<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 25, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-10948
OFFICE DEPOT, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 59-2663954
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) No.)
2200 OLD GERMANTOWN ROAD, 33445
DELRAY BEACH, FLORIDA (Zip Code)
(Address of principal executive offices)
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Registrant's telephone number, including area code: (561) 438-4800
Securities registered pursuant to Section 12(b) of the Act:
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<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. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 3, 2000 was approximately $3,651,720,818.
As of March 3, 2000, the Registrant had 321,728,565 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of our Annual Report to Stockholders for the fiscal year ended
December 25, 1999 are incorporated by reference in Part II, and the Proxy
Statement, to be mailed to stockholders on or about March 31, 2000 for the
Annual Meeting to be held on April 28, 2000, is incorporated by reference in
Part III.
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PART I
ITEM 1. BUSINESS.
GENERAL
Office Depot, Inc., together with our subsidiaries, is the largest supplier
of office products and services in the world. We sell to consumers and
businesses of all sizes through our three business segments: Stores, Business
Services and International. We operate on a 52- or 53-week fiscal year ending on
the last Saturday in December.
Stock Split
On February 24, 1999, our Board of Directors ("Board") declared a
three-for-two stock split in the form of a 50% stock dividend distributed on
April 1, 1999 to stockholders of record on March 11, 1999. We have restated all
share and per share amounts in our financial statements to reflect this stock
split. The split resulted in the issuance of approximately 125 million
additional shares of our stock to existing stockholders.
Stock Repurchase
In August 1999, our Board approved a $500 million stock repurchase program
reflecting its belief that our common stock represented a significant value at
its then-current trading price. We completed this stock repurchase during the
third and fourth quarters of 1999 by purchasing 46.7 million shares of our stock
at a total cost of $500 million plus commissions. In January and March 2000, our
Board approved additional stock repurchases of up to $200 million, bringing our
total authorization to $700 million. As of March 3, 2000 we had purchased an
additional 9.2 million shares of our stock at a total cost of $100 million plus
commissions. The remaining authorization does not have an expiration date, and
we can acquire our common stock either on the open market or through negotiated
purchases.
Stores Division
We opened our first office supply store in Florida in October 1986. As of
March 3, 2000, we operated 829 retail office supply stores through our Stores
Division in 46 states, the District of Columbia and 5 Canadian provinces.
Our stores utilize a warehouse format. Using this format, merchandise is
displayed on the sales floor using low-profile fixtures, pallets, bins and
industrial steel shelving, permitting the bulk stacking of inventory and quick
and efficient restocking. Shelving is positioned to form aisles large enough to
comfortably accommodate customer traffic and merchandise movement.
Our stores carry a wide selection of merchandise, including brand name
office supplies, business machines and computers, computer software, office
furniture and other business-related products. Our stores sell primarily to
small offices/home offices and individual consumers. Each store also contains a
multipurpose copy and print center offering printing, reproduction, mailing,
shipping and other services. The sales staff in all of our stores includes
specialists who are trained to answer our customers' questions regarding a wide
variety of technology products.
We open new stores either by leasing existing retail space and renovating
it according to our specifications or by constructing new space. Prior to
selecting a new store site, we obtain detailed demographic information
indicating business concentrations, traffic counts, population, income levels
and future growth prospects. Our stores are located primarily in suburban strip
shopping centers on major commercial roadways where the cost of space is
generally lower than in urban areas. These suburban locations are generally more
accessible to our customers and provide them with convenient parking.
Additionally, they are typically situated in a manner that allows our stores to
efficiently receive inventory on a daily basis.
Our retail stores 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 its inventory on the sales floor
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according to a uniform store layout plan. This plan is intended to display
merchandise effectively, use merchandising space efficiently and provide
customers with a consistent and appealing store layout. We completed
approximately 65 store remodels in 1999, compared with 200 in 1998. In 1999, we
focused on re-merchandising our stores (i.e., re-arranging product displays in a
way that is more appealing to the customer) rather than performing full-scale
remodels. This approach requires less capital and yields a better overall return
given the number of new stores in our store base. Recent changes in our store
layouts provide a more customer-friendly atmosphere, with brighter lighting and
more colorful displays.
Substantially all inventory on the sales floor is bar-coded for automatic
processing. Sales are processed through registers located at the front of the
store. Sales and inventory information for each stock-keeping unit ("SKU") are
transmitted to our central computer system daily, and pricing information is
transmitted from our central computer system back to the stores. Rather than
individually price marking each product, a master sign for each product is used
to display its price. As price changes occur, a new master sign is automatically
generated for the product display, and the new price is reflected in the
register, allowing us to avoid labor costs associated with re-pricing.
Our overall business strategy for our Stores Division is to maximize sales
and profitability in our existing stores and to add new stores in existing
markets that have the potential for further Office Depot development, in smaller
markets in regions that are still under-served by office supply retailers and,
to a lesser extent, in larger markets that are attractive because of the number
of potential customers in those markets. However, stores in larger markets often
require higher occupancy costs. Store opening activity for the last five years
is summarized as follows:
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<CAPTION>
OPEN AT
BEGINNING OPEN AT END STORES
OF YEAR OPENED CLOSED OF YEAR RELOCATED
--------- ------ ------ ----------- ---------
<S> <C> <C> <C> <C> <C>
1995...................................... 420 82 1 501 6
1996...................................... 501 60 -- 561 3
1997...................................... 561 42 1 602 2
1998...................................... 602 101 1 702 5
1999...................................... 702 130 7 825 14
</TABLE>
The decline in the number of stores opened in 1996 and 1997 was the result
of our proposed merger with Staples, Inc. ("Staples"), which was terminated in
July 1997. During this period of uncertainty, several of our key real estate
employees left the Company. After the merger discussions with Staples were
terminated, we re-staffed our real estate department and re-launched our store
expansion program.
We currently plan to open approximately 100 new retail stores in the United
States and Canada during 2000. However, our real estate strategy will stress a
more analytical approach in the future, rather than focusing on a specific
number of new stores. Over the past year, we have conducted extensive customer
and market research that will provide us with a more precise evaluation of the
profit potential and return on investment of each new store opening.
Business Services Group ("BSG")
In 1993 and 1994, we expanded into the contract business by acquiring eight
contract stationers. Contract stationers are businesses which provide a wide
variety of office products to customers who have continuing relationships with
the seller, often through contractual agreements to purchase office supplies
from that seller. These acquisitions allowed us to enter the contract business
and broaden our commercial (primarily catalog) and retail delivery business. In
1998, we merged with Viking Office Products, Inc. ("Viking"), a global direct
marketing office products company, significantly increasing the customer base
and catalog marketing expertise of our BSG. Today, BSG sells office products and
services to contract and commercial customers through our Office Depot(R) and
Viking Office Products(R) direct mail catalogs and Internet sites, and by means
of our dedicated contract sales force.
We currently operate customer service centers ("CSCs") in 18 states. Our
CSCs, which range in size from 51,000 to 620,000 square feet, serve as warehouse
and delivery facilities, many of which also house sales
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offices, call centers and administrative offices. Our CSCs perform warehousing
and delivery services on behalf of all of our domestic segments, handling most
of our delivery business. We believe that these facilities, along with their
surrounding satellites, provide cost effective and efficient delivery services
to our customers in the 48 contiguous states.
Our contract and commercial customers have access to a broad selection of
stocked office products and office furniture, as well as special order items. In
addition, we provide our contract customers with specialized services designed
to aid them in achieving efficiencies and eliminating waste in their overall
office products and office furniture costs. These services include tailored
electronic ordering, stockless office procurement, desktop delivery, business
forms management services and comprehensive product usage reports.
Prior to our merger with Viking in August 1998, we replaced several
outdated, inefficient facilities with new CSCs and converted all of our
warehouse and order entry systems to one common technology platform. Customers
place orders by phone, fax, electronic data interchange ("EDI") and the
Internet. Orders are routed to the appropriate CSC for delivery. If an item is
not in stock, the order is automatically routed to a wholesaler. Wholesaler
orders are generally delivered to the CSC the same day, enabling us to deliver
the most complete order possible to our customers, in most cases the next
business day.
We currently operate 30 CSCs in the United States, 10 of which we added as
a result of the Viking merger. We have initiated plans to integrate our Viking
and Office Depot warehouses. We expect to accomplish this integration by either
absorbing the Viking operations into existing Office Depot warehouses or by
opening new combined warehouses, depending on the particular market
circumstances. Once our integration is complete, we will operate 21 combined
CSCs, having closed nine Viking and two Office Depot CSCs and opened two new
combined facilities. See MERGERS, ACQUISITIONS AND RESTRUCTURINGS for further
information. Although we are integrating our warehouse and delivery network, we
will continue to operate under both the Office Depot(R) and Viking(R) brands.
In January 1998, we introduced our Office Depot public Web site
(www.officedepot.com), offering our customers the convenience of shopping over
the Internet. The addition of this site expanded our domestic electronic
commerce capabilities beyond the Viking public Web site (www.vikingop.com) and
the Office Depot business-to-business ("B2B") contract Web sites. Our Web sites
provide customers with the same assortment of products offered to our catalog
customers. They also provide news articles geared toward small office/home
office businesses as well as pertinent information about Office Depot.
Our strategies for growing the BSG include continuing to build and expand
upon our integrated national network to provide efficient and effective delivery
services to customers. We plan to complete the integration of our Viking and
Office Depot CSCs by early 2001. See MERGERS, ACQUISITIONS AND RESTRUCTURINGS
for further discussion. Additionally, we plan to increase our penetration into
new and existing markets by expanding the coverage of our contract sales force,
which currently exceeds 1,100 account executives, and by increasing the use of
database marketing tools to maximize the effectiveness of our direct mail
catalogs.
International Division
Our International Division sells office products and services to retail,
contract and commercial customers in 17 countries outside the United States and
Canada. We launched our international direct marketing business in 1990 under
the Viking(R) brand with the establishment of our United Kingdom operations. In
December 1993, we initiated our international retail operations by opening our
first store in Colombia through a licensing agreement. We have expanded
internationally through licensing and joint venture agreements, acquisitions and
the merger with Viking.
In March 1999, we introduced our first international public Web site
(www.viking-direct.co.uk) for individuals and businesses in the United Kingdom;
and in the first quarter of 2000, we introduced our public Web site in Germany
(www.viking.de). We expect to introduce several new international Web sites in
2000 under both the Office Depot(R) and Viking(R) brand names. In relative
terms, sales of office products via the Internet are significantly less
prevalent internationally than in the United States. We believe that this
affords
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us a unique opportunity to achieve "first mover" advantages by aggressively
developing and introducing Internet shopping opportunities for our international
customers.
As of March 3, 2000, we have 121 office supply stores in eight countries
outside the United States and Canada operating under the Office Depot name, 32
of which are wholly owned. In addition to these retail stores, our International
Division has catalog and delivery operations in 14 countries. We operate our
catalog business under the Viking(R) brand in 11 of these countries and the
Office Depot(R) brand in five of these countries. Our International Division
currently operates in Australia, Austria, Belgium, Colombia, France, Germany,
Hungary, Ireland, Israel, Italy, Japan, Luxembourg, Mexico, the Netherlands,
Poland, Thailand and the United Kingdom. Certain of our operations are
wholly-owned; others operate through joint venture or licensing arrangements.
CSCs in our International Division serve the same function as they do in
our BSG, but are typically smaller. They range in size from 36,000 to 240,000
square feet and may also accommodate call centers and/or administrative offices.
International store and CSC operations, including facilities operated through
licensing and joint venture agreements, for the last five years are detailed
below. All years prior to 1998 have been restated to include facilities operated
by Viking prior to our merger.
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OFFICE SUPPLY STORES CUSTOMER SERVICE CENTERS
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OPEN AT OPEN AT OPEN AT OPEN AT
BEGINNING END BEGINNING END
OF PERIOD OPENED CLOSED OF PERIOD OF PERIOD OPENED CLOSED OF PERIOD
--------- ------ ------ --------- --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995.......................................... 3 6 -- 9 4 4 -- 8
1996.......................................... 9 12 -- 21 8 4 -- 12
1997.......................................... 21 18 -- 39 12 4 -- 16
1998.......................................... 39 48 -- 87 16 2 1 17
1999.......................................... 87 36 5 118 17 1 1 17
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MERGERS, ACQUISITIONS AND RESTRUCTURINGS
Viking Merger
On August 26, 1998, we completed our merger with Viking. Faced with the
task of integrating our Office Depot and Viking warehouses, we formulated a plan
to close most of the Viking facilities by the end of 2000. In 1998, we recorded
merger and restructuring costs of $108.1 million that were directly related to
the Viking merger. These costs consisted of legal fees, investment banker fees,
asset write-offs associated with the closure of identified facilities, write-off
of software applications to be abandoned, personnel costs and other facility
exit and integration costs. During the fourth quarter of 1999, we modified our
integration plans after evaluating the results of integrating two test
facilities. Our modified plans incorporate a simplified approach and, as a
result, require less capital. Consequently, we reversed previously accrued
charges of $32.5 million, reducing direct merger costs to a net credit of $28.6
million in 1999. For additional information regarding the restructuring and
integration, refer to the Management's Discussion and Analysis incorporated by
reference in Item 7 of this report.
Closure of Furniture at Work(TM) and Images(TM) Stores
In addition to our core retail and delivery businesses, we have in the past
operated under the following concepts:
Images(TM) and Office Depot Express(TM) -- Retail stores providing
graphics design, printing, copying, shipping and fulfillment services, as
well as a limited assortment of office supplies.
Furniture At Work(TM) -- Stand alone office furniture stores offering a
broad line of office furniture, office accessories and design services.
In November 1998, we decided to focus our attention on the continued growth
of our core businesses and on expansion of our international operations. In
conjunction with this decision, we decided to close our five Furniture at
Work(TM)and five Images(TM)/Office Depot Express(TM) stores, and we recorded
restructuring costs of $11.0 million. These costs consisted primarily of
estimated lease commitments subsequent to the closing of
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the stores and the write-off of certain fixed assets. In 1999, we recorded a net
restructuring credit of $2.0 million as a result of adjusting our estimates of
expenses to actual as the stores closed. All ten of these stores have been
closed. For additional information regarding this restructuring, please refer to
the Management's Discussion and Analysis incorporated by reference in Item 7 of
this report.
Acquisition of Joint Venture Interests in France and Japan
In November 1998, we purchased our joint venture partner's 50% interest in
our French Office Depot retail operations for $27.7 million, recording goodwill
of $20.2 million. Following this purchase, we decided to restructure and
integrate the separate Office Depot and Viking operations in France. We do not
expect to close any facilities in France in conjunction with restructuring or
integration. Instead, we will integrate the warehousing and delivery operation
of our Office Depot(R) and Viking(R) brands in each of our existing warehouses.
In April 1999, we purchased our joint venture partner's 50% interest in our
Japanese Office Depot retail operations for $27.6 million, raising our total
ownership in those operations to 100%. In conjunction with this acquisition, we
recorded goodwill of $21.4 million and announced plans to restructure and
integrate our Japanese operations. We closed one CSC in 1999 and plan to close
another during 2000. Additionally, we have closed one store in connection with
implementing our plans.
During 1999, we recorded restructuring costs, primarily personnel-related
costs and facility exit costs, of $23.5 million for integration activities in
France and Japan. For additional information regarding the restructuring and
integration in these countries, refer to the Management's Discussion and
Analysis incorporated by reference in Item 7 of this report.
STORE CLOSURE AND RELOCATION
During 1999, we recorded a charge of $40.4 million to reflect our decision
to accelerate our store closure program for under-performing stores and our
relocation program for older stores in our Stores Division. This charge also
reflects our decision to sell our interest in our retail operations in Thailand.
On October 28, 1999, we entered into an agreement with Central Retail Group, our
joint venture partner at the time, to sell them our Thai operations for $1.4
million and license to them certain trademarks, software and operating systems.
Central Retail Group now operates the two Thai stores under a licensing
agreement. Finally, the charge also reflects our decision to write-off certain
other long-lived assets in our BSG.
OFFICE PRODUCTS BUSINESS
Businesses in our industry primarily sell three broad categories of
merchandise: general office supplies, technology products and office furniture.
Office products distributors include contract stationers (selling at significant
discounts from list prices to their contract customers), mail order companies
(selling through catalogs) and retailers (including office superstores such as
the ones we operate). Most recently, Internet-based companies have emerged as a
new force in this industry.
Although the office products business has changed in recent years, a
significant portion of the market is still served by small dealers. These
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 use the
distributor's catalog, showing products at retail list prices, for selection and
price negotiation with the customer. We believe that these dealers generally
sell their products at prices higher than those we offer to our customers.
Over the past decade, high-volume office supply superstores have emerged
throughout the United States. These stores offer a wide selection of products, a
high level of customer service and low prices. High-volume office products
retailers typically offer substantial price savings to individuals and small-to
medium-sized 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 begun offering a wide
variety of similar products at low prices and have become increasingly
competitive with office supply
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superstores. Direct mail and Internet-based companies have also established a
growing presence in the office products industry.
Larger customers have been, and continue to be, served primarily by full
service contract stationers, which offer contract bids at discounts equivalent
to or greater than those offered by our retail stores and catalogs. These
stationers, including our own contract stationer business, traditionally serve
their customers through a commissioned sales force, purchase in large quantities
primarily from manufacturers, and offer competitive pricing and customized
services to their customers.
COMPETITION
We operate in a highly competitive environment. Historically, our markets
have been served by traditional office products dealers and contract stationers.
We believe that we compete favorably against dealers on the basis of price,
because these dealers typically purchase their products from distributors and
generally sell their products at prices higher than we offer. We compete with
other full service contract stationers on the basis of service and value-added
technology. We also compete with other office supply superstores, wholesale
clubs selling general merchandise, discount stores, mass merchandisers,
conventional retail stores, catalog showrooms, Internet-based companies and
direct mail companies. These companies, in varying degrees, compete with us on
both price and selection. We are the largest seller of office products and
services in the world, and we believe that our ability to buy in large
quantities directly from the manufacturers affords us a competitive advantage
over our smaller competitors, some of which must buy from distributors.
We compete with several high-volume office supply chains that are similar
to us in terms of store format, pricing strategy and product selection and
availability in markets where we operate, primarily those in the United States
and Canada. We differentiate ourselves from these other superstore chains in
terms of the convenience of our store locations, our customer service, the
extent of our product selection, and our "in stock" position (i.e., having the
products we carry on the shelves for our customers). We anticipate that in the
future we will face increased competition from these chains as each of us
expands our operations.
In the delivery and contract stationer portions of the industry, our
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
businesses, stationery retail outlets and Internet-based merchandisers. Other
office supply superstore chains are also developing a presence in the contract
stationer and Internet channels of the business. We compete with these
businesses in substantially all of our current markets. In the future, we may
face increased competition from Internet-based merchandisers who dedicate all of
their resources to electronic commerce.
Some of the entities we compete against may have greater financial
resources than we do. We cannot assure you that increased competition will not
have an adverse effect on us. However, we believe that we compete effectively
based on price, selection, availability, location and customer service.
MERCHANDISING AND PRODUCT STRATEGY
Our merchandising strategy is to offer a broad selection of office
products, under both our Office Depot(R) and Viking(R) brands, and to provide
our customers with a compelling combination of quality, assortment, price and
service. Our selection of office products includes general office supplies,
computers, software and computer supplies, business machines and related
supplies, and office furniture. Each of our office supply superstores stocks
approximately 8,000 SKUs, including variations in color and size, and our CSCs
stock approximately 13,000 SKUs, including 4,500 of the SKUs stocked at our
office supply stores. The number of SKUs carried in our CSCs decreased in 1999
as a result of a rationalization of our warehouse inventory assortments in
connection with the integration and consolidation of our Viking and Office Depot
CSCs. As we continue our integration, we will continue to evaluate and optimize
the number of SKUs we offer.
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The table below shows sales of each major product group as a percentage of
our total merchandise sales for 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
General office supplies(1)............................... 40.96% 42.85% 42.65%
Technology Products(2)................................... 47.55% 46.02% 45.69%
Office furniture(3)...................................... 11.49% 11.13% 11.66%
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
- ---------------
(1) Includes paper; filing supplies; organizers; business cases; writing
instruments; mailing supplies; desktop accessories; calendars; business
forms; binders; tape; post-it notes; staplers; fasteners; art supplies;
school supplies; engineering, food and janitorial supplies; and revenue from
the copy and print centers located in each store.
(2) Includes calculators; typewriters; projectors; telephones; cameras and film;
cash registers; copiers; facsimile machines; tape recorders; computers;
printers; computer diskettes; ribbons; cartridges; software and books.
(3) Includes chairs; desks; tables; partitions; bookcases; filing and storage
cabinets; and furniture accessories such as chair mats, lamps, and clocks.
We buy substantially all of our merchandise directly from manufacturers and
other primary suppliers. Our suppliers deliver the merchandise directly to our
stores or CSCs or to our ten cross-dock facilities. Our supply chain operations,
including the cross-docks, use a customized system to manage the inbound flow of
merchandise with the goal of minimizing our landed cost. This system enables us
to maintain optimal in-stock positions by permitting a shorter lead time for
reordering at the stores and CSCs, while still meeting the minimum ordering
requirements of our vendors. The use of cross-docks also reduces our freight
costs by centralizing the receiving function.
Our BSG is party to several multi-year contracts with certain of our
customers and anticipates entering into more such contracts in the future as we
grow our contract business. Nonetheless, we have not entered into any material
long-term contracts or commitments with any vendor or customer, the loss of
which would materially adversely affect our financial position or the results of
our operations. We have not experienced any difficulty in obtaining desired
quantities of merchandise for sale, and we do not foresee having any significant
difficulties in the future.
Buyers located at our corporate headquarters are responsible for selecting
and purchasing merchandise. For merchandise offered to retail, direct mail and
Internet customers, corporate buyers also determine pricing. Our contract sales
force in our BSG determines the price of products sold to our contract
customers. Replenishment buyers monitor inventory levels and initiate product
reorders with the assistance of our customized replenishment system. This system
allows buyers to devote more time to selecting products, developing new product
lines, analyzing competitive developments and negotiating with vendors to obtain
more favorable prices and product availability. We transmit purchase orders by
EDI to a significant number of our vendors, and we electronically receive
Advance Shipment Notices and invoices back from them. This method of electronic
ordering expedites orders and promotes accuracy and efficiency. We plan to
continue to expand this program to the remainder of our vendors.
We buy substantially all of our inventory directly from manufacturers in
large quantities without using a central warehouse. We maintain substantially
all of our inventory on the sales floors of our stores, at our cross-docks and
at our CSCs.
CATALOG PRODUCTION AND CIRCULATION
We use our catalogs to market directly to both existing and prospective
customers throughout the world. Separate catalog assortments promote our dual
brand (Office Depot(R) and Viking(R)) mail order strategy. We currently
circulate both Viking(R) and Office Depot(R) brand catalogs through our BSG and
International Division. Each catalog is printed in full color with pictures and
narrative descriptions that emphasize key
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product benefits and features. We have developed a distinctive style for our
catalogs, most of which are produced in-house by our designers, writers and
production artists, using a computer-based catalog creation system.
Our Viking(R) brand catalog mailings include monthly sale catalogs, which
are mailed to all active Viking customers and present our most popular items. A
complete "Buyers Guide," containing all of our products at the regular discount
prices, is delivered to our Office Depot(R) and Viking(R) brand catalog
customers every six months. The Buyers Guide, which is mailed to all of our
active customers, varies in size between countries. Prospecting catalogs with
special offers designed to attract new customers are mailed frequently. In
addition, Office Depot(R) and Viking(R) specialty catalogs are delivered to
selected customers monthly.
We currently have several different specialty catalogs, including catalogs
dedicated to office furniture, computer supplies, custom printed business forms
and stationery, paper products, shipping and warehouse supplies (including
cleaning and janitorial products) and presentation supplies (including
transparencies and overhead slides). Other specialty catalogs are being
considered and may be introduced in the future.
During 1999, we mailed approximately 296 million copies of over 180
different Office Depot(R) and Viking(R) brand catalogs. During 1998 and 1997, we
mailed approximately 248 million and 226 million copies, respectively, of over
100 different catalogs to existing and prospective customers.
SELLING AND MARKETING
We are able to maintain our competitive pricing policy primarily as a
result of the significant cost efficiencies we achieve through our operating
format and purchasing power. Our marketing programs are designed to attract new
customers and to persuade existing customers to make additional purchases. We
advertise in the major newspapers in each of our local markets. These
advertisements are supplemented with local and national radio and television
advertising and direct marketing efforts. We continuously acquire new customers
by selectively mailing specially designed catalogs to prospective customers.
Sometimes we obtain the names of prospective customers in new and existing
markets through the use of selected mailing lists from outside marketing
information services and other sources. We use a proprietary mailing list system
for our Viking(R) brand catalogs and other promotional mailings. We plan to use
this same technology to increase the effectiveness of our Office Depot(R) brand
catalogs in the future. Catalogs are also distributed through our contract sales
force and are available in each of our stores.
We have a low price guarantee policy for our Office Depot(R) brand. Under
this policy, we will match any competitor's comparable lower price. In addition,
the Office Depot(R) brand guarantee gives the customer a credit of 55% of the
price difference, up to $55. This program assures customers that they can always
receive low prices from us even during periodic sales promotions by our
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.
In addition to the sales associates at each of our stores and the customer
service representatives at our call centers, we have a dedicated sales force
serving contract customers in our BSG. Our dedicated sales force operates out of
our more than 60 regional sales offices. All members of our sales force are
employees.
In early 1998, we introduced our Office Depot public Web site
(www.officedepot.com), enabling customers to order our products directly through
the Internet. In early 2000, we launched our completely renovated Viking public
Web site (www.vikingop.com), providing our Viking customers with improved
functionality, greater selection and easier direct order services. Our customers
nationwide can place orders over the Internet, by telephone or by fax using
toll-free telephone numbers that route the calls through call centers located in
Florida, Georgia, Texas, Ohio, Connecticut, Kansas, and California. We
electronically transmit any orders received at the call centers or via the
Internet to the store or CSC closest to our customer for pick-up or delivery at
a nominal delivery fee (free with a minimum order size, currently $50). Orders
are packaged, invoiced and shipped for next-day delivery or same-day delivery in
the case of Viking orders in selected markets.
8
<PAGE> 10
Through our BSG, we provide our contract customers with specialized
services designed to aid them in achieving efficiencies and eliminating waste in
their overall office products and office furniture costs. These services include
electronic ordering, stockless office procurement, desktop delivery, business
forms management services and comprehensive product usage reports. Desktop
delivery entails delivering the merchandise to individual departments within our
customers' facilities, rather than delivering the packages to one central
receiving point. We also develop customized intranet sites in tandem with our
customers, allowing them to set rules and limitations on their employees'
electronic ordering abilities. Customer orders from these intranet sites are
transmitted to us via the Internet.
In March 1999, we introduced our first international public Web site
(www.viking-direct.co.uk) for individuals and businesses in the United Kingdom;
and in the first quarter of 2000, we introduced our public Web site in Germany
(www.viking.de). We expect to introduce several new international Web sites in
2000 under both the Office Depot(R) and Viking(R) brand names, providing our
international customers with another way to order office products from us.
In addition to the normal payment options available to all of our
customers, we offer our contract and qualified commercial customers the option
of purchasing on credit through open accounts. We also offer revolving credit
terms to Office Depot(R) brand customers through the use of private label credit
cards. These credit cards are issued without charge to credit-qualified
customers. Sales transactions using the private label credit cards are
transmitted electronically to financial services companies, which credit our
bank account with the net proceeds within two days. We offer our contract
customers a store purchasing card which allows them to purchase office supplies
at one of our retail stores, while still taking advantage of their contract
pricing. No single customer in any of our segments accounts for more than 1%
percent of our total sales.
INFORMATION SYSTEMS
Inventory is received and stocked in each facility using an automated
inventory tracking system. Prior to our merger with Viking, we replaced several
outdated, inefficient facilities with new CSCs and converted all of our
warehouse and order entry systems to one common technology platform. We have
initiated plans to integrate our Viking and Office Depot warehouses. See
MERGERS, ACQUISITIONS AND RESTRUCTURINGS. Customer orders, placed by phone, fax
or electronically, are filled by the most appropriate CSC or office supply
superstore, usually for next day delivery. The appropriate delivery location is
determined by our automated routing systems, and orders are filled using both
in-stock and wholesaler-supplied inventory.
In operating our business, we use IBM ES9000 mainframes and IBM AS/400
computers and client/server technologies that primarily run on Microsoft
Windows. Our information systems include advanced software packages that have
been customized for our specific business operations. By maximizing our
application of these technologies, we have improved our ability to manage our
inventories, order processing, replenishment and marketing efforts.
Inventory data is updated instantaneously in our systems when the
merchandise is scanned for receiving or transfer, and sales and certain
inventory data is updated in our systems each night by downloading information
from our point-of-sale and our telemarketing order entry systems. Our
point-of-sale systems permit the entry of sales data through the use of bar code
laser scanning. The systems also have a price "look-up" capability that permits
immediate price checking and the efficient movement of customers through the
check-out process. Data from all of our locations and order sources is
transmitted to our headquarters at the end of each day, permitting a perpetual
daily inventory and the calculation of average unit cost by SKU for each of our
stores and CSCs. Daily compilation of sales and gross margin data allows us to
analyze profitability and inventory by item and product line, as well as monitor
the success of our sales promotions. For all SKUs, we have immediate access to
on-hand daily unit inventory, units on order, current and past rates of sale and
other information pertinent to the management of our inventory.
All of our computer operations are managed internally in state-of-the-art
facilities that capitalize on advanced technologies. Our help desk is manned 24
hours per day, 7 days per week, and 365 days per year; and we utilize off-site
disaster recovery facilities. These operations result in industry leading system
availability and reliability.
9
<PAGE> 11
We have invested in a state-of-the-art data warehouse that allows us to
perform trend and market basket analyses, manage our customer relationships, and
produce more effective advertising campaigns. We strive for superior customer
satisfaction, and our information systems initiatives are designed with that
goal in mind. The aim of our new data warehouse solution is to use sales
transaction and customer interaction information to market on a more personal
basis with each of our customers. Our international initiatives include
launching several electronic commerce sites throughout the world and building a
world-class network and computing infrastructure.
Our Office Depot public Web site -- www.officedepot.com -- has won a number
of honors. Our business-to-business electronic commerce sites have sophisticated
work-flow components that help our customers electronically manage their
ordering process for office supplies, with thousands of customer orders
processed each day. Internet-enabled applications allow our suppliers to
directly interact with our systems, improving order flow and supply chain
management. We use our corporate intranet to improve employee productivity and
responsiveness and reduce our administrative costs.
EMPLOYEES, STORE MANAGEMENT AND TRAINING
As of March 3, 2000, we had approximately 48,000 employees worldwide. We
anticipate that we will continue to add employees in the future as we grow and
expand our business. We try to promote as many of our existing employees into
management positions as possible. Because of the rapid rate of our expansion,
however, for the foreseeable future we will continue to recruit a portion of our
management talent from external sources.
We hire and train new employees well in advance of new store and CSC
openings, and these employees undergo a comprehensive training program prior to
the facility opening. In general, our store managers have extensive experience
in retailing, particularly with warehouse store chains or discount stores that
generate high sales volumes. Each of our new retail store managers usually
spends two to four months in an apprenticeship position at an existing Office
Depot store prior to being assigned to a new store. Typically, our CSC managers
have extensive experience in distribution operations. Our retail sales
associates view product knowledge videos and complete written training programs
relating to certain products before being allowed to assist customers. We create
some of these videos and training programs internally. New product information
is periodically transmitted to associates via satellite broadcasts. The
satellite broadcasts are also used for associate training. We grant stock
options and offer bonus programs to certain of our employees, including retail
store managers, as an incentive to attract and retain them.
We have never experienced a strike or any other work stoppage among our
domestic employees, and we believe that our relations with all of our employees
are good. There are no collective bargaining agreements covering any of our
employees. However, certain of our international employees work under various
labor arrangements.
10
<PAGE> 12
ITEM 2. PROPERTIES.
As of March 3, 2000, we operate 791 office supply stores in 46 states and
the District of Columbia, 38 office supply stores in 5 Canadian provinces and
121 office supply stores (including those operated under licensing and joint
venture agreements) in 8 countries outside of the United States and Canada. We
also operate 30 CSCs in 18 U.S. states and 17 CSCs in 10 countries outside of
the United States. The following table sets forth the locations of these
facilities.
STORES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATE/COUNTRY #
- ------------- ---
<S> <C>
UNITED STATES:
Alabama 14
Alaska 2
Arizona 11
Arkansas 7
California 121
Colorado 22
Connecticut 2
Delaware 1
District of Columbia 2
Florida 79
Georgia 34
Hawaii 4
Idaho 3
Illinois 32
Indiana 14
Iowa 5
</TABLE>
<TABLE>
<CAPTION>
STATE/COUNTRY #
- ------------- ---
<S> <C>
Kansas 10
Kentucky 10
Louisiana 23
Maryland 12
Massachusetts 2
Michigan 25
Minnesota 10
Mississippi 8
Missouri 18
Montana 1
Nebraska 4
Nevada 9
New Jersey 8
New Mexico 4
New York 17
North Carolina 22
</TABLE>
<TABLE>
<CAPTION>
STATE/COUNTRY #
- ------------- ---
<S> <C>
North Dakota 2
Ohio 32
Oklahoma 9
Oregon 15
Pennsylvania 9
Rhode Island 1
South Carolina 11
Tennessee 17
Texas 95
Utah 6
Virginia 17
Washington 26
West Virginia 3
Wisconsin 11
Wyoming 1
---
Total United States 791
</TABLE>
<TABLE>
<S> <C>
CANADA:
Alberta 8
British Columbia 8
Manitoba 4
Ontario 16
Saskatchewan 2
---
Total Canada 38
COLOMBIA 2
FRANCE 26
HUNGARY 4
ISRAEL 22
JAPAN 6
MEXICO 43
POLAND 16
THAILAND 2
---
Total Outside the United
States 121
</TABLE>
CSC'S
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATE/COUNTRY #
- ------------- ---
<S> <C>
UNITED STATES:
Arizona 1
California 4
Colorado 2
Connecticut 1
Florida 3
Georgia 1
Illinois 1
Louisiana 1
Maryland 2
Massachusetts 1
</TABLE>
<TABLE>
<CAPTION>
STATE/COUNTRY #
- ------------- ---
<S> <C>
Michigan 1
Minnesota 2
New Jersey 1
North Carolina 1
Ohio 2
Texas 3
Utah 1
Washington 2
---
Total United States 30
</TABLE>
<TABLE>
<CAPTION>
STATE/COUNTRY #
- ------------- ---
<S> <C>
AUSTRALIA 2
FRANCE 2
ISRAEL 1
GERMANY 2
THE NETHERLANDS 1
IRELAND 1
ITALY 1
JAPAN 2
MEXICO 2
UNITED KINGDOM 3
---
Total Outside the United
States 17
</TABLE>
11
<PAGE> 13
Most of our facilities are leased or subleased, with lease terms (excluding
renewal options) expiring in various years through 2020, except for the 66
facilities, excluding our corporate offices and systems data center, which we
own. Our owned facilities are located in 16 states, primarily in Florida, Texas
and California; two Canadian provinces; the United Kingdom; the Netherlands;
Australia; Mexico and France.
We operate our retail stores under the Office Depot(R), Office Depot
Express(R) and Office Place(R) (in Ontario, Canada) names. Our contract and
catalog businesses operate under the names Office Depot(R) and Viking Office
Products(R).
Our corporate offices in Delray Beach, Florida consist of approximately
575,000 square feet in three adjacent buildings -- two are owned and one is
leased. We also own a corporate office building in Torrance, California which is
approximately 180,000 square feet in size and a systems data center in
Charlotte, North Carolina which is approximately 53,000 square feet in size.
ITEM 3. LEGAL PROCEEDINGS.
We are involved in litigation arising in the normal course of our business.
We do not believe that any of these matters, either individually or in the
aggregate, will materially affect our financial position or the results of our
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
12
<PAGE> 14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.
Our common stock is listed on the New York Stock Exchange ("NYSE") under
the symbol "ODP." As of March 3, 2000, there were 4,204 holders of record of our
common stock. The last reported sale price of the common stock on the NYSE on
March 3, 2000 was $11.6875.
The following table sets forth, for the periods indicated, the high and low
sale prices of our common stock, as quoted on the NYSE Composite Tape. These
prices do not include retail mark-ups, mark-downs or commission.
<TABLE>
<CAPTION>
1999 HIGH(1) LOW(1)
- ---- -------- --------
<S> <C> <C>
First Quarter........................................ $26.0000 $20.3333
Second Quarter....................................... 25.8333 18.2500
Third Quarter........................................ 23.0000 9.8125
Fourth Quarter....................................... 13.1875 9.0000
</TABLE>
<TABLE>
<CAPTION>
1998
- ----
<S> <C> <C>
First Quarter........................................ $20.0417 $14.5000
Second Quarter....................................... 23.1667 18.7083
Third Quarter........................................ 24.8333 13.3333
Fourth Quarter....................................... 24.4167 10.5833
</TABLE>
- ---------------
(1) Prices have been adjusted to reflect the three-for-two stock split which
occurred on April 1, 1999.
We have never declared or paid cash dividends on our common stock, and we
do not currently intend to pay cash dividends in the foreseeable future.
Earnings and other cash resources will continue to be used in the expansion of
our business.
On February 24, 1999, our Board declared a three-for-two stock split in the
form of a 50% stock dividend payable on April 1, 1999 to stockholders of record
on March 11, 1999. In conjunction with the stock split, 124,560,075 additional
shares were issued to our existing stockholders on April 1, 1999.
In August 1999, our Board approved a $500 million stock repurchase program
reflecting its belief that our common stock represented a significant value at
its then-current trading price. We purchased 46.7 million shares of our stock at
a total cost of $500 million plus commissions during the third and fourth
quarters of 1999. In January and March 2000, our Board approved additional stock
repurchases of up to $200 million, bringing our total authorization to $700
million. As of March 3, 2000, we had purchased an additional 9.2 million shares
of our stock at a total cost of $100 million plus commissions. The remaining
authorization does not have an expiration date, and we can acquire our common
stock either in the open market or through negotiated purchases.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this Item is set forth in Exhibit 13 under the
heading "Financial Highlights" as of and for the fiscal years ended December 25,
1999, December 26, 1998, December 27, 1997, December 28, 1996 and December 30,
1995. This information is set forth in our Annual Report to Stockholders for the
fiscal year ended December 25, 1999 (on page 22) and is incorporated herein by
this reference and made a part hereof.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by this item is set forth in Exhibit 13 under the
headings "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Cautionary Statements for Purposes of the 'Safe
Harbor' Provisions of the Private Securities Litigation Reform Act of 1995."
This
13
<PAGE> 15
information is set forth in our Annual Report to Stockholders for the fiscal
year ended December 25, 1999 (on pages 23-38) and is incorporated herein by
reference and made a part hereof.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risks
When we invest our funds in short-term investments, which generate income
subject to variable interest rates, we are subject to interest rate risk. We did
not, however, have any funds invested in such instruments as of December 25,
1999.
Our zero coupon, convertible subordinated notes (Liquid Yield Option Notes
or LYONs(R)) offer stated yields to maturity which are not subject to interest
rate risks. Borrowings under our domestic and Japanese credit facilities are
both subject to variable interest rates. As of December 25, 1999, there were no
borrowings under our domestic credit agreement. The interest rate risk on our
Japanese bank borrowings has been partially mitigated by an interest rate swap
that fixes the interest rate on a portion of our yen borrowings for the
remaining life of the loan. With interest rates currently approximating 1% in
Japan, a 10% change in interest rates would not materially change our total
interest expense.
Foreign Exchange Rate Risks
The nature and magnitude of our foreign exchange risks have not changed
materially in the past year. We conduct business in various countries outside
the United States where the functional currency of the country is not the U.S.
dollar. This results in foreign exchange translation exposure when these foreign
currency earnings are translated into U.S. dollars in our consolidated financial
statements. As of December 25, 1999, a 10% change in the applicable foreign
exchange rates would have resulted in an increase or decrease in our after-tax
earnings of approximately $3 million on an annual basis.
We are also subject to foreign exchange transaction exposure when our
subsidiaries transact business in a currency other than their own functional
currency. This exposure arises primarily from inventory purchases in a foreign
currency. The introduction of the euro and our decision to consolidate our
European purchases has greatly reduced these exposures. During 1999, we entered
into foreign exchange forward contracts to hedge certain inventory exposures.
The maximum contract amount outstanding during the year was $13.7 million.
ITEM 8. FINANCIAL STATEMENTS.
The information required by this Item is set forth in Exhibit 13 under the
headings "Consolidated Balance Sheets," "Consolidated Statements of Earnings,"
"Consolidated Statements of Stockholders' Equity," "Consolidated Statements of
Cash Flows" and "Notes to Consolidated Financial Statements" as of December 25,
1999 and December 26, 1998 and for the fiscal years ended December 25, 1999,
December 26, 1998 and December 27, 1997. This information is set forth in our
Annual Report to Stockholders for the fiscal year ended December 25, 1999 (on
pages 40-57) and is incorporated herein by this reference and made a part
hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
14
<PAGE> 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to directors and executive officers is
incorporated herein by reference to the information under the caption "Directors
and Executive Officers" in the Proxy Statement for our 2000 Annual Meeting of
Stockholders.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to executive compensation is incorporated herein
by reference to the information under the caption "Executive Compensation" in
the Proxy Statement for our 2000 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to security ownership of certain beneficial owners
and management is incorporated herein by reference to the information under the
caption "Stock Ownership Information" in the Proxy Statement for our 2000 Annual
Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to certain relationships and related transactions
is incorporated herein by reference to the information under the caption
"Certain Relationships and Related Transactions" in the Proxy Statement for our
2000 Annual Meeting of Stockholders.
15
<PAGE> 17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
1. The financial statements listed in the "Index to Financial
Statements."
2. The financial statement schedule listed in "Index to Financial
Statement Schedule."
3. The exhibits listed in the "Index to Exhibits."
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the year ended December 25,
1999 except those disclosed in our 1999 Quarterly Reports on Form 10-Q.
16
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 22nd day of
March, 2000.
OFFICE DEPOT, INC.
By /s/ DAVID I. FUENTE
------------------------------------
David I. Fuente, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March 22, 2000.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<C> <S>
/s/ DAVID I. FUENTE Chairman of the Board and Chief Executive
- ----------------------------------------------------- Officer (Principal Executive Officer)
David I. Fuente
/s/ IRWIN HELFORD Vice Chairman and Director
- -----------------------------------------------------
Irwin Helford
/s/ M. BRUCE NELSON President -- Office Depot International and
- ----------------------------------------------------- Director
M. Bruce Nelson
/s/ BARRY J. GOLDSTEIN Executive Vice President -- Finance, Chief
- ----------------------------------------------------- Financial Officer, (Principal Financial
Barry J. Goldstein Officer)
/s/ CHARLES E. BROWN Senior Vice President -- Finance and
- ----------------------------------------------------- Controller (Principal Accounting Officer)
Charles E. Brown
/s/ LEE A. AULT, III Director
- -----------------------------------------------------
Lee A. Ault, III
/s/ NEIL R. AUSTRIAN Director
- -----------------------------------------------------
Neil R. Austrian
/s/ CYNTHIA R. COHEN Director
- -----------------------------------------------------
Cynthia R. Cohen
/s/ W. SCOTT HEDRICK Director
- -----------------------------------------------------
W. Scott Hedrick
/s/ JAMES L. HESKETT Director
- -----------------------------------------------------
James L. Heskett
/s/ MICHAEL J. MYERS Director
- -----------------------------------------------------
Michael J. Myers
/s/ FRANK P. SCRUGGS, JR. Director
- -----------------------------------------------------
Frank P. Scruggs, Jr.
/s/ PETER J. SOLOMON Director
- -----------------------------------------------------
Peter J. Solomon
</TABLE>
17
<PAGE> 19
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report of Deloitte & Touche LLP on
Consolidated Financial Statements......................... *
Consolidated Balance Sheets................................. *
Consolidated Statements of Earnings......................... *
Consolidated Statements of Stockholders' Equity............. *
Consolidated Statements of Cash Flows....................... *
Notes to Consolidated Financial Statements.................. *
Independent Auditors' Report of Deloitte & Touche LLP on
Financial Statement Schedule.............................. F-2
</TABLE>
- ---------------
* Incorporated herein by reference to the respective information in our Annual
Report to Stockholders for the fiscal year ended December 25, 1999.
F-1
<PAGE> 20
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Office Depot, Inc.:
We have audited the consolidated financial statements of Office Depot, Inc. and
Subsidiaries as of December 25, 1999 and December 26, 1998 and for each of the
three years in the period ended December 25, 1999, and have issued our report
thereon dated February 10, 2000 (March 3, 2000 as to Note J); such consolidated
financial statements and report are included in the Company's Annual Report to
Stockholders for the fiscal year ended December 25, 1999 and are incorporated
herein by reference. Our audits also included the financial statement schedule
of Office Depot, Inc. and Subsidiaries listed in the Index to Financial
Statement Schedule. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
February 10, 1999 (March 3, 2000 as to Note J)
F-2
<PAGE> 21
INDEX TO FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Schedule II -- Valuation and Qualifying Accounts and
Reserves.................................................. S-1
</TABLE>
All other schedules have been omitted because they are inapplicable, not
required or the information is included elsewhere herein.
<PAGE> 22
SCHEDULE II
OFFICE DEPOT, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- ------------ ----------------- ----------
DEDUCTIONS --
BALANCE AT ADDITIONS -- WRITE-OFFS, BALANCE AT
BEGINNING CHARGED TO PAYMENTS AND END OF
DESCRIPTION OF PERIOD EXPENSES OTHER ADJUSTMENTS PERIOD
----------- ---------- ------------ ----------------- ----------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
1999............................................ $25,927 $22,940 $21,131 $27,736
1998............................................ 25,587 23,702 23,362 25,927
1997............................................ 17,662 25,254 17,329 25,587
Accrued Merger Costs:
1999............................................ $40,832 $26,035 $45,599 $21,268
1998............................................ 1,416 73,329 33,913 40,832
1997............................................ 1,956 13,218 13,758 1,416
</TABLE>
S-1
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE+
------- ------- ------------
<C> <S> <C>
3.1 Restated Certificate of Incorporation, as amended to date... (1)
3.2 Bylaws...................................................... (2)
4.1 Form of Certificate representing shares of Common Stock..... (3)
4.2 Form of Indenture (including form of LYON) between the
Company and The Bank of New York, as Trustee................ (4)
4.3 Form of Indenture (including form of LYON) between the
Company and Bankers Trust Company, as Trustee............... (5)
4.4 Rights Agreement dated as of September 4, 1996 between
Office Depot, Inc. and ChaseMellon Shareholder Services,
L.L.C., as Rights Agent, including the form of Certificate
of Designation, Preferences and Rights of Junior
Participating Preferred Stock, Series A attached thereto as
Exhibit A, the form of Rights Certificate attached thereto
as Exhibit B and the Summary of Rights attached thereto as
Exhibit C................................................... (6)
10.1 Revolving Credit and Line of Credit Agreement dated as of
February 20, 1998 by and among the Company and SunTrust
Bank, Central Florida, National Association, individually
and as Administrative Agent; Bank of America National Trust
and Savings Association, individually and as Syndication
Agent; NationsBank, National Association, individually and
as Documentation Agent; Royal Bank of Canada, individually
and as Co-Agent; Citibank, N.A., individually and as
Co-Agent; The First National Bank of Chicago, individually
and as Co-Agent; CoreStates Bank, N.A.; PNC Bank, National
Association; Fifth Third Bank; and Hibernia National Bank.
(Exhibits to the Revolving Credit and Line of Credit
Agreement have been omitted, but a copy may be obtained free
of charge upon request to the Company)...................... (7)
10.2 Office Depot, Inc. Long-Term Equity Incentive Plan*......... (8)
10.3 1997-2001 Office Depot, Inc. Designated Executive Incentive
Plan*....................................................... (7)
10.4 Form of Change of Control Employment Agreement, dated as of
September 4, 1996, by and between Office Depot, Inc. and
each of Thomas Kroeger and William P. Seltzer............... (9)
10.5 Form of Change of Control Employment Agreement, dated as of
September 4, 1996, by and between Office Depot, Inc. and
each of David I. Fuente and Barry J. Goldstein.............. (9)
10.6 Form of Indemnification Agreement, dated as of September 4,
1996, by and between Office Depot, Inc. and each of David I.
Fuente, Cynthia R. Cohen, W. Scott Hedrick, James L.
Heskett, Michael J. Myers, Peter J. Solomon, Barry J.
Goldstein, William P. Seltzer, and Thomas Kroeger........... (9)
10.7 Form of Executive Employment Agreement, dated as of October
21, 1997, by and between Office Depot, Inc. and each of
Thomas Kroeger, Barry J. Goldstein and William P. Seltzer... (7)
10.8 Form of Executive Employment Agreement, dated as of January
1, 1998, by and between Office Depot, Inc. and David I.
Fuente......................................................
10.9 Executive Part-time Employment Agreement, dated as of
September 30, 1999, by and between Office Depot, Inc. and
Irwin Helford...............................................
</TABLE>
II-1
<PAGE> 24
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE+
------- ------- ------------
<C> <S> <C>
10.10 Form of Executive Employment Agreement, dated as of May 17,
1998, by and between Office Depot, Inc. and Bruce Nelson....
10.11 Form of Executive Employment Agreement, dated as of March
30, 1998, by and between Office Depot, Inc. and Shawn
McGhee......................................................
13.1 Certain portions of the Company's Annual Report to
Stockholders................................................
21.1 List of subsidiaries........................................
23.1 Consent of Deloitte & Touche LLP............................
27.1 Financial Data Schedule.....................................
</TABLE>
- ---------------
+ This information appears only in the manually signed original copies of this
report.
* Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the respective exhibit to the Proxy Statement
for the Company's 1995 Annual Meeting of Stockholders.
(2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
filed with the Commission on August 12, 1996.
(3) Incorporated by reference to the respective exhibit to the Company's
Registration Statement No. 33-39473.
(4) Incorporated by reference to the respective exhibit to the Company's
Registration Statement No. 33-54574.
(5) Incorporated by reference to the respective exhibit to the Company's
Registration Statement No. 33-70378.
(6) Incorporated by reference to the Company's Current Report on Form 8-K, filed
with the Commission on September 6, 1996.
(7) Incorporated by reference to the respective exhibit to the Company's Annual
Report on Form 10-K for the year ended December 27, 1997.
(8) Incorporated by reference to the respective exhibit to the Proxy Statement
for the Company's 1997 Annual Meeting of Stockholders.
(9) Incorporated by reference to the respective exhibit to the Company's Annual
Report on Form 10-K for the year ended December 28, 1996.
Upon request, the Company will furnish a copy of any exhibit to this report
upon the payment of reasonable copying and mailing expenses.
II-2
<PAGE> 1
EXHIBIT 10.8
EXECUTIVE EMPLOYMENT AGREEMENT
(For Executive Officers Who Also Have a Change of Control Employment Agreement)
THIS AGREEMENT is made as of January 1, 1998 between Office
Depot, Inc., a Delaware corporation (the "Company"), and David I. Fuente
("Executive").
In consideration of the mutual covenants contained herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. EMPLOYMENT.
(a) The Company shall employ Executive, and Executive hereby
accepts employment with the Company, upon the terms and conditions set forth in
this Agreement for the period beginning on the date hereof and ending as
provided in paragraph 4 hereof (the "EMPLOYMENT TERM").
(b) The parties hereto have entered into an Employment
Agreement dated as of September 1996 by and between the Company and the
Executive (the "CHANGE OF CONTROL EMPLOYMENT AGREEMENT") which, by its terms,
takes effect during the "EMPLOYMENT PERIOD" as defined in such agreement. During
any such Employment Period under the Change of Control Employment Agreement, the
terms and provisions of the Change of Control Employment Agreement shall control
to the extent such terms and provisions are in conflict with the terms and
provisions of this Agreement. In addition, during such Employment Period, the
Employment Term hereunder shall be tolled and upon expiration of the Employment
Period under the Change of Control Employment Agreement the Employment Term
hereunder shall recommence.
2. POSITION AND DUTIES.
(a) During the Employment Period, Executive shall serve as
Chairman of the Company's Board of Directors (the "Board") and shall have the
normal duties, responsibilities and authority attendant to such position,
subject to the power of the Board to expand or limit such duties,
responsibilities and authority. The Executive shall also serve as the Chief
Executive Officer of the Company until such time as his replacement is elected
by the Board.
(b) Executive shall report to the Board, and Executive shall
devote Executive's best efforts and Executive's full business time and attention
(except for permitted vacation periods and reasonable periods of illness or
other incapacity) to the business and affairs of the Company and its
Subsidiaries; PROVIDED Executive shall, with the prior written approval of
the Board, be allowed to serve as (i) a director or officer of any non-profit
organization including trade, civic, educational or charitable organizations, or
(ii) a director of any corporation which is not competing
<PAGE> 2
with the Company or any of its Subsidiaries in the office product and office
supply industry so long as such duties do not materially interfere with the
performance of Executive's duties or responsibilities under this Agreement.
Executive shall perform Executive's duties and responsibilities under this
Agreement to the best of Executive's abilities in a diligent, trustworthy,
businesslike and efficient manner.
(c) Executive shall be based at or in the vicinity of the
Company's headquarters ~ may be required to travel as necessary to perform
Executive's duties and responsibilities under this Agreement.
(d) For purposes of this Agreement, "SUBSIDIARIES" shall mean
any corporation of which the securities having a majority of the voting power in
electing directors are, at the time of determination, owned by the Company,
directly or through one of more Subsidiaries.
3. BASE SALARY AND BENEFITS.
(a) Initially, Executive's base salary shall be $1,000,000
per annum (the "BASE SALARY"), which salary shall be payable in regular
installments in accordance with the Company's general payroll practices and
shall be subject to customary withholding. Executive's Base Salary shall be
reviewed at least annually by the Compensation Committee of the Board and shall,
in their discretion, be subject to adjustment, but not reduction, based on among
other things, market practice and performance and the applicability of Section
162(m) of the Internal Revenue Code. In addition, during the Employment Term,
Executive shall be entitled to participate in certain of the Company's long term
incentive programs established currently or in the future by the Company for
which officers of the Company then at Executive's level are generally eligible
(including, but not limited to, stock option, restricted stock, performance
unit/share plans or long-term cash plans). Assuming approval of the requisite
amendments to the Company's Long-Term Equity Incentive Plan at the Company's
1998 Annual Meeting, at the next following Board meeting the Board shall grant
to Executive an option to purchase 1,000,000 shares of common stock at a
purchase price equal to the market price on the date of grant. Executive will
also be entitled to receive an additional grant of options for 1,000,000 shares
on January 4, 1999, with an option price equal to the greater of the market
price on such date of grant or 125% of the purchase price of the initial tranche
of options described above. Each option grant will have a ten year term and will
vest in a single tranche on the fourth anniversary of its date of grant.
Beginning in the year 2000, Executive will be entitled to receive annual grants
of stock options at the discretion of the Board or the Compensation Committee;
provided, however, that Executive shall be entitled to receive grants of options
each year for at least 165,000 shares.
(b) In addition to the Base Salary, Executive shall be
entitled to participate in the Company's Management Incentive Plan (the "BONUS
PLAN") as administered by the Board or the Compensation Committee. For 1998, the
"minimum," "target" and "maximum" bonus payment
- 2 -
<PAGE> 3
levels shall be 50%, 70% and 100% of salary, respectively. These payment levels
will be increased by 5, 8.5 and 10 percentage points, respectively, each year
during the Employment Term beginning in 1999 (e.g. in 1999, the payment levels
will be 55%, 78.5% and 110%, respectively). These levels may be adjusted by the
Board if the Section 162(m) limits are changed and the Board chooses to increase
Executive's salary; in which case the bonus levels may be decreased
proportionally. If the Board or the Compensation Committee modifies such Bonus
Plan during the Employment Term, Executive shall continue to participate at a
level no lower than the highest level established for any officer of the Company
then at Executive's level. At the discretion of the Board or the Compensation
Committee, Executive may be offered from time to time the opportunity to
participate in other bonus plans of the Company in lieu of the Bonus Plan and,
if Executive chooses to participate in such plan or plans, the provisions of
this paragraph 3(b) shall be tolled during the period of such participation.
(c) Executive shall also be entitled to a deferred matching
bonus equal to the amount actually earned by Executive each year under the Bonus
Plan (the "DEFERRED BONUS") provided, however, that such Deferred Bonus shall
only be paid if, and shall be contingent upon, the Company meeting its earnings
per share target for such year under the Bonus Plan. Deferred Bonus earned with
respect to 1998 and 1999 will vest in a single tranche on December 31, 2000 and
Deferred Bonuses earned with respect to subsequent years will each vest in a
single tranche on the fourth December 31 following the year in which such
Deferred Bonus is earned (e.g. the Deferred Bonus earned with respect to 2000
will vest 100% on December 31, 2004).
(d) Executive shall be entitled to paid vacation in
accordance with the Company's general payroll practices for officers of the
Company then at Executive's level.
(e) The Company shall reimburse Executive for all reasonable
expenses incurred by Executive in the course of performing Executive's duties
under this Agreement which are consistent with the Company's policies in effect
from time to time with respect to travel, entertainment and other business
expenses, subject to the Company's requirements with respect to reporting and
documentation of such expenses.
(f) Executive will be entitled to all benefits as are, from
time to time, maintained for officers of the Company then at Executive's level,
including without limitation: medical, prescription, dental, disability,
employee life, group life, split-dollar life, accidental death and travel
accident insurance plans (collectively, "INSURANCE BENEFITS"), profit sharing
and retirement benefits.
- 3 -
<PAGE> 4
4. TERM.
(a) The term of Executive's employment hereunder shall end on
the fifth anniversary of the date of this Agreement; PROVIDED that (i) such term
shall be automatically extended for successive one year periods in the event
that written notice of the termination of this' Agreement is not given by one
party hereto to the other party at least six months prior to the end of such
term (the term of Executive's employment hereunder, as it may be extended, is
herein referred to as the "Employment Term"); PROVIDED FURTHER that (ii) the
Employment Term shall terminate prior to such date (A) upon Executive's death or
permanent disability or incapacity (as determined by the Board in its good faith
judgment), (B) upon the mutual agreement of the Company and Executive, (C) by
the Company's termination of Executive's employment hereunder for Cause (as
defined below) or without Cause or (D) by Executive's termination of employment
for Good Reason (as defined below) or without Good Reason.
(b) If Executive's employment hereunder is terminated by the
Company without Cause or is terminated by the Executive for Good Reason,
Executive (and Executive's family with respect to clause (iii) below) shall be
entitled to receive (i) Executive's Base Salary through the second anniversary
of such termination and Executive's Pro Rata Bonus (as defined in paragraph (h)
below), if and only if Executive has not breached the provisions of paragraphs
5,6 and 7 hereof, (ii) vested and earned (in accordance with the Company's
applicable plan or program) but unpaid amounts under incentive plans, deferred
compensation plans, and other employer programs of the Company in which
Executive is then participating (other than the Pro Rata Bonus), and (iii)
Insurance Benefits through the second anniversary of such termination pursuant
to the Company's insurance programs, as in effect from time to time, to the
extent Executive participated immediately prior to the date of such termination.
The amounts payable pursuant to paragraph 4(b)(i) and (ii) shall be payable, at
the Company's discretion, in one lump sum payment within 30 days following
termination of the Employment Term or in any other manner consistent with the
Company's normal payment policies.
(c) If Executive's employment hereunder is terminated by the
Company for Cause or by the Executive without Good Reason, Executive shall be
entitled to receive (i) Executive's Base Salary through the date of such
termination and (ii) vested and earned (in accordance with the Company's
applicable plan or program) but unpaid amounts under incentive plans, health and
welfare plans, deferred compensation plans, and other employer programs of the
Company which Executive participates; provided, however, that Executive shall
not be entitled to payment of a Pro Rata Bonus.
(d) At the expiration of the Employment Term or if
Executive's employment hereunder is terminated upon Executive's death or
permanent disability or incapacity (as determined by the Board in its good faith
judgment), Executive (and Executive's family with respect to clause (iv) below),
or Executive's estate if applicable, shall be entitled to receive (i)
Executive's Base Salary through the date of such termination, (ii) Executive's
Pro Rata Bonus (as defined in paragraph 4(h) below), (iii) vested and earned (in
accordance with the Company's applicable plan or program) but
- 4 -
<PAGE> 5
unpaid amounts under incentive plans, health and welfare plans, deferred
compensation plans, and other employer programs of the Company in which
Executive participates, and (iv) health insurance benefits (which shall
terminate upon Executive's death). Amounts payable pursuant to paragraphs
4(d)(i), (ii) and (iii) shall be payable, at the Company's discretion, in one
lump sum payment within 30 days following expiration or termination of the
Employment Term or in any other manner consistent with the Company's normal
payment policies.
(e) Except as otherwise provided herein, fringe benefits and
bonuses (if any) which accrue or become payable after the expiration or
termination of the Employment Term shall cease upon such termination.
(f) For purposes of this Agreement, "CAUSE" shall mean:
(i) the willful and continued failure of the
Executive to perform substantially the Executive's duties with the
Company or one of its affiliates (other than any such failure
resulting from incapacity due to physical or mental illness), after a
written demand for substantial performance is delivered to the
Executive by the Board which specifically identifies the manner in
which the Board believes that the Executive has not substantially
performed the Executive's duties, or
(ii) the willful engaging by the Executive in illegal
conduct or gross misconduct which is materially and demonstrably
injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or based upon the advice of counsel for the Company shall
be conclusively presumed to be done, or omitted to be done, by the Executive in
good faith and in the best interests of the Company. The cessation of employment
of the Executive shall not be deemed to be for Cause unless and until there
shall have been delivered to the Executive a copy of a resolution duly adopted
by the affirmative vote of not less than three quarters of the entire membership
of the Board at a meeting of the Board called and held for such purpose (after
reasonable notice is provided to the Executive and the Executive is given an
opportunity, together with counsel, to be heard before the Board), finding that,
in the good faith opinion of the Board, the Executive is guilty of the conduct
described in subparagraph (i) or (ii) above, and specifying the particulars
thereof in detail.
(g) For purposes of this Agreement, "GOOD REASON" shall mean:
(i) the assignment to the Executive of any duties
inconsistent with the Executive's position (including status, offices,
titles and reporting requirements), authority, duties
- 5 -
<PAGE> 6
or responsibilities as contemplated by paragraph 2 of this Agreement, or any
other action by the Company which results in a diminution in such position,
authority, duties or responsibilities, excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given by the
Executive;
(ii) any failure by the Company to comply with any
of the provisions of paragraph 3 of this Agreement, other than an
isolated, insubstantial and inadvertent failure not occurring in bad
faith and which is remedied by the Company promptly after receipt of
notice thereof given by the Executive;
(iii) the Company's requiring the Executive to be
based at any location other than as provided in paragraph 2(c) hereof;
or
(iv) any purported termination by the Company of the
Executive's employment otherwise than as expressly permitted by this
Agreement.
(h) For purposes of this Agreement, "PRO RATA BONUS" shall
mean the sum OF(i) the pro rata portion (calculated as if the "target" amount
under such plan has been reached) under any current annual incentive plan from
the beginning of the year of termination through the date of termination and
(ii) if and to the extent Executive is vested, the pro rata portion (calculated
as if the "target" amount under such plan has been reached) under any long-term
incentive plan or performance plan from the beginning of the period of
determination through the date of termination.
(i) Notwithstanding any other provisions of this Agreement,
any health insurance benefits that Executive becomes entitled to receive as a
result of any subsequent employment after the expiration or termination of the
Employment Term shall serve as primary coverage for Executive and Executive's
family.
5. CONFIDENTIAL INFORMATION. Executive acknowledges that the
information, observations and data obtained by Executive while employed by the
Company and its Subsidiaries concerning the business or affairs of the Company
or any other Subsidiary ("CONFIDENTIAL INFORMATION") are the property of the
Company or such Subsidiary. Therefore, Executive agrees that Executive shall not
disclose to any unauthorized person or use for Executive's own purposes any
Confidential Information without the prior written consent of the Board, unless
and to the extent that the aforementioned matters become generally known to and
available for use by the public other than as a result of Executive's acts or
omissions. Executive shall deliver to the Company at the termination of the
Employment Term, or at any other time the Company may request, all memoranda,
notes, plans, records, reports, computer tapes, printouts and software and other
documents and data (and copies thereof) in any form or medium relating to the
Confidential Information, Work Product (as defined below) or the business of the
Company or any Subsidiary that Executive may then possess or have under
Executive's control.
- 6 -
<PAGE> 7
6. INVENTIONS AND PATENTS. Executive acknowledges that
all inventions, innovations, improvements, developments, methods, designs,
analyses, drawings, reports and all similar or related information (whether or
not patentable) that relate to the Company's or any of its Subsidiaries' actual
or anticipated business, research and development or existing or future products
or services and that are conceived, developed or made by Executive while
employed by the Company and its Subsidiaries ("WORK PRODUCT") belong to the
Company or such Subsidiary. Executive shall promptly disclose such Work Product
to the Board and perform all actions reasonably requested by the Board (whether
during or after the Employment Term) to establish and confirm such ownership
(including, without limitation, assignments, consents, powers of attorney and
other instruments).
7. NON-COMPETE. NON-SOLICITATION.
(a) In further consideration of the compensation to be
paid to Executive hereunder, Executive acknowledges that in the course of
Executive's employment with the Company Executive shall become familiar with the
Company's trade secrets and with other Confidential Information concerning the
Company and its Subsidiaries and that Executive's services shall be of special,
unique and extraordinary value to the Company and its Subsidiaries. Therefore,
Executive agrees that, during the Employment Term and for one year thereafter
(the "NONCOMPETE PERIOD"), Executive shall not directly or indirectly own any
interest in, manage, control, participate in, consult with, render services for,
or in any manner engage in any business competing with the businesses of the
Company or its Subsidiaries, as such businesses exist or are in process on the
date of the termination of Executive's employment, within any geographical area
in which the Company or its Subsidiaries engage or plan to engage in such
businesses. Nothing herein shall prohibit Executive from being a passive owner
of not more than 2% of the outstanding stock of any class of a corporation which
is publicly traded, so long as Executive has no active participation in the
business of such corporation.
(b) During the Noncompete Period, Executive shall not
directly or indirectly through another entity (i) induce or attempt to induce
any employee of the Company or any Subsidiary to leave the employ of the Company
or such Subsidiary, or in any way interfere with the relationship between the
Company or any Subsidiary and any employee thereof, (ii) hire any person who was
an employee of the Company or any Subsidiary at any time during the Employment
Term or (iii) induce or attempt to induce any customer, supplier, licensee,
licensor, franchisee or other business relation of the Company or any Subsidiary
to cease doing business with the Company or such Subsidiary, or in any way
interfere with the relationship between any such customer, supplier, licensee,
licensor, franchisee, or business relation and the Company or any Subsidiary
(including, without limitation, making any negative statements or communications
about the Company or its Subsidiaries).
- 7 -
<PAGE> 8
(c) If, at the time of enforcement of this paragraph 7, a
court shall hold that the duration, scope or area restrictions stated herein are
unreasonable under circumstances then existing, the parties agree that the
maximum duration, scope or area reasonable under such circumstances shall be
substituted for the stated duration, scope or area and that the court shall be
allowed to revise the restrictions contained herein to cover the maximum period,
scope and area permitted by law. Executive agrees that the restrictions
contained in this paragraph 7 are reasonable.
(d) In the event of the breach or a threatened breach by
Executive of any of the provisions of this paragraph 7, the Company, in addition
and supplementary to other rights and remedies existing in its favor, may apply
to any court of law or equity of competent jurisdiction for specific performance
and/or injunctive or other relief in order to enforce or prevent any violations
of the provisions hereof (without posting a bond or other security). In
addition, in the event of an alleged breach or violation by Executive of this
paragraph 7, the Noncompete Period shall be tolled until such breach or
violation has been duly cured.
8. EXECUTIVE'S REPRESENTATIONS. Executive hereby
represents and warrants to the Company that (i) the execution, delivery and
performance of this Agreement by Executive do not and shall not conflict with,
breach, violate or cause a default under any contract, agreement, instrument,
order, judgment or decree to which Executive is a party or by which Executive is
bound, (ii) Executive is not a party to or bound by any employment agreement,
noncompete agreement or confidentiality agreement with any other person or
entity and (iii) upon the execution and delivery of this Agreement by the
Company, this Agreement shall be the valid and binding obligation of Executive,
enforceable in accordance with its terms. Executive hereby acknowledges and
represents that Executive has had an opportunity to consult with independent
legal counsel regarding Executive's rights and obligations under this Agreement
and that Executive fully understands the terms and conditions contained herein.
9. SURVIVAL. Paragraphs 5, 6 and 7 and paragraphs 9
through 16 shall survive and continue in full force in accordance with their
terms notwithstanding any termination of the Employment Term.
10. NOTICES. Any notice provided for in this Agreement
shall be in writing and shall be either personally delivered, or mailed by first
class mail, return receipt requested, to the recipient at the address below
indicated:
NOTICES TO EXECUTIVE:
Name: David I. Fuente
Address: 701 Tern Point Circle
Boca Raton, FL 33431
- 8 -
<PAGE> 9
Office Depot, Inc.
2200 Germantown Road
Delray Beach, Florida 33445
Attention: Chief Financial Officer
and
Office Depot, Inc.
2200 Germantown Road
Delray Beach, Florida 33445
Attention: Executive Vice President - Human Resources
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement shall be deemed to have been given when so delivered
or mailed.
11. SEVERABILITY. Whenever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable law or
rule in any jurisdiction, such invalidity, illegality or unenforceability shall
not affect any other provision or any other jurisdiction, but this Agreement
shall be reformed, construed and enforced in such jurisdiction as if such
invalid, illegal or unenforceable provision had never been contained herein.
12. COMPLETE AGREEMENT. This Agreement and those documents
expressly referred to herein and other documents of even date herewith embody
the complete agreement and understanding among the parties and supersede and
preempt any prior understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter hereof in
any way (provided, however that during the "Employment Period," as defined in
the Change of Control Employment Agreement, the terms and provision of the
Change of Control Employment Agreement shall be effective and shall control to
the extent there is any conflict between such agreement and this Agreement).
13. NO STRICT CONSTRUCTION. The language used in this
Agreement shall be deemed to be the language chosen by the parties hereto to
express their mutual intent, and no rule of strict construction shall be applied
against any party.
-9-
<PAGE> 10
14. COUNTERPARTS. This Agreement may be executed in
separate counterparts, each of which is deemed to be an original and all of
which taken together constitute one and the same agreement.
15. SUCCESSORS AND ASSIGNS. This Agreement is intended to
bind and inure to the benefit of and be enforceable by Executive, the Company
and their respective heirs, successors and assigns, except that Executive may
not assign Executive's rights or delegate Executive's obligations hereunder
without the prior written consent of the Company.
16. CHOICE OF LAW. All issues and questions concerning
the construction, validity, enforcement and interpretation of this Agreement and
the exhibits and schedules hereto shall be governed by, and construed in
accordance with, the laws of the State of Florida, without giving effect to any
choice of law or conflict of law rules or provisions (whether of the State of
Florida or any other jurisdiction) that would cause the application of the laws
of any jurisdiction other than the State of Florida.
17. AMENDMENT AND WAIVER. The provisions of this Agreement
may be amended or waived only with the prior written consent of the Company and
Executive, and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement.
* * * * *
- 10 -
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
OFFICE DEPOT, INC.
By: /s/ W. Scott Hedrick
-----------------------------------
Name: W. Scott Hedrick
Its: Chairman, Compensation Committee
EXECUTIVE
/s/ David I. Fuente
--------------------------------------
Name: David I. Fuente
- 11 -
<PAGE> 1
EXHIBIT 10.9
EXECUTIVE PART-TIME EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of September 30, 1999
between Office Depot, Inc., a Delaware corporation (the" COMPANY"), and Irwin
Helford ("Executive"), with reference to the following facts:
A. Executive has been employed by Viking Office Products, Inc., a
California corporation ("Viking"), as Chairman and Chief
Executive Officer pursuant to an Employment Agreement, dated
as of July 1, 1997 (the "Employment Agreement"). In August
1998, Viking was acquired by the Company, and Viking is now a
wholly-owned subsidiary of the Company.
B. Executive and the Company have agreed to change the status of
Executive from a full-time employee of Viking to a part-time
employee of the Company, to terminate the Employment Agreement
and to replace such Employment Agreement with this Agreement.
C. Executive and the Company desire by this Agreement to set
forth certain understandings between them regarding such
employment relationship.
D. Executive and the Company also desire by this Agreement to set
forth certain additional understandings between them regarding
restrictions on Executive's ability to compete with the
Company for the period described herein.
In consideration of the mutual covenants contained herein and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. PART-TIME EMPLOYMENT.
Executive's employment as Chairman and Chief Executive Officer of Viking shall
end as of the close of business on September 30, 1999. Effective on and as of
such date and time (the "Effective Date"), Executive's former Employment
Agreement (as amended) with Viking shall terminate and cease, and the Company
shall commence the employment of Executive under the terms of this Agreement.
Executive hereby agrees to the termination of his former Employment Agreement
and accepts such employment with the Company, on a part-time basis, upon the
terms and conditions set forth in this Agreement for the period beginning on
September 30, 1999 and ending as provided in paragraph 4 hereof (the "EMPLOYMENT
TERM"). From and after the Effective Date, Executive shall no longer be an
officer of the Company or of Viking. The change in Executive's status from a
full-time employee of Viking to a part-time employee of the Company as provided
in this Agreement shall not be deemed a termination of Executive's
- 1 -
<PAGE> 2
employment for purposes of the vesting or exercisability of any stock options
held by Executive that were issued under stock option plans of the Company or
Viking, all of which shall remain in full force and effect in accordance with
their terms.
2. POSITION AND DUTIES.
(a) During the Employment Term, Executive shall serve as a Senior Advisor
to the Company, shall be available to consult with the Company with
respect to all aspects of the business of the former Viking
organization at mutually agreed upon times and otherwise shall provide
such advisory services as are mutually agreed upon by Executive and
the Company. He shall work with the Company's chief executive officer
("CEO"), its chief financial officer or the President of Office Depot
International to expand or limit such duties, responsibilities and
authority.
(b) Executive shall devote reasonable efforts and attention to the
business and affairs of the Company and its Subsidiaries on a
part-time basis as set forth herein, sufficient to provide to the
Company the advisory services contemplated hereby. Executive shall be
free to serve as (i) a director or officer of any non-profit
organization including trade, civic, educational or charitable
organizations, or (ii) a director, owner, employee or consultant of
any other corporation which is not competing with the Company or any
of its Subsidiaries in the office product and office supply industry
so long as such duties do not materially interfere with the
performance of Executive's duties or responsibilities under this
Agreement or reflect badly on the Company. Executive shall perform
Executive's duties and responsibilities under this Agreement to the
best of Executive's abilities in a diligent, trustworthy, businesslike
and efficient manner.
(c) For purposes of this Agreement, "SUBSIDIARIES" shall mean any
corporation of which the securities having a majority of the voting
power in electing directors are, at the time of determination, owned
by the Company, directly or through one of more Subsidiaries,
including, without limitation, Viking.
3. BASE SALARY AND BENEFITS.
(a) Executive's base salary for the performance of his services
hereunder shall be Fifty Thousand Dollars ($50,000) per annum in accordance with
the Company's general payroll practices and shall be subject to customary
withholding.
(b) In consideration of the termination of the Executive's former
Employment Agreement with Viking, he shall receive the termination payment set
forth on ATTACHMENT A to this Agreement.
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<PAGE> 3
(c) In addition to the Base Salary, for the period January 1, 1999 to
September 30, 1999, Executive shall be entitled to a bonus as set forth on
ATTACHMENT A to this Agreement.
(d) The Company shall reimburse Executive for all reasonable and
necessary business expenses incurred by him in the course of performing his
duties under this Agreement, in accordance with the Company's policies in effect
from time to time for peer executives with respect to travel, entertainment and
other business expenses, subject to the Company's reasonable requirements with
respect to reporting and documentation of such expenses. Executive agrees that
he will not receive an automobile or other allowances.
(e) During the Employment Term (and for any additional time specified
on ATTACHMENT B hereto), Executive shall be eligible for those benefits which
are set forth on ATTACHMENT B to this Agreement; provided this Agreement has not
been terminated by Executive without good reason or has not been terminated by
the Company for Cause.
(f) During the Employment Term, Executive shall continue to be treated
as an employee of the Company for purposes of the vesting and exercisability of
his outstanding stock options in accordance with the terms of the applicable
stock option plans and agreements between Executive and the Company or Viking;
PROVIDED HOWEVER, that Executive shall not be eligible for any future stock
option grants. In addition, the indemnification provisions for officers and
directors under the charter documents and bylaws of the Company and Viking, and
the provisions of any written Indemnification Agreement between Executive and
the Company or Viking, shall be extended to Executive (to the maximum extent
permitted by law), during the Employment Term and thereafter, with respect to
any and all matters, events or transactions occurring or effected during
Executive's employment with Viking or during the Employment Term.
4. TERM.
(a) The Employment Term shall end on September 30, 2002; PROVIDED THAT
(i) the Employment Term shall terminate prior to such date (A) upon Executive's
death or permanent disability or incapacity (as determined by the Company's
Board of Directors (the "Board") in its good faith judgment), (B) upon the
mutual agreement of the Company and Executive, (C) by the Company's termination
of this Agreement for Cause (as defined below) or without Cause or (D) by
Executive's termination of this Agreement for Good Reason (as defined below) or
without Good Reason.
(b) If the Employment Term is terminated by the Company without Cause
or is terminated by Executive for Good Reason, Executive (and Executive's family
with respect to clause (iii) below) shall be entitled to receive (i) Executive's
Base Salary, including accrued but unpaid amounts, through September 30, 2002
and (ii) vested and earned (in accordance with the Company's applicable plan or
program) but unpaid amounts under health and welfare plans, deferred
compensation plans, and other employer programs of the Company, if any, in which
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<PAGE> 4
Executive participates. The amounts payable pursuant to paragraph 4(b)(i) and
(ii) shall be payable in one lump sum within 30 days following termination of
the Employment Term.
(c) If the Employment Term is terminated by the Company for Cause or
by Executive without Good Reason, Executive shall be entitled to receive (i)
Executive's Base Salary through the date of such termination and (ii) vested and
earned (in accordance with the Company's applicable plan or program) but unpaid
amounts under health and welfare plans, deferred compensation plans, and other
employer programs of the Company in which Executive participates.
(d) If the Employment Term is terminated upon Executive's death or
permanent disability or incapacity (as determined by the Board or the CEO in
their good faith judgment), Executive, or Executive's estate if applicable,
shall be entitled to receive the sum of (i) Executive's Base Salary through the
date of such termination and (ii) vested and earned (in accordance with the
Company's applicable plan or program) but unpaid amounts under health and
welfare plans, deferred compensation plans, and other employer programs of the
Company in which Executive participates. The amounts payable pursuant to this
paragraph 4(d) shall be payable, at the Company's discretion, in one lump sum
payment within 30 days following termination of the Employment Term or in any
other manner consistent with the Company's normal payment policies.
(e) Except as otherwise provided herein, fringe benefits hereunder (if
any) which accrue or become payable after the termination of the Employment Term
shall cease upon such termination unless otherwise specified on ATTACHMENT B to
this Agreement.
(f) For purposes of this Agreement, "CAUSE" shall mean:
(i) the willful and continued failure of Executive to perform
substantially Executive's duties under this Agreement with the Company
or one of its Subsidiaries or affiliates (other than any such failure
resulting from incapacity due to physical or mental illness), after a
written demand for substantial performance is delivered to Executive
by the CEO which specifically identifies the manner in which the CEO
believes that Executive has not substantially performed Executive's
duties, or
(ii) the willful engaging by Executive in illegal conduct or
gross misconduct which is materially and demonstrably injurious to the
Company.
For purposes of this provision, no act or failure to act, on the part
of Executive, shall be considered "willful" unless it is done, or omitted to be
done, by Executive in bad faith or without reasonable belief that Executive's
action or omission was in the best interests of the Company. Any act, or failure
to act, based upon authority given pursuant to a resolution duly adopted by the
Company's Board or upon the instructions of the CEO or based upon the advice of
counsel for the Company shall be conclusively presumed to be done, or omitted to
be done, by Executive in good faith and in the best interests of the Company.
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<PAGE> 5
(g) For purposes of this Agreement, "GOOD REASON" shall mean a
material breach by the Company of a material provision of this Agreement which
has not been cured by the Company within thirty (30) days after written notice
of noncompliance has been given by Executive to the Company.
5. CONFIDENTIAL INFORMATION. Executive acknowledges that the
information, observations and data obtained by Executive while employed by the
Company and its Subsidiaries concerning the business or affairs of the Company
or any other Subsidiary ("CONFIDENTIAL INFORMATION") are the property of the
Company or such Subsidiary. Therefore, Executive agrees that Executive shall not
disclose to any unauthorized person or use for Executive's own purposes any
Confidential Information without the prior written consent of the CEO, unless
and to the extent that the aforementioned matters become generally known to and
available for use by the public other than as a result of Executive's acts or
omissions. Executive shall deliver to the Company at the termination of the
Employment Term, or at any other time the Company may request, all memoranda,
notes, plans, records, reports, computer tapes, printouts and software and other
documents and data (and copies thereof) in any form or medium relating to the
Confidential Information, Work Product (as defined below) or the business of the
Company or any Subsidiary which Executive may then possess or have under
Executive's control. The provisions of this paragraph 5 shall survive the
termination of this Agreement for an unlimited period of time.
6. INVENTIONS AND PATENTS; EXECUTIVE'S LIKENESS AND NAME. Executive
acknowledges that all inventions, innovations, improvements, developments,
methods, designs, analyses, drawings, reports and all similar or related
information (whether or not patentable) that relate to the Company's or any of
its Subsidiaries' actual or anticipated business, research and development or
existing or future products or services and that are conceived, developed or
made by Executive while employed by the Company and its Subsidiaries ("WORK
PRODUCT") belong to the Company or such Subsidiary. Executive shall promptly
disclose such Work Product to the CEO and perform all actions reasonably
requested by the CEO (whether during or after the Employment Term) to establish
and confirm such ownership (including, without limitation, assignments,
consents, powers of attorney and other instruments). In addition, Executive
acknowledges that the exclusive use of his likeness and name in business or
commerce shall continue to belong exclusively to the Company for the remainder
of Executive's natural life.
7. NON-COMPETE, NON-SOLICITATION.
(a) Executive acknowledges that during the course of Executive's
employment with Viking he has, and in the course of Executive's employment with
the Company he shall, become familiar with the trade secrets of Viking and the
Company and with other Confidential Information concerning Viking, the Company
and its other Subsidiaries and that Executive's services have been and shall
continue to be of special, unique and extraordinary value to Viking, the Company
and its other Subsidiaries. Therefore, in consideration of the payment to
Executive of the sum set forth on Attachment A to this Agreement (the
"Noncompete Payment"), Executive
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<PAGE> 6
agrees that, until the third anniversary of the expiration or earlier
termination of the Employment Term (including any extension or renewal of the
Employment Term) (the "NONCOMPETE PERIOD"), Executive shall not directly or
indirectly own any interest in, manage, control, participate in, consult with,
render services for, or in any manner engage in any business on behalf of or in
concert with any key competitor of the Company, including without limitation the
following companies (or any affiliates of any such companies), each of which are
considered to be key competitors of the Company (collectively, the
"Competitors"): Staples; Boise-Cascade; BT Office Products; Office Max; P.P.R.
and Lyreco or with any other company which engages or decides to engage in
business competitive with the Company, including without limitation such
companies as Wal-Mart, Target Stores or any Internet or other direct mail or
direct marketing company engaged as a significant part of its business in the
sale of business or office products. Nothing herein shall prohibit Executive
from being a passive owner of not more than 2% of the outstanding stock of any
class of a corporation which is publicly traded, including any Competitor, so
long as Executive has no active participation in the business of such
corporation. Except as provided in this Agreement, there shall be no
restrictions upon Executive's employment or services.
(b) During the Employment Term and the Noncompete Period, Executive
shall not directly or indirectly through another entity (i) induce or attempt to
induce any employee of the Company or any Subsidiary to leave the employ of the
Company or such Subsidiary, or in any way interfere with the relationship
between the Company or any Subsidiary and any employee thereof, (ii) hire any
person who was an employee of the Company or any Subsidiary at any time during
the Employment Term or the Noncompete Period or (iii) on behalf of or for the
benefit of any Competitor, induce or attempt to induce any customer, supplier,
licensee, licensor, franchisee or other business relation of the Company or any
Subsidiary to cease doing business with the Company or such Subsidiary, or in
any way interfere with the relationship between any such customer, supplier,
licensee, licensor, franchisee or business relation and the Company or any
Subsidiary (including, without limitation, making any negative statements or
communications about the Company or its Subsidiaries). The Company agrees to use
its best efforts to cause its executive officers and the executive officers of
Viking not to make any negative statements or communications about Executive.
(c) If, at the time of enforcement of this paragraph 7, a court shall
hold that the duration, scope or area restrictions stated herein are
unreasonable under circumstances then existing, the parties agree that the
maximum duration, scope or area reasonable under such circumstances shall be
substituted for the stated duration, scope or area and that the court shall be
allowed to revise the restrictions contained herein to cover the maximum period,
scope and area permitted by law. Executive acknowledges that he has carefully
read and considered the provisions of this paragraph 7 and, having done so,
agrees that the restrictions set forth herein (including but not limited to the
time periods of restriction and the geographical areas of restriction) are fair
and reasonable and are reasonably required to protect the interests of the
Company, its Subsidiaries and its stockholders.
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<PAGE> 7
(d) In the event of the breach or a threatened breach by Executive of
any of the provisions of this paragraph 7, the Company, in addition and
supplementary to other rights and remedies existing in its favor, may apply to
any court of law or equity of competent jurisdiction for specific performance
and/or injunctive or other relief in order to enforce or prevent any violations
of the provisions hereof (without posting a bond or other security). In
addition, in the event of an alleged breach or violation by Executive of this
paragraph 7, the Noncompete Period shall be tolled until such breach or
violation has been duly cured.
(e) The Noncompete Payment shall be subject to income tax, social
security, and similar withholding obligations as required by law. The parties
hereto acknowledge that, except as otherwise agreed to by Executive and the
Company, any taxes that may be due and owing with respect to the Noncompete
Payment shall be the sole responsibility of Executive, and Executive hereby
agrees to indemnify and hold Company harmless if any such taxes are not paid.
The Noncompete Payment shall not be considered compensation for any benefit
calculation or other purpose under any retirement plan or other benefit plan
maintained by the Company or Viking. If the Noncompete Payment is not timely
paid, it will bear interest at the lower often percent per annum and the maximum
rate permitted by Florida law.
8. EXECUTIVE'S REPRESENTATIONS. Executive hereby represents and
warrants to the Company that (i) the execution, delivery and performance of this
Agreement by Executive do not and shall not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment or
decree to which Executive is a party or by which Executive is bound, (ii)
Executive is not a party to or bound by any employment agreement, noncompete
agreement or confidentiality agreement with any other person or entity and (iii)
upon the execution and delivery of this Agreement by the Company, this Agreement
shall be the valid and binding obligation of Executive, enforceable in
accordance with its terms. Executive hereby acknowledges and represents that
Executive has had an opportunity to consult with independent legal counsel
regarding Executive's rights and obligations under this Agreement and that
Executive fully understands the terms and conditions contained herein.
9. SURVIVAL. Paragraphs 5, 6 and 7 and paragraphs 9 through 18 shall
survive and continue in full force in accordance with their terms
notwithstanding any termination of the Employment Term.
10. NOTICES. Any notice provided for in this Agreement shall be in
writing and shall be either personally delivered, or mailed by first class mail,
return receipt requested, to the recipient at the address below indicated:
NOTICES TO EXECUTIVE:
Irwin Helford
Address: 27 Crestroad West
Rolling Hills, CA 90274
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<PAGE> 8
NOTICES TO THE COMPANY:
Office Depot, Inc.
2200 Old Germantown Road
Delray Beach, Florida 33445
Attention: Chief Financial Officer
and
Office Depot, Inc.
2200 Old Germantown Road
Delray Beach, Florida 33445
Attention: Executive Vice President - Human Resources
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement shall be deemed to have been given when so delivered
or mailed.
11. SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
12. COMPLETE AGREEMENT. This Agreement and those documents expressly
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
13. NO STRICT CONSTRUCTION. The language used in this Agreement shall
be deemed to be the language chosen by the parties hereto to express their
mutual intent, and no rule of strict construction shall be applied against any
party.
14. COUNTERPARTS; FACSIMILE SIGNATURES. This Agreement may be executed
in separate counterparts, each of which is deemed to be an original and all of
which taken together constitute one and the same agreement. This Agreement may
be executed by any party by delivery of a facsimile signature, which signature
shall have the same force and effect as an original signature. Any party which
delivers a facsimile signature shall promptly thereafter deliver an originally
executed signature to the other party(ies); provided, however, that the failure
to deliver an original signature page shall not affect the validity of any
signature delivered by facsimile.
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<PAGE> 9
15. SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Executive, the Company and their
respective heirs, successors and assigns, except that Executive may not assign
Executive's rights or delegate Executive's obligations hereunder without the
prior written consent of the Company.
16. CHOICE OF LAW. All issues and questions concerning the
construction, validity, enforcement and interpretation of this Agreement and the
exhibits and schedules hereto shall be governed by, and construed in accordance
with, the laws of the State of Florida, without giving effect to any choice of
law or conflict of law rules or provisions (whether of the State of Florida or
any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
17. AMENDMENT AND WAIVER. The provisions of this Agreement may be
amended or waived only with the prior written consent of the Company and
Executive, and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement.
18. ARBITRATION. Any controversy which may arise between Executive and
the Company with respect to the construction, interpretation or application of
any of the terms, provisions or conditions of this agreement or any monetary
claim arising from or relating to this agreement will be submitted to final and
binding arbitration in West Palm Beach, Florida, in accordance with the rules of
the American Arbitration Association then in effect.
19. INCORPORATION OF ATTACHMENTS BY REFERENCE. The attachments to this
Agreement are incorporated by reference and made a part hereof as if set forth
at length herein.
* * *
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<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
OFFICE DEPOT, INC.
By: /s/ Thomas Kroeger
----------------------
Name: Thomas Kroeger
Its: Executive Vice President,
Human Resources
EXECUTIVE
/s/ Irwin Helford
-------------------------
Name: Irwin Helford
<PAGE> 11
ATTACHMENT A
PAYMENTS DUE TO EXECUTIVE
1. TERMINATION PAYMENT. In consideration of his agreement to terminate his
previous Employment Agreement with Viking and to enter into this Employment
Agreement, Executive shall receive the sum of $750,000.
2. BONUS PAYMENT. For the period of his former employment with Viking, from
January 1, 1999 through and including September 30, 1999, Executive shall
receive his target bonus from his former full time employment with Viking in the
amount of $1,500,000. It is agreed that on and as of September 30, 1999, the
amount of such bonus would otherwise not be determined and that the parties are
agreeing to this amount of bonus for Executive in lieu of calculating such bonus
at the end of the fiscal year of Viking and that such payment is provided
pursuant to this Agreement and not to any performance of the Company. Such
payment shall be made not later than October 15, 1999.
3. Non-Compete Agreement. In consideration of Executive's agreements in
paragraph 7 of this Agreement, he shall receive the sum of $4,000,000, payable
in a lump sum not later than October 15, 1999.
IT IS EXPRESSLY UNDERSTOOD AND AGREED THAT ALL PAYMENTS BEING MADE TO EXECUTIVE
HEREUNDER SHALL BE SUBJECT TO DEDUCTIONS FOR APPLICABLE FEDERAL, STATE AND LOCAL
TAXES, FICA AND MEDICARE PAYMENTS AND ALL OTHER APPLICABLE WITHHOLDING AMOUNTS.
<PAGE> 12
ATTACHMENT B
BENEFITS TO WHICH EXECUTIVE IS ENTITLED
1. HEALTH INSURANCE. Provided this Agreement has not been terminated by
Executive without Good Reason or by the Company for Cause, Executive
and his eligible dependents shall be entitled to health insurance
coverage comparable to the health insurance Executive and his eligible
dependents have received during the period of his prior employment
with Viking for the Term of this Agreement and ending at the end of
Executive's natural life. In the event this Agreement should be
terminated by the Company without Cause or by the Executive for Good
Reason, such benefits shall continue as provided herein as if such
termination had not occurred. Such health insurance may be under the
terms of the existing policy of insurance provided to Executive or
pursuant to any other insurance plan selected by the Company which
provides comparable coverage and benefits.
2. SPLIT DOLLAR LIFE INSURANCE. PROVIDED THIS AGREEMENT has not been
terminated by Executive without Good Reason or by the Company for
Cause, the Company shall continue the policy of split dollar life
insurance on the life of Executive.
3. RESTRICTED STOCK PLAN. Executive shall continue to participate in the
Restricted Stock Plan in which he currently participates during the
duration of this Agreement.
4. NO OTHER BENEFITS. Executive shall otherwise receive none of the
benefits to which he may formerly have been entitled as an employee of
Viking, including without limitation, automobile allowance, tax and
financial planning, participation in other health and welfare plans,
if any.
IT is expressly UNDERSTOOD THAT ALL benefits payable TO EXECUTIVE WHICH ARE
SUBJECT TO federal, state or local income taxation shall be provided net of any
required withholding FOR SUCH TAXES.
<PAGE> 1
Exhibit 10.10
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of May 17, 1998 between Office Depot, Inc., a
Delaware corporation (the "COMPANY"), and Bruce Nelson ("EXECUTIVE").
In consideration of the mutual covenants contained herein and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. EMPLOYMENT
The Company shall employ Executive, and Executive hereby accepts
employment with the Company, upon the terms and conditions set forth in this
Agreement for the period beginning on the date hereof and ending as provided in
paragraph 4 hereof (the "Employment Term").:
2. POSITION AND DUTIES
(a) During the Employment Period, Executive shall serve as a CEO and
President of Viking Products, Inc. and shall have the normal duties,
responsibilities and authority of an Executive Officer of the Company, subject
to the power of the Company's chief executive officer ("CEO") to expand or limit
such duties, responsibilities and authority.
(b) Executive shall devote Executive's best efforts and Executive's
full business time and attention (except for permitted vacation periods and
reasonable periods of illness or other incapacity) to the business and affairs
of the Company and its Subsidiaries; PROVIDED THAT Executive shall, with the
prior approval of the CEO, be allowed to serve as (i) a director or officer of
any non-profit organization including trade, civic, educational or charitable
organizations, or (ii) a director of any corporation which is not competing with
the Company or any of its Subsidiaries in the office product and office supply
industry so long as such duties do not materially interfere with the performance
of Executive's duties or responsibilities under this Agreement. Executive shall
perform Executive's duties and responsibilities under this Agreement to the best
of Executive's abilities in a diligent, trustworthy, businesslike and efficient
manner.
(c) For purposes of this Agreement, "SUBSIDIARIES" shall mean any
corporation of which the securities having a majority of the voting power in
electing directors are, at the time of determination, owned by the Company,
directly or through one or more Subsidiaries.
3. BASE SALARY AND BENEFITS
(a) Initially, Executive's base salary shall be $600,000 per annum (the
"BASE SALARY"), which salary shall be payable in regular installments in
accordance with the Company's general payroll practices and shall be subject to
customary withholding. Executive's Base Salary shall be reviewed at least
annually by the CEO and shall be subject
<PAGE> 2
2
to adjustment as the CEO shall determine based on among other things, market
practice and performance. In addition, during the Employment Term, Executive
shall be entitled to participate in certain of the Company's long term incentive
programs established currently or in the future by the Company for which
officers of the Company then at Executive's level are generally eligible
(including, but not limited to, stock option, restricted stock, performance
unit/share plans or long-term cash plans).
(b) In addition to the Base Salary, Executive shall be entitled to
participate in the Company's Management Incentive Plan (the "Bonus Plan") as
administered by the Compensation Committee. If the Compensation Committee (or
the Company's Board of Directors (the "Board")) modifies such Bonus Plan during
the Employment Term, Executive shall continue to participate at a level no lower
than the highest established for any officer of the Company then at Executive's
level.
(c) Executive shall be entitled to paid vacation in accordance with the
Company's general payroll practices for officers of the Company then at
Executive's level.
(d) The Company shall reimburse Executive for all reasonable expenses
incurred by Executive in the course of performing Executive's duties under this
Agreement which are consistent with the Company's policies in effect from time
to time with respect to travel, entertainment and other business expenses,
subject to the Company's requirements with respect to reporting and
documentation of such expenses.
(e) Executive will be entitled to all benefits currently or in the
future maintained for officers of the Company then at Executive's level,
including without limitation: medical and dental insurance, life insurance and
short-term and long-term disability insurance, supplemental health and life
insurance, profit sharing and retirement benefits.
4. TERM
(a) The Employment Term shall end on the second anniversary of the
Merger (as defined in the Agreement and Plan of Merger among Office Depot, Inc.,
VK Acquisition Corp. and Viking Office Products Inc. dated May 17,1998;
PROVIDED THAT (i) the Employment Term shall be extended for one year in the
event that written notice of the tennination of this Agreement is not given by
one party hereof to the other at least six months prior to the end of the
Employment Term PROVIDED FURTHER that (ii) the Employment Term shall terminate
prior to such date (A) upon Executive's death or permanent disability or
incapacity (as determined by the Board in its good faith judgment), (B) upon the
mutual agreement of the Company and Executive, (C) by the Company's termination
of this Agreement for Cause (as defined below) or without Cause or (D) by
Executive's termination of this Agreement for Good Reason (as defined below) or
without Good Reason.
(b) If the Employment Term is terminated by the Company without Cause
or is terminated by the Executive for Good Reason, Executive (and Executive's
family with respect to clause (iii) below) shall be entitled to receive (i)
Executive's Base Salary through
<PAGE> 3
3
the second anniversary of such termination and Executive's Pro Rata Bonus, if
and only if Executive has not breached the provisions of paragraph 5, 6 and 7
hereof, (ii) vested and earned (in accordance with the Company's applicable plan
or program) but unpaid amounts under incentive plans, health and welfare plans,
deferred compensation plans, and other employer programs of the Company which
Executive participates (other than the Pro Rata Bonus) and (iii) life insurance
and medical insurance through the second anniversary of such termination
pursuant to the Company's insurance programs to the extent Executive
participated immediately prior to the date of such termination; PROVIDED THAT
the insurance Executive or Executive's family is entitled to pursuant to this
clause (iii) shall be reduced by the amount of any such insurance Executive or
Executive's family is entitled to receive as a result of any other employment.
The amounts payable pursuant to paragraph 4(b)(i) and (ii) shall be payable, at
the Company's discretion, in one lump sum payment within 30 days following
termination of the Employment Term or in any other manner consistent with the
Company's normal payment policies.
(c) If the Employment Term is terminated by the Company for Cause or by
the Executive without Good Reason, Executive shall be entitled to receive (i)
Executive's Base Salary through the date of such termination and (ii) vested and
earned (in accordance with the Company's applicable plan or program) but unpaid
amounts under incentive plans, health and welfare plans, deferred compensation
plans, and other employer programs of the Company which Executive participates;
provided, however, Executive shall not be entitled to payment of a Pro Rata
Bonus.
(d) If the Employment Term is terminated upon Executive's death or
permanent disability or incapacity (as determined by the Board in its good faith
judgment), Executive, or Executive's estate if applicable, shall be entitled to
receive the sum of (i) Executive's Base Salary through the date of such
termination and (ii) vested and earned (in accordance with the Company's
applicable plan or program) but unpaid amounts under incentive plans, health and
welfare plans, deferred compensation plans, and other employer programs of the
Company which Executive participates. The amount payable pursuant to this
paragraph 4(d) shall be payable, at the Company's discretion, in one lump sum
payment within 30 days following termination of the Employment Term or in any
other manner consistent with the Company's normal payment policies.
(e) Except as otherwise provided herein, fringe benefits and bonuses
hereunder (if any) which accrue or become payable after the termination of the
Employment Term shall cease upon such termination.
(f) For purposes of the Agreement, Agreement, "CAUSE" shall mean:
(i) the willful and continued failure of the Executive to
perform substantially the Executive's duties with the Company or one of
its affiliates (other than any such failure resulting from incapacity
due to physical or mental illness), after a written demand for
substantial performance is delivered to the Executive by the Board or
the CEO which specifically identifies the manner in which the Board or
the
<PAGE> 4
4
CEO believes that the Executive has not substantially performed the
Executive's Duties, or
(ii) the willful engaging by the Executive in illegal conduct
or gross misconduct which is materially and demonstrably injurious to
the Company.
For purposes of this provision, no act of failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interest of the Company. Any act,
or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the CEO or based upon the
advice of counsel for the Company shall be conclusively presumed to be done, or
omitted to be done, by the Executive in good faith and in the best interest of
the Company.
(g) For purposes of this Agreement, "GOOD REASON" shall mean a material
breach by the Company of a material provision of this Agreement which has not
been cured by the Company within thirty (30) days after written notice of
noncompliance has been given by Executive to the Company.
(h) For purposes of the Agreement, "PRO RATA BONUS" shall mean the sum
of (i) the pro rata portion (calculated as if the "target" amount under such
plan has been reached) under any current annual incentive plan from the
beginning of the year of termination through the date of termination and (ii) if
and to the extent Executive is vested, the pro rata portion (calculated as if
the "target" amount under such plan has been reached) under any long-term
incentive plan or performance plan from the beginning of the period of
determination through the date of termination.
5. CONFIDENTIAL INFORMATION. Executive acknowledges that the
information, observations and data obtained by Executive while employed by the
Company and its Subsidiaries concerning the business or affairs of the Company
or any other Subsidiary ("CONFIDENTIAL INFORMATION") are the property of the
Company or such Subsidiary. Therefore, Executive agrees that Executive shall not
disclose to any unauthorized person or use for Executive's own purposes any
Confidential Information without the prior written consent of the Board or the
CEO, unless and to the extent that the aforementioned matters become generally
known to and available for use by the public other than as a result of
Executive's acts or omissions. Executive shall deliver to the Company at
termination of the Employment Term, or at any other time the Company may
request, all memoranda, notes, plans, record, reports, computer tapes, printouts
and software and other documents and data (and copies therein) in any form or
medium relating to the Confidential Information, Work Product (as defined below)
or the business of the Company or any Subsidiary that Executive may then possess
or have under Executive's control.
6. INVENTIONS AND PATENTS. Executive acknowledges that all inventions,
innovations, improvements, development, methods, designs, analyses, drawings,
reports and all similar or related information (whether or not patentable) that
relate to the Company's or any of its Subsidiaries' actual or anticipated
business, research and development or existing or
<PAGE> 5
5
future products or services and that are conceived, developed or made by
Executive while employed by the Company and its Subsidiaries ("WORK PRODUCT")
belong to the Company or such Subsidiary. Executive shall promptly disclose such
Work Product to the Board or the CEO and perform all actions reasonably
requested by the Board or the CEO (whether during or after the Employment Term)
to establish and confirm such ownership (including, without limitation,
assignments, consents, powers of attorney and other instruments).
7. NON-COMPETE, NON-SOLICITATION.
(a) In further consideration of the compensation to be paid to
Executive hereunder, Executive acknowledges that in the course of Executive's
employment with the Company Executive shall become familiar with the Company's
trade secrets and with other Confidential Information concerning the Company and
its Subsidiaries and that Executive's services shall be of special, unique and
extraordinary value to the Company and its Subsidiaries. Therefore, Executive
agrees that, during the Employment Term and for one year thereafter (the
"NONCOMPETE PERIOD"), Executive shall not directly or indirectly own any
interest in, manage, control, participate in, consult with, render services for,
or in any manner engage in any business competing with the businesses of the
Company or its Subsidiaries, as such businesses exist or are in process on the
date of the termination of Executive's employment, within any geographical area
in which the Company or its Subsidiaries engage or plan to engage in such
businesses. Nothing herein shall prohibit Executive from being a passive owner
of not more than 2% of the outstanding stock of any class of a corporation which
is publicly traded, so long as Executive has no active participation in the
business of such corporation.
(b) During the Noncompete Period, Executive shall not directly or
indirectly through another entity (i) induce or attempt to induce any employee
of the Company or any Subsidiary to leave the employ of the Company or such
Subsidiary, or in any way interfere with the relationship between the Company or
any Subsidiary and any employee thereof, (ii) hire any person who was an
employee of the Company or any Subsidiary at any time during the Employment Term
or (iii) induce or attempt to induce any customer, supplier, licensee, licensor,
franchisee or other business relation of the Company or any Subsidiary to cease
doing business with the Company or such Subsidiary, or in any way interfere with
the relationship between any such customer, supplier, licensee or business
relation and the Company or any Subsidiary (including, without limitation,
making any negative statements or communications about the Company or its
Subsidiaries).
(c) If, at the time of enforcement of this paragraph 7, a court shall
hold that the duration, scope or area restrictions stated herein are
unreasonable under circumstances then existing, the parties agree that the
maximum duration, scope or area reasonable under such circumstances shall be
substituted for the stated duration, scope or area and that the court shall be
allowed to revise the restrictions contained in this paragraph 7 are reasonable.
(d) In the event of the breach or a threatened breach by Executive of
any of the provisions of this paragraph 7, the Company, in addition and
supplementary to other rights and remedies existing in its favor, may apply to
any court of law or equity of
<PAGE> 6
6
competent jurisdiction for specific performance and/or injunctive or other
relief in order to enforce or prevent any violations for the provisions hereof
(without posting a bond or other security). In addition, in the event of any
alleged breach or violation by Executive of this paragraph 7, the Noncompete
Period shall be tolled until such breach or violation has been duly cured.
8. EXECUTIVE'S REPRESENTATIONS. Executive hereby represents and
warrants to the Company that (i) the execution, delivery and performance of this
Agreement by Executive do not and shall not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment or
decree to which Executive is a party or by which Executive is bound, (ii)
Executive is not a party to or bound by any employment agreement, noncompete
agreement or confidentiality agreement with any other person or entity and (iii)
upon the execution and delivery of this Agreement by the Company, this Agreement
shall be the valid and binding obligation of Executive, enforceable in
accordance with its terms. Executive hereby acknowledges and represents that
Executive has had an opportunity to consult with independent legal counsel
regarding Executive's rights and obligations under this Agreement and that
Executive fully understands the terms and conditions contained herein.
9. SURVIVAL. Paragraphs 5, 6 and 7 and paragraphs 9 through 16 shall
survive and continue in full force in accordance with their terms
notwithstanding any termination of the Employment Term.
10. NOTICES. Any notice provided for in this Agreement shall be in
writing and shall be either personally delivered, or mailed by first class mail,
return receipt requested, to the recipient at the address below indicated:
NOTICE TO EXECUTIVE:
Name: Bruce Nelson
Address: 67 Marguerite
Rancho Palos Verdes, CA 90274
NOTICE TO THE COMPANY:
Office Depot, Inc.
2200 Old Germantown Road
Delray Beach, Florida 33445
Attention: Chief Financial Officer
<PAGE> 7
7
and
Office Depot, Inc.
2200 Germantown Road
Defray Beach, Florida 33445
Attention: Executive Vice President - Human Resources
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement shall be deemed to have been given when so delivered
or mailed.
11. SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not effect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
12. COMPLETE AGREEMENT. This Agreement and those documents expressly
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
13. NO STRICT CONSTRUCTION. The language used in this Agreement shall
be deemed to be the language chosen by the parties hereto to express their
mutual intent, and no rule of strict construction shall be applied against any
party.
14. COUNTERPARTS. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
15. SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Executive, the Company and their
respective heirs, successors and assigns, except that Executive may not assign
Executive's rights or delegate Executive's obligations hereunder without the
prior written consent of the Company.
16. CHOICE OF LAW. All issues and questions concerning the
construction, validity, enforcement and interpretation of this Agreement and the
exhibits and schedules hereto shall be governed by, and construed in accordance
with, the laws of the State of Florida, without giving effect to any choice of
law or conflict of law rules or provisions (whether of the State of Florida or
any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
<PAGE> 8
8
17. AMENDMENT AND WAIVER. The provisions of this Agreement may be
amended or waived only with the prior written consent of the Company and
Executive, and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement.
* * * * *
<PAGE> 9
9
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
OFFICE DEPOT, INC.
By: /s/ Thomas Kroeger
---------------------------------
Name: Thomas Kroeger
Its: Executive Vice President,
Human Resources
EXECUTIVE
/s/ Bruce Nelson
------------------------------------
Name: Bruce Nelson
<PAGE> 1
EXHIBIT 10.11
EXECUTIVE EMPLOYMENT AGREEMENT
(For Executive Officers Who Also Have a Change of Control Employment Agreement)
THIS AGREEMENT is made as of March 30, 1998 between Office
Depot, Inc., a Delaware corporation (the "COMPANY"), and Shawn McGhee
("EXECUTIVE").
In consideration of the mutual covenants contained herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. EMPLOYMENT.
(a) The Company shall employ Executive, and Executive hereby
accepts employment with the Company, upon the terms and conditions set forth in
this Agreement for the period beginning on the date hereof and ending as
provided in paragraph 4 hereof (the "EMPLOYMENT TERM").
(b) The parties hereto have entered into an Employment
Agreement dated as of ____________ by and between the Company and the Executive
(the "Change of Control Employment Agreement") which, by its terms, takes effect
during the "Employment Period" as defined in such agreement. During any such
Employment Period under the Change of Control Employment Agreement, the terms
and provisions of the Change of Control Employment Agreement shall control to
the extent such terms and provisions are in conflict with the terms and
provisions of this Agreement. In addition, during such Employment Period, the
Employment Term hereunder shall be tolled and upon expiration of the Employment
Period under the Change of Control Employment Agreement the Employment Term
hereunder shall recommence.
2. POSITION AND DUTIES.
(a) During the Employment Period, Executive shall serve as
Executive Vice President Merchandising and Marketing of the Company and shall
have the normal duties, responsibilities and authority attendant to such
position, subject to the power of the Company's chief executive officer ("CEO")
or Board of Directors (the "Board") to expand or limit such duties,
responsibilities and authority.
(b) Executive shall report to the President and Chief
Operating Officer, and Executive shall devote Executive's best efforts and
Executive's full business time and attention (except for permitted vacation
periods and reasonable periods of illness or other incapacity) to the business
and affairs of the Company and its Subsidiaries; PROVIDED that Executive shall,
with the prior written approval of the CEO, be allowed to serve as (i) a
director or officer of any non-profit organization including trade, civic,
educational or charitable organizations, or (ii) a director of any corporation
which is not competing with the Company or any of its Subsidiaries in the office
product and office supply industry so long as such duties do not materially
interfere with the performance
<PAGE> 2
of Executive's duties or responsibilities under this Agreement. Executive shall
perform Executive's duties and responsibilities under this Agreement to the best
of Executive's abilities in a diligent, trustworthy, businesslike and efficient
manner.
(c) Executive shall be based at or in the vicinity of the
Company's headquarters but may be required to travel as necessary to perform
Executive's duties and responsibilities under this Agreement.
(d) For purposes of this Agreement, "SUBSIDIARIES" shall mean
any corporation of which the securities having a majority of the voting power in
electing directors are, at the time of determination, owned by the Company,
directly or through one of more Subsidiaries.
3. BASE SALARY AND BENEFITS.
(a) Initially, Executive's base salary shall be $425,000 per
annum (the "Base Salary"), which salary shall be payable in regular installments
in accordance with the Company's general payroll practices and shall be subject
to customary withholding. Executive's Base Salary shall be reviewed at least
annually by the Compensation Committee of the Board and shall be subject to
adjustment, but not reduction, as they shall determine based on among other
things, market practice and performance. In addition, during the Employment
Term, Executive shall be entitled to participate in certain of the Company's
long term incentive programs established currently or in the future by the
Company for which officers of the Company then at Executive's level, are
generally eligible (including, but not limited to, stock option, restricted
stock, performance unit/share plans or long-term cash plans).
(b) In addition to the Base Salary, Executive shall be
entitled to participate in the Company's Management Incentive Plan (the "Bonus
Plan") as administered by the Board or the Compensation Committee. If the Board
or the Compensation Committee modifies such Bonus Plan during the Employment
Term, Executive shall continue to participate at a level no lower than the
highest level established for any officer of the Company then at Executive's
level. At the discretion of the Board or the Compensation Committee, Executive
may be offered from time to time the opportunity to participate in other bonus
plans of the Company in lieu of the Bonus Plan and, if Executive chooses to
participate in such plan or plans, the provisions of this paragraph 3(b) shall
be tolled during the period of such participation.
(c) Executive shall be entitled to paid vacation in
accordance with the Company's general payroll practices for officers of the
Company then at Executive's level.
(d) The Company shall reimburse Executive for all reasonable
expenses incurred by Executive in the course of performing Executive's duties
under this Agreement which are consistent with the Company's policies in effect
from time to time with respect to travel, entertainment and other business
expenses, subject to the Company's requirements with respect to reporting and
documentation of such expenses.
- 2 -
<PAGE> 3
(e) Executive will be entitled to all benefits as are, from
time to time, maintained for officers of the Company then at Executive's level,
including without limitation: medical, prescription, dental, disability,
employee life, group life, split-dollar life, accidental death and travel
accident insurance plans (collectively, "Insurance Benefits"), profit sharing
and retirement benefits.
4. TERM.
(a) The Employment Term shall end on the third anniversary of
the date of this Agreement; PROVIDED THAT (i) the Employment Term shall be
extended for one year in the event that written notice of the termination of
this Agreement is not given by one party hereof to the other at least six months
prior to the end of the Employment Term; PROVIDED FURTHER that (ii) the
Employment Term shall terminate prior to such date (A) upon Executive's death or
permanent disability or incapacity (as determined by the Board in its good faith
judgment), (B) upon the mutual agreement of the Company and Executive, (C) by
the Company's termination of this Agreement for Cause (as defined below) or
without Cause or (D) by Executive's termination of this Agreement for Good
Reason (as defined below) or without Good Reason.
(b) If the Employment Term is terminated by the Company
without Cause or is terminated by the Executive for Good Reason, Executive (and
Executive's family with respect to clause (iii) below) shall be entitled to
receive (i) Executive's Base Salary through the twenty-four month anniversary of
such termination and Executive's Pro Rata Bonus (as defined in paragraph (h)
below), if and only if Executive has not breached the provisions of paragraphs
5,6 and 7 hereof, (ii) vested and earned (in accordance with the Company's
applicable plan or program) but unpaid amounts under incentive plans, deferred
compensation plans, and other employer programs of the Company in which
Executive is then participating (other than the Pro Rata Bonus), and (iii)
Insurance Benefits through the twenty-four month anniversary of such termination
pursuant to the Company's insurance programs, as in effect from time to time, to
the extent Executive participated immediately prior to the date of such
termination; PROVIDED that any health insurance benefits which Executive becomes
entitled to receive as a result of any subsequent employment shall serve as
primary coverage for Executive and Executive's family. The amounts payable
pursuant to paragraph 4(b)(i) and (ii) shall be payable, at the Company's
discretion, in one lump sum payment within 30 days following termination of the
Employment Term or in any other manner consistent with the Company's normal
payment policies.
(c) If the Employment Term is terminated by the Company for
Cause or by the Executive without Good Reason, Executive shall be entitled to
receive (i) Executive's Base Salary through the date of such termination and
(ii) vested and earned (in accordance with the Company's applicable plan or
program) but unpaid amounts under incentive plans, health and welfare plans,
deferred compensation plans, and other employer programs of the Company which
Executive participates; provided, however, that Executive shall not be entitled
to payment of a Pro Rata Bonus.
(d) If the Employment Term is terminated upon Executive's
death or permanent disability or incapacity (as determined by the Board in its
good faith judgment), Executive, or
- 3 -
<PAGE> 4
Executive's estate if applicable, shall be entitled to receive the sum of(i)
Executive's Base Salary through the date of such termination and Executive's Pro
Rata Bonus (as defined in paragraph (h) below) and (ii) vested and earned (in
accordance with the Company's applicable plan or program) but unpaid amounts
under incentive plans, health and welfare plans, deferred compensation plans,
and other employer programs of the Company which Executive participates. The
amounts payable pursuant to this paragraph 4(d) shall be payable, at the
Company's discretion, in one lump sum payment within 30 days following
termination of the Employment Term or in any other manner consistent with the
Company's normal payment policies.
(e) Except as otherwise provided herein, fringe benefits and
bonuses (if any) which accrue or become payable after the termination of the
Employment Term shall cease upon such termination.
(f) For purposes of this Agreement, "CAUSE" shall mean:
(i) the willful and continued failure of the
Executive to perform substantially the Executive's duties with the
Company or one of its affiliates (other than any such failure resulting
from incapacity due to physical or mental illness), after a written
demand for substantial performance is delivered to the Executive by the
Board or the CEO which specifically identifies the manner in which the
Board or the CEO believes that the Executive has not substantially
performed the Executive's duties, or
(ii) the willful engaging by the Executive in illegal
conduct or gross misconduct which is materially and demonstrably
injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the CEO or based upon the
advice of counsel for the Company shall be conclusively presumed to be done, or
omitted to be done, by the Executive in good faith and in the best interests of
the Company. The cessation of employment of the Executive shall not be deemed to
be for Cause unless and until there shall have been delivered to the Executive a
copy of a resolution duly adopted by the affirmative vote of not less than three
quarters of the entire membership of the Board at a meeting of the Board called
and held for such purpose (after reasonable notice is provided to the Executive
and the Executive is given an opportunity, together with counsel, to be heard
before the Board), finding that, in the good faith opinion of the Board, the
Executive is guilty of the conduct described in subparagraph (i) or (ii) above,
and specifying the particulars thereof in detail.
(g) For purposes of this Agreement, "GOOD REASON" shall mean:
- 4 -
<PAGE> 5
(i) the assignment to the Executive of any duties
inconsistent with the Executive's position (including status, offices, titles
and reporting requirements), authority, duties or responsibilities as
contemplated by paragraph 2 of this Agreement, or any other action by the
Company which results in a diminution in such position, authority, duties or
responsibilities, excluding for this purpose an isolated, insubstantial and
inadvertent action not taken in bad faith and which is remedied by the Company
promptly after receipt of notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of
the provisions of paragraph 3 of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given by the
Executive;
(iii) the Company's requiring the Executive to be
based at any location other than as provided in paragraph 2(c) hereof; or
(iv) any purported termination by the Company of the
Executive's employment otherwise than as expressly permitted by this Agreement.
(h) For purposes of this Agreement, "PRO RATA BONUS" shall
mean the sum of(i) the pro rata portion (calculated as if the "target" amount
under such plan has been reached) under any current annual incentive plan from
the beginning of the year of termination through the date of termination and
(ii) if and to the extent Executive is vested, the pro rata portion (calculated
as if the "target" amount under such plan has been reached) under any long-term
incentive plan or performance plan from the beginning of the period of
determination through the date of termination.
5. CONFIDENTIAL INFORMATION. Executive acknowledges that the
information, observations and data obtained by Executive while employed by the
Company and its Subsidiaries concerning the business or affairs of the Company
or any other Subsidiary ("CONFIDENTIAL INFORMATION") are the property of the
Company or such Subsidiary. Therefore, Executive agrees that Executive shall not
disclose to any unauthorized person or use for Executive's own purposes any
Confidential Information without the prior written consent of the Board or the
CEO, unless and to the extent that the aforementioned matters become generally
known to and available for use by the public other than as a result of
Executive's acts or omissions. Executive shall deliver to the Company at the
termination of the Employment Term, or at any other time the Company may
request, all memoranda, notes, plans, records, reports, computer tapes,
printouts and software and other documents and data (and copies thereof) in any
form or medium relating to the Confidential Information, Work Product (as
defined below) or the business of the Company or any Subsidiary that Executive
may then possess or have under Executive's control.
6. INVENTIONS AND PATENTS. Executive acknowledges that all
inventions, innovations, improvements, developments, methods, designs, analyses,
drawings, reports and all similar or related information (whether or not
patentable) that relate to the Company's or any of its Subsidiaries' actual or
anticipated business, research and development or existing or future products
- 5 -
<PAGE> 6
or services and that are conceived, developed or made by Executive while
employed by the Company and its Subsidiaries ("WORK PRODUCT") belong to the
Company or such Subsidiary. Executive shall promptly disclose such Work Product
to the Board or the CEO and perform all actions reasonably requested by the
Board or the CEO (whether during or after the Employment Term) to establish and
confirm such ownership (including, without limitation, assignments, consents,
powers of attorney and other instruments).
7. NON-COMPETE, NON-SOLICITATION.
(a) In further consideration of the compensation to be paid
to Executive hereunder, Executive acknowledges that in the course of Executive's
employment with the Company Executive shall become familiar with the Company's
trade secrets and with other Confidential Information concerning the Company and
its Subsidiaries and that Executive's services shall be of special, unique and
extraordinary value to the Company and its Subsidiaries. Therefore, Executive
agrees that, during the Employment Term and for one year thereafter (the
"NONCOMPETE PERIOD"), Executive shall not directly or indirectly own any
interest in, manage, control, participate in, consult with, render services for,
or in any manner engage in any business competing with the businesses of the
Company or its Subsidiaries, as such businesses exist or are in process on the
date of the termination of Executive's employment, within any geographical area
in which the Company or its Subsidiaries engage or plan to engage in such
businesses. Nothing herein shall prohibit Executive from being a passive owner
of not more than 2% of the outstanding stock of any class of a corporation which
is publicly traded, so long as Executive has no active participation in the
business of such corporation.
(b) During the Noncompete Period, Executive shall not
directly or indirectly through another entity (i) induce or attempt to induce
any employee of the Company or any Subsidiary to leave the employ of the Company
or such Subsidiary, or in any way interfere with the relationship between the
Company or any Subsidiary and any employee thereof, (ii) hire any person who was
an employee of the Company or any Subsidiary at any time during the Employment
Term or (iii) induce or attempt to induce any customer, supplier, licensee,
licensor, franchisee or other business relation of the Company or any Subsidiary
to cease doing business with the Company or such Subsidiary, or in any way
interfere with the relationship between any such customer, supplier, licensee,
licensor, franchisee, or business relation and the Company or any Subsidiary
(including, without limitation, making any negative statements or communications
about the Company or its Subsidiaries).
(c) If, at the time of enforcement of this paragraph 7, a
court shall hold that the duration, scope or area restrictions stated herein are
unreasonable under circumstances then existing, the parties agree that the
maximum duration, scope or area reasonable under such circumstances shall be
substituted for the stated duration, scope or area and that the court shall be
allowed to revise the restrictions contained herein to cover the maximum period,
scope and area permitted by law. Executive agrees that the restrictions
contained in this paragraph 7 are reasonable.
- 6 -
<PAGE> 7
(d) In the event of the breach or a threatened breach by
Executive of any of the provisions of this paragraph 7, the Company, in addition
and supplementary to other rights and remedies existing in its favor, may apply
to any court of law or equity of competent jurisdiction for specific performance
and/or injunctive or other relief in order to enforce or prevent any violations
of the provisions hereof (without posting a bond or other security). In
addition, in the event of an alleged breach or violation by Executive of this
paragraph 7, the Noncompete Period shall be tolled until such breach or
violation has been duly cured.
8. EXECUTIVE'S REPRESENTATIONS. Executive hereby represents
and warrants to the Company that (i) the execution, delivery and performance of
this Agreement by Executive do not and shall not conflict with, breach, violate
or cause a default under any contract, agreement, instrument, order, judgment or
decree to which Executive is a party or by which Executive is bound, (ii)
Executive is not a party to or bound by any employment agreement, noncompete
agreement or confidentiality agreement with any other person or entity and (iii)
upon the execution and delivery of this Agreement by the Company, this Agreement
shall be the valid and binding obligation of Executive, enforceable in
accordance with its terms. Executive hereby acknowledges and represents that
Executive has had an opportunity to consult with independent legal counsel
regarding Executive's rights and obligations under this Agreement and that
Executive fully understands the terms and conditions contained herein.
9. SURVIVAL. Paragraphs 5, 6 and 7 and paragraphs 9 through
16 shall survive and continue in full force in accordance with their terms
notwithstanding any termination of the Employment Term.
10. NOTICES. Any notice provided for in this Agreement shall
be in writing and shall be either personally delivered, or mailed by first class
mail, return receipt requested, to the recipient at the address below indicated:
NOTICES TO EXECUTIVE:
Name: Shawn McGhee
Address: ______________________
NOTICES TO THE COMPANY:
Office Depot, Inc.
2200 Germantown Road
Delray Beach, Florida 33445
Attention: Chief Financial Officer
and
- 7 -
<PAGE> 8
Office Depot, Inc.
2200 Germantown Road
Delray Beach, Florida 33445
Attention: Executive Vice President - Human Resources
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement shall be deemed to have been given when so delivered
or mailed.
11. SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
12. COMPLETE AGREEMENT. This Agreement and those documents
expressly referred to herein and other documents of even date herewith embody
the complete agreement and understanding among the parties and supersede and
preempt any prior understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter hereof in
any way (provided, however that during the "Employment Period," as defined in
the Change of Control Employment Agreement, the terms and provision of the
Change of Control Employment Agreement shall be effective and shall control to
the extent there is any conflict between such agreement and this Agreement).
13. NO STRICT CONSTRUCTION. The language used in this
Agreement shall be deemed to be the language chosen by the parties hereto to
express their mutual intent, and no rule of strict construction shall be applied
against any party.
14. COUNTERPARTS. This Agreement maybe executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
15. SUCCESSORS AND ASSIGNS. This Agreement is intended to
bind and inure to the benefit of and be enforceable by Executive, the Company
and their respective heirs, successors and assigns, except that Executive may
not assign Executive's rights or delegate Executive's obligations hereunder
without the prior written consent of the Company.
16. CHOICE OF LAW. All issues and questions concerning the
construction, validity, enforcement and interpretation of this Agreement and the
exhibits and schedules hereto shall be governed by, and construed in accordance
with, the laws of the State of Florida, without giving effect to any choice of
law or conflict of law rules or provisions (whether of the State of Florida or
any
- 8 -
<PAGE> 9
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
17. AMENDMENT AND WAIVER. The provisions of this Agreement
may be amended or waived only with the prior written consent of the Company and
Executive, and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement.
* * * * *
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<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement as of the date first written above.
OFFICE DEPOT, INC.
By: /s/ Tom Kroeger
--------------------------------
Name: Tom Kroeger
Its: Executive Vice President,
Human Resources
EXECUTIVE
/s/ Shawn McGhee
------------------------------------
Name: Shawn McGhee
- 10 -
<PAGE> 1
Exhibit 13.1
Five-Year Financial Highlights Office Depot, Inc. and Subsidiaries
Statements of Earnings Data:
(In thousands, except per share amounts and statistical data)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Sales $10,263,280 $8,997,738 $8,100,319 $7,250,931 $6,233,985
Cost of goods sold and occupancy costs 7,450,310 6,484,464 5,963,521 5,395,223 4,650,240
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 2,812,970 2,513,274 2,136,798 1,855,708 1,583,745
Store and warehouse operating and selling expenses 1,961,037 1,642,042 1,443,192 1,280,107 1,041,514
Pre-opening expenses 23,628 17,150 6,609 9,827 17,746
General and administrative expenses 381,611 330,194 272,022 222,714 195,816
Merger and restructuring costs (7,104) 119,129 16,094 -- --
Store closure and relocation costs 40,425 -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Operating profit(1) 413,373 404,759 398,881 343,060 328,669
Interest income 30,176 25,309 7,570 3,726 4,004
Interest expense (26,148) (22,356) (21,680) (26,378) (22,741)
Miscellaneous expense, net(1) (3,514) (18,985) (13,180) (8,325) (7,075)
- --------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 413,887 388,727 371,591 312,083 302,857
Income taxes 156,249 155,531 136,730 115,865 117,797
- --------------------------------------------------------------------------------------------------------------------------
Net earnings $ 257,638 $ 233,196 $ 234,861 $ 196,218 $ 185,060
- --------------------------------------------------------------------------------------------------------------------------
Earnings per share(2)
Basic $ .71 $ .64 $ .65 $ .55 $ .53
Diluted .69 .61 .62 .53 .50
STATISTICAL DATA:
- --------------------------------------------------------------------------------------------------------------------------
Facilities open at end of period:
United States and Canada:
Office supply stores 825 702 602 561 501
Customer service centers 30 30 33 32 31
Call centers 7 8 8 6 5
International(3)
Office supply stores 118 87 39 21 9
Customer service centers 17 17 16 12 8
Call centers 14 13 12 8 5
BALANCE SHEET DATA:
- --------------------------------------------------------------------------------------------------------------------------
Working capital(1) $ 687,007 $1,293,370 $1,093,463 $ 860,280 $ 836,761
Total assets(1) 4,276,183 4,025,283 3,498,891 3,186,630 2,891,390
Long-term debt, excluding current maturities 321,099 470,711 447,020 416,757 494,910
Common stockholders' equity 1,907,720 2,028,879 1,717,638 1,469,110 1,238,820
(1)We have reclassified certain amounts in our prior year financial statements to conform with our current year presentation.
(2)Earnings per share previously reported for 1995 through 1998 have been restated to reflect the three-for-two stock split
declared on February 24, 1999.
(3)Includes facilities in our international segment that we wholly own or lease, as well as those that we operate through
licensing and joint venture agreements.
</TABLE>
Page 22 Office Depot Annual Report 1999
<PAGE> 2
Office Depot Annual Report 1999 Page 23
Office Depot, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Tabular dollar amounts are in thousands)
GENERAL
Office Depot, Inc., together with our subsidiaries, is the largest supplier of
office products and services in the world. We sell to consumers and businesses
of all sizes through our three business segments: Stores, Business Services and
International. Each of these segments is described in more detail below. In
1999, we refined our segment definitions to better reflect our current
management responsibilities. We modified our financial systems to allow us to
restate 1998 segment information. However, reliable information was not
available to restate our 1997 segment information. We operate on a 52- or
53-week fiscal year ending on the last Saturday in December.
This Management's Discussion and Analysis ("MD&A") is intended to provide
information to assist you in better understanding and evaluating our financial
condition and results of operations. We recommend that you read this MD&A in
conjunction with our Consolidated Financial Statements and the Notes to those
statements. This MD&A section contains significant amounts of forward-looking
information, and is qualified by our Cautionary Statements regarding
forward-looking information. You will find Cautionary Statements throughout
this MD&A; however, most of them can be found in a separate section immediately
following this MD&A. Without limitation, when we use the words "believe,"
"estimate," "plan," "expect," "intend," "anticipate," "continue," "project" and
similar expressions in this Annual Report, we are identifying forward-looking
statements, and our Cautionary Statements apply to these terms and expressions.
On February 24, 1999, our Board of Directors declared a three-for-two stock
split in the form of a 50% stock dividend distributed on April 1, 1999 to
stockholders of record on March 11, 1999. We have restated all share and per
share amounts in our financial statements to reflect this stock split. The
split resulted in the issuance of approximately 125 million additional shares.
STORES DIVISION
Our Stores Division sells office products, copy and print services and other
business-related services under the Office Depot(R) and the Office Place(R)
brands through our chain of high-volume office supply stores in the United
States and Canada. We opened our first office supply store in Florida in
October 1986. From our inception, we have been a leader in the retail office
supplies industry, concentrating on expanding our store base and increasing our
sales in markets with high concentrations of small- and medium-sized
businesses. As of the end of 1999, our Stores Division operated 825 office
supply stores in 46 states, the District of Columbia and Canada. Store activity
for the last five years has been as follows:
<TABLE>
<CAPTION>
Open at Open at
Beginning End Stores
of Period Opened Closed of Period Relocated
- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995 420 82 1 501 6
1996 501 60 -- 561 3
1997 561 42 1 602 2
1998 602 101 1 702 5
1999 702 130 7 825 14
- ----------------------------------------------------------------
</TABLE>
The decline in the number of stores opened in 1996 and 1997 was the result of
our proposed merger with Staples, Inc. ("Staples"), which was terminated in
July 1997. During this period of uncertainty, several of our key employees in
the real estate area left the Company. See MERGER AND RESTRUCTURING COSTS for
more information on the proposed Staples merger. After the merger discussions
with Staples were terminated, we re-staffed our real estate department and
re-launched our store expansion program.
We currently plan to open approximately 100 new retail stores in the United
States and Canada during 2000. Our real estate strategy will stress a more
analytical approach in the future, rather than focusing on a specific number of
new stores. Over the past year, we have conducted extensive customer and market
research that will provide us with a more precise evaluation of the profit
potential and return on investment of each new store opening.
BUSINESS SERVICES GROUP ("BSG")
In 1993 and 1994, we expanded into the contract business by acquiring eight
contract stationers with 18 domestic customer service centers and an
established contract sales force. These acquisitions allowed us to enter the
contract business and broaden our commercial (primarily catalog) and retail
delivery businesses. Today, BSG sells office products and services to contract
and commercial customers through our Office Depot(R) and Viking Office
Products(R) direct mail catalogs and Internet sites, and by means of our
dedicated sales force. Customer service centers ("CSCs") are warehouse and
delivery facilities, many of which also house sales offices, call centers and
administrative offices. Our CSCs perform warehousing and delivery services on
behalf of all our domestic segments of our business. Prior to our merger with
Viking Office Products, Inc. ("Viking") in August 1998, we replaced several
outdated, inefficient facilities with new CSCs and converted all of our
warehouse and order entry systems to one common technology platform.
At the end of 1999, we operated 30 CSCs in the United States, 10 of which we
added as a result of the Viking merger. We have initiated plans to integrate
our Viking and Office Depot warehouses. We expect to accomplish this
integration by either
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(Tabular dollar amounts are in thousands)
absorbing the Viking operations into existing Office Depot warehouses or by
opening new combined warehouses, depending on the particular market
circumstances. Once our integration is complete, we will operate 21 combined
CSCs after closing nine Viking and two Office Depot CSCs and opening two new
combined facilities. We have included the estimated costs of this integration
in merger and restructuring costs. See MERGER AND RESTRUCTURING COSTS for
further information. Although we are integrating our warehouse and delivery
network, we will continue to operate under both the Office Depot and Viking
brands.
In January 1998, we introduced our Office Depot public Web site
(www.officedepot.com), offering our customers the convenience of shopping
on-line. The addition of this site expanded our domestic electronic commerce
capabilities beyond the Viking public Web site (www.vikingop.com) and the
Office Depot business-to-business ("B2B") contract Web sites. In 1999, our
domestic Internet sales were $349.7 million, compared to approximately $66.5
million in 1998, an increase of 426%. Although this business channel is still
in its infancy, we believe our Internet business will provide significant
future growth opportunities for our BSG segment and our business as a whole
based on the growth rates we have experienced over the last two years.
INTERNATIONAL DIVISION
Our International Division sells office products and services to retail and
commercial customers in 17 countries outside the United States and Canada. We
launched our international direct marketing business in 1990 under the Viking
brand with the establishment of our United Kingdom operations. In December
1993, we initiated our international retail operations by opening our first
store in Colombia through a licensing agreement. We have expanded
internationally through licensing and joint venture agreements, acquisitions
and the merger with Viking. Prior to 1998, our international business was
operated entirely through licensing and joint venture agreements. In 1998, we
merged with Viking, whose international operations were wholly-owned, and we
increased our ownership in our retail operations in France to 100%. In 1999, we
increased our ownership in our retail operations in Japan to 100%.
In March 1999, we introduced our first international public Web site
(www.viking-direct.co.uk) for individuals and businesses in the United Kingdom;
and in the first quarter of 2000, we introduced our public Web site in Germany
(www.viking.de). We expect to introduce several new international Web sites in
2000 under both the Office Depot and Viking brand names, and we believe that
the Internet provides a significant opportunity for international growth.
At the end of 1999, there were 118 office supply stores in eight countries
outside the United States and Canada operating under the Office Depot name, 32
of which were wholly-owned. This compares to 87 stores in eight countries, 15
of which were wholly-owned, at the end of 1998. In addition to these retail
stores, our International Division has catalog and delivery operations in 13
countries. We operate our catalog business under the Viking brand in 11 of
these countries and under the Office Depot brand in four of these countries. At
the end of 1999, our International Division operated in Australia, Austria,
Belgium, Colombia, France, Germany, Hungary, Ireland, Israel, Italy, Japan,
Luxembourg, Mexico, the Netherlands, Poland, Thailand and the United Kingdom.
International store and CSC operations, including facilities operated through
licensing and joint venture agreements, for the last five years are detailed
below. All years prior to 1998 have been restated to include facilities
operated by Viking prior to our merger.
<TABLE>
<CAPTION>
Office Supply Stores
----------------------------------------------
Open at Open at
Beginning End
of Period Opened Closed of Period
- -------------------------------------------------------
<S> <C> <C> <C> <C>
1995 3 6 -- 9
1996 9 12 -- 21
1997 21 18 -- 39
1998 39 48 -- 87
1999 87 36 5 118
- --------------------------------------------------------
<CAPTION>
Customer Service Centers
----------------------------------------------
Open at Open at
Beginning End
of Period Opened Closed of Period
- -------------------------------------------------------
<S> <C> <C> <C> <C>
1995 4 4 -- 8
1996 8 4 -- 12
1997 12 4 -- 16
1998 16 2 1 17
1999 17 1 1 17
- -------------------------------------------------------
</TABLE>
We have begun integrating and restructuring our operations in France and Japan,
the only two international operations in which we sell under both our Office
Depot and Viking brands. In conjunction with this restructuring, we closed one
CSC and one store in Japan, with a second CSC targeted for closure. In France,
we merged our Office Depot and Viking headquarters into a new, more
conveniently located office. We expect to complete our integration in both
countries by the end of 2000. We have included the estimated costs of this
integration in merger and restructuring costs. See MERGER AND RESTRUCTURING
COSTS for further information.
RESULTS OF OPERATIONS
As discussed earlier in this MD&A, we operate in three reportable
segments -- Stores, BSG and International. Each of these segments is managed
separately primarily because it serves different customer groups. Our senior
management evaluates the performance of our business based on each segment's
operating income, which is defined as income before income taxes, interest
income
Page 24 Office Depot Annual Report 1999
<PAGE> 4
Office Depot Annual Report 1999 Page 25
Office Depot, Inc. and Subsidiaries
and expense, goodwill amortization, merger and restructuring costs and general
and administrative expenses. In 1999, we refined our segment definitions to
better reflect our current management responsibilities. All segment amounts
presented throughout this MD&A for prior years have been restated, whenever
possible, to reflect this refinement in segment definitions.
SALES
<TABLE>
<CAPTION>
1999 1998
Annual Annual
1999 1998 1997 Increase Increase
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Stores $ 5,781,336 $ 5,049,201 $ 4,716,991 15% 7%
BSG 3,164,953 2,904,984 2,503,826 9% 16%
International 1,320,875 1,047,472 882,806 26% 19%
Inter-segment (3,884) (3,919) (3,304)
- -------------------------------------------------------------------------------------
Total $ 10,263,280 $ 8,997,738 $ 8,100,319 14% 11%
=====================================================================================
</TABLE>
Overall
The largest driver of our overall sales increases has been our continued
worldwide store expansion. We increased our domestic and international store
base by 123 and 31 stores, respectively, in 1999 and by 100 and 48 stores,
respectively, in 1998. We also achieved greater penetration in the contract
market by expanding our contract sales force. Furthermore, we adopted a more
focused marketing approach to our Viking catalog circulation internationally,
allowing us to achieve additional sales growth. We believe that the growth in
our Internet business, with total domestic Internet sales increasing 426% in
1999 to $350 million, has stimulated sales growth in our BSG segment. In our
stores and warehouses worldwide, we achieved comparable sales growth of 6% in
1999 and 8% in 1998. As discussed above, in 1999, we refined our segment
definitions but were not able to restate our 1997 segment information. Had we
refined our 1997 sales, the percentage increase in our 1998 Stores Division
sales would have been somewhat greater than 7%. Similarly, the percentage
increase in our BSG for 1998 would have been somewhat smaller than 16%.
Our worldwide sales by product group were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
General office supplies 40.96% 42.85% 42.65%
Technology products 47.55% 46.02% 45.69%
Office furniture 11.49% 11.13% 11.66%
- --------------------------------------------------------------------------------
100.00% 100.00% 100.00%
================================================================================
</TABLE>
Our merchandise mix remained relatively consistent between 1997 and 1998, with
a slight shift toward the sale of technology products (i.e., computers,
business machines and related supplies), driven primarily by growth in the
business machine supplies category. In 1999, aggressive promotional programs
offering discounts on certain hardware and software when customers purchased
Internet service further expanded the sales of technology products. We have
also continued to focus on consultative selling of technology products in our
stores.
Stores
We have increased sales in our Stores Division primarily through our store
expansion program. Sales generated by non-comparable stores represented
approximately 90% and 86% of the total sales increases in our Stores Division
in 1999 and 1998, respectively. The remainder of the growth is attributable to
comparable sales increases of 2% and 3% in 1999 and 1998, respectively. We
expect to add approximately 100 new stores to our store base in 2000. We
believe that the opening of new Office Depot stores in markets where our own
and competing retailers' stores already exist has and will continue to
negatively impact our comparable store sales increases in the future. However,
we believe we will benefit from overall sales increases when we open new stores
in those markets. Our plan to close certain under-performing stores in 2000,
which we announced in the third quarter of 1999, will negatively impact our
sales growth in the short term. See STORE CLOSURE AND RELOCATION COSTS for
further information regarding the impact our store closings will have on our
revenues in 2000.
Sales of computer products (i.e., computers, printers, peripherals, software
and related supplies) in our stores, with increases of 23% in 1999 and 7% in
1998, contributed significantly to the sales increases in our Stores Division.
Growth in units sold of technology products greatly exceeded declines in
average selling prices for both years, particularly in computer hardware. Sales
of business machine supplies, which are also significant to our Stores product
mix, increased 17% in 1999 and 22% in 1998.
In late 1999, the SEC released accounting guidance which dictates that
retailers named as the legal obligor in an extended warranty service contract
must recognize the revenues and direct expenses associated with the sale of
such warranties over the service period of the contract, regardless of economic
risk. In addition, retailers that are not the legal obligor in a warranty
service contract must record their revenues net of direct expenses. We sell
extended service plans, administered by an unrelated third party, to customers
in our Stores Division. All performance obligations and risk of loss associated
with such contracts are economically transferred to our administrator, which
insures itself against any liabilities arising under such contracts, at the
time the contracts are sold to the customer.
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(Tabular dollar amounts are in thousands)
While our service plans typically extended over a period of one to four years,
we previously recognized the gross revenues and direct expenses from the sale
of these contracts immediately. Because we were named as the legal obligor in
the majority of the states in which we sell these contracts, we modified our
accounting to recognize revenue for warranty service contract sales in those
states over the service period. In those states where we are not the legal
obligor, we modified our accounting to recognize warranty revenues net of the
direct costs. We have given effect to this modification to our accounting in
our 1999 financial statements by reducing our sales and cost of goods sold by
(1) the cumulative amounts we need to defer and recognize in future periods and
(2) the cumulative amounts we need to net against our sales. We are modifying
the terms of our extended service contracts in states where we are not legally
obligated to serve as the obligor to substantially alleviate the deferral of
our warranty revenues and costs in future years. This adjustment, which only
impacted our Stores Division, resulted in a reduction in our 1999 gross profit
of $15.8 million, or $0.03 per share.
BSG
In our BSG segment, we achieved increased contract sales in 1999 and 1998
through expansion of our sales force and promotion of our B2B Web sites. Our
BSG Internet sales increased to $350 million in 1999, compared with sales of
$66 million in 1998. The number of Internet customers who have opened accounts
on-line has increased by approximately 250,000 since the end of 1998, when we
had approximately 42,000 on-line customer accounts open. In 1997, our Internet
channel consisted solely of B2B sites, which were not significant as compared
to our other sales channels. Accordingly, we did not begin capturing data on
this sales channel until January 1998, when we launched our public Internet
site. We expect continued growth in our Internet sales during 2000 as we
allocate additional resources to that sales channel.
We also experienced growth in our Viking brand catalog sales in both years,
driven by a more targeted approach to catalog promotions. We have achieved
comparatively smaller increases in our Office Depot brand catalog sales from
increased circulation of our direct mail catalogs. Sales of business machine
supplies, which are significant to our BSG product mix, increased 26% in 1999
and 55% in 1998.
International
Sales in our International Division grew as we continued to penetrate new and
existing markets with our Office Depot and Viking brands. Comparable catalog
sales increased 15% and 18% in 1999 and 1998, respectively. Our International
Division also includes the sales from our French and Japanese stores, which were
consolidated from the fourth quarter of 1998 and the second quarter of 1999,
respectively, following our purchase of the remaining 50% interest in each of
these operations from our joint venture partners. In U.S. dollars, our
comparable catalog sales increased 15% in 1999 and 18% in 1998. In local
currency, our International Division's sales increased 30% in 1999 and 19% in
1998. Competitive, political and economic conditions in international markets
in which we operate may impact our sales in the future.
GROSS PROFIT
<TABLE>
<CAPTION>
Gross
Profit %*
- -------------------------------------------------------------------------------
<S> <C> <C>
1999
Stores $ 1,303,543 22.6%
BSG 978,533 30.9%
International 532,559 40.3%
Inter-segment (1,665)
- -------------------------------------------------------------------------------
Total $ 2,812,970 27.4%
===============================================================================
1998
Stores $ 1,199,864 23.8%
BSG 884,734 30.5%
International 430,173 41.1%
Inter-segment (1,497)
- -------------------------------------------------------------------------------
Total $ 2,513,274 27.9%
===============================================================================
1997
Stores $ 1,012,127 21.5%
BSG 768,059 30.7%
International 357,792 40.5%
Inter-segment (1,180)
- -------------------------------------------------------------------------------
Total $ 2,136,798 26.4%
===============================================================================
</TABLE>
*Our gross profit for 1999 includes a provision for slow-moving and obsolete
inventories of $56.1 million and a $15.8 million adjustment to modify our
accounting for warranty service contracts as discussed in the SALES section.
Excluding these charges and adjustments, our gross profit percentages would
have been 23.4% in our Stores Division, 31.4% in our BSG, 40.4% in our
International Division and 28.0% overall. The provision for slow-moving and
obsolete inventories is discussed below.
Page 26 Office Depot Annual Report 1999
<PAGE> 6
Office Depot Annual Report 1999 Page 27
Office Depot, Inc. and Subsidiaries
Overall
The decrease in our overall gross profit percentage in 1999 as compared to 1998
is primarily the result of a $56.1 million provision for slow-moving and
obsolete inventories recorded in the third quarter of 1999. The need for this
provision resulted from two factors: 1) slow-moving technology related products
whose market values have been adversely affected by accelerated rates of change
in technology, and 2) a rationalization of our warehouse inventory assortments
in connection with the Viking warehouse consolidation. This provision impacted
gross profit in our business segments as follows:
<TABLE>
- ---------------------------------------------------------
<S> <C>
Stores $ 39,200
BSG 15,500
International 1,400
- ---------------------------------------------------------
Total $ 56,100
=========================================================
</TABLE>
While we believe that this charge is non-recurring, we cannot assure you that
we will not incur charges like this in the future.
Excluding the charges and adjustments discussed earlier, decreased net product
costs derived from merger-related synergies during 1999 drove our slight
improvement in margins compared to 1998. However, offsetting these savings were
increased occupancy costs in our Stores Division and lowered margins in our
International Division, both of which are discussed in more detail later. In
1998, our overall gross profit improved as compared to 1997 as a result of
favorable product mix shifts within the technology category and continued
strengthening of our vendor relationships which drove overall product costs
down.
Our overall gross profit percentages fluctuate as a result of numerous factors,
including competitive pricing pressures; changes in product, catalog and
customer mix; emergence of new technology; suppliers' pricing changes; as well
as our ability to manage our net product costs through growth in total
merchandise purchases. Additionally, our occupancy costs may vary as we add
stores and CSCs in new markets with different rental and other occupancy costs
and as we relocate and/or close existing stores in current markets.
Stores
Gross profit in our Stores Division decreased as a result, in part, of
increased occupancy costs driven by the large number of new stores we opened in
the fourth quarter of 1998 and throughout 1999. Our stores typically need about
four years to reach sales maturity. Until a store reaches maturity, its fixed
occupancy costs as a percentage of its sales are typically higher than in more
mature stores. In addition, technology products, which yield lower gross profit
percentages than other product groups, have increased each year as a percentage
of our total Stores' sales mix. As discussed in more detail earlier, in 1999, we
also increased our provision for slow-moving and obsolete inventories in our
stores, and we modified our accounting for the recognition of sales and
direct costs of warranty service contracts. In 1998, our Stores Division saw a
favorable shift in sales mix within the technology category toward the more
profitable business machine supplies and accessories compared to 1997. In
addition, the improvements in our 1998 gross profit percentages in our Stores
Division were largely the result of proactive merchandising and pricing
strategies applied to all product categories.
BSG
We earn higher gross profit percentages in our BSG than in our Stores Division
principally as the result of a different sales mix. Paper, machine supplies and
other general office supplies, which yield higher margins than our other
product groups, account for a much larger percentage of total sales in our BSG
than in our Stores Division. BSG's gross profit percentages are, however, lower
than those we earn internationally as a result of the lower relative pricing we
negotiate with our contract customers. Contributing to the increase in our
BSG's gross profit from 1998 to 1999 were overall lower net product costs. We
were also able to lower our product costs by realizing certain synergies from
our merger with Viking. An increase in our provision for slow-moving and
obsolete inventory, as more fully discussed above, partially offset these
improvements in gross profit percentages. In 1998, gross profit declined
slightly as we aggressively pursued market share growth, particularly in our
contract business, in a highly competitive environment. We believe this
strategy resulted in increased market penetration and improved margins in our
BSG in 1999.
International
Gross profit as a percentage of sales in our International Division decreased
during 1999 largely because of the consolidation of our French and Japanese
retail operating results beginning in November 1998 and April 1999,
respectively. The operations of these countries were previously accounted for
under the equity method, which did not impact our gross profit. See MERGER AND
RESTRUCTURING COSTS for further information. Similar to our margins
domestically, the gross margins in our international retail stores are
significantly lower than in our international catalog business, mainly as a
result of pricing and product mix differences. With the consolidation of
certain retail operations, our International Division's gross profit rate has
decreased. In our catalog operations, we also saw an unfavorable shift in our
sales mix in 1999 to ink and laser jet supplies, which yield lower gross profit
margins than other office products. The impact of the increase in the provision
for slow-moving and obsolete inventories during 1999 was not significant. In
1998, gross profit in our International Division improved over 1997 as our
direct mail operations in various European countries continued to mature.
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(Tabular dollar amounts are in thousands)
STORE AND WAREHOUSE OPERATING AND SELLING EXPENSES
<TABLE>
<CAPTION>
Percentage
of Sales
- ---------------------------------------------------------------------------
<S> <C> <C>
1999
Stores $ 864,713 15.0%
BSG 728,728 23.0%
International 369,078 27.9%
Other (1,482)
- ---------------------------------------------------------------------------
Total $ 1,961,037 19.1%
===========================================================================
1998
Stores $ 675,538 13.4%
BSG 684,484 23.6%
International 283,102 27.0%
Other (1,082)
===========================================================================
Total $ 1,642,042 18.2%
===========================================================================
1997
Stores $ 622,266 13.2%
BSG 577,752 23.1%
International 243,952 27.6%
Other (778)
- ---------------------------------------------------------------------------
Total $ 1,443,192 17.8%
===========================================================================
</TABLE>
Overall
Store and warehouse operating and selling expenses consist of personnel costs;
maintenance and other facility costs; advertising expenses; delivery and
transportation costs; credit card and bank charges and certain other operating
and selling costs. On an overall basis, higher personnel and advertising costs
in our stores were the main driver of our expense increases relative to sales
in 1999 and 1998. As discussed more fully below, the large number of new stores
in our store base and the fixed component of certain personnel costs have
increased our costs as a percentage of sales in our newer stores compared to
our more mature stores. These increased costs were only partially offset by our
ability to hold certain of our operating expenses constant as our sales
increased.
Stores
In our Stores Division, the largest components of operating and selling
expenses are personnel, facility, advertising and credit card expenses. In our
Stores Division, we added 123 stores in 1999 (with 38 opened in the fourth
quarter) and 100 stores in 1998 (with 68 opened in the fourth quarter). Because
newer stores typically generate lower average sales than more mature stores,
operating and selling expenses as a percentage of sales in the Stores Division
have increased. Additionally, we believe that opening new stores in existing
markets has cannibalized, to some extent, the sales of other Office Depot
stores in those markets (i.e., had the effect of reducing sales at existing
stores), also causing our expenses to increase relative to sales.
The increase in expenses during 1999 and 1998 was driven largely by
personnel-related costs, primarily because of competitive wage pressure and the
need to attract more highly skilled associates in certain positions.
Approximately 60% of our stores' operating expenses are personnel related and
have a relatively large fixed cost component. In 1999, we also increased our
advertising expenses, launching our new "Taking Care of Business" campaign, and
incurred additional operating expenses as we focused on several new sales and
re-merchandising initiatives. In 1998, we incurred certain incremental expenses
in our Stores Division to support our aggressive store remodeling program. We
completed approximately 65 and 200 store remodels in 1999 and 1998,
respectively. The decrease in the total number of remodels in 1999 stems from
an increased focus on re-merchandising our stores (i.e., re-arranging product
displays in a way that is more appealing to the customer) rather than
performing full remodels. This approach requires less capital and is more
appropriate given the number of new stores in our store base.
BSG
Personnel, facility and delivery expenses are the largest components of our BSG
operating expenses. Operating and selling expenses as a percentage of sales are
significantly higher in our BSG than in our Stores Division, principally because
of the need for a more experienced and highly compensated sales force. Although
our BSG made operating efficiency improvements in our warehouses during the
latter half of 1999, these improvements are expected to impact overall
operating expenses more significantly in the future. During the second half of
1999, we began processing both Office Depot and Viking brand orders in our
combined warehouses, and we expect to fully integrate all warehouses by early
2001. This will significantly reduce the total number of warehouse facilities
we operate and should positively impact our BSG operating expenses relative to
sales. See additional discussion of our BSG integration in MERGER AND
RESTRUCTURING COSTS. Operating and selling expenses as a percentage of sales
increased in 1998 as compared to 1997, primarily because of the costs
associated with consolidating and integrating five of our Office Depot CSCs
into two larger, more efficient facilities. They also increased as a result of
converting our Office Depot warehouse and order entry systems to common
technology platforms.
International
Similar to our BSG, personnel and delivery expenses are significant components
of our International Division's operating and selling expenses. Furthermore,
because direct mail is our largest international sales channel, advertising
expense, including the cost of catalog preparation and mailing, is a
significant expense for us. Operating and selling expenses as a percentage of
sales are significantly higher in our International Division than in our other
segments primarily because of the use of an extensive marketing program to
drive sales in new and existing markets.
Page 28 Office Depot Annual Report 1999
<PAGE> 8
Office Depot Annual Report 1999 Page 29
Office Depot, Inc. and Subsidiaries
Additionally, certain of our operations are in their start-up phase, which also
increases our international operating expenses as a percentage of sales when
compared to other segments.
During 1999, increased advertising costs significantly impacted our operating
and selling expenses as a percentage of sales. Increasing competition in many
of our established markets, coupled with our efforts to gain market share in
certain newer markets, have driven up our advertising costs. Furthermore, as
discussed earlier in this MD&A, we began consolidating the results of our
French and Japanese retail operations in the fourth quarter of 1998 and the
second quarter of 1999, respectively, as opposed to previously using the equity
method of accounting. In 1999, we expanded our store base by 31, ending the
year with 118 retail stores internationally. This has resulted in increased
operating expenses because the fixed costs of operating a store represent a
larger percentage of sales for newer stores than for more mature stores. As
part of our integration plan (see MERGER AND RESTRUCTURING COSTS), we will be
consolidating certain of our Office Depot and Viking operations in France and
Japan. We believe this will result in improved operating results in those
countries. In 1998, our international operating and selling expenses as a
percentage of sales improved primarily as a result of our operations continuing
to mature in countries such as Germany, which we entered in late 1995.
As our operations in a particular market grow, certain fixed operating expenses
decline relative to sales. Additionally, as market share increases, advertising
costs in the form of prospecting and delivery costs, which are affected by the
density of the delivery areas, decline as a percentage of sales. As we continue
to grow our international business and establish brand recognition, we expect
to leverage certain fixed operating expenses, and our cost to attract new
customers should decline as a percentage of sales. We believe, however, that
these improvements will be offset, as they were in 1999, by the incremental
costs incurred to continue developing new markets, including Japan.
PRE-OPENING EXPENSES
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Pre-opening expenses $ 23,628 $ 17,150 $ 6,609
Office supply stores opened* 159 106 44
- -------------------------------------------------------------------------------
</TABLE>
*Includes relocations.
Our pre-opening expenses consist principally of personnel, property and
advertising expenses incurred in opening or relocating stores in our Stores
Division. We typically incur these expenses during a six-week period prior to
the store opening. Because we expense these items as they are incurred, the
amount of pre-opening expenses we incur each year is generally proportional to
the number of new stores we open during the period. Our pre-opening expenses
also include, to a lesser extent, expenses incurred to open or relocate
facilities in our Business Services Group and our International Division.
In 1999, our pre-opening expenses approximated $155,000 per domestic office
supply store and $80,000 per international office supply store. The amount for
our domestic stores has increased from our historical average of $125,000
because we acquired a group of stores from another retailer, which generated
higher occupancy costs during an extended pre-opening period. Our cost to open
a new CSC varies significantly with the size and location of the facility.
Historically, we have incurred up to $1,750,000 to open a domestic or
international CSC.
GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
General and
administrative expenses $ 381,611 $ 330,194 $ 272,022
Percentage of sales 3.7% 3.7% 3.4%
- -------------------------------------------------------------------------------
</TABLE>
Our general and administrative expenses consist primarily of personnel-related
costs associated with support functions. Because these functions, for the most
part, support all segments of our business, we do not consider these costs in
determining our segment profitability. Throughout 1998 and 1999, we
strengthened our corporate infrastructure, particularly in the areas of Supply
Chain management and MIS. This initiative was a significant contributor to the
increases in our general and administrative expenses in the last two years. The
benefits of this increased spending are reflected in our lower levels of
inventory per store and improved purchasing efficiencies. Also contributing to
the growth in our general and administrative expenses over the last two years
was spending to support our Year 2000 compliance efforts, CSC consolidation and
integration and electronic commerce initiatives. In 1997, our personnel-related
costs were lower than our current trends as a result of the proposed merger
with Staples. During that period of uncertainty, many of our corporate
departments were reduced in size in preparation for combining the support
functions of the two companies.
MERGER AND RESTRUCTURING COSTS
Viking Merger
In August 1998, we completed our merger with Viking. Transactional and other
direct expenses of this merger, primarily legal and investment banking fees,
were recorded as merger and restructuring costs in 1998.
Subsequent to the merger, we immediately began the process of integrating our
Office Depot and Viking businesses. Our original plans, which we expected to
complete during 2000, initially included the closing of 15 domestic CSCs and
the opening of five new domestic CSCs, as well as installing complex new
systems in each surviving facility. During the fourth quarter of 1999, after
evaluating the results of integrating two test facilities, we modified our CSC
integration plans. Our new plans incorporate a more simplified approach and, as
a result, require less capital. Furthermore, our new plans require the closing
of only 11 existing
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(Tabular dollar amounts are in thousands)
CSCs and the opening of only two new CSCs, which were opened as test facilities
in late 1999. We lease all but two of the closing CSCs. We sold one of the CSCs
in 1999, and we plan to sell the other in 2000. Our plan is to vacate all of the
buildings. Accordingly, we have written off certain assets such as leasehold
improvements and redundant software and conveyor systems in these CSCs. In
addition, merger and restructuring costs include certain expenses of exiting
these facilities that will provide no future economic benefit to us (e.g.,
future lease obligations, personnel retention and other termination costs). As a
result of modifying our integration plans in the fourth quarter of 1999, we
reversed previously accrued merger and restructuring charges of $32.5 million,
reducing merger and restructuring costs to a net credit of $7.1 million for the
year.
We accrue merger and restructuring costs when significant changes in our plan
are unlikely, which in most cases requires that planned actions take place
within one year. In the case of our CSC integration, we plan to integrate all
but three of our CSCs during 2000. We feel confident that significant changes in
our plan are unlikely even though three of our CSCs will not be integrated until
early 2001.
Closure of Furniture at Work(TM) and Images(TM) Stores
As a result of our decision to focus on the continued growth of our core
businesses and on expanding our international operations, we closed nine of our
Furniture at Work(TM) and Images(TM) stores in 1999 and one in the fourth
quarter of 1998. Eight of the ten facilities were leased; the other two were
owned. We have sold one of the owned facilities and are presently in
negotiations to sell the second. In addition, we exercised a purchase option on
one of our leased facilities because we have negotiated a sale of that facility
as well. We have recorded the exit costs related to closing these facilities in
merger and restructuring costs.
Acquisition of Joint Venture Interests in France and Japan
In November 1998, we purchased our joint venture partner's interest in our
French Office Depot retail operations. Following this purchase, we decided to
restructure and integrate the separate Office Depot and Viking operations in
France. During 1999, we merged the Office Depot and Viking headquarters into a
new office that is more conveniently located. We do not expect to close any
facilities in conjunction with our restructuring and integration programs in
France. Instead, we will integrate the warehousing and delivery of our Office
Depot and Viking brand merchandise in each of our existing warehouses.
In April 1999, we purchased our joint venture partner's interest in our Japanese
Office Depot retail operations and announced plans to restructure and integrate
our operations in Japan. We closed one leased CSC and one leased store in Japan
in conjunction with these plans. We expect to close another CSC in 2000. We have
recorded merger and restructuring costs in 1999 associated with these
activities. We expect our operations in France and Japan to be completely
integrated by the end of 2000.
Proposed Staples Merger
In September 1996, we entered into an agreement and plan of merger with Staples.
In June 1997, the proposed merger was blocked by a preliminary injunction
granted by the Federal District Court at the request of the Federal Trade
Commission. In July 1997, we announced that the merger agreement had been
terminated. Costs directly attributable to the merger transaction, primarily
legal expenses, were recorded in 1997 as a result of this attempted merger.
Merger and restructuring costs in 1999, 1998 and 1997 consist of the following
charges:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------------
<S> <C> <C> <C>
Viking Merger and Proposed
Staples Merger:
Costs directly attributable to
the merger transactions $ 236 $ 31,555 $16,094
Asset write-offs associated
with closing identified
facilities and the write-off
of software applications to
be abandoned (19,065) 41,962 --
Other facility exit costs,
principally estimated
lease costs subsequent
to the expected closing
of each facility (10,051) 20,079 --
Personnel retention and
termination costs 295 14,553 --
----------------------------------------------------------
$(28,585) $108,149 $16,094
==========================================================
Closure of Furniture at Work(TM) and
Images(TM) Stores:
Asset write-offs associated
with closing the stores $ 2,813 $ 3,882 $ --
Other facility exit costs,
principally estimated
lease costs subsequent
to closing the stores (4,832) 7,098 --
----------------------------------------------------------
$ (2,019) $ 10,980 $ --
==========================================================
Acquisition of Joint Venture Interests
in France and Japan:
Costs directly attributable to
the acquisitions $ 1,317 $ -- $ --
Asset write-offs associated with
closing identified facilities 3,023 -- --
Other facility exit costs, princi-
pally estimated lease costs
subsequent to the expected
closing of each facility 5,311 -- --
Personnel retention and
termination costs 13,849 -- --
----------------------------------------------------------
$ 23,500 $ -- $ --
==========================================================
Grand Total $ (7,104) $ 119,129 $16,094
==========================================================
</TABLE>
Page 30 Office Depot Annual Report 1999
<PAGE> 10
Office Depot Annual Report 1999 Page 31
Office Depot, Inc. and Subsidiaries
We determined the fair value of assets to be disposed of by estimating the net
realizable value at the time of the anticipated closure or discontinuation of
use. Estimated proceeds from and costs to dispose of these assets were
determined through analysis of historical data and expected outcomes. The costs
required to complete our merger and restructuring plans necessarily involve the
use of estimates. We believe our estimates are unlikely to change significantly
in the future.
As of December 25, 1999 and December 26, 1998, we have remaining accruals of
approximately $21.3 million and $40.8 million, respectively, for merger and
restructuring costs. Amounts expensed for asset write-offs are recorded as a
reduction of our fixed assets. All other amounts are recorded as accrued
expenses. The activity in the liability accounts by cost category is as follows:
<TABLE>
<CAPTION>
Beginning New Cash Other Ending
Balance Charges Payments Adjustments Balance
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Accrued direct
merger costs $ 1,626 $ 1,684 $ (1,540) $ (131) $ 1,639
Accrued other
facility exit costs 26,080 4,344 (8,744) (13,916) 7,764
Accrued personnel
retention and
termination costs 13,126 20,007 (15,405) (5,863) 11,865
-------------------------------------------------------------------------
Total accrued
costs $40,832 $26,035 $(25,689) $(19,910) $21,268
-------------------------------------------------------------------------
1998
Accrued direct
merger costs $ 113 $31,555 $(30,042) $ -- $ 1,626
Accrued other
facility exit costs 1,303 27,221 (2,400) (44) 26,080
Accrued personnel
retention and
termination costs -- 14,553 (1,427) -- 13,126
-------------------------------------------------------------------------
Total accrued
costs $ 1,416 $73,329 $(33,869) $ (44) $40,832
=========================================================================
</TABLE>
The other adjustments column represents adjustments of original estimates and
other adjustments pursuant to plan modifications made during the fourth quarter
of 1999. In addition to the amounts we have accrued, we expect to incur
additional integration-related costs over the remaining integration periods.
Although we expect these costs to be insignificant to our future operating
results, there can be no assurance that this will be the case. We expect to rely
primarily on cash flows generated from operations to fund our
integration-related costs. SEE LIQUIDITY AND CAPITAL RESOURCES.
We expected to terminate approximately 171 store, warehouse and support
employees worldwide in conjunction with our restructuring and integration plans.
To date, all 171 employees have been terminated. We believe the reduction in our
revenues and increases in our operating profit arising from these integration
activities will be insignificant to our overall and segment results.
STORE CLOSURE AND RELOCATION COSTS
We recorded a charge of $46.4 million in the third quarter of 1999 to reflect
our decision to accelerate our store closure program for under-performing stores
and our relocation program for older stores in our Stores Division. This charge
also reflects our decision to sell our interest in our retail operations in
Thailand. On October 28, 1999, we entered into an agreement with Central Retail
Group, our joint venture partner, to sell to them our Thai operations and
license to them certain trademarks, software and operating systems. Central
Retail Group now operates the two Thai stores under a licensing agreement.
Finally, the charge also reflects our decision to write-off certain other
long-lived assets in our BSG. During the fourth quarter of 1999, we reversed
$6.0 million of the charge relating to stores that may be relocated after 2000.
This reversal is in accordance with guidance issued by the SEC in late 1999
which provides that restructuring charges should not be accrued unless changes
in the plan are unlikely, which in most cases requires that planned actions take
place within one year.
This charge, net of the reversal, consisted of asset impairment costs ($29.2
million), residual lease obligations ($8.3 million) and other exit costs ($2.9
million). Asset impairment costs consist principally of leasehold improvements
and other assets that will be retired when the identified stores are closed or
relocated. The charge impacted the operating profits of our business segments as
follows:
<TABLE>
<S> <C>
- --------------------------------------
Stores $33,260
BSG 2,907
International 4,258
- --------------------------------------
Total $40,425
======================================
</TABLE>
While we believe that this charge is of a non-recurring nature, we cannot assure
you that we will not incur similar charges in the future. We do not foresee any
impact on our revenues or operating profit as a result of the BSG asset
write-offs. We believe the lost revenues and increased operating profit in our
Stores and International Divisions from closing these stores and selling our
joint venture interest will be insignificant.
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(Tabular dollar amounts are in thousands)
OTHER INCOME AND EXPENSE
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $30,176 $25,309 $ 7,570
Interest expense 26,148 22,356 21,680
Miscellaneous expense, net 3,514 18,985 13,180
- --------------------------------------------------------------------
</TABLE>
We do not consider interest income and expense arising from our financing
activities at the corporate level in determining segment profitability. The
increases in interest income in 1999 and 1998 resulted from improved operating
cash flows in 1998, which yielded higher average cash balances throughout 1998
and most of 1999. Pursuant to our Board of Directors authorizing stock
repurchases in August 1999 of up to $500 million, we purchased 46.7 million
shares of our stock at a total cost of $500 million plus commissions during the
last half of 1999. As a result, our cash balances have declined, and we expect a
proportional impact on our interest income in future periods. In January 2000
and March 2000, our Board authorized additional stock repurchases of up to $200
million. This will further reduce our cash balances in the future.
The majority of our interest expense is fixed in nature and relates to our
convertible, subordinated debt. Additionally, during 1999, we entered into a
number of capital leases, primarily related to new point-of-sale equipment in
our stores. This has resulted in increased interest expense, which may continue
in future years. In late 1999, we began borrowing against our yen-denominated
loan facility to finance our expansion in Japan. Because the interest rate we
are currently paying on our yen borrowings is between 1% and 2%, we expect that
the effect of these borrowings on our future interest expense will be
negligible. See LIQUIDITY AND CAPITAL RESOURCES.
Our net miscellaneous expense consists of equity in the earnings (losses) of our
joint venture investments, royalty and franchise income that we generate from
licensing and franchise agreements and the amortization of goodwill. All of our
equity investments involve operations outside of the United States and Canada,
and our equity in the earnings (losses) of these operations is included in
determining the profitability of our International Division.
The decrease in net miscellaneous expense in 1999 is primarily attributable to
the consolidation of our French and Japanese retail operations beginning in the
fourth quarter of 1998 and second quarter of 1999, respectively, when we
purchased the remaining 50% interest from our joint venture partners. Prior to
that consolidation, we recorded equity losses related to the start-up of those
operations. During 1998, we increased our ownership share in our operations in
Thailand to 80%. Accordingly, the results of our Thai operations have been
consolidated from the date of the ownership increase. See Store Closure and
Relocation Costs for a discussion of our decision to subsequently sell our
ownership interest in the Thai business in November 1999. In 1999, our remaining
joint venture operations in Mexico and Israel were profitable. Through our joint
ventures that are accounted for using the equity method, we opened 14 locations
in 1999, 40 locations in 1998 and 15 locations in 1997 that required start-up
costs.
INCOME TAXES
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Income taxes $ 156,249 $ 155,531 $136,730
Effective income tax rate* 37.8% 40.0% 36.8%
Effective income tax rate*,
excluding merger and
restructuring costs 37.0% 37.0% 36.8%
======================================================
</TABLE>
*Income taxes as a percentage of earnings before income taxes.
In 1999 and 1998, certain non-deductible merger-related charges caused our
overall effective income tax rates to rise. Our overall effective income tax
rate, excluding merger and restructuring costs, may fluctuate in the future as a
result of the mix of pre-tax income and tax rates between countries.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by (used in) our operating, investing and financing activities is
summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
Operating activities $ 373,152 $ 678,615 $ 461,095
Investing activities (451,544) (271,317) (155,176)
Financing activities (405,849) 61,747 (131,929)
=====================================================
</TABLE>
OPERATING AND INVESTING ACTIVITIES
We have historically relied on cash flow generated from operations as our
primary source of funds because the majority of our store sales are generated on
a cash and carry basis. Furthermore, we use private label credit card programs,
administered and financed by financial services companies, to expand our sales
without the burden of carrying additional receivables. Our cash requirements are
also reduced by vendor credit terms that allow us to finance a portion of our
inventory. We generally offer credit terms, under which we carry our own
receivables, to our contract and certain of our direct mail customers. As we
expand our contract and direct mail businesses, we anticipate that our accounts
receivable portfolio will continue to grow. Receivables from rebate, cooperative
advertising and marketing programs with our vendors comprise a significant
percentage of our total receivables. These receivables tend to fluctuate
seasonally (growing during the second half of the year and declining during
the first half), because certain collections do not happen until after an entire
program year has been completed.
Page 32 Office Depot Annual Report 1999
<PAGE> 12
Office Depot Annual Report 1999 Page 33
Office Depot, Inc. and Subsidiaries
The decline in our operating cash flows in 1999 is primarily attributable to our
increased store openings. On a worldwide basis in 1999, excluding joint venture
operations and licensing arrangements, we opened 159 stores, including
relocations of older stores, as compared to 106 and 44 stores during 1998 and
1997, respectively. Opening a new domestic store requires that we outlay
approximately $600,000 in cash for the portion of our inventories that is not
financed by our vendors, as well as approximately $155,000 for pre-opening
expenses (see PRE-OPENING EXPENSES). Our focus on supply chain management helped
boost our 1998 operating cash flows through the $139 million reduction in our
inventories. This focus continued to reduce the average inventory balances held
in stores and CSCs in 1999; however, this benefit was offset by increases
resulting from stocking a large number of new stores with inventories and from
incremental Y2K-related purchasing.
Our primary investing activity is the acquisition of capital assets. The number
of stores and CSCs we open or remodel each year generally drives the volume of
our capital investments. As mentioned above, our store openings have
increased significantly in each of the years reported. These openings were the
most significant contributors to our increased investing cash outflows. Computer
and other equipment purchases at our corporate offices and at our facilities,
necessary to complete Y2K remediation (see YEAR 2000) and to support our store
expansion, also contributed to our increased cash investing needs.
Our Viking integration plans, which are discussed in MERGER AND RESTRUCTURING
COSTS, will require capital investments, both domestically and internationally,
approximating $50 million over the next 12 to 18 months. We also currently plan
to open approximately 100 stores in our Stores Division and 35 stores and one
warehouse in our International Division during 2000. We estimate that our cash
investing requirements will be approximately $1.2 million for each new domestic
office supply store. The $1.2 million includes approximately $600,000 for
leasehold improvements, fixtures, point-of-sale terminals and other equipment,
and approximately $600,000 for the portion of our inventories that will not be
financed by our vendors. In addition, each new office supply store requires
pre-opening expenses of $155,000 domestically and $80,000 internationally. Our
cash investing requirements for a new CSC are significantly more than the
requirements for a new store. Each new domestic and international CSC requires
between $6 to $16 million for capital assets and inventory and pre-opening
expenses up to $1.8 million, depending on the size, type and location of the
facility.
We have expanded our presence in the electronic commerce marketplace by entering
into strategic business relationships with several Web-based providers of
business-to-business ("B2B") electronic commerce solutions. We have made equity
investments in these companies, including PurchasePro.com ($5.2 million), and
three other companies ($45.5 million). Of these investments, only the shares in
PurchasePro.com are traded publicly. Although our investment in PurchasePro.com
has increased in value by more than $100 million since our initial investment,
our other investments may not generate similar appreciation. Furthermore, the
gain on our investment in PurchasePro.com will not be realized until our
investment is sold. In February 2000, we exercised 250,000 warrants and sold the
underlying shares of PurchasePro.com on the open market for $19.0 million, net
of commissions. The exercise price was satisfied through the exercise of an
additional 27,777 warrants. We will realize a gain on this transaction in the
first quarter of 2000. The value of our remaining investments could decrease
before they are realized. We will continue to look for opportunities to invest
in companies that provide B2B electronic commerce solutions for small- and
medium-sized businesses.
FINANCING ACTIVITIES
In February 1998, we entered into a credit agreement with a syndicate of banks.
This credit agreement (the "domestic credit facility") provides us with a
working capital line and letters of credit totaling $300 million. This agreement
provides for various borrowing rate options, including a rate based on credit
rating and fixed charge coverage ratio factors that currently would result in an
interest rate of .18% over LIBOR. Our domestic credit facility expires in
February 2003 and contains certain restrictive covenants relating to various
financial statement ratios. During December 1999, we borrowed and repaid a total
of $44.2 million. As of December 25, 1999, we had no outstanding borrowings
under this facility, but we had outstanding letters of credit under this
facility totaling $18.0 million.
In July 1999, we entered into term loan and revolving credit agreements with
several Japanese banks (the "yen facilities") to provide financing for our
operating and expansion activities in Japan. The yen facilities provide for
maximum aggregate borrowings of (YEN)9.76 billion (the equivalent of $96
million at December 25, 1999) at an interest rate of .875% over the Tokyo
Interbank Offered Rate ("TIBOR"). Although the loans mature at varying rates of
three to six months, we have classified these borrowings as non-current on our
Balance Sheet because we intend to renew them as they come due. These yen
facilities contain
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(Tabular dollar amounts are in thousands)
covenants similar to those in our domestic credit facility as described
earlier. During 1999, we borrowed the equivalent of $47 million under the yen
facilities. We have borrowed the equivalent of an additional $8 million
subsequent to the end of the year. Effective as of October 28, 1999, we entered
into a yen interest rate swap for a principal amount equivalent to $23 million
at December 25, 1999 in order to hedge against the volatility of the interest
payments on a portion of our yen borrowings. The terms of the swap specify that
we pay an interest rate of .7% and receive TIBOR.
In addition to bank borrowings, we have historically used equity capital,
convertible debt and capital equipment leases as supplemental sources of funds.
In August 1999, our Board approved a $500 million stock repurchase program
reflecting its belief that our common stock represented a significant value at
its then-current trading price. We purchased 46.7 million shares of our stock at
a total cost of $500 million plus commissions during the third and fourth
quarters of 1999. In January 2000 and March 2000, our Board approved additional
stock repurchases of up to $200 million, bringing our total authorization to
$700 million. As of March 3, 2000 we had purchased an additional 9.2 million
shares of our stock at a total cost of $100 million plus commissions. The
remaining authorization does not have an expiration date, and we can acquire our
common stock either on the open market or through negotiated purchases.
The decline in cash from our financing activities in 1999, as compared to 1998,
was driven by our stock repurchases. The increase in cash flows from financing
activities in 1998 as compared to 1997 was driven by our repayment of short-term
borrowings in 1997 and by funds received from stock options exercised by our
employees in 1998. In connection with our merger with Viking, all options held
by Viking employees prior to the merger, with the exception of those granted
under Viking's annual option award in July 1998, vested fully on the merger
date.
In 1992 and 1993, we issued Liquid Yield Option Notes ("LYONs") which are zero
coupon, convertible subordinated notes maturing in 2007 and 2008, respectively.
Each LYON(R) is convertible at the option of the holder at any time on or prior
to its maturity into Office Depot common stock at conversion rates of 43.895 and
31.851 shares per 1992 and 1993 LYON(R) , respectively. On November 1, 2000 for
the 1993 LYONs(R) and December 11, 2002 for the 1992 LYONs(R) , the holder may
require us to purchase the LYONs(R) from them at the issue price plus accrued
original issue discount. If the holder decides to exercise their put option, we
have the choice of paying the holder in cash, common stock or a combination of
the two. For that reason, our 1993 LYONs(R) have been classified as a current
liability on our 1999 Balance Sheet. Unless our stock price increases
substantially above current levels, we expect that a significant number of
LYONs(R) will be put to the Company in November of this year. Our current
intention is to pay cash for any puts exercised on November 1, 2000.
We continually review our financing options. Although we currently anticipate
that we will finance all of our 2000 expansion, integration and other activities
through cash on hand, funds generated from operations, equipment leases and
funds available under our credit facilities, we will consider alternative
financing as appropriate for market conditions. Our financing requirements
beyond 1999 will be affected primarily by the number of new stores or CSCs we
open or acquire, the specific actions required to integrate our Office Depot and
Viking operations, and the decisions of the LYONs(R) holders.
SIGNIFICANT TRENDS, DEVELOPMENTS
AND UNCERTAINTIES
Over the years, we have seen continued development and growth of competitors in
all segments of our business. Mass merchandisers have increased their assortment
of home office merchandise, attracting additional back-to-school customers and
year-round casual shoppers. We also face competition from other office
superstores that compete directly with us in numerous markets. These other
office superstores compete with us in geographical locations where we have
traditionally been the market leader, just as we have begun penetrating markets
where they have historically held the dominant market share. This competition is
likely to result in increased competitive pressures on pricing, product
selection and services provided.
We have also seen growth in new and innovative competitors that offer office
products over the Internet, featuring special purchase incentives and one-time
deals (such as close-outs). Through our own successful Internet and
business-to-business Web sites, we believe that we have positioned ourselves
competitively in the electronic commerce arena. We have invested in strategic
partnerships with several business-to-business Internet companies offering
innovative solutions to small businesses, a target customer group. We are
committed to supporting our Internet channel to meet the needs of our customers,
including investing in new and innovative electronic commerce business
enterprises.
Page 34 Office Depot Annual Report 1999
<PAGE> 14
Office Depot Annual Report 1999 Page 35
Office Depot, Inc. and Subsidiaries
EURO
On January 1, 1999, 11 of the 15 member countries of the European Economic and
Monetary Union ("EMU") established fixed conversion rates between their existing
currencies and the EMU's common currency (the "euro"). The euro is presently
trading on currency exchanges and may be used in business transactions. The
ultimate conversion to the euro will eliminate currency exchange rate risk among
the member countries. The former currencies of the participating countries are
scheduled to remain legal tender as denominations of the euro until January 1,
2002. During this transition period, parties may settle transactions using
either the euro or a participating country's former currency. On July 1, 2002,
new euro-denominated bills and coins will become the sole legal currency, and
all former currencies will be withdrawn from circulation. We have adapted our
internal systems to accommodate euro-denominated transactions.
We generate significant sales in Europe and are currently evaluating the
business implications of the conversion to the euro. The use of a single
currency in the participating countries may affect our ability to price our
products differently in various European markets because of price transparency.
We realize that we may be faced with price harmonization at lower average prices
for items we sell in some markets. Nevertheless, other market factors such as
local taxes, customer preferences and product assortment may reduce the
likelihood or impact of price equalization. Based on these evaluations, we do
not expect the conversion to the euro to have a material effect on our financial
position or the results of our operations.
INTEREST RATE AND FOREIGN EXCHANGE
MARKET RISKS
INTEREST RATE RISKS
When we invest our funds in short-term investments, which generate income
subject to variable interest rates, we are subject to interest rate risk. We did
not, however, have any funds invested in such instruments as of December 25,
1999.
Our zero coupon, convertible subordinated notes offer stated yields to maturity
which are not subject to interest rate risks. Borrowings under our domestic and
Japanese credit facilities are both subject to variable interest rates. As of
December 25, 1999, there were no borrowings under our domestic credit agreement.
The interest rate risk on our Japanese bank borrowings has been partially
mitigated by an interest rate swap that fixes the interest rate on a portion of
our yen borrowings for the remaining life of the loan. With interest rates
currently approximating 1% in Japan, a 10% change in interest rates would not
materially change our total interest expense.
FOREIGN EXCHANGE RATE RISKS
The nature and magnitude of our foreign exchange risks have not changed
materially in the past year. We conduct business in various countries outside
the United States where the functional currency of the country is not the U.S.
dollar. This results in foreign exchange translation exposure when these foreign
currency earnings are translated into U.S. dollars in our consolidated financial
statements. As of December 25, 1999, a 10% change in the applicable foreign
exchange rates would have resulted in an increase or decrease in our after-tax
earnings of approximately $3 million on an annual basis.
We are also subject to foreign exchange transaction exposure when our
subsidiaries transact business in a currency other than their own functional
currency. This exposure arises primarily from inventory purchases in a foreign
currency. The introduction of the euro and our decision to consolidate our
European purchases has greatly reduced these exposures. During 1999, we entered
into foreign exchange forward contracts to hedge certain inventory exposures.
The maximum contract amount outstanding during the year was $13.7 million.
INFLATION AND SEASONALITY
Although we cannot accurately determine the precise effects of inflation on our
business, we do not believe inflation has a material impact on our sales or the
results of our operations. We consider our business to generally be somewhat
seasonal, with sales in our Stores Division and Business Services Group slightly
higher during the first and fourth quarters of each year and sales in our
International Division slightly higher in the third quarter.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires that we
record all derivatives as assets or liabilities measured at their fair value.
Gains or losses resulting from changes in the values of those derivatives would
be accounted for according to the intended use of the derivative and whether it
qualifies for hedge accounting.
In July 1999, the FASB issued SFAS No. 137, which defers the effective date of
SFAS No. 133 until the start of fiscal years beginning after June 15, 2000. We
will adopt SFAS No. 133 for our fiscal year 2001. Assuming our current level of
involvement in derivative instruments and hedging activities does not change
before we adopt this Statement, we do not expect the adoption of SFAS No. 133 to
have a material impact on our financial position or the results of our
operations.
<PAGE> 15
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
CAUTIONARY STATEMENTS
In December 1995, the Private Securities Litigation Reform Act of 1995 (the
"Act") was enacted by the United States Congress. The Act, as amended, contains
certain amendments to the Securities Act of 1933 and the Securities Exchange Act
of 1934. These amendments provide protection from liability in private lawsuits
for "forward-looking" statements made by public companies. We want to take
advantage of the "safe harbor" provisions of the Act. In doing so, we have
disclosed these forward-looking statements by informing you in specific
cautionary statements of the circumstances which may cause the information in
these statements not to transpire as expected.
This Annual Report contains both historical information and other information
that you can use to infer future performance. Examples of historical information
include our annual financial statements and the commentary on past performance
contained in our MD&A. While we have specifically identified certain information
as being forward-looking in the context of its presentation, we caution you
that, with the exception of information that is clearly historical, all the
information contained in this Annual Report should be considered to be
"forward-looking statements" as referred to in the Act. Without limiting the
generality of the preceding sentence, any time we use the words "estimate,"
"project," "intend," "expect," "believe," "anticipate," "continue" and similar
expressions, we intend to clearly express that the information deals with
possible future events and is forward-looking in nature.
Forward-looking information involves risks and uncertainties, including certain
matters that we discuss in more detail below and in our report on Form 10-K,
filed with the Securities & Exchange Commission. This information is based on
various factors and important assumptions about future events that may or may
not actually come true. As a result, our operations and financial results in the
future could differ materially and substantially from those we have discussed in
the forward-looking statements in this Annual Report. In particular, the factors
we discuss below and in our Form 10-K could affect our actual results and could
cause our actual results in 2000 and in future years to differ materially from
those expressed in any forward-looking statement made by us or on our behalf in
this Annual Report.
COMPETITION
We compete with a variety of retailers, dealers and distributors in a highly
competitive marketplace that includes high-volume office supply chains,
warehouse clubs, computer stores, contract stationers and well-established mass
merchant retailers.
Well-established mass merchant retailers have the financial and distribution
ability to compete very effectively with us should they choose to enter the
office superstore retail category, Internet office supply or contract stationer
business. This could have a material adverse effect on our business and results
of our operations.
INTERNET
Internet-based merchandisers also compete with us. This competition is expected
to increase in the future as these companies proliferate and continue to expand
their operations. Many start-up operations that are heavily focused on Internet
sales may be able to compete with us in the areas of price and selection. While
most of these companies cannot offer the levels of service and stability of
supply that we provide, they nevertheless may be formidable competitors,
particularly for customers who are willing to look for the absolute lowest price
without regard to the other attributes of our business model. Some of these
competitors may be willing to substantially sacrifice their profitability in
order to gain a foothold in the marketplace; and the stock market success of
certain Internet retailers may enable such operations to raise capital in the
public markets without regard to profitability for the near term. In addition,
certain manufacturers of computer hardware, software and peripherals, including
certain of our suppliers, have expanded their own direct marketing of products,
particularly over the Internet. Even as we expand our own Internet efforts, our
ability to anticipate and adapt to the developing Internet marketplace and the
capabilities of our network infrastructure to efficiently handle our rapidly
expanding operations are of critical importance. Furthermore, our profitability
goals may also serve to inhibit the expansion of our presence on the Internet,
because dedicated Internet concerns are currently evaluated differently in the
financial markets than more established concerns such as ours. Failure to
execute well in any of these key areas could have a material adverse effect on
our future sales growth and profitability.
EXECUTION OF EXPANSION PLANS
We plan to open approximately 100 stores in the United States and Canada during
2000, and we consider our expansion program to be an integral part of our plan
to achieve anticipated operating results in future years. Circumstances outside
our control, such as adverse weather conditions affecting construction
schedules, unavailability of acceptable sites or materials, labor disputes and
similar issues could impact anticipated
Page 36 Office Depot Annual Report 1999
<PAGE> 16
Office Depot Annual Report 1999 Page 37
Office Depot, Inc. and Subsidiaries
store openings. The failure to expand by opening new stores as planned and the
failure to generate the anticipated sales growth in markets where new stores are
opened could have a material adverse effect on our future sales growth and
profitability.
CANNIBALIZATION OF SALES IN EXISTING OFFICE DEPOT STORES
As we expand the number of our stores in existing markets, sales of existing
stores may suffer from cannibalization (customers of our existing stores begin
shopping at our new stores). Our new stores typically require an extended period
of time to reach the sales and profitability levels of our existing stores.
Moreover, the opening of new stores does not ensure that those stores will ever
be as profitable as existing stores, particularly when new stores are opened in
highly competitive markets or markets in which other office supply superstores
may have achieved "first mover" advantage. Our comparable sales are affected by
a number of factors, including the opening of additional Office Depot stores;
the expansion of our contract stationer business in new and existing markets;
competition from other office supply chains, mass merchandisers, warehouse
clubs, computer stores, other contract stationers and Internet-based
businesses; and regional, national and international economic conditions. In
addition, our profitability would be adversely affected if our competitors were
to attempt to capture market share by reducing prices.
COSTS OF REMODELING AND RE-MERCHANDISING STORES
The remodeling and re-merchandising of our stores has contributed to increased
store expenses, and these costs are expected to continue impacting store
expenses throughout 2000 and beyond. While a necessary aspect of maintaining a
fresh and appealing image to our customers, the expenses associated with such
activities could result in a significant impact on our net income in the future.
Furthermore, our growth, through both store openings and acquisitions, will
continue to require the expansion and upgrading of our informational,
operational and financial systems, as well as necessitate the hiring of new
managers at the store and supervisory level.
HISTORICAL FLUCTUATIONS IN PERFORMANCE
Fluctuations in our quarterly operating results have occurred in the past and
may occur in the future. A variety of factors could contribute to this
quarter-to-quarter variability, including new store openings which require an
outlay of pre-opening expenses, generate lower initial profit margins and
cannibalize existing stores; timing of warehouse integration; competitors'
pricing; changes in our product mix; fluctuations in advertising and
promotional expenses; the effects of seasonality; acquisitions of contract
stationers; competitive store openings or other events.
VIKING MERGER AND INTEGRATION
On August 26, 1998, we merged with Viking. Costs related to the integration of
Viking's warehouse facilities with our delivery network will increase our
warehouse expenses in 2000 and beyond. Moreover, integrating the operations and
management of Office Depot and Viking is a complex process. There can be no
assurance that this integration process will be completed as rapidly as we
anticipate or that, even if achieved as anticipated, it will result in all of
the anticipated synergies and other benefits we expect to realize. The
integration of the two companies will require significant management attention,
which may temporarily distract us from other matters. Our inability to
successfully complete the integration of the operations of Office Depot and
Viking could have a material adverse effect on our future sales growth and
profitability.
INTERNATIONAL ACTIVITY
We have operations in a number of international markets. We intend to enter
additional international markets as attractive opportunities arise. Each entry
could take the form of a start-up, acquisition of stock or assets or a joint
venture or licensing arrangement. In addition to the risks described above (in
our domestic operations), internationally we face such risks as foreign currency
fluctuations, unstable political and economic conditions, and, because some of
our foreign operations are not wholly-owned, compromised operating control in
certain countries. Moreover, we do not have a large group of managers
experienced in international operations and will need to recruit additional
management resources to successfully compete in many foreign markets. All of
these risks could have a material adverse effect on our financial position or
our results from operations. Our start-up operation in Japan, in particular, has
proven to be unprofitable to date and, in fact, has generated losses that have
materially affected our financial results in the past and are expected to do so
for some time in the future. Because of differing commercial practices, laws and
other factors, our ability to use the Internet and electronic commerce to
substantially increase sales in international locations may not progress at the
same rate as in North America.
CONTRACT AND COMMERCIAL
We compete with a number of contract stationers, mail order operators and
retailers who supply office products and services to large and small businesses,
both nationally and internationally. In order to achieve and maintain expected
profitability levels, we must continue to grow this segment of the business
while maintaining the service levels and aggressive pricing necessary to retain
existing customers. There can be no assurance we will be able to continue to
expand our contract and commercial
<PAGE> 17
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (CONTINUED)
business while retaining our base of existing customers, and any failure to do
so could have a material adverse effect on our profitability. We are also
working on various initiatives to improve margin levels in this business
segment, but there is no assurance that these initiatives will prove successful.
Some of our competitors operate only in the contract and/or commercial channels
and therefore may be able to focus more attention on the business services
segment, thereby providing formidable competition. Our failure to adequately
address this segment of our business could put us at a competitive disadvantage
relative to these competitors.
SOURCES AND USES OF CASH
We believe that our current level of cash and cash equivalents, future operating
cash flows, lease financing arrangements and funds available under our credit
facilities and term loan should be sufficient to fund our planned expansion,
integration and other operating cash needs for at least the next year. However,
there can be no assurance that additional sources of financing will not be
required during the next 12 months as a result of unanticipated cash demands,
opportunities for expansion, acquisition or investment, changes in growth
strategy, changes in our warehouse integration plans or adverse operating
results. We could attempt to meet our financial needs through the capital
markets in the form of either equity or debt financing. Alternative financing
will be considered if market conditions make it financially attractive. There
can be no assurance that any additional funds required by us, whether within the
next 12 months or thereafter, will be available to us on satisfactory terms. Our
inability to access needed financial resources could have a material adverse
effect on our financial position or operating results.
EFFECTS OF CERTAIN NON-RECURRING CHARGES
On August 30, 1999, we disclosed in a public statement that we anticipated a
shortfall in our earnings during the second half of 1999 compared to the
investment community's consensus expectations. We also announced the
departure of our then-Chief Operating Officer and anticipated charges against
earnings in the third quarter for slow-moving inventories in our warehouses
and stores and for accelerated store closings and relocations. Then, in the
fourth quarter of 1999, in response to recently issued guidance from the SEC,
certain of these charges were reversed. Additionally, each quarter since our
August 1998 merger with Viking, we have incurred merger and restructuring
charges and credits. There can be no assurance that additional charges of
this nature will not be required in the future as well. Such charges, if any,
could have a materially adverse impact on our financial position or operating
results in the future.
Y2K ISSUES
While we have worked diligently to bring our own systems into Year 2000
compliance and believe that the transition was successful, there can be no
assurance that we will not have Y2K-related problems in the future. We also have
endeavored to ensure that our suppliers, vendors and major customers are Y2K
compliant. While we have not encountered any significant difficulties during the
early days of 2000, there can be no assurance that all such suppliers, vendors
or major customers did, in fact, become Y2K compliant on a timely basis. In
addition to the business risks inherent in the Y2K issues, there is also the
possibility of litigation from customers and other parties claiming to have been
damaged by failures of our products and/or services. While we fully expect to
rely on certain protections afforded under federal legislation passed in 1999 as
well as on indemnifications from suppliers of various products, there is a
possibility that certain claims might not be barred by this legislation or might
not be susceptible to indemnification and that the results of such litigation
could have a material adverse effect on our businesses.
DISCLAIMER OF OBLIGATION TO UPDATE
We assume no obligation (and specifically disclaim any obligation) to update
these Cautionary Statements or any other forward-looking statements contained
in this Annual Report to reflect actual results, changes in assumptions or other
factors affecting such forward-looking statements.
Page 38 Office Depot Annual Report 1999
<PAGE> 18
Office Depot Annual Report 1999 Page 39
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 25, 1999 and December 26, 1998, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended December 25, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Office
Depot, Inc. and Subsidiaries as of December 25, 1999 and December 26, 1998 and
the results of their operations and their cash flows for each of the three
years in the period ended December 25, 1999 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
February 10, 2000 (March 3, 2000 as to Note J)
<PAGE> 19
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
DECEMBER 25, December 26,
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 218,784 $ 704,541
Short-term investments -- 10,424
Receivables, net of allowances of $27,736 in 1999 and $25,927 in 1998 849,478 721,446
Merchandise inventories, net 1,436,879 1,258,355
Deferred income taxes 68,279 52,422
Prepaid expense 57,632 33,247
- -------------------------------------------------------------------------------------------------------------------
Total current assets 2,631,052 2,780,435
Property and equipment, net 1,145,628 891,471
Goodwill, net 240,166 227,964
Other assets 259,337 125,413
- -------------------------------------------------------------------------------------------------------------------
$ 4,276,183 $ 4,025,283
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,239,301 $ 1,027,591
Accrued expenses and other liabilities 414,690 386,730
Income taxes payable 39,588 69,910
Current maturities of long-term debt 250,466 2,834
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,944,045 1,487,065
Long-term debt, net of current maturities 109,653 35,490
Deferred income taxes and other credits 103,319 38,628
Zero coupon, convertible subordinated notes 211,446 435,221
Commitments and contingencies
Stockholders' equity:
Common stock -- authorized 800,000,000 shares of $.01 par value;
issued 376,212,439 in 1999 and 373,817,704 in 1998 3,762 3,738
Additional paid-in capital 926,295 838,122
Unamortized value of long-term incentive stock grants (4,065) (2,874)
Accumulated other comprehensive income 15,730 (18,078)
Retained earnings 1,467,359 1,209,721
Treasury stock, at cost -- 46,770,272 shares in 1999 and 3,245,170 shares in 1998 (501,361) (1,750)
- -------------------------------------------------------------------------------------------------------------------
1,907,720 2,028,879
- -------------------------------------------------------------------------------------------------------------------
$ 4,276,183 $ 4,025,283
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
Page 40 Office Depot Annual Report 1999
<PAGE> 20
Office Depot Annual Report 1999 Page 41
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $10,263,280 $8,997,738 $8,100,319
Cost of goods sold and occupancy costs 7,450,310 6,484,464 5,963,521
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 2,812,970 2,513,274 2,136,798
Store and warehouse operating and selling expenses 1,961,037 1,642,042 1,443,192
Pre-opening expenses 23,628 17,150 6,609
General and administrative expenses 381,611 330,194 272,022
Merger and restructuring costs (7,104) 119,129 16,094
Store closure and relocation costs 40,425 -- --
- ----------------------------------------------------------------------------------------------------------------------
Operating profit 413,373 404,759 398,881
Other income (expense):
Interest income 30,176 25,309 7,570
Interest expense (26,148) (22,356) (21,680)
Miscellaneous expense, net (3,514) (18,985) (13,180)
- ----------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 413,887 388,727 371,591
Income taxes 156,249 155,531 136,730
- ----------------------------------------------------------------------------------------------------------------------
Net earnings $ 257,638 $ 233,196 $ 234,861
======================================================================================================================
Earnings per share:
Basic $ .71 $ .64 $ .65
Diluted .69 .61 .62
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 21
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except for number of shares)
<TABLE>
<CAPTION>
Unamortized Accumulated
Common Common Additional value of long- other compre-
stock stock paid-In term incentive hensive
shares amount capital stock grant income
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 28, 1996 364,629,996 $3,647 $731,739 $(5,244) $ (946)
Comprehensive income:
Net earnings
Foreign currency translation adjustment (18,343)
Comprehensive income
Exercise of stock options (including
income tax benefits) 2,727,243 27 23,095
Issuance of stock under employee
stock purchase plans 528,569 5 6,335
Matching contributions under 401(k)
and deferred compensation plans 226,785 2 2,799
Conversion of LYONs to common stock 1,402 -- 20
Cancellation of long-term incentive
stock grant (450,000) (4) (2,303) 1,640
Amortization of long-term incentive
stock grant -- -- -- 394
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 27, 1997 367,663,995 $3,677 $761,685 $(3,210) $ (19,289)
Comprehensive income:
Net earnings
Foreign currency translation adjustment 1,211
Comprehensive income
Exercise of stock options (including
income tax benefits) 5,399,946 54 63,456
Issuance of stock under employee
stock purchase plans 467,394 4 7,896
Matching contributions under 401(k)
and deferred compensation plans 203,055 2 3,882
Conversion of LYONs to common stock 83,314 1 1,203
Amortization of long-term incentive
stock grant 336
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 26, 1998 373,817,704 $3,738 $838,122 $(2,874) $ (18,078)
Comprehensive income:
Net earnings
Foreign currency translation adjustment (28,319)
Unrealized gain on investment
securities, net of tax 62,127
Comprehensive income
Acquisition of treasury stock
Retirement of treasury stock (3,245,170) (32) (1,718)
Grant of long-term incentive stock 130,000 1 2,127 (2,127)
Exercise of stock options (including
income tax benefits) 4,457,024 45 72,865
Issuance of stock under employee
stock purchase plans 712,431 7 9,240
Matching contributions under 401(k)
and deferred compensation plans 320,906 3 5,423
Conversion of LYONs to common stock 23,710 -- 329
Payment for fractional shares in
connection with 3-for-2 stock split (4,166) -- (93)
Amortization of long-term incentive
stock grant 936
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 25, 1999 376,212,439 $3,762 $926,295 $(4,065) $ 15,730
================================================================================================================================
<CAPTION>
Compre-
hensive Retained Treasury
income earnings stock
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 28, 1996 $ 741,664 $ (1,750)
Comprehensive income:
Net earnings $234,861 234,861
Foreign currency translation adjustment (18,343)
--------
Comprehensive income $216,518
========
Exercise of stock options (including
income tax benefits)
Issuance of stock under employee
stock purchase plans
Matching contributions under 401(k)
and deferred compensation plans
Conversion of LYONs to common stock
Cancellation of long-term incentive
stock grant
Amortization of long-term incentive
stock grant
- ---------------------------------------------------------------------------------------------------------
Balance at December 27, 1997 $ 976,525 $ (1,750)
Comprehensive income:
Net earnings $233,196 233,196
Foreign currency translation adjustment 1,211
--------
Comprehensive income $234,407
========
Exercise of stock options (including
income tax benefits)
Issuance of stock under employee
stock purchase plans
Matching contributions under 401(k)
and deferred compensation plans
Conversion of LYONs to common stock
Amortization of long-term incentive
stock grant
- ---------------------------------------------------------------------------------------------------------
Balance at December 26, 1998 $1,209,721 $ (1,750)
Comprehensive income:
Net earnings $257,638 257,638
Foreign currency translation adjustment (28,319)
Unrealized gain on investment
securities, net of tax 62,127
--------
Comprehensive income $291,446
========
Acquisition of treasury stock (501,361)
Retirement of treasury stock 1,750
Grant of long-term incentive stock
Exercise of stock options (including
income tax benefits)
Issuance of stock under employee
stock purchase plans
Matching contributions under 401(k)
and deferred compensation plans
Conversion of LYONs to common stock
Payment for fractional shares in
connection with 3-for-2 stock split
Amortization of long-term incentive
stock grant
- ---------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 25, 1999 $1,467,359 $(501,361)
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
Page 42 Office Depot Annual Report 1999
<PAGE> 22
Office Depot Annual Report 1999 Page 43
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 10,205,532 $ 8,928,519 $ 8,017,406
Cash paid to suppliers (9,739,616) (8,119,219) (7,416,925)
Interest received 31,865 23,972 5,611
Interest paid (6,472) (3,625) (4,166)
Income taxes paid (118,157) (151,032) (140,831)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 373,152 678,615 461,095
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities (154,364) (36,697) --
Proceeds from maturities or sales of investment securities 114,141 44,260 20,030
Investments in unconsolidated joint ventures (1,606) (40,475) (22,464)
Purchase of remaining ownership interest in joint ventures (21,629) (27,680) --
Capital expenditures (396,008) (233,089) (156,869)
Proceeds from sale of property and equipment 7,922 22,364 4,127
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (451,544) (271,317) (155,176)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and sale of
stock under employee stock purchase plans 59,082 64,237 19,959
Repurchase of common stock for treasury (501,006) -- --
Proceeds from issuance of long-term debt 42,841 -- --
Payments on long- and short-term borrowings (6,766) (2,490) (151,888)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (405,849) 61,747 (131,929)
- -----------------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (1,516) (4,381) (1,939)
- -----------------------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (485,757) 464,664 172,051
Cash and cash equivalents at beginning of period 704,541 239,877 67,826
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 218,784 $ 704,541 $ 239,877
- -----------------------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net earnings $ 257,638 $ 233,196 $ 234,861
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 168,553 140,604 119,748
Provision for losses on inventories and receivables 111,510 81,270 76,919
Net (earnings) losses on equity method investments (2,041) 15,254 7,842
Accreted interest on zero coupon, convertible subordinated notes 19,534 18,812 18,005
Contributions of common stock to employee benefit
and stock purchase plans 5,426 4,501 3,373
Compensation expense for long-term incentive stock grants 479 336 (272)
Deferred income taxes (430) (38,244) 9,534
Loss on disposal of property and equipment 14,124 2,023 4,657
Changes in assets and liabilities:
Increase in receivables (152,523) (88,595) (147,991)
(Increase) decrease in merchandise inventories (250,003) 106,189 (28,251)
Net increase in prepaid expenses and other assets (24,862) (16,792) (7,870)
Net increase in accounts payable, accrued
expenses and deferred credits 225,747 220,061 170,540
- -----------------------------------------------------------------------------------------------------------------------------------
Total adjustments 115,514 445,419 226,234
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 373,152 $ 678,615 $ 461,095
===================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular dollar amounts are in thousands)
NOTE A--SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Office Depot, Inc., together with our subsidiaries, is the world's largest
supplier of office products and services, operating in 19 countries throughout
the world and doing business primarily under two brands -- Office Depot and
Viking Office Products. We serve our customers, including those in countries
operated under licensing and joint venture agreements, through multiple sales
channels. They include an international chain of high-volume office supply
stores located in ten countries; a domestic contract sales network; three
Internet sites, serving both our domestic and international customers; and
catalog, mail order and delivery operations in 15 countries. After merging with
Viking Office Products, Inc. ("Viking") in August 1998, we now have operations,
either owned directly or operated through joint ventures or licensing
arrangements, in Australia, Austria, Belgium, Canada, Colombia, France, Germany,
Hungary, Ireland, Israel, Italy, Japan, Luxembourg, Mexico, the Netherlands,
Poland, Thailand, the United Kingdom and the United States.
BASIS OF PRESENTATION: We operate on a 52- or 53-week fiscal year ending on the
last Saturday in December. All periods presented in our consolidated financial
statements consisted of 52 weeks. We have included account balances from our
wholly-owned and majority-owned subsidiaries in our consolidated financial
statements. We eliminate any significant inter-company transactions when
consolidating the account balances of our subsidiaries. We have reclassified
certain amounts in our prior year statements to conform them to the
presentation used in the current year.
We currently maintain licensing agreements for the operation of Office Depot
stores in Colombia, Hungary, Poland and Thailand, and we have entered into
joint venture agreements for the operation of our stores in Israel and Mexico,
which are accounted for using the equity method. Our portion of the income or
loss from the operations of those two joint ventures is included in
miscellaneous expense on our Consolidated Statements of Earnings. The financial
position, results of operations and cash flows from our French and Japanese
retail operations have been included in our consolidated financial statements
since November 1998 and April 1999, respectively, as a result of increasing our
ownership share to 100% in each of those operations. Similarly, our share of
the Thai joint venture's financial position, results of operations and cash
flows have been included in our consolidated financial statements from April
1998 to October 1999, when our ownership interest was 80%. In November 1999, we
sold our interest in our Thai operations back to our joint venture partner (see
Note C).
On February 24, 1999, our Board of Directors declared a three-for-two stock
split in the form of a 50% stock dividend distributed on April 1, 1999 to
stockholders of record on March 11, 1999. We have restated all shares and per
share amounts in our financial statements to reflect this stock split. In
conjunction with the stock split, we issued 124,560,075 additional shares on
April 1, 1999.
USE OF ESTIMATES: When we prepare our financial statements, accounting
guidelines require us to make estimates and assumptions that affect amounts
reported in our financial statements and disclosure of contingent assets and
liabilities at the date of our financial statements. Actual results could differ
from those estimates.
FOREIGN CURRENCY TRANSLATION: Our subsidiaries outside of the United States
record transactions using their local currency as their functional currency. In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 52,
"Foreign Currency Translation," the assets and liabilities of our foreign
subsidiaries are translated into U.S. dollars using either the exchange rates
in effect at the balance sheet dates or historical exchange rates, depending
upon the account translated. Income and expenses are translated at average
daily exchange rates each month. The translation adjustments that result from
translating the balance sheets at different rates than the income statements
are included in accumulated other comprehensive income, which is a separate
component of our stockholders' equity. Accumulated other comprehensive income
also includes gains and losses on inter-company loans that are not expected to
be repaid in the foreseeable future.
CASH AND CASH EQUIVALENTS: We consider all highly liquid investments with
original maturities of three months or less to be cash equivalents.
RECEIVABLES: Included in our receivables are our trade receivables not sold
through outside credit card programs and our other non-trade receivables. Our
trade receivables totaled $506.7 million and $464.0 million on December 25,
1999 and December 26, 1998, respectively. We record an allowance for doubtful
accounts, reducing our receivables balance to an amount we estimate is
collectible from our customers. We encounter limited credit risk associated
with our trade receivables because we have a large customer base that extends
across many different industries and geographic regions.
Other receivables, totaling $342.8 million and $257.4 million as of December
25, 1999 and December 26, 1998, respectively, consist primarily of receivables
from our vendors under purchase rebate, cooperative advertising and various
other marketing programs. Amounts we expect to receive from our vendors that
relate to our purchase of merchandise inventories are capitalized and
recognized as a reduction of our cost of goods sold as the merchandise is sold.
Amounts relating to cooperative advertising and marketing programs are
recognized as a reduction of our advertising expense in the period that the
related expenses are incurred.
MERCHANDISE INVENTORIES: Our inventories are stated at the lower of cost or
market value. We use a weighted average method for determining the cost of
approximately 90% of our inventories and the first-in-first-out (FIFO) method
for the remainder of our inventories, primarily in our International segment.
In the third quarter of 1999, we increased our provision for slow-moving and
obsolete inventories in our warehouses and stores by $56.1 million (as more
fully discussed in Note C).
Page 44 Office Depot Annual Report 1999
<PAGE> 24
Office Depot Annual Report 1999 Page 45
Office Depot, Inc. and Subsidiaries
INCOME TAXES: We use the provisions of SFAS No. 109, "Accounting for Income
Taxes," to calculate our current Federal and state income tax liability, as
well as any deferred tax assets or liabilities. Under this standard, deferred
tax assets and liabilities represent the tax effects, based on current law, of
any temporary differences in the timing of when revenues and expenses are
recognized for tax purposes and when they are recognized for financial
statement purposes.
We have not recognized income taxes on the undistributed earnings of certain of
our foreign subsidiaries. Our intention is to reinvest such earnings
permanently to fund further overseas expansion. Cumulative undistributed
earnings of our foreign subsidiaries for which no Federal income taxes have
been provided approximated $354.5 million and $248.3 million as of December 25,
1999 and December 26, 1998, respectively.
PROPERTY AND EQUIPMENT: We record our property and equipment at cost. We record
depreciation and amortization in a manner that recognizes the cost of our
depreciable assets in operations over their estimated useful lives using
straight-line or accelerated methods. We estimate the useful lives of our
depreciable assets to be 10-30 years for buildings and 3-10 years for
furniture, fixtures and equipment. We amortize our leasehold improvements over
the shorter of the terms of the underlying leases, including probable renewal
periods, or the estimated useful lives of the improvements.
INVESTMENTS: All of our investments, except those which are consolidated or
accounted for under the equity method, are classified as "available for sale"
under the provisions of SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Accordingly, we report our investments at fair
value if fair value can be determined. Under SFAS No. 115, fluctuations in fair
value of investments classified as "available for sale" are included as a
separate component of stockholders' equity, net of applicable taxes. At December
25, 1999, we held investments in four unrelated Internet-based companies. All
of these investments, which are included in other assets, were made during 1999
and are classified as long-term on our 1999 Consolidated Balance Sheet. The
carrying amount of these investments at December 25, 1999 is $152.0 million.
One of these investments is publicly traded and has been adjusted from its cost
of $5.2 million to its fair value of $106.5 million, with the unrealized gains
included in accumulated other comprehensive income in our Consolidated
Statements of Stockholders' Equity, net of applicable income taxes. The
remaining investments are in closely held corporations, and their fair market
values cannot be readily determined. These investments are recorded at cost.
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 we have acquired under the purchase method of accounting. We
amortize our goodwill on a straight-line basis over 40 years, which is the
maximum period allowed. The accumulated amortization of our goodwill was $44.5
million and $37.5 million as of December 25, 1999 and December 26,1998,
respectively.
IMPAIRMENT OF LONG-LIVED ASSETS: In accordance with SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," we review our long-lived assets, goodwill and other intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. Measurement of an
impairment loss for such long-lived assets and identifiable intangibles is
based on the fair value of the asset less any costs to sell that asset. We have
recognized impairment losses during the periods presented in association with
merger and restructuring (see Note B) and store closure and relocation
activities (see Note C). Otherwise, we have not recognized significant
impairment losses during the periods presented.
FAIR VALUE OF FINANCIAL INSTRUMENTS: SFAS No. 107, "Disclosure about Fair Value
of Financial Instruments," requires that we disclose the fair value of our
financial instruments when it is practical to estimate. We have determined the
estimated fair values of our financial instruments, which are either recognized
in our Consolidated Balance Sheets or disclosed within these Notes to our
Consolidated Financial Statements, 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 we have presented are not necessarily indicative of the amounts
we could realize in a current market exchange.
Short-term Assets and Liabilities: The fair values of our cash and cash
equivalents, receivables and accounts payable approximate their carrying values
because of their short-term nature.
Investments: We use quoted market prices, if available, to determine the fair
value of our long-term investments. However, most of our long-term investments
are in closely held corporations, and quoted market prices are not available.
For these investments, a reasonable estimate of fair value could not be made
without incurring excessive costs. However, because of the recent nature of
these investments, we believe that cost approximates fair value.
Notes Payable: The fair values of our zero coupon, convertible subordinated
notes are determined based on quoted market prices.
Other Debt: We estimate the fair value of our short- and long-term debt by
discounting the cash flows using current interest rates for financial
instruments with similar characteristics and maturities.
Interest Rate Swaps: We had an interest rate swap agreement outstanding at
December 25, 1999 covering a principal amount equivalent to $23 million.
Designed to hedge against the volatility of the interest payments on a portion
of our yen borrowings, this swap effectively converts a portion of our
long-term variable rate debt to a fixed rate obligation. The fair value of our
interest rate swaps (used for hedging purposes) is the amount we would receive
or have to pay to terminate the swap agreement at the
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollar amounts are in thousands)
reporting date, taking into account current interest rates. This fair value
amount is provided to us by our financial institution, the counterparty to our
interest rate swap agreement.
Foreign Currency Contracts: We enter into forward currency contracts to hedge
against certain foreign currency purchase commitments. Gains and losses from
these transactions are included in the cost of the underlying purchases.
Similar to our interest rate swaps, the fair value of our foreign currency
contracts is the amount we would receive or have to pay to terminate the
contract at the reporting date, taking into account current interest rates.
This fair value amount is also provided to us by our financial institution.
There were no significant differences as of December 25, 1999 and December 26,
1998 between the carrying value and fair value of our financial instruments
except as disclosed below:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Zero coupon, convertible subordinated notes $454,426 $433,031 $435,200 $633,600
Long-term investments for which it is
practicable to estimate fair value-warrants(1) -- 98,250 -- --
Interest rate swaps -- (60) -- --
Foreign currency contracts -- (273) -- --
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) We own 750,000 warrants to purchase shares of PurchasePro.com. We acquired
these warrants in conjunction with our investment in the common stock of
PurchasePro.com. Because the warrants have not been registered under the
rules of the Securities and Exchange Act of 1933, they are not publicly
traded on a market exchange. We determined the fair value of these warrants
using an option model with the assistance of our investment banker.
REVENUE RECOGNITION: We record revenue at the time of shipment for delivery and
catalog sales, and at the point of sale for all retail store sales except for
sales of extended warranty service plans. These service plans are sold to our
customers and administered by an unrelated third party. All performance
obligations and risk of loss associated with such contracts are economically
transferred to the administrator at the time the contracts are sold to the
customer. Our service plans typically extend over a period of one to four
years. Because we are the legal obligor in the majority of states in which we
sell these contracts, we defer any revenues and direct expenses associated with
the sale of these warranty plans and recognize them over the service period of
the contract.
We recognize losses on the sale of our credit card receivables in accordance
with SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." The related losses are recorded as store
and warehouse operating and selling expenses in our Consolidated Statements of
Earnings.
ADVERTISING: Advertising costs are either charged to expense when incurred or,
in the case of direct marketing advertising, capitalized and amortized in
proportion to the related revenues. We participate in cooperative advertising
programs with our vendors in which they reimburse us for a portion of our
advertising costs. Advertising expense, net of cooperative advertising
allowances, amounted to $285.3 million in 1999, $230.8 million in 1998 and
$201.8 million in 1997.
PRE-OPENING EXPENSES: Pre-opening expenses related to opening new stores and
warehouses or relocating existing stores and warehouses are expensed as
incurred.
SELF-INSURANCE: We are primarily self-insured for workers' compensation, auto
and general liability and our employee medical insurance programs.
Self-insurance liabilities are based on claims filed and estimates of claims
incurred but not reported. These liabilities are not discounted.
COMPREHENSIVE INCOME: Comprehensive income represents the change in
stockholders' equity from transactions and other events and circumstances
arising from non-stockholder sources. Our comprehensive income for 1999
consists of net income, foreign currency translation adjustments and unrealized
gains or losses on investment securities that are available for sale, net of
applicable income taxes. Our comprehensive income for 1998 and 1997 consists of
net income and foreign currency translation adjustments.
DERIVATIVE FINANCIAL INSTRUMENTS: We use a variety of derivative financial
instruments, including foreign currency contracts and interest rate swaps, to
hedge our exposure to foreign currency exchange and interest rate risks. We
have established policies and procedures for assessing the risk and approving
the use of derivative financial instrument activities. We do not enter into
these types of financial instruments for trading or speculative purposes.
Interest rate swaps involve the periodic exchange of payments without the
exchange of the underlying principal amounts. New payments are recognized as an
adjustment to interest expense. In 1999, we entered into a yen interest rate
swap for a principal amount equivalent to $23 million, the full amount of which
was outstanding on December 25, 1999, in order to hedge against the volatility
of the interest payments on a portion of our yen borrowings. The swap will
mature in July 2000.
Foreign currency contracts involve the future exchange of currencies at an
agreed-upon exchange rate. We often enter into contracts to hedge certain of
our inventory purchases when we pay our suppliers in a different currency than
we sell to our customers. At December 25, 1999, we had approximately $300,000
of foreign currency contracts outstanding which will
Office Depot Annual Report 1999 Page 46
<PAGE> 26
Office Depot Annual Report 1999 Page 47
Office Depot, Inc. and Subsidiaries
mature at varying dates through June 2000. At December 26, 1998, we had no
foreign currency contracts outstanding. Since the introduction of the euro on
January 1, 1999, the exchange rates between the European member countries have
been effectively fixed. Because the United Kingdom is not one of the member
countries, we currently use these foreign currency contracts to hedge our
exposure to fluctuations in the exchange rate between the British pound and the
euro. Gains and losses from these transactions are included in the cost of the
underlying inventory purchases, which are not recognized in earnings until the
inventory is sold.
NEW ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 requires that we record all derivatives as assets or
liabilities measured at their fair value. Gains or losses resulting from
changes in the values of those derivatives should be accounted for according to
the intended use of the derivative and whether it qualifies for hedge
accounting. In July 1999, the FASB issued SFAS No. 137, which defers the
effective date of SFAS No. 133 until the start of fiscal years beginning after
June 15, 2000. We will adopt SFAS No. 133 for our fiscal year 2001. Assuming
our current level of involvement in derivative instruments and hedging
activities does not change before we adopt this Statement, we do not expect the
adoption of SFAS No. 133 to have a material impact on our financial position or
the results of our operations.
NOTE B-MERGER AND RESTRUCTURING
TRANSACTIONS
VIKING MERGER: In August 1998, we completed our merger with Viking.
Transactional and other direct expenses of this merger, primarily legal and
investment banking fees, were recorded as merger and restructuring costs in
1998.
Subsequent to the merger, we immediately began the process of integrating our
Office Depot and Viking businesses. Our original plans, which we expected to
complete during 2000, initially included the closing of 15 domestic CSCs and
the opening of five new domestic CSCs, as well as installing complex new
systems in each surviving facility. During the fourth quarter of 1999, after
evaluating the results of integrating two test facilities, we modified our CSC
integration plans. Our new plans incorporate a more simplified approach and, as
a result, require less capital. Furthermore, our new plans require the closing
of only 11 existing CSCs and the opening of only two new CSCs, which were
opened as test facilities in late 1999. We lease all but two of the closing
CSCs. We sold one of the CSCs in 1999, and we plan to sell the other in 2000.
Our plan is to vacate all of the buildings. Accordingly, we have written off
certain assets such as leasehold improvements and redundant software and
conveyor systems in these CSCs. In addition, merger and restructuring costs
include certain expenses of exiting these facilities that will provide no
future economic benefit to us (e.g., future lease obligations, personnel
retention and other termination costs). As a result of modifying our
integration plans in the fourth quarter of 1999, we reversed previously accrued
merger and restructuring charges of $32.5 million, reducing merger and
restructuring costs to a net credit of $7.1 million for the year.
We accrue merger and restructuring costs when significant changes in our plan
are unlikely, which in most cases requires that planned actions take place
within one year. In the case of our CSC integration, we plan to integrate all
but three of our CSCs during 2000. We feel confident that significant changes
in our plan are unlikely even though three of our CSCs will not be integrated
until early 2001.
CLOSURE OF FURNITURE AT WORK(TM) AND IMAGES(TM) STORES: As a result of our
decision to focus on the continued growth of our core businesses and on
expanding our international operations, we closed nine of our Furniture at
Work(TM) and Images(TM) stores in 1999 and one in the fourth quarter of 1998.
Eight of the ten facilities were leased; the other two were owned. We have sold
one of the owned facilities and are presently in negotiations to sell the
second. In addition, we exercised a purchase option on one of our leased
facilities since we have negotiated a sale of that facility as well. We have
recorded the exit costs related to closing these facilities in merger and
restructuring costs.
ACQUISITION OF JOINT VENTURE INTERESTS IN FRANCE AND JAPAN: In November 1998,
we purchased our joint venture partner's interest in our French Office Depot
retail operations. Following this purchase, we decided to restructure and
integrate the separate Office Depot and Viking operations in France. During
1999, we merged the Office Depot and Viking headquarters into a new office that
is more conveniently located. We do not expect to close any facilities in
conjunction with our restructuring and integration programs in France. Instead,
we will integrate the warehousing and delivery of our Office Depot and Viking
brand merchandise in each of our existing warehouses.
In April 1999, we purchased our joint venture partner's interest in our
Japanese Office Depot retail operations and announced plans to restructure and
integrate our operations in Japan. We closed one leased CSC and one leased
store in Japan in conjunction with these plans. We expect to close another CSC
in 2000. We have recorded merger and restructuring costs in 1999 associated
with these activities. We expect our operations in France and Japan to be
completely integrated by the end of 2000.
PROPOSED STAPLES MERGER: In September 1996, we entered into an agreement and
plan of merger with Staples, Inc. ("Staples"). In June 1997, the proposed
merger was blocked by a preliminary injunction granted by the Federal District
Court at the request of the Federal Trade Commission. In July 1997, we
announced that the merger agreement had been terminated. Costs directly
attributable to the merger transaction, primarily legal expenses, were recorded
in 1997.
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollar amounts are in thousands)
Merger and restructuring costs in 1999, 1998 and 1997 consist of the following
charges:
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Viking Merger and Proposed
Staples Merger:
Costs directly attributable to
the merger transactions $ 236 $ 31,555 $ 16,094
Asset write-offs associated
with closing identified
facilities and the write-off
of software applications to
be abandoned (19,065) 41,962 --
Other facility exit costs,
principally estimated
lease costs subsequent
to the expected closing
of each facility (10,051) 20,079 --
Personnel retention and
termination costs 295 14,553 --
- -----------------------------------------------------------------------------------------
$ (28,585) $ 108,149 $ 16,094
=========================================================================================
Closure of Furniture at Work(TM) and
Images(TM) Stores:
Asset write-offs associated
with closing the stores $ 2,813 $ 3,882 $ --
Other facility exit costs,
principally estimated
lease costs subsequent
to closing the stores (4,832) 7,098 --
- -----------------------------------------------------------------------------------------
$ (2,019) $ 10,980 $ --
=========================================================================================
Acquisition of Joint Venture Interests
in France and Japan:
Costs directly attributable to
the acquisitions $ 1,317 $ -- $ --
Asset write-offs associated with
closing identified facilities 3,023 -- --
Other facility exit costs, princi-
pally estimated lease costs
subsequent to the expected
closing of each facility 5,311 -- --
Personnel retention and
termination costs 13,849 -- --
- -----------------------------------------------------------------------------------------
$ 23,500 $ -- $ --
=========================================================================================
Grand Total $ (7,104) $ 119,129 $ 16,094
=========================================================================================
</TABLE>
We determined the fair value of assets to be disposed of by estimating the net
realizable value at the time of the anticipated closure or discontinuation of
use. Estimated proceeds from and costs to dispose of these assets were
determined through analysis of historical data and expected outcomes. The costs
required to complete our merger and restructuring plans necessarily involve the
use of estimates. We believe our estimates are unlikely to change significantly
in the future.
As of December 25, 1999 and December 26, 1998, we have remaining accruals of
approximately $21.3 million and $40.8 million, respectively, for merger and
restructuring costs. Amounts expensed for asset write-offs are recorded as a
reduction of our fixed assets. All other amounts are recorded as accrued
expenses. The activity in the liability accounts by cost category is as
follows:
<TABLE>
<CAPTION>
Beginning New Cash Other Ending
Balance Charges Payments Adjustments Balance
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Accrued direct
merger costs $ 1,626 $ 1,684 $ (1,540) $ (131) $ 1,639
Accrued other
facility exit costs 26,080 4,344 (8,744) (13,916) 7,764
Accrued personnel
retention and
termination costs 13,126 20,007 (15,405) (5,863) 11,865
- ---------------------------------------------------------------------------------------------------
Total accrued
costs $ 40,832 $ 26,035 $ (25,689) $ (19,910) $ 21,268
===================================================================================================
1998
Accrued direct
merger costs $ 113 $ 31,555 $ (30,042) $ -- $ 1,626
Accrued other
facility exit costs 1,303 27,221 (2,400) (44) 26,080
Accrued personnel
retention and
termination costs -- 14,553 (1,427) -- 13,126
- ---------------------------------------------------------------------------------------------------
Total accrued
costs $ 1,416 $ 73,329 $ (33,869) $ (44) $ 40,832
===================================================================================================
</TABLE>
The other adjustments column represents adjustments of original estimates and
other adjustments pursuant to plan modifications made during the fourth quarter
of 1999. We expect to incur additional merger and restructuring costs over the
remaining integration periods. Although we expect these costs to be
insignificant to our future operating results, there can be no assurance that
this will be the case.
NOTE C--OTHER ONE-TIME CHARGES
AND ADJUSTMENTS
In 1999, we increased our provision for slow-moving and obsolete inventories by
$56.1 million. The need for this provision resulted from two factors: 1)
slow-moving technology related products whose market values have been adversely
affected by accelerated rates of change in technology, and 2) a rationalization
of our warehouse inventory assortments in connection with the Viking warehouse
consolidation. This provision has been included in our cost of goods sold.
We recorded a charge of $46.4 million in 1999 to reflect our decision to
accelerate our store closure program for under-performing stores and our
relocation program for older stores in our Stores Division. This charge also
reflects our decision to sell our interest in our retail operations in
Thailand. On October 28, 1999, we entered into an agreement with Central Retail
Group, our joint venture partner, to sell to them our Thai operations and
license
Page 48 Office Depot Annual Report 1999
<PAGE> 28
Office Depot Annual Report 1999 Page 49
Office Depot, Inc. and Subsidiaries
to them certain trademarks, software and operating systems. Central Retail
Group now operates the two stores under a licensing agreement. Finally, the
charge also reflects our decision to write-off certain other long-lived assets
in our BSG.
We subsequently reversed $6.0 million of the charge relating to stores that may
be relocated after 2000. This reversal is in accordance with recently issued
guidance from the SEC which provides that charges should not be accrued unless
changes in our plans are unlikely, which in most cases requires that planned
actions take place within one year. This charge, net of the reversal, consists
of asset impairment costs ($29.2 million), residual lease obligations ($8.3
million) and other exit costs ($2.9 million) and reduces our operating profit.
NOTE D--PROPERTY AND EQUIPMENT
Property and equipment consisted of:
<TABLE>
<CAPTION>
DECEMBER 25, December 26,
1999 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Land $ 88,312 $ 81,617
Buildings 183,596 165,650
Leasehold improvements 561,455 447,521
Furniture, fixtures and equipment 889,650 740,076
- -----------------------------------------------------------------------
1,723,013 1,434,864
Less accumulated depreciation (577,385) (543,393)
- -----------------------------------------------------------------------
$ 1,145,628 $ 891,471
=======================================================================
</TABLE>
Assets held under capital leases included above consisted of:
<TABLE>
<CAPTION>
DECEMBER 25, December 26,
1999 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Buildings $ 48,326 $ 31,066
Furniture, fixtures and equipment 34,359 16,308
- -----------------------------------------------------------------------
82,685 47,374
Less accumulated depreciation (16,817) (9,786)
- -----------------------------------------------------------------------
$ 65,868 $ 37,588
=======================================================================
</TABLE>
NOTE E--LONG-TERM DEBT
Debt that will mature within one year consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 25, December 26,
1999 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Capital lease obligations $ 7,486 $ 2,834
Zero coupon, convertible
subordinated notes 242,980 --
- -----------------------------------------------------------------------
$ 250,466 $ 2,834
=======================================================================
</TABLE>
Our 1993 LYONs(R) (described in more detail in Note F) have an option feature
that allows each holder of a note to require us, on November 1, 2000, to
purchase the LYON(R) from them at the issue price plus accrued original
discount. If the option is exercised, we have the choice of paying the holder
in cash, common stock or a combination of the two. Because the option on the
1993 LYONs(R) is exercisable in the next 12 months, we have classified this
debt as current as of December 25, 1999. This debt was classified as long-term
at December 26, 1998.
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 25, December 26,
1999 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Capital lease obligations
collateralized by certain
buildings and equipment $ 69,439 $ 38,324
Yen facility borrowings 47,435 --
Other 265 --
Less current portion (7,486) (2,834)
- -----------------------------------------------------------------------
$ 109,653 $ 35,490
=======================================================================
</TABLE>
In February 1998, we entered into a credit agreement with a syndicate of banks.
This credit agreement (the "domestic credit facility") provides us with a
working capital line and letters of credit totaling $300 million. This
agreement provides for various borrowing rate options, including a rate based
on credit rating and fixed charge coverage ratio factors that currently would
result in an interest rate of .18% over LIBOR. Our domestic credit facility
expires in February 2003 and contains certain restrictive covenants relating to
various financial statement ratios. During 1999, we borrowed and repaid a total
of $44.2 million. As of December 25, 1999, we had no outstanding borrowings
under this facility, but we had outstanding letters of credit under this
facility totaling $18.0 million.
In July 1999, we entered into term loan and revolving credit agreements with
several Japanese banks (the "yen facilities") to provide financing for our
operating and expansion activities in Japan. The yen facilities provide for
maximum aggregate borrowings of (Y)9.76 billion (the equivalent of $96 million
at December 25, 1999) at an interest rate of .875% over the Tokyo Interbank
Offered Rate ("TIBOR"). Although the loans mature at varying rates of three to
six months, we have classified these borrowings as non-current on our Balance
Sheet because we intend to renew them as they come due. These yen facilities
contain covenants similar to those in our domestic credit facility as described
earlier. During 1999, we borrowed the equivalent of $47 million under these yen
facilities. We have borrowed the equivalent of an additional $8 million
subsequent to the end of the year. Effective as of October 28, 1999, we entered
into a yen interest rate swap with a financial institution for a principal
amount equivalent to $23 million at December 25, 1999 in order to hedge against
the volatility of the interest payments on a portion of our yen borrowings. The
terms of the swap specify that we pay an interest rate of .7% and receive
TIBOR. The swap will mature in July 2000.
Under our capital lease agreements, we are required to make certain monthly,
quarterly or annual lease payments through
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollar amounts are in thousands)
2017. Our aggregate minimum capital lease payments for the next five years and
beyond, with their present value as of December 25, 1999, are as follows:
<TABLE>
<CAPTION>
1999
- -------------------------------------------------------------------------------
<S> <C>
2000 $ 12,907
2001 10,616
2002 10,718
2003 10,753
2004 5,721
Thereafter 62,300
- -------------------------------------------------------------------------------
Total minimum lease payments 113,015
Less amount representing interest at 5.0% to 8.95% 43,576
- -------------------------------------------------------------------------------
Present value of net minimum lease payments 69,439
Less current portion 7,486
- -------------------------------------------------------------------------------
Long-term portion $ 61,953
===============================================================================
</TABLE>
NOTE F--ZERO COUPON, CONVERTIBLE
SUBORDINATED NOTES
On December 11, 1992, we issued to the public Liquid Yield Option Notes
("LYONs(R)") with principal amounts totaling $316 million and proceeds of $151
million (the "1992 LYONs(R)"). We issued each 1992 LYON(R) for a price of
$476.74, and we are not required to make periodic interest payments on the
notes. Our 1992 LYONs(R) will mature on December 11, 2007 at $1,000 per
LYON(R), representing a yield to maturity, computed on a semi-annual bond
equivalent basis, of 5%.
On November 1, 1993, we issued to the public LYONs(R) with principal amounts
totaling $345 million and proceeds of $191 million (the "1993 LYONs(R)"). We
issued each 1993 LYON(R) for a price of $552.07, and we are not required to
make periodic interest payments on the notes. Our 1993 LYONs(R) will mature on
November 1, 2008 at $1,000 per LYON(R), representing a yield to maturity,
computed on a semi-annual bond equivalent basis, of 4%.
All LYONs(R) are subordinated to all of our existing and future senior
indebtedness.
Each LYON(R) is convertible at the option of the holder at any time on or
prior to maturity into our common stock at a conversion rate of 43.895 shares
per 1992 LYON(R) and 31.851 shares per 1993 LYONs(R). On November 1, 2000
for the 1993 LYONs(R) and December 11, 2002 for the 1992 LYONs(R), the holder
may require us to purchase the LYONs(R) from them at the issue price plus
accrued original issue discount. If the holder decides to exercise their put
option, we have the choice of paying the holder in cash, common stock or a
combination of the two. For that reason, our 1993 LYONs(R) have been
classified as current (see Note F). The total outstanding amounts of the 1992
and 1993 LYONs(R) as of December 25, 1999, including accrued interest,
approximated $211.4 million and $243.0 million, respectively.
In addition, if we experience a change in control prior to November 1, 2000,
the holders of our 1993 LYONs(R) can require us to purchase the 1993 LYONs(R)
from them for cash. This option is no longer available to the holders of our
1992 LYONs(R). Beginning on December 11, 1996 for the 1992 LYONs(R) and on
November 1, 2000 for the 1993 LYONs(R), we can redeem all or part of these
notes at any time from the holders for cash equal to the issue price plus
accrued original issue discount through the date of redemption. As of December
25, 1999, we have reserved 24,740,713 shares of unissued common stock for
conversion of the zero coupon, convertible subordinated notes.
NOTE G--INCOME TAXES
Our income tax provision consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Current provision:
Federal $ 114,800 $ 147,031 $ 90,889
State 15,561 23,975 16,161
Foreign 26,318 22,769 20,146
Deferred (benefit) provision (430) (38,244) 9,534
- -------------------------------------------------------------------------------
Total provision for
income taxes $ 156,249 $ 155,531 $ 136,730
===============================================================================
</TABLE>
The tax-effected components of deferred income tax assets and liabilities
consisted of the following:
<TABLE>
<CAPTION>
AS OF As of
DECEMBER 25, December 26,
1999 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Self-insurance accruals $ 18,366 $ 17,503
Inventory 12,659 9,910
Vacation pay and other
accrued compensation 9,220 10,765
Reserve for bad debts 6,589 6,352
Reserve for facility closings 16,537 5,829
Merger costs 9,011 29,179
Foreign and state net
operating loss carryforwards 74,645 33,401
Other items 31,726 20,123
- -----------------------------------------------------------------------
Gross deferred tax assets 178,753 133,062
Valuation allowance (74,645) (33,401)
- -----------------------------------------------------------------------
Deferred tax assets 104,108 99,661
- -----------------------------------------------------------------------
Basis difference in fixed assets 43,765 45,462
Unrealized gain on
investment securities 39,222 --
Capitalized leases 5,275 3,335
Excess of tax over book amortization 2,653 2,385
Other items 14,020 10,516
- -----------------------------------------------------------------------
Deferred tax liabilities 104,935 61,698
- -----------------------------------------------------------------------
Net deferred tax assets (liabilities) $ (827) $ 37,963
=======================================================================
</TABLE>
Page 50 Office Depot Annual Report 1999
<PAGE> 30
Office Depot Annual Report 1999 Page 51
Office Depot, Inc. and Subsidiaries
As of December 25, 1999, we had approximately $163 million of foreign and $167
million of state net operating loss carryforwards. Of these carryforwards, $10
million can be carried forward indefinitely, $6 million will expire in 2000 and
the balance will expire between 2001 and 2012. The valuation allowance has been
developed to reduce our deferred tax asset to an amount that is more likely
than not to be realized, and is based upon the uncertainty of the realization
of certain foreign and state deferred tax assets relating to net operating loss
carryforwards.
The following is a reconciliation of income taxes at the Federal statutory rate
to our provision for income taxes:
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal tax computed at
the statutory rate $ 144,862 $ 136,054 $ 130,057
State taxes, net of
Federal benefit 12,383 14,978 11,477
Nondeductible
goodwill amortization 1,964 1,990 1,992
Merger costs 2,920 11,044 --
Foreign income taxed at
rates other than Federal (6,508) (10,061) (6,463)
Other items, net 628 1,526 (333)
- -------------------------------------------------------------------------------
Provision for income taxes $ 156,249 $ 155,531 $ 136,730
===============================================================================
</TABLE>
NOTE H--COMMITMENTS AND CONTINGENCIES
OPERATING LEASES: We lease facilities and equipment under agreements that
expire in various years through 2020. Substantially all such leases contain
provisions for multiple renewal options. In addition to minimum rentals, we are
required to pay certain executory costs such as real estate taxes, insurance
and common area maintenance on most of our facility leases. We are also
required to pay additional rent on certain of our facility leases if sales
exceed a specified amount. The table below shows you our future minimum lease
payments due under non-cancelable leases as of December 25, 1999. These minimum
lease payments do not include facility leases that were accrued as merger and
restructuring costs (See Note B) or store closure and relocation costs (See
Note C).
<TABLE>
<S> <C>
2000 $ 332,136
2001 305,963
2002 271,350
2003 228,770
2004 200,595
Thereafter 1,106,663
- -------------------------------------------------------------------------------
2,445,477
Less sublease income 19,540
- -------------------------------------------------------------------------------
$2,425,937
===============================================================================
</TABLE>
The above amounts include lease commitments for 36 stores that had not yet
opened as of December 25, 1999. We are in the process of opening new stores and
CSCs in the ordinary course of business, and leases signed subsequent to
December 25, 1999 are not included in the above described commitment amounts.
Rent expense, including equipment rental, was approximately $321.5 million,
$249.2 million and $218.4 million in 1999, 1998 and 1997, respectively.
Included in this rent expense was approximately $0.8 million, $1.1 million and
$1.5 million of contingent rent, otherwise known as percentage rent, in 1999,
1998 and 1997, respectively. Rent expense was reduced in 1999, 1998 and 1997 by
sublease income of approximately $3.2 million, $4.0 million and $3.0 million,
respectively.
RECEIVABLES SOLD WITH RECOURSE: We have two private label credit card programs
that are managed by financial services companies. All credit card receivables
related to these programs were sold on a recourse basis during 1999, 1998 and
1997. Proceeds from the sale of these receivables were approximately $1.1
billion in 1999, 1998 and 1997. Our 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 $223.6 million at
December 25, 1999.
OTHER: We are involved in litigation arising in the normal course of
our business. In our opinion, these matters will not materially affect
our financial position or results of our operations.
NOTE I--EMPLOYEE BENEFIT PLANS
LONG-TERM EQUITY INCENTIVE PLAN: Our Long-Term Equity Incentive Plan, which was
approved effective October 1, 1997, provides for the grants of stock options
and other incentive awards, including restricted stock, to our directors,
officers and key employees. When we merged with Viking, their employee and
director stock option plans were terminated. When outstanding options issued
under Viking's prior plans are exercised, Office Depot common stock is issued.
As of December 25, 1999, we had 40,723,118 shares of common stock reserved for
issuance to directors, officers and key employees under our Long-Term Equity
Incentive Plan. Under this plan, stock options must be granted at an option
price that is greater than or equal to the market price of the stock on the
date of the grant. If an employee owns at least 10% of our outstanding common
stock, the option price must be at least 110% of the market price on the date
of the grant.
Options granted under this plan and options granted in July 1998 under Viking's
prior plans become exercisable from one to five years after the date of grant,
provided that the individual is continuously employed with us. The vesting
periods for all other
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollar amounts are in thousands)
options granted under Viking's prior plans were accelerated, and the options
became exercisable, as of the date of our merger with Viking in August 1998.
All options granted expire no more than ten years from the date of grant.
Under this plan, we have also issued 211,193 shares of restricted stock at no
cost to the employees, 13,565 of which have been canceled. The fair market
value of these awards approximated $2.9 million at the date of the grants.
Common stock issued under this plan is restricted and vests over a three to
four year period. We recognize compensation expense over the vesting period.
LONG-TERM INCENTIVE STOCK PLAN: Viking has a Long-Term Incentive Stock Plan
that, prior to the merger, allowed Viking's management to award up to 2,400,000
restricted shares of common stock to key Viking employees. Under this plan,
1,845,000 shares were issued at no cost to employees, 1,135,000 of which have
been canceled. Pursuant to the merger agreement, shares issued under this plan
were converted to Office Depot common stock, and no additional shares may be
issued under the plan. The fair market value of these restricted stock awards
approximated $10.0 million at the date of the grants. Prior to the merger, the
vesting period was 15 years. Because of the plan's change in control
provision, however, the employees now vest in their stock ratably over the
15-year period. Compensation expense is recognized over the vesting period.
EMPLOYEE STOCK PURCHASE PLAN: Our Employee Stock Purchase Plan, which was
approved effective July 1999, replaces our prior plan and Viking's plan and
permits eligible employees to purchase our common stock at 85% of its fair
market value. The maximum aggregate number of shares eligible for purchase
under this plan is 1,125,000.
OTHER STOCK-BASED COMPENSATION PLANS: Viking has two stock-based compensation
plans that are effective in Australia and the United Kingdom. These plans
allow eligible employees to purchase up to 537,813 shares of common stock at
80-85% of its fair market value.
RETIREMENT SAVINGS PLANS: We have a 401(k) retirement savings plan which allows
eligible employees to contribute up to 18% of their salaries, commissions and
bonuses, up to $10,000 annually, to the plan on a pretax basis in accordance
with the provisions of Section 401(k) of the Internal Revenue Code. We make
matching contributions of common stock into the plan that is equivalent to 50%
of the first 3% of an employee's contributions. We may, at our option, make
discretionary matching common stock contributions in addition to the normal
match. We also have a deferred compensation plan, which permits eligible
employees to make tax-deferred contributions of up to 18% of their salaries,
commissions and bonuses to the plan. We make matching contributions to the
deferred compensation plan similar to those under our 401(k) retirement savings
plan described above.
Additionally, Viking has a profit sharing plan that includes a 401(k) plan
allowing eligible employees to make pretax contributions. Under the profit
sharing plan, we make matching cash contributions of 25% of the first 6% of the
employee's contributions.
ACCOUNTING FOR STOCK-BASED COMPENSATION: We apply Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations in accounting for our stock-based compensation plans. The
compensation cost that we have charged against income for our Long-Term Equity
Incentive Plan, Long-Term Incentive Stock Plan, Employee Stock Purchase Plans,
and retirement savings plans approximated $12.5 million, $19.9 million and $4.1
million in 1999, 1998 and 1997, respectively. No other compensation costs have
been recognized under our stock-based compensation plans. Had compensation
cost for awards under our stock-based compensation plans been determined using
the fair value method prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation," our net earnings and earnings per share would have been reduced
to the pro forma amounts presented below:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings
As reported $257,638 $233,196 $234,861
Pro forma 226,424 184,916 214,653
Basic earnings per share
As reported $ .71 $ .64 $ .65
Pro forma .63 .50 .59
Diluted earnings per share
As reported $ .69 $ .61 $ .62
Pro forma .61 .49 .57
- ------------------------------------------------------------------
</TABLE>
The fair value of each stock option granted is established on the date of the
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions for grants in 1999, 1998 and 1997:
- - expected volability rates of 35% for 1999 and 25% for 1998 and 1997
- - risk-free interest rates of 5.84% for 1999, 4.88% for 1998, and 5.75% for
1997
- - expected lives of 5.6, 5.0 and 5.1 years for 1999, 1998 and 1997,
respectively
- - a dividend yield of zero for all three years.
Office Depot Annual Report 1999 Page 52
<PAGE> 32
Office Depot Annual Report 1999 Page 53
Office Depot Inc. and Subsidiaries
A summary of the status of and the changes in our stock option plans for the
last three years is presented below.
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------------
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 31,369,122 $13.75 28,708,497 $10.79 23,446,599 $10.35
Granted 8,123,883 18.85 9,225,000 20.49 10,447,604 11.13
Canceled (1,325,988) 15.91 (1,165,218) 13.56 (2,481,107) 13.78
Exercised (4,659,951) 10.31 (5,399,157) 9.59 (2,704,599) 5.51
- ----------------------------------------------------------------------------------------------
Outstanding at end of year 33,507,066 $15.31 31,369,122 $13.75 28,708,497 $10.79
- ----------------------------------------------------------------------------------------------
</TABLE>
As of December 25, 1999, the weighted average fair values of options granted
during 1999, 1998, 1997 were $8.24, $6.77 and $4.34, respectively.
The following table summarizes information about options outstanding at December
25, 1999.
<TABLE>
<CAPTION>
Options Understanding Options Exercisable
- ---------------------------------------------------------------------- ------------------------------
Weighted
Average Remaining Weighted Weighted
Range of Number Contractual Life Average Number Average
Exercise Prices Outstanding (in years) Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.17 - $ 1.95 179,985 4.4 $ 1.37 179,985 $ 1.37
1.96 - 2.95 241,331 1.7 2.40 241,331 2.40
2.95 - 4.42 1,107,185 1.8 3.79 1,107,185 3.79
4.43 - 6.64 473,853 3.3 5.37 473,853 5.37
6.65 - 9.97 4,702,507 5.6 8.95 4,011,122 8.91
9.98 - 14.96 8,374,907 6.8 12.04 4,467,979 12.72
14.97 - 22.45 13,895,815 8.2 18.29 4,192,720 18.21
22.46 - 25.00 4,531,483 8.8 24.39 390,548 24.08
- ---------------------------------------------------------------------------------------------------------
$ 0.17 - $25.00 33,507,066 7.3 $15.37 15,064,723 $12.34
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollar amounts are in thousands)
NOTE J - CAPITAL STOCK
PREFERRED STOCK: As of December 25, 1999, 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, we adopted a Stockholder
Rights Plan (the "Rights Plan"). Under this Rights Plan, each of our
stockholders is issued one right to acquire one one-thousandth of a share of our
Junior Participating Preferred Stock, Series A at an exercise price of $63.33,
subject to adjustment, for each outstanding share of Office Depot common stock
they own. These rights are only exercisable if a single person or company were
to acquire 20% or more of our outstanding common or if we announced a tender or
exchange offer that would result in 20% or more of our common stock being
acquired.
If we are acquired, each right, except those of the acquirer, can be exchanged
for shares of our common stock with a market value of twice the exercise price
of the right. In addition, if we become involved in a merger or other business
combination where (1) we are not the surviving company, (2) our common stock is
changed or exchanged, or (3) 50% or more of our assets or earning power is sold,
then each right, except those of the acquirer, and an amount equal to the
exercise price of the right can be exchanged for shares of our common stock with
a market value of twice the exercise price of the right.
We may redeem the rights for $0.01 per right at any time prior to an
acquisition.
STOCK SPLIT: On February 24, 1999, we declared a three-for-two stock split in
the form of a 50% stock dividend, payable April 1, 1999. All share and per
share amounts have been restated in our financial statements to reflect this
stock split. In conjunction with the stock split, we issued 124,560,075
additional shares on April 1, 1999.
TREASURY STOCK: In August 1999, our Board approved a $500 million stock
repurchase program. We purchased 46.7 million shares of our stock at a total
cost of $500 million plus commissions during the third and fourth quarters of
1999. In January 2000 and March 2000, our Board approved additional stock
repurchases of up to $200 million, bringing our total authorization to $700
million. As of March 3, 2000, we had purchased an additional 9.2 million shares
of our stock at a total cost of $100 million plus commissions. The remaining
authorization does not have an expiration date, and we can acquire our common
stock either in the open market or through negotiated purchases.
NOTE K - NET EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of shares
outstanding during each period. Diluted earnings per share further assumes that
the zero coupon, convertible subordinated notes, if dilutive, are converted as
of the beginning of the period and that, under the treasury stock method,
dilutive stock options are exercised. Net earnings under this assumption have
been adjusted for interest on the notes, net of the related income tax effect.
The information required to compute basic and diluted net earnings per share is
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic:
Weighted average number of
common shares outstanding 361,499 367,065 362,633
Diluted:
Net earnings $257,638 $233,196 $234,861
Interest expense related to
convertible notes, net of tax 12,068 11,532 11,037
- -------------------------------------------------------------------------------
Adjusted net earnings $269,706 $244,728 $245,898
- -------------------------------------------------------------------------------
Weighted average number of
common shares outstanding 361,499 367,065 362,633
Shares issued upon assumed
conversion of convertible notes 24,744 24,810 24,848
Shares issued upon assumed
exercise of stock options 7,414 10,444 7,449
- -------------------------------------------------------------------------------
Shares used in computing
diluted net earnings per
common share 393,657 402,319 394,930
===============================================================================
</TABLE>
Options to purchase 26,672,312 shares of common stock at an average exercise
price of approximately $17.44 per share were not included in our computation of
diluted earnings per share for 1999 because their effect would be anti-dilutive.
NOTE L - SUPPLEMENTAL INFORMATION ON NON-CASH
INVESTING AND FINANCING ACTIVITIES
Our Consolidated Statements of Cash Flows for 1999, 1998 and 1997 do not include
the following non-cash investing and financing transactions:
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets acquired under
capital leases $37,881 $ 8,935 $24,300
Common stock issued upon
conversion of debt 329 1,204 20
Additional paid-in capital
related to tax benefit on
stock options exercised 22,987 11,235 8,165
Unrealized gain on investment
securities, net of income taxes 62,128 -- --
Shares received into treasury for
payment of withholding taxes
on stock options exercised 354 -- --
===============================================================================
</TABLE>
Page 54 Office Depot Annual Report 1999
<PAGE> 34
Office Depot Annual Report 1999 Page 55
NOTE M - SEGMENT INFORMATION
We adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," effective for our fiscal year ended December 26, 1998.
We operate in three reportable segments: Stores, BSG and International. Each of
these segments is managed separately primarily because it serves different
customer groups. Our senior management evaluates the performance of our
business based on each segment's operating income, which is defined as income
before income taxes, interest income and expense, goodwill amortization, merger
and restructuring costs and general and administrative expenses. In 1999, we
refined our segment definitions to better reflect our current management
responsibilities. We modified our financial systems to allow us to restate 1998
information. However, reliable information was not available to restate our
1997 segment informtion.
The following is a summary of our significant accounts and balances by segment,
reconciled to our consolidated totals.
<TABLE>
<CAPTION>
Sales Earnings Before Income Taxes
--------------------------------------- -------------------------------------
1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Stores $ 5,781,336 $5,049,201 $4,716,991 $ 384,508 $ 510,721 $ 383,619
Business Services 3,164,953 2,904,984 2,503,826 246,047 196,705 189,940
International 1,320,875 1,047,472 882,806 160,839 134,260 106,806
- ----------------------------------------------------------------------------------------------------------------------
Total Reportable Segments 10,267,164 9,001,657 8,103,623 791,394 841,686 680,365
Eliminations and other (3,884) (3,919) (3,304) (377,507) (452,959) (308,774)
- ----------------------------------------------------------------------------------------------------------------------
Total $10,263,280 $8,997,738 $8,100,319 $ 413,887 $ 388,727 $ 371,591
======================================================================================================================
<CAPTION>
Capital Expenditures Depreciation and Amortization
--------------------------------------- -------------------------------------
1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Stores $ 198,751 $ 153,624 $ 71,312 $ 74,363 $ 60,130 $ 51,761
Business Services 71,810 41,180 43,764 29,189 25,049 29,254
International 35,766 10,355 25,789 14,768 9,771 13,760
- ----------------------------------------------------------------------------------------------------------------------
Total Reportable Segments 306,327 205,159 140,865 118,320 94,950 94,775
Other 89,681 27,930 16,004 50,233 45,654 24,973
- ----------------------------------------------------------------------------------------------------------------------
Total $ 396,008 $ 233,089 $ 156,869 $ 168,553 $140,604 $119,748
======================================================================================================================
<CAPTION>
Provision for Losses on Equity in Earnings (Losses)
Accounts Receivable and Inventory of Investees, Net
--------------------------------------- -------------------------------------
1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Stores $ 43,203 $ 26,037 $ 27,716 $ -- $ -- $ --
Business Services $ 47,368 $ 31,532 $ 39,524 $ -- $ -- $ --
International 20,939 23,701 9,679 3,331 (12,811) (7,034)
- ----------------------------------------------------------------------------------------------------------------------
Total Reportable Segments 111,510 81,270 76,919 3,331 (12,811) (7,034)
Other -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Total $ 111,510 $ 81,270 $ 76,919 $ 3,331 $(12,811) $(7,034)
======================================================================================================================
</TABLE>
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollar amounts are in thousands)
<TABLE>
<CAPTION>
Assets
----------------------------
1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
Stores $2,088,130 $1,783,183
Business Services 915,225 841,817
International 617,346 498,076
- ----------------------------------------------------------------
Total Reportable Segments 3,620,701 3,123,076
Other 655,482 902,207
- ----------------------------------------------------------------
Total $4,276,183 $4,025,283
================================================================
</TABLE>
A reconciliation of our earnings before income taxes reported by our reportable
segments to earnings before income taxes in our consolidated financial
statements is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Total from reportable
segments $ 791,394 $ 841,686 $ 680,385
General and
administrative
expenses (381,611) (330,194) (272,022)
Unallocated portion
of miscellaneous
expense, net (6,845) (6,174) (6,146)
Interest, net 4,028 2,953 (14,110)
Merger and
restructuring costs 7,104 (119,129) (16,094)
Inter-segment
transactions (183) (415) (402)
- ----------------------------------------------------------------------------------
Total $ 413,887 $ 388,727 $ 371,591
==================================================================================
</TABLE>
Our total sales by operating segment include Inter-segment sales, which are
generally recorded at the cost to the selling entity. The accounting policies
of our segments are the same as those described in the summary of significant
accounting policies (see Note A). Assets not allocated to segments consist
primarily of our corporate cash balances, tax related accounts, employee benefit
plan balances and assets associated with corporate investing and financing
transactions.
We have operations, either owned directly or operated through joint ventures or
licensing arrangements, in Australia, Austria, Belgium, Canada, Colombia,
France, Germany, Hungary, Ireland, Israel, Italy, Japan, Luxembourg, Mexico, the
Netherlands, Poland, the United Kingdom and the United States. During 1999, we
sold our operations in Thailand (as more fully discussed in Note C). There is
no single geographic area outside of the United States in which we generate 10%
or more of our total revenues. Summarized financial information relating to our
operations is as follows:
<TABLE>
<CAPTION>
Sales
-----------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $ 8,739,178 $ 7,761,516 $ 7,031,498
International 1,524,102 1,236,222 1,068,821
- -----------------------------------------------------------------------------------
Total $10,263,280 $ 8,997,738 $ 8,100,319
===================================================================================
<CAPTION>
Assets
-----------------------------
1999 1998
- -----------------------------------------------------------------
<S> <C> <C>
United States $ 3,668,038 $ 3,474,007
International 608,145 551,276
- -----------------------------------------------------------------
Total $ 4,276,183 $ 4,025,283
=================================================================
</TABLE>
Office Depot Annual Report 1999 Page 56
<PAGE> 36
Office Depot Annual Report 1999 Page 57
Office Depot, Inc. and Subsidiaries
NOTE N -- QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED DECEMBER 25, 1999(a)
Net Sales $2,622,851 $2,343,036 $2,578,500 $2,718,893
Gross Profit(b) 728,848 678,235 649,992 755,895
Net earnings (loss) 100,576 74,116 (1,073) 84,019
Net earnings (loss) per common share:
Basic $ .27 $ .20 $ .00 $ .26
Diluted(c) .25 .19 .00 .24
Fiscal Year Ended December 26, 1998(a)
Net sales $2,398,677 $2,068,558 $2,234,900 $2,295,603
Gross Profit(b) 630,494 573,649 622,036 687,095
Net earnings 81,094 67,676 15,748 68,678
Net earnings per common share:
Basic $ .22 $ .18 $ .04 $ .19
Diluted(c) .21 .17 .04 .18
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) In the third quarter 1999, we increased our provision for slow-moving and
obsolete inventories by $56.1 million. This provision has been included
in our cost of goods sold. We also recorded a store closure and relocation
charge of $46.4 million in the third quarter of 1999, and reversed $6.0
million of it during the fourth quarter of 1999. All of these charges are
discussed in more detail in Note C. Furthermore, we began recording merger
and restructuring costs in the third quarter of 1998 relating to the
Viking merger. We reversed previously accrued merger and restructuring
charges of $32.5 million during the fourth quarter of 1999 as a result of
modifying our integration plans. These costs are discussed in more detail
in Note B.
(b) Gross profit is net of occupancy costs.
(c) For the third quarters of 1998 and 1999, the zero coupon, convertible
subordinated notes were anti-dilutive and, accordingly, were not included
in the diluted earnings per share computations.
<PAGE> 1
EXHIBIT 21.1
LIST OF THE COMPANY'S SUBSIDIARIES
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
---- -----------------------------
<S> <C>
Eastman, Inc. Delaware
Office Depot, Inc. Delaware
OD International, Inc. Delaware
The Office Club, Inc. California
ODO, Inc. Florida
Office Depot of Texas, L.P. Delaware
ODI of Texas, Inc. Delaware
Viking Direct Limited United Kingdom
Viking Office Products, Inc. California
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
No. 33-31743, No. 33-62781, No. 33-62801, No. 333-24521, No. 333-45591,
No. 333-59603, No. 333-63507, No. 333-68081, and No. 333-69831 of Office Depot,
Inc. on Forms S-8 of our reports dated February 10, 2000 (March 3, 2000 as to
Note J) included and incorporated by reference in the Annual Report on Form 10-K
of Office Depot, Inc. for the year ended December 25, 1999.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
March 22, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF OFFICE DEPOT, INC. FOR THE YEAR ENDED DECEMBER 25, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-START> DEC-27-1998
<PERIOD-END> DEC-25-1999
<CASH> 218,784
<SECURITIES> 0
<RECEIVABLES> 877,214
<ALLOWANCES> 27,736
<INVENTORY> 1,436,879
<CURRENT-ASSETS> 2,631,052
<PP&E> 1,723,013
<DEPRECIATION> 577,385
<TOTAL-ASSETS> 4,276,183
<CURRENT-LIABILITIES> 1,944,045
<BONDS> 571,565
0
0
<COMMON> 3,762
<OTHER-SE> 1,903,958
<TOTAL-LIABILITY-AND-EQUITY> 4,276,183
<SALES> 10,263,280
<TOTAL-REVENUES> 10,263,280
<CGS> 7,450,310
<TOTAL-COSTS> 9,434,975
<OTHER-EXPENSES> 414,932
<LOSS-PROVISION> 22,940
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 413,887
<INCOME-TAX> 156,249
<INCOME-CONTINUING> 257,638
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 257,638
<EPS-BASIC> 0.71
<EPS-DILUTED> 0.69
</TABLE>
