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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 25, 2003
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.
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 471-6900
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
PREFERRED SHARE PURCHASE RIGHTS 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. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). X Yes No __
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant as of April 3, 2003 was approximately
$639,802,396.
The number of Common Shares, without par value, of the Registrant outstanding,
net of treasury shares, as of April 3, 2003 was 124,233,475.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for use at the 2003 Annual Meeting
of Shareholders to be held on June 5, 2003, are incorporated by reference in
Part III of this report.
TABLE OF CONTENTS
Item No. Page No.
-------- --------
PART I
1. Business 3
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 17
Results of Operations
7A. Quantitative and Qualitative Disclosures About Market Risk 36
8. Financial Statements and Supplementary Data 37
9. Changes in and Disagreements with Accountants on Accounting and 37
Financial Disclosure
PART III
10. Directors and Executive Officers of the Registrant 38
11. Executive Compensation 38
12. Security Ownership of Certain Beneficial Owners and Management 38
13. Certain Relationships and Related Transactions 38
14. Controls and Procedures 38
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 39
Signatures 40
Certifications 41
Exhibit Index 43
2
PART I
ITEM 1. BUSINESS
GENERAL
OfficeMax, Inc. ("OfficeMax" or the "Company"), which was incorporated
in Ohio in 1988, operates a chain of high-volume office products superstores. As
of January 25, 2003, OfficeMax owned and operated 970 superstores in 49 states,
Puerto Rico, the U.S. Virgin Islands and, through a majority-owned subsidiary,
in Mexico. In addition to offering office products, business-machines and
related items, OfficeMax superstores also feature CopyMax(R) and
FurnitureMax(R), in-store modules devoted exclusively to print-for-pay services
and office furniture. Additionally, the Company reaches customers with an
offering of over 40,000 items through its award winning e-Commerce site,
OfficeMax.com(R), its direct-mail catalogs and its outside sales force, all of
which are serviced by its three PowerMax distribution facilities, 18 delivery
centers and two national customer call and contact centers.
OfficeMax makes its Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and amendments to those reports
available, free of charge, on its Web site, www.officemax.com, as soon as
reasonably practicable after the Company files such material with, or furnishes
such material to, the Securities and Exchange Commission. The Company's filings
with the Securities and Exchange Commission are also available, at no charge, at
www.sec.gov, as well as on a number of other Web sites. The Company is not
including the information on its Web site as part of, or incorporating it by
reference into, this Annual Report on Form 10-K.
The Company has two business segments: Domestic and International. The
Company's operations in the United States, Puerto Rico and the U.S. Virgin
Islands, comprised of its retail stores, e-Commerce operations, catalog business
and outside sales groups, are included in the Domestic segment. The operations
of the Company's majority-owned subsidiary in Mexico, OfficeMax de Mexico, are
included in the International segment. Additional information regarding the
Company's business segments is presented in Management's Discussion and Analysis
of Financial Condition and Results of Operations contained in this Annual Report
on Form 10-K, and financial information regarding these segments is provided in
Note 9 of Notes to Consolidated Financial Statements contained in this Annual
Report on Form 10-K.
BUSINESS STRATEGY
Over the last two and a half years, OfficeMax has made major
investments in developing and implementing a multi-pronged strategy which
included the development and installation of a state-of-the-art supply chain
management network backed by a new integrated computer system, significant
enhancements to overall store-level execution and focused marketing tactics that
has enabled the Company to gain market share with its core business customer
while maximizing gross margin dollars. These investments significantly fueled
the Company's improved results in fiscal 2002. The Company also believes the
improvements are the catalyst for accelerated profitable growth in the future.
In fiscal 2003 and beyond, the Company plans to grow its business through
expansion opportunities in existing markets, product line extensions, strategic
partnerships and international growth with a focus on Latin America. OfficeMax
plans to expand the marketing of its products and services through its
commercial sales operations and target new customer sets in specialized markets
that are currently not served by the office products superstore industry. The
key elements of this strategy are as follows:
- Extensive Merchandise and Service Offering. OfficeMax has
become a productivity ally for small businesses, not only selling
office machines and supplies, but also expanding its line of business
services. Each OfficeMax superstore offers approximately 8,000 stock
keeping units ("SKUs") of quality, name-brand and OfficeMax
private-branded merchandise, which represents a breadth and depth of
in-stock items not available from traditional office products
retailers, mass merchandisers or wholesale clubs. The Company has also
increased the marketing emphasis of in-store business services
including CopyMax, its digital print-for-pay offering targeted at
serving the small business customer.
3
OfficeMax continues to introduce line extensions of products
that are aligned with its core customers, such as higher-end
electronics merchandise which includes all-in-one machines,
communications equipment and digital imaging technology. Additionally,
the Company is expanding its private branding of products which offers
compelling values with quality equal to or better than national brands.
This strategy provides increased gross margin opportunities. In fiscal
year 2002, OfficeMax superstores offered approximately 800 OfficeMax
private-branded and direct import products manufactured to our
specifications. The Company expects this offering to increase to over
1,000 products in fiscal year 2003. In the future, OfficeMax will
continue to position itself as a small business ally by expanding goods
and services that are aligned with this customer segment.
- New Store Prototype. The Company's merchandise presentation
is highlighted by wide aisles with open ceilings, bright lighting,
colorful signage and bold graphics. This easy-to-shop format is
designed to enhance customer convenience, create an enjoyable,
efficient shopping experience and promote impulse purchases. In fiscal
year 2002, the Company introduced its latest store iteration, a 20,000
square-foot footprint, which features improved sightlines, enhanced
lighting, and new graphic signage that significantly enhances the
shopping experience, assists the purchase decision process and
encourages add-on item sales. The new prototype is approximately 15%
smaller than existing stores, achieved as a result of the Company
needing less space, another derived benefit of its new supply-chain
management initiative. Upon entrance to this new prototype, customers
have immediate visibility of every product category offered, which the
Company has grouped into major "worlds" or categories. The worlds
include: supplies such as Office Organization; Presentation; Paper and
almost every imaginable type of office tool; Technology and Software;
CopyMax, our print-for-pay-business; and FurnitureMax, featuring
chairs, desks and everything in-between for the office. The new
prototype also features an enhanced navigational signing and
point-of-purchase package within the worlds, that helps make shopping
easier and more efficient and fosters add-on sales. Also during fiscal
year 2002, as a result of its successful completion of supply chain
management improvements, OfficeMax completed a fixture height reduction
program inside its stores, as there is no longer a need for "top-stock"
used for back-up inventory. This program enables the Company to
incorporate many of the enhancements of its latest prototype across the
entire chain and dramatically improve the esthetics and visibility in
its stores.
As a result of the Company's infrastructure improvements, the
Company is now developing and experimenting with smaller store format
tests. OfficeMax currently operates a small number of smaller
footprint stores called OfficeMax PDQ (Pretty Darn Quick). This
smaller format is 4,000 to 7,000 square feet and features the
Company's high-margin CopyMax print-for-pay offering. A second
generation of this smaller format is now in development and will be
tested later this year.
- Domestic Store Expansion and Remodels. The Company opened
five new domestic superstores during fiscal year 2002 and intends to
open approximately the same number in fiscal year 2003. In addition,
OfficeMax plans to remodel approximately 250 existing superstores in
fiscal year 2003 utilizing its new format and key features of its
latest store prototype. All remodels and new superstore openings will
occur in markets where OfficeMax already has a major presence, which
will enable it to better leverage advertising, distribution and
management and supervisory costs.
Prospective locations for new superstores are evaluated using
on-site surveys conducted by real estate specialists 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
superstores and relevant demographic information, such as the number of
businesses and the income and education levels in the area.
4
The following table summarizes the Company's domestic
superstore real estate activity by fiscal year, including Puerto Rico
and the U.S. Virgin Islands:
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
1999 115 1 - 946
2000 54 5 - 995
2001 17 48 - 964
2002 5 29 - 940
- Guaranteed Everyday Low Prices. OfficeMax maintains an
everyday low price policy. The Company guarantees its low prices by
matching any advertised price or refunding the difference between a
lower advertised price and the price paid at OfficeMax within 14 days,
subject to certain exclusions. The Company also promotes a 115% low
price guarantee whereby if a customer finds a lower price at any office
products superstore on an identical item, OfficeMax will refund the
customer 115% of the difference (up to $55.00). In addition, for the
Company's CopyMax offerings, it provides an on-time guarantee ensuring
a customer's job is produced as promised.
- Customer Service. To develop and maintain customer loyalty,
OfficeMax fosters a customer-centric sales culture that focuses
associates on making customer service their number one priority. The
Company views the quality of its associates' interaction with its
customers as critical to its success. To this end, the Company
emphasizes training and personnel development and seeks to attract and
retain well-qualified, highly motivated associates. Additionally, the
Company has centralized most administrative functions at its corporate
office and customer call and contact centers and automated many
store-level tasks or shifted such tasks to off hours to enable in-store
associates to focus on effective customer service. In fiscal year 2002,
OfficeMax implemented "Boundless Selling," a program that, in part,
uses wireless technology and a sales leader in its stores to leverage
payroll while enhancing customer service capabilities. The wireless
technology used in the Boundless Selling program enables sales
associates in each store to communicate in real-time with each other
and members of the store management team who act as the sales leader.
This store management associate is responsible for generating sales and
providing direction and feedback to sales associates as they interact
with customers. OfficeMax believes each of these improvements gives
customers a quicker, more satisfying shopping experience and keeps them
returning to the Company's locations.
- Information Technology. In fiscal year 2002, OfficeMax began
the implementation of a chain-wide, new point-of-sale system in its
store locations. This new system includes a multitude of features
including Customer Relationship Management (CRM) tools that will
provide the Company insight into customer buying habits. OfficeMax
believes the CRM data that will be collected by the system will be
another valuable tool for its sales associates to make real-time
purchase recommendations to customers, as well as for improving
targeted marketing efforts. The new point-of-sale system also features
a benefit called "Line-Buster" technology that will allow its sales
associates to check out customers paying with credit cards anywhere in
the store using hand-held units, which is expected to result in a
better shopping experience, particularly during very busy selling
periods such as back-to-school, holiday and in January, a time many
businesses stock up on supplies for the new year. This new system
roll-out is expected to be completed during fiscal year 2003.
5
- Marketing Concepts. OfficeMax's store-within-a-store
concepts are designed to complement its core office supply merchandise
assortment by providing additional products and services to the
Company's customers and provide the Company with opportunities for
incremental store traffic and sales. These concepts include the
departments or in-store modules of CopyMax and FurnitureMax. 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 a full-line of office furniture
and related accessories and a variety of specialized services such as
office layout and design and professional set-up and installation. Both
CopyMax and FurnitureMax have a presence in every OfficeMax superstore.
In fiscal year 2002, OfficeMax increased the marketing
emphasis of its CopyMax print-for-pay services. Every CopyMax
store-within-a-store location is 100% digitally-connected, which allows
every location, and the Company's CopyMax specific e-Commerce site, to
act as a point of fulfillment. This connectivity creates a virtual
print-on-demand environment for OfficeMax's small business customers.
OfficeMax also established a CopyMax store-based outside sales
organization in fiscal year 2002, including the implementation of three
commercial sales territories with over 200 dedicated CopyMax sales
representatives to market print-for-pay services to medium- and
larger-size businesses. The Company believes CopyMax serves as a major
differentiator from it competitors in the office products industry and
a value-add for the small- and medium-size business customers.
- OfficeMax.com. The Company believes that the Internet is an
important channel for the sale of office products and the procurement
of business services. OfficeMax.com offers a vast selection of over
40,000 items, many through a "virtual" inventory, coupled with free,
fast delivery on orders over $50 for most locations. OfficeMax is
focused on further integrating the site with other OfficeMax channels
by means of features such as weekly sneak previews of in-store
specials, sent to preferred customers via the Internet several days
prior to the promotion appearing in local newspapers. Another feature
of the OfficeMax.com site and an example of integrating channels, is
the ability of users to order online using our catalogs as reference
and then submitting catalog item numbers when ordering electronically.
OfficeMax.com also offers an expanding array of integrated business
services targeted at small business and home office customers,
including communications, eBusiness utilities, marketing, travel,
virtual learning and financial services.
OfficeMax will also use the Internet and e-Commerce as a
foundation for expansion into new international markets. In the spring
of fiscal year 2003, OfficeMax is planning to launch an e-Commerce site
in Canada, allowing the Company to tap into the multi-billion dollar
Canadian office products market for a minimal capital investment.
- Catalog and Commercial Outside Sales. The Company's strategy
to serve medium and larger, non-retail store business customers is to
put a greater emphasis on its catalog and commercial sales force
operations. A full-assortment catalog containing more than 30,000 items
plus a variety of merchandise from a third party provider allows
customers the convenience of catalog ordering and fast delivery.
OfficeMax also employs a commissioned outside sales force to provide
personal service for more customized business needs, including the
integration of customer-specific online ordering for its larger
customers' special needs. These customers are served through the
Company's two national customer call and contact centers and 18
delivery centers. In fiscal year 2003, OfficeMax will expand its
commercial sales presence by aggressively targeting businesses in the
United States with 50 to 100 employees.
- International Expansion. During fiscal year 2002, the
Company opened three OfficeMax superstores in Mexico through its
majority-owned subsidiary, OfficeMax de Mexico, ending the year with 30
locations. OfficeMax stores operated by this subsidiary are virtually
identical to those operated by the Company domestically. In fiscal year
2003, the Company plans to open up to ten additional superstores in
Mexico and launch a redesign of the OfficeMax de Mexico e-Commerce
site. The new site will incorporate the Company's U.S. OfficeMax.com
technology platform, enabling OfficeMax de Mexico to take advantage of
the latest in customer relationship management and position it as a
premier office products site in Mexico.
The Company believes additional future international expansion
opportunities exist in Latin America. Ultimately, the Company's
international expansion will depend upon general economic and business
conditions affecting consumer spending in these markets, the
availability of desirable store locations, the negotiation of
acceptable terms and the availability of adequate capital.
6
- Other Growth Areas. OfficeMax believes there are other
growth opportunities for the Company including non-traditional formats
that could include new store-within-a-store concepts in conjunction
with retail partners outside of the office products industry, and the
opportunity for OfficeMax to align with vertical markets such as
education, real estate and healthcare.
MARKETING, PROMOTIONS AND ADVERTISING
The Company's marketing efforts are directed at small-and medium-size
businesses, home office customers, and individual consumers. By extending and
integrating its marketing channels to include e-Commerce, direct-mail catalog
and an outside sales force, OfficeMax also serves the medium and larger
corporate customer. A multimedia approach is used to attract customers by
emphasizing the Company's "Max Means More" marketing theme which is designed to
position OfficeMax as the retailer that gives SOHO business customers (also
known as small office home office customers), more of what they need to run
their businesses in the form of selection, service and value. The Company's
advertising campaigns utilize network, local and cable television commercials,
newspaper ads, seasonal spot television and radio commercials, direct mail
promotions, circulars, outdoor billboards, mass transit cards, sports arena and
online advertising as well as other promotional and public/community relation
vehicles. OfficeMax also utilizes special marketing programs developed to target
the small business customer and support seasonal events such as the
back-to-school selling period, the Christmas holiday season, and the January
"re-stocking" back-to-business period. The Company also implements
"micro-marketing" campaigns, or market specific advertising, to leverage its
advertising spend and to target certain key markets in a cost-effective manner.
In fiscal year 2003, OfficeMax will take its "Max Means More" marketing
program to the next level using a multi-media approach, showcased in broadcast
advertising as well as targeted direct mail. OfficeMax will also use focused
promotional tactics aimed at gaining market share with the core business
customer while maintaining gross margin dollars. The Company's marketing
objective is to create awareness and carry its brand promise of more service,
more value, and more selection to the business and SOHO customer. OfficeMax
believes its Max Means More campaign will be long-lived and will help continue
to differentiate it from competitors in the office supply superstore industry.
MANAGEMENT INFORMATION SYSTEMS
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, e-Commerce and financial
systems. During fiscal year 2002, the Company completed upgrades to the SAP R/3
4.6c release, the current release of Manugistics which is utilized for
forecasting and transportation management, and the current release of
BroadVision which supports our direct business channels. OfficeMax believes that
these upgrades, and numerous other projects completed during fiscal year 2002,
position the Company to grow and operate the business more effectively.
The Company's in-store, point-of-sale (POS) registers capture sales
information at the time of each transaction, at the category and stock keeping
unit (SKU) level, by the use of bar-code scanners that update store-level
perpetual inventory records. This information is transmitted on a daily basis to
corporate headquarters, where it is evaluated and used in merchandising and
replenishment decisions. The Company also tracks in-store inventory through the
use of portable, handheld, radio frequency terminals. These terminals permit
store personnel to scan a product on the shelf and instantly retrieve specific
product information, such as recent sales history, gross margin and inventory
levels. The Company intends to install an additional feature of its integrated
SAP software platform, SAP's Retail Store module, in fiscal year 2003, which
will provide more enhanced in-store inventory data. In fiscal year 2002,
OfficeMax began the chain-wide implementation of a new point-of-sale system in
its stores. This new system includes a multitude of features including Customer
Relationship Management (CRM) tools that will provide the Company insight into
customer buying habits. OfficeMax believes the CRM data that will be collected
by the system will be another valuable tool for its sales associates to make
real-time purchase recommendations to customers, as well as for improving
targeted marketing efforts. The new point-of-sale system also features a benefit
called "Line-Buster" technology that will allow its sales associates to check
out customers paying with credit cards anywhere in the store using hand-held
units, which is expected to result in a better shopping experience, particularly
during very busy selling periods such as back-to-school, holiday and in January,
a time many businesses stock up on supplies for the new year. This new system
roll-out is expected to be completed during fiscal year 2003.
The Company utilizes its own on-line intranet and "frame-relay"
network, which supports data communication between corporate headquarters and
its stores, delivery and customer call and contact centers. This technology is
employed to centralize credit card and check authorization and validate
transactions. In addition, the network enhances intra-Company
7
communication and supports electronic maintenance of in-store technology. The
Company also utilizes its own intranet, known as @Max(SM), which provides
information on demand in real time to all of the Company's corporate and field
management associates, and is also used for online product knowledge and
management training.
The Company employs a variety of scalable software and hardware systems
that provide transaction processing, administration, product searching, customer
support, fulfillment and order tracking for OfficeMax.com. The transaction
processing systems are currently interfaced with the Company's legacy order
management system. The legacy system will be replaced with SAP's Customer
Relationship module for order management, payment processing and distribution in
fiscal year 2003 to improve operational efficiencies and the Company's customer
analytics. OfficeMax's e-Commerce systems are based on industry standard
architectures. The backbone of the technology structure consists of Oracle
database servers with Sun Microsystems hardware. The Company's e-Commerce
Internet systems are hosted at an independently operated third party facility,
which provides high-speed, redundant communications lines, emergency power
backup and continuous systems monitoring. Load balancing systems and redundant
servers provide for fault tolerance and for no single point of failure in the
event of outages or catastrophic events.
MERCHANDISING
The Company's merchandising strategy focuses on offering an extensive
selection of quality, name-brand and OfficeMax private-branded products. The
following table sets forth the approximate percentage of net sales attributable
to each merchandise group for the periods presented:
- ----------------------------------------------------------------------------------------------------
JANUARY 25, JANUARY 26, JANUARY 27,
FISCAL YEAR ENDED 2003 2002 2001
- ----------------------------------------------------------------------------------------------------
Office supplies, including print-for-pay services 38.0% 39.4% 39.2%
Electronics, business machines and digital products 34.8 33.1 32.1
Office furniture 10.4 11.0 13.0
Computers, printers, software, peripherals and related
consumable products 12.6 12.2 12.2
International segment and other 4.2 4.3 3.5
----- ----- -----
Total Company 100.0% 100.0% 100.0%
===== ===== =====
The Company offers a wide selection of name-brand office products,
packaged and sold in multi-unit packages for the business customer and in single
units for the individual consumer. The Company also offers private-branded
products under the OfficeMax(R) label in order to provide customers additional
savings on a wide variety of commodity products for which management believes
national brand recognition is not a key determinant of customer selection and
satisfaction. These commodity items include various paper products such as
computer and copy paper, legal pads, notebooks, envelopes and similar 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. In fiscal year 2002, OfficeMax
superstores offered approximately 800 OfficeMax private-branded and direct
import products manufactured to our specifications. The Company expects this
offering to increase to over 1,000 products in fiscal year 2003.
PURCHASING AND DISTRIBUTION
OfficeMax maintains a centralized group of merchandise and product
category managers who utilize a detailed merchandise planning system to select
the product mix for each store and delivery center in conjunction with
systematic, frequent input from field management.
The Company believes that it has good relationships with its vendors
and does not consider itself dependent on any single source for its merchandise.
The Company has not experienced any material difficulty in obtaining desired
quantities of merchandise for sale and does not foresee having any material
difficulties in the future.
8
The Company has two national customer call and contact centers, 18
delivery centers and, through a majority-owned subsidiary, a call and delivery
center in Mexico. The Company operates three PowerMax inventory distribution
facilities located in Alabama, Nevada and Pennsylvania. The first PowerMax
facility was opened in fiscal year 1998. The Company completed its PowerMax
network by opening one facility in each of fiscal years 1999 and 2000 and
expanding the facility located in Nevada in fiscal year 2001. Prior to the
development of the PowerMax network, the Company's superstores and delivery
centers received inventory shipments directly from each individual vendor.
Currently, more than 95% of the Company's merchandise offering is replenished
from its PowerMax facilities. Development of the PowerMax network, coupled with
the Company's state-of-the-art computer systems, has enabled the Company to
reduce per-store inventory and improve its working capital management and
in-stock positions by permitting a shorter lead time for reordering at the
stores and delivery centers, while meeting the minimum order requirements of the
Company's vendors. Additionally, the PowerMax network has resulted in more
efficient inventory receiving processes and allowed the Company to devote more
of its store-level personnel resources to customer service. The Company
considers its PowerMax network to be a key component of its business strategies
and expects the network to contribute significantly to improved profitability in
future periods.
COMPETITION
The domestic and international office products industries, which
include superstore chains, "e-tailers" and numerous other competitors, are
highly competitive. Businesses in the office products industry compete on the
basis of pricing, product selection, convenience, customer service and ancillary
business offerings.
As a result of consolidation in the office products superstore
industry, OfficeMax currently only has two direct domestic superstore-type
competitors, Office Depot and Staples, which are similar to the Company in terms
of store format, pricing strategy and product selection. The Company's other
competitors include traditional office products retailers and direct mail
operators. During recent years, OfficeMax has experienced increased competition
from computer and electronics superstore retailers, mass merchandisers, Internet
merchandisers and wholesale clubs. In particular, mass merchandisers and
wholesale clubs have increased their assortment of office products in order to
attract home office customers and individual consumers. Further, various other
retailers that have not historically competed with OfficeMax, such as drug
stores and grocery chains, have begun carrying at least a limited assortment of
paper products and other basic office supplies. Management expects this trend
towards a proliferation of retailers offering a limited assortment of office
supplies to continue.
The Company believes it competes favorably with its competitors and
differentiates itself based on the breadth and depth of its in-stock merchandise
offering along with specialized services offerings, its everyday low prices, the
quality of its customer service and the efficiencies and convenience of its
integrated channels. OfficeMax does not compete in the contract commercial
business; however, it utilizes an outside sales force to support growth in sales
to medium and larger size corporate and institutional type customers.
Some of OfficeMax's 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's business.
SEASONALITY
The Company's business is 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 supply consumption during the summer period, as people spend more
time on outdoor activities and vacations.
ASSOCIATES
As of April 3, 2003, the Company had approximately 30,600 domestic
associates, including 15,500 full-time and 15,100 part-time associates, 1,900 of
whom were employed at its corporate headquarters and customer call and contact
centers and 28,700 of whom were employed at OfficeMax stores, delivery centers,
and inventory distribution centers.
9
ITEM 2. PROPERTIES
DOMESTIC SEGMENT
As of April 3, 2003, OfficeMax had 938 superstores in 49 states, Puerto
Rico and the U.S. Virgin Islands. The following table details OfficeMax's
domestic superstores by state and territory:
Alabama 13 Nebraska 7
Alaska 3 Nevada 13
Arkansas 2 New Hampshire 3
Arizona 33 New Jersey 17
California 83 New Mexico 9
Colorado 25 New York 40
Connecticut 10 North Carolina 28
Delaware 2 North Dakota 2
Florida 57 Ohio 51
Georgia 31 Oklahoma 4
Hawaii 4 Oregon 10
Idaho 6 Pennsylvania 30
Illinois 53 Rhode Island 2
Indiana 19 South Carolina 9
Iowa 10 South Dakota 3
Kansas 11 Tennessee 25
Kentucky 8 Texas 74
Louisiana 7 Utah 15
Maine 2 Virginia 23
Maryland 2 Washington 21
Massachusetts 18 West Virginia 6
Michigan 43 Wisconsin 27
Minnesota 34 Wyoming 2
Mississippi 6
Missouri 23 Puerto Rico 8
Montana 3 U.S. Virgin Islands 1
The Company operates a small number of smaller footprint stores called
OfficeMax PDQ. This smaller format is 4,000 to 7,000 square feet and features
the Company's CopyMax print-for-pay offering and a narrower offering of
supplies, furniture and technology products compared to the Company's regular
size stores.
The Company occupies all of its stores under long-term lease
agreements. These leases generally have initial 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.
The Company's corporate headquarters are located in two buildings in
the suburban Cleveland, Ohio area. The Company owns both of these facilities,
one of which is subject to a mortgage secured loan.
The Company operates 18 delivery centers located in 17 states and
Puerto Rico and two national customer call and contact centers located in Ohio
and Texas. The Company occupies all of these facilities under various long-term
leases. The Company also operates three PowerMax distribution facilities. The
PowerMax distribution facilities are located in Alabama, Nevada and
Pennsylvania. The Company leases two of these distribution facilities under
synthetic operating leases from special purpose entities ("SPEs") that have
been established by nationally prominent, creditworthy commercial lessors to
facilitate the financing of those assets for the Company. The synthetic
operating leases expire in fiscal year 2004. One of the synthetic operating
leases can be extended at the Company's option until fiscal year 2006. The
Company occupies the third PowerMax distribution facility under a long-term
operating lease. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Off Balance Sheet Arrangements and
Contractual Obligations" and "Item 7.
10
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recently Issued Accounting Pronouncements" for more information
regarding the Company's synthetic operating leases.
Approximately 40 of the Company's store leases were guaranteed by Kmart
Corporation (Kmart), which from 1990 to 1995 was an equity investor in OfficeMax
during the Company's early stages of development. Kmart sold the balance of its
equity position in OfficeMax in 1995. 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. In connection with that agreement, OfficeMax and Kmart subsequently
entered into a Consent and Undertaking Agreement and an Assignment, pursuant to
which OfficeMax assigned some 45 leases to Kmart and took back subleases. The
agreements generally protect against interference by Kmart in the leases absent
default, and provide for Kmart to assign the leases back to OfficeMax should
Kmart be released from its guarantees or if necessary to prevent a rejection in
bankruptcy. Kmart is presently a debtor in possession in a Chapter 11 bankruptcy
case filed on January 22, 2002.
INTERNATIONAL SEGMENT
As of April 3, 2003, the Company's majority-owned subsidiary in Mexico,
OfficeMax de Mexico, had 30 superstores located throughout the country and a
call and delivery center located in Mexico City. OfficeMax de Mexico occupies
all of these facilities under various long-term operating leases.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to previously disclosed securities litigation in
the United States District Court for the Northern District of Ohio, Eastern
Division and the Cuyahoga County, Ohio Court of Common Pleas. On March 27, 2002,
the United States District Court for the Northern District of Ohio, Eastern
Division, granted the Company's motion to dismiss all claims against it and its
officers and directors in Bernard Fidel, et al. vs. OfficeMax, Inc., et al.,
Case No. 1:00CV2432, and the four related cases consolidated with the Fidel case
(i.e., Case Nos. 1:00CV2558, 1:00CV2562, 1:00CV2606, and 1:00CV2720). The court
thereby dismissed, in their entirety, these putative class action cases against
the Company and certain of its officers and directors. Plaintiffs filed a motion
requesting the court to reconsider its dismissal of these cases. The Company
filed a brief in opposition to plaintiffs' motion, which motion was denied by
the court on July 26, 2002. On August 26, 2002, plaintiffs filed a notice of
appeal of the court's July 26, 2002 order and the court's March 27, 2002 order.
The appeal has been fully briefed and the parties are awaiting oral argument. As
previously disclosed, these lawsuits involve claims against the Company and
certain of its officers and directors for violations of the federal securities
laws for allegedly making false and misleading statements that served to
artificially inflate the value of the Company's stock and/or relating to the
Company's shareholder rights plan. There has been no change in the status of two
of the remaining previously disclosed securities cases (i.e., the consolidated
cases Great Neck Capital Appreciation and Crandon Capital Partners), which were
stayed. The remaining two previously disclosed securities cases (i.e., Carrao
and Miller3), which also had been stayed, were dismissed without prejudice by
agreement of the parties on November 25, 2002; however, those plaintiffs
expressly retained the right to reinstitute those actions if the plaintiffs in
Fidel are successful in their pending appeal before the Sixth Circuit Court of
Appeals.
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
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of fiscal year 2002.
11
EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below is the name, present position and age of each of the
executive officers of the Company as of April 3, 2003 as well as prior positions
held by each during the past five years and the date when each was first elected
or appointed to serve as an executive officer. Executive officers are generally
elected annually by the Board of Directors and hold office until their
successors are elected or until the earlier of their death, resignation or
removal.
DATE FIRST
ELECTED OR
NAME POSITION AGE APPOINTED
---- -------- --- ----------
Michael Feuer Chairman of the Board and 58 1988
Chief Executive Officer
Gary J. Peterson President, Chief Operating Officer 52 2000
Michael F. Killeen Senior Executive Vice President, 59 2001
Chief Financial Officer
Harold L. Mulet Executive Vice President, 51 1999
Retail Sales and Store Productivity
Ross H. Pollock Executive Vice President, 47 1997
General Counsel and Secretary
Ryan T. Vero Executive Vice President, 33 2000
Merchandising and Marketing
Phillip P. DePaul Senior Vice President, 33 2002
Controller
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 from Jo-Ann
Stores, Mr. Feuer served as Senior Vice President and a member of that company's
executive committee.
Mr. Peterson has served as the President, Chief Operating Officer of
the Company since March 2000. From July 1996 to February 2000, Mr. Peterson
served as an executive officer and COO of Blockbuster Entertainment, the world's
largest operator of video stores with over 4,000 stores. From August 1993 to
July 1996, Mr. Peterson served as Chief Operating Officer of Southeast Frozen
Foods L.P., a distributor to retail grocery stores. Mr. Peterson has also held
various management positions with Wal-Mart Stores, Inc., Carter Hawley Hale
Department Stores and Thrifty Drug Stores.
Mr. Killeen joined the Company in December 2001, as Senior Executive
Vice President, Financial and Corporate Strategies, and assumed the duties of
Chief Financial Officer in January 2002. From January 2000 until December 2001,
Mr. Killeen was a business consultant. From 1978 until December 1999, Mr.
Killeen was a partner with the accounting firm of Arthur Andersen LLP.
Mr. Mulet has served as Executive Vice President, Retail Sales and
Store Productivity of the Company since May 1999. From August 1995 to May 1999,
Mr. Mulet served as Senior Vice President, Stores at Service Merchandise
Company. Prior to August 1995, Mr. Mulet served as Regional Vice President of
Target Corporation.
12
Mr. Pollock has served as Executive Vice President, General Counsel and
Secretary of the Company since March 2001. From March 1998 to March 2001, Mr.
Pollock served as Senior Vice President, General Counsel and Secretary of the
Company. 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. Vero has served as Executive Vice President, Merchandising and
Marketing since October 2001. From August 2000 to October 2001, Mr. Vero served
as Executive Vice President, e-Commerce/Direct of the Company. From February
1999 to August 2000, Mr. Vero served as Vice President, e-Commerce of the
Company. From October 1996 to February 1999, Mr. Vero served as Divisional Vice
President, OfficeMax Online, and from January 1996 to October 1996, he served in
a variety of management positions with the Company.
Mr. DePaul has served as Senior Vice President, Controller of the
Company since May 2002. From July 2001 to May 2002, Mr. DePaul served as Vice
President, Assistant Controller of the Company. From August 1998 to July 2001,
Mr. DePaul served in various management positions in the Company's financial
reporting and financial planning groups. From September 1993 to August 1998, Mr.
DePaul was employed by the accounting firm of Ernst & Young LLP.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS
OfficeMax Common Shares are listed on the New York Stock Exchange and
traded under the symbol OMX. The high and low sales prices of the Company's
Common Shares during each quarter of fiscal year 2001 and fiscal year 2002, as
reported on the New York Stock Exchange Consolidated Transaction reporting
system, are listed below:
Fiscal Year 2001 High Low
- ---------------- ----- -----
1st Quarter (ended April 28, 2001) $4.22 $2.75
2nd Quarter (ended July 28, 2001) 3.94 3.06
3rd Quarter (ended October 27, 2001) 4.95 2.60
4th Quarter (ended January 26, 2002) 4.91 2.50
Fiscal Year 2002 High Low
- ---------------- ----- -----
1st Quarter (ended April 27, 2002) $7.25 $3.76
2nd Quarter (ended July 27, 2002) 8.06 3.79
3rd Quarter (ended October 26, 2002) 5.05 3.05
4th Quarter (ended January 25, 2003) 6.55 4.05
The Company has never paid cash dividends on its Common Shares. 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 April 3, 2003, the Company had 3,704 shareholders of record. On
April 3, 2003, the closing price of the Company's Common Shares was $5.15.
14
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data as of, and for the fiscal years ended, January
25, 2003, January 26, 2002, January 27, 2001, January 22, 2000 and January 23,
1999 is set forth below:
(Dollars in millions, except per share data)
- ---------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal Fiscal Fiscal
2002 (1) 2001 (2) 2000 (3) 1999 (4) 1998 (5)
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL DATA (6)
Sales $ 4,775.6 $ 4,625.9 $ 5,121.3 $ 4,815.0 $ 4,326.0
Cost of merchandise sold, including
buying and occupancy costs 3,578.9 3,536.1 3,892.4 3,646.1 3,276.5
Inventory liquidation -- 3.7 8.2 -- --
Inventory markdown charge for
item rationalization -- -- -- 77.4 --
Computer segment asset write-off -- -- -- -- 80.0
Gross profit 1,196.7 1,086.1 1,220.7 1,091.5 969.5
Store closing and asset impairment 2.5 76.8 109.6 -- --
Operating income (loss) 24.6 (201.9) (193.6) 32.4 86.7
Net income (loss) 73.7 (309.5) (133.2) 10.0 48.6
Earnings (loss) per common share:
Basic 0.60 (2.72) (1.20) 0.09 0.40
Diluted 0.59 (2.72) (1.20) 0.09 0.39
STATISTICAL DATA
End of period superstores:
Domestic segment 940 966 997 955 837
International segment 30 27 23 15 12
FINANCIAL POSITION
Working capital $ 356.0 $ 240.0 $ 403.4 $ 469.1 $ 501.1
Total assets 1,785.4 1,755.0 2,293.3 2,275.0 2,231.9
Total long-term debt 1.4 1.5 1.7 15.1 16.4
Redeemable preferred shares 21.8 21.8 52.3 -- --
Shareholders' equity 780.4 705.9 982.3 1,116.0 1,138.1
(1) On March 9, 2002, President Bush signed into law the "Job Creation and
Worker Assistance Act" (H.R. 3090). This new tax law temporarily extends
the carryback period for net operating losses incurred during the Company's
taxable years ended in 2001 and 2000 to five years from two years. In the
first quarter of fiscal year 2002, the Company reversed a portion of the
valuation allowance for its net deferred tax assets recorded during fiscal
year 2001 and recognized an income tax benefit of $57,500,000 due to the
extension of the carryback period. The income tax benefit increased net
income by $0.46 per diluted share. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Charges and
Reserves" and Note 6 of Notes to Consolidated Financial Statements of the
Company for additional information regarding the tax benefit recorded.
15
(2) In the third quarter of fiscal year 2001, the Company recorded a pre-tax
charge of $10,000,000 to record a reserve for legal matters. The charge
increased the net loss in fiscal year 2001 by $6,050,000, or $0.05 per
diluted share. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Charges and Reserves" for
additional information regarding this legal reserve. In the fourth quarter
of fiscal year 2001, the Company recorded a valuation allowance of
$170,616,000 to reduce to zero the value of its net deferred tax assets,
including amounts related to its net operating loss carryforwards. The
valuation allowance reduced net income by $1.49 per diluted share. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Charges and Reserves" and Note 6 of Notes to
Consolidated Financial Statements of the Company for additional information
regarding the valuation allowance. Also, in the fourth quarter of fiscal
year 2001, in conjunction with its decision to close 29 underperforming
domestic superstores, the Company recorded net, pre-tax charges of
$76,761,000 for store closing and asset impairment and $3,680,000 for
inventory liquidation. These charges reduced net income by $49,955,000, or
$0.44 per diluted share. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Charges and Reserves"
and Note 2 of Notes to Consolidated Financial Statements of the Company for
additional information regarding these charges.
(3) In conjunction with its decision to close 50 underperforming domestic
superstores, the Company recorded, in the fourth quarter of fiscal year
2000, pre-tax charges of $109,578,000 for store closing and asset
impairment and $8,244,000 for inventory liquidation. These charges reduced
net income by $71,789,000, or $0.64 per diluted share. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Charges and Reserves" and Note 2 of Notes to Consolidated
Financial Statements of the Company for additional information regarding
these charges. In the third quarter of fiscal year 2000, the Company
recorded a $19,465,000 pre-tax charge for a litigation settlement. The
litigation settlement charge was included in cost of merchandise sold and
reduced net income by $11,679,000, or $0.10 per diluted share. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Charges and Reserves" for additional information regarding
this charge for litigation settlement.
(4) In order to effect the acceleration of its supply-chain management
initiative and the implementation of the Company's new warehouse management
system, the Company decided to eliminate select current products on hand as
part of its program of merchandise and vendor rationalization. In
connection with this decision, the Company recorded a pre-tax markdown
charge of $77,372,000 in fiscal year 1999. The charge reduced net income by
$49,518,000, or $0.43 per diluted share.
(5) In conjunction with its decision to realign its former Computer Business
segment, the Company recorded a pre-tax charge of $79,950,000 in the third
quarter of fiscal year 1998. The charge provided for the liquidation of
discontinued computer inventory and the write-off of other assets directly
related to the Company's discontinued former Computer Business segment. The
charge reduced net income by $49,889,000, or $0.41 per diluted share.
(6) Fiscal year 2000 included 53 weeks. Fiscal years 2002, 2001, 1999 and 1998
included 52 weeks.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company has two business segments: Domestic and International. The
Company's operations in the United States, Puerto Rico and the U.S. Virgin
Islands, comprised of its retail stores, e-Commerce operations, catalog business
and outside sales groups, are included in the Domestic segment. The Domestic
segment also includes the operations of the Company's former Computer Business
segment, which was phased out during fiscal year 2000. The operations of the
Company's majority-owned subsidiary in Mexico, OfficeMax de Mexico, are included
in the International segment. OfficeMax's domestic e-Commerce operations,
catalog business and outside sales groups are integrated and aligned with its
domestic superstores in order to more efficiently leverage its various business
channels. As a result, management evaluates performance based on an integrated
view of its domestic operations. Management evaluates performance of the
Company's International segment separately because of the differences between
the operating environments for its Domestic and International segments.
During fiscal years 2002, 2001 and 2000, the Company recorded charges
related to its store closing program and supply-chain management initiatives as
well as charges related to various legal matters and to provide a valuation
allowance for its net deferred tax assets. All of these charges are included in
the results of operations of the Company's Domestic segment. Additional
information regarding these charges is included below under the caption "Charges
and Reserves."
FISCAL YEAR 2002 (52 WEEKS) COMPARED TO FISCAL YEAR 2001 (52 WEEKS)
CONSOLIDATED OPERATIONS
Sales in fiscal year 2002 increased 3.2% to $4,775,563,000 from
$4,625,877,000 in fiscal year 2001. Fiscal 2001 included sales of approximately
$76,740,000 from the 29 underperforming domestic superstores that were closed as
of the first day of fiscal year 2002. The year-over-year sales increase was
primarily due to a comparable-store sales (sales for stores that have been open
for more than one year) increase of approximately 4% and sales from new
superstores opened in fiscal years 2002 and 2001. Fiscal year 2002
comparable-store sales primarily reflect a comparable-store sales increase of
more than 4% experienced by the Company's Domestic segment. Sales for the
Company's International segment increased 8.9% during fiscal year 2002 to
$153,084,000 from $140,584,000 primarily as a result of sales from the new
superstores opened during fiscal years 2002 and 2001, partially offset by a
decrease in comparable-store sales of approximately 3%.
Gross profit was $1,196,691,000, or 25.1% of sales, in fiscal year 2002 and
$1,086,128,000, or 23.5% of sales, in fiscal year 2001. The increase in gross
margin as a percentage of sales was primarily due to improved leverage
(decreasing as a percentage of sales) of certain fixed costs, such as occupancy
costs for the Company's superstores, delivery centers and inventory distribution
facilities, which are included in cost of merchandise sold and continued
efficiencies realized by the Company's PowerMax supply-chain network. In
addition, prior year gross margin was negatively impacted by a $3,680,000 charge
for inventory liquidation recorded by the Company's Domestic segment related to
its store closing program. Additional information regarding the inventory
liquidation charge is included below under the caption "Charges and Reserves."
Store operating and selling expenses, which consist primarily of store
payroll, operating and advertising expenses, decreased $18,836,000, or 1.1% of
sales, to $1,034,122,000, or 21.7% of sales, in fiscal year 2002 from
$1,052,958,000, or 22.8% of sales, in fiscal year 2001. The decrease in store
operating and selling expenses as a percentage of sales was primarily due to the
closing of 29 underperforming domestic superstores as of the first day of fiscal
year 2002 and improved leveraging of store-level payroll, including the
incremental costs associated with store-level initiatives by the Company's
Domestic segment. The improved store operating and selling expense leverage
realized by the Company's Domestic segment was partially offset by increased
store operating and selling expense for the Company's International segment.
Prior year store operating and selling expense was negatively impacted by a
$10,000,000 charge to record a reserve for legal matters in the Company's
Domestic segment. Additional information regarding the legal reserve is included
below under the caption "Charges and Reserves."
General and administrative expenses decreased $10,917,000, or 0.3% of
sales, to $134,763,000, or 2.8% of sales, in fiscal year 2002 from $145,680,000,
or 3.1% of sales, in fiscal year 2001. The decrease in general and
administrative expenses was realized in the Company's Domestic segment and was
primarily due to the Company's continued expense control programs and efficiency
gains from the Company's information technology initiatives, as well as the
elimination of costs incurred during the prior year for consulting services that
supported the Company's various business initiatives.
In accordance with the provisions of Financial Accounting Standards Board
Statement No. 142, "Goodwill and Other Intangibles" ("FAS 142"), which was
effective for the Company as of the beginning of fiscal year 2002, goodwill and
intangible assets with an indefinite useful life are no longer amortized, but
are tested for impairment at
17
least annually. Accordingly, no goodwill amortization was recorded in fiscal
year 2002. Goodwill amortization was $9,855,000 in fiscal year 2001. Prior to
fiscal year 2002, goodwill was capitalized and amortized over 10 to 40 years
using the straight-line method. Additional information regarding this new
standard is included below under the caption "Significant Accounting Policies."
Pre-opening expenses were $672,000 and $2,790,000 in fiscal years 2002 and
2001, respectively. Pre-opening expenses, which consist primarily of store
payroll, supplies and grand opening advertising for new superstores, are
expensed as incurred and, therefore, fluctuate from period to period depending
on the timing and number of new store openings. The Company's Domestic segment
opened five new superstores in fiscal year 2002 and opened 17 new superstores
and completed the expansion of its PowerMax distribution facility in Las Vegas
in fiscal year 2001. Total pre-opening expenses for the Domestic segment were
$392,000 in fiscal year 2002 and $1,801,000 in fiscal year 2001. The Company's
International segment opened three and five new superstores in Mexico during
fiscal years 2002 and 2001, respectively, and incurred pre-opening expenses of
approximately $280,000 and $989,000, respectively, during those years.
Store closing and asset impairment charges were $2,489,000 and $76,761,000
in fiscal years 2002 and 2001, respectively. Eight underperforming domestic
superstores and one domestic delivery center were included in the net charge for
fiscal year 2002 and 29 underperforming domestic superstores were included in
the net charge for fiscal year 2001. Additional information regarding these
charges is included below under the caption "Charges and Reserves."
Interest expense, net was $5,980,000 and $14,804,000 in fiscal years 2002
and 2001, respectively. The decrease in net interest expense during fiscal year
2002 was primarily due to lower average outstanding borrowings for the Company's
Domestic segment and lower interest rates on the Company's outstanding
borrowings. As of January 25, 2003, the Domestic segment had no outstanding
borrowings under its revolving credit facility. Interest income for the
International segment decreased year over year, primarily as a result of lower
interest earned on this segment's short-term investments.
Other expense, net was $61,000 in fiscal year 2001. Other expense, net
consisted primarily of amounts related to the Company's investment in a
Brazilian company. The Company wrote-off its remaining investment in the
Brazilian company during the fourth quarter of fiscal year 2001. Additional
information regarding the write-off of the Company's investment in the Brazilian
company is included below under the caption "Charges and Reserves."
In accordance with the provisions of Financial Accounting Standards Board
Statement No. 109, "Accounting for Income Taxes" ("FAS 109"), the Company
recorded a $170,616,000 charge to establish a valuation allowance for its net
deferred tax assets including amounts related to its net operating loss
carryforwards in the fourth quarter of fiscal year 2001. The Company intends to
maintain a full valuation allowance for its net deferred tax assets and net
operating loss carryforwards until sufficient positive evidence exists to
support reversal of some portion or the remainder of the allowance. Until such
time, except for minor state, local and foreign tax provisions, the Company will
have no reported tax provision, net of valuation adjustments. The Company was
not required to recognize any income tax expense in fiscal year 2002. Any future
decision to reverse a portion or all of the remaining valuation allowance will
be based on consideration of several factors including, but not limited to, the
Company's expectations regarding future taxable income and the Company's
cumulative income or loss in the then most recent three-year period. Additional
information regarding the valuation allowance recorded in fiscal year 2001 is
included below under the caption "Charges and Reserves."
On March 9, 2002, President Bush signed into law the "Job Creation and
Worker Assistance Act" (H.R. 3090). This new tax law temporarily extends the
carryback period for net operating losses incurred during the Company's taxable
years ended in 2001 and 2000 to five years from two years. In the first quarter
of fiscal year 2002, the Company reversed a portion of the valuation allowance
for its net deferred tax assets recorded during the prior year and recognized an
income tax benefit of $57,500,000 due to the extension of the carryback period.
Additional information regarding the tax benefit recorded in fiscal year 2002 is
included below under the caption "Charges and Reserves."
In addition to the income tax expense recorded to establish the valuation
allowance, the Company recognized income tax benefit of $80,912,000 during
fiscal year 2001, reflecting an effective tax rate of approximately 37.3%. This
effective tax rate was different from the statutory income tax rate as a result
of state and local income taxes and non-deductible goodwill amortization. The
Company recognized net income tax expense, including the income tax expense
recorded to establish the valuation allowance and the income tax benefit, of
$89,704,000 during fiscal year 2001.
As a result of the foregoing factors, net income for fiscal year 2002 was
$73,724,000, or $0.59 per diluted share. The tax benefit recognized in the first
quarter of fiscal year 2002 increased net income by $57,500,000, or $0.46 per
diluted share. The net loss for fiscal year 2001 was $309,458,000, or $2.72 per
18
diluted share including the after-tax effects of charges for inventory
liquidation, store closing and asset impairment, the reserve for legal matters
and the deferred tax asset valuation allowance of $2,227,000, $47,728,000,
$6,050,000 and $170,616,000, respectively. In total these charges impacted the
fiscal year 2001 net loss by $1.98 per diluted share. Goodwill amortization
recognized in fiscal year 2001 was $9,855,000, or $0.09 per diluted share.
Additional information regarding the charges recorded in fiscal year 2001 for
inventory liquidation, store closing and asset impairment, legal matters and the
valuation allowance is included below under the caption "Charges and Reserves."
DOMESTIC SEGMENT
Sales for the Domestic segment increased 3.1% in fiscal year 2002 to
$4,622,479,000 from $4,485,293,000 in fiscal year 2001. Fiscal year 2001
included sales of approximately $76,740,000 from the 29 underperforming domestic
superstores that were closed as of the first day of fiscal year 2002. The
year-over-year sales increase was primarily due to a comparable-store sales
increase of approximately 4%, coupled with the sales from new superstores opened
in fiscal years 2002 and 2001. The sales increase was partially offset by the
impact of the stores that were closed on the first day of fiscal year 2002. The
Company's Domestic segment realized sequential quarter-over-quarter improvement
in comparable-store sales during all four quarters of fiscal year 2002. The
comparable-store sales gains were driven by both increased customer counts and
higher average revenue per customer transaction primarily as a result of the
Company's new merchandising and marketing initiatives, improved inventory
in-stock position and better in-store execution. Fiscal year 2001
comparable-store sales for the Domestic segment were negatively impacted by the
recession in the U.S. and negative consumer and business sentiment following the
September 11th terrorist attacks.
Gross profit for the Domestic segment was $1,161,113,000, or 25.1% of
sales, in fiscal year 2002 and $1,052,544,000, or 23.5% of sales, in fiscal year
2001. The increase in gross margin as a percentage of sales was primarily due to
improved leverage of certain fixed costs, such as occupancy costs for the
segment's superstores, delivery centers and inventory distribution facilities,
that are included in cost of merchandise sold. The improved leverage of fixed
costs benefited the Domestic segment's gross margin by approximately 1.0% of
sales. The Domestic segment's gross margin also benefited from continued
efficiencies realized by the Company's PowerMax supply-chain network. In
addition, prior year gross margin was negatively impacted by a charge for
inventory liquidation recorded by the Company's Domestic segment related to its
store closing program of $3,680,000, or 0.1% of sales. Additional information
regarding the inventory liquidation charge is included below under the caption
"Charges and Reserves."
Operating results for the Domestic segment were income of $20,307,000 in
fiscal year 2002 and a loss of $206,580,000 in fiscal year 2001. The fiscal year
2001 loss included charges for inventory liquidation, store closing and asset
impairment and the reserve for legal matters recorded by the Domestic segment of
$3,680,000, $76,761,000 and $10,000,000, respectively. The year-over-year
improvement in the operating results of the Domestic segment was primarily due
to the increase in gross profit as a percentage of sales and the improved
leverage of store operating and selling expenses and general and administrative
expenses as well as the charges recorded in fiscal year 2001. The improved
leverage of store operating and selling expenses and general and administrative
expenses was driven by the Domestic segment's comparable-store sales gains as
well as the Company's continued expense control programs. Domestic segment
payroll related expenses, which represent approximately 50% of the total store
operating and selling expenses and general and administrative expenses,
decreased in terms of absolute dollars and as a percentage of sales
year-over-year.
As a result of the foregoing factors, Domestic segment net income for
fiscal year 2002 was $71,185,000, or $0.57 per diluted share. The tax benefit
recognized in the first quarter of fiscal year 2002 increased the Domestic
segment's net income by $57,500,000, or $0.46 per diluted share. The Domestic
segment net loss for fiscal year 2001 was $312,089,000, or $2.74 per diluted
share, including the after-tax effects of charges for inventory liquidation,
store closing and asset impairment, reserve for legal matters and the valuation
allowance of $2,227,000, $47,728,000, $6,050,000 and $170,616,000, respectively.
In total these charges impacted the fiscal year 2001 net loss by $1.98 per
diluted share. Goodwill amortization recognized in fiscal year 2001 was
$9,390,000, or $0.08 per diluted share. Additional information regarding the
charges recorded in fiscal year 2001 for inventory liquidation, store closing
and asset impairment, legal matters and the deferred tax asset valuation
allowance is included below under the caption "Charges and Reserves."
19
INTERNATIONAL SEGMENT
Sales for the International segment in fiscal year 2002 increased 8.9% to
$153,084,000 from $140,584,000 in fiscal year 2001. This sales increase was
primarily due to the new superstores opened in fiscal years 2002 and 2001,
partially offset by a comparable-store sales decrease of approximately 3%. This
segment opened three and five new superstores in fiscal years 2002 and 2001,
respectively. This segment closed one superstore in fiscal year 2001.
Comparable-store sales were negatively impacted by the changes in currency
exchange rates during fiscal year 2002. In local currency, comparable-store
sales were relatively flat for the International segment during fiscal year
2002. The Company expects the unfavorable currency exchange rate trends to
continue to negatively impact comparable-store sales for OfficeMax de Mexico
during at least the first half of fiscal year 2003.
Gross profit for the International segment was $35,578,000, or 23.2% of
sales, in fiscal year 2002 and $33,584,000, or 23.9% of sales, in fiscal year
2001. The decrease in gross margin as a percentage of sales was primarily due to
the negative effect of currency exchange rate fluctuations on the cost of
products sourced from the United States, partially offset by a sales mix shift
towards higher margin supply merchandise.
Operating income for the International segment was $4,338,000, or 2.8% of
sales, in fiscal year 2002 and $4,664,000, or 3.3% of sales, in fiscal year
2001. The decrease in operating income as a percentage of sales was primarily
due to the decrease in gross margin as a percentage of sales.
Minority interest in the net income of the International segment was
$2,441,000 and $2,973,000 in fiscal years 2002 and 2001, respectively.
As a result of the foregoing factors, net income for the International
segment was $2,539,000, or 1.7% of sales, in fiscal year 2002 and $2,631,000, or
1.9% of sales, in fiscal year 2001. International segment net income was $0.02
per diluted share in fiscal years 2002 and 2001. Goodwill amortization
recognized in fiscal year 2001 was $465,000, or $0.01 per diluted share.
20
FISCAL YEAR 2001 (52 WEEKS) COMPARED TO FISCAL YEAR 2000 (53 WEEKS)
CONSOLIDATED OPERATIONS
Sales in fiscal year 2001 decreased 9.7% to $4,625,877,000 from
$5,121,337,000 in fiscal year 2000. Fiscal year 2000 included sales of
approximately $224,026,000 from the Company's discontinued former Computer
Business segment and 46 underperforming domestic superstores that were closed as
of the first day of fiscal year 2001. Sales for the 53rd week included in fiscal
year 2000 for the Company's Domestic segment were approximately $104,220,000.
The year-over-year sales decrease was primarily due to the discontinued former
Computer Business segment, the closed stores and the additional week of sales
included in fiscal year 2000 as well as a comparable-store sales decrease of
approximately 6%. Fiscal year 2001 comparable-store sales primarily reflect a
comparable-store sales decrease of approximately 6% experienced by the Company's
Domestic segment. Fiscal year 2001 comparable-store sales for the Domestic
segment were negatively impacted by the recession in the U.S. and uncertain
consumer and business sentiment following the September 11th terrorist attacks.
These factors contributed to a decline in small business capital purchases and
the formation of new company start-ups, as well as reduced consumer spending,
particularly for technology and furniture products. Sales for the Company's
International segment increased 21% during fiscal year 2001 to $140,584,000 from
$116,269,000 primarily as a result of a comparable-store sales increase of
approximately 7% and sales from the new superstores opened during fiscal years
2001 and 2000.
Gross profit was $1,086,128,000, or 23.4% of sales, in fiscal year 2001 and
$1,220,728,000, or 23.8% of sales, in fiscal year 2000. The Company's Domestic
segment recorded inventory liquidation charges related to its store closing
program in fiscal years 2001 and 2000 and a charge for a legal settlement in
fiscal year 2000. These charges were included as a component of the Domestic
segment's cost of merchandise sold. The de-leveraging of certain fixed costs,
such as occupancy costs for the Company's superstores, delivery centers and
inventory distribution facilities, which are included in cost of merchandise
sold, primarily as a result of the comparable-store sales decrease experienced
by the Company's Domestic segment, reduced gross profit by approximately 1.3% of
sales during fiscal year 2001. The phase-out of the Company's low-margin former
Computer Business segment, which was completed during fiscal year 2000,
partially offset the impact of de-leveraging fixed costs included in cost of
merchandise sold. Additional information regarding the inventory liquidation
charges and the legal settlement is included below under the caption "Charges
and Reserves."
Store operating and selling expenses, which consist primarily of store
payroll, operating and advertising expenses, decreased $78,493,000 to
$1,052,958,000 in fiscal year 2001 from $1,131,451,000 in fiscal year 2000. This
decrease was primarily a result of the phase-out of the former Computer Business
segment, the closing of 46 underperforming domestic superstores as of the first
day of fiscal year 2001 and the 53rd week included in the fiscal year 2000
results for the Company's Domestic segment. As a percentage of sales, store
operating and selling expenses increased to 22.8% in fiscal year 2001 from 22.1%
in fiscal year 2000. The increase as a percentage of sales was primarily due to
the de-leveraging of certain operating expenses in the Company's Domestic
segment and a $10,000,000 charge to record a reserve for legal matters recorded
in the Company's Domestic segment during the third quarter of fiscal year 2001.
Additional information regarding the legal reserve is included below under the
caption "Charges and Reserves."
General and administrative expenses decreased $10,593,000 to $145,680,000
in fiscal year 2001 from $156,273,000 in fiscal year 2000. The decrease in
general and administrative expenses was primarily due to the Company's continued
cost-and-expense control initiatives, efficiency gains as a result of the
Company's information technology initiatives and the 53rd week included in the
Domestic segment's fiscal year 2000 results.
Goodwill amortization was $9,855,000 in fiscal year 2001 and $9,863,000 in
fiscal year 2000. During those fiscal years, goodwill was capitalized and
amortized over 10 to 40 years using the straight-line method. As a result of a
new accounting standard, FAS 142, that was effective for the Company as of the
beginning of fiscal year 2002, goodwill is no longer amortized, but will be
tested for impairment at least annually. Additional information regarding this
new accounting standard is included below under the caption "Significant
Accounting Policies."
21
Pre-opening expenses were $2,790,000 and $7,113,000 in fiscal years 2001
and 2000, respectively. Pre-opening expenses, which consist primarily of store
payroll, supplies and grand opening advertising for new superstores, are
expensed as incurred and, therefore, fluctuate from period to period depending
on the timing and number of new store openings. Total pre-opening expenses for
the Domestic segment were $1,801,000 in fiscal year 2001 and $6,061,000 in
fiscal year 2000. The Company's Domestic segment opened 17 new superstores and
completed the expansion of its PowerMax distribution facility in Las Vegas in
fiscal year 2001 and opened 54 new superstores in fiscal year 2000. The
Company's Domestic segment also incurred pre-opening expenses of approximately
$1,000,000 during fiscal year 2000 to open a PowerMax inventory distribution
facility. The Company's International segment opened five and eight new
superstores in Mexico during fiscal years 2001 and 2000, respectively, and
incurred pre-opening expenses of approximately $989,000 and $1,052,000 during
those years.
Store closing and asset impairment charges were $76,761,000 and
$109,578,000 in fiscal years 2001 and 2000, respectively. Twenty-nine
underperforming domestic superstores were included in the net charge for fiscal
year 2001 and 48 underperforming domestic superstores were included in the net
charge for fiscal year 2000. Additional information regarding these charges is
included below under the caption "Charges and Reserves."
Interest expense, net, was $14,804,000 and $16,493,000 in fiscal years 2001
and 2000, respectively. The decrease in net interest expense during fiscal year
2001 was primarily due to reduced average outstanding borrowings for the
Company's Domestic segment and lower interest rates. As of January 26, 2002, the
Domestic segment had outstanding borrowings under its revolving credit facility
of $20,000,000. Interest income for the International segment decreased year
over year, primarily as a result of lower interest earned on this segment's
short-term investments.
Other expense, net, was $61,000 in fiscal year 2001 and $60,000 in fiscal
year 2000. Other expense, net, consists primarily of amounts related to the
Company's investment in a Brazilian Company. The Company wrote-off its remaining
investment in the Brazilian company during the fourth quarter of fiscal year
2001. Additional information regarding the write-off of the Company's investment
in the Brazilian company is included below under the caption "Charges and
Reserves."
In accordance with the provisions of FAS 109, the Company recorded a
$170,616,000 charge to establish a valuation allowance for its net deferred tax
assets including amounts related to its net operating loss carryforwards, in the
fourth quarter of fiscal year 2001. In addition to the income tax expense
recorded to establish the valuation allowance, the Company recognized income tax
benefit of $80,912,000 during fiscal year 2001, reflecting an effective tax rate
of approximately 37.3%. The Company recognized an income tax benefit of
$79,076,000 in fiscal year 2000, reflecting an effective tax rate of
approximately 37.6%. The effective tax rates for both years were different from
the statutory income tax rate as a result of state and local income taxes and
non-deductible goodwill amortization. The Company recognized net income tax
expense, including the income tax expense recorded to establish the valuation
allowance and the income tax benefit, of $89,704,000 during fiscal year 2001.
Additional information regarding the valuation allowance recorded in fiscal year
2001 is included below under the caption "Charges and Reserves."
As a result of the foregoing factors, the net loss for fiscal year 2001 was
$309,458,000, or $2.72 per diluted share, including the after-tax effects of
charges for inventory liquidation, store closing and asset impairment, the
reserve for legal matters and the deferred tax asset valuation allowance of
$2,227,000, $47,728,000, $6,050,000 and $170,616,000, respectively. In total,
these charges impacted the fiscal year 2001 net loss by $1.98 per diluted share.
The net loss for fiscal year 2000 was $133,166,000, or $1.20 per diluted share,
including the after-tax effects of charges for litigation settlement, inventory
liquidation and store closing and asset impairment of $11,679,000, $4,946,000
and $66,843,000, respectively. In total, these charges impacted the fiscal year
2000 net loss by $0.74 per diluted share. Additional information regarding the
charges for inventory liquidation and store closing and asset impairment
recorded during fiscal years 2001 and 2000 as well as the reserve for legal
matters and the litigation settlement recorded in fiscal years 2001 and 2000,
respectively, and the valuation allowance recorded in fiscal year 2001 is
included below under the caption "Charges and Reserves."
22
DOMESTIC SEGMENT
Sales for the Domestic segment in fiscal year 2001 decreased 10.4% to
$4,485,293,000 from $5,005,068,000 in fiscal year 2000. Fiscal year 2000
included sales of approximately $224,026,000 from the Company's discontinued
former Computer Business segment and 46 underperforming domestic superstores
that were closed as of the first day of fiscal year 2001. Sales for the 53rd
week included in fiscal year 2000 for this segment were approximately
$104,220,000. The year-over-year sales decrease was primarily due to the
discontinued former Computer Business segment, the closed stores and the
additional week of sales included in fiscal year 2000 as well as a
comparable-store sales decrease of approximately 6%. Fiscal year 2001
comparable-store sales were negatively impacted by the recession in the U.S. and
uncertain consumer and business sentiment following the September 11th terrorist
attacks. These factors contributed to a decline in both small business capital
purchases and the formation of new company startups, as well as reduced consumer
spending, particularly for technology and furniture products. Sales for certain
items, such as furniture and certain technology products were also impacted by
declines in average sales prices.
Gross profit for the Domestic segment was $1,052,544,000, or 23.5% of
sales, in fiscal year 2001 and $1,188,739,000, or 23.8% of sales, in fiscal year
2000. Certain fixed costs, such as occupancy costs for the segment's
superstores, delivery centers and inventory distribution facilities, are
included in cost of merchandise sold. The de-leveraging of these costs,
primarily as a result of the comparable-store sales decrease, reduced gross
margin by approximately 1.3% of sales during fiscal year 2001. The phase-out of
the Company's low-margin former Computer Business segment, which was completed
during fiscal year 2000, partially offset the impact of de-leveraging fixed
costs included in cost of merchandise sold. The Domestic segment recorded
inventory liquidation charges related to its store closing program in fiscal
years 2001 and 2000 of $3,680,000, or 0.1% of sales, and $8,244,000, or 0.2% of
sales, respectively. The Domestic segment also recorded a charge for a legal
settlement in fiscal year 2000 of $19,465,000, or 0.4% of sales. These charges
were included as a component of the Domestic segment's cost of merchandise sold.
Additional information regarding the inventory liquidation charges and the
charge for a legal settlement is included below under the caption "Charges and
Reserves."
Operating results for the Domestic segment were a loss of $206,580,000 in
fiscal year 2001 and a loss of $198,493,000 in fiscal year 2000. The fiscal year
2001 loss included charges for inventory liquidation, store closing and asset
impairment and the reserve for legal matters recorded by the Domestic segment of
$3,680,000, $76,761,000 and $10,000,000, respectively. The fiscal year 2000 loss
included charges for inventory liquidation, litigation settlement and store
closing and asset impairment recorded by the Domestic segment of $8,244,000,
19,465,000 and $109,578,000, respectively. The increase in the operating loss
for the Domestic segment was primarily due to the overall sales decrease
experienced by this segment and the related decrease in gross profit. The
decrease in gross profit was partially offset by reduced store operating and
selling, and general and administrative expenses.
As a result of the foregoing factors, the Domestic segment's net loss for
fiscal year 2001 was $312,089,000, or $2.74 per diluted share, including the
after-tax effects of charges for inventory liquidation, store closing and asset
impairment, the reserve for legal matters and the deferred tax asset valuation
allowance of $2,227,000, $47,728,000, $6,050,000 and $170,616,000, respectively.
In total, these charges impacted the fiscal year 2001 net loss by $1.98 per
diluted share. The Domestic segment's net loss for fiscal year 2000 was
$137,188,000, or $1.24 per diluted share, including the after-tax effects of
charges for litigation settlement, inventory liquidation and store closing and
asset impairment of $11,679,000, $4,946,000 and $66,843,000, respectively. In
total, these charges impacted the fiscal year 2000 net loss by $0.74 per diluted
share. Additional information regarding the charges for inventory liquidation
and store closing and asset impairment recorded during fiscal years 2001 and
2000 as well as the reserve for legal matters and the litigation settlement
recorded in fiscal years 2001 and 2000, respectively, and the valuation
allowance recorded in fiscal year 2001 is included below under the caption
"Charges and Reserves."
INTERNATIONAL SEGMENT
Sales for the International segment in fiscal year 2001 increased 20.9% to
$140,584,000 from $116,269,000 in fiscal year 2000. This sales increase was
primarily due to a comparable-store sales increase of approximately 7% and new
superstores opened in fiscal years 2001 and 2000. This segment opened five and
eight new superstores in fiscal years 2001 and 2000, respectively. This segment
closed one superstore in fiscal year 2001. The comparable-store sales increase
experienced by this segment was primarily due to growth in the sales of
computers and related peripherals. These items accounted for approximately 54%
of the International segment's sales in fiscal year 2001 as compared to 51% of
this segment's sales in fiscal year 2000.
23
Gross profit for the International segment was $33,584,000, or 23.9% of
sales, in fiscal year 2001 and $31,989,000, or 27.5% of sales, in fiscal year
2000. The decrease in gross margin as a percentage of sales was primarily due to
the growth in the low-margin computer and peripheral product categories which
generate lower margins than sales of supply products.
Operating income for the International segment was $4,664,000, or 3.3% of
sales, in fiscal year 2001 and $4,943,000, or 4.3% of sales, in fiscal year
2000. The decrease in operating income as a percentage of sales was primarily
due to the decrease in gross profit as a percentage of sales, partially offset
by improved leverage of store operating and selling expenses.
Minority interest in the net income of the International segment was
$2,973,000 and $2,139,000 in fiscal years 2001 and 2000, respectively.
As a result of the foregoing factors, net income for the International
segment was $2,631,000, or 1.9% of sales, in fiscal year 2001 and $4,022,000, or
3.5% of sales, in fiscal year 2000. International segment net income was $0.02
per diluted share in fiscal year 2001 and $0.04 per diluted share in fiscal
year 2000.
CHARGES AND RESERVES
STORE CLOSING PROGRAM
Fiscal Year 2002. In December 2002, the Company conducted a review of its
domestic real estate portfolio and committed to close eight underperforming
superstores and one delivery center. In conjunction with these closings, the
Company recorded a pre-tax charge for store closing and asset impairment of
$11,915,000 during the fourth quarter of fiscal year 2002. Major components of
the charge included lease disposition costs of $9,118,000, asset impairment and
disposition of $2,530,000 and other closing costs of $267,000. Estimated lease
disposition costs in the charge included the aggregate rent expense for the
closing stores, net of approximately $6,849,000 of expected future sublease
income. The Company estimated future sublease income for the closing stores
based on real estate studies prepared by independent real estate industry
advisors. Also during the fourth quarter of fiscal year 2002, the Company
reversed certain portions of the store closing reserves established in fiscal
year 2001 and fiscal year 2000, respectively, when those portions of the
reserves were deemed no longer necessary. The reversals reduced the fiscal year
2002 charge by approximately $11,203,000. Additional information regarding the
reversal of portions of the store closing reserve is included within this
section under the sub-headings "Fiscal Year 2001" and "Fiscal Year 2000." The
Company recorded a pre-tax charge for asset impairment of $1,777,000 during the
second quarter of fiscal year 2002. In total, the net charges for store closing
and asset impairment reduced fiscal year 2002 net income by $2,489,000 or $0.02
per diluted share.
Fiscal Year 2001. During the fourth quarter of fiscal year 2001, the
Company announced that it had completed a review of its domestic real estate
portfolio and elected to close 29 underperforming domestic superstores. In
conjunction with these store closings, the Company recorded a pre-tax charge for
store closing and asset impairment of $79,838,000 during the fourth quarter of
fiscal year 2001. Major components of the charge included lease disposition
costs of $53,646,000, asset impairment and disposition of $20,674,000 and other
closing costs, including severance, of $5,518,000. Estimated lease disposition
costs in the charge included the aggregate rent expense for the closed stores,
net of approximately $42,344,000 of expected future sublease income. The Company
estimated future sublease income for the closed stores based on real estate
studies prepared by independent real estate industry advisors. During the fourth
quarter of fiscal year 2001, certain portions of the reserve for store closing
costs established during fiscal year 2000 were deemed no longer necessary and
reversed. This reversal reduced the fiscal year 2001 charge by approximately
$3,077,000. Additional information regarding the reversal of a portion of the
store closing reserve is included within this section under the sub-heading
"Fiscal Year 2000." The net charge of $76,761,000, net of income tax benefit,
reduced fiscal year 2001 net income by $47,728,000, or $0.42 per diluted share.
Also during the fourth quarter of fiscal year 2001, the Company recorded an
additional pre-tax charge of $3,680,000 as a result of the inventory liquidation
at the closed stores. The inventory liquidation charge, net of income tax
benefit, reduced fiscal year 2001 net income by $2,227,000, or $0.02 per diluted
share.
Included in the charge for store closing and asset impairment was
$5,631,000 of expense related to the write-off of the Company's investment in a
Brazilian company, as well as receivables from the Brazilian company.
The 29 stores were closed during the first quarter of fiscal year 2002 upon
completion of the liquidation process that began as of the first day of fiscal
year 2002. The results of operations for the 29 closed stores were assumed by a
third-party liquidator and, accordingly, were not included in the Company's
consolidated results of operations for fiscal year 2002.
During the fourth quarter of fiscal year 2002, the Company reversed
approximately $8,847,000 of the reserve for store closing costs originally
established in fiscal year 2001, as a result of management's successful efforts
to sublease closed stores and negotiate early terminations of leases.
24
Fiscal Year 2000. During fiscal year 2000, the Company announced that it
had conducted a review of its domestic real estate portfolio and elected to
close 50 underperforming domestic superstores. In conjunction with these store
closings, the Company recorded a pre-tax charge for store closing and asset
impairment of $109,578,000 during the fourth quarter of fiscal year 2000. Major
components of the charge included lease disposition costs of $89,815,000, asset
impairment and disposition costs of $13,071,000 and other closing costs,
including severance, of $6,692,000. Estimated lease disposition costs in the
charge included the aggregate rent expense for the closed stores, net of
approximately $83,981,000 of expected future sublease income. The Company
estimated future sublease income for the closed stores based on real estate
studies prepared by independent real estate industry advisors. The charge, net
of income tax benefit, reduced net income by $66,843,000, or $0.59 per diluted
share, during fiscal year 2000. Also during the fourth quarter of fiscal year
2000, the Company recorded an additional pre-tax charge of $8,244,000 as a
result of the inventory liquidation at the closed stores. The inventory
liquidation charge, net of income tax benefits, reduced fiscal year 2000 net
income by $4,946,000, or $0.05 per diluted share.
Of the 50 superstores originally expected to close, 48 were liquidated and
closed during fiscal year 2001. During the fourth quarter of fiscal year 2001,
the Company elected not to close the remaining two stores due to changes in
competitive and market conditions and reversed the charge originally recorded to
close those stores. In total, approximately $3,077,000 of the original charge
recorded in fiscal year 2000 was reversed during the fourth quarter of fiscal
year 2001, primarily as a result of the two stores management elected not to
close and certain equipment lease termination costs that were lower than
expected. During the fourth quarter of fiscal year 2002, the Company reversed
approximately $2,356,000 of the reserve originally established in fiscal year
2000, as a result of management's successful efforts to sublease closed stores
and negotiate early terminations of leases. The results of operations for 46 of
the 48 closed stores were assumed by a third-party liquidator and, accordingly,
were not included in the Company's consolidated results of operations after
January 27, 2001.
See Note 2 of Notes to Consolidated Financial Statements of the Company for
additional information regarding the store closing and asset impairment charges.
INCOME TAXES
In the fourth quarter of fiscal year 2001, the Company recorded a charge of
approximately $170,616,000, or $1.49 per diluted share, to establish a valuation
allowance for its net deferred tax assets, including amounts related to its net
operating loss carryforwards. The valuation allowance was calculated in
accordance with the provisions of FAS 109, which places primary importance on
the Company's operating results in the most recent three-year period when
assessing the need for a valuation allowance. Although management believes the
Company's results for those periods were heavily affected by deliberate and
planned infrastructure improvements, including its PowerMax distribution network
and state-of-the-art SAP computer system, as well as an aggressive store closing
program, the Company's cumulative loss in the three-year period ended on January
26, 2002 represented negative evidence sufficient to require a full valuation
allowance under the provisions of FAS 109. The Company intends to maintain a
full valuation allowance for its net deferred tax assets until sufficient
positive evidence exists to support reversal of some portion or the remainder of
the allowance. Until such time, except for minor state, local and foreign tax
provisions, the Company will have no reported tax provision, net of valuation
allowance adjustments. Any future decision to reverse a portion or all of the
remaining valuation allowance will be based on consideration of several factors
including, but not limited to, the Company's expectations regarding future
taxable income and the Company's cumulative income or loss in the then most
recent three-year period.
On March 9, 2002, President Bush signed into law the "Job Creation and
Worker Assistance Act" (H.R. 3090). This new tax law temporarily extends the
carryback period for net operating losses incurred during the Company's taxable
years ended in 2001 and 2000 to five years from two years. During the first
quarter of fiscal year 2002, the Company reversed a portion of the valuation
allowance recorded during the fourth quarter of fiscal year 2001 and recognized
an income tax benefit of $57,500,000 due to the extension of the carryback
period. The income tax benefit increased fiscal year 2002 net income by $0.46
per diluted share.
Also during fiscal year 2002, the Company received refunds of amounts on
deposit with the IRS of approximately $30,000,000 related to prior year tax
returns.
See Note 6 of Notes to Consolidated Financial Statements of the Company for
additional information regarding income taxes.
25
LEGAL SETTLEMENT -- FISCAL YEAR 2001
During the third quarter of fiscal year 2001, the Company recorded a
pre-tax charge of $10,000,000 to provide for the settlement of a class action
lawsuit in California regarding overtime wages and the classification of exempt
employees, as well as other legal matters. The charge was included as a
component of store operating and selling expenses. The charge, net of income tax
benefit, increased the net loss in fiscal year 2001 by $6,050,000 or $0.05 per
diluted share.
LEGAL SETTLEMENT -- FISCAL YEAR 2000
During the third quarter of fiscal year 2000, the Company, based on changes
in circumstances and the advice of outside legal counsel, elected to settle its
lawsuit with Ryder Integrated Logistics prior to trial. As a result of the
settlement, the Company recorded a pre-tax charge of $19,465,000, which was
included as a component of cost of merchandise sold. The charge, net of income
tax benefit, increased the net loss in fiscal year 2000 by $11,679,000, or $0.10
per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations provided $93,579,000 of cash during fiscal year
2002, primarily as a result of net income of $73,724,000, including the tax
benefit of $57,500,000 due to the extension of the carryback period. During
fiscal year 2002, the Company received refunds of amounts on deposit with the
IRS related to prior year tax returns of approximately $30,000,000. See Note 6
of Notes to Consolidated Financial Statements of the Company for additional
information regarding income taxes. These sources of cash, as well as non-cash
expense for depreciation of $90,161,000, were partially offset by changes in
working capital. Inventory increased $46,145,000 from the end of the prior
fiscal year due to planned purchases to support the Company's comparable-store
sales growth during the important new year "Back-to-Business" selling period in
January and February. Accounts payable decreased $90,157,000 since the end of
the prior fiscal year, primarily as a result of the Company's decisions to take
advantage of special discounts and forego extended terms offered by its vendors
and increased fourth quarter purchases of foreign-sourced inventory which
typically have shorter payment terms than inventory sourced domestically. The
change in overdraft balances since the end of the previous fiscal year is
reflected in the Consolidated Statement of Cash Flows as a financing activity.
The overdraft balances are included as a component of accounts payable in the
Company's Consolidated Balance Sheet. As a result of the foregoing factors,
accounts payable-to-inventory leverage decreased to 47.2% as of January 25,
2003, from 56.0% as of January 26, 2002. During fiscal year 2002, annualized
inventory turns improved to 3.8 times per year from 3.4 times per year in the
prior year, primarily as a result of the Company's continued, successful
supply-chain management initiatives. The Company's operations provided
$231,021,000 of cash during fiscal year 2001 primarily as a result of a
reduction in inventory of $274,261,000, partially offset by a decrease in
accounts payable of $57,035,000. The reduction in inventory was the result of
the Company's supply-chain management initiatives. The Company's operations used
$13,930,000 of cash during fiscal year 2000.
Net cash used for investing activities, primarily capital expenditures for
new and remodeled superstores and information technology initiatives, was
$51,835,000 in fiscal year 2002, as compared to $50,377,000 in fiscal year 2001
and $141,134,000 in fiscal year 2000. Capital expenditures were $49,188,000,
$49,228,000 and $134,812,000 in fiscal years 2002, 2001 and 2000, respectively.
The Company expects capital expenditures for fiscal year 2003, primarily for
store remodels, information technology initiatives, including the new
point-of-sale system, and new store openings, to be approximately $100,000,000.
Net cash provided by financing was $19,454,000 in fiscal year 2002. Fiscal
year 2002 financing activities primarily represented an increase in overdraft
balances of $36,210,000 and a reduction of outstanding borrowings under the
Company's revolving credit facility of $20,000,000. In addition to funding
capital expenditures, the Company has used its cash from operations to reduce
borrowings under the Company's revolving credit facility by $220,000,000 over
the past two fiscal years. The Company had no outstanding borrowings under the
revolving credit facility as of January 25, 2003. Net cash used for financing
was $232,263,000 in fiscal year 2001, which primarily represented a reduction of
outstanding borrowings under the Company's revolving credit facility of
$200,000,000. Net cash provided by financing was $209,880,000 in fiscal year
2000. Fiscal year 2000 financing activities primarily represented borrowings
under the Company's revolving credit facility and the issuance of $50,000,000 of
redeemable preferred shares.
26
The Company opened five new superstores in the United States and three new
superstores in Mexico in fiscal year 2002 and plans to open approximately the
same number of domestic superstores during fiscal year 2003 and up to ten new
superstores in Mexico. Management estimates that the Company's cash requirements
for opening a domestic superstore, exclusive of pre-opening expenses, will be
approximately $900,000, including approximately $425,000 for leasehold
improvements, fixtures, point-of-sale terminals and other equipment, and
approximately $400,000 for the portion of store inventory that is not financed
by accounts payable to vendors. Pre-opening expenses are expected to average
approximately $90,000 per domestic and international superstore in fiscal year
2003.
On March 9, 2002, President Bush signed into law the "Job Creation and
Worker Assistance Act" (H.R. 3090). This new tax law temporarily extends the
carryback period for net operating losses incurred during the Company's taxable
years ended in 2001 and 2000 to five years from two years. In the first quarter
of fiscal year 2002, the Company reversed a portion of the valuation allowance
for its net deferred tax assets recorded during the prior year and recognized an
income tax benefit of $57,500,000 due to the extension of the carryback period.
The Company has received refunds for the additional net operating loss carryback
resulting from the extension of the carryback period. Also during fiscal year
2002, the Company received refunds of amounts on deposit with the IRS related to
prior year tax returns of approximately $30,000,000. See Note 6 of Notes to
Consolidated Financial Statements of the Company for additional information
regarding income taxes.
Due to the decline in Kmart's debt rating, the Company was required to
purchase, during the first quarter of fiscal year 2002, the mortgage notes on
two of its store properties for an aggregate amount of $5,085,000. Both of the
properties are occupied by the Company. Principal and interest payments to the
Company under the mortgage notes are secured by the Company's rent payments
under the related lease agreements. Interest on the mortgage notes accrues to
the Company at an average rate of approximately 10% per annum which exceeds the
Company's current borrowing rate. The Company does not expect the decline in
Kmart's debt rating or Kmart's subsequent bankruptcy filing to have a material
adverse impact on OfficeMax's financial position or the results of its
operations. See Note 3 of Notes to Consolidated Financial Statements of the
Company for additional information regarding the Company's relationship with
Kmart.
During the fourth quarter of fiscal year 2000, the Company entered into a
senior secured revolving credit facility. During the first quarter of fiscal
year 2002, the Company extended the term of the revolving credit facility until
February 27, 2004. The revolving credit facility is secured by a first priority
perfected security interest in the Company's inventory and certain accounts
receivable and provides for borrowings of up to $700,000,000 at the bank's base
rate or Eurodollar Rate plus 1.75% to 2.50% depending on the level of borrowing.
As of January 25, 2003, the Company had no outstanding borrowings under the
revolving credit facility. As of January 26, 2002, the Company had outstanding
borrowings of $20,000,000 under the revolving credit facility at a weighted
average interest rate of 4.75%. Also under this facility, the Company had
$117,136,000 and $111,580,000 of standby letters of credit outstanding as of
January 25, 2003 and January 26, 2002, respectively, in connection with its
insurance programs and two synthetic operating leases. These letters of credit
reduce the Company's available borrowing capacity under the revolving credit
facility. The Company pays quarterly usage fees of between 1.62% and 1.87% per
annum on the outstanding standby letters of credit.
The Company pays quarterly fees of 0.25% per annum on the unused portion of
the revolving credit facility. Available borrowing capacity under the revolving
credit facility is calculated as a percentage of the Company's inventory and
certain accounts receivable. As of January 25, 2003, the Company had unused and
available borrowings under the revolving credit facility in excess of
$444,000,000.
During the second quarter of fiscal year 2000, the Company repaid the
outstanding balance of its mortgage loan in the amount of $16,100,000. The
mortgage loan was secured by the Company's international corporate headquarters
and had an original maturity of