<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
EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 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
---------------------------------------------------------
OFFICE DEPOT, INC.
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(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
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(Address of principal executive offices) (Zip Code)
(561) 438-4800
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
requirements for the past 90 days.
Yes [X] No [ ]
The registrant had 245,741,094 shares of common stock outstanding as of
November 6, 1998.
<PAGE> 2
OFFICE DEPOT, INC.
Form 10-Q - Quarter ended September 26, 1998
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statements of Earnings for the
13 and 39 Weeks Ended September 26, 1998 and
September 27, 1997 3
Consolidated Balance Sheets as of
September 26, 1998 and December 27, 1997 4
Consolidated Statements of Stockholders'
Equity for the 39 Weeks Ended September 26, 1998
and the Year Ended December 27, 1997 5
Consolidated Statements of Cash Flows for the
39 Weeks Ended September 26, 1998 and
September 27, 1997 6
Notes to Consolidated Financial Statements 7-10
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-21
ITEM 3. Not Applicable
PART II. OTHER INFORMATION 22-23
SIGNATURE 24
INDEX TO EXHIBITS 25
</TABLE>
2
<PAGE> 3
OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks 13 Weeks 39 Weeks 39 Weeks
Ended Ended Ended Ended
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales $ 2,234,900 $ 2,030,549 $ 6,702,135 $ 6,014,081
Cost of goods sold and occupancy costs 1,612,864 1,493,347 4,875,956 4,440,532
----------- ----------- ----------- -----------
Gross profit 622,036 537,202 1,826,179 1,573,549
Store and warehouse operating
and selling expenses 402,737 362,571 1,206,704 1,072,369
Pre-opening expenses 3,663 753 7,676 2,336
General and administrative expenses 83,772 68,830 233,065 196,988
Amortization of goodwill 1,555 1,537 4,627 4,610
----------- ----------- ----------- -----------
491,727 433,691 1,452,072 1,276,303
----------- ----------- ----------- -----------
Operating profit 130,309 103,511 374,107 297,246
Other income (expense)
Interest income (expense), net 1,063 (3,345) 30 (11,160)
Equity in earnings (losses)
of investees, net (691) (2,505) (8,732) (4,478)
Merger and restructuring costs (87,815) -- (87,815) (16,094)
----------- ----------- ----------- -----------
Earnings before income taxes 42,866 97,661 277,590 265,514
Income taxes 27,118 35,923 113,072 97,212
----------- ----------- ----------- -----------
Net earnings $ 15,748 $ 61,738 $ 164,518 $ 168,302
=========== =========== =========== ===========
Earnings per common share:
Basic $ 0.06 $ 0.26 $ 0.67 $ 0.70
Diluted 0.06 0.24 0.65 0.67
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
<PAGE> 4
OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 26, December 27,
1998 1997
------------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 542,966 $ 239,877
Short-term investments 61,015 17,868
Receivables, net of allowances 659,636 652,786
Merchandise inventories 1,192,269 1,397,266
Deferred income taxes 47,059 35,846
Prepaid expenses 40,733 37,436
----------- -----------
Total current assets 2,543,678 2,381,079
Property and equipment, net 903,359 846,676
Goodwill, net of amortization 209,916 212,344
Other assets 122,823 80,720
----------- -----------
$ 3,779,776 $ 3,520,819
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 947,150 $ 988,738
Accrued expenses 293,000 265,267
Income taxes 32,284 31,138
Current maturities of long-term debt 3,483 2,473
----------- -----------
Total current liabilities 1,275,917 1,287,616
Long-term debt, less current maturities 35,593 29,406
Deferred taxes and other credits 93,616 68,545
Zero coupon, convertible subordinated notes 430,550 417,614
----------- -----------
1,835,676 1,803,181
----------- -----------
Stockholders' equity
Common stock - authorized 800,000,000 shares of
$.01 par value; issued 247,603,180 in 1998 and
245,109,330 in 1997 2,476 2,451
Additional paid-in capital 813,699 762,911
Unamortized value of long-term incentive stock grant (2,958) (3,210)
Accumulated other comprehensive income (8,410) (19,289)
Retained earnings 1,141,043 976,525
Less: 2,163,447 shares of treasury stock, at cost (1,750) (1,750)
----------- -----------
1,944,100 1,717,638
----------- -----------
$ 3,779,776 $ 3,520,819
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
<PAGE> 5
OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
UNAMORTIZED
COMMON COMMON ADDITIONAL VALUE OF LONG-
STOCK STOCK PAID-IN TERM INCENTIVE
SHARES AMOUNT CAPITAL STOCK GRANT
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at December 28, 1996 243,086,664 $ 2,431 $ 732,955 $ (5,244)
Comprehensive income:
Net earnings for the period
Foreign currency translation adjustment
Comprehensive income
Exercise of stock options (including
tax benefits) 1,818,162 18 23,105
Issuance of stock under employee
stock purchase plan 352,379 4 6,336
401(k) plan matching contributions 151,190 1 2,800
Conversion of LYONs to common stock 935 -- 19
Cancellation of long-term incentive
stock grant (300,000) (3) (2,304) 1,640
Amortization of long-term incentive
stock grant -- -- -- 394
------------- ------------- ------------- -------------
Balance at December 27, 1997 245,109,330 2,451 762,911 (3,210)
(Unaudited):
Comprehensive Income:
Net earnings for the period
Foreign currency translation adjustment
Comprehensive income
Exercise of stock options (including
tax benefits) 2,139,952 21 41,387
Issuance of stock under employee
stock purchase plan 183,950 2 4,885
401(k) and deferred compensation plans
matching contributions 118,465 1 3,401
Conversion of LYONs to common stock 51,483 1 1,115
Amortization of long-term incentive
stock grant -- -- -- 252
------------- ------------- ------------- -------------
Balance at September 26, 1998 247,603,180 $ 2,476 $ 813,699 $ (2,958)
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
RETAINED TREASURY COMPREHENSIVE COMPREHENSIVE
EARNINGS STOCK INCOME INCOME
------------- ------------ ------------- -------------
<S> <C> <C> <C>
Balance at December 28, 1996 $ 741,664 $ (1,750) $ (946)
Comprehensive income:
Net earnings for the period 234,861 $ 234,861
Foreign currency translation adjustment (18,343) (18,343)
------------
Comprehensive income $ 216,518
============
Exercise of stock options (including
tax benefits)
Issuance of stock under employee
stock purchase plan
401(k) plan matching contributions
Conversion of LYONs to common stock
Cancellation of long-term incentive
stock grant
Amortization of long-term incentive
stock grant
------------- ------------ ------------- ------------
Balance at December 27, 1997 976,525 (1,750) (19,289)
(Unaudited):
Comprehensive Income:
Net earnings for the period 164,518 $ 164,518
Foreign currency translation adjustment 10,879 10,879
------------
Comprehensive income $ 175,397
============
Exercise of stock options (including
tax benefits)
Issuance of stock under employee
stock purchase plan
401(k) and deferred compensation plans
matching contributions
Conversion of LYONs to common stock
Amortization of long-term incentive
stock grant
------------- ------------- ------------
Balance at September 26, 1998 $ 1,141,043 $ (1,750) $ (8,410)
============= ============= ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
5
<PAGE> 6
OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Change in Cash and Cash Equivalents
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
39 Weeks Ended 39 Weeks Ended
September 26, September 27,
1998 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Cash received from customers $ 6,621,800 $ 5,923,709
Cash paid to suppliers (6,076,461) (5,439,336)
Interest received 21,691 2,686
Interest paid (2,779) (2,812)
Income taxes paid (103,251) (110,565)
----------- -----------
Net cash provided by operating activities 461,000 373,682
----------- -----------
Cash flows from investing activities
Proceeds from maturities or sale of investment
securities and bonds 27,704 21,411
Purchase of investment securities and bonds (69,708) --
Proceeds from sale of property and equipment 16,704 3,217
Capital expenditures (161,961) (105,223)
----------- -----------
Net cash used in investing activities (187,261) (80,595)
----------- -----------
Cash flows from financing activities
Proceeds from exercise of stock options and sales
of stock under employee stock purchase plan 36,467 12,290
Foreign currency translation adjustment (6,022) (693)
Payments on long- and short-term borrowings (1,095) (141,855)
----------- -----------
Net cash provided by (used in) financing activities 29,350 (130,258)
----------- -----------
Net increase in cash and cash equivalents 303,089 162,829
Cash and cash equivalents at beginning of period 239,877 67,826
----------- -----------
Cash and cash equivalents at end of period $ 542,966 $ 230,655
=========== ===========
Reconciliation of net earnings to net cash
provided by operating activities
Net earnings $ 164,518 $ 168,302
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization 102,924 88,603
Provision for losses on inventory and accounts receivable 47,891 48,162
Accreted interest on zero coupon, convertible
subordinated notes 14,052 13,443
Contributions of common stock to employee
benefit and stock purchase plans 3,885 2,619
Loss on disposal of property and equipment 873 4,830
Deferred income taxes (6,625) (13,305)
Changes in assets and liabilities
Increase in receivables (23,240) (97,792)
Decrease in merchandise inventories 181,138 91,003
Increase in prepaid expenses, deferred income
taxes and other assets (36,113) (10,669)
Increase in accounts payable, accrued
expenses and deferred credits 11,697 78,486
----------- -----------
Total adjustments 296,482 205,380
----------- -----------
Net cash provided by operating activities $ 461,000 $ 373,682
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
6
<PAGE> 7
OFFICE DEPOT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Basis of Presentation
The interim financial statements as of September 26, 1998 and for the 13 and 39
week periods ended September 26, 1998 and September 27, 1997 are unaudited;
however, in the opinion of management, such interim statements reflect all
adjustments (consisting only of normal recurring items) necessary for a fair
presentation of the financial position, results of operations and cash flows of
Office Depot, Inc. (the "Company") for the interim periods presented. Certain
reclassifications were made to prior year statements to conform to current year
presentations. Interim results 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
27, 1997.
The Company maintains licensing agreements for the operation of Office Depot
stores in Colombia, Hungary, Israel and Poland and joint venture agreements to
operate stores in Mexico, France, Thailand and Japan. In April 1998, the Company
increased its ownership share in its Thai joint venture from 20% to 80%.
Accordingly, the Company's share of the Thai joint venture's financial position,
results of operations and cash flows has been included in the consolidated
interim financial statements. All other joint ventures are accounted for using
the equity method.
7
<PAGE> 8
Note B - Merger Transactions
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 recorded costs of
$16.1 million during the 39 week period ended September 27, 1997 that were
directly related to the terminated merger. These costs consisted primarily of
legal fees, investment banker fees and personnel retention costs.
On August 26, 1998, the Company completed its merger with Viking Office
Products, Inc. ("Viking"). In conjunction with the merger, each outstanding
share of Viking common stock was converted into one share of Office Depot common
stock. A total of 85,329,976 shares of Office Depot common stock were issued
pursuant to the merger. The merger was accounted for as a pooling of interests.
Accordingly, the consolidated financial statements of the Company have been
restated and combined with the consolidated financial statements of Viking as if
the merger had taken place at the beginning of the periods reported. During the
13 weeks ended September 26, 1998, the Company recorded $87.8 million of merger
and restructuring charges related to the merger with Viking. Merger and
restructuring charges consist primarily of fees and other expenses directly
attributable to the merger transaction and the estimated costs, principally
asset impairment, of integrating the operations.
Unaudited combined and separate results of Office Depot and Viking for the
periods presented in the accompanying consolidated statements of earnings were
as follows:
<TABLE>
<CAPTION>
13 Weeks 13 Weeks 39 Weeks 39 Weeks
Ended Ended Ended Ended
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
------------- ------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
SALES
Office Depot $1,845,902 $1,690,275 $5,524,537 $4,994,544
Viking 388,998 340,274 1,177,598 1,019,537
---------- ---------- ---------- ----------
Combined $2,234,900 $2,030,549 $6,702,135 $6,014,081
========== ========== ========== ==========
NET EARNINGS (LOSS)
Office Depot $ 30,420 $ 43,732 $ 131,957 $ 112,993
Viking (14,672) 18,006 32,561 55,309
---------- ---------- ---------- ----------
Combined $ 15,748 $ 61,738 $ 184,518 $ 168,302
========== ========== ========== ==========
</TABLE>
No adjustments to the sales, net earnings or net assets of Office Depot or
Viking were required to conform the two companies' accounting practices.
8
<PAGE> 9
Note C - Net Earnings Per Share
Basic earnings per common share is based upon the weighted average number of
shares outstanding during each period. Diluted earnings per common share further
assumes that the zero coupon, convertible subordinated notes, if dilutive, 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, if dilutive, net of the related income tax effect.
The following information was used to compute basic and diluted earnings per
share:
<TABLE>
<CAPTION>
13 Weeks 13 Weeks 39 Weeks 39 Weeks
Ended Ended Ended Ended
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
------------- ------------ ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Basic:
Weighted average number of
common shares outstanding 245,137 241,817 244,267 241,445
========= ========= ========= =========
Diluted:
Net earnings $ 15,748 $ 61,738 $ 164,518 $ 168,302
Interest expense related to
convertible notes, net of tax --(1) 2,716 8,641 8,268
--------- --------- --------- ---------
Adjusted net earnings $ 15,748 $ 64,454 $ 173,159 $ 176,570
========= ========= ========= =========
Weighted average number of
common shares outstanding 245,137 241,817 244,267 241,445
Shares issued upon assumed
conversion of convertible notes --(1) 16,565 16,550 16,565
Shares issued upon assumed
exercise of stock options 7,229 4,983 7,182 4,708
--------- --------- --------- ---------
Shares used in computing diluted
earnings per common share 252,366 263,365 267,999 262,718
========= ========= ========= =========
</TABLE>
(1) For the 13 weeks ended September 26, 1998, the zero coupon, convertible
subordinated notes were anti-dilutive and, accordingly, were not included in
the diluted earnings per share computation.
9
<PAGE> 10
Note D - Non-cash Investing and Financing Transactions
The Consolidated Statements of Cash Flows do not include the following non-cash
investing and financing transactions:
<TABLE>
<CAPTION>
39 Weeks Ended 39 Weeks Ended
September 26, September 27,
1998 1997
--------------- --------------
(in thousands)
<S> <C> <C>
Additional paid-in capital related
to tax benefits on stock options exercised $ 9,346 $ 866
Assets acquired under capital leases 8,292 24,300
Common stock issued upon conversion of debt 1,116 --
</TABLE>
Note E - New Accounting Pronouncements
In June 1997, Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosures About Segments of an Enterprise and Related Information," was
issued. SFAS No. 131 establishes standards for the way 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 stockholders. 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 companies report financial
and descriptive information about their reportable operating segments.
Operating segments are defined as those components of an enterprise about which
separate financial information is regularly evaluated by the chief operating
decision maker when allocating resources and assessing performance. SFAS No. 131
requires that companies report a measure of segment profit or loss, certain
specific revenue and expense items, and segment assets. SFAS No. 131 also
requires that companies report descriptive information about the manner in which
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, but is not required for interim financial statements in
the initial year of its application. The Company has not yet determined the
effects that SFAS No. 131 will have on the disclosures in its consolidated
financial statements.
10
<PAGE> 11
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales increased 10% to $2.2 billion during the third quarter of 1998 from $2.0
billion for the third quarter of 1997, and increased 11% to $6.70 billion during
the first nine months of 1998 from $6.0 billion for the first nine months of
1997. The 15 new office supply stores opened subsequent to the second quarter of
1998 and the 60 new office supply stores, net of one closure, opened subsequent
to the third quarter of 1997 contributed $65.0 million and $153.0 million to the
increased sales for the third quarter and first nine months of 1998,
respectively. Additionally, the Company realized 5% growth for the third quarter
and 7% growth for the first nine months of 1998 in comparable sales for Office
Depot stores and customer service centers open for more than one year. Viking
sales for the third quarter and first nine months of 1998 increased 14% and 16%,
respectively, primarily as a result of growth in international markets.
Sales of general office supplies increased as a percentage of total sales during
the third quarter and first nine months of 1998 over the comparable 1997
periods, driven primarily by the growth in the Business Services Division where
supplies account for a larger portion of the sales mix. Sales of business
machines and machine supplies continued to increase during the third quarter and
first nine months of 1998 as compared to the same periods in 1997. Although the
comparable unit sales of computers increased by 20% and 10% for the third
quarter and first nine months of 1998, respectively, over the comparable 1997
periods, the average retail price decreased by 19% and 13%, respectively, for
the same periods, resulting in negative comparable sales in this category.
The Company opened 33 office supply stores and closed one store in the first
nine months of 1998, bringing the total number of office supply stores open at
the end of the third quarter to 634, compared with 574 stores open at the end of
the third quarter of 1997. During the third quarter, the Company completed the
consolidation of four California customer service centers into two newer, larger
facilities. Domestically, the Company operated 21 customer service centers under
the Office Depot name and 10 delivery warehouses under the Viking name as of the
end of the third quarter of 1998 compared to 23 and 10, respectively, at the end
of the third quarter of 1997. Internationally, the Company operated 7 customer
service centers under the Office Depot name through joint ventures and 11
delivery warehouses under the Viking name as of the end of the third quarter of
1998 compared to 5 and 10, respectively, at the end of the third quarter of
1997. The Company plans to integrate the operations of certain delivery
facilities over the next two years, resulting in the closure of duplicate
facilities that service the same geographic areas.
Gross profit as a percentage of sales was 27.8% and 27.2% during the third
quarter and first nine months of 1998, respectively, as compared with 26.5% and
26.2% during the comparable periods of 1997. Gross profit as a percentage of
sales continued to be positively impacted by purchasing leverage. Furthermore,
the downward pressure on overall gross profit has lessened in the third quarter
and first nine months of 1998 as compared to the same periods in 1997 because of
a favorable shift in sales mix for Office Depot to business machine supplies,
which yield much higher margins than
11
<PAGE> 12
computers and business machines. In addition, the Company has experienced
improved margins on computers, which traditionally have much lower margins than
other products. The gross profit percentage for Viking did not change
significantly for the reported periods. The Company's gross profit as a
percentage of sales fluctuates as a result of numerous factors, including
competitive pricing pressures, changes in product and customer mix, suppliers
pricing changes, as well as the Company's ability to achieve purchasing leverage
through growth in total merchandise purchases. Additionally, occupancy costs can
vary as the Company adds new stores and customer service centers in areas or
markets with above average real estate costs.
The four largest components of store and warehouse operating and selling
expenses are payroll, depreciation, advertising and credit card expenses. Store
and warehouse operating and selling expenses as a percentage of sales are
significantly higher in the Business Services Division than in the Stores
Division, principally because of the need for a more experienced and more highly
compensated sales force. Management expects these expenses to decline as a
percentage of sales as the Business Services Division generates incremental
sales in each market and enhances operating efficiencies in its warehouses.
Store and warehouse operating and selling expenses as a percentage of sales were
18.0% during the third quarter and first nine months of 1998, as compared to
17.9% and 17.8% in the third quarter and first nine months of 1997,
respectively. Store and warehouse operating and selling expenses as a percentage
of sales have increased overall in the Business Services Division for the third
quarter and first nine months of 1998 as compared to the same periods in 1997,
primarily because of costs associated with the consolidation of four customer
service centers into two larger and newer facilities. Expenses in the Stores
Division increased in the third quarter and first nine months of 1998 over the
comparable 1997 periods because of the completion of 51 and 180 store remodels
in the same periods, respectively. The increase in expenses is expected to
continue as the Company completes approximately 20 additional remodels by the
end of 1998. Late in the fourth quarter of 1997, the Company launched a new
advertising campaign, significantly increasing broadcast and cable television
exposure. This campaign resulted in increased costs in both the Stores and
Business Services divisions during the first nine months of 1998. Additionally,
start-up costs incurred in Viking's operations in Italy contributed to the
increase in store and warehouse operating and selling expenses.
Pre-opening expenses consist principally of amounts paid for salaries and
property costs. Because 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. Pre-opening
expenses increased to $3.7 million in the third quarter of 1998 from $.8 million
in the comparable quarter of 1997, and increased to $7.7 million in the first
nine months of 1998 from $2.3 million during the comparable 1997 period. The
Company added 33 new office supply stores, relocated three and closed one in the
first nine months of 1998, 15 of which were added and all three of which were
relocated in the third quarter, as compared with 14 new and one replacement
office supply store and one new Furniture at Work store in the comparable 1997
nine month period, nine of which were added in the third quarter of 1997. Store
openings in 1997 were slowed because of the uncertainty surrounding the proposed
merger with Staples, Inc. ("Staples"). Pre-opening expenses in the first nine
months of 1998 also include costs incurred to significantly expand one customer
service center and open another larger customer service center to replace two
existing facilities, while pre-opening expenses in the third quarter of 1997
include costs associated with replacing one existing customer service center
with a larger facility. Pre-opening expenses, which currently approximate
$100,000 per standard office supply store, are
12
<PAGE> 13
predominately incurred during a six-week period prior to the store opening.
Pre-opening expenses for a new standard-sized customer service center are
approximately $500,000 and pre-opening expenses for a new larger-sized customer
service center are approximately $1,500,000; however, these expenses may vary
with the size and type of future customer service centers.
General and administrative expenses increased to 3.7% of sales for the third
quarter of 1998 from 3.4% for the third quarter of 1997, while these expenses
increased as a percentage of sales to 3.5% for the first nine months of 1998
from 3.3% for the first nine months of 1997. In the first nine months of 1997,
staffing issues associated with the proposed Staples merger resulted in fewer
corporate personnel. By the end of the second quarter of 1998, the Company had
restaffed most of the corporate positions and had strengthened its management
team with the addition of several new key executives. Certain corporate expenses
have increased in the first nine months of 1998 primarily because of costs
associated with the consolidation and integration of the Company's California
customer service centers and store remodeling initiative, as well as increased
staffing in the merchandising area which has driven reductions in inventory
levels. While the Company has been able to decrease other general and
administrative expenses, there can be no assurance that the Company will be able
to continue to increase sales without a proportionate increase in corporate
expenditures.
Net interest income (expense) improved from an expense of $3.3 million to an
income of $1.1 million for the third quarter of 1998 compared to the third
quarter of 1997; and it improved from an expense of $11.1 million to an income
of $30 thousand for the first nine months of 1998 compared to the comparable
period of 1997. These improvements reflect improved operating cash flows, which
yield higher cash balances, coupled with the repayment of short-term borrowings
during the 1997 period. These amounts vary with the Company's financing
decisions.
Equity in earnings (losses) of investees represents the Company's share of the
earnings (losses) of its joint ventures. The decline in losses of $1.8 million
from the third quarter of 1997 to the third quarter of 1998 is related primarily
to refinements in information previously reported by Japan's joint venture
management. The increase in losses of $4.3 million for the first nine months of
1998 compared with the first nine months of 1997 is attributable to increasing
start-up costs incurred by the Company's joint ventures operations. The Company
through its joint ventures opened 22 locations in the first nine months of 1998
(excluding 6 locations in Mexico that were purchased and did not require
start-up costs), and opened 10 locations in the comparable period of 1997.
Losses incurred by such joint ventures are expected to continue for the
remainder of 1998 and 1999 as a result of the protracted start-up period
generally associated with international operations. However, the addition of
Viking management and its international infrastructure is expected to improve
the Company's international operating performance.
13
<PAGE> 14
Income taxes as a percentage of earnings before income taxes increased from
36.8% to 63.3% for the third quarter, and from 36.6% to 40.7% for the first nine
months of 1998. This increased rate is the result of certain non-deductible
merger-related charges, primarily investment banking and legal fees, incurred in
the third quarter of 1998. The Company's overall income tax rate generally
fluctuates as a result of various tax planning strategies employed domestically
and internationally.
In September 1996, the Company entered into an agreement and plan of merger with
Staples. In September 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 recorded costs of $16.1
million during the 39 week period ended September 27, 1997 that were directly
related to the terminated merger. These costs consisted primarily of legal fees,
investment banker fees and personnel retention costs.
On August 26, 1998, the Company completed its merger with Viking Office
Products, Inc. ("Viking"). In conjunction with the merger, each outstanding
share of Viking common stock was converted into one share of Office Depot common
stock. The merger was accounted for as a pooling of interests. Accordingly, the
prior periods' consolidated financial statements of the Company have been
restated and combined with the consolidated financial statements of Viking as if
the merger had taken place at the beginning of the periods reported.
During the 13 weeks ended September 26, 1998, the Company recorded $87.8 million
of merger and restructuring charges related to the merger with Viking. Merger
and restructuring charges consist of fees and other expenses directly
attributable to the merger transaction and the estimated costs, primarily asset
impairment, of integrating the operations.
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. Because the majority of the Company's store sales are on a
cash and carry basis, cash flow generated from operating stores provides a
source of liquidity to the Company. Furthermore, the Company uses 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 carrying
additional receivables. Working capital requirements are also reduced by vendor
credit terms that allow the Company to finance a portion of its inventory.
Sales made to larger customers through the Company's 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. Therefore, as the
Company expands its contract business, management anticipates that the Company's
accounts receivable will continue to grow.
14
<PAGE> 15
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. Industry practice dictates that under such programs, a
significant portion of the collections are made after an entire program year has
been completed.
In the first nine months of 1998, the Company opened 33, relocated three and
closed one office supply store, compared with 14 opened and one relocated office
supply store and one new Furniture at Work(TM) store in the comparable period of
1997. In addition, the Company consolidated four customer service centers in its
Business Services Division into two newer, larger facilities during the first
nine months of 1998, compared to replacing one customer service center with a
larger facility in 1997. Uncertainty and staffing issues associated with the
proposed Staples merger negatively affected the Company's store opening program
during 1997 and continued to impact it through the first half of 1998. By the
end of the third quarter, the Company has restaffed its real estate function and
increased the pace of its store opening momentum.
Net cash provided by operating activities was $461.0 million in the first nine
months of 1998, compared with $373.7 million provided in the comparable 1997
period. This increase was driven primarily by the Company's continued focus on
inventory and supply chain management, which resulted in a significant reduction
in inventory balances while maintaining the best in-stock position in the
Company's history. Increases in contract and commercial sales from existing
customer service centers also leverage assets employed and generate incremental
working capital. Cash generated from operations is also affected by fluctuations
in the levels of receivables. Capital expenditures are affected by the number of
stores and warehouses opened, replaced or remodeled each year, as well as the
increase in computer and other equipment at the corporate office required to
support such expansion. Cash used for capital expenditures was $162.0 million in
the first nine months of 1998 and $105.2 million in the first nine months of
1997.
During the 39 weeks ended September 26, 1998, the Company's cash balance
increased by $303.1 million and long- and short-term debt decreased by $2.3
million, excluding $14.1 million in non-cash accretion of interest on the
Company's zero coupon, convertible subordinated debt and $8.3 million in debt
created by the acquisition of assets through capital leases.
The Company entered into a new credit agreement in February 1998 with a
syndicate of banks which provides for a working capital line and letters of
credit totaling $300 million. The new credit agreement replaced the Company's
previous credit agreement and 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 .18 % over
LIBOR, at .5% over the Federal Funds rate, at 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 .095%
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 September 26, 1998, the
Company had no outstanding borrowings under the credit facility and had
outstanding letters of credit totaling $11 million.
15
<PAGE> 16
The Company currently plans to open between 50 and 60 additional office supply
stores during the fourth quarter of 1998. Management estimates that the
Company's cash requirements, exclusive of pre-opening expenses, will be
approximately $1.8 million for each additional office supply store, which
includes an average of approximately $.9 million for leasehold improvements,
fixtures, point-of-sale terminals and other equipment in the stores, as well as
approximately $0.9 million for the portion of the store inventory that is not
financed by vendors. In addition, management estimates that each new store
requires pre-opening expenses of approximately $0.1 million. The cash
requirements for a customer service center, exclusive of pre-opening expenses,
are significantly more than a store. Each new customer service center requires
pre-opening expenses of approximately $0.5 million to $2.0 million, depending on
the size of the facility.
IMPACT OF THE YEAR 2000
The Year 2000 ("Y2K") issues arise because of the inability of certain
electronic data operating systems to differentiate between the years 1900 and
2000 when processing data. Many systems were written to recognize and process
two digits for the year, instead of four.
In recent years, the producers of electronic data operating systems and other
businesses generally have become aware of Y2K issues and the potential for
disruption in the operation of business as a result of systems which are not Y2K
compliant. Y2K issues can arise at any point in the Company's supply,
processing, distribution, operation or financial processes. Most systems
developed in the past several years have been designed with Y2K issues in mind
and are Y2K compliant, whereas many older Systems have been found not to be Y2K
compliant and require various changes in order to make them Y2K compliant.
Many of the Company's computer systems were developed over the past four years,
and management believes that they are already Y2K compliant. In order to
establish standards and guidelines, assist in development and remediation plans,
track and report on progress, and answer customer inquiries regarding its Y2K
compliance efforts, the Company has established the Year 2000 Project Office
("Project 2000"). Project 2000 has been divided into four major components--
Management Information Systems ("MIS") Operations, MIS Development (MIS
Operations and MIS Development are sometimes collectively referred to as
"Technology Systems"), Facilities and Suppliers (Facilities and Suppliers are
sometimes collectively referred to as "Non-Technology Systems").
16
<PAGE> 17
The first component of Project 2000 is MIS Operations, which includes data
center process automation equipment, software not internally developed or
supported by the MIS department, and data/voice networks. The phases of this
component are: 1) complete an inventory of all hardware and software, 2)
evaluate the readiness of all hardware and software, and identify any upgrades
necessary to make them Y2K compliant, and 3) correct all non-compliant hardware
and software through upgrades certified as Y2K compliant by their vendors. The
Company expects to complete all phases of this component by April 1999.
The second component of Project 2000 is MIS Development, which focuses on the
proper operation of application software developed or supported in-house. The
phases of this component are: 1) assess systems for potential Y2K issues, 2)
remediate any non-compliant systems by changing the program code to properly
process Y2K dates, 3) test to make sure remediation has not changed the
functionality of the system, and place new program code into production, 4) test
the accuracy of the output under multiple scenarios, and 5) certify that the
systems are Y2K compliant. This component is being completed by multiple MIS
teams. Although each team is at a different phase in the project, this
component, as a whole, is currently on schedule to be substantially completed by
January 1999. Overall, the two Technology components together are approximately
80% complete.
The third component of Project 2000 is Facilities. The Facilities portion of
Project 2000 involves buildings and transportation. Typical concerns related to
buildings include security, environment and communication. Concerns related to
transportation include scheduling, communication, security, tracking and
maintenance. The phases of this component are: 1) develop an inventory of
vendors and associated equipment or services, 2) certify that vendors are Y2K
compliant, 3) upgrade systems and equipment to compliant versions, if necessary,
4) test equipment and systems, and 5) certify locations as Y2K compliant. The
Company has completed phases 1 and 2 of this component and has begun work on
phase 3. This component is currently on schedule to be completed by April 1999.
The fourth component of Project 2000 is Suppliers. For the Suppliers portion of
Project 2000, the Company will attempt to ensure that merchandise suppliers are
able to meet their delivery commitments. The phases of this component are: 1)
develop a supplier survey, 2) request that suppliers confirm compliance, 3)
establish confidence/risk levels by product, 4) develop contingency plans for
non-compliant vendors (e.g., alternate product sources, increased inventory
levels, etc.), and 5) certify products as Y2K compliant or implement contingency
plans. Phase 1 has been completed and phases 2 and 3 are in the process of being
completed. This component is currently on schedule to be completed by April
1999.
The Company's Y2K effort is being undertaken on a worldwide basis to identify
the level of Y2K preparedness of the Company's operations in each country.
Because of the interdependent nature of the Company's operations with those of
its suppliers and customers, the Company could be materially adversely affected
if utilities, private businesses or governmental entities with which it does
17
<PAGE> 18
business are not adequately prepared for the year 2000. A reasonably possible
worst case scenario resulting from the Company not being fully Y2K compliant by
January 1, 2000 might include, among other things, temporary store or warehouse
closings, delays in the delivery of products, delays in the receipt of supplies,
payment and collection errors, and inventory and supply obsolescence.
Consequently, the business and results of operations of the Company could be
materially adversely affected by a temporary inability of the Company to conduct
its business in the ordinary course for a period of time after January 1, 2000.
However, management believes that its Y2K readiness program should significantly
reduce any adverse effect from any such disruptions, and the effect on the
Company's financial position or the results of its operations should not be
material. The Company has not experienced any significant delays in other MIS
initiatives as a result of Project 2000.
Costs for hardware and software are capitalized and depreciated over the assets'
estimated useful lives. All other costs specifically associated with Project
2000 (e.g., labor, consulting fees, maintenance contracts, etc.) are expensed as
incurred. Total costs incurred related to Project 2000 through September 1998
were approximately $5.0 million, none of which were capitalized. The Company
expects to spend another $6.0 to $8.0 million to complete Project 2000,
including an insignificant amount that will be capitalized.
The Company's Y2K readiness program is an ongoing process, and the estimates of
costs and completion dates for various components of the Y2K readiness program
described above are subject to change. The estimates and conclusions herein
contain forward-looking statements and are based on management's best estimates
of future events. Although the Company expects its systems and facilities to be
Y2K compliant by April 1999, there is no assurance that these results will be
achieved. Risks to completing the plan include the availability of resources,
the Company's ability to discover and correct any potential Y2K issues, and the
ability of suppliers, customers and governmental agencies to bring their systems
into Y2K compliance.
EURO
On January 1, 1999, certain member countries of the European Union are scheduled
to establish fixed conversion rates between their existing currencies and the
European Union's common currency (the euro). The euro will then trade on
currency exchanges and may be used in business transactions. The conversion to
the euro will eliminate currency exchange rate risk among the member countries.
The former currencies of the participating countries are scheduled to remain
legal tender as denominations of the euro until January 1, 2002. During this
transition period, parties may settle transactions using either the euro or a
participating country's former currency. Beginning in January 2002, new
euro-denominated bills and coins will become the sole legal currency, and all
former currencies will be withdrawn from circulation.
The use of a single currency in the participating countries may affect the
ability of the Company to price their products differently in the various
European markets because of price transparency. One possible result is price
harmonization at lower average prices for items sold in some markets.
Nevertheless, other market factors such as local taxes, customer preferences and
product assortment may reduce the chance for price stabilization.
18
<PAGE> 19
The Company has significant sales in Europe; therefore, the Company is currently
evaluating the business implications of the conversion to the euro, including
the need to adapt internal systems to accommodate euro-denominated transactions,
the competitive implications of cross border price transparency, the impact on
existing marketing programs, and other strategic implications. While still in
the assessment phase, the Company does not expect the conversion to the euro to
have a material effect on its financial position or the results of its
operations.
NEW ACCOUNTING PRONOUNCEMENT
The Company will adopt Statement of Financial Accounting Standards ("SFAS") No.
131 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 should include the reported segments' sales, operating profit,
identifiable assets and certain other information. This Statement is effective
for fiscal years beginning after December 15, 1997 and will require disclosure
of information relating to prior periods, 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 - CAUTIONARY STATEMENTS
With the exception of historical matters, the matters discussed in this
Quarterly Report on Form 10-Q are forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, as the same may be
amended from time to time (the "Act") and in releases made by the Securities and
Exchange Commission ("SEC") from time to time. Such forward-looking statements
involve both known and unknown 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
1998 and beyond to differ materially from those expressed in any forward-
looking statement made by the Company. These Cautionary Statements are being
made pursuant to the Act, with the intention of obtaining the benefits of the
"safe harbor" provisions of the Act. The Company cautions investors that any
forward-looking statements made by the Company are not guarantees of future
performance and that actual results may differ materially from those in the
forward-looking statements as a result of various factors, including but not
limited to those set forth below.
The Company currently plans to open between 50 and 60 additional stores in the
fourth quarter of 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 for 1999 and future periods. The failure
to expand by opening new stores as planned could have a material adverse effect
on the Company's future sales growth and profitability.
19
<PAGE> 20
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.
More recently, the Company began competing with internet-based merchandisers.
This competition is expected to 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.
In addition, as the Company expands the number of its stores in existing
markets, sales of existing stores may suffer. New stores typically require
several months or longer 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 could 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.
The remodeling of the stores has contributed to increased store expenses, and
these costs are expected to continue impacting store expenses through 1999. The
failure to achieve the projected improvements in operating margins could result
in a significant impact on the Company's net income in the future. Furthermore,
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.
On August 26, 1998, the Company merged with Viking. Costs related to the
integration of Viking's warehouse facilities into the Company's delivery
business will contribute to increased warehouse expenses in 1998 and 1999.
Moreover, integrating the operations and management of Office Depot and Viking
will be a complex process, and there can be no assurance that this integration
will be completed rapidly or will result in the achievement of all of the
anticipated synergies and other benefits expected to be realized. Furthermore,
the integration of the two companies will require significant management
attention, which may temporarily distract management from its usual focus on the
daily operations of their respective businesses. The ability of management to
integrate successfully the operations of Office Depot and Viking could have a
material adverse effect on the revenues and operating results of the Company.
20
<PAGE> 21
The Company has operations in several international markets. 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, adverse political and economic conditions,
obtaining adequate and appropriate inventory and, because some of 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 expansion, integration and other operating cash
needs for at least the next 12 months. However, there can be no assurance that
additional sources of financing will not be required during the next 12 months
as a result of unanticipated cash demands or opportunities for expansion or
acquisition, changes in growth strategy or adverse operating results.
Furthermore, 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.
The Company assumes no obligation (and specifically disclaims any obligation) to
update the forward-looking statements contained in this Quarterly Report on Form
10-Q to reflect actual results, changes in assumptions or other factors
affecting such forward-looking statements.
21
<PAGE> 22
PART II. OTHER INFORMATION
ITEMS 1 Legal Proceedings
On May 21, 1998, a Viking stockholder filed a purported class action complaint
in Superior Court, State of California, County of Los Angeles for breach of
fiduciary duties against Viking. The complaint also named Office Depot as a
defendant, alleging that it aided and abetted Viking in the breach of its
fiduciary duties. The complaint sought an injunction against the merger and the
certification as a class of all Viking stockholders. The Company has settled
this lawsuit and has agreed to take certain measures in connection with the
merger and to pay the plaintiff's attorneys' fees and expenses, up to $300,000.
This amount is included in merger and restructuring charges in the accompanying
Consolidated Statement of Earnings for the 13 weeks ended September 26, 1998.
ITEM 2 Changes in Securities and Use of Proceeds
The stockholders approved an increase in the number of authorized shares of $.01
par value common stock from 400,000,000 shares to 800,000,000 shares on August
26, 1998. See also Item 4.
ITEM 3 Not applicable.
ITEM 4 Submission of Matters to a Vote of Security Holders
A special meeting of the Company's stockholders was held on August 26, 1998 to
vote on the following:
1. To approve the issuance of shares of Office Depot common stock in
exchange for each outstanding share of Viking common stock (on the
basis of one share of Office Depot common stock for each outstanding
share of Viking common stock) pursuant to the plan of merger. The
stockholders approved this matter with 123,713,731 votes for and
447,869 votes against it. In addition, there were 421,033 abstentions
and 19,273,875 broker non-votes.
2. To approve an amendment to Section 4.1 of the certificate of
incorporation of Office Depot to increase the number of authorized
shares of Office Depot common stock from 400,000,000 to 800,000,000.
The stockholders approved this amendment with 139,741,784 votes for and
3,870,628 votes against it. In addition, there were 244,096
abstentions.
3. To approve an amendment to the Office Depot Long-Term Equity Incentive
Plan to increase the number of shares of Office Depot common stock
reserved for issuance to officers and key employees following the
merger with Viking from 15,212,500 to 20,712,500. The stockholders
approved this amendment with 86,334,119 votes for and 37,922,545 votes
against it. There were 325,968 abstentions and 19,273,876 broker
non-votes as well.
22
<PAGE> 23
ITEM 5 Not applicable.
ITEM 6 Exhibits and Reports on Form 8-K
a. 27.1 Financial Data Schedule (for SEC use only)
b. Restated Financial Data Schedules for the years ended December 30,
1995, December 28, 1996 and December 27, 1997 (for SEC use only)
c. Restated Financial Data Schedules for the quarters ended March 29,
1997, June 28, 1997, September 27, 1997, March 28, 1998 and June 27,
1998 (for SEC use only)
d. A Current Report on Form 8-K dated August 13, 1998 was filed on August
14, 1998 regarding the provisions of the settlement agreement reached
with the plaintiff in SZYMCZAK V. HELFORD ET AL, as noted in Item 1
above.
23
<PAGE> 24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OFFICE DEPOT, INC.
(Registrant)
Date: November 10, 1998 By: /s/ Barry J. Goldstein
--------------------------------------
Barry J. Goldstein
Executive Vice President-Finance
and Chief Financial Officer
Date: November 10, 1998 By: /s/ Charles E. Brown
--------------------------------------
Charles E. Brown
Senior Vice President-Finance
and Controller
(Principal Accounting Officer)
24
<PAGE> 25
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Certificate of Amendment of Restated Certificate of
Incorporation
27.1 Financial Data Schedule (for SEC use only)
27.2 Restated Financial Data Schedules for the years ended
December 30, 1995, December 28, 1996 and December 27, 1997.
(for SEC use only)
27.3 Restated Financial Data Schedules for the quarters ended
March 29, 1997, June 28, 1997, September 27, 1997, March 28,
1998 and June 27, 1998. (for SEC use only)
25
<PAGE> 1
Exhibit 3.1
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
*****
Office Depot, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY:
FIRST: That at a meeting of the Board of Directors of July 10, 1998
resolutions were duly adopted setting forth a proposed amendment to the
Restated Certificate of Incorporation of said corporation, declaring said
amendment to be advisable and calling a meeting of the stockholders of said
corporation for consideration thereof. The resolution setting forth the
proposed amendment is as follows:
RESOLVED, That the Restated Certificate of Incorporation of this
corporation be amended by changing Section 4.1 thereof so that, as amended
said section shall be and read as follows:
"4.1 Capital Stock. The total number of shares of capital stock which
the corporation has authority to issue is 800 million shares of Common
Stock, par value of $0.01 per share, and 1 million shares of Preferred
Stock, par value of $0.01 per share."
SECOND: That thereafter, pursuant to resolution of the Board of Directors,
a special meeting of the stockholders of said corporation was duly called and
held, upon notice in accordance with Section 222 of the General Corporation Law
of the State of Delaware, at which meeting the necessary number of shares as
required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF OFFICE DEPOT, INC. FOR THE QUARTER ENDED SEPTEMBER 26,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-START> DEC-28-1997
<PERIOD-END> SEP-26-1998
<CASH> 542,966
<SECURITIES> 61,015
<RECEIVABLES> 518,653
<ALLOWANCES> 28,078
<INVENTORY> 1,192,269
<CURRENT-ASSETS> 2,543,678
<PP&E> 1,369,666
<DEPRECIATION> 466,307
<TOTAL-ASSETS> 3,779,776
<CURRENT-LIABILITIES> 1,275,917
<BONDS> 469,626
0
0
<COMMON> 2,476
<OTHER-SE> 1,941,624
<TOTAL-LIABILITY-AND-EQUITY> 3,779,776
<SALES> 6,702,135
<TOTAL-REVENUES> 6,702,135
<CGS> 4,875,956
<TOTAL-COSTS> 6,090,336
<OTHER-EXPENSES> 237,692
<LOSS-PROVISION> 16,176
<INTEREST-EXPENSE> 16,777
<INCOME-PRETAX> 277,590
<INCOME-TAX> 113,072
<INCOME-CONTINUING> 164,518
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 164,518
<EPS-PRIMARY> 0.67
<EPS-DILUTED> 0.65
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FINANCIAL STATEMENTS OF OFFICE DEPOT, INC. FOR THE YEAR ENDED DECEMBER 30,
1995, YEAR ENDED DECEMBER 28, 1996 AND YEAR ENDED DECEMBER 27, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-30-1995 DEC-28-1996 DEC-27-1997
<PERIOD-START> JAN-01-1995 DEC-31-1995 DEC-29-1996
<PERIOD-END> DEC-30-1995 DEC-28-1996 DEC-27-1997
<CASH> 67,950 67,826 239,877
<SECURITIES> 28,167 37,858 17,868
<RECEIVABLES> 310,288 382,896 465,803
<ALLOWANCES> 12,442 25,493 28,863
<INVENTORY> 1,351,785 1,426,199 1,397,266
<CURRENT-ASSETS> 1,987,937 2,132,281 2,381,079
<PP&E> 842,024 1,075,924 1,240,743
<DEPRECIATION> 204,422 290,866 394,067
<TOTAL-ASSETS> 2,896,589 3,200,213 3,520,819
<CURRENT-LIABILITIES> 1,151,268 1,272,001 1,287,616
<BONDS> 498,219 559,096 449,493
0 0 0
0 0 0
<COMMON> 2,393 2,431 2,451
<OTHER-SE> 1,236,425 1,466,678 1,715,187
<TOTAL-LIABILITY-AND-EQUITY> 2,896,589 3,200,213 3,520,819
<SALES> 6,233,985 7,250,931 8,100,319
<TOTAL-REVENUES> 6,233,985 7,250,931 8,100,319
<CGS> 4,640,892 5,395,223 5,963,267
<TOTAL-COSTS> 5,709,602 6,685,157 7,413,326
<OTHER-EXPENSES> 201,827 228,861 278,197
<LOSS-PROVISION> 12,053 19,526 25,254
<INTEREST-EXPENSE> 22,741 26,378 21,680
<INCOME-PRETAX> 302,857 312,083 371,591
<INCOME-TAX> 117,797 115,865 136,730
<INCOME-CONTINUING> 185,060 196,218 234,861
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 185,060 196,218 234,861
<EPS-PRIMARY> 0.79 0.82 0.97
<EPS-DILUTED> 0.75 0.79 0.93
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF OFFICE DEPOT, INC. FOR THE QUARTER ENDED MARCH 29, 1997,
QUARTER ENDED JUNE 28, 1997, QUARTER ENDED SEPTEMBER 27, 1997, QUARTER ENDED
MARCH 28, 1998 AND QUARTER ENDED JUNE 27, 1998, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-27-1997 DEC-27-1997 DEC-27-1997 DEC-26-1998 DEC-26-1998
<PERIOD-START> DEC-29-1996 DEC-29-1996 DEC-29-1996 DEC-28-1997 DEC-28-1997
<PERIOD-END> MAR-29-1997 JUN-28-1997 SEP-27-1997 MAR-28-1998 JUN-27-1998
<CASH> 131,084 99,761 230,655 431,128 368,282
<SECURITIES> 29,512 26,021 16,447 48,674 80,960
<RECEIVABLES> 543,329 407,657 456,005 476,587 455,296
<ALLOWANCES> 27,667 23,108 27,248 31,348 26,842
<INVENTORY> 1,342,510 1,243,984 1,301,722 1,339,217 1,265,608
<CURRENT-ASSETS> 2,077,482 1,973,918 2,236,872 2,494,797 2,412,032
<PP&E> 1,100,370 1,131,456 1,185,786 1,256,832 1,319,674
<DEPRECIATION> 315,899 342,622 367,495 418,822 446,188
<TOTAL-ASSETS> 3,147,825 3,049,124 3,341,499 3,640,224 3,617,472
<CURRENT-LIABILITIES> 1,157,609 992,363 1,192,373 1,298,958 1,170,061
<BONDS> 422,897 426,900 454,984 453,446 465,397
0 0 0 0 0
0 0 0 0 0
<COMMON> 2,434 2,437 2,443 2,459 2,469
<OTHER-SE> 1,518,213 1,581,982 1,646,769 1,806,491 1,889,449
<TOTAL-LIABILITY-AND-EQUITY> 3,147,825 3,049,124 3,341,499 3,640,224 3,617,472
<SALES> 2,125,527 3,983,532 6,014,081 2,398,677 4,467,235
<TOTAL-REVENUES> 2,125,527 3,983,532 6,014,081 2,398,677 4,467,235
<CGS> 1,581,034 2,947,185 4,440,532 1,768,183 3,263,092
<TOTAL-COSTS> 1,954,910 3,658,566 5,515,237 2,189,318 4,071,072
<OTHER-EXPENSES> 64,858 131,231 201,598 76,467 152,365
<LOSS-PROVISION> 5,300 11,025 19,035 6,431 10,602
<INTEREST-EXPENSE> 5,539 10,561 16,067 5,431 11,080
<INCOME-PRETAX> 93,778 167,853 265,514 128,449 234,724
<INCOME-TAX> 34,243 61,289 97,212 47,355 85,954
<INCOME-CONTINUING> 59,535 106,564 168,302 81,094 148,770
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 59,535 106,564 168,302 81,094 148,770
<EPS-PRIMARY> 0.25 0.44 0.70 0.33 0.61
<EPS-DILUTED> 0.24 0.43 0.67 0.32 0.58
</TABLE>
