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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, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _____________ to
_____________
Commission file number 1-13380
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OFFICEMAX, INC.
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(Exact name of registrant as specified in its charter)
OHIO 34-1573735
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(State or other jurisdiction of incorporation or organization) (I.R.S. employer identification no.)
3605 WARRENSVILLE CENTER ROAD, SHAKER HEIGHTS, OHIO 44122
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 921-6900
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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COMMON SHARES, WITHOUT PAR VALUE NEW YORK STOCK EXCHANGE
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
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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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 28, 1997 was approximately $1,624,445,672.
The number of Common Shares, without par value, of the Registrant outstanding as
of March 28, 1997 was 123,835,169.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement dated April 17, 1997, for use at
the Annual Meeting of Shareholders to be held on May 19, 1997 are incorporated
by reference in Part III hereof.
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PART I
ITEM 1. BUSINESS
GENERAL
OfficeMax, Inc. ("OfficeMax" or the "Company"), one of the fastest
growing specialty retailers in the United States, last year became the fourth
company in U.S. business history to exceed $3 billion in sales in less than nine
years from the date founded. At the close of fiscal 1996, the Company operated
564 high volume, deep discount office product superstores in over 220 markets in
47 states and Puerto Rico, as well as three national call centers, 17 delivery
centers and a new OfficeMax retail joint venture in Mexico. At March 30, 1997,
OfficeMax had 579 office product superstores which is more stores in the United
States than any other office product superstore chain.
The Company sells its merchandise primarily to small and medium
businesses, home office customers and individual consumers. Through its growing
delivery and catalog operations, OfficeMax also serves the medium and larger
corporate customer. Additionally, the Company operates OfficeMax OnLine on the
Internet, which enables customers to buy a wide assortment of OfficeMax
merchandise using their personal computers.
OfficeMax TriMax Super Centers, the Company's latest store format,
range in size from 23,500 to 36,000 square feet. These Super Centers feature an
OfficeMax superstore that offers approximately 7,700 supply items together with
store-within-a-store modules of FurnitureMax and CopyMax, which are devoted to
office furniture and "print-for-pay" services, respectively. The Company's new
format now includes a "TechMax" department, which showcases the latest in
computers, wireless digital technology and similarly related technology
products.
HISTORY
OfficeMax, which was co-founded by Michael Feuer, its current Chairman
and Chief Executive Officer, opened its first superstore in suburban Cleveland,
Ohio in July 1988. During the subsequent 28 months, the Company opened 28
superstores and acquired an additional seven stores from Office World, Inc., a
deep-discount office products retailer located in the greater Chicago area.
In November 1990, Kmart Corporation ("Kmart") acquired a 21.6% equity
interest in the Company. As part of this transaction, OfficeMax acquired from
Kmart five deep-discount office products superstores that operated under the
name "Office Square" in the Chicago, Illinois and Akron/Canton, Ohio markets. In
November 1991, Kmart increased its ownership interest in the Company to in
excess of 90% by purchasing all of the outstanding capital shares of the Company
except for certain shares held by the Company's co-founders.
In June 1992, the Company acquired OW Office Warehouse, Inc., a 41
store office product superstore chain with stores located primarily in the
Mid-Atlantic region. In March 1993, the Company acquired BizMart, Inc., a 105
store national office products superstore chain with stores located in the
Southwest, West and Pacific Northwest regions of the United States. Immediately
following each acquisition, the acquired stores were operationally integrated,
remodeled, remerchandised and converted to the OfficeMax name, merchandise
presentation and format. As a result of these acquisitions and the opening of
new superstores, OfficeMax achieved a national presence.
On November 2, 1994, the Company completed an initial public offering
("IPO") of its Common Shares at $8.44 per share (adjusted to give effect for
3-for-2 splits of the Company's Common Shares effected in the form of dividends
paid on July 12, 1995 and July 9, 1996). The net proceeds from the IPO were paid
to Kmart in exchange for certain funding amounts previously provided by Kmart to
the Company. As a result of the IPO, Kmart's ownership interest in OfficeMax was
reduced to approximately 24.6%.
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On July 20, 1995, the Company completed a primary and secondary
offering ("the Secondary Offering") consisting of 8,627,774 primary shares and
28,205,289 secondary shares owned by Kmart. Net proceeds to the Company from the
Secondary Offering was $110,177,000. Following completion of the Secondary
Offering Kmart no longer owned an interest in OfficeMax.
On September 11, 1995, the Company sold its approximate 20% interest in
the contract stationer, Corporate Express, Inc. ("Corporate Express"), for
$195,831,000, resulting in a pre-tax gain of approximately $118,014,000
($69,124,000 after-tax gain, or $0.57 per share).
INDUSTRY OVERVIEW
Over the past approximately eight years, the office products industry
has experienced rapid growth which the Company believes is primarily
attributable to a shift in the United States to a more service oriented economy
and the increasing utilization of technology, such as computers and fax
machines, in businesses and homes. The Company believes that these trends will
continue to expand the office products industry and will create opportunities
for continued growth in market share for operators of high-volume office
products superstores such as OfficeMax.
Small and Medium-Sized Business Market. The Company's primary target
market consists of small and medium-sized businesses, employing between one and
100 employees, home office customers and individual consumers. During the early
to mid 1980's, this market was served primarily by traditional office products
retailers which typically operated small stores offering limited services and a
limited selection of in-stock merchandise purchased from wholesalers or other
distributors and sold to the ultimate consumer at manufacturers' or catalog list
prices. Conversely, office products superstores, such as OfficeMax, feature a
wide selection of name-brand and private label merchandise purchased directly
from the manufacturer and sold at deep-discount prices that are typically 30% to
70% below manufacturers' suggested retail and catalog list prices. As a result
of their ability to offer selection, service and discount prices, office
products superstores are capturing an increasing percentage of the retail office
products market in the United States.
Large Business Market. Large businesses, employing over 100 people,
have historically been served primarily by traditional commercial office
suppliers, known as "contract stationers," which provide their large business
customers with a wide variety of office products purchased from manufacturers
and intermediate wholesalers, generally for next-day delivery. This is a large
and very fragmented segment of the office products industry with the six largest
contract stationers only controlling 25% of the market. Contract stationers
typically utilize an in-house, commissioned sales force to solicit orders from
the purchasing departments of their customers, which order merchandise from the
contract stationer's or an intermediate wholesaler's catalog.
BUSINESS STRATEGY
The Company's strategy is to expand its market share, to be a leading
provider of office products, supplies and services in each of the markets in
which it competes and to continue expanding into new markets, including
expansion internationally. The key elements of this strategy are as follows:
Extensive Selection of Merchandise in an Easy to Shop Format and
Presentation. Each OfficeMax superstore offers approximately 7,700 stock keeping
units ("SKU's") of quality, in-stock, name-brand and private label merchandise.
This represents a breadth and depth of in-stock items that are not available
from traditional office products retailers, specialty office products retailers,
mass merchandisers or wholesale clubs. The Company's bold and dramatic
merchandise presentation is highlighted by wide aisles, bright lighting with
open ceilings, colorful signage and bold graphics. This easy to shop
presentation is designed to enhance customer convenience, create an enjoyable
shopping experience different from that provided by the Company's competitors
and promote impulse buying, thereby increasing sales.
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Everyday Low Prices. The Company's everyday low price policy is to
offer deep-discount prices that are typically 30% to 70% below manufacturers'
suggested retail and catalog list prices. In addition, the Company guarantees
its low prices up to 155%. OfficeMax will match any advertised price or refund
the difference on an item purchased within seven days. An additional 55%
merchandise credit will be issued if the lower price is from an office products
superstore such as Staples, Inc. ("Staples") and Office Depot, Inc. ("Office
Depot").
Customer Service. To develop and maintain customer loyalty, OfficeMax
has fostered a customer-oriented culture that demands a high level of customer
service from each associate. The Company views the quality of its customers'
interaction with its associates as critical to its success. Toward this end, the
Company emphasizes training and personnel development, seeks to attract and
retain well qualified, highly motivated associates, and has centralized most
administrative functions at its corporate office and call centers to enable
in-store associates to focus primarily on serving the customer.
Focused Expansion. The Company enters markets that provide multi-store
opportunities combined with markets in which the Company believes a single
OfficeMax superstore can be one of the dominant office products suppliers.
Prospective locations are evaluated using on-site surveys conducted by real
estate experts 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 stores and relevant demographic
information, such as the number of businesses and the income and education
levels in the area.
New retailing concepts. During the last two years, OfficeMax has
launched new retailing concepts, which provide additional products and services
to the Company's customers and an opportunity for incremental store traffic,
including the store-within-a-store modules, CopyMax and FurnitureMax. CopyMax
offers customers a wide range of "print-for-pay" services, from self-service
black and white copying to full service state of the art digital printing and
publishing. FurnitureMax provides expanded furniture selection and specialized
services. The Company's newest format, TechMax, features the latest in
communication products. These concepts are discussed in greater detail under the
headings "Stores" and "Expansion".
Network of delivery centers. The Company's expanded network of delivery
centers and catalog call centers have opened up new channels of distribution to
drive the core office supply business. The delivery centers service the majority
of the markets in which OfficeMax superstores are located, significantly
increasing the Company's ability to capture market share in the medium and large
business segments.
QuadMax-Electronic Retailing. QuadMax, the Company's online electronic
retailing division, consists of four components and is designed to capitalize
on the emerging and rapidly expanding online computer industry. The OfficeMax
OnLine web site, introduced in March 1995, is one component of the QuadMax
initiative and features thousands of office products, computers, software and
related merchandise. OfficeMax OnLine currently is available on America Online
and the Internet through the Company's world wide web site, www.officemax.com.
The other three components which are scheduled to be rolled out in 1997 are
kiosks, CD-ROM catalogs and OfficeMax Corporate Direct. The touch-screen,
networked, in-store kiosks will replace the current in-store paper special
order catalog and contribute to improved inventory management. The kiosk
technology also enables kiosks to be placed in banks, office buildings, hotels
and other facilities with high volumes of business traffic and provide
customers with the ability to order more than 20,000 office supplies,
furniture, computers and business machines and receive next day delivery via
the OfficeMax delivery system. The new interactive CD-ROM catalogs will provide
the small office/home office customer with real time information, instant
pricing updates and electronic ordering capability. Through OfficeMax Corporate
Direct, the Company plans during fiscal 1997 to increase its emphasis on
targeting companies employing between 50 and 300 office employees. Corporate
Direct is an Internet based purchasing system for these larger companies which
is currently being tested in several markets. This initiative will be supported
by the Company's existing delivery center facilities, systems and online
technology.
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International Opportunities. During the second-half of fiscal 1996, the
Company opened two OfficeMax superstores in Mexico City through a joint venture
with its Mexican partner, Grupo OpriMax, a Mexican corporation. In fiscal 1997,
the joint venture plans to continue to open superstores in Mexico. Additionally,
during fiscal 1996 OfficeMax announced the formation of a joint venture with
JUSCO Company Ltd., a Japanese corporation, to open office products superstores
in Japan. The Company is currently in the process of building an infrastructure
for this venture and anticipates opening the first superstore in late 1997 or
early 1998. OfficeMax owns a 19% interest in each joint venture.
MERCHANDISING
The Company's merchandising strategy focuses on offering an extensive
selection of quality, name-brand and private label office products at
deep-discount prices. OfficeMax superstores feature approximately 7,700 SKU's
generally in the categories of office supplies, computers, computer software,
business electronics and office furniture. The following table sets forth the
approximate percentage of net sales attributable to each merchandise group for
the periods presented:
FISCAL YEAR ENDED
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JAN. 25, JAN. 27, JAN. 21,
1997 1996 1995
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Office supplies, including "print-for-pay" service (1) 37.7% 40.7% 42.7%
Electronics, business machines, computers,
software, peripherals and related consumable
products such as computer cartridges, ribbons
and paper 51.1 47.5 44.7
Office furniture 11.2 11.8 12.6
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100.0% 100.0% 100.0%
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(1) Excludes consumable supplies relating to computers and business machines.
The Company emphasizes a wide selection of name-brand office products,
packaged and sold in multi-unit packages for the business customer and single
units for the individual consumer. The Company also offers private label
products under the OfficeMax(R) label in order to provide customers additional
savings on selected commodity products for which management believes national
brand recognition is not a key determinant of customer satisfaction. These
commodity items include various paper products such as computer and copy paper,
legal pads and notebooks, envelopes and similar functional items. Despite their
lower selling price, these items typically carry higher gross margins than
comparable branded items and help build consumer recognition for the OfficeMax
family of Max brand products. The Company's merchandising staff routinely
evaluates new name-brand and private label merchandise to maximize profit
opportunities and to provide customers with the best value. The Company also
includes its toll-free telephone number on the packaging of certain commodity
and private label goods to increase repeat sales as commodity goods are used and
replenished.
PURCHASING AND DISTRIBUTION
OfficeMax maintains a centralized buying group of merchandise managers
and buyers who average approximately 16 years of retail buying and merchandising
experience. Using a detailed merchandise planning system, this buying group
selects the merchandise mix for each store in conjunction with systematic,
frequent input from field management and store personnel. The Company utilizes a
proprietary merchandise replenishment system, "ForeMax," which automatically
analyzes and forecasts sales trends for each SKU statistically and then predicts
each store's merchandise requirements.
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The Company believes that it has good relationships with its vendors
and does not consider itself dependent on any single source for its merchandise.
As the number of stores increases pursuant to the Company's store expansion
plan, the Company believes that it will be able to continue to obtain sufficient
merchandise for all of its stores on a timely basis.
The Company currently uses the services of a third party logistics firm
to operate independent "ThruMax" cross-docking centers. The Company continues to
evaluate its distribution strategy and methods in order to determine how to
utilize new and improved technology to increase inventory controls and reduce
expenses and delivery lead times.
MARKETING, PROMOTIONS AND ADVERTISING
OfficeMax directs its marketing efforts at small and medium-sized
businesses, home office customers and individual consumers. A multimedia
approach is used to attract new customers while re-emphasizing the Company's
value message to existing customers. Included in these campaigns are national
television commercials, newspaper ads, seasonal spot television and radio
commercials, direct mail promotions, circulars, and outdoor billboards, sports
arena and other such signage. OfficeMax also publishes full-color catalogs and
has introduced catalogs on CD-ROM to further communicate the benefits of
shopping at OfficeMax.
Advertising campaigns and promotions are conducted continuously
throughout the year to reach new and existing customers. To further increase
sales, OfficeMax takes advantage of seasonal selling opportunities. Special
marketing programs are developed to support the Back-To-School selling period,
the Christmas holiday season, plus the January "re-stocking" Back-To-Basics
period. Additional marketing opportunities arise during the Mother's Day,
Father's Day and Graduation selling periods.
STORES
The OfficeMax office products superstore concept is based upon a
prototype that ranges from approximately 23,500 to 36,000 square feet. These
superstores are generally destination oriented locations in high-traffic,
suburban strip-mall shopping centers that provide customers easy access and
ample store-front parking. Each superstore displays merchandise in accordance
with a corporate developed plan-o-gram to ensure that it utilizes optimal
display techniques and provides a consistent and attractive shopping environment
for customers. The Company continuously re-evaluates the attributes of its
prototype store model and periodically makes adjustments to the desired store
layout. These changes are integrated into new stores as they are opened and are
also considered when the Company remodels existing units. The Company's latest
prototype is characterized by an increased degree of visual acuity, a central
computer and business electronics section and a segregated CopyMax
"print-for-pay" area. Management believes that attractive and up-to-date stores
contribute to customer satisfaction and loyalty, leading to increased sales.
Prior to fiscal 1996, store remodels occurred regularly at intervals ranging
from three to four years. However, because of the success of the Company's
latest prototype, 154 existing superstores were remodeled during fiscal 1996 and
plans are in place to remodel 120 more during fiscal 1997. All new stores opened
after November 30, 1996 were TriMax locations, which feature a version of
CopyMax and FurnitureMax along with the traditional OfficeMax superstore.
Introduced in July 1995, the store-within-a-store CopyMax units feature
a broad assortment of "print-for-pay" services for businesses and consumers
ranging from self-service copying to digital printing and publishing as well as
color copying, custom printing and related specialty services. Approximately
4,000 to 6,000 square feet are devoted to a full service CopyMax "hub" location,
which utilizes the latest digital printing equipment and technology and serves
as a centralized production facility. Mini-CopyMax "spoke" locations are either
converted business service centers in existing stores that have or will be
remodeled, or employed in new locations which total size approximates 23,500
square feet. These spoke locations are served by a hub utilizing the "CopyMax
Link" software. This link software, a modem based solution that provides the
capability to transmit documents to any CopyMax location, creates a
"hub-and-spoke" concept that optimizes equipment in the CopyMax hubs. Customers
can also use CopyMax Link software loaded on their computers to download
documents for reproduction at a CopyMax location. This link
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technology has enabled the Company to rapidly roll out the CopyMax concept, and
the Company has quickly emerged as one of the largest "print-for-pay" operations
in the country with 418 locations in fiscal 1996.
Another store-within-a-store module, FurnitureMax features an extensive
selection of office furniture from the ready-to-assemble products currently sold
by OfficeMax to a broader assortment of office chairs, dividers, filing cabinets
and higher-end case goods, desks and credenzas. FurnitureMax also offers
specialized services such as customized space planning, on site consultation,
installation, furniture setup and delivery. Full size FurnitureMax stores are a
4,000 to 8,000 square foot addition to an existing OfficeMax superstore while
mini-FurnitureMax units are a 2,000 square foot module.
A TechMax department is now included in the Company's newest store
format. This module showcases the latest in computers, wireless digital
technology, communications products and similarly related technology products
and features specially trained associates to serve the TechMax customers.
EXPANSION
Small and Medium-Sized Business Market. The Company's expansion
strategy primarily focuses on new store growth and its new retailing concepts.
The Company opened 96 superstores in fiscal 1996 and intends to continue
its rapid growth by opening approximately 125-150 additional superstores in
fiscal 1997. At the end of fiscal 1996, OfficeMax operated 94 full size
FurnitureMax stores of which 70 were opened in fiscal 1996. The Company intends
to continue with the rollout of this concept in fiscal 1997 by introducing full
size FurnitureMax units in up to 45 new and existing OfficeMax locations across
the United States. During fiscal 1996, the Company opened 410 CopyMax units,
including the conversion of over 340 existing business service centers to
mini-CopyMax units, bringing the total number of units to 418. The Company
intends to add approximately 250 CopyMax locations in fiscal 1997, including up
to 55 additional full service hubs.
Large Business Market. OfficeMax has undertaken several initiatives to
better serve the needs of its larger customers, predominately through its
catalog and delivery operations. One such initiative is OfficeMax Corporate
Direct which features customized online ordering for customers with 50 to 300
office employees. The Company also serves the needs of large businesses through
its expanded full-color catalogs featuring approximately 5,000 items and with
other specialized catalogs. These catalogs, which are distributed periodically
to businesses and individual customers, feature toll-free telephone ordering and
typically offer next business day delivery. During fiscal 1996, the Company
opened five expanded delivery centers, bringing its total delivery centers to
17. In contrast to the small business, home office and individual consumer
customer focus of OfficeMax's retail superstores, OfficeMax Corporate Direct,
the expanded OfficeMax catalog and the Company's delivery centers enable larger
businesses, municipalities and school systems to purchase from OfficeMax on much
the same basis as they could from contract stationers and other traditional
office product suppliers.
International. The Company has entered into a joint venture agreement
with Grupo OpriMax, a Mexican corporation, and opened two OfficeMax stores in
Mexico with eight more stores planned in fiscal 1997. In addition, the Company
signed an agreement with JUSCO Company Ltd., a Japanese corporation, to open
stores in Japan. OfficeMax has a 19% interest in each joint venture. There can
be no assurance that any such venture will become operational, or, if it does,
that it will be profitable. Ultimately, the Company's international expansion
will depend upon general economic and business conditions affecting consumer
spending, the availability of desirable locations, the negotiation of acceptable
terms and the availability of adequate capital.
CUSTOMER SERVICE
The Company believes that a fundamental element of its success is its
customer-oriented culture that demands a high level of customer service from
each of its associates. The Company views the quality of its customers'
interaction with its associates as critical to maintaining customer confidence
and loyalty. Through its emphasis on
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training and personnel development, the Company believes it attracts and retains
well-qualified, highly motivated associates committed to providing superior
levels of customer service.
Management has undertaken a number of initiatives that demonstrate its
commitment to excellent in-store customer service. For example, by centralizing
most administrative functions at its corporate offices and call centers,
OfficeMax enables its in-store associates to focus primarily on customer
service. In addition, the Company has implemented ServiceMax, a program that
details customer service standards to be met by each store-level associate and
assigns to each superstore one or more associates whose primary responsibility
is to ensure that each customer receives prompt, courteous and knowledgeable
service. The Company has also developed proprietary Computer Based Training
(CBT) to ensure that associates receive the training needed to keep pace with
new technology and learn more effective methods of customer service.
The Company continually analyzes and refines its methods of conducting
business at the store level and in its delivery centers. For example, the
Company has formally identified internal best practices, known as MaxPractices,
that enable store associates to execute in-store and facility activities more
efficiently. The Company views MaxPractices as an ongoing, evolving program of
operational excellence to be carried out at each of the Company's locations and
its corporate headquarters and call centers.
MANAGEMENT INFORMATION SYSTEMS
OfficeMax has developed comprehensive operational and administrative
controls using centralized computer systems which rapidly collect and
disseminate information between corporate headquarters and each store. This
system has enabled OfficeMax to enhance customer service and to achieve strong
financial controls by enabling management to react quickly and efficiently to
critical store-level information.
The Company uses, at its headquarters, a platform of Unix-based
parallel processors which supports a wide variety of mission critical
applications, ranging from merchandise replenishment to order fulfillment,
electronic retailing and financial systems. This "open system" architecture
provides seamless connectivity to a number of special purpose applications that
provide the information required to make timely and accurate decisions. This
technology also provides "scalability," the ability to support growth within the
same platform.
During 1996, the Company launched FutureMax, an information systems
replatforming project based on improved client-server systems and technology.
FutureMax is comprised of three major application suites, merchandising,
inventory management and financial systems, as well as a broad replatforming of
the Company's information systems' technical infrastructure. OfficeMax has
invested approximately $40 million in the last two years to upgrade systems and
controls and intends to continue investing aggressively in this area to support
its growth.
The Company operates a proprietary in-store computer system called
"StoreMax" that allows the daily tracking of inventory receipts through the use
of portable handheld radio frequency terminals. These terminals permit store
managers to scan a product on the shelf and instantly retrieve product specific
information, such as recent sales history, gross profit margin and inventory
levels. In-store point-of-sale registers capture sales information at the time
of each transaction at the category and SKU level by the use of bar-code
scanners that update store-level perpetual inventory levels. This information is
transmitted on a daily basis to corporate headquarters, where it is evaluated
and used in merchandising and replenishment decisions. In addition, StoreMax is
used to transmit data to each store relating to its key day-to-day operations.
The Company utilizes an online advanced "frame-relay" network which
supports data communication between headquarters and its stores, delivery and
call centers. This technology is employed to centralize credit card and check
authorization and validate transactions. In addition, the network enhances
intra-Company communication and supports electronic maintenance of in-store
technology. The Company has also launched a plan to develop its own intranet,
known as @Max, which will provide information on demand to all of the Company's
associates.
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The Company has implemented a "quick response" program with its vendors
for the purpose of reducing inventory levels and increasing inventory turnover.
As part of this program, the Company uses electronic data interchange ("EDI"),
in lieu of paper copy, for approximately 90% of its purchase orders and
approximately 85% of its vendor invoices. EDI provides certain advantages such
as immediate confirmation of the price, delivery terms and quantity of
merchandise ordered. In addition, the Company has been experimenting with
vendor-managed inventory programs with a select number of vendors. Under these
programs, the Company shares its sales information for a particular SKU with the
vendor and the vendor, rather than the Company, assumes responsibility for
replenishment decisions.
COMPETITION
The office products industry, which includes both national superstores
chains and other indirect competitors, is 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 the consolidation of the office products superstore
industry, OfficeMax currently has only two direct competitors, Staples and
Office Depot, which are similar to the Company in terms of store format, pricing
strategy and product selection. Of the over 20 office products superstore chains
that opened between approximately 1986 and 1994 all but OfficeMax, Staples and
Office Depot have either been acquired or gone out of business. In addition, if
consummated, the proposed merger of Staples and Office Depot would leave the
office products superstore industry with OfficeMax and the combined
Staples/Office Depot entity as the only two high-volume, national, discount
office products superstore chains.
While not all OfficeMax stores currently compete with either Staples or
Office Depot stores, regardless of whether the merger is consummated, the
Company believes it will face increased competition from Staples and Office
Depot, or a combination thereof, as the remaining office product superstore
chains expand their operations in the same markets. The Company believes that it
competes favorably with Staples and Office Depot through consistent execution of
its business strategy, the components of which are designed to favorably
differentiate OfficeMax from Staples and Office Depot.
OfficeMax's indirect competitors include traditional office product
retailers, electronics superstore retailers, mass merchandisers and wholesale
clubs, and direct mail operators. Although these non-superstore companies sell
office products and compete with OfficeMax in limited markets or with respect to
limited product categories, OfficeMax does not consider them to be major direct
competitors. These companies cannot provide all of the advantages that an office
products superstore has to offer such as one-stop shopping convenience, discount
prices, customer benefits and a full range of ancillary business services. For
example, electronic superstore retailers, such as Circuit City and Best Buy,
feature consumer electronics and computers which overlap with only a portion of
the merchandise selection provided by OfficeMax.
Some of OfficeMax's direct and indirect 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.
ASSOCIATES
As of March 30, 1997, the Company had approximately 23,500 employees,
including 12,419 full-time and 10,983 part-time associates, 1,006 of whom were
employed at its Corporate headquarters, divisional offices and call centers and
22,396 of whom were employed at OfficeMax stores and delivery centers. None of
the Company's associates is subject to a collective bargaining agreement.
Management believes that its relationship with its associates is satisfactory.
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ITEM 2. PROPERTIES
OfficeMax superstores are relatively immature, having been opened as of
March 30, 1997 an average of 3.2 years operating under the OfficeMax name and
format. Of the Company's 579 superstores, 259 have been opened by OfficeMax
within the last three years. Management believes that the Company's young stores
represent an opportunity for future sales growth as they proceed through the
maturation cycle.
The Company occupies virtually all of its stores pursuant to long-term
leases. These leases generally have terms ranging from 10 to 25 years plus
renewal options. Most of these leases require the Company to pay minimum rents,
subject to periodic adjustments, plus other charges including utilities, real
estate taxes, common area maintenance and, in limited cases, contingent rentals
based on sales. Several of the Company's store leases are guaranteed by Kmart
Corporation as a result of Kmart's previous equity ownership in the Company. The
Company and Kmart are parties to a Lease Guaranty, Reimbursement and
Indemnification Agreement, pursuant to which Kmart has agreed to maintain
existing guarantees and provide a limited number of additional guarantees, and
the Company has agreed, among other things, to indemnify Kmart against
liabilities incurred in connection with those guarantees.
As of March 30, 1997, OfficeMax had 579 superstores in 48 states and
Puerto Rico. The following table details OfficeMax superstores by state and
territory:
Alabama 6 Nebraska 3
Alaska 2 Nevada 7
Arkansas 1 New Hampshire 3
Arizona 15 New Jersey 15
California 48 New Mexico 3
Colorado 11 New York 34
Connecticut 8 North Carolina 12
Delaware 1 North Dakota 1
Florida 34 Ohio 42
Georgia 13 Oklahoma 3
Hawaii 3 Oregon 6
Idaho 4 Pennsylvania 26
Illinois 36 Rhode Island 2
Indiana 13 South Carolina 7
Iowa 5 South Dakota 2
Kansas 6 Tennessee 18
Kentucky 3 Texas 49
Louisiana 1 Utah 10
Maine 1 Washington 13
Massachusetts 14 Virginia 12
Michigan 33 West Virginia 3
Minnesota 16 Wisconsin 12
Mississippi 2 Wyoming 2
Missouri 14 Puerto Rico 3
Montana 1
10
11
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in litigation incidental to
the conduct of its business. The Company believes that no pending litigation to
which it is a party will have a material adverse effect on its liquidity,
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below are the names, positions and ages of the executive
officers of the Company as of March 30, 1997. Each executive officer will serve
until his successor is selected by the Board of Directors or until his earlier
resignation or removal.
NAME POSITION AGE
- ---------------- ---------------------------------- ---
Michael Feuer Chairman of the Board and 52
Chief Executive Officer
John C. Martin President, Retail Stores 47
John C. Belknap Executive Vice President and 50
Chief Financial Officer
Frederic M. Comins, Jr. Executive Vice President, 49
Human Resources and Administration
Edward L. Cornell Executive Vice President, 48
New Business Development
George H. Luckey Executive Vice President, 51
General Merchandise Manager
James R. Tener Executive Vice President, 48
Store Operations
Mark L. Keschl Senior Vice President, 41
Real Estate
Mark L. Race Senior Vice President, 49
Store Planning
Jeffrey L. Rutherford Senior Vice President, 36
Finance and Treasurer
Ann M. Holt Vice President, Controller 40
Ross H. Pollock Vice President, Secretary and 41
General Counsel
11
12
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 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, Mr. Feuer served Fabri-Centers as
Senior Vice President and a member of that company's executive committee.
Mr. Martin has served as President, Retail Stores of the Company since
March 1996. From November 1993 to March 1996, Mr. Martin served as Executive
Vice President, Store Operations of the Company. From March 1993 to November
1993, Mr. Martin served as Senior Vice President of the Company. From March 1992
to March 1993, Mr. Martin served as Vice President, Group Merchandise Manager.
From August 1988 to March 1992, Mr. Martin was Senior Vice President
Merchandising with Boston Distributors, Inc., a national hard goods distributor.
Mr. Martin has also held various merchandise management and vice president
positions with Gold Circle Stores and various subsidiaries of Federated
Department Stores, Inc.
Mr. Belknap has served as Executive Vice President and Chief Financial
Officer of the Company since December 1995. From February 1994 to February 1995,
Mr. Belknap was Executive Vice President and Chief Financial Officer of Zale
Corporation, a 1,200 store jewelry retail chain. From January 1990 to January
1994 and from February 1995 to December 1995, Mr. Belknap was an independent
financial consultant. From January 1989 to May 1993, Mr. Belknap also was a
director of, and consultant to, Finlay Enterprises, Inc., an operator of leased
fine jewelry departments in major department stores nationwide. Prior to 1989,
Mr. Belknap was Chief Financial Officer of Seligman & Latz, Kay Corporation, and
its subsidiary, Kay Jewelers, Inc.
Mr. Comins has served as Executive Vice President, Human Resources and
Administration since September 1996. From July 1990 to November 1995, Mr. Comins
was associated with Kmart Corporation, serving most recently as Senior Vice
President-Executive & Organization Resources.
Mr. Cornell has served as Executive Vice President, New Business
Development of the Company since December 1995. From February 1993 to December
1995, Mr. Cornell served as Executive Vice President and Chief Financial Officer
of the Company. From February 1992 to February 1993, Mr. Cornell served as
Senior Vice President and Chief Financial Officer of the Company. From March
1983 to February 1992, Mr. Cornell was associated with Things Remembered, a
specialty retail subsidiary of Cole National Corporation, serving most recently
as Executive Vice President and Chief Financial Officer. Mr. Cornell has also
held various management positions with Wal-Mart Stores, Inc. and Zayre
Corporation.
Mr. Luckey has served as Executive Vice President, General Merchandise
Manager of the Company since February 1993. From July 1989 to February 1993, Mr.
Luckey served as Senior Vice President, General Merchandise Manager of the
Company. Prior to July 1989, Mr. Luckey was a general merchandising manager for
Hypershops, Inc. (operating under the name Biggs), a hypermarket retailer in
Cincinnati, Ohio. Mr. Luckey has also held various merchandise management
positions with The May Department Stores and Carlisle Department Stores.
Mr. Tener has served as Executive Vice President, Store Operations of
the Company since April 1996. From March 1995 to April 1996, Mr. Tener was
President/Chief Operating Officer of Busybody, Inc., a 50 store fitness
equipment retailer. From December 1989 to July 1994, Mr. Tener was Senior Vice
President, Operations at Pier 1 Imports, a specialty home furnishing retailer
with approximately 650 stores. From December 1988 to December 1989, Mr. Tener
was Vice President, Regional Director of Operations at Marshalls, the off-price
retailer and a former division of Melville, Inc. Prior to December 1988, Mr.
Tener was associated with Gold Circle Stores, a division of Federated Department
Stores, Inc., serving in various management and vice president positions for
over 18 years.
12
13
Mr. Keschl has served as Senior Vice President, Real Estate of the
Company since September 1993. From September 1992 to August 1993, Mr. Keschl
worked as a real estate consultant, performing services for The Sports
Authority, Inc., a large format sporting goods retailer. From November 1984 to
August 1992, Mr. Keschl was associated with Toys-R-Us, Inc., serving most
recently as Senior Vice President of Real Estate. Mr. Keschl has also held
various real estate related positions with Arbor Drugs, a Michigan based chain
of retail drug stores.
Mr. Race has served as Senior Vice President, Store Planning of the
Company since April 1996. From September 1992 to April 1996, Mr. Race served the
Company as Vice President, Store Planning. From July 1991 to September 1992, Mr.
Race served as Director of Construction of the Company. Prior to July 1991, Mr.
Race was associated with Fabri-Centers of America, Inc. for 13 years where he
held various store planning, construction and administrative service positions,
including Director of Administrative Services from March 1987 to March 1991.
Mr. Rutherford has served as Senior Vice President, Finance and
Treasurer of the Company since February 1997. From January 1984 to January 1997,
Mr. Rutherford was employed in various positions with the public accounting firm
of Arthur Andersen LLP, most recently Senior Manager.
Ms. Holt has served as Vice President, Controller of the Company since
February 1997. From February 1995 to February 1997, Ms. Holt served as
Divisional Vice President in the Financial Accounting group. From March 1992 to
February 1995, Ms. Holt served as Director of Financial Accounting. From March
1990 to March 1992, Ms. Holt served as Assistant Controller of the Company.
Prior to joining OfficeMax, Ms. Holt was associated with Milo Beauty and Barber
Supply, Inc., a national distributor of beauty and barber supplies, for 13 years
where she held various accounting and finance positions.
Mr. Pollock has served as Vice President, Secretary and General Counsel
of the Company since January 1997. From September 1988 to December 1996, Mr.
Pollock practiced law with the law firm of Benesch, Friedlander, Coplan &
Aronoff in its Cleveland, Ohio office.
13
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER
MATTERS
The range of the high and low sales prices on the New York Stock
Exchange for the Company's Common Shares during fiscal 1995 and fiscal 1996 is
listed below:
Fiscal 1995 High Low
- ----------- ---- ---
1st Quarter 12-1/8 9-7/8
2nd Quarter 14-3/8 9-3/4
3rd Quarter 17 14
4th Quarter 17-5/8 11-7/8
Fiscal 1996 High Low
- ----------- ---- ---
1st Quarter 19-1/4 13-5/8
2nd Quarter 18-1/8 12-1/4
3rd Quarter 15-3/4 12-1/8
4th Quarter 15-1/4 9-7/8
The Company has never paid cash dividends on its common shares. The
Company does not anticipate paying any cash dividends on its common shares in
the foreseeable future because it intends to retain its earnings to finance the
expansion of its business and for general corporate purposes. The declaration
and payment 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 March 28, 1997, the Company had approximately 3,400 shareholders
of record. On March 31, 1997, the closing market value per share was $ 13.00.
14
15
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data as of and for the fiscal years ended
January 23, 1993, January 22, 1994, January 21, 1995, January 27, 1996 and
January 25, 1997 is set forth below:
(Dollars in millions, except per share and store data)
- -----------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal Fiscal Fiscal
1996 1995(1) 1994 1993 1992(2)
- -----------------------------------------------------------------------------------------------------
OPERATING DATA
Sales $ 3,179.3 $ 2,542.5 $ 1,841.2 $ 1,421.8 $ 528.2
Gross profit 690.3 572.0 418.8 312.8 116.8
Operating income 105.5 86.3 55.6 20.0 0.5
Net income (loss) 68.8 125.8 30.4 10.8 (0.7)
Earnings and pro forma earnings
per common share(3) 0.55 1.04 0.27 0.09 --
OTHER FINANCIAL AND OPERATING DATA
Percentage increase in sales 25.0% 38.1% 29.5% 169.2% 115.6%
Comparable store sales increase(4) 11.0% 16.7% 17.0% 18.2% 28.5%
End of period stores 564 468 388 328 179
FINANCIAL POSITION
Working capital $ 488.8 $ 499.4 $ 211.9 $ 113.6 $ 30.6
Total assets 1,867.3 1,587.9 1,257.5 1,009.7 448.6
Total debt, including
capital lease obligations 20.0 -- 0.3 0.8 1.3
Shareholders' equity 1,063.6 990.9 748.6 608.5 258.2
(1) Net income and earnings per common share includes $69.1 million, or $0.57
per share, after-tax gain from sale of Corporate Express, Inc.
(2) Data for the period ended January 23, 1993 reflect partial year results
from the acquisition of OW Office Warehouse on June 30, 1992.
(3) Pro forma earnings per Common Share data for fiscal 1993 and 1994 give
effect to the offering, the proceeds from the offering paid to Kmart and
the issuance of additional Kmart shares and management shares as if such
transactions had taken place at the beginning of that period.
(4) Comparable store sales include the sales of a store beginning on the first
day of the 53rd week of its operation, except for stores acquired from
BizMart. Stores acquired from BizMart were first included in the comparable
store sales calculation on August 21, 1994 to correspond to the 53rd week
following substantial completion of their remodeling, remerchandising and
conversion to the OfficeMax name, merchandise presentation and format.
15
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales for fiscal 1996 increased 25% to $3,179,274,000 versus
$2,542,513,000 in fiscal 1995, which had one additional week. This followed a
38% increase in fiscal 1995, of which 2.5% was attributable to the additional
week, from $1,841,212,000 in fiscal 1994. The fiscal 1996 sales increase was
primarily attributable to a full year's sales from the 80 stores opened during
fiscal 1995, a comparable store increase of 11% and the additional partial
year's sales from 96 new stores and 5 new delivery centers opened during fiscal
1996. Comparable stores sales in fiscal 1995 increased 17% from fiscal 1994.
Cost of merchandise sold, including buying and occupancy costs,
increased as a percentage of sales to 78.3% in fiscal 1996 from 77.5% in fiscal
1995, which increased from 77.3% in fiscal 1994. Correspondingly, gross profit
as a percent of sales was 21.7% for fiscal 1996 compared to 22.5% and 22.7% for
fiscal 1995 and 1994, respectively. The gross profit decline in fiscal 1996 and
1995 was primarily attributable to increased lower margin computer sales as a
percentage of the total merchandise mix, offset by continued leveraging of
occupancy costs and improved margins in paper-related merchandise and other
supply categories.
Store operating and selling expenses, which consist primarily of store
payroll, operating and advertising expense, decreased to 15.8% of sales in
fiscal 1996 from 16.5% of sales in fiscal 1995 and 17.1% of sales in fiscal
1994. These decreases were primarily as a result of leveraging advertising and
payroll expense over higher sales volumes and continued expense control offset
by increased non-capitalizable remodeling expense.
Pre-opening expense was $10,649,000, $6,818,000 and $5,309,000 for
fiscal 1996, 1995 and 1994, respectively, reflecting 96, 80 and 70 new store
openings and the other retail units described below. Pre-opening expense
averaged approximately $75,000 for an OfficeMax superstore for all three years,
consisting primarily of store payroll, supplies and grand opening advertising.
Additionally, in fiscal 1996 and 1995, pre-opening expense included the costs
associated with opening 70 and 22 FurnitureMax units, respectively, which
averaged approximately $25,000 per store, and 66 and eight CopyMax hub stores,
respectively, which averaged approximately $35,000 per store. The Company's
policy is to expense these items during the first full month of the store's
operation. Consequently, pre-opening expenses in each period are generally a
function of the number of new stores opened during that period.
General and administrative expenses decreased slightly as a percentage
of sales to 1.9% in fiscal 1996 from 2.0% in fiscal 1995. General and
administrative expenses were 1.9% in fiscal 1994. These expenditures include
information systems, infrastructure and management staffing to accommodate the
Company's rapid growth. The slight decrease reflects the Company's rigorous cost
control measures and the leveraging effect of a 25% sales increase. As the
Company continues to aggressively develop and rollout new initiatives, general
and administrative expenses are anticipated to grow slightly as a percentage of
sales.
Goodwill amortization was $9,390,000 in fiscal 1996, as compared to
$9,414,000 in fiscal 1995 and $9,428,000 in fiscal 1994. Goodwill is capitalized
and amortized over 40 years using the straight line method.
Operating income for fiscal 1996 increased to $105,456,000, or 3.3% of
sales, as compared to operating income of $86,253,000 and $55,629,000, or 3.4%
and 3.0% of sales, in fiscal 1995 and 1994, respectively, as a result of the
factors discussed above.
16
17
Interest income, net was $7,485,000 for fiscal 1996, as compared to
$7,198,000 and $562,000 in fiscal 1995 and 1994, respectively. Interest income
for fiscal 1996 and 1995 was primarily attributable to interest earned on cash
received from the Company's July 20, 1995 public offering and the sale of its
interest in the contract stationer, Corporate Express, Inc. Fiscal 1994 results
reflected net cash transfers between the Company and Kmart Corporation as equity
transactions and, accordingly, did not reflect interest expense on intercompany
transactions.
Equity income from affiliate was $2,178,000 in fiscal 1995 and
represents the Company's proportionate share of income reported by Corporate
Express, Inc. through September 10, 1995, the date prior to which the Company
sold its entire interest in Corporate Express, Inc. In fiscal 1994, equity
income from affiliate was $141,000 and represents the Company's proportionate
share of income for the two months after OfficeMax increased its ownership
interest in Corporate Express, Inc. and, accordingly, began to account for its
investment under the equity method of accounting. Gain on sale of affiliate was
$118,014,000 in fiscal 1995 resulting from the Company selling its entire
interest in Corporate Express, Inc.
Income taxes were $44,136,000 in fiscal 1996, $87,880,000 in fiscal
1995 and $25,975,000 in fiscal 1994 with effective tax rates of 39.1%, 41.1% and
46.1%, respectively. The effective tax rates for all three years were different
from the statutory income tax rate primarily as a result of tax exempt interest,
state and local taxes, equity income from affiliate and non-deductible goodwill
amortization expense.
Net income, as a result of the foregoing factors, was $68,805,000 in
fiscal 1996. Net income in fiscal 1995 was $125,763,000 which includes a net
after-tax gain of $69,124,000 resulting from the Company's sale of its entire
interest in Corporate Express, Inc. Excluding the gain from the sale of
Corporate Express, Inc., net income for fiscal 1995 was $56,639,000. This
compares to $30,357,000 in fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operations in fiscal 1996 was $24,313,000. Funding
required for working capital was due to the additional inventory requirements
for 96 new superstores and 5 new delivery centers, increased inventory levels in
existing superstores reflecting primarily seasonal and computer merchandise
buying opportunities, offset by higher accounts payable. Net cash used for
investing activities was $106,748,000 for fiscal 1996, principally as a result
of the purchase of fixed assets. Net cash provided by financing was $23,309,000
for fiscal 1996 and included the proceeds received from the corporate
headquarters' mortgage and the sale of shares under the Company's share purchase
plans.
In fiscal 1997, the Company plans to open approximately 125 to 150
additional superstores, 45 FurnitureMax stores, 55 CopyMax stores, and remodel
120 existing superstores. Management estimates that the Company's cash
requirements for the openings and remodels, exclusive of pre-opening expenses,
will be approximately $1,200,000, $215,000, $430,000 and $196,000, respectively,
for each additional OfficeMax superstore, FurnitureMax, CopyMax and store
remodel. For an OfficeMax store, the requirements include an average of
approximately $450,000 for leasehold improvements, fixtures, point-of-sales
terminals and other equipment in the stores, and approximately $750,000 for the
portion of store inventory that is not financed by accounts payable to vendors.
Pre-opening expenses are expected to average approximately $75,000 for an
OfficeMax superstore, $25,000 for a FurnitureMax store and $35,000 for a CopyMax
store.
The Company expects its funds generated from operations as well as its
current cash reserves, and, when necessary, seasonal short-term borrowings will
be sufficient to finance its operations and capital requirements, including its
expansion strategy. Available through May 1999, the Company has a $100 million
revolving credit facility against which no borrowings existed as of January 25,
1997. In addition, the Company is continually evaluating its financing options
including an increase in its revolving credit facility.
17
18
SEASONALITY AND INFLATION
The Company's business is somewhat seasonal, with sales and operating
income higher in the third and fourth quarters, which include the Back-to-School
period and the holiday selling season, respectively, followed by the traditional
new year office supply restocking month of January. Sales in the second
quarter's summer months are the slowest of the year primarily because of lower
office supplies consumption during the summer vacation period. Management
believes inflation has not had a material effect on the Company's financial
condition or operating results for the periods presented.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K, in future filings by the Company
with the Securities and Exchange Commission (the "Commission"), in the Company's
press releases, and in oral statements made by or with the approval of an
authorized executive officer of the Company constitute "forward-looking
statements" as that term is defined under the Private Securities Litigation
Reform Act of 1995 (the "Act") and releases issued by the Commission. The
Company desires to take advantage of the "Safe Harbor" Provisions Effect Act.
The words "believe," "expect," "anticipate," "intend," "estimate" and other
expressions which are predictions of or indicate future events and trends and
which do not relate to historical matters identify forward-looking statements.
Reliance should not be placed on forward-looking statements because they involve
known and unknown risks, uncertainties and other factors, which may cause the
actual results, performance or achievements of the Company to differ materially
from anticipated future results, performance or achievements expressed or
implied by such forward-looking statements. The Company undertakes no obligation
to publicly update or revise any forward-looking statement, whether as a result
of new information, future events or otherwise.
The future operating results of the Company may be affected by general
economic conditions and a number of other factors, including without limitation,
the following:
Recognizing that the Company's two direct competitors are attempting to
merge, and that they may have greater resources than the Company, no assurance
can be given that this merger, if consummated, will not have an adverse effect
on the Company's business. The Company's expansion into new geographic markets
in which its competitors are already established, and expansion of the Company's
competitors into markets in which the Company is currently operating, have had,
and may continue to have, an adverse effect on the Company's operations. In
addition, the Company believes that it will face increased competition in the
future as the Company and its competitors continue to expand their operations
and scope of services. Any attempt by the Company or any of its competitors to
reduce prices systematically to gain market share or otherwise could result in
industry wide reduced prices and lower gross margins.
Over the last few years, the Company's rapid growth has resulted
largely from the Company's aggressive new store opening strategy. While the
Company intends to continue pursuing an aggressive new store expansion strategy
by opening approximately 125-150 new superstores in fiscal 1997 and by
continuing to consider strategic acquisitions, there is no guarantee that the
Company's historic growth rate can or will continue or that such new store
openings or acquisitions will occur. The Company's ability to open new
superstores at its planned rate is dependent on a number of factors, some of
which are beyond the control of the Company. In addition, the Company's
expansion strategy includes clustering new stores in existing markets, which
results in some transfer of sales from existing stores to the new locations.
While management believes that its aggressive expansion strategy will improve
its overall market position and, ultimately, its profitability, there can be no
assurance that this will occur.
18
19
The Company intends to continue to expand the operations of its related
businesses, CopyMax, FurnitureMax and most recently QuadMax: Electronic
Retailing -- initiatives which are still being developed and refined. The
expansion of these related businesses requires the investment of significant
cash and resources, which may diminish the Company's overall success and
profitability. There is no guarantee that CopyMax, FurnitureMax or QuadMax
ultimately will be profitable.
The Company is largely dependent on the services of Michael Feuer, the
Company's Co-Founder, Chairman and Chief Executive Officer, and its senior
management. The loss of Mr. Feuer or any of the Company's other senior
management could have an adverse impact on the Company.
The Company has entered into a joint venture agreement with
locally-based companies in each of Mexico and Japan. The Company is also
exploring the possibility of expansion into other international markets as well.
There is no guarantee that the Company will develop or maintain significant
operations internationally or that any such operations will be successful. Any
international operations established by the Company will be subject to risks
similar to those affecting its North American operations in addition to a number
of other risks, including lack of complete operating control, lack of local
business experience, foreign currency fluctuations, language and other cultural
barriers and political and economic instability.
While the Company intends to continue investing aggressively in
FutureMax, an information systems replatforming project based on improved client
server systems and technology, to support the Company's rapid growth, there can
be no assurance that these upgraded systems and controls will enhance the
Company's profitability.
In addition, although the Company continues to evaluate its
distribution strategy and methods in order to determine how to utilize new and
improved technology to increase inventory controls, reduce expenses and delivery
lead times, there can be no assurance that changes in the Company's current
distribution methods will accomplish these goals.
The foregoing factors could affect the Company's actual results and
could cause the Company's actual results during fiscal 1997 and beyond to be
materially different from any anticipated results expressed in any
forward-looking statement made by or on behalf of the Company.
The Company expects that its current cash and cash equivalents and
funds available under its revolving credit facility will be sufficient to fund
its planned store openings and other operating cash needs for at least the next
12 months. However, there can be no assurance that the Company will not require
additional sources of financing prior to that time as a result of unanticipated
cash needs, acquisitions or other opportunities or disappointing operating
results. There also can be no assurance that any additional funds required by
the Company will be available to the Company on satisfactory terms.
19
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants ............................................. 20
Consolidated Statements of Income - Fiscal years ended January 25, 1997,
January 27, 1996 and January 21, 1995 .................................... 21
Consolidated Balance Sheets - January 25, 1997 and January 27, 1996 ........... 22
Consolidated Statements of Cash Flows - Fiscal years ended
January 25, 1997, January 27, 1996 and January 21, 1995 .................. 23
Consolidated Statements of Changes in Shareholders' Equity - Fiscal years ended
January 25, 1997, January 27, 1996 and January 21, 1995 .................. 24
Notes to Consolidated Financial Statements .................................... 25
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders of OfficeMax, Inc.
In our opinion, the consolidated financial statements listed in the index on
this page present fairly, in all material respects, the financial position of
OfficeMax, Inc. and its subsidiaries at January 25, 1997 and January 27, 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended January 25, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards 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 the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Cleveland, Ohio
February 27, 1997
20
21
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JAN. 25, JAN. 27, JAN. 21,
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
Sales $ 3,179,274 $ 2,542,513 $ 1,841,212
Cost of merchandise sold, including
buying and occupancy costs 2,489,016 1,970,536 1,422,400
------------ ------------ ------------
Gross profit 690,258 571,977 418,812
Store operating and selling expenses 503,161 418,391 314,130
Pre-opening expenses 10,649 6,818 5,309
General and administrative expenses 61,602 51,101 34,316
Goodwill amortization 9,390 9,414 9,428
------------ ------------ ------------
Total operating expenses 584,802 485,724 363,183
------------ ------------ ------------
Operating income 105,456 86,253 55,629
Interest income, net 7,485 7,198 562
------------ ------------ ------------
Income before income taxes and
equity income from affiliate 112,941 93,451 56,191
Equity income from affiliate -- 2,178 141
Gain on sale of affiliate -- 118,014 --
------------ ------------ ------------
Income before income taxes 112,941 213,643 56,332
Income taxes 44,136 87,880 25,975
------------ ------------ ------------
Net income $ 68,805 $ 125,763 $ 30,357
============ ============ ============
EARNINGS PER COMMON SHARE DATA (PRO FORMA IN FISCAL 1994):
Earnings per common share $ 0.55 $ 1.04 $ 0.27
============ ============ ============
Weighted average number of
common shares outstanding 125,133,000 120,679,000 114,387,000
============ ============ ============
See accompanying Notes to Consolidated Financial Statements.
21
22
OFFICEMAX, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
- --------------------------------------------------------------------------------
JANUARY 25, JANUARY 27,
1997 1996
- --------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and equivalents $ 258,111 $ 365,863
Accounts receivable, net of allowances
of $861 and $659, respectively 39,455 27,039
Merchandise inventories 894,407 636,211
Other current assets 28,691 20,009
----------- -----------
Total current assets 1,220,664 1,049,122
Property and Equipment:
Buildings and land 16,843 5,966
Leasehold improvements 167,527 101,624
Furniture and fixtures 224,582 148,581
----------- -----------
Total property and equipment 408,952 256,171
Less: Accumulated depreciation
and amortization (116,084) (75,795)
----------- -----------
Property and equipment, net 292,868 180,376
Other assets and deferred charges 19,994 15,236
Goodwill, net of accumulated amortization
of $41,842 and $32,452, respectively 333,744 343,134
----------- -----------
$ 1,867,270 $ 1,587,868
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable-trade $ 490,417 $ 348,605
Accrued expenses and other liabilities 138,671 81,602
Accrued salaries and related expenses 32,504 33,482
Advertising payable 23,144 44,802
Taxes other than income taxes 45,865 41,222
Mortgage loan, current portion 1,300 -
----------- -----------
Total current liabilities 731,901 549,713
Mortgage loan 18,700 -
Other long-term liabilities 53,105 47,266
----------- -----------
Total liabilities 803,706 596,979
----------- -----------
Commitments and contingencies (Note 5) - -
Shareholders' equity:
Common stock, without par value;
200,000,000 shares authorized; 123,766,614
and 123,496,170 shares issued and
outstanding, respectively 854,094 850,557
Deferred stock compensation (1,149) (1,482)
Retained earnings 210,619 141,814
----------- -----------
Total shareholders' equity 1,063,564 990,889
----------- -----------
$ 1,867,270 $ 1,587,868
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
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OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JAN. 25, JAN. 27, JAN. 21,
1997 1996 1995
- ------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR):
OPERATIONS
Net income $ 68,805 $ 125,763 $ 30,357
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 51,613 41,209 34,409
Deferred income taxes (2,529) (1,578) 11,394
Increase in other long-term liabilities 5,855 17,854 6,423
Gain on sale of affiliate -- (118,014) --
Other-net 409 (1,662) (469)
Changes in current assets and current liabilities:
Increase in inventories (258,196) (168,034) (62,788)
Increase in accounts payable 141,812 16,444 92,576
Other-net (32,082) 49,246 10,782
--------- --------- ---------
Net cash provided by (used for)
operations (24,313) (38,772) 122,684
--------- --------- ---------
INVESTING
Capital expenditures (101,039) (81,433) (42,565)
Acquisitions -- -- (46,365)
Transfer of cash on deposit
with related party -- 141,017 (141,017)
Proceeds from sale of affiliate -- 195,831 --
Increase in other long-term assets (5,187) -- --
Other-net (522) 700 600
--------- --------- ---------
Net cash provided by (used for)
investing (106,748) 256,115 (229,347)
--------- --------- ---------
FINANCING
Reduction in long-term debt and
capital lease obligations (16) (295) (463)
Net equity transactions with Kmart -- -- 95,839
Proceeds from initial public offering -- -- 421,343
Payment to Kmart for the proceeds
received from initial public offering -- -- (421,343)
Proceeds from mortgage loan 20,000 -- --
Proceeds from issuance of
common stock, net 3,325 115,582 12,776
--------- --------- ---------
Net cash provided by financing 23,309 115,287 108,152
--------- --------- ---------
CASH AND CASH EQUIVALENTS
Net increase (decrease) for the period (107,752) 332,630 1,489
Balance, beginning of period 365,863 33,233 31,744
--------- --------- ---------
Balance, end of period $ 258,111 $ 365,863 $ 33,233
========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
23
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OFFICEMAX, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------------------------------------------------------
COMMON SHARES ADDITIONAL DEFERRED NOTES
------------- PAID-IN STOCK RECEIVABLE RETAINED
NUMBER AMOUNT CAPITAL COMPENSATION COMMON SHARE EARNINGS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 22, 1994 52,607,667 $ 187,198 $ 410,307 -- -- $ 11,005 $ 608,510
Net equity transactions with Kmart -- -- 95,839 -- -- -- 95,839
Recapitalization prior to initial
public offering -- 110,114 (84,803) -- -- (25,311) --
Issuance of common shares at
initial public offering 52,726,500 421,343 -- -- -- -- 421,343
Payment to Kmart at
initial offering -- -- (421,343) -- -- -- (421,343)
Issuance of common shares to
Kmart at initial public offering 7,165,742 -- -- -- -- -- --
Sale of shares under
management share purchase
plan(including tax benefit) 790,577 6,989 -- (1,623) (5,053) -- 313
Sale of shares under employee
share purchase plan
(including tax benefit) 1,318,305 10,064 -- -- -- -- 10,064
Exercise of stock options 11,796 47 -- -- -- -- 47
Issuance of stock options -- 721 -- (721) -- -- --
Issuance of common shares
under director plan 6,521 75 -- (75) -- -- --
Reduction in notes receivable,
common share stock -- -- -- -- 3,251 -- 3,251
Amortization of deferred
compensation -- -- -- 195 -- -- 195
Net income -- -- -- -- -- 30,357 30,357
------------------------------------------------------------------------------------------
BALANCE AT JANUARY 21, 1995 114,627,108 736,551 -- (2,224) (1,802) 16,051 748,576
Issuance of common shares
under director plan 17,678 226 -- (226) -- -- --
Issuance of common shares at
July 20,1995 offering 8,627,774 110,177 -- -- -- -- 110,177
Exercise of stock options 53,067 243 -- -- -- -- 243
Sale of shares under employee
share purchase plan
(including tax benefit) 170,543 3,360 -- -- -- -- 3,360
Amortization of deferred
compensation -- -- -- 968 -- -- 968
Reduction of notes receivable,
common share stock -- -- -- -- 1,802 -- 1,802
Net income -- -- -- -- -- 125,763 125,763
------------------------------------------------------------------------------------------
BALANCE AT JANUARY 27, 1996 123,496,170 850,557 -- (1,482) -- 141,814 990,889
Issuance of common shares
under director plan 18,749 212 -- (150) -- -- 62
Exercise of stock options 164,980 926 -- -- -- -- 926
Sale of shares under
management share purchase
plan(including tax benefit) (7,848) 681 -- (475) -- -- 206
Sale of shares under employee
share purchase plan
(including tax benefit) 94,563 1,718 -- -- -- -- 1,718
Amortization of deferred
compensation -- -- -- 958 -- -- 958
Net Income -- -- -- -- -- 68,805 68,805
------------------------------------------------------------------------------------------
BALANCE AT JANUARY 25, 1997 123,766,614 $ 854,094 -- ($1,149) -- $ 210,619 $1,063,564
==========================================================================================
See accompanying Notes to Consolidated Financial Statements.
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OFFICEMAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OfficeMax, Inc. ("OfficeMax" or the "Company") operates a chain of
high-volume, deep-discount office products superstores. At January 25, 1997, the
Company owned and operated 564 stores in 47 states and Puerto Rico and had a 19%
investment in a joint venture in Mexico which operates OfficeMax superstores
similar to those in the U.S.
The Company's initial public offering (the "Offering") on November 2,
1994 resulted in 80,325,000 common shares, without par value, being sold to the
public. At the time of the Offering, Kmart Corporation ("Kmart") owned a 92.7%
equity interest in the Company. The proceeds from the Offering were paid to
Kmart and 7,165,742 common shares (the "additional Kmart Shares") were issued to
Kmart, reducing Kmart's ownership in the Company to approximately 25%.
Additionally, the Company, at the time of the Offering, issued 790,577 common
shares (the "Management Shares") pursuant to a Management Share Purchase Plan
adopted in connection with the Offering. See Note 2 for further discussion of
the Company's historical relationship with Kmart.
On July 20, 1995, the Company sold 8,627,774 of its common shares in a
public offering (the "Secondary Offering"). Net proceeds from the sale of these
shares amounted to $110,177,000, after deducting underwriters' discounts and
commissions. As part of the Secondary Offering, Kmart sold all of its remaining
shares.
BASIS OF PRESENTATION
The Company's consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation. Investments in affiliates,
representing less than 20% of the ownership of such companies, are accounted for
under the cost method and loans, which the Company makes from time to time to
these affiliates, are recorded in other assets.
The Company's fiscal year ends on the Saturday prior to the last
Wednesday in January. Fiscal years 1996 ("fiscal 1996") and fiscal year 1994
("fiscal 1994") consisted of 52 weeks and ended on January 25, 1997 and January
21, 1995, respectively. Fiscal year 1995 ("fiscal 1995") consisted of 53 weeks
and ended on January 27, 1996.
On May 22, 1996, the Board of Directors declared a three-for-two stock
split in the form of a 50% share dividend payable July 9, 1996 to shareholders
of record as of June 3, 1996. All share, average share and per share amounts
included in the accompanying consolidated financial statements and notes thereto
give retroactive effect to the share dividend.
Certain reclassifications have been made to prior year amounts to
conform to the current presentation.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.
EARNINGS PER COMMON SHARE
Earnings per common share is based on the weighted average of common
and common equivalent shares outstanding in fiscal 1996 and fiscal 1995. Common
equivalent shares relate to outstanding stock options.
The pro forma earnings per common share data for fiscal 1994 has been
prepared assuming that the Offering and the issuance of the Additional Kmart
Shares and Management Shares had taken place at the beginning of the period.
Options outstanding under the Company's option plans and options granted in
connection with the Offering are treated as common share equivalents for
purposes of pro forma earnings per common share. The pro
25
26
forma earnings per common share data are not necessarily indicative of what
actual earnings per common share would have been had such transactions occurred
on the basis assumed.
The pro forma weighted average number of common shares outstanding for
fiscal 1994 is as follows:
Common Shares outstanding during year 52,685,000
Common Share equivalents for options outstanding 842,000
Pro forma adjustments:
Common Shares offered by the Company in the Offering 52,727,000
Additional Kmart shares 7,165,000
Management Shares 790,000
Common Share equivalents for options granted in
connection with the Management Shares 178,000
-----------
Total pro forma weighted average number of shares 114,387,000
===========
CASH AND EQUIVALENTS
Cash and equivalents includes short-term investments with original
maturities of 90 days or less.
Marketable securities are classified as held-to-maturity. These
securities are carried at amortized cost of $190,674,000 at January 25, 1997 and
consist primarily of investments in commercial paper and government securities
with maturities of ninety days or less.
INVENTORIES
Inventories are valued at the lower of average cost or market.
ACCOUNTS RECEIVABLE
Accounts receivable primarily consists of amounts due from vendors
under rebate, cooperative advertising and other contractual programs and trade
receivables not financed through outside programs. Also included in this balance
is a receivable (for a credit) due from a service provider. See Note 5 for
further discussion.
PROPERTY AND EQUIPMENT
Components of property and equipment are recorded at cost and
depreciated over their respective estimated useful lives using the straight-line
method for financial statement purposes and accelerated methods for income tax
purposes. Most store properties are leased, and improvements are amortized over
the lesser of the term of the lease or 20 years. Other annual rates used in
computing depreciation are 14% - 20% for store fixtures and 20% - 33% for other
fixtures and equipment.
INCOME TAXES
The Company uses the liability method whereby income taxes are
recognized during the 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.
GOODWILL
Goodwill is amortized over 40 years using the straight-line method. The
Company evaluates the recoverability of goodwill and reviews the amortization
period on an annual basis by comparing the undiscounted cash flows from
operating activities with the carrying value of goodwill. Based on its review,
the Company does not believe that an impairment of its goodwill has occurred.
26
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CURRENT LIABILITIES
Under the Company's cash management system, checks issued pending
clearance result in overdraft balances for accounting purposes and are included
in the accounts payable balance. The amounts reclassified were $107,317,000 and
$75,027,000 for fiscal 1996 and 1995, respectively.
FINANCIAL INSTRUMENTS
The recorded value of the Company's financial instruments, which
includes short term securities, accounts receivable, accounts payable and
mortgage payable, 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
maintain safety and liquidity.
STOCK BASED COMPENSATION
Effective January 27, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation,"
("FAS123"). As provided for under FAS123, the Company has elected to continue to
account for stock based compensation under the provisions of Accounting
Principles Boards ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. Pro forma disclosures
of net earnings and earnings per share, as if the fair value based method of
accounting defined in FAS123 had been applied, are presented in Note 10.
PRE-OPENING EXPENSES
Costs associated with the opening of a new store are expensed during
the first month of the store's operation.
NOTE 2. RELATIONSHIP AND INTERCOMPANY AGREEMENTS WITH KMART CORPORATION
INTERCOMPANY AGREEMENT
Prior to the Offering, all amounts necessary to fund the Company's
working capital and expansion, to the extent not provided through internally
generated funds, were provided by Kmart. These amounts have been reflected in
the Company's consolidated financial statements as equity transactions, and the
Company recorded such transactions as additional paid-in capital. Net equity
transactions in fiscal 1994 totaled $95,839,000 and consisted primarily of cash
management and the additional investment in Corporate Express, Inc. For the
period subsequent to the Offering and prior to July 20, 1995, Kmart provided the
Company participation in certain centrally managed employee benefit and
self-insurance programs. The Company had a similar arrangement with Kmart prior
to the Offering, including the allocation of administrative costs related to
Kmart's specialty retail division. This agreement terminated on July 20, 1995.
CASH MANAGEMENT AGREEMENT
Prior to the Offering and for a period of 180 days after the Offering,
Kmart provided the Company with cash management services and financing,
including the investment of surplus cash. The Company's historical financial
statements reflect net funding provided by Kmart to the Company as adjustments
of Kmart's investment in the Company and, accordingly, do not reflect interest
expense on net cash transfers between the Company and Kmart. Had such
transactions, except those relating to acquisitions, between the Company and
Kmart been accounted for as short-term loans, and assuming the Company's
anticipated incremental borrowing rate under its Revolving Credit Facility was
in effect throughout the period, on a pro forma basis the Company would have
incurred interest expense of $1,600,000 for fiscal 1994. Under the agreement,
which expired on May 8, 1995, the Company had $141,017,000 in excess cash on
deposit with Kmart at January 21, 1995.
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LEASE GUARANTEE AGREEMENT
Kmart continues to guarantee certain of the Company's leases in effect
at the date of the Offering and provides guarantees which it previously
committed to with respect to stores opened after the Offering and prior to the
end of fiscal 1995. Such lease guarantees are provided by Kmart at no cost to
the Company. The Company has agreed to indemnify Kmart for any losses incurred
by Kmart as a result of actions, omissions or defaults on the part of OfficeMax,
as well as for all amounts paid by Kmart pursuant to Kmart's guarantees of the
Company's leases. The agreement contains certain financial and operating
covenants, including restrictions on the Company's ability to pay dividends,
incur indebtedness, incur liens or merge with another entity.
TAX ALLOCATION AND INDEMNIFICATION AGREEMENT
The Company remains severally liable, with Kmart and Kmart's other
subsidiaries, for Kmart's federal tax liabilities for any period in which the
Company was included in the Kmart consolidated return. However, Kmart will
indemnify the Company for any federal income tax liability of Kmart or any of
Kmart's subsidiaries (other than that which is attributable to the Company) that
the Company may be required to pay; further, the Company will indemnify Kmart
for any of the Company's federal income tax liabilities which Kmart may be
required to pay.
The Company was included in the consolidated United States federal
income tax return filed by Kmart for the taxable period ending on or before
November 9, 1994, the settlement date of the Offering. Accordingly, the
provision for federal income taxes and the related payments or refunds of tax
relating to this period were determined on a consolidated basis. The Company's
federal income tax provision and related tax payments or refunds have been
reflected in the Company's financial statements in accordance with Kmart's tax
allocation policy.
The Company's income tax provisions computed on a stand alone company
basis in fiscal 1994 would not have been materially different from those
recorded in its financial statements.
NOTE 3. ACQUISITIONS AND INVESTMENTS
CORPORATE EXPRESS
On September 11, 1995, the Company sold its interest in Corporate
Express, Inc. ("Corporate Express") for $195,831,000, resulting in a gain of
$118,014,000 (after-tax gain of $69,124,000, or $0.57 per share). Prior to the
sale of its investment, the Company owned approximately 20% of Corporate
Express.
NOTE 4. DEBT
LINE OF CREDIT
The Company has entered into a credit agreement for a $100 million
revolving credit facility ("Revolving Credit Facility") with its principal bank
and a syndicate of five other domestic banks. The Revolving Credit Facility
provides for borrowings bearing an interest rate based on the principal bank's
prime rate or reserve adjusted LIBOR plus .20% to .325%. In addition, the
Company must also pay on a quarterly basis fees ranging from .125% to .175% per
annum on the available and unused portion of the Revolving Credit Facility.
The Revolving Credit Facility expires May 8, 1999, but can be extended
for one year provided the Company meets certain requirements. Standby letters of
credit issued in connection with the Company's self insurance program are
considered outstanding amounts under the Revolving Credit Facility and totaled
$10,675,000 and $6,975,000 as of January 25, 1997 and January 27, 1996,
respectively. There were no borrowings under the Revolving Credit Facility as of
January 25, 1997 and January 27, 1996.
MORTGAGE
On January 16, 1997, the Company entered into a $20 million mortgage
agreement (the "Mortgage") secured by its Shaker Hts., Ohio international
corporate headquarters. The Mortgage has a fixed term of 10 years, quarterly
amortization payments of $325,000 plus interest at 6.99% per annum (after giving
effect to an interest rate swap) with a final payment of $7 million due at
maturity. Maturities of long term borrowings will be $1.3 million over each of
the next five years.
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The Revolving Credit Facility and the Mortgage contain similar
financial covenants with respect to consolidated net worth, fixed charge
coverage, funded indebtedness and consolidated leverage ratios.
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company is currently in discussions with a service provider
concerning amounts that the Company claims it is entitled to pursuant to the
terms of an ongoing service contract. The Company has remitted all amounts
currently due under the terms of the agreement and has recorded a receivable for
a credit of approximately $15 million based on management's interpretation of
the terms and conditions of the contract. There are also various other 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. However, in the event of an
unanticipated final determination in respect of certain outstanding matters, the
Company's consolidated net income for the period in which such determination
occurs could be materially affected.
NOTE 6. PRIVATE LABEL CREDIT CARD PROGRAM
The Company has an arrangement with a financial services company ( the
"Issuer") whereby the Issuer manages two private label credit card programs for
the Company. 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 Issuers' cost of providing credit and collecting the
receivables which are non-recourse to the Company.
NOTE 7. INCOME TAXES
The provision (benefit) for income taxes consists of:
- -------------------------------------------------------------------------------------
FISCAL YEAR ENDED JAN. 25, JAN. 27, JAN. 21,
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------
Current
Federal $39,275 $72,277 $10,382
State and local 5,815 16,839 4,200
Foreign 1,575 342 -
Deferred (2,529) (1,578) 11,393
-------------------------------------------
Total income taxes $44,136 $87,880 $25,975
============================================
A reconciliation of the federal statutory rate to the Company's effective tax
rate follows:
- -------------------------------------------------------------------------------------
FISCAL YEAR ENDED JAN. 25, JAN. 27, JAN. 21,
1997 1996 1995
- ----------------------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
State and local taxes,
net of federal tax benefit 3.4% 5.2% 4.8%
Goodwill amortization 2.9% 1.5% 5.9%
Tax exempt interest (1.6)% (.6)% -
Other (.6)% - .4%
----------------------------------------
Total income taxes 39.1% 41.1% 46.1%
=========================================
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Deferred tax assets (liabilities) resulted from the following:
- --------------------------------------------------------------------
FISCAL YEAR JAN. 25, JAN. 27,
(In thousands) 1997 1996
- --------------------------------------------------------------------
Deferred tax assets (liabilities):
Federal tax loss carryforwards $ - $ 946
Inventory 2,400 1,587
Property and equipment (1,494) (462)
Accrued expenses not
currently deductible 32,736 29,042
-------------------------
Total deferred tax assets $33,642 $31,113
==========================
NOTE 8. LEASES
DESCRIPTION OF LEASING ARRANGEMENTS
The Company conducts operations primarily in leased facilities. Store
leases are generally for terms of 10 to 25 years with multiple five to ten year
renewal options which allow the Company the option to extend the life of the
lease up to 20 years beyond the initial noncancellable term at escalated rents.
Certain leases provide for additional rental payments based on a
percent of sales in excess of a specified base. Also, certain leases provide for
payment by the Company of executory costs (taxes, maintenance and insurance).
LEASE COMMITMENTS
Future minimum lease payments and future minimum rentals at January 25, 1997
were as follows:
FISCAL YEAR OPERATING
(In thousands) LEASES
- --------------------------------------------------
1997 .................... $ 185,297
1998 .................... 179,804
1999 .................... 172,631
2000 .................... 162,963
2001 .................... 145,119
Later Years ....................... 964,859
----------
Total minimum lease payments....... $1,810,673
==========
RENTAL EXPENSE
A summary of operating lease rental expense and short-term rentals follows:
- --------------------------------------------------------------------
FISCAL YEAR ENDED JAN. 25, JAN. 27, JAN. 21,
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------
Minimum rentals $153,637 $117,294 $93,013
Percentage rentals 783 555 365
-----------------------------------------
Total $154,420 $117,849 $93,378
========================================
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NOTE 9. SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------------------------------------------
FISCAL YEAR ENDED JAN. 25, JAN. 27, JAN. 21,
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Cash transactions:
Cash paid for interest $ - $ 218 $ 51
Cash paid for income taxes $26,060 $80,556 $3,528
Non-cash transactions:
Liabilities accrued for
Property and Equipment
acquired $53,956 - -
NOTE 10. EMPLOYEE BENEFIT PLANS
STOCK PURCHASE PLANS
In connection with the Offering, the Company adopted a Management Share
Purchase Plan (the "Management Plan"), an Employee Share Purchase Plan (the
"Employee Plan") and a Director Plan (the "Director Plan"). Under the Management
Plan, the Company's senior management personnel are required to use 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. In addition, senior management personnel were
given a one-time opportunity to invest up to $1 million each to purchase
restricted common shares at the time of the Offering at a 20% discount from the
initial public offering price, net of underwriting discounts and commissions.
For each restricted common share purchased, the Company granted the employee an
option to purchase one additional restricted common share at the initial public
offering price less underwriting discounts and commissions. Restricted common
shares purchased under the Management Plan will generally be 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 $643,000, $541,000 and $135,000 for fiscal 1996, 1995 and 1994,
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 for one
year from date of purchase. The maximum number of shares eligible for purchase
under this plan is 2,958,761. The Company does not 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. Each participant will receive all of their
annual retainer in the form of restricted shares paid at the beginning of the
relevant calendar year and all of their meeting fees in the form of unrestricted
common shares paid at the end of the calendar quarter in which the meetings
occurred. The restrictions on such shares generally lapse one year from the date
of grant. The maximum number of shares reserved for issuance under the Director
Plan is 112,929.
SAVINGS PLAN
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 annual earnings, subject to statutory limitations.
Effective August 25, 1995, the Company began matching 25% of the first 3% of the
employee's
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contribution. The Company approved an increase of the matching contribution to
50% of the first 3%, effective February 1, 1997. 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. The
charge to operations for the Company's matching contribution amounted to
$322,000 and $132,000 in fiscal 1996 and 1995, respectively.
STOCK OPTION PLANS
In fiscal 1996, the OfficeMax, Inc. 1994 Stock Option Plan (the "1994
Plan") was amended and restated as the Equity-Based Award Plan. As part of the
amendment to the 1994 Plan, the OfficeMax, Inc. Employee Non-Qualified Share
Option Plan was terminated and all outstanding options were merged into the
Equity-Based Award Plan. The Equity-Based Award Plan provides for the issuance
of share appreciation rights, restricted shares and up to 11,647,343 options to
purchase common shares. Options granted under the Equity-Based Award Plan become
exercisable from one to seven years after the date of grant and expire ten years
from date of grant. Options may be granted only at option prices not less than
the fair market value per common share on the date of the grant except that in
connection with the Offering, options to purchase common shares were granted at
the initial public offering price less underwriting discounts and commissions.
The Company recognized compensation expense on these grants of $188,000,
$240,000 and $60,000 for fiscal 1996, 1995 and 1994, respectively.
Other stock option plans include a share option plan adopted in 1988
(the "1988 Plan"). As of January 25, 1997 there were 57,313 vested options
outstanding and no further grants may be made under the 1988 Plan. The related
shares have been placed in escrow for future exercise.
Exercisable options outstanding were 965,019 and 546,677 at January 25,
1997 and January 27, 1996, respectively.
Option activity for each of the last three years was as follows:
- --------------------------------------------------------------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
- --------------------------------------------------------------------------------
Outstanding at
January 22, 1994 1,784,639 $5.49
Granted 1,629,110 8.00
Exercised (11,796) 4.01
Cancelled (250,310) 6.18
---------------------------------
Outstanding at
January 21, 1995 3,151,643 6.74
Granted 1,290,299 11.79
Exercised (53,067) 4.58
Cancelled (473,225) 7.20
---------------------------------
Outstanding at
January 27, 1996 3,915,650 8.38
Granted 3,416,719 14.54
Exercised (164,983) 5.61
Cancelled (356,094) 9.84
---------------------------------
Outstanding at
January 25, 1997 6,811,292 11.46
=================================
STOCK BASED COMPENSATION
Under FAS 123, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model. The weighted average
assumptions used for grants in fiscal 1996 and 1995,
32
33
respectively, were expected volatility of 41.8% and 43.1% and risk-free interest
rates of 6.21% and 7.23%. A dividend yield of zero and an expected life of 5
years were used in the model for both years.
The following table summarizes information about options outstanding at
January 25, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------------------------------------------
RANGE OF OPTIONS WEIGHTED WEIGHTED OPTIONS WEIGHTED
EXERCISE PRICES AVERAGE AVERAGE AVERAGE
EXERCISE PRICE REMAINING LIFE EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------
$4.007 831,935 $ 4.01 4.58 831,935 $4.01
$7.993 to $8.447 1,395,376 8.08 7.34 133,084 8.45
$10.67 to $11.55 1,122,020 11.50 8.09 - -
$14.00 to $14.63 3,351,622 14.49 9.10 - -
$15.29 to $17.09 110,339 16.58 9.04 - -
Consistent with the method prescribed by FAS 123, the weighted average
fair value at the date of grant was $6.58 and $5.78 for options granted in
fiscal 1996 and 1995, respectively. Giving effect to such compensation costs,
pro forma net earnings and pro forma earnings per share would have been
$65,440,000 and $0.52, respectively, for fiscal 1996 and $124,305,000 and $1.03,
respectively, for fiscal 1995. The pro forma amounts listed above do not take
into consideration the pro forma compensation expense related to grants made
prior to fiscal 1995.
33
34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
34
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 regarding Directors is 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 Item 10 regarding Executive Officers is
contained under the caption "Executive Officers of the Registrant" in Part I of
this Form 10-K which information under such caption is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is contained on pages 6 through 10
of the Proxy Statement and under the captions "Compensation of Directors" and
"Compensation Committee Interlocks and Insider Participation" contained in the
Proxy Statement which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is contained under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement which information under such captions is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
35
36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
See Index on page 20 of this Annual Report.
(a)(2) Financial Statement Schedules:
None
(a)(3) Exhibits:
See Exhibit Index contained herein at pages 38 and 39.
(b) Reports on Form 8-K:
None
36
37
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 24, 1997 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 Chairman and Chief April 24, 1997
- -------------------- Executive Officer and Director
Michael Feuer (Principal Executive Officer)
/s/ John C. Belknap Executive Vice President, Chief April 24, 1997
- --------------------- Financial Officer (Principal
John C. Belknap Financial and Accounting Officer)
/s/ Raymond L. Bank Director April 24, 1997
- -----------------------
Raymond L. Bank
/s/ Burnett W. Donoho Director April 24, 1997
- ----------------------------
Burnett W. Donoho
/s/ Carl D. Glickman Director April 24, 1997
- -------------------------
Carl D. Glickman
/s/ D. Dwayne Hoven Director April 24, 1997
- -------------------------
D. Dwayne Hoven
/s/ James F. McCann Director April 24, 1997
- --------------------
James F. McCann
/s/ Sydell L. Miller Director April 24, 1997
- --------------------
Sydell L. Miller
37
38
EXHIBIT INDEX
-------------
Sequential Page No.
or Incorporation
Exhibit No. Description of Exhibit by Reference
- ----------- ---------------------- ------------
3.1 Second Amended and Restated Articles of Incorporation of the Company. (3)
3.2 Code of Regulations of the Company. (3)
4.1 Specimen Stock Certificate. (1)
10.1 Credit Agreement dated December 22, 1994 by and among the Company and Society National (3)
Bank, as agent, National City Bank, Mellon Bank, N.A., The First National Bank of
Chicago and Corestates Bank, N.A.
10.2 Mortgage Loan Agreement dated November 6, 1996 by and between the Company and KeyBank
National Association.
10.3 Amended and Restated Employment Agreement dated as of March 9, 1995 by and between (3)
Michael Feuer and the Company.
10.4 Share purchase agreement dated August 25, 1995 by and among the Company, Corporate (4)
Express, Inc. and Synergom, Inc. relating to the purchase by Corporate Express from
OfficeMax of the outstanding Corporate Express Common Stock owned by OfficeMax.
10.5 OfficeMax Employee Share Purchase Plan. (1)
10.6 OfficeMax Management Share Purchase Plan. (1)
10.7 OfficeMax Director Share Plan. (1)
10.8 OfficeMax Equity-Based Award Plan. (5)
10.9 Shareholder Agreement dated August 30, 1994 among the Company, Kmart Corporation and (1)
each of Michael Feuer and Robert Hurwitz.
10.10 Intercompany Agreement dated November 9, 1994 between the Company and Kmart Corporation. (2)
10.11 Tax Allocation Agreement dated November 9, 1994 between the Company and Kmart (2)
Corporation.
10.12 Lease Guaranty, Indemnification and Reimbursement Agreement dated November 9, 1994 (2)
between the Company and Kmart Corporation.
10.13 Cash Management Agreement dated November 9, 1994 between the Company and Kmart (2)
Corporation.
10.14 Registration Rights Agreement dated November 9, 1994 between the Company and Kmart (2)
Corporation
38
39
21 List of Subsidiaries
23 Consent of Independent Accountants
27 Financial Data Schedule
(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
(No. 1-13380) for the quarter ended October 22, 1994, and incorporated
herein by reference.
(3) Included as an exhibit to the Company's Annual Report on Form 10-K (No.
1-13380) for the fiscal year ended January 21, 1995, and incorporated
herein by reference.
(4) Included as an exhibit to the Company's Annual Report on Form 10-K (No.
1-13380) for the fiscal year ended January 27, 1996, and incorporated
herein by reference.
(5) Included as an exhibit to the Company's Quarterly Report on Form 10-Q
(No. 1-13380) for the quarter ended July 27, 1996, and incorporated
herein by reference.
39