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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
EXCHANGE ACT OF 1934
For the quarterly period ended March 26, 1994
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
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
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The registrant had 96,375,636 shares of common stock outstanding as of May 4,
1994.
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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 26, 1994
and March 27, 1993 3
Consolidated Balance Sheets as of
March 26, 1994 and December 25, 1993 4
Consolidated Statements of Cash Flows
for the 13 Weeks Ended March 26, 1994
and March 27, 1993 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 10
SIGNATURE 11
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OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks 13 Weeks
Ended Ended
March 26, March 27,
1994 1993
--------- ---------
<S> <C> <C>
Sales $ 994,845 $ 582,115
Cost of goods sold and occupancy costs 762,725 448,483
--------- ---------
Gross profit 232,120 133,632
Store and warehouse operating
and selling expenses 159,261 92,544
Pre-opening expenses 1,259 1,605
General and administrative expenses 27,611 15,610
Amortization of goodwill 1,269 15
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189,400 109,774
--------- ---------
Operating profit 42,720 23,858
Interest expense (income), net 3,242 681
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Earnings before income taxes 39,478 23,177
Income taxes 16,556 9,039
--------- ---------
Net earnings $ 22,922 $ 14,138
========= =========
Earnings per common and
common equivalent share $ 0.23 $ 0.15
========= =========
Average common and common
equivalent shares 99,343 92,831
========= =========
</TABLE>
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OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 26, December 25,
1994 1993
---------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 98,875 $ 140,219
Receivables, net of allowances 174,732 177,008
Merchandise inventories 705,400 649,786
Deferred income taxes 26,185 26,024
Prepaid expenses and refundable income taxes 6,534 4,951
---------- ----------
Total current assets 1,011,726 997,988
Property and Equipment 384,645 344,621
Less accumulated depreciation and amortization 89,893 80,691
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294,752 263,930
Goodwill, net of amortization 199,155 200,462
Other Assets 24,604 23,618
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$1,530,237 $1,485,998
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 414,596 $ 399,766
Accrued expenses 120,098 129,233
Income Taxes 20,728 13,036
Current maturities of long-term debt 2,922 4,372
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Total current liabilities 558,344 546,407
Long-Term Debt, less current maturities 15,566 16,636
Deferred Taxes and Other Credits 6,114 5,478
Zero Coupon, Convertible, Subordinated Notes 354,177 350,298
Common Stockholders' Equity
Common stock - authorized 200,000,000 shares of
$.01 par value; issued 97,558,621 in 1994 and
95,609,233 in 1993 976 997
Additional paid-in capital 433,142 427,360
Foreign currency translation adjustment 557 383
Retained earnings 163,111 140,189
Less: 1,442,298 shares of treasury stock (1,750) (1,750)
---------- ----------
596,036 567,179
---------- ----------
$1,530,237 $1,485,998
========== ==========
</TABLE>
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OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks Ended 13 Weeks Ended
March 26, March 27,
1994 1993
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Cash received from customers $ 996,188 $ 589,420
Cash paid for inventory (797,149) (397,234)
Cash paid for store and warehouse operating,
selling and general administrative expenses (189,818) (122,680)
Interest received 1,261 1,427
Interest paid (624) (224)
Taxes paid (10,902) (122)
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Net cash provided (used) by operating
activities (1,044) 70,587
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Cash flows from investing activities
Capital expenditures-net (41,619) (17,290)
Cash acquired 1,721 -
----------- -----------
Net cash used in investing activities (39,898) (17,290)
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Cash flows from financing activities
Proceeds from exercise of stock options 3,665 2,423
Foreign currency translation adjustment 174 (48)
Proceeds from long- and short-term borrowing 56 -
Payments on long- and short-term debt (2,576) (606)
----------- -----------
Net cash provided by financing activities 1,319 1,769
----------- -----------
Net increase (decrease) in cash and cash
equivalents (39,623) 55,066
Cash and equivalents at beginning of period 138,498 130,192
----------- -----------
Cash and equivalents at end of period $ 98,875 $ 185,258
=========== ===========
Reconciliation of net earnings to net cash
provided (used) by operating activities
Net earnings $ 22,922 $ 14,138
Adjustments to reconcile net earnings
to net cash provided (used) by operating activities
Depreciation and amortization 10,829 6,024
Changes in assets and liabilities
Decrease in accounts receivable 2,276 20,906
Decrease (increase) in inventory (55,614) 54,645
Decrease (increase) in prepaid expenses and
other assets (1,423) 3,362
Increase (decrease) in accounts payable
and other liabilities 19,966 (28,488)
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Total adjustments (23,966) 56,449
----------- -----------
Net cash provided (used) by operating activities $ (1,044) $ 70,587
=========== ===========
</TABLE>
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OFFICE DEPOT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The interim financial statements as of March 26, 1994 and for the 13
week periods ended March 26, 1994 and March 27, 1993 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 25, 1993.
2. Average common and common equivalent shares utilized in computing
first quarter earnings per share include approximately 3,423,000 and
3,191,000 shares in 1994 and 1993, respectively, as a result of
applying the treasury stock method to outstanding stock options.
3. In February 1994, the Company completed the acquisitions of L. E.
Muran Co., Inc., a Boston-based contract stationer, and Yorkship
Press, Inc., a contract stationer servicing Philadelphia and southern
New Jersey. The Company issued 1,557,164 shares of common stock in
connection with these acquisitions. These acquisitions were accounted
for on a "pooling of interests" basis. The Consolidated Balance Sheet
as of December 26, 1993 has been restated to include the financial
position of the combined companies. Results of operations for
the 13 weeks ended March 26, 1994 includes the results of operations
of the combined companies. Results of operations and financial
position prior to December 26, 1993 have not been adjusted due to
immateriality. An adjustment to increase retained earnings as of
December 26, 1993 in the amount of $12,414,000 has been made.
4. The Consolidated Statements of Cash Flows for the 13 weeks ended March
26, 1994 and March 27, 1993 do not include noncash financing
transactions of $2,096,000 and $2,119,000, respectively, relating to
additional paid-in-capital associated with tax benefits of stock
options exercised. In addition, the Consolidated Statements of Cash
Flows for the 13 weeks ended March 26, 1994 and March 27, 1993 do not
include noncash financing transactions of $3,879,000 and $1,884,000,
respectively, associated with accreted interest on convertible,
subordinated notes.
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Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales increased 71% from $582,115,000 in the first quarter of 1993 to
$994,845,000 in the first quarter of 1994. Comparable store sales increased
34% for the first quarter of 1994. The balance of the sales increase was
attributable to the 66 new stores and the 12 contract stationer warehouses
acquired subsequent to the first quarter of 1993. The Company opened eleven
stores in the first quarter of 1994, bringing the total number of stores open
at the end of the first quarter to 362, compared with 297 stores at the end of
the first quarter of 1993. The Company also operated 5 delivery centers and 12
contract stationer warehouses at the end of the first quarter of 1994 compared
to 5 delivery centers at the end of the first quarter of 1993. The Company
expects to combine its contract stationer warehouses and delivery centers in
the future. All of the contract stationer warehouses were acquired subsequent
to the first quarter of 1993. Comparable store sales in the future may be
affected by competition from other stores, the opening of additional stores, or
expansion of contract stationer business in existing markets, and economic
conditions.
Gross profit as a percentage of sales was 23.3% during the first
quarter of 1994, and 23.0% during the comparable quarter in 1993. The increase
was primarily a result of purchasing efficiencies gained through vendor volume
discount programs that increased as purchasing levels continued to increase.
Additionally, the Company benefited from leveraging occupancy costs through
higher average sales per store. These gains were partially offset by lower
gross margins resulting from an increase in sales of lower margin business
machines and computers. Gross profit as a percentage of sales is higher in the
contract stationer portion of the business than the retail store portion as a
result of significantly fewer business machines and computers being sold
through the contract stationer portion.
Store and warehouse operating and selling expenses as a percentage of
sales were 16.0% in the first quarter of 1994, compared with 15.9% in the
comparable period in 1993. Store and warehouse operating expenses, consisting
primarily of payroll and advertising expenses, have increased in the aggregate
due to the Company's expansion program and due to selling expenses incurred by
contract stationers as well as somewhat higher operating expenses incurred by
contract stationers. While 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 are being opened, as new stores typically generate lower sales than the
average mature store, resulting in higher operating and selling expenses as a
percentage of sales for new stores. 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,
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advertising costs, which are substantially a fixed expense for a market area,
should decrease as a percentage of sales. The Company has also continued a
strategy of opening stores in existing markets. While increasing the number of
stores increases operating results in absolute dollars, this may have the
effect of increasing expenses as a percentage of sales since the sales of
certain existing stores in the market may initially be adversely affected.
Pre-opening expenses decreased from $1,605,000 in the first quarter of 1993 to
$1,259,000 in the comparable period in 1994. Pre-opening expenses currently
are approximately $125,000 per store and are predominately incurred during a
six-week period prior to the store opening. These expenses consist principally
of amounts paid for salaries 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 opened.
General and administrative expenses have increased as a percentage of
sales from 2.7% in the first quarter of 1993 to 2.8% in the comparable period
in 1994. General and administrative expenses include, among other costs, site
selection expenses and store management training expenses, and therefore vary
with the number of new store openings in that quarter and the next quarter. The
Company's commitment to improving the efficiency of its computer systems
resulted in an increase in general and administrative expenses in the first
quarter of 1994; however, the Company believes the systems investment will
provide benefits in late 1994 and beyond. General and administrative expenses
also increased with the acquisitions of the contract stationers, as this
portion of the office products industry typically has a higher expense
component than retail stores. Additionally, there are some duplicative
expenses incurred as a result of the acquisitions. These increases have been
partially offset by a decrease in general and administrative expenses as a
percentage of sales for the Company's retail store operations, primarily as a
result of the Company's ability to increase sales without a proportionate
increase in corporate expenditures.
The Company incurred net interest expense of $3,242,000 in the first quarter of
1994, as compared to $681,000 in the first quarter of 1993 primarily due to
$185,000,000 raised in November 1993 via a public offering of zero coupon,
convertible, subordinated notes.
The Company recorded goodwill amortization of $1,269,000 in the first quarter
of 1994 as compared to $15,000 in the 1993 comparable quarter. The increase in
goodwill amortization was attributable to the contract stationer acquisitions
which occurred subsequent to the first quarter of 1993. The increase in the
effective income tax rate for 1994 was due to nondeductible goodwill
amortization.
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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. This allows the Company to expand
its retail sales without the burden of additional receivables since the
programs are administered and financed by financial services companies.
Sales made from the contract stationer warehouses are made under regular
commercial credit terms, where the Company carries its own receivables. As the
Company expands into servicing additional large companies in the contract
stationer portion of its business, it is expected that a greater portion of the
Company's receivables will be carried.
In the first quarter of 1994, the Company added 11 stores as compared to 13
stores for the comparable 1993 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 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 warehouses as
the Company continues to expand its efforts in computers and business machines.
This has resulted in net cash provided (used) in operating activities of
$(1,044,000) and $70,587,000 in the first quarter of 1994 and 1993,
respectively. Capital expenditures are also affected by the number of stores
and warehouses opened 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 $41,619,000 and $17,290,000 in the
first quarter of 1994 and 1993, respectively.
During the three months ended March 26, 1994, the Company's cash balance
decreased approximately $39,623,000 and long- and short-term debt increased by
approximately $1,359,000. The decrease in cash 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.
The Company plans to open a total of approximately 55 to 60 additional stores
during the remainder of 1994. Management estimates that the Company's cash
requirements, exclusive of pre-opening expenses, will be approximately
$1,200,000 for each additional store. In addition, management estimates that
each new store will require pre-opening expenses of approximately $125,000.
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The Company has a credit agreement with its principal bank and a syndicate of
commercial banks to provide for a working capital line of $200,000,000. The
credit agreement provides that funds borrowed will bear interest, at the
Company's option, at either 3/4% over the LIBOR rate or at a base rate linked
to the prime rate. The Company must also pay a fee of 1/4% per annum on the
unused portion of the credit facility. The credit facility expires in
September 1996. 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
$15,000,000 of equipment from the Company and lease such equipment back to the
Company. As of March 26, 1994, there were no borrowings outstanding under the
working capital line and the Company has utilized approximately $7,711,000 of
this lease facility.
The Company's management is continually reviewing its financing
options. Although the Company has the ability to finance its planned expansion
through 1994 from cash on hand, funds received from the LYONS debt offering in
November 1993, funds generated from operations, and funds borrowed under the
Company's credit facilities, the Company will also consider alternative
financing, such as the issuance of equity, debt or convertible debt, if market
conditions make them financially attractive alternatives for funding the
Company's short-term or long-term expansion. The Company has acquired its
contract stationer businesses with cash and the issuance of common stock. The
Company's financing requirements in the future will be affected by the number
of new stores, delivery centers and contract stationer warehouses opened or
acquired.
PART II. OTHER INFORMATION
Items 1 - 6 Not applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OFFICE DEPOT, INC.
(Registrant)
Date: May 9, 1993 By: /s/Barry J. Goldstein
----------------------------
Barry J. Goldstein
Executive Vice President-Finance
and Chief Financial Officer
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