<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 March 27, 1999
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 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)
(561) 438-4800
----------------------------------------------------
(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 374,152,907 shares of common stock outstanding as of May 3,
1999.
<PAGE> 2
OFFICE DEPOT, INC.
FORM 10-Q - QUARTER ENDED MARCH 27, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statements of Earnings for the
13 Weeks Ended March 27, 1999 and
March 28, 1998 3
Consolidated Balance Sheets as of
March 27, 1999 and December 26, 1998 4
Consolidated Statements of Stockholders'
Equity for the 13 Weeks Ended March 27, 1999
and the Year Ended December 26, 1998 5
Consolidated Statements of Cash Flows for the
13 Weeks Ended March 27, 1999 and
March 28, 1998 6
Notes to Consolidated Financial Statements 7 - 12
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12 - 24
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk 24
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 24
ITEM 2. Changes in Securities and Use of Proceeds 24
ITEM 3. Defaults Upon Senior Securities 25
ITEM 4. Submission of Matters to a vote of Security Holders 25
ITEM 5. Other Information 25
ITEM 6. Exhibits and Reports on Form 8-K 26
SIGNATURE 27
INDEX TO EXHIBITS 28
</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
ENDED ENDED
MARCH 27, MARCH 28,
1999 1998
---------- ----------
<S> <C> <C>
Sales $2,622,851 $2,398,677
Cost of goods sold and occupancy costs 1,894,003 1,768,183
---------- ----------
Gross profit 728,848 630,494
Store and warehouse operating
and selling expenses 471,669 419,961
Pre-opening expenses 6,463 1,174
General and administrative expenses 89,723 74,931
Merger and restructuring costs 2,761 --
---------- ----------
Operating profit 158,232 134,428
Other income (expense):
Interest income, net 3,361 64
Miscellaneous expense, net (1,838) (6,043)
---------- ----------
Earnings before income taxes 159,755 128,449
Income taxes 59,179 47,355
---------- ----------
Net earnings $ 100,576 $ 81,094
=========== ==========
Earnings per share:
Basic $0.27 $0.22
Diluted 0.25 0.21
</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>
MARCH 27, DECEMBER 26,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 900,639 $ 704,541
Short-term investments 9,347 10,424
Receivables, net of allowances 659,200 721,446
Merchandise inventories 1,234,407 1,258,355
Deferred income taxes 57,706 52,422
Prepaid expenses 43,026 33,247
---------- ----------
Total current assets 2,904,325 2,780,435
Property and equipment, net 1,010,913 935,407
Goodwill, net of amortization 225,417 227,964
Other assets 134,810 125,413
---------- ----------
$4,275,465 $4,069,219
========== ==========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $1,066,013 $1,027,591
Accrued expenses 391,333 430,666
Income taxes payable 116,139 69,910
Current maturities of long-term debt 4,830 2,834
---------- ----------
Total current liabilities 1,578,315 1,531,001
Long-term debt, net of current maturities 45,259 35,490
Deferred income taxes and other credits 50,386 38,628
Zero coupon, convertible subordinated notes payable 439,751 435,221
---------- ----------
2,113,711 2,040,340
---------- ----------
Commitments and Contingencies
Stockholders' equity:
Common stock - authorized 800,000,000 shares of
$.01 par value; issued 376,937,895 in 1999 and
373,817,704 in 1998 3,769 3,738
Additional paid-in capital 883,559 838,122
Accumulated other comprehensive income (31,776) (18,078)
Unamortized value of long-term incentive stock grant (2,345) (2,874)
Retained earnings 1,310,297 1,209,721
Less: 3,245,170 shares of treasury stock, at cost (1,750) (1,750)
---------- ----------
2,161,754 2,028,879
---------- ----------
$4,275,465 $4,069,219
========== ==========
</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 ACCUMULATED
COMMON COMMON ADDITIONAL VALUE OF LONG- OTHER
STOCK STOCK PAID-IN TERM INCENTIVE RETAINED TREASURY COMPREHENSIVE
SHARES AMOUNT CAPITAL STOCK GRANT EARNINGS STOCK INCOME
----------- ------ ---------- -------------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 27, 1997 367,663,995 $3,677 $761,685 $(3,210) $ 976,525 $(1,750) $(19,289)
Comprehensive income:
Net earnings for the year 233,196
Foreign currency translation
adjustment 1,211
Comprehensive income
Exercise of stock options,
including income tax
benefits 5,399,946 54 63,456
Issuance of stock under employee
stock purchase plans 467,394 4 7,896
Matching contributions under 401(k)
and deferred compensation plans 203,055 2 3,882
Conversion of LYONs to common
stock 83,314 1 1,203
Amortization of long-term
incentive stock grant -- -- 336
----------- ------ -------- ------- ---------- ------- --------
BALANCE AT DECEMBER 26, 1998 373,817,704 3,738 838,122 (2,874) 1,209,721 (1,750) (18,078)
(UNAUDITED):
Comprehensive income:
Net earnings for the period 100,576
Foreign currency translation
adjustment (13,698)
Comprehensive income
Exercise of stock options, including
income tax benefits 2,951,366 29 41,784
Issuance of stock under employee
stock purchase plans 71,783 1 1,515
Matching contributions under 401(k)
and deferred compensation plans 79,548 1 1,881
Conversion of LYONs to common stock 17,494 -- 257
Amortization of long-term incentive
stock grant -- -- 529
----------- ------ -------- ------- ---------- ------- --------
BALANCE AT MARCH 27, 1999 376,937,895 $3,769 $883,559 $(2,345) $1,310,297 $(1,750) $(31,776)
=========== ====== ======== ======= ========== ======= ========
Total Comprehensive Income for the periods:
52 Weeks Ended December 26, 1998 $234,407
13 Weeks Ended March 27, 1999 96,878
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED 13 WEEKS ENDED
MARCH 27, MARCH 28,
1999 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 2,619,326 $ 2,355,637
Cash paid to suppliers (2,396,983) (2,119,681)
Interest received 9,006 4,126
Interest paid (1,554) (906)
Income taxes paid (5,144) (4,620)
----------- -----------
Net cash provided by operating activities 224,651 234,556
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities or sale of short-term
investment securities and bonds 2,407 7,894
Purchase of short-term investment securities and bonds -- (11,272)
Proceeds from sale of property and equipment 118 12,746
Capital expenditures (61,562) (34,258)
----------- -----------
Net cash used in investing activities (59,037) (24,890)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and sales
of stock under employee stock purchase plans 35,944 8,622
Payments on long- and short-term borrowings (933) (631)
----------- -----------
Net cash provided by financing activities 35,011 7,991
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (4,527) 597
----------- -----------
Net increase in cash and cash equivalents 196,098 218,254
Cash and cash equivalents at beginning of period 704,541 239,877
----------- ------------
Cash and cash equivalents at end of period $ 900,639 $ 458,131
========== ==========
RECONCILIATION OF NET EARNINGS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net earnings $ 100,576 $ 81,094
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 38,457 32,606
Provision for losses on inventories and receivables 20,573 17,194
Accreted interest on zero coupon, convertible
subordinated notes 4,787 4,628
Contributions of common stock to employee
benefit and stock purchase plans 1,882 1,283
Loss on disposal of property and equipment 3,455 289
Changes in assets and liabilities:
Decrease in receivables 52,005 42,355
Decrease in merchandise inventories 7,158 48,022
Net increase in prepaid expenses, deferred income
taxes and other assets (11,840) (16,161)
Net increase in accounts payable, accrued
expenses and deferred credits 7,598 23,246
----------- -----------
Total adjustments 124,075 153,462
----------- -----------
Net cash provided by operating activities $ 224,651 $ 234,556
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
OFFICE DEPOT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except share data)
NOTE A - BASIS OF PRESENTATION
In August 1998, Office Depot, Inc. merged with Viking Office Products, Inc.
("Viking"). The merger was accounted for as a pooling of interests.
Accordingly, the consolidated financial statements and other non-financial
information of Office Depot have been restated and combined with the
consolidated financial statements and other non-financial information of Viking
to show you the results as if the merger had taken place at the beginning of
the periods reported.
Office Depot, Inc. and Subsidiaries, inclusive of Viking, (collectively
referred to as the "Company" or "Office Depot") is the world's largest supplier
of office products and services. References to the Company throughout these
Notes to Consolidated Financial Statements are made using the first person
notations of "we" or "our." We serve our customers in 19 countries through our
international chain of high-volume office supply stores; our contract sales
network throughout the United States; and our catalog, mail order and delivery
operations. We operate primarily under two brands - Office Depot(R) and Viking
Office Products(R).
We operate on a 52 or 53 week fiscal year ending on the last Saturday of
December. Our interim financial statements as of March 27, 1999 and for the 13
week periods ended March 27, 1999 (also referred to as "the first quarter of
1999") and March 28, 1998 (also referred to as "the first quarter of 1998") are
unaudited. However, in our opinion, the interim statements reflect all
adjustments (consisting only of normal recurring items) necessary to provide to
you a fair presentation of our financial position, results of operations and
cash flows for the periods presented. We have made certain reclassifications to
our prior year statements to conform them to the presentation we used in the
current year. These interim results are not necessarily indicative of the
results you should expect for the full year. We recommend that you read our
interim financial statements in conjunction with our audited financial
statements for the year ended December 26, 1998.
With the addition of Viking, the Company or our licensees now have operations
in Australia, Austria, Belgium, Canada, Colombia, France, Germany, Hungary,
Ireland, Israel, Italy, Japan, Luxembourg, Mexico, the Netherlands, Poland,
Thailand, the United Kingdom and the United States.
Joint venture operations in which we own 50% or less are accounted for using
the equity method. Joint venture operations in which we own more than 50% are
accounted for on a consolidated basis. In November 1998, we purchased the
remaining 50% of our joint venture operations in France. Accordingly, we have
consolidated the financial position, results of operations and cash flows of
our French operations since November 1998. Additionally, on March 29, 1999, we
purchased the remaining 50% of our joint venture operations in Japan. Beginning
in the second quarter of 1999, we will consolidate the financial position,
results of operations and cash flows of our Japanese operations.
7
<PAGE> 8
On February 24, 1999, our Board of Directors declared a three-for-two stock
split in the form of a 50% stock dividend distributed on April 1, 1999 to
stockholders of record on March 11, 1999. We have restated all share and per
share amounts retroactively to reflect this stock split. In conjunction with
the stock split, we issued 124,471,670 additional shares on April 1, 1999.
NOTE B - MERGER TRANSACTIONS
As part of our merger with Viking, each outstanding share of Viking common
stock was converted into one share of Office Depot common stock. We issued a
total of 128,106,688 shares of Office Depot common stock pursuant to the
merger.
As we integrate the two companies, we intend to close certain facilities.
Furthermore, given our decision to focus on the continued growth of our core
businesses and on expanding our international operations, we are in the process
of closing our Furniture at Work(TM) and Images(TM) stores. We incurred merger
and restructuring costs associated with these closings totaling $2,761,000 in
the first quarter of 1999. These costs consisted principally of asset impairment
write-offs, facility exit costs and personnel related costs. As we have
previously disclosed, we incurred merger and restructuring costs in connection
with these closings totaling $119,129,000 in the third and fourth quarters of
1998. As of March 27, 1999 and December 26, 1998, we have included approximately
$83.4 million and $84.8 million, respectively, related to these costs in accrued
expenses on our Consolidated Balance Sheets.
Excluding the after-tax impact of these merger and restructuring costs, our
diluted earnings per share would have been $0.26 for the first quarter of 1999.
The following is a reconciliation of amounts that Office Depot reported for the
first quarter of 1998, prior to merging with Viking, to amounts that we have
restated to reflect the merger on a pooling of interests basis:
SALES
- -----
Office Depot, as previously reported $1,981,096
Viking 417,581
----------
Combined $2,398,677
==========
NET EARNINGS
- ------------
Office Depot, as previously reported $ 55,823
Viking 25,271
----------
Combined $ 81,094
==========
We did not need to make any adjustments to the sales, net earnings or net
assets of Office Depot or Viking to conform the two companies' accounting
practices.
8
<PAGE> 9
NOTE C - NET EARNINGS PER SHARE ("EPS")
Basic EPS is based on the weighted average number of shares outstanding during
each period. Diluted EPS further assumes that our zero coupon, convertible
subordinated notes, if dilutive, were converted as of the beginning of the
period and that, under the treasury stock method, dilutive stock options were
exercised. We have adjusted net earnings under this assumption for interest on
the notes, if dilutive, net of the related income tax effect. All shares have
been restated for the stock split we described in Note A. If the stock split
had not been declared, basic shares would have been 248,536,000 and 243,352,000
and diluted shares would have been 272,848,000 and 266,372,000 for the 13 weeks
ended March 27, 1999 and March 28, 1998, respectively.
The information you need to compute basic and diluted EPS is as follows:
<TABLE>
<CAPTION>
13 WEEKS 13 WEEKS
ENDED ENDED
MARCH 27, MARCH 28,
1999 1998
--------- ---------
<S> <C> <C>
Basic:
Weighted average number of
common shares outstanding 372,805 365,029
======== ========
Diluted:
Net earnings $100,576 $ 81,094
Interest expense related to
convertible notes, net of income taxes 2,934 2,837
-------- --------
Adjusted net earnings $103,510 $ 83,931
======== ========
Weighted average number of
common shares outstanding 372,805 365,029
Shares issued upon assumed
conversion of convertible notes 24,753 24,845
Shares issued upon assumed
exercise of stock options 11,714 9,684
-------- --------
Shares used in computing diluted
EPS 409,272 399,558
======== ========
</TABLE>
NOTE D - NON-CASH INVESTING AND FINANCING TRANSACTIONS
Our Consolidated Statements of Cash Flows do not include the following non-cash
investing and financing transactions:
<TABLE>
<CAPTION>
13 WEEKS ENDED 13 WEEKS ENDED
MARCH 27, MARCH 28,
1999 1998
------------- --------------
<S> <C> <C>
Additional paid-in capital related
to income tax benefits on stock options exercised $ 6,072 $ 860
Assets acquired under capital leases 12,698 --
Common stock issued upon conversion of debt 257 43
</TABLE>
9
<PAGE> 10
NOTE E - NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires us to report every
derivative instrument at its fair value on the balance sheet. This statement
also requires us to recognize any change in the derivatives' fair value in our
earnings for the current period unless the derivatives meet specific hedge
accounting criteria.
SFAS No. 133 is effective for fiscal quarters of fiscal years that begin after
June 15, 1999. We have not determined the impact that this statement will have
on our financial position or the results of our operations when we adopt it.
NOTE F - SEGMENT INFORMATION
We operate through three reportable operating segments: Stores, Business
Services and International. We identified these segments based on how our
management evaluates our business. The following is a summary of significant
accounts and balances by segment for the 13 weeks ended March 27, 1999 and March
28, 1998, respectively that reconciles to our consolidated financial statements
for the comparable period.
<TABLE>
<CAPTION>
SALES EARNINGS BEFORE INCOME TAXES
-------------------------- ----------------------------
1999 1998 1999 1998
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Stores $1,549,322 $1,412,538 $142,413 $130,100
Business Services 747,153 711,527 60,074 41,502
International 327,558 275,441 47,950 33,342
---------- ---------- -------- --------
Total reportable segments 2,624,033 2,399,506 250,437 204,944
Eliminations and other (1,182) (829) (90,682) (76,495)
---------- ---------- -------- --------
Total $2,622,851 $2,398,677 $159,755 $128,449
========== ========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
PROVISION FOR LOSSES ON
INVENTORIES AND RECEIVABLES DEPRECIATION AND AMORTIZATION
--------------------------- -----------------------------
1999 1998 1999 1998
-------- ------------ --------- -------
<S> <C> <C> <C> <C>
Stores $ 9,528 $ 7,194 $17,473 $14,460
Business Services 8,293 6,969 9,387 8,103
International 2,752 3,031 3,937 3,689
-------- -------- ------- -------
Total reportable segments 20,573 17,194 30,797 26,252
Other -- -- 7,660 6,354
-------- -------- ------- -------
Total $ 20,573 $ 17,194 $38,457 $32,606
======== ======== ======= =======
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
ASSETS
-------------------------------
CAPITAL EXPENDITURES AS OF AS OF
------------------------ MARCH 27, DECEMBER 26,
1999 1998 1999 1998
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Stores $22,949 $10,826 $1,796,024 $1,811,118
Business Services 1,561 3,270 950,080 851,673
International 5,013 3,627 445,649 528,212
------- ------- ---------- ----------
Total reportable segments 29,523 17,723 3,191,753 3,191,003
Other 32,039 16,535 1,083,712 878,216
------- ------- ---------- ----------
Total $61,562 $34,258 $4,275,465 $4,069,219
=====-= ======= ========== ==========
</TABLE>
The following is a reconciliation of earnings before income taxes by reportable
segment to earnings before income taxes in our consolidated financial
statements.
<TABLE>
<CAPTION>
13 WEEKS 13 WEEKS
ENDED ENDED
MARCH 27, MARCH 28,
1999 1998
--------- --------
<S> <C> <C>
Reportable segments $250,437 $204,944
General and administrative expenses (89,723) (74,931)
Unallocated portion of miscellaneous
income (expense), net (1,537) (1,536)
Interest income (expense), net 3,361 64
Merger and restructuring costs (2,761) --
Intersegment transactions (22) (92)
-------- --------
Total. $159,755 $128,449
======== ========
</TABLE>
Total sales by operating segment include intersegment sales, which we
generally record at the cost to the selling entity. We evaluate the performance
of each of our segments based on their results of operations before income
taxes, merger and restructuring costs, goodwill amortization, interest income
(expense) and general and administrative expenses. The accounting policies we
apply to each of our segments are the same as those applied to the consolidated
Company. You will find a summary of our significant accounting policies in Note
A to our audited 1998 consolidated financial statements. Assets that we have
not allocated to segments consist primarily of corporate cash balances, tax
related accounts, employee benefit plan balances and assets associated with
corporate investing and financing activities.
11
<PAGE> 12
We have operations in Australia, Austria, Belgium, Canada, Colombia, France,
Germany, Hungary, Ireland, Israel, Italy, Japan, Luxembourg, Mexico, the
Netherlands, Poland, Thailand, the United Kingdom and the United States. We do
not generate 10% or more of our total sales in any single country outside of
the United States. Summarized geographic information relating to those
operations is as follows:
<TABLE>
<CAPTION>
SALES ASSETS
-------------------------- ----------------------------
13 WEEKS 13 WEEKS
ENDED ENDED AS OF AS OF
MARCH 27, MARCH 28, MARCH 27, DECEMBER 26,
1999 1998 1999 1998
--------- --------- ---------- -----------
<S> <C> <C> <C> <C>
United States $2,243,877 $2,070,264 $3,753,645 $3,591,105
International* 378,974 328,413 521,820 478,114
---------- ---------- ---------- ----------
Total $2,622,851 $2,398,677 $4,275,465 $4,069,219
========== ========== ========== ==========
</TABLE>
* As used above, International includes Canada. For purposes of identifying our
reportable operating segments, we include our Canadian operations in our
Stores segment.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Tabular amounts in thousands)
GENERAL
Office Depot, Inc. and Subsidiaries (collectively referred to as "Office Depot"
or "we") is the largest supplier of office products and services in the world.
We sell to consumers and businesses of all sizes through three business segments
- - Stores, Business Services and International. Each of these segments is
described in more detail below. We operate on a 52 or 53 week fiscal year ending
on the last Saturday in December.
This Management's Discussion and Analysis ("MD&A") is intended to provide you
with information to assist you in understanding and evaluating our financial
results and condition. Included in this analysis are our cautionary statements
regarding "forward-looking information." We recommend that you read this MD&A
in conjunction with our Consolidated Financial Statements, the Notes thereto
and our 1998 Annual Report on Form 10-K.
On February 24, 1999, our Board of Directors declared a three-for-two stock
split in the form of a 50% stock dividend distributed on April 1, 1999 to
stockholders of record on March 11, 1999. We have restated all of our share and
per share amounts retroactively to reflect this stock split.
In August 1998, Office Depot merged with Viking Office Products, Inc.
("Viking"). As part of 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, we have restated and
combined the prior period's consolidated financial statements and other
non-financial information of Office Depot with the consolidated financial
statements and other non-financial information of Viking to show you the
results as if the merger had taken place at the beginning of the periods
reported.
12
<PAGE> 13
Our Stores Division opened 27 office supply stores and closed four stores in the
first quarter of 1999, bringing our total number of retail office supply stores
open at the end of the first quarter to 725. This compares with 602 stores open
at the end of the first quarter of 1998. Our Business Services Group operated
30 customer service centers ("CSCs") at the end of the first quarter 1999, as
compared to 33 for the comparable period in 1998. This reduction results from
completing the consolidation of our five Office Depot CSCs in California into
two larger, more efficient facilities by the end of 1998.
Our International Division operated 93 retail office supply stores, 17 of which
were wholly owned, at the end of the first quarter of 1999. This compares to 46
stores, none of which were wholly owned, open at the end of the comparable
period in 1998. In addition to these stores, which are located in eight
countries, our International Division has mail order and delivery operations in
ten countries outside of the United States and Canada.
As we integrate our Office Depot and Viking operations, we intend to close
certain facilities, both domestically and internationally, over the next two
years. We plan to expense the estimated costs of this integration, primarily
asset impairment and facility exit costs, as incurred. These costs are included
in merger and restructuring costs. See MERGER AND RESTRUCTURING COSTS.
RESULTS OF OPERATIONS
SALES
FIRST QUARTER, 1999 SALES INCREASE
------------------- ----------- --------
Stores $1,549,322 10%
Business Services 747,153 5%
International 327,558 19%
Inter-segment (1,182) *
---------
Total $2,622,851 9%
FIRST QUARTER, 1998
-------------------
Stores $1,412,538 **
Business Services 711,527 **
International 275,441 **
Inter-segment (829) *
----------
Total $2,398,677 **
- -----------------------
* Not meaningful.
** Increase over 1997 first quarter is outside the scope of this.
MD&A
Our Stores Division increased its sales primarily through the sales generated by
the 123 stores we have added since March 28, 1998. Store sales in the 602 stores
in the United States and Canada that have been open for more than one year,
generally referred to as comparable store sales increased less than 1%. Our
Business Services Group achieved increased sales primarily by expanding our
contract sales force and by increasing circulation of direct mail catalogs.
Additionally, the introduction of the Office Depot public Internet site
(www.officedepot.com) in January 1998 contributed to the increased sales in our
Business Services Group by offering our customers greater flexibility in their
ordering choices. Sales from our public and business-to-business web sites
increased to $50.4 million in the first quarter of 1999, as compared with $5.9
million in the first quarter of 1998.
13
<PAGE> 14
The increase in sales in our International Division was primarily the result of
continued penetration of the Viking(R) brand in Germany and other countries, and
sales from our 17 Office Depot(R) brand stores in France. Because we held a 50%
interest in our French operations and accounted for that investment under the
equity method until November 1998, we did not include sales from the six French
stores open during the first quarter of 1998 in our sales for that period. Our
sales in the future may be impacted by competition, the opening of new Office
Depot stores in markets where stores already exist, and political and economic
conditions in the international markets in which we do business.
GROSS PROFIT
GROSS PROFIT GROSS PROFIT%
------------ -------------
FIRST QUARTER, 1999
- -------------------
Stores $355,646 23.0%
Business Services 236,492 31.7%
International 137,182 41.9%
Inter-segment (472)
-------- ----
Total $728,848 27.8%
FIRST QUARTER, 1998
- -------------------
Stores $309,150 21.9%
Business Services 209,470 29.4%
International 112,086 40.7%
Inter-segment (212)
------- ----
Total $630,494 26.3%
As we have grown and our relationships with our key vendors have strengthened,
we have lowered our net product costs, thereby improving our gross profit
percentages. Furthermore, while we earn lower gross profit percentages on our
computers, business machines and related supplies than on our other product
groups, we continue to see a favorable shift in product mix within that group
toward machine supplies and accessories which yield higher margins. This shift
has contributed to higher overall gross profit margins. Furthermore, we have
improved our margins on computers by reducing our brand assortment and inventory
levels and by increasing our inventory turns. In our general office supplies
group, we have benefited from lower purchase costs within the paper category.
In addition to the positive impact from stronger technology margins, gross
profit percentage in our Stores Division has improved as a result of more
proactive merchandising and pricing strategies used in all product categories.
The improvement in gross profit percentage in our Business Services Group was
driven largely by the use of a more disciplined pricing approach and lower net
costs for our paper products. Paper and other general office supplies account
for a much larger percentage total sales in our Business Services Group than in
our Stores Division. Gross profit in our International Division has improved as
our direct mail operations in various European countries have continued to
mature.
14
<PAGE> 15
Our overall gross profit percentage fluctuates as a result of numerous factors,
including competitive pricing pressures, changes in product and customer mix,
suppliers' pricing changes, as well as our ability to lower our net product
costs through growth in total merchandise purchases. Additionally, our
occupancy costs, which reduce gross profit, can vary as we add stores and CSCs
in new markets.
STORE AND WAREHOUSE OPERATING AND SELLING EXPENSES
<TABLE>
<CAPTION>
STORE AND WAREHOUSE OPERATING
AND SELLING EXPENSES % OF SALES
----------------------------- ----------
<S> <C> <C>
FIRST QUARTER, 1999
-------------------
Stores $ 207,533 13.4%
Business Services 176,418 23.6%
International 88,168 27.0%
Other (450)
-----------
Total $471,669 18.0%
FIRST QUARTER, 1998
-------------------
Stores $ 178,871 12.7%
Business Services 166,973 23.5%
International 74,237 27.0%
Other (120)
-----------
Total $ 419,961 17.5%
</TABLE>
The largest components of operating and selling expenses in our Stores Division
are personnel expenses, advertising and credit card processing fees. Our Stores
Division has increased its store base by 123 stores since the first quarter of
1998. This has lowered the average age of our store base. Because newer stores
usually generate lower average sales than mature ones, operating and selling
expenses as a percentage of sales in the Stores Division have increased. This
increase was driven largely by payroll and other expenses which have a
relatively large fixed cost component. In addition, we believe that opening new
stores in existing markets has cannibalized the sales of other Office Depot
stores in those markets (i.e., had the effect of reducing sales at existing
stores), causing expenses to increase relative to sales. The overall increase in
operating expenses compared to the prior year was offset somewhat by a reduction
in our remodeling costs. We remodeled 51 stores during the first quarter of
1998, compared to only 24 during the comparable period in 1999.
Operating and selling expenses as a percentage of sales are significantly
higher in our Business Services Group than in our Stores Division, principally
because of the need for a more experienced and more highly compensated sales
force. These expenses, the largest components of which are personnel and
delivery costs, have not materially changed as a percentage of sales from the
first quarter of 1998 to the comparable period in 1999.
We believe that operating synergies arising from the Viking merger will begin to
positively impact our Business Services Group's operating and selling expenses
during the remainder of 1999. During the second quarter of 1999, we will begin
integrating our Office Depot and Viking warehouses. We expect to begin combining
facilities early in the third quarter of this year and to have fully integrated
all facilities by the end of 2000. See additional discussion of the planned
integration in MERGER AND RESTRUCTURING COSTS.
15
<PAGE> 16
Similar to our Business Services Group, personnel and delivery expenses are
significant elements of our International Division's operating and selling
expenses. Furthermore, because direct mail presently constitutes our largest
international sales channel, advertising, including the cost of catalog
production and mailing, represents a significant expense. Our international
operating expenses as a percentage of sales are larger than the expenses in our
other reporting segments because several of our local country operations are in
their start-up phase. As we grow our business and establish brand recognition in
a particular market, we expect to leverage certain fixed operating expenses, and
our cost to attract new customers should decline as a percentage of sales. We
believe, however, that these improvements will be offset by the incremental
costs incurred to develop other new markets, including Japan.
Operating and selling expenses in our International Division have not changed as
a percentage of sales from the first quarter of 1998 to the comparable period in
1999. Overall improvements during the quarter were largely offset by the
financial impact of labor conflicts in France. The labor issues were resolved
before the end of the first quarter of 1999.
PRE-OPENING EXPENSES
FIRST QUARTER, 1999 FIRST QUARTER, 1998
------------------- -------------------
Pre-opening expenses $6,463 $1,174
Office supply stores opened* 29 1
- ----------------------------
* Includes relocations and wholly owned international locations.
Our pre-opening expenses consist principally of personnel, property and
advertising expenses that we incur in opening new stores. Because we expense
these items as incurred, the amount of pre-opening expenses we incur in each
period is generally proportional to the number of new stores we open during the
period. In addition to costs to open one store, our pre-opening expenses in the
first quarter of 1998 included costs associated with expanding one CSC and
opening one new CSC to replace three existing facilities.
Pre-opening expenses generally approximate $125,000 per standard office supply
store. We typically incur these expenses during a six-week period prior to the
store opening. During the first quarter of 1999, these costs increased
significantly on a per-store basis because of our acquisition of a group of
stores, which generated higher occupancy costs attributable to a longer
pre-opening period. Our pre-opening expenses also include, to a lesser extent,
expenses incurred to open and relocate facilities in our Business Services
Group and our International Division. We incur expenses of approximately
$500,000 in the pre-opening phase of a new standard-sized CSC. Pre-opening
expenses for a new, larger-sized CSC approximate $1,750,000. However, these
expenses may vary with the size, type and location of future CSCs.
16
<PAGE> 17
GENERAL AND ADMINISTRATIVE EXPENSES
- -----------------------------------
FIRST QUARTER, 1999 FIRST QUARTER, 1998
------------------- -------------------
General and administrative expenses $89,723 $74,931
Percentage of sales 3.4% 3.1%
Our general and administrative expenses consist primarily of personnel-related
costs associated with support functions. Because these functions, for the most
part, support all segments of our business, we do not consider these costs in
determining our segment profitability. Throughout 1998, we strengthened our
corporate management infrastructure, including adding several key executives.
This initiative was the most significant contributor to the increase in our
general and administrative expenses from the first quarter of 1998 to the first
quarter of 1999. In our merchandising and supply chain operations, this
increased managerial expertise helped us to reduce our inventory levels, despite
adding 123 new stores during the intervening period. Costs associated with our
Year 2000 compliance efforts and e-commerce initiatives have also contributed to
higher general and administrative expenses in 1999.
While certain other general and administrative expenses have not increased as a
percentage of sales, we cannot assure you that we will be able to continue to
increase our sales without a proportionate increase in corporate expenditures.
However, we expect synergies arising from the Viking merger to positively impact
our general and administrative expenses in the future.
MERGER AND RESTRUCTURING COSTS
- ------------------------------
In August 1998, we completed our merger with Viking. In September 1998, in
formulating our strategy for integrating the two companies, we announced plans
to close several facilities by the end of 2000. The facilities that we plan to
close either are redundant or are less efficient than other existing facilities.
Additionally, in November 1998, we decided to focus our attention on continuing
to grow our core business and on expanding our international operations. In
conjunction with this decision, we plan to close our Furniture at Work(TM) and
Images(TM) stores by the end of 1999. Beginning in the third quarter of 1998, we
have accrued the estimated costs associated with these plans. The merger and
restructuring costs of $2,761,000 recorded in the first quarter of 1999 consist
mostly of revised estimates for facility closure costs and additional
personnel-related costs incurred.
On March 29, 1999, we increased our ownership share in our Japanese operations
from 50% to 100%. In connection with this purchase, we plan to restructure our
existing operations in Japan. While we have not yet determined the amount of
merger and restructuring costs related to this restructuring effort, we expect
to charge between $15 and $20 million to our operations in the second quarter of
1999. Because we now own 100% of our Japanese operations, we will consolidate
the financial position, results of operations and cash flows of these
operations, beginning in the second quarter of 1999.
17
<PAGE> 18
OTHER INCOME AND EXPENSES
- -------------------------
We do not consider interest income and expense arising from our financing
activities at the corporate level in determining segment profitability. The
increase in interest income results from our larger cash balances, which in turn
are attributable to our increased operating cash flows over the past year.
These higher cash flows have resulted in growing cash balances. The majority of
our interest expense is fixed in nature and relates to our convertible,
subordinated debt.
Miscellaneous expense consists of equity in the earnings (losses) of our
investees and amortization of goodwill. Equity in earnings (losses) of our
investees represents our share of the earnings (losses) of the joint ventures in
which we have an ownership interest of 50% or less, as well as royalty and
franchise income that we generate under license agreements. Because all of our
equity investees operate outside of the United States and Canada, equity in
earnings (losses) of our investees is included in determining the profitability
of our International Division. The decrease in miscellaneous expense is
primarily attributable to non-recurring adjustments we made to earlier estimates
of the start-up losses in Japan. Also, we have consolidated our French
operations since November 1998. Prior to that, start-up losses incurred in
connection with this venture were accounted for under the equity method.
INCOME TAXES
FIRST QUARTER, 1999 FIRST QUARTER, 1998
------------------- -------------------
Income taxes $59,179 $47,355
Effective income tax rate* 37.0% 36.9%
- -----------------------
* Income taxes as a percentage of earnings before income taxes.
Our effective income tax rate generally fluctuates as a result of relative
profitability of our operations in individual countries and the varying tax
rates to which they are subject, offset somewhat by various tax planning
strategies we use domestically and internationally.
CASH FLOWS AND CAPITAL RESOURCES
Cash provided by (used in) our operating, investing and financing activities
has been as follows:
FIRST QUARTER, FIRST QUARTER,
1999 1998
-------------- --------------
Operating activities $224,651 $234,556
Investing activities $(59,037) $(24,890)
Financing activities $ 35,011 $ 7,991
18
<PAGE> 19
OPERATING
- ---------
We have historically relied principally on cash flow generated from our
operations as our primary source of funds because the majority of our store
sales are on a cash and carry basis. Furthermore, we use private label credit
card programs, administered and financed by financial services companies, to
expand our sales without the burden of carrying additional receivables. Our
cash requirements are also reduced by vendor credit terms that allow us to
finance a portion of our inventory. We generally offer credit terms, under
which we carry our own receivables, to our larger contract and direct mail
customers. In contrast, our smaller retail and commercial customers generally
pay in cash or by credit card. Therefore, as we expand our contract and direct
mail businesses, we anticipate that our accounts receivable portfolio will
grow. Receivables from our vendors under rebate, cooperative advertising and
marketing programs comprise a significant percentage of our total receivables.
These receivables tend to fluctuate somewhat seasonally, growing during the
second half of the year and declining during the first half because certain
collections occur after an entire program year has been completed.
The decrease in cash flows from our operating activities is primarily
attributable to increases in operating and selling expenses as a percentage of
sales in the Stores Division. As discussed in STORE AND WAREHOUSE OPERATING AND
SELLING EXPENSES, this results from the lower average age of our store base.
INVESTING
- ---------
Capital assets represent our primary investing activity. The number of stores
and CSCs we open or remodel generally drives the volume of our capital
investments. Increased expenditures for computer and other equipment at our
corporate offices required to support our expansion also contribute to our
investing activities.
We opened 27 stores (including 4 relocations) in the United States and Canada
and two stores in France during the first quarter of 1999, compared to one
additional store added in the comparable 1998 period. This increase was the
most significant contributor to the overall increase in our capital
expenditures for the quarter.
We currently plan to open at least 82 additional stores during the remainder of
1999. We estimate that our cash requirements, excluding pre-opening expenses,
will be approximately $1.4 million for each new office supply store. This
consists of $650,000 for leasehold improvements, fixtures, point-of-sale
terminals and other equipment in the stores, and $750,000 for the portion of
inventories that is not financed by our vendors. In addition, we estimate that
each new office supply store will require pre-opening expenses of approximately
$125,000. Our cash requirements for new CSCs are significantly more than for
stores, and these costs vary depending on the size, type and location of the
facility.
FINANCING
- ---------
In February 1998, we entered into a new credit agreement with a syndicate of
banks. This credit agreement provides us a working capital line and letters of
credit totaling $300 million. The new credit agreement replaced our previous
credit agreement and provides
19
<PAGE> 20
for various borrowing rate options, including a rate based on credit rating and
fixed charge coverage ratio factors that currently would result in an interest
rate of .18% over LIBOR. The credit facility expires in February 2003 and
contains certain restrictive covenants relating to various financial statement
ratios. Since February 1997, we have not borrowed any amounts against our
credit facility. As of March 27, 1999, we had outstanding letters of credit
totaling $17.4 million under the facility. In addition to bank borrowings, we
have historically used equity capital, convertible debt and capital equipment
leases as supplemental sources of funds.
The improvement in cash provided from our financing activities in the first
quarter of 1999 as compared to the first quarter of 1998 was driven by an
increase in the volume of stock options exercised by our employees. In
connection with our merger with Viking, all options held by Viking employees
prior to the merger, with the exception of those granted under Viking's annual
option award in July 1998, became fully vested on the merger date.
In 1992 and 1993, we issued Liquid Yield Option Notes ("LYONs") which are zero
coupon, convertible subordinated notes maturing in 2007 and 2008, respectively.
Each LYON is convertible at the option of the holder at any time on or prior to
its maturity into Office Depot common stock at conversion rates of 43.895 and
31.851 shares per 1992 and 1993 LYON, respectively. We may, at our option,
elect to pay the purchase price on any particular conversion date in cash or
common stock, or any combination thereof.
We continually review our financing options. Although we currently anticipate
that we will finance all of our 1999 expansion and other activities through
cash on hand, funds generated from operations, equipment leases and funds
available under our revolving credit facility, we will consider alternative
financing if market conditions make it financially attractive. Our financing
requirements beyond 1999 will be affected by our operating and investing
decisions, including the number of new stores or CSCs we open or acquire.
YEAR 2000
As the Year 2000 ("Y2K") approaches, we are faced with issues related to the
inability of certain electronic data operating systems to differentiate between
the years 1900 and 2000 when processing data. Many systems and programs were
written to recognize and process two digits for the year, instead of four.
In recent years, the producers of electronic data operating systems, as well as
most other businesses, have generally become aware of Y2K issues and the
potential for disruption in the operation of business as a result of systems
that are not Y2K compliant. Y2K issues can arise at any point in operational or
financial processes. Most systems and programs developed in the past several
years have been designed to be Y2K compliant, whereas many of the older systems
and programs are not Y2K compliant and require various changes in order to
bring them into compliance.
Most of our current application systems were developed over the past four years
and were designed to use four-digit year values. We believe that these systems
are already Y2K compliant. To ensure a smooth transition into the millennium,
we have established our Year 2000 Project Office led by a Year 2000 Project
Team (collectively referred to as
20
<PAGE> 21
"Project 2000"). The objective of Project 2000 is to establish standards and
guidelines, assist in development and remediation plans, track and report on
progress, and answer customer and vendor inquiries regarding our Y2K compliance
efforts. Project 2000 consists of four major components: Technology Systems,
including (1) Operations and (2) Development; and Non-technology Systems,
including (3) Facilities and (4) Merchandising. Our Y2K effort is worldwide,
and our goal is to minimize disruption of our business in each country we
operate in when January 1, 2000 arrives.
TECHNOLOGY SYSTEMS:
In the Operations component of Project 2000, we are reviewing our data center
process automation equipment, software not internally developed or supported by
our MIS department, and our data/voice networks. We are in the process of: 1)
inspecting all equipment and complete an inventory of all of our hardware and
software, 2) evaluating the readiness of all hardware and software and
determining what upgrades are required and 3) correcting all non-compliant
hardware and software using upgrades certified as Y2K compliant by their
vendors. We expect to complete this component by August 1999.
In the MIS Development component, we are focusing on the proper operation of
application software developed or supported in-house. We are in the process of:
1) assessing our systems for potential Y2K issues, 2) remediating any
non-compliant systems by changing the program code to properly process all
dates, 3) testing to make sure remediation has not changed the functionality of
the application, and implement new program code, 4) testing the accuracy of the
output under multiple scenarios and 5) certifying that the systems are Y2K
compliant. We have multiple teams within our MIS organization working on this
component of Project 2000. Although each team is at a different stage of
completion, we are substantially finished with this component, as a whole.
Overall, the two Technology components together are currently approximately 90%
complete.
NON-TECHNOLOGY SYSTEMS:
The Facilities component of Project 2000 involves our buildings, including
security, heating/ventilation/air conditioning and telephone systems; and our
transportation systems and equipment, including scheduling, communication,
security, tracking and maintenance. We have fully completed this component. The
phases consisted of: 1) developing an inventory of equipment and services and
associated vendors, 2) contacting all of our vendors to verify Y2K compliance
of their equipment and services, 3) upgrading systems and equipment to
compliant versions, if necessary, 4) testing equipment and systems and 5)
certifying that all such equipment and services are Y2K compliant.
In the Merchandising component of Project 2000, we are attempting to ensure that
our merchandise suppliers are able to meet their delivery commitments. The
phases of this component are: 1) developing a supplier survey, 2) requesting
that our suppliers confirm their Y2K compliance, 3) establishing confidence/risk
levels by product, 4) developing contingency plans, such as alternate product
sources and increased inventory levels, for non-compliant vendors and 5)
certifying products as Y2K compliant or implement contingency plans. We are
finished with phase 1 and are working on phases 2 and 3. We will continue to
follow up with vendors until they have all responded. Over 90% of respondents
have indicated that they have plans in place for internal systems compliance,
and the majority of the respondents have already certified that their products
are Y2K compliant. We expect to complete this component, to the extent possible,
by September 1999.
Because our operations are highly dependent on those of our suppliers and
customers, we could be materially adversely affected if utilities, private
businesses or governmental entities with which we do business are not
adequately prepared for the year 2000. A reasonably possible worst case
scenario resulting from our not being fully Y2K compliant by January 1, 2000
might include, among other things, temporary store or CSC closings, delays in
the delivery of products, delays in the receipt of supplies, payment and
collection errors, and inventory and supply obsolescence. Our business and the
results of our operations could be materially adversely affected by a temporary
inability to conduct business in the ordinary course for a period of time after
January 1, 2000. However, we believe that our Y2K readiness efforts will
significantly reduce any adverse effect from any such disruptions. Furthermore,
we do not believe that the effects on our financial position and the results of
our operations will be material. We have not experienced any significant delays
in other MIS initiatives as a result of Project 2000.
21
<PAGE> 22
We capitalize costs for hardware and software and depreciate them over the
assets' estimated useful lives. We expense all other costs specifically
associated with Project 2000 (e.g., labor, consulting fees, maintenance
contracts, etc.) as incurred. We incurred approximately $5 million in 1998
related to Project 2000. We expensed substantially all of these costs.
Additionally, we incurred costs of approximately $6 million during the first
quarter of 1999. We expect to spend another $7 million to complete Project
2000, most of which we will expense as incurred. Our estimate of costs
related to this effort has increased from amounts previously disclosed as a
result of certain equipment write-offs not originally contemplated.
Our 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 further change. Our estimates and conclusions contain
forward-looking statements and are based on our best estimates of future
events. Although we expect our systems and facilities to be Y2K compliant by
the end of the third quarter of 1999, we cannot assure you that we will achieve
this goal. Risks to our completing the plan include the availability of
resources, our ability to identify and correct any potential Y2K issues, and
the willingness and ability of suppliers, customers and governmental agencies
to bring their systems into Y2K compliance.
EURO
On January 1, 1999, eleven of the fifteen member countries of the European
Economic and Monetary Union ("EMU") established fixed conversion rates between
their existing currencies and the EMU's common currency (the euro). The euro is
currently trading on currency exchanges and may be used in business
transactions. The ultimate 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.
22
<PAGE> 23
The use of a single currency in the participating countries may affect our
ability to price products differently in various European markets because of
price transparency. We realize that we may be faced with price harmonization at
lower average prices for items we sell in some markets. Nevertheless, other
market factors such as local taxes, customer preferences and product assortment
may reduce the likelihood of price equalization.
We generate significant sales in Europe and are currently evaluating the
business implications of the conversion to the euro. These implications
include, among other things, the need to adapt internal systems to accommodate
euro-denominated transactions; competitive implications of cross border price
transparency and the impact on our existing marketing programs. Based on these
evaluations, we do not expect the conversion to the euro to have a material
effect on our financial position or the results of our operations.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that we report every
derivative instrument at its fair value on the balance sheet as either an asset
or a liability. This statement also requires that we recognize changes in the
derivative's fair value currently in earnings unless the derivatives meet
specific hedge accounting criteria.
SFAS No. 133 is effective for fiscal quarters of fiscal years that begin after
June 15, 1999. We have not yet determined the impact that this statement will
have on our financial position or the results of our operations when we adopt
it.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
In December 1995, the Private Securities Litigation Reform Act of 1995 (the
"Act") was enacted by the United States Congress. The Act contains certain
amendments to the Securities Act of 1933 and the Securities Exchange Act of
1934. These amendments provide protection from liability in private lawsuits
for "forward-looking" statements made by public companies and other persons
specified in the Act. We want to take advantage of the "safe harbor" provisions
of the Act.
This Quarterly Report on Form 10-Q contains both historical information and
other information that looks towards our future performance. Examples of
historical information include our quarterly financial statements and the
commentary on past performance contained in this MD&A. We caution readers that,
with the exception of information which clearly deals with historical matters,
the information contained in this Quarterly Report on Form 10-Q should be
considered to be "forward-looking statements" as referred to in the Act.
Without limiting the generality of the preceding sentence, any time we use the
words
23
<PAGE> 24
"estimate," "project," "intend," "expect" and similar expressions, we intend to
clearly express that the information deals with possible future events and is
forward-looking in nature.
Forward-looking information involves risks and uncertainties, including certain
matters which we discussed in more detail in the Cautionary Statements contained
in our 1998 Annual Report on Form 10-K. This information is based on various
factors and important assumptions about future events that may or may not
actually come true. As a result, our operations and financial results in the
future could differ materially and substantially from those we have discussed in
the forward-looking statements in this Quarterly Report. In particular, the
factors we discussed in the Cautionary Statements in our 1998 Annual Report on
Form 10-K could affect our actual results and could cause our actual results
during 1999 and in future years beyond 1999 to differ materially from those
expressed in any forward-looking statement made by or on behalf of us in this
Quarterly Report. Those cautionary statements are incorporated herein by this
reference to them.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISKS
See the disclosure in our 1998 Annual Report on Form 10-K, filed March 22, 1999.
We do not believe that the risk we face related to interest rate changes has
changed materially different than at the date of such Report.
FOREIGN EXCHANGE RATE RISKS
See the disclosure in our 1998 Annual Report on Form 10-K, filed March 22, 1999.
We do not believe that the risk we face related to foreign currencies has
changed materially different than at the date of such Report.
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
We are involved in litigation arising in the normal course of our business. We
do not believe that these matters will materially affect our financial position
or the results of our operations.
24
<PAGE> 25
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 24, 1999, our Board of Directors declared a three-for-two stock
split in the form of a 50% stock dividend distributed on April 1, 1999 to
stockholders of record on March 11, 1999.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held an annual meeting of our stockholders on April 21, 1999 to vote on the
following:
a. To elect twelve directors to hold office until the next annual
meeting of our stockholders or until their successors have been
elected and qualified. Our stockholders voted to elect all
twelve directors. Votes for and votes withheld, by nominee were
as follows:
NOMINEE FOR WITHHELD
------- --- --------
Lee A. Ault, III 221,316,198 3,878,012
Neil R. Austrian 221,329,828 3,864,382
Cynthia R. Cohen 221,294,030 3,900,180
David I. Fuente 221,308,102 3,886,108
W. Scott Hedrick 221,332,745 3,861,465
Irwin Helford 221,334,683 3,859,527
James Heskett 221,298,965 3,895,245
John C. Macatee 221,254,556 3,939,654
Michael J. Myers 221,317,048 3,877,162
M. Bruce Nelson 221,019,872 4,174,338
Frank P. Scruggs, Jr. 219,423,110 5,771,100
Peter J. Solomon 219,440,290 5,753,920
b. To consider the adoption of the 1999 Employee Stock Purchase.
Our stockholders approved this matter with 222,074,988 votes
for and 2,760,437 votes against it. In addition, there were
358,785 abstentions.
c. To ratify the appointment of Deloitte & Touche LLP as our
independent public accountants for the 1999 fiscal year. Our
stockholders approved this matter with 224,755,838 votes for
and 224,180 votes against it. In addition, there were 214,192
abstentions.
25
<PAGE> 26
ITEM 5 OTHER INFORMATION
Not applicable.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
a. 27.1 Financial Data Schedule (for SEC use only)
b. 27.2 Restated Financial Data Schedule for the quarter ended March 28,
1998 (for SEC use only)
26
<PAGE> 27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OFFICE DEPOT, INC.
(Registrant)
Date: May 11, 1999 By: /s/ Barry J. Goldstein
-------------------------------------
Barry J. Goldstein
Executive Vice President-Finance
and Chief Financial Officer
Date: May 11, 1999 By: /s/ Charles E. Brown
-------------------------------------
Charles E. Brown
Senior Vice President-Finance
and Controller
(Principal Accounting Officer)
27
<PAGE> 28
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27.1 Financial Data Schedule (for SEC use only)
27.2 Restated Financial Data Schedule for the quarter ended March 28,
1998 (for SEC use only)
28
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-START> DEC-27-1998
<PERIOD-END> MAR-27-1999
<CASH> 900,639
<SECURITIES> 9,347
<RECEIVABLES> 629,709
<ALLOWANCES> 29,491
<INVENTORY> 1,234,407
<CURRENT-ASSETS> 2,904,325
<PP&E> 1,543,105
<DEPRECIATION> 532,192
<TOTAL-ASSETS> 4,275,465
<CURRENT-LIABILITIES> 1,578,315
<BONDS> 489,840
0
0
<COMMON> 3,769
<OTHER-SE> 2,157,985
<TOTAL-LIABILITY-AND-EQUITY> 4,275,465
<SALES> 2,622,851
<TOTAL-REVENUES> 2,622,851
<CGS> 1,894,003
<TOTAL-COSTS> 2,372,135
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,708
<INTEREST-EXPENSE> 6,351
<INCOME-PRETAX> 159,755
<INCOME-TAX> 59,179
<INCOME-CONTINUING> 100,576
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 100,576
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.25
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-START> DEC-28-1997
<PERIOD-END> MAR-28-1998
<CASH> 431,128
<SECURITIES> 48,674
<RECEIVABLES> 476,587
<ALLOWANCES> 31,348
<INVENTORY> 1,339,217
<CURRENT-ASSETS> 2,494,797
<PP&E> 1,256,832
<DEPRECIATION> 418,822
<TOTAL-ASSETS> 3,640,224
<CURRENT-LIABILITIES> 1,298,958
<BONDS> 453,446
0
0
<COMMON> 3,688
<OTHER-SE> 1,805,262
<TOTAL-LIABILITY-AND-EQUITY> 3,640,224
<SALES> 2,398,677
<TOTAL-REVENUES> 2,398,677
<CGS> 1,768,183
<TOTAL-COSTS> 2,189,318
<OTHER-EXPENSES> 76,467
<LOSS-PROVISION> 6,431
<INTEREST-EXPENSE> 5,431
<INCOME-PRETAX> 128,449
<INCOME-TAX> 47,355
<INCOME-CONTINUING> 81,094
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81,094
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.21
</TABLE>
