Office Depot 2002 Annual Report Download - page 41

Office Depot, Inc. and Subsidiaries 39
The tax-effected components of deferred income tax assets and liabili-
ties consisted of the following:
December 28, December 29,
(Dollars in thousands) 2002 2001
Self-insurance accruals $ 26,049 $ 28,020
Inventory 34,125 25,150
Vacation pay and other
accrued compensation 31,558 29,670
Reserve for bad debts 4,585 12,724
Reserve for facility closings 52,637 56,151
Merger costs 4,934 5,304
Unrealized loss on investments 20,279 19,266
Foreign and state net operating
loss carryforwards 86,281 88,006
Other items, net 39,545 23,451
Gross deferred tax assets 299,993 287,742
Valuation allowance (86,281) (72,605)
Deferred tax assets 213,712 215,137
Basis difference in fixed assets 81,016 71,880
Capitalized leases 5,417 5,573
Excess of tax over book amortization 3,356 3,641
Other items, net 1,730 1,856
Deferred tax liabilities 91,519 82,950
Net deferred tax assets $122,193 $132,187
As of December 28, 2002, we had approximately $148 million of foreign
and $751 million of state net operating loss carryforwards. Of these
carryforwards, approximately $19 million will expire in 2003, $10 mil-
lion will carry over indefinitely, and the balance will expire between
2004 and 2022. The valuation allowance has been developed to reduce
our deferred tax asset to an amount that is more likely than not to be
realized, and is based upon the uncertainty of the realization of certain
foreign and state deferred tax assets relating to net operating loss carry-
forwards. Also, during 2002, we made an election that resulted in the
utilization of acquired net operating losses associated with 4Sure.com.
This election reduced deferred tax assets and increased goodwill (see
Note E), with no impact on results of operations or current period cash
flow. This and certain other non-cash items have been removed for cash
flow presentation.
The following is a reconciliation of income taxes at the Federal statu-
tory rate to the provision for income taxes:
(Dollars in thousands) 2002 2001 2000
Federal tax computed
at the statutory rate $167,721 $109,945 $32,361
State taxes, net of
Federal benefit 8,526 13,333 6,899
Non-deductible
goodwill amortization —1,834 1,744
Foreign income taxed
at rates other than Federal (12,656) (14,534) (1,822)
Other items, net 4,131 1,718 2,790
Provision for income taxes $167,722 $112,296 $41,972
Note H—Commitments and Contingencies
Operating Leases: Office Depot leases facilities and equipment under
agreements that expire in various years through 2029. Substantially all
such leases contain provisions for multiple 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 our facility
leases. Certain leases contain provisions for additional rent to be paid if
sales exceed a specified amount. The table below shows future minimum
lease payments due under non-cancelable leases as of December 28,
2002. These minimum lease payments include facility leases that were
accrued as store closure costs (See Note C).
(Dollars in thousands)
2003 $ 390,771
2004 353,042
2005 308,916
2006 272,697
2007 251,148
Thereafter 1,118,332
2,694,906
Less sublease income 90,718
$2,604,188
The Company is in the process of opening new stores and CSCs in the ordi-
nary course of business, and leases signed subsequent to December 28,
2002 are not included in the above described commitment amounts.
Rent expense, including equipment rental, was approximately $404.9 mil-
lion, $398.1 million and $393.5 million in 2002, 2001, and 2000, respec-
tively. Included in this rent expense was approximately $0.7 million,
$0.7 million, and $1.1 million of contingent rent, otherwise known as
percentage rent, in 2002, 2001, and 2000, respectively. Rent expense
was reduced by sublease income of approximately $2.9 million in 2002,
$3.0 million in both 2001 and 2000.
Guarantee of Private Label Credit Card Receivables: Office Depot
has private label credit card programs that are managed by a financial
services company. The Company acts as the guarantor of all loans
between our commercial customers and the financial services company.
The difference between the transfer amount and the amount received
is recognized in store and warehouse operating and selling expense.
Maximum exposure to off-balance sheet credit risk is represented by
the outstanding balance of private label credit card receivables trans-
ferred, less reserves held by the financial services company which are
funded by us. At December 28, 2002, the transferred amount totaled
approximately $265.4 million. The fair value liability associated with risk
of loss is included in accrued expenses.
Other: We are involved in litigation arising in the normal course of
business. In our opinion, these matters will not materially affect our
financial position or results of operations.
Note I—Employee Benefit Plans
Long-Term Equity Incentive Plan
The Long-Term Equity Incentive Plan, which was approved by the
Company’s stockholders, effective October 1, 1997. This plan provides