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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 March 29, 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
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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 (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 157,543,339 shares of common stock outstanding as of May 9,
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 Weeks Ended March 29, 1997 and
March 30, 1996 3
Consolidated Balance Sheets as of
March 29, 1997 and December 28, 1996 4
Consolidated Statements of Cash Flows for the
13 Weeks Ended March 29, 1997 and
March 30, 1996 5
Notes to Consolidated Financial Statements 6 - 9
Item 2 Management's Discussion and Analysis of
------ Financial Condition and Results of Operations 10 - 17
Part II. OTHER INFORMATION 18
SIGNATURE 19
INDEX TO EXHIBITS 20
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OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
13 Weeks 13 Weeks
Ended Ended
March 29, March 30,
1997 1996
---------- ----------
Sales $1,772,444 $1,632,995
Cost of goods sold and occupancy costs 1,372,903 1,277,617
---------- ----------
Gross profit 399,541 355,378
Store and warehouse operating
and selling expenses 274,617 246,773
Pre-opening expenses 791 1,141
General and administrative expenses 46,066 44,443
Amortization of goodwill 1,312 1,330
---------- ----------
322,786 293,687
---------- ----------
Operating Profit 76,755 61,691
Other (income) expense
Interest (income) expense, net 4,753 4,856
Equity and franchise (income) loss, net 1,245 445
Merger costs 6,611 ---
---------- ----------
Earnings before income taxes 64,146 56,390
Income taxes 25,359 22,907
---------- ----------
Net earnings $ 38,787 $ 33,483
========== ==========
Earnings per common and common equivalent share:
Primary $0.24 $0.21
Fully diluted $0.24 $0.21
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OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
March 29, December 28,
1997 1996
----------- ------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 84,585 $ 51,398
Receivables, net of allowances 365,981 401,900
Merchandise inventories 1,241,371 1,324,506
Deferred income taxes 29,436 29,583
Prepaid expenses 13,322 14,209
----------- -----------
Total current assets 1,734,695 1,821,596
Property and Equipment, net 671,035 671,648
Goodwill, net of amortization 188,719 190,052
Other Assets 61,677 57,021
----------- -----------
$ 2,656,126 $ 2,740,317
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 743,285 $ 781,963
Accrued expenses 202,013 177,680
Income taxes 43,605 25,819
Short-term borrowings and current maturities
of long-term debt 2,373 142,339
----------- -----------
Total current liabilities 991,276 1,127,801
Long-Term Debt, less Current Maturities 16,518 17,128
Deferred Taxes and Other Credits 46,513 39,814
Zero Coupon, Convertible Subordinated Notes 404,006 399,629
Common Stockholders' Equity
Common stock - authorized 400,000,000 shares of
$.01 par value; issued 159,666,044 in 1997 and
159,417,089 in 1996 1,597 1,594
Additional paid-in capital 634,047 630,049
Foreign currency translation adjustment (1,993) (1,073)
Retained earnings 565,912 527,125
Less: 2,163,447 shares of treasury stock, at cost (1,750) (1,750)
----------- -----------
1,197,813 1,155,945
----------- -----------
$ 2,656,126 $ 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)
13 Weeks Ended 13 Weeks Ended
March 29, March 30,
1997 1996
------------ -----------
Cash flows from operating activities
Cash received from customers $ 1,755,741 $ 1,610,048
Cash paid for merchandise inventories (1,205,937) (1,270,582)
Cash paid for store and warehouse operating,
selling and general and administrative expenses (352,074) (323,238)
Interest received 510 408
Interest paid (1,333) (1,153)
Income taxes paid (3,820) (907)
----------- -----------
Net cash provided by operating activities 193,087 14,576
----------- -----------
Cash flows from investing activities
Capital expenditures, net (21,183) (28,165)
----------- -----------
Net cash used in investing activities (21,183) (28,165)
----------- -----------
Cash flows from financing activities
Proceeds from exercise of stock options and sales
of stock under employee stock purchase plan 2,779 6,495
Foreign currency translation adjustment (920) (27)
Payments on long- and short-term borrowings (140,576) (18,410)
----------- -----------
Net cash used in financing activities (138,717) (11,942)
----------- -----------
Net increase (decrease) in cash and cash equivalents 33,187 (25,531)
Cash and cash equivalents at beginning of period 51,398 61,993
----------- -----------
Cash and cash equivalents at end of period $ 84,585 $ 36,462
=========== ===========
Reconciliation of net earnings to net cash
provided by operating activities
Net earnings $ 38,787 $ 33,483
----------- -----------
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization 23,691 19,091
Provision for inventory shrinkage and bad debts 10,943 8,761
Accreted interest on zero coupon, convertible
subordinated notes 4,377 4,164
Contributions of common stock to employee
benefit and stock purchase plans 840 1,061
Changes in assets and liabilities
Decrease in receivables 33,837 33,508
Decrease (increase) in merchandise inventories 74,274 (16,580)
Increase in prepaid expenses, deferred income
taxes and other assets (4,184) (12,294)
Increase (decrease) in accounts payable, accrued
expenses and deferred credits 10,522 (56,618)
----------- -----------
Total adjustments 154,300 (18,907)
----------- -----------
Net cash provided by operating activities $ 193,087 $ 14,576
=========== ===========
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OFFICE DEPOT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The interim financial statements as of March 29, 1997 and for the 13
week periods ended March 29, 1997 and March 30, 1996 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. 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 shares and 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 share assuming full dilution was
determined on the assumption that the convertible notes were converted
as of the beginning of the period. Net earnings under this assumption
have been adjusted for interest net of its tax effect.
The information required to compute net earnings per share on a
primary and fully diluted basis is as follows:
13 Weeks Ended 13 Weeks Ended
March 29, March 30,
1997 1996
-------------- --------------
(in thousands)
Primary:
Weighted average number of common and
common equivalent shares 159,296 158,123
======== ========
Fully diluted:
Net earnings $ 38,787 $ 33,483
Interest expense related to convertible
notes, net of tax 2,692 2,540
-------- --------
Adjusted net earnings $ 41,479 $ 36,023
======== ========
Weighted average number of common and
common equivalent shares 159,450 158,130
Shares issued upon assumed conversion
of convertible notes 16,565 16,565
-------- --------
Shares used in computing net earnings per
common and common equivalent share
assuming full dilution 176,015 174,695
======== ========
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3. In September 1996, the Company entered into an agreement and plan of
merger (the "Merger Agreement") with Staples, Inc. ("Staples") and
Marlin Acquisition Corp., a wholly-owned subsidiary of Staples
("Acquisition Sub"). Pursuant to the Merger Agreement, after all of
the conditions set forth in the Merger Agreement are complied with:
(i) Acquisition Sub will be merged with and into Office Depot, and
Office Depot will become a wholly-owned subsidiary of Staples and (ii)
each outstanding share of the Company's common stock will be converted
into the right to receive 1.14 shares of common stock of Staples. In
connection with the merger, both companies were also issued mutual
options to purchase up to 19.9% of the outstanding stock of the other
company under certain conditions.
The consummation of the merger is subject to a number of conditions,
including approval by the stockholders of both the Company and
Staples, and the receipt of governmental consents and approvals,
including those under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 and the Canadian Competition Act. On November 1, 1996, the
Federal Trade Commission ("FTC") issued a Second Request for
information to Staples and the Company, beginning an investigation of
the merger. Since that time, the Company has cooperated with the FTC
in its review of the merger. An "Advanced Ruling Certificate" from the
Canadian Competition Bureau clearing the proposed merger under
Canadian law was received on December 16, 1996.
On March 10, 1997, the FTC voted to challenge the merger. On March 12,
1997, the Company and Staples reached a conditional agreement to sell
63 stores to Office Max, Inc. for $108.75 million after completion of
the merger. Based on discussions with the FTC staff, the Company
believed that this agreement addressed the FTC's concerns, and would
have allowed the merger to close subject to entering into a consent
decree which had been negotiated with the FTC staff.
However, on April 4, 1997, the FTC voted to reject the proposed
consent decree and on April 9, 1997, the FTC initiated legal action to
challenge the merger. The Company and Staples are contesting the FTC's
efforts to challenge the merger. A preliminary injunction hearing in
the Federal District Court in Washington, DC is scheduled for May
19-23, 1997, with a decision by the judge expected by mid-June. In
April 1997, several states moved to subpoena merger records from
Staples and the Company in order to decide whether or not to take
legal action to block the merger.
The merger agreement with Staples can be terminated by either party if
the merger shall not have been consummated by May 31, 1997; however,
the parties may agree to waive this provision and provide for a later
termination date. The Board of Directors of the Company have not, as
yet, approved an extension of such date.
The merger, if completed, will be accounted for as a pooling of
interests, and, accordingly, the Company's prior period financial
statements will be restated and
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combined with the prior period financial statements of Staples, as if
the merger had taken place at the beginning of the periods reported.
Based upon the number of outstanding shares of Staples common stock
and Company common stock as of March 29, 1997, the stockholders of the
Company immediately prior to the consummation of the merger will own
approximately 53% of the outstanding shares of Staples common stock
immediately following consummation of the merger.
Upon consummation of the merger, pursuant to the Merger Agreement,
each outstanding option to purchase Company common stock will be
converted into an option to purchase such number of shares of Staples
common stock (rounded down to the nearest whole number) as is equal to
the number of shares of Company common stock issuable upon exercise of
such option immediately prior to the effective time multiplied by the
exchange ratio. The exercise price per share of each such option, as
so converted, will be equal to (x) the aggregate exercise price for
the shares of Company common stock otherwise purchasable pursuant to
such Company stock option immediately prior to the effective time
divided by (y) the number of whole shares of Staples common stock
deemed purchasable pursuant to such Company stock option as determined
above (rounded up to the nearest whole cent). All outstanding Company
stock options, under the terms of such option agreements, will become
exercisable in full upon the closing of the merger.
In September 1996, a complaint was filed asserting, among other
things, a claim for breach of fiduciary duty against members of the
Company's Board of Directors, seeking to be certified as a class
action and seeking injunctive relief in connection with the proposed
merger. The Company believes that this lawsuit is without merit and
will defend against it vigorously.
4. During the first quarter of 1997, the Company expensed approximately
$6,611,000 of costs directly related to the pending merger. These
costs, consisting primarily of legal fees, investment banker fees and
personnel retention costs, represent costs incurred through March 29,
1997.
5. The Consolidated Statements of Cash Flows do not include the following
non-cash investing and financing transactions:
13 Weeks Ended 13 Weeks Ended
March 29, March 30,
1997 1996
-------------- --------------
(in thousands)
Additional paid-in capital related
to tax benefit on stock options exercised $381 $1,775
Equipment purchased under capital leases -- 5,252
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6. 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 weeks
ended March 29, 1997, basic and diluted earnings per common share, as
computed under SFAS No. 128, would be $.25 and $.24, respectively. For
the 13 weeks ended March 30, 1996, basic and diluted earnings per
common share, as computed under SFAS No. 128, would not change from
primary and fully diluted earnings per common and common equivalent
share shown on the accompanying consolidated statements of earnings.
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Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales increased 9% to $1,772,444,000 in the first quarter of 1997 from
$1,632,995,000 in the first quarter of 1996. Approximately 68% of the increase
in sales was due to the 57 new office supply stores opened subsequent to the
first quarter of 1996. Comparable sales for stores and delivery facilities open
for more than one year at March 29, 1997 increased 2% for the first quarter of
1997. Sales of computers, business machines and related supplies rose slightly
as a percentage of total sales in the first quarter of 1997 over the comparable
1996 period, although the average unit sales prices of computers decreased from
1996. Average unit retail prices for copy paper and related products were
approximately 30% below prior year levels as a result of a soft paper market.
The Company opened one office supply store in the first quarter of 1997,
bringing the total number of office supply stores open at the end of the first
quarter to 562, compared with 505 stores open at the end of the first quarter
of 1996. The Company also operated 23 contract stationer and delivery
warehouses (customer service centers) at the end of the first 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. Additionally, in the first quarter of 1997, the Company opened
one Furniture At Work(TM) store. As of March 29, 1997, the Company operated
three Images(TM), two Office Depot Express(TM) and five Furniture At Work(TM)
stores.
Gross profit as a percentage of sales was 22.5% during the first quarter of
1997 as compared with 21.8% during the comparable quarter of 1996. This
improvement in margin was realized, primarily through the slowed rate of
growth in sales of computers and related products as a percentage of total
sales. The Company's management believes that gross profit as a percentage of
sales may 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 may
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 15.5% and 15.1% in the first quarter of 1997 and 1996, respectively. Store
and warehouse operating and selling expenses, consisting primarily of payroll
and advertising expenses, have increased primarily due to normal salary
increases coupled with only 2% comparable store sales increases. While store
and warehouse operating and selling expenses as a percentage of sales continue
to be significantly higher in the contract stationer business than in the
retail business, principally due to the need for a
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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
first quarter 1997 operating margins since new store openings were limited.
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 $791,000 in the first quarter of 1997 from
$1,141,000 in the comparable quarter of 1996. The Company added one and
replaced one office supply store in the first quarter of 1997, as compared with
four new stores in the comparable 1996 period. Pre-opening expenses in the
first quarter of 1996 include costs associated with replacing one existing
customer service center ("CSC") with a larger, more functional facility, while
no CSC's were replaced in the first quarter of 1997. 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.
Preopening expenses for other retail office products stores currently
approximate $115,000 per store. CSC pre-opening expenses are approximately
$500,000; however, these expenses may vary with the size and type of future
CSC's. CSC replacement and new satellite warehouse and sales office preopening
costs approximate $75,000. 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. Included in preopening expenses for the first quarter of 1997 are costs
incurred at four office supply stores and one warehouse replacement scheduled
to open early in the second quarter. Similarly, preopening expenses for the
same period in 1996 include costs incurred at four office supply stores opened
early in the second quarter of 1996.
General and administrative expenses decreased as a percentage of sales to 2.6%
for the quarter ended March 29, 1997 from 2.7% for the comparable 1996 period.
However, still impacting these expenses is the Company's commitment to
improving the efficiency of its management information systems and increasing
its information
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systems programming staff. While this systems investment has and will continue
to increase general and administrative expenses in the short term, the Company
believes it will provide benefits in the future. These increases have been
offset by decreases in other general and administrative expenses, primarily as
a result of the Company's ability to increase sales without a proportionate
increase in corporate expenditures. 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
pending merger has, to some extent, resulted in a decline in corporate
personnel and, thus, reduced general and administrative expenses.
During the first quarter of 1997, the Company expensed approximately $6,611,000
of costs directly related to the pending merger. These costs, consisting
primarily of legal fees, investment banker fees and personnel retention costs,
represent costs incurred through March 29, 1997. The Company expects to incur
additional merger costs in future periods. The amount of these future costs is
difficult to estimate since they will vary depending upon future developments.
In September 1996, the Company entered into an agreement and plan of merger
(the "Merger Agreement") with Staples, Inc. ("Staples") and Marlin Acquisition
Corp., a wholly-owned subsidiary of Staples ("Acquisition Sub"). Pursuant to
the Merger Agreement, after all of the conditions set forth in the Merger
Agreement are complied with: (i) Acquisition Sub will be merged with and into
Office Depot, and Office Depot will become a wholly-owned subsidiary of Staples
and (ii) each outstanding share of the Company's common stock will be converted
into the right to receive 1.14 shares of common stock of Staples. In connection
with the merger, both companies were also issued mutual options to purchase up
to 19.9% of the outstanding stock of the other company under certain
conditions.
The consummation of the merger is subject to a number of conditions, including
approval by the stockholders of both the Company and Staples, and the receipt
of governmental consents and approvals, including those under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the Canadian
Competition Act. On November 1, 1996, the Federal Trade Commission ("FTC")
issued a Second Request for information to Staples and the Company, beginning
an investigation of the merger. Since that time, the Company has cooperated
with the FTC in its review of the merger. An "Advanced Ruling Certificate" from
the Canadian Competition Bureau clearing the proposed merger under Canadian law
was received on December 16, 1996.
On March 10, 1997, the FTC voted to challenge the merger. On March 12, 1997,
the Company and Staples reached a conditional agreement to sell 63 stores to
Office Max, Inc. for $108.75 million after completion of the merger. Based on
discussions with the FTC staff, the Company believed that this agreement
addressed the FTC's concerns, and would have allowed the merger to close
subject to entering into a consent decree which had been negotiated with the
FTC staff.
However, on April 4, 1997, the FTC voted to reject the proposed consent decree
and on April 9, 1997, the FTC initiated legal action to challenge the merger.
The Company and Staples are contesting the FTC's efforts to challenge the
merger. A preliminary
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injunction hearing in the Federal District Court in Washington, DC is scheduled
for May 19-23, 1997, with a decision by the judge expected by mid-June. In
April 1997, several states moved to subpoena merger records from Staples and
the Company in order to decide whether or not to take legal action to block the
merger.
The merger agreement with Staples can be terminated by either party if the
merger shall not have been consummated by May 31, 1997; however the parties may
agree to waive this provision and provide for a later termination date. The
Board of Directors of the Company have not, as yet, approved an extension of
such date.
While the Company believes that the merger with Staples is in the best
interests of its customers and shareholders, the Company is fully prepared to
continue on a stand alone basis if it does not prevail in the FTC litigation.
The merger, if completed, will be accounted for as a pooling of interests, and,
accordingly, the Company's prior period financial statements will be restated
and combined with the prior period financial statements of Staples, as if the
merger had taken place at the beginning of the periods reported.
Based upon the number of outstanding shares of Staples common stock and Company
common stock as of March 29, 1997, the stockholders of the Company immediately
prior to the consummation of the merger will own approximately 53% of the
outstanding shares of Staples common stock immediately following consummation
of the merger.
Upon consummation of the merger, pursuant to the Merger Agreement, each
outstanding option to purchase Company common stock will be converted into an
option to purchase such number of shares of Staples common stock (rounded down
to the nearest whole number) as is equal to the number of shares of Company
common stock issuable upon exercise of such option immediately prior to the
effective time multiplied by the exchange ratio. The exercise price per share
of each such option, as so converted, will be equal to (x) the aggregate
exercise price for the shares of Company common stock otherwise purchasable
pursuant to such Company stock option immediately prior to the effective time
divided by (y) the number of whole shares of Staples common stock deemed
purchasable pursuant to such Company stock option as determined above (rounded
up to the nearest whole cent). All Company stock options outstanding as of
March 29, 1997, under the terms of such option agreements, will become
exercisable in full upon the closing of the merger.
In September 1996, a complaint was filed asserting, among other things, a claim
for breach of fiduciary duty against members of the Company's Board of
Directors, seeking to be certified as a class action and seeking injunctive
relief in connection with the proposed merger. The Company believes that this
lawsuit is without merit and will defend against it vigorously.
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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.
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 quarter of 1997, the Company added one and replaced one office
supply store and added one Furniture At Work(TM) store, compared with four new
office supply stores, one 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 delay in the pending merger with
Staples, has negatively affected the Company's short-term store opening
program. Net cash provided by operating activities was $193,087,000 in the
first quarter of 1997, compared with $14,576,000 provided 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 $21,183,000
and $28,165,000 in the first three months of 1997 and 1996, respectively.
During the 13 weeks ended March 29, 1997, the Company's cash balance increased
by $33,187,000 and long- and short-term debt decreased by $140,576,000,
excluding $4,377,000 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
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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
available portion of the credit facility. The credit facility currently expires
June 30, 2000. As of March 29, 1997, the Company had no outstanding borrowings
under the line of credit and had outstanding letters of credit totaling
$11,017,000 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 March 29, 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 $25,000,000 of equipment. As of March 29,
1997, the Company had utilized approximately $21,484,000 of this additional
lease facility.
The Company currently plans to open approximately 40 new office supply stores
and relocate three to four delivery warehouses during 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 is still under construction. The lease will be classified as a
capital lease and will be recorded as such when the term commences in the
second half of 1997. This lease will result in a capital lease asset and
obligation of approximately $26,000,000 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 than 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
15
16
periods; earlier application is not permitted. When adopted, all prior-period
earnings per share data are required to be restated. For the 13 weeks ended
March 29, 1997, basic and diluted earnings per common share, as computed under
SFAS No. 128, would be $.25 and $.24, respectively. For the 13 weeks ended
March 30, 1996, basic and diluted earnings per common share, as computed under
SFAS No. 128, would not change from primary and fully diluted earnings per
common and common equivalent share shown on the accompanying consolidated
statements of earnings.
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 proposed merger, the Company and its Board of Directors
believe that the merger is in the best interests of its customers and
shareholders; however the Company is fully prepared to continue on a
stand-alone basis if it does not prevail in the pending litigation.
The Company's strategy of aggressive store growth has been negatively affected
by the uncertainty of the pending merger. The Company currently plans to open
approximately 40 additional stores by the end 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
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17
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 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
- ------
On April 4, 1997, the Federal Trade Commission ("FTC") voted to reject a
proposed consent decree which the Company and Staples, Inc. ("Staples")
believed adequately addressed the FTC's concerns about the proposed merger
between the Company and Staples. On April 9, 1997, the FTC initiated legal
action to challenge the merger. A preliminary injunction hearing in the
Federal District Court in Washington, DC is set for May 19-23, 1997, with a
decision by the judge expected by mid-June.
In April 1997, several states moved to subpoena merger records from Staples
and the Company in order to decide whether or not to take legal action to
block the merger.
Items 2-5 Not applicable.
- ---------
Item 6 Exhibits and Reports on Form 8-K
- ------
a. 27.1 Financial Data Schedule (for SEC use only)
b. The Company did not file any Reports on Form 8-K during the quarter
ended March 29, 1997.
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19
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.
------------------
(Registrant)
Date: May 13, 1997 By: /s/ Barry J. Goldstein
----------------------------
Barry J. Goldstein
Executive Vice President-Finance
and Chief Financial Officer
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20
INDEX TO EXHIBITS
Exhibit No. Description Page No.
- ----------- ----------- --------
27.1 Financial Data Schedule (for SEC use only)
20
5
1,000
3-MOS
DEC-27-1997
DEC-29-1996
MAR-29-1997
84,585
0
379,350
13,369
1,241,371
1,734,695
946,089
275,054
2,656,126
991,276
422,897
0
0
1,597
1,196,216
2,656,126
1,772,444
1,772,444
1,372,903
1,648,311
47,378
2,081
5,504
64,146
25,359
38,787
0
0
0
38,787
.24
.24
