OFFICE DEPOT, INC. Exhibit 13.1
FINANCIAL HIGHLIGHTS
(In thousands, except per share amounts and statistical data)
2001 2000(4) 1999 1998 1997
------------ ------------ ------------ ------------ ------------
STATEMENTS OF EARNINGS DATA:
Sales(1) ................................... $ 11,154,081 $ 11,569,696 $ 10,272,060 $ 8,997,738 $ 8,108,714
Cost of goods sold and occupancy costs ..... 7,983,973 8,479,437 7,450,575 6,484,699 5,963,521
------------ ------------ ------------ ------------ ------------
Gross profit .......................... 3,170,108 3,090,259 2,821,485 2,513,039 2,145,193
Store and warehouse operating
and selling expenses(1) ................... 2,343,394 2,409,478 2,023,055 1,683,973 1,482,179
General and administrative expenses(1) ..... 451,722 453,784 328,108 288,028 241,430
Facility closure costs ..................... 8,436 110,038 40,425 -- --
Other operating expenses ................... 12,125 6,733 16,524 136,279 22,703
------------ ------------ ------------ ------------ ------------
Operating profit ...................... 354,431 110,226 413,373 404,759 398,881
Interest income ............................ 13,058 11,502 30,176 25,309 7,570
Interest expense ........................... (44,302) (33,901) (26,148) (22,356) (21,680)
Miscellaneous income (expense), net ........ (9,057) 4,632 (3,514) (18,985) (13,180)
------------ ------------ ------------ ------------ ------------
Earnings before income taxes ............... 314,130 92,459 413,887 388,727 371,591
Income taxes ............................... 113,087 43,127 156,249 155,531 136,730
------------ ------------ ------------ ------------ ------------
Net earnings ............................... $ 201,043 $ 49,332 $ 257,638 $ 233,196 $ 234,861
============ ============ ============ ============ ============
Earnings per share(2):
Basic .................................... $ 0.67 $ 0.16 $ 0.71 $ 0.64 $ 0.65
Diluted .................................. 0.66 0.16 0.69 0.61 0.62
STATISTICAL DATA:
Facilities open at end of period:
United States and Canada:
Office supply stores ................... 859 888 825 702 602
Customer service centers ............... 24 25 30 30 33
Call centers ........................... 13 7 7 8 8
International(3):
Office supply stores ................... 143 132 118 87 39
Customer service centers ............... 23 19 19 18 17
Call centers ........................... 15 14 14 13 12
BALANCE SHEET DATA:
Working capital ............................ $ 704,676 $ 790,752 $ 687,007 $ 1,293,370 $ 1,093,463
Total assets ............................... 4,331,643 4,196,334 4,276,183 4,025,283 3,498,891
Long-term debt, excluding current maturities 317,552 598,499 321,099 470,711 447,020
Common stockholders' equity ................ 1,848,438 1,601,251 1,907,720 2,028,879 1,717,638
(1) Certain amounts in prior year financial statements have been
reclassified to conform to current year presentation.
(2) Earnings per share amounts previously reported for 1997 and 1998 have
been restated to reflect the three-for-two stock split declared on
February 24, 1999.
(3) Includes facilities in our International Division that we wholly own or
lease, as well as those that we operate through licensing and joint
venture agreements.
(4) Includes 53 weeks in accordance with our 52 - 53 week reporting
convention.
1
OFFICE DEPOT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Office Depot, Inc., together with our subsidiaries, ("Office Depot" or the
"Company") 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: North American Retail Division, Business Services Group, and
International Division. These segments include multiple sales channels
consisting of office supply stores, a contract sales force, Internet sites, and
catalog and delivery operations. Each of these segments is described in more
detail below. We operate on a 52- or 53-week fiscal year ending on the last
Saturday in December. Our results for the fiscal year 2000 contained 53 weeks;
all other years reflected in the preceding table contained 52 weeks.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("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. This MD&A section
contains significant amounts of forward-looking information, and is qualified by
our Cautionary Statements regarding forward-looking information. You will find
Cautionary Statements throughout this MD&A; however, most of them can be found
in a separate section immediately following this MD&A. Without limitation, when
we use the words "believe," "estimate," "plan," "expect," "intend,"
"anticipate," "continue," "project," "should" and similar expressions in this
Annual Report, we are identifying forward-looking statements, and our Cautionary
Statements apply to these terms and expressions and the text in which such terms
and expressions are used.
NORTH AMERICAN RETAIL DIVISION
Our North American Retail 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 office supply stores
in the United States and Canada. We opened our first office supply store in
Florida in October 1986. From inception, we have been a leader in the retail
office supplies industry, concentrating on expanding our store base and
increasing our sales in markets with high concentrations of small- and
medium-sized businesses. As of the end of 2001, our North American Retail
Division operated 859 office supply stores in 44 states, the District of
Columbia and Canada. Store activity for the last five years has been as follows:
Open at Stores Open at
Beginning -------------------- End
of Period Opened Closed of Period Relocated
--------- ------ ------ --------- ---------
1997 561 42 1 602 2
1998 602 101 1 702 5
1999 702 130 7 825 14
2000 825 70 7 888 4
2001 888 44 73 859 5
The number of store openings and closings over this five-year period has been
affected by our proposed (and subsequently abandoned) attempts to merge with
Staples, Inc. ("Staples"), another large company in the retail office products
segment. In 1996, we entered into an agreement and plan of merger with Staples.
The proposed merger was enjoined by a preliminary injunction granted by the
Federal District Court at the request of the Federal Trade Commission; and in
July 1997, we announced that the merger agreement had been terminated. During
this period of uncertainty, several of our key employees in the real estate area
left the Company. After the merger discussions with Staples were terminated, we
re-staffed our real estate department and aggressively re-launched our store
expansion program. Many of the retail store locations opened during this period
of aggressive expansion have not performed to our expectations. In 2000, we
scaled back our expansion plans and announced the closing of 70 under-performing
store locations in the first quarter of 2001. During 2001, we opened 44 new
stores, most of them in existing markets where we continue to find real estate
sites that enhance our current market positions, build density and target new
opportunities for growth. We also identified 13 additional under-performing
stores, three of which were closed in 2001.
In 2002, we plan to add 25 to 30 new retail stores, most of which will be
located in areas where we currently enjoy strong market positions, with the
balance in under-served markets. In future years, we expect to continue this
approach to retail store expansion, with an emphasis on market density in order
to leverage advertising dollars and cross-channel opportunities to create a
seamless customer experience across all channels. All new stores are expected to
incorporate a more efficient platform of approximately 20,000 square feet and to
feature a more interactive customer experience.
2
In 2001, we reorganized our management team and hired Jerry Colley as President,
North American Stores. Mr. Colley has now been with our Company approximately
one year; and he, in turn, has made numerous changes in our management ranks,
along with other changes in the ways in which we operate our retail stores. Mr.
Colley reports directly to our Chairman and CEO, Bruce Nelson.
BUSINESS SERVICES GROUP ("BSG")
In 1993 and 1994, we expanded into the contract office supply business by
acquiring eight contract stationers with 18 domestic customer service centers
and a professional outside sales force. These acquisitions allowed us to enter
the contract business and broaden our commercial (primarily catalog) and retail
delivery businesses. In 1998, we expanded our direct mail business through our
merger with Viking Office Products ("Viking"). Today, BSG sells office products
and services to contract and commercial customers through our Office Depot(R)
brand and Viking Office Products(R) brand direct mail catalogs and Internet
sites, and by means of our dedicated sales force. Customer service centers
("CSCs") are warehouse and delivery facilities, some of which also house sales
offices, call centers and administrative offices. Our CSCs perform warehousing
and delivery services on behalf of all segments of our business.
At the end of the third quarter of 1998, we operated 20 Office Depot and 10
Viking CSCs. At that time, we initiated, and later modified, plans to integrate
certain of our Viking and Office Depot warehouses, which were largely completed
during 2001. At the end of 2001, we operated 24 CSCs in the United States. Once
our integration is complete, we will operate 22 CSCs, consisting of nine Office
Depot facilities, two Viking facilities and 11 combined facilities.
In January 1998, we introduced our Office Depot public Web site
(WWW.OFFICEDEPOT.COM), offering our customers the convenience of shopping with
us on-line. In late August of 1998, when we merged with Viking, we also acquired
the Viking public Web site (WWW.VIKINGOP.COM). In 2001, when we acquired
4Sure.com, we acquired the 4Sure.com Web sites (WWW.COMPUTERS4SURE.COM and
WWW.SOLUTIONS4SURE.COM) aimed at technology purchasers. We believe our Internet
business will provide significant future growth opportunities for our BSG
segment and our business as a whole based on the growth rates we have
experienced over the last three years.
Throughout 2001, Robert Keller, was President of BSG. Mr. Keller has been with
our Company for four years in various executive capacities. Mr. Keller reports
to our Chairman and CEO, Bruce Nelson.
INTERNATIONAL DIVISION
Our International Division sells office products and services in 16 countries
outside the United States and Canada through Office Depot retail stores, Office
Depot(R) brand and Viking Office Products(R) brand direct mail catalogs and
Internet sites, and an Office Depot contract sales force. The international
direct marketing business was launched in 1990 under the Viking Office
Products(R) brand with the establishment of operations in the United Kingdom. We
have expanded internationally in a variety of ways, including licensing and
joint venture agreements, acquisitions, and the merger with Viking. Prior to
1998, our international business was operated entirely through licensing and
joint venture agreements. In 1998, we merged with Viking, whose international
operations were wholly-owned, and we subsequently acquired the remaining 50%
interest from our joint venture partner in France, bringing our ownership to
100%. In early 1999, we acquired the interests of our joint venture partner in
Japan, bringing our ownership to 100%. During 2001, we added the contract
stationer Sands & McDougall(TM) to our business in Australia.
In March 1999, we introduced our first international public Web site
(WWW.VIKING-DIRECT.CO.UK) for individuals and businesses in the United Kingdom.
Between 2000 and 2001, we introduced nine new public Web sites and one contract
Web site in the following countries: Germany (www.viking.de), The Netherlands
(www.vikingdirect.nl), Italy (www.vikingop.it), Australia (www.vikingop.com.au),
Japan (www.vikingop.co.jp and www.officedepot.co.jp), France
(www.vikingdirect.fr and www.officedepot.fr), Austria (www.vikingdirekt.at) and
the United Kingdom (bsdnet.officedepot.co.uk).
We launched our Office Depot contract business in the United Kingdom in 2000 and
began service in 2001 in three new countries - Ireland, The Netherlands and
France. This channel targets medium- to large-sized businesses and offers
personalized service through a dedicated sales force, individualized pricing and
overnight fulfillment, using our existing European logistics infrastructure.
3
At the end of 2001, our International Division sold office products and services
through either wholly-owned operations, or through joint ventures or licensing
agreements, in Australia, Austria, Belgium, France, Germany, Hungary, Ireland,
Israel, Italy, Japan, Luxembourg, Mexico, The Netherlands, Poland, Thailand and
the United Kingdom. Seven of these countries served retail customers through a
total of 143 office supply stores; 39 stores were wholly-owned. This compares to
132 stores in seven countries, 35 of which were wholly-owned, at the end of
2000. We also had catalog and delivery operations in 14 of these countries
during 2001. International Division store and CSC operations, including
facilities operated through licensing and joint venture agreements, for the last
five years are detailed below. All years prior to 1998 have been restated to
include facilities operated by Viking prior to our merger. Also, the number of
CSCs has been restated to reflect two combined store/CSC facilities that were
previously classified as stores only.
Office Supply Stores Customer Service Centers
------------------------------------------------------- -----------------------------------------------------
Open at Open at Open at Open at
Beginning End Beginning End
of Period Opened Closed of Period of Period Opened Closed of Period
--------- ------ ------ --------- --------- ------ ------ ---------
1997 21 18 -- 39 13 4 -- 17
1998 39 48 -- 87 17 2 1 18
1999 87 36 5 118 18 2 1 19
2000 118 19 5 132 19 -- -- 19
2001 132 15 4 143 19 5 1 23
In 2002, we plan to expand our International Division by opening 10 to 15 new
retail stores in France and Japan, adding the European Business Service Division
to two new countries and launching service in Spain and Switzerland.
As part of the overall restructuring of our management team, all of our European
operations were consolidated under the leadership of Rolf van Kaldekerken, who
is President of our European business. Mr. van Kaldekerken reports to our
Chairman and CEO, Bruce Nelson. During 2001, we also changed the management of
our operations in Japan, and named Richard Lepley, an experienced international
retailer, as President of Office Depot Japan and Viking Japan. Mr. Lepley
reports directly to our Chairman and CEO, Bruce Nelson.
RESULTS OF OPERATIONS
Fiscal 2001 was a year of improved operational performance across the Company
and increased overall earnings compared to 2000, even in the face of difficult
economic conditions and a decline in our consolidated sales. Diluted earnings
per share improved to $0.66 from $0.16 in 2000, and down from $0.69 in 1999.
Fiscal year 2000 was adversely affected by charges associated with a
comprehensive business review that resulted in the closing of 70 retail stores,
the write-down of certain assets and the elimination of some employee positions.
Additional store closure and impairment costs, the write-down of certain
Internet investments, settlement of certain employee claims and gain on the sale
of our London warehouse were recognized in 2001. Without these charges and
credits, EPS was $0.79 in 2001 and $0.70 in 2000. See CHARGES AND CREDITS
section below for additional discussion of these items.
OVERALL
(Dollars in millions) 2001 2000 1999
----------- ------------ -----------
Sales $ 11,154.1 100.0% $ 11,569.7 100.0% $ 10,272.1 100.0%
Cost of goods sold and occupancy costs 7,984.0 71.6% 8,479.4 73.3% 7,450.6 72.5%
----------- ----- ----------- ----- ----------- -----
Gross profit 3,170.1 28.4% 3,090.3 26.7% 2,821.5 27.5%
Store and warehouse operating
and selling expenses 2,343.4 21.0% 2,409.5 20.8% 2,023.1 19.7%
----------- ----- ----------- ----- ----------- -----
Store and warehouse operating profit $ 826.7 7.4% $ 680.8 5.9% $ 798.4 7.8%
=========== ===== =========== ===== =========== =====
Our overall sales decreased 4% in 2001 and increased 13% in 2000, while
comparable sales decreased 2% in 2001 and grew 7% in 2000. Fiscal year 2000
included 53 weeks in accordance with our 52-53 week accounting convention.
Adjusting 2000 to a 52-week basis, sales decreased 2% in 2001. The overall sales
decrease in 2001 reflects a 10% decrease in our North American Retail Division,
a 4% increase in our Business Services Group and a 6% increase in our
International Division. Sales across the United States were adversely affected
in 2001 by the slowing domestic economy. Additionally, the decline in sales of
our North American Retail Division reflects our decision to close 73 stores
during 2001, following our comprehensive business review performed in the latter
part of 2000. The largest percentage sales increases in 2000 were realized in
our BSG segment, driven most significantly by the growth in our contract and
Internet businesses. E-commerce sales have improved in all periods, increasing
almost 60% in 2001 to $1.6 billion. Also contributing significantly to our sales
growth in 2000 was the continued expansion of our store base.
4
Our worldwide sales by product group were as follows:
2001 2000 1999
----- ----- -----
General office supplies 44.2% 41.7% 41.0%
Technology products 46.3% 47.5% 47.5%
Office furniture 9.5% 10.8% 11.5%
----- ----- -----
100.0% 100.0% 100.0%
====== ====== ======
In both 2001 and 2000, our sales mix shifted toward our core office supply
items. Sales of technology products decreased significantly in 2001, reflecting
to a large extent, a general slowing of technology-related product sales in the
overall economy. Moreover, many more general and specialty retailers outside the
office products retail segment (including discount retailers, drug store chains
and warehouse club retailers) have broadened their assortments of technology
products. Technology products generally have lower profit margins compared to
many of the core office supplies. Also, within the technology products category,
the mix shifted from technology hardware and software towards machine supplies.
Sales of office furniture declined, reflecting lower volume and unit prices in
2001 and lower average selling prices during 2000, as many business customers
deferred large purchases because of concerns about the economy.
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 improve 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.
In mid-2000, we reduced prices for paper and machine supplies across all of our
domestic sales channels in response to competitive pressures from discount clubs
and other non-traditional sellers of those supply items. These price reductions,
along with increased product costs, primarily for paper and machine supplies,
had the most significant effect on our decreased gross profit percentage in 2000
compared to 1999. These two product groups accounted for approximately 34% of
our total sales mix in 2000.
Store and warehouse operating and selling expenses consist of personnel costs;
maintenance and other facility costs; advertising expenses; delivery and
transportation costs; credit card and bank charges and certain other operating
and selling costs. These costs, expressed as a percentage of sales, increased in
both 2001 and 2000. The increase in 2001 reflects the impact of declining sales
on the ratio, while the increase in 2000 is primarily the result of higher
personnel and warehouse costs. In 2001, we scaled back our personnel-related
costs in response to weaker sales. Other expenses, such as credit card fees and
delivery fees, have also declined along with sales. In 2000, however, we
experienced higher delivery- and personnel-related costs in our warehouse
operations as third-party carriers increased their rates, and our facility
integration efforts took longer to complete than originally planned. We also had
a significant increase during 2000 in personnel expenses in our domestic stores,
largely related to wage pressures stemming from a tight labor market. Also
included in this category are certain charges and credits that affect the
comparisons of on-going operations and are more fully discussed below.
CHARGES AND CREDITS
Our financial results were significantly affected in 2001, 2000 and 1999 by
charges and credits that do not relate to on-going sales and service activities.
Charges recorded in 2000 were the largest and provide a context for some of the
charges in 2001. During the latter half of 2000, we conducted a comprehensive
business review of all aspects of our business. Commitments made at that time
resulted in a significant change in the Company's strategic direction and led to
modifications of our important business practices. Among other things, the
review resulted in a decision to close 70 under-performing North American retail
stores, close and relocate two warehouses, invest in new warehouse technologies,
reduce the number of slower-moving SKUs in our retail stores and North American
warehouses and modify business practices to increase efficiency. A total net
charge of $260.6 million was recorded and is summarized in the table below.
Included in the $174.7 million facility-related charge is $110.0 million in
facility closure costs and $64.7 million for the write-down of other impaired
assets and related exit costs. Other business review charges included $38.4
million for inventory reductions, a net $10.5 million provision for sales
returns and allowances and $12.6 million for the disposal of certain fixed
assets. Also in 2000, we recorded $32.5 million in severance costs, primarily
related to changes in senior management, and a net $6.8 million credit to adjust
a previous merger accrual for improved estimates of actual costs. Outside of
operations, we recorded impairment charges of $11.1 million relating to goodwill
in Japan and $45.5 million of other than temporary declines in the value of
certain Internet investments. Earlier in 2000, we also realized a $57.9 million
gain on the sale of certain Internet investments.
5
During 2001, we closed 73 stores, 70 of which were identified as part of our
comprehensive business review. We also identified 10 additional under-performing
stores to be closed in 2002. Charges of $43.6 million were recorded for asset
impairments relating to these stores, and to adjust estimated lease termination
costs recorded in 2000 resulting from a softening in the market for retail space
subleases, partially offset by a $10.2 million gain on sale of a warehouse. We
also reached settlement of certain non-recurring legal claims and recognized
amortization of an existing retention agreement. Non-operating expenses included
charges of $14.1 million, primarily to recognize an additional other than
temporary decline in value of certain Internet investments. As of the end of
2001, our Internet investment portfolio was carried at $15.2 million.
In late 1999, we changed our method of accounting for revenue generated from
sales of extended service warranty contracts. Under the laws of certain states,
we are obligated to assume the risk of loss associated with such contracts. In
these states, we modified our accounting to recognize revenue for warranty
service contract sales over the service period, which typically extends over a
period of one to four years. In those states where we are not the legal obligor,
we modified our accounting to recognize warranty revenues after deducting the
related direct costs. This change resulted in a reduction in our 1999 gross
profit of $15.8 million.
Also in 1999, we recorded a charge of $56.1 million to establish a provision for
slow-moving and obsolete inventories and we recorded facility closure charges of
$40.4 million to reflect our decision to accelerate our store closure program
for under-performing stores and our relocation program for older stores in our
North American Retail Division.
The following tables summarize the charges and credits by category and segment:
(Dollars in millions) 2001 2000 1999
-------- -------- --------
Earnings before taxes, excluding non-recurring
items $ 377.5 $ 353.0 $ 519.1
Charges and credits:
Facility-related, net 33.4 174.7 40.4
Other 2000 business review -- 61.5 --
Legal, merger and other operating 15.9 25.7 64.8
Internet investments and other non-operating 14.1 (1.3) --
-------- -------- --------
Total charges, net 63.4 260.6 105.2
-------- -------- --------
Earnings before taxes as reported $ 314.1 $ 92.4 $ 413.9
======== ======== ========
See Note B of the Notes to Consolidated Financial Statements for additional
discussion and line item presentation of the 2000 charges and credits.
(Dollars in millions) 2001 2000 1999
------- --------- --------
Distribution of charges and credits by segment:
North American Retail Division $ 43.6 $ 201.1 $ 88.3
BSG -- 8.6 (12.2)
International Division (10.2) 18.7 29.1
Other - Corporate 30.0 32.2 --
------- --------- --------
Total $ 63.4 $ 260.6 $ 105.2
======= ========= ========
After considering the effect of income taxes, the impact of these net charges on
our net earnings was $41.0 million, $172.9 million and $69.3 million for 2001,
2000, and 1999, respectively.
The components of segment operating profit presented below include the charges
and credits outlined above. Additionally, certain expenses, primarily
payroll-related, previously recorded in total company general and administrative
expenses have been reclassified to determine segment operating profit beginning
in 2001. Prior year amounts reflect the reclassification of these costs.
NORTH AMERICAN RETAIL DIVISION
(Dollars in millions) 2001 2000 1999
---------- ---------- ----------
Sales $ 5,842.6 100.0% $ 6,487.5 100.0% $ 5,893.4 100.0%
Cost of goods sold and occupancy costs 4,479.1 76.7% 5,065.0 78.1% 4,556.5 77.3%
---------- ---------- ----------
Gross profit 1,363.5 23.3% 1,422.5 21.9% 1,336.9 22.7%
Operating and selling expenses 1,046.7 17.9% 1,101.7 17.0% 923.2 15.7%
---------- ---------- ----------
Segment operating profit $ 316.8 5.4% $ 320.8 4.9% $ 413.7 7.0%
========== ========== ==========
6
Sales in our North American Retail Division decreased 10% in 2001 and increased
10% in 2000. Adjusting fiscal 2000 results to remove the 53rd week, sales
decreased 8% in 2001. The decrease was experienced across all regions of the
country and reflects the adverse effect of the weak U.S. economy. Additionally,
the sales decline during 2001 reflects the closing of 73 stores identified as
under-performing stores as part of the comprehensive business review in late
2000. The sales increase in 2000 was primarily achieved through our store
expansion program. For 2001, comparable sales in the 816 stores that had been
open for more than one year were down 8%. In 2000, comparable sales were
essentially even with 1999.
While sales decreased in 2001, gross profit expressed as a percent of sales
increased. Sales shifted away from lower-margin computer hardware, software and
office furniture and into products such as machine and office supplies, as well
as additional copy center services. Sales of computer products declined 26% in
2001 compared with an increase of 3% in 2000, reflecting declines in both volume
and average unit price. We are unable to predict when, and to what extent, this
trend will reverse. During 1999, we offered low priced units and more aggressive
promotional programs on computer products, including an instant rebate program
when the customer contracted for Internet service, which resulted in strong
sales for that year at lower margin percentages. The Internet service provider
instant rebate program was in effect for portions of 2000 and 2001. The sale of
business furniture declined 16% in 2001, after increasing 14% in 2000. The
decrease in 2001 is consistent with the slowing economy and decisions to cancel
or defer office-related purchases. The sale of business machine supplies
increased in both periods.
Lower margins realized on paper and machine supplies contributed most notably to
the decrease in gross profit in 2000 compared to 1999. Increased costs of these
core products and decreased prices in response to competitive pressures
negatively impacted gross profit. Also in 2000, sales increases in the North
American Retail Division were not sufficient to leverage the additional fixed
expenses incurred with the addition of new stores. Gross profit includes fixed
costs such as occupancy and rental costs for equipment in our print and copy
centers.
A significant portion of the comprehensive business review completed at the end
of 2000 was focused on the North American Retail Division and, among other
things, included a commitment to enhance the shoppers' experience in our retail
stores. To that end, we implemented a Division-wide re-merchandising campaign
that included personnel training, improved signage and lighting, improved
product adjacencies and additional private label merchandise. Also, as a result
of the business review, we closed 70 under-performing stores in early 2001 and
another three later in the year. The table above includes charges and credits
reported in line items through segment operating profit. In 2000, these charges
include $29.5 million to provide for sales returns and allowances, $10.1 million
for inventory adjustments and $57.8 million relating to asset impairments and
write-downs. Additional charges and credits relating to the North American
Retail Division, such as facility closure costs, were reported on line items
below segment operating profit and are discussed in the CHARGES AND CREDITS
section above. Fiscal year 2001 includes $35.2 million of charges relating to
additional store closures and impairments from 13 additional under-performing
stores, three of which were closed during the year.
In our North American Retail Division, the largest components of operating and
selling expenses are personnel, facility, advertising and credit card expenses.
Each of these components declined in 2001; and total operating and selling
expenses, excluding the charges outlined above, decreased 3% in 2001. Personnel
costs, which represent over 50% of the total costs in this caption, showed the
largest decline as payroll was adjusted down in response to declining sales and
from a net reduction in stores. Personnel costs in 2000 were higher than in
1999, primarily because of competitive wage pressure and the need to attract
more highly skilled employees in certain positions. Additionally, rent and
depreciation expense decreased in 2001 from store closings, partially offset by
adding 44 stores during the year. Lower sales in 2001 also contributed to lower
credit card fees and reduced advertising. In 2000, we saw an increase in
delivery orders as a percentage of total store sales. These orders are delivered
by the warehousing operations in our BSG, which allocates a portion of their
cost to cover the delivery expense. As explained in the BSG section below,
warehouse expenses increased in 2000, which also negatively impacted operating
and selling expenses. Delivery and transportation costs declined slightly in
2001.
BSG
(Dollars in millions) 2001 2000 1999
---------- ---------- ----------
Sales $ 3,763.0 100.0% $ 3,618.8 100.0% $ 3,057.2 100.0%
Cost of goods sold and occupancy costs 2,573.9 68.4% 2,526.6 69.8% 2,108.0 69.0%
---------- ---------- ----------
Gross profit 1,189.1 31.6% 1,092.2 30.2% 949.2 31.0%
Operating and selling expenses 897.9 23.9% 910.8 25.2% 727.8 23.8%
---------- ---------- ----------
Segment operating profit $ 291.2 7.7% $ 181.4 5.0% $ 221.4 7.2%
========== ========== ==========
7
Sales in our BSG segment grew 4% in 2001 and 18% in 2000. Adjusting fiscal 2000
to a 52-week basis, sales increased 6% in 2001. While sales increased for the
year, the rate of growth for both contract and commercial business declined over
the course of the year, consistent with the slowing U.S. economy. Sales in the
western U.S. displayed the greatest decline following the general slowdown in
the technology services sector. The growth in 2000 sales reflects an increase in
our large business customer base and significant growth in our Internet
business. We expect continued growth in our Internet sales during 2002 as we
allocate additional resources to that sales channel. Machine supplies include
laser, inkjet and copier supplies, and increased 16% in 2001 and 27% in 2000.
General office supplies and paper sales also increased in both periods.
Technology-related sales are a smaller part of BSG sales, but they declined in
2001 after showing some gains in 2000. Office furniture sales declined 11% in
2001.
Gross profit was enhanced during 2001 as we maintained stricter adherence to
volume-dependent pricing arrangements. We earn higher gross profit percentages
in our BSG than in our retail operations principally as the result of lower
occupancy costs and a relative sales mix with fewer technology products. Paper,
machine supplies, and other general office supplies, which yield higher margins
than our other product groups, account for a much larger percentage of total
sales in our BSG than in our stores. However, BSG's gross profit percentages are
lower than in our International Division as a result of the lower relative
pricing we negotiate with our contract customers. Contributing to the decrease
in our BSG's gross profit from 1999 to 2000 was an increase in paper costs,
coupled with reduced prices for paper products, ink and toner in response to
competitive pressures. Further, these products increased in our product mix,
which compounded the negative impact on gross profit.
The 2000 comprehensive business review also covered operations of BSG and
included a number of initiatives to improve delivery operations, lower warehouse
costs and improve customer satisfaction. Included in fiscal year 2000 results
are net charges of $10.9 million for inventory adjustments, sales returns and
allowances, and facility closure costs. No similar charges or credits were
recorded in 2001. During 2001, on-time deliveries, order fill rates and quality
index calculations all increased, and customer complaints decreased
significantly.
Personnel, facility and delivery expenses are the largest components of our BSG
operating expenses. Operating and selling expenses as a percentage of sales
decreased in 2001 primarily from reduced personnel and outside labor costs. Call
center modifications and warehouse efficiency programs were significant
contributors to lower personnel-related costs. Delivery costs decreased as we
lowered our use of third-party vendors and added technology to streamline
operations. Advertising expenses increased in 2001 as we received lower
cooperative advertising payments from participating vendors. Operating and
selling expenses as a percentage of sales are significantly higher in our BSG
than in our North American Retail Division, principally because of the need for
a more experienced and highly compensated sales force that directly calls on our
BSG customers. In 2000, operating and selling expenses increased over 1999
primarily as a result of higher delivery costs arising from increased rates
charged by third-party carriers, and from personnel-related expenses associated
with our warehouse staff. Furthermore, a larger workforce was required to handle
the execution of our warehouse integration plans. During the transition into
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. During 2002, we anticipate two new
distribution facilities, one in Atlanta and the other in Baltimore, to replace
outdated facilities, which have reached capacity. These new facilities are
expected to enhance our ability to grow in these two important markets.
INTERNATIONAL DIVISION
<Table>
<Caption>
(Dollars in millions) 2001 2000 1999
----------------------- ------------------------ ------------------------
Sales $ 1,552.0 100.0% $ 1,467.4 100.0% $ 1,352.4 100.0%
Cost of goods sold and occupancy costs 932.3 60.1% 890.0 60.7% 788.3 59.5%
---------- ---------- ----------
Gross profit 619.7 39.9% 577.4 39.3% 537.1 40.5%
Operating and selling expenses 400.3 25.8% 398.5 27.1% 373.6 28.2%
---------- ---------- ----------
Segment operating profit $ 219.4 14.1% $ 178.9 12.2% $ 163.5 12.3%
========== ========== ==========
Sales in our International Division grew 6% in 2001 and 11% in 2000. Adjusting
fiscal 2000 to a 52-week basis, sales increased 8% in 2001. Foreign currency
translations adversely affected sales in all periods. Excluding the foreign
currency effect, sales in our International Division grew 11% in 2001 and 23% in
2000. Comparable sales, excluding the foreign currency effect, increased 12% in
the current year compared with growth of over 30% in 2000. These increases in
2001 were achieved despite softness experienced in our operations in larger
European countries relating to softer economic conditions generally throughout
Europe. Although the Office Depot(R) brand continues to grow as a percentage of
the total sales in this segment, our Viking Office Products(R) brand still
accounts for the vast majority of our international business, representing
approximately 87% of all international sales in 2001 and 88% in 2000. These
Viking catalog operations had local currency comparable sales increases of 11%
in 2001 and 16% in 2000. Competitive, political, and economic conditions in
international markets in which we operate may impact our sales in the future.
8
As noted above, sales in local currencies have substantially increased in recent
years. For U.S. reporting, these sales are translated into U.S. dollars at
average exchange rates during the year. The strong U.S. dollar has adversely
affected reported sales in each of the three years presented, in some cases
significantly. To the extent the U.S. dollar continues to strengthen relative to
the currencies where we conduct business, this adverse effect on reported sales
can be expected to continue.
Gross profit as a percentage of sales increased in 2001 and reflects pricing
initiatives in certain machine and general office supply categories, partially
offset by the introduction of our lower-margin contract sales in certain
European countries. The decrease in gross profit as a percent of sales in 2000
resulted from an unfavorable mix shift towards machine supplies, primarily ink
and toner cartridges, which yield lower gross profit margins than other
products. As with our other segments, our International Division was affected by
higher costs for paper and machine supplies in 2000. However, unlike our
domestic segments, the effect of these cost increases was lessened with
increased pricing in our catalogs during the latter half of the year.
Operating and selling expenses as a percentage of sales are higher in our
International Division than in our other segments primarily because we use an
extensive marketing program to drive sales in new and existing markets, and we
have start-up activities in several markets. Similar to our BSG, personnel and
delivery expenses are significant components of our International Division's
operating and selling expenses. Additionally, the cost of catalog preparation
and mailing is a significant component to support the direct mail channel.
Continuing a trend that began in 2000, advertising expenses continued to
decline, reflecting the impact of improved mailing efficiencies throughout
Europe in 2001, as well as continued improvement in our use of more effective
advertising campaigns in Japan. In 1999, increasing competition in many of our
established markets, coupled with our efforts to gain market share in certain
newer markets, drove up our advertising costs.
During 2001, we incurred additional operating expenses related to the start up
of contract businesses in Europe along with the acquisition of a contract
stationer in Australia. These incremental costs are normal as we continue
developing our business in new markets. These expenses are offset by continuing
improvement in certain fixed operating expenses. As our operations grow in a
particular market, fixed operating expenses decline relative to sales. For
example, advertising costs in the form of prospecting and delivery costs, which
are affected by the density of the delivery areas, decline as a percentage of
sales as the market grows. We expect to leverage certain fixed operating
expenses, and our cost to attract new customers should decline as a percentage
of sales as we continue to establish our brands and grow our international
business.
Fiscal 2001 includes a gain of $10.2 million from the sale of a London warehouse
and fiscal 2000 includes charges of $5.3 million for closed stores and
facilities resulting from the 2000 comprehensive business review.
CORPORATE AND OTHER
PRE-OPENING EXPENSES
(Dollars in thousands) 2001 2000 1999
------- ------- -------
Pre-opening expenses $10,172 $13,465 $23,628
Office supply stores opened* 55 78 159
* INCLUDES DOMESTIC AND WHOLLY-OWNED INTERNATIONAL OPENINGS AND RELOCATIONS.
Our pre-opening expenses consist principally of personnel, property and
advertising expenses incurred in opening or relocating stores in our North
American Retail Division. Our pre-opening expenses also include, to a lesser
extent, expenses incurred to open or relocate facilities in our BSG and
International Division. We typically incur pre-opening expenses during a
six-week period prior to a store opening. Because we expense these items as they
are incurred, the amount of pre-opening expenses each year is generally
proportional to the number of new stores opened during the period. This has been
the primary contribution to the fluctuation in pre-opening expenses over the
three years presented. For 2001, our pre-opening expenses approximated $160,000
per domestic office supply store and $101,000 per international office supply
store. Our cost to open a new CSC varies significantly with the size and
location of the facility. We currently estimate costs to open a domestic or
international CSC to be $1.5 million per facility.
9
GENERAL AND ADMINISTRATIVE EXPENSES
(Dollars in thousands) 2001 2000 1999
-------- -------- --------
General and administrative expenses $451,722 $453,784 $328,108
Percentage of sales 4.0% 3.9% 3.2%
Our general and administrative expenses primarily consist of personnel-related
costs associated with support functions. Because these functions, for the most
part, support all segments of our business, we do not consider these costs in
determining our segment profitability. Throughout 2000 and 1999, we developed
improvements in our infrastructure, particularly in the areas of Supply Chain
Management, MIS and International. These areas were significant contributors to
the increases in our general and administrative expenses in those years. The
primary benefits derived from this increased spending were the expansion and
improvement of our e-commerce services, a new data center, improvements in our
inventory in-stock positions and support for our rapidly growing International
Division. Also included in this category in 1999 are expenses relating to our
CSC consolidation and integration initiatives.
OTHER INCOME AND EXPENSE
(Dollars in thousands) 2001 2000 1999
-------- -------- --------
Interest income $ 13,058 $ 11,502 $ 30,176
Interest expense (44,302) (33,901) (26,148)
Miscellaneous income (expense), net (9,057) 4,632 (3,514)
Financing and investing activities are not included in determining segment
profitability. During 2001, we issued $250 million of senior subordinated notes
that mature in 2008. We also entered into swap agreements to convert these notes
to a variable interest rate, to balancing our fixed and variable interest
portfolio. Interest expense in 2001 reflects this additional borrowing. Higher
cash balances from this borrowing and increased cash flow from operations
contributed to the increase in interest income in 2001, despite a decreasing
interest rate environment. Cash balances, and related interest income, declined
in 2000 reflecting $300.8 million of cash used for purchases of our stock.
During the fourth quarter of 2000, we began borrowing against our domestic
credit facility, which led to increased interest expense over 1999. These
borrowings were repaid during 2001. Also, reserves established in connection
with the 2000 comprehensive business review, and in 2001 for future lease
obligations related to our facility closures and merger activities, are recorded
at the net present value of the obligation. As we pay these obligations, the
imputed interest cost on the discounted obligations is recognized as interest
expense. This has also caused interest expense to increase in 2000 compared to
1999 and should be expected to continue in future years.
Our net miscellaneous income (expense) consists of equity in the earnings of our
joint venture investments, royalty and franchise income that we generate from
licensing and franchise agreements, and gains or impairments on Internet
investments. All of our equity investments involve operations outside of the
United States and Canada. Impairment charges for other than temporary declines
in value of certain Internet investments were $14.7 million in 2001 and $45.5
million in 2000. Fiscal year 2000 also included a realized gain of $57.9 million
from the sale of certain Internet investments and $11.1 million of goodwill
impairment in Japan. Under accounting rules that apply in 2002, we will no
longer record goodwill amortization, but will test each year for possible
impairment. See NEW ACCOUNTING STANDARDS below.
INCOME TAXES
(Dollars in thousands) 2001 2000 1999
--------- -------- ---------
Income Taxes $ 113,087 $ 43,127 $ 156,249
Effective income tax rate* 36.0% 46.6% 37.8%
Effective income tax rate*, excluding
merger and restructuring costs and 36.0% 37.0% 37.0%
other one-time charges and credits
*Income Taxes as a percentage of earnings before income taxes.
</Table>
The effective income tax rate in 2001 declined to 36%, primarily reflecting the
increase in International activity taxed at lower rates. The effective tax rate
may decline further during 2002.
In 2000 and 1999, certain non-deductible merger-related charges and other
one-time charges caused our overall effective income tax rates to rise. Our
overall effective income tax rate, excluding these charges, may fluctuate in the
future as a result of the mix of pre-tax income and tax rates between countries.
10
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by (used in) our operating, investing and financing activities is
summarized as follows:
(Dollars in thousands) 2001 2000 1999
--------- --------- ---------
Operating activities $ 747,166 $ 316,482 $ 369,449
Investing activities (231,944) (239,365) (447,841)
Financing activities (85,403) (134,093) (405,849)
OPERATING AND INVESTING ACTIVITIES
We have historically relied on cash flows generated from operations as our
primary source of funds because the majority of 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 sales
without the burden of carrying additional receivables. Our cash requirements are
also reduced by vendor credit terms that allow us to finance a portion of our
inventory. We generally offer credit terms, under which we carry our own
receivables, to contract and certain direct mail customers. As we expand our
contract and direct mail businesses, we anticipate that our accounts receivable
portfolio will continue to grow. Amounts due for rebate, cooperative advertising
and marketing programs with our vendors comprise a significant percentage of
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 happen until after an entire program year has been
completed.
The increase in operating cash flows in 2001 is primarily attributable to an
improvement in operating profit and a focus on reducing certain components of
working capital, following the 2000 comprehensive business review. During 2001,
both accounts receivable and inventory balances decreased significantly,
primarily from management actions. Inventory levels held in stores and CSCs
decreased in each consecutive year presented because of improved inventory
turnover, our SKU reduction program and our focus on supply chain management.
Operating cash flows in 2000 declined mainly due to lower gross profit, higher
store and warehouse operating and selling expenses and higher general and
administrative expenses.
The number of stores and CSCs we open or remodel each year generally drives the
volume of our capital investments. Over the past three years our capital
expenditures have decreased as fewer stores have been opened in each successive
year. Additionally, throughout 2001 we more closely scrutinized capital
expenditures with an emphasis on improving our return on assets. During 2000, we
also had significant expenditures related to our Viking integration plans. In
1999, computer and other equipment purchases at our corporate offices and at our
facilities, necessary to complete Y2K remediation, relocation of our corporate
data center, and support for our store expansion, also contributed to our
increased cash investing needs.
We currently plan to open 25 to 30 stores in our North American Retail Division
and 10 to 15 stores in our International Division during 2002. We estimate that
our cash investing requirements will be approximately $1.1 million for each new
domestic office supply store. The $1.1 million includes approximately $0.5
million for leasehold improvements, fixtures, point-of-sale terminals and other
equipment, and approximately $0.6 million for the portion of our inventories
that will not be financed by our vendors. In addition, our average new office
supply store requires pre-opening expenses of approximately $0.2 million. We
also plan to expand our European Business Service Division into two new
countries.
We have expanded our presence in the e-commerce marketplace by acquiring
Internet-based companies and entering into strategic business relationships with
several Web-based providers of business-to-business e-commerce solutions. In
2001, we acquired the operations of 4Sure.com, an Internet-based technology
business. We made non-controlling investments in technology-related companies
during 2000 and 1999 of $30.1 million and $50.7 million, respectively. During
2000, we sold certain of these investments and realized a gain of $57.9 million.
Also, we recorded impairment charges of $14.7 million in 2001 and $45.5 million
in 2000 to recognize the other than temporary declines in value. The carrying
value of these investments at December 29, 2001 and December 30, 2000 was $15.2
million and $29.9 million, respectively. We will continue to look for
opportunities to invest in companies that provide business-to-business
e-commerce solutions for small- and medium-sized businesses.
FINANCING ACTIVITIES
Our domestic credit facilities provide us with a maximum of $555.0 million in
funds. These facilities consist of two separate credit agreements, a five-year
loan providing us with a working capital line and letters of credit capacity
totaling $300.0 million, and a 364-day loan for working capital totaling $255.0
million. As of December 29, 2001, we had no outstanding borrowings under these
lines of credit; we did have letters of credit totaling $36.8 million against
the five-year facility. Our five-year agreement was entered into in February
1998 and has various borrowing rate options, including a rate based on our
credit rating that currently would result in an interest rate of 0.70% over the
London Interbank Offered Rate ("LIBOR"). Our credit agreement entered into in
June 2001 with a 364-day term also has various borrowing rate options, including
a current borrowing rate of 0.95% over LIBOR. Both agreements contain similar
restrictive covenants relating to various financial statement ratios.
11
In July 2001, we issued $250 million of seven year, non-callable, senior
subordinated notes due on July 15, 2008. The notes contain provisions that, in
certain circumstances, place financial restrictions or limitations on our
Company. The notes have a coupon interest rate of 10.00%, payable semi-annually
on January 15 and July 15. In August 2001, we entered into LIBOR-based variable
rate swap agreements with notional amounts aggregating $250 million. The
effective interest rate since August 2001 was 7.8% and, beginning in January
2002, was 6.15%. This rate will be reset every six months.
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 $74.5 million
at December 29, 2001) at an interest rate of 0.875% over the Tokyo Interbank
Offered Rate ("TIBOR"). These facilities are available to us until July 2002,
and are therefore classified as current on our balance sheet. The yen facilities
loan agreements are tied to the covenants in our domestic facilities described
earlier. As of December 29, 2001, we had outstanding yen borrowings equivalent
to $74.5 million under these yen facilities, with an average effective interest
rate of 1.118%. Effective October 28, 1999, we entered into a yen interest rate
swap with a financial institution for a principal amount equivalent to $18.6
million at December 29, 2001 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 0.700% and receive TIBOR. The swap will
mature in July 2002.
In addition to bank borrowings, we have historically used equity capital,
convertible debt and capital equipment leases as supplemental sources of funds.
In October 2001, our Board of Directors authorized the Company to repurchase up
to $50 million of its common stock each year until rescinded by the Board. The
repurchased shares will be added to the Company's treasury shares and will be
used to meet the Company's near-term requirements for its stock option and other
benefit plans. During 2001, we repurchased approximately 252,000 shares of our
stock at a total cost of $4.2 million plus commissions.
In August 1999, our Board approved a $500 million stock repurchase program
reflecting its belief that our common stock represented a significant value at
its then-current trading price. 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. During the first half of 2000, our Board approved additional
stock repurchases of up to $300 million, bringing our total authorization to
$800 million. We completed these programs during 2000, purchasing an additional
35.4 million shares of our stock at a total cost of $300 million plus
commissions.
In 1992 and 1993, we issued certain 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, the majority of the holders of our 1993 LYONs(R) required us
to purchase the LYONs(R) from them at the issue price plus accrued original
issue discount. We paid the holders $249.2 million in connection with this
repurchase, and reclassified the remaining 1993 LYONs(R) obligation as
long-term. Our 1992 LYONs(R) have a similar provision whereby the holders may
require us to purchase these notes at the issue price plus accrued original
issue discount on December 11, 2002, and therefore, these obligations totaling
$233.5 million have been classified as a current liability on our Consolidated
Balance Sheet. If the holders decide to exercise their put option, we have the
choice of paying the holders in cash, common stock or a combination of the two.
Our 2001 net cash used in financing activities consisted mainly of long- and
short-term debt payments of $400.5 million to pay off our domestic credit
facility debt that was accumulated in the fourth quarter of 2000. These payments
were partially offset by proceeds received in 2001 from the issuance of $250
million in senior subordinated notes as discussed above. For 2000, our stock
repurchase and the repurchase of our 1993 LYONs(R) made up the majority of cash
used in financing activities. We began borrowing from our domestic credit
facilities during the fourth quarter of 2000, primarily to fund the LYONs(R)
repurchase. We continually review our financing options. Although we currently
anticipate that we will finance all of our 2002 operations, expansion and other
activities through cash on hand, funds generated from operations, equipment
leases and funds available under our credit facilities, we will consider
alternative financing as appropriate for market conditions.
12
The following table summarizes the Company's long-term obligations at December
29, 2001:
(Dollars in millions) Payments due by Period
--------------------------------------------------------------------
Less than After 5
Contractual Cash Obligations Total 1 year 1 - 3 years 4 - 5 years years
---------- --------- ----------- ----------- ----------
Long-term debt $ 555.6 $ 308.0 $ -- $ -- $ 247.6
Capital lease obligations 122.9 15.9 25.1 13.2 68.7
Operating leases 2,590.4 400.0 645.8 469.0 1,075.6
Unconditional purchase obligations 2.1 2.1 -- -- --
---------- -------- -------- -------- ----------
Total contractual cash obligations $ 3,271.0 $ 726.0 $ 670.9 $ 482.2 $ 1,391.9
========== ======== ======== ======== ==========
Approximately $308 million of obligations have been classified as current
maturities in the Consolidated Balance Sheet because of an investor call
provision relating to $233.5 million of obligations and the scheduled agreement
termination relating to the U.S. dollar equivalent of $74.5 million of debt
denominated in Japanese Yen. These amounts may be reclassified as long-term
obligations if investors fail to exercise the call provision and the Company
renegotiates the Japanese debt.
Additionally, we have Letters of Credit totaling $36.8 million outstanding at
the end of the year and we have recourse for private label credit card
receivables transferred to a third party. We record an estimate for losses on
these receivables in our financial statements. The total outstanding amount
transferred to third a party at the end of the year was approximately $252
million.
SIGNIFICANT ACCOUNTING POLICIES
Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. As
such, some accounting policies have a significant impact on amounts reported in
these financial statements. A summary of those significant accounting policies
can be found in Notes to the Consolidated Financial Statements as NOTE A. In
particular, judgment is used in areas such as determining the allowance for
uncollectible accounts, cooperative advertising and vendor programs, the
provision for sales returns and allowances, self-insurance accruals, adjustments
to inventory valuations and provisions for store closures and asset impairments.
SIGNIFICANT TRENDS, DEVELOPMENTS AND UNCERTAINTIES
Over the years, we have seen continued development and growth of competitors in
all segments of our business. In particular, 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 supply superstores that compete directly with us
in numerous markets. This competition is likely to result in increased
competitive pressures on pricing, product selection and services provided. Many
of these retail competitors, including discounters, warehouse clubs, and even
drug stores and grocery chains, have begun carrying at least limited numbers of
basic office supply products, including ink jet and toner cartridges, printer
paper and other basic supplies. Some of them have also begun to feature
technology products. Many of them price these offerings lower than we do, but
they have not shown any indication of greatly expanding their somewhat limited
product offerings at this time. This trend towards a proliferation of retailers
offering a limited assortment of office products is a potentially serious trend
in the industry, and one that our management is watching closely.
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 Internet and
business-to-business Web sites, we believe that we have positioned ourselves
competitively in the e-commerce arena.
MARKET SENSITIVE RISKS AND POSITIONS
We have market risk exposure related to interest rates and foreign currency
exchange rates. Market risk is measured as the potential negative impact on
earnings, cash flows or fair values resulting from a hypothetical change in
interest rates or foreign currency exchange rates over the next year. We manage
the exposure to market risks at the corporate level. The portfolio of
interest-sensitive assets and liabilities is monitored and adjusted to provide
liquidity necessary to satisfy anticipated short-term needs. The percentage of
fixed and variable rate debt is managed through borrowings and interest rate
swap agreements to fall within a desired range. Our risk management policies
allow the use of specified financial instruments for hedging purposes only;
speculation on interest rates or foreign currency rates is not permitted.
13
INTEREST RATE RISK
We are exposed to the impact of interest rate changes on cash equivalents and
debt obligations. The impact on cash and short-term investments held at the end
of 2001 of a hypothetical 10% decrease in interest rates would be a decrease in
interest income of approximately $1 million in 2002.
Market risk associated with our debt portfolio is summarized below:
2001 2000
------------------------------------------- ------------------------------------------
(Dollars in thousands) Carrying Fair Risk Carrying Fair Risk
Value Value Sensitivity Value Value Sensitivity
-------- -------- ----------- --------- -------- -----------
Fixed interest rate debt(1) $481,107 $531,602 $ 6,770 $224,438 $196,700 $ 732
Variable interest rate debt(1) 74,509 74,509 373 453,568 453,568 1,948
(1) Including current maturities.
The risk sensitivity of fixed rate debt reflects the estimated increase in fair
value from a 50 basis point decrease in interest rates, calculated on a
discounted cash flow basis. The sensitivity of variable rate debt reflects the
possible increase in interest expense during the next period from a 50 basis
point change in interest rates prevailing at year end.
During 2001, we entered into an interest rate swap agreement to receive fixed
and pay floating rates, converting the equivalent of $250 million of this
portfolio to variable rate debt through 2008. The fair value of this agreement
at December 29, 2001 was immaterial. Additionally, the variable interest
payments of certain overseas debt have been hedged through mid-year 2002 under a
variable to fixed rate swap agreement. The U.S. dollar equivalent notional
amount was $18.6 million at year-end 2001 and $21.0 million at year-end 2000.
Sensitivity of this agreement to a 50 basis point change in interest rates was
not material in either period.
FOREIGN EXCHANGE RATE RISK
We conduct business in various countries outside the United States where the
functional currency of the country is not the U.S. dollar. This results in
foreign exchange translation exposure when results of these foreign operations
are translated into U.S. dollars in our consolidated financial statements. As of
December 29, 2001, a 10% change in the applicable foreign exchange rates would
result in an increase or decrease in our operating profit of approximately $11
million.
We are also subject to foreign exchange transaction exposure when our
subsidiaries transact business in a currency other than their own functional
currency. This exposure arises primarily from a limited amount of inventory
purchases in a foreign currency. The introduction of the euro and our decision
to consolidate our European purchases has greatly reduced these exposures.
During 2001, foreign exchange forward contracts to hedge certain inventory
exposures were less than $16.4 million.
One practical effect of the strong U.S. dollar over the past several years has
been a reduction in the reported results of operations from our extensive
overseas operations, due to the requirement to report our results in U.S.
dollars. While we look for opportunities to reduce our exposure to foreign
currency fluctuation against the U.S. dollar, at this point we have determined
not to pursue hedging opportunities generally.
INFLATION AND SEASONALITY
Although we cannot determine the precise effects of inflation on our business,
we do not believe inflation has a material impact on our sales or the results of
our operations. We consider our business to be somewhat seasonal, with sales in
our North American Retail Division and Business Services Group slightly higher
during the first and fourth quarters of each year, and sales in our
International Division slightly higher in the third quarter.
14
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 141, ACCOUNTING FOR BUSINESS COMBINATIONS, and Statement No. 142, GOODWILL
AND OTHER INTANGIBLE ASSETS. These Statements modify accounting for business
combinations after June 30, 2001 and will affect the Company's treatment of
goodwill and other intangible assets at the start of fiscal year 2002. The
Statements require that goodwill existing at the date of adoption be reviewed
for possible impairment and that impairment tests be periodically repeated, with
impaired assets written down to fair value. The initial test of goodwill must be
completed within six months of adoption, or by June 2002 for Office Depot, with
a completion of testing by the end of 2002. Additionally, existing goodwill and
intangible assets must be assessed and classified consistent with the
Statements' criteria. Intangible assets with estimated useful lives will
continue to be amortized over those periods. Amortization of goodwill and
intangible assets with indeterminate lives will cease. We have not yet completed
the initial test of existing goodwill and, accordingly, cannot estimate the full
impact of these rules. However, goodwill amortization, which totaled $7.0
million for 2001, will no longer be recorded.
In July 2001, the FASB issued Statement No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS. This Statement requires capitalizing any retirement costs as part
of the total cost of the related long-lived asset and subsequently allocating
the total expense to future periods using a systematic and rational method.
Adoption of this Statement is required for Office Depot with the beginning of
fiscal year 2003. We have not yet completed our evaluation of the impact of
adopting this Statement.
In October 2001, the FASB issued Statement No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. This Statement supersedes Statement
No. 121 but retains many of its fundamental provisions. Additionally, this
Statement expands the scope of discontinued operations to include more disposal
transactions. The provisions of this Statement are effective for Office Depot
with the beginning of fiscal year 2002. We do not anticipate a significant
impact to the Company's results of operations from adoption of this Statement.
15
OFFICE DEPOT, INC.
CAUTIONARY STATEMENTS for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
CAUTIONARY STATEMENTS
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 Annual Report contains both historical information and other information
that you can use to infer future performance. Examples of historical information
include our annual 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 Annual Report 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 discuss in more detail below and in our report on Form 10-K,
filed with the Securities & Exchange Commission. This information is based on
various factors and important assumptions about future events that may or may
not actually come true. As a result, our operations and financial results in the
future could differ materially and substantially from those we have discussed in
the forward-looking statements in this Annual Report. In particular, the factors
we discuss below and in our Form 10-K could affect our actual results and could
cause our actual results in 2002 and in future years to differ materially from
those expressed in any forward-looking statement made by us or on our behalf in
this Annual Report.
COMPETITION: We compete with a variety of retailers, dealers and distributors in
a highly competitive marketplace that includes high-volume office supply chains,
warehouse clubs, computer stores, contract stationers and well-established mass
merchant retailers. Even grocery and drug store chains have begun to carry at
least limited supplies of basic office supplies and even technology items.
Well-established mass merchant retailers have the financial and distribution
ability to compete very effectively with us should they choose to enter the
office superstore retail category, Internet office supply or contract stationer
business or substantially expand their offering in their existing retail
outlets. This could have a material adverse effect on our business and results
of our operations.
INTERNET: Internet-based merchandisers also compete with us. This competition is
expected to increase in the future as these companies proliferate and continue
to expand their operations. Many start-up operations that are heavily focused on
Internet sales may be able to compete with us in the areas of price and
selection. While most of these companies cannot offer the levels of service and
stability of supply that we provide, they nevertheless may be formidable
competitors, particularly for customers who are willing to look for the absolute
lowest price without regard to the other attributes of our business model. In
addition, certain manufacturers of computer hardware, software and peripherals,
including certain of our suppliers, have expanded their own direct marketing of
products, particularly over the Internet. Even as we expand our own Internet
efforts, our ability to anticipate and adapt to the developing Internet
marketplace and the capabilities of our network infrastructure to efficiently
handle our rapidly expanding operations are of critical importance. Furthermore,
our profitability goals may also serve to inhibit the expansion of our presence
on the Internet, because dedicated Internet concerns are currently evaluated
differently in the financial markets than more established concerns such as
ours. Failure to execute well in any of these key areas could have a material
adverse effect on our future sales growth and profitability.
16
EXECUTION OF EXPANSION PLANS: We plan to open approximately 25 to 30 stores in
the United States and Canada and 10 to 15 stores in our International Division
during 2002, and we also plan to open two new BSG distribution centers in
Atlanta and Baltimore during 2002. We consider our expansion program to be an
integral part of our plan to achieve anticipated operating results in future
years. Circumstances outside our control, such as adverse weather conditions
affecting construction schedules, unavailability of acceptable sites or
materials, labor disputes and similar issues could impact anticipated store
openings. The failure to expand by opening new stores or distribution centers as
planned and the failure to generate the anticipated sales growth in markets
where new stores are opened could have a material adverse effect on our future
sales growth and profitability.
CANNIBALIZATION OF SALES IN EXISTING OFFICE DEPOT STORES: As we expand the
number of our stores in existing markets, sales of existing stores may suffer
from cannibalization (customers of our existing stores begin shopping at our new
stores). Our new stores typically require an extended period of time to reach
the sales and profitability levels of our existing stores. Moreover, the opening
of new stores does not ensure that those stores will ever be as profitable as
existing stores, particularly when new stores are opened in highly competitive
markets or markets in which other office supply superstores may have achieved
"first mover" advantage. Our comparable sales are affected by a number of
factors, including the opening of additional Office Depot stores; the expansion
of our contract stationer business in new and existing markets; competition from
other office supply chains, mass merchandisers, warehouse clubs, computer
stores, other contract stationers and Internet-based businesses; and regional,
national and international economic conditions. In addition, our profitability
would be adversely affected if our competitors were to attempt to capture market
share by reducing prices.
COSTS OF REMODELING AND RE-MERCHANDISING STORES: The remodeling and
re-merchandising of our stores has contributed to increased store expenses, and
these costs are expected to continue impacting store expenses throughout 2002
and beyond. While a necessary aspect of maintaining a fresh and appealing image
to our customers, the expenses associated with such activities could result in a
significant impact on our net income in the future. In addition, there is no
guarantee that these changes will generate any of the benefits that we have
anticipated. Furthermore, our growth, through both store openings and
acquisitions, will continue to require the expansion and upgrading of our
informational, operational and financial systems, as well as necessitate the
hiring of new managers at the store and supervisory level.
HISTORICAL FLUCTUATIONS IN PERFORMANCE: Fluctuations in our quarterly operating
results have occurred in the past and may occur in the future. A variety of
factors could contribute to this quarter-to-quarter variability, including new
store openings which require an outlay of pre-opening expenses, generate lower
initial profit margins and cannibalize existing stores; timing of warehouse
integration; competitors' pricing; changes in our product mix; fluctuations in
advertising and promotional expenses; the effects of seasonality; acquisitions
of contract stationers; competitive store openings or other events.
VIKING MERGER AND INTEGRATION: On August 26, 1998, we merged with Viking. Costs
related to the integration of Viking's warehouse facilities with our delivery
network will increase our warehouse expenses in 2002 and beyond. Moreover,
integrating the operations and management of Office Depot and Viking has been,
and continues to be, a complex process. There can be no assurance that this
integration process will be completed as rapidly as we anticipate or that, even
if achieved as anticipated, it will result in all of the anticipated synergies
and other benefits we expect to realize. The integration of the two companies
continues to require significant management attention, which may temporarily
distract us from other matters. Our inability to successfully complete the
integration of the operations of Office Depot and Viking could have a material
adverse effect on our future sales growth and profitability.
INTERNATIONAL ACTIVITY: We have operations in a number of international markets.
We intend to enter additional international markets as attractive opportunities
arise. Each entry could take the form of a start-up, acquisition of stock or
assets or a joint venture or licensing arrangement. In addition to the risks
described above (in our domestic operations), internationally we face such risks
as foreign currency fluctuations, unstable political and economic conditions,
and, because some of our foreign operations are not wholly-owned, compromised
operating control in certain countries. 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 crisis 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. Also, we have experienced
significant fluctuations in foreign currency exchange rates in 2001, which have
resulted in lower than anticipated sales and earnings in our International
Division. Our results may continue to be adversely affected by these
fluctuations in the future. In addition, we do not have a large group of
managers experienced in international operations and will need to recruit
additional management resources to successfully compete in many foreign markets.
All of these risks could have a material adverse effect on our financial
position or our results from operations. Moreover, as we increase the relative
percentage of our business that is operated globally, we also increase the
impact these factors have on our future operating results. Our start-up
operation in Japan, in particular, has proven to be unprofitable to date and, in
fact, has generated losses that have materially affected our financial results
in the past and are expected to do so for some time in the future. Because of
differing commercial practices, laws and other factors, our ability to use the
Internet and e-commerce to substantially increase sales in international
locations may not progress at the same rate as in North America.
17
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.
CONTRACT AND COMMERCIAL: We compete with a number of contract stationers, mail
order and Internet operators and retailers who supply office products and
services to large and small businesses, both nationally and internationally. In
order to achieve and maintain expected profitability levels, we must continue to
grow this segment of the business while maintaining the service levels and
aggressive pricing necessary to retain existing customers. There can be no
assurance we will be able to continue to expand our contract and commercial
business while retaining our base of existing customers, and any failure to do
so could have a material adverse effect on our profitability. We are also
working on various initiatives to improve margin levels in this business
segment, but there is no assurance that these initiatives will prove successful.
Some of our competitors operate only in the contract and/or commercial channels
and therefore may be able to focus more attention on the business services
segment, thereby providing formidable competition. Our failure to adequately
address this segment of our business could put us at a competitive disadvantage
relative to these competitors. In addition, we have reached maximum capacity in
some of our distribution centers that serve our contract and commercial
customers. In 2002, we plan to open new distribution facilities in Atlanta and
Baltimore. Failure to open these facilities as planned, or material delays in
construction and/or equipping these facilities, could have a material adverse
impact on our anticipated results in 2002.
SOURCES AND USES OF CASH: We believe that our current level of cash and cash
equivalents, future operating cash flows, lease financing arrangements and funds
available under our credit facilities and term loan should be sufficient to fund
our planned expansion, integration and other operating cash needs for at least
the next year. However, there can be no assurance that additional sources of
financing will not be required during the next twelve months as a result of
unanticipated cash demands, opportunities for expansion, acquisition or
investment, changes in growth strategy, changes in our warehouse integration
plans or adverse operating results. We could attempt to meet our financial needs
through the capital markets in the form of either equity or debt financing.
Alternative financing will be considered if market conditions make it
financially attractive. There can be no assurance that any additional funds
required by us, whether within the next twelve months or thereafter, will be
available to us on satisfactory terms. Our inability to access needed financial
resources could have a material adverse effect on our financial position or
operating results.
EFFECTS OF CERTAIN ONE-TIME CHARGES: During the fourth quarter of 2000, we
conducted a review of all aspects of our business, with particular attention on
our North American Retail Division and on our distribution and supply chain
activities (see the CHARGES AND CREDITS section of our MD&A for further
details). We expect that these decisions will result in increasing our Company's
profitability and efficiency in the future. However, this analysis involves many
variables and uncertainties; and, as a result, we may not achieve any of the
expected benefits. In 1999, we announced one-time charges against earnings for
slow-moving inventories in our warehouses and stores and for accelerated store
closings and relocations. There can be no assurance that additional charges of
this nature will not be required in the future as well. In particular, we expect
that a retail store chain, such as our North American Retail Division, should
expect to close a certain number of stores each year, remodel and/or relocate
other stores. We cannot be certain that our decisions to close, remodel and/or
relocate stores will have the desired favorable results on our financial
performance, nor can we anticipate the size and nature of non-recurring charges
associated with such matters. Such charges, if any, could have a materially
adverse impact on our financial position or operating results in the future.
18
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 economy has recently begun to show signs of a
downturn. The Federal Reserve dramatically reduced interest rates throughout
2001 in recognition of the economic downturn and in an effort to address that
downturn. The overall stock market has been in a period of poor performance
throughout 2001. The retail industry, in particular, continues to display signs
of a slowdown, with several specialty retailers, both in and outside our
industry segment, reporting earnings warnings throughout 2001. One major
discount retailer filed for bankruptcy protection earlier in 2002, further
indicating that the slow economy is having an impact on the retail industry.
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 continues to have vacancies in certain key
positions. Various searches are 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.
DISCLAIMER OF OBLIGATION TO UPDATE
We assume no obligation (and specifically disclaim any obligation) to update
these Cautionary Statements or any other forward-looking statements contained in
this Annual Report to reflect actual results, changes in assumptions or other
factors affecting such forward-looking statements, except as required by laws
and regulations.
19
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Office Depot, Inc.
We have audited the consolidated balance sheets of Office Depot, Inc.
(the "Company") as of December 29, 2001 and December 30, 2000 and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended December 29, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Office
Depot, Inc. as of December 29, 2001 and December 30, 2000 and the results of
their operations and their cash flows for each of the three years in the period
ended December 29, 2001 in conformity with accounting principles generally
accepted in the United States of America.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
February 13, 2002
20
OFFICE DEPOT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 29, December 30,
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 563,410 $ 151,482
Receivables, net of allowances of $32,682 in 2001 and
$34,461 in 2000 ............................................ 781,476 896,333
Merchandise inventories, net .................................. 1,259,522 1,420,825
Deferred income taxes ......................................... 148,490 157,779
Prepaid expenses .............................................. 53,292 72,670
----------- -----------
Total current assets .............................. 2,806,190 2,699,089
Property and equipment, net ....................................... 1,110,011 1,119,306
Goodwill, net ..................................................... 249,560 219,971
Other assets ...................................................... 165,882 157,968
----------- -----------
Total Assets ...................................... $ 4,331,643 $ 4,196,334
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 1,060,968 $ 1,136,994
Accrued expenses and other liabilities ........................ 612,999 580,966
Income taxes payable .......................................... 109,026 37,118
Current maturities of long-term debt .......................... 318,521 153,259
----------- -----------
Total current liabilities ........................ 2,101,514 1,908,337
Deferred income taxes and other credits ........................... 64,139 88,247
Long-term debt, net of current maturities ......................... 315,331 374,061
Zero coupon, convertible subordinated notes ....................... 2,221 224,438
Commitments and contingencies
Stockholders' equity:
Common stock - authorized 800,000,000 shares of
$.01 par value; issued 385,538,340 in 2001 and
378,688,359 in 2000 ....................................... 3,855 3,787
Additional paid-in capital .................................... 1,007,088 939,214
Unamortized value of long-term incentive stock grant .......... (2,578) (2,793)
Accumulated other comprehensive loss .......................... (71,273) (53,490)
Retained earnings.............................................. 1,717,734 1,516,691
Treasury stock, at cost - 82,443,170 shares in 2001
and 82,190,548 shares in 2000 .............................. (806,388) (802,158)
----------- -----------
Total stockholders' equity ........................ 1,848,438 1,601,251
----------- -----------
Total liabilities and stockholders' equity $ 4,331,643 $ 4,196,334
=========== ===========
The accompanying notes are an integral part of these statements.
21
OFFICE DEPOT, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
2001 2000 1999
------------ ------------ ------------
Sales ....................................... $ 11,154,081 $ 11,569,696 $ 10,272,060
Cost of goods sold and occupancy costs 7,983,973 8,479,437 7,450,575
------------ ------------ ------------
Gross profit ............................ 3,170,108 3,090,259 2,821,485
Store and warehouse operating
and selling expenses .................... 2,343,394 2,409,478 2,023,055
General and administrative expenses ......... 451,722 453,784 328,108
Facility closure costs ...................... 8,436 110,038 40,425
Other operating expenses .................... 12,125 6,733 16,524
------------ ------------ ------------
Operating profit ........................ 354,431 110,226 413,373
Other income (expense):
Interest income ......................... 13,058 11,502 30,176
Interest expense ........................ (44,302) (33,901) (26,148)
Miscellaneous income (expense), net...... (9,057) 4,632 (3,514)
------------ ------------ ------------
Earnings before income taxes ................ 314,130 92,459 413,887
Income taxes ................................ 113,087 43,127 156,249
------------ ------------ ------------
Net earnings ................................ $ 201,043 $ 49,332 $ 257,638
============ ============ ============
Earnings per share:
Basic ................................. $ .67 $ .16 $ .71
Diluted ............................... .66 .16 .69
The accompanying notes are an integral part of these statements.
22
OFFICE DEPOT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
Unamortized Accumu-
value lated
of long- other
term compre- Compre-
Common Common Additional incentive hensive hensive
stock stock paid-in stock Income Income Retained Treasury
shares amount capital grant (loss) (loss) earnings stock
----------- ------ ---------- ----------- -------- -------- ---------- ---------
Balance at December 6, 1998 373,817,704 $3,738 $ 838,122 $(2,874) $(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 (3,245,170) (32) (1,718) 1,750
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(R)
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) 15,730 1,467,359 (501,361)
Comprehensive income:
Net earnings $ 49,332 49,332
Foreign currency
translation adjustment (7,093) (7,093)
Realized gain on investment
securities, net of tax (62,127) (62,127)
--------
Comprehensive income (loss) $(19,888)
========
Acquisition of treasury stock (300,797)
Grant of long-term incentive
stock 25,000 199 (199)
Cancellation of long-term
incentive stock (50,000) (819) 600
Exercise of stock options
(including income tax
benefits) 424,809 4 (1,984)
Issuance of stock under
employee stock purchase
plans 1,372,566 14 9,713
Matching contributions
under 401(k) and
deferred compensation
plans 703,545 7 5,810
Amortization of long-term
incentive stock grant 871
Balance at December 30, 2000 378,688,359 3,787 939,214 (2,793) (53,490) 1,516,691 (802,158)
Comprehensive income:
Net earnings $201,043 201,043
Foreign currency translation
adjustment (17,783) (17,783)
--------
Comprehensive income (loss) $183,260
========
Acquisition of treasury
stock (4,254)
Grant of long-term
incentive stock 80,000 1 764
Exercise of stock options
(including income
tax benefits) 5,604,810 55 56,430
Issuance of stock under
employee stock purchase
plans 751,400 8 6,712
Matching contributions
under 401(k) and
deferred compensation
plans 413,771 4 3,957
Direct stock purchase plans 11 24
Amortization of long-term
incentive stock grant 215
Balance at December 29, 2001 385,538,340 $3,855 $1,007,088 $(2,578) $(71,273) $1,717,734 $(806,388)
=========== ====== ========== ======= ======== ========== =========
The accompanying notes are an integral part of these statements.
23
OFFICE DEPOT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
2001 2000 1999
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings .......................................................... $ 201,043 $ 49,332 $ 257,638
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization .................................... 199,434 205,710 171,083
Provision for losses on inventories and receivables .............. 109,560 121,226 145,996
Net (earnings) on equity method investments ...................... (10,892) (9,436) (2,041)
Accreted interest on zero coupon, convertible subordinated notes . 11,308 19,203 19,534
Employee stock benefit plans ..................................... 5,001 6,469 5,905
Deferred income tax expense (benefit) ............................ 196 (81,814) (430)
Net loss (gain) on investment securities ......................... 14,100 (12,414) --
(Gain) loss on disposal of property and equipment ................ (5,275) 10,585 9,882
Write-down of impaired assets .................................... 43,623 114,343 13,965
Changes in assets and liabilities:
Decrease (increase) in receivables .......................... 93,849 (85,327) (152,523)
Decrease (increase) in merchandise inventories .............. 81,651 (66,348) (284,489)
Net decrease (increase) in prepaid expenses and other assets 13,156 (21,561) (24,862)
Net (decrease) increase in accounts payable, accrued expenses
and deferred .............................................. (9,588) 66,514 209,791
--------- --------- ---------
Total adjustments ..................................................... 546,123 267,150 111,811
--------- --------- ---------
Net cash provided by operating activities .................................. 747,166 316,482 369,449
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions .......................................................... (45,604) -- --
Purchases of investment securities .................................... -- (30,112) (154,364)
Proceeds from maturities or sales of investment securities ............ -- 54,006 114,141
Investments in unconsolidated joint ventures .......................... -- -- (1,606)
Purchase of remaining ownership interest in joint ventures ............ -- -- (21,629)
Capital expenditures .................................................. (207,287) (267,728) (392,305)
Proceeds from sale of property and equipment .......................... 20,947 4,469 7,922
--------- --------- ---------
Net cash used in investing activities ...................................... (231,944) (239,365) (447,841)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and sale of stock under
employee stock purchase plans .................................... 52,962 12,388 59,082
Repurchase of common stock for treasury ............................... (4,193) (300,797) (501,006)
Proceeds from issuance of long-term debt .............................. 266,286 430,522 42,841
Payments on long- and short-term borrowings ........................... (400,458) (27,015) (6,766)
Repurchase of zero coupon, convertible subordinated notes ............. -- (249,191) --
--------- --------- ---------
Net cash used in financing activities ...................................... (85,403) (134,093) (405,849)
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents ............... (17,891) (10,326) (1,516)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents ....................... 411,928 (67,302) (485,757)
Cash and cash equivalents at beginning of period ........................... 151,482 218,784 704,541
--------- --------- ---------
Cash and cash equivalents at end of period ................................. $ 563,410 $ 151,482 $ 218,784
========= ========= =========
The accompanying notes are an integral part of these statements.
24
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Office Depot, Inc. (the "Company") is the world's largest
supplier of office products and services, operating in 18 countries under two
product brands - Office Depot(R) and Viking Office Products(R). Products and
services are offered through wholly-owned retail stores, contract
business-to-business sales relationships, commercial catalog business and
multiple Web sites providing a wide-range of office products, computers and
technical support functions.
BASIS OF PRESENTATION: The consolidated financial statements of Office Depot,
Inc. and its subsidiaries have been prepared in accordance with accounting
principles generally accepted in the United States of America. All intercompany
transactions have been eliminated in consolidation. Non-controlling investments
in joint ventures selling office products and services in Mexico and Israel are
accounted for using the equity method. The Company's share of joint ventures'
operations is included in the Consolidated Statements of Earnings in
miscellaneous income (expense), net.
Certain prior year amounts have been reclassified to conform to current year
presentation.
FISCAL PERIODS: Fiscal years are based on a 52- or 53-week period ending on the
last Saturday in December. The 2000 financial statements consist of 53 weeks;
all other periods presented consist of 52 weeks.
ESTIMATES AND ASSUMPTIONS: Preparation of these financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
amounts reported in the financial statements and related notes. Actual results
may differ from those estimates.
FOREIGN CURRENCY TRANSLATION: Assets and liabilities of international operations
are translated into U.S. dollars using the exchange rate on the balance sheet
date. Revenues and expenses are translated at average monthly exchange rates.
Translation adjustments resulting from this process are recorded in
stockholders' equity as a component of other comprehensive income (loss).
CASH EQUIVALENTS: Highly liquid securities with maturities of three months or
less are classified as cash equivalents.
RECEIVABLES: Trade receivables totaled $491.3 million and $547.4 million at
December 29, 2001 and December 30, 2000, respectively. An allowance for doubtful
accounts has been recorded to reduce receivables to an amount expected to be
collectible from customers. The allowance recorded in 2001 and 2000 was
approximately $32.7 million and $34.5 million, respectively. Receivables
generated through a private label credit card program are transferred to
financial services companies with recourse to Office Depot. The outstanding
amount transferred at December 29, 2001 was $252.0 million.
The Company's exposure to credit risk associated with trade receivables is
limited by having a large customer base that extends across many different
industries and geographic regions. However, the Company's receivables may be
adversely affected by an economic slowdown in the U.S. or internationally.
Other receivables, totaling $290.2 million and $348.9 million as of December 29,
2001 and December 30, 2000, respectively, consist primarily of amounts due from
vendors under purchase rebate, cooperative advertising and various other
marketing programs. Amounts expected to be received from vendors relating to
purchases of merchandise inventories are recognized as a reduction of cost of
goods sold as the merchandise is sold. Amounts relating to cooperative
advertising and marketing programs are recognized as a reduction of advertising
expense in the period that the related expenses are incurred.
MERCHANDISE INVENTORIES: Inventories are stated at the lower of cost or market
value. The weighted average method is used to determine the cost of over 90% of
inventories and the first-in-first-out (FIFO) method for the remainder of our
inventories, primarily in our International Division.
INCOME TAXES: Income tax expense is recognized at applicable U.S. or
International tax rates. Certain revenue and expense items may be recognized in
one period for financial statement purposes and a different period's income tax
return. The tax effects of such differences are reported as deferred income
taxes.
Essentially all earnings of foreign subsidiaries are expected to be reinvested
in overseas expansion. Accordingly, no provision has been made for incremental
U.S. taxes on undistributed earnings considered permanently invested. Cumulative
undistributed earnings of our foreign subsidiaries for which no Federal income
taxes have been provided was $582.0 million and $440.5 million as of December
29, 2001 and December 30, 2000, respectively.
25
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT: Property and equipment additions are recorded at cost.
Depreciation and amortization is recognized over their estimated useful lives
using the straight-line method. The useful lives of depreciable assets is
estimated to be 15-30 years for buildings and 3-10 years for furniture, fixtures
and equipment. Leasehold improvements are amortized over the shorter of the
terms of the underlying leases or the estimated useful lives of the
improvements.
INVESTMENTS: Investments in certain Internet-based companies and funds are
considered available for sale and, accordingly, are carried at estimated fair
value. Changes in fair value after initial investment are included as a separate
component of stockholders' equity, net of applicable taxes. Other than temporary
declines in the value of these investments are recognized in earnings in the
period the impairment is determined. At December 29, 2001 and December 30, 2000,
the portfolio value was $15.2 million and $29.9 million, respectively. The
decline in value resulted from impairments recorded during 2001.
GOODWILL: Goodwill represents the excess of the purchase price and related costs
over the value assigned to net tangible and identifiable intangible assets of
businesses acquired and accounted for under the purchase method. As the result
of a new accounting rule that becomes effective in 2002, goodwill will no longer
be amortized in the Statement of Earnings, but will be tested annually for
impairment (see NEW ACCOUNTING STANDARDS below). For each year through 2001,
goodwill was amortized on a straight-line basis, generally over 40 years. The
accumulated amortization of goodwill was $68.3 million and $63.2 million as of
December 29, 2001 and December 30, 2000, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS: Long-lived assets are reviewed for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. Impairment is assessed at
the location level, considering the estimated undiscounted cash flows over the
asset's remaining life. If estimated cash flows are insufficient to recover the
investment, an impairment loss is recognized based on the fair value of the
asset less any costs of disposition. An impairment loss of $19.3 million was
recognized in 2001 relating to certain under-performing retail stores.
Impairment charges of $63.0 million were also recognized in 2000.
FACILITY CLOSURE COSTS: The Company regularly reviews store performance against
expectations and closes stores not meeting investment standards. Costs
associated with closures resulting from such on-going performance reviews,
principally lease cancellation costs, are accrued when the decision to close is
made and, in 2001, $5.7 million, net was included in store and warehouse
operating and selling expenses for closures and asset dispositions.
As part of a comprehensive business review conducted in 2000, a commitment to
close 70 stores was made. A charge of $110.0 million related to those closures
was reported on a separate line in the Consolidated Statements of Earnings,
because of its significance. This estimate was increased in 2001 by $8.4
million, reflecting an increase in estimated lease termination costs resulting
from a softening in the market for real estate subleases. An accelerated store
closure program in 1999 resulted in a charge of $40.4 million and is reported in
the Consolidated Statements of Earnings similar to the 2000 closures.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The estimated fair values of financial
instruments recognized in the Consolidated Balance Sheets or disclosed within
these Notes to our Consolidated Financial Statements have been determined using
available market information, information from unrelated third party financial
institutions and appropriate valuation methodologies. However, considerable
judgment is required in interpreting market data to develop estimates of fair
value. Accordingly, the estimates presented are not necessarily indicative of
the amounts that could be realized in a current market exchange.
SHORT-TERM ASSETS AND LIABILITIES: The fair values of cash and cash equivalents,
receivables and accounts payable approximate their carrying values because of
their short-term nature.
NOTES PAYABLE: The fair values of the zero coupon, convertible subordinated
notes and senior subordinated notes were determined based on quoted market
prices.
INTEREST RATE SWAPS AND FOREIGN CURRENCY CONTRACTS: The fair values of our
interest rate swaps and foreign currency contracts are the amounts receivable or
payable to terminate the agreements at the reporting date, taking into account
current interest and exchange rates. These amounts were provided by an unrelated
third party financial institution and were immaterial at year end 2001 and 2000.
26
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
There were no significant differences as of December 29, 2001 and December 30,
2000 between the carrying values and fair values of the financial instruments
except as disclosed below:
2001 2000
---------------------- ----------------------
Carrying Fair Carrying Fair
(Dollars in Thousands) Value Value Value Value
-------- -------- -------- --------
Zero coupon, convertible subordinated notes ..... $235,747 $258,794 $224,438 $195,453
Senior subordinated notes ....................... 245,360 271,250 -- --
Long-term investments for which it is practicable
to estimate fair value - warrants(1) ........ -- -- -- 14,913
(1) We own 944,446 warrants to purchase shares of PurchasePro.com. Because
the warrants have not been registered under the rules of the Securities
Act of 1933, they are not publicly traded on a market exchange. In
2000, we determined the fair value of these warrants using an option
model with the assistance of our investment banker. At December 29,
2001, the fair value of the warrants was minimal.
REVENUE RECOGNITION: Revenue is recorded at the time of shipment for delivery
and catalog sales, and at the point of sale for essentially all retail store
transactions. When revenue is recorded, an allowance for sales returns is
estimated based on past experience. Revenue from sales of extended warranty
service plans is either recognized at the point of sale or over the warranty
period, depending on various states' laws determination of legal obligor status.
All performance obligations and risk of loss associated with such contracts are
transferred to an unrelated third party administrator at the time the contracts
are sold. Costs associated with these contracts are recognized in the same
period as the related revenue.
SHIPPING AND HANDLING FEES AND COSTS: Income generated from shipping and
handling fees is classified as revenues for all periods presented. The costs
related to shipping and handling are presented as a component of store and
warehouse operating and selling expenses. These costs were $748.6 million in
2001, $756.6 million in 2000 and $594.2 million in 1999.
ADVERTISING: Advertising costs are either charged to expense when incurred or,
in the case of direct marketing advertising, capitalized and amortized in
proportion to the related revenues. We participate in cooperative advertising
programs with our vendors in which they reimburse us for a portion of our
advertising costs. Advertising expense, net of cooperative advertising
allowances, amounted to $317.0 million in 2001, $295.8 million in 2000 and
$285.3 million in 1999.
PRE-OPENING EXPENSES: Pre-opening expenses related to opening new stores and
warehouses or relocating existing stores and warehouses are expensed as incurred
and included in other operating expenses.
SELF-INSURANCE: Office Depot is primarily self-insured for workers'
compensation, auto and general liability and employee medical insurance
programs. Self-insurance liabilities are based on claims filed and estimates of
claims incurred but not reported. These liabilities are not discounted.
COMPREHENSIVE INCOME (LOSS): Comprehensive income (loss) represents the change
in stockholders' equity from transactions and other events and circumstances
arising from non-stockholder sources. Comprehensive income (loss) consists of
net earnings, foreign currency translation adjustments and realized or
unrealized gains (losses) on investment securities that are available for sale,
net of applicable income taxes.
DERIVATIVE FINANCIAL INSTRUMENTS: Certain derivative financial instruments may
be used to hedge the exposure to foreign currency exchange rate and interest
rate risks, subject to established risk management policies. Such approved
financial instruments include swaps, options, caps, forwards and futures. Use of
derivative financial instruments for trading or speculative purposes is
prohibited by Company policies.
NEW ACCOUNTING STANDARDS: In July 2001, the Financial Accounting Standards Board
("FASB") issued Statement No. 141, ACCOUNTING FOR BUSINESS COMBINATIONS, and
Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. These Statements modify
accounting for business combinations after June 30, 2001 and will affect the
Company's treatment of goodwill and other intangible assets at the start of
fiscal year 2002. The Statements require that goodwill existing at the date of
adoption be reviewed for possible impairment and that impairment tests be
periodically repeated, with impaired assets written-down to fair value. The
initial test of goodwill must be completed within six months of adoption, or by
June 2002 for Office Depot, with a completion of testing by the end of 2002.
Additionally, existing goodwill and intangible assets must be assessed and
classified consistent with the Statements' criteria.
27
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangible assets with estimated useful lives will continue to be amortized over
those periods. Amortization of goodwill and intangible assets with indeterminate
lives will cease. We have not yet completed the initial test of existing
goodwill and, accordingly, cannot estimate the full impact of these rules.
However, goodwill amortization, which totaled $7.0 million for 2001, will no
longer be recorded.
In July 2001, the FASB issued Statement No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS. This Statement requires capitalizing any retirement costs as part
of the total cost of the related long-lived asset and subsequently allocating
the total expense to future periods using a systematic and rational method.
Adoption of this Statement is required for Office Depot with the beginning of
fiscal year 2003. We have not yet completed our evaluation of the impact of
adopting this Statement.
In October 2001, the FASB issued Statement No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. This Statement supersedes Statement
No. 121 but retains many of its fundamental provisions. Additionally, this
Statement expands the scope of discontinued operations to include more disposal
transactions. The provisions of this Statement are effective for Office Depot
with the beginning of fiscal year 2002. We do not anticipate a significant
impact to the Company's results of operations from adoption of this Statement.
NOTE B - 2000 COMPREHENSIVE BUSINESS REVIEW AND OTHER
During the second half of 2000, following a change in senior management, Company
personnel performed a comprehensive review of the business. As a result of this
review, a significant number of facilities were closed, assets were written down
and employees were severed. At the same time, initiatives were launched to
enhance the shoppers' experience and improve efficiency. Essentially all actions
resulting from the business review were put in place during the last part of
2000 or early 2001. Additionally in 2000, costs were recorded relating to
executive severance arrangements and gains were realized from the sale of
certain Internet investments. The primary elements of the net charge of $260.6
million relating to the business review and other significant charges and
credits recorded in 2000, are summarized below:
(Dollars in millions)
Line item presentation Amount Nature of charge or credit
- ---------------------- ------ --------------------------
Gross profit $ 48.9 Inventory adjustment of $38.4 million for write-down to net
realizable value and liquidation from closed stores, and $10.5
million, net, to establish a reserve for sales returns and
allowances.
Operating and selling expenses 64.7 Impairment of assets in closed stores of $63.0 million and $1.7
million reductions in contract sales force.
General and administrative expenses 45.1 Severance costs of $33.9 million for changes in senior
management and $11.2 million to write-off corporate assets.
Facility closure costs 110.0 Estimated costs for closing 70 under-performing stores and four
inefficient warehouses. Included in the charge is $75.2 million for
net lease obligations, $21.7 million for asset write-offs, $2.8
million for severance and various other exit costs of $10.3 million
for items such as leased equipment, labor and facility clean up.
Other operating expenses (6.8) Merger and restructuring net credit from completed activities and
changes in estimates.
Miscellaneous (income) expense, net (1.3) A $57.9 million gain on the sale of certain Internet investments,
offset by a $45.5 million charge for an other than temporary
decline in value of other Internet investments and $11.1 million
charge relating to goodwill impairment.
-------
Total charges, net $ 260.6
=======
The accrual for lease termination costs identified above was based on the future
commitments under contract, adjusted for anticipated sublease and termination
benefits. During 2001, an additional net $8.4 million was recorded to reflect
lower anticipated recoveries resulting from a softening in the market for
sublease space. Also in 2001, we recognized $15.9 million of charges from
settlement of certain legal claims and amortization of an existing retention
agreement.
28
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE B - 2000 COMPREHENSIVE BUSINESS REVIEW AND OTHER (CONTINUED)
In 1999 we increased our provision for slow-moving and obsolete inventory in our
warehouses and stores by $56.1 million and recorded a $15.8 million provision
for extended warranty service plans.
NOTE C - MERGER AND RESTRUCTURING
In 1998 Office Depot merged with Viking Office Products and in 1999 the Company
acquired full ownership interests in two previous joint ventures. In connection
with each of these combinations, plans were developed to integrate operations,
eliminate redundancies and streamline processes. The integration plans relating
to the Viking merger included opening certain domestic Customer Service Centers
("CSCs") and closing others, as well as the installation of new systems in each
surviving facility. After evaluating the results of integrating two facilities,
the plans were simplified. In 1999, planned net closures were reduced and $28.6
million of previously accrued integration costs were reversed. In 2000, under
the direction of a new management team, the integration plans were adjusted, and
the Viking-related merger costs were reduced by a net $6.3 million to reflect
fewer closures and to recognize added personnel retention and termination costs.
Separate integration plans were developed relating to the acquisition of
additional joint venture interests in France and Japan. Approximately $23.5
million was accrued in 1999 relating to the integration and restructuring of
these operations, primarily related to personnel retention and severance,
facility closures and related lease termination costs. Of this amount, $0.7
million was reversed in 2000 as portions of the restructuring were completed.
As a result of the focus on continued growth of the core business and on
expanding international operations, the Company decided in 1998 to close its
photocopy stores and certain furniture-related retail operations. As actual
costs relating to the closure process were incurred, and to adjust estimated
lease costs, approximately $2.0 million of accrued costs were reversed in 1999
and an additional $0.2 million recorded in 2000.
At year-end 2001 and 2000, approximately $4.9 and $3.9 million, respectively,
remained accrued for merger and restructuring costs, primarily relating to
residual lease termination costs, the unamortized portion of an employee
retention agreement and other identified commitments. Charges recorded in 2001
primarily relate to additional lease accruals from a softening in the market for
real estate subleases and for employee retention agreement amortization. Amounts
expensed for asset write-offs are recorded as a reduction of fixed assets; all
other amounts are recorded as accrued expenses. The activity in the liability
accounts by cost category is as follows:
Beginning New Cash Other Ending
(Dollars in thousands) Balance Charges Payments Adjustments Balance
--------- -------- -------- ----------- --------
2001
Accrued direct merger costs ... $ -- $ -- $ -- $ -- $ --
Accrued other facility exit costs 1,187 3,134 (1,714) (1,321) 1,286
Accrued personnel retention
and termination costs ...... 2,633 1,267 (1,383) 1,001 3,618
-------- -------- -------- -------- --------
Total accrued costs ........ $ 3,920 $ 4,401 $ (3,097) $ (320) $ 4,904
======== ======== ======== ======== ========
2000
Accrued direct merger costs ... $ 1,639 $ -- $ (86) $ (1,553) $ --
Accrued other facility exit costs 7,764 1,348 (2,835) (5,090) 1,187
Accrued personnel retention and
termination costs .......... 11,865 4,798 (11,450) (2,480) 2,733
-------- -------- -------- -------- --------
Total accrued costs ........ $ 21,268 $ 6,146 $(14,371) $ (9,123) $ 3,920
======== ======== ======== ======== ========
The other adjustments column represents changes to original estimates, plan
modifications and balance true-ups.
29
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consisted of:
December 29, December 30,
(Dollars in thousands) 2001 2000
------------ -----------
Land .................................... $ 89,455 $ 89,458
Buildings ............................... 245,628 248,297
Leasehold improvements .................. 608,738 609,701
Furniture, fixtures and equipment........ 967,953 937,050
----------- -----------
1,911,774 1,884,506
Less accumulated depreciation ........... (801,763) (765,200)
----------- -----------
$ 1,110,011 $ 1,119,306
=========== ===========
The above table of property and equipment includes assets held under capital
leases as follows:
December 29, December 30,
(Dollars in thousands) 2001 2000
------------ -----------
Buildings................................ $ 55,966 $ 53,397
Furniture, fixtures and equipment........ 37,731 41,909
---------- ----------
93,697 95,306
Less accumulated depreciation... (30,104) (26,193)
---------- ----------
$ 63,593 $ 69,113
========== ==========
NOTE E -DEBT
The debt components consisted of the following:
December 29, December 30,
(Dollars in thousands) 2001 2000
------------ ------------
Current maturities of long-term debt:
Capital lease obligations ................... $ 10,486 $ 7,259
Domestic 364-day credit facility borrowings . -- 146,000
Zero coupon, convertible subordinated notes . 233,526 --
Yen facility borrowings ..................... 74,509 --
-------- --------
$318,521 $153,259
======== ========
Long-term debt, net of current maturities:
Domestic five-year credit facility borrowings $ -- $243,587
Yen facility borrowings ..................... -- 63,981
Senior subordinated notes ................... 245,360 --
Capital lease obligations ................... 69,971 66,493
-------- --------
$315,331 $374,061
======== ========
Convertible debt, net of current maturities:
Zero coupon, convertible subordinated notes . $ 2,221 $224,438
======== ========
</Table>
30
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE E - DEBT (CONTINUED)
The Company's 364-day term domestic credit agreement provides up to $255.0
million of working capital availability through May 2002. While no amounts were
outstanding under this agreement, the borrowing rate at December 29, 2001 was
0.95% over the London Interbank Offered Rate ("LIBOR"). The 364-day credit
agreement existing at December 30, 2000 provided up to $300.0 million of credit.
Of that amount, $146.0 was outstanding at December 30, 2000, with an average
effective interest rate of 7.996%.
The Company also has a long-term domestic credit facility that provides working
capital and letters of credit capacity totaling $300.0 million through February
2003. There were no outstanding borrowings under this credit facility at
December 29, 2001 compared with $243.6 million at December 30, 2000. Letters of
credit utilized under this agreement totaled $36.8 million and $49.5 million for
the fiscal years ending 2001 and 2000, respectively. The borrowing rates under
this agreement at December 29, 2001 and December 30, 2000 were 0.70% over LIBOR
and 0.475% over LIBOR, respectively. The average effective interest rate on
borrowings under this facility for the prior year was 7.001%.
In July 2001, the Company issued $250 million of seven year, non-callable,
senior subordinated notes due on July 15, 2008. The notes have a coupon interest
rate of 10.00%, payable semi-annually on January 15 and July 15. In August 2001,
the Company entered into LIBOR-based variable rate swap agreements with notional
amounts aggregating $250 million that qualify for shortcut hedge accounting. The
effective interest rate on this borrowing at December 29, 2001 including the
effect of the swap agreements, was 7.8% and will be reset every six months.
The Company has issued two series of zero coupon, convertible subordinated notes
(Liquid Yield Option Notes (LYONs(R))), one series in 1992 and one series in
1993. Each series is a zero coupon note that pays no current interest, but
increases in value to provide the holder with a constant yield to maturity. Each
LYON(R) is convertible into a specified amount of Office Depot common stock at
the option of the holder, is callable by the Company at the original issue price
plus accrued interest and is subordinated to all existing and future senior
indebtedness. Approximately 13.8 million shares of common stock have been
reserved for the possible conversion of these LYONs(R) issues.
The original proceeds of the 1992 LYONs(R) was $150.8 million. With a 5% yield,
these notes will increase to $316.3 million by maturity in December 2007. The
stock conversion rate on the 1992 LYONs(R) is 43.895 per note. These notes also
contain an option feature that allows each holder to put the security to the
Company on December 11, 2002 in return for payment of the issue price plus
accrued interest. The Company may pay the holder in cash, common stock or a
combination of the two. Because the holder's option on the 1992 LYONs(R) is
exercisable in the next 12 months, this series has been included in current
maturities of long-term debt at December 29, 2001.
The original proceeds of the 1993 LYONs(R) was $190.5 million. These notes
provide a 4% yield through maturity in November 2008 and a stock conversion rate
of 31.851 per note. In November 2000, a majority of the holders of the 1993
LYONs(R) required us to purchase the notes at original issue price plus accrued
interest. A total of $249.2 million was paid in connection with this repurchase.
Approximately $2.2 million of 1993 LYONs(R) remain outstanding at December 29,
2001.
The Company has a term loan and revolving credit agreements with several
Japanese banks (the "yen facilities") to provide financing for operating and
expansion activities in Japan. The yen facilities provide for maximum aggregate
borrowings of (Y)9.76 billion (the equivalent of $74.5 million at December 29,
2001) at an interest rate of 0.875% over the Tokyo Interbank Offered Rate
("TIBOR"). At December 29, 2001 there were outstanding yen borrowings equivalent
to $74.5 million under these yen facilities, which had an average effective
interest rate of 1.118%. The total amount outstanding is included in current
maturities of long-term debt because the facility expires in July 2002. The
Company has entered into a yen interest rate swap agreement with a U.S. dollar
notional equivalent of $18.6 million at December 29, 2001. The terms of the swap
specify that we pay an interest rate of 0.700% and receive TIBOR and will expire
in July 2002.
The Company is in compliance with all restrictive covenants included in the
above debt agreements.
31
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE E - DEBT (CONTINUED)
Under capital lease agreements, the Company is required to make certain monthly,
quarterly or annual lease payments through 2020. The aggregate minimum capital
lease payments for the next five years and beyond, with their present value as
of December 29, 2001, are as follows:
December 29,
(Dollars in thousands) 2001
------------
2002........................................................ $ 15,937
2003........................................................ 15,134
2004........................................................ 9,962
2005........................................................ 7,009
2006........................................................ 6,224
Thereafter.................................................. 68,675
--------
Total minimum lease payments................................ 122,941
Less amount representing interest at 5.00% to 10.27%........ 42,484
--------
Present value of net minimum lease payments................. 80,457
Less current portion........................................ 10,486
--------
Long-term portion........................................... $ 69,971
========
NOTE F - INCOME TAXES
Our income tax provision consisted of the following:
<Table>
<Caption>
(Dollars in thousands) 2001 2000 1999
--------- --------- ---------
Current provision:
Federal ..................... $ 66,074 $ 71,407 $ 114,800
State ....................... 12,904 22,616 15,561
Foreign ..................... 33,913 30,918 26,318
Deferred expense (benefit) ...... 196 (81,814) (430)
--------- --------- ---------
Total provision for income taxes $ 113,087 $ 43,127 $ 156,249
========= ========= =========
The tax-effected components of deferred income tax assets and liabilities
consisted of the following:
December 29, December 30,
(Dollars in thousands) 2001 2000
----------- -----------
Self-insurance accruals .......................... $ 28,020 $ 23,702
Inventory ........................................ 25,150 17,790
Vacation pay and other accrued compensation ...... 29,670 27,762
Reserve for bad debts ............................ 12,724 7,493
Reserve for facility closings .................... 56,151 67,563
Merger costs ..................................... 5,304 6,117
Unrealized loss on investments ................... 19,266 17,499
Foreign and state net operating loss carryforwards 88,006 91,037
Other items, net ................................. 23,451 27,343
--------- ---------
Gross deferred tax assets ..................... 287,742 286,306
Valuation allowance .............................. (72,605) (91,037)
--------- ---------
Deferred tax assets ........................... 215,137 195,269
--------- ---------
Basis difference in fixed assets ................. 71,880 51,797
Capitalized leases ............................... 5,573 5,757
Excess of tax over book amortization ............. 3,641 1,214
Other items, net ................................. 1,856 16,294
--------- ---------
Deferred tax liabilities ...................... 82,950 75,062
--------- =========
Net deferred tax assets .......................... $ 132,187 $ 120,207
========= =========
As of December 29, 2001, we had approximately $44 million of federal, $105
million of foreign and $642 million of state net operating loss carryforwards.
Of these carryforwards, approximately $28 million will expire in 2002, $12
million will carry over indefinitely, and the balance will expire between 2003
and 2021. The valuation allowance has been developed to reduce our deferred tax
asset to an amount that is more likely than not to be realized, and is based
upon the uncertainty of the realization of certain foreign and state deferred
tax assets relating to net operating loss carryforwards. The federal net
operating loss is subject to Internal Revenue Code Section 382 limitations, but
is expected to be substantially realized.
32
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE F - INCOME TAXES (CONTINUED)
The following is a reconciliation of income taxes at the Federal statutory rate
to the provision for income taxes:
(Dollars in thousands) 2001 2000 1999
--------- --------- ---------
Federal tax computed at the statutory rate ..... $ 109,945 $ 32,361 $ 144,862
State taxes, net of Federal benefit ............ 13,333 6,899 12,383
Nondeductible goodwill amortization ............ 1,834 1,744 1,964
Merger costs ................................... -- 969 2,920
Foreign income taxed at rates other than Federal (13,743) (667) (6,508)
Other items, net ............................... 1,718 1,821 628
--------- --------- ---------
Provision for income taxes ..................... $ 113,087 $ 43,127 $ 156,249
========= ========= =========
NOTE G - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES: Office Depot leases facilities and equipment under agreements
that expire in various years through 2021. Substantially all such leases contain
provisions for multiple renewal options. In addition to minimum rentals, there
are certain executory costs such as real estate taxes, insurance and common area
maintenance on most of our facility leases. Certain leases contain provisions
for additional rent to be paid if sales exceed a specified amount. The table
below shows future minimum lease payments due under non-cancelable leases as of
December 29, 2001. These minimum lease payments do not include facility leases
that were accrued as merger and restructuring costs or store closure and
relocation costs (See NOTES B and C).
(Dollars in thousands)
2002............................................ $ 400,021
2003............................................ 345,876
2004............................................ 299,922
2005............................................ 251,804
2006............................................ 217,219
Thereafter...................................... 1,075,627
-----------
2,590,469
Less sublease income............................ 59,526
-----------
$ 2,530,943
===========
The Company is in the process of opening new stores and CSCs in the ordinary
course of business, and leases signed subsequent to December 29, 2001 are not
included in the above described commitment amounts. Rent expense, including
equipment rental, was approximately $398.1 million, $393.5 million and $321.5
million in 2001, 2000 and 1999, respectively. Included in this rent expense was
approximately $0.7 million, $1.1 million, and $0.8 million of contingent rent,
otherwise known as percentage rent, in 2001, 2000, and 1999, respectively. Rent
expense was reduced by sublease income of approximately $3.0 million in 2001 and
2000, and $3.2 million in 1999.
33
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE G - COMMITMENTS AND CONTINGENCIES (CONTINUED)
GUARANTEE OF PRIVATE LABEL CREDIT CARD RECEIVABLES: Office Depot has private
label credit card programs that are managed by two financial services companies.
The Company acts as the guarantor of all loans between our customers and the
financial services companies. Maximum exposure to off-balance sheet credit risk
is represented by the outstanding balance of private label credit card
receivables, less reserves held by the financial services companies which are
funded by us. At December 29, 2001, maximum exposure totaled approximately
$252.0 million.
OTHER: Office Depot entered into an investment agreement with an Internet
company that may require Office Depot to fund an additional $2.5 million
investment.
We are involved in litigation arising in the normal course of business. In our
opinion, these matters will not materially affect our financial position or
results of operations.
NOTE H - EMPLOYEE BENEFIT PLANS
LONG-TERM EQUITY INCENTIVE PLAN
The Long-Term Equity Incentive Plan, which was approved effective October 1,
1997, provides for the grants of stock options and other incentive awards,
including restricted stock, to directors, officers and key employees. After the
merger with Viking was completed, their employee and director stock option plans
were terminated. When outstanding options issued under Viking's prior plans are
exercised, Office Depot common stock is issued.
As of December 29, 2001, there were 49,457,044 shares of common stock reserved
for issuance to directors, officers and key employees under the Long-Term Equity
Incentive Plan. Under this plan, stock options must be granted at an option
price that is greater than or equal to the market price of the stock on the date
of the grant. If an employee owns at least 10% of our outstanding common stock,
the option price must be at least 110% of the market price on the date of the
grant.
Options granted under this plan and options granted in July 1998 under Viking's
prior plans become exercisable from one to five years after the date of grant,
provided that the individual is continuously employed with the Company. The
vesting periods for all other options granted under Viking's prior plans were
accelerated, and the options became exercisable, as of the date of our merger
with Viking in August 1998. All options granted expire no more than ten years
from the date of grant.
Under this plan, 316,193 shares of restricted stock were issued at no cost to
the employees, 63,565 of which have been canceled. The fair market value of
these awards approximated $3.9 million at the date of the grants. Common stock
issued under this plan is restricted, with vesting periods of up to four years
from the date of grant. Compensation expense is recognized over the vesting
period.
Tax benefits are recorded based on an estimated stock options activity. Each
year, the prior year's estimated tax benefit is adjusted based on the actual
stock sold during the year. In 2000, this adjustment resulted in a reduction of
estimated 1999 tax benefit and completely offset our 2000 estimated tax benefit
(See NOTE K).
34
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE H - EMPLOYEE BENEFIT PLANS (CONTINUED)
LONG-TERM INCENTIVE STOCK PLAN
Viking had a Long-Term Incentive Stock Plan that, prior to the merger, allowed
Viking's management to award up to 2,400,000 restricted shares of common stock
to key Viking employees. Under this plan, 1,845,000 shares were issued at no
cost to employees, 1,200,000 of which have been canceled. Pursuant to the merger
agreement, shares issued under this plan were converted to Office Depot common
stock, and no additional shares may be issued under the plan. The fair market
value of these restricted stock awards approximated $10.0 million at the date of
the grants. Prior to the merger, the vesting period was 15 years. Because of the
plan's change in control provision, however, the employees now vest in their
stock ratably over the 15-year period. Compensation expense is recognized over
the vesting period.
EMPLOYEE STOCK PURCHASE PLAN
The Employee Stock Purchase Plan, which was approved effective July 1999,
replaces the prior plan and Viking's plan and permits eligible employees to
purchase our common stock at 85% of its fair market value. The maximum aggregate
number of shares eligible for purchase under this plan is 3,125,000.
OTHER STOCK-BASED COMPENSATION PLANS
There are two stock-based compensation plans that are effective in Australia and
the United Kingdom. These plans allow eligible employees to purchase up to
537,813 shares of common stock at 85% of its fair market value.
RETIREMENT SAVINGS PLANS
Office Depot has a 401(k) retirement savings plan that allows eligible employees
to contribute up to 18% of their salaries, commissions and bonuses, up to
$10,500 annually, to the plan on a pretax basis in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. Matching
contributions of common stock that are made into the plan are equivalent to 50%
of the first 3% of an employee's contributions. However, discretionary matching
common stock contributions in addition to the normal match may be made. The
Company also has a deferred compensation plan, which permits eligible employees,
who are restricted from making contributions to the 401(k) plan, to make
tax-deferred contributions of up to 18% of their salaries, commissions and
bonuses to the plan. Matching contributions to the deferred compensation plan
are similar to those under our 401(k) retirement savings plan described above.
During 2001, $3.4 million was recognized as compensation expense under the
programs.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES," and related Interpretations in accounting for
stock-based compensation plans. The compensation cost charged against income for
the Long-Term Equity Incentive Plan, Long-Term Incentive Stock Plan, Employee
Stock Purchase Plans and retirement savings plans approximated $9.4 million,
$11.2 million and $12.5 million in 2001, 2000 and 1999, respectively. No other
compensation costs have been recognized under our stock-based compensation
plans. Had compensation cost for awards under our stock-based compensation plans
been determined using the fair value method prescribed by SFAS No. 123,
"Accounting for Stock-Based Compensation," our net earnings and earnings per
share would have been reduced to the pro forma amounts presented below:
35
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE H - EMPLOYEE BENEFIT PLANS (CONTINUED)
(In thousands, except per share amounts) 2001 2000 1999
----------- ---------- -----------
Net earnings
As reported ................................ $ 201,043 $ 49,332 $ 257,638
Pro forma .................................. 165,068 11,253 226,424
Basic earnings per share
As reported ................................ $ .67 $ .16 $ .71
Pro forma .................................. .55 .04 .63
Diluted earnings per share
As reported ................................ $ .66 $ .16 $ .69
Pro forma .................................. .54 .04 .61
The fair value of each stock option granted is established on the date of the
grant using the Black-Scholes option pricing model with the following weighted
average assumptions for grants in 2001, 2000 and 1999:
o Expected volatility rates of 40% for 2001, 40% for 2000 and 35% for
1999
o Risk-free interest rates of 4.58% for 2001, 6.37% for 2000 and 5.84%
for 1999
o Expected lives of 4.9, 5.6 and 5.6 years for 2001, 2000 and 1999,
respectively
o A dividend yield of zero for all three years
A summary of the status of and changes in our stock option plans for the last
three years is presented below.
2001 2000 1999
--------------------------- ------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- -------- ----------- -------- ----------- ---------
Outstanding at beginning of year 36,406,229 $12.81 33,507,066 $15.31 31,369,122 $13.75
Granted ........................ 6,759,000 9.41 9,937,750 8.73 8,123,883 18.85
Canceled ....................... (2,642,428) 13.99 (6,608,072) 16.45 (1,325,988) 15.91
Exercised ...................... (5,522,280) 7.93 (430,515) 6.18 (4,659,951) 10.31
----------- ------ ----------- ------ ----------- ------
Outstanding at end of year ..... 35,000,521 $13.29 36,406,229 $12.81 33,507,066 $15.31
=========== ====== =========== ====== =========== ======
As of December 29, 2001, the weighted average fair values of options granted
during 2001, 2000 and 1999 were $3.92, $4.18, and $8.24, respectively.
The following table summarizes information about options outstanding at December
29, 2001.
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------- ---------------------------------
Weighted
Average Remaining Weighted Weighted
Range of Number Contractual Life Average Number Average
Exercise Prices Outstanding (In Years) Exercise Price Exercisable Exercise Price
-------------------- ----------- ----------------- -------------- ---------- --------------
$0.17 - $1.95 25,840 4.3 $0.55 25,840 $ 0.55
1.96 - 2.94 32,186 0.6 2.55 32,186 2.55
2.95 - 4.42 7,200 0.7 3.67 7,200 3.67
4.43 - 6.64 588,921 6.5 6.11 292,706 5.80
6.65 - 9.97 11,510,448 7.7 8.52 3,568,083 8.52
9.98 - 14.96 9,974,697 6.3 11.52 6,408,944 11.93
14.97 - 22.45 10,604,500 6.1 18.30 9,173,244 18.52
22.46 - 25.00 2,256,729 6.6 24.19 1,384,143 24.17
----- ----- ---------- --- ------- ---------- ------
$0.17 - $ 25.00 35,000,521 6.7 $ 13.29 20,892,346 $14.94
===== ======= ========== === ======= ========== ======
36
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE I - CAPITAL STOCK
PREFERRED STOCK
As of December 29, 2001, there were 1,000,000 shares of $.01 par value preferred
stock authorized of which none are issued or outstanding.
STOCKHOLDER RIGHTS PLAN
Effective September 4, 1996, we adopted a Stockholder Rights Plan (the "Rights
Plan"). Under this Rights Plan, each of our stockholders is issued one right to
acquire one one-thousandth of a share of our Junior Participating Preferred
Stock, Series A at an exercise price of $63.33, subject to adjustment, for each
outstanding share of Office Depot common stock they own. These rights are only
exercisable if a single person or company were to acquire 20% or more of our
outstanding common stock or if we announced a tender or exchange offer that
would result in 20% or more of our common stock being acquired.
If we are acquired, each right, except those of the acquirer, can be exchanged
for shares of our common stock with a market value of twice the exercise price
of the right. In addition, if we become involved in a merger or other business
combination where (1) we are not the surviving company, (2) our common stock is
changed or exchanged, or (3) 50% or more of our assets or earning power is sold,
then each right, except those of the acquirer, and an amount equal to the
exercise price of the right can be exchanged for shares of our common stock with
a market value of twice the exercise price of the right.
We may redeem the rights for $0.01 per right at any time prior to an
acquisition.
TREASURY STOCK
In August 1999, the Board approved a $500 million stock repurchase program. This
program was completed by the end of 1999, with the purchase of 46.7 million
shares of our stock at a total cost of $500 million plus commissions. During
2000, the Board approved additional stock repurchases of up to $300 million.
This program was completed during 2000 with the repurchase of 35.4 million
shares of stock. In 2001, the Board approved stock repurchases of up to $50
million a year until cancelled by the Board. During 2001, approximately 252,000
shares were repurchased at a total cost of $4.2 million plus commissions.
NOTE J - EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of
shares outstanding during each period. Diluted earnings per share further
assumes that the zero coupon, convertible subordinated notes, if dilutive, are
converted as of the beginning of the period and that, under the treasury stock
method, dilutive stock options are exercised. Net earnings under this assumption
have been adjusted for interest on the zero coupon, convertible subordinated
notes, net of the related income tax effect.
37
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE J - EARNINGS PER SHARE (CONTINUED)
The information required to compute basic and diluted net earnings per share is
as follows:
(In Thousands) 2001 2000 1999
-------- -------- --------
Basic:
Weighted average number of common shares outstanding ..... 298,054 309,301 361,499
======== ======== ========
Diluted:
Net earnings ............................................. $201,043 $ 49,332 $257,638
Interest expense related to convertible notes, net of tax 7,238 -- 12,068
-------- -------- --------
Adjusted net earnings..................................... $208,281 $ 49,332 $269,706
======== ======== ========
Weighted average number of common shares outstanding ..... 298,054 309,301 361,499
Shares issued upon assumed conversion of convertible notes 13,846 -- 24,744
Shares issued upon assumed exercise of stock options ..... 4,524 1,930 7,414
Shares used in computing diluted
-------- -------- --------
Net earnings per common shares ....................... 316,424 311,231 393,657
======== ======== ========
For 2000, the zero coupon convertible subordinated notes would have been
anti-dilutive, and therefore the shares (23.0 million) and related interest
expense ($12.1 million) were excluded from our calculation of diluted earnings
per share. Options to purchase 12.7 million shares of common stock were not
included in our computation of diluted earnings per share for 2001 because their
effect would also have been anti-dilutive.
NOTE K - SUPPLEMENTAL INFORMATION ON OPERATING, INVESTING AND FINANCING
ACTIVITIES
Additional supplemental information related to the Consolidated Statements of
Cash Flows is as follows:
(Dollars in thousands) 2001 2000 1999
--------- --------- ---------
Cash paid for:
Interest ................................................ $ 17,802 $ 9,099 $ 6,472
Taxes ................................................... 15,008 132,743 118,157
Supplemental non-cash information:
Assets acquired under capital leases ........................ 8,256 12,569 37,881
Additional paid-in capital related to tax
benefit on stock options exercised (See NOTE H) .......... 10,218 (4,640) 22,987
Unrealized gain on investment securities, net of income taxes -- -- 62,128
38
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE L - SEGMENT INFORMATION
Office Depot operates in three reportable segments: North American Retail
Division, Business Services Group ("BSG"), and International Division. Each of
these segments is managed separately primarily because it serves different
customer groups. The accounting policies of our segments are the same as those
described in the summary of significant accounting policies (see Note A). Senior
management evaluates the performance of each business segment based on operating
income, which is defined as income before income taxes, interest income and
expense, goodwill amortization, merger and restructuring costs, facility closure
costs, general and administrative expenses, and pre-opening expenses.
The following is a summary of our significant accounts and balances by segment,
reconciled to our consolidated totals.
North American International Eliminations Consolidated
(Dollars in Thousands) Retail Division BSG Division and Other* Total
--------------- ---------- -------------- ------------ ------------
Sales 2001 $ 5,842,648 $3,763,006 $1,552,072 $ (3,645) $11,154,081
2000 6,487,522 3,618,768 1,467,357 (3,951) 11,569,696
1999 5,893,385 3,057,187 1,325,372 (3,884) 10,272,060
Earnings Before Income Taxes 2001 $ 300,082 $ 285,101 $ 227,336 $(498,389) $ 314,130
2000 239,284 191,996 173,438 (512,259) 92,459
1999 399,120 256,045 136,488 (377,766) 413,887
Capital Expenditures 2001 $ 76,337 $ 44,087 $ 56,740 $ 30,123 $ 207,287
2000 106,646 55,690 32,994 72,398 267,728
1999 195,048 71,810 35,766 89,681 392,305
Depreciation and Amortization 2001 $ 88,227 $ 45,699 $ 16,866 $ 48,642 $ 199,434
2000 92,276 42,588 18,797 52,049 205,710
1999 76,982 35,093 15,619 43,389 171,083
Provision for Losses on Accounts 2001 $ 35,739 $ 53,712 $ 20,109 -- $ 109,560
Receivable and Inventory 2000 30,121 57,628 33,477 -- 121,226
1999 60,003 65,053 20,940 -- 145,996
Equity in Earnings of 2001 -- -- $ 10,892 -- $ 10,892
Joint Ventures 2000 -- -- 9,436 -- 9,436
1999 -- -- 2,041 -- 2,041
Assets 2001 $ 1,803,042 $1,198,355 $ 864,201 $ 466,045 $ 4,331,643
2000 2,184,976 1,105,936 736,229 169,193 4,196,334
39
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE L - SEGMENT INFORMATION (CONTINUED)
* Amounts included in `Eliminations and Other' consist of the following:
SALES consist of inter-segment sales, which are generally recorded at
the cost to the selling entity. EARNINGS BEFORE INCOME TAXES are
primarily associated with corporate activities and are detailed in the
following table:
(Dollars in thousands) 2001 2000 1999
--------- --------- --------
General and administrative expenses $ 451,722 $ 501,700 $ 381,611
Loss (gain) on investment securities 14,100 (12,414) --
Interest (income) expense, net ..... 31,199 22,399 (4,028)
Intersegment transactions .......... 711 257 183
Other, net ......................... 657 317 --
--------- --------- ---------
Total ....................... $ 498,389 $ 512,259 $ 377,766
========= ========= =========
CAPITAL EXPENDITURES, DEPRECIATION AND AMORTIZATION, and ASSETS included in
`Eliminations and Other' are also related primarily to our corporate activities.
We sell office products and services through either wholly-owned operations or
through joint ventures or licensing arrangements, in Australia, Austria,
Belgium, Canada, France, Germany, Hungary, Ireland, Israel, Italy, Japan,
Luxembourg, Mexico, The Netherlands, Poland, Thailand, the United Kingdom and
the United States. Also from 1993 through the fourth quarter of 2000, we had
operations in Columbia under a licensing agreement. 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 operations is as
follows (dollars in thousands):
Sales Assets
------------------------------------------------- -----------------------------
2001 2000 1999 2001 2000
----------- ----------- ----------- ----------- -----------
United States $ 9,452,453 $ 9,901,975 $ 8,743,428 $ 3,585,843 $ 3,391,678
International 1,701,628 1,667,721 1,528,632 745,800 804,656
----------- ----------- ----------- ----------- -----------
Total $11,154,081 $11,569,696 $10,272,060 $ 4,331,643 $ 4,196,334
=========== =========== =========== =========== ===========
NOTE M - QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
(In thousands, except per share amounts) Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
FISCAL YEAR ENDED DECEMBER 29, 2001
Net sales ........................... $ 3,017,914 $ 2,553,503 $ 2,782,493 $ 2,800,171
Gross profit(1) ..................... 806,851 738,570 808,491 816,196
Net earnings ........................ 56,329 41,974 62,460 40,280
Net earnings per common share:
Basic .......................... $ .19 $ .14 $ .21 $ .13
Diluted ........................ .19 .14 .20 .13
FISCAL YEAR ENDED DECEMBER 30, 2000
Net sales ........................... $ 3,065,657 $ 2,632,850 $ 2,822,991 $ 3,048,198
Gross profit(1) ..................... 837,576 751,550 735,151 765,983
Net earnings (loss) ................. 109,036 57,937 50,622 (168,263)
Net earnings (loss) per common share:
Basic .......................... $ .34 $ .18 $ .17 $ (.57)
Diluted(2) ..................... .32 .18 .16 (.57)
(1) Gross profit is net of occupancy costs.
(2) For the fourth quarter of 2000, the zero coupon, convertible
subordinated notes were anti-dilutive and, accordingly, were not
included in the diluted earnings per share computations. In addition,
for the fourth quarter of 2000, options to purchase common stock were
anti-dilutive and not included in the diluted earnings per share
computations.
40