Other long-term liabilities 168,533 175,456
----------- -----------
Total liabilities 1,017,369 1,029,874
Commitments and contingencies - -
Minority interest 19,891 19,184
Shareholders' Equity:
Common stock, without par value; 200,000,000 shares
authorized; 134,760,638 and 134,284,054 shares issued
and outstanding, respectively 888,375 895,466
Deferred stock compensation (125) (29)
Cumulative translation adjustment 499 616
Retained deficit (57,433) (87,589)
Less: Treasury stock, at cost (92,047) (102,515)
----------- -----------
Total shareholders' equity 739,269 705,949
----------- -----------
$ 1,776,529 $ 1,755,007
=========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these balance sheets.
3
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
13 WEEKS ENDED 26 WEEKS ENDED
------------------------------ ------------------------------
JULY 27, JULY 28, JULY 27, JULY 28,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Sales $ 1,008,709 $ 978,759 $ 2,189,273 $ 2,172,730
Cost of merchandise sold, including
buying and occupancy costs 761,726 735,170 1,642,962 1,638,853
------------- ------------- ------------- -------------
Gross profit 246,983 243,589 546,311 533,877
Store operating and selling expenses 241,152 235,170 497,994 504,068
Pre-opening expenses 158 1,466 529 2,295
General and administrative expenses 35,169 37,361 69,182 74,984
Goodwill amortization - 2,463 - 4,927
Asset impairment 1,777 - 1,777 -
------------- ------------- ------------- -------------
Total operating expenses 278,256 276,460 569,482 586,274
Operating loss (31,273) (32,871) (23,171) (52,397)
Interest expense, net 2,125 4,757 3,466 10,157
Other expense, net - 99 - 86
------------- ------------- ------------- -------------
Loss before income taxes (33,398) (37,727) (26,637) (62,640)
Income tax benefit - (13,984) (57,500) (23,118)
Minority interest (36) 253 707 1,059
------------- ------------- ------------- -------------
Net income (loss) $ (33,362) $ (23,996) $ 30,156 $ (40,581)
============= ============= ============= =============
INCOME (LOSS) PER COMMON SHARE:
Basic $ (0.27) $ (0.22) $ 0.24 $ (0.37)
============= ============= ============= =============
Diluted $ (0.27) $ (0.22) $ 0.24 $ (0.37)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic 123,920,449 113,147,741 123,578,173 113,123,148
============= ============= ============= =============
Diluted 123,920,449 113,147,741 124,884,721 113,123,148
============= ============= ============= =============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
26 WEEKS ENDED
----------------------
JULY 27, JULY 28,
2002 2001
--------- ---------
CASH PROVIDED BY (USED FOR):
OPERATIONS
Net income (loss) $ 30,156 $ (40,581)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation and amortization 44,278 51,489
Asset impairment 1,777 -
Income taxes - (349)
Other, net 1,380 3,677
Changes in current assets and current liabilities:
(Increase) decrease in inventories (63,931) 106,592
Decrease in accounts payable (80,861) (123,150)
Decrease in accounts receivable 11,058 14,987
Decrease in accrued liabilities (9,022) (7,364)
Decrease in store closing reserve (14,152) (17,109)
Receivable for income tax refund (10,962) -
Other, net (4,318) (20,453)
--------- ---------
Net cash used for operations (94,597) (32,261)
--------- ---------
INVESTING
Capital expenditures (24,395) (22,878)
Other, net (3,240) (1,380)
--------- ---------
Net cash used for investing (27,635) (24,258)
--------- ---------
FINANCING
Increase in revolving credit facilities 110,000 51,000
Payments of mortgage principal (66) (63)
Decrease in overdraft balances (5,330) (67,123)
(Increase) decrease in advanced payments for leased
facilities (190) 1,106
Proceeds from the issuance of common stock, net 3,378 384
Other, net (594) 2,662
--------- ---------
Net cash provided by (used for) financing 107,198 (12,034)
--------- ---------
Effect of exchange rate changes on cash and equivalents (995) 4,066
--------- ---------
Net decrease in cash and equivalents (16,029) (64,487)
Cash and equivalents, beginning of the period 76,751 127,337
--------- ---------
Cash and equivalents, end of the period $ 60,722 $ 62,850
========= =========
SUPPLEMENTAL INFORMATION
Interest paid on debt $ 1,619 $ 10,817
========= =========
Taxes paid on income (excluding tax refunds) $ 120 $ 1,001
========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
OFFICEMAX, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Deferred Cumulative
Common Stock Translation Retained Treasury
Shares Compensation Adjustment Deficit Stock Total
--------- ------------ ---------- --------- --------- ---------
BALANCE AT JANUARY 26, 2002 $ 895,466 $ (29) $ 616 $ (87,589) $(102,515) $ 705,949
Comprehensive income:
Net income - - - 30,156 - 30,156
Cumulative translation adjustment - - (117) - - (117)
---------
Total comprehensive income 30,039
Issuance of common shares
under director plan (200) (206) - - 424 18
Exercise of stock options
(including tax benefit) (6,631) - - - 9,458 2,827
Sale of shares under employee
share purchase plan
(including tax benefit) (260) - - - 586 326
Amortization of deferred
compensation - 110 - - - 110
--------- --------- --------- --------- --------- ---------
BALANCE AT JULY 27, 2002 $ 888,375 $ (125) $ 499 $ (57,433) $ (92,047) $ 739,269
========= ========= ========= ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
6
OFFICEMAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE 13 AND 26 WEEKS ENDED
JULY 27, 2002 AND JULY 28, 2001
Significant Accounting and Reporting Policies
- ---------------------------------------------
1. The accompanying unaudited consolidated financial statements have been
prepared from the financial records of OfficeMax, Inc. and its subsidiaries
(the "Company" or "OfficeMax") and reflect all adjustments which are, in
the opinion of management, necessary to fairly present the results of the
interim periods covered in this report. The results for any interim period
are not necessarily indicative of the results to be expected for the full
fiscal year.
2. The Company's consolidated financial statements for the 13 and 26 weeks
ended July 27, 2002 and July 28, 2001 included in this Quarterly Report on
Form 10-Q have been prepared in accordance with the accounting policies
described in the Notes to Consolidated Financial Statements for the fiscal
year ended January 26, 2002 which were included in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission (File
No. 1-13380) on April 17, 2002 and as updated below in "Note 5 of Notes to
Consolidated Financial Statements." Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted in accordance with the
rules and regulations of the Securities and Exchange Commission. These
financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Form 10-K referred to
above. Certain reclassifications have been made to prior year amounts to
conform to the current presentation.
3. The Company's fiscal year ends on the Saturday prior to the last Wednesday
in January. Fiscal year 2002 ends on January 25, 2003 and includes 52
weeks. Fiscal year 2001 ended on January 26, 2002 and included 52 weeks.
4. At July 27, 2002, OfficeMax operated a chain of 968 superstores in 49
states, Puerto Rico and the U.S. Virgin Islands, and through a majority
interest in a joint venture in Mexico. 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 an offering of over 30,000 items through its
eCommerce site, OfficeMax.com, its direct-mail catalogs and its outside
sales force. The Company's domestic retail stores, OfficeMax.com, its
direct mail catalogs and its outside sales force are serviced by its three
PowerMax inventory distribution facilities, 18 delivery centers and two
national call/customer contact centers.
5. The following is an update of certain of the Company's significant
accounting policies.
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 expected to be generated by the asset over its remaining
useful life. If impairment exists, the carrying amount of the asset is
reduced to fair value or fair value less the cost to sell depending upon
whether the asset is held for use or disposal, respectively. The Company
evaluates possible impairment of long-lived assets for each of its retail
stores individually based on 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.
7
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.
As a result of a new accounting standard, FAS 142, that is effective for
the Company as of the beginning of fiscal year 2002, goodwill and
intangible assets with an indefinite useful life are no longer to be
amortized, but are tested for impairment at least annually. Accordingly,
the Company no longer amortizes its goodwill and is required to complete
the impairment test at least annually. The Company completed the initial
impairment test during the second quarter of fiscal year 2002 and
concluded that the fair value of both of the Company's reporting units
(Domestic and International) exceeded the carrying value as of January 27,
2002 and therefore no impairment existed at that date. See "Note 11 of
Notes to Consolidated Financial Statements" below for more information
regarding FAS 142.
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 reported at the point-of-sale to a customer
except in a limited number of states where state law specifies the Company
as the legal obligor. In such states, the revenue from the sale of extended
warranty contracts is recognized ratably over the contract period. The
costs associated with the extended warranty contracts are recognized in the
same period as the related revenue. The performance obligations and risk of
loss associated with extended warranty contracts sold by the Company are
assumed by a third party.
Vendor Income Recognition
The Company participates in various cooperative advertising and other
vendor marketing programs with its vendors. Income from cooperative
advertising programs is recognized as a reduction of advertising expense in
the period in which the related expense is incurred. Income from other
vendor marketing programs is recognized as a reduction of cost of
merchandise sold, unless the income represents a reimbursement of a
specific cost incurred by the Company, in which case the income is
recognized as a reduction of the related expense. The Company also
participates in various volume purchase rebate programs with its vendors.
These programs typically have a one-year term and offer increasing tiered
rebates based on the Company achieving certain purchase levels. The Company
recognizes income from volume purchase rebate programs as a reduction of
cost of merchandise sold as the related inventory is sold. For tiered
volume purchase rebate programs, the Company recognizes income based on
expected purchases during the rebate program period. The Company calculates
expected purchases during the rebate program period based on its
replenishment model which utilizes a product and store specific algorithm
that incorporates recent sales trends, upcoming promotional events and
other relevant data to project sales and the related replenishment
requirements. The Company revises its purchase expectations continuously
throughout the rebate program period. Any adjustments to income from volume
purchase rebate programs are recognized as a cumulative adjustment in the
period of the change.
Also see the accounting policies described in the Notes to Consolidated
Financial Statements for the fiscal year ended January 26, 2002 which were
included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission (File No. 1-13880) on April 17, 2002 for
a description of the Company's other significant accounting policies.
6. The components of the Company's comprehensive income (loss) are as follows:
(Dollars in thousands)
13 WEEKS ENDED 26 WEEKS ENDED
------------------------------- -------------------------
JULY 27, JULY 28, JULY 27, JULY 28,
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------
Net income (loss) $(33,362) $(23,996) $ 30,156 $(40,581)
Other comprehensive income (loss):
Cumulative translation adjustment 1,044 265 (117) 345
-------- -------- -------- --------
Comprehensive income (loss) $(32,318) $(23,731) $ 30,039 $(40,236)
======== ======== ======== ========
8
7. 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:
(Dollars in thousands, except per share data)
13 WEEKS ENDED 26 WEEKS ENDED
-------------------------------------- ---------------------------------------
JULY 27, JULY 28, JULY 27, JULY 28,
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (33,362) $ (23,996) $ 30,156 $ (40,581)
Preferred stock accretion - (773) - (1,546)
------------- ------------- ------------- -------------
Net income (loss) available
to common shareholders $ (33,362) $ (24,769) $ 30,156 $ (42,127)
============= ============= ============= =============
Weighted average number of
common shares outstanding 123,920,449 113,147,741 123,578,173 113,123,148
Effect of dilutive securities:
Stock options - - 1,255,341 -
Restricted stock units - - 51,207 -
------------- ------------- ------------- -------------
Weighted average number of
common shares outstanding
and assumed conversions 123,920,449 113,147,741 124,884,721 113,123,148
============= ============= ============= =============
Income (loss) per common share-Basic $ (0.27) $ (0.22) $ 0.24 $ (0.37)
============= ============= ============= =============
Income (loss) per common share-Diluted $ (0.27) $ (0.22) $ 0.24 $ (0.37)
============= ============= ============= =============
Options to purchase 15,802,829 common shares at a weighted average exercise
price of $7.74 and 51,207 restricted stock units were excluded from the
calculation of diluted earnings per common share for the 13 weeks ended
July 27, 2002, because their effect would have been anti-dilutive due to
the net loss recognized in that period. Options to purchase 12,888,847
common shares were excluded from the calculation of diluted earnings per
common share for the 26 weeks ended July 27, 2002 because the exercise
prices of these options were greater than the average market price. The
weighted average exercise price of these options was $8.75.
Options to purchase 14,873,989 common shares at a weighted average exercise
price of $7.82 and 93,489 restricted stock units were excluded from the
calculation of diluted earnings per common share for the 13 and 26 weeks
ended July 28, 2001, because their effect would have been anti-dilutive due
to the net loss recognized in those periods.
9
8. The Company has two business segments: Domestic and International. The
Company's operations in the United States, Puerto Rico and the U.S. Virgin
Islands 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 majority owned joint venture in
Mexico, OfficeMax de Mexico, are included in the International segment.
The following table summarizes the results of operations for the Company's
business segments for the 13 weeks ended July 27, 2002 and July 28, 2001:
(Dollars in thousands)
TOTAL
13 WEEKS ENDED JULY 27, 2002 COMPANY DOMESTIC INTERNATIONAL
- ----------------------------------------------------------------------------------------------------
Sales $ 1,008,709 $ 972,741 $ 35,968
Cost of merchandise sold, including
buying and occupancy costs 761,726 733,362 28,364
----------- ----------- -----------
Gross profit 246,983 239,379 7,604
Operating loss (31,273) (31,063) (210)
Interest expense (income), net 2,125 2,260 (135)
Minority interest (36) - (36)
----------- ----------- -----------
Net loss $ (33,362) $ (33,323) $ (39)
=========== =========== ===========
13 WEEKS ENDED JULY 28, 2001
- ----------------------------------------------------------------------------------------------------
Sales $ 978,759 $ 949,557 $ 29,202
Cost of merchandise sold, including
buying and occupancy costs 735,170 714,066 21,104
----------- ----------- -----------
Gross profit 243,589 235,491 8,098
Operating loss (32,871) (32,774) (97)
Interest expense (income), net 4,757 5,252 (495)
Other (income) expense, net 99 (17) 116
Income tax benefit (13,984) (13,984) -
Minority interest 253 - 253
----------- ----------- -----------
Net income (loss) $ (23,996) $ (24,025) $ 29
=========== =========== ===========
10
The following table summarizes the results of operations for the Company's
business segments for the 26 weeks ended July 27, 2002 and July 28, 2001:
(Dollars in thousands)
TOTAL
26 WEEKS ENDED JULY 27, 2002 COMPANY DOMESTIC INTERNATIONAL
----------------------------------------------------------------------------------------------
Sales $ 2,189,273 $ 2,115,041 $ 74,232
Cost of merchandise sold, including
buying and occupancy costs 1,642,962 1,585,456 57,506
----------- ----------- -----------
Gross profit 546,311 529,585 16,726
Operating income (loss) (23,171) (24,305) 1,134
Interest expense (income), net 3,466 3,774 (308)
Income tax benefit (57,500) (57,500) -
Minority interest 707 - 707
----------- ----------- -----------
Net income $ 30,156 $ 29,421 $ 735
=========== =========== ===========
26 WEEKS ENDED JULY 28, 2001
----------------------------------------------------------------------------------------------
Sales $ 2,172,730 $ 2,109,126 $ 63,604
Cost of merchandise sold, including
buying and occupancy costs 1,638,853 1,592,394 46,459
----------- ----------- -----------
Gross profit 533,877 516,732 17,145
Operating income (loss) (52,397) (53,640) 1,243
Interest expense (income), net 10,157 10,842 (685)
Other expense, net 86 86 -
Income tax benefit (23,118) (23,118) -
Minority interest 1,059 - 1,059
----------- ----------- -----------
Net income (loss) $ (40,581) $ (41,450) $ 869
=========== =========== ===========
The total assets of the International segment were approximately
$81,808,000 and $76,239,000 as of July 27, 2002 and January 26, 2002,
respectively. The total assets of the International segment included
long-lived assets, primarily fixed assets, of approximately $26,498,000 and
$26,405,000 as of July 27, 2002 and January 26, 2002, respectively.
Included in the total assets of the International segment was goodwill, net
of accumulated amortization, of $3,699,000 as of July 27, 2002 and January
26, 2002. Depreciation expense for the International segment was
approximately $861,000 and $1,699,000 for the 13 and 26 weeks ended July
27, 2002, respectively, and $757,000 and $1,488,000 for the 13 and 26 weeks
ended July 28, 2001, respectively.
The Company has a 19% interest in a Brazilian company that operated two
superstores in Brazil. During the first quarter of fiscal year 2002, the
Brazilian company closed its two superstores and ceased operations. The
Company accounts for its investment in the Brazilian company on the cost
basis and wrote-off its remaining investment as well as receivables from
the Brazilian company 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. The Company
includes its investments accounted for under the cost or equity methods,
including its investment in the Brazilian company, in the Domestic
segment.
11
9. 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 these 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.
During the first quarter of fiscal year 2002, the 29 stores completed the
liquidation process and were closed. The results of operations for the 29
closed stores were assumed by a third-party liquidator and, accordingly,
were not included in the Company's consolidated results of operations after
January 26, 2002.
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. 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 superstores due to changes in
competitive and market conditions and reversed the reserve originally
recorded for costs to close those stores. In total, approximately
$3,077,000 of the original reserve recorded in fiscal year 2000 was
reversed during the fourth quarter of fiscal year 2001, primarily as a
result of the two stores the Company elected not to close and certain
equipment lease termination costs that were lower than expected. The
results of operations for 46 of the 48 closed stores were assumed by a
third-party liquidator and, accordingly, were not included in the Company's
consolidated results of operations after January 27, 2001.
A reconciliation of major components of the Company's store closing
reserve is as follows:
(Dollars in thousands)
BALANCE BALANCE
JANUARY 26, PAYMENT / JULY 27,
2002 USAGE 2002
-----------------------------------------------------------------------------------------
Lease disposition $122,304 $ 10,685 $111,619
Other closing costs, including severance 7,218 3,467 3,751
-------- -------- --------
Total $129,522 $ 14,152 $115,370
======== ======== ========
As of July 27, 2002 and January 26, 2002, $90,590,000 and $98,035,000 of
the store closing reserve, respectively, was included in other long-term
liabilities. Lease disposition cost included in the reserve for store
closing costs includes the aggregate straight-line rent expense for the
closed stores net of expected future sublease income of $100,991,000 and
$101,389,000 as of July 27, 2002 and January 26, 2002, respectively.
10. 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 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 some portion or the remainder of the
allowance. 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.
12
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. During
the first quarter of fiscal year 2002, the Company reversed a portion of
the valuation allowance recorded during the fourth quarter of fiscal year
2001 and recognized an income tax benefit equal to the amount of expected
additional net operating loss carryback of $57,500,000. As of July 27,
2002, the valuation allowance was $123,918,000, which represents a full
valuation allowance of the Company's net deferred tax assets and net
operating loss carryforwards. The Company received a refund for the
majority of the additional net operating loss carryback during May 2002 and
a second refund was received during August 2002. The Company expects to
receive the remainder of the refund for the additional net operating loss
carryback during fiscal year 2002. As of July 27, 2002, a receivable for
the $10,962,000 income tax refund was included in other current assets.
11. In July 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 141, "Accounting for Business Combinations" ("FAS 141") and
Statement No. 142, "Goodwill and Other Intangibles" ("FAS 142"). These
Statements modify accounting for business combinations and address the
accounting for goodwill and other intangible assets. The provisions of FAS
141 are effective for business combinations initiated after June 30, 2001.
The provisions of FAS 142 are effective for fiscal years beginning after
December 15, 2001, and are effective for interim periods in the initial
year of adoption. FAS 142 specifies that, among other things, goodwill and
intangible assets with an indefinite useful life will no longer be
amortized. The standard requires goodwill and intangible assets with an
indefinite useful life to be periodically tested for impairment 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 no longer amortizes its goodwill and was required to complete the
first step of 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 must be performed to measure
the amount of the impairment loss, if any. The Company engaged a financial
advisory firm to prepare certain analyses regarding the fair value of the
Company's reporting units (Domestic and International) and to perform the
first step of the impairment test. In developing its analyses, the
financial advisory firm reviewed plans prepared by management, interviewed
senior managers of the Company and performed independent research. Based on
a review of the analyses prepared by the financial advisory firm and its
own reviews, management has concluded that the fair value of both of the
Company's reporting units exceeded the carrying value as of January 27,
2002 and therefore no impairment existed at that date. Because both of the
Company's reporting units satisfied the requirements of the first step of
the impairment test, the second step of the impairment test is not
necessary. In the future, the Company will be required to complete the
impairment test annually.
13
The following table presents the transitional disclosures required by
FAS 142:
(Dollars in thousands, except per share data)
13 WEEKS ENDED 26 WEEKS ENDED
-----------------------------------------------------------------------------
JULY 27, JULY 28, JULY 27, JULY 28,
2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------------------
Reported net income (loss) $ (33,362) $ (23,996) $ 30,156 $ (40,581)
Add back: Amortization of goodwill - 2,463 - 4,927
---------------- ---------------- ---------------- ----------------
Adjusted net income (loss) $ (33,362) $ (21,533) $ 30,156 $ (35,654)
================ ================ ================ ================
BASIC EARNINGS PER COMMON SHARE:
Reported net income (loss) $ (0.27) $ (0.22) $ 0.24 $ (0.37)
Add back: Amortization of goodwill - 0.02 - 0.04
---------------- ---------------- ---------------- ----------------
Adjusted net income (loss) $ (0.27) $ (0.20) $ 0.24 $ (0.33)
================ ================ ================ ================
DILUTED EARNINGS PER COMMON SHARE:
Reported net income (loss) $ (0.27) $ (0.22) $ 0.24 $ (0.37)
Add back: Amortization of goodwill - 0.02 - 0.04
---------------- ---------------- ---------------- ----------------
Adjusted net income (loss) $ (0.27) $ (0.20) $ 0.24 $ (0.33)
================ ================ ================ ================
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
RESULTS OF OPERATIONS
- ---------------------
Sales for the 13 and 26 weeks ended July 27, 2002 increased to $1,008,709,000
and $2,189,273,000, respectively, from $978,759,000 and $2,172,730,000,
respectively, for the comparable prior year periods. Prior year sales included
revenues from the 29 stores that were closed as of the first day of the current
fiscal year. Excluding sales of these 29 closed stores from the comparable
prior year periods, sales for the 13 and 26 weeks increased approximately 5%
and 3%, respectively, primarily as a result of comparable-store sales increases
of approximately 3.4% and 1.3% during the 13 and 26 weeks ended July 27, 2002,
respectively, and new store openings. The second quarter of fiscal year 2002
marked the third consecutive quarter of sequential quarter-over-quarter
improvement in comparable-store sales. During the second quarter of the current
year, comparable-store sales improved approximately 300 and 600 basis points
over the first quarter of the current year and the fourth quarter of the prior
year, respectively. During the 13 weeks ended July 27, 2002, the number of
customer transactions at stores opened more than one year increased
approximately 4% over the comparable prior year period primarily as a result of
the Company's new merchandising and marketing initiatives, improved inventory
in-stock position and better in-store execution.
Cost of merchandise sold, including buying and occupancy costs, increased as a
percentage of sales to 75.5% for the 13 weeks ended July 27, 2002 from 75.1%
for the comparable period last year. Correspondingly, gross margin decreased
0.4% from the comparable prior year period to 24.5% of sales for the 13 weeks
ended July 27, 2002. Gross margin was slightly down, as anticipated, because of
a change in merchandise mix relating to the growing popularity of digital
photography and related items, combined with a planned clearance program.
Digital photography represents an expanded category for the Company which
carries a lower initial merchandise mark-up than OfficeMax's average product
mark-up. The normal seasonal merchandise clearance activity was increased
during the second quarter as a result of an on-going program of optimizing
products by reallocating shelf space and moving out slower moving items. The
impact of these lower gross margin items on gross profit is most significant
during the second quarter when sales of the Company's core office supply
merchandise are slowest. The effect of the shift in merchandise mix and planned
clearance program during the second quarter was partially offset by improved
leverage of freight expense and certain fixed occupancy costs included in cost
of merchandise sold. For the 26 weeks ended July 27, 2002, cost of merchandise
sold, including buying costs decreased 0.4% from the comparable period last
year to 75.0%. Correspondingly, gross margin increased to 25.0% of sales for
the 26 weeks ended July 27, 2002 from 24.6% of sales for the comparable prior
year period. The increase in gross margin as a percentage of sales during the
first half of fiscal year 2002 was due primarily to improved leverage of
certain fixed occupancy costs included in cost of merchandise sold and the
continued realization of efficiencies in the Company's PowerMax supply-chain
network.
Store operating and selling expenses, which consist primarily of store payroll,
operating and advertising expenses, increased to $241,152,000 for the 13 weeks
ended July 27, 2002 from $235,170,000 for the 13 weeks ended July 28, 2001. For
the 26 weeks ended July 27, 2002, store operating and selling expenses decreased
to $497,994,000 from $504,068,000 for the 26 weeks ended July 28, 2001. As a
percentage of sales, store operating and selling expenses decreased to 23.9% and
22.8% for the 13 and 26 weeks ended July 27, 2002, respectively, from 24.0% and
23.2% for the comparable periods last year. The decrease in store operating and
selling expenses as a percentage of sales was primarily due to the closing of 29
underperforming superstores as of the first day of the current fiscal year and
improved leverage of store-level payroll, including incremental costs associated
with in-store initiatives. The improved payroll leverage was partially offset by
an increase in advertising expense, net of vendor funding, which increased in
both absolute dollars and as a percentage of sales during the second quarter of
fiscal year 2002 as compared to the comparable prior year period.
General and administrative expenses decreased to $ 35,169,000, or 3.5% of sales,
and $69,182,000, or 3.2% of sales, for the 13 and 26 weeks ended July 27, 2002,
respectively, from $37,361,000, or 3.8% of sales, and $74,984,000, or 3.5% of
sales, for the 13 and 26 weeks ended July 28, 2001, respectively. The decrease
in general and administrative expenses was primarily due to the Company's
continued expense control programs.
15
Pre-opening expenses were $158,000 and $529,000 for the 13 and 26 weeks ended
July 27, 2002, respectively, and $1,466,000 and $2,295,000 for the comparable
periods last year. Pre-opening expenses, which consist primarily of store
payroll, supplies and grand opening advertising are expensed as incurred. During
the second quarter of the current fiscal year, the Company opened one new
domestic superstore. During the second quarter of last year, the Company opened
six new domestic superstores and one new superstore in Mexico. The Company
opened five new domestic superstores and one new superstore in Mexico through
its joint venture during the first half of the current fiscal year. During the
first half of last year, the Company opened 12 new domestic superstores,
completed the expansion of its PowerMax distribution facility in Las Vegas for
which the Company incurred pre-opening expenses of $296,000 and opened two new
superstores in Mexico.
As a result of a new accounting standard, FAS 142, that was effective for the
Company as of the beginning of fiscal year 2002, goodwill and intangible assets
with an indefinite useful life are no longer amortized, but are tested for
impairment at least annually. Accordingly, no amortization was recorded for the
13 and 26 weeks ended July 27, 2002. Goodwill amortization was $2,463,000 and
$4,927,000 for the 13 and 26 weeks ended July 28, 2001. Prior to fiscal year
2002, goodwill was capitalized and amortized over 10 - 40 years using the
straight-line method. See "Note 11 of Notes to Consolidated Financial
Statements" above for more information regarding FAS 142.
As a result of the foregoing factors, the Company incurred operating losses of
$31,273,000 and $23,171,000 for the 13 and 26 weeks ended July 27, 2002,
respectively, compared to operating losses of $32,871,000 and $52,397,000 for
the comparable periods last year.
Interest expense, net, was $2,125,000 and $3,466,000 for the 13 and 26 weeks
ended July 27, 2002, as compared to $4,757,000 and $10,157,000 for the
comparable periods last year. The decrease in interest expense was primarily due
to lower average outstanding borrowings during the first half of the current
fiscal year as compared to the same period last year and lower interest rates on
the Company's outstanding borrowings.
In accordance with the provisions of FAS 109, the Company recorded a 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
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 some portion or the remainder of the allowance.
Until such time, except for state, local and foreign tax provisions, the Company
will have no reported tax provision, net of valuation allowance adjustments. See
"Note 10 of Notes to Consolidated Financial Statements" above for more
information regarding the charge and the valuation allowance.
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 to five years from two years for net operating losses incurred during
the Company's taxable years ended in 2001 and 2000. During the first quarter of
fiscal year 2002, the Company reversed a portion of the valuation allowance for
its net deferred tax assets and net operating loss carryforwards recorded
during the fourth quarter of fiscal year 2001 and recognized an income tax
benefit equal to the amount of expected additional net operating loss carryback
of $57,500,000. See "Note 10 of Notes to Consolidated Financial Statements"
above for more information regarding the income tax benefit recognized during
the first half of fiscal year 2002.
As a result of the foregoing factors, the Company had pre-tax losses, net of
minority interest, of $33,362,000 and $27,344,000 for the 13 and 26 weeks ended
July 27, 2002, respectively, compared to pre-tax net losses, net of minority
interest, of $37,980,000 and $63,699,000 for the comparable periods last year.
The Company had a net loss of $33,362,000 and net income of $30,156,000 for the
13 and 26 weeks ended July 27, 2002, respectively, compared to net losses of
$23,996,000 and $40,581,000 for the comparable periods last year.
16
BUSINESS SEGMENTS
- -----------------
Domestic Segment
Sales for the Domestic segment were $972,741,000 and $2,115,041,000 for the 13
and 26 weeks ended July 27, 2002, respectively, as compared to $949,557,000 and
$2,109,126,000 for the like periods last year. Excluding sales for the 29 closed
stores, sales for the Domestic segment increased approximately $39,126,000 and
$42,101,000 over the comparable periods last year. The increase in sales for the
Domestic segment during the 13 and 26 weeks ended July 27, 2002 was primarily
due to an increase in comparable-store sales of approximately 3.2% during the
second quarter of fiscal year 2002 and the sales from 10 (net) new domestic
superstores opened since the end of the second quarter of fiscal year 2001.
Comparable-store sales for the Domestic segment increased approximately 1.2% for
the first six months of the current fiscal year and were flat for the first
quarter of fiscal year 2002.
Gross profit for the Domestic segment was $239,379,000, or 24.6% of sales, and
$529,585,000, or 25.0% of sales, for the 13 and 26 weeks ended July 27, 2002,
respectively, compared to $235,491,000, or 24.8% of sales, and $516,732,000, or
24.5% of sales, for the 13 and 26 weeks ended July 28, 2001, respectively.
Gross profit during the second quarter of the current year was slightly down as
a percentage of sales compared to the prior year second quarter, as
anticipated, because of a change in merchandise mix relating to the growing
popularity of digital photography and related items, combined with a planned
clearance program. Digital photography represents an expanded category for the
Company which carries a lower initial merchandise mark-up than OfficeMax's
average product mark-up. The normal seasonal merchandise clearance activity was
increased during the second quarter as a result of an on-going program of
optimizing products by reallocating shelf space and moving out slower moving
items. The impact of these lower margin items on gross profit is most
significant during the second quarter when sales of the Company's core office
supply merchandise are slowest. The effect of the shift in merchandise mix and
the planned clearance program during the second quarter was partially offset by
improved leverage of certain fixed occupancy costs included in cost of
merchandise sold and the continued realization of efficiencies in the Company's
PowerMax supply-chain network. The improved fixed-cost leverage and
supply-chain efficiencies also contributed to a 50 basis point year-over-year
improvement in gross profit as a percentage of sales during the first half of
fiscal year 2002.
As a result of a new accounting standard, FAS 142, no amortization was recorded
for the 13 and 26 weeks ended July 27, 2002. Goodwill amortization was
$2,346,000 and $4,694,000 for the Domestic segment in the comparable periods
last year. See "Note 11 of Notes to Consolidated Financial Statements" above for
more information regarding FAS 142.
Operating results for the Domestic segment were operating losses of $31,063,000
and $24,305,000 for the 13 and 26 weeks ended July 27, 2002, respectively,
compared to operating losses of $32,774,000 and $53,640,000 for the comparable
periods last year. The decrease in operating losses was primarily due to
improved leverage of store operating and selling expenses and general and
administrative expenses.
As described above, during the first quarter of fiscal year 2002, the Company
reversed a portion of the valuation allowance for its net deferred tax assets
and net operating loss carryforwards recorded during the fourth quarter of
fiscal year 2001 and recognized an income tax benefit equal to the amount of
expected additional net operating loss carryback of $57,500,000. Other than the
benefit for additional net operating loss carryback, the Domestic segment had no
reported tax provision, net of valuation allowance adjustments. See "Note 10 of
Notes to Consolidated Financial Statements" above for more information regarding
the income tax benefit recognized during the first half of fiscal year 2002.
The Domestic segment had pre-tax losses of $33,323,000 and $28,079,000 for the
13 and 26 weeks ended July 27, 2002, respectively, compared to pre-tax losses of
$38,009,000 and $64,568,000 for the comparable periods last year. The Domestic
segment had a net loss of $33,323,000 and net income of $29,421,000 for the 13
and 26 weeks ended July 27, 2002, respectively, compared to net losses of
$24,025,000 and $41,450,000 for the comparable periods last year.
17
International Segment
Sales for the International segment increased 23% to $35,968,000 and 17% to
$74,232,000 for the 13 and 26 weeks ended July 27, 2002, respectively, from
$29,202,000 and $63,604,000 for the comparable periods last year. The increases
in sales are primarily due to comparable-store sales growth of 8% in the second
quarter and 3% for the first half of fiscal year 2002, and the sales from four
(net) new superstores opened since the end of the second quarter of fiscal year
2001. Comparable-store sales for the International segment were impacted by the
change in currency exchange rates during the second quarter of fiscal year 2002.
In local currency, comparable-store sales increased 11% in the second quarter of
fiscal year 2002. See "Item 3 Quantitative and Qualitative Disclosures About
Market Risk" below for more information regarding foreign currency exchange
rates.
Gross profit for the International segment was $7,604,000, or 21.1% of sales,
and $16,726,000, or 22.5% of sales, for the 13 and 26 weeks ended July 27,
2002, respectively, compared to $8,098,000, or 27.7% of sales, and $17,145,000,
or 27.0% of sales, for the comparable prior year periods. The decrease in gross
profit as a percentage of sales was primarily due to an increase in the sale of
technology and peripheral products which generate lower margins than sales of
office supply products and furniture. Gross profit as a percentage of sales was
also negatively impacted by the effect of currency exchange rate changes on the
cost of products sourced from the United States during the second quarter of
fiscal year 2002. Further, gross profit during the second quarter of the prior
year benefited from favorable physical inventory adjustments.
As a result of a new accounting standard, FAS 142, no goodwill amortization was
recorded for the 13 and 26 weeks ended July 27, 2002. Goodwill amortization was
$117,000 and $233,000 for the International segment in the comparable periods
last year. See "Note 11 of Notes to Consolidated Financial Statements" above for
more information regarding FAS 142.
Operating results for the International segment was a loss of $210,000 for the
13 weeks ended July 27, 2002, compared to a loss of $97,000 for the comparable
period last year. The International segment had operating income of $1,134,000,
or 1.5% of sales, for the 26 weeks ended July 27, 2002, compared to operating
income of $1,243,000, or 2.0% of sales, for the comparable period last year. The
decrease in year-to-date 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 (loss) of the International segment was
($36,000) and $707,000 for the 13 and 26 weeks ended July 27, 2002,
respectively, compared to $253,000 and $1,059,000 for the 13 and 26 weeks ended
July 28, 2001, respectively.
The International segment incurred a net loss of $39,000 for the 13 weeks ended
July 27, 2002, compared to net income of $29,000 for the comparable prior year
period. The International segment had net income of $735,000 and $869,000 for
the 26 weeks ended July 27, 2002 and July 28, 2001, respectively.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's operating activities used $94,597,000 of cash during the 26 weeks
ended July 27, 2002, primarily for the purchase of inventory which increased
$63,931,000, and the payment of accounts payable, which decreased $80,861,000,
since the end of the prior fiscal year. The increase in inventory was due to
the seasonal build-up of inventory prior to the back-to-school selling season
and accelerated purchases of imported merchandise for the back-to-school
selling period. The decrease in accounts payable since the end of the prior
fiscal year is also consistent with seasonal fluctuations in inventory
turnover, which is generally slower during the first and second quarters, and
the related decrease in accounts payable-to-inventory leverage. Year-over-year
accounts payable-to-inventory leverage increased to 42.9% from 38.1%, and
inventory turns increased to 3.7 times per year from 3.2 times per year,
primarily as a result of the Company's continued supply-chain management
initiatives. Also, due to enhanced replenishment processes and a strong
financial condition, the Company continued to achieve more favorable terms with
its vendors, and in some instances elected to take special discounts and forego
extended terms during the second quarter of fiscal year 2002. Inventory
decreased $103,739,000 in total, or 9% on a per-store basis, compared to the
second quarter of the prior fiscal year. The Company's operating activities
used $32,261,000 of cash during the 26 weeks ended July 28, 2001. Prior year
operating activities primarily represent the payment of accounts payable of
$123,150,000 net of a decrease in inventory of $106,592,000. The prior year
inventory reduction was due to supply-chain management initiatives that
resulted in a full year inventory reduction of $275,000,000. These inventory
efficiencies were partially offset by the prior year second quarter seasonal
inventory increase.
18
Net cash used for investing activities was $27,635,000 for the 26 weeks ended
July 27, 2002 versus $24,258,000 for the comparable prior year period. Capital
expenditures, primarily for new superstores and the Company's information
technology initiatives, were $24,395,000 during the first half of fiscal year
2002 and $22,878,000 during the first half of fiscal year 2001. Other net
investing activities during the current year primarily represent the purchase of
the mortgage notes on two of the Company's properties for a face value of
approximately $5,000,000. 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.
Net cash provided by financing activities was $107,198,000 for the 26 weeks
ended July 27, 2002. Current year financing activities primarily represent
borrowings under the Company's revolving credit facility and a decrease in
overdraft balances (outstanding checks). Net cash used for financing activities
was $12,034,000 in the comparable prior year period primarily due to a decrease
in overdraft balances, partially offset by borrowings under the Company's
revolving credit facility. Year-over-year borrowings decreased $141,000,000 to
$130,000,000 as of July 27, 2002.
Management estimates that the Company's cash requirements for opening a
superstore, exclusive of pre-opening expenses, will typically be approximately
$900,000 per unit. For an OfficeMax superstore, the requirements include an
average of approximately $425,000 for leasehold improvements, fixtures,
point-of-sale terminals and other equipment, and approximately $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 during the remainder of fiscal year 2002. During fiscal year 2002,
the Company expects to open fewer domestic superstores than last year, all of
which will be opened by the holiday selling season. The Company's joint venture
in Mexico may open up to five new superstores during the remainder of the
current year. The Company expects total capital expenditures for the remainder
of fiscal year 2002, primarily for IT initiatives and new store openings, to
total approximately $35,000,000 to $40,000,000.
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 to five years from two years for net operating losses incurred during
the Company's taxable years ended in 2001 and 2000. During the first quarter of
fiscal year 2002, the Company reversed a portion of the valuation allowance for
its net deferred tax assets and net operating loss carryforwards recorded
during the fourth quarter of fiscal year 2001 and recognized an income tax
benefit equal to the amount of expected additional net operating loss carryback
of $57,500,000. The Company received a refund for the majority of the
additional net operating loss carryback during the second quarter of fiscal
year 2002. The Company expects to receive the remainder of the refund for the
expected additional net operating loss carryback during fiscal year 2002. See
"Note 10 of Notes to Consolidated Financial Statements" above for more
information regarding the income tax refund.
The Company expects its funds generated from operations as well as its current
cash reserves, and, when necessary, seasonal short-term borrowings, will be
sufficient to finance its operations and capital requirements in the foreseeable
future.
During the third quarter of fiscal year 2001, the Company's Domestic segment
established a reserve in the amount of $10,000,000 to provide for the expected
future settlement of a class action lawsuit in California regarding overtime
wages and the classification of exempt employees, as well as other legal
matters. During the second quarter of fiscal year 2002, the Company made cash
payments in settlement of the California overtime lawsuit of approximately
$7,100,000. Including settlement payments, legal fees and other costs, payments
associated with the California overtime lawsuit approximated the original
reserve established in the third quarter of fiscal year 2001.
19
In accordance with an amended and restated joint venture agreement, the
minority owner in the Company's joint venture 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 owner has indicated that it has no intentions to
exercise this right in fiscal year 2002. If the earnings targets are achieved
and the minority owner elects to put its ownership interest to the Company, the
purchase price would be equal to fair value calculated based on the joint
venture's earnings for the last four quarters before interest, taxes,
depreciation and amortization and current market multiples of similar
companies. Currently, the fair value purchase price would not be expected to
exceed $40,000,000 throughout fiscal year 2002.
During the fourth quarter of fiscal year 2000, the Company entered into a senior
secured revolving credit facility. During the first quarter of fiscal year 2002,
the Company extended the term of the revolving credit facility until February
27, 2004. The revolving credit facility is secured by a first priority perfected
security interest in the Company's inventory and certain accounts receivable and
provides for borrowings of up to $700,000,000 at the bank's base rate or
Eurodollar Rate plus 1.75% to 2.50% depending on the level of borrowing. As of
July 27, 2002, the Company had outstanding borrowings of $130,000,000 under the
revolving credit facility at a weighted average interest rate of 3.58%. Also
under this facility, the Company had $112,306,000 of standby letters of credit
outstanding as of July 27, 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. 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 July 27, 2002, the Company had
unused and available borrowings under the revolving credit facility of more than
$340,000,000.
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 July
27, 2002, the Company had purchased a total of 12,702,100 shares at a cost of
$113,619,000, including systematic purchases to cover potential dilution from
the issuance of shares under the Company's equity-based incentive plans. The
Company has not repurchased any common shares since fiscal year 1999.
The Company occupies 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. Synthetic operating leases are financial
structures that qualify under generally accepted accounting principles as
operating leases for financial reporting purposes and as debt financing for
income tax purposes. The Company leases the PowerMax facilities 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 Company has not
established any SPEs. No officers, directors or employees of the Company hold
any direct or indirect equity interest in such SPEs. The SPEs finance the cost
of the property through the issuance of commercial paper. 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 leases, 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. 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.
20
The Company's business is seasonal, with sales and operating income higher in
the third and fourth fiscal quarters, which include the back-to-school period
and the holiday selling season, respectively, followed by the traditional new
year office supply restocking month of January. Sales in the second fiscal
quarter's summer months are the slowest of the year primarily because of lower
office supplies consumption during the summer vacation period. Based on current
trends, management expects the Company's operations for the third quarter of
fiscal year 2002 to reflect continued year-over-year improvements and that
comparable-store sales during that quarter will increase over the same period a
year ago.
LEGAL PROCEEDINGS
- -----------------
There are various claims, lawsuits and pending actions against the Company
incidental to the Company's operations. Although litigation is inherently
subject to many uncertainties, it is the opinion of management that the ultimate
resolution of these matters will not have a material effect on the Company's
liquidity and financial position. However, in the event of an unanticipated
adverse final determination, the Company's consolidated net income for the
period in which such determination occurs could be materially affected. See
"Liquidity and Capital Resources" above and "Part II - Other Information; Item
1. Legal Proceedings" below.
GATEWAY ALLIANCE
- ----------------
In fiscal year 2000, Gateway Companies, Inc. ("Gateway") committed to operate
licensed store-within-a-store computer departments within all OfficeMax
superstores in the United States pursuant to a strategic alliance, which
included the terms of a Master License Agreement (the "MLA"). In connection with
the investment requirements of the strategic alliance, during the second quarter
of fiscal year 2000, Gateway invested $50,000,000 in OfficeMax convertible
preferred stock - $30,000,000 in Series A Voting Preference Shares (the "Series
A Shares") designated for OfficeMax and $20,000,000 in Series B Serial Preferred
Shares (the "Series B Shares") designated for OfficeMax.com.
The Series A Shares, which had a purchase price of $9.75 per share, 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. Accordingly, the
Company stopped recording the accretion of the Series A Shares and accruing
interest on the Series B Shares at that date. 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.
21
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 for the fiscal year ended January 26, 2002,
which were included in the Company's Annual Report on Form 10-K. Certain of the
Company's significant accounting policies are updated in this Quarterly Report
on Form 10-Q. See "Note 5 of Notes to Consolidated Financial Statements" above
for additional information regarding these accounting policies. 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,
an allowance for estimated shrinkage is provided based on various factors
including sales volume, the location's historical shrinkage results and current
trends. If actual losses as a result of inventory shrinkage are different than
management's estimates, adjustments to the Company's allowance for inventory
shrinkage may be required.
The Company records an allowance for future inventory cost markdowns to be
taken for inventory not expected to be part of its ongoing merchandise
offering. This allowance was $6,250,000 and $4,500,000 as of July 27, 2002 and
January 26, 2002, respectively. Management estimates the required allowance 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 in the fourth quarter of fiscal year 2001. 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 some portion or the remainder of the
allowance. 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 10 of Notes to Consolidated Financial
Statements" above for more information regarding the charge and the valuation
allowance.
22
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 expected to be generated by the asset over its remaining useful life.
If impairment exists, the carrying amount of the asset is reduced to fair value
or fair value less the cost to sell depending upon whether the asset is held for
use or disposal, respectively. The Company evaluates possible impairment of
long-lived assets for each of its retail stores individually based on
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 the second quarter of fiscal year
2002, the Company recorded an impairment loss of $1,777,000. If actual future
operating results or cash flows are different than management's estimates,
additional impairment losses may be required to be recorded.
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. As a result of a
new accounting standard, FAS 142, that is effective for the Company as of the
beginning of fiscal year 2002, goodwill and intangible assets with an
indefinite useful life are no longer to be amortized, but are tested for
impairment at least annually. Accordingly, the Company no longer amortizes its
goodwill and is required to complete the impairment test at least annually. The
Company completed the initial impairment test during the second quarter of
fiscal year 2002. To assist management in performing the impairment test, the
Company engaged a financial advisory firm to prepare certain analyses
regarding the fair value of the Company's reporting units (Domestic and
International). In developing its analyses, the financial advisory firm
reviewed plans prepared by management, interviewed senior managers of the
Company and performed independent research. Based on a review of the analyses
prepared by the financial advisory firm and its own reviews, management has
concluded that the fair value of both of the Company's reporting units exceeded
the carrying value as of January 27, 2002 and therefore no impairment existed at
that date. If actual future operating results or cash flows are different than
the estimates considered by the financial advisory firm and management when
performing the impairment test, an impairment loss, or write-off, of some
portion of the Company's goodwill may be required to be recorded. See "Note 11
of Notes to Consolidated Financial Statements" above for more information
regarding FAS 142.
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
- -----------------------------------------
In July 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" ("FAS 143"). FAS 143 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 its results of operations.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("FAS 146"). FAS 146 addresses
financial accounting and reporting for costs associated with exit or
23
disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)" ("Issue 94-3"). FAS 146
requires that a liability be recognized for those costs only when the liability
is incurred. In contrast, under Issue 94-3, a company recognized a liability for
an exit cost when it committed to an exit plan. FAS 146 also establishes fair
value as the objective for initial measurement of liabilities related to exit or
disposal activities. FAS 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. The Company is currently assessing the
financial statement impact, if any, of the adoption of this new standard.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
- ----------------------------------------------------------
This Quarterly Report on Form 10-Q 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, gross margin 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 of this report, are
subject to risks, uncertainties and other factors that could cause the
Company's actual results to differ materially from those stated, projected or
implied in the forward-looking statements. These risks and uncertainties
include the following: risks associated with general economic conditions
(including effects of additional terrorist attacks and hostilities, slower than
anticipated economic recovery and declining employment rate or other changes in
our customers' business environments, including an increase in bankruptcy
filings); increasing competition that includes office supply superstores,
warehouse clubs, contract stationers, electronics stores and mass merchant
retailers, as well as grocery and drug store chains; failure to adequately
execute plans and unforeseen circumstances beyond the Company's control in
connection with the development, implementation and execution of new business
processes, procedures and programs (including the Company's supply-chain
management program); greater than expected expenses associated with the
Company's activities; continuing shifts in merchandise mix related to digital
photography or other technology products which have a lower gross margin; the
results of continuing FAS 142 assessment; and other risks and uncertainties
described in Exhibit 99.1 of the Company's Annual Report on 10-K for the fiscal
year ended January 26, 2002, and in other reports and exhibits to reports filed
with the Securities and Exchange Commission (these descriptions are
incorporated herein by reference). You are strongly urged to review such
filings for a more detailed discussion of such risks and uncertainties. The
Company's SEC filings are available, at no charge, at www.sec.gov and
www.freeEDGAR.com, as well as on a number of other Web sites. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------
The Company is exposed to market risk, principally interest rate risk and
foreign exchange risk. Market risk can be measured as the potential negative
impact on earnings, cash flows or fair values resulting from a hypothetical
change in interest rates or foreign currency exchange rates over time.
Interest Rate 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 impact on cash and short-term investments held
at July 27, 2002 of a hypothetical 10% decrease in interest rates would not be
material to the Company's financial position or the results of its operations.
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. Market risk associated
with the Company's debt portfolio is summarized below:
(Dollars in thousands)
JULY 27, 2002
----------------------------------------------------
Carrying Risk
value Fair Value Sensitivity
- ---------------------------------------------------------------------------------------
Fixed interest rate debt,
including current maturities $ 1,586 $ 1,693 $ 37
Variable interest rate debt $130,000 $130,000 $ 242
The risk sensitivity of fixed rate debt reflects the estimated increase in fair
value from a 50 basis point decrease in interest rates, calculated on a
discounted cash flow basis. The risk sensitivity of variable rate debt reflects
the hypothetical increase in interest expense during the first half of fiscal
year 2002 from a 50 basis point increase in interest rates prevailing during
that period.
Foreign Exchange Rate Risk
The Company is exposed to foreign exchange risk through its joint venture in
Mexico. A 10% change in the applicable foreign exchange rates would have
resulted in an increase or decrease in year-to-date operating profit of
approximately $100,000. Such a change in exchange rates would have also resulted
in an increase or decrease in the net assets of the joint venture of
approximately $2,000,000 as of July 27, 2002. 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.
25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- -------------------------
The Company is 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 filed a motion
requesting the court to reconsider its dismissal of these cases, which motion
was denied by the court on July 26, 2002. On August 26, 2002, plaintiffs filed a
notice of appeal of the court's July 26, 2002 order and the court's March 27,
2002 order. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
A. The 2002 Annual Meeting of Shareholders of OfficeMax was held on May
21, 2002. Shareholders of record at the close of business on April 5,
2002, were entitled to vote at the Annual Meeting of Shareholders.
B. The following persons were nominated to serve, and were elected, as
directors of the Company to serve a term of two years or until their
successors are elected: Burnett Donoho, Lee Fisher, Michael Killeen,
Ivan Winfield, and Jacqueline Woods. The voting results for each
nominee were as follows:
Name For Withheld
---- --- --------
Burnett Donoho 110,247,190 3,160,582
Lee Fisher 110,209,234 3,198,538
Michael Killeen 110,260,287 3,147,485
Ivan Winfield 110,233,958 3,173,814
Jacqueline Woods 110,231,094 3,176,678
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
(a) Exhibits: None
(b) Reports on Form 8-K: A Current Report on Form 8-K was filed on
July 23, 2002 regarding the Company's
dismissal of PricewaterhouseCoopers LLP as
its independent accountants and the
engagement of KPMG LLP as the Company's
independent auditor for fiscal year 2002.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OFFICEMAX, INC.
Date: September 10, 2002 By: /s/ Michael F. Killeen
-----------------------
Michael F. Killeen
Senior Executive Vice President,
Chief Financial Officer
I, Michael Feuer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of OfficeMax, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 10, 2002
/s/ Michael Feuer
-----------------
Michael Feuer
Chairman and Chief Executive Officer
I, Michael F. Killeen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of OfficeMax, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 10, 2002
/s/ Michael F. Killeen
----------------------
Michael F. Killeen
Chief Financial Officer
27