<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 March 28, 1998
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________ to ______________________
Commission file number 1-10948
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OFFICE DEPOT, INC.
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(Exact name of registrant as specified in its charter)
Delaware 59-2663954
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
2200 Old Germantown Road, Delray Beach, Florida 33445
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(Address of principal executive offices) (Zip Code)
(561) 278-4800
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(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirement for the past 90 days.
Yes X No
-------- ---------
The registrant had 159,142,921 shares of common stock outstanding as of May 7,
1998.
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OFFICE DEPOT, INC.
INDEX
<TABLE>
<CAPTION>
Page
Part I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1 Financial Statements
------
Consolidated Statements of Earnings for the
13 Weeks Ended March 28, 1998 and
March 29, 1997 3
Consolidated Balance Sheets as of
March 28, 1998 and December 27, 1997 4
Consolidated Statements of Stockholders'
Equity for the 13 Weeks Ended March 28, 1998
and the Year Ended December 27, 1997 5
Consolidated Statements of Cash Flows for the
13 Weeks Ended March 28, 1998 and
March 29, 1997 6
Notes to Consolidated Financial Statements 7 - 9
Item 2 Management's Discussion and Analysis of
------ Financial Condition and Results of Operations 10 - 16
Part II. OTHER INFORMATION 17
SIGNATURE 18
INDEX TO EXHIBITS 19
</TABLE>
2
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OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks 13 Weeks
Ended Ended
March 28, March 29,
1998 1997
--------- ---------
<S> <C> <C>
Sales $1,981,096 $1,772,444
Cost of goods sold and occupancy costs 1,518,638 1,372,903
---------- ----------
Gross profit 462,458 399,541
Store and warehouse operating and selling expenses 306,711 274,617
Pre-opening expenses 1,174 791
General and administrative expenses 55,465 46,066
Amortization of goodwill 1,311 1,312
---------- ----------
364,661 322,786
---------- ----------
Operating profit 97,797 76,755
Other (income) expense
Interest expense, net 941 4,753
Equity in (losses) earnings of investees, net 4,507 1,245
Merger costs -- 6,611
---------- ----------
Earnings before income taxes 92,349 64,146
Income taxes 36,526 25,359
---------- ----------
Net earnings $ 55,823 $ 38,787
========== ==========
Earnings per common share:
Basic $0.35 $0.25
Diluted 0.33 0.24
</TABLE>
3
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OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 28, December 27,
1998 1997
--------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 390,019 $ 199,637
Receivables, net of allowances 422,514 494,942
Merchandise inventories 1,228,658 1,273,753
Deferred income taxes 37,129 35,846
Prepaid expenses 16,357 16,409
----------- -----------
Total current assets 2,094,677 2,020,587
Property and equipment, net 688,726 700,663
Goodwill, net of amortization 183,430 184,711
Other assets 89,951 75,128
----------- -----------
$ 3,056,784 $ 2,981,089
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 853,137 $ 868,725
Accrued expenses 222,070 245,915
Income taxes 52,993 20,669
Short-term borrowings and current maturities
of long-term debt 2,487 2,473
----------- -----------
Total current liabilities 1,130,687 1,137,782
Long-term debt, less current maturities 28,761 29,406
Deferred taxes and other credits 80,194 67,382
Zero coupon, convertible subordinated notes 422,198 417,614
Common stockholders' equity
Common stock - authorized 400,000,000 shares of
$.01 par value; issued 160,907,531 in 1998 and
160,466,708 in 1997 1,609 1,605
Additional paid-in capital 656,498 647,752
Accumulated other comprehensive income (4,037) (5,503)
Retained earnings 742,624 686,801
Less: 2,163,447 shares of treasury stock, at cost (1,750) (1,750)
----------- -----------
1,394,944 1,328,905
----------- -----------
$ 3,056,784 $ 2,981,089
=========== ===========
</TABLE>
4
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OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Accumulated
Common Common Additional Other
Stock Stock Paid-in Retained Treasury Comprehensive Comprehensive
Shares Amount Capital Earnings Stock Income Income
------ ------ ------- -------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 29, 1996 159,417,089 $1,594 $630,049 $527,125 ($1,750) ($1,073)
Comprehensive income:
Net earnings for the period 159,676 $159,676
Foreign currency translation
adjustment (4,430) (4,430)
--------
Comprehensive income $155,246
========
Exercise of stock options (including
tax benefits) 611,084 6 9,598
Issuance of stock under employee
purchase plan 286,410 3 5,286
401(k) plan matching contributions 151,190 2 2,800
Conversion of LYONS to common stock 935 -- 19
----------- ------ -------- -------- ------- ------
Balance at December 27, 1997 160,466,708 1,605 647,752 686,801 (1,750) (5,503)
(Unaudited):
Comprehensive Income:
Net earnings for the period 55,823 55,823
Foreign currency translation
adjustment 1,466 1,466
--------
Comprehensive income $ 57,289
========
Exercise of stock options (including
tax benefits) 338,732 3 6,172
Issuance of stock under employee
purchase plan 58,396 1 1,402
401(k) and deferred compensation plan
matching contributions 41,648 -- 1,129
Conversion of LYONS to common stock 2,047 -- 43
----------- ------ -------- -------- ------- ------
Balance at March 28, 1998 160,907,531 $1,609 $656,498 $742,624 ($1,750) (4,037)
=========== ====== ======== ======== ======= ======
</TABLE>
5
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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>
13 Weeks Ended 13 Weeks Ended
March 28, March 29,
1998 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Cash received from customers $ 1,954,811 $ 1,755,741
Cash paid for merchandise inventories (1,342,434) (1,205,937)
Cash paid for store and warehouse operating,
selling and general and administrative expenses (417,242) (352,074)
Interest received 3,367 510
Interest paid (986) (1,333)
Income taxes paid (3,431) (3,820)
----------- -----------
Net cash provided by operating activities 194,085 193,087
----------- -----------
Cash flows from investing activities
Capital expenditures, net (11,102) (21,183)
----------- -----------
Net cash used in investing activities (11,102) (21,183)
----------- -----------
Cash flows from financing activities
Proceeds from exercise of stock options and sales
of stock under employee stock purchase plan 6,564 2,779
Foreign currency translation adjustment 1,466 (920)
Payments on long- and short-term borrowings (631) (140,576)
----------- -----------
Net cash provided by (used in) financing activities 7,399 (138,717)
----------- -----------
Net increase in cash and cash equivalents 190,382 33,187
Cash and cash equivalents at beginning of period 199,637 51,398
----------- -----------
Cash and cash equivalents at end of period $ 390,019 $ 84,585
=========== ===========
Reconciliation of net earnings to net cash
provided by operating activities
Net earnings $ 55,823 $ 38,787
----------- -----------
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization 26,431 23,691
Provision for losses on inventory and accounts receivable 12,732 10,943
Accreted interest on zero coupon, convertible
subordinated notes 4,628 4,377
Contributions of common stock to employee
benefit and stock purchase plans 1,283 840
Changes in assets and liabilities
Decrease in receivables 69,518 33,837
Decrease in merchandise inventories 35,273 74,274
Increase in prepaid expenses, deferred income
taxes and other assets (18,165) (4,184)
Increase in accounts payable, accrued
expenses and deferred credits 6,562 10,522
----------- -----------
Total adjustments 138,262 154,300
----------- -----------
Net cash provided by operating activities $ 194,085 $ 193,087
=========== ===========
</TABLE>
6
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OFFICE DEPOT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The interim financial statements as of March 28, 1998 and for the 13
week periods ended March 28, 1998 and March 29, 1997 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 27, 1997.
The Company maintains licensing agreements for the operation of Office
Depot stores in Colombia, Hungary, Israel, Poland and Thailand and
joint venture agreements to operate stores in Mexico, France and Japan.
In April 1998, the Company increased its ownership share in its
Thailand joint venture from 20% to 80%, which will require that the
Company consolidate the joint venture's financial results beginning in
the second quarter of 1998.
2. In September 1996, the Company entered into an agreement and plan of
merger with Staples, Inc. ("Staples"). In June 1997, the proposed
merger was blocked by a preliminary injunction granted by the Federal
District Court at the request of the Federal Trade Commission. In July
1997, the Company and Staples announced that the merger agreement had
been terminated. The Company expensed costs of $6,611,000 during the 13
week period ended March 29, 1997 directly related to the terminated
merger. These costs consisted primarily of legal fees, investment
banker fees and personnel retention costs.
3. Basic earnings per common share is based upon the weighted average
number of shares outstanding during each period. Diluted earnings per
common share is determined on the assumption that the zero coupon,
convertible subordinated notes were converted as of the beginning of
the period and that dilutive stock options were exercised. Net earnings
under this assumption have been adjusted for interest on the notes, net
of its income tax effect.
7
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The information required to compute basic and diluted earnings per
share is as follows:
<TABLE>
<CAPTION>
13 Weeks Ended 13 Weeks Ended
March 28, March 29,
1998 1997
-------------- --------------
(in thousands)
<S> <C> <C>
Basic:
Weighted average number of common
shares outstanding 158,502 157,359
======== ========
Diluted:
Net earnings $55,823 $38,787
Interest expense related to convertible
notes, net of tax 2,836 2,692
-------- --------
Adjusted net earnings $58,659 $41,479
======== ========
Weighted average number of common
shares outstanding 158,502 157,359
Shares issued upon assumed conversion
of convertible notes 16,564 16,565
Shares issued upon assumed exercise of
stock options 4,206 1,937
-------- --------
Shares used in computing diluted earnings
per common share 179,272 175,861
======== ========
</TABLE>
4. The Consolidated Statements of Cash Flows do not include the following
non-cash investing and financing transactions:
<TABLE>
<CAPTION>
13 Weeks Ended 13 Weeks Ended
March 28, March 29,
1998 1997
-------------- --------------
(in thousands)
<S> <C> <C>
Additional paid-in capital related
to tax benefit on stock options exercised $860 $381
Common stock issued upon conversion of debt 43 --
</TABLE>
5. 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
8
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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. This
statement is not required to be applied to interim financial statements
in the initial year of its application. The Company has not yet
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 $1,981,096,000 in the first quarter of 1998 from
$1,772,444,000 in the first quarter of 1997. Approximately 34% of the increase
in sales was due to the 42 new office supply stores opened subsequent to the
first quarter of 1997. The remainder of the increase is attributable to the 8%
growth in comparable sales for stores and delivery facilities open for more than
one year at March 28, 1998. Sales of computers, business machines and related
supplies rose slightly as a percentage of total sales in the first quarter of
1998 over the comparable 1997 period, driven primarily by the sales of machine
supplies. The average unit sales prices and comparable store sales of computers
have decreased from 1997, while the number of units sold has increased.
The Company opened one and closed one office supply store in the first quarter
of 1998, bringing the total number of office supply stores open at the end of
the first quarter to 602, compared with 562 stores open at the end of the first
quarter of 1997. The Company also operated 23 contract stationer and delivery
warehouses (customer service centers) at the end of the first quarters of both
1998 and 1997. Several of these are newer, larger facilities which replaced
existing facilities. The Company is currently completing the integration and
conversion of the contract stationer businesses that were previously acquired by
the Company into a national network of facilities, which utilize standard
systems and procedures. Additionally, as of March 28, 1998, the Company operated
three Images(TM), two Office Depot Express(TM) and five Furniture At Work(TM)
stores.
In September 1996, the Company entered into an agreement and plan of merger with
Staples, Inc. ("Staples"). In June 1997, the proposed merger was blocked by a
preliminary injunction granted by the Federal District Court at the request of
the Federal Trade Commission. In July 1997, the Company and Staples announced
that the merger agreement had been terminated. The Company expensed costs of
$6,611,000 during the 13 week period ended March 29, 1997 directly related to
the terminated merger. These costs consisted primarily of legal fees, investment
banker fees and personnel retention costs.
Gross profit as a percentage of sales was 23.3% during the first quarter of 1998
as compared with 22.5% during the comparable quarter of 1997. Gross profit as a
percentage of sales was positively impacted by purchasing efficiencies gained
from vendor discount and rebate programs. While revenue from the sale of
business machines and computers has continued to increase as a percentage of
total sales, the resulting downward pressure on overall gross profit has
declined in the first quarter of 1998 as compared to the first quarter of 1997
since sales of computers, which yield the lowest gross profits in that product
category, have decreased as a percentage of sales while sales of business
machines and consumable machine supplies, which yield much higher margins, have
increased. These improvements in margin were partially offset by lower margins
on copy paper and related products. The Company's gross profit as a
10
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percentage of sales can fluctuate as a result of numerous factors, including,
pricing pressures, changes in product and customer mix, cost fluctuations
resulting from suppliers' pricing pressures, as well as the Company's ability to
achieve purchasing efficiencies through growth in total merchandise purchases.
Additionally, occupancy costs can vary as the Company adds new stores and
warehouses to complete its market plan.
Store and warehouse operating and selling expenses as a percentage of sales
remained consistent at 15.5% in the first quarters of both 1998 and 1997. Store
and warehouse operating and selling expenses consist primarily of payroll and
advertising expenses. While store and warehouse operating and selling expenses
as a percentage of sales continue to be significantly higher in the contract
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. In the stores, 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 impact the Company's first
quarter 1998 operating margins since new store openings were limited. Since
advertising costs are substantially a fixed expense for a market area, they
typically decline as a percentage of total sales as the Company increases its
market penetration. Late in the fourth quarter of 1997, the Company launched a
new advertising campaign, significantly increasing broadcast and cable
television exposure. Increased costs during the first quarter of 1998 in
connection with this campaign and incremental costs incurred in consolidating
and converting its California delivery warehouses offset the decreases in the
contract stationer operating expenses. The Company believes that these increased
expenses will support future growth in overall profitability and operating
margins.
Pre-opening expenses increased to $1,174,000 in the first quarter of 1998 from
$791,000 in the comparable quarter of 1997. Pre-opening expenses in the first
quarter of 1997 include costs associated with replacing one existing warehouse
("customer service center") with a larger, more functional facility. Preopening
expenses in the first quarter of 1998 include costs incurred related to
significantly expanding one customer service center and opening one new customer
service center to replace three existing facilities. Additionally, the Company
added one and closed one office supply store in the first quarter of 1998, as
compared with one new store and one replacement store in the comparable 1997
period. Pre-opening expenses, which currently approximate $150,000 per office
supply prototype store, are predominately incurred during a six-week period
prior to the store opening. Pre-opening expenses for new standard-sized
warehouses are approximately $500,000; however, these expenses may vary with the
size and type of future customer service centers. 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.
11
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General and administrative expenses increased as a percentage of sales to 2.8%
for the quarter ended March 28, 1998 from 2.6% for the comparable 1997 period.
In the first quarter of 1997, uncertainty surrounding the terminated merger
resulted, to some extent, in a decline in corporate personnel. By the end of the
first quarter of 1998, the Company had not only replaced most of the corporate
personnel who left, but had also strengthened its management team with the
addition of several new key executives. While this has resulted in an increase
in general and administrative costs, the Company believes the hiring of these
key executives will provide benefits in the near future. The Company's
continuing commitment to improving the efficiency of its management information
systems and expanding its information systems programming staff has and will
continue to increase general and administrative expenses in the short term.
However, the Company believes that this effort will provide efficiencies in the
future. These increases have been offset by decreases in other general and
administrative expenses, primarily as a result of the Company's ability to
increase sales without a proportionate increase in corporate expenditures.
However, there can be no assurance that the Company will be able to continue to
increase sales without a proportionate increase in corporate expenditures.
LIQUIDITY AND CAPITAL RESOURCES
Since the Company's inception in March 1986, it has relied upon equity capital,
convertible debt, capital equipment leases 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 that allow the Company to finance a portion of its
inventory. The Company utilizes private label credit card programs administered
and financed by financial services companies, which allow the Company to expand
its store sales without the burden of additional receivables.
Sales made to larger customers through the Company's delivery and contract
business are generally made pursuant to regular commercial credit terms under
which the Company carries its own receivables, as opposed to sales made to
smaller customers, who generally pay in cash or by credit card. Thus, as the
Company expands its delivery and contract business, it is expected that the
Company's 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 the nature of such programs, under
which a significant portion of collections are made after an entire program year
has been completed.
In the first quarter of 1998, the Company added one and closed one office supply
store, compared with one new and one replacement office supply store in the
comparable period of 1997. Uncertainty and the loss of certain real estate
personnel resulting from the terminated merger with Staples have negatively
affected the Company's store
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opening program through the first quarter of 1998. Net cash provided by
operating activities was $194,085,000 in the first quarter of 1998, compared
with $193,087,000 provided in the comparable 1997 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
should provide a greater portion of funds required for new store inventories and
other working capital requirements. Increases in contract and commercial sales
from existing delivery warehouses also leverages assets employed and generates
working capital. Cash generated from operations is also affected by increases in
receivables carried and increases in inventory as the Company adds additional
stores and utilizes additional capacity in its warehouses as part of its
expansion plans. Capital expenditures are also affected by the number of stores
and warehouses opened or replaced each year and the increase in computer and
other equipment at the corporate office required to support such expansion. Cash
used for capital expenditures was $11,102,000 in the first three months of 1998
and $21,183,000 in the first three months of 1997.
During the 13 weeks ended March 28, 1998, the Company's cash balance increased
by $190,382,000 and long- and short-term debt decreased by $675,000, excluding
$4,628,000 in non-cash accretion of interest on the Company's zero coupon,
convertible subordinated debt.
The Company entered into a new credit agreement in February 1998, which has
replaced its previous credit agreement, with a syndicate of banks which provides
for a working capital line and letters of credit totaling $300,000,000. The
credit agreement provides that funds borrowed bear interest, at the Company's
option: at a rate based on a grid incorporating credit rating and fixed charge
coverage ratio factors that currently would result in .21 % over LIBOR, at the
higher of .5% over the Federal Funds rate and a base rate linked to the prime
rate, or at a rate determined under a competitive bid facility. The Company must
also pay a facility fee at a rate based on a grid incorporating credit rating
and fixed charge coverage ratio factors that currently would result in a .115%
per annum charge on the total credit facility. The credit facility expires in
February 2003. The credit agreement contains certain restrictive covenants
relating to various financial statement ratios. As of March 28, 1998, the
Company had no outstanding borrowings under the credit facility and had
outstanding letters of credit totaling $10,016,000 under its previous credit
facility. In June 1995, the Company entered into a lease facility under which
the bank agreed to purchase up to $25,000,000 of equipment on behalf of the
Company and lease such equipment to the Company. As of March 28, 1998, the
Company had utilized approximately $21,556,000 of this lease facility.
The Company currently plans to open approximately 80 to 100 stores and
significantly expand at least two delivery warehouses during 1998. 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 inventory
that is not financed by vendors. The cash requirements for a standard 150,000
square foot delivery warehouse, exclusive of pre-
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opening expenses, are 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 inventory not financed by vendors. In
addition, management estimates that each new store and standard-sized warehouse
requires pre-opening expenses of approximately $150,000 and $500,000,
respectively. The new warehouses being completed in 1998 are significantly
larger than our standard delivery warehouses and are expected to require larger
investments and pre-opening costs.
IMPACT OF THE YEAR 2000 ISSUE
The Company is undertaking a comprehensive review of all of its computer
software, computer hardware, and other operating equipment and systems to
mitigate disruption of its business related to the Year 2000 issue. The Company
has retained outside consultants and suppliers to aid in this review. Most of
the Company's computer systems have been developed over the past four years, and
management believes that they are already Year 2000 compliant. The Company does
not expect the costs associated with its Year 2000 compliance program to have a
material effect on its financial position or results of its operations.
Additionally, the Company is reviewing the Year 2000 issue with its suppliers,
shippers, customers and other external business partners. There can be no
assurance until 2000, however, that all of the Company's systems, and the
systems of its suppliers, shippers, customers and other external business
partners will function adequately. If any such systems are not Year 2000
compliant, it could have a material adverse effect on the Company.
NEW ACCOUNTING PRONOUNCEMENTS
The Company will adopt the following Statement of Financial Accounting Standards
("SFAS") in the year ending December 26, 1998.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," establishes standards for reporting certain information about the
Company's operating segments. These disclosures are to include the reported
segments' sales, operating profit, identifiable assets and other certain
information. This Statement is effective for fiscal years beginning after
December 15, 1997 and will require disclosure of prior period information, if
practicable. This statement is not required to be applied to interim financial
statements in the initial year of its application. The Company has not yet
determined the impact of adopting this pronouncement on its financial
statements.
FUTURE OPERATING RESULTS
With the exception of historical matters, the matters discussed in this
Quarterly Report on Form 10-Q are forward-looking statements that involve risks
and uncertainties, including those discussed below. The factors discussed below
could affect the
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Company's actual results and could cause the Company's actual results during the
remainder of 1998 and beyond to differ materially from those expressed in any
forward-looking statement made by the Company.
The Company's strategy of aggressive store growth has been negatively affected
in the short-term by the terminated merger with Staples. The Company currently
plans to open approximately 80-100 additional 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 is expected to increase in the future as both the Company and
these and other companies continue to expand their operations. In the future,
the Company may also face competition from internet-based merchandisers. There
can be no assurance that such competition will not have an adverse effect on the
Company's business in the future.
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. The Company's comparable sales results are affected by a number
of factors, including 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. 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.
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.
Costs related to the integration of acquired facilities in the Company's
delivery business have contributed to increased warehouse expenses, and these
integration costs are
15
<PAGE> 16
expected to continue to impact store and warehouse expenses at decreasing levels
through 1998. The failure to achieve the projected decrease in integration costs
toward the end of 1998 could result in a significant impact on the Company's net
income in the future. 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 utilizing licensing
and joint venture agreements. The Company intends to enter other international
markets as attractive opportunities arise. In addition to the risks described
above arising from the Company's domestic store and delivery operations,
internationally the Company also faces the risk of foreign currency
fluctuations, political and social conditions, obtaining adequate and
appropriate inventory and, since its foreign operations are not wholly-owned,
compromised operating control in certain countries.
The Company believes that its current cash and cash equivalents, 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.
16
<PAGE> 17
PART II. OTHER INFORMATION
Items 1-5 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 March 28,
1998.
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: May 11, 1998 By: /s/ Barry J. Goldstein
------------------------- -------------------------------
Barry J. Goldstein
Executive Vice President-Finance
and Chief Financial Officer
18
<PAGE> 19
INDEX TO EXHIBITS
Exhibit No. Description Page No.
- ----------- ----------- --------
27.1 Financial Data Schedule (for SEC use only)
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 MARCH 28, 1998,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-START> DEC-28-1997
<PERIOD-END> MAR-28-1998
<CASH> 390,019
<SECURITIES> 0
<RECEIVABLES> 287,454
<ALLOWANCES> 21,036
<INVENTORY> 1,228,658
<CURRENT-ASSETS> 2,094,677
<PP&E> 1,048,837
<DEPRECIATION> 360,111
<TOTAL-ASSETS> 3,056,784
<CURRENT-LIABILITIES> 1,130,687
<BONDS> 453,446
0
0
<COMMON> 1,609
<OTHER-SE> 1,393,335
<TOTAL-LIABILITY-AND-EQUITY> 3,056,784
<SALES> 1,981,096
<TOTAL-REVENUES> 1,981,096
<CGS> 1,518,638
<TOTAL-COSTS> 1,826,523
<OTHER-EXPENSES> 56,776
<LOSS-PROVISION> 2,083
<INTEREST-EXPENSE> 5,407
<INCOME-PRETAX> 92,349
<INCOME-TAX> 36,526
<INCOME-CONTINUING> 55,823
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,823
<EPS-PRIMARY> .35
<EPS-DILUTED> .33
</TABLE>
