<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 24, 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.
---------------
(Exact name of registrant as specified in its charter)
OHIO 34-1573735
---- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3605 WARRENSVILLE CENTER ROAD, SHAKER HEIGHTS, OHIO 44122
---------------------------------------------------------
(Address of principal executive offices)
(zip code)
(216) 921-6900
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ].
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Shares Outstanding as of
Title of Class August 26, 1999
-------------- ---------------
Common Shares 125,001,659
(without par value)
<PAGE> 2
OFFICEMAX, INC.
INDEX
Part I - Financial Information Page
------------------------------
Item 1. Financial Statements 3-8
Item 2. Management's Discussion and Analysis of Financial 9-14
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 15
Market Risk
Part II - Other Information
---------------------------
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
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<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OFFICEMAX, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
July 24, January 23,
1999 1999
--------------- ------------
<S> <C> <C>
ASSETS (Unaudited)
Current Assets:
Cash and equivalents $ 50,179 $ 67,482
Accounts receivable, net of allowances
of $603 and $824, respectively 81,212 141,800
Merchandise inventories 1,247,065 1,254,761
Other current assets 46,258 39,600
----------- -----------
Total current assets 1,424,714 1,503,643
Property and Equipment:
Buildings and land 19,266 19,223
Leasehold improvements 184,842 183,320
Furniture and fixtures 406,722 381,151
----------- -----------
Total property and equipment 610,830 583,694
Less: Accumulated depreciation and amortization (265,503) (230,446)
----------- -----------
Property and equipment, net 345,327 353,248
Other assets and deferred charges 62,690 60,040
Goodwill, net of accumulated amortization
of $65,316 and $60,621, respectively 310,270 314,965
=========== ===========
$ 2,143,001 $ 2,231,896
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $ 549,044 $ 625,810
Accrued expenses and other liabilities 55,144 121,441
Accrued salaries and related expenses 41,726 50,704
Taxes other than income taxes 54,472 58,638
Revolving credit facility 210,500 144,700
Mortgage loan, current portion 1,300 1,300
----------- -----------
Total current liabilities 912,186 1,002,593
Mortgage loan 15,775 16,425
Other long-term liabilities 79,937 74,736
----------- -----------
Total liabilities 1,007,898 1,093,754
Commitments and contingencies -- --
Shareholders' Equity:
Common shares, without par value; 200,000,000 shares
Authorized; 125,163,905 and 124,988,442 shares issued
and outstanding, respectively 868,904 868,321
Deferred stock compensation (293) (260)
Retained earnings 373,302 348,859
Less: Treasury stock (106,810) (78,778)
----------- -----------
Total shareholders' equity 1,135,103 1,138,142
=========== ===========
$ 2,143,001 $ 2,231,896
=========== ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these balance sheets.
3
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<TABLE>
<CAPTION>
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
13 Weeks Ended 26 Weeks Ended
---------------------------------- ----------------------------------
July 24, July 25, July 24, July 25,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales $ 970,463 $ 874,470 $ 2,149,873 $ 1,935,544
Cost of merchandise sold, including
buying and occupancy costs 732,713 666,131 1,633,671 1,484,867
------------- ------------- ------------- -------------
Gross profit 237,750 208,339 516,202 450,677
Store operating and selling expenses 196,731 172,171 403,556 356,397
Pre-opening expenses 2,327 2,876 4,497 4,635
General and administrative expenses 29,569 24,546 58,797 47,586
Goodwill amortization 2,347 2,346 4,694 4,692
------------- ------------- ------------- -------------
Total operating expenses 230,974 201,939 471,544 413,310
Operating income 6,776 6,400 44,658 37,367
Interest (expense), net (2,773) (2,109) (4,506) (1,912)
------------- ------------- ------------- -------------
Income before income taxes 4,003 4,291 40,152 35,455
Income taxes 1,576 1,666 15,709 13,756
------------- ------------- ------------- -------------
Net income $ 2,427 $ 2,625 $ 24,443 $ 21,699
============= ============= ============= =============
EARNINGS PER COMMON SHARE DATA:
Basic $ 0.02 $ 0.02 $ 0.21 $ 0.17
============= ============= ============= =============
Diluted $ 0.02 $ 0.02 $ 0.21 $ 0.17
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic 113,270,357 124,614,985 113,854,926 124,608,133
============= ============= ============= =============
Diluted 114,658,535 127,190,251 114,906,613 127,078,810
============= ============= ============= =============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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<TABLE>
<CAPTION>
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
26 Weeks Ended
--------------------------------------
July 24, July 25,
1999 1998
--------------- ---------------
<S> <C> <C>
CASH PROVIDED BY (USED FOR):
OPERATIONS
Net income $ 24,443 $ 21,699
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 40,861 35,273
Deferred income taxes (1,399) 677
Increase (decrease) in other long-term liabilities 5,201 (442)
Other, net (96) (145)
Change in current assets and current liabilities:
Decrease (increase) in inventories 7,696 (66,424)
(Decrease) increase in accounts payable (27,504) 19,221
Decrease (increase) in accounts receivable 60,588 (26,384)
(Decrease) in accrued liabilities (58,757) (64,541)
Other, net (5,552) (16,301)
-------- ---------
Net cash provided by (used for) operations 45,481 (97,367)
-------- ---------
INVESTING
Capital expenditures (48,804) (50,373)
Other, net (2,244) (1,356)
-------- ---------
Net cash (used for) investing (51,048) (51,729)
-------- ---------
FINANCING
Payments of mortgage principal (650) (650)
Increase in revolving credit facilities 65,800 132,500
Decrease in overdraft balances (49,262) (12,388)
Purchase of treasury stock (29,306) --
Proceeds from issuance of common stock, net 1,682 4,836
-------- ---------
Net cash (used for) provided by financing (11,736) 124,298
-------- ---------
CASH AND CASH EQUIVALENTS
Net (decrease) for the period (17,303) (24,798)
Balance, beginning of period 67,482 66,801
-------- ---------
Balance, end of period $ 50,179 $ 42,003
======== =========
SUPPLEMENTAL INFORMATION
Interest paid on debt $ 5,141 $ 2,354
======== =========
Taxes paid on income $ 24,038 $ 32,090
======== =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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<TABLE>
<CAPTION>
OFFICEMAX, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Common Shares Deferred
------------------------- Stock Retained Treasury
Shares Amount Compensation Earnings Stock Total
----------- ----------- ------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 23, 1999 124,988,442 $ 868,321 $ (260) $ 348,859 $ (78,778) $ 1,138,142
Issuance of common shares
under director plan 1,657 (122) -- -- 137 15
Exercise of stock options
(including tax benefit) 51,944 140 -- -- 390 530
Sale of shares under
management share purchase
plan (including tax benefit) 71,008 125 (175) -- 747 697
Sale of shares under employee
share purchase plan
(including tax benefit) 50,854 440 -- -- -- 440
Amortization of deferred
Compensation -- -- 142 -- -- 142
Treasury stock purchased
(3,435,100 shares) -- -- -- -- (29,306) (29,306)
Net income -- -- -- 24,443 -- 24,443
----------- ----------- ----------- ----------- ----------- -----------
Balance at July 24, 1999 125,163,905 $ 868,904 $ (293) $ 373,302 $ (106,810) $ 1,135,103
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
6
<PAGE> 7
OFFICEMAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE 13 AND 26 WEEKS ENDED
JULY 24, 1999 AND JULY 25, 1998
Significant Accounting and Reporting Policies
- ---------------------------------------------
1. The accompanying consolidated financial statements have been prepared from
the financial records of OfficeMax, Inc. and its subsidiaries (the
"Company" or "OfficeMax") without audit and reflect all adjustments which
are, in the opinion of management, necessary to fairly present the results
of the interim periods covered in this report. The results for any interim
period are not necessarily indicative of the results to be expected for the
full fiscal year.
2. The Company's consolidated financial statements for the 13 and 26 weeks
ended July 24, 1999 and July 25, 1998 included in this Quarterly Report on
Form 10-Q, have been prepared in accordance with the accounting policies
described in the Notes to Consolidated Financial Statements for the fiscal
year ended January 23, 1999 which were included in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission (File
No. 1-13380) on April 8, 1999. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted in
accordance with the rules and regulations of the Securities and Exchange
Commission. These financial statements should be read in conjunction with
the financial statements and the notes thereto included in the Form 10-K
referred to above. Certain reclassifications have been made to prior year
amounts to conform to the current presentation.
3. The Company's fiscal year ends on the Saturday prior to the last Wednesday
in January.
4. At July 24, 1999, OfficeMax operated a chain of 883 full-size superstores
in over 370 markets, 49 states, Puerto Rico and the U.S. Virgin Islands, as
well as two smaller format, OfficeMax PDQ stores, two national call centers
and 18 delivery centers. Through joint venture partnerships, the Company
also operated on an international basis with 20 locations in Mexico and
Japan. The joint ventures operate OfficeMax superstores similar to those in
the United States.
5. The average common and common equivalent shares utilized in computing
diluted earnings per share for the 13 and 26 weeks ended July 24, 1999
include 1,277,092 and 940,600 shares, respectively, resulting from the
application of the treasury stock method to outstanding stock options. The
average common and common equivalent shares utilized in computing diluted
earnings per share for the 13 and 26 weeks ended July 25, 1998 include
2,477,800 and 2,373,210 such shares. Options to purchase 6,300,196 and
6,459,209 shares were excluded from the calculation of diluted earnings per
share for the 13 and 26 weeks ended July 24, 1999, respectively, because
the exercise prices of the options were greater than the average market
price. These shares had weighted average exercise prices of $13.57 and
$13.49, respectively. Options to purchase 46,959 shares at a weighted
average exercise price of $17.09 were excluded from the calculation of
diluted earnings per share for the 26 weeks ended July 25, 1998, because
the exercise prices were greater than the average market price. The average
market price during the 13 weeks ended July 25, 1998 exceeded the exercise
prices of all outstanding options.
6. In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
is required to be adopted in fiscal years beginning after June 15, 2000.
Because of the Company's minimal use of derivatives, management does not
anticipate the adoption of the new Statement to have a significant effect
on earnings or the financial position of the Company.
7. 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
7
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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 above and in the Summary of Significant Accounting
Policies (Note 1) included in the Company's Annual Report on Form 10-K for the
year ended January 23, 1999.
The following tables summarize the results of the Company's reportable business
segments: (Unaudited)
<TABLE>
<CAPTION>
13 WEEKS ENDED 26 WEEKS ENDED
------------------------------ --------------------------------
CORE BUSINESS SEGMENT JULY 24, JULY 25, JULY 24, JULY 25,
(Dollars in thousands) 1999 1998 1999 1998
-------------------------------------------------------- ------------- -------------- ----------
<S> <C> <C> <C> <C>
Sales $ 923,165 $ 818,788 $2,034,742 $1,786,995
Cost of merchandise sold, including buying
and occupancy costs 684,897 610,936 1,516,264 1,333,639
---------- ---------- ---------- ----------
Gross profit 238,268 207,852 518,478 453,356
Operating income 15,288 8,429 64,580 51,990
Net income $ 8,012 $ 4,538 $ 37,331 $ 31,957
========== ========== ========== ==========
</TABLE>
Included in net income of the Core Business Segment is net interest expense of
$2,114,000 and $1,012,000 for the 13 weeks ended July 24, 1999 and July 25,
1998, respectively. During the 26 weeks ended July 24, 1999 and July 25, 1998,
this segment had net interest expense of $3,266,000 and net interest income of
$226,000, respectively. Income tax expense for the Core Business Segment was
$5,162,000 and $2,879,000 for the 13 weeks ended July 24, 1999 and July 25,
1998, respectively, and $23,983,000 and $20,259,000 for the 26 weeks ended July
24, 1999 and July 25, 1998, respectively.
<TABLE>
<CAPTION>
13 WEEKS ENDED 26 WEEKS ENDED
------------------------------ ----------------------------
COMPUTER BUSINESS SEGMENT JULY 24, JULY 25, JULY 24, JULY 25,
(Dollars in thousands) 1999 1998 1999 1998
--------------------------------------------------------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Sales $ 47,298 $ 55,682 $ 115,131 $ 148,549
Cost of merchandise sold, including buying
and occupancy costs 47,816 55,195 117,407 151,228
---------- ---------- ---------- ----------
Gross profit (loss) (518) 487 (2,276) (2,679)
Operating income (loss) (8,512) (2,029) (19,922) (14,623)
Net income (loss) $ (5,585) $ (1,913) $ (12,888) $ (10,258)
========== ========== ========== ==========
</TABLE>
Included in the net loss of the Computer Business Segment is net interest
expense of $659,000 and $1,240,000 for the 13 and 26 weeks ended July 24, 1999,
respectively. During the 13 and 26 weeks ended July 25, 1998, this segment had
net interest expense of $1,097,000 and $2,138,000, respectively. The Computer
Business Segment recognized income tax benefit of $3,586,000 and $1,213,000 for
the 13 weeks ended July 24, 1999 and July 25, 1998, respectively, and
$8,274,000 and $6,503,000 for the 26 weeks ended July 24, 1999 and July 25,
1998, respectively. The total assets of the Computer Business Segment,
primarily inventory and accounts receivable, were approximately $96,711,000 and
$60,280,000 as of July 24, 1999 and January 23, 1999, respectively. This
segment also had accounts payable of $39,826,000 and $14,274,000 as of July 24,
1999 and January 23, 1999, respectively.
There are no intersegment sales or expense allocations. There are no
differences between the combined results of the Core and Computer Business
Segments and the total Company's results. The Company does not allocate fixed
assets or depreciation to the Computer Business Segment. Other than its
investments in Mexico, Japan and Brazil, the Company has no international sales
or assets.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISSCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
RESULTS OF OPERATIONS
Consolidated Results
Consolidated sales for the 13 and 26 weeks ended July 24, 1999 increased 11% to
$970,463,000 and $2,149,873,000, respectively, from $874,470,000 and
$1,935,544,000 for the comparable periods last year. The increase in
consolidated sales was attributable to a full period of sales from the 120
full-size superstores opened during fiscal 1998 and additional sales from 52 new
full-size superstores and one smaller format OfficeMax PDQ store opened at
various points during the 26 weeks ended July 24, 1999. Consolidated same-store
sales decreased by 1% for the second quarter of fiscal 1999 reflecting the
impact of a 22% decline in the average retail prices of fax machines, printers
and copiers experienced by the Company's Core Business Segment and a 19% decline
in the average selling prices for computers experienced by the Company's
Computer Business Segment.
Consolidated cost of merchandise sold, including buying and occupancy costs,
decreased as a percentage of sales to 75.5% and 76.0% for the 13 and 26 weeks
ended July 24, 1999, respectively, from 76.2% and 76.7% for the comparable
periods last year. Correspondingly, consolidated gross profit increased as a
percentage of sales to 24.5% and 24.0% for the 13 and 26 weeks ended July 24,
1999, respectively. The gross profit increase was primarily due to the Company's
continued focus on enhancing its Core Business Segment merchandise assortment to
emphasize high-margin items and the Company's deliberate decision to modify its
computer assortment and continue to reduce its low or no profit computer
promotions.
Consolidated store operating and selling expenses, which consist primarily of
store payroll, operating and advertising expenses, increased as a percentage of
sales to 20.3% and 18.8% for the 13 and 26 weeks ended July 24, 1999 from 19.7%
and 18.4% for the comparable periods a year earlier. The Company experienced a
decrease in leverage of store operating and selling expenses primarily due to
deflationary retail pricing for business machines and computers along with costs
incurred for its accelerated store openings.
Pre-opening expenses were $2,327,000 and $4,497,000 for the 13 and 26 weeks
ended July 24, 1999, reflecting the opening of 28 and 52 full-size superstores,
respectively. During the comparable prior year periods, pre-opening expenses
were $2,876,000 and $4,635,000, reflecting the opening of 21 and 41 full-size
superstores, respectively. Also, during the first half of fiscal 1998, the
Company opened its PowerMax I distribution facility for which the Company
incurred pre-opening expenses of $980,000. Pre-opening expenses, which consist
primarily of store payroll, supplies and grand opening advertising, averaged
approximately $85,000 per full-size superstore in the current and prior year.
Pre-opening expenses increase approximately $25,000 per unit when certain
enhanced CopyMax or FurnitureMax features are included in a superstore.
General and administrative expenses were 3.1% and 2.7% of sales for the 13 and
26 weeks ended July 24, 1999, as compared to 2.8% and 2.5% of sales for the
comparable prior year periods. These increases reflect 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 information technology
("IT") initiatives. The Company is in the process of implementing the SAP
system, a fully integrated Enterprise Resource Planning platform that will
automate and integrate various business processes of the Company. Conversion to
the SAP Human Resources and Finance modules occurred in November 1998 and May
1999, respectively. Conversion to the SAP Retail and Merchandising system is
scheduled for the fourth quarter of fiscal 1999.
Goodwill amortization was $2,347,000 and $4,694,000 for the 13 and 26 weeks
ended July 24, 1999, versus $2,346,000 and $4,692,000 for same periods a year
earlier. Goodwill is capitalized and amortized over 40 years using the
straight-line method.
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<PAGE> 10
As a result of the foregoing factors, consolidated operating income increased to
$6,776,000 and $44,658,000 or 0.7% and 2.1% of sales for the 13 and 26 weeks
ended July 24, 1999, respectively, as compared to $6,400,000 and $37,367,000 or
0.7% and 1.9% of sales, for the comparable periods a year earlier.
Interest expense, net, was $2,773,000 and $4,506,000 for the 13 and 26 weeks
ended July 24, 1999, respectively, as compared to $2,109,000 and $1,912,000 for
the comparable periods a year earlier. The increase in interest expense during
the first half of fiscal 1999 was primarily due to increased borrowings to fund
the Company's stock repurchase program and accelerate expansion plans.
Income tax expense for the 13 and 26 weeks ended July 24, 1999 was $1,576,000
and $15,709,000, respectively. For the comparable prior year periods, income tax
expense was $1,666,000 and 13,756,000, respectively. The effective tax rates for
both periods are different from the federal statutory income tax rate primarily
as a result of goodwill amortization, tax exempt interest, and state and local
taxes.
Consolidated net income, as a result of the foregoing factors, was $2,427,000
and $2,625,000 or 0.3% of sales for the 13 weeks ended July 24, 1999 and July
25, 1998, respectively. Consolidated net income was $24,443,000 and $21,699,000
or 1.1% of sales for the 26 weeks ended July 24, 1999 and July 25, 1998.
BUSINESS SEGMENTS
Core Business Segment
Sales for the Core Business Segment increased 13% to $923,165,000 for the 13
weeks ended July 24, 1999 from $818,788,000 for the comparable period last year.
The increase in the second quarter of fiscal 1999 was due to the additional
sales from 131 new full-size superstores and two smaller format OfficeMax PDQ
stores opened since the end of the second quarter of fiscal 1998 and a
comparable-store sales increase of 1%. Declines in average selling prices for
fax machines, printers and copiers reduced the Core Business Segment's
comparable-store sales increase by approximately 2% during the quarter. Sales
for the Core Business Segment increased 14% to $2,034,742,000 for the 26 weeks
ended July 24, 1999 from $1,786,995,000 for the comparable prior year period,
primarily as a result of new store openings and a comparable-store sales
increase of 2%.
Cost of merchandise sold, including buying and occupancy costs for the Core
Business Segment decreased as a percentage of sales to 74.2% and 74.5% for the
13 and 26 weeks ended July 24, 1999, respectively, from 74.6% for the comparable
prior year periods. Gross profit for this segment increased to $238,268,000 and
$518,478,000 or 25.8% and 25.5% of sales for the 13 and 26 weeks ended July 24,
1999, respectively. The increase was due to the Company's continued focus on
enhancing the merchandise assortment of this segment to emphasize high-margin
items.
Operating income for the Core Business Segment increased to $15,288,000 and
$64,580,000 or 1.7% and 3.2% of sales for the 13 and 26 weeks ended July 24,
1999, respectively, from $8,429,000 and $51,990,000 or 1.0% and 2.9% of sales
for the like periods last year. These increases were primarily due to gross
profit improvement and improved leverage of certain operating expenses.
Net income for the Core Business Segment increased to $8,012,000 and $37,331,000
or 0.9% and 1.8% of sales for the 13 and 26 weeks ended July 24, 1999,
respectively, from $4,538,000 and $31,957,000 or 0.6% and 1.8% of sales for the
comparable periods last year.
Computer Business Segment
Sales for the Computer Business Segment decreased 15% to $47,298,000 for the 13
weeks ended July 24, 1999 from $55,682,000 for the comparable period last year.
Same-store sales for the Computer Business Segment declined 31% for the 13
weeks. The reduction in comparable-store sales was due primarily to a 19%
reduction in the average selling prices for computers along with the Company's
deliberate decision to modify its computer
10
<PAGE> 11
assortment and continue to reduce its low or no profit computer promotions
compared to a year ago. Sales for the Computer Business Segment decreased 22% to
$115,131,000 for the 26 weeks ended July 24, 1999 from $148,549,000 for the
comparable prior year period.
Cost of merchandise sold, including buying and occupancy costs, for the Computer
Business Segment increased as a percentage of sales to 101.1% and 102.0% for the
13 and 26 weeks ended July 24, 1999, respectively, from 99.1% and 101.8% for the
comparable periods last year, despite merchandise margin improvement during the
second quarter of fiscal 1999. The increase in the cost of merchandise sold as a
percentage of sales was due primarily to decreased leverage of certain occupancy
costs. The decline in leverage was the result of the Company's decision to
modify this segment's product assortment and promotions and lower sales volume
during the Company's seasonally slowest quarter. Gross profit for the Computer
Business Segment was a loss of $518,000 for the 13 weeks ended July 24, 1999, as
compared to gross profit of $487,000 for the comparable prior year period. For
the 26 weeks ended July 24, 1999, gross profit for the Computer Business Segment
was a loss of $2,276,000 as compared to a loss of $2,679,000 in the comparable
prior year period.
Operating loss for the Computer Business Segment was $8,512,000 for the 13 weeks
ended July 24, 1999, as compared to a loss of $2,029,000 for the like period a
year earlier. During the prior year, various computer vendor programs reduced
advertising expense and minimized the operating loss. Many of these programs
were discontinued in conjunction with the Company's decision to realign its
Computer Business Segment and modify its computer assortment during the fourth
quarter of fiscal 1998. Operating loss for the Computer Business Segment was
$19,922,000 for the 26 weeks ended July 24, 1999, versus a loss of $14,623,000
for the comparable period last year.
Net loss for the Computer Business Segment was $5,585,000 and $12,888,000 for
the 13 and 26 weeks ended July 24, 1999, respectively, as compared to a net loss
of $1,913,000 and $10,258,000 for the comparable periods last year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities generated $45,481,000 of cash during the 26
weeks ended July 24, 1999, which was an increase of $142,848,000 over the prior
year. Decreases in inventory and accounts receivable were the primary source of
the year-over-year increase. Consolidated inventory decreased $7,696,000 since
the year ended January 23, 1999. The decrease in inventory was achieved despite
adding merchandise for the 52 new full-size superstores, a smaller format
OfficeMax PDQ store and a delivery center that were opened during the first half
of fiscal 1999. Further, consolidated inventory decreased 7% year-over-year on a
per store basis primarily as a result of the Company's continued focus on its
supply-chain management initiatives, including its logistical infrastructure
project called PowerMax. Major uses of working capital included accounts payable
and accrued liabilities, which decreased $27,504,000 and $58,757,000,
respectively during the 26 weeks ended July 25, 1999.
Net cash used for investing activities was $51,048,000 for the 26 weeks ended
July 24, 1999, versus $51,729,000 in the comparable prior year period. Capital
expenditures, primarily for new and remodeled stores and the Company's IT
initiatives, were $48,804,000 during the 26 weeks ended July 24, 1999 and
$50,373,000 during the comparable period in the prior year.
Net cash used for financing was $11,736,000 for the 26 weeks ended July 24,
1999. Current year financing activities primarily represent borrowings under the
Company's revolving credit facilities, a decrease in overdraft balances and the
payment of $29,306,000 for treasury stock purchases. Net cash provided by
financing in the comparable prior year period primarily represented borrowings
on the Company's revolving credit facilities.
During the second half of fiscal 1999, the Company plans to open approximately
63 new full-size superstores and remodel approximately 24 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 a full-size 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
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<PAGE> 12
the portion of store inventory that is not financed by accounts payable to
vendors. Pre-opening expenses are expected to average approximately $85,000 per
full-size OfficeMax superstore. In select cases, that average is expected to
increase by approximately $25,000 when certain enhanced CopyMax or FurnitureMax
features are included.
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 $500,000,000 of revolving credit facilities
available through June 2002. As of July 24, 1999, the Company had outstanding
borrowings of $210,500,000 under its revolving credit facilities at a weighted
average interest rate of 5.32%
On August 13, 1998, the Company's Board of Directors increased the Company's
authorization to repurchase its common stock on the open market to $200,000,000.
As of July 24, 1999, the Company had purchased a total of 11,670,100 shares at a
cost of $108,084,000. This included systematic purchases to cover potential
dilution from the 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'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 back-to-business
selling season in January. Sales in the second quarter's summer months are the
slowest of the year primarily because of lower office supplies consumption
during the summer vacation period.
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.
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
12
<PAGE> 13
not adversely affected by the Year 2000 issue; and (c) contacting other third
parties and requesting assurances that such parties and their products will be
Year 2000 ready on a timely basis. The Company has assembled a Year 2000 project
team that is responsible for the Company's Year 2000 readiness 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, which includes members of the
Company's senior management, has retained an outside contractor to serve as the
"Year 2000 Czar". The Year 2000 Czar is responsible for coordinating the
Company's Year 2000 project and reporting to management. The Year 2000 Czar
provides weekly progress reports to the project team and periodic status reports
to the 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 ready versions. The
Company expects to complete its readiness 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
readiness process for non-mission critical systems is also the end of its third
fiscal quarter of 1999.
Currently, the Company estimates it has completed 87% of its readiness 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.
While the Company continues to focus on solutions for Year 2000 issues, and
expects to complete its project in a timely manner, the Company is in the
process of identifying potential major business interruptions that could
reasonably likely result from Year 2000 issues and is developing contingency
plans to address such potential interuptions. 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. The Company is also
developing contingency plans designed to generally protect the Company from
unanticipated Year 2000 business interruptions. Contingency plans are
anticipated to include for example, identification of alternative suppliers or
service providers and the development of alternative procedures. Regardless of
the contingency plans developed, there can be no assurance that the
implementation of these plans will be successful.
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
$3,000,000 has been incurred through August 31, 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 increased costs to the Company,
potential delays in obtaining key operational data for analysis, and the
inability to process customer orders, pay vendors, collect 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. However, the Company's
results from operations could be materially
13
<PAGE> 14
adversely affected if third parties (e.g., suppliers, utilities, banks and
government entities) have not adequately addressed their respective Year 2000
issues. The most reasonably likely worst case scenario which could result from
the failure of the Company or its suppliers or other key third parties to
adequately address Year 2000 issues would include a temporary closing of one or
more of the Company's stores or distribution facilities or interruption of the
Company's ability to receive and process telephone, facsimile or internet
orders.
Regarding products it sells, the Company believes that the vendors that supply
products to the Company for resale are solely responsible for the Year 2000
functionality of those products. The Company has encouraged its merchandise
vendors to disclose any potential effect that the Year 2000 change might have on
their products. The Company also encourages its customers to contact the
manufacturers directly for specific up-to-date information on individual
products.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Portions of this Quarterly Report on Form 10-Q include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The words "believe," "expect," "anticipate," "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 Exhibit 99.1 to the Company's Annual Report on Form
10-K for the year ended January 23, 1999 as filed with the Securities and
Exchange Commission. 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.
14
<PAGE> 15
ITEM 3. 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 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 exchange risk through its joint venture
partnerships in Mexico, Japan and Brazil. The Company believes its potential
exposure to foreign exchange risk is not material.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
A. The 1999 Annual Meeting of Shareholders of OfficeMax, Inc. was
held on May 13, 1999. Holders of Common Shares of record at the close of
business on March 26, 1999, were entitled to vote at the Annual Meeting of
Shareholders.
B. The following persons were nominated to serve, and were elected,
as directors of the Company to serve a term of two years or until their
successors are elected: Raymond Bank, Michael Feuer and Carl Glickman. The
voting results for each such nominee were as follows:
Name For Withheld
---- --- --------
Raymond Bank 97,365,569 1,120,950
Michael Feuer 97,277,442 1,209,077
Carl Glickman 97,284,515 1,202,004
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
Exhibits:
(a) Exhibits: .
27.0 Financial Data Schedule for the period ended
July 24, 1999
(b) Reports on Form 8-K: None
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OFFICEMAX, INC.
Date: September 7, 1999 By:
Jeffrey L. Rutherford
---------------------
Executive Vice President, Chief Financial
Officer
(Principal Financial Officer and
Principal Accounting Officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from consolidated
balance sheets and consolidated statements of operations and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-22-2000
<PERIOD-START> JAN-24-1999
<PERIOD-END> JUL-24-1999
<CASH> 50,179
<SECURITIES> 0
<RECEIVABLES> 81,212
<ALLOWANCES> 603
<INVENTORY> 1,247,065
<CURRENT-ASSETS> 1,424,714
<PP&E> 610,830
<DEPRECIATION> 265,503
<TOTAL-ASSETS> 2,143,001
<CURRENT-LIABILITIES> 912,186
<BONDS> 0
0
0
<COMMON> 868,904
<OTHER-SE> 266,199
<TOTAL-LIABILITY-AND-EQUITY> 2,143,001
<SALES> 2,149,873
<TOTAL-REVENUES> 2,149,873
<CGS> 1,633,671
<TOTAL-COSTS> 1,633,671
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,506
<INCOME-PRETAX> 40,152
<INCOME-TAX> 15,709
<INCOME-CONTINUING> 24,443
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<NET-INCOME> 24,443
<EPS-BASIC> .21
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