<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 25, 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 329,178,558 shares of common stock outstanding as of
November 4, 1999.
<PAGE> 2
OFFICE DEPOT, INC.
FORM 10-Q - QUARTER ENDED SEPTEMBER 25, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the
13 and 39 Weeks Ended September 25, 1999 and
September 26, 1998 3
Consolidated Balance Sheets as of
September 25, 1999 and December 26, 1998 4
Consolidated Statements of Cash Flows for the
39 Weeks Ended September 25, 1999 and
September 26, 1998 5
Consolidated Statements of Stockholders'
Equity for the 39 Weeks Ended September 25, 1999
and the Year Ended December 26, 1998 6
Notes to the Consolidated Financial Statements 7 - 13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14 - 28
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 28 - 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security
Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
INDEX TO EXHIBITS 31
</TABLE>
2
<PAGE> 3
OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 26,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales $2,578,500 $2,234,900 $7,544,387 $6,702,135
Cost of goods sold and
occupancy costs (Note C) 1,928,508 1,612,864 5,487,312 4,875,956
------------ ----------- ----------- -----------
Gross profit 649,992 622,036 2,057,075 1,826,179
Store and warehouse operating
and selling expenses 481,954 402,737 1,406,833 1,206,704
Pre-opening expenses 5,007 3,663 16,709 7,676
General and administrative expenses 106,129 83,772 285,559 233,065
Merger and restructuring
costs (Note B) 8,955 87,815 24,434 87,815
Store closure and
relocation costs (Note C) 46,438 --- 46,438 ---
------------ ----------- ----------- -----------
Operating profit 1,509 44,049 277,102 290,919
Other income (expense):
Interest income, net 2,149 1,063 7,520 30
Miscellaneous expense, net (461) (2,246) (4,106) (13,359)
------------ ----------- ----------- -----------
Earnings before income taxes 3,197 42,866 280,516 277,590
Income taxes 4,270 27,118 106,897 113,072
------------ ----------- ----------- -----------
Net earnings (loss) $ (1,073) $ 15,748 $ 173,619 $ 164,518
============ ========== ========== ==========
Earnings (loss) per share:
Basic $0.00 $0.04 $0.47 $0.45
Diluted 0.00 0.04 0.45 0.43
</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 25, DECEMBER 26,
1999 1998
------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 503,340 $ 704,541
Short-term investments 72,013 10,424
Receivables, net 810,212 721,446
Merchandise inventories, net 1,215,943 1,258,355
Deferred income taxes 75,119 52,422
Prepaid expenses 45,853 33,247
---------- ----------
Total current assets 2,722,480 2,780,435
Property and equipment, net 1,136,216 935,407
Goodwill, net 246,170 227,964
Other assets 135,403 125,413
---------- ----------
$4,240,269 $4,069,219
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,174,785 $1,027,591
Accrued expenses 567,880 430,666
Income taxes payable 33,543 69,910
Current maturities of long-term debt 7,858 2,834
---------- ----------
Total current liabilities 1,784,066 1,531,001
Long-term debt, net of current maturities 83,369 35,490
Deferred income taxes and other credits 55,254 38,628
Zero coupon, convertible subordinated notes payable 449,465 435,221
---------- ----------
2,372,154 2,040,340
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock - authorized 800,000,000 shares of
$.01 par value; issued 378,443,292 in 1999 and
373,817,704 in 1998 3,784 3,738
Additional paid-in capital 909,476 838,122
Accumulated other comprehensive income (33,539) (18,078)
Unamortized value of long-term incentive stock grant (2,205) (2,874)
Retained earnings 1,383,340 1,209,721
Treasury stock, at cost - 39,539,670 shares in 1999
and 3,245,170 shares in 1998 (392,741) (1,750)
---------- ----------
1,868,115 2,028,879
---------- ----------
$4,240,269 $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 CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
39 WEEKS ENDED 39 WEEKS ENDED
SEPTEMBER 25, SEPTEMBER 26,
1999 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $7,458,647 $6,621,800
Cash paid to suppliers (6,893,247) (6,047,659)
Interest received 27,029 21,691
Interest paid (4,895) (2,779)
Income taxes paid (137,888) (103,251)
------------- ------------
Net cash provided by operating activities 449,646 489,802
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities or sales of investment securities 42,006 27,704
Purchases of investment securities (110,161) (69,708)
Purchase of remaining 50% interest in Japanese joint venture (21,629) ---
Investments in unconsolidated joint ventures (268) (36,987)
Proceeds from sale of property and equipment 3,869 19,128
Capital expenditures (296,371) (156,200)
------------- -------------
Net cash used in investing activities (382,554) (216,063)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and sale
of stock under employee stock purchase plans 52,011 36,467
Repurchase of common stock for treasury (329,718) --
Proceeds from issuance of long-term debt 17,444 --
Payments on long- and short-term borrowings (4,619) (1,095)
--------------- ---------------
Net cash (used in) provided by financing activities (264,882) 35,372
------------- --------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (3,411) (6,022)
--------------- ---------------
Net (decrease) increase in cash and cash equivalents (201,201) 303,089
Cash and cash equivalents at beginning of period 704,541 239,877
------------- -------------
Cash and cash equivalents at end of period $ 503,340 $ 542,966
============ ============
RECONCILIATION OF NET EARNINGS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net earnings $ 173,619 $ 164,518
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 123,730 102,924
Provision for losses on inventories and receivables 87,054 47,891
Net (earnings) losses on equity method investments (790) 10,458
Accreted interest on zero coupon, convertible
subordinated notes 14,573 14,052
Contributions of common stock to employee
benefit and stock purchase plans 4,240 3,885
Loss on disposal of property and equipment 4,891 873
Deferred income taxes (10,683) (6,625)
Changes in assets and liabilities:
Increase in receivables (116,292) (23,240)
(Increase) decrease in merchandise inventories (10,522) 181,138
Net increase in prepaid expenses and other assets (15,583) (9,584)
Net increase in accounts payable, accrued
expenses and deferred credits 195,409 3,512
-------------- ---------------
Total adjustments 276,027 325,284
-------------- -------------
Net cash provided by operating activities $ 449,646 $ 489,802
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED UNAMORTIZED
COMMON COMMON ADDITIONAL OTHER VALUE OF LONG-
STOCK STOCK PAID-IN COMPREHENSIVE TERM INCENTIVE RETAINED TREASURY
SHARES AMOUNT CAPITAL INCOME STOCK GRANT EARNINGS STOCK TOTAL
----------- ------ ---------- ------------- -------------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 27, 1997 367,663,995 $3,677 $761,685 $(19,289) $(3,210) $ 976,525 $ (1,750) $1,717,638
Comprehensive income:
Net earnings for the
year 233,196 233,196
Foreign currency
translation adjustment 1,211 1,211
Exercise of stock options,
including income tax
benefits 5,399,946 54 63,456 63,510
Issuance of stock under
employee stock purchase
plans 467,394 4 7,896 7,900
Matching contributions
under 401(k) and deferred
compensation plans 203,055 2 3,882 3,884
Conversion of LYONs to
common stock 83,314 1 1,203 1,204
Amortization of long-term
incentive stock grant -- -- -- 336 336
----------- ------ -------- -------- ------- ---------- --------- ----------
BALANCE AT DECEMBER 26, 1998 373,817,704 3,738 838,122 (18,078) (2,874) 1,209,721 (1,750) 2,028,879
(UNAUDITED):
Comprehensive income:
Net earnings for the period 173,619 173,619
Foreign currency translation
adjustment (22,438) (22,438)
Unrealized gain on investment
securities, net of tax 6,977 6,977
Purchase of treasury stock (390,991) (390,991)
Exercise of stock options,
including income tax
benefits 4,027,481 40 60,843 60,883
Issuance of stock under
employee stock purchase
plans 364,230 4 6,036 6,04
Matching contributions under
401(k) and deferred
compensation plans 214,334 2 4,239 4,241
Conversion of LYONs to
common stock 23,709 -- 329 329
Amortization of long-term
incentive stock grant 669 669
Payment for fractional shares
in connection with 3-for-2
stock split (4,166) -- (93) (93)
----------- ------ -------- -------- ------- ---------- --------- ----------
BALANCE AT SEPTEMBER 25, 1999 378,443,292 $3,784 $909,476 $(33,539) $(2,205) $1,383,340 $(392,741) $1,868,115
=========== ====== ======== ======== ======= ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
OFFICE DEPOT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands)
NOTE A - BASIS OF PRESENTATION
Office Depot, Inc., together with our subsidiaries, including Viking Office
Products, Inc. ("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 are made throughout these Notes to the Consolidated
Financial Statements using the first person notations of "we" or "our."
In August 1998, Office Depot merged with Viking. We accounted for the merger as
a pooling of interests. We have restated and combined the 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.
With the addition of Viking, we now have operations in Australia, Austria,
Belgium, Canada, Colombia, France, Germany, Hungary, Ireland, Israel, Italy,
Japan, Luxembourg, Mexico, the Netherlands, Poland, Thailand (see Note C below
regarding our decision to sell our operations in Thailand), the United Kingdom
and the United States. In some of these countries, we operate under license or
joint venture arrangements. We serve our customers through a combination of
office supply retail stores, mail order catalogs and e-commerce. In the United
States, we also use a contract sales network to serve our larger corporate
customers. We do business primarily under two brands - Office Depot(R) and
Viking Office Products(R).
Our joint ventures in Israel and Mexico are accounted for using the equity
method because we own 50% or less of the business and can exercise significant
influence over their operations and policies. Our joint venture in Thailand is
accounted for on a consolidated basis because we own more than 50% of the
business (See Note C). In November 1998, we purchased the remaining 50%
ownership interest in our joint venture operations in France; and in April
1999, we purchased the remaining 50% interest in our joint venture operations
in Japan. Accordingly, we have consolidated the financial position, results of
operations and cash flows of our French and Japanese retail operations since
those respective dates.
We operate on a 52 or 53-week fiscal year ending on the last Saturday of
December. Our interim financial statements as of September 25, 1999 and for the
13 and 39-week periods ended September 25, 1999 and September 26, 1998 are
unaudited. However, in our opinion, these interim financial statements reflect
all adjustments (consisting only of normal recurring items) necessary to
provide you with a fair presentation of our financial position, results of
operations and cash flows for the periods presented. These interim results do
not necessarily indicate the results you should expect for the full year. For a
better understanding of our Company and its financial statements, we recommend
that you read our interim financial statements in conjunction with our audited
financial statements for the year ended December 26, 1998.
7
<PAGE> 8
We have made certain reclassifications to our prior year statements to conform
them to the presentation we used in the current year.
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 in our financial statements to reflect this stock split. In
conjunction with the stock split, we issued 124,560,075 additional shares on
April 1, 1999.
NOTE B - MERGER AND RESTRUCTURING 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.
No adjustments to the sales, net earnings or net assets of Office Depot or
Viking were required to conform the two companies' accounting practices.
As we continue to integrate the two companies, both domestically and
internationally, we intend to close certain facilities. Furthermore, as a
result of our decision to focus on the continued growth of our core businesses
and on expanding our international operations, we closed our Furniture at
Work(TM) and Images(TM) stores. During the third and fourth quarters of 1998,
we incurred merger and restructuring costs of $119.1 million associated with
these activities. These costs consisted principally of facility exit and
personnel related costs.
In November 1998, we purchased our joint venture partner's interest in our
French retail operations. Following this purchase, we decided to restructure
and integrate our separate Office Depot and Viking operations in France.
Similarly, in April 1999, we purchased our joint venture partner's interest in
our Japanese retail operations and announced plans to restructure and integrate
our operations in Japan.
During the first nine months of 1999, we recorded merger and restructuring
costs of $24.4 million, primarily associated with additional personnel related
costs and our plans for restructuring and integrating our Japanese operations.
As of September 25, 1999 and December 26, 1998, we have included approximately
$81.3 million and $84.8 million, respectively, related to the merger and
restructuring costs described above in accrued expenses on our Consolidated
Balance Sheets.
NOTE C - THIRD QUARTER 1999 CHARGES
In the third quarter of 1999, we increased our provision for slow-moving and
obsolete inventories in our warehouses and stores by $56.1 million. This charge
is primarily related to slow moving technology-related products whose market
values have been adversely affected by accelerated rates of change in
technology and a rationalization of the warehouse inventory assortments in
conjunction with the Viking warehouse consolidation.
This charge has been included in our cost of goods sold.
In addition, we recorded a charge of $46.4 million in the third quarter of 1999
to reflect our decision to accelerate our store closure and relocation program
for older and under-performing stores in our Stores Division. The charge also
reflected our decision to sell our interest in our two stores in Thailand. On
8
<PAGE> 9
October 28, 1999, we entered into an agreement with Central Retail Group, our
joint venture partner, to sell to them our Thailand operations and license to
them certain trademarks and software and operating systems. Central Retail
Group will now operate the two stores under a license agreement. Finally, the
charge also reflects our decision to write-down certain other long-term assets
in our Business Services Group.
NOTE D - COMPREHENSIVE INCOME
Comprehensive income represents all non-owner changes in equity and, for Office
Depot, consists of the following:
<TABLE>
<CAPTION>
THIRD QUARTER YTD
------------------------ -------------------------
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net earnings (loss) $(1,073) $15,748 $173,619 $164,518
Foreign currency translation adjustments (4,852) 14,177 (22,438) 10,879
Unrealized gain on investment securities* 11,381 -- 11,381 --
Tax on unrealized gain (4,404) -- (4,404) --
------- ------- -------- --------
Total comprehensive income $ 1,052 $29,925 $158,158 $175,397
======= ======= ======== ========
</TABLE>
*The unrealized gain on investment securities arises from the changes in
fair value of equity investments that are classified as "available for
sale" under the provisions SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." During September 1999, we
made equity investments in two unrelated companies at a cost of $6.5
million.
NOTE E - STOCK REPURCHASE
On August 30, 1999, our Board of Directors authorized a repurchase of up to
$500 million of our stock. As of September 25, 1999, we had purchased
36,294,500 shares of our stock at a total cost of $390.2 million plus
commissions. We have since purchased an additional 10,179,900 shares at a total
cost of $106.9 million plus commissions, substantially completing the
authorized repurchase program.
NOTE F - LONG-TERM DEBT
In July 1999, we entered into term loan and revolving credit agreements with
several Japanese banks (the "yen facilities") to provide financing for our
operations in Japan. The yen facilities provide for maximum aggregate
borrowings of (Y)9.76 billion (the equivalent of $80 million at the time that
the agreements were executed and $90 million at September 25, 1999) at an
interest rate of .875% over the Tokyo Interbank Offered Rate ("TIBOR"). These
yen facilities contain covenants similar to those in our domestic credit
facility, which you can read about in our 1998 Annual Report. We borrowed
(Y)2.03 billion (the equivalent of $19.4 million at September 25, 1999) under
these yen facilities during the third quarter of 1999. We have borrowed an
additional (Y)2.82 billion (the equivalent of $26.8 million at the time of the
borrowings) subsequent to the end of the third quarter. Effective as of October
28, 1999, we entered into a yen interest rate swap for a notional amount of
(Y)2.4 billion in order to hedge against the volatility of the interest
payments on a portion of the yen borrowings. The terms of the swap specify that
we pay an interest rate of .7% and receive TIBOR.
9
<PAGE> 10
NOTE G - EARNINGS PER SHARE ("EPS")
Basic EPS is calculated based on the weighted average number of shares
outstanding during each period. Diluted EPS further assumes that: 1) our zero
coupon, convertible subordinated notes, if dilutive (i.e., if their effect
reduces EPS), were converted to common stock as of the beginning of each
period, 2) stock options, if dilutive (i.e., if the exercise price of the
option is lower than the average market price of the common stock), were
exercised and 3) the proceeds from the assumed exercise of dilutive stock
options were used to repurchase common stock to be held in treasury. We adjust
net earnings under this assumption for interest accreted on the notes, if
dilutive, net of the related income tax effect.
You should use the following information to compute basic and diluted EPS for
the periods indicated.
<TABLE>
<CAPTION>
Third Quarter Year to Date
------------------------- ---------------------------
1999 1998 1999 1998
------- ------- ------- --------
<S> <C> <C> <C> <C>
Basic:
Weighted average number of
common shares outstanding 368,878 367,706 371,989 366,401
======== ======== ======== ========
Diluted:
Net earnings (loss) $ (1,073) $ 15,748 $173,619 $164,518
Interest expense related to
convertible notes, net of income taxes -- -- 8,943 8,641
-------- --------- -------- --------
Adjusted net earnings (loss) $ (1,073) $ 15,748 $182,562 $173,159
======== ========= ======== ========
Weighted average number of
common shares outstanding 368,878 367,706 371,989 366,401
Shares issued upon assumed
conversion of convertible notes* -- -- 24,746 24,825
Shares issued upon assumed
exercise of dilutive stock options 5,795 10,843 9,124 10,774
-------- --------- -------- --------
Shares used in computing diluted EPS 374,673 378,549 405,859 402,000
======== ========= ======== ========
</TABLE>
*For the third quarter of 1999 and 1998, the zero coupon, convertible
subordinated notes were anti-dilutive and, accordingly, were not included
in the diluted EPS calculations.
NOTE H - 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>
Year to Date
----------------------------
1999 1998
------- ------
<S> <C> <C>
Additional paid-in capital related
to income tax benefits on stock options exercised $13,760 $9,346
Assets acquired under capital leases 37,795 8,292
Common stock issued upon conversion of debt 329 1,116
Unrealized gain on investment securities, net of income taxes 6,977 --
</TABLE>
10
<PAGE> 11
NOTE I - NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 requires that we record all derivatives as assets or liabilities
measured at their fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for according to the intended
use of the derivative and whether it qualifies for hedge accounting.
In July 1999, the FASB issued SFAS No.137, which defers the effective date of
SFAS No. 133 until the start of fiscal years beginning after June 15, 2000. We
will adopt SFAS No. 133 in our fiscal year 2001. We do not expect the adoption
of SFAS No. 133 to have a material impact on our financial position or the
results of our operations.
NOTE J - SEGMENT INFORMATION
We operate through three reportable segments: Stores, Business Services and
International. You will find a more complete description of each of these
operating groups in paragraphs 5 through 7 of ITEM 2 (MD&A). We have identified
and defined these segments based on how our management evaluates our business
internally. In the second quarter of 1999, we revised our segment definitions
to better reflect management accountability. All segment amounts presented here
have been restated to reflect this change. 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. The following is a summary of
significant accounts and balances by segment for the 13 and 39 weeks ended
September 25, 1999 and September 26, 1998, respectively, that reconciles to our
consolidated financial statements for the comparable periods.
<TABLE>
<CAPTION>
SALES*
--------------------------------------------------------------
Third Quarter Year to Date
--------------------------- ---------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Stores $1,462,416 $1,247,700 $4,264,756 $3,747,203
Business Services 803,484 736,663 2,337,771 2,189,269
International 313,489 251,426 944,926 768,323
---------- ---------- ---------- ----------
Total reportable segments 2,579,389 2,235,789 7,547,453 6,704,795
Eliminations (889) (889) (3,066) (2,660)
---------- ---------- ---------- ----------
Total $2,578,500 $2,234,900 $7,544,387 $6,702,135
========== ========== ========== ==========
</TABLE>
*Sales by operating segment include intersegment sales, which we generally
record at the cost to the selling entity.
11
<PAGE> 12
<TABLE>
<CAPTION>
PROVISION FOR LOSSES ON INVENTORIES AND RECEIVABLES
-----------------------------------------------------------
Third Quarter Year to Date
------------------------ ------------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Stores $23,511 $ 5,392 $34,137 $17,895
Business Services 26,113 8,309 43,461 22,801
International 3,989 3,206 9,456 7,195
------- ------- ------- -------
Total reportable segments 53,613 16,907 87,054 47,891
Other -- -- -- --
------- ------- ------- ------
Total $53,613 $16,907 $87,054 $47,891
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DEPRECIATION AND AMORTIZATION
-----------------------------------------------------------
Third Quarter Year to Date
------------------------ --------------------------
1999 1998 1999 1998
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Stores $19,058 $15,337 $ 54,636 $ 44,276
Business Services 7,891 8,298 20,631 20,525
International 4,683 1,954 10,776 6,092
------- ------- --------- --------
Total reportable segments 31,632 25,589 86,043 70,893
Other 13,039 10,323 37,687 32,031
------- ------- --------- --------
Total $44,671 $35,912 $123,730 $102,924
======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
EARNINGS BEFORE INCOME TAXES*
-------------------------------------------------------------
Third Quarter Year to Date
-------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Stores $ 37,203 $ 122,831 $ 294,905 $ 355,392
Business Services 51,059 55,698 181,397 146,231
International 29,714 36,546 111,998 101,815
--------- --------- --------- ---------
Total reportable segments 117,976 215,075 588,300 603,438
Eliminations and other (114,779) (172,209) (307,784) (325,848)
--------- --------- --------- ---------
Total $ 3,197 $ 42,866 $ 280,516 $ 277,590
========= ========= ========= =========
</TABLE>
*Earnings before income taxes for our reportable segments include the charges
discussed in Note C.
Eliminations and other in the table above consist of the following:
<TABLE>
<CAPTION>
Third Quarter Year to Date
------------------------- ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
General and administrative expenses $106,129 $ 83,772 $285,559 $233,065
Unallocated portion of miscellaneous
expense, net 1,759 1,555 5,132 4,627
Interest (income) expense, net (2,149) (1,063) (7,520) (30)
Merger and restructuring costs 8,955 87,815 24,434 87,815
Intersegment transactions 85 130 179 371
--------- -------- -------- --------
Total $114,779 $172,209 $307,784 $325,848
======== ======== ======== ========
</TABLE>
As illustrated above, we evaluate the performance of each of our business
segments based on their results of operations before income taxes, merger and
restructuring costs, goodwill amortization, interest (income) expense and
general and administrative expenses.
12
<PAGE> 13
<TABLE>
<CAPTION>
CAPITAL EXPENDITURES
--------------------------------------------------------------
Third Quarter Year to Date
--------------------------- -------------------------
1999 1998 1999 1998
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Stores $ 37,280 $35,633 $160,330 $ 76,157
Business Services 33,161 8,089 57,380 34,400
International 20,801 8,110 26,792 17,348
-------- ------- -------- --------
Total reportable segments 91,242 51,832 244,502 127,905
Other 15,667 5,120 51,869 28,295
-------- ------- -------- --------
Total $106,909 $56,952 $296,371 $156,200
======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
ASSETS*
-------
As of
------------------------------
September 25, December 26,
1999 1998
---------- -----------
<S> <C> <C>
Stores $1,916,336 $1,783,183
Business Services 898,632 882,248
International 587,415 501,581
---------- ----------
Total reportable segments 3,402,383 3,167,012
Eliminations and other 837,886 902,207
---------- ----------
Total $4,240,269 $4,069,219
========== ==========
</TABLE>
*Assets that were not allocated to segments consist primarily of corporate
cash balances, tax related accounts, employee benefit plan balances,
goodwill and other assets associated with corporate investing and
financing activities.
We currently have operations, including joint ventures and licensees, in
Australia, Austria, Belgium, Canada, Colombia, France, Germany, Hungary,
Ireland, Israel, Italy, Japan, Luxembourg, Mexico, the Netherlands, Poland,
Thailand (see Note C above for information relating to our decision to sell our
Thailand operations), 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 information relating to our operations inside and
outside of the United States is as follows:
<TABLE>
<CAPTION>
SALES ASSETS
---------------------------------------------------------- --------------------------------
As of
--------------------------------
Third Quarter Year to Date September 25, December 26,
---------------------------- -------------------------- ------------- -------------
1999 1998 1999 1998 1999 1998
------------ ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
United States $2,216,959 $1,941,626 $6,453,596 $5,795,137 $3,513,650 $3,470,241
International* 361,541 293,274 1,090,791 906,998 726,619 598,978
------------ ------------ ----------- ------------ ------------ ------------
Total $2,578,500 $2,234,900 $7,544,387 $6,702,135 $4,240,269 $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. Additionally, certain corporate assets, primarily
goodwill, relating to our Canadian and International operations have been
included in International assets above.
13
<PAGE> 14
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Tabular amounts in thousands)
GENERAL
Office Depot, Inc., together with our subsidiaries and 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
information to assist you in better understanding and evaluating our financial
results and financial condition. This MD&A section contains significant amounts
of forward-looking information, and is qualified by our Cautionary Statements
referred to below regarding "forward-looking information." We recommend that
you read this MD&A in conjunction with our Consolidated Financial Statements
and the Notes to those statements, as well as our 1998 Annual Report on Form
10-K.
In August 1998, Office Depot, Inc. 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. We accounted
for the merger as a pooling of interests. We have restated and combined the
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.
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 in our financial statements to reflect this stock split.
STORES DIVISION -- Our Stores Division sells office products and copy and print
services primarily under the Office Depot(R) brand to retail customers through
our chain of high volume office supply stores in the United States and Canada.
In the first nine months of 1999, our Stores Division opened 86, relocated 10
and closed one office supply store, bringing our total number of stores open at
the end of the third quarter to 787. This compares with 634 stores that were
open at the end of the third quarter of 1998.
BUSINESS SERVICES GROUP -- Through our Business Services Group, we sell office
products and services to contract and commercial customers through our Office
Depot(R) and Viking Office Products(R) direct mail catalogs and Internet sites.
In addition, our contract sales force is dedicated solely to serving the needs
of our contract customers. To facilitate delivery to our domestic commercial,
contract and retail customers, our Business Services Group operated 30 customer
service centers ("CSCs") at the end of the third quarter of 1999. This compares
to 31 CSCs in operation at the end of the comparable period in 1998.
14
<PAGE> 15
INTERNATIONAL -- Our International Division sells office products and services
to retail and commercial customers in 17 countries outside the United States
and Canada. At the end of the third quarter of 1999, there were 105 office
supply stores outside the United States and Canada operating under the Office
Depot name, 29 of which were wholly owned by us. This compares to 66 stores,
none of which were wholly owned, at the end of the comparable period in 1998.
In addition to these stores, located in eight foreign countries, our
International Division has catalog and delivery operations in 13 countries.
As we integrate our Office Depot and Viking operations, we intend to close
certain facilities, both domestically and internationally, over the next 21
months. We expense the estimated costs of this integration, primarily asset
impairment and facility exit costs, as these costs are incurred. These costs
are included in merger and restructuring costs. See MERGER AND RESTRUCTURING
COSTS.
RESULTS OF OPERATIONS
SALES
<TABLE>
<CAPTION>
THIRD QUARTER 1999 THIRD QUARTER 1998 INCREASE
------------------ ------------------ --------
<S> <C> <C> <C>
Stores $1,462,416 $1,247,700 17%
Business Services 803,484 736,663 9%
International 313,489 251,426 25%
Inter-segment (889) (889)
---------- ----------
Total $2,578,500 $2,234,900 15%
========== ==========
YEAR TO DATE 1999 YEAR TO DATE 1998 INCREASE
----------------- ----------------- --------
Stores $4,264,756 $3,747,203 14%
Business Services 2,337,771 2,189,269 7%
International 944,926 768,323 23%
Inter-segment (3,066) (2,660)
---------- ----------
Total $7,544,387 $6,702,135 13%
========== ==========
</TABLE>
We increased sales in our Stores Division primarily through our store expansion
program. Sales generated by the 153 stores we have added since the end of the
third quarter of 1998 represent over 70% of the total sales increases for the
Stores Division. Additionally, comparable store sales increased 3% for the
quarter and 2% for the first nine months of 1999. Sales of technology products
(computers, printers, peripherals, software and related supplies) in our
stores, up 27% for the quarter and 19% year to date, lead the increases, with
the increase in units sold exceeding significant declines in average selling
prices, particularly in computer hardware.
In our Business Services Group, we achieved increased sales for the third
quarter and first nine months of 1999 through our expansion of the contract
sales force and by increased use of our public (www.officedepot.com) and
business-to-business Internet sites. We believe that by offering our customers
greater flexibility in their ordering choices, we have attracted new customers.
Our Internet sales increased to $98.9 million in the third quarter of 1999 and
$219.4 million in the first nine months of 1999, compared with sales of $19.0
15
<PAGE> 16
million and $37.1 million in the third quarter and first nine months of 1998,
respectively. Sales of business machines supplies and furniture contributed
most significantly to these increases, with growth in both the units sold and
the average selling prices.
In addition to comparable sales increases, the sales in our International
Division include 100% of the sales from our French and Japanese stores in 1999,
but not in 1998. These results were not consolidated until the fourth quarter
of 1998 and the second quarter of 1999, respectively, when we purchased the
remaining 50% interest in these operations from our joint venture partners. We
also continued to increase the market penetration of our Viking brand,
generating higher catalog sales in local currencies in each country in which we
operate. Our overall International Division sales increased 29% for the quarter
and 24% year to date in local currencies.
Competitive, political and economic conditions, including currency
fluctuations, in international markets in which we do business may impact our
sales in the future. Additionally, the opening of new Office Depot stores in
markets where stores already exist could negatively affect our comparable store
sales increases in the future.
GROSS PROFIT
<TABLE>
<CAPTION>
ADJUSTED ADJUSTED
GROSS GROSS GROSS GROSS GROSS GROSS
PROFIT PROFIT% PROFIT%* PROFIT PROFIT% PROFIT%*
------- -------- -------- ------- -------- --------
THIRD QUARTER 1999 YEAR TO DATE 1999
------------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stores $292,871 20.0% 22.7% Stores $ 954,797 22.4% 23.3%
Business Services 235,859 29.4% 31.3% Business Services 723,233 30.9% 31.6%
International 121,629 38.8% 39.3% International 380,276 40.2% 40.4%
Inter-segment (367) Inter-segment (1,231)
-------- ----------
Total $649,992 25.2% 27.4% Total $2,057,075 27.3% 28.0%
======== ==========
</TABLE>
<TABLE>
<CAPTION>
THIRD QUARTER 1998 YEAR TO DATE 1998
------------------ -----------------
<S> <C> <C> <C> <C> <C>
Stores $292,879 23.5% n/a Stores $ 857,720 22.9% n/a
Business Services 225,518 30.6% n/a Business Services 654,558 29.9% n/a
International 103,901 41.3% n/a International 314,784 41.0% n/a
Inter-segment (262) Inter-segment (883)
-------- ----------
Total $622,036 27.8% n/a Total $1,826,179 27.2% n/a
======== ==========
</TABLE>
* Gross profit for the third quarter and year-to-date periods in 1999 include
a provision for slow-moving and obsolete inventories of $56.1 million. Since
this provision is of a non-recurring nature, we have shown gross profit
percentages before consideration of this charge. The provision is discussed
separately below.
Gross Profit Excluding Provision for Slow-moving and Obsolete Inventories
- -------------------------------------------------------------------------
For the quarter, the decrease in our overall gross profit as a percentage of
sales is the result of increased occupancy costs relative to sales, which was
driven by a decline in the average age of our store base. Until a store reaches
maturity, its fixed expenses as a percentage of sales are typically higher than
more mature stores. On a year-to-date basis, this also impacted our overall
gross profit rate but was more than offset by lower net product costs.
16
<PAGE> 17
As we have grown and our relationships with our key vendors have strengthened,
we have continued to lower our net product costs, thereby strengthening our
gross profit percentages. During the fourth quarter of 1998, our Finance and
Merchandising groups made substantial improvements to the systems and processes
we use to manage our volume rebate, cooperative advertising and marketing
programs. As a result, we have been able to reflect the impact of these
programs on a more consistent and timely basis during the year than in the
past. This improvement was a significant positive contributor to gross profit
percentages in our Stores and Business Services segments for the third quarter
and first nine months of 1999.
In our Stores Division, technology products, which yield lower gross profit
percentages than our other product groups, continued to increase as a
percentage of our total sales mix. In our general office supplies group, we
have benefited from lower purchase costs for paper products.
We earn higher gross profit percentages in our Business Services Group than in
our Stores Division principally because of a different sales mix. The gross
profit percentages are, however, lower than those earned internationally as a
result of the lower relative pricing offered to our contract customers. Paper
and other general office supplies account for a much larger percentage of total
sales in our Business Services Group than in our Stores Division. These
products yield higher gross profit percentages than our other product groups.
In our Business Services Group, the improvements in our vendor programs
processes were a significant factor in our improved gross margin percentages
for the quarter and year-to-date periods. Further contributing to the increases
were lower net costs for our paper products and a more disciplined contract
pricing approach.
Gross profit in our International Division for the third quarter decreased
largely from the consolidation of our French and Japanese retail operations,
which were previously accounted for under the equity method. Gross profit
percentages earned in our international retail stores are significantly lower
than in our international catalog business.
Our overall gross profit percentage fluctuates as a result of numerous factors,
including competitive pricing pressures, changes in product, catalog and
customer mix, suppliers' pricing changes, as well as our ability to manage our
net product costs through growth in total merchandise purchases. Additionally,
our occupancy costs may vary as we add stores and CSCs in new markets with
varying rental and other occupancy costs.
Provision for Slow-moving and Obsolete Inventories
- --------------------------------------------------
In the third quarter of 1999, we increased our provision for slow-moving and
obsolete inventories in our warehouses and stores by $56.1 million. This
increased provision is primarily related to slow moving technology related
products whose market values have been adversely affected by accelerated rates
of change in technology and a rationalization of the warehouse inventory
assortments in conjunction with the Viking warehouse consolidation. Because we
do not anticipate the circumstances necessitating this increased provision to
be of a recurring nature, we have separately explained this charge.
17
<PAGE> 18
This increased provision impacted gross profit in our business segments as
follows:
Stores $39,200
Business Services 15,500
International 1,400
---------
Total $56,100
=========
While management believes that this charge is of a non-recurring nature, we
cannot assure you that we will not incur charges like this in the future.
STORE AND WAREHOUSE OPERATING AND SELLING EXPENSES
<TABLE>
<CAPTION>
STORE AND STORE AND
WAREHOUSE WAREHOUSE
OPERATING AND % OF OPERATING AND % OF
SELLING EXPENSES SALES SELLING EXPENSES SALES
---------------- ------ ---------------- -----
THIRD QUARTER 1999 YEAR TO DATE 1999
------------------ -----------------
<S> <C> <C> <C> <C> <C>
Stores $212,248 14.5% Stores $ 605,747 14.2%
Business Services 181,572 22.6% Business Services 538,564 23.0%
International 88,416 28.2% International 263,574 27.9%
Inter-segment (282) Inter-segment (1,052)
-------- ----------
Total $481,954 18.7% Total $1,406,833 18.6%
======== ==========
THIRD QUARTER 1998 YEAR TO DATE 1998
------------------ -----------------
Stores $167,969 13.5% Stores $ 498,158 13.3%
Business Services 168,234 22.8% Business Services 504,819 23.1%
International 66,666 26.5% International 204,239 26.6%
Inter-segment (132) Inter-segment (512)
-------- ----------
Total $402,737 18.0% Total $1,206,704 18.0%
======== ==========
</TABLE>
In our Stores Division, we have opened 153 stores, net of closures, since the
end of the third quarter of 1998, which has lowered the average age of our
store base. Because newer stores usually generate lower average sales than
mature stores, operating and selling expenses as a percentage of sales in our
Stores Division have increased. Additionally, 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 our expenses to increase relative to sales. The increase for
the quarter and year-to-date periods was driven largely by personnel-related
expenses, which represent over 60% of our Stores' operating expenses and have a
relatively large fixed cost component. Wage pressure associated with attracting
a more skilled sales force has increased our payroll costs during 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. Although our Business Services Group made operating efficiency
improvements in our warehouses during the third quarter of 1999, these
improvements are expected to impact our overall operating expenses more
significantly in future quarters. In addition, while operating synergies
arising from the Viking merger have begun to have a positive impact on our
Business Services Group's operating and selling expenses, we believe we will
achieve even greater improvements next year. During the fourth quarter of 1999,
we began combining the processing of Office Depot and Viking brand orders in
18
<PAGE> 19
our warehouses, and we expect to have fully integrated all warehouses by the
first half of 2001. This will significantly reduce the total number of
warehouse facilities we operate and should positively impact our Business
Services Group's overall operating expenses relative to sales. See additional
discussion of the planned integration in MERGER AND RESTRUCTURING COSTS.
Similar to the situation in our Business Services Group, personnel and delivery
expenses are significant components of our International Division's operating
and selling expenses. Furthermore, because direct mail presently constitutes
our largest international sales channel, advertising expense, including the
cost of catalog production and mailing, represents a significant expense for
us. Certain of our operations are in their start-up phase, which also increases
our international operating expenses as a percentage of sales when compared to
other reporting segments. For both the quarter and year-to-date periods,
increased advertising costs significantly impacted our International Division's
operating expenses as a percentage of their sales. Increasing competition in
certain of our established markets, coupled with efforts to gain market share
in certain of our newer markets, have driven up our advertising costs.
Furthermore, as discussed earlier in this MD&A, we have consolidated the
results of our French and Japanese retail operations in 1999, as opposed to
using the equity method for these investments in the comparable prior year
periods. Because retail operations are typically more costly than catalog
operations, this has had the effect of raising our international operating
expenses relative to sales. As we continue to grow our international business
and establish brand recognition, 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 continue developing new markets, including Japan.
PRE-OPENING EXPENSES
<TABLE>
<CAPTION>
PRE-OPENING LOCATIONS PRE-OPENING LOCATIONS
EXPENSES OPENED* EXPENSES OPENED*
----------- --------- ----------- ----------
THIRD QUARTER 1999 YEAR TO DATE 1999
------------------ -----------------
<S> <C> <C> <C> <C> <C>
Stores $4,147 33 Stores $14,872 96
Business Services 321 1 Business Services 365 1
International 539 7 International 1,472 12
------ -------
Total $5,007 Total $16,709
====== =======
THIRD QUARTER 1998 YEAR TO DATE 1998
- ------------------ -----------------
Stores $2,077 18 Stores $4,168 36
Business Services 1,586 -- Business Services 3,508 1
International -- -- International -- --
------ ------
Total $3,663 Total $7,676
====== ======
</TABLE>
* Includes relocations and wholly owned international locations.
Our pre-opening expenses consist principally of personnel, property (real
estate) 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. 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.
19
<PAGE> 20
Pre-opening expenses generally approximate $160,000 for a domestic office
supply store. We typically incur these expenses during a six-week period prior
to the store opening. On a year-to-date basis in 1999, these costs increased
significantly on a per-store basis because of our acquisition of a group of
stores from another retailer, which generated higher occupancy costs
attributable to a longer pre-opening period. The cost to open a new CSC varies
significantly with the size, type and location of the facility. Historically,
we have incurred up to $1,750,000 to open domestic CSCs.
GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Third Quarter Year to Date
----------------------------- ----------------------------
1999 1998 1999 1998
-------- ------- -------- --------
<S> <C> <C> <C> <C>
General and
administrative expenses $106,129 $83,772 $285,559 $233,065
Percentage of sales 4.12% 3.75% 3.79% 3.48%
</TABLE>
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 and 1999, we
strengthened our corporate infrastructure, particularly in the areas of Supply
Chain Management and MIS. This initiative was a significant contributor to the
increase in our general and administrative expenses in the third quarter and
first nine months of 1999, versus the comparable 1998 periods. The benefits of
this increased spending are reflected in our lower levels of inventory per
store and improved purchasing efficiencies. Also contributing to the growth was
an increase in spending to support our international expansion.
MERGER AND RESTRUCTURING COSTS
In August 1998, we completed our merger with Viking and began implementing our
plans to integrate the Office Depot and Viking businesses. As we continue to
integrate the two companies, both domestically and internationally, we intend
to close certain facilities. Furthermore, as a result of our decision to focus
on the continued growth of our core businesses and on expanding our
international operations, we closed our Furniture at Work(TM) and Images(TM)
stores. During the third quarter of 1998, we incurred merger and restructuring
costs of $87.8 million associated with these activities. These costs consisted
principally of facility exit and personnel related costs.
In November 1998, we purchased our joint venture partner's interest in our
French retail operations. Following this purchase, we decided to restructure
and integrate our separate Office Depot and Viking operations in France.
Similarly, in April 1999, we purchased our joint venture partner's interest in
our Japanese retail operations and announced plans to restructure and integrate
our operations in Japan.
During the first nine months of 1999, we recorded merger and restructuring
costs of $24.4 million, primarily associated with additional personnel
related costs and with our plans for restructuring and integrating our Japanese
operations.
20
<PAGE> 21
The costs required to complete our merger and restructuring plans are expensed
as incurred, and necessarily involve the use of estimates. These estimates are
subject to change as the integration and restructuring process evolves.
STORE CLOSURE AND RELOCATION COSTS
We recorded a charge of $46.4 million in the third quarter of 1999 to reflect
our decision to accelerate our store closure and relocation program for older
and under-performing stores in our Stores Division. The charge also reflected
our decision to sell our interest in our two stores in Thailand. On October 28,
1999, we entered into an agreement with Central Retail Group, our joint venture
partner, to sell to them our Thailand operations and license to them certain
trademarks and software and operating systems. Central Retail Group will now
operate the two stores under a license agreement. Finally, the charge also
reflects our decision to write-down certain other long-term assets in our
Business Services Group.
These charges, consisting of asset impairment costs ($29.1 million), residual
lease obligations ($14.4 million) and other exit costs ($2.9 million), impacted
operating profit of our business segments as follows:
Stores $39,273
Business Services 2,907
International 4,258
---------
Total $46,438
=========
While management believes that this charge is of a non-recurring nature, we
cannot assure you that we will not incur charges of this nature in the future.
Excluding the after-tax impact of the store closure and relocation charges and
the provision for slow-moving and obsolete inventories, our diluted earnings
per share would have been $0.19 for the third quarter of 1999 and $0.65 for the
first nine months of 1999, compared with $.21 and $.60 for the respective
periods in 1998.
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 net
increase in interest income results from larger average cash balances
maintained throughout the first nine months of 1999 compared with the first
nine months of 1998. Pursuant to our Board of Directors authorizing a stock
repurchase of up to $500 million, we purchased 36,294,500 shares of our stock
at a total cost of $390.2 million plus commissions during the third quarter of
1999. Subsequent to the end of the quarter, we substantially completed the
remainder of the authorized stock repurchase. As a result, our cash balances
have declined, and we expect a proportional impact on our interest income.
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
investments, royalty and franchise income that we generate under license
agreements, and amortization of goodwill. Because our equity investees operate
outside of the United States and Canada, equity in earnings (losses) of our
21
<PAGE> 22
investees is included in determining the profitability of our International
Division. The decreases in miscellaneous expense are primarily attributable to
the consolidation of our Japanese operations beginning in the second quarter of
1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by (used in) our operating, investing and financing activities is
summarized as follows:
Year to Date
--------------------------- Increase
1999 1998 (Decrease)
-------- -------- ----------
Operating activities $449,646 $489,802 $ (40,156)
Investing activities (382,554) (216,063) (166,491)
Financing activities (264,882) 35,372 (300,254)
OPERATING
We have historically relied on cash flow generated from our operations as our
primary source of funds because the majority of our store sales are generated
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 contract and certain of our direct mail customers.
As we expand our contract and direct mail businesses, we anticipate that our
accounts receivable portfolio will continue to 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 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 decline in cash flows from our operating activities is primarily
attributable to our increased store openings. We opened 108 stores, including
10 relocations, domestically and internationally during the first nine months
of 1999 as compared to 36 stores, including three relocations, during the same
period in 1998. Opening a new store requires a cash outlay of approximately
$800 thousand for the portion of inventories that is not financed by our
vendors, as well as approximately $160 thousand for pre-opening expenses (see
PRE-OPENING EXPENSES).
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. The increasing requirements for computer and other equipment at
our corporate offices to support our expansion and complete our Y2K remediation
(see YEAR 2000) also contribute to our investing activities.
We opened 96 stores, including 10 relocations, in the United States and Canada,
nine stores in France and three stores in Japan during the first nine months of
1999, compared with 36 stores opened, including three relocations, in the
United States and Canada during the comparable 1998 period. This increase was
22
<PAGE> 23
the most significant contributor to the overall increase in our capital
expenditures for the first nine months of 1999. Opening a new store requires a
cash outlay of approximately $700 thousand for leasehold improvements,
fixtures, point-of-sale terminals and other equipment in the stores.
We currently plan to open approximately 40 additional stores in the Stores
Division and 13 stores in the International Division during the remainder of
1999. We expect our cash requirements for new stores to approximate the amounts
discussed above in OPERATING and INVESTING. Our cash requirements for new CSCs,
which are significantly greater than for stores, vary depending on the size,
type and location of the facility.
FINANCING
In February 1998, we entered into a credit agreement with a syndicate of banks.
This credit agreement provides us with a working capital line and letters of
credit totaling $300 million. This credit agreement replaced a previous credit
agreement with another group of banks. It provides 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 this or our prior
credit facility. As of September 25, 1999, we had outstanding letters of credit
totaling $19.7 million under the facility.
In July 1999, we entered into term loan and revolving credit agreements with
several Japanese banks (the "yen facilities") to provide financing for our
operations in Japan. The yen facilities provide for maximum aggregate
borrowings of (Y)9.76 billion (the equivalent of $80 million at the time that
the agreements were executed and $90 million at September 25, 1999) at an
interest rate of .875% over the Tokyo Interbank Offered Rate ("TIBOR"). These
yen facilities contain covenants similar to those in our domestic credit
facility, which you can read about in our 1998 Annual Report. We borrowed
(Y)2.03 billion (the equivalent of $19.4 million at September 25, 1999) under
the yen facilities in the third quarter of 1999. We have borrowed an additional
(Y)2.82 billion (the equivalent of $26.8 million at the time of the borrowings)
subsequent to the end of the third quarter. Effective as of October 28, 1999,
we entered into a yen interest rate swap for a notional amount of (Y)2.4
billion in order to hedge against the volatility of the interest payments on a
portion of the yen borrowings. The terms of the swap specify that we pay an
interest rate of .7% and receive TIBOR.
In addition to bank borrowings, we have historically used equity capital,
convertible debt and capital equipment leases as supplemental sources of funds.
The year-to-date decline in cash from our financing activities year to date
during 1999, as compared to the year-to-date 1998 period, was driven by our
stock repurchase program. As of September 25, 1999, we had purchased 36,294,500
shares of our stock at a total cost of $390.2 million plus commissions, $60.2
million of which had not been paid for by the end of the third quarter. We have
since purchased an additional 10,179,900 shares at a total cost of $106.9
million plus commissions, substantially completing the authorized stock
repurchase program. This decrease was offset slightly by 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.
23
<PAGE> 24
In 1992 and 1993, we issued Liquid Yield Option Notes ("LYONs(R)"), which are
zero coupon, convertible subordinated notes maturing in 2007 and 2008,
respectively. Each LYON(R) 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(R), respectively. On
November 1, 2000 for the 1993 LYONs(R) and December 11, 2002 for the 1992
LYONs(R), the holder may require us to purchase the LYONs(R) from them at the
issue price plus accrued original issue discount. If the holder decides to
exercise their put option, we have the choice of paying the holder in cash,
common stock or a combination of the two.
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 credit facilities, 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, and the
decisions of the LYONs(R) holders.
SIGNIFICANT TRENDS, DEVELOPMENTS AND UNCERTAINTIES
Throughout 1999, we have seen continued development and growth of traditional
and innovative competitors in all segments of our business. Mass merchandisers
have increased their assortment of home office merchandise and are formidable
competitors in the area of back-to-school business as well as year round casual
shoppers for non-technology business products. Other office superstores have
provided strong competition in a number of markets in which we compete head to
head with them. They have taken steps to open stores in the markets in which
Office Depot has traditionally been the market leader, just as we have begun to
penetrate markets in which they have traditionally been stronger. The net
result is likely to be increased competitive pressures on margins in
multi-store markets.
With the growth of Internet-based businesses, new and innovative competitors
have arisen, offering many of our products online. By offering special purchase
incentives and one-time deals (such as close-outs), they continue to place
pressure on our sales and margins. We have our own Internet and
business-to-business Web sites and believe that we are in a position to be
competitive in the e-commerce fields of today and tomorrow. We are increasing
our willingness to invest in strategic partnerships with Internet companies
offering innovative solutions to small businesses, which are the core customer
base of our business. We believe it is inevitable that the pace of transition
to e-commerce will accelerate in the future and that we must remain committed
to developing our own internal capabilities in this field of commerce, while
remaining open to investing in new and innovative e-commerce business
enterprises. Most of our competitors are similarly investing in electronic
commerce activity, by starting their own Internet sites, investing in Internet
businesses or a combination of the two.
YEAR 2000
As the Year 2000 ("Y2K") approaches, along with most other businesses, 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.
24
<PAGE> 25
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 established our Year 2000 Project Office led by a Year 2000 Project Team
(collectively referred to as "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 of our operations when January 1, 2000 arrives.
Technology Systems:
In the Operations component of Project 2000, we have substantially completed our
review of our data center process automation equipment, software not internally
developed or supported by our MIS department, and our data/voice networks. We
have substantially completed: 1) inspecting equipment and completing an
inventory of our hardware and software, 2) evaluating the readiness of hardware
and software and determining what upgrades are required and 3) correcting
non-compliant hardware and software using upgrades certified as Y2K compliant by
their vendors.
In the Development component, we have substantially completed focusing on the
proper operation of application software developed or supported in-house. We
have substantially completed: 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 implementing new program
code, 4) testing the accuracy of the output under multiple scenarios and 5)
certifying that the systems are Y2K compliant. We have a few teams within our
MIS organization working on this component of Project 2000. Overall, the two
Technology components together are currently approximately 95% complete. The
majority of the work remaining is in our international locations. We expect to
complete this component prior to the end of the year.
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 our vendors to verify Y2K compliance for
their equipment and services, 3) upgrading systems and equipment to compliant
versions, if necessary, 4) testing equipment and systems and 5) certifying that
such equipment and services are Y2K compliant.
25
<PAGE> 26
In the Merchandising component of Project 2000, we attempted to ensure that our
merchandise suppliers are able to meet their delivery commitments. The phases
of this component were: 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 implementing contingency plans. 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 have completed this component, to the
extent possible.
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. We anticipate that third parties in our
domestic businesses will be Y2K compliant and that there will be no significant
interruptions in our domestic businesses as the Millennium deadline passes. We
are less confident, however, in the state of readiness among third parties in
our international locations and anticipate that some interruptions in our
international businesses are possible.
As of this time, we generally expect our systems in all locations to function
properly on and after January 1, 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. We do plan
to safeguard against short-term interruptions in delivery systems, both
domestically and internationally, by increasing our purchases of inventories
and supplies in the fourth quarter in anticipation of the Year 2000. 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.
We capitalize costs for hardware and software and depreciate them over their
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 $4.6 million in 1998 related to Project
2000, substantially all of which was expensed. Additionally, we have incurred
costs of approximately $6.2 million, $1.4 million of which was capitalized,
during the first nine months of 1999. We expect to spend another $.7 million to
complete Project 2000, most of which we will expense as incurred. We have
lowered our estimate of costs incurred from previous estimates as a result of
better information.
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
26
<PAGE> 27
events. Although we expect our systems and facilities to be Y2K compliant by
the end of 1999, we cannot assure you that there will not be business
interruptions due to a variety of factors, including problems with key third
party suppliers of goods and services and unanticipated problems in our own
systems despite our reasonable belief at this time that we will be fully Y2K
compliant internally. 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 presently 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. On January 1, 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 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. We have completed our plan
to adapt our internal systems to accommodate euro-denominated transactions.
Other implications include, among other things, competitive issues related to
cross-border price transparency, which may make it more difficult to set prices
in a local market different from those in other member countries. It may also
impact our existing marketing materials. 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 (the "FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 requires that we record all derivatives as assets or liabilities
measured at their fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for according to the intended
use of the derivative and whether it qualifies for hedge accounting.
In July 1999, the FASB issued SFAS No.137, which defers the effective date of
SFAS No. 133 until the start of fiscal years beginning after June 15, 2000. We
will adopt SFAS No. 133 in our fiscal year 2001. We do not expect the adoption
of SFAS No. 133 to have a material impact on our financial position or the
results of our operations.
27
<PAGE> 28
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, as amended, 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 by disclosing which statements we provide to you are
forward-looking statements by providing specific cautionary statements to
inform you as to circumstances which may cause the information in
forward-looking statements not to be realized.
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,
while we have specifically identified certain information as being
forward-looking in the context of its presentation, with the exception of
information which clearly deals with historical matters, all 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 "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 and in the Company's press
release dated August 30, 1999, filed with the SEC as part of Form 8-K on the
same date as its release. 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 and in our August 30, 1999 press release could affect our actual results
and could cause our actual results during the remainder of 1999 and in future
years 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
Refer to 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
is materially different than it was at the date of that report.
28
<PAGE> 29
FOREIGN EXCHANGE RATE RISKS
Refer to 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 is
materially different than it was at the date of that 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.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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. A Current Report on Form 8-K was filed on August 30, 1999 regarding our
comments on earnings in the second half of 1999 and our announcement of
a stock repurchase plan.
c. A current Report on Form 8-K was filed on October 14, 1999 regarding
certain management changes.
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OFFICE DEPOT, INC.
------------------------------------
(Registrant)
Date: November 9, 1999 By: /s/ Barry J. Goldstein
--------------------------------
Barry J. Goldstein
Executive Vice President-Finance
and Chief Financial Officer
Date: November 9, 1999 By: /s/ Charles E. Brown
--------------------------------
Charles E. Brown
Senior Vice President-Finance
and Controller
(Principal Accounting Officer)
30
<PAGE> 31
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- ------------------------------------------
27.1 Financial Data Schedule (for SEC use only)
31
<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 25,
1999 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-25-1999
<PERIOD-START> DEC-27-1998
<PERIOD-END> SEP-25-1999
<CASH> 503,340
<SECURITIES> 72,013
<RECEIVABLES> 837,999
<ALLOWANCES> 27,787
<INVENTORY> 1,215,943
<CURRENT-ASSETS> 2,722,480
<PP&E> 1,695,178
<DEPRECIATION> 558,962
<TOTAL-ASSETS> 4,240,269
<CURRENT-LIABILITIES> 1,784,066
<BONDS> 449,465
0
0
<COMMON> 3,784
<OTHER-SE> 1,864,331
<TOTAL-LIABILITY-AND-EQUITY> 4,240,269
<SALES> 7,544,387
<TOTAL-REVENUES> 7,544,387
<CGS> 5,487,312
<TOTAL-COSTS> 6,910,854
<OTHER-EXPENSES> 356,431
<LOSS-PROVISION> 16,445
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 280,516
<INCOME-TAX> 106,897
<INCOME-CONTINUING> 173,619
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 173,619
<EPS-BASIC> 0.47
<EPS-DILUTED> 0.45
</TABLE>
