<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 22, 2000
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 each class May 19, 2000
------------------- ------------
Common Shares, without par value 112,741,889
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OFFICEMAX, INC.
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information Page
------------------------------
<S> <C> <C>
Item 1. Financial Statements 3-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-15
Item 3. Quantitative and Qualitative Disclosures About
Market Risks 16
Part II - Other Information
---------------------------
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
------------------------------
OFFICEMAX, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
APRIL 22, JANUARY 22,
2000 2000
------------------- -------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 72,232 $ 73,087
Accounts receivable, net of allowances
of $485 and $687, respectively 87,972 111,734
Merchandise inventories 1,255,332 1,273,844
Other current assets 58,427 69,344
------------------- -------------------
Total current assets 1,473,963 1,528,009
Property and Equipment:
Buildings and land 19,315 19,292
Leasehold improvements 188,527 188,900
Furniture, fixtures and equipment 512,750 505,345
------------------- -------------------
Total property and equipment 720,592 713,537
Less: Accumulated depreciation and amortization (331,326) (311,069)
------------------- -------------------
Property and equipment, net 389,266 402,468
Other assets and deferred charges 33,913 34,333
Goodwill, net of accumulated amortization
of $72,502 and $70,039, respectively 307,750 310,168
------------------- -------------------
$ 2,204,892 $ 2,274,978
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $ 624,451 $ 702,416
Accrued expenses and other liabilities 108,732 140,094
Accrued salaries and related expenses 39,211 50,313
Taxes other than income taxes 74,558 72,966
Revolving credit facilities 139,800 91,800
Mortgage loan, current portion 1,300 1,300
------------------- -------------------
Total current liabilities 988,052 1,058,889
Mortgage loan 14,800 15,125
Other long-term liabilities 73,316 70,895
------------------- -------------------
Total liabilities 1,076,168 1,144,909
Commitments and contingencies - -
Minority interest 14,761 14,072
Shareholders' Equity:
Common shares, without par value; 200,000,000 shares
authorized; 124,985,364 shares issued and outstanding 867,539 867,866
Deferred stock compensation (343) (304)
Retained earnings 356,817 358,900
Cumulative translation adjustments (667) -
Less: Treasury stock, at cost (109,383) (110,465)
------------------- -------------------
Total shareholders' equity 1,113,963 1,115,997
------------------- -------------------
$ 2,204,892 $ 2,274,978
=================== ===================
</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 22, APRIL 24,
2000 1999
------------------- -------------------
<S> <C> <C>
Sales $ 1,344,188 $ 1,179,410
Cost of merchandise sold, including buying
and occupancy costs 1,016,696 900,958
------------------- -------------------
Gross profit 327,492 278,452
Store operating and selling expenses 283,334 206,825
Pre-opening expenses 2,305 2,170
General and administrative expenses 38,682 29,228
Goodwill amortization 2,463 2,347
------------------- -------------------
Total operating expenses 326,784 240,570
Operating income 708 37,882
Interest expense, net 1,531 1,957
Other expense (income), net 318 (224)
------------------- -------------------
Income (loss) before income taxes (1,141) 36,149
Income taxes 253 14,133
Minority interest 689 -
------------------- -------------------
Net income (loss) $ (2,083) $ 22,016
=================== ===================
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ (0.02) $ 0.19
=================== ===================
Diluted $ (0.02) $ 0.19
=================== ===================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic 112,474,264 115,598,438
=================== ===================
Diluted 112,474,264 116,382,105
=================== ===================
</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 22, APRIL 24,
2000 1999
------------------- -------------------
<S> <C> <C>
CASH PROVIDED BY (USED FOR):
OPERATIONS
Net income (loss) $ (2,083) $ 22,016
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 24,170 20,047
Deferred income taxes 608 (2,571)
Other, net 686 187
Changes in current assets and current liabilities
Decrease in inventories 18,512 36,504
Decrease in accounts payable (84,952) (41,452)
Decrease in accounts receivable 25,293 69,154
Decrease in accrued liabilities (20,602) (35,154)
Other, net (6,597) (2,316)
------------------- -------------------
Net cash (used for) provided by operations (44,965) 66,415
------------------- -------------------
INVESTING
Capital expenditures (24,903) (26,743)
Other, net (508) (875)
------------------- -------------------
Net cash used for investing (25,411) (27,618)
------------------- -------------------
FINANCING
Increase in revolving credit facilities 48,000 15,700
Payments of mortgage principal (325) (325)
Increase (decrease) in overdraft balances 4,970 (40,736)
Purchase of treasury stock - (29,306)
Decrease in advanced payments for leased facilities 16,611 -
Proceeds from the issuance of common stock, net 754 1,111
------------------- -------------------
Net cash provided by (used for) financing 70,010 (53,556)
------------------- -------------------
Effect of exchange rate changes on cash and cash equivalents (489) -
------------------- -------------------
Net decrease in cash and equivalents (855) (14,759)
Cash and equivalents, beginning of the period 73,087 67,482
------------------- -------------------
Cash and equivalents, end of the period $ 72,232 $ 52,723
=================== ===================
SUPPLEMENTAL INFORMATION
Interest paid on debt $ 2,077 $ 2,132
=================== ===================
Taxes paid on income $ - $ 5,581
=================== ===================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
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OFFICEMAX, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Deferred Cumulative
Common Stock Retained Translation Treasury
Shares Compensation Earnings Adjustment Stock Total
------------- ---------------- --------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 22, 2000 $ 867,866 $ (304) $ 358,900 $ - $ (110,465) $1,115,997
Comprehensive income:
Net income (loss) - - (2,083) - - (2,083)
Cumulative translation
adjustment - - - (667) - (667)
---------------
Total comprehensive income (2,750)
Sale of shares under
management share purchase
plan (including tax benefit) (168) (100) - - 668 400
Sale of shares under employee
share purchase plan
(including tax benefit) (159) - - - 414 255
Amortization of deferred
compensation - 61 - - - 61
------------- ---------------- --------------- ------------- -------------- ---------------
BALANCE AT APRIL 22, 2000 $ 867,539 $ (343) $ 356,817 $ (667) $ (109,383) $1,113,963
============= ================ =============== ============= ============== ===============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
6
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OFFICEMAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE 13 WEEKS ENDED
APRIL 22, 2000 AND APRIL 24, 1999
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 22, 2000 and April 24, 1999 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 22, 2000 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 21, 2000. 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 them to the current
presentation.
3. The Company's fiscal year ends on the Saturday prior to the last Wednesday
in January. Fiscal year 2000 ends on January 27, 2001 and includes 53
weeks. Fiscal year 1999 ended on January 22, 2000 and included 52 weeks.
4. At April 22, 2000, OfficeMax operated a chain of 969 full-size superstores
in over 370 markets, located in 49 states, Puerto Rico and the U.S. Virgin
Islands. In addition to offering office products, business machines,
computers and related items, the Company also features CopyMax and
FurnitureMax, in-store modules devoted exclusively to print-for-pay
services and office furniture. OfficeMax also operates smaller format
OfficeMax PDQ stores. In addition, the Company operates OfficeMax.com
(http://www.officemax.com), a business to business Internet site offering
office products and business services. Through joint venture partnerships,
OfficeMax operates international locations in Brazil, Japan and Mexico.
Additionally, the Company has 19 delivery centers located throughout the
United States to serve its catalog and direct marketing businesses and
OfficeMax.com, enabling individual consumers and businesses to buy a wide
assortment of merchandise.
5. The average common and common equivalent shares utilized in computing
diluted earnings per share for the 13 weeks ended April 22, 2000 and April
24, 1999 include 172,530 and 732,368 shares, respectively, resulting from
the application of the treasury stock method to outstanding stock options.
Options to purchase 13,431,000 and 7,512,000 shares were excluded from the
calculation of diluted earnings per share for the 13 weeks ended April 22,
2000 and April 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 $10.09 and $13.62, respectively. The
average common and common equivalent shares utilized in computing diluted
earnings per share for the 13 weeks ended April 22, 2000 and April 24, 1999
include 175,976 and 51,299 restricted stock units.
6. In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which,
as amended, is required to be adopted in fiscal years beginning after June
15, 2000. Due to the Company's minimal use of derivatives, management does
not anticipate that the adoption of the new Statement will have significant
effect on the earnings or the financial position of the Company.
7
<PAGE> 8
7. The Company has three reportable business segments: the Core Business
Segment, the Computer Business Segment and the OfficeMax.com Segment. The
operations of the Company's retail stores, catalogs and outside sales force
are included in either the Core Business Segment or 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 OfficeMax.com Segment represents the operations
of the Company's Internet site. Prior to fiscal year 1999, the
OfficeMax.com Segment was reported in the Core Business Segment. All prior
year amounts have been restated to reflect the separate presentation of the
OfficeMax.com Segment. The Company evaluates performance and allocates
resources based on the operations of these segments. The accounting
policies of the reportable business segments are the same as those
described 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 22, 2000.
The following table summarizes the results of operations for the Company's
reportable business segments:
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
TOTAL
13 WEEKS ENDED APRIL 22, 2000 COMPANY CORE COMPUTERS OFFICEMAX.COM
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $1,344,188 $1,249,290 $ 68,770 $ 26,128
Cost of merchandise sold, including
buying and occupancy costs 1,016,696 932,567 64,985 19,144
-----------------------------------------------------
Gross profit 327,492 316,723 3,785 6,984
Operating income (loss) 708 15,768 (3,116) (11,944)
Interest expense, net 1,531 1,120 84 327
Other, net 318 318 -- --
Income tax expense (benefit) 253 6,442 (1,280) (4,909)
Minority interest 689 689 -- --
-----------------------------------------------------
Net income (loss) $ (2,083) $ 7,199 $ (1,920) $ (7,362)
=====================================================
</TABLE>
<TABLE>
<CAPTION>
TOTAL
13 WEEKS ENDED APRIL 24, 1999 COMPANY CORE COMPUTERS OFFICEMAX.COM
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $1,179,410 $1,107,147 $ 67,833 $ 4,430
Cost of merchandise sold, including
buying and occupancy costs 900,958 827,916 69,591 3,451
-----------------------------------------------------
Gross profit (loss) 278,452 279,231 (1,758) 979
Operating income (loss) 37,882 50,098 (11,410) (806)
Interest expense, net 1,957 1,366 581 10
Other, net (224) (224) -- --
Income tax expense (benefit) 14,133 19,140 (4,688) (319)
-----------------------------------------------------
Net income (loss) $ 22,016 $ 29,816 $ (7,303) $ (497)
=====================================================
</TABLE>
8
<PAGE> 9
The combined results of operations and assets of the three reportable
business segments are equal to the Company's consolidated results of
operations and assets. Certain centrally incurred costs are allocated to
the business segments based on each segment's estimated usage and/or
benefit. There is no profit or loss on intersegment transactions or
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
$41,905,000 and $65,850,000 as of April 22, 2000 and January 22, 2000,
respectively. This segment also had accounts payable of $9,792,000 and
$3,605,000 as of April 22, 2000 and January 22, 2000, respectively. The
total assets of the OfficeMax.com segment, primarily fixed assets, were
approximately $2,370,000 and $1,695,000 as of April 22, 2000 and January
22, 2000, respectively. This segment also had accrued expenses of
$13,682,000 and $5,645,000 as of April 22, 2000 and January 22, 2000,
respectively. Depreciation expense for the OfficeMax.com segment was
$141,000 and $29,000 for the 13 weeks ended April 22, 2000 and April 24,
1999, respectively. Goodwill and the related amortization are included in
the Core Business Segment.
Through joint venture partnerships, the Company operates on an
international basis with locations in Brazil, Japan and Mexico. The joint
ventures operate OfficeMax superstores similar to those in the United
States. Due to its majority interest, the Company consolidates the
financial position, results of operations and cash flows of the joint
venture in Mexico, OfficeMax de Mexico, within the Core Business Segment.
The Company's other investments in joint ventures are accounted for under
the cost method. Sales for OfficeMax de Mexico were $24,094,000 during the
13 weeks ended April 22, 2000. During the 13 weeks ended April 24, 1999,
the Company accounted for the joint venture in Mexico under the equity
method and, accordingly did not consolidate OfficeMax de Mexico's sales.
The net assets of OfficeMax de Mexico included long-lived assets, primarily
fixed assets, of $16,123,000 and $14,084,000 as of April 22, 2000 and
January 22, 2000. Other than its investments in joint venture partnerships,
the Company has no international sales or assets.
8. During the second quarter of fiscal year 2000, the Company repaid the
outstanding balance of its mortgage loan in the amount of $16,100,000. The
mortgage loan was secured by the Company's international corporate
headquarters and had an original maturity of January 2007.
9. During the second quarter of fiscal 2000, in accordance with a strategic
alliance between the Company and Gateway Companies, Inc. ("Gateway"),
Gateway invested $50 million in two newly created series of convertible
preferred shares of the Company. The strategic alliance is described in
greater detail in "Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations."
9
<PAGE> 10
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 22, 2000 increased 14% to
$1,344,188,000 from $1,179,410,000 for the comparable period last year. The
increase in consolidated sales was attributable to a same-store sales increase
of 2%, a full period of sales from the 115 superstores opened during fiscal year
1999 and additional sales from the 23 (net) new full-size superstores opened at
various points during the 13-week period ended April 22, 2000. Additionally,
$24,094,000 of sales for the Company's joint venture in Mexico, OfficeMax de
Mexico, are included in consolidated sales for the 13 weeks ended April 22,
2000, due to the Company's majority interest in the joint venture which was
purchased as of the end of fiscal year 1999. During the 13 weeks ended April 24,
1999, the Company accounted for the joint venture under the equity method and,
accordingly did not consolidate OfficeMax de Mexico's sales. The current quarter
same-store sales increase was achieved even with a 10% decline in the average
retail prices of fax machines, printers and copiers experienced by the Company's
Core Business Segment and a 14% decline in average selling prices for computers
experienced by the Company's Computer Business Segment. A shift in the timing of
the Easter holiday from the first quarter to second quarter of fiscal year 2000
improved consolidated same-store sales by slightly less than one percent.
Consolidated cost of merchandise sold, including buying and occupancy costs
decreased as a percentage of sales to 75.6% for the 13 weeks ended April 22,
2000 from 76.4% for the comparable period last year. Correspondingly,
consolidated gross profit increased to 24.4% of sales for the first quarter of
fiscal year 2000 as compared to 23.6% for the comparable period a year earlier.
The increase in consolidated gross profit as a percentage of sales was due
primarily to gross profit improvements in each of the Company's segments with
the Company's Computer Business and OfficeMax.com segments realizing greater
increases in percentage terms than the Company's Core Business Segment.
Consolidated store operating and selling expenses, which consist primarily of
store payroll, operating and advertising expenses, increased by 37% to
$283,334,000 from $206,825,000 for the comparable period last year. Consolidated
store operating and selling expenses increased as a percentage of sales to 21.1%
for the 13 weeks ended April 22, 2000 from 17.5% for the comparable period a
year earlier. The increase was primarily due to costs associated with the
Company's supply-chain management and operating improvement initiatives. These
costs include reduced vendor income from vendor support programs eliminated as
part of the Company's program of merchandise and vendor rationalization and
investments in store payroll to enhance customer service levels through
increased associate training for product knowledge and selling skills along with
increased employee coverage within the stores.
Pre-opening expenses were $2,305,000 for the 13 weeks ended April 22, 2000,
reflecting the opening of 24 full-size superstores. 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 store. Pre-opening
expenses, which consist primarily of store payroll, supplies and grand opening
advertising, averaged approximately $90,000 and $85,000 per full-size superstore
in the 13 weeks ended April 22, 2000 and April 24, 1999, respectively.
Pre-opening expenses increase approximately $30,000 per superstore when certain
enhanced CopyMax or FurnitureMax features are included.
General and administrative expenses increased by 32% to $38,682,000 from
$29,228,000 for the comparable period of the prior year. General and
administrative expenses were 2.9% of sales for the 13 weeks ended April 22,
2000, as compared to 2.5% of sales for the same period last year. This increase
reflects costs for consulting services supporting the Company's supply-chain
management and operating improvement initiatives, continued investment in the
Company's organizational structure and increased depreciation expense as a
result of the Company's information technology 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. The Company has already completed its conversion to
the SAP Human Resources and Finance
10
<PAGE> 11
modules. Conversion to the first phase of the SAP Retail and Merchandising
systems was completed during the second quarter of fiscal year 2000, with full
implementation scheduled for mid-summer.
Goodwill amortization was $2,463,000 for the 13 weeks ended April 22, 2000, as
compared to $2,347,000 for the 13 weeks ended April 24, 1999. Goodwill is
capitalized and amortized over 10-40 years using the straight-line method.
As a result of the foregoing factors, operating income was $708,000 or 0.1% of
sales for the 13 weeks ended April 22, 2000, as compared to $37,882,000 or 3.2%
of sales, for the comparable period a year earlier.
Interest expense was $1,531,000 for the 13 weeks ended April 22, 2000, as
compared to $1,957,000 for the comparable period a year earlier. The decrease in
interest expense during the first quarter of fiscal year 2000 was primarily due
to lower average outstanding borrowings during the current fiscal year.
Income taxes were $253,000 for the 13 weeks ended April 22, 2000, as compared to
$14,133,000 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.
As a result of the foregoing factors, the Company had a net loss of $2,083,000
for the 13 weeks ended April 22, 2000, as compared to net income of $22,016,000
for the comparable period a year earlier.
BUSINESS SEGMENTS
-----------------
Core Business Segment
Sales for the Core Business Segment increased 13% to $1,249,290,000 for the 13
weeks ended April 22, 2000 from $1,107,147,000 for the comparable period last
year. The increase in the first quarter of fiscal year 2000 was due to the
additional sales from the 115 new full-size superstores opened since the end of
the first quarter of fiscal year 1999 and a comparable-store sales increase of
1%. A 10% decline in average selling prices for fax machines, printers and
copiers combined with a less aggressive promotional strategy relative to last
year reduced the Core Business Segment's comparable sales increase by
approximately 1%.
Cost of merchandise sold, including buying and occupancy costs for the Core
Business Segment decreased as a percentage of sales to 74.6% for the 13 weeks
ended April 22, 2000 from 74.8% for the comparable prior year period. Gross
profit for the Core Business Segment increased to $316,723,000 for the 13 weeks
ended April 22, 2000 from $279,231,000 for the comparable period a year earlier.
Operating income for the Core Business Segment was $15,768,000 or 1.3% of sales
for the 13 weeks ended April 22, 2000, as compared to $50,098,000 or 4.5% of
sales for the comparable prior year period. The decrease in operating income in
the first quarter of fiscal year 2000 was primarily due to increased store
operating and selling expenses related to the Company's supply-chain management
and operating improvement initiatives.
Net income for the Core Business Segment was $7,199,000 or 0.6% of sales for the
13 weeks ended April 22, 2000, as compared to $29,816,000 or 2.7% of sales for
the comparable period last year.
Computer Business Segment
Sales for the Computer Business Segment increased 1% to $68,770,000 for the 13
weeks ended April 22, 2000 from $67,833,000 for the comparable period last year.
Same-store sales for the Computer Business Segment declined 15% for the first
quarter of fiscal year 2000 primarily resulting from a reduction in the
average retail prices for computers compared to a year ago.
Cost of merchandise sold, including buying and occupancy costs for the Computer
Business Segment decreased as a percentage of sales to 94.5% for the 13-week
period ended April 22, 2000 from 102.6% of sales for the same period last year.
The decrease is the result of the Company's decision to continue to modify this
segment's product
11
<PAGE> 12
assortment and promotions. Gross profit for the Computer Business Segment was
$3,785,000 for the first quarter of fiscal year 2000 as compared to a loss of
$1,758,000 for the comparable prior year period.
Operating loss for the Computer Business Segment was $3,116,000 for the 13-week
period ended April 22, 2000, as compared to an operating loss of $11,410,000 for
the like period a year earlier. The decrease in operating loss during the first
quarter of fiscal year 2000 was primarily due to improved merchandise gross
margin and reduced advertising expenses compared to a year ago.
Net loss for the Computer Business Segment was $1,920,000 for the 13 weeks ended
April 22, 2000, as compared to a loss of $7,303,000 for the comparable period
last year.
OfficeMax.com Segment
Sales for the OfficeMax.com Segment increased 490% to $26,128,000 for the 13
weeks ended April 22, 2000 from $4,430,000 in the same period last year. This
sales growth in the first quarter of fiscal year 2000 reflected the Company's
continued aggressive offline marketing program aimed at capturing a larger share
of the online small-business market, new online business services launched
affecting the periods presented, an overall national increase in online
business-to-business e-Commerce and an increase in repeat-customer purchases.
Cost of merchandise sold including buying costs for the OfficeMax.com Segment
was 73.3% of sales for the 13 weeks ended April 22, 2000 compared to 77.9% of
sales for the comparable prior year period. Gross profit for the OfficeMax.com
Segment was $6,984,000 or 26.7% of sales in first quarter of fiscal year 2000
and $979,000 or 22.1% of sales in the same period last year. The improvement in
gross profit as a percentage of sales for the first quarter of fiscal year 2000
compared to the first quarter of fiscal year 1999 was due primarily to a more
disciplined pricing strategy and continued emphasis on selling core office
supplies to small business customers.
The OfficeMax.com Segment incurred an operating loss of $11,944,000 for the 13
weeks ended April 22, 2000 and $806,000 in the comparable prior year period. The
net operating losses were primarily due to the segment's aggressive advertising
and marketing programs focused on customer acquisition in the small business
market space.
Net income for the OfficeMax.com Segment was a loss of $7,362,000 in first
quarter of fiscal year 2000 and $497,000 in first quarter of fiscal year 1999.
STRATEGIC ALLIANCE WITH GATEWAY COMPANIES, INC.
-----------------------------------------------
During the first quarter of fiscal year 2000, the Company entered into a
five-year multi-channel alliance with Gateway. The strategic alliance consists
of three elements: sales of products and services through physical retail
channels, sales of products and services through e-Commerce channels and an
investment in OfficeMax by Gateway.
Under the terms of a master license agreement (the "Master License Agreement"),
Gateway will operate a licensed "store-within-a-store" computer department in
all OfficeMax retail stores in the United States and Puerto Rico. The department
will offer products consistent with the Company's current Computer Business
Segment, including computers, monitors and related products and services. In
accordance with the alliance, Gateway will staff the store-within-a-store
modules and own all of the inventory and recognize all of the sales within the
store-within-a-store modules. OfficeMax will receive a fixed monthly rent from
Gateway. The store-within-a-store rollout began during the first quarter of
fiscal year 2000 with the installation of Gateway store-within-a-store
departments in 35 OfficeMax superstores and is expected to be complete by the
end of the first quarter of fiscal year 2001. In July 2000, an interim Gateway
display will be installed in all OfficeMax superstores that have yet to receive
a full-size store-within-a-store installation. The interim displays will replace
the Company's current Computer Business Segment and will be in place until a
full-size Gateway store-within-a-store department is installed. The Company has
begun to phase-out operations of the Computer Business Segment and expects to
exit this business by the end of the second quarter of fiscal year 2000.
Additionally, a reciprocal Internet relationship between OfficeMax and Gateway
provides for significant cross marketing and promotional opportunities.
OfficeMax will be the exclusive office supply partner on Gateway's
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Internet site, Gateway.com, and will have its icon and hot link featured on the
computer desktop of Gateway systems sold to small businesses and consumers in
the United States over the next five years. In exchange, OfficeMax will pay
Gateway a commission on sales to customers acquired from Gateway properties or
promotional efforts, including certain guaranteed minimum annual payments.
Gateway will have the exclusive right to market and sell computers and related
products on OfficeMax.com, and will pay the Company a commission on sales to
customers acquired from OfficeMax properties or promotional efforts. The
Internet relationship, including the linking of OfficeMax.com and Gateway.com is
expected to commence during the second quarter of fiscal year 2000.
In accordance with the alliance, Gateway has invested $50,000,000 in OfficeMax
convertible preferred stock, $30,000,000 designated for OfficeMax and
$20,000,000 designated for OfficeMax.com.
Gateway's investment in OfficeMax is in the form of a newly created series of
convertible preferred shares of the Company, the Series A Voting Preference
Shares (the "Series A Shares"), at a purchase price of $9.75 per share. The
Series A Shares vote on an as-converted to common shares of the Company ("Common
Shares") basis (one vote per share) and do not bear any stated dividend. After
two years, the Series A Shares are convertible into Common Shares of the Company
on a 1:1 basis provided that Gateway store-within-a-store modules are opened in
accordance with the terms of the Master License Agreement and the fair market
value of the Company's Common Shares is at least $12.50 per share. If after two
years Gateway store-within-a-store modules are not opened in accordance with the
terms of the Master License Agreement, the Series A Shares are redeemable by
Gateway at face value. If at the end of the alliance, Gateway
store-within-a-store modules are opened in accordance with the terms of the
Master License Agreement, each Series A Share is convertible into Common Shares
of the Company having a fair market value of $12.50. The Company may also elect
to convert the Series A Shares into Common Shares on a 1:1 basis at any time,
subject to certain "make-whole" or fair market value guarantees designed to
ensure a value to Gateway of $12.50 per share. In addition, Gateway may elect to
convert the Series A Shares into Common Shares on a 1:1 basis in the event of a
change in control of the Company, delisting of the Common Shares, or a
termination of registration of the Common Shares under the Securities Exchange
Act of 1934.
Gateway's investment in OfficeMax.com is also in the form of a newly created
series of convertible preferred shares of the Company, the Series B Serial
Preferred Shares (the "Series B Shares"), at a purchase price of $10 per share.
The Series B Shares bear a dividend rate of 7% per annum and have no voting
rights. The Series B Shares are convertible into any security which might be
issued in the future by the Company that specifically relates to OfficeMax.com
(the "OfficeMax.com Security") at a 30% discount to the initial price of the
OfficeMax.com Security determined by a public market. The Series B Shares are
redeemable at the option of either the Company or Gateway at face value plus
accrued and unpaid dividends, if no such OfficeMax.com Security is registered
under the Securities Act of 1933 and the Securities Exchange Act of 1934 and
listed for trading on a national securities exchange by June 30, 2001, or
Gateway elects not to convert the Series B Shares into an OfficeMax.com
Security. The June 30, 2001 conversion or redemption deadline can be extended
to June 30, 2002, if Gateway elects to extend certain dates in the Master
License Agreement.
During the second quarter of fiscal year 2000, Gateway paid the Company $50
million in cash in satisfaction of the investment requirements of the strategic
alliance. Accordingly, the Company issued Gateway 3,076,982 Series A Shares and
2,000,000 Series B Shares.
The Master License Agreement also contains various change in control provisions
which provide for the termination of the agreement by either OfficeMax or
Gateway upon a change in control of the other party, as defined in the
agreement. Further, if a change in control of Gateway results in Gateway being
controlled by a person or entity whose primary business is the owning or
operating of office supply superstores, the Company is entitled to a payment of
$100,000,000. If a change in control of the Company results in the Company being
controlled by a person or entity who is a major retailer of personal computers
and Internet goods and services or a personal computer manufacturer, Gateway
will be entitled to a payment of $100,000,000.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's operating activities used $44,965,000 of cash during the 13 weeks
ended April 22, 2000, primarily for accounts payable and accrued expenses, which
decreased $84,952,000 and $20,602,000, respectively, since the end of the prior
fiscal year. These cash outflows were partially offset by decreases in accounts
receivable and
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inventory of $25,293,000 and $18,512,000, respectively. The decrease in
inventory was achieved in spite of adding merchandise for the 23 (net) new
superstores that were opened during the first quarter of fiscal year 2000.
Further, consolidated inventory decreased 12% year-over-year on a per store
basis primarily as a result of the Company's continued implementation of its
supply-chain management initiatives. The Company's operating activities
generated $66,415,000 of cash during the 13 weeks ended April 24, 1999.
Net cash used for investing activities was $25,411,000 for the 13 weeks ended
April 22, 2000 versus $27,618,000 in the comparable prior year period. Capital
expenditures, primarily for new and remodeled stores and the Company's IT
initiatives, were $24,903,000 during the first quarter of fiscal year 2000 and
$26,743,000 during the first quarter of fiscal year 1999.
Net cash provided by financing activities was $70,010,000 for the 13 weeks ended
April 22, 2000. Current year financing activities primarily represent borrowings
under the Company's revolving credit facilities, which increased by $48,000,000
in the 13 weeks ended April 22, 2000. Net cash used by financing activities in
the comparable prior year period primarily represented borrowings on the
Company's revolving credit facilities, a decrease in overdraft balances and the
payment of $29,306,000 for treasury stock purchases.
During the 13 weeks ending July 22, 2000, the Company plans to open 15 new
OfficeMax superstores. Management estimates that the Company's cash requirements
for opening or remodeling a superstore, exclusive of pre-opening expenses, will
be approximately $1,025,000. For each OfficeMax superstore, the requirements
include an average of approximately $425,000 for leasehold improvements,
fixtures, point-of-sale terminals and other equipment, and approximately
$600,000 for the portion of store inventory that is not financed by accounts
payable to vendors. Pre-opening expenses are expected to average approximately
$90,000 per full-size OfficeMax superstore during the remainder of fiscal year
2000. In select cases, that average is expected to increase by approximately
$30,000 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 retail operations and capital requirements, including
its expansion strategy. In December 1999, the Company's Board of Directors
authorized the Company to explore alternative capital structures for its
e-Commerce business, OfficeMax.com. The Company is evaluating various
alternatives including a sale of shares tracking its OfficeMax.com business. The
Company's marketing and expansion plans for OfficeMax.com could be limited if it
is unable to obtain additional equity.
The Company has $400,000,000 of revolving credit facilities available through
June 2002. As of April 22, 2000, the Company had outstanding borrowings of
$139,800,000 under its revolving credit facilities at a weighted average
interest rate of 6.39%
During the second quarter of fiscal year 2000, the Company repaid the
outstanding balance of its mortgage loan in the amount of $16,100,000. The
mortgage loan was secured by the Company's international corporate headquarters
and had an original maturity of January 2007.
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
22, 2000, the Company had purchased a total of 12,702,100 shares at a cost of
$113,619,000. 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 are limited, by financial covenants related to
the Company's revolving credit facility, to purchases to satisfy the Company's
obligation under its equity-based award plans.
The Company's business is seasonal, with sales and operating income higher in
the third and fourth fiscal 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 fiscal
quarter's summer months are the slowest of the year primarily because of lower
office supplies consumption during the summer vacation period.
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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 continues 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.
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,"
"forecast," 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 22, 2000 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.
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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 interest rate for the Company's revolving credit
facilities is variable, while the Company's long-term debt and the interest
component of its operating leases is generally fixed. The Company manages its
interest rate risk by maintaining a combination of fixed and variable rate debt.
The Company believes its potential exposure to interest rate risk is not
material to the Company's financial position or the results of its operations.
The Company is exposed to foreign exchange risk through its joint venture
partnerships in Brazil, Japan and Mexico. 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-------------------------
On March 24, 2000, Charles Miller and Great Neck Capital Appreciation, L.P.
initiated two separate, but virtually identical, purported class actions against
the Company and its directors. The cases, both filed in the Court of Common
Pleas for Cuyahoga County, Ohio, allege claims for interference with
shareholders' franchise rights against the Company and its directors and breach
of fiduciary duty against the directors relating to the adoption of a
shareholder rights plan on March 17, 2000. The cases are in their earliest
stages and discovery has not yet commenced. The Company believes that the cases
are without merit and intends to vigorously defend against the allegations set
forth in both complaints.
On April 7, 2000, Crandon Capital Partners initiated a purported class action
against the Company and its directors. The case, filed in the Court of Common
Pleas for Cuyahoga County, Ohio, also alleges claims for interference with
shareholders' franchise rights against the Company and its directors and breach
of fiduciary duty against the directors relating to the adoption of the
shareholder rights plan. The case is in its earliest stages and discovery has
not yet commenced. The Company believes that the case is without merit and
intends to vigorously defend against the allegations set forth in the complaint.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
------- --------------------------------
(a) Exhibits: 27.0 Financial Data Schedule for the period
ended April 22, 2000 (for SEC use only)
(b) Reports on Form 8-K: None
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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: May 31, 2000 By: /s/ Jeffrey L. Rutherford
-------------------------
Jeffrey L. Rutherford
Senior Executive Vice President, Chief Financial
Officer (Principal Financial and Accounting Officer)
18
