Office Depot 2000 Annual Report Download - page 27

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Office Depot, Inc. and Subsidiaries
Euro
On January 1, 1999, eleven of the fifteen member countries of
the European Economic and Monetary Union (“EMU”) estab-
lished fixed conversion rates between their existing currencies
and the EMU’s common currency (the “euro”). The euro is
presently trading on currency exchanges and may be used in
business transactions. The ultimate conversion to the euro will
eliminate currency exchange rate risk among the member coun-
tries. The former currencies of the participating countries are
scheduled to remain the sole legal tender as denominations of
the euro and the euro will not exist as a physical means of
exchange until January 1, 2002. On January 1, 2002, the euro
will be in circulation and parties may settle transactions using
either the euro or a participating country’s former currency. On
July 1, 2002, new euro-denominated bills and coins will become
the sole legal currency, and all former currencies will be with-
drawn from circulation.
We generate significant sales in Europe and are currently evalu-
ating the business implications of the conversion to the euro. We
have determined that we need to make multiple changes and
modifications to our current systems to prepare them for July 1,
2002. Also, the use of a single currency in the participating
countries may affect our ability to price our products differently
in various European markets because of price transparency. We
realize that we may be faced with price harmonization at lower
average prices for items we sell in some markets. Nevertheless,
other market factors such as local taxes, customer preferences
and product assortment may reduce the likelihood or impact
of price equalization. Based on these evaluations, we do not
expect the conversion to the euro to have a material effect on
our financial position or the results of our operations.
Interest Rate and Foreign Exchange Market Risks
Interest Rate Risks
We have some investments subject to interest rate risk. These
consist primarily of cash equivalents and short-term marketable
securities. A 10% change in interest rates would change our
interest income by approximately $0.5 million. Our zero coupon,
convertible subordinated notes offer stated yields to maturity
which are not subject to interest rate risks. Borrowings under
our domestic and Japanese credit facilities are both subject to
variable interest rates. The interest rate risk on our Japanese
bank borrowings has been partially mitigated by an interest rate
swap that fixes the interest rate on a portion of our yen borrow-
ings for the remaining life of the loan. With interest rates currently
approximating 1% in Japan, a 10% change in interest rates
would not materially change our total interest expense. How-
ever, a 10% change in the domestic interest rates would have
changed our net interest expense by $2.3 million in 2000.
Foreign Exchange Rate Risks
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 these foreign currency earnings are translated into U.S.
dollars in our consolidated financial statements. As of December
30, 2000, a 10% change in the applicable foreign exchange rates
would have resulted in an increase or decrease in our annual
operating profit of approximately $9.8 million on an annual basis.
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
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 2000, we entered
into foreign exchange forward contracts to hedge certain inven-
tory exposures. The maximum contract amount outstanding
during the year was $14.6 million.
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 generally 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.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the
“FASB”) issued Statement of Financial Accounting Standards
(“SFAS”) No. 133, “Accounting for Derivative Instruments and
Hedging Activities.” SFAS No. 133 requires that we record all
derivatives as assets or liabilities measured at their fair value.
Gains or losses resulting from changes in the values of those
derivatives would be accounted for according to the intended
use of the derivative and whether it qualifies for hedge accounting.
In July 1999, the FASB issued SFAS No. 137, which deferred
the effective date of SFAS No. 133 until the start of fiscal years
beginning after June 15, 2000. We will adopt SFAS No. 133 for
our fiscal year 2001. Assuming our current level of involvement
in derivative instruments and hedging activities does not change
before we adopt this Statement, we do not expect the adoption
of SFAS No. 133 to have a material impact on our financial
position or the results of our operations.