<PAGE> 1
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 September 28, 1996
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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.
- ------------------------------------------------------------------------------
(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)
(407) 278-4800
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(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirement for the past 90 days.
Yes X No
------ -------
The registrant had 157,107,234 shares of common stock outstanding as of
November 7, 1996.
<PAGE> 2
OFFICE DEPOT, INC.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Earnings for the
13 and 39 Weeks Ended September 28, 1996
and September 30, 1995 3
Consolidated Balance Sheets as of
September 28, 1996 and December 30, 1995 4
Consolidated Statements of Cash Flows for the
39 Weeks Ended September 28, 1996 and
September 30, 1995 5
Notes to Consolidated Financial Statements 6-8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-15
Part II. OTHER INFORMATION 16-17
SIGNATURE 18
INDEX TO EXHIBITS 19
</TABLE>
2
<PAGE> 3
OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks 13 Weeks 39 Weeks 39 Weeks
Ended Ended Ended Ended
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Sales $1,509,650 $1,337,108 $4,524,010 $3,888,730
Cost of goods sold and occupancy costs 1,175,964 1,029,618 3,510,242 3,004,607
---------- ---------- ---------- ----------
Gross profit 333,686 307,490 1,013,768 884,123
Store and warehouse operating
and selling expenses 232,115 197,838 703,870 580,243
Pre-opening expenses 1,248 4,244 6,746 10,408
General and administrative expenses 37,512 37,116 122,342 110,007
Amortization of goodwill 1,306 1,290 3,942 3,882
---------- ---------- ---------- ----------
272,181 240,488 836,900 704,540
---------- ---------- ---------- ----------
Operating Profit 61,505 67,002 176,868 179,583
Other expense
Interest expense, net 6,609 5,151 17,783 16,782
Equity and franchise loss, net 1,463 241 1,830 614
---------- ---------- ---------- ----------
Earnings before income taxes 53,433 61,610 157,255 162,187
Income taxes 21,575 24,768 63,677 65,453
---------- ---------- ---------- ----------
Net earnings $ 31,858 $ 36,842 $ 93,578 $ 96,734
========== ========== ========== ==========
Earnings per common and
common equivalent share:
Primary $ 0.20 $ 0.24 $ 0.59 $ 0.63
Fully diluted $ 0.20 $ 0.23 $ 0.58 $ 0.61
</TABLE>
3
<PAGE> 4
OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 28, December 30,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 35,574 $ 61,993
Receivables, net of allowances 393,356 380,431
Merchandise inventories 1,236,276 1,258,413
Deferred income taxes 25,980 18,542
Prepaid expenses 13,823 11,620
------------ ------------
Total current assets 1,705,009 1,730,999
Property and equipment, net 643,366 565,082
Goodwill, net of amortization 191,352 195,302
Other assets 51,090 39,834
------------ ------------
$ 2,590,817 $ 2,531,217
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 716,033 $ 841,589
Accrued expenses 178,711 166,575
Income taxes 23,359 10,542
Current maturities of long-term debt 2,438 3,309
------------ ------------
Total current liabilities 920,541 1,022,015
Long-Term Debt, less current maturities 129,573 112,340
Deferred Taxes and Other Credits 29,177 11,297
Zero Coupon, Convertible, Subordinated Notes 395,301 382,570
Common Stockholders' Equity
Common stock - authorized-400,000,000 shares of
$.01 par value; issued 159,244,915 in 1996 and
157,961,801 in 1995 1,592 1,580
Additional paid-in capital 625,762 605,876
Foreign currency translation adjustment (1,040) (794)
Retained earnings 491,661 398,083
Less: 2,163,447 shares of treasury stock (1,750) (1,750)
------------ ------------
1,116,225 1,002,995
------------ ------------
$ 2,590,817 $ 2,531,217
============ ============
</TABLE>
4
<PAGE> 5
OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
39 Weeks Ended 39 Weeks Ended
September 28, September 30,
1996 1995
------------- --------------
<S> <C> <C>
Cash flows from operating activities
Cash received from customers $ 4,494,896 $ 3,831,171
Cash paid for merchandise inventories (3,436,292) (2,943,430)
Cash paid for store and warehouse operating,
selling and general and administrative expenses (932,337) (752,205)
Interest received 1,088 696
Interest paid (6,272) (5,189)
Taxes paid (42,293) (55,207)
-------------- ------------
Net cash provided by operating activities 78,790 75,836
-------------- ------------
Cash flows from investing activities
Capital expenditures-net (127,827) (154,373)
-------------- ------------
Net cash used by investing activities (127,827) (154,373)
-------------- ------------
Cash flows from financing activities
Proceeds from exercise of stock options and sales
of stock under employee stock purchase plan 11,755 15,369
Proceeds from stock offerings --- 122,023
Foreign currency translation adjustment (246) 2,308
Proceeds from long- and short-term borrowings 120,833 176,430
Payments on long- and short-term borrowings (109,724) (206,868)
-------------- ------------
Net cash provided by financing activities 22,618 109,262
-------------- ------------
Net increase (decrease) in cash and cash equivalents (26,419) 30,725
Cash and cash equivalents at beginning of period 61,993 32,406
-------------- ------------
Cash and cash equivalents at end of period $ 35,574 $63,131
============== ============
Reconciliation of net earnings to net cash
provided by operating activities
Net earnings $ 93,578 $96,734
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization 60,358 47,252
Provision for losses on inventory shrinkage
and accounts receivable 21,358 11,007
Accreted interest on convertible, subordinated notes 12,737 12,127
Contributions of common stock to employee
benefit and stock purchase plans 2,712 2,349
Changes in assets and liabilities
(Increase) in receivables (16,483) (60,513)
(Increase) decrease in inventories 4,337 (48,078)
(Increase) in prepaid expenses and other assets (22,508) (11,743)
Increase (decrease) in accounts payable, accrued
expenses and deferred credits (77,299) 26,701
-------------- ------------
Total adjustments (14,788) (20,898)
-------------- ------------
Net cash provided by operating activities $ 78,790 $ 75,836
============== ============
</TABLE>
5
<PAGE> 6
OFFICE DEPOT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The interim financial statements as of September 28, 1996 and for the 13
and 39 week periods ended September 28, 1996 and September 30, 1995 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 30, 1995.
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 or when issued. 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:
<TABLE>
<CAPTION>
13 Weeks 13 Weeks 39 Weeks 39 Weeks
Ended Ended Ended Ended
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Primary:
Weighted average number of common
and common equivalent shares 158,612 156,640 158,484 154,576
======== ======== ======== ========
Fully Diluted:
Net Earnings $ 31,858 $ 36,842 $ 93,578 $ 96,734
Interest expense related to convertible
notes, net of tax 2,598 2,428 7,770 7,397
-------- -------- -------- --------
Adjusted net earnings $ 34,456 $ 39,270 $101,348 $104,131
======== ======== ======== ========
Weighted average number of common and
common equivalent shares 158,861 156,675 158,570 154,729
Shares issued upon assumed conversion
of convertible notes 16,565 16,573 16,565 16,580
-------- -------- -------- --------
Shares used in computing net earnings per
common and common equivalent share
assuming full dilution 175,426 173,248 175,135 171,309
======== ======== ======== ========
</TABLE>
6
<PAGE> 7
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, (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. 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 FTC submitted to Staples and Office Depot a request
for additional information and documentary material (the "Second
Request"). Staples and Office Depot are in the process of furnishing
information in response to the Second Request. In connection with the
merger, both companies also issued mutual options to purchase up to 19.9%
of the outstanding stock of the other company under certain conditions.
The merger, when 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
Office Depot Common Stock as of September 28, 1996, the stockholders of
Office Depot 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 Office Depot 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 Office Depot 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 Office Depot
Common Stock otherwise purchasable pursuant to such Office Depot 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 Office Depot Stock Option as determined above (rounded up to the
nearest whole cent). All outstanding Office Depot Stock Options will
become exercisable in full upon the closing of the merger.
7
<PAGE> 8
4. The Consolidated Statements of Cash Flows do not include the following
non-cash investing and financing transactions:
<TABLE>
<CAPTION>
39 Weeks Ended 39 Weeks Ended
September 28, September 30,
1996 1995
-------------- --------------
<S> <C> <C>
Additional paid-in capital related
to tax benefit on stock options exercised $5,427,000 $3,551,000
Equipment purchased under capital leases 5,252,000 ---
Conversion of convertible, subordinated
debt to common stock 6,000 233,000
</TABLE>
5. Effective September 4, 1996, the Company's Board of Directors adopted a
Stockholder Rights Plan (the "Rights Plan"). The Rights Plan provides for
the issuance to stockholders of record on September 16, 1996 one right
for each outstanding share of the Company's common stock. The rights will
become exercisable only if a person or group, other than Staples and its
affiliates, acquires 20% or more of the Company's outstanding common stock
or announces a tender or exchange offer that would result in ownership of
20% or more of the Company's common stock. Each right, should it become
exercisable, will entitle the holder to purchase one one-thousandth of a
share of Junior Participating Preferred Stock, Series A of the Company at
an exercise price of $95.00, subject to adjustment.
In the event of an acquisition, each right will entitle the holder, other
than an acquirer, to receive a number of shares of common stock with a
market value equal to twice the exercise price of the right. In
addition, in the event that the Company is involved in a merger or other
business combination wherein the Company is not the surviving
corporation, or wherein common stock is changed or exchanged, or in a
transaction with any entity other than Staples or any affiliate thereof
in which 50% or more of the Company's assets or earning power is sold,
each holder of a right, other than an acquirer, will have the right to
receive, at the exercise price of the right, a number of shares of common
stock of the acquiring company with a market value equal to twice the
exercise price of the right.
The Company's board of directors may redeem the rights for $0.01 per
right at any time prior to an acquisition.
8
<PAGE> 9
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales increased 13% to $1,509,650,000 in the third quarter of 1996 from
$1,337,108,000 in the third quarter of 1995 and 16% to $4,524,010,000 for the
first nine months of 1996 from $3,888,730,000 for the first nine months of
1995. Approximately 40% of the increase in sales for the first nine months was
due to the 74 new stores opened subsequent to the third quarter of 1995.
Comparable sales for stores and delivery facilities open for more than one year
at September 28, 1996 increased 4% for the third quarter of 1996 and 7% for the
first nine months of 1996. While sales of computers, business machines and
related supplies rose as a percentage of total sales in the first nine months
of 1996 over the comparable 1995 period, sales of computers slowed in the
second and third quarters of 1996 compared to the third quarter of 1995.
Additionally, retail prices of paper-related products have decreased,
negatively affecting sales dollars on these products. The Company opened eight
office supply stores in the third quarter of 1996, bringing the total number
of office supply stores open at the end of the third quarter to 535, compared
with 461 stores open at the end of the third quarter of 1995. The Company
also operated 23 and 24 contract stationer and delivery warehouses (customer
service centers) at the end of the third quarters of 1996 and 1995,
respectively. 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 third quarter of 1996, the Company opened
one Furniture At Work(TM) store. As of September 28, 1996, the Company
operated four Images(TM) and three Furniture At Work(TM) stores.
Gross profit as a percentage of sales was 22.1% and 22.4% during the third
quarter and first nine months of 1996, respectively, as compared with 23.0% and
22.7% during the comparable quarter and first nine months of 1995,
respectively. Sales of lower margin business machines and computers, while
slowing somewhat, continue to result in downward pressure on gross profit
percentages. Improved operating efficiencies in the Company's crossdock
facilities have partially offset this negative impact. Additionally, margins
in the contract stationer business in 1996 have improved over comparable 1995
periods. 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, increased competitive pricing
pressure in more market areas, continued change in sales 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 15.4% and 15.6% in the third quarter and first nine months of 1996,
respectively, as compared to 14.8% and 14.9% in the third quarter and first
nine months of 1995, respectively. Store and warehouse operating and selling
expenses, consisting primarily of payroll and advertising expenses, have
9
<PAGE> 10
increased primarily due to additional costs incurred in the integration of the
Company's contract stationer and delivery business. These expenses as a
percentage of sales are significantly higher in the contract stationer
business than in the retail business, principally due to the need for a more
experienced and more highly compensated sales force. Management expects that
as the Company progresses toward full integration of this business, certain
fixed expenses will decrease as a percentage of sales, thereby improving the
Company's overall store and warehouse operating expense ratio. However, this
improvement in integration-related expenses is not expected to significantly
impact the Company's expenses until 1997. Similarly, 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 has partially
offset the integration-related impact on operating expenses in the contract
stationer business, as the number of new stores has declined as a percentage
of the Company's total retail sales base. Additionally, when the Company
enters large metropolitan market areas 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 in these large markets are opened, 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 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 $1,248,000 in the third quarter of 1996 from
$4,244,000 in the comparable quarter in 1995 and from $10,408,000 to $6,746,000
in the first nine months of 1996 as compared to the same period in 1995. The
Company added 34 office supply stores in the first nine months of 1996, eight
of which were in the third quarter, as compared with 42 in the comparable 1995
period, 13 of which were in the third quarter. Pre-opening expenses in the
first nine months of 1995 include costs associated with replacing six existing
customer service centers with larger, more functional facilities, while the
first nine months of 1996 pre-opening expenses include costs associated with
replacing only two customer service centers. Pre-opening expenses, which
currently approximate $150,000 per standard office supply store and greater for
a megastore, are predominately incurred during a six-week period prior to the
store opening. Warehouse pre-opening expenses approximate $500,000; however,
these expenses may vary with the size of future warehouses. 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 decreased as a percentage of sales to 2.5%
and 2.7% for the quarter and nine months ended September 28, 1996,
respectively, from 2.8% for the comparable 1995 periods. However, 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 increases general and
administrative expenses in current periods, partially offsetting other
10
<PAGE> 11
efficiencies, the Company believes the systems investment will provide
benefits in the future. General and administrative expenses in prior years
had been higher as a percentage of sales in the contract stationers' business
than in the retail business. However, these expenses have decreased in 1996
as a percentage of sales, positively affecting the Company's overall general
and administrative expenses. There can be no assurance that the Company will
be able to continue to increase sales without a proportionate increase in
corporate expenditures.
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, (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. 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 FTC submitted to Staples and Office
Depot a request for additional information and documentary material (the
"Second Request"). Staples and Office Depot are in the process of furnishing
information in response to the Second Request. In connection with the merger,
both companies also issued mutual options to purchase up to 19.9% of the
outstanding stock of the other company under certain conditions.
The merger, when 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 Office
Depot Common Stock as of September 28, 1996, the stockholders of Office Depot
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 Office Depot 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 Office
Depot 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 Office Depot Common Stock otherwise
purchasable pursuant to such Office Depot 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 Office Depot Stock Option as determined
above (rounded up to the nearest whole cent). All outstanding Office Depot
Stock Options will become exercisable in full upon the closing of the merger.
11
<PAGE> 12
The pending merger with Staples has not had a material effect on the Company's
results of operations for the period ended September 28, 1996. There can be no
assurance that the pending Merger will not have a material effect on the
Company in the future.
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 capital equipment financings as a source of funds.
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
credit cards. 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 nine months of 1996, the Company added 34 office supply stores,
compared with 42 new office supply stores added in the comparable period of
1995. Net cash provided by operating activities was $78,790,000 in the first
nine months of 1996, compared with $75,836,000 provided in the comparable 1995
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 $127,827,000
and $154,373,000 in the first nine months of 1996 and 1995, respectively.
During the 39 weeks ended September 28, 1996, the Company's cash balance
decreased by $26,419,000 and long- and short-term debt increased by
$11,104,000, excluding $12,737,000 in non-cash accretion of interest on the
Company's zero coupon, convertible debt and $5,252,000 of equipment purchased
under capital leases.
12
<PAGE> 13
The Company has a credit agreement with its principal bank and a syndicate of
commercial banks to provide 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: the higher of the prime rate
or .5% over the Federal Funds rate; the LIBOR rate plus .25% to .375%,
depending on the fixed charge coverage ratio; 1.75% over the Federal Funds
rate; or under a competitive bid facility. The Company must also pay a
facility fee of between .125% and .25% per annum, depending on the Company's
fixed charge coverage ratio on the available and unused portion of the credit
facility. The credit facility currently expires June 30, 2000. As of
September 28, 1996, the Company had outstanding borrowings of $110,881,000 and
had outstanding letters of credit totaling $15,596,000 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 September 28, 1996, the Company has
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 September 28, 1996, the Company has utilized
approximately $7,155,000 of this additional lease facility.
The Company plans to open 25 to 30 new office supply stores and replace one
delivery warehouse during the remainder of 1996. Management estimates that the
Company's cash requirements, exclusive of pre-opening expenses, will be
approximately $1,700,000 for each additional office supply store, which
includes an average of approximately $900,000 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 approximately $150,000 and $500,000,
respectively. Pre-opening expenses for a megastore will be higher than a
regular office supply store.
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 1996 and beyond to differ materially
from those expressed in any forward- looking statement made by the Company.
13
<PAGE> 14
With respect to the proposed Merger, the Board of Directors of both Office
Depot and Staples believe the combined company will have greater financial
strength, operational efficiencies, earning power and growth potential than
either company would have on its own. These potential benefits include
synergies of the combined company in reduced product costs, advertising and
marketing expenses, distribution costs and general and administrative expenses.
Additionally, management believes the combined company will be able to take
advantage of a complementary store network, a complementary delivery
network, and the best of personnel and operating systems and practices
employed by the two companies.
Integration of the operations of the two companies and management will be a
time-consuming process, and there can be no assurance that this integration
will result in the achievement of the anticipated synergies and other benefits
expected to be realized from the Merger. Moreover, the integration of these
organizations will require the dedication of management resources, which may
temporarily distract attention from the day-to-day business of the combined
company.
The Company competes with a variety of retailers, dealers and distributors in a
highly competitive marketplace. High-volume office supply chains 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 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.
The Company plans to continue its strategy of aggressive store growth, opening
25 to 30 new office supply stores during the remainder of 1996. 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.
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
14
<PAGE> 15
have on the sales of existing stores in more mature markets, the pricing
activity of both stores and contract stationers 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 1996. The
failure to achieve the projected decrease in integration costs towards the end
of 1996 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.
15
<PAGE> 16
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
On September 6, 1996, a complaint was filed in the Court of Chancery of the
State of Delaware in and for New Castle County, entitled DR. WILLIAM A.
DOMBROWSKI v. OFFICE DEPOT, INC. ET AL., Civil Action No. 15203. Among other
things, this lawsuit asserts a claim for breach of fiduciary duty against
members of the Office Depot Board, seeks to be certified as a class action and
seeks injunctive relief in connection with the Merger. Office Depot and the
Office Depot Board believe that this lawsuit is without merit and will defend
against it vigorously.
Item 2 Changes in Securities
Effective September 4, 1996, the Company's Board of Directors adopted a
Stockholder Rights Plan (the "Rights Plan"). The Rights Plan provides for the
issuance to stockholders of record on September 16, 1996 one right for each
outstanding share of the Company's common stock. The rights will become
exercisable only if a person or group, other than Staples and its affiliates,
acquires 20% or more of the Company's outstanding common stock or announces a
tender or exchange offer that would result in ownership of 20% or more of the
Company's common stock. Each right, should it become exercisable, will
entitle the holder to purchase one one-thousandth of a share of Junior
Participating Preferred Stock, Series A of the Company at an exercise price
of $95.00, subject to adjustment.
In the event of an acquisition, each right will entitle the holder, other than
an acquirer, to receive a number of shares of common stock with a market value
equal to twice the exercise price of the right. In addition, in the event
that the Company is involved in a merger or other business combination
wherein the Company is not the surviving corporation, or wherein common stock
is changed or exchanged, or in a transaction with any entity other than
Staples or any affiliate thereof in which 50% or more of the Company's assets
or earning power is sold, each holder of a right, other than an acquirer,
will have the right to receive, at the exercise price of the right, a number
of shares of common stock of the acquiring company with a market value equal
to twice the exercise price of the right.
The Company's board of directors may redeem the rights for $0.01 per right at
any time prior to an acquisition.
Items 3-5 Not applicable.
Item 6 Exhibits and Reports on Form 8-K
a. See "Index to Exhibits"
b. The Company filed a report on Form 8-K on September 6, 1996,
effective September 4, 1996, disclosing that it had entered into an
agreement and plan of merger (the "Merger Agreement") with Staples, Inc.
16
<PAGE> 17
("Staples") and Marlin Acquisition Corp., a wholly-owned subsidiary of
Staples ("Acquisition Sub"). Pursuant to the Merger Agreement, (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 common stock of Office Depot will be converted into
the right to receive 1.14 shares of common stock of Staples. In
connection with the merger, both companies also issued mutual options to
purchase up to 19.9% of the outstanding stock of the other company under
certain conditions.
The Company filed a report on Form 8-K on September 16, 1996, effective
September 4, 1996, disclosing that the Company's Board of Directors
adopted a Stockholder Rights Plan (the "Rights Plan"). The Rights Plan
provides for the issuance of one right for each outstanding share of the
Company's common stock. The rights will become exercisable only if a
person or group, other than Staples and its affiliates, acquires 20% or
more of the Company's outstanding common stock or announces a tender or
exchange offer that would result in ownership of 20% or more of the
Company's common stock. Each right, should it become exercisable, will
entitle the holder to purchase one one-thousandth of a share of Junior
Participating Preferred Stock, Series A of the Company at an exercise
price of $95.00, subject to adjustment.
In the event of an acquisition, each right will entitle the holder, other
than an acquirer, to receive a number of shares of common stock with a
market value equal to twice the exercise price of the right. In
addition, in the event that the Company is involved in a merger or other
business combination with any entity other than Staples or an affiliate
thereof wherein the Company is not the surviving corporation, or wherein
common stock is changed or exchanged, or in a transaction with any entity
other than Staples or an affiliate thereof in which 50% or more of its
assets or earning power are sold, each holder of a right, other than an
acquirer, will have the right to receive, at the exercise price of the
right, a number of shares of common stock of the acquiring company with a
market value equal to twice the exercise price of the right.
The Company's board of directors may redeem the rights for $0.01 per
right at any time prior to an acquisition.
17
<PAGE> 18
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: November 12, 1996 By: /s/ Barry J. Goldstein
--------------------------------
Barry J. Goldstein
Executive Vice President-Finance
and Chief Financial Officer
18
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
2.1 Agreement and Plan of Merger dated as of
September 4, 1996 among Staples, Inc.,
Marlin Acquisition Corp. and Office Depot, Inc. *
4.1 Rights Agreement dated as of September 4, 1996
between Office Depot, Inc. and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent,
including the form of Certificate of Designation,
Preferences and Rights of Junior Participating
Preferred Stock, Series A attached thereto as
Exhibit A, the form of Rights Certificate attached
thereto as Exhibit B and the Summary of Rights
attached thereto as Exhibit C. **
10.1 Stock Option Agreement dated as of September 4,
1996 between Staples, Inc., as Grantee, and
Office Depot, Inc. as Grantor. *
10.2 Stock Option Agreement dated as of September 4,
1996 between Office Depot, Inc., as Grantee, and
Staples, Inc., as Grantor. *
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
*Incorporated by reference to the Company's Current Report on Form 8-K, filed
with the Commission on September 6, 1996.
**Incorporated by reference to the Company's Registration Statement on
Form 8-A, filed with the Commission on September 6, 1996.
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF OFFICE DEPOT, INC. FOR THE QUARTER ENDED SEPTEMBER
28, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> SEP-28-1996
<CASH> 35,574
<SECURITIES> 0
<RECEIVABLES> 237,366
<ALLOWANCES> 5,993
<INVENTORY> 1,236,276
<CURRENT-ASSETS> 1,705,009
<PP&E> 878,431
<DEPRECIATION> 235,065
<TOTAL-ASSETS> 2,590,817
<CURRENT-LIABILITIES> 920,541
<BONDS> 527,312
0
0
<COMMON> 1,592
<OTHER-SE> 1,114,633
<TOTAL-LIABILITY-AND-EQUITY> 2,590,817
<SALES> 1,509,650
<TOTAL-REVENUES> 1,509,650
<CGS> 1,175,964
<TOTAL-COSTS> 1,409,327
<OTHER-EXPENSES> 38,818
<LOSS-PROVISION> 2,518
<INTEREST-EXPENSE> 7,206
<INCOME-PRETAX> 53,433
<INCOME-TAX> 21,575
<INCOME-CONTINUING> 31,858
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,858
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
