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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One)

For the transition period from __________________ to __________________

Commission file number 1-10948

OFFICE DEPOT, INC.

(561) 438-4800

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   x   No   o

The registrant had 308,561,647 shares of common stock outstanding as of September 28, 2002.

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PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

OFFICE DEPOT, INC.

The accompanying notes are an integral part of these statements.

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OFFICE DEPOT, INC.

The accompanying notes are an integral part of these statements.

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OFFICE DEPOT, INC.

The accompanying notes are an integral part of these statements.

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OFFICE DEPOT, INC.

(Tabular amounts in thousands)

Note A – Basis of Presentation

Office Depot, Inc., including consolidated subsidiaries (the “Company”), is the world’s largest seller of office products and services. Fiscal years are based on a 52- or 53-week period ending on the last Saturday in December. The condensed consolidated balance sheet at December 29, 2001 has been derived from audited financial statements at that date. The condensed interim financial statements as of September 28, 2002 and for the 13- and 39-week periods ending September 28, 2002 (also referred to as “the third quarter of 2002” and “year-to-date 2002,” respectively) and September 29, 2001 (also referred to as “the third quarter of 2001” and “year-to-date 2001”) are unaudited. However, in our opinion, these financial statements reflect all adjustments (consisting only of normal, recurring items) necessary to provide a fair presentation of our financial position, results of operations and cash flows for the periods presented. Certain prior year amounts have been reclassified to conform to the current year’s presentation.

These interim results are not necessarily indicative of the results that should be expected for the full year. For a better understanding of the Company and its financial statements, we recommend reading these condensed interim financial statements in conjunction with the Company’s audited financial statements for the year ended December 29, 2001, which are included in our 2001 Annual Report on Form 10-K, filed on March 19, 2002.

Note B – Discontinued Operations

In August 2002, the Company announced its decision to sell its Australian operations. Accordingly, the Australian portion of the Company’s business is accounted for as a discontinued operation within the International segment disclosure and the consolidated financial statements. Prior periods presented have been restated to reflect this classification.

Australia’s revenues and pre-tax profit, respectively, were $20.6 million and $1.5 million for the third quarter and $61.4 million and $1.7 million year–to-date for 2002. The comparable amounts for 2001 were $19.2 million and $0.5 million for the third quarter and $54.2 million and $2.2 million year-to-date. Australia’s assets and liabilities have been classified as held for sale and are included in other current assets and other current liabilities within the accompanying Condensed Consolidated Balance Sheets.

The Company has engaged a third party to locate a buyer for the business and anticipates completing the transaction by the early part of 2003.

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Note C – Comprehensive Income

Comprehensive income represents all non-owner changes in stockholders’ equity and consists of the following:

Note D – Stock Repurchase

In 2001, the board of directors approved common stock repurchases of up to $50 million per year, subject to annual approval. During the third quarter of 2002, the Company repurchased 934,000 shares at a total cost of $12.5 million, including commissions. Year-to-date purchases during 2002 totaled 2,229,228 shares at a cost of $36.4 million, including commissions.

Note E – Long-Term Debt

On April 24, 2002, the Company replaced its 364-day credit agreement, domestic credit facility, and its yen facilities with a single credit facility through a syndicate of banks, financial institutions and other lenders. This new revolving credit facility (the “New Credit Facility”) provides for borrowings in the aggregate amount of $600 million, including up to $150 million for issuance of standby and trade letters of credit. The New Credit Facility is a 3-year, unsecured revolving credit facility maturing on April 24, 2005. The New Credit Facility has the availability for U.S. dollar borrowings up to the full amount of the facility, and for yen borrowings up to an equivalent of $100 million U.S. dollars. Borrowings will bear interest at a benchmark variable rate plus a spread determined at the time of usage. For U.S. dollar borrowings, interest will be based on the then-current London Interbank Offering Rate (LIBOR). For international borrowings, interest will be based on the then-current Eurocurrency rate. The Company can specify the benchmark rates for periods of one, two, three or six months. Based on the Company’s current credit ratings, all borrowings would include a spread of 0.925%. The covenants contained in the New Credit Facility are similar to those in the credit facilities existing as of December 29, 2001. As of September 28, 2002, the New Credit Facility had outstanding yen borrowings equivalent to $79.7 million, which had an average effective interest rate of 1.05%, and outstanding letters of credit totaling $43.5 million.

Based on the termination date of the credit agreement outstanding at December 29, 2001, yen facility borrowings were classified as current maturities of long-term debt in the Company’s Condensed Consolidated Balance Sheet. Under the New Credit Facility, outstanding yen borrowings at September 28, 2002 are classified as long-term debt, net of current maturities.

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In 1992 and 1993 the Company issued two series of zero coupon, convertible subordinated notes (Liquid Yield Options Notes (LYONs®)). The 1992 LYONs® had an original maturity of December 2007 and contained an option feature allowing each holder to put the security to the Company on December 11, 2002. Because of the holder’s option, the 1992 LYONs® were included in current maturities of long-term debt in the accompanying Condensed Consolidated Balance Sheet as of December 29, 2001.

In August 2002, the Company redeemed all of the 1992 LYONs® for $241 million, representing the original issue price plus accrued interest. In September 2002, the Company also exercised its option to redeem the remaining 1993 LYONs® for $2.3 million, representing the remaining original issue price plus accrued interest. As of September 28, 2002, there were no amounts outstanding for 1992 or 1993 LYONs® .

In August 2001, the Company entered into LIBOR-based variable rate swap agreements to convert the fixed interest rate on its $250 million seven year, non-callable, senior subordinated notes issued July 2001. In September 2002, the Company terminated these interest rate swap agreements and received proceeds totaling $20.4 million. The benefit associated with these proceeds is being amortized over the remaining term of the notes, lowering the effective interest rate on this borrowing to 8.7%.

Note F – Earnings Per Share (“EPS”)

The information required to compute basic and diluted EPS is as follows:

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Options to purchase approximately 19 million shares of common stock were not included in our computation of diluted earnings per share for the third quarter of 2002 because their weighted average effect would have been anti-dilutive.

Note G – Segment Information

The following is a summary of our significant accounts and balances by segment, reconciled to consolidated totals.

A reconciliation of earnings from continuing operations before income taxes from our reportable segments to earnings from continuing operations before income taxes in our condensed consolidated financial statements is as follows:

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Note H – Goodwill and Intangible Assets

Financial Accounting Standards Board (FASB) Statement No. 142, Goodwill and Other Intangibles, was effective for Office Depot at the beginning of fiscal year 2002. The components of goodwill by segments are listed below:

The change in net book value of goodwill is primarily related to a tax election the Company made during the second quarter of 2002. Following the acquisition of 4Sure.com in the second half of 2001, the Company recorded a deferred tax asset for the anticipated future tax benefit of 4Sure.com’s net operating loss (NOL) carryforwards. The election in 2002 resulted in the utilization of those NOLs and will result in the related goodwill being deductible over 15 years for tax purposes. Accordingly, goodwill was increased and deferred tax assets were reduced by a like amount. The election has no impact on the results of operations. The remaining change in the net book value of goodwill relates to the reclassification of goodwill relating to the Company’s Australian operations to other assets, as well as fluctuations in foreign currency exchange rates.

The net book value of intangible assets totaled $9.9 million at September 28, 2002 and $10.9 million at December 29, 2001. Beginning with fiscal 2002, approximately $2 million of intangible assets are no longer subject to amortization. Amortization of intangible assets totaled $0.3 million for the third quarter, and $1.0 million for the first nine months of 2002. Amortization of goodwill and intangible assets totaled $1.8 million for the third quarter, and $5.4 million for the first nine months of 2001. Without this amortization, pro forma earnings per share would have increased by $0.01 for the third quarter and $0.02 for the first nine months of 2001. It is anticipated that amortization of intangible assets will continue at approximately $1.4 million per year for each of the next two years and approximately $0.4 million per year for the following three years.

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Note I – New Accounting Standards

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 April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Correction. This Statement eliminates extraordinary accounting treatment for reporting gain or loss on debt extinguishment, and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of this Statement are effective for the Company with the beginning of fiscal year 2003; however, early application of the Statement is encouraged. Debt extinguishments reported as extraordinary items prior to scheduled or early adoption of this Statement would be reclassified in most cases following adoption. The Company does not anticipate a significant impact on its results of operations from adopting this Statement.

     In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which is generally before an actual liability has been incurred. Adoption of this Statement is required with the beginning of fiscal year 2003. This Statement will impact the timing of exit or disposal activities reported by the Company after adoption.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

GENERAL

Office Depot, Inc., together with our subsidiaries, is the largest seller of office products and services in the world. We sell to consumers and businesses of all sizes through our three business segments: North American Retail Division, Business Services Group (“BSG”) and International Division.

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 condensed consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q, as well as our 2001 Annual Report on Form 10-K.

This MD&A contains significant amounts of forward-looking information. Without limitation, when we use the words “believe,” “estimate,” “plan,” “expect,” “intend,” “anticipate,” “continue,” “project,” “probably,” “should” and similar expressions in this Quarterly Report on Form 10-Q, we are

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identifying forward-looking statements. Our Cautionary Statements, which you will find immediately following this MD&A and following the MD&A in our 2001 Annual Report on Form 10-K, apply to these forward-looking statements.

RESULTS OF OPERATIONS

Net earnings increased 41% to $88.2 million for the third quarter, and increased 54% to $247.8 million for the first nine months of 2002, compared to the corresponding periods of 2001. Diluted earnings per share increased to $0.28 for the second quarter and $0.78 for the first nine months of 2002. Our improved earnings reflect higher sales in BSG and International, but continued softness in the North American Retail business. Overall gross margins were higher and operational efficiencies in warehousing activities contributed to the higher earnings, but were partially offset by expansion costs, primarily in certain European countries. Operating results for the first nine months of 2002 also include a $15 million accrual for the anticipated settlement of class action litigation in the state of California. Included in third quarter and nine-month results for 2001 were charges related to asset impairments, as well as a gain on asset sale offset by accrued legal costs. Additionally, in accordance with accounting rules that became effective at the beginning of fiscal year 2002, goodwill is no longer being amortized. During 2001, goodwill amortization was approximately $2 million for the third quarter and $5 million for the first nine months.

Overall

Overall sales for the third quarter and first nine months of 2002 increased 4% and 3%, respectively. Comparable worldwide sales in the 864 stores and 39 delivery centers that have been open for more than one year improved 1% for the third quarter and were flat for the first nine months of 2002.

Worldwide e-commerce sales grew 35% to $543 million during the quarter, and grew 36% to $1.5 billion for the first nine months of 2002. These e-commerce sales are comprised of all worldwide online sales, including those from our domestic and international public Web sites, as well as Office

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Depot’s contract business-to-business sites. These sales are reported in the business segment in which they are generated, primarily BSG.

North American Retail Division

Sales in the North American Retail Division decreased 1% for the third quarter and were flat for the first nine months of 2002. Comparable store sales in the 832 stores in the U.S. and Canada that have been open for more than one year declined 2% in both the third quarter and for the first nine months of 2002. Back-to-school sales, which represent an important part of third quarter operating activity, were below expectations and below prior year. Comparable furniture sales were down 9% for the quarter and technology hardware sales were down 5%, representing a smaller decline than what was experienced in each of the two preceding quarters of 2002. Core office supplies and paper and filing sales showed mixed results, with softer back-to-school offsetting some increases in those areas.

Gross profit as a percent of sales increased, reflecting operational improvements including better buying, product management and re-merchandising. Globally sourced back-to-school products and some continued shift in product mix away from lower-margin technology products also benefited gross profit.

Store and warehouse operating and selling expenses include an accrual of $3 million in the quarter and a total of $15 million for the nine months of 2002 relating to the anticipated settlement of potential class action litigation in the state of California. Advertising costs were lower and average payroll per store was lower, reflecting labor scheduling improvements and cost control efforts. Included in results for the third quarter and first nine months of 2001 were approximately $26 million of store closure and asset impairment charges.

In addition to store and warehouse operating profit reported above, segment earnings reported in Note G include pre-opening expenses and an adjustment to accrued facility closure costs. Total

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segment earnings, before general and administrative costs or interest allocation, totaled $118.0 million for the third quarter and $334.6 million for the first nine months of 2002. The comparable amounts for 2001 were $77.0 million for the quarter and $221.6 million for the first nine months.

During the third quarter of 2002, eight new retail stores were opened and three relocated, bringing the total to 861 stores operated throughout the United States and Canada.

Business Services Group