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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 26, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-10948
OFFICE DEPOT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-2663954
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
2200 OLD GERMANTOWN ROAD, 33445
DELRAY BEACH, FLORIDA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 561/438-4800
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
Common Stock, par value $0.01 per share..................... New York Stock Exchange
Preferred Share Purchase Rights............................. New York Stock Exchange
Liquid Yield Option Notes due 2007 convertible into Common
Stock..................................................... New York Stock Exchange
Liquid Yield Option Notes due 2008 convertible into Common
Stock..................................................... New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 5, 1999 was approximately $8,413,828,062.
As of March 5, 1999, the Registrant had 248,983,334 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended December 26, 1998 are incorporated by reference in Part II, and the
Proxy Statement to be mailed to stockholders on or about March 19, 1999 for the
Annual Meeting to be held on April 21, 1999 is incorporated by reference in Part
III.
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PART I
ITEM 1. BUSINESS.
GENERAL
Office Depot, Inc. ("Office Depot" or the "Company") is the largest
supplier of office products and services in the world. The Company sells to
consumers and businesses of all sizes through three business segments -- Stores,
Business Services and International. The Company operates on a 52 or 53 week
fiscal year ending on the last Saturday in December.
Stock Split
On February 24, 1999, the Company's Board of Directors declared a
three-for-two stock split in the form of a 50% stock dividend payable on April
1, 1999 to stockholders of record on March 11, 1999. With the exception of pro
forma earnings per share, share and per share information in this Form 10-K does
not reflect this stock split.
Stores
Office Depot began its operations by opening its first retail office supply
store in Florida in October 1986. Through its Stores Division, as of March 12,
1999, it operated 706 retail office supply stores in 41 states, the District of
Columbia and 5 Canadian provinces.
The Company's stores use a warehouse format. This method of retailing
involves the display of merchandise using low-profile fixtures, pallets, bins
and industrial steel shelving that permit the bulk stacking of inventory and
quick and efficient restocking. Shelving is positioned to form aisles large
enough to comfortably accommodate customer traffic and merchandise movement. The
stores carry a wide selection of merchandise, including brand name office
supplies, business machines and computers, computer software, office furniture
and other business-related products. The stores sell primarily to small
offices/home offices and individual consumers. Each Office Depot store also
contains a multipurpose print and copy center offering printing, copying and a
wide assortment of other services. The stores' sales staff includes specialists
who are trained to answer customer questions regarding a wide variety of
technology-oriented products.
The Company's expansion program is carried out either by leasing existing
retail space and renovating it according to Office Depot's specifications or by
constructing new space. Prior to selecting a new store site, the Company obtains
detailed demographic information indicating business concentrations, traffic
counts, population, income levels and future growth prospects. The Company's
stores are located primarily in suburban strip shopping centers on major
commercial roadways where the cost of space is generally lower than at urban
locations. These suburban locations are generally more accessible to the
Company's primary customers, have convenient parking and readily receive
inventory on a daily basis.
The Company's retail stores average 27,500 square feet and conform to a
model designed to achieve cost efficiency by minimizing rent and eliminating the
need for a central warehouse. Each store displays virtually all of its inventory
on the sales floor according to a uniform store layout plan. This plan is
intended to display merchandise effectively, use merchandising space efficiently
and provide customers with a consistent and appealing store layout. In 1998, the
Company accelerated its store remodeling program and remodeled approximately 200
of its stores to a newer and more appealing store layout.
Prior to being displayed on the sales floor, inventory is labeled for
automatic processing. Sales are processed through sophisticated registers
located at the front of the store. In the retailing business, different products
are managed and referred to using unique alpha-numeric codes known as
stock-keeping-units, or "SKUs." Each day, sales and inventory information are
transmitted by SKU to the Company's central computer system, and pricing
information is transmitted from the central computer system to the stores.
Rather than individually price marking each product, a master sign for each
product displays its price. As price changes occur, new master signs are
automatically generated for the product display and the new prices are reflected
in the register, allowing the Company to avoid labor costs associated with price
remarking.
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The Company's overall business strategy for its Stores Division is to
increase the sales and profitability of existing stores and to add new stores in
locations where the Company can establish a significant market presence. Store
opening activity for the last five years is summarized as follows:
OPEN AT
BEGINNING OPEN AT END
OF YEAR OPENED CLOSED RELOCATED OF YEAR
------------ ------ ------ --------- -----------
1994.................................... 351 71 2 1 420
1995.................................... 420 82 1 6 501
1996.................................... 501 60 -- 3 561
1997.................................... 561 42 1 2 602
1998.................................... 602 101 1 5 702
The rate of new store openings during 1997 and the first nine months of
1998 was reduced because of uncertainty associated with the proposed merger with
Staples, Inc. ("Staples"), which was terminated in July 1997. By the fourth
quarter of 1998, however, the Company restaffed its real estate department and
significantly increased the pace of store openings. The Company currently plans
to open at least 105 stores in the United States and Canada during 1999.
Business Services
In the early 1990's, Office Depot expanded its delivery business and began
offering contract stationer services. Through its contract stationer operations,
the Company provides a wide variety of office products to medium and large
business customers who have continuing relationships with the Company, often
through contractual agreements. The customer relationship is typically managed
by a dedicated sales organization.
The Company's Business Services Group offers delivery and contract services
to individuals, small and home office businesses, larger businesses, educational
institutions and government agencies through catalogs, contract and public web
sites and a dedicated sales force.
The Company provides its contract and commercial customers access to a
broad selection of stocked office products and office furniture, as well as
special order items. In addition, the Company provides its contract customers
with specialized services designed to aid them in achieving improved
efficiencies and a significant reduction in their overall office products and
office furniture costs. These services include electronic ordering, stockless
office procurement, desktop delivery and comprehensive product usage reports.
Office Depot currently operates customer service centers ("CSCs") in 18
states. CSCs, which range in size from 51,000 to 662,000 square feet, serve as
warehouse and delivery facilities. Many also house sales offices, call centers
and administrative offices. Most of the Company's delivery business is handled
through these facilities. The Company believes that its CSCs, along with their
surrounding satellite facilities, provide cost effective and efficient delivery
services to its customers in the 48 contiguous states. In 1998, the Company
merged with Viking Office Products, Inc. ("Viking"), a global direct marketing
office products company, significantly increasing the customer base and
marketing expertise of the Business Services Group.
In 1998, prior to the merger with Viking, the Company completed the
integration of its Office Depot CSCs into a national delivery network. This
integration included replacing and significantly expanding a number of existing
facilities with larger, more efficient CSCs and installing uniform order entry,
warehouse management and routing systems. Customers place orders by phone, fax,
electronic data interchange ("EDI") and e-commerce (Internet/intranet). Orders
are routed to the appropriate CSC for delivery. If an item is not in stock, the
order is automatically routed to a wholesaler. Wholesaler orders are generally
delivered to the CSC the same day, enabling Office Depot to deliver complete
orders to its customers the next day.
With the addition of 10 facilities through its merger with Viking, the
Company currently operates 30 CSCs. In formulating its strategy for integrating
the two companies, the Company has announced plans to close several facilities
by the end of 2000. See MERGERS AND ACQUISITIONS for further discussion of the
merger.
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In January 1998, the Company introduced the Office Depot Internet site
(www.officedepot.com), expanding its e-commerce capabilities beyond the existing
contract web site. The Company's web site provides customers with the same
assortment of products offered to its catalog customers with the convenience of
electronic ordering. It also provides news articles that would be of interest to
small office/home office businesses as well as pertinent information about
Office Depot.
The Company's strategies for growing its Business Services Group include
continuing to build and expand upon its integrated national network to provide
efficient and effective delivery services to customers. During 1998, the Company
completed the consolidation of its five Office Depot CSCs in California into two
larger facilities. The Company will begin integrating the Viking order entry,
warehouse management and routing systems into its national network in 1999.
Additionally, the Business Services Group plans to increase its penetration into
new and existing markets by expanding the coverage of its contract sales force,
which currently exceeds 900 account executives, and by increasing the frequency
and variety of its direct mail catalogs.
International
The Viking brand launched its international expansion in 1990 with the
opening of its United Kingdom operations. The first Office Depot store outside
of the United States and Canada opened in Colombia in late 1993. Today, the
Company's International Division has expanded its international retail and
catalog business to include operations in 17 countries outside of the United
States and Canada.
The International Division operates retail office supply stores and
provides catalog and delivery services to customers in Australia, Austria,
Belgium, Colombia, France, Germany, Hungary, Ireland, Israel, Italy, Japan,
Luxembourg, Mexico, The Netherlands, Poland, Thailand and United Kingdom. In
addition to delivery warehouses, certain of the Company's international CSCs
house call centers and administrative offices. While most of the International
Group's operations are wholly-owned, certain countries operate under license and
joint venture agreements. Stores, call centers, and CSCs open as of December 26,
1998 were located in the following countries:
COUNTRY STORES CALL CENTERS CUSTOMER SERVICE CENTERS
- ------- ------ ------------ ------------------------
Australia(4)................................... -- 1 2
Austria........................................ -- 1 --
Colombia(1).................................... 4 -- --
France(3)(4)................................... 15 1 2
Germany........................................ -- -- 2
Hungary(1)..................................... 3 -- --
Ireland(4)..................................... -- 1 1
Israel(2)...................................... 15 -- 1
Italy.......................................... -- 1 1
Japan(2)....................................... 3 -- 2
Mexico(2)...................................... 34 -- 2
The Netherlands................................ -- 1 1
Poland(1)...................................... 11 -- --
Thailand(2).................................... 2 -- --
United Kingdom(4).............................. -- 3 3
--- --- ---
Total................................ 87 9 17
=== === ===
- ---------------
(1) Operated under license agreements.
(2) Operated under joint venture agreements.
(3) In November 1998, the Company purchased its joint venture partner's 50%
ownership share in its French operations, making France a wholly-owned
operation. See MERGERS AND ACQUISITIONS.
(4) The call centers are housed inside the customer service centers.
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MERGERS AND ACQUISITIONS
On August 26, 1998, the Company completed its merger with Viking. In
conjunction with the merger, each outstanding share of Viking common stock was
converted into one share of Office Depot common stock. The merger was accounted
for as a pooling of interests. Accordingly, all financial data, statistical
data, financial statements and discussions of financial and other information
have been restated to include Viking's information as if the merger had taken
place at the beginning of the periods reported.
In September 1998, in formulating its strategy for integrating Office Depot
and Viking, management announced plans to close several facilities by the end of
2000. The facilities to be closed are either redundant or handle business that
can be more efficiently handled by other existing facilities. The Company
recorded costs of $108.1 million during the year ended December 26, 1998 that
were directly related to the Viking merger. These costs consisted of legal fees,
investment banker fees, asset impairment associated with the closure of
identified facilities, write-off of software applications to be abandoned,
personnel costs and other facility exit and integration costs. For additional
information regarding the restructuring, refer to Management's Discussion and
Analysis incorporated by reference in Item 7 of this report.
In November 1998, the Company increased its ownership position in its
operations in France from 50% to 100% by purchasing for $27.7 million its joint
venture partner's ownership share. As a result of the purchase, the Company
recorded goodwill of $20.2 million.
RESTRUCTURING
In addition to the Company's core office products retail and delivery
businesses, the Company has also operated the following concepts:
Images(TM) and Office Depot Express(TM) -- Retail stores located in South
Florida that provide graphics design, printing, copying, shipping and
fulfillment services as well as a limited assortment of office supplies.
Furniture At Work(TM) -- Retail office furniture stores offering a broad
line of office furniture, office accessories and design services.
In November 1998, the Company decided to focus its attention on more
rapidly expanding its core businesses, both domestically and internationally. In
conjunction with this decision, the Company plans to close its five Furniture at
Work(TM) and four Images(TM)/Office Depot Express(TM) stores. In 1998, the
Company recorded restructuring costs of $11.0 million in conjunction with this
restructuring. These costs consist primarily of estimated lease commitments
subsequent to the closing of the stores and the write-off of certain fixed
assets. For additional information regarding the restructuring, please refer to
Management's Discussion and Analysis incorporated by reference in Item 7 of this
report.
OFFICE PRODUCTS INDUSTRY
The office products industry is comprised of three broad categories of
merchandise: general office supplies, technology products and office furniture.
Office products distributors include contract stationers (selling at significant
discounts from list prices to their contract customers), mail order companies
(selling through catalogs) and retailers (including office superstores such as
those operated by Office Depot). More recently, Internet companies have emerged
as a new force in the industry.
Although the industry has changed in recent years, a significant portion of
the market is still served by small dealers. These dealers purchase a
significant portion of their merchandise from national or regional office supply
distributors who, in turn, purchase merchandise from manufacturers. Dealers
often employ a commissioned sales force that use the distributor's catalog,
showing products at retail list prices, for selection and price negotiation with
the customer. The Company believes that these dealers generally sell their
products at prices higher than those offered by the Company.
Over the past decade, high-volume office supply superstores have emerged
throughout the United States. These stores offer a wide selection of products,
strong customer service and low prices. High-volume office products retailers
typically offer substantial price savings to individuals and small- to
medium-sized
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businesses, which traditionally have had limited opportunities to buy at
significant discounts from retail list prices. Recently, other retailers,
including mass merchandisers and warehouse clubs, have begun offering a wide
variety of similar products at low prices and have become increasingly
competitive with office supply superstores. Direct mail and Internet-based
companies are also gaining wide acceptance in the office products industry.
Larger customers have been, and continue to be, served primarily by full
service contract stationers offering contract bids at discounts equivalent to or
greater than those offered by the Company's retail stores and catalogs. These
stationers, including the Company's contract stationer business, traditionally
serve larger businesses through a commissioned sales force, purchase in large
quantities primarily from manufacturers, and offer competitive pricing and
customized services to their customers.
COMPETITION
Office Depot operates in a highly competitive environment. Historically,
its markets were served by traditional office products dealers and contract
stationers. The Company believes it competes favorably against dealers on the
basis of price because these dealers typically purchase their products from
distributors and generally sell their products at prices higher than those
offered by Office Depot. The Company competes against other full service
contract stationers on the basis of price, service and value-added technology.
The Company also competes with other office supply superstores, wholesale clubs
selling general merchandise, discount stores, mass merchandisers, conventional
retail stores, catalog showrooms and direct mail companies. These companies, in
varying degrees, compete with Office Depot on both price and selection. The
Company's ability to buy in large quantities directly from manufacturers affords
a competitive advantage against competitors who buy from distributors.
Several high-volume office supply chains that are similar in concept to
Office Depot in terms of store format, pricing strategy and product selection
and availability also operate in the United States. The Company competes with
these chains and other competitors described above in substantially all of its
current markets. The Company anticipates that in the future it will face
increased competition from these chains.
The Company's Business Services Group principally competes against national
and regional full service contract stationers, national and regional office
furniture dealers, independent office product distributors, discount superstores
and, to a lesser extent, direct mail order houses, stationery retail outlets and
Internet-based merchandisers. Other office supply superstore chains also operate
contract stationer businesses. The Company competes with these businesses in
substantially all of its current markets. In the future, the Company may face
increased competition from Internet-based merchandisers who dedicate a larger
portion of their resources to e-commerce than does Office Depot.
MERCHANDISING AND PRODUCT STRATEGY
Office Depot's merchandising strategy uses two brands, Office Depot and
Viking, to offer a broad selection of brand-name office products which provide
customers with the most compelling combination of quality, assortment, price and
service. The Company offers a comprehensive selection of office products,
including general office supplies, computers, software and computer supplies,
business machines and related supplies, and office furniture. Each of the
Company's office supply stores stocks approximately 7,000 SKUs, including
variations in color and size; and the Company's CSCs stock approximately 18,000
SKUs, including the 7,000 SKUs stocked at the office supply stores. During the
integration process, the Company will evaluate and reduce the number of SKUs to
the most efficient level, while retaining a broad assortment of products for its
customers.
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The table below shows sales of each major product group as a percentage of
total merchandise sales for 1996, 1997 and 1998:
1996 1997 1998
----- ----- -----
General office supplies(1).................................. 42.73% 42.65% 42.85%
Computers, business machines and related supplies(2)........ 45.65% 45.69% 46.02%
Office furniture(3)......................................... 11.62% 11.66% 11.13%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
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(1) Includes paper, filing supplies, organizers, business cases, writing
instruments, mailing supplies, desktop accessories, calendars, business
forms, binders, tape, post-it notes, staplers, fasteners, art supplies,
school supplies, engineering, food and janitorial supplies, and revenues
from the print and copy center located in each store.
(2) Includes calculators, typewriters, projectors, telephones, cameras and film,
cash registers, copiers, facsimile machines, tape recorders, computers,
printers, computer diskettes, ribbons, cartridges, software and books.
(3) Includes chairs, desks, tables, partitions, bookcases, filing and storage
cabinets, and furniture accessories such as chairmats, lamps and clocks.
The Company buys substantially all of its merchandise directly from
manufacturers and other primary source suppliers. Products are delivered by
manufacturers either directly to the stores or CSCs or to the Company's ten
cross-dock facilities. Office Depot's supply chain operations, including the
cross-docks, employ a customized system that manages the inbound flow of
merchandise with the goal of achieving optimal in-stock positions at the lowest
possible cost. This system maintains optimal in-stock positions by allowing for
a shorter delivery cycle to the stores and CSCs, while still meeting the minimum
ordering requirements of the vendors. The use of cross-docks also reduces the
Company's freight costs by centralizing the receiving function.
While the Business Services Group is party to several multi-year contracts
with certain of its contract customers and anticipates increasing this business
in the future, the Company has no material long-term contracts or commitments
with any vendor or customer, the loss of which would have a material adverse
effect on the Company. The Company has not experienced any difficulty in
obtaining desired quantities of merchandise for sale and does not foresee any
significant difficulties in the future.
Buyers at the Company's corporate headquarters are responsible for
selecting and purchasing merchandise. For merchandise offered to retail, direct
mail and Internet customers, corporate buyers also determine pricing. The
pricing of merchandise sold to contract customers is determined by the contract
sales force in the Business Services Group. Replenishment buyers, or rebuyers,
located both centrally and in the field, monitor inventory levels and initiate
product reorders with the assistance of the Company's customized replenishment
system. This system allows buyers to devote more time to selecting products,
developing new product lines, analyzing competitive developments and negotiating
with vendors to obtain more favorable prices and product availability.
The Company currently transmits purchase orders by EDI and receives Advance
Shipment Notices and invoices electronically from vendors that account for a
significant portion of its purchases. This method of electronic ordering
expedites orders and promotes accuracy and efficiency. The Company plans to
expand this program to the remainder of its vendors.
CATALOG PRODUCTION
The Company uses its catalogs and Internet sites to market directly to both
existing and prospective customers. Separate catalog assortments promote both
the Office Depot and Viking brands. Each catalog is printed in full color with
pictures and narrative descriptions that emphasize key product benefits and
features. The Company has developed a consistent and distinctive style for its
catalogs, most of which are produced in-house by its designers, writers and
production artists, using a computer-based catalog creation system.
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The Company's Viking brand catalog mailings include monthly sale catalogs
which are mailed to all active customers and contain the items most popular with
Viking customers. A complete "Buyers' Guide" containing all of the products
offered at regular discount prices is delivered to catalog customers every six
months. The Buyers' Guides for international customers are somewhat smaller than
those circulated domestically and vary between countries. Prospecting catalogs
with special offers designed to acquire new customers are mailed frequently.
Both Office Depot and Viking offer several different specialty catalogs,
including catalogs dedicated to office furniture, computer supplies, custom
printed business forms and stationery, pager products, shipping and warehouse
supplies (including cleaning and janitorial products) and presentation supplies
(including transparencies and overhead slides). Other specialty catalogs are
being considered and may be introduced in the future. The Company mailed
approximately 242 million, 225 million and 184 million copies of over 100
different Office Depot and Viking brand catalogs during 1998, 1997 and 1996,
respectively.
MARKETING AND SALES
The Company is able to maintain its competitive pricing policy primarily as
a result of the significant cost efficiencies achieved through its operating
format and purchasing power.
Marketing. The Company's marketing programs are designed to attract new
customers and to induce existing customers to make additional purchases. The
Company advertises in the major local newspapers in each of its markets. These
advertisements are supplemented with local and national radio and television
advertising and direct marketing efforts. The Company continuously acquires new
customers by selectively mailing specially designed catalogs to prospective
customers. The Company sometimes obtains the names of prospective customers in
new and existing markets through the use of selected mailing lists from outside
marketing information services and other sources. The Company uses a database
marketing system for its Viking catalogs and other promotional mailings. The
Company plans to use this same technology to increase the effectiveness of its
Office Depot brand catalogs in the future. Catalogs are also distributed through
the Company's contract sales force and are available in each of the Company's
stores.
The Company has a low price guarantee policy for its Office Depot brand.
Under this policy, the Company will match any comparable competitor's lower
price. In addition, the guarantee gives the customer a credit of 55% of the
difference, up to $55. This program assures customers of always receiving low
prices from the Company even during periodic sales promotions by competitors.
Monthly competitive pricing analyses are performed to monitor each market, and
prices are adjusted as necessary to adhere to this pricing philosophy and ensure
competitive positioning.
Sales. In addition to the sales associates at each of its stores and the
customer service representatives at its call centers, the Company has a
dedicated sales force serving its contract customers in the Business Services
Group. The Company's dedicated sales force operates out of its 68 regional sales
offices. All members of the Company's sales force are employees of the Company.
In early 1998, the Company introduced an Internet site enabling customers
to order directly from the Company. The Company's customers nationwide can place
orders over the Internet or by telephone or fax using toll-free telephone
numbers that route the calls through the Company's call centers located in South
Florida, Atlanta, Texas, Ohio, Connecticut, Kansas, and California. Orders
received by the call centers or via the Internet are transmitted electronically
to the store or CSC nearest the customer for pick-up or delivery at a nominal
delivery fee (free with a minimum order size). Orders are packaged, invoiced and
shipped for next-day delivery or same-day delivery as is the case for Viking
orders in selected markets.
The Company, through its Business Services Group, provides its contract
customers with a wide range of services designed to improve efficiencies and
reduce costs, including electronic ordering, stockless office procurement,
business forms management services and comprehensive product usage reports. The
Business Services Group provides certain of its customers with desktop delivery,
wherein merchandise is delivered to individual departments within a customer's
facilities, rather than being delivered to one central receiving point. The
Company also provides electronic ordering to its contract customers through
customized intranet sites
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developed in tandem with these customers. Customer orders placed through an
intranet site are sent to the Company over the Internet.
Terms. The Company offers its contract and qualified commercial customers
credit through open accounts, although the payment options available to retail
customers are also available to all contract and commercial customers. The
Company also offers revolving credit terms to Office Depot brand customers
through the use of private label credit cards. These credit cards are issued
without charge to credit-qualified customers. Sales transactions using the
private label credit cards are transmitted electronically to financial services
companies, which credit Office Depot's bank account with the net proceeds within
two days. The Company offers its contract customers a store purchasing card
which allows these customers to purchase office supplies at one of the Company's
office supply stores under the terms of their contracts. No single customer
accounts for more than one percent of the Company's sales.
MANAGEMENT INFORMATION SYSTEMS
Inventory is received and stocked in each facility using an automated
inventory tracking system. Prior to the merger with Viking, Office Depot
completed the conversion of its warehouse and order entry systems to a new
common platform. The Company has begun the integration of Viking's delivery and
warehouse systems with Office Depot's. See MERGERS AND ACQUISITIONS. Customer
orders placed via telephone, fax or electronically are filled by the appropriate
CSC or office supply store, usually for next-day delivery. The appropriate
delivery location is determined by the Company's automated routing systems, and
the order is filled using both in-stock and wholesaler-supplied inventory.
The Company uses IBM ES9000 mainframes, IBM System AS/400 computers and
client/server technologies that primarily run on Microsoft Windows in operating
its business. The Company's information systems include advanced software
packages that have been customized for the Company's specific business
operations. By integrating these technologies, the Company is able to
efficiently manage inventories, order processing, replenishment and marketing
efforts.
Inventory data is entered into the Company's information system upon its
receipt, and sales data is entered through the use of either the Company's
point-of-sale or its telemarketing order entry system. The point-of-sale system
permits the entry of sales data through the use of bar code laser scanning. The
system also has a price "look-up" capability that permits immediate price
verification 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 SKU for
each store and CSC. Daily compilation of sales and gross margin data allows the
Company to monitor profitability and inventory by item and product line, as well
as the success of sales promotions. For all SKUs, management has immediate
access to on-hand daily unit inventory, units on order, current and past rates
of sale and other information pertinent to the management of its inventory.
All of the Company's computer operations are managed internally in
state-of-the-art facilities that use automated systems management tools, a help
desk which is manned 24 hours per day/7 days per week, and off-site disaster
recovery facilities. The Company's fully redundant network is managed internally
using advanced technologies throughout the system. These operations result in
industry leading system availability and reliability.
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The Company's public Internet site -- www.officedepot.com -- is a
state-of-the-art electronic commerce site that has won a number of Internet
honors. The Company's business-to-business e-commerce site has sophisticated
work-flow components that help customers electronically manage their ordering
process for office supplies, with thousands of customer orders processed on a
daily basis. Internet-enabled applications allow our suppliers to directly
interact with our systems, improving order flow and supply chain management. The
Company's corporate personnel make use of an internally developed and managed
intranet to greatly increase productivity and customer responsiveness and to
reduce internal costs.
EMPLOYEES, STORE MANAGEMENT AND TRAINING
As of March 12, 1999, the Company employed approximately 44,000 persons.
Additional employees will be added as needed to support the Company's expansion
program. The Company is committed to the development and promotion of its
employees. However, the Company's rapid growth will require continued management
recruitment from outside the Company.
The Company hires and trains new employees well in advance of new store and
CSC openings. In general, store managers have extensive experience in retailing,
particularly with warehouse store chains or discount stores that generate high
sales volumes. Each of the Company's new retail store managers usually spends
two to four months in an apprenticeship position at an existing Office Depot
store prior to being assigned to a new store. Typically, the Company's CSC
managers have extensive experience in distribution operations.
The Company's retail sales associates view product knowledge videos and
complete written training programs relating to certain products before being
allowed to assist customers. The Company creates some of these videos and
training programs internally. New product information is transmitted to
associates via satellite broadcasts on a routine basis. The satellite broadcasts
are also used for associate training.
The Company grants stock options and offers bonus programs to certain of
its employees as an incentive to attract and retain such employees.
The Company has never experienced a strike or any other work stoppage among
its domestic employees, and management believes that its relations with all of
its employees are good. There are no collective bargaining agreements covering
any of the Company's employees. However, certain of its international employees
are covered by various labor arrangements as dictated by government regulation
or local custom.
9
11
ITEM 2. PROPERTIES.
As of March 12, 1999, Office Depot operates 675 office product stores in 41
states and the District of Columbia (including 666 office supply stores, four
Images(TM)/Office Depot Express(TM) stores, and five Furniture At Work(TM)
stores), 40 office supply stores in five Canadian provinces and 92 office supply
stores (including those operated under licensing and joint venture agreements)
in 8 countries outside of the United States and Canada. The Company also
operates 30 CSCs in 18 U.S. states and 17 CSCs in 10 foreign countries. The
following table sets forth the locations of these facilities.
STORES CSCS
- ------------------------------------------------------------------- --------------------------------
LOCATION # LOCATION # LOCATION #
- -------- --- -------- --- -------- ---
UNITED STATES: North Dakota 1 UNITED STATES:
Alabama 14 Ohio 25 Arizona 1
Arizona 8 Oklahoma 7 California 4
Arkansas 7 Oregon 14 Colorado 2
California 109 Pennsylvania 7 Connecticut 1
Colorado 19 South Carolina 11 Florida 3
District of Columbia 2 Tennessee 13 Georgia 1
Florida 78 Texas 80 Illinois 1
Georgia 31 Utah 4 Louisiana 1
Hawaii 3 Virginia 15 Maryland 2
Idaho 1 Washington 22 Massachusetts 1
Illinois 30 West Virginia 3 Michigan 1
Indiana 12 Wisconsin 11 Minnesota 2
Iowa 5 Wyoming 1 New Jersey 1
Kansas 7 CANADA: North Carolina 1
Kentucky 7 Alberta 8 Ohio 2
Louisiana 21 British Columbia 8 Texas 3
Maryland 11 Manitoba 4 Utah 1
Michigan 20 Ontario 18 Washington 2
Minnesota 8 Saskatchewan 2 AUSTRALIA 2
Mississippi 5 COLOMBIA 4 FRANCE 2
Missouri 13 FRANCE 17 ISRAEL 1
Montana 1 HUNGARY 3 GERMANY 2
Nebraska 3 ISRAEL 17 IRELAND 1
Nevada 8 JAPAN 3 ITALY 1
New Jersey 4 MEXICO 35 JAPAN 2
New Mexico 4 POLAND 11 MEXICO 2
New York 9 THAILAND 2 THE NETHERLANDS 1
North Carolina 21 UNITED KINGDOM 3
Most of the Company's facilities are leased or subleased, with lease terms
(excluding renewal options) expiring between 1999 and 2020, except for 60
facilities, excluding corporate facilities, that are owned by Office Depot. The
owned facilities are located in 17 states, primarily Florida and Texas, three
Canadian provinces, the United Kingdom, Australia, Thailand, Mexico and France.
The Company operates its office supply stores under the names Office Depot, The
Office Place (in Ontario, Canada) and Office Depot Express (internationally).
The Business Services Group operates under the names Office Depot, Viking Office
Products and a number of variations of those names.
The Company's corporate offices in Delray Beach, Florida consist of
approximately 575,000 square feet in three adjacent buildings, two of which are
owned and one leased. The corporate office building in Torrance, California,
which the Company owns, consists of approximately 180,000 square feet.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in litigation arising in the normal course of its
business. The Company believes that these matters will not materially affect its
financial position or the results of its operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
10
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.
Office Depot's common stock is listed on the New York Stock Exchange (NYSE)
under the symbol ODP. As of March 5, 1999, there were 3,484 holders of record of
common stock. The last reported sale price of the common stock on the NYSE on
March 5, 1999 was $34.6875.
The following table sets forth, for the periods indicated, the high and low
sale prices of the common stock quoted on the NYSE Composite Tape. These prices
do not include retail mark-ups, mark-downs or commissions.
1997 HIGH LOW
- ---- ------- -------
First Quarter............................................... $23.250 $16.375
Second Quarter.............................................. 21.250 12.000
Third Quarter............................................... 21.563 14.500
Fourth Quarter.............................................. 23.688 18.750
1998 HIGH LOW
- ---- ------- -------
First Quarter............................................... $30.063 $21.750
Second Quarter.............................................. 34.750 28.063
Third Quarter............................................... 37.250 20.000
Fourth Quarter.............................................. 36.625 15.875
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.
On February 24, 1999, the Company's Board of Directors declared a
three-for-two stock split in the form of a 50% stock dividend payable on April
1, 1999 to stockholders of record on March 11, 1999. In conjunction with the
stock split, approximately 125 million additional shares will be issued on April
1, 1999.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this Item is set forth in Exhibit 13 under the
heading "Financial Highlights" as of and for the fiscal years ended December 26,
1998, December 27, 1997, December 28, 1996, December 30, 1995 and December 31,
1994. This information is set forth in our Annual Report to Stockholders for the
fiscal year ended December 26, 1998 (on page 1) and is incorporated herein by
this reference and made a part hereof.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HABOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The information required by this item is set forth in Exhibit 13 under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations." This information is set forth in the Company's Annual Report to
Stockholders for the fiscal year ended December 26, 1998 (on pages 33-44) and is
incorporated herein by reference and made a part hereof. The following
Cautionary Statements are in addition to those contained in the Company's Annual
Report.
In December 1995, the Private Securities Litigation Reform Act of 1995 (the
"Act") was enacted by the United States Congress. The Act contains certain
amendments to the Securities Act of 1933 and the Securities Exchange Act of
1934. These amendments provide protection from liability in private lawsuits for
"forward-looking" statements made by public companies and other persons
specified in the Act. The Company desires to take advantage of the "safe harbor"
provisions of the Act. In order to do so, these cautionary statements are
provided.
11
13
This Annual Report on Form 10-K contains both information which is
historical in nature and other information which looks towards the future
performance of the Company. Examples of historical information include the 1998
financial statements and the commentary on past performance contained in
Management's Discussion and Analysis ("MD&A"), which are incorporated herein by
reference to the respective information in the Company's Annual Report to
Stockholders for the fiscal year ended December 26, 1998. The Company cautions
readers that, with the exception of information which clearly deals with
historical matters, the information contained in this Annual Report on Form 10-K
should be considered to be "forward-looking statements" as referred to in the
Act. Without limiting the generality of the preceding sentence, any time the
words "estimate," "project," "intend," "expect" and similar expressions are
used, these are intended to clearly express that the information deals with
possible future events and is forward-looking in nature.
Forward-looking information involves risks and uncertainties, including
certain matters which are discussed in more detail below. This information is
based on various factors and important assumptions about future events that may
or may not actually come true. As a result, the Company's operations in the
future and its financial results could differ materially and substantially from
those discussed in the forward-looking statements in this Annual Report on Form
10-K. In particular, the factors discussed below could affect the Company's
actual results and could cause the Company's actual results during 1999 and in
future years beyond 1999 to differ materially from those expressed in any
forward-looking statement made by or on behalf of the Company in this Annual
Report on Form 10-K.
COMPETITION: The Company competes with a variety of retailers, dealers and
distributors in a highly competitive marketplace. High-volume office supply
chains, mass merchandisers, warehouse clubs, computer stores and contract
stationers that compete directly with the Company operate in most of its
geographic markets. Well-established mass merchant retailers have the financial
and distribution ability to compete very effectively with the Company should
they choose to enter the office superstore retail category, Internet office
supply or contract stationer business. This could have a material adverse effect
on the Company's business and results of operations.
INTERNET: More recently, Internet-based merchandisers have begun competing
with the Company. This competition is expected to increase in the future as both
the Company and these and other companies continue to expand their operations.
Many startup operations focused exclusively on Internet sales may be able to
effectively compete with the Company in the areas of price and selection. While
most of them cannot offer the levels of service and stability of supply provided
by the Company, they nevertheless may be formidable competitors, particularly
for customers who are willing to look for the absolute lowest price without
regard to other attributes of the business. Some of these competitors may be
willing to substantially sacrifice their profitability in order to gain a
foothold in the marketplace, and the stock market success of certain Internet
retailers may enable such operations to raise capital in the public markets
without regard to profitability for the near future. In addition, certain
manufacturers of computer hardware, software and peripherals, including
suppliers of the Company, have expanded their own direct marketing of products,
particularly over the Internet. Even as the Company expands its own Internet
sales, its ability to anticipate and adapt to the developing Internet sales
market and to Internet competition will be key factors in its success.
Additionally, the capabilities of the Company's network infrastructure
(including its server, hardware and software) to efficiently handle the
Company's rapidly expanding operations, including its Internet traffic, is of
critical importance. Failure to execute in any of these key areas could have a
material adverse effects on the Company's future sales growth, profitability and
operating results.
EXECUTION OF EXPANSION PLANS: The Company plans to open approximately 105
stores in 1999, and the Company considers its expansion program to be an
integral part of its plan to achieve anticipated operating results in future
years. However, there can be no assurance that the Company will be able to find
favorable store locations, negotiate favorable leases, hire and train store and
account managers, and integrate the new stores in a manner that will allow the
Company to meet its expansion program. Conditions outside the Company's control,
such as adverse weather conditions affecting construction schedules,
unavailability of materials, labor disputes and similar issues also could impact
anticipated store openings. The failure to expand by opening new stores as
planned could have a material adverse effect on the Company's future sales
growth, profitability and operating results.
12
14
CANNIBALIZATION OF SALES IN EXISTING OFFICE DEPOT BUSINESS LOCATIONS: In
addition, as the Company expands the number of its stores in existing markets,
sales of existing stores may suffer. New stores typically require an extended
period of time, generally exceeding a year, to reach the levels of sales and
profitability of the Company's existing stores; and there can be no assurance
that new stores will ever be as profitable as existing stores because of
competition from other store chains and the tendency of existing stores to share
sales as the Company opens new stores in its more mature markets. The Company's
comparable sales results are affected by a number of factors, including the
opening of additional Office Depot stores; the expansion of the Company's
contract stationer business in new and existing markets; competition from other
office supply chains, mass merchandisers, warehouse clubs, computer stores and
other contract stationers as well as Internet-based businesses; and regional,
national and international economic conditions. In addition, the Company's gross
margin and profitability would be adversely affected if its competitors were to
attempt to capture market share by reducing prices.
COSTS OF REMODELING, UPDATING STORES: The remodeling of stores has
contributed to increased store expenses, and these costs are expected to
continue impacting store expenses throughout 1999 and beyond. While a necessary
aspect of keeping existing stores up to date both from a technology and
merchandising point of view, the expenses associated with such activities could
result in a significant impact on the Company's operating results in the future.
Furthermore, the Company's growth, through both store openings and acquisitions,
will continue to require the expansion and upgrading of the Company's
informational, operational and financial systems, as well as necessitate the
hiring of new managers at the store and supervisory level.
HISTORICAL FLUCTUATIONS IN PERFORMANCE: Fluctuations in the Company's
quarterly operating results have occurred in the past and may occur in the
future. A variety of factors such as new store openings with their concurrent
pre-opening expenses; the extent to which new stores are less profitable than
existing stores as they commence operations; the effect new stores have on the
sales of existing stores in more mature markets; warehouse integration; the
pricing activity of competitors in the Company's markets, including the
Internet; changes in the Company's product mix; increases and decreases in
advertising and promotional expenses; the effects of seasonality; acquisitions
of competitors' contract stationers and stores; or other events could contribute
to this quarter to quarter variability.
VIKING MERGER; INTEGRATION; INTERNATIONAL ACTIVITY: On August 26, 1998,
the Company merged with Viking Office Products, Inc. ("Viking"). Costs related
to the integration of Viking's facilities into the Company's business will
contribute to increased operating expenses in 1999 and possibly beyond.
Moreover, integrating the operations and management of Office Depot and Viking
is a complex process. There can be no assurance that this integration process
will be completed as rapidly as management anticipates or, even if achieved as
anticipated, that it will result in all of the anticipated synergies and other
benefits expected to be realized. The integration of the two companies will
require significant management attention, which may temporarily distract
management from other matters. The inability of management to integrate
successfully the operations of Office Depot and Viking could have a material
adverse effect on the future revenues and sales growth, profitability, and
operating results of the Company.
The Company has operations in several international markets, including in
particular those markets in which Viking has operated prior to the merger. The
Company intends to enter other international markets as attractive opportunities
arise. Such entry could be in the form of acquisitions of stock or assets or by
the formation of joint venture or licensing agreements. In addition to the risks
described above arising from the Company's domestic store, delivery, contract,
and Internet operations, internationally, the Company also faces such additional
risks as foreign currency fluctuations, unstable political and economic
conditions, obtaining adequate and appropriate inventory and, because some of
its foreign operations are not wholly-owned, compromised operating control in
certain countries. Moreover, the Company does not have a large group of managers
experienced in international operations and will have to recruit additional
management resources to successfully compete in many foreign markets. All of
these risks could have a material adverse effect on the Company's financial
position and results of operations.
13
15
CONTRACT AND COMMERCIAL SALES: The Company competes with a number of
contract stationers who supply office products and services to large and small
businesses both nationally and internationally. In order to achieve and maintain
expected profitability levels, the Company must continue to grow this segment of
the business. There can be no assurance the Company will be able to continue
expanding its contract and commercial business while retaining its base of
existing customers, and any failure to do so could have a material adverse
effect on the Company's profitability and operating results.
SOURCES AND USES OF CASH; FINANCING: The Company believes that its current
cash and cash equivalents, future operating cash flows, lease financing
arrangements and funds available under its revolving credit facility should be
sufficient to fund its planned expansion, integration and other operating cash
needs, for at least the next year. However, there can be no assurance that
additional sources of financing will not be required during the next twelve
months as a result of unanticipated cash demands, opportunities for expansion or
acquisition, changes in growth strategy or adverse operating results. The
Company could attempt to meet its financial needs through the capital markets in
the form of either equity (for example, the issuance of more stock) or debt (for
example, new borrowings) financing. Alternative financing will be considered if
market conditions make it financially attractive. There can be no assurance that
any additional funds required by the Company, whether within the next twelve
months or thereafter, will be available to the Company on satisfactory terms,
either in the equity or debt markets. The inability of the Company to access
needed financial resources could have a material adverse effect on the Company's
financial position and its results of operations.
Y2K ISSUES: While the Company has worked diligently to bring its own
systems into compliance with Year 2000 issues and has endeavored to ensure that
its suppliers, vendors and major customers are also Y2K compliant (see pages
40-41 of Management's Discussion and Analysis), there can be no assurance that
the Company and all of its suppliers, vendors and major customers will in fact
become Year 2000 compliant. Any significant failure by the Company's suppliers,
vendors or major customers, or indeed, any unanticipated failure by the Company
to become fully Y2K compliant could have a material adverse effect on the
Company's financial position and results of operations. In addition to the
business risks inherent in the Y2K issues, there is also the possibility of
litigation from customers and other parties claiming to have been damaged by
failures of products and/or services provided to them by the Company. While the
Company fully expects to rely on indemnifications from suppliers of various
products, there is a possibility that certain claims might not be the subject of
indemnification and that the results of such litigation could have a material
adverse effect on the Company and its businesses.
DISCLAIMER OF OBLIGATION TO UPDATE: The Company assumes no obligation (and
specifically disclaims any obligation) to update these Cautionary Statements or
any other forward-looking statements contained in this Annual Report on Form
10-K to reflect actual results, changes in assumptions or other factors
affecting such forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risks
The Company's short-term investment portfolio generates interest income
which is affected by changes in interest rates. As of December 26, 1998,
assuming the investment portfolio was held constant, management estimates that a
ten percent change in short-term interest rates would result in an after-tax
increase or decrease of approximately $2 million in investment income on an
annual basis. The Company's zero coupon, convertible, subordinated notes offer
stated yields to maturity which are not subject to interest rate risks.
Borrowings under the Company's bank credit agreement would be subject to
variable interest rates; however, there were no such borrowings at December 26,
1998.
Foreign Exchange Rate Risks
The Company conducts business in various countries outside of the United
States, and does, from time to time, enter into forward or option contracts to
minimize the exposure to foreign exchange rate risk related to
14
16
specific transactions. During 1998, a maximum of $13.1 million in foreign
exchange forward contracts was outstanding at any one time. As of December 26,
1998, there were no forward or option contracts outstanding.
Foreign currency transaction exposure arises when an operating unit
transacts business denominated in a currency that is not its own functional
currency. The Company's transaction risks are attributable primarily to
inventory purchases from third party vendors. The introduction of the euro has
significantly reduced such risks, and transaction exposures on an overall basis
are not significant.
The Company also has foreign exchange translation exposures resulting from
the translation of foreign currency-denominated earnings into U.S. dollars in
the Company's consolidated financial statements. Management estimates that, as
of December 26, 1998, a ten percent change in applicable foreign exchange rates
would have raised or lowered the Company's after-tax earnings by approximately
$3.5 million on an annual basis.
ITEM 8. FINANCIAL STATEMENTS.
The information required by this Item is set forth in Exhibit 13 under the
headings "Consolidated Balance Sheets," "Consolidated Statements of Earnings,"
"Consolidated Statements of Stockholders' Equity," "Consolidated Statements of
Cash Flows" and "Notes to Consolidated Financial Statements" as of December 26,
1998 and December 27, 1997 and for the fiscal years ended December 26, 1998,
December 27, 1997 and December 28, 1996. This information is set forth in our
Annual Report to Stockholders for the fiscal year ended December 26, 1998 (on
pages 46-63) and is incorporated herein by this reference and made a part
hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
15
17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to directors and executive officers of the Company
is incorporated herein by reference to the information under the caption
"Directors & Management" in the Company's Proxy Statement for the 1999 Annual
Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to executive compensation is incorporated herein
by reference to the information under the caption "Executive Compensation" in
the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to security ownership of certain beneficial owners
and management is incorporated herein by reference to the information under the
caption "Stock Ownership" in the Company's Proxy Statement for the 1999 Annual
Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to certain relationships and related transactions
is incorporated herein by reference to the information under the caption
"Certain Relationships and Related Transactions" in the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders.
16
18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
1. The financial statements listed in the "Index to Financial
Statements."
2. The financial statement schedule listed in "Index to Financial
Statement Schedule."
3. The exhibits listed in the "Index to Exhibits."
(b) Reports on Form 8-K.
The Company did not file any Reports on Form 8-K during the fourth
quarter of fiscal 1998.
17
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 22nd day of
March, 1999.
OFFICE DEPOT, INC.
By: /s/ DAVID I. FUENTE
------------------------------------
David I. Fuente, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March 22, 1999.
SIGNATURE CAPACITY
--------- --------
/s/ DAVID I. FUENTE Chairman of the Board and Chief Executive
- ----------------------------------------------------- Officer (Principal Executive Officer)
David I. Fuente
/s/ IRWIN HELFORD Vice Chairman and Director
- -----------------------------------------------------
Irwin Helford
/s/ JOHN C. MACATEE Director, President and Chief Operating
- ----------------------------------------------------- Officer
John C. Macatee
/s/ M. BRUCE NELSON Corporate Executive Officer and Director
- -----------------------------------------------------
M. Bruce Nelson
/s/ BARRY J. GOLDSTEIN Executive Vice President -- Finance, Chief
- ----------------------------------------------------- Financial Officer and Treasurer
Barry J. Goldstein
/s/ CHARLES E. BROWN Senior Vice President -- Finance and
- ----------------------------------------------------- Controller (Principal Accounting Officer)
Charles E. Brown
/s/ LEE A. AULT, III Director
- -----------------------------------------------------
Lee A. Ault, III
/s/ NEIL R. AUSTRIAN Director
- -----------------------------------------------------
Neil R. Austrian
/s/ CYNTHIA R. COHEN Director
- -----------------------------------------------------
Cynthia R. Cohen
/s/ W. SCOTT HEDRICK Director
- -----------------------------------------------------
W. Scott Hedrick
/s/ JAMES L. HESKETT Director
- -----------------------------------------------------
James L. Heskett
/s/ MICHAEL J. MYERS Director
- -----------------------------------------------------
Michael J. Myers
/s/ FRANK P. SCRUGGS, JR. Director
- -----------------------------------------------------
Frank P. Scruggs, Jr.
/s/ PETER J. SOLOMON Director
- -----------------------------------------------------
Peter J. Solomon
18
20
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report of Deloitte & Touche LLP on
Consolidated Financial Statements......................... *
Consolidated Balance Sheets................................. *
Consolidated Statements of Earnings......................... *
Consolidated Statements of Stockholders' Equity............. *
Consolidated Statements of Cash Flows....................... *
Notes to Consolidated Financial Statements.................. *
Independent Auditors' Report of Deloitte & Touche LLP on
Financial Statement Schedule.............................. F-2
- ---------------
* Incorporated herein by reference to the respective information in the
Company's Annual Report to Stockholders for the fiscal year ended December 26,
1998.
F-1
21
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Office Depot, Inc.:
We have audited the consolidated financial statements of Office Depot, Inc.
and Subsidiaries as of December 26, 1998 and December 27, 1997 and for each of
the three years in the period ended December 26, 1998, and have issued our
report thereon dated February 17, 1999 (February 24, 1999 as to the stock split
described in Note A); such consolidated financial statements and reports are
included in the Company's Annual Report to Stockholders for the fiscal year
ended December 26, 1998 and are incorporated herein by reference. Our audits
also included the financial statement schedule of Office Depot, Inc. and
Subsidiaries listed in the Index to Financial Statement Schedule. The financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
February 17, 1999, (February 24, 1999 as to the stock split described in Note A)
F-2
22
INDEX TO FINANCIAL STATEMENT SCHEDULE
PAGE
-----
Schedule II -- Valuation and Qualifying Accounts and
Reserves.................................................. II-1
All other schedules have been omitted because they are inapplicable, not
required or the information is included elsewhere herein.
23
SCHEDULE II
OFFICE DEPOT, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS(1)
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- ----------------------- ------------- --------------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER DEDUCTIONS -- BALANCE AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS WRITE-OFFS OF PERIOD
----------- ---------- ---------- ---------- ------------- --------------
Allowance for Doubtful Accounts:
1998.................................... $25,587 $23,702 -- $23,362 $25,927
1997.................................... 17,662 25,254 -- 17,329 25,587
1996.................................... 8,694 19,763 600 11,395 17,662
- ---------------
(1) Amounts for 1997 and 1996 have been restated to reflect the merger with
Viking Office Products, Inc. on a pooling of interests basis.
II-1
24
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
------- -------
3.1 Restated Certificate of Incorporation, as amended to
date(13)
3.2 Bylaws(2)
4.1 Form of certificate representing shares of Common Stock(3)
4.2 Form of Indenture (including form of LYON) between the
Company and The Bank of New York, as Trustee(4)
4.3 Form of Indenture (including form of LYON) between the
Company and Bankers Trust Company, as Trustee(5)
4.4 Rights Agreement dated as of September 4, 1996 between
Office Depot, Inc. and ChaseMellon Shareholder Services,
L.L.C., as Rights Agent, including the form of Certificate
of Designation, Preferences and Rights of Junior
Participating Preferred Stock, Series A attached thereto as
Exhibit A, the form of Rights Certificate attached thereto
as Exhibit B and the Summary of Rights attached thereto as
Exhibit C(6)
10.1 Stock Purchase Agreement, dated as of June 21, 1989, between
the Company and Carrefour S.A. (3)
10.2 Agreement and Plan of Reorganization, dated December 19,
1990, among the Company, The Office Club, Inc. and OD Sub
Corp. (3)
10.3 Stock Purchase Agreement, dated as of April 24, 1991,
between the Company, Carrefour S.A. and Carrefour Nederland
B.V. (7)
10.4 Revolving Credit and Line of Credit Agreement dated as of
February 20, 1998 by and among the Company and SunTrust
Bank, Central Florida, National Association, individually
and as Administrative Agent; Bank of America National Trust
and Savings Association, individually and as Syndication
Agent; NationsBank, National Association, individually and
as Documentation Agent; Royal Bank of Canada, individually
and as Co-Agent; Citibank, N.A., individually and as
Co-Agent; The First National Bank of Chicago, individually
and as Co-Agent; The First National Bank of Chicago,
individually and as Co-Agent; CoreStates Bank, N.A.; PNC
Bank, National Association; Fifth Third Bank; and Hibernia
National Bank. (Exhibits to the Revolving Credit and Line of
Credit Agreement have been omitted, but a copy may be
obtained free of charge upon request to the Company)(12)
10.5 Office Depot, Inc. Long-Term Equity Incentive Plan*(8)
10.6 Amended and Restated Agreement and Plan of Merger dated as
of July 12, 1993 and amended and restated as of August 30,
1993 by and among the Company, Eastman Office Products
Corporation, EOPC Acquisition Corp. and certain investors(9)
10.7 1997-2001 Office Depot, Inc. Designated Executive Incentive
Plan*(12)
10.8 Partnership Agreement, dated as of June 10, 1995, between
the Company and Carrefour, a joint stock company
incorporated under French law(10)
10.9 Form of Employment Agreement, dated as of September 4, 1996,
by and between Office Depot, Inc. and each of F. Terry Bean,
Thomas Kroeger and William P. Seltzer(11)
10.10 Form of Employment Agreement, dated as of September 4, 1996,
by and between Office Depot, Inc. and each of David I.
Fuente, John C. Macatee, Barry J. Goldstein and Richard M.
Bennington(11)
10.11 Form of Indemnification Agreement, dated as of September 4,
1996, by and between Office Depot, Inc. and each of David I.
Fuente, Cynthia R. Cohen, W. Scott Hedrick, James L.
Heskett, Michael J. Myers, Peter J. Solomon, Barry J.
Goldstein, F. Terry Bean, Richard M. Bennington, William P.
Seltzer, John C. Macatee, Thomas Kroeger and R. John
Schmidt, Jr.(11)
25
EXHIBIT
NUMBER EXHIBIT
------- -------
10.12 Form of Employment Agreement, dated as of October 21, 1997,
by and between Office Depot, Inc. and each of Richard M.
Bennington, Barry J. Goldstein, John C. Macatee and William
P. Seltzer(12)
13.1 Annual Report to Securityholders
21.1 List of the Company's subsidiaries
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule
- ---------------
+ This information appears only in the manually signed original copies of
this report.
* Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the respective exhibit to the Company's Proxy
Statement for its 1995 Annual Meeting of Stockholders.
(2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
filed with the Commission on August 12, 1996.
(3) Incorporated by reference to the respective exhibit to the Company's
Registration Statement No. 33-39473.
(4) Incorporated by reference to the respective exhibit to the Company's
Registration Statement No. 33-54574.
(5) Incorporated by reference to the respective exhibit to the Company's
Registration Statement No. 33-70378.
(6) Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on September 6, 1996.
(7) Incorporated by reference to the respective exhibit to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 29, 1991.
(8) Incorporated by reference to the respective exhibit to the Company's Proxy
Statement for its 1997 Annual Meeting of Stockholders.
(9) Incorporated by reference to the respective exhibit to the Company's
Registration Statement No. 33-51409.
(10) Incorporated by reference to the respective exhibit to the Company's Annual
Report on Form 10-K for the year ended December 30, 1995.
(11) Incorporated by reference to the respective exhibit to the Company's Annual
Report on Form 10-K for the year ended December 28, 1996.
(12) Incorporated by reference to the respective exhibit to the Company's Annual
Report on Form 10-K for the year ended December 27, 1997.
(13) Incorporated by reference to the respective exhibit to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September 26,
1998.
Upon request, the Company will furnish a copy of any exhibit to this report
upon the payment of reasonable copying and mailing expenses.