1
Filed pursuant to Rule 424(b)(3)
Registration No. 33-53579
PROSPECTUS
5,442,836 Shares
OFFICE DEPOT, INC.
Common Stock
__________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The 5,442,836 shares of common stock, $.01 par value per share (the
"Common Stock"), covered by this Prospectus may be offered and issued from time
to time by Office Depot, Inc. (the "Company") in connection with future
acquisitions of other businesses, properties or securities in business
combination transactions in accordance with Rule 415(a)(1)(viii) of Regulation C
under the Securities Act of 1933, as amended (the "1933 Act"). This Prospectus
may also be used, with the Company's prior consent, by persons or entities who
have received or will receive such shares in connection with such acquisitions
and who wish to offer and sell such shares under circumstances requiring or
making desirable its use and by certain donees of such persons or entities. See
"Securities Covered by this Prospectus."
The Common Stock is listed on the New York Stock Exchange, Inc. (the
"NYSE") under the symbol "ODP." On May 18, 1994, the closing sale price of the
Common Stock on the NYSE was $34 1/4 per share. See "Common Stock Price Range
and Dividends."
All references to numbers of shares of Common Stock, or options for
shares of Common Stock, and all references to market and option prices per
share, and income per share in this Prospectus have been adjusted to reflect all
stock dividends of the Company through the date of this Prospectus.
The date of this Prospectus is May 19, 1994.
2
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY
PERSON IN ANY JURISDICTION WHERE SUCH OFFER WOULD BE UNLAWFUL.
__________
TABLE OF CONTENTS
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SECURITIES COVERED BY THIS PROSPECTUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
UNAUDITED COMBINED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS . . . . . . . . . . . . . . . . . . . 7
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . 10
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
OWNERSHIP OF COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
DESCRIPTION OF COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
COMMON STOCK PRICE RANGE AND DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
CERTAIN TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
__________
AVAILABLE INFORMATION
The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended, and, in accordance therewith,
files reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such material may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the following Regional Offices of the Commission: 7 World Trade Center, New
York, New York 10048, and Suite 1500, Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60661. Copies of such material may be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Company's
Common Stock is listed on the NYSE and such material may also be inspected at
the offices of the NYSE, 20 Broad Street, New York, New York 10006.
This Prospectus constitutes a part of a Registration Statement on Form
S-1 filed by the Company with the Commission under the 1933 Act. This
Prospectus omits certain information contained in the Registration Statement,
and reference is hereby made to the Registration Statement and related exhibits
for further information with respect to the Company and the shares of Common
Stock offered hereby. Statements contained herein concerning the provisions of
any document are not necessarily complete and, in each instance, reference is
made to the copy of such document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission. Each such statement is
qualified in its entirety by such reference.
- 2 -
3
PROSPECTUS SUMMARY
The following is qualified by the detailed summary information and
financial statements (including the notes thereto) included elsewhere in this
Prospectus.
The Company
Office Depot, Inc. (the "Company") operates the largest chain of
high-volume retail office supply stores in the United States. The Company has
344 stores in 33 U.S. states and the District of Columbia and 18 stores in five
Canadian provinces. The Company sells high-quality, brand-name office products
at significant discounts primarily to small- and medium-sized businesses. The
Company's stores utilize a "warehouse" format and carry a wide selection of
merchandise, including general office supplies, business machines and
computers, office furniture and other business-related products. The Company's
business strategy for its retail stores is to enhance the sales and
profitability of its existing stores and to add new stores in locations where
the Company can achieve a significant market presence. Through expansion, the
Company seeks to increase efficiencies in operations, purchasing, marketing and
management. During 1993, the Company added 67 new stores. The Company intends
to open approximately 60 to 70 stores during 1994, 11 of which were open as of
the end of the first quarter. The Company's retail merchandising strategy is
to offer customers a wide selection of brand-name office products at everyday
low prices. The Company believes that its prices are significantly lower than
those typically offered to small- and medium-sized businesses by their
traditional sources of supply. The Company is able to maintain its low
competitive price policy primarily as a result of the significant cost
efficiencies achieved through its operating format and purchasing power. The
Company buys substantially all of its inventory directly from manufacturers in
large quantities and maintains substantially all of its inventory on the sales
floors of its "no frills" stores.
The Company recently has entered into the full-service contract
stationer portion of the office supply industry. The Company operates a
full-service contract stationer business serving medium- and large-sized
businesses in the United States through 12 contract stationer warehouses. The
Company also delivers to small- and medium-sized businesses through five
delivery centers and certain of its retail stores. The Company expects to
combine its contract stationer warehouses and delivery centers in the future.
The Company has become one of the leading full service contract stationers and
office furniture dealers in the western United States and Texas through its
acquisitions in 1993 of the office supply business of Wilson Stationery &
Printing Company ("Wilson"), a full service contract stationer with operations
in Texas and North Carolina, and Eastman Office Products Corporation
("Eastman"), a full service contract stationer and office furniture dealer
headquartered in California that operates primarily in the western United
States. In February 1994, the Company acquired all of the outstanding common
stock of L.E. Muran Co. ("Muran"), a Boston-based contract stationer, and
Yorkship Press Inc. ("Yorkship"), a New Jersey-based contract stationer serving
Philadelphia and southern New Jersey. The Company, through this division,
sells office products primarily to medium- and large-sized businesses
(generally, organizations with over 75 white-collar employees), schools and
other educational institutions and governmental agencies. The Company provides
these customers access to a broad selection of office supplies and office
furniture, as well as specialized resources and services designed to achieve
improved efficiencies and significant reductions in their overall office
supplies and furniture costs, including electronic ordering, stockless office
procurement and business forms management services (which reduce customer needs
for office supplies storage facilities), desktop delivery programs (which
reduce customer personnel requirements) and comprehensive product utilization
reports.
- 3 -
4
SUMMARY FINANCIAL DATA
Set forth below are summary consolidated financial data for the
Company as of and for the periods indicated. The following information should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Company's Consolidated Financial
Statements and Notes thereto, and other historical and pro forma financial
information appearing elsewhere in this Prospectus.
52 Weeks Ended 13 Weeks Ended Pro Forma(1)
----------------------------------------- ---------------------- -------------
52 Weeks
Ended
December 25, December 26, December 28, March 26, March 27, December 25,
1993 1992 1991 1994 1993 1993
------------ ------------- ------------ -------- ---------- -------------
Statements of Earnings Data: (In thousands, except per share and statistical data)
Sales . . . . . . . . . . . . . . . . . $2,579,494 $1,732,965 $1,300,847 $994,845 $582,115 $2,808,924
Cost of goods sold and occupancy costs 1,980,429 1,334,305 1,001,484 762,725 448,483 2,138,788
---------- ---------- ---------- -------- -------- ----------
Gross profit . . . . . . . . . . . . 599,065 398,660 299,363 232,120 133,632 670,136
Store and warehouse operating and
selling expenses . . . . . . . . . . 399,966 275,016 214,525 159,261 92,544 443,842
Pre-opening expenses . . . . . . . . . 9,073 7,453 7,774 1,259 1,605 9,073
General and administrative expenses . . 75,851 53,933 39,007 27,611 15,610 96,349
Amortization of goodwill . . . . . . . 1,613 49 -- 1,269 15 4,957
Litigation Settlement . . . . . . . . . -- -- -- -- -- (3,288)
---------- ---------- ---------- -------- -------- ----------
Operating profit . . . . . . . . . . 112,562 62,209 38,057 42,720 23,858 119,203
Interest income (expense), net. . . . . (6,042) (156) (2,235) (3,242) (681) (8,953)
Merger costs . . . . . . . . . . . . . -- -- (8,950) -- -- --
---------- ---------- ---------- -------- -------- ----------
Earnings before income taxes and
extraordinary credit(2). . . . . . 106,520 62,053 26,872 39,478 23,177 110,250
Income taxes . . . . . . . . . . . . . 43,103 24,261 12,495 16,556 9,039 45,789
---------- ---------- ---------- -------- -------- ----------
Earnings before extraordinary
credit(2) . . . . . . . . . . . . 63,417 37,792 14,377 22,922 14,138 64,461
Extraordinary credit(3) . . . . . . . . -- 1,396 614 -- -- --
---------- ---------- ---------- -------- -------- ----------
Net earnings(2) . . . . . . . . . . $ 63,417 $ 39,188 $ 14,991 $ 22,922 $ 14,138 $ 64,461
========== ========== ========== ======== ======== ==========
Per Common Share:
Earnings before extraordinary
credit(2) . . . . . . . . . . . . . $ .67 $ .41 $ .18 $ .23 $ .15 $ .67
Extraordinary credit(3) . . . . . . . -- .02 .01 -- -- --
---------- ---------- ---------- -------- -------- ----------
Net earnings(2) . . . . . . . . . . . $ .67 $ .43 $ .19 $ .23 $ .15 $ .67
========== ========== ========== ======== ======== ==========
Dividends . . . . . . . . . . . . . . -- -- -- -- -- --
Statistical Data:
Facilities open at end of period:
Stores. . . . . . . . . . . . . . . . 351 284 228 362 297 351
Delivery and contract
warehouses. . . . . . . . . . . . . 15 5 2 17 5 15
Balance Sheet Data: March 26,
1994
--------------
(in thousands)
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 453,382
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,530,237
Long-term debt(4). . . . . . . . . . . . . . . . . . . . . . . . . . . 369,743
Common stockholders' equity. . . . . . . . . . . . . . . . . . . . . . 569,036
_________________________
(1) The pro forma Statements of Earnings data is presented for
informational purposes only and presents the effect of the merger of a
wholly owned subsidiary of the Company and Eastman on September 13,
1993 under the purchase method of accounting assuming the merger had
occurred as of December 27, 1992.
(2) Includes effect of $8,950,000 ($7,410,000 after tax) of merger costs
in 1991.
(3) The extraordinary credit represents the benefit derived from the
utilization of a net operating loss carryforward.
(4) Excludes current maturities.
- 4 -
5
THE COMPANY
The Company operates the largest chain of high-volume retail office
supply stores in the United States. The Company has 344 stores in 33 U.S.
states and the District of Columbia and 18 stores in five Canadian provinces.
The Company sells high-quality, brand-name office products at significant
discounts primarily to small- and medium-sized businesses. The Company's
stores utilize a "warehouse" format and carry a wide selection of merchandise,
including general office supplies, business machines and computers, office
furniture and other business-related products. The Company's business strategy
for its retail stores is to enhance the sales and profitability of its existing
stores and to add new stores in locations where the Company can achieve a
significant market presence. Through expansion, the Company seeks to increase
efficiencies in operations, purchasing, marketing and management. During 1993,
the Company added 67 new stores. The Company intends to open approximately 60
to 70 stores during 1994, 11 of which were open as of the end of the first
quarter. The Company's retail merchandising strategy is to offer customers a
wide selection of brand-name office products at everyday low prices. The
Company believes that its prices are significantly lower than those typically
offered to small- and medium-sized businesses by their traditional sources of
supply. The Company is able to maintain its low competitive price policy
primarily as a result of the significant cost efficiencies achieved through its
operating format and purchasing power. The Company buys substantially all of
its inventory directly from manufacturers in large quantities and maintains
substantially all of its inventory on the sales floors of its "no frills"
stores. The Company operates in a highly competitive environment and believes
that in the future it will face increased competition from high-volume office
supply and wholesale club chains as the Company and these chains expand their
operations.
The Company recently has entered into the full-service contract
stationer portion of the office supply industry. The Company operates a
full-service contract stationer business serving medium- and large-sized
businesses in the United States through 12 contract stationer warehouses. The
Company also delivers to small- and medium-sized businesses through five
delivery centers and certain of its retail stores. The Company expects to
combine its contract stationer warehouses and delivery centers in the future.
The Company has become one of the leading full service contract stationers and
office furniture dealers in the western United States and Texas through its
acquisitions in 1993 of the office supply business of Wilson, a full service
contract stationer with operations in Texas and North Carolina, and Eastman, a
full service contract stationer and office furniture dealer headquartered in
California that operates primarily in the western United States. In February
1994, the Company acquired all of the outstanding common stock of Muran, a
Boston-based contract stationer, and Yorkship, a New Jersey-based contract
stationer servicing Philadelphia and southern New Jersey. The Company, through
this division, sells office products primarily to medium- and large-sized
businesses (generally, organizations with over 75 white-collar employees),
schools and other educational institutions and governmental agencies. The
Company provides these customers access to a broad selection of office supplies
and office furniture, as well as specialized resources and services designed
to achieve improved efficiencies and significant reductions in their overall
office supplies and furniture costs, including electronic ordering, stockless
office procurement and business forms management services (which reduce
customer needs for office supplies storage facilities), desktop delivery
programs (which reduce customer personnel requirements) and comprehensive
product utilization reports.
The Company's principal executive offices are located at 2200 Old
Germantown Road, Delray Beach, Florida 33445, and its telephone number is (407)
278-4800. As used in this Prospectus, the term the "Company" refers to Office
Depot, Inc., a Delaware corporation, and its subsidiaries, including Club, the
term "Depot" refers to the operations of the Company prior to its acquisition
of The Office Club, Inc., and the term "Club" refers to the operations of The
Office Club, Inc., a California corporation, prior to its acquisition by the
Company. Office Depot, Inc. was organized in March 1986 as a Florida
corporation. In September 1986, Office Depot, Inc. was incorporated in
Delaware and succeeded to the business of the Florida corporation. In April
1991, a subsidiary of the Company merged with and into Club and Club became a
wholly-owned subsidiary of the Company.
- 5 -
6
SECURITIES COVERED BY THIS PROSPECTUS
The 5,442,836 shares of Common Stock covered by this Prospectus are
available for use in future acquisitions of other businesses, properties or
securities in business combination transactions, which may relate to businesses
similar or dissimilar to the Company's businesses. The consideration offered
by the Company in such acquisitions in addition to the shares of Common Stock
offered by this Prospectus may include cash, debt or other securities (which
may be convertible into shares of Common Stock covered by this Prospectus), or
assumption by the Company of liabilities of the business being acquired, or a
combination thereof. It is contemplated that the terms of each acquisition
will be determined by negotiations between the Company and the management or
the owners of the businesses or properties to be acquired or the owners of the
securities (including newly issued securities) to be acquired, with the Company
taking into account the quality of management, the past and potential earning
power and growth of the businesses, properties or securities to be acquired,
and other relevant factors. It is anticipated that shares of Common Stock
issued in acquisitions will be valued at a price reasonably related to the
market value of the Common Stock at the time the basic terms of the acquisition
are tentatively agreed upon or at or about the time or times of delivery of the
shares of Common Stock.
With the consent of the Company, this Prospectus may also be used by
persons or entities who have received or will receive from the Company Common
Stock covered by this Prospectus in connection with acquisitions of businesses,
properties or securities and who may wish to sell such stock under
circumstances requiring or making desirable use of this Prospectus and by
certain transferees of such persons or entities. The Company's consent to such
use may be conditioned upon such persons or entities agreeing not to offer more
than a specified number of shares following amendments to this Prospectus,
which the Company may agree to use its best efforts to prepare and file at
certain intervals. The Company may require that any such offering be effected
in an organized manner through securities dealers.
Sales by means of this Prospectus by persons other than the Company
may be made from time to time privately at prices to be individually negotiated
with the purchasers, or publicly through transactions on the NYSE (which may
involve crosses and block transactions), other exchanges or in the
over-the-counter market, at prices reasonably related to market prices at the
time of sale or at negotiated prices. Broker-dealers participating in such
transactions may act as agent or as principal and may receive commissions from
the purchasers as well as from the sellers. The Company may indemnify any
broker-dealer participating in such transactions against certain liabilities,
including liabilities under the 1933 Act. Profits, commissions and discounts
on sales by persons who may be deemed to be underwriters within the meaning of
the 1933 Act may be deemed underwriting compensation under the 1933 Act.
Stockholders may also offer shares of Common Stock issued in past and
future acquisitions or purchased from the Company by means of prospectuses
under other registration statements or pursuant to exemptions from the
registration requirements of the 1933 Act, including sales which meet the
requirements of Rule 144 or 145(d) under the 1933 Act, and stockholders should
seek the advice of their own counsel with respect to the legal requirements for
such sales.
- 6 -
7
UNAUDITED COMBINED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF EARNINGS
The following pro forma condensed consolidated Statements of Earnings
present the effect of the acquisition of Eastman under the purchase method of
accounting by combining the financial statements of the Company and Eastman.
The Company reports its results of operations utilizing a 52 or 53 week fiscal
year which ends on the last Saturday in December. Eastman utilized a fiscal
year which ended on June 30 each year. The combined pro forma condensed
consolidated Statement of Earnings for the year ended December 25, 1993
combines the results of operations of the Company for the 52 weeks then ended
with the results of operations of Eastman for the year ended December 31, 1993
assuming the acquisition of Eastman had occurred as of December 27, 1992.
The combined pro forma condensed consolidated Statements of Earnings
data is presented for informational purposes only. Accordingly, the pro forma
data is not necessarily indicative of the operating results that would have
occurred had the acquisition been consummated at the beginning of the earliest
period presented or of future operating results. The combined pro forma
condensed consolidated Statements of Earnings should be read in conjunction
with the consolidated financial statements and related notes thereto of the
Company and Eastman contained elsewhere in this Prospectus.
UNAUDITED COMBINED PRO FORMA
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
Year Ended December 25, 1993
-----------------------------------------------------------------
Pro Forma Combined
Office Depot Eastman Adjustments Pro Forma
------------ ------- ----------- ---------
Sales. . . . . . . . . . . . . . . . . . . . . . . . $2,579,494 $229,378 $ 52 (1) $2,808,924
Cost of goods sold and occupancy costs . . . . . . . 1,980,429 161,321 (2,962) (1) 2,138,788
---------- -------- ------- ----------
Gross profit. . . . . . . . . . . . . . . . 599,065 68,057 3,014 670,136
Store and warehouse operating and selling expenses . 399,966 -- 43,876 (1) 443,842
Pre-opening expenses . . . . . . . . . . . . . . . . 9,073 -- -- 9,073
General and administrative expenses. . . . . . . . . 75,851 -- 20,498 (1) 96,349
Amortization of goodwill . . . . . . . . . . . . . . 1,613 -- 3,344 (2) 4,957
Selling, general and administrative expenses . . . . -- 58,051 (58,051) (1) --
Depreciation and amortization. . . . . . . . . . . . -- 4,339 (2,798) (1) --
(1,541) (2)
Litigation expenses. . . . . . . . . . . . . . . . . -- 511 (511) (1) --
Litigation settlement. . . . . . . . . . . . . . . . -- (3,288) -- (3,288)
---------- -------- ------- ----------
Operating profit . . . . . . . . . . . . . 112,562 8,444 (1,803) 119,203
Interest expense (income), net . . . . . . . . . . . 6,042 10,183 (7,272) (3) 8,953
---------- -------- ------- ----------
Earnings from continuing operations before income
taxes . . . . . . . . . . . . . . . . . . . 106,520 (1,739) 5,469 110,250
Income taxes . . . . . . . . . . . . . . . . . . . . 43,103 (12) 2,698 (4) 45,789
---------- -------- ------- ----------
Earnings from continuing operations . . . . . . . $ 63,417 $ (1,727) $ 2,771 $ 64,461
========== ======== ======= ==========
Earnings per common and common equivalent share:
Earnings from continuing operations . . . . . . . $ .67 $ (1.48) (5) $ .67
========== ======== ==========
Weighted average common and common equivalent
shares. . . . . . . . . . . . . . . . . . . . . . 94,627 1,166 96,558
========== ======== ==========
See accompanying notes to Unaudited Combined Pro Forma Condensed Consolidated
Statements of Earnings
- 7 -
8
OFFICE DEPOT, INC. AND EASTMAN OFFICE PRODUCTS CORPORATION
NOTES TO UNAUDITED COMBINED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF EARNINGS
(1) Certain reclassification adjustments have been made to present the
Company and Eastman pro forma financial information on a basis
consistent with that of the Company.
(2) An adjustment has been made to record goodwill amortization (on a 40
year basis). However, all information for a final determination of
goodwill has not yet been obtained. The value of fixed assets of
Eastman was increased by $3.5 million on December 4, 1992 as a result
of the acquisition of the common stock of Eastman by Eastman
Acquisition Corporation. (See Note 1 to the Notes to Consolidated
Financial Statements of Eastman). No subsequent adjustments to fair
market value of fixed assets were deemed necessary as a result of the
acquisition.
(3) For pro forma purposes, the assumption was made that cash proceeds
from the Company's subordinated, convertible notes were utilized to
consummate the acquisition from December 27, 1992. Accordingly,
interest and financing costs associated with Eastman, Inc.'s bank
debt, Eastman, Inc.'s notes and the Eastman preferred stock have been
eliminated. An adjustment has been made to eliminate the Company's
interest income on such proceeds after December 1992. Also,
associated interest on any assumed draws on the Company's working
capital line has been included.
(4) An adjustment has been made to the provision for income taxes using
the Company's average statutory rate for the net effect of pro forma
adjustments made to the Unaudited Combined Pro Forma Condensed
Consolidated Statements of Earnings for the period presented.
(5) Weighted average common and common equivalent shares for purposes of
the earnings per share calculation for Eastman is assumed to be
1,166,000 shares. Earnings from continuing operations for Eastman
have been reduced for preferred stock dividends and accretion of
$1,629,000 for the year ended December 25, 1993.
- 8 -
9
SELECTED FINANCIAL DATA
The financial data in the following table is qualified in its entirety
by, and should be read in conjunction with, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Company's
Consolidated Financial Statements and Notes thereto, and other financial and
pro forma information appearing elsewhere in this Prospectus. With respect to
the years ended December 1993, 1992, 1991, 1990 and 1989, the statements of
earnings data and balance sheet data have been derived from audited financial
statements of the Company. The financial statements of the Company for the
years ended 1993, 1992 and 1991, which are included elsewhere in this
Prospectus, have been audited by Deloitte & Touche, independent certified
public accountants. The statements of earnings data for the 13 week periods
ended March 26, 1994 and March 27, 1993 and the balance sheet data as of March
26, 1994 have been derived from unaudited interim financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of results of operations and
financial position have been included in the aforementioned interim unaudited
financial statements. The results of operations for the 13 weeks ended March
26, 1994 are not necessarily indicative of results to be expected for the full
year.
52 Weeks 52 Weeks 52 Weeks 52 Weeks 52 Weeks 13 Weeks 13 Weeks
Ended Ended Ended Ended Ended Ended Ended
December 25, December 26, December 28, December 29, December 30, March 26, March 27,
1993 1992 1991 1990 1989 1994 1993
----------- ----------- ---------- ---------- ---------- ------------ ----------
(In thousands, except per share and statistical data)
Statements of Earnings
Data:
Sales . . . . . . . . . . $2,579,494 $1,732,965 $1,300,847 $903,306 $459,449 $994,845 $582,115
Cost of goods sold and
occupancy costs . . . . . 1,980,429 1,334,305 1,001,484 699,309 358,099 762,725 448,483
---------- ---------- ---------- -------- -------- -------- --------
Gross profit . . . . . 599,065 398,660 299,363 203,997 101,350 232,120 133,632
Store and warehouse
operating and selling
expenses . . . . . . . 399,966 275,016 214,525 146,907 70,935 159,261 92,544
Pre-opening expenses . . 9,073 7,453 7,774 8,838 7,782 1,259 1,605
General and
administrative expenses 75,851 53,933 39,007 28,530 18,087 27,611 15,610
Amortization of goodwill 1,613 49 -- -- -- 1,269 15
---------- ---------- ---------- -------- -------- -------- --------
Operating profit . . . 112,562 62,209 38,057 19,722 4,546 42,720 23,858
Interest income . . . . . 4,556 1,303 151 685 3,166 1,260 1,427
Interest expense . . . . (10,598) (1,459) (2,386) (1,594) (878) (4,502) (2,108)
Merger costs . . . . . . -- -- (8,950) -- -- -- --
---------- ---------- ---------- -------- -------- -------- --------
Earnings before income
taxes and
extraordinary
credit(1) . . . . . . 106,520 62,053 26,872 18,813 6,834 39,478 23,177
Income taxes . . . . . . 43,103 24,261 12,495 7,329 3,761 16,556 9,039
---------- ---------- ---------- -------- -------- -------- --------
Earnings before
extraordinary
credit(1) . . . . . . 63,417 37,792 14,377 11,484 3,073 22,922 14,138
Extraordinary credit(2) -- 1,396 614 1,063 532 -- --
---------- ---------- ---------- -------- -------- -------- --------
Net earnings(1) . . . . $ 63,417 $ 39,188 $ 14,991 $ 12,547 $ 3,605 $ 22,922 $ 14,138
========== ========== ========== ======== ======== ======== ========
Per Common Share:
Earnings before
extraordinary
credit(1) . . . . . . $ .67 $ .41 $ .18 $ .16 $ .05 $ .23 $ .15
Extraordinary credit(2) -- .02 .01 .01 -- -- --
---------- ---------- ---------- -------- -------- -------- --------
Net earnings(1) . . . . $ .67 $ .43 $ .19 $ .17 $ .05 $ .23 $ .15
========== ========== ========== ======== ======== ======== ========
Dividends . . . . . . . -- -- -- -- -- -- --
Statistical Data:
Facilities open at end of
period:
Stores . . . . . . . . 351 284 228 173 99 362 297
Delivery and contract
stationer warehouses . 15 5 2 2 -- 17 5
December 25, December 26, December 28, December 29, December 30, March 26,
1993 1992 1991 1990 1989 1994
----------- ----------- ---------- ---------- ---------- ------------
Balance Sheet Data:
Working capital . . . . . $ 440,957 $357,452 $179,818 $ 74,583 $ 68,869 $ 453,382
Total assets . . . . . . 1,463,899 848,373 559,275 355,935 235,740 1,530,237
Long-term debt(3) . . . . 366,527 154,566 6,456 21,349 5,012 369,743
Common stockholders'
equity . . . . . . . . . 554,689 382,447 305,443 144,062 118,655 596,036
____________________
(1) Includes effect of $8,950,000 ($7,410,000 after tax) of merger costs in
1991.
(2) The extraordinary credit represents the benefit derived from the
utilization of a net operating loss carryforward.
(3) Excludes current maturities.
- 9 -
10
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 acquired Club and 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, and also acquired ten contract
stationer warehouses through the acquisition of Wilson and Eastman, ending 1993
with 15 delivery and contract stationer warehouses. During the first quarter
of 1994, the Company opened 11 stores and acquired two contract stationer
warehouses through the acquisitions of Muran and Yorkship, ending the quarter
with 362 stores and 17 delivery centers 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. Also, as a result of the merger with Club, the Company
incurred merger costs of $8,950,000 in 1991.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED MARCH 26, 1994 COMPARED TO THIRTEEN WEEKS ENDED MARCH 27,
1993
Sales increased 71% from $582,115,000 in the first quarter of 1993 to
$994,845,000 in the first quarter of 1994. Comparable store sales increased
34% for the first quarter of 1994. The balance of the sales increase was
attributable to the 66 new stores opened and the 12 contract stationer
warehouses acquired subsequent to the first quarter of 1993. The Company
opened eleven stores in the first quarter of 1994, bringing the total number of
stores open at the end of the first quarter to 362, compared with 297 stores at
the end of the first quarter of 1993. The Company also operated five delivery
centers and 12 contract stationer warehouses at the end of the first quarter of
1994 compared to five delivery centers at the end of the first quarter of 1993.
The Company expects to combine its contract stationer warehouses and delivery
centers in the future. All of the contract stationer warehouses were acquired
subsequent to the first quarter of 1993. Comparable store sales in the future
may be affected by competition from other stores, the opening of additional
stores, or expansion of contract stationer business in existing markets, and
economic conditions.
Gross profit as a percentage of sales was 23.3% during the first
quarter of 1994 and 23.0% during the comparable quarter in 1993. The increase
was primarily a result of purchasing efficiencies gained through vendor volume
discount programs that increased as purchasing levels continued to increase.
Additionally, the Company benefited from leveraging occupancy costs through
higher average sales per store. These gains were partially offset by lower
gross margins resulting from an increase in sales of lower margin business
machines and computers. Gross profit as a percentage of sales is higher in the
contract stationer portion of the business than the retail store portion as a
result of significantly fewer business machines and computers being sold
through the contract stationer portion.
- 10 -
11
Store and warehouse operating and selling expenses as a percentage of
sales were 16.0% in the first quarter of 1994, compared with 15.9% in the
comparable period in 1993. 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 and due to selling expenses
incurred by contract stationers as well as the somewhat higher operating
expenses incurred by contract stationers. While the majority of these expenses
vary proportionately with sales, there is a fixed cost component to these
expenses such that, as sales increase within a given market area, store and
warehouse operating and selling expenses 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 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, should decrease 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 may have the
effect of increasing expenses as a percentage of sales since the sales of
certain existing stores in the market may initially be adversely affected.
Pre-opening expenses decreased from $1,605,000 in the first quarter of
1993 to $1,259,000 in the comparable period in 1994. Pre-opening expenses
currently are approximately $125,000 per store and are predominately 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 have increased as a percentage of
sales from 2.7% in the first quarter of 1993 to 2.8% in the comparable period
in 1994. 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 in that quarter and the next quarter.
The Company's commitment to improving the efficiency of its computer systems
resulted in an increase in general and administrative expenses in the first
quarter of 1994; however, the Company believes the systems investment will
provide benefits in late 1994 and beyond. General and administrative expenses
also increased with the acquisitions of Wilson, Eastman, Muran and Yorkship, as
this portion of the office products industry typically has a higher expense
component than retail stores. Additionally, there are some duplicative
expenses incurred as a result of the acquisitions. These increases have been
partially offset by a decrease in general and administrative expenses as a
percentage of sales for the Company's retail store operations, primarily as a
result of the Company's ability to increase sales without a proportionate
increase in corporate expenditures.
The Company incurred net interest expense of $3,242,000 in the first
quarter of 1994, as compared to $681,000 in the first quarter of 1993 primarily
due to $185,000,000 raised in November 1993 via a public offering of zero
coupon, convertible, subordinated notes.
The Company recorded goodwill amortization of $1,269,000 in the first
quarter of 1994 as compared to $15,000 in the 1993 comparable quarter. The
increase in goodwill amortization was attributable to the acquisitions of
Eastman and Wilson which occurred subsequent to the first quarter of 1993. The
increase in the effective income tax rate for 1994 was due to nondeductible
goodwill amortization.
FISCAL YEARS 1993, 1992 AND 1991
In April 1991, a subsidiary of the Company merged with and into 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
- 11 -
12
the financial position and results of operations as if they had merged as of
the beginning of operations in 1986. 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 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 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, 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 to complete its market plan, and purchasing efficiencies
realized as total merchandise purchases increase.
Store and Warehouse Operating and Selling Expenses. Store and
warehouse operating and selling expenses as a percentage of sales were 15.5% in
1993, 15.9% in 1992 and 16.5% in 1991. 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
- 12 -
13
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 S.A., a
French hypermarket retailer ("Carrefour"). Also in December 1991, the Company
completed a public offering of 6,900,000 shares of Common Stock raising net
proceeds of approximately $92,000,000. In December 1992 and November 1993, the
Company completed public offerings of zero coupon, convertible, subordinated
debt raising net proceeds of approximately $146,000,000 and $185,000,000,
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 amortization in 1994 will be higher than 1993
reflecting a full year of amortization arising from the Wilson and Eastman
acquisitions.
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 an 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
- 13 -
14
$185,000,000, $138,000,000 and $123,000,000 in 1993, 1992 and 1991,
respectively, and approximately $62,000,000 for the first quarter of 1994. The
outstanding balance of such receivables at March 26, 1994 was $45,459,000. The
Company has also utilized capital equipment financing to fund working capital
requirements.
Sales made from the 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. In the first quarter of 1994, the Company added 11
stores, as compared to 13 stores for the comparable 1993 period. 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. Cash
generated from operations will be affected by an increase in receivables
carried without outside financing and an increase in inventory at the stores as
the Company continues to expand its efforts in computers and business machines.
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. Net cash of $(1,044,000) and $70,587,000 has been provided
(used) in operating activities in the first quarter of 1994 and 1993,
respectively. 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. Cash utilized for capital expenditures was
$41,619,000 and $17,290,000 in the first quarter of 1994 and 1993,
respectively.
The Company plans to open approximately 60 to 70 stores during 1994,
11 of which were open as of the end of the first quarter. 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.
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).
During the three months ended March 26, 1994, the Company's cash balance
decreased approximately $39,623,000 and long- and short-term debt increased by
approximately $1,359,000. The decrease in cash was primarily attributable to
payments for fixed assets and inventories for new stores as well as payments
for inventory mix changes resulting from an increase in business machine and
computer sales.
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 Facility"). 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 March 26,
1994, 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
March 26, 1994, the Company has utilized approximately $7,711,000 of this lease
facility.
The Company's management is continually reviewing its financing
options. Although the Company has the ability to finance its planned expansion
through 1994 from cash on hand, funds received from the debt offering in 1993,
funds generated from operations, and funds borrowed under the Credit Facility,
the Company will also consider alternative financing, such as the issuance of
equity, debt or convertible debt, if market conditions make them financially
attractive alternatives for funding the Company's short-term or long-term
expansion. The Company has acquired its contract stationer
- 14 -
15
businesses with cash and the issuance of Common Stock. The Company's financing
requirements in the future will be affected by the number of new stores,
delivery centers and contract stationer warehouses opened or acquired.
INFLATION AND SEASONALITY
Although the Company cannot accurately determine the precise effects
of inflation, it does not believe inflation has a material effect on sales or
results of operations. The Company considers its business to be somewhat
seasonal with sales generally slightly higher during the first and fourth
quarters of each year.
- 15 -
16
BUSINESS
GENERAL
Office Depot, Inc. (the "Company") operates the largest chain of
high-volume retail office supply stores in the United States, with 344 stores
in 33 states and the District of Columbia and 18 stores in five Canadian
provinces. The Company sells high-quality, brand-name office products at
significant discounts primarily to small- and medium-sized businesses. The
Company's stores utilize a "warehouse" format and carry a wide selection of
merchandise, including general office supplies, business machines and
computers, office furniture and other business-related products. The Company's
business strategy for its retail stores is to enhance the sales and
profitability of its existing stores and to add new stores in locations where
the Company can achieve a significant market presence. Through expansion, the
Company seeks to increase efficiencies in operations, purchasing, marketing and
management. During 1993, the Company added 67 new stores. The Company intends
to open approximately 60 to 70 stores during 1994, 11 of which were open as of
the end of the first quarter. The Company's retail merchandising strategy is
to offer customers a wide selection of brand-name office products at everyday
low prices. The Company believes that its prices are significantly lower than
those typically offered to small- and medium-sized businesses by their
traditional sources of supply. The Company is able to maintain its low
competitive price policy primarily as a result of the significant cost
efficiencies achieved through its operating format and purchasing power. The
Company buys substantially all of its inventory directly from manufacturers in
large quantities and maintains substantially all of its inventory on the sales
floors of its "no frills" stores. The Company operates in a highly competitive
environment and believes that in the future it will face increased competition
from other high-volume office supply and wholesale club chains as the Company
and these chains expand their operations.
The Company recently has entered the full-service contract stationer
portion of the office supply industry. The Company operates a full-service
contract stationer business serving medium- and large-sized businesses in the
United States through 12 contract stationer warehouses. The Company also
delivers to small- and medium-sized businesses through five delivery centers
and certain of its retail stores. The Company expects to combine its contract
stationer warehouses and delivery centers in the future. The Company is one of
the leading full service contract stationers and office furniture dealers in
the western United States and Texas through its acquisitions of Wilson and
Eastman. The Company, through this division, sells office products primarily
to medium- and large-sized businesses (generally, organizations with over 75
white-collar employees), schools and other educational institutions and
governmental agencies. The Company provides these customers access to a broad
selection of office supplies and office furniture, as well as specialized
resources and services designed to achieve improved efficiencies and
significant reductions in their overall office supplies and furniture costs,
including electronic ordering, stockless office procurement and business forms
management services (which reduce customer needs for office supplies storage
facilities), desktop delivery programs (which reduce customer personnel
requirements) and comprehensive product utilization reports.
On May 17, 1993, the Company acquired the office supply business of
Wilson from Steelcase Inc. in exchange for 663,881 shares of Common Stock,
representing approximately $15,000,000 at market value at the date of issuance,
and the assumption of certain liabilities. The Company and Steelcase Inc. were
not, at the time of the acquisition, and are not currently, affiliated. Wilson
is a full service contract stationer with operations in Texas and North
Carolina.
On September 13, 1993, the Company acquired all of the outstanding
common stock of Eastman, a full service contract stationer and office furniture
dealer headquartered in California that operates primarily in the western
United States. The Company acquired the Eastman common stock in exchange for
2,693,053 shares of Common Stock, representing approximately $80,000,000 at
market value at the date of issuance, and $20,000,000 in cash. The Company
also acquired the outstanding preferred stock of Eastman for approximately
$13,000,000 in cash, acquired pursuant to a tender offer approximately
$82,000,000 aggregate principal amount of Eastman, Inc.'s 13% Series B
Subordinated Notes due 2002 for approximately $103,000,000 in cash and paid
approximately $19,000,000 in cash to pay off the outstanding balance of
Eastman, Inc.'s revolving credit facility. No affiliation existed between the
Company and Eastman prior to this transaction.
- 16 -
17
In February 1994, the Company acquired all of the outstanding common
stock of Muran, a Boston-based contract stationer, in exchange for 1,254,967
shares of Common Stock. Additionally, in February 1994 the Company acquired
all of the outstanding common stock of Yorkship, a New Jersey-based contract
stationer serving Philadelphia and southern New Jersey, in exchange for 302,197
shares of Common Stock. No affiliation existed between the Company and either
of Muran or Yorkship prior to these transactions.
OFFICE PRODUCTS INDUSTRY
The office products industry is comprised of three broad categories of
merchandise: office supplies, office machines and microcomputers, and office
furniture. These products are distributed through different and sometimes
overlapping channels of distribution, including manufacturers, distributors,
dealers, retailers and catalog companies. The retail office products industry,
through which smaller businesses have traditionally purchased office products,
is highly fragmented with few regional or national chains and is typified by
stores that do not stock a full range of office products.
Retail sales of office products in the United States are made
primarily through office product dealers, which generally operate one or more
retail stores and utilize a central warehouse facility. Dealers purchase a
significant portion of their merchandise from national or regional office
supply distributors who in turn purchase merchandise from manufacturers.
Dealers often employ a commissioned sales force that utilizes the distributor's
catalog, showing products at retail list prices, for selection and price
negotiation with the customer. Contract bids are typically available to large
businesses that are offered discounts equivalent to or greater than those
offered by the Company. The Company believes that small- and medium-sized
businesses, however, have typically been able to obtain from dealers discounts
on manufacturers' suggested retail list prices of only 20% or less. In
addition, those businesses whose volume usage does not justify a dealer's
one-to-one selling effort generally have been treated as retail customers and
charged prices close to full retail list prices.
In the past few years, high-volume office products retailers employing
various formats have emerged in several geographic markets of the United States
targeting the smaller businesses that traditionally purchased from dealers by
offering significantly lower prices. These price advantages result primarily
from direct, high-volume purchasing from manufacturers and warehouse retailing,
thereby avoiding the distributor's mark-up and eliminating the need for a
commissioned sales force and a central distribution facility. High-volume
office products retailers typically offer substantial price savings to
individuals and small- and medium-sized businesses, which traditionally have
had limited opportunities to buy at significant discounts off the retail list
prices.
Larger customers have been, and continue to be, serviced primarily by
full service contract stationers. These stationers traditionally serve larger
businesses through commissioned sales forces, purchase in large quantities
primarily from manufacturers and offer competitive pricing and customized
services to their customers. The Company has entered the full-service contract
stationer portion of the office supply industry through its acquisitions of
Wilson, Eastman, Muran and Yorkship.
MERCHANDISING AND PRODUCT STRATEGY
The Company's retail merchandising strategy is to offer a broad
selection of brand-name office products at everyday low prices. Each of the
Company's stores offer a comprehensive selection of paper and paper products,
filing supplies, computer hardware and software, calculators, copiers,
typewriters, telephones, facsimile and other business machines, office
furniture, art and engineering supplies and virtually every other type of
office supply. Each of the Company's stores carries approximately 5,600
stock-keeping units (including variations in color and size). In the Contract
Stationer Division, in order to be able to respond satisfactorily to its
customers' orders, certain of the contract stationer warehouses currently carry
up to 18,000 stock-keeping units in inventory. Although the Company has not
determined the number of stock-keeping units in inventory its contract
stationer warehouses will carry in the future, the Company expects such number
to be less than 18,000.
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18
The table below shows sales of each major product group as a
percentage of total merchandise sales for the 1993, 1992 and 1991 fiscal years:
1993 1992 1991
Fiscal Fiscal Fiscal
Year Year Year
------ ------ ------
General office supplies(1) . . . . . . . . . . . . . 45.6% 48.5% 50.8%
Business machines and related supplies,
computers and computer accessories(2) . . . . . . . 41.3 38.7 34.8
Office furniture(3) . . . . . . . . . . . . . . . . . 13.1 12.8 14.4
---- ---- ----
100.0% 100.0% 100.0%
- -------------------------
(1) Includes paper, filing supplies, organizers, writing instruments,
mailing supplies, desktop accessories, calendars, business forms,
binders, tape, art supplies, books, engineering and janitorial
supplies and revenues from the business services center located in
each store.
(2) Includes calculators, adding machines, typewriters, telephones, cash
registers, copiers, facsimile machines, safes, tape recorders,
computers, computer diskettes, computer paper and related accessories.
(3) Includes, chairs, desks, tables, partitions and filing and storage
cabinets.
The Company buys approximately 95% of its merchandise directly from
manufacturers and other primary source suppliers. Products are generally
delivered from manufacturers directly to the stores or warehouses. The Company
is currently expanding its cross-dock operations that utilize independent
distributors' facilities to receive bulk deliveries from vendors and sort and
deliver merchandise to the Company's stores and warehouses. These operations
use the Company's computer system and the distributors' existing facilities and
trucks, which, when fully implemented, should enable the Company to realize
savings from freight and handling charges and reduce store inventory levels.
No single customer accounts for more than one percent of the Company's sales.
The Company has no material long-term contracts or commitments with any vendor
or customer. The Company has not experienced any difficulty in obtaining
desired quantities of merchandise for sale and does not foresee any such
difficulty in the future.
Initial purchasing decisions are made at the corporate headquarters
level by buyers who are responsible for selecting and pricing merchandise.
Inventory levels are monitored and reorders for products are prepared by
central replenishment buyers or "rebuyers" with the assistance of a
computerized automatic replenishment system. This system allows buyers to
devote more time to selecting products, developing new product lines, analyzing
competitive developments and negotiating with vendors in order to obtain more
favorable prices and product availability. Purchase orders to approximately
250 vendors are currently transmitted by electronic data interchange ("EDI"),
which expedites orders and promotes accuracy and efficiency. During 1993, the
Company started to receive Advance Ship Notices ("ASN") and invoicing via EDI
from selected vendors. The Company plans to expand this program in 1994.
MARKETING AND SALES
Retail. The Company's marketing programs are designed to attract new
customers to visit its stores for the first time and to provide information to
existing customers. The Company places advertisements with the major local
newspapers in each of its markets. These newspaper advertisements are
supplemented with local radio and television advertising and direct marketing
efforts. During 1992, the Company launched a major national television
advertising campaign utilizing the "Taking Care of Business" theme. The
current series of television commercials is running on three national
television networks and on 11 national cable stations. All print
advertisements, as well as catalog layouts, are created by the Company's
in-house graphics department. The Company periodically issues catalogs
featuring merchandise offered in its stores. The catalogs compare the
manufacturer's suggested retail list price and the Company's price to
illustrate the savings offered. The catalogs are distributed through direct
mail programs and are available in each store. Upon entering a new market, the
Company purchases a list of businesses for an initial mailing of catalogs.
This list is continually refined and updated by incorporating the names of
private label credit card holders, guarantee card holders and check paying
customers and forms the basis of a highly targeted proprietary mailing list for
updated catalogs and other promotional mailings.
- 18 -
19
The Company's stores have a low price guarantee policy. Under this
policy, the Company will match any competitor's lower price and give the
customer 50% (up to $50) of the difference towards the customer's purchase.
This program assures customers of always receiving the lowest price from the
Company's stores even during periodic sales promotions by competitors. Monthly
competitive pricing analyses are performed to monitor each market and prices
are adjusted as necessary to adhere to this pricing philosophy and ensure
competitive positioning.
Contract Stationer. The Company acquires and maintains its customers
primarily through its direct sales force. The Company's sales force is divided
between its office supplies and contract furniture divisions. All members of
the Company's sales force are employees of the Company.
SERVICES
Retail. The Company provides three key services to its customers --
credit, telephone and facsimile ordering and delivery.
The Company offers revolving credit terms to its customers through the
use of private label credit cards. Every business customer can apply for one
of these credit cards, which are issued without charge. Sales transactions
using the private label credit cards are transmitted by computer to financial
services companies, which credit the Company's bank account with the net
proceeds the following day.
The Company's customers nationwide can place orders by telephone or
facsimile using toll-free telephone numbers through the Company's order
departments in south Florida and in the San Francisco area. Orders received by
the order departments are transmitted electronically to the store or delivery
center nearest the customer for pick-up or delivery at a nominal delivery fee
or free delivery with a minimum order size. Orders are packaged, invoiced and
shipped for next-day delivery.
The Company opened two regional delivery warehouses in 1990 (in south
Florida and northern California) and three regional delivery facilities in 1992
(in the Atlanta, Baltimore/Washington and Los Angeles markets). All delivery
orders received from customers in these areas, whether through the Company's
telephone centers or at its stores, are handled through these facilities. The
Company believes that these facilities enable it to provide improved delivery
services on a more cost effective basis and intends to open additional regional
delivery warehouses during 1994. No new delivery centers were opened during
1993 pending the Company's entry into the contract stationer portion of the
business and the determination of the optimal configuration of a facility which
would support deliveries to both retail and contract customers.
The Company's stores each have a business services center, which
offers self-service and high-volume photocopying as well as facsimile,
printing, binding, typesetting and other business services.
Contract Stationer. The Company provides the office supplies
purchasing departments of its customers with a wide range of services designed
to improve efficiencies and reduce costs, including electronic ordering,
stockless office procurement and business forms management services, desktop
delivery programs and comprehensive product utilization reports. For contract
stationer customers, the Company will typically sell on credit through an open
account.
The Company services its contract stationer customers from warehouses
located in Arizona, California, Colorado, Massachusetts, New Jersey, North
Carolina, Texas, Utah and Washington. All of these warehouses were acquired in
the Company's acquisitions of Wilson, Eastman, Muran and Yorkship.
- 19 -
20
STORE DESIGN AND OPERATIONS
The Company's stores average approximately 25,000 square feet of space
and conform to a model designed to achieve cost efficiency by minimizing rent
and eliminating the need for a central warehouse. Each store displays
virtually all of its inventory on the sales floor according to a plan-o-gram
that designates the location of each item in the store. The plan-o-gram is
intended to ensure that merchandise is effectively displayed and to promote
economy and efficiency in the use of merchandising space. On the sales floor,
merchandise is displayed on pallets or in bins on 10 to 12 foot high industrial
steel shelving that permits the bulk stacking of inventory and quick and
efficient restocking. The shelving is positioned to form aisles large enough
to comfortably accommodate customer traffic and merchandise movement.
Additional efficiencies are gained by selling merchandise in multiple quantity
packaging, which significantly reduces duplicate handling and stock costs.
In all of the Company's stores, inventory that has not been bar coded
by the manufacturer is bar coded in the receiving area and moved directly to
the sales floor. Sales are processed through centralized check-out facilities,
which transmit sales and inventory information on a stock-keeping unit basis to
the Company's central computer system where this information is updated daily.
Rather than individually price marking each product, merchandise is identified
by its stock-keeping unit number with a master sign for each product displaying
the product's price. As price changes occur, a new master sign is
automatically generated for the product display and the new price is reflected
in the check-out register, allowing the Company to avoid labor costs associated
with price remarking.
MANAGEMENT INFORMATION SYSTEMS
The Company employs an IBM ES9000 mainframe and multiple IBM System
AS/400 computers to aid in controlling its merchandising and operations. The
system includes advanced software packages that have been customized for the
Company's specific business operations. The Company is currently implementing
a multi-year strategy to upgrade and convert its systems to operate in an "open
system" mainframe environment.
Inventory data is entered into the computer system upon its receipt by
the store and sales data is entered through the use of a point-of-sale or
telemarketing system. The point-of-sale system permits the entry of sales data
through the use of bar code scanning laser guns and also has a price "look-up"
capability that permits immediate price checking and efficient movement of
customers through the check-out process. Information is centrally processed at
the end of each day, permitting a perpetual daily inventory and the calculation
of average unit cost by stock-keeping unit for each store or warehouse. Daily
compilation of sales and margin data permits the monitoring of sales, gross
margin and inventory by item and product line, as well as the results of sales
promotions. For all stock-keeping units, management has immediate access to
on-hand daily unit inventory, units on order, current and past rates of sale,
the number of weeks' sales for which quantities are on-hand and a recommended
unit purchase reorder. Data from all the Company's stores (other than those in
Florida) are transmitted by satellite to the Company's headquarters, which
provides faster response and is more cost efficient than traditional telephonic
transmission.
EXPANSION PROGRAM
The Company's business strategy for its retail stores is to enhance
the sales and profitability of its existing stores, to add new stores in
locations where the Company can achieve a significant market presence and to
expand its contract stationer business. Through expansion, the Company seeks
to increase efficiencies in operations, purchasing, marketing and management.
The Company added 67 new stores in 1993, and plans to open approximately 60 to
70 stores and additional delivery centers during 1994. The Company had opened
11 new stores as of the end of the first quarter of 1994.
Prior to selecting a new retail store site, the Company obtains
detailed demographic information indicating business concentrations, traffic
counts, population, income levels and future growth prospects. The Company's
existing and scheduled new stores are located primarily in suburban strip
shopping centers on major commercial thoroughfares where the cost of space is
generally lower than at urban locations. Suburban locations are generally
- 20 -
21
more accessible to the Company's primary customers, have convenient parking and
facilitate delivery to customers and receipt of inventory from manufacturers.
The Company expands by leasing existing space and renovating it according to
its specifications or by constructing new space according to its
specifications.
Accomplishing the Company's expansion goals will depend on a number of
factors, including the Company's ability to locate and obtain acceptable sites,
open new stores in a timely manner, hire and train competent managers,
integrate new stores into its operations, generate funds from operations and
continue to access external sources of capital.
Through its acquisitions in 1993 and to date in 1994, the Company has
expanded its presence in the contract stationer portion of the office products
industry by acquiring existing contract stationer businesses in selected
markets. The Company's business strategy includes continued expansion in this
portion of the industry, although no assurances can be given that it will be
able to expand as planned.
EMPLOYEES, STORE MANAGEMENT AND TRAINING
As of May 16, 1994, the Company employed approximately 20,500 persons.
Additional personnel will be added as needed to implement the Company's
expansion program. The Company's goal is to promote as many existing employees
into management positions as possible. Due to the rate of its expansion,
however, for the foreseeable future the Company will continue to hire a portion
of its management personnel from outside the Company.
The Company's policy is to hire and train additional personnel in
advance of new store openings. In general, store managers have extensive
experience in retailing, particularly with warehouse store chains or discount
stores that generate high sales volumes. Each new store manager usually spends
two to four months in an apprenticeship position at an existing store prior to
being assigned to a new store. The Company's sales employees are required to
view product knowledge videos and complete written training programs relating
to certain products. The Company creates some of these videos and training
programs while the remainder are supplied by manufacturers. The Company grants
stock options to certain of its employees as an incentive to attract and retain
such employees.
The Company has never experienced a strike or any work stoppage and
management believes that its relations with its employees are good. There are
no collective bargaining agreements covering any of the Company's employees.
COMPETITION
The Company operates in a highly competitive environment. Its markets
are presently served primarily by traditional office products dealers that
typically operate a central warehouse and one or more retail stores. The
Company believes it competes favorably against these dealers, who purchase
their products from distributors and generally sell their products at prices
higher than those offered by the Company, because they generally offer small-
and medium-sized businesses discounts on manufacturer's suggested retail list
prices of only 20% or less as compared to the Company's 30% to 60% discount to
all customers. The Company also competes with wholesale clubs selling general
merchandise, discount stores, mass merchandisers, conventional retail stores,
catalog showrooms and direct mail companies. While these competitors generally
charge small business customers lower prices than traditional office products
dealers, they typically have a more limited in-stock product selection than the
Company's stores and do not provide many of the services provided by the
Company.
Several high-volume office supply chains that are similar in concept
to the Company in terms of store format, pricing strategy and product selection
and availability also operate in the United States. The Company competes with
these chains and wholesale club chains in substantially all of its current and
prospective markets. The Company believes that in the future it will face
increased competition from these chains as the Company and these chains expand
their operations. Some of the entities against which the Company competes, or
may compete, are larger and have greater financial resources than the Company.
No assurance can be given that increased competition
- 21 -
22
will not have an adverse effect on the Company. The Company believes it
competes based on product price, selection, availability and service.
In the contract stationer portion of the industry, principal
competitors are national and regional full service contract stationers,
national and regional office furniture dealers, independent office product
distributors, discount superstore chains and to a lesser extent, direct mail
order houses and stationery retail outlets. Certain discount superstore chains
also appear to be attempting to develop a presence in the contract stationer
portion of the business.
PROPERTIES
As of May 18, 1994, the Company operated 344 stores in 33 states and
the District of Columbia and 18 stores in five Canadian provinces. The Company
also operates five delivery centers and a full service contract stationer
business through 12 contract stationer warehouses. The following table sets
forth the locations of the Company's facilities.
Number Number
State of Stores State of Stores
- ----- --------- ----- ---------
Alabama 6 Nevada 4
Arizona 2 New Mexico 2
Arkansas 2 North Carolina 11
California 66 Ohio 2
Colorado 11 Oklahoma 5
District of Columbia 2 Oregon 7
Florida 57 Pennsylvania 5
Georgia 16 South Carolina 5
Hawaii 1 Tennessee 7
Idaho 1 Texas 45
Illinois 10 Virginia 4
Indiana 7 Washington 11
Iowa 1 Wisconsin 6
Kansas 4
Kentucky 3
Louisiana 7 Canada
Maryland 10 ------
Michigan 10 Alberta 5
Mississippi 1 British Columbia 4
Missouri 10 Manitoba 2
Nebraska 3 Ontario 6
Saskatchewan 1
Delivery Centers and
Contract
Stationer Warehouses
- ----------------------------
Arizona 1
California 5
Colorado 1
Florida 1
Georgia 1
Maryland 1
Massachusetts 1
New Jersey 1
North Carolina 1
Texas 2
Utah 1
Washington 1
- 22 -
23
All the Company's facilities are leased or subleased by the Company
with lease terms (excluding renewal options exercisable by the Company at
escalated rents) expiring between 1994 and 2015, except for two Oklahoma
stores, three Florida stores, four Texas stores and one California store that
are owned by the Company. The Company operates its stores under the names
Office Depot and The Office Place in Ontario, Canada. The Company operates its
contract stationer warehouses under the names Eastman Office Products, Wilson
Business Products, L.E. Muran and Yorkship Business Supply.
The Company's corporate offices in Delray Beach, Florida, containing
approximately 350,000 square feet in two adjacent buildings, were purchased in
February 1994 for approximately $16 million. The Company had previously
occupied one of the buildings under a lease covering approximately 150,000
square feet.
LEGAL PROCEEDINGS
The Company is involved in litigation arising in the normal course of
its business. The Company believes that these matters will not materially
affect its financial position or operations.
- 23 -
24
MANAGEMENT
DIRECTORS ANd EXECUTIVE OFFICERS
Directors are elected at the Annual Meeting of Stockholders to serve
during the ensuing year or until a successor is duly elected and qualified.
Executive officers are elected annually by the Board and serve at the
discretion of the Board.
The Company's Board of Directors currently consists of eight members.
Set forth below is certain information concerning each of the Company's
directors and executive officers:
Name Age Position
---- --- --------
David I. Fuente . . . . . . . . . 48 Chairman of the Board and Chief Executive Officer
Mark D. Begelman . . . . . . . . . 46 Director, President and Chief Operating Officer
Barry J. Goldstein . . . . . . . . 51 Executive Vice President -- Finance, Chief Financial
Officer and Secretary
F. Terry Bean . . . . . . . . . . 46 Executive Vice President -- Human Resources
Richard M. Bennington . . . . . . 53 Executive Vice President -- Store Operations
Gary D. Foss . . . . . . . . . . . 51 Executive Vice President -- Merchandising and Marketing
Samuel T. Gentles, Jr. . . . . . . 39 Executive Vice President -- Strategic Planning
William P. Seltzer . . . . . . . . 55 Executive Vice President -- Systems and Distribution
Denis Defforey . . . . . . . . . . 68 Director
W. Scott Hedrick . . . . . . . . . 48 Director
John B. Mumford . . . . . . . . . 50 Director
Michael J. Myers . . . . . . . . . 53 Director
Peter J. Solomon . . . . . . . . . 55 Director
Alan L. Wurtzel . . . . . . . . . 60 Director
DAVID I. FUENTE has been Chairman of the Board and Chief Executive
Officer since he joined the Company in December 1987. For five years prior to
that time, he was employed by The Sherwin-Williams Co. ("Sherwin-Williams") as
President of its Paint Stores Group, a chain of over 1,800 paint stores. Prior
positions included Vice President of Marketing of the Paint Stores Group and
Vice President of Marketing, Consumer Division, and Vice President of
Marketing, Automotive Aftermarket Division of Sherwin-Williams. Mr. Fuente is
a director of National Vision Associates Ltd.
MARK D. BEGELMAN has been a director, President and Chief Operating
Officer since he joined the Company in April 1991. He has substantial
experience in the office products industry and over 20 years in retail
merchandising. Prior to joining the Company, he was Chairman of the Board of
Club from August 1990 until April 1991 and Chief Executive Officer of Club from
April 1986 until April 1991, when Club became a subsidiary of the Company.
From May 1981 to May 1986, he served as Senior Vice President of John Bruener
Company, a home furnishings retailer. From June 1976 to May 1981, Mr. Begelman
was Divisional Merchandise Manager of Jordan Marsh Stores Corporation, a
general merchandise retailer.
- 24 -
25
BARRY J. GOLDSTEIN has been Chief Financial Officer since he joined
the Company in May 1987, has served as Executive Vice President -- Finance
since July 1991 and has served as Secretary since January 1988. From May 1987
until June 1991, he served as Vice President -- Finance. Prior to joining the
Company, he spent 22 years in public accounting, the most recent 18 of which
were with Grant Thornton, a national accounting firm. He became a partner of
Grant Thornton in 1976.
F. TERRY BEAN has been Executive Vice President -- Human Resources
since he joined the Company in January 1994. Prior to joining the Company, he
was employed by Roses Stores Inc., a mass merchandiser, as Senior Vice
President of Human Resources. From 1978 to 1989, he was employed by Federal
Express Corp., a shipping company, where he held the position of Vice President
of Personnel Services from 1982 through 1989. Prior to 1973, Mr. Bean held
human resource management positions with Eaton Corp. and Johnson & Johnson
Corp.
RICHARd M. BENNINGTON has been Executive Vice President -- Store
Operations since July 1991. He joined the Company as a store manager in June
1986 and has served as the Company's Executive Vice President -- Office Depot
Store Operations, Vice President -- Operations, District Manager and Director
of Store Operations. Prior to joining the Company, he was employed for one
year by Mr. How, a chain of home products stores, as a Zone Manager and held
various field operations positions with other specialty and mass merchandise
chains.
GARY D. FOSS has been Executive Vice President -- Merchandising and
Marketing since April 1993. He served as Executive Vice President -- Marketing
from the time he joined the Company in April 1991 until March 1993. From July
1990 until April 1991, he was the Executive Vice President -- Merchandising of
Club, a subsidiary of the Company since April 1991. From 1985 to 1990, he was
Chief Executive Officer and President of Home Express, Inc., a California-based
home furnishing retailer. From 1962 to 1985, Mr. Foss held various
merchandising, marketing and management positions with Dayton Hudson
Corporation, including Chief Executive Officer and President of the R.G.
Brandens Home Store Division.
SAMUEL T. GENTLES, Jr. has been Executive Vice President -- Strategic
Planning since January 1994. Mr. Gentles served as President of the Commercial
Contract Division from September 1993 to December 1993 and was Executive Vice
President of the Commercial Contract Division from April 1993 to August 1993.
He served as Executive Vice President -- Merchandising from July 1991 to March
1993. Mr. Gentles joined the Company as Executive Vice President -- Office
Club Store Operations in April 1991. Prior to joining the Company, he served
for four years as Executive Vice President -- Operations and for a year as
Executive Vice President of Merchandising of Club, a subsidiary of the Company
since April 1991. From March 1983 to July 1986, Mr. Gentles held various
merchandising management positions, most recently as Executive Vice President
and Chief Operating Officer of Warehouse Club, Inc., a warehouse membership
club.
WILLIAM P. SELTZER has been Executive Vice President -- Systems and
Distribution since joining the Company in August 1992. Prior to joining the
Company, he was Senior Vice President -- Distribution and Systems of Revco D.S.
Inc. from November 1987 to July 1992. Mr. Seltzer was Vice President of
Systems for the H.E. Butt Grocery Company from 1977 to 1987, and was Corporate
Manager of Information Processing from 1972 to 1977 with SCM Corporation.
DENIS DEFFOREY has been a director since April 1990. He is a member
of the supervisory board ("Conseil de Surveiliance") of Carrefour, a French
hypermarket chain that he co-founded in 1959, and is a director of DeNoyange
S.A., the principal shareholder of Carrefour. Mr. Defforey is a director of
Editions S.A. and PetsMart, Inc.
W. SCOTT Hedrick has been a director since April 1991. From November
1986 until April 1991, he was a director of Club, a subsidiary of the Company
since April 1991. He was a founder and has been a general partner of InterWest
Partners, a venture capital fund, since 1979.
JOHN B. MUMFORD has been a director since April 1991. He was a
co-founder of Club, a subsidiary of the Company since April 1991, and served as
Chairman of the Board of Directors of Club from its inception in February
- 25 -
26
1986 to August 1990, at which time he was named Vice Chairman. He has been
president of Crosspoint Corporation, a venture capital firm, since 1972 and
managing general partner of Crosspoint Venture Partners, a venture capital
fund, since 1982. Mr. Mumford is Chairman of the Board of Photonics
Corporation and a director of INMAC Corporation.
MICHAEL J. MYERS has been a director since July 1987. He is the
President and a director of First Century Partners Management Company, an
advisor to private venture capital equity funds, and a director of Smith Barney
Venture Corp., a wholly-owned subsidiary of Smith Barney, Inc., which acts as
the managing general partner of two private venture capital equity funds.
Until January 1992, he was a Senior Vice President and Managing Director of
Smith Barney, Harris Upham & Co., Incorporated ("Smith Barney"). He joined
Smith Barney's venture capital group in 1972 and has had a senior operating
responsibility for that group since 1976. Prior to 1972, he spent three years
with J.H. Whitney & Co., a private venture capital firm. Mr. Myers is a
director of Vista Environmental Information, Inc. and Wynstar Inc.
PETER J. SOLOMON has been a director since April 1990. He is Chairman
and Chief Executive Officer of Peter J. Solomon Company Limited, an investment
banking firm which provided services to the Company in fiscal 1993. From 1985
to 1989, he was a Vice Chairman and a member of the board of directors of
Shearson Lehman Hutton Inc. ("Shearson"). From 1981 to 1985, he was a Managing
Director at Shearson. Mr. Solomon is a director of Centennial Cellular
Corporation, Century Communications, Inc., Monro Muffler/Brake, Inc.,
Phillips-VanHeusen Corporation, Ralphs Grocery Company, Bradlees, Inc. and
Culbro Corporation.
ALAN L. WURTZEL has been a director since February 1989. Since June
1984, he has been the Chairman of the Board of Circuit City Stores, Inc.
("Circuit City"), a large consumer electronics retailing chain. From 1965 to
1986, he served in several other capacities with Circuit City, including Chief
Executive Officer, President and Vice President. From December 1986 to April
1988, he served as President of Operation Independence, a nonprofit
organization.
The Board met seven times during the 1993 fiscal year. The Board has
standing Audit, Compensation, Executive and Nominating Committees. Mr.
Defforey attended 71% of the Board meetings and 66% of the Audit Committee
meetings. All other directors attended at least 75% of the aggregate of the
total number of meetings of the Board and the total number of meetings of all
committees on which they served.
The Audit Committee is composed of three directors (currently Messrs.
Defforey, Mumford and Myers). This committee recommends to the Board the
appointment of the Company's independent accountants. The committee meets with
the independent accountants to discuss the scope of the audit, any nonaudit
related assignments, fees, the independence of the accountants, the results of
the audit and the effectiveness of the Company's internal accounting controls.
The committee reports to the Board. The independent accountants have access to
the committee, with or without advising management, to discuss auditing and any
other accounting matters. The Audit Committee met three times during the 1993
fiscal year.
The Compensation Committee is currently composed of two directors
(currently Messrs. Hedrick and Wurtzel). This committee recommends action by
the Board regarding the salaries and incentive compensation of elected officers
of the Company. The committee also reviews the compensation of certain other
principal management employees and administers the Company's employee benefit
plans. The Compensation Committee met twice during the 1993 fiscal year.
The Executive Committee was established in February 1992 and is
composed of four directors (currently Messrs. Begelman, Fuente, Solomon and
Wurtzel). This committee handles matters arising between regularly scheduled
meetings of the Board. The Executive Committee did not meet during the 1993
fiscal year.
The Nominating Committee is composed of four directors (currently
Messrs. Begelman, Fuente, Solomon and Wurtzel). This committee evaluates the
performance of incumbent directors, considers nominees recommended by
management or stockholders of the Company and develops its own recommendations.
The committee will
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27
consider nominees recommended by stockholders, although it has not adopted any
procedures to be followed by stockholders in submitting such recommendations.
In February 1994, the Nominating Committee adopted a charter formalizing the
duties of the committee and evidencing the Company's commitment to increasing
the diversity of the Board. In accordance with its charter, the Nominating
Committee has initiated a search to identify qualified candidates, with a view
to increasing the diversity of the Board at the earliest feasible date. The
Nominating Committee met once during the 1993 fiscal year.
COMPENSATION
Directors Compensation. In fiscal 1993, directors who were not
salaried officers of the Company received $18,000 per year for serving on the
Board and were reimbursed for costs incurred in attending meetings. No
additional amounts were paid for attendance at special meetings or for service
on any committee of the Board. Directors who were not salaried officers of the
Company also each received a number of options equal to $150,000 divided by the
fair market value of Common Stock on the date of grant for their first year of
service on the Board after election by the Company's stockholders and a number
of options equal to $50,000 divided by the fair market value of Common Stock on
the date of grant for each subsequent year of service on the Board. All such
options become exercisable in equal proportions on the first, second and third
anniversary of the date of grant. Directors who are salaried officers of the
Company receive no compensation other than their compensation for such service
as officers.
The Board adopted the Directors Stock Option Plan (the "Directors
Plan") in March 1991. In February 1994, the Board approved an amendment to the
Directors Plan (as so amended, the "Amended Directors Plan") which was
approved by the Company's stockholders at the 1994 Annual Meeting of
Stockholders. The amendment increases the number of shares of the Common Stock
authorized under the Amended Directors Plan by 100,000 shares and provides that
each director who is not otherwise an employee of the Company or its
subsidiaries receives options to purchase 7,500 shares of Common Stock each
year, rather than a number of shares determined by dividing $50,000 by the fair
market value of a share of Common Stock on the date of grant ($150,000 in the
case of a director's first year of service) under the Directors Plan. The
Board approved the amendment in order to implement a policy of increasing
emphasis on performance based compensation for directors while decreasing
directors' cash compensation. The options are exercisable at fair market value
on the date of grant.
Effective April 1994, directors who are not salaried officers of the
Company will receive $8,000 per year plus $1,000 per Board meeting attended for
serving on the Board and will be reimbursed for costs incurred in attending
meetings. No additional amounts will be paid for service on any committee of
the Board.
- 27 -
28
Executive Officers Compensation. The following table sets forth the
aggregate cash compensation paid by the Company for services rendered during
the 1993 fiscal year by the Company's Chief Executive Officer and the Company's
four other most highly compensated executive officers.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
---------------------------------------- ------------------------------------
Awards Payouts
------------------------- -------
Securities
Other Restricted Underlying All
Annual Stock Options/ LTIP Other
Name and Salary Bonus Compensation ward(s) SARs Payouts Compensation
Principal Position Year ($) ($) ($)(1) ($) (#)(2) ($) ($)(3)
------------------ ---- ------ ------- ------------ ---------- ---------- ------- ------------
David I. Fuente, 1993 550,000 864,981 -0- -0- 75,000 -0- 4,497
Chief Executive 1992 475,000 335,350 -0- -0- 181,770 -0- 4,364
Officer 1991 425,000 281,973 -0- 450,000 -0-
Mark D. Begelman, 1993 450,000 651,384 -0- -0- 60,000 -0- 4,497
President and Chief 1992 400,000 256,000 -0- -0- 68,220 -0- 4,364
Operating Officer(4) 1991 239,985 200,292 -0- 900,000 -0-
Samuel T. Gentles, 1993 263,077 352,523 -0- -0- 35,000 -0- 3,970
Executive Vice 1992 225,000 137,250 -0- -0- 51,855 -0- 899
President-- 1991 140,625 109,355 -0- 150,000 -0-
Strategic Planning
Gary D. Foss, 1993 250,000 344,469 -0- -0- 35,000 -0- 4,322
Executive Vice 1992 225,000 135,900 -0- -0- 41,025 -0- 1,211
President--Merchan- 1991 124,366 98,449 -0- 30,000 -0-
dising
and Marketing (4)
Richard M. Bennington, 1993 250,000 339,477 -0- -0- 35,000 -0- 4,355
Executive Vice 1992 225,000 128,250 -0- -0- 22,500 -0- 2,700
President -- 1991 200,000 103,500 -0- 150,000 -0-
Store Operations
_______________
(1) Other Annual Compensation items for persons named in the summary
compensation table were not reportable in 1993 and 1992 and are not
required to be presented for years prior to 1992.
(2) Options granted in 1991 and 1992 have been adjusted to reflect a
two-for-one stock split in 1992 and a three-for-two stock split in
1993.
(3) All other compensation is not required to be presented for years prior
to 1992. Amounts reported for 1993 and 1992 represent matching
contributions under the Company's Retirement Savings Plan, a defined
contribution plan.
(4) Messrs. Begelman, Gentles and Foss joined the company on April 10,
1991 upon consummation of the acquisition of Club by the Company.
- 28 -
29
The following table sets forth information with respect to all options
granted in fiscal 1993 under the Company's employee stock option plan to the
Company's Chief Executive Officer and the Company's four other most highly
compensated executive officers.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants Grant Date Value
---------------------------------------------------------------------------------------- ----------------
Number of Percent of Total
Securities Options/SA
Underlying Granted to Exercise or Grant Date
Options/SARs Employees in Base Price Expiration Present Value (2)
Name Granted(1) Fiscal Year ($/Sh) Date ($)
---- ----------- ----------- ---------- --------- -------------
David I. Fuente . . . . . 75,000 5.1 26.88 7/20/03 1,105,610
Mark D. Begelman . . . . 60,000 4.1 26.88 7/20/03 884,488
Samuel T. Gentles, Jr. . 35,000 2.4 26.88 7/20/03 515,951
Gary D. Foss . . . . . . 35,000 2.4 26.88 7/20/03 515,951
Richard M. Bennington . . 35,000 2.4 26.88 7/20/03 515,951
_______________
(1) All options granted in fiscal 1993 vest in three equal annual installments
on July 20, 1994, July 20, 1995 and July 20, 1996 and were not awarded
with tandem stock appreciation rights ("SARs"). In the event of a Sale of
the Company (as defined in the Company's employee stock option plan), the
committee administering the option plan may stipulate in its sole
discretion, that (i) outstanding options and SARs will become immediately
exercisable; (ii) outstanding options and SARs shall be assumed by the
successor corporation; or (iii) substantially equivalent options and SAR's
shall be substituted by the successor corporation. In order to prevent
dilution or enlargement of rights under the options, in the event of a
reorganization, recapitalization, stock split, stock dividend,
combinations of shares, merger, consolidation or other change in the
Common Stock, the number of shares available upon exercise and the
exercise price will be adjusted accordingly.
(2) The Black-Scholes option pricing model was used to determine the grant
date present value of the stock options granted in 1993 by the Company to
the executive officers listed above. Under the Black-Scholes option
pricing model, the grant date present value of each stock option referred
to in the table was calculated to be $14.74. The following facts and
assumptions were used in making such calculation: (i) an exercise price
of $26.875 for each such stock option; (ii) a fair market value of $26.875
for one share of Common Stock on the date of grant; (iii) a dividend yield
of 0%; (iv) a stock option term of 10 years; (v) a stock volatility of
30.72%, based on an analysis of weekly stock closing prices of Common
Stock during the fourth quarter of 1993; and (vi) an assumed risk-free
interest rate of 5.73%, which is equivalent to the yield on a ten-year
treasury note on the date of grant. No other discounts or restrictions
related to vesting or the likelihood of vesting of stock options were
applied. The resulting grant date present value of $14.74 for each stock
option was multiplied by the total number of stock options granted to each
of the executive officers listed above to determine the total grant date
present value of such stock options granted to each such executive
officer, respectively.
- 29 -
30
The following table sets forth information with respect to all options
exercised in fiscal 1993 and the year-end value of unexercised options held by
the Company's Chief Executive Officer and the Company's four other most highly
compensated executive officers.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at Fiscal at Fiscal
Year-End Year-End
-------- --------
Name Shares Acquired Value Exercisable/ Exercisable/
---- on Exercise Received Unexercisable Unexercisable
(#) ($) (#) ($)
--------------- -------- ------------- -------------
David I. Fuente . . . . 9,000 263,625 230,591 4,994,014
346,180 5,681,298
Mark D. Begelman . . . -0- -0- 380,717 9,409,260
405,480 8,345,007
Samuel T. Gentles, Jr. -0- -0- 116,394 2,916,678
119,570 1,884,125
Gary D. Foss . . . . . -0- -0- 108,300 3,006,918
105,786 1,851,028
Richard M. Bennington . -0- -0- 82,502 2,038,468
100,000 1,666,409
STOCK OPTION AND STOCK APPRECIATION PLAN
The Company's Stock Option and Stock Appreciation Plan (the "Plan") was
originally adopted by the Board in February 1989, and was amended in 1992 and
1993. In February 1994, the Board approved an amendment to the Plan (as so
amended, the "1994 Plan") which was approved by the Company's stockholders at
the 1994 Annual Meeting of Stockholders. The amendment increases the number of
shares of Common Stock authorized under the 1994 Plan by 2,500,000 shares. The
Board approved the amendment after evaluating the Company's existing
compensation programs and the Company's long-range goals and expansion plans.
The Board concluded that the amendment was necessary for the Company to
continue to attract, motivate and retain qualified employees.
COMPENSATION COMMITTEe INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board is comprised of two directors,
currently Messrs. Hedrick and Wurtzel. Neither of such directors is or was an
officer of the Company or any of its subsidiaries, no executive officer of the
Company (other than Mr. Fuente, who serves on the compensation committee of
National Vision Associates Ltd.) serves or served on the compensation committee
of another entity, and no executive officer of the Company serves or served as
a director of another entity who has or had an executive officer serving on the
compensation committee of the Company.
- 30 -
31
OWNERSHIP OF COMMON STOCK
The following table sets forth certain information with respect to the
beneficial ownership of Common Stock as of May 18, 1994 by (i) each stockholder
known by the Company to own beneficially more than five percent (5%) of the
outstanding Common Stock, (ii) each director of the Company, (iii) the
Company's Chief Executive Officer and four other most highly compensated
executive officers, and (iv) all executive officers and directors of the
Company as a group. Beneficial ownership of less than one percent is indicated
by an asterisk. Except as otherwise indicated below, each of the entities
named in the table has sole voting and investment power with respect to all
shares of Common Stock beneficially owned by such entity as set forth opposite
such entity's name. No effect has been given to shares reserved for issuance
under outstanding stock options except where otherwise indicated.
Number of Shares
Name of Individual or Group Beneficially Owned Percent of Class Outstanding
--------------------------- ------------------ ----------------------------
The Equitable Companies 4,824,475 5.01%
Incorporated(1)
787 Seventh Avenue
New York, New York 10019
Fourcar B.V.(2) 15,128,400 15.70%
Coolsingel 139
3012 AG Rotterdam
The Netherlands
Mark D. Begelman(3) 665,379 *
Richard M. Bennington(4) 82,799 *
Denis Defforey(2) 15,167,834 15.74%
Gary D. Foss(5) 200,940 *
David I. Fuente(6) 480,962 *
Samuel T. Gentles, Jr.(7) 199,297 *
W. Scott Hedrick(8) 29,532 *
John B. Mumford(9) 50,418 *
Michael J. Myers(10) 18,749 *
Peter J. Solomon(11) 60,434 *
Alan L. Wurtzel(12) 24,749 *
All Executive Officers and Directors as 17,351,353 18.00%
a Group (14 persons)(13)
________________________
(1) Based solely upon a Schedule 13G dated February 9, 1994, certain
subsidiaries of The Equitable Companies Incorporated (i) may be
deemedto have sole power to vote or to direct the vote of shares as
follows: the Equitable Life Assurance Society of the United States
("Equitable"), 716,290 shares; Alliance Capital Management, L.P.
("Alliance"), 3,204,082 shares; and Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"), 14,651 shares; (ii) may be deemed to
have shared power to vote or to direct the vote of shares as follows:
Alliance, 17,800 shares; and Wood, Struthers & Winthrop Management
Corporation ("WS&W"), 452 shares; and (iii) may be deemed to have sole
power to dispose or to direct the disposition of shares as
- 31 -
32
follows: Equitable, 716,290 shares; Alliance, 3,808,082 shares; DLJ,
14,651 shares; and WS&W, 452 shares. In addition, based solely upon
the Schedule 13G described above, Equity and Law PLC, a company
affiliated with The Equitable Companies Incorporated, may be deemed to
have sole power to vote or to direct the vote of 285,000 shares and
may be deemed to have sole power to dispose or to direct the
disposition of 285,000 shares.
(2) Includes options to purchase 39,434 shares issued to Mr. Defforey as a
director of the Company. Mr. Defforey, a director of the Company and
a member of the supervisory board ("Conseil de Surveiliance") of
Carrefour, which indirectly owns all of the outstanding capital stock
of Fourcar B.V. ("Fourcar"), may be deemed to share voting and
dispositive power as to 15,128,400 shares held of record by Fourcar.
Mr. Defforey disclaims beneficial ownership of shares held by Fourcar.
(3) Includes options to purchase 380,717 shares issued to Mr. Begelman
pursuant to the Company's employee stock option plan, 15,000 shares
held of record by Mark Zwerner and Joel Koeppel Trustees, Mark D.
Begelman Irrevocable Trust f/b/o Matthew Bryan Begelman and 15,000
shares held of record by Mark Zwerner and Joel Koeppel Trustees, Mark
D. Begelman Irrevocable Trust f/b/o Loren Andrea Begelman.
(4) Includes options to purchase 82,502 shares issued to Mr. Bennington
pursuant to the Company's employee stock option plan.
(5) Includes options to purchase 106,060 shares issued to Mr. Foss
pursuant to the Company's employee stock option plan.
(6) Includes options to purchase 230,591 shares issued to Mr. Fuente
pursuant to the Company's employee stock option plan and 37,720 shares
held of record by his children, Alan D. Fuente and Steven M. Fuente.
Mr. Fuente disclaims beneficial ownership of the shares held by his
children.
(7) Includes options to purchase 116,394 shares issued to Mr. Gentles
pursuant to the Company's employee stock option plan.
(8) Includes options to purchase 7,851 shares issued to Mr. Hedrick as a
director of the Company.
(9) Includes options to purchase 7,851 shares issued to Mr. Mumford as a
director of the Company and 38,028 shares held of record by the John
Brese Mumford and Christine Joyce Mumford Family Trust dated October
13, 1983.
(10) Includes options to purchase 18,749 shares issued to Mr. Myers as a
director of the Company.
(11) Includes options to purchase 39,434 shares granted to Mr. Solomon as a
director of the Company.
(12) Includes options to purchase 18,749 shares issued to Mr. Wurtzel as a
director of the Company.
(13) Includes options to purchase 1,182,118 shares.
- 32 -
33
DESCRIPTION OF COMMON STOCK
The Company's authorized capital stock consists of (i) 200,000,000
shares of Common Stock and (ii) 1,000,000 shares of Preferred Stock.
COMMON STOCK
At May 17, 1994, there were 96,399,582 shares of Common Stock
outstanding held by approximately 3,364 holders of record. At such date,
approximately 1,836,659 shares were reserved for issuance upon the exercise of
outstanding stock options.
The holders of Common Stock are entitled to one vote for each share on
all matters submitted to a vote of stockholders and do not have cumulative
voting rights in the election of directors. The holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board out of legally available funds. Upon liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to share ratably in
all assets of the Company that are legally available for distribution, after
payment of all debts and other liabilities and subject to the prior rights of
any holders of any Preferred Stock then outstanding. The holders of Common
Stock have no preemptive, subscription, redemption or conservation rights. The
outstanding shares are fully paid and nonassessable. The rights, preferences
and privileges of holders of Common Stock are subject to any series of
Preferred Stock that the Company may issue in the future.
The transfer agent for the Common Stock is Mellon Bank, N.A., Pittsburgh,
Pennsylvania.
REGISTRATION RIGHTS
Pursuant to a Stock Purchase Agreement, dated June 21, 1989, between
the Company and Carrefour (the "Carrefour Stock Purchase Agreement"), the
Company has granted Carrefour and its subsidiaries registrations rights
covering 9,690,000 shares of Common Stock held by Carrefour and its
subsidiaries (the "Carrefour Stock"). Under the Carrefour Stock Purchase
Agreement, the Company can be required to file one registration statement on
Form S-1 and three registration statements on Forms S-2 or S-3 covering the
Carrefour Stock having a public offering price of at least $8,000,000 (or such
lesser amount as shall constitute 100% of the Carrefour Stock). The Company
has agreed to pay all registration expenses in connection therewith. These
registration rights may be exercised at any time, and such registration rights
terminate when all of the Carrefour Stock can be sold within a three-month
period pursuant to Rule 144 under the 1933 Act. Subject to certain
limitations, whenever the Company proposes to register Common Stock under the
1933 Act, the Company may be required to include all or any portion of the
Carrefour Stock in such registration at the Company's expense until such time
as all of the Carrefour Stock can be sold within a three month period pursuant
to Rule 144 under the 1933 Act. See "Certain Transactions."
The Company is a party to registration agreement, dated July 24, 1987,
pursuant to which it granted the initial purchasers of shares convertible
preferred stock of the Company, which were converted into Common Stock in June
1988 (the "Registrable Securities"), and their assignees certain rights with
respect to the registration under the 1933 Act. Under this agreement, the
holders of at least a majority of the Registrable Securities may require the
Company, subject to certain limitations, to file two registrations statements
on Form S-1 covering all or any part of their Registrable Securities, and the
holder of at least one-third of the Registrable Securities can require the
Company, subject to certain limitations, to file five registration statements
on Forms S-2 and S-3 covering all or any part of their Registrable Securities.
The Company has agreed to pay all registration expenses in connection
therewith. Under certain other circumstances, the holders of the Registrable
Securities will be entitled to request one additional registration under the
1933 Act at their own expense. Subject to certain limitations, whenever the
Company proposes to register its securities under the 1933 Act, the holders of
Registrable Securities may require the Company to include all or any portion of
their Registrable Securities in such registrations at the Company's expense.
The Registrable Securities, other than those held by affiliates of the Company,
are currently eligible for resale pursuant to Rule 144(k) under the 1933 Act.
- 33 -
34
The Company has separately granted to the holders of restricted shares
of Common Stock that were issued in 1986, the right, subject to certain
limitations, to require the Company to include at the Company's expense all or
any portion of such Common Stock in certain registrations of the Company's
securities under the Securities Act. All of these restricted shares are
currently eligible for resale pursuant to Rule 144(k) under the 1933 Act.
COMMON STOCK PRICE RANGE AND DIVIDENDS
The Common Stock of the Company is listed on the NYSE under the symbol
"ODP." The following table sets forth, as quoted on the NYSE Composite Tape,
as adjusted to reflect a two-for-one stock split effective May 26, 1992 and a
three-for-two stock split effective May 24, 1993, the high and low sale prices
of the Common Stock. These prices do not include retail mark-ups, mark-downs
or commissions.
High Low
---- ---
1992:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . $19 $15 1/4
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3/64 12 1/2
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 43/64 15 59/64
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 23 1/4 16 27/64
1993:
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
1994:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . $39 3/4 $33
Second Quarter (through May 18, 1994) . . . . . . . . . . . . . . 37 1/8 31 3/8
On May 18, 1994, the last sale price of the Common Stock as reported on
the NYSE was $34 1/4 per share. As of May 17, 1994, there were 3,364 holders of
record of Common Stock.
The Company has never declared or paid cash dividends on its Common
Stock and does not currently intend to pay cash dividends in the foreseeable
future. Earnings and other cash resources of the Company will be used to
continue the expansion of the Company's business. In addition, under the terms
of the Credit Facility, the Company may only pay cash dividends in an amount
not to exceed 25% of net earnings.
- 34 -
35
CERTAIN TRANSACTIONS
On April 24, 1991, the Company entered into a Stock Purchase Agreement
(the "Stock Purchase Agreement") with Carrefour, pursuant to which the Company
agreed to sell to Carrefour 4,290,000 newly issued shares of Common Stock at a
price of $9.33 per share (the "Carrefour Transaction"). These shares are
currently held by Fourcar, an indirect wholly-owned subsidiary of Carrefour.
The Carrefour Transaction was consummated on June 7, 1991 and resulted in
proceeds to the Company of $40,040,000. Under the terms of the Stock Purchase
Agreement, among other provisions, Carrefour and its affiliates may not, prior
to July 1, 1994, without the consent of the Board and subject to certain
conditions, (i) increase their percentage ownership of the Company's voting
securities above the greater of (A) 25% or (B) 1% more than the percentage
ownership of any other stockholder or stockholder group of the Company, (ii)
sell such shares without first offering such shares to the Company pursuant to
a right of first refusal, or (iii) form or encourage the formation of a group
to acquire control of the Company. In the event of any subsequent issuances of
the Company's securities prior to July 1, 1994, Carrefour has been granted the
preemptive right to purchase additional securities of the Company in order to
retain its percentage ownership in the Company. In connection with the
Carrefour Transaction, the Company has also granted Carrefour certain
registration rights with respect to Common Stock held by it until such time as
Carrefour can sell within a three-month period pursuant to Rule 144 under the
1933 Act all of the Common Stock then held by it. The Company has also agreed
to nominate, and to use reasonable efforts to elect, a representative of
Carrefour to the Board so long as Carrefour and its affiliates hold at least
10% of the Company's outstanding voting securities. See "Description of Common
Stock--Registration Rights." Mr. Defforey was nominated to the Board in
accordance with this agreement. In addition, Carrefour has agreed not to
compete with the Company in the retail office products supply business in a
large volume, warehouse or discount store format in North America until the
later of July 1, 1994 or one year after a representative of Carrefour no longer
serves on the Board.
LEGAL MATTERS
Certain legal matters regarding the issuance of the Common Stock,
under laws other than federal or state securities laws, have been passed upon
for the Company by Kirkland & Ellis, a partnership including professional
corporations, Chicago, Illinois.
EXPERTS
The financial statements and related financial statement schedules of
the Company as of December 25, 1993 and December 26, 1992 and for each of the
52 week periods ended December 25, 1993, December 26, 1992 and December 28,
1991 included in this Prospectus and elsewhere in the Registration Statement
have been audited by Deloitte & Touche, independent auditors, as stated in
their reports appearing herein and elsewhere in the Registration Statement and
have been so included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
The financial statements of Eastman Office Products Corporation and
Subsidiaries as of June 30, 1993 and 1992 and for the seven-month period ended
June 30, 1993, the five-month period ended November 30, 1992 and the year ended
June 30, 1992 included in this Prospectus have been audited by Deloitte &
Touche, independent auditors, as stated in their report appearing herein and
have been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
- 35 -
36
INDEX TO FINANCIAL STATEMENTS
OFFICE DEPOT, INC. Page
----
I. Unaudited Interim Information
Consolidated Statement of Earnings for the 13 Weeks Ended
March 26, 1994 and March 27, 1993 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheet as of March 26, 1994 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Cash Flows for the 13 Weeks Ended
March 26, 1994 and March 27, 1993 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Notes to Consolidated Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
II. Audited Financial Statements
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Earnings for the 52 Weeks ended
December 25, 1993, December 26, 1992 and December 28, 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Balance Sheets as of December 25, 1993 and December 26, 1992 . . . . . . . . . . . . . . . . . . . . F-7
Consolidated Statements of Stockholders' Equity for the period from December 30, 1990
to December 25, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Consolidated Statements of Cash Flows for the 52 Weeks ended
December 25, 1993, December 26, 1992 and December 28, 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . F-9
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-10
EASTMAN OFFICE PRODUCTS CORPORATION
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FA-1
Consolidated Balance Sheets -- As of June 30, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . FA-2
Consolidated Statements of Operations -- For the seven-month period ended
June 30, 1993, the five-month period ended November 30, 1992 and
the year ended June 30, 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FA-4
Consolidated Statements of Stockholders' Equity -- For the seven-month period ended
June 30, 1993, the five-month period ended November 30, 1992 and
the year ended June 30, 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FA-6
Consolidated Statements of Cash Flows -- For the seven-month period ended
June 30, 1993, the five-month period ended November 30, 1992 and
the year ended June 30, 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FA-7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FA-10
-36-
37
Office Depot, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
13 Weeks 13 Weeks
Ended Ended
March 26, March 27,
1994 1993
-------- --------
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $994,845 $582,115
Cost of goods sold and occupancy costs . . . . . . . . . . . . $762,725 $448,483
-------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . 232,120 133,632
Store and warehouse operating and selling expenses . . . . . . 159,261 92,544
Pre-opening expenses . . . . . . . . . . . . . . . . . . . . . 1,259 1,605
General and administrative expenses . . . . . . . . . . . . . . 27,611 15,610
Amortization of goodwill . . . . . . . . . . . . . . . . . . . $ 1,269 $ 15
-------- --------
$189,400 $109,774
-------- --------
Operating profit . . . . . . . . . . . . . . . . . . . . . . 42,720 23,858
Interest expense (income), net . . . . . . . . . . . . . . . . $ 3,242 $ 681
-------- --------
Earnings before income taxes . . . . . . . . . . . . . . . . 39,478 23,177
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,556 $ 9,039
-------- --------
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . $ 22,922 $ 14,138
======== ========
Net earnings per common and common equivalent share . . . . . . $ .23 $ .15
======== ========
Average common and common equivalent shares . . . . . . . . . . $ 99,343 $ 92,831
======== ========
The accompanying notes are an integral part of these statements.
F-1
38
Office Depot, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
(In thousands, except share and per share amounts)
(Unaudited)
March 26,
1994
---------
ASSETS
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 98,875
Receivables, net of allowances . . . . . . . . . . . . . . . . . . . . . . . 174,732
Merchandise inventories . . . . . . . . . . . . . . . . . . . . . . . . . . 705,400
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,185
Prepaid expenses and refundable income taxes . . . . . . . . . . . . . . . . 6,534
----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,011,726
Property and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 384,645
Less accumulated depreciation & amortization . . . . . . . . . . . . . . . . 89,893
----------
294,752
Goodwill, net of amortization . . . . . . . . . . . . . . . . . . . . . . . . . 199,155
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,604
----------
$1,530,237
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 414,596
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,098
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,728
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . 2,922
----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . 558,344
Long-Term Debt, less current maturities . . . . . . . . . . . . . . . . . . . . 15,566
Deferred Taxes and Other Credits . . . . . . . . . . . . . . . . . . . . . . . 6,114
Zero Coupon, Convertible, Subordinated Notes . . . . . . . . . . . . . . . . . 354,177
Common Stockholders' Equity
Common Stock--authorized 200,000,000 shares of $.01 par value; issued
97,558,621 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 976
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 433,142
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . 557
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163,111
Less: 1,442,298 shares of treasury stock . . . . . . . . . . . . . . . . . (1,750)
----------
596,036
----------
$1,530,237
==========
The accompanying notes are an integral part of these statements.
F-2
39
Office Depot, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
(Unaudited)
13 Weeks 13 Weeks
Ended Ended
March 26, March 27,
1994 1993
-------- ---------
Cash flows from operating activities
Cash received from customers . . . . . . . . . . . . . . . . $ 996,188 $ 589,420
Cash paid for inventory . . . . . . . . . . . . . . . . . . (797,149) (397,234)
Cash paid for store and warehouse operating, selling and
general administrative expenses . . . . . . . . . . . . . (189,818) (122,680)
Interest received . . . . . . . . . . . . . . . . . . . . . 1,261 1,427
Interest paid . . . . . . . . . . . . . . . . . . . . . . . (624) (224)
Taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . (10,902) (122)
--------- ---------
Net cash provided (used) by operating activities . . . . . (1,044) 70,587
--------- ---------
Cash flows from investing activities
Capital expenditures - net . . . . . . . . . . . . . . . . . (41,619) (17,290)
Cash acquired . . . . . . . . . . . . . . . . . . . . . . . 1,721 --
--------- ---------
Net cash used in investing activities . . . . . . . . . . (39,898) (17,290)
--------- ---------
Cash flows from financing activities
Proceeds from exercise of stock options . . . . . . . . . . 3,665 2,423
Foreign currency translation adjustment . . . . . . . . . . 174 (48)
Proceeds from long- and short-term borrowing . . . . . . . . 56 --
Payments on long- and short-term debt . . . . . . . . . . . (2,576) (606)
--------- ---------
Net cash provided by financing activities . . . . . . . . 1,319 1,769
--------- ---------
Net increase (decrease) in cash and cash equivalents . . . (39,623) 55,066
Cash and equivalents at beginning of period . . . . . . . . . . 138,498 130,192
--------- ---------
Cash and cash equivalents at end of period . . . . . . . . . . $ 98,875 $ 185,258
========= =========
Reconciliation of net earnings to net cash provided (used) by
operating activities
Net earnings . . . . . . . . . . . . . . . . . . . . . . . $ 22,922 $ 14,138
Adjustments to reconcile net earnings to net cash provided
(used) by operating activities
Depreciation and amortization . . . . . . . . . . . . . 10,829 6,024
Changes in assets and liabilities . . . . . . . . . . .
Decrease in accounts receivable . . . . . . . . . . . 2,276 20,906
Decrease (increase) in inventory . . . . . . . . . . . (55,614) 54,645
Decrease (increase) in prepaid expenses and other
assets . . . . . . . . . . . . . . . . . . . . . . . . (1,423) 3,362
Increase (decrease) in accounts payable and other
liabilities . . . . . . . . . . . . . . . . . . . . . 19,966 (28,488)
--------- ---------
Total adjustments . . . . . . . . . . . . . . . . . . . . . (23,966) 56,449
--------- ---------
Net cash provided (used) by operating activities . . . . . . . $ (1,044) $ 70,587
========= =========
The accompanying notes are an integral part of these statements.
F-3
40
Office Depot, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The interim financial statements as of March 26, 1994 and for the 13
week periods ended March 26, 1994 and March 27, 1993 are unaudited;
however, such interim statements reflect all adjustments (consisting
only of normal recurring accruals) necessary for a fair presentation
of the financial position and the results of operations for the
interim periods presented. The results of operations for the interim
periods presented are not necessarily indicative of the results to be
expected for the full year. The interim financial statements should
be read in conjunction with the audited financial statements for the
year ended December 25, 1993.
2. Average common and common equivalent shares utilized in computing
first quarter earnings per share include approximately 3,423,000 and
3,191,000 shares in 1994 and 1993, respectively, as a result of
applying the treasury stock method to outstanding stock options.
3. In February 1994, the Company completed the acquisitions L.E. Muran
Co., Inc. ("Muran"), a Boston-based contract stationer, and Yorkship
Press, Inc. ("Yorkship"), a contract stationer servicing Philadelphia
and southern New Jersey. The Company issued 1,557,164 shares of
common stock in connection with these acquisitions. These
acquisitions were accounted for on a "pooling of interests" basis.
Results of operations for the 13 weeks ended March 26, 1994 include
the results of operations of Muran and Yorkship since December 26,
1993. Results of operations and financial position as of and
prior to December 25, 1993 have not been adjusted due to
immateriality. An adjustment to increase retained earnings as of
December 26, 1993 in the amount of $12,414,000 has been made.
4. The Consolidated Statements of Cash Flows for the 13 weeks ended March
26, 1994 and March 27, 1993 do not include noncash financing
transactions of $2,096,000 and $2,119,000, respectively, relating to
additional paid-in capital associated with tax benefits of stock
options exercised. In addition, the Consolidated Statements of Cash
Flows for the 13 weeks ended March 26, 1994 and March 27, 1993 do not
include noncash financing transactions of $3,879,000 and $1,884,000,
respectively, associated with accreted interest on convertible,
subordinated notes.
F-4
41
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.
/s/ Deloitte & Touche
- ---------------------
DELOITTE & TOUCHE
Certified Public Accountants
Fort Lauderdale, Florida
February 8, 1994
F-5
42
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.
F-6
43
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 . . . . . . . . . . . . . . . . . . . . . . . . . . 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.
F-7
44
Office Depot, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM DECEMBER 30, 1990 TO DECEMBER 25, 1993
(In thousands, except share amounts)
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.
F-8
45
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 . . . . . . . . . . . . . . $ 2,553,347 $ 1,701,557 $ 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 . . . . . . . . . (520,203) (369,235) (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 equivalent . . . . . . . 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.
F-9
46
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.
F-10
47
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 Share
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.
F-11
48
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 fair 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
======== ========
F-12
49
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
F-13
50
Office Depot, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
NOTE D -- ZERO COUPON, CONVERTIBLE, SUBORDINATED NOTES
On December 11, 1992, the Company issued $316,250,000 principal amount
of Liquid Yield Option(TM) Notes ("LYONs" (TM)) with a price to the public of
$150,769,000. The issue price of each such LYON was $476.74 and there will be
no periodic payments of interest. The LYONs will mature on December 11, 2007
at $1,000 per LYON representing a yield to maturity of 5% (computed on a semi-
annual bond equivalent basis).
On November 1, 1993, the Company issued $345,000,000 principal amount
of LYONs with a price to the public of $190,464,000. The issue price of each
such LYON was $552.07 and there will be no periodic payments of interest.
These LYONs will mature on November 1, 2008 at $1,000 per LYON, representing a
yield to maturity of 4% (computed on a 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.
__________________________________
(TM) Trademark of Merrill Lynch & Co., Inc.
F-14
51
Office Depot, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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
======= ======= =======
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)
======== ========
F-15
52
Office Depot, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following schedule is a reconciliation of income taxes at the federal
statutory rate to the provision for income taxes:
52 Weeks 52 Weeks 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
======== ======== ========
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.
F-16
53
Office Depot, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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).
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,
F-17
54
Office Depot, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
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
F-18
55
Office Depot, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
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
=========
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
F-19
56
Office Depot, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
F-20
57
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Eastman Office Products Corporation
Signal Hill, California
We have audited the accompanying consolidated balance sheets of Eastman Office
Products Corporation and subsidiaries (the Company) (formerly Eastman
Corporation) as of June 30, 1993 and 1992, and the related consolidated
statements of operations, stockholders' equity and cash flows for the
seven-month period ended June 30, 1993, the five-month period ended November
30, 1992 and the year ended June 30, 1992. These consolidated 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Eastman Office Products
Corporation and subsidiaries as of June 30, 1993 and 1992, and the results of
their operations and their cash flows for the seven-month period ended June 30,
1993, the five-month period ended November 30, 1992 and the year ended June 30,
1992, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche
- ---------------------
DELOITTE & TOUCHE
Certified Public Accountants
Costa Mesa, California
August 27, 1993 (except paragraphs 2 and 3 of Note 14 for which the dates are
September 13, 1993 and October 1, 1993, respectively)
FA-1
58
EASTMAN OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except share amounts)
Predecessor
-----------
June 30, June 30,
1993 1992
-------- --------
ASSETS
CURRENT ASSETS OF CONTINUING OPERATIONS:
Accounts receivable, less allowance for doubtful accounts of $1,633 in
1993 and $1,482 in 1992 (Note 7) $ 43,543 $ 41,963
Merchandise inventories (Notes 2 and 7) 34,058 30,942
Prepaid expenses and other current assets $ 1,736 $ 1,474
-------- --------
Total current assets of continuing operations 79,337 74,379
NET ASSETS RELATED TO DISCONTINUED OPERATIONS (Note 13) $ 56,872
-------- --------
Total current assets 79,337 131,251
PROPERTY AND EQUIPMENT, net (Notes 2 and 3) 21,967 18,516
OTHER ASSETS:
Other assets and intangibles (primarily capitalized financing costs in
1993) (Note 2) 8,715 2,057
Goodwill, net of accumulated amortization of $1,314 (Note 2) $ 77,936
-------- --------
Total other assets $ 86,651 $ 2,057
-------- --------
$187,955 $151,824
======== ========
See notes to consolidated financial statements.
FA-2
59
EASTMAN OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except share amounts)
Predecessor
-----------
June 30, June 30,
1993 1992
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft $ 1,010 $ 2,694
Accounts payable and accrued expenses (Note 4) 33,151 27,080
Currently payable and deferred income taxes (Notes 2 and 8) 1,993 1,944
Current portion of capital lease obligations (Note 5) $ 771 $ 748
------- --------
Total current liabilities 36,925 32,466
LONG-TERM DEBT:
Senior subordinated notes (Note 7) 90,000
Revolving line of credit (Note 7) 20,325
Capital lease obligations, excluding current portion (Note 5) 2,791 4,025
-------- --------
Total long-term debt 113,116 4,025
DEFERRED RENT (Note 5) 2,849 2,847
DEFERRED TAXES (Notes 2 and 8) 5,230 384
CUMULATIVE REDEEMABLE PREFERRED STOCK,
par value $90.40; liquidation value $100; 134,686 shares authorized;
103,199 shares issued and outstanding (Note 9) 9,643
CUMULATIVE REDEEMABLE PREFERRED STOCK
DIVIDEND DISTRIBUTABLE 154
REDEEMABLE WARRANTS (Notes 9 and 10) 949
COMMITMENTS AND CONTINGENCIES (Notes 5 and 11)
STOCKHOLDERS' EQUITY (Notes 7 and 10):
Predecessor preferred stock, stated at $0.001; 10,000,000 shares
authorized; none issued and outstanding
Predecessor common stock, stated at $1; 100,000,000 shares authorized;
14,687,080 shares issued and outstanding 14,687
Common stock, stated at $0.001; 3,000,000 shares authorized; 1,014,576
shares issued and outstanding 1
Predecessor non-voting common stock, stated at $1; 232 shares authorized;
232 shares issued and outstanding
Additional paid-in capital 18,289 89,302
Retained earnings 799 8,113
-------- --------
Total stockholders' equity 19,089 112,102
-------- --------
$187,955 $151,824
======== ========
See notes to consolidated financial statements.
FA-3
60
EASTMAN OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Predecessor
--------------------------------
Seven months Five months
ended ended Year ended
June 30, November 30, June 30,
1993 1992 1992
-------- -------- ---------
REVENUES $183,609 $129,780 $294,637
COST OF SALES 127,412 90,455 200,040
-------- -------- --------
GROSS PROFIT 56,197 39,325 94,597
OPERATING EXPENSES:
Selling, general and administrative 42,563 31,809 68,571
Depreciation and amortization (Note 2) 3,751 1,897 4,261
Litigation expenses (Note 11) 522 143 2,306
Litigation settlement (Note 11) (3,288)
-------- -------- --------
Total operating expenses 43,548 33,849 75,138
-------- -------- --------
Operating income 12,649 5,476 19,459
Interest expense 8,479 75 445
--------- -------- --------
EARNINGS FROM CONTINUING OPERATIONS BEFORE PROVISION
FOR INCOME TAXES, DISCONTINUED OPERATIONS AND
EXTRAORDINARY ITEM 4,170 5,401 19,014
PROVISION FOR INCOME TAXES (Notes 2 and 8) 2,226 1,847 7,604
-------- -------- --------
EARNINGS FROM CONTINUING OPERATIONS BEFORE
DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM 1,944 3,554 11,410
See notes to consolidated financial statements.
FA-4
61
EASTMAN OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Predecessor
-----------------------------
Seven months Five months
ended ended Year ended
June 30, November 30, June 30,
1993 1992 1992
-------- -------- --------
DISCONTINUED OPERATIONS (Note 13):
Earnings (loss) from discontinued operations, net of
taxes (benefit) of $268 - November 30, 1992 and
$(1,306) - June 30, 1992 $ - $ 528 $ (1,949)
Loss on disposal of discontinued operations, net of tax
benefit of $(1,122) - June 30, 1992 (1,673)
--------- --------- --------
Total earnings (loss) from discontinued operations 528 (3,622)
--------- --------- --------
EARNINGS BEFORE EXTRAORDINARY ITEM 1,944 4,082 7,788
EXTRAORDINARY ITEM (Note 13) 4,665
--------- --------- --------
NET EARNINGS 1,944 4,082 12,453
PREFERRED STOCK DIVIDENDS AND ACCRETION 1,145
-------- --------- ---------
NET EARNINGS ATTRIBUTABLE TO COMMON STOCK $ 799 $ 4,082 $ 12,453
======== ========= ========
See notes to consolidated financial statements.
FA-5
62
EASTMAN OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except share amounts)
Common stock
---------------------------- Additional Total
Number paid-in Retained stockholders'
of shares Amount capital earnings equity
--------- ------ --------- -------- ------------
PREDECESSOR:
BALANCE, July 1, 1991 13,294,720 $ 13,295 $ 71,894 $ 14,460 $ 99,649
Net earnings 12,453 12,453
Stock dividends 1,392,592 1,392 17,408 (18,800)
---------- --------- -------- -------- ---------
BALANCE, June 30, 1992 14,687,312 14,687 89,302 8,113 112,102
Issuance of nonvoting stock 3 3
Net earnings for five months ended
November 30, 1992 4,082 4,082
Recapitalization of predecessor,
including a stock redemption (14,687,312) (14,687) (89,305) (12,195) (116,187)
EASTMAN OFFICE PRODUCTS
CORPORATION AND SUBSIDIARIES:
Common stock issued upon formation of
Eastman Acquisition Corporation,
October 21, 1992 100,000 100 100
Common stock issued 914,576 1 18,139 18,140
Compensation related to stock options 50 50
Accretion of preferred stock (35) (35)
Cash dividends on preferred stock (636) (636)
Stock dividends on preferred stock (474) (474)
Net earnings for seven months ended
June 30, 1993 1,944 1,944
---------- -------- -------- -------- --------
BALANCE, June 30, 1993 1,014,576 $ 1 $18,289 $ 799 $ 19,089
========== ======== ======= ======== ========
See notes to consolidated financial statements.
FA-6
63
EASTMAN OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Predecessor
---------------------------
Seven months Five months
ended ended Year ended
June 30, November 30, June 30,
1993 1992 1992
-------------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings from continuing operations $ 1,944 $ 3,554 $11,410
Adjustments to reconcile net earnings from continuing operations to net cash
provided by operating activities of continuing operations:
Depreciation and amortization 3,751 1,897 4,261
Amortization of financing costs 700
Loss (gain) on sale of fixed assets 89 100 (63)
Decrease (increase) in accounts receivable (3,535) 1,620 (5,929)
Provision for doubtful accounts 95 454 557
Decrease (increase) in merchandise inventories (3,047) 3,554 (2,600)
Decrease (increase) in prepaid expenses and other current assets 1,277 (2,000) (710)
Increase (decrease) in accounts payable and accrued expenses 7,347 (3,729) 7,017
Increase (decrease) in other liabilities 722 (466) 1,260
--------- -------- -------
Net cash provided by operating activities of continuing operations 9,343 4,984 15,203
--------- -------- -------
Earnings from discontinued operations and extraordinary item 528 2,716
Loss on disposal of discontinued operations (1,673)
Adjustments to reconcile earnings from discontinued operations to net cash provided
by (used in) operating activities of discontinued operations:
Depreciation and amortization 298
Loss on sale of fixed assets 154
Increase in accounts receivable (189)
Decrease in prepaid expenses and other assets 10,158
Decrease in accounts payable and accrued expenses (18,233)
Increase in other liabilities 4,209
Increase in accounts receivable, other (2,752)
--------- -------- -------
Net cash provided by (used in) operating activities of discontinued operations 1,985 (6,769)
--------- -------- -------
Net cash provided by operating activities 9,343 6,969 8,434
--------- -------- -------
See notes to consolidated financial statements.
FA-7
64
EASTMAN OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Predecessor
---------------------------
Seven months Five months
ended ended Year ended
June 30, November 30, June 30,
1993 1992 1992
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures $ (931) $(3,660) $(5,641)
Proceeds from sale of fixed assets 28 286 103
Capitalized acquisition and financing costs (13,499)
Other investing activities, net 145 (3,502)
--------- ------- -------
Net cash used in investing activities of continuing operations (14,402) (3,229) (9,040)
--------- ------- -------
Capital expenditures (12)
Proceeds from sale of fixed assets 3,028 801
Other investing activities, net 3,530
--------- ------- -------
Net cash provided by investing activities of discontinued operations 3,028 4,319
--------- ------- -------
Net cash used in investing activities (14,402) (201) (4,721)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in cash overdraft of continuing operations (2,065) 380 (2,398)
Change in advances from discontinued operations, including changes in
intercompany deferred taxes (3,765)
Borrowings under revolving line of credit 68,125
Payments under revolving line of credit (47,800)
Common stock issued 18,240
Cumulative redeemable preferred stock/warrants issued 10,000
Borrowings under senior subordinated notes 90,000
Purchase of common stock from former stockholders (142,000)
Reduction of capital lease obligations (480)
Additional capital lease obligations 84 73
Cash dividends (429)
Compensation expense related to stock options 50
Other financing activities, net (239)
--------- ------- -------
Net cash (used in) provided by financing activities of continuing operations (6,275) 214 (6,163)
--------- ------- -------
Change in advances to continuing operations 1,262 1,482
Distribution of discontinued assets (38,891)
--------- ------- -------
Net cash provided by (used in) financing activities of discontinued operations (38,891) 1,262 1,482
--------- ------- -------
Net cash (used in) provided by financing activities (45,166) 1,476 (4,681)
--------- ------- -------
See notes to consolidated financial statements.
FA-8
65
EASTMAN OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Predecessor
---------------------------
Seven months Five months
ended ended Year ended
June 30, November 30, June 30,
1993 1992 1992
------------ ------------ ------------
NET INCREASE (DECREASE) IN TOTAL CASH $(50,225) $ 8,244 $ (968)
TOTAL CASH, beginning of period 50,225 41,981 42,949
-------- ------- -------
TOTAL CASH, end of period $ - $50,225 $41,981
======== ======= =======
CASH, DISCONTINUED OPERATIONS (includes restricted cash of $3,204 -
November 30, 1992 and $3,825 - June 30, 1992) $ - $50,225 $41,981
CASH, continuing operations
------- -------
CASH, end of period $ - $50,225 $41,981
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
Cash paid during the period for:
Interest $ 7,127 $ 181 $ 815
Income taxes $ 1,641 $ 81 $ 4,278
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Common stock warrants issued as a cost of financing long-term debt $ 237
Accrued cumulative redeemable preferred stock cash dividends $ 207
Cumulative redeemable preferred stock dividends $ 474
See notes to consolidated financial statements.
FA-9
66
EASTMAN OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SEVEN-MONTH PERIOD ENDED
JUNE 30, 1993, THE FIVE-MONTH PERIOD ENDED NOVEMBER 30, 1992 AND THE YEAR ENDED
JUNE 30, 1992
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements for the seven months
ended June 30, 1993 reflect the operations of Eastman Office Products
Corporation and subsidiaries (formerly Eastman Corporation and
subsidiaries, the Company). All the stock of the Company was acquired by
Eastman Acquisition Corporation (EAC) on December 4, 1992 (the Acquisition)
and accounted for as being effective as of December 1, 1992. Because of
the debt financing incurred in connection with the Acquisition and the
adjustments made to allocate the excess of the aggregate purchase price
over the historical value of the net assets acquired, the accompanying
consolidated financial statements of the Company are not directly
comparable to those of the Predecessor, as defined below.
The accompanying consolidated financial statements for the five months
ended November 30, 1992 and the year ended June 30, 1992 reflect the
operations of the Company prior to the Acquisition. These operations are
referred to as the "Predecessor" and include as continuing operations the
accounts relating to Eastman, Inc., a wholly owned subsidiary of the
Company, and as discontinued operations the accounts of Buffums, Inc.
(Buffums) and the Southern Terminals group of affiliated corporations
(collectively, STI).
EAC was established by a group of investors led by McCown De Leeuw & Co.
(MDC) for the sole purpose of acquiring all of the outstanding common stock
of the Company (consisting primarily of the net assets and operations of
Eastman, Inc.) from Petersville Sleigh Limited and David Jones Limited (the
selling stockholders). EAC had engaged in no business activity prior to
the Acquisition. The purchase price was approximately $142,000. In
connection with the Acquisition, EAC issued mandatory redeemable preferred
stock, redeemable warrants, and common stock (Notes 9 and 10).
Also in connection with this acquisition, Eastman, Inc. issued $90,000
of senior subordinated notes and borrowed $24,725 under a $50,000 revolving
credit agreement and transferred the proceeds to the Company to complete
the purchase.
Upon consummation of the Acquisition, EAC was merged with and into the
Company, with the Company remaining as the surviving corporation. The
Company has no current operations except for the business activity of
Eastman, Inc.
The Acquisition was accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16, Business Combinations.
Accordingly, the total purchase price has been allocated to the tangible
and intangible assets and liabilities acquired based on the Company's
estimates of their respective fair values at the date of acquisition.
FA-10
67
EASTMAN OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SEVEN-MONTH PERIOD ENDED
JUNE 30, 1993, THE FIVE-MONTH PERIOD ENDED NOVEMBER 30, 1992 AND THE YEAR ENDED
JUNE 30, 1992 (CONTINUED)
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The following unaudited pro forma information combines the results of
operations for the Predecessor's five months ended November 30, 1992 and
the Company's results of operations for the seven months ended June 30,
1993 as if the Acquisition had occurred on July 1, 1992, after giving
effect to certain adjustments including depreciation, amortization of
goodwill and financing costs, increased interest expense on acquisition
debt and related income tax effects.
JUNE 30, 1993
-------------
Total revenues $313,389
Net earnings 991
The above pro forma information does not purport to represent what the
Company's actual results of operations would have been had the operations
been combined during the periods presented and is not intended to be a
projection of future results or trends.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description - The Company is a full service contract stationer
which distributes and sells office supplies and office furniture primarily
in the Western United States.
Principles of Consolidation - The consolidated balance sheet at June 30,
1993 includes the accounts of Eastman Office Products Corporation and its
wholly owned subsidiary, Eastman, Inc. Significant intercompany balances
and transactions have been eliminated.
Merchandise Inventories - Merchandise inventories are stated at the
lower of cost or market. Cost is determined on the last-in, first-out
method. The replacement cost of the inventories approximated $34,058 and
$34,782 at June 30, 1993 and 1992, respectively.
Purchase Discounts - Purchase discounts related to volume purchases of
inventory are reported on a cash basis.
Property and Equipment - Property and equipment, including those assets
related to capital leases, are stated at cost. Depreciation and
amortization are provided using the straight-line method over estimated
lives or lease terms, whichever is shorter.
Capitalized Financing Costs - Capitalized financing costs are amortized
on a basis that approximates the interest method over the expected terms of
the debt.
Goodwill - Goodwill arising from the Acquisition represents the excess
of purchase price and related costs over the value assigned to the net
tangible assets of the business purchased. Goodwill is amortized on a
straight-line basis over 35 years.
Income Taxes - The Company recognizes income tax expense in accordance
with Statement of Financial Accounting Standards No. 109, which requires
the use of the liability method of accounting for income taxes. Under the
liability method, deferred taxes are recognized for the tax consequences of
temporary differences between the financial statement carrying values of
existing assets and liabilities and their related tax bases. The
FA-11
68
EASTMAN OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SEVEN-MONTH PERIOD ENDED
JUNE 30, 1993, THE FIVE-MONTH PERIOD ENDED NOVEMBER 30, 1992 AND THE YEAR ENDED
JUNE 30, 1992 (CONTINUED)
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Predecessor recognized income tax expense using the income method in
accordance with Accounting Principles Board Opinion No. 11. The
Predecessor's financial statements have not been restated.
For the five-month period ended November 30, 1992 and the year ended
June 30, 1992, the principal differences relating to deferred taxes of the
Predecessor are primarily due to the recognition of profit on installment
sales, rent expense, bad debt expense and accelerated depreciation.
Reclassifications - Certain reclassifications have been made to prior
year amounts to conform to current year presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30:
Predecessor
-------------
1993 1992
-------- --------
Buildings $ 1,982 $ 2,929
Leasehold improvements 3,676 4,824
Furniture, fixtures and equipment 18,733 28,064
------- -------
24,391 35,817
Less accumulated depreciation and amortization (2,424) (17,301)
------- -------
Total property and equipment $21,967 $18,516
======= =======
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Included in accounts payable and accrued expenses are the following at
June 30:
Predecessor
-------------
1993 1992
-------- --------
Trade accounts payable $20,454 $17,349
Accrued payroll 2,534 2,237
Accrued profit sharing 1,746 1,675
Other 8,417 5,819
------- -------
Total accounts payable and accrued expenses $33,151 $27,080
======= =======
5. LONG-TERM LEASE AND COMMITMENTS
The Company leases its facilities and equipment under various
noncancelable operating and capital lease agreements, some of which provide
for minimum annual rentals which are subject to adjustment for changes in
applicable cost of living indices.
FA-12
69
EASTMAN OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SEVEN-MONTH PERIOD ENDED
JUNE 30, 1993, THE FIVE-MONTH PERIOD ENDED NOVEMBER 30, 1992 AND THE YEAR ENDED
JUNE 30, 1992 (CONTINUED)
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Leases with free rent periods and/or scheduled and specific rent
increases are recognized by the Company on a straight-line basis over the
lease term.
The Company has facility and equipment leases which are accounted for as
capital leases. Accordingly, the related obligations have been recorded
using the Company's incremental borrowing rate as of the Acquisition date.
The following is a schedule of future minimum commitments under leasing
arrangements, including capital leases and noncancelable operating leases
with initial or remaining terms of one year or more at June 30, 1993:
Capital leases Operating leases Total
Twelve months ended June 30:
1994 $1,042 $ 4,476 $ 5,518
1995 712 4,225 4,937
1996 547 4,145 4,692
1997 443 4,155 4,598
1998 319 4,342 4,661
Thereafter 1,724 15,522 17,246
------ ------- -------
Total minimum lease payments 4,787 $36,865 $41,652
Less amounts representing interest (1,225)
------
Present value of net minimum lease payments $3,562
======
Rent expense related to continuing operations amounted to $3,116 for the
seven months ended June 30, 1993, $2,061 for the five months ended November
30, 1992 and $4,362 for the year ended June 30, 1992.
The following is a summary of leased property (included in Note 3) under
capital leases by major classes at June 30:
Predecessor
-------------
1993 1992
-------- --------
Buildings $1,982 $2,929
Furniture, fixtures and equipment 1,871 3,058
------ ------
3,853 5,987
Less accumulated depreciation and amortization (540) (1,519)
------ ------
Net Property and equipment under capital leases $3,313 $4,468
====== ======
6. PROFIT SHARING PLAN AND EMPLOYEE BENEFIT AGREEMENTS
The Company has a profit-sharing plan that provides retirement benefits
to substantially all regular employees with more than one year of service.
Total profit sharing expense related to continuing operations was $1,263
for the seven months ended June 30, 1993, $446 for the five months ended
November 30, 1992 and $1,704 for the year ended June 30, 1992. The
Company's contributions to the plan are made at the discretion of the Board
of Directors. The Company amended its profit sharing plan in fiscal 1992
to include a 401(k) plan. The Company currently matches employee
contributions up to 25% of the first 4% contributed for nonhighly
compensated and noncommissioned employees. The Company contributed $107
for the seven months ended June 30, 1993, $35 for the five months ended
November 30, 1992 and $80 for the year ended June 30, 1992.
FA-13
70
EASTMAN OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SEVEN-MONTH PERIOD ENDED
JUNE 30, 1993, THE FIVE-MONTH PERIOD ENDED NOVEMBER 30, 1992 AND THE YEAR ENDED
JUNE 30, 1992 (CONTINUED)
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The Company has entered into long-term management contracts with eight
of its executive officers. The remaining terms of these agreements are
five years for the president and four years for the remaining seven members
of management.
7. LONG-TERM DEBT
Effective as of the Acquisition date, Eastman, Inc. issued $90,000 of
Series A Senior Subordinated Notes (the Notes) pursuant to an Indenture
dated as of December 4, 1992 (the Indenture). The Notes, which mature in
2002, bear a fixed interest rate of 13%, payable semi-annually. The Notes
are unsecured and are non-callable for five years. Subsequently, the Notes
will be callable at premiums declining to par in the ninth year. Mandatory
redemption payments of 25% of the principal amount of the Notes on the
eighth and ninth anniversaries of issuance at a purchase price equal to the
principal amount thereof plus accrued interest are required to retire,
prior to maturity, 50% of the Notes. New notes have been registered via an
exchange offer under the Securities Act of 1933 for Series B Senior
Subordinated Notes (the New Notes). The exchange was completed, and the
New Notes were effective June 7, 1993 and have the same terms and
conditions as the original Notes. (See Note 14.)
In addition, Eastman, Inc. entered into a $50,000 revolving credit
agreement with a syndicate of banks. Borrowings under this facility are
limited to the lesser of (i) a borrowing base relating to a percentage of
eligible accounts receivable and eligible inventory, or (ii) $50,000, and
are secured by inventory, accounts receivable, and common stock of the
Company. Based on the Company's anticipated level of inventory and
receivables, the Company does not expect its borrowing base to fall below
the required level to support the debt through the maturity date. A
portion of the revolving loan facility may be utilized for letters of
credit. Interest is payable quarterly at an annual rate equal to the base
rate (the higher of the federal funds rate plus 1/2 of 1% per annum) or
the prime rate plus 1.50%. The revolving credit agreement matures on
November 30, 1997.
Both the Indenture and the revolving credit agreement contain certain
covenants which limit the Company's ability to incur indebtedness, pay cash
dividends and make certain other payments. These debt agreements also
require the Company to maintain certain financial ratios.
8. INCOME TAXES
Effective December 1, 1992, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). This
statement requires the recognition of deferred tax assets and liabilities
for the future consequences of events that have been recognized in the
Company's financial statements or tax returns. The measurement of the
deferred items is based on enacted tax laws. In the event the future
consequences of differences between financial reporting bases and the tax
bases of the Company's assets and liabilities result in a deferred tax
asset, SFAS 109 requires an evaluation of the probability of being able to
realize the future benefits indicated by such asset. A valuation allowance
related to a deferred tax asset is recorded when it is more likely than not
that some portion or all of the deferred tax asset will not be realized.
As of June 30, 1993, the Company has not recorded a valuation allowance.
FA-14
71
EASTMAN OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SEVEN-MONTH PERIOD ENDED
JUNE 30, 1993, THE FIVE-MONTH PERIOD ENDED NOVEMBER 30, 1992 AND THE YEAR ENDED
JUNE 30, 1992 (CONTINUED)
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The components of the provision for income taxes related to continuing
operations are as follows:
PREDECESSOR
--------------------------------
Seven months Five months
ended ended Year ended
June 30, 1993 November 30, 1992 June 30, 1992
------------- ----------------- -------------
Current income taxes:
Federal $1,609 $1,113 $6,098
State 511 528 1,951
------ ------ ------
2,120 1,641 8,049
Deferred income taxes: 103 220 (264)
Federal 3 (14) (181)
------ ------ ------
State 106 206 (445)
------ ------ ------
$2,226 $1,847 $7,604
====== ====== ======
The provision for income taxes of continuing operations differs from the
amount computed by applying the federal statutory rate to income before
taxes as follows:
PREDECESSOR
--------------------------------
Seven months Five months
ended ended Year ended
June 30, 1993 November 30, 1992 June 30, 1992
------------- ----------------- -------------
Federal statutory rate 34.0% 34.0% 34.0%
State taxes, net 6.0 6.0 6.0
Alternative minimum tax credits (5.8)
Other (primarily amortization of goodwill) 13.4
---- ---- ----
Effective income tax rate 53.4% 34.2% 40.0%
==== ==== ====
As a result of the Acquisition, the Company recognized goodwill, the
amortization of which is nondeductible for income tax purposes.
The Company does not expect that the recently enacted tax changes will
have a material effect on the Company's tax accounts. The Company is
currently undergoing an IRS examination for the tax years ended June 30,
1990, 1991 and 1992. The Company is indemnified by the previous
stockholders for any amounts owed over $1,250 resulting from the
examination.
The major components of the Company's net deferred taxes of $4,989 at
June 30, 1993 are as follows:
Depreciation and amortization $6,571
LIFO reserve 1,572
Deferred rent (1,234)
Bad debts (707)
Inventory cost capitalization (597)
State income taxes (385)
Other (231)
------
$4,989
======
FA-15
72
EASTMAN OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SEVEN-MONTH PERIOD ENDED
JUNE 30, 1993, THE FIVE-MONTH PERIOD ENDED NOVEMBER 30, 1992 AND THE YEAR ENDED
JUNE 30, 1992 (CONTINUED)
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Net long-term deferred tax liabilities of $5,230 are shown separately,
while net current deferred tax assets are included elsewhere due to their
immateriality.
9. CUMULATIVE REDEEMABLE PREFERRED STOCK
In connection with the Acquisition, EAC (prior to being merged with the
Company) issued 100,000 shares of cumulative redeemable preferred stock
(the preferred stock) with a liquidation value of $ 100 per share. The
preferred stock is non-voting (except in limited circumstances) and earns
dividends at a rate of 14% per year. Dividends at a rate of 6% per year
for the first five years after issuance will be paid by the issuance of
additional shares of preferred stock. Dividends are payable quarterly in
arrears when and as declared by the Board of Directors. The preferred
stock is nonredeemable for five years after its issuance. Thereafter, the
preferred stock is redeemable at the option of the Company at a premium
declining ratably to 100% of liquidation value at the end of the tenth
year, plus accrued dividends through the redemption date. The preferred
stock is mandatorily redeemable on December 15, 2004. (See Note 14.)
Quarterly cash dividends of 8% per annum and stock dividends of 6% per
annum were declared by the Company on June 24, 1993, payable on September
15, 1993.
The purchasers of the preferred stock also received warrants to purchase
up to 6% of the fully diluted common stock of the Company (69,971 shares at
June 30, 1993) exercisable at a future date for a nominal price. The
warrants are not exercisable until December 4, 1998 except in connection
with certain triggering events. The warrants expire ten years from their
issue date. (See Note 14.)
10. STOCKHOLDERS' EQUITY
Common Stock - Common stock issued at the Acquisition date included
104,500 shares acquired by management. The holders of the common stock are
entitled to one vote per common share owned. A portion of management's
cash equity contribution, amounting to $1,775, was funded from bonuses paid
by the selling stockholders in the form of a deferred compensation plan for
management's efforts in assisting the selling stockholders in the
divestiture of the Company and the discontinued operations. The bonus
payments used to purchase stock on behalf of the management group were
reflected as a reduction of the Company's stockholders' capitalization at
the Acquisition date.
In addition, in connection with the financing of the Acquisition, a
certain financial institution received warrants to purchase up to 2% of the
fully diluted common stock of the Company (23,324 shares at June 30, 1993)
exercisable at a future date for a nominal price. The warrants have
substantially the same terms as the warrants referred to in Note 9. (See
Note 14.)
Stock Option Plan - In connection with the Acquisition, the Company
established a performance stock option plan (the plan). Under the plan,
58,309 shares of common stock were granted to key employees. The number of
shares may be increased from time to time at the discretion of the Board of
Directors, but may not exceed 7% of the issued and outstanding common stock
on a fully diluted basis. Options vest over a term of 10 years from the
grant date and will be issued with a nominal exercise price. The vesting
period may be accelerated by certain triggering events. (See Note 14.)
Compensation expense related to this plan is being recognized over the
stated
FA-16
73
EASTMAN OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SEVEN-MONTH PERIOD ENDED
JUNE 30, 1993, THE FIVE-MONTH PERIOD ENDED NOVEMBER 30, 1992 AND THE YEAR ENDED
JUNE 30, 1992 (CONTINUED)
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
vesting period. If the transaction described in Note 14 is
completed (and all options are vested and exercised when the Company's
stock is valued at $85.50 per share), the Company estimates that
compensation expense of approximately $4,900 may be recognized.
11. LITIGATION
The Company filed suit in 1987 in Los Angeles Superior Court against the
lessor of the Company's Signal Hill facility, and certain other persons, to
resolve disputes relating to the completion of construction and
improvements to the lease facility, and nonpayment of amounts due the
Company. In February 1988, the defendants filed a cross-complaint against
the Company, claiming breach of contract and interference with the contract
and seeking damages of an unspecified amount. On March 15, 1993,
settlement discussions were initiated by the court. On May 26, 1993, the
Company entered into a stipulation for settlement that has been approved by
the court. Among other terms, the stipulation agreement provides for
aggregate payments of $4,373 to the Company and the previous selling
stockholders. The aggregate payments will be made by the deposit of $210
into a capital improvements fund, a payment of $1,000 over a 24-month
period and the payment of the balance in cash. As part of the purchase of
the Company, the Company is obligated to pay a portion of any amounts
recovered in this lawsuit to the previous stockholders. The previous
stockholders agreed to pay the first $250 received from the recoveries to
the President of the Company. The net settlement to the Company of $3,288
has been recorded as income as of June 30, 1993.
The Company is also involved in litigation arising in the normal course
of its business, none of which, individually or in the aggregate, is likely
to be material to the Company's financial position or results of
operations.
12. RELATED PARTIES
The Company entered into a Management Services Agreement, dated as of
December 4, 1992 (the Management Services Agreement) with MDC Management
Company II, L.P., MDC Management Company IIA, L.P. and MDC Management
Company IIE, L.P. (the MDC Management Companies) for certain management and
financial services to be provided to the Company. The Management Services
Agreement provides for an annual fee equal to $370 to be paid to the MDC
Management Companies plus reimbursement of their reasonable out-of-pocket
costs of approximately $100 (1993). The Management Services Agreement
terminates on November 30, 1997, which date is automatically extended
annually by one year (each, a "renewal date") unless the MDC Management
Companies receive a notice of termination by the Company prior to the
renewal date. The Company paid to MDC a fee equal to $1,500 in connection
with the Acquisition. In addition, the Company paid $919 as
reimbursement for the investing group's out-of-pocket expenses incurred
in connection with the Acquisition, as payment of administrative costs
incurred by management in connection with a deferred compensation plan
(Note 10), and as compensation to the Company's President for services
rendered in connection with the Acquisition.
FA-17
74
EASTMAN OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SEVEN-MONTH PERIOD ENDED
JUNE 30, 1993, THE FIVE-MONTH PERIOD ENDED NOVEMBER 30, 1992 AND THE YEAR ENDED
JUNE 30, 1992 (CONTINUED)
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
13. DISCONTINUED OPERATIONS
As discussed in Note 1, prior to June 30, 1992, the selling stockholders
determined to dispose of their interests in the Company, with Eastman, Inc.
as the only ongoing operating business. Accordingly, on October 22, 1992,
the stockholders entered into a stock purchase agreement to sell Eastman,
Inc. to an unrelated third party and transfer to the existing stockholders
the remaining assets and liabilities of those businesses owned by the
Company and/or its subsidiaries other than those related to Eastman, Inc.
On March 18, 1991, Buffums filed for protection under Chapter 11 of the
Bankruptcy Code, and liquidation procedures commenced. Management's
estimate of the financial effect of the liquidation was included in the
discontinued operations presented in the consolidated financial statements
for the year ended June 30, 1991, with revised estimates reflected in the
year ended June 30, 1992.
Buffums had a Past Service Pension Plan (the Buffums Plan) that covered
substantially all personnel employed prior to February 1, 1976. In
connection with the liquidation of Buffums, the Buffums Plan was
terminated. Assets of the Buffums Plan were maintained in a trust fund and
have been distributed to Buffums Plan participants in accordance with the
terms of the Buffums Plan.
When the acquisition described in Note 1 was completed, the Company had
no further responsibility for any difference between management's estimate
of the net realizable value of, and amounts actually realized from,
Buffums' liquidation.
Effective July 1, 1992, the Company sold substantially all the net
assets of STI to a wholly-owned subsidiary of Petersville Sleigh Limited.
The cash purchase price of $3,900 approximated the net book value of STI.
Combined revenues of Buffums and STI were $421 for year ended June 30,
1992.
As part of discontinued operations, the Company had two notes receivable
totaling $12,094 collateralized by real estate (buildings) owned by an
affiliate. One note related to a facility previously used by Buffums. Due
to the bankruptcy filing, the affiliate is involved in litigation with the
owner of the land lease on which the facility is constructed. The second
note related to a facility leased by Eastman, Inc. which was being offered
for sale at a price significantly below the original book value of the
note. Due to the uncertain real estate market, the Company had established
a loss reserve of $6,025 against these notes receivable.
The effects of the litigation and the ultimate sales price of the leased
Eastman, Inc. facility could not be estimated at June 30, 1992. Since
these notes are included in discontinued operations, any subsequent loss
upon settlement of the litigation or disposal of the facility will be the
responsibility of David Jones Limited and/or Petersville Sleigh Limited or
their respective affiliates.
FA-18
75
EASTMAN OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SEVEN-MONTH PERIOD ENDED
JUNE 30, 1993, THE FIVE-MONTH PERIOD ENDED NOVEMBER 30, 1992 AND THE YEAR ENDED
JUNE 30, 1992 (CONTINUED)
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The following details assets and liabilities in liquidation or being
held for sale (discontinued operations) by the Predecessor at June 30,
1992:
ASSETS:
Cash $38,156
Accounts receivable, less allowance for doubtful accounts 37
Property and equipment, at cost, less accumulated depreciation and
amortization 540
Notes and advances receivable from affiliate, net of reserve 6,283
Prepaid expenses and other assets 5,185
Net assets in liquidation - Buffums, including restricted cash of $3,825 3,535
-------
Total assets 53,736
LIABILITIES:
Accounts payable and accrued expenses 197
Other current liabilities (3,161)
Long-term debt and other long-term liabilities (172)
-------
Total liabilities (3,136)
-------
NET ASSETS RELATED TO DISCONTINUED OPERATIONS $56,872
=======
For the year ended June 30, 1992, the Predecessor recorded an
extraordinary benefit of approximately $4,700 due to the utilization of net
operating loss carryovers from discontinued operations.
14. SUBSEQUENT EVENT
In connection with the Acquisition, the stockholders granted Staples,
Inc. a right of first offer in the event of a possible sale of the
Company. MDC gave Staples, Inc. its option to exercise such right of
first offer and purchase all of the outstanding common stock of the
Company, which Staples, Inc. declined. With Staples, Inc. having declined
to exercise the right of first offer, MDC decided to entertain third-party
offers with respect to the sale of all of the outstanding common stock of
the Company.
On September 13, 1993, Office Depot acquired the common stock of the
Company. In connection with the acquisition, Office Depot 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. Office Depot acquired the outstanding
preferred stock of the Company for $13,158,000. Office Depot also paid
$19,479,000 to terminate Eastman Inc.'s revolving credit facility.
Additionally, Office Depot 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,
on October 1, 1993 Office Depot purchased $81,750,000 principal amount of
the Notes for $103,414,000 in cash.
FA-19
