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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the quarterly period ended July 1, 1995
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-10948
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OFFICE DEPOT, INC.
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(Exact name of registrant as specified in its charter)
Delaware 59-2663954
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2200 Old Germantown Road, Delray Beach, Florida 33445
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(Address of principal executive offices) (Zip Code)
(407) 278-4800
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(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirement for the past 90 days.
Yes X No
--- ---
The registrant had 150,306,766 shares of common stock outstanding as of July
27, 1995.
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OFFICE DEPOT, INC.
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Earnings
for the 13 and 26 Weeks Ended July 1, 1995
and June 25, 1994 3
Consolidated Balance Sheets as of
July 1, 1995 and December 31, 1994 4
Consolidated Statements of Cash Flows
for the 26 Weeks Ended July 1, 1995
and June 25, 1994 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 - 10
Part II. OTHER INFORMATION 11 - 12
SIGNATURE 13
INDEX TO EXHIBITS 14
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OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
13 Weeks 13 Weeks 26 Weeks 26 Weeks
Ended Ended Ended Ended
July 1, June 25, July 1, June 25,
1995 1994 1995 1994
---------- ----------- ---------- -----------
Sales $1,200,410 $924,676 $2,551,622 $1,966,072
Cost of goods sold and occupancy costs 928,606 709,076 1,974,989 1,513,535
---------- -------- ---------- ----------
Gross profit 271,804 215,600 576,633 452,537
Store and warehouse operating
and selling expenses 179,238 142,201 382,405 302,660
Pre-opening expenses 2,912 1,973 6,164 3,232
General and administrative expenses 36,192 31,413 73,264 60,799
Amortization of goodwill 1,297 1,268 2,592 2,537
---------- -------- ---------- ----------
219,639 176,855 464,425 369,228
---------- -------- ---------- ----------
Operating Profit 52,165 38,745 112,208 83,309
Interest expense, net 6,812 3,774 11,631 7,234
---------- -------- ---------- ----------
Earnings before income taxes 45,353 34,971 100,577 76,075
Income taxes 17,935 14,162 40,685 30,720
---------- -------- ---------- ----------
Net earnings $ 27,418 $ 20,809 $ 59,892 $ 45,355
========== ======== ========== ==========
Earnings per common and
common equivalent share $ .18 $ .14 $ .39 $ .30
========== ======== ========== ==========
Average common and common
equivalent shares 153,642 152,380 153,544 152,379
========== ======== ========== ==========
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OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
July 1, December 31,
1995 1994
----------- -----------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 30,277 $ 32,406
Receivables, net of allowances 290,571 266,629
Merchandise inventories 984,947 936,048
Deferred income taxes 33,744 32,093
Prepaid expenses 13,702 7,046
---------- ----------
Total current assets 1,353,241 1,274,222
Property and Equipment 622,045 524,350
Less accumulated depreciation and amortization 153,700 127,121
---------- ----------
468,345 397,229
Goodwill, net of amortization 197,903 200,449
Other Assets 37,197 32,083
---------- ----------
$2,056,686 $1,903,983
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 517,810 $ 609,914
Accrued expenses 151,197 154,894
Income taxes 8,997 18,051
Current maturities of long-term debt 778 4,030
---------- ----------
Total current liabilities 678,782 786,889
Long-Term Debt, less current maturities 204,233 27,460
Deferred Taxes and Other Credits 10,659 8,023
Zero Coupon, Convertible, Subordinated Notes 374,356 366,340
Common Stockholders' Equity
Common stock - authorized 400,000,000 shares of
$.01 par value; issued 152,343,395 in 1995 and
151,536,781 in 1994 1,523 1,515
Additional paid-in capital 465,510 453,117
Foreign currency translation adjustment (2,203) (3,295)
Retained earnings 325,576 265,684
Less: 2,163,447 shares of treasury stock (1,750) (1,750)
---------- ----------
788,656 715,271
---------- ----------
$2,056,686 $1,903,983
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OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
(Unaudited)
26 Weeks Ended 26 Weeks Ended
July 1, June 25,
1995 1994
----------- -----------
Cash flows from operating activities
Cash received from customers $ 2,512,748 $ 1,948,309
Cash paid for inventory (2,025,380) (1,482,493)
Cash paid for store and warehouse operating,
selling and general administrative expenses (522,332) (416,926)
Interest received 132 2,608
Interest paid (2,305) (1,537)
Taxes paid (50,143) (39,777)
----------- -----------
Net cash provided (used) by operating activities (87,280) 10,184
----------- -----------
Cash flows from investing activities
Capital expenditures-net (98,100) (70,996)
----------- -----------
Net cash used by investing activities (98,100) (70,996)
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Cash flows from financing activities
Proceeds from exercise of stock options 8,767 5,666
Foreign currency translation adjustment 1,092 251
Proceeds from long- and short-term borrowings 176,430 8,139
Payments on long- and short-term borrowings (3,038) (10,646)
S corporation distribution to stockholders -- (542)
----------- -----------
Net cash provided by financing activities 183,251 2,868
----------- -----------
Net decrease in cash and cash equivalents (2,129) (57,944)
Cash and equivalents at beginning of period 32,406 142,471
----------- -----------
Cash and equivalents at end of period $ 30,277 $ 84,527
=========== ===========
Reconciliation of net earnings to net cash
provided (used) by operating activities
Net earnings $ 59,892 $ 45,355
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities
Depreciation and amortization 30,377 23,000
Changes in assets and liabilities
Decrease (increase) in accounts receivable (23,942) 6,423
Increase in inventory (48,899) (26,658)
Increase in prepaid expenses and other assets (14,268) (12,608)
Decrease in accounts payable
and other liabilities (90,440) (25,328)
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Total adjustments (147,172) (35,171)
----------- -----------
Net cash provided (used) by operating activities $ (87,280) $ 10,184
=========== ===========
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OFFICE DEPOT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The interim financial statements as of July 1, 1995 and for the 13 and
26 week periods ended July 1, 1995 and June 25, 1994 are unaudited;
however, such interim statements reflect all adjustments (consisting
only of normal recurring accruals) necessary for a fair presentation
of the financial position and the results of operations for the
interim periods presented. The results of operations for the interim
periods presented are not necessarily indicative of the results to be
expected for the full year. The interim financial statements should
be read in conjunction with the audited financial statements for the
year ended December 31, 1994.
2. Average common and common equivalent shares utilized in computing
second quarter earnings per share include approximately 3,708,000 and
4,631,000 shares in 1995 and 1994, respectively, as a result of
applying the treasury stock method to outstanding stock options.
3. The Consolidated Statements of Cash Flows for the 26 weeks ended July
1, 1995 and June 25, 1994 do not include noncash financing
transactions of $1,994,000 and $3,186,000, respectively, relating to
additional paid-in capital associated with tax benefits of stock
options exercised and $1,640,000 and $1,252,000, respectively,
relating to common stock and additional paid-in capital associated
with stock issued to the Office Depot Retirement Savings Plan and
related to the employee stock purchase program. In addition, the
Consolidated Statements of Cash Flows for the 26 weeks ended July 1,
1995 and June 25, 1994 do not include noncash financing transactions
of $8,145,000 and $7,787,000, respectively, associated with accreted
interest on convertible, subordinated notes.
4. In June 1995, the Company amended its credit agreement with its
principal bank and a syndicate of commercial banks to increase the
working capital line to $300,000,000 and to modify other terms. The
credit agreement provides that funds borrowed will bear interest, at
the Company's option, at .3125% over the LIBOR rate, 1.75% over the
Fed Funds rate, at a base rate linked to the prime rate or at a
competitive bid rate. The Company also pays a fee of .1875% per annum
on the total credit facility. The credit facility expires in June
2000. As of July 1, 1995 the Company had borrowed $191,430,000 under
the credit facility. In addition to the credit facility, the bank has
provided a lease facility to the Company under which the bank has
agreed to purchase up to $25,000,000 of equipment from the Company and
lease such equipment back to the Company. As of July 1, 1995, the
Company had approximately $2,865,000 outstanding under this lease
facility.
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Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales increased 30% to $1,200,410,000 in the second quarter of 1995 from
$924,676,000 in the second quarter of 1994; and to $2,551,622,000 for the
first six months of 1995 from $1,966,072,000 for the first six months of 1994,
an increase of 30%. Comparable store sales increased 18% for the second quarter
and 19% for the first six months of 1995, respectively. The balance of the
sales increase was attributable to the 80 new stores (net of one store closure)
opened subsequent to the second quarter of 1994. The Company opened 17 stores
and closed one store in the second quarter of 1995, bringing the total number
of stores open at the end of the second quarter to 448 compared with 368 stores
at the end of the second quarter of 1994. The Company also operated 24
contract stationer and delivery warehouses (customer service centers) at the
end of both the second quarter of 1995 and 1994. Comparable store sales in the
future may be affected by competition from other stores and contract
stationers, the opening of additional Office Depot stores or the expansion of
the Company's contract stationer business in its existing markets, and general
market conditions.
Gross profit as a percentage of sales was 22.6% during both the second quarter
and first six months of 1995, compared with 23.3% and 23.0% during the second
quarter and first six months of 1994, respectively. The decrease was primarily
a result of an increase in sales of lower margin business machines and
computers and an increase in paper costs. These decreases were partially
offset by purchasing efficiencies gained through vendor volume discount
programs which increased as purchasing levels continued to increase, and by
leveraging the Company's occupancy costs through higher average sales per
store. Gross margins are slightly higher in the contract stationer portion of
the business due to a lower percentage of business machine and computer sales.
Gross margins may fluctuate in both the retail and contract stationer business
as a result of competitive pricing in more market areas, continued change in
sales product mix and increased occupancy costs in certain new markets.
Store and warehouse operating and selling expenses as a percentage of sales
were 14.9% and 15.0% in the second quarter and first six months of 1995,
respectively, compared with 15.4% in each of the comparable periods in 1994.
Store and warehouse operating and selling expenses consist primarily of payroll
and advertising expenses. Although the majority of these expenses vary
proportionately with sales, there is a fixed cost component to these expenses
such that, as sales increase within a given market area, store and warehouse
operating and selling expenses should decrease as a percentage of sales. This
benefit may not be fully realized, however, during periods when a large number
of new stores and customer service centers are being opened, as new facilities
typically generate lower sales than the average mature location, resulting in
higher operating and selling expenses as a percentage of sales for such new
facilities. This percentage is also affected when the Company enters large
metropolitan market areas where the advertising costs for the full market must
be absorbed by the small number of stores initially opened. As additional
stores in these large markets are opened, advertising costs, which are
substantially a fixed expense for a market area, typically decrease overall as
a percentage of sales. The Company has also continued
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a strategy of opening additional stores in existing markets. Although
increasing the number of stores increases operating income in absolute dollars,
this may have the effect of increasing overall expenses as a percentage of
sales, since the sales of certain existing stores in the market may initially
be adversely affected. Warehouse expenses in the first six months of 1995 were
adversely affected by the additional costs incurred in the integration of the
contract stationer warehouses. The integration is expected to be substantially
completed by early 1996.
Pre-opening expenses increased to $2,912,000 in the second quarter of 1995 from
$1,973,000 in the comparable period in 1994, and to $6,164,000 in the six month
period ended July 1, 1995 from $3,232,000 in the comparable 1994 period.
Pre-opening expenses in 1995 include the costs associated with replacing six
existing customer service centers with larger, more functional facilities.
Additionally, the Company added 29 stores in the first six months of 1995, as
compared with 17 stores in the comparable 1994 period. Pre-opening expenses
currently are approximately $125,000 per store and $500,000 for a customer
service center, and are predominately incurred during a six-week period prior
to the opening of the store or a twelve-week period prior to the opening of a
customer service center. Pre-opening expenses may vary based on geographical
area and customer base being serviced. These expenses consist principally of
amounts paid for salaries, occupancy costs and supplies. Since the Company's
policy is to expense these items during the period in which they occur, the
amount of pre-opening expenses in each quarter is generally proportional to the
number of new stores or customer service centers opened or in the process of
being opened during the period.
General and administrative expenses have decreased as a percentage of sales
to 3.0% in the second quarter of 1994 from 3.4% in the comparable period in
1994, and to 2.9% in the first six months of 1995 from 3.1% in the comparable
1994 period. General and administrative expenses have decreased as a
percentage of sales, primarily as a result of the Company's ability to increase
sales without a proportionate increase in corporate expenditures. The
Company's continued investment in its information systems should allow the
Company to further reduce general and administrative expenses as a percentage
of sales.
The Company incurred net interest expense of $6,812,000 and $11,631,000 in the
second quarter and first six months of 1995, respectively, as compared with
$3,774,000 and $7,234,000 in the comparable periods in 1994. This increase in
interest expense is primarily due to funds borrowed under the Company's
revolving credit agreement.
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LIQUIDITY AND CAPITAL RESOURCES
Since the Company's store sales are substantially on a cash and carry basis,
cash flow generated from operating stores provides a source of liquidity to the
Company. Working capital requirements are reduced by vendor credit terms,
which allow the Company to finance a portion of its inventory. The Company
utilizes private label credit card programs administered and financed by
financial service companies; this allows the Company to expand its retail sales
without the burden of additional receivables.
Sales made through the customer service centers are generally made under
regular commercial credit terms, where the Company carries its own receivables.
As the Company expands into servicing additional large companies in the
delivery portion of its business, it is expected that the Company will carry a
greater amount of receivables.
In the second quarter of 1995, the Company added 17 stores and closed one store,
compared with 8 stores added in the comparable 1994 period. The Company also
replaced two of its existing customer service centers with larger, more
efficient facilities. As stores mature and become more profitable, and as the
number of new stores opened in a year becomes a smaller percentage of the
existing store base, cash generated from operations will provide a greater
portion of funds required for new store fixed assets, inventories and other
working capital requirements. Cash generated from operations will be affected
by an increase in receivables carried without outside financing, and an increase
in inventory at the stores and customer service centers as the Company continues
to expand its sales in computers and business machines. Net cash provided
(used) by operating activities was $(87,280,000) and $10,184,000 in the first
six months of 1995 and 1994, respectively. Capital expenditures are also
affected by the number of stores and customer service centers opened, converted
or acquired each year and the increase in computer and other equipment at the
corporate office required to support such expansion. Cash utilized for capital
expenditures was $98,100,000 and $70,996,000 in the first six months of 1995 and
1994, respectively.
During the 26 weeks ended July 1, 1995, the Company's cash balance decreased
approximately $2,129,000 and long- and short-term debt increased by
approximately $173,392,000. The decrease in cash (and increase in long-term
debt, reflecting primarily borrowings under its working capital facility) was
primarily attributable to payments for fixed assets and inventories for new
stores as well as payments for inventory mix changes resulting from an increase
in business machines and computer sales and a build up of paper inventory to
protect against rising costs and product availability.
The Company plans to open a total of approximately 40 to 50 additional stores,
replace four existing customer service centers, close three customer service
centers, and add two new customer service centers during the remainder of 1995.
Management estimates that the Company's cash requirements, exclusive of
pre-opening expenses, will be approximately $1,700,000 and $5,300,000 for each
additional store and customer service center, respectively.
The Company has recently amended its credit agreement with its principal bank
and a syndicate of commercial banks to provide for a working capital line of
$300,000,000.
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The credit agreement provides that funds borrowed will bear interest, at the
Company's option, at .3125% over the LIBOR rate, 1.75% over the Fed Funds
rate, at a base rate linked to the prime rate or at a competitive bid rate.
The Company also pays a fee of .1875% per annum on the total credit facility.
The credit facility expires in June 2000. As of July 1, 1995 the Company had
borrowed $191,430,000 under the credit facility. In addition to the credit
facility, the bank has provided a lease facility to the Company under which the
bank has agreed to purchase up to $25,000,000 of equipment from the Company and
lease such equipment back to the Company. As of July 1, 1995, the Company had
approximately $2,865,000 outstanding under this lease facility.
The Company's management continually reviews its financing options. It is
currently anticipated that the Company has the ability to finance its planned
expansion through 1995 from cash on hand, funds generated from operations,
equipment leased under the Company's lease facility, and funds borrowed under
the Company's amended credit facility. The Company is considering and will
continue to consider alternative financing opportunities including the issuance
of equity, debt or convertible debt, if market conditions make such
alternatives financially attractive methods of funding the Company's
short-term or long-term expansion. The Company's financing requirements in the
future will be affected by the number of new stores and customer service
centers opened, converted or acquired and additional receivables carried by the
Company.
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PART II. OTHER INFORMATION
Items 1-3 Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of Office Depot, Inc.
held on May 18, 1995, the nominees for election as Directors
of the Corporation were elected without opposition.
A vote of the common stock with respect to this election was:
Number of Shares
Nominee For Withheld
------- --- --------
Mark D. Begelman 125,294,087 1,508,195
Denis Defforey 125,259,018 1,543,264
David I. Fuente 125,319,872 1,482,410
W. Scott Hedrick 125,384,280 1,418,002
John B. Mumford 125,288,962 1,513,320
Michael J. Myers 125,313,493 1,488,789
Peter J. Solomon 125,364,136 1,438,146
Cynthia Cohen Turk 125,322,153 1,480,129
Alan L. Wurtzel 125,379,460 1,422,822
The number of shares of broker non-votes for the election of Directors was
none.
The following proposals of the Board of Directors were submitted for adoption.
The board proposals were adopted by the votes indicated (which constituted the
affirmative vote of more than one-half of the shares voting).
RESOLVED, that based upon the recommendation of the Board of Directors of the
Corporation, the Restated Certificate of Incorporation of the Corporation be
amended and restated in its entirety to read as set forth in Appendix A of the
Proxy.
For the proposal: 119,527,062 Shares
Against the proposal: 6,289,909 Shares
Abstaining: 985,311 Shares
The number of shares of broker non-votes in the above proposal was none.
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RESOLVED, that based upon the recommendation of the Board of Directors of the
Corporation, the adoption of the Office Depot, Inc. Omnibus Equity Plan is
hereby approved and adopted.
For the proposal: 103,828,629 Shares
Against the proposal: 21,763,591 Shares
Abstaining: 1,210,062 Shares
The number of shares of broker non-votes in the above proposal was none.
RESOLVED, that based upon the recommendation of the Board of Directors of the
Corporation, the adoption of the 1994-1998 Office Depot, Inc. Designated
Executive Incentive Plan, including amounts payable thereunder with respect to
the 1994 fiscal year, is hereby approved and adopted.
For the proposal: 123,181,593 Shares
Against the proposal: 3,097,787 Shares
Abstaining: 522,902 Shares
The number of shares of broker non-votes in the above proposal was none.
RESOLVED, that based upon the recommendation of the Board of Directors of the
Corporation, the appointment of Deloitte & Touche LLP as independent public
accountants to audit the Corporation's consolidated financial statements for
the fiscal year ending December 30, 1995 is hereby approved and adopted.
For the proposal: 126,316,557 Shares
Against the proposal: 279,120 Shares
Abstaining: 206,605 Shares
The number of shares of broker non-votes in the above proposal was none.
Item 5 Not applicable.
Item 6 Exhibits and Reports on Form 8-K
a. 10.6 Third Amendment to Revolving Credit and Line of Credit
Agreement dated as of June 30, 1995 by and among the company
and Sun Bank, National Association, individually and as Agent,
NationsBank of Florida, N.A., PNC Bank, Kentucky, Inc., Bank
of America National Trust and Savings Association and Royal
Bank of Canada.
27.1 Financial Data Schedule (for SEC use only)
b. No reports on Form 8-K were filed during the quarter ended
July 1, 1995.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OFFICE DEPOT, INC.
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(Registrant)
Date: July 31, 1995 By: /s/ Barry J. Goldstein
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Barry J. Goldstein
Executive Vice President-Finance
and Chief Financial Officer
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INDEX TO EXHIBITS
Page
10.6 Third Amendment to Revolving Credit and Line of Credit 15
Agreement dated as of June 30, 1995 by and among the
company and Sun Bank, National Association, individually
and as Agent, NationsBank of Florida, N.A., PNC Bank,
Kentucky, Inc., Bank of America National Trust and Savings
Association and Royal Bank of Canada.
27.1 Financial Data Schedule (for SEC use only)
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