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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended JANUARY 25, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 1-13380
OFFICEMAX, INC.
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(Exact name of registrant as specified in its charter)
OHIO 34-1573735
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
3605 WARRENSVILLE CENTER ROAD, SHAKER HEIGHTS, OHIO 44122
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 471-6900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
COMMON SHARES, WITHOUT PAR VALUE NEW YORK STOCK EXCHANGE
PREFERRED SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). X Yes No __
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant as of April 3, 2003 was approximately
$639,802,396.
The number of Common Shares, without par value, of the Registrant outstanding,
net of treasury shares, as of April 3, 2003 was 124,233,475.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for use at the 2003 Annual Meeting
of Shareholders to be held on June 5, 2003, are incorporated by reference in
Part III of this report.
TABLE OF CONTENTS
Item No. Page No.
-------- --------
PART I
1. Business 3
2. Properties 10
3. Legal Proceedings 11
4. Submission of Matters to a Vote of Security Holders 11
Executive Officers of the Registrant 12
PART II
5. Market for Registrant's Common Shares and Related Shareholder Matters 14
6. Selected Financial Data 15
7. Management's Discussion and Analysis of Financial Condition and 17
Results of Operations
7A. Quantitative and Qualitative Disclosures About Market Risk 36
8. Financial Statements and Supplementary Data 37
9. Changes in and Disagreements with Accountants on Accounting and 37
Financial Disclosure
PART III
10. Directors and Executive Officers of the Registrant 38
11. Executive Compensation 38
12. Security Ownership of Certain Beneficial Owners and Management 38
13. Certain Relationships and Related Transactions 38
14. Controls and Procedures 38
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 39
Signatures 40
Certifications 41
Exhibit Index 43
2
PART I
ITEM 1. BUSINESS
GENERAL
OfficeMax, Inc. ("OfficeMax" or the "Company"), which was incorporated
in Ohio in 1988, operates a chain of high-volume office products superstores. As
of January 25, 2003, OfficeMax owned and operated 970 superstores in 49 states,
Puerto Rico, the U.S. Virgin Islands and, through a majority-owned subsidiary,
in Mexico. In addition to offering office products, business-machines and
related items, OfficeMax superstores also feature CopyMax(R) and
FurnitureMax(R), in-store modules devoted exclusively to print-for-pay services
and office furniture. Additionally, the Company reaches customers with an
offering of over 40,000 items through its award winning e-Commerce site,
OfficeMax.com(R), its direct-mail catalogs and its outside sales force, all of
which are serviced by its three PowerMax distribution facilities, 18 delivery
centers and two national customer call and contact centers.
OfficeMax makes its Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and amendments to those reports
available, free of charge, on its Web site, www.officemax.com, as soon as
reasonably practicable after the Company files such material with, or furnishes
such material to, the Securities and Exchange Commission. The Company's filings
with the Securities and Exchange Commission are also available, at no charge, at
www.sec.gov, as well as on a number of other Web sites. The Company is not
including the information on its Web site as part of, or incorporating it by
reference into, this Annual Report on Form 10-K.
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, comprised of its retail stores, e-Commerce operations, catalog business
and outside sales groups, 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. Additional information regarding the
Company's business segments is presented in Management's Discussion and Analysis
of Financial Condition and Results of Operations contained in this Annual Report
on Form 10-K, and financial information regarding these segments is provided in
Note 9 of Notes to Consolidated Financial Statements contained in this Annual
Report on Form 10-K.
BUSINESS STRATEGY
Over the last two and a half years, OfficeMax has made major
investments in developing and implementing a multi-pronged strategy which
included the development and installation of a state-of-the-art supply chain
management network backed by a new integrated computer system, significant
enhancements to overall store-level execution and focused marketing tactics that
has enabled the Company to gain market share with its core business customer
while maximizing gross margin dollars. These investments significantly fueled
the Company's improved results in fiscal 2002. The Company also believes the
improvements are the catalyst for accelerated profitable growth in the future.
In fiscal 2003 and beyond, the Company plans to grow its business through
expansion opportunities in existing markets, product line extensions, strategic
partnerships and international growth with a focus on Latin America. OfficeMax
plans to expand the marketing of its products and services through its
commercial sales operations and target new customer sets in specialized markets
that are currently not served by the office products superstore industry. The
key elements of this strategy are as follows:
- Extensive Merchandise and Service Offering. OfficeMax has
become a productivity ally for small businesses, not only selling
office machines and supplies, but also expanding its line of business
services. Each OfficeMax superstore offers approximately 8,000 stock
keeping units ("SKUs") of quality, name-brand and OfficeMax
private-branded merchandise, which represents a breadth and depth of
in-stock items not available from traditional office products
retailers, mass merchandisers or wholesale clubs. The Company has also
increased the marketing emphasis of in-store business services
including CopyMax, its digital print-for-pay offering targeted at
serving the small business customer.
3
OfficeMax continues to introduce line extensions of products
that are aligned with its core customers, such as higher-end
electronics merchandise which includes all-in-one machines,
communications equipment and digital imaging technology. Additionally,
the Company is expanding its private branding of products which offers
compelling values with quality equal to or better than national brands.
This strategy provides increased gross margin opportunities. In fiscal
year 2002, OfficeMax superstores offered approximately 800 OfficeMax
private-branded and direct import products manufactured to our
specifications. The Company expects this offering to increase to over
1,000 products in fiscal year 2003. In the future, OfficeMax will
continue to position itself as a small business ally by expanding goods
and services that are aligned with this customer segment.
- New Store Prototype. The Company's merchandise presentation
is highlighted by wide aisles with open ceilings, bright lighting,
colorful signage and bold graphics. This easy-to-shop format is
designed to enhance customer convenience, create an enjoyable,
efficient shopping experience and promote impulse purchases. In fiscal
year 2002, the Company introduced its latest store iteration, a 20,000
square-foot footprint, which features improved sightlines, enhanced
lighting, and new graphic signage that significantly enhances the
shopping experience, assists the purchase decision process and
encourages add-on item sales. The new prototype is approximately 15%
smaller than existing stores, achieved as a result of the Company
needing less space, another derived benefit of its new supply-chain
management initiative. Upon entrance to this new prototype, customers
have immediate visibility of every product category offered, which the
Company has grouped into major "worlds" or categories. The worlds
include: supplies such as Office Organization; Presentation; Paper and
almost every imaginable type of office tool; Technology and Software;
CopyMax, our print-for-pay-business; and FurnitureMax, featuring
chairs, desks and everything in-between for the office. The new
prototype also features an enhanced navigational signing and
point-of-purchase package within the worlds, that helps make shopping
easier and more efficient and fosters add-on sales. Also during fiscal
year 2002, as a result of its successful completion of supply chain
management improvements, OfficeMax completed a fixture height reduction
program inside its stores, as there is no longer a need for "top-stock"
used for back-up inventory. This program enables the Company to
incorporate many of the enhancements of its latest prototype across the
entire chain and dramatically improve the esthetics and visibility in
its stores.
As a result of the Company's infrastructure improvements, the
Company is now developing and experimenting with smaller store format
tests. OfficeMax currently operates a small number of smaller
footprint stores called OfficeMax PDQ (Pretty Darn Quick). This
smaller format is 4,000 to 7,000 square feet and features the
Company's high-margin CopyMax print-for-pay offering. A second
generation of this smaller format is now in development and will be
tested later this year.
- Domestic Store Expansion and Remodels. The Company opened
five new domestic superstores during fiscal year 2002 and intends to
open approximately the same number in fiscal year 2003. In addition,
OfficeMax plans to remodel approximately 250 existing superstores in
fiscal year 2003 utilizing its new format and key features of its
latest store prototype. All remodels and new superstore openings will
occur in markets where OfficeMax already has a major presence, which
will enable it to better leverage advertising, distribution and
management and supervisory costs.
Prospective locations for new superstores are evaluated using
on-site surveys conducted by real estate specialists and field
operations personnel coupled with a proprietary real estate selection
model, which assesses potential store locations and incorporates
computer-generated mapping. The model analyzes a number of factors that
have contributed to the success of existing OfficeMax locations
including the location's size, visibility, accessibility and parking
capacity, potential sales transfer effects on existing OfficeMax
superstores and relevant demographic information, such as the number of
businesses and the income and education levels in the area.
4
The following table summarizes the Company's domestic
superstore real estate activity by fiscal year, including Puerto Rico
and the U.S. Virgin Islands:
FISCAL STORES STORES STORES
YEAR OPENED CLOSED ACQUIRED TOTAL
-------- ---------- -------- ---------- ---------
1988 3 - - 3
1989 8 - - 11
1990 23 - 12 46
1991 33 - - 79
1992 61 2 41 179
1993 53 9 105 328
1994 70 10 - 388
1995 80 - - 468
1996 96 - - 564
1997 150 1 - 713
1998 120 1 - 832
1999 115 1 - 946
2000 54 5 - 995
2001 17 48 - 964
2002 5 29 - 940
- Guaranteed Everyday Low Prices. OfficeMax maintains an
everyday low price policy. The Company guarantees its low prices by
matching any advertised price or refunding the difference between a
lower advertised price and the price paid at OfficeMax within 14 days,
subject to certain exclusions. The Company also promotes a 115% low
price guarantee whereby if a customer finds a lower price at any office
products superstore on an identical item, OfficeMax will refund the
customer 115% of the difference (up to $55.00). In addition, for the
Company's CopyMax offerings, it provides an on-time guarantee ensuring
a customer's job is produced as promised.
- Customer Service. To develop and maintain customer loyalty,
OfficeMax fosters a customer-centric sales culture that focuses
associates on making customer service their number one priority. The
Company views the quality of its associates' interaction with its
customers as critical to its success. To this end, the Company
emphasizes training and personnel development and seeks to attract and
retain well-qualified, highly motivated associates. Additionally, the
Company has centralized most administrative functions at its corporate
office and customer call and contact centers and automated many
store-level tasks or shifted such tasks to off hours to enable in-store
associates to focus on effective customer service. In fiscal year 2002,
OfficeMax implemented "Boundless Selling," a program that, in part,
uses wireless technology and a sales leader in its stores to leverage
payroll while enhancing customer service capabilities. The wireless
technology used in the Boundless Selling program enables sales
associates in each store to communicate in real-time with each other
and members of the store management team who act as the sales leader.
This store management associate is responsible for generating sales and
providing direction and feedback to sales associates as they interact
with customers. OfficeMax believes each of these improvements gives
customers a quicker, more satisfying shopping experience and keeps them
returning to the Company's locations.
- Information Technology. In fiscal year 2002, OfficeMax began
the implementation of a chain-wide, new point-of-sale system in its
store locations. This new system includes a multitude of features
including Customer Relationship Management (CRM) tools that will
provide the Company insight into customer buying habits. OfficeMax
believes the CRM data that will be collected by the system will be
another valuable tool for its sales associates to make real-time
purchase recommendations to customers, as well as for improving
targeted marketing efforts. The new point-of-sale system also features
a benefit called "Line-Buster" technology that will allow its sales
associates to check out customers paying with credit cards anywhere in
the store using hand-held units, which is expected to result in a
better shopping experience, particularly during very busy selling
periods such as back-to-school, holiday and in January, a time many
businesses stock up on supplies for the new year. This new system
roll-out is expected to be completed during fiscal year 2003.
5
- Marketing Concepts. OfficeMax's store-within-a-store
concepts are designed to complement its core office supply merchandise
assortment by providing additional products and services to the
Company's customers and provide the Company with opportunities for
incremental store traffic and sales. These concepts include the
departments or in-store modules of CopyMax and FurnitureMax. CopyMax
offers customers a wide range of "print-for-pay" services from
self-service black and white copying to full-service digital printing
and publishing. FurnitureMax provides a full-line of office furniture
and related accessories and a variety of specialized services such as
office layout and design and professional set-up and installation. Both
CopyMax and FurnitureMax have a presence in every OfficeMax superstore.
In fiscal year 2002, OfficeMax increased the marketing
emphasis of its CopyMax print-for-pay services. Every CopyMax
store-within-a-store location is 100% digitally-connected, which allows
every location, and the Company's CopyMax specific e-Commerce site, to
act as a point of fulfillment. This connectivity creates a virtual
print-on-demand environment for OfficeMax's small business customers.
OfficeMax also established a CopyMax store-based outside sales
organization in fiscal year 2002, including the implementation of three
commercial sales territories with over 200 dedicated CopyMax sales
representatives to market print-for-pay services to medium- and
larger-size businesses. The Company believes CopyMax serves as a major
differentiator from it competitors in the office products industry and
a value-add for the small- and medium-size business customers.
- OfficeMax.com. The Company believes that the Internet is an
important channel for the sale of office products and the procurement
of business services. OfficeMax.com offers a vast selection of over
40,000 items, many through a "virtual" inventory, coupled with free,
fast delivery on orders over $50 for most locations. OfficeMax is
focused on further integrating the site with other OfficeMax channels
by means of features such as weekly sneak previews of in-store
specials, sent to preferred customers via the Internet several days
prior to the promotion appearing in local newspapers. Another feature
of the OfficeMax.com site and an example of integrating channels, is
the ability of users to order online using our catalogs as reference
and then submitting catalog item numbers when ordering electronically.
OfficeMax.com also offers an expanding array of integrated business
services targeted at small business and home office customers,
including communications, eBusiness utilities, marketing, travel,
virtual learning and financial services.
OfficeMax will also use the Internet and e-Commerce as a
foundation for expansion into new international markets. In the spring
of fiscal year 2003, OfficeMax is planning to launch an e-Commerce site
in Canada, allowing the Company to tap into the multi-billion dollar
Canadian office products market for a minimal capital investment.
- Catalog and Commercial Outside Sales. The Company's strategy
to serve medium and larger, non-retail store business customers is to
put a greater emphasis on its catalog and commercial sales force
operations. A full-assortment catalog containing more than 30,000 items
plus a variety of merchandise from a third party provider allows
customers the convenience of catalog ordering and fast delivery.
OfficeMax also employs a commissioned outside sales force to provide
personal service for more customized business needs, including the
integration of customer-specific online ordering for its larger
customers' special needs. These customers are served through the
Company's two national customer call and contact centers and 18
delivery centers. In fiscal year 2003, OfficeMax will expand its
commercial sales presence by aggressively targeting businesses in the
United States with 50 to 100 employees.
- International Expansion. During fiscal year 2002, the
Company opened three OfficeMax superstores in Mexico through its
majority-owned subsidiary, OfficeMax de Mexico, ending the year with 30
locations. OfficeMax stores operated by this subsidiary are virtually
identical to those operated by the Company domestically. In fiscal year
2003, the Company plans to open up to ten additional superstores in
Mexico and launch a redesign of the OfficeMax de Mexico e-Commerce
site. The new site will incorporate the Company's U.S. OfficeMax.com
technology platform, enabling OfficeMax de Mexico to take advantage of
the latest in customer relationship management and position it as a
premier office products site in Mexico.
The Company believes additional future international expansion
opportunities exist in Latin America. Ultimately, the Company's
international expansion will depend upon general economic and business
conditions affecting consumer spending in these markets, the
availability of desirable store locations, the negotiation of
acceptable terms and the availability of adequate capital.
6
- Other Growth Areas. OfficeMax believes there are other
growth opportunities for the Company including non-traditional formats
that could include new store-within-a-store concepts in conjunction
with retail partners outside of the office products industry, and the
opportunity for OfficeMax to align with vertical markets such as
education, real estate and healthcare.
MARKETING, PROMOTIONS AND ADVERTISING
The Company's marketing efforts are directed at small-and medium-size
businesses, home office customers, and individual consumers. By extending and
integrating its marketing channels to include e-Commerce, direct-mail catalog
and an outside sales force, OfficeMax also serves the medium and larger
corporate customer. A multimedia approach is used to attract customers by
emphasizing the Company's "Max Means More" marketing theme which is designed to
position OfficeMax as the retailer that gives SOHO business customers (also
known as small office home office customers), more of what they need to run
their businesses in the form of selection, service and value. The Company's
advertising campaigns utilize network, local and cable television commercials,
newspaper ads, seasonal spot television and radio commercials, direct mail
promotions, circulars, outdoor billboards, mass transit cards, sports arena and
online advertising as well as other promotional and public/community relation
vehicles. OfficeMax also utilizes special marketing programs developed to target
the small business customer and support seasonal events such as the
back-to-school selling period, the Christmas holiday season, and the January
"re-stocking" back-to-business period. The Company also implements
"micro-marketing" campaigns, or market specific advertising, to leverage its
advertising spend and to target certain key markets in a cost-effective manner.
In fiscal year 2003, OfficeMax will take its "Max Means More" marketing
program to the next level using a multi-media approach, showcased in broadcast
advertising as well as targeted direct mail. OfficeMax will also use focused
promotional tactics aimed at gaining market share with the core business
customer while maintaining gross margin dollars. The Company's marketing
objective is to create awareness and carry its brand promise of more service,
more value, and more selection to the business and SOHO customer. OfficeMax
believes its Max Means More campaign will be long-lived and will help continue
to differentiate it from competitors in the office supply superstore industry.
MANAGEMENT INFORMATION SYSTEMS
The Company uses a platform of Unix-based parallel processors, which
supports a wide variety of mission critical applications, ranging from
merchandise replenishment to order fulfillment, e-Commerce and financial
systems. During fiscal year 2002, the Company completed upgrades to the SAP R/3
4.6c release, the current release of Manugistics which is utilized for
forecasting and transportation management, and the current release of
BroadVision which supports our direct business channels. OfficeMax believes that
these upgrades, and numerous other projects completed during fiscal year 2002,
position the Company to grow and operate the business more effectively.
The Company's in-store, point-of-sale (POS) registers capture sales
information at the time of each transaction, at the category and stock keeping
unit (SKU) level, by the use of bar-code scanners that update store-level
perpetual inventory records. This information is transmitted on a daily basis to
corporate headquarters, where it is evaluated and used in merchandising and
replenishment decisions. The Company also tracks in-store inventory through the
use of portable, handheld, radio frequency terminals. These terminals permit
store personnel to scan a product on the shelf and instantly retrieve specific
product information, such as recent sales history, gross margin and inventory
levels. The Company intends to install an additional feature of its integrated
SAP software platform, SAP's Retail Store module, in fiscal year 2003, which
will provide more enhanced in-store inventory data. In fiscal year 2002,
OfficeMax began the chain-wide implementation of a new point-of-sale system in
its stores. This new system includes a multitude of features including Customer
Relationship Management (CRM) tools that will provide the Company insight into
customer buying habits. OfficeMax believes the CRM data that will be collected
by the system will be another valuable tool for its sales associates to make
real-time purchase recommendations to customers, as well as for improving
targeted marketing efforts. The new point-of-sale system also features a benefit
called "Line-Buster" technology that will allow its sales associates to check
out customers paying with credit cards anywhere in the store using hand-held
units, which is expected to result in a better shopping experience, particularly
during very busy selling periods such as back-to-school, holiday and in January,
a time many businesses stock up on supplies for the new year. This new system
roll-out is expected to be completed during fiscal year 2003.
The Company utilizes its own on-line intranet and "frame-relay"
network, which supports data communication between corporate headquarters and
its stores, delivery and customer call and contact centers. This technology is
employed to centralize credit card and check authorization and validate
transactions. In addition, the network enhances intra-Company
7
communication and supports electronic maintenance of in-store technology. The
Company also utilizes its own intranet, known as @Max(SM), which provides
information on demand in real time to all of the Company's corporate and field
management associates, and is also used for online product knowledge and
management training.
The Company employs a variety of scalable software and hardware systems
that provide transaction processing, administration, product searching, customer
support, fulfillment and order tracking for OfficeMax.com. The transaction
processing systems are currently interfaced with the Company's legacy order
management system. The legacy system will be replaced with SAP's Customer
Relationship module for order management, payment processing and distribution in
fiscal year 2003 to improve operational efficiencies and the Company's customer
analytics. OfficeMax's e-Commerce systems are based on industry standard
architectures. The backbone of the technology structure consists of Oracle
database servers with Sun Microsystems hardware. The Company's e-Commerce
Internet systems are hosted at an independently operated third party facility,
which provides high-speed, redundant communications lines, emergency power
backup and continuous systems monitoring. Load balancing systems and redundant
servers provide for fault tolerance and for no single point of failure in the
event of outages or catastrophic events.
MERCHANDISING
The Company's merchandising strategy focuses on offering an extensive
selection of quality, name-brand and OfficeMax private-branded products. The
following table sets forth the approximate percentage of net sales attributable
to each merchandise group for the periods presented:
- ----------------------------------------------------------------------------------------------------
JANUARY 25, JANUARY 26, JANUARY 27,
FISCAL YEAR ENDED 2003 2002 2001
- ----------------------------------------------------------------------------------------------------
Office supplies, including print-for-pay services 38.0% 39.4% 39.2%
Electronics, business machines and digital products 34.8 33.1 32.1
Office furniture 10.4 11.0 13.0
Computers, printers, software, peripherals and related
consumable products 12.6 12.2 12.2
International segment and other 4.2 4.3 3.5
----- ----- -----
Total Company 100.0% 100.0% 100.0%
===== ===== =====
The Company offers a wide selection of name-brand office products,
packaged and sold in multi-unit packages for the business customer and in single
units for the individual consumer. The Company also offers private-branded
products under the OfficeMax(R) label in order to provide customers additional
savings on a wide variety of commodity products for which management believes
national brand recognition is not a key determinant of customer selection and
satisfaction. These commodity items include various paper products such as
computer and copy paper, legal pads, notebooks, envelopes and similar items.
Despite lower selling prices, these items typically carry higher gross margins
than comparable branded items and help build consumer recognition for the
OfficeMax family of Max-brand products. In fiscal year 2002, OfficeMax
superstores offered approximately 800 OfficeMax private-branded and direct
import products manufactured to our specifications. The Company expects this
offering to increase to over 1,000 products in fiscal year 2003.
PURCHASING AND DISTRIBUTION
OfficeMax maintains a centralized group of merchandise and product
category managers who utilize a detailed merchandise planning system to select
the product mix for each store and delivery center in conjunction with
systematic, frequent input from field management.
The Company believes that it has good relationships with its vendors
and does not consider itself dependent on any single source for its merchandise.
The Company has not experienced any material difficulty in obtaining desired
quantities of merchandise for sale and does not foresee having any material
difficulties in the future.
8
The Company has two national customer call and contact centers, 18
delivery centers and, through a majority-owned subsidiary, a call and delivery
center in Mexico. The Company operates three PowerMax inventory distribution
facilities located in Alabama, Nevada and Pennsylvania. The first PowerMax
facility was opened in fiscal year 1998. The Company completed its PowerMax
network by opening one facility in each of fiscal years 1999 and 2000 and
expanding the facility located in Nevada in fiscal year 2001. Prior to the
development of the PowerMax network, the Company's superstores and delivery
centers received inventory shipments directly from each individual vendor.
Currently, more than 95% of the Company's merchandise offering is replenished
from its PowerMax facilities. Development of the PowerMax network, coupled with
the Company's state-of-the-art computer systems, has enabled the Company to
reduce per-store inventory and improve its working capital management and
in-stock positions by permitting a shorter lead time for reordering at the
stores and delivery centers, while meeting the minimum order requirements of the
Company's vendors. Additionally, the PowerMax network has resulted in more
efficient inventory receiving processes and allowed the Company to devote more
of its store-level personnel resources to customer service. The Company
considers its PowerMax network to be a key component of its business strategies
and expects the network to contribute significantly to improved profitability in
future periods.
COMPETITION
The domestic and international office products industries, which
include superstore chains, "e-tailers" and numerous other competitors, are
highly competitive. Businesses in the office products industry compete on the
basis of pricing, product selection, convenience, customer service and ancillary
business offerings.
As a result of consolidation in the office products superstore
industry, OfficeMax currently only has two direct domestic superstore-type
competitors, Office Depot and Staples, which are similar to the Company in terms
of store format, pricing strategy and product selection. The Company's other
competitors include traditional office products retailers and direct mail
operators. During recent years, OfficeMax has experienced increased competition
from computer and electronics superstore retailers, mass merchandisers, Internet
merchandisers and wholesale clubs. In particular, mass merchandisers and
wholesale clubs have increased their assortment of office products in order to
attract home office customers and individual consumers. Further, various other
retailers that have not historically competed with OfficeMax, such as drug
stores and grocery chains, have begun carrying at least a limited assortment of
paper products and other basic office supplies. Management expects this trend
towards a proliferation of retailers offering a limited assortment of office
supplies to continue.
The Company believes it competes favorably with its competitors and
differentiates itself based on the breadth and depth of its in-stock merchandise
offering along with specialized services offerings, its everyday low prices, the
quality of its customer service and the efficiencies and convenience of its
integrated channels. OfficeMax does not compete in the contract commercial
business; however, it utilizes an outside sales force to support growth in sales
to medium and larger size corporate and institutional type customers.
Some of OfficeMax's competitors may have greater financial resources
than the Company. There can be no assurance that increased competition will not
have an adverse effect on the Company's business.
SEASONALITY
The Company's business is seasonal with sales and operating income
higher in the third and fourth quarters, which include the Back-to-School period
and the holiday selling season, respectively, followed by the traditional new
year office supply restocking month of January. Sales in the second quarter's
summer months are historically the slowest of the year primarily because of
lower office supply consumption during the summer period, as people spend more
time on outdoor activities and vacations.
ASSOCIATES
As of April 3, 2003, the Company had approximately 30,600 domestic
associates, including 15,500 full-time and 15,100 part-time associates, 1,900 of
whom were employed at its corporate headquarters and customer call and contact
centers and 28,700 of whom were employed at OfficeMax stores, delivery centers,
and inventory distribution centers.
9
ITEM 2. PROPERTIES
DOMESTIC SEGMENT
As of April 3, 2003, OfficeMax had 938 superstores in 49 states, Puerto
Rico and the U.S. Virgin Islands. The following table details OfficeMax's
domestic superstores by state and territory:
Alabama 13 Nebraska 7
Alaska 3 Nevada 13
Arkansas 2 New Hampshire 3
Arizona 33 New Jersey 17
California 83 New Mexico 9
Colorado 25 New York 40
Connecticut 10 North Carolina 28
Delaware 2 North Dakota 2
Florida 57 Ohio 51
Georgia 31 Oklahoma 4
Hawaii 4 Oregon 10
Idaho 6 Pennsylvania 30
Illinois 53 Rhode Island 2
Indiana 19 South Carolina 9
Iowa 10 South Dakota 3
Kansas 11 Tennessee 25
Kentucky 8 Texas 74
Louisiana 7 Utah 15
Maine 2 Virginia 23
Maryland 2 Washington 21
Massachusetts 18 West Virginia 6
Michigan 43 Wisconsin 27
Minnesota 34 Wyoming 2
Mississippi 6
Missouri 23 Puerto Rico 8
Montana 3 U.S. Virgin Islands 1
The Company operates a small number of smaller footprint stores called
OfficeMax PDQ. This smaller format is 4,000 to 7,000 square feet and features
the Company's CopyMax print-for-pay offering and a narrower offering of
supplies, furniture and technology products compared to the Company's regular
size stores.
The Company occupies all of its stores under long-term lease
agreements. These leases generally have initial terms ranging from 10 to 25
years plus renewal options. Most of these leases require the Company to pay
minimum rents, subject to periodic adjustments, plus other charges including
utilities, real estate taxes, common area maintenance and, in limited cases,
contingent rentals based on sales.
The Company's corporate headquarters are located in two buildings in
the suburban Cleveland, Ohio area. The Company owns both of these facilities,
one of which is subject to a mortgage secured loan.
The Company operates 18 delivery centers located in 17 states and
Puerto Rico and two national customer call and contact centers located in Ohio
and Texas. The Company occupies all of these facilities under various long-term
leases. The Company also operates three PowerMax distribution facilities. The
PowerMax distribution facilities are located in Alabama, Nevada and
Pennsylvania. The Company leases two of these distribution facilities under
synthetic operating leases from special purpose entities ("SPEs") that have
been established by nationally prominent, creditworthy commercial lessors to
facilitate the financing of those assets for the Company. The synthetic
operating leases expire in fiscal year 2004. One of the synthetic operating
leases can be extended at the Company's option until fiscal year 2006. The
Company occupies the third PowerMax distribution facility under a long-term
operating lease. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Off Balance Sheet Arrangements and
Contractual Obligations" and "Item 7.
10
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recently Issued Accounting Pronouncements" for more information
regarding the Company's synthetic operating leases.
Approximately 40 of the Company's store leases were guaranteed by Kmart
Corporation (Kmart), which from 1990 to 1995 was an equity investor in OfficeMax
during the Company's early stages of development. Kmart sold the balance of its
equity position in OfficeMax in 1995. The Company and Kmart are parties to a
Lease Guaranty, Reimbursement and Indemnification Agreement, pursuant to which
Kmart has agreed to maintain existing guarantees and provide a limited number of
additional guarantees, and the Company has agreed, among other things, to
indemnify Kmart against liabilities incurred in connection with those
guarantees. In connection with that agreement, OfficeMax and Kmart subsequently
entered into a Consent and Undertaking Agreement and an Assignment, pursuant to
which OfficeMax assigned some 45 leases to Kmart and took back subleases. The
agreements generally protect against interference by Kmart in the leases absent
default, and provide for Kmart to assign the leases back to OfficeMax should
Kmart be released from its guarantees or if necessary to prevent a rejection in
bankruptcy. Kmart is presently a debtor in possession in a Chapter 11 bankruptcy
case filed on January 22, 2002.
INTERNATIONAL SEGMENT
As of April 3, 2003, the Company's majority-owned subsidiary in Mexico,
OfficeMax de Mexico, had 30 superstores located throughout the country and a
call and delivery center located in Mexico City. OfficeMax de Mexico occupies
all of these facilities under various long-term operating leases.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to previously disclosed securities litigation in
the United States District Court for the Northern District of Ohio, Eastern
Division and the Cuyahoga County, Ohio Court of Common Pleas. On March 27, 2002,
the United States District Court for the Northern District of Ohio, Eastern
Division, granted the Company's motion to dismiss all claims against it and its
officers and directors in Bernard Fidel, et al. vs. OfficeMax, Inc., et al.,
Case No. 1:00CV2432, and the four related cases consolidated with the Fidel case
(i.e., Case Nos. 1:00CV2558, 1:00CV2562, 1:00CV2606, and 1:00CV2720). The court
thereby dismissed, in their entirety, these putative class action cases against
the Company and certain of its officers and directors. Plaintiffs filed a motion
requesting the court to reconsider its dismissal of these cases. The Company
filed a brief in opposition to plaintiffs' motion, 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.
The appeal has been fully briefed and the parties are awaiting oral argument. 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., Carrao
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.
In addition, there are various claims, lawsuits and pending actions
against the Company incident to the Company's operations. It is the opinion of
management that the ultimate resolution of these matters will not have a
material effect on the Company's liquidity, financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of fiscal year 2002.
11
EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below is the name, present position and age of each of the
executive officers of the Company as of April 3, 2003 as well as prior positions
held by each during the past five years and the date when each was first elected
or appointed to serve as an executive officer. Executive officers are generally
elected annually by the Board of Directors and hold office until their
successors are elected or until the earlier of their death, resignation or
removal.
DATE FIRST
ELECTED OR
NAME POSITION AGE APPOINTED
---- -------- --- ----------
Michael Feuer Chairman of the Board and 58 1988
Chief Executive Officer
Gary J. Peterson President, Chief Operating Officer 52 2000
Michael F. Killeen Senior Executive Vice President, 59 2001
Chief Financial Officer
Harold L. Mulet Executive Vice President, 51 1999
Retail Sales and Store Productivity
Ross H. Pollock Executive Vice President, 47 1997
General Counsel and Secretary
Ryan T. Vero Executive Vice President, 33 2000
Merchandising and Marketing
Phillip P. DePaul Senior Vice President, 33 2002
Controller
Mr. Feuer is the Company's co-founder, Chairman of the Board and Chief
Executive Officer. He has served as a Director of the Company since its
inception in April 1988. Prior to becoming Chairman in March 1995, Mr. Feuer
served as President. From May 1970 through March 1988, Mr. Feuer was associated
with Jo-Ann Stores, Inc. (formerly Fabri-Centers of America, Inc.), a publicly
held, New York Stock Exchange-listed, national retail chain which then had over
600 stores. In his most recent capacity prior to his departure from Jo-Ann
Stores, Mr. Feuer served as Senior Vice President and a member of that company's
executive committee.
Mr. Peterson has served as the President, Chief Operating Officer of
the Company since March 2000. From July 1996 to February 2000, Mr. Peterson
served as an executive officer and COO of Blockbuster Entertainment, the world's
largest operator of video stores with over 4,000 stores. From August 1993 to
July 1996, Mr. Peterson served as Chief Operating Officer of Southeast Frozen
Foods L.P., a distributor to retail grocery stores. Mr. Peterson has also held
various management positions with Wal-Mart Stores, Inc., Carter Hawley Hale
Department Stores and Thrifty Drug Stores.
Mr. Killeen joined the Company in December 2001, as Senior Executive
Vice President, Financial and Corporate Strategies, and assumed the duties of
Chief Financial Officer in January 2002. From January 2000 until December 2001,
Mr. Killeen was a business consultant. From 1978 until December 1999, Mr.
Killeen was a partner with the accounting firm of Arthur Andersen LLP.
Mr. Mulet has served as Executive Vice President, Retail Sales and
Store Productivity of the Company since May 1999. From August 1995 to May 1999,
Mr. Mulet served as Senior Vice President, Stores at Service Merchandise
Company. Prior to August 1995, Mr. Mulet served as Regional Vice President of
Target Corporation.
12
Mr. Pollock has served as Executive Vice President, General Counsel and
Secretary of the Company since March 2001. From March 1998 to March 2001, Mr.
Pollock served as Senior Vice President, General Counsel and Secretary of the
Company. From January 1997 to March 1998, Mr. Pollock served as Vice President,
General Counsel and Secretary of the Company. From September 1988 to December
1996, Mr. Pollock practiced law with the law firm of Benesch, Friedlander,
Coplan & Aronoff in its Cleveland, Ohio office.
Mr. Vero has served as Executive Vice President, Merchandising and
Marketing since October 2001. From August 2000 to October 2001, Mr. Vero served
as Executive Vice President, e-Commerce/Direct of the Company. From February
1999 to August 2000, Mr. Vero served as Vice President, e-Commerce of the
Company. From October 1996 to February 1999, Mr. Vero served as Divisional Vice
President, OfficeMax Online, and from January 1996 to October 1996, he served in
a variety of management positions with the Company.
Mr. DePaul has served as Senior Vice President, Controller of the
Company since May 2002. From July 2001 to May 2002, Mr. DePaul served as Vice
President, Assistant Controller of the Company. From August 1998 to July 2001,
Mr. DePaul served in various management positions in the Company's financial
reporting and financial planning groups. From September 1993 to August 1998, Mr.
DePaul was employed by the accounting firm of Ernst & Young LLP.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS
OfficeMax Common Shares are listed on the New York Stock Exchange and
traded under the symbol OMX. The high and low sales prices of the Company's
Common Shares during each quarter of fiscal year 2001 and fiscal year 2002, as
reported on the New York Stock Exchange Consolidated Transaction reporting
system, are listed below:
Fiscal Year 2001 High Low
- ---------------- ----- -----
1st Quarter (ended April 28, 2001) $4.22 $2.75
2nd Quarter (ended July 28, 2001) 3.94 3.06
3rd Quarter (ended October 27, 2001) 4.95 2.60
4th Quarter (ended January 26, 2002) 4.91 2.50
Fiscal Year 2002 High Low
- ---------------- ----- -----
1st Quarter (ended April 27, 2002) $7.25 $3.76
2nd Quarter (ended July 27, 2002) 8.06 3.79
3rd Quarter (ended October 26, 2002) 5.05 3.05
4th Quarter (ended January 25, 2003) 6.55 4.05
The Company has never paid cash dividends on its Common Shares. The
declaration and payment of any dividends in the future will be at the discretion
of the Company's Board of Directors and will depend on, among other things, the
Company's earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions with respect to payment of dividends and
other factors deemed relevant by the Company's Board of Directors.
As of April 3, 2003, the Company had 3,704 shareholders of record. On
April 3, 2003, the closing price of the Company's Common Shares was $5.15.
14
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data as of, and for the fiscal years ended, January
25, 2003, January 26, 2002, January 27, 2001, January 22, 2000 and January 23,
1999 is set forth below:
(Dollars in millions, except per share data)
- ---------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal Fiscal Fiscal
2002 (1) 2001 (2) 2000 (3) 1999 (4) 1998 (5)
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL DATA (6)
Sales $ 4,775.6 $ 4,625.9 $ 5,121.3 $ 4,815.0 $ 4,326.0
Cost of merchandise sold, including
buying and occupancy costs 3,578.9 3,536.1 3,892.4 3,646.1 3,276.5
Inventory liquidation -- 3.7 8.2 -- --
Inventory markdown charge for
item rationalization -- -- -- 77.4 --
Computer segment asset write-off -- -- -- -- 80.0
Gross profit 1,196.7 1,086.1 1,220.7 1,091.5 969.5
Store closing and asset impairment 2.5 76.8 109.6 -- --
Operating income (loss) 24.6 (201.9) (193.6) 32.4 86.7
Net income (loss) 73.7 (309.5) (133.2) 10.0 48.6
Earnings (loss) per common share:
Basic 0.60 (2.72) (1.20) 0.09 0.40
Diluted 0.59 (2.72) (1.20) 0.09 0.39
STATISTICAL DATA
End of period superstores:
Domestic segment 940 966 997 955 837
International segment 30 27 23 15 12
FINANCIAL POSITION
Working capital $ 356.0 $ 240.0 $ 403.4 $ 469.1 $ 501.1
Total assets 1,785.4 1,755.0 2,293.3 2,275.0 2,231.9
Total long-term debt 1.4 1.5 1.7 15.1 16.4
Redeemable preferred shares 21.8 21.8 52.3 -- --
Shareholders' equity 780.4 705.9 982.3 1,116.0 1,138.1
(1) 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. In the
first quarter of fiscal year 2002, the Company reversed a portion of the
valuation allowance for its net deferred tax assets recorded during fiscal
year 2001 and recognized an income tax benefit of $57,500,000 due to the
extension of the carryback period. The income tax benefit increased net
income by $0.46 per diluted share. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Charges and
Reserves" and Note 6 of Notes to Consolidated Financial Statements of the
Company for additional information regarding the tax benefit recorded.
15
(2) In the third quarter of fiscal year 2001, the Company recorded a pre-tax
charge of $10,000,000 to record a reserve for legal matters. The charge
increased the net loss in fiscal year 2001 by $6,050,000, or $0.05 per
diluted share. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Charges and Reserves" for
additional information regarding this legal reserve. In the fourth quarter
of fiscal year 2001, the Company recorded a valuation allowance of
$170,616,000 to reduce to zero the value of its net deferred tax assets,
including amounts related to its net operating loss carryforwards. The
valuation allowance reduced net income by $1.49 per diluted share. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Charges and Reserves" and Note 6 of Notes to
Consolidated Financial Statements of the Company for additional information
regarding the valuation allowance. Also, in the fourth quarter of fiscal
year 2001, in conjunction with its decision to close 29 underperforming
domestic superstores, the Company recorded net, pre-tax charges of
$76,761,000 for store closing and asset impairment and $3,680,000 for
inventory liquidation. These charges reduced net income by $49,955,000, or
$0.44 per diluted share. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Charges and Reserves"
and Note 2 of Notes to Consolidated Financial Statements of the Company for
additional information regarding these charges.
(3) In conjunction with its decision to close 50 underperforming domestic
superstores, the Company recorded, in the fourth quarter of fiscal year
2000, pre-tax charges of $109,578,000 for store closing and asset
impairment and $8,244,000 for inventory liquidation. These charges reduced
net income by $71,789,000, or $0.64 per diluted share. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Charges and Reserves" and Note 2 of Notes to Consolidated
Financial Statements of the Company for additional information regarding
these charges. In the third quarter of fiscal year 2000, the Company
recorded a $19,465,000 pre-tax charge for a litigation settlement. The
litigation settlement charge was included in cost of merchandise sold and
reduced net income by $11,679,000, or $0.10 per diluted share. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Charges and Reserves" for additional information regarding
this charge for litigation settlement.
(4) In order to effect the acceleration of its supply-chain management
initiative and the implementation of the Company's new warehouse management
system, the Company decided to eliminate select current products on hand as
part of its program of merchandise and vendor rationalization. In
connection with this decision, the Company recorded a pre-tax markdown
charge of $77,372,000 in fiscal year 1999. The charge reduced net income by
$49,518,000, or $0.43 per diluted share.
(5) In conjunction with its decision to realign its former Computer Business
segment, the Company recorded a pre-tax charge of $79,950,000 in the third
quarter of fiscal year 1998. The charge provided for the liquidation of
discontinued computer inventory and the write-off of other assets directly
related to the Company's discontinued former Computer Business segment. The
charge reduced net income by $49,889,000, or $0.41 per diluted share.
(6) Fiscal year 2000 included 53 weeks. Fiscal years 2002, 2001, 1999 and 1998
included 52 weeks.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company has two business segments: Domestic and International. The
Company's operations in the United States, Puerto Rico and the U.S. Virgin
Islands, comprised of its retail stores, e-Commerce operations, catalog business
and outside sales groups, are included in the Domestic segment. The Domestic
segment also includes the operations of the Company's former Computer Business
segment, which was phased out during fiscal year 2000. The operations of the
Company's majority-owned subsidiary in Mexico, OfficeMax de Mexico, are included
in the International segment. OfficeMax's domestic e-Commerce operations,
catalog business and outside sales groups are integrated and aligned with its
domestic superstores in order to more efficiently leverage its various business
channels. As a result, management evaluates performance based on an integrated
view of its domestic operations. Management evaluates performance of the
Company's International segment separately because of the differences between
the operating environments for its Domestic and International segments.
During fiscal years 2002, 2001 and 2000, the Company recorded charges
related to its store closing program and supply-chain management initiatives as
well as charges related to various legal matters and to provide a valuation
allowance for its net deferred tax assets. All of these charges are included in
the results of operations of the Company's Domestic segment. Additional
information regarding these charges is included below under the caption "Charges
and Reserves."
FISCAL YEAR 2002 (52 WEEKS) COMPARED TO FISCAL YEAR 2001 (52 WEEKS)
CONSOLIDATED OPERATIONS
Sales in fiscal year 2002 increased 3.2% to $4,775,563,000 from
$4,625,877,000 in fiscal year 2001. Fiscal 2001 included sales of approximately
$76,740,000 from the 29 underperforming domestic superstores that were closed as
of the first day of fiscal year 2002. The year-over-year sales increase was
primarily due to a comparable-store sales (sales for stores that have been open
for more than one year) increase of approximately 4% and sales from new
superstores opened in fiscal years 2002 and 2001. Fiscal year 2002
comparable-store sales primarily reflect a comparable-store sales increase of
more than 4% experienced by the Company's Domestic segment. Sales for the
Company's International segment increased 8.9% during fiscal year 2002 to
$153,084,000 from $140,584,000 primarily as a result of sales from the new
superstores opened during fiscal years 2002 and 2001, partially offset by a
decrease in comparable-store sales of approximately 3%.
Gross profit was $1,196,691,000, or 25.1% of sales, in fiscal year 2002 and
$1,086,128,000, or 23.5% of sales, in fiscal year 2001. The increase in gross
margin as a percentage of sales was primarily due to improved leverage
(decreasing as a percentage of sales) of certain fixed costs, such as occupancy
costs for the Company's superstores, delivery centers and inventory distribution
facilities, which are included in cost of merchandise sold and continued
efficiencies realized by the Company's PowerMax supply-chain network. In
addition, prior year gross margin was negatively impacted by a $3,680,000 charge
for inventory liquidation recorded by the Company's Domestic segment related to
its store closing program. Additional information regarding the inventory
liquidation charge is included below under the caption "Charges and Reserves."
Store operating and selling expenses, which consist primarily of store
payroll, operating and advertising expenses, decreased $18,836,000, or 1.1% of
sales, to $1,034,122,000, or 21.7% of sales, in fiscal year 2002 from
$1,052,958,000, or 22.8% of sales, in fiscal year 2001. The decrease in store
operating and selling expenses as a percentage of sales was primarily due to the
closing of 29 underperforming domestic superstores as of the first day of fiscal
year 2002 and improved leveraging of store-level payroll, including the
incremental costs associated with store-level initiatives by the Company's
Domestic segment. The improved store operating and selling expense leverage
realized by the Company's Domestic segment was partially offset by increased
store operating and selling expense for the Company's International segment.
Prior year store operating and selling expense was negatively impacted by a
$10,000,000 charge to record a reserve for legal matters in the Company's
Domestic segment. Additional information regarding the legal reserve is included
below under the caption "Charges and Reserves."
General and administrative expenses decreased $10,917,000, or 0.3% of
sales, to $134,763,000, or 2.8% of sales, in fiscal year 2002 from $145,680,000,
or 3.1% of sales, in fiscal year 2001. The decrease in general and
administrative expenses was realized in the Company's Domestic segment and 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 that
supported the Company's various business initiatives.
In accordance with the provisions of Financial Accounting Standards Board
Statement No. 142, "Goodwill and Other Intangibles" ("FAS 142"), which 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
17
least annually. Accordingly, no goodwill amortization was recorded in fiscal
year 2002. Goodwill amortization was $9,855,000 in fiscal year 2001. Prior to
fiscal year 2002, goodwill was capitalized and amortized over 10 to 40 years
using the straight-line method. Additional information regarding this new
standard is included below under the caption "Significant Accounting Policies."
Pre-opening expenses were $672,000 and $2,790,000 in fiscal years 2002 and
2001, respectively. Pre-opening expenses, which consist primarily of store
payroll, supplies and grand opening advertising for new superstores, are
expensed as incurred and, therefore, fluctuate from period to period depending
on the timing and number of new store openings. The Company's Domestic segment
opened five new superstores in fiscal year 2002 and opened 17 new superstores
and completed the expansion of its PowerMax distribution facility in Las Vegas
in fiscal year 2001. Total pre-opening expenses for the Domestic segment were
$392,000 in fiscal year 2002 and $1,801,000 in fiscal year 2001. The Company's
International segment opened three and five new superstores in Mexico during
fiscal years 2002 and 2001, respectively, and incurred pre-opening expenses of
approximately $280,000 and $989,000, respectively, during those years.
Store closing and asset impairment charges were $2,489,000 and $76,761,000
in fiscal years 2002 and 2001, respectively. Eight underperforming domestic
superstores and one domestic delivery center were included in the net charge for
fiscal year 2002 and 29 underperforming domestic superstores were included in
the net charge for fiscal year 2001. Additional information regarding these
charges is included below under the caption "Charges and Reserves."
Interest expense, net was $5,980,000 and $14,804,000 in fiscal years 2002
and 2001, respectively. The decrease in net interest expense during fiscal year
2002 was primarily due to lower average outstanding borrowings for the Company's
Domestic segment and lower interest rates on the Company's outstanding
borrowings. As of January 25, 2003, the Domestic segment had no outstanding
borrowings under its revolving credit facility. Interest income for the
International segment decreased year over year, primarily as a result of lower
interest earned on this segment's short-term investments.
Other expense, net was $61,000 in fiscal year 2001. Other expense, net
consisted primarily of amounts related to the Company's investment in a
Brazilian company. The Company wrote-off its remaining investment in the
Brazilian company during the fourth quarter of fiscal year 2001. Additional
information regarding the write-off of the Company's investment in the Brazilian
company is included below under the caption "Charges and Reserves."
In accordance with the provisions of Financial Accounting Standards Board
Statement No. 109, "Accounting for Income Taxes" ("FAS 109"), 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 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 adjustments. The Company was
not required to recognize any income tax expense in fiscal year 2002. Any future
decision to reverse a portion or all of the remaining valuation allowance will
be based on consideration of several factors including, but not limited to, the
Company's expectations regarding future taxable income and the Company's
cumulative income or loss in the then most recent three-year period. Additional
information regarding the valuation allowance recorded in fiscal year 2001 is
included below under the caption "Charges and Reserves."
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. In the first quarter
of fiscal year 2002, the Company reversed a portion of the valuation allowance
for its net deferred tax assets recorded during the prior year and recognized an
income tax benefit of $57,500,000 due to the extension of the carryback period.
Additional information regarding the tax benefit recorded in fiscal year 2002 is
included below under the caption "Charges and Reserves."
In addition to the income tax expense recorded to establish the valuation
allowance, the Company recognized income tax benefit of $80,912,000 during
fiscal year 2001, reflecting an effective tax rate of approximately 37.3%. This
effective tax rate was different from the statutory income tax rate as a result
of state and local income taxes and non-deductible goodwill amortization. The
Company recognized net income tax expense, including the income tax expense
recorded to establish the valuation allowance and the income tax benefit, of
$89,704,000 during fiscal year 2001.
As a result of the foregoing factors, net income for fiscal year 2002 was
$73,724,000, or $0.59 per diluted share. The tax benefit recognized in the first
quarter of fiscal year 2002 increased net income by $57,500,000, or $0.46 per
diluted share. The net loss for fiscal year 2001 was $309,458,000, or $2.72 per
18
diluted share including the after-tax effects of charges for inventory
liquidation, store closing and asset impairment, the reserve for legal matters
and the deferred tax asset valuation allowance of $2,227,000, $47,728,000,
$6,050,000 and $170,616,000, respectively. In total these charges impacted the
fiscal year 2001 net loss by $1.98 per diluted share. Goodwill amortization
recognized in fiscal year 2001 was $9,855,000, or $0.09 per diluted share.
Additional information regarding the charges recorded in fiscal year 2001 for
inventory liquidation, store closing and asset impairment, legal matters and the
valuation allowance is included below under the caption "Charges and Reserves."
DOMESTIC SEGMENT
Sales for the Domestic segment increased 3.1% in fiscal year 2002 to
$4,622,479,000 from $4,485,293,000 in fiscal year 2001. Fiscal year 2001
included sales of approximately $76,740,000 from the 29 underperforming domestic
superstores that were closed as of the first day of fiscal year 2002. The
year-over-year sales increase was primarily due to a comparable-store sales
increase of approximately 4%, coupled with the sales from new superstores opened
in fiscal years 2002 and 2001. The sales increase was partially offset by the
impact of the stores that were closed on the first day of fiscal year 2002. The
Company's Domestic segment realized sequential quarter-over-quarter improvement
in comparable-store sales during all four quarters of fiscal year 2002. The
comparable-store sales gains were driven by both 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. Fiscal year 2001
comparable-store sales for the Domestic segment were negatively impacted by the
recession in the U.S. and negative consumer and business sentiment following the
September 11th terrorist attacks.
Gross profit for the Domestic segment was $1,161,113,000, or 25.1% of
sales, in fiscal year 2002 and $1,052,544,000, or 23.5% of sales, in fiscal year
2001. The increase in gross margin as a percentage of sales was primarily due to
improved leverage of certain fixed costs, such as occupancy costs for the
segment's superstores, delivery centers and inventory distribution facilities,
that are included in cost of merchandise sold. The improved leverage of fixed
costs benefited the Domestic segment's gross margin by approximately 1.0% of
sales. The Domestic segment's gross margin also benefited from continued
efficiencies realized by the Company's PowerMax supply-chain network. In
addition, prior year gross margin was negatively impacted by a charge for
inventory liquidation recorded by the Company's Domestic segment related to its
store closing program of $3,680,000, or 0.1% of sales. Additional information
regarding the inventory liquidation charge is included below under the caption
"Charges and Reserves."
Operating results for the Domestic segment were income of $20,307,000 in
fiscal year 2002 and a loss of $206,580,000 in fiscal year 2001. The fiscal year
2001 loss included charges for inventory liquidation, store closing and asset
impairment and the reserve for legal matters recorded by the Domestic segment of
$3,680,000, $76,761,000 and $10,000,000, respectively. The year-over-year
improvement in the operating results of the Domestic segment was primarily due
to the increase in gross profit as a percentage of sales and the improved
leverage of store operating and selling expenses and general and administrative
expenses as well as the charges recorded in fiscal year 2001. The improved
leverage of store operating and selling expenses and general and administrative
expenses was driven by the Domestic segment's comparable-store sales gains as
well as the Company's continued expense control programs. Domestic segment
payroll related expenses, which represent approximately 50% of the total store
operating and selling expenses and general and administrative expenses,
decreased in terms of absolute dollars and as a percentage of sales
year-over-year.
As a result of the foregoing factors, Domestic segment net income for
fiscal year 2002 was $71,185,000, or $0.57 per diluted share. The tax benefit
recognized in the first quarter of fiscal year 2002 increased the Domestic
segment's net income by $57,500,000, or $0.46 per diluted share. The Domestic
segment net loss for fiscal year 2001 was $312,089,000, or $2.74 per diluted
share, including the after-tax effects of charges for inventory liquidation,
store closing and asset impairment, reserve for legal matters and the valuation
allowance of $2,227,000, $47,728,000, $6,050,000 and $170,616,000, respectively.
In total these charges impacted the fiscal year 2001 net loss by $1.98 per
diluted share. Goodwill amortization recognized in fiscal year 2001 was
$9,390,000, or $0.08 per diluted share. Additional information regarding the
charges recorded in fiscal year 2001 for inventory liquidation, store closing
and asset impairment, legal matters and the deferred tax asset valuation
allowance is included below under the caption "Charges and Reserves."
19
INTERNATIONAL SEGMENT
Sales for the International segment in fiscal year 2002 increased 8.9% to
$153,084,000 from $140,584,000 in fiscal year 2001. This sales increase was
primarily due to the new superstores opened in fiscal years 2002 and 2001,
partially offset by a comparable-store sales decrease of approximately 3%. This
segment opened three and five new superstores in fiscal years 2002 and 2001,
respectively. This segment closed one superstore in fiscal year 2001.
Comparable-store sales were negatively impacted by the changes in currency
exchange rates during fiscal year 2002. In local currency, comparable-store
sales were relatively flat for the International segment during fiscal year
2002. The Company expects the unfavorable currency exchange rate trends to
continue to negatively impact comparable-store sales for OfficeMax de Mexico
during at least the first half of fiscal year 2003.
Gross profit for the International segment was $35,578,000, or 23.2% of
sales, in fiscal year 2002 and $33,584,000, or 23.9% of sales, in fiscal year
2001. The decrease in gross margin as a percentage of sales was primarily due to
the negative effect of currency exchange rate fluctuations on the cost of
products sourced from the United States, partially offset by a sales mix shift
towards higher margin supply merchandise.
Operating income for the International segment was $4,338,000, or 2.8% of
sales, in fiscal year 2002 and $4,664,000, or 3.3% of sales, in fiscal year
2001. The decrease in operating income as a percentage of sales was primarily
due to the decrease in gross margin as a percentage of sales.
Minority interest in the net income of the International segment was
$2,441,000 and $2,973,000 in fiscal years 2002 and 2001, respectively.
As a result of the foregoing factors, net income for the International
segment was $2,539,000, or 1.7% of sales, in fiscal year 2002 and $2,631,000, or
1.9% of sales, in fiscal year 2001. International segment net income was $0.02
per diluted share in fiscal years 2002 and 2001. Goodwill amortization
recognized in fiscal year 2001 was $465,000, or $0.01 per diluted share.
20
FISCAL YEAR 2001 (52 WEEKS) COMPARED TO FISCAL YEAR 2000 (53 WEEKS)
CONSOLIDATED OPERATIONS
Sales in fiscal year 2001 decreased 9.7% to $4,625,877,000 from
$5,121,337,000 in fiscal year 2000. Fiscal year 2000 included sales of
approximately $224,026,000 from the Company's discontinued former Computer
Business segment and 46 underperforming domestic superstores that were closed as
of the first day of fiscal year 2001. Sales for the 53rd week included in fiscal
year 2000 for the Company's Domestic segment were approximately $104,220,000.
The year-over-year sales decrease was primarily due to the discontinued former
Computer Business segment, the closed stores and the additional week of sales
included in fiscal year 2000 as well as a comparable-store sales decrease of
approximately 6%. Fiscal year 2001 comparable-store sales primarily reflect a
comparable-store sales decrease of approximately 6% experienced by the Company's
Domestic segment. Fiscal year 2001 comparable-store sales for the Domestic
segment were negatively impacted by the recession in the U.S. and uncertain
consumer and business sentiment following the September 11th terrorist attacks.
These factors contributed to a decline in small business capital purchases and
the formation of new company start-ups, as well as reduced consumer spending,
particularly for technology and furniture products. Sales for the Company's
International segment increased 21% during fiscal year 2001 to $140,584,000 from
$116,269,000 primarily as a result of a comparable-store sales increase of
approximately 7% and sales from the new superstores opened during fiscal years
2001 and 2000.
Gross profit was $1,086,128,000, or 23.4% of sales, in fiscal year 2001 and
$1,220,728,000, or 23.8% of sales, in fiscal year 2000. The Company's Domestic
segment recorded inventory liquidation charges related to its store closing
program in fiscal years 2001 and 2000 and a charge for a legal settlement in
fiscal year 2000. These charges were included as a component of the Domestic
segment's cost of merchandise sold. The de-leveraging of certain fixed costs,
such as occupancy costs for the Company's superstores, delivery centers and
inventory distribution facilities, which are included in cost of merchandise
sold, primarily as a result of the comparable-store sales decrease experienced
by the Company's Domestic segment, reduced gross profit by approximately 1.3% of
sales during fiscal year 2001. The phase-out of the Company's low-margin former
Computer Business segment, which was completed during fiscal year 2000,
partially offset the impact of de-leveraging fixed costs included in cost of
merchandise sold. Additional information regarding the inventory liquidation
charges and the legal settlement is included below under the caption "Charges
and Reserves."
Store operating and selling expenses, which consist primarily of store
payroll, operating and advertising expenses, decreased $78,493,000 to
$1,052,958,000 in fiscal year 2001 from $1,131,451,000 in fiscal year 2000. This
decrease was primarily a result of the phase-out of the former Computer Business
segment, the closing of 46 underperforming domestic superstores as of the first
day of fiscal year 2001 and the 53rd week included in the fiscal year 2000
results for the Company's Domestic segment. As a percentage of sales, store
operating and selling expenses increased to 22.8% in fiscal year 2001 from 22.1%
in fiscal year 2000. The increase as a percentage of sales was primarily due to
the de-leveraging of certain operating expenses in the Company's Domestic
segment and a $10,000,000 charge to record a reserve for legal matters recorded
in the Company's Domestic segment during the third quarter of fiscal year 2001.
Additional information regarding the legal reserve is included below under the
caption "Charges and Reserves."
General and administrative expenses decreased $10,593,000 to $145,680,000
in fiscal year 2001 from $156,273,000 in fiscal year 2000. The decrease in
general and administrative expenses was primarily due to the Company's continued
cost-and-expense control initiatives, efficiency gains as a result of the
Company's information technology initiatives and the 53rd week included in the
Domestic segment's fiscal year 2000 results.
Goodwill amortization was $9,855,000 in fiscal year 2001 and $9,863,000 in
fiscal year 2000. During those fiscal years, goodwill was capitalized and
amortized over 10 to 40 years using the straight-line method. As a result of a
new accounting standard, FAS 142, that was effective for the Company as of the
beginning of fiscal year 2002, goodwill is no longer amortized, but will be
tested for impairment at least annually. Additional information regarding this
new accounting standard is included below under the caption "Significant
Accounting Policies."
21
Pre-opening expenses were $2,790,000 and $7,113,000 in fiscal years 2001
and 2000, respectively. Pre-opening expenses, which consist primarily of store
payroll, supplies and grand opening advertising for new superstores, are
expensed as incurred and, therefore, fluctuate from period to period depending
on the timing and number of new store openings. Total pre-opening expenses for
the Domestic segment were $1,801,000 in fiscal year 2001 and $6,061,000 in
fiscal year 2000. The Company's Domestic segment opened 17 new superstores and
completed the expansion of its PowerMax distribution facility in Las Vegas in
fiscal year 2001 and opened 54 new superstores in fiscal year 2000. The
Company's Domestic segment also incurred pre-opening expenses of approximately
$1,000,000 during fiscal year 2000 to open a PowerMax inventory distribution
facility. The Company's International segment opened five and eight new
superstores in Mexico during fiscal years 2001 and 2000, respectively, and
incurred pre-opening expenses of approximately $989,000 and $1,052,000 during
those years.
Store closing and asset impairment charges were $76,761,000 and
$109,578,000 in fiscal years 2001 and 2000, respectively. Twenty-nine
underperforming domestic superstores were included in the net charge for fiscal
year 2001 and 48 underperforming domestic superstores were included in the net
charge for fiscal year 2000. Additional information regarding these charges is
included below under the caption "Charges and Reserves."
Interest expense, net, was $14,804,000 and $16,493,000 in fiscal years 2001
and 2000, respectively. The decrease in net interest expense during fiscal year
2001 was primarily due to reduced average outstanding borrowings for the
Company's Domestic segment and lower interest rates. As of January 26, 2002, the
Domestic segment had outstanding borrowings under its revolving credit facility
of $20,000,000. Interest income for the International segment decreased year
over year, primarily as a result of lower interest earned on this segment's
short-term investments.
Other expense, net, was $61,000 in fiscal year 2001 and $60,000 in fiscal
year 2000. Other expense, net, consists primarily of amounts related to the
Company's investment in a Brazilian Company. The Company wrote-off its remaining
investment in the Brazilian company during the fourth quarter of fiscal year
2001. Additional information regarding the write-off of the Company's investment
in the Brazilian company is included below under the caption "Charges and
Reserves."
In accordance with the provisions of FAS 109, 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, in the
fourth quarter of fiscal year 2001. In addition to the income tax expense
recorded to establish the valuation allowance, the Company recognized income tax
benefit of $80,912,000 during fiscal year 2001, reflecting an effective tax rate
of approximately 37.3%. The Company recognized an income tax benefit of
$79,076,000 in fiscal year 2000, reflecting an effective tax rate of
approximately 37.6%. The effective tax rates for both years were different from
the statutory income tax rate as a result of state and local income taxes and
non-deductible goodwill amortization. The Company recognized net income tax
expense, including the income tax expense recorded to establish the valuation
allowance and the income tax benefit, of $89,704,000 during fiscal year 2001.
Additional information regarding the valuation allowance recorded in fiscal year
2001 is included below under the caption "Charges and Reserves."
As a result of the foregoing factors, the net loss for fiscal year 2001 was
$309,458,000, or $2.72 per diluted share, including the after-tax effects of
charges for inventory liquidation, store closing and asset impairment, the
reserve for legal matters and the deferred tax asset valuation allowance of
$2,227,000, $47,728,000, $6,050,000 and $170,616,000, respectively. In total,
these charges impacted the fiscal year 2001 net loss by $1.98 per diluted share.
The net loss for fiscal year 2000 was $133,166,000, or $1.20 per diluted share,
including the after-tax effects of charges for litigation settlement, inventory
liquidation and store closing and asset impairment of $11,679,000, $4,946,000
and $66,843,000, respectively. In total, these charges impacted the fiscal year
2000 net loss by $0.74 per diluted share. Additional information regarding the
charges for inventory liquidation and store closing and asset impairment
recorded during fiscal years 2001 and 2000 as well as the reserve for legal
matters and the litigation settlement recorded in fiscal years 2001 and 2000,
respectively, and the valuation allowance recorded in fiscal year 2001 is
included below under the caption "Charges and Reserves."
22
DOMESTIC SEGMENT
Sales for the Domestic segment in fiscal year 2001 decreased 10.4% to
$4,485,293,000 from $5,005,068,000 in fiscal year 2000. Fiscal year 2000
included sales of approximately $224,026,000 from the Company's discontinued
former Computer Business segment and 46 underperforming domestic superstores
that were closed as of the first day of fiscal year 2001. Sales for the 53rd
week included in fiscal year 2000 for this segment were approximately
$104,220,000. The year-over-year sales decrease was primarily due to the
discontinued former Computer Business segment, the closed stores and the
additional week of sales included in fiscal year 2000 as well as a
comparable-store sales decrease of approximately 6%. Fiscal year 2001
comparable-store sales were negatively impacted by the recession in the U.S. and
uncertain consumer and business sentiment following the September 11th terrorist
attacks. These factors contributed to a decline in both small business capital
purchases and the formation of new company startups, as well as reduced consumer
spending, particularly for technology and furniture products. Sales for certain
items, such as furniture and certain technology products were also impacted by
declines in average sales prices.
Gross profit for the Domestic segment was $1,052,544,000, or 23.5% of
sales, in fiscal year 2001 and $1,188,739,000, or 23.8% of sales, in fiscal year
2000. Certain fixed costs, such as occupancy costs for the segment's
superstores, delivery centers and inventory distribution facilities, are
included in cost of merchandise sold. The de-leveraging of these costs,
primarily as a result of the comparable-store sales decrease, reduced gross
margin by approximately 1.3% of sales during fiscal year 2001. The phase-out of
the Company's low-margin former Computer Business segment, which was completed
during fiscal year 2000, partially offset the impact of de-leveraging fixed
costs included in cost of merchandise sold. The Domestic segment recorded
inventory liquidation charges related to its store closing program in fiscal
years 2001 and 2000 of $3,680,000, or 0.1% of sales, and $8,244,000, or 0.2% of
sales, respectively. The Domestic segment also recorded a charge for a legal
settlement in fiscal year 2000 of $19,465,000, or 0.4% of sales. These charges
were included as a component of the Domestic segment's cost of merchandise sold.
Additional information regarding the inventory liquidation charges and the
charge for a legal settlement is included below under the caption "Charges and
Reserves."
Operating results for the Domestic segment were a loss of $206,580,000 in
fiscal year 2001 and a loss of $198,493,000 in fiscal year 2000. The fiscal year
2001 loss included charges for inventory liquidation, store closing and asset
impairment and the reserve for legal matters recorded by the Domestic segment of
$3,680,000, $76,761,000 and $10,000,000, respectively. The fiscal year 2000 loss
included charges for inventory liquidation, litigation settlement and store
closing and asset impairment recorded by the Domestic segment of $8,244,000,
19,465,000 and $109,578,000, respectively. The increase in the operating loss
for the Domestic segment was primarily due to the overall sales decrease
experienced by this segment and the related decrease in gross profit. The
decrease in gross profit was partially offset by reduced store operating and
selling, and general and administrative expenses.
As a result of the foregoing factors, the Domestic segment's net loss for
fiscal year 2001 was $312,089,000, or $2.74 per diluted share, including the
after-tax effects of charges for inventory liquidation, store closing and asset
impairment, the reserve for legal matters and the deferred tax asset valuation
allowance of $2,227,000, $47,728,000, $6,050,000 and $170,616,000, respectively.
In total, these charges impacted the fiscal year 2001 net loss by $1.98 per
diluted share. The Domestic segment's net loss for fiscal year 2000 was
$137,188,000, or $1.24 per diluted share, including the after-tax effects of
charges for litigation settlement, inventory liquidation and store closing and
asset impairment of $11,679,000, $4,946,000 and $66,843,000, respectively. In
total, these charges impacted the fiscal year 2000 net loss by $0.74 per diluted
share. Additional information regarding the charges for inventory liquidation
and store closing and asset impairment recorded during fiscal years 2001 and
2000 as well as the reserve for legal matters and the litigation settlement
recorded in fiscal years 2001 and 2000, respectively, and the valuation
allowance recorded in fiscal year 2001 is included below under the caption
"Charges and Reserves."
INTERNATIONAL SEGMENT
Sales for the International segment in fiscal year 2001 increased 20.9% to
$140,584,000 from $116,269,000 in fiscal year 2000. This sales increase was
primarily due to a comparable-store sales increase of approximately 7% and new
superstores opened in fiscal years 2001 and 2000. This segment opened five and
eight new superstores in fiscal years 2001 and 2000, respectively. This segment
closed one superstore in fiscal year 2001. The comparable-store sales increase
experienced by this segment was primarily due to growth in the sales of
computers and related peripherals. These items accounted for approximately 54%
of the International segment's sales in fiscal year 2001 as compared to 51% of
this segment's sales in fiscal year 2000.
23
Gross profit for the International segment was $33,584,000, or 23.9% of
sales, in fiscal year 2001 and $31,989,000, or 27.5% of sales, in fiscal year
2000. The decrease in gross margin as a percentage of sales was primarily due to
the growth in the low-margin computer and peripheral product categories which
generate lower margins than sales of supply products.
Operating income for the International segment was $4,664,000, or 3.3% of
sales, in fiscal year 2001 and $4,943,000, or 4.3% of sales, in fiscal year
2000. The decrease in operating income as a percentage of sales was primarily
due to the decrease in gross profit as a percentage of sales, partially offset
by improved leverage of store operating and selling expenses.
Minority interest in the net income of the International segment was
$2,973,000 and $2,139,000 in fiscal years 2001 and 2000, respectively.
As a result of the foregoing factors, net income for the International
segment was $2,631,000, or 1.9% of sales, in fiscal year 2001 and $4,022,000, or
3.5% of sales, in fiscal year 2000. International segment net income was $0.02
per diluted share in fiscal year 2001 and $0.04 per diluted share in fiscal
year 2000.
CHARGES AND RESERVES
STORE CLOSING PROGRAM
Fiscal Year 2002. In December 2002, the Company conducted a review of its
domestic real estate portfolio and committed to close eight underperforming
superstores and one delivery center. In conjunction with these closings, the
Company recorded a pre-tax charge for store closing and asset impairment of
$11,915,000 during the fourth quarter of fiscal year 2002. Major components of
the charge included lease disposition costs of $9,118,000, asset impairment and
disposition of $2,530,000 and other closing costs of $267,000. Estimated lease
disposition costs in the charge included the aggregate rent expense for the
closing stores, net of approximately $6,849,000 of expected future sublease
income. The Company estimated future sublease income for the closing stores
based on real estate studies prepared by independent real estate industry
advisors. Also during the fourth quarter of fiscal year 2002, the Company
reversed certain portions of the store closing reserves established in fiscal
year 2001 and fiscal year 2000, respectively, when those portions of the
reserves were deemed no longer necessary. The reversals reduced the fiscal year
2002 charge by approximately $11,203,000. Additional information regarding the
reversal of portions of the store closing reserve is included within this
section under the sub-headings "Fiscal Year 2001" and "Fiscal Year 2000." The
Company recorded a pre-tax charge for asset impairment of $1,777,000 during the
second quarter of fiscal year 2002. In total, the net charges for store closing
and asset impairment reduced fiscal year 2002 net income by $2,489,000 or $0.02
per diluted share.
Fiscal Year 2001. During the fourth quarter of fiscal year 2001, the
Company announced that it had completed a review of its domestic real estate
portfolio and elected to close 29 underperforming domestic 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. Major components of the charge included lease disposition
costs of $53,646,000, asset impairment and disposition of $20,674,000 and other
closing costs, including severance, of $5,518,000. Estimated lease disposition
costs in the charge included the aggregate rent expense for the closed stores,
net of approximately $42,344,000 of expected future sublease income. The Company
estimated future sublease income for the closed stores based on real estate
studies prepared by independent real estate industry advisors. During the fourth
quarter of fiscal year 2001, certain portions of the reserve for store closing
costs established during fiscal year 2000 were deemed no longer necessary and
reversed. This reversal reduced the fiscal year 2001 charge by approximately
$3,077,000. Additional information regarding the reversal of a portion of the
store closing reserve is included within this section under the sub-heading
"Fiscal Year 2000." The net charge of $76,761,000, net of income tax benefit,
reduced fiscal year 2001 net income by $47,728,000, or $0.42 per diluted share.
Also during the fourth quarter of fiscal year 2001, the Company recorded an
additional pre-tax charge of $3,680,000 as a result of the inventory liquidation
at the closed stores. The inventory liquidation charge, net of income tax
benefit, reduced fiscal year 2001 net income by $2,227,000, or $0.02 per diluted
share.
Included in the charge for store closing and asset impairment was
$5,631,000 of expense related to the write-off of the Company's investment in a
Brazilian company, as well as receivables from the Brazilian company.
The 29 stores were closed during the first quarter of fiscal year 2002 upon
completion of the liquidation process that began as of the first day of fiscal
year 2002. The results of operations for the 29 closed stores were assumed by a
third-party liquidator and, accordingly, were not included in the Company's
consolidated results of operations for fiscal year 2002.
During the fourth quarter of fiscal year 2002, the Company reversed
approximately $8,847,000 of the reserve for store closing costs originally
established in fiscal year 2001, as a result of management's successful efforts
to sublease closed stores and negotiate early terminations of leases.
24
Fiscal Year 2000. During fiscal year 2000, the Company announced that it
had conducted a review of its domestic real estate portfolio and elected to
close 50 underperforming domestic superstores. In conjunction with these store
closings, the Company recorded a pre-tax charge for store closing and asset
impairment of $109,578,000 during the fourth quarter of fiscal year 2000. Major
components of the charge included lease disposition costs of $89,815,000, asset
impairment and disposition costs of $13,071,000 and other closing costs,
including severance, of $6,692,000. Estimated lease disposition costs in the
charge included the aggregate rent expense for the closed stores, net of
approximately $83,981,000 of expected future sublease income. The Company
estimated future sublease income for the closed stores based on real estate
studies prepared by independent real estate industry advisors. The charge, net
of income tax benefit, reduced net income by $66,843,000, or $0.59 per diluted
share, during fiscal year 2000. Also during the fourth quarter of fiscal year
2000, the Company recorded an additional pre-tax charge of $8,244,000 as a
result of the inventory liquidation at the closed stores. The inventory
liquidation charge, net of income tax benefits, reduced fiscal year 2000 net
income by $4,946,000, or $0.05 per diluted share.
Of the 50 superstores originally expected to close, 48 were liquidated and
closed during fiscal year 2001. During the fourth quarter of fiscal year 2001,
the Company elected not to close the remaining two stores due to changes in
competitive and market conditions and reversed the charge originally recorded to
close those stores. In total, approximately $3,077,000 of the original charge
recorded in fiscal year 2000 was reversed during the fourth quarter of fiscal
year 2001, primarily as a result of the two stores management elected not to
close and certain equipment lease termination costs that were lower than
expected. During the fourth quarter of fiscal year 2002, the Company reversed
approximately $2,356,000 of the reserve originally established in fiscal year
2000, as a result of management's successful efforts to sublease closed stores
and negotiate early terminations of leases. 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.
See Note 2 of Notes to Consolidated Financial Statements of the Company for
additional information regarding the store closing and asset impairment charges.
INCOME TAXES
In the fourth quarter of fiscal year 2001, the Company recorded a charge of
approximately $170,616,000, or $1.49 per diluted share, 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 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 three-year period ended on January
26, 2002 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 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. Any future decision to reverse a portion or all of the
remaining valuation allowance will be based on consideration of several factors
including, but not limited to, the Company's expectations regarding future
taxable income and the Company's cumulative income or loss in the then most
recent three-year period.
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. The income tax benefit increased fiscal year 2002 net income by $0.46
per diluted share.
Also during fiscal year 2002, the Company received refunds of amounts on
deposit with the IRS of approximately $30,000,000 related to prior year tax
returns.
See Note 6 of Notes to Consolidated Financial Statements of the Company for
additional information regarding income taxes.
25
LEGAL SETTLEMENT -- FISCAL YEAR 2001
During the third quarter of fiscal year 2001, the Company recorded a
pre-tax charge of $10,000,000 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. The charge was included as a
component of store operating and selling expenses. The charge, net of income tax
benefit, increased the net loss in fiscal year 2001 by $6,050,000 or $0.05 per
diluted share.
LEGAL SETTLEMENT -- FISCAL YEAR 2000
During the third quarter of fiscal year 2000, the Company, based on changes
in circumstances and the advice of outside legal counsel, elected to settle its
lawsuit with Ryder Integrated Logistics prior to trial. As a result of the
settlement, the Company recorded a pre-tax charge of $19,465,000, which was
included as a component of cost of merchandise sold. The charge, net of income
tax benefit, increased the net loss in fiscal year 2000 by $11,679,000, or $0.10
per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations provided $93,579,000 of cash during fiscal year
2002, primarily as a result of net income of $73,724,000, including the tax
benefit of $57,500,000 due to the extension of the carryback period. During
fiscal year 2002, the Company received refunds of amounts on deposit with the
IRS related to prior year tax returns of approximately $30,000,000. See Note 6
of Notes to Consolidated Financial Statements of the Company for additional
information regarding income taxes. These sources of cash, as well as non-cash
expense for depreciation of $90,161,000, were partially offset by changes in
working capital. Inventory increased $46,145,000 from the end of the prior
fiscal year due to planned purchases to support the Company's comparable-store
sales growth during the important new year "Back-to-Business" selling period in
January and February. Accounts payable decreased $90,157,000 since the end of
the prior fiscal year, primarily as a result of the Company's decisions to take
advantage of special discounts and forego extended terms offered by its vendors
and increased fourth quarter purchases of foreign-sourced inventory which
typically have shorter payment terms than inventory sourced domestically. The
change in overdraft balances since the end of the previous fiscal year is
reflected in the Consolidated Statement of Cash Flows as a financing activity.
The overdraft balances are included as a component of accounts payable in the
Company's Consolidated Balance Sheet. As a result of the foregoing factors,
accounts payable-to-inventory leverage decreased to 47.2% as of January 25,
2003, from 56.0% as of January 26, 2002. During fiscal year 2002, annualized
inventory turns improved to 3.8 times per year from 3.4 times per year in the
prior year, primarily as a result of the Company's continued, successful
supply-chain management initiatives. The Company's operations provided
$231,021,000 of cash during fiscal year 2001 primarily as a result of a
reduction in inventory of $274,261,000, partially offset by a decrease in
accounts payable of $57,035,000. The reduction in inventory was the result of
the Company's supply-chain management initiatives. The Company's operations used
$13,930,000 of cash during fiscal year 2000.
Net cash used for investing activities, primarily capital expenditures for
new and remodeled superstores and information technology initiatives, was
$51,835,000 in fiscal year 2002, as compared to $50,377,000 in fiscal year 2001
and $141,134,000 in fiscal year 2000. Capital expenditures were $49,188,000,
$49,228,000 and $134,812,000 in fiscal years 2002, 2001 and 2000, respectively.
The Company expects capital expenditures for fiscal year 2003, primarily for
store remodels, information technology initiatives, including the new
point-of-sale system, and new store openings, to be approximately $100,000,000.
Net cash provided by financing was $19,454,000 in fiscal year 2002. Fiscal
year 2002 financing activities primarily represented an increase in overdraft
balances of $36,210,000 and a reduction of outstanding borrowings under the
Company's revolving credit facility of $20,000,000. In addition to funding
capital expenditures, the Company has used its cash from operations to reduce
borrowings under the Company's revolving credit facility by $220,000,000 over
the past two fiscal years. The Company had no outstanding borrowings under the
revolving credit facility as of January 25, 2003. Net cash used for financing
was $232,263,000 in fiscal year 2001, which primarily represented a reduction of
outstanding borrowings under the Company's revolving credit facility of
$200,000,000. Net cash provided by financing was $209,880,000 in fiscal year
2000. Fiscal year 2000 financing activities primarily represented borrowings
under the Company's revolving credit facility and the issuance of $50,000,000 of
redeemable preferred shares.
26
The Company opened five new superstores in the United States and three new
superstores in Mexico in fiscal year 2002 and plans to open approximately the
same number of domestic superstores during fiscal year 2003 and up to ten new
superstores in Mexico. Management estimates that the Company's cash requirements
for opening a domestic superstore, exclusive of pre-opening expenses, will be
approximately $900,000, including approximately $425,000 for leasehold
improvements, fixtures, point-of-sale terminals and other equipment, and
approximately $400,000 for the portion of store inventory that is not financed
by accounts payable to vendors. Pre-opening expenses are expected to average
approximately $90,000 per domestic and international superstore in fiscal year
2003.
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. In the first quarter
of fiscal year 2002, the Company reversed a portion of the valuation allowance
for its net deferred tax assets recorded during the prior year and recognized an
income tax benefit of $57,500,000 due to the extension of the carryback period.
The Company has received refunds for the additional net operating loss carryback
resulting from the extension of the carryback period. Also during fiscal year
2002, the Company received refunds of amounts on deposit with the IRS related to
prior year tax returns of approximately $30,000,000. See Note 6 of Notes to
Consolidated Financial Statements of the Company for additional information
regarding income taxes.
Due to the decline in Kmart's debt rating, the Company was required to
purchase, during the first quarter of fiscal year 2002, the mortgage notes on
two of its store properties for an aggregate amount of $5,085,000. Both of the
properties are occupied by the Company. Principal and interest payments to the
Company under the mortgage notes are secured by the Company's rent payments
under the related lease agreements. Interest on the mortgage notes accrues to
the Company at an average rate of approximately 10% per annum which exceeds the
Company's current borrowing rate. The Company does not expect the decline in
Kmart's debt rating or Kmart's subsequent bankruptcy filing to have a material
adverse impact on OfficeMax's financial position or the results of its
operations. See Note 3 of Notes to Consolidated Financial Statements of the
Company for additional information regarding the Company's relationship with
Kmart.
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 January 25, 2003, the Company had no outstanding borrowings under the
revolving credit facility. As of January 26, 2002, the Company had outstanding
borrowings of $20,000,000 under the revolving credit facility at a weighted
average interest rate of 4.75%. Also under this facility, the Company had
$117,136,000 and $111,580,000 of standby letters of credit outstanding as of
January 25, 2003 and January 26, 2002, respectively, in connection with its
insurance programs and two synthetic operating leases. These letters of credit
reduce the Company's available borrowing capacity 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 January 25, 2003, the Company had unused and
available borrowings under the revolving credit facility in excess of
$444,000,000.
During the second quarter of fiscal year 2000, the Company repaid the
outstanding balance of its mortgage loan in the amount of $16,100,000. The
mortgage loan was secured by the Company's international corporate headquarters
and had an original maturity of January 2007.
During the fourth quarter of fiscal year 2000, the Company assumed an
eleven-year $1,800,000 mortgage loan secured by real estate occupied by the
Company. The Company had previously leased this real estate. As of January 25
2003, $1,518,000 of the mortgage loan was outstanding. The mortgage loan bears
interest at a rate of 5.0% per annum. Maturities of the mortgage loan including
interest will be approximately $213,000 for each of the next five years.
The Company expects its funds generated from operations as well as its
current cash reserves and, when necessary, seasonal short-term borrowings to be
sufficient to finance its operations and capital requirements. The Company is
negotiating an extension of its current revolving credit facility which expires
in February 2004. The Company expects to finalize the extension during the first
half of fiscal year 2003, on equally favorable terms as compared to its current
agreement.
27
OFF BALANCE SHEET ARRANGEMENTS
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. The Company leases the PowerMax
facilities from special purpose entities ("SPEs") that have been established by
nationally prominent, creditworthy commercial lessors to facilitate the
financing of those assets for the Company. 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 could draw on the letters of credit
in order to redeem the commercial paper. These letters of credit reduce the
Company's available borrowing capacity 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 agreements 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 for any shortfall from a fair value specified in the lease
agreements. 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.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). The Company is assessing the impact of
adoption of FIN 46. However, based on management's preliminary assessment, it is
reasonably possible that the Company will be required to consolidate the VIEs
(previously referred to as SPEs or special purpose entities) from which it
leases two of its PowerMax inventory distribution facilities beginning in the
third quarter of fiscal year 2003. If the Company is required to consolidate the
VIEs, the assets and related depreciation, liabilities and non-controlling
interests of these VIEs will be reflected in the Company's consolidated
financial statements. Additional information regarding the adoption of FIN 46 is
included below under the caption "Recently Issued Accounting Pronouncements."
CONTRACTUAL OBLIGATIONS
The Company is obligated to make future payments under various contracts
such as its revolving credit facility, operating leases and other contractual
obligations. The following table summarizes the Company's significant
contractual obligations as of January 25, 2003:
(In thousands)
Payments Due by Period
------------------------------------------------------------------------
Less than After
Contractual Obligations Total 1 year 1-3 years 4-5 years 5 years
---------- --------- --------- --------- ----------
Long-term Debt $ 1,518 $ 128 $ 301 $ 333 $ 756
Operating Leases 2,715,256 349,332 621,648 510,465 1,233,811
Other Obligations 21,750 21,750 -- -- --
---------- -------- -------- -------- ----------
Total Contractual Obligations $2,738,524 $371,210 $621,949 $510,798 $1,234,567
========== ======== ======== ======== ==========
Long-term Debt. Amount represents a mortgage loan secured by real estate
occupied by the Company. The Company had previously leased this real estate.
Operating Leases. Amount represents rents due under the Company's operating
leases and includes future lease payments under two synthetic operating lease
agreements of approximately $6,000,000 and $4,000,000 during fiscal years 2003
and 2004, respectively.
Other Obligations. Amount represents the full value of the Company's
outstanding Series B Serial Preferred Shares (the "Series B Shares") of
$21,750,000. See "Gateway Alliance" below and Note 11 of Notes to Consolidated
Financial Statements of the Company for additional information regarding the
Series B Shares.
Unconditional Purchase Obligations. In accordance with an amended and
restated joint venture agreement, the minority owner of the Company's subsidiary
in Mexico, OfficeMax de Mexico, can elect to put its remaining 49% interest in
the subsidiary to the Company, if certain earnings targets are achieved. These
earnings targets are calculated quarterly on a rolling four quarter basis. 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's earnings for the last four quarters
before interest, taxes, depreciation and amortization and current market
multiples of similar companies. The fair value purchase price for fiscal year
2003 is currently estimated at $25,000,000 to $30,000,000.
28
OTHER SIGNIFICANT COMMERCIAL COMMITMENTS
The following table summarizes the Company's significant commercial
commitments as of January 25, 2003:
(In thousands)
Amount of Commitment Expiration Per Period
------------------------------------------------------------------
Less than After
Other Commercial Commitments Total 1 year 1-3 years 4-5 years 5 years
-------- --------- --------- -------- -------
Lines of Credit $ -- $ -- $ -- $ -- $ --
Standby Letters of Credit 117,136 -- 117,136 -- --
-------- -------- -------- ------- -------
Total Commercial Commitments $117,136 $ -- $117,136 $ -- $ --
======== ======== ======== ======= =======
Lines of Credit. As of January 25, 2003 the Company had no outstanding
borrowings under its revolving credit facility. The revolving credit facility
expires in February 2004, however, the Company is negotiating an extension of
this facility and expects to finalize the extension during the first half of
fiscal year 2003.
Standby Letters of Credit. Amount represents outstanding letters of credit
issued in connection with the Company's insurance programs and two synthetic
operating leases. These letters of credit are issued under the Company's
revolving credit facility. The revolving credit facility expires in February
2004, however, the Company is negotiating an extension of this facility and
expects to finalize the extension during the first half of fiscal year 2003.
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 management of
the Company to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the periods presented. Actual
amounts could differ from these estimates and different amounts could be
reported using different assumptions and estimates.
The Company's significant accounting policies are described in the Notes to
Consolidated Financial Statements. Management believes that of its significant
accounting policies, its policies concerning inventories, income taxes,
impairment of long-lived assets, goodwill, vendor income recognition and
facility closure costs involve high degrees 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 set forth below.
INVENTORIES
Inventories are valued at weighted average cost or market. Throughout the
year, the Company performs annual physical inventories at all of its locations.
For periods subsequent to the date of each location's last physical inventory,
an allowance for estimated shrinkage is provided based on various factors
including sales volume, the location's historical shrinkage results and current
trends. If actual losses as a result of inventory shrinkage are different than
management's estimates, adjustments to the Company's allowance for inventory
shrinkage may be required.
The Company records cost markdowns for inventory not expected to be part
of its ongoing merchandise offering. These markdowns amounted to $6,250,000
and $4,500,000 as of January 25, 2003 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.
29
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 bases of assets and liabilities. The Company
assesses the recoverability of its deferred tax assets in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("FAS 109"). In accordance with that standard, the Company
recorded a valuation allowance equal to its net deferred tax assets, including
amounts related to its net operating loss carryforwards as of January 26, 2002.
The Company intends to maintain a full valuation allowance for its net deferred
tax assets 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. Any future decision to
reverse a portion or all of the remaining valuation allowance will be based on
consideration of several factors including, but not limited to, the Company's
expectations regarding future taxable income and the Company's cumulative income
or loss in the then most recent three-year period. In the event the Company was
to determine, based on the existence of sufficient positive evidence, that it
would be able to realize its deferred tax assets in the future in excess of its
net recorded amount, a reduction of the valuation allowance would increase
income in the period such determination was made. See Note 6 of Notes to
Consolidated Financial Statements of the Company for additional information
regarding income taxes.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for possible impairment at least
annually and whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable by the undiscounted future
cash flows 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 fiscal years 2002, 2001 and 2000, the
Company recorded impairment losses of $4,107,000, $8,325,000 and $2,399,000,
respectively. If actual future operating results or cash flows are different
than management's estimates, additional impairment losses may be required. See
Note 2 of Notes to Consolidated Financial Statements of the Company for
additional information regarding impairment losses recorded by the Company.
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 are no longer amortized, but are tested for impairment 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 their respective
carrying values as of January 27, 2002 and, therefore, no impairment existed at
that date. In addition to the initial impairment test completed during the
second quarter of fiscal year 2002, the Company elected to perform the first of
its annual impairment tests during the fourth quarter of fiscal year 2002 and
concluded that the fair value of both of the Company's reporting units exceeded
their respective carrying values and no impairment charge was required. The
Company engaged a financial advisory firm to assist management in completing the
impairment tests and to prepare certain analyses regarding the fair value of the
Company's reporting units. In developing its analyses, the financial advisory
firm reviewed plans prepared by management, interviewed senior managers of the
Company and performed independent research. Calculations regarding the fair
value of the Company's reporting units, including the analyses prepared by the
financial advisory firm, rely primarily on forecasts and projections regarding
future operating results and cash flows, which require management to make
estimates and assumptions. If actual operating results or cash flows are
different than management's estimates and assumptions, the Company could be
required to record impairment charges in future periods. In future years, the
Company will be required to complete the annual impairment test during its
fourth fiscal quarter.
30
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 include annual purchase targets 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. If actual purchases are different than
management's expectations, adjustments to the results of operations may be
necessary.
In November 2002, the FASB Emerging Issues Task Force ("Task Force") issued
EITF Issue No. 02-16, "Accounting by a Customer (including a Reseller) for Cash
Consideration Received from a Vendor" ("EITF 02-16"). EITF 02-16 addresses the
following two issues: (i) the classification in a reseller's financial
statements of cash consideration received from a vendor ("Issue 1"); and (ii)
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 all new arrangements, including modifications of existing
arrangements, entered into after December 31, 2002. Issue 2 is effective for all
new arrangements initiated after November 21, 2002.
As noted above, the Company and its vendors participate in cooperative
advertising programs and other vendor marketing programs in which the vendors
reimburse the Company for a portion of its advertising costs. Any change to the
Company's accounting for cooperative advertising arrangements or other vendor
marketing programs could result in consideration received from our vendors being
used to lower product costs in inventory rather than as an offset to our
advertising costs. Such a change could impact the timing of recognition of cash
consideration received from our vendors and could increase our gross profit and
net advertising expenses. The Company has not yet completed its assessment of
whether, or to what extent, EITF 02-16 will impact its results of operations
during fiscal year 2003. See "Recently Issued Accounting Pronouncements" below
for additional information regarding EITF 02-16.
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 real estate industry advisors. Management periodically engages
independent real estate industry advisors to update the real estate studies
utilized to calculate the reserves for facility closure costs. During fiscal
year 2002, the Company engaged independent real estate industry advisors to
prepare real estate studies regarding the domestic facilities the Company
committed to close during the fourth quarter of fiscal year 2002 and to update
the real estate studies prepared for all of the domestic facilities the Company
closed in prior years. The remaining reserves for facility closure costs
recorded in prior fiscal years were adjusted, as necessary, based on these
updated real estate studies. If actual sublease income is different than
management's estimate, adjustments to the Company's store closing reserves may
be necessary.
During January 2003, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("FAS 146"). The adoption of FAS 146 had no
immediate impact on the Company's financial position, or results of operations,
but will affect the timing and recognition of future facility closure costs that
may be reported by the Company. See "Recently Issued Accounting Pronouncements"
below for additional information regarding FAS 146.
31
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (including information incorporated by
reference) contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Any information in this report
that is not historical information is a forward-looking statement which may be
identified by the use of language such as "may," "will," "should," "expects,"
"plans," "anticipates," "estimates," "believes," "thinks," "continues,"
"indicates," "outlook," "looks," "goals," "initiatives," "projects," or similar
expressions. These statements are likely to address the Company's growth
strategy, future financial performance (including sales, 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 the statement was made, are subject to risks, uncertainties and other
factors that could cause actual results to differ materially from those stated,
projected or implied in the forward-looking statements. These risks and
uncertainties include those described in Exhibit 99.1 to this Form 10-K, and in
other reports and exhibits to those reports filed with the Securities and
Exchange Commission. You are strongly urged to review such filings for a more
detailed discussion of such risks and uncertainties. The Company's filings with
the Securities and Exchange Commission are available at no charge at www.sec.gov
and www.freeEDGAR.com, as well as on a number of other web sites including
OfficeMax.com, under the investor information section. These risks and
uncertainties also include the following: risks associated with general economic
conditions (including the effects of the war in Iraq, the stock market decline,
currency devaluation, 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,
wholesale clubs, contract stationers, computer and electronics superstore
retailers, Internet merchandisers and mass merchandisers, as well as grocery and
drug store chains; and the result of continuing FAS 142 assessments and other
new accounting pronouncements. The foregoing list of important factors is not
exclusive. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
SIGNIFICANT TRENDS AND DEVELOPMENTS
During recent years, the Company has experienced increased competition from
mass merchandisers and wholesale clubs. These retailers have increased their
assortment of office products in order to attract home office customers and
individual consumers. Further, various other retailers that have not
historically competed with OfficeMax, such as drug stores and grocery chains,
have begun carrying at least a limited assortment of paper products and basic
office supplies. Management expects this trend towards a proliferation of
retailers offering a limited assortment of office supplies to continue. This
increased competition is likely to result in additional competitive pressures on
pricing and gross profits.
During February, the first month of the Company's current fiscal year,
OfficeMax experienced Domestic segment comparable-store sales growth in the high
single-digits, despite the negative effects of major winter storms in the
Midwest and Northeast. Beginning in mid-March, after President George W. Bush
issued a public ultimatum to the leadership of Iraq, and the eventual outbreak
of war in Iraq, the Company began experiencing an intermittent "CNN effect,"
manifested by customers spending less time shopping and more time at home
viewing war reports and live action on television, especially during the evening
hours and weekends. The Company cannot yet quantify to what degree the war and
related declines in consumer and business sentiments will have on its business
during the balance of the current quarter and beyond, particularly if the war
takes a negative turn. See Exhibit 99.1 to this Form 10-K for more information
regarding uncertainties and other factors that could adversely affect the
Company's results.
32
LEGAL PROCEEDINGS
There are various claims, lawsuits and pending actions against the Company
incident to the Company's operations. It is the opinion of management that the
ultimate resolution of these matters will not have a material adverse effect on
the Company's liquidity, financial position or results of operations.
GATEWAY ALLIANCE
In fiscal year 2000, Gateway Companies, Inc. ("Gateway") committed to
operate licensed store-within-a-store computer departments within all OfficeMax
superstores in the United States pursuant to a strategic alliance, which
included the terms of a Master License Agreement (the "MLA"). In connection with
the investment requirements of the strategic alliance, during the second quarter
of fiscal year 2000, Gateway invested $50,000,000 in OfficeMax convertible
preferred stock -- $30,000,000 in Series A Voting Preference Shares (the "Series
A Shares") designated for OfficeMax and $20,000,000 in Series B Serial Preferred
Shares (the "Series B Shares") designated for OfficeMax.com.
The Series A Shares, which had a purchase price of $9.75 per share, voted
on an as-converted to common shares basis (one vote per share) and did not bear
any interest or coupon. The Series A Shares were to increase in value from $9.75
per share to $12.50 per share on a straight-line basis over the five-year term
of the alliance. The Company recognized the increase in value by a charge
directly to Retained Earnings for Preferred Share Accretion. The Series B
Shares, which had a purchase price of $10 per share and a coupon rate of 7% per
annum, had no voting rights.
During the first quarter of fiscal year 2001, Gateway announced its
intention to discontinue selling computers in non-Gateway stores, including
OfficeMax superstores. At that time, OfficeMax and Gateway began discussing
legal issues regarding Gateway's performance under the strategic alliance. In
the second quarter of fiscal year 2001, Gateway ended its rollout of Gateway
store-within-a-store computer departments in the Company's superstores and has
since removed its equipment and fixtures from such stores. On July 23, 2001,
Gateway notified the Company of its termination of the MLA and its desire to
exercise its redemption rights with respect to the Series B Shares. Thereafter,
the Company, which had previously notified Gateway of Gateway's breaches under
the MLA and related agreements, reaffirmed its position that Gateway was in
breach of its obligations under the MLA and related agreements. Accordingly, the
Company stopped recording the accretion of the Series A Shares and accruing
interest on the Series B Shares at that date. Litigation and arbitration
proceedings have commenced 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.
SEASONALITY AND INFLATION
The Company's business is seasonal with sales and operating income higher
in the third and fourth quarters, which include the Back-to-School period and
the holiday selling season, respectively, followed by the traditional new year
office supply re-stocking month of January. Sales in the second quarter's summer
months are historically the slowest of the year primarily because of lower
office supplies consumption during the summer vacation period. Management
believes inflation has not had a material effect on the Company's financial
condition or operating results for the periods presented and, in fact, has
experienced decreasing selling prices for items such as furniture, fax machines,
printers, copiers and various other electronics merchandise.
33
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. The
provisions of FAS 143 were effective for the Company as of the beginning of
fiscal year 2003. The Company does not believe the adoption of FAS 143 will have
a material impact on its financial position or results of operations.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("FAS 145"). FAS 145 eliminates the extraordinary accounting
treatment for reporting gains and losses from the extinguishment of debt, and
formally amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings or describe their applicability under
changed conditions. The provisions of FAS 145 were effective for the Company as
of the beginning of fiscal year 2003. The Company does not believe the adoption
of FAS 145 will have a material impact on its financial position or results of
operations.
In June 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)" ("EITF 94-3"). FAS 146 requires that
a liability be recognized for costs associated with exit or disposal activities
only when the liability is incurred. In contrast, under EITF 94-3, a company was
required to recognize a liability for such costs 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
will be recorded at present value and any changes in the liability due to the
passage of time will be recognized as an increase in the liability and as
accretion expense. In contrast, under EITF 94-3 a liability for lease
termination costs was recorded for an amount equal to the undiscounted total of
all remaining lease payments. The provisions of FAS 146 were effective for the
Company as of January 1, 2003. The adoption of this new standard had no
immediate impact on the Company's financial position or results of operations,
but will affect the timing and recognition of future facility closure costs
that may be reported by the Company.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure" ("FAS 148"). FAS 148
provides alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation as originally
provided by FASB Statement No. 123, "Accounting for Stock-Based Compensation"
("FAS 123"). Additionally, FAS 148 amends the disclosure requirements of FAS 123
in both annual and interim financial statements. The disclosure requirements are
effective for financial reports for interim periods beginning after December 15,
2002. The adoption of FAS 148 had no impact on the Company's financial position
or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires certain
guarantees to be recorded at fair value regardless of the probability of the
loss. FIN 45 is effective for guarantees issued or modified after December 31,
2002. The adoption of this new interpretation had no impact on the Company's
financial position or results of operations.
34
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies consolidation
requirements for variable interest entities ("VIEs"). It establishes additional
factors beyond ownership of a majority voting interest to indicate that a
company has a controlling financing interest in an entity (or a relationship
sufficiently similar to a controlling financial interest that it requires
consolidation). Consolidation of a VIE by an investor is required when it is
determined that the investor will absorb a majority of the VIE's expected losses
or residual returns if they occur. The Company leases two of its PowerMax
distribution facilities from VIEs (previously referred to as SPEs or special
purpose entities) that have been established by nationally prominent,
creditworthy commercial lessors to facilitate the financing of the inventory
distribution facilities. The VIEs 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 VIEs could
draw on the letters of credit in order to redeem the commercial paper. These
letters of credit reduce the Company's available borrowing capacity 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 agreements 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 for any shortfall from a fair value specified in
the lease agreements. 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.
This interpretation applies immediately to variable interest entities
created or obtained after January 31, 2003 and must be retroactively applied to
holdings in variable interest entities acquired before February 1, 2003 in
interim and annual financial statements issued for periods beginning after June
15, 2003. FIN 46 may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements with a cumulative-effect adjustment as of
the beginning of the first year restated. The Company is assessing the impact of
adoption of FIN 46. However, based on management's preliminary assessment, it is
reasonably possible that the Company will be required to consolidate the VIEs
involved in the leasing of its PowerMax inventory distribution facilities
beginning in the third quarter of fiscal year 2003. If the Company is required
to consolidate the VIEs, the assets and related depreciation, liabilities and
non-controlling interests of the VIEs will be reflected in the Company's
consolidated financial statements. The Company has not yet determined under
which of the transition alternatives it will report the impact, if any, of
adopting FIN 46.
In November 2002, the FASB Emerging Issues Task Force ("Task Force") issued
EITF Issue 02-16, "Accounting by a Customer (including a Reseller) for Cash
Consideration Received from a Vendor," ("EITF 02-16"). EITF 02-16 addresses the
following two issues: (i) the classification in a reseller's financial
statements of cash consideration received from a vendor ("Issue 1") ; and (ii)
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 stipulates
that cash consideration received from a vendor is presumed to be a reduction of
the prices of the vendors' products and should, therefore, be recognized as a
reduction of cost of merchandise sold when recognized in the reseller's
financial statements. However, that presumption is overcome when the
consideration is either (a) a payment for assets or services delivered to the
vendor, in which case the cash consideration should be recognized as revenue (or
other income, as appropriate) when recognized in the reseller's income
statement, or (b) a reimbursement of a specific, incremental, identifiable cost
incurred by the reseller in selling the vendor's products, in which case the
cash consideration should be characterized as a reduction of that cost when
recognized in the reseller's income statement. Issue 2 states that vendor
rebates should be recognized on a systematic and rational allocation of the cash
consideration offered to each of the underlying transactions that results in
progress by the reseller toward earning the rebate, provided the amounts are
probable and reasonably estimable. Issue 1 is effective for all new
arrangements, including modifications of existing arrangements, entered into
after December 31, 2002. Issue 2 is effective for all new arrangements initiated
after November 21, 2002.
The Company and its vendors participate in cooperative advertising programs
and other vendor marketing programs in which the vendors reimburse the Company
for a portion of its advertising costs. Any change to our accounting for
cooperative advertising arrangements or other vendor marketing programs could
result in consideration received from our vendors being used to lower product
costs in inventory rather than as an offset to our advertising costs. Such a
change could impact the timing of recognition of cash consideration received
from our vendors and could increase our gross profit and net advertising
expenses. The Company has not yet completed its assessment of whether, or to
what extent, EITF 02-16 will impact its results of operations during fiscal year
2003.
35
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, principally interest rate risk and
foreign currency 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 as of January 25, 2003 and January 26, 2002, respectively, 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 JANUARY 25, 2003 AS OF JANUARY 26, 2002
----------------------------------- ------------------------------
Carrying Fair Risk Carrying Fair Risk
Value Value Sensitivity Value Vaue Sensitivity
- ---------------------------------------------------------------------------------------------------------------
Fixed interest rate debt, including $1,518 $1,572 $ 33 $1,652 $1,808 $ 45
current maturities
Variable interest rate debt $ -- $ -- $347 $ 20 $ 20 $1,014
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 fiscal year 2002 and fiscal year 2001, respectively, from a 50
basis point increase in prevailing interest rates during those periods. The
Company had no outstanding borrowings under its revolving credit facility as of
January 25, 2003. The Company had outstanding borrowings of $20,000,000 under
its revolving credit facility as of January 26, 2002.
Foreign Currency Exchange Rate Risk
The Company is exposed to foreign currency exchange rate risk through its
majority-owned subsidiary in Mexico. A 10% change in the dollar/peso exchange
rates would have resulted in an increase or decrease in fiscal year 2002 and
fiscal year 2001 net income of approximately $300,000 and $350,000,
respectively. Such a change in the dollar/peso exchange rates would have also
resulted in an increase or decrease in the net assets of the majority-owned
subsidiary of approximately $4,000,000 as of both January 25, 2003 and January
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.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements on page F-1. Supplementary
quarterly financial information for the Company is included in Note 13 of Notes
to Consolidated Financial Statements of the Company.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
A Current Report on Form 8-K was filed with the Securities and Exchange
Commission on July 23, 2002 regarding the Company's dismissal of
PricewaterhouseCoopers LLP as its independent accountants and the engagement of
KPMG LLP as the Company's independent auditor for fiscal year 2002.
37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 regarding Directors will be
contained under the caption "Election of Directors" in the Proxy Statement which
will be filed with the Securities and Exchange Commission pursuant to Regulation
14A, not later than 120 days after the end of the fiscal year, which information
under such caption is incorporated herein by reference.
The information required by this Item 10 regarding executive officers is
contained under the caption "Executive Officers of the Registrant" in Part I of
this report.
The information regarding compliance with Section 16 of the Securities
Exchange Act of 1934 is set forth under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement which will be filed with
the Securities and Exchange Commission pursuant to Regulation 14A, not later
than 120 days after the end of the fiscal year, which information under such
caption is incorporated herein by reference.
In addition to the Company's Code of Business Conduct and Ethics that is
applicable to all associates of the Company, in accordance with Section 406 of
the Sarbanes-Oxley Act, the Company has adopted a Code of Ethics that
specifically applies to the Company's principal executive officer, principal
financial officer and principal accounting officer or controller. The Company
intends to disclose on its website (www.OfficeMax.com) any amendments to, or
waivers from, this Code of Ethics. See Exhibit 99.3 to this Form 10-K for a copy
of this Code of Ethics.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be contained under the
captions "How are Directors Compensated?" and "Compensation Committee Interlocks
and Insider Participation" in the Proxy Statement which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year, which information under such captions
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 will be contained under the
captions "Security Ownership of Certain Beneficial Owners" and "Security
Ownership of Management" in the Proxy Statement which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year, which information under such captions
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 will be contained under the
caption "Certain Relationships and Related Transactions" in the Proxy Statement
which will be filed with the Securities and Exchange Commission pursuant to
Regulation 14A, not later than 120 days after the end of the fiscal year, which
information under such caption is incorporated herein by reference.
ITEM 14. 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 Company's 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.
A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. Because
of the inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.
38
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements:
See Index to Consolidated Financial Statements on page F-1.
(a)(2) Financial Statement Schedules:
Valuation and Qualifying Accounts (see page S-1)
(a)(3) Exhibits:
See Exhibit Index on pages 43 and 44 of this report.
(b) Reports on Form 8-K:
A Current Report on Form 8-K reporting under Item 5, Other Events and
Required FD Disclosure, was filed on December 2, 2002, regarding an
interview of the Company's CEO by Bloomberg News Service about the
Company's sales for the Thanksgiving Day weekend.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OFFICEMAX, INC.
DATE: April 8, 2003 By: /s/ Michael Feuer
---------------------------
Michael Feuer, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Michael Feuer April 8, 2003
- -------------------
Michael Feuer, Chairman and Chief Executive
Officer (Principal Executive Officer)
/s/ Michael F. Killeen April 8, 2003
- -----------------------
Michael F. Killeen, Senior Executive Vice President,
Chief Financial Officer (Principal Financial Officer)
/s/ Phillip P. DePaul April 8, 2003
- ----------------------
Phillip P. DePaul, Senior Vice President,
Controller
/s/ Raymond L. Bank April 8, 2003
- --------------------
Raymond L. Bank, Director
/s/ Burnett W. Donoho April 2, 2003
- ----------------------
Burnett W. Donoho, Director
/s/ Lee Fisher April 8, 2003
- --------------
Lee Fisher, Director
/s/ Jerry Sue Thornton April 8, 2003
- ----------------------
Jerry Sue Thornton, Director
/s/ Ivan J. Winfield April 8, 2003
- --------------------
Ivan J. Winfield, Director
/s/ Jacqueline F. Woods April 2, 2003
- -----------------------
Jacqueline F. Woods, Director
40
I, Michael Feuer, certify that:
1. I have reviewed this Annual Report on Form 10-K of OfficeMax, Inc.;
2. Based on my knowledge, this Annual 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 Annual
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual 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 Annual 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 Annual 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
Annual Report (the "Evaluation Date"); and
c) Presented in this Annual 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 Annual
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: April 8, 2003
/s/ Michael Feuer
-------------------------------------
Michael Feuer
Chairman and Chief Executive Officer
41
I, Michael F. Killeen, certify that:
1. I have reviewed this Annual Report on Form 10-K of OfficeMax, Inc.;
2. Based on my knowledge, this Annual 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 Annual
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual 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 Annual 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 Annual 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
Annual Report (the "Evaluation Date"); and
c) Presented in this Annual 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 Annual
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: April 8, 2003
/s/ Michael F. Killeen
--------------------------
Michael F. Killeen
Chief Financial Officer
42
EXHIBIT INDEX
Incorporation
Exhibit No. Description of Exhibit by Reference
- ----------- ---------------------- -------------
3.1 Second Amended and Restated Articles of Incorporation of the (6)
Company, as amended.
3.2 Code of Regulations of the Company. (3)
4.1 Specimen Certificate for the Common Shares. (1)
4.2 Rights Agreement Dated as of March 17, 2000 between the Company (7)
and First Chicago Trust Company of New York, as Rights Agent.
10.1 Loan and Security Agreement dated as of November 30, 2000, by and (8)
among Fleet Retail Finance, Inc., as administrative agent,
Fleet National Bank, as issuer, Chase Business Credit Corp. and
The Chase Manhattan Bank, as co-agents, GMAC Business Credit, LLC
and GMAC Commercial Credit, LLC, as documentation agents, The CIT
Group/Business Credit, Inc., as syndication agent, Fleet
Securities, Inc., as arranger, and the Company, as lead borrower
for OfficeMax, Inc., BizMart, Inc., BizMart (Texas), Inc. and
OfficeMax Corp., as borrowers.
10.2 Mortgage Loan Agreement dated November 6, 1996 by and between the (4)
Company and KeyBank National Association.
*10.3 Amended and Restated Employment Agreement dated as of January 2, (6)
2000 by and between Michael Feuer and the Company.
*10.4 OfficeMax Employee Share Purchase Plan. (1)
*10.5 OfficeMax Management Share Purchase Plan. (1)
*10.6 OfficeMax Director Share Plan, as amended and restated (9)
February 28, 2002.
*10.7 OfficeMax Amended and Restated Equity-Based Award Plan. (8)
*10.8 OfficeMax Annual Incentive Bonus Plan. (5)
10.9 Lease Guaranty, Indemnification and Reimbursement Agreement dated (2)
November 9, 1994 between the Company and Kmart Corporation.
*10.10 Forms of Severance Agreements. (6)
*10.11 Schedule of certain executive officers who are parties to the (9)
Severance Agreements in the forms referred to in Exhibit
10.10.
21.1 List of Subsidiaries. (6)
23.1 Consent of KPMG LLP (filed herewith).
23.2 Consent of PricewaterhouseCoopers LLP (filed herewith).
99.1 Statement Regarding Forward Looking Information (filed herewith).
43
99.2 Certification of CEO and CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
99.3 Code of Ethics for Principal Executive Officer, Principal
Financial Officer and Principal Accounting Officer or Controller
as required by Section 406 of the Sarbanes-Oxley Act of 2002
(filed herewith).
(1) Included as an exhibit to the Company's Registration Statement on Form S-1
(No. 33-83528) and incorporated herein by reference.
(2) Included as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended October 22, 1994 (File No. 1-3380), and incorporated
herein by reference.
(3) Included as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended January 21, 1995 (File No. 13380), and incorporated
herein by reference.
(4) Included as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended January 25, 1997 (File No. 1-3380), and incorporated
herein by reference.
(5) Included as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended January 24, 1998 (File No. 1-3380), and incorporated
herein by reference.
(6) Included as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended January 22, 2000 (File No. 1-3380), and incorporated
herein by reference.
(7) Included as an exhibit to the Company's Form 8-A filed on March 20, 2000,
and incorporated herein by reference.
(8) Included as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended January 27, 2001 (File No. 1-3380), and incorporated
herein by reference.
(9) Included as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended January 26, 2002 (File No. 1-3380), and incorporated
herein by reference.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
44
OFFICEMAX, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Reports of Independent Accountants F-2
Consolidated Statements of Income -- Fiscal years ended January 25, 2003,
January 26, 2002, and January 27, 2001 F-3
Consolidated Balance Sheets -- January 25, 2003 and
January 26, 2002 F-4
Consolidated Statements of Cash Flows -- Fiscal years ended January 25,
2003, January 26, 2002 and January 27, 2001 F-5
Consolidated Statements of Changes in Shareholders' Equity -- Fiscal
years ended January 25, 2003, January 26, 2002 and
January 27, 2001 F-6
Notes to Consolidated Financial Statements F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of OfficeMax, Inc.
We have audited the accompanying consolidated balance sheet of OfficeMax, Inc.
and subsidiaries (the "Company") as of January 25, 2003, and the related
consolidated statements of operations, shareholders' equity, cash flows and
supplemental schedule for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and supplemental schedule based on our audit. The accompanying
consolidated financial statements and supplemental schedule of OfficeMax, Inc.
and subsidiaries as of January 26, 2002, were audited by other auditors whose
report thereon dated April 15, 2002, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the January 25, 2003 consolidated financial statements and
supplemental schedule referred to above present fairly, in all material
respects, the financial position of OfficeMax, Inc. and subsidiaries as of
January 25, 2003 and the results of their operations and their cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America.
As discussed in note 1 to the consolidated financial statements, the Company
adopted the Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 142 effective January 27, 2002.
/s/ KPMG LLP
- ----------------
KPMG LLP
February 25, 2003
To the Board of Directors and Shareholders of OfficeMax, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of OfficeMax, Inc. and its subsidiaries at January 26, 2002,
and the results of their operations and their cash flows for each of the two
years in the period ended January 26, 2002 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 15(a)(2) presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
- ----------------------------------
PRICEWATERHOUSECOOPERS LLP
April 15, 2002
F-2
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------------------
January 25, January 26, January 27,
2003 2002 2001
Fiscal Year Ended
- ------------------------------------------------------------------------------------------------------------------------------
Sales $ 4,775,563 $ 4,625,877 $ 5,121,337
Cost of merchandise sold, including buying and
occupancy costs 3,578,872 3,536,069 3,892,365
Inventory liquidation -- 3,680 8,244
---------------------------------------------------------------------
3,578,872 3,539,749 3,900,609
Gross profit 1,196,691 1,086,128 1,220,728
Store operating and selling expenses 1,034,122 1,052,958 1,131,451
General and administrative expenses 134,763 145,680 156,273
Goodwill amortization -- 9,855 9,863
Pre-opening expenses 672 2,790 7,113
Store closing and asset impairment 2,489 76,761 109,578
---------------------------------------------------------------------
Total operating expenses 1,172,046 1,288,044 1,414,278
---------------------------------------------------------------------
Operating income (loss) 24,645 (201,916) (193,550)
Interest expense, net 5,980 14,804 16,493
Other expense, net -- 61 60
---------------------------------------------------------------------
Income (loss) before income taxes 18,665 (216,781) (210,103)
Income tax (benefit) expense (57,500) 89,704 (79,076)
Minority interest 2,441 2,973 2,139
---------------------------------------------------------------------
Net income (loss) $ 73,724 $ (309,458) $ (133,166)
=====================================================================
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ 0.60 $ (2.72) $ (1.20)
=====================================================================
Diluted $ 0.59 $ (2.72) $ (1.20)
=====================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic 123,817,000 114,308,000 112,738,000
=====================================================================
Diluted 125,109,000 114,308,000 112,738,000
=====================================================================
See accompanying Notes to Consolidated Financial Statements.
F-3
OFFICEMAX, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------
JANUARY 25, JANUARY 26,
2003 2002
- ---------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and equivalents $ 137,143 $ 76,751
Accounts receivable, net of allowances
of $1,073 and $974, respectively 90,339 87,511
Merchandise inventories 927,679 884,827
Other current assets 27,585 43,834
-----------------------------------
Total current assets 1,182,746 1,092,923
Property and Equipment:
Buildings and land 36,133 35,725
Leasehold improvements 183,547 185,998
Furniture, fixtures and equipment 645,466 616,768
-----------------------------------
Total property and equipment 865,146 838,491
Less: Accumulated depreciation (567,709) (479,204)
-----------------------------------
Property and equipment, net 297,437 359,287
Other assets and deferred charges 14,763 12,302
Goodwill, net of accumulated amortization
of $89,757 290,495 290,495
-----------------------------------
$ 1,785,441 $ 1,755,007
===================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable -- trade $ 437,884 $ 495,505
Accrued expenses and other liabilities 227,022 196,297
Accrued salaries and related expenses 60,190 50,705
Taxes other than income taxes 79,781 68,509
Credit facilities -- 20,000
Redeemable preferred shares -- Series B 21,750 21,750
Mortgage loan, current portion 128 122
-----------------------------------
Total current liabilities 826,755 852,888
Mortgage loan 1,390 1,530
Other long-term liabilities 157,587 175,456
-----------------------------------
Total liabilities 985,732 1,029,874
-----------------------------------
Commitments and contingencies -- --
Minority interest 19,264 19,184
Shareholders' Equity:
Common stock without par value;
200,000,000 shares authorized;
134,801,656 and 134,284,054 shares
issued and outstanding, respectively 887,556 895,466
Deferred stock compensation (153) (29)
Cumulative translation adjustment (2,457) 616
Retained deficit (13,865) (87,589)
Less: Treasury stock, at cost (90,636) (102,515)
-----------------------------------
Total shareholders' equity 780,445 705,949
-----------------------------------
$ 1,785,441 $ 1,755,007
===================================
See accompanying Notes to Consolidated Financial Statements.
F-4
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------
JANUARY 25, JANUARY 26, JANUARY 27,
Fiscal Year Ended 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net income (loss) $ 73,724 $(309,458) $(133,166)
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Store closing and asset impairment 4,107 19,836 11,905
Depreciation and amortization 90,161 105,310 101,526
Deferred income taxes -- 89,704 (55,401)
Other -- net 3,100 16,329 389
Changes in current assets and current liabilities:
(Increase) decrease in inventories (46,145) 274,261 114,755
Decrease in accounts payable (90,157) (57,035) (141,213)
Decrease in accounts receivable 874 19,598 6,895
Increase in accrued liabilities 50,012 60,921 99,755
Other -- net 7,903 11,555 (19,375)
-----------------------------------------------------
Net cash provided by (used for) operations 93,579 231,021 (13,930)
-----------------------------------------------------
INVESTING
Capital expenditures (49,188) (49,228) (134,812)
Other -- net (2,647) (1,149) (6,322)
-----------------------------------------------------
Net cash used for investing (51,835) (50,377) (141,134)
-----------------------------------------------------
FINANCING
(Decrease) increase in revolving credit facilities (20,000) (200,000) 128,200
Payments of mortgage principal, net (134) (127) (14,646)
Increase (decrease) in overdraft balances 36,210 (36,740) 25,792
(Increase) decrease in advance payments for
leased facilities (390) 2,449 19,672
Proceeds from issuance of common stock, net 3,969 1,213 2,220
Proceeds from issuance of preferred stock, net -- -- 50,000
Other -- net (201) 942 (1,358)
-----------------------------------------------------
Net cash provided by (used for) financing 19,454 (232,263) 209,880
-----------------------------------------------------
Effect of exchange rate changes on cash and
cash equivalents (806) 1,033 (566)
Net increase (decrease) in cash and equivalents 60,392 (50,586) 54,250
Cash and equivalents, beginning of period 76,751 127,337 73,087
-----------------------------------------------------
Cash and equivalents, end of period $ 137,143 $ 76,751 $ 127,337
=====================================================
See accompanying Notes to Consolidated Financial Statements.
F-5
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative
Common Deferred Stock Translation Retained Treasury
Stock Compensation Adjustment Earnings Stock Total
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 22, 2000 $ 867,866 $ (304) $ -- $ 358,900 $ (110,465) $ 1,115,997
Comprehensive income (loss):
Net loss -- -- -- (133,166) -- (133,166)
Cumulative translation adjustment -- -- (417) -- -- (417)
-----------
Total comprehensive loss (133,583)
Shares issued under director plan (502) (220) -- -- 751 29
Exercise of stock options
(including tax benefit) (466) -- -- -- 1,009 543
Sale of shares under management share
purchase plan (168) (70) -- -- 668 430
Sale of shares under employee share
purchase plan (1,411) -- -- -- 2,341 930
Amortization of deferred compensation -- 273 -- -- -- 273
Preferred stock accretion -- -- -- (2,319) -- (2,319)
--------- ---------- -------- --------- ---------- -----------
BALANCE AT JANUARY 27, 2001 865,319 (321) (417) 223,415 (105,696) 982,300
Comprehensive income (loss):
Net loss -- -- -- (309,458) -- (309,458)
Cumulative translation adjustment -- -- 1,033 -- -- 1,033
-----------
Total comprehensive loss (308,425)
Shares issued under director plan (46) -- -- -- 78 32
Exercise of stock options (555) -- -- -- 1,072 517
Sale of shares under management share
purchase plan (43) 26 -- -- -- (17)
Sale of shares under employee share
purchase plan (1,324) -- -- -- 2,031 707
Amortization of deferred compensation -- 266 -- -- -- 266
Preferred stock accretion -- -- -- (1,546) -- (1,546)
Conversion of Series A Preference Share 32,115 -- -- -- -- 32,115
--------- ---------- -------- --------- ---------- -----------
BALANCE AT JANUARY 26, 2002 895,466 (29) 616 (87,589) (102,515) 705,949
Comprehensive income (loss):
Net income -- -- -- 73,724 -- 73,724
Cumulative translation adjustment -- -- (3,073) -- -- (3,073)
-----------
Total comprehensive income 70,651
Shares issued under director plan (355) (355) -- -- 771 61
Exercise of stock options (6,905) -- -- -- 9,858 2,953
Sale of shares under management share
purchase plan -- -- -- -- -- --
Sale of shares under employee share
purchase plan (650) -- -- -- 1,250 600
Amortization of deferred compensation -- 231 -- -- -- 231
--------- --------- -------- --------- ---------- -----------
BALANCE AT JANUARY 25, 2003 $ 887,556 $ (153) $ (2,457) $ (13,865) $ (90,636) $ 780,445
========= ========= ======== ========= ========== ===========
See accompanying Notes to Consolidated Financial Statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OfficeMax, Inc. ("OfficeMax" or the "Company") operates a chain of
high-volume office products superstores. At January 25, 2003, the Company
operated 970 superstores in 49 states, Puerto Rico, the U.S. Virgin Islands and,
through a majority-owned 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 40,000 items through its e-Commerce site,
OfficeMax.com, its direct-mail catalogs and its outside sales force, all of
which are serviced by its three PowerMax inventory distribution facilities, 18
delivery centers and two national customer call and contact centers.
BASIS OF PRESENTATION
The Company's consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. Affiliates in which the Company owns
a controlling majority interest are also included in the Company's consolidated
financial statements. Intercompany accounts and transactions have been
eliminated in consolidation.
The Company has two business segments: Domestic and International. The
Company's operations in the United States, Puerto Rico, and the U.S. Virgin
Islands, comprised of its retail stores, e-Commerce operations, catalog business
and outside sales groups, 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. See Note 9 of Notes to Consolidated
Financial Statements for additional information regarding the Company's business
segments.
The Company's fiscal year ends on the Saturday prior to the last Wednesday
in January. Fiscal years 2002 and 2001 ended on January 25, 2003 and January 26,
2002, respectively, and included 52 weeks. Fiscal year 2000 ended on January 27,
2001 and included 53 weeks. Due to statutory audit requirements, OfficeMax de
Mexico maintains its calendar year end and the Company consolidates OfficeMax de
Mexico's calendar year results of operations with its fiscal year results.
Certain reclassifications have been made to prior year amounts to conform
to the current presentation.
ACCOUNTING ESTIMATES
The consolidated financial statements of the Company are prepared in
conformity with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires management of
the Company to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the periods presented. Actual
amounts could differ from these estimates and different amounts could be
reported using different assumptions and estimates.
F-7
CASH AND EQUIVALENTS
Cash and equivalents includes short-term investments with original
maturities of 90 days or less and amounts receivable from credit card issuers.
Amounts receivable from credit card issuers are typically converted to cash
within 2 to 4 days of the original sales transaction. These amounts totaled
$37,296,000 and $34,058,000 as of January 25, 2003 and January 26, 2002,
respectively.
ACCOUNTS RECEIVABLE
Accounts receivable consists primarily of amounts due from vendors under
purchase rebate, cooperative advertising and other vendor marketing programs and
trade receivables not financed through outside programs. The Company has an
arrangement with a financial services company (the "Issuer") whereby the Issuer
manages the Company's private label credit card programs. The credit card
accounts, and receivables generated thereby, are owned by the Issuer. Under the
terms of the agreement, the Issuer charges the Company a fee to cover the
Issuer's cost of providing credit and collecting the receivables which are
non-recourse to the Company.
INVENTORIES
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.
The Company records cost markdowns for inventory not expected to be part of
its ongoing merchandise offering. These markdowns amounted to $6,250,000 and
$4,500,000 as of January 25, 2003 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.
ADVERTISING
Advertising costs are either expensed the first time the advertising takes
place or, in the case of direct-response advertising, capitalized and amortized
in proportion to related revenues. Total gross advertising expense was
$222,074,000, $191,706,000 and $236,994,000 for fiscal years 2002, 2001 and
2000, respectively. The total amount of direct-response advertising capitalized
and included in other current assets was $1,262,000 and $3,805,000 as of January
25, 2003 and January 26, 2002, respectively.
The Company and its vendors participate in cooperative advertising programs
in which the vendors reimburse the Company for a portion of its advertising
costs. Net advertising expense is included as a component of store operating and
selling expenses.
PROPERTY AND EQUIPMENT
Components of property and equipment are recorded at cost and depreciated
over their estimated useful lives using the straight-line method. All store
properties are leased, and improvements are amortized over the lesser of the
term of the lease or 20 years. The estimated useful lives of other depreciable
assets are generally as follows: buildings and improvements -- 10 to 40 years;
and furniture, fixtures and equipment, including information technology
equipment and software -- 3 to 10 years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for possible impairment at least
annually and whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable by the undiscounted future
cash flows 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
F-8
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 fiscal years 2002, 2001 and 2000, the Company
recorded impairment losses of $4,107,000, $8,325,000 and $2,399,000,
respectively. See Note 2 of Notes to Consolidated Financial Statements for
additional information regarding impairment losses recorded by the Company.
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 are no longer 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 their respective carrying values as of
January 27, 2002 and, therefore, no impairment existed at that date. In addition
to the initial impairment test completed during the second quarter of fiscal
year 2002, the Company elected to perform the first of its annual impairment
tests during the fourth quarter of fiscal year 2002 and concluded that the fair
value of both of the Company's reporting units exceeded their respective
carrying values and no impairment charge was required. In future years, the
Company will be required to complete the annual impairment test during its
fourth fiscal quarter.
The Company calculates the fair value of its reporting units based on a
combination of two valuation methods, including estimated discounted cash flows
of the Company's reporting units and the market comparative approach, which uses
historical performance relative to observable market pricing as an indication of
value.
F-9
The following table presents the transitional disclosures required by FAS
142:
- --------------------------------------------------------------------------------------------------------
Fiscal Year Ended JANUARY 25, JANUARY 26, JANUARY 27,
(In thousands, except per share data) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------
Reported net income (loss) $ 73,724 $ (309,458) $ (133,166)
Add back: Amortization of goodwill -- 9,855 9,863
---------- ----------- -----------
Adjusted net income (loss) $ 73,724 $ (299,603) $ (123,303)
========== =========== ===========
BASIC EARNINGS PER COMMON SHARE
Reported net income (loss) $ 0.60 $ (2.72) $ (1.20)
Add back: Amortization of goodwill -- 0.09 0.09
---------- ----------- -----------
Adjusted net income (loss) $ 0.60 $ (2.63) $ (1.11)
========== =========== ===========
DILUTED EARNINGS PER COMMON SHARE
Reported net income (loss) $ 0.59 $ (2.72) $ (1.20)
Add back: Amortization of goodwill -- 0.09 0.09
---------- ----------- -----------
Adjusted net income (loss) $ 0.59 $ (2.63) $ (1.11)
========== =========== ===========
INSURANCE PROGRAMS
The Company maintains insurance coverage, and is self-insured when
economically beneficial, for certain losses relating to workers' compensation
claims, employee medical benefits and general and auto liability claims.
Liabilities for these losses are based on claims filed and actuarial estimates
of claims incurred but not yet reported and totaled $30,857,000 and $28,719,000
as of January 25, 2003 and January 26, 2002, respectively, including accrued
liabilities for the related insurance premiums and other expenses. The Company
has purchased stop-loss coverage in order to limit its exposure for self-insured
losses. The Company has issued, when required, standby letters of credit to
support its insurance programs.
CURRENT LIABILITIES
Under the Company's cash management system, checks issued pending clearance
that result in overdraft balances for accounting purposes are included in
accounts payable and totaled $115,667,000 and $79,457,000 as of January 25, 2003
and January 26, 2002, respectively. Any increase or decrease in the amount of
these outstanding checks is reflected as a financing activity in the
Consolidated Statements of Cash Flows.
FINANCIAL INSTRUMENTS
The recorded value of the Company's financial instruments, which includes
its short-term investments, accounts receivable, accounts payable, revolving
credit facilities and mortgage loan, approximates fair value. Financial
instruments which potentially subject the Company to concentration of credit
risk consist principally of cash investments. The Company invests its excess
cash in high-quality securities placed with major banks and financial
institutions. The Company has established guidelines relative to diversification
and maturities to mitigate risk and maintain liquidity.
REVENUE RECOGNITION
The Company recognizes revenue when the earnings process is complete,
generally at either the point-of-sale to a customer or upon delivery to a
customer or third party delivery service, less an appropriate provision for
returns and net of coupons and other sales incentives. Revenue from certain
sales transactions, in which the Company effectively acts as an agent or broker,
is reported on a net or commission basis. Revenue from the sale of extended
warranty contracts is reported at the point-of-sale to a customer, on a net or
commission basis, 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
F-10
period. The performance obligations and risk of loss associated with extended
warranty contracts sold by the Company are assumed by a third-party.
SHIPPING AND HANDLING FEES AND COSTS
Fees charged to customers in a sale transaction for shipping and handling
are classified as revenues. Shipping and handling related costs are included as
a component of store operating and selling expenses. These costs were
$54,864,000, $56,006,000 and $64,774,000 in fiscal years 2002, 2001 and 2000,
respectively.
PRE-OPENING EXPENSES
Pre-opening expenses, which consist primarily of store payroll, supplies
and grand opening advertising for new stores, are expensed as incurred.
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 include annual purchase targets 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 consideration 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.
In November 2002, the FASB Emerging Issues Task Force ("Task Force") issued
EITF Issue No. 02-16, "Accounting by a Customer (including a Reseller) for Cash
Consideration Received from a Vendor" ("EITF 02-16"). EITF 02-16 addresses the
following two issues: (i) the classification in a reseller's financial
statements of cash consideration received from a vendor ("Issue 1"); and (ii)
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 all new arrangements, including modifications of existing
arrangements, entered into after December 31, 2002. Issue 2 is effective for all
new arrangements initiated after November 21, 2002. The Company is currently
assessing the impact, if any, EITF 02-16 will have on its fiscal year 2003
results of operations. See "Recently Issued Accounting Pronouncements" below for
additional information regarding EITF 02-16.
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 real estate industry advisors. Management periodically engages
independent real estate industry advisors to update the real estate studies
utilized to calculate the reserves for facility closure costs. During fiscal
year 2002, the Company engaged independent real estate industry advisors to
prepare real estate studies regarding the domestic facilities the Company
committed to close during the fourth quarter of fiscal year 2002 and to update
the real estate studies prepared for all of the domestic facilities the Company
closed in prior years. The remaining reserves for facility closure costs
recorded in prior fiscal years were adjusted, as necessary, based on these
updated real estate studies. See Note 2 of Notes to Consolidated Financial
Statements for additional information regarding facility closure costs.
During January 2003, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("FAS 146"). The adoption of FAS 146 had no
immediate impact on the Company's financial
F-11
position or results of operations, but will affect the timing and recognition of
future facility closure costs that may be reported by the Company. See
"Recently Issued Accounting Pronouncements" below for additional information
regarding FAS 146.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation under the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and provides pro forma disclosures of the compensation
expense determined under the fair value provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123"). Under APB 25, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
grant over the amount an employee must pay to acquire the stock. The Company
grants options only at prices not less than the fair market value per common
share on the date of grant. Accordingly, the Company was not required under the
provisions of APB 25 to recognize any compensation expense during fiscal years
2002, 2001 or 2000.
The Company prepares pro forma disclosures of the compensation expense
determined under the fair value provisions of FAS 123 using the Black-Scholes
option pricing model and the weighted average assumptions below, as well as an
assumption of forfeiture rates for unvested options.
- ----------------------------------------------------------------------------------------------------------------
Fiscal Year Ended JANUARY 25, JANUARY 26, JANUARY 27,
2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------
Risk free interest rate 3.3% 5.0% 6.2%
Expected dividend yield 0% 0% 0%
Expected stock volatility 70.9% 50.4% 37.4%
Expected life of options 5 years 5 years 5 years
The weighted average fair value at the date of grant of options granted in
fiscal years 2002, 2001 and 2000 was $3.47, $2.15 and $2.16, respectively.
The following table illustrates pro forma net earnings and pro forma
earnings per common share, giving effect to compensation costs calculated using
the fair value method prescribed by FAS 123.
- ----------------------------------------------------------------------------------------------------------------
Fiscal Year Ended JANUARY 25, JANUARY 26, JANUARY 27,
(In thousands, except per share data) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) $68,841 $(310,597) $(133,790)
Pro forma earnings (loss) per common share
Basic $ 0.56 $ (2.73) $ (1.21)
Diluted $ 0.55 $ (2.73) $ (1.21)
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 bases of assets and liabilities. The Company
assesses the recoverability of its deferred tax assets in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("FAS 109"). In accordance with that standard, the Company
recorded a valuation allowance equal to its net deferred tax assets, including
amounts related to its net operating loss carryforwards as of January 26, 2002.
The Company intends to maintain a full valuation allowance for its net deferred
tax assets until sufficient positive evidence exists to support the reversal of
F-12
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. Any future decision to
reverse a portion or all of the remaining valuation allowance will be based on
consideration of several factors including, but not limited to, the Company's
expectations regarding future taxable income and the Company's cumulative income
or loss in the then most recent three-year period. See Note 6 of Notes to
Consolidated Financial Statements for additional information regarding income
taxes.
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. The
provisions of FAS 143 were effective for the Company as of the beginning of
fiscal year 2003. The Company does not believe the adoption of FAS 143 will have
a material impact on its financial position or results of operations.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("FAS 145"). FAS 145 eliminates the extraordinary accounting
treatment for reporting gains and losses from the extinguishment of debt, and
formally amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings or describe their applicability under
changed conditions. The provisions of FAS 145 were effective for the Company as
of the beginning of fiscal year 2003. The Company does not believe the adoption
of FAS 145 will have a material impact on its financial position or results of
operations.
In June 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)" ("EITF 94-3"). FAS 146 requires that
a liability be recognized for costs associated with exit or disposal activities
only when the liability is incurred. In contrast, under EITF 94-3, a company was
required to recognize a liability for such costs 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
will be recorded at present value and any changes in the liability due to the
passage of time will be recognized as an increase in the liability and as
accretion expense. In contrast, under EITF 94-3 a liability for lease
termination costs was recorded for an amount equal to the undiscounted total of
all remaining lease payments. The provisions of FAS 146 were effective for the
Company as of January 1, 2003. The adoption of this new standard had no
immediate impact on the Company's financial position or results of operations,
but will affect the timing and recognition of future facility closure costs that
may be reported by the Company.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure" ("FAS 148"). FAS 148
provides alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation as originally
provided by FASB Statement No. 123, "Accounting for Stock-Based Compensation"
("FAS 123"). Additionally, FAS 148 amends the disclosure requirements of FAS 123
in both annual and interim financial statements. The disclosure requirements are
effective for financial reports for interim periods beginning after December 15,
2002. The adoption of FAS 148 had no impact on the Company's financial position
or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires certain
guarantees to be recorded at fair value regardless of the probability of the
loss. FIN 45 is effective for guarantees issued or modified after December
F-13
31, 2002. The adoption of this new interpretation had no impact on the Company's
financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies consolidation
requirements for variable interest entities ("VIEs"). It establishes additional
factors beyond ownership of a majority voting interest to indicate that a
company has a controlling financing interest in an entity (or a relationship
sufficiently similar to a controlling financial interest that it requires
consolidation). Consolidation of a VIE by an investor is required when it is
determined that the investor will absorb a majority of the VIE's expected losses
or residual returns if they occur. The Company leases two of its PowerMax
distribution facilities from VIEs (previously referred to as SPEs or special
purpose entities) that have been established by nationally prominent,
creditworthy commercial lessors to facilitate the financing of the inventory
distribution facilities. The VIEs 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 VIEs could
draw on the letters of credit in order to redeem the commercial paper. These
letters of credit reduce the Company's available borrowing capacity 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 agreements 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 for any shortfall from a fair value specified in
the lease agreements. 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.
This interpretation applies immediately to variable interest entities
created or obtained after January 31, 2003 and must be retroactively applied to
holdings in variable interest entities acquired before February 1, 2003 in
interim and annual financial statements issued for periods beginning after June
15, 2003. FIN 46 may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements with a cumulative-effect adjustment as of
the beginning of the first year restated. The Company is assessing the impact of
adoption of FIN 46. However, based on management's preliminary assessment, it is
reasonably possible that the Company will be required to consolidate the VIEs
involved in the leasing of its PowerMax inventory distribution facilities
beginning in the third quarter of fiscal year 2003. If the Company is required
to consolidate the VIEs, the assets and related depreciation, liabilities and
non-controlling interests of these VIEs will be reflected in the Company's
consolidated financial statements. The Company has not yet determined under
which of the transition alternatives it will report the impact, if any, of
adopting FIN 46.
In November 2002, the FASB Emerging Issues Task Force ("Task Force") issued
EITF Issue 02-16, "Accounting by a Customer (including a Reseller) for Cash
Consideration Received from a Vendor," ("EITF 02-16"). EITF 02-16 addresses the
following two issues: (i) the classification in a reseller's financial
statements of cash consideration received from a vendor ("Issue 1"); and (ii)
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 stipulates
that cash consideration received from a vendor is presumed to be a reduction of
the prices of the vendors' products and should, therefore, be recognized as a
reduction of cost of merchandise sold when recognized in the reseller's
financial statements. However, that presumption is overcome when the
consideration is either (a) a payment for assets or services delivered to the
vendor, in which case the cash consideration should be recognized as revenue (or
other income, as appropriate) when recognized in the reseller's income
statement, or (b) a reimbursement of a specific, incremental, identifiable cost
incurred by the reseller in selling the vendor's products, in which case the
cash consideration should be characterized as a reduction of that cost when
recognized in the reseller's income statement. Issue 2 states that vendor
rebates should be recognized on a systematic and rational allocation of the cash
consideration offered to each of the underlying transactions that results in
progress by the reseller toward earning the rebate, provided the amounts are
probable and reasonably estimable. Issue 1 is effective for all new
arrangements, including modifications of
F-14
existing arrangements, entered into after December 31, 2002. Issue 2 is
effective for all new arrangements initiated after November 21, 2002.
As noted above, the Company and its vendors participate in cooperative
advertising programs and other vendor marketing programs in which the vendors
reimburse the Company for a portion of its advertising costs. Any change to our
accounting for cooperative advertising arrangements or other vendor marketing
programs could result in consideration received from our vendors being used to
lower product costs in inventory rather than as an offset to our advertising
costs. Such a change could impact the timing of recognition of cash
consideration received from our vendors and could increase our gross profit and
net advertising expenses. The Company has not yet completed its assessment of
whether, or to what extent, EITF 02-16 will impact its results of operations
during fiscal year 2003.
NOTE 2. STORE CLOSING AND ASSET IMPAIRMENT
FISCAL YEAR 2002
In December 2002, the Company completed a review of its domestic real
estate portfolio and committed to close eight underperforming domestic
superstores and one delivery center. In conjunction with these closings, the
Company recorded a pre-tax charge for store closing and asset impairment of
$11,915,000 during the fourth quarter of fiscal year 2002. Also during the
fourth quarter of fiscal year 2002, the Company reversed $8,847,000 and
$2,356,000 of the store closing reserves originally established in fiscal year
2001 and fiscal year 2000, respectively, when those portions of the reserves
were deemed no longer necessary. See "Fiscal Year 2001" and "Fiscal Year 2000"
below for additional information regarding the reversal of the prior year
reserves. In addition, the Company recorded a pre-tax charge for asset
impairment of $1,777,000 during the second quarter of fiscal year 2002. In
total, the net charges for store closing and asset impairment reduced fiscal
year 2002 net income by $2,489,000, or $0.02 per diluted share.
FISCAL YEAR 2001
During the fourth quarter of fiscal year 2001, the Company elected to close
29 underperforming domestic superstores and recorded a pre-tax charge for store
closing and asset impairment of $79,838,000. Also during the fourth quarter of
fiscal year 2001, the Company reversed $3,077,000 of the store closing reserve
originally established in fiscal year 2000 when that portion of the reserve was
deemed no longer necessary. See "Fiscal Year 2000" below for additional
information regarding the reversal of the prior year reserve. The net charge of
$76,761,000, net of income tax benefit, reduced fiscal year 2001 net income by
$47,728,000, or $0.42 per diluted share. 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 2002, the Company reversed approximately $8,847,000 of the reserve
for store closing costs originally established in fiscal year 2001, as a result
of management's successful efforts to sublease closed stores and negotiate early
terminations of leases.
Included in the charge for store closing and asset impairment, recorded
during the fourth quarter of fiscal year 2001, was $5,631,000 of expense
related to the write-off of the Company's investment in a Brazilian company, as
well as receivables from the Brazilian company.
Also during the fourth quarter of fiscal year 2001, the Company recorded an
additional pre-tax charge of $3,680,000 as a result of the inventory liquidation
at the closed stores. The inventory liquidation charge, net of income tax
benefit, reduced fiscal year 2001 net income by $2,227,000, or $0.02 per diluted
share.
FISCAL YEAR 2000
During the fourth quarter of fiscal year 2000, the Company elected to close
50 underperforming domestic superstores and recorded a pre-tax charge for store
closing and asset
F-15
impairment of $109,578,000. The charge, net of income tax benefit, reduced
fiscal year 2000 net income by $66,843,000, or $0.59 per diluted share. Of the
50 superstores originally expected to close, 48 were liquidated and closed
during fiscal year 2001. During the fourth quarter of fiscal year 2001, the
Company elected not to close the two remaining 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
reserve for store closing costs originally established 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. During the fourth quarter of
fiscal year 2002, the Company reversed approximately $2,356,000 of the reserve
for store closing costs originally established in fiscal year 2000, as a result
of management's successful efforts to sublease closed stores and negotiate early
terminations of leases. 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.
Also during the fourth quarter of fiscal year 2000, the Company recorded an
additional pre-tax charge of $8,244,000 as a result of the inventory liquidation
at the closed stores. The inventory liquidation charge, net of income tax
benefit, reduced fiscal year 2000 net income by $4,946,000, or $0.05 per diluted
share.
A reconciliation of major components of the Company's store closing reserve
is as follows:
- --------------------------------------------------------------------------------------------------------------
BALANCE BALANCE
JANUARY 26, PAYMENT/ JANUARY 25,
(In thousands) 2002 CHARGES REVERSALS USAGE 2003
- --------------------------------------------------------------------------------------------------------------
Lease disposition costs,
net of sublease income $ 122,304 $9,118 $(10,288) $(19,830) $101,304
Other closing costs,
including severance 7,218 467 (915) (3,844) 2,926
------------------------------------------------------------------------------
Total $ 129,522 $9,585 $(11,203) $(23,674) $104,230
==============================================================================
As of January 25, 2003 and January 26, 2002, $81,330,000 and $98,035,000 of
the store closing reserve, respectively, was included in other long-term
liabilities. Lease disposition costs included in the reserve for store closing
costs include the aggregate rent expense for the closed stores net of expected
future sublease income of $109,139,000 and $101,389,000 as of January 25, 2003
and January 26, 2002, respectively. Of the total expected future sublease income
included in the reserve for store closing costs, the Company had obtained
sublease or assignment agreements for certain of its closed stores totaling
approximately $49,804,000 and $14,020,000 as of January 25, 2003 and January 26,
2002, respectively.
NOTE 3. RELATIONSHIP WITH KMART CORPORATION
Approximately 40 of the Company's store leases were guaranteed by Kmart
Corporation ("Kmart"), which from 1990 to 1995 was an equity investor in
OfficeMax during the Company's early stages of development. Kmart sold the
balance of its equity position in OfficeMax in 1995. The Company and Kmart are
parties to a Lease Guaranty, Reimbursement and Indemnification Agreement,
pursuant to which Kmart agreed to maintain existing guarantees and provide a
limited number of additional guarantees, and the Company has agreed, among other
things, to indemnify Kmart against liabilities incurred in connection with those
guarantees. In connection with that agreement, OfficeMax and Kmart subsequently
entered into a Consent and Undertaking Agreement and an Assignment, pursuant to
which OfficeMax assigned some 45 leases to Kmart and took back subleases. The
agreements generally protect against interference by Kmart in the leases absent
default, and provide for Kmart to assign the leases back to OfficeMax should
Kmart be released from its guarantees or if necessary to prevent a rejection in
bankruptcy. Kmart is presently a debtor in possession in a Chapter 11 bankruptcy
case filed on January 22, 2002.
F-16
During the first quarter of fiscal year 2002, due to a decline in Kmart's
debt rating, the Company was required to purchase the mortgage notes on two of
its store properties for an aggregate amount of $5,085,000. Both of the
properties are occupied by the Company. Principal and interest payments to the
Company under the mortgage notes are secured by the Company's rent payments
under the related lease agreements. Interest on the mortgage notes accrues to
the Company at an average rate of approximately 10% per annum, which exceeds the
Company's current borrowing rate. The Company does not expect the decline in
Kmart's debt rating or Kmart's subsequent bankruptcy filing to have a material
adverse impact on OfficeMax's financial position or the results of its
operations.
NOTE 4. DEBT
REVOLVING CREDIT FACILITIES
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 January 25, 2003, the Company had no outstanding borrowings under the
revolving credit facility. As of January 26, 2002, the Company had outstanding
borrowings of $20,000,000 under the revolving credit facility at a weighted
average interest rate of 4.75%. Also from this facility, the Company had
$117,136,000 and $111,580,000 of standby letters of credit outstanding as of
January 25, 2003 and January 26, 2002, respectively, in connection with its
insurance programs and two synthetic operating leases. These standby letters of
credit reduce the Company's available borrowing capacity 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 January 25, 2003, the Company had unused and
available borrowings under the revolving credit facility in excess of
$444,000,000.
MORTGAGE LOAN
During the second quarter of fiscal year 2000, the Company repaid the
outstanding balance of a mortgage loan in the amount of $16,100,000. The
mortgage loan was secured by the Company's international corporate headquarters
and had an original maturity of January 2007.
During the fourth quarter of fiscal year 2000, the Company assumed an
eleven-year $1,800,000 mortgage loan secured by real estate occupied by the
Company. The Company previously leased the real estate. The mortgage loan bears
interest at a rate of 5.0% per annum. Maturities of the mortgage loan, including
interest, will be approximately $213,000 for each of the next five years.
NOTE 5. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company occupies all of its stores, delivery centers and national
customer call and contact centers under various long-term lease agreements.
These leases generally have initial terms ranging from 10 to 25 years plus
renewal options. Most of these leases require the Company to pay minimum rents,
subject to periodic adjustments, plus other charges including utilities, real
estate taxes, common area maintenance and, in limited cases, contingent rentals
based on sales.
The Company 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. The Company leases the PowerMax
facilities from special purpose entities ("SPEs") that have been established
F-17
by nationally prominent, creditworthy commercial lessors to facilitate the
financing of those assets for the Company. 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 could draw on the letters of credit
in order to redeem the commercial paper. These letters of credit reduce the
Company's available borrowing capacity 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 for any shortfall from 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.
F-18
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", ("FIN 46"). The Company is assessing the impact of
adoption of FIN 46. However, based on management's preliminary assessment, it is
reasonably possible that the Company will be required to consolidate the VIEs
(previously referred to as SPEs or special purpose entities) from which it
leases two of its PowerMax inventory distribution facilities beginning in the
third quarter of fiscal year 2003. If the Company is required to consolidate the
VIEs, the assets and related depreciation, liabilities and non-controlling
interests of these VIEs will be reflected in the Company's consolidated
financial statements.
The table below summarizes the future minimum lease payments and future
minimum rentals due under non-cancelable leases as of January 25, 2003.
- -------------------------------------------------------------------------
FISCAL YEAR OPERATING
(In thousands) LEASES
- -------------------------------------------------------------------------
2003 $ 338,202
2004 314,004
2005 286,644
2006 260,346
2007 227,087
Thereafter 1,164,380
----------
Total minimum lease payments $2,590,663
==========
Other long-term liabilities as of January 25, 2003 and January 26, 2002
included approximately $66,756,000 and $66,319,000, respectively, related to
future rent escalation clauses under certain operating leases that are
recognized on a straight-line basis over the terms of the respective lease.
F-19
A summary of operating lease rental expense and short-term rentals, net of
sublease income, is as follows:
- --------------------------------------------------------------------------------
FISCAL YEAR ENDED JANUARY 25, JANUARY 26, JANUARY 27,
(In thousands) 2003 2002 2001
- --------------------------------------------------------------------------------
Minimum rentals $345,890 $366,288 $365,586
Percentage rentals 618 188 249
-------- -------- --------
Total $346,508 $366,476 $365,835
======== ======== ========
OTHER COMMITMENTS
In accordance with an amended and restated joint venture agreement, the
minority owner of the Company's subsidiary in Mexico, OfficeMax de Mexico, can
elect to put its remaining 49% interest in the subsidiary to the Company, if
certain earnings targets are achieved. These earnings targets are calculated
quarterly on a rolling four quarter basis. 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's
earnings for the last four quarters before interest, taxes, depreciation and
amortization and current market multiples of similar companies. The fair value
purchase price for fiscal year 2003 is currently estimated at $25,000,000 to
$30,000,000.
The Company has an arrangement with a financial services company (the
"Issuer") whereby the Issuer manages the Company's private label credit card
programs. The credit card accounts, and receivables generated thereby, are owned
by the Issuer. Under the terms of the agreement, the Issuer charges the Company
a fee to cover the Issuer's cost of providing credit and collecting the
receivables which are non-recourse to the Company. The Company's agreement with
the Issuer permits the Issuer to terminate the agreement at anytime if the
Company does not maintain a minimum tangible net worth as defined in the
agreement. As of January 25, 2003, the Company's tangible net worth exceeded the
minimum tangible net worth required by the agreement with the Issuer by
approximately $36,935,000. The Company believes that if it did not maintain the
required minimum tangible net worth and the Issuer terminated the agreement, it
would be able to find another financial services company to manage its private
label credit card programs.
There are various claims, lawsuits and pending actions against the Company
incident to the Company's operations. It is the opinion of management that the
ultimate resolution of these matters will not have a material adverse effect on
the Company's liquidity, financial position or results of operations. See Note
11 of Notes to Consolidated Financial Statements for information regarding
litigation and arbitration proceedings involving the Company and Gateway
Companies, Inc. ("Gateway").
NOTE 6. INCOME TAXES
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 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 three-year period ended January 26, 2002 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 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
F-20
foreign tax provisions, the Company will have no reported tax provision, net of
valuation allowance adjustments. Any future decision to reverse a portion or all
of the remaining valuation allowance will be based on consideration of several
factors including, but not limited to, the Company's expectations regarding
future taxable income and the Company's cumulative income or loss in the then
most recent three-year period.
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. As of January 25, 2003, the valuation allowance was approximately
$108,885,000, which represents a full valuation allowance of the Company's net
deferred tax assets, including amounts related to its net operating loss
carryforwards. The Company has received refunds for all of the additional net
operating loss carryback resulting from the extension of the carryback period.
Also during fiscal year 2002, the Company received refunds of amounts on
deposit with the IRS of approximately $30,000,000 related to prior year tax
returns.
The provision (benefit) for income taxes consists of:
- ---------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JANUARY 25, JANUARY 26, JANUARY 27,
(In thousands) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------
Current federal $ -- $ (4,863) $(21,317)
State and local -- 8,037 (4,084)
Foreign -- 112 1,727
Deferred 61,731 (84,198) (55,402)
Valuation allowance (61,731) 170,616 --
Benefit due to change in tax law (57,500) -- --
-------- --------- --------
Total income tax expense (benefit) $(57,500) $ 89,704 $(79,076)
======== ========= ========
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
- ---------------------------------------------------------------------------------------------------------
JANUARY 25, JANUARY 26, JANUARY 27,
FISCAL YEAR ENDED 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------
Federal statutory rate (benefit) 35.0% (35.0)% (35.0)%
State and local taxes, net of
federal tax effects 3.0% (4.1)% (4.0)%
Goodwill amortization -- 4.5% 1.7%
Valuation allowance (38.0)% 76.0% --
Benefit due to change in tax law (308.1)% -- --
Other -- -- (0.3)%
------ ----- -------
Total income tax expense (benefit) (308.1)% 41.4% (37.6)%
====== ===== =======
F-21
The Company's net deferred tax assets are attributable to temporary
differences related to:
- --------------------------------------------------------------------------------
FISCAL YEAR ENDED JANUARY 25, JANUARY 26,
(In thousands) 2003 2002
- --------------------------------------------------------------------------------
Inventory $ 5,361 $ 5,402
Property and equipment (10,212) (22,154)
Escalating rent 26,244 26,133
Store closing reserve 43,608 57,678
Accrued expenses not currently deductible 27,337 28,657
Net operating loss carryforwards and other 16,547 74,900
Valuation allowance (108,885) (170,616)
--------- ---------
Total net deferred tax assets $ -- $ --
========= =========
NOTE 7. SUPPLEMENTAL CASH FLOW INFORMATION
Additional supplemental information related to the Consolidated Statements
of Cash Flows is as follows:
- ----------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JANUARY 25, JANUARY 26, JANUARY 27,
(In thousands) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------
Cash transactions:
Cash paid for interest $ 2,749 $15,115 $15,819
Cash paid for income taxes (excluding income tax
refunds) 13,192 2,166 6,742
Cash paid for acquisition of majority interest in
OfficeMax de Mexico -- -- 10,000
Non-cash transactions:
Liabilities accrued for property and
equipment acquired 5,781 11,818 24,290
Tax benefit related to exercise of
stock options -- 36 70
NOTE 8. EMPLOYEE BENEFIT PLANS
STOCK PURCHASE PLANS
The Company has adopted a Management Share Purchase Plan (the "Management
Plan"), an Employee Share Purchase Plan (the "Employee Plan") and a Director
Share Plan (the "Director Plan"). Under the Management Plan, the Company's
officers are required to use at least 20%, and may use up to 100%, of their
annual incentive bonuses to purchase restricted common shares of the Company at
a 20% discount from the fair value of the same number of unrestricted common
shares. Restricted common shares purchased under the Management Plan are
generally restricted from sale or transfer for three years from date of
purchase. The maximum number of common shares reserved for issuance under the
Management Plan is 1,242,227. The Company recognized compensation expense for
the discount on the restricted common shares of $25,000, $66,000 and $103,000 in
fiscal years 2002, 2001 and 2000, respectively.
The Employee Plan is available to all full-time employees of the Company
who are not covered under the Management Plan and who have worked at least 1,000
hours during a period of 12 consecutive months. Each eligible employee has the
right to purchase, on a quarterly basis, the Company's common shares at a 15%
discount from the fair market value per common share. Shares purchased under the
Employee Plan are generally restricted from sale or transfer for one
F-22
year from date of purchase. The maximum number of shares eligible for purchase
under the Employee Plan is 2,958,761. The Company is not required to record
compensation expense with respect to shares purchased under the Employee Plan.
The Director Plan covers all directors of the Company who are not officers
or employees of the Company. Participants receive their entire annual retainer
in the form of restricted common shares paid at the beginning of the relevant
calendar year and all of their meeting fees in the form of unrestricted common
shares paid at the end of the calendar quarter in which the meetings occurred.
Shares paid to participants in the Director Plan are issued at the fair market
value on the date of grant without discount. The restrictions on such shares
generally lapse one year from the date of grant. The maximum number of shares
reserved for issuance under the Director Plan is 750,000.
SAVINGS PLANS
Employees of the Company who meet certain service requirements are eligible
to participate in the Company's 401(k) Savings Plan. Participants may contribute
2% to 15% of their annual earnings, subject to statutory limitations. The
Company matches 50% of the first 3% of the employee's contribution. Such
matching Company contributions are invested in shares of the Company's common
stock and become vested 50% after two years of service and 100% after three
years of service. Highly compensated employees (as defined by the Employee
Retirement Income Security Act of 1974, as amended) are eligible to participate
in the Company's Executive Savings Deferral Plan ("ESDP") if their contributions
to the 401(k) Savings Plan are limited. The provisions of the ESDP are similar
to those of the Company's 401(k) Savings Plan. The charge to operations for the
Company's matching contributions to these plans amounted to $1,635,000,
$1,477,000 and $1,290,000 for fiscal years 2002, 2001 and 2000, respectively.
STOCK OPTION PLANS
The Company's Equity-Based Award Plan provides for the issuance of up to
26,000,000 share appreciation rights, restricted shares and options to purchase
common shares. Options granted under the Equity-Based Award Plan become
exercisable from one to seven years after the date of grant and expire ten years
from date of grant.
Exercisable options outstanding were 7,995,054 as of January 25, 2003,
6,303,979 as of January 26, 2002 and 3,996,544 as of January 27, 2001.
Option activity for each of the last three fiscal years was as follows:
- ------------------------------------------------------------------------------
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
- ------------------------------------------------------------------------------
Outstanding at January 22, 2000 12,088,347 $ 10.56
Granted 5,485,993 3.62
Exercised (112,822) 4.01
Forfeited (2,604,895) 10.30
------------ -----------
Outstanding at January 27, 2001 14,856,623 8.09
Granted 2,549,562 3.17
Exercised (119,870) 4.01
Forfeited (3,470,525) 7.44
------------ -----------
Outstanding at January 26, 2002 13,815,790 7.85
Granted 3,869,790 5.73
Exercised (1,111,946) 2.68
Forfeited (1,514,859) 7.62
------------ -----------
Outstanding at January 25, 2003 15,058,775 $ 7.71
============ ===========
F-23
The following table summarizes information about options outstanding as of
January 25, 2003:
Options Outstanding Options Exercisable
----------------------------------- -------------------------------------
Range of Weighted Average Weighted Average Weighted Average
Exercise Prices Options Exercise Price Remaining Life (Years) Options Exercise Price
-------------- -------------------- ----------------- -------------------
$ 2.38 to $ 4.31 2,599,305 $ 3.10 8.3 1,194,680 $ 2.94
$ 4.56 to $ 5.96 3,684,479 $ 5.75 9.1 140,046 $ 5.39
$ 6.06 to $ 7.08 2,737,925 $ 6.57 6.7 1,850,304 $ 6.61
$ 7.56 to $ 9.78 2,042,585 $ 7.92 5.6 1,280,417 $ 7.72
$10.19 to $11.75 2,063,333 $ 11.48 3.3 1,951,329 $ 11.54
$13.88 to $18.07 1,931,148 $ 15.02 4.3 1,578,278 $ 15.12
NOTE 9. BUSINESS SEGMENTS
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, comprised of its retail stores, e-Commerce operations, catalog business
and outside sales groups, are included in the Domestic segment. The Domestic
segment also includes the Company's investments accounted for under the cost or
equity methods, including its investment in a Brazilian company. The operations
of the Company's majority-owned subsidiary in Mexico, OfficeMax de Mexico, are
included in the International segment. During recent years, OfficeMax has
integrated and aligned its domestic e-Commerce operations, catalog business and
outside sales groups with its superstores in order to more efficiently leverage
its various business channels. As a result, management evaluates performance and
allocates resources based on an integrated view of its domestic operations.
Management evaluates the performance of the Company's International segment
separately because of the differences between the operating environments for its
Domestic and International segments.
The accounting policies of the Company's business segments are the same as
those described in the Summary of Significant Accountings Policies (Note 1 of
Notes to Consolidated Financial Statements). The combined results of operations
and assets of the Company's business segments are equal to the Company's
consolidated results of operations and assets.
The following table summarizes the results of operations for the Company's
business segments: (In thousands)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL
FISCAL YEAR 2002 COMPANY DOMESTIC INTERNATIONAL
- ----------------------------------------------------------------------------------------------------------------------
Sales $ 4,775,563 $ 4,622,479 $ 153,084
Cost of merchandise sold, including buying and
occupancy costs 3,578,872 3,461,366 117,506
----------- ----------- ---------
Gross profit 1,196,691 1,161,113 35,578
Store closing and asset impairment 2,489 2,489 --
Operating income 24,645 20,307 4,338
Interest expense (income), net 5,980 6,622 (642)
Income tax benefit (57,500) (57,500) --
Minority interest 2,441 -- 2,441
----------- ----------- ---------
Net income $ 73,724 $ 71,185 $ 2,539
=========== =========== =========
F-24
- -----------------------------------------------------------------------------------------------------------------------
TOTAL
FISCAL YEAR 2001 COMPANY DOMESTIC INTERNATIONAL
- -----------------------------------------------------------------------------------------------------------------------
Sales $ 4,625,877 $ 4,485,293 $ 140,584
Cost of merchandise sold, including buying and
occupancy costs 3,536,069 3,429,069 107,000
Inventory liquidation 3,680 3,680 --
----------- ----------- ---------
Gross profit 1,086,128 1,052,544 33,584
Store closing and asset impairment 76,761 76,761 --
Operating income (loss) (201,916) (206,580) 4,664
Interest expense (income), net 14,804 15,744 (940)
Other, net 61 61 --
Income tax benefit (80,912) (80,912) --
Valuation allowance - deferred tax assets 170,616 170,616 --
Minority interest 2,973 -- 2,973
----------- ----------- ---------
Net income (loss) $ (309,458) $ (312,089) $ 2,631
=========== =========== =========
The total assets of the International segment were approximately
$69,728,000 and $76,239,000 as of January 25, 2003 and January 26, 2002,
respectively. The total assets of the International segment included long-lived
assets, primarily fixed assets, of approximately $23,676,000 and $26,405,000 as
of January 25, 2003 and January 26, 2002, respectively. Depreciation expense for
the International segment was approximately $4,016,000 for fiscal year 2002 and
$2,641,000 for fiscal year 2001. Included in the total assets of the
International segment was goodwill of $3,699,000, which was net of $968,000 of
accumulated amortization, as of January 25, 2003 and January 26, 2002. Goodwill
amortization for the International segment was approximately $465,000 for fiscal
year 2001. As a result of a new accounting pronouncement, FAS 142, that was
effective for the Company as of the beginning of fiscal year 2002, goodwill is
no longer amortized.
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.
Other than its investments in OfficeMax de Mexico, the Company has no
international sales or assets.
NOTE 10. SHAREHOLDERS' EQUITY
SHAREHOLDER RIGHTS PLAN
During the first quarter of fiscal year 2000, the Company adopted a
Shareholder Rights Plan designed to protect its shareholders against "abusive
takeover tactics", by providing certain rights to its shareholders if any group
or person acquires more than 15 percent of the Company's common stock. The plan
was implemented by issuing one preferred share purchase right for each share of
common stock outstanding at the close of business on March 17, 2000, or issued
thereafter until the rights become exercisable. Each right will entitle the
holder to buy one one-thousandth of a participating preferred share at a $30
initial exercise price. Each fraction of a participating preferred share will be
equivalent to a share of the Company's common stock. The rights become
exercisable if any group acquires more than 15% of the outstanding OfficeMax
common stock or if a person or group begins a tender or exchange offer that
could result in such an acquisition.
F-25
NOTE 11. GATEWAY ALLIANCE
In fiscal year 2000, Gateway committed to operate licensed
store-within-a-store computer departments within all OfficeMax superstores in
the United States pursuant to a strategic alliance, which included the terms of
a Master License Agreement (the "MLA"). In connection with the investment
requirements of the strategic alliance, during the second quarter of fiscal year
2000, Gateway invested $50,000,000 in OfficeMax convertible preferred stock -
$30,000,000 in Series A Voting Preference Shares (the "Series A Shares")
designated for OfficeMax and $20,000,000 in Series B Serial Preferred Shares
(the "Series B Shares") designated for OfficeMax.com.
The Series A Shares, which had a purchase price of $9.75 per share, voted
on an as-converted to Common Shares basis (one vote per share) and did not bear
any interest or coupon. The Series A Shares were to increase in value from $9.75
per share to $12.50 per share on a straight-line basis over the five-year term
of the alliance. The Company recognized the increase in value by a charge
directly to Retained Earnings for Preferred Share Accretion. The Series B
Shares, which had a purchase price of $10 per share and a coupon rate of 7% per
annum, had no voting rights.
During the first quarter of fiscal year 2001, Gateway announced its
intention to discontinue selling computers in non-Gateway stores, including
OfficeMax superstores. At that time, OfficeMax and Gateway began discussing
legal issues regarding Gateway's performance under the strategic alliance. In
the second quarter of fiscal year 2001, Gateway ended its rollout of Gateway
store-within-a-store computer departments in the Company's superstores and has
since removed its equipment and fixtures from such stores. On July 23, 2001,
Gateway notified the Company of its termination of the MLA and its desire to
exercise its redemption rights with respect to the Series B Shares. Thereafter,
the Company, which had previously notified Gateway of Gateway's breaches under
the MLA and related agreements, reaffirmed its position that Gateway was in
breach of its obligations under the MLA and related agreements. Accordingly, the
Company stopped recording the accretion of the Series A Shares and accruing
interest on the Series B Shares at that date. Litigation and arbitration
proceedings have commenced with each party asserting claims of non-performance
against each 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.
F-26
NOTE 12. EARNINGS PER COMMON SHARE
Basic earnings per common share is based on the weighted average number of
common shares outstanding, and diluted earnings per common share is based on
the weighted average number of common shares outstanding and all potentially
dilutive common stock equivalents.
A reconciliation of the basic and diluted per share computations is as
follows:
- --------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JANUARY 25, JANUARY 26, JANUARY 27,
(In thousands, except per share data) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------
Net income (loss) $ 73,724 $(309,458) $(133,166)
Preferred stock accretion -- (1,546) (2,319)
-------- --------- ---------
Net income (loss)
available to common shareholders $ 73,724 $(311,004) $(135,485)
======== ========= =========
Weighted average number of common shares
outstanding 123,817 114,308 112,738
Effect of dilutive securities:
Stock options 1,243 -- --
Restricted stock 49 -- --
-------- --------- ---------
Weighted average number of common shares
outstanding and assumed
conversions 125,109 114,308 112,738
======== ========= =========
Basic earnings (loss) per common share $ 0.60 $ (2.72) $ (1.20)
======== ========= =========
Diluted earnings (loss) per common share $ 0.59 $ (2.72) $ (1.20)
======== ========== =========
Options to purchase 12,368,499 common shares were excluded from the
calculation of diluted earnings per common share in fiscal year 2002, because
the exercise prices of the options were greater than the average market price.
These shares had a weighted average exercise price of $8.70.
All potentially dilutive common stock equivalents were excluded from the
calculation of diluted earnings per common share for fiscal years 2001 and 2000,
because their effect would have been anti-dilutive due to the net loss
recognized in those periods. Options to purchase 13,815,790 common shares at a
weighted average exercise price of $7.85 and 81,607 restricted stock units were
excluded from the calculation of diluted earnings per common share for fiscal
year 2001. Options to purchase 14,856,623 common shares at a weighted average
exercise price of $8.09 and 148,463 restricted stock units were excluded from
the calculation of diluted earnings per common share for fiscal year 2000.
F-27
NOTE 13. QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS
Unaudited quarterly consolidated results of operations for the fiscal years
ended January 25, 2003 and January 26, 2002 are summarized as follows: (In
thousands, except per share data)
FISCAL YEAR 2002
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER (1) QUARTER (2) QUARTER QUARTER (2)
- -------------------------------------------------------------------------------------------------------------------------------
Sales $ 1,178,152 $ 1,006,271 $1,255,606 $1,335,534
Cost of merchandise sold,
including buying and
occupancy costs 878,824 759,288 937,942 1,002,818
----------- ----------- ---------- ----------
Gross profit 299,328 246,983 317,664 332,716
Store closing and asset impairment -- 1,777 -- 712
Operating income (loss) 8,102 (31,273) 18,842 28,974
Income (loss) before income taxes 6,761 (33,398) 17,562 27,740
Income tax benefit (57,500) -- -- --
Net income (loss) $ 63,518 $ (33,362) $ 16,512 $ 27,056
Income (loss) per common share:
Basic $ 0.52 $ (0.27) $ 0.13 $ 0.22
Diluted $ 0.51 $ (0.27) $ 0.13 $ 0.22
FISCAL YEAR 2001
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER (3)
- ----------------------------------------------------------------------------------------------------------------------------------
Sales $ 1,191,467 $ 976,675 $ 1,186,433 $ 1,271,302
Cost of merchandise sold,
including buying and
occupancy costs 901,179 733,086 903,715 998,089
Inventory liquidation -- -- -- 3,680
----------- --------- ----------- -----------
Gross profit 290,288 243,589 282,718 269,533
Store closing and asset impairment -- -- -- 76,761
Operating loss (19,526) (32,871) (36,468) (113,051)
Loss before income taxes (24,913) (37,727) (39,209) (114,932)
Income tax benefit (9,134) (13,984) (14,714) (43,080)
Deferred tax valuation allowance -- -- -- 170,616
Net loss $ (16,585) $ (23,996) $ (25,780) $ (243,097)
Loss per common share:
Basic $ (0.15) $ (0.22) $ (0.23) $ (2.06)
Diluted $ (0.15) $ (0.22) $ (0.23) $ (2.06)
F-28
(1) During the first quarter of fiscal year 2002, the Company reversed a
portion of the deferred tax asset valuation allowance recorded during the
fourth quarter of fiscal year 2001 and recorded an income tax benefit of
$57,500,000 due to the effects of a new tax law that extended the carryback
period for net operating losses incurred during the Company's taxable years
ended in 2001 and 2000. See Note 6 of Notes to Consolidated Financial
Statements for additional information regarding income taxes.
(2) The Company recorded a charge of $1,777,000 for asset impairment during the
second quarter of fiscal year 2002. During the fourth quarter of fiscal
year 2002, the Company recorded a net charge of $712,000 for store closing
and asset impairment. See Note 2 of Notes to Consolidated Financial
Statements for additional information regarding store closing and asset
impairment charges.
(3) The Company recorded a net charge of $76,761,000 for store closing and
asset impairment, as well as a charge for inventory liquidation of
$3,680,000 in the fourth quarter of fiscal year 2001. See Note 2 of Notes
to Consolidated Financial Statements for additional information regarding
store closing and asset impairment and inventory liquidation charges.
During the fourth quarter of fiscal year 2001, the Company recorded
additional cost of merchandise sold of $13,629,000 as a result of the
finalization of estimates for inventory shrink expense including the
effects of the implementation of certain supply chain initiatives. Also
during 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. See Note 6 of Notes to Consolidated Financial Statements for
additional information regarding income taxes.
F-29
DEDUCTIONS -
BALANCE ADDITIONS - WRITE-OFFS, BALANCE
AT BEGINNING CHARGED TO PAYMENTS AND AT END
(In thousands) OF PERIOD EXPENSE OTHER ADJUSTMENTS OF PERIOD
- --------------------------------- -------------- ----------- ----------------- ---------
Tax Asset Valuation Allowance
2002 $ 170,616 $ - $ 61,731 $ 108,885
2001 - 170,616 - 170,616
2000 - - - -
S-1