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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 23, 1999
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 (I.R.S. employer identification no.)
of incorporation or organization)
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. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 26, 1999 was approximately $927,463,493.
The number of Common Shares, without par value, of the Registrant outstanding as
of March 26, 1999 was 114,149,353.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement dated April 8, 1999, for use at the
Annual Meeting of Shareholders to be held on May 13, 1999 are incorporated by
reference in Part III hereof.
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TABLE OF CONTENTS
Item No. Page No.
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Part I
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1. Business 1
2. Properties 10
3. Legal Proceedings 11
4. Submission of Matters to a Vote of Security Holders 11
Executive Officers of the Registrant 12
Part II
5. Market for Registrant's Common Shares and Related
Shareholder Matters 14
6. Selected Financial Data 15
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
7A. Quantitative and Qualitative Disclosures About Market Risk 21
8. Financial Statements and Supplementary Data 21
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 21
Part III
10. Directors and Executive Officers of the Registrant 22
11. Executive Compensation 22
12. Security Ownership of Certain Beneficial Owners and Management 22
13. Certain Relationships and Related Transactions 22
Part IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 23
Signatures 24
Exhibit Index 25
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NOTE ON INCORPORATION BY REFERENCE
In Part III of this Form 10-K, various information and data are
incorporated by reference from OfficeMax's Definitive Proxy Statement dated
April 8, 1999 ("Proxy Statement"). Any reference in this Form 10-K to
disclosures in the Proxy Statement shall constitute incorporation by reference
only of that specific information and data into this Form 10-K.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Portions of this Annual Report on Form 10-K (including information
incorporated by reference) include "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The words
"believe," "expect," "anticipate," "project," "plan," "intend," and similar
expressions, among others, identify "forward-looking statements," which speak
only as of the date the statement was made. Such forward-looking statements are
subject to risks, uncertainties and other factors which could cause actual
results to materially differ from those made, projected or implied in such
statements. The most significant of such risks, uncertainties and other factors
are described in this report and Exhibit 99.1 to this Form 10-K. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events, or otherwise.
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PART I
ITEM 1. BUSINESS
GENERAL
OfficeMax, Inc. ("OfficeMax" or the "Company") is the largest operator
of high-volume, deep-discount office product superstores in the United States in
terms of the number of stores and breadth of geographic coverage. As of January
23, 1999, OfficeMax operated 832 superstores in over 350 markets in 49 states
and Puerto Rico, as well as two national call centers, 17 delivery centers and
OfficeMax retail joint ventures in Mexico and Japan.
The typical full-size OfficeMax superstore is approximately 23,500
square feet and offers over 8,000 office products and related items. The
Company's eighth superstore iteration since inception, known within the Company
as Millenium 8.0, focuses on the higher profit margin items of the Company's
office supply business. Within each superstore, prominent signage highlights the
Company's marketing concepts: Supplies (office supplies), TechMax(R)
(electronics, business machines, computers and related items), CopyMax(SM)
(print-for-pay services), and FurnitureMax(R) (office furniture).
The Company markets its merchandise primarily to small- and medium-size
businesses, home office customers and individual consumers. By extending its
marketing channels to include direct catalog and a commercial sales force,
OfficeMax also serves the medium and larger corporate customer. Additionally,
the Company operates OfficeMax.com on the Internet at http://www.officemax.com,
which enables consumers and businesses to buy a wide assortment of OfficeMax
merchandise.
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 OfficeWorld, 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 two co-founders.
In June 1992, the Company acquired OW Office Warehouse, Inc., a 41-store
office products 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%.
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
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from the Secondary Offering were $110,177,000. Following completion of the
Secondary Offering, Kmart no longer owned an interest in OfficeMax.
In November 1995, the Company signed an agreement with its joint venture
partner in Mexico, and opened its first superstore in Mexico City in August
1996. In July 1998, the Company increased its ownership percentage in the joint
venture to 39% and began accounting for its investment under the equity method.
At January 23, 1999, the joint venture operated 12 OfficeMax superstores in
Mexico.
In December 1996, the Company signed an agreement with its joint venture
partner in Japan, and opened its first superstore in November 1997. At January
23, 1999, the joint venture operated five OfficeMax superstores in Japan.
In July 1998, the Company signed an agreement with its joint venture
partner in Brazil and plans to open its first superstore in Sao Paulo in fiscal
1999.
The following table summarizes the Company's domestic superstore
opening activity by fiscal year:
FISCAL STORES STORES STORES
YEAR OPENED CLOSED ACQUIRED TOTAL
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1988 3 - - 3
1989 8 - - 11
1990 23 - 12 46
1991 33 - - 79
1992 61 2 41 179
1993 53 9 105 328
1994 70 10 - 388
1995 80 - - 468
1996 96 - - 564
1997 150 1 - 713
1998 120 1 - 832
In addition, the Company opened its first OfficeMax PDQ(SM) in fiscal
1998. Through its joint venture partnerships, the Company has expanded
internationally by opening seven superstores during fiscal 1998, eight
superstores during fiscal 1997 and two superstores during fiscal 1996.
INDUSTRY OVERVIEW
Over the past approximately ten years, the office products industry has
experienced rapid growth which the Company believes is attributable primarily to
a shift in the United States to a more service oriented economy and the
increasing utilization of technology, such as fax machines, cellular phones and
computers, in businesses and home offices. 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-Size Business Market. The Company's primary target
market consists of small- and medium-size businesses, employing between one and
100 employees, home office customers and individual consumers. Historically,
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' suggested
retail 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 manufacturers 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.
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- 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 business day delivery. 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
In response to major declines in retail selling prices for computers
experienced by OfficeMax during 1998, similar to the entire computer industry,
the Company reorganized its business into two distinct operating segments: the
Core Business Segment and the Computer Business Segment. The Core Business
Segment includes office supplies, business machines, peripherals, print-for-pay
services and office furniture. The Computer Business Segment includes desktop
and laptop personal computers and computer monitors. The Company evaluates
performance and allocates resources based on the results of these two segments.
The Company's strategy is to enhance 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
international expansion. The key elements of this strategy are as follows:
- Realigning the Computer Business Segment. In response to
dramatic declines in retail prices of computers, the Company is
developing a new operating model for its Computer Business Segment. The
new operating model, known within the Company as "Millennium 2000",
includes targeting the small- and medium-sized business customer along
with the higher-end home office and consumer market. To more
effectively target these customers, the Company plans to reduce the
number of computer vendors in its stores from as many as 11 to two
sources. Additionally, in a seven market test with IBM, the Company
will exclusively offer IBM personal computers, laptops, monitors,
servers and related services in a separate department. These
departments will be staffed by IBM personnel in some markets and
specially IBM-trained OfficeMax personnel in others.
- Extensive Selection of Merchandise in an Easy-to-Shop
Presentation. Each OfficeMax superstore offers over 8,000 stock keeping
units ("SKUs") of quality, in-stock, name-brand and private label
merchandise. This offering represents a breadth and depth of in-stock
items that are not available from traditional office products
retailers, mass merchandisers or wholesale clubs. The Company's
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 and promote impulse buying,
thereby increasing sales.
- 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 between a
lower advertised price and the price paid at OfficeMax within seven
days of the original purchase. An additional 55% merchandise credit (up
to $55.00) will be issued if the lower price is from an office products
superstore such as Staples, Inc. ("Staples") or 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 on serving customers.
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- Focused Expansion. The Company enters markets that provide
multi-store opportunities as well as 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 consultants 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 Marketing Concepts. During the last four years,
OfficeMax has launched new in-store marketing concepts that complement
the Company's Supplies "module" by providing additional products and
services to the Company's customers and an opportunity for incremental
store traffic. These new concepts include the departments or "in-store
modules", CopyMax, FurnitureMax and TechMax. CopyMax offers customers a
wide range of print-for-pay services, from self-service black and white
copying to full service digital printing and publishing. FurnitureMax
provides an expanded furniture selection and specialized services.
TechMax features the latest in communication and technology products.
During fiscal 1998, the Company opened its first OfficeMax
PDQ. This unique "quick-shop" format includes a reduced Supplies module
of over 3,000 commodity-type office products and a full-service CopyMax
module. The OfficeMax PDQ format is designed to allow the Company to
penetrate urban locations in both domestic and international markets
and is appropriate for office park complexes, office buildings and on,
or near, college campuses. These concepts are discussed in greater
detail under the headings "Stores" and "Expansion."
- Non-Store Retailing. The Company's strategy for the catalog
business is to capitalize on the OfficeMax brand name awareness by
providing other channels which give the OfficeMax customer more
purchasing options. A full assortment catalog of all the items found in
OfficeMax stores plus a variety of merchandise available from a third
party distributor allows customers the convenience of catalog ordering
and next business day delivery. The Company also provides special order
catalogs containing more than 20,000 items to meet its customers'
needs. As many of the OfficeMax small business customers grow, they
take advantage of these purchasing options.
- Electronic Commerce. The Company's online electronic
retailing division consists of components designed to capitalize on the
emerging and rapidly expanding channel of Internet commerce. The
OfficeMax.com web site, available on the internet at www.officemax.com,
was introduced in March 1995 and features over 20,000 office products,
electronics, business machines, computers, peripherals and related
merchandise. OfficeMax.com also operates the
SoftwareSupersite@OfficeMax(SM) which offers over 10,000 software
titles, all available for immediate purchase via electronic downloading
or regular delivery. Customers can choose from business applications,
popular games and various other software items. In addition, OfficeMax
operates Printlink@CopyMax(SM) which enables consumers and businesses
to create, proof and order personalized items like business cards,
rubber stamps and labels. After they develop and approve their items
via the online proofing area, Printlink@CopyMax produces and ships the
personalized items directly to their door.
- Supply-Chain Management. During fiscal 1998, the Company
launched a major supply-chain management initiative, the first phase of
which included the opening of the Company's PowerMax I distribution
facility in Las Vegas, Nevada. This center is the first location in a
planned network of regional distribution facilities. The next center is
scheduled to open in fiscal 1999.
- International Opportunities. During fiscal 1998, the
Company opened three OfficeMax superstores in Mexico through a joint
venture with Grupo Oprimax, S.A. de C.V. a Mexican corporation, ending
the year with 12 superstores. In fiscal 1999, this joint venture plans
to open up to six more superstores in Mexico. Additionally, the
Company's joint venture with JUSCO Company Ltd., a Japanese
corporation, opened four OfficeMax superstores in Japan, ending the
year with five superstores. The expansion plan for the Japanese joint
venture includes opening up to four more stores in fiscal 1999. During
fiscal 1998, the Company signed a joint venture agreement with MGDK &
Associados S/C Ltda., a Brazilian company. The Brazilian joint venture
plans to open two OfficeMax superstores in Brazil during fiscal 1999.
OfficeMax owns a 39% interest in the Mexican joint venture and a 19%
interest in the Japanese and Brazilian joint ventures.
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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. The following table sets forth the approximate percentage
of net sales attributable to each merchandise group for the periods presented:
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JANUARY 23, JANUARY 24, JANUARY 25,
FISCAL YEAR ENDED 1999 1998 1997
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Office supplies, including print-for-pay services 37.9% 37.6% 37.7%
Electronics and business machines 23.2 23.3 23.7
Office furniture 12.6 11.8 11.2
Printers, software, peripherals and related consumable
products such as printer cartridges and ribbons 18.5 15.7 14.0
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Total Core Business Segment 92.2 88.4 86.6
Desktop and laptop personal computers and computer
monitors (Computer Business Segment) 7.8 11.6 13.4
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Total Company 100.0% 100.0% 100.0%
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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 lower
selling prices, these items typically carry higher gross margins than comparable
branded items and help build consumer recognition for the OfficeMax family of
Max-brand products. The Company's merchandising staff regularly evaluates new
name-brand and private label merchandise opportunities to maximize profits and
to provide customers with enhanced values. 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 group of merchandise and category
managers who average approximately 20 years of retail buying and merchandising
experience. Using a detailed merchandise planning system, this group selects the
product 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," to analyze and forecast sales
trends for each SKU statistically and then estimate each store's merchandise
requirements. The Company's merchandising initiatives have been keenly focused
on improving Gross Margin Return on Investment ("GMROI"), which is the ratio of
gross margin dollars to the average inventory investment. Increasing GMROI is a
performance objective in all levels of management within merchandising, visual
presentation, inventory management and finance. GMROI is being utilized
consistently for merchandising decisions related to the Company's basic and
seasonal assortments.
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 OfficeMax'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.
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MARKETING, PROMOTIONS AND ADVERTISING
OfficeMax directs its marketing efforts at small- and medium-size
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.
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-Business
period. Additional marketing opportunities arise during the Mother's Day,
Father's Day and graduation selling periods.
As part of its ongoing efforts to strengthen customer loyalty and
enhance the image of its stores as a value destination, the Company introduced
MaxRebates(SM) and MaxValues(SM). MaxRebates, the industry's first one-check
rebate program, allows customers to complete just one form for all rebate
qualified purchases and receive one check in return. This is an added value each
time customers shop at OfficeMax. MaxValues provides customers with value added
items, such as three free legal pads with the purchase of a twelve-pack of legal
pads.
STORES
The typical full-size OfficeMax superstore is approximately 23,500
square feet. OfficeMax 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 evaluates the attributes of
its prototype store model and periodically makes adjustments to the 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, Millennium 8.0, is characterized by a heightened merchandise focus on
the core Supplies module along with enhanced visual acuity throughout the store.
Within each superstore, prominent signage highlights the Company's marketing
concepts: Supplies (office supplies), TechMax (electronics, business machines,
computers and related items), CopyMax (print-for-pay services), and FurnitureMax
(office furniture). Management believes that attractive and up-to-date stores
contribute to customer satisfaction and loyalty, leading to increased sales. The
Company plans to remodel nearly 70 superstores during fiscal 1999.
The Company's Supplies modules feature office products, including
writing instruments, paper, filing supplies, business forms and other supplies.
Introduced in July 1995, the in-store CopyMax modules 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. The mini-CopyMax or "spoke" locations are
smaller in-store modules averaging approximately 900-square feet. Today, these
spoke locations are served by a hub utilizing the "CopyMax Link" software. This
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. An internet-based remote file
submission solution is planned for fiscal 1999 which is expected to provide
customers additional features and capabilities to support their printing needs.
Customers can use PrintLink@CopyMax, a unique custom printing site on the
Internet which allows customers to design and purchase a variety of products
including stationary, business cards, announcements and labels right from their
own computer keyboard.
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Another in-store module, FurnitureMax, features an extensive selection
of office furniture ranging from ready-to-assemble products 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 free delivery. Full-size FurnitureMax hubs are an approximately 4,000
to 8,000 square foot addition to an existing OfficeMax superstore while
mini-FurnitureMax modules contain approximately 2,000 square feet.
TechMax showcases the latest in computers, wireless digital technology,
communications products and similarly related technology products and features
specially trained associates to assist the customer.
OfficeMax PDQ is a smaller express store footprint that includes a
reduced Supplies module of over 3,000 commodity-type office products combined
with a full-service CopyMax hub in a 5,000 to 7,500-square-foot retail site. The
OfficeMax PDQ format will allow the Company to penetrate high-density urban
locations, satellite locations within metro markets and international locations.
The first OfficeMax PDQ was opened in fiscal 1998.
EXPANSION
Small- and Medium-Size Business Market. The Company's expansion
strategy primarily focuses on new store growth and its new marketing concepts.
The Company opened 120 superstores in fiscal 1998 and intends to continue its
rapid growth by opening approximately 100 additional full-size superstores in
the United States, up to five new OfficeMax PDQ locations and additional
delivery and distribution facilities in fiscal 1999. The Company's fiscal 1999
international expansion plans include opening two superstores in Sao Paulo,
Brazil while continuing to expand in Mexico and Japan with an estimated 10
stores and two distribution facilities.
Large Business Market. OfficeMax has undertaken several initiatives to
better serve the needs of its larger customers, predominately through its
commercial sales group. The Company 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 free next business day delivery on orders over $50. In addition,
the Company employs a commercial sales force to attract new customers as well as
maintain existing customers. The Company continues to develop a network of
delivery centers in the major markets OfficeMax serves. In contrast to the small
business, home office and individual consumer customer focus of OfficeMax's
retail superstores, the Company's expanded catalogs, commercial sales force and
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. During fiscal 1998, the Company opened three OfficeMax
superstores in Mexico through its joint venture with Grupo Oprimax, S.A. de C.V.
a Mexican corporation, ending the year with 12 superstores. In fiscal 1999, the
joint venture plans to open up to six more superstores in Mexico. Additionally,
the Company's joint venture with JUSCO Company Ltd., a Japanese corporation,
opened four OfficeMax superstores in Japan, ending the year with five
superstores. The expansion plan for Japan includes opening up to four more
stores in fiscal 1999. During fiscal 1998, the Company signed a joint venture
agreement with MGDK & Associados S/C Ltda., a Brazilian company. The joint
venture plans to open two OfficeMax superstores in Brazil during fiscal 1999.
Ultimately, the Company's international expansion will depend upon general
economic and business conditions affecting consumer spending, the availability
of desirable store 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 training and personnel development, the
Company strives to attract and retain 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 in-store customer service. For example, by centralizing most
administrative functions at its corporate offices and call centers, OfficeMax
enables its
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in-store associates to focus primarily on customer service. In addition, the
Company implemented ServiceMax, a training 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 the "MaxCertification Program" using Computer Based Training
(CBT) modules to ensure that every associate receives the one-on-one product
knowledge training they need to provide informative customer service.
MANAGEMENT INFORMATION SYSTEMS
In fiscal 1998, OfficeMax began the implementation of SAP, a leading
Enterprise Resource Planning ("ERP") system being used by approximately 15,000
companies worldwide, including many Fortune 500 companies. As OfficeMax has
grown substantially and rapidly over the past 10 years, the legacy information
systems necessary to support such growth have become increasingly complex. SAP
will provide a flexible, consolidated, enterprise-wide system that will provide
real time information necessary to make informed and strategic business
decisions and to react quickly to critical store-level information. The Company
believes its partnership with SAP will enable the Company to grow more quickly
and efficiently.
At its headquarters, the Company uses a platform of Unix-based parallel
processors which supports a wide variety of mission critical applications,
ranging from merchandise replenishment to order fulfillment, electronic commerce
and financial systems. With the availability and price performance advantage of
larger Sun Microsystems Servers, as well as the implementation of SAP, the
Company will consolidate its systems and simplify systems management with fewer,
larger systems. This technology also provides "scalability," the ability to
support growth within the same platform.
During 1998, the Company converted to the SAP Human Resource System.
This is the first step in its efforts to maximize process improvement
opportunities. During 1999, OfficeMax expects to convert to the SAP Financial,
Retail and Merchandising Systems. OfficeMax has invested over $75,000,000 in the
last three years to upgrade systems and processes and intends to continue
investing aggressively in this area to support the Company's 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 specific product
information, such as recent sales history, gross profit margin and inventory
levels. In-store, point-of-sale registers capture sales information at the time
of each transaction at the category and SKU level by the use of bar-code
scanners that update store-level perpetual inventory 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 providing information that is key for
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. Additional network and bandwidth capabilities are planned to be
added in fiscal 1999 to accommodate the needs of the Company's CopyMax
facilities and the volume of large, multi-color files being sent to and from
customers and various Company facilities. The Company has also launched its own
intranet, know as @Max(SM), which provides information on demand to all of the
Company's Corporate and Field Management associates.
For information regarding the Company's Year 2000 readiness, see "Item
7 - Management's Discussion and Analysis of Financial Condition and Results of
Operations; Year 2000 Readiness."
COMPETITION
The office products industry, which includes both national superstore
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.
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<PAGE> 11
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 approximately 20 office products
superstore chains that were launched in the U.S. between 1986 and 1994, all but
OfficeMax, Staples and Office Depot have either been acquired or gone out of
business.
Although not all OfficeMax stores currently compete with either Staples
or Office Depot stores, the Company believes it will face increased competition
from Staples and Office Depot as the three 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 differentiate
OfficeMax from Staples and Office Depot.
OfficeMax's indirect competitors include traditional office product
retailers, electronics superstore retailers, mass merchandisers, 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 customer benefits that an
office products superstore has to offer such as one-stop shopping convenience,
discount prices 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.
OfficeMax's Computer Business Segment competes with electronic
superstore retailers, such as CompUSA, Circuit City and Best Buy, and
direct-to-customer manufacturers, such as Dell and Gateway. During fiscal 1998,
the Company announced plans to realign its Computer Business Segment in order to
enhance its competitive position. These plans include modifying the breadth of
merchandise assortment to target computing solutions for the small- and
medium-size business and home office customers.
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 1, 1999, the Company had approximately 38,980 employees,
including 19,050 full time and 19,930 part-time associates, 1,899 of whom were
employed at its Corporate headquarters, divisional offices and call centers and
37,081 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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<PAGE> 12
ITEM 2. PROPERTIES
OfficeMax superstores are relatively immature. As of March 1, 1999, the
Company's stores had been open an average of 3.8 years operating under the
OfficeMax name and format. Of the Company's 842 superstores, 375 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 under long-term lease
agreements. These leases generally have terms ranging from 10 to 25 years plus
renewal options. Most of these leases require the Company to pay minimum rents,
subject to periodic adjustments, plus other charges including utilities, real
estate taxes, common area maintenance and, in limited cases, contingent rentals
based on sales. Several of the Company's store leases are guaranteed by Kmart.
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 1, 1999, OfficeMax had 842 superstores in 49 states, Puerto
Rico and the U.S. Virgin Islands. The following table details OfficeMax
superstores by state and territory:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Alabama 9 Nebraska 6
Alaska 3 Nevada 10
Arkansas 4 New Hampshire 3
Arizona 21 New Jersey 15
California 80 New Mexico 8
Colorado 18 New York 44
Connecticut 9 North Carolina 21
Delaware 2 North Dakota 3
Florida 52 Ohio 52
Georgia 23 Oklahoma 5
Hawaii 4 Oregon 12
Idaho 6 Pennsylvania 34
Illinois 47 Rhode Island 2
Indiana 20 South Carolina 8
Iowa 9 South Dakota 3
Kansas 11 Tennessee 21
Kentucky 8 Texas 65
Louisiana 11 Utah 14
Maine 1 Washington 19
Maryland 1 Virginia 19
Massachusetts 16 West Virginia 6
Michigan 40 Wisconsin 21
Minnesota 22 Wyoming 2
Mississippi 5 Puerto Rico 6
Missouri 17 U.S. Virgin Islands 1
Montana 3
</TABLE>
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<PAGE> 13
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to litigation it initiated in October 1997 in
the United States District Court for the Northern District of Ohio against Ryder
Integrated Logistics, Inc. ("Ryder") arising out of Ryder's failure to fulfill
certain payment guarantees pursuant to the terms of the Company's logistics
service agreement with Ryder. The Company terminated the logistics service
agreement in June 1997 based on numerous claims against Ryder under the
agreement including, among others, Ryder's refusal to honor its cost guarantees
and its failure to return overpayments to the Company. During the course of the
agreement, the Company recorded receivables from Ryder of approximately
$19,000,000 representing overpayments due from Ryder pursuant to the terms of
the agreement. In January 1998, Ryder filed a counterclaim against the Company
alleging damages arising from the Company's termination of the agreement in the
amount of approximately $75,000,000. The Company believes the counterclaim is
without merit and intends to vigorously defend against such counterclaim.
Management is of the opinion that, although the ultimate resolution of
the Ryder litigation cannot be forecasted with certainty, final disposition of
this matter should not materially affect the Company's liquidity, financial
position or results of operations. However, in the event of an unanticipated
adverse final determination in this matter, the Company's consolidated net
income for the period in which such determination occurs could be materially
affected.
In addition, there are various claims, lawsuits and pending actions
against the Company incident to the Company's operations. It is the opinion of
management that the ultimate resolution of these matters will not have a
material effect on the Company's liquidity, financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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<PAGE> 14
EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below are the names, positions and ages of the executive
officers of the Company as of March 26, 1999. Each executive officer will serve
until his successor is elected by the Board of Directors or until his earlier
resignation or removal.
<TABLE>
<CAPTION>
NAME POSITION AGE
--------- -------------------------- ---
<S> <C> <C>
Michael Feuer Chairman of the Board and 54
Chief Executive Officer
John C. Martin President, Retail Stores 48
Edward L. Cornell Executive Vice President, 50
Non-Retail Stores and
International Development
Jeffrey L. Rutherford Executive Vice President, 38
Chief Financial Officer
Wendell L. Wilson Executive Vice President, 51
CopyMax Sales and Marketing
Mark L. Keschl Senior Vice President, 43
Real Estate
Ross H. Pollock Senior Vice President, 43
General Counsel and Secretary
Mark L. Race Senior Vice President, 50
Store Planning and Project Development
</TABLE>
Mr. Feuer is the Company's co-founder, Chairman of the Board and Chief
Executive Officer. He has served as a Director of the Company since its
inception in April 1988. Prior to becoming Chairman in March 1995, Mr. Feuer
served as President. From May 1970 through March 1988, Mr. Feuer was associated
with Jo-Ann Stores, Inc. (formerly Fabri-Centers of America, Inc.), a publicly
held, New York Stock Exchange-listed, national retail chain which then had over
600 stores. In his most recent capacity prior to his departure, 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. Cornell has served as Executive Vice President, Non-Retail Stores
and International Development of the Company since December 1995. From February
1993 to December 1995, Mr. Cornell served as Executive Vice President, 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 employed by Things
Remembered, a specialty retail subsidiary of Cole National Corporation, serving
most recently
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<PAGE> 15
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. Rutherford has served as Executive Vice President, Chief Financial
Officer of the Company since March 1998. From June 1997 to March 1998, Mr.
Rutherford served as Senior Vice President, Chief Financial Officer of the
Company. From February 1997 to June 1997, Mr. Rutherford served as Senior Vice
President, Finance and Treasurer of the Company. From January 1984 to January
1997, Mr. Rutherford was associated with Arthur Andersen LLP, a big five public
accounting firm.
Mr. Wilson has served as Executive Vice President, CopyMax Sales and
Marketing of the Company since December 1997. From March 1995 to November 1997,
Mr. Wilson was employed by Kinko's, Inc. as Vice President of Operations and
Public Management. From 1984 to March 1995, Mr. Wilson held various senior
management positions at Xerox Corporation.
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 employed by 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. Pollock has served as Senior Vice President, General Counsel and
Secretary of the Company since March 1998. From January 1997 to March 1998, Mr.
Pollock served as Vice President, General Counsel and Secretary of the Company.
From September 1988 to December 1996, Mr. Pollock practiced law with the law
firm of Benesch, Friedlander, Coplan & Aronoff in its Cleveland, Ohio office.
Mr. Race has served as Senior Vice President, Store Planning and
Project Development of the Company since April 1996. From September 1992 to
April 1996, Mr. Race served as Vice President, Store Planning of the Company.
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 Jo-Ann Stores,
Inc. (formerly Fabri-Centers of America, Inc.) for 13 years were he held various
store planning, construction and administrative service positions.
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<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED
SHAREHOLDER MATTERS
The high and low sales prices of the Company's Common Shares during
each quarter of fiscal 1997 and fiscal 1998, as reported on the New York Stock
Exchange Consolidated Transaction reporting system, are listed below:
<TABLE>
<CAPTION>
Fiscal 1997 High Low
----------- ---- ---
<S> <C> <C>
1st Quarter (ended April 26, 1997) $15.125 $10.875
2nd Quarter (ended July 26, 1997) 15.250 11.375
3rd Quarter (ended October 25, 1997) 16.250 13.000
4th Quarter (ended January 24, 1998) 15.063 11.813
Fiscal 1998 High Low
----------- ---- ---
1st Quarter (ended April 25, 1998) $19.625 $14.063
2nd Quarter (ended July 25, 1998) 19.563 13.875
3rd Quarter (ended October 24, 1998) 15.438 6.625
4th Quarter (ended January 23, 1999) 12.500 8.875
</TABLE>
The Company has never paid cash dividends on its Common Shares. The
Company does not anticipate paying any cash dividends on its Common Shares in
the foreseeable future because it intends to retain its earnings to finance the
expansion of its business and for general corporate purposes. The declaration
and payment of any dividends in the future will be at the discretion of the
Company's Board of Directors and will depend on, among other things, the
Company's earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions with respect to payment of dividends and
other factors deemed relevant by the Company's Board of Directors.
As of March 26, 1999, the Company had approximately 3,970 shareholders
of record. On March 26, 1999, the closing price of the Company's Common Shares
was $8.125.
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<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data as of and for the fiscal years ended January
23, 1999, January 24, 1998, January 25, 1997, January 27, 1996 and January 21,
1995 is set forth below:
<TABLE>
<CAPTION>
(Dollars in millions, except per share and store data)
- -----------------------------------------------------------------------------------------------------------------------------
FISCAL FISCAL FISCAL FISCAL FISCAL
1998 (1) 1997 1996 1995 (2) 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCIAL DATA
Sales $ 4,337.8 $ 3,765.4 $ 3,179.3 $ 2,542.5 $ 1,841.2
Cost of merchandise sold, including
buying and occupancy costs 3,284.6 2,895.0 2,489.0 1,970.5 1,422.4
Computer segment asset write-off 80.0 - - - -
Gross profit 973.2 870.4 690.3 572.0 418.8
Operating income 86.7 145.9 105.5 86.3 55.6
Net income 48.6 89.6 68.8 125.8 30.4
Pro forma earnings per common share: (3)
Basic 0.40 0.73 0.56 1.06 0.27
Diluted 0.39 0.72 0.55 1.04 0.27
OTHER FINANCIAL AND OPERATING DATA
Percentage increase in sales 15.2% 18.4% 25.0% 38.1% 29.5%
Comparable-store sales increase (4) 0.4% 1.1% 11.0% 16.7% 17.0%
End of period stores 832 713 564 468 388
FINANCIAL POSITION
Working capital $ 501.1 $ 561.5 $ 473.4 $ 499.4 $ 211.9
Total assets 2,231.9 1,960.2 1,867.3 1,587.9 1,257.5
Total long-term debt, including capital
lease obligations 17.7 19.0 20.0 - 0.3
Shareholders' equity 1,138.1 1,160.6 1,063.6 990.9 748.6
</TABLE>
(1) In conjunction with its decision to realign the Computer Business
Segment, the Company recorded a non-recurring, non-cash, pre-tax charge
of $79,950,000 in January 1999. The charge reduced net income by
$49,889,000 or $0.41 per diluted share.
(2) Net income and pro forma earnings per common share in fiscal 1995 include
a $69.1 million, or $0.57 per share, after-tax gain from the sale of
Corporate Express, Inc.
(3) Pro forma earnings per Common Share data for fiscal 1994 gives effect to
the issuance of all shares at the time of the Offering and the proceeds
from the Offering paid to Kmart 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 105 stores
acquired from BizMart in March 1993. 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 store format.
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<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Consolidated Results
Consolidated sales in fiscal 1998 advanced 15.2% to $4,337,768,000 from
$3,765,444,000 in fiscal 1997. This followed an 18.4% increase in 1997 from
$3,179,274,000 in fiscal 1996. The 1998 increase in consolidated sales was
primarily due to the full year's sales from the 150 superstores opened during
fiscal 1997, the additional partial year's sales from 120 superstores opened
during fiscal 1998 and a 0.4% comparable-store sales increase. The
comparable-store sales increase was negatively impacted by a 15.9% decrease in
the average selling prices of fax machines, printers and copiers experienced by
the Company's Core Business Segment and a 26.3% decrease in average selling
prices experienced by the Company's Computer Business Segment. Comparable store
sales in fiscal 1997 increased 1.1% from fiscal 1996. The Company opened 96 new
stores during fiscal 1996.
Cost of merchandise sold, including buying and occupancy costs and
excluding the non-recurring computer segment asset write-off recorded during the
fourth quarter of fiscal 1998, decreased as a percentage of sales to 75.7% in
fiscal 1998 from 76.9% in fiscal 1997 and 78.3% in fiscal 1996. Correspondingly,
gross profit, excluding the non-recurring computer segment asset write-off, was
24.3% for fiscal 1998 versus 23.1% and 21.7% for fiscal years 1997 and 1996,
respectively. The gross profit increases in fiscal 1998 and 1997 were primarily
due to enhanced marketing of higher margin items in the Company's Core Business
Segment and a reduction in the number of low margin computer promotions in the
Company's Computer Business Segment. Including the non-recurring computer
segment asset write-off, cost of merchandise sold, including buying and
occupancy costs, was $3,364,532,000 or 77.6% of sales for fiscal 1998. Gross
profit for fiscal 1998, including the non-recurring charge was 22.4% of sales.
Store operating and selling expenses, which consist primarily of store
payroll, operating and advertising expense, increased to 17.5% of sales in
fiscal 1998 from 16.3% of sales in fiscal 1997 and 15.8% of sales in fiscal
1996. The increases in fiscal 1998 and fiscal 1997 were primarily due to the
increase in the number of stores opened for less than one year. New stores
typically begin to leverage various fixed cost components during their second or
third year of operations as sales increase. The increase in fiscal 1998 was also
attributable to costs incurred to upgrade the Company's fleet of self-service
copiers throughout all of the Company's stores with enhanced CopyMax features.
Pre-opening expenses were $11,851,000, $15,512,000 and $10,649,000 in
fiscal 1998, fiscal 1997 and fiscal 1996, respectively, primarily reflecting
120, 150 and 96 new superstore openings. Pre-opening expenses, which consist
primarily of store payroll, supplies and grand opening advertising, averaged
approximately $85,000 per OfficeMax superstore during fiscal 1998 and fiscal
1997 versus approximately $75,000 per OfficeMax superstore in fiscal 1996. Also
during fiscal 1998, the Company opened its PowerMax I distribution facility in
Las Vegas, Nevada for which the Company incurred pre-opening expenses of
$980,000. Pre-opening expenses increase when certain enhanced CopyMax or
FurnitureMax features are included in a superstore. During fiscal 1998, 12
superstores were opened with enhanced CopyMax or FurnitureMax features versus
103 and 136 superstores opened with enhanced CopyMax or FurnitureMax features
during fiscal 1997 and fiscal 1996, respectively. Pre-opening expenses for these
enhanced features averaged approximately $25,000 to $35,000 per unit in fiscal
1998, 1997 and 1996.
General and administrative expenses increased as a percentage of sales to
2.4% in fiscal 1998 from 2.3% and 1.9% in fiscal years 1997 and 1996,
respectively. This increase reflects the Company's continuing efforts to enhance
its infrastructure to support planned growth both in the United States and
internationally. The infrastructure enhancements include efforts to strengthen
the Company's management team and the Company's information technology ("IT")
initiatives. The Company is in the process of implementing the SAP system. The
SAP system is a fully integrated Enterprise Resource Planning platform that will
automate and integrate the Company's business processes. The conversion to the
first module of SAP occurred on November 30, 1998.
Goodwill amortization was $9,390,000 in fiscal years 1998, 1997 and 1996.
Goodwill is capitalized and amortized over 40 years using the straight-line
method.
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<PAGE> 19
As a result of the foregoing factors, operating income for fiscal 1998,
excluding the non-recurring computer segment asset write-off, increased to
$166,642,000 or 3.8% of sales, as compared to operating income of $145,917,000
and $105,456,000, or 3.9% and 3.3% of sales, for fiscal years 1997 and 1996,
respectively. Including the non-recurring computer segment asset write-off,
operating income was $86,692,000 or 2.0% of sales in fiscal 1998.
Interest expense was $5,681,000 in fiscal year 1998 as compared to
interest income of $514,000 and $7,485,000 in fiscal years 1997 and 1996,
respectively. The increase in interest expense in fiscal 1998 was primarily due
to increased borrowings used to fund the Company's expansion plans, seasonal
inventory requirements and stock repurchase program. Interest income in 1996 was
primarily due 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. on September 10, 1995.
Income taxes were $32,391,000 in fiscal 1998, $56,811,000 in fiscal
1997 and $44,136,000 in fiscal 1996 with effective tax rates of 40.0%, 38.8% and
39.1%, respectively. The effective tax rates for all three years were different
from the statutory income tax rate as a result of tax exempt interest, state and
local income taxes, and non-deductible goodwill amortization expense.
As a result of the foregoing factors, net income for fiscal 1998,
excluding the non-recurring computer segment asset write-off was $98,509,000 or
2.3% of sales as compared to $89,620,000 or 2.4% of sales in fiscal 1997 and
$68,805,000 or 2.2% of sales in fiscal 1996. The non-recurring computer segment
asset write-off reduced net income by $49,889,000.
BUSINESS SEGMENTS
Core Business Segment
Sales for the Core Business Segment increased 20.2% to $4,000,846,000 in fiscal
1998 from $3,328,976,000 in fiscal 1997. Sales for this business segment
increased 21.0% in fiscal 1997 from $2,751,987,000 in fiscal 1996. The increase
in fiscal 1998 was due to the additional stores opened in fiscal years 1998 and
1997 and a comparable store sales increase of 6.0%. Declines in average selling
prices for fax machines, printers and copiers reduced the Core Business
Segment's comparable sales increase by 1.9%. Core Business Segment comparable
store sales in fiscal 1997 increased 2.4% from fiscal 1996.
Cost of merchandise sold, including buying and occupancy costs for the Core
Business Segment decreased as a percentage of sales to 73.9% in fiscal 1998 from
74.0% and 75.2% in fiscal years 1997 and 1996, respectively. Correspondingly,
gross profit for the Core Business Segment increased to $1,043,854,000 or 26.1%
of sales in fiscal 1998 as compared to $864,598,000 or 26.0% of sales in fiscal
1997 and $682,066,000 or 24.8% of sales in fiscal 1996. The gross profit
increase in fiscal 1998 was primarily due to the Company's chain-wide space
reallocation program which provided for expanding the office supply merchandise
assortment by nearly 1,000 SKUs and moving these products to a more prominent
position within the store. The decline in average selling price of fax machines,
printers and copiers partially offset the gains from the space reallocation
program. The gross profit increase in fiscal 1997 was primarily due to enhanced
marketing of higher margin office supply and furniture merchandise.
Operating income for the Core Business Segment increased to $183,163,000 in
fiscal 1998 from $152,078,000 in fiscal 1997 and $122,501,000 in fiscal 1996.
Net income for the Core Business Segment increased to $111,496,000 in fiscal
1998 from $96,130,000 and $80,954,000 in fiscal years 1997 and 1996,
respectively.
Computer Business Segment
Sales for the Computer Business Segment decreased 22.8% to $336,922,000
in fiscal 1998 from $436,468,000 in fiscal 1997. A decline in average selling
prices for the Computer Business Segment contributed to a 42.4% comparable store
sales decrease. The comparable store sales decrease was partially offset by the
additional sales from stores opened
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<PAGE> 20
during fiscal years 1998 and 1997. Sales for this business segment increased
2.1% in fiscal 1997 from $427,287,000 in fiscal 1996.
Cost of merchandise sold, including buying and occupancy costs and
excluding the non-recurring computer segment asset write-off, decreased as a
percentage of sales to 97.2% in fiscal 1998 from 98.7% and 98.1% in fiscal years
1997 and 1996, respectively. Gross profit, excluding the non-recurring charge
was 2.8% of sales in fiscal 1998 as compared to 1.3% and 1.9% of sales in fiscal
1997 and 1996, respectively. This gross profit improvement in fiscal 1998 was
primarily due to the Company's deliberate decision to forgo low-margin computer
promotions compared to prior years.
In conjunction with its decision to realign the Computer Business
Segment, the Company recorded a non-recurring, non-cash, pre-tax charge of
$79,950,000 during January 1999. The charge accounted for the liquidation of
existing, discontinued computer inventory. In addition, the charge provided for
the impairment of prepaid expenses and other assets directly related to the
Computer Business Segment. Including the non-recurring charge, cost of
merchandise sold, including buying and occupancy costs, was 121.0% of sales.
Operating loss for the Computer Business Segment, excluding the
non-recurring computer segment asset write-off, was $16,521,000 in fiscal 1998,
as compared to $6,161,000 in fiscal 1997 and $17,045,000 in fiscal 1996.
Including the non-recurring charge, operating loss was $96,471,000 in fiscal
1998.
Net loss for the Computer Business Segment, excluding the non-recurring
computer segment asset write-off, was $12,987,000 in fiscal 1998. The
non-recurring charge increased the Computer Business Segment net loss by
$49,889,000. Net loss for the Computer Business Segment was $6,510,000 in fiscal
1997 and $12,149,000 in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities generated $31,011,000 of cash during
fiscal 1998, which is an increase of $124,646,000 over the prior year. Increases
in accounts payable and accrued liabilities were the primary source of the
year-over-year increase. Major uses of working capital included an increase in
inventories and accounts receivable of $168,533,000 and $49,350,000,
respectively. The increase in inventory was due to the additional 120
superstores opened during fiscal 1998 and the build-up of merchandise for the
Company's PowerMax I facility. Same-store inventory levels decreased 6% in
fiscal 1998 and accounts payable leverage as a percent of inventory increased
from 46% at January 24, 1998 to 50% at January 23, 1999. The decrease in
comparable-store inventory and the improvement in accounts payable leverage are
primarily due to the Company's supply-chain management initiatives. The increase
in accounts receivable was due to increased vendor funding based on higher
merchandise purchase volumes. Net cash used by operations was $56,603,000 in
fiscal 1996.
Net cash used for investing activities, primarily capital expenditures
for new and remodeled stores, was $125,063,000 in fiscal 1998 as compared to
$103,217,000 in fiscal 1997 and $106,748,000 in fiscal 1996. Capital
expenditures were $120,760,000, $125,804,000 and $101,039,000 in fiscal years
1998, 1997 and 1996, respectively.
Net cash provided by financing was $94,733,000 in fiscal 1998. Current
year financing activities primarily represent borrowings under the Company's
credit facilities and the payment of $77,499,000 for treasury stock purchases.
In fiscal 1999, the Company plans to open approximately 100 new
OfficeMax superstores in the United States, up to five new OfficeMax PDQ
locations and additional delivery and distributions facilities. The Company also
expects to remodel nearly 70 existing superstores. Management estimates that the
Company's cash requirements for opening or remodeling a superstore, exclusive of
pre-opening expenses, will be approximately $1,075,000 and $210,000,
respectively. For an OfficeMax superstore, the requirements include an average
of approximately $425,000 for leasehold improvements, fixtures, point-of-sale
terminals and other equipment, and approximately $650,000 for the portion of
store inventory that is not financed by accounts payable to vendors. Pre-opening
expenses are expected to
-18-
<PAGE> 21
average approximately $85,000 for an OfficeMax superstore. In select cases, that
average is expected to increase by approximately $30,000 when certain enhanced
CopyMax or FurnitureMax features are included.
On August 13, 1998, the Company's Board of Directors authorized the
Company to repurchase up to $200,000,000 of its common shares on the open
market, doubling its previous authorization. At the end of fiscal 1998, the
Company had purchased a total of 8,235,000 shares at a cost of $78,778,000. This
included systematic purchases of shares to cover potential dilution from the
future issuance of shares under the Company's equity-based incentive plans.
Future purchases of common shares will depend on the Company's obligation under
its equity-based incentive plans, its cash position and market conditions.
The Company is a party to litigation it initiated in October 1997 in
the United States District Court for the Northern District of Ohio against Ryder
arising out of Ryder's failure to fulfill certain payment guarantees pursuant to
the terms of the Company's logistics service agreement with Ryder. The Company
terminated the logistics service agreement in June 1997 based on numerous claims
against Ryder under the agreement including, among others, Ryder's refusal to
honor its cost guarantees and its failure to return overpayments to the Company.
During the course of the agreement, the Company recorded receivables from Ryder
of approximately $19,000,000 representing overpayments due from Ryder pursuant
to the terms of the agreement. In January 1998, Ryder filed a counterclaim
against the Company alleging damages arising from the Company's termination of
the agreement in the amount of approximately $75,000,000. The Company believes
the counterclaim is without merit and intends to vigorously defend against such
counterclaim.
Management is of the opinion that, although the ultimate resolution of
the Ryder litigation cannot be forecasted with certainty, final disposition of
this matter should not materially affect the Company's liquidity, financial
position or results of operations. However, in the event of an unanticipated
adverse final determination in this matter, the Company's consolidated net
income for the period in which such determination occurs could be materially
affected.
In addition, there are various claims, lawsuits and pending actions
against the Company incident to the Company's operations. It is the opinion of
management that the ultimate resolution of these matters will not have a
material effect on the Company's liquidity, financial position or results of
operations.
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. The Company has a $500,000,000 revolving credit facility
available through June 2002, under which $135,000,000 of borrowings were
outstanding as of January 23, 1999. In addition, the Company has uncommitted
bank lines of credit of up to $32,000,000, of which $9,700,000 was outstanding
at January 23, 1999.
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 historically the slowest of the year primarily
because of lower office supplies consumption during the summer vacation period.
Management believes inflation has not had a material effect on the Company's
financial condition or operating results for the periods presented and, in fact,
has experienced deflation for items such as fax machines, printers, copiers and
computers.
YEAR 2000 READINESS
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to identify the applicable year.
Time-sensitive computer programs may recognize "00" as the year 1900 rather than
the year 2000, which could result in miscalculations or system failures. The
Company is engaged in a company-wide project to address the Year 2000 Issue. The
scope of the Company's Year 2000 project includes: (a) identifying and taking
appropriate corrective action to remedy the Company's software, hardware and
imbedded technology; (b) working with key third parties with which the Company
does business electronically to ensure that such business is not adversely
affected by the Year 2000 Issue; and (c) contacting other third parties and
requesting assurances that such parties and
-19-
<PAGE> 22
their products will be Year 2000 compliant on a timely basis. The Company has
assembled a Year 2000 project team that is responsible for overseeing the
Company's Year 2000 compliance process and ensuring that there are no major
interruptions in the Company's operations as a result of the Year 2000 Issue.
The project team includes members of the Company's senior management, as well as
outside contractors and consultants. The project team provides regular updates
to the Company's Board of Directors.
The Company has identified both mission critical Year 2000 issues
(primarily hardware, operating systems and application systems used in
day-to-day operations) and non-mission critical Year 2000 issues related to
facilities and product support. The Company is in the process of implementing
the SAP system which is expected to resolve potential mission critical problems
related to the Year 2000 Issue. However, there can be no assurance that the SAP
system will be successfully implemented on a timely basis. Accordingly, as a
precautionary measure, all current legacy systems scheduled to be replaced by
the SAP system are also in the process of being upgraded to Year 2000 compliant
versions. The Company expects to complete its compliance process for mission
critical systems by the end of its third fiscal quarter of 1999.
The Company has determined that it will be required to modify or
replace other portions of its software, hardware and imbedded technology, which
are not considered mission critical systems, so that they will function properly
with respect to the year 2000 and thereafter. The Company's target for
completing its compliance process for non-mission critical systems is also the
end of its third fiscal quarter of 1999.
Currently, the Company estimates it has completed 55% of its compliance
process for both mission critical and non-mission critical systems and issues.
The Company is in the process of developing formal contingency plans in the
event that any of its mission critical or non-mission critical Year 2000 issues
are not resolved in a timely manner.
The Company is directly working with key third parties with which the
Company does business electronically to remediate and test affected systems. The
Company is also in the process of contacting other third parties, including
product suppliers, to identify other potential Year 2000 issues. The Company
intends to either resolve any issues identified or develop appropriate
contingency plans.
All costs and expenses incurred relating to the Year 2000 Issue are
charged against income on a current basis. Based on the Company's most recent
evaluation, including internal expenses, the total cost of the Company's Year
2000 project is expected to be approximately $5,000,000, of which approximately
$1,800,000 has been incurred through January 23, 1999.
Management's estimates regarding the expected completion dates and cost
involved in the Company's Year 2000 project are based on various assumptions
regarding future events, including the availability of resources, the success of
third parties in addressing their own Year 2000 issues, and other factors. There
are significant risks to the Company if the actual completion dates or costs
differ materially from expected completion dates and costs. These risks include
the need to process transactions manually at significant costs to the Company,
significant delays in obtaining key operational data for analysis, the inability
to process customer orders, pay vendors, settle receivables or procure
merchandise for resale on a timely basis and to perform other critical business
functions which could have a material adverse effect on the Company's financial
position and the results of its operations. Further, the Company cannot
reasonably estimate the impact on the Company of key third parties not
successfully addressing their own Year 2000 issues.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("FAS
133") which is required to be adopted in fiscal years beginning after June 15,
1999. FAS 133 will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company has not yet determined what the effect of the new pronouncement will
be on the earnings and financial position of the Company.
-20-
<PAGE> 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, principally interest rate risk
and foreign exchange risk.
Interest earned on the Company's cash equivalents and short-term
investments, as well as interest paid on its debt and lease obligations, are
sensitive to changes in interest rates. The Company's long-term debt is
principally variable rate debt, while the interest component of its operating
leases is generally fixed. The Company manages its interest rate risk by
maintaining a combination of fixed and variable rate debt. The Company has
entered into an interest rate swap agreement to fix the interest rate associated
with the mortgage on its corporate headquarters. The Company believes its
potential exposure to interest rate risk is not material to the Company's
financial position or the results of its operations.
The Company is exposed to foreign currency exchange risk through its
joint venture partnerships in Mexico, Japan and Brazil. The Company has not
entered into any derivative financial instruments to hedge this exposure, and
believes its potential exposure is not material to the Company's financial
position or the results of its operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements on page F-1.
Supplementary quarterly financial information for the Company is included in
Note 11 of Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
-21-
<PAGE> 24
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 12
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 on pages 3 and 4 of
the Proxy Statement under the captions "Security Ownership of Certain Beneficial
Owners" and "Security Ownership of Management" in the Proxy Statement which
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is contained on pages 11 and 12 of
the Proxy Statement under the caption "Certain Relationships and Related
Transactions" which information is incorporated herein by reference.
-22-
<PAGE> 25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements:
See Index to Consolidated Financial Statements on page F-1.
(a)(2) Financial Statement Schedules:
None
(a)(3) Exhibits:
See Exhibit Index on pages 25 and 26 of this report.
(b) Reports on Form 8-K:
None
-23-
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OFFICEMAX, INC.
DATE: April 8, 1999 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.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Michael Feuer Chairman and Chief April 8, 1999
- -------------------- Executive Officer and Director
Michael Feuer (Principal Executive Officer)
/s/ Jeffrey L. Rutherford Executive Vice President, Chief April 8, 1999
- --------------------------- Financial Officer (Principal
Jeffrey L. Rutherford Financial and Accounting Officer)
/s/ Raymond L. Bank Director April 8, 1999
- ---------------------
Raymond L. Bank
/s/ Burnett W. Donoho Director April 8, 1999
- -----------------------
Burnett W. Donoho
/s/ Carl D. Glickman Director April 8, 1999
- -----------------------
Carl D. Glickman
/s/ James F. McCann Director April 8, 1999
- -------------------
James F. McCann
/s/ Sydell L. Miller Director April 8, 1999
- --------------------
Sydell L. Miller
/s/ Ivan J. Winfield Director April 8, 1999
- --------------------
Ivan J. Winfield
</TABLE>
-24-
<PAGE> 27
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Incorporation
Exhibit No. Description of Exhibit by Reference
- ----------- ---------------------- ------------
<S> <C> <C>
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 Certificate for the Common Shares. (1)
10.1 Credit Agreement dated as of July 3, 1997 by and among the Company, the lenders (6)
party thereto, the co-agents party thereto, KeyBank National Association, as
documentation agent, and The Bank of New York, as administrative agent and as
swing line lender.
10.2 Mortgage Loan Agreement dated November 6, 1996 by and between the Company and (5)
KeyBank National Association.
* 10.3 Amended and Restated Employment Agreement dated as of October 13, 1998 by and between
Michael Feuer and the Company (filed herewith).
10.4 Share purchase agreement dated August 25, 1995 by and among the Company, (4)
Corporate 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 Amended and Restated Equity-Based Award Plan. (7)
* 10.9 OfficeMax Annual Incentive Bonus Plan. (7)
10.10 Lease Guaranty, Indemnification and Reimbursement Agreement dated November 9, (2)
1994 between the Company and Kmart Corporation.
* 10.11 Forms of Severance Agreements. (7)
* 10.12 Schedule of certain executive officers who are parties to the Severance
Agreements in the forms referred to in Exhibit 10.11 (filed herewith).
21 List of Subsidiaries. (5)
23 Consent of Independent Accountants (filed herewith).
27.1 Financial Data Schedule for fiscal year ended January 23, 1999 (filed herewith).
27.2 Restated Financial Data Schedule for fiscal year ended January 24, 1998 (filed herewith).
99.1 Statement Regarding Forward Looking Information (filed herewith).
</TABLE>
-25-
<PAGE> 28
(1) Included as an exhibit to the Company's Registration Statement on Form
S-1 (No. 33-83528) and incorporated herein by reference.
(2) Included as an exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended October 22, 1994, and incorporated herein by
reference.
(3) Included as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended January 21, 1995, and incorporated herein by
reference.
(4) Included as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended January 27, 1996, and incorporated herein by
reference.
(5) Included as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended January 25, 1997, and incorporated herein by
reference.
(6) Included as an exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended October 25, 1997, and incorporated herein by
reference.
(7) Included as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended January 24, 1998, and incorporated herein by
reference.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
-26-
<PAGE> 29
OFFICEMAX, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Management F - 2
Report of Independent Accountants F - 2
Consolidated Statements of Income - Fiscal years ended January 23, 1999,
January 24, 1998 and January 25, 1997 F - 3
Consolidated Balance Sheets - January 23, 1999 and January 24, 1998 F - 4
Consolidated Statements of Cash Flows - Fiscal years ended January 23,
1999, January 24, 1998 and January 25, 1997 F - 5
Consolidated Statements of Changes in Shareholders' Equity -
Fiscal years ended January 23, 1999, January 24, 1998
and January 25, 1997 F - 6
Notes to Consolidated Financial Statements F - 7
</TABLE>
F-1
<PAGE> 30
REPORT OF MANAGEMENT
Responsibility for the integrity and objectivity of the financial
information presented in this Annual Report on Form 10-K rests with OfficeMax
management. The financial statements of OfficeMax, Inc. and its subsidiaries
were prepared in conformity with generally accepted accounting principles,
applying certain estimates and judgements as required.
OfficeMax has established and maintains a system of internal controls
designed to provide reasonable assurance that the books and records reflect the
transactions of the Company and that its established policies and procedures are
carefully followed. This system is based on written procedures, policies and
guidelines, organizational structures that provide an appropriate division of
responsibility, a program of internal audit and the careful selection and
training of qualified personnel.
PricewaterhouseCoopers LLP, independent accountants, examined the
financial statements and their report is presented below. Their opinion is based
on an examination which provides an independent, objective review of the way
OfficeMax fulfills its responsibility to publish statements which present fairly
its financial position and operating results. They obtain and maintain an
understanding of the Company's accounting and reporting controls, test
transactions and perform related auditing procedures as they consider necessary
to arrive at an opinion on the fairness of the financial statements. While the
independent accountants make extensive reviews of procedures, it is neither
practicable nor necessary for them to test a large portion of the daily
transactions.
The Board of Directors pursues its oversight responsibility for the
financial statements through its Audit Committee, composed of Directors who are
not associates of the Company. The Committee meets periodically with the
independent accountants, representatives of management and internal auditors to
assure that all are carrying out their responsibilities. To assure independence,
PricewaterhouseCoopers and the internal auditors have full and free access to
the Audit Committee, without Company representatives present, to discuss the
results of their examinations and their opinions on the adequacy of internal
controls and the quality of financial reporting.
/s/Michael Feuer /s/Jeffrey L. Rutherford
- ---------------- ------------------------
Michael Feuer Jeffrey L. Rutherford
Chairman of the Board & Executive Vice President,
Chief Executive Officer Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders of OfficeMax, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of OfficeMax, Inc. and its subsidiaries (the "Company") at January 23,
1999 and January 24, 1998, and the results of their operations and their cash
flows for each of the three years in the period ended January 23, 1999, 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/ PricewaterhouseCoopers LLP
- ------------------------------
PRICEWATERHOUSECOOPERS LLP
Cleveland, Ohio
March 4, 1999
F-2
<PAGE> 31
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
===========================================================================================================
JANUARY 23, JANUARY 24, JANUARY 25,
FISCAL YEAR ENDED 1999 1998 1997
===========================================================================================================
<S> <C> <C> <C>
Sales $ 4,337,768 $ 3,765,444 $ 3,179,274
Cost of sales, including buying and
occupancy costs 3,284,582 2,895,084 2,489,016
Computer segment asset write-off 79,950 - -
----------------------------------------------
3,364,532 2,895,084 2,489,016
Gross profit 973,236 870,360 690,258
Store operating and selling expenses 761,122 614,890 503,161
Pre-opening expenses 11,851 15,512 10,649
General and administrative expenses 104,181 84,651 61,602
Goodwill amortization 9,390 9,390 9,390
----------------------------------------------
Total operating expenses 886,544 724,443 584,802
----------------------------------------------
Operating income 86,692 145,917 105,456
Interest income (expense), net (5,681) 514 7,485
----------------------------------------------
Income before income taxes 81,011 146,431 112,941
Income taxes 32,391 56,811 44,136
----------------------------------------------
Net income $ 48,620 $ 89,620 $ 68,805
==============================================
EARNINGS PER COMMON SHARE DATA:
Basic earnings per common share $ 0.40 $ 0.73 $ 0.56
==============================================
Diluted earnings per common share $ 0.39 $ 0.72 $ 0.55
==============================================
Weighted average number of common shares outstanding:
Basic number of common shares outstanding 122,240,000 123,213,000 122,877,000
==============================================
Diluted number of common shares outstanding 123,751,000 125,196,000 125,133,000
==============================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE> 32
OFFICEMAX, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
=============================================================================
JANUARY 23, JANUARY 24,
1999 1998
=============================================================================
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 67,482 $ 66,801
Accounts receivable, net of allowances of
$824 and $837, respectively 141,800 92,450
Merchandise inventories 1,254,761 1,086,228
Other current assets 39,600 37,255
----------- -----------
Total current assets 1,503,643 1,282,734
Property and Equipment:
Buildings and land 19,223 19,212
Leasehold improvements 183,320 172,878
Furniture and fixtures 381,151 287,728
----------- -----------
Total property and equipment 583,694 479,818
Less: Accumulated depreciation and
amortization (230,446) (167,965)
----------- -----------
Property and equipment, net 353,248 311,853
Other assets and deferred charges 60,040 41,280
Goodwill, net of accumulated amortization
of $60,621 and $51,231, respectively 314,965 324,355
=========== ===========
$ 2,231,896 $ 1,960,222
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $ 625,810 $ 496,619
Accrued expenses and other liabilities 121,441 128,674
Accrued salaries and related expenses 50,704 38,669
Taxes other than income taxes 58,638 55,953
Credit facilities 144,700 -
Mortgage loan, current portion 1,300 1,300
----------- -----------
Total current liabilities 1,002,593 721,215
Mortgage loan 16,425 17,725
Other long-term liabilities 74,736 60,637
----------- -----------
Total liabilities 1,093,754 799,577
----------- -----------
Commitments and contingencies - -
Shareholders' Equity:
Common stock without par value;
200,000,000 shares authorized;
124,988,442 and 124,370,209 shares
issued and outstanding, respectively 868,321 861,991
Deferred stock compensation (260) (306)
Retained earnings 348,859 300,239
Less: Treasury stock, at cost (78,778) (1,279)
----------- -----------
Total shareholders' equity 1,138,142 1,160,645
----------- -----------
$ 2,231,896 $ 1,960,222
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> 33
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
====================================================================================================================
JANUARY 23, JANUARY 24, JANUARY 25,
FISCAL YEAR ENDED 1999 1998 1997
====================================================================================================================
<S> <C> <C> <C>
OPERATIONS
Net income $ 48,620 $ 89,620 $ 68,805
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 73,863 67,320 51,613
Deferred income taxes (16,235) 3,804 (2,529)
Increase in other long-term liabilities 14,099 7,532 5,855
Other - net 79 (3,090) (14,974)
Changes in current assets and current liabilities:
(Increase) in inventories (168,533) (191,821) (258,196)
Increase in accounts payable 106,689 2,598 109,522
(Increase) decrease in accounts receivable (49,350) (68,378) 2,967
Increase (decrease) in accrued liabilities 21,779 (1,220) (19,666)
--------------------------------------------------------------
Net cash provided by (used for) operations 31,011 (93,635) (56,603)
--------------------------------------------------------------
INVESTING
Capital expenditures (120,760) (125,804) (101,039)
Proceeds from the sale of equipment - 27,675 -
Other - net (4,303) (5,088) (5,709)
--------------------------------------------------------------
Net cash (used for) investing (125,063) (103,217) (106,748)
--------------------------------------------------------------
FINANCING
Reduction in capital lease obligations - - (16)
Increase in revolving credit facilities 144,700 - -
Proceeds from mortgage loan - - 20,000
Payments of mortgage principal (1,300) (975) -
Increase in overdraft balances 22,502 3,604 32,290
Purchase of treasury stock (77,499) (1,279) -
Proceeds from issuance of common stock, net 6,330 4,192 3,325
--------------------------------------------------------------
Net cash provided by financing 94,733 5,542 55,599
--------------------------------------------------------------
Net increase (decrease) in cash and equivalents 681 (191,310) (107,752)
Cash and equivalents, beginning of period 66,801 258,111 365,863
--------------------------------------------------------------
Cash and equivalents, end of period $ 67,482 $ 66,801 $ 258,111
==============================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE> 34
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
================================================================================================================================
COMMON SHARES DEFERRED STOCK RETAINED TREASURY
-------------------------------
SHARES AMOUNT COMPENSATION EARNINGS STOCK TOTAL
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
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
(including tax benefit) 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
Issuance of common shares under
director plan 12,445 176 (150) - - 26
Exercise of stock options
(including tax benefit) 526,167 5,071 - - - 5,071
Sale of shares under management
share purchase plan (including
tax benefit) (13,236) 1,692 - - - 1,692
Sale of shares under employee
share purchase plan (including
tax benefit) 78,219 958 - - - 958
Amortization of deferred
compensation - - 993 - - 993
Treasury stock purchased (100,000
shares) - - - - (1,279) (1,279)
Net income - - - 89,620 - 89,620
-------------------------------------------------------------------------------------------
BALANCE AT JANUARY 24, 1998 124,370,209 861,991 (306) 300,239 (1,279) 1,160,645
Issuance of common shares under
director plan 14,114 175 (141) - - 34
Exercise of stock options
(including tax benefit) 472,988 4,550 - - - 4,550
Sale of shares under management
share purchase plan (including
tax benefit) 45,572 652 (113) - - 539
Sale of shares under employee
share purchase plan (including
tax benefit) 85,559 953 - - - 953
Amortization of deferred
compensation - - 300 - - 300
Treasury stock purchased
(8,135,000 shares) - - - - (77,499) (77,499)
Net income - - - 48,620 - 48,620
===========================================================================================
BALANCE AT JANUARY 23, 1999 124,988,442 $ 868,321 $ (260) $ 348,859 $ (78,778) $1,138,142
===========================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE> 35
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 23, 1999, the
Company owned and operated 832 stores in 49 states and Puerto Rico as well as 17
delivery centers and two national call centers throughout the United States
which service the Company's catalog and direct marketing customers. Through
joint venture partnerships, the Company also operates on an international basis
including locations in Mexico and Japan. The joint ventures operate OfficeMax
superstores similar to those in the United States.
BASIS OF PRESENTATION
The Company's consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation. Investments in affiliates
representing 20%-50% of the ownership of such companies for which the Company
has the ability to exercise significant influence over operating and financial
policies, are accounted for under the equity method. 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 or accounts receivable.
The Company has two reportable business segments: the Core Business
Segment and the Computer Business Segment. The Core Business Segment includes
office supplies, business machines, peripherals, print-for-pay services and
office furniture. The Computer Business Segment includes desktop and laptop
personal computers and computer monitors.
The Company's fiscal year ends on the Saturday prior to the last
Wednesday in January. Fiscal years 1998, 1997 and 1996 ended on January 23,
1999, January 24, 1998 and January 25, 1997, respectively.
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.
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. The Company
had no marketable securities at January 23, 1999. Such securities totaled
$6,500,000 at January 24, 1998 and consisted primarily of investments in
commercial paper, government securities and repurchase agreements with
maturities of 90 days or less.
INVENTORIES
Inventories are valued at the lower of average cost or market.
ACCOUNTS RECEIVABLE
Accounts receivable consists primarily of amounts due from vendors
under rebate, cooperative advertising and other contractual programs and trade
receivables not financed through outside programs. The Company has an
arrangement with a financial services company (the "Issuer") whereby the Issuer
manages the Company's private label credit card programs. The credit card
accounts, and receivables generated thereby, are owned by the Issuer. Under the
terms of the agreement, the Issuer charges the Company a fee to cover the
Issuer's cost of providing credit and collecting the receivables which are
non-recourse to the Company.
ADVERTISING
Advertising costs are either expensed or capitalized and amortized in
proportion to related revenues. The total amount capitalized in accordance with
the provisions of Statement of Position 93-7 issued by the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants
was $5,891,000 and $8,786,000 at January 23, 1999 and January 24, 1998,
respectively. These amounts relate to the Company's catalog and other direct
response advertising and are amortized over the six month period during which
the merchandise contents and pricing are valid. The Company and its vendors
participate in cooperative advertising programs in which the vendors reimburse
the Company for a portion of certain advertising costs. Advertising expense, net
of vendor reimbursements, was $88,769,000, $87,590,000 and $79,549,000 for
fiscal 1998, 1997 and 1996, respectively.
F-7
<PAGE> 36
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 basis of assets and liabilities.
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. All 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 13%-20% for store fixtures and equipment and 14%-33%
for other fixtures and equipment.
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. Based on its review, the Company does not believe
that an impairment of its goodwill has occurred.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses the recoverability of its long-lived assets,
including goodwill, by determining whether the amortization of the remaining
balance of an asset over its remaining useful life can be recovered through
undiscounted future operating cash flows. If impairment exists, the carrying
amount of the asset would be reduced.
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 $133,423,000 and
$110,921,000 for fiscal years 1998 and 1997, respectively.
FINANCIAL INSTRUMENTS
The recorded value of the Company's financial instruments, which
includes short term securities, accounts receivable, accounts payable, revolving
credit facilities 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.
REVENUE RECOGNITION
The Company recognizes revenue when the earnings process is complete,
generally at the point-of-sale to a customer or upon delivery to a customer.
PRE-OPENING EXPENSES
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting Costs of Start-up Activities"
("SOP 98-5"), which requires that costs related to start-up activities be
expensed as incurred. Prior to fiscal 1998, the Company expensed costs
associated with the opening of a new store during the first month of the store's
operations. The Company adopted the provisions of SOP 98-5 in its financial
statements for the year ended January 23, 1999. The effect of adoption was not
significant to the Company's results of operations.
F-8
<PAGE> 37
STOCK BASED COMPENSATION
Effective January 27, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("FAS
123"). As provided for under FAS 123, 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 FAS 123 had been applied, are presented in Note 9 of Notes
to Consolidated Financial Statements.
EARNINGS PER COMMON SHARE
Earnings per share are calculated in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS
128"), effective for fiscal 1997. FAS 128 requires the Company to report both
basic earnings per share, which is based on the weighted average number of
common shares outstanding, and diluted earnings per share, which is based on the
weighted average number of common shares outstanding and all potentially
dilutive common stock equivalents. Earnings per share data for all prior years
have been recalculated to reflect the provisions of FAS 128.
A reconciliation of the basic and diluted per share computations is as
follows:
<TABLE>
<CAPTION>
PER SHARE
(Dollars in thousands, except per share data) INCOME SHARES AMOUNT
======================================================================================================================
<S> <C> <C> <C>
FISCAL 1998
Earnings per share of common stock - Basic $ 48,620 122,240 $ 0.40
Effect of dilutive securities:
Stock options 714
Restricted stock units 797
--------------- --------------- ---------------
Earnings per share of common stock - Diluted $ 48,620 123,751 $ 0.39
--------------- --------------- ---------------
FISCAL 1997
Earnings per share of common stock - Basic $ 89,620 123,213 $ 0.73
Effect of dilutive securities:
Stock options 1,224
Restricted stock units 759
--------------- --------------- ---------------
Earnings per share of common stock - Diluted $ 89,620 125,196 $ 0.72
--------------- --------------- ---------------
FISCAL 1996
Earnings per share of common stock - Basic $ 68,805 122,877 $ 0.56
Effect of dilutive securities:
Stock options 1,488
Restricted stock units 768
--------------- --------------- ---------------
Earnings per share of common stock - Diluted $ 68,805 125,133 $ 0.55
=============== =============== ===============
</TABLE>
Options to purchase 4,794,000, 3,218,000 and 185,000 common shares were excluded
from the calculation of diluted earnings per share in fiscal years 1998, 1997
and 1996, respectively, because the exercise prices of the options were greater
than the average market price. These shares had weighted average exercise prices
of $14.89, $14.47 and $9.87, respectively.
F-9
<PAGE> 38
NOTE 2. COMPUTER SEGMENT ASSET WRITE-OFF
In conjunction with its decision to realign its Computer Business
Segment, the Company recorded a non-recurring, pre-tax charge of $79,950,000
during January 1999. The non-cash charge accounted for the liquidation of
existing, discontinued computer inventory. In addition, the charge provided for
the impairment of prepaid expenses and other assets directly related to the
Computer Business Segment. The charge reduced net income by $49,889,000 or $0.41
per diluted share.
NOTE 3. RELATIONSHIP WITH KMART CORPORATION
Prior to the Company's initial public offering (the "Offering") on
November 2, 1994, Kmart Corporation ("Kmart") owned a 92.7% equity interest in
the Company. The proceeds from the Offering were paid to Kmart, reducing Kmart's
ownership in the Company to approximately 25%. On July 20, 1995, the Company
sold common shares in a public offering (the "Secondary Offering"). As part of
the Secondary Offering, Kmart sold all of its remaining shares.
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.
NOTE 4. DEBT
CREDIT FACILITIES
On July 3, 1997, the Company entered into a five year, $500,000,000
revolving credit facility (the "revolving credit facility") in which 19 banks
participate. The revolving credit facility provides for borrowings bearing
interest at the banks' prime or Eurodollar rate plus .1450% to .3125%. The
Company must also pay quarterly fees on the full amount of the revolving credit
facility varying between .08% and .1875% per annum. 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 $19,800,000
and $16,000,000 as of January 23, 1999 and January 24, 1998, respectively. As of
January 23, 1999, the Company had outstanding borrowings of $135,000,000 under
the revolving credit facility at a weighted average interest rate of 5.21%.
There were no borrowings outstanding under the revolving credit facility as of
January 24, 1998.
In addition to the revolving credit facility, the Company has
uncommitted bank lines which provide for unsecured borrowings of up to
$32,000,000, of which $9,700,000 was outstanding at January 23, 1999 at a
weighted average interest rate of 5.06%. There were no borrowings under these
uncommitted lines at January 24, 1998. There are no commitment fees or
compensating balances associated with these arrangements.
MORTGAGE
On January 16, 1997, the Company entered into a $20,000,000 mortgage
agreement (the "Mortgage") secured by its 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 $7,000,000 due at maturity. Maturities of
long-term borrowings will be $1,300,000 over each of the next five years.
The revolving credit facility and the Mortgage contain similar
financial covenants with respect to fixed charge coverage and consolidated
leverage ratios.
F-10
<PAGE> 39
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company is a party to litigation it initiated in October 1997 in
the United States District Court for the Northern District of Ohio against Ryder
Integrated Logistics, Inc. ("Ryder") arising out of Ryder's failure to fulfill
certain payment guarantees pursuant to the terms of the Company's logistics
service agreement with Ryder. The Company terminated the logistics service
agreement in June 1997 based on numerous claims against Ryder under the
agreement including, among others, Ryder's refusal to honor its cost guarantees
and its failure to return overpayments to the Company. During the course of the
agreement the Company recorded receivables from Ryder of approximately
$19,000,000 representing overpayments due from Ryder pursuant to the terms of
the agreement. In January 1998, Ryder filed a counterclaim against the Company
alleging damages arising from the Company's termination of the agreement in the
amount of approximately $75,000,000. The Company believes the counterclaim is
without merit and intends to vigorously defend against such counterclaim.
Management is of the opinion that, although the ultimate resolution of
the Ryder litigation cannot be forecasted with certainty, final disposition of
this matter should not materially affect the Company's liquidity, financial
position or results of operations. However, in the event of an unanticipated
adverse final determination in this matter, the Company's consolidated net
income for the period in which such determination occurs could be materially
affected.
In addition, there are various claims, lawsuits and pending actions
against the Company incident to the Company's operations. It is the opinion of
management that the ultimate resolution of these matters will not have a
material effect on the Company's liquidity, financial position or results of
operations.
NOTE 6. INCOME TAXES
The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
=================================================================================================================
FISCAL YEAR ENDED JANUARY 23, JANUARY 24, JANUARY 25,
(In thousands) 1999 1998 1997
=================================================================================================================
<S> <C> <C> <C>
Current federal $ 44,574 $ 45,694 $ 39,275
State and local 3,304 5,900 5,815
Foreign 748 1,413 1,575
Deferred (16,235) 3,804 (2,529)
--------------- --------------- --------------
Total income taxes $ 32,391 $ 56,811 $ 44,136
=============== =============== ==============
</TABLE>
A reconciliation of the federal statutory rate to the Company's
effective tax rate follows:
<TABLE>
<CAPTION>
=================================================================================================================
JANUARY 23, JANUARY 24, JANUARY 25,
FISCAL YEAR ENDED 1999 1998 1997
=================================================================================================================
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
State and local taxes net of federal tax benefit 2.7% 2.6% 3.4%
Goodwill amortization 4.1% 2.2% 2.9%
Tax exempt interest (0.1)% (0.2)% (1.6)%
Other (1.7)% (0.8)% (0.6)%
--------------- --------------- --------------
Total income taxes 40.0% 38.8% 39.1%
=============== =============== ==============
</TABLE>
F-11
<PAGE> 40
Deferred tax assets (liabilities) resulted from the following:
<TABLE>
<CAPTION>
=============================================================================================
FISCAL YEAR ENDED JANUARY 23, JANUARY 24,
(In thousands) 1999 1998
=============================================================================================
<S> <C> <C>
Inventory $ 5,248 $ 1,134
Property and equipment (8,943) (3,474)
Escalating rent 20,516 2,711
Accrued expenses not currently deductible 29,251 29,467
--------------- ---------------
Total deferred tax assets $ 46,072 $ 29,838
=============== ===============
</TABLE>
NOTE 7. 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 10 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
23, 1999 were as follows:
<TABLE>
<CAPTION>
=========================================================================
FISCAL YEAR OPERATING
(In thousands) LEASES
=========================================================================
<S> <C>
1999 $ 289,643
2000 281,321
2001 265,193
2002 240,359
2003 213,073
Thereafter 1,540,721
===============
Total minimum lease payments $ 2,830,310
===============
</TABLE>
RENTAL EXPENSE
A summary of operating lease rental expense and short-term rentals
follows:
<TABLE>
<CAPTION>
=================================================================================================================
FISCAL YEAR ENDED JANUARY 23, JANUARY 24, JANUARY 25,
(In thousands) 1999 1998 1997
=================================================================================================================
<S> <C> <C> <C>
Minimum rentals $ 264,858 $ 218,271 $ 153,637
Percentage rentals 478 428 783
=============== =============== ==============
Total $ 265,336 $ 218,699 $ 154,420
=============== =============== ==============
</TABLE>
F-12
<PAGE> 41
NOTE 8. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
=================================================================================================================
FISCAL YEAR ENDED JANUARY 23, JANUARY 24, JANUARY 25,
(In thousands) 1999 1998 1997
=================================================================================================================
<S> <C> <C> <C>
Cash transactions:
Cash paid for interest $ 6,640 $ 2,269 $ -
Cash paid for income taxes $ 59,117 $ 48,649 $ 26,060
Non-cash transactions:
Liabilities accrued for property and
equipment acquired $ - $ 18,148 $ 53,956
Note receivable converted to equity investment $ 4,000 $ - $ -
Tax benefit related to stock options $ 500 $ 3,705 $ -
</TABLE>
NOTE 9. 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 Share Plan (the "Director Plan"). Under the
Management Plan, the Company's officers are required to use at least 20%, and
may use up to 100%, of their annual incentive bonuses to purchase restricted
common shares of the Company at a 20% discount from the fair value of the same
number of unrestricted common shares. Restricted common shares purchased under
the Management Plan are generally restricted from sale or transfer for three
years from date of purchase. The maximum number of common shares reserved for
issuance under the Management Plan is 1,242,227. The Company recognized
compensation expense for the discount on the restricted common shares of
$160,000, $623,000 and $643,000 for fiscal 1998, 1997 and 1996, respectively.
The Employee Plan is available to all full-time employees of the
Company who are not covered under the Management Plan and who have worked at
least 1,000 hours during a period of 12 consecutive months. Each eligible
employee has the right to purchase, on a quarterly basis, the Company's common
shares at a 15% discount from the fair market value per common share. Shares
purchased under the Employee Plan are generally restricted from sale or transfer
for one year from date of purchase. The maximum number of shares eligible for
purchase under the Employee Plan is 2,958,761. The Company is not required to
record compensation expense with respect to shares purchased under the Employee
Plan.
The Director Plan covers all directors of the Company who are not
officers or employees of the Company. Participants receive all of their annual
retainer in the form of restricted common shares paid at the beginning of the
relevant calendar year and all of their meeting fees in the form of unrestricted
common shares paid at the end of the calendar quarter in which the meetings
occurred. The restrictions on such shares generally lapse one year from the date
of grant. The maximum number of shares reserved for issuance under the Director
Plan is 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 their annual earnings, subject to statutory limitations.
Effective August 25, 1995, the Company began matching 25% of the first 3% of the
employee's contribution. The Company increased 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 $950,000,
$794,000 and $322,000 in fiscal 1998, 1997 and 1996, respectively.
F-13
<PAGE> 42
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 17,000,000 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 either
five or ten years from date of grant. Options may be granted only at option
prices not less than the fair market value per common share on the date of the
grant. There was no compensation expense related to Equity-Based Award Plan
grants during fiscal 1998. The Company recognized compensation expense on grants
under the 1994 Plan of $233,000 and $188,000 in fiscal 1997 and 1996,
respectively.
Exercisable options outstanding were 3,209,432 at January 23, 1999,
2,318,018 at January 24, 1998, and 965,019 at January 25, 1997.
Option activity for each of the last three years was as follows:
<TABLE>
<CAPTION>
================================================================================================
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
================================================================================================
<S> <C> <C>
OUTSTANDING AT JANUARY 27, 1996 3,915,650 $ 8.38
Granted 3,416,719 14.54
Exercised (164,983) 5.61
Forfeited (356,094) 9.84
----------------- ------------------
OUTSTANDING AT JANUARY 25, 1997 6,811,292 11.46
Granted 3,416,130 12.26
Exercised (491,802) 5.77
Forfeited (1,586,530) 13.22
----------------- ------------------
OUTSTANDING AT JANUARY 24, 1998 8,149,090 11.78
Granted 4,910,266 11.66
Exercised (472,989) 8.60
Forfeited (1,484,780) 13.98
----------------- ------------------
OUTSTANDING AT JANUARY 23, 1999 11,101,587 $ 11.57
================= ==================
</TABLE>
F-14
<PAGE> 43
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 1998, 1997 and 1996, respectively, were
expected volatility of 30.9%, 34.5% and 41.8% and risk-free interest rates of
4.88%, 6.25% and 6.21%. A dividend yield of zero and an expected life of five
years were used in the model for all three years.
The following table summarizes information about options outstanding at
January 23, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
=========================================================================================================================
RANGE OF WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES OPTIONS EXERCISE PRICE REMAINING LIFE (YEARS) OPTIONS EXERCISE PRICE
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
$4.01 461,611 $ 4.01 3.33 461,611 $ 4.01
$6.68 to $8.45 2,807,365 $ 7.09 7.28 817,365 $ 8.08
$10.50 to $11.75 3,032,445 $ 11.62 7.33 1,613,741 $ 11.60
$13.88 to $14.75 3,934,147 $ 14.53 7.90 276,700 $ 14.45
$15.29 to $17.09 866,019 $ 16.50 8.75 40,015 $ 16.19
</TABLE>
Consistent with the method prescribed by FAS 123, the following table
summarizes the weighted average fair value at the date of grant for options
granted in fiscal 1998, 1997 and 1996. The table also illustrates pro forma net
earnings and pro forma earnings per share, giving effect to such compensation
costs. The pro forma amounts listed below do not take into consideration the pro
forma compensation expense related to grants made prior to fiscal 1995.
<TABLE>
<CAPTION>
=======================================================================================================================
JANUARY 23, JANUARY 24, JANUARY 25,
FISCAL YEAR ENDED 1999 1998 1997
=======================================================================================================================
<S> <C> <C> <C>
Weighted average fair value $ 4.28 $ 5.08 $ 6.58
Pro forma net earnings $ 44,200,000 $ 84,822,000 $ 65,440,000
Pro forma earnings per share:
Basic earnings per share $ 0.36 $ 0.69 $ 0.52
Diluted earnings per share $ 0.36 $ 0.68 $ 0.52
</TABLE>
F-15
<PAGE> 44
NOTE 10. BUSINESS SEGMENTS
The Company has two reportable business segments: the Core Business
Segment and the Computer Business Segment. The Core Business Segment includes
office supplies, business machines, peripherals, print-for-pay services and
office furniture. The Computer Business Segment includes desktop and laptop
personal computers and computer monitors. The Company evaluates performance and
allocates resources based on the operations of these two segments. The
accounting policies of the reportable business segments are the same as those
described in the Summary of Significant Accounting Policies (Note 1).
The following table summarizes the results of operations for the
Company's reportable business segments:
(Dollars in thousands)
<TABLE>
<CAPTION>
FISCAL 1998 TOTAL COMPANY COMPUTERS CORE
================================================================================================================
<S> <C> <C> <C>
Sales $ 4,337,768 $ 336,922 $ 4,000,846
Cost of merchandise sold, including
buying and occupancy costs 3,284,582 327,590 2,956,992
Computer segment asset write-off 79,950 79,950 -
---------------------------------------------------------
3,364,532 407,540 2,956,992
Gross profit (loss) 973,236 (70,618) 1,043,854
Operating income (loss) 86,692 (96,471) 183,163
Net income (loss) $ 48,620 $ (62,876) $ 111,496
=========================================================
FISCAL 1997
================================================================================================================
Sales $ 3,765,444 $ 436,468 $ 3,328,976
Cost of merchandise sold, including
buying and occupancy costs 2,895,084 430,706 2,464,378
---------------------------------------------------------
Gross profit 870,360 5,762 864,598
Operating income (loss) 145,917 (6,161) 152,078
Net income (loss) $ 89,620 $ (6,510) $ 96,130
=========================================================
FISCAL 1996
============================================================================================================
Sales $ 3,179,274 $ 427,287 $ 2,751,987
Cost of merchandise sold, including
buying and occupancy costs 2,489,016 419,095 2,069,921
---------------------------------------------------------
Gross profit 690,258 8,192 682,066
Operating income (loss) 105,456 (17,045) 122,501
Net income (loss) $ 68,805 $ (12,149) $ 80,954
=========================================================
</TABLE>
Included in net income of the Core Business Segment is $981,000 of net interest
expense in fiscal 1998 and $4,990,000 and $10,388,000 of net interest income in
fiscal years 1997 and 1996, respectively. Included in net income of the Computer
Business Segment is net interest expense of $4,700,000, $4,476,000 and
$2,903,000 in fiscal years 1998, 1997 and 1996, respectively. Income tax expense
for the Core Business Segment was $70,686,000, $60,938,000 and $51,936,000 for
fiscal years 1998, 1997 and 1996, respectively. During those same fiscal years,
the Computer Business Segment recognized income tax benefit of $38,295,000,
$4,127,000 and $7,800,000, respectively. There are no intersegment sales or
expense allocations. The Company does not allocate fixed assets or depreciation
to the Computer Business Segment. The total assets of the Computer Business
Segment, primarily inventory and accounts receivable, were approximately
$60,280,000 and $151,390,000 as of January 23, 1999 and January 24, 1998,
respectively. This segment also had accounts payable of $14,274,000 and
$6,502,000 as of January 23, 1999 and January 24, 1998, respectively. Other than
its investments in Mexico, Japan and Brazil, the Company has no international
sales or assets.
F-16
<PAGE> 45
NOTE 11. QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS
(Unaudited)
Unaudited quarterly consolidated results of operations for the years
ended January 23, 1999 and January 24, 1998 are summarized as follows:
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
FISCAL 1998
====================================================================================================================
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
====================================================================================================================
<S> <C> <C> <C> <C>
Sales $ 1,061,074 $ 874,470 $ 1,152,359 $ 1,249,865
Cost of merchandise sold, including
buying and occupancy costs 818,736 666,131 869,080 930,635
Computer segment asset write-off - - - 79,950
Gross profit 242,338 208,339 283,279 239,280
Net income 19,074 2,625 33,578 (6,657)
Earnings per common share:
Basic $ 0.15 $ 0.02 $ 0.27 $ (0.06)
Diluted $ 0.15 $ 0.02 $ 0.27 $ (0.06)
FISCAL 1997
====================================================================================================================
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
====================================================================================================================
Sales $ 888,640 $ 776,144 $ 992,365 $ 1,108,295
Cost of merchandise sold, including
buying and occupancy costs 688,869 604,385 756,952 844,878
Gross profit 199,771 171,759 235,413 263,417
Net income 15,730 2,450 31,435 40,005
Earnings per common share:
Basic $ 0.13 $ 0.02 $ 0.26 $ 0.32
Diluted $ 0.13 $ 0.02 $ 0.25 $ 0.32
</TABLE>
F-17
<PAGE> 1
Exhibit 10.3
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
BETWEEN
OFFICEMAX, INC.
AND
MICHAEL FEUER
<PAGE> 2
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
-----------------------------------------
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this
"Agreement") is entered into as of the 13th day of October, 1998, between
OFFICEMAX, INC., an Ohio corporation (the "Company"), and MICHAEL FEUER
("Executive").
W I T N E S S E T H :
---------------------
WHEREAS, the Company and Executive are parties to an Amended
and Restated Employment Agreement entered into as of March 5, 1998 (the "Prior
Employment Agreement"); and
WHEREAS, the Compensation Committee (the "Compensation
Committee") of the Board of Directors (the "Board") of the Company has approved
and recommended the amendment of the Prior Employment Agreement so as, inter
alia, to provide that the term of this Agreement shall be a rolling five (5)
year "ever green" period and for severance payments and continuation of certain
benefits for no less than five (5) years in the event of the termination of
Executive's employment with the Company for any reason other than death or
"Cause" (as hereinafter defined) on the terms and conditions set forth in this
Agreement; and
WHEREAS, in furtherance of the foregoing, it is deemed
advisable to amend and restate in full the Prior Employment Agreement as
provided herein; and
WHEREAS, the Compensation Committee approved the execution and
delivery of this Agreement by the Company by written action dated October 13,
1998,
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the parties hereby agree as follows:
1. Employment.
-----------
(a) The Company hereby employs Executive as its Chairman of the Board
and Chief Executive Officer, and Executive hereby accepts such employment, on
the terms and conditions set forth herein.
(b) During the term of this Agreement and any renewal hereof (all
references herein to the term of this Agreement shall include references to the
period of renewal hereof, if any), Executive shall be and have the titles,
duties and authority of the Chairman of the Board and Chief Executive Officer of
the Company and shall devote his entire business time and all reasonable efforts
to his employment and perform diligently such duties
<PAGE> 3
as are customarily performed by the chairman of the board, president and chief
executive officer of a company the size and structure of the Company, together
with such other duties as may be reasonably requested from time to time by the
Board, which duties shall be consistent with his position as set forth above and
as provided in Paragraph 2.
(c) Executive shall not, without the prior written consent of the
Company, directly or indirectly, during the term of this Agreement, other than
in the performance of duties naturally inherent to the businesses of the Company
and in furtherance thereof, render services of a business, professional or
commercial nature to any other person or firm, whether for compensation or
otherwise; provided, however, that so long as it does not materially interfere
with his full-time employment hereunder, Executive may attend to outside
investments, serve as a director of a corporation which does not compete with
the Company (as provided in Paragraph 10), and serve as a director, trustee or
officer of, or otherwise participate in, educational, welfare, social, religious
and civic organizations. The Company hereby acknowledges that Executive is
currently serving a three (3) year term as a member of the Advisory Committee of
the New York Stock Exchange Board of Directors and a four (4) year term as a
member of the Case Western Reserve University Weatherhead School of Management
Visiting Committee.
2. Term and Positions.
-------------------
(a) Subject to the provisions for renewal and termination hereinafter
provided, the term of this Agreement shall begin on the date hereof and shall
continue for five (5) years thereafter. Such term shall automatically be
extended for one additional day as of t he end of the first day of the term
hereof and as of the end of each succeeding day thereafter, unless the Agreement
is terminated as provided in Paragraph 8.
(b) Executive, without any compensation in addition to that which is
specifically provided in this Agreement, shall serve, and shall be entitled and
have the right to serve, as a member of the Board, Chairman of the Board,
President and Chief Executive Officer of the Company. Without limiting the
generality of any of the foregoing, except as hereafter expressly agreed in
writing by Executive (i) Executive shall not be required to report to any single
individual and shall report only to the Board as an entire body, (ii) no
individual shall be elected or appointed as Chairman of the Board, President or
Chief Executive Officer of the Company, (iii) the highest levels of
Vice-Presidents and other executive officers of the Company shall report to no
individual other than Executive, and (iv) no individual or group of individuals
(including a committee established or other designee appointed by the Board)
shall have any authority over or equal to the authority of Executive in his role
as Chairman of the Board, President and Chief Executive Officer (except that the
Compensation Committee shall continue to
-2-
<PAGE> 4
have such powers as may be required to maintain the compliance of the Company's
benefit plans under Section 16 of the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder), and neither the
Company, the Board, nor any member of the Board shall take any action which will
or could have the effect of, or appear to have the effect of, giving such
authority to any such individual or group. For service as a director, officer
and employee of the Company, Executive shall be entitled to the full protection
of the applicable indemnification provisions of the corporate charter, code of
regulations, by-laws and other policies and procedures of the Company.
(c) If:
(i) the Company materially changes Executive's duties and
responsibilities as set forth in Paragraphs 1(b) and 2(b) without his consent
(including, without limitation, by violating any of the provisions of clauses
(i), (ii), (iii) and (iv) of Paragraph 2(b)); or
(ii) Executive's place of employment or the principal executive
offices of the Company are located more than fifty (50) miles from the
geographical center of Cleveland, Ohio; or
(iii) there occurs a material breach by the Company of any of its
obligations under this Agreement, which breach has not been cured in all
material respects within ten (10) days after Executive gives notice thereof to
the Company; or
(iv) there occurs a "Change in Control" (as hereinafter defined)
of the Company, then in any such event Executive shall have the right to
terminate his employment with the Company, but such termination shall not be
considered a voluntary resignation or termination by Executive of such
employment or of this Agreement but rather a discharge of Executive by the
Company without "Cause" (as hereinafter defined).
(d) Executive shall be deemed not to have consented to any material
change in his duties and responsibilities unless he shall give written notice of
his consent thereto to the Board within fifteen (15) days after receipt of a
written proposal setting forth such change. If Executive shall not have given
such consent, the Company shall have the opportunity to withdraw such proposed
material change by written notice to Executive given within ten (10) days after
the end of said fifteen (15) day period.
(e) The term "Change in Control" means the first to occur of the
following events:
-3-
<PAGE> 5
- (i) any person or group of commonly controlled persons owns or controls,
directly or indirectly, thirty percent (30%) or more of the voting control or
value of the capital stock of the Company; or
- (ii) the shareholders of the Company approve an agreement to merge or
consolidate with another corporation or other entity resulting (whether
separately or in connection with a series of transactions) in a change in
ownership of thirty percent (30%) or more of the voting control or value of the
capital stock of the Company, or an agreement to sell or otherwise dispose of
all or substantially all of the Company's assets (including, without limitation,
a plan of liquidation or dissolution), or otherwise approve of a fundamental
alteration in the nature of the Company's business.
3. Compensation.
-------------
(a) For all services he may render to the Company during the term of
this Agreement, the Company shall pay to Executive the following:
(i) for the period beginning on the date hereof and ending January
23, 1999, salary equal to an annual salary of Nine Hundred Fifty Thousand
Dollars ($950,000) multiplied by the ratio of the number of days in the period
beginning on the date hereof and ending on January 23, 1999 to the total number
of days in the current Fiscal Year (as hereinafter defined);
(ii) for the Fiscal Year beginning on January 24, 1999, and for
each Fiscal Year thereafter during the term of this Agreement, salary as
determined by the Compensation Committee, which in no event shall be less than
the annual salary that was payable by the Company to Executive under this
Paragraph 3(a) for the immediately preceding Fiscal Year; and
(iii) notwithstanding the foregoing, at any time and from time to
time during the term of this Agreement, the Compensation Committee may increase
(but not decrease) Executive's annual salary.
Salary payable by the Company to Executive under this Paragraph 3(a) shall be
payable in those installments customarily used in payment of salaries to the
Company's executives (but in no event less frequently than monthly). The term
"Fiscal Year" means the period beginning on the day after the Saturday
immediately preceding the last Wednesday in January of one year and ending on
the Saturday immediately preceding the last Wednesday in January of the
immediately following year.
-4-
<PAGE> 6
(b) In addition to the salary provided in Paragraph 3(a), the Company
shall pay to Executive bonus compensation (i) under the OfficeMax, Inc. Annual
Incentive Bonus Plan, or (ii) if such plan ceases to be in effect in
substantially the same form as in effect on the date of this Agreement, at least
annually in respect of each Fiscal Year not later than ninety (90) days after
the close of each Fiscal Year as determined by the Compensation Committee and
based on the performance of the Company (which shall be based on criteria no
less favorable to Executive than criteria used by the Compensation Committee to
determine bonus compensation for other senior executives of the Company).
4. Salary and Bonus; Payment in the Event of Death.
------------------------------------------------
In the event of Executive's death during the term
of this Agreement:
(a) The Company shall pay to Executive a pro rata portion of the bonus
applicable to the Fiscal Year in which such death occurs, as such bonus is
determined under Paragraph 3(b). Such pro rata portion shall be determined by
multiplying the amount, if any, of bonus that would have been payable pursuant
to such Paragraph 3(b) if Executive had remained employed under this Agreement
for the entire applicable Fiscal Year and achieved 100% of Executive's personal
goals for the fiscal year by a fraction (the "Partial Year Fraction"), the
numerator of which is the number of days in the applicable Fiscal Year elapsed
prior to the date of death and the denominator of which is three hundred
sixty-five (365).
(b) The pro rata portion of the bonus described in Paragraph 4(a)
shall be paid when and as provided in Paragraph 3(b).
(c) Except as otherwise provided in Paragraphs 4(a), 5, 6 and 7,
Executive's employment hereunder shall terminate and Executive shall be entitled
to no further compensation or other benefits under this Agreement, except as to
that portion of any unpaid salary and other benefits accrued and earned by him
hereunder up to and including the date of such death.
5. Options to Acquire Common Shares; Certain Other Payments.
---------------------------------------------------------
(a) The Company has granted to Executive under the Prior Employment
Agreement and pursuant to Stock Option Agreements executed prior to the date
hereof options (all of which, together with any additional options hereafter
granted under the Plan (defined below) are referred to as the "Options") to
purchase common shares of the Company, without par value, under the OfficeMax,
Inc. Equity-Based Award Plan as in effect
-5-
<PAGE> 7
on the date of this Agreement (the "Plan", the terms in this Paragraph 5 having
the same meaning as under the Plan, unless otherwise defined in this Agreement).
(b) The Compensation Committee has determined that the following
provisions shall apply to the grant of the Options, in addition to or in
substitution for the provisions of the Plan:
(i) Except as otherwise provided in this Agreement, (A) the
Options granted to Executive as of March 9, 1995 (the "1995 Options") shall
expire on March 9, 2005, and shall not be exercisable thereafter, and (B)
Executive may exercise, and shall have the irrevocable and nonforfeitable right
to exercise, the 1995 Options to the extent not previously exercised and thereby
purchase any number of Shares up to but not in excess of the cumulative number
of Shares set forth below on or after the corresponding dates:
* 337,500 Shares on or after January 27, 1996;
* 675,000 Shares on or after January 25, 1997;
* and 1,012,500 Shares on or after January 24, 1998.
(ii) In the event of the cessation of Executive's employment with
the Company for Cause prior to the end of the term of this Agreement (subject to
the provisions of Paragraph 2(c)), any unexercised Options shall terminate and
be of no further force or effect simultaneously with such cessation; otherwise,
the Options and Executive's right to exercise the Options shall not be affected
by the cessation of his employment with the Company for any reason except as
expressly provided in this Agreement or in the Plan.
(iii)In the event of the cessation of Executive's employment
with the Company for any reason other than (A) Cause or (B) Executive's death,
in addition to any other Options which Executive is then entitled to exercise
hereunder, prior to any of the dates referred to in Paragraph 5(b)(i) Executive
shall be entitled to exercise all of the Options. In the event of the cessation
of Executive's employment with the Company as a result of his death, in addition
to any other Options which Executive is then entitled to exercise hereunder,
prior to any of the dates referred to in Paragraph 5(b)(i), Executive shall be
entitled to exercise a number of Options equal to the additional number he would
have been eligible to exercise on the next date described in Paragraph 5(b)(i)
after Executive's death multiplied by the Partial Year Fraction in respect of
the Fiscal Year in which such death occurred.
-6-
<PAGE> 8
(iv) In the event of and in connection with any Change in
Control, all of the Options shall be fully and immediately exercisable by
Executive, notwithstanding the terms of Paragraph 5(b)(i).
(v) Notwithstanding the provisions of Paragraph 5(b)(i) or of any
Stock Option Agreement between the Company and Executive relating to the period
during which Options may be exercised, if one of the events described in
Paragraphs 5(b)(iii) or 5(b) (iv) occurs, thereby accelerating any dates under
Paragraph 5(b) (i) on which Options first may be exercised, all of the Options
shall expire on the date which is three (3) years after the date of such event,
and shall not be exercisable thereafter.
(c) If the Plan is altered, amended, suspended or discontinued as
provided in Section 11 thereof in a manner that could have the effect of denying
Executive the benefits of the Options as granted under the Plan as in effect on
the date hereof, subject to the provisions of this Agreement, the terms of the
Plan as in effect on the date hereof shall be deemed to be incorporated into and
thereby become obligations of the Company under this Agreement, notwithstanding
such alteration, suspension or discontinuation of the Plan.
(d) If all or any portion of the amounts payable to Executive under
this Agreement, including without limitation the amounts payable under this
Paragraph 5(d), the issuance of Shares and the amounts payable under Paragraph
8(d), constitute "excess parachute payments" within the meaning of Section 280G
of the Internal Revenue Code of 1986, as amended (the "Code"), that are subject
to the excise tax imposed by Section 4999 of the Code (or any similar tax or
assessment), the amounts payable hereunder shall be increased to the extent
necessary to place Executive in the same after-tax position as he would have
been in had no such tax assessment been imposed on any such payment paid or
payable to Executive under this Agreement or any other payment that Executive
may receive in connection therewith. Such incremental payment shall be made
promptly after the amount has been determined and in any event no later than
five (5) business days before such excise or other similar tax or assessment is
due. If it subsequently is determined (pursuant to final regulations or
published rulings of the Internal Revenue Service, final judgment of a court of
competent jurisdiction, Internal Revenue Service audit assessment, or otherwise)
that the amount of such excise or other similar taxes or assessments payable by
Executive is greater than the amount initially so determined, then the Company
shall pay Executive an amount equal to the sum of: (i) such additional excise or
other taxes, plus (ii) any interest, fines and penalties resulting from such
underpayment, plus (iii) an amount necessary to reimburse Executive for any
income, excise or other tax assessment payable by
-7-
<PAGE> 9
Executive with respect to the amounts specified in (i) and (ii) above, and the
reimbursement provided by this clause (iii), in the manner described above in
this Paragraph 5(d). Payment thereof shall be made within five (5) business days
after the date upon which such subsequent determination is made.
6. Retirement Benefits.
--------------------
Executive shall participate in all retirement and other benefit plans of the
Company (both qualified and nonqualified) generally available to classifications
of employees of the Company of which Executive is a member and for which
Executive qualifies under the terms thereof (and nothing in this Agreement shall
or shall be deemed to in any way adversely affect Executive's right and benefits
thereunder).
7. Life Insurance and Other Benefits.
----------------------------------
(a) The Company shall provide to Executive and his spouse and
dependents the life, health and dental insurance coverage described on Annex A
to this Agreement.
(b) The Company shall provide Executive with a monthly automobile
allowance which shall not be less than the monthly automobile allowance for
Executive in effect on the date hereof, adjusted annually to reflect inflation
as measured by changes in the Consumer Price Index or other comparable index.
(c) Executive shall be entitled to such periods of vacation and
sick leave allowance each year determined by Executive in his reasonable and
good faith discretion, which in any event shall be not less than as provided
under the Company's vacation and sick leave policy for executive officers.
(d) Executive shall be entitled to participate in any equity or
other employee benefit plan that is generally available to senior executive
officers, as distinguished from general management, of the Company. Executive's
participation in and benefits under any such plan shall be on the terms and
subject to the conditions specified in the governing document of the particular
plan.
(e) The Company shall provide Executive with tax and financial
advisory and tax return preparation services at an annual cost to the Company
not to exceed five thousand dollars ($5,000), adjusted annually to reflect
inflation as measured by changes in the Consumer Price Index or other comparable
index.
8. Termination.
------------
(a) The employment of Executive under this Agreement, and the term
hereof, may be terminated by the Company:
(i) on death or Permanent Disability (as hereinafter defined)
of Executive, or
-8-
<PAGE> 10
(ii) for Cause at any time by action of the Board. For purposes
hereof, the term "Cause" shall mean:
(A) Executive's fraud, commission of a felony or of an act or series
of acts which result in material injury to the business reputation of the
Company, commission of an act or series of repeated acts of dishonesty, which
act is or acts are materially inimical to the best interests of the Company, or
Executive's willful and repeated failure to perform his duties under this
Agreement, which failure has not been cured within fifteen (15) days after the
Company gives notice thereof to Executive;
(B) Executive's material breach of any material provision of this
Agreement, which breach has not been cured in all substantial respects within
ten (10) days after the Company gives notice thereof to Executive;
(C) Executive's engagement as an officer, director, employee or
consultant of an entity in competition with the Company (as defined in Paragraph
10(b)); or
(D) Executive's direct or indirect involvement as a shareholder,
proprietor or partner of an entity in competition with the Company (as defined
in Paragraph 10(b)); provided, however, that ownership of less than one percent
(1%) of a class of publicly traded securities of an entity shall not be deemed
to be a violation of the foregoing clause. Any termination by reason of the
foregoing shall not be in limitation of any other right or remedy the Company
may have under this Agreement or otherwise. On any termination of this
Agreement, Executive shall be deemed to have resigned from all offices and
directorships held by Executive in the Company and in each of its subsidiaries
and affiliates, as the case may be.
(b) In the event of a termination claimed by the Company to be for
"Cause" pursuant to Paragraph 8(a)(ii), Executive shall have the right to have
the justification for said termination determined by arbitration in Cleveland,
Ohio. In such event, Executive shall serve on the Company within thirty (30)
days after termination a written request for arbitration. The Company
immediately shall request the appointment of an arbitrator by the American
Arbitration Association and thereafter the question of "Cause" shall be
determined under the rules of the American Arbitration Association, and the
decision of the arbitrator shall be final and binding on both parties. The
parties shall use all reasonable efforts to facilitate and expedite the
arbitration, and shall act to
-9-
<PAGE> 11
cause the arbitration to be completed as promptly as possible. During the
pendency of the arbitration, Executive shall continue to receive all
compensation and benefits to which he is entitled hereunder, and if at any time
during the pendency of such arbitration the Company fails to pay and provide all
compensation and benefits to Executive in a timely manner the Company shall be
deemed to have automatically waived whatever rights it then may have had to
terminate Executive's employment for Cause. Expenses of the arbitration shall be
borne by the Company.
(c) In the event of termination for death or Cause, except as
otherwise provided in Paragraphs 4, 5, 6 and 7, Executive shall be entitled to
no further compensation or other benefits under this Agreement, except as to
that portion of any unpaid salary and other benefits accrued and earned by him
hereunder up to and including the effective date of such termination.
(d) In the event of the termination by the Company of Executive's
employment with the Company for any reason other than one death or Cause, in
addition to whatever other rights or remedies Executive may have against the
Company as a result of such termination, the Company shall continue for the
remainder of the term of this Agreement then in effect to pay and provide to
Executive all of the salary and bonus compensation and other rights and benefits
provided for herein; provided, however, that such bonus compensation in respect
of each Fiscal Year included within the payment period shall be the greater of
(i) the bonus compensation paid or payable to Executive in respect of the Fiscal
Year immediately preceding the Fiscal Year during which such termination occurs
or (ii) the average of the bonus compensation paid or payable to Executive in
respect of each of the three (3) Fiscal Years immediately preceding the Fiscal
Year during which such termination occurs.
(e) For purposes of this Agreement, Executive's "Permanent Disability"
shall be deemed to have occurred after one hundred twenty (120) days in the
aggregate during any consecutive twelve (12) month period, or after ninety (90)
consecutive days, during which one hundred twenty (120) or ninety (90) days, as
the case may be, Executive, by reason of his physical or mental disability or
illness, shall have been unable to discharge his duties under this Agreement.
The date of Permanent Disability shall be such one hundred twentieth (120th) or
ninetieth (90th) day, as the case may be. In the event either the Company or
Executive, after receipt of notice of Executive's Permanent Disability from the
other, disputes Executive's Permanent Disability, Executive promptly shall
submit to a physical examination by the chief of medicine of any major
accredited hospital in the Cleveland, Ohio, area and, unless such physician
shall issue his written statement to the effect that in his opinion, based on
his diagnosis, Executive is capable of resuming his employment and devoting his
full time and energy to
-10-
<PAGE> 12
discharging his duties within thirty (30) days after the date of such statement,
such Permanent Disability shall be deemed to have occurred.
9. Reimbursement.
--------------
The Company shall reimburse Executive or provide him with an
expense allowance during the term of this Agreement for travel, entertainment
and other expenses reasonably and necessarily incurred by Executive in
connection with the Company's business. Executive shall furnish such
documentation with respect to reimbursement to be paid under this Paragraph 9 as
the Company shall reasonably request.
10. Covenants and Confidential Information.
---------------------------------------
(a) During the term of this Agreement, including any periods during
which Executive is not providing services to the Company but is receiving
payments of compensation hereunder (but not including payments under Paragraphs
5, 6 or 7), Executive shall not, directly or indirectly, do or suffer any of the
following:
(i) Own, manage, control or participate in the ownership,
management, or control of, or be employed or engaged by or otherwise affiliated
or associated as a consultant, independent contractor or otherwise with, any
other corporation, partnership, proprietorship, firm, association or other
business entity, or otherwise engage in any business, which is in competition
with the Company (as described in Paragraph 10(b)); provided, however, that the
ownership of not more than one percent (1%) of any class of publicly traded
securities of any entity shall not be deemed a violation of this covenant;
(ii) Employ, assist in employing, or otherwise associate in
business with any senior executive of the Company who was so employed or
retained at any time during the one (1) year period preceding the date on which
Executive's employment with the Company ceases;
(iii) Induce any person who is a senior executive or officer of
the Company to terminate said relationship; and
(iv) Disclose, divulge, discuss, copy or otherwise use or suffer
to be used in any manner, in competition with, or contrary to the interests of,
the Company any confidential information or trade secrets of the Company, it
being acknowledged by Executive that all such information regarding the business
of the Company compiled or obtained by, or furnished to, Executive while
Executive shall
-11-
<PAGE> 13
have been employed by or associated with the Company is confidential information
and the Company's exclusive property.
(b) For purposes of this Agreement, an entity shall be deemed to be in
competition with the Company if and only if more than twenty-five per cent (25%)
of the gross revenues of such entity are derived from the business of selling
office supplies, office furniture, computers, and such other products of the
type as are sold at or from a majority of OfficeMax stores on the date of the
termination of Executive's employment hereunder.
(c) Executive expressly agrees and understands that the remedy at law
for any breach by him of this Paragraph 10 will be inadequate and that the
damages flowing from such breach are not readily susceptible to being measured
in monetary terms. Accordingly, it is acknowledged that, upon adequate proof of
Executive's violation of any legally enforceable provision of this Paragraph 10,
the Company shall be entitled to immediate injunctive relief and may obtain a
temporary order restraining any threatened or further breach. Nothing in this
Paragraph 10 shall be deemed to limit the Company's remedies at law or in equity
for any breach by Executive of any of the provisions of this Paragraph 10 which
may be pursued or availed of by the Company.
(d) Executive has carefully considered the nature and extent of the
restrictions upon him and the rights and remedies conferred upon the Company
under this Paragraph 10, and hereby acknowledges and agrees that the same are
reasonable in time and territory, are designed to eliminate competition which
otherwise would be unfair to the Company, do not stifle the inherent skill and
experience of Executive, would not operate as a bar to Executive's sole means of
support, are fully required to protect the legitimate interests of the Company
and do not confer a benefit upon the Company disproportionate to the detriment
to Executive.
11. Withholding Taxes.
------------------
Certain payments to Executive under this Agreement may be subject
to withholding on account of federal, state and local taxes as required by law.
Except with respect to income realized by Executive as described in Paragraph
5(d), if any particular payment required hereunder is insufficient to provide
the amount of such taxes required to be withheld, the Company may withhold such
taxes from any other payment due Executive. Except with respect to income
realized by Executive as described in Paragraph 5(d), in the event all cash
payments due Executive are insufficient to provide the required amount of such
withholding taxes, Executive, within five (5) days of written notice from the
Company, shall pay to the Company the amount of such
-12-
<PAGE> 14
withholding taxes in excess of all cash payments due Executive at the time such
withholding is required to be made by the Company.
12. Severable Provisions.
---------------------
The provisions of this Agreement are severable and if any one or
more provisions may be determined to be illegal or otherwise unenforceable, in
whole or in part, the remaining provisions and any partially unenforceable
provision to the extent enforceable in any jurisdiction nevertheless shall be
binding and enforceable.
13. Binding Agreement.
------------------
The rights and obligations of the Company under this Agreement
shall inure to the benefit of, and shall be binding on, the Company and its
successors and assigns, and the rights and obligations (other than obligations
to perform services) of Executive under this Agreement shall inure to the
benefit of, and shall be binding upon, Executive and his heirs, personal
representatives and successors and assigns.
14. Enforcement of Rights; Arbitration
-----------------------------------
(a) If the Company terminates Executive's employment with the Company other
than for Cause or as a result of his death or Permanent Disability or Executive
alleges that the Company otherwise has breached or the Company otherwise
breaches this Agreement or any of its obligations hereunder, in order for
Executive to enforce and continue to enjoy his rights hereunder, including
without limitation the right to continue to receive compensation and other
payments and benefits hereunder for the remainder of the term of this Agreement,
Executive shall be under no duty to seek other employment or otherwise mitigate
his damages as a result of such termination of employment or alleged breach or
breach by the Company.
(b) The Company shall indemnify and reimburse Executive for his costs and
expenses, including reasonable attorneys' fees, incurred in connection with
enforcing his rights hereunder.
(c) Any controversy or claim arising out of or relating to this Agreement,
or the breach thereof, shall be settled by arbitration in accordance with the
Rules of the American Arbitration Association then pertaining in the City of
Cleveland, Ohio, and judgment upon the award rendered by the arbitrator or
arbitrators may be entered in any court having jurisdiction thereof. The
arbitrator or arbitrators shall be deemed to possess the powers to issue
mandatory orders and restraining orders in connection with such arbitration;
provided, however, that nothing in this Paragraph 14 shall be construed so as to
deny the Company the right and power to seek and obtain injunctive relief in a
court of equity for any breach or threatened breach by Executive of any of his
covenants contained in Paragraph 10 hereof.
-13-
<PAGE> 15
15. Notices.
--------
Any notice to be given under this Agreement shall be personally
delivered in writing or shall have been deemed duly given when received after it
is posted in the United States mail, postage prepaid, registered or certified,
return receipt requested, and if mailed to the Company, shall be addressed to
its principal place of business, attention: General Counsel, and if mailed to
Executive, shall be addressed to him at his home address last known on the
records of the Company, or at such other address or addresses as either the
Company or Executive may hereafter designate in writing to the other.
16. Waiver.
-------
The failure of either party to enforce any provision or provisions
of this Agreement shall not in any way be construed as a waiver of any such
provision or provisions as to any future violations thereof, nor prevent that
party thereafter from enforcing each and every other provision of this
Agreement. The rights granted the parties herein are cumulative and the waiver
of any single remedy shall not constitute a waiver of such party's right to
assert all other legal remedies available to it under the circumstances.
17. Miscellaneous.
--------------
This Agreement supersedes all prior agreements and understandings
between the parties and may not be modified or terminated orally. No
modification, termination or attempted waiver shall be valid unless in writing
and signed by the party against whom the same is sought to be enforced.
18. Governing Law.
--------------
This Agreement shall be governed by and construed according to the
laws of the State of Ohio.
19. Captions and Paragraph Headings.
--------------------------------
Captions and paragraph headings used herein are for convenience
and are not a part of this Agreement and shall not be used in construing it.
20. Miscellaneous.
--------------
Where necessary or appropriate to the meaning hereof, the singular
and plural shall be deemed to include each other, and the masculine, feminine
and neuter shall be deemed to include each other.
-14-
<PAGE> 16
IN WITNESS WHEREOF, the parties have executed this Agreement
effective on the day and year first set forth above.
OFFICEMAX, INC.
By /s/ Ross H. Pollock
-------------------------
Ross H. Pollock
Secretary
/s/ Michael Feuer
--------------------------
Michael Feuer
-15-
<PAGE> 17
ANNEX A
Benefits Summary for Mr. Feuer
MEDICAL INSURANCE
- -----------------
OfficeMax offers a Section 125, self-insured medical plan to all full-time
Associates after three months of service. The Plan maximum lifetime benefit is
$1,000,000. The Plan is designed to pay in-network charges at 80%. Expenses for
prescription drugs and preventive services are not subject to a deductible.
DENTAL INSURANCE
- ----------------
OfficeMax offers a Section 125, self-insured dental plan to all full-time
Associates after six months of service. The annual maximum Plan benefit is
$1,000. There is a schedule that is followed for preventive and restorative
care.
LIFE INSURANCE
- --------------
Through an insurance company, OfficeMax provides each full-time Associate with 1
1/2 times his or her salary in group, term-life insurance. Mr. Feuer holds the
plan maximum limit of $500,000. The group life insurance policy has an
Accidental Death and Dismemberment (AD&D) clause. An additional benefit (not to
exceed $500,000) would be payable in the event of accidental loss of life/limb
based on the policy's defined schedule. This policy remains in effect until age
70, then follows a benefit reduction schedule.
SHORT-TERM DISABILITY
- ---------------------
OfficeMax offers a Section 125, Short-Term Disability Plan to all full-time
Associates after six months of service. The benefit (up to $1,000 per week) is
payable for short-term disability leaves lasting up to 13 weeks. There is a
seven-day waiting period before benefits are payable.
LONG-TERM DISABILITY
- --------------------
Through an insurance company, OfficeMax provides each full-time Associate with
Long-Term disability benefits after three months of service. The benefits are
payable after 90 days of disability at 60% of salary up to a monthly maximum of
$10,000. Any such Long-Term disability benefits received by Mr. Feuer following
the termination of his employment as a result of his Permanent Disability (as
such term is defined in the Employment Agreement to which this Annex A is
attached) will be credited against the Company's obligations to continue Mr.
Feuer's salary and bonus compensation as a result of his Permanent Disability.
401(K) PLAN
- -----------
OfficeMax offers a Section 401(k) Plan to all Associates after one year of
service. Mr. Feuer is fully vested in his payroll deferrals to the Plan. The
Plan offers a company match of 50% of the first 3% of compensation contributed
by the Associate. The Plan is subject to non-discrimination rules which
currently limit Mr. Feuer's maximum annual contribution below the annual maximum
allowed under the IRC. The Company does not offer any other retirement plans.
<PAGE> 1
EXHIBIT 10.12
I. Executive Officers party to Severance Agreement (Form A):
John C. Martin
Jeffrey L. Rutherford
Mark L. Keschl
Mark L. Race
II. Executive Officers party to Severance Agreement (Form B):
Edward L. Cornell
Wendell L. Wilson
Ross H. Pollock
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-85994) of OfficeMax, Inc. of our report dated
March 4, 1999 appearing on page F - 2 of OfficeMax Inc.'s Annual Report on Form
10-K for the year ended January 23, 1999.
PRICEWATERHOUSECOOPERS LLP
Cleveland, Ohio
April 8, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE YEAR ENDED JANUARY 23, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Jan-23-1999
<PERIOD-START> Jan-25-1998
<PERIOD-END> Jan-23-1999
<CASH> 67,482
<SECURITIES> 0
<RECEIVABLES> 142,624
<ALLOWANCES> 824
<INVENTORY> 1,254,761
<CURRENT-ASSETS> 1,503,643
<PP&E> 583,694
<DEPRECIATION> 230,446
<TOTAL-ASSETS> 2,231,896
<CURRENT-LIABILITIES> 1,002,593
<BONDS> 0
0
0
<COMMON> 868,321
<OTHER-SE> 269,821
<TOTAL-LIABILITY-AND-EQUITY> 2,231,896
<SALES> 4,337,768
<TOTAL-REVENUES> 4,337,768
<CGS> 3,364,532
<TOTAL-COSTS> 3,364,532
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,681
<INCOME-PRETAX> 81,011
<INCOME-TAX> 32,391
<INCOME-CONTINUING> 48,620
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,620
<EPS-PRIMARY> .40
<EPS-DILUTED> .39
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE YEAR ENDED JANUARY 24, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THIS
IS A RESTATED SCHEDULE.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Jan-24-1998
<PERIOD-START> Jan-26-1997
<PERIOD-END> Jan-24-1998
<CASH> 66,801
<SECURITIES> 0
<RECEIVABLES> 93,287
<ALLOWANCES> 837
<INVENTORY> 1,086,228
<CURRENT-ASSETS> 1,282,734
<PP&E> 479,818
<DEPRECIATION> 167,965
<TOTAL-ASSETS> 1,960,222
<CURRENT-LIABILITIES> 721,215
<BONDS> 0
0
0
<COMMON> 861,991
<OTHER-SE> 298,654
<TOTAL-LIABILITY-AND-EQUITY> 1,960,222
<SALES> 3,765,444
<TOTAL-REVENUES> 3,765,444
<CGS> 2,895,084
<TOTAL-COSTS> 2,895,084
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (514)
<INCOME-PRETAX> 146,431
<INCOME-TAX> 56,811
<INCOME-CONTINUING> 89,620
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 89,620
<EPS-PRIMARY> .73
<EPS-DILUTED> .72
</TABLE>
<PAGE> 1
EXHIBIT 99.1
OFFICEMAX, INC.
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a "safe harbor" for "forward-looking statements" (as defined in the
Act). The Form 10-K to which this exhibit is attached, the Company's Annual
Report to Shareholders, any Form 10-Q or any Form 8-K of the Company, or any
other written or oral statements made by or on behalf of the Company may include
or incorporate by reference forward-looking statements which reflect the
Company's current view (as of the date such forward-looking statement is made)
with respect to future events, prospects, projections or financial performance.
These forward-looking statements are subject to certain uncertainties and other
factors that could cause actual results to differ materially from those made,
implied or projected in such statements. These uncertainties and other factors
include, but are not limited to the following:
- the Company faces uncertainties relating to general economic
conditions;
- the Company faces intense competition from a variety of
retailers, dealers and distributors, including, other
high-volume office product chains that are similar in concept
to the Company in terms of store format, pricing strategy and
product selection; in particular, the Company faces intense
price competition in its sales of computers and related
products;
- continued decline in average selling prices of computers and
other electronic equipment or unanticipated declines in the
average selling price of other products could adversely affect
the Company's results;
- the Company faces potential competition from Internet-based
merchandisers;
- there could be malfunctions or failures of the Company's
information systems, including malfunctions or failures
associated with Year 2000 readiness problems;
- an integral part of the Company's business plan is an
aggressive store growth strategy; there can be no assurance,
however, that the Company will be able to find favorable store
locations, negotiate favorable leases, hire and train
employees and store managers and integrate the new stores in a
manner that will allow it to meet its expansion strategy;
- as the Company expands the number of its stores in existing
markets, sales at existing stores may be impacted;
- new stores typically take time to reach the levels of sales
and profitability of the Company's existing stores, and there
can be no assurance that new stores will be as profitable as
existing stores;
- there are operating and financial risks related to managing
rapid growth and integrating acquired businesses;
- fluctuations in the Company's quarterly operating results have
occurred in the past and may occur in the future based on a
variety of factors such as new store openings with their
concurrent pre-opening expenses, the extent to which new
stores are less profitable as they commence operations, the
effect new stores have on the sale of existing stores in more
mature markets, the pricing activity of competitors in the
Company's markets, changes in the Company's product mix,
increases and decreases in advertising and promotional
expenses, the effects of seasonality, acquisition of contract
stationers and stores of competitors;
- there can be no assurance that (1) the Company will not
require additional sources of financing as a result of
unanticipated cash needs, acquisitions or other opportunities
<PAGE> 2
or disappointing operating results or (2) any additional funds
required by the Company will be available to the Company on
satisfactory terms;
- while the Company continues to evaluate its distribution
strategy and methods in order to take advantage of new and
improved technology to increase inventory controls and reduce
expenses and delivery lead times, there can be no assurance
that changes in the Company's current distribution methods
will accomplish these goals;
- there is potential for rapid and significant changes in
technology which could adversely affect the Company's
operations;
- 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 a
material adverse impact on the Company;
- there are risks associated with international operations,
including lack of local business experience, foreign currency
fluctuations, language and other cultural barriers, political
and economic instability and, since the Company's foreign
operations are not wholly-owned, a lack of operating control;
and
- strikes or other labor disruptions could adversely affect the
Company's operations.
The words "believe," "expect," "anticipate," "project," "plan,"
"intend," and similar expressions, among others, identify "forward-looking
statements," which speak only as of the date the statement was made. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
