<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 25, 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 316,200,923 shares of common stock outstanding as of
April 24, 2000.
<PAGE> 2
OFFICE DEPOT, INC.
FORM 10-Q - QUARTER ENDED MARCH 25, 2000
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 25, 2000 and December 25, 1999 3
Consolidated Statements of Earnings for the
13 Weeks Ended March 25, 2000 and
March 27, 1999 4
Consolidated Statements of Stockholders'
Equity for the 13 Weeks Ended March 25, 2000
and the Year Ended December 25, 1999 5
Consolidated Statements of Cash Flows for the
13 Weeks Ended March 25, 2000 and
March 27, 1999 6
Notes to our Consolidated Financial Statements 7-16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16-31
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities and Use of Proceeds 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security
Holders 32-33
Item 5. Other Information 33
Item 6. Exhibits and Reports on Form 8-K 33
SIGNATURES 34
INDEX TO EXHIBITS 35
2
<PAGE> 3
OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 25, December 25,
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 344,035 $ 218,784
Receivables, net 796,417 849,478
Merchandise inventories, net 1,256,163 1,436,879
Deferred income taxes 68,279 68,279
Prepaid expenses 57,557 57,632
----------- -----------
Total current assets 2,522,451 2,631,052
Property and equipment, net 1,158,683 1,145,628
Goodwill, net 238,818 240,166
Other assets 250,504 259,337
----------- -----------
$ 4,170,456 $ 4,276,183
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,132,916 $ 1,239,301
Accrued expenses and other liabilities 376,983 414,690
Income taxes payable 96,122 39,588
Current maturities of long-term debt 8,870 7,486
Current maturities of zero coupon,
convertible subordinated notes 245,383 242,980
----------- -----------
Total current liabilities 1,860,274 1,944,045
Long-term debt, net of current maturities 125,596 109,653
Deferred income taxes and other credits 94,112 103,319
Zero coupon, convertible subordinated notes 214,069 211,446
Commitments and contingencies
Stockholders' equity:
Common stock - authorized 800,000,000 shares of
$.01 par value; issued 376,817,562 in 2000 and
376,212,439 in 1999 3,768 3,762
Additional paid-in capital 932,269 926,295
Unamortized value of long-term incentive stock grants (3,891) (4,065)
Accumulated other comprehensive income 13,550 15,730
Retained earnings 1,576,395 1,467,359
Treasury stock, at cost - 60,077,175 shares in 2000
and 46,770,272 shares in 1999 (645,686) (501,361)
----------- -----------
1,876,405 1,907,720
----------- -----------
$ 4,170,456 $ 4,276,183
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
13 Weeks 13 Weeks
Ended Ended
March 25, March 27,
2000 1999
----------- -----------
<S> <C> <C>
Sales $ 3,063,253 $ 2,622,851
Cost of goods sold and occupancy costs 2,228,011 1,894,003
----------- -----------
Gross profit 835,242 728,848
Store and warehouse operating
and selling expenses 569,381 471,669
Pre-opening expenses 2,650 6,463
General and administrative expenses 106,349 89,723
Merger and restructuring costs 1,029 2,761
----------- -----------
Operating profit 155,833 158,232
Other income (expense):
Interest income 3,364 9,712
Interest expense (7,196) (6,351)
Miscellaneous income (expense), net 21,072 (1,838)
----------- -----------
Earnings before income taxes 173,073 159,755
Income taxes 64,037 59,179
----------- -----------
Net earnings $ 109,036 $ 100,576
=========== ===========
Earnings per share:
Basic $ 0.34 $ 0.27
Diluted 0.32 0.25
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Unamortized
Common Common Additional Value of Long-
Stock Stock Paid-in Term Incentive
Shares Amount Capital Stock Grant
------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Balance at December 26, 1998 373,817,704 $ 3,738 $ 838,122 $ (2,874)
Comprehensive income:
Net earnings
Foreign currency translation adjustment
Unrealized gain on investment
securities, net of tax
Comprehensive income
Acquisition of treasury stock
Retirement of treasury stock (3,245,170) (32) (1,718)
Grant of long-term incentive stock 130,000 1 2,127 (2,127)
Exercise of stock options (including
income tax benefits) 4,457,024 45 72,865
Issuance of stock under employee
stock purchase plans 712,431 7 9,240
Matching contributions under 401(k)
and deferred compensation plans 320,906 3 5,423
Conversion of LYONs to common stock 23,710 -- 329
Payment for fractional shares in
connection with 3-for-2 stock split (4,166) -- (93)
Amortization of long-term incentive
stock grant 936
------------- ------------ ------------ ------------
BALANCE AT DECEMBER 25, 1999 376,212,439 $ 3,762 $ 926,295 $ (4,065)
(UNAUDITED):
Comprehensive income:
Net earnings
Foreign currency translation adjustment
Net unrealized loss on investment
securities, net of tax
Comprehensive income
Acquisition of treasury stock
Exercise of stock options (including
income tax benefits) 182,610 2 1,721
Issuance of stock under employee
stock purchase plans 285,878 3 2,702
Matching contributions under 401(k)
and deferred compensation plans 136,635 1 1,551
Amortization of long-term incentive
stock grant 174
------------- ------------ ------------ ------------
BALANCE AT MARCH 25, 2000 376,817,562 $ 3,768 $ 932,269 $ (3,891)
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Comprehensive Retained Treasury
Income Income Earnings Stock
------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 26, 1998 $ (18,078) $ 1,209,721 $ (1,750)
Comprehensive income:
Net earnings $ 257,638 257,638
Foreign currency translation adjustment (28,319) (28,319)
Unrealized gain on investment
securities, net of tax 62,127 62,127
------------
Comprehensive income $ 291,446
============
Acquisition of treasury stock (501,361)
Retirement of treasury stock 1,750
Grant of long-term incentive stock
Exercise of stock options (including
income tax benefits)
Issuance of stock under employee
stock purchase plans
Matching contributions under 401(k)
and deferred compensation plans
Conversion of LYONs to common stock
Payment for fractional shares in
connection with 3-for-2 stock split
Amortization of long-term incentive
stock grant
------------ ------------ ------------
BALANCE AT DECEMBER 25, 1999 $ 15,730 $ 1,467,359 $ (501,361)
(UNAUDITED):
Comprehensive income:
Net earnings $ 109,036 109,036
Foreign currency translation adjustment 7,489 7,489
Net unrealized loss on investment
securities, net of tax (9,669) (9,669)
------------
Comprehensive income $ 106,856
============
Acquisition of treasury stock (144,325)
Exercise of stock options (including
income tax benefits)
Issuance of stock under employee
stock purchase plans
Matching contributions under 401(k)
and deferred compensation plans
Amortization of long-term incentive
stock grant
------------ ------------ ------------
BALANCE AT MARCH 25, 2000 $ 13,550 $ 1,576,395 $ (645,686)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks Ended 13 Weeks Ended
March 25, March 27,
2000 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 3,025,235 $ 2,619,326
Cash paid to suppliers (2,730,452) (2,353,161)
Interest received 2,467 9,006
Interest paid (2,238) (1,554)
Income taxes paid (7,388) (5,144)
----------- -----------
Net cash provided by operating activities 287,624 268,473
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities or sales of investment securities 18,960 2,407
Purchase of investment securities (5,740) --
Capital expenditures, net of proceeds from sales (51,585) (105,266)
----------- -----------
Net cash used in investing activities (38,365) (102,859)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and sale
of stock under employee stock purchase plans 4,116 35,944
Acquisition of treasury stock (144,325) --
Proceeds from issuance of long-term debt 8,421 --
Payments on long- and short-term borrowings (1,554) (933)
----------- -----------
Net cash (used in) provided by financing activities (133,342) 35,011
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 9,334 (4,527)
----------- -----------
Net increase in cash and cash equivalents 125,251 196,098
Cash and cash equivalents at beginning of period 218,784 704,541
----------- -----------
Cash and cash equivalents at end of period $ 344,035 $ 900,639
=========== ===========
RECONCILIATION OF NET EARNINGS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net earnings $ 109,036 $ 100,576
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 47,420 38,457
Provision for losses on merchandise inventories and
receivables 29,973 20,573
Accreted interest on zero coupon, convertible
subordinated notes 5,026 4,787
Contributions of common stock to employee
benefit and stock purchase plans 1,552 1,882
Net (earnings) losses on equity method investments (3,286) 646
Loss on disposal of property and equipment 2,021 3,455
Deferred income taxes (256) (57)
Gain on sale of investment securities (18,960) --
Changes in assets and liabilities:
Decrease in receivables 44,553 52,005
Decrease in merchandise inventories 159,248 7,158
Net decrease (increase) in prepaid expenses,
deferred income taxes and other assets 234 (12,429)
Net (decrease) increase in accounts payable,
accrued expenses and deferred credits (88,937) 51,420
----------- -----------
Total adjustments 178,588 167,897
----------- -----------
Net cash provided by operating activities $ 287,624 $ 268,473
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
OFFICE DEPOT, INC. AND SUBSIDIARIES
NOTES TO OUR CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except share data)
NOTE A - BASIS OF PRESENTATION
Office Depot, Inc., together with our subsidiaries, is the world's largest
supplier of office products and services, operating in 19 countries throughout
the world and doing business primarily under two brands - Office Depot(R) and
Viking Office Products(R). We serve our customers, including those in countries
operated under licensing and joint venture agreements, through multiple sales
channels. These channels include an international chain of high-volume office
supply stores located in ten countries; a domestic contract sales network; five
commercial Internet sites, serving both our domestic and international
customers; and catalog, mail order and delivery operations in 16 countries.
After merging with Viking Office Products, Inc. ("Viking") in August 1998, we
now have operations, either owned directly or operated through joint venture or
licensing agreements, in Australia, Austria, Belgium, Canada, Colombia, France,
Germany, Hungary, Ireland, Israel, Italy, Japan, Luxembourg, Mexico, the
Netherlands, Poland, Thailand, the United Kingdom and the United States.
We currently maintain licensing agreements for the operation of Office Depot
stores in Colombia, Hungary, Poland and Thailand. Our stores in Israel and
Mexico are operated under joint venture agreements and are accounted for using
the equity method. Our portion of the income or loss from the operation of these
joint ventures is included in miscellaneous income (expense) on our consolidated
statements of earnings. The financial position, results of operations and cash
flows of our Japanese retail operations are included in our consolidated
financial statements as of the balance sheet dates and for the first quarter of
2000. Prior to April 1999, we operated these stores under a joint venture
agreement. Accordingly, the results of these operations were accounted for using
the equity method during the first quarter of 1999.
We operate on a 52- or 53-week fiscal year ending on the last Saturday of
December. Our interim financial statements as of March 25, 2000 and for the
13-week periods ending March 25, 2000 and March 27, 1999 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 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
interim financial statements in conjunction with our audited financial
statements for the year ended December 25, 1999 included in our 1999 Annual
Report.
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.
NOTE B - MERGER AND RESTRUCTURING TRANSACTIONS
VIKING MERGER: In August 1998, we completed our merger with Viking. Subsequent
to the merger, we immediately began the process of integrating the Office Depot
and Viking businesses. Our plans, which we initially expected to complete during
2000, anticipated closing 15 domestic CSCs and opening five new domestic CSCs,
as well as installing complex new systems in each surviving facility. During the
fourth quarter of 1999, after evaluating the results of two integrated test
facilities, we modified our integration plans. Our revised plans incorporate a
simpler approach and, as a result, require less time and capital to complete.
Furthermore, under our revised plans, we will close only nine of our existing
CSCs, and no additional CSCs will be opened. We lease all but two of the CSCs we
now plan to close. We sold one of these CSCs in 1999, and we expect to sell the
other in 2000. Our plan is to vacate all of the buildings once we have ceased
operations in them. Accordingly, we have written off certain assets such as
leasehold improvements, redundant software and conveyor systems in these CSCs.
In addition to these charges, merger and restructuring costs include certain
expenses of exiting these facilities that will provide us with no future
economic benefit (e.g., future lease obligations, personnel-related termination
costs, etc.).
Furthermore, we have combined certain of our support functions in our Viking and
Office Depot domestic headquarters in conjunction with our integration plans.
Merger and restructuring costs include charges associated with these activities,
primarily personnel-related termination costs.
We accrue merger and restructuring costs when significant changes in our plan
are unlikely, which generally requires that planned actions take place within
one year. In the case of our CSC integration, we plan to integrate all of our
CSCs by March 2001.
CLOSURE OF FURNITURE AT WORK(TM) AND IMAGES(TM) STORES: As a result of our 1998
decision to focus on continuing to grow our core businesses and expanding our
international operations, we closed all of our Furniture at Work(TM) and
Images(TM) stores. Exit costs related to closing these facilities are
included in merger and restructuring costs for the first quarter of 1999.
ACQUISITION OF JOINT VENTURE INTERESTS IN FRANCE AND JAPAN: In November 1998, we
purchased our joint venture partner's interest in our French Office Depot retail
operations. Following this purchase, we decided to restructure and integrate the
separate Office Depot and Viking operations in France. During 1999, this
decision involved consolidating the Office Depot and Viking headquarters into a
new office that is more conveniently located. We do not expect to close any
operating facilities in conjunction with our restructuring and integration
efforts in France. Instead, we will integrate the warehousing and delivery of
our Office Depot and Viking brand merchandise in each of our existing
warehouses.
8
<PAGE> 9
Following our April 1999 purchase of our joint venture partner's interest in our
Japanese Office Depot retail operations, we began restructuring and integrating
our Office Depot and Viking operations in Japan. During 1999, we closed one CSC
and one store, and we expect to close another CSC in 2000.
Costs associated with these integration activities, primarily personnel-related
costs, were included in merger and restructuring costs in the first quarters of
2000 and 1999. We expect our operations in France and Japan to be completely
integrated by the end of 2000.
Merger and restructuring costs in the first quarters of 2000 and 1999 consists
of the following charges:
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Viking Merger:
Facility and personnel-related costs $ 951 $1,092
attributable to the merger transaction
------ ------
$ 951 $1,092
------ ------
Closure of Furniture at Work(TM) and Images(TM) Stores:
Asset write-offs associated with closing stores $ -- $1,127
Other facility exit costs, principally estimated lease costs
subsequent to closing the stores -- 464
------ ------
$ -- $1,591
------ ------
Acquisition of Joint Venture Interests in France and Japan:
Personnel-related costs
$ 78 $ 78
------ ------
$ 78 $ 78
------ ------
Grand Total $1,029 $2,761
====== ======
</TABLE>
We determined the fair value of assets held for disposal by estimating the net
realizable value at the time of closure or removal from service. Estimated
proceeds from and costs to dispose of these assets were determined through
analysis of historical data and expected outcomes. The costs required to
complete our merger and restructuring plans necessarily involve the use of
estimates. We believe our estimates are unlikely to change significantly in the
future.
9
<PAGE> 10
As of March 25, 2000, we had remaining accruals of approximately $20.1 million
for merger and restructuring costs. Amounts expensed for asset write-offs are
recorded as a reduction of our fixed assets. All other amounts are recorded as
accrued expenses. The activity in our accruals by expense category is as
follows:
<TABLE>
<CAPTION>
Beginning New Cash Ending
Balance Charges Payments Balance
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Accrued merger transaction costs $ 1,639 $ -- $ (86) $ 1,553
Accrued other facility exit costs 7,764 24 (334) 7,454
Accrued personnel retention and
termination costs 11,865 1,005 (1,733) 11,137
-------- -------- ------- --------
Total accrued costs $ 21,268 $ 1,029 $ (2,153) $ 20,144
======== ======== ======= ========
</TABLE>
We expect to incur additional merger and restructuring costs over the remaining
integration period. Although we expect these costs to be insignificant to our
future operating results, there can be no assurance that this will be the case.
NOTE C - COMPREHENSIVE INCOME
Comprehensive income represents all non-owner changes in stockholders' equity
and consists of the following:
<TABLE>
<CAPTION>
First Quarter
2000 1999
--------- ---------
<S> <C> <C>
Net earnings $ 109,036 $ 100,576
Foreign currency translation adjustments 7,489 (13,698)
Net unrealized loss on investment securities* (16,780) --
Tax on net unrealized loss 7,111 --
--------- ---------
Total comprehensive income $ 106,856 $ 86,878
========= =========
</TABLE>
*The net unrealized loss on investment securities arises from the changes
in fair value of equity investments that are classified as "available for
sale" under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." As of March 25, 2000, we owned two investments which met
this classification, and their recorded values were adjusted accordingly.
NOTE D - STOCK REPURCHASE
In August 1999, our Board of Directors approved a $500 million stock repurchase
program. We purchased 46.7 million shares of our stock at a total cost of $500
million plus commissions during the third and fourth quarters of 1999. In
January and March 2000, our Board of Directors approved additional stock
repurchases of up to $100 million each, bringing our total authorization to $700
million. As of March 25, 2000, we had purchased an
10
<PAGE> 11
additional 13.3 million shares of our stock at a total cost of $144 million plus
commissions, leaving a remaining authorization of approximately $56 million. The
remaining authorization does not have an expiration date, and we can acquire our
common stock either in the open market or through negotiated purchases.
NOTE E - LONG-TERM DEBT
In February 1998, we entered into a credit agreement with a syndicate of banks
as described more fully in our 1999 Annual Report. As of March 25, 2000, we had
no outstanding borrowings under this facility, but we had outstanding letters of
credit totaling $28.8 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. The yen facilities provide for
maximum aggregate borrowings of (Y)9.76 billion (the equivalent of $91 million
at March 25, 2000) at an interest rate of .875% over the Tokyo Interbank Offered
Rate ("TIBOR"). Although the loans mature at varying dates over three to six
months, we have classified these borrowings as long-term because we intend to
renew them as they come due. These yen facilities contain covenants similar to
those in our domestic credit facility, which you can read about in our 1999
Annual Report. As of March 25, 2000, the equivalent of $54 million was
outstanding under these yen facilities. Effective as of October 28, 1999, we
entered into a yen interest rate swap with a financial institution (for a
principal amount equivalent to $22 million at March 25, 2000) in order to hedge
against the volatility of the interest payments on a portion of our yen
borrowings. The terms of the swap specify that we pay an interest rate of .7%
and receive TIBOR. The swap will mature in July 2000, but we intend to renew it
for as long as the hedged borrowings remain outstanding.
NOTE F - GAIN ON SALE OF INVESTMENT
In February 2000, we exercised 250,000 warrants and simultaneously sold the
underlying shares of one of our "available-for-sale" investments on the open
market for $19.0 million, net of commissions. We paid the exercise price of the
warrants through the exercise of an additional 27,777 warrants. We realized a
gain of $19.0 million on this transaction, which is included in miscellaneous
income in our consolidated statement of earnings.
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
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<PAGE> 12
used to repurchase common stock to be held in treasury. We adjust net earnings
under this assumption for interest accreted on the notes, if these notes are
dilutive, net of the related income tax effect.
The information required to compute basic and diluted EPS is as follows:
<TABLE>
<CAPTION>
FIRST QUARTER
2000 1999
-------- --------
<S> <C> <C>
Basic:
Weighted average number of
common shares outstanding 323,605 372,805
======== ========
Diluted:
Net earnings $109,036 $100,576
Interest expense related to
convertible notes, net of income taxes 3,166 2,934
-------- --------
Adjusted net earnings $112,202 $103,510
======== ========
Weighted average number of
common shares outstanding 323,605 372,805
Shares issued upon assumed
conversion of convertible notes 24,741 24,753
Shares issued upon assumed
exercise of dilutive stock options 2,998 11,714
-------- --------
Shares used in computing diluted EPS 351,344 409,272
======== ========
</TABLE>
Options to purchase 22,320,768 shares of common stock at an average exercise
price of approximately $18.47 per share were not included in our computation of
diluted earnings per share for the first quarter of 2000, because their effect
would be anti-dilutive.
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>
First Quarter
2000 1999
-------- --------
<S> <C> <C>
Additional paid-in capital related to income tax
benefits on stock options exercised $ 312 $ 6,072
Assets acquired under capital leases 12,569 12,698
Common stock issued upon conversion of debt -- 257
Net unrealized loss on investment securities,
net of income taxes (9,669) --
</TABLE>
12
<PAGE> 13
NOTE I - NEW ACCOUNTING PRONOUNCEMENTS
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 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. 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.
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 once 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. We do not expect the
adoption of EITF 00-02 to have a material impact on our financial position or
the results of our operations.
NOTE J - SEGMENT INFORMATION
We operate in three reportable segments: Stores, Business Services Group ("BSG")
and International. You will find a more complete description of each of these
operating groups in paragraphs 3 through 5 of Item 2 (Management's Discussion
and Analysis). Each of these segments is managed separately primarily because it
either serves different customer groups or provides a different service format.
Our senior management evaluates the performance of our business based on each
segment's operating income, which is defined as income before taxes, interest
income and expense, gains and losses on investments, merger and restructuring
costs and general and administrative expenses. During the first quarter of 2000,
we redefined our operating and reporting segments to more closely match
management responsibility. Accordingly, all of our segment information has been
restated to reflect this change. The accounting policies we apply to each of our
segments are the same as those applied to our consolidated company. These are
described in the summary of significant accounting policies in our 1999 Annual
Report.
13
<PAGE> 14
The following is a summary of our significant accounts and balances by segment
for the first quarters of 2000 and 1999, reconciled to our consolidated totals.
<TABLE>
<CAPTION>
Earnings Before
Sales Income Taxes
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Stores $ 1,795,647 $ 1,548,725 $ 154,227 $ 142,503
BSG 882,747 747,750 57,857 58,675
International 385,811 327,558 53,266 47,722
----------- ----------- ----------- -----------
Total reportable segments 3,064,205 2,624,033 265,350 248,900
Eliminations and other (952) (1,182) (92,277) (89,145)
----------- ----------- ----------- -----------
Total $ 3,063,253 $ 2,622,851 $ 173,073 $ 159,755
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Capital Depreciation
Expenditures and Amortization
---------------------------- ----------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Stores $ 24,471 $ 65,898 $ 22,135 $ 17,152
BSG 12,936 1,201 10,547 7,628
International 8,207 4,950 3,216 2,952
-------- -------- -------- --------
Total reportable segments 45,614 72,049 35,898 27,732
Other 6,052 33,335 11,522 10,725
-------- -------- -------- --------
Total $ 51,666 $105,384 $ 47,420 $ 38,457
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Provision for Losses On Equity in Earnings
Inventories and Receivables (Losses) of Investees, Net*
--------------------------- ---------------------------
2000 1999 2000 1999
------- ------- -------- -------
<S> <C> <C> <C> <C>
Stores $11,215 $ 9,528 $ -- $ --
BSG 10,703 8,293 -- --
International 8,055 2,752 3,594 (301)
------- ------- ------- -------
Total reportable segments 29,973 20,573 3,594 (301)
Other -- -- -- --
------- ------- ------- -------
Total $29,973 $20,573 $ 3,594 $ (301)
======= ======= ======= =======
</TABLE>
* Includes licensing fee income
14
<PAGE> 15
<TABLE>
<CAPTION>
Assets as of
--------------------------------
March 25, December 25,
2000 1999
---------- ----------
<S> <C> <C>
Stores $1,986,567 $2,170,928
BSG 1,061,119 1,097,232
International 676,077 683,322
---------- ----------
Total reportable segments 3,723,763 3,951,482
Other 446,693 324,701
---------- ----------
Total $4,170,456 $4,276,183
========== ==========
</TABLE>
A reconciliation of our earnings before income taxes from our reportable
segments to earnings before income taxes in our consolidated financial
statements is as follows:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Total from reportable segments $ 265,350 $ 248,900
General and administrative expenses (106,349) (89,723)
Gain on sale of investment 18,960 --
Interest (income) expense, net (3,832) 3,361
Merger and restructuring costs (1,029) (2,761)
Intersegment transactions (27) (22)
--------- ---------
Total $ 173,073 $ 159,755
========= =========
</TABLE>
Our total sales by operating segment include inter-segment sales, which are
generally recorded at the cost to the selling entity. Assets not allocated to
segments consist primarily of our corporate cash balances, tax-related accounts,
employee benefit plan balances and assets associated with corporate investing
and financing transactions.
15
<PAGE> 16
We have operations, either owned directly or operated through joint venture or
licensing agreements, in Australia, Austria, Belgium, Canada, Colombia, France,
Germany, Hungary, Ireland, Israel, Italy, Japan, Luxembourg, Mexico, the
Netherlands, Poland, Thailand, the United Kingdom and the United States. There
is no single country outside of the United States in which we generate
10% or more of our total revenues. Summarized financial information relating to
our domestic and foreign operations is as follows:
<TABLE>
<CAPTION>
Sales Assets
for the as of
First Quarter March 25, December 25,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
United States $2,618,738 $2,243,877 $3,564,751 $3,668,038
International 444,515 378,974 605,705 608,145
---------- ---------- ---------- ----------
Total $3,063,253 $2,622,851 $4,170,456 $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 supplier of
office products and services in the world. We sell to consumers and businesses
of all sizes through our three business segments: Stores, Business Services
Group and International. Each of these segments is described in more detail
below. During the first quarter of 2000, we redefined our operating and
reporting segments to more closely match management responsibility. All
financial information for our segments has been restated to reflect this change.
We operate on a 52- or 53-week fiscal year ending on the last Saturday in
December.
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 consolidated financial statements and the notes to those statements in Item
1 of this Form 10-Q, as well as our 1999 Annual Report. This MD&A contains
significant amounts of forward-looking information, and is qualified by our
Cautionary Statements regarding forward-looking information. While you will find
Cautionary Statements throughout this MD&A, there is also a separate section
immediately following this MD&A and a separate section immediately following the
MD&A in our 1999 Annual Report. Without limitation, when we use the words
"believe," "estimate," "plan," "expect," "intend," "anticipate," "continue,"
"project" and similar expressions in this Form 10-Q, we are identifying
forward-looking statements, and our Cautionary Statements apply to these terms
and expressions.
16
<PAGE> 17
STORES: Our Stores Division sells office products, copy and print services, and
other business-related services under the Office Depot(R) and the Office
Place(R) brands through our chain of high volume retail stores throughout the
United States and Canada. In the first quarter of 2000, our Stores Division
opened 11 office supply stores, bringing our total number of stores operating at
the end of the quarter to 836. This compares with 725 stores that were operating
at the end of the first quarter of 1999.
BUSINESS SERVICES GROUP ("BSG"): Through our BSG, we sell office products and
services to contract and commercial customers in the United States and Canada
through our Office Depot(R) and Viking Office Products(R) direct mail catalogs
and Internet sites, and by means of our Office Depot contract sales force. To
facilitate delivery to our domestic commercial, contract and retail customers,
our BSG operated 30 customer service centers ("CSCs") in the United States at
the end of the first quarters of 2000 and 1999.
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 first quarter of 2000, there were 121 retail office
supply stores outside the United States and Canada operating under the Office
Depot(R) name, 32 of which were wholly owned. This compares to 93 stores, 17 of
which were wholly owned, at the end of the comparable period in 1999. In
addition to these stores, located in eight foreign countries, our International
Division has catalog and delivery operations in 14 countries and public Internet
sites in three countries. Most of our international catalog and delivery
operations are operated under the Viking Office Products(R) name.
We have initiated plans to integrate our Viking and Office Depot operations
domestically and internationally. We have included the estimated costs of this
integration in merger and restructuring costs. See MERGER AND RESTRUCTURING
COSTS for further information.
RESULTS OF OPERATIONS
SALES
<TABLE>
<CAPTION>
First Quarter
2000 1999 Increase
----------- ----------- -----------
<S> <C> <C> <C>
Stores $ 1,795,647 $ 1,548,725 16%
Business Services 882,747 747,750 18%
International 385,811 327,558 18%
Inter-segment (952) (1,182) *
----------- ----------- ------
Total $ 3,063,253 $ 2,622,851 17%
=========== =========== ======
</TABLE>
* Not meaningful.
17
<PAGE> 18
OVERALL
The largest driver of our overall sales increase has been our continued
worldwide store expansion. We have increased our domestic and international
store base by 111 and 28 stores, respectively, since the end of the first
quarter of 1999. Increased contract sales in our BSG segment is the next largest
contributor to our overall sales increase. We achieved greater penetration in
the contract market by expanding our contract sales force and modifying their
compensation and sales support infrastructure.
STORES
We increased sales in our Stores Division primarily through our store expansion
program, with sales generated by non-comparable stores (those open for less than
one year) representing approximately 75% of the total sales increase. The
remaining increase is attributable to comparable sales growth of 5% for the
first quarter of 2000. As a result of heavy in-store promotions, sales of
furniture led the increase with significant quarter-over-quarter growth. Sales
of computer hardware products (i.e.,computers, monitors, printers, copiers,
scanners, and peripherals) also grew for the quarter, with the increase in units
sold exceeding declines in average selling prices.
BSG
Expansion of our sales force, along with modification of their compensation and
sales support infrastructure, were the largest drivers of growth in our BSG
segment. Sales generated from our public and contract Web sites in the United
States increased to $171.6 million in the first quarter of 2000, as compared to
$50.4 million in the first quarter of 1999. We believe that the breadth of our
service offerings within our BSG attracts new customers and enhances existing
customer relationships. Sales of paper and filing products and machine supplies
(i.e., inkjet supplies, ribbons, laser and copier supplies) displayed the
largest overall increases, with growth in both units sold and average
selling prices.
INTERNATIONAL
Approximately 53% of the total sales increases in our International Division
resulted from the start-up of our Japanese catalog operations and the
consolidation of our Japanese retail operations in April 1999. Prior to our
purchase of the remaining 50% interest in this retail operation from our joint
venture partner in April 1999, the business was accounted for using the equity
method. Our International Division also achieved significant comparable sales
increases, with our comparable catalog sales and comparable store sales
increasing 6% and 20%, respectively. These comparable sales numbers were
negatively impacted by unfavorable exchange rate changes. In local currency, our
comparable sales increased 14% for our catalog operations and 37% for our retail
operations. The competitive, political and economic conditions that exist in
international markets in which we operate may impact our sales in this segment
in the future.
18
<PAGE> 19
GROSS PROFIT
<TABLE>
<CAPTION>
First Quarter Gross First Quarter Gross
2000 Profit % 1999 Profit %
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Stores $ 408,672 22.8% $ 356,238 23.0%
Business Services 274,524 31.1% 235,900 31.5%
International 152,375 39.5% 137,182 41.9%
Other (329) -- (472) --
--------- --------- --------- ---------
Total $ 835,242 27.3% $ 728,848 27.8%
========= ========= ========= =========
</TABLE>
OVERALL
For the first quarter of 2000, the decrease in our overall gross profit
percentage is primarily the result of increased occupancy costs driven by the
large number of new stores opened throughout 1999 and the consolidation of our
Japanese retail operations in our 2000 results. Our stores typically need about
four years to reach sales maturity. Until a store reaches maturity, its fixed
occupancy costs as a percentage of its sales are typically higher than in more
mature stores. Internationally, our retail operations require higher occupancy
costs than our catalog operations. Increased paper costs also affected gross
margins in each of our segments, but overall product costs decreased slightly as
a result of improved purchasing leverage associated with volume growth and
vendor consolidation.
Our overall gross profit percentages fluctuate as a result of numerous factors,
including competitive pricing pressures; changes in product, catalog and
customer mix; emergence of new technology; 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 different rental and other occupancy costs,
and as we relocate and/or close existing stores in current markets.
STORES
In our Stores Division, our gross profit rate has decreased as a result of the
increased occupancy costs discussed above. Furthermore, our margins were
negatively impacted by the shift in our sales mix toward furniture and
technology products, which yield lower gross profit percentages than other
product groups. However, the negative impact of these shifts in our sales mix
was offset by improvements in our computer hardware margins and lowered net
product costs as a result of improved incentive programs negotiated with our
vendors.
BSG
We earn higher gross profit percentages in our BSG than in our Stores Division
principally because of a different sales mix. Paper, machine supplies and other
general office supplies, which yield higher margins than certain other product
groups, account for a much larger percentage of total sales in our BSG than in
our Stores Division. BSG's gross profit percentages are, however, lower than
those we earn internationally as a result of the lower relative pricing we
negotiate with our domestic contract customers. Our gross profit margins
decreased in our BSG segment primarily because of increased paper costs without
a corresponding increase in selling prices. Changing prices in our BSG segment
requires more time than in our Stores Division because of existing contractual
relationships with our
19
<PAGE> 20
customers. Additionally, our BSG segment's sales mix shifted toward furniture
products, which yield lower margins than certain of our other product groups.
INTERNATIONAL
Gross profit in our International Division for the first quarter of 2000
decreased largely because of increased retail sales as a percentage of our total
international sales. With the consolidation of our Japanese retail operations
beginning in the second quarter of 1999 and the significant sales growth in our
French retail operations, retail sales in the first quarter of 2000 represented
12% of our total sales, compared to 6% in the first quarter of 1999. 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 increased occupancy costs as a
percentage of sales.
STORE AND WAREHOUSE OPERATING AND SELLING EXPENSES
<TABLE>
<CAPTION>
First Quarter First Quarter
2000 % of Sales 1999 % of Sales
------------- ---------- ------------- ---------
<S> <C> <C> <C> <C>
Stores $ 251,824 14.0% $ 208,024 13.4%
Business Services 215,369 24.4% 175,927 23.5%
International 102,490 26.6% 88,169 26.9%
Other (302) -- (451) --
--------- --------- --------- ---------
Total $ 569,381 18.6% $ 471,669 18.0%
========= ========= ========= =========
</TABLE>
OVERALL
Operating and selling expenses increased overall as we pursued increased market
penetration in all of our segments. To achieve this growth, we expanded our
contract sales force and invested in a new advertising campaign. We believe
these changes will result in greater sales growth in the future, thereby
lowering our operating costs. Additionally, the costs of integrating our Viking
and Office Depot operations have negatively impacted our operating and selling
costs.
STORES
In our Stores Division, operating and selling expenses have increased as a
percentage of sales largely because of increased advertising expense to promote
our "Taking Care of Business" campaign. Also, delivery expenses have increased
as a result of rising costs in our CSCs as more fully discussed below and an
increase in the number of delivered orders.
BSG
Operating and selling expenses as a percentage of sales are significantly higher
in our BSG than in our Stores Division, principally because of the need for a
more experienced and highly compensated sales force. The increases in warehouse
operating and selling expenses for the first quarter were driven largely by
personnel-related expenses associated with expanding our contract sales force
and our warehouse staff. We expanded our sales force in order to further
penetrate the contract market. The increase in our warehouse workforce was
required to handle the transition to fully integrated Office Depot/Viking
20
<PAGE> 21
warehouses. During the latter half of 1999, we began processing both Office
Depot and Viking brand orders in certain facilities, and we expect to fully
integrate all warehouses by early 2001. During the transition period, we
continued to operate both the closing warehouse and the new integrated warehouse
in one of our markets for a few months, contributing to the increased operating
and selling expenses in BSG. We currently operate out of 28 of the 30 CSCs that
were open at the end of the first quarter of 1999 and two combined facilities
opened in the fourth quarter of 1999. 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
MERGER AND RESTRUCTURING COSTS.
INTERNATIONAL
Similar to our other segments, personnel and delivery expenses are the most
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 this segment.
Certain of our international operations are in their start-up phase, which also
increases our international operating expenses as a percentage of sales when
compared to our other reporting segments.
For the quarter, the decrease in operating and selling expenses as a percentage
of sales was largely the result of decreased retail and commercial advertising
costs. As discussed earlier, our retail operations, which now include Japan,
currently represent a much larger proportion of our international sales than in
the comparable 1999 period. Overall operating costs in our international retail
operations are higher as a percentage of sales than in our catalog operations
because of the fixed-cost infrastructure required to operate stores. However,
the decreased advertising costs more than offset this effect.
As we continue to expand our international business and establish greater 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>
First Quarter
2000 1999
------------- -------------
<S> <C> <C>
Pre-opening expenses $2,650 $6,463
Office supply stores opened* 11 29
</TABLE>
* Includes relocations and wholly-owned international locations.
21
<PAGE> 22
Our pre-opening expenses consist principally of personnel, property and
advertising expenses incurred in opening or relocating stores in our Stores
Division. We typically incur these expenses during a six-week period prior to
the store opening. Because we expense these items as they are incurred, the
amount of pre-opening expenses we incur each period is generally proportional to
the number of new stores we open and the number of stores we are currently in
the process of opening during the period. Our pre-opening expenses also include,
to a lesser extent, expenses incurred to open and relocate facilities in our BSG
and our International Division.
Pre-opening expenses typically approximate $155 thousand per domestic office
supply store and $80 thousand per international office supply store, but may be
higher for stores with extended pre-opening rent periods. Our cost to open a new
CSC varies significantly with the size and location of the facility.
Historically, we have incurred pre-opening expenses of up to $1.8 million to
open a domestic or international CSC.
GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
First Quarter
2000 1999
---------- ----------
<S> <C> <C>
General and administrative expenses $ 106,349 $ 89,723
Percentage of sales 3.5% 3.4%
</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. Contributing to the growth in our general
and administrative expenses were increases in spending to support our e-commerce
and data warehouse initiatives and international expansion.
MERGER AND RESTRUCTURING COSTS
VIKING MERGER
In August 1998, we completed our merger with Viking Office Products, Inc.
("Viking"). Subsequent to the merger, we immediately began the process of
integrating the Office Depot and Viking businesses. Our plans, which we
initially expected to complete during 2000, anticipated closing 15 domestic CSCs
and opening five new domestic CSCs, as well as installing complex new systems in
each surviving facility. During the fourth quarter of 1999, after evaluating the
results of two integrated test facilities, we modified our integration plans.
Our revised plans incorporate a simpler approach and, as a result, require less
time and capital to complete. Furthermore, under our revised plans, we will
close only nine of our existing CSCs, and no additional CSCs will be opened. We
lease all but two of the CSCs we now plan to close. We sold one of these CSCs in
1999, and we expect to sell the other in 2000. Our plan is to vacate all of the
buildings once we have ceased operations in them. Accordingly, we have written
off certain assets such as leasehold improvements, redundant
22
<PAGE> 23
software and conveyor systems in these CSCs. In addition to these charges,
merger and restructuring costs include certain expenses of exiting these
facilities that will provide us with no future economic benefit (e.g., future
lease obligations, personnel-related termination costs, etc.).
Furthermore, we have combined certain of our support functions in our Viking and
Office Depot domestic headquarters in conjunction with our integration plans.
Merger and restructuring costs include charges associated with these activities,
primarily personnel-related termination costs.
We accrue merger and restructuring costs when significant changes in our plan
are unlikely, which generally requires that planned actions take place within
one year. In the case of our CSC integration, we plan to integrate all of our
CSCs by March 2001.
CLOSURE OF FURNITURE AT WORK(TM) AND IMAGES(TM) STORES
As a result of our 1998 decision to focus on continuing to grow our core
businesses and expanding our international operations, we closed all of our
Furniture at Work(TM) and Images(TM) stores. Exit costs related to closing
these facilities are included in merger and restructuring costs for the first
quarter of 1999.
ACQUISITION OF JOINT VENTURE INTERESTS IN FRANCE AND JAPAN
In November 1998, we purchased our joint venture partner's interest in our
French Office Depot retail operations. Following this purchase, we decided to
restructure and integrate the separate Office Depot and Viking operations in
France. During 1999, this decision involved consolidating the Office Depot and
Viking headquarters into a new office that is more conveniently located. We do
not expect to close any operating facilities in conjunction with our
restructuring and integration efforts in France. Instead, we will integrate the
warehousing and delivery of our Office Depot and Viking brand merchandise in
each of our existing warehouses.
Following our April 1999 purchase of our joint venture partner's interest in our
Japanese Office Depot retail operations, we began restructuring and integrating
our Office Depot and Viking operations in Japan. During 1999, we closed one CSC
and one store, and we expect to close another CSC in 2000.
Costs associated with these integration activities, primarily personnel-related
costs, were included in merger and restructuring costs in the first quarters of
2000 and 1999. We expect our operations in France and Japan to be completely
integrated by the end of 2000.
23
<PAGE> 24
Merger and restructuring costs in the first quarters of 2000 and 1999 consists
of the following charges:
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Viking Merger:
Facility and personnel-related costs
attributable to the merger transaction $ 951 $1,092
------ ------
$ 951 $1,092
Closure of Furniture at Work(TM) and Images(TM) Stores:
Asset write-offs associated with closing stores $ -- $1,127
Other facility exit costs, principally estimated lease costs
subsequent to closing the stores -- 464
------ ------
$ -- $1,591
------ ------
Acquisition of Joint Venture Interests in France and Japan:
Personnel-related costs $ 78 $ 78
------ ------
$ 78 $ 78
------ ------
Grand Total $1,029 $2,761
====== ======
</TABLE>
We determined the fair value of assets held for disposal by estimating the net
realizable value at the time of closure or removal from service. Estimated
proceeds from and costs to dispose of these assets were determined through
analysis of historical data and expected outcomes. The costs required to
complete our merger and restructuring plans necessarily involve the use of
estimates. We believe our estimates are unlikely to change significantly in the
future.
As of March 25, 2000, we had remaining accruals of approximately $20.1 million
for merger and restructuring costs. Amounts expensed for asset write-offs are
recorded as a reduction of our fixed assets. All other amounts are recorded as
accrued expenses. The activity in our accruals by expense category is as
follows:
<TABLE>
<CAPTION>
Beginning New Cash Ending
Balance Charges Payments Balance
------- ------- ------- -------
<S> <C> <C> <C> <C>
Accrued merger transaction costs $ 1,639 $ -- $ (86) $ 1,553
Accrued other facility exit costs 7,764 24 (334) 7,454
Accrued personnel retention and
termination costs 11,865 1,005 (1,733) 11,137
------- ------- ------- -------
Total accrued costs $21,268 $ 1,029 $(2,153) $20,144
======= ======= ======= =======
</TABLE>
We expect to incur additional merger and restructuring costs over the remaining
integration period. Although we expect these costs to be insignificant to our
future operating results, there can be no assurance that this will be the case.
24
<PAGE> 25
OTHER INCOME AND EXPENSES
<TABLE>
<CAPTION>
First Quarter
2000 1999
-------- --------
<S> <C> <C>
Interest income $ 3,364 $ 9,712
Interest expense (7,196) (6,351)
Miscellaneous income
(expense), net 21,072 (1,838)
</TABLE>
We do not consider interest income and expense arising from our corporate
investing and financing activities in determining segment profitability. The
decrease in interest income is attributable to our lower average cash balances
following our repurchase of 60 million shares of our stock at a total cost of
$644.0 million, plus commissions, during the last half of 1999 and first quarter
of 2000. We also expect a proportional impact on our interest income in future
periods.
The majority of our interest expense is fixed in nature and relates to our
convertible, subordinated debt. Additionally, throughout 1999 and the first
quarter of 2000, we entered into a number of capital leases, primarily for
new point-of-sale equipment in our stores. This has resulted in increased
interest expense which will likely continue in future years. In late 1999, we
began borrowing against our yen-denominated loan facility to finance our
expansion in Japan. Because the interest rate we are currently paying on our yen
borrowings is between 1% and 2%, the effect of these borrowings on interest
expense in the first quarter of 2000 was negligible. See LIQUIDITY AND CAPITAL
RESOURCES for further discussion.
Our miscellaneous income (expense) consists of equity in the earnings (losses)
of our joint venture investments, licensing fees that we generate from licensing
agreements, amortization of goodwill and a gain on the sale of investment
securities. All of our equity method investments involve operations outside of
the United States and Canada, and our equity in the earnings (losses) of these
operations is included, along with our licensing income, in determining the
profitability of our International Division. Because our goodwill arose from
purchases that benefit our segments, the amortization of that goodwill is
included in the profitability of the segments benefited. Gains or losses from
the sale of investments, on the other hand, are not included in our segment
profitability, because the decisions are controlled at the corporate level. The
majority of the miscellaneous income recorded in the first quarter of 2000
resulted from a $19.0 million gain on the sale of investment securities. Also,
earnings of our equity method investments were $3.3 million in the first quarter
of 2000, compared with a loss of $0.6 million in the first quarter of 1999. This
is primarily attributable to the consolidation of our Japanese retail operations
beginning in the second quarter of 1999 when we purchased the remaining 50%
interest from our joint venture partner. Prior to that consolidation, we
recorded equity losses related to the start-up of those operations. Through our
joint ventures that are accounted for using the equity method, we opened three
locations in 2000 and four locations in 1999 that required start-up costs.
25
<PAGE> 26
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by (used in) our operating, investing and financing activities is
summarized as follows:
<TABLE>
<CAPTION>
First Quarter Increase
2000 1999 (Decrease)
--------- --------- ---------
<S> <C> <C> <C>
Operating activities $ 287,624 $ 268,473 $ 19,151
Investing activities (38,365) (102,859) 64,494
Financing activities (133,342) 35,011 (168,353)
</TABLE>
OPERATING AND INVESTING ACTIVITIES
We have historically relied on cash flows generated from 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 inventories. We generally offer credit terms, under which we
carry our own receivables, to our contract and certain of our catalog customers.
As we expand our contract and catalog businesses, we anticipate that our
accounts receivable portfolio will continue to grow. Receivables from rebate,
cooperative advertising and marketing programs with our vendors 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 do not occur until after an
entire program year has been completed.
The increase in our operating cash flows is primarily attributable to decreased
store openings. On a worldwide basis in the first quarter of 2000, excluding
joint venture operations and licensing arrangements, we opened 11 stores,
including relocations of older stores, as compared to 29 stores during the first
quarter 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 (see PRE-OPENING EXPENSES). In the first quarter of 2000, we also
reduced our inventory balances by $181 million, as we sold merchandise purchased
in late 1999 as part of our Y2K preparedness. Furthermore, our ongoing supply
chain management efforts have decreased our average store inventory by 15% since
the first quarter of 1999.
Our primary investing activity is the acquisition of capital assets. The number
of stores and CSC's we open or remodel each quarter generally drives the volume
of our capital investments. As mentioned above, our store openings for the first
quarter of 2000 have decreased as compared to the first quarter of 1999. This
was the most significant contributor to the overall decrease in our investing
cash outflows.
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<PAGE> 27
Our Viking integration plans, which are discussed in MERGER AND RESTRUCTURING
COSTS, will require capital investments, both domestically and internationally,
approximating $50 million over the next 12 months. We also currently plan to
open approximately 90 to 100 stores in our Stores Division and 35 stores and one
warehouse in our International Division in 2000. We estimate that our cash
investing requirements will be approximately $1.1 million for each new domestic
office supply store. The $1.1 million investment includes approximately $600
thousand for leasehold improvements, fixtures, point-of-sale terminals and other
equipment and approximately $500 thousand for the portion of our inventories
that is not financed by our vendors. In addition, each new office supply store
typically requires pre-opening expenses of $155 thousand domestically and $80
thousand internationally. Our cash investing requirements for a new CSC are
significantly higher than the requirements for a new store. Each new domestic
and international CSC requires between $6 and $16 million for capital assets and
inventories and pre-opening expenses of up to $1.8 million, depending on the
size, type and location of the facility.
We have 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 1999 ($50.7 million) and in the
first quarter of 2000 ($5.7 million). In February 2000, we exercised 250,000
warrants and simultaneously sold the underlying shares of one of these
investments on the open market for $19.0 million, net of commissions. We paid
the exercise price of the warrants through the exercise of an additional 27,777
warrants. We realized a gain of $19.0 million on this transaction in the first
quarter of 2000. Although certain of our investments have increased in value
since our initial investment, these and our other investments may not generate
similar appreciation in the future. Furthermore, the net unrealized gain we have
recorded in stockholders' equity will not be realized until our investments are
sold, and the value of all of our remaining investments could decrease before it
is realized. We plan to continue looking for opportunities to invest in
companies that provide B2B electronic commerce solutions for small- and
medium-sized businesses.
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. As of March 25, 2000,
we had no outstanding borrowings under this facility, but we had outstanding
letters of credit totaling $28.8 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. The yen facilities provide for
maximum aggregate borrowings of (Y)9.76
27
<PAGE> 28
billion (the equivalent of $91 million at March 25, 2000) at an interest rate of
.875% over the Tokyo Interbank Offered Rate ("TIBOR"). Although the loans mature
at varying dates over three to six months, we have classified these borrowings
as long-term because we intend to renew them as they come due. These yen
facilities contain covenants similar to those in our February 1998 domestic
credit facility. As of March 25, 2000, the equivalent of $54 million was
outstanding under these yen facilities. Effective as of October 28, 1999, we
entered into a yen interest rate swap with a financial institution (for a
principal amount equivalent to $22 million at March 25, 2000) in order to hedge
against the volatility of the interest payments on a portion of our yen
borrowings. The terms of the swap specify that we pay an interest rate of .7%
and receive TIBOR. The swap will mature in July 2000, but we intend to renew it
for as long as the hedged borrowings remain outstanding.
In addition to bank borrowings, we have historically used equity capital,
convertible debt and capital equipment leases as supplemental sources of funds.
The decline in our cash from financing activities during the first quarter of
2000, as compared to the first quarter of 1999, was driven largely by our stock
repurchase program. During the first quarter of 2000, we purchased 13.3 million
shares of our stock at a total cost of $144.0 million plus commissions.
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), each 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. For that reason, our 1993 LYONs(R)
have been classified as current liabilities on our March 25, 2000 and
December 25, 1999 consolidated balance sheets. Unless our stock price increases
substantially above current levels, we expect that a significant number of our
1993 LYONs(R) holders will exercise their put options in November of this year.
Our current intention is to pay cash for any puts exercised on November 1, 2000.
We continually review our financing options. Although we currently anticipate
that we will finance all of our 2000 expansion, integration 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 as appropriate for market conditions. We expect that our financing
requirements in 2000 will be affected primarily by the number of new stores or
CSCs we open or acquire, the specific actions required to integrate our Office
Depot and Viking operations and the decisions of our LYONs(R) holders.
28
<PAGE> 29
SIGNIFICANT TRENDS, DEVELOPMENTS AND UNCERTAINTIES
Over the years, we have seen continued development and growth of competitors in
all segments of our business. Mass merchandisers and warehouse clubs have
increased their assortment of home office merchandise, attracting additional
back-to-school customers and year-round casual shoppers. We also face
competition from other office products superstores that compete directly with us
in numerous markets. These other office products superstores compete with us in
geographical locations where we have traditionally been the market leader, just
as we have begun penetrating markets where they have historically held the
dominant market share. This competition, along with the competition from mass
merchandisers and warehouse clubs, is likely to result in increased competitive
pressures on pricing, product selection and services provided.
We have also seen growth in new and innovative competitors that offer office
products over the Internet, featuring special purchase incentives and one-time
deals (such as close-outs). Through our own successful commercial and contract
Web sites, we believe that we have positioned ourselves competitively in the
electronic commerce arena. We have invested in strategic partnerships with
several business-to-business Internet companies offering innovative solutions to
small businesses, a target customer group. We are committed to supporting our
Internet channel to enable us to meet the changing needs of our customers,
including continuing to invest in new and innovative electronic commerce
businesses.
EURO
On January 1, 1999, 11 of the 15 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 July 1, 2002,
new euro-denominated bills and coins will become the sole legal currency, and
all former currencies will be withdrawn from circulation. We have adapted our
internal systems to accommodate euro-denominated transactions.
We generate significant sales in Europe. The use of a single currency in the
participating countries may affect our ability to price our 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 or
magnitude of price equalization. Based on our initial evaluations of the
business implications of our conversion to the euro, we do not expect it to have
a material effect on our financial position, results of operations or business
practices.
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<PAGE> 30
NEW ACCOUNTING PRONOUNCEMENTS
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 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. We
will adopt SFAS No. 133 in our fiscal year 2001. Assuming our current level of
involvement in derivative instruments and hedging activities does not change
before we adapt this statement, 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.
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 once 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. We do not expect the
adoption of EITF 00-02 to have a material impact on our financial position or
the results of our operations.
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
30
<PAGE> 31
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 in the Act. Without limiting the
generality of the preceding sentence, any time we use the words "estimate,"
"project," "intend," "expect," " believe," "anticipate," "continue" 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 discussed in more detail in the Cautionary Statements contained
in our 1999 Annual Report on Form 10-K, filed with the Securities and Exchange
Commission on March 22, 2000. 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
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 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 or on our behalf in this Quarterly Report.
Those Cautionary Statements are incorporated herein by this reference to them.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISKS
See the disclosure in our 1999 Annual Report on Form 10-K, filed on March 22,
2000. 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, filed on March 22,
2000. 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.
31
<PAGE> 32
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
We held an annual meeting of our stockholders on April 28, 2000 to vote on the
following:
a. To elect 11 directors to hold office until the next Annual Meeting of
our stockholders or until their successors have been elected and
qualified. Our stockholders voted to elect all 11 directors. Votes for
and votes withheld, by nominee, were as follows:
<TABLE>
<CAPTION>
Nominee For Withheld
------- --- --------
<S> <C> <C>
Lee A Ault, III 288,293,408 4,080,949
Neil R. Austrian 288,280,883 4,093,474
Cynthia R. Cohen 288,388,724 3,985,633
David I. Fuente 258,434,207 33,940,150
W. Scott Hedrick 288,315,980 4,058,377
Irwin Helford 288,102,679 4,271,678
James L. Heskett 288,322,282 4,052,075
Michael J. Myers 288,307,126 4,067,231
M. Bruce Nelson 287,558,887 4,815,470
Frank P. Scruggs, Jr. 285,807,347 6,567,010
Peter J. Solomon 285,277,360 7,096,997
</TABLE>
32
<PAGE> 33
b. To consider an amendment to our Long-Term Equity Incentive Plan to
increase the number of shares of our common stock authorized for
issuance under the Plan by 16 million shares. Our stockholders
approved this matter with 139,723,606 votes for and 94,206,261 votes
against it. In addition, there were 1,492,819 abstentions and
56,951,671 broker non-votes.
c. To consider an amendment to our Employee Stock Purchase Plan to
provide for an increase of 2 million in the number of shares of our
common stock authorized to be sold pursuant to the Plan. Our
stockholders approved this matter with 229,679,742 votes for and
4,502,575 votes against it. In addition, there were 1,170,326
abstentions and 57,021,714 broker non-votes.
d. To ratify our Board's appointment of Deloitte & Touche LLP as our
independent public accountants for the 2000 fiscal year. Our
stockholders approved this matter with 290,846,375 votes for and
627,229 votes against it. In addition, there were 900,753 abstentions.
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).
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<PAGE> 34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OFFICE DEPOT, INC.
(Registrant)
Date: May 9, 2000 By: /s/ Barry J. Goldstein
--------------------------------
Barry J. Goldstein
Executive Vice President-Finance
and Chief Financial Officer
Date: May 9, 2000 By: /s/ Charles E. Brown
--------------------------------
Charles E. Brown
Senior Vice President-Finance
and Controller
(Principal Accounting Officer)
34
<PAGE> 35
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule (for SEC use only)
35
<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 MARCH 25, 2000
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-30-2000
<PERIOD-START> DEC-26-1999
<PERIOD-END> MAR-25-2000
<CASH> 334,035
<SECURITIES> 0
<RECEIVABLES> 766,982
<ALLOWANCES> (29,435)
<INVENTORY> 1,256,163
<CURRENT-ASSETS> 2,522,451
<PP&E> 1,776,504
<DEPRECIATION> 617,821
<TOTAL-ASSETS> 4,170,456
<CURRENT-LIABILITIES> 1,860,274
<BONDS> 593,918
0
0
<COMMON> 3,768
<OTHER-SE> 1,872,637
<TOTAL-LIABILITY-AND-EQUITY> 4,170,456
<SALES> 3,063,523
<TOTAL-REVENUES> 3,063,523
<CGS> 2,228,011
<TOTAL-COSTS> 2,800,042
<OTHER-EXPENSES> 107,378
<LOSS-PROVISION> 6,743
<INTEREST-EXPENSE> 7,196
<INCOME-PRETAX> 173,073
<INCOME-TAX> 64,037
<INCOME-CONTINUING> 109,036
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 109,036
<EPS-BASIC> 0.34
<EPS-DILUTED> 0.32
</TABLE>
