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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 June 28, 1997
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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 ______________________
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 (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)
(561) 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 157,838,901 shares of common stock outstanding as of August
8, 1997.
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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 June 28, 1997 and
June 29, 1996 3
Consolidated Balance Sheets as of
June 28, 1997 and December 28, 1996 4
Consolidated Statements of Cash Flows for the
26 Weeks Ended June 28, 1997 and
June 29, 1996 5
Notes to Consolidated Financial Statements 6 - 8
ITEM 2 Management's Discussion and Analysis of
------ Financial Condition and Results of Operations 9 - 16
Part II. OTHER INFORMATION 17
SIGNATURE 18
INDEX TO EXHIBITS 19
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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
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
----------- ---------- ----------- -----------
Sales $ 1,531,825 $1,381,365 $ 3,304,269 $ 3,014,360
Cost of goods sold and occupancy costs 1,171,291 1,056,661 2,544,194 2,334,278
----------- ---------- ----------- -----------
Gross profit 360,534 324,704 760,075 680,082
Store and warehouse operating
and selling expenses 247,904 224,982 522,521 471,755
Pre-opening expenses 792 4,357 1,583 5,498
General and administrative expenses 45,581 40,387 91,647 84,830
Amortization of goodwill 1,311 1,306 2,623 2,636
----------- ---------- ----------- -----------
295,588 271,032 618,374 564,719
----------- ---------- ----------- -----------
Operating profit 64,946 53,672 141,701 115,363
Other expense (income)
Interest expense, net 4,306 6,318 9,059 11,174
Equity and franchise (income) loss, net 728 (78) 1,973 367
Merger costs 9,483 --- 16,094 ---
----------- ---------- ----------- -----------
Earnings before income taxes 50,429 47,432 114,575 103,822
Income taxes 19,955 19,195 45,314 42,102
----------- ---------- ----------- -----------
Net earnings $ 30,474 $ 28,237 $ 69,261 $ 61,720
=========== ========== =========== ===========
Earnings per common and
common equivalent share:
Primary $0.19 $0.18 $0.44 $0.39
Fully diluted $0.19 $0.18 $0.43 $0.38
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OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
June 28, December 28,
1997 1996
----------- ------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 69,905 $ 51,398
Receivables, net of allowances 382,781 401,900
Merchandise inventories 1,154,705 1,324,506
Deferred income taxes 35,570 29,583
Prepaid expenses 12,594 14,209
---------- ----------
Total current assets 1,655,555 1,821,596
Property and equipment, net 667,034 671,648
Goodwill, net of amortization 187,403 190,052
Other assets 64,624 57,021
---------- ----------
$2,574,616 $2,740,317
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 641,163 $ 781,963
Accrued expenses 200,623 177,680
Income taxes 27,477 25,819
Short-term borrowings and current maturities
of long-term debt 2,393 142,339
---------- ----------
Total current liabilities 871,656 1,127,801
Long-term debt, less current maturities 15,851 17,128
Deferred taxes and other credits 46,672 39,814
Zero coupon, convertible subordinated notes 408,656 399,629
Common stockholders' equity
Common stock - authorized 400,000,000 shares of
$.01 par value; issued 159,891,479 in 1997 and
159,417,089 in 1996 1,599 1,594
Additional paid-in capital 637,736 630,049
Foreign currency translation adjustment (2,190) (1,073)
Retained earnings 596,386 527,125
Less: 2,163,447 shares of treasury stock, at cost (1,750) (1,750)
---------- ----------
1,231,781 1,155,945
---------- ----------
$2,574,616 $2,740,317
========== ==========
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OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Change in Cash and Cash Equivalents
(In thousands)
(Unaudited)
26 Weeks Ended 26 Weeks Ended
June 28, June 29,
1997 1996
-------------- --------------
Cash flows from operating activities
Cash received from customers $3,279,285 $3,019,591
Cash paid for merchandise inventories (2,360,515) (2,431,936)
Cash paid for store and warehouse operating,
selling and general and administrative expenses (675,714) (596,391)
Interest received 1,363 725
Interest paid (1,955) (3,286)
Income taxes paid (47,260) (42,597)
---------- ----------
Net cash provided by (used in) operating activities 195,204 (53,894)
---------- ----------
Cash flows from investing activities
Capital expenditures, net (39,474) (79,380)
---------- ----------
Net cash used in investing activities (39,474) (79,380)
---------- ----------
Cash flows from financing activities
Proceeds from exercise of stock options and sales
of stock under employee stock purchase plan 5,117 9,367
Foreign currency translation adjustment (1,117) 33
Proceeds from long- and short-term borrowings --- 120,833
Payments on long- and short-term borrowings (141,223) (41,363)
---------- ----------
Net cash (used in) provided by financing activities (137,223) 88,870
---------- ----------
Net increase (decrease) in cash and cash equivalents 18,507 (44,404)
Cash and cash equivalents at beginning of period 51,398 61,993
---------- ----------
Cash and cash equivalents at end of period $ 69,905 $ 17,589
========== ==========
Reconciliation of net earnings to net cash
provided by operating activities
Net earnings $ 69,261 $ 61,720
---------- ----------
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities
Depreciation and amortization 47,898 39,025
Provision for inventory shrinkage and bad debts 21,019 10,608
Accreted interest on zero coupon, convertible
subordinated notes 9,027 8,420
Contributions of common stock to employee
benefit and stock purchase plans 1,617 1,895
Changes in assets and liabilities
Decrease in receivables 14,590 42,035
Decrease (increase) in merchandise inventories 153,311 (3,674)
Increase in prepaid expenses, deferred income
taxes and other assets (13,136) (16,198)
Decrease in accounts payable, accrued
expenses and deferred credits (108,383) (197,725)
---------- ----------
Total adjustments 125,943 (115,614)
---------- ----------
Net cash provided by (used in) operating activities $ 195,204 $ (53,894)
========== ==========
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OFFICE DEPOT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The interim financial statements as of June 28, 1997 and for the 13 and
26 week periods ended June 28, 1997 and June 29, 1996 are unaudited;
however, such interim financial 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. Certain reclassifications were made
to prior year statements to conform to current year presentations. The
interim financial statements should be read in conjunction with the
audited financial statements for the year ended December 28, 1996.
2. Net earnings per common and common equivalent share is based upon the
weighted average number of common shares and common share equivalents
outstanding during each period. Stock options are considered common
stock equivalents. The zero coupon, convertible subordinated notes are
not common stock equivalents. Net earnings per common and common
equivalent share assuming full dilution was determined on the
assumption that the convertible notes were converted as of the
beginning of the periods. Net earnings under this assumption have been
adjusted for interest, net of its income tax effect.
The information required to compute net earnings per share on a primary
and fully diluted basis is as follows:
13 Weeks 13 Weeks 26 Weeks 26 Weeks
Ended Ended Ended Ended
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
-------- -------- -------- --------
Primary:
Weighted average number of common
and common equivalent shares 158,864 158,718 159,080 158,424
======== ======== ======== ========
Fully Diluted:
Net Earnings $30,474 $28,237 $69,261 $61,720
Interest expense related to convertible
notes, net of tax 2,860 2,596 5,552 5,136
-------- -------- -------- --------
Adjusted net earnings $33,334 $30,833 $74,813 $66,856
======== ======== ======== ========
Weighted average number of common and
common equivalent shares 159,179 158,720 159,315 158,433
Shares issued upon assumed conversion
of convertible notes 16,565 16,565 16,565 16,565
-------- -------- -------- --------
Shares used in computing net earnings per
common and common equivalent share
assuming full dilution 175,744 175,285 175,880 174,998
======== ======== ======== ========
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3. In September 1996, the Company entered into an agreement and plan of
merger with Staples, Inc. ("Staples") and Marlin Acquisition Corp., a
wholly-owned subsidiary of Staples. On April 4, 1997, the Federal Trade
Commission ("FTC") initiated legal action to challenge the proposed
merger. The Company and Staples contested the FTC's efforts to
challenge the merger, and a preliminary injunction hearing in the
Federal District Court in Washington, DC was held in May 1997. On June
30, 1997, the judge granted the FTC's request for a preliminary
injunction to block the proposed merger, and on July 2, 1997, the
Company and Staples announced that the merger agreement had been
terminated.
During the 13 and 26 week periods ended June 28, 1997, the Company
expensed approximately $9,483,000 and $16,094,000, respectively, of
costs directly related to the terminated merger. These costs,
consisting primarily of legal fees, investment banker fees and
personnel retention costs, represent estimated costs incurred through
June 28, 1997; however, final billings have not, as yet, been
determined for certain litigation and other costs.
4. The Consolidated Statements of Cash Flows do not include the following
non-cash investing and financing transactions:
26 Weeks Ended 26 Weeks Ended
June 28, June 29,
1997 1996
-------------- --------------
(in thousands)
Additional paid-in capital related
to tax benefit on stock options exercised $ 957 $2,021
Equipment purchased under capital leases --- 5,252
Conversion of convertible subordinated --- 6
notes to common stock
5. In February 1997, Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share," was issued. SFAS No. 128, which
supersedes Accounting Principles Board ("APB") Opinion No. 15, requires
a dual presentation of basic and diluted earnings per share on the face
of the income statement. Basic earnings per share excludes dilution and
is computed by dividing income or loss attributable to common
stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the entity. Diluted earnings per share is computed
similarly to fully diluted earnings per share under APB Opinion No. 15.
SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier
application is not permitted. When adopted, all prior-period earnings
per share data are required to be restated. For the 13 and 26 weeks
ended June 28, 1997 and June 29, 1996, basic earnings per common share,
as computed under SFAS No. 128, would be the same as primary earnings
per common and common equivalent share shown on the
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accompanying consolidated statements of earnings. Similarly, for the 13
and 26 weeks ended June 28, 1997 and June 29, 1996, diluted earnings
per common share, as computed under SFAS No. 128, would be the same as
fully diluted earnings per common and common equivalent share shown on
the accompanying consolidated statements of earnings.
In June 1997, SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," was issued. SFAS No. 131
establishes standards for the way that public companies report selected
information about operating segments in annual financial statements and
requires that those companies report selected information about
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and
services, geographic areas, and major customers. SFAS No. 131, which
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," but retains the requirement to report information about
major customers, requires that a public company report financial and
descriptive information about its reportable operating segments.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources
and in assessing performance. Generally, financial information is
required to be reported on the basis that it is used internally for
evaluating segment performance and deciding how to allocate resources
to segments. SFAS No. 131 requires that a public company report a
measure of segment profit or loss, certain specific revenue and expense
items, and segment assets. However, SFAS No. 131 does not require the
reporting of information that is not prepared for internal use if
reporting it would be impracticable. SFAS No. 131 also requires that a
public company report descriptive information about the way that the
operating segments were determined, the products and services provided
by the operating segments, differences between the measurements used in
reporting segment information and those used in the enterprise's
general-purpose financial statements, and changes in the measurement of
segment amounts from period to period. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997. The
Company has not determined the effects, if any, that SFAS No. 131 will
have on the disclosures in its consolidated financial statements.
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Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales increased 11% to $1,531,825,000 in the second quarter of 1997 from
$1,381,365,000 in the second quarter of 1996 and 10% to $3,304,269,000 for the
first six months of 1997 from $3,014,360,000 for the first six months of 1996.
Approximately 38% of the increase in sales for the first six months of 1997 was
due to the 38 new office supply stores opened subsequent to the second quarter
of 1996. Comparable sales for stores and delivery facilities open for more than
one year at June 28, 1997 increased 6% for the second quarter of 1997 and 4% for
the first six months of 1997. Sales of computers, business machines and related
supplies rose slightly as a percentage of total sales in the second quarter of
1997 over the comparable 1996 period, driven primarily by increases in sales of
machine supplies. The average unit sales prices and comparable unit sales of
computers have decreased from 1996. Average unit retail prices for copy paper
and related products were approximately 20% below prior year levels as a result
of a soft paper market.
The Company opened four and closed one office supply store in the second quarter
of 1997, bringing the total number of office supply stores open at the end of
the second quarter to 565, compared with 527 stores open at the end of the
second quarter of 1996. The Company also operated 23 contract stationer and
delivery warehouses (customer service centers ("CSC's")) at the end of the
second quarters of both 1997 and 1996. Several of these are newer, larger
facilities which replaced existing facilities acquired as part of the contract
stationer acquisitions in 1993 and 1994. As of June 28, 1997, the Company also
operated three Images(TM), two Office Depot Express(TM) and five Furniture At
Work(TM) stores.
Gross profit as a percentage of sales was 23.5% and 23.0% during the second
quarter and first half of 1997, respectively, as compared with 23.5% and 22.6%
during the comparable quarter and first six months of 1996, respectively.
Improvements in margin for the first six months of 1997 have been realized
primarily through the decrease in sales of computers as a percentage of total
sales. The Company's management believes that gross profit as a percentage of
sales can fluctuate as a result of numerous factors, including continued
expansion of its contract stationer business, competitive pricing in more market
areas, continued change in product mix, continued fluctuation in paper prices,
as well as the Company's ability to achieve purchasing efficiencies through
growth in total merchandise purchases. Additionally, occupancy costs can
increase in new markets and in certain existing markets where the Company plans
to add new stores and warehouses to complete its market plan.
Store and warehouse operating and selling expenses as a percentage of sales were
16.2% and 15.8% in the second quarter and first six months of 1997,
respectively, as compared to 16.3% and 15.7% in the second quarter and first six
months of 1996, respectively. Store and warehouse operating and selling expenses
consist primarily of payroll and advertising expenses. While store and warehouse
operating and selling expenses as a percentage of sales continue to be
significantly higher in the contract
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stationer business than in the retail business, principally due to the need for
a more experienced and more highly compensated sales force, these expenses have
begun to decline as a percentage of sales as the Company progresses toward full
integration of this business. Management expects that as the Company continues
this progress, certain fixed expenses should decrease as a percentage of sales,
thereby improving the Company's overall store and warehouse operating expenses
as a percentage of sales. In the retail business, while the majority of store
expenses vary proportionately with sales, there is a fixed cost component to
these expenses that, as sales increase within each store and within a cluster of
stores in a given market area, should decrease as a percentage of sales. This
benefit in the retail business did not significantly improve the Company's
operating margins for the first six months of 1997, since new store openings
were limited during this period. When the Company first enters a large
metropolitan market area where the advertising costs for the full market must be
absorbed by the small number of facilities opened, advertising expenses are
initially higher as a percentage of sales. As additional stores are opened in
the same market, advertising costs, which are substantially a fixed expense for
a market area, have been and should continue to be reduced as a percentage of
total sales. The Company has also continued, while on a more limited scale than
in prior periods, a strategy of opening stores in existing markets. While
increasing the number of stores increases operating results in absolute dollars,
this also has the effect of increasing expenses as a percentage of sales since
the sales of certain existing stores in the market may be adversely affected.
Pre-opening expenses decreased to $792,000 in the second quarter of 1997 from
$4,357,000 in the comparable quarter of 1996 and decreased to $1,583,000 from
$5,498,000 in the first half of 1997, as compared to the same period in 1996.
The Company added five new and one replacement office supply store in the first
half of 1997, four of which were added in the second quarter, as compared with
26 new stores in the comparable 1996 period, 22 of which were added in the
second quarter. Pre-opening expenses, which currently approximate $150,000 per
standard office supply store, are predominately incurred during a six-week
period prior to the store opening. CSC pre-opening expenses are approximately
$500,000; however, these expenses may vary with the size and type of future
CSC's. These expenses consist principally of amounts paid for salaries and
property expenses. 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
period 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 increased as a percentage of sales to 3.0%
for the quarter ended June 28, 1997 from 2.9% for the comparable 1996 period,
while these expenses were 2.8% as a percentage of sales for both the first half
of 1997 and 1996. Still impacting these expenses is the Company's commitment to
improving the efficiency of its management information systems and increasing
its information systems programming staff. While this investment in systems has
and will continue to increase general and administrative expenses in the short
term, the Company believes it will provide benefits in the future. Increases
resulting from this initiative have been partially offset by decreases in other
general and administrative expenses, both as a result of the Company's ability
to increase sales without a proportionate increase in
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corporate expenditures, and as a result of reduction in certain costs achieved
through systems initiatives already being implemented. However, there can be no
assurance that the Company will be able to continue to increase sales without a
proportionate increase in corporate expenditures. Additionally, uncertainty
surrounding the terminated merger with Staples has, to some extent, resulted in
a decline in corporate personnel costs and, thus, reduced general and
administrative expenses the first half of 1997.
During the second quarter and first half of 1997, the Company expensed
approximately $9,483,000 and $16,094,000, respectively, of costs directly
related to the terminated merger with Staples. These costs, consisting primarily
of legal fees, investment banker fees and personnel retention costs, represent
estimated costs incurred through June 28, 1997; however, final billings have
not, as yet, been determined for certain litigation and other costs. The Company
does not expect to incur significant additional costs associated with the
terminated merger in future periods.
TERMINATED MERGER
In September 1996, the Company entered into an agreement and plan of merger with
Staples, Inc. ("Staples") and Marlin Acquisition Corp., a wholly-owned
subsidiary of Staples. On April 4, 1997, the Federal Trade Commission ("FTC")
initiated legal action to challenge the proposed merger. The Company and Staples
contested the FTC's efforts to challenge the merger, and a preliminary
injunction hearing in the Federal District Court in Washington, DC was held in
May 1997. On June 30, 1997, the judge granted the FTC's request for a
preliminary injunction to block the proposed merger, and on July 2, 1997, the
Company and Staples announced that the merger agreement had been terminated.
While the Company believed that the merger with Staples would have been in the
best interests of its customers and shareholders, the Company has prepared
itself to continue on a stand alone basis. Many of the initiatives undertaken in
planning for the merger have and will continue to strengthen the Company's
support systems and operating practices.
LIQUIDITY AND CAPITAL RESOURCES
Since the Company's inception in March 1986, the Company has relied on equity
capital, convertible debt and bank borrowings as the primary sources of its
funds. 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 inventories. The Company
utilizes private label credit card programs administered and financed by
financial service companies, which allow the Company to expand its store sales
without the burden of additional receivables. The Company has also utilized
equipment financings as a source of funds in previous periods.
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Sales made to larger customers are generally made under regular commercial
credit terms where the Company carries its own receivables, as opposed to sales
made to smaller customers, in which payments are generally tendered in cash or
by credit card. Thus, as the Company continues to expand into servicing
additional large companies, it is expected that the Company's trade receivables
will continue to grow.
Receivables from vendors under rebate, cooperative advertising and marketing
programs, which comprise a significant percentage of total receivables, tend to
fluctuate seasonally, growing during the second half of the year and declining
during the first half. This is the result of collections generally made after an
entire program year is completed.
In the first six months of 1997, the Company added five and replaced one office
supply store and added one Furniture At Work(TM) store, compared with 26 new
office supply stores, two new Images(TM) and one new Furniture At Work(TM) store
added in the comparable period of 1996. Uncertainty and a loss of certain real
estate personnel, both resulting from the terminated merger with Staples, has
had a negative short-term effect on the Company's store opening program. Net
cash provided by operating activities was $195,204,000 in the six months of
1997, compared with net cash used by operating activities of $53,894,000 in the
comparable 1996 period. 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 of existing stores should
provide a greater portion of funds required for new store inventories and other
working capital requirements. Cash utilized for capital expenditures was
$39,474,000 and $79,380,000 in the first six months of 1997 and 1996,
respectively.
During the 26 weeks ended June 28, 1997, the Company's cash balance increased by
$18,507,000 and long- and short-term debt decreased by $141,223,000, excluding
$9,027,000 in non-cash accretion of interest on the Company's zero coupon,
convertible subordinated debt.
The Company has a credit agreement with its principal bank and a syndicate of
commercial banks which provides for a working capital line and letters of credit
totaling $300,000,000. The credit agreement provides that funds borrowed will
bear interest, at the Company's option, at either .3125% over the LIBOR rate,
1.75% over the Federal Funds rate, a base rate linked to the prime rate, or
under a competitive bid facility. The Company must also pay a facility fee of
.1875% per annum on the total credit facility. The credit facility currently
expires June 30, 2000. As of June 28, 1997, the Company had no outstanding
borrowings under the line of credit and had outstanding letters of credit
totaling $10,828,000 under the credit facility. The credit agreement contains
certain restrictive covenants relating to various financial statement ratios. 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 on behalf of the Company and lease such equipment to the Company. As
of June 28, 1997, the Company had utilized approximately $18,321,000 of this
lease facility. In July 1996, the Company entered into an additional lease
facility with another bank for up to
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$25,000,000 of equipment. As of June 28, 1997, the Company had utilized
approximately $21,484,000 of this additional lease facility.
The Company currently plans to open approximately 35 new office supply stores
and relocate one delivery warehouses during the second half of 1997. Management
estimates that the Company's cash requirements, exclusive of pre-opening
expenses, will be approximately $1,900,000 for each additional office supply
store, which includes an average of approximately $1,100,000 for leasehold
improvements, fixtures, point-of-sale terminals and other equipment in the
stores, as well as approximately $800,000 for the portion of the store
inventories that is not financed by vendors. The cash requirements, exclusive of
pre-opening expenses, for a delivery warehouse is expected to be approximately
$5,300,000, which includes an average of $3,100,000 for leasehold improvements,
fixtures and other equipment and $2,200,000 for the portion of inventories not
financed by vendors. In addition, management estimates that each new store and
warehouse will require pre-opening expenses of between $115,000 and $500,000,
depending on the type of facility. In January 1996, the Company entered into a
lease commitment for an additional corporate office building which was completed
in July 1997. The lease is classified as a capital lease and will be recorded as
such in the third quarter of 1997. This lease will result in a capital lease
asset and obligation of approximately $24,000,000 and initial annual lease
commitments of approximately $2,200,000.
NEW ACCOUNTING PRONOUNCEMENT
In February 1997, Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share" was issued. SFAS No. 128, which supersedes Accounting
Principles Board ("APB") Opinion No. 15, requires a dual presentation of basic
and diluted earnings per share on the face of the income statement. Basic
earnings per share excludes dilution and is computed by dividing income or loss
attributable to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. Diluted
earnings per share is computed similarly to fully diluted earnings per share
under APB Opinion No. 15. SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods;
earlier application is not permitted. When adopted, all prior-period earnings
per share data are required to be restated. For the 13 and 26 weeks ended June
28, 1997 and June 29, 1996, basic earnings per common share, as computed under
SFAS No. 128, would be the same as primary earnings per common and common
equivalent share shown on the accompanying consolidated statements of earnings.
Similarly, for the 13 and 26 weeks ended June 28, 1997 and June 29, 1996,
diluted earnings per common share, as computed under SFAS No. 128, would be the
same as fully diluted earnings per common and common equivalent share shown on
the accompanying consolidated statements of earnings.
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In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," was issued. SFAS No. 131 establishes standards for the way
that public companies report selected information about operating segments in
annual financial statements and requires that those companies report selected
information about segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. SFAS No. 131, which supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," but
retains the requirement to report information about major customers, requires
that a public company report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. SFAS No. 131 requires that a public company report a measure of
segment profit or loss, certain specific revenue and expense items, and segment
assets. However, SFAS No. 131 does not require the reporting of information that
is not prepared for internal use if reporting it would be impracticable. SFAS
No. 131 also requires that a public company report descriptive information about
the way that the operating segments were determined, the products and services
provided by the operating segments, differences between the measurements used in
reporting segment information and those used in the enterprise's general-purpose
financial statements, and changes in the measurement of segment amounts from
period to period. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. The Company has not determined the effects,
if any, that SFAS No. 131 will have on the disclosures in its consolidated
financial statements.
FUTURE OPERATING RESULTS
With the exception of historical matters, the matters discussed in this
Quarterly Report on Form 10-Q are forward-looking statements that involve risks
and uncertainties, including those discussed below. The factors discussed below
could affect the Company's actual results and could cause the Company's actual
results during the remainder of 1997 and beyond to differ materially from those
expressed in any forward-looking statement made by the Company.
With respect to the terminated merger, the Company and its Board of Directors
believed that the merger would have been in the best interests of its customers
and shareholders; however the Company is fully prepared to continue on a
stand-alone basis. Many of the initiatives undertaken in planning for the
terminated merger have and will continue to strengthen the Company's support
systems and operating practices.
The Company's strategy of aggressive store growth has been negatively affected
in the short-term by the uncertainty of the terminated merger. The Company
currently plans
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to open approximately 35 additional stores during the second half of 1997. There
can be no assurance that the Company will be able to find favorable store
locations, negotiate favorable leases, hire and train employees and store
managers, and integrate the new stores in a manner that will allow it to meet
its expansion schedule. The failure to be able to expand by opening new stores
on plan could have a material adverse effect on the Company's future sales
growth and profitability.
The Company competes with a variety of retailers, dealers and distributors in a
highly competitive marketplace. High-volume office supply chains, mass
merchandisers, warehouse clubs, computer stores and contract stationers that
compete directly with the Company operate in most of its geographic markets.
This competition will increase in the future as both the Company and these and
other companies continue to expand their operations. There can be no assurance
that such competition will not have an adverse effect on the Company's business
in the future. The opening of additional Office Depot stores, the expansion of
the Company's contract stationer business in new and existing markets,
competition from other office supply chains, mass merchandisers, warehouse
clubs, computer stores and contract stationers, and regional and national
economic conditions will all affect the Company's comparable sales results. In
addition, the Company's gross margin and profitability would be adversely
affected if its competitors were to attempt to capture market share by reducing
prices.
In addition, as the Company expands the number of its stores in existing
markets, sales of existing stores can suffer. New stores typically take time to
reach the levels of sales and profitability of the Company's existing stores and
there can be no assurance that new stores will ever be as profitable as existing
stores because of competition from other store chains and the tendency of
existing stores to share sales as the Company opens new stores in its more
mature markets.
Fluctuations in the Company's quarterly operating results have occurred in the
past and may occur in the future. A variety of factors such as new store
openings with their concurrent pre-opening expenses, the extent to which new
stores are less profitable as they commence operations, the effect new stores
have on the sales of existing stores in more mature markets, the pricing
activity of competitors in the Company's markets, changes in the Company's
product mix, increases and decreases in advertising and promotional expenses,
the effects of seasonality, acquisitions of contract stationers and stores of
competitors or other events could contribute to this quarter to quarter
variability.
The Company has grown dramatically over the past several years and has shown
significant increases in its sales, stores in operation, employees and warehouse
and delivery operations. In addition, the Company acquired a number of contract
stationer operations, and the expenses incurred in the integration of acquired
facilities in its delivery business have contributed to increased warehouse
expenses. These integration costs are expected to continue to impact store and
warehouse expenses at decreasing levels through the end of 1997. The failure to
achieve the projected decrease in integration costs towards the end of 1997
could result in a significant impact on the Company's net income. The Company's
growth, through both store openings and acquisitions, will continue to require
the expansion and upgrading of the
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Company's operational and financial systems, as well as necessitate the hiring
of new managers at the store and supervisory level.
The Company has entered a number of international markets using licensing
agreements and joint venture arrangements. The Company intends to enter other
international markets as attractive opportunities arise. In addition to the
risks described above that face the Company's domestic store and delivery
operations, internationally the Company also faces the risk of foreign currency
fluctuations, local conditions and competitors, obtaining adequate and
appropriate inventory and, since its foreign operations are not wholly-owned, a
lack of operating control in certain countries.
The Company believes that its current cash and cash equivalents, equipment
leased under the Company's existing or new lease financing arrangements and
funds available under its revolving credit facility should be sufficient to fund
its planned store and delivery center openings and other operating cash needs,
including investments in international joint ventures, for at least the next
twelve months. However, there can be no assurance that additional sources of
financing will not be required during the next twelve months as a result of
unanticipated cash demands or opportunities for expansion or acquisition,
changes in growth strategy or adverse operating results. Also, alternative
financing will be considered if market conditions make it financially
attractive. There also can be no assurance that any additional funds required by
the Company, whether within the next twelve months or thereafter, will be
available to the Company on satisfactory terms.
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PART II. OTHER INFORMATION
Item 1 Legal Proceedings
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Items 2-5 Not applicable.
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Item 6 Exhibits and Reports on Form 8-K
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a. See "Index to Exhibits"
b. The Company filed a Current Report on Form 8-K on May 30, 1997,
effective May 27, 1997, disclosing that it had executed Amendment No. 2
to the September 4, 1996 Agreement and Plan of Merger by and among
Office Depot, Staples, Inc. and Marlin Acquisition Corp., a
wholly-owned subsidiary of Staples. The amendment modified the merger
agreement with respect to various termination provisions. On July 2,
1997, subsequent to a Federal Trade District Court judge granting the
Federal Trade Commission a preliminary injunction to block the merger,
the Company and Staples, Inc. terminated the merger agreement.
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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: August 12, 1997 By: /s/ BARRY J. GOLDSTEIN
--------------------------------
Barry J. Goldstein
Executive Vice President-Finance
and Chief Financial Officer
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INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION PAGE NO.
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3.1 Amended and Restated Bylaws
27.1 Financial Data Schedule (for SEC use only)
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