OFFICE DEPOT INC, 10-K405/A, 1997-04-16

OFFICE DEPOT INC
10-K405/A, 1997-04-16
MISCELLANEOUS SHOPPING GOODS STORES

Previous: LANDS END INC, DEF 14A, 1997-04-16

Next: HALDANE BERNARD ASSOCIATES INC, 10QSB, 1997-04-16

<PAGE> 1

================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A

<TABLE>
<S> <S>
(MARK ONE)
[X] AMENDMENT NO. 1 TO ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE
REQUIRED, EFFECTIVE OCTOBER 7, 1996).
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996
OR
[ ] 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 ____________
</TABLE>

COMMISSION FILE NUMBER 1-10948
OFFICE DEPOT, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 59-2663954
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
2200 OLD GERMANTOWN ROAD, DELRAY BEACH, 33445
FLORIDA
(Address of principal executive offices) (Zip Code)
</TABLE>

Registrant's telephone number, including area code: 561/278-4800

Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
<S> <C>
Common Stock, par value $0.01 per share..................... New York Stock Exchange
Preferred Share Purchase Rights............................. 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. [X]

The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 24, 1997 was approximately $3,471,557,773.

As of March 24, 1997, the Registrant had 157,471,381 shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

No documents (other than exhibits) have been incorporated by reference to
this Annual Report on Form 10-K.
================================================================================
<PAGE> 2

Following is a description of the amendment:

ITEM 1. BUSINESS.

The second sentence of the fourth paragraph of the subitem "Expansion
Program -- Other Office Products and Services" currently reads "The Company
opened its first store in Texas in 1995 and opened four additional stores in
California, South Florida and Texas in 1996." The sentence is amended to read
"The Company opened its first store in Texas in 1995 and opened three additional
stores in California, South Florida and Texas in 1996."

The first sentence of the subitem Store Design and Operations -- Delivery
Services currently reads "The Company's customer service centers range from
38,000 to 325,000 square feet, with its more recently opened customer service
centers averaging 165,000 square feet." The sentence is amended to read "The
Company's customer service centers range from 34,000 to 434,000 square feet,
with its more recently opened customer service centers averaging 165,000 square
feet."

ITEM 2. PROPERTIES.

The second sentence of the second paragraph currently reads "The owned
facilities are located in twenty states, primarily Florida and Texas and four
Canadian provinces." The sentence is amended to read "The owned facilities are
located in sixteen states, primarily Florida and Texas and three Canadian
provinces."

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.

The table of the high and low sale prices of the Common Stock quoted on the
New York Stock Exchange Composite Tape currently reports a high quote of $23.750
for the third quarter of 1996. The table is amended to report a high quote of
$23.500 for the third quarter of 1996.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The tenth sentence of the fifth paragraph of the subitem "Liquidity and
Capital Resources" currently reads "As of December 28, 1996, the Company has
utilized approximately $12,682,000 of this lease facility." The sentence is
amended to read "As of December 28, 1996, the Company had utilized approximately
$18,321,000 of this lease facility.

ITEM 8. FINANCIAL STATEMENTS.

The consolidated financial statements (together with independent auditors'
report) of the Company and its subsidiaries are included on pages F-2 through
F-19 of this report on Form 10-K/A.

The conformed signature to the Independent Auditors' Report currently reads
"/s/ Deloitt & Touche LLP." The signature is amended to read "/s/ Deloitte &
Touche LLP."

The table for tax effected components of deferred income tax accounts in
Note F to the consolidated financial statements currently reports "Reserve for
facility closings" of 2,996 and 3,073 for the periods ended December 30, 1995
and December 31, 1994, respectively. Note F is amended to report "Reserve for
facility closings" of 5,734 and 5,707 for the periods ended December 30, 1995
and December 31, 1994, respectively.

The table for tax effected components of deferred income tax accounts in
Note F to the consolidated financial statements currently reports "Other items,
net" of 16,875 and 13,034 for the periods ended December 30, 1995 and December
31, 1994, respectively. Note F is amended to report "Other items, net" of 14,137
and 10,400 for the periods ended December 30, 1995 and December 31, 1994,
respectively.

1
<PAGE> 3

The fourth sentence of Note L to the consolidated financial statements
currently reads "One of 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 $4,800,000 as of
December 28, 1996." The sentence is amended to read "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 $4,800,000 as of December 28, 1996."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

References to "Effective Date" in subitem "Proposed Merger" are amended to
refer to "Effective Time."

EXHIBIT 23.1

The conformed signature to the Independent Auditors' Consent currently
reads "/s/ Deloitte & Touche." The signature is amended to read "/s/ Deloitte &
Touche LLP."

The revised Items and Exhibit are included in their entirety as part of
this report on Form 10-K/A.

2
<PAGE> 4

PART I

ITEM 1. BUSINESS.

PROPOSED MERGER

In September 1996, the Company entered into an agreement and plan of merger
(the "Merger Agreement") with Staples, Inc. ("Staples") and Marlin Acquisition
Corp., a wholly-owned subsidiary of Staples ("Acquisition Sub"). Pursuant to the
Merger Agreement, (i) Acquisition Sub will be merged with and into Office Depot,
and Office Depot will become a wholly-owned subsidiary of Staples and (ii) each
outstanding share of the Company's common stock will be converted into the right
to receive 1.14 shares of common stock of Staples. In connection with the
merger, both companies also issued mutual options to purchase up to 19.9% of the
outstanding stock of the other company under certain conditions.

The consummation of the merger is subject to a number of conditions,
including approval by the stockholders of both the Company and Staples, and the
receipt of governmental consents and approvals, including those under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act") and the
Canadian Competition Act. On November 1, 1996, the Federal Trade Commission
("FTC") issued a Second Request for Information to Staples and the Company,
beginning an investigation of the merger. Since that time, the Company has
cooperated with the FTC in its review of the merger and has provided the FTC
with requested documents and information. The Company believes the merger fully
complies with the antitrust laws. An "Advanced Ruling Certificate" from the
Canadian Competition Bureau clearing the proposed merger under Canadian law was
received on December 16, 1996.

On March 10, 1997, the FTC voted to challenge the merger. Staples and the
Company plan to vigorously contest any FTC challenge. Nevertheless, the Company
has been working with Staples and the FTC staff on an acceptable divestiture of
stores or other settlement arrangement that would benefit the Company, its
shareholders and its customers by allowing the merger to close. Staples and the
Company have entered into an agreement with OfficeMax, Inc. ("OfficeMax")
whereby Staples and the Company would divest a total of 63 stores, which Staples
and the Company believe should remedy any perceived competitive issues and
should obviate the need for any FTC challenge. The FTC is currently reviewing
the proposed divestiture package, and has withheld issuance of a complaint
pending this review. If this or another settlement is ultimately approved by the
FTC, a consent decree would be issued along with the complaint that would allow
the merger to close.

If a settlement is not ultimately approved by the FTC, the Company
anticipates the merger will be subject to litigation with the FTC. A preliminary
injunction hearing will be held, likely within a few months of the issuance of
the complaint. Whether or not the FTC is ultimately successful in obtaining a
preliminary injunction, after any appeals, the FTC has told the Company it plans
to pursue its challenge in FTC administrative hearings. Staples and the Company
each have the right to terminate the Merger Agreement if the merger has not been
consummated by May 31, 1997.

Notwithstanding the Company's belief that the merger fully complies with
the antitrust laws and notwithstanding the ongoing negotiations with the FTC,
there can be no assurance that the FTC will not ultimately challenge the merger
or that the merger will ultimately be consummated.

GENERAL

The information in the remainder of this section pertains to the business
of the Company as it is currently conducted without giving effect to the
proposed merger between the Company and Staples.

Office Depot, Inc. (the "Company") operates a national chain of high-volume
retail office products stores, provides delivery of its products in the United
States and Canada and is a full-service contract stationer serving businesses
throughout the United States. The Company sells high-quality, brand-name office
products at significant discounts at its office products stores and through its
delivery business.

The Company began its operations in 1986 with its first retail store.
Currently, it operates 536 office products stores in 38 states and the District
of Columbia and 36 stores in five Canadian provinces. Through its

3
<PAGE> 5

23 customer service centers and certain retail stores, the Company also delivers
office products to businesses of all sizes and provides other value-added
business services.

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 businesses.
The stores utilize a "warehouse" format. The Company also operates five Images
stores and five Furniture At Work stores. The Company's business strategy for
its office products 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 1996, the Company opened 66 new
office products stores. The Company currently believes it will open
approximately 40 stores during 1997.

The Company's delivery business provides delivery services of office
products and full service contract stationer services for small, medium and
large businesses, schools and other educational institutions and governmental
agencies. The Company's delivery sales exceeded $1.85 billion in 1996. The
Company provides its delivery customers access to a broad selection of office
products 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 products and office furniture
costs. These efficiencies include electronic ordering, stockless office
procurement and business forms management services (which reduce customer need
for office products 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
and opening new facilities in 1995.

The Company's strategy for its delivery business is to build an integrated
national operation to provide delivery service to 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 contract stationer businesses that have been
acquired by the Company into a national network of facilities providing a
consistently 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 1996,
the Company replaced three of its customer service centers with larger, more
efficient facilities. During 1997, the Company plans to replace three to four of
its existing customer service centers with larger facilities, consolidating
operations in certain markets.

Through expansion of both its office products 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, at its
crossdocks and at its customer service centers. The Company operates in a highly
competitive environment, and no assurance can be given that increased
competition will not have an adverse effect on the Company's operations.

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 with operations 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.

4
<PAGE> 6

- 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.

The Company has entered into licensing arrangements for the operation of
office supply stores in Colombia, Israel and Poland and joint venture agreements
to operate stores in Mexico and France. As of December 28, 1996, there were
five, seven, three, seven and two stores and delivery centers open in Colombia,
Israel, Poland, Mexico and France under these arrangements, respectively. The
Company's joint venture partner in France is Carrefour S.A. ("Carrefour"), which
beneficially owns approximately 6% of the Company's issued and outstanding
shares of common stock through its indirect wholly-owned subsidiary Fourcar B.V.
("Fourcar"). The joint venture is owned 50% by Carrefour and 50% by the Company.
Office Depot has also entered into a joint venture in Japan and a licensing
arrangement in Thailand. Two stores were opened in March 1997 in Thailand and
stores are expected to open in Japan in late 1997.

OFFICE PRODUCTS INDUSTRY

The office products industry is comprised of three broad categories of
merchandise: office supplies, office machines and computers, and office
furniture. These products are distributed through different and often
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 products 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. Dealers purchase a significant portion of their merchandise from
national or regional office supply distributors who, in turn, purchase
merchandise from 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 in the past 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 were 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. 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. Recently, other retailers, including mass merchandisers
and warehouse clubs, have been offering a wide variety of like products at low
prices, and have become increasingly competitive with office supply superstores.
Delivery companies have also been making inroads into the Company's traditional
customer base.

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

5
<PAGE> 7

their customers. The Company entered the full-service contract stationer portion
of the office products 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
retail stores.

The table below shows sales of each major product group as a percentage of
total merchandise sales for the 1996, 1995, and 1994 fiscal years:

<TABLE>
<CAPTION>
1996 1995 1994
FISCAL FISCAL FISCAL
YEAR YEAR YEAR
------ ------ ------
<S> <C> <C> <C>
General office supplies(1).................................. 44.2% 47.2% 48.1%
Business machines and related supplies, computers and
computer accessories(2)................................... 44.6 41.3 39.0
Office furniture(3)......................................... 11.2 11.5 12.9
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>

- ---------------

(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 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 625
vendors are currently transmitted by electronic data interchange ("EDI"), which
expedites orders and promotes accuracy and efficiency. The Company receives
Advance Ship Notices 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. Print advertisements, as well as
catalog layouts, are created by the Company's in-house graphics department. The
Company periodically issues catalogs featuring merchandise

6
<PAGE> 8

offered in its stores. The catalogs generally 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 regional 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 office supply 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.

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
generally 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 customers nationwide can place orders by telephone or
facsimile using toll-free telephone numbers that route the calls through the
Company's order departments located in South Florida, Atlanta 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
contract 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 contract
and 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 60 new office supply stores in 1996, and
plans to open approximately 40 new stores during 1997. Uncertainty and a loss of
certain real estate personnel, both resulting

7
<PAGE> 9

from the delay in the pending merger with Staples, have negatively affected the
Company's short term store opening program. Office supply store opening activity
for the last five years is summarized as follows.

<TABLE>
<CAPTION>
OFFICE SUPPLY STORES
-------------------------------------------------
OPEN BEGINNING OPENED/ OPEN END
OF PERIOD ACQUIRED CLOSED OF PERIOD
-------------- -------- ------ ---------
<S> <C> <C> <C> <C>
1992............................................. 228 58(1) 2 284
1993............................................. 284 68 1 351
1994............................................. 351 71 2 420
1995............................................. 420 82 1 501
1996............................................. 501 60 -- 561
</TABLE>

- ---------------

(1) Includes the acquisition of five stores in Canada.

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 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 and real
estate personnel, integrate new stores into its operations, generate adequate
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 office supply stores. During 1996, the Company replaced three
of its existing customer service centers with larger, more efficient facilities.
During 1997, the Company plans to replace three to four customer service centers
with larger facilities, consolidating operations in certain markets.

Other Office Products and Services. In addition to the Company's core
office supply and delivery businesses, the Company also operates the following:

- International -- Retail office supply stores and delivery services
operated under the Office Depot(R) name abroad, either through joint
ventures or licensing arrangements. Since 1994, a total of 24 such stores
and delivery centers have been opened in Colombia, Israel, Mexico, Poland
and France. In addition, two such stores were opened in Thailand in March
1997 and one or more stores are expected to open in Japan in late 1997.

- Images(TM) -- Retail facilities which provide a range of business
services including graphic design, printing, copying, shipping and
fulfillment services as well as a limited assortment of office supplies.
Four Images units and one Office Depot Express(TM) (a slightly different
store format with an expanded assortment of products) are currently open
in South Florida.

- 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 1995 in Las Vegas. Six additional megastores opened during 1995
and 1996 when the Company entered the New York metropolitan market with
five stores and the Salt Lake City market with one store.

8
<PAGE> 10

- 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 1995 and opened three additional stores in California, South
Florida and Texas in 1996.

- Uptime Services(TM) -- 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 leasing and training, software
support and product protection plans.

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 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
34,000 to 434,000 square feet, with its more recently opened customer service
centers averaging 165,000 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 gross margin data permits the monitoring of sales,
gross margin and inventory by item and product line, as well as

9
<PAGE> 11

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 allows a
customer to place an order via phone, fax or electronically. When the order is
placed, the system determines the appropriate customer service center for
delivery, looks up the stock status of each item ordered and automatically
reserves 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.

EMPLOYEES, STORE MANAGEMENT AND TRAINING

As of March 24, 1997, the Company employed approximately 32,000 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 internally 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. These companies, in varying degrees, compete with the
Company on both price and selection.

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 other competitors described above 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 and as competitors allocate more shelf space to office products.

10
<PAGE> 12

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 products 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.

11
<PAGE> 13

ITEM 2. PROPERTIES.

As of March 24, 1997, the Company operated 536 office product stores in 38
states and the District of Columbia and 36 office supply 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.............. 11 New Jersey......... 2 Arizona............ 1
Arizona.............. 2 New Mexico......... 3 California......... 5
Arkansas............. 4 New York........... 4 Colorado........... 1
California........... 103 North Carolina..... 19 Florida............ 2
Colorado............. 15 Ohio............... 13 Georgia............ 1
District of
Columbia........... 2 Oklahoma........... 5 Illinois........... 1
Florida.............. 71 Oregon............. 11 Louisiana.......... 1
Georgia.............. 25 Pennsylvania....... 6 Maryland........... 1
Hawaii............... 3 South Carolina..... 9 Massachusetts...... 1
Idaho................ 1 Tennessee.......... 7 Michigan........... 1
Illinois............. 23 Texas.............. 60 Minnesota.......... 1
Indiana.............. 9 Utah............... 1 New Jersey......... 1
Iowa................. 1 Virginia........... 10 North Carolina..... 1
Kansas............... 6 Washington......... 20 Ohio............... 1
Kentucky............. 3 West Virginia...... 1 Texas.............. 2
Louisiana............ 15 Wisconsin.......... 10 Utah............... 1
Maryland............. 11 Washington......... 1
Michigan............. 17 CANADA
Minnesota............ 7 Alberta............ 8
Mississippi.......... 4 British Columbia... 8
Missouri............. 12 Manitoba........... 2
Nebraska............. 3 Ontario............ 16
Nevada............... 7 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 1997 and 2021, except for 46 facilities that
are owned by the Company. The owned facilities are located in sixteen states,
primarily Florida and Texas and three Canadian provinces. The Company operates
its office products stores under the names Office Depot, The Office Place (in
Ontario, Canada), Furniture at Work, Images, and Office Depot Express. 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. The Company has entered into a lease for an additional 210,000
square foot building which is being constructed adjacent to the existing
buildings.

12
<PAGE> 14

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 24, 1997, there were 3,273 holders of
record of Common Stock. The last reported sales price of the Common Stock on the
NYSE on March 24, 1997 was $22.125.

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.

<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
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

1996
First Quarter............................................. $23.875 $16.875
Second Quarter............................................ 25.625 19.375
Third Quarter............................................. 23.500 12.875
Fourth Quarter............................................ 23.750 17.250
</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.

13
<PAGE> 15

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

GENERAL

Office Depot began operations by opening its first office supply 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 1996, the Company
operated 570 office products stores in 38 states, the District of Columbia and
Canada. Store opening activity for the last five years is summarized as follows:

<TABLE>
<CAPTION>
OFFICE PRODUCTS STORES
--------------------------------------------------------------
OFFICE SUPPLY
STORES
----------------- OTHER
OPEN BEGINNING OPENED/ RETAIL STORES OPEN END
OF PERIOD ACQUIRED CLOSED OPENED OF PERIOD
-------------- -------- ------ ------------- ---------
<S> <C> <C> <C> <C> <C>
1992........................................ 228 58(1) 2 -- 284
1993........................................ 284 68 1 -- 351
1994........................................ 351 71 2 -- 420
1995........................................ 420 82 1 3 504
1996........................................ 504 60 -- 6 570
</TABLE>

- ---------------

(1) Includes the acquisition of five stores in Canada.

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 1996.

The Company's results are impacted by the costs incurred in connection with
its 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 continue to 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 28, 1996 and December 30, 1995 and
the 53 weeks ended December 31, 1994.

RESULTS OF OPERATIONS FOR THE YEARS 1996, 1995 AND 1994

Sales. Sales increased to $6,068,598,000 in 1996 from $5,313,192,000 in
1995 and $4,266,199,000 in 1994, or 14% in 1996 and 25% in 1995. Adjusting for
the additional week in 1994, the 1995 sales increase was 27%. The increases in
sales were due primarily to the 60 additional office supply stores in 1996 and
the 81 additional office supply stores in 1995. The increases also were
attributable to same store sales growth. Comparable sales in 1996 for the 501
office supply stores and 23 warehouses open for more than one year at

14
<PAGE> 16

December 28, 1996 increased 5% from 1995. Comparable sales in 1995 for the 419
office supply stores and 23 warehouses open for more than one year at December
30, 1995 increased 17% from 1994. Comparable sales in the future may be affected
by competition from other stores, the opening of additional stores in existing
markets and economic conditions. Sales of computers, business machines and
related supplies in 1996 have risen as a percentage of total sales over 1994 and
1995 sales in this category.

Gross Profit. Gross profit as a percentage of sales was 22.5% in 1996,
22.6% in 1995 and 23.0% in 1994. In 1995, 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 somewhat 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. In 1996, while gross profit continued to
benefit from vendor discount programs, a continued increase in business machines
and computers in its product mix, and increased occupancy costs as a percentage
of sales as a result of the Company's continued expansion into metropolitan
markets which tend to yield higher average rents, negatively impacted gross
profit as a percentage of sales. 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, competitive pricing in more market
areas, continued change in 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 15.7% in 1996,
14.7% in 1995 and 15.1% in 1994. Store and warehouse operating and selling
expenses, consisting primarily of payroll, delivery and advertising expenses,
have increased in the aggregate primarily due to the Company's expansion
program. The Company, in 1995 and 1996, invested in larger delivery warehouses
to accommodate future growth as part of the integration of its contract
stationer delivery business. These investments and conversion of operating
systems as part of the Company's integration effort have increased current
operating expenses as a percentage of sales but should be leveraged as
additional sales are generated in these facilities. In addition to the expansion
of the contract stationer business, the Company has continued its retail
expansion. While the majority of these retail related 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.

Pre-opening Expenses. As a result of continued store and delivery
warehouse openings, pre-opening expenses incurred were $9,827,000 in 1996,
$17,746,000 in 1995 and $11,990,000 in 1994. Pre-opening expenses, which are
currently approximately $150,000 per office supply prototype store, are
predominately incurred during a six-week period prior to the store opening. New
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
preopening 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 2.7% in 1996, 2.9% in 1995 and 3.0% in 1994.
General and administrative expenses include, among other costs, site selection
expenses and store management training expenses, and therefore vary somewhat
with the number of new store openings. During 1994 through 1996, the Company
increased its commitment to

15
<PAGE> 17

improving the efficiency of its management information systems and significantly
increased its information systems programming staff. While this systems
investment has and will continue to increase general and administrative expenses
in the short term, the Company believes it will provide benefits in the future.
These increases have been 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.

Other Income and Expenses. During 1996, 1995 and 1994, interest expense
was $26,078,000, $22,551,000 and $18,096,000, respectively. The increase in
interest expense is primarily due to increases in the draws on the working
capital line of credit. Interest income during 1996, 1995 and 1994 was
$1,593,000, $1,357,000 and $4,000,000, respectively. The decrease from 1994 to
1995 is due primarily to the use of funds raised in public offerings in 1992 and
1993.

Amortization of Goodwill. The Company recorded amortization of goodwill of
$5,247,000, $5,213,000 and $5,288,000 in 1996, 1995 and 1994, respectively.

Income Taxes. The effective income tax rate, in comparison to statutory
rates, for 1996, 1995 and 1994 was negatively impacted by nondeductible goodwill
amortization. The reduction of the effective income tax rate from 1995 to 1996
was primarily due to lower effective state income tax rates. The effective
income tax rate for 1994 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).

PROPOSED MERGER

In September 1996, the Company entered into the Merger Agreement with
Staples and Acquisition Sub. Pursuant to the Merger Agreement, (i) Acquisition
Sub will be merged with and into Office Depot, and Office Depot will become a
wholly-owned subsidiary of Staples and (ii) each outstanding share of the
Company's common stock will be converted into the right to receive 1.14 shares
of common stock of Staples. In connection with the merger, both companies also
issued mutual options to purchase up to 19.9% of the outstanding stock of the
other company under certain conditions.

The consummation of the merger is subject to a number of conditions,
including approval by the stockholders of both the Company and Staples, and the
receipt of governmental consents and approvals, including those under the HSR
Act and the Canadian Competition Act. On November 1, 1996, the FTC issued a
Second Request for Information to Staples and the Company, beginning an
investigation of the merger. Since that time, the Company has cooperated with
the FTC in its review of the merger and has provided the FTC with requested
documents and information. The Company believes the merger fully complies with
the antitrust laws. An "Advanced Ruling Certificate" from the Canadian
Competition Bureau clearing the proposed merger under Canadian law was received
on December 16, 1996.

On March 10, 1997, the FTC voted to challenge the merger. Staples and the
Company plan to vigorously contest any FTC challenge. Nevertheless, the Company
has been working with Staples and the FTC staff on an acceptable divestiture of
stores or other settlement arrangement that would benefit the Company, its
shareholders and its customers by allowing the merger to close. Staples and the
Company have entered into an agreement with OfficeMax whereby Staples and the
Company would divest a total of 63 stores, which Staples and the Company believe
should remedy any perceived competitive issues and should obviate the need for
any FTC challenge. The FTC is currently reviewing the proposed divestiture
package, and has withheld issuance of a complaint pending this review. If this
or another settlement is ultimately approved by the FTC, a consent decree would
be issued along with the complaint that would allow the merger to close.

16
<PAGE> 18

administrative hearings. Staples and the Company each have the right to
terminate the Merger Agreement if the merger has not been consummated by May 31,
1997.

The merger, if completed, will be accounted for as a pooling of interests,
and, accordingly, the Company's prior period financial statements will be
restated and combined with the prior period financial statements of Staples, as
if the merger had taken place at the beginning of the periods reported.

Based upon the number of outstanding shares of Staples common stock and
Company common stock as of December 28, 1996, the stockholders of Company
immediately prior to the consummation of the merger will own approximately 53%
of the outstanding shares of Staples common stock immediately following
consummation of the merger.

Upon consummation of the proposed merger, pursuant to the Merger Agreement,
each outstanding option to purchase the Company common stock will be converted
into an option to purchase such number of shares of Staples common stock
(rounded down to the nearest whole number) as is equal to the number of shares
of Company common stock issuable upon exercise of such option immediately prior
to the effective time of the merger multiplied by the exchange ratio. The
exercise price per share of each such option, as so converted, will be equal to
(x) the aggregate exercise price for the shares of Company common stock
otherwise purchasable pursuant to such Company stock option immediately prior to
the effective time of the merger divided by (y) the number of whole shares of
Staples common stock deemed purchasable pursuant to such Company stock option as
determined above (rounded up to the nearest whole cent). All outstanding Company
stock options, under the terms of such option agreements, will become
exercisable in full upon the closing of the merger.

In September 1996, a complaint was filed asserting, among other things, a
claim for breach of fiduciary duty against members of the Company's Board of
Directors, seeking to be certified as a class action and seeking injunctive
relief in connection with the proposed merger. The Company believes that this
lawsuit is without merit and will defend against it vigorously.

LIQUIDITY AND CAPITAL RESOURCES

Since the Company's inception in March 1986, the Company has relied upon
equity capital, convertible debt, capital equipment leases and bank borrowings
as the primary sources of its funds. 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.

A significant portion of the sales made from the contract stationer
warehouses are 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 66 office products stores in 1996, 84 office products
stores (net of closures) in 1995 and 69 office products stores (net of closures)
in 1994. Net cash provided by operating activities was $112,963,000, $25,974,000
and $46,107,000 for 1996, 1995 and 1994, 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
will 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 increases in receivables carried without outside financing and
increases in inventory as the

17
<PAGE> 19

Company continues to expand. 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 $22,000,000 for the
corporate headquarters in 1994) was $176,888,000 in 1996, $219,892,000 in 1995
and $171,810,000 in 1994. During 1996, the Company's cash balance decreased by
$10,595,000 and long- and short-term debt increased by $60,877,000.

The Company has a credit agreement with its principal bank and a syndicate
of commercial banks which provides 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 .3125% over the LIBOR
rate, 1.75% over the Federal Funds rate, a base rate linked to the prime rate,
or under a competitive bid facility. The Company must also pay a facility fee of
.1875% per annum on the available and unused portion of the credit facility. The
credit facility currently expires June 30, 2000. As of December 28, 1996, the
Company had borrowed $140,000,000 and had outstanding letters of credit totaling
$11,170,000 under the credit facility. The credit agreement contains certain
restrictive covenants relating to various financial statement ratios. In the
first quarter of 1997, the Company repaid in full all borrowings outstanding at
December 28, 1996 under the credit agreement. Accordingly, the outstanding
balance is reflected as a current liability at December 28, 1996. 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 28, 1996,
the Company had utilized approximately $18,321,000 of this lease facility. In
July 1996, the Company entered into an additional lease facility with another
bank for up to $25,000,000 of equipment. As of December 28, 1996, the Company
had utilized approximately $16,493,000 of this lease facility.

The Company currently plans to open approximately 40 stores and 3 to 4
delivery warehouses during 1997. Uncertainty and a loss of certain real estate
personnel, both resulting from the delay in the pending merger with Staples,
have negatively affected the Company's short-term store opening program.
Management estimates that the Company's cash requirements, exclusive of
pre-opening expenses, will be approximately $1,900,000 for each additional
store, which includes an average of approximately $1,100,000 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. In January 1996, the Company entered into a lease commitment for
an additional corporate office building which is still under construction. The
lease will be classified as a capital lease and will be recorded as such when
the term commences in 1997. This lease will result in a capital lease asset and
obligation of approximately $26,000,000 and initial annual lease commitments of
approximately $2,200,000.

In 1992 and 1993, the Company issued Liquid Yield Option Notes ("LYONs")
which are zero coupon, convertible subordinated notes maturing in 2007 and 2008,
respectively. 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 conversion rates of 29.263 and
21.234 shares per 1992 and 1993 LYON, respectively. The 1992 LYONs may be
required to be purchased by the Company at the option of the holder, as of
December 11, 1997, 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. The total
amount of the 1992 LYONs as of December 28, 1996, including accrued interest,
was approximately $183,825,000.

The Company's management continually reviews its financing options and,
although they currently anticipate that the 1997 expansion will be financed
through cash on hand, funds generated from operations, equipment leased under
the Company's lease facilities and funds available under the Company's revolving
credit facility, alternative financing will be considered if market conditions
make it financially attractive. The

18
<PAGE> 20

Company's financing requirements beyond 1997 will be affected by the number of
new stores or warehouses opened or acquired.

INFLATION AND 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 proposed merger with Staples, 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 1997 and
beyond to differ materially from those expressed in any forward-looking
statement made by or on behalf of the Company.

19
<PAGE> 21

ITEM 8. FINANCIAL STATEMENTS.

The consolidated financial statements (together with independent auditors'
report) of the Company and its subsidiaries are included on pages F-2 through

F-19 of this report on Form 10-K.

20
<PAGE> 22

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

CARREFOUR S.A.

On April 24, 1991, the Company entered into a Stock Purchase Agreement (the
"Stock Purchase Agreement") with Carrefour, pursuant to which the Company agreed
to sell to Carrefour 6,435,000 newly issued shares of the Company's Common Stock
at a price of $6.23 per share (the "Carrefour Transaction"). Such shares were
issued to Fourcar, a wholly-owned indirect subsidiary of Carrefour. The
Carrefour Transaction was consummated on June 7, 1991 and resulted in proceeds
to the Company of $40,040,000. Fourcar subsequently purchased additional shares
in the market. In August 1995, 15,500,000 shares of the Company's Common Stock
were offered pursuant to a public offering whereby 2,000,000 shares were sold by
the Company and 13,500,000 shares were sold by Fourcar (the "Offerings").
Following the completion of the Offerings, Fourcar continued to own 9,192,600
shares of Common Stock (approximately 6% of the then issued and outstanding
shares). In addition, Carrefour has agreed not to compete with the Company in
the retail office products supply business in a large volume, warehouse or
discount store format in North America. In June 1995, the Company entered into a
joint venture agreement with 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. The joint venture is owned 50% by Carrefour and 50% by the Company. The
joint venture opened its first two stores in France in 1996. Herve Defforey, who
is a director of the Company, is the Director of General Finance and
Administration of Carrefour and, is a Director of the joint venture.

PROPOSED MERGER

David I. Fuente, Barry J. Goldstein and Richard M. Bennington, all of whom
are currently executive officers of the Company, each have entered into an
employment agreements with Staples, which will take effect upon the Effective
Time (as defined in the employment agreements). Each employment agreement has a
three-year term and contemplates that during the one-year period beginning upon
the Effective Time and ending on the first anniversary thereof (the "Initial
Period") the executive will devote a significant portion of his time to the
integration of the two companies. The employment agreement provides for an
annual base salary, bonus arrangements and other benefits which are comparable
to those currently received by the executive from the Company. In order to
induce the executive to remain employed by Staples after consummation of the
merger (the "Merged Company") during the critical transitional period in which
the operations of the two companies are being integrated, the employment
agreement provides that the executive shall be paid a bonus (the "Initial
Bonus") equal to 50% of his Base Amount (as defined below) if he is employed by
the Company as of the Effective Time and an additional bonus (the "Transition
Bonus") equal to 150% of his Base Amount if he is employed by the Merged Company
on the first anniversary of the Effective Time. Generally, an executive's "Base
Amount" means the sum of his current annual base salary with the Company and the
highest annual bonus earned by him during the five full fiscal years prior to
the date of the employment agreement. The employment agreement also provides
that if the executive's employment is terminated either (i) by the Merged
Company without cause (as defined in the employment agreements), (ii) by the
executive for good reason (as defined in the employment agreements, including,
among other things, a diminution in his position or responsibilities after the
Initial Period from such executive's duties prior to the merger or a required
relocation), or (iii) upon the death or disability of the executive, then the
Merged Company shall provide certain benefits to the executive (or his estate or
beneficiary), including (a) the payment of 100% of his Base Amount (the
"Severance Payment"), (b) if such employment termination occurs during the
Initial Period (and the executive has therefore not received the Transition
Bonus) the payment of an additional amount equal to the Transition Bonus, (c)
the payment of a pro rata portion of his

21
<PAGE> 23

annual bonus for the year in which employment termination occurs and (d) the
continuation of employee benefits (including medical, disability and other
insurance benefits) for a period of three years after such employment
termination. The employment agreement further provides that in the event the
payments to the executive under the employment agreement (the "Original
Payments") are subject to the excise tax imposed by Section 4999 of the Internal
Revenue Code (the "Code") (or any interest or penalties are incurred by the
executive with respect to such excise tax), then the Merged Company shall make
an additional payment (the "Gross-Up Payment") to the executive in an amount
such that after payment by the executive of all taxes (including the excise tax)
imposed upon the Gross-Up Payment, the executive retains a portion of the Gross-
Up Payment equal to the amount of the excise tax imposed upon the Original
Payments (provided that if the net after-tax payments to the executive after the
Gross-Up Payment would not be at least $50,000 greater than the net after-tax
payments to the executive that would result from an elimination of the Gross-Up
Payment and a reduction of the Original Payments to such amount that would avoid
the imposition of any excise tax, then no Gross-Up Payment shall be made to the
executive and the Original Payments shall be reduced to such reduced amount).
The employment agreement also contains a covenant by the executive that he will
not, while employed by the Merged Company and for two years after the
termination of his employment with the Merged Company, participate in any
capacity in any business engaged principally in the sale of office supplies in
any country where the Merged Company or its affiliates is then doing business.

F. Terry Bean, Harry S. Brown, R. John Schmidt, Jr. and William P. Seltzer,
all of whom are currently executive officers of the Company, have each entered
into an employment agreement with Staples on substantially the terms described
in the preceding paragraph, with the following exceptions: the amount of the
Transition Bonus payable to the executive is 100% (rather than 150%) of his Base
Amount; and the amount of the Severance Payment payable to the executive is 50%
(rather than 100%) of his Base Amount.

Approximately 51 additional employees of the Company have each entered into
an employment agreement with Staples on substantially the terms described above,
with the following exceptions: no bonuses are paid to such employee upon either
the Effective Time or the first anniversary of the Effective Time; the Base
Amount is calculated with reference to the highest annual bonus earned in the
prior three fiscal years (rather than five); the amount of the Severance Payment
is 100% of his or her Base Amount; the provision of benefits following certain
employment terminations continues for one year (rather than three); and there is
no Gross-Up Payment made in the event that the Original Payments are subject to
the excise tax under Section 4999 of the Code (the amount of the Original
Payments under these Employment Agreements would not normally trigger such
excise tax).

All outstanding stock options for the purchase of Company common stock were
granted pursuant to option agreements that provide that such options shall
become exercisable in full from and after the date of a change in control of the
Company. The merger will constitute a change in control of the Company within
the meaning of such option agreements.

Pursuant to the Merger Agreement, Staples has agreed to indemnify each
present and former director and officer of the Company against liabilities or
expenses incurred in connection with claims relating to matters occurring prior
to the closing of the Merger, and to maintain in effect directors' and officers'
liability insurance for their benefit. In addition, Office Depot has entered
into an indemnity agreement with each of its directors and executive officers
pursuant to which the Company has agreed, among other things, to indemnify such
persons to the maximum extent permitted by Delaware law.

Peter J. Solomon, a member of the Company's board of directors, is also
Chairman of PJSC. PJSC was engaged by the Company to provide investment banking
services in connection with the proposed merger with Staples. Under the
engagement letter between the Company and PJSC, the Company has agreed to pay
PJSC, upon consummation of the merger, a transaction fee of 0.375% of the
aggregate consideration paid or payable in the merger (the "Initial Transaction
Fee") minus (a) the amount paid (up to $2 million) by the Company to a financial
advisor other than PJSC for a fairness opinion and (b) the amount paid by the
Company to any additional financial advisor hired by the Company (up to an
aggregate of 30% of the Initial Transaction Fee). For this purpose, the
"aggregate consideration" includes the total amount of cash, securities,
contractual arrangements and other properties paid or payable to holders of the
Company's equity

22
<PAGE> 24

securities (including any amounts paid to holders of options, warrants and
convertible securities) plus the amount of any short-term and long-term debt of
the Company (x) existing on the balance sheet of the Company at the time of the
consummation of the merger or (y) repaid, retired or assumed in connection with
the merger. PJSC is also entitled, if the Company receives a break-up,
termination or topping fee in connection with the termination or abandonment of
the merger, to a cash fee equal to 70% of the lesser of (i) $10 million or (ii)
20% of the aggregate amount of all such break-up fees. The Company also has
agreed to reimburse PJSC for its reasonable out-of-pocket expenses, including
attorneys' fees, under certain circumstances and to indemnify PJSC against
certain liabilities, including certain liabilities under the federal securities
laws.

23
<PAGE> 25

SIGNATURE

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 April 16, 1997.

OFFICE DEPOT, INC.

By: /s/ BARRY J. GOLDSTEIN

------------------------------------
Barry J. Goldstein
Executive Vice President -- Finance,
Chief Financial Officer and
Secretary

24
<PAGE> 26

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report of Deloitte & Touche LLP on
Consolidated Financial Statements and Financial Statement
Schedule.................................................. F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Earnings......................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 27

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 28, 1996 and December 30, 1995, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended December 28, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a)2.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule 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 28, 1996 and December 30,
1995 and the results of their operations and their cash flows for each of the
three years in the period ended December 28, 1996 in conformity with generally
accepted accounting principles. Also, 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 25, 1997
(March 10, 1997 as to Note B)

F-2
<PAGE> 28

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 30,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 51,398 $ 61,993
Receivables, net of allowances of $11,538 in 1996 and
$3,808 in 1995......................................... 401,900 380,431
Merchandise inventories................................... 1,324,506 1,258,413
Deferred income taxes..................................... 29,583 18,542
Prepaid expenses.......................................... 14,209 11,620
---------- ----------
Total current assets.............................. 1,821,596 1,730,999
Property and Equipment, net................................. 671,648 565,082
Goodwill, net of Amortization............................... 190,052 195,302
Other Assets................................................ 57,021 39,834
---------- ----------
$2,740,317 $2,531,217
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 781,963 $ 841,589
Accrued expenses.......................................... 177,680 166,575
Income taxes.............................................. 25,819 10,542
Short-term borrowings and current maturities of long-term
debt................................................... 142,339 3,309
---------- ----------
Total current liabilities......................... 1,127,801 1,022,015
Long-Term Debt, less Current Maturities..................... 17,128 112,340
Deferred Taxes and Other Credits............................ 39,814 11,297
Zero Coupon, Convertible Subordinated Notes................. 399,629 382,570
Commitments and Contingencies............................... -- --
Common Stockholders' Equity:
Common stock -- authorized 400,000,000 shares of $.01 par
value; issued 159,417,089 in 1996 and 157,961,801 in
1995................................................... 1,594 1,580
Additional paid-in capital................................ 630,049 605,876
Foreign currency translation adjustment................... (1,073) (794)
Retained earnings......................................... 527,125 398,083
Less: 2,163,447 shares of treasury stock, at cost......... (1,750) (1,750)
---------- ----------
1,155,945 1,002,995
---------- ----------
$2,740,317 $2,531,217
========== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-3
<PAGE> 29

CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS )

<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 53 WEEKS
ENDED ENDED ENDED
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Sales..................................................... $6,068,598 $5,313,192 $4,266,199
Cost of goods sold and occupancy costs.................... 4,700,910 4,110,334 3,283,498
---------- ---------- ----------
Gross profit.............................................. 1,367,688 1,202,858 982,701
Store and warehouse operating and selling expenses........ 951,084 782,478 642,572
Pre-opening expenses...................................... 9,827 17,746 11,990
General and administrative expenses....................... 162,149 153,344 130,022
Amortization of goodwill.................................. 5,247 5,213 5,288
---------- ---------- ----------
1,128,307 958,781 789,872
---------- ---------- ----------
Operating profit.......................................... 239,381 244,077 192,829
Other income (expense)
Interest income......................................... 1,593 1,357 4,000
Interest expense........................................ (26,078) (22,551) (18,096)
Equity and franchise income (loss), net................. (2,178) (962) 197
---------- ---------- ----------
Earnings before income taxes.............................. 212,718 221,921 178,930
Income taxes.............................................. 83,676 89,522 73,973
---------- ---------- ----------
Net earnings.............................................. $ 129,042 $ 132,399 $ 104,957
========== ========== ==========
Earnings per common and common equivalent share:
Primary................................................. $ .81 $ .85 $ .69
Fully diluted........................................... .80 .83 .68
</TABLE>

The accompanying notes are an integral part of these statements.

F-4
<PAGE> 30

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM DECEMBER 26, 1993 TO DECEMBER 28, 1996
(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 26, 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 -- -- --
Issuance of stock under employee purchase
plan.................................... 199,974 2 4,651 -- -- --
401(k) 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 -- -- --
Issuance of stock under employee purchase
plan.................................... 274,161 3 7,019 -- -- --
401(k) 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)
Exercise of stock options (including tax
benefits)............................... 947,402 10 14,347 -- -- --
Issuance of stock under employee purchase
and restricted award plans.............. 398,913 3 7,750 -- -- --
401(k) plan matching contributions........ 108,681 1 2,070 -- -- --
Conversion of LYONs to common stock....... 292 -- 6 -- -- --
Foreign currency translation adjustment... -- -- -- (279) -- --
Net earnings for the period............... -- -- -- -- 129,042 --
----------- ------ -------- ------- -------- -------
BALANCE AT DECEMBER 28, 1996.............. 159,417,089 $1,594 $630,049 $(1,073) $527,125 $(1,750)
=========== ====== ======== ======= ======== =======
</TABLE>

The accompanying notes are an integral part of these statements.

F-5
<PAGE> 31

CONSOLIDATED STATEMENTS OF CASH FLOWS
CHANGE IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)

<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 53 WEEKS
ENDED ENDED ENDED
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Cash received from customers.......................... $ 6,039,729 $ 5,243,724 $ 4,208,675
Cash paid for inventories............................. (4,632,221) (4,090,129) (3,239,438)
Cash paid for store and warehouse operating, selling
and general and administrative expenses............ (1,231,412) (1,045,448) (860,354)
Interest received..................................... 1,624 1,357 4,296
Interest paid......................................... (8,898) (5,665) (2,078)
Income taxes paid..................................... (55,859) (77,865) (64,994)
----------- ----------- -----------
Net cash provided by operating activities.......... 112,963 25,974 46,107
----------- ----------- -----------
Cash flows from investing activities
Capital expenditures, net............................. (176,888) (219,892) (171,810)
----------- ----------- -----------
Net cash used in investing activities.............. (176,888) (219,892) (171,810)
----------- ----------- -----------
Cash flows from financing activities
Proceeds from exercise of stock options and sales of
stock under employee stock purchase plan........... 14,596 20,883 14,976
Proceeds from stock offering.......................... -- 121,799 --
Foreign currency translation adjustment............... (279) 2,501 (3,678)
Proceeds from long- and short-term borrowings......... 146,652 178,410 30,466
Payments on long- and short-term borrowings........... (107,639) (100,088) (25,584)
S corporation distribution to stockholders............ -- -- (542)
----------- ----------- -----------
Net cash provided by financing activities.......... 53,330 223,505 15,638
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents...................................... (10,595) 29,587 (110,065)
Cash and cash equivalents at beginning of period........ 61,993 32,406 142,471
----------- ----------- -----------
Cash and cash equivalents at end of period.............. $ 51,398 $ 61,993 $ 32,406
=========== =========== ===========
Reconciliation of net earnings to net cash provided by
operating activities
Net earnings.......................................... $ 129,042 $ 132,399 $ 104,957
----------- ----------- -----------
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization...................... 82,525 64,830 49,585
Provision for losses on inventory and accounts
receivable....................................... 38,597 20,297 11,718
Accreted interest on zero coupon, convertible
subordinated notes............................... 17,064 16,505 16,042
Contributions of common stock to employee benefit
and stock purchase plans......................... 2,780 2,271 2,458
Changes in assets and liabilities
Increase in receivables............................ (30,054) (116,092) (66,026)
Increase in merchandise inventories................ (96,105) (340,372) (283,233)
Increase in prepaid expenses, deferred income taxes
and other assets................................. (32,965) (583) (18,337)
Increase in accounts payable, accrued expenses and
deferred credits................................. 2,079 246,719 228,943
----------- ----------- -----------
Total adjustments............................. (16,079) (106,425) (58,850)
----------- ----------- -----------
Net cash provided by operating activities............... $ 112,963 $ 25,974 $ 46,107
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-6
<PAGE> 32

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 1996 and 1995 and 53 weeks in 1994.

All common stock share and per share amounts for all periods presented have
been adjusted for a three-for-two stock split in June 1994 effected in the form
of a stock dividend.

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 28, 1996 and December 30, 1995 are comprised of
trade receivables not financed through outside programs, totaling approximately
$222,673,000 and $187,476,000, 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 $179,227,000 and
$192,955,000 as of December 28, 1996 and December 30, 1995, respectively,
consist primarily of estimated receivables from vendors under various rebate,
cooperative advertising and miscellaneous 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 programs are recognized as a reduction of advertising expense in the
period that the related expenses are incurred.

MERCHANDISE INVENTORIES

Inventories are stated at the lower of weighted average cost or market
value.

F-7
<PAGE> 33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
estimated useful lives of the improvements. The Company capitalized interest
costs of approximately $700,000 in 1996, $600,000 in 1995 and $1,000,000 in 1994
as part of the cost of major asset construction projects.

GOODWILL

Goodwill represents the excess of purchase price and related costs over the
value assigned to the net tangible and identifiable intangible assets of
businesses acquired under the purchase method of accounting. Goodwill is
amortized on a straight-line basis over 40 years. Accumulated amortization of
goodwill was $17,411,000 and $12,164,000 as of December 28, 1996 and December
30, 1995, respectively. Management periodically evaluates the recoverability of
goodwill, as measured by projected undiscounted future cash flows from the
underlying acquired businesses which gave rise to such amount.

LONG-LIVED ASSETS

Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS No. 121"), 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 reported at the lower of the
carrying amount or fair value less cost to sell.

The adoption of SFAS No. 121 in 1996 did not have a material effect on the
Company's financial position or the results of its operations.

ADVERTISING

Advertising costs are either charged to expense when incurred or
capitalized and amortized in proportion to related revenues. 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 cooperative advertising allowances, amounted to
$55,828,000 in 1996, $42,878,000 in 1995 and $45,361,000 in 1994.

F-8
<PAGE> 34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRE-OPENING EXPENSES

Pre-opening expenses related to new store and customer service center
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

- quoted market prices were used to determine the fair value of the zero
coupon, convertible subordinated notes.

There were no significant differences as of December 28, 1996 and December
30, 1995 in the carrying value and fair value of financial instruments except
for the zero coupon, convertible subordinated notes which had a carrying value
of $399,629,000 and $382,570,000 and a fair value of $376,033,000 and
$422,407,000 at the end of 1996 and 1995, respectively.

NOTE B -- PROPOSED MERGER

F-9
<PAGE> 35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE B -- PROPOSED MERGER (CONTINUED)
for Information to Staples and the Company, beginning an investigation of the
merger. Since that time, the Company has cooperated with the FTC in its review
of the merger and has provided the FTC with requested documents and information.
The Company believes the merger fully complies with the antitrust laws. An
"Advanced Ruling Certificate" from the Canadian Competition Bureau clearing the
proposed merger under Canadian law was received on December 16, 1996.

On March 10, 1997, the FTC voted to challenge the merger. Staples and the
Company plan to vigorously contest any FTC challenge. Nevertheless, the Company
has been working with Staples and the FTC staff on an acceptable divestiture of
stores or other settlement arrangement that would benefit the Company, its
shareholders and its customers by allowing the merger to close. Staples and the
Company have entered into an agreement with OfficeMax, Inc. whereby Staples and
the Company would divest a total of 63 stores, which Staples and the Company
believe should remedy any perceived competitive issues and should obviate the
need for any FTC challenge. The FTC is currently reviewing the proposed
divestiture package, and has withheld issuance of a complaint pending this
review. If this or another settlement is ultimately approved by the FTC, a
consent decree would be issued along with the complaint that would allow the
merger to close.

Staples and the Company each have the right to terminate the Merger
Agreement if the merger has not been consummated by May 31, 1997.

Based upon the number of outstanding shares of Staples common stock and the
Company common stock as of December 28, 1996, the stockholders of the Company
immediately prior to the consummation of the merger will own approximately 53%
of the outstanding shares of Staples common stock immediately following
consummation of the merger.

Upon consummation of the proposed merger, pursuant to the Merger Agreement,
each outstanding option to purchase Company common stock will be converted into
an option to purchase such number of shares of Staples common stock (rounded
down to the nearest whole number) as is equal to the number of shares of Company
common stock issuable upon exercise of such option immediately prior to the
effective time multiplied by the exchange ratio. The exercise price per share of
each such option, as so converted, will be equal to (x) the aggregate exercise
price for the shares of Company common stock otherwise purchasable pursuant to
such Company stock option immediately prior to the effective time divided by (y)
the number of whole shares of Staples common stock deemed purchasable pursuant
to such Company stock option as determined above (rounded up to the nearest
whole cent). All outstanding Company stock options, under the terms of such
option agreements, will become exercisable in full upon the closing of the
merger.

F-10
<PAGE> 36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE C -- PROPERTY AND EQUIPMENT

Property and equipment consists of:

<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 30,
1996 1995
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Land....................................................... $ 64,678 $ 64,094
Buildings.................................................. 103,338 66,703
Leasehold improvements..................................... 333,992 278,821
Furniture, fixtures and equipment.......................... 423,525 338,308
-------- --------
925,533 747,926
Less accumulated depreciation and amortization............. 253,885 182,844
-------- --------
$671,648 $565,082
======== ========
</TABLE>

Assets held under capital leases included above consist of:

<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 30,
1996 1995
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Assets, at cost............................................ $24,929 $22,439
Less accumulated depreciation.............................. 14,334 12,919
------- -------
$10,595 $ 9,520
======= =======
</TABLE>

NOTE D -- DEBT

Debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 28, 1996 DECEMBER 30, 1995
----------------------- -----------------------
SHORT-TERM LONG-TERM SHORT-TERM LONG-TERM
---------- --------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Capital lease obligations collateralized
by certain equipment and fixtures..... $ -- $ 9,816 $ -- $ 8,570
13% senior subordinated notes, unsecured
and due 2002.......................... -- 9,651 -- 9,888
Non-interest bearing promissory note,
due February 1996, guaranteed by an
irrevocable letter of credit.......... -- -- 1,980 --
Bank borrowings......................... 140,000 -- -- 95,000
Installment notes, interest rates
ranging from 5.9% to 18.7%, payable in
monthly installments through 2007,
collateralized by certain equipment... -- -- -- 211
-------- ------- ------ --------
140,000 19,467 1,980 113,669
Current portion of long-term debt....... 2,339 (2,339) 1,329 (1,329)
-------- ------- ------ --------
$142,339 $17,128 $3,309 $112,340
======== ======= ====== ========
</TABLE>

F-11
<PAGE> 37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE D -- DEBT (CONTINUED)
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 28, 1996, the Company had $140,000,000 of outstanding borrowings
under the revolving credit facility and had utilized approximately $18,321,000
of the lease facility. Additionally, the Company had outstanding letters of
credit under the credit agreement totaling $11,170,000 as of December 28, 1996.
The loan agreement contains covenants relating to maintaining various financial
statement ratios. In the first quarter of 1997, the Company repaid in full all
borrowings outstanding at December 28, 1996 under the credit agreement.
Accordingly, the outstanding balance is reflected as a current liability at
December 28, 1996.

Maturities of debt are as follows:

<TABLE>
<CAPTION>
DECEMBER 28,
1996
------------
(IN THOUSANDS)
<S> <C>
1997........................................................ $142,339
1998........................................................ 2,495
1999........................................................ 2,596
2000........................................................ 2,343
2001........................................................ 588
Thereafter.................................................. 9,106
--------
$159,467
========
</TABLE>

Future minimum lease payments under capital leases together with the
present value of the net minimum lease payments as of December 28, 1996 are as
follows:

<TABLE>
<CAPTION>
DECEMBER 28,
1996
------------
(IN THOUSANDS)
<S> <C>
1997........................................................ $2,633
1998........................................................ 2,659
1999........................................................ 2,621
2000........................................................ 2,227
2001........................................................ 398
Thereafter.................................................. 680
-------
Total minimum lease payments................................ 11,218
Less amount representing interest at 6.0% to 9.0%........... 1,402
-------
Present value of net minimum lease payments................. 9,816
Less current portion........................................ 2,101
-------
Non-current portion......................................... $7,715
=======
</TABLE>

NOTE E -- 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 semiannual bond equivalent basis).

F-12
<PAGE> 38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE E -- ZERO COUPON, CONVERTIBLE SUBORDINATED NOTES (CONTINUED)
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. The total amount of the
1992 LYONs and 1993 LYONs as of December 28, 1996, including accrued interest,
were approximately $183,825,000 and $215,804,000, respectively.

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. The Company believes the proposed merger with Staples does not
constitute a change in control of the Company for purposes of the LYONs.
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.

NOTE F -- INCOME TAXES

The income tax provision consists of the following:

<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 53 WEEKS
ENDED ENDED ENDED
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current provision
Federal......................................... $69,291 $65,573 $62,211
State........................................... 8,649 12,613 14,616
Deferred provision (benefit)...................... 5,736 11,336 (2,854)
------- ------- -------
Total provision for income taxes.................. $83,676 $89,522 $73,973
======= ======= =======
</TABLE>

The tax effected components of deferred income tax accounts consists of the
following:

<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest premium on notes redeemed................ $ -- $ 2,004 $ 4,944
Self-insurance accruals........................... 7,529 5,839 8,302
Inventory costs capitalized for tax purposes...... 2,949 2,797 4,483
Vacation pay accruals............................. 3,535 3,264 2,993
Reserve for bad debts............................. 3,606 1,173 1,463
Reserve for facility closings..................... 4,768 5,734 5,707
Other items, net.................................. 17,955 14,137 10,400
------- ------- -------
Deferred tax assets............................... 40,342 34,948 38,292
------- ------- -------
Excess of tax over book depreciation.............. 12,465 7,468 3,524
Capitalized leases................................ 5,123 4,781 4,509
Excess of tax over book amortization.............. 2,775 1,455 708
Other items, net.................................. 11,835 7,364 4,335
------- ------- -------
Deferred tax liabilities.......................... 32,198 21,068 13,076
------- ------- -------
Net deferred tax assets........................... $ 8,144 $13,880 $25,216
======= ======= =======
</TABLE>

F-13
<PAGE> 39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE F -- INCOME TAXES (CONTINUED)
The following schedule is a reconciliation of income taxes at the federal
statutory rate to the provision for income taxes:

<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 53 WEEKS
ENDED ENDED ENDED
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal tax computed at the statutory rate.... $74,452 $77,672 $62,626
State taxes, net of federal benefit........... 6,382 8,877 8,944
Effect of S corporation income prior to
acquisitions................................ -- -- (1,161)
Nondeductible goodwill amortization........... 1,821 1,843 1,955
Other items, net.............................. 1,021 1,130 1,609
------- ------- -------
Provision for income taxes.................... $83,676 $89,522 $73,973
======= ======= =======
</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.

NOTE G -- COMMITMENTS AND 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 1997 and 2021. 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 28,
1996
-----------------
(IN THOUSANDS)
<S> <C>
1997........................................................ $ 155,761
1998........................................................ 151,245
1999........................................................ 141,425
2000........................................................ 124,092
2001........................................................ 108,377
Thereafter.................................................. 628,422
----------
$1,309,322
==========
</TABLE>

The above amounts include ten stores leased but not yet opened as of
December 28, 1996. The Company is in the process of opening new stores and
customer service centers in the ordinary course of business, and leases signed
subsequent to December 28, 1996 are not included in the above described
commitment amount. Rent expense, including equipment rental, was approximately
$184,697,000, $154,633,000 and $124,693,000, during 1996, 1995 and 1994,
respectively.

In January 1996, the Company entered into a lease commitment for an
additional corporate office building. As of December 28, 1996, the building,
which is based on a build-to-suit lease, was still under construction. The lease
has an initial term of 20 years commencing on the earlier of (i) the Company's
commencement of business in the building, or (ii) the later of (a) July 1, 1997
or (b) 15 days following completion of the building. This lease will be
classified as a capital lease and will be recorded as such when the term
commences in 1997. This lease will result in a capital lease asset and
obligation of approximately

F-14
<PAGE> 40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE G -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
$26,000,000 and initial annual lease commitments of approximately $2,200,000.
Also, in July 1996, the Company entered into an operating lease facility for up
to $25,000,000 of equipment. As of December 28, 1996, the Company had utilized
approximately $16,493,000 of this lease facility.

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 (see also Note
B).

As of December 28, 1996, the Company has reserved 16,565,223 shares of
unissued common stock for conversion of the zero coupon, convertible
subordinated notes (see also Note E).

NOTE H -- EMPLOYEE BENEFIT PLANS

STOCK OPTION PLANS

As of December 28, 1996, the Company had reserved 10,693,208 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 and
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 (see also Note B). All options expire no more than ten years after the
date of grant. No amounts have been charged to income under the plans.

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 3% of the
employee's compensation, in any calendar year.

ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations in accounting for
its stock-based compensation plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plan. The compensation cost that has been
charged against income for its Employee Stock Purchase Plan and its restricted
stock award plan approximated $1,482,000, $693,000 and $428,000, in 1996, 1995
and 1994, respectively. Had compensation cost for the Company's stock-based
compensation plans been determined using the fair value method described in

F-15
<PAGE> 41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," at the grant dates for awards under these plans, the Company's
net earnings and earnings per share would have been reduced to the pro forma
amounts presented below:

<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net earnings (in thousands)
As reported............................................... $129,042 $132,399
Pro forma................................................. 122,072 129,712
Primary earnings per share
As reported............................................... $ 0.81 $ 0.85
Pro forma................................................. 0.77 0.83
Fully diluted earnings per share
As reported............................................... $ 0.80 $ 0.83
Pro forma................................................. 0.76 0.81
</TABLE>

The fair value of each option grant is established on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996 and 1995: expected volatility of 25% for
both years, risk-free interest rates of 6.36% for 1996 and 6.28% for 1995,
expected lives of approximately five years for both years; and a dividend yield
of zero for both years.

A summary of the status of the option plans as of and for the changes
during each of the three years in the period ended December 28, 1996 is
presented below:

<TABLE>
<CAPTION>
1996 1995 1994
--------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year... 8,325,801 $16.95 8,369,379 $12.95 8,715,741 $ 9.29
Granted............... 2,036,276 16.50 1,983,750 27.00 1,944,002 22.67
Canceled.............. 841,942 22.33 291,487 20.21 342,094 21.41
Exercised............. 946,502 7.98 1,735,841 8.49 1,948,270 5.56
--------- ------ --------- ------ --------- ------
Outstanding at end of
year................ 8,573,633 $17.30 8,325,801 $16.89 8,369,379 $12.80
========= ====== ========= ====== ========= ======
</TABLE>

The weighted average fair values of options granted during the years ended
December 28, 1996 and December 30, 1995 were $5.83 and $9.60, respectively.

F-16
<PAGE> 42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table summarizes information about the option plans as of
December 28, 1996:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
--------------- ----------- ----------------- -------- ----------- --------
<C> <C> <C> <C> <C> <C>
$ 2.28 - 3.40 153,191 3.4 $ 3.16 153,191 $ 3.16
3.41 - 5.15 185,981 3.3 4.15 185,981 4.15
5.16 - 7.70 965,395 4.5 6.01 965,395 6.01
7.71 - 11.50 363,814 5.5 10.76 363,814 10.76
11.51 - 17.30 2,439,621 7.9 13.88 1,097,190 13.28
17.31 - 23.00 2,445,990 7.6 20.29 1,581,945 19.95
23.01 - 31.94 2,019,641 8.4 26.67 810,205 26.49
-------------- --------- --- ------ --------- ------
$ 2.28 - 31.94 8,573,633 7.3 $17.30 5,157,721 $15.23
============== ========= === ====== ========= ======
</TABLE>

NOTE I -- 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 28, 1996, there were 1,000,000 shares of $.01 par value
preferred stock authorized of which none are issued or outstanding.

STOCKHOLDER RIGHTS PLAN

Effective September 4, 1996, the Company's Board of Directors adopted a
Stockholder Rights Plan (the "Rights Plan"). The Rights Plan provides for the
issuance to stockholders of record on September 16, 1996 one right for each
outstanding share of the Company's common stock. The rights will become
exercisable only if a person or group, other than Staples and its affiliates,
acquires 20% or more of the Company's outstanding common stock or announces a
tender or exchange offer that would result in ownership of 20% or more of the
Company's common stock. Each right, should it become exercisable, will entitle
the holder to purchase one one-thousandth of a share of Junior Participating
Preferred Stock, Series A of the Company at an exercise price of $95.00, subject
to adjustment.

In the event of an acquisition, each right will entitle the holder, other
than an acquirer, to receive a number of shares of common stock with a market
value equal to twice the exercise price of the right. In addition, in the event
that the Company is involved in a merger or other business combination wherein
the Company is not the surviving corporation, or wherein common stock is changed
or exchanged, or in a transaction with any entity other than Staples or any
affiliate thereof in which 50% or more of the Company's assets or earning power
is sold, each holder of a right, other than an acquirer, will have the right to
receive, at the exercise price of the right, a number of shares of common stock
of the acquiring company with a market value equal to twice the exercise price
of the right.

The Company's board of directors may redeem the rights for $0.01 per right
at any time prior to an acquisition.

F-17
<PAGE> 43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE J -- SUPPLEMENTAL INFORMATION ON NONCASH INVESTING AND FINANCING ACTIVITIES

The Consolidated Statements of Cash Flows for 1996, 1995 and 1994 do not
include the following noncash investing and financing transactions:

<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 53 WEEKS
ENDED ENDED ENDED
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Equipment purchased under leases.................. $4,805 $5,836 $ --
Conversion of convertible, subordinated debt to
common stock.................................... 6 275 --
Additional paid-in capital related to tax benefit
on stock options exercised...................... 6,804 7,598 6,816
</TABLE>

NOTE K -- 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 unconverted notes were converted as of the beginning of the period. Net
earnings under this assumption have been adjusted for interest, net of its
income 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 52 WEEKS 53 WEEKS
ENDED ENDED ENDED
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Primary:
Weighted average number of common and
common equivalent shares............. 158,655 155,551 152,570
======== ======== ========
Fully diluted:
Net earnings............................ $129,042 $132,399 $104,957
Interest expense related to convertible
notes, net of tax.................... 10,580 10,068 9,359
-------- -------- --------
Adjusted net earnings................... $139,622 $142,467 $114,316
======== ======== ========
Weighted average number of common and
common equivalent shares............. 158,720 155,674 152,654
Shares issued upon assumed conversion of
convertible notes.................... 16,565 16,568 16,580
-------- -------- --------
Shares used in computing net earnings
per common and common equivalent
share assuming full dilution......... 175,285 172,242 169,234
======== ======== ========
</TABLE>

F-18
<PAGE> 44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE L -- 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 $331,000,000, $313,000,000 and
$253,000,000 in 1996, 1995 and 1994, 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 $4,800,000 as of December 28, 1996. One of the financial services
companies 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.

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 28, 1996
Net sales....................................... $1,632,995 $1,381,365 $1,509,650 $1,544,588
Gross profit(a)................................. 355,378 324,704 333,686 353,920
Net earnings.................................... 33,483 28,237 31,858 35,464
Net earnings per common share (fully diluted)... $ .21 $ .18 $ .20 .22
Fiscal Year Ended December 30, 1995
Net sales....................................... $1,351,212 $1,200,410 $1,337,108 $1,424,462
Gross profit(a)................................. 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
</TABLE>

- ---------------

(a) Gross profit is net of occupancy costs.

F-19

<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 and
in Registration Statement No. 333-15853 of Office Depot, Inc. on Form S-4 of our
report dated February 25, 1997 (March 10, 1997 as to Note B) appearing in the
Annual Report on Form 10-K of Office Depot, Inc. for the year ended December 28,
1996.

/s/ Deloitte & Touche LLP

DELOITTE & TOUCHE LLP
Certified Public Accountants

Fort Lauderdale, Florida
March 27, 1997