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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 (Fee required)
For the fiscal year ended December 30, 1995
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No fee required)
for the transition period from to
Commission file number 1-10948
OFFICE DEPOT, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-2663954
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2200 Old Germantown Road, Delray Beach, Florida 33445
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 407/278-4800
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange on
Title of each class which registered
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<S> <C>
Common Stock, par value $0.01 per share New York Stock Exchange
Liquid Yield Option Notes due 2007 convertible into Common Stock New York Stock Exchange
Liquid Yield Option Notes due 2008 convertible into Common Stock New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 25, 1996 was approximately $2,993,014,582.
As of March 25, 1996, the Registrant had 156,575,931 shares of Common
Stock outstanding.
Documents Incorporated by Reference
Portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended December 30, 1995, are incorporated by reference in Part II
and the Proxy Statement to be mailed to stockholders on or about April 23, 1996
for the Annual Meeting to be held on May 23, 1996, are incorporated by reference
in Part III.
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PART I
ITEM 1. BUSINESS.
GENERAL
Office Depot, Inc. (the "Company") operates the largest chain of
high-volume retail office supply stores in North America, provides delivery
service to small- and medium-size businesses and is a full-service contract
stationer serving medium- and large-size businesses throughout the United
States. The Company sells high-quality, brand-name office products at
significant discounts at its office supply stores and through its delivery
business.
The Company began its operations in 1986 with its first retail store.
Currently, it operates 476 office supply stores in 37 states and the District
of Columbia and 29 stores in five Canadian provinces. Through its 23 customer
service centers and certain retail stores, the Company delivers office products
to businesses of all sizes and provides value-added services to medium- and
large-size businesses.
The Company's office supply stores carry a wide selection of merchandise,
including general office supplies, business machines and computers, office
furniture and other business-related products for sale primarily to small- and
medium-size businesses. The stores utilize a "warehouse" format. The
Company also operates three Images(TM) stores and one Furniture At Work(TM)
store. The Company's business strategy for its office supply stores is to
enhance the sales and profitability of its existing stores and to add new
stores in locations where the Company can establish a significant market
presence. During 1995, the Company opened 82 new office supply stores and
closed 1 store. The Company intends to open approximately 80 stores during
1996.
The Company's delivery business provides delivery services of office
products to small- and medium-size businesses and full service contract
stationer service for medium- and large-size businesses (generally,
organizations with over 75 white-collar employees), schools and other
educational institutions and governmental agencies. The Company's delivery
sales exceeded $1.65 billion in 1995. The Company provides its delivery
customers access to a broad selection of office supplies and office furniture,
including the approximately 6,000 items available at the Company's office
supply stores and approximately 5,000 additional items which are only stocked
at the Company's customer service centers. In addition, the Company provides
its contract stationer customers with specialized resources and services
designed to aid them in achieving improved efficiencies and significant
reduction in their overall office supply and office furniture costs. These
efficiencies include electronic ordering, stockless office procurement and
business forms management services (which reduce customer need for office
supplies storage facilities), desktop delivery programs (which reduce customer
personnel requirements) and comprehensive product utilization reports. The
Company's nationwide full service contract stationer business was built
primarily through the acquisition of eight contract stationers in 1993 and
1994. The Company's strategy for its delivery business is to build an
integrated national operation to provide delivery service to small- and
medium-size businesses and to increase the Company's penetration into new and
existing markets for its full service contract stationer business. The
Company also seeks to enhance its operating margins through the conversion of
businesses acquired by the Company into a national network of facilities
providing a consistent high-level of customer service. The Company is in the
process of combining the operations of its 23 contract stationer warehouses
and delivery centers, as well as the delivery functions at the retail stores.
During 1995, the Company replaced eight of its customer service centers with
larger, more efficient facilities, closed three customer service centers, and
added two new customer service centers. During 1996, the Company plans to
replace three of its customer service centers.
Through expansion of both its office supply stores and delivery business,
the Company seeks to increase efficiencies in operations, purchasing, marketing
and management. The Company's merchandising strategy is to offer customers a
wide selection of brand-name office products at everyday low prices. The
Company is able to maintain its competitive price policy primarily as a result
of the significant cost efficiencies achieved through its operating format and
purchasing power. The Company buys substantially all of its inventory directly
from manufacturers in large quantities. It does not utilize a central
warehouse and maintains most of its inventory on the sales floors of its
stores, its crossdocks and at its customer service centers. The Company
operates in a highly
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competitive environment and no assurance can be given that
increased competition will not have an adverse effect on the Company.
Following is a brief description of the eight contract stationer
acquisitions noted above:
- In May 1993, the Company acquired the office supply
business of Wilson Stationery & Printing Company ("Wilson"), a
full service contract stationer with operations in Texas and
North Carolina.
- In September 1993, the Company acquired Eastman Office
Products Corporation ("Eastman"), a full service contract
stationer and office furniture dealer headquartered in
California that operates primarily in the western United
States.
- In February 1994, the Company acquired L.E. Muran Co.,
Inc., based in Boston, and Yorkship Press, Inc. servicing
customers in Philadelphia and southern New Jersey.
- In May 1994, the Company acquired Midwest Carbon Company,
based in Minneapolis, and Silvers, Inc. based in Detroit.
- In August 1994, the Company acquired J.A. Kindel Company,
based in Cincinnati, and Allstate Office Products, Inc., based
in Tampa.
Each of the 1994 acquisitions was accounted for on a "pooling of
interests" basis. Accordingly, the financial data, statistical data,
financial statements and discussions of financial and other information
included in or incorporated by reference herein for periods prior to the
acquisitions have been restated to reflect the financial position, results of
operations, and other information relating to these companies for all periods
presented. No affiliations existed between the Company and any of the acquired
companies prior to the acquisitions. The 1993 acquisitions were accounted for
as purchases. Therefore, all information and data included or incorporated by
reference herein include the results of those businesses from the respective
dates of acquisition.
Since 1994, the Company has entered into licensing arrangements for the
operation of office supply stores under the Office Depot(R) name in Colombia,
Israel and Poland and a joint venture agreement to operate stores in Mexico.
In June 1995, the Company entered into a joint venture agreement with Carrefour
S.A. ("Carrefour") to own and operate office supply stores in France using a
format similar to that utilized by the Company in its U.S. stores. Carrefour,
through Fourcar B.V., an indirect, wholly-owned subsidiary, owns approximately
6% of the Company's issued and outstanding shares of common stock. The joint
venture is owned 50% by Carrefour and 50% by the Company. The joint venture
currently plans to open its first store in France in mid-1996. The Company
also has entered into a licensing agreement with Central Department Store Co.,
Ltd., one of the largest retail conglomerates in Southeast Asia, to open stores
in Thailand beginning in late-1996.
OFFICE PRODUCTS INDUSTRY
The office products industry is comprised of three broad categories of
merchandise: office supplies, office machines and microcomputers, and office
furniture. These products are distributed through different and sometimes
overlapping channels of distribution, including manufacturers, distributors,
dealers, retailers and catalog companies.
Sales of office products in the United States have historically been made
primarily through office product dealers and contract stationers, which
generally operate one or more retail stores and utilize a central warehouse
facility. Smaller businesses have traditionally purchased office products from
retail office products dealers, and there have been few regional or national
chains. This portion of the industry is still typified by small stores
operated by dealers that do not stock a full range of office products.
Dealers purchase a significant portion of their merchandise from national or
regional office supply distributors who, in turn, purchase merchandise from
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manufacturers. Dealers often employ a commissioned sales force that utilizes
the distributor's catalog, showing products at retail list prices, for
selection and price negotiation with the customer. The Company believes that
small- and medium-size businesses typically have been able to obtain discounts
on manufacturers' suggested retail list prices of only 20% or less. In
addition, those businesses whose volume usage does not justify a dealer's one-
to-one selling effort generally have been treated as retail customers and
charged prices close to full retail list prices.
Over the past decade, high-volume office supply superstores have emerged
throughout the United States. These stores offer selection, service and low
prices and target the smaller businesses that traditionally purchased from
dealers. The superstores' price advantages result primarily from direct,
high-volume purchasing from manufacturers and warehouse retailing, thereby
avoiding the distributor's mark-up and eliminating the need for a commissioned
sales force and a central distribution facility. High-volume office products
retailers typically offer substantial price savings to individuals and small-
and medium-size businesses, which traditionally have had limited opportunities
to buy at significant discounts from retail list prices.
Larger customers have been, and continue to be, served primarily by full
service contract stationers which offer contract bids to larger businesses at
discounts equivalent to or greater than those offered by the Company. These
stationers traditionally serve larger businesses through commissioned sales
forces, purchase in large quantities primarily from manufacturers and offer
competitive pricing and customized services to their customers. The Company
entered the full-service contract stationer portion of the office supply
industry by acquiring eight contract stationers during 1993 and 1994 and
opening new facilities in 1995.
MERCHANDISING AND PRODUCT STRATEGY
The Company's merchandising strategy is to offer a broad selection of
brand-name office products at everyday low prices. The Company offers a
comprehensive selection of paper and paper products, filing supplies, computer
hardware and software, calculators, copiers, typewriters, telephones, facsimile
and other business machines, office furniture, art and engineering supplies and
virtually every other type of office supply. Each of the Company's office
supply stores stocks approximately 6,000 stock-keeping units (including
variations in color and size) and each customer service center stocks
approximately 11,000 stock-keeping units, including the 6,000 stock-keeping
units stocked at the stores.
The table below shows sales of each major product group as a percentage of
total merchandise sales for the 1995, 1994, and 1993 fiscal years:
<TABLE>
Caption
1995 1994 1993
Fiscal Fiscal Fiscal
Year Year Year
------ ------ ------
<S> <C> <C> <C>
General office supplies(1)..................... 47.2% 48.1% 50.9%
Business machines and related supplies,
computers and computer accessories(2)........ 41.3% 39.0 36.2
Office furniture(3)............................ 11.5% 12.9 12.9
====== ====== ======
100.0% 100.0% 100.0%
</TABLE>
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(1) Includes paper, filing supplies, organizers, writing instruments, mailing
supplies, desktop accessories, calendars, business forms, binders, tape,
art supplies, books, engineering and janitorial supplies and revenues from
the business services center located in each store.
(2) Includes calculators, adding machines, typewriters, telephones, cash
registers, copiers, facsimile machines, safes, tape recorders, computers,
computer diskettes, computer paper and related accessories.
(3) Includes chairs, desks, tables, partitions and filing and storage
cabinets.
The Company buys substantially all of its merchandise directly from
manufacturers and other primary source suppliers. Products are generally
delivered from manufacturers directly to the stores or customer
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service centers. The Company operates nine cross-dock operations that receive
bulk deliveries from certain vendors and sort and deliver merchandise to the
Company's stores and customer service centers. The cross-dock operations
enable the Company to maintain better in-stock positions. No single customer
accounts for more than one percent of the Company's sales. The Company has no
material long-term contracts or commitments with any vendor or customer. The
Company has not experienced any difficulty in obtaining desired quantities of
merchandise for sale and does not foresee any significant difficulties in the
future.
Initial purchasing decisions are generally made at the corporate
headquarters level by buyers who are responsible for selecting and pricing
merchandise. Inventory levels are monitored, and reorders for products are
prepared by central replenishment buyers or "rebuyers" with the assistance of a
computerized automatic replenishment system. This system allows buyers to
devote more time to selecting products, developing new product lines, analyzing
competitive developments and negotiating with vendors in order to obtain more
favorable prices and product availability. Purchase orders to approximately
400 vendors are currently transmitted by electronic data interchange (EDI),
which expedites orders and promotes accuracy and efficiency. The Company
receives Advance Ship Notices (ASN) and invoicing via EDI from selected vendors
and continues to expand this program to other vendors.
MARKETING AND SALES
Marketing. The Company's marketing programs are designed to attract new
customers and to provide information to existing customers. The Company places
advertisements with the major local newspapers in each of its markets. These
newspaper advertisements are supplemented with local radio and television
advertising and direct marketing efforts. During 1992, the Company launched a
major national television advertising campaign utilizing the "Taking Care of
Business" theme. The current series of television commercials is running on
three national television networks and on twelve national cable stations. All
print advertisements, as well as catalog layouts, are created by the Company's
in-house graphics department. The Company periodically issues catalogs
featuring merchandise offered in its stores. The catalogs compare the
manufacturer's suggested retail list price and the Company's price to
illustrate the savings offered. The catalogs are distributed through direct
mail programs and are available in each store. Upon entering a new market, the
Company purchases a list of businesses for an initial mailing of catalogs.
This list is continually refined and updated by incorporating the names of
private label credit card holders and guarantee card holders and forms the
basis of a highly targeted proprietary mailing list for updated catalogs and
other promotional mailings.
The Company has a low price guarantee policy. Under this policy, the
Company will match any competitor's lower price and give the customer 55% (up
to $55) of the difference toward the customer's purchase. This program assures
customers of always receiving the lowest price from the Company even during
periodic sales promotions by competitors. Monthly competitive pricing analyses
are performed to monitor each market, and prices are adjusted as necessary to
adhere to this pricing philosophy and ensure competitive positioning.
Sales. In addition to the sales associates at each of its stores, the
Company has a direct sales force serving its contract stationer customers. The
sales force operates out of the Company's 23 customer service centers and
additional satellite sales offices. All members of the Company's sales force
are employees of the Company.
SERVICES
Each Office Depot store contains a multipurpose business center for
printing, copying and a wide assortment of other services. These business
centers offer shoppers a range of printing and reproduction capabilities,
including business cards, letterhead stationery and envelopes, personalized
checks and business forms, full- or self-service copies, color copies, custom
stamps and labels, signs and banners. Each of the Company's office supply
stores also has business machine specialists, specially-trained associates who
are available to answer customer questions on a wide variety of technically
sophisticated products.
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The Company currently operates 23 regional customer service centers in 17
states. Delivery orders received from customers in these areas, whether
through the Company's telephone centers, contract customer orders or at its
stores, are substantially handled through these facilities. The Company
believes that these facilities enable it to provide improved delivery services
on a more cost effective basis.
The Company's small- to medium-size customers nationwide can place orders
by telephone or facsimile using toll-free telephone numbers through the
Company's order departments in South Florida and the San Francisco area.
Orders received by the order departments are transmitted electronically to the
store or delivery center nearest the customer for pick-up or delivery at a
nominal delivery fee or free delivery with a minimum order size. Orders are
packaged, invoiced and shipped for next-day delivery.
The Company provides the office supplies purchasing departments of its
medium-to large-size business customers with a wide range of services designed
to improve efficiencies and reduce costs, including electronic ordering,
stockless office procurement and business forms management services, desktop
delivery programs and comprehensive product utilization reports. For contract
customers, the Company will typically sell on credit through an open account,
although all credit options provided at the retail stores are also available to
all delivery customers.
The Company offers revolving credit terms to its customers through the use
of private label credit cards. Every customer can apply for one of these
credit cards, which are issued without charge. Sales transactions using the
private label credit cards are transmitted by computer to financial services
companies, which credit the Company's bank account with the net proceeds within
two days.
EXPANSION PROGRAM
Office Supply Stores. The Company's business strategy for its office
supply stores is to enhance the sales and profitability of its existing stores,
and to add new stores in locations where the Company can achieve a significant
market presence. The Company opened 82 new stores and closed one store in
1995, and plans to open approximately 80 stores during 1996.
<TABLE>
Stores
-----------------------------------------------
Open Open
Beginning End
Year of Period Opened/Acquired Closed of Period
- ---- --------- --------------- ------ ---------
<S> <C> <C> <C> <C>
1991. . . . . . . . . 173 57 2 228
1992. . . . . . . . . 228 58(1) 2 284
1993. . . . . . . . . 284 68 1 351
1994. . . . . . . . . 351 71 2 420
1995. . . . . . . . . 420 82 1 501(2)
</TABLE>
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(1) Includes the acquisition of five stores in Canada.
(2) Does not include two Images(TM) stores and one Furniture At Work(TM)
store.
Prior to selecting a new store site, the Company obtains detailed
demographic information indicating business concentrations, traffic counts,
population, income levels and future growth prospects. The Company's existing
and scheduled new stores are located primarily in suburban strip shopping
centers on major commercial
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thoroughfares where the cost of space is generally lower than at urban
locations. Suburban locations are generally more accessible to the Company's
primary customers, have convenient parking and facilitate delivery to customers
and receipt of inventory from manufacturers. The Company expands by leasing
existing space and renovating it according to its specifications or by
constructing new space according to its specifications.
Accomplishing the Company's expansion goals will depend on a number of
factors, including the Company's ability to locate and obtain acceptable sites,
open new stores in a timely manner, hire and train competent managers,
integrate new stores into its operations, generate funds from operations and
continue to access external sources of capital.
Delivery Services. The Company's strategy for delivery services is to
build an integrated national operation which will provide delivery services to
small- and medium-size businesses and enable it to increase the penetration in
new and existing markets by the Company's full service contract stationer
business. The Company is in the process of combining the operations of its
contract stationer warehouses and delivery centers, as well as the delivery
functions at the retail stores. During 1995, the Company replaced eight of its
existing customer service centers with larger, more efficient facilities,
closed three customer service centers, and added two additional customer
service centers. During 1996, the Company plans to replace three customer
service centers.
New Opportunities. In addition to the Company's core business focus and
expansion opportunities, the Company is also developing and testing new growth
concepts including the following:
- International - Retail office supply stores operated under
the Office Depot(R) name abroad, either through joint
ventures or licensing arrangements. Since 1994, a total of 12
such stores and delivery centers have been opened in Colombia,
Israel, Mexico and Poland and the Company expects additional
stores to be opened in these countries as well as in France
and Thailand during 1996.
- Images(TM) - Retail facilities which provide a range of
business services including graphic design, printing, copying,
shipping and fulfillment services. Three Images(TM) units are
currently open in South Florida with additional openings
planned during 1996.
- Office Depot(R) "Megastores" - 45,000-50,000 square foot
Office Depot(R) retail stores with expanded assortments of
furniture, computer software and accessories and general
office supplies. The first megastore opened in August in Las
Vegas. Three additional megastores opened during December
1995, when the Company entered the New York metropolitan
market.
- Furniture At Work(TM) - Approximately 20,000 square foot
office furniture stores, which offer a broad line of office
furniture, office accessories and design services. The
Company opened its first store in Texas in the fourth quarter
of 1995 and will open an additional store in California at the
beginning of the second quarter of 1996.
- Uptime Services(SM) - Providers, primarily through outside
service companies, of a variety of technology support services
which complement the Company's computer and business machine
offerings, including on-site installation (at home or office),
computer rentals and training, software support and product
protection. The Company began offering these services to both
United States and Canadian customers in July 1995.
STORE DESIGN AND OPERATIONS
Office Supply Stores. The Company's office supply stores average
approximately 25,000-30,000 square feet of space (other than its Megastores,
which average 45,000-50,000 square feet) and conform to a model designed to
achieve cost efficiency by minimizing rent and eliminating the need for a
central warehouse. Each store displays virtually all of its inventory on the
sales floor according to a plan-o-gram that designates the location of each
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item in the store. The plan-o-gram is intended to ensure that merchandise is
effectively displayed and to promote economy and efficiency in the use of
merchandising space. On the sales floor, merchandise is displayed on various
types of fixtures including low-profile fixtures, on pallets or in bins on ten
to twelve foot high industrial steel shelving that permits the bulk stacking of
inventory and quick and efficient restocking. The shelving is positioned to
form aisles large enough to comfortably accommodate customer traffic and
merchandise movement. Additional efficiencies are gained by selling merchandise
in multiple quantity packaging, which significantly reduces duplicate handling
and stocking costs.
In all of the Company's stores, inventory that has not been bar coded by
the manufacturer is bar coded in the receiving area and moved directly to the
sales floor. Sales are processed through centralized check-out facilities,
which transmit sales and inventory information on a stock-keeping unit basis to
the Company's central computer system where this information is updated daily.
Rather than individually price marking each product, merchandise is identified
by its stock-keeping unit number with a master sign for each product displaying
the product's price. As price changes occur, a new master sign is
automatically generated for the product display and the new price is reflected
in the check-out register, allowing the Company to avoid labor costs associated
with price remarking.
Delivery Services. The Company's customer service centers range from
38,000 to 325,000 square feet, with its more recently opened customer service
centers averaging 150,000 square feet. Inventory is received and stocked in
each center using an automated inventory tracking system. The Company is in
the process of converting its customer service centers to an integrated system.
Customer orders, placed via phone, fax or electronically, are filled by the
appropriate customer service center for next day delivery. The appropriate
customer service center is determined by the Company's automated routing
systems and the order is filled by using both in-stock and wholesaler
inventory.
MANAGEMENT INFORMATION SYSTEMS
The Company employs IBM ES9000 mainframes and IBM System AS/400
computers and client/server technologies to aid in controlling its
merchandising and operations. The systems include advanced software packages
that have been customized for the Company's specific business operations. By
integrating these environments, the Company improved its ability to manage
stock status, order processing, inventory replenishment and advertising
maintenance. The Company is continuing its implementation of a multi-year
strategy to upgrade and convert its systems to operate in an "open system"
mainframe environment.
Inventory data is entered into the computer system upon its receipt by the
store, and sales data is entered through the use of a point-of-sale or
telemarketing system. The point-of-sale system permits the entry of sales data
through the use of bar code laser scanning and also has a price "look-up"
capability that permits immediate price checking and efficient movement of
customers through the check-out process. Information is centrally processed at
the end of each day, permitting a perpetual daily inventory and the calculation
of average unit cost by stock-keeping unit for each store or warehouse. Daily
compilation of sales and margin data permits the monitoring of sales, gross
margin and inventory by item and product line, as well as the results of sales
promotions. For all stock-keeping units, management has immediate access to
on-hand daily unit inventory, units on order, current and past rates of sale,
the number of weeks' sales for which quantities are on-hand and a recommended
unit purchase reorder. Data from all of the Company's stores is transmitted to
the Company's headquarters on a daily basis.
The Company is in the process of integrating the acquired contract
stationer businesses and its commercial delivery business into a national
delivery network. This integration encompasses many systems, including order
entry, warehouse management and routing. This integrated system will allow a
customer to place an order via phone, fax or electronically. When the order is
placed, the system will determine the appropriate customer service center for
delivery, look up the stock status of each item ordered and will automatically
reserve the item for the customer or place it on order from the wholesaler.
The wholesaler order will be delivered to the customer service center the same
day, enabling the Company to deliver the most complete order possible the next
day. The Company believes that the complete implementation of these systems
will enable it to aggressively grow its delivery business.
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EMPLOYEES, STORE MANAGEMENT AND TRAINING
As of March 18, 1996, the Company employed approximately 31,000
persons. Additional personnel will be added as needed to implement the
Company's expansion program. The Company's goal is to promote as many existing
employees into management positions as possible. Due to the rate of its
expansion, however, for the foreseeable future the Company will continue to
hire a portion of its management personnel from outside the Company.
The Company's policy is to hire and train additional personnel in advance
of new store and customer service center openings. In general, store managers
have extensive experience in retailing, particularly with warehouse store
chains or discount stores that generate high sales volumes. Each new store
manager usually spends two to four months in an apprenticeship position at an
existing store prior to being assigned to a new store. The Company's retail
sales associates are required to view product knowledge videos and complete
written training programs relating to certain products. The Company creates
some of these videos and training programs while the remainder are supplied by
manufacturers. Typically, customer service center managers have extensive
experience in distribution operations. The Company grants stock options to
certain of its employees as an incentive to attract and retain such employees.
The Company has never experienced a strike or any other work stoppages and
management believes that its relations with its employees are good. There are
no collective bargaining agreements covering any of the Company's employees.
COMPETITION
The Company operates in a highly competitive environment. Its markets are
presently served by traditional office products dealers that typically operate
a central warehouse and one or more retail stores. The Company believes it
competes favorably against these dealers, who purchase their products from
distributors and generally sell their products at prices higher than those
offered by the Company, because they generally offer small- and medium-size
businesses discounts on manufacturers' suggested retail list prices of only 20%
or less as compared to the Company's 30% to 60% discount to customers. The
Company also competes with wholesale clubs selling general merchandise,
discount stores, mass merchandisers, conventional retail stores, catalog
showrooms and direct mail companies. While these competitors generally charge
small business customers lower prices than traditional office products dealers,
they typically have a more limited in-stock product selection than the
Company's retail stores and do not provide many of the services provided by the
Company.
Several high-volume office supply chains that are similar in concept to
the Company in terms of store format, pricing strategy and product selection
and availability also operate in the United States. The Company competes with
these chains and wholesale club chains in substantially all of its current
markets. The Company believes that in the future it will face increased
competition from these chains as the Company and these chains expand their
operations.
In the delivery and contract stationer portions of the industry, principal
competitors are national and regional full service contract stationers,
national and regional office furniture dealers, independent office product
distributors, discount superstores and, to a lesser extent, direct mail order
houses and stationery retail outlets. Certain office supply superstores are
also developing a presence in the contract stationer portion of the business.
The Company competes with these businesses in substantially all of its current
markets.
Some of the entities against which the Company competes, or may compete,
may have greater financial resources than the Company. No assurance can be
given that increased competition will not have an adverse effect on the
Company. The Company believes it competes based on product price, selection,
availability and service.
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ITEM 2. PROPERTIES.
As of March 25, 1996, the Company operated 476 office supply stores in 37
states and the District of Columbia and 29 stores in five Canadian provinces.
The Company also operates 23 customer service centers. The following table
sets forth the locations of these Company facilities.
<TABLE>
<CAPTION>
Number of
Number Number Customer Service
State of Stores State of Stores State Delivery Centers
- ---- --------- ---- --------- ----- ----------------
<S> <C> <C> <C> <C> <C>
Alabama 9 Nevada 5 Arizona 1
Arizona 2 New Jersey 2 California 5
Arkansas 4 New Mexico 3 Colorado 1
California 94 New York 1 Florida 2
Colorado 15 North Carolina 18 Georgia 1
District of Columbia 2 Ohio 11 Illinois 1
Florida 62 Oklahoma 5 Louisiana 1
Georgia 24 Oregon 11 Maryland 1
Hawaii 3 Pennsylvania 5 Massachusetts 1
Idaho 1 South Carolina 8 Michigan 1
Illinois 21 Tennessee 6 Minnesota 1
Indiana 9 Texas 52 New Jersey 1
Iowa 1 Virginia 7 North Carolina 1
Kansas 5 Washington 15 Ohio 1
Kentucky 3 West Virginia 1 Texas 2
Louisiana 13 Wisconsin 7 Utah 1
Maryland 11 Washington 1
Michigan 15 Canada
Minnesota 6 ------
Mississippi 4 Alberta 7
Missouri 12 British Columbia 7
Nebraska 3 Manitoba 2
Ontario 11
Saskatchewan 2
</TABLE>
Most of the Company's facilities are leased or subleased by the Company
with lease terms (excluding renewal options exercisable by the Company at
escalated rents) expiring between 1996 and 2020, except for 30 stores that are
owned by the Company. The owned retail facilities are located in eleven
states, primarily Florida and Texas, and three Canadian provinces. The Company
operates its retail stores under the names Office Depot and The Office Place
(in Ontario, Canada). The Company operates its contract stationer businesses
under the name Office Depot.
The Company's corporate offices in Delray Beach, Florida, containing
approximately 350,000 square feet in two adjacent buildings, were purchased in
February 1994.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in litigation arising in the normal course
of its business. The Company believes that these matters will not materially
affect its financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
-9-
<PAGE> 11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS.
The Common Stock of the Company is listed on the New York Stock
Exchange ("NYSE") under the symbol "ODP." At March 25, 1996, there were
3,745 holders of record of Common Stock. The last reported sales price of the
Common Stock on the NYSE on March 25, 1996 was $19.25.
The following table sets forth, for the periods indicated, the high and
low sale prices of the Common Stock quoted on the NYSE Composite Tape. These
prices do not include retail mark-ups, mark-downs or commission, and have been
adjusted to reflect a three-for-two stock split in June 1994.
High Low
---- ---
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1994
First Quarter..................... $26.500 $22.000
Second Quarter.................... 25.750 20.500
Third Quarter..................... 26.500 18.875
Fourth Quarter.................... 27.000 21.625
1995
First Quarter..................... $26.500 $22.750
Second Quarter.................... 29.500 20.875
Third Quarter..................... 32.125 27.000
Fourth Quarter.................... 31.750 19.000
</TABLE>
The Company has never declared or paid cash dividends on its
Common Stock and does not currently intend to pay cash dividends in the
foreseeable future. Earnings and other cash resources of the Company will be
used to continue the expansion of the Company's business.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data as of and for the fiscal years ended
December 30, 1995, December 31, 1994 and December 25, 1993 set forth in the
Company's Annual Report to Stockholders for the fiscal year ended December 30,
1995 (on the inside front cover) is incorporated herein by reference and made
a part of this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and
Results of Operations set forth in the Company's Annual Report to Stockholders
for the fiscal year ended December 30, 1995 (on pages 21-25) is incorporated
herein by reference and made a part of this report.
ITEM 8. FINANCIAL STATEMENTS.
The financial statements of the Company for the fiscal years ended
December 30, 1995, December 31, 1994 and December 25, 1993 set forth in the
Company's Annual Report to Stockholders for the fiscal year ended December 30,
1995 (on pages 26-41) are incorporated herein by reference and made a part of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
-10-
<PAGE> 12
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to directors and executive officers of the
Company is incorporated herein by reference to the information under the
caption "Management--Directors and Executive Officers" in the Company's Proxy
Statement for the 1996 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to executive compensation is incorporated herein
by reference to the information under the caption "Management--Compensation" in
the Company's Proxy Statement for the 1996 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to security ownership of certain beneficial
owners and management is incorporated herein by reference to the tabulation
under the caption "Security Ownership" in the Company's Proxy Statement for the
1996 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to certain relationships and related
transactions is incorporated herein by reference to the information under the
caption "Certain Transactions" in the Company's Proxy Statement for the 1996
Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
1. The financial statements listed in the "Index to
Financial Statements."
2. The financial statement schedule listed in "Index
to Financial Statement Schedule."
3. The exhibits listed in the "Index to Exhibits."
(b) Reports on Form 8-K.
The Company did not file any Reports on Form 8-K during the fourth
quarter of fiscal 1995.
-11-
<PAGE> 13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 28, 1996.
OFFICE DEPOT, INC.
By /S/ DAVID I. FUENTE
-------------------------------------
David I. Fuente, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March 28, 1996.
Signature Capacity
--------- --------
/S/ DAVID I. FUENTE
- -----------------------------
David I. Fuente Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
/S/ BARRY J. GOLDSTEIN
- -----------------------------
Barry J. Goldstein Executive Vice President -- Finance,
Chief Financial Officer and Secretary
(Principal Financial and Accounting
Officer)
/S/ MARK D. BEGELMAN
- -----------------------------
Mark D. Begelman Director
/S/ CYNTHIA COHEN TURK
- -----------------------------
Cynthia Cohen Turk Director
/S/ DENIS DEFFOREY
- -----------------------------
Denis Defforey Director
/S/ W. SCOTT HEDRICK
- -----------------------------
W. Scott Hedrick Director
/S/ JOHN B. MUMFORD
- -----------------------------
John B. Mumford Director
/S/ MICHAEL J. MYERS
- -----------------------------
Michael J. Myers Director
/S/ PETER J. SOLOMON
- -----------------------------
Peter J. Solomon Director
/S/ ALAN L. WURTZEL
- -----------------------------
Alan L. Wurtzel Director
<PAGE> 14
INDEX TO FINANCIAL STATEMENTS
Page
----
<TABLE>
<CAPTION>
<S> <C>
Consolidated Balance Sheets................................................. *
Consolidated Statements of Earnings......................................... *
Consolidated Statements of Stockholders' Equity............................. *
Consolidated Statements of Cash Flows....................................... *
Notes to Consolidated Financial Statements.................................. *
Report of Deloitte & Touche LLP on Consolidated Financial Statements........ *
Report of Deloitte & Touche LLP on Financial Statement Schedule............. F-2
</TABLE>
- --------------------
* Incorporated herein by reference to the respective information in the
Company's Annual Report to Stockholders for the fiscal year ended December
30, 1995.
F - 1
<PAGE> 15
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Office Depot, Inc.:
We have audited the consolidated financial statements of Office Depot, Inc. and
Subsidiaries as of December 30, 1995 and December 31, 1994 and for each of the
three years in the period ended December 30, 1995, and have issued our report
thereon dated February 12, 1996; such consolidated financial statements and
report are included in your 1995 Annual Report to Stockholders and are
incorporated herein by reference. Our audits also included the financial
statement schedule of Office Depot, Inc. and Subsidiaries listed in the Index
to Financial Statement Schedule. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
February 12, 1996
F - 2
<PAGE> 16
INDEX TO FINANCIAL STATEMENT SCHEDULE
Page
<TABLE>
<CAPTION>
<S> <C>
Schedule II - Valuation and Qualifying Accounts and Reserves............ F-4
</TABLE>
All other schedules have been omitted because they are inapplicable, not
required or the information is included elsewhere herein.
F - 3
<PAGE> 17
SCHEDULE II
OFFICE DEPOT, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D
- ---------------------- ----------- -------------------------------------------------- --------
Additions
------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other Deductions - End of
Description of Period Expenses Accounts Write-offs Period
- ---------------------- ---------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts:
1995 . . . . . . . . . $3,426 $1,869 $ -- $1,487 $3,808
1994 . . . . . . . . . 3,251 1,167 -- 992 3,426
1993 . . . . . . . . . 659 1,024 1,909(1) 341 3,251
</TABLE>
(1) Allowance for doubtful accounts of Eastman and Wilson at the respective
dates of acquisition.
F - 4
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page +
- ------- ------- ------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation, as amended to date (1)
3.2 Bylaws (2)
4.1 Form of certificate representing shares of Common Stock (2)
4.2 Form of Indenture (including form of LYON) between the Company and (3)
The Bank of New York, as Trustee
4.3 Form of Indenture (including form of LYON) between the Company and (4)
Bankers Trust Company, as Trustee
10.1 Stock Purchase Agreement, dated as of June 21, 1989, between the (2)
Company and Carrefour S.A.
10.2 Agreement and Plan of Reorganization, dated December 19, 1990, (2)
among the Company, The Office Club, Inc. and OD Sub Corp.
10.3 Stock Purchase Agreement, dated as of April 24, 1991, between the (5)
Company, Carrefour S.A. and Carrefour Nederland B. V.
10.4 Revolving Credit and Line of Credit Agreement dated as of (6)
September 30, 1993 by and among the Company and Sun Bank, National
Association, individually and as Agent, NationsBank of Florida,
N.A., PNC Bank, Kentucky, Inc., Bank of America National Trust and
Savings Association and Royal Bank of Canada
10.5 Office Depot, Inc. Omnibus Equity Plan* (1)
10.6 Directors' Stock Option Plan* (7)
10.7 Amended and Restated Agreement and Plan of Merger dated as of July (8)
12, 1993 and amended and restated as of August 30, 1993 by and
among the Company, Eastman Office Products Corporation, EOPC
Acquisition Corp. and certain investors
10.8 1994-1998 Office Depot, Inc. Designated Executive Incentive Plan* (1)
10.9 Partnership Agreement, dated as of June 10, 1995, between the
Company and Carrefour, a joint stock company incorporated under
French law.
13.1 Annual Report to Stockholders
21.1 List of the Company's subsidiaries
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
+ This information appears only in the manually signed original copies of
this report.
* Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the respective exhibit to the Company's
Proxy Statement for its 1995 Annual Meeting of Stockholders.
(2) Incorporated by reference to the respective exhibit to the Company's
Registration Statement No. 33-39473.
(3) Incorporated by reference to the respective exhibit to the Company's
Registration Statement No. 33-54574.
(4) Incorporated by reference to the respective exhibit to the Company's
Registration Statement No. 33-70378.
(5) Incorporated by reference to the respective exhibit to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 29,
1991.
(6) Incorporated by reference to the respective exhibit to the Company's
Current Report on Form 8-K filed October 14, 1993.
(7) Incorporated by reference to the respective exhibit to the Company's
Annual Report on Form 10-K for the year ended December 26, 1992.
(8) Incorporated by reference to the respective exhibit to the Company's
Registration Statement No. 33-51409.
Upon request, the Company will furnish a copy of any exhibit to this
report upon the payment of reasonable copying and mailing expenses.
<PAGE> 1
EXHIBIT 10.9
- --------------------------------------------------------------------------------
PARTNERSHIP AGREEMENT
between
OFFICE DEPOT, INC.
and
CARREFOUR, S.A.
Dated as of June 10, 1995
- --------------------------------------------------------------------------------
<PAGE> 2
PARTNERSHIP AGREEMENT
Between OFFICE DEPOT having its registered office at 220 Old Germantown Road,
Delray Beach, Florida 33445, USA represented by Mr. David Fuente, (hereafter
referred to as "OD") and
CARREFOUR, a joint stock company incorporated under French law, having its
registered office at 6 Avenue Raymond Poincare, 75116 Paris, France, acting in
its own name and on behalf of the other companies in the CARREFOUR Group,
represented by Mr. Daniel Bernard, (hereafter referred to as "Carrefour").
(The parties are hereinafter collectively referred to as the "Partners").
<PAGE> 3
PREAMBLE
OD carries on, in the USA and Canada, the activity of selling office supplies,
office services, business machines, computer equipment and office furniture at
discount prices in the retail format of warehouse formats (the "Business").
Carrefour carries on, in countries throughout the world, an activity
establishing and operating hypermarkets proposing self-service at discount
prices of a large assortment of food and non-food items, as well as various
services.
1. OBJECT
The Partners have decided to pool their knowledge and experience and
to create a joint venture company as described hereinafter, with the
object of developing together a chain of stores that sells at discount
prices office supplies, office services, business machines, computer
equipment, and office furniture in the retail warehouse format similar
to the format that OD operates in North America (the "Joint Venture").
2. TERRITORY
The territory in which the Joint Venture will exercise its activity
shall be France (the "Territory").
3. JOINT VENTURE VEHICLE
- 2 -
<PAGE> 4
3.1 The Partners shall cause a Societe par Actions Simplifiee
("SAS"), a company having limited liability under French law, to be
formed with the name "Office Depot France SAS" (hereinafter the "Joint
Venture Company"), in which the Partners shall each hold 50% of the
capital stocks and 50% of the voting rights.
3.2 The initial share capital of the Joint Venture Company shall
be 5,000,000 FF divided into 50,000 shares having a par value of 100
FF each. Initial capital contribution shall be the equivalent of
2,500,000 FF for each of Carrefour and OD.
3.3 The Partners may initially hold their respective interests in
the Joint Venture Company either directly or through affiliated
companies and hereby expressly warrant to each other that they will
continue to have lasting control over these companies (the
"Affiliates"). For purposes of this Agreement, the term control shall
mean the relevant Partner holding more than 50% of the voting stock
shares or a majority of the voting rights in the relevant Affiliate
company.
3.4 Additionally subsidiary companies, such as a Societe en Nom
Collectif with the name "Office Depot France SNC" ("SNC"), may be
organized, if justified by practical commercial grounds or for other
sound reasons. Unless such companies are fully owned by the Joint
Venture Company, the principle of equality of the shareholding ratio
between Partners and all other
- 3 -
<PAGE> 5
provisions of this Agreement will apply to those companies on the same
basis. Upon mutual consent of the Partners, the SAS form of the Joint
Venture Company shall be converted into any other suitable form of
limited liability entity.
3.5 One of the goals of the Joint Venture being to arrange for the
listing of the Joint Venture Company, the Partners agree that in the
event of listing, they will make such changes to the present Agreement
and the Joint Venture Company as may be necessary or desirable.
4. MANAGEMENT
4.1 The Joint Venture Company shall be controlled by a Board of
Directors (the "Board") comprised of six directors, three of whom shall
be appointed by OD and three of whom shall be appointed by Carrefour.
All decisions of the Board except those specified in Article 4.5,
shall be adopted by majority decisions of all members present or
represented. The Chairman of the Board will be elected by the Board.
In addition, the General Manager will sit on the Board and shall have
no voting rights on matters brought before the Board.
4.2 OD shall be responsible for the operation and management of
the Joint Venture Company. The OD Directors shall have the right to
appoint and replace the General Manager, who shall initially be Mr.
Bernard Louvat. The General Manager shall be empowered to take all
decisions concerning the Joint Venture
- 4 -
<PAGE> 6
Company which arise in the ordinary course of business.
4.3 The General Manager shall be responsible for preparing an
annual budget for the Joint Venture Company, to be submitted to the
Board of Directors for approval. The General Manager shall also be
responsible for the preparation, monitoring, and updating of a
four-year business plan and shall provide all relevant financial
information to the Board of Directors.
4.4 The General Manager shall manage the Company in accordance
with the approved budget and business plan. The initial business plan
will be prepared and submitted to the Board of Directors within four
months of signing, will be duly approved for the next four years by
the Partners and will be reviewed annually.
4.5 The unanimous approval of all members of the Board shall be
required for the Joint Venture Company to carry out the following
restricted transactions:
a) any modifications to the Articles of the Incorporation of the
Joint Venture Company;
b) any modifications to, or the adoption of, expansion of
financing strategies of the Joint Venture Company and
adoption/approval of the business plan and each annual budget.
4.6 The Board of Directors shall meet at least twice a year upon
the written request of the Chairman of the Board or the General
Manager. The written request shall be sent 15 days in advance. At
least one Board meeting may be held in
- 5 -
<PAGE> 7
the United States if contemporaneously held with the OD Board
Meeting.
5. TECHNICAL ASSISTANCE
Carrefour shall enter into certain service arrangement contracts with
the Joint Venture Company for purposes of providing the necessary
technical expertise, as set forth in the Technical Assistance
Agreement in the form annexed hereto. The fee as outlined in the
Technical Assistance Agreement of two-tenths of one percent (2/10%) of
net sales payable to Carrefour. The fee structure cannot be changed
without the agreement of the Partners.
6. MASTER AGREEMENT
OD and the Joint Venture Company shall enter into the Master
Agreement, which is annexed hereto, for purposes of granting OD rights
and trademarks to the Joint Venture Company. The fee structure is as
outlined in the Master Agreement of .50% (1/2 of one percent) of Net
Sales payable to Office Depot in addition to the initial fee for
France of USD$400,000 for the software licenses. The fee structure
cannot be changed without the agreement of the Partners.
7. SHARE TRANSFERS
The Partner that wishes to transfer, sell or otherwise dispose of any
of its shares must first obtain the written consent of
- 6 -
<PAGE> 8
the non-transferring Partner. In the case of transfer by a Partner to
an Affiliate of that Partner, the consent of the other Partners shall
not be unreasonably withheld.
8. TERMINATION/DEFAULTING PARTNER
8.1 Term Unless earlier terminated as provided herein, the
Joint Venture shall continue as long as the Partners remain
Shareholders of the Joint Venture Company.
8.2 A notice of termination of this Agreement may be given by a
Partner in the event that the other Partner is in material breach of
any of its obligations under this Agreement (or any of the other
agreements contemplated hereby), where such breach has not been cured
within a reasonable time, which in no event shall be less than 30
working days after receipt of such notification by such other Partner,
provided that the cure for such breach is commenced within such 30-day
period.
8.3 In the event this Agreement is terminated under Section 8.2,
the effect will be to compel the defaulting Partner, at the
non-defaulting Partner's option, to either offer to sell its shares to
the non-defaulting Partner or purchase the non-defaulting Partner's
shares in each case at a price determined by an independent expert.
The expert shall be named by mutual agreement of the Partners or,
failing agreement, by the President of the Commercial Court of Paris
upon the request of the most diligent Partner. The expert shall
render his determination within three months after nomination and his
- 7 -
<PAGE> 9
determination shall be final and not subject to appeal.
8.4 Bankruptcy The Joint Venture will automatically terminate and
the Joint Venture Company will be dissolved upon the bankruptcy,
resignation or expulsion of either Partner.
9. NON-COMPETITION
OD and Carrefour agree that for the term of this Agreement they shall
not engage or take any interest or shareholding, whether directly or
indirectly, in any entity in the territory having an activity
identical or similar to the Business, provided, however, that
Carrefour shall reserve the right to sell office equipment, furniture
and products in its hypermarkets.
10. DISPUTE RESOLUTION AND DEADLOCK
10.1 The Partners hereby agree that in the event of major or
persistent disagreement between the Partners concerning the business
plan or the management of the Joint Venture Company which leads to the
inability of the Joint Venture Company to conduct business in due
course, or a disagreement between the Partners involving a transfer of
shares, the procedure set forth in Section 10.2 shall apply.
10.2 Either Partner may, upon written notice, call a meeting of the
President of each Partner. The purpose of the meeting shall be to
resolve amicably, and in good faith, any dispute. In the event that
the dispute cannot be resolved successfully
- 8 -
<PAGE> 10
within one month of the delivery of such notice (the "Notice") date,
then for a period of three months, OD shall have the option to
purchase all of Carrefour's shares in the Joint Venture Company at a
price to be determined by an independent expert in accordance with the
procedure described in Article 8.3.
10.3 In the event that OD does not exercise its option, then for a
succeeding period of three months, Carrefour shall have the option to
purchase all of OD's shares in the Joint Venture Company at the same
price.
10.4 If neither OD nor Carrefour exercise their options, then the
Joint Venture shall terminate and the Joint Venture Company either be
sold to a third party with the agreement of both Partners or shall be
liquidated.
11. TRANSPARENCY AND ACCESS TO THE BOOKS OF THE JOINT VENTURE COMPANY
The Partners subscribe to the principle of transparency in connection
with the Joint Venture Company.
12. ASSUMPTION
A pre-condition of the validity of such transfer of shares under
Section 7 is that the acquiring party must expressly and
simultaneously accept to be bound by the terms of this Agreement and
that the Partner transferring the shares
- 9 -
<PAGE> 11
guarantees the due performance of all obligations hereunder if so
required by the other Partner.
13. AUDIT
The accounts of the Joint Venture Company shall be audited once per
year by Deloitte and Touche.
Each Partner shall have the right to carry out a supplementary
independent audit of the Joint Venture Company, no more than once per
year and at its own cost, and the Joint Venture Company shall
cooperate in supplying the necessary information.
14. MODIFICATIONS
This Agreement may not be modified except by written agreement signed
by both the Partners.
15. WHOLE AGREEMENT
This Agreement and the related agreements annexed hereto constitute
the entire agreement between the Partners and supersede any prior
understanding, whether written or oral concerning the present Joint
Venture.
16. SEVERABILITY
In the event that any of the provisions of this Agreement should prove
to be invalid or illegal, this fact shall not affect the validity of
the remaining provisions and the
- 10 -
<PAGE> 12
offending provision shall be severed from this Agreement. The
Partners undertake to replace the invalid or illegal provision with a
permissible provision which as nearly as possible reproduces the legal
and financial purposes of the invalid or illegal provision.
17. WAIVER
No failure or delay on the part of either Partner hereto to exercise
any right, power or remedy hereunder shall operate as a waiver
thereof, nor shall any express waiver or assent to any breach or
default operate as a waiver or assent to any subsequent breach or
default of the same or any other term or condition of this Agreement.
18. CONFIDENTIALITY
The Partners agree, both during this Agreement and after its
termination for whatever reason, except as otherwise required by
applicable law, to keep strictly confidential all technical,
financial, commercial, and other confidential information obtained by
them during the course of the Agreement and the related agreements
annexed hereto.
19. APPLICABLE LAW
This Agreement shall be governed and construed in accordance with the
law of France.
- 11 -
<PAGE> 13
20. LANGUAGE
This Agreement is executed in the English language and any
translations made into another language for the convenience of the
Partners shall in no way prevail over the English version, which is
the sole binding Agreement between the Partners.
21. RELATION AMONG AGREEMENTS
The Partners agree that the present Agreement and all other agreements
and documents attached or relating to the Joint Venture shall be
considered as one complete whole. In the event of inconsistency or
disagreement among such agreements and/or documents, the terms of the
Partnership Agreement shall prevail. In the event of termination of
the Joint Venture for any reason, all of such agreements shall
terminate (except for clauses expressly surviving termination). All
disputes between the Partners concerning any of such agreements shall
be resolved in a consistent and coordinated manner by arbitration as
set forth herein.
22. AUTHORIZATIONS - DECLARATIONS
The Partners agree to take all necessary steps to obtain any
authorizations and to complete any declarations which may be necessary
for the proper performance of this Agreement.
23. ARBITRATION
23.1 In the event of any dispute concerning the
- 12 -
<PAGE> 14
interpretation, validity, or performance of this Agreement, and any
other agreement relating to the Joint Venture, the Partners agree that
they shall meet, with a view to finding an amicable resolution.
Failing such an amicable resolution within 30 days from the date of
the meeting between the Partners to which they have been called by
either Partner, by way of registered letter, the question shall be
submitted to arbitration in accordance with the rules of the
International Chamber of Commerce.
23.2 The Partners shall each name an arbitrator in the month
following the expiration of the 30-day delay referred to above. Each
Partner shall notify the other by registered letter of the name of the
arbitrator chosen and the questions it wishes to submit for decision.
The arbitrators chosen shall have a further 30 days in which to
appoint a third arbitrator, who shall preside as Chairman of the
arbitration.
23.3 In the event that one of the Partners fails to designate an
arbitrator, or the two arbitrators fail to agree on the appointment of
the third, any missing arbitrator shall be designated in accordance
with the ICC Rules.
23.4 The arbitration shall take place in Geneva and the arbitrators
shall use their best efforts to render a decision in the shortest time
possible. The language of the arbitration shall be English.
23.5 The decision of the arbitrators shall be final and binding and
incapable of appeal. The decision may be
- 13 -
<PAGE> 15
registered with a competent Court, upon the request of either of the
Partners.
Signed this 10th day of June, 1995
/s/ D. Bernard /s/ D. Fuente
- -------------------------- ----------------------------
CARREFOUR OFFICE DEPOT
D. Bernard D. Fuente
- 14 -
<PAGE> 1
EXHIBIT 13.1
FINANCIAL HIGHLIGHTS
(In thousands, except per share amounts and statistical data)
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended Ended Ended
December December December December December
STATEMENTS OF EARNINGS DATA: 30, 1995 31, 1994 25, 1993 26, 1992 28, 1991
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $5,313,192 $4,266,199 $2,836,787 $1,962,953 $1,497,882
Cost of goods sold and occupancy costs 4,110,334 3,283,498 2,185,145 1,512,304 1,152,766
- ----------------------------------------------------------------------------------------------------------
Gross profit 1,202,858 982,701 651,642 450,649 345,116
Store and warehouse operating
and selling expenses 782,478 642,572 423,272 301,743 240,572
Pre-opening expenses 17,746 11,990 9,073 7,453 7,774
General and administrative expenses 153,344 130,022 95,142 69,549 52,076
Amortization of goodwill 5,213 5,288 1,617 49 -
- ----------------------------------------------------------------------------------------------------------
Operating profit 244,077 192,829 122,538 71,855 44,694
Interest income 1,357 4,000 4,626 1,393 280
Interest expense (22,551) (18,096) (11,322) (2,658) (3,992)
Equity and franchise income (loss), net (962) 197 108 - -
Merger costs _ _ _ _ (8,950)
- ----------------------------------------------------------------------------------------------------------
Earnings before income taxes and
extraordinary credit(1) 221,921 178,930 115,950 70,590 32,032
Income taxes 89,522 73,973 45,118 25,345 13,246
- ----------------------------------------------------------------------------------------------------------
Earnings before extraordinary credit(1) 132,399 104,957 70,832 45,245 18,786
Extraordinary credit(2) _ _ _ 1,396 614
- ----------------------------------------------------------------------------------------------------------
Net earnings(1) $ 132,399 $ 104,957 $ 70,832 $ 46,641 $ 19,400
========== ========== ========== ========== ==========
Per common share and common
equivalent share:
Earnings before extraordinary credit(1) $ .85 $ .69 $ .48 $ .32 $ .15
Extraordinary credit(2) _ _ _ .01 _
- ----------------------------------------------------------------------------------------------------------
Net earnings(1) $ .85 $ .69 $ .48 $ .33 $ .15
========== ========== ========== ========== ==========
Per common share and common equivalent share-
assuming full dilution:
Earnings before extraordinary credit(1) $ .83 $ .68 $ .48 $ .32 $ .15
Extraordinary credit(2) _ _ _ .01 _
- ----------------------------------------------------------------------------------------------------------
Net earnings(1) $ .83 $ .68 $ .48 $ .33 $ .15
========== ========== ========== ========== ==========
Dividends _ _ _ _ _
December December December December December
STATISTICAL DATA: 30, 1995 31, 1994 25, 1993 26, 1992 28, 1991
- ----------------------------------------------------------------------------------------------------------
Facilities open at end of period:
Office supply stores 501 420 351 284 228
Contract stationer/delivery warehouses 23 24 23 13 10
Other retail locations 3 _ _ _ _
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA:
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital $ 708,984 $ 487,333 $ 471,114 $386,426 $203,326
Total assets 2,531,217 1,903,983 1,531,092 908,585 607,938
Long-term debt(3) 494,910 393,800 367,602 158,313 9,259
Common stockholders' equity 1,002,995 715,271 590,284 413,907 331,699
</TABLE>
- ----------------------
(1) Includes effect of $8,950,000 of merger costs in 1991.
(2) The extraordinary credit represents the benefit derived from the utilization
of a net operating loss carryforward.
(3) Excludes current maturities.
<PAGE> 2
Office Depot Inc. And Subsidiaries
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS
GENERAL
- --------------------------------------------------------------------------------
Office Depot began operations by opening its first retail store in Florida
in October 1986. The Company implemented an expansion program to establish
itself as a leader in targeted market areas with high concentrations of small-
and medium-sized businesses. This program included opening new stores and
acquiring stores in strategic markets. At the end of 1995, the Company operated
501 office supply stores in 37 states, the District of Columbia and Canada.
Store opening activity for the last five years is summarized as follows:
<TABLE>
<CAPTION>
Open Open
Beginning Opened/ End
of Period Acquired Closed of Period
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1991 173 57 2 228
1992 228 58(1) 2 284
1993 284 68 1 351
1994 351 71 2 420
1995 420 82 1 501(2)
</TABLE>
(1) Includes the acquisition of five stores in Canada.
(2) Does not include two Images stores and one Furniture At Work store.
In 1993, the Company expanded into the full service contract stationer
portion of the office supply industry by acquiring two contract stationers with
ten warehouses through the acquisitions of Wilson Stationery and Printing
Company ("Wilson") in May and Eastman Office Products Corporation ("Eastman")
in September, both of which were accounted for as purchases. During 1994, the
Company acquired the outstanding stock of six contract stationers with eight
warehouses; L. E. Muran Co., Inc. and Yorkship Press, Inc. in February, Midwest
Carbon Company and Silver's, Inc. in May, and J.A. Kindel Company and Allstate
Office Products, Inc. in August. Each of these 1994 acquisitions was accounted
for on a "pooling of interests" basis and, accordingly, the accompanying
financial data, statistical data, financial statements and discussions of
financial and other information included for periods prior to the acquisitions
have been restated to reflect the financial position, results of operations and
other information relating to these companies for all periods presented. The
Company operated 23 delivery and contract stationer warehouses throughout the
United States at the end of 1995.
The Company's results are impacted by the costs incurred in connection
with its aggressive new store opening schedule. Pre-opening expenses are
charged to earnings as incurred. Corporate general and administrative
expenses are also incurred in anticipation of store openings. As the Company's
store base and sales volume continue to grow, the Company expects that the
adverse impact on profitability from new store openings will decrease as
expenses incurred prior to store openings continue to represent a declining
percentage of total sales.
The Company operates on a 52 or 53 week fiscal year ending on the last
Saturday in December. The fiscal years for the financial statements presented
were comprised of the 52 weeks ended December 30, 1995, the 53 weeks ended
December 31, 1994 and the 52 weeks ended December 25, 1993.
RESULTS OF OPERATIONS FOR THE YEARS 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
SALES
Sales increased to $5,313,192,000 in 1995 from $4,266,199,000 in 1994 and
$2,836,787,000 in 1993. Sales in 1995 increased 25% from 1994 sales, and sales
in 1994 increased 50% from 1993 sales. Adjusting for the additional week in
1994, the 1995 sales increase was 27%, and the 1994 sales increase was 47%. The
increases in sales were due primarily to the 81 additional stores in 1995 and
the 69 additional stores in 1994. Sales of computers, business machines and
related supplies have risen as a percentage of total sales over 1993 and 1994
sales in this category. The increases also were attributable to same store
sales growth. Comparable sales in 1995 for the 419 stores and 23 warehouses
open for more than one year at December 30, 1995 increased 17% from 1994.
Comparable sales in 1994 for the 349 stores and 23 warehouses open for more
than one year at December 31, 1994 increased 27% from 1993. Comparable sales in
the future may be affected by competition from other stores, the opening of
additional stores in existing markets and economic conditions.
21
<PAGE> 3
Office Depot Inc. And Subsidiaries
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS
(continued)
GROSS PROFIT
Gross profit as a percentage of sales was 22.6% in 1995 and 23.0% in 1994
and 1993. Purchasing efficiencies gained through vendor volume, rebate and
other discount programs, improved inventory loss experience and leveraging
occupancy costs through higher average sales per store were offset by lower
gross margins resulting from an increase in sales of lower margin business
machines and computers, combined with decreased margins in the contract
stationer business. The Company's management believes that gross profit as a
percentage of sales may fluctuate as a result of the continued expansion of its
contract stationer base, the result of competitive pricing in more market
areas, continued change in sales product mix and increased occupancy costs in
certain new markets and in existing markets where the Company desires to add
stores and warehouses in particular locations to complete its market plan, as
well as purchasing efficiencies realized as total merchandise purchases
increase.
STORE AND WAREHOUSE OPERATING AND SELLING EXPENSES
Store and warehouse operating and selling expenses as a percentage of sales
were 14.7% in 1995, 15.1% in 1994 and 14.9% in 1993. Store and warehouse
operating and selling expenses, consisting primarily of payroll and advertising
expenses, have increased in the aggregate primarily due to the Company's
expansion program. While the majority of these expenses vary proportionately
with sales, there is a fixed cost component to these expenses that, as sales
increase within each store and within a cluster of stores in a given market
area, should decrease as a percentage of sales. This benefit may not be fully
realized, however, during periods when a large number of new stores and
delivery centers are being opened, as new facilities typically generate lower
sales than the average mature location, resulting in higher operating and
selling expenses as a percentage of sales for new facilities. This percentage
is also affected when the Company enters large metropolitan market areas where
the advertising costs for the full market must be absorbed by the small number
of stores initially opened. As additional stores in these large markets are
opened, advertising costs, which are substantially a fixed expense for a market
area, will be reduced as a percentage of sales. The Company has also continued
a strategy of opening stores in existing markets. While increasing the number
of stores increases operating results in absolute dollars, this also has the
effect of increasing expenses as a percentage of sales since the sales of
certain existing stores in the market may initially be adversely affected. In
addition to the Company's retail expansion, the expenses incurred in the
integration and replacement of acquired facilities in its delivery business has
contributed to increased warehouse expenses.
PRE-OPENING EXPENSES
As a result of continued store and delivery warehouse openings,
pre-opening expenses incurred were $17,746,000 in 1995, $11,990,000 in 1994 and
$9,073,000 in 1993. Pre-opening expenses, which are currently approximately
$150,000 per prototype store and greater for a megastore, are predominately
incurred during a six-week period prior to the store opening. Warehouse
pre-opening expenses approximate $500,000; however, these expenses may vary
with the size of future warehouses. These expenses consist principally of
amounts paid for salaries and property expenses. Since the Company's policy is
to expense these items during the period in which they occur, the amount of
pre-opening expenses in each quarter is generally proportional to the number of
new stores and delivery centers opening.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses as a percentage of sales were 2.9% in
1995, 3.0% in 1994 and 3.4% in 1993. General and administrative expenses
include, among other costs, site selection expenses and store management
training expenses, and therefore vary with the number of new store openings.
During 1993 through 1995, the Company increased its commitment to improving the
efficiency of its management information systems and significantly increased
its information systems programming staff. While this increases general and
administrative expenses in current periods, the Company believes the systems
investment will provide benefits in the future. These increases have been
partially offset by a decrease in other general and administrative expenses as
a percentage of sales, primarily as a result of the Company's ability to
increase sales without a proportionate increase in corporate expenditures.
However, there can be no assurance that the Company will be able to continue
to increase sales without a proportionate increase in corporate expenditures.
General and administrative expenses have been higher in the contract
stationers' business than in the retail business.
OTHER INCOME AND EXPENSES
During 1995, 1994 and 1993, interest expense was $22,551,000, $18,096,000
and $11,322,000, respectively. The increase in interest expense is primarily
due to the subordinated debt issued in 1993 and increase in 1995 and 1994 in
the draws on the working capital line of credit. In November 1993, the Company
completed a public offering of
22
<PAGE> 4
Office Depot Inc. And Subsidiaries
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS (continued)
zero coupon, convertible, subordinated debt, raising net proceeds of
approximately $185 million. In August 1995, the Company completed a public
offering of 4,325,000 shares of common stock, raising net proceeds of
approximately $121.8 million. As the Company has utilized the funds raised in
its public offerings to fund its expansion, interest income has fluctuated.
Interest income during 1995, 1994 and 1993 was $1,357,000, $4,000,000 and
$4,626,000, respectively.
AMORTIZATION OF GOODWILL
The Company recorded amortization of goodwill of $5,213,000, $5,288,000
and $1,617,000 in 1995, 1994 and 1993, respectively. Goodwill amortization was
higher in 1994 than in 1993, reflecting a full year of amortization arising
from the Wilson and Eastman acquisitions in 1993.
INCOME TAXES
The effective income tax rate for 1995, 1994 and 1993 was negatively
impacted by nondeductible goodwill amortization. The effective income tax rate
for 1994 and 1993 was impacted by the combining of certain acquired companies
which had no provision for income taxes because they were organized as
S Corporations (as defined under income tax laws).
LIQUIDITY & CAPITAL RESOURCES
- -------------------------------------------------------------------------------
Since the Company's inception in March 1986, the Company has relied upon
equity capital, convertible debt, and bank borrowings as the primary sources of
its funds. The Company completed a public offering of zero coupon, convertible,
subordinated debt in 1993 raising net proceeds of approximately $185,000,000.
The Company issued approximately 5.7 million shares of common stock for
acquisitions in 1994. In August 1995, the Company issued 4,325,000 shares of
common stock in a public offering raising net proceeds of $121,799,000.
Since the Company's store sales are substantially on a cash and carry
basis, cash flow generated from operating stores provides a source of liquidity
to the Company. Working capital requirements are reduced by vendor credit terms
that allow the Company to finance a portion of its inventory. The Company
utilizes private label credit card programs administered and financed by
financial services companies, which allow the Company to expand store sales
without the burden of additional receivables. All credit card receivables sold
to the financial services company under one program were sold on a recourse
basis. Proceeds to the Company for such receivables sold with recourse were
approximately $313,000,000, $253,000,000 and $185,000,000 in 1995, 1994 and
1993, respectively. The outstanding balance of such receivables at December 30,
1995 was $54,400,000. The Company has also utilized capital equipment
financings as a source of funds.
Sales made from the customer service centers are generally made under
regular commercial credit terms where the Company carries its own receivables.
As the Company expands the contract stationer portion of its business, it is
expected that the Company's receivables will continue to grow.
The Company added (net of closures) 81 stores in 1995, 69 stores in 1994
and 67 stores in 1993. Net cash provided by operating activities was
$25,974,000, $46,107,000 and $86,226,000 for 1995, 1994 and 1993, respectively.
As stores mature and become more profitable, and as the number of new stores
opened in a year becomes a smaller percentage of the existing store base, cash
generated from operations should provide a greater portion of funds required for
new store inventories and other working capital requirements. Cash generated
from operations will continue to be affected by an increase in receivables
carried without outside financing and increases in inventory at the stores as
the Company continues to expand its efforts in computers and business machines.
Capital expenditures are also affected by the number of stores and warehouses
opened or acquired each year and the increase in computer and other equipment
at the corporate office required to support such expansion. Cash utilized for
capital expenditures (including $22 million for the corporate headquarters in
1994) was $219,892,000 in 1995, $171,810,000 in 1994 and $104,568,000 in 1993.
During 1995, the Company's cash balance increased by $29,587,000 and long-
and short-term debt increased by $100,389,000, including $16,505,000 in
non-cash accretion of interest on the Company's zero coupon, convertible debt.
The Company has a credit agreement with its principal bank and a syndicate
of commercial banks to provide for a working capital line and letters of credit
totaling $300,000,000. The credit agreement provides that funds borrowed will
bear interest, at the Company's option, at either: the higher of the prime rate
or .5% over the Federal Funds rate; the LIBOR rate plus .25% to .375%,
depending on the fixed charge coverage ratio; 1.75% over the Federal Funds rate;
or under a competitive bid facility. The Company must also pay a facility fee
of between .125% and .25% per annum, depending on the Company's fixed charge
coverage ratio on the available and unused portion of the credit facility. The
23
<PAGE> 5
Office Depot Inc. And Subsidiaries
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS (continued)
credit facility currently expires June 30, 2000. As of December 30, 1995, the
Company had borrowed $95,000,000 and had outstanding letters of credit totaling
$15,612,000 under the credit facility. The credit agreement contains certain
restrictive covenants relating to various financial statement ratios. In
addition to the credit facility, the bank has provided a lease facility to the
Company under which the bank has agreed to purchase up to $25,000,000 of
equipment on behalf of the Company and lease such equipment to the Company. As
of December 30, 1995, the Company has utilized approximately $7,621,000 of this
lease facility.
The Company plans to open approximately 80 stores and 1 to 2 delivery
warehouses during 1996. Management estimates that the Company's cash
requirements, exclusive of pre-opening expenses, will be approximately
$1,700,000 for each additional store, which includes an average of
approximately $900,000 for leasehold improvements, fixtures, point-of-sale
terminals and other equipment in the stores, as well as approximately $800,000
for the portion of the store inventory that is not financed by vendors. The
cash requirements, exclusive of pre-opening expenses, for a delivery warehouse
is expected to be approximately $5,300,000, which includes an average of
$3,100,000 for leasehold improvements, fixtures and other equipment and
$2,200,000 for the portion of inventory not financed by vendors. In addition,
management estimates that each new store and warehouse requires pre-opening
expenses of approximately $150,000 and $500,000, respectively. Pre-opening
expenses for a megastore will be higher than a regular store. The Company's
management continually reviews its financing options and, although they
currently anticipate that the 1996 expansion, including investments in
international joint ventures, will be financed through cash on hand, funds
generated from operations, equipment leased under the Company's lease facility
and funds borrowed under the Company's revolving credit facility, alternative
financing will be considered if market conditions make it financially
attractive. The Company's financing requirements beyond 1996 will be affected
by the number of new stores or warehouses opened or acquired.
NEW ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
The Company will adopt the following Statements of Financial Accounting
Standards ("SFAS") in the year ending December 28, 1996.
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. Long-lived assets and
certain identifiable intangibles to be held and used by a company are required
to be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Measurement of an impairment loss for such long-lived assets and identifiable
intangibles should be based on the fair value of the asset. Long-lived assets
and certain identifiable intangibles to be disposed of are required to be
reported generally at the lower of the carrying amount or fair value less cost
to sell. SFAS No. 121 is effective for fiscal years that begin after December
15, 1995. Management has not yet determined the effect of SFAS No. 121 on the
Company's financial position or results of operations.
SFAS No. 123, "Accounting for Stock-Based Compensation" establishes
financial accounting and reporting standards for stock-based employee
compensation plans, including stock options, stock purchase plans, restricted
stock and stock appreciation rights. SFAS No. 123 defines and encourages the
use of the fair value method of accounting for employee stock-based
compensation. Continuing use of the intrinsic value based method of accounting
prescribed in Accounting Principles Board Opinion No. 25 ("APB 25") for
measurement of employee stock-based compensation is allowed with pro forma
disclosures of net income and earnings per share as if the fair value method of
accounting had been applied. Transactions in which equity instruments are
issued in exchange for goods or services from non-employees must be accounted
for based on the fair value of the consideration received or of the equity
instrument issued, whichever is more reliably measurable. SFAS No. 123 is
effective for transactions entered into in fiscal years that begin after
December 15, 1995. The Company has determined that it will continue to use the
method of accounting prescribed in APB 25 for measurement of employee
stock-based compensation, and will begin providing the required pro forma
disclosures in its financial statements for the year ending December 28, 1996
as allowed by SFAS No. 123.
24
<PAGE> 6
Office Depot Inc. And Subsidiaries
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS (continued)
INFLATION & SEASONALITY
- --------------------------------------------------------------------------------
Although the Company cannot accurately determine the precise effects of
inflation, it does not believe inflation has a material effect on sales or
results of operations. The Company considers its business to be somewhat
seasonal with sales generally slightly higher during the first and fourth
quarters of each year.
STATEMENT 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. The Act contains amendments to the Securities Act of
1933 and the Securities Exchange Act of 1934 which provide protection from
liability in private lawsuits for "forward-looking" statements made by persons
specified in the Act. The Company desires to take advantage of the "safe
harbor" provisions of the Act.
The Company wishes to caution readers that with the exception of
historical matters, the matters discussed in this Annual Report are
forward-looking statements that involve risks and uncertainties, including but
not limited to factors related to the highly competitive nature of the office
products supply industry and its sensitivity to changes in general economic
conditions, the Company's expansion plans and ability to integrate the acquired
contract stationer businesses, the results of financing efforts and other
factors discussed in the Company's filings with the Securities and Exchange
Commission. Such factors could affect the Company's actual results and could
cause the Company's actual results during 1996 and beyond to differ materially
from those expressed in any forward-looking statement made by or on behalf of
the Company.
25
<PAGE> 7
Office Depot Inc. And Subsidiaries
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Office Depot, Inc.
We have audited the consolidated balance sheets of Office Depot, Inc. and
Subsidiaries as of December 30, 1995 and December 31, 1994, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended December 30, 1995. 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 generally accepted auditing
standards. 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 consolidated financial position of Office
Depot, Inc. and Subsidiaries as of December 30, 1995 and December 31, 1994 and
the results of their operations and their cash flows for each of the three
years in the period ended December 30, 1995 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
February 12, 1996
26
<PAGE> 8
Office Depot Inc. And Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
December 30, December 31, December 25,
1995 1994 1993
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $5,313,192 $4,266,199 $2,836,787
Cost of goods sold and occupancy costs 4,110,334 3,283,498 2,185,145
- --------------------------------------------------------------------------------------
Gross profit 1,202,858 982,701 651,642
Store and warehouse operating and selling expenses 782,478 642,572 423,272
Pre-opening expenses 17,746 11,990 9,073
General and administrative expenses 153,344 130,022 95,142
Amortization of goodwill 5,213 5,288 1,617
- --------------------------------------------------------------------------------------
958,781 789,872 529,104
---------- ---------- -----------
Operating profit 244,077 192,829 122,538
Other income (expense)
Interest income 1,357 4,000 4,626
Interest expense (22,551) (18,096) (11,322)
Equity and franchise income (loss), net (962) 197 108
- -------------------------------------------------------------------------------------
Earnings before income taxes 221,921 178,930 115,950
Income taxes 89,522 73,973 45,118
- -------------------------------------------------------------------------------------
Net earnings $ 132,399 $ 104,957 $ 70,832
========== ========== ==========
Earnings per common and common equivalent share:
Primary $ .85 $ .69 $ .48
Fully diluted .83 .68 .48
</TABLE>
The accompanying notes are an integral part of these statements.
27
<PAGE> 9
Office Depot Inc. And Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 30, December 31,
Assets 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 61,993 $ 32,406
Receivables, net of allowances of $3,808
in 1995 and $3,426 in 1994 380,431 266,629
Merchandise inventories 1,258,413 936,048
Deferred income taxes 18,542 32,093
Prepaid expenses 11,620 7,046
- -----------------------------------------------------------------------------------------------
Total current assets 1,730,999 1,274,222
Property and Equipment, net 565,082 397,229
Goodwill, net of amortization 195,302 200,449
Other Assets 39,834 32,083
- -----------------------------------------------------------------------------------------------
$ 2,531,217 $ 1,903,983
=========== ===========
Liabilities & Stockholders' Equity
- -----------------------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 841,589 $ 609,914
Accrued expenses 166,575 154,894
Income taxes 10,542 18,051
Current maturities of long-term debt 3,309 4,030
- -----------------------------------------------------------------------------------------------
Total current liabilities 1,022,015 786,889
Long-Term Debt, less current maturities 112,340 27,460
Deferred Taxes and Other Credits 11,297 8,023
Zero Coupon, Convertible, Subordinated Notes 382,570 366,340
Commitments and Contingencies - -
Common Stockholders' Equity:
Common stock - authorized 400,000,000 shares of
$.01 par value; issued 157,961,801 in 1995 and
151,536,781 in 1994 1,580 1,515
Additional paid-in capital 605,876 453,117
Foreign currency translation adjustment (794) (3,295)
Retained earnings 398,083 265,684
Less: 2,163,447 shares of treasury stock, at cost (1,750) (1,750)
- -----------------------------------------------------------------------------------------------
1,002,995 715,271
---------- ----------
$2,531,217 $1,903,983
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
28
<PAGE> 10
Office Depot Inc. And Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Period from December 27, 1992 to December 30, 1995
(In thousands, except for number of shares)
<TABLE>
<CAPTION>
Foreign
Common Common Additional Currency
Stock Stock Paid-in Translation Retained Treasury
Shares Amount Capital Adjustment Earnings Stock
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 27, 1992 142,088,182 $1,421 $320,421 $ 98 $ 93,717 $(1,750)
Issuance of common stock for
acquisitions 5,035,401 50 94,647 - - -
Exercise of stock options
(including tax benefits) 1,841,505 18 11,272 - - -
Sale of stock under employee
purchase plan 89,489 1 1,604 - - -
401k plan matching contributions 59,619 1 947 - - -
S corporation distribution to stockholders - - - - (3,280) -
Foreign currency translation adjustment - - - 285 - -
Net earnings for the period - - - - 70,832 -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 25, 1993 149,114,196 1,491 428,891 383 161,269 (1,750)
Exercise of stock options
(including tax benefits) 2,137,696 21 17,526 - - -
Sale of stock under employee
purchase plan 199,974 2 4,651 - - -
401k plan matching contributions 84,915 1 2,049 - - -
S corporation distribution to stockholders - - - - (542) -
Foreign currency translation adjustment - - - (3,678) - -
Net earnings for the period - - - - 104,957 -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 151,536,781 1,515 453,117 (3,295) 265,684 (1,750)
Issuance of common stock 4,325,000 43 121,756 - - -
Exercise of stock options
(including tax benefits) 1,751,620 17 22,146 - - -
Sale of stock under employee
purchase plan 274,161 3 7,019 - - -
401k plan matching contributions 59,438 1 1,564 - - -
Conversion of LYONs to common stock 14,801 1 274 - - -
Foreign currency translation adjustment - - - 2,501 - -
Net earnings for the period - - - - 132,399 -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 30, 1995 157,961,801 $1,580 $605,876 $ (794) $ 398,083 $(1,750)
=========== ====== ======== ====== ========= =======
</TABLE>
The accompanying notes are an integral part of these statements.
29
<PAGE> 11
Office Depot Inc. And Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Change in Cash and Cash Equivalents
(in thousands)
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
December 30, December 31, December 25,
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Cash received from customers $ 5,243,724 $ 4,208,675 $ 2,805,053
Cash paid for inventory (4,090,129) (3,239,438) (2,130,771)
Cash paid for store and warehouse operating,
selling and general and administrative
expenses (1,045,448) (860,354) (559,440)
Interest received 1,357 4,296 4,654
Interest paid (5,665) (2,078) (2,595)
Taxes paid (77,865) (64,994) (30,675)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 25,974 46,107 86,226
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Capital expenditures - net (219,892) (171,810) (104,568)
Purchase of Eastman common stock - - (20,001)
Acquisition of cash overdraft assumed, net _ _ (4,106)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (219,892) (171,810) (128,675)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from exercise of stock options and sales of
stock under employee stock purchase plan 20,883 14,976 10,308
Proceeds from stock offering 121,799 _ _
Foreign currency translation adjustment 2,501 (3,678) 285
Proceeds from long- and short-term borrowings 178,410 30,466 231,359
Payments on long- and short-term borrowings (100,088) (25,584) (188,722)
S corporation distribution to stockholders _ (542) (3,280)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 223,505 15,638 49,950
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 29,587 (110,065) 7,501
Cash and cash equivalents at beginning of period 32,406 142,471 134,970
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 61,993 $ 32,406 $ 142,471
=========== =========== ===========
Reconciliation of net earnings to net cash
provided by operating activities
Net earnings $ 132,399 $ 104,957 $ 70,832
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization 64,830 49,585 31,762
Accreted interest on convertible, subordinated notes 16,505 16,042 8,754
Contributions of common stock to employee benefit
and stock purchase plans 2,271 2,458 1,107
Changes in assets and liabilities (net of effect in 1993 of
the Eastman and Wilson acquisitions)
Increase in receivables (113,802) (64,640) (50,200)
Increase in merchandise inventories (322,365) (272,901) (151,991)
Increase in prepaid expenses, deferred income
taxes and other assets (583) (18,337) (15,646)
Increase in accounts payable, accrued
expenses and deferred credits 246,719 228,943 191,608
- ----------------------------------------------------------------------------------------------------------------------
Total adjustments (106,425) (58,850) 15,394
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 25,974 $ 46,107 $ 86,226
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
30
<PAGE> 12
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
Office Depot, Inc. and subsidiaries (the "Company") operates a national
chain of high-volume office supply stores and contract stationer/delivery
warehouses. The Company was incorporated in March 1986 and opened its first
store in October 1986.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated in consolidation. Investments in joint ventures are
accounted for using the equity method.
The Company is on a 52 or 53 week fiscal year ending on the last Saturday
in December. The fiscal years presented in the financial statements include 52
weeks in 1995, 53 weeks in 1994 and 52 weeks in 1993.
All common stock share and per share amounts for all periods presented
have been adjusted for two three-for-two stock splits in June
1994 and June 1993 effected in the form of stock dividends.
Certain reclassifications were made to prior year statements to conform to
current year presentations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers any highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
RECEIVABLES
Receivables as of December 30, 1995 and December 31, 1994 are comprised of
trade receivables not financed through outside programs, totaling approximately
$187,476,000 and $119,203,000, respectively, as well as amounts due from
others. An allowance for doubtful accounts is provided for estimated amounts
considered to be uncollectible. The credit risk related to these trade
receivables is limited due to the large number of customers comprising the
Company's customer base, and their dispersion across many different industries
and geographies.
Amounts due from others, totaling approximately $192,955,000 and
$147,426,000 as of December 30, 1995 and December 31, 1994, respectively,
consist primarily of estimated receivables from vendors under various rebate,
cooperative advertising and miscellaneous marketing programs. Funds received
from vendors under rebate and miscellaneous marketing programs related to the
purchase price of merchandise inventories are capitalized and recognized
as a reduction of cost of sales as merchandise is sold. Amounts relating to
cooperative advertising and marketing 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 weighted average cost or market
value.
INCOME TAXES
The Company provides for Federal and state income taxes currently payable
as well as deferred income taxes resulting from temporary differences between
the basis of assets and liabilities for tax purposes and for financial
statement purposes using the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Under this standard, deferred
tax assets and liabilities represent the tax effects, based on current tax law,
of future deductible or taxable amounts attributable to events that have been
recognized in the financial statements.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation and amortization
are provided in amounts sufficient to relate the cost of depreciable assets
to operations over their estimated useful lives on a straight line basis.
Estimated useful lives are 30 years for buildings and 3 to 10 years
for furniture, fixtures and equipment. Leasehold improvements are amortized over
the lesser of the terms of the respective leases, including applicable renewal
periods, or the service lives of the improvements. The Company capitalized
interest costs of approximately $600,000 in 1995 and $1,000,000 in 1994 as part
of the cost of major asset construction projects. Since there were no such
projects in 1993, no interest costs were capitalized in that year.
31
<PAGE> 13
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
GOODWILL
Goodwill represents the excess of purchase price and related costs over
the value assigned to the net tangible assets of businesses acquired. Goodwill
is amortized on a straight-line basis over 40 years. Accumulated amortization
of goodwill was $12,164,000 and $6,946,000 as of December 30, 1995 and December
31, 1994, respectively. Management periodically evaluates the recoverability of
goodwill, which would be adjusted for a permanent decline in value, if any, as
measured by projected undiscounted future cash flows from the acquired
businesses.
ADVERTISING
Advertising costs are charged to expense when incurred. The Company and
its vendors participate in cooperative advertising programs in which the
vendors reimburse the Company for a portion of certain advertising costs.
Advertising expense, net of vendor reimbursements, amounted to $42,878,000 in
1995, $45,361,000 in 1994, and $28,270,000 in 1993.
PRE-OPENING EXPENSES
Pre-opening expenses related to new store and delivery warehouse openings
are expensed as incurred.
POSTRETIREMENT BENEFITS
The Company does not currently provide postretirement benefits for its
employees.
INSURANCE RISK RETENTION
The Company retains certain risks for workers' compensation, general
liability and employee medical programs and accrues estimated liabilities on an
undiscounted basis for known claims and claims incurred but not reported.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about
Fair Value of Financial Instruments," requires disclosure of the fair value of
financial instruments, both assets and liabilities, recognized and not
recognized in the Consolidated Balance Sheets of the Company, for which it is
practicable to estimate fair value. The estimated fair values of financial
instruments which are presented herein have been determined by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgment is required in interpreting market data to develop
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of amounts the Company could realize in a current
market exchange.
The following methods and assumptions were used to estimate fair value:
- the carrying amounts of cash and cash equivalents, receivables and
accounts payable approximate fair value due to their short term nature;
- discounted cash flows using current interest rates for financial
instruments with similar characteristics and maturity were used to
determine the fair value of short-term and long-term debt; and,
- market prices were used to determine the fair value of the zero coupon,
convertible, subordinated notes.
There were no significant differences as of December 30, 1995 and December
31, 1994 in the carrying value and fair value of financial instruments
except for the zero coupon, convertible, subordinated notes which had a
carrying value of $382,570,000 and $366,340,000 and a fair value of
$422,407,000 and $407,675,000 at the end of 1995 and 1994, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
The Company will adopt the following Statements of Financial Accounting
Standards ("SFAS") in the year ending December 28, 1996.
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of. Long-lived assets and
certain identifiable intangibles to be held and used by a company are required
to be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Measurement of an impairment loss for such long-lived assets and identifiable
intangibles should be based on the fair value of the asset. Long-lived assets
and certain identifiable intangibles to be disposed of are required to be
reported generally at the lower of the carrying amount or fair value less cost
to sell. SFAS No. 121 is effective for fiscal years that begin after
December 15, 1995. Management has not yet determined the effect of
SFAS No. 121 on the Company's financial position or results of operations.
SFAS No. 123, "Accounting for Stock-Based Compensation" estab-
32
<PAGE> 14
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
lishes financial accounting and reporting standards for stock-based employee
compensation plans, including stock options, stock purchase plans, restricted
stock, and stock appreciation rights. SFAS No. 123 defines and encourages the
use of the fair value method of accounting for employee stock-based
compensation. Continuing use of the intrinsic value based method of accounting
prescribed in Accounting Principles Board Opinion No. 25 ("APB 25") for
measurement of employee stock-based compensation is allowed with pro forma
disclosures of net income and earnings per share as if the fair value method of
accounting had been applied. Transactions in which equity instruments are
issued in exchange for goods or services from non-employees must be accounted
for based on the fair value of the consideration received or of the equity
instrument issued, whichever is more reliably measurable. SFAS No. 123 is
effective for transactions entered into in fiscal years that begin after
December 15, 1995. The Company has determined that it will continue to use the
method of accounting prescribed in APB 25 for measurement of employee
stock-based compensation, and will begin providing the required pro forma
disclosures in its financial statements for the year ending December 28, 1996
as allowed by SFAS No. 123.
NOTE B - PROPERTY & EQUIPMENT
- -------------------------------------------------------------------------------
Property and equipment consists of:
<TABLE>
<CAPTION>
December 30, December 31,
1995 1994
- ------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Land $ 64,094 $ 38,058
Buildings 66,703 31,619
Leasehold improvements 278,821 215,503
Furniture, fixtures and equipment 338,308 239,170
- ------------------------------------------------------------------------
747,926 524,350
Less accumulated depreciation and
amortization 182,844 127,121
- ------------------------------------------------------------------------
$565,082 $397,229
======== ========
</TABLE>
Equipment held under capital leases included in furniture, fixtures and
equipment above consists of:
<TABLE>
<CAPTION>
December 30, December 31,
1995 1994
- ------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Equipment $22,439 $15,681
Less accumulated depreciation 12,919 12,258
- ------------------------------------------------------------------------
$ 9,520 $ 3,423
======= =======
</TABLE>
NOTE C LONG-TERM DEBT
- --------------------------------------------------------------------------------
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 30, December 31,
1995 1994
- ---------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Capital lease obligations
collateralized by certain
equipment and fixtures $ 8,570 $ 3,417
13% senior subordinated notes,
unsecured and due 2002 9,888 10,126
Non-interest bearing promissory note,
due February 1996, guaranteed by an
irrevocable letter of credit 1,980 -
Bank borrowings 95,000 15,000
Installment notes, interest
rates ranging from 5.9% to 18.7%,
payable in monthly installments
through 2007, collateralized by
certain equipment 211 2,947
- ------------------------------------------------------------------------
115,649 31,490
Less current portion 3,309 4,030
- ------------------------------------------------------------------------
$112,340 $27,460
======== =======
</TABLE>
33
<PAGE> 15
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE C - LONG-TERM DEBT (continued)
- -------------------------------------------------------------------------------
The Company has a credit agreement with its principal bank and a syndicate
of commercial banks to provide for a working capital line and letters of credit
totaling $300,000,000. The agreement provides that funds borrowed will bear
interest, at the Company's option, at either: the higher of the prime rate or
.5% over the Federal Funds rate; the LIBOR rate plus .25% to .375%, depending
on the fixed charge coverage ratio; 1.75% over the Federal Funds rate; or under
a competitive bid facility. The Company must also pay a fee of between .125%
and .25% per annum, depending on the Company's fixed charge coverage ratio, on
the available and unused portion of the credit facility. The credit facility
expires in June 2000. In addition to the credit facility, the bank has provided
a lease facility to the Company under which the bank has agreed to purchase up
to $25,000,000 of equipment on behalf of the Company and lease such equipment
to the Company. As of December 30, 1995, the Company had $95,000,000 of
outstanding borrowings under the revolving credit facility and had utilized
approximately $7,621,000 of the lease facility. Additionally, the Company had
outstanding letters of credit under the credit agreement totaling $15,612,000
as of December 30, 1995. The loan agreement contains covenants relating to
maintaining various financial statement ratios.
Contractual maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
December 30,
1995
-------------------------------------
(in thousands)
<S> <C>
1996 $ 3,309
1997 1,964
1998 1,841
1999 1,903
2000 96,849
Thereafter 9,783
--------------------------------
$115,649
========
</TABLE>
Future minimum lease payments under capital leases together with the present
value of the net minimum lease payments as of December 30, 1995 are as follows:
<TABLE>
<CAPTION>
December 30,
1995
-------------------------------------------
(in thousands)
<S> <C>
1996 $1,759
1997 1,692
1998 1,718
1999 1,680
2000 1,288
Thereafter 1,000
------------------------------------
Minimum lease payments 9,137
Less: amount representing
interest at 9.5% to 15.0% 567
------------------------------------
Present value of net minimum
lease payments 8,570
Less: current portion 1,318
------------------------------------
Non-current portion $7,252
======
</TABLE>
34
<PAGE> 16
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE D - ZERO COUPON, CONVERTIBLE, SUBORDINATED NOTES
- --------------------------------------------------------------------------------
On December 11, 1992, the Company issued $316,250,000 principal amount of
Liquid Yield Option Notes (LYONs) with a price to the public of $150,769,000.
The issue price of each such LYON was $476.74 and there will be no periodic
payments of interest. The LYONs will mature on December 11, 2007 at $1,000 per
LYON, representing a yield to maturity of 5% (computed on a semi-annual bond
equivalent basis).
On November 1, 1993, the Company issued $345,000,000 principal amount of
LYONs with a price to the public of $190,464,000. The issue price of each such
LYON was $552.07 and there will be no periodic payments of interest. These
LYONs will mature on November 1, 2008 at $1,000 per LYON, representing a yield
to maturity of 4% (computed on a semi-annual bond equivalent basis).
All LYONs are subordinated to all existing and future senior indebtedness
of the Company.
Each LYON is convertible at the option of the holder at any time
on or prior to maturity, unless previously redeemed or otherwise purchased by
the Company, into common stock of the Company at a conversion rate of 29.263
shares per 1992 LYON and 21.234 shares per 1993 LYON. The LYONs may be required
to be purchased by the Company, at the option of the holder, as of December 11,
1997 and December 11, 2002 for the 1992 LYONs and as of November 1, 2000 for
the 1993 LYONs, at the issue price plus accrued original issue discount. The
Company, at its option, may elect to pay the purchase price on any particular
purchase date in cash or common stock, or any combination thereof. During 1995,
$506,000 par value of 1992 LYONs were converted to 14,801 shares of common
stock of the Company for an aggregate conversion price of approximately
$275,000, including accrued interest.
In addition, prior to December 11, 1997 for the 1992 LYONs and prior to
November 1, 2000 for the 1993 LYONs, the LYONs will be purchased for cash by
the Company, at the option of the holder, in the event of a change in control
of the Company. Beginning on December 11, 1996, for the 1992 LYONs and on
November 1, 2000 for the 1993 LYONs, the LYONs are redeemable for cash at any
time at the option of the Company in whole or in part at the issue price plus
accrued original issue discount through the date of redemption.
35
<PAGE> 17
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE E - INCOME TAXES
- --------------------------------------------------------------------------------
The income tax provision consists of the following:
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
December 30, December 31, December 25,
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands)
Current
Federal $65,573 $62,211 $40,068
State 12,613 14,616 9,449
Deferred (benefit) 11,336 (2,854) (4,399)
- ------------------------------------------------------------------------------------------------------------
Total provision for income taxes $89,522 $73,973 $45,118
======= ======= =======
</TABLE>
The tax effected components of deferred income tax accounts consist of
the following:
<TABLE>
<CAPTION>
As of As of As of
December 30, December 31, December 25,
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Interest premium on notes redeemed $ 2,004 $ 4,944 $ 7,832
Self-insurance accruals 5,839 8,302 6,466
Inventory costs capitalized for tax purposes 2,797 4,483 3,215
Other items, net 24,308 20,563 14,435
- --------------------------------------------------------------------------------------------------------
Deferred tax assets 34,948 38,292 31,948
- --------------------------------------------------------------------------------------------------------
Excess of tax over book depreciation 7,468 3,524 3,208
Capitalized leases 4,781 4,509 3,160
Other items, net 8,819 5,043 3,218
- --------------------------------------------------------------------------------------------------------
Deferred tax liabilities 21,068 13,076 9,586
- --------------------------------------------------------------------------------------------------------
Net deferred tax assets $13,880 $25,216 $22,362
======= ======= =======
</TABLE>
The following schedule is a reconciliation of income taxes at the
federal statutory rate to the provision for income taxes:
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
December 30, December 31, December 25,
1995 1994 1993
- --------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Tax computed at the statutory rate $77,672 $62,626 $40,583
State taxes net of federal benefit 8,877 8,944 5,748
Effect of S Corporation income prior
to acquisitions _ (1,161) (1,709)
Nondeductible goodwill amortization 1,843 1,955 483
Other items, net 1,130 1,609 13
- --------------------------------------------------------------------------------------------------------
Provision for income taxes $89,522 $73,973 $45,118
======= ======= =======
</TABLE>
Four of the contract stationers acquired in 1994 were organized as S
Corporations and, therefore, did not provide for income taxes prior to their
respective acquisitions.
36
<PAGE> 18
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE F - COMMITMENTS & CONTINGENCIES
- --------------------------------------------------------------------------------
LEASES
The Company conducts its operations in various leased facilities under
leases that are classified as operating leases for financial statement
purposes. The leases provide for the Company to pay real estate taxes, common
area maintenance, and certain other expenses, including, in some instances,
contingent rentals based on sales. Lease terms, excluding renewal option
periods exercisable by the Company at escalated rents, expire between 1996 and
2020. In addition to the base lease term, the Company has various renewal
option periods. Also, certain equipment used in the Company's operations is
leased under operating leases. A schedule of fixed operating lease commitments
follows:
<TABLE>
<CAPTION>
December 30,
1995
- ---------------------------------------
(in thousands)
<S> <C>
1996 $ 142,155
1997 132,099
1998 121,660
1999 111,117
2000 95,794
Thereafter 532,366
- ---------------------------------------
$1,135,191
==========
</TABLE>
The above amounts include 42 stores leased but not yet opened as of
December 30, 1995. The Company is in the process of opening new stores and
delivery warehouses in the ordinary course of business, and leases signed
subsequent to December 30, 1995 are not included in the above described
commitment amount. Rent expense, including equipment rental, was approximately
$154,633,000, $124,693,000 and $94,017,000, during 1995, 1994 and 1993,
respectively.
OTHER
Certain holders of the Company's common stock have limited demand
registration rights. The cost of such registration will generally be borne by
the Company.
The Company is involved in litigation arising in the normal course of
its business. In the opinion of management, these matters will not materially
affect the financial position or results of operations of the Company.
As of December 30, 1995, the Company has reserved 16,565,515 shares of
unissued common stock for conversion of the subordinated notes (see Note D).
NOTE G - EMPLOYEE BENEFIT PLANS
- --------------------------------------------------------------------------------
STOCK OPTION PLANS
As of December 30, 1995, the Company had reserved 11,639,710 shares of
common stock for issuance to officers and key employees under its 1986 and 1987
Incentive Stock Option Plans, its 1988 and 1989 Employees Stock Option Plans,
its Omnibus Equity Plan, and its Directors Stock Option Plan. Under these
plans, the option price must be equal to or in excess of the market price of
the stock on the date of the grant or, in the case of employees who own 10%
or more of common stock, the minimum price must be 110% of the market price.
Options granted to date become exercisable from one to four years after
the date of grant, provided that the individual is continuously employed by the
Company. All options expire no more than ten years after the date of grant.
Options to purchase 4,774,106 shares were exercisable at December 30, 1995. No
amounts have been charged to income under the plans.
37
<PAGE> 19
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE G - EMPLOYEE BENEFIT PLANS (continued)
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Option Price
Shares Per Share
- ---------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 27, 1992 8,736,195 $ .02 - 15.28
Granted 2,214,702 $ 13.22 - 23.84
Canceled 449,628 $ 1.76 - 17.92
Exercised 1,785,528 $ .30 - 15.00
- ---------------------------------------------------------------------------
Outstanding at December 25, 1993 8,715,741 $ .02 - 23.84
Granted 1,944,002 $ 20.00 - 26.50
Canceled 342,094 $ 2.09 - 25.13
Exercised 1,948,270 $ .02 - 21.92
- ---------------------------------------------------------------------------
Outstanding at December 31, 1994 8,369,379 $ .02 - 26.50
Granted 1,983,750 $ 19.69 - 31.94
Canceled 291,487 $ 5.89 - 31.00
Exercised 1,735,841 $ .02 - 26.50
- ---------------------------------------------------------------------------
Outstanding at December 30, 1995 8,325,801 $ 2.21 - 31.94
=========
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In October 1989, the Board of Directors approved an Employee Stock
Purchase Plan, which permits eligible employees to purchase common stock from
the Company at 90% of its fair market value through regular payroll deductions.
The maximum aggregate number of shares eligible for purchase under the plan is
1,125,000.
RETIREMENT SAVINGS PLAN
In February 1990, the Board of Directors approved a Retirement Savings
Plan, which permits eligible employees to make contributions to the plan on a
pretax salary reduction basis in accordance with the provisions of Section
401(k) of the Internal Revenue Code. The Company makes a matching stock
contribution of 50% of the employee's pretax contribution up to a maximum of 3%
of the employee's compensation in any calendar year. The Retirement Savings
Plans of the acquired companies were merged into the Company's Plan during 1994
and 1995.
NOTE H - CAPITAL STOCK
- --------------------------------------------------------------------------------
In August 1995, the Company completed a public offering of 4,325,000
shares of common stock, raising net proceeds of approximately $121,799,000.
As of December 30, 1995, there was 1,000,000 shares of $.01 par value
preferred stock authorized of which none are issued or outstanding.
38
<PAGE> 20
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE I - PURCHASE OF EASTMAN AND WILSON
- --------------------------------------------------------------------------------
On May 17, 1993, the Company acquired substantially all of the assets and
assumed certain of the liabilities of the office supply business of Wilson
Stationery & Printing Company ("Wilson"), a contract stationer based in
Houston, Texas. The Company issued 995,821 shares of common stock, representing
$15,000,000 at market value at date of issuance, in exchange for the acquired
net assets of Wilson. This acquisition was accounted for as a purchase.
On September 13, 1993, the Company acquired the common stock of Eastman
Office Products Corporation ("Eastman"), a contract stationer and office
furniture dealer headquartered in California that operates primarily in the
western United States. In connection with the acquisition, the Company issued
4,039,580 shares of common stock with a market value of approximately
$79,707,000 and paid $20,001,000 in cash. This acquisition was accounted for as
a purchase. The Company also acquired the outstanding preferred stock of
Eastman for $13,158,000. Additionally, the Company offered to purchase for
cash, pursuant to a tender offer, $90,000,000 principal amount of Eastman,
Inc.'s 13% Series B Subordinated Notes due 2002 (the "Notes"). Pursuant to the
tender offer, in October 1993 the Company purchased $81,750,000 principal
amount of the Notes for $103,414,000 in cash.
The excess of the cost over the fair value of net assets acquired for the
above acquisitions is being amortized over 40 years on the straight-line
method. The Company's Consolidated Statements of Earnings include the operating
results of acquisitions from the respective dates of the purchases.
NOTE J - SUPPLEMENTAL INFORMATION OF NON-CASH INVESTING AND FINANCING ACTIVITIES
- --------------------------------------------------------------------------------
The Consolidated Statements of Cash Flows for 1995, 1994 and 1993 do not
include the following non-cash investing and financing transactions:
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
December 30, December 31, December 25,
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Equipment purchased under capital
leases $5,836 - -
Conversion of convertible, subordinated
debt to common stock 275 - -
Additional paid-in capital related to tax
benefit on stock options exercised 7,598 $6,816 $ 3,525
Acquisition of net assets of Wilson and Eastman:
Fair value of assets acquired (including goodwill) - - 333,805
Liabilities assumed - - (219,097)
-------------------------------------------------------------------------------------------------------
Net assets acquired - - 114,708
Total issuance of common stock - - 94,707
-------------------------------------------------------------------------------------------------------
Cash used to purchase Eastman common stock - - $ 20,001
=========
</TABLE>
NOTE K - RECEIVABLES SOLD WITH RECOURSE
- --------------------------------------------------------------------------------
The Company has two private label credit card programs which are managed
by financial services companies. All credit card receivables related to one of
these programs were sold on a recourse basis. Proceeds to the Company for such
receivables sold with recourse were approximately $313,000,000, $253,000,000 and
$185,000,000 in 1995, 1994 and 1993, respectively. The Company's maximum
exposure to off-balance sheet credit risk is represented by the outstanding
balance of private label credit card receivables with recourse, which totaled
approximately $54,400,000 at December 30, 1995. The financial services company
periodically estimates the percentage to be withheld from proceeds for
receivables sold to achieve the necessary reserve for potential uncollectible
amounts. The Company expenses such withheld amounts at the time of the sale to
the financial services company.
39
<PAGE> 21
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE L - NET EARNINGS PER SHARE
- --------------------------------------------------------------------------------
Net earnings per common and common equivalent share is based upon the
weighted average number of shares and equivalents outstanding during each
period. Stock options are considered common stock equivalents. The zero coupon,
convertible, subordinated notes are not common stock equivalents. Net earnings
per common share assuming full dilution was determined on the assumption that
the convertible notes were converted as of the beginning of the period or
when issued. Net earnings under this assumption has been adjusted for interest
net of its tax effect.
The information required to compute net earnings per share on a primary and
fully diluted basis is as follows:
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
December 30, December 31, December 25,
1995 1994 1993
- ----------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Primary:
Weighted average number of common and
common equivalent shares 155,551 152,570 147,640
======== ======== ========
Fully diluted:
Net earnings $132,399 $104,957 $ 70,832
Interest expense related to convertible
notes, net of tax 10,068 9,359 5,340
--------------------------------------------------------------------------------------------
Adjusted net earnings $142,467 $114,316 $ 76,172
======== ======== ========
Weighted average number of common and
common equivalent shares 155,674 152,654 147,959
Shares issued upon assumed conversion
of convertible notes 16,568 16,580 10,466
--------------------------------------------------------------------------------------------
Shares used in computing net earnings per
common and common equivalent share
assuming full dilution 172,242 169,234 158,425
======== ======== ========
</TABLE>
40
<PAGE> 22
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE M - QUARTERLY FINANCIAL DATA (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Fiscal Year Ended
December 30, 1995
Net sales $1,351,212 $1,200,410 $1,337,108 $1,424,462
Gross profit(1) 304,829 271,804 307,490 318,735
Net earnings 32,474 27,418 36,842 35,665
---------- ---------- ---------- ----------
Net earnings per common
share (fully diluted) $ .21 $ .18 $ .23 $ .22
========== ========== ========== ==========
Fiscal Year Ended
December 31, 1994
Net sales $1,041,396 $ 924,676 $1,044,815 $1,255,312
Gross profit(1) 236,937 215,600 243,538 286,626
Net earnings 24,546 20,809 27,411 32,191
---------- ---------- ---------- ----------
Net earnings per common
share (fully diluted) $ .16 $ .14 $ .18 $ .20
========== ========== ========== ==========
</TABLE>
_______________________
(1) Gross profit is net of occupancy costs.
41
<PAGE> 1
EXHIBIT 21.1
LIST OF THE COMPANY'S SUBSIDIARIES
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
---- -----------------------------
<S> <C>
Eastman, Inc. ............................ Delaware
Eastman Office Products Corporation ...... Delaware
ODI, Inc. ................................ Delaware
OD International, Inc. ................... Delaware
Office Town, Inc. ........................ Puerto Rico
The Canadian Office Depot, Inc. .......... British Columbia, Canada
The Office Club, Inc. .................... California
Southern Terminals, Inc. ................. North Carolina
Carolina Rail Service, Inc. .............. North Carolina
Con Eng Coal, Inc. ....................... Pennsylvania
OD Commercial, Inc. ...................... Delaware
ODO, Inc. ................................ Florida
ODNV, Inc. ............................... Nevada
ODHC, Inc. . ............................. Delaware
MG Realty, Inc. .......................... California
OD France L.L.C. ......................... Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
No. 33-31743, No. 33-62781 and No. 33-62801 of Office Depot, Inc. on
Forms S-8 of our reports dated February 12, 1996 appearing in
and incorporated by reference in the Annual Report on Form 10-K of Office
Depot, Inc. for the year ended December 30, 1995.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
March 26, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF OFFICE DEPOT FOR THE YEAR ENDED DECEMBER 30, 1995, AND
IS QUALFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-30-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-30-1995
<EXCHANGE-RATE> 1
<CASH> 61,993
<SECURITIES> 0
<RECEIVABLES> 187,476
<ALLOWANCES> 3,808
<INVENTORY> 1,258,413
<CURRENT-ASSETS> 1,730,999
<PP&E> 747,926
<DEPRECIATION> 182,844
<TOTAL-ASSETS> 2,531,217
<CURRENT-LIABILITIES> 1,022,105
<BONDS> 498,219
0
0
<COMMON> 1,580
<OTHER-SE> 1,001,415
<TOTAL-LIABILITY-AND-EQUITY> 2,531,217
<SALES> 5,313,192
<TOTAL-REVENUES> 5,313,192
<CGS> 4,110,334
<TOTAL-COSTS> 4,910,558
<OTHER-EXPENSES> 158,557
<LOSS-PROVISION> 1,869
<INTEREST-EXPENSE> 22,551
<INCOME-PRETAX> 221,921
<INCOME-TAX> 89,522
<INCOME-CONTINUING> 132,399
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 132,399
<EPS-PRIMARY> .85
<EPS-DILUTED> .83
</TABLE>
