<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 April 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
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.
Title of Class Shares Outstanding as of
-------------- May 28, 1999
Common Shares ------------
(without par value) 113,336,569
<PAGE> 2
OFFICEMAX, INC.
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information Page
------------------------------
<S> <C> <C>
Item 1. Financial Statements 3-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-13
Item 3. Quantitative and Qualitative Disclosures About
Market Risks 14
Part II - Other Information
---------------------------
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
OFFICEMAX, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
APRIL 24, JANUARY 23,
1999 1999
------------------- -------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 52,723 $ 67,482
Accounts receivable, net of allowances
of $1,000 and $824, respectively 72,646 141,800
Merchandise inventories 1,218,257 1,254,761
Other current assets 46,117 39,600
------------------- -------------------
Total current assets 1,389,743 1,503,643
Property and Equipment:
Buildings and land 19,266 19,223
Leasehold improvements 183,734 183,320
Furniture and fixtures 390,083 381,151
------------------- -------------------
Total property and equipment 593,083 583,694
Less: Accumulated depreciation and amortization (247,514) (230,446)
------------------- -------------------
Property and equipment, net 345,569 353,248
Other assets and deferred charges 61,638 60,040
Goodwill, net of accumulated amortization
of $62,968 and $60,621, respectively 312,618 314,965
------------------- -------------------
$ 2,109,568 $ 2,231,896
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities:
Accounts payable - trade $ 543,622 $ 625,810
Accrued expenses and other liabilities 86,116 121,441
Accrued salaries and related expenses 38,839 50,704
Taxes other than income taxes 54,335 58,638
Revolving credit facilities 160,400 144,700
Mortgage loan, current portion 1,300 1,300
------------------- -------------------
Total current liabilities 884,612 1,002,593
Mortgage loan 16,100 16,425
Other long-term liabilities 76,987 74,736
------------------- -------------------
Total liabilities 977,699 1,093,754
Commitments and contingencies - -
Shareholders' Equity:
Common shares, without par value; 200,000,000 shares
authorized; 125,104,561 and 124,988,442 shares issued
and outstanding, respectively 868,563 868,321
Deferred stock compensation (354) (260)
Retained earnings 370,875 348,859
Less: Treasury stock, at cost (107,215) (78,778)
------------------- -------------------
Total shareholders' equity 1,131,869 1,138,142
------------------- -------------------
$ 2,109,568 $ 2,231,896
=================== ===================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these balance sheets.
3
<PAGE> 4
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
13 WEEKS ENDED
-----------------------------------------
APRIL 24, APRIL 25,
1999 1998
------------------- -------------------
<S> <C> <C>
Sales $ 1,179,410 $ 1,061,074
Cost of merchandise sold, including buying
and occupancy costs 900,958 818,736
------------------- -------------------
Gross Profit 278,452 242,338
Store operating and selling expenses 206,825 184,226
Pre-opening expenses 2,170 1,759
General and administrative expenses 29,228 23,040
Goodwill amortization 2,347 2,346
------------------- -------------------
Total operating expenses 240,570 211,371
Operating income 37,882 30,967
Interest income (expense), net (1,733) 197
------------------- -------------------
Income before income taxes 36,149 31,164
Income taxes 14,133 12,090
------------------- -------------------
Net income $ 22,016 $ 19,074
=================== ===================
EARNINGS PER COMMON SHARE:
Basic $ 0.19 $ 0.15
=================== ===================
Diluted $ 0.19 $ 0.15
=================== ===================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic 115,598,438 124,472,062
=================== ===================
Diluted 116,382,105 127,049,856
=================== ===================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
<PAGE> 5
OFFICEMAX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
13 WEEKS ENDED
-----------------------------------------
APRIL 24, APRIL 25,
1999 1998
------------------- -------------------
<S> <C> <C>
CASH PROVIDED BY (USED FOR):
OPERATIONS
Net income $ 22,016 $ 19,074
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 20,047 17,445
Deferred income taxes (2,571) 514
Increase (decrease) in other long-term liabilities 2,251 (966)
Other - net 187 (504)
Changes in current assets and current liabilities
Decrease (increase) in inventories 36,504 (27,470)
(Decrease) increase in accounts payable (41,452) 9,483
Decrease (increase) in accounts receivable 69,154 (6,394)
Decrease in accrued liabilities (35,154) (47,065)
Other - net (4,567) (12,649)
------------------- -------------------
Net cash provided by (used for) operations 66,415 (48,532)
------------------- -------------------
INVESTING
Capital expenditures (26,743) (28,201)
Other - net (875) (1,294)
------------------- -------------------
Net cash (used for) investing (27,618) (29,495)
------------------- -------------------
FINANCING
Increase in revolving credit facilities 15,700 66,500
Payments of mortgage principal (325) (325)
Decrease in overdraft balances (40,736) (12,211)
Purchase of treasury stock (29,306) -
Proceeds from the issuance of common stock, net 1,111 2,195
------------------- -------------------
Net cash (used for) provided by financing (53,556) 56,159
------------------- -------------------
Net decrease in cash and equivalents (14,759) (21,868)
Cash and equivalents, beginning of the period 67,482 66,801
------------------- -------------------
Cash and equivalents, end of the period $ 52,723 $ 44,933
=================== ===================
SUPPLEMENTAL INFORMATION
Interest paid on debt $ 2,132 $ 422
=================== ===================
Taxes paid on income $ 5,581 $ 14,782
=================== ===================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
<PAGE> 6
OFFICEMAX, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
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 - (122) - - 122 -
Exercise of stock options
(including tax benefit) 9,150 45 - - - 45
Sale of shares under
management share purchase
plan (including tax benefit) 80,673 126 (175) - 747 698
Sale of shares under employee
share purchase plan
(including tax benefit) 26,296 193 - - - 193
Amortization of deferred
compensation - - 81 - - 81
Treasury stock purchased
(3,435,100 shares) - - - - (29,306) (29,306)
Net income - - - 22,016 - 22,016
---------------- -------------- ---------------- -------------- ------------- --------------
BALANCE AT APRIL 24, 1999 125,104,561 $ 868,563 $ (354) $ 370,875 $(107,215) $ 1,131,869
================ ============== ================ ============== ============= ==============
</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 WEEKS ENDED
APRIL 24, 1999 AND APRIL 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 weeks ended
April 24, 1999 and April 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 April 24, 1999, OfficeMax operated a chain of 856 full-size superstores
in over 360 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 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 weeks ended April 24, 1999 and April
25, 1998 include 783,667 and 2,479,392 shares, respectively, resulting from
the application of the treasury stock method to outstanding stock options.
Options to purchase 7,512,000 and 50,000 were excluded from the calculation
of diluted earnings per share for the 13 weeks ended April 24, 1999 and
April 25, 1998, respectively, because the exercise prices of the options
were greater than the average market price. These shares had weighted
average exercise prices of $13.62 and $17.09, respectively.
6. 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, 2000. 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 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 determined what the
effect of the new pronouncement will be on the earnings and financial
position of the Company.
7
<PAGE> 8
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 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 table summarizes the results of the Company's reportable
business segments:
<TABLE>
<CAPTION>
(Unaudited)
(Dollars in thousands) CONSOLIDATED
13 WEEKS ENDED APRIL 24, 1999 COMPANY COMPUTERS CORE
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 1,179,410 $ 67,833 $ 1,111,577
Cost of merchandise sold, including buying
and occupancy costs 900,958 69,591 831,367
---------------- ----------------- -----------------
Gross profit (loss) 278,452 (1,758) 280,210
Operating income (loss) 37,882 (11,410) 49,292
Net income (loss) $ 22,016 $ (7,303) $ 29,319
================ ================= =================
CONSOLIDATED
13 WEEKS ENDED APRIL 25, 1998 COMPANY COMPUTERS CORE
----------------------------------------------------------------------------------------------------------
Sales $ 1,061,074 $ 92,867 $ 968,207
Cost of merchandise sold, including buying
and occupancy costs 818,736 96,033 722,703
---------------- ----------------- -----------------
Gross profit (loss) 242,338 (3,166) 245,504
Operating income (loss) 30,967 (12,594) 43,561
Net income (loss) $ 19,074 $ (8,345) $ 27,419
================ ================= =================
</TABLE>
Included in net income of the Core Business Segment is $1,152,000 of net
interest expense for the 13 weeks ended April 24, 1999 and $1,238,000 of
net interest income for the 13 weeks ended April 25, 1998. Included in the
net loss of the Computer Business Segment is net interest expense of
$581,000 and $1,041,000 for the 13 weeks ended April 24, 1999 and April 25,
1998, respectively. Income tax expense for the Core Business Segment was
$18,821,000 and $17,380,000 for the 13 weeks ended April 24, 1999 and April
25, 1998, respectively. During those same periods, the Computer Business
Segment recognized income tax benefit of $4,688,000 and $5,290,000,
respectively. The total assets of the Computer Business Segment, primarily
inventory and accounts receivable, were approximately $56,942,000 and
$60,280,000 as of April 24, 1999 and January 23, 1999, respectively. This
segment also had accounts payable of $25,997,000 and $14,274,000 as of
April 24, 1999 and January 23, 1999, respectively. There are no
intersegment sales or expense allocations. 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 weeks ended April 24, 1999 increased 11% to
$1,179,410,000 from $1,061,074,000 for the comparable period last year. The
increase in consolidated sales was attributable to a full period of sales from
the 120 superstores opened during fiscal 1998 and additional sales from 24 new
full-size superstores opened at various points during the 13-week period ended
April 24, 1999. Consolidated same-store sales decreased by less than one percent
for the first quarter of fiscal 1999 reflecting the impact of a 21% decline in
the average retail prices of fax machines, printers and copiers experienced by
the Company's Core Business Segment and a 13% decline in 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 76.4% for the 13 weeks ended April 24,
1999 from 77.2% for the comparable period last year. Correspondingly,
consolidated gross profit was 23.6% of sales for the first quarter of fiscal
1999 as compared to 22.8% for the comparable period a year earlier. The gross
profit increase was 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.
Consolidated store operating and selling expenses, which consist primarily of
store payroll, operating and advertising expenses, increased as a percentage of
sales to 17.5% for the 13 weeks ended April 24, 1999 from 17.4% for the
comparable period 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
record first quarter store openings, which included 24 full-size superstores
along with a second smaller format OfficeMax PDQ location.
Pre-opening expenses were $2,170,000 for the 13 weeks ended April 24, 1999,
reflecting the opening of 24 full-size superstores and one smaller format
OfficeMax PDQ. Pre-opening expenses were $1,759,000 for the 13 weeks ended April
25, 1998, reflecting the opening of 20 full-size superstores. Pre-opening
expenses, which consist primarily of store payroll, supplies and grand opening
advertising, averaged approximately $85,000 per full-size superstore in the 13
weeks ended April 24, 1999 and April 25, 1998. 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 2.5% of sales for the 13 weeks ended
April 24, 1999, as compared to 2.2% of sales for the same period last year. 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 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 systems is
scheduled for the fourth quarter of fiscal 1999.
Goodwill amortization was $2,347,000 for the 13 weeks ended April 24, 1999, as
compared to $2,346,000 for the 13 weeks ended April 25, 1998. Goodwill is
capitalized and amortized over 40 years using the straight-line method.
As a result of the foregoing factors, operating income increased to $37,882,000
or 3.2% of sales for the 13 weeks ended April 24, 1999, as compared to operating
income of $30,967,000 or 2.9% of sales, for the comparable period a year
earlier.
9
<PAGE> 10
Interest expense, net, was $1,733,000 for the 13 weeks ended April 24, 1999, as
compared to interest income, net, of $197,000 for the comparable period a year
earlier. The increase in interest expense during the first quarter of fiscal
1999 was primarily due to increased borrowings to fund the Company's stock
repurchase program and aggressive expansion plans.
Income taxes were $14,133,000 for the 13 weeks ended April 24, 1999, as compared
to $12,090,000 for the same period a year ago. 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.
Net income as a result of the foregoing factors, was $22,016,000 or 1.9% of
sales for the 13 weeks ended April 24, 1999, as compared to $19,074,000 or 1.8%
of sales for the comparable period a year earlier.
BUSINESS SEGMENTS
- -----------------
Core Business Segment
Sales for the Core Business Segment increased 15% to $1,111,577,000 for the 13
weeks ended April 24, 1999 from $968,207,000 for the comparable period last
year. The increase in fiscal 1999 was due to the additional sales from the 124
new full-size superstores opened since the end of the first quarter of fiscal
1998 and a comparable-store sales increase of 3%. Declines in average selling
prices for fax machines, printers and copiers reduced the Core Business
Segment's comparable sales increase by approximately 3%.
Cost of merchandise sold, including buying and occupancy costs for the Core
Business Segment increased as a percentage of sales to 74.8% for the 13 weeks
ended April 24, 1999 from 74.6% for the comparable prior year period. The
increase was primarily due to the additional fixed occupancy costs from the 124
new full-size superstores opened since the end of the first quarter of fiscal
1998. Gross profit for the Core Business Segment increased to $280,210,000 for
the 13 weeks ended April 24, 1999 from $245,504,000 for the comparable period a
year earlier.
Operating income for the Core Business Segment increased to $49,292,000 for the
13 weeks ended April 24, 1999 from $43,561,000 for the like period last year. As
a percentage of sales, operating income decreased to 4.4% for the 13 weeks ended
April 24, 1999 from 4.5% for the comparable prior year period due primarily to
the increased fixed occupancy costs from the 124 new full-size superstores
opened since the end of the first quarter of fiscal 1998.
Net income for the Core Business Segment increased to $29,319,000 for the 13
weeks ended April 24, 1999 from $27,419,000 for the comparable period last year.
Net income decreased as a percentage of sales to 2.6% for the 13 weeks ended
April 24, 1999 from 2.8% for the comparable prior year period.
Computer Business Segment
Sales for the Computer Business Segment decreased 27% to $67,833,000 for the 13
weeks ended April 24, 1999 from $92,867,000 for the comparable period last year.
Same-store sales for the Computer Business Segment declined 40% for the 13-week
period due primarily to a 13% reduction in the average selling prices for
computers along with the Company's deliberate decision to continue to reduce
low-end, low or no profit computer promotions.
Cost of merchandise sold, including buying and occupancy costs for the Computer
Business Segment decreased as a percentage of sales to 102.6% for the 13-week
period ended April 24, 1999 from 103.4% of sales for the same period last year.
The decrease is consistent with the Company's decision to modify this segment's
product assortment and promotions. Gross profit for the Computer Business
Segment was a loss of $1,758,000 for the 13 weeks ended April 24, 1999 as
compared to a loss of $3,166,000 for the comparable prior year period.
10
<PAGE> 11
Operating loss for the Computer Business Segment was $11,410,000 for the 13-week
period ended April 24, 1999 as compared to an operating loss of $12,594,000 for
the like period a year earlier.
Net loss for the Computer Business Segment was $7,303,000 for the 13 weeks ended
April 24, 1999 as compared to a net loss of $8,345,000 for the comparable period
last year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's operating activities generated $66,415,000 of cash during the 13
weeks ended April 24, 1999, which was an increase of $114,947,000 over the prior
year. Decreases in inventory and accounts receivable were the primary source of
the year-over-year increase. Consolidated inventory decreased $36,504,000 or 3%
since the year ended January 23, 1999. The decrease in inventory was achieved in
spite of adding merchandise for the record number of new superstores that were
opened during the first quarter of fiscal 1999. Further, consolidated inventory
decreased 5% year-over-year on a per store basis primarily as a result of the
Company's continued implementation of its supply-chain management initiatives.
Major uses of working capital included accounts payable and accrued expenses,
which decreased $41,452,000 and $35,154,000, respectively.
Net cash used for investing activities was $27,618,000 for the 13 weeks ended
April 24, 1999 versus $29,495,000 in the comparable prior year period. Capital
expenditures, primarily for new and remodeled stores and the Company's IT
initiatives, were $26,743,000 during the 13 weeks ended April 24, 1999 and
$28,201,000 during the comparable period in the prior year.
Net cash used for financing was $53,556,000 for the 13 weeks ended April 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 13 weeks ending July 24, 1999, the Company plans to open over 25 new
OfficeMax superstores and 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 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 April 24, 1999, the Company had outstanding
borrowings of $160,400,000 under its revolving credit facilities at a weighted
average interest rate of 5.11%
On August 13, 1998, the Company's Board of Directors authorized the Company to
repurchase up to $200,000,000 of its common stock on the open market. At April
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.
11
<PAGE> 12
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 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 compliant on a
timely basis. The Company has assembled a Year 2000 project team that is
responsible for 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, which includes members of the Company's
senior management, has retained an outside contractor to serve as "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 quarterly 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 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.
12
<PAGE> 13
Currently, the Company estimates it has completed 60% 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
$2,400,000 has been incurred through April 24, 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. However, the Company's
results from operations could be materially adversely affected if third parties
(e.g., suppliers, utilities, banks and government entities) have not adequately
addressed their respective Year 2000 Issues. For example, if utilities fail on
January 1, 2000, the Company could be forced to, among other things, temporarily
close stores.
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 Form10-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.
13
<PAGE> 14
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 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 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.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits: 27.0 Financial Data Schedule for the period ended
April 24, 1999 (for SEC use only)
(b) Reports on Form 8-K: None
15
<PAGE> 16
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: June 8, 1999 By: /s/ Jeffrey L. Rutherford
-------------------------
Jeffrey L. Rutherford
Executive Vice President, Chief
Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
16
<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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-22-2000
<PERIOD-START> JAN-24-1999
<PERIOD-END> APR-24-1999
<CASH> 53,723
<SECURITIES> 0
<RECEIVABLES> 73,646
<ALLOWANCES> 1,000
<INVENTORY> 1,218,257
<CURRENT-ASSETS> 1,389,743
<PP&E> 593,083
<DEPRECIATION> 247,514
<TOTAL-ASSETS> 2,109,568
<CURRENT-LIABILITIES> 884,612
<BONDS> 0
0
0
<COMMON> 868,563
<OTHER-SE> 263,306
<TOTAL-LIABILITY-AND-EQUITY> 1,131,869
<SALES> 1,179,410
<TOTAL-REVENUES> 1,179,410
<CGS> 900,958
<TOTAL-COSTS> 900,958
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 36,149
<INCOME-TAX> 14,133
<INCOME-CONTINUING> 22,016
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,016
<EPS-BASIC> .19
<EPS-DILUTED> .19
</TABLE>
