SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 29, 2001
Or
[ ] Transition Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
for the transition period from ____ to _____
Commission file number 1-10948
OFFICE DEPOT, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-2663954
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
2200 Old Germantown Road, Delray Beach, Florida 33445
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 438-4800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of Each Class which registered
------------------- ------------------------
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. [ ]
The aggregate market value of voting stock held by non-affiliates of
the registrant as of March 1, 2002 was approximately $5,787,894,988.
As of March 1, 2002, the Registrant had 310,510,285 shares of Common
Stock outstanding.
Documents Incorporated by Reference:
Portions of our Annual Report to Stockholders for the fiscal year ended December
29, 2001 are incorporated by reference in Parts I and II, and the Proxy
Statement, to be mailed to stockholders on or about March 25, 2002 for the
Annual Meeting to be held on April 25, 2002, is incorporated by reference in
Part III.
PART I
ITEM 1. BUSINESS.
Office Depot Inc., together with our subsidiaries, ("Office Depot" or the
"Company") is the largest supplier of office products and services in the world.
We sell to consumers and businesses of all sizes through our three business
segments: North American Retail Division, Business Services Group ("BSG"), and
International Division.
OFFICE PRODUCTS BUSINESS
Businesses in our industry primarily sell three broad categories of merchandise:
general office supplies, technology products and office furniture. Office
products distributors include contract stationers (selling at significant
discounts from list prices to their contract customers), mail order companies
(selling through catalogs) and retailers (including office superstores such as
the ones we operate). Over the past few years, Internet-based companies have
emerged as a new channel in this industry.
Although the office products business has changed in recent years, a significant
portion of the market is still served by small dealers. These dealers purchase a
significant portion of their merchandise from national or regional office supply
distributors who, in turn, purchase merchandise from manufacturers. Dealers
often employ a commissioned sales force that use the distributor's catalog,
showing products at retail list prices, for selection and price negotiation with
the customer. We believe that these dealers generally sell their products at
prices higher than those we offer to our customers.
Since the mid-1980s, high-volume office supply superstores have emerged
throughout the United States. These stores offer a wide selection of products, a
high level of customer service and low prices. High-volume office products
retailers typically offer substantial price savings to individuals and small- to
medium-sized businesses, which traditionally have had limited opportunities to
buy at significant discounts from retail list prices. During the late 1990s,
other retailers, including mass merchandisers and warehouse clubs, have begun
offering a wide variety of similar products at low prices and have become
increasingly competitive with office supply superstores. Direct mail and
Internet-based companies have also established a growing presence in the office
products industry.
Larger customers have been, and continue to be, served primarily by full service
contract stationers, which offer contract bids at discounts equivalent to or
greater than those offered by our retail stores and catalogs. These stationers,
including our own contract stationer business, traditionally serve their
customers through a commissioned sales force, purchase in large quantities
primarily from manufacturers, and offer competitive pricing and customized
services to their customers.
COMPETITION
We operate in a highly competitive environment. Historically, our markets have
been served by traditional office products dealers and contract stationers. We
believe that we compete favorably against dealers on the basis of price and
selection. We compete with other full service contract stationers on the basis
of service and value-added technology. We also compete with other office supply
superstores, wholesale clubs selling general merchandise, discount stores, mass
merchandisers, conventional retail stores, catalog showrooms, Internet-based
companies and direct mail companies. These companies, in varying degrees,
compete with us on both price and selection. Currently, we are the largest
seller of office products and services in the world in terms of dollar volume of
products and services sold, and we believe that our ability to buy in large
quantities directly from the manufacturers affords us a competitive advantage
over our smaller competitors.
We compete with several high-volume office supply chains that are similar to us
in terms of store format, pricing strategy and product selection and
availability in markets where we operate, primarily those in the United States
and Canada. We differentiate ourselves from these other superstore chains in
terms of the convenience of our store locations, our customer service, the
extent of our product selection, and our "in stock" position (i.e., having the
products we carry on the shelves for our customers). We anticipate that in the
future we will face increased competition from these chains as each of us
expands our operations.
In the delivery and contract stationer portions of the industry, our principal
competitors are national and regional full service contract stationers, national
and regional office furniture dealers, independent office products distributors,
discount superstores and, to a lesser extent, direct mail businesses, stationery
retail outlets and Internet-based merchandisers. Other office supply superstore
chains have developed a presence in the contract stationer and Internet channels
of the business. We compete with these businesses in substantially all of our
current markets. In the future, we may face increased competition from
Internet-based merchandisers who dedicate all of their resources to electronic
commerce.
Some of the entities we compete against may have greater financial resources
than we do. We cannot assure you that increased competition will not have an
adverse effect on us. However, we believe that we compete effectively based on
price, selection, availability, location and customer service.
MERCHANDISING AND PRODUCT STRATEGY
Our merchandising strategy is to offer a broad selection of office products,
under both our Office Depot(R) and Viking Office Products(R) brands, and to
provide our customers with a compelling combination of quality, assortment,
price and service. Our selection of office products includes general office
supplies, computers, software and computer supplies, business machines and
related supplies, and office furniture. In late 2000, we adopted a plan to
reduce the number of SKUs in our domestic stores and warehouses in order to
improve customer service and efficiencies by having better "in stock" positions
for products our customers purchase most frequently. During 2001, the SKU
reduction was completed. Our domestic office supply superstores now stock
approximately 7,900 SKUs, including variations in color and size, and our
domestic Customer Service Centers ("CSCs") stock approximately 10,200 SKUs.
We buy substantially all of our merchandise directly from manufacturers and
other primary suppliers. In some cases, we also have begun to source our own
merchandise from offshore locations under private label brands that are
exclusive to Office Depot and Viking. In most cases, our suppliers deliver the
merchandise directly to our CSCs, cross-dock facilities or stores. Our supply
chain operations, including the cross-docks, use a customized system to manage
the inbound flow of merchandise with the goal of minimizing our landed cost.
This system enables us to maintain optimal in-stock positions by permitting a
shorter lead time for reordering at the stores and CSCs, while still meeting the
minimum ordering requirements of our vendors. The use of cross-docks also
reduces our freight costs by centralizing the receiving function.
Our BSG is party to multi-year contracts with many of its customers and
anticipates entering into similar contracts in the future as we grow our
contract business. Nonetheless, we have not entered into any material long-term
contracts or commitments with any vendor or customer, the loss of any one of
which would materially adversely affect our financial position or the results of
our operations. We have not experienced any material difficulty in obtaining
desired quantities of merchandise for sale, and we do not foresee having any
significant difficulties in the future.
Buyers are responsible for selecting and purchasing merchandise. For merchandise
offered to our retail store, direct mail and Internet customers, our operating
management determines pricing based upon buyer recommendations. Our contract
sales force in our BSG determines the price of products sold to our contract
customers. Replenishment buyers monitor inventory levels and initiate product
reorders with the assistance of our customized replenishment system. This system
allows buyers to devote more time to selecting products, developing new product
lines, analyzing competitive developments and negotiating with vendors to obtain
more favorable prices and product availability. We transmit purchase orders by
EDI to a significant number of our vendors, and we electronically receive
Advance Shipment Notices and invoices back from them. This method of electronic
ordering expedites orders and promotes accuracy and efficiency. We plan to
continue to expand this program to the remainder of our vendors.
We buy substantially all of our inventory directly from manufacturers in large
quantities without using a central warehouse. We maintain substantially all of
our inventory on the sales floors of our stores, at our cross-docks and at our
CSCs.
STORE STRATEGY
Our retail stores conform to a model designed to achieve cost efficiency by
minimizing rent and eliminating the need for a central warehouse. Each store
displays virtually all its inventory on the sales floor using low-profile
fixtures, pallets, bins and industrial steel shelving, permitting the bulk
stacking of inventory and quick and efficient restocking. Shelving is positioned
to form aisles large enough to comfortably accommodate customer traffic and
merchandise movement. During 2001, we further enhanced the shopping experience
with the installation of new lighting, signage, and broadband Internet
capabilities across our entire North American Retail chain.
Our stores sell primarily to small offices/home offices and individual
consumers. We carry a wide selection of merchandise, including brand name office
supplies, business machines and computers, computer software, office furniture
and other business-related products. Each store also contains a multipurpose
copy and print center offering printing, reproduction, mailing, shipping, and
other services. Through our partnership with UPS, we established UPS shipping
centers within our North American Retail stores. This enables us to offer our
customers a full selection of packaging and shipping supplies, as well as the
complete portfolio of U.S. domestic and international UPS shipping services at
regular UPS Customer Counter rates.
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CATALOG PRODUCTION AND CIRCULATION
We use our catalogs to market directly to both existing and prospective
customers throughout the world. Separate catalog assortments promote our dual
brand (Office Depot(R) and Viking Office Products(R)) mail order strategy. We
currently circulate both Office Depot(R) and Viking Office Products(R) brand
catalogs through our BSG and International Division. Each catalog is printed in
full color with pictures and narrative descriptions that emphasize key product
benefits and features. We have developed a distinctive style for our catalogs,
most of which are produced in-house by our designers, writers and production
artists, using a computer-based catalog creation system.
Our Viking Office Products(R) brand catalog mailings include monthly sale
catalogs, which are mailed to all active Viking customers and present our most
popular items. A complete buyers guide, containing all of our products at the
regular discount prices, is delivered to our Office Depot(R) and Viking Office
Products(R) brand catalog customers every six months. This buyers guide, which
is mailed to all of our active customers, varies in size between countries.
Prospecting catalogs with special offers designed to attract new customers are
mailed frequently. In addition, Office Depot(R) and Viking Office Products(R)
specialty catalogs are delivered to selected customers monthly.
During 2001, we mailed approximately 307 million copies of Office Depot(R) and
Viking(R) brand catalogs to existing and prospective customers. During 2000 and
1999, we mailed approximately 305 million and 296 million copies, respectively.
SELLING AND MARKETING
We are able to maintain our competitive pricing policy primarily as a result of
the significant cost efficiencies we achieve through our operating format and
purchasing power. Our marketing programs are designed to attract new customers
and to persuade existing customers to make additional purchases. We advertise in
the major newspapers in most of our local markets. These advertisements are
supplemented with local and national radio and network and cable television
advertising campaigns and direct marketing efforts. We continuously acquire new
customers by selectively mailing specially designed catalogs to prospective
customers. Sometimes we obtain the names of prospective customers in new and
existing markets through the use of selected mailing lists from outside
marketing information services and other sources. We use a proprietary mailing
list system for our Viking Office Products(R) brand catalogs and other
promotional mailings. We plan to use this same technology to increase the
effectiveness of our Office Depot(R) brand catalogs in the future. Catalogs are
also distributed through our contract sales force and are available in each of
our stores.
We have a low price guarantee policy for our Office Depot(R) brand products sold
in stores and through catalogs. Under this policy, we will match any
competitor's comparable lower price. This program assures customers that they
can always receive low prices from us even during periodic sales promotions by
our competitors. Monthly competitive pricing analyses are performed to monitor
each market, and prices are adjusted as necessary to adhere to this pricing
philosophy and ensure competitive positioning.
Our customers nationwide can place orders over the Internet, by telephone or by
fax using toll-free telephone numbers that route the calls through call centers
located in Florida, Georgia, Texas, Ohio, Connecticut, Kansas, New Jersey,
Arizona and California. We electronically transmit any orders received at the
call centers or via the Internet to the store or CSC closest to our customer for
pick-up or delivery at a nominal delivery fee (free with a minimal order size).
Orders are packaged, invoiced and shipped for next-day delivery or same-day
delivery in the case of Viking orders in selected markets.
Through our BSG, we provide our contract customers with specialized services
designed to aid them in achieving efficiencies and eliminating waste in their
overall office products and office furniture costs. These services include
electronic ordering, stockless office procurement, desktop delivery, business
forms management services, and comprehensive product usage reports. Desktop
delivery entails delivering the merchandise to individual departments within our
customers' facilities, rather than delivering the packages to one central
receiving point. We also develop customized Intranet sites in tandem with our
customers, allowing them to set rules and limitations on their employees'
electronic ordering abilities. Customer orders from these Intranet sites are
transmitted to us via the Internet.
In addition to the normal payment options available to all of our customers, we
offer our contract and qualified commercial customers the option of purchasing
on credit through open accounts. We also offer revolving credit terms to Office
Depot(R) brand customers through the use of private label credit cards. These
credit cards are issued without charge to credit-qualified customers. Sales
transactions using the private label credit cards are transmitted electronically
to financial services companies, which credit our bank account with the net
proceeds within two days. We offer our contract customers a store
3
purchasing card which allows them to purchase office supplies at one of our
retail stores, while still taking advantage of their contract pricing. No single
customer in any of our segments accounts for more than 1% percent of our total
sales. All of our credit card operations are conducted by third parties with
whom we contract to perform this service.
INFORMATION SYSTEMS
In operating our business, we use IBM ES9000 mainframes, IBM AS/400 computers
and client/server technologies. Our information systems include advanced
software packages that have been customized for our specific business
operations. By maximizing our application of these technologies, we have
improved our ability to manage our inventories, order processing, replenishment
and marketing efforts.
Inventory data is updated instantaneously in our systems when the merchandise is
scanned for receiving or transfer, and sales and certain inventory data is
updated in our systems each night by downloading information from our
point-of-sale and our telemarketing order entry systems. Our point-of-sale
systems permit the entry of sales data through the use of bar code laser
scanning. The systems also have a price "look-up" capability that permits
immediate price checking and the efficient movement of customers through the
check-out process. Data from all of our locations and order sources is
transmitted to our headquarters at the end of each day, permitting a perpetual
daily inventory and the calculation of average unit cost by SKU for each of our
stores and CSCs. Daily compilation of sales and gross margin data allows us to
analyze profitability and inventory by item and product line, as well as monitor
the success of our sales promotions. For all SKUs, we have immediate access to
on-hand daily unit inventory, units on order, current and past rates of sale and
other information pertinent to the management of our inventory.
All of our computer operations are managed internally in state-of-the-art
facilities that capitalize on advanced technologies. Our help desk is manned 24
hours per day, 7 days per week. We utilize off-site disaster recovery facilities
and redundancies. These operations result in industry leading system
availability and reliability.
We have invested in a new data warehouse system that now allows us to perform
trend and market basket analyses, manage our customer relationships, and produce
more effective advertising campaigns. We strive for superior customer
satisfaction, and our information systems initiatives are designed with that
goal in mind. Our new data warehouse solution is designed to use sales
transaction and customer interaction information to market on a more personal
basis with each of our customers. Our international initiatives include
launching several electronic commerce sites throughout the world and building a
world-class network and computing infrastructure.
Our Office Depot public Web site--WWW.OFFICEDEPOT.COM--has won a number of
awards from information technology industry and customer groups. Worldwide, we
offer a total of 15 business-to-business electronic commerce sites. These sites
have sophisticated work-flow components that help our customers electronically
manage their ordering process for office supplies, with thousands of customer
orders processed each day. Internet-enabled applications allow our suppliers to
directly interact with our systems, improving order flow and supply chain
management. We use our corporate Intranet to improve employee productivity and
responsiveness and reduce our administrative costs.
EMPLOYEES
As of March 1, 2002, we had approximately 45,000 employees worldwide. Virtually
all of these are full time employees. Our labor relations generally are good,
and the overwhelming majority of our facilities are not organized by any labor
union. In the most recent labor organizing activity in a large facility in
California, our employees rejected the efforts of the labor union to organize
that workforce.
INFORMATION INCORPORATED BY REFERENCE
The following information is included in Exhibit 13. Such information is set
forth in Office Depot's 2001 Annual Report to Stockholders and is incorporated
herein by reference:
General description of our business segments - Pages 18-20
Financial information about segments - Pages 20-25 and 50-51
Revenues by product group - Page 20
Seasonality of the business - Page 29
Financial information about geographic areas - Page 51
4
EXECUTIVE OFFICERS OF THE REGISTRANT
BRUCE NELSON AGE: 57
Mr. Nelson has served as Chief Executive Officer of Office Depot, Inc. since
July 17, 2000 and Chairman of our Board of Directors since December 29, 2001.
Previously, he served both as President of Office Depot International and as
President of our subsidiary, Viking Office Products, Inc. He has been one of our
directors since he joined us in August 1998. From January 1996 until August
1998, he served as President and as a director of Viking. From July 1995 until
January 1996, Mr. Nelson was Chief Operating Officer of Viking, and from January
1995 until July 1995, he was Executive Vice President of Viking. From 1990 until
July 1994, Mr. Nelson was President and Chief Executive Officer of BT Office
Products USA. He had previously worked for over 22 years at Boise Cascade Office
Products in a number of executive positions.
JERRY COLLEY AGE: 49
Mr. Colley joined Office Depot in February 2001 as our President, North American
Retail Stores. Prior to joining Office Depot, he was Senior Vice President,
Stores and Customer Satisfaction for AutoZone, Inc., from 1997 to 2001. Prior to
his tenure at AutoZone, Mr. Colley was Executive Vice President of Tire Kingdom
from January 1996 to July 1996, and President of Rose Auto Parts, a regional
retail chain, from February 1995 to December 1995, and Vice President,
Stores/Regional Manager for AutoZone/AutoShack from 1987 to 1995.
ROBERT J. KELLER AGE: 48
Mr. Keller has been President, Business Services Group since August 2000.
Previously, he served as Executive Vice President, Business Services Division
from June 1999 to August 2000 and Senior Vice President, Contract Sales from
February 1998 to June 1999. Before joining Office Depot, Mr. Keller was
Executive Vice President (1993 to 1998) and Senior Vice President (1988 to 1993)
of Dunn & Bradstreet Corporation.
ROLF Van KALDEKERKEN AGE: 58
Mr. Van Kaldekerken has been President, European Operations since August 2000.
Prior to that appointment, he served as Executive Vice President, European
Operations from January 2000 to August 2000. Previously, he was President &
Country Manager for Germany from 1998 to January 2000 for Office Depot
International and Managing Director and Vice President, Germany, Benelux and
Austria for Viking Office Products from November 1994 until August 1998, when
Viking was merged into our Company. Prior to joining Viking, Mr. Van Kaldekerken
was European Operations Manager and European Purchasing Manager for INMAC
Corporation.
CHARLES E. BROWN AGE: 49
Mr. Brown has been our Executive Vice President and Chief Financial Officer
since October 2001. Prior to assuming that position, Mr. Brown was our Senior
Vice President, Finance and Controller since he joined our Company in May 1998.
He was Senior Vice President and Chief Financial Officer of Denny's, Inc. from
January 1996 until May 1998; from August 1994 until December 1995, he was Vice
President and Chief Financial Officer of ARAMARK International; and from
September 1989 until July 1994, he was Vice President and Controller of Pizza
Hut International, a Division of PepsiCo, Inc.
JOCELYN CARTER-MILLER AGE: 44
Ms. Carter-Miller joined our Company in February 2002 as Executive Vice
President, Marketing, and Chief Marketing Officer. From 1992 to 2002, she was
employed by Motorola, Inc. in various positions, including Corporate Vice
President/Chief Marketing Officer and in various divisional capacities. From
1983 to 1991, Ms. Carter-Miller was employed by Mattel, Inc. in various
marketing positions, including Vice President, Marketing and Product Development
from 1987 to 1991. Ms. Carter-Miller is also a director of Principal Financial
Group, Inc., a publicly traded company.
JAY CROSSON AGE: 51
Mr. Crosson has been our Executive Vice President, Human Resources since June
2001. From November 2000 until June 2001, he served as Senior Vice President,
Human Resources and from July 2000 until November 2000, he was our Senior Vice
President, HR Operations. He joined our Company in November 1997 as Vice
President of Human Resources (Stores Division). Prior to joining our Company,
Mr. Crosson served in various officer level human resources positions with
Sherwin-Williams Company, Cleveland, Ohio.
DAVID C. FANNIN AGE: 56
Mr. Fannin has been our Executive Vice President, General Counsel and Secretary
since August 2000. Previously, he was Senior Vice President and General Counsel
since he joined our Company in November 1998, and our Corporate Secretary since
January 1999. Mr. Fannin was Executive Vice President, General Counsel and
Corporate Secretary of Sunbeam Corporation, a manufacturer and wholesaler of
durable household and outdoor consumer products, from January 1994 until
5
August 1998. In connection with his tenure at Sunbeam Corporation, Mr. Fannin
was the subject of administrative proceedings brought by the U.S. Securities
and Exchange Commission with respect to Section 17(a)(3) of the Securities Act
of 1933. These proceedings culminated in Mr. Fannin's consent in May 2001
(without admitting or denying any liability) to the entry of a Commission
cease-and-desist order.
PATRICIA MORRISON AGE: 42
Ms. Morrison joined our Company in January 2002 as Executive Vice President and
Chief Information Officer. From 2000 to December 2001, she was Vice
President-Information Systems & Chief Information Officer of Quaker Oats
Company. From 1997 to 2000, she was employed by the General Electric Company, as
Chief Information Officer of GE Industrial Systems (1998-2000) and Chief
Information Officer, GE Electrical Distribution & Control (1997-1998). Prior to
her employment at GE, Ms. Morrison was employed by Procter & Gamble Company from
1981 to 1997, in various positions, including Manager-Management Systems for the
Cosmetics & Fragrance Division (1995-1997); Associate Director - Center for
Excellence (1993-1995) and Associate Director, U.S. Finance & Accounting Systems
(1992-1993).
JAMES A. WALKER AGE: 45
Mr. Walker has been Senior Vice President, Finance, and Controller since October
2001. Prior to assuming that position, Mr. Walker served as Vice President,
Retail Stores Group Finance from 1999 until 2001. From May 1996 until February
1999, when he joined Office Depot, Mr. Walker served as Vice President,
Financial Planning for Advantica Restaurants, Inc. (operator of
Denny's(R)Restaurants); from May 1991 until May 1996, Mr. Walker was employed by
PepsiCo, Inc. in various capacities in the finance and strategic planning areas.
Information with respect to our directors, including our executive officers who
are also directors, is incorporated herein by reference to the information under
the caption "Election of Directors/Biographical Information of the Candidates"
in the Proxy Statement for our 2002 Annual Meeting of Stockholders.
6
ITEM 2. PROPERTIES.
As of March 1, 2002, we operate 822 office supply stores in 44 states and the
District of Columbia, 35 office supply stores in five Canadian provinces and 144
office supply stores (including those operated under licensing and joint venture
agreements) in seven countries outside of the United States and Canada. We also
operate 24 CSCs in 18 U.S. states and 24 CSCs in 13 countries outside of the
United States. The following table sets forth the locations of these facilities.
STORES
- -------------------------------------------------------------------------------------------------------------
Stores
State/country # State/country # State/country #
- ------------- --- ------------- -- ------------- --
UNITED STATES:
Alabama 15 Kansas 8 North Dakota 2
Alaska 2 Kentucky 13 Ohio 11
Arizona 3 Louisiana 27 Oklahoma 14
Arkansas 10 Maryland 14 Oregon 15
California 130 Michigan 19 Pennsylvania 9
Colorado 26 Minnesota 10 South Carolina 14
Delaware 1 Mississippi 12 South Dakota 1
District of Columbia 2 Missouri 19 Tennessee 23
Florida 88 Montana 2 Texas 104
Georgia 38 Nebraska 5 Utah 4
Hawaii 3 Nevada 12 Virginia 18
Idaho 5 New Jersey 5 Washington 28
Illinois 33 New Mexico 4 West Virginia 3
Indiana 17 New York 13 Wisconsin 11
Iowa 3 North Carolina 25 Wyoming 1
---
Total United States 822
CANADA: FRANCE 30
Alberta 8 HUNGARY 3
British Columbia 9 ISRAEL 23
Manitoba 3 JAPAN 10
Ontario 13 MEXICO 61
Saskatchewan 2 POLAND 15
--- THAILAND 2
Total Canada 35 ---
Total Outside the 144
United States
CSCS
- -----------------------------------------------------------------------------------------------------------
Stores
State/country # State/country # State/country #
- ------------- --- ------------- -- ------------- --
UNITED STATES:
Arizona 1 Massachusetts 1 AUSTRALIA 3
California 3 Michigan 1 BELGIUM 1
Colorado 2 Minnesota 1 FRANCE 2
Connecticut 1 New Jersey 1 ISRAEL 1
Florida 2 North Carolina 1 GERMANY 3
Georgia 1 Ohio 1 THE NETHERLANDS 1
Illinois 1 Texas 2 IRELAND 1
Louisiana 1 Utah 1 ITALY 1
Maryland 2 Washington 1 JAPAN 2
MEXICO 2
POLAND 3
SWITZERLAND 1
UNITED KINGDOM 3
---
Total United States 24 Total Outside the 24
United States
7
Most of our facilities are leased or subleased, with lease terms (excluding
renewal options) expiring in various years through 2020, except for the 76
facilities and our corporate offices and systems data center, which we own. Our
owned facilities are located in 18 states, primarily in Florida, Texas and
California; two Canadian provinces; the United Kingdom; the Netherlands;
Australia; Mexico and France.
We operate through retail stores under the Office Depot(R) and The Office
Place(R) (in Ontario, Canada) names, and via the Internet, under 4Sure.com(R),
Computers4Sure.com(R) and Solutions4Sure.com(R). Our contract and catalog
businesses operate under the names Office Depot(R), Viking Office Products(R),
Viking Direct(R) and Sands & McDougall(TM).
Our corporate offices in Delray Beach, Florida consist of approximately 575,000
square feet in three adjacent buildings--two of which are owned and one is
leased. We also own a corporate office building in Torrance, California which is
approximately 180,000 square feet in size, and a systems data center in
Charlotte, North Carolina which is approximately 53,000 square feet in size.
ITEM 3. LEGAL PROCEEDINGS.
We are involved in litigation arising in the normal course of our business.
While from time to time claims are asserted that make demands for large sums of
money (including from time to time, actions which are asserted to be
maintainable as class action suits), we do not believe that any of these
matters, either individually or in the aggregate, will materially affect our
financial position or the results of our operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.
Our common stock is listed on the New York Stock Exchange ("NYSE") under the
symbol "ODP." As of March 1, 2002, there were 3,872 holders of record of our
common stock. The last reported sale price of the common stock on the NYSE on
March 1, 2002 was $19.00.
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The following table sets forth, for the periods indicated, the high and low sale
prices of our common stock, as quoted on the NYSE Composite Tape. These prices
do not include retail mark-ups, mark-downs or commission.
High Low
---- ---
2001
First Quarter $10.200 $7.125
Second Quarter 10.650 8.250
Third Quarter 14.250 9.740
Fourth Quarter 18.580 13.330
2000
First Quarter $14.875 $9.875
Second Quarter 14.750 6.000
Third Quarter 8.313 5.875
Fourth Quarter 8.750 6.000
We have never declared or paid cash dividends on our common stock, and we do not
currently intend to pay cash dividends in the foreseeable future. Earnings and
other cash resources will continue to be used in the expansion of our business.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this Item is set forth in Exhibit 13.1 under the
heading "Financial Highlights" as of and for the fiscal years ended December 29,
2001, December 30, 2000, December 25, 1999, December 26, 1998 and December 27,
1997. This information is set forth in our Annual Report to Stockholders for the
fiscal year ended December 29, 2001 (on page 17) and is incorporated herein by
this reference and made a part hereof.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by this item is set forth in Exhibit 13.1 under the
headings "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Cautionary Statements for Purposes of the `Safe
Harbor' Provisions of the Private Securities Litigation Reform Act of 1995."
This information is set forth in our Annual Report to Stockholders for the
fiscal year ended December 29, 2001 (on pages 18-32) and is incorporated herein
by reference and made a part hereof.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this item is set forth in Exhibit 13.1 under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations." This information is set forth in our Annual Report to
Stockholders for the fiscal year ended December 31, 2001 (on pages 28-29) and is
incorporated herein by reference and made a part hereof.
ITEM 8. FINANCIAL STATEMENTS
The information required by this Item is set forth in Exhibit 13.1 under the
headings "Independent Auditors' Report of Deloitte & Touche LLP on Consolidated
Financial Statements," "Consolidated Balance Sheets," "Consolidated Statements
of Earnings," "Consolidated Statements of Stockholders' Equity," "Consolidated
Statements of Cash Flows" and "Notes to Consolidated Financial Statements" as of
December 29, 2001 and December 30, 2000 and for the fiscal years ended December
29, 2001, December 30, 2000 and December 25, 1999. This information is set forth
in our Annual Report to Stockholders for the fiscal year ended December 29, 2001
(on pages 34-51) and is incorporated herein by this reference and made a part
hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
9
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning our executive officers is set forth in Item 1 of this
Form 10-K under the caption "Executive Officers of the Registrant."
Information with respect to our directors is incorporated herein by reference to
the information "Election of Directors/Biographical Information on the
Candidates" in the Proxy Statement for our 2002 Annual Meeting of Stockholders.
Information required by Item 405 of Regulation S-K is incorporated herein by
reference to "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Proxy Statement for our 2002 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to executive compensation is incorporated herein by
reference to the information under the caption "Executive Compensation" in the
Proxy Statement for our 2002 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to security ownership of certain beneficial owners and
management is incorporated herein by reference to the information under the
caption "Stock Ownership Information" in the Proxy Statement for our 2002 Annual
Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to such contractual relationships is incorporated
herein by reference to the information under the captions "CEO Compensation" and
"Contractual Arrangement with our Vice-Chairman, Irwin Helford" in the Proxy
Statement for our 2002 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
1. The financial statements listed in Item 8.
2. The financial statement schedule listed in "Index to
Financial Statement Schedule."
3. The exhibits listed in the "Index to Exhibits."
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the year ended
December 29, 2001 except those disclosed in our 2001 Quarterly
Reports on Form 10-Q, and the following report on Form 8-K
filed in the fourth quarter ended December 29, 2001.
1. The Company filed a report dated November 28, 2001,
which reported under Items 7 and 9 regarding a press
release with respect to mid-quarter results for the
fourth quarter of 2001.
10
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 19th day of
March 2002.
OFFICE DEPOT, INC.
By /s/ M. Bruce Nelson
--------------------------------------
M. Bruce Nelson
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 19, 2002.
Signature Capacity
--------- --------
/s/ M. Bruce Nelson Chief Executive Officer (Principal Executive
- ---------------------------- Officer) and Chairman of the Board
M. Bruce Nelson
/s/ Irwin Helford Vice Chairman and Director
- ----------------------------
Irwin Helford
/s/ Charles E. Brown Executive Vice President, Finance and Chief
- ---------------------------- Financial Officer (Principal Financial Officer)
Charles E. Brown
/s/ James A. Walker Senior Vice President, Finance and Controller
- ---------------------------- (Principal Accounting Officer)
James A. Walker
/s/ Lee A. Ault, III Director
- ----------------------------
Lee A. Ault, III
/s/ Neil R. Austrian Director
- ----------------------------
Neil R. Austrian
/s/ Cynthia R. Cohen Director
- ----------------------------
Cynthia R. Cohen
/s/ David I. Fuente Director
- ----------------------------
David I. Fuente
/s/ Brenda J. Gaines Director
- ----------------------------
Brenda J. Gaines
/s/ Bruce S. Gordon Director
- ----------------------------
Bruce S. Gordon
/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
11
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report of Deloitte & Touche LLP on Consolidated Financial Statements *
Consolidated Balance Sheets *
Consolidated Statements of Earnings *
Consolidated Statements of Stockholders' Equity *
Consolidated Statements of Cash Flows *
Notes to Consolidated Financial Statements *
Independent Auditors' Report of Deloitte & Touche LLP on Financial Statement Schedule F-2
- -------------------------
* Incorporated herein by reference to the respective information in our Annual
Report to Stockholders for the fiscal year ended December 29, 2001.
F-1
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Office Depot, Inc.:
We have audited the consolidated financial statements of Office Depot, Inc. as
of December 29, 2001 and December 30, 2000 and for each of the three years in
the period ended December 29, 2001, and have issued our report thereon dated
February 13, 2002; such consolidated financial statements and report are
included in the Company's Annual Report to Stockholders for the fiscal year
ended December 29, 2001 and are incorporated herein by reference. Our audits
also included the financial statement schedule of Office Depot, Inc. listed in
the Index to Financial Statement Schedule. This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
February 13, 2002
F-2
INDEX TO FINANCIAL STATEMENT SCHEDULE
Page
----
Schedule II - Valuation and Qualifying Accounts and Reserves S-1
All other schedules have been omitted because they are inapplicable, not
required or the information is included elsewhere herein.
SCHEDULE II
OFFICE DEPOT, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Column A Column B Column C Column D Column E
- -------- ------------ ------------- ----------------- ----------
Deductions --
Balance at Additions -- Write-offs, Balance at
Beginning of Charged to Payments and End of
Description Period Expense Other Adjustments Period
- ----------- ------------ ------------- ----------------- ----------
Allowance for Doubtful
Accounts:
2001 $34,461 $23,475 $25,254 $32,682
2000 27,736 30,448 23,723 34,461
1999 25,927 22,940 21,131 27,736
Accrued Merger Costs:
2001 $ 3,920 $ 4,401 $ 3,417 $ 4,904
2000 21,268 6,146 23,494 3,920
1999 40,832 26,035 45,599 21,268
S-1
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Exhibit Page+
- ------ ------- ------------
3.1 Restated Certificate of Incorporation, as amended to date 1
3.2 Bylaws 13
4.1 Form of Certificate representing shares of Common Stock 2
4.2 Form of Indenture (including form of LYON(R)) between the Company and The Bank of 3
New York, as Trustee
4.3 Form of Indenture (including form of LYON(R)) between the Company and Bankers 4
Trust Company, as Trustee
4.4 Rights Agreement dated as of September 4, 1996 between Office Depot, Inc. and 5
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.
10.01 Revolving Credit and Line of Credit Agreement dated as of February 20, 1998 by 6
and among the Company and SunTrust Bank, Central Florida, National Association,
individually and as Administrative Agent; Bank of America National Trust and
Savings Association, individually and as Syndication Agent; NationsBank,
National Association, individually and as Documentation Agent; Royal Bank of
Canada, individually and as Co-Agent; Citibank, N.A., individually and as
Co-Agent; The First National Bank of Chicago, individually and as Co-Agent;
CoreStates Bank, N.A.; PNC Bank, National Association; Fifth Third Bank; and
Hibernia National Bank. (Exhibits to the Revolving Credit and Line of Credit
Agreement have been omitted)
10.02 Office Depot, Inc. Long-Term Equity Incentive Plan* 7
10.03 1997-2001 Office Depot, Inc. Designated Executive Incentive Plan* 6
10.04 Form of Indemnification Agreement, dated as of September 4, 1996, by and 8
between Office Depot, Inc. and each of David I. Fuente, Cynthia R. Cohen, W.
Scott Hedrick, James L. Heskett, Michael J. Myers, Peter J. Solomon, William P.
Seltzer, and Thomas Kroeger
10.05 Executive Part-time Employment Agreement, dated as of September 30, 1999, by and 9
between Office Depot, Inc. and Irwin Helford
10.06 Revolving Credit Agreement dated as of May 10, 2001 by and among Office Depot, 12
Inc. and Suntrust Bank, individually and as Administrative Agent; Solomon Smith
Barney, Inc. (SSBI) and Bank One, N.A., as joint lead arrangers, SSBI as sole
bookrunner; Citibank, N.A., individually and as sole Syndication Agent; Bank
One, N.A., individually and as Documentation Agent; and BNP Paribas and Wells
Fargo Bank, N.A. individually and as Co-Documentation Agents and First Union
National Bank, Fleet National Bank and the Royal Bank of Scotland. (Exhibits
to the Revolving Credit Agreement have been omitted, but a copy may be obtained
free of charge upon request to the Company)
10.07 Executive Severance Agreement, including Release and Non-competition Agreement, 10
dated September 19, 2000 by and between the Company and David I. Fuente
(schedules and exhibits omitted).
10.08 Executive Retirement Agreement dated July 17, 2000 by and between the Company 10
and Barry J. Goldstein (Attachment A omitted).
10.09 Executive Employment Agreement dated January 30, 2001 by and between the 11
Company and Jerry Colley
10.10 Change of Control Agreement, dated as of January 30, 2001, by and between the 11
Company and Jerry Colley
10.11 Change of Control Agreement, dated as of May 28, 1998, by and between the 11
Company and Charles E. Brown
II-1
Sequentially
Exhibit Numbered
Number Exhibit Page+
- ------ ------- ------------
10.12 Executive Employment Agreement dated July 25, 2000 by and between the Company 11
and Robert J. Keller
10.13 Change of Control Agreement, dated as of July 25, 2000, by and between the 11
Company and Robert J. Keller
10.14 First Amendment dated December 21, 2000 to the Revolving Credit Agreement dated 11
as of June 2, 2000
10.15 Second Amendment dated December 21, 2000 to the Revolving Credit and Line of 11
Credit Agreement dated as of February 20, 1998
10.16 Executive Employment Agreement dated October 8, 2001 by and between the Company
and Charles E. Brown
10.17 Executive Employment Agreement including Change of Control Agreement dated as
of December 29, 2001 by and between the Company and M. Bruce Nelson
10.18 Consulting Agreement dated as of March 1, 2002 by and between the Company and
Irwin Helford
13.1 Certain portions of the Company's Annual Report to Stockholders
21.1 List of subsidiaries
23.1 Consent of Deloitte & Touche LLP
- ----------------
+ This information appears only in the manually signed original copies of
this report.
* Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the respective exhibit to the Proxy Statement
for the Company's 1995 Annual Meeting of Stockholders.
(2) Incorporated by reference to the respective exhibit to the Company's
Registration Statement No. 33-39473.
(3) Incorporated by reference to the respective exhibit to the Company's
Registration Statement No. 33-54574.
(4) Incorporated by reference to the respective exhibit to the Company's
Registration Statement No. 33-70378.
(5) Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on September 6, 1996.
(6) Incorporated by reference to the respective exhibit to the Company's
Annual Report on Form 10-K for the year ended December 27, 1997.
(7) Incorporated by reference to the respective exhibit to the Proxy Statement
for the Company's 1997 Annual Meeting of Stockholders.
(8) Incorporated by reference to the respective exhibit to the Company's
Annual Report on Form 10-K for the year ended December 28, 1996.
(9) Incorporated by reference to the respective exhibit to the Company's
Annual Report on Form 10-K for the year ended December 25, 1999.
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
filed with the Commission on October 31, 2000.
(11) Incorporated by reference to the respective exhibit to the Company's
Annual Report on Form 10-K for the year ended December 30, 2000.
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
filed with the Commission on July 28, 2001.
(13) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
filed with the Commission on November 2, 2001.
Upon request, the Company will furnish a copy of any exhibit to this report upon
the payment of reasonable copying and mailing expenses.
II-2
Exhibit 10.16
EXECUTIVE EMPLOYMENT AGREEMENT
(For Executive Officers Who Also Have a Change of Control Employment Agreement)
THIS EMPLOYMENT AGREEMENT is made as of October 8, 2001
between Office Depot, Inc., a Delaware corporation (the "COMPANY"), and Charles
E. Brown ("EXECUTIVE").
The Company and Executive are parties to one or more prior
employment agreements and/or amendments thereto, or extensions thereof
(collectively "Prior Agreements");
The parties desire to replace all such Prior Agreements with
this Employment Agreement, and each of them hereby agrees that this Employment
Agreement, upon execution by each of the Company and Executive, supersedes and
replaces any and all Prior Agreements and, together with the Change of Control
Employment Agreement dated contemporaneously herewith, constitutes the entire
understanding of the Company and Executive with regard to the employment of
Executive by the Company;
Now Therefore, in consideration of the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. EMPLOYMENT.
(a) The Company shall employ Executive, and Executive hereby
accepts employment with the Company, upon the terms and conditions set forth in
this Agreement for the period beginning on the date hereof and ending as
provided in paragraph 4 hereof (the "EMPLOYMENT TERM").
(b) The parties hereto also have entered into an Employment
Agreement dated as May 28, 1998 by and between the Company and the Executive
(the "Change of Control Employment Agreement") which, by its terms, takes effect
during the "Employment Period" as defined in such agreement. During any such
Employment Period under the Change of Control Employment Agreement, the terms
and provisions of the Change of Control Employment Agreement shall control to
the extent such terms and provisions are in conflict with the terms and
provisions of this Agreement. In addition, during such Employment Period, the
Employment Term hereunder shall be tolled and upon expiration of the Employment
Period under the Change of Control Employment Agreement the Employment Term
hereunder shall recommence.
2. POSITION AND DUTIES.
(a) During the Employment Period, Executive shall serve as
Executive Vice Finance and Chief Financial Officer of the Company and shall have
the normal duties, responsibilities and authority attendant to such position,
subject to the power of the Company's [chief executive officer ("CEO") to expand
or limit such duties, responsibilities and authority.
(b) Executive shall report to the CEO, and Executive shall
devote Executive's best efforts and Executive's full business time and attention
(except for permitted vacation periods and reasonable periods of illness or
other incapacity) to the business and affairs of the Company and its
Subsidiaries; PROVIDED THAT Executive shall, with the prior written approval of
the CEO, be allowed to serve as (i) a director or officer of any non-profit
organization including trade, civic, educational or charitable organizations, or
(ii) a director of any corporation which is not competing with the Company or
any of its Subsidiaries in the office product and office supply industry so long
as such duties do not materially interfere with the performance of Executive's
duties or responsibilities under this Agreement. Executive shall perform
Executive's duties and responsibilities under this Agreement to the best of
Executive's abilities in a diligent, trustworthy, businesslike and efficient
manner.
(c) Executive shall be based at or in the vicinity of the
Company's headquarters BUT may be required to travel as necessary to perform
Executive's duties and responsibilities under this Agreement.
(d) For purposes of this Agreement, "SUBSIDIARIES" shall mean
any corporation of which the securities having a majority of the voting power in
electing directors are, at the time of determination, owned by the Company,
directly or through one of more Subsidiaries.
3. BASE SALARY AND BENEFITS.
(a) Initially, Executive's base salary shall be $425,000.00
per annum (the "BASE SALARY"), which salary shall be payable in regular
installments in accordance with the Company's general payroll practices and
shall be subject to customary withholding. Executive's Base Salary shall be
reviewed at least annually by the Compensation Committee of the Board and shall
be subject to adjustment, but not reduction, as they shall determine based on
among other things, market practice and performance. In addition, during the
Employment Term, Executive shall be entitled to participate in the Company's
Long Term Equity Incentive Plan.
(b) In addition to the Base Salary, Executive shall be
entitled to participate in the Company's Management Incentive Plan (the "Bonus
Plan") as administered by the Compensation Committee. If the Board or the
Compensation Committee modifies such Bonus Plan during the Employment Term,
Executive shall continue to participate at a level no lower than the highest
level established for any officer of the Company then at Executive's level. At
the discretion of the Board or the Compensation Committee, Executive may be
offered from time to time the opportunity to participate in other bonus plans of
the Company in lieu of the Bonus Plan and, if Executive chooses to participate
in such plan or plans, the provisions of this paragraph 3(b) shall be tolled
during the period of such participation.
- 2 -
(c) Executive shall be entitled to paid vacation in accordance
with the Company's general payroll practices for officers of the Company then at
Executive's level.
(d) The Company shall reimburse Executive for all reasonable
expenses incurred by Executive in the course of performing Executive's duties
under this Agreement which are consistent with the Company's policies in effect
from time to time with respect to travel, entertainment and other business
expenses, subject to the Company's requirements with respect to reporting and
documentation of such expenses.
(e) Executive will be entitled to all benefits as are, from
time to time, maintained for officers of the Company then at Executive's level,
including without limitation: medical, prescription, dental, disability,
employee life, group life, split-dollar life, accidental death and travel
accident insurance plans (collectively, "Insurance Benefits"), profit sharing
and retirement benefits.
4. TERM.
(a) The Employment Term shall end on the second anniversary of
the date of this Agreement; PROVIDED THAT (i) the Employment Term shall be
extended for one year in the event that written notice of the termination of
this Agreement is not given by one party hereof to the other at least six months
prior to the end of the Employment Term, and it shall continue thereafter from
year to year in like fashion ("evergreen") unless and until either party
provides written notice as provided in the first clause of this sentence;
PROVIDED FURTHER that (ii) the Employment Term shall terminate prior to such
date (A) upon Executive's death or permanent disability or incapacity (as
determined by the Board in its good faith judgment), (B) upon the mutual
agreement of the Company and Executive, (C) by the Company's termination of this
Agreement for Cause (as defined below) or without Cause or (D) by Executive's
termination of this Agreement for Good Reason (as defined below) or without Good
Reason.
(b) If the Employment Term is terminated by the Company
without Cause or is terminated by the Executive for Good Reason, Executive (and
Executive's family with respect to clause (iii) below) shall be entitled to
receive (i) Executive's Base Salary through the eighteenth month anniversary of
such termination and Executive's Pro Rata Bonus (as defined in paragraph (h)
below), if and only if Executive has not breached the provisions of paragraphs
5, 6 and 7 hereof, (ii) vested and earned (in accordance with the Company's
applicable plan or program) but unpaid amounts under incentive plans, deferred
compensation plans, and other employer programs of the Company in which
Executive is then participating (other than the Pro Rata Bonus), and (iii)
Insurance Benefits through the eighteenth month anniversary of such termination
pursuant to the Company's insurance programs, as in effect from time to time, to
the extent Executive participated immediately prior to the date of such
termination; PROVIDED THAT any health insurance benefits which Executive becomes
entitled to receive as a result of any subsequent employment shall serve as
primary coverage for Executive and Executive's family.
- 3 -
The amounts payable pursuant to paragraph 4(b)(i) and (ii) shall be payable, at
the Company's discretion, in one lump sum payment within 30 days following
termination of the Employment Term or in any other manner consistent with the
Company's normal payment policies.
(c) If the Employment Term is terminated by the Company for
Cause or by the Executive without Good Reason, Executive shall be entitled to
receive (i) Executive's Base Salary through the date of such termination and
(ii) vested and earned (in accordance with the Company's applicable plan or
program) but unpaid amounts under incentive plans, health and welfare plans,
deferred compensation plans, and other employer programs of the Company which
Executive participates; provided, however, that Executive shall not be entitled
to payment of a Pro Rata Bonus.
(d) If the Employment Term is terminated upon Executive's
death or permanent disability or incapacity (as determined by the Board in its
good faith judgment), Executive, or Executive's estate if applicable, shall be
entitled to receive the sum of (i) Executive's Base Salary through the date of
such termination and Executive's Pro Rata Bonus (as defined in paragraph (h)
below) and (ii) vested and earned (in accordance with the Company's applicable
plan or program) but unpaid amounts under incentive plans, health and welfare
plans, deferred compensation plans, and other employer programs of the Company
which Executive participates. The amounts payable pursuant to this paragraph
4(d) shall be payable, at the Company's discretion, in one lump sum payment
within 30 days following termination of the Employment Term or in any other
manner consistent with the Company's normal payment policies.
(e) Except as otherwise provided herein, fringe benefits and
bonuses (if any) which accrue or become payable after the termination of the
Employment Term shall cease upon such termination.
(f) For purposes of this Agreement, "CAUSE" shall mean:
(i) the willful and continued failure of the
Executive to perform substantially the Executive's duties with the
Company or one of its affiliates (other than any such failure resulting
from incapacity due to physical or mental illness), after a written
demand for substantial performance is delivered to the Executive by the
CEO which specifically identifies the manner in which the CEO believes
that the Executive has not substantially performed the Executive's
duties, or
(ii) the willful engaging by the Executive in illegal
conduct or gross misconduct [which is materially and demonstrably
injurious to the Company].
- 4 -
For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the CEO or based upon the
advice of counsel for the Company shall be conclusively presumed to be done, or
omitted to be done, by the Executive in good faith and in the best interests of
the Company. The cessation of employment of the Executive shall not be deemed to
be for Cause unless and until there shall have been delivered to the Executive a
copy of a resolution duly adopted by the affirmative vote of not less than three
quarters of the entire membership of the Board at a meeting of the Board called
and held for such purpose (after reasonable notice is provided to the Executive
and the Executive is given an opportunity, together with counsel, to be heard
before the Board), finding that, in the good faith opinion of the Board, the
Executive is guilty of the conduct described in subparagraph (i) or (ii) above,
and specifying the particulars thereof in detail.
(g) For purposes of this Agreement, "GOOD REASON" shall mean:
(i) the assignment to the Executive of any duties
inconsistent with the Executive's position (including status, offices, titles
and reporting requirements), authority, duties or responsibilities as
contemplated by paragraph 2 of this Agreement, or any other action by the
Company which results in a diminution in such position, authority, duties or
responsibilities, excluding for this purpose an isolated, insubstantial and
inadvertent action not taken in bad faith and which is remedied by the Company
promptly after receipt of notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of
the provisions of paragraph 3 of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given by the
Executive;
(iii) the Company's requiring the Executive to be
based at any location other than as provided in paragraph 2(c) hereof; or
(iv) any purported termination by the Company of the
Executive's employment otherwise than as expressly permitted by this Agreement.
(h) For purposes of this Agreement, "PRO RATA BONUS" shall
mean the sum of (i) the pro rata portion (calculated as if the "target" amount
under such plan has been reached) under any current annual incentive plan from
the beginning of the year of termination through the date of termination and
(ii) if and to the extent Executive is vested, the pro rata portion (calculated
as if the "target" amount under such plan has been reached) under any long-term
- 5 -
incentive plan or performance plan from the beginning of the period of
determination through the date of termination.
5. CONFIDENTIAL INFORMATION. Executive acknowledges that the
information, observations and data obtained by Executive while employed by the
Company and its Subsidiaries concerning the business or affairs of the Company
or any other Subsidiary ("CONFIDENTIAL INFORMATION") are the property of the
Company or such Subsidiary. Therefore, Executive agrees that Executive shall not
disclose to any unauthorized person or use for Executive's own purposes any
Confidential Information without the prior written consent of the Board or the
CEO, unless and to the extent that the aforementioned matters become generally
known to and available for use by the public other than as a result of
Executive's acts or omissions. Executive shall deliver to the Company at the
termination of the Employment Term, or at any other time the Company may
request, all memoranda, notes, plans, records, reports, computer tapes,
printouts and software and other documents and data (and copies thereof) in any
form or medium relating to the Confidential Information, Work Product (as
defined below) or the business of the Company or any Subsidiary that Executive
may then possess or have under Executive's control.
6. INVENTIONS AND PATENTS. Executive acknowledges that all
inventions, innovations, improvements, developments, methods, designs, analyses,
drawings, reports and all similar or related information (whether or not
patentable) that relate to the Company's or any of its Subsidiaries' actual or
anticipated business, research and development or existing or future products or
services and that are conceived, developed or made by Executive while employed
by the Company and its Subsidiaries ("WORK PRODUCT") belong to the Company or
such Subsidiary. Executive shall promptly disclose such Work Product to the
Board or the CEO and perform all actions reasonably requested by the Board or
the CEO (whether during or after the Employment Term) to establish and confirm
such ownership (including, without limitation, assignments, consents, powers of
attorney and other instruments).
- 6 -
7. NON-COMPETE, NON-SOLICITATION.
(a) In further consideration of the compensation to be paid to
Executive hereunder, Executive acknowledges that in the course of Executive's
employment with the Company Executive shall become familiar with the Company's
trade secrets and with other Confidential Information concerning the Company and
its Subsidiaries and that Executive's services shall be of special, unique and
extraordinary value to the Company and its Subsidiaries. Therefore, Executive
agrees that, during the Employment Term and for one year thereafter (the
"NONCOMPETE PERIOD"), Executive shall not directly or indirectly own any
interest in, manage, control, participate in, consult with, render services for,
or in any manner engage in any business competing with the businesses of the
Company or its Subsidiaries, as such businesses exist or are in process on the
date of the termination of Executive's employment, within any geographical area
in which the Company or its Subsidiaries engage or plan to engage in such
businesses. Nothing herein shall prohibit Executive from being a passive owner
of not more than 2% of the outstanding stock of any class of a corporation which
is publicly traded, so long as Executive has no active participation in the
business of such corporation.
(b) During the Noncompete Period, Executive shall not directly
or indirectly through another entity (i) induce or attempt to induce any
employee of the Company or any Subsidiary to leave the employ of the Company or
such Subsidiary, or in any way interfere with the relationship between the
Company or any Subsidiary and any employee thereof, (ii) hire any person who was
an employee of the Company or any Subsidiary at any time during the Employment
Term or (iii) induce or attempt to induce any customer, supplier, licensee,
licensor, franchisee or other business relation of the Company or any Subsidiary
to cease doing business with the Company or such Subsidiary, or in any way
interfere with the relationship between any such customer, supplier, licensee,
licensor, franchisee, or business relation and the Company or any Subsidiary
(including, without limitation, making any negative statements or communications
about the Company or its Subsidiaries).
(c) If, at the time of enforcement of this paragraph 7, a
court shall hold that the duration, scope or area restrictions stated herein are
unreasonable under circumstances then existing, the parties agree that the
maximum duration, scope or area reasonable under such circumstances shall be
substituted for the stated duration, scope or area and that the court shall be
allowed to revise the restrictions contained herein to cover the maximum period,
scope and area permitted by law. Executive agrees that the restrictions
contained in this paragraph 7 are reasonable.
(d) In the event of the breach or a threatened breach by
Executive of any of the provisions of this paragraph 7, the Company, in addition
and supplementary to other rights and remedies existing in its favor, may apply
to any court of law or equity of competent jurisdiction for specific performance
and/or injunctive or other relief in order to enforce or
- 7 -
prevent any violations of the provisions hereof (without posting a bond or other
security). In addition, in the event of an alleged breach or violation by
Executive of this paragraph 7, the Noncompete Period shall be tolled until such
breach or violation has been duly cured.
8. EXECUTIVE'S REPRESENTATIONS. Executive hereby represents
and warrants to the Company that (i) the execution, delivery and performance of
this Agreement by Executive do not and shall not conflict with, breach, violate
or cause a default under any contract, agreement, instrument, order, judgment or
decree to which Executive is a party or by which Executive is bound, (ii)
Executive is not a party to or bound by any employment agreement, noncompete
agreement or confidentiality agreement with any other person or entity and (iii)
upon the execution and delivery of this Agreement by the Company, this Agreement
shall be the valid and binding obligation of Executive, enforceable in
accordance with its terms. Executive hereby acknowledges and represents that
Executive has had an opportunity to consult with independent legal counsel
regarding Executive's rights and obligations under this Agreement and that
Executive fully understands the terms and conditions contained herein.
9. SURVIVAL. Paragraphs 5, 6 and 7 and paragraphs 9 through 18
shall survive and continue in full force in accordance with their terms
notwithstanding any termination of the Employment Term.
10. NOTICES. Any notice provided for in this Agreement shall
be in writing and shall be either personally delivered, or mailed by first class
mail, return receipt requested, to the recipient at the address below indicated:
NOTICES TO EXECUTIVE:
Name: Charles E. Brown
Address: 6875 NW 102nd Lane
Parkland, FL 33076
NOTICES TO THE COMPANY:
Office Depot, Inc.
2200 Germantown Road
Delray Beach, Florida 33445
Attention: Chief Executive Officer
and
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Office Depot, Inc.
2200 Germantown Road
Delray Beach, Florida 33445
Attention: Executive Vice President & General Counsel,
Corporate Secretary
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement shall be deemed to have been given when so delivered
or mailed.
11. SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
12. COMPLETE AGREEMENT. This Agreement and those documents
expressly referred to herein and other documents of even date herewith embody
the complete agreement and understanding among the parties and supersede and
preempt any prior understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter hereof in
any way (provided, however that during the "Employment Period," as defined in
the Change of Control Employment Agreement, the terms and provision of the
Change of Control Employment Agreement shall be effective and shall control to
the extent there is any conflict between such agreement and this Agreement).
13. NO STRICT CONSTRUCTION. The language used in this
Agreement shall be deemed to be the language chosen by the parties hereto to
express their mutual intent, and no rule of strict construction shall be applied
against any party.
14. COUNTERPARTS. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
15. SUCCESSORS AND ASSIGNS. This Agreement is intended to bind
and inure to the benefit of and be enforceable by Executive, the Company and
their respective heirs, successors and assigns, except that Executive may not
assign Executive's rights or delegate Executive's obligations hereunder without
the prior written consent of the Company.
16. CHOICE OF LAW. All issues and questions concerning the
construction, validity, enforcement and interpretation of this Agreement and the
exhibits and schedules hereto
- 9 -
shall be governed by, and construed in accordance with, the laws of the State of
Florida, without giving effect to any choice of law or conflict of law rules or
provisions (whether of the State of Florida or any other jurisdiction) that
would cause the application of the laws of any jurisdiction other than the State
of Florida.
17. AMENDMENT AND WAIVER. The provisions of this Agreement may
be amended or waived only with the prior written consent of the Company and
Executive, and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement.
18. ARBITRATION. Except as to the right of the Company to
resort to any court of competent jurisdiction to obtain injunctive relief or
specific enforcement of the Executive's obligations of confidentiality and
non-competition under this Employment Agreement (or otherwise), any dispute or
controversy between the Company and Executive arising out of or relating to this
Agreement or the breach of this Agreement shall be settled by arbitration
administered by the American Arbitration Association ("AAA") in accordance with
its Commercial Arbitration Rules then in effect, and judgment on the award
rendered by the arbitrator may be entered in any court having jurisdiction
thereof. Any arbitration shall be held before a single arbitrator who shall be
selected by the mutual agreement of the Company and Executive, unless the
parties are unable to agree to an arbitrator, in which case the arbitrator will
be selected under the procedures of the AAA. The arbitrator shall have the
authority to award any remedy or relief that a court of competent jurisdiction
could order or grant, including, without limitation, the issuance of an
injunction. However, either party may, without inconsistency with this
arbitration provision, apply to any court otherwise having jurisdiction over
such dispute or controversy and seek interim provisional, injunctive or other
equitable relief until the arbitration award is rendered or the controversy is
otherwise resolved. Except as necessary in court proceedings to enforce this
arbitration provision or an award rendered hereunder, or to obtain interim
relief, or as may otherwise be required by law, neither a party nor an
arbitrator may disclose the existence, content or results of any arbitration
hereunder without the prior written consent of the Company and Executive. The
Company and Executive acknowledge that this Agreement evidences a transaction
involving interstate commerce. Notwithstanding any choice of law provision
included in this Agreement, the United States Federal Arbitration Act shall
govern the interpretation and enforcement of this arbitration provision. The
arbitration proceeding shall be conducted in Palm Beach County, Florida unless
the parties mutually agree to another location. The Company shall pay the costs
of any arbitrator(s) appointed hereunder.
* * * * *
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IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
OFFICE DEPOT, INC.
By: /s/ Jay G. Crosson
-------------------------------------
Name: Jay G. Crosson
Its: Executive Vice President Human
Resources
EXECUTIVE
/s/ Charles E. Brown
-----------------------------------------
Name: Charles E. Brown
Date: November 1, 2001
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Exhibit 10.17
AGREEMENT
BETWEEN OFFICE DEPOT, INC.
AND
M. BRUCE NELSON
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
THIS AGREEMENT is made and entered into as of the 29th day of December 2001 (the
"Effective Date"), by and between Office Depot, Inc., a Delaware corporation
(the COMPANY"), and M. Bruce Nelson ("EXECUTIVE").
RECITALS
A. The Company and Executive have been parties to a certain Employment
Agreement, dated June 6, 2000, and effective as of January 1, 2000,
which originally employed Executive as President of Office Depot
International, and which replaced certain other agreements pertaining
to Executive's employment, non-competition, change-in-control, and
certain other matters (collectively the "Former Agreements"), including
certain agreements between the Company's predecessor company, Viking
Office Products, Inc. ("Viking") and Executive, to which the Company
succeeded at the time of the Company's merger with Viking;
B. The Company named Executive as its Chief Executive Officer ("CEO") on
July 16, 2001 and reached certain understandings with him regarding the
terms and conditions of his employment in such position, which are
incorporated by reference herein;
C. The Company and Executive also are parties to an agreement pertaining
to the co-ownership of certain residential real estate in Palm Beach
County, Florida (the "Real Estate Co- Ownership Agreement");
2
D. Subsequent to the date of the Employment Agreement and the Real Estate
Co-Ownership Agreement, Executive has been elected to the additional
position and office of Chairman of the Board of the Company, effective
as of December 29, 2001 (the "Chairman Effective Date"), and the
Company and Executive desire to amend and restate the Employment
Agreement as set forth herein so that the terms and provisions of this
Amended and Restated Employment Agreement set forth the complete
statement of the relationships between the parties in Executive's
positions as Chairman and CEO, including the terms of the Real Estate
Co-Ownership Agreement;
E. The parties enter into this Agreement in consideration of the various
promises, undertakings and understandings between them, as set forth
below.
Now therefore, in consideration of the foregoing recitals, which are
incorporated by reference herein, and the mutual covenants contained herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. EMPLOYMENT
The Company shall continue to employ Executive, and Executive hereby accepts
such continued employment with the Company, for the positions and duties, and
upon the further terms and conditions set forth in this Agreement, for the
period beginning on the Effective Date and ending as provided in section 4
hereof (the "Employment Term").
2. POSITIONS AND DUTIES (a) OFFICES AND DUTIES. Executive shall serve as
Chairman and Chief Executive Officer ("CEO") of the Company, reporting directly
to the Board of Directors. In these positions, he shall have all the normal
duties, responsibilities and authority of the Chairman and CEO of the Company,
subject to the power of the Company's Board to expand or limit such duties,
responsibilities and authority; provided, however, that any such expanded or
limited duties, responsibilities and authority must be consistent with the
normal duties, responsibilities and authority of a person holding the position
of Chairman and CEO of a major publicly held company.
3
(b) DEDICATION TO DUTIES; OTHER ACTIVITIES. Executive shall devote his
best efforts and full business time and attention (except for permitted vacation
periods and reasonable periods of illness or other incapacity) to the business
and affairs of the Company and its Subsidiaries; PROVIDED THAT Executive shall,
with the prior approval of the Board, be allowed to serve as (i) a director or
officer of any non-profit organization including trade, civic, educational or
charitable organizations, or (ii) a director of any for-profit corporation which
is not competing with the Company or any of its Subsidiaries in the office
product and office supply industry, so long as such duties do not materially
interfere with the performance of Executive's duties or responsibilities under
this Agreement. Executive shall perform Executive's duties and responsibilities
under this Agreement to the best of Executive's abilities in a diligent,
trustworthy, businesslike and efficient manner.
(c) SUBSIDIARIES. For purposes of this Agreement, "SUBSIDIARIES" shall
mean any corporation of which the securities having a majority of the voting
power in electing directors are, at the time of determination, owned by the
Company, directly or through one or more Subsidiaries.
3. BASE SALARY AND BENEFITS
(a) BASE SALARY; ADJUSTMENTS. During the Employment Term, Executive shall
receive a base salary of One Million Dollars ($1,000,000) per annum (the "BASE
SALARY"), which Base Salary is payable in regular installments in accordance
with the Company's general payroll practices and shall be subject to customary
withholding. Executive's Base Salary shall be reviewed at least annually by the
Compensation Committee and shall be subject to increase (any such increased
amount shall become the "Base Salary" for all purposes hereunder), but not
reduction, as the Compensation Committee and the Board shall determine, based on
among other things, market practice and performance of the Company.
4
(b) INCENTIVE AND OTHER PLANS. In addition to the Base Salary, during the
Employment Term, Executive shall be entitled to participate in the Company's
long term and other incentive programs established currently or in the future by
the Company, for which the most senior executive officers of the Company are
generally eligible (including, but not limited to, stock option, restricted
stock, performance unit/share plans, mid-term or long-term cash plans or other
mid-term or long-term incentive plans).
(c) ANNUAL BONUS PLANS. Executive shall be entitled to participate in the
Company's Bonus Plan for its most senior executives (the "Bonus Plan") as
administered by the Compensation Committee of the Board. If the Compensation
Committee (or the Company's Board of Directors (the "Board")) modifies such
Bonus Plan during the Employment Term, Executive shall continue to participate
at a level no lower than the highest level established for any officer of the
Company. Throughout the Term, the "minimum," "target" and "maximum" bonus
payment levels for Executive shall be not less than 70%, 100% and 200% of
salary, respectively. These bonus levels may be increased but may not be
decreased by action of the Compensation Committee and/or the Board of the
Company. However, these levels also may be adjusted by the Compensation
Committee or the Board if the Section 162(m) limits are changed and the
Compensation Committee or the Board chooses to increase Executive's Base Salary;
in which case the bonus levels may be decreased to reflect proportionally such
increased Base Salary. If the Board or the Compensation Committee modifies such
Bonus Plan during the Employment Term, Executive shall continue to participate
at a level no lower than the highest level established for any officer of the
Company. At the discretion of the Board or the Compensation Committee, Executive
may be offered from time to time the opportunity to participate in other bonus
plans of the Company in addition to, or in lieu of, the Bonus Plan.
(d) DEFERRED BONUS PLANS. If the Company adopts at any time during the Term, any
deferred bonus plan for the senior executives of the Company, then Executive
shall be entitled to a deferred matching bonus (the "DEFERRED BONUS") in
accordance with the terms and provisions of any applicable deferred bonus plan
adopted by the Compensation Committee and/or the Board.
5
(e) VACATIONS. Executive shall be entitled to paid vacation in accordance with
the Company's general payroll practices for officers of the Company then at
Executive's level, but in no event less than four (4) weeks per year.
(f) EXPENSE REIMBURSEMENTS. The Company shall reimburse Executive for all
reasonable expenses incurred by Executive in the course of performing
Executive's duties under this Agreement which are consistent with the Company's
policies in effect from time to time with respect to travel, entertainment and
other business expenses, subject to the Company's requirements with respect to
reporting and documentation of such expenses.
(g) OTHER BENEFITS. Executive will be entitled to all other benefits currently
or in the future maintained for officers of the Company then at Executive's
level, including without limitation: medical and dental insurance, life
insurance (including split-dollar insurance) and short-term and long-term
disability insurance, supplemental health and life insurance, profit sharing and
retirement benefits.
(h) CONTINUATION OF HEALTH INSURANCE. With respect to health insurance benefits,
Executive and his eligible dependents shall be entitled to the continuation of
at least the same level of health insurance coverage Executive and his eligible
dependents are receiving on the Effective Date of the Agreement during the
Employment Term. From the end of the Employment Term until Executive becomes
eligible for the federal Medicare program, or any successor to such program
(herein collectively "Medicare"), the Company shall provide a comparable plan of
health insurance to Executive, at no cost or contribution by Executive;
provided, however, that such comparable plan shall provide continuous coverage
of all conditions covered under the health insurance plan by which Executive and
his eligible dependents are covered on the Effective Date. From the date on
which Executive becomes eligible for Medicare and ending at the end of
Executive's natural life, the Company shall reimburse Executive and his spouse
for the cost of any policy of Medigap insurance purchased by them, supplementing
coverage provided by Medicare. In the event Executive should die prior to the
death of the person who is his spouse on the Effective Date of this Agreement,
then such spouse shall continue to receive the health benefits to be provided
hereunder to Executive and his spouse until she becomes eligible for
6
Medicare and thereafter she shall receive reimbursement for any Medigap
insurance purchased by her from and after such date, during the balance of her
natural life.
(i) SPECIAL OPTION GRANT. In further consideration of Executive's accepting the
additional duties and responsibilities of Chairman of the Board of Directors and
as an incentive for his remaining as Chairman and CEO of the Company throughout
the Employment Term, and as an incentive to increase shareholder value of the
Company, Executive has been (or shall be, as the case may be) awarded by action
of the Compensation Committee of the Board special ten-year stock option grants
upon the following terms:
(a) Grant Date of December 20, 2001, option to acquire up to Seven
Hundred Fifty Thousand (750,000) shares of Company stock
Exercise price: $ 21.606 per share (125% of fair market value
of $17.285 on date of grant) Vesting: 100% on December 31,
2004
(b) Grant Date of January 2, 2002, option to acquire up to Two
Hundred Fifty Thousand (250,000) shares of Company stock
Exercise price: $22.344 per share (125% of fair market value
of $17.875 on date of grant) Vesting: 100% on December 31,
2004.
4. TERM; RENEWALS. Subject to earlier termination pursuant to section 5 below,
the Employment Term shall end on December 31, 2004 , and shall continue
automatically thereafter from year to year on an "evergreen" basis, unless and
until either the Company or Executive shall provide written notice to the other,
not less than six (6) months prior to the end of the then-current Term that this
Agreement shall not be continued.
5. TERMINATION DUE TO DEATH, DISABILITY, INCAPACITY. The Employment Term also
shall terminate prior to the date set forth in section 4 above:
(a) upon Executive's death or permanent disability or incapacity (as determined
by the Board in its good faith judgment);
(b) upon the mutual agreement of the Company and Executive;
7
(c) by the Company's termination of this Agreement for Cause (as defined below)
or without Cause; or
(d) by Executive's termination of this Agreement for Good Reason (as defined
below) or without Good Reason.
6. TERMINATION OF THE EMPLOYMENT WITHOUT CAUSE; FOR GOOD REASON. If the
Employment Term is terminated by the Company without Cause or is terminated by
Executive for Good Reason, Executive (and Executive's family with respect to
clause (iii) below) shall be entitled to receive the following:
(i) An amount equal to the sum of (A) Executive's Base Salary
which would be payable through the second anniversary of such
termination and (B) Executive's Pro Rata Bonus, if and only if
Executive has not breached the provisions of sections 13, 14
and 15 hereof,
(ii) vested and earned (in accordance with the Company's applicable
plan or program) but unpaid amounts under incentive plans,
health and welfare plans, deferred compensation plans, and
other employer programs of the Company in which Executive
participates (other than the Pro Rata Bonus);
(iii) insurance benefits as set forth in Section 3(h) above;
(iv) All grants and awards, including stock options and restricted
stock shall continue to vest through the second anniversary of
such termination; provided, however, that the stock option
grant referred to in Section 3(i) above shall vest in its
entirety on the effective date of termination without Cause or
termination for Good reason. All stock options (other than the
premium-priced stock options referred to in Section 3(i)
above) shall remain exercisable through and including
8
the ninetieth (90th) day following the second anniversary of
such termination (but not later than the expiration of the
original term of the option). The premium-priced stock options
referred to in Section 3(i) above, AND any other stock options
granted to Executive subsequent to the Effective Date of this
Agreement, shall remain exercisable through the three (3) year
anniversary of the date of termination of Executive's
employment under this Agreement, but not later than the end of
the original ten-year term of such stock option(s), if the
Employment Term ends for any reason OTHER THAN termination by
the Company for "Cause" as defined below, or resignation by
the Executive WITHOUT "Good Reason" as defined below. In the
event of a termination by the Company for "Cause" or by
Executive without "Good Reason," then Executive's stock
options, and the continued exercisability thereof shall be
governed by the terms of such stock options and the Long Term
Equity Incentive Plan of the Company, or any replacement for
such Plan. Any long-term incentive plan amount that has been
earned but that is not yet fully vested, shall become fully
vested not later than the second anniversary of such
termination without Cause or termination for Good Reason; and
(v) The amount payable pursuant to section 6(i) shall be payable
as follows: (a) $100,000 in the form of salary continuation of
$50,000 per annum and (b) the balance in one lump sum payment
within 30 days following termination of the Employment Term,
and the amounts payable pursuant to section 6 (ii) and 6(iii)
above, shall be paid or provided in accordance with the
particular plan or program.
7. TERMINATION FOR CAUSE; WITHOUT GOOD REASON. If the Employment Term is
terminated by the Company for Cause or by Executive without Good Reason,
Executive shall be entitled to receive only the following: (i) Executive's Base
Salary through the date of such termination and (ii) vested and earned (in
accordance with the Company's applicable plan or program) but unpaid amounts
under incentive plans, health and welfare plans, deferred compensation plans,
and other employer programs of the Company which Executive participates;
provided, however,
9
Executive shall not be entitled to payment of any Pro Rata Bonus. In such event,
Executive and Executive's spouse shall not receive the continued health
insurance benefits provided pursuant to Section 3(h) above.
8. CONSEQUENCES OF TERMINATION FOR DEATH, DISABILITY OR INCAPACITY. If the
Employment Term is terminated upon Executive's death or permanent disability or
incapacity (as determined by the Board in its good faith judgment), Executive,
or Executive's estate if applicable, shall be entitled to receive the sum of (i)
Executive's Base Salary through the date of such termination and (ii) vested and
earned (in accordance with the Company's applicable plan or program) but unpaid
amounts under incentive plans, health and welfare plans, deferred compensation
plans, and other employer programs of the Company which Executive participates
(including the benefits of Section 3(h) above) and the benefits to which
Executive would be entitled pursuant to Sections 6(i) through 6(iv) above. The
amount payable pursuant to this Section 8 shall be payable, at the Company's
discretion, in one lump sum payment within 30 days following termination of the
Employment Term or in any other manner consistent with the Company's normal
payment policies.
9. EFFECT OF TERMINATION ON FRINGE BENEFITS. Except as otherwise provided
herein, fringe benefits and bonuses hereunder (if any) which accrue or become
payable after the termination of the Employment Term shall cease upon such
termination.
10. CERTAIN DEFINITIONS.
(a) For purposes of the Agreement, Agreement, "CAUSE" shall mean:
(i) the willful and continued failure of Executive to perform
substantially 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 Executive by the Board which specifically
identifies the manner in which the Board believes that Executive has
not substantially performed Executive's Duties, or
10
(ii) the willful engaging by Executive in illegal conduct or
gross misconduct which is materially and demonstrably injurious to the
Company.
For purposes of this Subsection 10(a) , no act or failure to act, on
the part of Executive, shall be considered "willful" unless it is done,
or omitted to be done, by Executive in bad faith or without reasonable
belief that Executive's action or omission was in the best interest of
the Company. Any act, or failure to act, based upon authority given
pursuant to a resolution duly adopted by the Board or based upon the
advice of counsel for the Company shall be conclusively presumed to be
done, or omitted to be done, by Executive in good faith and in the best
interest of the Company. The cessation of employment of Executive shall
not be deemed to be for Cause unless and until there shall have been
delivered to 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 Executive and
Executive is given an opportunity, together with counsel, to be heard
before the Board), finding that, in the good faith opinion of the
Board, Executive is guilty of the conduct described in subparagraph
(i)or (ii) above, and specifying the particulars thereof in detail.
(b) For purposes of this Agreement, "GOOD REASON" shall mean (i) the
assignment to Executive of any duties inconsistent with his positions, (ii) a
failure to maintain Executive in the positions set forth in Section 2(a) above,
or (iii) a material breach by the Company of a material provision of this
Agreement, in any case which has not been cured by the Company within thirty
(30) days after written notice of such action, breach or noncompliance has been
given by Executive to the Company or (ii) the delivery by the Company of a
notice of non-continuation pursuant to section 4 of this Agreement or
non-continuation of the Change in Control Agreement attached hereto as Schedule
3, pursuant to section 1(b) thereof.
11
(c) For purposes of the Agreement, "PRO RATA BONUS" shall mean the sum
of (i) the pro rata portion (calculated as if the "target" amount under such
plan has been reached) under any current annual incentive plan from the
beginning of the year of termination through the date of termination and (ii) if
and to the extent Executive is vested under any long-term incentive plan that
provides for such pro-rata vesting, the pro rata portion (calculated as if the
"target" amount under such plan has been reached) under any such long-term
incentive plan or performance plan from the beginning of the period of
determination through the date of termination.
(d) For purposes of this Agreement, the term "DATE OF TERMINATION"
shall mean thirty (30) days following written notice by one party to the other,
as notices are prescribed to be provided in the Agreement, of a termination of
Executive's Employment under the Agreement, and specifying the reason(s)
therefor; provided, however that if Executive's employment is terminated by
reason of death or disability, the Date of Termination shall be the date of
death of Executive or the date on which Executive is determined to be disabled.
11. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY; GROSS-UP PROVISIONS. (a)
Anything in this Agreement 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 Executive (whether paid or
payable or distributed or distributable pursuant to the terms of this Agreement,
any schedule to this Agreement, or otherwise, but determined without regard to
any additional payments required under this Section 11) (a "Payment") would be
subject to the excise tax imposed by Section 4999 of the Code or any interest or
penalties are incurred by 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 Executive shall be entitled to receive an
additional payment (a "Gross-Up Payment") in an amount such that after payment
by 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, Executive retains an amount of the Gross-Up Payment equal
to the Excise Tax imposed upon the
12
Payments. Notwithstanding the foregoing provisions of this Section 11, if it
shall be determined that Executive is entitled to a Gross-Up Payment, but that
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 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 Executive and the Payments, in
the aggregate, shall be reduced to the Reduced Amount.
(b) Subject to the provisions of Section 11(c), all determinations
required to be made under this Section 11, 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
Executive (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and Executive within 15 business days of the
receipt of notice from 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 a
change in control or "CIC" as defined in Schedule 3 to this Agreement ,
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 11(b), shall be paid by the Company to
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 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 11(c) and Executive thereafter
is required to make a payment of any Excise Tax, the Accounting Firm shall
13
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
Executive.
(c) 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 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. 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 Executive in writing prior to the expiration of such period
that it desires to contest such claim, 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 Executive harmless, on an
after-tax basis, for any Excise Tax or income tax
14
(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 11, 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 Executive to pay the tax
claimed and sue for a refund or to contest the claim in any permissible manner,
and 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 Executive to pay such claim and sue for a refund, the Company
shall advance the amount of such payment to Executive, on an interest-free basis
and shall indemnify and hold 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 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 Executive shall be 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 Executive of an amount advanced by the
Company pursuant to Section 11(c) above, Executive becomes entitled to receive
any refund with respect to such claim, Executive shall (subject to the Company's
complying with the requirements of Section 11(c) above) 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 Executive of
an amount advanced by the Company pursuant to Section 11(c) , a determination is
made that Executive shall not be entitled to any refund with respect to such
claim and the Company does not notify 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
15
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.
12. NOTICE OF TERMINATION; HOW GIVEN. Any termination by the Company for Cause
or by Executive for Good Reason, shall be communicated by Notice of Termination
to the other party hereto given in accordance with Section 18 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 Executive's
employment under the provision so indicated and (iii) if the Date of Termination
(as defined in Section 10(d) above) 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 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
Executive or the Company, respectively, hereunder or preclude Executive or the
Company, respectively, from asserting such fact or circumstance in enforcing
Executive's or the Company's rights hereunder.
13. CONFIDENTIAL INFORMATION. Executive acknowledges that the information,
observations and data obtained by Executive while employed by the Company and
its Subsidiaries concerning the business or affairs of the Company or any other
Subsidiary ("CONFIDENTIAL INFORMATION") are the property of the Company.
Therefore, Executive agrees that Executive shall not disclose to any
unauthorized person or use for Executive's own purposes any Confidential
Information without the prior written consent of the Board , unless and to the
extent that the aforementioned matters become generally known to and available
for use by the public other than as a result of Executive's acts or omissions.
Executive shall deliver to the Company at termination of the Employment Term, or
at any other time the Company may request, all memoranda, notes, plans, record,
reports, computer tapes, printouts and software and other documents and data
(and copies therein) in any form or medium relating to the Confidential
Information, Work Product (as defined below) of the business of the Company or
any Subsidiary that Executive may then possess or have under Executive's
control.
16
14. WORK PRODUCT. Executive acknowledges that all inventions, innovations,
improvements, development, methods, designs, analyses, drawings, reports and all
similar or related information (whether or not patentable) that relate to the
Company's or any of its Subsidiaries' actual or anticipated business, research
and development or existing or future products or services and that are
conceived, developed or made by Executive while employed by the Company and its
Subsidiaries ("WORK PRODUCT") belong to the Company. Executive shall promptly
disclose such Work Product to the Board and perform all actions reasonably
requested by the Board (whether during or after the Employment Term) to
establish and confirm such ownership (including, without limitation,
assignments, consents, powers of attorney and other instruments).
15. NON-COMPETE, NON-SOLICITATION. Executive and the Company each acknowledge
that they have entered into, and are parties to the "NON-COMPETITION,
NON-SOLICITATION AND NO-HIRE AGREEMENT," attached hereto as SCHEDULE 2 and
incorporated by reference herein.
16. EXECUTIVE'S REPRESENTATIONS. Executive hereby represents and warrants to the
Company that (i) the execution, delivery and performance of this Agreement by
Executive do not and shall not conflict with, breach, violate or cause a default
under any contract, agreement, instrument, order, judgment or decree to which
Executive is a party or by which Executive is bound, (ii) Executive is not a
party to or bound by any employment agreement, noncompete agreement or
confidentiality agreement with any other person or entity (other than as
specifically referenced in this Agreement), and (iii) upon the execution and
delivery of this Agreement by the Company, this Agreement shall be the valid and
binding obligation of Executive, enforceable in accordance with its terms.
Executive hereby acknowledges and represents that Executive has had an
opportunity to consult with independent legal counsel regarding Executive's
rights and obligations under this Agreement and that Executive fully understands
the terms and conditions contained herein.
17
17. SURVIVAL. Sections 5, 6 and 7 and sections 9 through 24 shall survive and
continue in full force in accordance with their terms notwithstanding any
termination of the Employment Term.
18. NOTICES. Any notice provided for in this Agreement shall be in writing and
shall be either personally delivered, or mailed by first class mail, return
receipt requested, to the recipient at the address below indicated:
Notice to Executive:
Name: Bruce Nelson
2301 Spanish River
Boca Raton, FL 33432
Notice to the Company:
Office Depot, Inc.
2200 Germantown Road
Delray Beach, Florida 33445
Attention: General Counsel
and
Office Depot, Inc.
2200 Germantown Road
Delray Beach, Florida 33445
Attention: Executive Vice President - Human Resources
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement shall be deemed to have been given when so delivered
or mailed.
19. MISCELLANEOUS PROVISIONS.
(a) SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision
of this Agreement is held to be invalid, illegal or
unenforceable in any
18
respect under any applicable law or rule in any jurisdiction,
such invalidity, illegality or unenforceability shall not
effect any other provision or any other jurisdiction, but this
Agreement shall be reformed, construed and enforced in such
jurisdiction as if such invalid, illegal or unenforceable
provision had never been contained herein.
(b) COMPLETE AGREEMENT. This Agreement and those agreements and
documents expressly referred to herein and the Schedules
attached to this Agreement embody the complete agreement and
understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or
among the parties, written or oral, which may have related to
the subject matter hereof in any way. Documents and/or
agreements incorporated by reference herein are hereby deemed
to be made a part hereof.
(c) NO STRICT CONSTRUCTION; NO WAIVER. The language used in this
Agreement shall be deemed to be the language chosen by the
parties hereto to express their mutual intent, and no rule of
strict construction shall be applied against any party.
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 Executive or the Company may have
hereunder, including, without limitations the right of
Executive to terminate employment for Good Reason pursuant to
this Agreement or any Schedule to this Agreement, shall not be
deemed to be a waiver of such provision or right or any other
provision or right of this Agreement.
(d) COUNTERPARTS. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and
all of which taken together constitute one and the same
agreement.
(e) SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Executive, the
Company and their respective heirs, successors and assigns,
except that Executive may not assign Executive's rights or
delegate Executive's obligations hereunder without the prior
written consent of the
19
Company. This Agreement is personal to Executive and without
the prior written consent of the Company shall not be
assignable by Executive otherwise than by will or the laws of
descent and distribution. This Agreement shall inure to the
benefit of and be enforceable by Executive's legal
representatives. This Agreement shall inure to the benefit of
and be binding upon the Company and its successors and
assigns. 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.
(f) CHOICE OF LAW. All issues and questions concerning the
construction, validity, enforcement and interpretation of this
Agreement and the exhibits and schedules hereto shall be
governed by, and construed in accordance with, the laws of the
State of Florida, without giving effect to any choice of law
or conflict of law rules or provisions (whether of the State
of Florida or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the
State of Florida.
(g) AMENDMENT AND WAIVER. The provisions of this Agreement may be
amended or waived only with the prior written consent of the
Company and Executive, and no course of conduct or failure or
delay in enforcing the provisions of this Agreement shall
affect the validity, binding effect or enforceability of this
Agreement.
20. NO SET-OFF OR MITIGATION. 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
Executive or others. In no event shall Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to
20
Executive under any of the provisions of this Agreement, and such amounts shall
not be reduced whether or not Executive obtains other employment.
21. PAYMENT OF CERTAIN EXPENSES. If, and to the extent, Executive is successful
in any action against the Company to enforce any of his rights under this
Agreement, the Company shall reimburse Executive for his reasonable attorneys'
fees and expenses incurred in pursuing such action.
22. ARBITRATION. Except as to any controversy or claim which Executive elects by
written notice to the Company, to have adjudicated by a court of competent
jurisdiction, any dispute or controversy between the Company and Executive
arising out of or relating to this Agreement or the breach of this Agreement
shall be settled by arbitration administered by the American Arbitration
Association ("AAA") in accordance with its Commercial Arbitration Rules then in
effect, and judgment on the award rendered by the arbitrator may be entered in
any court having jurisdiction thereof. Any arbitration shall be held before a
single arbitrator who shall be selected by the mutual agreement of the Company
and Executive, unless the parties are unable to agree to an arbitrator, in which
case the arbitrator will be selected under the procedures of the AAA. The
arbitrator shall have the authority to award any remedy or relief that a court
of competent jurisdiction could order or grant, including, without limitation,
the issuance of an injunction. However, either party may, without inconsistency
with this arbitration provision, apply to any court otherwise having
jurisdiction over such dispute or controversy and seek interim provisional,
injunctive or other equitable relief until the arbitration award is rendered or
the controversy is otherwise resolved. Except as necessary in court proceedings
to enforce this arbitration provision or an award rendered hereunder, or to
obtain interim relief, or as may otherwise be required by law, neither a party
nor an arbitrator may disclose the existence, content or results of any
arbitration hereunder without the prior written consent of the Company and
Executive. The Company and Executive acknowledge that this Agreement evidences a
transaction involving interstate commerce. Notwithstanding any choice of law
provision included in this Agreement, the United States Federal Arbitration Act
shall govern the interpretation and enforcement of this arbitration provision.
The arbitration proceeding shall be conducted in Palm Beach County, Florida or
such other location to which the parties may agree. The Company shall pay the
costs of any arbitrator appointed hereunder.
21
23. WITHHOLDING. 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.
24. SCHEDULES. The Schedules attached hereto are incorporated by reference
herein and made a part hereof. The following Schedules are attached:
(a) Retention Agreement;
(b) Agreement of Non-Competition, Non-Solicitation, and No-Hire;
(c) Change in Control Agreement; and
(d) Real Estate Co-Ownership Agreement
* * * *
SIGNATURES CONTAINED ON FOLLOWING PAGE
22
IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as
of the 29th day of December, 2001.
OFFICE DEPOT, INC.
By /s/ Scott Hedrick
--------------------------------------
Name: Scott Hedrick
Its: Chairman, Compensation Committee
of the Board of Directors
EXECUTIVE
/s/ M. Bruce Nelson
-----------------------------
Name: M. Bruce Nelson
23
SCHEDULE 1
RETENTION AGREEMENT
This Retention Agreement ("Agreement") was entered into by Executive and the
Company originally on June 7, 2000, and is amended and restated herein effective
as of December 29, 2001 as a matter of convenience to the parties.
A. Under the terms of the Employment Agreement dated December 29, 2001, by
and between the Executive and the Company (as defined in such
Employment Agreement) (herein the "Employment Agreement"), to which
this Agreement is attached as SCHEDULE 1, the Company is employing
Executive as the Company's Chairman and Chief Executive Officer. In
addition to the provisions thereof, the Company wishes to enter into
this Agreement to provide further assurance that Executive will remain
with the Company and provide to it his experience and expertise in the
areas of domestic catalog marketing and in international business.
B. The terms of this Agreement are provided for the purpose of further
inducing Executive to remain with the Company, and Executive is ready
and willing to enter into this Agreement.
Now therefore, in consideration of the foregoing Recitals, which are
incorporated by this reference and other good and valuable consideration, the
parties hereby agree as follows:
1. RETENTION PAYMENTS TO EXECUTIVE. The Company has made and/or hereby agrees to
make the following payments to Executive:
On June 7, 2000, to ensure the retention of Executive through at least
the end of December 2002, the sum of Three Million, Eight Hundred
Thousand Dollars ($3,800,000) was deposited into a deferred
compensation account with Merrill Lynch for the benefit of Executive,
to be invested as directed by Executive in accordance with the terms
and conditions of the Merrill Lynch deferred compensation agreement
with the Company. This amount (the "Deferred Payment"), together with
any and all income and appreciation on the
24
Deferred Payment while in the deferred compensation account and
unvested, shall vest 100% on December 31, 2002, provided that Executive
remains an employee of the Company through and including December 31,
2002. It is further agreed, however, that the Deferred Payment shall
also vest 100% upon the occurrence of any of the following events PRIOR
to December 31, 2002 :
(i) There is a change in control of the Company, as set
forth in the Change in Control Agreement attached to
the Employment Agreement as SCHEDULE 3.
(ii) Executive dies, becomes disabled or incapacitated as
set forth in the Employment Agreement.
(iii) Executive's employment is terminated by the Company
without Cause or is terminated by Executive for Good
Reason, as defined and set forth in the Employment
Agreement.
The vested Deferred Payment, together with any income and appreciation,
shall be payable to Executive (or Executive's beneficiaries) in
accordance with the provisions of the Merrill Lynch deferred
compensation agreement with the Company and Executive, and Executive's
(or such beneficiaries') election thereunder.
2. GRANT OF STOCK OPTIONS. As consideration for the cancellation of the Prior
Agreements, the Company granted to Executive on June 6, 2000, an option to
acquire stock in the Company (which option is evidenced by a separate option
agreement) as follows:
a) A ten-year option (the "Retention Option") to acquire up to
400,000 shares of the Company's stock. Such Retention Option
provides, among other provisions, that it shall remain
exercisable through and including 90 days following the second
anniversary of any termination of Executive by the Company
without Cause, or any termination by Executive with Good
Reason, as such terms are defined in the Employment Agreement.
25
b) The Retention Option shall vest in full (100%) on December 31,
2002; provided that Executive remains continuously employed by
the Company on such date.
c) The Retention Option shall have an early vesting provision,
which provides that the Retention Option shall vest in full
(100%) upon the occurrence of any of the events set forth in
Section 1 (i) through (iii) above and, in the case of Section
1(i) above, shall have an exercise period through the balance
of the full ten-year term of the Retention Option.
3. INCORPORATION FROM EMPLOYMENT AGREEMENT. The following provisions from the
Employment Agreement are incorporated herein by reference: 11 through 23.
In testimony whereof, this Retention Agreement is separately signed by the
parties, originally effective on the 7th day of June, 2000 and amended and
restated effective as of the 29th day of December, 2001.
Executive Office Depot, Inc.
/s/ M. Bruce Nelson By /s/ Scott Hedrick
- --------------------------------- --------------------------------------
M. Bruce Nelson Name: Scott Hedrick
Title: Chairman, Compensation
Committee
26
SCHEDULE 2
AGREEMENT OF NON-COMPETITION, NON-SOLICITATION AND NO-HIRE
This Agreement of Non-Competition, Non-Solicitation and No-Hire (this
"Noncompete Agreement") made and entered into originally on the 7th day of June,
2000, is amended and restated as of the 29th day of December 2001 as a matter of
convenience to the parties, by and between Office Depot, Inc., a Delaware
corporation (the "Company") and M. Bruce Nelson (the "Executive").
RECITALS
A. The Company and Executive are on this date entering into an Employment
Agreement, which this Agreement is attached as Schedule 2 (the
"Employment Agreement"); and
B. Executive acknowledges that he is being employed as a very senior
executive officer of the Company and as such is fully familiar with the
most sensitive, confidential and proprietary information of the Company
("Confidential Information"); and
C. Executive has been requested by the Company to enter into this
Noncompete Agreement as a condition to the Company's being willing to
enter into the other Agreements being entered into contemporaneously
herewith; and
D. The parties are willing to abide by the terms and provisions of this
Noncompete Agreement;
AGREEMENT
NOW THEREFORE, in consideration of the foregoing recitals, which are
incorporated by reference and made a part hereof, the payment to Executive
referred to in Section 1 below, and other good and valuable consideration, the
parties hereby agree as follows:
1. PAYMENT TO EXECUTIVE; AGREEMENT OF NON-COMPETITION. For and in
consideration of the payment by the Company to Executive in one lump
sum, in cash, on June 7, 2000, the date hereof of the sum of One
Million Five Hundred Thousand Dollars ($1,500,000), receipt and
sufficiency of which are hereby acknowledged, Executive acknowledges
that in the course of Executive's employment with the Company Executive
shall become familiar with the Company's trade secrets and with other
Confidential Information
27
concerning the Company and its Subsidiaries and that Executive's
services shall be of special, unique and extraordinary value to the
Company and its Subsidiaries. Therefore, and in consideration of the
payment(s) being made to Executive hereunder, Executive agrees that,
during the Employment Term (as defined in the Employment Agreement) and
for a period of one year thereafter, unless Executive is named CEO of
the Company, in which event, the Non-Compete Period is for three years
after leaving the Company instead of one year,. (in either such event,
as used herein, the "NONCOMPETE PERIOD"), Executive shall not directly
or indirectly own any interest in, manage, control, participate in,
consult with, render services for, or in any manner engage in any
business competing with the businesses of the Company or its
Subsidiaries, as such businesses exist or are in process on the date of
the termination of Executive's employment with the Company, within any
geographical area in which the Company or its Subsidiaries engage in
such businesses on the date of termination of Executive's employment
with the Company. Nothing herein shall prohibit Executive from being a
passive owner of not more than 2% of the outstanding stock of any class
of a corporation which is publicly traded, so long as Executive has no
active participation in the business of such corporation.
2. NON-SOLICITATION; NO-HIRE; NON-INTERFERENCE. During the Noncompete
Period, Executive shall not directly, or indirectly through another
entity, (i) induce or attempt to induce any employee of the Company or
any Subsidiary to leave the employ of the Company or such Subsidiary,
or in any way interfere with the relationship between the Company or
any Subsidiary and any employee thereof, (ii) hire any person who was
an employee of the Company or any Subsidiary at the time of termination
of the Employment Term or (iii) induce or attempt to induce any
customer, supplier, licensee, licensor, franchisee or other business
relation of the Company or any Subsidiary to cease doing business with
the Company or such Subsidiary, or in any way interfere with the
relationship between any such customer, supplier, licensee or business
relation and the Company or any Subsidiary (including, without
limitation, making any negative statements or communications about the
Company or its Subsidiaries).
28
3. REFORMATION OF THIS AGREEMENT. If, at the time of enforcement of this
Noncompete Agreement, any court shall hold that the duration, scope or
geographical restrictions stated herein are unreasonable under the
circumstances then existing, the parties agree that it is their mutual
desire and intent that the Company shall be afforded the maximum
duration, scope or area reasonable under such circumstances, and each
of them hereby requests such court to reform this Agreement so that the
maximum duration, scope and geographical restrictions available under
applicable law at the time of enforcement of this Agreement shall be
substituted by such court for the stated duration, scope or
geographical area stated herein and that the court shall be allowed to
revise the restrictions contained in this Noncompete Agreement to such
provisions as are deemed reasonable by the court at the time such
enforcement is requested.
4. INJUNCTIVE RELIEF. In the event of the breach or any threatened breach
by Executive of any of the provisions of this Noncompete Agreement, the
Company, in addition and supplementary to any and all other rights and
remedies existing in its favor, may apply to any court of law or equity
of competent jurisdiction for specific performance and/or injunctive or
other relief in order to enforce this Noncompete Agreement or to
prevent any violations or threatened violations of the provisions
hereof (without being required to post any bond or other security to
secure such relief). In addition, in the event of any alleged breach or
violation by Executive of this Noncompete Agreement, the Noncompete
Period shall be tolled until such breach or violation has been duly
cured and thereafter the Noncompete Period shall be extended for an
additional period of time equivalent to the time during which Executive
was in breach of this Noncompete Agreement.
5. INCORPORATION OF TERMS BY REFERENCE. The provisions of the following
number sections of the Employment Agreement are incorporated by
reference as if set forth at length herein and shall be deemed to
constitute a part hereof notwithstanding the earlier termination of
such Employment Agreement: sections 11 through 23 of the Employment
Agreement are incorporated by this reference.
29
IN TESTIMONY WHEREOF, the parties have signed this NONCOMPETE AGREEMENT
originally dated as of the 7th day of June, 2000, amended and restated as of the
29th day of December, 2001.
Executive Office Depot, Inc.
/s/ M. Bruce Nelson By /s/ Scott Hedrick
- ---------------------------------- --------------------------------------
M. Bruce Nelson Name: Scott Hedrick
Title: Chairman, Compensation
Committee
30
SCHEDULE 3
CHANGE IN CONTROL AGREEMENT
This Change in Control ("CIC") Agreement was originally entered into by
Executive and the Company on June 7, 2000, and is amended and restated herein as
of December 29, 2001, as a matter of convenience for the parties.
a. 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
Executive, notwithstanding the possibility, threat or occurrence of a
Change in Control (as defined below) of the Company.
b. The Board believes it is imperative to diminish the inevitable
distraction of Executive by virtue of the personal uncertainties and
risks created by a pending or threatened Change in Control and to
encourage Executive's full attention and dedication to the Company
currently and in the event of any threatened or pending Change in
Control, and to provide Executive with compensation and benefits
arrangements upon a Change in Control which ensure that the
compensation and benefits expectations of 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 CIC Agreement, supplemental to the Employment
Agreement dated as of December 29, 2001 between Executive and the Company, to
which this SCHEDULE 3 is attached (such Agreement, together with the Schedules
thereto, herein referred to as the "Employment Agreement").
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. CERTAIN DEFINITIONS. (a) The "Effective Date" shall mean the first
date during the CIC Period (as defined in Section 1(b)) on which a CIC (as
defined in Section 1(c)) occurs. Anything in this Agreement to the contrary
notwithstanding, if a CIC occurs and if
31
Executive's employment with the Company is terminated prior to the date on which
the CIC occurs, and if it is reasonably demonstrated by Executive that such
termination of employment (i) was at the request of a third party who has taken
steps reasonably calculated to effect a CIC or (ii) otherwise arose in
connection with or anticipation of a CIC, 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 "CIC 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 CIC 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 Executive that the CIC Period shall not be
so extended.
(c) A "Change in Control" or "CIC" shall mean:
(i) 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 CIC:
(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
32
(ii) 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
(iii) 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
33
ownership existed prior to the Business Combination and (iii) at least
a majority of the members of the board 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
(iv) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
(d) "Employment" shall mean the employment of Executive pursuant to the
Employment Agreement to which this Schedule 3 is attached.
Other terms shall have the meanings ascribed to them in various sections of this
CIC Agreement or otherwise shall have the meanings ascribed to them in the
Employment Agreement.
2. TERMINATION OF EMPLOYMENT. In addition to the other termination
provisions contained in Sections 5 through 11 of the Employment Agreement,
Executive's employment shall be subject to the following provisions, immediately
following the Effective Date of a CIC:
(a) GOOD REASON. Executive's employment may be terminated by
Executive for Good Reason. For purposes of this Agreement, following a CIC,
"Good Reason" shall not have the meaning ascribed to it in Section 10(b) of the
Employment Agreement, but instead shall mean:
(i) the assignment to Executive of any duties
inconsistent in any respect with Executive's Position(s) (including
status, offices, titles and reporting requirements), authority, duties
or responsibilities as contemplated by Section 2 of the Employment
Agreement, or any other action by the Company which results in a
diminution in such Position(s), authority, duties or responsibilities,
excluding for this
34
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 Executive;
(ii) any failure by the Company to comply with any of
the provisions of Section 3 of the Employment Agreement, other than an
isolated, insubstantial and inadvertent failure not occurring in bad
faith and which is remedied by the Company promptly after receipt of
notice thereof given by Executive;
(iii) the Company's requiring Executive to be based
at any office or location other than in Delray Beach, Florida or in
Torrance, California or the Company's requiring 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
Executive's employment otherwise than as expressly permitted by the
Employment Agreement; or
(v) any failure by the Company to comply with and
satisfy any other material provision of the Employment Agreement.
(b) For purposes of this Section, any good faith determination
of "Good Reason" made by Executive shall be conclusive and irrefutable
by the Company. Anything in this Agreement to the contrary
notwithstanding, a termination by Executive for any reason during the
thirty (30) day period immediately preceding the first anniversary of
the Effective Date of a CIC shall be deemed to be a termination for
Good Reason for all purposes of this Agreement.
3. OBLIGATIONS OF THE COMPANY UPON TERMINATION. The Company shall have the
following obligations to Executive upon a termination of Executive's employment
following a CIC:
(a) If the termination is for death, disability or incapacity,
then for purposes of this CIC Agreement, the Company shall pay to
Executive or his estate, in a lump
35
sum not more than 30 days after the Date of Termination, the sums due
under Section 3(c) hereof, as if Executive had notified the Company of
his election to terminate the Agreement for Good Reason and not the
sums due under Section 5 of the Employment Agreement.
(b) If the termination is for Cause, then the rights and
obligations of the parties shall be governed by the provisions of
Section 7 of the Employment Agreement.
(c) If the termination is by the Company without Cause or by
Executive for Good Reason:
(i) the Company shall pay to 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) 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
annual Bonus most recently paid to Executive pursuant to
Section 3(c) of the Employment Agreement and (ii) the Bonus
paid or payable pursuant to such Section 3(c), 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 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 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
36
B. the amount equal to the product of (a)
three (3) and (b) the sum of (x) Executive's annual Base
Salary and (y) the Highest Annual Bonus.
(ii) for three (3) years after 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 Executive and/or
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 3(f) of the
Employment Agreement if Executive's employment had not been
terminated or, if more favorable to 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 Executive becomes
re-employed 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 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 Executive for retiree benefits
pursuant to such plans, practices, programs and policies,
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 Executive with out placement services the
scope and provider of which shall be selected by Executive in
his sole discretion; and
(iv) to the extent not theretofore paid or provided,
the Company shall timely pay or provide to Executive any other
amounts or benefits required to
37
be paid or provided or which 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").
C. Following termination for any reason, Executive's obligation to "buy
out" Viking's interest in Executive's Florida residential real estate (as
defined in the Real Estate Co-Ownership attached as SCHEDULE 4 to the Employment
Agreement) or to sell any other property as a result of a "put" by the Company,
may be deferred by Executive or his successor(s) for a period of up to two years
following such termination of employment.
4. FULL SETTLEMENT. (a) 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 Executive or others.
In no event shall Executive be obligated to seek other employment or take any
other action by way of mitigation of the amounts payable to Executive under any
of the provisions of this Agreement and such amounts shall not be reduced
whether or not Executive obtains other employment. Anything in the Employment
Agreement to the contrary notwithstanding, the Company agrees to pay as
incurred, to the fullest extent permitted by law, all legal fees and expenses
which Executive may reasonably incur as a result of any contest (regardless of
the outcome thereof) by the Company, 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
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").
In Testimony whereof, this CIC Agreement is signed by the parties, originally
dated as of the 7th day of June, 2000, and amended and restated as of the 29th
day of December, 2001.
Executive Office Depot, Inc.
/s/ M. Bruce Nelson By /s/ Scott Hedrick
- ----------------------------------- --------------------------------------
M. Bruce Nelson Name: Scott Hedrick
Title: Chairman, Compensation
Committee
38
SCHEDULE 4
REAL ESTATE CO-OWNERSHIP AGREEMENT
THIS REAL ESTATE CO-OWNERSHIP AGREEMENT, made and entered into this 29th day of
December, 2001 by and between Office Depot, Inc., a Delaware corporation
("Company") and M. Bruce Nelson, a resident of Boca Raton, Florida, and Chief
Executive Officer of Company ("Executive").
RECITALS
a. Company and Executive (and Executive's Spouse, defined below) are
co-owners of the residential property located at 2301 Spanish River
Road, Boca Raton, FL 33432 (the "Property").
b. The Parties desire herein to confirm their understandings with respect
to the co-ownership of the Property and to clarify their respective
rights and obligations with respect to the Property and it set forth
their understandings in this Real Estate Co-Ownership Agreement.
Now therefore, in consideration of the Recitals, incorporated by
reference herein, and other good and valuable consideration, the
parties agree as follows:
1. BACKGROUND. At the request of the Company, Executive relocated to Florida to
serve as Chief Executive Officer of the Company and purchased the Property as
his new principal residence in the State of Florida, jointly with his wife
Lavaun Nelson ("Executive's Spouse"), together with the Company's investment in
the Property as set forth below.
39
2. PRINCIPAL TERMS OF INVESTMENT. The parties acknowledge that they have
co-invested in the Property as follows:
(a) Office Depot -- $1,850,000 28%
(b) Executive (jointly with
Executive's Spouse) $1,749,724 72%
(c) Mortgage Loan $3,000,000
(Included as part of
Executive's Interest)
(d) Total Investments $6,599,724
The parties own the Property as tenants-in-common (Executive and Executive's
Spouse, jointly, as one party, and the Company, as the other tenant-in-common),
with each party having an undivided percentage interest in the Property, in the
percentages set forth above.
3. CONSENT TO MORTGAGE: The Company has agreed that Executive may borrow the sum
referred to above as the Loan and that the Property may be encumbered in full by
the lien of a first mortgage on the Property in favor of the lender ("Lender")
to the Executive. The Company hereby agrees to and has executed such
documentation as the Lender has required to subject its undivided 28% interest
in the Property to the lien of a mortgage in favor of Lender.
Executive is fully responsible for the payment of all debt service on the Loan,
and the Company is not, and shall not be an obligor or guarantor on the Loan.
Executive's percentage of ownership in the Property is subject to the principal
amount of the Loan. No payment of principal on the Loan shall serve to increase
Executive's percentage interest in the Property or to reduce the Company's
percentage interest therein. In the event of a sale of the Property, repayment
of any outstanding principal balance of the Loan shall be charged against
Executive's percentage of ownership interest in the proceeds of the sale of the
Property.
4. EXPENSES. All debt service payments, repairs, taxes and other costs and
expenses of every kind and nature incurred in connection with the Property and
Executive's residency therein, shall be the sole responsibility of Executive,
but the Company shall
40
have the right, at any time upon thirty (30) days' prior written notice to
Executive, in order to protect its interest in the Property, to step in and pay
any such taxes, liens, repairs or other expenses and to charge the cost of the
same against Executive and to encumber Executive's 72% ownership interest in the
Property in the amount of such repairs.
5. RESTRICTIONS ON SALE AND ENCUMBRANCE. Neither the Company nor Executive shall
have any right to sell or encumber its or his interest in the Property without
the prior written approval of the other, except (a) in connection with a sale of
the entire Property as provided in Section 7 below and (b) except for the
Company's consent to the encumbrance of a first mortgage lien on the Property to
secure the Executive Loan referred to above. The Loan may not be modified,
amended, extended or increased in amount without the prior written consent of
the Company.
6. RISK OF LOSS; INSURANCE. The parties shall share risk of loss of the Property
in proportion to their respective percentages of ownership in the Property.
Executive shall keep the Property insured against all risks, including without
limitation fire and windstorm, for the benefit of all the parties, including a
standard mortgagee's clause, under a policy of insurance that covers 100% of the
value thereof, naming the Company and Lender, as additional insureds, as their
respective interests may appear.
7. SALE OF THE PROPERTY; PURCHASE BY EXECUTIVE; COMPANY RIGHTS. Whenever
Executive desires to sell the Property, he shall be entitled to do so, subject
to the provisions of this Section 7. Similarly, if Executive desires to purchase
the Company's percentage interest in the Property, he shall have the right to do
so subject to the provisions of this Section 7.
(a) SALE -- In the event Executive desires at any time to sell the
Property, the Company shall receive at closing net proceeds (after commissions,
transfer taxes and other costs of sale, but before payment of the Loan) from the
sale of the Property which are equal at least to $1,850,000, the amount of its
investment in the Property, or 28% of the net proceeds, whichever amount is
greater. While Executive has the right to specify
41
that the Property shall be sold, each party shall be required to agree upon the
sales price and terms of sale (if sold for terms other than cash). The
Executive's share of the net proceeds shall be reduced by any amount required to
pay off the Loan.
(b) PURCHASE - In the event Executive desires at any time to purchase
the Company's interest in the Property, he may do so by providing written notice
to the Company, proposing the price at which he desires to purchase the
Company's interest therein. The Company shall have the right to accept such
proposed price, or to require that an appraisal of the Property be made,
following which the parties shall endeavor in good faith to negotiate a price
consistent with the appraisal. In the event they are unable to do so, they agree
to submit the matter to binding arbitration in accordance with Section 10 below.
In no event shall the Company's interest in the Property be purchased for less
than $1,850,000, the amount of its original investment in the Property,
regardless of the appraisal or the result of any arbitration.
(c) PUT BY THE COMPANY - In the event that Executive's employment by
the Company shall terminate or Executive shall abandon the Property or fail to
occupy it as his principal residence for a period of 180 days or longer, the
Company shall have the right, at its option, by written notice to Executive, to
require him to purchase the Company's interest in the Property for cash at the
price proposed by the Company. Executive shall have the right either to accept
such proposed selling price or to require that an appraisal be made, following
which the parties shall endeavor in good faith to negotiate a price consistent
with the appraisal. In the event they are unable to do so, they agree to submit
the matter to binding arbitration in accordance with Section 10 below.
In the event Executive is unable or unwilling to purchase the Company's interest
in the Property, the Company shall have the right to require that the Property
be sold and the net proceeds divided between the parties in accordance with
their respective percentage interests in the Property.
42
Anything to the contrary herein notwithstanding, in the event Executive's
employment was terminated by the Company without Cause or by the Executive for
Good Reason (each as such terms are defined in the Employment Agreement to which
this Agreement is attached as SCHEDULE 4 (the "Employment Agreement")), or due
to Executive's death or disability, or for any reason after a Change in Control
(as such term is defined in the Change in Control Agreement attached to the
Employment Agreement as SCHEDULE 3), then Executive's (or Executive's
successors') obligation to purchase the Company's interest in the Property, or
to sell the Property as a result of a "put" by the Company under this Section
7(c) shall be extended at the option of Executive (or Executive's successor) for
a period of up to two (2) years.
8. NOTICES. Any notice provided for in this Agreement shall be in writing and
shall be either personally delivered, or mailed by first class mail, return
receipt requested, to the recipient at the address below indicated:
Notice to Executive:
Name: Bruce Nelson
Address: 2301 Spanish River Road
Boca Raton, FL 33432
Notice to the Company:
Office Depot, Inc.
2200 Germantown Road
Delray Beach, Florida 33445
Attention: General Counsel
and
Office Depot, Inc.
2200 Germantown Road
Delray Beach, Florida 33445
Attention: Executive Vice President - Human Resources
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement shall be deemed to have been given when so delivered
or mailed.
43
9. MISCELLANEOUS PROVISIONS.
The provisions of Section 19 of the Employment Agreement are incorporated by
this reference herein, as if set forth verbatim.
10. ARBITRATION. The arbitration provisions of Section 22 of the Employment
Agreement are incorporated by this reference herein, as if set forth verbatim.
* * * * * *
IN WITNESS WHEREOF, the parties hereto have executed this Agreement,
originally dated as of November 27, 2000, and amended and restated as of the
29th day of December, 2001.
Executive OFFICE DEPOT, Inc.
/s/ Bruce Nelson By /s/ Scott Hedrick
- --------------------------------- --------------------------------------
Bruce Nelson Name: Scott Hedrick
Its: Chairman, Compensation
Committee
EXHIBIT 10.18
LIFETIME CONSULTING & NON-COMPETION
AGREEMENT
THIS AGREEMENT is made and entered into this First day of March, 2002 between
Office Depot, Inc., a Delaware corporation (the "COMPANY"), and Irwin Helford
("Consultant").
a. Consultant has been an employee and director of Viking Office
Products, Inc., a California corporation ("VIKING"), and a Director
of the Company, through and including the date hereof, on which date
Consultant has resigned from his positions as a Board member and/or
employee of Viking.
b. Consultant shall continue to serve as a Director of the Company
through and including April 25, 2002, the date of the Company's
Annual Meeting.
c. Consultant and the Company have agreed to enter into this Lifetime
Consulting Agreement, to ensure that the many years of knowledge and
experience of Consultant shall remain available to the Company
(including Viking) for the natural lifetime of Consultant.
d. Consultant also has previously granted to the Company a lifetime
license to use his name and likeness in advertising, catalogs and
similar commercial communications, which license shall remain in
full force and effect.
e. Consultant and the Company desire by this Agreement to set forth
certain understandings between them regarding such consulting
relationship.
Now therefore, in consideration of the mutual covenants contained herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. CONSULTING RELATIONSHIP. Consultant has on today's date (the "EFFECTIVE
DATE") has resigned from his positions as a director and employee of
Viking and from all positions of any nature whatever with either the
Company or any affiliate of the Company, except for his position as a
Director of the Company, which position he shall continue to occupy
until April 25, 2002, the date of the Company's 2002 Annual Meeting.
From and after the Effective Date, Consultant shall make himself
available to serve as a consultant to the Chairman and CEO of Company
as herein set forth.
2. POSITION AND DUTIES. During the Term of this Agreement (which shall
extend for the natural lifetime of Consultant), Consultant shall make
himself available at reasonable times and places, for reasonable
durations, to serve as a consultant to the Chairman and CEO of Company,
available to consult with such Chairman and CEO and provide such
advisory services as are mutually agreed upon by Consultant and the
Chairman and CEO of Company. Consultant shall be free to serve as (i) a
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director or officer of any non-profit organization including trade,
civic, educational or charitable organizations, or (ii) a director,
owner, employee or consultant of any other corporation which is not
competing with the Company or any of its Subsidiaries in the office
product and office supply industry so long as such duties do not
materially interfere with the performance of Consultant's duties or
responsibilities under this Agreement or reflect badly on the Company.
Consultant shall perform Consultant's duties and responsibilities under
this Agreement to the best of Consultant's abilities in a diligent,
trustworthy, businesslike and efficient manner.
In the event at any time during the Term, the Chairman and CEO of the
Company is anyone other than Bruce Nelson, then Consultant shall not be
required to provide more than one day of consulting services per year
in order to keep this Agreement in full force and effect.
For purposes of this Agreement, "SUBSIDIARIES" shall mean any
corporation of which the securities having a majority of the voting
power in electing directors are, at the time of determination, owned by
the Company, directly or through one of more Subsidiaries, including,
without limitation, Viking.
3. CONSIDERATION.
(a) In consideration of his services to be rendered, and the
non-competition provisions hereinbelow set forth, Consultant
is hereby granted by the Company lifetime medical benefits, as
more full set forth on ATTACHMENT A hereto.
(b) Consultant shall have a period of ninety (90) days following
April 25, 2002 in which to exercise any and all of his vested
stock options, which date is July 24, 2002 . There shall be no
further vesting of unvested stock options during such period;
nor shall Consultant be entitled to the grant of any
additional stock options by the Company.
(c) In consideration of the existing lifetime license to use
Consultant's name and likeness as set forth in said license,
the Company agrees to reimburse Consultant for maintaining
electronic security at Consultant's residence, unless and
until the Company elects to discontinue use of Consultant's
name and likeness, in which event the Company shall provide
Consultant ninety (90) days' written notice before
discontinuing reimbursement for such electronic security at
Consultant's residence.
(d) Consultant shall not receive any other salary, bonus or other
remuneration from Company during the Term of this Agreement
other then the lifetime medical benefits referred to in
subsection 3(a) above, and his compensation as a Director of
the Company through and including April 25, 2002.
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(e) Company shall reimburse Consultant for any reasonable and
necessary business expenses incurred by him in the course of
performing his duties under this Agreement, in accordance with
the Company's policies in effect from time to time, subject to
the Company's reasonable requirements with respect to
reporting and documentation of such expenses.
4. TERM.
(a) The Term of this Agreement is for the natural lifetime of
Consultant, unless terminated as set forth here.
(b) The Term shall end (A) upon Consultant's death, (B) upon the
mutual agreement of the Company and Consultant, (C) by the
Company's termination of this Agreement for Cause (as defined
below) or (D) by Consultant's termination of this Agreement
for Good Reason (as defined below).
(c) If the Agreement is terminated by the Company for Cause or by
Consultant without Good Reason, Consultant shall thereupon
lose all further consulting fees and benefits hereunder.
(d) If the Agreement is terminated upon Consultant's death, all
remuneration and/or benefits provided hereunder shall
terminate and cease on the last day of the month in which his
death occurs.
(e) If the Agreement is terminated by Consultant for Good Reason,
then his remuneration and benefits shall continue for his
natural lifetime.
(f) For purposes of this Agreement, "CAUSE" shall mean any action
by Consultant from and after the date hereof, which in the
good faith opinion of the Chairman and CEO of Company or the
Board of Directors ("Board") of the Company violates any
provision of this Agreement.
(g) For purposes of this Agreement, "GOOD REASON" shall mean a
material breach by the Company of a material provision of this
Agreement which has not been cured by the Company within
thirty (30) days after written notice of noncompliance has
been given by Consultant to the Company.
5. CONFIDENTIAL INFORMATION. Consultant acknowledges that the
information, observations and data obtained by Consultant while employed by the
Company and its Subsidiaries concerning the business or affairs of the Company
or any other Subsidiary ("CONFIDENTIAL INFORMATION") are the property of the
Company or such Subsidiary. Therefore, Consultant agrees that Consultant shall
not disclose to any unauthorized person or use for Consultant's own purposes any
Confidential Information without the prior written consent of the CEO, unless
and to the extent that the aforementioned matters become generally known to and
available for use by the public other than as a result of Consultant's acts or
-3-
omissions. Consultant shall deliver to the Company as soon as practicable after
the Effective Date hereof, or at any other time the Company may request, all
memoranda, notes, plans, records, reports, computer tapes, printouts and
software and other documents and data (and copies thereof) in any form or medium
relating to the Confidential Information, Work Product (as defined below) or the
business of the Company or any Subsidiary which Consultant may then possess or
have under Consultant's control. The provisions of this paragraph 5 shall
survive the termination of this Agreement for an unlimited period of time.
6. INVENTIONS AND PATENTS; CONSULTANT'S LIKENESS AND NAME. Consultant
acknowledges that all inventions, innovations, improvements, developments,
methods, designs, analyses, drawings, reports and all similar or related
information (whether or not patentable) that relate to the Company's or any of
its Subsidiaries' actual or anticipated business, research and development or
existing or future products or services and that are conceived, developed or
made by Consultant while employed by the Company and its Subsidiaries ("WORK
PRODUCT") belong to the Company or such Subsidiary. Consultant shall promptly
disclose such Work Product to the CEO and perform all actions reasonably
requested by the CEO to establish and confirm such ownership (including, without
limitation, assignments, consents, powers of attorney and other instruments). In
addition, Consultant acknowledges that the exclusive use of his likeness and
name in business or commerce shall continue to belong exclusively to the Company
for the remainder of Consultant's natural life.
7. NON-COMPETE, NON-SOLICITATION.
(a) Consultant acknowledges that during the course of Consultant's
employment with Viking he has, and in the course of Consultant's employment with
the Company he has become familiar with the trade secrets of Viking and the
Company and with other Confidential Information concerning Viking, the Company
and its other Subsidiaries and that Consultant's services have been and shall
continue to be of special, unique and extraordinary value to Viking, the Company
and its other Subsidiaries. Therefore, in consideration of the payments to
Consultant of the sums set forth in this Agreement, Consultant agrees that
during his lifetime, he shall not directly or indirectly own any interest in,
manage, control, participate in, consult with, render services for, or in any
manner engage in any business on behalf of or in concert with any key competitor
of the Company, including without limitation the following companies (or any
affiliates of any such companies), each of which are considered to be key
competitors of the Company (collectively, the "COMPETITORS"): Staples;
Boise-Cascade; BT Office Products; Office Max; P.P.R. and Lyreco or with any
other company which engages or decides to engage in business competitive with
the Company, including without limitation such companies as Wal-Mart, Target
Stores or any Internet or other direct mail or direct marketing company engaged
as a significant part of its business in the sale of business or office
products. Nothing herein shall prohibit Consultant from being a passive owner of
not more than 2% of the outstanding stock of any class of a corporation which is
publicly traded, including any Competitor, so long as Consultant has no active
participation in the business of such corporation. Except as provided in this
Agreement, there shall be no restrictions upon Consultant's employment or
services.
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(b) During the Term, Consultant shall not directly or indirectly
through another entity (i) induce or attempt to induce any employee of the
Company or any Subsidiary to leave the employ of the Company or such Subsidiary,
or in any way interfere with the relationship between the Company or any
Subsidiary and any employee thereof, (ii) hire any person who was an employee of
the Company or any Subsidiary at any time during the Employment Term or the
Noncompete Period or (iii) on behalf of or for the benefit of any Competitor,
induce or attempt to induce any customer, supplier, licensee, licensor,
franchisee or other business relation of the Company or any Subsidiary to cease
doing business with the Company or such Subsidiary, or in any way interfere with
the relationship between any such customer, supplier, licensee, licensor,
franchisee or business relation and the Company or any Subsidiary (including,
without limitation, making any negative statements or communications about the
Company or its Subsidiaries). The Company agrees to use its best efforts to
cause its Consultant officers and the Consultant officers of Viking not to make
any negative statements or communications about Consultant.
(c) If, at the time of enforcement of this paragraph 7, a court shall
hold that the duration, scope or area restrictions stated herein are
unreasonable under circumstances then existing, the parties agree that the
maximum duration, scope or area reasonable under such circumstances shall be
substituted for the stated duration, scope or area and that the court shall be
allowed to revise the restrictions contained herein to cover the maximum period,
scope and area permitted by law. Consultant acknowledges that he has carefully
read and considered the provisions of this paragraph 7 and, having done so,
agrees that the restrictions set forth herein (including but not limited to the
time periods of restriction and the geographical areas of restriction) are fair
and reasonable and are reasonably required to protect the interests of the
Company, its Subsidiaries and its stockholders.
(d) In the event of the breach or a threatened breach by Consultant of
any of the provisions of this paragraph 7, the Company, in addition and
supplementary to other rights and remedies existing in its favor, may apply to
any court of law or equity of competent jurisdiction for specific performance
and/or injunctive or other relief in order to enforce or prevent any violations
of the provisions hereof (without posting a bond or other security). In
addition, in the event of an alleged breach or violation by Consultant of this
paragraph 7, the Noncompete Period shall be tolled until such breach or
violation has been duly cured.
(e) The parties hereto acknowledge that, except as otherwise agreed to
by Consultant and the Company, any taxes that may be due and owing with respect
to the payments to Consultant hereunder shall be the sole responsibility of
Consultant, and Consultant hereby agrees to indemnify and hold Company harmless
if any such taxes are not paid.
8. CONSULTANT'S REPRESENTATIONS. Consultant hereby represents that upon
the execution and delivery of this Agreement by the Company and by him, this
Agreement shall be the valid and binding obligation of Consultant, enforceable
in accordance with its terms. Consultant hereby acknowledges and represents that
Consultant has had an opportunity to consult with independent legal counsel
regarding Consultant's rights and obligations under this Agreement and that
Consultant fully understands the terms and conditions contained herein.
-5-
9. SURVIVAL. Paragraphs 5, 6 and 7 and paragraphs 9 through 18 shall
survive and continue in full force in accordance with their terms
notwithstanding any termination of the Employment Term.
10. NOTICES. Any notice provided for in this Agreement shall be in
writing and shall be either personally delivered, or mailed by first class mail,
return receipt requested, to the recipient at the address below indicated:
NOTICES TO CONSULTANT:
Irwin Helford
27 Crest Road West
Rolling Hills, CA 90274
NOTICES TO THE COMPANY:
Office Depot, Inc.
2200 Old Germantown Road
Delray Beach, Florida 33445
Attention: Chairman and CEO
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement shall be deemed to have been given when so delivered
or mailed.
11. SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
12. COMPLETE AGREEMENT. This Agreement and those documents expressly
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
13. NO STRICT CONSTRUCTION. The language used in this Agreement shall
be deemed to be the language chosen by the parties hereto to express their
mutual intent, and no rule of strict construction shall be applied against any
party.
-6-
14. COUNTERPARTS; FACSIMILE SIGNATURES. This Agreement may be executed
in separate counterparts, each of which is deemed to be an original and all of
which taken together constitute one and the same agreement. This Agreement may
be executed by any party by delivery of a facsimile signature, which signature
shall have the same force and effect as an original signature. Any party which
delivers a facsimile signature shall promptly thereafter deliver an originally
executed signature to the other party(ies); provided, however, that the failure
to deliver an original signature page shall not affect the validity of any
signature delivered by facsimile.
15. SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Consultant, the Company and their
respective heirs, successors and assigns, except that Consultant may not assign
Consultant's rights or delegate Consultant's obligations hereunder without the
prior written consent of the Company.
16. CHOICE OF LAW. All issues and questions concerning the
construction, validity, enforcement and interpretation of this Agreement and the
exhibits and schedules hereto shall be governed by, and construed in accordance
with, the laws of the State of Florida, without giving effect to any choice of
law or conflict of law rules or provisions (whether of the State of Florida or
any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
17. AMENDMENT AND WAIVER. The provisions of this Agreement may be
amended or waived only with the prior written consent of the Company and
Consultant, and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement.
18. ARBITRATION. Any controversy which may arise between Consultant
and the Company with respect to the construction, interpretation or application
of any of the terms, provisions or conditions of this agreement or any monetary
claim arising from or relating to this agreement will be submitted to final and
binding arbitration in West Palm Beach, Florida, in accordance with the rules of
the American Arbitration Association then in effect.
19. INCORPORATION OF ATTACHMENTS BY REFERENCE. The attachments to this
Agreement are incorporated by reference and made a part hereof as if set forth
at length herein.
* * *
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
OFFICE DEPOT, INC. IRWIN HELFORD
By: x
------------------------- --------------------------
Name:
----------------------
Its:
----------------------
-7-
ATTACHMENT A
1. HEALTH INSURANCE. Provided this Agreement has not been terminated by
Consultant without Good Reason or by the Company for Cause, Consultant
and his eligible dependents shall be entitled to health insurance
coverage comparable to the health insurance Consultant and his eligible
dependents have received during the period of his prior employment with
Viking and Office Depot for the Term of this Agreement and ending at
the end of Consultant's natural life and for his spouse on the date of
this agreement for a period ending at the end of her natural life
(provided she survives Consultant). In the event this Agreement should
be terminated by the Company without Cause or by the Consultant for
Good Reason, such benefits shall continue as provided herein as if such
termination had not occurred. Such health insurance may be under the
terms of the existing policy of insurance provided to Consultant or
pursuant to any other insurance plan selected by the Company which
provides comparable coverage and benefits. As and to the extent
Consultant is eligible for coverage under the Medicare system of the
federal government (or any of his dependents is so eligible), this
benefit may take the form of the Company's providing either a policy of
Medigap insurance sufficient to provide to Consultant a comparable
level of medical insurance to that provided during his tenure with the
Company or payments to Consultant to reimburse him for the reasonable
costs of such coverage.
2. NO OTHER BENEFITS. Consultant shall otherwise receive none of the
benefits to which he may formerly have been entitled as an employee of
Viking, including without limitation, automobile allowance, tax and
financial planning, participation in other health and welfare plans, if
any.
OFFICE DEPOT, INC. Exhibit 13.1
FINANCIAL HIGHLIGHTS
(In thousands, except per share amounts and statistical data)
2001 2000(4) 1999 1998 1997
------------ ------------ ------------ ------------ ------------
STATEMENTS OF EARNINGS DATA:
Sales(1) ................................... $ 11,154,081 $ 11,569,696 $ 10,272,060 $ 8,997,738 $ 8,108,714
Cost of goods sold and occupancy costs ..... 7,983,973 8,479,437 7,450,575 6,484,699 5,963,521
------------ ------------ ------------ ------------ ------------
Gross profit .......................... 3,170,108 3,090,259 2,821,485 2,513,039 2,145,193
Store and warehouse operating
and selling expenses(1) ................... 2,343,394 2,409,478 2,023,055 1,683,973 1,482,179
General and administrative expenses(1) ..... 451,722 453,784 328,108 288,028 241,430
Facility closure costs ..................... 8,436 110,038 40,425 -- --
Other operating expenses ................... 12,125 6,733 16,524 136,279 22,703
------------ ------------ ------------ ------------ ------------
Operating profit ...................... 354,431 110,226 413,373 404,759 398,881
Interest income ............................ 13,058 11,502 30,176 25,309 7,570
Interest expense ........................... (44,302) (33,901) (26,148) (22,356) (21,680)
Miscellaneous income (expense), net ........ (9,057) 4,632 (3,514) (18,985) (13,180)
------------ ------------ ------------ ------------ ------------
Earnings before income taxes ............... 314,130 92,459 413,887 388,727 371,591
Income taxes ............................... 113,087 43,127 156,249 155,531 136,730
------------ ------------ ------------ ------------ ------------
Net earnings ............................... $ 201,043 $ 49,332 $ 257,638 $ 233,196 $ 234,861
============ ============ ============ ============ ============
Earnings per share(2):
Basic .................................... $ 0.67 $ 0.16 $ 0.71 $ 0.64 $ 0.65
Diluted .................................. 0.66 0.16 0.69 0.61 0.62
STATISTICAL DATA:
Facilities open at end of period:
United States and Canada:
Office supply stores ................... 859 888 825 702 602
Customer service centers ............... 24 25 30 30 33
Call centers ........................... 13 7 7 8 8
International(3):
Office supply stores ................... 143 132 118 87 39
Customer service centers ............... 23 19 19 18 17
Call centers ........................... 15 14 14 13 12
BALANCE SHEET DATA:
Working capital ............................ $ 704,676 $ 790,752 $ 687,007 $ 1,293,370 $ 1,093,463
Total assets ............................... 4,331,643 4,196,334 4,276,183 4,025,283 3,498,891
Long-term debt, excluding current maturities 317,552 598,499 321,099 470,711 447,020
Common stockholders' equity ................ 1,848,438 1,601,251 1,907,720 2,028,879 1,717,638
(1) Certain amounts in prior year financial statements have been
reclassified to conform to current year presentation.
(2) Earnings per share amounts previously reported for 1997 and 1998 have
been restated to reflect the three-for-two stock split declared on
February 24, 1999.
(3) Includes facilities in our International Division that we wholly own or
lease, as well as those that we operate through licensing and joint
venture agreements.
(4) Includes 53 weeks in accordance with our 52 - 53 week reporting
convention.
1
OFFICE DEPOT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Office Depot, Inc., together with our subsidiaries, ("Office Depot" or the
"Company") is the largest supplier of office products and services in the world.
We sell to consumers and businesses of all sizes through our three business
segments: North American Retail Division, Business Services Group, and
International Division. These segments include multiple sales channels
consisting of office supply stores, a contract sales force, Internet sites, and
catalog and delivery operations. Each of these segments is described in more
detail below. We operate on a 52- or 53-week fiscal year ending on the last
Saturday in December. Our results for the fiscal year 2000 contained 53 weeks;
all other years reflected in the preceding table contained 52 weeks.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to provide information to assist you in better
understanding and evaluating our financial condition and results of operations.
We recommend that you read this MD&A in conjunction with our Consolidated
Financial Statements and the Notes to those statements. This MD&A section
contains significant amounts of forward-looking information, and is qualified by
our Cautionary Statements regarding forward-looking information. You will find
Cautionary Statements throughout this MD&A; however, most of them can be found
in a separate section immediately following this MD&A. Without limitation, when
we use the words "believe," "estimate," "plan," "expect," "intend,"
"anticipate," "continue," "project," "should" and similar expressions in this
Annual Report, we are identifying forward-looking statements, and our Cautionary
Statements apply to these terms and expressions and the text in which such terms
and expressions are used.
NORTH AMERICAN RETAIL DIVISION
Our North American Retail Division sells office products, copy and
print services and other business-related services under the Office Depot(R) and
the Office Place(R) brands through our chain of high-volume office supply stores
in the United States and Canada. We opened our first office supply store in
Florida in October 1986. From inception, we have been a leader in the retail
office supplies industry, concentrating on expanding our store base and
increasing our sales in markets with high concentrations of small- and
medium-sized businesses. As of the end of 2001, our North American Retail
Division operated 859 office supply stores in 44 states, the District of
Columbia and Canada. Store activity for the last five years has been as follows:
Open at Stores Open at
Beginning -------------------- End
of Period Opened Closed of Period Relocated
--------- ------ ------ --------- ---------
1997 561 42 1 602 2
1998 602 101 1 702 5
1999 702 130 7 825 14
2000 825 70 7 888 4
2001 888 44 73 859 5
The number of store openings and closings over this five-year period has been
affected by our proposed (and subsequently abandoned) attempts to merge with
Staples, Inc. ("Staples"), another large company in the retail office products
segment. In 1996, we entered into an agreement and plan of merger with Staples.
The proposed merger was enjoined by a preliminary injunction granted by the
Federal District Court at the request of the Federal Trade Commission; and in
July 1997, we announced that the merger agreement had been terminated. During
this period of uncertainty, several of our key employees in the real estate area
left the Company. After the merger discussions with Staples were terminated, we
re-staffed our real estate department and aggressively re-launched our store
expansion program. Many of the retail store locations opened during this period
of aggressive expansion have not performed to our expectations. In 2000, we
scaled back our expansion plans and announced the closing of 70 under-performing
store locations in the first quarter of 2001. During 2001, we opened 44 new
stores, most of them in existing markets where we continue to find real estate
sites that enhance our current market positions, build density and target new
opportunities for growth. We also identified 13 additional under-performing
stores, three of which were closed in 2001.
In 2002, we plan to add 25 to 30 new retail stores, most of which will be
located in areas where we currently enjoy strong market positions, with the
balance in under-served markets. In future years, we expect to continue this
approach to retail store expansion, with an emphasis on market density in order
to leverage advertising dollars and cross-channel opportunities to create a
seamless customer experience across all channels. All new stores are expected to
incorporate a more efficient platform of approximately 20,000 square feet and to
feature a more interactive customer experience.
2
In 2001, we reorganized our management team and hired Jerry Colley as President,
North American Stores. Mr. Colley has now been with our Company approximately
one year; and he, in turn, has made numerous changes in our management ranks,
along with other changes in the ways in which we operate our retail stores. Mr.
Colley reports directly to our Chairman and CEO, Bruce Nelson.
BUSINESS SERVICES GROUP ("BSG")
In 1993 and 1994, we expanded into the contract office supply business by
acquiring eight contract stationers with 18 domestic customer service centers
and a professional outside sales force. These acquisitions allowed us to enter
the contract business and broaden our commercial (primarily catalog) and retail
delivery businesses. In 1998, we expanded our direct mail business through our
merger with Viking Office Products ("Viking"). Today, BSG sells office products
and services to contract and commercial customers through our Office Depot(R)
brand and Viking Office Products(R) brand direct mail catalogs and Internet
sites, and by means of our dedicated sales force. Customer service centers
("CSCs") are warehouse and delivery facilities, some of which also house sales
offices, call centers and administrative offices. Our CSCs perform warehousing
and delivery services on behalf of all segments of our business.
At the end of the third quarter of 1998, we operated 20 Office Depot and 10
Viking CSCs. At that time, we initiated, and later modified, plans to integrate
certain of our Viking and Office Depot warehouses, which were largely completed
during 2001. At the end of 2001, we operated 24 CSCs in the United States. Once
our integration is complete, we will operate 22 CSCs, consisting of nine Office
Depot facilities, two Viking facilities and 11 combined facilities.
In January 1998, we introduced our Office Depot public Web site
(WWW.OFFICEDEPOT.COM), offering our customers the convenience of shopping with
us on-line. In late August of 1998, when we merged with Viking, we also acquired
the Viking public Web site (WWW.VIKINGOP.COM). In 2001, when we acquired
4Sure.com, we acquired the 4Sure.com Web sites (WWW.COMPUTERS4SURE.COM and
WWW.SOLUTIONS4SURE.COM) aimed at technology purchasers. We believe our Internet
business will provide significant future growth opportunities for our BSG
segment and our business as a whole based on the growth rates we have
experienced over the last three years.
Throughout 2001, Robert Keller, was President of BSG. Mr. Keller has been with
our Company for four years in various executive capacities. Mr. Keller reports
to our Chairman and CEO, Bruce Nelson.
INTERNATIONAL DIVISION
Our International Division sells office products and services in 16 countries
outside the United States and Canada through Office Depot retail stores, Office
Depot(R) brand and Viking Office Products(R) brand direct mail catalogs and
Internet sites, and an Office Depot contract sales force. The international
direct marketing business was launched in 1990 under the Viking Office
Products(R) brand with the establishment of operations in the United Kingdom. We
have expanded internationally in a variety of ways, including licensing and
joint venture agreements, acquisitions, and the merger with Viking. Prior to
1998, our international business was operated entirely through licensing and
joint venture agreements. In 1998, we merged with Viking, whose international
operations were wholly-owned, and we subsequently acquired the remaining 50%
interest from our joint venture partner in France, bringing our ownership to
100%. In early 1999, we acquired the interests of our joint venture partner in
Japan, bringing our ownership to 100%. During 2001, we added the contract
stationer Sands & McDougall(TM) to our business in Australia.
In March 1999, we introduced our first international public Web site
(WWW.VIKING-DIRECT.CO.UK) for individuals and businesses in the United Kingdom.
Between 2000 and 2001, we introduced nine new public Web sites and one contract
Web site in the following countries: Germany (www.viking.de), The Netherlands
(www.vikingdirect.nl), Italy (www.vikingop.it), Australia (www.vikingop.com.au),
Japan (www.vikingop.co.jp and www.officedepot.co.jp), France
(www.vikingdirect.fr and www.officedepot.fr), Austria (www.vikingdirekt.at) and
the United Kingdom (bsdnet.officedepot.co.uk).
We launched our Office Depot contract business in the United Kingdom in 2000 and
began service in 2001 in three new countries - Ireland, The Netherlands and
France. This channel targets medium- to large-sized businesses and offers
personalized service through a dedicated sales force, individualized pricing and
overnight fulfillment, using our existing European logistics infrastructure.
3
At the end of 2001, our International Division sold office products and services
through either wholly-owned operations, or through joint ventures or licensing
agreements, in Australia, Austria, Belgium, France, Germany, Hungary, Ireland,
Israel, Italy, Japan, Luxembourg, Mexico, The Netherlands, Poland, Thailand and
the United Kingdom. Seven of these countries served retail customers through a
total of 143 office supply stores; 39 stores were wholly-owned. This compares to
132 stores in seven countries, 35 of which were wholly-owned, at the end of
2000. We also had catalog and delivery operations in 14 of these countries
during 2001. International Division store and CSC operations, including
facilities operated through licensing and joint venture agreements, for the last
five years are detailed below. All years prior to 1998 have been restated to
include facilities operated by Viking prior to our merger. Also, the number of
CSCs has been restated to reflect two combined store/CSC facilities that were
previously classified as stores only.
Office Supply Stores Customer Service Centers
------------------------------------------------------- -----------------------------------------------------
Open at Open at Open at Open at
Beginning End Beginning End
of Period Opened Closed of Period of Period Opened Closed of Period
--------- ------ ------ --------- --------- ------ ------ ---------
1997 21 18 -- 39 13 4 -- 17
1998 39 48 -- 87 17 2 1 18
1999 87 36 5 118 18 2 1 19
2000 118 19 5 132 19 -- -- 19
2001 132 15 4 143 19 5 1 23
In 2002, we plan to expand our International Division by opening 10 to 15 new
retail stores in France and Japan, adding the European Business Service Division
to two new countries and launching service in Spain and Switzerland.
As part of the overall restructuring of our management team, all of our European
operations were consolidated under the leadership of Rolf van Kaldekerken, who
is President of our European business. Mr. van Kaldekerken reports to our
Chairman and CEO, Bruce Nelson. During 2001, we also changed the management of
our operations in Japan, and named Richard Lepley, an experienced international
retailer, as President of Office Depot Japan and Viking Japan. Mr. Lepley
reports directly to our Chairman and CEO, Bruce Nelson.
RESULTS OF OPERATIONS
Fiscal 2001 was a year of improved operational performance across the Company
and increased overall earnings compared to 2000, even in the face of difficult
economic conditions and a decline in our consolidated sales. Diluted earnings
per share improved to $0.66 from $0.16 in 2000, and down from $0.69 in 1999.
Fiscal year 2000 was adversely affected by charges associated with a
comprehensive business review that resulted in the closing of 70 retail stores,
the write-down of certain assets and the elimination of some employee positions.
Additional store closure and impairment costs, the write-down of certain
Internet investments, settlement of certain employee claims and gain on the sale
of our London warehouse were recognized in 2001. Without these charges and
credits, EPS was $0.79 in 2001 and $0.70 in 2000. See CHARGES AND CREDITS
section below for additional discussion of these items.
OVERALL
(Dollars in millions) 2001 2000 1999
----------- ------------ -----------
Sales $ 11,154.1 100.0% $ 11,569.7 100.0% $ 10,272.1 100.0%
Cost of goods sold and occupancy costs 7,984.0 71.6% 8,479.4 73.3% 7,450.6 72.5%
----------- ----- ----------- ----- ----------- -----
Gross profit 3,170.1 28.4% 3,090.3 26.7% 2,821.5 27.5%
Store and warehouse operating
and selling expenses 2,343.4 21.0% 2,409.5 20.8% 2,023.1 19.7%
----------- ----- ----------- ----- ----------- -----
Store and warehouse operating profit $ 826.7 7.4% $ 680.8 5.9% $ 798.4 7.8%
=========== ===== =========== ===== =========== =====
Our overall sales decreased 4% in 2001 and increased 13% in 2000, while
comparable sales decreased 2% in 2001 and grew 7% in 2000. Fiscal year 2000
included 53 weeks in accordance with our 52-53 week accounting convention.
Adjusting 2000 to a 52-week basis, sales decreased 2% in 2001. The overall sales
decrease in 2001 reflects a 10% decrease in our North American Retail Division,
a 4% increase in our Business Services Group and a 6% increase in our
International Division. Sales across the United States were adversely affected
in 2001 by the slowing domestic economy. Additionally, the decline in sales of
our North American Retail Division reflects our decision to close 73 stores
during 2001, following our comprehensive business review performed in the latter
part of 2000. The largest percentage sales increases in 2000 were realized in
our BSG segment, driven most significantly by the growth in our contract and
Internet businesses. E-commerce sales have improved in all periods, increasing
almost 60% in 2001 to $1.6 billion. Also contributing significantly to our sales
growth in 2000 was the continued expansion of our store base.
4
Our worldwide sales by product group were as follows:
2001 2000 1999
----- ----- -----
General office supplies 44.2% 41.7% 41.0%
Technology products 46.3% 47.5% 47.5%
Office furniture 9.5% 10.8% 11.5%
----- ----- -----
100.0% 100.0% 100.0%
====== ====== ======
In both 2001 and 2000, our sales mix shifted toward our core office supply
items. Sales of technology products decreased significantly in 2001, reflecting
to a large extent, a general slowing of technology-related product sales in the
overall economy. Moreover, many more general and specialty retailers outside the
office products retail segment (including discount retailers, drug store chains
and warehouse club retailers) have broadened their assortments of technology
products. Technology products generally have lower profit margins compared to
many of the core office supplies. Also, within the technology products category,
the mix shifted from technology hardware and software towards machine supplies.
Sales of office furniture declined, reflecting lower volume and unit prices in
2001 and lower average selling prices during 2000, as many business customers
deferred large purchases because of concerns about the economy.
Our overall gross profit percentages fluctuate as a result of numerous factors,
including competitive pricing pressures; changes in product, catalog and
customer mix; emergence of new technology; suppliers' pricing changes; as well
as our ability to improve our net product costs through growth in total
merchandise purchases. Additionally, our occupancy costs may vary as we add
stores and CSCs in new markets with different rental and other occupancy costs,
and as we relocate and/or close existing stores in current markets.
In mid-2000, we reduced prices for paper and machine supplies across all of our
domestic sales channels in response to competitive pressures from discount clubs
and other non-traditional sellers of those supply items. These price reductions,
along with increased product costs, primarily for paper and machine supplies,
had the most significant effect on our decreased gross profit percentage in 2000
compared to 1999. These two product groups accounted for approximately 34% of
our total sales mix in 2000.
Store and warehouse operating and selling expenses consist of personnel costs;
maintenance and other facility costs; advertising expenses; delivery and
transportation costs; credit card and bank charges and certain other operating
and selling costs. These costs, expressed as a percentage of sales, increased in
both 2001 and 2000. The increase in 2001 reflects the impact of declining sales
on the ratio, while the increase in 2000 is primarily the result of higher
personnel and warehouse costs. In 2001, we scaled back our personnel-related
costs in response to weaker sales. Other expenses, such as credit card fees and
delivery fees, have also declined along with sales. In 2000, however, we
experienced higher delivery- and personnel-related costs in our warehouse
operations as third-party carriers increased their rates, and our facility
integration efforts took longer to complete than originally planned. We also had
a significant increase during 2000 in personnel expenses in our domestic stores,
largely related to wage pressures stemming from a tight labor market. Also
included in this category are certain charges and credits that affect the
comparisons of on-going operations and are more fully discussed below.
CHARGES AND CREDITS
Our financial results were significantly affected in 2001, 2000 and 1999 by
charges and credits that do not relate to on-going sales and service activities.
Charges recorded in 2000 were the largest and provide a context for some of the
charges in 2001. During the latter half of 2000, we conducted a comprehensive
business review of all aspects of our business. Commitments made at that time
resulted in a significant change in the Company's strategic direction and led to
modifications of our important business practices. Among other things, the
review resulted in a decision to close 70 under-performing North American retail
stores, close and relocate two warehouses, invest in new warehouse technologies,
reduce the number of slower-moving SKUs in our retail stores and North American
warehouses and modify business practices to increase efficiency. A total net
charge of $260.6 million was recorded and is summarized in the table below.
Included in the $174.7 million facility-related charge is $110.0 million in
facility closure costs and $64.7 million for the write-down of other impaired
assets and related exit costs. Other business review charges included $38.4
million for inventory reductions, a net $10.5 million provision for sales
returns and allowances and $12.6 million for the disposal of certain fixed
assets. Also in 2000, we recorded $32.5 million in severance costs, primarily
related to changes in senior management, and a net $6.8 million credit to adjust
a previous merger accrual for improved estimates of actual costs. Outside of
operations, we recorded impairment charges of $11.1 million relating to goodwill
in Japan and $45.5 million of other than temporary declines in the value of
certain Internet investments. Earlier in 2000, we also realized a $57.9 million
gain on the sale of certain Internet investments.
5
During 2001, we closed 73 stores, 70 of which were identified as part of our
comprehensive business review. We also identified 10 additional under-performing
stores to be closed in 2002. Charges of $43.6 million were recorded for asset
impairments relating to these stores, and to adjust estimated lease termination
costs recorded in 2000 resulting from a softening in the market for retail space
subleases, partially offset by a $10.2 million gain on sale of a warehouse. We
also reached settlement of certain non-recurring legal claims and recognized
amortization of an existing retention agreement. Non-operating expenses included
charges of $14.1 million, primarily to recognize an additional other than
temporary decline in value of certain Internet investments. As of the end of
2001, our Internet investment portfolio was carried at $15.2 million.
In late 1999, we changed our method of accounting for revenue generated from
sales of extended service warranty contracts. Under the laws of certain states,
we are obligated to assume the risk of loss associated with such contracts. In
these states, we modified our accounting to recognize revenue for warranty
service contract sales over the service period, which typically extends over a
period of one to four years. In those states where we are not the legal obligor,
we modified our accounting to recognize warranty revenues after deducting the
related direct costs. This change resulted in a reduction in our 1999 gross
profit of $15.8 million.
Also in 1999, we recorded a charge of $56.1 million to establish a provision for
slow-moving and obsolete inventories and we recorded facility closure charges of
$40.4 million to reflect our decision to accelerate our store closure program
for under-performing stores and our relocation program for older stores in our
North American Retail Division.
The following tables summarize the charges and credits by category and segment:
(Dollars in millions) 2001 2000 1999
-------- -------- --------
Earnings before taxes, excluding non-recurring
items $ 377.5 $ 353.0 $ 519.1
Charges and credits:
Facility-related, net 33.4 174.7 40.4
Other 2000 business review -- 61.5 --
Legal, merger and other operating 15.9 25.7 64.8
Internet investments and other non-operating 14.1 (1.3) --
-------- -------- --------
Total charges, net 63.4 260.6 105.2
-------- -------- --------
Earnings before taxes as reported $ 314.1 $ 92.4 $ 413.9
======== ======== ========
See Note B of the Notes to Consolidated Financial Statements for additional
discussion and line item presentation of the 2000 charges and credits.
(Dollars in millions) 2001 2000 1999
------- --------- --------
Distribution of charges and credits by segment:
North American Retail Division $ 43.6 $ 201.1 $ 88.3
BSG -- 8.6 (12.2)
International Division (10.2) 18.7 29.1
Other - Corporate 30.0 32.2 --
------- --------- --------
Total $ 63.4 $ 260.6 $ 105.2
======= ========= ========
After considering the effect of income taxes, the impact of these net charges on
our net earnings was $41.0 million, $172.9 million and $69.3 million for 2001,
2000, and 1999, respectively.
The components of segment operating profit presented below include the charges
and credits outlined above. Additionally, certain expenses, primarily
payroll-related, previously recorded in total company general and administrative
expenses have been reclassified to determine segment operating profit beginning
in 2001. Prior year amounts reflect the reclassification of these costs.
NORTH AMERICAN RETAIL DIVISION
(Dollars in millions) 2001 2000 1999
---------- ---------- ----------
Sales $ 5,842.6 100.0% $ 6,487.5 100.0% $ 5,893.4 100.0%
Cost of goods sold and occupancy costs 4,479.1 76.7% 5,065.0 78.1% 4,556.5 77.3%
---------- ---------- ----------
Gross profit 1,363.5 23.3% 1,422.5 21.9% 1,336.9 22.7%
Operating and selling expenses 1,046.7 17.9% 1,101.7 17.0% 923.2 15.7%
---------- ---------- ----------
Segment operating profit $ 316.8 5.4% $ 320.8 4.9% $ 413.7 7.0%
========== ========== ==========
6
Sales in our North American Retail Division decreased 10% in 2001 and increased
10% in 2000. Adjusting fiscal 2000 results to remove the 53rd week, sales
decreased 8% in 2001. The decrease was experienced across all regions of the
country and reflects the adverse effect of the weak U.S. economy. Additionally,
the sales decline during 2001 reflects the closing of 73 stores identified as
under-performing stores as part of the comprehensive business review in late
2000. The sales increase in 2000 was primarily achieved through our store
expansion program. For 2001, comparable sales in the 816 stores that had been
open for more than one year were down 8%. In 2000, comparable sales were
essentially even with 1999.
While sales decreased in 2001, gross profit expressed as a percent of sales
increased. Sales shifted away from lower-margin computer hardware, software and
office furniture and into products such as machine and office supplies, as well
as additional copy center services. Sales of computer products declined 26% in
2001 compared with an increase of 3% in 2000, reflecting declines in both volume
and average unit price. We are unable to predict when, and to what extent, this
trend will reverse. During 1999, we offered low priced units and more aggressive
promotional programs on computer products, including an instant rebate program
when the customer contracted for Internet service, which resulted in strong
sales for that year at lower margin percentages. The Internet service provider
instant rebate program was in effect for portions of 2000 and 2001. The sale of
business furniture declined 16% in 2001, after increasing 14% in 2000. The
decrease in 2001 is consistent with the slowing economy and decisions to cancel
or defer office-related purchases. The sale of business machine supplies
increased in both periods.
Lower margins realized on paper and machine supplies contributed most notably to
the decrease in gross profit in 2000 compared to 1999. Increased costs of these
core products and decreased prices in response to competitive pressures
negatively impacted gross profit. Also in 2000, sales increases in the North
American Retail Division were not sufficient to leverage the additional fixed
expenses incurred with the addition of new stores. Gross profit includes fixed
costs such as occupancy and rental costs for equipment in our print and copy
centers.
A significant portion of the comprehensive business review completed at the end
of 2000 was focused on the North American Retail Division and, among other
things, included a commitment to enhance the shoppers' experience in our retail
stores. To that end, we implemented a Division-wide re-merchandising campaign
that included personnel training, improved signage and lighting, improved
product adjacencies and additional private label merchandise. Also, as a result
of the business review, we closed 70 under-performing stores in early 2001 and
another three later in the year. The table above includes charges and credits
reported in line items through segment operating profit. In 2000, these charges
include $29.5 million to provide for sales returns and allowances, $10.1 million
for inventory adjustments and $57.8 million relating to asset impairments and
write-downs. Additional charges and credits relating to the North American
Retail Division, such as facility closure costs, were reported on line items
below segment operating profit and are discussed in the CHARGES AND CREDITS
section above. Fiscal year 2001 includes $35.2 million of charges relating to
additional store closures and impairments from 13 additional under-performing
stores, three of which were closed during the year.
In our North American Retail Division, the largest components of operating and
selling expenses are personnel, facility, advertising and credit card expenses.
Each of these components declined in 2001; and total operating and selling
expenses, excluding the charges outlined above, decreased 3% in 2001. Personnel
costs, which represent over 50% of the total costs in this caption, showed the
largest decline as payroll was adjusted down in response to declining sales and
from a net reduction in stores. Personnel costs in 2000 were higher than in
1999, primarily because of competitive wage pressure and the need to attract
more highly skilled employees in certain positions. Additionally, rent and
depreciation expense decreased in 2001 from store closings, partially offset by
adding 44 stores during the year. Lower sales in 2001 also contributed to lower
credit card fees and reduced advertising. In 2000, we saw an increase in
delivery orders as a percentage of total store sales. These orders are delivered
by the warehousing operations in our BSG, which allocates a portion of their
cost to cover the delivery expense. As explained in the BSG section below,
warehouse expenses increased in 2000, which also negatively impacted operating
and selling expenses. Delivery and transportation costs declined slightly in
2001.
BSG
(Dollars in millions) 2001 2000 1999
---------- ---------- ----------
Sales $ 3,763.0 100.0% $ 3,618.8 100.0% $ 3,057.2 100.0%
Cost of goods sold and occupancy costs 2,573.9 68.4% 2,526.6 69.8% 2,108.0 69.0%
---------- ---------- ----------
Gross profit 1,189.1 31.6% 1,092.2 30.2% 949.2 31.0%
Operating and selling expenses 897.9 23.9% 910.8 25.2% 727.8 23.8%
---------- ---------- ----------
Segment operating profit $ 291.2 7.7% $ 181.4 5.0% $ 221.4 7.2%
========== ========== ==========
7
Sales in our BSG segment grew 4% in 2001 and 18% in 2000. Adjusting fiscal 2000
to a 52-week basis, sales increased 6% in 2001. While sales increased for the
year, the rate of growth for both contract and commercial business declined over
the course of the year, consistent with the slowing U.S. economy. Sales in the
western U.S. displayed the greatest decline following the general slowdown in
the technology services sector. The growth in 2000 sales reflects an increase in
our large business customer base and significant growth in our Internet
business. We expect continued growth in our Internet sales during 2002 as we
allocate additional resources to that sales channel. Machine supplies include
laser, inkjet and copier supplies, and increased 16% in 2001 and 27% in 2000.
General office supplies and paper sales also increased in both periods.
Technology-related sales are a smaller part of BSG sales, but they declined in
2001 after showing some gains in 2000. Office furniture sales declined 11% in
2001.
Gross profit was enhanced during 2001 as we maintained stricter adherence to
volume-dependent pricing arrangements. We earn higher gross profit percentages
in our BSG than in our retail operations principally as the result of lower
occupancy costs and a relative sales mix with fewer technology products. Paper,
machine supplies, and other general office supplies, which yield higher margins
than our other product groups, account for a much larger percentage of total
sales in our BSG than in our stores. However, BSG's gross profit percentages are
lower than in our International Division as a result of the lower relative
pricing we negotiate with our contract customers. Contributing to the decrease
in our BSG's gross profit from 1999 to 2000 was an increase in paper costs,
coupled with reduced prices for paper products, ink and toner in response to
competitive pressures. Further, these products increased in our product mix,
which compounded the negative impact on gross profit.
The 2000 comprehensive business review also covered operations of BSG and
included a number of initiatives to improve delivery operations, lower warehouse
costs and improve customer satisfaction. Included in fiscal year 2000 results
are net charges of $10.9 million for inventory adjustments, sales returns and
allowances, and facility closure costs. No similar charges or credits were
recorded in 2001. During 2001, on-time deliveries, order fill rates and quality
index calculations all increased, and customer complaints decreased
significantly.
Personnel, facility and delivery expenses are the largest components of our BSG
operating expenses. Operating and selling expenses as a percentage of sales
decreased in 2001 primarily from reduced personnel and outside labor costs. Call
center modifications and warehouse efficiency programs were significant
contributors to lower personnel-related costs. Delivery costs decreased as we
lowered our use of third-party vendors and added technology to streamline
operations. Advertising expenses increased in 2001 as we received lower
cooperative advertising payments from participating vendors. Operating and
selling expenses as a percentage of sales are significantly higher in our BSG
than in our North American Retail Division, principally because of the need for
a more experienced and highly compensated sales force that directly calls on our
BSG customers. In 2000, operating and selling expenses increased over 1999
primarily as a result of higher delivery costs arising from increased rates
charged by third-party carriers, and from personnel-related expenses associated
with our warehouse staff. Furthermore, a larger workforce was required to handle
the execution of our warehouse integration plans. During the transition into
integrated facilities, we incurred certain incremental expenses related to
preparing for the increased volume of deliveries and the dual-brand fulfillment
in the newly integrated facilities. During 2002, we anticipate two new
distribution facilities, one in Atlanta and the other in Baltimore, to replace
outdated facilities, which have reached capacity. These new facilities are
expected to enhance our ability to grow in these two important markets.
INTERNATIONAL DIVISION
(Dollars in millions) 2001 2000 1999
----------------------- ------------------------ ------------------------
Sales $ 1,552.0 100.0% $ 1,467.4 100.0% $ 1,352.4 100.0%
Cost of goods sold and occupancy costs 932.3 60.1% 890.0 60.7% 788.3 59.5%
---------- ---------- ----------
Gross profit 619.7 39.9% 577.4 39.3% 537.1 40.5%
Operating and selling expenses 400.3 25.8% 398.5 27.1% 373.6 28.2%
---------- ---------- ----------
Segment operating profit $ 219.4 14.1% $ 178.9 12.2% $ 163.5 12.3%
========== ========== ==========
Sales in our International Division grew 6% in 2001 and 11% in 2000. Adjusting
fiscal 2000 to a 52-week basis, sales increased 8% in 2001. Foreign currency
translations adversely affected sales in all periods. Excluding the foreign
currency effect, sales in our International Division grew 11% in 2001 and 23% in
2000. Comparable sales, excluding the foreign currency effect, increased 12% in
the current year compared with growth of over 30% in 2000. These increases in
2001 were achieved despite softness experienced in our operations in larger
European countries relating to softer economic conditions generally throughout
Europe. Although the Office Depot(R) brand continues to grow as a percentage of
the total sales in this segment, our Viking Office Products(R) brand still
accounts for the vast majority of our international business, representing
approximately 87% of all international sales in 2001 and 88% in 2000. These
Viking catalog operations had local currency comparable sales increases of 11%
in 2001 and 16% in 2000. Competitive, political, and economic conditions in
international markets in which we operate may impact our sales in the future.
8
As noted above, sales in local currencies have substantially increased in recent
years. For U.S. reporting, these sales are translated into U.S. dollars at
average exchange rates during the year. The strong U.S. dollar has adversely
affected reported sales in each of the three years presented, in some cases
significantly. To the extent the U.S. dollar continues to strengthen relative to
the currencies where we conduct business, this adverse effect on reported sales
can be expected to continue.
Gross profit as a percentage of sales increased in 2001 and reflects pricing
initiatives in certain machine and general office supply categories, partially
offset by the introduction of our lower-margin contract sales in certain
European countries. The decrease in gross profit as a percent of sales in 2000
resulted from an unfavorable mix shift towards machine supplies, primarily ink
and toner cartridges, which yield lower gross profit margins than other
products. As with our other segments, our International Division was affected by
higher costs for paper and machine supplies in 2000. However, unlike our
domestic segments, the effect of these cost increases was lessened with
increased pricing in our catalogs during the latter half of the year.
Operating and selling expenses as a percentage of sales are higher in our
International Division than in our other segments primarily because we use an
extensive marketing program to drive sales in new and existing markets, and we
have start-up activities in several markets. Similar to our BSG, personnel and
delivery expenses are significant components of our International Division's
operating and selling expenses. Additionally, the cost of catalog preparation
and mailing is a significant component to support the direct mail channel.
Continuing a trend that began in 2000, advertising expenses continued to
decline, reflecting the impact of improved mailing efficiencies throughout
Europe in 2001, as well as continued improvement in our use of more effective
advertising campaigns in Japan. In 1999, increasing competition in many of our
established markets, coupled with our efforts to gain market share in certain
newer markets, drove up our advertising costs.
During 2001, we incurred additional operating expenses related to the start up
of contract businesses in Europe along with the acquisition of a contract
stationer in Australia. These incremental costs are normal as we continue
developing our business in new markets. These expenses are offset by continuing
improvement in certain fixed operating expenses. As our operations grow in a
particular market, fixed operating expenses decline relative to sales. For
example, advertising costs in the form of prospecting and delivery costs, which
are affected by the density of the delivery areas, decline as a percentage of
sales as the market grows. We expect to leverage certain fixed operating
expenses, and our cost to attract new customers should decline as a percentage
of sales as we continue to establish our brands and grow our international
business.
Fiscal 2001 includes a gain of $10.2 million from the sale of a London warehouse
and fiscal 2000 includes charges of $5.3 million for closed stores and
facilities resulting from the 2000 comprehensive business review.
CORPORATE AND OTHER
PRE-OPENING EXPENSES
(Dollars in thousands) 2001 2000 1999
------- ------- -------
Pre-opening expenses $10,172 $13,465 $23,628
Office supply stores opened* 55 78 159
* INCLUDES DOMESTIC AND WHOLLY-OWNED INTERNATIONAL OPENINGS AND RELOCATIONS.
Our pre-opening expenses consist principally of personnel, property and
advertising expenses incurred in opening or relocating stores in our North
American Retail Division. Our pre-opening expenses also include, to a lesser
extent, expenses incurred to open or relocate facilities in our BSG and
International Division. We typically incur pre-opening expenses during a
six-week period prior to a store opening. Because we expense these items as they
are incurred, the amount of pre-opening expenses each year is generally
proportional to the number of new stores opened during the period. This has been
the primary contribution to the fluctuation in pre-opening expenses over the
three years presented. For 2001, our pre-opening expenses approximated $160,000
per domestic office supply store and $101,000 per international office supply
store. Our cost to open a new CSC varies significantly with the size and
location of the facility. We currently estimate costs to open a domestic or
international CSC to be $1.5 million per facility.
9
GENERAL AND ADMINISTRATIVE EXPENSES
(Dollars in thousands) 2001 2000 1999
-------- -------- --------
General and administrative expenses $451,722 $453,784 $328,108
Percentage of sales 4.0% 3.9% 3.2%
Our general and administrative expenses primarily consist of personnel-related
costs associated with support functions. Because these functions, for the most
part, support all segments of our business, we do not consider these costs in
determining our segment profitability. Throughout 2000 and 1999, we developed
improvements in our infrastructure, particularly in the areas of Supply Chain
Management, MIS and International. These areas were significant contributors to
the increases in our general and administrative expenses in those years. The
primary benefits derived from this increased spending were the expansion and
improvement of our e-commerce services, a new data center, improvements in our
inventory in-stock positions and support for our rapidly growing International
Division. Also included in this category in 1999 are expenses relating to our
CSC consolidation and integration initiatives.
OTHER INCOME AND EXPENSE
(Dollars in thousands) 2001 2000 1999
-------- -------- --------
Interest income $ 13,058 $ 11,502 $ 30,176
Interest expense (44,302) (33,901) (26,148)
Miscellaneous income (expense), net (9,057) 4,632 (3,514)
Financing and investing activities are not included in determining segment
profitability. During 2001, we issued $250 million of senior subordinated notes
that mature in 2008. We also entered into swap agreements to convert these notes
to a variable interest rate, to balancing our fixed and variable interest
portfolio. Interest expense in 2001 reflects this additional borrowing. Higher
cash balances from this borrowing and increased cash flow from operations
contributed to the increase in interest income in 2001, despite a decreasing
interest rate environment. Cash balances, and related interest income, declined
in 2000 reflecting $300.8 million of cash used for purchases of our stock.
During the fourth quarter of 2000, we began borrowing against our domestic
credit facility, which led to increased interest expense over 1999. These
borrowings were repaid during 2001. Also, reserves established in connection
with the 2000 comprehensive business review, and in 2001 for future lease
obligations related to our facility closures and merger activities, are recorded
at the net present value of the obligation. As we pay these obligations, the
imputed interest cost on the discounted obligations is recognized as interest
expense. This has also caused interest expense to increase in 2000 compared to
1999 and should be expected to continue in future years.
Our net miscellaneous income (expense) consists of equity in the earnings of our
joint venture investments, royalty and franchise income that we generate from
licensing and franchise agreements, and gains or impairments on Internet
investments. All of our equity investments involve operations outside of the
United States and Canada. Impairment charges for other than temporary declines
in value of certain Internet investments were $14.7 million in 2001 and $45.5
million in 2000. Fiscal year 2000 also included a realized gain of $57.9 million
from the sale of certain Internet investments and $11.1 million of goodwill
impairment in Japan. Under accounting rules that apply in 2002, we will no
longer record goodwill amortization, but will test each year for possible
impairment. See NEW ACCOUNTING STANDARDS below.
INCOME TAXES
(Dollars in thousands) 2001 2000 1999
--------- -------- ---------
Income Taxes $ 113,087 $ 43,127 $ 156,249
Effective income tax rate* 36.0% 46.6% 37.8%
Effective income tax rate*, excluding
merger and restructuring costs and 36.0% 37.0% 37.0%
other one-time charges and credits
*Income Taxes as a percentage of earnings before income taxes.
The effective income tax rate in 2001 declined to 36%, primarily reflecting the
increase in International activity taxed at lower rates. The effective tax rate
may decline further during 2002.
In 2000 and 1999, certain non-deductible merger-related charges and other
one-time charges caused our overall effective income tax rates to rise. Our
overall effective income tax rate, excluding these charges, may fluctuate in the
future as a result of the mix of pre-tax income and tax rates between countries.
10
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by (used in) our operating, investing and financing activities is
summarized as follows:
(Dollars in thousands) 2001 2000 1999
--------- --------- ---------
Operating activities $ 747,166 $ 316,482 $ 369,449
Investing activities (231,944) (239,365) (447,841)
Financing activities (85,403) (134,093) (405,849)
OPERATING AND INVESTING ACTIVITIES
We have historically relied on cash flows generated from operations as our
primary source of funds because the majority of store sales are generated on a
cash and carry basis. Furthermore, we use private label credit card programs,
administered and financed by financial services companies, to expand sales
without the burden of carrying additional receivables. Our cash requirements are
also reduced by vendor credit terms that allow us to finance a portion of our
inventory. We generally offer credit terms, under which we carry our own
receivables, to contract and certain direct mail customers. As we expand our
contract and direct mail businesses, we anticipate that our accounts receivable
portfolio will continue to grow. Amounts due for rebate, cooperative advertising
and marketing programs with our vendors comprise a significant percentage of
total receivables. These receivables tend to fluctuate seasonally (growing
during the second half of the year and declining during the first half), because
certain collections do not happen until after an entire program year has been
completed.
The increase in operating cash flows in 2001 is primarily attributable to an
improvement in operating profit and a focus on reducing certain components of
working capital, following the 2000 comprehensive business review. During 2001,
both accounts receivable and inventory balances decreased significantly,
primarily from management actions. Inventory levels held in stores and CSCs
decreased in each consecutive year presented because of improved inventory
turnover, our SKU reduction program and our focus on supply chain management.
Operating cash flows in 2000 declined mainly due to lower gross profit, higher
store and warehouse operating and selling expenses and higher general and
administrative expenses.
The number of stores and CSCs we open or remodel each year generally drives the
volume of our capital investments. Over the past three years our capital
expenditures have decreased as fewer stores have been opened in each successive
year. Additionally, throughout 2001 we more closely scrutinized capital
expenditures with an emphasis on improving our return on assets. During 2000, we
also had significant expenditures related to our Viking integration plans. In
1999, computer and other equipment purchases at our corporate offices and at our
facilities, necessary to complete Y2K remediation, relocation of our corporate
data center, and support for our store expansion, also contributed to our
increased cash investing needs.
We currently plan to open 25 to 30 stores in our North American Retail Division
and 10 to 15 stores in our International Division during 2002. We estimate that
our cash investing requirements will be approximately $1.1 million for each new
domestic office supply store. The $1.1 million includes approximately $0.5
million for leasehold improvements, fixtures, point-of-sale terminals and other
equipment, and approximately $0.6 million for the portion of our inventories
that will not be financed by our vendors. In addition, our average new office
supply store requires pre-opening expenses of approximately $0.2 million. We
also plan to expand our European Business Service Division into two new
countries.
We have expanded our presence in the e-commerce marketplace by acquiring
Internet-based companies and entering into strategic business relationships with
several Web-based providers of business-to-business e-commerce solutions. In
2001, we acquired the operations of 4Sure.com, an Internet-based technology
business. We made non-controlling investments in technology-related companies
during 2000 and 1999 of $30.1 million and $50.7 million, respectively. During
2000, we sold certain of these investments and realized a gain of $57.9 million.
Also, we recorded impairment charges of $14.7 million in 2001 and $45.5 million
in 2000 to recognize the other than temporary declines in value. The carrying
value of these investments at December 29, 2001 and December 30, 2000 was $15.2
million and $29.9 million, respectively. We will continue to look for
opportunities to invest in companies that provide business-to-business
e-commerce solutions for small- and medium-sized businesses.
FINANCING ACTIVITIES
Our domestic credit facilities provide us with a maximum of $555.0 million in
funds. These facilities consist of two separate credit agreements, a five-year
loan providing us with a working capital line and letters of credit capacity
totaling $300.0 million, and a 364-day loan for working capital totaling $255.0
million. As of December 29, 2001, we had no outstanding borrowings under these
lines of credit; we did have letters of credit totaling $36.8 million against
the five-year facility. Our five-year agreement was entered into in February
1998 and has various borrowing rate options, including a rate based on our
credit rating that currently would result in an interest rate of 0.70% over the
London Interbank Offered Rate ("LIBOR"). Our credit agreement entered into in
June 2001 with a 364-day term also has various borrowing rate options, including
a current borrowing rate of 0.95% over LIBOR. Both agreements contain similar
restrictive covenants relating to various financial statement ratios.
11
In July 2001, we issued $250 million of seven year, non-callable, senior
subordinated notes due on July 15, 2008. The notes contain provisions that, in
certain circumstances, place financial restrictions or limitations on our
Company. The notes have a coupon interest rate of 10.00%, payable semi-annually
on January 15 and July 15. In August 2001, we entered into LIBOR-based variable
rate swap agreements with notional amounts aggregating $250 million. The
effective interest rate since August 2001 was 7.8% and, beginning in January
2002, was 6.15%. This rate will be reset every six months.
In July 1999, we entered into term loan and revolving credit agreements with
several Japanese banks (the "yen facilities") to provide financing for our
operating and expansion activities in Japan. The yen facilities provide for
maximum aggregate borrowings of (Y)9.76 billion (the equivalent of $74.5 million
at December 29, 2001) at an interest rate of 0.875% over the Tokyo Interbank
Offered Rate ("TIBOR"). These facilities are available to us until July 2002,
and are therefore classified as current on our balance sheet. The yen facilities
loan agreements are tied to the covenants in our domestic facilities described
earlier. As of December 29, 2001, we had outstanding yen borrowings equivalent
to $74.5 million under these yen facilities, with an average effective interest
rate of 1.118%. Effective October 28, 1999, we entered into a yen interest rate
swap with a financial institution for a principal amount equivalent to $18.6
million at December 29, 2001 in order to hedge against the volatility of the
interest payments on a portion of our yen borrowings. The terms of the swap
specify that we pay an interest rate of 0.700% and receive TIBOR. The swap will
mature in July 2002.
In addition to bank borrowings, we have historically used equity capital,
convertible debt and capital equipment leases as supplemental sources of funds.
In October 2001, our Board of Directors authorized the Company to repurchase up
to $50 million of its common stock each year until rescinded by the Board. The
repurchased shares will be added to the Company's treasury shares and will be
used to meet the Company's near-term requirements for its stock option and other
benefit plans. During 2001, we repurchased approximately 252,000 shares of our
stock at a total cost of $4.2 million plus commissions.
In August 1999, our Board approved a $500 million stock repurchase program
reflecting its belief that our common stock represented a significant value at
its then-current trading price. We purchased 46.7 million shares of our stock at
a total cost of $500 million plus commissions during the third and fourth
quarters of 1999. During the first half of 2000, our Board approved additional
stock repurchases of up to $300 million, bringing our total authorization to
$800 million. We completed these programs during 2000, purchasing an additional
35.4 million shares of our stock at a total cost of $300 million plus
commissions.
In 1992 and 1993, we issued certain Liquid Yield Option Notes ("LYONs(R)"),
which are zero coupon, convertible subordinated notes maturing in 2007 and 2008,
respectively. Each LYON(R) is convertible at the option of the holder at any
time on or prior to its maturity into Office Depot common stock at conversion
rates of 43.895 and 31.851 shares per 1992 and 1993 LYON(R), respectively. On
November 1, 2000, the majority of the holders of our 1993 LYONs(R) required us
to purchase the LYONs(R) from them at the issue price plus accrued original
issue discount. We paid the holders $249.2 million in connection with this
repurchase, and reclassified the remaining 1993 LYONs(R) obligation as
long-term. Our 1992 LYONs(R) have a similar provision whereby the holders may
require us to purchase these notes at the issue price plus accrued original
issue discount on December 11, 2002, and therefore, these obligations totaling
$233.5 million have been classified as a current liability on our Consolidated
Balance Sheet. If the holders decide to exercise their put option, we have the
choice of paying the holders in cash, common stock or a combination of the two.
Our 2001 net cash used in financing activities consisted mainly of long- and
short-term debt payments of $400.5 million to pay off our domestic credit
facility debt that was accumulated in the fourth quarter of 2000. These payments
were partially offset by proceeds received in 2001 from the issuance of $250
million in senior subordinated notes as discussed above. For 2000, our stock
repurchase and the repurchase of our 1993 LYONs(R) made up the majority of cash
used in financing activities. We began borrowing from our domestic credit
facilities during the fourth quarter of 2000, primarily to fund the LYONs(R)
repurchase. We continually review our financing options. Although we currently
anticipate that we will finance all of our 2002 operations, expansion and other
activities through cash on hand, funds generated from operations, equipment
leases and funds available under our credit facilities, we will consider
alternative financing as appropriate for market conditions.
12
The following table summarizes the Company's long-term obligations at December
29, 2001:
(Dollars in millions) Payments due by Period
--------------------------------------------------------------------
Less than After 5
Contractual Cash Obligations Total 1 year 1 - 3 years 4 - 5 years years
---------- --------- ----------- ----------- ----------
Long-term debt $ 555.6 $ 308.0 $ -- $ -- $ 247.6
Capital lease obligations 122.9 15.9 25.1 13.2 68.7
Operating leases 2,590.4 400.0 645.8 469.0 1,075.6
Unconditional purchase obligations 2.1 2.1 -- -- --
---------- -------- -------- -------- ----------
Total contractual cash obligations $ 3,271.0 $ 726.0 $ 670.9 $ 482.2 $ 1,391.9
========== ======== ======== ======== ==========
Approximately $308 million of obligations have been classified as current
maturities in the Consolidated Balance Sheet because of an investor call
provision relating to $233.5 million of obligations and the scheduled agreement
termination relating to the U.S. dollar equivalent of $74.5 million of debt
denominated in Japanese Yen. These amounts may be reclassified as long-term
obligations if investors fail to exercise the call provision and the Company
renegotiates the Japanese debt.
Additionally, we have Letters of Credit totaling $36.8 million outstanding at
the end of the year and we have recourse for private label credit card
receivables transferred to a third party. We record an estimate for losses on
these receivables in our financial statements. The total outstanding amount
transferred to third a party at the end of the year was approximately $252
million.
SIGNIFICANT ACCOUNTING POLICIES
Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. As
such, some accounting policies have a significant impact on amounts reported in
these financial statements. A summary of those significant accounting policies
can be found in Notes to the Consolidated Financial Statements as NOTE A. In
particular, judgment is used in areas such as determining the allowance for
uncollectible accounts, cooperative advertising and vendor programs, the
provision for sales returns and allowances, self-insurance accruals, adjustments
to inventory valuations and provisions for store closures and asset impairments.
SIGNIFICANT TRENDS, DEVELOPMENTS AND UNCERTAINTIES
Over the years, we have seen continued development and growth of competitors in
all segments of our business. In particular, mass merchandisers and warehouse
clubs have increased their assortment of home office merchandise, attracting
additional back-to-school customers and year-round casual shoppers. We also face
competition from other office supply superstores that compete directly with us
in numerous markets. This competition is likely to result in increased
competitive pressures on pricing, product selection and services provided. Many
of these retail competitors, including discounters, warehouse clubs, and even
drug stores and grocery chains, have begun carrying at least limited numbers of
basic office supply products, including ink jet and toner cartridges, printer
paper and other basic supplies. Some of them have also begun to feature
technology products. Many of them price these offerings lower than we do, but
they have not shown any indication of greatly expanding their somewhat limited
product offerings at this time. This trend towards a proliferation of retailers
offering a limited assortment of office products is a potentially serious trend
in the industry, and one that our management is watching closely.
We have also seen growth in new and innovative competitors that offer office
products over the Internet, featuring special purchase incentives and one-time
deals (such as close-outs). Through our own successful Internet and
business-to-business Web sites, we believe that we have positioned ourselves
competitively in the e-commerce arena.
MARKET SENSITIVE RISKS AND POSITIONS
We have market risk exposure related to interest rates and foreign currency
exchange rates. Market risk is measured as the potential negative impact on
earnings, cash flows or fair values resulting from a hypothetical change in
interest rates or foreign currency exchange rates over the next year. We manage
the exposure to market risks at the corporate level. The portfolio of
interest-sensitive assets and liabilities is monitored and adjusted to provide
liquidity necessary to satisfy anticipated short-term needs. The percentage of
fixed and variable rate debt is managed through borrowings and interest rate
swap agreements to fall within a desired range. Our risk management policies
allow the use of specified financial instruments for hedging purposes only;
speculation on interest rates or foreign currency rates is not permitted.
13
INTEREST RATE RISK
We are exposed to the impact of interest rate changes on cash equivalents and
debt obligations. The impact on cash and short-term investments held at the end
of 2001 of a hypothetical 10% decrease in interest rates would be a decrease in
interest income of approximately $1 million in 2002.
Market risk associated with our debt portfolio is summarized below:
2001 2000
------------------------------------------- ------------------------------------------
(Dollars in thousands) Carrying Fair Risk Carrying Fair Risk
Value Value Sensitivity Value Value Sensitivity
-------- -------- ----------- --------- -------- -----------
Fixed interest rate debt(1) $481,107 $531,602 $ 6,770 $224,438 $196,700 $ 732
Variable interest rate debt(1) 74,509 74,509 373 453,568 453,568 1,948
(1) Including current maturities.
The risk sensitivity of fixed rate debt reflects the estimated increase in fair
value from a 50 basis point decrease in interest rates, calculated on a
discounted cash flow basis. The sensitivity of variable rate debt reflects the
possible increase in interest expense during the next period from a 50 basis
point change in interest rates prevailing at year end.
During 2001, we entered into an interest rate swap agreement to receive fixed
and pay floating rates, converting the equivalent of $250 million of this
portfolio to variable rate debt through 2008. The fair value of this agreement
at December 29, 2001 was immaterial. Additionally, the variable interest
payments of certain overseas debt have been hedged through mid-year 2002 under a
variable to fixed rate swap agreement. The U.S. dollar equivalent notional
amount was $18.6 million at year-end 2001 and $21.0 million at year-end 2000.
Sensitivity of this agreement to a 50 basis point change in interest rates was
not material in either period.
FOREIGN EXCHANGE RATE RISK
We conduct business in various countries outside the United States where the
functional currency of the country is not the U.S. dollar. This results in
foreign exchange translation exposure when results of these foreign operations
are translated into U.S. dollars in our consolidated financial statements. As of
December 29, 2001, a 10% change in the applicable foreign exchange rates would
result in an increase or decrease in our operating profit of approximately $11
million.
We are also subject to foreign exchange transaction exposure when our
subsidiaries transact business in a currency other than their own functional
currency. This exposure arises primarily from a limited amount of inventory
purchases in a foreign currency. The introduction of the euro and our decision
to consolidate our European purchases has greatly reduced these exposures.
During 2001, foreign exchange forward contracts to hedge certain inventory
exposures were less than $16.4 million.
One practical effect of the strong U.S. dollar over the past several years has
been a reduction in the reported results of operations from our extensive
overseas operations, due to the requirement to report our results in U.S.
dollars. While we look for opportunities to reduce our exposure to foreign
currency fluctuation against the U.S. dollar, at this point we have determined
not to pursue hedging opportunities generally.
INFLATION AND SEASONALITY
Although we cannot determine the precise effects of inflation on our business,
we do not believe inflation has a material impact on our sales or the results of
our operations. We consider our business to be somewhat seasonal, with sales in
our North American Retail Division and Business Services Group slightly higher
during the first and fourth quarters of each year, and sales in our
International Division slightly higher in the third quarter.
14
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 141, ACCOUNTING FOR BUSINESS COMBINATIONS, and Statement No. 142, GOODWILL
AND OTHER INTANGIBLE ASSETS. These Statements modify accounting for business
combinations after June 30, 2001 and will affect the Company's treatment of
goodwill and other intangible assets at the start of fiscal year 2002. The
Statements require that goodwill existing at the date of adoption be reviewed
for possible impairment and that impairment tests be periodically repeated, with
impaired assets written down to fair value. The initial test of goodwill must be
completed within six months of adoption, or by June 2002 for Office Depot, with
a completion of testing by the end of 2002. Additionally, existing goodwill and
intangible assets must be assessed and classified consistent with the
Statements' criteria. Intangible assets with estimated useful lives will
continue to be amortized over those periods. Amortization of goodwill and
intangible assets with indeterminate lives will cease. We have not yet completed
the initial test of existing goodwill and, accordingly, cannot estimate the full
impact of these rules. However, goodwill amortization, which totaled $7.0
million for 2001, will no longer be recorded.
In July 2001, the FASB issued Statement No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS. This Statement requires capitalizing any retirement costs as part
of the total cost of the related long-lived asset and subsequently allocating
the total expense to future periods using a systematic and rational method.
Adoption of this Statement is required for Office Depot with the beginning of
fiscal year 2003. We have not yet completed our evaluation of the impact of
adopting this Statement.
In October 2001, the FASB issued Statement No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. This Statement supersedes Statement
No. 121 but retains many of its fundamental provisions. Additionally, this
Statement expands the scope of discontinued operations to include more disposal
transactions. The provisions of this Statement are effective for Office Depot
with the beginning of fiscal year 2002. We do not anticipate a significant
impact to the Company's results of operations from adoption of this Statement.
15
OFFICE DEPOT, INC.
CAUTIONARY STATEMENTS for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
CAUTIONARY STATEMENTS
In December 1995, the Private Securities Litigation Reform Act of 1995 (the
"Act") was enacted by the United States Congress. The Act, as amended, contains
certain amendments to the Securities Act of 1933 and the Securities Exchange Act
of 1934. These amendments provide protection from liability in private lawsuits
for "forward-looking" statements made by public companies. We want to take
advantage of the "safe harbor" provisions of the Act. In doing so, we have
disclosed these forward-looking statements by informing you in specific
cautionary statements of the circumstances which may cause the information in
these statements not to transpire as expected.
This Annual Report contains both historical information and other information
that you can use to infer future performance. Examples of historical information
include our annual financial statements and the commentary on past performance
contained in our MD&A. While we have specifically identified certain information
as being forward-looking in the context of its presentation, we caution you
that, with the exception of information that is clearly historical, all the
information contained in this Annual Report should be considered to be
"forward-looking statements" as referred to in the Act. Without limiting the
generality of the preceding sentence, any time we use the words "estimate,"
"project," "intend," "expect," "believe," "anticipate," "continue" and similar
expressions, we intend to clearly express that the information deals with
possible future events and is forward-looking in nature.
Forward-looking information involves risks and uncertainties, including certain
matters that we discuss in more detail below and in our report on Form 10-K,
filed with the Securities & Exchange Commission. This information is based on
various factors and important assumptions about future events that may or may
not actually come true. As a result, our operations and financial results in the
future could differ materially and substantially from those we have discussed in
the forward-looking statements in this Annual Report. In particular, the factors
we discuss below and in our Form 10-K could affect our actual results and could
cause our actual results in 2002 and in future years to differ materially from
those expressed in any forward-looking statement made by us or on our behalf in
this Annual Report.
COMPETITION: We compete with a variety of retailers, dealers and distributors in
a highly competitive marketplace that includes high-volume office supply chains,
warehouse clubs, computer stores, contract stationers and well-established mass
merchant retailers. Even grocery and drug store chains have begun to carry at
least limited supplies of basic office supplies and even technology items.
Well-established mass merchant retailers have the financial and distribution
ability to compete very effectively with us should they choose to enter the
office superstore retail category, Internet office supply or contract stationer
business or substantially expand their offering in their existing retail
outlets. This could have a material adverse effect on our business and results
of our operations.
INTERNET: Internet-based merchandisers also compete with us. This competition is
expected to increase in the future as these companies proliferate and continue
to expand their operations. Many start-up operations that are heavily focused on
Internet sales may be able to compete with us in the areas of price and
selection. While most of these companies cannot offer the levels of service and
stability of supply that we provide, they nevertheless may be formidable
competitors, particularly for customers who are willing to look for the absolute
lowest price without regard to the other attributes of our business model. In
addition, certain manufacturers of computer hardware, software and peripherals,
including certain of our suppliers, have expanded their own direct marketing of
products, particularly over the Internet. Even as we expand our own Internet
efforts, our ability to anticipate and adapt to the developing Internet
marketplace and the capabilities of our network infrastructure to efficiently
handle our rapidly expanding operations are of critical importance. Furthermore,
our profitability goals may also serve to inhibit the expansion of our presence
on the Internet, because dedicated Internet concerns are currently evaluated
differently in the financial markets than more established concerns such as
ours. Failure to execute well in any of these key areas could have a material
adverse effect on our future sales growth and profitability.
16
EXECUTION OF EXPANSION PLANS: We plan to open approximately 25 to 30 stores in
the United States and Canada and 10 to 15 stores in our International Division
during 2002, and we also plan to open two new BSG distribution centers in
Atlanta and Baltimore during 2002. We consider our expansion program to be an
integral part of our plan to achieve anticipated operating results in future
years. Circumstances outside our control, such as adverse weather conditions
affecting construction schedules, unavailability of acceptable sites or
materials, labor disputes and similar issues could impact anticipated store
openings. The failure to expand by opening new stores or distribution centers as
planned and the failure to generate the anticipated sales growth in markets
where new stores are opened could have a material adverse effect on our future
sales growth and profitability.
CANNIBALIZATION OF SALES IN EXISTING OFFICE DEPOT STORES: As we expand the
number of our stores in existing markets, sales of existing stores may suffer
from cannibalization (customers of our existing stores begin shopping at our new
stores). Our new stores typically require an extended period of time to reach
the sales and profitability levels of our existing stores. Moreover, the opening
of new stores does not ensure that those stores will ever be as profitable as
existing stores, particularly when new stores are opened in highly competitive
markets or markets in which other office supply superstores may have achieved
"first mover" advantage. Our comparable sales are affected by a number of
factors, including the opening of additional Office Depot stores; the expansion
of our contract stationer business in new and existing markets; competition from
other office supply chains, mass merchandisers, warehouse clubs, computer
stores, other contract stationers and Internet-based businesses; and regional,
national and international economic conditions. In addition, our profitability
would be adversely affected if our competitors were to attempt to capture market
share by reducing prices.
COSTS OF REMODELING AND RE-MERCHANDISING STORES: The remodeling and
re-merchandising of our stores has contributed to increased store expenses, and
these costs are expected to continue impacting store expenses throughout 2002
and beyond. While a necessary aspect of maintaining a fresh and appealing image
to our customers, the expenses associated with such activities could result in a
significant impact on our net income in the future. In addition, there is no
guarantee that these changes will generate any of the benefits that we have
anticipated. Furthermore, our growth, through both store openings and
acquisitions, will continue to require the expansion and upgrading of our
informational, operational and financial systems, as well as necessitate the
hiring of new managers at the store and supervisory level.
HISTORICAL FLUCTUATIONS IN PERFORMANCE: Fluctuations in our quarterly operating
results have occurred in the past and may occur in the future. A variety of
factors could contribute to this quarter-to-quarter variability, including new
store openings which require an outlay of pre-opening expenses, generate lower
initial profit margins and cannibalize existing stores; timing of warehouse
integration; competitors' pricing; changes in our product mix; fluctuations in
advertising and promotional expenses; the effects of seasonality; acquisitions
of contract stationers; competitive store openings or other events.
VIKING MERGER AND INTEGRATION: On August 26, 1998, we merged with Viking. Costs
related to the integration of Viking's warehouse facilities with our delivery
network will increase our warehouse expenses in 2002 and beyond. Moreover,
integrating the operations and management of Office Depot and Viking has been,
and continues to be, a complex process. There can be no assurance that this
integration process will be completed as rapidly as we anticipate or that, even
if achieved as anticipated, it will result in all of the anticipated synergies
and other benefits we expect to realize. The integration of the two companies
continues to require significant management attention, which may temporarily
distract us from other matters. Our inability to successfully complete the
integration of the operations of Office Depot and Viking could have a material
adverse effect on our future sales growth and profitability.
INTERNATIONAL ACTIVITY: We have operations in a number of international markets.
We intend to enter additional international markets as attractive opportunities
arise. Each entry could take the form of a start-up, acquisition of stock or
assets or a joint venture or licensing arrangement. In addition to the risks
described above (in our domestic operations), internationally we face such risks
as foreign currency fluctuations, unstable political and economic conditions,
and, because some of our foreign operations are not wholly-owned, compromised
operating control in certain countries. Recent world events have served to
underscore even further the risks and uncertainties of operating in other parts
of the world. Risks of civil unrest, war and economic crisis in portions of the
world outside North America in which we operate represent a more significant
factor than may have been the case in the past. Also, we have experienced
significant fluctuations in foreign currency exchange rates in 2001, which have
resulted in lower than anticipated sales and earnings in our International
Division. Our results may continue to be adversely affected by these
fluctuations in the future. In addition, we do not have a large group of
managers experienced in international operations and will need to recruit
additional management resources to successfully compete in many foreign markets.
All of these risks could have a material adverse effect on our financial
position or our results from operations. Moreover, as we increase the relative
percentage of our business that is operated globally, we also increase the
impact these factors have on our future operating results. Our start-up
operation in Japan, in particular, has proven to be unprofitable to date and, in
fact, has generated losses that have materially affected our financial results
in the past and are expected to do so for some time in the future. Because of
differing commercial practices, laws and other factors, our ability to use the
Internet and e-commerce to substantially increase sales in international
locations may not progress at the same rate as in North America.
17
EURO: On January 1, 1999, 11 of the 15 member countries of the European Economic
and Monetary Union established fixed conversion rates between their existing
currencies and their new common currency (the "euro"). On July 1, 2002, new
euro-denominated bills and coins will become the sole legal currency in those
countries, and all former currencies will be withdrawn from circulation. Since
the introduction of the euro, we have been evaluating the business implications
of modifying our systems to properly recognize and handle conversion to the
euro. Based on that evaluation, we need to make multiple changes and
modifications to our current systems before July 1, 2002. We expect to complete
our system modifications in advance of the deadline, and we do not expect our
conversion to the euro to have a material effect on our financial position or
the results of our operations. However, we may not complete the system changes
by the targeted date, preventing us from accepting orders or collecting
receivables from our customers or from paying our vendors. This could have an
adverse impact on our business and our future operating results.
CONTRACT AND COMMERCIAL: We compete with a number of contract stationers, mail
order and Internet operators and retailers who supply office products and
services to large and small businesses, both nationally and internationally. In
order to achieve and maintain expected profitability levels, we must continue to
grow this segment of the business while maintaining the service levels and
aggressive pricing necessary to retain existing customers. There can be no
assurance we will be able to continue to expand our contract and commercial
business while retaining our base of existing customers, and any failure to do
so could have a material adverse effect on our profitability. We are also
working on various initiatives to improve margin levels in this business
segment, but there is no assurance that these initiatives will prove successful.
Some of our competitors operate only in the contract and/or commercial channels
and therefore may be able to focus more attention on the business services
segment, thereby providing formidable competition. Our failure to adequately
address this segment of our business could put us at a competitive disadvantage
relative to these competitors. In addition, we have reached maximum capacity in
some of our distribution centers that serve our contract and commercial
customers. In 2002, we plan to open new distribution facilities in Atlanta and
Baltimore. Failure to open these facilities as planned, or material delays in
construction and/or equipping these facilities, could have a material adverse
impact on our anticipated results in 2002.
SOURCES AND USES OF CASH: We believe that our current level of cash and cash
equivalents, future operating cash flows, lease financing arrangements and funds
available under our credit facilities and term loan should be sufficient to fund
our planned expansion, integration and other operating cash needs for at least
the next year. However, there can be no assurance that additional sources of
financing will not be required during the next twelve months as a result of
unanticipated cash demands, opportunities for expansion, acquisition or
investment, changes in growth strategy, changes in our warehouse integration
plans or adverse operating results. We could attempt to meet our financial needs
through the capital markets in the form of either equity or debt financing.
Alternative financing will be considered if market conditions make it
financially attractive. There can be no assurance that any additional funds
required by us, whether within the next twelve months or thereafter, will be
available to us on satisfactory terms. Our inability to access needed financial
resources could have a material adverse effect on our financial position or
operating results.
EFFECTS OF CERTAIN ONE-TIME CHARGES: During the fourth quarter of 2000, we
conducted a review of all aspects of our business, with particular attention on
our North American Retail Division and on our distribution and supply chain
activities (see the CHARGES AND CREDITS section of our MD&A for further
details). We expect that these decisions will result in increasing our Company's
profitability and efficiency in the future. However, this analysis involves many
variables and uncertainties; and, as a result, we may not achieve any of the
expected benefits. In 1999, we announced one-time charges against earnings for
slow-moving inventories in our warehouses and stores and for accelerated store
closings and relocations. There can be no assurance that additional charges of
this nature will not be required in the future as well. In particular, we expect
that a retail store chain, such as our North American Retail Division, should
expect to close a certain number of stores each year, remodel and/or relocate
other stores. We cannot be certain that our decisions to close, remodel and/or
relocate stores will have the desired favorable results on our financial
performance, nor can we anticipate the size and nature of non-recurring charges
associated with such matters. Such charges, if any, could have a materially
adverse impact on our financial position or operating results in the future.
18
ECONOMIC DOWNTURN: In the past decade, the favorable United States economy has
contributed to the expansion and growth of retailers. Our country has
experienced low inflation, low interest rates, low unemployment and an
escalation of new businesses. The economy has recently begun to show signs of a
downturn. The Federal Reserve dramatically reduced interest rates throughout
2001 in recognition of the economic downturn and in an effort to address that
downturn. The overall stock market has been in a period of poor performance
throughout 2001. The retail industry, in particular, continues to display signs
of a slowdown, with several specialty retailers, both in and outside our
industry segment, reporting earnings warnings throughout 2001. One major
discount retailer filed for bankruptcy protection earlier in 2002, further
indicating that the slow economy is having an impact on the retail industry.
This general economic slowdown may adversely impact our business and the results
of our operations.
EXECUTIVE MANAGEMENT: Since the appointment of our new Chief Executive Officer,
we have evolved our management organization to better address the future goals
of our Company. This new organization continues to have vacancies in certain key
positions. Various searches are underway to identify the best individuals to
fill these positions; however, the process may be a protracted one. Furthermore,
the new management structure may not be ideal for our Company and may not result
in the benefits expected; and, as a result, may materially and adversely affect
our future operating results.
DISCLAIMER OF OBLIGATION TO UPDATE
We assume no obligation (and specifically disclaim any obligation) to update
these Cautionary Statements or any other forward-looking statements contained in
this Annual Report to reflect actual results, changes in assumptions or other
factors affecting such forward-looking statements, except as required by laws
and regulations.
19
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Office Depot, Inc.
We have audited the consolidated balance sheets of Office Depot, Inc.
(the "Company") as of December 29, 2001 and December 30, 2000 and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended December 29, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 financial position of Office
Depot, Inc. as of December 29, 2001 and December 30, 2000 and the results of
their operations and their cash flows for each of the three years in the period
ended December 29, 2001 in conformity with accounting principles generally
accepted in the United States of America.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
February 13, 2002
20
OFFICE DEPOT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 29, December 30,
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 563,410 $ 151,482
Receivables, net of allowances of $32,682 in 2001 and
$34,461 in 2000 ............................................ 781,476 896,333
Merchandise inventories, net .................................. 1,259,522 1,420,825
Deferred income taxes ......................................... 148,490 157,779
Prepaid expenses .............................................. 53,292 72,670
----------- -----------
Total current assets .............................. 2,806,190 2,699,089
Property and equipment, net ....................................... 1,110,011 1,119,306
Goodwill, net ..................................................... 249,560 219,971
Other assets ...................................................... 165,882 157,968
----------- -----------
Total Assets ...................................... $ 4,331,643 $ 4,196,334
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 1,060,968 $ 1,136,994
Accrued expenses and other liabilities ........................ 612,999 580,966
Income taxes payable .......................................... 109,026 37,118
Current maturities of long-term debt .......................... 318,521 153,259
----------- -----------
Total current liabilities ........................ 2,101,514 1,908,337
Deferred income taxes and other credits ........................... 64,139 88,247
Long-term debt, net of current maturities ......................... 315,331 374,061
Zero coupon, convertible subordinated notes ....................... 2,221 224,438
Commitments and contingencies
Stockholders' equity:
Common stock - authorized 800,000,000 shares of
$.01 par value; issued 385,538,340 in 2001 and
378,688,359 in 2000 ....................................... 3,855 3,787
Additional paid-in capital .................................... 1,007,088 939,214
Unamortized value of long-term incentive stock grant .......... (2,578) (2,793)
Accumulated other comprehensive loss .......................... (71,273) (53,490)
Retained earnings.............................................. 1,717,734 1,516,691
Treasury stock, at cost - 82,443,170 shares in 2001
and 82,190,548 shares in 2000 .............................. (806,388) (802,158)
----------- -----------
Total stockholders' equity ........................ 1,848,438 1,601,251
----------- -----------
Total liabilities and stockholders' equity $ 4,331,643 $ 4,196,334
=========== ===========
The accompanying notes are an integral part of these statements.
21
OFFICE DEPOT, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
2001 2000 1999
------------ ------------ ------------
Sales ....................................... $ 11,154,081 $ 11,569,696 $ 10,272,060
Cost of goods sold and occupancy costs 7,983,973 8,479,437 7,450,575
------------ ------------ ------------
Gross profit ............................ 3,170,108 3,090,259 2,821,485
Store and warehouse operating
and selling expenses .................... 2,343,394 2,409,478 2,023,055
General and administrative expenses ......... 451,722 453,784 328,108
Facility closure costs ...................... 8,436 110,038 40,425
Other operating expenses .................... 12,125 6,733 16,524
------------ ------------ ------------
Operating profit ........................ 354,431 110,226 413,373
Other income (expense):
Interest income ......................... 13,058 11,502 30,176
Interest expense ........................ (44,302) (33,901) (26,148)
Miscellaneous income (expense), net...... (9,057) 4,632 (3,514)
------------ ------------ ------------
Earnings before income taxes ................ 314,130 92,459 413,887
Income taxes ................................ 113,087 43,127 156,249
------------ ------------ ------------
Net earnings ................................ $ 201,043 $ 49,332 $ 257,638
============ ============ ============
Earnings per share:
Basic ................................. $ .67 $ .16 $ .71
Diluted ............................... .66 .16 .69
The accompanying notes are an integral part of these statements.
22
OFFICE DEPOT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
Unamortized Accumu-
value lated
of long- other
term compre- Compre-
Common Common Additional incentive hensive hensive
stock stock paid-in stock Income Income Retained Treasury
shares amount capital grant (loss) (loss) earnings stock
----------- ------ ---------- ----------- -------- -------- ---------- ---------
Balance at December 6, 1998 373,817,704 $3,738 $ 838,122 $(2,874) $(18,078) $1,209,721 $ (1,750)
Comprehensive income:
Net earnings $257,638 257,638
Foreign currency
translation adjustment (28,319) (28,319)
Unrealized gain on
investment securities,
net of tax 62,127 62,127
--------
Comprehensive income $291,446
========
Acquisition of treasury stock (501,361)
Retirement of treasury stock (3,245,170) (32) (1,718) 1,750
Grant of long-term incentive
stock 130,000 1 2,127 (2,127)
Exercise of stock options
(including income tax
benefits) 4,457,024 45 72,865
Issuance of stock under
employee stock purchase
plans 712,431 7 9,240
Matching contributions
under 401(k) and
deferred compensation
plans 320,906 3 5,423
Conversion of LYONs(R)
to common stock 23,710 329
Payment for fractional
shares in connection
with 3-for-2 stock split (4,166) (93)
Amortization of long-term
incentive stock grant 936
Balance at December 25, 1999 376,212,439 3,762 926,295 (4,065) 15,730 1,467,359 (501,361)
Comprehensive income:
Net earnings $ 49,332 49,332
Foreign currency
translation adjustment (7,093) (7,093)
Realized gain on investment
securities, net of tax (62,127) (62,127)
--------
Comprehensive income (loss) $(19,888)
========
Acquisition of treasury stock (300,797)
Grant of long-term incentive
stock 25,000 199 (199)
Cancellation of long-term
incentive stock (50,000) (819) 600
Exercise of stock options
(including income tax
benefits) 424,809 4 (1,984)
Issuance of stock under
employee stock purchase
plans 1,372,566 14 9,713
Matching contributions
under 401(k) and
deferred compensation
plans 703,545 7 5,810
Amortization of long-term
incentive stock grant 871
Balance at December 30, 2000 378,688,359 3,787 939,214 (2,793) (53,490) 1,516,691 (802,158)
Comprehensive income:
Net earnings $201,043 201,043
Foreign currency translation
adjustment (17,783) (17,783)
--------
Comprehensive income (loss) $183,260
========
Acquisition of treasury
stock (4,254)
Grant of long-term
incentive stock 80,000 1 764
Exercise of stock options
(including income
tax benefits) 5,604,810 55 56,430
Issuance of stock under
employee stock purchase
plans 751,400 8 6,712
Matching contributions
under 401(k) and
deferred compensation
plans 413,771 4 3,957
Direct stock purchase plans 11 24
Amortization of long-term
incentive stock grant 215
Balance at December 29, 2001 385,538,340 $3,855 $1,007,088 $(2,578) $(71,273) $1,717,734 $(806,388)
=========== ====== ========== ======= ======== ========== =========
The accompanying notes are an integral part of these statements.
23
OFFICE DEPOT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
2001 2000 1999
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings .......................................................... $ 201,043 $ 49,332 $ 257,638
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization .................................... 199,434 205,710 171,083
Provision for losses on inventories and receivables .............. 109,560 121,226 145,996
Net (earnings) on equity method investments ...................... (10,892) (9,436) (2,041)
Accreted interest on zero coupon, convertible subordinated notes . 11,308 19,203 19,534
Employee stock benefit plans ..................................... 5,001 6,469 5,905
Deferred income tax expense (benefit) ............................ 196 (81,814) (430)
Net loss (gain) on investment securities ......................... 14,100 (12,414) --
(Gain) loss on disposal of property and equipment ................ (5,275) 10,585 9,882
Write-down of impaired assets .................................... 43,623 114,343 13,965
Changes in assets and liabilities:
Decrease (increase) in receivables .......................... 93,849 (85,327) (152,523)
Decrease (increase) in merchandise inventories .............. 81,651 (66,348) (284,489)
Net decrease (increase) in prepaid expenses and other assets 13,156 (21,561) (24,862)
Net (decrease) increase in accounts payable, accrued expenses
and deferred .............................................. (9,588) 66,514 209,791
--------- --------- ---------
Total adjustments ..................................................... 546,123 267,150 111,811
--------- --------- ---------
Net cash provided by operating activities .................................. 747,166 316,482 369,449
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions .......................................................... (45,604) -- --
Purchases of investment securities .................................... -- (30,112) (154,364)
Proceeds from maturities or sales of investment securities ............ -- 54,006 114,141
Investments in unconsolidated joint ventures .......................... -- -- (1,606)
Purchase of remaining ownership interest in joint ventures ............ -- -- (21,629)
Capital expenditures .................................................. (207,287) (267,728) (392,305)
Proceeds from sale of property and equipment .......................... 20,947 4,469 7,922
--------- --------- ---------
Net cash used in investing activities ...................................... (231,944) (239,365) (447,841)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and sale of stock under
employee stock purchase plans .................................... 52,962 12,388 59,082
Repurchase of common stock for treasury ............................... (4,193) (300,797) (501,006)
Proceeds from issuance of long-term debt .............................. 266,286 430,522 42,841
Payments on long- and short-term borrowings ........................... (400,458) (27,015) (6,766)
Repurchase of zero coupon, convertible subordinated notes ............. -- (249,191) --
--------- --------- ---------
Net cash used in financing activities ...................................... (85,403) (134,093) (405,849)
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents ............... (17,891) (10,326) (1,516)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents ....................... 411,928 (67,302) (485,757)
Cash and cash equivalents at beginning of period ........................... 151,482 218,784 704,541
--------- --------- ---------
Cash and cash equivalents at end of period ................................. $ 563,410 $ 151,482 $ 218,784
========= ========= =========
The accompanying notes are an integral part of these statements.
24
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Office Depot, Inc. (the "Company") is the world's largest
supplier of office products and services, operating in 18 countries under two
product brands - Office Depot(R) and Viking Office Products(R). Products and
services are offered through wholly-owned retail stores, contract
business-to-business sales relationships, commercial catalog business and
multiple Web sites providing a wide-range of office products, computers and
technical support functions.
BASIS OF PRESENTATION: The consolidated financial statements of Office Depot,
Inc. and its subsidiaries have been prepared in accordance with accounting
principles generally accepted in the United States of America. All intercompany
transactions have been eliminated in consolidation. Non-controlling investments
in joint ventures selling office products and services in Mexico and Israel are
accounted for using the equity method. The Company's share of joint ventures'
operations is included in the Consolidated Statements of Earnings in
miscellaneous income (expense), net.
Certain prior year amounts have been reclassified to conform to current year
presentation.
FISCAL PERIODS: Fiscal years are based on a 52- or 53-week period ending on the
last Saturday in December. The 2000 financial statements consist of 53 weeks;
all other periods presented consist of 52 weeks.
ESTIMATES AND ASSUMPTIONS: Preparation of these financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
amounts reported in the financial statements and related notes. Actual results
may differ from those estimates.
FOREIGN CURRENCY TRANSLATION: Assets and liabilities of international operations
are translated into U.S. dollars using the exchange rate on the balance sheet
date. Revenues and expenses are translated at average monthly exchange rates.
Translation adjustments resulting from this process are recorded in
stockholders' equity as a component of other comprehensive income (loss).
CASH EQUIVALENTS: Highly liquid securities with maturities of three months or
less are classified as cash equivalents.
RECEIVABLES: Trade receivables totaled $491.3 million and $547.4 million at
December 29, 2001 and December 30, 2000, respectively. An allowance for doubtful
accounts has been recorded to reduce receivables to an amount expected to be
collectible from customers. The allowance recorded in 2001 and 2000 was
approximately $32.7 million and $34.5 million, respectively. Receivables
generated through a private label credit card program are transferred to
financial services companies with recourse to Office Depot. The outstanding
amount transferred at December 29, 2001 was $252.0 million.
The Company's exposure to credit risk associated with trade receivables is
limited by having a large customer base that extends across many different
industries and geographic regions. However, the Company's receivables may be
adversely affected by an economic slowdown in the U.S. or internationally.
Other receivables, totaling $290.2 million and $348.9 million as of December 29,
2001 and December 30, 2000, respectively, consist primarily of amounts due from
vendors under purchase rebate, cooperative advertising and various other
marketing programs. Amounts expected to be received from vendors relating to
purchases of merchandise inventories are recognized as a reduction of cost of
goods sold as the 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 cost or market
value. The weighted average method is used to determine the cost of over 90% of
inventories and the first-in-first-out (FIFO) method for the remainder of our
inventories, primarily in our International Division.
INCOME TAXES: Income tax expense is recognized at applicable U.S. or
International tax rates. Certain revenue and expense items may be recognized in
one period for financial statement purposes and a different period's income tax
return. The tax effects of such differences are reported as deferred income
taxes.
Essentially all earnings of foreign subsidiaries are expected to be reinvested
in overseas expansion. Accordingly, no provision has been made for incremental
U.S. taxes on undistributed earnings considered permanently invested. Cumulative
undistributed earnings of our foreign subsidiaries for which no Federal income
taxes have been provided was $582.0 million and $440.5 million as of December
29, 2001 and December 30, 2000, respectively.
25
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT: Property and equipment additions are recorded at cost.
Depreciation and amortization is recognized over their estimated useful lives
using the straight-line method. The useful lives of depreciable assets is
estimated to be 15-30 years for buildings and 3-10 years for furniture, fixtures
and equipment. Leasehold improvements are amortized over the shorter of the
terms of the underlying leases or the estimated useful lives of the
improvements.
INVESTMENTS: Investments in certain Internet-based companies and funds are
considered available for sale and, accordingly, are carried at estimated fair
value. Changes in fair value after initial investment are included as a separate
component of stockholders' equity, net of applicable taxes. Other than temporary
declines in the value of these investments are recognized in earnings in the
period the impairment is determined. At December 29, 2001 and December 30, 2000,
the portfolio value was $15.2 million and $29.9 million, respectively. The
decline in value resulted from impairments recorded during 2001.
GOODWILL: Goodwill represents the excess of the purchase price and related costs
over the value assigned to net tangible and identifiable intangible assets of
businesses acquired and accounted for under the purchase method. As the result
of a new accounting rule that becomes effective in 2002, goodwill will no longer
be amortized in the Statement of Earnings, but will be tested annually for
impairment (see NEW ACCOUNTING STANDARDS below). For each year through 2001,
goodwill was amortized on a straight-line basis, generally over 40 years. The
accumulated amortization of goodwill was $68.3 million and $63.2 million as of
December 29, 2001 and December 30, 2000, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS: Long-lived assets are reviewed for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. Impairment is assessed at
the location level, considering the estimated undiscounted cash flows over the
asset's remaining life. If estimated cash flows are insufficient to recover the
investment, an impairment loss is recognized based on the fair value of the
asset less any costs of disposition. An impairment loss of $19.3 million was
recognized in 2001 relating to certain under-performing retail stores.
Impairment charges of $63.0 million were also recognized in 2000.
FACILITY CLOSURE COSTS: The Company regularly reviews store performance against
expectations and closes stores not meeting investment standards. Costs
associated with closures resulting from such on-going performance reviews,
principally lease cancellation costs, are accrued when the decision to close is
made and, in 2001, $5.7 million, net was included in store and warehouse
operating and selling expenses for closures and asset dispositions.
As part of a comprehensive business review conducted in 2000, a commitment to
close 70 stores was made. A charge of $110.0 million related to those closures
was reported on a separate line in the Consolidated Statements of Earnings,
because of its significance. This estimate was increased in 2001 by $8.4
million, reflecting an increase in estimated lease termination costs resulting
from a softening in the market for real estate subleases. An accelerated store
closure program in 1999 resulted in a charge of $40.4 million and is reported in
the Consolidated Statements of Earnings similar to the 2000 closures.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The estimated fair values of financial
instruments recognized in the Consolidated Balance Sheets or disclosed within
these Notes to our Consolidated Financial Statements have been determined using
available market information, information from unrelated third party financial
institutions and appropriate valuation methodologies. However, considerable
judgment is required in interpreting market data to develop estimates of fair
value. Accordingly, the estimates presented are not necessarily indicative of
the amounts that could be realized in a current market exchange.
SHORT-TERM ASSETS AND LIABILITIES: The fair values of cash and cash equivalents,
receivables and accounts payable approximate their carrying values because of
their short-term nature.
NOTES PAYABLE: The fair values of the zero coupon, convertible subordinated
notes and senior subordinated notes were determined based on quoted market
prices.
INTEREST RATE SWAPS AND FOREIGN CURRENCY CONTRACTS: The fair values of our
interest rate swaps and foreign currency contracts are the amounts receivable or
payable to terminate the agreements at the reporting date, taking into account
current interest and exchange rates. These amounts were provided by an unrelated
third party financial institution and were immaterial at year end 2001 and 2000.
26
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
There were no significant differences as of December 29, 2001 and December 30,
2000 between the carrying values and fair values of the financial instruments
except as disclosed below:
2001 2000
---------------------- ----------------------
Carrying Fair Carrying Fair
(Dollars in Thousands) Value Value Value Value
-------- -------- -------- --------
Zero coupon, convertible subordinated notes ..... $235,747 $258,794 $224,438 $195,453
Senior subordinated notes ....................... 245,360 271,250 -- --
Long-term investments for which it is practicable
to estimate fair value - warrants(1) ........ -- -- -- 14,913
(1) We own 944,446 warrants to purchase shares of PurchasePro.com. Because
the warrants have not been registered under the rules of the Securities
Act of 1933, they are not publicly traded on a market exchange. In
2000, we determined the fair value of these warrants using an option
model with the assistance of our investment banker. At December 29,
2001, the fair value of the warrants was minimal.
REVENUE RECOGNITION: Revenue is recorded at the time of shipment for delivery
and catalog sales, and at the point of sale for essentially all retail store
transactions. When revenue is recorded, an allowance for sales returns is
estimated based on past experience. Revenue from sales of extended warranty
service plans is either recognized at the point of sale or over the warranty
period, depending on various states' laws determination of legal obligor status.
All performance obligations and risk of loss associated with such contracts are
transferred to an unrelated third party administrator at the time the contracts
are sold. Costs associated with these contracts are recognized in the same
period as the related revenue.
SHIPPING AND HANDLING FEES AND COSTS: Income generated from shipping and
handling fees is classified as revenues for all periods presented. The costs
related to shipping and handling are presented as a component of store and
warehouse operating and selling expenses. These costs were $748.6 million in
2001, $756.6 million in 2000 and $594.2 million in 1999.
ADVERTISING: Advertising costs are either charged to expense when incurred or,
in the case of direct marketing advertising, capitalized and amortized in
proportion to the related revenues. We participate in cooperative advertising
programs with our vendors in which they reimburse us for a portion of our
advertising costs. Advertising expense, net of cooperative advertising
allowances, amounted to $317.0 million in 2001, $295.8 million in 2000 and
$285.3 million in 1999.
PRE-OPENING EXPENSES: Pre-opening expenses related to opening new stores and
warehouses or relocating existing stores and warehouses are expensed as incurred
and included in other operating expenses.
SELF-INSURANCE: Office Depot is primarily self-insured for workers'
compensation, auto and general liability and employee medical insurance
programs. Self-insurance liabilities are based on claims filed and estimates of
claims incurred but not reported. These liabilities are not discounted.
COMPREHENSIVE INCOME (LOSS): Comprehensive income (loss) represents the change
in stockholders' equity from transactions and other events and circumstances
arising from non-stockholder sources. Comprehensive income (loss) consists of
net earnings, foreign currency translation adjustments and realized or
unrealized gains (losses) on investment securities that are available for sale,
net of applicable income taxes.
DERIVATIVE FINANCIAL INSTRUMENTS: Certain derivative financial instruments may
be used to hedge the exposure to foreign currency exchange rate and interest
rate risks, subject to established risk management policies. Such approved
financial instruments include swaps, options, caps, forwards and futures. Use of
derivative financial instruments for trading or speculative purposes is
prohibited by Company policies.
NEW ACCOUNTING STANDARDS: In July 2001, the Financial Accounting Standards Board
("FASB") issued Statement No. 141, ACCOUNTING FOR BUSINESS COMBINATIONS, and
Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. These Statements modify
accounting for business combinations after June 30, 2001 and will affect the
Company's treatment of goodwill and other intangible assets at the start of
fiscal year 2002. The Statements require that goodwill existing at the date of
adoption be reviewed for possible impairment and that impairment tests be
periodically repeated, with impaired assets written-down to fair value. The
initial test of goodwill must be completed within six months of adoption, or by
June 2002 for Office Depot, with a completion of testing by the end of 2002.
Additionally, existing goodwill and intangible assets must be assessed and
classified consistent with the Statements' criteria.
27
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangible assets with estimated useful lives will continue to be amortized over
those periods. Amortization of goodwill and intangible assets with indeterminate
lives will cease. We have not yet completed the initial test of existing
goodwill and, accordingly, cannot estimate the full impact of these rules.
However, goodwill amortization, which totaled $7.0 million for 2001, will no
longer be recorded.
In July 2001, the FASB issued Statement No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS. This Statement requires capitalizing any retirement costs as part
of the total cost of the related long-lived asset and subsequently allocating
the total expense to future periods using a systematic and rational method.
Adoption of this Statement is required for Office Depot with the beginning of
fiscal year 2003. We have not yet completed our evaluation of the impact of
adopting this Statement.
In October 2001, the FASB issued Statement No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. This Statement supersedes Statement
No. 121 but retains many of its fundamental provisions. Additionally, this
Statement expands the scope of discontinued operations to include more disposal
transactions. The provisions of this Statement are effective for Office Depot
with the beginning of fiscal year 2002. We do not anticipate a significant
impact to the Company's results of operations from adoption of this Statement.
NOTE B - 2000 COMPREHENSIVE BUSINESS REVIEW AND OTHER
During the second half of 2000, following a change in senior management, Company
personnel performed a comprehensive review of the business. As a result of this
review, a significant number of facilities were closed, assets were written down
and employees were severed. At the same time, initiatives were launched to
enhance the shoppers' experience and improve efficiency. Essentially all actions
resulting from the business review were put in place during the last part of
2000 or early 2001. Additionally in 2000, costs were recorded relating to
executive severance arrangements and gains were realized from the sale of
certain Internet investments. The primary elements of the net charge of $260.6
million relating to the business review and other significant charges and
credits recorded in 2000, are summarized below:
(Dollars in millions)
Line item presentation Amount Nature of charge or credit
- ---------------------- ------ --------------------------
Gross profit $ 48.9 Inventory adjustment of $38.4 million for write-down to net
realizable value and liquidation from closed stores, and $10.5
million, net, to establish a reserve for sales returns and
allowances.
Operating and selling expenses 64.7 Impairment of assets in closed stores of $63.0 million and $1.7
million reductions in contract sales force.
General and administrative expenses 45.1 Severance costs of $33.9 million for changes in senior
management and $11.2 million to write-off corporate assets.
Facility closure costs 110.0 Estimated costs for closing 70 under-performing stores and four
inefficient warehouses. Included in the charge is $75.2 million for
net lease obligations, $21.7 million for asset write-offs, $2.8
million for severance and various other exit costs of $10.3 million
for items such as leased equipment, labor and facility clean up.
Other operating expenses (6.8) Merger and restructuring net credit from completed activities and
changes in estimates.
Miscellaneous (income) expense, net (1.3) A $57.9 million gain on the sale of certain Internet investments,
offset by a $45.5 million charge for an other than temporary
decline in value of other Internet investments and $11.1 million
charge relating to goodwill impairment.
-------
Total charges, net $ 260.6
=======
The accrual for lease termination costs identified above was based on the future
commitments under contract, adjusted for anticipated sublease and termination
benefits. During 2001, an additional net $8.4 million was recorded to reflect
lower anticipated recoveries resulting from a softening in the market for
sublease space. Also in 2001, we recognized $15.9 million of charges from
settlement of certain legal claims and amortization of an existing retention
agreement.
28
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE B - 2000 COMPREHENSIVE BUSINESS REVIEW AND OTHER (CONTINUED)
In 1999 we increased our provision for slow-moving and obsolete inventory in our
warehouses and stores by $56.1 million and recorded a $15.8 million provision
for extended warranty service plans.
NOTE C - MERGER AND RESTRUCTURING
In 1998 Office Depot merged with Viking Office Products and in 1999 the Company
acquired full ownership interests in two previous joint ventures. In connection
with each of these combinations, plans were developed to integrate operations,
eliminate redundancies and streamline processes. The integration plans relating
to the Viking merger included opening certain domestic Customer Service Centers
("CSCs") and closing others, as well as the installation of new systems in each
surviving facility. After evaluating the results of integrating two facilities,
the plans were simplified. In 1999, planned net closures were reduced and $28.6
million of previously accrued integration costs were reversed. In 2000, under
the direction of a new management team, the integration plans were adjusted, and
the Viking-related merger costs were reduced by a net $6.3 million to reflect
fewer closures and to recognize added personnel retention and termination costs.
Separate integration plans were developed relating to the acquisition of
additional joint venture interests in France and Japan. Approximately $23.5
million was accrued in 1999 relating to the integration and restructuring of
these operations, primarily related to personnel retention and severance,
facility closures and related lease termination costs. Of this amount, $0.7
million was reversed in 2000 as portions of the restructuring were completed.
As a result of the focus on continued growth of the core business and on
expanding international operations, the Company decided in 1998 to close its
photocopy stores and certain furniture-related retail operations. As actual
costs relating to the closure process were incurred, and to adjust estimated
lease costs, approximately $2.0 million of accrued costs were reversed in 1999
and an additional $0.2 million recorded in 2000.
At year-end 2001 and 2000, approximately $4.9 and $3.9 million, respectively,
remained accrued for merger and restructuring costs, primarily relating to
residual lease termination costs, the unamortized portion of an employee
retention agreement and other identified commitments. Charges recorded in 2001
primarily relate to additional lease accruals from a softening in the market for
real estate subleases and for employee retention agreement amortization. Amounts
expensed for asset write-offs are recorded as a reduction of fixed assets; all
other amounts are recorded as accrued expenses. The activity in the liability
accounts by cost category is as follows:
Beginning New Cash Other Ending
(Dollars in thousands) Balance Charges Payments Adjustments Balance
--------- -------- -------- ----------- --------
2001
Accrued direct merger costs ... $ -- $ -- $ -- $ -- $ --
Accrued other facility exit costs 1,187 3,134 (1,714) (1,321) 1,286
Accrued personnel retention
and termination costs ...... 2,633 1,267 (1,383) 1,001 3,618
-------- -------- -------- -------- --------
Total accrued costs ........ $ 3,920 $ 4,401 $ (3,097) $ (320) $ 4,904
======== ======== ======== ======== ========
2000
Accrued direct merger costs ... $ 1,639 $ -- $ (86) $ (1,553) $ --
Accrued other facility exit costs 7,764 1,348 (2,835) (5,090) 1,187
Accrued personnel retention and
termination costs .......... 11,865 4,798 (11,450) (2,480) 2,733
-------- -------- -------- -------- --------
Total accrued costs ........ $ 21,268 $ 6,146 $(14,371) $ (9,123) $ 3,920
======== ======== ======== ======== ========
The other adjustments column represents changes to original estimates, plan
modifications and balance true-ups.
29
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consisted of:
December 29, December 30,
(Dollars in thousands) 2001 2000
------------ -----------
Land .................................... $ 89,455 $ 89,458
Buildings ............................... 245,628 248,297
Leasehold improvements .................. 608,738 609,701
Furniture, fixtures and equipment........ 967,953 937,050
----------- -----------
1,911,774 1,884,506
Less accumulated depreciation ........... (801,763) (765,200)
----------- -----------
$ 1,110,011 $ 1,119,306
=========== ===========
The above table of property and equipment includes assets held under capital
leases as follows:
December 29, December 30,
(Dollars in thousands) 2001 2000
------------ -----------
Buildings................................ $ 55,966 $ 53,397
Furniture, fixtures and equipment........ 37,731 41,909
---------- ----------
93,697 95,306
Less accumulated depreciation... (30,104) (26,193)
---------- ----------
$ 63,593 $ 69,113
========== ==========
NOTE E -DEBT
The debt components consisted of the following:
December 29, December 30,
(Dollars in thousands) 2001 2000
------------ ------------
Current maturities of long-term debt:
Capital lease obligations ................... $ 10,486 $ 7,259
Domestic 364-day credit facility borrowings . -- 146,000
Zero coupon, convertible subordinated notes . 233,526 --
Yen facility borrowings ..................... 74,509 --
-------- --------
$318,521 $153,259
======== ========
Long-term debt, net of current maturities:
Domestic five-year credit facility borrowings $ -- $243,587
Yen facility borrowings ..................... -- 63,981
Senior subordinated notes ................... 245,360 --
Capital lease obligations ................... 69,971 66,493
-------- --------
$315,331 $374,061
======== ========
Convertible debt, net of current maturities:
Zero coupon, convertible subordinated notes . $ 2,221 $224,438
======== ========
30
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE E - DEBT (CONTINUED)
The Company's 364-day term domestic credit agreement provides up to $255.0
million of working capital availability through May 2002. While no amounts were
outstanding under this agreement, the borrowing rate at December 29, 2001 was
0.95% over the London Interbank Offered Rate ("LIBOR"). The 364-day credit
agreement existing at December 30, 2000 provided up to $300.0 million of credit.
Of that amount, $146.0 was outstanding at December 30, 2000, with an average
effective interest rate of 7.996%.
The Company also has a long-term domestic credit facility that provides working
capital and letters of credit capacity totaling $300.0 million through February
2003. There were no outstanding borrowings under this credit facility at
December 29, 2001 compared with $243.6 million at December 30, 2000. Letters of
credit utilized under this agreement totaled $36.8 million and $49.5 million for
the fiscal years ending 2001 and 2000, respectively. The borrowing rates under
this agreement at December 29, 2001 and December 30, 2000 were 0.70% over LIBOR
and 0.475% over LIBOR, respectively. The average effective interest rate on
borrowings under this facility for the prior year was 7.001%.
In July 2001, the Company issued $250 million of seven year, non-callable,
senior subordinated notes due on July 15, 2008. The notes have a coupon interest
rate of 10.00%, payable semi-annually on January 15 and July 15. In August 2001,
the Company entered into LIBOR-based variable rate swap agreements with notional
amounts aggregating $250 million that qualify for shortcut hedge accounting. The
effective interest rate on this borrowing at December 29, 2001 including the
effect of the swap agreements, was 7.8% and will be reset every six months.
The Company has issued two series of zero coupon, convertible subordinated notes
(Liquid Yield Option Notes (LYONs(R))), one series in 1992 and one series in
1993. Each series is a zero coupon note that pays no current interest, but
increases in value to provide the holder with a constant yield to maturity. Each
LYON(R) is convertible into a specified amount of Office Depot common stock at
the option of the holder, is callable by the Company at the original issue price
plus accrued interest and is subordinated to all existing and future senior
indebtedness. Approximately 13.8 million shares of common stock have been
reserved for the possible conversion of these LYONs(R) issues.
The original proceeds of the 1992 LYONs(R) was $150.8 million. With a 5% yield,
these notes will increase to $316.3 million by maturity in December 2007. The
stock conversion rate on the 1992 LYONs(R) is 43.895 per note. These notes also
contain an option feature that allows each holder to put the security to the
Company on December 11, 2002 in return for payment of the issue price plus
accrued interest. The Company may pay the holder in cash, common stock or a
combination of the two. Because the holder's option on the 1992 LYONs(R) is
exercisable in the next 12 months, this series has been included in current
maturities of long-term debt at December 29, 2001.
The original proceeds of the 1993 LYONs(R) was $190.5 million. These notes
provide a 4% yield through maturity in November 2008 and a stock conversion rate
of 31.851 per note. In November 2000, a majority of the holders of the 1993
LYONs(R) required us to purchase the notes at original issue price plus accrued
interest. A total of $249.2 million was paid in connection with this repurchase.
Approximately $2.2 million of 1993 LYONs(R) remain outstanding at December 29,
2001.
The Company has a term loan and revolving credit agreements with several
Japanese banks (the "yen facilities") to provide financing for operating and
expansion activities in Japan. The yen facilities provide for maximum aggregate
borrowings of (Y)9.76 billion (the equivalent of $74.5 million at December 29,
2001) at an interest rate of 0.875% over the Tokyo Interbank Offered Rate
("TIBOR"). At December 29, 2001 there were outstanding yen borrowings equivalent
to $74.5 million under these yen facilities, which had an average effective
interest rate of 1.118%. The total amount outstanding is included in current
maturities of long-term debt because the facility expires in July 2002. The
Company has entered into a yen interest rate swap agreement with a U.S. dollar
notional equivalent of $18.6 million at December 29, 2001. The terms of the swap
specify that we pay an interest rate of 0.700% and receive TIBOR and will expire
in July 2002.
The Company is in compliance with all restrictive covenants included in the
above debt agreements.
31
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE E - DEBT (CONTINUED)
Under capital lease agreements, the Company is required to make certain monthly,
quarterly or annual lease payments through 2020. The aggregate minimum capital
lease payments for the next five years and beyond, with their present value as
of December 29, 2001, are as follows:
December 29,
(Dollars in thousands) 2001
------------
2002........................................................ $ 15,937
2003........................................................ 15,134
2004........................................................ 9,962
2005........................................................ 7,009
2006........................................................ 6,224
Thereafter.................................................. 68,675
--------
Total minimum lease payments................................ 122,941
Less amount representing interest at 5.00% to 10.27%........ 42,484
--------
Present value of net minimum lease payments................. 80,457
Less current portion........................................ 10,486
--------
Long-term portion........................................... $ 69,971
========
NOTE F - INCOME TAXES
Our income tax provision consisted of the following:
(Dollars in thousands) 2001 2000 1999
--------- --------- ---------
Current provision:
Federal ..................... $ 66,074 $ 71,407 $ 114,800
State ....................... 12,904 22,616 15,561
Foreign ..................... 33,913 30,918 26,318
Deferred expense (benefit) ...... 196 (81,814) (430)
--------- --------- ---------
Total provision for income taxes $ 113,087 $ 43,127 $ 156,249
========= ========= =========
The tax-effected components of deferred income tax assets and liabilities
consisted of the following:
December 29, December 30,
(Dollars in thousands) 2001 2000
----------- -----------
Self-insurance accruals .......................... $ 28,020 $ 23,702
Inventory ........................................ 25,150 17,790
Vacation pay and other accrued compensation ...... 29,670 27,762
Reserve for bad debts ............................ 12,724 7,493
Reserve for facility closings .................... 56,151 67,563
Merger costs ..................................... 5,304 6,117
Unrealized loss on investments ................... 19,266 17,499
Foreign and state net operating loss carryforwards 88,006 91,037
Other items, net ................................. 23,451 27,343
--------- ---------
Gross deferred tax assets ..................... 287,742 286,306
Valuation allowance .............................. (72,605) (91,037)
--------- ---------
Deferred tax assets ........................... 215,137 195,269
--------- ---------
Basis difference in fixed assets ................. 71,880 51,797
Capitalized leases ............................... 5,573 5,757
Excess of tax over book amortization ............. 3,641 1,214
Other items, net ................................. 1,856 16,294
--------- ---------
Deferred tax liabilities ...................... 82,950 75,062
--------- =========
Net deferred tax assets .......................... $ 132,187 $ 120,207
========= =========
As of December 29, 2001, we had approximately $44 million of federal, $105
million of foreign and $642 million of state net operating loss carryforwards.
Of these carryforwards, approximately $28 million will expire in 2002, $12
million will carry over indefinitely, and the balance will expire between 2003
and 2021. The valuation allowance has been developed to reduce our deferred tax
asset to an amount that is more likely than not to be realized, and is based
upon the uncertainty of the realization of certain foreign and state deferred
tax assets relating to net operating loss carryforwards. The federal net
operating loss is subject to Internal Revenue Code Section 382 limitations, but
is expected to be substantially realized.
32
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE F - INCOME TAXES (CONTINUED)
The following is a reconciliation of income taxes at the Federal statutory rate
to the provision for income taxes:
(Dollars in thousands) 2001 2000 1999
--------- --------- ---------
Federal tax computed at the statutory rate ..... $ 109,945 $ 32,361 $ 144,862
State taxes, net of Federal benefit ............ 13,333 6,899 12,383
Nondeductible goodwill amortization ............ 1,834 1,744 1,964
Merger costs ................................... -- 969 2,920
Foreign income taxed at rates other than Federal (13,743) (667) (6,508)
Other items, net ............................... 1,718 1,821 628
--------- --------- ---------
Provision for income taxes ..................... $ 113,087 $ 43,127 $ 156,249
========= ========= =========
NOTE G - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES: Office Depot leases facilities and equipment under agreements
that expire in various years through 2021. Substantially all such leases contain
provisions for multiple renewal options. In addition to minimum rentals, there
are certain executory costs such as real estate taxes, insurance and common area
maintenance on most of our facility leases. Certain leases contain provisions
for additional rent to be paid if sales exceed a specified amount. The table
below shows future minimum lease payments due under non-cancelable leases as of
December 29, 2001. These minimum lease payments do not include facility leases
that were accrued as merger and restructuring costs or store closure and
relocation costs (See NOTES B and C).
(Dollars in thousands)
2002............................................ $ 400,021
2003............................................ 345,876
2004............................................ 299,922
2005............................................ 251,804
2006............................................ 217,219
Thereafter...................................... 1,075,627
-----------
2,590,469
Less sublease income............................ 59,526
-----------
$ 2,530,943
===========
The Company is in the process of opening new stores and CSCs in the ordinary
course of business, and leases signed subsequent to December 29, 2001 are not
included in the above described commitment amounts. Rent expense, including
equipment rental, was approximately $398.1 million, $393.5 million and $321.5
million in 2001, 2000 and 1999, respectively. Included in this rent expense was
approximately $0.7 million, $1.1 million, and $0.8 million of contingent rent,
otherwise known as percentage rent, in 2001, 2000, and 1999, respectively. Rent
expense was reduced by sublease income of approximately $3.0 million in 2001 and
2000, and $3.2 million in 1999.
33
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE G - COMMITMENTS AND CONTINGENCIES (CONTINUED)
GUARANTEE OF PRIVATE LABEL CREDIT CARD RECEIVABLES: Office Depot has private
label credit card programs that are managed by two financial services companies.
The Company acts as the guarantor of all loans between our customers and the
financial services companies. Maximum exposure to off-balance sheet credit risk
is represented by the outstanding balance of private label credit card
receivables, less reserves held by the financial services companies which are
funded by us. At December 29, 2001, maximum exposure totaled approximately
$252.0 million.
OTHER: Office Depot entered into an investment agreement with an Internet
company that may require Office Depot to fund an additional $2.5 million
investment.
We are involved in litigation arising in the normal course of business. In our
opinion, these matters will not materially affect our financial position or
results of operations.
NOTE H - EMPLOYEE BENEFIT PLANS
LONG-TERM EQUITY INCENTIVE PLAN
The Long-Term Equity Incentive Plan, which was approved effective October 1,
1997, provides for the grants of stock options and other incentive awards,
including restricted stock, to directors, officers and key employees. After the
merger with Viking was completed, their employee and director stock option plans
were terminated. When outstanding options issued under Viking's prior plans are
exercised, Office Depot common stock is issued.
As of December 29, 2001, there were 49,457,044 shares of common stock reserved
for issuance to directors, officers and key employees under the Long-Term Equity
Incentive Plan. Under this plan, stock options must be granted at an option
price that is greater than or equal to the market price of the stock on the date
of the grant. If an employee owns at least 10% of our outstanding common stock,
the option price must be at least 110% of the market price on the date of the
grant.
Options granted under this plan and options granted in July 1998 under Viking's
prior plans become exercisable from one to five years after the date of grant,
provided that the individual is continuously employed with the Company. The
vesting periods for all other options granted under Viking's prior plans were
accelerated, and the options became exercisable, as of the date of our merger
with Viking in August 1998. All options granted expire no more than ten years
from the date of grant.
Under this plan, 316,193 shares of restricted stock were issued at no cost to
the employees, 63,565 of which have been canceled. The fair market value of
these awards approximated $3.9 million at the date of the grants. Common stock
issued under this plan is restricted, with vesting periods of up to four years
from the date of grant. Compensation expense is recognized over the vesting
period.
Tax benefits are recorded based on an estimated stock options activity. Each
year, the prior year's estimated tax benefit is adjusted based on the actual
stock sold during the year. In 2000, this adjustment resulted in a reduction of
estimated 1999 tax benefit and completely offset our 2000 estimated tax benefit
(See NOTE K).
34
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE H - EMPLOYEE BENEFIT PLANS (CONTINUED)
LONG-TERM INCENTIVE STOCK PLAN
Viking had a Long-Term Incentive Stock Plan that, prior to the merger, allowed
Viking's management to award up to 2,400,000 restricted shares of common stock
to key Viking employees. Under this plan, 1,845,000 shares were issued at no
cost to employees, 1,200,000 of which have been canceled. Pursuant to the merger
agreement, shares issued under this plan were converted to Office Depot common
stock, and no additional shares may be issued under the plan. The fair market
value of these restricted stock awards approximated $10.0 million at the date of
the grants. Prior to the merger, the vesting period was 15 years. Because of the
plan's change in control provision, however, the employees now vest in their
stock ratably over the 15-year period. Compensation expense is recognized over
the vesting period.
EMPLOYEE STOCK PURCHASE PLAN
The Employee Stock Purchase Plan, which was approved effective July 1999,
replaces the prior plan and Viking's plan and permits eligible employees to
purchase our common stock at 85% of its fair market value. The maximum aggregate
number of shares eligible for purchase under this plan is 3,125,000.
OTHER STOCK-BASED COMPENSATION PLANS
There are two stock-based compensation plans that are effective in Australia and
the United Kingdom. These plans allow eligible employees to purchase up to
537,813 shares of common stock at 85% of its fair market value.
RETIREMENT SAVINGS PLANS
Office Depot has a 401(k) retirement savings plan that allows eligible employees
to contribute up to 18% of their salaries, commissions and bonuses, up to
$10,500 annually, to the plan on a pretax basis in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. Matching
contributions of common stock that are made into the plan are equivalent to 50%
of the first 3% of an employee's contributions. However, discretionary matching
common stock contributions in addition to the normal match may be made. The
Company also has a deferred compensation plan, which permits eligible employees,
who are restricted from making contributions to the 401(k) plan, to make
tax-deferred contributions of up to 18% of their salaries, commissions and
bonuses to the plan. Matching contributions to the deferred compensation plan
are similar to those under our 401(k) retirement savings plan described above.
During 2001, $3.4 million was recognized as compensation expense under the
programs.
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
stock-based compensation plans. The compensation cost charged against income for
the Long-Term Equity Incentive Plan, Long-Term Incentive Stock Plan, Employee
Stock Purchase Plans and retirement savings plans approximated $9.4 million,
$11.2 million and $12.5 million in 2001, 2000 and 1999, respectively. No other
compensation costs have been recognized under our stock-based compensation
plans. Had compensation cost for awards under our stock-based compensation plans
been determined using the fair value method prescribed by SFAS No. 123,
"Accounting for Stock-Based Compensation," our net earnings and earnings per
share would have been reduced to the pro forma amounts presented below:
35
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE H - EMPLOYEE BENEFIT PLANS (CONTINUED)
(In thousands, except per share amounts) 2001 2000 1999
----------- ---------- -----------
Net earnings
As reported ................................ $ 201,043 $ 49,332 $ 257,638
Pro forma .................................. 165,068 11,253 226,424
Basic earnings per share
As reported ................................ $ .67 $ .16 $ .71
Pro forma .................................. .55 .04 .63
Diluted earnings per share
As reported ................................ $ .66 $ .16 $ .69
Pro forma .................................. .54 .04 .61
The fair value of each stock option granted is established on the date of the
grant using the Black-Scholes option pricing model with the following weighted
average assumptions for grants in 2001, 2000 and 1999:
o Expected volatility rates of 40% for 2001, 40% for 2000 and 35% for
1999
o Risk-free interest rates of 4.58% for 2001, 6.37% for 2000 and 5.84%
for 1999
o Expected lives of 4.9, 5.6 and 5.6 years for 2001, 2000 and 1999,
respectively
o A dividend yield of zero for all three years
A summary of the status of and changes in our stock option plans for the last
three years is presented below.
2001 2000 1999
--------------------------- ------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- -------- ----------- -------- ----------- ---------
Outstanding at beginning of year 36,406,229 $12.81 33,507,066 $15.31 31,369,122 $13.75
Granted ........................ 6,759,000 9.41 9,937,750 8.73 8,123,883 18.85
Canceled ....................... (2,642,428) 13.99 (6,608,072) 16.45 (1,325,988) 15.91
Exercised ...................... (5,522,280) 7.93 (430,515) 6.18 (4,659,951) 10.31
----------- ------ ----------- ------ ----------- ------
Outstanding at end of year ..... 35,000,521 $13.29 36,406,229 $12.81 33,507,066 $15.31
=========== ====== =========== ====== =========== ======
As of December 29, 2001, the weighted average fair values of options granted
during 2001, 2000 and 1999 were $3.92, $4.18, and $8.24, respectively.
The following table summarizes information about options outstanding at December
29, 2001.
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------- ---------------------------------
Weighted
Average Remaining Weighted Weighted
Range of Number Contractual Life Average Number Average
Exercise Prices Outstanding (In Years) Exercise Price Exercisable Exercise Price
-------------------- ----------- ----------------- -------------- ---------- --------------
$0.17 - $1.95 25,840 4.3 $0.55 25,840 $ 0.55
1.96 - 2.94 32,186 0.6 2.55 32,186 2.55
2.95 - 4.42 7,200 0.7 3.67 7,200 3.67
4.43 - 6.64 588,921 6.5 6.11 292,706 5.80
6.65 - 9.97 11,510,448 7.7 8.52 3,568,083 8.52
9.98 - 14.96 9,974,697 6.3 11.52 6,408,944 11.93
14.97 - 22.45 10,604,500 6.1 18.30 9,173,244 18.52
22.46 - 25.00 2,256,729 6.6 24.19 1,384,143 24.17
----- ----- ---------- --- ------- ---------- ------
$0.17 - $ 25.00 35,000,521 6.7 $ 13.29 20,892,346 $14.94
===== ======= ========== === ======= ========== ======
36
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE I - CAPITAL STOCK
PREFERRED STOCK
As of December 29, 2001, there were 1,000,000 shares of $.01 par value preferred
stock authorized of which none are issued or outstanding.
STOCKHOLDER RIGHTS PLAN
Effective September 4, 1996, we adopted a Stockholder Rights Plan (the "Rights
Plan"). Under this Rights Plan, each of our stockholders is issued one right to
acquire one one-thousandth of a share of our Junior Participating Preferred
Stock, Series A at an exercise price of $63.33, subject to adjustment, for each
outstanding share of Office Depot common stock they own. These rights are only
exercisable if a single person or company were to acquire 20% or more of our
outstanding common stock or if we announced a tender or exchange offer that
would result in 20% or more of our common stock being acquired.
If we are acquired, each right, except those of the acquirer, can be exchanged
for shares of our common stock with a market value of twice the exercise price
of the right. In addition, if we become involved in a merger or other business
combination where (1) we are not the surviving company, (2) our common stock is
changed or exchanged, or (3) 50% or more of our assets or earning power is sold,
then each right, except those of the acquirer, and an amount equal to the
exercise price of the right can be exchanged for shares of our common stock with
a market value of twice the exercise price of the right.
We may redeem the rights for $0.01 per right at any time prior to an
acquisition.
TREASURY STOCK
In August 1999, the Board approved a $500 million stock repurchase program. This
program was completed by the end of 1999, with the purchase of 46.7 million
shares of our stock at a total cost of $500 million plus commissions. During
2000, the Board approved additional stock repurchases of up to $300 million.
This program was completed during 2000 with the repurchase of 35.4 million
shares of stock. In 2001, the Board approved stock repurchases of up to $50
million a year until cancelled by the Board. During 2001, approximately 252,000
shares were repurchased at a total cost of $4.2 million plus commissions.
NOTE J - EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of
shares outstanding during each period. Diluted earnings per share further
assumes that the zero coupon, convertible subordinated notes, if dilutive, are
converted as of the beginning of the period and that, under the treasury stock
method, dilutive stock options are exercised. Net earnings under this assumption
have been adjusted for interest on the zero coupon, convertible subordinated
notes, net of the related income tax effect.
37
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE J - EARNINGS PER SHARE (CONTINUED)
The information required to compute basic and diluted net earnings per share is
as follows:
(In Thousands) 2001 2000 1999
-------- -------- --------
Basic:
Weighted average number of common shares outstanding ..... 298,054 309,301 361,499
======== ======== ========
Diluted:
Net earnings ............................................. $201,043 $ 49,332 $257,638
Interest expense related to convertible notes, net of tax 7,238 -- 12,068
-------- -------- --------
Adjusted net earnings..................................... $208,281 $ 49,332 $269,706
======== ======== ========
Weighted average number of common shares outstanding ..... 298,054 309,301 361,499
Shares issued upon assumed conversion of convertible notes 13,846 -- 24,744
Shares issued upon assumed exercise of stock options ..... 4,524 1,930 7,414
Shares used in computing diluted
-------- -------- --------
Net earnings per common shares ....................... 316,424 311,231 393,657
======== ======== ========
For 2000, the zero coupon convertible subordinated notes would have been
anti-dilutive, and therefore the shares (23.0 million) and related interest
expense ($12.1 million) were excluded from our calculation of diluted earnings
per share. Options to purchase 12.7 million shares of common stock were not
included in our computation of diluted earnings per share for 2001 because their
effect would also have been anti-dilutive.
NOTE K - SUPPLEMENTAL INFORMATION ON OPERATING, INVESTING AND FINANCING
ACTIVITIES
Additional supplemental information related to the Consolidated Statements of
Cash Flows is as follows:
(Dollars in thousands) 2001 2000 1999
--------- --------- ---------
Cash paid for:
Interest ................................................ $ 17,802 $ 9,099 $ 6,472
Taxes ................................................... 15,008 132,743 118,157
Supplemental non-cash information:
Assets acquired under capital leases ........................ 8,256 12,569 37,881
Additional paid-in capital related to tax
benefit on stock options exercised (See NOTE H) .......... 10,218 (4,640) 22,987
Unrealized gain on investment securities, net of income taxes -- -- 62,128
38
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE L - SEGMENT INFORMATION
Office Depot operates in three reportable segments: North American Retail
Division, Business Services Group ("BSG"), and International Division. Each of
these segments is managed separately primarily because it serves different
customer groups. The accounting policies of our segments are the same as those
described in the summary of significant accounting policies (see Note A). Senior
management evaluates the performance of each business segment based on operating
income, which is defined as income before income taxes, interest income and
expense, goodwill amortization, merger and restructuring costs, facility closure
costs, general and administrative expenses, and pre-opening expenses.
The following is a summary of our significant accounts and balances by segment,
reconciled to our consolidated totals.
North American International Eliminations Consolidated
(Dollars in Thousands) Retail Division BSG Division and Other* Total
--------------- ---------- -------------- ------------ ------------
Sales 2001 $ 5,842,648 $3,763,006 $1,552,072 $ (3,645) $11,154,081
2000 6,487,522 3,618,768 1,467,357 (3,951) 11,569,696
1999 5,893,385 3,057,187 1,325,372 (3,884) 10,272,060
Earnings Before Income Taxes 2001 $ 300,082 $ 285,101 $ 227,336 $(498,389) $ 314,130
2000 239,284 191,996 173,438 (512,259) 92,459
1999 399,120 256,045 136,488 (377,766) 413,887
Capital Expenditures 2001 $ 76,337 $ 44,087 $ 56,740 $ 30,123 $ 207,287
2000 106,646 55,690 32,994 72,398 267,728
1999 195,048 71,810 35,766 89,681 392,305
Depreciation and Amortization 2001 $ 88,227 $ 45,699 $ 16,866 $ 48,642 $ 199,434
2000 92,276 42,588 18,797 52,049 205,710
1999 76,982 35,093 15,619 43,389 171,083
Provision for Losses on Accounts 2001 $ 35,739 $ 53,712 $ 20,109 -- $ 109,560
Receivable and Inventory 2000 30,121 57,628 33,477 -- 121,226
1999 60,003 65,053 20,940 -- 145,996
Equity in Earnings of 2001 -- -- $ 10,892 -- $ 10,892
Joint Ventures 2000 -- -- 9,436 -- 9,436
1999 -- -- 2,041 -- 2,041
Assets 2001 $ 1,803,042 $1,198,355 $ 864,201 $ 466,045 $ 4,331,643
2000 2,184,976 1,105,936 736,229 169,193 4,196,334
39
Office Depot, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE L - SEGMENT INFORMATION (CONTINUED)
* Amounts included in `Eliminations and Other' consist of the following:
SALES consist of inter-segment sales, which are generally recorded at
the cost to the selling entity. EARNINGS BEFORE INCOME TAXES are
primarily associated with corporate activities and are detailed in the
following table:
(Dollars in thousands) 2001 2000 1999
--------- --------- --------
General and administrative expenses $ 451,722 $ 501,700 $ 381,611
Loss (gain) on investment securities 14,100 (12,414) --
Interest (income) expense, net ..... 31,199 22,399 (4,028)
Intersegment transactions .......... 711 257 183
Other, net ......................... 657 317 --
--------- --------- ---------
Total ....................... $ 498,389 $ 512,259 $ 377,766
========= ========= =========
CAPITAL EXPENDITURES, DEPRECIATION AND AMORTIZATION, and ASSETS included in
`Eliminations and Other' are also related primarily to our corporate activities.
We sell office products and services through either wholly-owned operations or
through joint ventures or licensing arrangements, in Australia, Austria,
Belgium, Canada, France, Germany, Hungary, Ireland, Israel, Italy, Japan,
Luxembourg, Mexico, The Netherlands, Poland, Thailand, the United Kingdom and
the United States. Also from 1993 through the fourth quarter of 2000, we had
operations in Columbia under a licensing agreement. There is no single country
outside of the United States in which we generate 10% or more of our total
revenues. Summarized financial information relating to our operations is as
follows (dollars in thousands):
Sales Assets
------------------------------------------------- -----------------------------
2001 2000 1999 2001 2000
----------- ----------- ----------- ----------- -----------
United States $ 9,452,453 $ 9,901,975 $ 8,743,428 $ 3,585,843 $ 3,391,678
International 1,701,628 1,667,721 1,528,632 745,800 804,656
----------- ----------- ----------- ----------- -----------
Total $11,154,081 $11,569,696 $10,272,060 $ 4,331,643 $ 4,196,334
=========== =========== =========== =========== ===========
NOTE M - QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
(In thousands, except per share amounts) Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
FISCAL YEAR ENDED DECEMBER 29, 2001
Net sales ........................... $ 3,017,914 $ 2,553,503 $ 2,782,493 $ 2,800,171
Gross profit(1) ..................... 806,851 738,570 808,491 816,196
Net earnings ........................ 56,329 41,974 62,460 40,280
Net earnings per common share:
Basic .......................... $ .19 $ .14 $ .21 $ .13
Diluted ........................ .19 .14 .20 .13
FISCAL YEAR ENDED DECEMBER 30, 2000
Net sales ........................... $ 3,065,657 $ 2,632,850 $ 2,822,991 $ 3,048,198
Gross profit(1) ..................... 837,576 751,550 735,151 765,983
Net earnings (loss) ................. 109,036 57,937 50,622 (168,263)
Net earnings (loss) per common share:
Basic .......................... $ .34 $ .18 $ .17 $ (.57)
Diluted(2) ..................... .32 .18 .16 (.57)
(1) Gross profit is net of occupancy costs.
(2) For the fourth quarter of 2000, the zero coupon, convertible
subordinated notes were anti-dilutive and, accordingly, were not
included in the diluted earnings per share computations. In addition,
for the fourth quarter of 2000, options to purchase common stock were
anti-dilutive and not included in the diluted earnings per share
computations.
40
Exhibit 21.1
LIST OF THE COMPANY'S SIGNIFICANT SUBSIDIARIES
Name Jurisdiction of Incorporation
- ---- -----------------------------
Eastman Office Supplies, Inc. Delaware
OD International, Inc. Delaware
The Office Club, Inc. California
Office Depot of Texas, L.P. Delaware
Office Depot International (UK) Limited United Kingdom
Viking Office Products, Inc. California
Viking Direct BV Netherlands
Viking Direct GmbH Germany
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-31743, No. 33-62781, No. 33-62801, No. 333-24521, No. 333-45591, No.
333-59603, No. 333-63507, No. 333-68081, No. 333-69831, No. 333-41060, No.
333-90305 and No. 333-80123, of Office Depot, Inc. on Forms S-8 of our report
dated February 13, 2002 included and incorporated by reference in the Annual
Report on Form 10-K of Office Depot, Inc. for the year ended December 29, 2001.
DELOITTE & TOUCHE LLP
Miami, Florida
March 19, 2002
