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 June 28, 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 157,838,901 shares of common stock outstanding as of August 8, 1997.
2 OFFICE DEPOT, INC. INDEX Page Part I. FINANCIAL INFORMATION ITEM 1 Financial Statements ------ Consolidated Statements of Earnings for the 13 and 26 Weeks Ended June 28, 1997 and June 29, 1996 3 Consolidated Balance Sheets as of June 28, 1997 and December 28, 1996 4 Consolidated Statements of Cash Flows for the 26 Weeks Ended June 28, 1997 and June 29, 1996 5 Notes to Consolidated Financial Statements 6 - 8 ITEM 2 Management's Discussion and Analysis of ------ Financial Condition and Results of Operations 9 - 16 Part II. OTHER INFORMATION 17 SIGNATURE 18 INDEX TO EXHIBITS 19 2
3 OFFICE DEPOT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> 13 Weeks 13 Weeks 26 Weeks 26 Weeks Ended Ended Ended Ended June 28, June 29, June 28, June 29, 1997 1996 1997 1996 ----------- ---------- ----------- ----------- <S> <C> <C> <C> <C> Sales $ 1,531,825 $1,381,365 $ 3,304,269 $ 3,014,360 Cost of goods sold and occupancy costs 1,171,291 1,056,661 2,544,194 2,334,278 ----------- ---------- ----------- ----------- Gross profit 360,534 324,704 760,075 680,082 Store and warehouse operating and selling expenses 247,904 224,982 522,521 471,755 Pre-opening expenses 792 4,357 1,583 5,498 General and administrative expenses 45,581 40,387 91,647 84,830 Amortization of goodwill 1,311 1,306 2,623 2,636 ----------- ---------- ----------- ----------- 295,588 271,032 618,374 564,719 ----------- ---------- ----------- ----------- Operating profit 64,946 53,672 141,701 115,363 Other expense (income) Interest expense, net 4,306 6,318 9,059 11,174 Equity and franchise (income) loss, net 728 (78) 1,973 367 Merger costs 9,483 --- 16,094 --- ----------- ---------- ----------- ----------- Earnings before income taxes 50,429 47,432 114,575 103,822 Income taxes 19,955 19,195 45,314 42,102 ----------- ---------- ----------- ----------- Net earnings $ 30,474 $ 28,237 $ 69,261 $ 61,720 =========== ========== =========== =========== Earnings per common and common equivalent share: Primary $0.19 $0.18 $0.44 $0.39 Fully diluted $0.19 $0.18 $0.43 $0.38 </TABLE> 3
4 OFFICE DEPOT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) <TABLE> <CAPTION> June 28, December 28, 1997 1996 ----------- ------------ <S> <C> <C> (Unaudited) ASSETS Current assets Cash and cash equivalents $ 69,905 $ 51,398 Receivables, net of allowances 382,781 401,900 Merchandise inventories 1,154,705 1,324,506 Deferred income taxes 35,570 29,583 Prepaid expenses 12,594 14,209 ---------- ---------- Total current assets 1,655,555 1,821,596 Property and equipment, net 667,034 671,648 Goodwill, net of amortization 187,403 190,052 Other assets 64,624 57,021 ---------- ---------- $2,574,616 $2,740,317 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 641,163 $ 781,963 Accrued expenses 200,623 177,680 Income taxes 27,477 25,819 Short-term borrowings and current maturities of long-term debt 2,393 142,339 ---------- ---------- Total current liabilities 871,656 1,127,801 Long-term debt, less current maturities 15,851 17,128 Deferred taxes and other credits 46,672 39,814 Zero coupon, convertible subordinated notes 408,656 399,629 Common stockholders' equity Common stock - authorized 400,000,000 shares of $.01 par value; issued 159,891,479 in 1997 and 159,417,089 in 1996 1,599 1,594 Additional paid-in capital 637,736 630,049 Foreign currency translation adjustment (2,190) (1,073) Retained earnings 596,386 527,125 Less: 2,163,447 shares of treasury stock, at cost (1,750) (1,750) ---------- ---------- 1,231,781 1,155,945 ---------- ---------- $2,574,616 $2,740,317 ========== ========== </TABLE> 4
5 OFFICE DEPOT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Change in Cash and Cash Equivalents (In thousands) (Unaudited) <TABLE> <CAPTION> 26 Weeks Ended 26 Weeks Ended June 28, June 29, 1997 1996 -------------- -------------- <S> <C> <C> Cash flows from operating activities Cash received from customers $3,279,285 $3,019,591 Cash paid for merchandise inventories (2,360,515) (2,431,936) Cash paid for store and warehouse operating, selling and general and administrative expenses (675,714) (596,391) Interest received 1,363 725 Interest paid (1,955) (3,286) Income taxes paid (47,260) (42,597) ---------- ---------- Net cash provided by (used in) operating activities 195,204 (53,894) ---------- ---------- Cash flows from investing activities Capital expenditures, net (39,474) (79,380) ---------- ---------- Net cash used in investing activities (39,474) (79,380) ---------- ---------- Cash flows from financing activities Proceeds from exercise of stock options and sales of stock under employee stock purchase plan 5,117 9,367 Foreign currency translation adjustment (1,117) 33 Proceeds from long- and short-term borrowings --- 120,833 Payments on long- and short-term borrowings (141,223) (41,363) ---------- ---------- Net cash (used in) provided by financing activities (137,223) 88,870 ---------- ---------- Net increase (decrease) in cash and cash equivalents 18,507 (44,404) Cash and cash equivalents at beginning of period 51,398 61,993 ---------- ---------- Cash and cash equivalents at end of period $ 69,905 $ 17,589 ========== ========== Reconciliation of net earnings to net cash provided by operating activities Net earnings $ 69,261 $ 61,720 ---------- ---------- Adjustments to reconcile net earnings to net cash provided by (used in) operating activities Depreciation and amortization 47,898 39,025 Provision for inventory shrinkage and bad debts 21,019 10,608 Accreted interest on zero coupon, convertible subordinated notes 9,027 8,420 Contributions of common stock to employee benefit and stock purchase plans 1,617 1,895 Changes in assets and liabilities Decrease in receivables 14,590 42,035 Decrease (increase) in merchandise inventories 153,311 (3,674) Increase in prepaid expenses, deferred income taxes and other assets (13,136) (16,198) Decrease in accounts payable, accrued expenses and deferred credits (108,383) (197,725) ---------- ---------- Total adjustments 125,943 (115,614) ---------- ---------- Net cash provided by (used in) operating activities $ 195,204 $ (53,894) ========== ========== </TABLE> 5
6 OFFICE DEPOT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The interim financial statements as of June 28, 1997 and for the 13 and 26 week periods ended June 28, 1997 and June 29, 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. Certain reclassifications were made to prior year statements to conform to current year presentations. The interim financial statements should be read in conjunction with the audited financial statements for the year ended December 28, 1996. 2. Net earnings per common and common equivalent share is based upon the weighted average number of common shares and common share 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 and common equivalent share assuming full dilution was determined on the assumption that the convertible notes were converted as of the beginning of the periods. Net earnings under this assumption have been adjusted for interest, net of its income 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 26 Weeks 26 Weeks Ended Ended Ended Ended June 28, June 29, June 28, June 29, 1997 1996 1997 1996 -------- -------- -------- -------- <S> <C> <C> <C> <C> Primary: Weighted average number of common and common equivalent shares 158,864 158,718 159,080 158,424 ======== ======== ======== ======== Fully Diluted: Net Earnings $30,474 $28,237 $69,261 $61,720 Interest expense related to convertible notes, net of tax 2,860 2,596 5,552 5,136 -------- -------- -------- -------- Adjusted net earnings $33,334 $30,833 $74,813 $66,856 ======== ======== ======== ======== Weighted average number of common and common equivalent shares 159,179 158,720 159,315 158,433 Shares issued 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 175,744 175,285 175,880 174,998 ======== ======== ======== ======== </TABLE> 6
7 3. In September 1996, the Company entered into an agreement and plan of merger with Staples, Inc. ("Staples") and Marlin Acquisition Corp., a wholly-owned subsidiary of 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 in the Federal District Court in Washington, DC was held in May 1997. 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 13 and 26 week periods ended June 28, 1997, the Company expensed approximately $9,483,000 and $16,094,000, respectively, 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 June 28, 1997; however, final billings have not, as yet, been determined for certain litigation and other costs. 4. The Consolidated Statements of Cash Flows do not include the following non-cash investing and financing transactions: <TABLE> <CAPTION> 26 Weeks Ended 26 Weeks Ended June 28, June 29, 1997 1996 -------------- -------------- (in thousands) <S> <C> <C> Additional paid-in capital related to tax benefit on stock options exercised $ 957 $2,021 Equipment purchased under capital leases --- 5,252 Conversion of convertible subordinated --- 6 notes to common stock </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 the 13 and 26 weeks ended June 28, 1997 and June 29, 1996, basic earnings per common share, as computed under SFAS No. 128, would be the same as primary earnings per common and common equivalent share shown on the 7
8 accompanying consolidated statements of earnings. Similarly, for the 13 and 26 weeks ended June 28, 1997 and June 29, 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. 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 those 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," but retains the requirement to report information about major customers, 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. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. 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. However, SFAS No. 131 does not require the reporting of information that is not prepared for internal use if reporting it would be impracticable. 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 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. 8
9 Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Sales increased 11% to $1,531,825,000 in the second quarter of 1997 from $1,381,365,000 in the second quarter of 1996 and 10% to $3,304,269,000 for the first six months of 1997 from $3,014,360,000 for the first six months of 1996. Approximately 38% of the increase in sales for the first six months of 1997 was due to the 38 new office supply stores opened subsequent to the second quarter of 1996. Comparable sales for stores and delivery facilities open for more than one year at June 28, 1997 increased 6% for the second quarter of 1997 and 4% for the first six months of 1997. Sales of computers, business machines and related supplies rose slightly as a percentage of total sales in the second 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. Average unit retail prices for copy paper and related products were approximately 20% below prior year levels as a result of a soft paper market. The Company opened four and closed one office supply store in the second quarter of 1997, bringing the total number of office supply stores open at the end of the second quarter to 565, compared with 527 stores open at the end of the second quarter of 1996. The Company also operated 23 contract stationer and delivery warehouses (customer service centers ("CSC's")) at the end of the second 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 June 28, 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 23.5% and 23.0% during the second quarter and first half of 1997, respectively, as compared with 23.5% and 22.6% during the comparable quarter and first six months of 1996, respectively. Improvements in margin for the first six months of 1997 have been realized primarily through the decrease in sales of computers as a percentage of total sales. 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 16.2% and 15.8% in the second quarter and first six months of 1997, respectively, as compared to 16.3% and 15.7% in the second quarter and first six months of 1996, respectively. 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 9
10 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 six 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, while on a more limited scale than in prior periods, a strategy of opening stores in existing markets. While increasing the number of stores increases operating results in absolute dollars, this also has the effect of increasing expenses as a percentage of sales since the sales of certain existing stores in the market may be adversely affected. Pre-opening expenses decreased to $792,000 in the second quarter of 1997 from $4,357,000 in the comparable quarter of 1996 and decreased to $1,583,000 from $5,498,000 in the first half of 1997, as compared to the same period in 1996. The Company added five new and one replacement office supply store in the first half of 1997, four of which were added in the second quarter, as compared with 26 new stores in the comparable 1996 period, 22 of which were added in the second 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 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 increased as a percentage of sales to 3.0% for the quarter ended June 28, 1997 from 2.9% for the comparable 1996 period, while these expenses were 2.8% as a percentage of sales for both the first half of 1997 and 1996. 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 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 10
11 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. Additionally, uncertainty surrounding the terminated merger with Staples has, to some extent, resulted in a decline in corporate personnel costs and, thus, reduced general and administrative expenses the first half of 1997. During the second quarter and first half of 1997, the Company expensed approximately $9,483,000 and $16,094,000, respectively, 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 June 28, 1997; however, final billings have not, as yet, been determined for certain litigation and other costs. 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") and Marlin Acquisition Corp., a wholly-owned subsidiary of 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 in the Federal District Court in Washington, DC was held in May 1997. 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 has 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 receivables. The Company has also utilized equipment financings as a source of funds in previous periods. 11
12 Sales made to larger customers are generally made under regular commercial credit terms where the Company carries its own receivables, as opposed to sales made to smaller customers, in which payments are generally tendered in cash or by credit card. Thus, as the Company continues to expand into servicing additional large companies, it is expected that the Company's trade receivables will continue to grow. Receivables from vendors under rebate, cooperative advertising and marketing programs, which comprise a significant percentage of total receivables, tend to fluctuate seasonally, growing during the second half of the year and declining during the first half. This is the result of collections generally made after an entire program year is completed. In the first six months of 1997, the Company added five and replaced one office supply store and added one Furniture At Work(TM) store, compared with 26 new office supply stores, two new Images(TM) and one new Furniture At Work(TM) store added in the comparable period of 1996. Uncertainty and a loss of certain real estate personnel, both resulting from the 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 $195,204,000 in the six months of 1997, compared with net cash used by operating activities of $53,894,000 in the comparable 1996 period. As stores mature and become more profitable, and as the number of new stores opened in a year becomes a smaller percentage of the existing store base, cash generated from operations of existing stores should provide a greater portion of funds required for new store inventories and other working capital requirements. Cash utilized for capital expenditures was $39,474,000 and $79,380,000 in the first six months of 1997 and 1996, respectively. During the 26 weeks ended June 28, 1997, the Company's cash balance increased by $18,507,000 and long- and short-term debt decreased by $141,223,000, excluding $9,027,000 in non-cash accretion of interest on the Company's zero coupon, convertible subordinated debt. The Company has a credit agreement with its principal bank and a syndicate of commercial banks which provides for a working capital line and letters of credit totaling $300,000,000. The credit agreement provides that funds borrowed will bear interest, at the Company's option, at either .3125% over the LIBOR rate, 1.75% over the Federal 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 June 28, 1997, the Company had no outstanding borrowings under the line of credit and had outstanding letters of credit totaling $10,828,000 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 June 28, 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 12
13 $25,000,000 of equipment. As of June 28, 1997, the Company had utilized approximately $21,484,000 of this additional lease facility. The Company currently plans to open approximately 35 new office supply stores and relocate one delivery warehouses during the second half 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 will be recorded as such in the third quarter of 1997. This lease will result in a capital lease asset and obligation of approximately $24,000,000 and initial annual lease commitments of approximately $2,200,000. NEW ACCOUNTING PRONOUNCEMENT In February 1997, Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" was issued. SFAS No. 128, which supersedes Accounting Principles Board ("APB") Opinion No. 15, requires a dual presentation of basic and diluted earnings per share on the face of the income statement. Basic earnings per share excludes dilution and is computed by dividing income or loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that 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 26 weeks ended June 28, 1997 and June 29, 1996, basic earnings per common share, as computed under SFAS No. 128, would be the same as primary earnings per common and common equivalent share shown on the accompanying consolidated statements of earnings. Similarly, for the 13 and 26 weeks ended June 28, 1997 and June 29, 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. 13
14 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 those 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," but retains the requirement to report information about major customers, 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. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. 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. However, SFAS No. 131 does not require the reporting of information that is not prepared for internal use if reporting it would be impracticable. 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 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. 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 is 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 14
15 to open approximately 35 additional stores during the second half of 1997. There can be no assurance that the Company will be able to find favorable store locations, negotiate favorable leases, hire and train employees and store managers, and integrate the new stores in a manner that will allow it to meet its expansion schedule. The failure to be able to expand by opening new stores on plan could have a material adverse effect on the Company's future sales growth and profitability. The Company competes with a variety of retailers, dealers and distributors in a highly competitive marketplace. High-volume office supply chains, mass merchandisers, warehouse clubs, computer stores and contract stationers that compete directly with the Company operate in most of its geographic markets. This competition will increase in the future as both the Company and these and other companies continue to expand their operations. There can be no assurance that such competition will not have an adverse effect on the Company's business in the future. The opening of additional Office Depot stores, the expansion of the Company's contract stationer business in new and existing markets, competition from other office supply chains, mass merchandisers, warehouse clubs, computer stores and contract stationers, and regional and national economic conditions will all affect the Company's comparable sales results. In addition, the Company's gross margin and profitability would be adversely affected if its competitors were to attempt to capture market share by reducing prices. In addition, as the Company expands the number of its stores in existing markets, sales of existing stores can suffer. New stores typically take time to reach the levels of sales and profitability of the Company's existing stores and there can be no assurance that new stores will ever be as profitable as existing stores because of competition from other store chains and the tendency of existing stores to share sales as the Company opens new stores in its more mature markets. Fluctuations in the Company's quarterly operating results have occurred in the past and may occur in the future. A variety of factors such as new store openings with their concurrent pre-opening expenses, the extent to which new stores are less profitable as they commence operations, the effect new stores have on the sales of existing stores in more mature markets, the pricing activity of competitors in the Company's markets, changes in the Company's product mix, increases and decreases in advertising and promotional expenses, the effects of seasonality, acquisitions of contract stationers and stores of competitors or other events could contribute to this quarter to quarter variability. The Company has grown dramatically over the past several years and has shown significant increases in its sales, stores in operation, employees and warehouse and delivery operations. In addition, the Company acquired a number of contract stationer operations, and the expenses incurred in the integration of acquired facilities in its delivery business have contributed to increased warehouse expenses. These integration costs are expected to continue to impact store and warehouse expenses at decreasing levels through the end of 1997. The failure to achieve the projected decrease in integration costs towards the end of 1997 could result in a significant impact on the Company's net income. The Company's growth, through both store openings and acquisitions, will continue to require the expansion and upgrading of the 15
16 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. 16
17 PART II. OTHER INFORMATION Item 1 Legal Proceedings - ------ Items 2-5 Not applicable. - --------- Item 6 Exhibits and Reports on Form 8-K - ------ a. See "Index to Exhibits" b. The Company filed a Current Report on Form 8-K on May 30, 1997, effective May 27, 1997, disclosing that it had executed Amendment No. 2 to the September 4, 1996 Agreement and Plan of Merger by and among Office Depot, Staples, Inc. and Marlin Acquisition Corp., a wholly-owned subsidiary of Staples. The amendment modified the merger agreement with respect to various termination provisions. On July 2, 1997, subsequent to a Federal Trade District Court judge granting the Federal Trade Commission a preliminary injunction to block the merger, the Company and Staples, Inc. terminated the merger agreement. 17
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: August 12, 1997 By: /s/ BARRY J. GOLDSTEIN -------------------------------- Barry J. Goldstein Executive Vice President-Finance and Chief Financial Officer 18
19 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION PAGE NO. - ----------- ----------- -------- 3.1 Amended and Restated Bylaws 27.1 Financial Data Schedule (for SEC use only) 19