<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 23, 2000
-------------------------
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 297,948,899 shares of common stock outstanding as of
October 20, 2000.
<PAGE> 2
ITEM 1 FINANCIAL STATEMENTS
OFFICE DEPOT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 23, DECEMBER 25,
2000 1999
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 225,683 $ 218,784
Receivables, net 852,094 849,478
Merchandise inventories, net 1,390,245 1,436,879
Deferred income taxes and other current assets 128,963 125,911
----------- -----------
Total current assets 2,596,985 2,631,052
Property and equipment, net 1,181,697 1,145,628
Goodwill, net 232,933 240,166
Other assets 183,716 259,337
----------- -----------
$ 4,195,331 $ 4,276,183
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 1,242,767 $ 1,239,301
Accrued expenses and other current liabilities 444,902 414,690
Income taxes payable 44,199 39,588
Current maturities of long-term debt 258,576 250,466
----------- -----------
Total current liabilities 1,990,444 1,944,045
Deferred income taxes and other credits 87,981 103,319
Long-term debt, net of current maturities 344,821 321,099
Commitments and contingencies
Stockholders' equity:
Common stock - authorized 800,000,000 shares 3,780 3,762
of $.01 par value; issued 378,021,775 in
2000 and 376,212,439 in 1999
Additional paid-in capital 939,993 926,295
Unamortized value of long-term incentive stock grants (2,813) (4,065)
Accumulated other comprehensive income (72,090) 15,730
Retained earnings 1,684,954 1,467,359
Treasury stock, at cost - 79,125,319 shares in 2000
and 46,770,272 shares in 1999 (781,739) (501,361)
----------- -----------
1,772,085 1,907,720
----------- -----------
$ 4,195,331 $ 4,276,183
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
2
<PAGE> 3
OFFICE DEPOT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
------------------------------------ --------------------------------------
SEPTEMBER 23, SEPTEMBER 25, SEPTEMBER 23, SEPTEMBER 25,
2000 1999 2000 1999
----------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Sales $ 2,820,735 $ 2,578,500 $ 8,514,836 $ 7,544,387
Cost of goods sold and occupancy costs 2,087,769 1,928,508 6,197,117 5,487,312
----------- ----------- ----------- -----------
Gross profit 732,966 649,992 2,317,719 2,057,075
Store and warehouse operating
and selling expenses 546,944 481,954 1,648,278 1,406,833
Pre-opening expenses 2,823 5,007 8,630 16,709
General and administrative expenses 137,243 106,129 358,645 285,559
Merger and restructuring costs (3,177) 8,955 1,204 24,434
Store closure and relocation costs -- 46,438 -- 46,438
----------- ----------- ----------- -----------
Operating profit 49,133 1,509 300,962 277,102
Other income (expense):
Interest income 2,666 8,654 9,551 27,076
Interest expense (9,318) (6,505) (23,584) (19,556)
Miscellaneous income (expense), net 39,310 (461) 59,899 (4,106)
----------- ----------- ----------- -----------
Earnings before income taxes 81,791 3,197 346,828 280,516
Income taxes 31,169 4,270 129,233 106,897
----------- ----------- ----------- -----------
Net earnings (loss) $ 50,622 $ (1,073) $ 217,595 $ 173,619
=========== =========== =========== ===========
Earnings (loss) per common share:
Basic $ 0.17 $ 0.00 $ 0.69 $ 0.47
Diluted 0.16 0.00 0.67 0.45
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
3
<PAGE> 4
OFFICE DEPOT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
39 WEEKS ENDED 39 WEEKS ENDED
SEPTEMBER 23, SEPTEMBER 25,
2000 1999
------------------ ----------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings $ 217,595 $ 173,619
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 144,634 123,061
Provision for losses on inventories and receivables 75,850 118,541
Changes in assets and liabilities 28,731 21,318
Gain on sales of investment securities (57,950) --
Other operating activities, net 26,369 13,107
--------- ---------
Net cash provided by operating activities 435,229 449,646
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities or sales of
investment securities 54,006 42,006
Purchases of investment securities (24,612) (110,161)
Capital expenditures, net of proceeds from sales (181,203) (292,502)
Other investing activities -- (21,897)
--------- ---------
Net cash used in investing activities (151,809) (382,554)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and sale
of stock under employee stock purchase plans 9,713 52,011
Acquisition of treasury stock (280,378) (329,718)
Other financing activities, net 6,688 12,825
--------- ---------
Net cash used in financing activities (263,977) (264,882)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS (12,544) (3,411)
--------- ---------
Net increase (decrease) in cash and cash equivalents 6,899 (201,201)
Cash and cash equivalents at beginning of period 218,784 704,541
--------- ---------
Cash and cash equivalents at end of period $ 225,683 $ 503,340
========= =========
SUPPLEMENTAL DISCLOSURE OF OTHER CASH FLOW ACTIVITIES:
Interest received $ 9,112 $ 27,029
Interest paid 7,015 4,895
Income taxes paid 116,464 137,888
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Additional paid-in capital related to income tax
benefits on stock options exercised $ 482 $ 13,760
Assets acquired under capital leases 12,569 37,795
Unrealized gain on investment securities, net of income taxes -- 6,977
Reversal of unrealized gain on investment securities,
net of income taxes 62,128 --
Common stock issued upon conversion of debt -- 329
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
</TABLE>
4
<PAGE> 5
OFFICE DEPOT, INC. AND SUBSIDIARIES
NOTES TO OUR CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands)
NOTE A - BASIS OF PRESENTATION
Office Depot, Inc., together with our subsidiaries, is the world's largest
seller of office products and services. We operate on a 52- or 53-week fiscal
year ending on the last Saturday of December. Our condensed interim financial
statements as of September 23, 2000 and for the 13- and 39-week periods ending
September 23, 2000 (also referred to as "the third quarter of 2000" and
"year-to-date 2000," respectively) and September 25, 1999 (also referred to as
"the third quarter of 1999" and "year-to-date 1999," respectively) are
unaudited. However, in our opinion, these 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. Also, we have made certain
reclassifications to our historical financial 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. For a better understanding of our company and our
financial statements, we recommend that you read these condensed interim
financial statements in conjunction with our audited financial statements for
the year ended December 25, 1999, which are included in our 1999 Annual Report
on Form 10-K, filed on March 22, 2000.
NOTE B - NON-RECURRING CHARGES AND CREDITS
During the first three quarters of 2000, we recorded certain non-recurring
charges and credits primarily related to our restructuring plans, investment
transactions and executive management changes. Our 1999 results include certain
non-recurring charges related to merger and restructuring activities,
slow-moving and obsolete inventories and store closures and relocations. These
charges and credits, which are discussed in more detail below, impacted our
condensed consolidated statements of earnings as follows:
<TABLE>
<CAPTION>
THIRD QUARTER YEAR-TO-DATE
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cost of goods sold and occupancy costs 1 $ -- $ 56,100 $ -- $ 56,100
General and administrative expenses 2 27,544 -- 32,544 --
Merger and restructuring costs 3 (3,177) 8,955 1,204 24,434
Store closure and relocation costs 4 -- 46,438 -- 46,438
Miscellaneous income 5 (38,990) -- (57,950) --
--------- --------- --------- ---------
Total (credits) charges $ (14,623) $ 111,493 $ (24,202) $ 126,972
</TABLE>
1 - PROVISION FOR SLOW-MOVING AND OBSOLETE INVENTORY
In the third quarter of 1999, we increased our provision for slow-moving and
obsolete inventories in our warehouses and stores by $56 million. This charge
was primarily related to slow-moving technology-related products whose market
values were adversely affected by accelerated rates of change in technology and
a rationalization of the warehouse inventory assortments in conjunction with the
Viking warehouse consolidation.
5
<PAGE> 6
2 - MANAGEMENT CHANGES AND OTHER COSTS
During the third quarter and first nine months of 2000, we recorded charges of
$28 million and $33 million, respectively, primarily for severance costs
associated with changes in our executive management team.
3 - MERGER TRANSACTIONS AND RESTRUCTURING PLANS
For more detailed information on our merger and restructuring plans, see the
disclosure in our 1999 Annual Report on Form 10-K.
During the third quarter of 2000, we reviewed our Viking warehouse consolidation
and integration plans. Based on our review, we made the decision to indefinitely
postpone the integration and consolidation of our Viking and Office Depot brand
warehouses in two markets. We also updated our accruals, as we do each quarter,
based on actual progress to date. The final warehouse integration, which
involves preparing it to fulfill both our Office Depot and Viking brand orders,
is still expected to be completed in the first quarter of 2001; however, the
final Viking warehouse closure has been extended into the second quarter of
2001. Once a warehouse is integrated and has begun fulfilling orders for both
Office Depot and Viking customers, it can take up to four months to close the
associated excess warehouse. As a result of these changes, we recorded a net
credit in merger and restructuring costs of $3 million in the third quarter of
2000. Year-to-date 2000, merger and restructuring charges consisted primarily of
$4 million in personnel-related expenses, reduced by the adjustments we made in
the third quarter of 2000.
Charges in the third quarter of 1999 consisted of $11 million in
personnel-related costs and $2 million in asset impairment charges incurred as a
result of the Viking merger. These costs were reduced by a credit of $4 million
in facility-related costs resulting from changes in our original estimates for
the Images(TM) and Furniture at Work(TM) restructuring. In addition to the
charges and credits recorded in the third quarter of 1999, year-to-date 1999
merger charges included $9 million attributable to the acquisition of our
remaining joint venture interests in France and Japan, $4 million in asset
write-offs and personnel-related charges for our merger with Viking, and $2
million related to our Furniture at Work(TM) and Images(TM) restructuring. As of
September 2000, we had $11 million of accrued merger and restructuring charges
remaining.
4 - STORE CLOSURE AND RELOCATION COSTS
In the third quarter of 1999, we recorded a charge of $46 million, primarily to
reflect our decision to accelerate our store closure and relocation program for
older and under-performing stores in our North American Retail Division. You can
read more about this charge in our 1999 Annual Report on Form 10-K.
5 - INVESTMENT TRANSACTIONS
In September 1999, we began investing in companies that provide
business-to-business electronic commerce solutions for small- and medium-sized
businesses. We increased our investments in such companies during the first nine
months of 2000 by $25 million, and the cost of investments held as of September
23, 2000 totaled $70 million. The carrying value of our investments at September
23, 2000 was equal to our cost, because quoted market prices are not available
to adjust them to fair value. For these available-for-sale investments, a
reasonable estimate of fair value could not be made without incurring excessive
costs. During the first nine months of 2000, we liquidated one and a portion of
another of our investments, realizing a total gain of $58 million.
6
<PAGE> 7
We use specific identification to identify the cost of investments disposed of
and have included these gains in miscellaneous income. Details of these
transactions are as follows:
<TABLE>
<CAPTION>
IN MILLIONS
REALIZED
DATE NUMBER OF SHARES PROCEEDS GAIN
----------------------- --------------------- ------------------ ------------
<S> <C> <C> <C>
February 2000 277,777 $19 $19
September 2000 755,000 $35 $39
</TABLE>
NOTE C - COMPREHENSIVE INCOME
Comprehensive income represents all non-owner changes in stockholders' equity
and consists of the following:
<TABLE>
<CAPTION>
THIRD QUARTER YEAR-TO-DATE
----------------------- -------------------------
2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net earnings (loss) $ 50,622 $ (1,073) $ 217,595 $ 173,619
Foreign currency translation adjustments (9,850) (4,852) (25,692) (22,438)
(Reversals of) unrealized gains on
investment securities (25,963) 11,381 (101,350) 11,381
Income tax (provision) benefit on reversals
of unrealized gains (realized gains) on
investment securities 9,517 (4,404) 39,222 (4,404)
-------- -------- --------- ---------
Total comprehensive income $ 24,326 $ 1,052 $ 129,775 $ 158,158
======== ======== ========= =========
</TABLE>
When we disposed of our available-for-sale investment securities in 2000, we
increased our earnings by the amount of the realized gain and reduced other
comprehensive income by the amount of the unrealized gain, net of taxes,
previously recognized.
NOTE D - STOCK REPURCHASE
On August 30, 1999, our Board of Directors authorized a repurchase of up to $500
million of our common stock. In January, March and July 2000, our Board
authorized the repurchase of an additional $300 million of our common stock,
increasing the total program to $800 million. As of the end of the third quarter
of 2000, we had repurchased a total of 79 million shares under our stock
repurchase programs for $780 million plus commissions. Our stock repurchase
programs do not have an expiration date.
NOTE E - LONG-TERM DEBT
In June 2000, we entered into a credit agreement with a syndicate of banks. This
agreement has a one-year term and provides us with a working capital line of
credit of $300 million. Furthermore, this agreement has various borrowing rate
options, including a rate based on our credit rating, which would currently
result in an interest rate of 0.5% over LIBOR. Together with our existing
five-year credit agreement, we now have a total of $600 million in available
funds. You can read about the five-year credit agreement, entered into in
February 1998, in our 1999 Annual Report on Form 10-K. Both credit agreements
contain similar restrictive covenants. As of September 23, 2000, we
7
<PAGE> 8
had no outstanding borrowings under our domestic lines of credit, but we had
outstanding letters of credit totaling $37 million.
In July 1999, we entered into term loan and revolving credit agreements with
several Japanese banks (the "yen facilities") to provide financing for our
operating and expansion activities in Japan. As of September 23, 2000, the
equivalent of $57 million was outstanding under these yen facilities. We entered
into a yen interest rate swap (for a principal amount equivalent to $22 million
as of September 23, 2000) in order to hedge against the volatility of the
interest payments on a portion of our yen borrowings. The swap will mature in
July 2002. You can read more about our yen facilities and interest rate swap in
our 1999 Annual Report on Form 10-K.
NOTE F - EARNINGS PER SHARE ("EPS")
The information required to compute basic and diluted EPS is as follows:
<TABLE>
<CAPTION>
THIRD QUARTER YEAR-TO-DATE
----------------------- ----------------------
2000 1999 2000 1999
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Basic:
Weighted average number of
common shares outstanding 304,111 368,878 313,804 371,989
======== ========= ======== ========
Diluted:
Net earnings (loss) $ 50,622 $ (1,073) $217,595 $173,619
Interest expense related to
convertible notes, net of income taxes* 3,238 -- 9,594 8,943
-------- --------- -------- --------
Adjusted net earnings $ 53,860 $ (1,073) $227,189 $182,562
======== ========= ======== ========
Weighted average number of
common shares outstanding 304,111 368,878 313,804 371,989
Shares issued upon assumed
conversion of convertible notes* 24,741 -- 24,741 24,746
Shares issued upon assumed
exercise of dilutive stock options 1,363 5,795 2,164 9,124
-------- --------- -------- --------
Shares used in computing diluted EPS 330,215 374,673 340,709 405,859
======== ========= ======== ========
--------------
* For the third quarter of 1999, our zero coupon, convertible subordinated notes would have been
anti-dilutive if they were included in our calculation of diluted EPS. Accordingly, the shares
(24,743) and related interest expense ($3,031) were excluded from our computations.
</TABLE>
Options to purchase 35 million shares of common stock at an average exercise
price of $15 per share were not included in our computation of diluted earnings
per share for the third quarter of 2000, because their effect would be
anti-dilutive.
NOTE G - NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("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
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<PAGE> 9
derivatives should 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. In
June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an Amendment of FASB Statement No.
133," which addresses implementation issues experienced by those companies that
adopted SFAS No. 133 early. We will adopt SFAS No. 133, as well as its
amendments and interpretations, in the first quarter of 2001. We do not expect
the adoption of these statements to have a material impact on our financial
position or the results of our operations.
On December 3, 1999, the Securities and Exchange Commission ("SEC") staff
released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements," which provides guidance on the recognition, presentation,
and disclosure of revenue in reported financial statements. SAB No. 101 explains
the SEC staff's views on selected revenue recognition issues based on existing
generally accepted accounting principles. Subsequent to the release of SAB No.
101, the SEC issued SAB No. 101A and SAB No. 101B, each deferring the effective
date of SAB No. 101. This SAB must be adopted no later than the fourth quarter
of fiscal years beginning after December 15, 1999. Our adoption of SAB No. 101
in the fourth quarter of 2000 will have no impact on our financial position or
the results of our operations.
In March 2000, the Emerging Issues Task Force ("EITF") reached a consensus in
EITF Issue 00-02, "Accounting for Web Site Development Costs," agreeing that the
costs incurred to develop software to operate a Web site for internal use should
be accounted for in accordance with Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Under this SOP, costs incurred in the preliminary project stage
should be expensed as incurred, as should most training and data conversion
costs. External direct costs of materials and services and internal direct
payroll-related costs should be capitalized when certain criteria are met. This
consensus is effective for the first quarter beginning after June 30, 2000. We
will adopt EITF Issue 00-02 in the fourth quarter of 2000, and the adoption will
not have a material impact on our financial position or the results of our
operations.
In September 2000, the EITF reached a consensus in EITF Issue 00-10, "Accounting
for Shipping and Handling Fees and Costs," agreeing that shipping and handling
fees must be classified as revenues and comparable prior periods should be
restated. Further, they agreed that shipping and handling costs can be
classified anywhere in the statement of earnings, except they cannot be netted
against sales. If shipping and handling costs are not included in costs of goods
sold, the amount and classification of these expenses must be disclosed in the
footnotes to the financial statements. Currently, we classify shipping and
handling fees as an offset to shipping and handling costs in our store and
warehouse operating and selling expenses. This consensus must be adopted no
later than the fourth quarter of fiscal years beginning after December 15, 1999.
We will adopt EITF Issue 00-10 in the fourth quarter of 2000. The adoption of
EITF Issue 00-10 will have no impact on our financial position or the results of
our operations.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
replaces SFAS No. 125 with the same title. It revises the standards for
securitizations and other transfers of financial assets and collateral and
requires certain additional disclosures, but otherwise retains most of SFAS No.
125's provisions. We sell our credit card receivables to a third party, and this
statement will require us to disclose more information about these transactions.
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<PAGE> 10
We will adopt SFAS No. 140 in the fourth quarter of 2000, when the new
disclosure requirements become effective. The adoption of SFAS 140 will have no
impact on our financial position or the results of our operations.
NOTE H - SEGMENT INFORMATION
During the first quarter of 2000, we redefined our operating and reporting
segments to more closely match management responsibility. Accordingly, all of
our historical segment information has been restated to reflect this change. The
following is a summary of our significant accounts and balances by segment for
the 13- and 39-week periods ended September 23, 2000 and September 25, 1999,
reconciled to our consolidated totals.
<TABLE>
<CAPTION>
SALES
-----------------------------------------------------------------
THIRD QUARTER YEAR-TO-DATE
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
North American Retail * $ 1,587,053 $ 1,489,992 $ 4,798,703 $ 4,348,140
Business Services Group 897,854 775,908 2,650,331 2,254,387
International 336,669 313,489 1,068,601 944,926
----------- ----------- ----------- -----------
Total reportable segments 2,821,576 2,579,389 8,517,635 7,547,453
Eliminations (841) (889) (2,799) (3,066)
----------- ----------- ----------- -----------
Total $ 2,820,735 $ 2,578,500 $ 8,514,836 $ 7,544,387
=========== =========== =========== ===========
------------
* Previously referred to as Stores.
</TABLE>
<TABLE>
<CAPTION>
EARNINGS BEFORE INCOME TAXES
-----------------------------------------------------------------
THIRD QUARTER YEAR-TO-DATE
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
North American Retail $ 83,230 $ 82,234 $ 337,469 $ 346,761
Business Services Group 54,023 46,671 182,087 167,113
International 46,387 33,750 143,375 115,732
----------- ----------- ----------- -----------
Total reportable segments 183,640 162,655 662,931 629,606
Eliminations and other (101,849) (159,458) (316,103) (349,090)
----------- ----------- ----------- -----------
Total $ 81,791 $ 3,197 $ 346,828 $ 280,516
=========== =========== =========== ===========
</TABLE>
A reconciliation of our earnings before income taxes from our reportable
segments to earnings before income taxes in our condensed consolidated financial
statements is as follows:
<TABLE>
<CAPTION>
THIRD QUARTER YEAR-TO-DATE
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total from reportable segments $ 183,640 $ 162,655 $ 662,931 $ 629,606
General and administrative expenses (137,243) (106,129) (358,645) (285,559)
Gain on sales of investment securities 38,990 -- 57,950 --
Interest (expense) income, net (6,652) 2,149 (14,033) 7,520
Merger and restructuring costs 3,177 (8,955) (1,204) (24,434)
Store closure and relocation costs -- (46,438) -- (46,438)
Inter-segment transactions (121) (85) (171) (179)
----------- ----------- ----------- -----------
Total $ 81,791 $ 3,197 $ 346,828 $ 280,516
=========== =========== =========== ===========
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
ASSETS
------------------------------------------
SEPTEMBER 23, DECEMBER 25,
2000 1999
------------ ------------
<S> <C> <C>
North American Retail $2,116,050 $2,170,928
Business Services Group 1,138,005 1,097,232
International 700,605 683,322
---------- ----------
Total reportable segments 3,954,660 3,951,482
Other 240,671 324,701
---------- ----------
Total $4,195,331 $4,276,183
========== ==========
</TABLE>
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, is the largest seller of
office products and services in the world. We sell to consumers and businesses
of all sizes through our three business segments: North American Retail
(previously referred to as Stores), Business Services Group ("BSG") and
International. During the first quarter of 2000, we redefined our operating and
reporting segments to more closely match management responsibility. All
historical financial information for our segments has been restated to reflect
this change.
Management's Discussion and Analysis ("MD&A") is intended to provide information
to assist you in better understanding and evaluating our financial condition and
results of operations. We recommend that you read this MD&A in conjunction with
our condensed consolidated financial statements in Item 1 of this Quarterly
Report on Form 10-Q, as well as our 1999 Annual Report on Form 10-K. This MD&A
contains significant amounts of forward-looking information. Without limitation,
when we use the words "believe," "estimate," "plan," "expect," "intend,"
"anticipate," "continue," "project," "probably," "should" and similar
expressions in this Quarterly Report on Form 10-Q, we are identifying
forward-looking statements. Our Cautionary Statements, which you will find
immediately following this MD&A and following the MD&A in our 1999 Annual Report
on Form 10-K, apply to these forward-looking statements.
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<PAGE> 12
RESULTS OF OPERATIONS
NON-RECURRING CHARGES AND CREDITS
In the third quarters and first nine months of 2000 and 1999, we recorded
certain non-recurring charges and credits that impact the comparability of our
financial results. These charges and credits pertain primarily to merger and
restructuring activities, investment transactions, executive management changes,
store closures and relocations, and slow-moving and obsolete inventories. The
impact of these charges and credits, which are detailed in NOTE B -
NON-RECURRING CHARGES AND CREDITS to our condensed consolidated financial
statements in Item 1 of this Quarterly Report on Form 10-Q, is excluded from the
following discussions of our operating results.
OVERALL
Our overall sales increased by 9% for the third quarter and 13% for the first
nine months of 2000. The largest percentage sales increases were realized in our
BSG segment, driven most significantly by growth in our Internet business. Our
continued worldwide store expansion also contributed greatly to our overall
sales increases. During the 12 months ended September 23, 2000, we expanded our
domestic and international store base by 76 and 6 stores, respectively.
For the third quarter of 2000, our overall gross profit percentage was
negatively impacted primarily by our revised pricing strategy for paper, ink and
toner cartridges. In an effort to improve our competitive position with
non-traditional office supply retailers, we lowered our prices, changed
packaging and strengthened the promotion of these high-visibility product groups
that are essential to every business. In addition to our reduced selling prices,
paper costs have increased over last year, which magnified the negative impact
on gross profit during the third quarter as paper sales volume increased. This
increase in paper costs was the leading factor in the decline of our overall
gross profit for the year-to-date period. Also, our occupancy costs have risen
significantly as a percentage of sales, driven largely by the number of new
stores opened in the past year and the consolidation of our Japanese retail
operations in our 2000 results. (We began including Japan in our consolidated
results during the second quarter of 1999.) Our retail operations generally
require higher occupancy costs as a percentage of sales than our catalog
operations, resulting in downward pressure on our gross margins as we open more
stores.
There were several factors that impacted the increase in our operating and
selling expenses as a percentage of sales during the third quarter and first
nine months of 2000. With comparable store sales declining 1% for the quarter
and increasing only 1% for the first nine months of 2000, the fixed portion of
our store expenses increased relative to sales. Also this year, we have incurred
higher advertising expenses in our domestic segments for our "Taking Care of
Business" campaign, which we began during the latter half of 1999, and we
increased our catalog mailings to further penetrate our commercial markets.
Furthermore, we experienced higher delivery- and personnel-related costs in our
warehouse operations as third-party carriers increased their rates, and our
integration efforts have taken longer to complete than originally planned.
Stores in our North American Retail Division have not generated expected sales
volumes and profitability levels, particularly those opened from 1998 to 2000.
As a result, our management is examining these stores closely as part of a more
comprehensive business review and analysis. For further details on our business
review, see our LIQUIDITY AND CAPITAL RESOURCES section below.
12
<PAGE> 13
NORTH AMERICAN RETAIL
<TABLE>
<CAPTION>
THIRD QUARTER YEAR-TO-DATE
--------------------------------- ---------------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $1,587,053 100.0% $1,489,992 100.0% $4,798,703 100.0% $4,348,140 100.0%
Cost of goods sold
and occupancy costs 1,257,300 79.2% 1,147,342 77.0% 3,729,318 77.7% 3,327,795 76.5%
---------- ---------- ---------- ----------
Gross profit 329,753 20.8% 342,650 23.0% 1,069,385 22.3% 1,020,345 23.5%
Store operating and
selling expenses 243,946 15.4% 217,056 14.6% 723,725 15.1% 619,474 14.3%
---------- ---------- ---------- ----------
Store operating profit $ 85,807 5.4% $ 125,594 8.4% $ 345,660 7.2% 400,871 9.2%
========== ========== ========== ==========
</TABLE>
In our North American Retail Division, sales increased 7% for the third quarter
and 10% year-to-date. These increases were primarily generated by opening new
stores. Comparable sales declined 1% for the quarter and grew 1% for the year in
the 776 domestic stores that have been open for more than one year. These
comparable results were heavily impacted by a decline in sales of technology
products, both in hardware and software items. By contrast, we saw exceptional
growth last year in technology sales, primarily as a result of the September
1999 introduction of an instant rebate program provided in connection with an
Internet service provider ("ISP") and the launch of the popular Microsoft Office
2000(R) software suite. During most of the third quarter of 2000, we did not
have a competitive ISP offering in our stores.
As discussed in the OVERALL section above, we revised our pricing strategy for
paper, ink and toner cartridges during the third quarter of 2000. This was the
largest contributor to the decrease in gross profit percentage for the quarter.
Our gross profit percentages for both the quarter and year-to-date periods in
2000 were also negatively impacted by increases in paper costs and certain fixed
costs when compared to last year. Fixed costs included in our gross profit
include the occupancy costs of our stores and the rental costs for equipment
used in our print and copy centers. Occupancy costs have increased primarily as
a result of the larger proportion of new stores with higher average rents.
Furthermore, much of our print and copy center equipment was recently upgraded,
which further increased our underlying costs.
Our store operating and selling expenses have largely fixed components. Compared
to last year, these expenses have increased as a percentage of sales for both
the third quarter and year-to-date periods. This increase is mainly attributable
to our inability to gain expense leverage through sales growth, particularly in
those stores opened during the last three years. Increased advertising expenses
this year, primarily from greater spending on television, also negatively
impacted our operating expenses for the year-to-date 2000 period.
BSG
<TABLE>
<CAPTION>
THIRD QUARTER YEAR-TO-DATE
----------------------------- ---------------------------------
2000 1999 2000 1999
-------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $897,854 100.0% $775,908 100.0% $2,650,331 100.0% $2,254,387 100.0%
Cost of goods sold
and occupancy costs 627,382 69.9% 535,128 69.0% 1,823,543 68.8% 1,542,002 68.4%
-------- -------- ---------- ----------
Gross profit 270,472 30.1% 240,780 31.0% 826,788 31.2% 712,385 31.6%
Warehouse operating
and selling expenses 215,151 24.0% 176,764 22.8% 640,807 24.2% 524,837 23.3%
-------- -------- ---------- ----------
Warehouse operating profit $ 55,321 6.2% $ 64,016 8.2% $ 185,981 7.0% $ 187,548 8.3%
======== ======== ========== ==========
</TABLE>
13
<PAGE> 14
BSG's sales increased 16% in the third quarter and 18% in the first nine months
of 2000. Sales generated from our public and contract Web sites in the United
States increased to $219 million in the third quarter of 2000, as compared to
$99 million in the third quarter of 1999. Over the first nine months of 2000,
domestic Web site sales rose 162% to $574 million from $219 million in the
comparable 1999 period. We believe that our Internet services attract new
customers as well as strengthen existing customer relationships. The proportion
of paper and machine supplies increased in BSG's product mix during the first
nine months of 2000. These increases were mainly attributable to the overall
growth in our large business customer base. Sales of furniture also increased in
BSG's product mix in response to an emphasis on promoting these items, including
sales force training and enhanced assortment offerings.
BSG's gross profit percentage decreased for both the third quarter and the first
nine months of 2000. Increased paper costs, coupled with increased paper sales
in the product mix, put downward pressure on our year-to-date gross profit. Our
selling prices cannot be adjusted as quickly as our costs increase, because they
are either governed by contractual arrangements or are generally fixed for the
life of a catalog. In addition, during the third quarter of 2000, we reduced our
selling prices for paper products across all of our domestic divisions as part
of our new pricing strategy, which magnified the negative impact of these
products on our gross margin. Similarly, selling prices for ink and toner
cartridges were also lowered in the third quarter. The reduced prices for these
three core product groups had an even greater impact on third quarter 2000
gross margin as the sales volume increased.
The increase in warehouse operating and selling expenses during the first nine
months of 2000 was primarily the result of higher delivery costs, arising from
increased rates charged by third-party carriers. The increase in year-to-date
warehouse operating and selling expenses was further driven by personnel-related
expenses associated with our warehouse staff, where a larger workforce was
required to handle the execution of our warehouse integration plans. These plans
include integrating seven warehouses and opening and integrating two new
warehouses to incorporate the fulfillment of both our Office Depot and Viking
brand orders. Our plans also include closing nine warehouses and transferring
their orders to the integrated facilities. During the latter half of 1999, we
began the integration process, and we expect to complete our integration plans
by mid-2001. At the end of September 2000, three facilities had been fully
integrated, including two newly opened facilities, and three facilities had been
closed. During our transition into these integrated facilities, we incurred
certain incremental expenses related to preparing for the increased volume of
deliveries and the dual-brand fulfillment in the newly integrated facilities.
The integration of five other warehouses was started before the end of the third
quarter, but was not completed. We currently deliver merchandise out of 29
customer service centers ("CSCs"), including our five integrated Office
Depot/Viking facilities. As we progress in the integration process, we plan to
significantly reduce the total number of warehouse facilities we operate, which
should positively impact our BSG's overall operating expenses relative to sales.
See additional discussion of the planned integration in our 1999 Annual Report
on Form 10-K and in NOTE B - NON-RECURRING CHARGES AND CREDITS to our condensed
consolidated financial statements in Item 1 of this Quarterly Report on Form
10-Q.
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<PAGE> 15
INTERNATIONAL
<TABLE>
<CAPTION>
THIRD QUARTER YEAR-TO-DATE
---------------------------- -----------------------------
2000 1999 2000 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $336,669 100.0% $313,489 100.0% 1,068,601 100.0% $944,926 100.0%
Cost of goods sold
and occupancy costs 203,557 60.5% 190,460 60.8% 645,951 60.4% 563,250 59.6%
-------- -------- --------- --------
Gross profit 133,112 39.5% 123,029 39.2% 422,650 39.6% 381,676 40.4%
Store and warehouse
operating and selling
expenses 88,130 26.2% 88,416 28.2% 284,679 26.6% 263,574 27.9%
-------- -------- --------- --------
Store and warehouse
operating profit $ 44,982 13.4% $ 34,613 11.0% 137,971 12.9% $118,102 12.5%
======== ======== ========= ========
</TABLE>
Sales in our International Division increased by 7% for the third quarter and
13% for the first nine months of 2000 over the comparable 1999 periods. Our
international sales, translated into and reported in U.S. dollars, were
negatively impacted by unfavorable exchange rate changes. In local currencies,
the increases were 19% and 23% for the third quarter and first nine months of
2000, respectively, and our comparable sales increased 18% for the third quarter
and 19% for the first nine months of the year. Sales increased in our
International Division as a result of new store openings, the introduction of
multiple public Internet sites and significant comparable sales increases in
most countries in which we operate. Furthermore, our Japanese operations
accounted for a significant portion of the overall increase for the third
quarter and year-to-date periods. We first began consolidating the results of
our Japanese retail operations in April 1999 when we purchased the remaining 50%
ownership interest from our joint venture partner. Additionally, our Japanese
catalog operations began generating revenue for the first time during the second
quarter of 1999. We added six stores in France and Japan since the end of
September 1999, an increase in our wholly-owned international store base of more
than 20%. We also launched six public Internet sites--one Office Depot brand
site and five Viking brand sites--in five countries since the third quarter of
1999.
The year-to-date gross profit percentage is lower in 2000 because we
consolidated our Japanese retail operations for nine months, compared to five
months in the prior year period. Gross profit percentages earned in our
international retail stores are lower than the percentages in our international
catalog business, primarily as a result of pricing and product mix differences
and higher occupancy costs as a percentage of sales. The growth rates of our
international retail sales exceeded those of our international catalog sales,
contributing to the decrease in our gross profit rates for the year-to-date
period. Year-to-date 2000 results were also negatively impacted by higher costs
for our more popular products such as paper and laser cartridges. These cost
increases had a smaller impact on our third quarter results because we were able
to issue new catalogs with revised pricing on these items during the quarter. We
experienced an increase in our gross profit percentage in the third quarter of
2000 as compared to the same period in 1999. We distributed more competitively
priced catalogs during the third quarter of 1999 than during the third quarter
of 2000 to counter the entry of a competitor in one of our larger international
markets. We have earned greater volume rebates from our vendors, primarily
achieved through consolidating elements of our European purchasing. We began
recognizing a portion of these benefits during the third quarter of 1999; and as
a result, rebates had a greater effect on our year-to-date 2000 results than on
our third quarter 2000 results.
15
<PAGE> 16
For the third quarter and year-to-date 2000 periods, the decrease in operating
and selling expenses as a percentage of sales was achieved mainly through
efficiencies gained by growing sales. Advertising costs, in particular, grew at
a slower pace than our sales because we have implemented more productive
advertising campaigns in certain European markets with the help of our improved
data warehouses.
Looking forward, we anticipate continued volatility in exchange rates to have a
negative impact on the reported results of our international business segments
due to the strong U.S. dollar. We currently hedge some of our international
inventory purchases and are considering other opportunities to hedge against
such foreign currency volatility.
CORPORATE AND OTHER
Income and expenses not allocated to the store and warehouse operating profit of
our segments consist of pre-opening expenses, general and administrative
expenses, our share of the earnings (losses) of our joint ventures, amortization
of goodwill, interest income and expense, income taxes, and inter-segment
transactions. Our pre-opening expenses consist principally of personnel,
property and advertising expenses incurred in opening or relocating stores in
our North American Retail Division. They also include, to a lesser extent,
expenses incurred to open and relocate facilities in our BSG and our
International Division. We typically incur these expenses during a six-week
period prior to a store opening. Pre-opening expenses have declined in the first
half of 2000 as compared to 1999 as a result of fewer new store openings. We
opened 15 stores during the third quarter and 48 stores during the first nine
months of 2000, as compared to 40 stores and 108 stores for the respective
comparable periods in 1999. We have made a conscious decision to implement a
more conservative approach to our North American Retail real estate strategy
this year, and have reduced our planned store openings for the year to
approximately 70 stores.
Excluding the non-recurring charges discussed earlier, general and
administrative expenses increased by $4 million for the third quarter and $41
million for the first nine months of 2000, resulting in relatively flat expenses
as a percentage of sales. These increases are primarily from additional spending
to support our e-commerce and data warehouse initiatives and our international
expansion.
Our share of the earnings (losses) of our joint venture operations has improved
considerably over last year. Our joint ventures in Mexico and Israel achieved
stronger results this year, and our year-to-date 1999 earnings include the
losses from our Japanese retail operations for the period prior to April 1999,
when these operations were accounted for as a joint venture.
The decrease in interest income was attributable to our lower average cash
balances following the repurchase of 79 million shares of our stock at a total
cost of $780 million plus commissions. The shares were purchased during the last
half of 1999 and the first nine months of 2000 pursuant to a Board-approved
stock repurchase plan. We expect our average cash balances to remain at this
lower level through the end of 2001.
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<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
We are currently conducting a review of all aspects of our business. In our
North American Retail Division, many of our retail stores opened from 1998 to
2000 have been performing at levels below our expectations. Based on the results
of this comprehensive business review, we will probably close or relocate some
of these stores. It is also possible that we will choose to exit certain markets
and/or further penetrate other markets. We are also conducting a review of our
warehouse operations, including the number and type of SKUs we stock, our
operational capabilities and our customer service levels. Based on the results
of our review, we may reduce the number of SKUs handled and delivered by our
warehouses. We may also alter our warehouse network configuration and increase
the use of certain technologies and processes. If we make the changes
contemplated, we will record a one-time charge next quarter. However, we expect
the changes to improve our future operating results.
Our operating cash flows for the first nine months of 2000 were lower than the
same period in 1999. Our savings attributable to decreased store openings were
offset by lower gross profits, primarily during the third quarter, as explained
more fully in the RESULTS OF OPERATIONS section above. On a worldwide basis in
the first nine months of 2000, excluding joint venture operations and licensing
arrangements, we opened 48 stores, including relocations, as compared to 108
stores during the first nine months of 1999. Opening a new domestic store
requires that we outlay approximately $500 thousand for the portion of our
inventories that is not financed by our vendors, as well as approximately $155
thousand for pre-opening expenses.
Our primary investing activity is the acquisition of capital assets. The number
of stores and CSCs we open or remodel each period generally drives the volume of
our capital investments. As mentioned earlier, our store openings for the first
nine months of 2000 have decreased as compared to the first nine months of 1999.
This decrease was a significant contributor to the overall reduction in our
investing cash outflows. We have reduced our planned store openings for the year
2000 to approximately 70 stores.
Fewer investing opportunities also contributed significantly to the reduction in
our investing cash outflows. Beginning late in 1999, we expanded our presence in
the electronic commerce marketplace by entering into strategic business
relationships with several Web-based providers of business-to-business ("B2B")
electronic commerce solutions. We made equity investments in these and other
companies in late 1999 ($51 million) and in the first nine months of 2000 ($25
million). During the first nine months of 2000, we liquidated one and a portion
of another of our investments, which resulted in gains of $58 million. Although
certain of our investments increased in value since our initial purchase, our
remaining investments may not generate similar appreciation in the future.
Because most of our investments are in start-up companies operating in a
relatively new and volatile industry, we believe there is a high degree of risk
associated with these investments. They may permanently depreciate in value from
the amount we originally paid. We plan to continue to consider opportunities to
invest in companies that provide B2B electronic commerce solutions for small-
and medium-sized businesses, and our intention is to invest primarily or
exclusively in those with which we also form strategic business relationships.
Our cash outflows from financing activities during the first nine months of 2000
and 1999 were driven primarily by our stock repurchase program. Between August
1999 and July 2000, our Board of Directors authorized a common stock repurchase
program of $800 million. Under this program, in the first nine months of 1999,
we repurchased 36 million shares of our stock at a total cost of $390 million
plus commissions, $60 million of which had not been paid for by the end of
September 1999. During the first nine months of 2000, we purchased 32 million
17
<PAGE> 18
shares of our stock at a total cost of $280 million plus commissions. Total
repurchases under the program through September 2000 were $780 million plus
commissions. Although there is no expiration date for this most recent
authorization, we expect to complete it by the end of 2000.
On November 1, 2000, it is likely, based on our current stock price, that we
will be required to purchase our 1993 Liquid Yield Option Notes (LYONs(R)) from
the holders of those LYONs(R). Although we have the choice of paying the holders
$250 million in cash, common stock or a combination of the two, we intend to pay
them in cash, using cash on hand and funds available under our five-year credit
facility. You can read more about our LYONs(R) in our 1999 Annual Report on Form
10-K, and you can read more about our five-year credit facility, as well as our
two other credit facilities and our interest rate swap, in NOTE E - LONG-TERM
DEBT to our condensed consolidated financial statements in Item 1 of this
Quarterly Report on Form 10-Q.
EURO
For the past nine months, we have continued to evaluate the business
implications of modifying our systems to properly recognize and handle our
conversion to the euro. Based on that evaluation, we have determined that we
need to make multiple changes and modifications to our current systems to
prepare them for July 1, 2002, the date the new euro-denominated bills and coins
will become the sole legal currency in several European countries. Even so, we
still do not expect the conversion to the euro to have a material effect on our
financial position or the results of our operations. You can read more about the
euro's impact on our business in our 1999 Annual Report on Form 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
For information regarding new accounting pronouncements, see NOTE G - NEW
ACCOUNTING PRONOUNCEMENTS of our condensed consolidated financial statements in
Item 1 of this Form 10-Q.
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. We want to take
advantage of the "safe harbor" provisions of the Act. In doing so, we have
disclosed these forward-looking statements by informing you in specific
cautionary statements of the circumstances which may cause the information in
these statements not to transpire as expected.
This Quarterly Report on Form 10-Q contains both historical information and
other information that you may use to infer future performance. Examples of
historical information include our quarterly financial statements and the
commentary on past performance contained in our MD&A. While we have specifically
identified certain information as being forward-looking in the context of its
presentation, we caution you that, with the exception of information that is
clearly historical, all the information contained in this Quarterly Report on
Form 10-Q should be considered to be "forward-looking statements" as referred to
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<PAGE> 19
in the Act. Without limitation, when we use the words "believe," "estimate,"
"plan," "expect," "intend," "anticipate," "continue," "project," "probably,"
"should" 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 that we discuss in more detail below and in our 1999 Annual Report on
Form 10-K. This information is based on various factors and 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 substantially from
those we have discussed in the forward-looking statements in this Quarterly
Report. In particular, the factors we discuss below and in our 1999 Annual
Report on Form 10-K could affect our actual results and could cause our actual
results during the remainder of 2000 and in future years to differ materially
from those expressed in any forward-looking statement made by us in this
Quarterly Report on Form 10-Q. Those Cautionary Statements contained in our 1999
Annual Report on Form 10-K are incorporated herein by this reference to them,
and, in addition, we urge you to also consider the following updated cautionary
statements:
BUSINESS REVIEW
We currently are conducting a review of all aspects of our business, with
particular attention on the stores in our North American Retail Division and on
our distribution and supply chain activities. This review, which we expect to
complete by the end of 2000, is focused particularly - but not exclusively - on
our retail stores opened from 1998 to 2000, many of which have been performing
at levels below our expectations. Based on the results of this review, we will
probably close or relocate some of these stores. It is also possible that we
will choose to exit certain markets, and/or further penetrate other markets. We
expect that these decisions will result in improved profitability of our North
American Retail Division. However, this analysis involves many variables and
uncertainties; and, as a result, we may not achieve any of the expected
benefits. Furthermore, individual stores or markets that were not evaluated as
part of this business review may have similar characteristics as this class of
stores. Those stores may have an adverse affect on our business and our results
of operations in the future.
We are also conducting a review of our warehouse operations, including the
number and type of SKUs we stock, our operational capabilities and our customer
service levels. Based on the results of our review, we may reduce the number of
SKUs handled and delivered by our warehouses. We may also alter our warehouse
network configuration and increase the use of certain technologies and
processes. We expect that these decisions will result in improved profitability
of our warehouses in our Business Services Group. However, this analysis
involves many variables and uncertainties; and, as a result, we may not achieve
all or any of the expected benefits.
If we elect to close or relocate retail stores and/or to effect SKU reductions,
we will probably record a one-time charge which will impact our statements of
earnings and balance sheet in the fourth quarter of 2000 and result in much
lower earnings, or even a loss, after such charge is taken into account.
Moreover, we cannot project that our actions will have the desired result of
increasing our Company's efficiency and profitability in the future, nor can we
ensure that further charges of this nature will not be required in the future.
ECONOMIC DOWNTURN
In the past decade, the favorable United States economy has contributed to the
expansion and growth of retailers. Our country has experienced low inflation,
low interest rates, low unemployment and an escalation of new businesses. The
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<PAGE> 20
economy has recently begun to show signs of a downturn. The Federal Reserve has
raised interest rates, and the stock market has shown signs that it may no
longer be a "bull" market. The retail industry, in general, is displaying signs
of a slowdown, with several specialty retailers, both in and outside our
industry segment, reporting earnings warnings in the last few months. This
general economic slowdown may adversely impact our business and the results of
our operations.
EXECUTIVE MANAGEMENT
Since the appointment of our new Chief Executive Officer, we have evolved our
management organization to better address the future goals of our Company. This
new organization has vacancies in several key positions, including the President
of North American Retail and the Chief Financial Officer. A search is underway
to identify the best individuals to fill these positions; however, the process
may be a protracted one. Furthermore, the new management structure may not be
ideal for our Company and may not result in the benefits expected; and, as a
result, may materially and adversely affect our future operating results.
INTERNATIONAL ACTIVITY
In addition to our prior comments in our 1999 Annual Report on Form 10-K
regarding risk factors associated with operating outside North America, recent
world events have served to underscore even further the risks and uncertainties
of operating in other parts of the world. Risks of civil unrest, war and
economic crises in portions of the world outside North America in which we
operate represent a more significant factor than may have been the case in the
past. Moreover, as we increase the relative percentage of our business that is
operated globally, our Company is subject to greater risk associated with
political and economic issues that are beyond our control. This could have a
material adverse impact on our future operating results. Also, we have
experienced significant fluctuations in foreign currency exchange rates in 2000,
which have resulted in lower than anticipated sales and earnings in our
International Division. We are subject to the risk of foreign currency exchange
rate movements, and our results may continue to be adversely affected by these
fluctuations in the future.
EURO
On January 1, 1999, 11 of the 15 member countries of the European Economic and
Monetary Union established fixed conversion rates between their existing
currencies and their new common currency (the "euro"). On July 1, 2002, new
euro-denominated bills and coins will become the sole legal currency in those
countries, and all former currencies will be withdrawn from circulation. Since
the introduction of the euro, we have been evaluating the business implications
of modifying our systems to properly recognize and handle conversion to the
euro. Based on that evaluation, we need to make multiple changes and
modifications to our current systems before July 1, 2002. We expect to complete
our system modifications in advance of the deadline, and we do not expect our
conversion to the euro to have a material effect on our financial position or
the results of our operations. However, we may not complete the system changes
by the targeted date, preventing us from accepting orders or collecting
receivables from our customers or from paying our vendors. This could have an
adverse impact on our business and our future operating results.
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<PAGE> 21
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
INTEREST RATE RISKS
See the disclosure in our 1999 Annual Report on Form 10-K. We do not believe
that the risk we face related to interest rate changes is materially different
than it was at the date of such Report.
FOREIGN EXCHANGE RATE RISKS
See the disclosure in our 1999 Annual Report on Form 10-K. While we realize that
foreign currency exchange rates have fluctuated much more in the past year than
they have in previous years, we do not believe that the risk we face related to
foreign currencies is materially different than it was 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, either individually or in aggregate, will
materially affect our financial position or the results of our operations.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
a. 27.1 Financial Data Schedule (for SEC use only).
b. 1. A Current Report on Form 8-K was filed on August 22, 2000
regarding certain management changes.
2. A Current Report on Form 8-K was filed on September 9, 2000
regarding certain remarks made by management at a securities
analysts conference.
3. A Current Report on Form 8-K was filed on October 12, 2000
regarding a press release issued to announce our third quarter
2000 results.
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<PAGE> 22
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: October 31, 2000 By: /s/ M. Bruce Nelson
------------------------
M. Bruce Nelson
Chief Executive Officer
Date: October 31, 2000 By: /s/ Charles E. Brown
------------------------
Charles E. Brown
Senior Vice President,
Finance and Controller
(Principal Accounting
Officer)
22
<PAGE> 23
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
10.1 Executive Severance Agreement, including Release and
Non-Competition Agreement, dated September 19, 2000 by and
between the Company and David I. Fuente (schedules and exhibits
omitted).
10.2 Non-executive Chairman Agreement dated September 19, 2000 by and
between the Company and David I. Fuente.
10.3 Executive Retirement Agreement dated July 17, 2000 by and
between the Company and Barry J. Goldstein (Attachment A
omitted).
27.1 Financial Data Schedule (for SEC use only)
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