-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OT0olDuKyJlu0eGoLrPBQbspG0MqWDhYYkOHT07+e6sdTGX0t5t0Io1BORzXdXwU lwP/WN3fjXOhsp+xxTKbXg== 0000950152-99-003108.txt : 19990409 0000950152-99-003108.hdr.sgml : 19990409 ACCESSION NUMBER: 0000950152-99-003108 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990123 FILED AS OF DATE: 19990408 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OFFICEMAX INC /OH/ CENTRAL INDEX KEY: 0000929428 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS SHOPPING GOODS STORES [5940] IRS NUMBER: 341573735 STATE OF INCORPORATION: OH FISCAL YEAR END: 0125 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-13380 FILM NUMBER: 99589820 BUSINESS ADDRESS: STREET 1: 3605 WARRENSVILLE CENTER RD CITY: SHAKER HEIGHTS STATE: OH ZIP: 44122 BUSINESS PHONE: 2169216900 MAIL ADDRESS: STREET 1: 3605 WARRENSVILLE CENTER RD CITY: SHAKE HEIGHTS STATE: OH ZIP: 44122 10-K405 1 OFFICEMAX, INC. 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended JANUARY 23, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission file number 1-13380 ------- OFFICEMAX, INC. --------------- (Exact name of registrant as specified in its charter) OHIO 34-1573735 ---- ---------- (State or other jurisdiction (I.R.S. employer identification no.) of incorporation or organization) 3605 WARRENSVILLE CENTER ROAD, SHAKER HEIGHTS, OHIO 44122 --------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (216) 921-6900 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- COMMON SHARES, WITHOUT PAR VALUE NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 26, 1999 was approximately $927,463,493. The number of Common Shares, without par value, of the Registrant outstanding as of March 26, 1999 was 114,149,353. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement dated April 8, 1999, for use at the Annual Meeting of Shareholders to be held on May 13, 1999 are incorporated by reference in Part III hereof. 2
TABLE OF CONTENTS Item No. Page No. -------- -------- Part I 1. Business 1 2. Properties 10 3. Legal Proceedings 11 4. Submission of Matters to a Vote of Security Holders 11 Executive Officers of the Registrant 12 Part II 5. Market for Registrant's Common Shares and Related Shareholder Matters 14 6. Selected Financial Data 15 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 7A. Quantitative and Qualitative Disclosures About Market Risk 21 8. Financial Statements and Supplementary Data 21 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 21 Part III 10. Directors and Executive Officers of the Registrant 22 11. Executive Compensation 22 12. Security Ownership of Certain Beneficial Owners and Management 22 13. Certain Relationships and Related Transactions 22 Part IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 23 Signatures 24 Exhibit Index 25
NOTE ON INCORPORATION BY REFERENCE In Part III of this Form 10-K, various information and data are incorporated by reference from OfficeMax's Definitive Proxy Statement dated April 8, 1999 ("Proxy Statement"). Any reference in this Form 10-K to disclosures in the Proxy Statement shall constitute incorporation by reference only of that specific information and data into this Form 10-K. INFORMATION REGARDING FORWARD-LOOKING STATEMENTS Portions of this Annual Report on Form 10-K (including information incorporated by reference) include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The words "believe," "expect," "anticipate," "project," "plan," "intend," and similar expressions, among others, identify "forward-looking statements," which speak only as of the date the statement was made. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to materially differ from those made, projected or implied in such statements. The most significant of such risks, uncertainties and other factors are described in this report and Exhibit 99.1 to this Form 10-K. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. 3 PART I ITEM 1. BUSINESS GENERAL OfficeMax, Inc. ("OfficeMax" or the "Company") is the largest operator of high-volume, deep-discount office product superstores in the United States in terms of the number of stores and breadth of geographic coverage. As of January 23, 1999, OfficeMax operated 832 superstores in over 350 markets in 49 states and Puerto Rico, as well as two national call centers, 17 delivery centers and OfficeMax retail joint ventures in Mexico and Japan. The typical full-size OfficeMax superstore is approximately 23,500 square feet and offers over 8,000 office products and related items. The Company's eighth superstore iteration since inception, known within the Company as Millenium 8.0, focuses on the higher profit margin items of the Company's office supply business. Within each superstore, prominent signage highlights the Company's marketing concepts: Supplies (office supplies), TechMax(R) (electronics, business machines, computers and related items), CopyMax(SM) (print-for-pay services), and FurnitureMax(R) (office furniture). The Company markets its merchandise primarily to small- and medium-size businesses, home office customers and individual consumers. By extending its marketing channels to include direct catalog and a commercial sales force, OfficeMax also serves the medium and larger corporate customer. Additionally, the Company operates OfficeMax.com on the Internet at http://www.officemax.com, which enables consumers and businesses to buy a wide assortment of OfficeMax merchandise. HISTORY OfficeMax, which was co-founded by Michael Feuer, its current Chairman and Chief Executive Officer, opened its first superstore in suburban Cleveland, Ohio in July 1988. During the subsequent 28 months, the Company opened 28 superstores and acquired an additional seven stores from OfficeWorld, Inc., a deep-discount office products retailer located in the greater Chicago area. In November 1990, Kmart Corporation ("Kmart") acquired a 21.6% equity interest in the Company. As part of this transaction, OfficeMax acquired from Kmart five deep-discount office products superstores that operated under the name "Office Square" in the Chicago, Illinois and Akron/Canton, Ohio markets. In November 1991, Kmart increased its ownership interest in the Company to in excess of 90% by purchasing all of the outstanding capital shares of the Company except for certain shares held by the Company's two co-founders. In June 1992, the Company acquired OW Office Warehouse, Inc., a 41-store office products superstore chain with stores located primarily in the Mid-Atlantic region. In March 1993, the Company acquired BizMart, Inc., a 105-store national office products superstore chain with stores located in the Southwest, West and Pacific Northwest regions of the United States. Immediately following each acquisition, the acquired stores were operationally integrated, remodeled,remerchandised and converted to the OfficeMax name, merchandise presentation and format. As a result of these acquisitions and the opening of new superstores, OfficeMax achieved a national presence. On November 2, 1994, the Company completed an initial public offering ("IPO") of its Common Shares at $8.44 per share (adjusted to give effect for 3-for-2 splits of the Company's Common Shares effected in the form of dividends paid on July 12, 1995 and July 9, 1996). The net proceeds from the IPO were paid to Kmart in exchange for certain funding amounts previously provided by Kmart to the Company. As a result of the IPO, Kmart's ownership interest in OfficeMax was reduced to approximately 24.6%. On July 20, 1995, the Company completed a primary and secondary offering (the "Secondary Offering") consisting of 8,627,774 primary shares and 28,205,289 secondary shares owned by Kmart. Net proceeds to the Company -1- 4 from the Secondary Offering were $110,177,000. Following completion of the Secondary Offering, Kmart no longer owned an interest in OfficeMax. In November 1995, the Company signed an agreement with its joint venture partner in Mexico, and opened its first superstore in Mexico City in August 1996. In July 1998, the Company increased its ownership percentage in the joint venture to 39% and began accounting for its investment under the equity method. At January 23, 1999, the joint venture operated 12 OfficeMax superstores in Mexico. In December 1996, the Company signed an agreement with its joint venture partner in Japan, and opened its first superstore in November 1997. At January 23, 1999, the joint venture operated five OfficeMax superstores in Japan. In July 1998, the Company signed an agreement with its joint venture partner in Brazil and plans to open its first superstore in Sao Paulo in fiscal 1999. The following table summarizes the Company's domestic superstore opening activity by fiscal year: FISCAL STORES STORES STORES YEAR OPENED CLOSED ACQUIRED TOTAL -------------------------------------------------------------------- 1988 3 - - 3 1989 8 - - 11 1990 23 - 12 46 1991 33 - - 79 1992 61 2 41 179 1993 53 9 105 328 1994 70 10 - 388 1995 80 - - 468 1996 96 - - 564 1997 150 1 - 713 1998 120 1 - 832 In addition, the Company opened its first OfficeMax PDQ(SM) in fiscal 1998. Through its joint venture partnerships, the Company has expanded internationally by opening seven superstores during fiscal 1998, eight superstores during fiscal 1997 and two superstores during fiscal 1996. INDUSTRY OVERVIEW Over the past approximately ten years, the office products industry has experienced rapid growth which the Company believes is attributable primarily to a shift in the United States to a more service oriented economy and the increasing utilization of technology, such as fax machines, cellular phones and computers, in businesses and home offices. The Company believes that these trends will continue to expand the office products industry and will create opportunities for continued growth in market share for operators of high-volume office products superstores such as OfficeMax. - Small- and Medium-Size Business Market. The Company's primary target market consists of small- and medium-size businesses, employing between one and 100 employees, home office customers and individual consumers. Historically, this market was served primarily by traditional office products retailers which typically operated small stores offering limited services and a limited selection of in-stock merchandise purchased from wholesalers or other distributors and sold to the ultimate consumer at manufacturers' suggested retail or catalog list prices. Conversely, office products superstores, such as OfficeMax, feature a wide selection of name-brand and private label merchandise purchased directly from manufacturers and sold at deep-discount prices that are typically 30% to 70% below manufacturers' suggested retail and catalog list prices. As a result of their ability to offer selection, service and discount prices, office products superstores are capturing an increasing percentage of the retail office products market in the United States. -2- 5 - Large Business Market. Large businesses, employing over 100 people, have historically been served primarily by traditional commercial office suppliers, known as "contract stationers," which provide their large business customers with a wide variety of office products purchased from manufacturers and intermediate wholesalers, generally for next business day delivery. Contract stationers typically utilize an in-house, commissioned sales force to solicit orders from the purchasing departments of their customers, which order merchandise from the contract stationer's or an intermediate wholesaler's catalog. BUSINESS STRATEGY In response to major declines in retail selling prices for computers experienced by OfficeMax during 1998, similar to the entire computer industry, the Company reorganized its business into two distinct operating segments: the Core Business Segment and the Computer Business Segment. The Core Business Segment includes office supplies, business machines, peripherals, print-for-pay services and office furniture. The Computer Business Segment includes desktop and laptop personal computers and computer monitors. The Company evaluates performance and allocates resources based on the results of these two segments. The Company's strategy is to enhance its market share, to be a leading provider of office products, supplies and services in each of the markets in which it competes and to continue expanding into new markets, including international expansion. The key elements of this strategy are as follows: - Realigning the Computer Business Segment. In response to dramatic declines in retail prices of computers, the Company is developing a new operating model for its Computer Business Segment. The new operating model, known within the Company as "Millennium 2000", includes targeting the small- and medium-sized business customer along with the higher-end home office and consumer market. To more effectively target these customers, the Company plans to reduce the number of computer vendors in its stores from as many as 11 to two sources. Additionally, in a seven market test with IBM, the Company will exclusively offer IBM personal computers, laptops, monitors, servers and related services in a separate department. These departments will be staffed by IBM personnel in some markets and specially IBM-trained OfficeMax personnel in others. - Extensive Selection of Merchandise in an Easy-to-Shop Presentation. Each OfficeMax superstore offers over 8,000 stock keeping units ("SKUs") of quality, in-stock, name-brand and private label merchandise. This offering represents a breadth and depth of in-stock items that are not available from traditional office products retailers, mass merchandisers or wholesale clubs. The Company's merchandise presentation is highlighted by wide aisles, bright lighting with open ceilings, colorful signage and bold graphics. This easy-to-shop presentation is designed to enhance customer convenience, create an enjoyable shopping experience and promote impulse buying, thereby increasing sales. - Everyday Low Prices. The Company's everyday low price policy is to offer deep-discount prices that are typically 30% to 70% below manufacturers' suggested retail and catalog list prices. In addition, the Company guarantees its low prices up to 155%. OfficeMax will match any advertised price or refund the difference between a lower advertised price and the price paid at OfficeMax within seven days of the original purchase. An additional 55% merchandise credit (up to $55.00) will be issued if the lower price is from an office products superstore such as Staples, Inc. ("Staples") or Office Depot, Inc. ("Office Depot"). - Customer Service. To develop and maintain customer loyalty, OfficeMax has fostered a customer-oriented culture that demands a high level of customer service from each associate. The Company views the quality of its customers' interaction with its associates as critical to its success. Toward this end, the Company emphasizes training and personnel development, seeks to attract and retain well-qualified, highly motivated associates, and has centralized most administrative functions at its corporate office and call centers to enable in-store associates to focus on serving customers. -3- 6 - Focused Expansion. The Company enters markets that provide multi-store opportunities as well as markets in which the Company believes a single OfficeMax superstore can be one of the dominant office products suppliers. Prospective locations are evaluated using on-site surveys conducted by real estate consultants and field operations personnel coupled with a proprietary real estate selection model, which assesses potential store locations and incorporates computer-generated mapping. The model analyzes a number of factors that have contributed to the success of existing OfficeMax locations including the location's size, visibility, accessibility and parking capacity, potential sales transfer effects on existing OfficeMax stores and relevant demographic information, such as the number of businesses and the income and education levels in the area. - New Marketing Concepts. During the last four years, OfficeMax has launched new in-store marketing concepts that complement the Company's Supplies "module" by providing additional products and services to the Company's customers and an opportunity for incremental store traffic. These new concepts include the departments or "in-store modules", CopyMax, FurnitureMax and TechMax. CopyMax offers customers a wide range of print-for-pay services, from self-service black and white copying to full service digital printing and publishing. FurnitureMax provides an expanded furniture selection and specialized services. TechMax features the latest in communication and technology products. During fiscal 1998, the Company opened its first OfficeMax PDQ. This unique "quick-shop" format includes a reduced Supplies module of over 3,000 commodity-type office products and a full-service CopyMax module. The OfficeMax PDQ format is designed to allow the Company to penetrate urban locations in both domestic and international markets and is appropriate for office park complexes, office buildings and on, or near, college campuses. These concepts are discussed in greater detail under the headings "Stores" and "Expansion." - Non-Store Retailing. The Company's strategy for the catalog business is to capitalize on the OfficeMax brand name awareness by providing other channels which give the OfficeMax customer more purchasing options. A full assortment catalog of all the items found in OfficeMax stores plus a variety of merchandise available from a third party distributor allows customers the convenience of catalog ordering and next business day delivery. The Company also provides special order catalogs containing more than 20,000 items to meet its customers' needs. As many of the OfficeMax small business customers grow, they take advantage of these purchasing options. - Electronic Commerce. The Company's online electronic retailing division consists of components designed to capitalize on the emerging and rapidly expanding channel of Internet commerce. The OfficeMax.com web site, available on the internet at www.officemax.com, was introduced in March 1995 and features over 20,000 office products, electronics, business machines, computers, peripherals and related merchandise. OfficeMax.com also operates the SoftwareSupersite@OfficeMax(SM) which offers over 10,000 software titles, all available for immediate purchase via electronic downloading or regular delivery. Customers can choose from business applications, popular games and various other software items. In addition, OfficeMax operates Printlink@CopyMax(SM) which enables consumers and businesses to create, proof and order personalized items like business cards, rubber stamps and labels. After they develop and approve their items via the online proofing area, Printlink@CopyMax produces and ships the personalized items directly to their door. - Supply-Chain Management. During fiscal 1998, the Company launched a major supply-chain management initiative, the first phase of which included the opening of the Company's PowerMax I distribution facility in Las Vegas, Nevada. This center is the first location in a planned network of regional distribution facilities. The next center is scheduled to open in fiscal 1999. - International Opportunities. During fiscal 1998, the Company opened three OfficeMax superstores in Mexico through a joint venture with Grupo Oprimax, S.A. de C.V. a Mexican corporation, ending the year with 12 superstores. In fiscal 1999, this joint venture plans to open up to six more superstores in Mexico. Additionally, the Company's joint venture with JUSCO Company Ltd., a Japanese corporation, opened four OfficeMax superstores in Japan, ending the year with five superstores. The expansion plan for the Japanese joint venture includes opening up to four more stores in fiscal 1999. During fiscal 1998, the Company signed a joint venture agreement with MGDK & Associados S/C Ltda., a Brazilian company. The Brazilian joint venture plans to open two OfficeMax superstores in Brazil during fiscal 1999. OfficeMax owns a 39% interest in the Mexican joint venture and a 19% interest in the Japanese and Brazilian joint ventures. -4- 7 MERCHANDISING The Company's merchandising strategy focuses on offering an extensive selection of quality, name-brand and private label office products at deep-discount prices. The following table sets forth the approximate percentage of net sales attributable to each merchandise group for the periods presented:
- ------------------------------------------------------------------------------------------------------------------- JANUARY 23, JANUARY 24, JANUARY 25, FISCAL YEAR ENDED 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Office supplies, including print-for-pay services 37.9% 37.6% 37.7% Electronics and business machines 23.2 23.3 23.7 Office furniture 12.6 11.8 11.2 Printers, software, peripherals and related consumable products such as printer cartridges and ribbons 18.5 15.7 14.0 --------------- --------------- --------------- Total Core Business Segment 92.2 88.4 86.6 Desktop and laptop personal computers and computer monitors (Computer Business Segment) 7.8 11.6 13.4 =============== =============== =============== Total Company 100.0% 100.0% 100.0% =============== =============== ===============
The Company emphasizes a wide selection of name-brand office products, packaged and sold in multi-unit packages for the business customer and single units for the individual consumer. The Company also offers private label products under the OfficeMax(R) label in order to provide customers additional savings on selected commodity products for which management believes national brand recognition is not a key determinant of customer satisfaction. These commodity items include various paper products such as computer and copy paper, legal pads and notebooks, envelopes and similar functional items. Despite lower selling prices, these items typically carry higher gross margins than comparable branded items and help build consumer recognition for the OfficeMax family of Max-brand products. The Company's merchandising staff regularly evaluates new name-brand and private label merchandise opportunities to maximize profits and to provide customers with enhanced values. The Company also includes its toll-free telephone number on the packaging of certain commodity and private label goods to increase repeat sales as commodity goods are used and replenished. PURCHASING AND DISTRIBUTION OfficeMax maintains a centralized group of merchandise and category managers who average approximately 20 years of retail buying and merchandising experience. Using a detailed merchandise planning system, this group selects the product mix for each store in conjunction with systematic, frequent input from field management and store personnel. The Company utilizes a proprietary merchandise replenishment system, "ForeMax," to analyze and forecast sales trends for each SKU statistically and then estimate each store's merchandise requirements. The Company's merchandising initiatives have been keenly focused on improving Gross Margin Return on Investment ("GMROI"), which is the ratio of gross margin dollars to the average inventory investment. Increasing GMROI is a performance objective in all levels of management within merchandising, visual presentation, inventory management and finance. GMROI is being utilized consistently for merchandising decisions related to the Company's basic and seasonal assortments. The Company believes that it has good relationships with its vendors and does not consider itself dependent on any single source for its merchandise. As the number of stores increases pursuant to OfficeMax's store expansion plan, the Company believes that it will be able to continue to obtain sufficient merchandise for all of its stores on a timely basis. -5- 8 MARKETING, PROMOTIONS AND ADVERTISING OfficeMax directs its marketing efforts at small- and medium-size businesses, home office customers, and individual consumers. A multimedia approach is used to attract new customers while re-emphasizing the Company's value message to existing customers. Included in these campaigns are national television commercials, newspaper ads, seasonal spot television and radio commercials, direct mail promotions, circulars, and outdoor billboards, sports arena and other such signage. Advertising campaigns and promotions are conducted continuously throughout the year to reach new and existing customers. To further increase sales, OfficeMax takes advantage of seasonal selling opportunities. Special marketing programs are developed to support the Back-To-School selling period, the Christmas holiday season, plus the January "re-stocking" Back-To-Business period. Additional marketing opportunities arise during the Mother's Day, Father's Day and graduation selling periods. As part of its ongoing efforts to strengthen customer loyalty and enhance the image of its stores as a value destination, the Company introduced MaxRebates(SM) and MaxValues(SM). MaxRebates, the industry's first one-check rebate program, allows customers to complete just one form for all rebate qualified purchases and receive one check in return. This is an added value each time customers shop at OfficeMax. MaxValues provides customers with value added items, such as three free legal pads with the purchase of a twelve-pack of legal pads. STORES The typical full-size OfficeMax superstore is approximately 23,500 square feet. OfficeMax superstores are generally destination oriented locations in high-traffic, suburban strip-mall shopping centers that provide customers easy access and ample store-front parking. Each superstore displays merchandise in accordance with a corporate developed plan-o-gram to ensure that it utilizes optimal display techniques and provides a consistent and attractive shopping environment for customers. The Company continuously evaluates the attributes of its prototype store model and periodically makes adjustments to the store layout. These changes are integrated into new stores as they are opened and are also considered when the Company remodels existing units. The Company's latest prototype, Millennium 8.0, is characterized by a heightened merchandise focus on the core Supplies module along with enhanced visual acuity throughout the store. Within each superstore, prominent signage highlights the Company's marketing concepts: Supplies (office supplies), TechMax (electronics, business machines, computers and related items), CopyMax (print-for-pay services), and FurnitureMax (office furniture). Management believes that attractive and up-to-date stores contribute to customer satisfaction and loyalty, leading to increased sales. The Company plans to remodel nearly 70 superstores during fiscal 1999. The Company's Supplies modules feature office products, including writing instruments, paper, filing supplies, business forms and other supplies. Introduced in July 1995, the in-store CopyMax modules feature a broad assortment of print-for-pay services for businesses and consumers ranging from self-service copying to digital printing and publishing as well as color copying, custom printing and related specialty services. Approximately 4,000 to 6,000 square feet are devoted to a full service CopyMax "hub" location, which utilizes the latest digital printing equipment and technology and serves as a centralized production facility. The mini-CopyMax or "spoke" locations are smaller in-store modules averaging approximately 900-square feet. Today, these spoke locations are served by a hub utilizing the "CopyMax Link" software. This software, a modem based solution that provides the capability to transmit documents to any CopyMax location, creates a "hub-and-spoke" concept that optimizes equipment in the CopyMax hubs. An internet-based remote file submission solution is planned for fiscal 1999 which is expected to provide customers additional features and capabilities to support their printing needs. Customers can use PrintLink@CopyMax, a unique custom printing site on the Internet which allows customers to design and purchase a variety of products including stationary, business cards, announcements and labels right from their own computer keyboard. -6- 9 Another in-store module, FurnitureMax, features an extensive selection of office furniture ranging from ready-to-assemble products to a broader assortment of office chairs, dividers, filing cabinets and higher-end case goods, desks and credenzas. FurnitureMax also offers specialized services such as customized space planning, on site consultation, installation, furniture setup and free delivery. Full-size FurnitureMax hubs are an approximately 4,000 to 8,000 square foot addition to an existing OfficeMax superstore while mini-FurnitureMax modules contain approximately 2,000 square feet. TechMax showcases the latest in computers, wireless digital technology, communications products and similarly related technology products and features specially trained associates to assist the customer. OfficeMax PDQ is a smaller express store footprint that includes a reduced Supplies module of over 3,000 commodity-type office products combined with a full-service CopyMax hub in a 5,000 to 7,500-square-foot retail site. The OfficeMax PDQ format will allow the Company to penetrate high-density urban locations, satellite locations within metro markets and international locations. The first OfficeMax PDQ was opened in fiscal 1998. EXPANSION Small- and Medium-Size Business Market. The Company's expansion strategy primarily focuses on new store growth and its new marketing concepts. The Company opened 120 superstores in fiscal 1998 and intends to continue its rapid growth by opening approximately 100 additional full-size superstores in the United States, up to five new OfficeMax PDQ locations and additional delivery and distribution facilities in fiscal 1999. The Company's fiscal 1999 international expansion plans include opening two superstores in Sao Paulo, Brazil while continuing to expand in Mexico and Japan with an estimated 10 stores and two distribution facilities. Large Business Market. OfficeMax has undertaken several initiatives to better serve the needs of its larger customers, predominately through its commercial sales group. The Company serves the needs of large businesses through its expanded full-color catalogs featuring approximately 5,000 items and with other specialized catalogs. These catalogs, which are distributed periodically to businesses and individual customers, feature toll-free telephone ordering and typically offer free next business day delivery on orders over $50. In addition, the Company employs a commercial sales force to attract new customers as well as maintain existing customers. The Company continues to develop a network of delivery centers in the major markets OfficeMax serves. In contrast to the small business, home office and individual consumer customer focus of OfficeMax's retail superstores, the Company's expanded catalogs, commercial sales force and delivery centers enable larger businesses, municipalities and school systems to purchase from OfficeMax on much the same basis as they could from contract stationers and other traditional office product suppliers. International. During fiscal 1998, the Company opened three OfficeMax superstores in Mexico through its joint venture with Grupo Oprimax, S.A. de C.V. a Mexican corporation, ending the year with 12 superstores. In fiscal 1999, the joint venture plans to open up to six more superstores in Mexico. Additionally, the Company's joint venture with JUSCO Company Ltd., a Japanese corporation, opened four OfficeMax superstores in Japan, ending the year with five superstores. The expansion plan for Japan includes opening up to four more stores in fiscal 1999. During fiscal 1998, the Company signed a joint venture agreement with MGDK & Associados S/C Ltda., a Brazilian company. The joint venture plans to open two OfficeMax superstores in Brazil during fiscal 1999. Ultimately, the Company's international expansion will depend upon general economic and business conditions affecting consumer spending, the availability of desirable store locations, the negotiation of acceptable terms and the availability of adequate capital. CUSTOMER SERVICE The Company believes that a fundamental element of its success is its customer-oriented culture that demands a high level of customer service from each of its associates. The Company views the quality of its customers' interaction with its associates as critical to maintaining customer confidence and loyalty. Through its emphasis on training and personnel development, the Company strives to attract and retain well-qualified, highly motivated associates committed to providing superior levels of customer service. Management has undertaken a number of initiatives that demonstrate its commitment to in-store customer service. For example, by centralizing most administrative functions at its corporate offices and call centers, OfficeMax enables its -7- 10 in-store associates to focus primarily on customer service. In addition, the Company implemented ServiceMax, a training program that details customer service standards to be met by each store-level associate and assigns to each superstore one or more associates whose primary responsibility is to ensure that each customer receives prompt, courteous and knowledgeable service. The Company has also developed the "MaxCertification Program" using Computer Based Training (CBT) modules to ensure that every associate receives the one-on-one product knowledge training they need to provide informative customer service. MANAGEMENT INFORMATION SYSTEMS In fiscal 1998, OfficeMax began the implementation of SAP, a leading Enterprise Resource Planning ("ERP") system being used by approximately 15,000 companies worldwide, including many Fortune 500 companies. As OfficeMax has grown substantially and rapidly over the past 10 years, the legacy information systems necessary to support such growth have become increasingly complex. SAP will provide a flexible, consolidated, enterprise-wide system that will provide real time information necessary to make informed and strategic business decisions and to react quickly to critical store-level information. The Company believes its partnership with SAP will enable the Company to grow more quickly and efficiently. At its headquarters, the Company uses a platform of Unix-based parallel processors which supports a wide variety of mission critical applications, ranging from merchandise replenishment to order fulfillment, electronic commerce and financial systems. With the availability and price performance advantage of larger Sun Microsystems Servers, as well as the implementation of SAP, the Company will consolidate its systems and simplify systems management with fewer, larger systems. This technology also provides "scalability," the ability to support growth within the same platform. During 1998, the Company converted to the SAP Human Resource System. This is the first step in its efforts to maximize process improvement opportunities. During 1999, OfficeMax expects to convert to the SAP Financial, Retail and Merchandising Systems. OfficeMax has invested over $75,000,000 in the last three years to upgrade systems and processes and intends to continue investing aggressively in this area to support the Company's growth. The Company operates a proprietary, in-store computer system called "StoreMax" that allows the daily tracking of inventory receipts through the use of portable, handheld, radio frequency terminals. These terminals permit store managers to scan a product on the shelf and instantly retrieve specific product information, such as recent sales history, gross profit margin and inventory levels. In-store, point-of-sale registers capture sales information at the time of each transaction at the category and SKU level by the use of bar-code scanners that update store-level perpetual inventory levels. This information is transmitted on a daily basis to corporate headquarters, where it is evaluated and used in merchandising and replenishment decisions. In addition, StoreMax is used to transmit data to each store providing information that is key for day-to-day operations. The Company utilizes an online, advanced "frame-relay" network, which supports data communication between headquarters and its stores, delivery and call centers. This technology is employed to centralize credit card and check authorization and validate transactions. In addition, the network enhances intra-Company communication and supports electronic maintenance of in-store technology. Additional network and bandwidth capabilities are planned to be added in fiscal 1999 to accommodate the needs of the Company's CopyMax facilities and the volume of large, multi-color files being sent to and from customers and various Company facilities. The Company has also launched its own intranet, know as @Max(SM), which provides information on demand to all of the Company's Corporate and Field Management associates. For information regarding the Company's Year 2000 readiness, see "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations; Year 2000 Readiness." COMPETITION The office products industry, which includes both national superstore chains and other indirect competitors, is highly competitive. Businesses in the office products industry compete on the basis of pricing, product selection, convenience, customer service and ancillary business offerings. -8- 11 As a result of the consolidation of the office products superstore industry, OfficeMax currently has only two direct competitors, Staples and Office Depot, which are similar to the Company in terms of store format, pricing strategy and product selection. Of the approximately 20 office products superstore chains that were launched in the U.S. between 1986 and 1994, all but OfficeMax, Staples and Office Depot have either been acquired or gone out of business. Although not all OfficeMax stores currently compete with either Staples or Office Depot stores, the Company believes it will face increased competition from Staples and Office Depot as the three remaining office product superstore chains expand their operations in the same markets. The Company believes that it competes favorably with Staples and Office Depot through consistent execution of its business strategy, the components of which are designed to differentiate OfficeMax from Staples and Office Depot. OfficeMax's indirect competitors include traditional office product retailers, electronics superstore retailers, mass merchandisers, wholesale clubs, and direct mail operators. Although these non-superstore companies sell office products and compete with OfficeMax in limited markets or with respect to limited product categories, OfficeMax does not consider them to be major direct competitors. These companies cannot provide all of the customer benefits that an office products superstore has to offer such as one-stop shopping convenience, discount prices and a full range of ancillary business services. For example, electronic superstore retailers, such as Circuit City and Best Buy, feature consumer electronics and computers which overlap with only a portion of the merchandise selection provided by OfficeMax. OfficeMax's Computer Business Segment competes with electronic superstore retailers, such as CompUSA, Circuit City and Best Buy, and direct-to-customer manufacturers, such as Dell and Gateway. During fiscal 1998, the Company announced plans to realign its Computer Business Segment in order to enhance its competitive position. These plans include modifying the breadth of merchandise assortment to target computing solutions for the small- and medium-size business and home office customers. Some of OfficeMax's direct and indirect competitors may have greater financial resources than the Company. There can be no assurance that increased competition will not have an adverse effect on the Company. ASSOCIATES As of March 1, 1999, the Company had approximately 38,980 employees, including 19,050 full time and 19,930 part-time associates, 1,899 of whom were employed at its Corporate headquarters, divisional offices and call centers and 37,081 of whom were employed at OfficeMax stores and delivery centers. None of the Company's associates is subject to a collective bargaining agreement. Management believes that its relationship with its associates is satisfactory. -9- 12 ITEM 2. PROPERTIES OfficeMax superstores are relatively immature. As of March 1, 1999, the Company's stores had been open an average of 3.8 years operating under the OfficeMax name and format. Of the Company's 842 superstores, 375 have been opened by OfficeMax within the last three years. Management believes that the Company's young stores represent an opportunity for future sales growth as they proceed through the maturation cycle. The Company occupies virtually all of its stores under long-term lease agreements. These leases generally have terms ranging from 10 to 25 years plus renewal options. Most of these leases require the Company to pay minimum rents, subject to periodic adjustments, plus other charges including utilities, real estate taxes, common area maintenance and, in limited cases, contingent rentals based on sales. Several of the Company's store leases are guaranteed by Kmart. The Company and Kmart are parties to a Lease Guaranty, Reimbursement and Indemnification Agreement, pursuant to which Kmart has agreed to maintain existing guarantees and provide a limited number of additional guarantees, and the Company has agreed, among other things, to indemnify Kmart against liabilities incurred in connection with those guarantees. As of March 1, 1999, OfficeMax had 842 superstores in 49 states, Puerto Rico and the U.S. Virgin Islands. The following table details OfficeMax superstores by state and territory:
Alabama 9 Nebraska 6 Alaska 3 Nevada 10 Arkansas 4 New Hampshire 3 Arizona 21 New Jersey 15 California 80 New Mexico 8 Colorado 18 New York 44 Connecticut 9 North Carolina 21 Delaware 2 North Dakota 3 Florida 52 Ohio 52 Georgia 23 Oklahoma 5 Hawaii 4 Oregon 12 Idaho 6 Pennsylvania 34 Illinois 47 Rhode Island 2 Indiana 20 South Carolina 8 Iowa 9 South Dakota 3 Kansas 11 Tennessee 21 Kentucky 8 Texas 65 Louisiana 11 Utah 14 Maine 1 Washington 19 Maryland 1 Virginia 19 Massachusetts 16 West Virginia 6 Michigan 40 Wisconsin 21 Minnesota 22 Wyoming 2 Mississippi 5 Puerto Rico 6 Missouri 17 U.S. Virgin Islands 1 Montana 3
-10- 13 ITEM 3. LEGAL PROCEEDINGS The Company is a party to litigation it initiated in October 1997 in the United States District Court for the Northern District of Ohio against Ryder Integrated Logistics, Inc. ("Ryder") arising out of Ryder's failure to fulfill certain payment guarantees pursuant to the terms of the Company's logistics service agreement with Ryder. The Company terminated the logistics service agreement in June 1997 based on numerous claims against Ryder under the agreement including, among others, Ryder's refusal to honor its cost guarantees and its failure to return overpayments to the Company. During the course of the agreement, the Company recorded receivables from Ryder of approximately $19,000,000 representing overpayments due from Ryder pursuant to the terms of the agreement. In January 1998, Ryder filed a counterclaim against the Company alleging damages arising from the Company's termination of the agreement in the amount of approximately $75,000,000. The Company believes the counterclaim is without merit and intends to vigorously defend against such counterclaim. Management is of the opinion that, although the ultimate resolution of the Ryder litigation cannot be forecasted with certainty, final disposition of this matter should not materially affect the Company's liquidity, financial position or results of operations. However, in the event of an unanticipated adverse final determination in this matter, the Company's consolidated net income for the period in which such determination occurs could be materially affected. In addition, there are various claims, lawsuits and pending actions against the Company incident to the Company's operations. It is the opinion of management that the ultimate resolution of these matters will not have a material effect on the Company's liquidity, financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None -11- 14 EXECUTIVE OFFICERS OF THE REGISTRANT Listed below are the names, positions and ages of the executive officers of the Company as of March 26, 1999. Each executive officer will serve until his successor is elected by the Board of Directors or until his earlier resignation or removal.
NAME POSITION AGE --------- -------------------------- --- Michael Feuer Chairman of the Board and 54 Chief Executive Officer John C. Martin President, Retail Stores 48 Edward L. Cornell Executive Vice President, 50 Non-Retail Stores and International Development Jeffrey L. Rutherford Executive Vice President, 38 Chief Financial Officer Wendell L. Wilson Executive Vice President, 51 CopyMax Sales and Marketing Mark L. Keschl Senior Vice President, 43 Real Estate Ross H. Pollock Senior Vice President, 43 General Counsel and Secretary Mark L. Race Senior Vice President, 50 Store Planning and Project Development
Mr. Feuer is the Company's co-founder, Chairman of the Board and Chief Executive Officer. He has served as a Director of the Company since its inception in April 1988. Prior to becoming Chairman in March 1995, Mr. Feuer served as President. From May 1970 through March 1988, Mr. Feuer was associated with Jo-Ann Stores, Inc. (formerly Fabri-Centers of America, Inc.), a publicly held, New York Stock Exchange-listed, national retail chain which then had over 600 stores. In his most recent capacity prior to his departure, Mr. Feuer served Fabri-Centers as Senior Vice President and a member of that company's executive committee. Mr. Martin has served as President, Retail Stores of the Company since March 1996. From November 1993 to March 1996, Mr. Martin served as Executive Vice President, Store Operations of the Company. From March 1993 to November 1993, Mr. Martin served as Senior Vice President of the Company. From March 1992 to March 1993, Mr. Martin served as Vice President, Group Merchandise Manager. From August 1988 to March 1992, Mr. Martin was Senior Vice President Merchandising with Boston Distributors, Inc., a national hard goods distributor. Mr. Martin has also held various merchandise management and vice president positions with Gold Circle Stores and various subsidiaries of Federated Department Stores, Inc. Mr. Cornell has served as Executive Vice President, Non-Retail Stores and International Development of the Company since December 1995. From February 1993 to December 1995, Mr. Cornell served as Executive Vice President, Chief Financial Officer of the Company. From February 1992 to February 1993, Mr. Cornell served as Senior Vice President and Chief Financial Officer of the Company. From March 1983 to February 1992, Mr. Cornell was employed by Things Remembered, a specialty retail subsidiary of Cole National Corporation, serving most recently -12- 15 as Executive Vice President and Chief Financial Officer. Mr. Cornell has also held various management positions with Wal-Mart Stores, Inc. and Zayre Corporation. Mr. Rutherford has served as Executive Vice President, Chief Financial Officer of the Company since March 1998. From June 1997 to March 1998, Mr. Rutherford served as Senior Vice President, Chief Financial Officer of the Company. From February 1997 to June 1997, Mr. Rutherford served as Senior Vice President, Finance and Treasurer of the Company. From January 1984 to January 1997, Mr. Rutherford was associated with Arthur Andersen LLP, a big five public accounting firm. Mr. Wilson has served as Executive Vice President, CopyMax Sales and Marketing of the Company since December 1997. From March 1995 to November 1997, Mr. Wilson was employed by Kinko's, Inc. as Vice President of Operations and Public Management. From 1984 to March 1995, Mr. Wilson held various senior management positions at Xerox Corporation. Mr. Keschl has served as Senior Vice President, Real Estate of the Company since September 1993. From September 1992 to August 1993, Mr. Keschl worked as a real estate consultant, performing services for The Sports Authority, Inc., a large format sporting goods retailer. From November 1984 to August 1992, Mr. Keschl was employed by Toys-R-Us, Inc., serving most recently as Senior Vice President of Real Estate. Mr. Keschl has also held various real estate related positions with Arbor Drugs, a Michigan based chain of retail drug stores. Mr. Pollock has served as Senior Vice President, General Counsel and Secretary of the Company since March 1998. From January 1997 to March 1998, Mr. Pollock served as Vice President, General Counsel and Secretary of the Company. From September 1988 to December 1996, Mr. Pollock practiced law with the law firm of Benesch, Friedlander, Coplan & Aronoff in its Cleveland, Ohio office. Mr. Race has served as Senior Vice President, Store Planning and Project Development of the Company since April 1996. From September 1992 to April 1996, Mr. Race served as Vice President, Store Planning of the Company. From July 1991 to September 1992, Mr. Race served as Director of Construction of the Company. Prior to July 1991, Mr. Race was associated with Jo-Ann Stores, Inc. (formerly Fabri-Centers of America, Inc.) for 13 years were he held various store planning, construction and administrative service positions. -13- 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS The high and low sales prices of the Company's Common Shares during each quarter of fiscal 1997 and fiscal 1998, as reported on the New York Stock Exchange Consolidated Transaction reporting system, are listed below:
Fiscal 1997 High Low ----------- ---- --- 1st Quarter (ended April 26, 1997) $15.125 $10.875 2nd Quarter (ended July 26, 1997) 15.250 11.375 3rd Quarter (ended October 25, 1997) 16.250 13.000 4th Quarter (ended January 24, 1998) 15.063 11.813 Fiscal 1998 High Low ----------- ---- --- 1st Quarter (ended April 25, 1998) $19.625 $14.063 2nd Quarter (ended July 25, 1998) 19.563 13.875 3rd Quarter (ended October 24, 1998) 15.438 6.625 4th Quarter (ended January 23, 1999) 12.500 8.875
The Company has never paid cash dividends on its Common Shares. The Company does not anticipate paying any cash dividends on its Common Shares in the foreseeable future because it intends to retain its earnings to finance the expansion of its business and for general corporate purposes. The declaration and payment of any dividends in the future will be at the discretion of the Company's Board of Directors and will depend on, among other things, the Company's earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to payment of dividends and other factors deemed relevant by the Company's Board of Directors. As of March 26, 1999, the Company had approximately 3,970 shareholders of record. On March 26, 1999, the closing price of the Company's Common Shares was $8.125. -14- 17 ITEM 6. SELECTED FINANCIAL DATA Selected financial data as of and for the fiscal years ended January 23, 1999, January 24, 1998, January 25, 1997, January 27, 1996 and January 21, 1995 is set forth below:
(Dollars in millions, except per share and store data) - ----------------------------------------------------------------------------------------------------------------------------- FISCAL FISCAL FISCAL FISCAL FISCAL 1998 (1) 1997 1996 1995 (2) 1994 - ----------------------------------------------------------------------------------------------------------------------------- FINANCIAL DATA Sales $ 4,337.8 $ 3,765.4 $ 3,179.3 $ 2,542.5 $ 1,841.2 Cost of merchandise sold, including buying and occupancy costs 3,284.6 2,895.0 2,489.0 1,970.5 1,422.4 Computer segment asset write-off 80.0 - - - - Gross profit 973.2 870.4 690.3 572.0 418.8 Operating income 86.7 145.9 105.5 86.3 55.6 Net income 48.6 89.6 68.8 125.8 30.4 Pro forma earnings per common share: (3) Basic 0.40 0.73 0.56 1.06 0.27 Diluted 0.39 0.72 0.55 1.04 0.27 OTHER FINANCIAL AND OPERATING DATA Percentage increase in sales 15.2% 18.4% 25.0% 38.1% 29.5% Comparable-store sales increase (4) 0.4% 1.1% 11.0% 16.7% 17.0% End of period stores 832 713 564 468 388 FINANCIAL POSITION Working capital $ 501.1 $ 561.5 $ 473.4 $ 499.4 $ 211.9 Total assets 2,231.9 1,960.2 1,867.3 1,587.9 1,257.5 Total long-term debt, including capital lease obligations 17.7 19.0 20.0 - 0.3 Shareholders' equity 1,138.1 1,160.6 1,063.6 990.9 748.6
(1) In conjunction with its decision to realign the Computer Business Segment, the Company recorded a non-recurring, non-cash, pre-tax charge of $79,950,000 in January 1999. The charge reduced net income by $49,889,000 or $0.41 per diluted share. (2) Net income and pro forma earnings per common share in fiscal 1995 include a $69.1 million, or $0.57 per share, after-tax gain from the sale of Corporate Express, Inc. (3) Pro forma earnings per Common Share data for fiscal 1994 gives effect to the issuance of all shares at the time of the Offering and the proceeds from the Offering paid to Kmart as if such transactions had taken place at the beginning of that period. (4) Comparable store sales include the sales of a store beginning on the first day of the 53rd week of its operation, except for 105 stores acquired from BizMart in March 1993. Stores acquired from BizMart were first included in the comparable store sales calculation on August 21, 1994 to correspond to the 53rd week following substantial completion of their remodeling, remerchandising and conversion to the OfficeMax name, merchandise presentation and store format. -15- 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Consolidated Results Consolidated sales in fiscal 1998 advanced 15.2% to $4,337,768,000 from $3,765,444,000 in fiscal 1997. This followed an 18.4% increase in 1997 from $3,179,274,000 in fiscal 1996. The 1998 increase in consolidated sales was primarily due to the full year's sales from the 150 superstores opened during fiscal 1997, the additional partial year's sales from 120 superstores opened during fiscal 1998 and a 0.4% comparable-store sales increase. The comparable-store sales increase was negatively impacted by a 15.9% decrease in the average selling prices of fax machines, printers and copiers experienced by the Company's Core Business Segment and a 26.3% decrease in average selling prices experienced by the Company's Computer Business Segment. Comparable store sales in fiscal 1997 increased 1.1% from fiscal 1996. The Company opened 96 new stores during fiscal 1996. Cost of merchandise sold, including buying and occupancy costs and excluding the non-recurring computer segment asset write-off recorded during the fourth quarter of fiscal 1998, decreased as a percentage of sales to 75.7% in fiscal 1998 from 76.9% in fiscal 1997 and 78.3% in fiscal 1996. Correspondingly, gross profit, excluding the non-recurring computer segment asset write-off, was 24.3% for fiscal 1998 versus 23.1% and 21.7% for fiscal years 1997 and 1996, respectively. The gross profit increases in fiscal 1998 and 1997 were primarily due to enhanced marketing of higher margin items in the Company's Core Business Segment and a reduction in the number of low margin computer promotions in the Company's Computer Business Segment. Including the non-recurring computer segment asset write-off, cost of merchandise sold, including buying and occupancy costs, was $3,364,532,000 or 77.6% of sales for fiscal 1998. Gross profit for fiscal 1998, including the non-recurring charge was 22.4% of sales. Store operating and selling expenses, which consist primarily of store payroll, operating and advertising expense, increased to 17.5% of sales in fiscal 1998 from 16.3% of sales in fiscal 1997 and 15.8% of sales in fiscal 1996. The increases in fiscal 1998 and fiscal 1997 were primarily due to the increase in the number of stores opened for less than one year. New stores typically begin to leverage various fixed cost components during their second or third year of operations as sales increase. The increase in fiscal 1998 was also attributable to costs incurred to upgrade the Company's fleet of self-service copiers throughout all of the Company's stores with enhanced CopyMax features. Pre-opening expenses were $11,851,000, $15,512,000 and $10,649,000 in fiscal 1998, fiscal 1997 and fiscal 1996, respectively, primarily reflecting 120, 150 and 96 new superstore openings. Pre-opening expenses, which consist primarily of store payroll, supplies and grand opening advertising, averaged approximately $85,000 per OfficeMax superstore during fiscal 1998 and fiscal 1997 versus approximately $75,000 per OfficeMax superstore in fiscal 1996. Also during fiscal 1998, the Company opened its PowerMax I distribution facility in Las Vegas, Nevada for which the Company incurred pre-opening expenses of $980,000. Pre-opening expenses increase when certain enhanced CopyMax or FurnitureMax features are included in a superstore. During fiscal 1998, 12 superstores were opened with enhanced CopyMax or FurnitureMax features versus 103 and 136 superstores opened with enhanced CopyMax or FurnitureMax features during fiscal 1997 and fiscal 1996, respectively. Pre-opening expenses for these enhanced features averaged approximately $25,000 to $35,000 per unit in fiscal 1998, 1997 and 1996. General and administrative expenses increased as a percentage of sales to 2.4% in fiscal 1998 from 2.3% and 1.9% in fiscal years 1997 and 1996, respectively. This increase reflects the Company's continuing efforts to enhance its infrastructure to support planned growth both in the United States and internationally. The infrastructure enhancements include efforts to strengthen the Company's management team and the Company's information technology ("IT") initiatives. The Company is in the process of implementing the SAP system. The SAP system is a fully integrated Enterprise Resource Planning platform that will automate and integrate the Company's business processes. The conversion to the first module of SAP occurred on November 30, 1998. Goodwill amortization was $9,390,000 in fiscal years 1998, 1997 and 1996. Goodwill is capitalized and amortized over 40 years using the straight-line method. -16- 19 As a result of the foregoing factors, operating income for fiscal 1998, excluding the non-recurring computer segment asset write-off, increased to $166,642,000 or 3.8% of sales, as compared to operating income of $145,917,000 and $105,456,000, or 3.9% and 3.3% of sales, for fiscal years 1997 and 1996, respectively. Including the non-recurring computer segment asset write-off, operating income was $86,692,000 or 2.0% of sales in fiscal 1998. Interest expense was $5,681,000 in fiscal year 1998 as compared to interest income of $514,000 and $7,485,000 in fiscal years 1997 and 1996, respectively. The increase in interest expense in fiscal 1998 was primarily due to increased borrowings used to fund the Company's expansion plans, seasonal inventory requirements and stock repurchase program. Interest income in 1996 was primarily due to interest earned on cash received from the Company's July 20, 1995 public offering and the sale of its interest in the contract stationer, Corporate Express, Inc. on September 10, 1995. Income taxes were $32,391,000 in fiscal 1998, $56,811,000 in fiscal 1997 and $44,136,000 in fiscal 1996 with effective tax rates of 40.0%, 38.8% and 39.1%, respectively. The effective tax rates for all three years were different from the statutory income tax rate as a result of tax exempt interest, state and local income taxes, and non-deductible goodwill amortization expense. As a result of the foregoing factors, net income for fiscal 1998, excluding the non-recurring computer segment asset write-off was $98,509,000 or 2.3% of sales as compared to $89,620,000 or 2.4% of sales in fiscal 1997 and $68,805,000 or 2.2% of sales in fiscal 1996. The non-recurring computer segment asset write-off reduced net income by $49,889,000. BUSINESS SEGMENTS Core Business Segment Sales for the Core Business Segment increased 20.2% to $4,000,846,000 in fiscal 1998 from $3,328,976,000 in fiscal 1997. Sales for this business segment increased 21.0% in fiscal 1997 from $2,751,987,000 in fiscal 1996. The increase in fiscal 1998 was due to the additional stores opened in fiscal years 1998 and 1997 and a comparable store sales increase of 6.0%. Declines in average selling prices for fax machines, printers and copiers reduced the Core Business Segment's comparable sales increase by 1.9%. Core Business Segment comparable store sales in fiscal 1997 increased 2.4% from fiscal 1996. Cost of merchandise sold, including buying and occupancy costs for the Core Business Segment decreased as a percentage of sales to 73.9% in fiscal 1998 from 74.0% and 75.2% in fiscal years 1997 and 1996, respectively. Correspondingly, gross profit for the Core Business Segment increased to $1,043,854,000 or 26.1% of sales in fiscal 1998 as compared to $864,598,000 or 26.0% of sales in fiscal 1997 and $682,066,000 or 24.8% of sales in fiscal 1996. The gross profit increase in fiscal 1998 was primarily due to the Company's chain-wide space reallocation program which provided for expanding the office supply merchandise assortment by nearly 1,000 SKUs and moving these products to a more prominent position within the store. The decline in average selling price of fax machines, printers and copiers partially offset the gains from the space reallocation program. The gross profit increase in fiscal 1997 was primarily due to enhanced marketing of higher margin office supply and furniture merchandise. Operating income for the Core Business Segment increased to $183,163,000 in fiscal 1998 from $152,078,000 in fiscal 1997 and $122,501,000 in fiscal 1996. Net income for the Core Business Segment increased to $111,496,000 in fiscal 1998 from $96,130,000 and $80,954,000 in fiscal years 1997 and 1996, respectively. Computer Business Segment Sales for the Computer Business Segment decreased 22.8% to $336,922,000 in fiscal 1998 from $436,468,000 in fiscal 1997. A decline in average selling prices for the Computer Business Segment contributed to a 42.4% comparable store sales decrease. The comparable store sales decrease was partially offset by the additional sales from stores opened -17- 20 during fiscal years 1998 and 1997. Sales for this business segment increased 2.1% in fiscal 1997 from $427,287,000 in fiscal 1996. Cost of merchandise sold, including buying and occupancy costs and excluding the non-recurring computer segment asset write-off, decreased as a percentage of sales to 97.2% in fiscal 1998 from 98.7% and 98.1% in fiscal years 1997 and 1996, respectively. Gross profit, excluding the non-recurring charge was 2.8% of sales in fiscal 1998 as compared to 1.3% and 1.9% of sales in fiscal 1997 and 1996, respectively. This gross profit improvement in fiscal 1998 was primarily due to the Company's deliberate decision to forgo low-margin computer promotions compared to prior years. In conjunction with its decision to realign the Computer Business Segment, the Company recorded a non-recurring, non-cash, pre-tax charge of $79,950,000 during January 1999. The charge accounted for the liquidation of existing, discontinued computer inventory. In addition, the charge provided for the impairment of prepaid expenses and other assets directly related to the Computer Business Segment. Including the non-recurring charge, cost of merchandise sold, including buying and occupancy costs, was 121.0% of sales. Operating loss for the Computer Business Segment, excluding the non-recurring computer segment asset write-off, was $16,521,000 in fiscal 1998, as compared to $6,161,000 in fiscal 1997 and $17,045,000 in fiscal 1996. Including the non-recurring charge, operating loss was $96,471,000 in fiscal 1998. Net loss for the Computer Business Segment, excluding the non-recurring computer segment asset write-off, was $12,987,000 in fiscal 1998. The non-recurring charge increased the Computer Business Segment net loss by $49,889,000. Net loss for the Computer Business Segment was $6,510,000 in fiscal 1997 and $12,149,000 in fiscal 1996. LIQUIDITY AND CAPITAL RESOURCES The Company's operating activities generated $31,011,000 of cash during fiscal 1998, which is an increase of $124,646,000 over the prior year. Increases in accounts payable and accrued liabilities were the primary source of the year-over-year increase. Major uses of working capital included an increase in inventories and accounts receivable of $168,533,000 and $49,350,000, respectively. The increase in inventory was due to the additional 120 superstores opened during fiscal 1998 and the build-up of merchandise for the Company's PowerMax I facility. Same-store inventory levels decreased 6% in fiscal 1998 and accounts payable leverage as a percent of inventory increased from 46% at January 24, 1998 to 50% at January 23, 1999. The decrease in comparable-store inventory and the improvement in accounts payable leverage are primarily due to the Company's supply-chain management initiatives. The increase in accounts receivable was due to increased vendor funding based on higher merchandise purchase volumes. Net cash used by operations was $56,603,000 in fiscal 1996. Net cash used for investing activities, primarily capital expenditures for new and remodeled stores, was $125,063,000 in fiscal 1998 as compared to $103,217,000 in fiscal 1997 and $106,748,000 in fiscal 1996. Capital expenditures were $120,760,000, $125,804,000 and $101,039,000 in fiscal years 1998, 1997 and 1996, respectively. Net cash provided by financing was $94,733,000 in fiscal 1998. Current year financing activities primarily represent borrowings under the Company's credit facilities and the payment of $77,499,000 for treasury stock purchases. In fiscal 1999, the Company plans to open approximately 100 new OfficeMax superstores in the United States, up to five new OfficeMax PDQ locations and additional delivery and distributions facilities. The Company also expects to remodel nearly 70 existing superstores. Management estimates that the Company's cash requirements for opening or remodeling a superstore, exclusive of pre-opening expenses, will be approximately $1,075,000 and $210,000, respectively. For an OfficeMax superstore, the requirements include an average of approximately $425,000 for leasehold improvements, fixtures, point-of-sale terminals and other equipment, and approximately $650,000 for the portion of store inventory that is not financed by accounts payable to vendors. Pre-opening expenses are expected to -18- 21 average approximately $85,000 for an OfficeMax superstore. In select cases, that average is expected to increase by approximately $30,000 when certain enhanced CopyMax or FurnitureMax features are included. On August 13, 1998, the Company's Board of Directors authorized the Company to repurchase up to $200,000,000 of its common shares on the open market, doubling its previous authorization. At the end of fiscal 1998, the Company had purchased a total of 8,235,000 shares at a cost of $78,778,000. This included systematic purchases of shares to cover potential dilution from the future issuance of shares under the Company's equity-based incentive plans. Future purchases of common shares will depend on the Company's obligation under its equity-based incentive plans, its cash position and market conditions. The Company is a party to litigation it initiated in October 1997 in the United States District Court for the Northern District of Ohio against Ryder arising out of Ryder's failure to fulfill certain payment guarantees pursuant to the terms of the Company's logistics service agreement with Ryder. The Company terminated the logistics service agreement in June 1997 based on numerous claims against Ryder under the agreement including, among others, Ryder's refusal to honor its cost guarantees and its failure to return overpayments to the Company. During the course of the agreement, the Company recorded receivables from Ryder of approximately $19,000,000 representing overpayments due from Ryder pursuant to the terms of the agreement. In January 1998, Ryder filed a counterclaim against the Company alleging damages arising from the Company's termination of the agreement in the amount of approximately $75,000,000. The Company believes the counterclaim is without merit and intends to vigorously defend against such counterclaim. Management is of the opinion that, although the ultimate resolution of the Ryder litigation cannot be forecasted with certainty, final disposition of this matter should not materially affect the Company's liquidity, financial position or results of operations. However, in the event of an unanticipated adverse final determination in this matter, the Company's consolidated net income for the period in which such determination occurs could be materially affected. In addition, there are various claims, lawsuits and pending actions against the Company incident to the Company's operations. It is the opinion of management that the ultimate resolution of these matters will not have a material effect on the Company's liquidity, financial position or results of operations. The Company expects its funds generated from operations as well as its current cash reserves, and, when necessary, seasonal short-term borrowings will be sufficient to finance its operations and capital requirements, including its expansion strategy. The Company has a $500,000,000 revolving credit facility available through June 2002, under which $135,000,000 of borrowings were outstanding as of January 23, 1999. In addition, the Company has uncommitted bank lines of credit of up to $32,000,000, of which $9,700,000 was outstanding at January 23, 1999. SEASONALITY AND INFLATION The Company's business is somewhat seasonal with sales and operating income higher in the third and fourth quarters, which include the Back-to-School period and the holiday selling season, respectively, followed by the traditional new year office supply restocking month of January. Sales in the second quarter's summer months are historically the slowest of the year primarily because of lower office supplies consumption during the summer vacation period. Management believes inflation has not had a material effect on the Company's financial condition or operating results for the periods presented and, in fact, has experienced deflation for items such as fax machines, printers, copiers and computers. YEAR 2000 READINESS The Year 2000 Issue is the result of computer programs being written using two digits rather than four to identify the applicable year. Time-sensitive computer programs may recognize "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. The Company is engaged in a company-wide project to address the Year 2000 Issue. The scope of the Company's Year 2000 project includes: (a) identifying and taking appropriate corrective action to remedy the Company's software, hardware and imbedded technology; (b) working with key third parties with which the Company does business electronically to ensure that such business is not adversely affected by the Year 2000 Issue; and (c) contacting other third parties and requesting assurances that such parties and -19- 22 their products will be Year 2000 compliant on a timely basis. The Company has assembled a Year 2000 project team that is responsible for overseeing the Company's Year 2000 compliance process and ensuring that there are no major interruptions in the Company's operations as a result of the Year 2000 Issue. The project team includes members of the Company's senior management, as well as outside contractors and consultants. The project team provides regular updates to the Company's Board of Directors. The Company has identified both mission critical Year 2000 issues (primarily hardware, operating systems and application systems used in day-to-day operations) and non-mission critical Year 2000 issues related to facilities and product support. The Company is in the process of implementing the SAP system which is expected to resolve potential mission critical problems related to the Year 2000 Issue. However, there can be no assurance that the SAP system will be successfully implemented on a timely basis. Accordingly, as a precautionary measure, all current legacy systems scheduled to be replaced by the SAP system are also in the process of being upgraded to Year 2000 compliant versions. The Company expects to complete its compliance process for mission critical systems by the end of its third fiscal quarter of 1999. The Company has determined that it will be required to modify or replace other portions of its software, hardware and imbedded technology, which are not considered mission critical systems, so that they will function properly with respect to the year 2000 and thereafter. The Company's target for completing its compliance process for non-mission critical systems is also the end of its third fiscal quarter of 1999. Currently, the Company estimates it has completed 55% of its compliance process for both mission critical and non-mission critical systems and issues. The Company is in the process of developing formal contingency plans in the event that any of its mission critical or non-mission critical Year 2000 issues are not resolved in a timely manner. The Company is directly working with key third parties with which the Company does business electronically to remediate and test affected systems. The Company is also in the process of contacting other third parties, including product suppliers, to identify other potential Year 2000 issues. The Company intends to either resolve any issues identified or develop appropriate contingency plans. All costs and expenses incurred relating to the Year 2000 Issue are charged against income on a current basis. Based on the Company's most recent evaluation, including internal expenses, the total cost of the Company's Year 2000 project is expected to be approximately $5,000,000, of which approximately $1,800,000 has been incurred through January 23, 1999. Management's estimates regarding the expected completion dates and cost involved in the Company's Year 2000 project are based on various assumptions regarding future events, including the availability of resources, the success of third parties in addressing their own Year 2000 issues, and other factors. There are significant risks to the Company if the actual completion dates or costs differ materially from expected completion dates and costs. These risks include the need to process transactions manually at significant costs to the Company, significant delays in obtaining key operational data for analysis, the inability to process customer orders, pay vendors, settle receivables or procure merchandise for resale on a timely basis and to perform other critical business functions which could have a material adverse effect on the Company's financial position and the results of its operations. Further, the Company cannot reasonably estimate the impact on the Company of key third parties not successfully addressing their own Year 2000 issues. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("FAS 133") which is required to be adopted in fiscal years beginning after June 15, 1999. FAS 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company has not yet determined what the effect of the new pronouncement will be on the earnings and financial position of the Company. -20- 23 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk, principally interest rate risk and foreign exchange risk. Interest earned on the Company's cash equivalents and short-term investments, as well as interest paid on its debt and lease obligations, are sensitive to changes in interest rates. The Company's long-term debt is principally variable rate debt, while the interest component of its operating leases is generally fixed. The Company manages its interest rate risk by maintaining a combination of fixed and variable rate debt. The Company has entered into an interest rate swap agreement to fix the interest rate associated with the mortgage on its corporate headquarters. The Company believes its potential exposure to interest rate risk is not material to the Company's financial position or the results of its operations. The Company is exposed to foreign currency exchange risk through its joint venture partnerships in Mexico, Japan and Brazil. The Company has not entered into any derivative financial instruments to hedge this exposure, and believes its potential exposure is not material to the Company's financial position or the results of its operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Consolidated Financial Statements on page F-1. Supplementary quarterly financial information for the Company is included in Note 11 of Notes to Consolidated Financial Statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None -21- 24 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 regarding Directors is contained under the caption "Election of Directors" in the Proxy Statement which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year which information under such caption is incorporated herein by reference. The information required by Item 10 regarding Executive Officers is contained under the caption "Executive Officers of the Registrant" in Part I of this Form 10-K which information under such caption is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is contained on pages 6 through 12 of the Proxy Statement and under the captions "Compensation of Directors" and "Compensation Committee Interlocks and Insider Participation" contained in the Proxy Statement which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is contained on pages 3 and 4 of the Proxy Statement under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" in the Proxy Statement which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is contained on pages 11 and 12 of the Proxy Statement under the caption "Certain Relationships and Related Transactions" which information is incorporated herein by reference. -22- 25 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements: See Index to Consolidated Financial Statements on page F-1. (a)(2) Financial Statement Schedules: None (a)(3) Exhibits: See Exhibit Index on pages 25 and 26 of this report. (b) Reports on Form 8-K: None -23- 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OFFICEMAX, INC. DATE: April 8, 1999 By: /s/ Michael Feuer ------------------- Michael Feuer, Chairman and Chief Executive Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Michael Feuer Chairman and Chief April 8, 1999 - -------------------- Executive Officer and Director Michael Feuer (Principal Executive Officer) /s/ Jeffrey L. Rutherford Executive Vice President, Chief April 8, 1999 - --------------------------- Financial Officer (Principal Jeffrey L. Rutherford Financial and Accounting Officer) /s/ Raymond L. Bank Director April 8, 1999 - --------------------- Raymond L. Bank /s/ Burnett W. Donoho Director April 8, 1999 - ----------------------- Burnett W. Donoho /s/ Carl D. Glickman Director April 8, 1999 - ----------------------- Carl D. Glickman /s/ James F. McCann Director April 8, 1999 - ------------------- James F. McCann /s/ Sydell L. Miller Director April 8, 1999 - -------------------- Sydell L. Miller /s/ Ivan J. Winfield Director April 8, 1999 - -------------------- Ivan J. Winfield
-24- 27 EXHIBIT INDEX -------------
Incorporation Exhibit No. Description of Exhibit by Reference - ----------- ---------------------- ------------ 3.1 Second Amended and Restated Articles of Incorporation of the Company. (3) 3.2 Code of Regulations of the Company. (3) 4.1 Specimen Certificate for the Common Shares. (1) 10.1 Credit Agreement dated as of July 3, 1997 by and among the Company, the lenders (6) party thereto, the co-agents party thereto, KeyBank National Association, as documentation agent, and The Bank of New York, as administrative agent and as swing line lender. 10.2 Mortgage Loan Agreement dated November 6, 1996 by and between the Company and (5) KeyBank National Association. * 10.3 Amended and Restated Employment Agreement dated as of October 13, 1998 by and between Michael Feuer and the Company (filed herewith). 10.4 Share purchase agreement dated August 25, 1995 by and among the Company, (4) Corporate Express, Inc. and Synergom, Inc. relating to the purchase by Corporate Express from OfficeMax of the outstanding Corporate Express Common Stock owned by OfficeMax. * 10.5 OfficeMax Employee Share Purchase Plan. (1) * 10.6 OfficeMax Management Share Purchase Plan. (1) * 10.7 OfficeMax Director Share Plan. (1) * 10.8 OfficeMax Amended and Restated Equity-Based Award Plan. (7) * 10.9 OfficeMax Annual Incentive Bonus Plan. (7) 10.10 Lease Guaranty, Indemnification and Reimbursement Agreement dated November 9, (2) 1994 between the Company and Kmart Corporation. * 10.11 Forms of Severance Agreements. (7) * 10.12 Schedule of certain executive officers who are parties to the Severance Agreements in the forms referred to in Exhibit 10.11 (filed herewith). 21 List of Subsidiaries. (5) 23 Consent of Independent Accountants (filed herewith). 27.1 Financial Data Schedule for fiscal year ended January 23, 1999 (filed herewith). 27.2 Restated Financial Data Schedule for fiscal year ended January 24, 1998 (filed herewith). 99.1 Statement Regarding Forward Looking Information (filed herewith).
-25- 28 (1) Included as an exhibit to the Company's Registration Statement on Form S-1 (No. 33-83528) and incorporated herein by reference. (2) Included as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended October 22, 1994, and incorporated herein by reference. (3) Included as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended January 21, 1995, and incorporated herein by reference. (4) Included as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended January 27, 1996, and incorporated herein by reference. (5) Included as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended January 25, 1997, and incorporated herein by reference. (6) Included as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended October 25, 1997, and incorporated herein by reference. (7) Included as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended January 24, 1998, and incorporated herein by reference. * Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. -26- 29 OFFICEMAX, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Management F - 2 Report of Independent Accountants F - 2 Consolidated Statements of Income - Fiscal years ended January 23, 1999, January 24, 1998 and January 25, 1997 F - 3 Consolidated Balance Sheets - January 23, 1999 and January 24, 1998 F - 4 Consolidated Statements of Cash Flows - Fiscal years ended January 23, 1999, January 24, 1998 and January 25, 1997 F - 5 Consolidated Statements of Changes in Shareholders' Equity - Fiscal years ended January 23, 1999, January 24, 1998 and January 25, 1997 F - 6 Notes to Consolidated Financial Statements F - 7
F-1 30 REPORT OF MANAGEMENT Responsibility for the integrity and objectivity of the financial information presented in this Annual Report on Form 10-K rests with OfficeMax management. The financial statements of OfficeMax, Inc. and its subsidiaries were prepared in conformity with generally accepted accounting principles, applying certain estimates and judgements as required. OfficeMax has established and maintains a system of internal controls designed to provide reasonable assurance that the books and records reflect the transactions of the Company and that its established policies and procedures are carefully followed. This system is based on written procedures, policies and guidelines, organizational structures that provide an appropriate division of responsibility, a program of internal audit and the careful selection and training of qualified personnel. PricewaterhouseCoopers LLP, independent accountants, examined the financial statements and their report is presented below. Their opinion is based on an examination which provides an independent, objective review of the way OfficeMax fulfills its responsibility to publish statements which present fairly its financial position and operating results. They obtain and maintain an understanding of the Company's accounting and reporting controls, test transactions and perform related auditing procedures as they consider necessary to arrive at an opinion on the fairness of the financial statements. While the independent accountants make extensive reviews of procedures, it is neither practicable nor necessary for them to test a large portion of the daily transactions. The Board of Directors pursues its oversight responsibility for the financial statements through its Audit Committee, composed of Directors who are not associates of the Company. The Committee meets periodically with the independent accountants, representatives of management and internal auditors to assure that all are carrying out their responsibilities. To assure independence, PricewaterhouseCoopers and the internal auditors have full and free access to the Audit Committee, without Company representatives present, to discuss the results of their examinations and their opinions on the adequacy of internal controls and the quality of financial reporting. /s/Michael Feuer /s/Jeffrey L. Rutherford - ---------------- ------------------------ Michael Feuer Jeffrey L. Rutherford Chairman of the Board & Executive Vice President, Chief Executive Officer Chief Financial Officer REPORT OF INDEPENDENT ACCOUNTANTS To The Board of Directors and Shareholders of OfficeMax, Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of OfficeMax, Inc. and its subsidiaries (the "Company") at January 23, 1999 and January 24, 1998, and the results of their operations and their cash flows for each of the three years in the period ended January 23, 1999, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP - ------------------------------ PRICEWATERHOUSECOOPERS LLP Cleveland, Ohio March 4, 1999 F-2 31 OFFICEMAX, INC. CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data)
=========================================================================================================== JANUARY 23, JANUARY 24, JANUARY 25, FISCAL YEAR ENDED 1999 1998 1997 =========================================================================================================== Sales $ 4,337,768 $ 3,765,444 $ 3,179,274 Cost of sales, including buying and occupancy costs 3,284,582 2,895,084 2,489,016 Computer segment asset write-off 79,950 - - ---------------------------------------------- 3,364,532 2,895,084 2,489,016 Gross profit 973,236 870,360 690,258 Store operating and selling expenses 761,122 614,890 503,161 Pre-opening expenses 11,851 15,512 10,649 General and administrative expenses 104,181 84,651 61,602 Goodwill amortization 9,390 9,390 9,390 ---------------------------------------------- Total operating expenses 886,544 724,443 584,802 ---------------------------------------------- Operating income 86,692 145,917 105,456 Interest income (expense), net (5,681) 514 7,485 ---------------------------------------------- Income before income taxes 81,011 146,431 112,941 Income taxes 32,391 56,811 44,136 ---------------------------------------------- Net income $ 48,620 $ 89,620 $ 68,805 ============================================== EARNINGS PER COMMON SHARE DATA: Basic earnings per common share $ 0.40 $ 0.73 $ 0.56 ============================================== Diluted earnings per common share $ 0.39 $ 0.72 $ 0.55 ============================================== Weighted average number of common shares outstanding: Basic number of common shares outstanding 122,240,000 123,213,000 122,877,000 ============================================== Diluted number of common shares outstanding 123,751,000 125,196,000 125,133,000 ==============================================
See accompanying Notes to Consolidated Financial Statements. F-3 32 OFFICEMAX, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
============================================================================= JANUARY 23, JANUARY 24, 1999 1998 ============================================================================= ASSETS Current Assets: Cash and equivalents $ 67,482 $ 66,801 Accounts receivable, net of allowances of $824 and $837, respectively 141,800 92,450 Merchandise inventories 1,254,761 1,086,228 Other current assets 39,600 37,255 ----------- ----------- Total current assets 1,503,643 1,282,734 Property and Equipment: Buildings and land 19,223 19,212 Leasehold improvements 183,320 172,878 Furniture and fixtures 381,151 287,728 ----------- ----------- Total property and equipment 583,694 479,818 Less: Accumulated depreciation and amortization (230,446) (167,965) ----------- ----------- Property and equipment, net 353,248 311,853 Other assets and deferred charges 60,040 41,280 Goodwill, net of accumulated amortization of $60,621 and $51,231, respectively 314,965 324,355 =========== =========== $ 2,231,896 $ 1,960,222 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable - trade $ 625,810 $ 496,619 Accrued expenses and other liabilities 121,441 128,674 Accrued salaries and related expenses 50,704 38,669 Taxes other than income taxes 58,638 55,953 Credit facilities 144,700 - Mortgage loan, current portion 1,300 1,300 ----------- ----------- Total current liabilities 1,002,593 721,215 Mortgage loan 16,425 17,725 Other long-term liabilities 74,736 60,637 ----------- ----------- Total liabilities 1,093,754 799,577 ----------- ----------- Commitments and contingencies - - Shareholders' Equity: Common stock without par value; 200,000,000 shares authorized; 124,988,442 and 124,370,209 shares issued and outstanding, respectively 868,321 861,991 Deferred stock compensation (260) (306) Retained earnings 348,859 300,239 Less: Treasury stock, at cost (78,778) (1,279) ----------- ----------- Total shareholders' equity 1,138,142 1,160,645 ----------- ----------- $ 2,231,896 $ 1,960,222 =========== ===========
See accompanying Notes to Consolidated Financial Statements. F-4 33 OFFICEMAX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
==================================================================================================================== JANUARY 23, JANUARY 24, JANUARY 25, FISCAL YEAR ENDED 1999 1998 1997 ==================================================================================================================== OPERATIONS Net income $ 48,620 $ 89,620 $ 68,805 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 73,863 67,320 51,613 Deferred income taxes (16,235) 3,804 (2,529) Increase in other long-term liabilities 14,099 7,532 5,855 Other - net 79 (3,090) (14,974) Changes in current assets and current liabilities: (Increase) in inventories (168,533) (191,821) (258,196) Increase in accounts payable 106,689 2,598 109,522 (Increase) decrease in accounts receivable (49,350) (68,378) 2,967 Increase (decrease) in accrued liabilities 21,779 (1,220) (19,666) -------------------------------------------------------------- Net cash provided by (used for) operations 31,011 (93,635) (56,603) -------------------------------------------------------------- INVESTING Capital expenditures (120,760) (125,804) (101,039) Proceeds from the sale of equipment - 27,675 - Other - net (4,303) (5,088) (5,709) -------------------------------------------------------------- Net cash (used for) investing (125,063) (103,217) (106,748) -------------------------------------------------------------- FINANCING Reduction in capital lease obligations - - (16) Increase in revolving credit facilities 144,700 - - Proceeds from mortgage loan - - 20,000 Payments of mortgage principal (1,300) (975) - Increase in overdraft balances 22,502 3,604 32,290 Purchase of treasury stock (77,499) (1,279) - Proceeds from issuance of common stock, net 6,330 4,192 3,325 -------------------------------------------------------------- Net cash provided by financing 94,733 5,542 55,599 -------------------------------------------------------------- Net increase (decrease) in cash and equivalents 681 (191,310) (107,752) Cash and equivalents, beginning of period 66,801 258,111 365,863 -------------------------------------------------------------- Cash and equivalents, end of period $ 67,482 $ 66,801 $ 258,111 ==============================================================
See accompanying Notes to Consolidated Financial Statements. F-5 34 OFFICEMAX, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Dollars in thousands)
================================================================================================================================ COMMON SHARES DEFERRED STOCK RETAINED TREASURY ------------------------------- SHARES AMOUNT COMPENSATION EARNINGS STOCK TOTAL ================================================================================================================================ BALANCE AT JANUARY 27, 1996 123,496,170 $ 850,557 $ (1,482) $ 141,814 $ - $ 990,889 Issuance of common shares under director plan 18,749 212 (150) - - 62 Exercise of stock options (including tax benefit) 164,980 926 - - - 926 Sale of shares under management share purchase plan (including tax benefit) (7,848) 681 (475) - - 206 Sale of shares under employee share purchase plan (including tax benefit) 94,563 1,718 - - - 1,718 Amortization of deferred compensation - - 958 - - 958 Net income - - - 68,805 - 68,805 ------------------------------------------------------------------------------------------- BALANCE AT JANUARY 25, 1997 123,766,614 854,094 (1,149) 210,619 - 1,063,564 Issuance of common shares under director plan 12,445 176 (150) - - 26 Exercise of stock options (including tax benefit) 526,167 5,071 - - - 5,071 Sale of shares under management share purchase plan (including tax benefit) (13,236) 1,692 - - - 1,692 Sale of shares under employee share purchase plan (including tax benefit) 78,219 958 - - - 958 Amortization of deferred compensation - - 993 - - 993 Treasury stock purchased (100,000 shares) - - - - (1,279) (1,279) Net income - - - 89,620 - 89,620 ------------------------------------------------------------------------------------------- BALANCE AT JANUARY 24, 1998 124,370,209 861,991 (306) 300,239 (1,279) 1,160,645 Issuance of common shares under director plan 14,114 175 (141) - - 34 Exercise of stock options (including tax benefit) 472,988 4,550 - - - 4,550 Sale of shares under management share purchase plan (including tax benefit) 45,572 652 (113) - - 539 Sale of shares under employee share purchase plan (including tax benefit) 85,559 953 - - - 953 Amortization of deferred compensation - - 300 - - 300 Treasury stock purchased (8,135,000 shares) - - - - (77,499) (77,499) Net income - - - 48,620 - 48,620 =========================================================================================== BALANCE AT JANUARY 23, 1999 124,988,442 $ 868,321 $ (260) $ 348,859 $ (78,778) $1,138,142 ===========================================================================================
See accompanying Notes to Consolidated Financial Statements. F-6 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OfficeMax, Inc. ("OfficeMax" or the "Company") operates a chain of high-volume, deep-discount office products superstores. At January 23, 1999, the Company owned and operated 832 stores in 49 states and Puerto Rico as well as 17 delivery centers and two national call centers throughout the United States which service the Company's catalog and direct marketing customers. Through joint venture partnerships, the Company also operates on an international basis including locations in Mexico and Japan. The joint ventures operate OfficeMax superstores similar to those in the United States. BASIS OF PRESENTATION The Company's consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Investments in affiliates representing 20%-50% of the ownership of such companies for which the Company has the ability to exercise significant influence over operating and financial policies, are accounted for under the equity method. Investments in affiliates, representing less than 20% of the ownership of such companies, are accounted for under the cost method and loans, which the Company makes from time to time to these affiliates, are recorded in other assets or accounts receivable. The Company has two reportable business segments: the Core Business Segment and the Computer Business Segment. The Core Business Segment includes office supplies, business machines, peripherals, print-for-pay services and office furniture. The Computer Business Segment includes desktop and laptop personal computers and computer monitors. The Company's fiscal year ends on the Saturday prior to the last Wednesday in January. Fiscal years 1998, 1997 and 1996 ended on January 23, 1999, January 24, 1998 and January 25, 1997, respectively. Certain reclassifications have been made to prior year amounts to conform to the current presentation. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. CASH AND EQUIVALENTS Cash and equivalents includes short-term investments with original maturities of 90 days or less. Marketable securities are classified as held-to-maturity. The Company had no marketable securities at January 23, 1999. Such securities totaled $6,500,000 at January 24, 1998 and consisted primarily of investments in commercial paper, government securities and repurchase agreements with maturities of 90 days or less. INVENTORIES Inventories are valued at the lower of average cost or market. ACCOUNTS RECEIVABLE Accounts receivable consists primarily of amounts due from vendors under rebate, cooperative advertising and other contractual programs and trade receivables not financed through outside programs. The Company has an arrangement with a financial services company (the "Issuer") whereby the Issuer manages the Company's private label credit card programs. The credit card accounts, and receivables generated thereby, are owned by the Issuer. Under the terms of the agreement, the Issuer charges the Company a fee to cover the Issuer's cost of providing credit and collecting the receivables which are non-recourse to the Company. ADVERTISING Advertising costs are either expensed or capitalized and amortized in proportion to related revenues. The total amount capitalized in accordance with the provisions of Statement of Position 93-7 issued by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants was $5,891,000 and $8,786,000 at January 23, 1999 and January 24, 1998, respectively. These amounts relate to the Company's catalog and other direct response advertising and are amortized over the six month period during which the merchandise contents and pricing are valid. The Company and its vendors participate in cooperative advertising programs in which the vendors reimburse the Company for a portion of certain advertising costs. Advertising expense, net of vendor reimbursements, was $88,769,000, $87,590,000 and $79,549,000 for fiscal 1998, 1997 and 1996, respectively. F-7 36 INCOME TAXES The Company uses the liability method whereby income taxes are recognized during the year in which transactions enter into the determination of financial statement income. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between financial statement and tax basis of assets and liabilities. PROPERTY AND EQUIPMENT Components of property and equipment are recorded at cost and depreciated over their respective estimated useful lives using the straight-line method for financial statement purposes and accelerated methods for income tax purposes. All store properties are leased, and improvements are amortized over the lesser of the term of the lease or 20 years. Other annual rates used in computing depreciation are 13%-20% for store fixtures and equipment and 14%-33% for other fixtures and equipment. GOODWILL Goodwill is amortized over 40 years using the straight-line method. The Company evaluates the recoverability of goodwill and reviews the amortization period on an annual basis. Based on its review, the Company does not believe that an impairment of its goodwill has occurred. IMPAIRMENT OF LONG-LIVED ASSETS The Company assesses the recoverability of its long-lived assets, including goodwill, by determining whether the amortization of the remaining balance of an asset over its remaining useful life can be recovered through undiscounted future operating cash flows. If impairment exists, the carrying amount of the asset would be reduced. CURRENT LIABILITIES Under the Company's cash management system, checks issued pending clearance result in overdraft balances for accounting purposes and are included in the accounts payable balance. The amounts reclassified were $133,423,000 and $110,921,000 for fiscal years 1998 and 1997, respectively. FINANCIAL INSTRUMENTS The recorded value of the Company's financial instruments, which includes short term securities, accounts receivable, accounts payable, revolving credit facilities and mortgage payable, approximates fair value. Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash investments. The Company invests its excess cash in high-quality securities placed with major banks and financial institutions. The Company has established guidelines relative to diversification and maturities to maintain safety and liquidity. REVENUE RECOGNITION The Company recognizes revenue when the earnings process is complete, generally at the point-of-sale to a customer or upon delivery to a customer. PRE-OPENING EXPENSES In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting Costs of Start-up Activities" ("SOP 98-5"), which requires that costs related to start-up activities be expensed as incurred. Prior to fiscal 1998, the Company expensed costs associated with the opening of a new store during the first month of the store's operations. The Company adopted the provisions of SOP 98-5 in its financial statements for the year ended January 23, 1999. The effect of adoption was not significant to the Company's results of operations. F-8 37 STOCK BASED COMPENSATION Effective January 27, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("FAS 123"). As provided for under FAS 123, the Company has elected to continue to account for stock based compensation under the provisions of Accounting Principles Boards (`APB') Opinion No. 25, "Accounting for Stock Issued to Employees." Compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. Pro forma disclosures of net earnings and earnings per share, as if the fair value based method of accounting defined in FAS 123 had been applied, are presented in Note 9 of Notes to Consolidated Financial Statements. EARNINGS PER COMMON SHARE Earnings per share are calculated in accordance with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"), effective for fiscal 1997. FAS 128 requires the Company to report both basic earnings per share, which is based on the weighted average number of common shares outstanding, and diluted earnings per share, which is based on the weighted average number of common shares outstanding and all potentially dilutive common stock equivalents. Earnings per share data for all prior years have been recalculated to reflect the provisions of FAS 128. A reconciliation of the basic and diluted per share computations is as follows:
PER SHARE (Dollars in thousands, except per share data) INCOME SHARES AMOUNT ====================================================================================================================== FISCAL 1998 Earnings per share of common stock - Basic $ 48,620 122,240 $ 0.40 Effect of dilutive securities: Stock options 714 Restricted stock units 797 --------------- --------------- --------------- Earnings per share of common stock - Diluted $ 48,620 123,751 $ 0.39 --------------- --------------- --------------- FISCAL 1997 Earnings per share of common stock - Basic $ 89,620 123,213 $ 0.73 Effect of dilutive securities: Stock options 1,224 Restricted stock units 759 --------------- --------------- --------------- Earnings per share of common stock - Diluted $ 89,620 125,196 $ 0.72 --------------- --------------- --------------- FISCAL 1996 Earnings per share of common stock - Basic $ 68,805 122,877 $ 0.56 Effect of dilutive securities: Stock options 1,488 Restricted stock units 768 --------------- --------------- --------------- Earnings per share of common stock - Diluted $ 68,805 125,133 $ 0.55 =============== =============== ===============
Options to purchase 4,794,000, 3,218,000 and 185,000 common shares were excluded from the calculation of diluted earnings per share in fiscal years 1998, 1997 and 1996, respectively, because the exercise prices of the options were greater than the average market price. These shares had weighted average exercise prices of $14.89, $14.47 and $9.87, respectively. F-9 38 NOTE 2. COMPUTER SEGMENT ASSET WRITE-OFF In conjunction with its decision to realign its Computer Business Segment, the Company recorded a non-recurring, pre-tax charge of $79,950,000 during January 1999. The non-cash charge accounted for the liquidation of existing, discontinued computer inventory. In addition, the charge provided for the impairment of prepaid expenses and other assets directly related to the Computer Business Segment. The charge reduced net income by $49,889,000 or $0.41 per diluted share. NOTE 3. RELATIONSHIP WITH KMART CORPORATION Prior to the Company's initial public offering (the "Offering") on November 2, 1994, Kmart Corporation ("Kmart") owned a 92.7% equity interest in the Company. The proceeds from the Offering were paid to Kmart, reducing Kmart's ownership in the Company to approximately 25%. On July 20, 1995, the Company sold common shares in a public offering (the "Secondary Offering"). As part of the Secondary Offering, Kmart sold all of its remaining shares. Kmart continues to guarantee certain of the Company's leases in effect at the date of the Offering and provides guarantees which it previously committed to with respect to stores opened after the Offering and prior to the end of fiscal 1995. Such lease guarantees are provided by Kmart at no cost to the Company. The Company has agreed to indemnify Kmart for any losses incurred by Kmart as a result of actions, omissions or defaults on the part of OfficeMax, as well as for all amounts paid by Kmart pursuant to Kmart's guarantees of the Company's leases. The agreement contains certain financial and operating covenants, including restrictions on the Company's ability to pay dividends, incur indebtedness, incur liens or merge with another entity. NOTE 4. DEBT CREDIT FACILITIES On July 3, 1997, the Company entered into a five year, $500,000,000 revolving credit facility (the "revolving credit facility") in which 19 banks participate. The revolving credit facility provides for borrowings bearing interest at the banks' prime or Eurodollar rate plus .1450% to .3125%. The Company must also pay quarterly fees on the full amount of the revolving credit facility varying between .08% and .1875% per annum. Standby letters of credit issued in connection with the Company's self insurance program are considered outstanding amounts under the revolving credit facility and totaled $19,800,000 and $16,000,000 as of January 23, 1999 and January 24, 1998, respectively. As of January 23, 1999, the Company had outstanding borrowings of $135,000,000 under the revolving credit facility at a weighted average interest rate of 5.21%. There were no borrowings outstanding under the revolving credit facility as of January 24, 1998. In addition to the revolving credit facility, the Company has uncommitted bank lines which provide for unsecured borrowings of up to $32,000,000, of which $9,700,000 was outstanding at January 23, 1999 at a weighted average interest rate of 5.06%. There were no borrowings under these uncommitted lines at January 24, 1998. There are no commitment fees or compensating balances associated with these arrangements. MORTGAGE On January 16, 1997, the Company entered into a $20,000,000 mortgage agreement (the "Mortgage") secured by its international corporate headquarters. The Mortgage has a fixed term of 10 years, quarterly amortization payments of $325,000 plus interest at 6.99% per annum (after giving effect to an interest rate swap) with a final payment of $7,000,000 due at maturity. Maturities of long-term borrowings will be $1,300,000 over each of the next five years. The revolving credit facility and the Mortgage contain similar financial covenants with respect to fixed charge coverage and consolidated leverage ratios. F-10 39 NOTE 5. COMMITMENTS AND CONTINGENCIES The Company is a party to litigation it initiated in October 1997 in the United States District Court for the Northern District of Ohio against Ryder Integrated Logistics, Inc. ("Ryder") arising out of Ryder's failure to fulfill certain payment guarantees pursuant to the terms of the Company's logistics service agreement with Ryder. The Company terminated the logistics service agreement in June 1997 based on numerous claims against Ryder under the agreement including, among others, Ryder's refusal to honor its cost guarantees and its failure to return overpayments to the Company. During the course of the agreement the Company recorded receivables from Ryder of approximately $19,000,000 representing overpayments due from Ryder pursuant to the terms of the agreement. In January 1998, Ryder filed a counterclaim against the Company alleging damages arising from the Company's termination of the agreement in the amount of approximately $75,000,000. The Company believes the counterclaim is without merit and intends to vigorously defend against such counterclaim. Management is of the opinion that, although the ultimate resolution of the Ryder litigation cannot be forecasted with certainty, final disposition of this matter should not materially affect the Company's liquidity, financial position or results of operations. However, in the event of an unanticipated adverse final determination in this matter, the Company's consolidated net income for the period in which such determination occurs could be materially affected. In addition, there are various claims, lawsuits and pending actions against the Company incident to the Company's operations. It is the opinion of management that the ultimate resolution of these matters will not have a material effect on the Company's liquidity, financial position or results of operations. NOTE 6. INCOME TAXES The provision (benefit) for income taxes consists of:
================================================================================================================= FISCAL YEAR ENDED JANUARY 23, JANUARY 24, JANUARY 25, (In thousands) 1999 1998 1997 ================================================================================================================= Current federal $ 44,574 $ 45,694 $ 39,275 State and local 3,304 5,900 5,815 Foreign 748 1,413 1,575 Deferred (16,235) 3,804 (2,529) --------------- --------------- -------------- Total income taxes $ 32,391 $ 56,811 $ 44,136 =============== =============== ==============
A reconciliation of the federal statutory rate to the Company's effective tax rate follows:
================================================================================================================= JANUARY 23, JANUARY 24, JANUARY 25, FISCAL YEAR ENDED 1999 1998 1997 ================================================================================================================= Federal statutory rate 35.0% 35.0% 35.0% State and local taxes net of federal tax benefit 2.7% 2.6% 3.4% Goodwill amortization 4.1% 2.2% 2.9% Tax exempt interest (0.1)% (0.2)% (1.6)% Other (1.7)% (0.8)% (0.6)% --------------- --------------- -------------- Total income taxes 40.0% 38.8% 39.1% =============== =============== ==============
F-11 40 Deferred tax assets (liabilities) resulted from the following:
============================================================================================= FISCAL YEAR ENDED JANUARY 23, JANUARY 24, (In thousands) 1999 1998 ============================================================================================= Inventory $ 5,248 $ 1,134 Property and equipment (8,943) (3,474) Escalating rent 20,516 2,711 Accrued expenses not currently deductible 29,251 29,467 --------------- --------------- Total deferred tax assets $ 46,072 $ 29,838 =============== ===============
NOTE 7. LEASES DESCRIPTION OF LEASING ARRANGEMENTS The Company conducts operations primarily in leased facilities. Store leases are generally for terms of 10 to 25 years with multiple five to 10 year renewal options which allow the Company the option to extend the life of the lease up to 20 years beyond the initial noncancellable term at escalated rents. Certain leases provide for additional rental payments based on a percent of sales in excess of a specified base. Also, certain leases provide for payment by the Company of executory costs (taxes, maintenance and insurance). LEASE COMMITMENTS Future minimum lease payments and future minimum rentals at January 23, 1999 were as follows:
========================================================================= FISCAL YEAR OPERATING (In thousands) LEASES ========================================================================= 1999 $ 289,643 2000 281,321 2001 265,193 2002 240,359 2003 213,073 Thereafter 1,540,721 =============== Total minimum lease payments $ 2,830,310 ===============
RENTAL EXPENSE A summary of operating lease rental expense and short-term rentals follows:
================================================================================================================= FISCAL YEAR ENDED JANUARY 23, JANUARY 24, JANUARY 25, (In thousands) 1999 1998 1997 ================================================================================================================= Minimum rentals $ 264,858 $ 218,271 $ 153,637 Percentage rentals 478 428 783 =============== =============== ============== Total $ 265,336 $ 218,699 $ 154,420 =============== =============== ==============
F-12 41 NOTE 8. SUPPLEMENTAL CASH FLOW INFORMATION
================================================================================================================= FISCAL YEAR ENDED JANUARY 23, JANUARY 24, JANUARY 25, (In thousands) 1999 1998 1997 ================================================================================================================= Cash transactions: Cash paid for interest $ 6,640 $ 2,269 $ - Cash paid for income taxes $ 59,117 $ 48,649 $ 26,060 Non-cash transactions: Liabilities accrued for property and equipment acquired $ - $ 18,148 $ 53,956 Note receivable converted to equity investment $ 4,000 $ - $ - Tax benefit related to stock options $ 500 $ 3,705 $ -
NOTE 9. EMPLOYEE BENEFIT PLANS STOCK PURCHASE PLANS In connection with the Offering, the Company adopted a Management Share Purchase Plan (the "Management Plan"), an Employee Share Purchase Plan (the "Employee Plan") and a Director Share Plan (the "Director Plan"). Under the Management Plan, the Company's officers are required to use at least 20%, and may use up to 100%, of their annual incentive bonuses to purchase restricted common shares of the Company at a 20% discount from the fair value of the same number of unrestricted common shares. Restricted common shares purchased under the Management Plan are generally restricted from sale or transfer for three years from date of purchase. The maximum number of common shares reserved for issuance under the Management Plan is 1,242,227. The Company recognized compensation expense for the discount on the restricted common shares of $160,000, $623,000 and $643,000 for fiscal 1998, 1997 and 1996, respectively. The Employee Plan is available to all full-time employees of the Company who are not covered under the Management Plan and who have worked at least 1,000 hours during a period of 12 consecutive months. Each eligible employee has the right to purchase, on a quarterly basis, the Company's common shares at a 15% discount from the fair market value per common share. Shares purchased under the Employee Plan are generally restricted from sale or transfer for one year from date of purchase. The maximum number of shares eligible for purchase under the Employee Plan is 2,958,761. The Company is not required to record compensation expense with respect to shares purchased under the Employee Plan. The Director Plan covers all directors of the Company who are not officers or employees of the Company. Participants receive all of their annual retainer in the form of restricted common shares paid at the beginning of the relevant calendar year and all of their meeting fees in the form of unrestricted common shares paid at the end of the calendar quarter in which the meetings occurred. The restrictions on such shares generally lapse one year from the date of grant. The maximum number of shares reserved for issuance under the Director Plan is 112,929. SAVINGS PLAN Employees of the Company who meet certain service requirements are eligible to participate in the Company's 401(k) savings plan. Participants may contribute 2% to 15% of their annual earnings, subject to statutory limitations. Effective August 25, 1995, the Company began matching 25% of the first 3% of the employee's contribution. The Company increased the matching contribution to 50% of the first 3%, effective February 1, 1997. Such matching Company contributions are invested in shares of the Company's common stock and become vested 50% after two years of service and 100% after three years of service. The charge to operations for the Company's matching contribution amounted to $950,000, $794,000 and $322,000 in fiscal 1998, 1997 and 1996, respectively. F-13 42 STOCK OPTION PLANS In fiscal 1996, the OfficeMax, Inc. 1994 Stock Option Plan (the "1994 Plan") was amended and restated as the Equity-Based Award Plan. As part of the amendment to the 1994 Plan, the OfficeMax, Inc. Employee Non-Qualified Share Option Plan was terminated and all outstanding options were merged into the Equity-Based Award Plan. The Equity-Based Award Plan provides for the issuance of share appreciation rights, restricted shares and up to 17,000,000 options to purchase common shares. Options granted under the Equity-Based Award Plan become exercisable from one to seven years after the date of grant and expire either five or ten years from date of grant. Options may be granted only at option prices not less than the fair market value per common share on the date of the grant. There was no compensation expense related to Equity-Based Award Plan grants during fiscal 1998. The Company recognized compensation expense on grants under the 1994 Plan of $233,000 and $188,000 in fiscal 1997 and 1996, respectively. Exercisable options outstanding were 3,209,432 at January 23, 1999, 2,318,018 at January 24, 1998, and 965,019 at January 25, 1997. Option activity for each of the last three years was as follows:
================================================================================================ WEIGHTED AVERAGE SHARES EXERCISE PRICE ================================================================================================ OUTSTANDING AT JANUARY 27, 1996 3,915,650 $ 8.38 Granted 3,416,719 14.54 Exercised (164,983) 5.61 Forfeited (356,094) 9.84 ----------------- ------------------ OUTSTANDING AT JANUARY 25, 1997 6,811,292 11.46 Granted 3,416,130 12.26 Exercised (491,802) 5.77 Forfeited (1,586,530) 13.22 ----------------- ------------------ OUTSTANDING AT JANUARY 24, 1998 8,149,090 11.78 Granted 4,910,266 11.66 Exercised (472,989) 8.60 Forfeited (1,484,780) 13.98 ----------------- ------------------ OUTSTANDING AT JANUARY 23, 1999 11,101,587 $ 11.57 ================= ==================
F-14 43 STOCK-BASED COMPENSATION Under FAS 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average assumptions used for grants in fiscal 1998, 1997 and 1996, respectively, were expected volatility of 30.9%, 34.5% and 41.8% and risk-free interest rates of 4.88%, 6.25% and 6.21%. A dividend yield of zero and an expected life of five years were used in the model for all three years. The following table summarizes information about options outstanding at January 23, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ========================================================================================================================= RANGE OF WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISE PRICES OPTIONS EXERCISE PRICE REMAINING LIFE (YEARS) OPTIONS EXERCISE PRICE ========================================================================================================================= $4.01 461,611 $ 4.01 3.33 461,611 $ 4.01 $6.68 to $8.45 2,807,365 $ 7.09 7.28 817,365 $ 8.08 $10.50 to $11.75 3,032,445 $ 11.62 7.33 1,613,741 $ 11.60 $13.88 to $14.75 3,934,147 $ 14.53 7.90 276,700 $ 14.45 $15.29 to $17.09 866,019 $ 16.50 8.75 40,015 $ 16.19
Consistent with the method prescribed by FAS 123, the following table summarizes the weighted average fair value at the date of grant for options granted in fiscal 1998, 1997 and 1996. The table also illustrates pro forma net earnings and pro forma earnings per share, giving effect to such compensation costs. The pro forma amounts listed below do not take into consideration the pro forma compensation expense related to grants made prior to fiscal 1995.
======================================================================================================================= JANUARY 23, JANUARY 24, JANUARY 25, FISCAL YEAR ENDED 1999 1998 1997 ======================================================================================================================= Weighted average fair value $ 4.28 $ 5.08 $ 6.58 Pro forma net earnings $ 44,200,000 $ 84,822,000 $ 65,440,000 Pro forma earnings per share: Basic earnings per share $ 0.36 $ 0.69 $ 0.52 Diluted earnings per share $ 0.36 $ 0.68 $ 0.52
F-15 44 NOTE 10. BUSINESS SEGMENTS The Company has two reportable business segments: the Core Business Segment and the Computer Business Segment. The Core Business Segment includes office supplies, business machines, peripherals, print-for-pay services and office furniture. The Computer Business Segment includes desktop and laptop personal computers and computer monitors. The Company evaluates performance and allocates resources based on the operations of these two segments. The accounting policies of the reportable business segments are the same as those described in the Summary of Significant Accounting Policies (Note 1). The following table summarizes the results of operations for the Company's reportable business segments: (Dollars in thousands)
FISCAL 1998 TOTAL COMPANY COMPUTERS CORE ================================================================================================================ Sales $ 4,337,768 $ 336,922 $ 4,000,846 Cost of merchandise sold, including buying and occupancy costs 3,284,582 327,590 2,956,992 Computer segment asset write-off 79,950 79,950 - --------------------------------------------------------- 3,364,532 407,540 2,956,992 Gross profit (loss) 973,236 (70,618) 1,043,854 Operating income (loss) 86,692 (96,471) 183,163 Net income (loss) $ 48,620 $ (62,876) $ 111,496 ========================================================= FISCAL 1997 ================================================================================================================ Sales $ 3,765,444 $ 436,468 $ 3,328,976 Cost of merchandise sold, including buying and occupancy costs 2,895,084 430,706 2,464,378 --------------------------------------------------------- Gross profit 870,360 5,762 864,598 Operating income (loss) 145,917 (6,161) 152,078 Net income (loss) $ 89,620 $ (6,510) $ 96,130 ========================================================= FISCAL 1996 ============================================================================================================ Sales $ 3,179,274 $ 427,287 $ 2,751,987 Cost of merchandise sold, including buying and occupancy costs 2,489,016 419,095 2,069,921 --------------------------------------------------------- Gross profit 690,258 8,192 682,066 Operating income (loss) 105,456 (17,045) 122,501 Net income (loss) $ 68,805 $ (12,149) $ 80,954 =========================================================
Included in net income of the Core Business Segment is $981,000 of net interest expense in fiscal 1998 and $4,990,000 and $10,388,000 of net interest income in fiscal years 1997 and 1996, respectively. Included in net income of the Computer Business Segment is net interest expense of $4,700,000, $4,476,000 and $2,903,000 in fiscal years 1998, 1997 and 1996, respectively. Income tax expense for the Core Business Segment was $70,686,000, $60,938,000 and $51,936,000 for fiscal years 1998, 1997 and 1996, respectively. During those same fiscal years, the Computer Business Segment recognized income tax benefit of $38,295,000, $4,127,000 and $7,800,000, respectively. There are no intersegment sales or expense allocations. The Company does not allocate fixed assets or depreciation to the Computer Business Segment. The total assets of the Computer Business Segment, primarily inventory and accounts receivable, were approximately $60,280,000 and $151,390,000 as of January 23, 1999 and January 24, 1998, respectively. This segment also had accounts payable of $14,274,000 and $6,502,000 as of January 23, 1999 and January 24, 1998, respectively. Other than its investments in Mexico, Japan and Brazil, the Company has no international sales or assets. F-16 45 NOTE 11. QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (Unaudited) Unaudited quarterly consolidated results of operations for the years ended January 23, 1999 and January 24, 1998 are summarized as follows: (Dollars in thousands, except per share data)
FISCAL 1998 ==================================================================================================================== FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ==================================================================================================================== Sales $ 1,061,074 $ 874,470 $ 1,152,359 $ 1,249,865 Cost of merchandise sold, including buying and occupancy costs 818,736 666,131 869,080 930,635 Computer segment asset write-off - - - 79,950 Gross profit 242,338 208,339 283,279 239,280 Net income 19,074 2,625 33,578 (6,657) Earnings per common share: Basic $ 0.15 $ 0.02 $ 0.27 $ (0.06) Diluted $ 0.15 $ 0.02 $ 0.27 $ (0.06) FISCAL 1997 ==================================================================================================================== FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ==================================================================================================================== Sales $ 888,640 $ 776,144 $ 992,365 $ 1,108,295 Cost of merchandise sold, including buying and occupancy costs 688,869 604,385 756,952 844,878 Gross profit 199,771 171,759 235,413 263,417 Net income 15,730 2,450 31,435 40,005 Earnings per common share: Basic $ 0.13 $ 0.02 $ 0.26 $ 0.32 Diluted $ 0.13 $ 0.02 $ 0.25 $ 0.32
F-17 EX-10.3 2 EXHIBIT 10.3 1 Exhibit 10.3 AMENDED AND RESTATED EMPLOYMENT AGREEMENT BETWEEN OFFICEMAX, INC. AND MICHAEL FEUER 2 AMENDED AND RESTATED EMPLOYMENT AGREEMENT ----------------------------------------- THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of the 13th day of October, 1998, between OFFICEMAX, INC., an Ohio corporation (the "Company"), and MICHAEL FEUER ("Executive"). W I T N E S S E T H : --------------------- WHEREAS, the Company and Executive are parties to an Amended and Restated Employment Agreement entered into as of March 5, 1998 (the "Prior Employment Agreement"); and WHEREAS, the Compensation Committee (the "Compensation Committee") of the Board of Directors (the "Board") of the Company has approved and recommended the amendment of the Prior Employment Agreement so as, inter alia, to provide that the term of this Agreement shall be a rolling five (5) year "ever green" period and for severance payments and continuation of certain benefits for no less than five (5) years in the event of the termination of Executive's employment with the Company for any reason other than death or "Cause" (as hereinafter defined) on the terms and conditions set forth in this Agreement; and WHEREAS, in furtherance of the foregoing, it is deemed advisable to amend and restate in full the Prior Employment Agreement as provided herein; and WHEREAS, the Compensation Committee approved the execution and delivery of this Agreement by the Company by written action dated October 13, 1998, NOW, THEREFORE, in consideration of the mutual promises herein contained, the parties hereby agree as follows: 1. Employment. ----------- (a) The Company hereby employs Executive as its Chairman of the Board and Chief Executive Officer, and Executive hereby accepts such employment, on the terms and conditions set forth herein. (b) During the term of this Agreement and any renewal hereof (all references herein to the term of this Agreement shall include references to the period of renewal hereof, if any), Executive shall be and have the titles, duties and authority of the Chairman of the Board and Chief Executive Officer of the Company and shall devote his entire business time and all reasonable efforts to his employment and perform diligently such duties 3 as are customarily performed by the chairman of the board, president and chief executive officer of a company the size and structure of the Company, together with such other duties as may be reasonably requested from time to time by the Board, which duties shall be consistent with his position as set forth above and as provided in Paragraph 2. (c) Executive shall not, without the prior written consent of the Company, directly or indirectly, during the term of this Agreement, other than in the performance of duties naturally inherent to the businesses of the Company and in furtherance thereof, render services of a business, professional or commercial nature to any other person or firm, whether for compensation or otherwise; provided, however, that so long as it does not materially interfere with his full-time employment hereunder, Executive may attend to outside investments, serve as a director of a corporation which does not compete with the Company (as provided in Paragraph 10), and serve as a director, trustee or officer of, or otherwise participate in, educational, welfare, social, religious and civic organizations. The Company hereby acknowledges that Executive is currently serving a three (3) year term as a member of the Advisory Committee of the New York Stock Exchange Board of Directors and a four (4) year term as a member of the Case Western Reserve University Weatherhead School of Management Visiting Committee. 2. Term and Positions. ------------------- (a) Subject to the provisions for renewal and termination hereinafter provided, the term of this Agreement shall begin on the date hereof and shall continue for five (5) years thereafter. Such term shall automatically be extended for one additional day as of t he end of the first day of the term hereof and as of the end of each succeeding day thereafter, unless the Agreement is terminated as provided in Paragraph 8. (b) Executive, without any compensation in addition to that which is specifically provided in this Agreement, shall serve, and shall be entitled and have the right to serve, as a member of the Board, Chairman of the Board, President and Chief Executive Officer of the Company. Without limiting the generality of any of the foregoing, except as hereafter expressly agreed in writing by Executive (i) Executive shall not be required to report to any single individual and shall report only to the Board as an entire body, (ii) no individual shall be elected or appointed as Chairman of the Board, President or Chief Executive Officer of the Company, (iii) the highest levels of Vice-Presidents and other executive officers of the Company shall report to no individual other than Executive, and (iv) no individual or group of individuals (including a committee established or other designee appointed by the Board) shall have any authority over or equal to the authority of Executive in his role as Chairman of the Board, President and Chief Executive Officer (except that the Compensation Committee shall continue to -2- 4 have such powers as may be required to maintain the compliance of the Company's benefit plans under Section 16 of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder), and neither the Company, the Board, nor any member of the Board shall take any action which will or could have the effect of, or appear to have the effect of, giving such authority to any such individual or group. For service as a director, officer and employee of the Company, Executive shall be entitled to the full protection of the applicable indemnification provisions of the corporate charter, code of regulations, by-laws and other policies and procedures of the Company. (c) If: (i) the Company materially changes Executive's duties and responsibilities as set forth in Paragraphs 1(b) and 2(b) without his consent (including, without limitation, by violating any of the provisions of clauses (i), (ii), (iii) and (iv) of Paragraph 2(b)); or (ii) Executive's place of employment or the principal executive offices of the Company are located more than fifty (50) miles from the geographical center of Cleveland, Ohio; or (iii) there occurs a material breach by the Company of any of its obligations under this Agreement, which breach has not been cured in all material respects within ten (10) days after Executive gives notice thereof to the Company; or (iv) there occurs a "Change in Control" (as hereinafter defined) of the Company, then in any such event Executive shall have the right to terminate his employment with the Company, but such termination shall not be considered a voluntary resignation or termination by Executive of such employment or of this Agreement but rather a discharge of Executive by the Company without "Cause" (as hereinafter defined). (d) Executive shall be deemed not to have consented to any material change in his duties and responsibilities unless he shall give written notice of his consent thereto to the Board within fifteen (15) days after receipt of a written proposal setting forth such change. If Executive shall not have given such consent, the Company shall have the opportunity to withdraw such proposed material change by written notice to Executive given within ten (10) days after the end of said fifteen (15) day period. (e) The term "Change in Control" means the first to occur of the following events: -3- 5 - (i) any person or group of commonly controlled persons owns or controls, directly or indirectly, thirty percent (30%) or more of the voting control or value of the capital stock of the Company; or - (ii) the shareholders of the Company approve an agreement to merge or consolidate with another corporation or other entity resulting (whether separately or in connection with a series of transactions) in a change in ownership of thirty percent (30%) or more of the voting control or value of the capital stock of the Company, or an agreement to sell or otherwise dispose of all or substantially all of the Company's assets (including, without limitation, a plan of liquidation or dissolution), or otherwise approve of a fundamental alteration in the nature of the Company's business. 3. Compensation. ------------- (a) For all services he may render to the Company during the term of this Agreement, the Company shall pay to Executive the following: (i) for the period beginning on the date hereof and ending January 23, 1999, salary equal to an annual salary of Nine Hundred Fifty Thousand Dollars ($950,000) multiplied by the ratio of the number of days in the period beginning on the date hereof and ending on January 23, 1999 to the total number of days in the current Fiscal Year (as hereinafter defined); (ii) for the Fiscal Year beginning on January 24, 1999, and for each Fiscal Year thereafter during the term of this Agreement, salary as determined by the Compensation Committee, which in no event shall be less than the annual salary that was payable by the Company to Executive under this Paragraph 3(a) for the immediately preceding Fiscal Year; and (iii) notwithstanding the foregoing, at any time and from time to time during the term of this Agreement, the Compensation Committee may increase (but not decrease) Executive's annual salary. Salary payable by the Company to Executive under this Paragraph 3(a) shall be payable in those installments customarily used in payment of salaries to the Company's executives (but in no event less frequently than monthly). The term "Fiscal Year" means the period beginning on the day after the Saturday immediately preceding the last Wednesday in January of one year and ending on the Saturday immediately preceding the last Wednesday in January of the immediately following year. -4- 6 (b) In addition to the salary provided in Paragraph 3(a), the Company shall pay to Executive bonus compensation (i) under the OfficeMax, Inc. Annual Incentive Bonus Plan, or (ii) if such plan ceases to be in effect in substantially the same form as in effect on the date of this Agreement, at least annually in respect of each Fiscal Year not later than ninety (90) days after the close of each Fiscal Year as determined by the Compensation Committee and based on the performance of the Company (which shall be based on criteria no less favorable to Executive than criteria used by the Compensation Committee to determine bonus compensation for other senior executives of the Company). 4. Salary and Bonus; Payment in the Event of Death. ------------------------------------------------ In the event of Executive's death during the term of this Agreement: (a) The Company shall pay to Executive a pro rata portion of the bonus applicable to the Fiscal Year in which such death occurs, as such bonus is determined under Paragraph 3(b). Such pro rata portion shall be determined by multiplying the amount, if any, of bonus that would have been payable pursuant to such Paragraph 3(b) if Executive had remained employed under this Agreement for the entire applicable Fiscal Year and achieved 100% of Executive's personal goals for the fiscal year by a fraction (the "Partial Year Fraction"), the numerator of which is the number of days in the applicable Fiscal Year elapsed prior to the date of death and the denominator of which is three hundred sixty-five (365). (b) The pro rata portion of the bonus described in Paragraph 4(a) shall be paid when and as provided in Paragraph 3(b). (c) Except as otherwise provided in Paragraphs 4(a), 5, 6 and 7, Executive's employment hereunder shall terminate and Executive shall be entitled to no further compensation or other benefits under this Agreement, except as to that portion of any unpaid salary and other benefits accrued and earned by him hereunder up to and including the date of such death. 5. Options to Acquire Common Shares; Certain Other Payments. --------------------------------------------------------- (a) The Company has granted to Executive under the Prior Employment Agreement and pursuant to Stock Option Agreements executed prior to the date hereof options (all of which, together with any additional options hereafter granted under the Plan (defined below) are referred to as the "Options") to purchase common shares of the Company, without par value, under the OfficeMax, Inc. Equity-Based Award Plan as in effect -5- 7 on the date of this Agreement (the "Plan", the terms in this Paragraph 5 having the same meaning as under the Plan, unless otherwise defined in this Agreement). (b) The Compensation Committee has determined that the following provisions shall apply to the grant of the Options, in addition to or in substitution for the provisions of the Plan: (i) Except as otherwise provided in this Agreement, (A) the Options granted to Executive as of March 9, 1995 (the "1995 Options") shall expire on March 9, 2005, and shall not be exercisable thereafter, and (B) Executive may exercise, and shall have the irrevocable and nonforfeitable right to exercise, the 1995 Options to the extent not previously exercised and thereby purchase any number of Shares up to but not in excess of the cumulative number of Shares set forth below on or after the corresponding dates: * 337,500 Shares on or after January 27, 1996; * 675,000 Shares on or after January 25, 1997; * and 1,012,500 Shares on or after January 24, 1998. (ii) In the event of the cessation of Executive's employment with the Company for Cause prior to the end of the term of this Agreement (subject to the provisions of Paragraph 2(c)), any unexercised Options shall terminate and be of no further force or effect simultaneously with such cessation; otherwise, the Options and Executive's right to exercise the Options shall not be affected by the cessation of his employment with the Company for any reason except as expressly provided in this Agreement or in the Plan. (iii)In the event of the cessation of Executive's employment with the Company for any reason other than (A) Cause or (B) Executive's death, in addition to any other Options which Executive is then entitled to exercise hereunder, prior to any of the dates referred to in Paragraph 5(b)(i) Executive shall be entitled to exercise all of the Options. In the event of the cessation of Executive's employment with the Company as a result of his death, in addition to any other Options which Executive is then entitled to exercise hereunder, prior to any of the dates referred to in Paragraph 5(b)(i), Executive shall be entitled to exercise a number of Options equal to the additional number he would have been eligible to exercise on the next date described in Paragraph 5(b)(i) after Executive's death multiplied by the Partial Year Fraction in respect of the Fiscal Year in which such death occurred. -6- 8 (iv) In the event of and in connection with any Change in Control, all of the Options shall be fully and immediately exercisable by Executive, notwithstanding the terms of Paragraph 5(b)(i). (v) Notwithstanding the provisions of Paragraph 5(b)(i) or of any Stock Option Agreement between the Company and Executive relating to the period during which Options may be exercised, if one of the events described in Paragraphs 5(b)(iii) or 5(b) (iv) occurs, thereby accelerating any dates under Paragraph 5(b) (i) on which Options first may be exercised, all of the Options shall expire on the date which is three (3) years after the date of such event, and shall not be exercisable thereafter. (c) If the Plan is altered, amended, suspended or discontinued as provided in Section 11 thereof in a manner that could have the effect of denying Executive the benefits of the Options as granted under the Plan as in effect on the date hereof, subject to the provisions of this Agreement, the terms of the Plan as in effect on the date hereof shall be deemed to be incorporated into and thereby become obligations of the Company under this Agreement, notwithstanding such alteration, suspension or discontinuation of the Plan. (d) If all or any portion of the amounts payable to Executive under this Agreement, including without limitation the amounts payable under this Paragraph 5(d), the issuance of Shares and the amounts payable under Paragraph 8(d), constitute "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), that are subject to the excise tax imposed by Section 4999 of the Code (or any similar tax or assessment), the amounts payable hereunder shall be increased to the extent necessary to place Executive in the same after-tax position as he would have been in had no such tax assessment been imposed on any such payment paid or payable to Executive under this Agreement or any other payment that Executive may receive in connection therewith. Such incremental payment shall be made promptly after the amount has been determined and in any event no later than five (5) business days before such excise or other similar tax or assessment is due. If it subsequently is determined (pursuant to final regulations or published rulings of the Internal Revenue Service, final judgment of a court of competent jurisdiction, Internal Revenue Service audit assessment, or otherwise) that the amount of such excise or other similar taxes or assessments payable by Executive is greater than the amount initially so determined, then the Company shall pay Executive an amount equal to the sum of: (i) such additional excise or other taxes, plus (ii) any interest, fines and penalties resulting from such underpayment, plus (iii) an amount necessary to reimburse Executive for any income, excise or other tax assessment payable by -7- 9 Executive with respect to the amounts specified in (i) and (ii) above, and the reimbursement provided by this clause (iii), in the manner described above in this Paragraph 5(d). Payment thereof shall be made within five (5) business days after the date upon which such subsequent determination is made. 6. Retirement Benefits. -------------------- Executive shall participate in all retirement and other benefit plans of the Company (both qualified and nonqualified) generally available to classifications of employees of the Company of which Executive is a member and for which Executive qualifies under the terms thereof (and nothing in this Agreement shall or shall be deemed to in any way adversely affect Executive's right and benefits thereunder). 7. Life Insurance and Other Benefits. ---------------------------------- (a) The Company shall provide to Executive and his spouse and dependents the life, health and dental insurance coverage described on Annex A to this Agreement. (b) The Company shall provide Executive with a monthly automobile allowance which shall not be less than the monthly automobile allowance for Executive in effect on the date hereof, adjusted annually to reflect inflation as measured by changes in the Consumer Price Index or other comparable index. (c) Executive shall be entitled to such periods of vacation and sick leave allowance each year determined by Executive in his reasonable and good faith discretion, which in any event shall be not less than as provided under the Company's vacation and sick leave policy for executive officers. (d) Executive shall be entitled to participate in any equity or other employee benefit plan that is generally available to senior executive officers, as distinguished from general management, of the Company. Executive's participation in and benefits under any such plan shall be on the terms and subject to the conditions specified in the governing document of the particular plan. (e) The Company shall provide Executive with tax and financial advisory and tax return preparation services at an annual cost to the Company not to exceed five thousand dollars ($5,000), adjusted annually to reflect inflation as measured by changes in the Consumer Price Index or other comparable index. 8. Termination. ------------ (a) The employment of Executive under this Agreement, and the term hereof, may be terminated by the Company: (i) on death or Permanent Disability (as hereinafter defined) of Executive, or -8- 10 (ii) for Cause at any time by action of the Board. For purposes hereof, the term "Cause" shall mean: (A) Executive's fraud, commission of a felony or of an act or series of acts which result in material injury to the business reputation of the Company, commission of an act or series of repeated acts of dishonesty, which act is or acts are materially inimical to the best interests of the Company, or Executive's willful and repeated failure to perform his duties under this Agreement, which failure has not been cured within fifteen (15) days after the Company gives notice thereof to Executive; (B) Executive's material breach of any material provision of this Agreement, which breach has not been cured in all substantial respects within ten (10) days after the Company gives notice thereof to Executive; (C) Executive's engagement as an officer, director, employee or consultant of an entity in competition with the Company (as defined in Paragraph 10(b)); or (D) Executive's direct or indirect involvement as a shareholder, proprietor or partner of an entity in competition with the Company (as defined in Paragraph 10(b)); provided, however, that ownership of less than one percent (1%) of a class of publicly traded securities of an entity shall not be deemed to be a violation of the foregoing clause. Any termination by reason of the foregoing shall not be in limitation of any other right or remedy the Company may have under this Agreement or otherwise. On any termination of this Agreement, Executive shall be deemed to have resigned from all offices and directorships held by Executive in the Company and in each of its subsidiaries and affiliates, as the case may be. (b) In the event of a termination claimed by the Company to be for "Cause" pursuant to Paragraph 8(a)(ii), Executive shall have the right to have the justification for said termination determined by arbitration in Cleveland, Ohio. In such event, Executive shall serve on the Company within thirty (30) days after termination a written request for arbitration. The Company immediately shall request the appointment of an arbitrator by the American Arbitration Association and thereafter the question of "Cause" shall be determined under the rules of the American Arbitration Association, and the decision of the arbitrator shall be final and binding on both parties. The parties shall use all reasonable efforts to facilitate and expedite the arbitration, and shall act to -9- 11 cause the arbitration to be completed as promptly as possible. During the pendency of the arbitration, Executive shall continue to receive all compensation and benefits to which he is entitled hereunder, and if at any time during the pendency of such arbitration the Company fails to pay and provide all compensation and benefits to Executive in a timely manner the Company shall be deemed to have automatically waived whatever rights it then may have had to terminate Executive's employment for Cause. Expenses of the arbitration shall be borne by the Company. (c) In the event of termination for death or Cause, except as otherwise provided in Paragraphs 4, 5, 6 and 7, Executive shall be entitled to no further compensation or other benefits under this Agreement, except as to that portion of any unpaid salary and other benefits accrued and earned by him hereunder up to and including the effective date of such termination. (d) In the event of the termination by the Company of Executive's employment with the Company for any reason other than one death or Cause, in addition to whatever other rights or remedies Executive may have against the Company as a result of such termination, the Company shall continue for the remainder of the term of this Agreement then in effect to pay and provide to Executive all of the salary and bonus compensation and other rights and benefits provided for herein; provided, however, that such bonus compensation in respect of each Fiscal Year included within the payment period shall be the greater of (i) the bonus compensation paid or payable to Executive in respect of the Fiscal Year immediately preceding the Fiscal Year during which such termination occurs or (ii) the average of the bonus compensation paid or payable to Executive in respect of each of the three (3) Fiscal Years immediately preceding the Fiscal Year during which such termination occurs. (e) For purposes of this Agreement, Executive's "Permanent Disability" shall be deemed to have occurred after one hundred twenty (120) days in the aggregate during any consecutive twelve (12) month period, or after ninety (90) consecutive days, during which one hundred twenty (120) or ninety (90) days, as the case may be, Executive, by reason of his physical or mental disability or illness, shall have been unable to discharge his duties under this Agreement. The date of Permanent Disability shall be such one hundred twentieth (120th) or ninetieth (90th) day, as the case may be. In the event either the Company or Executive, after receipt of notice of Executive's Permanent Disability from the other, disputes Executive's Permanent Disability, Executive promptly shall submit to a physical examination by the chief of medicine of any major accredited hospital in the Cleveland, Ohio, area and, unless such physician shall issue his written statement to the effect that in his opinion, based on his diagnosis, Executive is capable of resuming his employment and devoting his full time and energy to -10- 12 discharging his duties within thirty (30) days after the date of such statement, such Permanent Disability shall be deemed to have occurred. 9. Reimbursement. -------------- The Company shall reimburse Executive or provide him with an expense allowance during the term of this Agreement for travel, entertainment and other expenses reasonably and necessarily incurred by Executive in connection with the Company's business. Executive shall furnish such documentation with respect to reimbursement to be paid under this Paragraph 9 as the Company shall reasonably request. 10. Covenants and Confidential Information. --------------------------------------- (a) During the term of this Agreement, including any periods during which Executive is not providing services to the Company but is receiving payments of compensation hereunder (but not including payments under Paragraphs 5, 6 or 7), Executive shall not, directly or indirectly, do or suffer any of the following: (i) Own, manage, control or participate in the ownership, management, or control of, or be employed or engaged by or otherwise affiliated or associated as a consultant, independent contractor or otherwise with, any other corporation, partnership, proprietorship, firm, association or other business entity, or otherwise engage in any business, which is in competition with the Company (as described in Paragraph 10(b)); provided, however, that the ownership of not more than one percent (1%) of any class of publicly traded securities of any entity shall not be deemed a violation of this covenant; (ii) Employ, assist in employing, or otherwise associate in business with any senior executive of the Company who was so employed or retained at any time during the one (1) year period preceding the date on which Executive's employment with the Company ceases; (iii) Induce any person who is a senior executive or officer of the Company to terminate said relationship; and (iv) Disclose, divulge, discuss, copy or otherwise use or suffer to be used in any manner, in competition with, or contrary to the interests of, the Company any confidential information or trade secrets of the Company, it being acknowledged by Executive that all such information regarding the business of the Company compiled or obtained by, or furnished to, Executive while Executive shall -11- 13 have been employed by or associated with the Company is confidential information and the Company's exclusive property. (b) For purposes of this Agreement, an entity shall be deemed to be in competition with the Company if and only if more than twenty-five per cent (25%) of the gross revenues of such entity are derived from the business of selling office supplies, office furniture, computers, and such other products of the type as are sold at or from a majority of OfficeMax stores on the date of the termination of Executive's employment hereunder. (c) Executive expressly agrees and understands that the remedy at law for any breach by him of this Paragraph 10 will be inadequate and that the damages flowing from such breach are not readily susceptible to being measured in monetary terms. Accordingly, it is acknowledged that, upon adequate proof of Executive's violation of any legally enforceable provision of this Paragraph 10, the Company shall be entitled to immediate injunctive relief and may obtain a temporary order restraining any threatened or further breach. Nothing in this Paragraph 10 shall be deemed to limit the Company's remedies at law or in equity for any breach by Executive of any of the provisions of this Paragraph 10 which may be pursued or availed of by the Company. (d) Executive has carefully considered the nature and extent of the restrictions upon him and the rights and remedies conferred upon the Company under this Paragraph 10, and hereby acknowledges and agrees that the same are reasonable in time and territory, are designed to eliminate competition which otherwise would be unfair to the Company, do not stifle the inherent skill and experience of Executive, would not operate as a bar to Executive's sole means of support, are fully required to protect the legitimate interests of the Company and do not confer a benefit upon the Company disproportionate to the detriment to Executive. 11. Withholding Taxes. ------------------ Certain payments to Executive under this Agreement may be subject to withholding on account of federal, state and local taxes as required by law. Except with respect to income realized by Executive as described in Paragraph 5(d), if any particular payment required hereunder is insufficient to provide the amount of such taxes required to be withheld, the Company may withhold such taxes from any other payment due Executive. Except with respect to income realized by Executive as described in Paragraph 5(d), in the event all cash payments due Executive are insufficient to provide the required amount of such withholding taxes, Executive, within five (5) days of written notice from the Company, shall pay to the Company the amount of such -12- 14 withholding taxes in excess of all cash payments due Executive at the time such withholding is required to be made by the Company. 12. Severable Provisions. --------------------- The provisions of this Agreement are severable and if any one or more provisions may be determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions and any partially unenforceable provision to the extent enforceable in any jurisdiction nevertheless shall be binding and enforceable. 13. Binding Agreement. ------------------ The rights and obligations of the Company under this Agreement shall inure to the benefit of, and shall be binding on, the Company and its successors and assigns, and the rights and obligations (other than obligations to perform services) of Executive under this Agreement shall inure to the benefit of, and shall be binding upon, Executive and his heirs, personal representatives and successors and assigns. 14. Enforcement of Rights; Arbitration ----------------------------------- (a) If the Company terminates Executive's employment with the Company other than for Cause or as a result of his death or Permanent Disability or Executive alleges that the Company otherwise has breached or the Company otherwise breaches this Agreement or any of its obligations hereunder, in order for Executive to enforce and continue to enjoy his rights hereunder, including without limitation the right to continue to receive compensation and other payments and benefits hereunder for the remainder of the term of this Agreement, Executive shall be under no duty to seek other employment or otherwise mitigate his damages as a result of such termination of employment or alleged breach or breach by the Company. (b) The Company shall indemnify and reimburse Executive for his costs and expenses, including reasonable attorneys' fees, incurred in connection with enforcing his rights hereunder. (c) Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in accordance with the Rules of the American Arbitration Association then pertaining in the City of Cleveland, Ohio, and judgment upon the award rendered by the arbitrator or arbitrators may be entered in any court having jurisdiction thereof. The arbitrator or arbitrators shall be deemed to possess the powers to issue mandatory orders and restraining orders in connection with such arbitration; provided, however, that nothing in this Paragraph 14 shall be construed so as to deny the Company the right and power to seek and obtain injunctive relief in a court of equity for any breach or threatened breach by Executive of any of his covenants contained in Paragraph 10 hereof. -13- 15 15. Notices. -------- Any notice to be given under this Agreement shall be personally delivered in writing or shall have been deemed duly given when received after it is posted in the United States mail, postage prepaid, registered or certified, return receipt requested, and if mailed to the Company, shall be addressed to its principal place of business, attention: General Counsel, and if mailed to Executive, shall be addressed to him at his home address last known on the records of the Company, or at such other address or addresses as either the Company or Executive may hereafter designate in writing to the other. 16. Waiver. ------- The failure of either party to enforce any provision or provisions of this Agreement shall not in any way be construed as a waiver of any such provision or provisions as to any future violations thereof, nor prevent that party thereafter from enforcing each and every other provision of this Agreement. The rights granted the parties herein are cumulative and the waiver of any single remedy shall not constitute a waiver of such party's right to assert all other legal remedies available to it under the circumstances. 17. Miscellaneous. -------------- This Agreement supersedes all prior agreements and understandings between the parties and may not be modified or terminated orally. No modification, termination or attempted waiver shall be valid unless in writing and signed by the party against whom the same is sought to be enforced. 18. Governing Law. -------------- This Agreement shall be governed by and construed according to the laws of the State of Ohio. 19. Captions and Paragraph Headings. -------------------------------- Captions and paragraph headings used herein are for convenience and are not a part of this Agreement and shall not be used in construing it. 20. Miscellaneous. -------------- Where necessary or appropriate to the meaning hereof, the singular and plural shall be deemed to include each other, and the masculine, feminine and neuter shall be deemed to include each other. -14- 16 IN WITNESS WHEREOF, the parties have executed this Agreement effective on the day and year first set forth above. OFFICEMAX, INC. By /s/ Ross H. Pollock ------------------------- Ross H. Pollock Secretary /s/ Michael Feuer -------------------------- Michael Feuer -15- 17 ANNEX A Benefits Summary for Mr. Feuer MEDICAL INSURANCE - ----------------- OfficeMax offers a Section 125, self-insured medical plan to all full-time Associates after three months of service. The Plan maximum lifetime benefit is $1,000,000. The Plan is designed to pay in-network charges at 80%. Expenses for prescription drugs and preventive services are not subject to a deductible. DENTAL INSURANCE - ---------------- OfficeMax offers a Section 125, self-insured dental plan to all full-time Associates after six months of service. The annual maximum Plan benefit is $1,000. There is a schedule that is followed for preventive and restorative care. LIFE INSURANCE - -------------- Through an insurance company, OfficeMax provides each full-time Associate with 1 1/2 times his or her salary in group, term-life insurance. Mr. Feuer holds the plan maximum limit of $500,000. The group life insurance policy has an Accidental Death and Dismemberment (AD&D) clause. An additional benefit (not to exceed $500,000) would be payable in the event of accidental loss of life/limb based on the policy's defined schedule. This policy remains in effect until age 70, then follows a benefit reduction schedule. SHORT-TERM DISABILITY - --------------------- OfficeMax offers a Section 125, Short-Term Disability Plan to all full-time Associates after six months of service. The benefit (up to $1,000 per week) is payable for short-term disability leaves lasting up to 13 weeks. There is a seven-day waiting period before benefits are payable. LONG-TERM DISABILITY - -------------------- Through an insurance company, OfficeMax provides each full-time Associate with Long-Term disability benefits after three months of service. The benefits are payable after 90 days of disability at 60% of salary up to a monthly maximum of $10,000. Any such Long-Term disability benefits received by Mr. Feuer following the termination of his employment as a result of his Permanent Disability (as such term is defined in the Employment Agreement to which this Annex A is attached) will be credited against the Company's obligations to continue Mr. Feuer's salary and bonus compensation as a result of his Permanent Disability. 401(K) PLAN - ----------- OfficeMax offers a Section 401(k) Plan to all Associates after one year of service. Mr. Feuer is fully vested in his payroll deferrals to the Plan. The Plan offers a company match of 50% of the first 3% of compensation contributed by the Associate. The Plan is subject to non-discrimination rules which currently limit Mr. Feuer's maximum annual contribution below the annual maximum allowed under the IRC. The Company does not offer any other retirement plans. EX-10.12 3 EXHIBIT 10.12 1 EXHIBIT 10.12 I. Executive Officers party to Severance Agreement (Form A): John C. Martin Jeffrey L. Rutherford Mark L. Keschl Mark L. Race II. Executive Officers party to Severance Agreement (Form B): Edward L. Cornell Wendell L. Wilson Ross H. Pollock EX-23 4 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-85994) of OfficeMax, Inc. of our report dated March 4, 1999 appearing on page F - 2 of OfficeMax Inc.'s Annual Report on Form 10-K for the year ended January 23, 1999. PRICEWATERHOUSECOOPERS LLP Cleveland, Ohio April 8, 1999 EX-27.1 5 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED JANUARY 23, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR Jan-23-1999 Jan-25-1998 Jan-23-1999 67,482 0 142,624 824 1,254,761 1,503,643 583,694 230,446 2,231,896 1,002,593 0 0 0 868,321 269,821 2,231,896 4,337,768 4,337,768 3,364,532 3,364,532 0 0 5,681 81,011 32,391 48,620 0 0 0 48,620 .40 .39
EX-27.2 6 EXHIBIT 27.2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED JANUARY 24, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THIS IS A RESTATED SCHEDULE. YEAR Jan-24-1998 Jan-26-1997 Jan-24-1998 66,801 0 93,287 837 1,086,228 1,282,734 479,818 167,965 1,960,222 721,215 0 0 0 861,991 298,654 1,960,222 3,765,444 3,765,444 2,895,084 2,895,084 0 0 (514) 146,431 56,811 89,620 0 0 0 89,620 .73 .72
EX-99.1 7 EXHIBIT 99.1 1 EXHIBIT 99.1 OFFICEMAX, INC. STATEMENT REGARDING FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for "forward-looking statements" (as defined in the Act). The Form 10-K to which this exhibit is attached, the Company's Annual Report to Shareholders, any Form 10-Q or any Form 8-K of the Company, or any other written or oral statements made by or on behalf of the Company may include or incorporate by reference forward-looking statements which reflect the Company's current view (as of the date such forward-looking statement is made) with respect to future events, prospects, projections or financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from those made, implied or projected in such statements. These uncertainties and other factors include, but are not limited to the following: - the Company faces uncertainties relating to general economic conditions; - the Company faces intense competition from a variety of retailers, dealers and distributors, including, other high-volume office product chains that are similar in concept to the Company in terms of store format, pricing strategy and product selection; in particular, the Company faces intense price competition in its sales of computers and related products; - continued decline in average selling prices of computers and other electronic equipment or unanticipated declines in the average selling price of other products could adversely affect the Company's results; - the Company faces potential competition from Internet-based merchandisers; - there could be malfunctions or failures of the Company's information systems, including malfunctions or failures associated with Year 2000 readiness problems; - an integral part of the Company's business plan is an aggressive store growth strategy; there can be no assurance, however, that the Company will be able to find favorable store locations, negotiate favorable leases, hire and train employees and store managers and integrate the new stores in a manner that will allow it to meet its expansion strategy; - as the Company expands the number of its stores in existing markets, sales at existing stores may be impacted; - new stores typically take time to reach the levels of sales and profitability of the Company's existing stores, and there can be no assurance that new stores will be as profitable as existing stores; - there are operating and financial risks related to managing rapid growth and integrating acquired businesses; - fluctuations in the Company's quarterly operating results have occurred in the past and may occur in the future based on a variety of factors such as new store openings with their concurrent pre-opening expenses, the extent to which new stores are less profitable as they commence operations, the effect new stores have on the sale of existing stores in more mature markets, the pricing activity of competitors in the Company's markets, changes in the Company's product mix, increases and decreases in advertising and promotional expenses, the effects of seasonality, acquisition of contract stationers and stores of competitors; - there can be no assurance that (1) the Company will not require additional sources of financing as a result of unanticipated cash needs, acquisitions or other opportunities 2 or disappointing operating results or (2) any additional funds required by the Company will be available to the Company on satisfactory terms; - while the Company continues to evaluate its distribution strategy and methods in order to take advantage of new and improved technology to increase inventory controls and reduce expenses and delivery lead times, there can be no assurance that changes in the Company's current distribution methods will accomplish these goals; - there is potential for rapid and significant changes in technology which could adversely affect the Company's operations; - the Company is largely dependent on the services of Michael Feuer, the Company's Co-Founder, Chairman and Chief Executive Officer, and its senior management; the loss of Mr. Feuer or any of the Company's other senior management could have a material adverse impact on the Company; - there are risks associated with international operations, including lack of local business experience, foreign currency fluctuations, language and other cultural barriers, political and economic instability and, since the Company's foreign operations are not wholly-owned, a lack of operating control; and - strikes or other labor disruptions could adversely affect the Company's operations. The words "believe," "expect," "anticipate," "project," "plan," "intend," and similar expressions, among others, identify "forward-looking statements," which speak only as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. -----END PRIVACY-ENHANCED MESSAGE-----