1
EXHIBIT 13.1
FINANCIAL HIGHLIGHTS
(In thousands, except per share amounts and statistical data)
52 Weeks 53 Weeks 52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended Ended Ended
December December December December December
STATEMENTS OF EARNINGS DATA: 30, 1995 31, 1994 25, 1993 26, 1992 28, 1991
- ----------------------------------------------------------------------------------------------------------
Sales $5,313,192 $4,266,199 $2,836,787 $1,962,953 $1,497,882
Cost of goods sold and occupancy costs 4,110,334 3,283,498 2,185,145 1,512,304 1,152,766
- ----------------------------------------------------------------------------------------------------------
Gross profit 1,202,858 982,701 651,642 450,649 345,116
Store and warehouse operating
and selling expenses 782,478 642,572 423,272 301,743 240,572
Pre-opening expenses 17,746 11,990 9,073 7,453 7,774
General and administrative expenses 153,344 130,022 95,142 69,549 52,076
Amortization of goodwill 5,213 5,288 1,617 49 -
- ----------------------------------------------------------------------------------------------------------
Operating profit 244,077 192,829 122,538 71,855 44,694
Interest income 1,357 4,000 4,626 1,393 280
Interest expense (22,551) (18,096) (11,322) (2,658) (3,992)
Equity and franchise income (loss), net (962) 197 108 - -
Merger costs _ _ _ _ (8,950)
- ----------------------------------------------------------------------------------------------------------
Earnings before income taxes and
extraordinary credit(1) 221,921 178,930 115,950 70,590 32,032
Income taxes 89,522 73,973 45,118 25,345 13,246
- ----------------------------------------------------------------------------------------------------------
Earnings before extraordinary credit(1) 132,399 104,957 70,832 45,245 18,786
Extraordinary credit(2) _ _ _ 1,396 614
- ----------------------------------------------------------------------------------------------------------
Net earnings(1) $ 132,399 $ 104,957 $ 70,832 $ 46,641 $ 19,400
========== ========== ========== ========== ==========
Per common share and common
equivalent share:
Earnings before extraordinary credit(1) $ .85 $ .69 $ .48 $ .32 $ .15
Extraordinary credit(2) _ _ _ .01 _
- ----------------------------------------------------------------------------------------------------------
Net earnings(1) $ .85 $ .69 $ .48 $ .33 $ .15
========== ========== ========== ========== ==========
Per common share and common equivalent share-
assuming full dilution:
Earnings before extraordinary credit(1) $ .83 $ .68 $ .48 $ .32 $ .15
Extraordinary credit(2) _ _ _ .01 _
- ----------------------------------------------------------------------------------------------------------
Net earnings(1) $ .83 $ .68 $ .48 $ .33 $ .15
========== ========== ========== ========== ==========
Dividends _ _ _ _ _
December December December December December
STATISTICAL DATA: 30, 1995 31, 1994 25, 1993 26, 1992 28, 1991
- ----------------------------------------------------------------------------------------------------------
Facilities open at end of period:
Office supply stores 501 420 351 284 228
Contract stationer/delivery warehouses 23 24 23 13 10
Other retail locations 3 _ _ _ _
BALANCE SHEET DATA:
- ----------------------------------------------------------------------------------------------------------
Working capital $ 708,984 $ 487,333 $ 471,114 $386,426 $203,326
Total assets 2,531,217 1,903,983 1,531,092 908,585 607,938
Long-term debt(3) 494,910 393,800 367,602 158,313 9,259
Common stockholders' equity 1,002,995 715,271 590,284 413,907 331,699
- ----------------------
(1) Includes effect of $8,950,000 of merger costs in 1991.
(2) The extraordinary credit represents the benefit derived from the utilization
of a net operating loss carryforward.
(3) Excludes current maturities.
2
Office Depot Inc. And Subsidiaries
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS
GENERAL
- --------------------------------------------------------------------------------
Office Depot began operations by opening its first retail store in Florida
in October 1986. The Company implemented an expansion program to establish
itself as a leader in targeted market areas with high concentrations of small-
and medium-sized businesses. This program included opening new stores and
acquiring stores in strategic markets. At the end of 1995, the Company operated
501 office supply stores in 37 states, the District of Columbia and Canada.
Store opening activity for the last five years is summarized as follows:
Open Open
Beginning Opened/ End
of Period Acquired Closed of Period
- --------------------------------------------------------------------------
1991 173 57 2 228
1992 228 58(1) 2 284
1993 284 68 1 351
1994 351 71 2 420
1995 420 82 1 501(2)
(1) Includes the acquisition of five stores in Canada.
(2) Does not include two Images stores and one Furniture At Work store.
In 1993, the Company expanded into the full service contract stationer
portion of the office supply industry by acquiring two contract stationers with
ten warehouses through the acquisitions of Wilson Stationery and Printing
Company ("Wilson") in May and Eastman Office Products Corporation ("Eastman")
in September, both of which were accounted for as purchases. During 1994, the
Company acquired the outstanding stock of six contract stationers with eight
warehouses; L. E. Muran Co., Inc. and Yorkship Press, Inc. in February, Midwest
Carbon Company and Silver's, Inc. in May, and J.A. Kindel Company and Allstate
Office Products, Inc. in August. Each of these 1994 acquisitions was accounted
for on a "pooling of interests" basis and, accordingly, the accompanying
financial data, statistical data, financial statements and discussions of
financial and other information included for periods prior to the acquisitions
have been restated to reflect the financial position, results of operations and
other information relating to these companies for all periods presented. The
Company operated 23 delivery and contract stationer warehouses throughout the
United States at the end of 1995.
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.
The Company operates on a 52 or 53 week fiscal year ending on the last
Saturday in December. The fiscal years for the financial statements presented
were comprised of the 52 weeks ended December 30, 1995, the 53 weeks ended
December 31, 1994 and the 52 weeks ended December 25, 1993.
RESULTS OF OPERATIONS FOR THE YEARS 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
SALES
Sales increased to $5,313,192,000 in 1995 from $4,266,199,000 in 1994 and
$2,836,787,000 in 1993. Sales in 1995 increased 25% from 1994 sales, and sales
in 1994 increased 50% from 1993 sales. Adjusting for the additional week in
1994, the 1995 sales increase was 27%, and the 1994 sales increase was 47%. The
increases in sales were due primarily to the 81 additional stores in 1995 and
the 69 additional stores in 1994. Sales of computers, business machines and
related supplies have risen as a percentage of total sales over 1993 and 1994
sales in this category. The increases also were attributable to same store
sales growth. Comparable sales in 1995 for the 419 stores and 23 warehouses
open for more than one year at December 30, 1995 increased 17% from 1994.
Comparable sales in 1994 for the 349 stores and 23 warehouses open for more
than one year at December 31, 1994 increased 27% from 1993. Comparable sales in
the future may be affected by competition from other stores, the opening of
additional stores in existing markets and economic conditions.
21
3
Office Depot Inc. And Subsidiaries
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS
(continued)
GROSS PROFIT
Gross profit as a percentage of sales was 22.6% in 1995 and 23.0% in 1994
and 1993. Purchasing efficiencies gained through vendor volume, rebate and
other discount programs, improved inventory loss experience and leveraging
occupancy costs through higher average sales per store were offset by lower
gross margins resulting from an increase in sales of lower margin business
machines and computers, combined with decreased margins in the contract
stationer business. The Company's management believes that gross profit as a
percentage of sales may fluctuate as a result of the continued expansion of its
contract stationer base, the result of competitive pricing in more market
areas, continued change in sales product mix and increased occupancy costs in
certain new markets and in existing markets where the Company desires to add
stores and warehouses in particular locations to complete its market plan, as
well as purchasing efficiencies realized as total merchandise purchases
increase.
STORE AND WAREHOUSE OPERATING AND SELLING EXPENSES
Store and warehouse operating and selling expenses as a percentage of sales
were 14.7% in 1995, 15.1% in 1994 and 14.9% in 1993. Store and warehouse
operating and selling expenses, consisting primarily of payroll and advertising
expenses, have increased in the aggregate primarily 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 and
delivery centers are being opened, as new facilities typically generate lower
sales than the average mature location, resulting in higher operating and
selling expenses as a percentage of sales for new facilities. This percentage
is also affected when the Company enters large metropolitan market areas where
the advertising costs for the full market must be absorbed by the small number
of stores initially opened. As additional stores in these large markets are
opened, advertising costs, which are substantially a fixed expense for a market
area, will be reduced as a percentage of sales. The Company has also continued
a strategy of opening stores in existing markets. While increasing the number
of stores increases operating results in absolute dollars, this also has the
effect of increasing expenses as a percentage of sales since the sales of
certain existing stores in the market may initially be adversely affected. In
addition to the Company's retail expansion, the expenses incurred in the
integration and replacement of acquired facilities in its delivery business has
contributed to increased warehouse expenses.
PRE-OPENING EXPENSES
As a result of continued store and delivery warehouse openings,
pre-opening expenses incurred were $17,746,000 in 1995, $11,990,000 in 1994 and
$9,073,000 in 1993. Pre-opening expenses, which are currently approximately
$150,000 per prototype store and greater for a megastore, are predominately
incurred during a six-week period prior to the store opening. Warehouse
pre-opening expenses approximate $500,000; however, these expenses may vary
with the size of future warehouses. These expenses consist principally of
amounts paid for salaries and property expenses. Since the Company's policy is
to expense these items during the period in which they occur, the amount of
pre-opening expenses in each quarter is generally proportional to the number of
new stores and delivery centers opening.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses as a percentage of sales were 2.9% in
1995, 3.0% in 1994 and 3.4% in 1993. 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 through 1995, the Company increased its commitment to improving the
efficiency of its management information systems and significantly increased
its information systems programming staff. While this increases general and
administrative expenses in current periods, the Company believes the systems
investment will provide benefits in the future. These increases have been
partially offset by a decrease in other general and administrative expenses as
a percentage of sales, primarily as a result of the Company's ability to
increase sales without a proportionate increase in corporate expenditures.
However, there can be no assurance that the Company will be able to continue
to increase sales without a proportionate increase in corporate expenditures.
General and administrative expenses have been higher in the contract
stationers' business than in the retail business.
OTHER INCOME AND EXPENSES
During 1995, 1994 and 1993, interest expense was $22,551,000, $18,096,000
and $11,322,000, respectively. The increase in interest expense is primarily
due to the subordinated debt issued in 1993 and increase in 1995 and 1994 in
the draws on the working capital line of credit. In November 1993, the Company
completed a public offering of
22
4
Office Depot Inc. And Subsidiaries
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS (continued)
zero coupon, convertible, subordinated debt, raising net proceeds of
approximately $185 million. In August 1995, the Company completed a public
offering of 4,325,000 shares of common stock, raising net proceeds of
approximately $121.8 million. As the Company has utilized the funds raised in
its public offerings to fund its expansion, interest income has fluctuated.
Interest income during 1995, 1994 and 1993 was $1,357,000, $4,000,000 and
$4,626,000, respectively.
AMORTIZATION OF GOODWILL
The Company recorded amortization of goodwill of $5,213,000, $5,288,000
and $1,617,000 in 1995, 1994 and 1993, respectively. Goodwill amortization was
higher in 1994 than in 1993, reflecting a full year of amortization arising
from the Wilson and Eastman acquisitions in 1993.
INCOME TAXES
The effective income tax rate for 1995, 1994 and 1993 was negatively
impacted by nondeductible goodwill amortization. The effective income tax rate
for 1994 and 1993 was impacted by the combining of certain acquired companies
which had no provision for income taxes because they were organized as
S Corporations (as defined under income tax laws).
LIQUIDITY & CAPITAL RESOURCES
- -------------------------------------------------------------------------------
Since the Company's inception in March 1986, the Company has relied upon
equity capital, convertible debt, and bank borrowings as the primary sources of
its funds. The Company completed a public offering of zero coupon, convertible,
subordinated debt in 1993 raising net proceeds of approximately $185,000,000.
The Company issued approximately 5.7 million shares of common stock for
acquisitions in 1994. In August 1995, the Company issued 4,325,000 shares of
common stock in a public offering raising net proceeds of $121,799,000.
Since the Company's store sales are substantially on a cash and carry
basis, cash flow generated from operating stores provides a source of liquidity
to the Company. Working capital requirements are reduced by vendor credit terms
that allow the Company to finance a portion of its inventory. The Company
utilizes private label credit card programs administered and financed by
financial services companies, which allow the Company to expand store sales
without the burden of additional receivables. All credit card receivables sold
to the financial services company under one program were sold on a recourse
basis. Proceeds to the Company for such receivables sold with recourse were
approximately $313,000,000, $253,000,000 and $185,000,000 in 1995, 1994 and
1993, respectively. The outstanding balance of such receivables at December 30,
1995 was $54,400,000. The Company has also utilized capital equipment
financings as a source of funds.
Sales made from the customer service centers are generally made under
regular commercial credit terms where the Company carries its own receivables.
As the Company expands the contract stationer portion of its business, it is
expected that the Company's receivables will continue to grow.
The Company added (net of closures) 81 stores in 1995, 69 stores in 1994
and 67 stores in 1993. Net cash provided by operating activities was
$25,974,000, $46,107,000 and $86,226,000 for 1995, 1994 and 1993, respectively.
As stores mature and become more profitable, and as the number of new stores
opened in a year becomes a smaller percentage of the existing store base, cash
generated from operations should provide a greater portion of funds required for
new store inventories and other working capital requirements. Cash generated
from operations will continue to be affected by an increase in receivables
carried without outside financing and increases in inventory at the stores as
the Company continues to expand its efforts in computers and business machines.
Capital expenditures are also affected by the number of stores and warehouses
opened or acquired each year and the increase in computer and other equipment
at the corporate office required to support such expansion. Cash utilized for
capital expenditures (including $22 million for the corporate headquarters in
1994) was $219,892,000 in 1995, $171,810,000 in 1994 and $104,568,000 in 1993.
During 1995, the Company's cash balance increased by $29,587,000 and long-
and short-term debt increased by $100,389,000, including $16,505,000 in
non-cash accretion of interest on the Company's zero coupon, convertible debt.
The Company has a credit agreement with its principal bank and a syndicate
of commercial banks to provide for a working capital line and letters of credit
totaling $300,000,000. The credit agreement provides that funds borrowed will
bear interest, at the Company's option, at either: the higher of the prime rate
or .5% over the Federal Funds rate; the LIBOR rate plus .25% to .375%,
depending on the fixed charge coverage ratio; 1.75% over the Federal Funds rate;
or under a competitive bid facility. The Company must also pay a facility fee
of between .125% and .25% per annum, depending on the Company's fixed charge
coverage ratio on the available and unused portion of the credit facility. The
23
5
Office Depot Inc. And Subsidiaries
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS (continued)
credit facility currently expires June 30, 2000. As of December 30, 1995, the
Company had borrowed $95,000,000 and had outstanding letters of credit totaling
$15,612,000 under the credit facility. The credit agreement contains certain
restrictive covenants relating to various financial statement ratios. In
addition to the credit facility, the bank has provided a lease facility to the
Company under which the bank has agreed to purchase up to $25,000,000 of
equipment on behalf of the Company and lease such equipment to the Company. As
of December 30, 1995, the Company has utilized approximately $7,621,000 of this
lease facility.
The Company plans to open approximately 80 stores and 1 to 2 delivery
warehouses during 1996. Management estimates that the Company's cash
requirements, exclusive of pre-opening expenses, will be approximately
$1,700,000 for each additional store, which includes an average of
approximately $900,000 for leasehold improvements, fixtures, point-of-sale
terminals and other equipment in the stores, as well as approximately $800,000
for the portion of the store inventory that is not financed by vendors. The
cash requirements, exclusive of pre-opening expenses, for a delivery warehouse
is expected to be approximately $5,300,000, which includes an average of
$3,100,000 for leasehold improvements, fixtures and other equipment and
$2,200,000 for the portion of inventory not financed by vendors. In addition,
management estimates that each new store and warehouse requires pre-opening
expenses of approximately $150,000 and $500,000, respectively. Pre-opening
expenses for a megastore will be higher than a regular store. The Company's
management continually reviews its financing options and, although they
currently anticipate that the 1996 expansion, including investments in
international joint ventures, will be financed through cash on hand, funds
generated from operations, equipment leased under the Company's lease facility
and funds borrowed under the Company's revolving credit facility, alternative
financing will be considered if market conditions make it financially
attractive. The Company's financing requirements beyond 1996 will be affected
by the number of new stores or warehouses opened or acquired.
NEW ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
The Company will adopt the following Statements of Financial Accounting
Standards ("SFAS") in the year ending December 28, 1996.
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. Long-lived assets and
certain identifiable intangibles to be held and used by a company are required
to be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Measurement of an impairment loss for such long-lived assets and identifiable
intangibles should be based on the fair value of the asset. Long-lived assets
and certain identifiable intangibles to be disposed of are required to be
reported generally at the lower of the carrying amount or fair value less cost
to sell. SFAS No. 121 is effective for fiscal years that begin after December
15, 1995. Management has not yet determined the effect of SFAS No. 121 on the
Company's financial position or results of operations.
SFAS No. 123, "Accounting for Stock-Based Compensation" establishes
financial accounting and reporting standards for stock-based employee
compensation plans, including stock options, stock purchase plans, restricted
stock and stock appreciation rights. SFAS No. 123 defines and encourages the
use of the fair value method of accounting for employee stock-based
compensation. Continuing use of the intrinsic value based method of accounting
prescribed in Accounting Principles Board Opinion No. 25 ("APB 25") for
measurement of employee stock-based compensation is allowed with pro forma
disclosures of net income and earnings per share as if the fair value method of
accounting had been applied. Transactions in which equity instruments are
issued in exchange for goods or services from non-employees must be accounted
for based on the fair value of the consideration received or of the equity
instrument issued, whichever is more reliably measurable. SFAS No. 123 is
effective for transactions entered into in fiscal years that begin after
December 15, 1995. The Company has determined that it will continue to use the
method of accounting prescribed in APB 25 for measurement of employee
stock-based compensation, and will begin providing the required pro forma
disclosures in its financial statements for the year ending December 28, 1996
as allowed by SFAS No. 123.
24
6
Office Depot Inc. And Subsidiaries
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS (continued)
INFLATION & SEASONALITY
- --------------------------------------------------------------------------------
Although the Company cannot accurately determine the precise effects of
inflation, it does not believe inflation has a material effect on sales or
results of operations. The Company considers its business to be somewhat
seasonal with sales generally slightly higher during the first and fourth
quarters of each year.
STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- --------------------------------------------------------------------------------
In December 1995, the Private Securities Litigation Reform Act of 1995
(the "Act") was enacted. The Act contains amendments to the Securities Act of
1933 and the Securities Exchange Act of 1934 which provide protection from
liability in private lawsuits for "forward-looking" statements made by persons
specified in the Act. The Company desires to take advantage of the "safe
harbor" provisions of the Act.
The Company wishes to caution readers that with the exception of
historical matters, the matters discussed in this Annual Report are
forward-looking statements that involve risks and uncertainties, including but
not limited to factors related to the highly competitive nature of the office
products supply industry and its sensitivity to changes in general economic
conditions, the Company's expansion plans and ability to integrate the acquired
contract stationer businesses, the results of financing efforts and other
factors discussed in the Company's filings with the Securities and Exchange
Commission. Such factors could affect the Company's actual results and could
cause the Company's actual results during 1996 and beyond to differ materially
from those expressed in any forward-looking statement made by or on behalf of
the Company.
25
7
Office Depot Inc. And Subsidiaries
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Office Depot, Inc.
We have audited the consolidated balance sheets of Office Depot, Inc. and
Subsidiaries as of December 30, 1995 and December 31, 1994, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended December 30, 1995. 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 30, 1995 and December 31, 1994 and
the results of their operations and their cash flows for each of the three
years in the period ended December 30, 1995 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
February 12, 1996
26
8
Office Depot Inc. And Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
December 30, December 31, December 25,
1995 1994 1993
- --------------------------------------------------------------------------------------
Sales $5,313,192 $4,266,199 $2,836,787
Cost of goods sold and occupancy costs 4,110,334 3,283,498 2,185,145
- --------------------------------------------------------------------------------------
Gross profit 1,202,858 982,701 651,642
Store and warehouse operating and selling expenses 782,478 642,572 423,272
Pre-opening expenses 17,746 11,990 9,073
General and administrative expenses 153,344 130,022 95,142
Amortization of goodwill 5,213 5,288 1,617
- --------------------------------------------------------------------------------------
958,781 789,872 529,104
---------- ---------- -----------
Operating profit 244,077 192,829 122,538
Other income (expense)
Interest income 1,357 4,000 4,626
Interest expense (22,551) (18,096) (11,322)
Equity and franchise income (loss), net (962) 197 108
- -------------------------------------------------------------------------------------
Earnings before income taxes 221,921 178,930 115,950
Income taxes 89,522 73,973 45,118
- -------------------------------------------------------------------------------------
Net earnings $ 132,399 $ 104,957 $ 70,832
========== ========== ==========
Earnings per common and common equivalent share:
Primary $ .85 $ .69 $ .48
Fully diluted .83 .68 .48
The accompanying notes are an integral part of these statements.
27
9
Office Depot Inc. And Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 30, December 31,
Assets 1995 1994
- -----------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 61,993 $ 32,406
Receivables, net of allowances of $3,808
in 1995 and $3,426 in 1994 380,431 266,629
Merchandise inventories 1,258,413 936,048
Deferred income taxes 18,542 32,093
Prepaid expenses 11,620 7,046
- -----------------------------------------------------------------------------------------------
Total current assets 1,730,999 1,274,222
Property and Equipment, net 565,082 397,229
Goodwill, net of amortization 195,302 200,449
Other Assets 39,834 32,083
- -----------------------------------------------------------------------------------------------
$ 2,531,217 $ 1,903,983
=========== ===========
Liabilities & Stockholders' Equity
- -----------------------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 841,589 $ 609,914
Accrued expenses 166,575 154,894
Income taxes 10,542 18,051
Current maturities of long-term debt 3,309 4,030
- -----------------------------------------------------------------------------------------------
Total current liabilities 1,022,015 786,889
Long-Term Debt, less current maturities 112,340 27,460
Deferred Taxes and Other Credits 11,297 8,023
Zero Coupon, Convertible, Subordinated Notes 382,570 366,340
Commitments and Contingencies - -
Common Stockholders' Equity:
Common stock - authorized 400,000,000 shares of
$.01 par value; issued 157,961,801 in 1995 and
151,536,781 in 1994 1,580 1,515
Additional paid-in capital 605,876 453,117
Foreign currency translation adjustment (794) (3,295)
Retained earnings 398,083 265,684
Less: 2,163,447 shares of treasury stock, at cost (1,750) (1,750)
- -----------------------------------------------------------------------------------------------
1,002,995 715,271
---------- ----------
$2,531,217 $1,903,983
========== ==========
The accompanying notes are an integral part of these statements.
28
10
Office Depot Inc. And Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Period from December 27, 1992 to December 30, 1995
(In thousands, except for number of shares)
Foreign
Common Common Additional Currency
Stock Stock Paid-in Translation Retained Treasury
Shares Amount Capital Adjustment Earnings Stock
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 27, 1992 142,088,182 $1,421 $320,421 $ 98 $ 93,717 $(1,750)
Issuance of common stock for
acquisitions 5,035,401 50 94,647 - - -
Exercise of stock options
(including tax benefits) 1,841,505 18 11,272 - - -
Sale of stock under employee
purchase plan 89,489 1 1,604 - - -
401k plan matching contributions 59,619 1 947 - - -
S corporation distribution to stockholders - - - - (3,280) -
Foreign currency translation adjustment - - - 285 - -
Net earnings for the period - - - - 70,832 -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 25, 1993 149,114,196 1,491 428,891 383 161,269 (1,750)
Exercise of stock options
(including tax benefits) 2,137,696 21 17,526 - - -
Sale of stock under employee
purchase plan 199,974 2 4,651 - - -
401k plan matching contributions 84,915 1 2,049 - - -
S corporation distribution to stockholders - - - - (542) -
Foreign currency translation adjustment - - - (3,678) - -
Net earnings for the period - - - - 104,957 -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 151,536,781 1,515 453,117 (3,295) 265,684 (1,750)
Issuance of common stock 4,325,000 43 121,756 - - -
Exercise of stock options
(including tax benefits) 1,751,620 17 22,146 - - -
Sale of stock under employee
purchase plan 274,161 3 7,019 - - -
401k plan matching contributions 59,438 1 1,564 - - -
Conversion of LYONs to common stock 14,801 1 274 - - -
Foreign currency translation adjustment - - - 2,501 - -
Net earnings for the period - - - - 132,399 -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 30, 1995 157,961,801 $1,580 $605,876 $ (794) $ 398,083 $(1,750)
=========== ====== ======== ====== ========= =======
The accompanying notes are an integral part of these statements.
29
11
Office Depot Inc. And Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Change in Cash and Cash Equivalents
(in thousands)
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
December 30, December 31, December 25,
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Cash received from customers $ 5,243,724 $ 4,208,675 $ 2,805,053
Cash paid for inventory (4,090,129) (3,239,438) (2,130,771)
Cash paid for store and warehouse operating,
selling and general and administrative
expenses (1,045,448) (860,354) (559,440)
Interest received 1,357 4,296 4,654
Interest paid (5,665) (2,078) (2,595)
Taxes paid (77,865) (64,994) (30,675)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 25,974 46,107 86,226
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Capital expenditures - net (219,892) (171,810) (104,568)
Purchase of Eastman common stock - - (20,001)
Acquisition of cash overdraft assumed, net _ _ (4,106)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (219,892) (171,810) (128,675)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from exercise of stock options and sales of
stock under employee stock purchase plan 20,883 14,976 10,308
Proceeds from stock offering 121,799 _ _
Foreign currency translation adjustment 2,501 (3,678) 285
Proceeds from long- and short-term borrowings 178,410 30,466 231,359
Payments on long- and short-term borrowings (100,088) (25,584) (188,722)
S corporation distribution to stockholders _ (542) (3,280)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 223,505 15,638 49,950
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 29,587 (110,065) 7,501
Cash and cash equivalents at beginning of period 32,406 142,471 134,970
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 61,993 $ 32,406 $ 142,471
=========== =========== ===========
Reconciliation of net earnings to net cash
provided by operating activities
Net earnings $ 132,399 $ 104,957 $ 70,832
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization 64,830 49,585 31,762
Accreted interest on convertible, subordinated notes 16,505 16,042 8,754
Contributions of common stock to employee benefit
and stock purchase plans 2,271 2,458 1,107
Changes in assets and liabilities (net of effect in 1993 of
the Eastman and Wilson acquisitions)
Increase in receivables (113,802) (64,640) (50,200)
Increase in merchandise inventories (322,365) (272,901) (151,991)
Increase in prepaid expenses, deferred income
taxes and other assets (583) (18,337) (15,646)
Increase in accounts payable, accrued
expenses and deferred credits 246,719 228,943 191,608
- ----------------------------------------------------------------------------------------------------------------------
Total adjustments (106,425) (58,850) 15,394
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 25,974 $ 46,107 $ 86,226
=========== =========== ===========
The accompanying notes are an integral part of these statements.
30
12
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 national
chain of high-volume office supply stores and contract stationer/delivery
warehouses. The Company was incorporated in March 1986 and opened its first
store in October 1986.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated in consolidation. Investments in joint ventures are
accounted for using the equity method.
The Company is on a 52 or 53 week fiscal year ending on the last Saturday
in December. The fiscal years presented in the financial statements include 52
weeks in 1995, 53 weeks in 1994 and 52 weeks in 1993.
All common stock share and per share amounts for all periods presented
have been adjusted for two three-for-two stock splits in June
1994 and June 1993 effected in the form of stock dividends.
Certain reclassifications were made to prior year statements to conform to
current year presentations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers any highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
RECEIVABLES
Receivables as of December 30, 1995 and December 31, 1994 are comprised of
trade receivables not financed through outside programs, totaling approximately
$187,476,000 and $119,203,000, respectively, as well as amounts due from
others. An allowance for doubtful accounts is provided for estimated amounts
considered to be uncollectible. The credit risk related to these trade
receivables is limited due to the large number of customers comprising the
Company's customer base, and their dispersion across many different industries
and geographies.
Amounts due from others, totaling approximately $192,955,000 and
$147,426,000 as of December 30, 1995 and December 31, 1994, respectively,
consist primarily of estimated receivables from vendors under various rebate,
cooperative advertising and miscellaneous marketing programs. Funds received
from vendors under rebate and miscellaneous marketing programs related to the
purchase price of merchandise inventories are capitalized and recognized
as a reduction of cost of sales as merchandise is sold. Amounts relating to
cooperative advertising and marketing are recognized as a reduction of
advertising expense in the period that the related expenses are incurred.
MERCHANDISE INVENTORIES
Inventories are stated at the lower of weighted average cost or market
value.
INCOME TAXES
The Company provides for Federal and state income taxes currently payable
as well as deferred income taxes resulting from temporary differences between
the basis of assets and liabilities for tax purposes and for financial
statement purposes using the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Under this standard, deferred
tax assets and liabilities represent the tax effects, based on current tax law,
of future deductible or taxable amounts attributable to events that have been
recognized in the financial statements.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation and amortization
are provided in amounts sufficient to relate the cost of depreciable assets
to operations over their estimated useful lives on a straight line basis.
Estimated useful lives are 30 years for buildings and 3 to 10 years
for furniture, fixtures and equipment. Leasehold improvements are amortized over
the lesser of the terms of the respective leases, including applicable renewal
periods, or the service lives of the improvements. The Company capitalized
interest costs of approximately $600,000 in 1995 and $1,000,000 in 1994 as part
of the cost of major asset construction projects. Since there were no such
projects in 1993, no interest costs were capitalized in that year.
31
13
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 $12,164,000 and $6,946,000 as of December 30, 1995 and December
31, 1994, respectively. Management periodically evaluates the recoverability of
goodwill, which would be adjusted for a permanent decline in value, if any, as
measured by projected undiscounted future cash flows from the acquired
businesses.
ADVERTISING
Advertising costs are charged to expense when incurred. The Company and
its vendors participate in cooperative advertising programs in which the
vendors reimburse the Company for a portion of certain advertising costs.
Advertising expense, net of vendor reimbursements, amounted to $42,878,000 in
1995, $45,361,000 in 1994, and $28,270,000 in 1993.
PRE-OPENING EXPENSES
Pre-opening expenses related to new store and delivery warehouse openings
are expensed as incurred.
POSTRETIREMENT BENEFITS
The Company does not currently provide postretirement benefits for its
employees.
INSURANCE RISK RETENTION
The Company retains certain risks for workers' compensation, general
liability and employee medical programs and accrues estimated liabilities on an
undiscounted basis for known claims and claims incurred but not reported.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about
Fair Value of Financial Instruments," requires disclosure of the fair value of
financial instruments, both assets and liabilities, recognized and not
recognized in the Consolidated Balance Sheets of the Company, for which it is
practicable to estimate fair value. The estimated fair values of financial
instruments which are presented herein have been determined by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgment is required in interpreting market data to develop
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of amounts the Company could realize in a current
market exchange.
The following methods and assumptions were used to estimate fair value:
- the carrying amounts of cash and cash equivalents, receivables and
accounts payable approximate fair value due to their short term nature;
- discounted cash flows using current interest rates for financial
instruments with similar characteristics and maturity were used to
determine the fair value of short-term and long-term debt; and,
- market prices were used to determine the fair value of the zero coupon,
convertible, subordinated notes.
There were no significant differences as of December 30, 1995 and December
31, 1994 in the carrying value and fair value of financial instruments
except for the zero coupon, convertible, subordinated notes which had a
carrying value of $382,570,000 and $366,340,000 and a fair value of
$422,407,000 and $407,675,000 at the end of 1995 and 1994, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
The Company will adopt the following Statements of Financial Accounting
Standards ("SFAS") in the year ending December 28, 1996.
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of. Long-lived assets and
certain identifiable intangibles to be held and used by a company are required
to be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Measurement of an impairment loss for such long-lived assets and identifiable
intangibles should be based on the fair value of the asset. Long-lived assets
and certain identifiable intangibles to be disposed of are required to be
reported generally at the lower of the carrying amount or fair value less cost
to sell. SFAS No. 121 is effective for fiscal years that begin after
December 15, 1995. Management has not yet determined the effect of
SFAS No. 121 on the Company's financial position or results of operations.
SFAS No. 123, "Accounting for Stock-Based Compensation" estab-
32
14
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
lishes financial accounting and reporting standards for stock-based employee
compensation plans, including stock options, stock purchase plans, restricted
stock, and stock appreciation rights. SFAS No. 123 defines and encourages the
use of the fair value method of accounting for employee stock-based
compensation. Continuing use of the intrinsic value based method of accounting
prescribed in Accounting Principles Board Opinion No. 25 ("APB 25") for
measurement of employee stock-based compensation is allowed with pro forma
disclosures of net income and earnings per share as if the fair value method of
accounting had been applied. Transactions in which equity instruments are
issued in exchange for goods or services from non-employees must be accounted
for based on the fair value of the consideration received or of the equity
instrument issued, whichever is more reliably measurable. SFAS No. 123 is
effective for transactions entered into in fiscal years that begin after
December 15, 1995. The Company has determined that it will continue to use the
method of accounting prescribed in APB 25 for measurement of employee
stock-based compensation, and will begin providing the required pro forma
disclosures in its financial statements for the year ending December 28, 1996
as allowed by SFAS No. 123.
NOTE B - PROPERTY & EQUIPMENT
- -------------------------------------------------------------------------------
Property and equipment consists of:
December 30, December 31,
1995 1994
- ------------------------------------------------------------------------
(in thousands)
Land $ 64,094 $ 38,058
Buildings 66,703 31,619
Leasehold improvements 278,821 215,503
Furniture, fixtures and equipment 338,308 239,170
- ------------------------------------------------------------------------
747,926 524,350
Less accumulated depreciation and
amortization 182,844 127,121
- ------------------------------------------------------------------------
$565,082 $397,229
======== ========
Equipment held under capital leases included in furniture, fixtures and
equipment above consists of:
December 30, December 31,
1995 1994
- ------------------------------------------------------------------------
(in thousands)
Equipment $22,439 $15,681
Less accumulated depreciation 12,919 12,258
- ------------------------------------------------------------------------
$ 9,520 $ 3,423
======= =======
NOTE C LONG-TERM DEBT
- --------------------------------------------------------------------------------
Long-term debt consists of the following:
December 30, December 31,
1995 1994
- ---------------------------------------------------------------------------
(in thousands)
Capital lease obligations
collateralized by certain
equipment and fixtures $ 8,570 $ 3,417
13% senior subordinated notes,
unsecured and due 2002 9,888 10,126
Non-interest bearing promissory note,
due February 1996, guaranteed by an
irrevocable letter of credit 1,980 -
Bank borrowings 95,000 15,000
Installment notes, interest
rates ranging from 5.9% to 18.7%,
payable in monthly installments
through 2007, collateralized by
certain equipment 211 2,947
- ------------------------------------------------------------------------
115,649 31,490
Less current portion 3,309 4,030
- ------------------------------------------------------------------------
$112,340 $27,460
======== =======
33
15
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE C - LONG-TERM DEBT (continued)
- -------------------------------------------------------------------------------
The Company has a credit agreement with its principal bank and a syndicate
of commercial banks to provide for a working capital line and letters of credit
totaling $300,000,000. The agreement provides that funds borrowed will bear
interest, at the Company's option, at either: the higher of the prime rate or
.5% over the Federal Funds rate; the LIBOR rate plus .25% to .375%, depending
on the fixed charge coverage ratio; 1.75% over the Federal Funds rate; or under
a competitive bid facility. The Company must also pay a fee of between .125%
and .25% per annum, depending on the Company's fixed charge coverage ratio, on
the available and unused portion of the credit facility. The credit facility
expires in June 2000. In addition to the credit facility, the bank has provided
a lease facility to the Company under which the bank has agreed to purchase up
to $25,000,000 of equipment on behalf of the Company and lease such equipment
to the Company. As of December 30, 1995, the Company had $95,000,000 of
outstanding borrowings under the revolving credit facility and had utilized
approximately $7,621,000 of the lease facility. Additionally, the Company had
outstanding letters of credit under the credit agreement totaling $15,612,000
as of December 30, 1995. The loan agreement contains covenants relating to
maintaining various financial statement ratios.
Contractual maturities of long-term debt are as follows:
December 30,
1995
-------------------------------------
(in thousands)
1996 $ 3,309
1997 1,964
1998 1,841
1999 1,903
2000 96,849
Thereafter 9,783
--------------------------------
$115,649
========
Future minimum lease payments under capital leases together with the present
value of the net minimum lease payments as of December 30, 1995 are as follows:
December 30,
1995
-------------------------------------------
(in thousands)
1996 $1,759
1997 1,692
1998 1,718
1999 1,680
2000 1,288
Thereafter 1,000
------------------------------------
Minimum lease payments 9,137
Less: amount representing
interest at 9.5% to 15.0% 567
------------------------------------
Present value of net minimum
lease payments 8,570
Less: current portion 1,318
------------------------------------
Non-current portion $7,252
======
34
16
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE D - ZERO COUPON, CONVERTIBLE, SUBORDINATED NOTES
- --------------------------------------------------------------------------------
On December 11, 1992, the Company issued $316,250,000 principal amount of
Liquid Yield Option Notes (LYONs) with a price to the public of $150,769,000.
The issue price of each such LYON was $476.74 and there will be no periodic
payments of interest. The LYONs will mature on December 11, 2007 at $1,000 per
LYON, representing a yield to maturity of 5% (computed on a semi-annual bond
equivalent basis).
On November 1, 1993, the Company issued $345,000,000 principal amount of
LYONs with a price to the public of $190,464,000. The issue price of each such
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 29.263
shares per 1992 LYON and 21.234 shares per 1993 LYON. The LYONs may be required
to be purchased by the Company, at the option of the holder, as of December 11,
1997 and December 11, 2002 for the 1992 LYONs and as of November 1, 2000 for
the 1993 LYONs, at the issue price plus accrued original issue discount. The
Company, at its option, may elect to pay the purchase price on any particular
purchase date in cash or common stock, or any combination thereof. During 1995,
$506,000 par value of 1992 LYONs were converted to 14,801 shares of common
stock of the Company for an aggregate conversion price of approximately
$275,000, including accrued interest.
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.
35
17
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE E - INCOME TAXES
- --------------------------------------------------------------------------------
The income tax provision consists of the following:
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
December 30, December 31, December 25,
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
(in thousands)
Current
Federal $65,573 $62,211 $40,068
State 12,613 14,616 9,449
Deferred (benefit) 11,336 (2,854) (4,399)
- ------------------------------------------------------------------------------------------------------------
Total provision for income taxes $89,522 $73,973 $45,118
======= ======= =======
The tax effected components of deferred income tax accounts consist of
the following:
As of As of As of
December 30, December 31, December 25,
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
(in thousands)
Interest premium on notes redeemed $ 2,004 $ 4,944 $ 7,832
Self-insurance accruals 5,839 8,302 6,466
Inventory costs capitalized for tax purposes 2,797 4,483 3,215
Other items, net 24,308 20,563 14,435
- --------------------------------------------------------------------------------------------------------
Deferred tax assets 34,948 38,292 31,948
- --------------------------------------------------------------------------------------------------------
Excess of tax over book depreciation 7,468 3,524 3,208
Capitalized leases 4,781 4,509 3,160
Other items, net 8,819 5,043 3,218
- --------------------------------------------------------------------------------------------------------
Deferred tax liabilities 21,068 13,076 9,586
- --------------------------------------------------------------------------------------------------------
Net deferred tax assets $13,880 $25,216 $22,362
======= ======= =======
The following schedule is a reconciliation of income taxes at the
federal statutory rate to the provision for income taxes:
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
December 30, December 31, December 25,
1995 1994 1993
- --------------------------------------------------------------------------------------------------------
(in thousands)
Tax computed at the statutory rate $77,672 $62,626 $40,583
State taxes net of federal benefit 8,877 8,944 5,748
Effect of S Corporation income prior
to acquisitions _ (1,161) (1,709)
Nondeductible goodwill amortization 1,843 1,955 483
Other items, net 1,130 1,609 13
- --------------------------------------------------------------------------------------------------------
Provision for income taxes $89,522 $73,973 $45,118
======= ======= =======
Four of the contract stationers acquired in 1994 were organized as S
Corporations and, therefore, did not provide for income taxes prior to their
respective acquisitions.
36
18
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE F - COMMITMENTS & 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 1996 and
2020. 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 30,
1995
- ---------------------------------------
(in thousands)
1996 $ 142,155
1997 132,099
1998 121,660
1999 111,117
2000 95,794
Thereafter 532,366
- ---------------------------------------
$1,135,191
==========
The above amounts include 42 stores leased but not yet opened as of
December 30, 1995. The Company is in the process of opening new stores and
delivery warehouses in the ordinary course of business, and leases signed
subsequent to December 30, 1995 are not included in the above described
commitment amount. Rent expense, including equipment rental, was approximately
$154,633,000, $124,693,000 and $94,017,000, during 1995, 1994 and 1993,
respectively.
OTHER
Certain holders of the Company's common stock have limited demand
registration rights. The cost of such registration will generally be borne by
the Company.
The Company is involved in litigation arising in the normal course of
its business. In the opinion of management, these matters will not materially
affect the financial position or results of operations of the Company.
As of December 30, 1995, the Company has reserved 16,565,515 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 30, 1995, the Company had reserved 11,639,710 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 Omnibus Equity Plan, and its Directors Stock Option Plan. Under these
plans, the option price must be equal to or in excess of the market price of
the stock on the date of the grant or, in the case of employees who own 10%
or more of common stock, the minimum price must be 110% of the market price.
Options granted to date become exercisable from one to four years after
the date of grant, provided that the individual is continuously employed by the
Company. All options expire no more than ten years after the date of grant.
Options to purchase 4,774,106 shares were exercisable at December 30, 1995. No
amounts have been charged to income under the plans.
37
19
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE G - EMPLOYEE BENEFIT PLANS (continued)
- ---------------------------------------------------------------------------
Number of Option Price
Shares Per Share
- ---------------------------------------------------------------------------
Outstanding at December 27, 1992 8,736,195 $ .02 - 15.28
Granted 2,214,702 $ 13.22 - 23.84
Canceled 449,628 $ 1.76 - 17.92
Exercised 1,785,528 $ .30 - 15.00
- ---------------------------------------------------------------------------
Outstanding at December 25, 1993 8,715,741 $ .02 - 23.84
Granted 1,944,002 $ 20.00 - 26.50
Canceled 342,094 $ 2.09 - 25.13
Exercised 1,948,270 $ .02 - 21.92
- ---------------------------------------------------------------------------
Outstanding at December 31, 1994 8,369,379 $ .02 - 26.50
Granted 1,983,750 $ 19.69 - 31.94
Canceled 291,487 $ 5.89 - 31.00
Exercised 1,735,841 $ .02 - 26.50
- ---------------------------------------------------------------------------
Outstanding at December 30, 1995 8,325,801 $ 2.21 - 31.94
=========
EMPLOYEE STOCK PURCHASE PLAN
In October 1989, the Board of Directors approved an Employee Stock
Purchase Plan, which permits eligible employees to purchase common stock from
the Company at 90% of its fair market value through regular payroll deductions.
The maximum aggregate number of shares eligible for purchase under the plan is
1,125,000.
RETIREMENT SAVINGS PLAN
In February 1990, the Board of Directors approved a Retirement Savings
Plan, which permits eligible employees to make contributions to the plan on a
pretax salary reduction basis in accordance with the provisions of Section
401(k) of the Internal Revenue Code. The Company makes a matching stock
contribution of 50% of the employee's pretax contribution up to a maximum of 3%
of the employee's compensation in any calendar year. The Retirement Savings
Plans of the acquired companies were merged into the Company's Plan during 1994
and 1995.
NOTE H - CAPITAL STOCK
- --------------------------------------------------------------------------------
In August 1995, the Company completed a public offering of 4,325,000
shares of common stock, raising net proceeds of approximately $121,799,000.
As of December 30, 1995, there was 1,000,000 shares of $.01 par value
preferred stock authorized of which none are issued or outstanding.
38
20
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE I - PURCHASE OF EASTMAN AND WILSON
- --------------------------------------------------------------------------------
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 995,821 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
4,039,580 shares of common stock with a market value of approximately
$79,707,000 and paid $20,001,000 in cash. This acquisition was accounted for as
a purchase. 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 the straight-line
method. The Company's Consolidated Statements of Earnings include the operating
results of acquisitions from the respective dates of the purchases.
NOTE J - SUPPLEMENTAL INFORMATION OF NON-CASH INVESTING AND FINANCING ACTIVITIES
- --------------------------------------------------------------------------------
The Consolidated Statements of Cash Flows for 1995, 1994 and 1993 do not
include the following non-cash investing and financing transactions:
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
December 30, December 31, December 25,
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
(in thousands)
Equipment purchased under capital
leases $5,836 - -
Conversion of convertible, subordinated
debt to common stock 275 - -
Additional paid-in capital related to tax
benefit on stock options exercised 7,598 $6,816 $ 3,525
Acquisition of net assets of Wilson and Eastman:
Fair value of assets acquired (including goodwill) - - 333,805
Liabilities assumed - - (219,097)
-------------------------------------------------------------------------------------------------------
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 related to one of
these programs were sold on a recourse basis. Proceeds to the Company for such
receivables sold with recourse were approximately $313,000,000, $253,000,000 and
$185,000,000 in 1995, 1994 and 1993, respectively. The Company's maximum
exposure to off-balance sheet credit risk is represented by the outstanding
balance of private label credit card receivables with recourse, which totaled
approximately $54,400,000 at December 30, 1995. 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 the sale to
the financial services company.
39
21
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE L - NET EARNINGS PER SHARE
- --------------------------------------------------------------------------------
Net earnings per common and common equivalent share is based upon the
weighted average number of shares and equivalents outstanding during each
period. Stock options are considered common stock equivalents. The zero coupon,
convertible, subordinated notes are not common stock equivalents. Net earnings
per common share assuming full dilution was determined on the assumption that
the convertible notes were converted as of the beginning of the period or
when issued. Net earnings under this assumption has been adjusted for interest
net of its tax effect.
The information required to compute net earnings per share on a primary and
fully diluted basis is as follows:
52 Weeks 53 Weeks 52 Weeks
Ended Ended Ended
December 30, December 31, December 25,
1995 1994 1993
- ----------------------------------------------------------------------------------------------
(in thousands)
Primary:
Weighted average number of common and
common equivalent shares 155,551 152,570 147,640
======== ======== ========
Fully diluted:
Net earnings $132,399 $104,957 $ 70,832
Interest expense related to convertible
notes, net of tax 10,068 9,359 5,340
--------------------------------------------------------------------------------------------
Adjusted net earnings $142,467 $114,316 $ 76,172
======== ======== ========
Weighted average number of common and
common equivalent shares 155,674 152,654 147,959
Shares issued upon assumed conversion
of convertible notes 16,568 16,580 10,466
--------------------------------------------------------------------------------------------
Shares used in computing net earnings per
common and common equivalent share
assuming full dilution 172,242 169,234 158,425
======== ======== ========
40
22
Office Depot Inc. And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE M - QUARTERLY FINANCIAL DATA (Unaudited)
- --------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
(in thousands, except per share data)
Fiscal Year Ended
December 30, 1995
Net sales $1,351,212 $1,200,410 $1,337,108 $1,424,462
Gross profit(1) 304,829 271,804 307,490 318,735
Net earnings 32,474 27,418 36,842 35,665
---------- ---------- ---------- ----------
Net earnings per common
share (fully diluted) $ .21 $ .18 $ .23 $ .22
========== ========== ========== ==========
Fiscal Year Ended
December 31, 1994
Net sales $1,041,396 $ 924,676 $1,044,815 $1,255,312
Gross profit(1) 236,937 215,600 243,538 286,626
Net earnings 24,546 20,809 27,411 32,191
---------- ---------- ---------- ----------
Net earnings per common
share (fully diluted) $ .16 $ .14 $ .18 $ .20
========== ========== ========== ==========
_______________________
(1) Gross profit is net of occupancy costs.
41