-----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, RjeuIV8JY3I5tMovOuxRk52tT2FupWfwp7Kvjsi2KkimeJOTayoUg+QCfZgHj2QH 6cr3pIxZKJ7u9+2YYA1zEw== 0000950152-99-007397.txt : 19990908 0000950152-99-007397.hdr.sgml : 19990908 ACCESSION NUMBER: 0000950152-99-007397 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990724 FILED AS OF DATE: 19990907 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-Q SEC ACT: SEC FILE NUMBER: 001-13380 FILM NUMBER: 99706858 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-Q 1 OFFICEMAX, INC. FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 - Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 24, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to________. Commission file number 1-13380 ------- OFFICEMAX, INC. --------------- (Exact name of registrant as specified in its charter) OHIO 34-1573735 ---- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3605 WARRENSVILLE CENTER ROAD, SHAKER HEIGHTS, OHIO 44122 --------------------------------------------------------- (Address of principal executive offices) (zip code) (216) 921-6900 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Shares Outstanding as of Title of Class August 26, 1999 -------------- --------------- Common Shares 125,001,659 (without par value) 2 OFFICEMAX, INC. INDEX Part I - Financial Information Page ------------------------------ Item 1. Financial Statements 3-8 Item 2. Management's Discussion and Analysis of Financial 9-14 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About 15 Market Risk Part II - Other Information --------------------------- Item 4. Submission of Matters to a Vote of Security Holders 16 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17 2 3
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS OFFICEMAX, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) July 24, January 23, 1999 1999 --------------- ------------ ASSETS (Unaudited) Current Assets: Cash and equivalents $ 50,179 $ 67,482 Accounts receivable, net of allowances of $603 and $824, respectively 81,212 141,800 Merchandise inventories 1,247,065 1,254,761 Other current assets 46,258 39,600 ----------- ----------- Total current assets 1,424,714 1,503,643 Property and Equipment: Buildings and land 19,266 19,223 Leasehold improvements 184,842 183,320 Furniture and fixtures 406,722 381,151 ----------- ----------- Total property and equipment 610,830 583,694 Less: Accumulated depreciation and amortization (265,503) (230,446) ----------- ----------- Property and equipment, net 345,327 353,248 Other assets and deferred charges 62,690 60,040 Goodwill, net of accumulated amortization of $65,316 and $60,621, respectively 310,270 314,965 =========== =========== $ 2,143,001 $ 2,231,896 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable - trade $ 549,044 $ 625,810 Accrued expenses and other liabilities 55,144 121,441 Accrued salaries and related expenses 41,726 50,704 Taxes other than income taxes 54,472 58,638 Revolving credit facility 210,500 144,700 Mortgage loan, current portion 1,300 1,300 ----------- ----------- Total current liabilities 912,186 1,002,593 Mortgage loan 15,775 16,425 Other long-term liabilities 79,937 74,736 ----------- ----------- Total liabilities 1,007,898 1,093,754 Commitments and contingencies -- -- Shareholders' Equity: Common shares, without par value; 200,000,000 shares Authorized; 125,163,905 and 124,988,442 shares issued and outstanding, respectively 868,904 868,321 Deferred stock compensation (293) (260) Retained earnings 373,302 348,859 Less: Treasury stock (106,810) (78,778) ----------- ----------- Total shareholders' equity 1,135,103 1,138,142 =========== =========== $ 2,143,001 $ 2,231,896 =========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets. 3 4
OFFICEMAX, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data) (Unaudited) 13 Weeks Ended 26 Weeks Ended ---------------------------------- ---------------------------------- July 24, July 25, July 24, July 25, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- Sales $ 970,463 $ 874,470 $ 2,149,873 $ 1,935,544 Cost of merchandise sold, including buying and occupancy costs 732,713 666,131 1,633,671 1,484,867 ------------- ------------- ------------- ------------- Gross profit 237,750 208,339 516,202 450,677 Store operating and selling expenses 196,731 172,171 403,556 356,397 Pre-opening expenses 2,327 2,876 4,497 4,635 General and administrative expenses 29,569 24,546 58,797 47,586 Goodwill amortization 2,347 2,346 4,694 4,692 ------------- ------------- ------------- ------------- Total operating expenses 230,974 201,939 471,544 413,310 Operating income 6,776 6,400 44,658 37,367 Interest (expense), net (2,773) (2,109) (4,506) (1,912) ------------- ------------- ------------- ------------- Income before income taxes 4,003 4,291 40,152 35,455 Income taxes 1,576 1,666 15,709 13,756 ------------- ------------- ------------- ------------- Net income $ 2,427 $ 2,625 $ 24,443 $ 21,699 ============= ============= ============= ============= EARNINGS PER COMMON SHARE DATA: Basic $ 0.02 $ 0.02 $ 0.21 $ 0.17 ============= ============= ============= ============= Diluted $ 0.02 $ 0.02 $ 0.21 $ 0.17 ============= ============= ============= ============= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic 113,270,357 124,614,985 113,854,926 124,608,133 ============= ============= ============= ============= Diluted 114,658,535 127,190,251 114,906,613 127,078,810 ============= ============= ============= =============
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4 5
OFFICEMAX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) 26 Weeks Ended -------------------------------------- July 24, July 25, 1999 1998 --------------- --------------- CASH PROVIDED BY (USED FOR): OPERATIONS Net income $ 24,443 $ 21,699 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 40,861 35,273 Deferred income taxes (1,399) 677 Increase (decrease) in other long-term liabilities 5,201 (442) Other, net (96) (145) Change in current assets and current liabilities: Decrease (increase) in inventories 7,696 (66,424) (Decrease) increase in accounts payable (27,504) 19,221 Decrease (increase) in accounts receivable 60,588 (26,384) (Decrease) in accrued liabilities (58,757) (64,541) Other, net (5,552) (16,301) -------- --------- Net cash provided by (used for) operations 45,481 (97,367) -------- --------- INVESTING Capital expenditures (48,804) (50,373) Other, net (2,244) (1,356) -------- --------- Net cash (used for) investing (51,048) (51,729) -------- --------- FINANCING Payments of mortgage principal (650) (650) Increase in revolving credit facilities 65,800 132,500 Decrease in overdraft balances (49,262) (12,388) Purchase of treasury stock (29,306) -- Proceeds from issuance of common stock, net 1,682 4,836 -------- --------- Net cash (used for) provided by financing (11,736) 124,298 -------- --------- CASH AND CASH EQUIVALENTS Net (decrease) for the period (17,303) (24,798) Balance, beginning of period 67,482 66,801 -------- --------- Balance, end of period $ 50,179 $ 42,003 ======== ========= SUPPLEMENTAL INFORMATION Interest paid on debt $ 5,141 $ 2,354 ======== ========= Taxes paid on income $ 24,038 $ 32,090 ======== =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 5 6
OFFICEMAX, INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Dollars in thousands) (Unaudited) Common Shares Deferred ------------------------- Stock Retained Treasury Shares Amount Compensation Earnings Stock Total ----------- ----------- ------------- ----------- ----------- ---------- Balance at January 23, 1999 124,988,442 $ 868,321 $ (260) $ 348,859 $ (78,778) $ 1,138,142 Issuance of common shares under director plan 1,657 (122) -- -- 137 15 Exercise of stock options (including tax benefit) 51,944 140 -- -- 390 530 Sale of shares under management share purchase plan (including tax benefit) 71,008 125 (175) -- 747 697 Sale of shares under employee share purchase plan (including tax benefit) 50,854 440 -- -- -- 440 Amortization of deferred Compensation -- -- 142 -- -- 142 Treasury stock purchased (3,435,100 shares) -- -- -- -- (29,306) (29,306) Net income -- -- -- 24,443 -- 24,443 ----------- ----------- ----------- ----------- ----------- ----------- Balance at July 24, 1999 125,163,905 $ 868,904 $ (293) $ 373,302 $ (106,810) $ 1,135,103 =========== =========== =========== =========== =========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 6 7 OFFICEMAX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE 13 AND 26 WEEKS ENDED JULY 24, 1999 AND JULY 25, 1998 Significant Accounting and Reporting Policies - --------------------------------------------- 1. The accompanying consolidated financial statements have been prepared from the financial records of OfficeMax, Inc. and its subsidiaries (the "Company" or "OfficeMax") without audit and reflect all adjustments which are, in the opinion of management, necessary to fairly present the results of the interim periods covered in this report. The results for any interim period are not necessarily indicative of the results to be expected for the full fiscal year. 2. The Company's consolidated financial statements for the 13 and 26 weeks ended July 24, 1999 and July 25, 1998 included in this Quarterly Report on Form 10-Q, have been prepared in accordance with the accounting policies described in the Notes to Consolidated Financial Statements for the fiscal year ended January 23, 1999 which were included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (File No. 1-13380) on April 8, 1999. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Form 10-K referred to above. Certain reclassifications have been made to prior year amounts to conform to the current presentation. 3. The Company's fiscal year ends on the Saturday prior to the last Wednesday in January. 4. At July 24, 1999, OfficeMax operated a chain of 883 full-size superstores in over 370 markets, 49 states, Puerto Rico and the U.S. Virgin Islands, as well as two smaller format, OfficeMax PDQ stores, two national call centers and 18 delivery centers. Through joint venture partnerships, the Company also operated on an international basis with 20 locations in Mexico and Japan. The joint ventures operate OfficeMax superstores similar to those in the United States. 5. The average common and common equivalent shares utilized in computing diluted earnings per share for the 13 and 26 weeks ended July 24, 1999 include 1,277,092 and 940,600 shares, respectively, resulting from the application of the treasury stock method to outstanding stock options. The average common and common equivalent shares utilized in computing diluted earnings per share for the 13 and 26 weeks ended July 25, 1998 include 2,477,800 and 2,373,210 such shares. Options to purchase 6,300,196 and 6,459,209 shares were excluded from the calculation of diluted earnings per share for the 13 and 26 weeks ended July 24, 1999, respectively, because the exercise prices of the options were greater than the average market price. These shares had weighted average exercise prices of $13.57 and $13.49, respectively. Options to purchase 46,959 shares at a weighted average exercise price of $17.09 were excluded from the calculation of diluted earnings per share for the 26 weeks ended July 25, 1998, because the exercise prices were greater than the average market price. The average market price during the 13 weeks ended July 25, 1998 exceeded the exercise prices of all outstanding options. 6. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in fiscal years beginning after June 15, 2000. Because of the Company's minimal use of derivatives, management does not anticipate the adoption of the new Statement to have a significant effect on earnings or the financial position of the Company. 7. The Company has two reportable business segments: the Core Business Segment and the Computer Business Segment. The Core Business Segment includes office supplies, business machines, peripherals, print-for-pay 7 8 services and office furniture. The Computer Business Segment includes desktop and laptop personal computers and computer monitors. The Company evaluates performance and allocates resources based on the operations of these two segments. The accounting policies of the reportable business segments are the same as those described above and in the Summary of Significant Accounting Policies (Note 1) included in the Company's Annual Report on Form 10-K for the year ended January 23, 1999. The following tables summarize the results of the Company's reportable business segments: (Unaudited)
13 WEEKS ENDED 26 WEEKS ENDED ------------------------------ -------------------------------- CORE BUSINESS SEGMENT JULY 24, JULY 25, JULY 24, JULY 25, (Dollars in thousands) 1999 1998 1999 1998 -------------------------------------------------------- ------------- -------------- ---------- Sales $ 923,165 $ 818,788 $2,034,742 $1,786,995 Cost of merchandise sold, including buying and occupancy costs 684,897 610,936 1,516,264 1,333,639 ---------- ---------- ---------- ---------- Gross profit 238,268 207,852 518,478 453,356 Operating income 15,288 8,429 64,580 51,990 Net income $ 8,012 $ 4,538 $ 37,331 $ 31,957 ========== ========== ========== ==========
Included in net income of the Core Business Segment is net interest expense of $2,114,000 and $1,012,000 for the 13 weeks ended July 24, 1999 and July 25, 1998, respectively. During the 26 weeks ended July 24, 1999 and July 25, 1998, this segment had net interest expense of $3,266,000 and net interest income of $226,000, respectively. Income tax expense for the Core Business Segment was $5,162,000 and $2,879,000 for the 13 weeks ended July 24, 1999 and July 25, 1998, respectively, and $23,983,000 and $20,259,000 for the 26 weeks ended July 24, 1999 and July 25, 1998, respectively.
13 WEEKS ENDED 26 WEEKS ENDED ------------------------------ ---------------------------- COMPUTER BUSINESS SEGMENT JULY 24, JULY 25, JULY 24, JULY 25, (Dollars in thousands) 1999 1998 1999 1998 --------------------------------------------------------- ----------- ---------- ---------- Sales $ 47,298 $ 55,682 $ 115,131 $ 148,549 Cost of merchandise sold, including buying and occupancy costs 47,816 55,195 117,407 151,228 ---------- ---------- ---------- ---------- Gross profit (loss) (518) 487 (2,276) (2,679) Operating income (loss) (8,512) (2,029) (19,922) (14,623) Net income (loss) $ (5,585) $ (1,913) $ (12,888) $ (10,258) ========== ========== ========== ==========
Included in the net loss of the Computer Business Segment is net interest expense of $659,000 and $1,240,000 for the 13 and 26 weeks ended July 24, 1999, respectively. During the 13 and 26 weeks ended July 25, 1998, this segment had net interest expense of $1,097,000 and $2,138,000, respectively. The Computer Business Segment recognized income tax benefit of $3,586,000 and $1,213,000 for the 13 weeks ended July 24, 1999 and July 25, 1998, respectively, and $8,274,000 and $6,503,000 for the 26 weeks ended July 24, 1999 and July 25, 1998, respectively. The total assets of the Computer Business Segment, primarily inventory and accounts receivable, were approximately $96,711,000 and $60,280,000 as of July 24, 1999 and January 23, 1999, respectively. This segment also had accounts payable of $39,826,000 and $14,274,000 as of July 24, 1999 and January 23, 1999, respectively. There are no intersegment sales or expense allocations. There are no differences between the combined results of the Core and Computer Business Segments and the total Company's results. The Company does not allocate fixed assets or depreciation to the Computer Business Segment. Other than its investments in Mexico, Japan and Brazil, the Company has no international sales or assets. 8 9 ITEM 2. MANAGEMENT'S DISSCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS - ------------- RESULTS OF OPERATIONS Consolidated Results Consolidated sales for the 13 and 26 weeks ended July 24, 1999 increased 11% to $970,463,000 and $2,149,873,000, respectively, from $874,470,000 and $1,935,544,000 for the comparable periods last year. The increase in consolidated sales was attributable to a full period of sales from the 120 full-size superstores opened during fiscal 1998 and additional sales from 52 new full-size superstores and one smaller format OfficeMax PDQ store opened at various points during the 26 weeks ended July 24, 1999. Consolidated same-store sales decreased by 1% for the second quarter of fiscal 1999 reflecting the impact of a 22% decline in the average retail prices of fax machines, printers and copiers experienced by the Company's Core Business Segment and a 19% decline in the average selling prices for computers experienced by the Company's Computer Business Segment. Consolidated cost of merchandise sold, including buying and occupancy costs, decreased as a percentage of sales to 75.5% and 76.0% for the 13 and 26 weeks ended July 24, 1999, respectively, from 76.2% and 76.7% for the comparable periods last year. Correspondingly, consolidated gross profit increased as a percentage of sales to 24.5% and 24.0% for the 13 and 26 weeks ended July 24, 1999, respectively. The gross profit increase was primarily due to the Company's continued focus on enhancing its Core Business Segment merchandise assortment to emphasize high-margin items and the Company's deliberate decision to modify its computer assortment and continue to reduce its low or no profit computer promotions. Consolidated store operating and selling expenses, which consist primarily of store payroll, operating and advertising expenses, increased as a percentage of sales to 20.3% and 18.8% for the 13 and 26 weeks ended July 24, 1999 from 19.7% and 18.4% for the comparable periods a year earlier. The Company experienced a decrease in leverage of store operating and selling expenses primarily due to deflationary retail pricing for business machines and computers along with costs incurred for its accelerated store openings. Pre-opening expenses were $2,327,000 and $4,497,000 for the 13 and 26 weeks ended July 24, 1999, reflecting the opening of 28 and 52 full-size superstores, respectively. During the comparable prior year periods, pre-opening expenses were $2,876,000 and $4,635,000, reflecting the opening of 21 and 41 full-size superstores, respectively. Also, during the first half of fiscal 1998, the Company opened its PowerMax I distribution facility for which the Company incurred pre-opening expenses of $980,000. Pre-opening expenses, which consist primarily of store payroll, supplies and grand opening advertising, averaged approximately $85,000 per full-size superstore in the current and prior year. Pre-opening expenses increase approximately $25,000 per unit when certain enhanced CopyMax or FurnitureMax features are included in a superstore. General and administrative expenses were 3.1% and 2.7% of sales for the 13 and 26 weeks ended July 24, 1999, as compared to 2.8% and 2.5% of sales for the comparable prior year periods. These increases reflect the Company's continuing efforts to enhance its infrastructure to support planned growth both in the United States and internationally. The infrastructure enhancements include efforts to strengthen the Company's management team and information technology ("IT") initiatives. The Company is in the process of implementing the SAP system, a fully integrated Enterprise Resource Planning platform that will automate and integrate various business processes of the Company. Conversion to the SAP Human Resources and Finance modules occurred in November 1998 and May 1999, respectively. Conversion to the SAP Retail and Merchandising system is scheduled for the fourth quarter of fiscal 1999. Goodwill amortization was $2,347,000 and $4,694,000 for the 13 and 26 weeks ended July 24, 1999, versus $2,346,000 and $4,692,000 for same periods a year earlier. Goodwill is capitalized and amortized over 40 years using the straight-line method. 9 10 As a result of the foregoing factors, consolidated operating income increased to $6,776,000 and $44,658,000 or 0.7% and 2.1% of sales for the 13 and 26 weeks ended July 24, 1999, respectively, as compared to $6,400,000 and $37,367,000 or 0.7% and 1.9% of sales, for the comparable periods a year earlier. Interest expense, net, was $2,773,000 and $4,506,000 for the 13 and 26 weeks ended July 24, 1999, respectively, as compared to $2,109,000 and $1,912,000 for the comparable periods a year earlier. The increase in interest expense during the first half of fiscal 1999 was primarily due to increased borrowings to fund the Company's stock repurchase program and accelerate expansion plans. Income tax expense for the 13 and 26 weeks ended July 24, 1999 was $1,576,000 and $15,709,000, respectively. For the comparable prior year periods, income tax expense was $1,666,000 and 13,756,000, respectively. The effective tax rates for both periods are different from the federal statutory income tax rate primarily as a result of goodwill amortization, tax exempt interest, and state and local taxes. Consolidated net income, as a result of the foregoing factors, was $2,427,000 and $2,625,000 or 0.3% of sales for the 13 weeks ended July 24, 1999 and July 25, 1998, respectively. Consolidated net income was $24,443,000 and $21,699,000 or 1.1% of sales for the 26 weeks ended July 24, 1999 and July 25, 1998. BUSINESS SEGMENTS Core Business Segment Sales for the Core Business Segment increased 13% to $923,165,000 for the 13 weeks ended July 24, 1999 from $818,788,000 for the comparable period last year. The increase in the second quarter of fiscal 1999 was due to the additional sales from 131 new full-size superstores and two smaller format OfficeMax PDQ stores opened since the end of the second quarter of fiscal 1998 and a comparable-store sales increase of 1%. Declines in average selling prices for fax machines, printers and copiers reduced the Core Business Segment's comparable-store sales increase by approximately 2% during the quarter. Sales for the Core Business Segment increased 14% to $2,034,742,000 for the 26 weeks ended July 24, 1999 from $1,786,995,000 for the comparable prior year period, primarily as a result of new store openings and a comparable-store sales increase of 2%. Cost of merchandise sold, including buying and occupancy costs for the Core Business Segment decreased as a percentage of sales to 74.2% and 74.5% for the 13 and 26 weeks ended July 24, 1999, respectively, from 74.6% for the comparable prior year periods. Gross profit for this segment increased to $238,268,000 and $518,478,000 or 25.8% and 25.5% of sales for the 13 and 26 weeks ended July 24, 1999, respectively. The increase was due to the Company's continued focus on enhancing the merchandise assortment of this segment to emphasize high-margin items. Operating income for the Core Business Segment increased to $15,288,000 and $64,580,000 or 1.7% and 3.2% of sales for the 13 and 26 weeks ended July 24, 1999, respectively, from $8,429,000 and $51,990,000 or 1.0% and 2.9% of sales for the like periods last year. These increases were primarily due to gross profit improvement and improved leverage of certain operating expenses. Net income for the Core Business Segment increased to $8,012,000 and $37,331,000 or 0.9% and 1.8% of sales for the 13 and 26 weeks ended July 24, 1999, respectively, from $4,538,000 and $31,957,000 or 0.6% and 1.8% of sales for the comparable periods last year. Computer Business Segment Sales for the Computer Business Segment decreased 15% to $47,298,000 for the 13 weeks ended July 24, 1999 from $55,682,000 for the comparable period last year. Same-store sales for the Computer Business Segment declined 31% for the 13 weeks. The reduction in comparable-store sales was due primarily to a 19% reduction in the average selling prices for computers along with the Company's deliberate decision to modify its computer 10 11 assortment and continue to reduce its low or no profit computer promotions compared to a year ago. Sales for the Computer Business Segment decreased 22% to $115,131,000 for the 26 weeks ended July 24, 1999 from $148,549,000 for the comparable prior year period. Cost of merchandise sold, including buying and occupancy costs, for the Computer Business Segment increased as a percentage of sales to 101.1% and 102.0% for the 13 and 26 weeks ended July 24, 1999, respectively, from 99.1% and 101.8% for the comparable periods last year, despite merchandise margin improvement during the second quarter of fiscal 1999. The increase in the cost of merchandise sold as a percentage of sales was due primarily to decreased leverage of certain occupancy costs. The decline in leverage was the result of the Company's decision to modify this segment's product assortment and promotions and lower sales volume during the Company's seasonally slowest quarter. Gross profit for the Computer Business Segment was a loss of $518,000 for the 13 weeks ended July 24, 1999, as compared to gross profit of $487,000 for the comparable prior year period. For the 26 weeks ended July 24, 1999, gross profit for the Computer Business Segment was a loss of $2,276,000 as compared to a loss of $2,679,000 in the comparable prior year period. Operating loss for the Computer Business Segment was $8,512,000 for the 13 weeks ended July 24, 1999, as compared to a loss of $2,029,000 for the like period a year earlier. During the prior year, various computer vendor programs reduced advertising expense and minimized the operating loss. Many of these programs were discontinued in conjunction with the Company's decision to realign its Computer Business Segment and modify its computer assortment during the fourth quarter of fiscal 1998. Operating loss for the Computer Business Segment was $19,922,000 for the 26 weeks ended July 24, 1999, versus a loss of $14,623,000 for the comparable period last year. Net loss for the Computer Business Segment was $5,585,000 and $12,888,000 for the 13 and 26 weeks ended July 24, 1999, respectively, as compared to a net loss of $1,913,000 and $10,258,000 for the comparable periods last year. LIQUIDITY AND CAPITAL RESOURCES The Company's operating activities generated $45,481,000 of cash during the 26 weeks ended July 24, 1999, which was an increase of $142,848,000 over the prior year. Decreases in inventory and accounts receivable were the primary source of the year-over-year increase. Consolidated inventory decreased $7,696,000 since the year ended January 23, 1999. The decrease in inventory was achieved despite adding merchandise for the 52 new full-size superstores, a smaller format OfficeMax PDQ store and a delivery center that were opened during the first half of fiscal 1999. Further, consolidated inventory decreased 7% year-over-year on a per store basis primarily as a result of the Company's continued focus on its supply-chain management initiatives, including its logistical infrastructure project called PowerMax. Major uses of working capital included accounts payable and accrued liabilities, which decreased $27,504,000 and $58,757,000, respectively during the 26 weeks ended July 25, 1999. Net cash used for investing activities was $51,048,000 for the 26 weeks ended July 24, 1999, versus $51,729,000 in the comparable prior year period. Capital expenditures, primarily for new and remodeled stores and the Company's IT initiatives, were $48,804,000 during the 26 weeks ended July 24, 1999 and $50,373,000 during the comparable period in the prior year. Net cash used for financing was $11,736,000 for the 26 weeks ended July 24, 1999. Current year financing activities primarily represent borrowings under the Company's revolving credit facilities, a decrease in overdraft balances and the payment of $29,306,000 for treasury stock purchases. Net cash provided by financing in the comparable prior year period primarily represented borrowings on the Company's revolving credit facilities. During the second half of fiscal 1999, the Company plans to open approximately 63 new full-size superstores and remodel approximately 24 existing superstores. Management estimates that the Company's cash requirements for opening or remodeling a superstore, exclusive of pre-opening expenses, will be approximately $1,075,000 and $210,000 respectively. For a full-size superstore, the requirements include an average of approximately $425,000 for leasehold improvements, fixtures, point-of-sale terminals and other equipment, and approximately $650,000 for 11 12 the portion of store inventory that is not financed by accounts payable to vendors. Pre-opening expenses are expected to average approximately $85,000 per full-size OfficeMax superstore. In select cases, that average is expected to increase by approximately $25,000 when certain enhanced CopyMax or FurnitureMax features are included. The Company expects its funds generated from operations as well as its current cash reserves, and, when necessary, seasonal short-term borrowings will be sufficient to finance its operations and capital requirements, including its expansion strategy. The Company has $500,000,000 of revolving credit facilities available through June 2002. As of July 24, 1999, the Company had outstanding borrowings of $210,500,000 under its revolving credit facilities at a weighted average interest rate of 5.32% On August 13, 1998, the Company's Board of Directors increased the Company's authorization to repurchase its common stock on the open market to $200,000,000. As of July 24, 1999, the Company had purchased a total of 11,670,100 shares at a cost of $108,084,000. This included systematic purchases to cover potential dilution from the issuance of shares under the Company's equity-based incentive plans. Future purchases of common shares will depend on the Company's obligation under its equity-based incentive plans, its cash position and market conditions. The Company's business is somewhat seasonal, with sales and operating income higher in the third and fourth quarters, which include the back-to-school period and the holiday selling season, respectively, followed by the back-to-business selling season in January. Sales in the second quarter's summer months are the slowest of the year primarily because of lower office supplies consumption during the summer vacation period. LEGAL PROCEEDINGS The Company is a party to litigation it initiated in October 1997 in the United States District Court for the Northern District of Ohio against Ryder Integrated Logistics, Inc. ("Ryder") arising out of Ryder's failure to fulfill certain payment guarantees pursuant to the terms of the Company's logistics service agreement with Ryder. The Company terminated the logistics service agreement in June 1997 based on numerous claims against Ryder under the agreement including, among others, Ryder's refusal to honor its cost guarantees and its failure to return overpayments to the Company. During the course of the agreement, the Company recorded receivables from Ryder of approximately $19,000,000 representing overpayments due from Ryder pursuant to the terms of the agreement. In January 1998, Ryder filed a counterclaim against the Company alleging damages arising from the Company's termination of the agreement in the amount of approximately $75,000,000. The Company believes the counterclaim is without merit and intends to vigorously defend against such counterclaim. Management is of the opinion that, although the ultimate resolution of the Ryder litigation cannot be forecasted with certainty, final disposition of this matter should not materially affect the Company's liquidity, financial position or results of operations. However, in the event of an unanticipated adverse final determination in this matter, the Company's consolidated net income for the period in which such determination occurs could be materially affected. In addition, there are various claims, lawsuits and pending actions against the Company incident to the Company's operations. It is the opinion of management that the ultimate resolution of these matters will not have a material effect on the Company's liquidity, financial position or results of operations. YEAR 2000 READINESS The Year 2000 issue is the result of computer programs being written using two digits rather than four to identify the applicable year. Time-sensitive computer programs may recognize "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. The Company is engaged in a company-wide project to address the Year 2000 issue. The scope of the Company's Year 2000 project includes: (a) identifying and taking appropriate corrective action to remedy the Company's software, hardware and imbedded technology; (b) working with key third parties with which the Company does business electronically to ensure that such business is 12 13 not adversely affected by the Year 2000 issue; and (c) contacting other third parties and requesting assurances that such parties and their products will be Year 2000 ready on a timely basis. The Company has assembled a Year 2000 project team that is responsible for the Company's Year 2000 readiness process and ensuring that there are no major interruptions in the Company's operations as a result of the Year 2000 issue. The project team, which includes members of the Company's senior management, has retained an outside contractor to serve as the "Year 2000 Czar". The Year 2000 Czar is responsible for coordinating the Company's Year 2000 project and reporting to management. The Year 2000 Czar provides weekly progress reports to the project team and periodic status reports to the Board of Directors. The Company has identified both mission critical Year 2000 issues (primarily hardware, operating systems and application systems used in day-to-day operations) and non-mission critical Year 2000 issues related to facilities and product support. The Company is in the process of implementing the SAP system which is expected to resolve potential mission critical problems related to the Year 2000 issue. However, there can be no assurance that the SAP system will be successfully implemented on a timely basis. Accordingly, as a precautionary measure, all current legacy systems scheduled to be replaced by the SAP system are also in the process of being upgraded to Year 2000 ready versions. The Company expects to complete its readiness process for mission critical systems by the end of its third fiscal quarter of 1999. The Company has determined that it will be required to modify or replace other portions of its software, hardware and imbedded technology, which are not considered mission critical systems, so that they will function properly with respect to the Year 2000 and thereafter. The Company's target for completing its readiness process for non-mission critical systems is also the end of its third fiscal quarter of 1999. Currently, the Company estimates it has completed 87% of its readiness process for both mission critical and non-mission critical systems and issues. The Company is in the process of developing formal contingency plans in the event that any of its mission critical or non-mission critical Year 2000 issues are not resolved in a timely manner. While the Company continues to focus on solutions for Year 2000 issues, and expects to complete its project in a timely manner, the Company is in the process of identifying potential major business interruptions that could reasonably likely result from Year 2000 issues and is developing contingency plans to address such potential interuptions. The Company is directly working with key third parties with which the Company does business electronically to remediate and test affected systems. The Company is also in the process of contacting other third parties, including product suppliers, to identify other potential Year 2000 issues. The Company intends to either resolve any issues identified or develop appropriate contingency plans. The Company is also developing contingency plans designed to generally protect the Company from unanticipated Year 2000 business interruptions. Contingency plans are anticipated to include for example, identification of alternative suppliers or service providers and the development of alternative procedures. Regardless of the contingency plans developed, there can be no assurance that the implementation of these plans will be successful. All costs and expenses incurred relating to the Year 2000 issue are charged against income on a current basis. Based on the Company's most recent evaluation, including internal expenses, the total cost of the Company's Year 2000 project is expected to be approximately $5,000,000, of which approximately $3,000,000 has been incurred through August 31, 1999. Management's estimates regarding the expected completion dates and cost involved in the Company's Year 2000 project are based on various assumptions regarding future events, including the availability of resources, the success of third parties in addressing their own Year 2000 issues, and other factors. There are significant risks to the Company if the actual completion dates or costs differ materially from expected completion dates and costs. These risks include the need to process transactions manually at increased costs to the Company, potential delays in obtaining key operational data for analysis, and the inability to process customer orders, pay vendors, collect receivables or procure merchandise for resale on a timely basis, and to perform other critical business functions which could have a material adverse effect on the Company's financial position and the results of its operations. Further, the Company cannot reasonably estimate the impact on the Company of key third parties not successfully addressing their own Year 2000 issues. However, the Company's results from operations could be materially 13 14 adversely affected if third parties (e.g., suppliers, utilities, banks and government entities) have not adequately addressed their respective Year 2000 issues. The most reasonably likely worst case scenario which could result from the failure of the Company or its suppliers or other key third parties to adequately address Year 2000 issues would include a temporary closing of one or more of the Company's stores or distribution facilities or interruption of the Company's ability to receive and process telephone, facsimile or internet orders. Regarding products it sells, the Company believes that the vendors that supply products to the Company for resale are solely responsible for the Year 2000 functionality of those products. The Company has encouraged its merchandise vendors to disclose any potential effect that the Year 2000 change might have on their products. The Company also encourages its customers to contact the manufacturers directly for specific up-to-date information on individual products. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION Portions of this Quarterly Report on Form 10-Q include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The words "believe," "expect," "anticipate," "plan," "intend," and similar expressions, among others, identify "forward-looking statements," which speak only as of the date the statement was made. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to materially differ from those made, projected or implied in such statements. The most significant of such risks, uncertainties and other factors are described in Exhibit 99.1 to the Company's Annual Report on Form 10-K for the year ended January 23, 1999 as filed with the Securities and Exchange Commission. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. 14 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk, principally interest rate risk and foreign exchange risk. Interest earned on the Company's cash equivalents and short-term investments, as well as interest paid on its debt and lease obligations, are sensitive to changes in interest rates. The Company's long-term debt is principally variable rate debt, while the interest component of its operating leases is generally fixed. The Company manages its interest rate risk by maintaining a combination of fixed and variable rate debt. The Company believes its potential exposure to interest rate risk is not material to the Company's financial position or the results of its operations. The Company is exposed to foreign exchange risk through its joint venture partnerships in Mexico, Japan and Brazil. The Company believes its potential exposure to foreign exchange risk is not material. 15 16 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ A. The 1999 Annual Meeting of Shareholders of OfficeMax, Inc. was held on May 13, 1999. Holders of Common Shares of record at the close of business on March 26, 1999, were entitled to vote at the Annual Meeting of Shareholders. B. The following persons were nominated to serve, and were elected, as directors of the Company to serve a term of two years or until their successors are elected: Raymond Bank, Michael Feuer and Carl Glickman. The voting results for each such nominee were as follows: Name For Withheld ---- --- -------- Raymond Bank 97,365,569 1,120,950 Michael Feuer 97,277,442 1,209,077 Carl Glickman 97,284,515 1,202,004 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- Exhibits: (a) Exhibits: . 27.0 Financial Data Schedule for the period ended July 24, 1999 (b) Reports on Form 8-K: None 16 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OFFICEMAX, INC. Date: September 7, 1999 By: Jeffrey L. Rutherford --------------------- Executive Vice President, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 17 EX-27 2 EXHIBIT 27
5 This schedule contains summary financial information extracted from consolidated balance sheets and consolidated statements of operations and is qualified in its entirety by reference to such financial statements. OTHER JAN-22-2000 JAN-24-1999 JUL-24-1999 50,179 0 81,212 603 1,247,065 1,424,714 610,830 265,503 2,143,001 912,186 0 0 0 868,904 266,199 2,143,001 2,149,873 2,149,873 1,633,671 1,633,671 0 0 4,506 40,152 15,709 24,443 0 0 0 24,443 .21 .21
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