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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED,
EFFECTIVE OCTOBER 7, 1996).
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 1-10948
OFFICE DEPOT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-2663954
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
2200 OLD GERMANTOWN ROAD, DELRAY BEACH, 33445
FLORIDA
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 561/278-4800
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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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
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 24, 1997 was approximately $3,471,557,773.
As of March 24, 1997, the Registrant had 157,471,381 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
No documents (other than exhibits) have been incorporated by reference to
this Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS.
PROPOSED MERGER
In September 1996, the Company entered into an agreement and plan of merger
(the "Merger Agreement") with Staples, Inc. ("Staples") and Marlin Acquisition
Corp., a wholly-owned subsidiary of Staples ("Acquisition Sub"). Pursuant to the
Merger Agreement, (i) Acquisition Sub will be merged with and into Office Depot,
and Office Depot will become a wholly-owned subsidiary of Staples and (ii) each
outstanding share of the Company's common stock will be converted into the right
to receive 1.14 shares of common stock of Staples. In connection with the
merger, both companies also issued mutual options to purchase up to 19.9% of the
outstanding stock of the other company under certain conditions.
The consummation of the merger is subject to a number of conditions,
including approval by the stockholders of both the Company and Staples, and the
receipt of governmental consents and approvals, including those under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act") and the
Canadian Competition Act. On November 1, 1996, the Federal Trade Commission
("FTC") issued a Second Request for Information to Staples and the Company,
beginning an investigation of the merger. Since that time, the Company has
cooperated with the FTC in its review of the merger and has provided the FTC
with requested documents and information. The Company believes the merger fully
complies with the antitrust laws. An "Advanced Ruling Certificate" from the
Canadian Competition Bureau clearing the proposed merger under Canadian law was
received on December 16, 1996.
On March 10, 1997, the FTC voted to challenge the merger. Staples and the
Company plan to vigorously contest any FTC challenge. Nevertheless, the Company
has been working with Staples and the FTC staff on an acceptable divestiture of
stores or other settlement arrangement that would benefit the Company, its
shareholders and its customers by allowing the merger to close. Staples and the
Company have entered into an agreement with OfficeMax, Inc. ("OfficeMax")
whereby Staples and the Company would divest a total of 63 stores, which Staples
and the Company believe should remedy any perceived competitive issues and
should obviate the need for any FTC challenge. The FTC is currently reviewing
the proposed divestiture package, and has withheld issuance of a complaint
pending this review. If this or another settlement is ultimately approved by the
FTC, a consent decree would be issued along with the complaint that would allow
the merger to close.
If a settlement is not ultimately approved by the FTC, the Company
anticipates the merger will be subject to litigation with the FTC. A preliminary
injunction hearing will be held, likely within a few months of the issuance of
the complaint. Whether or not the FTC is ultimately successful in obtaining a
preliminary injunction, after any appeals, the FTC has told the Company it plans
to pursue its challenge in FTC administrative hearings. Staples and the Company
each have the right to terminate the Merger Agreement if the merger has not been
consummated by May 31, 1997.
Notwithstanding the Company's belief that the merger fully complies with
the antitrust laws and notwithstanding the ongoing negotiations with the FTC,
there can be no assurance that the FTC will not ultimately challenge the merger
or that the merger will ultimately be consummated.
GENERAL
The information in the remainder of this section pertains to the business
of the Company as it is currently conducted without giving effect to the
proposed merger between the Company and Staples.
Office Depot, Inc. (the "Company") operates a national chain of high-volume
retail office products stores, provides delivery of its products in the United
States and Canada and is a full-service contract stationer serving businesses
throughout the United States. The Company sells high-quality, brand-name office
products at significant discounts at its office products stores and through its
delivery business.
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The Company began its operations in 1986 with its first retail store.
Currently, it operates 536 office products stores in 38 states and the District
of Columbia and 36 stores in five Canadian provinces. Through its 23 customer
service centers and certain retail stores, the Company also delivers office
products to businesses of all sizes and provides other value-added business
services.
The Company's office supply stores carry a wide selection of merchandise,
including general office supplies, business machines and computers, office
furniture and other business-related products for sale primarily to businesses.
The stores utilize a "warehouse" format. The Company also operates five Images
stores and five Furniture At Work stores. The Company's business strategy for
its office products stores is to enhance the sales and profitability of its
existing stores and to add new stores in locations where the Company can
establish a significant market presence. During 1996, the Company opened 66 new
office products stores. The Company currently believes it will open
approximately 40 stores during 1997.
The Company's delivery business provides delivery services of office
products and full service contract stationer services for small, medium and
large businesses, schools and other educational institutions and governmental
agencies. The Company's delivery sales exceeded $1.85 billion in 1996. The
Company provides its delivery customers access to a broad selection of office
products and office furniture, including the approximately 6,000 items available
at the Company's office supply stores and approximately 5,000 additional items
which are only stocked at the Company's customer service centers. In addition,
the Company provides its contract stationer customers with specialized resources
and services designed to aid them in achieving improved efficiencies and
significant reduction in their overall office products and office furniture
costs. These efficiencies include electronic ordering, stockless office
procurement and business forms management services (which reduce customer need
for office products storage facilities), desktop delivery programs (which reduce
customer personnel requirements) and comprehensive product utilization reports.
The Company's nationwide full service contract stationer business was built
primarily through the acquisition of eight contract stationers in 1993 and 1994
and opening new facilities in 1995.
The Company's strategy for its delivery business is to build an integrated
national operation to provide delivery service to businesses and to increase the
Company's penetration into new and existing markets for its full service
contract stationer business. The Company also seeks to enhance its operating
margins through the conversion of contract stationer businesses that have been
acquired by the Company into a national network of facilities providing a
consistently high level of customer service. The Company is in the process of
combining the operations of its 23 contract stationer warehouses and delivery
centers, as well as the delivery functions at the retail stores. During 1996,
the Company replaced three of its customer service centers with larger, more
efficient facilities. During 1997, the Company plans to replace three to four of
its existing customer service centers with larger facilities, consolidating
operations in certain markets.
Through expansion of both its office products stores and delivery business,
the Company seeks to increase efficiencies in operations, purchasing, marketing
and management. The Company's merchandising strategy is to offer customers a
wide selection of brand-name office products at everyday low prices. The Company
is able to maintain its competitive price policy primarily as a result of the
significant cost efficiencies achieved through its operating format and
purchasing power. The Company buys substantially all of its inventory directly
from manufacturers in large quantities. It does not utilize a central warehouse
and maintains most of its inventory on the sales floors of its stores, at its
crossdocks and at its customer service centers. The Company operates in a highly
competitive environment, and no assurance can be given that increased
competition will not have an adverse effect on the Company's operations.
Following is a brief description of the eight contract stationer
acquisitions noted above:
- In May 1993, the Company acquired the office supply business of Wilson
Stationery & Printing Company ("Wilson"), a full service contract
stationer with operations in Texas and North Carolina.
- In September 1993, the Company acquired Eastman Office Products
Corporation ("Eastman"), a full service contract stationer and office
furniture dealer headquartered in California with operations primarily
in the western United States.
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- In February 1994, the Company acquired L.E. Muran Co., Inc., based in
Boston, and Yorkship Press, Inc. servicing customers in Philadelphia and
southern New Jersey.
- In May 1994, the Company acquired Midwest Carbon Company, based in
Minneapolis, and Silvers, Inc. based in Detroit.
- In August 1994, the Company acquired J.A. Kindel Company, based in
Cincinnati, and Allstate Office Products, Inc., based in Tampa.
Each of the 1994 acquisitions was accounted for on a "pooling of interests"
basis. Accordingly, the financial data, statistical data, financial statements
and discussions of financial and other information included in or incorporated
by reference herein for periods prior to the acquisitions have been restated to
reflect the financial position, results of operations, and other information
relating to these companies for all periods presented. No affiliations existed
between the Company and any of the acquired companies prior to the acquisitions.
The 1993 acquisitions were accounted for as purchases. Therefore, all
information and data included or incorporated by reference herein include the
results of those businesses from the respective dates of acquisition.
The Company has entered into licensing arrangements for the operation of
office supply stores in Colombia, Israel and Poland and joint venture agreements
to operate stores in Mexico and France. As of December 28, 1996, there were
five, seven, three, seven and two stores and delivery centers open in Colombia,
Israel, Poland, Mexico and France under these arrangements, respectively. The
Company's joint venture partner in France is Carrefour S.A. ("Carrefour"), which
beneficially owns approximately 6% of the Company's issued and outstanding
shares of common stock through its indirect wholly-owned subsidiary Fourcar B.V.
("Fourcar"). The joint venture is owned 50% by Carrefour and 50% by the Company.
Office Depot has also entered into a joint venture in Japan and a licensing
arrangement in Thailand. Two stores were opened in March 1997 in Thailand and
stores are expected to open in Japan in late 1997.
OFFICE PRODUCTS INDUSTRY
The office products industry is comprised of three broad categories of
merchandise: office supplies, office machines and computers, and office
furniture. These products are distributed through different and often
overlapping channels of distribution, including manufacturers, distributors,
dealers, retailers and catalog companies.
Sales of office products in the United States have historically been made
primarily through office products dealers and contract stationers, which
generally operate one or more retail stores and utilize a central warehouse
facility. Smaller businesses have traditionally purchased office products from
retail office products dealers, and there have been few regional or national
chains. This portion of the industry is still typified by small stores operated
by dealers. Dealers purchase a significant portion of their merchandise from
national or regional office supply distributors who, in turn, purchase
merchandise from manufacturers. Dealers often employ a commissioned sales force
that utilizes the distributor's catalog, showing products at retail list prices,
for selection and price negotiation with the customer. The Company believes that
small- and medium-size businesses in the past have been able to obtain discounts
on manufacturers' suggested retail list prices of only 20% or less. In addition,
those businesses whose volume usage does not justify a dealer's one-to-one
selling effort generally were treated as retail customers and charged prices
close to full retail list prices.
Over the past decade, high-volume office supply superstores have emerged
throughout the United States. These stores offer selection, service and low
prices. High-volume office products retailers typically offer substantial price
savings to individuals and small- and medium-size businesses, which
traditionally have had limited opportunities to buy at significant discounts
from retail list prices. Recently, other retailers, including mass merchandisers
and warehouse clubs, have been offering a wide variety of like products at low
prices, and have become increasingly competitive with office supply superstores.
Delivery companies have also been making inroads into the Company's traditional
customer base.
Larger customers have been, and continue to be, served primarily by full
service contract stationers which offer contract bids to larger businesses at
discounts equivalent to or greater than those offered by the
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Company. These stationers traditionally serve larger businesses through
commissioned sales forces, purchase in large quantities primarily from
manufacturers, and offer competitive pricing and customized services to their
customers. The Company entered the full-service contract stationer portion of
the office products industry by acquiring eight contract stationers during 1993
and 1994 and opening new facilities in 1995.
MERCHANDISING AND PRODUCT STRATEGY
The Company's merchandising strategy is to offer a broad selection of
brand-name office products at everyday low prices. The Company offers a
comprehensive selection of paper and paper products, filing supplies, computer
hardware and software, calculators, copiers, typewriters, telephones, facsimile
and other business machines, office furniture, art and engineering supplies and
virtually every other type of office supply. Each of the Company's office supply
stores stocks approximately 6,000 stock-keeping units (including variations in
color and size) and each customer service center stocks approximately 11,000
stock-keeping units, including the 6,000 stock-keeping units stocked at the
retail stores.
The table below shows sales of each major product group as a percentage of
total merchandise sales for the 1996, 1995, and 1994 fiscal years:
1996 1995 1994
FISCAL FISCAL FISCAL
YEAR YEAR YEAR
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General office supplies(1).................................. 44.2% 47.2% 48.1%
Business machines and related supplies, computers and
computer accessories(2)................................... 44.6 41.3 39.0
Office furniture(3)......................................... 11.2 11.5 12.9
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100.0% 100.0% 100.0%
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(1) Includes paper, filing supplies, organizers, writing instruments, mailing
supplies, desktop accessories, calendars, business forms, binders, tape, art
supplies, books, engineering and janitorial supplies and revenues from the
business services center located in each store.
(2) Includes calculators, adding machines, typewriters, telephones, cash
registers, copiers, facsimile machines, safes, tape recorders, computers,
computer diskettes, computer paper and related accessories.
(3) Includes chairs, desks, tables, partitions and filing and storage cabinets.
The Company buys substantially all of its merchandise directly from
manufacturers and other primary source suppliers. Products are generally
delivered from manufacturers directly to the stores or customer service centers.
The Company operates nine cross-dock operations that receive bulk deliveries
from certain vendors and sort and deliver merchandise to the Company's stores
and customer service centers. The cross-dock operations enable the Company to
maintain better in-stock positions. No single customer accounts for more than
one percent of the Company's sales. The Company has no material long-term
contracts or commitments with any vendor or customer. The Company has not
experienced any difficulty in obtaining desired quantities of merchandise for
sale and does not foresee any significant difficulties in the future.
Initial purchasing decisions are generally made at the corporate
headquarters level by buyers who are responsible for selecting and pricing
merchandise. Inventory levels are monitored, and reorders for products are
prepared, by central replenishment buyers, or "rebuyers", with the assistance of
a computerized automatic replenishment system. This system allows buyers to
devote more time to selecting products, developing new product lines, analyzing
competitive developments and negotiating with vendors in order to obtain more
favorable prices and product availability. Purchase orders to approximately 625
vendors are currently transmitted by electronic data interchange ("EDI"), which
expedites orders and promotes accuracy and efficiency. The Company receives
Advance Ship Notices and invoicing via EDI from selected vendors and continues
to expand this program to other vendors.
MARKETING AND SALES
Marketing. The Company's marketing programs are designed to attract new
customers and to provide information to existing customers. The Company places
advertisements with the major local newspapers in each of its markets. These
newspaper advertisements are supplemented with local radio and television
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advertising and direct marketing efforts. Print advertisements, as well as
catalog layouts, are created by the Company's in-house graphics department. The
Company periodically issues catalogs featuring merchandise offered in its
stores. The catalogs generally compare the manufacturer's suggested retail list
price and the Company's price to illustrate the savings offered. The catalogs
are distributed through direct mail programs and are available in each store.
Upon entering a new market, the Company purchases a list of businesses for an
initial mailing of catalogs. This list is continually refined and updated by
incorporating the names of private label credit card holders and guarantee card
holders and forms the basis of a highly targeted proprietary mailing list for
updated catalogs and other promotional mailings.
The Company has a low price guarantee policy. Under this policy, the
Company will match any competitor's lower price and give the customer 55% (up to
$55) of the difference toward the customer's purchase. This program assures
customers of always receiving the lowest price from the Company even during
periodic sales promotions by competitors. Monthly competitive pricing analyses
are performed to monitor each market, and prices are adjusted as necessary to
adhere to this pricing philosophy and ensure competitive positioning.
Sales. In addition to the sales associates at each of its stores, the
Company has a direct sales force serving its contract stationer customers. The
sales force operates out of the Company's 23 regional customer service centers
and additional satellite sales offices. All members of the Company's sales force
are employees of the Company.
SERVICES
Each Office Depot office supply store contains a multipurpose business
center for printing, copying and a wide assortment of other services. These
business centers offer shoppers a range of printing and reproduction
capabilities, including business cards, letterhead stationery and envelopes,
personalized checks and business forms, full- or self-service copies, color
copies, custom stamps and labels, signs and banners. Each of the Company's
office supply stores also has business machine specialists, specially-trained
associates who are available to answer customer questions on a wide variety of
technically sophisticated products.
The Company currently operates 23 regional customer service centers in 17
states. Delivery orders received from customers in these areas, whether through
the Company's telephone centers, contract customer orders or at its stores, are
generally handled through these facilities. The Company believes that these
facilities enable it to provide improved delivery services on a more cost
effective basis.
The Company's customers nationwide can place orders by telephone or
facsimile using toll-free telephone numbers that route the calls through the
Company's order departments located in South Florida, Atlanta and the San
Francisco area. Orders received by the order departments are transmitted
electronically to the store or delivery center nearest the customer for pick-up
or delivery at a nominal delivery fee or free delivery with a minimum order
size. Orders are packaged, invoiced and shipped for next-day delivery.
The Company provides the office supplies purchasing departments of its
contract customers with a wide range of services designed to improve
efficiencies and reduce costs, including electronic ordering, stockless office
procurement and business forms management services, desktop delivery programs
and comprehensive product utilization reports. For contract customers, the
Company will typically sell on credit through an open account, although all
credit options provided at the retail stores are also available to all contract
and delivery customers.
The Company offers revolving credit terms to its customers through the use
of private label credit cards. Every customer can apply for one of these credit
cards, which are issued without charge. Sales transactions using the private
label credit cards are transmitted by computer to financial services companies,
which credit the Company's bank account with the net proceeds within two days.
EXPANSION PROGRAM
Office Supply Stores. The Company's business strategy for its office
supply stores is to enhance the sales and profitability of its existing stores,
and to add new stores in locations where the Company can achieve a
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significant market presence. The Company opened 60 new office supply stores in
1996, and plans to open approximately 40 new stores during 1997. Uncertainty and
a loss of certain real estate personnel, both resulting from the delay in the
pending merger with Staples, have negatively affected the Company's short term
store opening program. Office supply store opening activity for the last five
years is summarized as follows.
OFFICE SUPPLY STORES
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OPEN BEGINNING OPENED/ OPEN END
OF PERIOD ACQUIRED CLOSED OF PERIOD
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1992............................................. 228 58(1) 2 284
1993............................................. 284 68 1 351
1994............................................. 351 71 2 420
1995............................................. 420 82 1 501
1996............................................. 501 60 -- 561
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(1) Includes the acquisition of five stores in Canada.
Prior to selecting a new store site, the Company obtains detailed
demographic information indicating business concentrations, traffic counts,
population, income levels and future growth prospects. The Company's existing
and scheduled new stores are located primarily in suburban strip shopping
centers on major commercial thoroughfares where the cost of space is generally
lower than at urban locations. Suburban locations are generally more accessible
to the Company's primary customers, have convenient parking and facilitate
delivery to customers and receipt of inventory from manufacturers. The Company
expands by leasing existing space and renovating it according to its
specifications or by constructing new space according to its specifications.
Accomplishing the Company's expansion goals will depend on a number of
factors, including the Company's ability to locate and obtain acceptable sites,
open new stores in a timely manner, hire and train competent managers and real
estate personnel, integrate new stores into its operations, generate adequate
funds from operations and continue to access external sources of capital.
Delivery Services. The Company's strategy for delivery services is to
build an integrated national operation which will provide delivery services to
small- and medium-size businesses and enable it to increase the penetration in
new and existing markets by the Company's full service contract stationer
business. The Company is in the process of combining the operations of its
contract stationer warehouses and delivery centers, as well as the delivery
functions at the office supply stores. During 1996, the Company replaced three
of its existing customer service centers with larger, more efficient facilities.
During 1997, the Company plans to replace three to four customer service centers
with larger facilities, consolidating operations in certain markets.
Other Office Products and Services. In addition to the Company's core
office supply and delivery businesses, the Company also operates the following:
- International -- Retail office supply stores and delivery services
operated under the Office Depot(R) name abroad, either through joint
ventures or licensing arrangements. Since 1994, a total of 24 such stores
and delivery centers have been opened in Colombia, Israel, Mexico, Poland
and France. In addition, two such stores were opened in Thailand in March
1997 and one or more stores are expected to open in Japan in late 1997.
- Images(TM) -- Retail facilities which provide a range of business
services including graphic design, printing, copying, shipping and
fulfillment services as well as a limited assortment of office supplies.
Four Images units and one Office Depot Express(TM) (a slightly different
store format with an expanded assortment of products) are currently open
in South Florida.
- Office Depot(R) "Megastores" -- 45,000-50,000 square foot Office Depot(R)
retail stores with expanded assortments of furniture, computer software
and accessories and general office supplies. The first megastore opened
in August 1995 in Las Vegas. Six additional megastores opened during 1995
and
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1996 when the Company entered the New York metropolitan market with five
stores and the Salt Lake City market with one store.
- Furniture At Work(TM) -- Approximately 20,000 square foot office
furniture stores, which offer a broad line of office furniture, office
accessories and design services. The Company opened its first store in
Texas in 1995 and opened four additional stores in California, South
Florida and Texas in 1996.
- Uptime Services(TM) -- Providers, primarily through outside service
companies, of a variety of technology support services which complement
the Company's computer and business machine offerings, including on-site
installation (at home or office), computer leasing and training, software
support and product protection plans.
STORE DESIGN AND OPERATIONS
Office Supply Stores. The Company's office supply stores average
approximately 25,000-30,000 square feet of space (other than its Megastores,
which average 45,000-50,000 square feet) and conform to a model designed to
achieve cost efficiency by minimizing rent and eliminating the need for a
central warehouse. Each store displays virtually all of its inventory on the
sales floor according to a plan-o-gram that designates the location of each item
in the store. The plan-o-gram is intended to ensure that merchandise is
effectively displayed and to promote economy and efficiency in the use of
merchandising space. On the sales floor, merchandise is displayed on various
types of fixtures including low-profile fixtures, on pallets or in bins on ten
to twelve foot high industrial steel shelving that permits the bulk stacking of
inventory and quick and efficient restocking. The shelving is positioned to form
aisles large enough to comfortably accommodate customer traffic and merchandise
movement. Additional efficiencies are gained by selling merchandise in multiple
quantity packaging, which significantly reduces duplicate handling and stocking
costs.
In all of the Company's stores, inventory that has not been bar coded by
the manufacturer is bar coded in the receiving area and moved directly to the
sales floor. Sales are processed through centralized check-out facilities, which
transmit sales and inventory information on a stock-keeping unit basis to the
Company's central computer system where this information is updated daily.
Rather than individually price marking each product, merchandise is identified
by its stock-keeping unit number with a master sign for each product displaying
the product's price. As price changes occur, a new master sign is automatically
generated for the product display and the new price is reflected in the
check-out register, allowing the Company to avoid labor costs associated with
price remarking.
Delivery Services. The Company's customer service centers range from
38,000 to 325,000 square feet, with its more recently opened customer service
centers averaging 165,000 square feet. Inventory is received and stocked in each
center using an automated inventory tracking system. The Company is in the
process of converting its customer service centers to an integrated system.
Customer orders, placed via phone, fax or electronically, are filled by the
appropriate customer service center for next day delivery. The appropriate
customer service center is determined by the Company's automated routing
systems, and the order is filled by using both in-stock and wholesaler
inventory.
MANAGEMENT INFORMATION SYSTEMS
The Company employs IBM ES9000 mainframes and IBM System AS/400 computers
and client/server technologies to aid in controlling its merchandising and
operations. The systems include advanced software packages that have been
customized for the Company's specific business operations. By integrating these
environments, the Company improved its ability to manage stock status, order
processing, inventory replenishment and advertising maintenance. The Company is
continuing its implementation of a multi-year strategy to upgrade and convert
its systems to operate in an "open system" mainframe environment.
Inventory data is entered into the computer system upon its receipt by the
store, and sales data is entered through the use of a point-of-sale or
telemarketing system. The point-of-sale system permits the entry of sales data
through the use of bar code laser scanning and also has a price "look-up"
capability that permits immediate price checking and efficient movement of
customers through the check-out process. Information is
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centrally processed at the end of each day, permitting a perpetual daily
inventory and the calculation of average unit cost by stock-keeping unit for
each store or warehouse. Daily compilation of sales and gross margin data
permits the monitoring of sales, gross margin and inventory by item and product
line, as well as the results of sales promotions. For all stock-keeping units,
management has immediate access to on-hand daily unit inventory, units on order,
current and past rates of sale, the number of weeks' sales for which quantities
are on-hand and a recommended unit purchase reorder. Data from all of the
Company's stores is transmitted to the Company's headquarters on a daily basis.
The Company is in the process of integrating the acquired contract
stationer businesses and its commercial delivery business into a national
delivery network. This integration encompasses many systems, including order
entry, warehouse management and routing. This integrated system allows a
customer to place an order via phone, fax or electronically. When the order is
placed, the system determines the appropriate customer service center for
delivery, looks up the stock status of each item ordered and automatically
reserves the item for the customer or place it on order from the wholesaler. The
wholesaler order will be delivered to the customer service center the same day,
enabling the Company to deliver the most complete order possible the next day.
The Company believes that the complete implementation of these systems will
enable it to aggressively grow its delivery business.
EMPLOYEES, STORE MANAGEMENT AND TRAINING
As of March 24, 1997, the Company employed approximately 32,000 persons.
Additional personnel will be added as needed to implement the Company's
expansion program. The Company's goal is to promote as many existing employees
into management positions as possible. Due to the rate of its expansion,
however, for the foreseeable future the Company will continue to hire a portion
of its management personnel from outside the Company.
The Company's policy is to hire and train additional personnel in advance
of new store and customer service center openings. In general, store managers
have extensive experience in retailing, particularly with warehouse store chains
or discount stores that generate high sales volumes. Each new store manager
usually spends two to four months in an apprenticeship position at an existing
store prior to being assigned to a new store. The Company's retail sales
associates are required to view product knowledge videos and complete written
training programs relating to certain products. The Company creates some of
these videos and training programs internally while the remainder are supplied
by manufacturers. Typically, customer service center managers have extensive
experience in distribution operations. The Company grants stock options to
certain of its employees as an incentive to attract and retain such employees.
The Company has never experienced a strike or any other work stoppages, and
management believes that its relations with its employees are good. There are no
collective bargaining agreements covering any of the Company's employees.
COMPETITION
The Company operates in a highly competitive environment. Its markets are
presently served by traditional office products dealers that typically operate a
central warehouse and one or more retail stores. The Company believes it
competes favorably against these dealers, who purchase their products from
distributors and generally sell their products at prices higher than those
offered by the Company, because they generally offer small- and medium-size
businesses discounts on manufacturers' suggested retail list prices of only 20%
or less as compared to the Company's 30% to 60% discount to customers. The
Company also competes with wholesale clubs selling general merchandise, discount
stores, mass merchandisers, conventional retail stores, catalog showrooms and
direct mail companies. These companies, in varying degrees, compete with the
Company on both price and selection.
Several high-volume office supply chains that are similar in concept to the
Company in terms of store format, pricing strategy and product selection and
availability also operate in the United States. The Company competes with these
chains and other competitors described above in substantially all of its current
markets.
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The Company believes that in the future it will face increased competition from
these chains as the Company and these chains expand their operations and as
competitors allocate more shelf space to office products.
In the delivery and contract stationer portions of the industry, principal
competitors are national and regional full service contract stationers, national
and regional office furniture dealers, independent office products distributors,
discount superstores and, to a lesser extent, direct mail order houses and
stationery retail outlets. Certain office supply superstores are also developing
a presence in the contract stationer portion of the business. The Company
competes with these businesses in substantially all of its current markets.
Some of the entities against which the Company competes, or may compete,
may have greater financial resources than the Company. No assurance can be given
that increased competition will not have an adverse effect on the Company. The
Company believes it competes based on product price, selection, availability and
service.
ITEM 2. PROPERTIES.
As of March 24, 1997, the Company operated 536 office product stores in 38
states and the District of Columbia and 36 office supply stores in five Canadian
provinces. The Company also operates 23 customer service centers. The following
table sets forth the locations of these Company facilities.
NUMBER OF
NUMBER NUMBER CUSTOMER SERVICE
STATE OF STORES STATE OF STORES STATE DELIVERY CENTERS
- ----- --------- ----- --------- ----- ----------------
Alabama.............. 11 New Jersey......... 2 Arizona............ 1
Arizona.............. 2 New Mexico......... 3 California......... 5
Arkansas............. 4 New York........... 4 Colorado........... 1
California........... 103 North Carolina..... 19 Florida............ 2
Colorado............. 15 Ohio............... 13 Georgia............ 1
District of
Columbia........... 2 Oklahoma........... 5 Illinois........... 1
Florida.............. 71 Oregon............. 11 Louisiana.......... 1
Georgia.............. 25 Pennsylvania....... 6 Maryland........... 1
Hawaii............... 3 South Carolina..... 9 Massachusetts...... 1
Idaho................ 1 Tennessee.......... 7 Michigan........... 1
Illinois............. 23 Texas.............. 60 Minnesota.......... 1
Indiana.............. 9 Utah............... 1 New Jersey......... 1
Iowa................. 1 Virginia........... 10 North Carolina..... 1
Kansas............... 6 Washington......... 20 Ohio............... 1
Kentucky............. 3 West Virginia...... 1 Texas.............. 2
Louisiana............ 15 Wisconsin.......... 10 Utah............... 1
Maryland............. 11 Washington......... 1
Michigan............. 17 CANADA
Minnesota............ 7 Alberta............ 8
Mississippi.......... 4 British Columbia... 8
Missouri............. 12 Manitoba........... 2
Nebraska............. 3 Ontario............ 16
Nevada............... 7 Saskatchewan....... 2
Most of the Company's facilities are leased or subleased by the Company
with lease terms (excluding renewal options exercisable by the Company at
escalated rents) expiring between 1997 and 2021, except for 46 facilities that
are owned by the Company. The owned facilities are located in twenty states,
primarily Florida and Texas and four Canadian provinces. The Company operates
its office products stores under the names Office Depot, The Office Place (in
Ontario, Canada), Furniture at Work, Images, and Office Depot Express. The
Company operates its contract stationer businesses under the name Office Depot.
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The Company's corporate offices in Delray Beach, Florida, containing
approximately 350,000 square feet in two adjacent buildings, were purchased in
February 1994. The Company has entered into a lease for an additional 210,000
square foot building which is being constructed adjacent to the existing
buildings.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in litigation arising in the normal course of its
business. The Company believes that these matters will not materially affect its
financial position or results of operations.
In September 1996, a complaint was filed asserting, among other things, a
claim for breach of fiduciary duty against members of the Company's Board,
seeking to be certified as a class action and seeking injunctive relief in
connection with the proposed merger with Staples. The Company believes this
lawsuit is without merit and will contest it vigorously. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Proposed Merger."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.
The Common Stock of the Company is listed on the New York Stock Exchange
("NYSE") under the symbol "ODP." At March 24, 1997, there were 3,273 holders of
record of Common Stock. The last reported sales price of the Common Stock on the
NYSE on March 24, 1997 was $22.125.
The following table sets forth, for the periods indicated, the high and low
sale prices of the Common Stock quoted on the NYSE Composite Tape. These prices
do not include retail mark-ups, mark-downs or commission.
HIGH LOW
------- -------
1995
First Quarter............................................. $26.500 $22.750
Second Quarter............................................ 29.500 20.875
Third Quarter............................................. 32.125 27.000
Fourth Quarter............................................ 31.750 19.000
1996
First Quarter............................................. $23.875 $16.875
Second Quarter............................................ 25.625 19.375
Third Quarter............................................. 23.750 12.875
Fourth Quarter............................................ 23.750 17.250
The Company has never declared or paid cash dividends on its Common Stock
and does not currently intend to pay cash dividends in the foreseeable future.
Earnings and other cash resources of the Company will be used to continue the
expansion of the Company's business.
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ITEM 6. SELECTED FINANCIAL DATA.
FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND STATISTICAL DATA)
52 WEEKS 52 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
DECEMBER 28, DECEMBER 30, DECEMBER 31, DECEMBER 25, DECEMBER 26,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
STATEMENT OF EARNINGS DATA:
Sales................................... $6,068,598 $5,313,192 $4,266,199 $2,836,787 $1,962,953
Cost of goods sold and occupancy
costs................................. 4,700,910 4,110,334 3,283,498 2,185,145 1,512,304
---------- ---------- ---------- ---------- ----------
Gross profit............................ 1,367,688 1,202,858 982,701 651,642 450,649
Store and warehouse operating and
selling expenses...................... 951,084 782,478 642,572 423,272 301,743
Pre-opening expenses.................... 9,827 17,746 11,990 9,073 7,453
General and administrative expenses..... 162,149 153,344 130,022 95,142 69,549
Amortization of goodwill................ 5,247 5,213 5,288 1,617 49
---------- ---------- ---------- ---------- ----------
Operating profit........................ 239,381 244,077 192,829 122,538 71,855
Interest income......................... 1,593 1,357 4,000 4,626 1,393
Interest expense........................ (26,078) (22,551) (18,096) (11,322) (2,658)
Equity and franchise income (loss),
net................................... (2,178) (962) 197 108 --
---------- ---------- ---------- ---------- ----------
Earnings before income taxes and
extraordinary credit.................. 212,718 221,921 178,930 115,950 70,590
Income taxes............................ 83,676 89,522 73,973 45,118 25,345
---------- ---------- ---------- ---------- ----------
Earnings before extraordinary credit.... 129,042 132,399 104,957 70,832 45,245
Extraordinary credit(1)................. -- -- -- -- 1,396
---------- ---------- ---------- ---------- ----------
Net earnings............................ $ 129,042 $ 132,399 $ 104,957 $ 70,832 $ 46,641
========== ========== ========== ========== ==========
Per common share and common equivalent
share:
Earnings before extraordinary
credit.............................. $ .81 $ .85 $ .69 $ .48 $ .32
Extraordinary credit(1)............... -- -- -- -- .01
---------- ---------- ---------- ---------- ----------
Net earnings................... $ .81 $ 85 $ .69 $ .48 $ .33
========== ========== ========== ========== ==========
Per common share and common equivalent
share-assuming full dilution:
Earnings before extraordinary
credit.............................. $ .80 $ .83 $ .68 $ .48 $ .32
Extraordinary credit(1)............... -- -- -- -- .01
---------- ---------- ---------- ---------- ----------
Net earnings................... $ .80 $ .83 $ .68 $ .48 $ .33
========== ========== ========== ========== ==========
Dividends............................... -- -- -- -- --
DECEMBER 28, DECEMBER 30, DECEMBER 31, DECEMBER 25, DECEMBER 26,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
STATISTICAL DATA:
Facilities open at end of period:
Office supply stores........................ 561 501 420 351 284
Contract stationer/delivery warehouses...... 23 23 24 23 13
Other retail locations...................... 9 3 -- -- --
BALANCE SHEET DATA:
Working capital............................... $ 693,795 $ 708,984 $ 487,333 $ 471,114 $ 386,426
Total assets.................................. 2,740,317 2,531,217 1,903,983 1,531,092 908,585
Long-term debt(2)............................. 416,757 494,910 393,800 367,602 158,313
Common stockholders' equity................... 1,155,945 1,002,995 715,271 590,284 413,907
- ---------------
(1) The extraordinary credit represents the benefit derived from the utilization
of a net operating loss carryforward.
(2) Excludes current maturities.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Office Depot began operations by opening its first office supply store in
Florida in October 1986. The Company implemented an expansion program to
establish itself as a leader in targeted market areas with high concentrations
of small- and medium-sized businesses. This program included opening new stores
and acquiring stores in strategic markets. At the end of 1996, the Company
operated 570 office products stores in 38 states, the District of Columbia and
Canada. Store opening activity for the last five years is summarized as follows:
OFFICE PRODUCTS STORES
--------------------------------------------------------------
OFFICE SUPPLY
STORES
----------------- OTHER
OPEN BEGINNING OPENED/ RETAIL STORES OPEN END
OF PERIOD ACQUIRED CLOSED OPENED OF PERIOD
-------------- -------- ------ ------------- ---------
1992........................................ 228 58(1) 2 -- 284
1993........................................ 284 68 1 -- 351
1994........................................ 351 71 2 -- 420
1995........................................ 420 82 1 3 504
1996........................................ 504 60 -- 6 570
- ---------------
(1) Includes the acquisition of five stores in Canada.
The Company currently plan to open approximately 40 stores and 3 to 4
delivery warehouses during 1997. Uncertainty and a loss of certain real estate
personnel, both resulting form the delay in the pending merger with Staples,
negatively affected the Company's short-term store opening program.
In 1993, the Company expanded into the full service contract stationer
portion of the office supply industry by acquiring two contract stationers with
ten warehouses through the acquisitions of Wilson Stationery and Printing
Company ("Wilson") in May and Eastman Office Products Corporation ("Eastman") in
September, both of which were accounted for as purchases. During 1994, the
Company acquired the outstanding stock of six contract stationers with eight
warehouses: L. E. Muran Co., Inc. and Yorkship Press, Inc. in February, Midwest
Carbon Company and Silver's, Inc. in May, and J.A. Kindel Company and Allstate
Office Products, Inc. in August. Each of these 1994 acquisitions was accounted
for on a "pooling of interests" basis and, accordingly, the accompanying
financial data, statistical data, financial statements and discussions of
financial and other information included for periods prior to the acquisitions
have been restated to reflect the financial position, results of operations and
other information relating to these companies for all periods presented. The
Company operated 23 delivery and contract stationer warehouses throughout the
United States at the end of 1996.
The Company's results are impacted by the costs incurred in connection with
its new store opening schedule. Pre-opening expenses are charged to earnings as
incurred. Corporate general and administrative expenses are also incurred in
anticipation of store openings. As the Company's store base and sales volume
continue to grow, the Company expects that the adverse impact on profitability
from new store openings will continue to decrease as expenses incurred prior to
store openings continue to represent a declining percentage of total sales.
The Company operates on a 52 or 53 week fiscal year ending on the last
Saturday in December. The fiscal years for the financial statements presented
were comprised of the 52 weeks ended December 28, 1996 and December 30, 1995 and
the 53 weeks ended December 31, 1994.
RESULTS OF OPERATIONS FOR THE YEARS 1996, 1995 AND 1994
Sales. Sales increased to $6,068,598,000 in 1996 from $5,313,192,000 in
1995 and $4,266,199,000 in 1994, or 14% in 1996 and 25% in 1995. Adjusting for
the additional week in 1994, the 1995 sales increase was 27%. The increases in
sales were due primarily to the 60 additional office supply stores in 1996 and
the 81 additional office supply stores in 1995. The increases also were
attributable to same store sales growth. Comparable sales in 1996 for the 501
office supply stores and 23 warehouses open for more than one year at
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December 28, 1996 increased 5% from 1995. Comparable sales in 1995 for the 419
office supply stores and 23 warehouses open for more than one year at December
30, 1995 increased 17% from 1994. Comparable sales in the future may be affected
by competition from other stores, the opening of additional stores in existing
markets and economic conditions. Sales of computers, business machines and
related supplies in 1996 have risen as a percentage of total sales over 1994 and
1995 sales in this category.
Gross Profit. Gross profit as a percentage of sales was 22.5% in 1996,
22.6% in 1995 and 23.0% in 1994. In 1995, purchasing efficiencies gained through
vendor volume, rebate and other discount programs, improved inventory loss
experience and leveraging occupancy costs through higher average sales per store
were offset by somewhat lower gross margins resulting from an increase in sales
of lower margin business machines and computers, combined with decreased margins
in the contract stationer business. In 1996, while gross profit continued to
benefit from vendor discount programs, a continued increase in business machines
and computers in its product mix, and increased occupancy costs as a percentage
of sales as a result of the Company's continued expansion into metropolitan
markets which tend to yield higher average rents, negatively impacted gross
profit as a percentage of sales. The Company's management believes that gross
profit as a percentage of sales may fluctuate as a result of the continued
expansion of its contract stationer base, competitive pricing in more market
areas, continued change in product mix and increased occupancy costs in certain
new markets and in existing markets where the Company desires to add stores and
warehouses in particular locations to complete its market plan, as well as
purchasing efficiencies realized as total merchandise purchases increase.
Store and Warehouse Operating and Selling Expenses. Store and warehouse
operating and selling expenses as a percentage of sales were 15.7% in 1996,
14.7% in 1995 and 15.1% in 1994. Store and warehouse operating and selling
expenses, consisting primarily of payroll, delivery and advertising expenses,
have increased in the aggregate primarily due to the Company's expansion
program. The Company, in 1995 and 1996, invested in larger delivery warehouses
to accommodate future growth as part of the integration of its contract
stationer delivery business. These investments and conversion of operating
systems as part of the Company's integration effort have increased current
operating expenses as a percentage of sales but should be leveraged as
additional sales are generated in these facilities. In addition to the expansion
of the contract stationer business, the Company has continued its retail
expansion. While the majority of these retail related expenses vary
proportionately with sales, there is a fixed cost component to these expenses
that, as sales increase within each store and within a cluster of stores in a
given market area, should decrease as a percentage of sales. This benefit may
not be fully realized, however, during periods when a large number of new stores
and delivery centers are being opened, as new facilities typically generate
lower sales than the average mature location, resulting in higher operating and
selling expenses as a percentage of sales for new facilities. This percentage is
also affected when the Company enters large metropolitan market areas where the
advertising costs for the full market must be absorbed by the small number of
stores initially opened. As additional stores in these large markets are opened,
advertising costs, which are substantially a fixed expense for a market area,
will be reduced as a percentage of sales. The Company has also continued a
strategy of opening stores in existing markets. While increasing the number of
stores increases operating results in absolute dollars, this also has the effect
of increasing expenses as a percentage of sales since the sales of certain
existing stores in the market may initially be adversely affected.
Pre-opening Expenses. As a result of continued store and delivery
warehouse openings, pre-opening expenses incurred were $9,827,000 in 1996,
$17,746,000 in 1995 and $11,990,000 in 1994. Pre-opening expenses, which are
currently approximately $150,000 per office supply prototype store, are
predominately incurred during a six-week period prior to the store opening. New
warehouse pre-opening expenses approximate $500,000; however, these expenses may
vary with the size of future warehouses. These expenses consist principally of
amounts paid for salaries and property expenses. Since the Company's policy is
to expense these items during the period in which they occur, the amount of
preopening expenses in each quarter is generally proportional to the number of
new stores and delivery centers opening.
General and Administrative Expenses. General and administrative expenses
as a percentage of sales were 2.7% in 1996, 2.9% in 1995 and 3.0% in 1994.
General and administrative expenses include, among other costs, site selection
expenses and store management training expenses, and therefore vary somewhat
with the number of new store openings. During 1994 through 1996, the Company
increased its commitment to
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improving the efficiency of its management information systems and significantly
increased its information systems programming staff. While this systems
investment has and will continue to increase general and administrative expenses
in the short term, the Company believes it will provide benefits in the future.
These increases have been offset by a decrease in other general and
administrative expenses as a percentage of sales, primarily as a result of the
Company's ability to increase sales without a proportionate increase in
corporate expenditures. However, there can be no assurance that the Company will
be able to continue to increase sales without a proportionate increase in
corporate expenditures.
Other Income and Expenses. During 1996, 1995 and 1994, interest expense
was $26,078,000, $22,551,000 and $18,096,000, respectively. The increase in
interest expense is primarily due to increases in the draws on the working
capital line of credit. Interest income during 1996, 1995 and 1994 was
$1,593,000, $1,357,000 and $4,000,000, respectively. The decrease from 1994 to
1995 is due primarily to the use of funds raised in public offerings in 1992 and
1993.
Amortization of Goodwill. The Company recorded amortization of goodwill of
$5,247,000, $5,213,000 and $5,288,000 in 1996, 1995 and 1994, respectively.
Income Taxes. The effective income tax rate, in comparison to statutory
rates, for 1996, 1995 and 1994 was negatively impacted by nondeductible goodwill
amortization. The reduction of the effective income tax rate from 1995 to 1996
was primarily due to lower effective state income tax rates. The effective
income tax rate for 1994 was impacted by the combining of certain acquired
companies which had no provision for income taxes because they were organized as
S corporations (as defined under income tax laws).
PROPOSED MERGER
In September 1996, the Company entered into the Merger Agreement with
Staples and Acquisition Sub. Pursuant to the Merger Agreement, (i) Acquisition
Sub will be merged with and into Office Depot, and Office Depot will become a
wholly-owned subsidiary of Staples and (ii) each outstanding share of the
Company's common stock will be converted into the right to receive 1.14 shares
of common stock of Staples. In connection with the merger, both companies also
issued mutual options to purchase up to 19.9% of the outstanding stock of the
other company under certain conditions.
The consummation of the merger is subject to a number of conditions,
including approval by the stockholders of both the Company and Staples, and the
receipt of governmental consents and approvals, including those under the HSR
Act and the Canadian Competition Act. On November 1, 1996, the FTC issued a
Second Request for Information to Staples and the Company, beginning an
investigation of the merger. Since that time, the Company has cooperated with
the FTC in its review of the merger and has provided the FTC with requested
documents and information. The Company believes the merger fully complies with
the antitrust laws. An "Advanced Ruling Certificate" from the Canadian
Competition Bureau clearing the proposed merger under Canadian law was received
on December 16, 1996.
On March 10, 1997, the FTC voted to challenge the merger. Staples and the
Company plan to vigorously contest any FTC challenge. Nevertheless, the Company
has been working with Staples and the FTC staff on an acceptable divestiture of
stores or other settlement arrangement that would benefit the Company, its
shareholders and its customers by allowing the merger to close. Staples and the
Company have entered into an agreement with OfficeMax whereby Staples and the
Company would divest a total of 63 stores, which Staples and the Company believe
should remedy any perceived competitive issues and should obviate the need for
any FTC challenge. The FTC is currently reviewing the proposed divestiture
package, and has withheld issuance of a complaint pending this review. If this
or another settlement is ultimately approved by the FTC, a consent decree would
be issued along with the complaint that would allow the merger to close.
If a settlement is not ultimately approved by the FTC, the Company
anticipates the merger will be subject to litigation with the FTC. A preliminary
injunction hearing will be held, likely within a few months of the issuance of
the complaint. Whether or not the FTC is ultimately successful in obtaining a
preliminary
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injunction, after any appeals, the FTC has told the Company it plans to pursue
its challenge in FTC administrative hearings. Staples and the Company each have
the right to terminate the Merger Agreement if the merger has not been
consummated by May 31, 1997.
Notwithstanding the Company's belief that the merger fully complies with
the antitrust laws and notwithstanding the ongoing negotiations with the FTC,
there can be no assurance that the FTC will not ultimately challenge the merger
or that the merger will ultimately be consummated.
The merger, if completed, will be accounted for as a pooling of interests,
and, accordingly, the Company's prior period financial statements will be
restated and combined with the prior period financial statements of Staples, as
if the merger had taken place at the beginning of the periods reported.
Based upon the number of outstanding shares of Staples common stock and
Company common stock as of December 28, 1996, the stockholders of Company
immediately prior to the consummation of the merger will own approximately 53%
of the outstanding shares of Staples common stock immediately following
consummation of the merger.
Upon consummation of the proposed merger, pursuant to the Merger Agreement,
each outstanding option to purchase the Company common stock will be converted
into an option to purchase such number of shares of Staples common stock
(rounded down to the nearest whole number) as is equal to the number of shares
of Company common stock issuable upon exercise of such option immediately prior
to the effective time of the merger multiplied by the exchange ratio. The
exercise price per share of each such option, as so converted, will be equal to
(x) the aggregate exercise price for the shares of Company common stock
otherwise purchasable pursuant to such Company stock option immediately prior to
the effective time of the merger divided by (y) the number of whole shares of
Staples common stock deemed purchasable pursuant to such Company stock option as
determined above (rounded up to the nearest whole cent). All outstanding Company
stock options, under the terms of such option agreements, will become
exercisable in full upon the closing of the merger.
In September 1996, a complaint was filed asserting, among other things, a
claim for breach of fiduciary duty against members of the Company's Board of
Directors, seeking to be certified as a class action and seeking injunctive
relief in connection with the proposed merger. The Company believes that this
lawsuit is without merit and will defend against it vigorously.
LIQUIDITY AND CAPITAL RESOURCES
Since the Company's inception in March 1986, the Company has relied upon
equity capital, convertible debt, capital equipment leases and bank borrowings
as the primary sources of its funds. The Company issued approximately 5.7
million shares of common stock for acquisitions in 1994. In August 1995, the
Company issued 4,325,000 shares of common stock in a public offering raising net
proceeds of $121,799,000.
Since the Company's store sales are substantially on a cash and carry
basis, cash flow generated from operating stores provides a source of liquidity
to the Company. Working capital requirements are reduced by vendor credit terms
that allow the Company to finance a portion of its inventory. The Company
utilizes private label credit card programs administered and financed by
financial services companies, which allow the Company to expand store sales
without the burden of additional receivables.
A significant portion of the sales made from the contract stationer
warehouses are made under regular commercial credit terms where the Company
carries its own receivables. As the Company expands the contract stationer
portion of its business, it is expected that the Company's receivables will
continue to grow.
The Company added 66 office products stores in 1996, 84 office products
stores (net of closures) in 1995 and 69 office products stores (net of closures)
in 1994. Net cash provided by operating activities was $112,963,000, $25,974,000
and $46,107,000 for 1996, 1995 and 1994, respectively. As stores mature and
become more profitable, and as the number of new stores opened in a year becomes
a smaller percentage of the existing store base, cash generated from operations
will provide a greater portion of funds required for new store inventories and
other working capital requirements. Cash generated from operations will continue
to be
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affected by increases in receivables carried without outside financing and
increases in inventory as the Company continues to expand. Capital expenditures
are also affected by the number of stores and warehouses opened or acquired each
year and the increase in computer and other equipment at the corporate office
required to support such expansion. Cash utilized for capital expenditures
(including $22,000,000 for the corporate headquarters in 1994) was $176,888,000
in 1996, $219,892,000 in 1995 and $171,810,000 in 1994. During 1996, the
Company's cash balance decreased by $10,595,000 and long- and short-term debt
increased by $60,877,000.
The Company has a credit agreement with its principal bank and a syndicate
of commercial banks which provides for a working capital line and letters of
credit totaling $300,000,000. The credit agreement provides that funds borrowed
will bear interest, at the Company's option, at either .3125% over the LIBOR
rate, 1.75% over the Federal Funds rate, a base rate linked to the prime rate,
or under a competitive bid facility. The Company must also pay a facility fee of
.1875% per annum on the available and unused portion of the credit facility. The
credit facility currently expires June 30, 2000. As of December 28, 1996, the
Company had borrowed $140,000,000 and had outstanding letters of credit totaling
$11,170,000 under the credit facility. The credit agreement contains certain
restrictive covenants relating to various financial statement ratios. In the
first quarter of 1997, the Company repaid in full all borrowings outstanding at
December 28, 1996 under the credit agreement. Accordingly, the outstanding
balance is reflected as a current liability at December 28, 1996. In addition to
the credit facility, the bank has provided a lease facility to the Company under
which the bank has agreed to purchase up to $25,000,000 of equipment on behalf
of the Company and lease such equipment to the Company. As of December 28, 1996,
the Company has utilized approximately $12,682,000 of this lease facility. In
July 1996, the Company entered into an additional lease facility with another
bank for up to $25,000,000 of equipment. As of December 28, 1996, the Company
had utilized approximately $16,493,000 of this lease facility.
The Company currently plans to open approximately 40 stores and 3 to 4
delivery warehouses during 1997. Uncertainty and a loss of certain real estate
personnel, both resulting from the delay in the pending merger with Staples,
have negatively affected the Company's short-term store opening program.
Management estimates that the Company's cash requirements, exclusive of
pre-opening expenses, will be approximately $1,900,000 for each additional
store, which includes an average of approximately $1,100,000 for leasehold
improvements, fixtures, point-of-sale terminals and other equipment in the
stores, as well as approximately $800,000 for the portion of the store inventory
that is not financed by vendors. The cash requirements, exclusive of pre-opening
expenses, for a delivery warehouse is expected to be approximately $5,300,000,
which includes an average of $3,100,000 for leasehold improvements, fixtures and
other equipment and $2,200,000 for the portion of inventory not financed by
vendors. In addition, management estimates that each new store and warehouse
requires pre-opening expenses of approximately $150,000 and $500,000,
respectively. In January 1996, the Company entered into a lease commitment for
an additional corporate office building which is still under construction. The
lease will be classified as a capital lease and will be recorded as such when
the term commences in 1997. This lease will result in a capital lease asset and
obligation of approximately $26,000,000 and initial annual lease commitments of
approximately $2,200,000.
In 1992 and 1993, the Company issued Liquid Yield Option Notes ("LYONs")
which are zero coupon, convertible subordinated notes maturing in 2007 and 2008,
respectively. Each LYON is convertible at the option of the holder at any time
on or prior to maturity, unless previously redeemed or otherwise purchased by
the Company, into common stock of the Company at conversion rates of 29.263 and
21.234 shares per 1992 and 1993 LYON, respectively. The 1992 LYONs may be
required to be purchased by the Company at the option of the holder, as of
December 11, 1997, at the issue price plus accrued original issue discount. The
Company, at its option, may elect to pay the purchase price on any particular
purchase date in cash or common stock, or any combination thereof. The total
amount of the 1992 LYONs as of December 28, 1996, including accrued interest,
was approximately $183,825,000.
The Company's management continually reviews its financing options and,
although they currently anticipate that the 1997 expansion will be financed
through cash on hand, funds generated from operations, equipment leased under
the Company's lease facilities and funds available under the Company's revolving
credit facility, alternative financing will be considered if market conditions
make it financially attractive. The
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Company's financing requirements beyond 1997 will be affected by the number of
new stores or warehouses opened or acquired.
INFLATION AND SEASONALITY
Although the Company cannot accurately determine the precise effects of
inflation, it does not believe inflation has a material effect on sales or
results of operations. The Company considers its business to be somewhat
seasonal with sales generally slightly higher during the first and fourth
quarters of each year.
STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
In December 1995, the Private Securities Litigation Reform Act of 1995 (the
"Act") was enacted. The Act contains amendments to the Securities Act of 1933
and the Securities Exchange Act of 1934 which provide protection from liability
in private lawsuits for "forward-looking" statements made by persons specified
in the Act. The Company desires to take advantage of the "safe harbor"
provisions of the Act.
The Company wishes to caution readers that with the exception of historical
matters, the matters discussed in this Annual Report are forward-looking
statements that involve risks and uncertainties, including but not limited to
factors related to the highly competitive nature of the office products supply
industry and its sensitivity to changes in general economic conditions, the
Company's proposed merger with Staples, the Company's expansion plans and
ability to integrate the acquired contract stationer businesses, the results of
financing efforts and other factors discussed in the Company's filings with the
Securities and Exchange Commission. Such factors could affect the Company's
actual results and could cause the Company's actual results during 1997 and
beyond to differ materially from those expressed in any forward-looking
statement made by or on behalf of the Company.
ITEM 8. FINANCIAL STATEMENTS.
The consolidated financial statements (together with independent auditors'
report) of the Company and its subsidiaries are included on pages F-2 through
F-19 of this report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors are elected at the Annual Meeting of Stockholders to serve during
the ensuing year or until a successor is duly elected and qualified. Executive
officers are elected annually by the Board and serve at the discretion of the
Board. The following sets forth certain information concerning each of the
Company's directors and executive officers.
DIRECTORS
DAVID I. FUENTE AGE: 51
Mr. Fuente has been Chairman of the Board and Chief Executive Officer since
he joined the Company in December 1987. For five years prior to that time, he
was employed by The Sherwin-Williams Co. ("Sherwin-Williams") as President of
its Paint Stores Group, a chain of over 1,800 paint stores. Prior positions
included Vice President of Marketing of the Paint Stores Group and Vice
President of Marketing, Consumer Division, and Vice President of Marketing,
Automotive Aftermarket Division of Sherwin-Williams. Mr. Fuente is a director of
National Vision Associates Ltd.
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CYNTHIA R. COHEN AGE: 44
Ms. Cohen has been a director since July 1994. She is the President of
MARKETPLACE 2000, a marketing and strategy consulting firm. Prior to founding
the firm in 1990, she was a Partner of Deloitte & Touche. Ms. Cohen is a
director of Loehmann's Holdings, Inc., One Price Clothing, Inc., Capital
Factors, Inc. and Spec's Music Stores, Inc.
HERVE DEFFOREY AGE: 47
Mr. Defforey has been a director since May 1996. Since 1993, Mr. Defforey
has served as Director of General Finance and Administration of Carrefour. From
1990 to 1993, he served as Director of Diversification for EBRO SA. Mr. Defforey
is an executive director of Carrefour and a member of the oversight committee
(but not the board of directors) of Carrefour Nederland B.V. (a subsidiary of
Carrefour which directly owns all of the outstanding capital stock of Fourcar).
Mr. Defforey is a director of the joint venture entered into between the Company
and Carrefour to own and operate office supply stores in France.
W. SCOTT HEDRICK AGE: 51
Mr. Hedrick has been a director since April 1991. From November 1986 until
April 1991, he was a director of Office Club, a subsidiary of the Company since
April 1991. He was a founder and has been a general partner of InterWest
Partners, a venture capital fund, since 1979.
JAMES L. HESKETT AGE: 63
Mr. Heskett has been a director since May 1996. Mr. Heskett has served on
the faculty of the Harvard University Graduate School of Business Administration
since 1965 and has taught courses in marketing, business logistics, the
management of service operations, business policy and service management. Mr.
Heskett is a director of Equitable of Iowa Companies.
MICHAEL J. MYERS AGE: 56
Mr. Myers has been a director since July 1987. He is the President and a
director of First Century Partners Management Company, an advisor to private
venture capital equity funds, and a director of Smith Barney Venture Corp., a
wholly-owned subsidiary of Smith Barney, Inc., which acts as the managing
general partner of two private venture capital equity funds. Until January 1992,
he was a Senior Vice President and Managing Director of Smith Barney, Harris
Upham & Co., Incorporated ("Smith Barney"). He joined Smith Barney's venture
capital group in 1972 and has had a senior operating responsibility for that
group since 1976. Prior to 1972, he spent three years with J.H. Whitney & Co., a
private venture capital firm. Mr. Myers is a director of Encore Paper Company,
Inc., HASCO Holdings Corp. and Wisconsin Porcelain, Inc.
FRANK P. SCRUGGS, JR. AGE: 45
Mr. Scruggs has been a director since October 1996. Since May 1995, Mr.
Scruggs has been an attorney and shareholder in the law firm of Greenberg
Traurig specializing in the representation of management in employment and
governmental law matters. From 1984 until April 1995, Mr. Scruggs was a partner
in the law firm of Steel, Hector & Davis other than during the period from
January 1991 to July 1992 when Mr. Scruggs was Secretary of Labor of the State
of Florida. Mr. Scruggs is a director of Blue Cross and Blue Shield of Florida,
a managed care company.
PETER J. SOLOMON AGE: 58
Mr. Solomon has been a director since April 1990. He is Chairman and Chief
Executive Officer of Peter J. Solomon Company Limited ("PJSC"), an investment
banking firm which provided services to the Company in fiscal 1993 and is
providing services to the Company in connection with the proposed merger with
Staples. See "Certain Relationships and Related Transactions." From 1985 to
1989, he was a Vice Chairman and a member of the board of directors of Shearson
Lehman Hutton Inc. ("Shearson"). From 1981 to 1985, he was a Managing Director
at Shearson. Mr. Solomon is a director of Centennial Cellular Corporation,
Century Communications, Inc., Monro Muffler/Brake, Inc., Phillips-VanHeusen
Corporation and Culbro Corporation. Mr. Solomon served as a director of
Bradlees, Inc. until March 1996.
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EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
BARRY J. GOLDSTEIN AGE: 54
Mr. Goldstein has been Chief Financial Officer since he joined the Company
in May 1987, has served as Executive Vice President -- Finance since July 1991
and has served as Secretary since January 1988. From May 1987 until June 1991,
he served as Vice President -- Finance. Prior to joining the Company, he spent
22 years in public accounting, the most recent 18 of which were with Grant
Thornton, a national accounting firm. He became a partner of Grant Thornton in
1976.
F. TERRY BEAN AGE: 49
Mr. Bean has been Executive Vice President -- Human Resources since he
joined the Company in January 1994. Prior to joining the Company, he was
employed by Roses Stores Inc., a mass merchandiser, as Senior Vice President of
Human Resources. From 1978 to 1989, he was employed by Federal Express Corp., a
shipping company, where he held the position of Vice President of Personnel
Services from 1982 through 1989. Prior to 1978, Mr. Bean held human resource
management positions with Eaton Corp. and Johnson & Johnson Corp.
RICHARD M. BENNINGTON AGE: 56
Mr. Bennington has been Executive Vice President -- Operations and Sales
since January 1996, and was Executive Vice President -- Retail Division from
July 1991 to January 1996. He joined the Company as a store manager in June 1986
and has served as the Company's Executive Vice President -- Office Depot Store
Operations, Vice President -- Operations, District Manager and Director of Store
Operations. Prior to joining the Company, he was employed for one year by Mr.
How, a chain of home products stores, as a zone manager and held various field
operations positions with other specialty and mass merchandise chains.
HARRY S. BROWN AGE: 50
Mr. Brown has been Executive Vice President -- Merchandising since he
joined the Company in February 1995. Prior to joining the Company, he was
employed by Marshall's, an off-price department store chain, where he served in
various senior merchandise management positions from 1989 until 1995, most
recently as Executive Vice President, Merchandising, Planning and Allocation.
From 1980 to 1989, he served in various merchandise management positions within
Macy's.
WILLIAM P. SELTZER AGE: 58
Mr. Seltzer has been Executive Vice President -- Systems and Distribution
since joining the Company in August 1992. Prior to joining the Company, he was
Senior Vice President -- Distribution and Systems of Revco D.S. Inc. from
November 1987 to July 1992. Mr. Seltzer was Vice President of Systems for the
H.E. Butt Grocery Company from 1977 to 1987, and was Corporate Manager of
Information Processing from 1972 to 1977 with SCM Corporation.
The Company believes that each of its officers, directors and greater than
ten-percent owners complied with all Section 16(a) filing requirements
applicable to them during fiscal 1996.
The Board met nine times during the 1996 fiscal year. The Board has
standing Audit, Compensation, Executive and Nominating Committees. All directors
attended at least 75% of the aggregate of the total number of meetings of the
Board and the total number of meetings of all committees on which they served.
The Audit Committee is currently composed of two directors (Mr. Myers and
Ms. Cohen). This committee recommends to the Board the appointment of the
Company's independent accountants. The committee meets with the independent
accountants to discuss the scope of the audit, any nonaudit related assignments,
fees, the independence of the accountants, the results of the audit and the
effectiveness of the Company's internal accounting controls. The committee
reports to the Board. The independent accountants
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have access to the committee, with or without advising management, to discuss
auditing and any other accounting matters. The Audit Committee met three times
during the 1996 fiscal year.
The Compensation Committee is currently composed of two directors (Mr.
Hedrick and Ms. Cohen). This committee recommends action to the Board regarding
the salaries and incentive compensation of elected officers of the Company. The
committee also reviews the compensation of certain other principal management
employees and administers the Company's employee benefit plans. The Compensation
Committee met three times during the 1996 fiscal year.
The Executive Committee was established in February 1992 and is currently
composed of two directors (Messrs. Fuente and Solomon). This committee handles
matters arising between regularly scheduled meetings of the Board. The Executive
Committee did not meet during the 1996 fiscal year.
The Nominating Committee is currently composed of two directors (Messrs.
Fuente and Solomon). This committee evaluates the performance of incumbent
directors, considers nominees recommended by management or stockholders of the
Company and develops its own recommendations. The committee will consider
nominees recommended by stockholders in accordance with the Company's By-laws.
The Nominating Committee met one time during the 1996 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION.
Directors who are not salaried employees of the Company receive $15,000 per
year plus $2,000 per Board meeting attended and are reimbursed for costs
incurred in attending meetings. No additional amounts are paid for service on
any committee of the Board. Directors who are not salaried employees of the
Company also each receive options to purchase 7,500 shares of Common Stock per
year, with an exercise price per share of fair market value measured on the date
of grant. Such options become exercisable in equal proportions on the first,
second and third anniversary of their date of grant. Directors who are salaried
employees of the Company receive no compensation other than their compensation
for such service as employees. Directors who are not salaried employees of the
Company are permitted to defer 100% of their cash compensation under the Office
Depot Compensation Plan.
Executive Officers Compensation. The following table sets forth the
aggregate cash compensation paid by the Company for services rendered during the
1994, 1995 and 1996 fiscal years by (i) the Company's Chief Executive Officer,
(ii) the Company's four other most highly compensated executive officers who
were serving as executive officers at the end of the 1996 fiscal year and (iii)
one additional individual for whom disclosure would have been provided pursuant
to clause (ii) above but for the fact that the individual was not serving as an
executive officer at the end of the 1996 fiscal year (collectively, the "Named
Executive Officers").
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SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------- -----------------------------------
AWARDS PAYOUTS
------------------------- -------
SECURITIES
OTHER UNDER- ALL
ANNUAL RESTRICTED LYING OTHER
COMPEN- STOCK OPTIONS/ LTIP COMPEN-
SALARY BONUS SATION AWARD(S) SARS PAYOUTS SATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1) ($) (#)(2) ($) ($)/(3)
- --------------------------- ---- ------- --------- ------- ---------- ------------ ------- -------
David I. Fuente.................... 1996 800,000 -0- -0- -0- 165,000 -0- 160,801
Chief Executive 1995 700,000 280,000 -0- -0- 125,000 -0- 127,769
Officer 1994 625,000 1,250,000 -0- -0- 125,000 -0- 5,328
F. Terry Bean,..................... 1996 345,000 -0- 39,200 -0- 35,000 -0- 33,843
Executive Vice 1995 325,000 98,150 -0- -0- 35,000 -0- 26,194
President -- 1994 300,000 393,600 -0- -0- 110,000 -0- -0-
Human Resources
Richard M. Bennington,............. 1996 450,000 -0- -0- -0- 60,000 -0- 67,734
Executive Vice 1995 350,000 108,500 -0- -0- 35,000 -0- 52,508
President -- 1994 300,000 396,000 -0- -0- 35,000 -0- 2,958
Operations and Sales
Harry S. Brown(4).................. 1996 400,000 -0- -0- -0- 40,000 -0- 68,481
Executive Vice 1995 302,885 134,400 -0- -0- 95,000 -0- 52,433
President -- 1994 -0- -0- -0- -0- -0- -0- -0-
Merchandising and Marketing
Barry J. Goldstein,................ 1996 400,000 -0- -0- -0- 40,000 -0- 53,878
Executive Vice 1995 350,000 109,200 -0- -0- 35,000 -0- 43,122
President -- 1994 300,000 393,600 -0- -0- 35,000 -0- 2,958
Finance, Chief Financial Officer
and Secretary
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ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------- -----------------------------------
AWARDS PAYOUTS
------------------------- -------
SECURITIES
OTHER UNDER- ALL
ANNUAL RESTRICTED LYING OTHER
COMPEN- STOCK OPTIONS/ LTIP COMPEN-
SALARY BONUS SATION AWARD(S) SARS PAYOUTS SATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1) ($) (#)(2) ($) ($)/(3)
- --------------------------- ---- ------- --------- ------- ---------- ------------ ------- -------
Judith Rogala(5),.................. 1996 350,000 -0- 39,200 -0- -0- -0- 76,056
Executive Vice 1995 350,000 -0- -0- -0- 35,000 -0- 46,335
President -- 1994 193,821 192,000 -0- -0- 60,000 -0- -0-
Business Services Division
- ---------------
(1) Other Annual Compensation items for persons named in the summary
compensation table were not reportable in 1996, 1995 and 1994 except for Mr.
Bean and Ms. Rogala in 1996.
(2) Options granted have been adjusted to reflect a three-for-two stock split in
1994.
(3) Amounts reported represent insurance premiums paid by the Company for the
benefit of the Named Executive Officers under a split-dollar life insurance
policy and matching contributions under the Company's Retirement Savings
Plan, a defined contribution plan.
(4) Mr. Brown joined the Company as Executive Vice President -- Merchandising in
February 1995. Mr. Brown was compensated in 1995 at an annualized base
salary of $350,000.
(5) Ms. Rogala joined the Company as Executive Vice President-Business Services
Division in June 1994. Ms. Rogala resigned from the Company effective
January 1996.
The following table sets forth information with respect to all options
granted in fiscal 1996 under the Option Plan to the Named Executive Officers.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
GRANT DATE
INDIVIDUAL GRANTS VALUE
- ---------------------------------------------------------------------------------------------- ----------
PERCENT OF
NUMBER OF TOTAL EXERCISE
SECURITIES OPTIONS/SARS OR
UNDERLYING GRANTED TO BASE GRANT DATE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME GRANTED(1) FISCAL YEAR (S/SH) DATE VALUE(2)
- ---- ------------ ------------ -------- ---------- ----------
David I. Fuente.......................... 165,000 8.35 14.25 7/19/06 886,974
F. Terry Bean............................ 35,000 1.77 14.25 7/19/06 188,146
Richard M. Bennington.................... 60,000 3.04 14.25 7/19/06 322,536
Harry S. Brown........................... 40,000 2.02 14.25 7/19/06 215,024
Barry J. Goldstein....................... 40,000 2.02 14.25 7/19/06 215,024
Judith Rogala............................ -0- -0- -0- -- -0-
- ---------------
(1) All options granted in fiscal 1996 vest in three equal installments on July
19, 1997, July 19, 1998 and July 19, 1999 and were not awarded with tandem
stock appreciation rights ("SARs"). If the pending merger with Staples is
consummated, outstanding options and SARs will become immediately
exercisable under the terms of the applicable agreements. In order to
prevent dilution or enlargement of rights under the options, in the event of
the Staples merger or any other reorganization, recapitalization, stock
split, stock dividend, combinations of shares, merger, consolidation or
other change in the Common Stock the number of shares available upon
exercise and the exercise price will be adjusted accordingly. The
Compensation Committee may, subject to specified limitations, advance (i)
the date on which an option shall become exercisable by the grantee and (ii)
the grantee's right to designate an Appreciation Date for any SAR.
(2) The Black-Scholes option pricing model was used to determine the grant date
present value of the stock options granted in 1996 by the Company to the
executive officers listed above. Under the Black-Scholes
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option pricing model, the grant date present value of each stock option
referred to in the table was calculated to be $5.38. The following facts and
assumptions were used in making such calculation: (i) an exercise price of
$14.25 for each such stock option; (ii) a fair market value of $14.25 for
one share of Common Stock on the date of grant; (iii) a dividend yield of
0%; (iv) a stock option term of 10 years; (v) a stock volatility of 25.00%
based on an analysis of weekly stock closing prices of Common Stock during
the fourth quarter of 1996; and (vi) an assumed risk-free interest rate of
6.38% which is equivalent
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to the yield on a ten-year treasury note on the date of grant. No other
discounts or restrictions related to vesting or the likelihood of vesting of
stock options were applied. The resulting grant date present value of $5.38
for each stock option was multiplied by the total number of stock options
granted to each of the executive officers listed above to determine the
total grant date present value of such stock options granted to each such
executive officer, respectively.
The following table sets forth information with respect to all options
exercised in fiscal 1996 and the year-end value of unexercised options held by
the Named Executive Officers.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FISCAL YEAR-END FISCAL YEAR-END
SHARES --------------- ---------------
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
NAME (#) ($) (#)(1) ($)(1)
- ---- ----------- -------- --------------- ---------------
David I. Fuente............................... -0- -0- 990,156 7,142,568
290,001 618,750
F. Terry Bean................................. -0- -0- 84,999 -0-
95,002 131,250
Richard M. Bennington......................... -0- -0- 208,753 1,275,941
95,001 225,000
Harry S. Brown................................ -0- -0- 31,666 -0-
103,334 150,000
Barry J. Goldstein............................ -0- -0- 340,034 2,545,386
75,001 450,000
Judith Rogala................................. -0- -0- 51,665 -0-
-0- -0-
- ---------------
(1) The first number shown for each officer represents exercisable options, and
the second number represents unexercisable options.
EMPLOYMENT AGREEMENTS
David I. Fuente, Barry J. Goldstein, Richard M. Bennington, F. Terry Bean,
Harry S. Brown, R. John Schmidt, Jr. and William P. Seltzer, all of whom are
currently executive officers of the Company, entered into employment agreements
with the Company in September 1996. Each employment agreement provides that if
(but only if) the Company undergoes a Change of Control (as defined in the
employment agreements), not including a business combination with Staples or any
of its affiliates, during the Change of Control Period (as defined below), the
executive will be entitled to certain employment rights; a minimum annual base
salary and bonus; participation rights in the Company's incentive, savings,
retirement and welfare benefit plans; and certain payments and other benefits
upon termination of employment in certain circumstances. As used above, "Change
of Control Period" means the period commencing on the date of the employment
agreement and ending on the third anniversary thereof, provided that the Change
of Control Period will be automatically extended unless earlier terminated by
the Company. The purpose of the employment agreements is to assure the continued
dedication of the executive, notwithstanding the possibility, threat or
occurrence of a Change of Control.
The employment agreements provide for the employment of the executive for
the twelve-month period following a Change of Control (the "Employment Period")
on terms comparable to those the executive
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enjoyed immediately prior to the Change of Control. If, during the Employment
Period, the Company terminates an executive's employment other than for cause,
the executive terminates his own employment for Good Reason (as defined in the
employment agreements) or the executive's employment is terminated due to his
death or disability, the executive will be entitled to a lump sum cash payment
of (a) the sum of (i) the executive's accrued but unpaid salary through the
termination date and (ii) a pro rata portion of the higher of the executive's
highest bonus under any of the Company's annual incentive bonus plans during the
last three full fiscal years prior to the Change of Control and the annualized
annual bonus paid or payable for the most recently completed fiscal year (such
higher amount being referred to as the "Highest Annual Bonus") plus (b) two (in
the case of Messrs. Bean, Brown, Schmidt and Seltzer) or three (in the case of
Messrs. Fuente, Goldstein and Bennington) times the sum of such executive's
annual base salary and Highest Annual Bonus, plus (c) the equivalent of the
amount the executive would have received under the Company's retirement plans
had he continued to be employed by the Company for two or three years, as the
case may be, following his termination. Moreover, if the Company terminates an
executive's employment other than for cause or the executive terminates his own
employment for Good Reason, the executive and his family will continue to
receive the Company's welfare benefits for two or three years, as the case may
be, following the termination date. Each executive will receive a smaller
payment and benefit rights (as described in the employment agreements) if
terminated for cause or if the executive terminates his own employment for other
than Good Reason. The employment agreements further provide for the payment of a
"gross up" payment in the event that the payments set forth above are subject to
the excise tax imposed by Section 4999 of the Code.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board is comprised of two directors,
currently Mr. Hedrick and Ms. Cohen. Neither of such directors is or was an
officer of the Company or any of its subsidiaries, no executive officer of the
Company serves or served on the compensation committee of another entity (i) one
of whose executive officers served on the compensation committee of the Company
or (ii) one of whose executive officers served as a director of the Company, and
no executive officer of the Company serves or served as a director of another
entity who has or had an executive officer serving on the compensation committee
of the Company.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of March 24, 1997 by (i) each
stockholder known by the Company to own beneficially more than five percent (5%)
of the outstanding Common Stock, (ii) each director of the Company, (iii) the
Named Executive Officers and (iv) all executive officers and directors of the
Company as a group. Beneficial ownership of less than one percent is indicated
by an asterisk. Except as otherwise indicated below, each of the entities named
in the table has sole voting and investment power with respect to all shares of
Common Stock beneficially owned by such entity as set forth opposite such
entity's name, and the address of each of the entities named in the table is the
Company's address. No effect has been given to shares reserved for issuance
under outstanding stock options except where otherwise indicated.
NUMBER OF SHARES PERCENT OF CLASS
NAME OF INDIVIDUAL OR GROUP BENEFICIALLY OWNED(1) OUTSTANDING(2)
- --------------------------- --------------------- ----------------
Massachusetts Financial Services Company(3)................ 11,989,984 7.6%
500 Boylston Street
Boston, Massachusetts 02116
FMR Corp.(4)............................................... 9,451,850 6.0%
82 Devonshire Street
Boston, Massachusetts 02109
Fourcar B.V.(5)............................................ 9,192,600 5.8%
Coolsingel 139
3012 AG Rotterdam
The Netherlands
F. Terry Bean(6)........................................... 115,712 *
Richard M. Bennington(7)................................... 216,198 *
Harry S. Brown(8).......................................... 57,811 *
Cynthia R. Cohen(9)........................................ 13,038 *
Herve Defforey(10)......................................... 9,195,100 5.8%
David I. Fuente(11)........................................ 1,350,812 *
Barry J. Goldstein(12)..................................... 456,332 *
W. Scott Hedrick(13)....................................... 70,532 *
James L. Heskett(14)....................................... 3,500 *
Michael J. Myers(15)....................................... 43,786 *
Frank P. Scruggs, Jr....................................... -- *
Peter J. Solomon(16)....................................... 113,314 *
All Executive Officers and Directors
as a Group (14 persons)(17).............................. 12,064,784 7.6%
- ---------------
(1) Includes shares of Common Stock subject to options which are exercisable
within 60 days of March 24, 1997.
(2) Based on 157,471,381 shares of Common Stock outstanding as of March 24,
1997. Shares subject to options exercisable within 60 days of March 24,
1997 are considered for the purpose of determining the percent of the class
held by the holder of such option, but not for the purpose of computing the
percentage held by others.
(3) Based solely upon a Schedule 13G dated February 12, 1997. Of the 11,989,984
shares shown as beneficially owned by Massachusetts Financial Services
Company ("MFSC"), MFSC has sole voting power with respect to 11,804,034 of
such shares and sole dispositive power with respect to all 11,989,984 of
such shares.
(4) Based solely upon a Schedule 13G dated February 14, 1997. Of the 9,451,850
shares shown as beneficially owned by FMR Corp. ("FMR"), FMR has sole
voting power with respect to 135,355 of such shares and sole dispositive
power with respect to all 9,451,850 of such shares.
(5) Based solely upon a Schedule 13D dated July 31, 1995.
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(6) Includes options to purchase 110,000 shares issued to Mr. Bean pursuant to
the Office Depot, Inc. Stock Option and Stock Appreciation Rights Plan (the
"Option Plan").
(7) Includes options to purchase 208,753 shares issued to Mr. Bennington
pursuant to the Option Plan.
(8) Includes options to purchase 51,666 shares issued to Mr. Brown pursuant to
the Option Plan.
(9) Includes options to purchase 12,500 shares issued to Ms. Cohen as a
director of the Company.
(10) Includes options to purchase 2,500 shares issued to Mr. Defforey as a
director of the Company. Mr. Defforey is a director of the Company and is
an executive director of Carrefour S. A. ("Carrefour") and a member of the
oversight committee (but not the board of directors) of Carrefour Nederland
B.V. (a subsidiary of Carrefour which directly owns all of the outstanding
capital stock of Fourcar) and may be deemed to share voting and dispositive
power as to the 9,192,600 shares held of record by Fourcar. Mr. Defforey
disclaims beneficial ownership of these shares.
(11) Includes options to purchase 990,156 shares issued to Mr. Fuente pursuant
to the Option Plan, 1,890 shares held of record by his spouse, 3,990 shares
held of record by his step-daughter, Rebecca Mishkin, and 2,300 shares held
of record by an irrevocable trust for the benefit of his step-daughter. Mr.
Goldstein is the trustee of such trust. Mr. Fuente disclaims beneficial
ownership of the shares held by his spouse, his step-daughter and Mr.
Goldstein, as trustee.
(12) Includes options to purchase 340,034 shares issued to Mr. Goldstein
pursuant to the Option Plan and 2,300 shares held of record by an
irrevocable trust for the benefit of Mr. Fuente's step-daughter, of which
Mr. Goldstein is the trustee. As the trustee, Mr. Goldstein has investment
and voting power with respect to the shares held by the trust. Mr.
Goldstein disclaims beneficial ownership of the shares held by the trust.
(13) Includes options to purchase 38,011 shares issued to Mr. Hedrick as a
director of the Company.
(14) Includes options to purchase 2,500 shares issued to Mr. Heskett as a
director of the Company.
(15) Includes options to purchase 40,786 shares issued to Mr. Myers as a
director of the Company.
(16) Includes options to purchase 81,814 shares granted to Mr. Solomon as a
director of the Company.
(17) Includes options to purchase 2,266,469 shares. Also includes 9,192,600
shares held by Fourcar on account of Mr. Defforey's relationship with such
entity. Mr. Defforey disclaims beneficial ownership of such shares. See
Note 10 above.
The Company believes that Judith Rogola who resigned from the Company
effective January 1996 does not have a reporting obligation to the Company
regarding her beneficial ownership of outstanding Common Stock.
Staples has an option to purchase 31,200,000 shares of the Company's common
stock pursuant to an Option Agreement dated as of September 4, 1996. The option
may only be exercised upon the happening of certain events, none of which have
occurred as of the date hereof. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Proposed Merger."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CARREFOUR S.A.
On April 24, 1991, the Company entered into a Stock Purchase Agreement (the
"Stock Purchase Agreement") with Carrefour, pursuant to which the Company agreed
to sell to Carrefour 6,435,000 newly issued shares of the Company's Common Stock
at a price of $6.23 per share (the "Carrefour Transaction"). Such shares were
issued to Fourcar, a wholly-owned indirect subsidiary of Carrefour. The
Carrefour Transaction was consummated on June 7, 1991 and resulted in proceeds
to the Company of $40,040,000. Fourcar subsequently purchased additional shares
in the market. In August 1995, 15,500,000 shares of the Company's Common Stock
were offered pursuant to a public offering whereby 2,000,000 shares were sold by
the Company and 13,500,000 shares were sold by Fourcar (the "Offerings").
Following the completion of the Offerings, Fourcar continued to own 9,192,600
shares of Common Stock (approximately 6% of the then issued and outstanding
shares). In addition, Carrefour has agreed not to compete with the Company in
the retail office products supply business in a large volume, warehouse or
discount store format in North America. In June 1995, the Company entered into a
joint venture agreement with Carrefour to own and operate office supply stores
in France using a format similar to that utilized by the Company in its U.S.
stores. The joint
27
29
venture is owned 50% by Carrefour and 50% by the Company. The joint venture
opened its first two stores in France in 1996. Herve Defforey, who is a director
of the Company, is the Director of General Finance and Administration of
Carrefour and, is a Director of the joint venture.
PROPOSED MERGER
In September 1996, the Company entered into the Merger Agreement with
Staples and Acquisition Sub. Pursuant to the Merger Agreement, (i) Acquisition
Sub will be merged with and into Office Depot, and Office Depot will become a
wholly-owned subsidiary of Staples and (ii) each outstanding share of the
Company's common stock will be converted into the right to receive 1.14 shares
of common stock of Staples. In connection with the merger, both companies also
issued mutual options to purchase up to 19.9% of the outstanding stock of the
other company under certain conditions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Proposed Merger."
David I. Fuente, Barry J. Goldstein and Richard M. Bennington, all of whom
are currently executive officers of the Company, each have entered into an
employment agreements with Staples, which will take effect upon the Effective
Date (as defined in the employment agreements). Each employment agreement has a
three-year term and contemplates that during the one-year period beginning upon
the Effective Date and ending on the first anniversary thereof (the "Initial
Period") the executive will devote a significant portion of his time to the
integration of the two companies. The employment agreement provides for an
annual base salary, bonus arrangements and other benefits which are comparable
to those currently received by the executive from the Company. In order to
induce the executive to remain employed by Staples after consummation of the
merger (the "Merged Company") during the critical transitional period in which
the operations of the two companies are being integrated, the employment
agreement provides that the executive shall be paid a bonus (the "Initial
Bonus") equal to 50% of his Base Amount (as defined below) if he is employed by
the Company as of the Effective Date and an additional bonus (the "Transition
Bonus") equal to 150% of his Base Amount if he is employed by the Merged Company
on the first anniversary of the Effective Date. Generally, an executive's "Base
Amount" means the sum of his current annual base salary with the Company and the
highest annual bonus earned by him during the five full fiscal years prior to
the date of the employment agreement. The employment agreement also provides
that if the executive's employment is terminated either (i) by the Merged
Company without cause (as defined in the employment agreements), (ii) by the
executive for good reason (as defined in the employment agreements, including,
among other things, a diminution in his position or responsibilities after the
Initial Period from such executive's duties prior to the merger or a required
relocation), or (iii) upon the death or disability of the executive, then the
Merged Company shall provide certain benefits to the executive (or his estate or
beneficiary), including (a) the payment of 100% of his Base Amount (the
"Severance Payment"), (b) if such employment termination occurs during the
Initial Period (and the executive has therefore not received the Transition
Bonus) the payment of an additional amount equal to the Transition Bonus, (c)
the payment of a pro rata portion of his annual bonus for the year in which
employment termination occurs and (d) the continuation of employee benefits
(including medical, disability and other insurance benefits) for a period of
three years after such employment termination. The employment agreement further
provides that in the event the payments to the executive under the employment
agreement (the "Original Payments") are subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code (the "Code") (or any interest or
penalties are incurred by the executive with respect to such excise tax), then
the Merged Company shall make an additional payment (the "Gross-Up Payment") to
the executive in an amount such that after payment by the executive of all taxes
(including the excise tax) imposed upon the Gross-Up Payment, the executive
retains a portion of the Gross-Up Payment equal to the amount of the excise tax
imposed upon the Original Payments (provided that if the net after-tax payments
to the executive after the Gross-Up Payment would not be at least $50,000
greater than the net after-tax payments to the executive that would result from
an elimination of the Gross-Up Payment and a reduction of the Original Payments
to such amount that would avoid the imposition of any excise tax, then no
Gross-Up Payment shall be made to the executive and the Original Payments shall
be reduced to such reduced amount). The employment agreement also contains a
covenant by the executive that he will not, while employed by the Merged Company
and for two years after the termination of his employment with the
28
30
Merged Company, participate in any capacity in any business engaged principally
in the sale of office supplies in any country where the Merged Company or its
affiliates is then doing business.
F. Terry Bean, Harry S. Brown, R. John Schmidt, Jr. and William P. Seltzer,
all of whom are currently executive officers of the Company, have each entered
into an employment agreement with Staples on substantially the terms described
in the preceding paragraph, with the following exceptions: the amount of the
Transition Bonus payable to the executive is 100% (rather than 150%) of his Base
Amount; and the amount of the Severance Payment payable to the executive is 50%
(rather than 100%) of his Base Amount.
Approximately 51 additional employees of the Company have each entered into
an employment agreement with Staples on substantially the terms described above,
with the following exceptions: no bonuses are paid to such employee upon either
the Effective Date or the first anniversary of the Effective Date; the Base
Amount is calculated with reference to the highest annual bonus earned in the
prior three fiscal years (rather than five); the amount of the Severance Payment
is 100% of his or her Base Amount; the provision of benefits following certain
employment terminations continues for one year (rather than three); and there is
no Gross-Up Payment made in the event that the Original Payments are subject to
the excise tax under Section 4999 of the Code (the amount of the Original
Payments under these Employment Agreements would not normally trigger such
excise tax).
All outstanding stock options for the purchase of Company common stock were
granted pursuant to option agreements that provide that such options shall
become exercisable in full from and after the date of a change in control of the
Company. The merger will constitute a change in control of the Company within
the meaning of such option agreements.
Pursuant to the Merger Agreement, Staples has agreed to indemnify each
present and former director and officer of the Company against liabilities or
expenses incurred in connection with claims relating to matters occurring prior
to the closing of the Merger, and to maintain in effect directors' and officers'
liability insurance for their benefit. In addition, Office Depot has entered
into an indemnity agreement with each of its directors and executive officers
pursuant to which the Company has agreed, among other things, to indemnify such
persons to the maximum extent permitted by Delaware law.
Peter J. Solomon, a member of the Company's board of directors, is also
Chairman of PJSC. PJSC was engaged by the Company to provide investment banking
services in connection with the proposed merger with Staples. Under the
engagement letter between the Company and PJSC, the Company has agreed to pay
PJSC, upon consummation of the merger, a transaction fee of 0.375% of the
aggregate consideration paid or payable in the merger (the "Initial Transaction
Fee") minus (a) the amount paid (up to $2 million) by the Company to a financial
advisor other than PJSC for a fairness opinion and (b) the amount paid by the
Company to any additional financial advisor hired by the Company (up to an
aggregate of 30% of the Initial Transaction Fee). For this purpose, the
"aggregate consideration" includes the total amount of cash, securities,
contractual arrangements and other properties paid or payable to holders of the
Company's equity securities (including any amounts paid to holders of options,
warrants and convertible securities) plus the amount of any short-term and
long-term debt of the Company (x) existing on the balance sheet of the Company
at the time of the consummation of the merger or (y) repaid, retired or assumed
in connection with the merger. PJSC is also entitled, if the Company receives a
break-up, termination or topping fee in connection with the termination or
abandonment of the merger, to a cash fee equal to 70% of the lesser of (i) $10
million or (ii) 20% of the aggregate amount of all such break-up fees. The
Company also has agreed to reimburse PJSC for its reasonable out-of-pocket
expenses, including attorneys' fees, under certain circumstances and to
indemnify PJSC against certain liabilities, including certain liabilities under
the federal securities laws.
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
1. The financial statements listed in the "Index to Financial
Statements."
2. The financial statement schedule listed in "Index to Financial
Statement Schedule."
3. The exhibits listed in the "Index to Exhibits."
(b) Reports on Form 8-K.
The Company did not file any Reports on Form 8-K during the fourth
quarter of fiscal 1996.
30
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 28, 1997.
OFFICE DEPOT, INC.
By /s/ DAVID I. FUENTE
------------------------------------
David I. Fuente,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March 28, 1997.
SIGNATURE CAPACITY
--------- --------
/s/ DAVID I. FUENTE Chairman of the Board and Chief Executive
- ----------------------------------------------------- Officer (Principal Executive Officer)
David I. Fuente
/s/ BARRY J. GOLDSTEIN Executive Vice President -- Finance, Chief
- ----------------------------------------------------- Financial Officer and Secretary (Principal
Barry J. Goldstein Financial and Accounting Officer)
/s/ CYNTHIA R. COHEN Director
- -----------------------------------------------------
Cynthia R. Cohen
/s/ HERVE DEFFOREY Director
- -----------------------------------------------------
Herve Defforey
/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
31
32
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report of Deloitte & Touche LLP on
Consolidated Financial Statements and Financial Statement
Schedule.................................................. F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Earnings......................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
33
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Office Depot, Inc.
We have audited the consolidated balance sheets of Office Depot, Inc. and
Subsidiaries as of December 28, 1996 and December 30, 1995, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended December 28, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a)2.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Office Depot, Inc. and Subsidiaries as of December 28, 1996 and December 30,
1995 and the results of their operations and their cash flows for each of the
three years in the period ended December 28, 1996 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Deloitt & Touche LLP
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
February 25, 1997
(March 10, 1997 as to Note B)
F-2
34
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 28, DECEMBER 30,
1996 1995
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 51,398 $ 61,993
Receivables, net of allowances of $11,538 in 1996 and
$3,808 in 1995......................................... 401,900 380,431
Merchandise inventories................................... 1,324,506 1,258,413
Deferred income taxes..................................... 29,583 18,542
Prepaid expenses.......................................... 14,209 11,620
---------- ----------
Total current assets.............................. 1,821,596 1,730,999
Property and Equipment, net................................. 671,648 565,082
Goodwill, net of Amortization............................... 190,052 195,302
Other Assets................................................ 57,021 39,834
---------- ----------
$2,740,317 $2,531,217
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 781,963 $ 841,589
Accrued expenses.......................................... 177,680 166,575
Income taxes.............................................. 25,819 10,542
Short-term borrowings and current maturities of long-term
debt................................................... 142,339 3,309
---------- ----------
Total current liabilities......................... 1,127,801 1,022,015
Long-Term Debt, less Current Maturities..................... 17,128 112,340
Deferred Taxes and Other Credits............................ 39,814 11,297
Zero Coupon, Convertible Subordinated Notes................. 399,629 382,570
Commitments and Contingencies............................... -- --
Common Stockholders' Equity:
Common stock -- authorized 400,000,000 shares of $.01 par
value; issued 159,417,089 in 1996 and 157,961,801 in
1995................................................... 1,594 1,580
Additional paid-in capital................................ 630,049 605,876
Foreign currency translation adjustment................... (1,073) (794)
Retained earnings......................................... 527,125 398,083
Less: 2,163,447 shares of treasury stock, at cost......... (1,750) (1,750)
---------- ----------
1,155,945 1,002,995
---------- ----------
$2,740,317 $2,531,217
========== ==========
The accompanying notes are an integral part of these statements.
F-3
35
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS )
52 WEEKS 52 WEEKS 53 WEEKS
ENDED ENDED ENDED
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
Sales..................................................... $6,068,598 $5,313,192 $4,266,199
Cost of goods sold and occupancy costs.................... 4,700,910 4,110,334 3,283,498
---------- ---------- ----------
Gross profit.............................................. 1,367,688 1,202,858 982,701
Store and warehouse operating and selling expenses........ 951,084 782,478 642,572
Pre-opening expenses...................................... 9,827 17,746 11,990
General and administrative expenses....................... 162,149 153,344 130,022
Amortization of goodwill.................................. 5,247 5,213 5,288
---------- ---------- ----------
1,128,307 958,781 789,872
---------- ---------- ----------
Operating profit.......................................... 239,381 244,077 192,829
Other income (expense)
Interest income......................................... 1,593 1,357 4,000
Interest expense........................................ (26,078) (22,551) (18,096)
Equity and franchise income (loss), net................. (2,178) (962) 197
---------- ---------- ----------
Earnings before income taxes.............................. 212,718 221,921 178,930
Income taxes.............................................. 83,676 89,522 73,973
---------- ---------- ----------
Net earnings.............................................. $ 129,042 $ 132,399 $ 104,957
========== ========== ==========
Earnings per common and common equivalent share:
Primary................................................. $ .81 $ .85 $ .69
Fully diluted........................................... .80 .83 .68
The accompanying notes are an integral part of these statements.
F-4
36
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM DECEMBER 26, 1993 TO DECEMBER 28, 1996
(IN THOUSANDS, EXCEPT FOR NUMBER OF SHARES)
FOREIGN
COMMON COMMON ADDITIONAL CURRENCY
STOCK STOCK PAID-IN TRANSLATION RETAINED TREASURY
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS STOCK
----------- ------ ---------- ----------- -------- --------
BALANCE AT DECEMBER 26, 1993.............. 149,114,196 $1,491 $428,891 $ 383 $161,269 $(1,750)
Exercise of stock options (including tax
benefits)............................... 2,137,696 21 17,526 -- -- --
Issuance of stock under employee purchase
plan.................................... 199,974 2 4,651 -- -- --
401(k) plan matching contributions........ 84,915 1 2,049 -- -- --
S corporation distribution to
stockholders............................ -- -- -- -- (542) --
Foreign currency translation adjustment... -- -- -- (3,678) -- --
Net earnings for the period............... -- -- -- -- 104,957 --
----------- ------ -------- ------- -------- -------
BALANCE AT DECEMBER 31, 1994.............. 151,536,781 1,515 453,117 (3,295) 265,684 (1,750)
Issuance of common stock.................. 4,325,000 43 121,756 -- -- --
Exercise of stock options (including tax
benefits)............................... 1,751,620 17 22,146 -- -- --
Issuance of stock under employee purchase
plan.................................... 274,161 3 7,019 -- -- --
401(k) plan matching contributions........ 59,438 1 1,564 -- -- --
Conversion of LYONs to common stock....... 14,801 1 274 -- -- --
Foreign currency translation adjustment... -- -- -- 2,501 -- --
Net earnings for the period............... -- -- -- -- 132,399 --
----------- ------ -------- ------- -------- -------
BALANCE AT DECEMBER 30, 1995.............. 157,961,801 1,580 605,876 (794) 398,083 (1,750)
Exercise of stock options (including tax
benefits)............................... 947,402 10 14,347 -- -- --
Issuance of stock under employee purchase
and restricted award plans.............. 398,913 3 7,750 -- -- --
401(k) plan matching contributions........ 108,681 1 2,070 -- -- --
Conversion of LYONs to common stock....... 292 -- 6 -- -- --
Foreign currency translation adjustment... -- -- -- (279) -- --
Net earnings for the period............... -- -- -- -- 129,042 --
----------- ------ -------- ------- -------- -------
BALANCE AT DECEMBER 28, 1996.............. 159,417,089 $1,594 $630,049 $(1,073) $527,125 $(1,750)
=========== ====== ======== ======= ======== =======
The accompanying notes are an integral part of these statements.
F-5
37
CONSOLIDATED STATEMENTS OF CASH FLOWS
CHANGE IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
52 WEEKS 52 WEEKS 53 WEEKS
ENDED ENDED ENDED
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
Cash flows from operating activities
Cash received from customers.......................... $ 6,039,729 $ 5,243,724 $ 4,208,675
Cash paid for inventories............................. (4,632,221) (4,090,129) (3,239,438)
Cash paid for store and warehouse operating, selling
and general and administrative expenses............ (1,231,412) (1,045,448) (860,354)
Interest received..................................... 1,624 1,357 4,296
Interest paid......................................... (8,898) (5,665) (2,078)
Income taxes paid..................................... (55,859) (77,865) (64,994)
----------- ----------- -----------
Net cash provided by operating activities.......... 112,963 25,974 46,107
----------- ----------- -----------
Cash flows from investing activities
Capital expenditures, net............................. (176,888) (219,892) (171,810)
----------- ----------- -----------
Net cash used in investing activities.............. (176,888) (219,892) (171,810)
----------- ----------- -----------
Cash flows from financing activities
Proceeds from exercise of stock options and sales of
stock under employee stock purchase plan........... 14,596 20,883 14,976
Proceeds from stock offering.......................... -- 121,799 --
Foreign currency translation adjustment............... (279) 2,501 (3,678)
Proceeds from long- and short-term borrowings......... 146,652 178,410 30,466
Payments on long- and short-term borrowings........... (107,639) (100,088) (25,584)
S corporation distribution to stockholders............ -- -- (542)
----------- ----------- -----------
Net cash provided by financing activities.......... 53,330 223,505 15,638
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents...................................... (10,595) 29,587 (110,065)
Cash and cash equivalents at beginning of period........ 61,993 32,406 142,471
----------- ----------- -----------
Cash and cash equivalents at end of period.............. $ 51,398 $ 61,993 $ 32,406
=========== =========== ===========
Reconciliation of net earnings to net cash provided by
operating activities
Net earnings.......................................... $ 129,042 $ 132,399 $ 104,957
----------- ----------- -----------
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization...................... 82,525 64,830 49,585
Provision for losses on inventory and accounts
receivable....................................... 38,597 20,297 11,718
Accreted interest on zero coupon, convertible
subordinated notes............................... 17,064 16,505 16,042
Contributions of common stock to employee benefit
and stock purchase plans......................... 2,780 2,271 2,458
Changes in assets and liabilities
Increase in receivables............................ (30,054) (116,092) (66,026)
Increase in merchandise inventories................ (96,105) (340,372) (283,233)
Increase in prepaid expenses, deferred income taxes
and other assets................................. (32,965) (583) (18,337)
Increase in accounts payable, accrued expenses and
deferred credits................................. 2,079 246,719 228,943
----------- ----------- -----------
Total adjustments............................. (16,079) (106,425) (58,850)
----------- ----------- -----------
Net cash provided by operating activities............... $ 112,963 $ 25,974 $ 46,107
=========== =========== ===========
The accompanying notes are an integral part of these statements.
F-6
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Office Depot, Inc. and subsidiaries (the "Company") operates a national
chain of high-volume office supply stores and contract stationer/delivery
warehouses. The Company was incorporated in March 1986 and opened its first
store in October 1986.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated in consolidation. Investments in joint ventures are
accounted for using the equity method.
The Company is on a 52 or 53 week fiscal year ending on the last Saturday
in December. The fiscal years presented in the financial statements include 52
weeks in 1996 and 1995 and 53 weeks in 1994.
All common stock share and per share amounts for all periods presented have
been adjusted for a three-for-two stock split in June 1994 effected in the form
of a stock dividend.
Certain reclassifications were made to prior year statements to conform to
current year presentations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers any highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
RECEIVABLES
Receivables as of December 28, 1996 and December 30, 1995 are comprised of
trade receivables not financed through outside programs, totaling approximately
$222,673,000 and $187,476,000, respectively, as well as amounts due from others.
An allowance for doubtful accounts is provided for estimated amounts considered
to be uncollectible. The credit risk related to these trade receivables is
limited due to the large number of customers comprising the Company's customer
base, and their dispersion across many different industries and geographies.
Amounts due from others, totaling approximately $179,227,000 and
$192,955,000 as of December 28, 1996 and December 30, 1995, respectively,
consist primarily of estimated receivables from vendors under various rebate,
cooperative advertising and miscellaneous programs. Funds received from vendors
under rebate and miscellaneous marketing programs related to the purchase price
of merchandise inventories are capitalized and recognized as a reduction of cost
of sales as merchandise is sold. Amounts relating to cooperative advertising and
marketing programs are recognized as a reduction of advertising expense in the
period that the related expenses are incurred.
MERCHANDISE INVENTORIES
Inventories are stated at the lower of weighted average cost or market
value.
F-7
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company provides for Federal and state income taxes currently payable
as well as deferred income taxes resulting from temporary differences between
the basis of assets and liabilities for tax purposes and for financial statement
purposes using the provisions of Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes." Under this standard, deferred tax assets and
liabilities represent the tax effects, based on current tax law, of future
deductible or taxable amounts attributable to events that have been recognized
in the financial statements.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation and amortization
are provided in amounts sufficient to relate the cost of depreciable assets to
operations over their estimated useful lives on a straight-line basis. Estimated
useful lives are 30 years for buildings and 3 to 10 years for furniture,
fixtures and equipment. Leasehold improvements are amortized over the lesser of
the terms of the respective leases, including applicable renewal periods, or the
estimated useful lives of the improvements. The Company capitalized interest
costs of approximately $700,000 in 1996, $600,000 in 1995 and $1,000,000 in 1994
as part of the cost of major asset construction projects.
GOODWILL
Goodwill represents the excess of purchase price and related costs over the
value assigned to the net tangible and identifiable intangible assets of
businesses acquired under the purchase method of accounting. Goodwill is
amortized on a straight-line basis over 40 years. Accumulated amortization of
goodwill was $17,411,000 and $12,164,000 as of December 28, 1996 and December
30, 1995, respectively. Management periodically evaluates the recoverability of
goodwill, as measured by projected undiscounted future cash flows from the
underlying acquired businesses which gave rise to such amount.
LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS No. 121"), establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. Long-lived assets and certain
identifiable intangibles to be held and used by a company are required to be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Measurement of an
impairment loss for such long-lived assets and identifiable intangibles should
be based on the fair value of the asset. Long-lived assets and certain
identifiable intangibles to be disposed of are reported at the lower of the
carrying amount or fair value less cost to sell.
The adoption of SFAS No. 121 in 1996 did not have a material effect on the
Company's financial position or the results of its operations.
ADVERTISING
Advertising costs are either charged to expense when incurred or
capitalized and amortized in proportion to related revenues. The Company and its
vendors participate in cooperative advertising programs in which the vendors
reimburse the Company for a portion of certain advertising costs. Advertising
expense, net of vendor cooperative advertising allowances, amounted to
$55,828,000 in 1996, $42,878,000 in 1995 and $45,361,000 in 1994.
F-8
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRE-OPENING EXPENSES
Pre-opening expenses related to new store and customer service center
openings are expensed as incurred.
POSTRETIREMENT BENEFITS
The Company does not currently provide postretirement benefits for its
employees.
INSURANCE RISK RETENTION
The Company retains certain risks for workers' compensation, general
liability and employee medical programs and accrues estimated liabilities on an
undiscounted basis for known claims and claims incurred but not reported.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments," requires disclosure of the fair value of
financial instruments, both assets and liabilities, recognized and not
recognized in the Consolidated Balance Sheets of the Company, for which it is
practicable to estimate fair value. The estimated fair values of financial
instruments which are presented herein have been determined by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgment is required in interpreting market data to develop
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of amounts the Company could realize in a current market
exchange.
The following methods and assumptions were used to estimate fair value:
- the carrying amounts of cash and cash equivalents, receivables and
accounts payable approximate fair value due to their short-term nature;
- discounted cash flows using current interest rates for financial
instruments with similar characteristics and maturity were used to
determine the fair value of short-term and long-term debt; and
- quoted market prices were used to determine the fair value of the zero
coupon, convertible subordinated notes.
There were no significant differences as of December 28, 1996 and December
30, 1995 in the carrying value and fair value of financial instruments except
for the zero coupon, convertible subordinated notes which had a carrying value
of $399,629,000 and $382,570,000 and a fair value of $376,033,000 and
$422,407,000 at the end of 1996 and 1995, respectively.
NOTE B -- PROPOSED MERGER
In September 1996, the Company entered into an agreement and plan of merger
(the "Merger Agreement") with Staples, Inc. ("Staples") and Marlin Acquisition
Corp., a wholly-owned subsidiary of Staples ("Acquisition Sub"). Pursuant to the
Merger Agreement, (i) Acquisition Sub will be merged with and into Office Depot,
and Office Depot will become a wholly-owned subsidiary of Staples and (ii) each
outstanding share of the Company's common stock will be converted into the right
to receive 1.14 shares of common stock of Staples. In connection with the
merger, both companies also issued mutual options to purchase up to 19.9% of the
outstanding stock of the other company under certain conditions.
The consummation of the merger is subject to a number of conditions,
including approval by the stockholders of both the Company and Staples, and the
receipt of governmental consents and approvals, including those under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the Canadian
Competition Act. On November 1, 1996, the Federal Trade Commission ("FTC")
issued a Second Request
F-9
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- PROPOSED MERGER (CONTINUED)
for Information to Staples and the Company, beginning an investigation of the
merger. Since that time, the Company has cooperated with the FTC in its review
of the merger and has provided the FTC with requested documents and information.
The Company believes the merger fully complies with the antitrust laws. An
"Advanced Ruling Certificate" from the Canadian Competition Bureau clearing the
proposed merger under Canadian law was received on December 16, 1996.
On March 10, 1997, the FTC voted to challenge the merger. Staples and the
Company plan to vigorously contest any FTC challenge. Nevertheless, the Company
has been working with Staples and the FTC staff on an acceptable divestiture of
stores or other settlement arrangement that would benefit the Company, its
shareholders and its customers by allowing the merger to close. Staples and the
Company have entered into an agreement with OfficeMax, Inc. whereby Staples and
the Company would divest a total of 63 stores, which Staples and the Company
believe should remedy any perceived competitive issues and should obviate the
need for any FTC challenge. The FTC is currently reviewing the proposed
divestiture package, and has withheld issuance of a complaint pending this
review. If this or another settlement is ultimately approved by the FTC, a
consent decree would be issued along with the complaint that would allow the
merger to close.
If a settlement is not ultimately approved by the FTC, the Company
anticipates the merger will be subject to litigation with the FTC. A preliminary
injunction hearing will be held, likely within a few months of the issuance of
the complaint. Whether or not the FTC is ultimately successful in obtaining a
preliminary injunction, after any appeals, the FTC has told the Company it plans
to pursue its challenge in FTC administrative hearings.
Staples and the Company each have the right to terminate the Merger
Agreement if the merger has not been consummated by May 31, 1997.
The merger, if completed, will be accounted for as a pooling of interests,
and, accordingly, the Company's prior period financial statements will be
restated and combined with the prior period financial statements of Staples, as
if the merger had taken place at the beginning of the periods reported.
Based upon the number of outstanding shares of Staples common stock and the
Company common stock as of December 28, 1996, the stockholders of the Company
immediately prior to the consummation of the merger will own approximately 53%
of the outstanding shares of Staples common stock immediately following
consummation of the merger.
Upon consummation of the proposed merger, pursuant to the Merger Agreement,
each outstanding option to purchase Company common stock will be converted into
an option to purchase such number of shares of Staples common stock (rounded
down to the nearest whole number) as is equal to the number of shares of Company
common stock issuable upon exercise of such option immediately prior to the
effective time multiplied by the exchange ratio. The exercise price per share of
each such option, as so converted, will be equal to (x) the aggregate exercise
price for the shares of Company common stock otherwise purchasable pursuant to
such Company stock option immediately prior to the effective time divided by (y)
the number of whole shares of Staples common stock deemed purchasable pursuant
to such Company stock option as determined above (rounded up to the nearest
whole cent). All outstanding Company stock options, under the terms of such
option agreements, will become exercisable in full upon the closing of the
merger.
In September 1996, a complaint was filed asserting, among other things, a
claim for breach of fiduciary duty against members of the Company's Board of
Directors, seeking to be certified as a class action and seeking injunctive
relief in connection with the proposed merger. The Company believes that this
lawsuit is without merit and will defend against it vigorously.
F-10
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- PROPERTY AND EQUIPMENT
Property and equipment consists of:
DECEMBER 28, DECEMBER 30,
1996 1995
------------ ------------
(IN THOUSANDS)
Land....................................................... $ 64,678 $ 64,094
Buildings.................................................. 103,338 66,703
Leasehold improvements..................................... 333,992 278,821
Furniture, fixtures and equipment.......................... 423,525 338,308
-------- --------
925,533 747,926
Less accumulated depreciation and amortization............. 253,885 182,844
-------- --------
$671,648 $565,082
======== ========
Assets held under capital leases included above consist of:
DECEMBER 28, DECEMBER 30,
1996 1995
------------ ------------
(IN THOUSANDS)
Assets, at cost............................................ $24,929 $22,439
Less accumulated depreciation.............................. 14,334 12,919
------- -------
$10,595 $ 9,520
======= =======
NOTE D -- DEBT
Debt consists of the following:
DECEMBER 28, 1996 DECEMBER 30, 1995
----------------------- -----------------------
SHORT-TERM LONG-TERM SHORT-TERM LONG-TERM
---------- --------- ---------- ---------
(IN THOUSANDS)
Capital lease obligations collateralized
by certain equipment and fixtures..... $ -- $ 9,816 $ -- $ 8,570
13% senior subordinated notes, unsecured
and due 2002.......................... -- 9,651 -- 9,888
Non-interest bearing promissory note,
due February 1996, guaranteed by an
irrevocable letter of credit.......... -- -- 1,980 --
Bank borrowings......................... 140,000 -- -- 95,000
Installment notes, interest rates
ranging from 5.9% to 18.7%, payable in
monthly installments through 2007,
collateralized by certain equipment... -- -- -- 211
-------- ------- ------ --------
140,000 19,467 1,980 113,669
Current portion of long-term debt....... 2,339 (2,339) 1,329 (1,329)
-------- ------- ------ --------
$142,339 $17,128 $3,309 $112,340
======== ======= ====== ========
The Company has a credit agreement with its principal bank and a syndicate
of commercial banks which provides for a working capital line and letters of
credit totaling $300,000,000. The agreement provides that funds borrowed will
bear interest, at the Company's option, at either .3125% over the LIBOR rate,
1.75% over the Federal Funds rate, a base rate linked to the prime rate, or
under a competitive bid facility. The Company must also pay a fee of .1875% per
annum on the available and unused portion of the credit facility. The credit
facility expires in June 2000. In addition to the credit facility, the bank has
provided a capital lease facility to
F-11
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- DEBT (CONTINUED)
the Company under which the bank has agreed to purchase up to $25,000,000 of
equipment on behalf of the Company and lease such equipment to the Company. As
of December 28, 1996, the Company had $140,000,000 of outstanding borrowings
under the revolving credit facility and had utilized approximately $18,321,000
of the lease facility. Additionally, the Company had outstanding letters of
credit under the credit agreement totaling $11,170,000 as of December 28, 1996.
The loan agreement contains covenants relating to maintaining various financial
statement ratios. In the first quarter of 1997, the Company repaid in full all
borrowings outstanding at December 28, 1996 under the credit agreement.
Accordingly, the outstanding balance is reflected as a current liability at
December 28, 1996.
Maturities of debt are as follows:
DECEMBER 28,
1996
------------
(IN THOUSANDS)
1997........................................................ $142,339
1998........................................................ 2,495
1999........................................................ 2,596
2000........................................................ 2,343
2001........................................................ 588
Thereafter.................................................. 9,106
--------
$159,467
========
Future minimum lease payments under capital leases together with the
present value of the net minimum lease payments as of December 28, 1996 are as
follows:
DECEMBER 28,
1996
------------
(IN THOUSANDS)
1997........................................................ $2,633
1998........................................................ 2,659
1999........................................................ 2,621
2000........................................................ 2,227
2001........................................................ 398
Thereafter.................................................. 680
-------
Total minimum lease payments................................ 11,218
Less amount representing interest at 6.0% to 9.0%........... 1,402
-------
Present value of net minimum lease payments................. 9,816
Less current portion........................................ 2,101
-------
Non-current portion......................................... $7,715
=======
NOTE E -- ZERO COUPON, CONVERTIBLE SUBORDINATED NOTES
On December 11, 1992, the Company issued $316,250,000 principal amount of
Liquid Yield Option Notes ("LYONs") with a price to the public of $150,769,000.
The issue price of each such LYON was $476.74 and there will be no periodic
payments of interest. The LYONs will mature on December 11, 2007 at $1,000 per
LYON, representing a yield to maturity of 5% (computed on a semi-annual bond
equivalent basis).
On November 1, 1993, the Company issued $345,000,000 principal amount of
LYONs with a price to the public of $190,464,000. The issue price of each such
LYON was $552.07 and there will be no periodic payments of interest. These LYONs
will mature on November 1, 2008 at $1,000 per LYON, representing a yield to
maturity of 4% (computed on a semiannual bond equivalent basis).
F-12
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E -- ZERO COUPON, CONVERTIBLE SUBORDINATED NOTES (CONTINUED)
All LYONs are subordinated to all existing and future senior indebtedness
of the Company.
Each LYON is convertible at the option of the holder at any time on or
prior to maturity, unless previously redeemed or otherwise purchased by the
Company, into common stock of the Company at a conversion rate of 29.263 shares
per 1992 LYON and 21.234 shares per 1993 LYON. The LYONs may be required to be
purchased by the Company, at the option of the holder, as of December 11, 1997
and December 11, 2002 for the 1992 LYONs and as of November 1, 2000 for the 1993
LYONs, at the issue price plus accrued original issue discount. The Company, at
its option, may elect to pay the purchase price on any particular purchase date
in cash or common stock, or any combination thereof. The total amount of the
1992 LYONs and 1993 LYONs as of December 28, 1996, including accrued interest,
were approximately $183,825,000 and $215,804,000, respectively.
In addition, prior to December 11, 1997 for the 1992 LYONs and prior to
November 1, 2000 for the 1993 LYONs, the LYONs will be purchased for cash by the
Company, at the option of the holder, in the event of a change in control of the
Company. The Company believes the proposed merger with Staples does not
constitute a change in control of the Company for purposes of the LYONs.
Beginning on December 11, 1996, for the 1992 LYONs and on November 1, 2000 for
the 1993 LYONs, the LYONs are redeemable for cash at any time at the option of
the Company in whole or in part at the issue price plus accrued original issue
discount through the date of redemption.
NOTE F -- INCOME TAXES
The income tax provision consists of the following:
52 WEEKS 52 WEEKS 53 WEEKS
ENDED ENDED ENDED
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
Current provision
Federal......................................... $69,291 $65,573 $62,211
State........................................... 8,649 12,613 14,616
Deferred provision (benefit)...................... 5,736 11,336 (2,854)
------- ------- -------
Total provision for income taxes.................. $83,676 $89,522 $73,973
======= ======= =======
The tax effected components of deferred income tax accounts consists of the
following:
AS OF AS OF AS OF
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
Interest premium on notes redeemed................ $ -- $ 2,004 $ 4,944
Self-insurance accruals........................... 7,529 5,839 8,302
Inventory costs capitalized for tax purposes...... 2,949 2,797 4,483
Vacation pay accruals............................. 3,535 3,264 2,993
Reserve for bad debts............................. 3,606 1,173 1,463
Reserve for facility closings..................... 4,768 2,996 3,073
Other items, net.................................. 17,955 16,875 13,034
------- ------- -------
Deferred tax assets............................... 40,342 34,948 38,292
------- ------- -------
Excess of tax over book depreciation.............. 12,465 7,468 3,524
Capitalized leases................................ 5,123 4,781 4,509
Excess of tax over book amortization.............. 2,775 1,455 708
Other items, net.................................. 11,835 7,364 4,335
------- ------- -------
Deferred tax liabilities.......................... 32,198 21,068 13,076
------- ------- -------
Net deferred tax assets........................... $ 8,144 $13,880 $25,216
======= ======= =======
F-13
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- INCOME TAXES (CONTINUED)
The following schedule is a reconciliation of income taxes at the federal
statutory rate to the provision for income taxes:
52 WEEKS 52 WEEKS 53 WEEKS
ENDED ENDED ENDED
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
Federal tax computed at the statutory rate.... $74,452 $77,672 $62,626
State taxes, net of federal benefit........... 6,382 8,877 8,944
Effect of S corporation income prior to
acquisitions................................ -- -- (1,161)
Nondeductible goodwill amortization........... 1,821 1,843 1,955
Other items, net.............................. 1,021 1,130 1,609
------- ------- -------
Provision for income taxes.................... $83,676 $89,522 $73,973
======= ======= =======
Four of the contract stationers acquired in 1994 were organized as S
corporations and, therefore, did not provide for income taxes prior to their
respective acquisitions.
NOTE G -- COMMITMENTS AND CONTINGENCIES
LEASES
The Company conducts its operations in various leased facilities under
leases that are classified as operating leases for financial statement purposes.
The leases provide for the Company to pay real estate taxes, common area
maintenance, and certain other expenses, including, in some instances,
contingent rentals based on sales. Lease terms, excluding renewal option periods
exercisable by the Company at escalated rents, expire between 1997 and 2021. In
addition to the base lease term, the Company has various renewal option periods.
Also, certain equipment used in the Company's operations is leased under
operating leases. A schedule of fixed operating lease commitments follows:
DECEMBER 28,
1996
-----------------
(IN THOUSANDS)
1997........................................................ $ 155,761
1998........................................................ 151,245
1999........................................................ 141,425
2000........................................................ 124,092
2001........................................................ 108,377
Thereafter.................................................. 628,422
----------
$1,309,322
==========
The above amounts include ten stores leased but not yet opened as of
December 28, 1996. The Company is in the process of opening new stores and
customer service centers in the ordinary course of business, and leases signed
subsequent to December 28, 1996 are not included in the above described
commitment amount. Rent expense, including equipment rental, was approximately
$184,697,000, $154,633,000 and $124,693,000, during 1996, 1995 and 1994,
respectively.
In January 1996, the Company entered into a lease commitment for an
additional corporate office building. As of December 28, 1996, the building,
which is based on a build-to-suit lease, was still under construction. The lease
has an initial term of 20 years commencing on the earlier of (i) the Company's
commencement of business in the building, or (ii) the later of (a) July 1, 1997
or (b) 15 days following completion of the building. This lease will be
classified as a capital lease and will be recorded as such when the term
commences in 1997. This lease will result in a capital lease asset and
obligation of approximately
F-14
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
$26,000,000 and initial annual lease commitments of approximately $2,200,000.
Also, in July 1996, the Company entered into an operating lease facility for up
to $25,000,000 of equipment. As of December 28, 1996, the Company had utilized
approximately $16,493,000 of this lease facility.
OTHER
Certain holders of the Company's common stock have limited demand
registration rights. The cost of such registration will generally be borne by
the Company.
The Company is involved in litigation arising in the normal course of its
business. In the opinion of management, these matters will not materially affect
the financial position or results of operations of the Company (see also Note
B).
As of December 28, 1996, the Company has reserved 16,565,223 shares of
unissued common stock for conversion of the zero coupon, convertible
subordinated notes (see also Note E).
NOTE H -- EMPLOYEE BENEFIT PLANS
STOCK OPTION PLANS
As of December 28, 1996, the Company had reserved 10,693,208 shares of
common stock for issuance to officers and key employees under its 1986 and 1987
Incentive Stock Option Plans, its 1988 and 1989 Employees Stock Option Plans and
its Omnibus Equity Plan and its Directors Stock Option Plan. Under these plans,
the option price must be equal to or in excess of the market price of the stock
on the date of the grant or, in the case of employees who own 10% or more of
common stock, the minimum price must be 110% of the market price.
Options granted to date become exercisable from one to four years after the
date of grant, provided that the individual is continuously employed by the
Company (see also Note B). All options expire no more than ten years after the
date of grant. No amounts have been charged to income under the plans.
EMPLOYEE STOCK PURCHASE PLAN
In October 1989, the Board of Directors approved an Employee Stock Purchase
Plan, which permits eligible employees to purchase common stock from the Company
at 90% of its fair market value through regular payroll deductions. The maximum
aggregate number of shares eligible for purchase under the plan is 1,125,000.
RETIREMENT SAVINGS PLAN
In February 1990, the Board of Directors approved a Retirement Savings
Plan, which permits eligible employees to make contributions to the plan on a
pretax salary reduction basis in accordance with the provisions of Section
401(k) of the Internal Revenue Code. The Company makes a matching stock
contribution of 50% of the employee's pretax contribution, up to 3% of the
employee's compensation, in any calendar year.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations in accounting for
its stock-based compensation plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plan. The compensation cost that has been
charged against income for its Employee Stock Purchase Plan and its restricted
stock award plan approximated $1,482,000, $693,000 and $428,000, in 1996, 1995
and 1994, respectively. Had compensation cost for the Company's stock-based
compensation plans been determined using the fair value method described in
F-15
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," at the grant dates for awards under these plans, the Company's
net earnings and earnings per share would have been reduced to the pro forma
amounts presented below:
1996 1995
-------- --------
Net earnings (in thousands)
As reported............................................... $129,042 $132,399
Pro forma................................................. 122,072 129,712
Primary earnings per share
As reported............................................... $ 0.81 $ 0.85
Pro forma................................................. 0.77 0.83
Fully diluted earnings per share
As reported............................................... $ 0.80 $ 0.83
Pro forma................................................. 0.76 0.81
The fair value of each option grant is established on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996 and 1995: expected volatility of 25% for
both years, risk-free interest rates of 6.36% for 1996 and 6.28% for 1995,
expected lives of approximately five years for both years; and a dividend yield
of zero for both years.
A summary of the status of the option plans as of and for the changes
during each of the three years in the period ended December 28, 1996 is
presented below:
1996 1995 1994
--------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
Outstanding at
beginning of year... 8,325,801 $16.95 8,369,379 $12.95 8,715,741 $ 9.29
Granted............... 2,036,276 16.50 1,983,750 27.00 1,944,002 22.67
Canceled.............. 841,942 22.33 291,487 20.21 342,094 21.41
Exercised............. 946,502 7.98 1,735,841 8.49 1,948,270 5.56
--------- ------ --------- ------ --------- ------
Outstanding at end of
year................ 8,573,633 $17.30 8,325,801 $16.89 8,369,379 $12.80
========= ====== ========= ====== ========= ======
The weighted average fair values of options granted during the years ended
December 28, 1996 and December 30, 1995 were $5.83 and $9.60, respectively.
F-16
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table summarizes information about the option plans as of
December 28, 1996:
OPTIONS OUTSTANDING
------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
--------------- ----------- ----------------- -------- ----------- --------
$ 2.28 - 3.40 153,191 3.4 $ 3.16 153,191 $ 3.16
3.41 - 5.15 185,981 3.3 4.15 185,981 4.15
5.16 - 7.70 965,395 4.5 6.01 965,395 6.01
7.71 - 11.50 363,814 5.5 10.76 363,814 10.76
11.51 - 17.30 2,439,621 7.9 13.88 1,097,190 13.28
17.31 - 23.00 2,445,990 7.6 20.29 1,581,945 19.95
23.01 - 31.94 2,019,641 8.4 26.67 810,205 26.49
-------------- --------- --- ------ --------- ------
$ 2.28 - 31.94 8,573,633 7.3 $17.30 5,157,721 $15.23
============== ========= === ====== ========= ======
NOTE I -- CAPITAL STOCK
In August 1995, the Company completed a public offering of 4,325,000 shares
of common stock, raising net proceeds of approximately $121,799,000.
As of December 28, 1996, there were 1,000,000 shares of $.01 par value
preferred stock authorized of which none are issued or outstanding.
STOCKHOLDER RIGHTS PLAN
Effective September 4, 1996, the Company's Board of Directors adopted a
Stockholder Rights Plan (the "Rights Plan"). The Rights Plan provides for the
issuance to stockholders of record on September 16, 1996 one right for each
outstanding share of the Company's common stock. The rights will become
exercisable only if a person or group, other than Staples and its affiliates,
acquires 20% or more of the Company's outstanding common stock or announces a
tender or exchange offer that would result in ownership of 20% or more of the
Company's common stock. Each right, should it become exercisable, will entitle
the holder to purchase one one-thousandth of a share of Junior Participating
Preferred Stock, Series A of the Company at an exercise price of $95.00, subject
to adjustment.
In the event of an acquisition, each right will entitle the holder, other
than an acquirer, to receive a number of shares of common stock with a market
value equal to twice the exercise price of the right. In addition, in the event
that the Company is involved in a merger or other business combination wherein
the Company is not the surviving corporation, or wherein common stock is changed
or exchanged, or in a transaction with any entity other than Staples or any
affiliate thereof in which 50% or more of the Company's assets or earning power
is sold, each holder of a right, other than an acquirer, will have the right to
receive, at the exercise price of the right, a number of shares of common stock
of the acquiring company with a market value equal to twice the exercise price
of the right.
The Company's board of directors may redeem the rights for $0.01 per right
at any time prior to an acquisition.
F-17
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- SUPPLEMENTAL INFORMATION ON NONCASH INVESTING AND FINANCING ACTIVITIES
The Consolidated Statements of Cash Flows for 1996, 1995 and 1994 do not
include the following noncash investing and financing transactions:
52 WEEKS 52 WEEKS 53 WEEKS
ENDED ENDED ENDED
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
Equipment purchased under leases.................. $4,805 $5,836 $ --
Conversion of convertible, subordinated debt to
common stock.................................... 6 275 --
Additional paid-in capital related to tax benefit
on stock options exercised...................... 6,804 7,598 6,816
NOTE K -- NET EARNINGS PER SHARE
Net earnings per common and common equivalent share is based upon the
weighted average number of shares and equivalents outstanding during each
period. Stock options are considered common stock equivalents. The zero coupon,
convertible subordinated notes are not common stock equivalents. Net earnings
per common share assuming full dilution was determined on the assumption that
the unconverted notes were converted as of the beginning of the period. Net
earnings under this assumption have been adjusted for interest, net of its
income tax effect.
The information required to compute net earnings per share on a primary and
fully diluted basis is as follows:
52 WEEKS 52 WEEKS 53 WEEKS
ENDED ENDED ENDED
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
Primary:
Weighted average number of common and
common equivalent shares............. 158,655 155,551 152,570
======== ======== ========
Fully diluted:
Net earnings............................ $129,042 $132,399 $104,957
Interest expense related to convertible
notes, net of tax.................... 10,580 10,068 9,359
-------- -------- --------
Adjusted net earnings................... $139,622 $142,467 $114,316
======== ======== ========
Weighted average number of common and
common equivalent shares............. 158,720 155,674 152,654
Shares issued upon assumed conversion of
convertible notes.................... 16,565 16,568 16,580
-------- -------- --------
Shares used in computing net earnings
per common and common equivalent
share assuming full dilution......... 175,285 172,242 169,234
======== ======== ========
F-18
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE L -- RECEIVABLES SOLD WITH RECOURSE
The Company has two private label credit card programs which are managed by
financial services companies. All credit card receivables related to one of
these programs were sold on a recourse basis. Proceeds to the Company for such
receivables sold with recourse were approximately $331,000,000, $313,000,000 and
$253,000,000 in 1996, 1995 and 1994, respectively. One of the Company's maximum
exposure to off-balance sheet credit risk is represented by the outstanding
balance of private label credit card receivables with recourse, which totaled
approximately $4,800,000 as of December 28, 1996. One of the financial services
companies periodically estimates the percentage to be withheld from proceeds for
receivables sold to achieve the necessary reserve for potential uncollectible
amounts. The Company expenses such withheld amounts at the time of the sale to
the financial services company.
NOTE M -- QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Fiscal Year Ended December 28, 1996
Net sales....................................... $1,632,995 $1,381,365 $1,509,650 $1,544,588
Gross profit(a)................................. 355,378 324,704 333,686 353,920
Net earnings.................................... 33,483 28,237 31,858 35,464
Net earnings per common share (fully diluted)... $ .21 $ .18 $ .20 .22
Fiscal Year Ended December 30, 1995
Net sales....................................... $1,351,212 $1,200,410 $1,337,108 $1,424,462
Gross profit(a)................................. 304,829 271,804 307,490 318,735
Net earnings.................................... 32,474 27,418 36,842 35,665
Net earnings per common share (fully diluted)... $ .21 $ .18 $ .23 $ .22
- ---------------
(a) Gross profit is net of occupancy costs.
F-19
51
INDEX TO FINANCIAL STATEMENT SCHEDULE
PAGE
----
Schedule II -- Valuation and Qualifying Accounts and Reserves.............. F-21
All other schedules have been omitted because they are inapplicable, not
required or the information is included elsewhere herein.
F-20
52
SCHEDULE II
OFFICE DEPOT, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D
- --------------------------------------- ---------- --------------------------------------- --------------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER DEDUCTIONS -- BALANCE AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS WRITE-OFFS OF PERIOD
- --------------------------------------- ---------- ---------- ---------- ------------- --------------
Allowance for Doubtful Accounts:
1996................................. $3,808 $8,825 $600 $1,695 $11,538
1995................................. 3,426 1,869 -- 1,487 3,808
1994................................. 3,251 1,167 -- 992 3,426
F-21
53
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE +
- ------- ------- ------------
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 -- Stock Purchase Agreement, dated as of June 21, 1989, between
the Company and Carrefour S.A............................. (3)
10.2 -- Agreement and Plan of Reorganization, dated December 19,
1990, among the Company, The Office Club, Inc. and OD Sub
Corp...................................................... (3)
10.3 -- Stock Purchase Agreement, dated as of April 24, 1991,
between the Company, Carrefour S.A. and Carrefour
Nederland B. V............................................ (7)
10.4 -- Revolving Credit and Line of Credit Agreement dated as of
September 30, 1993 by and among the Company and Sun Bank,
National Association, individually and as Agent,
NationsBank of Florida, N.A., PNC Bank, Kentucky, Inc.,
Bank of America National Trust and Savings Association and
Royal Bank of Canada...................................... (8)
10.5 -- Office Depot, Inc. Omnibus Equity Plan*..................... (1)
10.6 -- Directors' Stock Option Plan*............................... (9)
10.7 -- Amended and Restated Agreement and Plan of Merger dated as
of July 12, 1993 and amended and restated as of August 30,
1993 by and among the Company, Eastman Office Products
Corporation, EOPC Acquisition Corp. and certain
investors................................................. (10)
10.8 -- 1994-1998 Office Depot, Inc. Designated Executive Incentive
Plan*..................................................... (1)
10.9 -- Partnership Agreement, dated as of June 10, 1995, between
the Company and Carrefour, a joint stock company
incorporated under French law............................. (11)
10.10 -- Agreement and Plan of Merger dated as of September 4, 1996,
by and among Staples, Inc., Marlin Acquisition Corp. and
Office Depot, Inc......................................... (12)
10.11 -- Stock Option Agreement dated as of September 4, 1996 between
Staples, Inc., as Grantee, and Office Depot, Inc., as
Grantor................................................... (12)
10.12 -- Stock Option Agreement dated as of September 4, 1996 between
Office Depot, Inc., as Grantee, and Staples, Inc., as
Grantor................................................... (12)
10.13 -- Form of Employment Agreement, dated as of September 4, 1996,
by and between Office Depot, Inc. and each of F. Terry
Bean, Harry S. Brown, R. John Schmidt, Jr. and William P.
Seltzer...................................................
10.14 -- Form of Employment Agreement, dated as of September 4, 1996,
by between Office Depot, Inc. and each of David I. Fuente,
Barry J. Goldstein and Richard M. Bennington..............
54
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE +
- ------- ------- ------------
10.15 -- Form of Indemnification Agreement, dated as of September 4,
1996, by and between Office Depot, Inc. and each of David
I. Fuente, Mark D. Begelman, Cynthia R. Cohen, Herve
Defforey, W. Scott Hedrick, James L. Heskett, John B.
Mumford, Michael J. Myers, Peter J. Solomon, Alan L.
Wurtzel, Barry J. Goldstein, F. Terry Bean, Richard M.
Bennington, Harry S. Brown, William P. Seltzer and R. John
Schmidt, Jr.
10.16 -- Financial advisory services letter agreement, dated as of
August 22, 1996, between Office Depot, Inc. and Peter J.
Solomon Company Limited...................................
21.1 -- List of the Company's subsidiaries..........................
23.1 -- Consent of Deloitte & Touche LLP............................
27.1 -- Financial Data Schedule.....................................
- ---------------
+ This information appears only in the manually signed original copies of
this report.
* Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the respective exhibit to the Company's Proxy
Statement for its 1995 Annual Meeting of Stockholders.
(2) Incorporated by reference to the 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
Quarterly Report on Form 10-Q for the quarterly period ended June 29, 1991.
(8) Incorporated by reference to the respective exhibit to the Company's
Current Report on Form 8-K filed October 14, 1993.
(9) Incorporated by reference to the respective exhibit to the Company's Annual
Report on Form 10-K for the year ended December 26, 1992.
(10) Incorporated by reference to the respective exhibit to the Company's
Registration Statement No. 33-51409.
(11) Incorporated by reference to the respective exhibit to the Company's Annual
Report on Form 10-K for the year ended December 30, 1995.
(12) Incorporated by reference to the Company's Registration Statement on Form
8-A, filed with the Commission on September 6, 1996.
Upon request, the Company will furnish a copy of any exhibit to this report
upon the payment of reasonable copying and mailing expenses.
1
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made as of September , 1996 by and between
Office Depot, Inc., a Delaware corporation (the "Company"), and F. Terry Bean
(the "Executive").
The Board of Directors of the Company (the "Board") has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication of the Executive, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined below) of
the Company. The Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change of Control and to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions. (a) The "Effective Date" shall mean the first date
during the Change of Control Period (as defined in Section 1(b)) on which a
Change of Control (as defined in Section 2) occurs. Anything in this Agreement
to the contrary notwithstanding, if a Change of Control occurs and if the
Executive's employment with the Company is terminated prior to the date on which
the Change of Control occurs, and if it is reasonably demonstrated by the
Executive that such termination of employment (i) was at the request of a third
party who has taken steps reasonably calculated to effect a Change of Control or
(ii) otherwise arose in connection with or anticipation of a Change of Control,
then for all purposes of this Agreement the "Effective Date" shall mean the date
immediately prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing on the
date hereof and ending on the third anniversary of the date hereof; provided,
however, that commencing on the date one year after the date hereof, and on each
annual anniversary of such date (such date and each annual anniversary thereof
shall be hereinafter referred to as the "Renewal Date"), unless previously
terminated, the Change of Control Period shall be automatically extended so as
to terminate three years from such Renewal Date, unless at least 60 days prior
to the Renewal Date the Company shall give notice to the Executive that the
Change of Control Period shall not be so extended.
2
2. Change of Control. For the purpose of this Agreement, a "Change of
Control" shall mean:
(a) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then-outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then-outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from the Company, (ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company, or (iv)
any acquisition by any corporation pursuant to a transaction which complies with
clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or sale or
other disposition of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 60% of,
respectively, the then-outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be, (ii) no
Person (excluding any corporation resulting from such Business Combination or
any employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then-outstanding shares of common
stock of the corporation resulting from such Business Combination, or the
combined voting power of the then-outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination and (iii) at least a majority of the members of the board
2
3
of directors of the corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board, providing for such Business
Combination; or
(d) Approval by the shareholders of the Company of a complete liquidation
or dissolution of the Company.
Notwithstanding any provision in this Agreement to the contrary, a "Change
of Control" shall not occur as a result of or in connection with any Business
Combination between the Company or any of its affiliates and Staples, Inc. or
any of its affiliates on or prior to June 30, 1997.
3. Employment Period. The Company hereby agrees to continue the Executive
in its employ, and the Executive hereby agrees to remain in the employ of the
Company subject to the terms and conditions of this Agreement, for the period
commencing on the Effective Date and ending on the first anniversary of such
date (the "Employment Period"). Such period may be extended in writing by the
mutual agreement of the Company and Executive at any time prior to such first
anniversary.
4. Terms of Employment. (a) Position and Duties. (i) During the Employment
Period, (A) the Executive's position (including status, offices, titles and
reporting requirements), authority, duties and responsibilities shall be at
least commensurate in all material respects with the most significant of those
held, exercised and assigned at any time during the 120-day period immediately
preceding the Effective Date and (B) the Executive's services shall be performed
at the location where the Executive was employed immediately preceding the
Effective Date or any office or location less than 35 miles from such location.
(ii) During the Employment Period, and excluding any periods of vacation
and sick leave to which the Executive is entitled, the Executive agrees to
devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions, and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
(b) Compensation. (i) Base Salary. During the Employment Period, the
Executive shall receive an annual base salary, including any applicable car
allowance ("Annual Base Salary"), which shall be paid at a monthly rate, at
least equal to twelve times the highest monthly base salary paid or payable,
including any base salary which has been earned but deferred, to the
3
4
Executive by the Company and its affiliated companies in respect of the
twelve-month period immediately preceding the month in which the Effective Date
occurs. During the Employment Period, the Annual Base Salary shall be reviewed
no more than 12 months after the last salary increase awarded to the Executive
prior to the Effective Date and thereafter at least annually. Any increase in
Annual Base Salary shall not serve to limit or reduce any other obligation to
the Executive under this Agreement. Annual Base Salary shall not be reduced
after any such increase and the term Annual Base Salary as utilized in this
Agreement shall refer to Annual Base Salary as so increased. As used in this
Agreement, the term "affiliated companies" shall include any company controlled
by, controlling or under common control with the Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall
be awarded, for each fiscal year ending during the Employment Period, an annual
bonus (the "Annual Bonus") in cash at least equal to the Executive's highest
bonus under the Company's annual incentive bonus plans, including, without
limitation, its Designated Executive Incentive Plan and Management Incentive
Plan, or any comparable bonus under any predecessor or successor plan or plans,
for the last three full fiscal years prior to the Effective Date (annualized in
the event that the Executive was not employed by the Company for the whole of
such fiscal year) (the "Recent Annual Bonus"). Each such Annual Bonus shall be
paid no later than the end of the third month of the fiscal year next following
the fiscal year for which the Annual Bonus is awarded, unless the Executive
shall elect to defer the receipt of such Annual Bonus.
(iii) Incentive, Savings and Retirement Plans. During the Employment
Period, the Executive shall be entitled to participate in all incentive, savings
and retirement plans, practices, policies and programs applicable generally to
other peer Executives of the Company and its affiliated companies, but in no
event shall such plans, practices, policies and programs provide the Executive
with incentive opportunities (measured with respect to both regular and special
incentive opportunities, to the extent, if any, that such distinction is
applicable), savings opportunities and retirement benefit opportunities, in each
case, less favorable, in the aggregate, than the most favorable of those
provided by the Company and its affiliated companies for the Executive under
such plans, practices, policies and programs as in effect at any time during the
120-day period immediately preceding the Effective Date or if more favorable to
the Executive, those provided generally at any time after the Effective Date to
other peer executives of the Company and its affiliated companies.
(iv) Welfare Benefit Plans. During the Employment Period, the Executive
and/or the Executive's family, as the case may be, shall be eligible for
participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, employee life, group life, split-dollar life, accidental death and
travel accident insurance plans and programs) to the extent applicable generally
to other peer executives of the Company and its affiliated companies, but in no
event shall such plans, practices, policies and programs provide the Executive
with benefits which are less favorable, in the aggregate, than the most
favorable of such plans, practices, policies and programs in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, those
4
5
provided generally at any time after the Effective Date to other peer executives
of the Company and its affiliated companies.
(v) Expenses. During the Employment Period, the Executive shall be entitled
to receive prompt reimbursement for all reasonable expenses incurred by the
Executive in accordance with the most favorable policies, practices and
procedures of the Company and its affiliated companies in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as in effect generally at
any time thereafter with respect to other peer executives of the Company and its
affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the Executive shall be
entitled to fringe benefits, including, without limitation, tax and financial
planning services, payment of club dues, and, if applicable, use of an
automobile and payment of related expenses, in accordance with the most
favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for the Executive at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.
(vii) Office and Support Staff. During the Employment Period, the Executive
shall be entitled to an office or offices of a size and with furnishings and
other appointments, and to exclusive personal secretarial and other assistance,
at least equal to the most favorable of the foregoing provided to the Executive
by the Company and its affiliated companies at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as provided generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive shall be
entitled to paid vacation in accordance with the most favorable plans, policies,
programs and practices of the Company and its affiliated companies as in effect
for the Executive at any time during the 120-day period immediately preceding
the Effective Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies.
5. Termination of Employment. (a) Death or Disability. The Executive's
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that the Disability
of the Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the Executive written
notice in accordance with Section 12(b) of this Agreement of its intention to
terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the 30th day after receipt of such
notice by the Executive (the "Disability Effective Date"), provided that, within
the 30 days after such receipt, the Executive shall not have returned to
full-time performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for 180 consecutive days as a result of
incapacity due to mental
5
6
or physical illness which is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to the
Executive or the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's employment during the
Employment Period for Cause. 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 Chief Executive Officer of the Company which specifically identifies
the manner in which the Board or Chief Executive Officer 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 duty
adopted by the Board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company 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.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment to the Executive of any duties inconsistent
in any respect with the Executive's position (including status, offices,
titles and reporting require ments), authority, duties or
responsibilities as contemplated by Section 4(a) 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 Section 4(b) of this Agreement, other than an isolated,
insubstantial and inadvertent failure
6
7
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
office or location other than as provided in Section 4(a)(i)(B) hereof
or the Company's requiring the Executive to travel on Company business
to a substantially greater extent than required immediately prior to the
Effective Date;
(iv) any purported termination by the Company of the
Executive's employ ment otherwise than as expressly permitted
by this Agreement; or
(v) any failure by the Company to comply with and satisfy
Section 11(c) of this Agreement.
For purposes of this Section 5(c), any good faith determination of "Good
Reason" made by the Executive shall be conclusive. Anything in this Agreement to
the contrary notwithstanding, a termination by the Executive for any reason
during the 30-day period immediately preceding the first anniversary of the
Effective Date shall be deemed to be a termination for Good Reason for all
purposes of this Agreement.
(d) Notice of Termination. Any termination by the Company for Cause, or by
the Executive for Good Reason, shall be communicated by Notice of Termination to
the other party hereto given in accordance with Section 12(b) of this Agreement.
For purposes of this Agreement, a "Notice of Termination" means a written notice
which (i) indicates the specific termination provision in this Agreement relied
upon, (ii) to the extent applicable, sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) if the Date of Termination
(as defined below) is other than the date of receipt of such notice, specifies
the termination date (which date shall be not more than thirty days after the
giving of such notice). The failure by the Executive or the Company to set forth
in the Notice of Termination any fact or circumstance which contributes to a
showing of Good Reason or Cause shall not waive any right of the Executive or
the Company, respectively, hereunder or preclude the Executive or the Company,
respectively, from asserting such fact or circumstance in enforcing the
Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the Executive's
employment is terminated by the Company for Cause, or by the Executive for Good
Reason, the date of receipt of the Notice of Termination or any later date
specified therein, as the case may be, (ii) if the Executive's employment is
terminated by the Company other than for Cause or Disability, the Date of
Termination shall be the date on which the Company notifies the Executive of
such termination and (iii) if the Executive's employment is terminated by reason
of death or Disability, the Date of Termination shall be the date of death of
the Executive or the Disability Effective Date, as the case may be.
6. Obligations of the Company upon Termination. (a) Good Reason; Other Than
for Cause, Death or Disability. If, during the Employment Period, the Company
shall terminate the
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Executive's employment other than for Cause, death or Disability or the
Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in
cash within 30 days after the Date of Termination the aggregate of the
following amounts:
A. the sum of (1) the Executive's Annual Base Salary through
the Date of Termination to the extent not theretofore paid, (2) the
product of (x) the higher of (I) the Recent Annual Bonus and (II) the
Annual Bonus paid or payable, including any bonus or portion thereof
which has been earned but deferred (and annualized for any fiscal year
consisting of less than twelve full months or during which the Executive
was employed for less than twelve full months), for the most recently
completed fiscal year during the Employment Period, if any (such higher
amount being referred to as the "Highest Annual Bonus") and (y) a
fraction, the numerator of which is the number of days in the current
fiscal year through the Date of Termination, and the denominator of
which is 365 and (3) any compensation previously deferred by the
Executive (together with any accrued interest or earnings thereon) and
any accrued vacation pay, in each case to the extent not theretofore
paid (the sum of the amounts described in clauses (1), (2), and (3)
shall be hereinafter referred to as the "Accrued Obligations"); and
B. the amount equal to the product of (1) two and (2) the
sum of (x) the Executive's Annual Base Salary and (y) the Highest
Annual Bonus; and
C. an amount equal to the excess of (1) the actuarial
equivalent of the benefit under the Company's qualified defined benefit
retirement plan (the "Retirement Plan") (utilizing actuarial assumptions
no less favorable to the Executive than those in effect under the
Company's Retirement Plan immediately prior to the Effective Date), and
any excess or supplemental retirement plan in which the Executive
participates (together, the "SERP") which the Executive would receive if
the Executive's employment continued for two years after the Date of
Termination assuming for this purpose that all accrued benefits are
fully vested, and, assuming that the Executive's compensation in each of
the two years is that required by Section 4(b)(i) and Section 4(b)(ii),
over (2) the actuarial equivalent of the Executive's actual benefit
(paid or payable), if any, under the Retirement Plan and the SERP as of
the Date of Termination;
(ii) for two years after the Executive's Date of Termination,
or such longer period as may be provided by the terms of the appropriate
plan, program, practice or policy, the Company shall continue benefits
to the Executive and/or the Executive's family at least equal to those
which would have been provided to them in accordance with the plans,
programs, practices and policies described in Section 4(b)(iv) of this
Agreement if the Executive's employment had not been terminated or, if
more favorable to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and its
affiliated companies and their families, provided, however, that if the
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Executive becomes reemployed with another employer and is eligible to
receive medical or other welfare benefits under another
employer-provided plan, the medical and other welfare benefits described
herein shall be secondary to those provided under such other plan during
such applicable period of eligibility. Notwithstanding the foregoing,
the Company shall continue to make all scheduled premium payments under
any split-dollar life insurance policy in effect on the Date of
Termination on behalf of the Executive for so long as such payments are
scheduled (without giving effect to Executive's termination). For
purposes of determining eligibility (but not the time of commencement of
benefits) of the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be considered to
have remained employed until two years after the Date of Termination and
to have retired on the last day of such period;
(iii) the Company shall, at its sole expense as incurred,
provide the Executive with out placement services the scope and provider
of which shall be selected by the Executive in his sole discretion; and
(iv) to the extent not theretofore paid or provided, the
Company shall timely pay or provide to the Executive any other amounts
or benefits required to be paid or provided or which the Executive is
eligible to receive under any plan, program, policy or practice or
contract or agreement of the Company and its affiliated companies (such
other amounts and benefits shall be hereinafter referred to as the
"Other Benefits").
(b) Death. If the Executive's employment is terminated by reason of the
Execu tive's death during the Employment Period, this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement, other than for payment of the amounts set forth in Section 6(i) and
the timely payment or provision of Other Benefits. The amounts set forth in
Section 6(i) shall be paid to the Executive's estate or beneficiary, as
applicable, in a lump sum in cash within 30 days of the Date of Termination.
With respect to the provision of Other Benefits, the term Other Benefits as
utilized in this Section 6(b) shall include, without limita tion, and the
Executive's estate and/or beneficiaries shall be entitled to receive, benefits
at least equal to the most favorable benefits provided by the Company and
affiliated companies to the estates and beneficiaries of peer executives of the
Company and such affiliated companies under such plans, programs, practices and
policies relating to death benefits, if any, as in effect with respect to other
peer executives and their beneficiaries at any time during the 120-day period
immediately preceding the Effective Date or, if more favorable to the
Executive's estate and/or the Executive's beneficiaries, as in effect on the
date of the Executive's death with respect to other peer executives of the
Company and its affiliated companies and their beneficiaries.
(c) Disability. If the Executive's employment is terminated by reason of
the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of the amounts set forth in Section 6(i) and the timely payment or provision of
Other Benefits. The amounts set forth in Section 6(i) shall be paid to the
Executive in a lump sum in cash within 30 days of the Date of Termination. With
respect to the provision of Other Benefits, the term "Other Benefits" as
utilized in this Section 6(c) shall in clude, and the Executive shall be
entitled after the Disability Effective Date to receive, disability and
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other benefits at least equal to the most favorable of those generally provided
by the Company and its affiliated companies to disabled executives and/or their
families in accordance with such plans, programs, practices and policies
relating to disability, if any, as in effect generally with respect to other
peer executives and their families at any time during the 120-day period
immediately preceding the Effective Date or, if more favorable to the Executive
and/or the Executive's family, as in effect at any time thereafter generally
with respect to other peer executives of the Company and its affiliated
companies and their families.
(d) Cause; Other than for Good Reason. If the Executive's employment shall
be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than for Accrued
Obligations and for the timely payment or provision of Other Benefits, in each
case to the extent theretofore unpaid. If the Executive voluntarily terminates
employment during the Employment Period, excluding a termination for Good
Reason, this Agreement shall terminate without further obligations to the
Executive, other than for Accrued Obligations and the timely payment or
provision of Other Benefits. In each such case, all Accrued Obligations shall be
paid to the Executive in a lump sum in cash within 30 days of the Date of
Termination.
7. Nonexclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
and for which the Executive may qualify, nor, subject to Section 12(f), shall
anything herein limit or otherwise affect such rights as the Executive may have
under any contract or agreement with the Company or any of its affiliated
companies. Amounts which are vested benefits or which the Executive is otherwise
entitled to receive under any plan, policy, practice or program of or any
contract or agreement with the Company or any of its affiliated companies at or
subsequent to the Date of Termination shall be payable in accordance with such
plan, policy, practice or program or contract or agreement except as explicitly
modified by this Agreement.
8. Full Settlement. The Company's obligation to make the payments provided
for in this Agreement and otherwise to perform its obligations hereunder shall
not be affected by any set-off, counterclaim, recoupment, defense or other
claim, right or action which the Company may have against the Executive or
others. In no event shall the Executive be obligated to seek other employment or
take any other action by way of mitigation of the amounts payable to the
Executive under any of the provisions of this Agreement and such amounts shall
not be reduced whether or not the Executive obtains other employment. The
Company agrees to pay as incurred, to the fullest extent permitted by law, all
legal fees and expenses which the Executive may reasonably incur as a result of
any contest (regardless of the outcome thereof) by the Company, the Executive or
others of the validity or enforceability of, or liability under, any provision
of this Agreement or any guarantee of performance thereof (including as a result
of any contest by the Executive about the amount of any payment pursuant to this
Agreement), plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code
of 1986, as amended (the "Code").
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9. Certain Additional Payments by the Company. (a) Anything in this Agree
ment to the contrary notwithstanding and except as set forth below, in the event
it shall be determined that any payment or distribution by the Company to or for
the benefit of the Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of
the Code or any interest or penalties are incurred by the Executive with respect
to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. Notwithstanding the foregoing provisions of this
Section 9(a), if it shall be determined that the Executive is entitled to a
Gross-Up Payment, but that the Executive, after taking into account the Payments
and the Gross-Up Payment, would not receive a net after-tax benefit of at least
$50,000 (taking into account both income taxes and any Excise Tax) as compared
to the net after-tax proceeds to the Executive resulting from an elimination of
the Gross-Up Payment and a reduction of the Payments, in the aggregate, to an
amount (the "Reduced Amount") such that the receipt of Payments would not give
rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive
and the Payments, in the aggregate, shall be reduced to the Reduced Amount.
(b) Subject to the provisions of Section 9(c), all determinations required
to be made under this Section 9, including whether and when a Gross-Up Payment
is required and the amount of such Gross-Up Payment and the assumptions to be
utilized in arriving at such determination, shall be made by Deloitte & Touche
or such other certified public accounting firm as may be designated by the
Executive (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and the Executive within 15 business days of
the receipt of notice from the Executive that there has been a Payment, or such
earlier time as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or group
effecting the Change of Control, the Executive shall appoint another nationally
recognized accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm hereunder). All
fees and expenses of the Accounting Firm shall be borne solely by the Company.
Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by
the Company to the Executive within five days of the receipt of the Accounting
Firm's determination. Any determination by the Accounting Firm shall be binding
upon the Company and the Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial determination
by the Accounting Firm hereunder, it is possible that Gross-Up Payments which
will not have been made by the Company should have been made ("Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Company exhausts its remedies pursuant to Section 9(c) and the
Executive thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has occurred
and any such Underpayment shall be promptly paid by the Company to or for the
benefit of the Executive.
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(c) The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by
the Company relating to such claim,
(ii) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order
effectively to contest such claim, and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs
and expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any Excise Tax or income tax (including
interest and penalties with respect thereto) imposed as a result of such
representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this Section 9(c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct the Executive to pay the tax claimed and sue for a
refund or to contest the claim in any permissible manner, and the Executive
agrees to prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more appellate
courts, as the Company shall determine; provided, however, that if the Company
directs the Executive to pay such claim and sue for a refund, the Company shall
advance the amount of such payment to the Executive, on an interest-free basis
and shall indemnify and hold the Executive harmless, on an after-tax basis, from
any Excise Tax or income tax (including interest or penalties with respect
thereto) imposed with respect to such advance or with respect to any imputed
income with respect to such advance; and further provided that any extension of
the statute of limitations relating to payment of taxes for the taxable year of
the Executive with respect to which such contested amount is claimed to be due
is limited solely to such contested amount. Furthermore, the Company's control
of the contest shall be limited to issues with respect to which a Gross-Up
Payment would be payable hereunder and the Executive shall be
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entitled to settle or contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 9(c), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 9(c)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 9(c), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
10. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the Company or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it. In no event shall an asserted violation of the provisions of
this Section 10 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement.
11. Successors. (a) This Agreement is personal to the Executive and without
the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Com pany and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to assume expressly and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
12. Miscellaneous. (a) This Agreement shall be governed by and construed in
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accordance with the laws of the State of Delaware, without reference to
principles of conflict of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. This Agreement may not
be amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing and
shall be given by hand delivery to the other party or by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
F. Terry Bean
c/o Office Depot, Inc.
2200 Old Germantown Road
Delray Beach, Florida 33445
If to the Company:
Office Depot, Inc.
2200 Old Germantown Road
Delray Beach, Florida 33445
Attention: President
or to such other address as either party shall have furnished to the other
in writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.
(d) The Company may withhold from any amounts payable under this Agreement
such Federal, state, local or foreign taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitations the right of the Executive to terminate employment for Good Reason
pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.
(f) The Executive and the Company acknowledge that, except as may otherwise
be provided under any other written agreement between the Executive and the
Company, the employment of the Executive by the Company is "at will" and,
subject to Section 1(a) hereof, prior to the Effective Date, the Executive's
employment and/or this Agreement may be terminated by either the Executive or
the Company at any time prior to the Effective Date, in which case the Executive
shall have no further rights under this Agreement. From and after the Effective
Date this
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Agreement shall supersede any other agreement between the parties with respect
to the subject matter hereof.
* * * * *
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IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
------------------------------
Executive
OFFICE DEPOT, INC.
BY:
---------------------------
ITS:
--------------------------
16
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Exhibit 10.14
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made as of September , 1996 by and between
Office Depot, Inc., a Delaware corporation (the "Company"), and David I. Fuente
(the "Executive").
The Board of Directors of the Company (the "Board") has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication of the Executive, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined below) of
the Company. The Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change of Control and to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions. (a) The "Effective Date" shall mean the first date
during the Change of Control Period (as defined in Section 1(b)) on which a
Change of Control (as defined in Section 2) occurs. Anything in this Agreement
to the contrary notwithstanding, if a Change of Control occurs and if the
Executive's employment with the Company is terminated prior to the date on which
the Change of Control occurs, and if it is reasonably demonstrated by the
Executive that such termination of employment (i) was at the request of a third
party who has taken steps reasonably calculated to effect a Change of Control or
(ii) otherwise arose in connection with or anticipation of a Change of Control,
then for all purposes of this Agreement the "Effective Date" shall mean the date
immediately prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing on the
date hereof and ending on the third anniversary of the date hereof; provided,
however, that commencing on the date one year after the date hereof, and on each
annual anniversary of such date (such date and each annual anniversary thereof
shall be hereinafter referred to as the "Renewal Date"), unless previously
terminated, the Change of Control Period shall be automatically extended so as
to terminate three years from such Renewal Date, unless at least 60 days prior
to the Renewal Date the Company shall give notice to the Executive that the
Change of Control Period shall not be so extended.
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2. Change of Control. For the purpose of this Agreement, a "Change of
Control" shall mean:
(a) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then-outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then-outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from the Company, (ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company, or (iv)
any acquisition by any corporation pursuant to a transaction which complies with
clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or sale or
other disposition of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 60% of,
respectively, the then-outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be, (ii) no
Person (excluding any corporation resulting from such Business Combination or
any employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then-outstanding shares of common
stock of the corporation resulting from such Business Combination, or the
combined voting power of the then-outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination and (iii) at least a majority of the members of the board
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of directors of the corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board, providing for such Business
Combination; or
(d) Approval by the shareholders of the Company of a complete liquidation
or dissolution of the Company.
Notwithstanding any provision in this Agreement to the contrary, a "Change
of Control" shall not occur as a result of or in connection with any Business
Combination between the Company or any of its affiliates and Staples, Inc.or any
of its affiliates on or prior to June 30, 1997.
3. Employment Period. The Company hereby agrees to continue the Executive
in its employ, and the Executive hereby agrees to remain in the employ of the
Company subject to the terms and conditions of this Agreement, for the period
commencing on the Effective Date and ending on the first anniversary of such
date (the "Employment Period"). Such period may be extended in writing by the
mutual agreement of the Company and Executive at any time prior to such first
anniversary.
4. Terms of Employment. (a) Position and Duties. (i) During the Employment
Period, (A) the Executive's position (including status, offices, titles and
reporting requirements), authority, duties and responsibilities shall be at
least commensurate in all material respects with the most significant of those
held, exercised and assigned at any time during the 120-day period immediately
preceding the Effective Date and (B) the Executive's services shall be performed
at the location where the Executive was employed immediately preceding the
Effective Date or any office or location less than 35 miles from such location.
(ii) During the Employment Period, and excluding any periods of vacation
and sick leave to which the Executive is entitled, the Executive agrees to
devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions, and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
(b) Compensation. (i) Base Salary. During the Employment Period, the Exec
utive shall receive an annual base salary, including any applicable car
allowance ("Annual Base Salary"), which shall be paid at a monthly rate, at
least equal to twelve times the highest monthly base salary paid or payable,
including any base salary which has been earned but deferred, to the
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Executive by the Company and its affiliated companies in respect of the
twelve-month period immediately preceding the month in which the Effective Date
occurs. During the Employment Period, the Annual Base Salary shall be reviewed
no more than 12 months after the last salary increase awarded to the Executive
prior to the Effective Date and thereafter at least annually. Any increase in
Annual Base Salary shall not serve to limit or reduce any other obligation to
the Executive under this Agreement. Annual Base Salary shall not be reduced
after any such increase and the term Annual Base Salary as utilized in this
Agreement shall refer to Annual Base Salary as so increased. As used in this
Agreement, the term "affiliated companies" shall include any company controlled
by, controlling or under common control with the Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall
be awarded, for each fiscal year ending during the Employment Period, an annual
bonus (the "Annual Bonus") in cash at least equal to the Executive's highest
bonus under the Company's annual incentive bonus plans, including, without
limitation, its Designated Executive Incentive Plan and Management Incentive
Plan, or any comparable bonus under any predecessor or successor plan or plans,
for the last three full fiscal years prior to the Effective Date (annualized in
the event that the Executive was not employed by the Company for the whole of
such fiscal year) (the "Recent Annual Bonus"). Each such Annual Bonus shall be
paid no later than the end of the third month of the fiscal year next following
the fiscal year for which the Annual Bonus is awarded, unless the Executive
shall elect to defer the receipt of such Annual Bonus.
(iii) Incentive, Savings and Retirement Plans. During the Employment
Period, the Executive shall be entitled to participate in all incentive, savings
and retirement plans, practices, policies and programs applicable generally to
other peer Executives of the Company and its affiliated companies, but in no
event shall such plans, practices, policies and programs provide the Executive
with incentive opportunities (measured with respect to both regular and special
incentive opportunities, to the extent, if any, that such distinction is
applicable), savings opportunities and retirement benefit opportunities, in each
case, less favorable, in the aggregate, than the most favorable of those
provided by the Company and its affiliated companies for the Executive under
such plans, practices, policies and programs as in effect at any time during the
120-day period immediately preceding the Effective Date or if more favorable to
the Executive, those provided generally at any time after the Effective Date to
other peer executives of the Company and its affiliated companies.
(iv) Welfare Benefit Plans. During the Employment Period, the Executive
and/or the Executive's family, as the case may be, shall be eligible for
participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, employee life, group life, split-dollar life, accidental death and
travel accident insurance plans and programs) to the extent applicable generally
to other peer executives of the Company and its affiliated companies, but in no
event shall such plans, practices, policies and programs provide the Executive
with benefits which are less favorable, in the aggregate, than the most
favorable of such plans, practices, policies and programs in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, those
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provided generally at any time after the Effective Date to other peer executives
of the Company and its affiliated companies.
(v) Expenses. During the Employment Period, the Executive shall be entitled
to receive prompt reimbursement for all reasonable expenses incurred by the
Executive in accordance with the most favorable policies, practices and
procedures of the Company and its affiliated companies in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as in effect generally at
any time thereafter with respect to other peer executives of the Company and its
affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the Executive shall be
entitled to fringe benefits, including, without limitation, tax and financial
planning services, payment of club dues, and, if applicable, use of an
automobile and payment of related expenses, in accordance with the most
favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for the Executive at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.
(vii) Office and Support Staff. During the Employment Period, the Executive
shall be entitled to an office or offices of a size and with furnishings and
other appointments, and to exclusive personal secretarial and other assistance,
at least equal to the most favorable of the foregoing provided to the Executive
by the Company and its affiliated companies at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as provided generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive shall be
entitled to paid vacation in accordance with the most favorable plans, policies,
programs and practices of the Company and its affiliated companies as in effect
for the Executive at any time during the 120-day period immediately preceding
the Effective Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies.
5. Termination of Employment. (a) Death or Disability. The Executive's
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that the Disability
of the Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the Executive written
notice in accordance with Section 12(b) of this Agreement of its intention to
terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the 30th day after receipt of such
notice by the Executive (the "Disability Effective Date"), provided that, within
the 30 days after such receipt, the Executive shall not have returned to
full-time performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for 180 consecutive days as a result of
incapacity due to mental
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or physical illness which is determined to be total and permanent by a physician
selected by the Company or its insurers and acceptable to the Executive or the
Executive's legal representative.
(b) Cause. The Company may terminate the Executive's employment during the
Employment Period for Cause. 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 Chief Executive Officer of the Company which specifically identifies
the manner in which the Board or Chief Executive Officer 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 duty
adopted by the Board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company 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.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment to the Executive of any duties inconsistent
in any respect with the Executive's position (including status, offices,
titles and reporting require ments), authority, duties or
responsibilities as contemplated by Section 4(a) 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 Section 4(b) of this Agreement, other than an isolated,
insubstantial and inadvertent failure
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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
office or location other than as provided in Section 4(a)(i)(B) hereof
or the Company's requiring the Executive to travel on Company business
to a substantially greater extent than required immediately prior to the
Effective Date;
(iv) any purported termination by the Company of the
Executive's employment otherwise than as expressly permitted by this
Agreement; or
(v) any failure by the Company to comply with and satisfy
Section 11(c) of this Agreement.
For purposes of this Section 5(c), any good faith determination of "Good
Reason" made by the Executive shall be conclusive. Anything in this Agreement to
the contrary notwithstanding, a termination by the Executive for any reason
during the 30-day period immediately preceding the first anniversary of the
Effective Date shall be deemed to be a termination for Good Reason for all
purposes of this Agreement.
(d) Notice of Termination. Any termination by the Company for Cause, or by
the Executive for Good Reason, shall be communicated by Notice of Termination to
the other party hereto given in accordance with Section 12(b) of this Agreement.
For purposes of this Agreement, a "Notice of Termination" means a written notice
which (i) indicates the specific termination provision in this Agreement relied
upon, (ii) to the extent applicable, sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) if the Date of Termination
(as defined below) is other than the date of receipt of such notice, specifies
the termination date (which date shall be not more than thirty days after the
giving of such notice). The failure by the Executive or the Company to set forth
in the Notice of Termination any fact or circumstance which contributes to a
showing of Good Reason or Cause shall not waive any right of the Executive or
the Company, respectively, hereunder or preclude the Executive or the Company,
respectively, from asserting such fact or circumstance in enforcing the
Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the Executive's
employment is terminated by the Company for Cause, or by the Executive for Good
Reason, the date of receipt of the Notice of Termination or any later date
specified therein, as the case may be, (ii) if the Executive's employment is
terminated by the Company other than for Cause or Disability, the Date of
Termination shall be the date on which the Company notifies the Executive of
such termination and (iii) if the Executive's employment is terminated by reason
of death or Disability, the Date of Termination shall be the date of death of
the Executive or the Disability Effective Date, as the case may be.
6. Obligations of the Company upon Termination. (a) Good Reason; Other Than
for Cause, Death or Disability. If, during the Employment Period, the Company
shall terminate the
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Executive's employment other than for Cause, death or Disability or the
Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in
cash within 30 days after the Date of Termination the aggregate of the
following amounts:
A. the sum of (1) the Executive's Annual Base Salary through
the Date of Termination to the extent not theretofore paid, (2) the
product of (x) the higher of (I) the Recent Annual Bonus and (II) the
Annual Bonus paid or payable, including any bonus or portion thereof
which has been earned but deferred (and annualized for any fiscal year
consisting of less than twelve full months or during which the Executive
was employed for less than twelve full months), for the most recently
completed fiscal year during the Employment Period, if any (such higher
amount being referred to as the "Highest Annual Bonus") and (y) a
fraction, the numerator of which is the number of days in the current
fiscal year through the Date of Termination, and the denominator of
which is 365 and (3) any compensation previously deferred by the
Executive (together with any accrued interest or earnings thereon) and
any accrued vacation pay, in each case to the extent not theretofore
paid (the sum of the amounts described in clauses (1), (2), and (3)
shall be hereinafter referred to as the "Accrued Obligations"); and
B. the amount equal to the product of (1) three and (2) the
sum of (x) the Executive's Annual Base Salary and (y) the Highest
Annual Bonus; and
C. an amount equal to the excess of (1) the actuarial
equivalent of the benefit under the Company's qualified defined benefit
retirement plan (the "Retirement Plan") (utilizing actuarial assumptions
no less favorable to the Executive than those in effect under the
Company's Retirement Plan immediately prior to the Effective Date), and
any excess or supplemental retirement plan in which the Executive
participates (together, the "SERP") which the Executive would receive if
the Executive's employment continued for three years after the Date of
Termination assuming for this purpose that all accrued benefits are
fully vested, and, assuming that the Executive's compensation in each of
the three years is that required by Section 4(b)(i) and Section
4(b)(ii), over (2) the actuarial equivalent of the Executive's actual
benefit (paid or payable), if any, under the Retirement Plan and the
SERP as of the Date of Termination;
(ii) for three years after the Executive's Date of
Termination, or such longer period as may be provided by the terms of
the appropriate plan, program, practice or policy, the Company shall
continue benefits to the Executive and/or the Executive's family at
least equal to those which would have been provided to them in
accordance with the plans, programs, practices and policies described in
Section 4(b)(iv) of this Agreement if the Executive's employment had not
been terminated or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer executives
of the Company and its affiliated companies and their families,
provided, however, that if the
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Executive becomes reemployed with another employer and is eligible to
receive medical or other welfare benefits under another
employer-provided plan, the medical and other welfare benefits described
herein shall be secondary to those provided under such other plan during
such applicable period of eligibility. Notwithstanding the foregoing,
the Company shall continue to make all scheduled premium payments under
any split-dollar life insurance policy in effect on the Date of
Termination on behalf of the Executive for so long as such payments are
scheduled (without giving effect to Executive's termination). For
purposes of determining eligibility (but not the time of commencement of
benefits) of the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be considered to
have remained employed until three years after the Date of Termination
and to have retired on the last day of such period;
(iii) the Company shall, at its sole expense as incurred,
provide the Executive with out placement services the scope and provider
of which shall be selected by the Executive in his sole discretion; and
(iv) to the extent not theretofore paid or provided, the
Company shall timely pay or provide to the Executive any other amounts
or benefits required to be paid or provided or which the Executive is
eligible to receive under any plan, program, policy or practice or
contract or agreement of the Company and its affiliated companies (such
other amounts and benefits shall be hereinafter referred to as the
"Other Benefits").
(b) Death. If the Executive's employment is terminated by reason of the
Execu tive's death during the Employment Period, this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement, other than for payment of the amounts set forth in Section 6(i) and
the timely payment or provision of Other Benefits. The amounts set forth in
Section 6(i) shall be paid to the Executive's estate or beneficiary, as
applicable, in a lump sum in cash within 30 days of the Date of Termination.
With respect to the provision of Other Benefits, the term Other Benefits as
utilized in this Section 6(b) shall include, without limita tion, and the
Executive's estate and/or beneficiaries shall be entitled to receive, benefits
at least equal to the most favorable benefits provided by the Company and
affiliated companies to the estates and beneficiaries of peer executives of the
Company and such affiliated companies under such plans, programs, practices and
policies relating to death benefits, if any, as in effect with respect to other
peer executives and their beneficiaries at any time during the 120-day period
immediately preceding the Effective Date or, if more favorable to the
Executive's estate and/or the Executive's beneficiaries, as in effect on the
date of the Executive's death with respect to other peer executives of the
Company and its affiliated companies and their beneficiaries.
(c) Disability. If the Executive's employment is terminated by reason of
the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of the amounts set forth in Section 6(i) and the timely payment or provision of
Other Benefits. The amounts set forth in Section 6(i) shall be paid to the
Executive in a lump sum in cash within 30 days of the Date of Termination. With
respect to the provision of Other Benefits, the term "Other Benefits" as
utilized in this Section 6(c) shall in clude, and the Executive shall be
entitled after the Disability Effective Date to receive, disability and
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other benefits at least equal to the most favorable of those generally provided
by the Company and its affiliated companies to disabled executives and/or their
families in accordance with such plans, programs, practices and policies
relating to disability, if any, as in effect generally with respect to other
peer executives and their families at any time during the 120-day period
immediately preceding the Effective Date or, if more favorable to the Executive
and/or the Executive's family, as in effect at any time thereafter generally
with respect to other peer executives of the Company and its affiliated
companies and their families.
(d) Cause; Other than for Good Reason. If the Executive's employment shall
be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than for Accrued
Obligations and for the timely payment or provision of Other Benefits, in each
case to the extent theretofore unpaid. If the Executive voluntarily terminates
employment during the Employment Period, excluding a termination for Good
Reason, this Agreement shall terminate without further obligations to the
Executive, other than for Accrued Obligations and the timely payment or
provision of Other Benefits. In each such case, all Accrued Obligations shall be
paid to the Executive in a lump sum in cash within 30 days of the Date of
Termination.
7. Nonexclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
and for which the Executive may qualify, nor, subject to Section 12(f), shall
anything herein limit or otherwise affect such rights as the Executive may have
under any contract or agreement with the Company or any of its affiliated
companies. Amounts which are vested benefits or which the Executive is otherwise
entitled to receive under any plan, policy, practice or program of or any
contract or agreement with the Company or any of its affiliated companies at or
subsequent to the Date of Termination shall be payable in accordance with such
plan, policy, practice or program or contract or agreement except as explicitly
modified by this Agreement.
8. Full Settlement. The Company's obligation to make the payments provided
for in this Agreement and otherwise to perform its obligations hereunder shall
not be affected by any set-off, counterclaim, recoupment, defense or other
claim, right or action which the Company may have against the Executive or
others. In no event shall the Executive be obligated to seek other employment or
take any other action by way of mitigation of the amounts payable to the
Executive under any of the provisions of this Agreement and such amounts shall
not be reduced whether or not the Executive obtains other employment. The
Company agrees to pay as incurred, to the fullest extent permitted by law, all
legal fees and expenses which the Executive may reasonably incur as a result of
any contest (regardless of the outcome thereof) by the Company, the Executive or
others of the validity or enforceability of, or liability under, any provision
of this Agreement or any guarantee of performance thereof (including as a result
of any contest by the Executive about the amount of any payment pursuant to this
Agreement), plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code
of 1986, as amended (the "Code").
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9. Certain Additional Payments by the Company. (a) Anything in this Agree
ment to the contrary notwithstanding and except as set forth below, in the event
it shall be determined that any payment or distribution by the Company to or for
the benefit of the Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of
the Code or any interest or penalties are incurred by the Executive with respect
to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. Notwithstanding the foregoing provisions of this
Section 9(a), if it shall be determined that the Executive is entitled to a
Gross-Up Payment, but that the Executive, after taking into account the Payments
and the Gross-Up Payment, would not receive a net after-tax benefit of at least
$50,000 (taking into account both income taxes and any Excise Tax) as compared
to the net after-tax proceeds to the Executive resulting from an elimination of
the Gross-Up Payment and a reduction of the Payments, in the aggregate, to an
amount (the "Reduced Amount") such that the receipt of Payments would not give
rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive
and the Payments, in the aggregate, shall be reduced to the Reduced Amount.
(b) Subject to the provisions of Section 9(c), all determinations required
to be made under this Section 9, including whether and when a Gross-Up Payment
is required and the amount of such Gross-Up Payment and the assumptions to be
utilized in arriving at such determination, shall be made by Deloitte & Touche
or such other certified public accounting firm as may be designated by the
Executive (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and the Executive within 15 business days of
the receipt of notice from the Executive that there has been a Payment, or such
earlier time as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or group
effecting the Change of Control, the Executive shall appoint another nationally
recognized accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm hereunder). All
fees and expenses of the Accounting Firm shall be borne solely by the Company.
Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by
the Company to the Executive within five days of the receipt of the Accounting
Firm's determination. Any determination by the Accounting Firm shall be binding
upon the Company and the Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial determination
by the Accounting Firm hereunder, it is possible that Gross-Up Payments which
will not have been made by the Company should have been made ("Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Company exhausts its remedies pursuant to Section 9(c) and the
Executive thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has occurred
and any such Underpayment shall be promptly paid by the Company to or for the
benefit of the Executive.
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(c) The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by
the Company relating to such claim,
(ii) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order
effectively to contest such claim, and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs
and expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any Excise Tax or income tax (including
interest and penalties with respect thereto) imposed as a result of such
representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this Section 9(c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct the Executive to pay the tax claimed and sue for a
refund or to contest the claim in any permissible manner, and the Executive
agrees to prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more appellate
courts, as the Company shall determine; provided, however, that if the Company
directs the Executive to pay such claim and sue for a refund, the Company shall
advance the amount of such payment to the Executive, on an interest-free basis
and shall indemnify and hold the Executive harmless, on an after-tax basis, from
any Excise Tax or income tax (including interest or penalties with respect
thereto) imposed with respect to such advance or with respect to any imputed
income with respect to such advance; and further provided that any extension of
the statute of limitations relating to payment of taxes for the taxable year of
the Executive with respect to which such contested amount is claimed to be due
is limited solely to such contested amount. Furthermore, the Company's control
of the contest shall be limited to issues with respect to which a Gross-Up
Payment would be payable hereunder and the Executive shall be
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entitled to settle or contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 9(c), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 9(c)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 9(c), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
10. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the Company or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it. In no event shall an asserted violation of the provisions of
this Section 10 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement.
11. Successors. (a) This Agreement is personal to the Executive and without
the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Com pany and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to assume expressly and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
12. Miscellaneous. (a) This Agreement shall be governed by and construed in
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accordance with the laws of the State of Delaware, without reference to
principles of conflict of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. This Agreement may not
be amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing and
shall be given by hand delivery to the other party or by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
David I. Fuente
c/o Office Depot, Inc.
2200 Old Germantown Road
Delray Beach, Florida 33445
If to the Company:
Office Depot, Inc.
2200 Old Germantown Road
Delray Beach, Florida 33445
Attention: President
or to such other address as either party shall have furnished to the other
in writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.
(d) The Company may withhold from any amounts payable under this Agreement
such Federal, state, local or foreign taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitations the right of the Executive to terminate employment for Good Reason
pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.
(f) The Executive and the Company acknowledge that, except as may otherwise
be provided under any other written agreement between the Executive and the
Company, the employment of the Executive by the Company is "at will" and,
subject to Section 1(a) hereof, prior to the Effective Date, the Executive's
employment and/or this Agreement may be terminated by either the Executive or
the Company at any time prior to the Effective Date, in which case the Executive
shall have no further rights under this Agreement. From and after the Effective
Date this
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Agreement shall supersede any other agreement between the parties with respect
to the subject matter hereof.
* * * * *
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IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
------------------------
Executive
OFFICE DEPOT, INC.
BY:
---------------------
ITS:
--------------------
16
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Exhibit 10.15
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of this 4th day
of September, 1996 by and between Office Depot, Inc., a Delaware corporation
(the "Company") and ____________________ ("Indemnitee"), a director and/or
officer of the Company.
WHEREAS, the Company and Indemnitee recognize the increasing difficulty
in obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance, and the general reductions in the
coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation subjecting officers and directors to expensive
litigation risks at the same time as liability insurance has been severely
limited;
WHEREAS, Indemnitee does not regard the current protection available as
adequate given the present circumstances, and Indemnitee and other officers and
directors of the Company may not be willing to serve as officers and directors
without adequate protection; and
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve as officers and
directors of the Company and to indemnify its officers and directors so as to
provide them with the maximum protection permitted by law.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. INDEMNIFICATION.
(a) THIRD PARTY PROCEEDINGS. The Company shall indemnify
Indemnitee if Indemnitee is or was a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the Company) by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company or any subsidiary of the
Company or by reason of the fact that Indemnitee is or was serving at the
request of the Company as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise, against
expenses (including attorneys' fees), judgments, fines, and amounts paid in
settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) actually and reasonably incurred by
Indemnitee in connection with such action, suit or proceeding if Indemnitee
acted in good faith and in a manner Indemnitee reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe Indemnitee's
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plan of NOLO CONTENDERE or
its equivalent, shall not, of itself, create a presumption that Indemnitee did
not act in
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good faith and in a manner which Indemnitee reasonably believed to be in or not
opposed to the best interests of the Company, and, with respect to any criminal
action or proceeding, had reasonable cause to believe that Indemnitee's conduct
was unlawful.
(b) PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. The Company
shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to
be made a party to any threatened, pending, or completed action or suit by or in
the right of the Company or any subsidiary of the Company to procure a judgment
in its favor by reason of the fact that Indemnitee is or was a director,
officer, employee or agent of the Company or any subsidiary of the Company, or
by reason of the fact that Indemnitee is or was serving at the request of the
Company as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise, against expenses
(including attorneys' fees) actually and reasonably incurred by Indemnitee in
connection with the defense or settlement of such action or suit if Indemnitee
acted in good faith and in a manner Indemnitee reasonably believed to be in or
not opposed to the best interests of the Company and except that no
indemnification shall be made in respect of any claim, issue, or matter as to
which Indemnitee shall have been adjudged to be liable to the Company unless and
only to the extent that the Court of Chancery of the State of Delaware or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all of the
circumstances of the case, Indemnitee is fairly and reasonably entitled to
indemnity for such expenses that the Court of Chancery of the State of Delaware
or such other court shall deem proper.
(c) MANDATORY PAYMENT OF EXPENSES. To the extent that
Indemnitee has been successful on the merits or otherwise in defense of any
action, suit, or proceeding referred to in Subsection (a) or (b) of this Section
1 or in defense of any claim, issue, or matter therein, Indemnitee shall be
indemnified against expenses (including attorneys' fees) and any costs of
settlement actually and reasonably incurred by Indemnitee in connection
therewith.
2. AGREEMENT TO SERVE. In consideration of this Agreement, Indemnitee
agrees to continue to serve as an officer or director of the Company, at the
will of the Company (or under separate agreement, if such agreement exists), in
the capacity in which Indemnitee currently serves and in any other capacity as
an officer or director of the Company or any subsidiary of the Company
subsequently assigned to Indemnitee, so long as Indemnitee is duly appointed or
elected and qualified in accordance with the applicable provisions of the
by-laws of the Company or any subsidiary of the Company or until such time as
Indemnitee tenders his or her resignation in writing; provided however, that
nothing contained in this Agreement is intended to create in Indemnitee any
right to continued employment.
3. Expenses; Indemnification Procedure.
(a) ADVANCEMENT OF EXPENSES. The Company shall advance all
expenses incurred by Indemnitee, and, to the fullest extent permitted by law,
amounts paid in settlement by Indemnitee in connection with the investigation,
defense, settlement, or appeal of any civil or criminal action, suit, or
proceeding referenced in Subsection (a) or (b) of Section 1. Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall ultimately be determined that Indemnitee is not entitled to be indemnified
by the Company as authorized hereby. The advances
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to be made hereunder shall be paid by the Company to Indemnitee within 20 days
following delivery of a written request therefor by Indemnitee to the Company.
(b) COOPERATION BY INDEMNITEE. Indemnitee shall, as a
condition precedent to his right to be indemnified under this Agreement, give
the Company notice in writing as soon as practicable of any claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement. In addition, Indemnitee shall give the Company such information and
cooperation as it may reasonably require and as shall be within Indemnitee's
power.
(c) PROCEDURE. Any indemnification and advances provided for
in Section 1 and this Section 3 shall be made no later than 20 days after
receipt of the written request of Indemnitee. If a claim under this Agreement,
under any statute, or under any provision of the Company's certificate of
incorporation or by-laws providing for indemnification, is not paid in full by
the Company within 20 days after a written request for payment thereof has first
been received by the Company, Indemnitee may, but need not, at any time
thereafter bring an action against the Company to recover the unpaid amount of
the claim and, subject to Section 12 of this Agreement, Indemnitee shall also be
entitled to be paid for the expenses (including attorneys' fees) of bringing
such action. It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in connection with any action,
suit, or proceeding in advance of its final disposition) that Indemnitee has not
met the standards of conduct that make it permissible under applicable law for
the Company to indemnify Indemnitee for the amount claimed, but the burden of
proving such defense shall be on the Company and Indemnitee shall be entitled to
receive interim payments of expenses pursuant to Section 3(a) unless and until
such defense may be finally adjudicated by court order or judgment from which no
further right of appeal exists. It is the parties' intention that if the Company
contests Indemnitee's right to indemnification, the question of Indemnitee's
right to indemnification shall be for the court to decide, and neither the
failure of the Company (including its board of directors, any committee or
subgroup of its board of directors, independent legal counsel, or its
stockholders) to have made a determination that indemnification of Indemnitee is
proper in the circumstances because Indemnitee has met the applicable standard
of conduct required by applicable law, nor an actual determination by the
Company (including its board of directors, any committee or subgroup of the
board of directors, independent legal counsel, or its stockholders) that
Indemnitee has not met such applicable standard of conduct shall be dispositive.
(d) NOTICE TO INSURERS. If, at the time of the receipt of a
notice of a claim pursuant to Section 3(b) hereof, the Company has director and
officer liability insurance in effect, the Company shall give prompt notice of
the commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
(e) SELECTION OF COUNSEL. In the event the Company shall be
obligated under Section 3(a) hereof to pay the expenses of any proceeding
against Indemnitee, the Company, if appropriate, shall be entitled to assume the
defense of such proceeding, with counsel approved by Indemnitee, upon the
delivery to Indemnitee of written notice of its election so to do. After
delivery of such notice, approval of such counsel by Indemnitee, and the
retention of such counsel by the Company, the Company will not be liable to
Indemnitee under this Agreement for any fees of counsel subsequently incurred by
Indemnitee with respect to the same proceeding, provided, that
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(i) Indemnitee shall have the right to employ his counsel in any such proceeding
at Indemnitee's expense; and (ii) if (A) the employment of counsel by Indemnitee
has been previously authorized by the Company, (B) Indemnitee shall have
reasonably concluded that there may be a conflict of interest between the
Company and Indemnitee in the conduct of any such defense, or (C) the Company
shall not, in fact, have employed counsel to assume the defense of such
proceeding, then the fees and expenses of Indemnitee's counsel shall be at the
expense of the Company.
4. Additional Indemnification Rights; Non-Exclusivity.
(a) SCOPE. Notwithstanding any other provision of this
Agreement, the Company hereby agrees to indemnify the Indemnitee to the full
extent permitted by law, notwithstanding that such indemnification is not
specifically authorized by the other provisions of this Agreement, the Company's
certificate of incorporation, by-laws, or by statute. In the event of any
changes, after the date of this Agreement, in any applicable law, statute, or
rule that expand the right of a Delaware corporation to indemnify a member of
its board of directors or its officers, such changes shall be, ipso facto,
within the purview of Indemnitee's rights and the Company's obligations under
this Agreement. In the event of any changes in any applicable law, statute, or
rule that narrow the right of a Delaware corporation to indemnify a member of
its board of directors, such changes, to the extent not otherwise required by
such law, statute, or rule to be applied to this Agreement shall have no effect
on this Agreement or the parties' rights and obligations hereunder.
(b) NON-EXCLUSIVITY. The indemnification provided by this
Agreement shall not be deemed exclusive of any rights to which an Indemnitee may
be entitled under the Company's certificate of incorporation, by-laws, any
agreement, any vote of stockholders or disinterested Directors, the General
Corporation Law of the State of Delaware, or otherwise, both as to action in
Indemnitee's official capacity and as to action in another capacity while
holding such office. The indemnification provided under this Agreement shall
continue as to Indemnitee for any action taken or not taken while serving in an
indemnified capacity even though he may have ceased to serve in such capacity at
the time of any action, suit, or other covered proceeding.
5. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred by him in the investigation, defense, appeal, or settlement of any
civil or criminal action, suit, or proceeding, but not, however, for the total
amount thereof, the Company shall nevertheless indemnify Indemnitee for the
portion of such expense, judgments, fines, or penalties to which Indemnitee is
entitled.
6. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge
that in certain instances, federal law will override Delaware law and prohibit
the Company from indemnifying its directors and officers. For example, the
Company and Indemnitee acknowledge that the Securities and Exchange Commission
has taken the position that indemnification is not permissible for liabilities
arising under certain federal securities laws and federal legislation prohibits
indemnification for certain violations of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). Indemnitee understands and
acknowledges that in the event the Company undertakes a public offering of its
securities pursuant to a registration with the Securities and Exchange
Commission (the "SEC"), the Company may be required to undertake with the SEC to
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submit the question of indemnification to a court in certain circumstances for a
determination of the Company's right under public policy to indemnify
Indemnitee.
7. SEVERABILITY. Nothing in this Agreement is intended to require or
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability pursuant to court order to
perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 7. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
8. EXCEPTIONS. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) EXCLUDED ACTIONS OR OMISSIONS. To indemnify Indemnitee for
indemnitee's actions, omissions or transactions from which Indemnitee may not be
relieved of liability under applicable law;
(b) CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance
expenses to Indemnitee with respect to proceedings or claims initiated or
brought voluntarily by Indemnitee and not by way of defense, except with respect
to proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 145 of the General Corporation Law of the State of Delaware, but such
indemnification or advancement of expenses may be provided by the Company in
specific cases if the Company's board of directors finds it to be appropriate;
(c) LACK OF GOOD FAITH. To indemnify Indemnitee for any expenses
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous;
(d) INSURED CLAIMS. To indemnify Indemnitee for expenses or
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) that
have been paid directly to Indemnitee by an insurance carrier under a policy of
director and officer liability insurance maintained by the Company; or
(e) CLAIMS UNDER SECTION 16(B). To indemnify Indemnitee for
expenses and the payment of profits arising from the purchase and sale by
Indemnitee of securities in violation of Section 16(b) of the Securities
Exchange Act of 1934, as amended, or any similar successor statute.
9. Construction of Certain Phrases.
(a) For purposes of this Agreement, references to the "Company"
shall include, in addition to Office Depot, Inc., any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger, so that if Indemnitee is or was a director, officer,
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employee, or agent of such constituent corporation or is or was serving at the
request of such constituent corporation as a director, officer, employee, or
agent of another corporation, partnership, joint venture, trust, or other
enterprise, Indemnitee shall stand in the same position under the provisions of
this Agreement with respect to the resulting or surviving corporation as
Indemnitee would have with respect to such constituent corporation if its
separate existence had continued.
(b) For purposes of this Agreement, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on Indemnitee with respect to an employee
benefit plan; and references to "serving at the request of the Company" shall
include any service as a director, officer, employee, or agent of the Company
that imposes duties on, or involves services by, such director, officer,
employee, or agent with respect to an employee benefit plan, its participants,
or beneficiaries; and if Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have
acted in a manner "not opposed to the best interests of the Company" as referred
to in this Agreement.
10. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall constitute an original.
11. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives, and assigns.
12. ATTORNEYS' FEES. In the event that any action is instituted by
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee with respect to such action,
unless as a part of such action, the court of competent jurisdiction determines
that each of the material assertions made by Indemnitee as a basis for such
action were not made in good faith or were frivolous. In the event of an action
instituted by or in the name of the Company under this Agreement or to enforce
or interpret any of the terms of this Agreement, Indemnitee shall be entitled to
be paid all court costs and expenses, including attorneys' fees, incurred by
Indemnitee in defense of such action (including with respect to Indemnitee's
counterclaims and cross-claims made in such action), unless as a part of such
action the court determines that each of Indemnitee's material defenses to such
action were made in bad faith or were frivolous.
13. NOTICES. All notices, requests, demands, and other communications
under this Agreement shall be in writing and shall be deemed duly given on the
third business day after the date postmarked, if sent by domestic certified or
registered mail with postage prepaid, or, if delivered by other means, on the
date actual notice is received. Notice to the Company shall be directed to the
President of the Company. The addresses for such notice to Indemnitee is as
shown on the signature page of this Agreement, or as subsequently modified by
written notice.
14. CONSENT TO JURISDICTION. The Company and Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding that arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of Delaware.
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15. GOVERNING LAW. This Agreement shall be governed by and its
provisions construed in accordance with the laws of the State of Delaware,
without giving effect to any choice of law or conflict of law rules or
provisions (whether of the State of Delaware or any other jurisdiction) that
would cause the application of the laws of any jurisdiction other than the State
of Delaware.
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IN WITNESS WHEREOF, the parties hereto have executed this
Indemnification Agreement as of the date first above written.
OFFICE DEPOT, INC.
By:_______________________________
Its:_______________________________
INDEMNITEE:
- ------------------------------
(signature)
- ------------------------------
(type or print name)
- ------------------------------
- ------------------------------
(address)
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Exhibit 10.16
PETER J. SOLOMON COMPANY 330 Park Avenue
LIMITED New York, NY 10023
TEL 212-936-3300
FAX 212-935-0770
August 22, 1996
Office Depot, Inc.
2200 Old Germantown Road
Delray Beach, FL 33445
Attention: Barry J. Goldstein, Executive Vice President, Chief Financial
Officer and Secretary
Ladies and Gentlemen:
The purpose of this letter is to confirm the engagement of Peter J.
Solomon Company Limited ("PJSC") by Office Depot, Inc. (the "Company") to
render financial advisory services to the Company in connection with a
possible: (i) merger of the Company (or a subsidiary of the Company) with
Staples, Inc. ("Staples") (or a subsidiary of Staples); (ii) merger of the
Company (or a subsidiary of the Company) and Staples (or a subsidiary of
Staples) with a new company ("Newco") formed for the purpose of effecting such
merger; (iii) acquisition by the Company (or a subsidiary of the Company) of
Staples or all or a significant portion of the assets of Staples; (iv) sale of
the Company or a significant portion of the assets of the Company to Staples
(or a subsidiary of Staples); or (v) any other form of transaction which
accomplishes a similar business combination between the Company and Staples
(collectively, a "Transaction").
SECTION 1. SERVICES TO BE RENDERED. PJSC will perform such of the
following financial advisory services as the Company may reasonably request:
(a) PJSC will familiarize itself to the extent it deems appropriate
and feasible with the business, operations, properties, financial condition and
prospects of the Company and, to the extent relevant, Staples, it being
understood that PJSC shall, in the course of such familiarization, rely
entirely upon publicly available information and such other information as may
be supplied by the Company or Staples, without independent investigation;
(b) PJSC will advise and assist the Company in the course of its
negotiations of any Transaction with Staples;
(c) PJSC will advise and assist management of the Company in making
presentations to the Company's Board of Directors regarding any proposed
Transaction;
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(d) PJSC will advise the Company in the execution of and closing of
a Transaction under a definitive agreement; and
(e) PJSC will render such other financial advisory services as may
time to time be agreed upon by PJSC and the Company.
SECTION 2. INFORMATION PROVIDED BY THE COMPANY.
(a) The Company shall make available (and shall request that
Staples make available) to PJSC all information concerning the business,
assets, liabilities, operations, prospects and financial or other condition of
the Company or Staples which PJSC reasonably requests in connection with the
rendering of services hereunder; and
(b) The Company recognizes and confirms that PJSC (i) will use and
rely primarily on the information provided by the Company and on information
available from generally recognized public sources in performing the services
contemplated hereby without having assumed any responsibility for independently
verifying the same; (ii) does not assume responsibility for the accuracy or
completeness of any such information; and (iii) will not make an appraisal of
any assets of the Company or Staples. The Company confirms that any such
information to be furnished by the Company when delivered will be true and
correct in all material respects and will not contain any material misstatement
of fact or omit to state any fact necessary to make the statements contained
therein not misleading. The Company will promptly notify PJSC if the Company
learns of any material inaccuracy or misstatement in, or any material omission
from, any such information furnished by the Company to PJSC.
SECTION 3. FEES.
(a) As compensation for the services rendered hereunder, the
Company agrees to pay PJSC (via wire transfer) a cash fee (the "Transaction
Fee") equal to 0.375% of the Aggregate Consideration paid or payable in
connection with a Transaction. In the event that the Company receives a
fairness opinion in connection with the Transaction from any financial advisor
other than PJSC, PJSC shall reduce the Transaction Fee by the amount paid by
the Company for such fairness opinion up to $2.0 million. In the event that the
Company hires any financial advisor in addition to PJSC in connection with the
Transaction, PJSC shall reduce the Transaction Fee by the amount paid by the
Company to such other financial advisor up to an amount equal to 30% of the
Transaction Fee (inclusive of the $2.0 million for any fairness opinion as
stipulated in the previous sentence).
Such Transaction Fee shall be contingent upon the consummation of a
Transaction and shall be payable at the closing thereof, provided that
compensation attributable to that part of Aggregate Consideration which is
contingent upon the realization of future financial performance (e.g. an
earn-out or similar provision) shall be paid by the Company to PJSC promptly
upon the receipt of such Aggregate
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Consideration by the Company, its shareholders or other parties. Compensation
attributable to that part of Aggregate Consideration which is deferred
(including without limitation any Aggregate Consideration held in escrow) shall
be valued at the total stated amount of such consideration, after applying an
appropriate discount thereto, which discount shall be determined in good faith
by PJSC and the Company, and shall be paid by the Company at the closing of a
Transaction.
For purposes hereof, the term "Aggregate Consideration" shall mean the
total amount of all cash, securities, contractual arrangements and other
properties paid or payable, directly or indirectly in connection with a
Transaction to holders of the Company's equity securities (including, without
limitation, amounts paid to holders of any warrants, stock purchase rights or
convertible securities of the Company and to holders of any options or stock
appreciation rights issued by the Company that are vested at or upon the
consummation of the Transaction). The value of securities that are freely
tradable in an established public market will be based on the average market
closing prices of such securities during the five trading days ending the fifth
trading day prior to the consummation of the Transaction. In the event that (i)
the Company (or a subsidiary of the Company) acquires Staples or (ii) the
Company (or a subsidiary of the Company) is the surviving entity in a
Transaction, Aggregate Consideration will include the value of the Company's
equity securities (including, without limitation, any warrants, stock purchase
rights or convertible securities of the Company and any options or stock
appreciation rights issued by the Company that are vested at or upon the
consummation of the Transaction) based on the average market closing prices of
such securities during the five trading days ending the fifth trading day prior
to the consummation of the Transaction.
Aggregate Consideration shall also include, without duplication, the
amount of any short-term debt and long-term debt of the Company (including the
principal amount of any indebtedness for borrowed money and capitalized leases
and the full amount of any off-balance sheet financings but excluding any
non-interest bearing current liabilities such as accounts payable) (x) repaid
or retired in connection with or in anticipation of a Transaction, (y) existing
on the Company's balance sheet at the time of a Transaction (if such
Transaction takes the form of a merger, consolidation or a sale of stock or
partnership interests) or (z) assumed in connection with a Transaction (if such
Transaction takes the form of a sale of assets). The value of securities, lease
payments and other consideration that are not freely tradable or have no
established public market, or if the consideration utilized consists of
property other than securities, the value of such property shall be the fair
market value thereof as determined in good faith by PJSC and the Company.
(b) If, following or in connection with the termination or
abandonment of any proposed Transaction, the Company receives a so-called
"break up," "termination," "topping" or similar fee or payment (a "Break Up
Fee"), PJSC shall be entitled to a cash fee equal to no less than 70% of the
lesser of (a) $10.0 million or (b) 20% of the aggregate amount of all such
Break Up Fees.
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SECTION 4. EXPENSES. In the event that a Transaction is not
consummated and without in any way reducing or affecting the provisions of
Exhibit A hereto, the Company shall reimburse PJSC for its actual and
reasonable out-of-pocket expenses incurred in connection with the provision of
services hereunder, the execution and delivery of this letter agreement,
including, without limitation, the actual and reasonable fees and disbursements
of PJSC's counsel. Out-of-pocket expenses shall include, but not be limited to,
travel and lodging, data processing and communication charges, research and
courier services. The Company shall promptly reimburse PJSC upon presentation
of an invoice or other similar documentation.
SECTION 5. INDEMNITY. The Company agrees to the provisions of Exhibit
A affixed hereto and incorporated herein by reference, which provisions shall
survive the termination or expiration of this letter agreement.
SECTION 6. TERM. The term of PJSC's engagement shall extend from the
date hereof until August 30, 1997 and shall continue thereafter until three
months after such time as the Company or PJSC shall have notified the other in
writing of the termination of this Agreement (the "Term"), provided, however,
that PJSC will be entitled to its full fees under Section 3 hereof, less
one-half of any fees previously paid by the Company to PJSC under this letter
agreement, in the event that a Transaction is consummated with Staples at any
time prior to the expiration of twelve months after such termination, or
definitive agreement with respect to a Transaction is executed with Staples at
any time prior to twelve months after such termination (which definitive
agreement subsequently results in the consummation of a Transaction or the
Company's receipt of any Break Up Fees at any time); provided, further, that
the provisions of Sections 4 through 7 and Exhibit A hereto shall survive any
such termination.
SECTION 7. MISCELLANEOUS.
(a) PJSC acknowledges that the Company shall have no obligation to
enter into any Transaction and shall have the right to reject any Transaction
or to terminate negotiations with respect to any Transaction at any time.
(b) Except as contemplated by the terms hereof or as required by
applicable law, PJSC shall keep confidential all non-public information
provided to it by the Company, and shall not disclose such information to any
third party, other than in confidence to such of its directors, officers,
employees, counsel and advisors as PJSC determines to have a need to know in
order to render services hereunder.
(c) Except as required by applicable law, any advice to be provided
by PJSC under this letter agreement shall not be disclosed publicly or made
available to third parties without the prior written approval of PJSC.
4
5
(d) The Company agrees that PJSC shall have the right after
completion of a Transaction to place advertisements in financial and other
newspapers and journals at its own expense describing its services hereunder.
(e) This letter agreement may not be amended or modified except by
a writing executed by each of the parties and shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to the conflicts of law principles thereof, and the provisions
hereof, including without limitation, the obligation to make the payments set
forth in Section 3 above shall be binding on the Company and its successors and
assigns.
(f) Any lawsuits with respect to, in connection with or arising out
of this letter agreement shall be brought in a court for the Southern District
of New York and the parties hereto consent to the jurisdiction and venue of
such court for the Southern District as the sole and exclusive forum, unless
such court is unavailable, for the resolution of claims by the parties arising
under or relating to this Agreement. The parties hereto further agree that
proper service of process on a party may be made on any agent designated by
such party located in the State of New York.
(g) To the extent permitted by applicable law, each party hereby
waives trial by jury in any lawsuit with respect to, in connection with or
arising out of this letter agreement, or any other claim or dispute relating
to the engagement of PJSC arising between the parties hereto. Each party hereto
confirms that the foregoing waivers are informed and freely made.
(h) The relationship of PJSC to the Company hereunder shall be that
of an independent contractor and PJSC shall no authority to bind, represent or
otherwise act as agent for the Company.
* * *
5
6
If the foregoing correctly sets forth the understanding and agreement
between PJSC and the Company, please so indicate by signing the enclosed copy
of this letter, whereupon it shall become a binding agreement between the
parties hereto as of the date first above written.
Very truly yours,
PETER J. SOLOMON COMPANY LIMITED
By: /s/ Peter J. Solomon
-----------------------
Peter J. Solomon, Chairman
Accepted and Agreed to as of
the day first written above:
OFFICE DEPOT, INC.
By: /s/ Barry J. Goldstein
- ---------------------------
Barry J. Goldstein,
Executive Vice President,
Chief Financial Officer and Secretary
6
7
EXHIBIT A
(a) The Company shall indemnify and hold harmless PJSC and its
affiliates and the respective directors, officers, controlling persons, agents
and employees of each of the foregoing (PJSC and all of such other persons
being collectively, "Indemnified Parties"), from and against any losses,
claims, damages, judgments, investigation costs, settlement costs, fines,
penalties, liabilities, arbitration awards and expenses, including its
reasonable attorneys' fees and disbursements (collectively, "Losses"), arising
out of or resulting from any actions, suits, claims, arbitrations,
investigations (whether formal or informal) or administrative or other
proceedings, or threats thereof (collectively "Actions"), brought or made
against any such Indemnified Party by any person or entity arising under or in
connection with the rendering of services by PJSC hereunder. The Company
shall not be liable under the foregoing indemnification provision (i) to an
Indemnified Party if it is finally judicially determined by a court of
competent jurisdiction that such Losses arose primarily out of the gross
negligence, bad faith or fraud of such Indemnified Party (a "Wrongdoer") or
(ii) to any Indemnified Party if, and only to the extent, it is finally and
judicially determined by a court of competent jurisdiction that the Losses
sustained by such Indemnified Party (a "Liable Party") arise primarily out of
the gross negligence, bad faith or fraud of PJSC.
(b) The Company shall promptly pay or reimburse each Indemnified
Party for any legal or other expenses reasonably incurred in any Action, as and
when incurred; PROVIDED, HOWEVER, that each Indemnified Party which is
determined to be a Wrongdoer and, if PJSC has been determined to be a
Wrongdoer, each Liable Party (to the extent that its Losses arise primarily out
of the gross negligence, bad faith or fraud of PJSC) will promptly remit to the
Company any amount theretofore paid or reimbursed under this clause (b).
The Company agrees that the provisions of this Exhibit A shall apply
whether or not any Indemnified Party is a formal party to any such Action and
that the Company will not settle or resolve any such Action unless it obtains
the written consent of such Indemnified Party, which consent will not be
unreasonably withheld. The Company shall, if requested by PJSC, assume the
defense of any such Action, including the employment of counsel reasonably
satisfactory to PJSC. Any Indemnified Party shall have the right to employ
separate counsel and participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of the Indemnified Party
unless such Indemnified Party shall have been advised by counsel in writing
that there may be one or more legal defenses available to it but are different
from or in addition to those available to the Company. The Company shall not be
liable for any settlement of any Action effected without the written consent of
the Company which shall not be unreasonably withheld.
7
8
EXHIBIT A (cont.)
The Company agrees that if any right of any Indemnified Party set forth
in the preceding paragraphs is finally judicially determined to be unenforceable
as a matter of law then the Company shall contribute to such Losses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and its shareholders, on the one hand, and such Indemnified Party, on
the other hand, in connection with the transactions contemplated hereby, and
(ii) if (and only if) the allocation provided in clause (i) is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) but also the relative fault of the
Company and the Indemnified Parties; provided, however, that in no event shall
the amount, if any, to be contributed by all Indemnified Parties exceed the
amount of the fees actually received by PJSC hereunder.
The rights of the Indemnified Parties hereunder shall be in addition to
any other rights that any Indemnified Party may have at common law, by statute
or otherwise.
8
1
EXHIBIT 21.1
LIST OF THE COMPANY'S SUBSIDIARIES
NAME JURISDICTION OF INCORPORATION
- ---- -----------------------------
Eastman, Inc................................................ Delaware
Eastman Office Products Corporation......................... Delaware
ODI, Inc.................................................... Delaware
OD International, Inc....................................... Delaware
Office Town, Inc............................................ Puerto Rico
The Canadian Office Depot, Inc.............................. British Columbia, Canada
The Office Club, Inc........................................ California
Southern Terminals, Inc..................................... North Carolina
Carolina Rail Service, Inc.................................. North Carolina
Con Eng Coal, Inc........................................... Pennsylvania
OD Commercial, Inc.......................................... Delaware
ODO, Inc.................................................... Florida
ODNV, Inc................................................... Nevada
ODHC, Inc................................................... Delaware
MG Realty, Inc.............................................. California
OD France L.L.C............................................. Delaware
Office Club (Thai) Co., Ltd................................. Thailand
Japan Office Supplies, L.L.C................................ Delaware
Office Depot Japan Co., Ltd................................. Japan
Office Depot (Israel), Ltd.................................. Israel
Office Depot France, S.A.S.................................. France
Office Depot de Mexico, S.A. de C.V......................... Mexico
1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-31743, No. 33-62781 and No. 33-62801 of Office Depot, Inc. on Forms S-8 and
in Registration Statement No. 333-15853 of Office Depot, Inc. on Form S-4 of our
report dated February 25, 1997 (March 10, 1997 as to Note B) appearing in the
Annual Report on Form 10-K of Office Depot, Inc. for the year ended December 28,
1996.
/s/ Deloitte & Touche
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
March 27, 1997
5
1,000
YEAR
DEC-28-1996
DEC-31-1995
DEC-28-1996
51,398
0
234,211
11,538
1,324,506
1,821,596
925,533
253,885
2,740,317
1,127,801
559,096
0
0
1,594
1,154,351
2,740,317
6,068,598
6,068,598
4,700,910
5,661,821
167,396
8,514
26,078
212,718
83,676
129,042
0
0
0
129,042
.81
.80
