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ANNUAL REPORT 1993
[PHOTO]
OFFICE
DEPOT
TAKING CARE OF BUSINESS
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Office Depot Inc. And Subsidiaries
FINANCIAL HIGHLIGHTS
(In thousands, except per share amounts and statistical data)
52 WEEKS 52 Weeks 52 Weeks 52 Weeks 53 Weeks
ENDED Ended Ended Ended Ended
DECEMBER December December December December
25, 1993 26, 1992 28, 1991 29, 1990 30, 1989
---------- ---------- --------- ---------- ----------
STATEMENTS OF EARNINGS DATA:
Sales................................ $2,579,494 $1,732,965 $1,300,847 $903,306 $ 459,449
Cost of goods sold and occupancy
costs.............................. 1,980,429 1,334,305 1,001,484 699,309 358,099
---------- ---------- ---------- --------- ---------
Gross profit......................... 599,065 398,660 299,363 203,997 101,350
Store and warehouse
operating and selling expenses..... 399,966 275,016 214,525 146,907 70,935
Pre-opening expenses................. 9,073 7,453 7,774 8,838 7,782
General and administrative expenses.. 75,851 53,933 39,007 28,530 18,087
Amortization of goodwill............. 1,613 49 -- -- --
---------- ---------- ---------- --------- ---------
Operating profit................... 112,562 62,209 38,057 19,722 4,546
Interest income...................... 4,556 1,303 151 685 3,166
Interest expense..................... (10,598) (1,459) (2,386) (1,594) (878)
Merger costs......................... -- -- (8,950) -- --
---------- ---------- ---------- ---------- ---------
Earnings before income taxes
and extraordinary credit (1)..... 106,520 62,053 26,872 18,813 6,834
Income taxes......................... 43,103 24,261 12,495 7,329 3,761
---------- ---------- ---------- ---------- ----------
Earnings before extraordinary
credit (1)....................... 63,417 37,792 14,377 11,484 3,073
Extraordinary credit (2)........... -- 1,396 614 1,063 532
---------- ---------- ---------- ---------- ----------
Net earnings (1)................... $ 63,417 $ 39,188 $ 14,991 $ 12,547 $ 3,605
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Per Common Share:
Earnings before extraordinary
credit (1 )...................... $ .67 $ .41 $ .18 $ .16 $ .05
Extraordinary credit (2)........... -- .02 .01 .01 --
Net earnings (1)................... $ .67 $ .43 $ .19 $ .17 $ .05
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Dividends.......................... -- -- -- -- --
STATISTICAL DATA:
Facilities open at end of period:
Stores............................. 351 284 228 173 99
Contract stationer/delivery
warehouses....................... 15 5 2 2 --
DECEMBER December December December December
25, 1993 26, 1992 28, 1991 29, 1990 30, 1989
---------- ---------- ---------- ---------- --------
BALANCE SHEET DATA:
Working capital...................... $ 440,957 $ 357,452 $ 179,818 $ 74,583 $ 68,869
Total assets......................... 1,463,899 848,373 559,275 355,935 235,740
Long-term debt (3)................... 366,527 154,566 6,456 21,349 5,012
Common stockholders' equity.......... 554,689 382,447 305,443 144,062 118,655
- ------------------
(1) Includes effect of $8,950,000 of merger costs in 1991.
(2) The extraordinary credit represents the benefit derived from the
utilization of a net operating loss carryforward. See Note E to
Consolidated Financial Statements.
(3) Excludes current maturities.
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[PHOTO] CORPORATE PROFILE.
"Office Depot has revolutionized the distribution of office products
and has the best prices and selection in its industry."
Michael DiCarlo, 8/9/93
John Hancock Special Equity Fund
Quoted in Fortune Magazine
Office Depot, Inc. operates the largest chain of office supply
superstores in North America, ending 1993 with 351 stores and 15 delivery and
contract stationer warehouses. The average Office Depot store is approximately
25,000 square feet in size.
Office Depot stores carry a full inventory averaging more than $1.5
million in top quality, brand name merchandise. Everything from pencils to
powerbooks, from a simple paper clip to the most advanced computer hardware and
software, from file folders to file cabinets -- all sold at discounts of up to
60% off list price, every day.
Office Depot stores cater to small and mid-size businesses, with a
majority of business customers shopping for companies with fewer than 50
employees. The retail locations also serve the rapidly growing home office
market.
To reach larger businesses, those with 50 to 5,000 employees or more,
the Company has entered into the contract stationer arena, through both the
concentrated development of Office Depot's current commercial delivery business
and through the acquisition of existing companies serving this important
segment of the $60-80 billion a year office products industry.
TABLE OF CONTENTS
Financial Highlights. Inside
Front Cover
Corporate Profile. 1
A Record of Successful Expansion. 2
Letter To Shareholders. 4
New Stores, New Markets,
Expanding the Customer Base. 7
New Products, New Services,
Expanding the Retail Business. 8
New Directions, New Opportunities,
Expanding the Delivery and
Contract Business. 12
New Media, New Message,
Expanding the Marketing Plan. 14
Strengthening Our Community Ties. 16
Management's Discussion and Analysis
of Financial Condition and
Results of Operations. 17
Independent Auditors Report. 21
Consolidated Financial Statements. 22
Notes to Consolidated Financial
Statements. 26
Coporate Data/ Inside
Officers & Directors. Back Cover
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[PHOTO] A RECORD OF SUCCESSFUL EXPANSION.
1986 * Opens first store in Fort Lauderdale, revolutionizing the way in which
small and mid-size businesses purchase office products, furniture and
business machines.
* Ends the year with sales of $2 million* and three stores in South
Florida.
1987 * Opens seven new stores across Florida and Georgia with funding from
venture capitalists.
* Launches advertising campaign, Office Depot..."Where America Saves on
Office Supplies.(TR)"
* Ends the year with sales of $33 million*.
1988 * Opens 16 new stores and expands into four new states.
* Completes initial public offering, selling 9,067,500 shares of common
stock at $2.22 per share.
* Ends the year with sales of $132 million*, a 292% increase over the
previous year.
1989 * Opens 41 stores in 29 new markets throughout the United States.
* Declares a 3-for-2 stock split of Office Depot's common stock in the
form of a 50% stock dividend.
* Sells 5,400,000 shares of previously unissued common stock for $41.4
million to Carrefour, a French hypermarket retailer.
* Ends the year with sales of $314 million*, a 138% increase over the
previous year.
1990 * Opens 55 new stores and the Company's first delivery center.
* Adds personal computers and peripherals to the merchandise assortment
and introduces expanded computer centers in 31 stores.
* Implements an Office Depot private label credit card with revolving
credit for business customers.
* Announces the signing of a definitive merger agreement, subject to
shareholder approval, with The Office Club, Inc., the West Coast's
leading office supply superstore chain.
* Ends the year with sales of $625 million*, a 99% increase over the
previous year.
1991 * Adds 55 stores.
* Issues an additional 25,970,781 shares of common stock to acquire
Office Club's 59 stores in nine states.
* Sells an additional 4,290,000 shares to Carrefour, adding over $40
million in capital to fund continued expansion.
* Raises an additional $92 million through a public offering of
6,900,000 shares of common stock.
* Ends the year with a total of 228 stores in 29 states and sales of
$1.3 billion, a 44% increase over the previous year. Operating
profit jumps 93% to $38 million.
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1992 * Adds 56 stores and three new delivery centers.
* Acquires the five stores and two lease locations of an office
supply superstore chain in western Canada.
* Declares a 2-for-1 split of Office Depot common stock.
* Launches national TV and print advertising campaign with the
theme "Taking Care of Business."
* Completes a successful offering of Liquid Yield Option Notes
(LYONs(TM)), raising approximately $146 million to finance
expansion and related working capital requirements.
* Posts 15% comparable store sales increases for the 226 stores
which have been open for more than one year.
* Ends the year with a total of 284 stores throughout the United
States and Canada and sales of $1.733 billion, a 33% increase
over the previous year. Operating profit increases 63% to $62
million.
*Sales results and number of stores opened prior to 1991 have
not been adjusted to reflect the acquisition of The Office
Club, Inc. All share numbers and per share amounts have been
adjusted to reflect 3-for-2 stock splits in 1989 and 1993, and
a 2-for-1 split in 1992.
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JANUARY
* Opens eight new stores in California, Colorado, Illinois, Missouri and Texas.
* Launches Business News, a quarterly magazine for owners of small and
mid-size businesses.
FEBRUARY
* Opens three new stores, including the first The Office Place store in
Ontario. The other stores are in Florida and Washington, D.C.
MARCH
* Opens three new stores in California and Illinois.
* Ends first quarter with sales of $582 million, a 34% increase from the
previous year. Comparable store sales increases for the 246 stores open for
more than one year are 19%.
APRIL
* Opens six new stores in California, Illinois, New Mexico, Texas and Virginia.
* Opens the Company's 300th store, located in San Francisco.
* The Miami Herald names Office Depot as "The Company of the Year."
MAY
* Opens five new stores in California, Illinois, Oregon and Washington.
* Enters the contract stationer segment of the office products industry by
acquiring Texas-based Wilson Business Products.
* Declares a 3-for-2 split of Office Depot common stock.
* Launches Home Business Advisor, a quarterly newsletter for the home office
market.
JUNE
* Opens four new stores in Florida, Michigan, Oregon and Ontario.
* Ends second quarter with sales of $527 million, a 36% increase from 1992's
second quarter. Comparable store sales increases for the 255 stores open for
more than one year rise to 20%.
JULY
* Opens three new stores in Louisiana, Michigan, and Alberta.
* Changes the name of the five Office Town stores in Tennessee to Office Depot.
AUGUST
* Opens seven new stores in Illinois, Michigan, Texas and Ontario.
* Announces the signing of two international licensing agreements to open Office
Depot stores in Colombia and Israel.
* Releases first four-color catalog, featuring full photography throughout.
* Launches program to sell specially-priced business information from Dun &
Bradstreet to Office Depot customers.
SEPTEMBER
* Opens four new stores in California, Florida, and Michigan.
* Completes the acquisition of Eastman, the West Coast's leading contract
stationer.
* Ends third quarter with sales of $659.9 million, a 52% increase from the
third quarter of 1992. Comparable store sales increases for the 270 stores
open for more than one year jump to 31%.
OCTOBER
* Opens four new stores in Arkansas, California, Nevada and Ontario.
* Raises approximately $185 million in an offering of Liquid Yield Option Notes
(LYONs(TM)). Proceeds from the sale are to repay outstanding debt, finance
continued expansion, and related working capital requirements.
NOVEMBER
* Opens nine new stores in British Columbia, Kansas, Michigan, Ontario, South
Carolina, Virginia and Washington.
* Launches new Technology Card for individual customers making high tech, high
ticket purchases.
DECEMBER
* Opens 12 new stores in California, Colorado, Florida, Illinois, Missouri,
North Carolina, Ontario, Saskatchewan and Texas.
* Files a "shelf" registration statement covering 4,000,000 shares of Office
Depot common stock for future acquisitions.
* Ends fourth quarter with sales of $809.5 million, a 69% increase over 1992's
fourth quarter. Comparable store sales increases for the 283 stores open for
more than one year are 33%.
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[PHOTO]
LETTER TO SHAREHOLDERS.
Office Depot enjoyed its best year ever in 1993. The Company reported
significant increases in sales, operating profit, net earnings and earnings per
share, as well as some of the highest comparable store sales increases in the
retail industry today.
In 1993, we strengthened our retail leadership position by adding 67 new
stores, while making new acquisitions for continued future growth in the
commercial/contract stationer segment of the office products industry.
[PHOTO]
David I. Fuente
OPERATING PERFORMANCE
Office Depot ended 1993 with sales of $2,579,494,000, a 49% increase
over 1992 sales of $1,732,965,000. Operating profit for 1993 was $112,562,000,
an 81% increase over the $62,209,000 reported in 1992.
Net earnings per share for 1993 was $.67, compared to $.41 in 1992
(excluding an extraordinary credit of $.02 per share relating to utilization of
net operating loss carryforwards, which raised the 1992 earnings per share to
$.43).
Comparable store sales increased 26% in 1993 for the 283 stores which
were open for more than one year. This increase followed a 15% increase in
comparable store sales that the Company experienced in 1992.
FINANCING
Office Depot's stockholders' equity increased to $554 million in 1993,
from $382 million in 1992. During 1993, the Company continued its history of
financing its rapid growth through the issuance of equity or convertible
instruments rather than through straight debt.
In November 1993, Office Depot once again took advantage of the strong
capital market and low interest rates and raised approximately $185 million
from the issuance of Liquid Yield Option Notes (LYONs(TM)). These zero coupon
convertible subordinated notes carry a 4% interest rate. In December 1992, the
Company raised $146 million through its first LYONs offering.
Proceeds from 1993's LYONs offering are being used by the Company to
repay outstanding debt, finance continued expansion and for related working
capital requirements. This issuance of convertible debt adds a conservative
amount of leverage to Office Depot's balance sheet.
GROWTH
Office Depot planned to open between 50 and 60 new stores in 1993 and
actually added 67. The Company ended the year with a total of 351 stores
throughout the United States and Canada, plus 15 delivery/contract warehouses
in the U.S.
The Company entered two major markets in 1994, opening six new stores in
the Toronto area and 10 in Michigan, including five in Detroit and its suburbs.
Additional stores are planned for both markets in 1994.
The Company added "fill-in" stores in many existing markets to
increase penetration and enhance Office Depot's position as the leading office
products superstore chain in the retail industry. By the end of 1993, for
example, Office Depot had
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a total of eight stores in the Chicago area and nine stores in and around
Washington, D.C., the two major markets the Company had entered in 1992.
This is consistent with our policy of saturating markets with Office
Depot stores, allowing the Company to achieve significant economies of scale,
particularly in marketing and advertising.
ACQUISITIONS
Office Depot entered the contract portion of the office products
industry in 1993 through the acquisition of two leading contract stationers:
the Texas-based Wilson Business Products and Eastman, the West Coast's leading
contract office products dealer. In February 1994, the Company completed the
acquisition of two additional contract stationers: the L.E. Muran Company,
which is based in Boston and covers most of New England, and Yorkship Press,
which serves southern New Jersey and the Philadelphia area.
[Graph]
TOTAL NET SALES
(In Millions)
By merging our existing delivery business with that of the acquired
contract stationers, the Company will be positioned as a significant player in
this portion of the office supply industry. Why is this important to Office
Depot's continued growth? As Office Products Distribution Magazine recently
reported:
"Corporate America still consumes the vast majority of office products,
and these businesses continue to rely on traditional commercial and contract
dealers as their primary source of supplies. These large commercial and
contract dealers move nearly as much product as superstores, warehouse clubs,
mail order houses and mass merchants combined."
We believe the sales potential of the commercial and contract business
is huge, perhaps even equal to that of Office Depot's retail division.
ACCOMPLISHMENTS
Office Depot successfully achieved several important goals in 1993:
* The Company solidified its position as the leading office products
superstore chain in the industry. Office Depot is first in total sales
and sales growth, first in total number of stores, first in average
sales per store and average weekly store sales, first in net earnings and
first in comparable store sales increases.
* The Company refined its merchandise assortment, putting extra
emphasis in the product categories of office furniture, business
machines and computer hardware and software. This has resulted in
increased sales.
* The Company made a major commitment to improving customer
satisfaction in 1993, through the implementation of new training programs
and by repeatedly communicating to all Associates the critical
importance that Office Depot places on superior customer care.
* The Company continued its Canadian expansion by adding nine new
stores in 1993, bringing our total to 18 stores across five provinces.
We also signed
[Photo]
Mark Begelman
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international licensing agreements to open Office Depot stores
in Colombia and Israel.
* The Company declared a 3-for-2 split of our common stock during the
second quarter of 1993. This was effected in the form of a stock
dividend to shareholders.
* The Company strengthened its management information systems by
installing a mainframe computer. It is now handling our general ledger,
accounts payable, distribution and fixed asset systems. In 1994, we'll
also be adding to the mainframe Office Depot's replenishment, inventory
management, order entry and fulfillment operations. These system
enhancements will prepare the Company for sustained growth through the
rest of this decade.
* The Company implemented a management training program that will help
us identify and develop Office Depot's next generation of managers. To
this end, more than 800 of our current management team underwent
"Frontline Leadership" training in 1993.
* The Company expanded its national television advertising campaign
"Taking Care of Business" and is now running TV commercials on the three
national networks (ABC, CBS, and NBC) as well as on 11 national cable
channels.
OUTLOOK
In 1994, we are working to increase sales and profitability at our
existing stores, delivery centers, and contract stationer facilities. The
Company expects to open between 60 and 70 new stores, ending the year with more
than 410 stores throughout the United States and Canada. It is our intention
to open Office Depot stores in at least two major new markets in 1994, including
Cincinnati and Minneapolis.
The Company is committed to the aggressive expansion of its commercial
and contract sales in 1994, and to completing the integration of the acquired
contract stationers into Office Depot's management and operating structure.
As we continue to grow and move into new segments of the office supply
industry, Office Depot is committed to maintaining a solid financial base.
This will enable the Company to fund our retail and delivery expansion, improve
both the appearance and operation of our stores, explore new product lines and
services, and continue to hire and develop a first rate team of retail
professionals. We are determined to keep alive that dynamic entrepreneurial
spirit which has been so critical to Office Depot's success.
We are proud of the excellent management team now in place at Office
Depot. Each and every person is dedicated to providing the leadership necessary
to maintain our Company's position as the leading office products retailer in
the world.
These are not mere words. It is a pledge we put into action every
day.
There are, of course, many people that we need to thank for making 1993
such a successful year for Office Depot:
First, our customers. We must never forget that it is their continued
support that fuels every expansion and funds every paycheck.
We also owe thanks to our shareholders. Without their trust and
support, Office Depot could never have grown so quickly in size and
profitability.
Finally, a very special thank you goes to Office Depot's 20,000
Associates all across North America. Without these hard working men and women
in the front line, we wouldn't be achieving such outstanding results in our
bottom line. It is their dedication that drives our business and transforms
our vision of success into profitable reality. They bring true meaning to the
words "Taking Care of Business."
Sincerely,
/s/ DAVID I. FUENTE
David I. Fuente
Chairman of the Board
Chief Executive Officer
/s/ MARK BEGELMAN
Mark Begelman
President
Chief Operating Officer
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[Photo]
NEW STORES,
NEW MARKETS,
EXPANDING THE
CUSTOMER BASE
[Map]
As North America's largest and fastest growing office supply superstore
chain, Office Depot added 67 new stores in 1993, opening them in 19 different
states and four Canadian provinces. Nine new Office Depot stores opened in
California, Illinois and Michigan; seven stores were added in Florida; six in
Ontario; and five in Texas.
Consistent with our tradition of aggressive expansion and rapid market
saturation, the Company entered into two major new markets in 1993 -- Detroit
and Toronto -- opening multiple locations in each. Additional Office Depot
stores were opened in the Chicago and Washington, D.C. metropolitan areas, the
two large markets that the Company had entered in 1992.
Office Depot ended 1993 with a total of 351 stores, including 333
retail locations and 15 delivery centers and contract warehouses in 33
American states and 18 stores in five Canadian provinces.
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[Photo]
NEW PRODUCTS,
NEW SERVICES,
EXPANDING THE
RETAIL BUSINESS.
"TAKING CARE OF BUSINESS EVERY DAY"
The above words and melody are rocker Randy Bachman's, but as the
musical theme behind the Company's on-going advertising and marketing campaign,
the message is key to Office Depot's continued leadership position as North
America's premier office supply warehouse retailer. We're taking care of
business!
BUILDING ON THE BASICS
Office Depot's core formula remains unchanged. The Company's
multi-billion dollar buying power enables it to buy brand name products in
large volume and at significant discounts directly from the world's leading
manufacturers, effectively eliminating middleman mark-ups.
These products are then sold through the Company's "warehouse-style"
stores or ordered from one of Office Depot's two computerized, state-of-the-art
TeleCenters. The orders are then delivered either from the stores or from one
of Office Depot's strategically-located Delivery Centers.
In the Company's on-going effort to remain the industry leader, both
technologically and operationally, Office Depot systematically re-examined
every aspect of the business process during 1993. The Company made
improvements where necessary, responding to specific comments and suggestions
made by customers, and upgraded equipment and systems to meet the increasing
demands of sustained and rapid growth.
The actual results from this effort have been rewarding. Overall sales
have increased substantially, customer satisfaction is at an all-time high, and
the Company is now "taking care of business" with the most enthusiastic,
dedicated, and best trained team of Associates in our eight year history.
BROADER MERCHANDISE ASSORTMENT
Office Depot offers customers a choice of nearly 5,600 top quality
products from some of the most respected and recognized manufacturers in the
world, including 3-M, Apple, Acco, Hon Industries, Hewlett-Packard, Xerox, IBM,
Avery Dennison, Compaq, Casio, Globe-Weiss, Sharp, O'Sullivan, NCR and Eberhard
Faber. Major merchandise categories stocked in every store include:
* General office supplies.
* Office furniture, ranging from ready-to-assemble desks and bookcases to
fully-upholstered executive chairs and case goods.
* Computer hardware, software, accessories and peripherals.
* Typewriters, word processors, printers and copiers.
* Telephones, fax machines and cellular phones.
* Paper, including a special selection of recycled paper products.
* Writing instruments and color markers.
* Accounting and bookkeeping supplies.
[Photo]
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"TAKING CARE OF BUSINESS EVERY WAY . . . WE'RE TAKING CARE OF BUSINESS."
* Art and engineering supplies.
* Back-to-school necessities.
Office Depot's buyers and merchandise specialists are constantly
researching and evaluating new products, insuring that the Company's product
assortment is well tested and always at the cutting edge of today's technology.
We are also actively involved with our vendors in the design and development
of new products, as well as in making major contributions in the areas of
marketing, packaging and merchandise display.
In the Company's continuing effort towards offering a balanced
assortment of both new and familiar products, Office Depot noticeably expanded
two important merchandise categories in 1993: Office Furniture and Business
Machines. This was done in direct response to growing customer demand.
After successfully re-merchandising our furniture assortment, Office
Depot has substantially increased the amount of floor space allocated to this
category. Our new furniture products include more upscale, commercial-oriented
styles that are of higher quality, greater durability, and with a more modern
contemporary design.
To better accommodate the expanding business machine needs
of both the home office market and our mid-sized commercial business
shoppers, Office Depot is now offering more technologically advanced
computers, plain paper fax machines and larger, more powerful copiers.
To best meet the service requirements of customers that prefer
technically sophisticated sales associates who are able to answer a wide
variety of product questions, Office Depot hired, trained and deployed
to every store a team of professional Business Machine Specialists.
More than 700 Associates have completed a special three-day training
workshop to learn the latest product information, industry insights and
sales techniques. This investment in our Associates has resulted in
increased sales of computers and business machines.
ADDITIONAL BUSINESS SERVICES
Every Office Depot store has a Business Services Center that shoppers
can use for printing, copying and faxing. Customers can also have color or
blueprint copies made for them, order personalized checks and business forms,
even take advantage of Office Depot's discount long-distance phone service.
During 1993, we revamped and expanded our custom printing program so
customers can order a much wider selection of business cards, letterhead
stationery, envelopes and other printed pieces. Customers can now also order
computer-cut custom signs and banners, which heretofore were available only at
small custom sign
[Photo]
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shops. Our Business Services Centers have also added engraving of fine pens,
business gifts, awards and plaques.
Credit and marketing information from Dun & Bradstreet is now available
at specially-reduced prices for Office Depot customers through our Business
Services Centers. Credit reports, customized mailing lists, prospect profiles,
and business payment records can all be ordered. This is the first time in D &
B's 150-year history that it has worked directly with a major retailer.
The Company is also testing and may soon expand District Copy Centers
to handle large, high speed duplication orders from commercial customers on a
24-hour turn-around basis. At all of our Business Services Centers, our pledge
of excellence is clear and consistent:
We guarantee every Business Services order will be done right, on time,
or it will be free!
A STRONG COMMITMENT TO CUSTOMER CARE
At Office Depot, assuring 100% customer satisfaction is more than just
a promise, it's a written policy. Shoppers are guaranteed complete
satisfaction with every product purchased from Office Depot. A "no questions
asked" refund and exchange policy is in effect in all stores. And with our
"Everyday Low Price Guarantee," if a customer finds a product advertised for
less by another local retailer, we will match that price and give the customer
an immediate credit of 50% of the difference on the purchase, up to a maximum
of $50.
Office Depot places the highest priority on superior Customer Service.
Associates in every store are knowledgeable, available to answer product
questions and ready to help shoppers who need assistance, whether in locating
specific items or by carrying a customer's packages out to the car.
The Company made a major commitment in 1993 to educate our Associates
on the critical importance that Office Depot places on customer satisfaction.
Office Depot significantly strengthened its Human Resources department and
rolled out new training and development programs companywide.
By developing profiles of all customer contact positions (sales
personnel, cashiers, telecenter specialists), the Company improved its hiring
process. Office Depot instituted an enhanced orientation program to educate
all new Associates on our commitment to customer care. To encourage and reward
Associates for outstanding performance in this area, Office Depot has
implemented programs such as Associate of the Month, The Customer Courtesy
Award, the President's Circle, the Kudos, and the Wall of Fame.
The management of Office Depot believes strongly that "our customers
know best." That is why we listen very closely to what they say. Through
numerous focus groups and an average of 13,000 Scantron surveys which our
customers mail in each month,
[PHOTO]
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we are able to understand the expectations
of our shoppers and be better prepared
to meet them. For example, when surveys [PHOTO]
showed that our customers wanted faster
check-outs, we made several procedural
changes that substantially quickened the
process.
Office Depot's goal for our customers is simple:
Easy in. Easy shop. Easy out.
BETTER, BRIGHTER STORES
At all Office Depot locations, products are attractively displayed on
easy-to-reach steel shelving in a floor-to-ceiling format. The vast majority
of store space is devoted to the selling area, with only a very small portion
dedicated to receiving and office space. Each store serves both a selling and
a warehousing function. This allows the Company to maximize the square footage
dedicated to generating revenue while minimizing overhead costs.
The front and center aisles feature bulk displays of frequently
purchased/high demand office products, with colorful and eye-catching endcap
displays promoting seasonal items or special buys. The easy-to-read signage and
easy-to-find informational Fact Tags explaining product features are also
appreciated and frequently used by shoppers.
During 1993, the Company upgraded the lighting in many stores and
covered the concrete floors with tile in about half of the stores. The
remaining stores will all be tiled by the end of 1994. These improvements give
the stores a cleaner, brighter look. We also enhanced the exterior
presentation of many stores to make them more visible and attractive to
shoppers.
SHARPENING THE SYSTEMS
From its inception, Office Depot has utilized state-of-the-art support
systems, particularly within the MIS area. During 1993, the Company made
dramatic upgrades to improve day-to-day operations companywide, and to
anticipate the increasing challenges from sustained growth ahead.
Office Depot refined and expanded our cross-dock program in 1993, more
than tripling the dollar volume of the product involved. The Company is
currently using seven cross-dock facilities across the country, all operated by
third parties but with a full-time Office Depot manager on site at each
location. The benefits of this program are a reduction in store labor costs
while enhancing the store's in-stock position. It also simplifies the
Company's purchasing process.
Inventory control systems track merchandise from the placing of orders
through the recording of sales, thus facilitating timely and cost-effective
merchandise replenishment at the store level. Cash registers equipped with
laser scanners read UPC bar codes, supply point-of-sale price look-up ability
and eliminate time and labor costs associated with merchandise labeling.
Office Depot utilizes a sophisticated shared satellite system to provide real-
time communication capabilities between the stores and the corporate
headquarters in Delray Beach, Florida.
"Office Depot has grown in every way: acquisitions, new-store growth
and same-store-sales growth. ODP is working toward an integrated system that
will put contract, commercial and the store business all on the same system.
The company is doing exciting things with respect to inventory management and
distribution."
Thomas Kully
William Blair & Co.
March 10, 1994
[PHOTO]
11
14
[PHOTO]
NEW DIRECTIONS,
NEW OPPORTUNITIES,
EXPANDING THE DELIVERY
AND CONTRACT BUSINESS
"Office Depot's management group has not only assembled the strongest
superstore chain in the office supplies sector, but they have put the company
on track to eventually become the leading contract stationer in the U.S. In
other words, Office Depot could eventually become the leading retailer or
distributor of office products in every growth segment of the market: retail
stores, telemarketing/delivery to small customers, contract stationers, and
eventually targeting markets that are not large enough to support retail
locations."
Dan Wewer
The Robinson-Humphrey Co.
January 19, 1994
The delivery business has been an important factor in Office Depot's
growth from the very beginning. At first, call-in orders were delivered from a
nearby store. Later, the Company started opening delivery centers. Office
Depot currently operates two major TeleCenters, one in Florida and the other in
California, and five delivery centers (Atlanta, Baltimore, Fort Lauderdale, Los
Angeles and San Francisco). Between 600 and 700 Office Depot trucks are on
the road every business day, each truck making dozens of deliveries.
FREE DELIVERY BOOSTS SALES
In August 1993, Office Depot announced a new delivery policy in many
markets. Delivery is now free for all orders over $50. Not only did total
sales increase, but so did the average dollar amount per order. Free delivery
is just part of the reason why the rate of growth for the Company's "call-in"
delivery business surpassed even the Company's overall 26% increase in
comparable store sales in 1993.
Under the slogan of "Satisfy Every Customer Every Day," Office Depot's
TeleCenter Operations have substantially increased their capacity to handle
phone-in orders. Advanced Automatic Call Distribution (ACD) technology was
installed in both TeleCenters to provide more effective call-handling service
and support aggressive growth in the Company's delivery sales.
ENTERING THE CONTRACT MARKET
While Office Depot has long been recognized as the leading office
supply retailer serving the small business market, the Company was barely
penetrating the large business market, a segment of the total office products
industry that is estimated to be between $20 and $30 billion in sales each
year. That changed in 1993, when the Company announced the acquisition of two
major contract stationers:
Wilson Business Products serves many large corporations in five
important markets in which Office Depot already has a strong retail presence:
Houston, Dallas, Austin and San Antonio, Texas, and Charlotte, North Carolina.
[PHOTO]
12
15
[map]
The location of Office Depot's 17 delivery centers and contract stationer
warehouses as of March 1994.
Eastman, headquartered in Southern California, is the West Coast's
leading contract stationer. It serves thousands of major companies from San
Diego to Seattle, from Portland to Denver, and posts annual sales in excess of
$300 million.
Over the last year, Office Depot has successfully integrated these two
contract stationers into the Company. An experienced and talented management
team is in place to spearhead the further growth and development of the
commercial and contract business.
By entering the contract market, the Company is enhancing its ability
to continue Office Depot's rapid growth, both in total annual sales and the
size of our customer base. Additionally, the Company will benefit from
operational synergies and economies of scale as we eliminate duplicate systems
while strengthening our overall buying power.
Office Depot has announced its intention to aggressively grow the
commercial and contract business over the next few years. In fact, the Company
completed the acquisition of two additional contract stationers in February
1994: the Boston based L.E. Muran Co., and Yorkship Press, based in southern
New Jersey. These two new acquisitions will enable Office Depot to expand its
contract stationer operations into the strategically important mid-Atlantic and
New England markets with a team of experienced professionals and an established
business base.
13
16
[PHOTO]
NEW MEDIA,
NEW MESSAGE,
EXPANDING THE
MARKETING PLAN
"Office Depot continues to enjoy just about the strongest sales
momentum of any retailer in our universe, as the Company's redoubled emphasis
on customer service and its proactive marketing programs yield sizable share
gains."
Christopher Vroom
Alex. Brown & Sons
January 12, 1994
Office Depot's successful "Taking Care of Business" television and
radio advertising campaign is now in its third generation and still going
strong. The current series of TV commercials are running on three national
television networks (ABC, CBS and NBC) and on 11 national cable stations
ranging from CNN and ESPN to CNBC and Lifetime. The broadcast campaign is also
being shown in more than 25 local markets with multiple store locations.
TARGETING THE MARKET
Television is just one part of the Company's multi-million dollar and
multi-media marketing approach, which also includes radio commercials,
newspaper ads and inserts, billboards in key cities, color-filled catalogs and
a variety of attention-grabbing direct mail campaigns, including special
purchase offers, grand opening announcements, preapproved credit applications
and seasonal supplements for back-to-school and gift-giving holidays.
Office Depot's 240-page catalog remains the backbone of our marketing
efforts. It is published several times each year and is mailed directly to both
current and potential customers. Over the last year, the Company completely
revamped the catalog, going from black and white line drawings of products to
sharp, four-color photography.
During 1993, Office Depot launched BusinessNews, a glossy quarterly
magazine filled with how-to advice and product information for the small
business market. The Company also published a quarterly newsletter, Office
Depot's Home Business Advisor, aimed at people with a home office. In 1994, the
two publications will merge into one magazine, and the Company will be unveiling
a Canadian version.
This combination of broadcast, newspaper and direct mail advertising
targets our customer base of small and mid-size businesses, building store
traffic companywide while, at the same time, increasing name recognition of
Office Depot throughout the United States and Canada.
14
17
[PHOTO COLLAGE]
18
[PHOTO]
STRENGTHENING OUR
COMMUNITY TIES
As part of the Company's stong sense of corporate and social
responsibility, Office Depot is involved with a number of charitable and
community service activities. The Company is a major contributor to the
Leukemia Society of America and is national sponsor of their semiannual "Dress
Down Day" fundraising event. The Company is also sponsoring the March of Dimes
WalkAmerica '94 campaign in 19 cities and states. In support of schools and
educational opportunities, Office Depot is actively involved with both Junior
Achievement and North Carolina's Computer Learning Center.
To assist our Associates in times of personal need, whether it be from
an unexpected medical emergency or sudden displacement by a natural disaster
like Hurricane Andrew, the Mississippi River floods or the Los Angeles
earthquake, the Company is formalizing its existing helping-hand program under
the auspices of a new Office Depot Foundation.
19
Office Depot Inc. And Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- -----------------------------------------------------------------------------
GENERAL
The Company opened its first store in October 1986. Two more stores
were opened in 1986 and an additional 12 stores were opened in 1987. The
Company continued its expansion program in 1988 and 1989 as part of a strategy
to establish itself as a leader in targeted market areas with high
concentrations of small- and medium-sized businesses. During 1988, the Company
opened 26 stores in California, Colorado, Florida, Georgia, Kentucky, North
Carolina, Oregon, Tennessee and Texas, ending the year with 41 stores. During
1989, the Company opened 58 new stores and ended 1989 with 99 stores. During
1990, the Company opened 75 new stores, ending the year with 173 stores in 27
states. During 1991, the Company opened 57 new stores ending the year with 228
stores. During 1992, the Company achieved its expansion plans by opening 53
new stores and acquiring five stores. The Company also closed two former Club
stores, thus ending 1992 with 284 stores in 32 states, the District of Columbia
and Canada. During 1993, the Company opened 68 new stores and closed one
store, ending the period with 351 stores in 33 states, the District of Columbia
and Canada. The Company also acquired ten contract stationer warehouses
through the acquisition of Wilson and Eastman, ending 1993 with 15 delivery and
contract stationer warehouses.
The Company's results are impacted by the costs incurred in connection
with its aggressive new store opening schedule. Pre-opening expenses are
charged to earnings as incurred. Corporate general and administrative expenses
are also incurred in anticipation of store openings. As the Company's store
base and sales volume continue to grow, the Company expects that the adverse
impact on profitability from new store openings will decrease as expenses
incurred prior to store openings continue to represent a declining percentage
of total sales.
RESULTS OF OPERATIONS FOR THE YEARS 1993, 1992 AND 1991
In April 1991, a subsidiary of the Company merged with and into The
Office Club, Inc. ("Club") and Club became a wholly-owned subsidiary of the
Company. The merger was accounted for in 1991 on a "pooling of interests" basis
for accounting and financial reporting purposes. Accordingly, financial data
in 1991, statistical data, financial statements and discussions of financial
and other information included for periods prior to the merger have been
restated to reflect the financial position and results of operations as if they
had merged as of the beginning of operations in 1986. Office Depot, Inc. and
The Office Club, Inc. before the merger will be referred to as "Depot" and
"Club," respectively. Also, as a result of the merger with Club, the Company
incurred merger costs of $8,950,000 in 1991.
Sales. Sales increased to $2,579,494,000 in 1993 from $1,732,965,000
in 1992 and $1,300,847,000 in 1991. Sales in 1993 increased 49% from 1992
sales. The increases in sales were due primarily to 67 additional stores in
1993 and 56 additional stores in 1992, including the five Canadian stores
acquired. The increases also were attributable to same store sales growth.
Comparable store sales in 1993 for the 283 stores open for more than one year
at December 25, 1993 increased 26% from 1992. Comparable store sales in 1992
for the 226 stores open for more than one year at December 26, 1992 increased
15% from 1991. Comparable store sales in the future may be affected by
competition from other stores, the opening of additional stores in existing
markets and economic conditions.
Gross Profit. Gross profit as a percentage of sales increased from
23.0% during 1991 and 1992 to 23.2% during 1993 primarily as a result of
purchasing efficiencies gained through vendor volume discount programs as
purchasing levels continue to increase and leveraging occupancy costs through
higher average sales per store offset by somewhat lower gross margins resulting
from an increase in sales of lower margin business machines and computers. The
Company's management believes that gross profit as a percentage of sales may
continue to fluctuate as a result of the expansion of its contract stationer
base, the result of competitive pricing in more market areas, increased
occupancy costs in certain new markets and in existing markets where the
Company desires to add stores and warehouses in particular locations to
complete its market plan, and purchasing efficiencies realized as total
merchandise purchases increase.
17
20
Office Depot Inc. And Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS Continued
- ------------------------------------------------------------------------------
Store and Warehouse Operating and Selling Expenses. Store and warehouse
operating and selling expenses as a percentage of sales were 15.5% in 1993,
15.9% in 1992 and 16.5% in 1991 as the Company opened its new stores in 1993
and 1992. Store and warehouse operating and selling expenses, consisting
primarily of payroll and advertising expenses, have increased in the aggregate
due to the Company's expansion program. While the majority of these expenses
vary proportionately with sales, there is a fixed cost component to these
expenses that, as sales increase within each store and within a cluster of
stores in a given market area, should decrease as a percentage of sales. This
benefit may not be fully realized, however, during periods when a large number
of new stores are being opened, as new stores typically generate lower sales
than the average mature store, resulting in higher store operating and selling
expenses as a percentage of sales for new stores. This percentage is also
affected when the Company enters large metropolitan market areas where the
advertising costs for the full market must be absorbed by the small number of
stores initially opened. As additional stores in these large markets are
opened, advertising costs, which are substantially a fixed expense for a market
area, will be reduced as a percentage of sales. The Company has also continued
a strategy of opening stores in existing markets. While increasing the number
of stores increases operating results in absolute dollars, this also has the
effect of increasing expenses as a percentage of sales since the sales of
certain existing stores in the market may initially be adversely affected.
During 1992 and 1993, the combination of an increase in average sales per store
and an increase in the amount of cooperative advertising support received
resulted in a decrease in store and warehouse operating and selling expenses as
a percentage of sales as compared to prior periods.
Pre-opening Expenses. As a result of continued store openings,
pre-opening expenses incurred were $9,073,000 in 1993, $7,453,000 in 1992 and
$7,774,000 in 1991. Pre-opening expenses currently are approximately $125,000
per store and are predominantly incurred during a six-week period prior to the
store opening. These expenses consist principally of amounts paid for salaries
and supplies. Since the Company's policy is to expense these items during the
period in which they occur, the amount of pre-opening expenses in each quarter
is generally proportional to the number of new stores opened.
General and Administrative Expenses. General and administrative
expenses as a percentage of sales were 2.9% in 1993, 3.1% in 1992, 3.0% in
1991. General and administrative expenses include, among other costs, site
selection expenses and store management training expenses, and therefore vary
with the number of new store openings. During 1993, the Company increased its
commitment to improving the efficiency of its systems and significantly
increased its information systems programming staff. While this increases
general and administrative expenses in the current year, the Company believes
the systems investment will provide benefits in the future. These increases
were partially offset by a decrease in general and administrative expenses as a
percentage of sales, primarily as a result of the Company's ability to increase
sales without a proportionate increase in corporate expenditures. During 1992,
the increase in general and administrative expenses as a percentage of sales
was primarily attributable to expenses incurred in connection with the
acquisition of the Company's Canadian operation, expenses related to Hurricane
Andrew disaster relief efforts and the beginning of the significant investment
in the ongoing program to upgrade the Company's information systems. Although
the Company anticipates further increases in corporate staff expenditures as
its expansion continues, general and administrative expenses as a percentage of
sales should continue to decrease.
Other Income and Expenses. During 1993, 1992 and 1991, interest
expense was $10,598,000, $1,459,000 and $2,386,000, respectively. In June
1991, the Company received $40,040,000 as a result of a private placement of
4,290,000 shares of its Common Stock to a subsidiary of Carrefour, a French
hypermarket retailer. Also in December 1991, the Company completed a public
offering of 6,900,000 shares of Common Stock raising net proceeds of
approximately $92 million. In December 1992 and November 1993, the Company
completed public offerings of zero coupon, convertible, subordinated debt
raising net proceeds of approximately $146 million and $185 million,
respectively. As the Company has utilized the funds raised in its public
offerings to fund its expansion, interest income has fluctuated. Interest income
during 1993, 1992 and 1991 was $4,556,000, $1,303,000 and $151,000,
respectively.
Net Earnings. The Company recorded amortization of goodwill of
$1,613,000 in 1993 and $49,000 in 1992. The increase in 1993 was attributable
to goodwill arising from the acquisition of Wilson in May 1993 and Eastman in
September 1993. Goodwill in 1994 will be higher than 1993 reflecting a full
year of amortization arising from the Wilson and Eastman acquisitions.
18
21
Office Depot Inc. And Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS Continued
- --------------------------------------------------------------------------------
Earnings before income taxes and extraordinary credit were $106,520,000
in 1993, $62,053,000 in 1992, and $26,872,000 in 1991. In 1991, earnings were
negatively affected by merger costs of $8,950,000.
The effective income tax rate for 1991 was negatively impacted by
certain nondeductible merger costs. The effective income tax rate for 1993 was
negatively impacted by the increase in the federal statutory rate and by
nondeductible goodwill amortization.
Net earnings were $63,417,000 in 1993, $39,188,000 in 1992, and
$14,991,000 in 1991. Net earnings for 1992, and 1991 include extraordinary
credits from the utilization of net operating loss carryforwards of $1,396,000
and $614,000 respectively. The increases in net earnings were attributable to
the significant increases in sales without commensurate increases in expenses.
LIQUIDITY AND CAPITAL RESOURCES
Since the Company's inception in March 1986, the Company has relied
upon equity capital and convertible debt as the primary source of its funds.
Shortly after inception, the Company was capitalized with $250,000 and in 1986
and 1987 private placements of Common Stock and Preferred Stock provided an
aggregate of $25,704,000 in net proceeds to the Company. Additional net
proceeds of $31,932,000 were raised by the Company in public equity offerings
in 1988. Net proceeds of $24,070,000, $11,944,000 and $92,386,000 were raised
by the Company in subsequent public equity offerings completed in 1989, 1990
and 1991, respectively. The Company also received proceeds of approximately
$41,400,000 and $40,040,000 from private placements of its Common Stock with a
subsidiary of Carrefour, completed in July 1989 and June 1991, respectively.
The Company completed public offerings of zero coupon, convertible,
subordinated debt in 1992 and 1993 raising net proceeds of approximately
$146,000,000 and $185,000,000, respectively.
Since the Company's store sales are substantially on a cash and carry
basis, cash flow generated from operating stores provides a source of liquidity
to the Company. Working capital requirements are reduced by vendor credit
terms that allow the Company to finance a portion of its inventory. The
Company utilizes private label credit card programs administered and financed
by financial services companies, which allow the Company to expand its retail
sales without the burden of additional receivables. All credit card
receivables sold to the financial service company under one program were sold
on a recourse basis. Proceeds to the Company for such receivables sold with
recourse were approximately $185,000,000, $138,000,000 and $123,000,000 in
1993, 1992 and 1991, respectively. The outstanding balance of such receivables
at December 25, 1993 was $39,900,000. The Company has also utilized capital
equipment financings to fund working capital requirements.
Sales made from the Eastman and Wilson contract stationer warehouses
are made under regular commercial credit terms, where the Company carries its
own receivables. This contributed to the increase in receivables in 1993 from
1992. As the Company expands into servicing additional large companies in the
contract stationer portion of its business, it is expected that a greater
portion of the Company's receivables will be carried.
In 1993, the Company added 67 stores, in 1992 it added 56 stores, and
in 1991 it added 55 stores. As stores mature and become more profitable, and
as the number of new stores opened in a year becomes a smaller percentage of
the existing store base, cash generated from operations will provide a greater
portion of funds required for new store fixed assets, inventories and other
working capital requirements. This has resulted in net cash provided (used) in
operating activities of $82,191,000, $(11,411,000), and $(41,717,000) for 1993,
1992 and 1991 respectively. Cash generated from operations will be affected by
an increase in receivables carried without outside financing and increases in
inventory at the stores as the Company continues to expand its efforts in
computers and business machines. Capital expenditures are also affected by the
number of stores and warehouses opened or acquired each year and the increase
in computer and other equipment at the corporate office required to support
such expansion. Cash utilized for capital expenditures was $102,417,000 in
1993, $62,542,000 in 1992 and $53,877,000 in 1991.
19
22
Office Depot Inc. And Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS Continued
- ---------------------------------------------------------------------------
The Company plans to open approximately 60 to 70 stores during 1994.
Management estimates that the Company's cash requirements, exclusive of
pre-opening expenses, will be approximately $1,200,000 for each additional
store. These expenditures include an average of approximately $600,000 for
leasehold improvements, fixtures, point-of-sale terminals and other equipment
in the stores, as well as approximately $600,000 for the portion of the store
inventory that is not financed by vendors. In addition, management estimates
that each new store will require pre-opening expenses of approximately
$125,000. The Company's management currently anticipates that its expansion
through 1994 will be financed through cash on hand, funds generated from
operations, equipment leased under the Company's lease facility and funds
borrowed under the Company's revolving credit facility. The Company's
financing requirements beyond 1994 will be affected by the number of new
stores or warehouses opened or acquired.
During 1993, the Company's cash balance increased by $8,306,000 and
long- and short-term debt increased by $212,118,000. This increase in cash and
debt was primarily attributable to cash provided and debt incurred in the public
debt offering, partially offset by payments for fixed assets and inventories
for new stores. Additionally, cash of $136,573,000 was utilized in various
transactions associated with the acquisition of Eastman and redemption of
outstanding Eastman debt (see Note I to Consolidated Financial Statements).
The Company has a credit agreement with its principal bank and a
syndicate of commercial banks to provide for a working capital line of
$200,000,000. The credit agreement provides that funds borrowed will bear
interest, at the Company's option, at either 3/4% over the LIBOR rate or at a
base rate linked to the prime rate. The Company must also pay a fee of 1/4% per
annum on the available and unused portion of the credit facility. The credit
facility expires in September 1996. As of December 25, 1993, the Company had
no outstanding borrowings under the credit facility. In addition to the credit
facility, the bank has provided a lease facility to the Company under which
the bank has agreed to purchase up to $15,000,000 of equipment from the Company
and lease such equipment back to the Company. As of December 25, 1993, the
Company has utilized approximately $7,711,000 of this lease facility.
INFLATION AND SEASONALITY
Although the Company cannot accurately determine the precise effects of
inflation, it does not believe inflation has a material effect on sales or
results of operations. The Company considers its business to be somewhat
seasonal with sales generally slightly higher during the first and fourth
quarters of each year.
20
23
Office Depot Inc. And Subsidiaries
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Directors of Office Depot, Inc.
We have audited the consolidated balance sheets of Office Depot, Inc.
and Subsidiaries as of December 25, 1993 and December 26, 1992, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended December 25, 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Office Depot, Inc. and Subsidiaries as of December 25, 1993 and December 26,
1992 and the results of their operations and their cash flows for each of the
three years in the period ended December 25, 1993 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE
Certified Public Accountants
Fort Lauderdale, Florida
February 8, 1994
21
24
Office Depot Inc. And Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
December 25, December 26, December 28,
1993 1992 1991
------------ ------------ ------------
Sales ........................................ $2,579,494 $1,732,965 $1,300,847
Cost of goods sold and occupancy cost......... 1,980,429 1,334,305 1,001,484
---------- ---------- ----------
Gross profit.................................. 599,065 398,660 299,363
Store and warehouse
operating and selling expenses.............. 399,966 275,016 214,525
Pre-opening expenses.......................... 9,073 7,453 7,774
General and administrative expenses........... 75,851 53,933 39,007
Amortization of goodwill...................... 1,613 49 --
---------- ---------- -----------
486,503 336,451 261,306
---------- ---------- -----------
Operating profit.............................. 112,562 62,209 38,057
Other income (expense)
Interest income............................. 4,556 1,303 151
Interest expense............................ (10,598) (1,459) (2,386)
Merger costs................................ -- -- (8,950)
---------- ---------- -----------
Earnings before income taxes and
extraordinary credit....................... 106,520 62,053 26,872
Income taxes.................................. 43,103 24,261 12,495
---------- ---------- -----------
Earnings before extraordinary credit.......... 63,417 37,792 14,377
Extraordinary credit.......................... -- 1,396 614
---------- ---------- -----------
Net earnings.................................. $ 63,417 $ 39,188 $ 14,991
---------- ---------- -----------
---------- ---------- -----------
Earnings per common and
common equivalent share
Earnings before extraordinary credit........ $ .67 $ .41 $ .18
Extraordinary credit........................ -- .02 .01
----- ----- -----
Net earnings................................. $ .67 $ .43 $ .19
----- ----- -----
----- ----- -----
The accompanying notes are an integral part of these statements.
22
25
Office Depot Inc. And Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
December 25, December 26,
1993 1992
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents .................................................... $ 138,498 $ 130,192
Receivables, net of allowances of $2,791 in 1993 and
$389 in 1992 ................................................................. 165,182 62,012
Merchandise inventories ...................................................... 643,773 456,252
Deferred income taxes ........................................................ 25,931 9,059
Prepaid expenses and refundable income taxes ................................. 4,778 6,497
----------- -----------
Total current assets ........................................................ 978,162 664,012
Property and Equipment, at Cost ................................................ 339,825 219,939
Less accumulated depreciation and amortization .............................. 77,681 51,471
----------- -----------
262,144 168,468
Goodwill, net of amortization ................................................. 200,462 2,224
Other Assets ................................................................... 23,131 13,669
----------- -----------
$ 1,463,899 $ 848,373
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................................................ $ 393,185 $ 237,385
Accrued expenses ............................................................ 128,129 66,227
Income taxes ................................................................. 12,786 --
Current maturities of long-term debt ........................................ 3,105 2,948
----------- -----------
Total current liabilities .............................................. 537,205 306,560
Long-Term Debt, less current maturities ........................................ 16,229 3,486
Deferred Taxes and Other Credits .............................................. 5,478 4,800
Zero Coupon, Convertible, Subordinated Notes ................................... 350,298 151,080
Commitments and Contingencies .................................................. -- --
Common Stockholders' Equity
Common stock-authorized 200,000,000 shares of $.01 par value;
issued 95,609,233 in 1993 and 90,925,224 in 1992 ........................... 956 909
Additional paid-in capital ................................................... 427,326 318,833
Foreign currency translation adjustment ..................................... 383 98
Retained earnings ........................................................... 127,774 64,357
Less: 1,442,298 shares of treasury stock, at cost ........................... (1,750) (1,750)
----------- -----------
554,689 382,447
$ 1,463,899 $ 848,373
----------- -----------
----------- -----------
The accompanying notes are an integral part of these statements.
23
26
Office Depot Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Period from December 30, 1990 to December 25, 1993 (In thousands, except for
number of shares)
- --------------------------------------------------------------------------------
Foreign
Common Common Additional Currency
Stock Stock Paid-in Translation Retained Treasury
Shares Amount Capital Adjustment Earnings Stock
------ ------ ------- ---------- -------- -----
Balance at December 30, 1990...... 73,742,931 $ 738 $ 134,896 $ - $ 10,178 $ (1,750)
Sales of common stock, net of
related costs..................... 11,190,000 112 132,314 - - -
Exercise of stock options
(including tax benefits)....... 2,129,094 21 13,359 - - -
Sale of stock under employee
purchase plan.................... 26,376 - 225 - - -
401k plan matching contributions.. 38,787 - 359 - - -
Net earnings for the period....... - - - - 14,991 -
---------- ------- --------- ---------- -------- --------
Balance at December 28, 1991...... 87,127,188 871 281,153 - 25,169 (1,750)
Exercise of stock options
(including tax benefits)....... 3,721,320 38 36,532 - - -
Sale of stock under employee
purchase plan..................... 39,932 - 705 - - -
401k plan matching contributions.. 36,784 - 443 - - -
Foreign currency translation
adjustment........................ - - - 98 - -
Net earnings for the period....... - - - - 39,188 -
---------- ------- --------- ---------- -------- --------
Balance at December 26, 1992...... 90,925,224 909 318,833 98 64,357 (1,750)
Issuance of common stock for
acquisitions...................... 3,356,934 34 94,664 - - -
Exercise of stock options
(including tax benefits)....... 1,227,670 13 11,278 - - -
Sale of stock under employee
purchase plan..................... 59,659 - 1,604 - - -
401k plan matching contributions.. 39,746 - 947 - - -
Foreign currency translation
adjustment........................ - - - 285 - -
Net earnings for the period....... - - - - 63,417 -
---------- ------- --------- ---------- -------- --------
Balance at December 25, 1993...... 95,609,233 $ 956 $ 427,326 $ 383 $127,774 $ (1,750)
---------- ------- --------- ---------- -------- --------
---------- ------- --------- ---------- -------- --------
The accompanying notes are an integral part of these statements.
24
27
Office Depot Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase in Cash and Cash Equivalents (in Thousands)
- --------------------------------------------------------------------------------
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
December 25, December 26, December 28,
1993 1992 1991
------------ ------------ ------------
Cash flows from operating activities
Cash received from customers......................... $ 2,383,345 $ 1,686,468 $ 1,285,534
Cash paid for inventories............................ (1,925,005) (1,335,487) (1,019,799)
Cash paid for store and warehouse operating,
selling and general and administrative expenses.... (350,201) (354,146) (296,841)
Interest received.................................... 4,557 1,303 151
Interest paid........................................ (1,845) (1,459) (2,386)
Taxes paid........................................... (28,660) (8,090) (8,376)
--------- --------- ---------
Net cash provided (used) in operating activities... 82,191 (11,411) (41,717)
Cash flows from investing activities
Capital expenditures - net........................... (102,417) (62,542) (53,877)
Purchase of Eastman common stock..................... (20,001) - -
Acquisition cash overdraft assumed, net.............. (4,106) - -
--------- --------- ---------
Net cash used in investing activities.............. (126,524) (62,542) (53,877)
--------- --------- ---------
Cash flows from financing activities
Proceeds from issuance of common stock............... - - 132,426
Proceeds from exercise of stock options.............. 10,308 15,836 7,257
Foreign currency translation adjustment.............. 285 98 -
Proceeds from long- and short-term borrowing......... 190,464 151,147 1,989
Payments on long- and short-term debt................ (148,418) (3,101) (16,452)
--------- --------- ---------
Net cash provided by financing activities.......... 52,639 163,980 125,220
--------- --------- ---------
Net increase in cash and cash equivalents........ 8,306 90,027 29,626
Cash and cash equivalents at beginning of period....... 130,192 40,165 10,539
--------- --------- ---------
Cash and cash equivalents at end of period............. $ 138,498 $ 130,192 $ 40,165
--------- --------- ---------
--------- --------- ---------
Reconciliation of net earnings to net cash
provided (used) in operating activities
Net earnings..................................... $ 63,417 $ 39,188 $ 14,991
Adjustments to reconcile net earnings to net cash
provided (used) in operating activities
Depreciation and amortization........................ 30,434 20,792 15,328
Changes in assets and liabilities (net of effect of
acquisitions)
Increase in receivables.............................. (45,006) (26,075) (19,440)
Increase in merchandise inventories................... (150,234) (118,379) (107,079)
Increase in prepaid expenses, deferred income
taxes and other assets........................... (15,862) (16,348) (7,288)
Increase in accounts payable, accrued
expenses and deferred credit..................... 199,442 89,411 61,771
--------- --------- ---------
Total adjustments................................ 18,774 (50,599) (56,708)
--------- --------- ---------
Net cash provided (used) in operating
activities....................................... $ 82,191 $ (11,411) $ (41,717)
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of these statements.
25
28
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Office Depot, Inc. and subsidiaries (the "Company") operates a chain of
high-volume office supply stores and contract stationer/delivery warehouses
throughout the country. The Company was incorporated in March 1986 and opened
its first store in October 1986.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated in consolidation.
All common stock share and per share amounts for all periods presented
have been adjusted for a three-for-two stock split in June 1993 and a
two-for-one stock split in May 1992 effected in the form of stock dividends.
Certain reclassifications were made to prior year statements to conform to
1993 presentations.
CASH AND CASH EQUIVALENTS
The Company considers any highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
RECEIVABLES
Receivables are comprised of trade receivables not financed through
outside programs as well as amounts due from vendors under rebate and
cooperative advertising programs.
MERCHANDISE INVENTORIES
Inventories are stated at the lower of weighted average cost or market
value.
INCOME TAXES
The Company currently provides for Federal and state income taxes
currently payable as well as for those deferred because of temporary
differences between reporting assets and liabilities for tax purposes and for
financial statement purposes using the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under this
standard, deferred tax assets and liabilities represent the tax effects, based
on current tax law, of future deductible or taxable amounts attributable to
events that have been recognized in the financial statements. In prior years,
the Company had provided for income taxes using the provisions of APB No. 11.
PROPERTY AND EQUIPMENT
Depreciation and amortization are provided in amounts sufficient to relate
the cost of depreciable assets to operations over their estimated service lives
on a straight line basis. Leasehold improvements are amortized over the terms
of the respective leases or the service lives of the improvements.
26
29
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
Goodwill
Goodwill represents the excess of purchase price and related costs
over the value assigned to the net tangible assets of businesses acquired.
Goodwill is amortized on a straight-line basis over 40 years. Accumulated
amortization of goodwill was $1,657,000 and $49,000 as of December 25, 1993 and
December 26, 1992, respectively.
Pre-opening Expenses
Pre-opening expenses related to new store openings are expensed as
incurred.
Acquisition of The Office Club, Inc.
On April 10, 1991, the Company completed its acquisition of The Office
Club, Inc. ("Club"). The merger with Club was accounted for in 1991 on a
"pooling of interests" basis for accounting and financial reporting purposes.
Financial statements for periods prior to the merger have been restated to
reflect the financial position and results of operations of the combined
companies as if they had merged as of the beginning of the earliest period
reported. Club became a wholly-owned subsidiary of the Company through the
exchange of 25,970,781 shares of the Company's common stock for all of the
outstanding stock of Club on a ratio of 1.194 shares of Depot stock for each
Club share. References to Office Depot, Inc. and to The Office Club, Inc.
before the merger will be referred to as "Depot" and "Club," respectively.
Costs of $8,950,000 associated with the merger have been reflected in the
results of operations for 1991.
Earnings Per Common and Common Equivalent Shares
Net earnings per common equivalent share is based upon the weighted
average number of shares and equivalents outstanding during each period. The
weighted average number of common and common equivalent shares outstanding for
the years ended December 25, 1993, December 26, 1992 and December 28, 1991 were
94,627,000, 91,709,000 and 80,178,000, respectively. Stock options and
warrants are considered common stock equivalents. The zero coupon,
convertible, subordinated notes are not common stock equivalents and are
anti-dilutive in the fully diluted computation.
Fiscal Year
The Company is on a 52 or 53 week fiscal year ending on the last
Saturday in December.
Postretirement Benefits
The Company does not currently provide postretirement benefits for its
employees.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosure about
Fair Value of Financial Instruments", requires disclosure of the fair value of
financial instruments, both assets and liabilities, recognized and not
recognized in the Consolidated Balance Sheet of the Company, for which it is
practicable to estimate fair value. The estimated fair values of financial
instruments which are presented herein have been determined by the Company
using available market information and appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data to
develop estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of amounts the Company could realize in a
current market exchange.
27
30
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
- ---------------------------------------------------------
The following methods and assumptions were used to estimate fair value:
* the carrying amounts of cash and cash equivalents, receivables and
accounts payable approximate fair value due to their short term nature;
* discounted cash flows using current interest rates for financial
instruments with similar characteristics and maturity were used to
determine the fair value of short-term and long-term debt; and,
* market prices were used to determine the value of the zero coupon,
convertible, subordinated notes.
There was no significant difference as of December 25, 1993 in the
carrying value and fair market value of financial instruments except for the
zero coupon, convertible, subordinated notes which had a carrying value of
$350,298,000 and a fair value of $419,750,000.
NOTE B--PROPERTY AND EQUIPMENT
Property and equipment consists of:
December 25, December 26,
1993 1992
-------------- --------------
(in thousands)
Land and buildings................................................. $ 35,402 $ 16,442
Furniture, fixtures and equipment.................................. 130,911 82,080
Automotive equipment............................................... 14,668 8,179
Leasehold improvements............................................. 142,566 100,339
Equipment under capital lease...................................... 16,278 12,899
----------- -------------
339,825 219,939
Less accumulated depreciation and amortization..................... 77,681 51,471
----------- -------------
$ 262,144 $ 168,468
----------- -------------
----------- -------------
Equipment under capital leases consists of:
December 25, December 26,
1993 1992
-------------- --------------
(in thousands)
Equipment....................................................... $ 16,278 $ 12,899
Accumulated depreciation........................................ 11,105 8,458
----------- -------------
$ 5,173 $ 4,441
----------- -------------
----------- -------------
28
31
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
- --------------------------------------------------------------------------------
NOTE C--LONG-TERM DEBT
Long-term debt consists of the following:
December 25, December 26,
1993 1992
------------ ------------
(in thousands)
Capital lease obligations collateralized by certain
equipment and fixtures ............................................ $ 5,496 $ 4,258
13% senior subordinated notes, unsecured and due 2002 ............... 10,368 --
Installment notes payable in monthly installments
through January 1996, collateralized by certain
telephone equipment and vehicles .................................. 3,470 2,176
---------- ----------
19,334 6,434
Less current portion ................................................ 3,105 2,948
---------- ----------
$ 16,229 $ 3,486
---------- ----------
---------- ----------
Maturities of long-term debt are as follows:
December 25,
1993
------------
(in thousands)
1994................................................................ $ 3,105
1995................................................................ 1,808
1996................................................................ 610
1997................................................................ 526
1998 and after...................................................... 13,285
------------
$ 19,334
------------
------------
Future minimum lease payments under capital leases together with the present
value of the net minimum lease payments as of December 25, 1993 are as follows:
December 25,
1993
------------
(in thousands)
1994................................................................ $ 2,624
1995................................................................ 1,271
1996................................................................ 542
1997................................................................ 437
1998 and after...................................................... 1,927
----------
Minimum lease payments ............................................. 6,801
Less: amount representing interest at 9.5% to 15.0% ................ 1,305
----------
Present value of net minimum lease payments ........................ 5,496
Less: current portion .............................................. 2,264
----------
Noncurrent portion ................................................. $ 3,232
----------
----------
The Company has a credit agreement with its principal bank and a
syndicate of commercial banks to provide for a working capital line of
$200,000,000. The agreement provides that funds borrowed will bear interest, at
the Company's option, at either 3/4% over the LIBOR rate or at a base rate
linked to the prime rate. The Company must also pay a fee of 1/4% per annum on
the available and unused portion of the credit facility. The credit facility
expires in September 1996. In addition to the credit facility, the bank has
provided a lease facility to the Company under which the bank has agreed to
purchase up to $15,000,000 of equipment from the Company and lease such
equipment back to the Company. As of December 25, 1993, the Company had no
outstanding borrowings under the revolving credit facility and had utilized
approximately $7,711,000 of the lease facility. The loan agreement contains
covenants relating to various financial statement ratios and provides for a
limitation on the payment of cash dividends on common stock, not to exceed 25%
of net earnings, without the bank's consent.
29
32
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
- --------------------------------------------------------------------------------
NOTE D--ZERO COUPON, CONVERTIBLE, SUBORDINATED NOTES
On December 11, 1992, the Company issued $316,250,000 principal amount
of Liquid Yield Option Notes (LYONs) with a price to the public of
$150,769,000. The issue price of each such LYON was $476.74 and there will be
no periodic payments of interest. The LYONs will mature on December 11, 2007
at $1,000 per LYON representing a yield to maturity of 5% (computed on a semi-
annual bond equivalent basis).
On November 1, 1993, the Company issued $345,000,000 principal amount
of LYONs with a price to the public of $190,464,000. The issue price of each
such LYONs was $552.07 and there will be no periodic payments of interest.
These LYONs will mature on November 1, 2008 at $1,000 per LYON, representing a
yield to maturity of 4% (computed on a semi-annual bond equivalent basis).
All LYONs are subordinated to all existing and future senior
indebtedness of the Company.
Each LYON is convertible at the option of the holder at any time on or
prior to maturity, unless previously redeemed or otherwise purchased by the
Company, into common stock of the Company at a conversion rate of 19.509 shares
per 1992 LYON and 14.156 shares per 1993 LYON. The LYONs may be required to be
purchased by the Company, at the option of the holder, as of December 11, 1997
and December 11, 2002 for the 1992 LYONs and as of November 1, 2000 for the
1993 LYONs, at the issue price plus accrued original issue discount. The
Company, at its option, may elect to pay the purchase price on any particular
purchase date in cash or common stock, or any combination thereof.
In addition, prior to December 11, 1997 for the 1992 LYONs and prior to
November 1, 2000 for the 1993 LYONs, the LYONs will be purchased for cash by
the Company, at the option of the holder, in the event of a change in control
of the Company. Beginning on December 11, 1996, for the 1992 LYONs and on
November 1, 2000 for the 1993 LYONs, the LYONs are redeemable for cash at any
time at the option of the Company in whole or in part at the issue price plus
accrued original issue discount through the date of redemption.
NOTE E--INCOME TAXES
Effective December 27, 1992, the Company adopted the provisions of
Statement No. 109, "Accounting for Income Taxes." The Company's adoption in
1993 of Statement No. 109 did not result in a material adjustment and was
recognized in the results of operations. The Company chose not to restate
prior years' results or disclosures as permitted by the Statement.
Club commenced operations in 1986 and incurred losses through 1989.
The resulting net operating loss carryforward was partially utilized in 1991
and fully utilized in 1992.
The income tax provision consists of the following:
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
December 25, December 26, December 28,
1993 1992 1991
------------ ------------ ------------
(in thousands)
Current
Federal ..................................................... $ 38,410 $ 22,887 $ 12,089
State ....................................................... 9,026 3,386 2,908
Deferred (benefit) .............................................. (4,333) (2,012) (2,502)
------------ ------------ ------------
Total provision for income taxes ................................ $ 43,103 $ 24,261 $ 12,495
------------ ------------ ------------
------------ ------------ ------------
30
33
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
- ----------------------------------------------------
The tax effected components of deferred income tax accounts as of December 25,
1993 are as follows:
Assets Liabilities
------- -----------
(in thousands)
Interest premium on notes redeemed.................... $ 7,832
Self-insurance costs.................................. 6,466
Inventory costs capitalized for tax purposes.......... 3,184
Excess of tax over book depreciation.................. -- $ 3,208
Capitalized leases.................................... -- 3,160
Other items........................................... 14,231 3,218
------- -------
$31,713 $ 9,586
------- -------
------- -------
The components of deferred income tax (benefit) are as follows:
52 Weeks 52 Weeks
Ended Ended
December 26, December 28,
1992 1991
----------- ------------
(in thousands)
Excess of tax over book depreciation.................. $ 470 $ 67
Inventory costs capitalized for tax purposes.......... (526) (435)
Vacation pay.......................................... (380) (305)
Self-insurance costs.................................. (3,032) (1,941)
Capitalized leases.................................... 720 368
Deferred book loss benefit recognized................. 888 148
Other items, net...................................... (152) (46)
Pre-opening costs..................................... -- (358)
------- -------
Total deferred benefit................................ $(2,012) $(2,502)
------- -------
------- -------
The following schedule is a reconciliation of income taxes at the federal
statutory rate to the provision for income taxes:
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
December 25, December 26, December 28,
1993 1992 1991
------------ ----------- -----------
(in thousands)
Tax computed at the statutory rate.................... $37,282 $21,098 $ 9,136
State taxes net of federal benefit.................... 5,326 3,330 1,598
Nondeductible goodwill amortization................... 483 -- --
Nondeductible merger costs............................ -- -- 1,700
Other items, net...................................... 12 (167) 61
------- ------- -------
Provision for income taxes............................ $43,103 $24,261 $12,495
------- ------- -------
------- ------- -------
31
34
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
- ----------------------------------------------------
NOTE F--COMMITMENTS AND CONTINGENCIES
Leases
The Company conducts its operations in various leased facilities under
leases that are classified as operating leases for financial statement
purposes. The leases provide for the Company to pay real estate taxes, common
area maintenance, and certain other expenses, including, in some instances,
contingent rentals based on sales. Lease terms, excluding renewal option
periods exercisable by the Company at escalated rents, expire between 1994 and
2015. In addition to the base lease term, the Company has various renewal
option periods. Also, certain equipment used in the Company's operations is
leased under operating leases. A schedule of fixed operating lease commitments
follows:
December 25,
1993
-----------
(in thousands)
1994 ........................................................ $ 93,960
1995 ........................................................ 92,987
1996 ........................................................ 86,246
1997 ........................................................ 80,333
1998 ........................................................ 76,658
Thereafter .................................................. 318,390
--------
$748,574
--------
--------
The above amounts include 27 stores leased but not yet opened as of
December 25, 1993. The Company is in the process of opening new stores in
the ordinary course of business and leases signed subsequent to December 25,
1993 are not included in the above described commitment amount. Rent expense,
including equipment rental, was approximately $91,005,000, $71,820,000 and
$61,656,000, during 1993, 1992 and 1991, respectively.
Other
Certain holders of the Company's common stock have limited demand
registration rights. The costs of such registration will generally be borne by
the Company.
The Company is involved in litigation arising in the normal course of
its business. In the opinion of management, these matters will not materially
affect the financial position or results of operations of the Company.
As of December 25, 1993, the Company has reserved 11,053,542 shares of
unissued common stock for conversion of the subordinated notes (see Note D).
32
35
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
- -----------------------------------------------------------
NOTE G--EMPLOYEE BENEFIT PLANS
Stock Option Plans
As of December 25, 1993, the Company had reserved 11,367,136 shares of
common stock for issuance to officers and key employees under its 1986 and 1987
Incentive Stock Option Plans, its 1988 and 1989 Employees Stock Option Plans,
its Directors Stock Option Plan and the Club Incentive Stock Option Plan.
Under these plans, the option price must be equal to or in excess of the market
price of the stock on the date of the grant or, in the case of employees who own
10% or more of common stock, the minimum price must be 110% of the market price.
Options granted to date become exercisable from one to four years after
the date of grant, provided that the individual is continuously employed by the
Company. All options expire no more than ten years after the date of grant.
Options to purchase 2,556,848 shares were exercisable at December 25, 1993. No
amounts have been charged to income under the plan.
Number of Option Price
Shares Per Share
----------------- -----------------
Outstanding at December 30, 1990.................... 5,964,519 $ .03- 8.75
Granted............................................. 3,217,530 $ 3.14-13.09
Canceled............................................ 364,611 $ 2.97-12.00
Exercised........................................... 1,579,224 $ .03- 8.67
-----------------
Outstanding at December 28, 1991.................... 7,238,214 $ .03-13.09
Granted............................................. 1,705,575 $ 13.33-22.92
Canceled............................................ 509,688 $ .63-19.42
Exercised........................................... 2,609,971 $ .03-13.09
-----------------
Outstanding at December 26, 1992.................... 5,824,130 $ .03-22.92
Granted............................................. 1,476,468 $ 19.83-35.75
Canceled............................................ 299,752 $ 2.65-26.88
Exercised........................................... 1,190,352 $ .44-22.50
-----------------
Outstanding at December 25, 1993.................... 5,810,494 $ .03-35.75
-----------------
-----------------
Other Stock Options
On December 28, 1987, a nonqualified option to purchase 2,099,997
shares of common stock was issued to the Company's chief executive officer. The
option with respect to 299,997 shares was exercisable upon issuance, with the
balance exercisable one-third each year commencing one year from the date
of issue. Options to purchase an aggregate of 224,997 shares were also issued
to two of the Company's principal officers.
The exercise price on the above described nonqualified options is $.63
per share. Options for 299,997 shares were exercised in February 1988. In
1990, options for 149,997 shares were exercised and options for 75,000 shares
were canceled. In 1991, options for 600,000 shares were exercised. In 1992,
options for the remaining 1,200,000 shares were exercised.
Employee Stock Purchase Plan
In October 1989, the Board of Directors approved an Employee Stock
Purchase Plan, which permits eligible employees to purchase common stock from
the Company at 90% of its fair market value through regular payroll deductions.
The maximum number of shares eligible for purchase under the plan is 750,000.
33
36
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
- --------------------------------------------------------------------------------
Retirement Savings Plan
In February 1990, the Board of Directors approved a Retirement Savings
Plan, which permits eligible employees to make contributions to the plan on a
pretax salary reduction basis in accordance with the provisions of Section
401(k) of the Internal Revenue Code. The Company makes a matching stock
contribution of 50% of the employee's pretax contribution up to a maximum of 3%
of the employee's compensation in any calendar year. The Office Club plan
provided a cash match up to certain limits. The Office Club Plan was
terminated in early 1993 and all employees were given the opportunity to join
the Depot plan.
NOTE H--CAPITAL STOCK
In May 1993, the Board of Directors and stockholders approved an amendment
to the Company's Certificate of Incorporation, which increased the authorized
number of shares of common stock from 100,000,000 to 200,000,000 shares. As of
December 25, 1993, there were 1,000,000 shares of $.01 par value preferred
stock authorized of which none are issued or outstanding.
Common Stock
On June 7, 1991, 4,290,000 shares of common stock were sold to a
subsidiary of Carrefour, a French hypermarket retailer, at a price of $9.33 per
share.
On December 24, 1991, the Company completed a public offering of 6,900,000
shares of common stock at $14.00 per share.
NOTE I--ACQUISITIONS
On May 17, 1993, the Company acquired substantially all of the assets and
assumed certain of the liabilities of the office supply business of Wilson
Stationery & Printing Company ("Wilson"), a contract stationer based in Houston
Texas. The Company issued 663,881 shares of common stock, representing
$15,000,000 at market value at date of issuance, in exchange for the acquired
net assets of Wilson. This acquisition was accounted for as a purchase.
On September 13, 1993, the Company acquired the common stock of Eastman
Office Products Corporation ("Eastman"), a contract stationer and office
furniture dealer headquartered in California that operates primarily in the
western United States. In connection with the acquisition, the Company issued
2,693,053 shares of common stock with a market value of approximately
$79,707,000 and paid out $20,001,000 in cash. This acquisition was accounted
for as a purchase. The Company has allocated the purchase price to the assets
acquired and liabilities assumed based on information obtained to date. The
allocation will be finalized when all necessary information regarding the fair
values of the assets and liabilities is available. The Company also acquired
the outstanding preferred stock of Eastman for $13,158,000. Additionally, the
Company offered to purchase for cash pursuant to a tender offer $90,000,000
principal amount of Eastman, Inc.'s 13% Series B Subordinated Notes due 2002
(the "Notes"). Pursuant to the tender offer, in October 1993 the Company
purchased $81,750,000 principal amount of the Notes for $103,414,000 in cash.
34
37
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
The excess of the cost over the fair value of net assets acquired for
the above acquisitions is being amortized over 40 years on a straight-line
method. The Company's Consolidated Statement of Earnings includes the
operating results of acquisitions from the respective dates of the purchases.
The following represents the pro forma results of operations assuming the
acquisitions of Eastman and Wilson had taken place on December 29, 1991.
52 Weeks 52 Weeks
Ended Ended
December 25, 1993 December 26, 1992
----------------- -----------------
(in thousands, except per share amounts)
(unaudited)
Sales........................................................... $2,828,630 $2,078,504
Net Earnings Before Extraordinary Credit........................ 62,520 37,841
Net Earnings Before Extraordinary Credit Per Share.............. .65 .40
This pro forma information is not necessarily indicative of the actual
results of operations that would have occurred had the acquisitions been made as
of December 29, 1991, or of results which may occur in the future.
NOTE J - SUPPLEMENTAL INFORMATION OF NONCASH INVESTING AND FINANCING ACTIVITIES
The Consolidated Statements of Cash Flows for 1993 and 1992 do not
include noncash financing transactions of $3,525,000 and $21,882,000,
respectively, relating to additional paid in capital associated with tax
benefits of stock options exercised and $8,754,000 for 1993 associated with
accreted interest on convertible, subordinated notes.
The Consolidated Statement of Cash Flows for 1993 does not include
noncash investing and financing transactions associated with common stock issued
for the acquisition of net assets of Wilson and of Eastman. The components of
the transactions are as follows:
(in thousands)
Fair value of assets acquired (including goodwill)......... $ 328,603
Liabilities assumed........................................ (213,895)
----------
Net assets acquired........................................ 114,708
Total issuance of common stock............................. 94,707
----------
Cash used to purchase Eastman common stock................. $ 20,001
----------
----------
35
38
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
- --------------------------------------------------------------------------------
NOTE K - RECEIVABLES SOLD WITH RECOURSE
The Company has two private label credit card programs which are
managed by financial services companies. All credit card receivables sold to
the financial services company under one of these programs were sold on a
recourse basis. Proceeds to the Company for such receivables sold with
recourse were approximately $185,000,000, $138,000,000 and $123,000,000 in
1993, 1992 and 1991, respectively. The Company's maximum exposure to
off-balance sheet credit risk is represented by the outstanding balance of
private label credit card receivables with recourse, which totaled approximately
$39,900,000 at December 25, 1993. The financial services company periodically
estimates the percentage to be withheld from proceeds for receivables sold to
achieve the necessary reserve for potential uncollectible amounts. The Company
expenses such withheld amounts at the time of sale to the financial services
company.
NOTE L - QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- -------- -------- --------
(in thousands, except per share data)
FISCAL YEAR ENDED DECEMBER 25, 1993
Net sales.......................................................... $582,115 $527,871 $659,925 $809,583
Gross profit(a).................................................... 133,632 122,671 151,478 191,284
-------- -------- -------- --------
Net earnings....................................................... $ 14,138 $ 10,861 $ 17,206 $ 21,212
-------- -------- -------- --------
-------- -------- -------- --------
Net earnings per common share...................................... $ .15 $ .12 $ .18 $ .22
-------- -------- -------- --------
-------- -------- -------- --------
FISCAL YEAR ENDED DECEMBER 26, 1992
Net sales.......................................................... $433,303 $386,832 $434,793 $478,037
Gross profit(a).................................................... 99,845 88,758 100,303 109,754
Earnings before extraordinary item................................. 9,351 6,451 9,758 12,232
Extraordinary item................................................. --- --- --- 1,396
-------- -------- -------- --------
Net earnings....................................................... $ 9,351 $ 6,451 $ 9,758 $ 13,628
-------- -------- -------- --------
-------- -------- -------- --------
Earnings per common share before extraordinary item................ $ .10 $ .07 $ .11 $ .13
Extraordinary item................................................. --- --- --- .02
-------- -------- -------- --------
Net earnings per common share...................................... $ .10 $ .07 $ .11 $ .15
-------- -------- -------- --------
-------- -------- -------- --------
(a) Gross profit is net of occupancy costs.
36
39
CORPORATE DATA
Directors Corporate Officers CHARLES CARMICHAEL
Vice President-Construction
DAVID I. FUENTE (3,4) DAVID I. FUENTE
Chairman of the Board Chairman of the Board MARK CLARK
Chief Executive Officer Chief Executive Officer Vice President-Marketing
MARK D. BEGELMAN (3) MARK D. BEGELMAN STEVEN S. EMBREE
President President Vice President-
Chief Operating Officer Chief Operating Officer General Merchandise Manager
DENIS DEFFOREY (1) F. TERRY BEAN RICHARD ESTALELLA
Director Executive Vice President- Regional Vice President-Stores
Carrefour Human Resources
Director MARTIN GONZALEZ
De Noyange, S.A. RICHARD M. BENNINGTON Regional Vice President-Stores
Executive Vice President-
W. SCOTT HEDRICK (2) Operations GEORGE HANDGIS
General Partner Vice President-Business Services
InterWest Partners GARY D. FOSS
Executive Vice President- JOHN MALONEY
JOHN B. MUMFORD (1) Merchandising & Marketing Executive Vice President-
President Commercial/Contract
Crosspoint Corporation BARRY J. GOLDSTEIN
Executive Vice President-Finance JAY MUTSCHLER
MICHAEL J. MYERS (1) Chief Financial Officer and Secretary Executive Vice President-
President Commercial/Contract
First Century Partners WILLIAM SELTZER
Management Company Executive Vice President- JIM PETERS
Director Systems & Distribution Regional Vice President-Stores
Smith Barney Venture Corp.
BRAD COSTELLO KEVIN PHILLIPS
Executive Vice President- Regional Vice President-Stores
PETER J. SOLOMON (3,4) Contract Furniture
Chairman of the Board LARRY PHILLIPS
Chief Executive Officer JOHN O. GRODE Regional Vice President-Stores
Peter J. Soloman Company Limited Vice President-Real Estate
ART QUINTANA
ALAN J. WURTZEL (2,3,4) R. JOHN SCHMIDT, JR. Vice President-General
Chairman of the Board Vice President-Controller Merchandising Manager
Circuit City Stores, Inc.
OPERATING OFFICERS THOMAS W. SMITH
(1) Member of Audit Committee Vice President-Operations
(2) Member of Compensation Committee MICHAEL K. BRENNAN
(3) Member of Nominating Committee Vice President- MICHAEL E. THOMPSON
(4) Member of Executive Committee General Merchandising Manager Vice President-Distribution &
Distribution Systems
Stockholder Information Trustee For Liquid Yield Form 10-K
Option Notes Due 2007 A Form 10-K is available without
Corporate Offices Bank of New York charge upon written request to:
2200 Old Germantown Road 48 Wall Street Investor Relations
Delray Beach, Florida 33445 New York, New York 10286 Office Depot, Inc.
(407) 278-4800 2200 Old Germantown Road
Delray Beach, Florida 33445
Annual Meeting Trustee for Liquid Yield
May 18, 1994 Option Notes Due 2008
Marriott Crocker Center Bankers Trust Company The following table sets forth,
5140 Town Center Circle Four Albany Street for the periods indicated, the
Boca Raton, Florida 33486 New York, New York 10006 high and low sales prices of the
common stock quoted on the
NYSE Composite Tape. These prices
do not include retail mark-ups, mark-downs
Legal Counsel Common Stock or commissions, and have been adjusted
Kirkland & Ellis Office Depot's Common Stock is quoted to reflect a 2-for-1 stock split in
Chicago, Illinois on the New York Stock Exchange under the May 1992, and a 3-for-2 stock split in
symbol ODP. As of March 14, 1994, there May 1993.
Certified Public Accountants were 3,355 stockholders of record. This
Deloitte & Touche number excludes individual stockholders Quarterly Stock Price Range
Ft. Lauderdale, Florida holding stock under nominee security 1992 High Low
position listings. First Quarter $19 $15 1/4
Transfer Agent and Registrar Second Quarter 17 3/64 12 1/2
Mellon Financial Servicer Dividend Policy Third Quarter 20 43/64 15 59/64
Four Station Square The Company has never declared or paid Fourth Quarter 23 1/4 16 27/64
Third Floor cash dividends on its Common Stock and
Pittsburgh, Pennsylvania does not intend to pay cash dividends in 1993 High Low
15219-1173 the foreseeable future. First Quarter $25 11/64 $17 53/64
Second Quarter 27 3/4 20 43/64
Third Quarter 33 7/8 25 3/8
Fourth Quarter 35 7/8 31 5/8
40
Office
Depot
CORPORATE OFFICES 2200 OLD GERMANTOWN ROAD
DELRAY BEACH, FLORIDA 33445 (407) 278-4800
___________________________________________
Office Depot and Office Town are registered trademarks of Office Depot, Inc.
41
APPENDIX TO ELECTRONIC FORMAT DOCUMENT
(Cover Page)
(Photo) - a line drawing of a desk with a computer. The
computer screen is filled with a photograph of
assorted office supplies.
(Page 1)
(Photo) - assorted office supplies
(Page 2)
(Photo) - assorted office supplies
(Page 4)
(Photo-upper left) - assorted office supplies
(Photo-center left) - David I. Fuente
(Page 5)
(Graph) - Total Net Sales (In Millions):
1986 2
1987 45
1988 184
1989 459
1990 903
1991 1,301
1992 1,733
1993 2,579
(Photo-center right) - Mark Begelman
42
(Page 7)
(Photo-upper right) - assorted office supplies
(Map) - map of the United States and Canada showing the number of the Company's
stores in each state or province as follows:
Alabama 6 Nevada 4
Arizona 1 New Mexico 2
Arkansas 2 North Carolina 11
California 67 Ohio 2
Colorado 12 Oklahoma 5
District of Columbia 4 Oregon 7
Florida 54 Pennsylvania 5
Georgia 16 South Carolina 5
Hawaii 1 Tennessee 5
Idaho 1 Texas 43
Illinois 9 Virginia 4
Indiana 7 Washington 11
Iowa 1 Wisconsin 6
Kansas 4
Kentucky 3
Louisiana 7 CANADA
Maryland 6 ------
Michigan 9 Alberta 5
Mississippi 1 British Columbia 4
Missouri 10 Manitoba 2
Nebraska 3 Ontario 6
Saskatchewan 1
(Page 8)
(Photo-upper left) - assorted office supplies
(Photo-lower left) - interior of an Office Depot store
(Page 9)
(Photo) - shoppers making purchases at an Office Depot store
(Page 10)
(Photo) - shoppers at the Business Services desk of an Office Depot store
(Page 11)
(Photo-upper right) - shopper at an Office Depot store
(Photo-lower right) - shoppers at an Office Depot store
(Page 12)
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43
(Photo-upper left) - assorted office supplies
(Photo-lower left) - Office Depot delivery truck
(Page 13)
(Map) - map of the United States showing the location of
the Company's delivery centers and contract
stationer warehouses as of March 1994 as follows:
Arizona 1
California 5
Colorado 1
Florida 1
Georgia 1
Maryland 1
Massachusetts 1
New Jersey 1
North 1
Carolina
Texas 2
Utah 1
Washington 1
(Page 14)
(Photo) - Office Supplies
(Page 15)
(Photo Collage) - Collage of Office Depot advertising
circulars and coupons
(Page 16)
(Photo) - Certificates, announcements and photographs commemorating
participation in and sponsorship of assorted charitable and
community service activities.
- 3 -
