Office Depot 2003 Annual Report Download - page 25

increase in our deferred income tax expense, an increase in our
closed store reserve, and various asset impairments. The addi-
tional depreciation includes the impact of Guilbert assets. Cash
flows provided by operating activities in 2002 reflect higher
net income, partially offset by an increase in overall inventory
at the end of the year.
Investing activities for 2003 include approximately $919
million for payments made in connection with our acquisition
of Guilbert, net of cash acquired. The purchase price of
Guilbert is subject to an upward adjustment of euro 40 million,
payable in Office Depot common stock or cash, if Office Depot
stock closes above $20 per share for five consecutive days over
an 18-month period following the closing date of the acquisi-
tion. See Note D to our Consolidated Financial Statements for
additional discussion of the purchase transaction. Investing
activities in 2003 also include $100 million we invested in a
mutual fund that primarily invests in U.S. Government agency
obligations and cash proceeds from selling our Australian
business in January 2003.
Excluding the acquisition of Guilbert, our primary invest-
ing activity is the acquisition of capital assets. The majority of
our capital asset acquisitions relate to opening or remodeling
retail stores and warehouses, as well as internal infrastructure
upgrades. During 2003, we added or relocated a total of 48
stores and consolidated two CSCs in North America.
Internationally, we opened 16 retail stores. We currently plan
to open approximately 70 to 80 stores in our North American
Retail Division and approximately 5 to 10 stores in our
International Division during 2004. We estimate that our cash
investing requirements will be approximately $1.0 million for
each new domestic office supply store. The $1.0 million
includes approximately $0.4 million for leasehold improve-
ments, fixtures, point-of-sale terminals and other equipment,
and approximately $0.6 million for the portion of our invento-
ries that will not be financed by our vendors. In addition, our
average new office supply store requires pre-opening expenses
of approximately $0.2 million.
In late 2003, we announced our decision to build a new
corporate support center in Boca Raton, Florida. We estimate
that the center will be completed in the early part of 2006 at a
cost in excess of $100 million, of which approximately $30
million will be paid in 2004.
Financing Activities
Our existing credit facility provides us with a maximum
of $600 million in funds, including up to $150 million for
issuance of standby and trade letters of credit. This facility is
a three-year, unsecured revolving credit agreement maturing
on April 24, 2005, though the Company may enter into a new
arrangement before this agreement expires. The agreement
provides for the availability of borrowings up to the equivalent
of $100 million in U.S. dollars, euro, British pounds or yen.
The remaining $500 million is available in U.S. dollars.
Borrowings will bear interest at a benchmark variable rate
plus a spread determined at the time of usage. For U.S. dollar
borrowings, interest can be based on the then-current London
Interbank Offering Rate (LIBOR) or U.S. prime rate, at the
Company’s election. For international borrowings, interest
will be based on the then-current Eurocurrency rate. We can
specify interest periods to be one, two, three or six months.
Based on our current credit ratings, borrowings would include
a spread of 0.925%. As of December 27, 2003, we had out-
standing yen borrowings equivalent to $100.1 million, which
had an effective interest rate of 0.9875%, and $72.8 million of
the Company’s total $81.5 million outstanding letters of credit
were under this agreement. The agreement contains restrictive
covenants relating to various financial statement ratios. We are
in compliance with all such covenants.
In August 2003, the Company completed an offering of
$400 million senior notes due August 2013. The notes are not
callable and bear interest at the rate of 6.25% per year, to be
paid on February 15 and August 15 of each year. The Notes
contain provisions that, in certain circumstances, place financial
restrictions or limitations on the Company. Simultaneous with
completing the offering, the Company liquidated a treasury
rate lock. The proceeds on the treasury rate lock will be amor-
tized over the term of the notes, reducing the effective interest
rate to the Company for the Notes to 5.87%. Also, in January
2004, we entered into a fixed-for-variable interest rate swap
with a notional amount of $100 million.
In July 2001, we issued $250 million of seven year, non-
callable, senior subordinated notes due on July 15, 2008. The
notes contain provisions that, in certain circumstances, place
financial restrictions or limitations on our Company. The notes
have a coupon interest rate of 10.00%, payable semi-annually
on January 15 and July 15. In August 2001, we entered into
LIBOR-based variable rate swap agreements with notional
amounts aggregating $250 million. In September 2002, we ter-
minated the swap agreements and received a payment of $18.8
million plus accrued interest receivable. The proceeds from
settlement are being amortized as a partial offset to interest
expense over the remaining life of the notes, lowering the
effective interest rate on these borrowings to 8.7%.
In October 2003, our Board of Directors authorized the
Company to repurchase up to $50 million of its common
stock. The repurchased shares are to be added to the Company’s
treasury shares and will effectively offset a portion of the
Company’s near-term requirements for its stock option and
other benefit plans. Under this program, we purchased approx-
imately 3.2 million shares of our stock during 2003 at a total
cost of $50.1 million. A similar program was authorized in
late 2001, and during 2002, we purchased 2.9 million shares
of our stock at a total cost of $45.9 million and 252,000 shares
during 2001 at a cost of $4.2 million.
During 2002, we exercised our option and redeemed all of
the outstanding shares of convertible subordinated notes, origi-
nally issued in 1992 and 1993. The shares were redeemed at
original issue price plus accrued interest, totaling $243 million.
Our 2001 net cash used in financing activities consisted
mainly of long- and short-term debt payments of $400.5 mil-
lion to pay off borrowings under our domestic credit facility
that accumulated during the fourth quarter of 2000, mainly to
support the repurchase of convertible subordinated notes
23 Office Depot 2003 / Form 10-K