UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
⌧
(cid:2)
Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the fiscal year ended December 29, 2012
or
Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the transition period from to
Commission file number 1-10948
Office Depot, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
6600 North Military Trail, Boca Raton, Florida
(Address of principal executive offices)
59-2663954
(I.R.S. Employer
Identification No.)
33496
(Zip Code)
(561) 438-4800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01 per share
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
No
(cid:2)
⌧
⌧
No
(cid:2)
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
No
⌧
(cid:2)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files): Yes
No
⌧
(cid:2)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to
⌧
the best of 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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large
accelerated filer” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
(cid:2)
Accelerated filer
⌧
(cid:2)
Smaller reporting company
(cid:2)
Non-accelerated filer
(Do not check if a smaller reporting company)
No
⌧
(cid:2)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2012 (based on the closing market price on the Composite Tape on June 29,
2012) was approximately $608,746,476 (determined by subtracting from the number of shares outstanding on that date the number of shares held by affiliates of Office Depot,
Inc.).
The number of shares outstanding of the registrant’s common stock, as of the latest practicable date: At January 26, 2013, there were 285,522,659 outstanding shares of Office
Depot, Inc. Common Stock, $0.01 par value.
Documents Incorporated by Reference:
Certain information required for Part III of this Annual Report on Form 10-K is incorporated by reference to the Office Depot, Inc. definitive Proxy Statement for its 2013Annual
Meeting of Shareholders, which shall be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Act of 1934, as amended, within 120
days of Office Depot, Inc.’s fiscal year end.
PART I.
PART II
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
TABLE OF CONTENTS
1
9
16
17
19
19
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 20
Item 6. Selected Financial Data
22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
43
Item 8. Financial Statements and Supplementary Data
43
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
43
Item 9A. Controls and Procedures
44
Item 9B. Other Information
46
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
SIGNATURES
Item 15. Exhibits and Financial Statement Schedules
46
46
46
47
47
48
49
PART I
Item 1. Business.
Office Depot, Inc. (“Office Depot”) is a global supplier of office products and services. Office Depot was incorporated in Delaware in
1986 with the opening of its first retail store in Fort Lauderdale, Florida. In fiscal year 2012, Office Depot sold $10.7 billion of
products and services to consumers and businesses of all sizes through three business segments (or “Divisions”): North American
Retail Division, North American Business Solutions Division and International Division. Sales are processed through multiple
channels, consisting of office supply stores, a contract sales force, an outbound telephone account management sales force, Internet
sites, direct marketing catalogs and call centers, all supported by a network of supply chain facilities and delivery operations.
In this Annual Report on Form 10-K (“Annual Report”), unless the context otherwise requires, the “Company”, “Office Depot”,
“we”, “us”, and “our” refer to Office Depot, Inc. and subsidiaries.
Additional information regarding our Divisions is presented below in Part II—Item 7. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” (“MD&A”) and in Note O of the Consolidated Financial Statements located in Part
IV—Item 15. “Exhibits and Financial Statement Schedules” of this Annual Report. We are currently evaluating changes to the
measurement of Division operating income in our management reporting. Under this consideration, which may be implemented in
2013, a significant amount of costs currently managed at the corporate level could be allocated to the Divisions and certain allocation
methodologies updated. When the analysis is compete, prior period reported information may be recast for comparison, using updated
allocations to prior periods where appropriate. For financial information regarding operations in geographic areas, refer to Note O in
the Consolidated Financial Statements located in Part IV—Item 15. “Exhibits and Financial Statement Schedules” of this Annual
Report.
North American Retail Division
The North American Retail Division sells a broad assortment of merchandise through our chain of office supply stores throughout the
United States. We currently offer general office supplies, computer supplies, business machines and related supplies, and office
furniture from national brands as well as our own brands. Our stores also contain a Copy & Print Depot
offering printing,
reproduction, mailing, shipping, and other services and we maintain nationwide availability of personal computer (“PC”) support and
network installation service that provides our customers with in-home, in-office and in-store support for their technology needs. Refer
to the Merchandising section below for additional product information.
TM
Our retail stores are designed to provide a positive shopping experience for the customer. We strive to optimize visual presentation,
product placement, shelf capacity and in-stock positions. Our goal is to maintain sufficient inventory in the stores to satisfy current
and near-term customer needs, while controlling the overall working capital invested in inventory.
The majority of our retail stores are located in leased facilities that currently average over 20,000 square feet. During 2012, we
committed to significant changes to our store portfolio. Over the next five years, we expect to downsize approximately 500 stores to
either small (averaging 5,900 sales square feet) or mid-size format (averaging 14,800 sales square feet). Approximately 50 stores will
be closed at the end of their lease terms. These plans may change based on market conditions. As of December 29, 2012, we had 79
locations in the small (31) and mid-size (48) store formats. Refer to Part II — Item 7. “MD&A” for additional information on the
North American Retail Division retail strategy.
At the end of 2012, the North American Retail Division operated 1,112 office supply stores throughout the United States. We have a
broad representation across North America with the largest concentration of our retail stores in Texas, Florida and California. The
count of open stores may include locations temporarily closed for remodels or other factors.
1
Store opening and closing activity for the last three years has been as follows:
2010
2011
2012
Open at
Beginning
of Period
1,152
1,147
1,131
Opened
17
9
4
Closed
22
25
23
Open at
End
of Period
1,147
1,131
1,112
Relocated
6
15
28
In recent years, we consolidated our supply chain network to utilize existing distribution centers (“DCs”) to meet the needs of both
our retail stores and North American Business Solutions customers. Refer to the North American supply chain discussion below for
additional information.
Sales and marketing efforts are integral to understanding the Divisions’ processes and management. These efforts are addressed after
the Divisions discussions.
North American Business Solutions Division
The North American Business Solutions Division sells nationally branded and our own brands office supplies, technology products,
cleaning and breakroom supplies, furniture, certain services, and other solutions. Office Depot customers are served by a dedicated
sales force, through catalogs and electronically through our Internet sites. We strive to ensure that our customers’ needs are satisfied
through various channel offerings. Refer to the Merchandising section below for additional product information.
Our contract sales channel employs a dedicated sales force that services the office supply needs of predominantly medium-sized to
large customers. We believe sales representatives contribute to customer loyalty by building relationships with customers and
providing information, business tools and problem-solving solutions to them. We offer contract customers the convenience of
shopping our dedicated web sites and retail locations, while honoring their contract pricing in lieu of retail pricing. We also use an
inside sales organization that is staffed by Office Depot employees who support selected existing and new small business customers
who prefer or require a more personalized experience, primarily by telephone. This function, previously outsourced, was brought
back in house at our new inside sales office in Austin, Texas in 2012. Part of our contract business is with various schools, local, state
and national governmental agencies. We also enter into agreements with consortiums to sell to governmental and non-profit entities
for non-exclusive buying arrangements. Sales to our contract customers that are fulfilled at retail locations are included in the results
of our North American Retail Division.
Our direct sales channel is tailored to serve small- to medium-sized customers. Direct customers can order products from our
catalogs, by phone or through our public web sites (www.officedepot.com), including our public web site devoted to technology
products (www.techdepot.com).
We use catalogs and the internet to market directly to both existing and prospective customers. Large catalogs with our full listing of
products are typically distributed annually and supplemented periodically with focused offerings. Prospecting catalogs with special
offers designed to attract new customers are also mailed at certain intervals. In addition, specialty and promotional catalogs may be
delivered more frequently to selected customers based on their past or potential future purchases. We also produce a Green Book
®
catalog, which features products that are recyclable, energy efficient, or otherwise have a reduced impact on the environment. We
continually evaluate our catalog offerings for efficiency and effectiveness at generating incremental revenues. Products purchased
through our catalogs and over the Internet are primarily fulfilled through our North American supply chain from DCs throughout the
U.S. and occasionally through wholesalers.
2
North American Supply Chain
The Company operates a network of DCs, crossdock, and combination facilities across the United States. In prior years, retail stores
were largely replenished through our crossdock flow-through facilities where bulk merchandise was sorted for distribution and
shipped to the requesting stores about three times per week. Based on our supply chain consolidation, we closed three crossdock
facilities in 2010 and one in 2011. The crossdock function in the markets where crossdocks were closed has been transitioned to the
existing DCs within the same markets. These combination facilities, which share real estate, technology, labor costs and inventory,
satisfy the needs of both retail stores and delivery customers. Costs are allocated to the North American Retail Division and North
American Business Solutions Division based on the relative services provided. Benefits of this consolidation include improved
inventory management and greater operational efficiency, as well as improved service.
DC activity for the last three years has been as follows:
2010
2011
2012
Crossdock facility activity for the last three years has been as follows:
2010
2011
2012
Open at
Beginning
of Period
15
13
13
Open at
Beginning
of Period
6
3
2
Opened/
Acquired
1
—
—
Closed
3
—
—
Opened
—
—
—
Closed
3
1
—
Open at
End of
Period
13
13
13
Open at
End
of Period
3
2
2
Inventory is held in our DCs at levels we believe sufficient to meet current and anticipated customer needs. We utilize processes to
evaluate the appropriate timing and quantity of reordering with the objective of controlling investment in inventory, while at the same
time ensuring customer satisfaction. Certain purchases are sent directly from the manufacturer to our customers. Some supply chain
facilities and some retail locations also house sales offices and administrative offices supporting our contract business.
Out-bound delivery and inbound direct import operations are currently provided by third-party carriers.
International Division
As of December 29, 2012, Office Depot sold to customers in 57 countries throughout Europe, Asia, Latin America, and Australia.
Outside of North America, the Company operates wholly-owned entities, majority-owned entities or participates in other ventures
covering 37 countries and has alliances in an additional 20 countries. Refer to the Merchandising section below for additional product
information.
The International Division sells office products and services through direct mail catalogs, contract sales forces, Internet sites and retail
stores, using a mix of Company-owned operations, joint ventures, licensing and franchise agreements, alliances and other
arrangements. The Company maintains DCs and call centers throughout Europe and Asia to support these operations. Currently, we
have catalog offerings in 15 countries outside of North America and operate more than 40 separate public web sites in the
International Division. As of December 29, 2012, the International Division operated, through wholly-owned or majority-owned
entities, 123 retail stores in France, South Korea and Sweden. In addition, we participate under licensing and merchandise
arrangements in South Korea, Israel, Japan, Dominican Republic and the Middle East. During 2010, we sold the operating entity in
Japan as well as the operating entity in Israel and entered into Office Depot licensing agreements with the respective buyers for
continued presence in those markets. During 2011, we acquired additional operations in Sweden, adding customers to both the
contract and retail distribution channels.
3
Since 1994, we have participated in a joint venture selling office products and services in Mexico and Central and South America. In
recent years, this venture, Office Depot de Mexico, has grown in size and scope and now includes 248 retail locations in Mexico,
Colombia, Costa Rica, El Salvador, Guatemala, Honduras, and Panama, as well as call centers and DCs to support the delivery
business in certain areas. Since we participate equally in this business with a partner, we account for the activity under the equity
method and venture sales of approximately $1.1 billion in 2012 are neither reflected in our revenues nor in our consolidated retail
comparable store statistics. Our portion of joint venture results is included in Miscellaneous income, net in the Consolidated
Statements of Operations.
During 2010, we entered into an amended shareholders’ agreement related to our venture in India such that control and ownership
became equally shared. Accordingly, we deconsolidated the assets and liabilities of this entity from the 2010 year end balance sheet
and account for this investment under the equity method.
The International Division has separate regional headquarters for Europe in The Netherlands and for Asia in Hong Kong.
International Division store and DC operations are summarized below:
Company-Owned Stores
Operated by Joint Ventures
Franchise and Licensing Arrangements
Total stores 2010
Company-Owned Stores
Operated by Joint Ventures
Franchise and Licensing Arrangements
Total stores 2011
Company-Owned Stores
Operated by Joint Ventures
Franchise and Licensing Arrangements
Total stores 2012
Open at
Beginning
of Period
137
195
100
432
97
215
143
455
131
232
183
546
Office Supply Stores
Opened/
Acquired
Closed/
Changed
Designation
7
21
53
(1)
81
43
(2)
18
45
106
4
16
7
27
47
(1)
1
10
58
9
1
5
15
12
—
44
(3)
56
Open
at End
of
Period
97
215
143
455
131
232
183
546
123
248
146
517
(1)
(2)
(3)
45 of these stores relate to Office Depot Israel which were changed to a licensing agreement.
40 of these stores relate to the acquisition of an entity in Sweden.
38 of these stores relate to the termination of the Thailand license agreement.
4
2010
2011
2012
Open at
Beginning
of Period
39
26
27
Distribution Centers
Opened/
Acquired
1
1
1
Closed/
Deconsolidated
14
(4)
—
5
Open
at End
of
Period
26
27
23
(4)
10 of these locations relate to the deconsolidation of Office Depot India.
Merchandising
Our merchandising strategy is to meet our customers’ needs by offering a broad selection of nationally branded office products, as
well as our own brands products and services. Our selection of own brand products has increased in breadth and level of
sophistication over time. We currently offer general office supplies, computer supplies, business machines and related supplies, and
office furniture under various labels, including Office Depot , Viking Office Products , Foray , and Ativa .
®
®
®
®
We classify our products into three categories: (1) supplies, (2) technology, and (3) furniture and other. The supplies category
includes products such as paper, binders, writing instruments, school supplies, and ink and toner. The technology category includes
products such as desktop and laptop computers, monitors, tablets, printers, cables, software, digital cameras, telephones, and wireless
communications products. The furniture and other category includes products such as desks, chairs, and luggage, sales in our copy
and print centers, and other miscellaneous items.
Total Company sales by product group were as follows:
Supplies
Technology
Furniture and other
2012
65.5%
20.9%
13.6%
100.0%
2011
65.1%
21.9%
13.0%
100.0%
2010
65.2%
22.4%
12.4%
100.0%
We buy substantially all of our merchandise directly from manufacturers and other primary suppliers, including direct sourcing of our
own brands products from domestic and offshore sources. We also enter into arrangements with vendors that can lower our unit
product costs if certain volume thresholds or other criteria are met. For additional discussion regarding these arrangements, refer to
“Critical Accounting Policies” in Part II—Item 7. MD&A.
We operate separate merchandising functions in North America, Europe and Asia as well as in our joint ventures. Each group is
responsible for selecting, purchasing and pricing merchandise as well as managing the product life cycle of our inventory. In recent
years, we have increasingly used global offerings across all regions to further reduce our product cost while maintaining product
quality.
We operate global sourcing offices in Shenzhen and Hangzhou, China, which allow us to better manage our product sourcing,
logistics and quality assurance. These offices consolidate our purchasing power with Asian factories and, in turn, help us to increase
the scope of our own brands offerings.
Sales and Marketing
Our marketing programs are designed to attract new customers and to drive frequency of customer visits to our stores and web sites.
We regularly advertise in major newspapers in most of our North American markets. We also advertise through local and national
radio, network and cable television advertising campaigns, and direct marketing efforts, such as the Internet and social networking.
5
We offer customer loyalty programs that provide customers with rewards that can be applied against future Office Depot purchases or
other incentives. These programs have provided us with valuable information enabling us to market more effectively to our
customers. These programs may change in popularity in the future, and we may make alterations to them from time to time.
We perform periodic competitive pricing analyses to monitor each market, and prices are adjusted as necessary to adhere to our
pricing philosophy and further our competitive positioning. We generally expect that our everyday pricing is competitive with other
resellers of office products.
We acquire new customers by selectively mailing specially designed catalogs and by making on-premises sales calls to prospective
customers. We also make outbound sales calls using dedicated agents through our telephone account management program. We
obtain the names of prospective customers in new and existing markets through the purchase of selected lists from outside marketing
information services and other sources as well as through the use of a proprietary mailing list system. We also acquire customers
through e-mail marketing campaigns and online affiliates. No single customer in any of our Divisions accounts for more than 10% of
our total sales or accounts receivable.
Our business is somewhat seasonal, with sales generally trending lower in the second quarter, following the “back-to-business” sales
cycle in the first quarter and preceding the “back-to-school” sales cycle in the third quarter and the holiday sales cycle in the fourth
quarter. Certain working capital components may build and recede during the year reflecting established selling cycles. Business
cycles can and have impacted our operations and financial position when compared to other periods.
Copy and Print
Our North American retail stores contain a Copy & Print Depot
offering printing, reproduction, mailing, shipping, and other
services. This includes Xerox Certified Print Specialist associates to assist with digital imaging and printing and shipping services
through UPS and the U.S. Postal Service. In addition to the in-store locations, we operate nine regional print facilities, which support
copy and print orders taken in our North American Retail and North American Business Solutions Divisions. We also offer copy and
print services to our customers in Europe through our e-commerce business and certain retail locations.
TM
TM
Intellectual Property
We hold trademark registrations domestically and worldwide and have numerous other applications pending worldwide for the names
“Office Depot”, “Viking”, “Ativa”, “Foray”, “Realspace”, and others. We consider the trademark for the Office Depot name the most
significant trademark held by us because of its impact on market awareness across all of our businesses and on customers’
identification with us. As with all domestic trademarks, our trademark registrations in the United States are for a ten year period and
are renewable every ten years, prior to their respective expirations, as long as the trademarks are used in the regular course of trade.
Industry and Competition
We operate in a highly competitive environment in all three Divisions. We believe that we compete favorably on the basis of price,
service, relationships and selection. We compete with office supply stores, wholesale clubs, discount stores, mass merchandisers,
Internet-based companies, food and drug stores, computer and electronics superstores and direct marketing companies. These
companies, in varying degrees, compete with us in substantially all of our current markets.
Other office supply retail companies market similarly to us in terms of store format, pricing strategy, product selection and product
availability in the markets where we operate, primarily those in the United States. We anticipate that in the future we will continue to
face increased competition from these companies.
6
Internationally, we compete on a similar basis to North America. Outside of the United States, we sell through contract and catalog
channels in 16 countries and operate retail stores, and in three of these countries we also sell through wholly-owned or majority-
owned entities. Additionally, our International Division provides office products and services in 41 countries through joint ventures,
licensing and franchise agreements, cross-border transactions, alliances and other arrangements.
Employees
As of January 26, 2013, we had approximately 38,000 employees worldwide. Our workforce is largely non-union and our labor
relations are generally good. In certain international locations, changes in staffing or work arrangements may need approval of local
works councils or other bodies.
Environmental Activities
As both a significant user and seller of paper products, we have developed environmental practices that are values-based and market-
driven. Our environmental initiatives center on three guiding principles: (1) recycling and pollution reduction; (2) sustainable forest
management; and (3) issue awareness and market development for environmentally preferable products. We offer thousands of
different products containing recycled content, including from 35% to 100% post-consumer waste content paper and technology
recycling services in our retail stores.
Office Depot continues to implement environmental programs in line with our stated environmental vision to “increasingly buy green,
be green and sell green” – including environmental sensitivity in our packaging, operations and sales offerings. Our ‘Green’ retail
store prototype design is based on our Austin, Texas store, which received a Leadership in Energy and Environmental Design (LEED)
Gold Certification from the United States Green Building Council in December 2008. In 2010, the United States Green Building
Council awarded our global headquarters in Boca Raton, Florida a LEED Gold Certification under the Operations and Maintenance
rating system and we were the first office supplies retailer with a headquarters building certified under any of the LEED rating
systems. Additional information on our green product offerings can be found at www.officedepot.com/buygreen.
Available Information
We maintain a web site at www.officedepot.com. We make available, free of charge, on the “Investor Relations” section of our web
site, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as
soon as reasonably practicable after we electronically file or furnish such materials to the United States Securities and Exchange
Commission (“SEC”). In addition, the public may read and copy any of the materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE, Washington DC 20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and
information statements and other information regarding issuers, such as the company, that file electronically with the SEC. The
address of that website is www.sec.gov.
Additionally, our corporate governance materials, including corporate governance guidelines; charters of the Audit, Compensation,
Finance, and Corporate Governance and Nominating Committees; and code of ethical behavior may also be found under the “Investor
Relations” section of our web site at www.officedepot.com.
7
Our Executive Officers
Neil R. Austrian — Age 73
Mr. Austrian has been Chairman and Chief Executive Officer since May 23, 2011 and he previously acted as Interim Chairman and
Chief Executive Officer beginning November 1, 2010. Mr. Austrian has served as a Director since 1998. He also served as our
Interim Chair and Chief Executive Officer from October 4, 2004 until March 11, 2005. Mr. Austrian served as President and Chief
Operating Officer of the National Football League from April 1991 until December 1999. He was a Managing Director of Dillon,
Read & Co. Inc. from October 1987 until March 1991. Mr. Austrian served as a director of Viking Office Products from January 1988
until August 1998 when Office Depot merged with Viking Office Products. He also serves as a director of The DirecTV Group
(formerly Hughes Electronics Company).
Michael Allison — Age: 55
Mr. Allison was appointed Executive Vice President, Human Resources for Office Depot in July 2011. Mr. Allison joined Office
Depot in September 2006 as Vice President, Human Resources. Prior to joining Office Depot, Mr. Allison served as Executive Vice
President of Human Resources for Victoria’s Secret Direct from February, 2001 to September, 2005. Prior to Victoria’s Secret, he
was Senior Vice President of Human Resources for Bank One and Senior Vice President and Director of Human Resources for
National City Bank.
Elisa Garcia — Age: 55
Ms. Garcia was appointed Executive Vice President, General Counsel and Corporate Secretary in July 2007 with overall
responsibility for global legal and compliance matters and governmental relations. Prior to joining Office Depot, Ms. Garcia served as
Executive Vice President, General Counsel and Corporate Secretary of Domino’s Pizza, Inc. from April 2000. Prior to joining
Domino’s Pizza, Ms. Garcia served as Latin American Regional Counsel for Philip Morris International, and Corporate Counsel for
GAF Corporation.
Kim Moehler — Age: 44
Ms. Moehler was appointed Senior Vice President and Controller in March 2012. Ms. Moehler previously served as Senior Vice
President, Finance- North American Retail and North America Financial Planning & Analysis since February 2012, and as Senior
Vice President, Finance North American Retail from September 2006 until February 2012. From May 2000 through September 2006,
Ms. Moehler served in director and vice president finance positions at the Company. Ms. Moehler joined the Company in February
1999 as Senior Manager, Budget & Finance Reporting. Before Office Depot, Ms. Moehler was with Advantica Corporation (owner of
Denny’s restaurants), leaving as the Director of Field Finance. She is a licensed CPA and graduated from the University of North
Carolina-Chapel Hill.
Michael Newman — Age: 56
Mr. Newman was appointed Executive Vice President, Chief Financial Officer in August 2008. Prior to joining Office Depot,
Mr. Newman served as Chief Financial Officer of Platinum Research Organization, Inc. from April 2007 through February 2008.
Prior to joining Platinum Research Organization, Mr. Newman was employed as an independent consultant since 2005. Mr. Newman
also served as Chief Financial Officer of Blackstone Crystal Holdings Capital Partners from 2004 to 2005 and Chief Financial Officer
of Radio Shack Corp. from 2001 to 2004. Mr. Newman also held Chief Financial Officer roles at Intimate Brands and Hussmann
International (which was acquired by Ingersoll-Rand in 2000). He also spent 17 years at General Electric in a variety of management
roles both in the United States and Europe.
8
Robert J. Moore — Age: 56
Mr. Moore is our Executive Vice President, marketing and Merchandising. He was appointed Executive Vice President and Chief
Marketing Officer for Office Depot in July of 2011 and assumed responsibility for our Merchandising Operations in August 2012.
Mr. Moore joined the Company as Interim Head of Marketing in April 2011. Prior to joining Office Depot, he ran his own marketing
consulting practice from January 2009 to April 2011, and before that served as President of the U.S. Vision Care business from July
2007 to July 2008 and various senior executive positions since 2002. Mr. Moore’s experience also includes Executive Vice President
of Marketing for Staples from 1999 to 2001 and Global VP Marketing and Product Design for Ray Ban Sunglass Group from 1996 to
1999.
Kevin Peters — Age: 55
Mr. Peters resigned from Office Depot effective January 4, 2013. He was appointed President, North American in July 2011. He
previously served as President of the North American Retail Division since April 2010 and as Executive Vice President, Supply
Chain and Information Technology since March 2009. He joined the Company in 2007 as Executive Vice President, Supply Chain.
Prior to joining the Company, Mr. Peters spent five years in management roles at W.W. Grainger, including Senior Vice President,
Supply Chain and Merchandising. Prior to W.W. Grainger, Mr. Peters spent 11 years at The Home Depot, serving as Vice President
and General Manager, Home Depot Commercial Direct and Vice President Supply Chain and Merchandising.
Steven Schmidt — Age: 58
Mr. Schmidt was appointed President, International in November 2011 after serving as Executive Vice President, Corporate Strategy
and New Business Development since July 2011, and as President, North American Business Solutions since July 2007. Prior to
joining Office Depot, Mr. Schmidt spent 11 years with the ACNielsen Corporation, most recently serving as President and Chief
Executive Officer. Prior to joining ACNielsen, Mr. Schmidt spent eight years at the Pillsbury Food Company, serving as President of
its Canadian and Southeast Asian operations. He has also held management positions at PepsiCo and Procter & Gamble.
Item 1A. Risk Factors.
In addition to risks and uncertainties in the ordinary course of business that are common to all businesses, important factors that are
specific to our industry and our Company could materially impact our future performance and results. We have provided below a list
of risk factors that should be reviewed when considering investing in our securities. These are not all the risks we face, and other
factors currently considered immaterial or unknown to us may impact our future operations.
Declines in business and consumer spending could adversely affect our business and financial performance.
Our operating results and performance depend significantly on worldwide economic conditions and their impact on business and
consumer spending. The decline in business and consumer spending resulting from the global recession has caused our comparable
store sales to continue to decline from prior periods and we have experienced similar declines in most of our other domestic and
international businesses. Our business and financial performance may continue to be adversely affected by current and future
economic conditions and the level of consumer debt and interest rates, which may cause a continued or further decline in business and
consumer spending.
9
Our business is highly competitive and failure to adequately differentiate ourselves or respond to shifting consumer demands
could adversely impact our financial performance.
The office products market is highly competitive and we compete locally, domestically and internationally with office supply stores,
including Staples and OfficeMax, wholesale clubs such as Costco and BJs, mass merchandisers such as Wal-Mart and Target,
computer and electronics superstores such as Best Buy, Internet-based companies such as Amazon.com, food and drug stores,
discount stores, and direct marketing companies. Many competitors have also increased their presence by broadening their
assortments or broadening from retail into the delivery and e-commerce channels, while others have substantially greater financial
resources to devote to sourcing, marketing and selling their products. Product pricing is also becoming ever more competitive,
particularly among competitors on the Internet. In order to achieve and maintain expected profitability levels, we must continue to
grow by adding new customers and taking market share from competitors. In addition, consumers are utilizing more technology and
purchasing less paper, file storage and similar products. If we are unable to provide technology solutions and services that meet
consumer needs or if we are unable to effectively compete, our sales and financial performance will be negatively impacted.
If we are unable to successfully maintain a relevant multichannel experience for our customers, our results of operations could be
adversely affected.
With the increasing use of computers, tablets, mobile phones and other devices to shop in our stores and online, we offer full and
mobile versions of our website (www.officedepot.com) and applications for mobile phones and tablets. In addition, we are increasing
the use of social media as a means of interacting with our customers and enhancing their shopping experiences. Multichannel retailing
is rapidly evolving and we must keep pace with the changing expectations of our customers and new developments by our
competitors. If we are unable to attract and retain team members or contract third parties with the specialized skills needed to support
our multichannel platforms, or are unable to implement improvements to our customer-facing technology in a timely manner, our
ability to compete and our results of operations could be adversely affected. In addition, if our web site and our other customer-facing
technology systems do not function as designed, we may experience a loss of customer confidence and satisfaction, data security
breaches, lost sales or be exposed to fraudulent purchases, which could adversely affect our reputation and results of operations.
We do a significant amount of business with government entities and loss of this business could negatively impact our results.
One of our largest U.S. customer groups consists of various state and local governments, government agencies and non-profit
organizations. Contracting with state and local governments is highly competitive, subject to federal and state procurement laws,
requires more restrictive contract terms and can be expensive and time-consuming. Bidding such contracts often requires that we
incur significant upfront time and expense without any assurance that we will win a contract. Our ability to compete successfully for
and retain business with the federal and various state and local governments is highly dependent on cost-effective performance and is
also sensitive to changes in national and international priorities and U.S., state and local government budgets, which in the current
economy continue to decrease. We service a substantial amount of government agency business through agreements with consortiums
of governmental and non-profit entities. If we are unsuccessful in retaining these customers, or if there is a significant reduction in
sales under our large government contracts or if we lose these contracts, it could adversely impact our financial results.
If a significant number of our vendors demand accelerated payments or require cash on delivery, such demands could have an
adverse impact on our operating cash flow and result in severe stress on our liquidity.
We purchase products for resale under credit arrangements with our vendors and have been able to negotiate payment terms that are
approximately equal in length to the time it takes to sell the vendor’s products. When the global economy is experiencing weakness as
it has over the last five years, vendors may seek credit insurance to protect against non-payment of amounts due to them. If we
continue to experience declining operating performance, and if we experience severe liquidity challenges, vendors may demand that
we accelerate our payment for their products. Borrowings under our existing credit facility could reach maximum levels under such
circumstances, causing us to seek alternative liquidity measures, but we may not be able to meet our obligations as they become due
until we secure such alternative measures.
10
A downgrade in our credit ratings or a general disruption in the credit markets could make it more difficult for us to access funds,
refinance indebtedness, obtain new funding or issue securities.
Historically, we have generated positive cash flow from operating activities and have had access to broad financial markets that
provide the liquidity we need to operate our business. Together, these sources have been used to fund operating and working capital
needs, as well as invest in business expansion through new store openings, capital improvements and acquisitions. Due to the
downturn in the global economy, our operating results have declined. Further deterioration in our financial results could negatively
impact our credit ratings, our liquidity and our access to the capital markets. Certain of our existing indebtedness matures in 2013 and
there can be no assurance that we will be able to refinance all or a portion of that indebtedness. If we are able to refinance all or a
portion of that indebtedness, there is no assurance that we will be able to secure such refinancing on more favorable terms than the
terms of our existing indebtedness.
A default under our credit facility could significantly restrict our access to funding and adversely impact our operations.
Our asset based credit facility contains a fixed charge coverage ratio covenant that is operative only when borrowing availability is
below $125 million or prior to a restricted transaction, such as incurring additional indebtedness, acquisitions, dispositions, dividends,
or share repurchases. The agreement also contains representations, warranties, affirmative and negative covenants, and default
provisions. A breach of any of these covenants could result in a default under our credit agreement. Upon the occurrence of an event
of default under our credit agreement, the lenders could elect to declare all amounts outstanding to be immediately due and payable
and terminate all commitments to extend further credit. If the lenders were to accelerate the repayment of borrowings, we may not
have sufficient assets to repay our asset based credit facility and our other indebtedness. Also, should there be an event of default, or a
need to obtain waivers following an event of default, we may be subject to higher borrowing costs and/or more restrictive covenants
in future periods. Acceleration of our obligations under our credit facilities would permit the holders of our other material debt to
accelerate their obligations.
Loss of key personnel could have an adverse impact on our business.
We depend on our executive management team and other key personnel, and the loss of certain personnel could result in the loss of
management continuity and institutional knowledge. We depend heavily upon our retail labor force to identify new customers and
provide desired products and personalized customer service to existing customers. The market for qualified employees, with the right
talent and competencies, is highly competitive, and may subject us to increased labor costs during periods of low unemployment. The
loss of the services of key employees or the inability to attract additional qualified managers may adversely affect our ability to
conduct operations in our stores in accordance with the standards that we have set.
We also depend on our executive officers as well as other key personnel. Although certain members of our executive team have
entered into agreements relating to their employment with us, most of our key personnel are not bound by employment agreements,
and those with employment or retention agreements are bound only for a limited period of time. If we are unable to retain our key
personnel, we may be unable to successfully develop and implement our business plans, which may have an adverse effect on our
business.
11
Disruption of global sourcing activities or our own brands quality concerns could negatively impact brand reputation and
earnings.
®
In recent years, we have substantially increased the number and types of products that we sell under our own brands including Office
Depot and other proprietary brands. Sources of supply may prove to be unreliable, or the quality of the globally sourced products
may vary from our expectations and standards. Economic and civil unrest in areas of the world where we source such products, as
well as shipping and dockage issues, could adversely impact the availability or cost of such products, or both. Moreover, as we seek
indemnities from the manufacturers of these products, the uncertainty of realization of any such indemnity and the lack of
understanding of U.S. product liability laws in certain parts of Asia make it more likely that we may have to respond to claims or
complaints from our customers. Most of our goods imported to the U.S. arrive from Asia through ports located on the U.S. west coast
and we are therefore subject to potential disruption due to labor unrest, security issues or natural disasters affecting any or all of these
ports.
Changes in tax laws in any of the multiple jurisdictions in which we operate can cause fluctuations in our overall tax rate
impacting our reported earnings.
Our global tax rate is derived from a combination of applicable tax rates in the various domestic and international jurisdictions in
which we operate. Depending upon the sources of our income, any agreements we may have with taxing authorities in various
jurisdictions, and the tax filing positions we take in these jurisdictions, our overall tax rate may fluctuate significantly from other
companies or even our own past tax rates. At any given point in time, we base our estimate of an annual effective tax rate upon a
calculated mix of the tax rates applicable to our Company and to estimates of the amount of income likely to be generated in any
given geography. The loss of one or more agreements with taxing jurisdictions, a change in the mix of our business from year to year
and from country to country, changes in rules related to accounting for income taxes, changes in tax laws in any of the multiple
jurisdictions in which we operate or adverse outcomes from the tax audits that regularly are in process in any of the jurisdictions in
which we operate could result in an unfavorable change in our overall tax rate.
We are subject to legal proceedings and legal compliance risks.
We are involved in various legal proceedings, which from time to time may involve class action lawsuits, state and federal
governmental inquiries, audits and investigations, employment, tort, consumer litigation and intellectual property litigation. At times,
such matters may involve directors and/or executive officers. Certain of these legal proceedings, including government investigations,
may be a significant distraction to management and could expose our Company to significant liability, including damages, fines,
penalties, attorneys’ fees and costs, and non-monetary sanctions, including suspensions and debarments from doing business with
certain government agencies, any of which could have a material adverse effect on our business and results of operations.
Failure to successfully manage our domestic and international business could have an adverse effect on our operations and
financial results.
Circumstances outside of our control could negatively impact anticipated store openings, joint ventures and franchise arrangements.
We cannot provide assurance that our new store openings, including some newly sized or formatted stores or retail concepts, will be
successful. There may be unintended consequences of adding joint venture and franchising partners to the Office Depot model, such
as the potential for compromised operational control in certain countries and inconsistent international brand image. These joint
venture and franchise arrangements may also add complexity to our processes and may require unanticipated operational adjustments
in the future that could adversely impact our operations and financial results.
12
We face such risks as foreign currency fluctuations, potential unfavorable foreign trade policies or unstable political and
economic conditions.
As of December 29, 2012, we sold to customers in 59 countries throughout North America, Europe, Asia, Latin America, and
Australia. We operate wholly-owned entities, majority-owned entities and participate in joint ventures and alliances globally. Sales
from our operations outside the U.S. are denominated in local currency, which must be translated into U.S. dollars for reporting
purposes and therefore our consolidated earnings can be significantly impacted by fluctuations in world currency markets. We are
required to comply with multiple foreign laws and regulations that may differ substantially from country to country, requiring
significant management attention and cost. In addition, the business cultures in certain areas of the world are different than those that
prevail in the U.S., and we may be at a competitive disadvantage against other companies that do not have to comply with standards
of financial controls or business integrity that we are committed to maintaining as a U.S. publicly traded company.
Changes in the regulatory environment may increase our expenses and may negatively impact our business.
We are subject to regulatory matters relating to our corporate conduct and the conduct of our business, including securities laws,
consumer protection laws, advertising regulations, and wage and hour regulations. Certain jurisdictions have taken a particularly
aggressive stance with respect to such matters and have implemented new initiatives and reforms, including more stringent disclosure
and compliance requirements. To the extent that we are subject to more challenging regulatory environments and enhanced legal and
regulatory requirements, such exposure could have a material adverse effect on our business, including the added cost of increased
compliance measures that we may determine to be necessary.
Healthcare reform legislation could adversely affect our future profitability and financial condition.
Rising healthcare costs and interest in universal healthcare coverage in the United States have resulted in government and private
sector initiatives proposing significant healthcare reforms. The Patient Protection and Affordable Care Act, signed into law on
March 23, 2010, is expected to increase our annual employee health care costs, with the most significant increases commencing in
2014. We cannot predict the extent of the effect of this statute, or any future state or federal healthcare legislation or regulation, will
have on us. However, an expansion in government’s role in the U.S. healthcare industry could result in significant long-term costs to
us, which could in turn adversely affect our future profitability and financial condition.
Increases in fuel and other commodity prices could have an adverse impact on our earnings.
We operate a large network of stores and delivery centers around the globe. As such, we purchase significant amounts of fuel needed
to transport products to our stores and customers as well as shipping costs to import products from overseas. While we may hedge our
anticipated fuel purchases, the underlying commodity costs associated with this transport activity have been volatile in recent years
and disruptions in availability of fuel could cause our operating costs to rise significantly to the extent not covered by our hedges.
Additionally, other commodity prices, such as paper, may increase and we may not be able to pass along such costs to our customers.
Fluctuations in the availability or cost of our energy and other commodity prices could have a material adverse effect on our
profitability.
Disruptions of our computer systems could adversely affect our operations.
We rely heavily on computer systems to process transactions, manage our inventory and supply-chain and to summarize and analyze
our global business. Certain systems are at or near the end of life and need to be replaced. If our systems are damaged or fail to
function properly, or, if we do not replace or upgrade certain systems, we may incur substantial costs to repair or replace them and
may experience an interruption of our normal business activities or loss of critical data. We are undertaking certain system
enhancements and conversions to increase productivity and efficiency, that, if not done properly, could divert the attention of our
workforce during development and implementation and constrain for some time our ability to provide the level of service our
customers demand. Also, once implemented, the new systems and technology may not provide the intended efficiencies or anticipated
benefits and could add costs and complications to our ongoing operations.
13
A breach of our information technology systems could adversely affect our reputation, business partner and customer
relationships and operations and result in high costs.
Through our sales and marketing activities, we collect and store certain personal information that our customers provide to purchase
products or services, enroll in promotional programs, register on our web site, or otherwise communicate and interact with us. This
may include names, addresses, phone numbers, email addresses, contact preferences, and payment account information. We also
gather and retain information about our employees in the normal course of business. We may share information about such persons
with vendors that assist with certain aspects of our business. In addition, our online operations at www.officedepot.com depend upon
the secure transmission of confidential information over public networks, such as information permitting cashless payments.
We have instituted safeguards for the protection of such information. These security measures may be compromised as a result of
third party security breaches, burglaries, malfeasance, faulty password management, misappropriation of data by employees, vendors
or unaffiliated third-parties, or other irregularity, and result in persons obtaining unauthorized access to our data or accounts. Despite
instituted safeguards for the protection of such information, we cannot be certain that all of our systems and those of our vendors and
unaffiliated third-parties are entirely free from vulnerability to attack. We may experience a breach of our systems and may be unable
to protect sensitive data. Moreover, an alleged or actual data security breach that affects our systems or results in the unauthorized
release of personal information could:
•
•
increase costs of doing business,
materially damage our reputation and brand, negatively affect customer satisfaction and loyalty, expose us to negative
publicity, individual claims or consumer class actions, administrative, civil or criminal investigations or actions, and
infringe on proprietary information.
Our business could be disrupted due to weather related factors.
Our operations are heavily concentrated in the southern U.S. (including Florida and the Gulf Coast). As such, we may be more
susceptible than some of our competitors to the effects of tropical weather disturbances, such as hurricanes. In addition, winter storm
conditions in areas that have a large concentration of our business activities could also result in lost retail sales, supply chain
constraints or other business disruptions. We believe that we have taken reasonable precautions to prepare for weather-related events,
but our precautions may not be adequate to mitigate the adverse effect of such events in the future.
The unionization of a significant portion of our workforce could increase our overall costs and adversely affect our operations.
We have a large employee base and while our management believes that our employee relations are good, we cannot be assured that
we will not experience pressure from labor unions or become the target of campaigns similar to those faced by our competitors. The
potential for unionization could increase if federal legislation is passed that would facilitate labor organization. Significant union
representation would require us to negotiate wages, salaries, benefits and other terms with many of our employees collectively and
could adversely affect our results of operations by significantly increasing our labor costs or otherwise restricting our ability to
maximize the efficiency of our operations.
14
BC Partners’ significant ownership interest dilutes the interests of our common shareholders, may discourage, delay or prevent a
change in control of our Company and grants important rights to BC Partners, Inc.
The Series A and Series B Preferred Stock that we sold in June 2009 to funds advised by BC Partners, Inc. (the “Investors”) were
immediately convertible into shares of our common stock at an initial conversion price of $5.00 per share (subject to a conversion
cap). The investment equates to a potential current ownership interest of approximately 22%, assuming the full conversion of each
series of preferred stock into the Company’s common stock. Any sales in the public market of the shares of common stock issuable
upon such conversion could adversely affect prevailing market prices of our common stock.
The initial dividend rate remains 10% on both the Series A and Series B Preferred Stock, and dividends are paid quarterly in cash or
are added to the liquidation preference at our option and are subject to certain restrictions. To the extent that dividends are added to
the liquidation preference, this further increases the ownership interest of the Investors and dilutes the interests of the common
shareholders.
The holders of the Series A and Series B Preferred Stock are entitled to vote with the holders of our common stock on an as-converted
basis, subject to limitations imposed by New York Stock Exchange (“NYSE”) shareholder approval requirements. The Investors have
agreed to cause all of their common stock and preferred stock entitled to vote at any meeting of our shareholders to be present at such
meeting and to vote all such shares in favor of any nominee or director nominated by the Company’s Corporate Governance and
Nominating Committee, against the removal of any director nominated by such Committee and, with respect to any other business or
proposal, in accordance with the recommendation of the Board of Directors (other than with respect to the approval of any proposed
business combination agreement between the Company and another entity). This may discourage, delay or prevent a change in control
of our Company, which could deprive our shareholders of an opportunity to receive a premium for their common stock as part of a
sale of our Company.
We also entered into a related Investor Rights Agreement pursuant to which we granted certain rights to the Investors that may
restrain our ability to take certain actions in the future. Subject to certain exceptions, for so long as the Investors’ ownership
percentage is equal to or greater than 10%, the approval of at least one of the directors designated to our Board of Directors by the
Investors is required for the Company to incur any indebtedness for borrowed money in excess of $200 million in the aggregate
during any fiscal year if the ratio of the consolidated debt of the Company to the trailing four quarter adjusted EBITDA of the
Company, on a consolidated basis, is more than 4x. In addition, for so long as the Investors’ ownership percentage is (i) equal to or
greater than 15%, the Investors are entitled to nominate three directors, (ii) less than 15% but more than 10%, two directors and
(iii) less than 10% but more than 5%, one director. There can be no assurance that the interests of the Investors are aligned with those
of our other shareholders. Investor interests can differ from each other and from other corporate interests and it is possible that the
Investors may have interests that differ from management and those of other shareholders. If the Investors were to sell, or otherwise
transfer, all or a large percentage of their holdings, our stock price could decline and we could find it difficult to raise capital, if
needed, through the sale of additional equity securities.
15
We have incurred significant impairment charges and we continue to incur significant impairment charges.
During 2012, we recognized non-cash asset impairment charges in our North American Retail Division of approximately $123.4
million. These charges reflect greater than anticipated downturns in sales at certain lower performing stores. We recognized store
asset impairment charges in the North American Retail Division of $11 million during 2011. We assess past performance and make
estimates and projections of future performance quarterly at an individual store level. Reduced sales, our shift in strategy to be less
promotional, as well as competitive factors and changes in consumer spending habits resulted in a downward adjustment of
anticipated future cash flows for the individual stores that resulted in the impairment. We foresee challenges in the market and
economy that could adversely impact our operations. To the extent that forward-looking sales and operating assumptions are not
achieved and are subsequently reduced, or if we commit to a more aggressive store downsizing strategy, including allocating capital
to further modify store formats, additional impairment charges may result. Additionally, the Company has $64.3 million of goodwill
at December 29, 2012, with $44.9 million in the International Division. We measure goodwill for impairment annually in the fourth
quarter or earlier if indicators of possible impairment are identified. Changes in the numerous variables associated with the
judgments, assumptions and estimates we make, in assessing the appropriate valuation of our goodwill, including changes resulting
from macroeconomic challenges in international markets, or disposition of components within reporting units, could in the future
require a reduction of goodwill and recognition of related non-cash impairment charges. If we were required to further impair our
store assets or our goodwill, it could have a material adverse effect on our business and results of operations.
Provisions in our stockholder rights plan may make it more difficult for a third party to acquire us.
We have adopted a stockholder rights plan that could make it more difficult for a third party to acquire, or could discourage a third
party from acquiring, our Company or a large block of our common stock. A third party that acquires 15% or more of our common
stock could suffer substantial dilution of its ownership interest under the terms of the stockholder rights plan through the issuance of
common stock or common stock equivalents to all stockholders other than the acquiring person.
Disclaimer of Obligation to Update
We assume no obligation (and specifically disclaim any such obligation) to update these Risk Factors or any other forward-looking
statements contained in this Annual Report to reflect actual results, changes in assumptions or other factors affecting such forward-
looking statements.
Item 1B. Unresolved Staff Comments.
None.
16
Item 2. Properties.
The following table sets forth our retail stores by location as of December 29, 2012.
State/Country
UNITED STATES:
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
State/Country
STORES
#
21 New Jersey
2 New Mexico
4 New York
12 North Carolina
142 North Dakota
41 Ohio
3 Oklahoma
1 Oregon
1 Pennsylvania
144 Puerto Rico
49 South Carolina
4 South Dakota
6 Tennessee
43 Texas
22 Utah
3 Virginia
7 Washington
21 West Virginia
38 Wisconsin
25 Wyoming
1 TOTAL UNITED STATES
20
8 INTERNATIONAL
19 FRANCE
25 SOUTH KOREA
4 SWEDEN
6 TOTAL INTERNATIONAL
19
17
#
11
7
8
38
2
13
17
18
11
6
20
1
27
155
9
23
36
2
14
3
1,112
54
18
51
123
As of December 29, 2012, we had 15 North American supply chain facilities in 12 U.S. states which support our North American
Retail and North American Business Solutions Divisions. As of December 29, 2012, we also had 23 DCs in 13 countries outside of
the United States, which support our International Division. The following tables set forth the locations of our supply chain facilities
as of December 29, 2012.
State
Arizona
California
Colorado
Florida
Georgia
Illinois
State
Florida
Mississippi
TOTAL
Country
Belgium
China
Czech Republic
France
Germany
Ireland
Italy
DCs (United States)
#
1 Minnesota
2 Ohio
1 Pennsylvania
1 Texas
1 Washington
1 TOTAL
Crossdock Facilities (United States)
#
1
1
2
International DCs
#
1 South Korea
4 Spain
1 Sweden
5 Switzerland
2 The Netherlands
1 United Kingdom
1 TOTAL
State
Country
#
1
1
1
2
1
13
#
1
1
1
1
1
3
23
Our corporate offices in Boca Raton, Florida consist of approximately 625,000 square feet of leased office space. We also lease a
corporate office in Venlo, The Netherlands which is approximately 210,000 square feet and we lease other administrative offices.
Each of our facilities is considered to be in good condition, adequate for its purpose and suitably utilized according to the individual
nature and requirements of the relevant operations.
Although we own a small number of our retail store locations, most of our facilities are leased or subleased.
18
Item 3. Legal Proceedings.
We are involved in litigation arising in the normal course of our business. While, from time to time, claims are asserted that make
demands for a large sum of money (including, from time to time, actions which are asserted to be maintainable as class action suits),
we do not believe that contingent liabilities related to these matters (including the matters discussed below), either individually or in
the aggregate, will materially affect our financial position, results of our operations or cash flows.
In addition, in the ordinary course of business, our sales to and transactions with government customers may be subject to lawsuits,
investigations, audits and review by governmental authorities and regulatory agencies, with which we cooperate. Many of these
lawsuits, investigations, audits and reviews are resolved without material impact to the company. While claims in these matters may
at times assert large demands, we do not believe that contingent liabilities related to these matters, either individually or in the
aggregate, will materially affect our financial position, results of our operations or cash flows. In addition to the foregoing, State of
California et. al. ex. rel. David Sherwin v. Office Depot was filed in Superior Court for the State of California, Los Angeles County,
and unsealed on October 19, 2012. This action seeks as relief monetary damages. This lawsuit relates to allegations regarding certain
pricing practices in California under a now expired agreement that was in place between January 2, 2006 and January 1, 2011,
pursuant to which state, local and non-profit agencies purchased office supplies (the “Purchasing Agreement”) from us. This action
seeks as relief monetary damages. This lawsuit, which is now pending in the United States District Court for the Central District of
California after a Notice of Removal filed by the Company. We believe that adequate provisions have been made for probable losses
on one claim in this matter and such amounts are not material. However, in light of the early stages of the other claims and the
inherent uncertainty of litigation, we are unable to reasonably determine the full effect of the potential liability in the matter. Office
Depot intends to vigorously defend itself in this lawsuit and filed motions to dismiss. Additionally, during the first quarter of 2011,
we were notified that the United States Department of Justice (“DOJ”) commenced an investigation into certain pricing practices
related to the Purchasing Agreement. We have cooperated with the DOJ on this matter.
Item 4. Mine Safety Disclosures.
None.
19
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “ODP.” As of the close of business on
January 26, 2013, there were 6,255 holders of record of our common stock. The last reported sale price of the common stock on the
NYSE on January 26, 2013 was $4.37.
The following table sets forth, for the periods indicated, the high and low sale prices of our common stock. These prices do not
include retail mark-ups, markdowns or commission.
2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2011
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$3.81
3.50
2.85
3.62
$6.10
4.74
4.42
2.58
$2.08
1.98
1.51
2.24
$4.77
3.33
2.05
1.80
We have never declared or paid cash dividends on our common stock and do not anticipate declaring or paying any cash dividends on
our common stock in the foreseeable future. Our Amended Credit Agreement allows payment of cash dividends on preferred stock
and share repurchases, in an aggregate amount of $75 million per fiscal year subject to the satisfaction of certain liquidity
requirements. Additionally, at December 29, 2012, pursuant to an indenture, dated as of March 14, 2012, among the Company, the
guarantors named therein and U.S. Bank National Association, as trustee, the Company is allowed to pay cash dividends of up to
approximately $66 million (adjusted in future periods for earnings and other factors as defined in the agreement). Further, so long as
investors in our redeemable preferred stock own at least 10% of the common stock voting rights, on an as-converted basis, the
affirmative vote of a majority of the shares of preferred stock then outstanding and entitled to vote is required for the declaration or
payment of a dividend on common stock if dividends on the preferred stock have not been paid in full in cash.
20
The foregoing graph shall not be deemed to be filed as part of this Annual Report and does not constitute soliciting material and
should not be deemed filed or incorporated by reference into any other filing of the Company under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, except to the extent we specifically incorporate the graph by
reference.
21
Item 6. Selected Financial Data.
The following table sets forth selected consolidated financial data at and for each of the five fiscal years in the period ended
December 29, 2012. It should be read in conjunction with the Consolidated Financial Statements and Notes thereto and MD&A,
included in Items 7 and 8 of this Annual Report, respectively.
(In thousands, except per share amounts and statistical data)
Statements of Operations Data:
Sales
Net earnings (loss)
Net earnings (loss) attributable to Office Depot, Inc.
(2)(3)(4)(5)(6)
(2)(3)(4)(5)(6)
2012
2011
(1)
2010
2009
2008
$10,695,652 $11,489,533 $11,633,094 $12,144,467 $14,495,544
$
(46,205) $ (598,724) $ (1,481,003)
(77,120) $
95,691 $
$
(77,111) $
95,694 $
(44,623) $ (596,465) $ (1,478,938)
Net earnings (loss) available to common
(2)(3)(4)(5)(6)
shareholders
Net earnings (loss) per share:
Basic
Diluted
$ (110,045) $
59,989 $
(81,736) $ (626,971) $ (1,478,938)
$
$
(0.39)
(0.39)
$
$
0.22
0.22
$
$
(0.30) $
(0.30) $
(2.30) $
(2.30) $
(5.42)
(5.42)
Statistical Data:
Facilities open at end of period:
United States:
International
Office supply stores
Distribution centers
Crossdock facilities
:
(7)
Office supply stores
Distribution centers
Call centers
Total square footage — North American Retail
Division
Percentage of sales by segment:
North American Retail Division
North American Business Solutions Division
International Division
Balance Sheet Data:
Total assets
Long-term debt, excluding current maturities
Redeemable preferred stock, net
1,112
13
2
123
23
21
1,131
13
2
131
27
22
1,147
13
3
97
26
25
1,152
15
6
137
39
29
1,267
20
12
162
43
27
25,518,027
26,556,126
27,559,184
28,109,844
30,672,862
41.7%
30.0%
28.3%
42.4%
28.4%
29.2%
42.7%
28.3%
29.0%
42.1%
28.7%
29.2%
42.2%
28.6%
29.2%
$ 4,010,779 $ 4,250,984 $ 4,569,437 $ 4,890,346 $ 5,268,226
688,788
—
485,331
386,401
659,820
355,979
662,740
355,308
648,313
363,636
(1)
(2)
(3)
Includes 53 weeks in accordance with our 52 — 53 week reporting convention.
Fiscal year 2012 Net earnings (loss), Net earnings attributable to Office Depot, Inc., and Net earnings available to common
shareholders include approximately $139 million of asset impairment charges, $63 million net gain on purchase price recovery
and $56 million of charges related to closure costs and process improvement activity. Refer to MD&A for additional
information.
Fiscal year 2011 Net earnings (loss), Net earnings attributable to Office Depot, Inc., and Net earnings available to common
shareholders includes approximately $58 million of charges relating to facility closure and process improvement activity.
Additionally, approximately $123 million of tax and interest benefits were recognized associated with settlements and removal
of contingencies and valuation allowances. Refer to MD&A for additional information.
22
(4)
(5)
(6)
(7)
Fiscal year 2010 Net earnings (loss), Net loss attributable to Office Depot, Inc., and Net loss available to common shareholders
include charges of approximately $87 million, including approximately $51 million for the write-off of Construction in Progress
related to developed software. Additionally, tax benefits and interest reversals of approximately $41 million were recognized
from settlements. Refer to MD&A for additional information.
Fiscal year 2009 Net earnings (loss), Net loss attributable to Office Depot, Inc., and Net loss available to common shareholders
include charges of approximately $253 million relating to facility closures and other items and approximately $322 million to
establish valuation allowances on certain deferred tax assets.
Fiscal year 2008 Net loss attributable to Office Depot, Inc. and Net loss available to common shareholders include impairment
charges for goodwill and trade names of $1.27 billion and other asset impairment charges of $222 million.
Facilities of wholly-owned or majority-owned entities operated by our International Division.
23
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
OVERVIEW
Our business is comprised of three segments. The North American Retail Division includes our retail stores in the U.S. which offer
office supplies and services, computers and business machines and related supplies, and office furniture. Most stores also have a copy
and print center offering printing, reproduction, mailing and shipping. The North American Business Solutions Division sells office
supply products and services in the U.S. and Canada directly to businesses through catalogs, Internet web sites and a dedicated sales
force. Our International Division sells office products and services through catalogs, Internet web sites, a dedicated sales force and
retail stores in Europe and Asia.
Our fiscal year results are based on a 52- or 53-week retail calendar ending on the last Saturday in December. Fiscal year 2011 is
based on 53 weeks, with a 14-week fourth quarter. Fiscal years 2012 and 2010 include 52 weeks. Our comparable store sales relate to
stores that have been open for at least one year. Stores are removed from the comparable sales calculation during remodeling and if
significantly downsized. A summary of factors important to understanding our results for 2012 is provided below. The comparisons to
prior years are discussed in the narrative that follows this overview.
• Total Company sales were $10.7 billion in 2012, down 7% compared to 2011. The 53 week added approximately $140 million of
rd
sales in 2011. Total Company sales decreased 1% in 2011 compared to 2010.
• Sales for 2012 compared to 2011 declined 8% in the North American Retail Division and 1% in the North American Business
Solutions Division. Comparable store sales in the North American Retail Division decreased 5% in 2012. International Division
sales decreased 10% in U.S. dollars and 5% in constant currencies.
• Gross margin for 2012 improved approximately 50 basis points compared to 2011, following a 100 basis point increase from 2010.
The increase in 2012 primarily reflects improvement from reduced promotional activity, lower property costs and changes in the
mix of sales channels and products sold.
• We recognized charges of approximately $56 million in 2012, primarily related to restructuring-related activity in the International
Division and restructuring and process improvement actions at the corporate level. Charges recognized in 2011 and 2010 totaled
approximately $58 million and $87 million, respectively.
• Non-cash asset impairment charges of $139 million were recorded in 2012, with $123 million recognized in the North American
Retail Division and $15 million recognized in the International Division. Refer to the Retail Strategy discussion below for
additional information.
• We also settled a dispute related to a 2003 acquisition which resulted in a gain of $68 million being recognized in 2012 as
Recovery of purchase price. A related expense of $5 million was reported in General and administrative expenses. Cash received
from this settlement was contributed to the acquired pension plan, resulting in the plan being in a net funded position of
approximately $8 million at December 29, 2012.
• The effective tax rate for 2012 was negative 2%, reflecting the impact of valuation allowances in the U.S. and certain international
jurisdictions, as well as the non-taxable recovery of purchase price and a benefit recognized from an approved tax loss carryback.
Tax and related interest benefits of approximately $123 million were recognized in 2011 from the reversal of uncertain tax position
accruals and the release of valuation allowances. Because of the valuation allowances, the Company continues to experience
significant effective tax rate volatility within the year and across years.
• At the end of 2012, we had $670.8 million in cash and cash equivalents and $699.4 million available on our asset based credit
facility. Cash flow from operating activities was $179.3 million for 2012.
24
OPERATING RESULTS
Discussion of additional income and expense items, including material charges and credits and changes in interest and taxes follows
our review of segment results.
We are currently evaluating changes to the measurement of Division operating income in our management reporting. Under this
consideration, which may be implemented in 2013, a significant amount of costs currently managed at the corporate level could be
allocated to the Divisions and certain allocation methodologies updated. When the analysis is compete, prior period reported
information may be recast for comparison, using updated allocations to prior periods where appropriate.
NORTH AMERICAN RETAIL DIVISION
(In millions)
Sales
% change
Division operating income
% of sales
2012
$ 4,457.8
(8)%
$
12.2
0.3%
2011
$ 4,870.2
(2)%
$
134.8
2.8%
2010
$ 4,962.8
(3)%
$
127.5
2.6%
Sales in our North American Retail Division decreased 8% in 2012, 2% in 2011 and 3% in 2010. Fiscal year 2011 included a 53
rd
week based on our retail calendar, compared to 52 weeks in 2012 and 2010. This additional week added approximately $78 million of
sales in fiscal year 2011. The decline in total sales in 2012 and 2011 reflects the closing of 23 and 25 stores, respectively. Comparable
store sales in 2012 from the 1,079 stores that were open for more than one year decreased 5%. Comparable store sales in 2011 from
the 1,107 stores that were open for more than one year decreased 2%, with the fourth quarter down 5% compared to the prior year.
Transaction counts were lower in both 2012 and 2011, consistent with the comparable store sales declines. Sales in Copy and Print
Depot increased in both 2012 and 2011, while sales of technology products, technology peripheral items, furniture and some office
supplies declined in both periods. Our decision to reduce promotions in select categories contributed to lower sales in both 2012 and
2011.
The North American Retail Division reported operating income of approximately $12 million in 2012, $135 million in 2011 and $128
million in 2010. Division operating income in 2012 included approximately $123 million of asset impairment charges, compared to
$11 million in 2011 and $2 million in 2010. Additional information on the 2012 impairment charge is provided in the Retail Strategy
discussion below. Division operating income for 2012 included approximately $2 million of severance and other charges, while 2011
included approximately $12 million of charges associated with the closure of stores in Canada. Gross margins increased in both 2012
and 2011 from lower promotional activity and a change in the mix of sales away from technology products, as well as continuing
benefits from lower occupancy costs. Operating expenses in 2012 included lower supply chain costs and lower payroll and variable
pay. Operating expenses in 2011 included severance and other costs associated with the store closures in Canada, higher variable
based pay and incremental costs incurred to drive increased customer focused selling activities. These costs were offset by a positive
contribution from the 53 week in 2011, decreased advertising expenses and other favorable items including benefits recognized from
changes to our private label credit card program. Division operating income in all periods was negatively affected by the impact our
sales volume decline had on gross margin and operating expenses (the “flow through” impact).
rd
At the end of 2012, we operated 1,112 retail stores in the U.S. We opened 4 new stores during 2012 and 9 stores during 2011. We
closed 23 stores in North America during 2012. We closed 25 stores in North America during 2011, including the 12 stores in
Canada.
25
Retail Strategy
As consumers have shifted their buying patterns, we have been developing new store formats to satisfy changing customer needs and
shopping behavior. We now have almost 80 stores in small- to mid-sized store formats. The inventory selections in these stores are
the higher-volume items that customers seek and the stores provide for an expanded services offering. At the stores, customers also
have the ability to order our inventory products from our web site. We continue to make modifications to these prototypes.
During 2012, the North American Retail Division conducted a review of each store location and developed a revised retail strategy
(the “NA Retail Strategy”). Approximately 40% of the stores in our portfolio have leases that will be at an optional renewal period
within the next three years and 65% within the next five years. Each location was reviewed for a decision to retain as currently
configured and located, downsize to either small or mid-size format, relocate, remodel, or close at the end of the base lease term.
The result of this analysis is a plan to downsize approximately 275 locations to small-format stores at the end of their current lease
term over the next three years and an additional 165 locations over the following two years. Approximately 60 locations will be
down-sized or relocated to the mid-sized format over three years and another 25 over the following two years. We anticipate closing
approximately 50 stores as their base lease period ends. The remaining stores in the portfolio are anticipated to remain as configured,
be remodeled or have base lease periods more than five years in the future. Future market conditions may impact any of the decisions
used in this analysis. Downsizing and closing stores likely will result in lower reported sales in future periods. Downsized locations
will be removed from the comparable store sales calculation until the one year comparable period is reached at the new store size. The
NA Retail Strategy includes anticipated capital expenditures of approximately $60 million per year for the next five years.
These decisions to modify the store portfolio have impacted our store impairment analysis which is prepared at an individual store
level. The cash flow time horizon for stores expected to be closed, relocated or downsized has been reduced to the base lease period,
eliminating renewal option periods from the calculation, where applicable. The current outlook on sales is a decline of 4% in the first
year. The projected sales continue to be negative for the second year, but are on an improving trend. This trend reflects our view that
a portion of the sales previously made in our retail locations may be migrating to our online and other channels, but because those
sales are not fulfilled out of the retail store, they are not considered cash flow sources in this impairment analysis. Gross margin
assumptions have been held constant at our current actual levels and we have assumed operating costs consistent with recent actual
results and planned activities.
In addition to the impact of our real estate strategy on asset impairments, certain remaining assets will now be depreciated over a
shorter period of time. We anticipate incremental accelerated depreciation of approximately $8 million and $4 million in 2013 and
2014, respectively. Because the NA Retail Strategy is based on taking actions at the end of the location’s lease term, we do not expect
significant closed store lease accruals. However, we do anticipate volatility in results in future periods as certain accounting criteria
are met. For example, certain locations with some level of impairment are facilities accounted for as capital leases. We no longer
expect to stay in the location beyond the base lease period but accounting rules limit the reconsideration of the capital lease term in
periods prior to a formal lease modification. This current period impairment charge related to these leased assets will be followed by a
credit to income in a future period from release of the accrued capital lease obligations when the option periods are not exercised and
the leases are terminated. Additionally, operating leases with scheduled rent increases result in higher expense and establishment of a
deferred rent credit in early years that is reversed in later years, resulting in a straight-line rent expense. If a location closes or
relocates at the end of the base lease term, this credit will be released to income at that time. Deferred rent credits for renegotiated
lease arrangements with the existing landlord will be amortized over the new lease period.
26
To the extent that forward-looking sales and operating assumptions in the current portfolio are not achieved and are subsequently
reduced, or more stores are closed, additional impairment charges may result. Of the 380 stores with some level of impairment
recognized in 2012, approximately 130 have remaining asset values of approximately $35 million that will be depreciated over their
shortened estimated useful lives. These and other lower-performing locations are particularly sensitive to changes in projected cash
flows over this period and additional impairment is possible in future periods if results are below projections. Store performance
lower than current projections may also result in additional 2013 quarterly asset impairment charges. However, at the end of 2012, the
impairment analysis reflects the company’s best estimate of future performance, including the intended future use of the company’s
retail stores.
NORTH AMERICAN BUSINESS SOLUTIONS DIVISION
(In millions)
Sales
% change
Division operating income
% of sales
2012
$ 3,214.9
(1)%
$
193.0
6.0%
2011
$ 3,262.0
(1)%
2010
$ 3,290.4
(6)%
$
145.1
4.4%
$
96.5
2.9%
rd
Sales in our North American Business Solutions Division decreased 1% in 2012, 1% in 2011 and 6% in 2010. The 53 week added
approximately $34 million of sales to the Division in 2011. Total sales in both the direct and contract channels decreased slightly in
2012 after considering the 53 week in 2011. Direct channel sales increased in 2011, while contract sales were lower compared to
2010. Sales to large and global accounts increased in both 2012 and 2011. However, sales to state and local government accounts
decreased in both periods reflecting continuation of budgetary pressures. Sales to small-to medium-sized businesses decreased in
2012 and increased in 2011, reflecting the 53 week of sales in 2011. During 2011, through alternative non-exclusive purchasing
arrangements, the Division retained approximately 87% of the revenue from customers formerly associated with a legacy public
sector purchasing cooperative. This retention rate is inclusive of declines due to public sector spending and budget constraints, which
impacted these customers as well as our other public sector customers. Sales in the contract channel, other than to customers buying
under these purchasing arrangements, were positive for 2011. On a product category basis, in 2012, copy and print, cleaning and
breakroom comparable sales increased, while sales in the supplies category decreased. Furniture sales decreased slightly. For 2011,
sales of cleaning and break room products and certain office supplies increased while ink and toner, furniture, paper and other office
supply categories decreased.
rd
rd
Division operating income totaled $193 million in 2012, $145 million in 2011, and $97 million in 2010. The 2012 increase in
Division operating income reflects gross margin benefits from reduced promotions and margin improvement initiatives, as well as
lower supply chain, advertising and other costs, partially offset by certain severance and process improvement costs. The increase in
2011 reflects the impact of a change in the mix of product sales to the direct channel, lower operating expenses, a change of mix of
customers in the contract channel, and positive impacts from our margin improvement initiatives. Lower selling, distribution and
advertising expenses were incurred in 2011 compared to 2010. Many of these operating expense reductions reflect initiatives put in
place in prior periods to improve efficiency and productivity. Also, fiscal year 2011 included benefits discrete to the period from
removing recourse provisions and changing terms and conditions in the Office Depot private label credit card program and
adjustments relating to customer incentives. The impact of the 53 week was relatively neutral to the Division’s overall operating
rd
income for 2011.
INTERNATIONAL DIVISION
(In millions)
Sales
% change
% change in constant currency sales
Division operating income
% of sales
2012
$ 3,022.9
(10)%
(5)%
$
49.3
1.6%
2011
$ 3,357.4
(1)%
(5)%
$
92.9
2.8%
2010
$ 3,379.8
(5)%
(2)%
$
110.8
3.3%
27
Sales in our International Division in U.S. dollars decreased 10% in 2012, 1% in 2011 and 5% in 2010. Constant currency sales
decreased 5% in 2012, 5% in 2011 and 2% in 2010. The 53 week added approximately $28 million to total Division sales in 2011.
The comparison of sales in 2011 to 2010 is also impacted by the sale and deconsolidation of operations in Israel and Japan in the
fourth quarter of 2010 and the acquisition of operations in Sweden in the first quarter of 2011. Contract channel sales in constant
currencies decreased 2% in 2012 and increased 3% in 2011. The 2012 decrease reflects competitive pressures and soft economic
conditions in Europe. The 2011 increase reflects growth in field sales as a result of added staff, as well an acquisition in Sweden.
Constant currency sales in the direct channel declined 10% in 2012 and 6% in 2011. Addressing this trend in the direct channel sales
has been a point of focus throughout 2012 and improvements have been seen in both the third and fourth quarters of the year. We will
continue to dedicate resources to improving sales in this channel.
rd
Division operating income totaled approximately $49 million in 2012, $93 million in 2011, and $111 million in 2010. Division
operating income for 2012 and 2011 includes charges of approximately $49 million and $31 million, respectively. The 2012 charges
relate to restructuring-related activities, as well as $14 million of asset impairments. As a result of slowing economic conditions in
Sweden and certain integration difficulties, in the third quarter of 2012, we re-evaluated remaining balances of acquisition-related
intangible assets. Based on this analysis, which included a decline in projected sales and profitability for this acquired business, we
concluded that cash flows would be insufficient to recover the assets over their expected use period. The 2011 charges primarily
related to severance and other costs associated with facility closures and streamlining processes.
The decreases in Division operating income in 2012, 2011 and 2010 were impacted by the flow through impact of lower sales levels.
Gross profit as a percent of sales decreased in 2012 and increased in 2011. The decrease in 2012 primarily reflects a shift in the mix
of sales away from the direct channel. The increase in 2011 results from acquisition and disposition activity and a change in the mix
of direct and contract sales, product costs not passed along to customers, partially offset by lower occupancy costs. Operating
expenses decreased across the Division in both 2012 and 2011, reflecting benefits from restructuring activities initiated in prior
periods.
For U.S. reporting, the International Division’s sales are translated into U.S. dollars at average exchange rates experienced during the
year. The Division’s reported sales were negatively impacted by approximately $160 million in 2012 and positively impacted by $147
million in 2011 from changes in foreign currency exchange rates. Internally, we analyze our international operations in terms of local
currency performance to allow focus on operating trends and results.
CORPORATE AND OTHER
Asset Impairments, Severance, Other Charges and Credits
In recent years, we have taken actions to adapt to changing and increasingly competitive conditions experienced in the markets in
which the Company serves. These actions include closing stores and distribution centers (“DCs”), consolidating functional activities,
disposing of businesses and assets, and taking actions to improve process efficiencies. Additionally, during 2012, we recognized
significant asset impairment charges in the North American Retail Division and International Division and recognized a gain from the
resolution of a dispute related to a 2003 acquisition.
28
The impact of asset impairments, severance and other charges and credits on Operating income (loss) recognized by line item
presentation in the Consolidated Statements of Operations are as follows.
(In millions)
Cost of goods sold and occupancy costs
Store and warehouse operating and selling expenses
Recovery of purchase price
Asset impairments
General and administrative expenses
Total charges and credits impact on Operating income (loss)
2012
$ —
22
(68)
139
34
$ 127
2011
2
$
25
—
—
31
$ 58
2010
$ —
14
—
51
22
$ 87
The 2012 charges and credits relate to $68.3 million recovery of purchase price, $138.5 million asset impairments, restructuring-
related activity, store closures, and process improvement actions at the corporate level. Non-cash asset impairment charges of $138.5
million includes $123.4 million in the North American Retail Division related to the NA Retail Strategy and under-performing stores
and $15.1 million recognized in the International Division, as discussed above. Refer to Note I of the Consolidated Financial
Statements for additional information.
Recovery of Purchase Price
The sale and purchase agreement (“SPA”) associated with a 2003 European acquisition included a provision whereby the seller was
required to pay an amount to the company if a specified acquired pension plan was calculated to be underfunded based on 2008 plan
data. The amount calculated by the plan’s actuary was disputed by the seller but upheld by an independent arbitrator. The seller
continued to dispute the award until both parties reached a settlement agreement in January 2012 and the seller paid approximately
GBP 37.7 million to the company, including GBP 5.5 million placed in escrow in 2011. Under the terms of the SPA, and in
agreement with the pension plan trustees, the company contributed the cash received, net of certain fees, to the pension plan. This
contribution caused the plan to go from a net liability position at the end of 2011 to a net asset position of approximately $8 million at
December 29, 2012. Because goodwill associated with this transaction was fully impaired in 2008, this recovery is recognized in the
2012 statement of operations. Also, consistent with the presentation in 2008, this recovery is reported at the corporate level and not
included in the determination of International Division operating income.
The $68.3 million Recovery of purchase price includes recognition of the cash received from the seller, certain fees incurred and
reimbursed, as well as the release of an accrued liability as the settlement agreement releases any and all claims under the SPA. An
additional expense of approximately $5.2 million related to this arrangement is included in General and administrative expenses,
resulting in a net increase in operating income for 2012 of $63.1 million. The transaction is treated as a non-taxable return of purchase
price for tax purposes.
The cash payment from the seller was received by a subsidiary of the company with the Euro as its functional currency and the
pension plan funding was made by a subsidiary with Pound Sterling as its functional currency, resulting in certain translation
differences between amounts reflected in the Consolidated Statements of Operations and the Consolidated Statements of Cash Flows
for 2012. The receipt of cash from the seller is presented as a source of cash in investing activities. The contribution of cash to the
pension plan is presented as a use of cash in operating activities. Refer to Note H of the Consolidated Financial Statements for
additional information.
Charges in 2011 and 2010
The 2011 charges primarily relate to the consolidation and elimination of functions in Europe, the closure of stores in Canada and
Company-wide process improvement initiatives. In the Consolidated Statements of Operations, for comparability to the 2012
presentation, we have reclassified $11.4 million related to 2011 store level impairment to Asset impairments line, which was
previously reported in Store and warehouse operating and selling expenses in the Consolidated Statements of Operations. However,
those asset impairment charges have not been reflected in the table above.
29
The charges in 2010 include $51 million for the abandonment of a certain software application, $23 million for losses on the disposal
of operating entities in Israel and Japan, as well as $13 million of compensation-related costs following the departure of the
Company’s former CEO.
The following table indicates the amount of charges and credits included in the determination of Division operating income and
recognized at the corporate level:
(In millions)
North American Retail Division
North America Business Solutions Division
International Division
Corporate level, recovery of purchase price
Corporate level, other
Total charges and credits impact on Operating income
2012
$ 125
3
49
(68)
18
$ 127
2011
$ 12
—
31
—
15
$ 58
2010
$ —
—
23
—
64
$ 87
General and Administrative Expenses
Total general and administrative expenses (“G&A”) decreased to $673 million in 2012 from $689 million in 2011. The portion of
G&A expenses considered directly or closely related to division activity is included in the measurement of Division operating
income. Other companies may charge more or less G&A expenses and other costs to their segments, and our results therefore may not
be comparable to similarly titled measures used by other companies. The remainder of the total G&A expenses are considered
corporate expenses. A breakdown of G&A is provided in the following table:
(In millions)
Division G&A
Corporate G&A
Total G&A
% of sales
2012
$ 326.9
345.9
672.8
6.3%
2011
$362.6
326.0
688.6
6.0%
2010
$342.2
316.6
658.8
5.7%
As noted above in “Asset Impairments, Severance, Other Charges and Credits”, total G&A expenses include charges of $34 million,
$31 million, and $22 million in 2012, 2011, and 2010, respectively. Of these amounts, approximately $16 million was included in
Division G&A for 2012, $17 million in 2011, and $9 million in 2010. The remaining amounts in each year were included in
Corporate G&A. After considering these charges, Corporate G&A expenses increased in 2012 from additional project costs and
personnel intended to improve performance in future periods, partially offset by lower variable pay. Corporate G&A expenses
increased in 2011 from higher variable based pay and the comparison to a favorable litigation settlement in 2010.
Other Income and Expense
(In millions)
Interest income
Interest expense
Loss on extinguishment of debt
Miscellaneous income, net
2012
$ 2.2
(68.9)
(12.1)
34.2
2011
$ 1.2
(33.2)
—
30.9
2010
$ 4.7
(58.5)
—
34.5
30
Interest expense was impacted by the reversal of accrued interest of $32 million in 2011 and $11 million in 2010 following
settlements of uncertain tax positions. Our accounting policy is to present interest accruals and reversals on uncertain tax positions as
a component of interest expense. Additionally, approximately $2 million of interest income was recognized in 2010 from one of the
tax settlements.
On March 15, 2012, we completed a cash tender offer to purchase up to $250 million aggregate principal amount of 6.25% Senior
Notes due 2013. The total consideration for each $1,000.00 note surrendered was $1,050.00. Additionally, tender fees and a
proportionate amount of deferred debt issue costs and a deferred cash flow hedge gain were included in the measurement of the $12.1
million extinguishment costs reported in the Consolidated Statement of Operations for 2012.
Our net miscellaneous income consists of our earnings of joint venture investments, gains and losses related to foreign exchange
transactions, and investment results from our deferred compensation plan. We recognized earnings from our joint venture in Mexico,
Office Depot de Mexico, of approximately $32 million, $34 million and $31 million in 2012, 2011, and 2010, respectively. These
results also were impacted by foreign currency and other gains and losses in all periods.
Income Taxes
(In millions)
Income tax expense (benefit)
Effective income tax rate*
2012
$ 1.7
(2)%
2011
$ (63.1)
(193)%
2010
$ (10.5)
18%
*
Income taxes as a percentage of earnings (loss) before income taxes.
The negative 2% effective tax rate for 2012 results from recognizing tax expense in jurisdictions with pre-tax income while being
precluded from recognizing deferred tax benefits on pre-tax losses in the U.S. and certain international jurisdictions that are subject to
valuation allowances. Additionally, the pension settlement was a non-taxable transaction and the full year tax rate includes a net $14
million tax benefit from an approved tax loss carryback. The effective rate also reflects the impact on deferred tax asset from a tax
rate change in an international jurisdiction.
The effective tax rates for 2011 and 2010 reflect benefits from settlements of uncertain tax positions (“UTPs”) and from the reversal
of valuation allowances on deferred tax assets. The 2011 rate includes the reversal of $81 million of UTP accruals following closure
of tax audits and the expiration of the statute of limitations on previously open tax years. The 2010 effective rate includes the reversal
of approximately $30 million of UTP accruals. In addition, 2011 and 2010 include approximately $9 million and $10 million,
respectively, of discrete benefits from the release of valuation allowances in certain European countries because of improved
performance in those jurisdictions. Partially offsetting these tax benefits is income tax expense recognized for taxpaying entities.
Because of significant valuation allowances that remain in other jurisdictions, deferred tax benefits are not recognized on certain loss
generating entities. Within our international operations, statutory tax expense is generally lower compared to the aggregate U.S.
federal and state income tax rates. This is further impacted by favorable tax ruling within our international operations.
The aggregate reversal of UTPs in 2010 was reduced by approximately $7 million which was offset against other tax-related accounts
and had no impact on earnings. The UTP reversals also resulted in a reversal of previously accrued interest expense of $32 million in
2011 and $11 million in 2010, as well as recognition of $2 million of interest income in 2010. Our accounting policy is to include
accrued interest on UTPs, and any related reversals, as a component of interest expense in the consolidated statement of operations.
31
Following the recognition of significant valuation allowances in 2009, we have regularly experienced substantial volatility in our
effective tax rate for interim periods. Because deferred income tax benefits cannot be recognized in several jurisdictions, changes in
the amount, mix and timing of projected pre-tax earnings in tax paying jurisdictions can have a significant impact on the annual
expected tax rate which, applied against year-to-date results, can result in significant volatility in the overall effective tax rate. This
interim and full year volatility is likely to continue in future periods until the valuation allowances can be released.
We have reached a tentative settlement with the U.S. Internal Revenue Service (“IRS”) Appeals Division to close the previously-
disclosed IRS deemed royalty assessment relating to 2009 and 2010 foreign operations. The settlement is subject to the Congressional
Joint Committee on Taxation approval which is anticipated in 2013. The resolution of this deemed royalty assessment will close all
known disputes relating to 2009 and 2010. However, pending this approval, the IRS has made a deemed royalty assessment of $12
million ($4.3 million tax-effected) relating to 2011 foreign operations. We disagree with this assessment and believe no UTP accrual
is required at this time.
We file a U.S. federal income tax return and other income tax returns in various states and foreign jurisdictions. The U.S. federal tax
returns for 2011 and 2012 are under review. Significant international tax jurisdictions include the U.K., the Netherlands, France and
Germany. Generally, we are subject to routine examination for years 2008 and forward in these foreign jurisdictions. It is reasonably
possible that some audits will close within the next twelve months which we do not believe would result in a change to our accrued
uncertain tax positions.
Refer to Note F in the Notes to Consolidated Financial Statements for additional tax discussion.
32
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
In 2011, the Company entered into a $1.0 billion Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with
a group of lenders, most of whom participated in the previously-existing $1.25 billion Credit Agreement. The Amended Credit
Agreement expires May 25, 2016 and was amended February 2012. Refer to Note E of the Consolidated Financial Statements for
additional information.
At December 29, 2012, we had approximately $670.8 million in cash and equivalents and another $699.4 million available under the
Amended Credit Agreement based on the December 2012 borrowing base certificate, for a total liquidity of approximately $1.4
billion. Approximately $184 million of cash and cash equivalents was held outside the United States and could result in additional tax
expense if repatriated. We consider our resources adequate to satisfy our cash needs for at least the next twelve months.
At December 29, 2012, no amounts were drawn under the Amended Credit Agreement. The maximum month end amount
outstanding during 2012 occurred in February at approximately $13 million. There were letters of credit outstanding under the
Amended Credit Agreement at the end of the year totaling approximately $90 million. An additional $0.2 million of letters of credit
were outstanding under separate agreements. Average borrowings under the Amended Credit Agreement during 2012 were
approximately $4.3 million at an average interest rate of 2.6%. The maximum monthly average borrowings during 2012 occurred in
February at approximately $13.2 million.
We also had short-term borrowings of $2.2 million at December 29, 2012 under various local currency credit facilities for our
international subsidiaries that had an effective interest rate at the end of the year of approximately 5.8%. The maximum month end
amount on these facilities occurred in July at approximately $16.1 million and the maximum monthly average amount occurred in
August at approximately $15.8 million. The majority of these short-term borrowings represent outstanding balances on uncommitted
lines of credit, which do not contain financial covenants.
The Company was in compliance with all applicable financial covenants at December 29, 2012.
Dividends on redeemable preferred stock are payable quarterly, and will be paid in-kind or in cash, only to the extent that the
Company has funds legally available for such payment and a cash dividend is declared by the Company’s Board of Directors.
Dividends for the first three quarters of 2012 were paid-in kind. The dividend for the fourth quarter of 2012 totaled $10.2 million and
was paid in cash when due, in January 2013.
Cash Flows
Cash provided by (used in) our operating, investing and financing activities is summarized as follows:
(In millions)
Operating activities
Investing activities
Financing activities
Operating Activities
2012
$179.3
(29.7)
(55.2)
2011
$ 199.7
(157.2)
(98.6)
2010
$ 203.1
(191.5)
(30.9)
We generated cash from operating activities of $179 million in 2012, compared to $200 million and $203 million in 2011 and 2010,
respectively. We recorded non-cash asset impairment charges of $139 million, $11 million, and $51 million, in 2012, 2011 and 2010,
respectively, as discussed above. In 2012, we recognized a credit in earnings as recovery from a business combination. The cash
portion of this recovery is reclassified out of earnings and reflected as a source of cash in investing activities. That cash was required
by the original purchase agreement to be contributed to the acquired pension plan. That pension funding of $58 million during the
first quarter of 2012 is presented as a use of cash in operating activities.
33
Changes in net working capital for the year-to-date 2012 resulted in a $35 million use of cash compared to $180 million use in the
same period last year. The 2011 caption includes the $66 million and $32 million non-cash accrual reversals. The decrease in
receivables, in the three years presented, reflects lower sales, improved collections, and certain changes in vendor purchase
arrangements that impacted working capital requirements. Inventory balances were lower at the end of 2012 as a result of initiatives
to better manage working capital. These sources of cash in 2012 were offset by decreases in trade accounts payable and accrued
expenses. Working capital is influenced by a number of factors, including the aging of inventory and timing of vendor payments. The
timing of payments is subject to variability during the year depending on a variety of factors, including the flow of goods, credit
terms, timing of promotions, vendor production planning, new product introductions and working capital management. For our
accounting policy on cash management, refer to Note A of the Consolidated Financial Statements.
During 2011, we received a $25 million dividend from our joint venture in Mexico, Office Depot de Mexico. No dividends were
received in 2012.
Investing Activities
Net cash used in investing activities was $30 million in 2012, $157 million in 2011, and $192 million in 2010. We invested $120
million, $130 million and $169 million in capital expenditures during 2012, 2011 and 2010, respectively. The 2012 capital
expenditures relate to new stores and relocations, internal initiatives and various capital projects. The $73 million of acquisition, net
of cash acquired was for the acquisition of an entity in Sweden that occurred during the first quarter of 2011. During 2010, we used
approximately $11 million to complete an acquisition. In 2012, we recovered $50 million from purchase price as discussed above and
released $9 million of cash placed in escrow in 2011 related to the same matter. Proceeds from disposition of assets and other
amounted to $32 million in 2012 compared to $8 million in 2011 and $35 million in 2010. Proceeds from the disposition of assets in
2012 included $12 million from a sale and lease back of an International warehouse, $10 million from sale of properties in North
America, and $9 million from cash proceeds related to a 2010 sale of one operating subsidiary in the International Division. Proceeds
from the disposition of assets in 2010 included $25 million from the sale of a data center and $8 million from the sale of two
operating subsidiaries in the International Division. Approximately $47 million was placed in a restricted cash escrow account in
2010 and released in 2011 to fund the Swedish acquisition.
Financing Activities
Net cash used in financing activities totaled $55 million, $99 million and $31 million in 2012, 2011 and 2010, respectively. In 2012,
we completed the early settlement of a cash tender offer to purchase up to $250 million aggregate principal amount of our outstanding
6.25% Senior Notes due 2013. We also issued $250 million aggregate principal amount of 9.75% Senior Secured Notes due
March 15, 2019. The tender activity resulted in a $13 million cash loss on extinguishment of debt. Additionally, new issuance costs
and costs related to the Amended Credit Agreement totaled $8 million. Payments on other long and short-term borrowings for the
period amounted to $57 million. Proceeds from issuance of borrowings for the period amounted to $22 million. The dividends on
preferred stock were paid in kind during 2012.
The use of cash in 2011 included the cash dividends paid on our redeemable preferred stock of approximately $37 million,
repayments of long and short term borrowings of $69 million, and $10 million in fees related to the Amended Credit Agreement. The
dividend on our redeemable preferred stock for the fourth quarter of 2011 was paid in-kind in January 2012. The sources of cash in
2011 included proceeds from issuance of borrowings of $10 million, as well as an advance of $9 million was received relating to a
dispute associated with a prior year acquisition in Europe. A final settlement of this dispute was reached in January 2012; refer to
Note H of the Consolidated Financial Statements for additional discussion.
34
The use of cash in 2010 resulted from the cash dividends paid on our redeemable preferred stock of approximately $28 million and
$22 million to acquire certain noncontrolling interests. The 2010 period included short-term borrowings under our asset based credit
facility and payments on long and short-term borrowings of $30 million. We have evaluated, and expect to continue to evaluate,
possible refinancing and other transactions. Such transactions may be material and may involve cash, the Company’s securities or the
assumption of additional indebtedness.
Off-Balance Sheet Arrangements
As of December 29, 2012, we had no off-balance sheet arrangements other than operating leases which are included in the table
below.
Contractual Obligations
The following table summarizes our contractual cash obligations at December 29, 2012, and the effect such obligations are expected
to have on liquidity and cash flow in future periods:
(In millions)
Contractual Obligations
(1)
Long-term debt obligations
Short-term borrowings and other
Capital lease obligations
(3)
Operating lease obligations
Purchase obligations
Other liabilities
(4)
(6)
(5)
Total contractual cash obligations
(2)
Payments Due by Period
Total
Less than
1 year
1 -
4 -
3 years
5 years
After 5
years
$ 595.8
2.2
341.7
2,151.7
38.0
10.2
$3,139.6
$ 187.3
2.2
35.5
467.1
36.6
10.2
$ 738.9
$ 54.2
—
70.2
725.8
1.4
—
$851.6
$ 53.3 $ 301.0
—
—
178.4
57.6
533.1
425.7
—
—
—
—
$536.6 $1,012.5
(1)
(2)
(3)
(4)
(5)
Long-term obligations consist primarily of expected payments (principal and interest) on our $250 million 9.75% Senior
Secured Notes and our $150 million 6.25% Senior Notes. Our $150 million 6.25% Senior Notes is due on August 2013.
Short-term borrowings consist of amounts outstanding under credit facilities for certain of our international subsidiaries.
The present value of these obligations are included on our Consolidated Balance Sheets. Refer to Note E of the Consolidated
Financial Statements for additional information about our capital lease obligations.
The operating lease obligations presented reflect future minimum lease payments due under the non-cancelable portions of our
leases, as of December 29, 2012. Our operating lease obligations are described in Note G of the Consolidated Financial
Statements. In the table above, sublease income operating lease obligations above have not been reduced by sublease income of
$48.3 million.
Purchase obligations include all commitments to purchase goods or services of either a fixed or minimum quantity that are
enforceable and legally binding on us that meet any of the following criteria: (1) they are non-cancelable, (2) we would incur a
penalty if the agreement was cancelled, or (3) we must make specified minimum payments even if we do not take delivery of the
contracted products or services. If the obligation is non-cancelable, the entire value of the contract is included in the table. If the
obligation is cancelable, but we would incur a penalty if cancelled, the dollar amount of the penalty is included as a purchase
obligation. If we can unilaterally terminate the agreement simply by providing a certain number of days notice or by paying a
termination fee, we have included the amount of the termination fee or the amount that would be paid over the “notice period.”
As of December 29, 2012, purchase obligations include television, radio and newspaper advertising, telephone services, certain
fixed assets and software licenses and service and maintenance contracts for information technology. Contracts that can be
unilaterally terminated without a penalty have not been included.
35
(6)
Other liabilities consist of dividends paid in January 2013 relating to the Redeemable Preferred Stock. Dividends payable in
future quarterly periods may be paid in-kind or in cash and are not determinable as of December 29, 2012. Refer to Note F of the
Consolidated Financial Statements for additional information.
Additionally, our Consolidated Balance Sheet as of December 29, 2012 includes $431.5 million classified as Deferred income
taxes and other long-term liabilities. This caption primarily consists of net long-term deferred income taxes, deferred lease
credits, liabilities under our deferred compensation plans, and accruals for uncertain tax positions. These liabilities have been
excluded from the above table as the timing and/or the amount of any cash payment is uncertain. Refer to Note F of the
Consolidated Financial Statements for additional information regarding our deferred tax positions and accruals for uncertain tax
positions and Note H for a discussion of our employee benefit plans.
In addition to the above, we have outstanding letters of credit totaling $0.2 million at December 29, 2012.
CRITICAL ACCOUNTING POLICIES
Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United
States of America. Preparation of these statements requires management to make judgments and estimates. Some accounting policies
have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies can be
found in Note A of the Consolidated Financial Statements. We have also identified certain accounting policies that we consider
critical to understanding our business and our results of operations and we have provided below additional information on those
policies.
Vendor arrangements — Inventory purchases from vendors are generally under arrangements that automatically renew until
cancelled with periodic updates or annual negotiated agreements. Many of these arrangements require the vendors to make payments
to us or provide credits to be used against purchases if and when certain conditions are met. We refer to these arrangements as
“vendor programs.” Vendor programs fall into two broad categories, with some underlying sub-categories. The first category is
volume-based rebates. Under those arrangements, our product costs per unit decline as higher volumes of purchases are reached.
Certain of our vendor agreements provide that we pay higher per unit costs prior to reaching a predetermined tier, at which time the
vendor rebates the per unit differential on past purchases, and also applies the lower cost to future purchases until the next milestone
is reached. Current accounting rules provide that companies with a sound basis for estimating their full year purchases, and therefore
the ultimate rebate level, can use that estimate to value inventory and cost of goods sold throughout the year. We believe our history
of purchases with many vendors provides us with a basis for our estimates of purchase volume. If the anticipated volume of purchases
is not reached, however, or if we form the belief at any point in the year that it is not likely to be reached, cost of goods sold and the
remaining inventory balances are adjusted to reflect that change in our outlook. We review sales projections and related purchases
against vendor program estimates at least quarterly and adjust these balances accordingly. In recent years, we have reduced the
number of arrangements that contain this tiered purchase rebate mechanism in exchange for a lower product cost throughout the year.
Continued elimination of tiered arrangements could further reduce the potential variability in gross margin from changes in volume-
based estimates.
36
The second broad category of arrangements with our vendors is event-based programs. These arrangements can take many forms,
including advertising support, special pricing offered by certain of our vendors for a limited time, payments for special placement or
promotion of a product, reimbursement of costs incurred to launch a vendor’s product, and various other special programs. These
payments are classified as a reduction of costs of goods sold or inventory, based on the nature of the program and the sell-through of
the inventory. Some arrangements may meet the specific, incremental, identifiable cost criteria that allow for direct operating expense
offset, but such arrangements are not significant.
Vendor programs are recognized throughout the year based on judgment and estimates and amounts due from vendors are generally
settled throughout the year based on purchase volumes. The final amounts due from vendors are generally known soon after year-end.
Substantially all vendor program receivables outstanding at the end of the year are settled within the three months immediately
following year-end. We believe that our historical collection rates of these receivables provide a sound basis for our estimates of
anticipated vendor payments throughout the year.
Inventory valuation — Inventories are valued at the lower of cost or market value. We monitor active inventory for excessive
quantities and slow-moving items and record adjustments as necessary to lower the value if the anticipated realizable amount is below
cost. We also identify merchandise that we plan to discontinue or have begun to phase out and assess the estimated recoverability of
the carrying value. This includes consideration of the quantity of the merchandise, the rate of sale, and our assessment of current and
projected market conditions and anticipated vendor programs. If necessary, we record a charge to cost of sales to reduce the carrying
value of this merchandise to our estimate of the lower of cost or realizable amount. Additional promotional activities may be initiated
and markdowns may be taken as considered appropriate until the product is sold or otherwise disposed. Estimates and judgments are
required in determining what items to stock and at what level, and what items to discontinue and how to value them prior to sale.
We also recognize an expense in cost of sales for our estimate of physical inventory loss from theft, short shipment and other factors
— referred to as inventory shrink. During the year, we adjust the estimate of our inventory shrink rate accrual following on-hand
adjustments and our physical inventory count results. These changes in estimates may result in volatility within the year or impact
comparisons to other periods.
Asset impairments — Store assets are reviewed quarterly for recoverability of their asset carrying amounts. The analysis uses input
from retail store operations and the Company’s accounting and finance personnel that organizationally report to the chief financial
officer. These projections are based on management’s estimates of store-level sales, gross margins, direct expenses, exercise of future
lease renewal options, where applicable, and resulting cash flows and, by their nature, include judgments about how current initiatives
will impact future performance. If the anticipated cash flows of a store cannot support the carrying value of its assets, the assets are
written down to estimated fair value using Level 3 inputs. Store asset impairment charges of $124 million and $11 million for 2012
and 2011, respectively, are in Asset impairments in the Consolidated Statements of Operations. These charges are measured as the
difference between the carrying value of the assets and their estimated fair value, typically calculated as the discounted amount of the
estimated cash flow, including estimated salvage value.
Important assumptions used in these projections include an assessment of future overall economic conditions, our ability to control
future costs, maintain aspects of positive performance, and successfully implement initiatives designed to enhance sales and gross
margins. To the extent that management’s estimates of future performance are not realized, future assessments could result in material
impairment charges. Unless individual store performance improves, future impairment charges may result.
37
Closed store accruals — We regularly assess the performance of each retail store against historical patterns and projections of future
profitability. These assessments are based on management’s estimates for sales levels, gross margin attainments, and cash flow
generation. If, as a result of these evaluations, management determines that a store will not achieve certain operating performance
targets, we may decide to close the store prior to the end of its lease term. At the point of closure, we recognize a liability for the
remaining costs related to the property, reduced by an estimate of any sublease income. The calculation of this liability requires us to
make assumptions and to apply judgment regarding the remaining term of the lease (including vacancy period), anticipated sublease
income, and costs associated with vacating the premises. Lease commitments with no economic benefit to the Company are
discounted at the credit-adjusted discount rate at the time of each location closure. With assistance from independent third parties to
assess market conditions, we periodically review these judgments and estimates and adjust the liability accordingly. Future
fluctuations in the economy and the market demand for commercial properties could result in material changes in this liability.
Generally, costs associated with facility closures are included in Store and warehouse operating and selling expenses in our
Consolidated Statements of Operations.
Goodwill and other intangible assets — We review goodwill and indefinite lived intangible assets for impairment annually in the
fourth quarter of the year, or sooner if indicators of potential impairment are identified. For 2012, we have elected to quantitatively
test for impairment of goodwill and indefinite lived intangible assets. This test compares the book value of net assets to the fair value
of the reporting units. If the fair value is determined to be less than the book value or qualitative factors indicate that it is more likely
than not that goodwill is impaired, a second step is performed to compute the amount of impairment as the difference between the
estimated fair value of goodwill and the carrying value. We estimate the fair value of the reporting units using discounted cash flow
and certain market value data. Fair value of the indefinite lived trade name is obtained using a discounted cash flow analysis. These
fair value methods require significant judgment assumptions and estimates, including industry economic factors and future
profitability.
The discounted cash flow analysis for goodwill testing begins with the ensuing year’s business plan and requires estimates of future
sales, profitability, capital expenditures and related cash flows. We include a residual value and discount the aggregate cash flow at an
estimated cost of capital for the related unit. We also review the results against a measurement of market capitalization and, to the
extent available, market data. Of the goodwill recognized at December 29, 2012, approximately $44.9 million was in the International
Division’s European reporting unit and $19.4 million was in the North American Business Solutions Division’s direct reporting unit.
The European reporting unit has the greatest sensitivity to potential changes in economic conditions, Company performance and the
related impacts on estimated fair value. This reporting unit is comprised of wholly-owned entities and ownership of the joint venture
in Mexico. At December 29, 2012, the fair value estimate of the reporting unit, including assumed control premiums, exceeded its
carrying value by approximately 30%. A significant portion of this excess is associated with the joint venture operations in Mexico. If
the joint venture were to be removed from the composition of the reporting unit, it is likely that all of the existing goodwill would be
impaired. Additionally, even if there is no change in the composition of the reporting unit, if future performance is below our
projections, goodwill and other intangible asset impairment charges can result. The estimated fair value of the direct reporting unit
was significantly in excess of its carrying value.
Income taxes — Income tax accounting requires management to make estimates and apply judgments to events that will be
recognized in one period under rules that apply to financial reporting and in a different period in our tax returns. In particular,
judgment is required when estimating the value of future tax deductions, tax credits, and the realizability of net operating loss
carryforwards (NOLs), as represented by deferred tax assets. When we believe the realization of all or a portion of a deferred tax asset
is not likely, we establish a valuation allowance. Changes in judgments that increase or decrease these valuation allowances impact
current earnings.
Because of the downturn in our performance in recent years, as well as the restructuring activities and charges we have taken in
response, we established significant valuation allowances during 2009. A portion of those valuation allowances were offset in 2012
when we recorded deferred tax liabilities related to removing the permanent reinvestment assumption of certain foreign investments.
Valuation allowances remain in certain foreign jurisdictions. Judgment is required in projecting when operations will be sufficiently
positive to allow a conclusion that utilization of the deferred tax assets will once again be more likely than not. Positive performance
in subsequent periods and projections of future positive performance will need to be evaluated against existing negative evidence.
Valuation allowances in certain foreign jurisdictions were removed during 2010 and 2011 because sufficient positive financial
information existed, resulting in tax benefit recognition of $10 million and $9 million, respectively. In 2012, additional valuation
allowances were established in certain foreign jurisdictions because realizability of the related deferred tax assets was no longer more
likely than not. Our effective tax rate in future periods may be positively or negatively impacted by changes in related judgments
about valuation allowances or pre-tax operations.
38
In addition to judgments associated with valuation accounts, our current tax provision can be affected by our mix of income and
identification or resolution of uncertain tax positions. Because income from domestic and international sources may be taxed at
different rates, the shift in mix during a year or over years can cause the effective tax rate to change. We base our rate during the year
on our best estimate of an annual effective rate, and update that estimate quarterly, with the cumulative effect of a change in the
anticipated annual rate reflected in the tax provision of that period. Such changes can result in significant interim reporting volatility.
This volatility can result from changes in our projected earnings levels, the mix of income, the impact of valuation allowances in
certain jurisdictions and the interim accounting rules applied to entities expected to pay taxes on a full year basis, but recognizing
losses in an interim period.
We file our tax returns based on our best understanding of the appropriate tax rules and regulations. However, complexities in the
rules and our operations, as well as positions taken publicly by the taxing authorities, may lead us to conclude that an accrual for an
uncertain tax position (“UTP”) is required. We generally maintain accruals for UTPs until examination of the tax position is
completed by the taxing authority, available review periods expire, or additional facts and circumstances cause us to change our
assessment of the appropriate accrual amount. During the third quarter of 2011, following closure of certain tax audits and the
expiration of the statute of limitations on previously open tax years, we reversed approximately $66 million of UTPs and a related $32
million of accrued interest. An additional UTP accrual of $15 million was reversed during the fourth quarter of 2011 following
closure of certain tax audits. Matters could arise in the future that could result in additional tax and interest expense or UTP accruals.
Further, the Company has significant operations outside the U.S. During 2012, U.S. deferred taxes were provided on one foreign
investment because repatriation of accumulated earnings was at least possible. However, no incremental U.S. deferred taxes have
been provided on the remaining foreign operations because earnings from those entities have been and will continue to be reinvested
into the foreign operations. Should we decide to distribute earnings from our foreign operations to the U.S., additional income tax
expense would be recognized, or valuation allowances reduced, for the income tax consequence of the anticipated distribution and
possibly for the calculated tax consequences of the full amount of undistributed earnings, net of allowable offsets.
Preferred stock paid-in-kind dividends — Our redeemable preferred stock carries a stated dividend of 10%, subject to future
decreases in certain circumstances, and allows for payment in cash or an increase in the preferred stock’s liquidation preference as
directed by the Board of Directors. The valuation for accounting purposes of the dividend paid in-kind requires significant judgment
to determine the estimated fair value. We have used a binomial simulation model to measure values of multiple possible outcomes of
the various provisions in the agreement that could impact whether the dividend rate would change based on future stock price
performance, whether the Company would issue a notice to call the preferred shares and whether the holders would convert their
preferred stock into common stock. While the fair value of preferred stock dividends paid in-kind has no standing in the contractual
rights to liquidation preference of the preferred shareholders nor any cash impact on the Company, it impacts the measurement of net
income available to common shareholders and earnings per share. Changes in the valuation assumptions such as the risk adjusted rate,
stock price volatility and time to call or convert can impact the estimated fair value and therefore the amount reported as net income
available to common shareholders and earnings per share. However, the valuation is most sensitive to changes in the underlying
common stock price. We believe the model used to estimate fair value is reasonable and appropriate, but the reported dividend
amount could change significantly in future periods based on changes in the underlying common stock price and the model inputs.
The Board of Directors decided to pay the dividend in-kind for the first three quarters of 2012 and in cash for the fourth quarter
amount due in January 2013. Dividends are expected to be paid in cash during 2013, though the Board of Directors assesses available
data quarterly before making that decision.
39
SIGNIFICANT TRENDS, DEVELOPMENTS AND UNCERTAINTIES
Competitive Factors — Over the years, we have seen continued development and growth of competitors in all segments of our
business. In particular, mass merchandisers and warehouse clubs, as well as grocery and drugstore chains, have increased their
assortment of home office merchandise, attracting additional back-to-school customers and year-round casual shoppers. Warehouse
clubs have expanded beyond their in-store assortment by adding catalogs and web sites from which a much broader assortment of
products may be ordered. We also face competition from other office supply stores that compete directly with us in numerous
markets. This competition is likely to result in increased competitive pressures on pricing, product selection and services provided.
Many of these retail competitors, including discounters, warehouse clubs, and drug stores and grocery chains, carry basic office
supply products. Some of them also feature technology products. Many of them may price certain of these offerings lower than we do,
but they have not shown an indication of greatly expanding their somewhat limited product offerings at this time. This trend towards a
proliferation of retailers offering a limited assortment of office products is a potentially serious trend in our industry that could shift
purchasing away from office supply specialty retailers and adversely impact our results.
We have also seen growth in competitors that offer office products over the Internet, featuring special purchase incentives and one-
time deals (such as close-outs). Through our own successful Internet and business-to-business web sites, we believe that we have
positioned ourselves competitively in the e-commerce arena.
Another trend in our industry has been consolidation, as competitors in office supply stores and the copy/print channel have been
acquired and consolidated into larger, well-capitalized corporations. This trend towards consolidation, coupled with acquisitions by
financially strong organizations, is potentially a significant trend in our industry that could impact our results.
We regularly consider these and other competitive factors when we establish both offensive and defensive aspects of our overall
business strategy and operating plans.
Economic Factors — Our customers in the North American Retail Division and the International Division and many of our customers
in the North American Business Solutions Division are predominantly small and home office businesses. Accordingly, spending by
these customers is affected by macroeconomic conditions, such as changes in the housing market and commodity costs, credit
availability and other factors. The downturn in the global economy experienced in recent years negatively impacted our sales and
profits.
Liquidity Factors — Historically, we have generated positive cash flow from operating activities and have had access to broad
financial markets that provide the liquidity we need to operate our business. Together, these sources have been used to fund operating
and working capital needs, as well as invest in business expansion through new store openings, capital improvements and
acquisitions. Due to the downturn in the global economy, our operating results have declined. We have in place an asset based credit
facility to provide liquidity, subject to availability as specified in the agreement. Further deterioration in our financial results could
negatively impact our credit ratings, our liquidity and our access to the capital markets. Certain of our existing indebtedness matures
in 2013 and there can be no assurance that we will be able to refinance all or a portion of that indebtedness. If we are able to refinance
all or a portion of that indebtedness, the terms of such refinancing will likely be less favorable than the terms of our existing
indebtedness, which would increase future interest expense.
40
MARKET SENSITIVE RISKS AND POSITIONS
We have adopted an enterprise risk management process patterned after the principles set out by the Committee of Sponsoring
Organizations (COSO) in 2004. Management utilizes a common view of exposure identification and risk management. A process is in
place for periodic risk reviews and identification of appropriate mitigation strategies.
We have market risk exposure related to interest rates, foreign currency exchange rates, and commodities. Market risk is measured as
the potential negative impact on earnings, cash flows or fair values resulting from a hypothetical change in interest rates or foreign
currency exchange rates over the next year. Interest rate changes on obligations may result from external market factors, as well as
changes in our credit rating. We manage our exposure to market risks at the corporate level. The portfolio of interest-sensitive assets
and liabilities is monitored to provide liquidity necessary to satisfy anticipated short-term needs. Our risk management policies allow
the use of specified financial instruments for hedging purposes only; speculation on interest rates, foreign currency rates, or
commodities is not permitted.
Interest Rate Risk
We are exposed to the impact of interest rate changes on cash, cash equivalents and debt obligations. The impact on cash and short-
term investments held at December 29, 2012 from a hypothetical 10% decrease in interest rates would be a decrease in interest
income of less than $0.1 million.
Market risk associated with our debt portfolio is summarized below:
2012
(In thousands)
6.25% senior notes
9.75% senior secured notes
Asset based credit facility
Carrying
Value
Risk
Sensitivity
$ 149,953 $ 153,750 $
474
$ 250,000 $ 265,938 $ 5,483
Fair
Value
2011
Fair
Value
Carrying
Value
Risk
Sensitivity
$ 399,953 $ 381,067 $ 2,860
— $ —
$
— $
The risk sensitivity of fixed rate debt reflects the estimated increase in fair value from a 50 basis point decrease in interest rates,
calculated on a discounted cash flow basis. The sensitivity of variable rate debt reflects the possible increase in interest expense
during the next period from a 50 basis point change in interest rates prevailing at year-end.
Foreign Exchange Rate Risk
We conduct business through entities in various countries outside the United States where their functional currency is not the U.S.
dollar. While we sell directly or indirectly to customers in 59 countries, the principal operations of our International Division are in
countries with Euro, British Pound and Mexican Peso functional currencies. We continue to assess our exposure to foreign currency
fluctuation against the U.S. dollar. As of December 29, 2012, a 10% change in the applicable foreign exchange rates would result in
an increase or decrease in our pretax earnings of approximately $5 million.
Although operations generally are conducted in the relevant local currency, we also are subject to foreign exchange transaction
exposure when our subsidiaries transact business in a currency other than their own functional currency. This exposure arises
primarily from inventory purchases in a foreign currency. At December 29, 2012, there was $27 million of foreign exchange forward
contracts hedging inventory exposures. This amount was the highest amount outstanding at any point during 2012. Also, from time-
to-time, we enter into foreign exchange forward transactions to protect against possible changes in exchange rates related to
scheduled or anticipated cash movements among our operating entities. At December 29, 2012, there were $14 million of foreign
exchange forward contracts to hedge these movements.
41
Generally, we evaluate the performance of our international businesses by focusing on the “local currency” results of the business,
and not with regard to the translation into U.S. dollars, as the latter is impacted by external factors.
Commodities Risk
We operate a large network of stores and delivery centers around the world. As such, we purchase significant amounts of fuel needed
to transport products to our stores and customers as well as pay shipping costs to import products from overseas. We are exposed to
potential changes in the underlying commodity costs associated with this transport activity. As of December 29, 2012, a 10% change
in domestic commodity costs would result in an increase or decrease in our operating profit of approximately $5 million.
INFLATION AND SEASONALITY
Although we cannot determine the precise effects of inflation on our business, we do not believe inflation has had a material impact
on our sales or the results of our operations. We consider our business to be somewhat seasonal, with sales generally trending lower in
the second quarter, following the “back-to-business” sales cycle in the first quarter and preceding the “back-to-school” sales cycle in
the third quarter and the holiday sales cycle in the fourth quarter. Certain working capital components may build and recede during
the year reflecting established selling cycles. Business cycles can and have impacted our operations and financial position when
compared to other periods.
NEW ACCOUNTING STANDARDS
Effective for the first quarter of 2013, a new accounting standard will require disclosure of amounts reclassified out of comprehensive
income by component. In addition, companies will be required to present, either on the face of financial statements or in a single note,
significant amounts reclassified out of accumulated other comprehensive income and the income statement line item affected by the
reclassification.
Effective for the first quarter of 2014, a new accounting standard will require disclosure of information about the effect or potential
effect of financial instrument netting arrangements on financial position. Companies will be required to present both net (offset
amounts) and gross information in the notes to the financial statements for relevant assets and liabilities that are offset. This standard
was further clarified to apply to specified financial instruments subject to master netting agreements.
Including the above, there are no recently issued accounting standards that are expected to have a material effect on our financial
condition, results of operations or cash flows. However, the Financial Accounting Standards Board has issued proposed accounting
rules relating to leasing transactions that, if passed in their current form, would have significant impacts to our financial
statements. Among other things, the current proposal would create a right of use asset and corresponding liability on the balance sheet
measured at the present value of lease payments. A lessee would use the effective-interest method to subsequently measure the
liability and the right-of-use asset would be amortized based on one of two approaches (determined by the nature of the underlying
asset). These proposed changes in accounting rules would have no direct economic impact to the Company.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the “Reform Act”) provides protection from liability in private lawsuits for
“forward-looking” statements made by public companies under certain circumstances, provided that the public company discloses
with specificity the risk factors that may impact its future results. We want to take advantage of the “safe harbor” provisions of the
Reform Act. This Annual Report contains both historical information and other information that you can use to infer future
performance. Examples of historical information include our annual financial statements and the commentary on past performance
contained in our MD&A. While we have specifically identified certain information as being forward-looking in the context of its
presentation, we caution you that, with the exception of information that is historical, all the information contained in this Annual
Report should be considered to be “forward-looking statements” as referred to in the Reform Act. Without limiting the generality of
the preceding sentence, any time we use the words “estimate,” “project,” “intend,” “expect,” “believe,” “anticipate,” “continue” and
similar expressions, we intend to clearly express that the information deals with possible future events and is forward-looking in
nature. Certain information in our MD&A is clearly forward-looking in nature, and without limiting the generality of the preceding
cautionary statements, we specifically advise you to consider all of our MD&A in the light of the cautionary statements set forth
herein.
42
Forward-looking information involves future risks and uncertainties. Much of the information in this report that looks towards future
performance of our Company is based on various factors and important assumptions about future events that may or may not actually
come true. As a result, our operations and financial results in the future could differ materially and substantially from those we have
discussed in the forward-looking statements in this Annual Report. Significant factors that could impact our future results are
provided in Item 1A. Risk Factors included in this Annual Report. Other risk factors are incorporated into the text of our MD&A,
which should itself be considered a statement of future risks and uncertainties, as well as management’s view of our businesses.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Refer to information in the “Market Sensitive Risks and Positions” subsection of Part II — Item 7. MD&A of this Annual Report.
Item 8. Financial Statements and Supplementary Data.
Refer to Part IV — Item 15(a) of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
43
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Based on management’s evaluation which included the participation of the Company’s Chief Executive Officer (“CEO”), and Chief
Financial Officer (“CFO”), as of December 29, 2012, the Company’s CEO and CFO concluded that the Company’s disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“the
Act”)), were effective to provide reasonable assurance that information required to be disclosed by the Company in reports that the
Company files or submits under the Act is recorded, processed, summarized and reported within the time periods specified in SEC
rules and forms and that such information is accumulated and communicated to the Company’s management, including the CEO and
CFO, to allow timely decisions regarding required disclosures.
Changes in Internal Controls
There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s most
recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management of Office Depot is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rule 13a-15(f) under the Act. Our Internal Control structure is designed to provide reasonable assurance to our
management and the Board of Directors regarding the reliability of financial reporting and the preparation and fair presentation of
published financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any
evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In evaluating our Internal Control, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control — Integrated Framework. Based on our assessment, management has concluded that the
Company’s internal control over financial reporting was effective as of December 29, 2012.
Our internal control over financial reporting as of December 29, 2012, has been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report provided below.
44
REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Office Depot, Inc.:
We have audited the internal control over financial reporting of Office Depot, Inc. and subsidiaries (the “Company”) as of
December 29, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal
executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely
basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are
subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 29, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the fiscal year ended December 29, 2012 of the Company and our report dated
February 20, 2013 expressed an unqualified opinion on those financial statements.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Boca Raton, Florida
February 20, 2013
45
Item 9B. Other Information.
On February 19, 2013, the Company entered into a definitive merger agreement (the “Agreement”) with OfficeMax Incorporated
(“OfficeMax”), pursuant to which the Company and OfficeMax would combine in a tax-free, all-stock merger transaction. At the
effective time of the merger, the Company would issue 2.69 new shares of common stock for each outstanding share of OfficeMax
common stock. In addition, at the effective time of the merger, the Company’s board of directors will be reconstituted to include an
equal number of directors designated by the Company and OfficeMax. The parties’ obligations to complete the merger are subject to
several conditions, including, among others, approval by the shareholders of each of the two companies, the receipt of certain
regulatory approvals and other customary closing conditions.
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
Information concerning our executive officers is set forth in Part 1 — Item 1. “Business” of this Annual Report under the caption
“Executive Officers of the Registrant.”
Information required by this item with respect to our directors and the nomination process is contained in the proxy statement for our
2013 Annual Meeting of Shareholders to be filed with the SEC (the “Proxy Statement”) under the heading “Election of Directors” and
is incorporated by reference in this Annual Report.
Information required by this item with respect to our audit committee and our audit committee financial experts is contained in the
Proxy Statement under the heading “Committees of Our Board of Directors – Audit Committee” and is incorporated by reference in
this Annual Report.
Information required by this item with respect to compliance with Section 16(a) of the Exchange Act is contained in the Proxy
Statement under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated by reference in this
Annual Report.
Our Code of Ethical Behavior is in compliance with applicable rules of the SEC that apply to our principal executive officer, our
principal financial officer, and our principal accounting officer or controller, or persons performing similar functions. A copy of the
Code of Ethical Behavior is available free of charge on the “Investor Relations” section of our web site at www.officedepot.com. We
intend to satisfy any disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of
this Code of Ethical Behavior by posting such information on our web site at the address and location specified above.
Item 11. Executive Compensation.
Information required by this item with respect to executive compensation and director compensation is contained in the Proxy
Statement under the headings “Compensation Discussion & Analysis” and “Director Compensation,” respectively, and is
incorporated by reference in this Annual Report.
The information required by this item with respect to compensation committee interlocks and insider participation is contained in the
Proxy Statement under the heading “Compensation Committee Interlocks and Insider Participation” and is incorporated by reference
in this Annual Report.
The compensation committee report required by this item is contained in the Proxy Statement under the heading “Compensation
Committee Report” and is incorporated by reference in this Annual Report.
The information required by this item with respect to compensation policies and practices as they relate to the Company’s risk
management is contained in the Proxy Statement under the heading “Board of Directors’ Role in Risk Oversight” and is incorporated
by reference in this Annual Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information required by this item with respect to security ownership of certain beneficial owners and management is contained in the
Proxy Statement under the heading “Stock Ownership Information” and is incorporated by reference in this Annual Report.
46
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information required by this item with respect to such contractual relationships and director independence is contained in the Proxy
Statement under the headings “Related Person Transactions Policy” and “Director Independence,” respectively, and is incorporated
by reference in this Annual Report.
Item 14. Principal Accountant Fees and Services.
Information with respect to principal accounting fees and services and pre-approval policies are contained in the Proxy Statement
under the headings “Audit and Other Fees” and “Audit Committee Pre-Approval Policies and Procedures” respectively, and is
incorporated by reference in this Annual Report.
47
Item 15. Exhibits and Financial Statement Schedules.
(a)The following documents are filed as a part of this report:
PART IV
1. The financial statements listed in “Index to Financial Statements.”
2. The financial statement schedules listed in “Index to Financial Statement Schedules.”
3. The exhibits listed in the “Index to Exhibits.”
(b)Exhibit 99
1. Financial statements of Office Depot de Mexico, S.A. de C.V. and Subsidiaries
48
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 20th day of February 2013.
SIGNATURES
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 February 20, 2013.
OFFICE DEPOT, INC.
By: /s/ NEIL R. AUSTRIAN
Neil R. Austrian
Chief Executive Officer
Signature
/s/ NEIL R. AUSTRIAN
Neil R. Austrian
/s/ MICHAEL D. NEWMAN
Michael D. Newman
/s/ KIM MOEHLER
Kim Moehler
/s/ JUSTIN BATEMAN
Justin Bateman
/s/ THOMAS J. COLLIGAN
Thomas J. Colligan
/s/ MARSHA JOHNSON EVANS
Marsha Johnson Evans
/s/ BRENDA J. GAINES
Brenda J. Gaines
/s/ EUGENE V. FIFE
Eugene V. Fife
/s/ W. SCOTT HEDRICK
W. Scott Hedrick
/s/ KATHLEEN MASON
Kathleen Mason
/s/ NIGEL TRAVIS
Nigel Travis
/s/ RAYMOND SVIDER
Raymond Svider
Capacity
Chief Executive Officer (Principal Executive Officer) and Chairman,
Board of Directors
Executive Vice President and Chief Financial Officer (Principal
Financial Officer)
Senior Vice President and Controller (Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
49
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm on Financial Statement Schedules
Index to Financial Statement Schedules
50
Page
51
52
53
54
55
56
57 – 94
95
96
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Office Depot, Inc.:
We have audited the accompanying consolidated balance sheets of Office Depot, Inc. and subsidiaries (the “Company”) as of
December 29, 2012 and December 31, 2011, and the related consolidated statements of operations, comprehensive income (loss),
stockholders’ equity, and cash flows for each of the three fiscal years in the period ended December 29, 2012. 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 the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Office Depot,
Inc. and subsidiaries at December 29, 2012 and December 31, 2011, and the results of their operations and their cash flows for each
of the three fiscal years in the period ended December 29, 2012, in conformity with accounting principles generally accepted in the
United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of December 29, 2012, based on the criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 20, 2013 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Boca Raton, Florida
February 20, 2013
51
OFFICE DEPOT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents
Receivables, net of allowances of $22,755 in 2012 and $19,671 in 2011
Inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Goodwill
Other intangible assets, net
Deferred income taxes
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable
Accrued expenses and other current liabilities
Income taxes payable
Short-term borrowings and current maturities of long-term debt
Total current liabilities
Deferred income taxes and other long-term liabilities
Long-term debt, net of current maturities
Total liabilities
Commitments and contingencies
Redeemable preferred stock, net (liquidation preference – $406,773 in 2012 and $377,729 in 2011)
Stockholders’ equity:
Office Depot, Inc. stockholders’ equity:
Common stock – authorized 800,000,000 shares of $.01 par value; issued shares –
291,734,027 in 2012 and 286,430,567 in 2011
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Treasury stock, at cost – 5,915,268 shares in 2012 and 2011
Total Office Depot, Inc. stockholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
52
December 29,
2012
December 31,
2011
$ 670,811
803,944
1,050,625
170,810
2,696,190
856,341
64,312
16,789
33,421
343,726
$4,010,779
$ 570,681
862,831
1,146,974
163,646
2,744,132
1,067,040
61,899
35,223
47,791
294,899
$4,250,984
$ 934,892
931,618
5,310
174,148
2,045,968
431,531
485,331
2,962,830
$ 993,636
1,010,011
7,389
36,401
2,047,437
452,313
648,313
3,148,063
386,401
363,636
2,917
1,119,775
212,717
(616,235)
(57,733)
661,441
107
661,548
$4,010,779
2,864
1,138,542
194,522
(539,124)
(57,733)
739,071
214
739,285
$4,250,984
OFFICE DEPOT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Sales
Cost of goods sold and occupancy costs
Gross profit
Store and warehouse operating and selling expenses
Recovery of purchase price
Asset impairments
General and administrative expenses
Operating income (loss)
Other income (expense):
Interest income
Interest expense
Loss on extinguishment of debt
Miscellaneous income, net
Earnings (loss) before income taxes
Income tax expense (benefit)
Net earnings (loss)
Less: Net loss attributable to the noncontrolling interests
Net earnings (loss) attributable to Office Depot, Inc.
Preferred stock dividends
Net earnings (loss) attributable to common stockholders
Net earnings (loss) per share:
Basic
Diluted
2012
$10,695,652
7,448,067
3,247,585
2,535,373
(68,314)
138,540
672,827
(30,841)
2,240
(68,937)
(12,110)
34,225
(75,423)
1,697
(77,120)
(9)
(77,111)
32,934
$ (110,045)
$
(0.39)
(0.39)
2011
$11,489,533
8,063,087
3,426,446
2,692,646
—
11,427
688,619
33,754
2010
$11,633,094
8,275,957
3,357,137
2,684,301
—
51,295
658,832
(37,291)
1,231
(33,223)
—
30,857
32,619
(63,072)
95,691
(3)
95,694
35,705
59,989
0.22
0.22
$
$
4,663
(58,498)
—
34,451
(56,675)
(10,470)
(46,205)
(1,582)
(44,623)
37,113
(81,736)
(0.30)
(0.30)
$
$
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
53
OFFICE DEPOT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
Net earnings (loss)
Other comprehensive income (loss), net of tax, where applicable:
Foreign currency translation adjustments
Amortization of gain on cash flow hedge
Change in deferred pension
Change in deferred cash flow hedge
Other
Total other comprehensive income (loss), net of tax, where applicable
Comprehensive income (loss)
Less: comprehensive income (loss) attributable to the noncontrolling interests
Comprehensive income (loss) attributable to Office Depot, Inc. stockholders
2012
$(77,120)
2011
$ 95,691
2010
$(46,205)
23,465
(2,308)
(2,910)
(43)
—
18,204
(58,916)
—
$(58,916)
(21,816)
(1,690)
(6,379)
617
—
(29,268)
66,423
14
$ 66,409
(32,224)
(1,659)
19,942
(51)
(246)
(14,238)
(60,443)
(1,248)
$(59,195)
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
54
OFFICE DEPOT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
Common
Stock
Shares
Common
Stock
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
(Accumulated
Deficit)
Treasury
Stock
Noncontrolling
Interest
Total
Stockholders’
Equity
Balance at December 26,
2009
280,652,278 $2,807 $1,193,157 $ 238,379 $ (590,195) $(57,733) $
2,827 $ 789,242
Disposition of majority-
owned subsidiaries
Purchase of subsidiary
shares from
noncontrolling interests
Comprehensive income
(loss), net of tax:
Net loss
Other comprehensive
income (loss)
Preferred stock dividends
Grant of long-term
incentive stock
Forfeiture of restricted
stock
Exercise of stock options
(including income tax
benefits and
withholding)
Amortization of long-term
incentive stock grants
2,523
2,523
(16,066)
(3,623)
(19,689)
(44,623)
(1,582)
(46,205)
(14,572)
(37,113)
334
(14,238)
(37,113)
223,762
2
(2)
(236,512)
(2)
2,419,708
24
590
20,843
—
(2)
614
20,843
Balance at December 25,
2010
283,059,236 $2,831 $1,161,409 $ 223,807 $ (634,818) $(57,733) $
479 $ 695,975
Purchase of subsidiary
shares from
noncontrolling interests
Comprehensive income
(loss), net of tax
Net loss
Other comprehensive
income (loss)
Preferred stock dividends
Grant of long-term
incentive stock
Forfeiture of restricted
stock
Exercise of stock options
(including income tax
benefits and
withholding)
Amortization of long-term
incentive stock grants
(983)
(279)
(1,262)
95,694
(29,285)
(35,705)
(3)
95,691
17
(29,268)
(35,705)
2,641,074
26
(342,281)
(3)
1,072,538
10
(74)
13,895
26
(3)
(64)
13,895
Balance at December 31,
2011
286,430,567 $2,864 $1,138,542 $ 194,522 $ (539,124) $(57,733) $
214 $ 739,285
Purchase of subsidiary
shares from
noncontrolling interests
Comprehensive income
(loss), net of tax
Net loss
Other comprehensive
income
(444)
(107)
(551)
(77,111)
18,195
(9)
(77,120)
9
18,204
Preferred stock dividends
Grant of long-term
incentive stock
Forfeiture of restricted
stock
Exercise and release of
incentive stock
(including income tax
benefits and
withholding)
Amortization of long-term
incentive stock grants
Balance at December 29,
2012
(32,934)
3,608,806
36
(36)
(446,703)
(4)
4
2,141,357
21
1,064
13,579
(32,934)
—
—
1,085
13,579
291,734,027 $2,917 $1,119,775 $ 212,717 $ (616,235) $(57,733) $
107 $ 661,548
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
55
OFFICE DEPOT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net earnings (loss)
Adjustments to reconcile net earnings (loss) to net cash provided by operating
activities:
Depreciation and amortization
Charges for losses on inventories and receivables
Net earnings from equity method investments
Loss on extinguishment of debt
Recovery of purchase price
Pension plan funding
Dividends received
Asset impairments
Compensation expense for share-based payments
Deferred income taxes and deferred tax assets valuation allowances
Loss (gain) on disposition of assets
Other operating activities
Changes in assets and liabilities:
Decrease in receivables
Decrease (increase) in inventories
Net decrease (increase) in prepaid expenses and other assets
Net decrease in accounts payable, accrued expenses and other current and
long-term liabilities
Total adjustments
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Acquisitions, net of cash acquired, and related payments
Recovery of purchase price
Proceeds from disposition of assets and other
Restricted cash
Release of restricted cash
Net cash used in investing activities
Cash flows from financing activities:
Net proceeds from employee share-based transactions
Advance received
Payment for non-controlling interests
Loss on extinguishment of debt
Debt retirement
Debt issuance
Debt related fees
Dividends on redeemable preferred stock
Proceeds from issuance of borrowings
Payments on long- and short-term borrowings
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
2012
2011
2010
$ (77,120)
$ 95,691
$ (46,205)
203,189
64,930
(30,462)
13,377
(58,049)
(58,030)
__
138,540
13,579
667
(1,764)
5,375
44,052
52,733
(138)
(131,547)
256,452
179,332
(120,260)
__
49,841
32,122
__
8,570
(29,727)
1,586
__
(551)
(13,377)
(250,000)
250,000
(8,012)
__
21,908
(56,736)
(55,182)
5,707
100,130
570,681
$ 670,811
211,410
56,200
(31,426)
__
__
__
25,016
11,427
13,895
(14,999)
4,420
8,510
99,927
53,902
25,754
(360,060)
103,976
199,667
(130,317)
(72,667)
__
8,117
(8,800)
46,509
(157,158)
254
8,800
(1,262)
__
__
__
(9,945)
(36,852)
9,598
(69,169)
(98,576)
(730)
(56,797)
627,478
$ 570,681
208,319
57,824
(30,635)
__
__
__
—
51,295
20,840
15,551
8,709
11,501
60,273
(87,724)
2,522
(69,144)
249,331
203,126
(169,452)
(10,952)
__
35,393
(46,509)
—
(191,520)
1,011
—
(21,786)
__
__
__
(4,688)
(27,639)
52,488
(30,284)
(30,898)
(13,128)
(32,420)
659,898
$ 627,478
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
56
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: Office Depot, Inc. (“Office Depot” or the “Company”) is a global supplier of office products and services under
the Office Depot brand and other proprietary brand names. As of December 29, 2012, the Company sold to customers throughout
North America, Europe, Asia and Latin America. Office Depot operates wholly-owned entities, majority-owned entities and
participates in other ventures and alliances.
®
Basis of Presentation: The Consolidated Financial Statements of Office Depot and its subsidiaries have been prepared in accordance
with accounting principles generally accepted in the United States of America. All intercompany transactions have been eliminated in
consolidation. In addition to wholly owned subsidiaries, the Company consolidates entities where it controls financial and operating
policies but does not have total ownership. Noncontrolling interests are presented in the Consolidated Balance Sheets and
Consolidated Statements of Stockholders’ Equity as a component of Total stockholders’ equity and in the Consolidated Statements of
Operations as a specific allocation of Net earnings (loss). The equity method of accounting is used for investments in which the
Company does not control but either shares control equally or has significant influence. During 2010, the Company amended the
shareholders’ agreement related to the venture in India such that control is shared equally. The venture was deconsolidated and
subsequently accounted for under the equity method. Remaining investment at year end 2012 and 2011 in this venture is considered
immaterial. The Company also participates in a joint venture selling office products and services in Mexico and Central and South
America that is accounted for using the equity method. Refer to Note P for additional information on investment in unconsolidated
joint venture.
Prior year amounts in the Asset impairment line of the Consolidated Statements of Operations and Consolidated Statements of Cash
Flows have been reclassified to conform to the current year presentation.
Fiscal Year: Fiscal years are based on a 52- or 53-week period ending on the last Saturday in December. Fiscal 2011 financial
statements consisted of 53 weeks, with the additional week occurring in the fourth quarter; all other periods presented in the
Consolidated Financial Statements consisted of 52 weeks.
Estimates and Assumptions: Preparation of these Consolidated Financial Statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts
reported in the Consolidated Financial Statements and related notes. For example, estimates are required for, but not limited to,
facility closure costs, asset impairments, fair value measurements, amounts earned under vendor programs, inventory valuation,
contingencies and valuation allowances on deferred tax assets. Actual results may differ from those estimates.
Foreign Currency: Assets and liabilities of international operations are translated into U.S. dollars using the exchange rate at the
balance sheet date. Revenues, expenses and cash flows are translated at average monthly exchange rates. Translation adjustments
resulting from this process are recorded in Stockholders’ equity as a component of Accumulated other comprehensive income
(“OCI”).
Monetary assets and liabilities denominated in a currency other than a consolidated entity’s functional currency result in transaction
gains or losses from the remeasurement at spot rates at the end of the period. Foreign currency gains and losses are recorded in
Miscellaneous income, net in the Consolidated Statements of Operations.
Cash Equivalents: All short-term highly liquid investments with original maturities of three months or less from the date of
acquisition are classified as cash equivalents. Amounts in transit from banks for customer credit card and debit card transactions that
process in less than seven days are classified as cash. The banks process the majority of these amounts within one to two business
days.
57
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash Management: Cash management process generally utilizes zero balance accounts which provide for the settlement of the
related disbursement accounts and cash concentration on a daily basis. Trade accounts payable and Accrued expenses as of
December 29, 2012 and December 31, 2011 included $53 million and $50 million, respectively, of amounts not yet presented for
payment drawn in excess of disbursement account book balances, after considering existing offset provisions. Approximately $184
million of Cash and cash equivalents was held outside the United States at December 29, 2012.
Receivables: Trade receivables, net, totaled $521.1 million and $631.7 million at December 29, 2012 and December 31, 2011,
respectively. An allowance for doubtful accounts has been recorded to reduce receivables to an amount expected to be collectible
from customers. The allowance recorded at December 29, 2012 and December 31, 2011 was $22.8 million and $19.7 million,
respectively.
Exposure to credit risk associated with trade receivables is limited by having a large customer base that extends across many different
industries and geographic regions. However, receivables may be adversely affected by an economic slowdown in the United States or
internationally. No single customer accounted for more than 10% of total sales or receivables in 2012, 2011 or 2010.
Other receivables are $282.9 million and $231.1 million as of December 29, 2012 and December 31, 2011, respectively, of which
$155.3 million and $181.6 million are amounts due from vendors under purchase rebate, cooperative advertising and various other
marketing programs.
The Company sells selected accounts receivables on a non-recourse basis to an unrelated financial institution under a factoring
agreement in France. The Company accounts for this transaction as a sale of receivables, removes receivables sold from its financial
statements, and records cash proceeds when received by the Company as cash provided by operating activities in the Statements of
Cash Flows. The financial institution makes available 80% of the face value of the receivables to the Company and retains the
remaining 20% as a guarantee until the receipt of the proceeds associated with the factored invoices. In 2012, the Company activated
the arrangement by selling receivables, approximately $53 million of which was settled in cash and $96 million as non-cash
transactions. As of December 29, 2012, a retention guarantee of $12.7 million and a receivable from the financial institution related to
factored receivables of $50.9 million are included in Prepaid expenses and other current assets and Receivables, respectively.
Inventories: Inventories are stated at the lower of cost or market value and are reduced for inventory losses based on physical counts.
In-bound freight is included as a cost of inventories. Also, certain vendor allowances that are related to inventory purchases are
recorded as a product cost reduction. The weighted average method is used to determine the cost of inventory in North America and
the first-in-first-out method is used for inventory held within the international operations.
Prepaid Expenses: At December 29, 2012 and December 31, 2011, Prepaid expenses and other current assets on the Consolidated
Balance Sheets included prepaid expenses of $116.3 million and $118.6 million, respectively, relating to short-term advance
payments on rent, marketing, services and other matters.
Income Taxes: Income tax expense is recognized at applicable United States or international tax rates. Certain revenue and expense
items may be recognized in one period for financial statement purposes and in a different period’s income tax return. The tax effects
of such differences are reported as deferred income taxes. Valuation allowances are recorded for periods in which realization of
deferred tax assets does not meet a more likely than not standard. Refer to Note F for additional information on deferred income
taxes.
58
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Property and Equipment: Property and equipment additions are recorded at cost. Depreciation and amortization is recognized over
their estimated useful lives using the straight-line method. The useful lives of depreciable assets are estimated to be 15-30 years for
buildings and 3-10 years for furniture, fixtures and equipment. Computer software is amortized over three years for common office
applications, five years for larger business applications and seven years for certain enterprise-wide systems. Leasehold improvements
are amortized over the shorter of the estimated economic lives of the improvements or the terms of the underlying leases, including
renewal options considered reasonably assured. The Company capitalizes certain costs related to internal use software that is expected
to benefit future periods. These costs are amortized using the straight-line method over the expected life of the software, which are
estimated to be 3-7 years.
Goodwill and Other Intangible Assets: Goodwill represents the excess of the cost of an acquisition over the value assigned to net
tangible and identifiable intangible assets of the business acquired. The Company assesses possible goodwill impairment annually in
the fourth quarter, or sooner if indications of possible impairment are identified. The Company elected to perform a quantitative test
of goodwill for 2012 and no impairment was identified. This test compares the book value of net assets to the fair value of the
reporting units. If the fair value is determined to be less than the book value, a second step is performed to compute the amount of
impairment as the difference between the estimated fair value of goodwill and the carrying value. The fair value of the reporting units
with goodwill were estimated using a discounted cash flow analysis and certain market information. This method of estimating fair
value requires assumptions, judgments and estimates of future performance.
Unless conditions warrant earlier action, intangible assets with indefinite lives also are assessed annually for impairment during the
fourth quarter. The Company elected to perform a quantitative test of its indefinite life intangible asset for 2012 and no impairment
was identified. The test was based on a discounted cash flow approach.
Cost of other intangible assets are amortized over their estimated useful lives. Amortizable intangible assets are periodically reviewed
to determine whether events and circumstances warrant a revision to the remaining period of amortization. During 2012, a charge of
approximately $14 million was recognized related to impairment of amortizing intangible assets. Refer to Note I for additional
discussion.
Impairment of Long-Lived Assets: Long-lived assets with identifiable cash flows are reviewed for possible impairment annually or
whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Impairment is
assessed at the individual store level which is the lowest level of identifiable cash flows, and considers the estimated undiscounted
cash flows over the asset’s remaining life. If estimated undiscounted cash flows are insufficient to recover the investment, an
impairment loss is recognized equal to the estimated fair value of the asset less its carrying value and any costs of disposition, net of
salvage value. The fair value estimate is generally the discounted amount of estimated store-specific cash flows. Impairment losses of
$124.2 million, $11.4 million and $2.3 million were recognized in 2012, 2011 and 2010, respectively. Because of the significance, the
2012 and 2011 amounts are included in Asset impairments in the Consolidated Statements of Operations. These impairment losses
relate to certain under-performing retail stores and changes in assumptions following the Company’s adoption in the third quarter of
2012 of the North American Retail Division retail strategy (“ NA Retail Strategy”). Refer to Note I for additional discussion.
Facility Closure Costs: Store performance is regularly reviewed against expectations and stores not meeting performance
requirements may be closed. Costs associated with store or other facility closures, principally accrued lease costs, are recognized
when the facility is no longer used in an operating capacity or when a liability has been incurred. Store assets are also reviewed for
possible impairment, or reduction of estimated useful lives.
59
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accruals for facility closure costs are based on the future commitments under contracts, adjusted for assumed sublease benefits and
discounted at the Company’s risk-adjusted rate at the time of closing. Additionally, the Company recognizes charges to terminate
existing commitments and charges or credits to adjust remaining closed facility accruals to reflect current expectations. Refer to Note
B for additional information on accrued balance relating to future commitments under operating leases for closed facilities. The short-
term and long-term components of this liability are included in Accrued expenses and other current liabilities and Deferred income
taxes and other long-term liabilities, respectively, on the Consolidated Balance Sheets.
Accrued Expenses: Included in Accrued expenses and other current liabilities in the Consolidated Balance Sheets are accrued
payroll-related amounts of approximately $203.8 million and $262 million at December 29, 2012 and December 31, 2011,
respectively.
Fair Value of Financial Instruments: The estimated fair values of financial instruments recognized in the Consolidated Balance
Sheets or disclosed within these Notes to Consolidated Financial Statements have been determined using available market
information, information from unrelated third-party financial institutions and appropriate valuation methodologies, primarily
discounted projected cash flows. Considerable judgment is required when interpreting market information and other data to develop
estimates of fair value. Refer to Note I for additional information on fair value.
Revenue Recognition: Revenue is recognized at the point of sale for retail transactions and at the time of successful delivery for
contract, catalog and Internet sales. Sales taxes collected are not included in reported sales. The Company uses judgment in estimating
sales returns, considering numerous factors including historical sales return rates. The Company also records reductions to revenue
for customer programs and incentive offerings including special pricing agreements, certain promotions and other volume-based
incentives. Revenue from sales of extended warranty service plans is either recognized at the point of sale or over the warranty
period, depending on the determination of legal obligor status. All performance obligations and risk of loss associated with such
contracts are transferred to an unrelated third-party administrator at the time the contracts are sold. Costs associated with these
contracts are recognized in the same period as the related revenue.
A liability for future performance is recognized when gift cards are sold and the related revenue is recognized when gift cards are
redeemed as payment for the products. The Company recognizes as revenue the unused portion of the gift card liability when
historical data indicates that additional redemption is remote.
Franchise fees, royalty income and the sales of products to franchisees and licensees, which currently are not significant, are included
in Sales, while product costs are included in Cost of goods sold and occupancy costs in the Consolidated Statements of Operations.
Cost of Goods Sold and Occupancy: The Company includes in Cost of goods sold and occupancy costs, inventory costs, net of
estimable vendor allowances and rebates, cash discounts on purchased inventory, freight costs incurred to bring merchandise to stores
and warehouses, provisions for inventory value and physical adjustments and occupancy costs, including depreciation or facility rent
of inventory-holding and selling locations and related utilities.
Shipping and Handling Fees and Costs: Income generated from shipping and handling fees is recorded in Sales for all periods
presented. Freight costs incurred to ship merchandise to customers are recorded as a component of Store and warehouse operating and
selling expenses. Distribution costs, including shipping costs, combined with warehouse handling costs totaled $711.5 million in
2012, $727.0 million in 2011 and $747.1 million in 2010. Approximately $6 million of accruals for distribution related facility
closures is included in the 2011 amount.
60
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other companies may present shipping and handling costs in cost of goods sold. Accordingly, the Company’s presentation of cost of
goods sold and gross profit may not be comparable to similarly titled captions used by other companies.
Store and Warehouse Operating and Selling Expenses: This caption includes employee payroll and benefits and other operating
costs incurred relating to selling activities, as well as shipping and handling activities described above. It also includes advertising
expenses and accretion, gains and losses relating to closed facilities. Asset impairments have been presented separately on the
Consolidated Statements of Operations.
General and Administrative Expenses: General and administrative expenses include, employee payroll and benefits, as well as
other expenses for executive management and various staff functions, such as information technology, most human resources
functions, finance, legal, internal audit, and certain merchandising and product development functions. Gains and losses relating to
assets used to support these functions, as well as certain charges related to Company-directed activities are included in this caption.
General and administrative expenses are allocated to business segments in determination of Division operating income to the extent
those costs are considered to be directly or closely related to segment activity.
Advertising: Advertising costs are charged either to expense when incurred or, in the case of direct marketing advertising, capitalized
and amortized in proportion to the related revenues over the estimated life of the material, which range from several months to up to
one year.
Advertising expense recognized was $402.4 million in 2012, $434.6 million in 2011 and $469.5 million in 2010. Prepaid advertising
costs were $27.3 million as of December 29, 2012 and $28.3 million as of December 31, 2011.
Accounting for Stock-Based Compensation: Stock-based compensation is accounted for using the fair value method of expense
recognition. The Company uses the Black-Scholes valuation model and recognize compensation expense on a straight-line basis over
the requisite service period of the grant. Alternative models are considered if grants have characteristics that cannot be reasonably
estimated using this model.
Pre-opening Expenses: Pre-opening expenses related to opening new stores and warehouses or relocating existing stores and
warehouses are expensed as incurred and included in Store and warehouse operating and selling expenses.
Self-insurance: Office Depot is primarily self-insured for workers’ compensation, auto and general liability and employee medical
insurance programs. Self-insurance liabilities are based on claims filed and estimates of claims incurred but not reported. These
liabilities are not discounted.
Comprehensive Income (Loss): Comprehensive income (loss) represents the change in stockholders’ equity from transactions and
other events and circumstances arising from non-stockholder sources. Comprehensive income consists of net earnings (loss), foreign
currency translation adjustments, deferred pension gains (losses), and elements of qualifying cash flow hedges. Because of valuation
allowances in U.S. and several international taxing jurisdictions, these items generally have little or no tax impact. The component
balances are net of immaterial tax impacts, where applicable. As of December 29, 2012, and December 31, 2011, the Consolidated
Balance Sheet reflected Accumulated OCI in the amount of $212.7 million and $194.5 million, which consisted of $216.0 million and
$192.5 million in foreign currency translation adjustments, $0.6 million and $3.0 million in unamortized gain on hedge and $3.9
million and $1.0 million in deferred pension loss, respectively. During 2012, approximately $3.3 million of the cumulative translation
adjustment balance was recognized upon disposition of an international subsidiary. Additionally, the cumulative translation
adjustment balance was reduced by $4.7 million in 2012 as a result of providing U.S. deferred taxes on certain foreign earnings
following a change in the Company’s permanent reinvestment assertion for the related entity. Refer to Note F for additional
discussion of income taxes.
61
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Vendor Arrangements: The Company enters into arrangements with substantially all significant vendors that provide for some form
of consideration to be received from the vendors. Arrangements vary, but some specify volume rebate thresholds, advertising support
levels, as well as terms for payment and other administrative matters. The volume-based rebates, supported by a vendor agreement,
are estimated throughout the year and reduce the cost of inventory and cost of goods sold during the year. This estimate is regularly
monitored and adjusted for current or anticipated changes in purchase levels and for sales activity. Other promotional consideration
received is event-based or represents general support and is recognized as a reduction of Cost of goods sold and occupancy costs or
Inventory, as appropriate based on the type of promotion and the agreement with the vendor. Some arrangements may meet the
specific, incremental, identifiable criteria that allow for direct operating expense offset, but such arrangements are not significant.
New Accounting Standards: Effective for the first quarter of 2013, a new accounting standard will require disclosure of amounts
reclassified out of comprehensive income by component. In addition, companies will be required to present, either on the face of
financial statements or in a single note, significant amounts reclassified out of accumulated other comprehensive income and the
income statement line item affected by the reclassification.
Effective for the first quarter of 2014, a new accounting standard will require disclosure of information about the effect or potential
effect of financial instrument netting arrangements on the Company’s financial position. Companies will be required to present both
net (offset amounts) and gross information in the notes to the financial statements for relevant assets and liabilities that are offset.
This standard was further clarified to apply to specified financial instruments subject to master netting agreements.
Including the above, there are no recently issued accounting standards that are expected to have a material effect on the Company’s
financial condition, results of operations or cash flows.
NOTE B – SEVERANCE AND FACILITY CLOSURE COSTS
In recent years, the Company has taken actions to adapt to changing and increasingly competitive conditions in the markets in which
the Company serves. These actions include closing stores and distribution centers, consolidating functional activities, disposing of
businesses and assets, and taking actions to improve process efficiencies.
Severance and facility closure accruals associated with exit and restructuring-related activities are as follows:
(In millions)
2012
Termination benefits
Lease, contract obligations and, other costs
Total
2011
Termination benefits
Lease, contract obligations and, other costs
Total
Beginning
Balance
Charges
Incurred
Cash
Payments
$
$
$
$
12
95
107
4
113
117
$
$
$
$
26
21
47
25
26
51
$
$
$
$
(33)
(48)
(81)
(17)
(59)
(76)
62
Non-cash
Settlements
and
Accretion
$ —
8
8
$
$ —
12
12
$
Currency
and Other
Adjustments
$
$
$
$
1
1
2
—
3
3
Ending
Balance
$
6
77
$ 83
$ 12
95
$ 107
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The charges incurred are presented in the following captions of the Consolidated Statements of Operations.
(In millions)
Cost of goods sold and occupancy costs
Store and warehouse operating and selling expenses
General and administrative expenses
The charges incurred are recognized in Divisions as presented below.
(In millions)
North American Retail Division
North America Business Solutions Division
International Division
Corporate level
2012
$—
21
26
2011
$ 1
25
25
2010
$—
14
22
2012
$ 2
3
32
10
2010
2011
$12
$—
— —
23
27
13
12
Severance costs usually require cash payment within one year of expense recognition. Facility closure costs usually require cash
payments over the related lease contract period or until the lease is terminated. The Company maintains accruals for facilities closed
that are considered part of operating activities. Accrual for facilities closed for 2012 and 2011 totaled $10 million and $14 million,
respectively. Closure costs and accretion totaled $4 million and $1 million in 2012 and 2011, respectively. Cash payments of $8
million and $7 were made in 2012 and 2011, respectively.
NOTE C – PROPERTY AND EQUIPMENT
Property and equipment consisted of:
(In thousands)
Land
Buildings
Leasehold improvements
Furniture, fixtures and equipment
Less accumulated depreciation
Total
The above table of property and equipment includes assets held under capital leases as follows:
(In thousands)
Buildings
Furniture, fixtures and equipment
Less accumulated depreciation
Total
$
December 29,
2012
31,430
290,153
746,909
1,337,612
2,406,104
(1,549,763)
856,341
$
$
December 31,
2011
34,258
335,862
998,736
1,547,659
2,916,515
(1,849,475)
$ 1,067,040
December 29,
2012
$ 228,392
57,565
285,957
(106,720)
$ 179,237
December 31,
2011
$ 266,992
53,924
320,916
(112,250)
$ 208,666
Depreciation expense was $152.1 million in 2012, $161.0 million in 2011, and $163.2 million in 2010. Refer to Note I for additional
information on asset impairment charges.
Included in $1,337.6 million above, are capitalized software costs of $398.0 million and $378.8 million at December 29, 2012 and
December 31, 2011, respectively. The unamortized amounts of the capitalized software costs are $165.7 million and $177.9 million at
December 29, 2012 and December 31, 2011, respectively. Amortization of capitalized software costs totaled $46.2 million,
$45.2 million and $42.2 million in 2012, 2011 and 2010, respectively. Software development costs that do not meet the criteria for
capitalization are expensed as incurred.
63
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Estimated future amortization expense for the next five years related to capitalized software at December 29, 2012 is as follows:
(In millions)
2013
2014
2015
2016
2017
Thereafter
$49.4
47.8
43.4
18.7
6.3
0.1
The weighted average amortization period for the remaining capitalized software is 3.6 years.
In 2010, the Company recognized a $51.3 million asset impairment associated with the abandonment of a certain capitalized software
application. This asset impairment is included in Asset impairments in the Consolidated Statement of Operations.
NOTE D – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The components of goodwill by segment are provided in the following table:
(In thousands)
Goodwill
Accumulated impairment losses
Balance as of December 25, 2010
Goodwill
Accumulated impairment losses
Goodwill acquired during the year
Foreign currency rate impact
Balance as of December 31, 2011
Goodwill
Accumulated impairment losses
Foreign currency rate impact
Balance as of December 29, 2012
North
American
Retail
Division
$ 1,842
(1,842)
—
1,842
(1,842)
__
__
—
1,842
(1,842)
—
$ —
North
American
Business
Solutions
Division
$ 367,790
(348,359)
19,431
367,790
(348,359)
__
__
19,431
367,790
(348,359)
__
$ 19,431
International
Division
$ 863,134
(863,134)
—
863,134
(863,134)
45,805
(3,337)
42,468
905,602
(863,134)
2,413
$ 44,881
Total
$ 1,232,766
(1,213,335)
19,431
1,232,766
(1,213,335)
45,805
(3,337)
61,899
1,275,234
(1,213,335)
2,413
64,312
$
Refer to Note I for additional discussion of the 2012 goodwill valuation considerations.
64
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Intangible Assets
The carrying value of an indefinite-lived intangible asset related to an acquired trade name was $5.7 million and $5.5 million, at
December 29, 2012 and December 31, 2011, respectively. The carrying value change during 2012 resulted from changes in foreign
currency rates. This intangible asset is included in Other intangible assets in the Consolidated Balance Sheets. Indefinite-lived
intangibles are not subject to amortization, but are assessed for impairment at least annually.
Definite-lived intangible assets are reviewed periodically to determine whether events and circumstances warrant a revision to the
remaining period of amortization. In the third quarter of 2012, the Company re-evaluated remaining balances of certain amortizing
intangible assets associated with a 2011 acquisition in Sweden. An impairment charge of approximately $14 million was recognized
and is presented in Asset impairment in the Consolidated Statements of Operations. Refer to Notes I and P for additional information
on the fair value measurement and the acquisition, respectively.
Definite-lived intangible assets, which are included in Other intangible assets in the Consolidated Balance Sheets, are as follows:
(In thousands)
Customer lists
Other
Total
(In thousands)
Customer lists
Other
Total
Gross
Carrying Value
28,000
$
3,400
31,400
$
December 29, 2012
Accumulated
Amortization
$ (16,864)
(3,400)
$ (20,264)
Net
Carrying Value
11,136
$
—
11,136
$
Gross
Carrying Value
$ 43,972
5,868
49,840
$
December 31, 2011
Accumulated
Amortization
$ (16,174)
(3,987)
$ (20,161)
Net
Carrying Value
$ 27,798
1,881
29,679
$
The weighted average amortization period for the remaining finite-lived intangible assets is 4.4 years.
Amortization of intangible assets was $4.9 million in 2012, $5.2 million in 2011, and $2.9 million in 2010 (at average foreign
currency exchange rates). For 2012, $2.6 million and $2.3 million are included in the Consolidated Statement of Operations in Selling
and warehouse operating and selling expenses and General and administrative expenses, respectively.
Estimated future amortization expense for the next five years at December 29, 2012 is as follows:
(In thousands)
2013
2014
2015
2016
2017
$2,545
2,545
2,545
2,545
956
65
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE E – DEBT
Debt consists of the following:
(In thousands)
Short-term borrowings and current maturities of long-term debt:
Short-term borrowings
Capital lease obligations
Other current maturities of long-term debt
Long-term debt, net of current maturities:
Senior Secured Notes
Senior Notes
Capital lease obligations
Other
December 29,
2012
December 31,
2011
$
2,203
19,694
152,251
$ 174,148
$ 250,000
—
217,884
17,447
$ 485,331
$ 15,057
18,626
2,718
$ 36,401
$
—
399,953
229,605
18,755
$ 648,313
The Company was in compliance with all applicable financial covenants of existing loan agreements at December 29, 2012.
Amended Credit Agreement
On May 25, 2011, the Company entered into a $1.0 billion Amended and Restated Credit Agreement (the “Amended Credit
Agreement”) with a group of lenders, most of whom participated in the Company’s previously-existing $1.25 billion Credit
Agreement. The Amended Credit Agreement provides for an asset based, multi-currency revolving credit facility (the “Facility”). The
Amended Credit Agreement also provides that the Facility may be increased by up to $250 million, subject to certain terms and
conditions, including obtaining increased commitments from existing or new lenders. The amount that can be drawn on the Facility at
any given time is determined based on percentages of certain accounts receivable, inventory and credit card receivables (the
“Borrowing Base”). At December 29, 2012, the Company was eligible to borrow $699.4 million of the Facility based on the
December Borrowing Base certificate. The Facility includes a sub-facility of up to $200 million which is available to certain of the
Company’s European subsidiaries (the “European Borrowers”). Certain of the Company’s domestic subsidiaries (the “Domestic
Guarantors”) guaranty the obligations under the Facility. The Agreement also provides for a letter of credit sub-facility of up to $325
million. All loans borrowed under the Agreement may be borrowed, repaid and reborrowed from time to time until the maturity date
of May 25, 2016.
All amounts borrowed under the Facility, as well as the obligations of the Domestic Guarantors, are secured by a lien on the
Company’s and such Domestic Guarantors’ accounts receivables, inventory, cash, cash equivalents and deposit accounts. All amounts
borrowed by the European Borrowers under the Facility are secured by a lien on such European Borrowers’ accounts receivable,
inventory, cash, cash equivalents and deposit accounts, as well as certain other assets. At the Company’s option, borrowings made
pursuant to the Facility bear interest at either, (i) the alternate base rate (defined as the higher of the Prime Rate (as announced by the
Agent), the Federal Funds Rate plus 1/2 of 1% and the one month Adjusted LIBO Rate (defined below) and 1%) or (ii) the Adjusted
LIBO Rate (defined as the LIBO Rate as adjusted for statutory revenues) plus, in either case, a certain margin based on the aggregate
average availability under the Facility. The Amended Credit Agreement also contains representations, warranties, affirmative and
negative covenants, and default provisions which are conditions precedent to borrowing. The most significant of these covenants and
default provisions include limitations in certain circumstances on acquisitions, dispositions, share repurchases and the payment of
cash dividends. The Company has never paid a cash dividend on its common stock.
66
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Facility also includes provisions whereby if the global availability is less than $150.0 million, or the European availability is
below $37.5 million, the Company’s cash collections go first to the agent to satisfy outstanding borrowings. Further, if total
availability falls below $125.0 million, a fixed charge coverage ratio test is required. Any event of default that is not cured within the
permitted period, including non-payment of amounts when due, any debt in excess of $25 million becoming due before the scheduled
maturity date, or the acquisition of more than 40% of the ownership of the Company by any person or group, within the meaning of
the Securities and Exchange Act of 1934, could result in a termination of the Facility and all amounts outstanding becoming
immediately due and payable.
The Amended Credit Agreement also permits the Company to use the Facility to redeem, tender or otherwise repurchase its existing
Senior Notes subject to a $600 million minimum liquidity requirement.
On February 24, 2012, the Company entered into an amendment (the “Amendment”) to the Amended Credit Agreement. The
Amendment provides the Company flexibility with regard to certain restrictive covenants in any possible refinancing and other
transactions. In addition, the Amendment released one of the Company’s subsidiaries from its guarantee obligations under the
Amended Credit Agreement.
At December 29, 2012, the Company had approximately $699.4 million of available credit under the Facility. At December 29, 2012,
no amounts were outstanding under the Facility. Letters of credit outstanding under the Facility totaled approximately $90 million. An
additional $0.2 million of letters of credit were outstanding under separate agreements. Average borrowings under the Facility during
the periods for which amounts were outstanding in 2012 were approximately $4.3 million at an average interest rate of 2.6%. The
maximum month end amount outstanding during 2012 occurred in February at approximately $13.2 million.
Senior Secured Notes
On March 14, 2012, the Company issued $250 million aggregate principal amount of its 9.75% Senior Secured Notes due March 15,
2019 (“Senior Secured Notes”) with interest payable in cash semiannually in arrears on March 15 and September 15 of each year. The
Senior Secured Notes are fully and unconditionally guaranteed on a senior secured basis by each of the Company’s existing and
future domestic subsidiaries that guarantee the Amended Credit Agreement. The Senior Secured Notes are secured on a first-priority
basis by a lien on substantially all of the Company’s domestic subsidiaries’ present and future assets, other than assets that secure the
Amended Credit Agreement, and certain of their present and future equity interests in foreign subsidiaries. The Senior Secured Notes
are secured on a second-priority basis by a lien on the Company and its domestic subsidiaries’ assets that secure the Amended Credit
Agreement. The Senior Secured Notes were issued pursuant to an indenture, dated as of March 14, 2012, among the Company, the
domestic subsidiaries named therein and U.S. Bank National Association, as trustee (the “Indenture”). Approximately $7 million was
capitalized associated with the issuance of the Senior Secured Notes and will be amortized through 2019.
The terms of the Indenture provide that, among other things, the Senior Secured Notes and guarantees will be senior secured
obligations and will: (i) rank senior in right of payment to any future subordinated indebtedness of the Company and the guarantors;
(ii) rank equally in right of payment with all of the existing and future senior indebtedness of the Company and the guarantors;
(iii) rank effectively junior to all existing and future indebtedness under the Amended Credit Agreement to the extent of the value of
certain collateral securing the Facility on a first-priority basis, subject to certain exceptions and permitted liens; (iv) rank effectively
senior to all existing and future indebtedness under the Amended Credit Agreement to the extent of the value of certain collateral
securing the Senior Secured Notes; and (v) be structurally subordinated in right of payment to all existing and future indebtedness and
other liabilities of the Company’s non-guarantor subsidiaries (other than indebtedness and liabilities owed to the Company or one of
the guarantors).
67
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Indenture contains affirmative and negative covenants that, among other things, limit or restrict the Company’s ability to: incur
additional debt or issue stock, pay dividends, make certain investments or make other restricted payments; engage in sales of assets;
and engage in consolidations, mergers and acquisitions. However, many of these currently active covenants will cease to apply for so
long as the Company receives and maintains investment grade ratings from specified debt rating services and there is no default under
the Indenture. There are no maintenance financial covenants.
The Senior Secured Notes may be redeemed by the Company, in whole or in part, at any time prior to March 15, 2016 at a price equal
to 100% of the principal amount plus a make-whole premium as of the redemption date and accrued and unpaid interest. Thereafter,
the Senior Secured Notes carry optional redemption features whereby the Company has the redemption option prior to maturity at par
plus a premium beginning at 104.875% at March 15, 2016 and declining ratably to par at March 15, 2018 and thereafter, plus accrued
and unpaid interest. Should the Company sell its ownership interest in Office Depot de Mexico, S.A., it would be required to offer to
repurchase an aggregate amount of Notes at least equal to 60% of the net proceeds of such sale at 100% of par plus accrued and
unpaid interest.
Additionally, on or prior to March 15, 2015, the Company may redeem up to 35% of the aggregate principal amount of the Senior
Secured Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 109.750% of the principal
amount of the Senior Secured Notes redeemed plus accrued and unpaid interest to the redemption date; and, upon the occurrence of a
change of control, holders of the Senior Secured Notes may require the Company to repurchase all or a portion of the Senior Secured
Notes in cash at a price equal to 101% of the principal amount to be repurchased plus accrued and unpaid interest to the repurchase
date. Change of control, as defined in the Indenture, is a transfer of all or substantially all of the assets of Office Depot, acquisition of
more than 50% of the voting power of Office Depot by a person or group, or members of the Office Depot Board of Directors as
previously approved by the stockholders of Office Depot ceasing to constitute a majority of the Office Depot Board of Directors.
Senior Notes
In August 2003, the Company issued $400 million senior notes (“Senior Notes”) which bear interest at the rate of 6.25% per year, and
because of amortization of a terminated treasury rate lock, have an effective interest rate of 5.86%. The notes contain provisions that
could, in certain circumstances, place financial restrictions or limitations on the Company.
On March 15, 2012, the Company repurchased $250 million aggregate principal amount of its outstanding Senior Notes under a cash
tender offer. The total consideration for each $1,000.00 note surrendered was $1,050.00. Tender fees and a proportionate amount of
deferred debt issue costs and a deferred cash flow hedge gain were included in the measurement of the $12.1 million extinguishment
costs reported in the Consolidated Statements of Operations for 2012. The cash amounts of the premium paid and tender fees are
reflected as financing activities in the Consolidated Statements of Cash Flows. Accrued interest was paid through the extinguishment
date.
The remaining $150 million outstanding Senior Notes is due in August 2013 and is classified as a current liability in the Consolidated
Balance Sheet as of December 29, 2012.
Short-Term Borrowing
The Company had short-term borrowings of $2.2 million at December 29, 2012 under various local currency credit facilities for
international subsidiaries that had an effective interest rate at the end of the year of approximately 5.8%. The maximum month end
amount occurred in July at approximately $16.1 million and the maximum monthly average amount occurred in August at
approximately $15.8 million. The majority of these short-term borrowings represent outstanding balances on uncommitted lines of
credit, which do not contain financial covenants.
68
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Capital Lease Obligations
Capital lease obligations primarily relate to buildings and equipment.
Aggregate annual maturities of long-term debt and capital lease obligations are as follows:
(In thousands)
2013
2014
2015
2016
2017
Thereafter
Total
Less amount representing interest on capital leases
Total
Less current portion
Total long-term debt
$ 191,026
38,061
37,606
31,315
30,888
443,588
772,484
(113,005)
659,479
(174,148)
$ 485,331
NOTE F – INCOME TAXES
The income tax expense (benefit) related to earnings (loss) from operations consisted of the following:
(In thousands)
Current:
Federal
State
Foreign
Deferred :
Federal
State
Foreign
Total income tax expense (benefit)
The components of earnings (loss) before income taxes consisted of the following:
(In thousands)
North America
International
Total
69
2012
2011
2010
$(13,819)
902
13,795
$(59,504)
(3,625)
15,023
$(28,278)
1,408
849
(4,700)
33
5,486
1,697
$
—
33
(14,999)
$(63,072)
—
(64)
15,615
$(10,470)
2012
$(129,310)
53,887
$ (75,423)
2011
$(4,131)
36,750
$ 32,619
2010
$(114,231)
57,556
$ (56,675)
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of deferred income tax assets and liabilities consisted of the following:
(In thousands)
U.S. and foreign net operating loss carryforwards
Deferred rent credit
Vacation pay and other accrued compensation
Accruals for facility closings
Inventory
Self-insurance accruals
Deferred revenue
State credit carryforwards, net of Federal benefit
Allowance for bad debts
Accrued rebates
Basis difference in fixed assets
Other items, net
Gross deferred tax assets
Valuation allowance
Deferred tax assets
Internal software
Basis difference in fixed assets
Deferred Subpart F income
Undistributed foreign earnings
Deferred tax liabilities
Net deferred tax assets
December 29,
2012
$ 366,927
95,220
61,356
21,027
14,406
19,374
6,613
8,278
2,727
121
39,762
64,230
700,041
(583,172)
116,869
2,799
—
10,791
72,345
85,935
30,934
$
December 31,
2011
$ 379,610
101,679
78,797
32,800
13,562
20,640
5,893
13,643
2,911
7,978
—
46,713
704,226
(621,719)
82,507
4,216
32,055
10,791
—
47,062
$ 35,445
For financial reporting purposes, a jurisdictional netting process is applied to deferred tax assets and deferred tax liabilities, resulting
in the balance sheet classification shown below.
(In thousands)
Deferred tax assets:
Included in Prepaid and other current assets
Deferred income taxes – noncurrent
Deferred tax liabilities:
Included in Accrued expenses and other current liabilities
Included in Deferred income taxes and other long-term liabilities
Net deferred tax asset
December 29,
2012
December 31,
2011
$ 36,725
33,421
$ 29,592
47,791
4,711
34,501
30,934
$
12,558
29,380
$ 35,445
As of December 29, 2012, the Company had approximately $229 million of U.S. Federal, $833 million of foreign, and $1.2 billion of
state net operating loss carryforwards. The U.S. Federal carryforward will expire between 2030 and 2032. Of the foreign
carryforwards, $623 million can be carried forward indefinitely, $29 million will expire in 2013, and the remaining balance will
expire between 2014 and 2032. Of the state carryforwards, $7 million will expire in 2013, and the remaining balance will expire
between 2014 and 2032. The Company has not triggered any provision, similar to the U.S. IRS Federal Section 382, limiting the use
of the Company’s net operating loss carryforwards and deferred tax assets as of December 29, 2012. If the Company were to become
subject to such provisions in future periods, the Company’s income tax expense may be negatively impacted.
70
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Additionally, as a result of the settlement of an audit with a foreign taxing authority, the Company has conceded net operating loss
carryforwards of $56 million and the previously disclosed $1.73 billion of foreign capital loss carryforwards ($454 million tax-
effected) that resulted from a 2010 internal restructuring transaction. Both of these deferred tax attributes were fully offset by
valuation allowance prior to the settlement. Under the tax laws of the jurisdiction, the capital loss carryforward was limited to only
offset a future capital gain resulting from an intercompany transaction between the specific subsidiaries of the Company involved in
the 2010 transaction. Because the Company believed that it was remote that the capital loss carryforward would be realized in the
foreseeable future, a full valuation allowance had been established against the asset and the Company had excluded the attribute from
the above tabular renditions of deferred tax assets and liabilities.
U.S. income taxes have not been provided on certain undistributed earnings of foreign subsidiaries, which were approximately $451
million as of December 29, 2012. The Company has historically reinvested such earnings overseas in foreign operations indefinitely
and expects that future earnings will also be reinvested overseas indefinitely except as follows. In the fourth quarter of 2012, the
Company concluded that it could no longer assert that foreign earnings of the Office Depot de Mexico joint venture would remain
permanently reinvested, and therefore has established a deferred tax liability on the excess financial accounting value as of
December 29, 2012 over the tax basis of the investment. Concurrently, as a result of the additional source of future taxable income
represented by the newly established deferred tax liability, the Company concluded that valuation allowances attributable to U.S.
Federal net operating loss carryforwards equal in value to the basis differential in the investment should be removed, as the Company
believes that these assets will more likely than not be realized in a future period. As a result of the Company incurring a pre-tax loss
and recognizing current-year benefits to its cumulative translation account attributable to its investment in the joint venture, the
Company recorded an approximate net $5 million deferred tax benefit from the release of the valuation allowance.
Valuation allowances have been established to reduce deferred asset to an amount that is more likely than not to be realized and is
based upon the uncertainty of the realization of certain deferred tax assets related to net operating loss carryforwards and other tax
attributes. Because of the downturn in the Company’s performance associated with recessionary economic conditions, as well as the
significant restructuring activities and charges the Company has taken in response, the Company has established valuation allowances
against significant portions of its domestic and foreign deferred tax assets. The establishment of valuation allowances requires
significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and
verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax
assets. An accumulation of recent pre-tax losses is considered strong negative evidence in that evaluation. While the Company
believes positive evidence exists with regard to the realizability of these deferred tax assets, it is not considered sufficient to outweigh
the objectively verifiable negative evidence, including the cumulative 36 month pre-tax loss history. Valuation allowances in certain
foreign jurisdictions were removed during 2010 and 2011 because sufficient positive financial information existed, resulting in tax
benefit recognition of $10 million and $9 million, respectively. In 2012, additional valuation allowances were established in certain
other foreign jurisdictions because realizability of the related deferred tax assets was no longer more likely than not. Deferred tax
assets without valuation allowances remain in certain foreign tax jurisdictions where supported by the evidence.
(In millions)
Valuation allowances at:
December 29, 2012
December 31, 2011
Beginning
Balance
Additions
Deductions
Ending
Balance
$ 621.7
$ 648.9
$ —
$ —
$
$
(38.5)
(27.2)
$583.2
$621.7
71
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In addition to the $583.2 million valuation allowance as of December 29, 2012, the Company has an additional $5 million tax effected
net operating loss carryforward assets generated from equity compensation deductions that if realized in future periods would benefit
additional paid-in capital.
The following is a reconciliation of income taxes at the Federal statutory rate to the provision (benefit) for income taxes:
(In thousands)
Federal tax computed at the statutory rate
State taxes, net of Federal benefit
Foreign income taxed at rates other than Federal
Increase (reduction) in valuation allowance
Non-deductible foreign interest
Change in uncertain tax positions
Tax expense from intercompany transactions
Subpart F income
Change in tax rate
Non-taxable return of purchase price
Outside basis difference of foreign joint venture
Tax accounting method change ruling
Disposition of foreign affiliates
Gain on intercompany sale
Other items, net
Income tax expense (benefit)
2012
$(26,398)
709
(14,889)
(8,662)
9,863
1,342
1,886
—
1,816
(22,361)
67,645
(15,548)
223
—
6,071
$ 1,697
2011
$ 11,417
1,417
(22,290)
(7,927)
11,818
(77,085)
4,955
10,101
1,529
—
—
—
—
—
2,993
$(63,072)
2010
$(19,836)
1,434
(15,926)
29,777
5,094
(32,283)
1,090
—
—
—
—
—
(8,562)
20,216
8,526
$(10,470)
The Company has reached a tentative settlement with the U.S. Internal Revenue Service (“IRS”) Appeals Division to close the
previously-disclosed IRS deemed royalty assessment relating to foreign operations. The settlement is subject to the Congressional
Joint Committee on Taxation approval which is anticipated in 2013. The resolution of this matter will close all known disputes with
the IRS relating to 2009 and 2010. The Company has included the settlement in its assessment of uncertain tax positions at
December 29, 2012, as provided below. Additionally, the 2012 tax rate includes an accrued benefit based on a ruling from the IRS
allowing the Company to amend the 2009 tax year to make certain tax accounting method changes previously reflected in the 2010
tax year and to file an additional claim for refund for the incremental 2009 tax loss. The net result of the tax ruling and the Company’s
settlement with the IRS Appeals Division will result in the receipt of approximately $14 million, which the Company expects to
receive after the Congressional Joint Committee on Taxation review.
The 2012 effective tax rate also includes the benefit from the Recovery of purchase price that is treated as a purchase price adjustment
for tax purposes. As discussed in Note H, this recovery would have been a reduction of related goodwill for financial reporting
purposes, but the related goodwill was impaired in 2008.
The significant tax jurisdictions related to the line item foreign income taxed at rates other than Federal include the UK, the
Netherlands and France.
72
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the activity related to uncertain tax positions:
(In thousands)
Beginning balance
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Statute expirations
Settlements
Ending balance
2012
$ 6,527
—
2,907
(829)
—
(4,053)
$ 4,552
2011
$ 110,540
—
471,081
(40,083)
(60,131)
(474,880)
6,527
$
2010
$141,125
3,436
24,936
(32,572)
(17)
(26,368)
$110,540
Included in the balance of $4.6 million at December 29, 2012, are $2.8 million of net uncertain tax positions that, if recognized,
would affect the effective tax rate. The difference of $1.8 million primarily results from positions which if sustained would be fully
offset by a change in valuation allowance.
The Company files a U.S. federal income tax return and other income tax returns in various states and foreign jurisdictions. With few
exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations for years before 2009. As
discussed above, U.S. federal filings for 2009 and 2010 are awaiting final resolution from the IRS Appeals Division. The 2011 IRS
Examination has been completed, and pending the final resolution of the tentative settlement with the IRS Appeals Division for 2009
and 2010 the IRS has made a deemed royalty assessment of $12.4 million ($4.3 million tax-effected) relating to 2011 foreign
operations. The Company disagrees with this assessment and believes that no uncertain tax position accrual is required as of
December 29, 2012. Additionally, the U.S. federal tax return for 2012 is under concurrent year review, and it is reasonably possible
that the audits for one or more of these periods will be closed prior to the end of 2013. Significant international tax jurisdictions
include the UK, the Netherlands, France and Germany. Generally, the Company is subject to routine examination for years 2008 and
forward in these jurisdictions. It is reasonably possible that certain of these audits will close within the next 12 months, which the
Company does not believe would result in a material change in its accrued uncertain tax positions. Additionally, the Company
anticipates that it is reasonably possible that new issues will be raised or resolved by tax authorities that may require changes to the
balance of unrecognized tax benefits, however, an estimate of such changes cannot reasonably be made.
The Company recognizes interest related to unrecognized tax benefits in interest expense and penalties in the provision for income
taxes. Because of the expiration of statute and settlement reached with certain taxing authorities, net interest credits of $30.4 million
in 2011 and $6.7 million in 2010 were recognized. The Company recognized expense from interest of approximately $1.9 million in
2012. The Company had approximately $8.8 million accrued for the payment of interest and penalties as of December 29, 2012.
In connection with the expensing of the fair value of employee stock options, the Company has elected to calculate the pool of excess
tax benefits under the alternative or “short-cut” method. At adoption, this pool of benefits was approximately $55.3 million and was
approximately $100.7 million as of December 29, 2012. This pool may increase in future periods if tax benefits realized are in excess
of those based on grant date fair values or may decrease if used to absorb future tax deficiencies determined for financial reporting
purposes.
NOTE G – COMMITMENTS AND CONTINGENCIES
Operating Leases: The Company leases retail stores and other facilities and equipment under operating lease agreements. Facility
leases typically are for a fixed non-cancellable term with one or more renewal options. In addition to minimum rentals, there are
certain executory costs such as real estate taxes, insurance and common area maintenance on most of the facility leases. Many lease
agreements contain tenant improvement allowances, rent holidays, and/or rent escalation clauses. For purposes of recognizing
incentives and minimum rental expenses on a straight-line basis over the terms of the leases, the Company uses the date of initial
possession to begin amortization.
73
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred rent liability for tenant improvement allowances and rent holidays are recognized and amortized over the terms of the
related leases as a reduction of rent expense. Rent related accruals totaled approximately $262.7 million and $254 million at
December 29, 2012 and December 31, 2011, respectively. The short-term and long-term components of these liabilities are included
in Accrued expenses and Other long-term liabilities, respectively, on the Consolidated Balance Sheets. For scheduled rent escalation
clauses during the lease terms or for rental payments commencing at a date other than the date of initial occupancy, the Company
records minimum rental expenses on a straight-line basis over the terms of the leases.
Certain leases contain provisions for additional rent to be paid if sales exceed a specified amount, though such payments have been
immaterial during the years presented.
Future minimum lease payments due under the non-cancelable portions of leases as of December 29, 2012 include facility leases that
were accrued as store closure costs and are as follows.
(In thousands)
2013
2014
2015
2016
2017
Thereafter
Less sublease income
Total
$
467,126
400,317
325,509
246,738
178,929
533,054
2,151,673
48,389
$ 2,103,284
Rent expense, including equipment rental, was $429.0 million, $447.1 million and $469.4 million in 2012, 2011, and 2010,
respectively. Rent expense was reduced by sublease income of $4.6 million in 2012, $3.0 million in 2011and $2.8 million in 2010.
Legal Matters: The Company is involved in litigation arising in the normal course of business. While, from time to time, claims are
asserted that make demands for a large sum of money (including, from time to time, actions which are asserted to be maintainable as
class action suits), the Company does not believe that contingent liabilities related to these matters (including the matters discussed
below), either individually or in the aggregate, will materially affect the Company’s financial position, results of operations or cash
flows.
In addition, in the ordinary course of business, sales to and transactions with government customers may be subject to lawsuits,
investigations, audits and review by governmental authorities and regulatory agencies, with which the Company cooperates. Many of
these lawsuits, investigations, audits and reviews are resolved without material impact to the Company. While claims in these matters
may at times assert large demands, the Company does not believe that contingent liabilities related to these matters, either
individually or in the aggregate, will materially affect our financial position, results of our operations or cash flows. In addition to the
foregoing, State of California et. al. ex. rel. David Sherwin v. Office Depot was filed in Superior Court for the State of California, Los
Angeles County, and unsealed on October 19, 2012. This lawsuit relates to allegations regarding certain pricing practices in
California under a now expired agreement that was in place between January 2, 2006 and January 1, 2011, pursuant to which state,
local and non-profit agencies purchased office supplies (the “Purchasing Agreement”) from us. This action seeks as relief monetary
damages. This lawsuit, which is now pending in the United States District Court for the Central District of California after a Notice of
Removal filed by the Company. We believe that adequate provisions have been made for probable losses on one claim in this matter
and such amounts are not material. However, in light of the early stages of the other claims and the inherent uncertainty of litigation,
we are unable to reasonably determine the full effect of the potential liability in the matter. Office Depot intends to vigorously defend
itself in this lawsuit and filed motions to dismiss. Additionally, during the first quarter of 2011, we were notified that the United
States Department of Justice (“DOJ”) commenced an investigation into certain pricing practices related to the Purchasing Agreement.
We have cooperated with the DOJ on this matter.
74
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE H – EMPLOYEE BENEFIT PLANS
Long-Term Incentive Plan
During 2007, the Company’s Board of Directors adopted, and the shareholders approved, the Office Depot, Inc. 2007 Long-Term
Incentive Plan (the “Plan”). The Plan permits the issuance of stock options, stock appreciation rights, restricted stock, restricted stock
units, performance-based, and other equity-based incentive awards. The option exercise price for each grant of a stock option shall not
be less than 100% of the fair market value of a share of common stock on the date the option is granted. Options granted under the
Plan become exercisable from one to five years after the date of grant, provided that the individual is continuously employed with the
Company. All options granted expire no more than ten years following the date of grant. Employee share-based awards are generally
issued in the first quarter of the year.
Long-Term Incentive Stock Plan
During 2010, the Company implemented a one-time voluntary stock option exchange program that had been approved by the
Company’s Board of Directors and the shareholders. The fair value exchange program resulted in the tender of 3.8 million shares of
eligible options in exchange for approximately 1.4 million of newly-issued options. No additional compensation expense resulted
from this value-for-value exchange; however, the remaining unamortized compensation expense was subject to amortization over the
three year vesting period. The new options have an exercise price of $5.13, which was the closing price of Office Depot, Inc. common
stock on the date of the exchange. The fair value of the exchanged shares was $2.97 per share. The new options are listed separately
in the tables below.
A summary of the activity in the stock option plans for the last three years is presented below.
Outstanding at beginning of year
Granted
Granted – option exchange
Cancelled
Cancelled – option exchange
Exercised
Outstanding at end of year
2012
2011
2010
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
19,059,176 $ 6.90 20,021,044 $ 7.49
4.53
—
9.46
—
0.86
$ 6.90
3,680,850
—
(3,567,513)
—
(1,075,205)
$ 5.25 19,059,176
82,000
—
(4,512,372)
—
(2,050,733)
12,578,071
3.22
—
14.51
—
0.88
24,202,715 $ 11.81
8.11
5,140,900
5.13
1,350,709
21.57
(4,510,682)
22.85
(3,739,557)
0.95
(2,423,041)
$ 7.49
20,021,044
75
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The weighted-average grant date fair values of options granted during 2012, 2011, and 2010 were $1.86, $2.25, and $3.89,
respectively, using the following weighted average assumptions for grants:
•
•
•
•
•
Risk-free interest rates of 0.94% for 2012, 1.97% for 2011, and 2.32% for 2010
Expected lives of 4.5 years for all three years
A dividend yield of zero for all three years
Expected volatility ranging from 72% to 74% for 2012, 67% to 77% for 2011, and 64% to 73% for 2010
Forfeitures are anticipated at 5% and are adjusted for actual experience over the vesting period
The following table summarizes information about options outstanding at December 29, 2012.
Range of
Exercise Prices
$0.85 $5.12
5.13 (option exchange)
5.14 10.00
10.01 15.00
15.01 25.00
25.01 33.61
$0.85 $33.61
Options Outstanding
Weighted Average
Remaining
Contractual Life
(in years)
3.82
3.48
3.55
1.17
0.61
1.00
3.48
Number
Outstanding
6,936,143
739,478
3,790,993
751,659
87,501
272,297
12,578,071
Weighted
Average
Exercise
Price
$ 2.11
5.13
7.65
11.31
17.45
31.44
$ 5.25
Number
Exercisable
5,105,443
541,019
2,676,641
751,659
87,501
272,297
9,434,560
Options Exercisable
Weighted Average
Remaining
Contractual Life
(in years)
3.36
3.14
3.09
1.17
0.61
1.00
3.00
Weighted
Average
Exercise
Price
$ 1.44
5.13
7.83
11.31
17.45
31.44
$ 5.26
The intrinsic value of options exercised in 2012, 2011 and 2010, was $4.0 million, $3.8 million, and $11.9 respectively.
As of December 29, 2012, there was approximately $3.4 million of total stock-based compensation expense that has not yet been
recognized relating to non-vested awards granted under option plans. This expense, net of forfeitures, is expected to be recognized
over a weighted-average period of approximately 1.25 years. Of the 3.1 million unvested shares, the Company estimates that
3.0 million shares, or 97%, will vest. The number of exercisable shares was 9.4 million shares of common stock at December 29,
2012 and 10.8 million shares of common stock at December 31, 2011.
Restricted Stock and Restricted Stock Units
Restricted stock grants typically vest annually over a three-year service period; however, share grants made to the Company’s Board
of Directors vest immediately and are free of restrictions.
In 2012, the Company granted 4.0 million shares of restricted stock and restricted stock units to eligible employees. These grants
typically vest one-third annually on the grant date anniversary. Included in the 2012 grant is one award of 500,000 shares that will
vest in two equal installments on December 31, 2012 and April 30, 2014. In addition, 336,000 shares were granted to the Board of
Directors as part of their annual compensation and vested immediately. A summary of the status of the Company’s nonvested shares
and changes during 2012, 2011 and 2010 is presented below.
76
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2012
2011
2010
Weighted
Average
Grant-
Date
Price
$
$
3.96
3.26
3.45
3.79
3.52
Shares
2,612,876
4,018,253
(695,751)
(475,478)
5,459,900
Weighted
Average
Grant-
Date
Price
$
$
10.39
3.96
9.00
4.97
3.96
Shares
1,318,162
173,387
(741,007)
(254,483)
496,059
Weighted
Average
Grant-
Date
Price
$
$
13.21
8.01
14.19
11.31
10.39
Shares
496,059
2,890,943
(594,876)
(179,250)
2,612,876
Nonvested at beginning of year
Granted
Vested
Forfeited
Nonvested at end of year
As of December 29, 2012, there was approximately $10.1 million of total unrecognized compensation cost related to nonvested
restricted stock. This expense, net of forfeitures, is expected to be recognized over a weighted-average period of approximately 2
years. Of the 5.5 million unvested shares at year end, the Company estimates that 5.0 million shares will vest. The total grant date fair
value of shares vested during 2012 was approximately $2.4 million.
Performance-Based Incentive Program
During 2012, the Company implemented a performance-based long-term incentive program consisting of performance stock units and
performance cash. Payouts under this program are based on achievement of certain financial targets set by the Board of Directors, and
are subject to additional service vesting requirements, generally of three years from the grant date. In total, 2.1 million performance
stock units were granted under the program. Based on 2012 performance, 1.0 million shares were earned and will be subject to the
vesting requirements; all remaining shares were forfeited.
The Company also granted $15.0 million in performance cash under the program described above. Based on 2012 performance, $5.6
million was considered earned and the remaining $9.4 million was forfeited. The vesting of the performance cash is identical to the
vesting for the performance stock units discussed above.
Long-Term Incentive Cash Plan
During 2012, certain of the Company’s employees were eligible to receive time-vested long-term incentive cash. Approximately $6
million was granted in March of 2012 with a three-year ratable vesting schedule. Awards vest on each of the first three anniversaries
following the grant date. As of December 29, 2012 there was approximately $5.5 million that remained outstanding.
Retirement Savings Plans
Eligible Company employees may participate in the Office Depot, Inc. Retirement Savings Plan (“401(k) Plan”), which was approved
by the Board of Directors. This plan allows those employees to contribute a percentage of their salary, commissions and bonuses in
accordance with plan limitations and provisions of Section 401(k) of the Internal Revenue Code. Company matching contributions
were suspended by the compensation and benefits committee of the Board of Directors during 2010. The committee reinstated the
Company matching provisions at 50% of the first 4% of an employee’s contributions, subject to the limits of the 401(k) Plan,
effective with the first pay period beginning in 2011. Matching contributions are invested in the same manner as the participants’ pre-
tax contributions. The 401(k) Plan also allows for a discretionary matching contribution in addition to the normal match contributions
if approved by the Board of Directors.
77
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Office Depot also sponsors the Office Depot, Inc. Non-Qualified Deferred Compensation Plan that, until December 2009, permitted
eligible highly compensated employees, who were limited in the amount they could contribute to the 401(k) Plan, to alternatively
defer a portion of their salary, commissions and bonuses up to maximums and under restrictive conditions specified in this plan and to
participate in Company matching provisions. The matching contributions to the deferred compensation plan were allocated to
hypothetical investment alternatives selected by the participants. The compensation and benefits committee of the Board of Directors
amended the plan to eliminate the predetermined matching contributions effective with the first payroll period beginning in 2009. In
October 2009, the plan was amended the plan to no longer accept new deferrals.
During 2012, 2011, and 2010, $7.3 million, $7.2 million and $80.2 thousand, respectively, was recorded as compensation expense for
Company contributions to these programs and certain international retirement savings plans. Additionally, nonparticipating annuity
premiums were paid for benefits in certain European countries totaling $5.0 million, $5.0 million and $4.7 million in 2012, 2011, and
2010, respectively.
Pension Plan
The Company has a defined benefit pension plan which is associated with a 2003 European acquisition and covers a limited number
of employees in Europe. During 2008, curtailment of that plan was approved by the trustees and future service benefits ceased for the
remaining employees.
The sale and purchase agreement (“SPA”) associated with the 2003 European acquisition included a provision whereby the seller was
required to pay an amount to the Company if the acquired pension plan was determined to be underfunded based on 2008 plan data.
The unfunded obligation amount calculated by the plan’s actuary based on that data was disputed by the seller. In accordance with the
SPA, the parties entered into arbitration to resolve this matter and, in March 2011, the arbitrator found in favor of the Company. The
seller pursued an annulment of the award in French court. In November 2011, the seller paid GBP 5.5 million ($8.8 million, measured
at then-current exchange rates) to the Company to allow for future monthly payments to the pension plan, pending a court ruling on
their cancellation request. That money was placed in an escrow account with the pension plan acting as trustee. On January 6, 2012,
the Company and the seller entered into a settlement agreement that settled all claims by either party for this and any other matter
under the original SPA. The seller paid an additional GBP 32.2 million (approximately $50 million, measured at then-current
exchange rates) to the Company in February 2012. Following this cash receipt in February 2012, the Company contributed the GBP
37.7 million (approximately $58 million at then-current exchange rates) to the pension plan, resulting in the plan changing from an
unfunded liability position at December 31, 2011 to a net asset position at December 29, 2012 as shown in table below. There are no
additional funding requirements while the plan is in a surplus position.
This pension provision of the SPA was disclosed in 2003 and subsequent periods as a matter that would reduce goodwill when the
plan was remeasured and cash received. However, all goodwill associated with this transaction was impaired in 2008, and because the
remeasurement process had not yet begun, no estimate of the potential payment to the Company could be made at that time.
Consistent with disclosures subsequent to the 2008 goodwill impairment, resolution of this matter in the first quarter of 2012 was
reflected as a credit to operating expense. The cash received from the seller, reversal of an accrued liability as a result of the
settlement agreement, fees incurred in 2012, and fee reimbursement from the seller have been reported in Recovery of purchase price
in the Consolidated Statements of Operations for 2012, totaling $68.3 million. An additional expense of $5.2 million of costs incurred
in prior periods related to this arrangement is included in General and administrative expenses, resulting in a net increase in operating
profit for 2012 of $63.1 million. Similar to the presentation of goodwill impairment in 2008, this recovery and related charge is
reported at the corporate level, not part of International Division operating income.
78
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The cash payment from the seller was received by a subsidiary of the Company with the Euro as its functional currency and the
pension plan funding was made by a subsidiary with Pound Sterling as its functional currency, resulting in certain translation
differences between amounts reflected in the Consolidated Statements of Operations and the Consolidated Statements of Cash Flows
for 2012. The receipt of cash from the seller is presented as a source of cash in investing activities. The contribution of cash to the
pension plan is presented as a use of cash in operating activities.
The following table provides a reconciliation of changes in the projected benefit obligation, the fair value of plan assets and the
funded status of the plan to amounts recognized on the Company’s Consolidated Balance Sheets:
(In thousands)
Changes in projected benefit obligation:
Obligation at beginning of period
Service cost
Interest cost
Benefits paid
Actuarial gain (loss)
Currency translation
Obligation at valuation date
Changes in plan assets:
Fair value at beginning of period
Actual return (loss) on plan assets
Company contributions
Benefits paid
Currency translation
Plan assets at valuation date
Net asset (liability) recognized at end of period
December 29, 2012
December 31, 2011
$
$
182,364
—
8,639
(4,545)
14,287
7,114
207,859
132,787
22,413
58,987
(4,545)
6,285
215,927
8,068
$
$
177,195
—
9,838
(4,118)
(1,558)
1,007
182,364
132,022
(1,259)
5,293
(4,118)
849
132,787
(49,577)
In the Consolidated Balance Sheets, the net funded amount at December 29, 2012 is classified as a non-current asset in the caption
Other assets and the net unfunded balance at December 31, 2011 was included in Deferred taxes and other long-term liabilities.
Included in OCI were deferred losses of $3.9 million and $1.0 million at December 29, 2012 and December 31, 2011, respectively.
The deferred loss is not expected to be amortized into income during 2012.
The components of net periodic cost (benefit) are presented below:
(In thousands)
Service cost
Interest cost
Expected return on plan assets
Net periodic pension cost (benefit)
2012
$
—
8,639
(10,674)
$ (2,035)
2011
$ —
9,838
(9,336)
502
$
2010
$ —
10,466
(8,039)
$ 2,427
79
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Assumptions used in calculating the funded status included:
Long-term rate of return on plan assets
Discount rate
Salary increases
Inflation
2012
6.00%
4.40%
—
3.00%
2011
6.00%
4.70%
—
3.00%
2010
6.77%
5.40%
—
3.40%
The plan’s investment policies and strategies are to ensure assets are available to meet the obligations to the beneficiaries and to
adjust plan contributions accordingly. The plan trustees are also committed to reducing the level of risk in the plan over the long term,
while retaining a return above that of the growth of liabilities.
The long-term rate of return on assets assumption has been derived based on long-term UK government fixed income yields, having
regard to the proportion of assets in each asset class. The funds invested in equities have been assumed to return 4.0% above the
return on UK government securities of appropriate duration. Funds invested in corporate bonds are assumed to return equal to a 15
year AA bond index. Allowance is made for expenses of 0.5% of assets.
The allocation of assets is as follows:
Equity securities
Debt securities
Total
The fair value of plan assets by asset category is as follows:
(In thousands)
Asset Category
Equity securities
Developed market equity funds
Emerging market equity funds
Total equity securities
Debt securities
UK debt funds
Liability term matching debt funds
Total debt securities
Total
Percentage of Plan Assets
2012
64%
36%
100%
2011
70%
30%
100%
2010
73%
27%
100%
Target
Allocation
65%
35%
Fair Value Measurements
at December 29, 2012
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
$
$
72,169
—
72,169
—
—
—
72,169
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
—
66,519
66,519
11,866
65,373
77,239
$ 143,758
$
$
—
—
—
—
—
—
—
Total
$ 72,169
66,519
138,688
11,866
65,373
77,239
$ 215,927
80
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands)
Asset Category
Equity securities
Developed market equity funds
Emerging market equity funds
Total equity securities
Debt securities
UK debt funds
Liability term matching debt funds
Total debt securities
Total
Fair Value Measurements
at December 31, 2011
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
$
$
86,601
1,487
88,088
—
—
—
88,088
Significant
Observable
Inputs
(Level 2)
$
—
3,824
3,824
30,439
10,436
40,875
$ 44,699
Significant
Unobservable
Inputs
(Level 3)
$
$
—
—
—
—
—
—
—
—
Total
$ 86,601
5,311
91,912
30,439
10,436
40,875
$ 132,787
Anticipated benefit payments, at December 29, 2012 exchange rates, are as follows:
(In thousands)
2013
2014
2015
2016
2017
Next five years
$ 4,764
4,906
5,053
5,204
5,361
29,316
NOTE I — FAIR VALUE MEASUREMENTS
The Company measures fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. In developing its fair value estimates, the Company uses the
following hierarchy:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3:
Significant unobservable inputs that are not corroborated by market data. Generally, these fair value measures are model-
based valuation techniques such as discounted cash flows or option pricing models using own estimates and assumptions or
those expected to be used by market participants.
The fair values of cash and cash equivalents, receivables, accounts payable and accrued expenses and other current liabilities
approximate their carrying values because of their short-term nature.
Refer to Note A for additional information on cash and cash equivalents, which total $670.8 million at December 29, 2012 (Level 1),
as well as fair value estimates used when considering potential impairments of long-lived assets (Level 3). Impairment charges of
$138.5 million, $11.4 million and $2.3 during 2012, 2011, and 2010, respectively, were based on estimated fair values of the related
assets of $42 million in 2012, $1.7 million in 2011 and $0.4 million in 2010.
81
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair values of the Company’s foreign currency contracts and fuel contracts are the amounts receivable or payable to terminate the
agreements at the reporting date, taking into account current interest rates, exchange rates and commodity prices. The values are
based on market-based inputs or unobservable inputs that are corroborated by market data. Refer to Note J for additional information
on the Company’s derivative instruments and hedging activities.
The Company records its Senior Notes payable at par value, adjusted for amortization of a fair value hedge which was cancelled in
2005. The fair value of the Senior Notes and the Senior Secured Notes are considered Level 2 fair value measurements and are based
on market trades of these securities on or about the dates below.
(In thousands)
6.25% Senior Notes
9.75% Senior Secured Notes
Fair Value Estimates Used in Impairment Analyses
North American Retail Division
2012
Carrying
Value
$149,953
$250,000
Fair
Value
$153,750
$265,938
2011
Carrying
Value
$399,953
—
Fair
Value
$381,067
—
Because of declining sales in recent periods, the Company has conducted a detailed quarterly store impairment analysis. The analysis
uses input from retail store operations and the Company’s accounting and finance personnel that organizationally report to the Chief
Financial Officer. These projections are based on management’s estimates of store-level sales, gross margins, direct expenses,
exercise of future lease renewal options, where applicable, and resulting cash flows and, by their nature, include judgments about how
current initiatives will impact future performance. If the anticipated cash flows of a store cannot support the carrying value of its
assets, the assets are impaired and written down to estimated fair value using Level 3 inputs. The Company recognized store asset
impairment charges of $11 million in 2011, and $18 million, $24 million, $73 million and $9 million, in the four quarters of 2012,
respectively.
A review of the North American Retail portfolio began in mid-2012 and the NA Retail Strategy was approved in the third quarter.
The analysis concluded with a plan for each location to downsize to either small or mid-size format, relocate, remodel, renew or close
at the end of the base lease term. These changes, and continued store performance, served as a basis for the Company’s asset
impairment review for the third and fourth quarters of 2012.
The NA Retail Strategy provides a plan to downsize approximately 275 locations to small-format stores at the end of their lease term
over the next three years and an additional 165 locations over the following two years. Approximately 60 locations will be downsized
or relocated to the mid-sized format over the next three years and another 25 over the following two years. The Company anticipates
closing approximately 50 stores as their base lease period ends. The remaining stores in the portfolio are anticipated to remain as
configured, be remodeled or have base lease periods more than five years in the future. Future market conditions could impact any of
these decisions used in this analysis.
82
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Approximately 40% of the store leases will be at the optional renewal period within the next three years and 65% within the next five
years. The individual cash flow time horizon for stores expected to be closed, relocated or downsized has been reduced to the base
lease period, eliminating renewal option periods from the calculation, where applicable. Additionally, projected sales trends included
in the impairment calculation model in prior periods have been reduced. The quarterly impairment analyses in recent periods have
contemplated short-term negative sales trends, a period of no growth, turning positive in the second and later years. However, the
actual quarterly results have declined more than included in the model and the Company recognized asset impairment charges each
quarter since the third quarter of 2011, even though the Company continued to lower projected sales trends for these tests. Each
period reflected the Company’s best estimate at the time. The current outlook on comparable store sales is a decline of 4% in the first
year. The projected sales continue to be negative for the second year, but are on an improving trend. Gross margin assumptions have
been held constant at current actual levels and operating costs are consistent with recent actual results and planned activities.
Following adoption of the NA Retail Strategy and impairment charges recognized, approximately 250 stores were reduced to
estimated salvage value of $7 million and assets for 130 locations were reduced to estimated fair value of $35 million based on their
projected cash flows, discounted at 13%. The remaining value after asset impairment charges will be depreciated over the remaining
lease period. These and other lower-performing locations are particularly sensitive to changes in projected cash flows over the
forecast period and additional impairment is possible in future periods if results are below projections. A 100 basis point decrease in
sales used in these estimates would have increased impairment by approximately $2.0 million. Independent of the sensitivity on sales
assumptions, a 50 basis point decrease in gross margin would have increased the impairment by approximately $4.6 million. The
interrelationship of having both of those inputs change as indicated would have resulted in impairment approximately $0.5 million
more than the sum of the two individual inputs.
The Company will continue to evaluate initiatives to improve performance and lower operating costs. To the extent that forward-
looking sales and operating assumptions are not achieved and are subsequently reduced, or if the Company commits to a more
extensive store downsizing strategy, additional impairment charges may result. Additionally, unless store performance improves,
future impairment charges may result. However, at the end of 2012, the impairment analysis reflects the Company’s best estimate of
future performance, including the intended future use of the Company’s retail store assets.
International Division
During 2011, the Company acquired an office supply company in Sweden to supplement the existing business in that market. As a
result of slowing economic conditions in Sweden after the acquisition, difficulties in the consolidation of multiple distribution centers
and the adoption of new warehousing systems which impacted customer service and delayed or undermined planned marketing
activities, the Company re-evaluated remaining balances of acquisition-related intangible assets of customer relationships and short-
lived tradename values. The acquisition-date intangible asset valuation anticipated customer attrition of approximately 11% to
13% per year through 2013. The cash flow analysis consistent with the original valuation of the definite-lived intangible assets was
updated by accounting and finance department personnel to reflect the decline experienced in 2012, as well as projected sales declines
of 8% for acquisition-date retail customer relationships and 2% for acquisition-date contract relationships in 2013 and costs necessary
to successfully complete the warehouse integration and re-launch the marketing initiatives. Cash flows related to these acquired
customer relationships with the updated Level 3 inputs were projected to be negative, then recovering, but were insufficient to recover
the intangible assets’ remaining carrying values. Accordingly, an impairment charge of approximately $14 million was recognized
during the third quarter of 2012 and is presented in Asset impairments in the Consolidated Statements of Operations.
Fair Value Estimates Used for Paid-in-Kind Dividends
The Company’s Board of Directors can elect to pay quarterly dividends on the preferred stock in cash or in-kind. Dividends paid-in-
kind are measured at fair value, using Level 3 inputs. The Company uses a binomial simulation that captures the call, conversion, and
interest rate reset features as well the optionality of paying the dividend in-kind or in cash. The Board of Directors and Company’s
management consider then-current and estimated future liquidity factors in making that quarterly decision.
83
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dividends were paid in cash for each of the quarterly periods of 2010, the first three quarters of 2011, and the fourth quarter of 2012.
For the 2011 dividends paid-in-kind, the simulation was based stock price volatility of 70%, a risk free rate of 1.49%, and a risk
adjusted rate of 14.6%. The fair value calculation of $7.7 million was approximately $1.6 million below the amount added to the
liquidation preference. For dividends paid-in-kind for the three quarters of 2012, the average stock price volatility was 63%, the risk
free rate was 3.0% and the risk adjusted rate was 14.5%. The aggregate fair value calculated for these three quarters was $22.8
million, $6.3 million below the amount added to the liquidation preference. For the dividend paid-in-kind for the third quarter of
2012, a stock price volatility of 55% or 75% would have increased the estimate by $0.7 million or decreased the estimate by $0.6
million, respectively. Using a beginning of period stock price of $1.50 or $3.50 would have decreased the estimate by $1.7 million or
increased the estimate by $1.1 million, respectively. Assuming that all future dividends would be paid in cash would have increased
the estimate by $1.3 million. Assuming all future dividends would be paid-in-kind had no significant impact.
Indefinite Lived Intangible Assets
The quantitative tests of indefinite lived intangible assets during 2012 were based on a combination of discounted cash flows and
market-based information, where available. Goodwill of $45 million included in the International Division is in a reporting unit
comprised of wholly-owned operating subsidiaries in Europe and ownership of the joint venture operating in Mexico. The assessment
of fair value of the operating subsidiaries was primarily based on a discounted cash flow analysis, including an estimated residual
value. The analysis is prepared by the Company’s finance and accounting personnel that organizationally report to the Chief Financial
Officer. The cash flows were projected to decrease, level and then trend positive, with an ending year growth rate of 1.5%. These
amounts were discounted at 13%. Market data was used to corroborate this estimated value. Market data was used to estimate the
value of the joint venture and was corroborated with a discounted cash flow analysis. The total estimated fair value of the reporting
unit exceeded its carrying value by approximately 30%, with a substantial majority of the value associated with the joint venture. If
the joint venture were removed from the composition of the reporting unit, it is likely that all of the existing goodwill would be
impaired. Additionally, even if there is no change in the composition of the reporting unit, if future performance is below our
projections, goodwill and other intangible asset impairment charges can result. The goodwill included in the North American
Business Services Division was also assessed with no indications of impairment identified.
The estimated value of the indefinite lived tradename included in the International Division was based on an estimated royalty rate of
0.5% applied to projected sales and discounted at 13%. No indications of impairment were identified.
There were no significant differences between the carrying values and fair values of the Company’s financial instruments as of
December 29, 2012 and December 31, 2011, except as disclosed above.
NOTE J — DERIVATIVE INSTRUMENTS AND HEDGING
As a global supplier of office products and services the Company is exposed to risks associated with changes in foreign currency
exchange rates, commodity prices and interest rates. Foreign operations are typically, but not exclusively, conducted in the currency
of the local environment. The Company is exposed to the risk of foreign currency exchange rate changes when making purchases,
selling products, or arranging financings that are denominated in a currency different from the entity’s functional currency.
Depending on the settlement timeframe and other factors, the Company may enter into foreign currency derivative transactions to
mitigate those risks. The Company may designate and account for such qualifying arrangements as hedges. Gains and losses on these
cash flow hedging transactions are deferred in other comprehensive income (“OCI”) and recognized in earnings in the same period as
the hedged item. Transactions that are not designated as cash flow hedges are marked to market at each period with changes in value
included in earnings. Historically, the Company has not entered into transactions to hedge net investment in foreign operations but
may in future periods.
84
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company is also exposed to the risk of changing fuel prices from inbound and outbound transportation arrangements. The
structure of many of these transportation arrangements, however, precludes applying hedge accounting. In those circumstances, the
Company may enter into derivative transactions to offset the risk of commodity price changes, and the value of the derivative contract
is marked to market at each reporting period with changes recognized in earnings. To the extent fuel arrangements qualify for hedge
accounting, gains and losses are deferred in OCI until such time as the hedged item impacts earnings. At the end of the 2012, the
Company had entered into a series of monthly forward swap contracts for approximately 10.9 million gallons of fuel settling through
January 2014. These contracts are not designated as hedging instruments.
Interest rate changes on Company’s obligations may result from external market factors, as well as changes in credit rating or
availability under the Facility. The Company manages exposure to interest rate risks at the corporate level. Interest rate sensitive
assets and liabilities are monitored and assessed for market risk. Currently, no interest rate related derivative arrangements are in
place. OCI includes the deferred gain from a hedge contract terminated in a prior period, net of the portion that was recognized as a
component of the Loss on extinguishment of debt during the quarter ended March 31, 2012. This deferral is being amortized to
interest expense through August 2013.
In certain markets, the Company may contract with third parties for future electricity needs. Such arrangements are not considered
derivatives because they are within the ordinary course of business and are for physical delivery. Accordingly, these arrangements are
not included in the tables below.
Financial instruments authorized under the Company’s established risk management policy include spot trades, swaps, options, caps,
collars, forwards and futures. Use of derivative financial instruments for speculative purposes is expressly prohibited.
The following tables provide information on the Company’s hedging and derivative positions and activity.
(In thousands)
Designated cash flow hedges:
Foreign exchange contracts
Non-designated hedging instruments:
Foreign exchange contracts
Commodity contracts – fuel
Total
December 29, 2012
December 31, 2011
Other
Current
Assets
Other
Current
Liabilities
Other
Current
Assets
Other
Current
Liabilities
$ 565
$
323
$ 284
$ —
—
201
$ 766
9
—
332
$
57
—
$ 341
92
251
343
$
85
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands)
Foreign exchange contracts
Commodity
contracts-fuel
Total
Non-Designated Hedging
Instruments
Amounts of Gain/(Loss)
Recognized in Statement of
Operations (a)(b)
(Gain)/Loss Recognized
in OCI
2010
2011
$(3,066) $(6,452) $(117) $(515) $1,646 $(1,982) $(165) $1,123 $(2,229)
2012
2012
2010
2012
2011
2010
(Gains)/Loss Reclassified
from OCI to Statement of
Operations (c)
2011
Designated Cash Flow Hedges
452
3,601
$(2,614) $(2,851) $ 136
253 — —
—
$(515) $1,646 $(1,982) $(165) $1,123 $(2,229)
—
—
—
(a) Foreign exchange contracts amounts are included in Miscellaneous income, net
(b) Approximately 60% of the fuel commodity contracts amounts are reflected in Cost of goods sold and occupancy costs. The
remaining 40% of the amounts are reflected in Store and warehouse operating and selling expenses.
Included in Cost of goods sold and occupancy costs.
(c)
The existing designated hedge contracts are highly effective and the ineffective portion is considered immaterial. As of December 29,
2012, the foreign exchange contracts extend through December 2013. Losses currently deferred in OCI are expected to be recognized
in earnings within the next twelve months. There were no hedging arrangements requiring collateral. However, the Company may be
required to provide collateral on certain arrangements in the future. The fair values of the Company’s foreign currency contracts and
fuel contracts are the amounts receivable or payable to terminate the agreements at the reporting date, taking into account current
exchange rates. The values are based on market-based inputs or unobservable inputs that are corroborated by market data.
NOTE K — REDEEMABLE PREFERRED STOCK
On June 23, 2009, Office Depot, Inc. issued 274,596 shares of 10.00% Series A Redeemable Convertible Participating Perpetual
Preferred Stock, par value $0.01 per share (“Series A Preferred Stock”), and 75,404 shares of 10.00% Series B Redeemable
Conditional Convertible Participating Perpetual Preferred Stock, par value $0.01 per share (“Series B Preferred Stock”), to funds
advised by BC Partners, Inc. (the “Investors”), for $350 million (collectively, the “Redeemable Preferred Stock”). The issued shares
are out of 280,000 authorized shares of Series A Preferred Stock and 80,000 authorized shares of Series B Preferred Stock. Approval
of conversion and voting rights for these shares was received at a special shareholders’ meeting on October 14, 2009.
The initial liquidation value of $1,000 per preferred share and the conversion rate of $5.00 per common share allow the two series of
preferred stock to be initially convertible into 70 million shares of common stock. The conversion rate is subject to anti-dilution
adjustments. Until converted or otherwise redeemed, the Redeemable Preferred Stock is recorded outside of permanent equity on the
Consolidated Balance Sheets because certain redemption conditions are not solely within the control of Office Depot. The balance is
presented inclusive of accrued dividends measured at fair value and net of approximately $25 million of fees.
86
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dividends are payable quarterly and will be paid in-kind or, in cash, only to the extent that the Company has funds legally available
for such payment and a cash dividend is declared by the Company’s Board of Directors and allowed by credit facilities. If not paid in
cash, an amount equal to the cash dividend due will be added to the liquidation preference and measured for accounting purposes at
fair value. After the third anniversary of issuance, the dividend rate will be reduced to:
(i)
7.87% if at any time after June 23, 2010, the closing price of the Company’s common stock is greater than or equal to
$6.62 per share for a period of 20 consecutive trading days, or
(ii) 5.75% if at any time after June 23, 2010, the closing price of the Company’s common stock is greater than or equal to
$8.50 per share for a period of 20 consecutive trading days.
The Redeemable Preferred Stock also may participate in dividends on common stock, if declared. However, if the closing price of the
common stock on the record date for a dividend payment is less than $45.00 per share, the Company may not declare or pay a cash
dividend on the common stock per share for any fiscal quarter in excess of the Redeemable Preferred Stock dividend amounts.
The Board of Directors approved cash dividends on the Redeemable Preferred Stock for each of the quarterly periods of 2010, the
first three quarters of 2011, and the fourth quarter of 2012. Dividends were accrued and paid-in-kind for the last two quarters of 2009,
fourth quarter of 2011 and the first three quarters of 2012. The stated-rate of those in-kind dividends were added to the liquidation
preference of the respective Series A and Series B Preferred Stock. For accounting purposes, the dividends paid-in-kind were
measured at fair value using a binomial simulation model. Refer to Note I for additional information. With an aggregate of Series A
and Series B of 350,000 shares, reported dividends calculated on a per share basis were $94.10, $102.01, and $106.04, for 2012,
2011, and 2010, respectively. The liquidation preference value of the Redeemable Preferred Stock was $406.8 million and $377.7
million at December 29, 2012 and December 31, 2011, respectively.
The Company has the option to exercise the redemption rights of the Redeemable Preferred Stock, in whole or in part, at any time
after June 23, 2012, subject to the right of the holder to first convert the preferred stock the Company proposes to redeem. The
redemption price is initially 107% of the liquidation preference amount plus any accrued but unpaid dividends and decreases by 1%
each year until reaching 100% after June 23, 2019. At any time after June 23, 2011, if the closing price of the common stock is
greater than or equal to $9.75 per share for a period of 20 consecutive trading days, the Redeemable Preferred Stock is redeemable at
100% of the liquidation preference amount plus any accrued but unpaid dividends, in whole or in part, at the option of the Company,
subject to the right of the holder to first convert the Redeemable Preferred Stock the Company proposes to redeem. The holder has the
option to exercise the redemption rights of the Redeemable Preferred Stock at 101% of the liquidation preference in the event of
certain fundamental change provisions (as defined in the Certificate of Designations for each series), including sale, bankruptcy or
delisting of the Company’s common stock.
In connection with the transaction, the Company entered into an Investor Rights Agreement. Subject to certain exceptions, for so long
as the Investors’ ownership percentage is equal to or greater than 10%, the approval of at least one of the directors designated to the
Company’s Board of Directors by the Investors is required for the Company to incur any indebtedness for borrowed money in excess
of $200 million in the aggregate during any fiscal year. In addition, at the current ownership percentage level, the Investors are
entitled to nominate up to three members of the Board of Directors. Declining ownership percentages reduce the Investors’ board
representation rights. Three directors designated by the Investors are current members of the Company’s Board of Directors.
87
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE L — CAPITAL STOCK
Preferred Stock
As of December 29, 2012, there were 1,000,000 shares of $0.01 par value preferred stock authorized of which 540,000 remain
undesignated. In June 2009, 360,000 shares were designated to the Redeemable Preferred Stock, of which 350,000 shares were issued
and are outstanding. In October 2012, 100,000 shares were designated to Series C Junior Participating Preferred Stock discussed in
the Rights Agreement section below.
Treasury Stock
At December 29, 2012, there were 5.9 million treasury shares held. Additional common stock repurchases are currently prohibited
under the Facility and, in certain circumstances, require prior approval under the Preferred Stock agreements.
Rights Agreement
In October 2012, Company entered into a stockholder rights plan (the “Rights Agreement”). Pursuant to the Rights Agreement, the
Board of Directors declared a dividend distribution of one Right (a “Right”) for each outstanding share of the Company’s common
stock, par value $0.01 per share to shareholders of record at the close of business on November 9, 2012, which date will be the record
date, and for each share of common stock issued (including shares distributed from Treasury) by the Company thereafter and prior to
the Distribution Date (as described below). Each Right entitles the registered holder, subject to the terms of the Rights Agreement, to
purchase from the Company one five-thousandth of a share of Series C Junior Participating Preferred Stock, $0.01 par value per share
(the “Series C Preferred Stock”), at a purchase price of $11.50 per one five-thousandth of a share of Series C Preferred Stock, subject
to adjustment.
Initially, no separate rights certificates will be distributed and instead the Rights will attach to all certificates representing shares of
outstanding common stock. The Rights will separate from the common stock on the distribution date (the “Distribution Date”), which
will occur on the earlier of (i) ten Business Days following a public announcement that a person or group of affiliated or associated
persons has become an “Acquiring Person,” or (ii) ten Business Days (or such later date as may be determined by the Board of
Directors prior to such time as any person becomes an Acquiring Person) following the commencement of a tender offer or exchange
offer that would result in a person or group of affiliated and associated persons beneficially owning 15% or more of the shares of
common stock then outstanding.
88
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE M — EARNINGS PER SHARE
The following table presents the calculation of net earnings (loss) per common share — basic and diluted:
(In thousands, except per share amounts)
Basic Earnings Per Share
Numerator:
Net earnings (loss) attributable to common stockholders
Denominator:
Weighted-average shares outstanding
Basic earnings (loss) per share
Diluted Earnings Per Share
Numerator:
Net earnings (loss) attributable to Office Depot, Inc.
Denominator:
Weighted-average shares outstanding
Effect of dilutive securities:
Stock options and restricted stock
Redeemable preferred stock
Diluted weighted-average shares outstanding
Diluted earnings (loss) per share
2012
2011
2010
$(110,045)
$ 59,989
$ (81,736)
279,727
(0.39)
$
277,918
0.22
$
275,557
(0.30)
$
$ (77,111)
$ 95,694
$ (44,623)
279,727
277,918
275,557
4,401
78,427
362,555
N/A
5,176
73,703
356,797
N/A
7,060
73,676
356,293
N/A
Awards of options and nonvested shares representing an additional 14.6 million, 13.6 million and 13.0 million shares of common
stock were outstanding for the years ended December 29, 2012, December 31, 2011 and December 25, 2010, respectively, but were
not included in the computation of diluted weighted-average shares outstanding because their effect would have been antidilutive. For
the three years presented, no tax benefits have been assumed in the weighted average share calculation in jurisdictions with valuation
allowances. The diluted share amounts for 2012, 2011 and 2010 are provided for informational purposes, as the level of earnings
(loss) for the periods causes basic earnings per share to be the most dilutive.
Following the Company’s issuance of the redeemable preferred stock in 2009, basic earnings per share is computed after
consideration of preferred stock dividends. The preferred stock has certain participation rights with common stock resulting in
application of the two-class method for computing earnings per share. In periods of sufficient earnings, this method assumes an
allocation of undistributed earnings to both participating stock classes. The two-class method impacted the computation of earnings
for the first quarter of 2012, but was not applicable to the full year 2012 because if would have been antidilutive. The preferred
stockholders are not required to fund losses.
Dividends on preferred stock that are paid-in-kind are measured at fair value for financial reporting purposes and may be higher or
lower than the cash-equivalent for the period. For additional information, refer to Note I and Note K.
89
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE N — SUPPLEMENTAL INFORMATION ON OPERATING, INVESTING AND FINANCING ACTIVITIES
Additional supplemental information related to the Consolidated Statements of Cash Flows is as follows:
(In thousands)
Cash interest paid (net of amounts capitalized)
Cash taxes paid (refunded)
Non-cash asset additions under capital leases
Non-cash paid-in-kind dividends (refer to Note K)
NOTE O — SEGMENT INFORMATION
2012
$56,808
10,297
9,029
22,765
2011
$54,833
(3,317)
10,025
7,656
2010
$ 62,352
(54,459)
13,251
—
Office Depot operates in three segments: North American Retail Division, North American Business Solutions Division, and
International Division. Each of these segments is managed separately primarily because it serves a different customer group. The
accounting policies for each segment are the same as those described in Note A. Division operating income is determined based on
the measure of performance reported internally to manage the business and for resource allocation. This measure allocates to the
respective Divisions those general and administrative expenses (“G&A”) considered directly or closely related to their operations.
Remaining G&A expenses and charges that are managed at the Corporate level are not allocated to the Divisions for measurement of
Division operating income. Refer to Note B for discussion of charges. Other companies may charge more or less of these items to
their segments and results may not be comparable to similarly titled measures used by other entities.
A summary of significant accounts and balances by segment, reconciled to consolidated totals follows.
(In thousands)
Sales
Division operating income
Capital expenditures
Depreciation and amortization
Charges for losses on receivables and inventories
Net earnings from equity method investments
Assets
North
American
Retail
North
American
Business
Solutions
International
Eliminations
and Other*
Consolidated
Total
2012 $4,457,826 $3,214,915 $3,022,911 $ — $10,695,652
2011 $4,870,166 $3,261,953 $3,357,414 $ — $11,489,533
2010 $4,962,838 $3,290,430 $3,379,826 $ — $11,633,094
254,526
2012 $
12,164 $ 193,033 $
372,785
2011 $ 134,794 $ 145,096 $
334,759
2010 $ 127,504 $
120,260
54,535 $
2012 $
130,317
62,699 $
2011 $
169,452
67,172 $
2010 $
203,189
84,627 $
2012 $
211,410
89,839 $
2011 $
208,319
86,657 $
2010 $
64,930
40,237 $
2012 $
56,200
31,274 $
2011 $
57,824
37,681 $
2010 $
30,462
— $
2012 $
31,426
— $
2011 $
30,635
— $
2010 $
2012 $1,170,046 $ 658,688 $1,311,716 $ 870,329 $ 4,010,779
2011 $1,434,844 $ 586,404 $1,373,108 $ 856,628 $ 4,250,984
49,329 $ — $
92,895 $ — $
96,474 $ 110,781 $ — $
25,350 $ 14,528 $
25,847 $
26,356 $ 18,572 $
22,690 $
27,637 $ 36,055 $
38,588 $
33,810 $ 67,492 $
17,260 $
22,102 $ 84,951 $
14,518 $
24,712 $ 81,945 $
15,005 $
18,858 $ — $
5,835 $
18,348 $ — $
6,578 $
11,680 $ — $
8,463 $
30,462 $ — $
— $
31,426 $ — $
— $
30,635 $ — $
— $
*
Amounts included in “Eliminations and Other” consist of assets (including all cash and cash equivalents) and depreciation
related to corporate activities.
90
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the measure of Division operating income to Earnings (loss) before income taxes follows.
(In thousands)
Division operating income
Add/(subtract):
Recovery of purchase price
Unallocated charges
Unallocated operating expenses
Interest expense
Interest income
Loss on extinguishment of debt
Miscellaneous income, net
Earnings (loss) before income taxes
2012
$ 254,526
2011
$ 372,785
2010
$ 334,759
68,314
(18,228)
(335,453)
(68,937)
2,240
(12,110)
34,225
$ (75,423)
__
(14,919)
(324,112)
(33,223)
1,231
__
30,857
$ 32,619
__
(63,934)
(308,116)
(58,498)
4,663
__
34,451
$ (56,675)
As of December 29, 2012, the Company sold to customers throughout North America, Europe, Asia and Latin America. The
Company operates through wholly-owned and majority-owned entities and participates in other ventures and alliances. There is no
single country outside of the United States in which the Company generates 10% or more of the Company’s total sales. Geographic
financial information relating to the Company’s business is as follows (in thousands).
United States
International
Total
2012
Sales
2011
$ 7,670,805 $ 8,108,402 $ 8,189,642
3,443,452
3,381,131
$10,695,652 $11,489,533 $11,633,094
3,024,847
2010
2012
Property and Equipment, Net
2011
$707,628 $ 901,572 $ 980,426
176,587
165,468
$856,341 $1,067,040 $1,157,013
148,713
2010
The Company classifies products into three categories: (1) supplies, (2) technology, and (3) furniture and other. The supplies category
includes products such as paper, binders, writing instruments, school supplies, and ink and toner. The technology category includes
products such as desktop and laptop computers, monitors, tablets, printers, cables, software, digital cameras, telephones, and wireless
communications products. The furniture and other category includes products such as desks, chairs, luggage, sales in the copy and
print centers, and other miscellaneous items.
Total Company sales by product group were as follows:
Supplies
Technology
Furniture and other
2012
65.5%
20.9%
13.6%
100.0%
2010
2011
65.2%
65.1%
22.4%
21.9%
13.0%
12.4%
100.0% 100.0%
NOTE P — INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
Since 1994, the Company has participated in a joint venture that sells office products and services in Mexico and Central and South
America, Office Depot de Mexico. Because the Company participates equally in this business with a partner, the Company accounts
for this investment using the equity method. The Company’s proportionate share of Office Depot de Mexico’s net income is presented
in Miscellaneous income, net in the Consolidated Statements of Operations. The investment balance at year end 2012 and 2011 of
$241.8 million and $196.9 million, respectively, is included in Other assets in the Consolidated Balance Sheets. The Company
received dividends of $25 million from this joint venture in 2011. The dividend is included as an operating activity in the
Consolidated Statements of Cash Flows.
91
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company also participates in a joint venture operating in India. The investment in and results of operations for that entity are
considered immaterial for all periods. The following tables provide summarized information from the balance sheets and statements
of income for Office Depot de Mexico:
(In thousands)
Current assets
Non-current assets
Current liabilities
Non-current liabilities
(In thousands)
Sales
Gross profit
Net income
December 29,
2012
$ 377,405
333,788
219,774
7,344
December 31,
2011
$ 303,404
295,033
199,588
5,895
2012
$1,144,020
347,866
63,183
2011
$1,114,201
326,804
61,951
2010
$961,616
283,189
61,269
NOTE Q — ACQUISITION AND DISPOSITIONS
During the fourth quarter of 2012, the Company sold its operations in Hungary and entered into a license agreement with the buyers.
The impact of this disposition is not significant to the Company’s results of operations, financial position or cash flows for any period
presented.
On February 25, 2011, the Company acquired all of the shares of Svanströms Gruppen (Frans Svanströms & Co AB), a supplier of
office products and services headquartered in Stockholm, Sweden to complement the Company’s existing business in that region. As
part of this all-cash transaction, the Company recognized approximately $46 million of non-deductible goodwill, primarily
attributable to anticipated synergies, $20 million of definite-lived intangible assets for customer relationships and proprietary names,
as well as net working capital and property and equipment. The definite-lived intangible assets had a weighted average life of 6.9
years at the acquisition date. Operations have been included in the International Division results since the date of acquisition.
Supplemental pro forma information as if the entities were combined at earlier periods is not provided based on materiality
considerations. As discussed in Note D, the definite-lived intangible assets were impaired in the third quarter of 2012.
In December 2010, the Company sold the stock of its operating entities in Israel and Japan and entered into licensing agreements with
the respective buyers of those companies. A loss on disposition of approximately $11 million was reflected in the operating income of
the International Division and included in Store and warehouse operating and selling expenses in the Consolidated Statement of
Operations. Additionally in December 2010, the Company entered into an amended shareholders’ agreement related to its joint
venture in India such that financial and operating policies are shared and equity capital balances are equal. The revenues and expenses
of these entities were included through the date of sale or deconsolidation in the Consolidated Statement of Operations and the assets
and liabilities of each of these entities were removed from the year end 2010 Consolidated Balance Sheet. The investment in India is
accounted for under the equity method, with the Company’s share of results being presented in Miscellaneous income, net.
92
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE R — QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share amounts)
Fiscal Year Ended December 29, 2012
Net sales
Gross profit
Net earnings (loss)
Net earnings (loss) attributable to Office Depot, Inc.
Net earnings (loss) available to common stockholders
Net earnings (loss) per share*:
Basic
Diluted
First Quarter
(1)
Second Quarter
(2)
Third Quarter
(3)
Fourth Quarter
(4)
$ 2,872,809
883,174
49,499
49,503
41,287
$ 2,507,150
746,064
(57,387)
(57,382)
(64,281)
$ 2,692,933
834,724
(61,925)
(61,916)
(69,566)
$ 2,622,760
783,623
(7,307)
(7,316)
(17,485)
$
$
0.14
0.14
$
$
(0.23)
(0.23)
$
$
(0.25)
(0.25)
$
$
(0.06)
(0.06)
*
(1)
Due to rounding, the sum of the quarterly earnings per share amounts may not equal the reported earnings per share for the year.
Net earnings include approximately $68 million of recovery of purchase price income from previous acquisition associated with
pension plan and approximately $12 million loss on extinguishment of debt.
(2)
(3)
(4)
Net earnings include approximately $24 million North American Retail Division fixed asset impairment.
Net earnings include approximately $88 million North American Retail and International Division asset impairments.
Net earnings include approximately $9 million North American Retail Division fixed asset impairment.
(In thousands, except per share amounts)
Fiscal Year Ended December 31, 2011
Net sales
Gross profit
Net earnings (loss)
Net earnings (loss) attributable to Office Depot, Inc.
Net earnings (loss) available to common stockholders
Net earnings (loss) per share*:
Basic
Diluted
First Quarter
Second Quarter
Third Quarter
(1)
Fourth Quarter
(2)
$2,972,960
878,188
(5,390)
(5,414)
(14,627)
$ 2,710,141
794,052
(20,116)
(20,114)
(29,327)
$ 2,836,737
855,020
100,849
100,872
91,659
$ 2,969,695
899,186
20,348
20,350
12,284
$
$
(0.05)
(0.05)
$
$
(0.11)
(0.11)
$
$
0.29
0.28
$
$
0.04
0.04
*
(1)
(2)
Due to rounding, the sum of the quarterly earnings per share amounts may not equal the reported earnings per share for the year.
Net earnings include approximately $99 million of tax and related interest benefits from the reversal of uncertain tax positions.
Fiscal year 2011 includes 53 weeks in accordance with the Company’s 52- week, 53-week retail calendar; accordingly, the
fourth quarter includes 14 weeks. Additionally, the fourth quarter includes approximately $24 million of benefits from the
reversal of uncertain tax positions and valuation allowances.
93
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE S — SUBSEQUENT EVENTS
On February 19, 2013, the Company entered into a definitive merger agreement (the “Agreement”) with OfficeMax Incorporated
(“OfficeMax”), pursuant to which the Company and OfficeMax would combine in an all-stock merger transaction. At the effective
time of the merger, the Company would issue 2.69 new shares of common stock for each outstanding share of OfficeMax common
stock. In addition, at the effective time of the merger, the Company’s board of directors will be reconstituted to include an equal
number of directors designated by the Company and OfficeMax. The parties’ obligations to complete the merger are subject to several
conditions, including, among others, approval by the shareholders of each of the two companies, the receipt of certain regulatory
approvals and other customary closing conditions.
94
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Office Depot, Inc.:
We have audited the consolidated financial statements of Office Depot, Inc. and subsidiaries (the “Company”) as of December 29,
2012 and December 31, 2011, and for each of the three fiscal years in the period ended December 29, 2012, and the Company’s
internal control over financial reporting as of December 29, 2012, and have issued our reports thereon dated February 20, 2013; such
consolidated financial statements and reports are included elsewhere in this Form 10-K. Our audits also included the consolidated
financial statement schedule of the Company listed in the accompanying index at Item 15(a)(2). This consolidated 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 consolidated financial statement schedule, when considered in relation to the basic financial statements taken as a
whole, present fairly, in all material respects, the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Boca Raton, Florida
February 20, 2013
95
INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedule II — Valuation and Qualifying Accounts and Reserves
Page
97
All other schedules have been omitted because they are not applicable, not required or the information is included elsewhere herein.
96
OFFICE DEPOT, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
SCHEDULE II
Column A
Column B
Column C
Column D
Column E
Description
Allowance for doubtful accounts:
2012
2011
2010
Additions—
Charged to
Deductions—
Write-offs,
Payments and
Other
Expense
Adjustments
Balance at End
of Period
15,013
13,603
10,954
11,929
21,979
15,709
$
$
22,755
19,671
28,047
Balance at
Beginning
of Period
$19,671
$28,047
$32,802
97
Exhibit
Number
3.1
3.2
3.3
3.4
3.5
3.6
3.7
4.1
4.2
4.3
4.4
4.5
4.6
4.7
INDEX TO EXHIBITS FOR OFFICE DEPOT 10-K
Exhibit
Restated Certificate of Incorporation (Incorporated by reference from the respective annex to the Proxy Statement
for Office Depot, Inc.’s 1995 Annual Meeting of Stockholders, filed with the SEC on April 20, 1995.)
Amendment to Restated Certificate of Incorporation (Incorporated by reference from Office Depot, Inc.’s Quarterly
Report on Form 10-Q, filed with the SEC on November 10, 1998.)
Amended and Restated Bylaws (Incorporated by reference from Office Depot, Inc.’s Current Report on Form 8-K,
filed with the SEC on January 24, 2013.)
Certificate of Elimination of the Junior Participating Preferred Stock, Series A (Incorporated by reference from
Office Depot, Inc.’s Current Report on Form 8-K, filed with the SEC on June 23, 2009.)
Certificate of Designations of the 10.00% Series A Redeemable Convertible Participating Perpetual Preferred Stock
(Incorporated by reference from Office Depot, Inc.’s Current Report on Form 8-K, filed with the SEC on June 23,
2009.)
Certificate of Designations of the 10.00% Series B Redeemable Conditional Convertible Participating Perpetual
Preferred Stock (Incorporated by reference from Office Depot, Inc.’s Current Report on Form 8-K, filed with the
SEC on June 23, 2009.)
Certificate of Designation of Series C Junior Participating Preferred Stock.
Form of Certificate representing shares of Common Stock (Incorporated by reference from the respective exhibit to
Office Depot, Inc.’s Registration Statement No. 33-39473 on Form S-4, filed with the SEC on March 15, 1991.)
Indenture, dated as of August 11, 2003, for the $400 million 6.250% Senior Notes due August 15, 2013, by and
between Office Depot, Inc. and SunTrust Bank (Incorporated by reference from the respective exhibit to Office
Depot, Inc.’s Registration Statement No. 333-108602 on Form S-4, filed with the SEC on September 8, 2003.)
Supplemental Indenture No. 1, dated as of August 11, 2003, for the $400 million 6.250% Senior Notes due
August 15, 2013, by and between Office Depot, Inc. and SunTrust Bank (Incorporated by reference from Office
Depot, Inc.’s Quarterly Report on Form 10-Q, filed with the SEC on October 27, 2003.)
Supplemental Indenture No. 2, dated as of October 9, 2003, for the $400 million 6.250% Senior Notes due
August 15, 2013, by and between Office Depot, Inc. and SunTrust Bank (Incorporated by reference from Office
Depot, Inc.’s Quarterly Report on Form 10-Q, filed with the SEC on October 27, 2003.)
Investor Rights Agreement, dated as of June 23, 2009, by and among Office Depot, Inc., BC Partners, Inc. and the
investors named in the Investor Rights Agreement (Incorporated by reference from Office Depot, Inc.’s Current
Report on Form 8-K, filed with the SEC on June 23, 2009.)
Registration Rights Agreement, dated as of June 23, 2009, by and among Office Depot, Inc., BC Partners, Inc. and
the investors named in the Registration Rights Agreement (Incorporated by reference from Office Depot, Inc.’s
Current Report on Form 8-K, filed with the SEC on June 23, 2009.)
Indenture, dated as of March 14, 2012, relating to the $250 million 9.75% Senior Secured Notes due 2019, among
Office Depot, Inc., the Guarantors named therein and U.S. Bank National Association (Incorporated by reference
from Office Depot, Inc.’s Current Report on Form 8-K, filed with the SEC on March 15, 2012.)
98
Exhibit
Number
4.8
4.9
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
Exhibit
Supplemental Indenture No. 3 to the Indenture dated as of August 11, 2003 between Office Depot, Inc. and U.S. Bank
National Association (as successor to SunTrust Bank), dated as of March 14, 2012, relating to the 6.250% Senior Notes
due August 15, 2013, between Office Depot, Inc. and U.S. Bank National Association (as successor to SunTrust Bank)
(Incorporated by reference from Office Depot, Inc.’s Current Report on Form 8-K, filed with the SEC on March 15,
2012.)
Rights Agreement, dated October 24, 2012, by and between Office Depot, Inc. and Computershare Shareowner
Services LLC (Incorporated by reference from Office Depot, Inc.’s Current Report on Form 8-K, filed with the SEC on
October 30, 2012.)
Lease Agreement dated November 10, 2006, by and between Office Depot, Inc. and Boca 54 North LLC (Incorporated
by reference from Office Depot, Inc.’s Annual Report on Form 10-K for the year ended December 27, 2008, filed with
the SEC on February 24, 2009.)
First Amendment to Lease dated July 3, 2007, by and between Office Depot, Inc. and Boca 54 North LLC
(Incorporated by reference from Office Depot, Inc.’s Annual Report on Form 10-K for the year ended December 27,
2008, filed with the SEC on February 24, 2009.)
Amended Offer Letter dated December 31, 2008, for the Employment of Michael Newman as the Chief Financial
Officer of Office Depot, Inc. (Incorporated by reference from Office Depot, Inc.’s Annual Report on Form 10-K for the
year ended December 26, 2009, filed with the SEC on February 23, 2010.) *
Offer Letter dated August 22, 2008, for the Employment of Michael Newman as the Chief Financial Officer of Office
Depot, Inc. (Incorporated by reference from Office Depot, Inc.’s Annual Report on Form 10-K for the year ended
December 27, 2008, filed with the SEC on February 24, 2009.)*
Office Depot, Inc. 2007 Long-Term Incentive Plan (Incorporated by reference from the respective appendix to the
Proxy Statement for Office Depot, Inc.’s 2007 Annual Meeting of Shareholders, filed with the SEC on April 2, 2007.)*
Change of Control Agreement, dated as of September 17, 2008, by and between Office Depot, Inc. and Michael D.
Newman (Incorporated by reference from Office Depot, Inc.’s Quarterly Report on Form 10-Q, filed with the SEC on
October 29, 2008.)*
2008 Office Depot, Inc. Bonus Plan for Executive Management Employees (Incorporated by reference from the
respective appendix to the Proxy Statement for Office Depot, Inc.’s 2008 Annual Meeting of Shareholders, filed with
the SEC on March 13, 2008.)*
Securities Purchase Agreement, dated as of June 23, 2009, by and among Office Depot, Inc. and the investors named in
the Securities Purchase Agreement (Incorporated by reference from Office Depot, Inc.’s Current Report on Form 8-K,
filed with the SEC on June 23, 2009.)
Change of Control Agreement, dated as of December 14, 2007, by and between Office Depot, Inc. and Steven M.
Schmidt (Incorporated by reference from Office Depot, Inc.’s Quarterly Report on Form 10-Q, filed with the SEC on
July 28, 2009.)*
Amendment to Employment Offer Letter Agreement, dated December 31, 2008, by and between Office Depot, Inc. and
Steven Schmidt (Incorporated by reference from Office Depot, Inc.’s Annual Report on Form 10-K for the year ended
December 26, 2009, filed with the SEC on February 23, 2010.)*
Employment Offer Letter Agreement, dated July 10, 2007, by and between Office Depot, Inc. and Steven Schmidt
(Incorporated by reference from Office Depot, Inc.’s Annual Report on Form 10-K for the year ended December 26,
2009, filed with the SEC on February 23, 2010.)*
99
Exhibit
Number
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
Exhibit
Office Depot, Inc. Amended Long-Term Incentive Plan (Incorporated by reference from Office Depot, Inc.’s Current
Report on Form 8-K, filed with the SEC on April 26, 2010.)*
Office Depot, Inc. Amended Long-Term Equity Incentive Plan, as revised and amended effective April 21, 2010
(Incorporated by reference from Office Depot, Inc.’s Current Report on Form 8-K, filed with the SEC on April 26,
2010.)*
Letter Agreement with Michael D. Newman, dated as of April 23, 2010 (Incorporated by reference from Office Depot,
Inc.’s Current Report on Form 8-K, filed with the SEC on April 26, 2010.)*
Letter Agreement between Office Depot, Inc. and Neil R. Austrian dated November 2, 2010 (Incorporated by reference
from Office Depot, Inc.’s Current Report on Form 8-K/A, filed with the SEC on November 2, 2010.)*
Form of Non-Qualified Stock Option Award Agreement between Office Depot, Inc. and Neil R. Austrian dated
November 2, 2010 (Incorporated by reference from Office Depot, Inc.’s Current Report on Form 8-K/A, filed with the
SEC on November 2, 2010.)*
Retention Agreement between Office Depot, Inc. and Michael D. Newman, dated November 4, 2010 (Incorporated by
reference from Office Depot, Inc.’s Current Report on Form 8-K, filed with the SEC on November 8, 2010.)*
Form of Associate Non-Competition, Confidentiality and Non-Solicitation Agreement between Office Depot, Inc. and
certain executives (Incorporated by reference from Office Depot, Inc.’s Annual Report on Form 10-K for the year
ended December 25, 2010, filed with the SEC on February 22, 2011.)*
Form of Change in Control Agreement between Office Depot, Inc. and certain executives (Incorporated by reference
from Office Depot, Inc.’s Current Report on Form 8-K, filed with the SEC on December 21, 2010.)*
Form of Waiver, dated as of March 30, 2011 (Incorporated by reference from Office Depot, Inc.’s Current Report on
Form 8-K, filed with the SEC on April 1, 2011.)
First Amendment to the Office Depot, Inc. 2007 Long-Term Incentive Plan (Incorporated by reference from Office
Depot, Inc.’s Current Report on Form 8-K, filed with the SEC on April 25, 2011.)*
Letter Agreement between Office Depot, Inc. and Neil R. Austrian dated May 23, 2011 (Incorporated by reference
from Office Depot, Inc.’s Current Report on Form 8-K, filed with the SEC on May 23, 2011.)*
2011 Restricted Stock Award Agreement (Time Vesting) for Neil R. Austrian, dated May 23, 2011 (Incorporated by
reference from Office Depot, Inc.’s Current Report on Form 8-K, filed with the SEC on May 23, 2011.)
2011 Restricted Stock Award Agreement (Performance Vesting) for Neil R. Austrian, dated May 23, 2011
(Incorporated by reference from Office Depot, Inc.’s Current Report on Form 8-K, filed with the SEC on May 23,
2011.)
Change of Control Agreement, dated as of May 23, 2011, by and between Office Depot, Inc. and Neil R. Austrian
(Incorporated by reference from Office Depot, Inc.’s Current Report on Form 8-K, filed with the SEC on May 23,
2011.)*
Amendment to Letter Agreement between Office Depot, Inc. and Neil R. Austrian dated July 25, 2011 (Incorporated
by reference from Office Depot, Inc.’s Current Report on Form 8-K, filed with the SEC on July 25, 2011.)*
100
Exhibit
Number
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
21
23.1
23.2
31.1
Exhibit
Form of Amended and Restated Credit Agreement, dated as of May 25, 2011, among Office Depot, Inc. and certain of
its European subsidiaries as Borrowers, JPMorgan Chase Bank, N.A., as Administrative Agent and U.S. Collateral
Agent, JPMorgan Chase Bank N.A., London Branch, as European Administrative and European Collateral Agent, and
the other lenders referred to therein (Incorporated by reference from Office Depot, Inc.’s Quarterly Report on Form 10-
Q, filed with the SEC on July 26, 2011.)**
Letter Agreement between Office Depot, Inc. and Elisa D. Garcia dated May 15, 2007 (Incorporated by reference from
Office Depot, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on
February 28, 2012.)*
Amendment to Letter Agreement between Office Depot, Inc. and Elisa D. Garcia effective December 31, 2008
(Incorporated by reference from Office Depot, Inc.’s Annual Report on Form 10-K for the year ended December 31,
2011, filed with the SEC on February 28, 2012.)*
Retention Agreement between Office Depot, Inc. and Elisa D. Garcia dated November 2, 2010 (Incorporated by
reference from Office Depot, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the
SEC on February 28, 2012.)*
First Amendment, dated February 24, 2012, to the Amended and Restated Credit Agreement, dated as of May 25,
2011, among Office Depot, Inc. and certain of its European subsidiaries as Borrowers, JPMorgan Chase Bank, N.A., as
Administrative Agent and U.S. Collateral Agent, JPMorgan Chase Bank N.A., London Branch, as European
Administrative and European Collateral Agent, and the other lenders referred to therein (Incorporated by reference
from Office Depot, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on
February 28, 2012.)
Form of Notes representing $250 million aggregate principal amount of 9.75% Senior Secured Notes due March 15,
2019 (Incorporated by reference from Office Depot, Inc.’s Quarterly Report on Form 10-Q, filed with the SEC on May
1, 2012.)
Form of Restricted Stock Awards for Executives (time vested) (Incorporated by reference from Office Depot, Inc.’s
Quarterly Report on Form 10-Q, filed with the SEC on May 1, 2012.)*
Form of Restricted Stock Award for Executives (performance/time vested) (Incorporated by reference from Office
Depot, Inc.’s Quarterly Report on Form 10-Q, filed with the SEC on May 1, 2012.)*
Form of 2012 Restricted Stock Award Agreement between Office Depot, Inc. and Neil R. Austrian dated May 7, 2012.
(Incorporated by reference from Office Depot, Inc.’s Quarterly Report on Form 10-Q, filed with the SEC on August 7,
2012.)*
Form of 2012 Restricted Stock Unit and Performance Cash Award Agreement between Office Depot, Inc. and Neil R.
Austrian dated May 7, 2012. (Incorporated by reference from Office Depot, Inc.’s Quarterly Report on Form 10-Q,
filed with the SEC on August 7, 2012.)*
Financing Agreement by and between Office Depot BS and ABN AMRO Commercial Finance, dated September 24,
2012.
Amendment No. 1 to Financing Agreement by and between Office Depot BS and ABN AMRO Commercial Finance,
dated September 24, 2012.
List of Office Depot, Inc.’s Subsidiaries
Consent of Independent Registered Public Accounting Firm
Consent of Independent Auditors
Certification of CEO required by Securities and Exchange Commission Rule 13a-14(a) or 15d-14(a)
101
Exhibit
Number
31.2
32
99
Exhibit
Certification of CFO required by Securities and Exchange Commission Rule 13a-14(a) or 15d-14(a)
Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Consolidated financial statements of Office Depot de Mexico, S. A. de C. V. and Subsidiaries
(101.INS)
XBRL Instance Document
(101.SCH)
XBRL Taxonomy Extension Schema Document
(101.CAL)
XBRL Taxonomy Extension Calculation Linkbase Document
(101.DEF)
XBRL Taxonomy Extension Definition Linkbase Document
(101.LAB)
XBRL Taxonomy Extension Label Linkbase Document
(101.PRE)
XBRL Taxonomy Extension Presentation Linkbase Document
* Management contract or compensatory plan or arrangement.
** Denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of
1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.
102
Exhibit 3.7
CERTIFICATE OF DESIGNATION
OF
SERIES C JUNIOR PARTICIPATING PREFERRED STOCK
OF
OFFICE DEPOT, INC.
Pursuant to Section 151 of the
General Corporation Law of
the State of Delaware
Office Depot, Inc., a corporation duly organized and existing under the General Corporation Law of the State of Delaware (the
“Corporation”), DOES HEREBY CERTIFY:
That, pursuant to authority conferred by the Restated Certificate of Incorporation of the Corporation, as amended, and by the
provisions of Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Corporation (the
“Board”), at a duly called meeting held on October 24, 2012, at which a quorum was present and acted throughout, adopted the
following resolutions, which resolutions remain in full force and effect on the date hereof, creating a series of one hundred thousand
(100,000) shares of Preferred Stock, $0.01 par value, designated as Series C Junior Participating Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board in accordance with the provisions of the Restated Certificate of
Incorporation of the Corporation, as amended, and Section 151(g) of the General Corporation Law of the State of Delaware, the
Board does hereby create, authorize and provide for the issuance of a series of Preferred Stock, $0.01 par value, of the Corporation,
designated as “Series C Junior Participating Preferred Stock,” having the voting powers, designation, preferences and relative,
participating, optional and other special rights, and qualifications, limitations and restrictions thereof that are set forth as follows:
Section 1. Designation and Amount. The shares of such class shall be designated as “Series C Junior Participating Preferred
Stock” (the “Series C Preferred Stock”) and the number of shares constituting such class shall be one hundred thousand (100,000).
Such number of shares may be increased or decreased by resolution of the Board of Directors, provided, however that no such
decrease shall reduce the number of shares of the Series C Preferred Stock to a number less than the number of shares then
outstanding, plus the number reserved for issuance upon the exercise of options, rights or warrants, or upon conversion of any
outstanding securities issued by the Corporation convertible into Series C Preferred Stock.
Section 2. Dividends and Distributions. (A) Subject to the prior and superior rights of the holders of any shares of any other
class or series of Preferred Stock of the Corporation ranking prior and superior to the shares of Series C Preferred Stock with respect
to dividends, each holder of a share (a “Share”) of Series C Preferred Stock shall be entitled to receive, when, as and if declared by
the Board of Directors out of funds legally available for that purpose, (i) quarterly dividends payable in cash on the last day of March,
June, September, and December in each year (each such date being a “Quarterly Dividend Payment Date”), commencing on the first
Quarterly Dividend Payment Date after the first issuance of such Share of Series C Preferred Stock, in an amount per Share (rounded
to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment hereinafter set forth, 5,000 times the
aggregate per share amount of all cash dividends declared on shares of the Common Stock since the immediately preceding Quarterly
Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of a Share of Series C
Preferred Stock, and (ii) subject to the provision for adjustment hereinafter set forth, quarterly distributions (payable in kind) on each
Quarterly Dividend Payment Date in an amount per Share equal to 5,000 times the aggregate per share amount of all non-cash
dividends or other distributions (other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares
of Common Stock, by reclassification or otherwise) declared on shares of Common Stock since the immediately preceding Quarterly
Dividend Payment Date, or with respect to the first Quarterly Dividend Payment Date, since the first issuance of a Share of Series C
Preferred Stock. In the event that the Corporation shall at any time after the Rights Dividend Declaration Date (as that term is defined
in the Rights Agreement dated October 24, 2012 by and between the Corporation and Computershare Shareowner Services LLC)
(i) declare any dividend on outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivide outstanding
shares of Common Stock or (iii) combine outstanding shares of Common Stock into a smaller number of shares, then in each such
case the amount to which the holder of a Share of Series C Preferred Stock was entitled immediately prior to such event pursuant to
the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which shall be the number of
shares of Common Stock that are outstanding immediately after such event and the denominator of which shall be the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on Shares of Series C Preferred Stock as provided in
paragraph (A) above immediately after it declares a dividend or distribution on the shares of Common Stock (other than a dividend or
distribution payable in shares of Common Stock); provided, however, that in the event no dividend or distribution shall have been
declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly
Dividend Date, a dividend of $1.00 per Share on the Series C Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and shall be cumulative on each outstanding Share of Series C Preferred Stock from
the Quarterly Dividend Payment Date next preceding the date of issuance of such Share of Series C Preferred Stock, unless the date
of issuance of such Share is prior to the record date for the first Quarterly Dividend Payment Date, in which case, dividends on such
Share shall begin to accrue from the date of issuance of such Share, or unless the date of issuance is a Quarterly Dividend Payment
Date or is a date after the record date for the determination of holders of Shares of Series C Preferred Stock entitled to receive a
quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue
and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid
on Shares of Series C Preferred Stock in an amount less than the aggregate amount of all such dividends at the time accrued and
payable on such Shares shall be allocated pro rata on a share-by-share basis among all Shares of Series C Preferred Stock at the time
outstanding. The Board of Directors may fix a record date for the determination of holders of Shares of Series C Preferred Stock
entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the
date fixed for the payment thereof.
Section 3. Voting Rights. The holders of Shares of Series C Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each Share of Series C Preferred Stock shall entitle the
holder thereof to 5,000 votes on all matters submitted to a vote of the holders of Common Stock of the Corporation. In the event the
Corporation shall at any time after the Rights Dividend Declaration Date (i) declare any dividend on outstanding shares of Common
Stock payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock or (iii) combine the outstanding shares
of Common Stock into a small number of shares, then in each such case the number of votes per Share to which holders of Shares of
Series C Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding immediately after such event and the denominator of
which shall be the number of shares of Common Stock that were outstanding immediately prior to such event.
2
(B) Except as otherwise provided herein or in any other Certificate of Designation creating a series of preferred stock, or
any similar stock, or by law, the holders of Shares of Series C Preferred Stock, the holders of shares of Common Stock, and the
holders of any other class or series of capital stock of the Corporation entitled to vote generally, together with the Common Stock,
shall vote together as one class on all matters submitted to a vote of the holders of such stock.
(C) (i) If at any time dividends on any Shares of Series C Preferred Stock shall be in arrears in an amount equal to six
quarterly dividends thereon, then during the period (a “default period”) from the occurrence of such event until such time as all
accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all Shares of
Series C Preferred Stock then outstanding shall have been declared and paid or set apart for payment, the holders of the outstanding
Shares of Series C Preferred Stock, together with the holders of outstanding shares of any one or more other classes or series of stock
of the Corporation upon which like voting rights have been conferred and are exercisable (voting together as a class), shall have the
right to elect two Directors to the Board of Directors of the Corporation at the Corporation’s next annual meeting of stockholders, and
so long as such default period continues, shall have the right to elect a successor to each of the two Directors so elected upon the
expiration of their respective terms, such right to be exercised at the subsequent annual meeting or meetings at which the respective
terms of such Directors expire. Any Director who shall have been so elected pursuant to this paragraph may be removed only for
cause. If the office of any Director elected by the holders of Shares of Series C Preferred Stock pursuant to this paragraph becomes
vacant for any reason, the remaining Director elected pursuant to this paragraph may choose a successor who shall hold office for the
unexpired term in respect of which such vacancy occurred, and if the offices of both such Directors elected by the holders of Shares
of Series C Preferred Stock pursuant to this paragraph become vacant for any reason, such vacancies may be filled for the unexpired
term in respect of which such vacancy occurred only by the affirmative vote of the holders of the outstanding Shares of Series C
Preferred Stock, together with the holders of the outstanding shares of any other class or series of stock upon which like voting rights
have been conferred and are exercisable (voting together as a class).
(ii) The voting rights vested pursuant to paragraph (C)(i) hereof in the holders of the outstanding Shares of Series C
Preferred Stock, together with the holders of outstanding shares of any one or more other classes or series of stock of the Corporation
upon which like voting rights have been conferred and are exercisable (voting together as a class), may not be exercised at any annual
meeting unless one-third of the outstanding shares of stock of the corporation upon which such voting rights have been conferred
shall be present at such meeting in person or by proxy. The absence of a quorum of the holders of Common Stock shall not affect the
exercise by the holders of Shares of Series C Preferred Stock of such rights. In connection with the election of Directors pursuant to
paragraph (C)(i) hereof, each holder of Shares of Series C Preferred Stock shall be entitled to one vote for each one five-thousandth of
a Share held (the holders of shares of any other class or series of preferred stock having like voting rights being entitled to such
number of votes, if any, for each share of such stock held as may be granted to them).
3
(iii) During any default period, the holders of shares of Common Stock and Shares of Series C Preferred Stock, and
other classes or series of stock of the Corporation, if applicable, shall continue to be entitled to elect (voting together as a class) all the
Directors other than the two Directors to be elected pursuant to paragraph (C)(i) hereof by the holders of the outstanding shares of
Series C Preferred Stock, together with the holders of outstanding shares of any one or more other classes or series of stock of the
Corporation upon which like voting rights have been conferred and are exercisable (voting together as a class).
(iv) Immediately upon the expiration of a default period, (x) the right of the holders of Shares of Series C Preferred
Stock to elect Directors pursuant to paragraph (C)(i) hereof shall cease (subject to re-vesting in the event of each and every
subsequent default of the character mentioned in paragraph (C)(i) above), and (y) the term of any Directors elected by the holders of
Shares of Series C Preferred Stock pursuant to paragraph (C)(i) hereof shall terminate.
(D) Except as set forth herein, holders of Shares of Series C Preferred Stock shall have no special voting rights and their
consents shall not be required (except to the extent they are entitled to vote with holders of share of Common Stock as set forth
herein) for taking any corporate action.
Section 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on Shares of
Series C Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on outstanding Shares of Series C Preferred Stock shall have been paid in full, the Corporation
shall not
(i) declare or pay dividends on, or make any other distributions on, any shares of Junior Stock;
(ii) declare or pay dividends on or make any other distributions on any shares of Parity Stock, except dividends paid
ratably on Shares of Series C Preferred Stock and shares of all such Parity Stock on which dividends are payable or in
arrears in proportion to the total amounts to which the holders of such Shares and all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares of any Junior Stock, provided, however, that the
Corporation may at any time redeem, purchase or otherwise acquire shares of any such Junior Stock in exchange for shares
of any Junior Stock;
(iv) redeem or purchase or otherwise acquire for consideration any Shares of Series C Preferred Stock, or any Parity
Stock except in accordance with a purchase offer made in writing or by publication (as determined by the Board of
Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective
annual dividend rates, and other relative rights and preferences of the respective series and classes, shall determine in good
faith, will result in fair an equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration
any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise
acquire such shares at such time and in such manner.
4
Section 5. Reacquired Shares. Any Shares of Series C Preferred Stock purchased or otherwise acquired by the Corporation
in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their
cancellation become authorized but unissued shares of Preferred Stock, $0.01 par value, and may be reissued as part of a new series
of Preferred Stock, subject to the conditions and restrictions on issuance set forth herein, in the Certificate, or in any other Certificate
of Designation creating series of Preferred Stock, $0.01 par value, or any similar stock, or as otherwise restricted by law.
Section 6. Liquidation, Dissolution or Winding Up. (A) Upon any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation no distribution shall be made (i) to the holders of shares of Junior Stock unless the holders of Shares of
Series C Preferred Stock shall have received, subject to adjustment as hereinafter provided in paragraph (B), the greater of either
(a) $1.00 per Share plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not earned or
declared, to the date of such payment, or (b) the amount equal to 5,000 times the aggregate per share amount to be distributed to
holders of shares of Common Stock, or (ii) to the holders of shares of Parity Stock, unless simultaneously therewith distributions are
made ratably on Shares of Series C Preferred Stock and all other shares of such Parity Stock in proportion to the total amounts to
which the holders of Shares of Series C Preferred Stock are entitled under clause (i)(a) of this sentence and to which the holders of
shares of such Parity Stock are entitled, in each case upon such liquidation, dissolution or winding up.
(B) In the event the Corporation shall at any time after the Rights Dividend Declaration Date (i) declare any dividend on
outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock, or
(iii) combine outstanding shares of Common Stock into a smaller number of shares, then in each such case the aggregate amount to
which holders of Shares of Series C Preferred Stock were entitled immediately prior to such event pursuant to clause (i)(b) of
paragraph (A) of this Section 6 shall be adjusted by multiplying such amount by a fraction the numerator of which shall be the
number of shares of Common Stock that are outstanding immediately after such event and the denominator of which shall be the
number of shares of Common Stock that were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination, or
other transaction in which the shares of Common Stock are exchanged for or converted into other stock, securities, cash, and/or any
other property, then in any such case Shares of Series C Preferred Stock shall at the same time be similarly exchanged for or
converted into an amount per Share (subject to the provision for adjustment hereinafter set forth) equal to 5,000 times the aggregate
amount of stock, securities, cash, and/or other property (payable in kind), as the case may be, into which or for which each share of
Common Stock is converted or exchanged. In the event the Corporation shall at any time after the Rights Dividend Declaration Date
(i) declare any dividend on outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivide outstanding
shares of Common Stock, or (iii) combine outstanding Common Stock into a smaller number of shares, then in each such case the
amount set forth in the immediately preceding sentence with respect to the exchange or conversion of Shares of Series C Preferred
Stock shall be adjusted by multiplying such amount by a fraction the numerator of which shall be the number of shares of Common
Stock that are outstanding immediately after such event and the denominator of which shall be the number of shares of Common
Stock that were outstanding immediately prior to such event.
Section 8. Redemption. The Shares of Series C Preferred Stock shall not be redeemable.
5
Section 9. Ranking. Except as provided below, the Series C Preferred Stock shall rank junior to all other series of Preferred
Stock, $0.01 par value, and to any other class of preferred stock that hereafter may be issued by the Corporation as to the payment of
dividends and the distribution of assets, unless the terms of any such series or class shall provide otherwise. The Series C Preferred
Stock shall rank prior, as to dividends and upon liquidation, dissolution, or winding up, to the Common Stock.
Section 10. Amendment. Except as set forth in Section 1 hereof, the Certificate, including, without limitation, this
Certificate of Designation shall not hereafter be amended, either directly or indirectly, or through merger or consolidation with
another corporation in any manner that would alter or change the powers, preferences or special rights of the Series C Preferred Stock
so as to affect them adversely without the affirmative vote of the holders of at least two thirds of the outstanding Shares of Series C
Preferred Stock, voting separately as a class.
Section 11. Fractional Shares. The Series C Preferred Stock may be issued in fractions of one five-thousandth of a Share or
other fractions of a share, which fractions shall entitle the holder, in proportion to such holder’s fractional shares, to exercise voting
rights, receive dividends, participate in distributions, and to have the benefit of all other rights of holders of Series C Preferred Stock.
Section 12. Definitions. All capitalized terms used herein have the meanings ascribed to them in the Restated Certificate of
Incorporation of the Corporation, as amended (the “Certificate”), unless otherwise defined herein. In addition, for purposes hereof, the
following terms shall have the meanings set forth below:
(A) The term “Common Stock” shall mean the class of stock designated as the Common Stock, $0.01 par value, of the
Corporation at the date hereof or any other class of stock resulting from successive changes or reclassification of such Common
Stock.
(B) The term “Junior Stock” (i) as used in Section 4, shall mean the Common Stock and any other class or series of capital
stock of the Corporation hereafter authorized or issued over which the Series C Preferred Stock has preference or priority as to the
payment of dividends and (ii) as used in Section 6, shall mean the Common Stock and any other class or series of capital stock of the
Corporation over which the Series C Preferred Stock has preference or priority in the distribution of assets on any liquidation,
dissolution or winding up of the Corporation.
(C) The term “Parity Stock” (i) as used in Section 4, shall mean any class or series of stock of the Corporation hereafter
authorized or issued ranking pari passu with the Series C Preferred Stock as to the payment of dividends and (ii) as used in Section 6,
shall mean any class or series of stock of the Corporation hereinafter authorized or issued and ranking pari passu with the Series C
Preferred Stock as to the distribution of assets on any liquidation, dissolution, or winding up of the Corporation.
6
IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation to be signed by its authorized officer
this 30th day of October, 2012.
OFFICE DEPOT, INC.
/s/ Elisa D. Garcia C.
By:
Name: Elisa D. Garcia C.
Title:
Executive Vice President, General Counsel
and Secretary
Exhibit 10.37
Financing agreement
Between the undersigned:
ABN AMRO Commercial Finance
A French limited company (S.A.) with share capital of €€ 20,000,015
Whose registered office is located at: 39, Rue Anatole France
92532 LEVALLOIS PERRET Cedex
RCS Nanterre 410 750 863
Hereinafter referred to as “ABN AMRO COM FIN”, on one side,
And
OFFICE DEPOT BS
A simplified joint-stock company (SAS) with share capital of €€ 140.803.200
Whose registered office is located at: 126, Avenue du Poteau
60300 SENLIS
RCS 324 559 970
Hereinafter referred to as “the Client” on the other side
Preliminary Title: Definitions
For the purposes of this agreement, the following terms are defined as follows:
Eligible receivables: In order to be eligible under the terms of this Agreement, receivables (“Eligible Receivables”) must fulfil all of
the following conditions:
- be unquestionable, liquid and denominated in euros,
- correspond to firm sales which have been delivered or services which have been provided,
- have a due date in line with applicable regulations,
- be issued to any type of debtor located in metropolitan France or in the OECD and agreed in advance by ABN AMRO COM
FIN.
Current account: An account held in the Client’s name with ABN AMRO COM FIN in which all transactions which this Financing
Agreement refers to, that constitute the account balance shall be registered.
Cashing accounts: Bank accounts belonging to the Client dedicated to the collection of payments received on behalf of ABN AMRO
COM FIN in the context of the management contract granted by ABN AMRO COM FIN.
A Significant Unfavorable Event is defined by the following:
- The customer’s financial situation presents a very significant imbalance which can question the company’s sustainability.
- The Customer controls (owns) companies the importance of which is significant and which are the object of a judgment of
liquidation.
- The Customer is the object of a statement of bankruptcy (suspension of payments).
- The Customer, has lost in less than 36 months more than half of share capital, without the reconstitution of shareholders’ equity,
or without Bank of France being informed of this reconstitution.
- A legal representative of the Customer, is under particular scrutiny, for example because of a judgment of personal bankruptcy
or a ban to manage a company.
- Companies that own and/or control the majority of shares of the Customer, are the object of a judgment of liquidation.
- The Customer has taken over a company rated P by the Bank of France and existing management team of the P rated company is
not substantially modified.
- The Customer exercises the function of legal representative in more than two companies which are object of a judgment of
liquidation in the last 5 years.
Service fees: ABN AMRO COM FIN’s remuneration, covering both the cost of the services and of the risk client. This commission is
only applicable if the Client activates the financing line.
Financing fees: ABN AMRO COM FIN’s remuneration, covering the delivery of funding prior to the settlement date. This
commission is only applicable if the Client activates the financing line.
Dilution: dilutions refer to any credit which reduce the balance of transferred receivables without a corresponding cash entry in the
dedicated bank account and particularly include credits, discounts, year-end rebates, advertising costs, direct payments (except by
Acquisition card) and disputes.
Disputes: failure of a debtor to pay, for any reason other than declared insolvency (Bad Debt) as soon as the receivable associated can
be considered as bad debt from the accounting point of view and at the latest 120 days after the due date.
Bad Debt: opening of a legal procedure according to Book VI of the French Commercial Code vis à vis the debtor.
Title 1: Purpose of the Agreement
This Agreement allows the Client to obtain from ABN AMRO COM FIN the financing, by subrogatory transfer without recourse, of
any commercial receivables arising from its activity of supply of office products and furniture.
For the purposes of managing the financing of its business cycle, the Client applied for, and ABN AMRO COM FIN agreed to
provide, a confirmed financing line without recourse for commercial receivables (Title 2) which can be activated at its initiative (Title
3).
This facility should not be used by Office Depot Inc. to avoid a breach of any of the covenants stated in the Amended and Restated
Credit Agreement dated May 25, 2011
Title 2: Back-up line of confirmed financing
Article 1: Amount, term
ABN AMRO COM FIN grants the Client irrevocably a Back-up line of confirmed financing for an amount of €€ 60,000,000 (sixty
million euros) for a period of two years from the date of signature of this agreement.
Article 2: Back-up fees
The Client shall pay a monthly Back-up fee, subject to VAT, of €€ 18,000 (eighteen thousand euros) excl. VAT. It is stipulated that this
fee is only payable on a pro rata basis for the period during which the financing line is not activated under the conditions set out in
Title 2 herein.
The Back-up fee shall be payable by transfer from the bank account whose references are attached (appendix 8), in advance, on the
25 of each month, from March 2012.
th
Title 3: Activation/Deactivation of the financing line
Article 1: Activation of the financing line
The Client may activate the financing line at any time by sending ABN AMRO COM FIN an email confirmed by a registered letter
with acknowledgment of receipt.
The financing line shall be entirely activated within 3 (three) working days following the client’s request providing all requirements
mentioned in article 5 are met.
The Parties agree that the Client may activate the financing line for a minimum period of 6 (six) months.
On the day the Agreement is deactivated, the Back-Up line automatically comes into effect under the conditions set out in article 2
below.
Article 2: Deactivation of the financing line
The Client may deactivate the financing line and move back into “back-up” mode at any time by sending ABN AMRO COM FIN an
email confirmed by a registered letter with acknowledgement of receipt.
In this case, the Back-up line of confirmed financing referred to in Title 2 will be built up as transactions generated by activation of
the financing line are liquidated, in particular following the payment of receivables by debtors.
Article 3: Scope
In order to be eligible under the terms of this Agreement, receivables (“Eligible Receivables”) must fulfil all of the following
conditions:
- be unquestionable, liquid and denominated in euros,
- correspond to firm sales which have been delivered or services which have been provided,
- have a due date in line with applicable regulations (article L.441-6 of the French Commercial Code),
- be issued to any type of debtor located in metropolitan France or in the OECD and agreed in advance by ABN AMRO COM
FIN.
The following are explicitly excluded from the scope of this Agreement:
- Receivables arising from deposits and/or down payments.
- Receivables corresponding to conditional sales or consignment sales.
- Receivables giving rise to partial, provisional or pro forma invoicing.
- Receivables corresponding to intermediary invoices in the context of corporate or other similar contracts, whose payment, even
after receipt without reservations, is dependent on the achievement of a performance obligation.
- Receivable arising from fees, charges or penalties payable by debtors.
- Receivables corresponding to a subcontracted activity.
- Receivables owed by the Client’s suppliers.
- Receivables owed by companies over which the Client has effective control via membership of their management or executive
board, or of their financial structure or which exercise the same type of effective reciprocal control.
- Receivables corresponding to work in progress.
Compliance with the eligibility conditions for the transferred receivables shall be the Client’s responsibility, ABN AMRO COM FIN
does not have any control over this; it is stipulated that the Client shall send ABN AMRO COM FIN, at its request, any document or
any useful information in connection with transactions.
The Client shall refrain from entering into any agreement (mobilization of receivables, factoring or other) causing a third party to
come into competition with ABN AMRO COM FIN with regards to the Eligible Receivables.
The Client undertakes to transfer to ABN AMRO Commercial Finance title over all receivables which are freely transferable.
Article 4: Current account agreement
The transactions handled pursuant to this Agreement shall be recorded in a current account opened in the name of the Client in the
books of ABN AMRO COM FIN; the sums due by ABN AMRO COM FIN as well as all sums due by the Client pursuant to this
Agreement shall be recorded in this current account (the “Current Account”).
The reciprocal discounts, debts and receivables recorded in the Current Account constitute solely account entries, all such entries
being indivisibly merged. Any debit balance arising from this merger shall be immediately due and every credit balance shall be
immediately available within the limits set out in Article 6 herein.
The Client and ABN AMRO COM FIN agree that the aforementioned reciprocal receivables and debts arising from performance of
this Agreement are related and indivisible, in such a way that they constitute each other’s guarantee and mutually offset each other
even when the conditions required for legally offsetting are not met.
As many sub-current-accounts may be opened in the name of the Client as necessary and shall all be part of the Current Account.
The Client’s Current Account shall not contain any overdraft authorisation. Should a debit position arise, in particular in respect of the
payment of any receivables held by ABN AMRO COM FIN against the Client, ABN AMRO COM FIN shall immediately be entitled
to claim repayment of the corresponding amounts from the Client.
ABN AMRO COM FIN shall send the Client a monthly Current Account statement. Each statement shall be deemed to reflect the
reality and the accuracy of the transactions between the Client and ABN AMRO COM FIN, except for obvious errors or motivated
and justified disputes, notified by the Client to ABN AMRO COM FIN within 60 days as from the notification date. Should the
monthly reconciliation carried out by the Client between its Accounts Receivable SubLedger and the Current Account reveal any
differences, the Client undertakes to carry out all usual verifications and to inform ABN AMRO COM FIN without delay of the
results of its verifications.
Termination of the Agreement launches the closure period for the Current Account, starting as from the date of notification of
termination. The definitive closure and the balance of the Current Account shall only be established subject to the settlement of all
pending transactions.
Article 5: Management of receivables
a) Opening of debit accounts
Prior to the activation of the financing line, and no more than once a week, the Client shall transmit to ABN AMRO COM FIN the
file meeting the requirements defined in the specifications document appended to this Agreement (Appendix 1) of all debtors included
in the application scope, referred to in article 1, including the following information:
- Debtor’s account number in the AR Subledger
- Debtor’s company name
- Debtor’s Siren number
- Debtor’s address and telephone number
The Siren number supplied by the Client shall exclusively prevail for identification of the debtor.
Debtors benefiting from an outstanding credit granted by the Client and approved by ABN AMRO COM FIN at the date of the audit
prior to the signing of the Agreement shall benefit from a credit approval up to that amount. New debtors for whom the outstanding
amount is inferior or equal to €€ 80,000 (eighty thousand euros) shall automatically benefit from a default credit approval of €€ 80,000
(eighty thousand euros). For any new outstanding amount above €€ 80,000 (eighty thousand euros) on a private debtor, the Client shall
transmit to ABN AMRO COM FIN all non-confidential information in its possession allowing ABN AMRO COM FIN to assess the
solvency. For debtors whose credit limit is above €€ 80,000 (eighty thousand euros), ABN AMRO COM FIN undertakes to send the
Client the approval granted within 2 (two) working days maximum following the communication of the information from the client. If
non-confidential information in its possession is not communicated, the approval shall be deemed to be refused.
ABN AMRO COM FIN may decide at any time to reduce or terminate acceptance of debtors whose outstanding is above €€ 80,000
(eighty thousand euros), in which case it shall inform the Client of its decision by any means and at the best delays. Such decisions
shall have immediate effect, although receivables corresponding to services rendered before the date on which the Client received
notice shall continue to be accepted.
The Client acknowledges that ABN AMRO COM FIN’s decisions concerning acceptance are intended for it alone, and agrees not to
disclose them to any third party, including the relevant debtors.
b)
Transfer of receivables
The Client shall transfer to ABN AMRO COM FIN on a weekly basis and according to the specifications attached to this Agreement
(Appendix 1), the list of the Eligible Receivables.
Transfer of title of the Eligible Receivables shall be by conventional subrogation in accordance with article 1250-1° of the French
Civil Code. By crediting the Current Account of the amount of the receivables transferred by the Client and which are listed in the
summary forms, ABN AMRO COM FIN shall become the sole holder of the title of the aforementioned receivables as a result and as
from the day of their registration in the account. The amount of the transferred receivables shall be credited to the current account
within a maximum of 48 (forty-eight) hours of receipt of the form.
To that effect, and at the latest on activation of the Agreement, the Client shall sign a permanent subrogation form in favour of ABN
AMRO COM FIN, of which a template is appended hereto (Appendix 2).
ABN AMRO COM FIN shall be entitled to request at any time the delivery of any document on the transferred receivables, in
particular invoices, purchase orders (except for phone orders) and delivery notes, which are deemed to be in its possession. ABN
AMRO COM FIN may request the Client to do its best to deliver the documents within a reasonable time.
The Client shall be dispensed from informing its debtors of the existence of this Agreement and from affixing any transfer clause on
its invoices.
c)
Payment of receivables
ABN AMRO Commercial Finance shall credit the Client’s current account with the amount of the transferred receivables which fulfil
the conditions of this agreement, including VAT.
d)
Transfer of credit notes
The Client shall provide ABN AMRO COM FIN with all credit notes to be deducted from the transferred receivables, as soon as they
are issued.
An explanation must be provided for these credit notes. These shall be deducted from the current account balance.
However, their booking on the current account shall not imply acceptance or verification by ABN AMRO COM FIN.
e)
Justifying documents
ABN AMRO COM FIN may demand the Client’s compliance with the following provisions at any time:
- Delivery of duplicate invoices
- Delivery of any documents it shall deem necessary to establish proof of the debt,
In the case of the cancellation of the mandate ABN AMRO COM FIN may demand the Client’s compliance with the following
provisions at any time:
- Delivery of original invoices in order to send them to debtors in the event of revocation of the mandate,
- Delivery of bills of exchange accepted from debtors or promissory notes issued by them, in the event of revocation of the
mandate,
f) Management mandate/recovery of receivables
Purpose of mandate: ABN AMRO COM FIN, owner of the receivables, shall be exclusively entitled to recover the receivables
transferred by the Client and to receive payments corresponding to these receivables.
However, with regard to the Client’s performances in relation to the management of its Debtors’ ledger, ABN AMRO COM FIN
mandates the Client to collect and receive payments in relation to the transferred receivables. This mandate shall not lead any
obligation of payment. Expenses of any kind shall remain payable by the Client.
The procedures have been communicated by the Client to ABN AMRO COM FIN during the diligences made prior to the signature
of this Agreement. Any significant change to such procedures must firstly be accepted by ABN AMRO COM FIN. The Client
commits to apply the credit and collection procedures as acted by ABN AMRO COPM FIN and generally to exercise due care to
protect ABN AMRO COM FIN’s rights.
Receipt of payments: payments received by the Client for the transferred receivables and payments by bank transfer shall be remitted
on the Client’s bank accounts referred to as the cashing accounts whose references are attached (appendix 7).
Promissory notes and bills of exchange shall be remitted on the dedicated bank account by the Client at the date of invoice issuing or
on receipt.
For whatever purposes it may serve, receivables credited to these accounts shall have firstly been transferred to ABN AMRO COM
FIN in accordance with articles L. 313-23 and following of the French Monetary and Financial code, pursuant to a security document
which shall be signed at the latest upon the date of the first remittance of receivables. The template for the assignment agreement for
receivables is appended as Appendix 3 and the protocols regarding the operation of the cashing accounts will be implemented
between the client, ABN AMRO COM FIN and the banks concerned. The references of the aforementioned account shall be stated on
original invoices. It is understood that any credit transfer corresponding to a transferred receivable, received on any bank account
other than the cashing bank account shall be immediately transferred to the dedicated account.
In case of deactivation of the financing line both parties commit to terminate the protocol of functioning of the cashing accounts as
soon as all operations initiated during the activation phase are settled.
As soon as the above mentioned operations are settled ABN AMRO COM gives up to the transfer of the receivables credited to these cashing
accounts.
Pursuant to the terms of a particular functioning agreement to be concluded with each of the aforementioned banks, the Client shall refrain from
operating those cashing accounts in debit or changing the domiciliation of the payments without having obtained ABN AMRO COM FIN’s prior
consent.
Disclosure: The Client shall report on the performance of the mandate, at the first remittance of receivables and at least twice a month, by
communicating to ABN AMRO COM FIN the information set out below in a format agreed by the Parties (ABN AMRO COM FIN shall
therefore supply the Client with a specifications document allowing it to prepare the corresponding files).
- The general ledger with the unmatched invoices of debtors included in the scope of the Agreement; the Client shall maintain the invoices
settled with bills of exchange payable on a future date in the general ledger submitted to ABN AMRO COM FIN.
- The up-to-date list of active debtors included in the scope of the application.
- List of the bad debts accounted over the past fortnight and registered in the “416” account category.
- The up-to-date statement of accruals for year-end rebates and advertising costs.
ABN AMRO COM FIN shall be entitled to conduct any necessary verification regarding the transferred receivables that could be on its premises
and on detailed documents, after the appointment made with the Client to be decided within 48 (forty-eight) business hours from the request by
ABN AMRO COM FIN, except in case of justified emergency. The Client shall provide all assistance necessary.
Cancellation of the mandate: ABN AMRO COM FIN may revoke the mandate 15 (fifteen) business days after a formal notice sent by registered
letter with acknowledgment of receipt, left unremedied, in the event of:
- Significant Unfavourable Event;
- dilutions (as defined in Preliminary Title) exceeding 10 % of the nominal amount including VAT of the transferred receivables, the
calculation being established according to a method communicated by ABN AMRO COM FIN and appended hereto (Appendix 4);
- arrears above 30 (thirty) days as from the due date exceeding 10% (ten percent) of the outstanding amount of transferred receivables, after
deduction of the unallocated credits, the calculation being established according to a method communicated by ABN AMRO COM FIN and
appended hereto (Appendix 4);
- DSO recorded in ABN AMRO COM FIN’s books of more than 75 (seventy-five) days, according to a calculation method communicated
by ABN AMRO COM FIN and appended hereto (Appendix 4).
If the mandate is revoked, ABN AMRO COM FIN shall have to take over collection of the transferred receivables; the Client hereby agrees to do
everything to help inform debtors of the revocation of the mandate and notify new payment account details.
Therefore, in the event of revocation, all invoices issued must strictly include the following text in a prominent position:
To ensure full settlement, payment is to be made to ABN AMRO Commercial Finance and sent to 39, Rue Anatole France 92532 Levallois-Perret
Cedex
Tel: +33 (0)1 41 49 93 93 / Fax: +33 (0)1 47 48 93 60
Bank details: Neuflize OBC – 3, Avenue Hoche 75008 PARIS
RIB: (sent under separate cover)
Receivable transferred to ABN AMRO Commercial Finance in accordance with articles L.313-23 to L.313-35 of the French Monetary and
Financial Code
In return of the taking over of the collection by ABN AMRO COM FIN, the factoring fee shall be increased by 0.20%. (zero point two percent)
and this pricing shall apply as of the effective date of mandate revocation and shall be applied to all receivable outstanding at this date.
In the event that ABN AMRO COM FIN receives payments relating to invoices whose title has not been transferred to it, even after termination
of this Agreement, shall be deemed to receive them on behalf of the Client and in the capacity of its agent.
In the event of a serious breach of contract by the Client, defined as any behaviour likely to prevent ABN AMRO COM FIN from benefiting
from its rights according to the present document, ABN AMRO COM FIN shall have the right to revoke the mandate without prior notice.
The Client undertakes not to revoke this power before the final balance of the current account has been established.
The Client grants ABN AMRO COM FIN full powers to endorse all payment title that might be made out to the order of the Client. The Client
undertakes not to revoke such powers for so long as its current account in ABN AMRO COM FIN’s books remains open. The power shall be
used by ABN AMRO COM FIN only in case the mandate is revoked.
In the case of the cancellation of the mandate the client commits to communicate to ABN AMRO COM FIN, at its request, a copy of the bills of
order and delivery within a reasonable time.
Article 6: Financing of receivables
The Client may at any time send a drawdown request to ABN AMRO COM FIN for a determined amount of up to a maximum of
€€ 60,000,000 (sixty million euros), which shall imperatively be paid by bank transfer in the invoicing currency during the afternoon of
the day of the request if the request has been sent prior to 10am and on the following day for all requests sent after 10am.
In the event that the Current Account balance available is greater than the receivables outstanding, ABN AMRO COM FIN shall
transfer the entire excess to a bank account, the details of which shall have been given by the Client, once this excess is greater than
€€ 10,000 (ten thousand euros).
The available balance is the result of the current account balance, minus non-financeable receivables, particularly made up of:
- unapproved receivables;
- disputes;
-
receivables bringing the financing of a single debtor up to 3% (three percent) of the total outstanding of eligible receivables
except agreement by ABN AMRO COM FIN of a list communicated by the client during the contract life;
- commissions due to ABN AMRO COM FIN, incl. VAT;
- year-end rebates due by the Client to debtors (it is specified that the amounts that are not claimed or deducted by the debtors
twelve months after they are payables are not deductible);
- constitution of the retention guarantee.
Article 7: Retention guarantee
The Client agrees to its current account being debited for the amounts necessary to build up a retention guarantee equal to 20%
(twenty percent) of the total outstanding Eligible Receivables transferred, by deduction of 20% (twenty percent) of the amount of
each remittance slip.
The total amount of the retention guarantee may under no circumstances be less than the highest amount of outstanding Eligible
Receivables transferred which have been payable for longer than 30 (thirty) days.
The retention guarantee is intended to cover the amount of dilutions and the bad debts.
The amounts retained within the retention guarantee shall be blocked as cash collateral and held by ABN AMRO COM FIN in whole
ownership and as a security. ABN AMRO COM FIN shall hold the credit balance of the retention guarantee in full ownership and
shall therefore be able to set off its repayment obligation of these amounts automatically and up to the level of the balance potentially
in debit in the Current Account at any time, and upon its definitive closure.
All excess amounts, where relevant, shall be returned to the Client.
Twice a month, ABN AMRO COM FIN shall withdraw the amount of the dilutions and the bad debts recorded over the period from
the retention guarantee.
In the event the total amount of dilutions and bad debts is higher than 8% (eight percent) of the transferred receivables, the rate of the
retention guarantee applied to future transfers may be increased by the difference between the percentage recorded and 8% (eight
percent).
Payments with subrogation transferred to the Client remain acquired for the fraction of the bad debts exceeding the amount of the
outstanding retention guarantee; if the amount of unpaid receivables at a certain date is in excess of the retention guarantee amount,
the resulting loss shall be borne by ABN AMRO COM FIN.
In order to neutralize the financial cost, the retention guarantee shall not be included in calculation of the financing fee.
The retention guarantee procedure is set out in Appendix 4
Article 8: Remuneration
8-1 Service fee:
ABN AMRO COM FIN shall receive a factoring fee, excl. VAT, of 0.17% (zero point one seven) of the net amount of the transferred
New Eligible Receivables (incl. VAT) at the time of each transfer.
The minimum annual fee comprising the factoring fee is fixed at €€ 120,000 (one hundred and twenty thousand euros) and is due for
the whole contractual year, beginning on the start date of this agreement and receipt of which may be divided into monthly fractions
at ABN AMRO COM FIN’s initiative.
Every six months, ABN AMRO COM FIN shall compare the fees effectively paid with the corresponding part of the minimum
annual fee, and, where relevant, shall carry out the corresponding regularisation so that the collected fee is equivalent to the minimum
annual fee.
In the event that in any contractual year ABN AMRO COM FIN receives as much back-up commission, as defined in Title 1, as
service commission, the two commissions shall be calculated on a pro-rata temporis basis.
8-2 Financing fee:
The financing shall result in a post accounted financing fee, subject to VAT and calculated on a pro rata basis at the rate of 1-month
Euribor + a margin of 2.40% (two point four percent), excluding VAT per annum. The benchmark rate for a given month shall be the
rate of the last working day of the previous month.
The financing fee, calculated day by day on the balance of the current account, shall be applied to any remaining amount due by the
Client while the current account is not discharged, it being specified that any payment received from a debtor shall decrease the
financing fee base as soon as it is booked in on the account.
For example, in order to comply with the law, article L.313-4 of the French Monetary and Financial Code, the global effective rate
applicable on 21/02/12 would be 3,02 % (three point zero two per cent) a year, for a financed amount of €€ 60,000,000 (sixty million
euros) (maximum amount available after application of the formula stated in article 7 paragraph 4).
In the mandate revocation scenario stipulated in article 5 of Title 2 above, all costs incurred for management, recovery and receipt by
ABN AMRO COM FIN of the transferred receivables shall be payable exclusively by the Client.
All present or future taxes, fiscal duties and related charges which may become due as a result of execution of this Agreement shall be
payable exclusively by the Client.
Other services shall be invoiced based on the applicable pricing (Appendix 7).
8-3 Activation/deactivation fees:
ABN AMRO COM FIN shall receive a fixed fee of €€ 10,000 (ten thousand euros) excl. VAT for every activation/deactivation of the
financing line.
Article 9: ABN AMRO ComFin Online service
ABN AMRO COM FIN shall make available to the Client a range of ABN AMRO ComFin Online services, allowing it to view and
manage its current accounts and debtor accounts, as well as to make financing and/or approval requests, via the secure website located
at the following URL address:
www.abnamrocommfin-direct.fr.
The Client declares that it has received and accepted the General Terms and Conditions for Use of the ABN AMRO ComFin Online
Service (Appendix 6), which are also accessible at the following URL address:
www.abnamrocommfin-direct.fr.
Subscription to the service is agreed for an unspecified term and shall end at the same time as this Agreement.
However, the Client may terminate the Service by sending ABN AMRO COM FIN a registered letter with acknowledgement of
receipt. Termination shall be effective three months following the end of the month in which notification letter is sent.
The Client acknowledges that ABN AMRO COM FIN may not be held liable towards it or towards third parties for any termination
of its access to the Service under the conditions set out above.
Subscription to the ABN AMRO ComFin Online Service shall be subject to the applicable pricing conditions.
Article 10: Disclosure obligation and verification right
ABN AMRO COM FIN shall give notice to the Client of transactions involving the transferred receivables by sending it the
corresponding statements and a monthly summary itemizing the transactions that took place during the previous month. The Client
shall have the use of the electronic data system of ABN AMRO COM FIN.
The Client shall give notice to ABN AMRO COM FIN at once of any significant unfavourable event or any plan likely to seriously
impact shareholding structure or any change of its Chairman or its Managing Director. The Client shall provide ABN AMRO COM
FIN with a certified balance sheet including the notes thereto and its profit and loss account upon their establishment but no later than
the first week of July, it being specified that these documents shall be communicated as drafts if they have not been submitted to the
annual general assembly within this time. A copy of the reports certified by the statutory auditors shall also be communicated upon
their availability.
The Client undertakes to supply to ABN AMRO COM FIN on request a copy of its general terms and conditions of sale along with
any amendments thereto.
On request, the Client also undertakes to send ABN AMRO COM FIN a copy of agreements relating to year-end rebates and
advertising costs, as well as a copy of monthly VAT declarations.
The Client undertakes to send ABN AMRO COM FIN a quarterly operating report in US GAAP, at the latest one month after the end
of the calendar quarter, along with the documents of similar nature requested by ABN AMRO COM FIN.
Independently of the audits referred to in Title 3 below, the Client authorises ABN AMRO COM FIN at any time to carry out any
verifications (particularly of accounting items) which it shall deem useful. These audits will generate no invoicing from ABN AMRO
COM FIN.
The Client undertakes to do the necessary to release ABN AMRO COM FIN from any liability in the event of loss or destruction of
the sold item and generally for all damage or injury caused to third parties.
Title 4: Audits
From the signature of this document ABN AMRO COM FIN shall conduct a quarterly audit at the Client’s premises.
The Client shall contribute €€ 3000 (three thousand euros) excl. VAT to the quarterly audit costs, per audit.
Title 5: Term and termination of the Agreement
The Agreement is agreed for a term of two years which may be renewed for a term to be defined by the Parties.
The Parties undertake to meet, at the latest three months before the expiry of the initial period, in order to discuss whether or not to
renew the Agreement.
ABN AMRO COM FIN may terminate the Agreement with 15 (fifteen) days’ notice, sent by registered letter with acknowledgment
of receipt in the event of:
- change of control of the Client or the OFFICE DEPOT Group;
- significant unfavourable event affecting the Client or the OFFICE DEPOT Group;
- any serious failure by the Client to fulfil its contractual obligations, including any actions by the Client that may prevent ABN
AMRO COM FIN’s rights from being exercised.
The Client may terminate the Agreement may with 15 (fifteen) days’ notice, sent by registered letter with acknowledgment of receipt
in case of any serious failure by ABN AMRO COM FIN to fulfil its contractual obligations, including any actions by ABN AMRO
COM FIN that may prevent the Client’s rights from being exercised.
Unless agreed otherwise by ABN AMRO Commercial Finance, outstanding financed amount during this notice period may not
exceed that which exists on the date of termination.
The termination of the Agreement, and after balancing of the transactions shall automatically lead to the termination of any collateral
granted in the framework of the aforementioned Agreement and ABN AMRO COM FIN undertakes to grant any release with effect at
the date of the balancing of the transactions.
Title 6: Transfer of this Agreement
Any total or partial transfer, in any form whatever, of the benefit of the provisions of this Agreement by the Client to a third party
shall be subject to the explicit prior consent of ABN AMRO COM FIN.
Title 7: Jurisdiction and applicable law
Any dispute relating to the execution, interpretation or termination of this Agreement shall be referred to the Paris Commercial Court
(Tribunal de Commerce), French law being exclusively applicable.
Title 8: Confidentiality
Each Party undertakes that for the duration of the Agreement and as from its end or termination to:
(i) Unless stipulated otherwise by law and/or regulations of the parties and/or group, maintain confidential the clauses of this
Agreement at all times and ensure that its employees, agents, representatives and external advisors do the same (by exception, the
financing partners of the Client shall be informed by ABN AMRO COM FIN of the existence of this Agreement);
(ii) Refrain from using or disclosing any information of a financial, technical or commercial nature that it could obtain in regard of the
business, the company, the goods, the services, the Clients and the suppliers of the other Party, with the exception of the information
that:
-
is publicly available without it being a result of a breach of the recipient Party; or
-
is made publicly available by an order, a directive or a decision from a court or another competent authority;
- were in possession by the recipient Party before its disclosure;
- would be supplied to such Party by a third party which did not acquire such information under a confidentiality undertaking.
Title 9: Effective start of the Agreement
The Agreement shall be effective once it has been signed.
Signed in Senlis, on February 24, 2012
In two original copies supplied to each Party.
Authorised signature and company stamp
/s/Michel Milicent
Michel Milicent
Managing Director
THE CLIENT
Write before the signature and company stamp the hand-written words “lu et approuvé” (“read and approved”).
/s/Arben Bora
Arben Bora
Managing Director
ABN AMRO Commercial Finance
AMENDMENT No. 1
To the Financing Agreement concluded on 24 February 2012
th
Exhibit 10.38
Between the undersigned:
ABN AMRO Commercial Finance
A French limited liability company (S.A.) with share capital of €€ 20,000,015
Whose head office is at: 39, rue Anatole France
92532 LEVALLOIS PERRET Cedex
Nanterre Trade and Companies Register 410 750 863
Hereinafter referred to as “ABN AMRO COM FIN”, party of the first part
And
OFFICE DEPOT BS
A French simplified joint-stock company (SAS) with share capital of €€ 140,803,200
Whose head office is at: 126, avenue du Poteau
60300 SENLIS
Trade and Companies Register 324 559 970
Hereinafter referred to as “the Client”, party of the second part
1 – The a) opening of accounts receivable in ARTICLE 5: Receivables Management is cancelled and replaced by the following:
a) Opening of accounts receivable
Prior to activation of the line of credit, and at the most once per week, the Client shall send ABN AMRO COM FIN the computer file
meeting the requirements of the specifications appended hereto (Appendix 1) of the debtors included in the scope of application, cited
in Article 1, comprising the following information:
- Account number of the debtor in the subledger
- Company name of the debtor
- SIREN number of the debtor
- Address and telephone number of the debtor
Only the SIREN number given by the Client is valid as identification of the debtor.
The debtors assigned by the Client benefit from an automatic outstanding loan set by default at €€ 80,000 (eighty thousand euros).
Clients who benefit from an outstanding loan exceeding €€ 80,000 (eighty thousand euros), which has been validated by ABN during
the last audit prior to activation of the line of credit, continue to benefit from this outstanding loan throughout the contract.
For any outstanding loan exceeding €€ 80,000 (eighty thousand euros) due from a debtor not subject to public law, the Client shall
transfer to ABN AMRO COM FIN any non-confidential information in its possession enabling it to assess solvency. With regard to
debtors whose credit limit exceeds €€ 80,000 (eighty thousand euros), ABN AMRO COM FIN agrees to inform the Client of its
approval within a maximum of two working days from when the information is sent by the Client. If it does not send the non-
confidential information in its possession, approval is deemed to be refused.
Approval granted to debtors whose credit limit exceeds €€ 80,000 can, at any time, be reduced or revoked by ABN AMRO COM FIN,
and the Client is informed of the decision by any means and as soon as possible. Such decisions have immediate effect, but the prior
approval in effect continues to apply to receivables corresponding to the services performed before the Client became aware of the
said decisions.
The Client acknowledges that the decisions of ABN AMRO COM FIN with regard to approval of credit are intended for it solely and
it must not pass on the information to third parties, including to the debtors.
2 – The f) Management mandate/recovery of receivables in ARTICLE 5 Receivables Management is cancelled and replaced by
the following:
f) Management mandate/recovery of receivables
Object of the mandate: ABN AMRO COM FIN, owner of the receivables, has the sole capacity to recover the receivables assigned by
the Client and to collect the payments corresponding to these receivables.
However, with regard to the results of the Client relating to management of its Debtors entry, ABN AMRO COM FIN authorises the
Client to recover and collect the payments relating to the receivables transferred. This mandate does not include any remuneration,
with the costs and outlay of any kind remaining payable by the Client.
The Client informed ABN AMRO COM FIN about the procedures during the audit prior to signing this Agreement. Any significant
change to the said procedures must be subject to the prior consent of ABN AMRO COM FIN. The Client is obligated to apply its
credit and recovery procedures such as noted by ABN AMRO COM FIN and, in general, to pay utmost attention to safeguarding the
rights of ABN AMRO COM FIN.
Collection of payments: the payments received by the Client, corresponding to the receivables transferred, and the payments by
transfer will be paid by banker’s order into the Client’s bank accounts opened with the Banks who are listed in Appendix 7 hereto,
referred to as Collection Accounts.
Recovered bills of exchange and bills of exchange will be submitted to the banks referred to above by the Client from issuance of the
related invoice or from their receipt.
For all intents and purposes, the receivables in return for the balances of these accounts will have been assigned beforehand as a
guarantee to ABN AMRO COM FIN pursuant to Articles L. 313-23 et seq. of the French Monetary and Financial Code as a surety
document which must be signed at the latest on the date of the first submission of receivables. The model assignment document as a
guarantee of professional receivables is shown in Appendix 3.
An agreement will be concluded between the Client and ABN AMRO COM FIN for the purposes of officially setting out the
operating rules of the collection accounts.
The references of the said account will be specified on the invoices. It is agreed that any transfer corresponding to a transferred
receivable, received in any account other than the Collection Account, must be transferred immediately to the latter.
In the event of deactivation of the credit line, the parties agree, from liquidation of the operations initiated during the activation phase,
to put an end to the operating agreements of the collection accounts.
Furthermore, ABN AMRO COM FIN agrees to waive the assignments of receivables in return for the balances of the bank accounts
from liquidation of the operations.
Under the terms of a special operating Agreement with the bank, the Client is prohibited from having the said Collection Account
operate in debit or from modifying the address of payments without the prior consent of ABN AMRO COM FIN.
Information: The Client will report, on first submission of receivables and at least twice per month, on the performance of the
mandate by sending ABN AMRO COM FIN, in the form agreed between the Parties, the elements listed below (for this purpose,
ABN AMRO COM FIN provides the Client with specifications enabling it to set the corresponding files):
- The general ledger for unreconciled entries of the debtors included in the scope of application; the Client will keep in the general
ledger sent to ABN AMRO COM FIN invoices cleared by bills of exchange falling due.
- The updated list of debtors included in the scope of application.
- The list of defaulting debtors and debtors downgraded to “416” during the past two weeks.
- An updated statement of provisions for rebates on turnover and advertising costs.
ABN AMRO COM FIN is authorised to launch any investigation that it deems necessary, including by an on-site inspection and of
documents after making an appointment with the Client, which must be decided within 48 (forty-eight) working hours from the
request of ABN AMRO COM FIN, unless there is proven urgency. The Client will provide all the assistance required.
Revocation of the mandate: ABN AMRO COM FIN can revoke the mandate, 15 (fifteen) working days after notice has gone
unheeded, by registered letter with acknowledgement of receipt, in the event of:
- A Significant Unfavourable Event;
- Dilution (such as set out in the Introductory Section) exceeding 10% (ten percent) of the nominal amount including taxes of the
transferred receivables, with the calculation being established in accordance with a method notified by ABN AMRO COM FIN and
appended hereto (Appendix 4);
- outstanding payments beyond 30 (thirty) days of the due date exceeding 10% (ten percent) of the total outstanding receivables
transferred after attributing unallocated credits, the calculation being established in accordance with a method notified by ABN
AMRO COM FIN and appended hereto (Appendix 4);
- average payment period of receivables noted in the books of ABN AMRO COM FIN exceeding 75 (seventy-five) days, in
accordance with a calculation method notified by ABN AMRO COM FIN and appended hereto (Appendix 4);
In the event of revocation of the mandate, ABN AMRO COM FIN will directly take charge of recovery of the transferred receivables;
the Client agrees in advance to provide all the help needed to inform the debtors of the revocation of the mandate and to provide the
details of its new payment account.
Therefore, in the event of revocation, the following text must be shown clearly on all copies of invoices:
To be in full discharge, payment to be made out to ABN AMRO Commercial Finance to be sent to 39, rue Anatole France 92532
Levallois-Perret Cedex Tel: 01 41 49 93 93 / Fax: 01 47 48 93 60 Bank address: Banque Neuflize OBC - 3, avenue Hoche 75008
PARIS
Bank account particulars: (sent in a separate letter)
Receivable assigned to ABN AMRO Commercial Finance pursuant to Articles L.313-23 to L.313-35 of the French Monetary and
Financial Code.
In return for taking charge of the recovery by ABN AMRO COM FIN, the Service Commission will be increased by 0.20% (zero
point two percent) and applied to the receivables comprising the outstanding amounts from the effective date of revocation of the
mandate.
ABN AMRO COM FIN, in the event that it receives, even after termination of this Agreement, payments relating to invoices,
ownership of which has not been transferred to it beforehand, is deemed to receive them on behalf of the Client and in its capacity as
representative of the latter.
In the event the Client seriously breaches its contractual obligations, including all behaviour of the Client that may have the effect of
preventing ABN AMRO COM FIN from fulfilling its rights hereunder, ABN AMRO COM FIN can revoke the mandate without
notice.
The Client must not revoke this authorisation before a final balance of the Current Account has been drawn up.
Lastly, for all intents and purposes, the Client grants power to ABN AMRO COM FIN to endorse the orders to pay which could be
made out to it and must not revoke this power of endorsement insofar as the Current Account in the books of ABN AMRO COM FIN
are not closed. This power will be exercised by ABN AMRO COM FIN only in the case of revocation of the mandate.
In the event of revocation of the mandate, the Client agrees to send ABN AMRO COM FIN, upon request, a copy of the proof of
deliveries and invoices, within a reasonable period.
3 – The other provisions of the financing agreement concluded on 24 February 2012 remain unchanged.
th
Drawn up in Senlis, on 24/02/2012
In two original copies issued to each of the parties.
THE CLIENT
Write the following by hand above the signature and company stamp
Read and approved
/s/ Michel Milcent
Name of the signatory: Michel Milcent
OFFICE DEPOT BS
A French simplified joint-stock company (SAS) with share capital of €€ 140,803,200
126, avenue du Poteau
60300 SENLIS
COMPIEGNE Trade and Companies Register 324 559 970
Position: Managing Director
ABN AMRO Commercial
Write the following by hand above the signature and company stamp
Read and approved
/s/Arben Bora
Name of the signatory: Arben Bora
ABN AMRO Commercial Finance
Position: Managing Director
ABN AMRO Commercial Finance
39, rue Anatole France
92532 Levallois-Perret Cedex
Tel.: 01 41 49 93 93 SIRET 41075086300020
[signature]
LIST OF OFFICE DEPOT INC.’S SIGNIFICANT SUBSIDIARIES
Name
The Office Club, Inc.
Viking Office Products, Inc.
Computers4Sure.com, Inc.
Solutions4Sure.com, Inc.
4Sure.com, Inc.
eDepot, LLC
OD International, Inc.
Office Depot Delaware Overseas Finance No. 1, LLC
Japan Office Supplies, LLC
OD France, LLC
ODV France, LLC
Swinton Avenue Trading Limited, Inc.
Neighborhood Retail Development Fund, LLC
HC Land Company LLC
2300 South Congress LLC
Notus Aviation, Inc.
OD Brazil Holdings, LLC
OD Medical Solutions LLC
Office Depot N.A. Shared Services LLC
Office Depot (Netherlands) LLC
Office Depot Foreign Holdings GP, LLC
Office Depot Foreign Holdings LP, LLC
North American Card and Coupon Services, LLC
Viking Direkt GesmbH
Office Depot International BVBA
Office Depot Overseas Holding Limited
Office Depot Brasil Participacoes Limitada
AsiaEC.com Limited
The Office Depot Network Technology Ltd.
Office Depot Merchandising (Shenzhen) Company Ltd.
OD Colombia S.A.S.
Ofixpres S.A.S.
Erial BQ S.A.
Fesa Formas Eficientes S.A.
OD El Salvador, Ltda. de C.V.
Ofixpres S.A. de C.V.
Office Depot s.r.o.
Office Depot France SNC
OD Participations (France) SAS
Europa S.A.S.
Office Depot BS
Office Depot (Holding) France SNC
Monster Ink France SNC
Office Depot Deutschland GmbH
Guilbert Beteiligungsholding GmbH
Hutter GmbH
Exhibit 21
Jurisdiction of Incorporation
California
California
Connecticut
Connecticut
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Virginia
Austria
Belgium
Bermuda
Brazil
Cayman Islands
China
China
Colombia
Columbia
Costa Rica
Costa Rica
El Salvador
El Salvador
Czech Republic
France
France
France
France
France
France
Germany
Germany
Germany
NEWGOH Immobilienverwaltung GmbH
Office Depot Service – und BeteiligungsGmbH&Co.KG
OD Guatemala y Companía. Limitada
OD Honduras S de RL
Office Depot Asia Holding Limited
Office Depot Global Sourcing Ltd. (f.k.a Office Supply Solutions (Hong Kong) Ltd.)
Office Depot Reliance Supply Solutions Private Limited
Office Depot Private Limited
Viking Direct (Ireland) Limited
Viking Finance (Ireland) Limited
Office Depot Ireland Limited
Office Depot Italia S.r.l.
Viking Holding Italia S.r.l. (f.k.a Viking Office Products S.r.l.)
VPC System S.r.l
Office Depot Korea Co. Limited
Guilbert Luxembourg S.A.R.L.
OD International (Luxembourg) Finance S.A.R.L.
Office Depot de Mexico SA de CV
Centro de Apoyo SA de CV
ODG Caribe SA de CV
Servicios Administrativos Office Depot SA de CV
Centro de Apoyo Caribe SA de CV
Formas Eficientes, SA de CV
Papelera General, SA de CV
Viking Direct B.V.
Office Depot B.V.
Office Depot International B.V.
Office Depot Latin American Holdings B.V.
Office Depot Finance B.V.
Office Depot Netherland B.V.
Office Depot (Netherlands) C.V.
Heteyo Holdings BV.
Guilbert International B.V.
Office Depot (Operations) Holding B.V.
Office Depot Coöperatief W.A.
Office Depot Europe B.V.
Xtreme Office B.V.
OD Panama SA
Office Depot Poland Sp z.o.o.
Office Depot Puerto Rico, LLC
Office Depot Service Center SRL
Office Depot s.r.o.
Office Depot S.L.
Office Depot Sweden (Holding) AB
Offie Depot Svenska AB (f.k.a Frans Svanstrom & Co AB)
Killbergs Kontorsvaruhus AB
Wettergrens i Goteborg AB
Wettergrens Kontorscenter AB
Office Depot GmbH
Office Depot Holding GmbH
Office Depot International (UK) Limited
Germany
Germany
Guatemala
Honduras
Hong Kong
Hong Kong
India
India
Ireland
Ireland
Ireland
Italy
Italy
Italy
Korea (South)
Luxembourg
Luxembourg
Mexico
Mexico
Mexico
Mexico
Mexico
Mexico
Mexico
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Panama
Poland
Puerto Rico
Romania
Slovak Republic (Slovakia)
Spain
Sweden
Sweden
Sweden
Sweden
Sweden
Switzerland
Switzerland
United Kingdom
Viking Direct (Holdings) Limited
Office Depot UK Limited
Guilbert UK Pension Trustees Ltd
Guilbert UK Holdings Ltd
Niceday Distribution Centre Ltd
Office 1 (1995) Ltd
Office 1 Ltd
Reliable UK Ltd
Office Depot (Holdings) Ltd.
Office Depot (Holdings) 2 Ltd.
Office Depot Europe Holdings Ltd.
Office Depot (Holdings) 3 Ltd.
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
* Ownership may consist of one subsidiary or any combination of subsidiaries, which may include Office Depot, Inc.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-45591, No. 333-59603, No. 333-63507, No. 333-
68081, No. 333-69831, No. 333-41060, No. 333-80123, No. 333-90305, No. 333-123527, No. 333-144936, and No. 333-177496 on
Form S-8 of our report relating to the financial statements and financial statement schedule of Office Depot, Inc., and the
effectiveness of Office Depot, Inc.’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of
Office Depot, Inc. for the fiscal year ended December 29, 2012.
Exhibit 23.1
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Boca Raton, Florida
February 20, 2013
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement No. 333-45591, No. 333-59603, No. 333-63507, No. 333-
68081, No. 333-69831, No. 333-41060, No. 333-80123, No. 333-90305, No. 333-123527, No. 333-144936, and No. 333-177496 on
Form S-8 of our report dated February 15, 2013 relating to the consolidated financial statements of Office Depot de México, S. A. de
C. V. (which report expresses an unqualified opinion and includes an explanatory paragraph regarding the fact that Mexican Financial
Reporting Standards vary from accounting principles generally accepted in the United States of America, the nature and effects of
which are presented in Note 18 in such consolidated financial statements), appearing in this Annual Report on Form 10-K of Office
Depot, Inc. for the fiscal year ended December 29, 2012.
Exhibit 23.2
Galaz, Yamazaki, Ruiz Urquiza, S. C.
Member of Deloitte Touche Tohmatsu Limited
/s/ C. P. C. Ma. Isabel Romero Miranda
February 20, 2013
México City, México
Exhibit 31.1
I, Neil R. Austrian, certify that:
1. I have reviewed this annual report on Form 10-K of Office Depot, Inc.;
Rule 13a-14(a)/15d-14(a) Certification
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
/s/ NEIL R. AUSTRIAN
Neil R. Austrian
Chief Executive Officer
Date: February 20, 2013
Exhibit 31.2
I, Michael D. Newman, certify that:
1. I have reviewed this annual report on Form 10-K of Office Depot, Inc.;
Rule 13a-14(a)/15d-14(a) Certification
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
/s/ MICHAEL D. NEWMAN
Michael D. Newman
Executive Vice President and Chief Financial Officer
Date: February 20, 2013
Office Depot, Inc.
Certification of CEO and CFO Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32
In connection with the Annual Report on Form 10-K of Office Depot, Inc. (the “Company”) for the fiscal year ended December 29,
2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Neil R. Austrian, as Chief Executive
Officer of the Company, and Michael D. Newman, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18
U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to each officer’s knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
/s/ NEIL R. AUSTRIAN
Name: Neil R. Austrian
Title: Chief Executive Officer
Date: February 20, 2013
/s/ MICHAEL D. NEWMAN
Name: Michael D. Newman
Title: Chief Financial Officer
Date: February 20, 2013
A signed original of this written statement required by Section 1350 of Title 18 of the United States Code has been provided to the
Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished as an exhibit to the Report pursuant to Item 601(b)(32) of Regulation S-K and
Section 1350 of Title 18 of the United States Code and, accordingly, is not being filed with the Securities and Exchange Commission
as part of the Report and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the
Securities Exchange Act of 1934 (whether made before or after the date of the Report, irrespective of any general incorporation
language contained in such filing).
Office Depot de México, S. A. de C. V. and Subsidiaries
(A 50% Owned Subsidiary of Grupo Gigante,
S. A. B. de C. V. and 50% Owned Affiliate of Office Depot Delaware Overseas Finance 1, LLC)
Consolidated Financial Statements for the Years Ended December 31, 2012, 2011 and 2010 (Unaudited) and Independent Auditors’
Report Dated February 15, 2013
Exhibit 99
Office Depot de México, S. A. de C. V. and Subsidiaries
(A 50% Owned Subsidiary of Grupo Gigante, S. A. B. de C. V.
and 50% Owned Affiliate of Office Depot Delaware Overseas Finance 1, LLC)
Independent Auditors’ Report and Consolidated
Financial Statements for 2012, 2011 and 2010
(Unaudited)
Table of contents
Independent Auditors’ Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
1
2
3
4
5
6
Independent Auditors’ Report to the Board
of Directors and Stockholders of Office
Depot de México, S. A. de C. V.
We have audited the accompanying consolidated financial statements of Office Depot de México, S. A. de C. V. and its subsidiaries
(the “Company”), which comprise the consolidated balance sheets as of December 31, 2012 and 2011, and the related consolidated
statements of income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the
consolidated financial statements.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
Mexican Financial Reporting Standards; this includes the design, implementation, and maintenance of internal control relevant to the
preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud
or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in
accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement
of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers
internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Office Depot de México, S. A. de C. V. and its subsidiaries as of December 31, 2012 and 2011, and the results of their operations and
their cash flows for the years then ended in accordance with Mexican Financial Reporting Standards.
MFRS vary in certain significant respects from accounting principles generally accepted in the United States of America (“U.S.
GAAP”). Information relating to the nature and effect of such differences is presented in Note 18 to the accompanying consolidated
financial statements.
The accompanying consolidated financial statements have been translated into English for the convenience of readers.
Galaz, Yamazaki, Ruiz Urquiza, S. C.
Member of Deloitte Touche Tohmatsu Limited
/s/ C. P. C. Ma. Isabel Romero Miranda
February 15, 2013
México City, México
Office Depot de México, S. A. de C. V. and Subsidiaries
(A 50% Owned Subsidiary of Grupo Gigante, S. A. B. de C. V.
and 50% Owned Affiliate of Office Depot Delaware Overseas Finance 1, LLC)
Consolidated Balance Sheets
As of December 31, 2012 and 2011
(In thousands of Mexican pesos)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable and recoverable taxes – Net
Due from related parties
Inventories – Net
Prepaid expenses
Total current assets
Property, equipment and leasehold improvements – Net
Deferred income taxes
Deferred statutory employee profit sharing
Intangible assets – Net
Goodwill
Total
Liabilities and stockholders’ equity
Current liabilities:
Trade accounts payable
Office Depot Asia Holding Limited – Related party
Accrued expenses
Taxes payable
Total current liabilities
Employee benefits
Total liabilities
Stockholders’ equity:
Common stock
Retained earnings
Foreign currency translation
Total stockholders’ equity
Total
See accompanying notes to consolidated financial statements.
2
2012
2011
$ 348,761 $ 302,656
862,920
224
2,933,151
105,851
4,204,802
1,033,617
307
3,368,349
94,436
4,845,470
4,327,788
98,288
808
78,295
61,648
4,133,426
27,224
798
100,149
61,648
$9,412,297 $8,528,047
$2,208,524 $2,185,112
5,898
374,817
96,008
2,661,835
17,309
414,388
118,178
2,758,399
44,951
2,803,350
40,775
2,702,610
1,266,239
5,204,895
137,813
6,608,947
1,266,239
4,385,233
173,965
5,825,437
$9,412,297 $8,528,047
Office Depot de México, S. A. de C. V. and Subsidiaries
(A 50% Owned Subsidiary of Grupo Gigante, S. A. B. de C. V.
and a 50% Owned Affiliate of Office Depot Delaware Overseas Finance 1, LLC)
Consolidated Statements of Income
For the years ended December 31, 2012, 2011 and 2010 (Unaudited)
(In thousands of Mexican pesos)
Revenues:
Net sales
Other
Costs and expenses:
Cost of sales
Selling, administrative and general expenses
Other expenses
Net comprehensive financing cost:
Bank commissions
Interest expense
Interest income
Exchange (loss) gain
Other financial income – Net
Monetary position gain
Income before income taxes
Income tax expense
Consolidated net income
See accompanying notes to consolidated financial statements.
2012
2011
2010
(Unaudited)
$15,086,057 $14,051,901 $12,157,735
76,289
12,234,024
70,722
14,122,623
47,048
15,133,105
10,482,201
3,260,774
13,742,975
9,941,600
2,912,261
12,853,861
8,605,431
2,420,183
11,025,614
(588)
(39,334)
—
(212,687)
(5,283)
9,352
(7,456)
56,873
—
(159,201)
(172,290)
(21,580)
10,486
5,107
74,047
—
(104,230)
(155,184)
(6,684)
12,391
(1,065)
71,773
1,506
(77,263)
1,230,341
410,679
819,662 $
1,125,198
396,936
728,262 $
1,131,147
354,031
777,116
$
3
Office Depot de México, S. A. de C. V. and Subsidiaries
(A 50% Owned Subsidiary of Grupo Gigante, S. A. B. de C. V.
and a 50% Owned Affiliate of Office Depot Delaware Overseas Finance 1, LLC)
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2012, 2011 and 2010 (Unaudited)
(In thousands of Mexican pesos)
Balances as of January 1, 2010 (Unaudited)
Comprehensive income (Unaudited)
Balances as of December 31, 2010 (Unaudited)
Dividends paid ($10.81 pesos per share)
Comprehensive income
Balances as of December 31, 2011
Comprehensive income
Balances as of December 31, 2012
Common
Stock
$1,266,239
—
1,266,239
—
—
1,266,239
—
$1,266,239
Retained
Earnings
$3,479,855
777,116
4,256,971
(600,000)
728,262
4,385,233
819,662
$5,204,895
Foreign Currency
Translation
$
$
41,400
(18,334)
23,066
—
150,899
173,965
(36,152)
137,813
See accompanying notes to consolidated financial statements.
4
$
Total Stockholders’
Equity
4,787,494
758,782
5,546,276
(600,000)
879,161
5,825,437
783,510
6,608,947
$
Office Depot de México, S. A. de C. V. and Subsidiaries
(A 50% Owned Subsidiary of Grupo Gigante, S. A. B. de C. V.
and a 50% Owned Affiliate of Office Depot Delaware Overseas Finance 1, LLC)
Consolidated Statements of Cash Flows
For the years ended December 31, 2012, 2011 and 2010 (Unaudited)
(In thousands of Mexican pesos)
Operating activities:
Income before income taxes
Items related to investing activities:
Depreciation and amortization
(Gain) loss on sale of fixed assets
Interest income
Other
Items related to financing activities:
Interest expense
Accounts receivable and recoverable taxes
Due to/from related parties – Net
Inventories
Prepaid expenses
Trade accounts payable
Accrued expenses
Income taxes paid
Other liabilities
Net cash provided by operating activities
Investing activities:
Purchases of equipment and investments in leasehold improvements
Acquisition of subsidiaries, net of cash acquired
Purchase of trademark
Proceeds from sale of equipment
Interest received
Net cash used in investing activities
Financing activities:
Borrowings from related party
Banks borrowings
Repayments to related party
Repayments of bank borrowings
Interest paid
Dividends paid
Net cash used in financing activities
Net (decrease) increase in cash and cash equivalents
Effects of exchange rate changes on cash
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
See accompanying notes to consolidated financial statements.
5
2012
2011
2010
(Unaudited)
$1,230,341 $1,125,198 $1,131,147
329,049
(1,195)
(9,352)
—
302,872
(1,147)
(10,486)
(708)
262,653
15,520
(12,391)
—
5,283
1,554,126
(170,697)
17,226
(435,198)
11,415
49,430
(130,535)
(289,477)
4,176
610,466
21,580
1,437,309
(51,571)
(527)
(204,088)
17,365
54,145
(88,054)
(251,339)
(20,136)
893,104
6,684
1,403,613
(95,802)
463
(495,636)
(51,692)
208,820
(143,557)
(218,166)
(17,468)
590,575
(538,834)
—
—
6,556
9,352
(522,926)
(529,491)
—
—
6,321
10,486
(512,684)
(321,450)
(178,353)
(10,786)
2,876
12,391
(495,322)
550,000
—
(550,000)
—
(5,283)
—
(5,283)
400,000
100,000
(400,000)
(100,000)
(21,580)
(600,000)
(621,580)
—
100,000
—
(100,000)
(6,684)
—
(6,684)
82,257
(36,152)
302,656
88,569
(17,870)
322,218
$ 348,761 $ 302,656 $ 392,917
(241,160)
150,899
392,917
Office Depot de México, S. A. de C. V. and Subsidiaries
(A 50% Owned Subsidiary of Grupo Gigante, S. A. B. de C. V.
and a 50% Owned Affiliate of Office Depot Delaware Overseas Finance 1, LLC)
Notes to Consolidated Financial Statements
For the years ended December 31, 2012, 2011 and 2010 (Unaudited)
(In thousands of Mexican pesos, unless stated otherwise)
1. Nature of business
Office Depot de México, S. A. de C. V. (“ODM”, a 50% owned subsidiary of Grupo Gigante, S. A. B. de C. V. and 50% owned
affiliate of Office Depot Delaware Overseas Finance 1, LLC) and subsidiaries (collectively, the “Company”) is a chain of 215
stores in Mexico, five in Costa Rica, eight in Guatemala, three in El Salvador, two in Honduras, three in Panama, 12 in
Colombia, nine distribution centers, a cross dock in Mexico that sells office supplies and electronic goods, and a printing service
specializing in the retail and catalogue business for office supplies.
2.
Basis of presentation
a.
Comparability—The most significant events and transactions affecting comparability of the accompanying consolidated
financial statements are discussed below:
Acquisition of subsidiaries: On September 30, 2010, ODM acquired, directly and indirectly through its subsidiaries, 100%
of the voting common stock of the companies Formas Eficientes, S. A. de C. V. and Papelera General, S. A. de C. V. in
Mexico, Ofixpres, S. A. S. in Colombia, Ofixpres, S. A. de C. V. in El Salvador; and FESA Formas Eficientes, S. A. in
Costa Rica. The primary activities of these companies include the distribution and handling of inventories as well as
fabrication of printed forms. The activities of the acquired companies are aligned with the business strategy of ODM to
increase sales and augment presence in Latin America.
The results of operations of the entities were included in the Company’s consolidated financial statements beginning
October 1, 2010.
b.
Consideration paid, in cash, totaled U.S.$15,408 million, equivalent to $192,293
Explanation for translation into English—The accompanying consolidated financial statements have been translated from
Spanish into English for use outside of Mexico. These consolidated financial statements are presented on the basis of
Mexican Financial Reporting Standards (“MFRS”), individually referred to as Normas de Información Financiera or
“NIFs”). Certain accounting practices applied by the Company that conform with MFRS may not conform with accounting
principles generally accepted in the country of use.
c. Monetary unit of the financial statements—The consolidated financial statements and notes as of December 31, 2012 and
2011 and for the years ended December 31, 2012, 2011 and 2010, include balances and transactions denominated in
Mexican pesos of different purchasing power.
6
d.
Consolidation of financial statements—The consolidated financial statements include the financial statements of ODM
and those of its subsidiaries over which it exercises control. ODM’s shareholding percentage in their capital stock is shown
below:
Direct Subsidiaries:
Company
Equity
Activity
Centro de Apoyo, S. A. de C. V.
99.998%
O. D. G. Caribe, S. A. de C. V.
99.999999%
Servicios Administrativos Office Depot, S. A.
de C. V.
OD Guatemala y Cía. LTDA
Erial BQ, S. A.
OD El Salvador, LTDA de C. V.
OD Honduras, S. de R. L.
OD Panamá, S. A.
Formas Eficientes, S. A. de C. V.
FESA Formas Eficientes, S. A.
Ofixpres, S.A. de C.V.
99.84%
99.9999%
100%
99.99%
99.999%
100%
99.922%
100%
99.939%
7
A Mexican real estate company, which
owns properties where several stores
of ODM are located.
A Mexican holding company of
subsidiaries specialized in the retail,
catalogue business for office supplies,
located in Colombia.
Provides administrative services to
Mexican related parties, located in
Mexico.
Operates stores specializing in the sale of
services and office supplies, located in
Guatemala.
Operates stores specializing in the sale of
services and office supplies, located in
Costa Rica.
Operates stores specializing in the sale of
services and office supplies, located in
El Salvador.
Operates stores specializing in the sale of
services and office supplies, located in
Honduras.
Operates stores specializing in the sale of
services and office supplies, located in
Panama.
The distribution and handling of office
supplies inventories as well as printed
forms, located in Mexico.
The distribution and handling of office
supplies inventories as well printed
forms, located in Costa Rica.
The distribution and handling of office
supplies inventories as well as printed
forms, located in El Salvador.
Indirect subsidiaries:
Company
Equity
Activity
Centro de Apoyo Caribe S. A. de C. V.
90.00%
OD Colombia, S. A. S.
Papelera General, S. A. de C. V.
Ofixpres, S. A. S.
89.90%
99.99%
100%
The acquisition and leasing of all types
of real estate. This company has not
initiated operations as of the date of
these consolidated financial
statements (subsidiary of Centro de
Apoyo, S. A. de C. V.), located in
Mexico.
Stores specializing in the sale of services
and office supplies (subsidiary of
ODG Caribe, S. A. de C. V.), located
in Colombia.
The distribution of office supplies
(subsidiary of Formas Eficientes,
S. A. de C. V.), located in México.
The distribution and handling of office
supplies inventories as well as
fabrication of printed forms, located
in Colombia, (subsidiary of OD
Colombia, S. A. S.).
e.
Significant intercompany balances and transactions have been eliminated in the accompanying consolidated financial
statements.
Translation of financial statements of foreign subsidiaries—To consolidate financial statements of foreign subsidiaries,
the accounting policies of the foreign entity are converted to MFRS using the currency in which transactions are recorded.
As the functional currency is the same as the currency in which transactions are recorded for all of the Company’s foreign
operations, the financial statements are subsequently translated to Mexican pesos using the following exchange rates: 1) the
closing exchange rate in effect at the balance sheet date for assets and liabilities; 2) historical exchange rates for
stockholders’ equity, and 3) the rate on the date of accrual of revenues, costs and expenses. Translation effects are recorded
in stockholders’ equity.
The currency in which transactions are recorded and the functional currency of foreign operations and the exchange rates
used in the different translation processes are as follows:
Company
OD Guatemala y Cía. LTDA
Erial BQ, S. A.
FESA Formas Eficientes, S. A.
OD El Salvador, LTDA de C. V.
Ofixpres, S.A. de C.V.
OD Honduras, S. de R. L.
OD Panamá, S. A.
OD Colombia, S. A. S.
Ofixpres, S. A. S.
Recording currency
Quetzal
Colon
Colon
US dollars
US dollars
Lempiras
US Dollars
Colombian pesos
Colombian pesos
Functional
currency
Quetzal
Colon
Colon
US dollars
US dollars
Lempiras
US Dollars
Colombian pesos
Colombian pesos
Exchange rate to
translate from
functional currency to
Mexican pesos
1.6436
0.0253
0.0253
12.9880
12.9880
0.6508
12.9880
0.0073
0.0073
f.
Comprehensive income—Represents changes in stockholders’ equity during the year, for concepts other than distributions
and activity in contributed common stock, and is comprised of the net income of the year, plus other comprehensive
income items of the same period, which are presented directly in stockholders’ equity without affecting the consolidated
statements of income. Other comprehensive income is represented solely by the translation effects of operations of foreign
entities.
g.
Classification of costs and expenses—Costs and expenses presented in the consolidated statements of income were
classified according to their function. Consequently, cost of sales is presented separately from the other costs and expenses.
8
3.
Summary of significant accounting policies
The accompanying consolidated financial statements have been prepared in conformity with MFRS, which require that
management make certain estimates and use certain assumptions that affect the amounts reported in the consolidated financial
statements and their related disclosures; however, actual results may differ from such estimates. The Company’s management,
upon applying professional judgment, considers that estimates made and assumptions used were adequate under the
circumstances. The significant accounting policies of the Company are as follows:
a.
Accounting changes -
Beginning January 1, 2012, the Company adopted the following new NIF:
NIF C-6, Property, Plant and Equipment.—This standard establishes the obligation to separately depreciate
significant components that comprise a single item of property, plant and equipment.
NIF C-15, Impairment of Long-Lived Assets—Eliminates a) the restriction that an asset should not be in use to be
classified as available for sale and b) the reversal of impairment losses of goodwill. It also establishes that
impairment losses of long-lived assets should be presented in the statements of income as costs or operating
expenses depending where they correspond to and not within other income or expenses.
The adoption of these new standards did not have material effects in the accompanying consolidated financial
statements.
b.
c.
d.
e.
f.
Recognition of the effects of inflation—Beginning on January 1, 2008, the Company discontinued recognition of the
effects of inflation in its consolidated financial statements for those entities that do not operate in an inflationary
environment, as that term is defined in MFRS. However, assets and stockholders’ equity include the restatement effects
recognized by those entities through December 31, 2007. The cumulative inflation rate in Mexico for the three fiscal years
prior to those ended December 31, 2012, 2011 and 2010 was 12.26%, 15.19% and 14.48%, respectively, for which reason
the economic environment continued to be considered non-inflationary in all periods. Inflation rates for the years ended
2012, 2011 and 2010 were 3.57%, 3.82% and 4.40%, respectively.
Cash and cash equivalents—Cash and cash equivalents consist mainly of bank deposits in checking accounts and readily
available daily investments of cash surpluses. Cash and cash equivalents are stated at nominal value plus accrued yields,
which are recognized in results as they accrue. The Company considers all short-term highly-liquid debt instruments
purchased with an original maturity of three months or less to be cash equivalents.
Concentration of credit risk—The Company sells products to customers primarily in the retail trade in Mexico. The
Company conducts periodic evaluations of its customers’ financial condition and generally does not require collateral. The
Company does not believe that significant risk of loss from a concentration of credit risk exists given the large number of
customers that comprise its customer base and their geographical dispersion. The Company also believes that its potential
credit risk is adequately covered by the allowance for doubtful accounts.
Inventories and cost of sales—Inventories are stated at the lower of cost or realizable value. Cost is determined using the
average cost method.
Property, equipment and leasehold improvements—Property, equipment and leasehold improvements are recorded at
acquisition cost. Balances from acquisitions made through December 31, 2007, were restated for the effects of inflation by
applying factors derived from the NCPI (National Consumer Price Index) through that date.
Depreciation is calculated using the straight-line method based on the useful lives of the related assets, as follows:
Buildings
Leasehold improvements
Furniture and fixtures
Computers
Vehicles
Average years
40
9-25
4-10
4
4-8
The useful lives of fixed assets are reviewed at least annually to determine whether events and circumstances warrant a
revision.
9
g.
Impairment of long-lived assets in use—The Company reviews the carrying amounts of long-lived asset in use, other than
goodwill and intangible assets with indefinite useful lives, when an impairment indicator suggests that such amounts might
not be recoverable, considering the greater of the present value of future net cash flows or the net sales price upon disposal.
Impairment is recorded when the carrying amounts exceed the greater of the aforementioned amounts. Impairment
indicators considered for these purposes are, among others, operating losses or negative cash flows in the period if they are
combined with a history or projection of losses, depreciation and amortization charged to results, which in percentage
terms in relation to revenues are substantially higher than that of previous years, obsolescence, competition and other legal
and economic factors.
h. Goodwill and intangible assets—Goodwill represents the excess of consideration paid over the fair value of the net assets
acquired in subsidiary shares, as of the date of acquisition. Through December 31, 2007, goodwill was restated for the
effects of inflation using the NCPI. Intangible assets with indefinite useful lives are carried at cost. Goodwill and intangible
assets with indefinite useful lives are not amortized and are subject to impairment tests at least once a year, regardless of
the existence of impairment indicators.
The Company amortizes the cost of its intangible assets with definite useful lives over such estimated useful lives. These
lives are reviewed at least annually to determine whether events and circumstances warrant a revision. Useful lives are as
follows:
Customer list
Non-compete agreement
Years
5
10
i.
j.
k.
l.
m.
Provisions—Provisions are recognized for current obligations that arise from a past event, that are probable to result in the
use of economic resources, and that can be reasonably estimated.
Direct employee benefits—Direct employee benefits are calculated based on the services rendered by employees,
considering their most recent salaries. The liability is recognized as it accrues. These benefits include mainly statutory
employee profit sharing (“PTU”) payable, compensated absences, such as vacation and vacation premiums, and incentives.
Employee benefits for termination, retirement and other—Liabilities related to seniority premiums and, severance
payments are recognized as they accrue and are calculated by independent actuaries based on the projected unit credit
method using nominal interest rates.
Statutory employee profit sharing (PTU)—PTU is recorded in the results of the year in which it is incurred and presented
under selling, administrative and general expenses in the accompanying consolidated statements of income. Deferred PTU
is derived from temporary differences that result from comparing the accounting and PTU bases of assets and liabilities
and is recognized only when it can be reasonably assumed that such difference will generate a liability or benefit, and there
is no indication that circumstances will change in such a way that the liabilities will not be paid or benefits will not be
realized.
Income taxes—Income tax (“ISR”) and the Business Flat Tax (“IETU”) are recorded in the results of the year they are
incurred. To recognize deferred income taxes, based on its financial projections, the Company determines whether it
expects to incur ISR or IETU and, accordingly, recognizes deferred taxes based on that expectation. Deferred taxes are
calculated by applying the corresponding tax rate to temporary differences resulting from comparing the accounting and
tax bases of assets and liabilities and including, if any, future benefits from tax loss carryforwards and certain tax credits.
Deferred tax assets are recorded only when there is a high probability of recovery.
10
n.
o.
p.
q.
Foreign currency transactions—Foreign currency transactions are recorded at the applicable exchange rate in effect at the
transaction date. Monetary assets and liabilities denominated in foreign currency are translated into functional currency
amounts at the applicable exchange rate in effect at the balance sheet date. Exchange fluctuations are recorded as a
component of net comprehensive financing cost in the consolidated statements of income.
Revenue recognition—Revenues are recognized in the period in which the risks and rewards of ownership of the
inventories are transferred to the customers, which generally coincides with the delivery of products to customers in
satisfaction of orders.
Revenue is recognized at the point of sale for retail transactions and at the time of successful delivery for contract, catalog
and internet sales. Sales taxes collected are not included in reported sales. The Company does not charge shipping and
handling costs to its customers; such costs are included within selling, administrative and general expenses within the
consolidated statements of income and amounted to $124,109, $118,037 and $101,803 in 2012, 2011 and 2010
(unaudited), respectively.
Advertising—Advertising costs are charged to expense when incurred. Advertising expense for the years ended
December 31, 2012, 2011 and 2010 (unaudited) was $239,639, $203,451and $202,107, respectively. Prepaid advertising
costs were $44,723 and $59,936 as of December 31, 2012 and 2011.
Reclassifications—Certain amounts in the consolidated financial statements as of December 31, 2011 and for the years
ended December 31, 2011 and 2010 (unaudited) have been reclassified in order to conform to the presentation of the
consolidated financial statements as of and for the year ended December 31, 2012.
4. Cash and cash equivalents
Checking accounts
Readily available daily investments
5. Accounts receivable and recoverable taxes
Trade accounts receivable
Allowance for doubtful accounts
Sundry debtors
Recoverable taxes, mainly value-added tax and income tax
2012
$258,009
90,752
$348,761
2011
$290,598
12,058
$302,656
2012
2011
$ 663,894 $619,977
(10,259)
609,718
32,871
220,331
$1,033,617 $862,920
(5,728)
658,166
33,263
342,188
Movements in the allowance for doubtful accounts for the years ended December 31 are as follows:
2012
2011
2010 (Unaudited)
Additional
charged to
expenses
$ 1,107
7,556
3,276
Write-
offs of
uncollectible
accounts
$
5,638
1,406
1,472
Balance at
ending of period
5,728
$
10,259
4,109
Balance at
beginning of
period
$ 10,259
4,109
2,305
11
6.
Inventories
Inventories
Allowance for obsolete inventories
Goods in-transit
2012
$3,337,106
(19,516)
3,317,590
50,759
$3,368,349
2011
$2,904,640
(12,659)
2,891,981
41,170
$2,933,151
Movements in the allowance for obsolete inventories for the years ended December 31 are as follows:
2012
2011
2010 (Unaudited)
7.
Property, equipment and leasehold improvements
a) Investment
Land
Buildings
Leasehold improvements
Furniture and fixtures
Computers
Vehicles
Construction in-progress
b) Accumulated depreciation and amortization
Buildings
Leasehold improvements
Furniture and fixtures
Computers
Vehicles
Balance at
beginning of
period
$ 12,659
11,983
5,022
Additional
charged to
expenses
$ 20,712
16,759
16,622
Shrinkage
$13,855
16,083
9,661
Balance at ending
of period
$
19,516
12,659
11,983
2012
2011
2010
(Unaudited)
$1,378,984 $1,365,260 $1,248,269
1,609,980
1,374,739
868,628
276,494
146,038
11,482
$6,480,680 $6,070,260 $5,535,630
1,713,779
1,476,640
966,230
314,352
160,225
73,774
1,803,077
1,600,527
1,064,491
375,465
171,582
86,554
713,485
675,835
270,329
113,109
$ 380,134 $ 325,758 $ 270,620
566,612
534,718
217,385
92,288
$2,152,892 $1,936,834 $1,681,623
$4,327,788 $4,133,426 $3,854,007
644,443
612,433
247,264
106,936
Depreciation expense for the years ended December 31, 2012, 2011 and 2010 (unaudited) was $230,248, $207,982 and
$196,794, respectively.
12
Amortization expense for the years ended December 31, 2012, 2011 and 2010 (unaudited) was $98,801, $94,890 and $65,859,
respectively, which includes amortization of leasehold improvements as well as intangibles detailed in Note 8.
8.
Intangible assets
Intangible assets as of December 31, are as follows:
Intangible assets with finite useful lives:
Non-compete agreement
Customer list
Accumulated amortization
Intangible asset with indefinite useful life:
Trademark
2012
2011
$ 22,412
105,908
128,320
(63,575)
64,745
$ 24,121
103,346
127,467
(40,308)
87,159
13,550
$ 78,295
12,990
$100,149
Amortization expense of intangible assets for the years ended December 31, 2012, 2011 and 2010 (unaudited) was $23,266,
$36,641 and $0, respectively. The estimated amortization expense of intangible assets with finite lives for each of the three
following years is as follows:
2013
2014
2015
9.
Employee benefits
$23,340
23,340
18,065
a.
b.
The Company pays seniority premium benefits to its employees, which consist of a lump sum payment of 12 days’ wage
for each year worked, calculated using the most recent salary, not to exceed twice the minimum wage established by law.
The related liability and annual cost of such benefits are calculated by an independent actuary on the basis of formulas
defined in the plans using the projected unit credit method.
The Company also provides statutorily mandated severance benefits to its employees terminated under certain
circumstances. Such benefits consist of a one-time payment of three months wages plus 20 days wages for each year of
service payable upon involuntary termination without just cause.
c.
Present value of these obligations are:
Defined benefit obligation—Underfunded
Unrecognized items:
Past service costs, change in methodology and changes to the
plan
Transition liability
Actuarial gains and losses
Total unrecognized amounts pending amortization
Net projected liability
2012
$(45,804)
2011
$(42,316)
989
83
(219)
853
$(44,951)
1,020
291
230
1,541
$(40,775)
13
d. Nominal rates used in actuarial calculations are as follows:
Discount of the projected benefit obligation at present value
Salary increase
Minimum wage increase rate
2012
2011
% %
7.98
5.86
4.27
8.19
5.73
4.27
The transition liability balance generated in 2007 will be amortized over a five-year period.
e. Net cost for the period includes the following items:
Service cost
Interest cost
Amortization of unrecognized prior service costs
Amortization of actuarial gains
Effect of personnel reduction or early termination (other than a
restructuring or discontinued operation)
Net cost for the period
2012
2011
$10,913
2,954
208
1,412
$ 9,255
2,880
5,197
(6,977)
2010
(Unaudited)
9,220
$
2,068
3,978
(1,759)
(605)
$14,882
(605)
$ 9,750
(509)
$ 12,998
f.
Changes in present value of the defined benefit obligation are as follows:
2012
2011
Benefit obligation at beginning of year
Service cost
Interest cost
Amortization of unrecognized prior service costs
Actuarial gains and losses – Net
Benefits paid
Effect of personnel reduction or early termination
Present value of the defined benefit obligation as of December 31
$ 40,775
10,913
2,954
208
1,412
(10,706)
(605)
$ 44,951
$33,997
9,255
2,880
5,197
(6,977)
(2,972)
(605)
$40,775
2010
(Unaudited)
$ 24,773
9,220
2,068
3,977
(1,759)
(3,775)
(507)
$ 33,997
g. Under Mexican legislation, the Company must make payments equivalent to 2% of its workers’ daily integrated salary to a
defined contribution plan that is part of the retirement savings system. The expense in 2012, 2011 and 2010 (unaudited)
was $15,908, $14,348 and $12,552, respectively.
14
h.
Balance of PTU as of December 31 is as follows:
PTU:
Current
Deferred
10. Stockholders’ equity
2012
2011
2010
(Unaudited)
$(11,489)
5
$(11,485)
$(10,186)
(79)
$(10,265)
$ (8,822)
1,018
$ (7,804)
a.
Common stock at par value (historical pesos) as of December 31, 2012 and 2011 is as follows:
Fixed capital:
Series A
Series B
Variable capital:
Series A
Series B
Total
Number of Shares
Amount
$
2,500
2,500
5,000
25
25
50
27,749,159
27,749,159
55,498,318
55,503,318
277,492
277,492
554,984
$555,034
Common stock consists of common nominative shares at a par value of $10 per share. Series A shares represent 50% of
common stock and may only be acquired by Mexican citizens. Series B shares represent 50% of common stock and may be
freely subscribed. Variable capital is unlimited.
Pursuant to a resolution at the general ordinary stockholders’ meeting held on April 8, 2011, a dividend was declared out of
the net tax income account (CUFIN) for $600,000.
Retained earnings include the statutory legal reserve. The General Corporate Law requires that at least 5% of net income of
the year be transferred to the legal reserve until the reserve equals 20% of capital stock at par value (historical pesos). The
legal reserve may be capitalized but may not be distributed unless the entity is dissolved. The legal reserve must be
replenished if it is reduced for any reason. As of December 31, 2012 and 2011, the legal reserve, in historical pesos, was
$111,007.
Stockholders’ equity, except restated paid-in capital and tax retained earnings will be subject to ISR payable by the
Company at the rate in effect upon distribution. Any tax paid on such distribution may be credited against annual and
estimated income taxes of the year in which the tax on dividends is paid and the following two fiscal years.
b.
c.
d.
e.
The balances of the stockholders’ equity tax accounts as of December 31, are:
Contributed capital account
Net tax income account (CUFIN)
Total
15
2012
$1,569,241
5,855,646
$7,424,887
2011
$1,515,297
4,785,758
$6,301,055
11. Foreign currency balances and transactions
a. As of December 31, the foreign currency monetary position is as follows:
Thousands of U.S. dollars:
Monetary assets
Monetary liabilities
Net monetary liability position
Equivalent in thousands of Mexican pesos
b.
Transactions denominated in foreign currency were as follows:
(Thousands of U.S. dollars)
Import purchases
Acquisition of fixed assets
Other expenses
2012
2011
$ 27,895
(35,546)
(7,651)
$(99,310)
$ 26,083
(28,639)
(2,556)
$(35,733)
2012
2011
192,777
22,538
822
183,755
18,657
606
2010
(Unaudited)
151,944
19,825
534
c. Mexican peso exchange rates in effect at the dates of the consolidated balance sheets and the date of the related
independent auditors’ report were as follows:
Mexican pesos per one U. S. dollar
12. Transactions and balances with related parties
December 31,
December 31,
2012
2011
$
12.98
$
13.98
February 15,
2013
$
12.69
a.
Transactions with related parties, carried out in the ordinary course of business, were as follows:
Sales:
Restaurantes Toks, S. A. de C. V.
Servicios Gastronómicos Gigante, S. A. de C. V.
Servicios Toks, S. A. de C. V.
Distribuidora Store Home, S. A. de C. V.
Unidad de Servicios Compartidos, S. A. de C. V.
Grupo Gigante, S. A. B. de C. V.
Gigante, S. A. de C. V.
Gigante Grupo Inmobiliario, S. A. de C. V.
Other related parties
Leases and maintenance income:
Restaurantes Toks, S. A. de C. V.
Distribuidora Store Home, S. A. de C. V.
Servicios Toks, S. A. de C. V.
Other related parties
2012
2011
2010
(Unaudited)
$ 1,142
162
110
78
118
32
6
16
1,989
12,943
3,350
2,393
1,210
$ 1,144
155
146
76
48
17
2
24
1,778
$
1,110
184
181
56
49
30
4
2
3,735
11,244
3,004
2,277
1,167
10,086
2,400
2,188
1,119
16
Leases, maintenance and other expenses:
Gigante Grupo Inmobiliario
Office Depot, Inc.
Gigante, S. A. de C. V.
Other related parties
Grupo Gigante, S. A. B. de C. V.
Interest expense:
Grupo Gigante, S. A. B. de C. V.
Acquisition and maintenance of vehicles:
Ola Polanco, S. A. de C. V.
Nami Naucalpan, S. A. de C. V.
Services paid:
2012
2011
2010
(Unaudited)
40,142
1,161
2,680
15,558
1,957
38,891
3,088
170
9,687
—
32,433
1,966
91
9,714
—
4,832
18,899
—
1,929
—
2,433
—
3,273
18
Compañía Mexicana de Aviación, S. A. de C. V.
—
—
3,654
Intermediation commissions paid:
Office Depot Asia Holding Limited
Purchase of inventories:
Office Depot Asia Holding Limited
b.
Balances due from related parties are as follows:
Restaurantes Toks, S. A. de C. V.
Servicios Toks, S. A. de C. V.
Grupo Gigante S. A. B. de C. V.
Distribuidora Storehome, S. A. de C. V.
Servicios Gastronómicos Gigante, S. A. de C. V.
Gigante, S. A. de C. V.
Other related parties
13. Other expenses
a. Detail is as follows:
Colombian equity tax
Others
—
—
17,526
426,262
269,706
17,424
2012
$194
12
27
18
30
7
19
$307
2011
$144
16
14
13
10
—
27
$224
2012
$—
588
$588
2011
$(39,334)
—
$(39,334)
2010
$—
—
$—
17
14. Tax environment
Income taxes in Mexico -
The Company is subject to ISR and IETU.
The ISR rate was 30% for 2012 and 2011; it will be 30% for 2013, 29% for 2014 and 28% for 2015 and subsequent years.
IETU—Revenues, as well as deductions and certain tax credits, are determined based on cash flows of each fiscal year. The
IETU rate is 17.5%. The Asset Tax (IMPAC) Law was repealed upon enactment of the IETU Law; however, under certain
circumstances, IMPAC paid in the ten years prior to the year in which ISR is paid for the first time, may be recovered, according
to the terms of the law.
Income tax incurred will be the higher of ISR and IETU.
Based on its financial projections and according to Interpretation of Financial Information Standard (“INIF”) 8, Effects of the
Business Flat Tax, the Company determined that certain subsidiaries will pay ISR while others will pay IETU. Therefore,
deferred income taxes are calculated under both tax regimes.
Income taxes in other countries -
The foreign subsidiaries calculate income taxes on their individual results, in accordance with the regulations of each country.
The tax rates applicable in other countries where the Company operates and the period in which tax losses may be applied, are as
follows:
Colombia
Costa Rica
El Salvador
Guatemala
Honduras
Panama
Statutory income tax rate (%)
2011
33.0
30.0
25.0
31.0
35.0
25.0
2012
33.0
30.0
30.0
31.0
31.0
25.0
2010
33.0
30.0
25.0
31.0
35.0
27.5
Period of
expiration
(a)
3
(b)
(b)
4
5
(a) Tax losses generated in 2006 may be amortized up to 25% in each fiscal year. Beginning 2007, tax losses may be amortized
without limitation on the value or period.
(b) Operating losses are not amortizable.
a.
Income taxes are as follows:
ISR:
Current
Deferred
IETU:
Current
Deferred
Total
2012
2011
2010
(Unaudited)
$446,002
(79,600)
366,402
$398,200
(41,574)
356,626
$ 365,899
(43,345)
322,554
33,660
10,617
44,277
$410,679
25,728
14,582
40,310
$396,936
23,892
7,585
31,477
$ 354,031
18
b.
Income taxes and the reconciliation of the statutory and effective ISR rates, expressed in amounts and as a percentage of
income before income taxes, are:
Statutory tax rate
Effects of inflation
Non-deductible expenses
Other
IETU
c.
The main items originating the deferred ISR asset are:
Deferred ISR asset:
Effect of tax loss carryforwards
Property, equipment and leasehold improvements
Accrued expenses
Allowance for doubtful accounts
Other, net
Deferred ISR asset
Deferred ISR liability:
Inventories
Prepaid expenses
Deferred ISR liability
Valuation allowance for deferred ISR asset
Net deferred ISR asset
2012
2011
%
30
(1)
1
(1)
4
33%
%
30
(2)
1
2
4
35%
2010
(Unaudited)
%
30
(3)
1
—
3
31%
2012
2011
$ 96,368
139,298
29,050
342
11,636
276,694
(18,657)
(15,661)
(34,318)
(93,068)
$149,308
$ 78,229
110,500
17,422
853
11,706
218,710
(55,539)
(19,957)
(75,496)
(75,587)
$ 67,627
Movements in the valuation allowance for the deferred ISR asset for the years ended December 31 are as follows:
2012
2011
2010 (Unaudited)
Balance at
beginning
of period
75,587
79,242
33,155
Additional
charged to
expenses
1,572
21,147
46,087
Amortization
of tax losses
—
24,802
—
Balance at ending
of period
77,159
75,587
79,242
d. As of December 31, the main items that give rise to a deferred IETU liability are:
Deferred IETU liability:
Accounts receivable from affiliated companies
Vehicles
Deferred IETU liability
Deferred IETU asset:
Accrued expenses
Deferred IETU asset:
Total IETU liability
Deferred income taxes
19
2012
2011
$(62,627)
(2,261)
(64,888)
$(49,690)
(1,789)
(51,479)
13,868
13,868
$(51,020)
$ 98,288
11,076
11,076
$(40,403)
$ 27,224
e.
The benefits of restated tax loss carryforwards for which the deferred ISR asset has been recognized, can be recovered
subject to certain conditions in different jurisdictions. Restated amounts as of December 31, 2012 and expiration dates are:
Year of
Expiration
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Tax loss
Carryforwards
3,568
$
2,556
2,086
2,001
1,256
995
369
23
22
22
12,898
$
In Colombia, tax losses carryforwards of $282,023 as of December 31, 2012 can be recovered without limitation on the
value or period.
15. Commitments and Contingencies
Commitments
The Company leases retail stores and other facilities under operating lease agreements with initial lease terms expiring in
various years through 2040. In addition to minimum rentals, there are certain executory costs such as real estate taxes, insurance
and common area maintenance on most of the Company’s facility leases.
The table below shows future minimum lease payments due under the non-cancelable portions of our leases as of December 31,
2012.
2013
2014
2015
2016
2017
Thereafter
$ 364,948
340,720
333,231
314,707
303,493
$2,498,292
Rent expense was $404,505 in 2012, $352,185 in 2011 and $294,838 in 2010.
Legal Matters
On August 31, 2005, in an effort to expand operations within Mexico, a sublease agreement with respect to a plot of land was
signed between the Company and a third party, under which the Company would sublease the land and build one of its Office
Depot stores. After subsequent analysis, in its own best interest, the Company decided not to proceed with the project and
notified the third party of its intent to early terminate the sublease contract. The third party considered this to be a breach of the
sublease contract, which resulted in the Company filing a lawsuit against the sublessor in July 2006, seeking the early
termination of the contract. The third party filed a counterclaim against the Company seeking mandatory performance by the
Company under the contract.
20
In October 2008, the Company was ordered under the counterclaim to comply with the terms of the sublease agreement, which
requires the construction of an Office Depot store on the plot of land. The Company filed an appeal in January 2009. On
August 19, 2010, the court rejected the Company’s appeal of January 2009. The Company filed an amparo or appeal (an
injunction on constitutional grounds) against the August 19, 2010 resolution as result of which (after the corresponding legal
steps), the court resolved the case on October 5, 2012 by ratifying the first resolution issued on October 2008 against the
Company.
Subsequently, the Company filed another appeal in November 2012.
The Company, together with its external counsel, estimated that the accrued rentals and the approximate cost of the construction
of the Office Depot store were approximately $18,000 and a liability was recognized for this amount as of December 31, 2012;
which is included in accrued expenses in the accompanying consolidated financial statements.
On February 14, 2013, a negotiated settlement was agreed upon between the Company and the third party, whereby the
Company agreed to settle the claim for $11,600. The adjustment to the provision is not recognized in the accompanying
consolidated financial statements as a result of its immateriality.
16. Subsequent events
The Company has evaluated events subsequent to December 31, 2012 to assess the need for potential recognition or disclosure
in the accompanying consolidated financial statements. Such events were evaluated through February 15, 2013, the date these
consolidated financial statements were available to be issued. Based upon this evaluation, except for the final resolution of the
legal matter disclosed in Note 15, it was determined that no other subsequent events occurred that require recognition or
disclosure in the consolidated financial statements.
17. New accounting principles
As part of its efforts to make Mexican standards converge with international standards, in 2012, the Mexican Board for Research
and Development of Financial Information Standards (“CINIF”) issued the following NIFs, INIFs and improvements to NIFs,
which will become effective as of January 1, 2013:
B-3, Statement of Comprehensive Income
B-4, Statement of Changes in Stockholders’ Equity
B-6, Statement of Financial Position
B-8, Consolidated or Combined Financial Statements
C-7, Investments in Associates, Joint Ventures and Other Permanent Investments
C-21, Joint Control Arrangements
Improvements to Mexican Financial Reporting Standards 2013
Some of the most important changes established by these standards are:
NIF B-3—Statement of Comprehensive Income, provides the option of presenting a) a single statement of comprehensive
income (loss) containing the items that comprise (i) net income (loss) of the entity, (ii) other comprehensive income (loss) items
of the entity and (iii) equity in other comprehensive income (loss) of other entities, such as associates, or b) two statements: a
statement of income (loss), which would include only items that make up net income (loss), and a separate statement of other
comprehensive income (loss), which should begin with net income (loss) and immediately present other comprehensive income
(loss) items of the entity and other comprehensive income (loss) of other entities, such as associates. In addition, NIF B-3
establishes that items should not be separately presented as non-ordinary in the financial statements or the notes to the financial
statements.
21
NIF B-4, Statement of Changes in Stockholders’ Equity, establishes the general principles for the presentation and structure of
the statement of changes in stockholders’ equity, such as showing retrospective adjustments due to accounting changes and
correction of errors that affect the beginning balances of stockholders’ equity and presenting comprehensive income (loss) in a
single line item, presenting detail of all items comprising comprehensive income (loss) based on the requirements of NIF B-3.
NIF B-6, Statement of Financial Position, specifies the structure of the statement of financial position as well as the rules of
presentation and disclosure.
NIF B-8, Consolidated or Combined Financial Statements, modifies the definition of control, which is the basis for requiring
that the financial information of that entity is consolidated with the reporting entity. Based on this new definition of control,
certain investments which did not previously require consolidation may now be consolidated while other investments that were
previously consolidated may no longer require consolidation. This NIF establishes that an entity controls another when it has
power to direct the investees relevant activities; it is exposed or entitled to variable returns from such participation in the
investee; and it has the ability to use its power to affect its returns. This standard introduces the concept of protective rights,
defined as the rights that protect the involvement of the investor but do not necessarily give the investor control. This standard
incorporates the principal-agent concept, whereby a decision-maker who has the authority to decide on the relevant activities of
the investee is considered a principal, while an agent merely makes decisions on behalf of the principal and thus does not
exercise control over the investee. The standard also replaces the concept of a special-purpose entity with a structured entity,
which is an entity designed in such a way that voting or other similar rights are not the determining factor for deciding controls
over the structured entity.
NIF C-7, Investments in Associates, Joint ventures and Other Permanent Investments, establishes that investments in joint
ventures should be recognized through the application of the equity method and that the participation of an investor in the
income or loss of investments in associated companies, joint ventures and others permanent investment should be recognized in
results in a single line item representing participation in the results of such investments. It requires additional disclosures aimed
at providing enahanced financial information of the associates and joint ventures and eliminates.
NIF C-21, Joint Control Arrangements, defines a joint arrangement as an arrangement in which two or more parties have joint
control. These types of arrangements can be in the form of 1) joint operations, whereby the parties to the arrangement have
direct rights to the assets and obligations for the liabilities of the arrangement or 2) joint ventures, whereby the parties have
rights to participate only in the residual value of the net assets of the arrangement. This standard establishes that participation in
a joint venture must be recognized as a permanent investment, and accounted for using the equity method.
Improvements to Mexican Financial Reporting Standards 2013—The main improvements that generate accounting changes that
should be recognized retroactively in fiscal years beginning on January 1, 2013 are:
Bulletin C-9, Liabilities, Provisions, Assets and Contingent Liabilities and Commitments and Bulletin C-12, Financial
Instruments with Characteristics of Liabilities,Equity or Both, establish that debt issuance costs must be presented net
against the corresponding liability and applied to results based on the effective interest method.
Bulletin C-15, Accounting for Impairment and Disposal of Long-lived Assets, eliminates the obligation to restate, for
comparative purposes, statements of financial position of prior periods for the effects of assets held for sale.
Bulletin D-5, Leases, establishes that non-refundable payments related to leasehold rights must be deferred during the lease
term and applied to results in proportion to the recognition of income or expense relating to the lessor or lessee,
respectively.
As of the date of these consolidated financial statements, the Company is still in the process of determining the effects of
adoption of these new standards.
22
18. Differences between MFRS and accounting principles generally accepted in the United States of America (“U.S. GAAP”)
The accompanying consolidated financial statements of the Company are prepared in accordance with MFRS, which may vary
in certain significant respects from U.S. GAAP. Note 3 to the accompanying consolidated financial statements summarizes the
accounting policies adopted by the Company. The principal differences between MFRS and U.S. GAAP as they affect the
Company’s consolidated net income, consolidated stockholders’ equity, presentation of consolidated financial information and
the relevant disclosures are summarized below:
Consolidated net income under MFRS
(i) Elimination of effects of inflation
(ii) Employee retirement obligations
(iii) Rent holidays
(v) Deferred PTU asset
Total U.S. GAAP adjustments
(vi) Deferred income tax effects on U.S. GAAP adjustments
Consolidated net income under U.S. GAAP
2012
2011
$819,662
24,056
972
(9,251)
(4)
15,773
(3,569)
$831,866
$728,262
30,570
(485)
411
79
30,575
22,927
$781,764
2010
(Unaudited)
$ 777,116
25,467
2,209
(4,664)
(1,018)
21,994
(5,412)
$ 793,698
Consolidated stockholders’ equity under MFRS (1)
(i) Elimination effects of inflation
(ii) Change in employee retirement obligations
(iii) Rent holidays
(iv) Amortization of goodwill
(v) Deferred PTU asset
Total U.S. GAAP adjustments
(vi) Deferred income tax effects on U.S. GAAP adjustments
Consolidated stockholders’ equity under U.S. GAAP
2012
$ 6,608,947
(422,222)
967
(48,719)
13,812
(808)
$ (456,970)
135,183
$6,287,160
2011
$ 5,825,437
(449,849)
1,392
(39,600)
13,812
(798)
$ (475,043)
140,543
$5,490,937
(1)
Individual adjustments to the accompanying reconciliation of stockholders’ equity include the effects of translation of
foreign operations whose functional currency is different from the Mexican peso.
(i)
Elimination of the effects of inflation—Through December 31, 2007, MFRS required the recognition of the
comprehensive effects of inflation on consolidated financial information. Beginning January 1, 2008, MFRS only
requires the recognition of the effects of inflation for entities that operate in an inflationary environment (one whose
cumulative inflation for the preceding three-year periods equals or exceeds 26%). Since that date, Mexico has
ceased to be an inflationary economic environment. However assets and stockholders’ equity under MFRS include
the effects of inflation recognized through December 31, 2007. The elimination of the effects of inflation on
individual line items in the consolidated balance sheets under MFRS are as follows:
Property, equipment and leasehold improvements
Intangible assets
Goodwill
Total adjustment
23
2012
$407,875
450
13,897
$422,222
2011
$435,386
566
13,897
$449,849
(ii)
U.S. GAAP generally requires the use of the historical cost basis of accounting, except when an entity operates in a
highly inflationary economy. Accordingly, the comprehensive effects of inflation recognized under MFRS have
been eliminated in the accompanying reconciliation of consolidated net income and stockholders’ equity to U.S.
GAAP.
Employee benefits—Under MFRS, liabilities from seniority premiums, pension plans and severance payment are
recognized as they accrue, determined based on actuarial calculations using the projected unit credit method. The
liability recognized under MFRS does not include unrecognized items such as actuarial gains and losses and prior
service costs, which under MFRS, will be amortized to the liability generally over the remaining service period of
the employees.
U.S. GAAP requires recognition of the fully overfunded or underfunded status of the liability for defined benefit
employee obligations, with an offsetting entry to other comprehensive income. The amounts included in other
comprehensive income are reclassified into results generally over the remaining service period of the
employees. Additionally, for certain termination benefits under MFRS, modifications to a plan and the related prior
service costs are recognized within results in the year of modification; under U.S. GAAP, these prior service costs
are recognized in other comprehensive income and amortized to results generally over the remaining service period
of the employees. Accordingly, the adjustment in the accompanying reconciliations of consolidated net income and
stockholders’ equity to U.S. GAAP include (i) the recognition of the fully underfunded status of the obligation under
U.S. GAAP within other comprehensive income and (ii) the difference in recognition of prior service costs related to
certain termination benefits, given modifications to such benefits in 2010.
In addition, U.S. GAAP requires certain additional disclosures as shown below:
As of December 31:
Projected benefit obligation
Change in benefit obligation:
Employee benefits
2012
Employee benefits
2011
$
45,804
$
41,780
Benefit obligation at beginning of year
Service cost
Interest cost
Amortization of transition obligation
Amortization of prior service cost
Actuarial gain
Benefits paid
Benefit obligation at end of year
41,780
10,913
2,954
128
974
(239)
(10,706)
45,804
$
35,518
9,255
2,880
3,558
1,371
(7,830)
(2,972)
41,780
$
Components of net periodic cost:
Service cost
Interest cost
Amortization of transition obligation
Amortization of prior service cost
Effect of personnel reduction or early
termination (other than a restructuring or
discontinued operation)
Amortization of net gain
Net periodic cost
24
Employee benefits
2012
Employee benefits
2011
$
$
10,912
2,954
128
112
—
(197)
13,910
$
$
9,255
2,880
3,590
1,371
(2,395)
(4,466)
10,235
The amount in accumulated other comprehensive income expected to be recognized as component of net periodic
benefit cost over the following fiscal year is $1,825.
Weighted-average assumptions used to determine benefit obligations and net periodic benefit cost as of and for the
year ended December 31, 2012 and 2011:
Discount of the projected benefit obligation at present value
Salary increase
Minimum wage increase rate
2012
%
8.19
5.73
4.27
2011
%
7.98
5.86
4.27
(iii) Rent holidays—Under MFRS, rental expense is recorded beginning when the related store initiates operations.
(iv)
(v)
Under U.S. GAAP, rental expense is recognized on a straight-line basis, or another more appropriate systematic
approach, which does not necessarily depend upon initiation of operations of the related store.
Amortization of goodwill—Under MFRS, goodwill stemming from an acquisition of a business was amortized
through 2004.
Under U.S. GAAP, amortization of goodwill ceased on January 1, 2002. The adjustment to the reconciliation of
consolidated stockholders’ equity represents the amortization of goodwill which occurred on goodwill from
January 1, 2002 to December 31, 2005.
Deferred PTU asset—Mexican statutory requirements require Mexican entities to pay statutory PTU to their
employees. Current PTU is recorded in the results of the year in which it is incurred. The recognition of deferred
PTU is also required, whether it results in a net liability or net asset position, and is determined considering
temporary differences between the accounting and the PTU bases of assets and liabilities.
While U.S. GAAP also contemplates the recognition of a net deferred PTU liability, it does not permit the
recognition of a net deferred PTU asset, given that it does not necessarily embody a probable future benefit to
contribute directly or indirectly to the future net cash inflows of an entity. Accordingly, the adjustment in the
accompanying reconciliation of consolidated net income and stockholders’ equity represents the removal of such
deferred PTU asset.
(vi) Deferred income taxes—The recognition of income taxes, including deferred income taxes, under MFRS considers a
methodology similar to that required under U.S. GAAP. The adjustments to the accompanying reconciliations of
consolidated net income and stockholders’ equity represent the deferred income tax effects of the aforementioned
U.S. GAAP adjustments.
Under both MFRS and U.S. GAAP, the change in deferred income taxes resulting from the effects of accounting for
inflation with respect to the tax values of assets and liabilities is recorded as a component of income tax expense.
MFRS requires the classification of the net deferred income tax asset or liability as long-term, while U.S. GAAP
requires classification based on the current or long-term nature of the asset or liability to which the deferred relates.
25
A reconciliation of the net deferred income tax asset from MFRS to U.S. GAAP and the composition of the net
deferred income tax asset under U.S. GAAP is as follows:
Reconciliation of deferred income tax asset:
Net deferred income tax asset under MFRS
Effects of elimination of inflation
Effects of employee retirement obligations
Effects of rent holidays
Effects of amortization of goodwill
Effects of actuarial gains in other comprehensive income
Total U.S. GAAP adjustments to net deferred income tax asset
Net deferred income tax asset under U.S. GAAP
Net deferred ISR asset under U.S. GAAP
Net deferred IETU asset under U.S. GAAP
Composition of net deferred income tax asset:
ISR
Current deferred ISR assets (liabilities):
Allowance for doubtful accounts
Inventories
Accrued liabilities
Prepaid expenses
Current deferred ISR liability – Net
Non – current deferred ISR assets (liabilities):
Rents holidays
Property, equipment and leasehold improvements
Effect of tax loss carryforwards
Other, net
Valuation allowance for deferred ISR asset
Non – current deferred ISR asset – Net
Net deferred ISR asset under U.S. GAAP
26
2012
2011
$
98,288
124,058
215
14,669
(4,144)
385
$ 135,183
233,471
284,231
(50,760)
$
27,224
132,397
319
11,880
(4,144)
91
$ 140,543
167,767
208,170
(40,403)
2012
2011
$
342
(18,657)
28,407
(15,661)
(5,569)
$
853
(55,539)
17,422
(19,957)
(57,221)
14,669
260,195
96,368
11,636
(93,068)
289,800
$ 284,231
11,880
239,163
78,229
11,706
(75,587)
265,391
$ 208,170
The effective rate differs from the statutory rate mainly due to the effects of non-deductible expenses as well as
different tax rates applicable in different tax jurisdiction in which the Company operates.
IETU
Current deferred IETU liability:
Account receivable from affiliated companies
Non – current deferred IETU assets – (liabilities):
Vehicles
Accrued expenses
Non – current deferred IETU asset – Net
Total IETU liability under U.S. GAAP
2012
2011
$
$
(62,627)
(62,627)
(2,261)
14,128
11,867
(50,760)
$
$
(49,690)
(49,690)
(1,789)
11,076
9,287
(40,403)
U.S. GAAP also provides guidance regarding recognition, measurement and disclosure of uncertain tax positions
taken by an enterprise. If an entity is unable to conclude that it is not more likely than not that the position it took
will be upheld upon examination by the related tax authorities, all or a portion of the benefit related to such tax
position may not be recognized. The Company has not taken any tax position for which it does not believe that it is
more likely than not that the full amount of the benefit taken will be sustained upon review, based on technical
merits of the position taken. The tax years that remain subject to examination by tax authorities are 2006 to 2011.
(vii) Additional presentation and disclosure differences -
(a) Fair value of financial instruments and fair value measurements—Under U.S. GAAP, an entity is
required to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. U.S. GAAP establishes a fair value hierarchy based on the level of independent,
objective evidence surrounding the inputs used to measure fair value. A financial instrument’s
categorization within the fair value hierarchy is based upon the lowest level of input that is significant to
the fair value measurement. Inputs used to measure fair value fall within one of the following three levels:
Level 1—applies to assets or liabilities for which there are quoted prices in active markets for identical
assets or liabilities.
Level 2—applies to assets or liabilities for which there are inputs other than quoted prices that are
observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets;
quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in which significant inputs are observable
or can be derived principally from, or corroborated by, observable market data.
Level 3—applies to assets or liabilities for which there are unobservable inputs to the valuation
methodology that are significant to the measurement of the fair value of the assets or liabilities.
27
The Company’s financial instruments consist principally of cash, accounts receivable, trade accounts
payable and accrued expenses. The Company believes that the recorded values of these financial
instruments approximate their current fair values because of their nature and respective maturity dates or
durations.
(b) Classification of certain items in the consolidated balance sheets and consolidated statements of
income—Under MFRS, the classification of certain costs and expenses differ from that required by U.S.
GAAP.
i.
ii.
Other expense of $588, $38,266 and $0 in 2012, 2011 and 2010 (unaudited), respectively, is
considered other operating expense under U.S. GAAP.
Normal bank commissions stemming from credit card transactions are included within
comprehensive financing cost in the consolidated statements of income under MFRS; these
amounts are included within selling, administrative and general expenses under U.S. GAAP. The
Company also incurs additional bank commissions on interest-free sales offered to customers,
where such sale is ultimately financed by the bank and not the Company. In those cases, the sale
price of the product sold is increased. Those additional commissions are included within
comprehensive financing cost under MFRS. Under U.S. GAAP, the amounts are a reduction of the
additional revenue charged to the customers. The amounts reclassified in 2012, 2011 and 2010
(unaudited) are $70,618, $62,309 and $49,013, respectively.
iii.
Certain items classified within other revenues in the consolidated statements of operations under
MFRS are presented within other operating income under U.S. GAAP. Such amounts in 2012,
2011 and 2010 (unaudited) are $12,069, $9,567 and $25,788, respectively.
(c) Consolidated statement of cash flows—Under MFRS, the Company presents a consolidated statement of
cash flows similar to that required under U.S. GAAP. However, certain classification differences exist,
mainly with respect to interest paid. As well, U.S. GAAP requires disclosures of non-cash investing and
financing activities.
Net income under U.S. GAAP
Depreciation and amortization
Allowance for doubtful accounts
(Gain) loss on sale of fixed assets
Deferred income tax
Net periodic cost
Unrealized foreign exchange loss (gain)
Changes in operating assets and liabilities:
Accounts receivable and recoverable taxes
Due to/from related parties
Inventories
Trade accounts payable
Accrued expenses
Accrued taxes
Other liabilities
Cash flows provided by operating activities
28
2012
2011
$ 831,866
298,277
4,531
(1,195)
(65,415)
13,910
2,578
1,084,552
$ 781,764
287,053
(6,150)
(1,147)
(49,343)
10,235
6,095
1,028,507
(187,415)
17,226
(435,198)
61,564
19,834
—
52,267
612,830
(45,421)
(527)
(204,088)
48,050
68,478
—
(2,305)
892,694
2010
(Unaudited)
$ 793,698
240,384
(1,804)
15,520
(33,808)
10,789
(4,999)
1,019,780
(93,998)
463
(495,636)
213,819
5,177
(39,879)
(603)
609,123
Cash flows from investing activities:
Purchases of equipment and investments in leasehold
improvements
Acquisitions of subsidiaries, net of cash acquired
Purchases of trade mark
Proceeds from the sale of equipment
Net cash used in investing activities
Cash flows from financing activities:
Borrowings from related party
Banks borrowings
Repayments to related party
Repayments of banks borrowings
Dividends paid
Net cash used in financing activities
Effect of exchange rate changes on cash
Cash and cash equivalents:
Net increase (decrease) for the year
Beginning of year
End of the year
2012
2011
(538,834)
6,556
(532,278)
550,000
—
(550,000)
—
—
—
(34,447)
(529,491)
—
—
6,321
(523,170)
400,000
100,000
(400,000)
(100,000)
(600,000)
(600,000)
140,215
46,105
302,656
$ 348,761
(90,261)
392,917
$ 302,656
2010
(Unaudited)
(321,450)
(178,353)
(10,786)
2,876
(507,713)
—
100,000
—
(100,000)
—
—
(30,711)
70,699
322,218
$ 392,917
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest paid
Income taxes paid
Supplemental disclosure of noncash investing activities:
Fixed assets acquired during the year included in accounts payable
29
2012
2011
$ 5,283
289,477
$ 21,580
251,339
2010
(Unaudited)
6,684
$
218,166
2012
2010
(Unaudited)
$13,237 $45,152 $ 12,986
2011
(d)
Statement of comprehensive income – The Company’s statement of comprehensive income under U.S. GAAP is as
follows:
Consolidated net income under U.S. GAAP
Other comprehensive income:
Translation effects of operations of foreign entities
Effect of employee retirement obligations (net of tax of
$385, $91 and $670 in 2012, 2011 and 2010,
respectively)
Total comprehensive income under U.S. GAAP
(viii) New accounting pronouncements under U.S. GAAP:
2012
2011
$831,866
$781,764
2010
(Unaudited)
$ 793,698
(34,202)
140,215
(30,711)
(1,441)
$796,223
2,728
$924,707
(3,156)
$ 759,831
In 2012, the Company adopted the following pronouncements, which did not have a material effect in the
accompanying consolidated financial statements:
(a)
In June 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) No. 2012-05, Presentation of Comprehensive Income, which updated the guidance in Accounting
Standards Codification (“ASC”) Topic 220, Comprehensive Income. Under the amendments in this ASU, an
entity has the option to present the total of comprehensive income, the components of net income and the
components of other comprehensive income either in a single continuous statement of comprehensive income
or in two separate but consecutive statements. In both choices, an entity is required to present each component
of net income along with total net income, each component of other comprehensive income along with a total
for other comprehensive income and a total amount for comprehensive income. This ASU eliminates the
option to present the components of other comprehensive income as part of the statement of changes in
stockholders’ equity. The amendments in this update do not change the items that must be reported in other
comprehensive income or when an item of other comprehensive income must be reclassified to net income. In
October 2012, the FASB proposed to indefinitely defer the specific requirement to present items that are
reclassified from other comprehensive income to net income alongside their respective components of net
income and other comprehensive income on the face of the respective statements; entities still must comply
with the existing requirements during the deferral period. This indefinite deferral was eliminated in February
2013 with the issuance of ASU 2013-02, discussed below.
(b)
In September 2012, the FASB issued ASU No. 2012-08, Testing Goodwill for Impairment, which amends the
guidance in ASC 350-20. The amendments in ASU 2012-08 provide entities with the option of performing a
qualitative assessment before performing the first step of the two-step impairment test. If entities determine, on
the basis of qualitative factors, it is not more likely than not that the fair value of the reporting unit is less than
the carrying amount, then performing the two-step impairment test would be unnecessary. However, if an
entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by
calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the
reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to
perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any.
ASU 2012-08 also provides entities with the option to bypass the qualitative assessment for any reporting unit
in any period and proceed directly to the first step of the two-step impairment test. Given that the Company is
required under MFRS to annually test goodwill for impairment on a quantitative basis, the Company did not
elect to perform a qualitative analysis under ASU 2012-08.
30
(c)
In May 2012, the FASB issued ASU No. 2012-04, Fair Value Measurement: Amendments to Achieve Common
Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which updated the guidance
in ASC Topic 820, Fair Value Measurement. ASU 2012-04 clarifies the application of existing fair value
measurement requirements including (1) the application of the highest and best use and valuation premise
concepts, (2) measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity,
and (3) quantitative information required for fair value measurements categorized within Level 3. ASU 2012-
04 also provides guidance on measuring the fair value of financial instruments managed within a portfolio, and
application of premiums and discounts in a fair value measurement. In addition, ASU 2012-04 requires
additional disclosure for Level 3 measurements regarding the sensitivity of fair value to changes in
unobservable inputs and any interrelationships between those inputs.
(ix)
The following are new pronouncements issued under U.S. GAAP which will be effective in future reporting periods:
(a)
(b)
(c)
In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet: Disclosures about Offsetting Assets
and Liabilities. This ASU requires an entity to disclose information about offsetting and related arrangements
to enable users of its financial statements to understand the effect of those arrangements on its financial
position. The objective of this disclosure is to facilitate comparison between those entities that prepare their
financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the
basis of International Financial Reporting Standards (“IFRS”). The amended guidance is effective for annual
reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The
Company will adopt this ASU in 2013.
In July 2012, the FASB issued ASU 2012-02, Intangibles – Goodwill and Other (Topic 350): Testing
Indefinite-Lived Intangible Assets for Impairment. This update amends ASU 2011-08, Intangibles – Goodwill
and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment and permits an entity first to
assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset
is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in
accordance with Subtopic 350-30, Intangibles - Goodwill and Other - General Intangibles Other than
Goodwill. The amendments are effective for annual and interim impairment tests performed for fiscal years
beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment
tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent
annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available
for issuance. The adoption of ASU 2012-02 is not expected to have a material impact on the Company’s
financial position or results of operations.
In October 2012, the FASB issued ASU 2012-04, Technical Corrections and Improvements in Accounting
Standards Update No. 2012-04. The amendments in this update cover a wide range of Topics in the
Accounting Standards Codification. These amendments include technical corrections and improvements to the
Accounting Standards Codification and conforming amendments related to fair value measurements. The
amendments in this update will be effective for fiscal periods beginning after December 15, 2012. The
adoption of ASU 2012-04 is not expected to have a material impact on the Company’s financial position or
results of operations.
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(d)
In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated
Other Comprehensive Income. The ASU adds new disclosure requirements for items reclassified out of
accumulated other comprehensive income (AOCI) and is intended to help entities improve the transparency of
changes in other comprehensive income and items reclassified out of AOCI in their financial statements. For
public entities, the new disclosure requirements are effective for fiscal years, and interim periods within those
years, beginning after December 15, 2012. However, for nonpublic entities, the ASU is effective for fiscal
years beginning after December 15, 2013, and interim and annual periods thereafter. Early adoption is
permitted. The amendments in the ASU should be applied prospectively. The adoption of ASU 2013-02 is not
expected to have a material impact on the Company’s financial position or results of operations.
* * * * * *
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