<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 27, 1997
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.
(Exact name of registrant as specified in its charter)
Delaware 59-2663954
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
2200 Old Germantown Road, Delray Beach, Florida 33445
(Address of principal executive offices) (Zip Code)
(561) 278-4800
(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 158,132,255 shares of common stock outstanding as of October
24, 1997.
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OFFICE DEPOT, INC.
INDEX
Page
Part I. FINANCIAL INFORMATION
ITEM 1 Financial Statements
Consolidated Statements of Earnings for the
13 and 39 Weeks Ended September 27, 1997 and
September 28, 1996 3
Consolidated Balance Sheets as of
September 27, 1997 and December 28, 1996 4
Consolidated Statements of Cash Flows for the
39 Weeks Ended September 27, 1997 and
September 28, 1996 5
Notes to Consolidated Financial Statements 6 - 9
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 18
Part II. OTHER INFORMATION 19 - 20
SIGNATURE 21
INDEX TO EXHIBITS 22
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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 39 Weeks 39 Weeks
Ended Ended Ended Ended
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales $1,690,275 $1,509,650 $4,994,544 $4,524,010
Cost of goods sold and occupancy costs 1,291,187 1,175,964 3,835,381 3,510,242
---------- ---------- ---------- ----------
Gross profit 399,088 333,686 1,159,163 1,013,768
Store and warehouse operating
and selling expenses 269,828 232,115 792,349 703,870
Pre-opening expenses 753 1,248 2,336 6,746
General and administrative expenses 49,288 37,512 140,935 122,342
Amortization of goodwill 1,312 1,306 3,935 3,942
---------- ---------- ---------- ----------
321,181 272,181 939,555 836,900
---------- ---------- ---------- ----------
Operating profit 77,907 61,505 219,608 176,868
Other expense (income)
Interest expense, net 3,834 6,609 12,893 17,783
Equity and franchise (income) loss, net 2,505 1,463 4,478 1,830
Merger costs --- --- 16,094 ---
---------- ---------- ---------- ----------
Earnings before income taxes 71,568 53,433 186,143 157,255
Income taxes 27,836 21,575 73,150 63,677
---------- ---------- ---------- ----------
Net earnings $ 43,732 $ 31,858 $ 112,993 $ 93,578
========== ========== ========== ==========
Earnings per common and
common equivalent share:
Primary $0.27 $0.20 $0.71 $0.59
Fully diluted $0.26 $0.20 $0.69 $0.58
</TABLE>
3
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OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 27, December 28,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 194,093 $ 51,398
Receivables, net of allowances 444,498 401,900
Merchandise inventories 1,203,777 1,324,506
Deferred income taxes 41,836 29,583
Prepaid expenses 14,410 14,209
------------ ------------
Total current assets 1,898,614 1,821,596
Property and equipment, net 682,419 671,648
Goodwill, net of amortization 186,089 190,052
Other assets 65,911 57,021
------------ ------------
$ 2,833,033 $ 2,740,317
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 778,823 $ 781,963
Accrued expenses 227,658 177,680
Income taxes 46,408 25,819
Short-term borrowings and current maturities
of long-term debt 2,639 142,339
------------ ------------
Total current liabilities 1,055,528 1,127,801
Long-term debt, less current maturities 39,273 17,128
Deferred taxes and other credits 46,406 39,814
Zero coupon, convertible subordinated notes 413,072 399,629
Common stockholders' equity
Common stock - authorized 400,000,000 shares of
$.01 par value; issued 160,152,946 in 1997 and
159,417,089 in 1996 1,602 1,594
Additional paid-in capital 641,098 630,049
Foreign currency translation adjustment (2,314) (1,073)
Retained earnings 640,118 527,125
Less: 2,163,447 shares of treasury stock, at cost (1,750) (1,750)
------------ ------------
1,278,754 1,155,945
------------ ------------
$ 2,833,033 $ 2,740,317
============ ============
</TABLE>
4
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OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Change in Cash and Cash Equivalents
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
39 Weeks Ended 39 Weeks Ended
September 27, September 28,
1997 1996
------------- --------------
<S> <C> <C>
Cash flows from operating activities
Cash received from customers $ 4,940,436 $ 4,494,896
Cash paid for merchandise inventories (3,539,396) (3,436,292)
Cash paid for store and warehouse operating,
selling and general and administrative expenses (1,005,246) (932,337)
Interest received 2,389 1,088
Interest paid (2,752) (6,272)
Income taxes paid (64,000) (42,293)
------------- -----------
Net cash provided by operating activities 331,431 78,790
------------ -----------
Cash flows from investing activities
Capital expenditures, net (53,249) (127,827)
------------- -----------
Net cash used in investing activities (53,249) (127,827)
------------- -----------
Cash flows from financing activities
Proceeds from exercise of stock options and sales
of stock under employee stock purchase plan 7,609 11,755
Foreign currency translation adjustment (1,241) (246)
Proceeds from long- and short-term borrowings --- 120,833
Payments on long- and short-term borrowings (141,855) (109,724)
------------- -----------
Net cash (used in) provided by financing activities (135,487) 22,618
------------- -----------
Net increase (decrease) in cash and cash equivalents 142,695 (26,419)
Cash and cash equivalents at beginning of period 51,398 61,993
------------- -----------
Cash and cash equivalents at end of period $ 194,093 $ 35,574
============= ===========
Reconciliation of net earnings to net cash
provided by operating activities
Net earnings $ 112,993 $ 93,578
------------- -----------
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities
Depreciation and amortization 72,364 60,358
Provision for inventory shrinkage and bad debts 37,373 21,358
Accreted interest on zero coupon, convertible
subordinated notes 13,443 12,737
Contributions of common stock to employee
benefit and stock purchase plans 2,582 2,712
Changes in assets and liabilities
Increase in receivables (51,628) (16,483)
Decrease in merchandise inventories 92,386 4,337
Increase in prepaid expenses, deferred income
taxes and other assets (22,968) (22,508)
Increase (decrease) in accounts payable, accrued
expenses and deferred credits 74,886 (77,299)
------------- -----------
Total adjustments 218,438 (14,788)
------------- -----------
Net cash provided by operating activities $ 331,431 $ 78,790
============= ===========
</TABLE>
5
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OFFICE DEPOT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The interim financial statements as of September 27, 1997 and for the
13 and 39 week periods ended September 27, 1997 and September 28, 1996
are unaudited; however, such interim financial statements reflect all
adjustments (consisting only of normal recurring accruals) necessary
for a fair presentation of the financial position and the results of
operations for the interim periods presented. The results of operations
for the interim periods presented are not necessarily indicative of the
results to be expected for the full year. The interim financial
statements should be read in conjunction with the audited financial
statements for the year ended December 28, 1996.
2. Net earnings per common and common equivalent share is based upon the
weighted average number of common shares and common equivalent shares
outstanding during each period. Stock options are considered common
stock equivalents. In determining primary earnings per common and
common equivalent share, the zero coupon convertible subordinated notes
are not considered common equivalent shares, however, in determining
fully diluted earnings per common and common equivalent share, such
notes are considered common equivalent shares as if converted as of the
beginning of the applicable period. Net earnings under this assumption
has been adjusted for related interest, net of its income tax effect.
The information required to compute net earnings per common 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 27, September 28, September 27, September 28,
1997 1996 1997 1996
------------- ------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Primary:
Weighted average number of common
and common equivalent shares 159,800 158,612 159,320 158,484
========= ========= ========= =========
Fully diluted:
Net earnings $43,732 $31,858 $112,993 $ 93,578
Interest expense related to convertible
notes, net of tax 2,716 2,598 8,267 7,770
--------- --------- --------- ---------
Adjusted net earnings $46,448 $34,456 $121,260 $101,348
========= ========= ========= =========
Weighted average number of common and
common equivalent shares 160,408 158,861 159,679 158,570
Shares issuable upon assumed conversion
of convertible notes 16,565 16,565 16,565 16,565
--------- --------- --------- ---------
Shares used in computing net earnings per
common and common equivalent share
assuming full dilution 176,973 175,426 176,244 175,135
========= ========= ========= =========
</TABLE>
6
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3. In September 1996, the Company entered into an agreement and plan of
merger with Staples, Inc. ("Staples"). On April 4, 1997, the Federal
Trade Commission ("FTC") initiated legal action to challenge the
proposed merger. The Company and Staples contested the FTC's efforts to
challenge the merger, and a preliminary injunction hearing was held in
May 1997 in the Federal District Court in Washington, DC. On June 30,
1997, the judge granted the FTC's request for a preliminary injunction
to block the proposed merger, and on July 2, 1997, the Company and
Staples announced that the merger agreement had been terminated.
During the 39 week period ended September 27, 1997, the Company
expensed $16,094,000 of costs directly related to the terminated
merger. These costs, consisting primarily of legal fees, investment
banker fees and personnel retention costs, represent estimated costs
incurred through September 27, 1997. No merger costs were recorded in
the 13 week period ended September 27, 1997.
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 27, September 28,
1997 1996
------------- -------------
<S> <C> <C>
(in thousands)
Additional paid-in capital related
to tax benefit on stock options exercised $ 866 $5,427
Buildings and equipment purchased under
capital leases 24,300 5,252
Conversion of convertible subordinated notes
to common stock --- 6
</TABLE>
5. In February 1997, Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share," was issued. SFAS No. 128, which
supersedes Accounting Principles Board ("APB") Opinion No. 15, requires
a dual presentation of basic and diluted earnings per share on the face
of the income statement. Basic earnings per share excludes dilution and
is computed by dividing income or loss attributable to common
stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the entity. Diluted earnings per share is computed
similarly to fully diluted earnings per share under APB Opinion No. 15.
SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier
application is not permitted. When adopted, all prior-period earnings
per share data are required to be restated. For
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the 13 and 39 weeks ended September 27, 1997, basic earnings per
common share, as computed under SFAS No. 128, would be $0.28 and $0.72.
For the 13 weeks ended September 28, 1996, basic earnings per common
share would be the same as primary earnings per common and common
equivalent share shown on the accompanying Consolidated Statements of
Earnings, and for the 39 weeks then ended, basic earnings per common
share would be $0.60. For the 13 and 39 weeks ended September 27, 1997
and September 28, 1996, diluted earnings per common share, as computed
under SFAS No. 128, would be the same as fully diluted earnings per
common and common equivalent share shown on the accompanying
Consolidated Statements of Earnings.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was
issued. SFAS No. 130 requires disclosure of comprehensive income and
its components in a company's general purpose financial statements.
Comprehensive income is defined as "the change in equity (net assets)
of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. It includes all changes
in equity during a period except those resulting from investments by
owners and distributions to owners." Under SFAS No. 130, all items of
comprehensive income are to be reported in a "financial statement that
is displayed with the same prominence as other financial statements."
SFAS 130 does not require a specific format for this financial
statement, but does mandate the display of an amount representing total
comprehensive income for the period (companies are not required to use
the terms "comprehensive income" or "total comprehensive income" in
their financial statements). Additionally, the statement requires the
classification of items comprising other comprehensive income by their
nature, and the accumulated balance of other comprehensive income must
be displayed separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997, with
reclassification of comparative (earlier period) financial statements.
The Company does not believe that SFAS No. 130 will have a material
effect on the disclosures in its consolidated financial statements.
In June 1997, SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," was issued. SFAS No. 131
establishes standards for the way that public companies report selected
information about operating segments in annual financial statements and
requires that such companies report selected information about segments
in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and
services, geographic areas, and major customers. SFAS No. 131, which
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," retains the requirement to report information about major
customers and requires that a public company report financial and
descriptive information about its reportable operating segments.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources
and in assessing performance. SFAS No. 131 requires that a
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public company report a measure of segment profit or loss, certain
specific revenue and expense items, and segment assets. SFAS No. 131
also requires that a public company report descriptive information
about the way that the operating segments were determined, the products
and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used
in the enterprise's general-purpose financial statements, and changes
in the measurement of segment amounts from period to period. SFAS No.
131 is effective for financial statements issued for periods beginning
after December 15, 1997. The Company has not determined the effects, if
any, that SFAS No. 131 will have on the disclosures in its consolidated
financial statements.
9
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Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales increased 12% to $1,690,275,000 in the third quarter of 1997 from
$1,509,650,000 in the third quarter of 1996 and 10% to $4,994,544,000 for the
first nine months of 1997 from $4,524,010,000 for the first nine months of 1996.
Approximately 29% of the increase in sales for the first nine months of 1997 was
due to the 40 new office supply stores opened subsequent to the third quarter of
1996. Comparable sales for stores and delivery facilities open for more than one
year at September 27, 1997 increased 8% for the third quarter of 1997 and 5% for
the first nine months of 1997. Sales of computers, business machines and related
supplies rose slightly as a percentage of total sales in the third quarter of
1997 over the comparable 1996 period, driven primarily by increases in sales of
machine supplies. The average unit sales prices and comparable unit sales of
computers have decreased from 1996. For the first nine months of 1997, average
unit retail prices for copy paper and related products were approximately 20%
below prior year levels as a result of continued weakness in the paper market.
The Company opened nine office supply stores in the third quarter of 1997,
bringing the total number of office supply stores open at the end of the third
quarter to 574, compared with 535 stores open at the end of the third quarter of
1996. The Company also operated 23 contract stationer and delivery warehouses
(customer service centers ["CSC's"]) at the end of the third quarters of both
1997 and 1996. Several of these are newer, larger facilities which replaced
existing facilities acquired as part of the contract stationer acquisitions in
1993 and 1994. As of September 27, 1997, the Company also operated three
Images(TM), two Office Depot Express(TM) and five Furniture At Work(TM) stores.
Gross profit as a percentage of sales was 23.6% and 23.2% during the third
quarter and first nine months of 1997, respectively, as compared with 22.1% and
22.4% during the comparable quarter and first nine months of 1996, respectively.
Improvements in margin for the first nine months and the third quarter of 1997
have been realized primarily through the decrease in sales of computers as a
percentage of total sales, combined with improved gross margins in the computer
category. The Company's management believes that gross profit as a percentage of
sales can fluctuate as a result of numerous factors, including continued
expansion of its contract stationer business, competitive pricing in more market
areas, continued change in product mix, continued fluctuation in paper prices,
as well as the Company's ability to achieve purchasing efficiencies through
growth in total merchandise purchases. Additionally, occupancy costs can
increase in new markets and in certain existing markets where the Company plans
to add new stores and warehouses to complete its market plan.
Store and warehouse operating and selling expenses as a percentage of sales were
16.0% and 15.9% in the third quarter and first nine months of 1997,
respectively, as compared to 15.4% and 15.6% in the third quarter and first nine
months of 1996, respectively. Store and warehouse operating and selling expenses
consist primarily of
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payroll and advertising expenses. While store and warehouse operating and
selling expenses as a percentage of sales continue to be significantly higher in
the contract stationer business than in the retail business, principally due to
the need for a more experienced and more highly compensated sales force, these
expenses have begun to decline as a percentage of sales as the Company
progresses toward full integration of this business. Management expects that as
the Company continues this progress, certain fixed expenses should decrease as a
percentage of sales, thereby improving the Company's overall store and warehouse
operating expenses as a percentage of sales. In the retail business, while the
majority of store expenses vary proportionately with sales, there is a fixed
cost component to these expenses that, as sales increase within each store and
within a cluster of stores in a given market area, should decrease as a
percentage of sales. This benefit in the retail business did not significantly
improve the Company's operating margins for the first nine months of 1997, since
new store openings were limited during this period. When the Company first
enters a large metropolitan market area where the advertising costs for the full
market must be absorbed by the small number of facilities opened, advertising
expenses are initially higher as a percentage of sales. As additional stores are
opened in the same market, advertising costs, which are substantially a fixed
expense for a market area, have been and should continue to be reduced as a
percentage of total sales. The Company has also continued, though 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, it 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 $753,000 in the third quarter of 1997 from
$1,248,000 in the comparable quarter of 1996 and decreased to $2,336,000 from
$6,746,000 in the first nine months of 1997, as compared to the same period in
1996. The Company added 14 new and one replacement office supply store in the
first nine months of 1997, nine of which were added in the third quarter, as
compared with 34 new stores in the comparable 1996 period, eight of which were
added in the third quarter. Pre-opening expenses, which currently approximate
$150,000 per standard office supply store, are predominately incurred during a
six-week period prior to the store opening. CSC pre-opening expenses are
approximately $500,000; however, these expenses may vary with the size and type
of future CSC's. These expenses consist principally of amounts paid for salaries
and occupancy expenses. Since the Company's policy is to expense these items
during the period in which they occur, the amount of pre-opening expenses in
each period is generally proportional to the number of new stores or customer
service centers opened or in the process of being opened during the period.
General and administrative expenses increased as a percentage of sales to 2.9%
for the quarter ended September 27, 1997 from 2.5% for the comparable 1996
period, while these expenses were 2.8% and 2.7% of sales for the first nine
months of 1997 and 1996, respectively. General and administrative expenses in
the third quarter of 1996 were reduced by an adjustment in bonus accruals
related to the Company's performance being below earnings levels eligible for
bonus payments. Still impacting these expenses is the Company's commitment to
improving the efficiency of its
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management information systems and increasing its information systems
programming staff. While this investment in systems has and will continue to
increase general and administrative expenses in the short term, the Company
believes it will provide benefits in the future. Increases resulting from this
initiative have been partially offset by decreases in other general and
administrative expenses, both as a result of the Company's ability to increase
sales without a proportionate increase in corporate expenditures, and as a
result of reduction in certain costs achieved through systems initiatives
already being implemented. However, there can be no assurance that the Company
will be able to continue to increase sales without a proportionate increase in
corporate expenditures.
During the 39 week period ended September 27, 1997, the Company expensed
approximately $16,094,000 of costs directly related to the terminated merger
with Staples. These costs, consisting primarily of legal fees, investment banker
fees and personnel retention costs, represent estimated costs incurred through
September 27, 1997. No merger costs were recorded in the 13 week period ended
September 27, 1997. The Company does not expect to incur significant additional
costs associated with the terminated merger in future periods.
TERMINATED MERGER
In September 1996, the Company entered into an agreement and plan of merger with
Staples, Inc. ("Staples"). On April 4, 1997, the Federal Trade Commission
("FTC") initiated legal action to challenge the proposed merger. The Company and
Staples contested the FTC's efforts to challenge the merger, and a preliminary
injunction hearing was held in May 1997 in the Federal District Court in
Washington, DC. On June 30, 1997, the judge granted the FTC's request for a
preliminary injunction to block the proposed merger, and on July 2, 1997, the
Company and Staples announced that the merger agreement had been terminated.
While the Company believed that the merger with Staples would have been in the
best interests of its customers and shareholders, the Company had prepared
itself to continue on a stand alone basis. Many of the initiatives undertaken in
planning for the merger have and will continue to strengthen the Company's
support systems and operating practices.
LIQUIDITY AND CAPITAL RESOURCES
Since the Company's inception in March 1986, the Company has relied on equity
capital, convertible debt and bank borrowings as the primary sources of its
funds. Since the Company's store sales are substantially on a cash and carry
basis, cash flow generated from operating stores provides a source of liquidity
to the Company. Working capital requirements are reduced by vendor credit terms,
which allow the Company to finance a portion of its inventories. The Company
utilizes private label credit card programs administered and financed by
financial service companies, which allow the Company to expand its store sales
without the burden of additional
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receivables. The Company has also utilized equipment financings as a source of
funds in previous periods.
Sales 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 being made
after an entire program year is completed.
In the first nine months of 1997, the Company added 14 and replaced one office
supply store and added one Furniture At Work(TM) store, compared with 34 new
office supply stores, two new Images(TM) and two new Furniture At Work(TM)
stores added in the comparable period of 1996. Uncertainty and a loss of certain
real estate personnel, both resulting from the terminated merger with Staples,
has had a negative short-term effect on the Company's store opening program. Net
cash provided by operating activities was $331,431,000 in the first nine months
of 1997, compared with net cash provided by operating activities of $78,790,000
in the comparable 1996 period. The Company's successful inventory reduction
initiative contributed significantly to this increase during the first nine
months of 1997. Additionally, 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
$53,249,000 and $127,827,000 in the first nine months of 1997 and 1996,
respectively.
During the 39 weeks ended September 27, 1997, the Company's cash balance
increased by $142,695,000 and long- and short-term debt decreased by
$141,855,000, excluding $13,443,000 in non-cash accretion of interest on the
Company's zero coupon, convertible subordinated debt and the addition of capital
leases of $24,300,000.
The Company has a credit agreement with its principal bank and a syndicate of
commercial banks which provides for a working capital line and letters of credit
totaling $300,000,000. The credit agreement provides that funds borrowed will
bear interest, at the Company's option, at either .3125% over the LIBOR rate,
1.75% over the Federal Funds rate, a base rate linked to the prime rate, or
under a competitive bid facility. The Company must also pay a facility fee of
.1875% per annum on the total credit facility. The credit facility currently
expires June 30, 2000. As of September 27, 1997, the Company had no outstanding
borrowings under the line of credit and had outstanding letters of credit
totaling $13,296,000 under the credit facility. The credit agreement contains
certain restrictive covenants relating to various financial statement ratios. In
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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 27, 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 September
27, 1997, the Company had utilized approximately $21,484,000 of this additional
lease facility.
The Company currently plans to open approximately 25 new office supply stores
and relocate one delivery warehouse during the fourth quarter of 1997.
Management estimates that the Company's cash requirements, exclusive of
pre-opening expenses, will be approximately $1,900,000 for each additional
office supply store, which includes an average of approximately $1,100,000 for
leasehold improvements, fixtures, point-of-sale terminals and other equipment in
the stores, as well as approximately $800,000 for the portion of the store
inventories that is not financed by vendors. The cash requirements, exclusive of
pre-opening expenses, for a delivery warehouse is expected to be approximately
$5,300,000, which includes an average of $3,100,000 for leasehold improvements,
fixtures and other equipment and $2,200,000 for the portion of inventories not
financed by vendors. In addition, management estimates that each new store and
warehouse will require pre-opening expenses of between $115,000 and $500,000,
depending on the type of facility. In January 1996, the Company entered into a
lease commitment for an additional corporate office building which was completed
in July 1997. The lease is classified as a capital lease and has initial annual
lease commitments of approximately $2,200,000.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share," was issued. SFAS No. 128, which supersedes Accounting
Principles Board ("APB") Opinion No. 15, requires a dual presentation of basic
and diluted earnings per share on the face of the income statement. Basic
earnings per share excludes dilution and is computed by dividing income or loss
attributable to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. Diluted
earnings per share is computed similarly to fully diluted earnings per share
under APB Opinion No. 15. SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods;
earlier application is not permitted. When adopted, all prior-period earnings
per share data are required to be restated. For the 13 and 39 weeks ended
September 27, 1997, basic earnings per common share, as computed under SFAS No.
128, would be $0.28 and $0.72. For the 13 weeks ended September 28, 1996, basic
earnings per common share would be the same as primary earnings per common and
common equivalent share shown on the accompanying Consolidated Statements of
Earnings, and for the 39 weeks then ended, basic earnings per common share would
be $0.60. For the 13 and 39 weeks ended September 27, 1997 and September 28,
1996, diluted
14
<PAGE> 15
earnings per common share, as computed under SFAS No. 128, would be the same as
fully diluted earnings per common and common equivalent share shown on the
accompanying Consolidated Statements of Earnings.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued. SFAS
No. 130 requires disclosure of comprehensive income and its components in a
company's general purpose financial statements. Comprehensive income is defined
as "the change in equity (net assets) of a business enterprise during a period
from transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners." Under SFAS No. 130, all
items of comprehensive income are to be reported in a "financial statement that
is displayed with the same prominence as other financial statements." SFAS 130
does not require a specific format for this financial statement, but does
mandate the display of an amount representing total comprehensive income for the
period (companies are not required to use the terms "comprehensive income" or
"total comprehensive income" in their financial statements). Additionally, the
statement requires the classification of items comprising other comprehensive
income by their nature, and the accumulated balance of other comprehensive
income must be displayed separately from retained earnings and additional
paid-in capital in the equity section of the balance sheet. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997, with
reclassification of comparative (earlier period) financial statements. The
Company does not believe that SFAS No. 130 will have a material effect on the
disclosures in its consolidated financial statements.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," was issued. SFAS No. 131 establishes standards for the way
that public companies report selected information about operating segments in
annual financial statements and requires that such companies report selected
information about segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. SFAS No. 131, which supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise,"
retains the requirement to report information about major customers and requires
that a public company report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. SFAS No. 131 requires that a
public company report a measure of segment profit or loss, certain specific
revenue and expense items, and segment assets. SFAS No. 131 also requires that a
public company report descriptive information about the way that the operating
segments were determined, the products and services provided by the operating
segments, differences between the measurements used in reporting segment
information and those used in the enterprise's general-purpose financial
statements, and changes in the measurement of segment amounts from period to
period. SFAS No. 131 is effective for financial statements issued for periods
beginning after December 15, 1997. The Company has not determined the effects,
if any, that SFAS No. 131 will have on the disclosures in its consolidated
financial statements.
15
<PAGE> 16
FUTURE OPERATING RESULTS
With the exception of historical matters, the matters discussed in this
Quarterly Report on Form 10-Q are forward-looking statements that involve risks
and uncertainties, including those discussed below. The factors discussed below
could affect the Company's actual results and could cause the Company's actual
results during the remainder of 1997 and beyond to differ materially from those
expressed in any forward-looking statement made by the Company.
With respect to the terminated merger, the Company and its Board of Directors
believed that the merger would have been in the best interests of its customers
and shareholders; however the Company was fully prepared to continue on a
stand-alone basis. Many of the initiatives undertaken in planning for the
terminated merger have and will continue to strengthen the Company's support
systems and operating practices.
The Company's strategy of aggressive store growth has been negatively affected
in the short-term by the uncertainty of the terminated merger. The Company
currently plans to open approximately 25 additional stores during the fourth
quarter of 1997 and 80 to 90 stores in 1998. There can be no assurance that the
Company will be able to find favorable store locations, negotiate favorable
leases, hire and train employees and store managers, and integrate the new
stores in a manner that will allow it to meet its expansion schedule. The
failure to be able to expand by opening new stores on plan could have a material
adverse effect on the Company's future sales growth and profitability.
The Company competes with a variety of retailers, dealers and distributors in a
highly competitive marketplace. High-volume office supply chains, mass
merchandisers, warehouse clubs, computer stores and contract stationers that
compete directly with the Company operate in most of its geographic markets.
This competition will increase in the future as both the Company and these and
other companies continue to expand their operations. There can be no assurance
that such competition will not have an adverse effect on the Company's business
in the future. The opening of additional Office Depot stores, the expansion of
the Company's contract stationer business in new and existing markets,
competition from other office supply chains, mass merchandisers, warehouse
clubs, computer stores and contract stationers, and regional and national
economic conditions will all affect the Company's comparable sales results. In
addition, the Company's gross margin and profitability would be adversely
affected if its competitors were to attempt to capture market share by reducing
prices.
In addition, as the Company expands the number of its stores in existing
markets, sales of existing stores can suffer. New stores typically take time to
reach the levels of sales and profitability of the Company's existing stores,
and there can be no assurance that new stores will ever be as profitable as
existing stores because of competition from other store chains and the tendency
of existing stores to share sales as the Company opens new stores in its more
mature markets.
16
<PAGE> 17
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 has 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 second quarter of
1998. The failure to achieve the projected decrease in integration costs by the
end of the second quarter of 1998 could result in a significant impact on the
Company's net income in 1998. 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.
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEMS 1 - 3 Not applicable.
- -----------
ITEM 4 Submission of Matters to a Vote of Security Holders
- ------
At the Annual Meeting of Stockholders of Office Depot, Inc. held on October
1, 1997, the following nominees for election as Directors of the
Corporation were elected.
NUMBER OF SHARES
----------------
NOMINEE FOR WITHHELD
------- --- --------
Cynthia R. Cohen 138,200,039 654,176
Herve Defforey 138,219,517 634,698
David I. Fuente 138,194,462 659,753
W. Scott Hedrick 138,254,671 599,544
James L. Heskett 138,243,262 610,953
John C. Macatee 138,218,507 635,708
Michael J. Myers 138,243,943 610,272
Frank P. Scruggs, Jr. 137,593,928 1,260,287
Peter J. Solomon 138,133,487 720,728
The number of shares of broker non-votes for the election of Directors was
none.
The following proposals of the Board of Directors were submitted for
adoption. The board proposals were adopted by the votes indicated (which
constituted the affirmative vote of more than one-half of the shares
voting).
The 1997 - 2001 Office Depot, Inc. Designated Executive Incentive Plan was
approved and adopted.
For the Proposal: 138,873,948 Shares
Against the Proposal: 4,243,712 Shares
Abstaining: 620,455 Shares
The number of shares of broker non-votes in the above proposal was none.
Amendments to the Office Depot, Inc. Omnibus Equity Plan were adopted, and
the Grant of July 1997 Options (as defined in the Proxy Statement) was
approved.
For the Proposal: 113,136,459 Shares
Against the Proposal: 25,084,101 Shares
Abstaining: 633,655 Shares
The number of shares of broker non-votes in the above proposal was none.
18
<PAGE> 19
The Office Depot, Inc. Long-Term Equity Incentive Plan was approved and
adopted.
For the Proposal: 89,716,245 Shares
Against the Proposal: 48,419,621 Shares
Abstaining: 602,249 Shares
The number of shares of broker non-votes in the above proposal was none.
The appointment of Deloitte & Touche LLP as independent public accountants
to audit the Corporation's consolidated financial statements for the fiscal
year ending December 27, 1997 was approved.
For the Proposal: 138,093,315 Shares
Against the Proposal: 277,090 Shares
Abstaining: 367,710 Shares
The number of shares of broker non-votes in the above proposal was none.
ITEM 5 Not applicable.
- ------
ITEM 6 Exhibits and Reports on Form 8-K
- ------
a. 27.1 Financial Data Schedule (for SEC use only)
b. No reports on Form 8-K were filed during the quarter ended September
27, 1997.
19
<PAGE> 20
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: October 29, 1997 By:/S/ BARRY J. GOLDSTIEN
-----------------------------
Barry J. Goldstein
Executive Vice President-Finance
and Chief Financial Officer
20
<PAGE> 21
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27.1 Financial Data Schedule (for SEC use only)
21
<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 27,
1997, 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-27-1997
<PERIOD-START> DEC-29-1996
<PERIOD-END> SEP-27-1997
<CASH> 194,093
<SECURITIES> 0
<RECEIVABLES> 283,909
<ALLOWANCES> 18,088
<INVENTORY> 1,203,777
<CURRENT-ASSETS> 1,898,614
<PP&E> 1,000,893
<DEPRECIATION> 318,474
<TOTAL-ASSETS> 2,833,033
<CURRENT-LIABILITIES> 1,055,528
<BONDS> 454,984
0
0
<COMMON> 1,602
<OTHER-SE> 1,277,152
<TOTAL-LIABILITY-AND-EQUITY> 2,833,033
<SALES> 4,994,544
<TOTAL-REVENUES> 4,994,544
<CGS> 3,835,381
<TOTAL-COSTS> 4,630,066
<OTHER-EXPENSES> 144,870
<LOSS-PROVISION> 9,076
<INTEREST-EXPENSE> 15,994
<INCOME-PRETAX> 186,143
<INCOME-TAX> 73,150
<INCOME-CONTINUING> 112,993
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 112,993
<EPS-PRIMARY> .71
<EPS-DILUTED> .69
</TABLE>
