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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 October 26, 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 December 6, 2002
------------------- ----------------
Common Shares, without par value 124,112,909
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
Item 4. Controls and Procedures 25
Part II - Other Information
---------------------------
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 26
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------------------------------
OFFICEMAX, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
OCTOBER 26, JANUARY 26,
2002 2002
----------------- ----------------
(Unaudited)
ASSETS
Current Assets:
Cash and equivalents $ 60,036 $ 76,751
Accounts receivable, net of allowances
of $924 and $974, respectively 86,557 87,511
Merchandise inventories 977,916 884,827
Other current assets 47,346 43,834
-------------- --------------
Total current assets 1,171,855 1,092,923
Property and Equipment:
Buildings and land 35,933 35,725
Leasehold improvements 180,873 185,998
Furniture, fixtures and equipment 639,031 616,768
-------------- --------------
Total property and equipment 855,837 838,491
Less: Accumulated depreciation (544,023) (479,204)
-------------- --------------
Property and equipment, net 311,814 359,287
Other assets and deferred charges 11,594 8,799
Trademarks 3,579 3,503
Goodwill, net of accumulated amortization of $89,757 290,495 290,495
-------------- --------------
$ 1,789,337 $ 1,755,007
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $ 481,423 $ 495,505
Accrued expenses and other liabilities 174,458 196,297
Accrued salaries and related expenses 57,435 50,705
Taxes other than income taxes 75,692 68,509
Credit facility 39,000 20,000
Redeemable preferred shares - Series B 21,750 21,750
Mortgage loan, current portion 127 122
-------------- --------------
Total current liabilities 849,885 852,888
Mortgage loan 1,426 1,530
Other long-term liabilities 166,245 175,456
-------------- --------------
Total liabilities 1,017,556 1,029,874
Commitments and contingencies -- --
Minority interest 18,637 19,184
Shareholders' Equity:
Common stock, without par value; 200,000,000 shares
authorized; 134,773,097 and 134,284,054 shares issued
and outstanding, respectively 888,046 895,466
Deferred stock compensation (64) (29)
Cumulative translation adjustment (2,399) 616
Retained deficit (40,921) (87,589)
Less: Treasury stock, at cost (91,518) (102,515)
-------------- --------------
Total shareholders' equity 753,144 705,949
-------------- --------------
$ 1,789,337 $ 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 39 WEEKS ENDED
--------------------------------- ----------------------------------
OCTOBER 26, OCTOBER 27, OCTOBER 26, OCTOBER 27,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Sales $ 1,258,361 $ 1,188,847 $ 3,447,634 $ 3,361,577
Cost of merchandise sold, including
buying and occupancy costs 940,697 906,129 2,583,659 2,544,982
------------- ------------- ------------- -------------
Gross profit 317,664 282,718 863,975 816,595
Store operating and selling expenses 265,840 280,314 763,834 784,382
General and administrative expenses 32,859 36,018 102,041 111,002
Pre-opening expenses 123 390 652 2,685
Goodwill amortization -- 2,464 -- 7,391
Asset impairment -- -- 1,777 --
------------- ------------- ------------- -------------
Total operating expenses 298,822 319,186 868,304 905,460
Operating income (loss) 18,842 (36,468) (4,329) (88,865)
Interest expense, net 1,280 2,766 4,746 12,923
Other (income) expense, net -- (25) -- 61
------------- ------------- ------------- -------------
Income (loss) before income taxes 17,562 (39,209) (9,075) (101,849)
Income tax benefit -- 14,714 57,500 37,832
Minority interest 1,050 1,285 1,757 2,344
------------- ------------- ------------- -------------
Net income (loss) $ 16,512 $ (25,780) $ 46,668 $ (66,361)
============= ============= ============= =============
INCOME (LOSS) PER COMMON SHARE:
Basic $ 0.13 $ (0.23) $ 0.38 $ (0.60)
============= ============= ============= =============
Diluted $ 0.13 $ (0.23) $ 0.37 $ (0.60)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic 124,011,459 113,218,671 123,722,642 113,161,739
============= ============= ============= =============
Diluted 124,789,814 113,218,671 124,867,491 113,161,739
============= ============= ============= =============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
39 WEEKS ENDED
---------------------------------------
OCTOBER 26, OCTOBER 27,
2002 2001
-------------- --------------
CASH PROVIDED BY (USED FOR):
OPERATIONS
Net income (loss) $ 46,668 $ (66,361)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation and amortization 67,308 76,926
Asset impairment 1,777 --
Deferred income taxes -- 12,226
Other, net (1,145) 9,669
Changes in current assets and current liabilities:
(Increase) decrease in inventories (95,971) 166,733
Decrease in accounts payable (10,271) (84,677)
Decrease in accounts receivable 11,337 26,358
Increase in accrued liabilities 12,672 8,822
Decrease in store closing reserve (18,267) (21,273)
Receivable for income tax refund (4,548) --
Other, net (11,117) (44,993)
-------------- --------------
Net cash (used for) provided by operations (1,557) 83,430
-------------- --------------
INVESTING
Capital expenditures (33,007) (32,461)
Other, net (2,905) (1,551)
-------------- --------------
Net cash (used for) investing (35,912) (34,012)
-------------- --------------
FINANCING
Increase (decrease) in revolving credit facilities 19,000 (79,600)
Payments of mortgage principal (99) (94)
Increase (decrease) in overdraft balances 10 (41,067)
(Increase) decrease in advanced payments for leased (190) 2,050
facilities
Proceeds from the issuance of common stock, net 3,578 570
Other, net (812) 1,054
-------------- --------------
Net cash provided by (used for) financing 21,487 (117,087)
-------------- --------------
Effect of exchange rate changes on cash and equivalents (733) 2,801
-------------- --------------
Net decrease in cash and equivalents (16,715) (64,868)
Cash and equivalents, beginning of the period 76,751 127,337
-------------- --------------
Cash and equivalents, end of the period $ 60,036 $ 62,469
============== ==============
SUPPLEMENTAL INFORMATION
Interest paid on debt $ 2,316 $ 13,650
============== ==============
Taxes paid on income (excluding tax refunds) $ 267 $ 1,070
============== ==============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
OFFICEMAX, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(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 -- -- -- 46,668 -- 46,668
Cumulative translation adjustment -- -- (3,015) -- -- (3,015)
-----------
Total comprehensive income 43,653
Issuance of common shares
under director plan (212) (206) -- -- 447 29
Exercise of stock options
(including tax benefit) (6,707) -- -- -- 9,571 2,864
Sale of shares under employee
share purchase plan
(including tax benefit) (501) -- -- -- 979 478
Amortization of deferred
compensation -- 171 -- -- -- 171
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT OCTOBER 26, 2002 $ 888,046 $ (64) $ (2,399) $ (40,921) $ (91,518) $ 753,144
=========== =========== =========== =========== =========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
6
OFFICEMAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE 13 AND 39 WEEKS ENDED
OCTOBER 26, 2002 AND OCTOBER 27, 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 39 weeks
ended October 26, 2002 and October 27, 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 October 26, 2002, OfficeMax operated a chain of 970 superstores in 49
states, Puerto Rico and the U.S. Virgin Islands and a subsidiary 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
operations, including its 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 significant accounting policies of
the Company.
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 the adoption of Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangibles" ("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 may no longer 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.
Therefore, no impairment existed at that date. The Company intends to
complete the annual impairment test during the fourth quarter of fiscal
year 2002. 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. Consideration received from
vendors for cooperative advertising programs is recognized as a reduction
of advertising expense in the period in which the related expense is
incurred. Consideration received from vendors for other vendor marketing
programs is recognized as a reduction of cost of merchandise sold, unless
the consideration represents a reimbursement of a specific cost incurred by
the Company, in which case the consideration 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 consideration
received from vendors for 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 the rebates 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 at least
quarterly throughout the rebate program period. See "Note 12 of Notes to
Consolidated Financial Statements" and "Part I - Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations;
Recently Issued Accounting Pronouncements" for additional information
regarding EITF Issue 02-16, "Accounting by a Customer (including a
Reseller) for Cash Consideration Received from a Vendor" which is
effective for new arrangements initiated after November 21, 2002 and
for fiscal periods beginning after December 15, 2002.
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 and
"Part I - Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations; Significant Accounting Policies" for
further information regarding certain of the Company's other significant
accounting policies.
8
6. The components of the Company's comprehensive income (loss) are as follows:
(In thousands)
13 WEEKS ENDED 39 WEEKS ENDED
------------------------------- ------------------------------
OCTOBER 26, OCTOBER 27, OCTOBER 26, OCTOBER 27,
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 16,512 $ (25,780) $ 46,668 $ (66,361)
Other comprehensive income (loss):
Cumulative translation adjustment (2,898) 500 (3,015) 845
------------- ------------- ------------- -------------
Comprehensive income (loss) $ 13,614 $ (25,280) $ 43,653 $ (65,516)
============= ============= ============= =============
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 39 WEEKS ENDED
------------------------------- --------------------------------
OCTOBER 26, OCTOBER 27, OCTOBER 26, OCTOBER 27,
2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 16,512 $ (25,780) $ 46,668 $ (66,361)
Preferred stock accretion -- -- -- (1,546)
------------- ------------- ------------- -------------
Net income (loss) available
to common shareholders $ 16,512 $ (25,780) $ 46,668 $ (67,907)
============= ============= ============= =============
Weighted average number of
common shares outstanding 124,011,459 113,218,671 123,722,642 113,161,739
Effect of dilutive securities:
Stock options 727,148 -- 1,093,642 --
Restricted stock units 51,207 -- 51,207 --
------------- ------------- ------------- -------------
Weighted average number of
common shares outstanding
and assumed conversions 124,789,814 113,218,671 124,867,491 113,161,739
============= ============= ============= =============
Income (loss) per common share-Basic $ 0.13 $ (0.23) $ 0.38 $ (0.60)
============= ============= ============= =============
Income (loss) per common share-Diluted $ 0.13 $ (0.23) $ 0.37 $ (0.60)
============= ============= ============= =============
9
Options to purchase 12,908,071 and 12,710,824 common shares were excluded
from the calculation of diluted earnings per common share for the 13 and 39
weeks ended October 26, 2002, respectively, because the exercise prices of
these options were greater than the average market price. The weighted
average exercise price of these options was $8.66 and $8.72, respectively.
Options to purchase 14,324,664 common shares at a weighted average exercise
price of $7.91 and 83,521 restricted stock units were excluded from the
calculation of diluted earnings per common share for the 13 and 39 weeks
ended October 27, 2001, because their effect would have been anti-dilutive
due to the net loss recognized in those periods.
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 subsidiary 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 October 26, 2002 and October 27,
2001:
(In thousands)
TOTAL
13 WEEKS ENDED OCTOBER 26, 2002 COMPANY DOMESTIC INTERNATIONAL
----------------------------------------------------------------------------------------------
Sales $ 1,258,361 $ 1,215,998 $ 42,363
Cost of merchandise sold, including
buying and occupancy costs 940,697 908,636 32,061
------------ ------------ ------------
Gross profit 317,664 307,362 10,302
Operating income 18,842 16,835 2,007
Interest expense (income), net 1,280 1,416 (136)
Minority interest 1,050 -- 1,050
------------ ------------ ------------
Net income $ 16,512 $ 15,419 $ 1,093
============ ============ ============
13 WEEKS ENDED OCTOBER 27, 2001
----------------------------------------------------------------------------------------------
Sales $ 1,188,847 $ 1,152,099 $ 36,748
Cost of merchandise sold, including
buying and occupancy costs 906,129 878,822 27,307
------------ ------------ ------------
Gross profit 282,718 273,277 9,441
Operating income (loss) (36,468) (38,971) 2,503
Interest expense (income), net 2,766 2,770 (4)
Other (income), net (25) (25) --
Income tax benefit 14,714 14,714 --
Minority interest 1,285 -- 1,285
------------ ------------ ------------
Net income (loss) $ (25,780) $ (27,002) $ 1,222
============ ============ ============
10
The following table summarizes the results of operations for the Company's
business segments for the 39 weeks ended October 26, 2002 and October 27,
2001:
(In thousands)
TOTAL
39 WEEKS ENDED OCTOBER 26, 2002 COMPANY DOMESTIC INTERNATIONAL
-----------------------------------------------------------------------------------------------
Sales $ 3,447,634 $ 3,331,039 $ 116,595
Cost of merchandise sold, including
buying and occupancy costs 2,583,659 2,494,092 89,567
------------ ------------ ------------
Gross profit 863,975 836,947 27,028
Operating income (loss) (4,329) (7,470) 3,141
Interest expense (income), net 4,746 5,190 (444)
Income tax benefit 57,500 57,500 --
Minority interest 1,757 -- 1,757
------------ ------------ ------------
Net income $ 46,668 $ 44,840 $ 1,828
============ ============ ============
39 WEEKS ENDED OCTOBER 27, 2001
-----------------------------------------------------------------------------------------------
Sales $ 3,361,577 $ 3,261,225 $ 100,352
Cost of merchandise sold, including
buying and occupancy costs 2,544,982 2,471,216 73,766
------------ ------------ ------------
Gross profit 816,595 790,009 26,586
Operating income (loss) (88,865) (92,611) 3,746
Interest expense (income), net 12,923 13,612 (689)
Other expense, net 61 61 --
Income tax benefit 37,832 37,832 --
Minority interest 2,344 -- 2,344
------------ ------------ ------------
Net income (loss) $ (66,361) $ (68,452) $ 2,091
============ ============ ============
The total assets of the International segment were approximately
$78,100,000 and $76,239,000 as of October 26, 2002 and January 26, 2002,
respectively. The total assets of the International segment included
long-lived assets, primarily fixed assets, of approximately $24,010,000 and
$26,405,000 as of October 26, 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 October 26, 2002 and
January 26, 2002. Depreciation expense for the International segment was
approximately $791,000 and $2,490,000 for the 13 and 39 weeks ended October
26, 2002, respectively, and $255,000 and $1,743,000 for the 13 and 39 weeks
ended October 27, 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:
(In thousands)
BALANCE BALANCE
JANUARY 26, PAYMENT / OCTOBER 26,
2002 USAGE 2002
====================================================================================================
Lease disposition $ 122,304 $ 14,683 $ 107,621
Other closing costs, including severance 7,218 3,585 3,633
------------ ------------ ------------
Total $ 129,522 $ 18,268 $ 111,254
============ ============ ============
As of October 26, 2002 and January 26, 2002, $88,174,000 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 rent expense for the closed stores net
of expected future sublease income of $100,838,000 and $101,389,000 as of
October 26, 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, including amounts related to its 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 of $57,500,000 due to the
extension of the carryback period. As of October 26, 2002, the valuation
allowance was approximately $117,507,000, which represents a full valuation
allowance of the Company's net deferred tax assets, including those related
to its net operating loss carryforwards. The Company has received refunds
for substantially all of the additional net operating loss carryback
resulting from the extension of the carryback period. The Company expects
to receive the remainder of the refund for the additional net operating
loss carryback during the fourth quarter of fiscal year 2002. As of October
26, 2002, a receivable for the remaining $4,548,000 of the income tax
refund was included in other current assets.
11. In July 2001, the Financial Accounting Standards Board (the "FASB") issued
FAS 142 which addresses the accounting for goodwill and other intangible
assets. 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 may 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 concluded that the fair value of both of the
Company's reporting units exceeded the carrying value as of January 27,
2002. 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 was not
necessary. The Company will be required to complete the impairment test
annually and intends to complete the annual impairment test during the
fourth quarter of fiscal year 2002.
13
The following table presents the transitional disclosures required by FAS
142:
(In thousands, except per share data)
13 WEEKS ENDED 39 WEEKS ENDED
----------------------------- -----------------------------
OCTOBER 26, OCTOBER 27, OCTOBER 26, OCTOBER 27,
2002 2001 2002 2001
----------------------------------------------------------------------------------------------------------
Reported net income (loss) $ 16,512 $ (25,780) $ 46,668 $ (66,361)
Add back: Amortization of goodwill -- 2,464 -- 7,391
------------- ------------- ------------- -------------
Adjusted net income (loss) $ 16,512 $ (23,316) $ 46,668 $ (58,970)
============= ============= ============= =============
BASIC EARNINGS PER COMMON SHARE:
Reported net income (loss) $ 0.13 $ (0.23) $ 0.38 $ (0.60)
Add back: Amortization of goodwill -- 0.02 -- 0.07
------------- ------------- ------------- -------------
Adjusted net income (loss) $ 0.13 $ (0.21) $ 0.38 $ (0.53)
============= ============= ============= =============
DILUTED EARNINGS PER COMMON SHARE:
Reported net income (loss) $ 0.13 $ (0.23) $ 0.37 $ (0.60)
Add back: Amortization of goodwill -- 0.02 -- 0.07
------------- ------------- ------------- -------------
Adjusted net income (loss) $ 0.13 $ (0.21) $ 0.37 $ (0.53)
============= ============= ============= =============
12. 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
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 was required to recognize 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. As a result of the fair value provisions of FAS 146, a
liability for lease termination costs would be recorded at present value
and any changes in the liability due to the passage of time would be
recognized as an increase in the liability and as accretion expense. In
contrast, under existing accounting pronouncements a liability for lease
termination costs is recorded for an amount equal to the undiscounted total
of all remaining lease payments. 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.
In November 2002, the FASB Emerging Issues Task Force issued EITF Issue
02-16, "Accounting by a Customer (including a Reseller) for Cash
Consideration Received from a Vendor," ("Issue 02-16"). Issue 02-16
addresses the classification in a reseller's financial statements of cash
consideration received from a vendor ("Issue 1") and the timing of
recognition by a reseller of a rebate or refund from a vendor that is
contingent upon achieving a specific cumulative level of purchases or
remaining a customer for a specified time period ("Issue 2"). Issue 1 is
effective for fiscal periods beginning after December 15, 2002. Issue 2 is
effective for all new arrangements initiated after November 21, 2002. The
Company is currently assessing the financial statement impact, if any, of
the adoption of Issue 02-16.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
RESULTS OF OPERATIONS
Consolidated sales for the 13 and 39 weeks ended October 26, 2002 increased
approximately 5.8% to $1,258,361,000 and 2.6% to $3,447,634,000, respectively,
from $1,188,847,000 and $3,361,577,000, respectively, for the like 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. The increase in current year
sales was primarily the result of comparable-store sales increases of
approximately 7.7% and 3.5% during the 13 and 39 weeks ended October 26, 2002,
respectively, and new store openings. The third quarter of fiscal year 2002
marked the fourth consecutive quarter of sequential quarter-over-quarter
improvement in comparable-store sales. The comparable-store sales gains were
driven by both increased customer counts and higher average revenue per customer
transaction. During the 13 weeks ended October 26, 2002, the number of customer
transactions at stores opened more than one year, as well as the average revenue
per customer transaction, 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, was $940,697,000
and $2,583,659,000 for the 13 and 39 weeks ended October 26, 2002, respectively,
and $906,129,000 and $2,544,982,000 for the 13 and 39 weeks ended October 27,
2001, respectively. Cost of merchandise sold, including buying and occupancy
costs, decreased as a percentage of sales to 74.8% for the 13 weeks ended
October 26, 2002 from 76.2% for the comparable period last year.
Correspondingly, gross margin increased approximately 1.4% of sales from the
comparable prior year period to 25.2% of sales for the 13 weeks ended October
26, 2002. For the 39 weeks ended October 26, 2002, cost of merchandise sold,
including buying and occupancy costs, decreased as a percentage of sales to
74.9% from 75.7% for the comparable period last year. Correspondingly, gross
margin increased approximately 0.8% of sales from the comparable prior year
period to 25.1% of sales for the 39 weeks ended October 26, 2002. The increase
in gross margin as a percentage of sales during the 13 and 39 weeks ended
October 26, 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
and operating and advertising expenses, decreased approximately $14,474,000 to
$265,840,000 for the 13 weeks ended October 26, 2002 from $280,314,000 for the
13 weeks ended October 27, 2001. For the 39 weeks ended October 26, 2002, store
operating and selling expenses decreased approximately $20,548,000 to
$763,834,000 from $784,382,000 for the 39 weeks ended October 27, 2001. As a
percentage of sales, store operating and selling expenses decreased to 21.1% and
22.2% for the 13 and 39 weeks ended October 26, 2002, respectively, from 23.6%
and 23.3% 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, and certain fixed costs included in store
operating and selling expenses such as equipment lease expense. Also, during the
third quarter of fiscal year 2001, the Company recorded a $10,000,000 reserve
for legal matters which increased store operating and selling expenses by
approximately 0.8% and 0.3% of sales during the 13 and 39 weeks ended October
27, 2001, respectively. The reserve was recorded to provide for the settlement
of a class action lawsuit in California regarding overtime wages and the
classification of exempt employees, as well as other legal matters.
15
General and administrative expenses decreased to $32,859,000, or 2.6% of sales,
and $102,041,000, or 3.0% of sales, for the 13 and 39 weeks ended October 26,
2002, respectively, from $36,018,000, or 3.0% of sales, and $111,002,000, or
3.3% of sales, for the 13 and 39 weeks ended October 27, 2001, respectively. The
decrease in general and administrative expenses was primarily due to the
Company's continued expense control programs and efficiency gains from the
Company's information technology initiatives as well as the elimination of costs
incurred during the prior year for consulting services supporting various
business initiatives.
Pre-opening expenses were $123,000 and $652,000 for the 13 and 39 weeks ended
October 26, 2002, respectively, and $390,000 and $2,685,000 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 third quarter of the current fiscal year, the Company opened two new
superstores in Mexico. During the third quarter of last year, the Company opened
four new domestic superstores and one new superstore in Mexico. The Company
opened five new domestic superstores and three new superstores in Mexico during
the first 39 weeks of the current fiscal year. During the first 39 weeks of
fiscal year 2001, the Company opened 16 new domestic superstores, completed the
expansion of its PowerMax distribution facility in Las Vegas and opened three
new superstores in Mexico.
In accordance with the provisions of 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 39
weeks ended October 26, 2002. Goodwill amortization was $2,464,000 and
$7,391,000 for the 13 and 39 weeks ended October 27, 2001. Prior to fiscal year
2002, goodwill was capitalized and amortized over 10 to 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, operating income for the 13 weeks ended
October 26, 2002 was $18,842,000, or 1.5% of sales. The Company incurred an
operating loss of $4,329,000 for the 39 weeks ended October 26, 2002. The
Company incurred operating losses of $36,468,000 and $88,865,000 for the
comparable periods last year.
Interest expense, net, was $1,280,000 and $4,746,000 for the 13 and 39 weeks
ended October 26, 2002, respectively, as compared to $2,766,000 and $12,923,000
for the comparable periods last year. The decrease in interest expense was
primarily due to lower average outstanding borrowings during the first 39 weeks
of the current fiscal year as compared to the same period last year and lower
interest rates on the Company's outstanding borrowings.
The Company had pre-tax income, net of minority interest, of $16,512,000, or
1.3% of sales, for the 13 weeks ended October 26, 2002 and a pre-tax loss, net
of minority interest, of $10,832,000, or (0.3%) of sales, for the 39 weeks ended
October 26, 2002 compared to pre-tax losses, net of minority interest, of
$40,494,000 and $104,193,000 for the comparable periods last year.
In accordance with the provisions of FAS 109, the Company recorded a charge to
establish a valuation allowance for its net deferred tax assets,including
amounts related to its 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 minor 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
recorded during the fourth quarter of fiscal year 2001 and recognized an income
tax benefit of $57,500,000 due to the extension of the carryback period. See
"Note 10 of Notes to Consolidated Financial Statements" above for more
information regarding the income tax benefit recognized during the first
nine months of fiscal year 2002.
16
As a result of the foregoing factors, the Company had net income of $16,512,000
and $46,668,000 for the 13 and 39 weeks ended October 26, 2002, respectively,
compared to net losses of $25,780,000 and $66,361,000 for the comparable periods
last year.
BUSINESS SEGMENTS
Domestic Segment
Sales for the Domestic segment increased to $1,215,998,000 and $3,331,039,000
for the 13 and 39 weeks ended October 26, 2002, respectively, from
$1,152,099,000 and $3,261,225,000 for the like periods last year. The increase
in sales for the Domestic segment during the 13 and 39 weeks ended October 26,
2002 was primarily due to an increase in comparable-store sales and the sales
from six new domestic superstores opened since the end of the third quarter of
fiscal year 2001. Comparable-store sales for the Domestic segment increased
approximately 7.9% and 3.6% for the 13 and 39 weeks ended October 26,
2002,respectively. The increase in comparable-store sales was driven by
increased customer counts and higher average revenue per customer transaction
primarily as a result of the Company's new merchandising and marketing
initiatives, improved inventory in-stock position and better in-store execution.
Gross profit for the Domestic segment was $307,362,000, or 25.3% of sales, and
$836,947,000, or 25.1% of sales, for the 13 and 39 weeks ended October 26, 2002,
respectively, compared to $273,277,000, or 23.7% of sales, and $790,009,000, or
24.2% of sales, for the 13 and 39 weeks ended October 27, 2001, respectively.
The increases in gross margin as a percentage of sales during the 13 and 39
weeks ended October 26, 2002 was primarily due 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.
In accordance with the provisions of FAS 142, no amortization was recorded for
the 13 and 39 weeks ended October 26, 2002. Goodwill amortization was $2,348,000
and $7,042,000 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.
The Domestic segment had operating income of $16,835,000, or 1.4% of sales, for
the 13 weeks ended October 26, 2002 and incurred an operating loss of $7,470,000
for the 39 weeks ended October 26, 2002, compared to operating losses of
$38,971,000 and $92,611,000 for the comparable periods last year. The
year-over-year improvement in the Domestic segment's operating results was
primarily due to the increase in gross profit as a percentage of sales and
improved leverage of store operating and selling expenses and general and
administrative expenses. Also, during the third quarter of the prior fiscal
year, the Domestic segment recorded a reserve to provide for the settlement of a
class action lawsuit in California regarding overtime wages and the
classification of exempt employees, as well as other legal matters which
increased the operating losses incurred during the 13 and 39 weeks ended October
27, 2001 by approximately $10,000,000.
The Domestic segment had pre-tax income of $15,419,000, or 1.3% of sales, for
the 13 weeks ended October 26, 2002 and incurred a pre-tax loss of $12,660,000,
or (0.4%) of sales, for the 39 weeks ended October 26, 2002, compared to pre-tax
losses of $41,716,000 and $106,284,000 for the comparable periods last year.
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 of $57,500,000 due to the
extension of the carryback period. 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 nine months of fiscal year 2002.
As a result of the foregoing factors, the Domestic segment had net income of
$15,419,000 and $44,840,000 for the 13 and 39 weeks ended October 26, 2002,
respectively, compared to net losses of $27,002,000 and $68,452,000 for the
comparable periods last year.
17
International Segment
Sales for the International segment increased to $42,363,000 and $116,595,000
for the 13 and 39 weeks ended October 26, 2002, respectively, from $36,748,000
and $100,352,000 for the comparable periods last year. The increase in sales was
primarily due to comparable-store sales growth of 0.8% and 2.5% for the 13 and
39 weeks ended October 26, 2002, respectively, and the sales from five new
superstores opened since the end of the third quarter of fiscal year 2001.
Comparable-store sales for the International segment were impacted by the change
in currency exchange rates during fiscal year 2002. In local currency,
comparable-store sales increased approximately 6.7% and 3.5%, respectively, for
the 13 and 39 weeks ended October 26, 2002. See "Item 3 Quantitative and
Qualitative Disclosures About Market Risk" below for more information regarding
foreign currency exchange risks.
Gross profit for the International segment was $10,302,000, or 24.3% of sales,
and $27,028,000, or 23.2% of sales, for the 13 and 39 weeks ended October 26,
2002, respectively, compared to $9,441,000, or 25.7% of sales, and $26,586,000,
or 26.5% 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.
In accordance with the provisions of FAS 142, no goodwill amortization was
recorded for the 13 and 39 weeks ended October 26, 2002. Goodwill amortization
was $116,000 and $349,000 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.
As a result of the foregoing factors, the International segment had operating
income of $2,007,000, or 4.7% of sales, and $3,141,000, or 2.7% of sales, for
the 13 and 39 weeks ended October 26, 2002, respectively, compared to operating
income of $2,503,000, or 6.8% of sales, and $3,746,000, or 3.7% of sales, for
the comparable periods 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 of the International segment was $1,050,000
and $1,757,000 for the 13 and 39 weeks ended October 26, 2002, respectively,
compared to $1,285,000 and $2,344,000 for the 13 and 39 weeks ended October 27,
2001, respectively.
The International segment had net income of $1,093,000, or 2.6% of sales, and
$1,828,000, or 1.6% of sales for the 13 and 39 weeks ended October 26, 2002,
compared to net income of $1,222,000, or 3.3% of sales, and $2,091,000, or 2.1%
of sales, for the comparable prior year periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities used $1,557,000 of cash during the 39 weeks
ended October 26, 2002, primarily for the purchase of inventory which increased
$95,971,000, and the payment of accounts payable, which decreased $10,271,000,
since the end of the prior fiscal year. The cash used for the purchase of
inventory and the payment of accounts payable offset the Company's earnings
before interest, taxes, depreciation and amortization of approximately
$63,000,000. The increase in inventory was due to the seasonal build-up of
inventory prior to the holiday selling season and accelerated purchases of
imported merchandise to mitigate, in part, the effects of the West Coast
Longshoremen's work stoppage. The decrease in accounts payable since the end of
the prior fiscal year is also consistent with seasonal fluctuations in inventory
turnover and the related decrease in accounts payable-to-inventory leverage.
Year-over-year accounts payable-to-inventory leverage increased to 49.2% from
46.8%, and annualized inventory turns increased to 3.8 times per year from 3.3
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 the Company has elected to take
special discounts and forego extended terms throughout fiscal year 2002.
Inventory decreased $14,440,000 in total, or 5% on a per-store basis, compared
to the third quarter of the prior fiscal year. The Company's operating
activities provided $83,430,000 of cash during the 39 weeks ended October 27,
2001. Prior year cash flow from operating activities primarily represent a
decrease in inventory of $166,733,000 net of the payment of accounts payable of
$84,677,000. The prior year inventory reduction was due to supply-chain
management initiatives that
18
resulted in a full-year inventory reduction of $274,000,000. These inventory
efficiencies were partially offset by the prior year third quarter seasonal
inventory increase.
Net cash used for investing activities was $35,912,000 for the 39 weeks ended
October 26, 2002 versus $34,012,000 for the comparable prior year period.
Capital expenditures, primarily for new superstores and the Company's
information technology initiatives, were $33,007,000 for the 39 weeks ended
October 26, 2002 and $32,461,000 for the 39 weeks ended October 27, 2001.
The Company expects total capital expenditures for the remainder of fiscal
year 2002, primarily for information technology initiatives to total
approximately $10,000,000 to $15,000,000.
Net cash provided by financing activities was $21,487,000 for the 39 weeks ended
October 26, 2002. Current year financing activities primarily represent
borrowings under the Company's revolving credit facility. Net cash used for
financing activities was $117,087,000 in the comparable prior year period
primarily due to a decrease in borrowings under the Company's revolving credit
facility and a decrease in overdraft balances. Year-over-year borrowings
decreased more than $101,000,000 to $39,000,000 as of October 26, 2002.
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 of
$57,500,000 due to the extension of the carryback period. The Company has
received refunds for substantially all of the additional net operating loss
carryback resulting from the extension of the carryback period. The Company
expects to receive the remainder of the refund for the additional net operating
loss carryback during the fourth quarter of 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.
In accordance with an amended and restated joint venture agreement, the minority
owner in the Company's subsidiary 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. These earnings
targets are calculated quarterly on a rolling four quarter basis. Currently,
the minority owner has indicated that it has no intentions to exercise this
right in fiscal year 2002 and has not provided any indication of its intentions
regarding the exercise of this right in fiscal year 2003. 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 subsidiary 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
$25,000,000 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
October 26, 2002, the Company had outstanding borrowings of $39,000,000 under
the revolving credit facility at a weighted average interest rate of 3.91%. Also
under this facility, the Company had $126,096,000 of standby letters of credit
outstanding as of October 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. 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 October 26, 2002, the Company
had unused and available borrowings under the revolving credit facility of more
than $370,000,000.
19
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
October 26, 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 special
purpose entities ("SPEs") that have been established by nationally prominent,
creditworthy commercial lessors that are not affiliated with OfficeMax 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,
or otherwise enter into an arrangement to maintain the continued use of these
facilities, and is unable to estimate its obligation, if any, under the fair
value provisions of these leases.
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.
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.
20
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 with each party asserting claims of non-performance
against the other.
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.
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 were updated in the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 27, 2002. See
"Note 5 of Notes to Consolidated Financial Statements" above for more
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 and the Company's gross margin could be adversely impacted.
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 October 26, 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 adversely impacted.
21
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 charge to
establish 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. If the Company determines, 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.
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 the
adoption of 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
may no longer 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.
Therefore, no impairment existed at that date. The Company intends to complete
the annual impairment test during the fourth quarter of fiscal year 2002. If the
annual impairment test indicates that the carrying value, including goodwill of
a reporting unit, exceeds the fair value 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.
22
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, then adjustments to the Company's store closing reserves
may be necessary. See "Note 12 of Notes to Consolidated Financial Statements"
above and "Recently Issued Accounting Pronouncements" below for additional
information regarding FASB Statement No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" which is effective for exit or disposal
activities that are initiated after December 31, 2002.
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 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 was required to recognize 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. As a result of the fair value provisions
of FAS 146, a liability for lease termination costs would be recorded at present
value and any changes in the liability due to the passage of time would be
recognized as an increase in the liability and as accretion expense. In
contrast, under existing accounting pronouncements a liability for lease
termination costs is recorded for an amount equal to the undiscounted total of
all remaining lease payments. 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.
In November 2002, the FASB Emerging Issues Task Force issued EITF Issue 02-16,
"Accounting by a Customer (including a Reseller) for Cash Consideration
Received from a Vendor, " ("Issue 02-16"). Issue 02-16 addresses the
classification in a reseller's financial statements of cash consideration
received from a vendor ("Issue 1") and the timing of recognition by a reseller
of a rebate or refund from a vendor that is contingent upon achieving a
specific cumulative level of purchases or remaining a customer for a specified
time period ("Issue 2"). Issue 1 is effective for fiscal periods beginning
after December 15, 2002. Issue 2 is effective for all new arrangements
initiated after November 21, 2002. The Company is currently assessing the
financial statement impact, if any, of the adoption of Issue 02-16.
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
23
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 Form 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 rate 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. None of the market risk sensitive instruments entered into by
the Company are for trading purposes.
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 of a hypothetical 10% decrease in interest
rates on cash and short-term investments held by the Company at October 26, 2002
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:
(In thousands)
AS OF OCTOBER 26, 2002
--------------------------------------
Carrying Risk
Value Fair Value Sensitivity
- ------------------------------------ ------------ ------------ ------------
Fixed interest rate debt,
including current maturities $ 1,553 $ 1,631 $ 35
Variable interest rate debt $39,000 $39,000 $302
The risk sensitivity of fixed rate debt reflects the estimated increase in fair
value of the Company's outstanding mortgage loan 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 three quarters of fiscal year 2002 from a 50 basis
point increase in prevailing interest rates during that period.
Foreign Exchange Rate Risk
The Company is exposed to foreign exchange rate risk through its subsidiary 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 $400,000. 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 $4,000,000 as of October 26, 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.
ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------
The Company maintains a set of disclosure controls and procedures designed to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Within the 90 day period
prior to the filing of this report, an evaluation was carried out under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the
effectiveness of our disclosure controls and procedures. Based on that
evaluation, the CEO and CFO have concluded that the Company's disclosure
controls and procedures are effective.
Subsequent to the date of their evaluation, there have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls.
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 two
of the remaining previously disclosed securities cases (i.e., the consolidated
cases GREAT NECK CAPITAL APPRECIATION and CRANDON CAPITAL PARTNERS), which were
stayed. The remaining two previously disclosed securities cases (i.e., CORRAO
and MILLER3), which also had been stayed, were dismissed without prejudice by
agreement of the parties on November 25, 2002; however, those plaintiffs
expressly retained the right to reinstitute those actions if the plaintiffs in
FIDEL are successful in their pending appeal before the Sixth Circuit Court of
Appeals.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits: None
(b) Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OFFICEMAX, INC.
Date: December 10, 2002 By: /s/ Michael F. Killeen
------------------------------------
Michael F. Killeen
Senior Executive Vice President,
Chief Financial Officer
26
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;
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;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 10, 2002
/s/ Michael Feuer
-----------------
Michael Feuer
Chairman and Chief Executive Officer
27
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;
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;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 10, 2002
/s/ Michael F. Killeen
----------------------
Michael F. Killeen
Chief Financial Officer
28