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 April 1, 1995
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ------------------------
Commission file number 1-10948
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OFFICE DEPOT, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 59-2663954
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2200 Old Germantown Road, Delray Beach, Florida 33445
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(407) 278-4800
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(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirement for the past 90 days.
Yes X No
----- -----
The registrant had 149,824,093 shares of common stock outstanding as of May 11,
1995.
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OFFICE DEPOT, INC.
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Earnings
for the 13 Weeks Ended April 1, 1995
and March 26, 1994 3
Consolidated Balance Sheets as of
April 1, 1995 and December 31, 1994 4
Consolidated Statements of Cash Flows
for the 13 Weeks Ended April 1, 1995
and March 26, 1994 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 - 10
Part II. OTHER INFORMATION 10
SIGNATURE 11
2
3
OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
13 Weeks 13 Weeks
Ended Ended
April 1, March 26,
1995 1994
---------- ----------
Sales $1,351,212 $1,041,396
Cost of goods sold and occupancy costs 1,046,383 804,459
---------- ----------
Gross profit 304,829 236,937
Store and warehouse operating
and selling expenses 203,167 160,459
Pre-opening expenses 3,252 1,259
General and administrative expenses 37,072 29,386
Amortization of goodwill 1,295 1,269
---------- ----------
244,786 192,373
---------- ----------
Operating Profit 60,043 44,564
Interest expense, net 4,819 3,460
---------- ----------
Earnings before income taxes 55,224 41,104
Income taxes 22,750 16,558
---------- ----------
Net earnings $ 32,474 $ 24,546
========== ==========
Earnings per common and
common equivalent share $ .21 $ .16
========== ==========
Average common and common
equivalent shares 153,446 152,378
========== ==========
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4
OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
April 1, December 31,
1995 1994
------------ ------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 28,195 $ 32,406
Receivables, net of allowances 268,638 266,629
Merchandise inventories 1,005,769 936,048
Deferred income taxes 33,635 32,093
Prepaid expenses 13,421 7,046
---------- ----------
Total current assets 1,349,658 1,274,222
Property and Equipment 571,654 524,350
Less accumulated depreciation and amortization 139,946 127,121
---------- ----------
431,708 397,229
Goodwill, net of amortization 199,166 200,449
Other Assets 31,636 32,083
---------- ----------
$2,012,168 $1,903,983
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 612,757 $ 609,914
Accrued expenses 139,398 154,894
Income taxes 35,623 18,051
Current maturities of long-term debt 1,392 4,030
---------- ----------
Total current liabilities 789,170 786,889
Long-Term Debt, less current maturities 91,719 27,460
Deferred Taxes and Other Credits 6,986 8,023
Zero Coupon, Convertible, Subordinated Notes 370,382 366,340
Common Stockholders' Equity
Common stock - authorized 200,000,000 shares of
$.01 par value; issued 151,903,352 in 1995 and
151,536,781 in 1994 1,519 1,515
Additional paid-in capital 458,934 453,117
Foreign currency translation adjustment (2,950) (3,295)
Retained earnings 298,158 265,684
Less: 2,163,447 shares of treasury stock (1,750) (1,750)
---------- ----------
753,911 715,271
---------- ----------
$2,012,168 $1,903,983
========== ==========
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5
OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
(Unaudited)
13 Weeks Ended 13 Weeks Ended
April 1, March 26,
1995 1994
-------------- -----------------
Cash flows from operating activities
Cash received from customers $ 1,319,819 $ 1,029,738
Cash paid for inventory (1,047,341) (798,692)
Cash paid for store and warehouse operating,
selling and general administrative expenses (288,459) (222,083)
Interest received 97 1,566
Interest paid (278) (572)
Taxes paid (6,652) (10,582)
---------- -----------
Net cash used by operating activities (22,814) (625)
---------- -----------
Cash flows from investing activities
Capital expenditures-net (47,326) (40,111)
---------- -----------
Net cash used by investing activities (47,326) (40,111)
---------- -----------
Cash flows from financing activities
Proceeds from exercise of stock options 3,963 3,155
Foreign currency translation adjustment 345 174
Proceeds from long- and short-term borrowings 63,510 6,023
Payments on long- and short-term borrowings (1,889) (6,718)
---------- -----------
Net cash provided by financing activities 65,929 2,634
---------- -----------
Net (decrease) in cash and cash equivalents (4,211) (38,102)
Cash and equivalents at beginning of period 32,406 142,471
---------- -----------
Cash and equivalents at end of period $ 28,195 $ 104,369
========== ===========
Reconciliation of net earnings to net cash
provided (used) by operating activities
Net earnings $ 32,474 $ 24,546
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities
Depreciation and amortization 14,534 11,152
Changes in assets and liabilities
(Increase) decrease in accounts receivable (2,009) 6,745
(Increase) in inventory (69,721) (53,812)
(Increase) in prepaid expenses and other assets (7,874) (7,757)
Increase in accounts payable and other liabilities 9,782 18,501
---------- ----------
Total adjustments (55,288) (25,171)
---------- ----------
Net cash used by operating activities $ (22,814) $ (625)
========== ==========
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OFFICE DEPOT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The interim financial statements as of April 1, 1995 and for the 13 week
periods ended April 1, 1995 and March 26, 1994 are unaudited; however,
such interim statements reflect all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the
financial position and the results of operations for the interim
periods presented. The results of operations for the interim
periods presented are not necessarily indicative of the results to be
expected for the full year. The interim financial statements should be
read in conjunction with the audited financial statements for the year
ended December 31, 1994.
2. Average common and common equivalent shares utilized in computing
first quarter earnings per share include approximately 3,900,000 and
5,135,000 shares in 1995 and 1994, respectively, as a result of
applying the treasury stock method to outstanding stock options.
3. The Consolidated Statements of Cash Flows for the 13 weeks ended
April 1, 1995 and March 26, 1994 do not include noncash financing
transactions of $948,000 and $2,096,000, respectively, relating to
additional paid-in capital associated with tax benefits of stock options
exercised and $910,000 and $508,000, respectively, relating to common
stock and additional paid-in capital associated with stock issued to
the Office Depot Retirement Savings Plan. In addition, the Consolidated
Statements of Cash Flows for the 13 weeks ended April 1, 1995 and March
26, 1994 do not include noncash financing transactions of $4,042,000 and
$3,879,000, respectively, associated with accreted interest on
convertible, subordinated notes.
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Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales increased 30% from $1,041,396,000 in the first quarter of 1994 to
$1,351,212,000 in the first quarter of 1995. Comparable store sales increased
19% for the first quarter of 1995. The balance of the sales increase was
attributable to the 70 new stores (net of 2 closures) and the one customer
service center opened subsequent to the first quarter of 1994. The Company
opened 12 stores in the first quarter of 1995, bringing the total number of
stores open at the end of the first quarter to 432 compared with 362 stores at
the end of the first quarter of 1994. The Company also operated 24 customer
service centers (formerly referred to as delivery centers and warehouses) at
the end of the first quarter of 1995 compared to 23 customer service centers at
the end of the first quarter of 1994. Comparable store sales in the future may
be affected by competition from other stores, the opening of additional stores
or expansion of contract stationer business in existing markets, and general
market conditions.
Gross profit as a percentage of sales was 22.6% during the first quarter of
1995, and 22.8% during the comparable quarter in 1994. The decrease was
primarily a result of lower gross margins resulting from an increase in sales
of lower margin business machines and computers and an increase in paper costs.
These decreases were partially offset by purchasing efficiencies gained through
vendor volume discount programs which increased as purchasing levels continued
to increase, and by leveraging the Company's occupancy costs through higher
average sales per store. Gross margins are higher in the contract stationer
portion of the business due to a lower percentage of business machine and
computer sales. Gross margins may fluctuate in both the retail and contract
stationer business as a result of competitive pricing in more market areas,
continued change in sales product mix and increased occupancy costs in certain
new markets.
Store and warehouse operating and selling expenses as a percentage of
sales were 15.0% in the first quarter of 1995, compared with 15.4% in the
comparable period in 1994. Store and warehouse operating expenses consist
primarily of payroll and advertising expenses. Although the majority of these
expenses vary proportionately with sales, there is a fixed cost component to
these expenses such that, as sales increase within a given market area, store
and warehouse operating and selling expenses typically decrease as a percentage
of sales. This benefit may not be fully realized, however, during periods when
a large number of new stores and customer service centers are being opened, as
new facilities typically generate lower sales than the average mature location,
resulting in higher operating and selling expenses overall as a percentage of
sales due to the new facilities. This percentage is also affected when the
Company enters large metropolitan market areas where the advertising costs for
the full market must be absorbed by the small number of stores initially
opened. As additional stores in these large markets are opened, advertising
costs, which are substantially a fixed expense for a market area, typically
decrease overall as a percentage of sales. The Company has also continued its
strategy of opening additional stores in existing
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markets. Although increasing the number of stores within a market typically
increases operating income in absolute dollars, this may also have the effect
of increasing overall expenses as a percentage of sales, since the sales of
certain existing stores in the market may initially be adversely affected.
Warehouse expenses increased in the first quarter of 1995 as a result of the
additional costs incurred in the integration of the contract stationer
warehouses acquired in 1993 and 1994. The integration is expected to be
substantially completed by the end of 1995.
Pre-opening expenses increased from $1,259,000 in the first quarter of 1994 to
$3,252,000 in the comparable period in 1995. Pre-opening expenses in 1995
include the costs associated with replacing four existing customer service
centers with larger, more functional facilities. Pre-opening expenses
currently are approximately $125,000 per store and $500,000 for a customer
service center, and are predominately incurred during a six-week period prior
to the opening of the store or customer service center. Pre-opening expenses
may vary based on geographical area and customer base being serviced. These
expenses consist principally of amounts paid for salaries, occupancy costs and
supplies. Since the Company's policy is to expense these items during the
period in which they occur, the amount of pre-opening expenses in each quarter
is generally proportional to the number of new stores or warehouses opened
during the period or in the process of being opened.
General and administrative expenses have decreased as a percentage of sales
from 2.8% in the first quarter of 1994 to 2.7% in the comparable period in
1995. General and administrative expenses include, among other costs, site
selection expenses and store management training expenses, and therefore vary
with the number of new store openings in that quarter and the next quarter.
General and administrative expenses have decreased as a percentage of sales,
primarily as a result of the Company's ability to increase sales without a
proportionate increase in corporate expenditures.
The Company incurred net interest expense of $4,819,000 in the first quarter of
1995, as compared to $3,460,000 in the first quarter of 1994. This increase in
interest expense is primarily due to funds borrowed under the Company's
revolving credit agreement.
The Company recorded goodwill amortization of $1,295,000 in the first quarter
of 1995 as compared to $1,269,000 in the 1994 comparable quarter.
The effective income tax rate for 1994 was favorably impacted by the combining
of certain acquired companies which had no provision for income taxes because
they were organized as S corporations (as defined under income tax laws), prior
to the acquisition.
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LIQUIDITY AND CAPITAL RESOURCES
Since the Company's store sales are substantially on a cash and carry basis,
cash flow generated from operating stores provides a source of liquidity to the
Company. Working capital requirements are reduced by vendor credit terms,
which allow the Company to finance a portion of its inventory. The Company
utilizes private label credit card programs administered and financed by
financial service companies; this allows the Company to expand its retail sales
without the burden of additional receivables.
Sales made through the customer service centers are made under regular
commercial credit terms, where the Company carries its own receivables. As the
Company expands into servicing additional large companies in the contract
stationer portion of its business, it is expected that the Company will carry a
greater amount of receivables.
In the first quarter of 1995, the Company added 12 stores, compared with 11
stores for the comparable 1994 period. The Company also replaced four existing
customer service centers with larger, more functional facilities during the
first quarter of 1995. As stores mature and become more profitable, and as the
number of new stores opened in a year becomes a smaller percentage of the
existing store base, cash generated from operations will provide a greater
portion of funds required for new store fixed assets, inventories and other
working capital requirements. Cash generated from operations will be affected
by an increase in receivables carried without outside financing, and an
increase in inventory at the stores and customer service centers as the Company
continues to expand its sales in computers and business machines. Net cash
used in operating activities was $22,814,000 and $625,000 in the first quarters
of 1995 and 1994, respectively. Capital expenditures are also affected by the
number of stores and customer service centers opened or acquired each year and
the increase in computer and other equipment at the corporate office required
to support such expansion. Cash utilized for capital expenditures was
$47,326,000 and $40,111,000 in the first quarters of 1995 and 1994,
respectively.
During the thirteen weeks ended April 1, 1995, the Company's cash balance
decreased approximately $4,211,000 and long- and short-term debt increased by
approximately $61,621,000. The decrease in cash was primarily attributable to
payments for fixed assets and inventories for new stores as well as payments
for inventory mix changes resulting from an increase in business machines and
computer sales. The increase in long- and short-term debt was due to the
Company borrowing of funds against its working capital line to fund continued
growth.
The Company plans to open a total of approximately 60 to 70 additional stores
and five customer service centers during the remainder of 1995. Management
estimates that the Company's cash requirements, exclusive of pre-opening
expenses, will be approximately $1,700,000 and $5,300,000 for each additional
store and customer service center, respectively.
The Company has a credit agreement with its principal bank and a syndicate of
commercial banks to provide for a working capital line of $200,000,000. The
credit
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agreement provides that funds borrowed will bear interest, at the Company's
option, at either 3/4% over the LIBOR rate or at a base rate linked to the
prime rate. The Company must also pay a fee of 1/4% per annum on the unused
portion of the credit facility. The credit facility expires in September 1996.
As of April 1, 1995 the Company had borrowed $78,510,000 under the credit
facility. In addition to the credit facility, the bank has provided a lease
facility to the Company under which the bank has agreed to purchase up to
$15,000,000 of equipment from the Company and lease such equipment back to the
Company. As of April 1, 1995, the Company had approximately $3,569,000
outstanding under this lease facility.
The Company's management continually reviews its financing options. Management
is currently negotiating with its banks to extend the duration of its credit
facility and to increase the amount available under this credit agreement.
Based on preliminary indications from its banks, management believes that the
terms of the revised credit facility will be more favorable than the terms of
the current facility. It is currently anticipated that the Company has the
ability to finance its planned expansion through 1995 from cash on hand, funds
generated from operations, equipment leased under the Company's lease facility,
and funds borrowed under the Company's revised credit facilities. The Company
may also consider alternative financing opportunities including the issuance of
equity, debt or convertible debt, if market conditions make such alternatives
financially attractive methods of funding the Company's short-term or
long-term expansion. The Company's financing requirements in the future will
be affected by the number of new stores and customer service centers opened or
acquired.
PART II. OTHER INFORMATION
Items 1 - 5 Not applicable.
Item 6 Exhibits, Financial Statement Schedules and Reports on Form 8-K
a. Exhibit 27 Financial Data Schedule (for SEC use only)
b. Reports on Form 8-K
The Company filed a Current Report on Form 8-K on
January 19, 1995 containing a restatement of the financial
statements included in its Annual Report on Form 10-K dated
December 25, 1993 to reflect the effects of the acquisitions
of six contract stationers in 1994.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OFFICE DEPOT, INC.
------------------
(Registrant)
Date: May 16, 1995 By: /s/Barry J. Goldstein
-------------------------------
Barry J. Goldstein
Executive Vice President-Finance
and Chief Financial Officer
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5
1,000
U.S. DOLLARS
3-MOS
DEC-30-1995
JAN-01-1995
APR-01-1995
1
28,195
0
272,455
3,817
1,005,769
1,349,658
571,654
139,946
2,012,168
789,170
462,101
1,519
0
0
752,392
2,012,168
1,351,212
1,351,212
1,046,383
1,252,802
38,367
0
4,819
55,224
22,750
32,474
0
0
0
32,474
.21
0
