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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

     
(Mark One)    
     
x   Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
     
    For the quarterly period ended    September 27, 2003   
     
    or
     
o   Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the transition period from ____________ to _____________

Commission file number    1-10948   

OFFICE DEPOT, INC.
(Exact name of registrant as specified in its charter)

(OFFICE DEPOT LOGO)

     
Delaware
(State or other jurisdiction of
incorporation or organization)
  59-2663954
(I.R.S. Employer
Identification No.)
     
2200 Old Germantown Road; Delray Beach, Florida
(Address of principal executive offices)
  33445
(Zip Code)

(561) 438-4800
(Registrant’s telephone number, including area code)


(Former name, former address and former fiscal year, if changed since last report)

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

Yes x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x No o

The registrant had 313,140,476 shares of common stock outstanding as of October 20, 2003.



 


TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EX-4.3 Supplemental Indenture # 1
EX-4.4 Supplemental Indenture #2
EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32 Section 906 Certifications


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

OFFICE DEPOT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
                         
            As of   As of
            September 27,   December 28,
            2003   2002
           
 
Assets
               
 
               
Current assets:
               
   
Cash and cash equivalents
  $ 822,961     $ 877,088  
   
Short-term investments
          6,435  
   
Receivables, net
    1,088,935       771,632  
   
Merchandise inventories, net
    1,193,772       1,305,589  
   
Deferred income taxes
    129,546       143,073  
   
Prepaid expenses and other current assets
    74,479       105,898  
 
   
     
 
       
Total current assets
    3,309,693       3,209,715  
 
Property and equipment, net
    1,204,550       1,118,062  
 
Goodwill
    836,538       257,797  
 
Other assets
    450,906       180,238  
 
   
     
 
       
Total assets
  $ 5,801,687     $ 4,765,812  
 
   
     
 
 
               
Liabilities and stockholders’ equity
               
 
               
Current liabilities:
               
   
Accounts payable
  $ 1,185,688     $ 1,173,973  
   
Accrued expenses and other current liabilities
    676,054       662,490  
   
Income taxes payable
    144,454       139,431  
   
Current maturities of long-term debt
    18,181       16,115  
 
   
     
 
 
               
       
Total current liabilities
    2,024,377       1,992,009  
 
               
Deferred income taxes and other credits
    273,307       64,721  
Long-term debt, net of current maturities
    831,865       411,970  
 
               
Commitments and contingencies
               
 
               
Stockholders’ equity:
               
 
Common stock — authorized 800,000,000 shares of $.01 par value; issued 398,434,870 in 2003 and 393,905,052 in 2002
    3,984       3,939  
 
Additional paid-in capital
    1,165,213       1,118,028  
 
Unamortized value of long-term incentive stock grants
    (904 )     (1,295 )
 
Accumulated other comprehensive income
    98,395       1,165  
 
Retained earnings
    2,258,933       2,028,442  
 
Treasury stock, at cost – 85,407,365 shares in 2003 and 85,389,591 in 2002
    (853,483 )     (853,167 )
 
   
     
 
     
Total stockholders’ equity
    2,672,138       2,297,112  
 
   
     
 
       
Total liabilities and stockholders’ equity
  $ 5,801,687     $ 4,765,812  
 
   
     
 

The accompanying notes are an integral part of these statements.

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OFFICE DEPOT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
                                       
          13 Weeks Ended   39 Weeks Ended
         
 
          September 27,   September 28,   September 27,   September 28,
          2003   2002   2003   2002
         
 
 
 
Sales
  $ 3,235,580     $ 2,870,781     $ 9,107,140     $ 8,514,913  
Cost of goods sold and occupancy costs
    2,219,984       2,020,352       6,272,450       6,024,991  
 
   
     
     
     
 
 
                               
 
Gross profit
    1,015,596       850,429       2,834,690       2,489,922  
 
                               
Store and warehouse operating and selling expenses
    720,119       576,747       2,042,744       1,718,610  
General and administrative expenses
    146,434       128,729       398,406       366,565  
Other operating expenses, net
    7,554       2,882       9,001       6,933  
 
   
     
     
     
 
 
    874,107       708,358       2,450,151       2,092,108  
 
   
     
     
     
 
 
                               
 
Operating profit
    141,489       142,071       384,539       397,814  
 
                               
Other income (expense):
                               
 
Interest income
    1,611       5,550       11,466       13,920  
 
Interest expense
    (14,530 )     (13,840 )     (37,785 )     (36,598 )
 
Miscellaneous income, net
    3,324       (637 )     19,490       3,416  
 
   
     
     
     
 
Earnings from continuing operations before income taxes and cumulative effect of accounting change
    131,894       133,144       377,710       378,552  
 
                               
Income taxes
    40,228       46,013       122,480       132,489  
 
   
     
     
     
 
Earnings from continuing operations before cumulative effect of accounting change
    91,666       87,131       255,230       246,063  
 
                               
Discontinued operations, net
          1,041       1,153       1,763  
 
                               
Cumulative effect of accounting change, net
                (25,892 )      
 
   
     
     
     
 
 
                               
   
Net earnings
  $ 91,666     $ 88,172     $ 230,491     $ 247,826  
 
   
     
     
     
 
 
                               
Earnings per share from continuing operations before cumulative effect of accounting change:
                               
     
Basic
  $ 0.30     $ 0.28     $ 0.83     $ 0.80  
     
Diluted
    0.29       0.27       0.82       0.77  
 
                               
Cumulative effect of accounting change:
                               
     
Basic
                (0.08 )      
     
Diluted
                (0.08 )      
 
                               
Net earnings per share:
                               
     
Basic
  $ 0.30     $ 0.29     $ 0.75     $ 0.81  
     
Diluted
    0.29       0.28       0.74       0.78  

The accompanying notes are an integral part of these statements.

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OFFICE DEPOT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
                         
            39 Weeks Ended
           
            September 27,   September 28,
            2003   2002
           
 
Cash flow from operating activities:
               
 
Net earnings
  $ 230,491     $ 247,826  
 
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
     
Cumulative effect of accounting change, net
    25,892        
     
Discontinued operations, net
    (1,153 )     (1,763 )
     
Depreciation and amortization
    171,743       149,324  
     
Provision for losses on inventories and receivables
    100,110       76,565  
     
Changes in working capital and other
    (37,464 )     205,303  
 
   
     
 
       
Net cash provided by operating activities
    489,619       677,255  
 
   
     
 
 
               
Cash flows from investing activities:
               
 
Acquisition, net of cash acquired
    (918,966 )      
 
Capital expenditures
    (145,202 )     (142,372 )
 
Proceeds from disposition of assets
    41,054       11,332  
 
Sale of short-term securities
    6,435        
 
   
     
 
   
Net cash used in investing activities
    (1,016,679 )     (131,040 )
 
   
     
 
 
               
Cash flows from financing activities:
               
 
Proceeds from exercise of stock options and sale of stock under employee stock purchase plans
    42,533       83,484  
 
Acquisition of treasury stock
          (36,380 )
 
Proceeds from issuance of Notes
    398,880        
 
Net payments on long- and short-term borrowings
    (3,511 )     (250,951 )
 
   
     
 
   
Net cash provided by (used in) financing activities
    437,902       (203,847 )
 
   
     
 
 
               
Effect of exchange rate changes on cash and cash equivalents
    35,031       32,431  
 
   
     
 
 
               
 
Net (decrease) increase in cash and cash equivalents
    (54,127 )     374,799  
   
Cash and cash equivalents at beginning of period
    877,088       565,388  
 
   
     
 
   
Cash and cash equivalents at end of period
  $ 822,961     $ 940,187  
 
   
     
 
 
               
Supplemental disclosure of other cash flow activities:
               
 
Interest paid
  $ 36,306     $ 36,481  
 
Income taxes paid
    73,178       67,270  
 
               
Supplemental disclosure of non-cash investing and financing activities:
               
 
Assets acquired under capital leases
  $ 1,459     $ 14,486  

The accompanying notes are an integral part of these statements.

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OFFICE DEPOT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note A – Basis of Presentation

Office Depot, Inc., including consolidated subsidiaries (the “Company”), is a global supplier 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 28, 2002 has been derived from audited financial statements at that date. The condensed interim financial statements as of September 27, 2003 and for the 13- and 39-week periods ending September 27, 2003 (also referred to as “the third quarter of 2003” and “year-to-date 2003”) and September 28, 2002 (also referred to as “the third quarter of 2002” and “year-to-date 2002”) 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 28, 2002, which are included in our 2002 Annual Report on Form 10-K, filed on March 13, 2003.

Note B – Cumulative Effect of Accounting Change

At the beginning of our 2003 fiscal year, we adopted Emerging Issues Task Force (“EITF”) Issue No. 02-16, Accounting by a Reseller for Cash Consideration Received from a Vendor. This guidance primarily affects our accounting for cooperative advertising arrangements. Previously, these arrangements were accounted for as a reduction of advertising expense. After adoption, amounts received from vendors under these arrangements are considered a reduction of product cost, reducing both inventory values and cost of goods sold. This treatment is similar to our accounting for vendor rebate arrangements. The amounts deferred for both arrangements are reviewed quarterly. Changes in the deferral rates and changes in inventory balances may impact quarterly or annual earnings.

To record the initial amount of cooperative advertising deferred in inventory at the beginning of the year, we recorded an after-tax cumulative effect adjustment of $25.9 million, or $0.08 per share. Prior periods have not been restated. Excluding the charge to record the cumulative effect of adoption, the impacts of applying this method in 2003, and the estimated pro forma impacts for 2002 are summarized as follows:

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(in millions, except per share amounts)
Increase (decrease)

                                 
    Third Quarter   Year-to-Date
   
 
            Pro Forma           Pro Forma
    2003   2002   2003   2002
   
 
 
 
Cost of goods sold
  $ (65.8 )   $ (55.4 )   $ (199.0 )   $ (215.6 )
Advertising expense
    62.7       52.2       178.9       195.3  
Operating profit
    3.1       3.2       20.1       20.3  
Net earnings
    1.9       2.0       13.1       12.8  
Diluted earnings per share
  $ 0.01     $ 0.01     $ 0.04     $ 0.04  

Note C – Accounting for Stock-Based Compensation

The Company accounts for its stock-based compensation plans under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees. The pro forma information below is based on provisions of Statement of Financial Accounting Standard (“FAS”) No. 123, Accounting for Stock-Based Compensation, as amended by FAS 148, Accounting for Stock-Based Compensation – Transition and Disclosure, issued in December 2002.

(In thousands, except per share amounts)

                                     
        Third Quarter   Year-to-Date
       
 
        2003   2002   2003   2002
       
 
 
 
 
Net earnings as reported
  $ 91,666     $ 88,172     $ 230,491     $ 247,826  
 
Stock based employee compensation cost included in net income as reported, net of tax
    174       154       365       506  
 
Compensation expense under FAS 123, net of tax
    (6,039 )     (7,867 )     (16,918 )     (22,287 )
 
   
     
     
     
 
 
Pro forma net earnings
  $ 85,801     $ 80,459     $ 213,938     $ 226,045  
 
   
     
     
     
 
Net earnings per share – Basic
                               
   
As reported
  $ 0.30     $ 0.29     $ 0.75     $ 0.81  
   
Pro forma
    0.28       0.26       0.69       0.74  
Net earnings per share – Diluted
                               
   
As reported
  $ 0.29     $ 0.28     $ 0.74     $ 0.78  
   
Pro forma
    0.27       0.26       0.68       0.71  

Note D – Acquisition

On June 2, 2003, the Company acquired all of the common shares of Guilbert S.A. (“Guilbert”) from Pinault-Printemps-Redoute S.A. Guilbert is the French parent company of a corporate group that constitutes one of the largest contract stationers in Europe. The results of Guilbert’s operations have been included in the consolidated financial statements since the date of acquisition.

The cash purchase price of euro 788.0 million was paid in two installments; euro 523.0 million was paid on June 2, 2003 and the additional euro 265.0 million was paid on June 30, 2003. Subsequent to the June 30 payment, the Company received a refund of approximately euro 8.0 million as a result of a working capital adjustment. The U.S. dollar value of the acquisition, net of the working capital adjustment and including transaction costs, totaled $942.3 million, based on the euro to U.S. dollar exchange rate on the purchase date. The price is subject to an upward

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adjustment of euro 40 million in cash or the Company’s common stock if the price per share of Office Depot common stock closes at or above $20 per share for any five consecutive trading days during the 18-month period following June 2, 2003. This contingent consideration was not included in the cost initially allocated to assets and liabilities acquired because of the uncertainty of payment; but if paid, it would increase the amount of goodwill recorded. Additionally, the seller is required to pay the value of any unfunded pension liability as determined by a future independent valuation. The current estimated unfunded pension liability has been recorded as part of the fair value assigned to liabilities assumed, with a corresponding receivable recorded as due from the seller. This unfunded value and the related receivable from the seller have been classified in long-term liabilities and other assets, respectively, in the accompanying condensed consolidated balance sheet and will change with future plan valuations until settled.

The Company is in the process of assessing and formulating a plan of integration for the operations of Guilbert. The integration plan, once completed, will likely include the cost of exiting certain activities or operations and terminating or relocating certain personnel. Those costs associated with Guilbert operations or personnel will be recorded as an adjustment to the value of goodwill in the period in which the Company finalizes and commits to the integration plan. No estimate of integration-related activity has been included in the initial purchase price allocation. Exit costs associated with Office Depot operations or personnel will be charged to operations as incurred in accordance with FAS 146, Accounting for Costs Associated with Exit or Disposal Activities.

All assets and liabilities of Guilbert, including goodwill of $589.2 million and intangibles assets of $181.5 million, have been allocated to the International Division. Intangible assets include $117.1 million for tradenames, currently estimated to have indefinite lives. The remaining $64.4 million has been assigned to customer-related intangibles that will be amortized on an accelerated basis over five years. The valuation of tradenames and other intangible assets, along with the related estimated lives, is in the preliminary stage and may change, possibly significantly. Intangible and other assets are included in other assets in Office Depot’s condensed consolidated balance sheet.

Unaudited pro forma information giving effect to the acquisition of Guilbert as if it had been acquired at the beginning of 2002 is shown below. This information relates to the acquired contract business of Guilbert. Based on our review, Guilbert’s results of operations have been modified from amounts originally prepared under French accounting principles to conform to accounting principles generally accepted in the United States of America. One such adjustment is the recognition in the first half of 2002 of a cumulative effect of an accounting change in the amount of $20.9 million, or $0.07 per diluted share, for the assumed adoption of FAS 142, Goodwill and Other Intangible Assets.

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Pro forma information
(In thousands, except per share amounts)

                                   
      Third Quarter   Year-to-Date
     
 
      2003   2002   2003   2002
     
 
 
 
Revenues
  $ 3,235,580     $ 3,185,846     $ 9,708,738     $ 9,455,731  
 
                               
Earnings from continuing operations before cumulative effect of change in accounting principle
  $ 91,666     $ 81,496     $ 255,401     $ 232,591  
 
                               
Net earnings
  $ 91,666     $ 82,537     $ 230,662     $ 213,401  
 
                               
Earnings per share from continuing operations before cumulative effect of change in accounting principle:
                               
 
Basic
  $ 0.30     $ 0.26     $ 0.83     $ 0.76  
 
Diluted
    0.29       0.26       0.82       0.73  
 
                               
Net earnings per share
                               
 
Basic
  $ 0.30     $ 0.27     $ 0.75     $ 0.70  
 
Diluted
    0.29       0.26       0.74       0.67  

Note E – Discontinued Operations

The Company completed the sale of its Australian operations in January 2003, recognizing an after-tax gain of $1.2 million. The results for Australia, including the gain on sale in 2003, are reported as a discontinued operation. Accordingly, the accompanying Condensed Consolidated Statements of Earnings for the third quarter and year-to-date 2002 were restated to reflect such classification. Additionally, Australia’s assets and liabilities were classified as held for sale and are included in prepaid expenses and other current assets and in accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheet as of December 28, 2002.

Australia’s revenues were $20.6 million and $61.4 million for the third quarter of 2002 and year-to-date 2002, with pretax income of $1.5 million and $1.7 million, respectively. Diluted net earnings per share from discontinued operations were $0.01 in both periods.

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Note F – Comprehensive Income

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

(In thousands)

                                   
      Third Quarter   Year-to-Date
     
 
      2003   2002   2003   2002
     
 
 
 
Net earnings
  $ 91,666     $ 88,172     $ 230,491     $ 247,826  
Other comprehensive income (loss):
                               
 
Foreign currency translation adjustments, net
    2,405       (5,987 )     80,786       42,969  
 
Proceeds from cash flow hedge
    16,444             16,444        
 
   
     
     
     
 
Total comprehensive income
  $ 110,515     $ 82,185     $ 327,721     $ 290,795  
 
   
     
     
     
 

Note G – Long-Term Debt

In August 2003, the Company completed an offering of $400 million senior notes due August 2013 (the “Notes”). The Notes are not callable and bear interest at the rate of 6.250% per year, to be paid on February 15 and August 15 of each year. The Notes contain provisions that, in certain circumstances, place financial restrictions or limitations on the Company. Simultaneous with completing the offering, the Company liquidated a treasury rate lock, the proceeds of which have been recorded in “accumulated other comprehensive income” on the accompanying Condensed Consolidated Balance Sheet as of September 27, 2003. The proceeds on the treasury rate lock will be amortized over the term of the notes, reducing the effective interest rate to the Company on the Notes to 5.870%.

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Note H – Earnings Per Share (“EPS”)

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

(In thousands, except share amounts)

                                       
          Third Quarter   Year-to-Date
         
 
          2003   2002   2003   2002
         
 
 
 
Basic:
                               
Weighted average number of common shares outstanding
    310,463       308,282       308,999       306,484  
 
   
     
     
     
 
 
                               
Diluted:
                               
Net earnings
  $ 91,666     $ 88,172     $ 230,491     $ 247,826  
Interest expense related to convertible notes, net of income taxes
          1,058             4,795  
 
   
     
     
     
 
   
Adjusted net earnings
  $ 91,666     $ 89,230     $ 230,491     $ 252,621  
 
   
     
     
     
 
 
                               
Weighted average number of common shares outstanding
    310,463       308,282       308,999       306,484  
Shares issued upon assumed
                               
 
conversion of convertible notes
          8,440             12,043  
Shares issued upon assumed exercise of dilutive stock options
    5,179       3,979       4,059       7,078  
 
   
     
     
     
 
     
Shares used in computing diluted EPS
    315,642       320,701       313,058       325,605  
 
   
     
     
     
 

Options to purchase approximately 16.3 million shares of common stock were not included in our computation of diluted earnings per share for the third quarter of 2003 because their weighted average effect would have been anti-dilutive.

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Note I – Segment Information

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

(In thousands)

                                   
      Sales
     
      Third Quarter   Year-to-Date
     
 
      2003   2002   2003   2002
     
 
 
 
North American Retail Division
  $ 1,451,915     $ 1,460,189     $ 4,259,759     $ 4,375,221  
Business Services Group
    1,006,561       1,004,074       2,998,429       2,950,308  
International Division
    777,812       407,375       1,851,223       1,191,707  
 
   
     
     
     
 
 
Total reportable segments
    3,236,288       2,871,638       9,109,411       8,517,236  
Eliminations
    (708 )     (857 )     (2,271 )     (2,323 )
 
   
     
     
     
 
 
Total
  $ 3,235,580     $ 2,870,781     $ 9,107,140     $ 8,514,913  
 
   
     
     
     
 
                                   
      Segment Operating Profit
     
      Third Quarter   Year-to-Date
     
 
      2003   2002   2003   2002
     
 
 
 
North American Retail Division
  $ 101,014     $ 119,893     $ 265,587     $ 337,512  
Business Services Group
    96,740       101,971       285,454       276,448  
International Division
    97,830       51,983       241,175       157,786  
 
   
     
     
     
 
 
Total reportable segments
    295,584       273,847       792,216       771,746  
Eliminations
    (107 )     (165 )     (270 )     (434 )
 
   
     
     
     
 
 
Total
  $ 295,477     $ 273,682     $ 791,946     $ 771,312  
 
   
     
     
     
 

A reconciliation of the measure of segment operating profit to consolidated earnings from continuing operations before income taxes and cumulative effect of accounting change is as follows:

                                   
      Third Quarter   Year-to-Date
     
 
      2003   2002   2003   2002
     
 
 
 
Total segment operating profit
  $ 295,477     $ 273,682     $ 791,946     $ 771,312  
General and administrative expenses
    (146,434 )     (128,729 )     (398,406 )     (366,565 )
Interest income
    1,611       5,550       11,466       13,920  
Interest expense
    (14,530 )     (13,840 )     (37,785 )     (36,598 )
Other, net
    (4,230 )     (3,519 )     10,489       (3,517 )
 
   
     
     
     
 
 
Earnings from continuing operations before income taxes and cumulative effect of accounting change
  $ 131,894     $ 133,144     $ 377,710     $ 378,552  
 
   
     
     
     
 
                                   
      Total Assets   Goodwill
     
 
      September 27,   December 28,   September 27,   December 28,
      2003   2002   2003   2002
     
 
 
 
North American Retail Division
  $ 1,342,508     $ 1,653,524     $ 1,687     $ 1,470  
Business Services Group
    1,080,816       1,063,700       229,950       229,950  
International Division
    2,126,049       771,734       604,901       26,377  
 
   
     
     
     
 
Total From Reportable Segments
    4,549,373       3,488,958       836,538       257,797  
Other
    1,252,314       1,276,854              
 
   
     
     
     
 
 
Total
  $ 5,801,687     $ 4,765,812     $ 836,538     $ 257,797  
 
   
     
     
     
 

 

 

 

Note J – New Accounting Standards

In January 2003, the FASB issued FASB Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities. FIN 46 addresses how to identify variable interest entities and provides guidance as to how a company may assess its interests in a variable interest entity for purposes of deciding whether consolidation of that entity is required. FIN 46 is effective for all variable interest entities created after January 31, 2003. The Company is required to adopt the provisions of FIN 46 for any variable interest entity created prior to February 1, 2003 by the end of the current fiscal year. The Company is reviewing the provisions of this interpretation and currently does not expect its implementation to have a material effect on the financial position, results of operations or cash flows.

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

GENERAL

Office Depot, Inc., together with our subsidiaries, is a global supplier of office products and services. 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 2002 Annual Report on Form 10-K.

This MD&A contains significant amounts of forward-looking information. Without limitation, when we use the words “believe,” “estimate,” “plan,” “expect,” “intend,” “anticipate,” “continue,” “project,” “probably,” “should” and similar expressions in this Quarterly Report on Form 10-Q, we are identifying forward-looking statements. Our Cautionary Statements, which you will find immediately following this MD&A and following the MD&A in our 2002 Annual Report on Form 10-K, apply to these forward-looking statements.

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RESULTS OF OPERATIONS

Net earnings for the third quarter of 2003 were affected by a decline in sales in our North American Retail Division, increased contract sales at somewhat lower margins in our Business Services Group, and expansion and favorable foreign currency exchange in our International Division.

On June 2, 2003, the Company acquired all of the common shares of Guilbert S.A. (“Guilbert”) from Pinault-Printemps-Redoute S.A. Guilbert is the French parent company of a corporate group that constitutes one of the largest contract stationers in Europe. The acquisition provides the Company an immediate presence in targeted markets, increases substantially the scope and breadth of the Company’s contract business in Europe, and establishes Office Depot as the leading multi-channel reseller of office products in continental Europe and the United Kingdom. The results of Guilbert’s operations are included in the results of operations for the International Division as well as the overall Company since the date of acquisition.

During the first quarter of 2003, we completed the sale of our business in Australia. We have accounted for the disposition of this business as a discontinued operation and have restated all comparable amounts for 2002.

At the start of fiscal year 2003, we adopted new accounting guidance, Emerging Issues Task Force (“EITF”) Issue No. 02-16, Accounting by a Reseller for Cash Consideration Received from a Vendor. Accordingly, amounts previously shown as a reduction of advertising expense are now classified as a reduction of cost of goods sold.

The adoption of the accounting change at the beginning of the year resulted in a $25.9 million after-tax charge, or $0.08 per share, reflecting the cumulative effect of adoption. Prior periods have not been restated. Excluding the charge to record the cumulative effect of adoption, the impacts of applying this method in 2003, and the estimated pro forma impacts for 2002, are summarized as follows:

(in millions, except per share amounts)
Increase (decrease)

                                 
    Third Quarter   Year-to-Date
   
 
            Pro Forma           Pro Forma
    2003   2002   2003   2002
   
 
 
 
Cost of goods sold
  $ (65.8 )   $ (55.4 )   $ (199.0 )   $ (215.6 )
Advertising expense
    62.7       52.2       178.9       195.3  
Operating profit
    3.1       3.2       20.1       20.3  
Net earnings
    1.9       2.0       13.1       12.8  
Diluted earnings per share
  $ 0.01     $ 0.01     $ 0.04     $ 0.04  

The table below provides a subtotal for segment operating profit. We use this measure of performance to assess the operations of each business unit; and we believe it is useful to investors because it reflects each segment’s direct activity. Our general and administrative expenses primarily consist of personnel and related costs associated with support functions. Because these functions support all segments of our business, we do not consider these costs in determining our segment profitability. Other companies, however, may charge more or less

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general and administrative expenses to their segments, and our results therefore may not be comparable to similarly titled measures used by other entities. Our measure of segment operating profit should not be considered as an alternative to operating income or net earnings determined in accordance with accounting principles generally accepted in the United States of America.

Overall
($ in millions)

                                                                   
      Third Quarter           Year-to-Date        
     
         
       
      2003           2002           2003           2002        
     
         
         
         
       
Sales
  $ 3,235.6       100.0 %   $ 2,870.8       100.0 %   $ 9,107.1       100.0 %   $ 8,514.9       100.0 %
Cost of goods sold and occupancy costs
    2,220.0       68.6 %     2,020.4       70.4 %     6,272.5       68.9 %     6,025.0       70.8 %
 
   
             
             
             
         
 
                                                               
 
Gross profit
    1,015.6       31.4 %     850.4       29.6 %     2,834.6       31.1 %     2,489.9       29.2 %
 
                                                               
Store and warehouse operating and selling expenses
    720.1       22.3 %     576.7       20.1 %     2,042.7       22.4 %     1,718.6       20.2 %
 
   
             
             
             
         
 
                                                               
Segment operating profit
    295.5       9.1 %     273.7       9.5 %     791.9       8.7 %     771.3       9.0 %
 
                                                               
General and administrative expenses
    146.4       4.5 %     128.7       4.5 %     398.4       4.4 %     366.6       4.3 %
 
                                                               
Other operating expenses, net
    7.6       0.2 %     2.9       0.1 %     9.0       0.1 %     6.9       0.1 %
 
   
             
             
             
         
 
                                                               
Operating profit
  $ 141.5       4.4 %   $ 142.1       4.9 %   $ 384.5       4.2 %   $ 397.8       4.6 %
 
   
             
             
             
         

Overall sales for the third quarter and first nine months of 2003 increased 13% and 7%, respectively, compared to the same periods in 2002. Comparable worldwide sales in the 902 stores and 37 delivery centers that have been open for more than one year decreased 1% for the third quarter and 2% for the first nine months of 2003. Sales of technology hardware and furniture declined in both periods.

Sales through our e-commerce channels continued their increasing trend. Worldwide e-commerce sales grew 24% to $672 million during the quarter, and grew 23% to $1.9 billion for the first nine months of 2003. 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 Depot’s contract business-to-business sites. These sales are reported in the generating business segment, primarily BSG, but e-commerce sales in the International Division are beginning to make a greater contribution.

The increase in gross profit as a percent of sales reflects the impact of adopting EITF 02-16 and a larger mix of sales from BSG and International. These benefits were partially offset by a lower contribution from technology and furniture products in North American Retail, a higher mix of larger national contract accounts in BSG, and increased lower margin contract sales in our International Division.

Excluding the impact of the change in accounting for vendor arrangements, store and warehouse operating and selling expenses as a percent of sales increased during the third quarter and slightly

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decreased in the first nine months of 2003, reflecting new initiatives in North American Retail and the cost of expansion activities in Europe, partially offset by the benefits of continued cost control improvements in BSG.

Included in other operating expenses, net for the third quarter of 2003 were approximately $6 million of costs relating to the Guilbert integration.

North American Retail Division
($ in millions)

                                                                   
      Third Quarter           Year-to-Date        
     
         
       
      2003           2002           2003           2002        
     
         
         
         
       
Sales
  $ 1,451.9       100.0 %   $ 1,460.2       100.0 %   $ 4,259.8       100.0 %   $ 4,375.2       100.0 %
Cost of goods sold and occupancy costs
    1,056.5       72.8 %     1,084.8       74.3 %     3,132.6       73.5 %     3,274.8       74.8 %
 
   
             
             
             
         
 
                                                               
 
Gross profit
    395.4       27.2 %     375.4       25.7 %     1,127.2       26.5 %     1,100.4       25.2 %
 
                                                               
Store and warehouse operating and selling expenses
    294.4       20.3 %     255.5       17.5 %     861.6       20.2 %     762.9       17.5 %
 
   
             
             
             
         
 
                                                               
Segment operating profit
  $ 101.0       6.9 %   $ 119.9       8.2 %   $ 265.6       6.3 %   $ 337.5       7.7 %
 
   
             
             
             
         

North American Retail sales declined by 1% for the third quarter and 3% for the first nine months of 2003 compared to the same periods last year. Comparable sales in the 859 stores open for more than one year declined 2% for the third quarter and 4% for the first nine months of 2003. Retail comparable sales results reflected a strong back-to-school season in the Company’s core supplies categories, offset by continued negative comparable sales in technology. Traffic was up 4% in the third quarter and down 1% for the first nine months, and the average transaction size was down 5% and 3%, respectively, again reflecting continued weakness in technology and furniture sales.

Adopting EITF 02-16 reduced the cost of goods sold for the third quarter and first nine months of 2003 by $36.7 million and $115.0 million, and increased advertising expense by $35.0 million and $104.1 million, respectively. Had this change been adopted in the third quarter and first nine months of 2002, the pro forma impact would have decreased cost of goods sold by $37.3 million and $134.6 million, and increased advertising expense by $35.7 million and $123.4 million, respectively.

Comparing the third quarter and first nine months of 2003 to the same periods in 2002 without the impact of EITF 02-16, gross margins declined reflecting clearance activity related to the Company’s new merchandising initiatives, a lower contribution from technology and furniture products, and higher charges for inventory shrink, offset in part by further improvements from better buying and globally sourced back-to-school products. Operating expenses as a percent of sales increased, reflecting de-leveraging from softer sales, higher benefits costs and increased costs associated with the Company’s new merchandising initiatives.

During the third quarter, the Company opened three new office supply stores, closed one store, and relocated four stores in North America. At the end of the third quarter, Office Depot operated a total of 879 office products superstores throughout the U.S. and Canada. The Company remains on track to open a total of 35 new stores in 2003.

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Business Services Group
($ in millions)

                                                                   
      Third Quarter           Year-to-Date        
     
         
       
      2003           2002           2003           2002        
     
         
         
         
       
Sales
  $ 1,006.6       100.0 %   $ 1,004.1       100.0 %   $ 2,998.4       100.0 %   $ 2,950.3       100.0 %
Cost of goods sold and occupancy costs
    684.1       68.0 %     689.0       68.6 %     2,026.9       67.6 %     2,032.2       68.9 %
 
   
             
             
             
         
 
                                                               
 
Gross profit
    322.5       32.0 %     315.1       31.4 %     971.5       32.4 %     918.1       31.1 %
 
                                                               
Store and warehouse operating and selling expenses
    225.8       22.4 %     213.1       21.2 %     686.0       22.9 %     641.7       21.8 %
 
   
             
             
             
         
 
                                                               
Segment operating profit
  $ 96.7       9.6 %   $ 102.0       10.2 %   $ 285.5       9.5 %   $ 276.4       9.3 %
 
   
             
             
             
         

Business Services Group sales were flat in the third quarter and increased 2% in the first nine months of 2003 compared to the same periods in 2002. The results reflect growth in the contract channel (3%), offset by declines in the North American catalog businesses. Domestic e-commerce sales grew by 11% during the quarter and 16% for the first nine months of 2003. Throughout BSG, furniture and technology sales were lower, but sales of supplies increased in both periods. Contract sales increased in most markets with the large customer segment growing at faster rates. Furthermore, both transactions and the average transaction value increased in the contract channel in both the quarter and year-to-date periods.

The change in accounting for vendor arrangements reduced the cost of goods sold for the third quarter and first nine months of 2003 by $17.0 million and $55.3 million, and increased advertising expense by $15.1 million and $46.1 million, respectively. Had this change been adopted in the third quarter and the first nine months of 2002, the pro forma impact would have decreased cost of goods sold by $11.2 million and $61.7 million, and increased advertising expense by $10.0 million and $53.3 million, respectively.

Without the impact of the change in accounting, gross margin decreased for both the third quarter and year-to-date, reflecting a higher mix of larger national contract accounts, offset by improvement in the Company’s catalog merchandising strategies and continued disciplined pricing. Both the contract and catalog channels continued to benefit from a reduction in warehouse and distribution costs partially offset by higher third-party delivery costs.

International Division
($ in millions)

                                                                   
      Third Quarter           Year-to-Date        
     
         
       
      2003           2002           2003           2002        
     
         
         
         
       
Sales
  $ 777.8       100.0 %   $ 407.4       100.0 %   $ 1,851.2       100.0 %   $ 1,191.7       100.0 %
Cost of goods sold and occupancy costs
    479.9       61.7 %     246.9       60.6 %     1,114.2       60.2 %     719.0       60.3 %
 
   
             
             
             
         
 
                                                               
 
Gross profit
    297.9       38.3 %     160.5       39.4 %     737.0       39.8 %     472.7       39.7 %
 
                                                               
Store and warehouse operating and selling expenses
    200.1       25.7 %     108.5       26.6 %     495.8       26.8 %     314.9       26.4 %
 
                                                               
Segment operating profit
  $ 97.8       12.6 %   $ 52.0       12.8 %   $ 241.2       13.0 %   $ 157.8       13.3 %
 
   
             
             
             
         

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Sales in the International Division increased 91% (71% in local currency) in the third quarter and 55% (35% in local currency) in the first nine months of 2003 compared to the same periods in 2002. Guilbert added $324 million of sales in the third quarter and a total of $444 million since our acquisition in June 2003. Excluding the acquisition of Guilbert, sales increased 11% (2% in local currency) in the third quarter and 18% (3% in local currency) in the first nine months of 2003 compared to the same periods in 2002. The change in exchange rates from the corresponding periods of the prior year increased sales reported in U.S. dollars by $39.9 million for the quarter and $184.7 million for the first nine months of the year. For the quarter and year to date, most of our European operations generated mid-single digit growth in local currency. The principal exceptions were France, Germany and Japan, where local economic conditions have been weak.

The change in accounting for vendor arrangements reduced cost of goods sold for the third quarter and first nine months of 2003 by $12.2 million and $28.7 million, and increased advertising expenses by $12.7 million and $28.8 million, respectively. Had this change been adopted in the third quarter and first nine months of 2002, the pro forma impact would have decreased cost of goods sold by $6.9 million and $19.3 million, and increased advertising expense by $6.5 million and $18.6 million, respectively.

Excluding the impact of adopting EITF 02-16, gross profit margin was down for the quarter and the first nine months of 2003, reflecting a higher mix of contract sales and increased distribution of prospecting catalogs (which have lower margins) in Europe to support growth into new markets, partially offset by better buying and increased purchasing discounts as a result of the Company’s recent Guilbert acquisition.

Store and warehouse operating and selling expenses as a percent of sales, after excluding the impact of EITF 02-16, declined slightly for both the third quarter and year-to-date as a result of strong cost controls and improved operating efficiencies across the Company’s European operations.

The sale of our Australian operations was completed in January 2003. Accordingly, the gain on the sale of this portion of the Company’s business has been presented as a discontinued operation in the Condensed Consolidated Statements of Earnings.

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Corporate and Other

Income and expenses not allocated to our business segments consist of general and administrative expenses, interest income and expense, miscellaneous income and expense, income taxes and inter-segment transactions.

General and Administrative Expenses: General and administrative expenses for the third quarter and nine months reflect the inclusion of Guilbert since acquisition in June, the impact of exchange rates on other international expenses, and amortization of recently implemented finance and human resources software applications. Additionally, net employee-related costs declined, reflecting lower costs associated with certain performance-based incentive plans (based on the established formulas for such plans), partially offset by higher health care and other benefit costs. As noted in our 2002 Annual Report on Form 10-K, other companies may charge more or less of their general and administrative costs to their segments, and comparisons to their operations could be affected.

Miscellaneous Income: In addition to equity in the earnings of our joint venture investments, miscellaneous income for the first nine months of 2003 includes recognition of approximately $12 million of net foreign currency gains, primarily resulting from holding euros during the second quarter of 2003 in advance of purchasing Guilbert on June 2, 2003. Additionally, the third quarter of 2002, includes a $3 million charge for the impairment of our investments in Internet partners.

Income Taxes: The effective income tax rate declined to 30.5% for the third quarter and 32.5% for the first nine months of 2003, compared to 35% in the same periods in 2002. These declines in the rates are attributable to a shift in the mix of domestic and international taxable income, which have different effective tax rates and, in the third quarter, from additional tax benefits earned in certain states.

Other: The Company is currently in the process of evaluating several matters that may result in certain charges to earnings during the fourth quarter of 2003. These matters include a possible loss in connection with the necessary replacement of a warehouse/distribution facility in the United Kingdom due to structural defects relating to the original construction of the facility and the possible write-offs of certain investments in Internet startup companies which the Company made several years ago.

In addition, the Company remains obligated under certain leases for closed retail stores, most of which were closed as part of the Company’s comprehensive business review in the first quarter of 2001. Since 2001, the Company has periodically evaluated and updated its estimates of the costs to be incurred under these obligations. As a result of the current real estate market and economic conditions and their impact on the amount of time and costs required to sublease or otherwise dispose of its obligations on these remaining leases, the Company is reassessing the prospects and uses for these properties which could impact the adequacy of the related reserves.

The ultimate outcome of these matters is unknown at this time. We anticipate completing these analyses and reflecting their results in the fourth quarter of 2003.

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LIQUIDITY AND CAPITAL RESOURCES

During the first nine months of 2003, cash provided by operating activities totaled $489.6 million compared to $677.3 million during the same period last year. This change primarily reflects a higher liquidation of trade and other payables in 2003, partially offset by faster collection of accounts receivable and by a lower ending inventory on hand. The condensed consolidated balance sheet at the end of the third quarter includes the accounts of Guilbert, and Guilbert’s cash flow impact for four months.

Cash used in investing activities was $1,016.7 million in the first nine months of 2003 compared to $131.0 million in the same period last year. Investing activities for 2003 include approximately $919.0 million for payments made in connection with our acquisition of Guilbert, net of cash acquired. The purchase price of Guilbert is subject to an upward adjustment of 40 million euros of Office Depot common stock or cash if Office Depot stock closes above $20 per share for five consecutive days over an 18-month period following the closing date of the acquisition. See Note D to our Condensed Consolidated Financial Statements for additional discussion of the purchase transaction. The increase in cash used for investing activities was partially offset by cash proceeds from selling our Australian business in January 2003.

Capital expenditures for first nine months of 2003 reflect the opening of fourteen new store locations and seven relocations in North American Retail, the opening of thirteen wholly-owned retail stores internationally (including the introduction of retail stores in Spain with the opening of five stores), as well as continued corporate infrastructure additions. The Company remains on track to open a total of approximately 35 new stores in North America in 2003.

Cash provided by financing activities was $437.9 million in the first nine months of 2003 compared to a use of $203.8 million in the same period in 2002. The major components in 2003 include proceeds from the issuance of our $400 million senior notes due 2013 as well as proceeds from exercises of stock options in the amount of $42.5 million. Cash used by financing activities in 2002 is primarily a result of our redemption of the Liquid Yield Option Notes (LYONS®) due in 2007 and 2008 for approximately $243 million as well as our purchase of $36 million of Office Depot common stock, partially offset by exercises of employee stock options and stock purchase plans in the amount of $83.5 million.

At September 27, 2003, we had approximately $431.2 million of available credit under our revolving credit facility and letters of credit outstanding totaling $72.9 million.

NEW ACCOUNTING STANDARDS

In January 2003, the FASB issued FASB Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities. FIN 46 addresses how to identify variable interest entities and provides guidance as to how a company may assess its interests in a variable interest entity for purposes of deciding whether consolidation of that entity is required. FIN 46 is effective for all variable interest entities created after January 31, 2003. The Company is required to adopt the provisions of FIN 46 for any variable interest entity created prior to February 1, 2003 by the end of the current fiscal year. The Company is reviewing the provisions of this interpretation and currently does not expect its implementation to have a material effect on the financial position, results of operations or cash flows.

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CRITICAL ACCOUNTING POLICIES

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our 2002 Annual Report on Form 10-K, filed on March 13, 2003, in the Notes to the Consolidated Financial Statements, Note A and the Critical Accounting Policies Section.

CAUTIONARY STATEMENTS for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

In December 1995, the Private Securities Litigation Reform Act of 1995 (the “Act”) was enacted by the United States Congress. The Act, as amended, contains certain amendments to the Securities Act of 1933 and the Securities Exchange Act of 1934. These amendments provide protection from liability in private lawsuits for “forward-looking” statements made by public companies. We want to take advantage of the “safe harbor” provisions of the Act. In doing so, we have disclosed these forward-looking statements by informing you in specific cautionary statements of the circumstances which may cause the information in these statements not to transpire as expected.

This Quarterly Report on Form 10-Q contains both historical information and other information that you may use to infer future performance. Examples of historical information include our quarterly financial statements and the commentary on past performance contained in our MD&A. While we have specifically identified certain information as being forward-looking in the context of its presentation, we caution you that, with the exception of information that is clearly historical, all the information contained in this Quarterly Report on Form 10-Q should be considered to be “forward-looking statements” as referred to 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 2002 Annual Report on Form 10-K filed with the Securities and 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 Quarterly Report. In particular, the factors we discuss below and in our 2002 Annual Report on Form 10-K could affect our actual results and could cause our actual results during the remainder of 2003 and in future years to differ materially from those expressed in any forward-looking statement made by us in this Quarterly Report on Form 10-Q. Those Cautionary Statements contained in our 2002 Annual Report on Form 10-K are incorporated herein by this reference to them; and, in addition, we urge you to also consider the following cautionary statements:

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Risks and Uncertainties Associated with the Acquisition of Guilbert S.A.: On June 2, 2003, we acquired Guilbert, a European contract business. This acquisition almost doubles the size of our operations in Europe. Guilbert is itself the product of a number of relatively recent acquisitions in a variety of different European locations and is not yet a fully-integrated company. Its integration with our existing business operations in Europe will present many difficult challenges and will demand the full-time attention of several key managers in Europe, and the part-time attention of most others. The demands placed on the time of our management team in the Guilbert integration may adversely affect the operation of our existing businesses in Europe. Our experience in integrating large acquisitions, such as the integration of Viking, indicates that the integration could take longer than planned and be subject to unanticipated difficulties and expenses. Key risks involve failure to execute as well or as quickly as anticipated on our integration plans; loss of key personnel in the acquired company; more difficulty in achieving cash savings than originally contemplated; and resistance to cultural changes in the acquired organization.

Furthermore, prior to our acquisition, Guilbert reported only under French generally accepted accounting principles and was not subject to U.S. securities laws or accounting rules. We may encounter unforeseen difficulties implementing the different and demanding accounting and disclosure controls required by U.S. law to be applied to Guilbert now that it is a subsidiary of a U.S. reporting company.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risks

Refer to the disclosure in our 2002 Annual Report on Form 10-K. We do not believe that the risk we face related to interest rate changes is materially different than it was at the date of the Annual Report.

Foreign Exchange Rate Risks

Refer to the disclosure in our 2002 Annual Report on Form 10-K. The acquisition of Guilbert S.A. in June 2003 has increased our operations in countries with euro and British pound functional currencies. Accordingly, a greater percentage of the Company’s reported results of operations is subject to changes in foreign currency exchange rates. Similar to our previously existing business in Europe, the Guilbert operations generally are conducted in the relevant local currency and Office Depot’s overall foreign currency transaction exposure has not changed materially.

Item 4. CONTROLS AND PROCEDURES

     
(a)   Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.
     
(b)   Internal Control Over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

We are involved in litigation arising in the normal course of our business. While, from time to time, claims are asserted that make demands for large sums of money (including, from time to time, actions which are asserted to be maintainable as class action suits), we do not believe that any of these matters, either individually or in the aggregate, will materially affect our financial position or the results of our operations.

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Item 6. EXHIBITS AND REPORTS ON FORM 8-K

     a) Exhibits

             
      4.1     Exchange and Registration Rights Agreement dated August 11, 2003 by and among the Company and the initial purchasers of the $400 million 6.250% Senior Notes due August 15, 2013 (incorporated by reference from the Form S-4 filed by Office Depot, Inc. on September 8, 2003)
             
      4.2     Indenture, dated as of August 11, 2003, for the $400 million 6.250% Senior Notes due August 15, 2013, between the Company and SunTrust Bank (incorporated by reference from the Form S-4 filed by Office Depot, Inc. on September 8, 2003)
             
      4.3     Supplemental Indenture No. 1, dated as of August 11, 2003, for the $400 million 6.250% Senior Notes due August 15, 2013, between the Company and SunTrust Bank
             
      4.4     Supplemental Indenture No. 2, dated as of October 9, 2003, for the $400 million 6.250% Senior Notes due August 15, 2013, between the Company and SunTrust Bank
             
      31.1     Section 302 Certification of CEO
             
      31.2     Section 302 Certification of CFO
             
      32     Section 906 Certifications

     b) Reports on Form 8-K

             
      1.     Form 8-K/A filed on July 31 to amend and supplement the information contained in the Form 8-K filed on June 17 and the Form 8-K/A filed on June 19
             
      2.     Form 8-K filed on August 5 announcing planned issuance of $300 million of debt securities, pursuant to an institutional private placement of ten-year senior notes
             
      3.     Form 8-K filed on August 6 announcing completion of the previously announced private placement offering
             
      4.     Form 8-K filed on September 3 regarding a third quarter mid-quarter performance update
             
      5.     Form 8-K filed on September 16 announcing the resignation of the EVP, Merchandising
             
      6.     Form 8-K filed on September 18 announcing an exchange offer related to the issuance of $400 million senior notes

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      7.     Form 8-K filed on September 29 announcing certain organizational changes in senior management
             
      8.     Form 8-K filed on October 9 announcing extension of the exchange offer related to the $400 million senior notes
             
      9.     Form 8-K filed on October 16 regarding a press release issued with earnings information for the quarter ended September 27
             
      10.     Form 8-K filed on October 17 announcing extension of the exchange offer related to the $400 million senior notes
             
      11.     Form 8-K filed on October 17 regarding a transcript of the conference call on financial results of Office Depot, Inc. conducted on October 16
             
      12.     Form 8-K filed on October 21 regarding completion of the exchange offer related to the $400 million senior notes

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

     
    OFFICE DEPOT, INC.
   
    (Registrant)
     
     
Date: October 27, 2003   By: /s/ Bruce Nelson
   
    Bruce Nelson
Chief Executive Officer
     
     
Date: October 27, 2003   By: /s/ Charles E. Brown
   
    Charles E. Brown
Executive Vice President, Finance and Chief Financial Officer
(Principal Financial Officer)
     
     
Date: October 27, 2003   By: /s/ James A. Walker
   
    James A. Walker
Senior Vice President, Finance and Controller
(Principal Accounting Officer)

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