Office Depot DEF 14A 2007
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Filed by the Registrant þ
Filed by a Party other than the Registrant o
Check the appropriate box:
OFFICE DEPOT, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
OFFICE DEPOT, INC.
2200 Old Germantown Road
Delray Beach, Florida 33445
By order of the Board of Directors,
David C. Fannin
Executive Vice President, General Counsel &
Delray Beach, Florida
April 2, 2007
Please note that for security reasons, we will require that you present the admission ticket included with this Proxy Statement. We also will require positive picture identification from all attendees at our Annual Meeting. We reserve the right to exclude any person whose name does not appear on our official shareholder list as of our record date of March 20, 2007. If you hold shares in street name and do not have a ticket, you must bring a letter from your stockbroker, or a current brokerage statement, to indicate that the broker is holding shares for your benefit. We also reserve the right to request any person to leave the Annual Meeting who is disruptive, refuses to follow the rules established for the meeting or for any other reason. Cameras, recording devices and other electronic devices, signs and placards will NOT be permitted at the meeting.
2007 ANNUAL MEETING OF SHAREHOLDERS
OF OFFICE DEPOT, INC.
This Proxy Statement contains important information about our 2007 Annual Meeting of Shareholders to be held on April 25, 2007 (Annual Meeting). We are mailing this Proxy Statement and accompanying proxy card to our shareholders on or about April 2, 2007.
Purposes of the Meeting. Our Annual Meeting will consider important matters outlined in the Notice of this Meeting. We have mailed these proxy materials to you in connection with the solicitation of proxies by our board of directors (Board of Directors or individually Directors). Our Board of Directors asks that you authorize your proxies to vote as our Board of Directors recommends.
Voting your Shares. If you cannot attend the Annual Meeting in person, you may vote your shares: (1) by completing, signing and returning your proxy card to us in the enclosed postage-paid envelope; (2) by voting electronically using a touch-tone telephone (866-540-5760); or (3) by using the Internet to vote your shares (www.proxyvoting.com/odp). If your shares are held in street name with a broker or similar party, you will need to contact your broker to determine whether you will be able to vote using one of these alternative methods. If you vote over the Internet, you may incur costs such as telephone and Internet access charges for which you will be responsible. If you choose to use the Internet or telephone to vote, you must do so by 6:00 p.m. Eastern Daylight Time on April 24, 2007, the day before our Annual Meeting takes place.
Delaware law permits electronically transmitted proxies, provided that each such proxy contains or is submitted with information from which the inspectors of election can determine that such proxy was authorized by the shareholder. The voting procedures available to registered shareholders for the Annual Meeting are designed to authenticate each shareholder by use of a control number, to allow shareholders to vote their shares, and to confirm that their instructions have been properly recorded.
OUR BOARD OF DIRECTORS RECOMMENDS that you vote FOR its nominees as Directors of the Company as described in Item 1; that you vote FOR the adoption of the Office Depot, Inc. 2007 Long-Term Incentive Plan as described in Item 2; and that you vote FOR the ratification of our Audit Committees appointment of Deloitte & Touche LLP as our independent public accountants as described in Item 3.
We also strongly urge you to vote by means of the telephone or the Internet as this allows for automatic tally of your votes and also saves Office Depot the cost of return postage. However you choose to vote, we urge you to VOTE as early as possible.
Proxies. Our Board of Directors has appointed certain persons (proxies) to vote proxy shares in accordance with the instructions of our shareholders. If you authorize the proxies to vote your shares, but do NOT specify how your shares should be voted, they will vote your shares as our Board of Directors recommends. If any other matters are presented for consideration at our Annual Meeting, your shares also will be voted as our Board of Directors recommends, unless you indicate on your proxy card that you withhold such authority. You can change or revoke your proxy (1) by mailing your request to our Corporate Secretary at our corporate headquarters so that it is received not later than 4:00 p.m. Eastern Daylight Time, on April 24, 2007, (2) by filing a proxy with a later date or (3) by voting your shares by ballot in person at the Annual Meeting.
Solicitation of Proxies. In addition to soliciting proxies by mail, we also may solicit proxies in person, by telephone or over the Internet. Our employees do not receive additional compensation for their solicitation services. Certain banking institutions, brokerage firms, custodians, trustees, nominees and fiduciaries who
hold shares for the benefit of another party (the beneficial owner) may solicit proxies for us. If so, they will mail proxy information to, or otherwise communicate with, the beneficial owners of shares of our common stock held by them. We also have hired Mellon Investor Services, LLC to assist us in communicating with these institutions and forwarding solicitation materials to them, and we have agreed to pay Mellon Investor Services a fee of $13,500 plus reimbursement of their reasonable out-of-pocket expenses in connection with this service. We will also reimburse brokerage firms and other custodians, nominees and fiduciaries for their expenses incurred in sending proxies and proxy materials to beneficial owners of our common stock.
Shareholders Eligible to Vote at Our Annual Meeting; List of Shareholders Available. Owners of our common stock as of the close of business on March 20, 2007 (the Record Date) will be entitled to vote at our Annual Meeting. Our official stock ownership records will conclusively determine whether you are a holder of record as of the Record Date. A list of shareholders entitled to vote at the meeting will be available at our Annual Meeting and for ten days prior to the meeting between the hours of 9:00 a.m. and 4:00 p.m. Eastern Daylight Time at our corporate headquarters in Delray Beach, Florida. As of March 20, 2007, there were 276,036,021 shares of common stock issued by Office Depot and owned by shareholders (i.e., excluding shares held in treasury by Office Depot). Each share of common stock is entitled to one vote on each matter considered at our Annual Meeting.
Establishing a Quorum. In order for us to transact business at our Annual Meeting, the holders of the majority of the outstanding shares of our stock must be present, either in person or by proxy. Shareholders choosing to abstain from voting and broker non-votes will be treated as present and entitled to vote for purposes of determining whether a quorum is present.
Effect of Abstentions and Broker Non-Votes. Brokers who hold shares for the accounts of their clients may vote such shares either as directed by their clients or in their own discretion if permitted by the stock exchange or other organization of which they are members. For purposes of the 2007 Annual Meeting, members of the New York Stock Exchange are permitted to vote their clients proxies in their own discretion as to the election of directors if the clients have not furnished voting instructions within 10 days of the meeting. Certain proposals other than the election of directors are non-discretionary and brokers who have received no instructions from their clients do not have discretion to vote on those items. When a broker votes a clients shares on some but not all of the proposals at a meeting, the missing votes are referred to as broker non-votes. Abstentions and broker non-votes will not be counted as a vote for or against any matter. However, abstentions will have the same effect as voting no or against a matter voted on at our Annual Meeting which requires the affirmative vote of a majority of the shares present and voting, except with respect to the election of directors. Broker non-votes will not be counted as shares entitled to vote and accordingly will not affect the outcome with respect to any matter to be voted on at the Annual Meeting. Under the rules of the New York Stock Exchange, brokers may not vote their clients shares with their own discretion with respect to Item 2, the approval of the 2007 Long-Term Incentive Plan.
Householding of Annual Disclosure Documents. The Securities and Exchange Commission has approved a rule concerning the delivery of disclosure documents, called householding. Under that rule, certain banks, brokers and other intermediaries have arranged for a single set of our Annual Report and Proxy Statement to be delivered to multiple shareholders sharing an address unless those banks, brokers and other intermediaries have received contrary instructions from one or more of the shareholders. The rule applies to our annual reports and proxy statements. Each shareholder will continue to receive a separate proxy card or voting instruction card. We will deliver promptly upon written or oral request a separate copy of this Proxy Statement and the Annual Report to a shareholder at a shared address to which a single copy of the document was sent. If you would like to receive your own set of such documents in future years, contact us by calling or writing to our Department of Investor Relations at our Corporate Headquarters at: 2200 Old Germantown Road, Delray Beach, FL 33445 or call us at: (561) 438-4800.
Two or more shareholders sharing an address can request delivery of a single copy of our annual disclosure documents if they are receiving multiple copies by contacting us in the same manner. If a broker or other nominee holds your shares, please contact ADP and inform them of your request by calling them at: (800) 542-1061 or writing to them at: Householding Department, 51 Mercedes Way, Edgewood, NY 11717. Please be sure to include your name, the name of your brokerage firm, and your account number.
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MATTERS TO BE CONSIDERED BY OUR SHAREHOLDERS
Twelve (12) individuals have been nominated for election as Directors at our Annual Meeting, to serve for a term of office that continues from the date and time of their elections until our next annual meeting of shareholders, or until their successors are elected and qualified. Subject to our Corporate Governance Guidelines discussed below in the section captioned Corporate Governance, the 12 nominees for the office of Director will be elected by majority vote. In an uncontested election, each Director nominee must be elected by a majority of the votes cast. In a contested election (an election in which the number of candidates exceeds the number of director positions to be filled), the traditional plurality vote standard shall apply. All of our Directors form a single class of Directors and stand for election each year. Information about the nominees, their business experience and other relevant information is set forth below.
Should any of these nominees become unable to serve (for example, if any of them should become seriously ill or incapacitated or should die), our Corporate Governance & Nominating Committee may propose a substitute nominee. If a substitute nominee is named, all proxies voting FOR the nominee who is unable to serve will be voted for the substitute nominee so named. If a substitute nominee is not named, all proxies will be voted for the election of the remaining nominees (or as directed on your proxy card). In no event will more than twelve (12) Directors be elected at our Annual Meeting.
On July 27, 2006, our Board of Directors approved an amendment to the Companys Bylaws, which revised the vote standard for the uncontested election of Directors from a plurality standard to a majority of the votes cast standard. This new director election standard applies for the first time this year. The new standard requires that each nominee for Director must be elected by a majority of the votes cast by the shares of the Company that are outstanding and entitled to vote in the election. This means that the number of votes cast for a Director nominee must exceed the number of votes against the nominee. Pursuant to the Companys Bylaws, abstentions are not considered to be votes cast; therefore an abstention will have no effect on the election of directors.
Pursuant to Article II, Section 9 of our amended and restated Bylaws, in any uncontested election of directors, any Director who is an incumbent Director who does not receive a greater number of votes cast for his election than votes against his or her election must tender his or her resignation to the Board of Directors. After the Director tenders his or her resignation, the Board of Directors must then decide within 90 days of the date the Director submitted his or her resignation, through a process managed by the Corporate Governance & Nominating Committee (and excluding the Director in question from all Board of Directors and Committee deliberations), whether to accept the Directors resignation. Absent a compelling reason for the Director to remain on the Board of Directors, as determined by the Board of Directors, the Board of Directors shall accept the Directors resignation. If the Board of Directors determines that there is a compelling reason for the Director to remain on the Board of Directors and does not accept the Directors resignation, the Board of Directors must publicly disclose its decision either in a Current Report on Form 8-K filed with the Securities and Exchange Commission or in a press release.
If the Board of Directors accepts an incumbent Directors resignation, that Director will immediately cease to be a member of the Board of Directors. If the Board of Directors does not accept an incumbent Directors resignation, that Director will continue to serve until the next annual meeting of shareholders, or until the earlier of his or her subsequent resignation or removal. If a Director nominee who was not already serving as an incumbent Director is not elected at the annual meeting, under Delaware law and our amended and restated Bylaws, that Director Nominee would not become a director and would not serve on the Board of Directors as a holdover director.
Your Board of Directors Recommends a Vote FOR Item 1 on Your Proxy Card
Election of all Nominees Listed Above as Directors
Mr. Ault has served as a Director since 1998. He is currently Chair of the Board of Directors (non-executive) of American Funds Insurance Series and Chair of the Board of Directors (non-executive) of American Funds Target Date Retirement Series, Inc., both mutual funds managed by Capital Research and Management Company. He served as Chair of the Board of Directors of In-Q-Tel, a technology venture company, from 1999 until December 2006 and was formerly Chair, President and Chief Executive Officer of Telecredit, Inc., a payment services company that merged with Equifax, Inc. in 1990. He served as a Director of Viking Office Products, Inc. from 1992 until August 1998 when Office Depot merged with Viking Office Products. He also is a Director of Anworth Mortgage Asset Corporation, a real estate investment trust.
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).
Mr. Bernauer has served as a Director since 2004. He currently serves as Chair of Walgreen Co. since July 2006. From 2003 until July 2006 Mr. Bernauer served as Chair and Chief Executive Officer of Walgreen. From 2002 to 2003 he served as President and Chief Executive Officer of Walgreen; from 1999 to 2002 as President and COO of Walgreen, and he has served in various management positions, with increasing areas of responsibility at Walgreen since 1966.
Mr. Bru has served as a Director since 2004. Mr. Bru retired as Vice Chair of PepsiCo in February 2005. From February 2003 until September 2004, he served as Chair and Chief Executive Officer of Frito-Lay North America. Frito-Lay North America is a division of PepsiCo, Inc. and the largest snack-food maker in the world. He joined Frito-Lay in 1999 as President and Chief Executive Officer. Prior to joining Frito-Lay, Mr. Bru served in various capacities for Sabritas, a subsidiary of PepsiCo and the largest snack food maker in Mexico, from 1981 to 1999. Mr. Bru served in various senior international positions with PepsiCo Foods International since joining PepsiCo in 1976 until his retirement in 2005. Currently he is also a Director of Kimberly-Clark Corporation.
Ms. Evans has served as a Director since September 2006. Ms. Evans retired from the U.S. Navy in 1998 with the rank of Rear Admiral. Ms. Evans was National Executive Director of Girl Scouts of the USA from 1998 to 2002 and President and CEO of the American Red Cross from 2002 to 2005. Currently, she is also a Director of Huntsman Corporation, Lehman Brothers Holdings and Weight Watchers International.
Mr. Fuente has been a Director since he joined Office Depot in 1987. Until December 2001, he served as Chair of our Board of Directors. From December 1987 until July 2000, Mr. Fuente also served as Chief Executive Officer of our Company. He is a Director of Ryder System, Inc., and Dicks Sporting Goods.
Ms. Gaines has been a Director since 2002. Ms. Gaines retired in 2004 from her position as President and Chief Executive Officer of Diners Club North America, a Division of Citigroup, a position she held from 2002 until 2004. She served as President of Diners Club North America from 1999 until 2002. From 1994 until 1999, she served as Executive Vice President, Corporate Card Sales, for Diners Club North America, and prior to that she served in various positions of increasing responsibility within Citigroup or its predecessor corporations from 1988. From 1985 until 1987, Ms. Gaines was Deputy Chief of Staff for the Mayor of the City of Chicago. She currently is a Director of CNA Financial Corporation, the Federal National Mortgage Association (Fannie Mae), and of Tenet Healthcare Corporation. She also serves on the Board of Directors of the March of Dimes, the Committee of 200 Foundation and the Economic Club of Chicago.
Dr. Hart has served as a Director since 2004. From 1995 to the present time, she has served as Professor, Entrepreneurial Management, at the Harvard Business School. From 1985 until 1990, Dr. Hart was a member of the Staples, Inc. founding management team, leading operations, strategic planning and growth implementation in new and existing markets. She is a Director of eCornell, Nina McLemore Inc., Royal Ahold NV, Summer Infant, Inc. and IntelliVid Corporation. Dr. Hart is also a Director of the Center for Womens Business Research, a Trustee of Cornell University.
Mr. Hedrick has been a Director since 1991. From November 1986 until April 1991, he was a Director of The Office Club, Inc., which was acquired by Office Depot in 1991. He was a founder and has been a general partner of InterWest Partners, a venture capital fund, since 1979. Mr. Hedrick is also a Director of Hot Topic and in December 2006, he joined the Board of Directors of the American Funds Target Date Retirement Series Inc.
Ms. Mason has served as a Director since September 2006. She currently serves as President and Chief Executive Officer of Tuesday Morning Corporation and has served in that position since July 2000. From July 1999 to November 1999, Ms. Mason served as President of Filenes Basement, a department store chain. From January 1997 to June 1999, Ms. Mason was President of HomeGoods, an off-price home fashion store and a subsidiary of TJX Companies. Ms. Mason was Chair and Chief Executive Officer of Cherry & Webb, a womens specialty store, from February 1987 to December 1996. Prior to those dates, she held management positions at Kaufmanns Division of the May Company, Mervyns Division of Target, Inc. and the Limited. She is also a Director of The Mens Wearhouse, Hot Topic, Inc., and Genesco, Inc. Ms. Mason has announced her intention not to stand for re-election to the Boards of The Mens Wearhouse and Hot Topic, Inc. in 2007.
Mr. Myers has served as a Director since 1987. He is a Senior Advisory Partner of Sentinel Capital Partners, a private equity investment firm. He is also the President and a Director of Smith Barney Venture Corp., a wholly owned subsidiary of Smith Barney Holdings, Inc., which acts as the managing general partner
of First Century Partnership III, a private venture capital investment fund. From 1976 until January 1992, he was a Senior Vice President and Managing Director of Smith Barney, Harris Upham & Co., Inc.
Mr. Odland has been Chair and Chief Executive Officer since March 11, 2005. Immediately prior to joining Office Depot, Inc., he was Chair, Chief Executive Officer, and President of AutoZone, Inc. from 2001 until March 2005. Previously he was an executive with Ahold USA from 1998 to 2000. Mr. Odland was President of the Foodservice Division of Sara Lee Bakery from 1997 to 1998. He was employed by The Quaker Oats Company from 1981 to 1996 in various executive positions. Mr. Odland is also a Director of General Mills, Inc.
We are committed to principles of good corporate governance and the independence of our Board of Directors from our management. Our Corporate Governance Guidelines may be viewed at our corporate web site, www.officedepot.com under the headings Company Information/Investor Relations/Corporate Governance. In addition, a printed copy of our Corporate Governance Guidelines will be provided to any shareholder upon written request to our Corporate Secretary. The Board of Directors adopted these Guidelines to monitor the effectiveness of policy and decision-making both at the Board of Directors and management level, and to enhance shareholder value over the long-term.
The Board of Directors evaluates the independence of each nominee for election as a Director of our Company in accordance with the Corporate Governance Guidelines it has adopted, which incorporate the applicable listing standards of the New York Stock Exchange. Pursuant to our Corporate Governance Guidelines, a majority of our Board of Directors must be Independent Directors within the meaning of the New York Stock Exchanges listing standards, and all Directors who sit on our Corporate Governance & Nominating Committee, Audit Committee and Compensation Committee must also be Independent Directors.
All members of our Audit Committee, Compensation Committee and our Corporate Governance & Nominating Committee have been determined by our Board of Directors to be Independent Directors. Our Board of Directors has reviewed the various relationships between members of our Board of Directors and the Company and has affirmatively determined that none of our Directors has a material relationship with Office Depot other than Mr. Odland, our Chair and Chief Executive Officer, who is a full time employee of our Company.
As a result, all members of our Board of Directors other than Mr. Odland have been determined to be Independent Directors. This determination by our Board of Directors is based upon an individual evaluation of each of our Directors, his or her employment or Board of Directors affiliations, and a determination either that the Independent Director has no business relationship with our Company other than his or her service on our Board of Directors or that while an Independent Director may have some involvement with a company or firm with which we do business, our Board of Directors has determined that such involvement is not material. None of our Directors serves as an executive officer of a charitable organization to which we made contributions during 2006. Our Chief Executive Officer, Mr. Odland, is not a member of any Committees of our Board of Directors.
Our Lead Director is Neil R. Austrian. As Lead Director, Mr. Austrian presides at regularly scheduled executive sessions of non-management Directors. The non-management Directors select the Director to serve as Lead Director. That Director is required to be an Independent Director of the Board of Directors.
Our Corporate Governance & Nominating Committee recently recommended and our Board of Directors adopted, in February 2007, a new written policy on related person transactions, and that policy has been applied in the determination of independence of our Directors. Our Related Person Transactions Policy (the Policy) sets forth the procedures governing the review and approval or ratification of transactions between the Company, on the one hand, and an executive officer or director or an immediate family member, on the other hand.
This Policy applies to all related person transactions, and under the Policy a related person transaction is any transaction:
No related person transaction shall be approved or ratified if such transaction is contrary to the best interests of the Company. Unless different terms are specifically approved or ratified by the Corporate Governance & Nominating Committee, any approved or ratified transaction must be on terms that are no less favorable to the Company than would be obtained in a similar transaction with an unaffiliated third party under the same or similar circumstances. All related person transactions or series of similar transactions must be presented to the Corporate Governance & Nominating Committee for review and pre-approval or ratification. A copy of the Policy is available for review on the Companys web site at www.officedepot.com under the headings Company Information/Investor Relations/Corporate Governance.
Candidates for election to our Board of Directors are nominated by our Corporate Governance & Nominating Committee and ratified by our Board of Directors for nomination to the shareholders. The Corporate Governance & Nominating Committee operates under a charter, which is available on our corporate web site at www.officedepot.com.
Candidates Recommended by Shareholders. Our Corporate Governance & Nominating Committee will give due consideration to candidates recommended by shareholders. Shareholders may recommend candidates for the consideration of the Corporate Governance & Nominating Committee by submitting such recommendation directly to the Committee by mail, as described under the heading Corporate Governance; Communicating with our Board of Directors. In making recommendations, shareholders should be mindful of the discussion of minimum qualifications set forth in the following paragraph.
Qualifications for Nomination. Our Corporate Governance & Nominating Committee believes that the minimum qualifications for serving on our Board of Directors are that a nominee have substantial experience in working as an executive officer for, or serving on the Board of Directors of, a public company, or that he or she demonstrates by significant accomplishment in another field of endeavor, whether in the for-profit or the non-profit sectors, an ability to make a meaningful contribution to the oversight and governance of a company having a scope and size similar to our Company. A Director must have an exemplary reputation and record for honesty in his or her personal dealings and business or professional activity, as confirmed by a background and security check. All Directors should possess a basic understanding of financial matters, have an ability to review and understand our financial and other reports, and to discuss such matters intelligently and effectively. He or she also needs to exhibit qualities of independence in thought and action. A candidate should be committed first and foremost to the interests of all our shareholders. Persons who represent a particular special interest, ideology, narrow perspective or point of view would not, therefore, generally be considered good candidates for election to our Board of Directors. In addition to these factors, the Committee seeks to have a Board of Directors that represents diversity as to gender, race, ethnicity and background experiences.
Methods of Finding Qualified Nominees. Our Corporate Governance & Nominating Committee identifies nominees in a number of ways. One method is the recommendation of sitting members of the Board of Directors, who personally know and have an understanding of the qualifications of a proposed nominee. A second method is an awareness of persons who are successful in business, the non-profit sector or a profession,
whether personally known to a member of the Board of Directors or not. Such persons are contacted from time to time to ask whether they would be willing to serve. If they are willing, then the Committee conducts significant amounts of due diligence to ensure that a nominee possess the qualifications, qualities and skills outlined above. The Corporate Governance & Nominating Committee also from time to time engages search firms to assist the Committee in identifying potential nominees to our Board of Directors. These firms conduct searches on behalf of the Corporate Governance & Nominating Committee and provide the Committee with names of potential director candidates. We pay these firms a fee for such services. In 2007, the Corporate Governance & Nominating Committee engaged a search firm known as The Directors Council to assist in searching for two new Directors, to bring the total number of our Board of Directors to twelve. As mentioned above, our Corporate Governance & Nominating Committee also is open to receiving recommendations from shareholders as to potential candidates it might consider.
Our shareholders and any other parties interested in communicating with our Board of Directors may contact any member (or all members) of our Board of Directors (including without limitation the Lead Director, Neil R. Austrian, or the Independent Directors as a group), any Committee of our Board of Directors or any Chair of any such Committee by mail. To communicate with our Directors by mail, correspondence may be addressed to any individual Director by name, to the Independent Directors as a group, to the Lead Director by title, to any Committee of our Board of Directors by name or to any Committee Chair either by name or by title. All such mailings are to be sent c/o Corporate Secretary to our corporate headquarters address, which is 2200 Old Germantown Road, Delray Beach, FL 33445.
In addition, any person who desires to communicate any matter specifically and confidentially to our Audit Committee may contact the Audit Committee by addressing a letter to the Chair of the Audit Committee, c/o Corporate Secretary, at our corporate headquarters address. Mark on the outside of the envelope that the communication inside is Confidential. Such communications to our Audit Committee may be submitted anonymously to the Audit Committee Chair, in which event the envelope will not be opened for any purpose, other than appropriate security inspections. Otherwise, such mailing will be forwarded directly to the Chair of our Audit Committee for his or her review and follow-up action as he or she deems appropriate.
It is our Board of Directors policy that each of our Directors should attend the Annual Meeting, at which time they are available to answer questions that may be raised in the question and answer period. At our 2006 Annual Meeting, nine of our ten Directors were in attendance.
Our Board of Directors has adopted a Code of Ethical Behavior for all of our employees. This Code also applies to our Directors. A copy of this Code may be viewed at our corporate website, www.officedepot.com under the headings Company Information/ Investor Relations/ Corporate Governance. In addition, a printed copy of our Code of Ethical Behavior will be provided to any shareholder upon written request to our Corporate Secretary at our address listed elsewhere in this Proxy Statement.
At the direction of the Board of Directors, our management has established the confidential Office Depot Hotline to assist our employees in complying with their ethical and legal obligations and reporting suspected violations of applicable laws, our policies, or established procedures. The Hotline enables our associates to express their concerns about possible violations of law or our policies without fear of retribution or retaliation of any kind. It is our express policy that no retaliatory action of any sort be taken against any associate using the Hotline procedure. The Hotline is operated by an independent third party, not by Company personnel. The Hotline can be accessed by either calling the following toll-free number or visiting the following web site:
The Board of Directors has established four standing committees (i) Audit, (ii) Compensation, (iii) Corporate Governance & Nominating and (iv) Finance. Our Board of Directors met five times during fiscal 2006. All of our Directors attended more than 75% of the total number of Board of Directors meetings and meetings of the committees on which they serve. The table below shows the current membership for each of the Board of Directors standing committees:
Each of the four committees of our Board of Directors has a written charter that has been approved by our Board of Directors, is available for review on our corporate website, www.officedepot.com under the headings Company Information/Investor Relations/Corporate Governance and is available in hard copy upon written request to our Corporate Secretary.
The Audit Committee has four members and typically meets at least four times per year. During 2006, the Audit Committee held seven meetings on: February 14, April 24, May 10, July 26, August 21, October 16 and November 7. Our Board of Directors has reviewed and made the determinations required by the listing standards of the New York Stock Exchange and regulations of the United States Securities and Exchange Commission (SEC) regarding the independence and financial literacy of the members of our Audit Committee. All members of the Audit Committee have been determined to be financially literate. In addition, our Board of Directors has determined that the following members of our Audit Committee qualify as audit committee financial experts within the meaning of the applicable regulations of the SEC: Brenda Gaines, Kathleen Mason and Michael Myers.
This determination has been made by our Board of Directors with respect to: (a) Ms. Gaines by virtue of her professional background, her years of working in the financial services industry, including most recently serving as North American President and Chief Executive Officer of Diners Club, a Division of Citigroup, a position she held from 2002 until her retirement in 2004; (b) Ms. Mason by virtue of her professional background, her experience as a Chief Executive Officer of and active participation on Boards of Directors of other publicly traded companies as well as on other audit committees of public companies; and (c) Mr. Myers, by virtue of his extensive career in business, including the securities industry, and experience in the areas of investment banking, finance and business. None of the members of our Audit Committee serves on more than three audit committees of public companies, including Office Depot, Inc.
The Audit Committee is responsible for the performance of our internal audit function as well as ensuring our compliance with legal and regulatory requirements, assessing and mitigating financial risks to the Company, and insuring the integrity of our financial reporting process. The Audit Committees responsibilities, discussed in detail in its charter, include, among other duties, the duty to:
The Corporate Governance & Nominating Committee has four members and typically meets three to four times per year. During 2006, the Corporate Governance & Nominating Committee met six times, on January 12, February 15, June 22, July 27, August 24, and November 8. Neil R. Austrian, the Chair of our Corporate Governance & Nominating Committee, also serves as the Lead Director of our Board of Directors. Pursuant to our Corporate Governance Guidelines, the Chair of the Corporate Governance & Nominating Committee also serves as the Companys Lead Director. He or she is elected to a one-year term and may serve a maximum of two successive such terms.
Our Corporate Governance & Nominating Committee is responsible for establishing and monitoring the effectiveness of the overall corporate governance philosophy and the Director nomination process. The Corporate Governance & Nominating Committees responsibilities include, among other duties, the duty to:
In addition, the Corporate Governance & Nominating Committee is also responsible for reviewing and approving any transactions between the Company and any related person including any of the corporations officers, directors or their immediate family members. See Corporate Governance; Related Person Transactions Policy.
The Compensation Committee has five members and typically meets four times per year. During 2006, the Compensation Committee met four times, on January 25, February 14, July 26, and November 7. The Compensation Committee is comprised of at least three Independent Directors.
Our Compensation Committee is responsible for establishing and monitoring the effectiveness of the overall compensation philosophy and policies of our Company. The Compensation Committees responsibilities, discussed in detail in its charter include, among other duties, the duty to:
The Chair of the Compensation Committee works with our Human Resources management and the General Counsel to set individual meeting agendas for the Compensation Committee following an overall annual calendar of regular activities that has been approved by the Committee and ratified by the Board of Directors.
The current Charter of the Compensation Committee was adopted on July 27, 2005, and describes the principles upon which the Committee is founded and operates. The Charter is reviewed periodically to ensure that the Compensation Committee is fulfilling its duties in aligning our executive compensation program with shareholder value creation, ensuring that we attract and retain talented executives and managers, and are being responsive to the legitimate needs of our shareholders.
The Compensation Committee has delegated authority to the Chair of the Committee, along with the CEO and/or the Executive Vice President Human Resources (EVP HR), to approve new hire stock option grants for officers who are not executive officers, provided that such grants are at levels that do not exceed a level that is 25% above the annual target long-term incentive for the newly hired officer and otherwise follow policies approved by the Compensation Committee. Grants and awards to executive level officers are reserved to the full Compensation Committee. Except as discussed in the preceding sentences, the Compensation Committee has not delegated any of its authority (for example to a subcommittee) regarding any of our executive compensation matters.
Among other matters, the Charter provides the Compensation Committee with the independent authority to engage outside advisors (including independent compensation consultants and legal counsel) to study our compensation policies and practices, to explain general compensation trends and best practices, and to make recommendations regarding both general and specific director and executive compensation matters. The Compensation Committee currently has selected and engaged the Hay Group, a human resource and compensation consulting firm, as its independent advisor with respect to executive compensation. Pursuant to its charter, the decision to retain the Hay Group (as well as other independent advisors) is at the sole discretion of the Compensation Committee, and such consultants work at the direction of the Compensation Committee.
The Hay Group provides independent advice to the Compensation Committee on executive compensation matters and, with the agreement and approval of the Committee, also works separately with the Companys management team on job analysis and leveling, broad-based compensation design and the global alignment of executive and non-executive compensation strategies.
The Hay Group provides different consulting teams to conduct analyses for the Board of Directors and the Company and maintains distinct billing arrangements for each project thereby assuring there is no conflict between the two sets of activities. The Committee believes that the Hay Groups counsel to the Committee is uniquely enhanced due to the consultants broad understanding of the Companys compensation strategy and systems for all employees and its ability to assure that compensation systems throughout the Company have internal integrity.
The Compensation Committee Chair works directly with the Hay Group to determine the scope of the work needed to be performed to assist the Committee in its decision making processes. For example, the Hay Group meets with the Chair of the Compensation Committee to review issues and gain input on plan design and alternatives. In this process, these consultants also interact from time to time with other members of the Compensation Committee, the CEO, the EVP-HR, the General Counsel and other senior management to gain better understanding of our pay policies and practices and to facilitate the development of our executive compensation strategies and approach to determining compensation levels.
We believe that it is important for management to provide input on the overall effectiveness of our executive compensation programs. We believe that even the best advice of a compensation consultant or other advisors must be combined with the input of senior management and the Compensation Committees own individual experiences and best judgment to arrive at the proper alignment of compensation philosophy, programs and practices. The CEO, the EVP-HR and the General Counsel are the members of senior management who interact most closely with the Compensation Committee. These individuals work with the Compensation Committee to provide their perspectives on reward strategies and how to align them with the Companys business and people strategies. They provide feedback and insights into how well our compensation programs and practices appear to be working. The Compensation Committee looks to our General Counsel for legal advice in the design and implementation of compensation plans, programs and practices. In addition, the CEO, the EVP HR and the General Counsel regularly attend at least portions of Compensation Committee meetings to participate in the presentation of materials and discussion of managements point of view regarding compensation issues.
Only Compensation Committee members and others specifically requested by the Compensation Committee participate in the Committees meetings. At each meeting, the Compensation Committee meets in executive session without members of management present for the purpose of discussing matters independently from management.
At its first quarter meetings in each fiscal year, the Committee reviews the Companys financial results for the prior fiscal year to determine if performance goals were attained. The Committee obtains such analysis from management, its compensation consultant and others it may deem necessary, and then certifies the results and reports the results to the Board of Directors.
The Compensation Committee reviews and approves the performance and compensation of the Companys executive officers, except for the CEO whose performance and compensation are reviewed and established by the full Board of Directors. The Compensation Committee approves final pay packages of the executive officers (excluding the CEO) for ratification by the full Board of Directors (excluding non-Independent Directors).
This section outlines some of the significant decisions reached during the four meetings of the Compensation Committee in 2006. At its January 25 meeting, the Compensation Committee reviewed our preliminary financial results for the prior fiscal year to determine if performance goals were attained. The Compensation Committee obtained such analysis from management and its compensation consultant, and certified the results to the Board of Directors. At its November, 2006 meeting, the Compensation Committee approved a change to the annual cash incentive plan in which our executive officers participate. The flex allowed under the plan to reflect individual performance was increased from plus or minus 10% to plus-or-minus 25%. This increase in flex was implemented to place more emphasis on the individual contributions of executives. At its November meeting, the Compensation Committee also decided to move away from the blanket freeze in base salaries for officers and to consider individual salary adjustments on an annual basis (which is a change to the policy agreed to at the January meeting) based upon competitive salary information provided by the Hay Group. It agreed at the same time to continue to move annual cash incentive opportunities as a percent of base salary to the 75th percentile for the executive officers as measured against
the peer information. The Compensation Committee also approved enhanced life insurance that covers the executive officers, which could be obtained at no incremental increase in cost to the Company.
The Compensation Committee is composed entirely of Independent Directors. None of our executive officers has served on the Board of Directors or compensation committee (or other committee serving an equivalent function) of any other entity, one of whose executive officers served on our Board of Directors or Compensation Committee.
The Finance Committee has four members and typically meets at least four times each year. During 2006, the Finance Committee met seven times, on January 25, March 2, March 15, April 19, May 11, July 26, and November 7.
Our Finance Committee is responsible for overseeing our capital structure, financial policies, and business and financial plans. The Finance Committees responsibilities, discussed in detail in its charter include, among other duties, the duty to:
This Compensation Discussion and Analysis (CD&A) is intended to provide the reader with a clear and understandable discussion of our compensation philosophy and practices, the elements of compensation of our CEO and other members of our executive management, including our NEOs (as defined below), why those elements have been selected and how they are applied and implemented by our Compensation Committee and ratified by the Independent Directors of our Board of Directors.
Our compensation programs are designed to enable us to recruit and retain the executive management required to achieve our short-term and long-term business objectives. These programs are structured to motivate our executive management and maximize their long-term commitment to our success by providing compensation elements that align executives with our long-term strategies and the interests of our shareholders.
We provide a base salary that recognizes the value of an executive both to us and in the executive talent marketplace. We provide annual cash and equity incentives designed to reward our executive management for the achievement of our annual business plan and our short-term and long-term performance goals. We also make equity awards to our executive management to link their ability to build their own long term net worth with our stock performance and to encourage retention of key managers by providing for vesting schedules over multiple years.
While we provide our executive management with a limited number of standard benefits and perquisites that we believe are in line with other companies of similar size, it is not part of our compensation philosophy to extend personal benefits to our executive management beyond those normally provided to similarly situated officers in comparable companies.
The Chief Executive Officer and the Chief Financial Officer during fiscal 2006, as well as the other individuals named in the Summary Compensation Table that follows, are referred to as the named executive officers or NEOs. Our executive management includes the NEOs and the other members of our Executive Committee (the Executive Committee consists of our CEO and his/her direct reports, currently consisting of seven persons). Our compensation programs are designed to closely align compensation with our Companys financial performance on both a short-term and long-term basis. To that end, our compensation programs employ a leveraged strategy that focuses on variable as opposed to fixed compensation in order to focus our executives on our annual and long-term strategic and operational goals. Most of the executives compensation opportunity is directly related to our ability to achieve certain financial metrics including, but not limited to, components of EVA (economic value added), namely EBIT (earnings before interest and taxes) and ROIC (return on invested capital).
In determining the appropriate compensation for our CEO and the other members of executive management, we rely on external benchmarking against other companies that the Compensation Committee has determined comprise an appropriate peer group (the Peer Group) against which to measure our compensation for executive management; we also rely on the Hay Groups Retail Industry 2006 Total Remuneration Survey (the Survey) and on our own policies for allocating among the various components of compensation to comport with our compensation philosophy.
In October 2005, the Committee decided to adopt as our Peer Group for compensation purposes for 2006 the same group used to assess our stock performance, the Specialty Retail Group independently selected by Standard & Poors. The Committee believed at that time that the retail industry afforded the best benchmark against which to measure our compensation programs, and selected this group because it is representative of companies that we compete against for both talent and business. In February 2006, Walgreen Co. was added to the 2006 compensation Peer Group. The members of the compensation Peer Group are:
The Peer Group provides direct incumbent information on a reliable job title match (e.g., the CEO) for key competitors and other relevant companies. The Committee compared all components of our compensation against our Peer Group, including base salary, annual incentive targets and actual awards, the value of long-term incentive awards, and the prevalence non-qualified deferred compensation programs. The Committee considered as well that many executives in other companies participate in pension plans, whereas Office Depot does not have pension plans. In 2006 the CEOs compensation was benchmarked solely against the Peer Group. For the other NEOs, the Committee relied on both the Peer Group and the Survey, for purposes of evaluating the salaries and annual variable pay target levels (both cash and equity), but weighted the data in the Survey more heavily because of the Committees view that the data in the Survey could be more accurately applied to the job descriptions of these executive officers.
The Survey provides compensation data on the broader retail market place (covering over 70 organizations, a majority of which are specialty stores). The compensation data utilized from the Survey is selected based on job content since proxy matches by title may not be available or may not adequately represent actual job content of our executive officers other than the CEO. The Committee determined that this additional information was useful because of the variability of job content below the CEO level, with considerable variation in levels of responsibility and duties by title among our other NEOs which made a strict comparison against our Peer Group by job title impossible.
Our CEOs base salary has been set to reflect the median of the CEO salaries in our Peer Group, and his total cash compensation if annual performance metrics are achieved or exceeded at approximately the 75th percentile. For the remainder of our executive management, the Committee set base salaries at the median level from the Survey for jobs of similar scope and complexity. In the case of all our executive management, if threshold financial performance goals are not achieved, cash incentive portions of compensation (i.e. cash bonus) would be zero.
We established a goal of placing our CEOs target total direct compensation, which we define as base salary plus target annual cash incentive (bonus) opportunity plus target annual equity grant opportunity, at approximately the 75th percentile of the Peer Group if the Company achieves or exceeds its annual and strategic performance goals. In setting the CEOs 2006 compensation package to target this percentile in the Peer Group, approximately 90% of the CEOs total target direct compensation was in the form of either annual cash incentive opportunities or annual equity grant opportunities. For the remaining members of executive management, including the NEOs, we set target annual cash incentive opportunities and target annual equity grant opportunities around the 75th percentile of the Survey for jobs of similar scope and complexity. However, in 2006, the actual annual cash incentives and equity grants earned by and awarded to the NEOs other than our CEO fell between the median and the 75th percentile.
The Committee routinely reviews the appropriateness of our benchmarking approaches, including whether we should add additional or different comparative metrics or modify the makeup of the Peer Group to ensure that our executive compensation program is both competitive and appropriate. Beginning in the second half of 2006 and continuing into early 2007, the Committee has worked with the Hay Group to undertake a complete reevaluation of the Peer Group used for compensation benchmarking. As a result of this comprehensive review, the Compensation Committee has decided to reformulate the approach utilized in prior years to better reflect the increasingly complex nature of the Companys business.
Office Depot is no longer solely a retail company. North American retail stores currently account for less than 50% of total Company revenue. Almost one-third of Office Depots business currently is located outside North America; almost one-third of the Companys business is in the so-called B to B sector, consisting of direct sales to business customers via contract sales, catalogs and over the Internet; and the Company is placing increasing emphasis on developing its own privately branded, directly sourced products, thus establishing itself as a company that sells branded products.
In light of these considerations, for 2007 the Committee has selected a new peer group (the 2007 Peer Group) that continues to include relevant retail companies but that also now includes other companies that have a more global business, a B to B business model and companies that have important brands.
The members of our 2007 Peer Group are:
Our compensation programs employ a highly leveraged pay strategy. In 2006, the CEOs base salary comprised one-ninth of his target total direct compensation. Base salaries for the NEOs other than the CEO are targeted to comprise from approximately one-fourth to one-third of their target total direct compensation. Because our executive compensation programs are primarily focused on variable pay, we target an annual salary that is no more than approximately 30% of each executive officers total compensation package.
We view a competitive annual base salary as an important component of compensation to attract and retain executive talent. Annual base salaries also serve as the foundation for the annual corporate bonus plan, which expresses bonus opportunity as a percentage of annual base salary (long-term equity incentive compensation, by contrast, is not directly linked to annual base salary). While annual base salary levels and potential increases are directly linked to individual performance, we view annual base salary as a primary component of compensation that will be paid even if we do not achieve our annual financial performance goals. However, we will consider our financial performance when evaluating proposed salary budgets and may increase, maintain or decrease salary or terminate executives if our financial performance warrants such action.
We use a formal job evaluation methodology to determine both the internal and external equity of our NEOs total compensation. Internal equity is considered in order to ensure that members of our executive
management are compensated at an appropriate level relative to other members of our executive management, while external equity is a measure of how our compensation of executive management compares to compensation for comparable job content at other companies that are similar to our Company. The Hay Group reviews each of the executive positions using its proprietary method of job evaluation to assess the relative size of each position. In this process we consider the breadth of responsibilities, the complexity of the role, and the roles impact on the success of the business. Once each job is valued independently, we compare the jobs to determine relative relationships and then relate this to pay opportunity levels. Our CEO did not receive a base salary increase in 2006. Instead, the CEO, and the members of the executive management, including the NEOs, received a 5% increase to their target bonus opportunity levels under our Bonus Plan.
We provide annual cash incentives (generally referred to as bonuses) for our CEO and the other members of our executive management, including the NEOs, that are based upon our ability to meet annual financial performance targets of return on invested capital (ROIC) and earnings before interest and taxes (EBIT). We believe these financial metrics directly relate to the executive managements ability to influence economic value added (or EVA) performance, which drives long-term shareholder value creation. Company-wide, these financial metrics are used for both corporate and business unit incentive plan design and are focused on driving balanced growth in these two critical areas. In 2006, for the CEO and the other members of the executive management, 100% of the annual bonus was driven by total Company performance, as opposed to business unit performance, since we believe that their primary job is to direct the overall performance of the Company.
At the beginning of each fiscal year, we approve a Bonus Plan matrix that details the relationship between performance on the two financial metrics and payout as a percentage of the target performance level. The matrix establishes a threshold performance level, below which no bonus may be paid, and a target performance level for each metric based on the level of difficulty in achieving our operating business plan as well as the risks associated with such business plan. For 2006, we used targets of ROIC of 13.5% and EBIT of approximately $736,533,000 (excluding certain charges and credits). For 2006, Company performance exceeded both targets: ROIC was 15.6% and EBIT was approximately $822,400,000 (These are non-GAAP numbers and exclude certain charges and credits. For a reconciliation of these numbers see our website at www.officedepot.com).
For 2007, we are again using ROIC and EBIT as our performance metrics for our Bonus Plan. However, the 2007 targets will be higher than the targets used for 2006. We have established targets that we believe reflect goals based on our annual business plan, but also are targets that we believe most of our business units will be able to achieve. There is no pre-established maximum bonus for individual bonus awards, however, the incremental bonus pool shall not exceed 20% of any EBIT earned in excess of target EBIT, thus providing a percentage cap on bonus compensation.
Targets under the Bonus Plan are expressed as a percentage of annual base salary. Targets increase with job scope and complexity, thereby increasing variable pay opportunity for jobs that have a greater impact on our annual results. The 2006 target bonus for the CEO was 155% of his annual salary. For other members of our executive management, the target bonus was either 65% or 70% of their annual salary based on job scope and complexity.
The CEO may recommend to the Committee that it modify bonus payouts based upon individual performance by our executive management. In 2006, the CEO had discretion to recommend modifying bonus payouts up to plus or minus 10%, but capped for any one individual by the overall bonus pool. This design feature will change in 2007 to increase the amount of flex that is available (as discussed below in the section captioned Actions in 2006 Concerning NEO Compensation).
We consider long-term equity incentive compensation to be critical to the alignment of executive compensation with shareholder value creation. Therefore, a market competitive long-term incentive component is an integral part of the overall executive compensation program. Our long-term equity incentive compensation awards are made pursuant to the Office Depot, Inc. Amended Long-Term Equity Incentive Plan (the LTEIP).
Our annual equity grants consist of a targeted dollar award value that is then translated into a combination of stock options and/or time-based restricted stock. The number of stock options is higher than the number of shares of restricted stock for the same dollar value because, unlike restricted stock which is a full value award, stock option value is based solely on the appreciation in the value of the underlying shares against the exercise price. Stock options are valued using the Black-Scholes option pricing model. However, regardless of the mix of stock options and restricted stock, the value by position is the same, based upon present value calculations of the value of options and restricted stock on the date of grant. Prior to the approval of an award by the Compensation Committee, an executive is permitted to select from the following alternative equity combinations:
We believe that allowing choice regarding the form of long-term equity incentive awards distinguishes our equity award program from those offered by our competitors and facilitates retention of talent within the competitive retail industry. It also allows for executives to tailor their equity awards to individual needs in terms of financial planning for retirement and estate planning. We first instituted the policy of permitting our executive officers to select the form of their equity compensation award from a limited menu of choices in 2006.
The CEO and other members of executive management are eligible for a target award designed to deliver a desired economic value in dollars consistent with our compensation philosophy. Individual performance can modify target long-term equity incentive levels up to plus or minus 25%, however payouts are limited by the overall long-term equity incentive pool which is calculated using the current eligible participants and their target valuations.
As discussed further under Discontinued Programs below, in 2006, the Company changed the approach to providing long-term equity incentive compensation by targeting value-based awards for various officer levels (Vice Presidents and above). For 2006, the Committee established the following levels of economic value in the equity component of compensation:
The Black-Scholes option pricing model is used to determine the grant date number of stock options. The grant date fair market value is used to determine the number of shares of restricted stock. In each case, the number of stock options or shares of restricted stock is calculated to attain the targeted economic value described above.
Both stock options and restricted stock grants vest over time, generally with one-third vesting on each of the first, second, and third anniversaries of the date of the grant, providing the executive remains in our employment. The vesting schedule is intended to promote retention. If an executive leaves the Company for any reason other than death, disability or retirement before vesting, the unvested stock options or restricted stock award is forfeited. Stock options generally have a seven-year term.
The LTEIP provides that stock options may not be granted with exercise prices set at less than 100% of fair market value of the stock option. Our LTEIP currently defines fair market value as the average of the high and low share price on the grant date. Due to changes in accounting and disclosure rules, we plan to change this practice and to measure the fair market value of our stock option awards at the closing stock price on the date of grant. The grant date is the date on which the Compensation Committee actually meets and takes action to make the grants. We do not permit repricing of stock options. No back-dating of stock options is permitted under any circumstances.
Our Compensation Committee traditionally has approved annual option grants at its February meeting, and did so in 2006. Recently, our Compensation Committee adopted a policy that states that if the date of its regular February meeting precedes the release of our earnings press release, and concurrent filing of our Annual Report on Form 10-K for the prior fiscal year, then the Compensation Committee will hold a separate meeting not less than five nor more than thirty days following the date of such release and filing to ensure that stock options are not issued while we may be in possession of material non-public information.
During 2006 the Company undertook a review of its LTEIP which will expire in October 2007. The Board of Directors recently adopted a new equity incentive plan subject to the approval of our shareholders. The new plan is known as the Office Depot, Inc. 2007 Long-Term Incentive Plan. A description of that Plan can be found under Item: 2 Approval of the Office Depot, Inc. 2007 Long-Term Incentive Plan elsewhere in this Proxy Statement. A copy of the Plan has been attached to this Proxy Statement in Appendix A.
We provide our executive management with core benefits that we believe are made available to most other executive officers in our Peer Group (e.g., coverage for medical, dental, vision care, prescription drugs, basic life insurance, long term disability coverage, car allowance) plus voluntary benefits that an executive may select (e.g., supplemental life insurance). Our overall benefits philosophy is to focus on the provision of core benefits, with executives able to use their cash compensation to obtain such other benefits as they individually determine to be appropriate for their situations. The CEO is contractually entitled to the use of Company-owned aircraft for personal travel, but such usage is strictly limited to not more than 100 hours of such personal air travel per year, pursuant to his Employment Agreement, described in greater detail below. In 2006, benefits and perquisites comprised no more than approximately 5% of total compensation of our NEOs. The CEOs benefits and perquisites comprised less than 4% of his total compensation. Benefits and perquisites provided to the NEOs are summarized in the Summary Compensation Table and Nonqualified Deferred Compensation Table, including footnotes.
While our executives do not have any form of pension or defined benefit plan, they are allowed to voluntarily defer cash compensation as part of our nonqualified deferred compensation plan (DCP). This allows executives to be made whole for the limits applicable under the Internal Revenue Code to contributions to ERISA qualified deferred compensation deferral vehicles such as the Companys 401(k) Plan. The maximum deferral into our DCP is 50% of base salary and 75% of annual bonus. We also provide a match for contributions to the DCP. The match currently is 50% of the first 6% of cash compensation deferred into the plan. In addition, executives may also participate in the Officers Deferred Compensation Plan allowing for a maximum deferral of 25% of base salary and 100% of annual bonus. This plan is incremental to the DCP, and it does not provide for a match on contributions.
In 2005, we launched a program designed to increase diversity among our senior management. A Diversity Incentive Award of 6,000 shares for each member of our executive management (including the NEOs but not including the CEO) was approved on October 19, 2005. The award will vest if the executive management ranks achieve certain target levels of female and minority management employees by the end of the 2007 fiscal year.
During a period of uncertainty in early 2005 while a search was underway for a new CEO (ultimately resulting in the hiring of Mr. Odland, our current CEO), we awarded special retention payments to several of our officers at that time, including members of executive management who were employed by us on February 17, 2005. The retention award was 140% of base salary in effect on the award date. Executive management received their awards partly in cash (paid in October 2005) and partly in shares of restricted stock with three year vesting: 17% in 2005, 66% in 2006 and 17% in 2007.
Other programs shown in the Compensation Tables include an EPS Restricted Share Award and a TSR (Total Shareholder Return) performance share plan to meet specific business objectives that were awarded by the Committee in years prior to 2006. The overall philosophy of the Committee and Company has since changed to reflect a more simplified compensation plan, and one that is focused more on EVA rather than EPS or share price. The EPS restricted stock plan was keyed to that single metric. The TSR plan was a plan based upon share price, plus dividend return to shareholders among a peer group. The Committee has moved away from these metrics and focuses now on EVA in the form of EBIT and ROIC or return on net assets.
Section 162(m) of the Internal Revenue Code (Code) generally does not allow a tax deduction to public companies for compensation in excess of $1 million paid to the CEO or any of the other NEOs. Certain compensation is specifically exempt from the deduction limit to the extent that it does not exceed $1 million during any fiscal year or is performance based as defined in section 162(m). We believe that it is generally in our interest to structure compensation to come within the deductibility limits set in section 162(m) whenever possible. However, we believe that we must maintain the flexibility to take actions which we deem to be in the best interests of the Company but which may not qualify for tax deductibility under section 162(m). In this regard, for fiscal 2006 the amount of base salary in excess of $1,000,000 for any NEO was not deductible for federal income tax purposes.
In addition to Section 162(m), we considered other tax and accounting provisions in developing the pay programs for our NEOs, including the CEO. These include the special rules applicable to non-qualified deferred compensation arrangements under Code section 409A and the accounting treatment of various types of equity-based compensation under Statement of Financial Accounting Standard No. 123(R) as well as the overall income tax rules applicable to various forms of compensation. While we tried to compensate our executives in a manner that produced favorable tax and accounting treatment, its main objective was to develop fair and equitable compensation arrangements that appropriately incentivized, rewarded and retained executives.
We believe that our executive management should maintain a meaningful equity interest in the Company through ownership of stock that they acquire either with their own funds, or by retaining restricted stock that has vested rather than disposing of such stock. Stock ownership helps executives to better understand the viewpoint of shareholders and incentivizes them to enhance shareholder value. To further those objectives, we established executive stock ownership guidelines to encourage and require such holdings by the CEO and other members of the executive management. Under these guidelines, the CEO is expected to hold Company stock equal to five times his base salary. Other members of the Companys executive management (including the NEOs) are expected to hold Company stock equal to one and a half times their base salaries. Members of our executive management have five years to satisfy this stock ownership requirement. All of the members of the Companys executive management have achieved the stock ownership goals applicable to them. We also have stock ownership guidelines for our Board of Directors, discussed below under the heading Director Compensation.
We have entered into written agreements with certain of our executive officers that provide for the payment of additional and future compensation of such executive officer in the event of certain types of terminations and, in some cases, in the event of a change of control of our Company. For a detailed description of these agreements and the potential amounts that we may be obligated to pay in the event these agreements are triggered, see Summary of Executive Agreements and Potential Payouts Upon Change of Control below.
The Compensation Committee of the Board of Directors of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with the management of the Company and, based on such review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and, through incorporation by reference from this Proxy Statement, the Companys Annual Report on Form 10-K for the year ended December 30, 2006.
THE COMPENSATION COMMITTEE:
Lee A. Ault (Chair)
David W. Bernauer
Abelardo E. Bru
Marsha Johnson Evans
W. Scott Hedrick
The following table provides a summary of the annual and long-term compensation which we paid to (or deferred for, or that was attributable to/earned with respect to 2006) for our NEOs for services rendered during the 2006 fiscal year.
Summary Compensation Table for Fiscal Year 2006
Grants of Plan-Based Awards in Fiscal Year 2006
Outstanding Equity Awards at 2006 Fiscal Year-End
In addition to offering a traditional qualified defined contribution retirement savings, or 401(k) plan, we also sponsor non-qualified deferred compensation plans for the benefit of our executive officers, including our NEOs. For a detailed description of the Office Depot, Inc. Non-Qualified Deferred Compensation Plan and the Officer Deferred Compensation Plan, see Compensation Discussion and Analysis Benefits and Perquisites.
The following table reflects information related to our non-qualified deferred compensation plans. Information regarding our qualified plans such as 401(k) plans is not included.
During its February 2006 meeting, the Compensation Committee set the compensation of outside directors at an annual targeted economic value of $250,000 (with not more than $75,000 to be in the form of cash, at the Directors election). The remainder will be in the form of stock options and/or restricted stock, the combinations of which the directors will choose based upon the same five choices offered to the NEOs. The purpose of this allocation of compensation is to more closely align the compensation of the Directors with the interests of long-term shareholders of the Company.
The Audit Committee Chair receives additional compensation of $25,000 annually for serving in that role, with other Committee Chairs each receiving $15,000 annually for serving as chairs of their respective committees. The Compensation Committee made these changes to director compensation after reviewing the board compensation levels of the 16-member peer group (described above under Benchmarking of Compensation) and other data provided by the Compensation Committees compensation consultant, the Hay Group. The Compensation Committee also agreed to hold director compensation constant through 2007.
Prior to February 2007, our Directors had stock ownership guidelines, originally expressed as three times their annual retainer. In 2007, the Compensation Committee changed the stock ownership guidelines for our Directors to require that all Directors own an amount of the Companys stock equal in market value to $250,000. The new ownership guidelines are equal to our Directors current annual compensation. As of February 2007, all of our Directors have attained the stock ownership goals applicable to them except for Ms. Mason and Ms. Evans, who joined the Company in September 2006.
A predecessor company, Viking Office Products, Inc., established a director legacy program in 1996. Under this program, any member of the Viking Board of Directors was permitted to nominate one or more charitable organizations to receive a future charitable contribution from Viking. A portion of the gift is made at the time of the Directors retirement and the remainder was to be paid at the time of the Directors death. In order to fund these charitable gift payments, Viking took out a life insurance policy on each Directors life. In 1998, the Company acquired Viking, and now the Company is the owner and beneficiary of the policies. Director participants and their estates have no legal right to the policy or its proceeds. The Company uses the
proceeds of the life insurance policies to fund the charitable gifts designated by the director participant. All of the premiums of the life insurance policies have been paid in full and no further premiums are required. There are no additional costs related to this program. Messrs. Ault and Austrian are currently the only two participants in this program as they are the only members of the current Board of Directors who were members of the Board of Directors of Viking.
Director Compensation Table for Fiscal Year 2006
We have entered into employment agreements and change of control agreements with certain of our NEOs. Material items addressed in these agreements include the term of the arrangement (including renewal provisions), the elements of the executives compensation, the amounts and benefits payable on various termination events (including a change of control of the Company), and restrictions relating to non-competition, non-solicitation and confidentiality of information imposed on the executive management.
The Employment Agreement with our CEO and the change of control Employment Agreements with certain of the other NEOs discussed below provide for enhanced payments and benefits in the event of a change of control (as defined in these agreements). The basic rationale for such change of control protections is to diminish the potential distraction due to personal uncertainties and risks that inevitably arise when a change of control is threatened or pending. Thus, the Committee and the Board of Directors determined to provide these executives with what they determined to be competitive change of control compensation and benefits.
The termination benefits payable in connection with a change of control require a double trigger which means that after a change of control (the first trigger) a covered executives employment is either involuntarily terminated without cause or the executive resigns for good reason (as both terms are defined in the relevant agreement), either of which would constitute the second trigger. A double trigger was selected to increase the likelihood that an executive would remain with the Company after a change of control.
In mid-2005, our Compensation Committee adopted a policy to cease entering into employment agreements with our officers. Prior to this decision, our policy had been to enter into written employment agreements with each of our officers, vice presidents and above. Since the Committees action in mid-2005, newly hired or promoted officers, including NEOs, have not entered into employment agreements with our Company. As a result, the following members of our executive management do not have formal employment agreements with the Company: Patricia McKay, our CFO, and Daisy Vanderlinde, our EVP-Human Resources. Each of them has the benefit of certain terms set out in their employment offer letters, discussed in more detail below.
We are party to an Employment Agreement dated March 11, 2005 with our Chief Executive Officer, Steve Odland. By its terms, the Employment Agreement expires on March 11, 2008 (the third anniversary of the effective date of the agreement). Starting with the third anniversary (and on each subsequent anniversary) of the Employment Agreement, the term of the agreement with Mr. Odland automatically extends for an additional one-year period unless either Mr. Odland or the Company gives at least 90 days written notice that the term is not to be extended.
Mr. Odland is entitled to the following compensation arrangement:
Notwithstanding the terms of the Employment Agreement, Mr. Odland elected not to receive a car allowance for 2006, and also elected not to receive reimbursement for tax preparation services to which he otherwise was entitled under the agreement.
Mr. Odlands employment may be terminated by the Company or Mr. Odland at any time, subject to the terms and condition of his Employment Agreement. The respective rights and obligations of Mr. Odland and the Company depend upon the party that initiates the termination and the reasons for the termination.
In the event of a termination of Mr. Odlands employment for cause or his resignation without good reason (as such terms are defined in his Employment Agreement) he receives his accrued compensation and benefits, but no pro rata bonus payment.
In the event of a termination resulting from death or disability, Mr. Odland receives:
In the event of termination of Mr. Odlands employment without cause or his resignation for good reason, he receives the same basic compensation and benefits as applicable upon death or disability with the exception of a bonus based on actual results in lieu of a target bonus, plus a lump sum cash severance payment equal to two times the sum of his base salary and bonus on a full year basis.
In the event of termination of Mr. Odlands employment without cause or Mr. Odlands resignation for good reason, but upon or after a change of control, he receives:
Upon a change of control, any unvested stock option, restricted stock and other long-term equity and other long-term incentive awards then held by Mr. Odland become fully (100%) vested.
If any payments would constitute an excess payment under Internal Revenue Code section 280G and be subject to the excise tax imposed by Internal Revenue Code section 4999 on such excess payments, Mr. Odland is entitled to a tax gross-up payment of such amount that would leave Mr. Odland in the same tax position as if no such excise tax (including related penalties or interest) was applicable.
In the Employment Agreement, Mr. Odland has agreed to various restrictive covenants that limit certain post-employment activity. These include a two-year non-competition agreement that bars employment or engaging in any business for any competitor, including office products retailers (other than a business selling office products and supplies as a minor portion of its business). Other restrictions include non-solicitation and non-interference provisions relating to our employees or employees of any subsidiary, as well as non-solicitation provisions relating to customers, suppliers and other business relations. In addition, non-disclosure provisions protect our confidential information and work product. Among other remedies, the Company is entitled to cease making payments under Mr. Odlands Employment Agreement in the event he violates his post-employment covenants.
In addition to the Companys annual equity awards made to the other NEOs, on February 28, 2007, our Compensation Committee recommended, and the full Board of Directors ratified, a special equity grant to Mr. Odland, consisting of two five-year cliff vesting grants of stock options as follows:
A) An option to acquire 422,098 shares of our common stock at an option exercise price of $33.605, vesting 100% five years (the Vesting Period) from the grant date on February 28, 2012 (herein referred to as the Vesting Date); provided that Mr. Odland is still employed by the Company on the Vesting Date.
B) An option to acquire 422,097 shares of the Companys common stock at an option exercise price of $33.605, vesting 100% on the Vesting Date if the average closing price of a share of common stock of the Company shall equal or exceed 150% of the option exercise price (or $50.407 per share) for a period of at least ninety (90) consecutive calendar days on the NYSE during the Vesting Period, and provided that Mr. Odland is still employed by the Company on such Vesting Date. If the performance goals described herein are not achieved during the Vesting Period, the option shall be forfeited without consideration.
A more complete description of Mr. Odlands 2007 special equity grant, and a copy of the Award Agreement, are available in the Companys Current Report filed on Form 8-K with the SEC on March 5, 2007.
No formal employment or change of control employment agreements are in effect with our Chief Financial Officer Patricia McKay, pursuant to the policy referred to previously, adopted in mid-2005, under which we no longer enter into employment agreements with officers. However, we are a party to an employment offer letter agreement with Ms. McKay, dated August 25, 2005, which provides for:
Ms. McKays employment is terminable at will by either Ms. McKay or the Company. Except for cause, or as specified in the letter agreement, if Ms. McKays employment is involuntarily terminated by us, then she will be entitled to:
Ms. McKays severance entitlements are conditional upon her execution of a release of claims against Office Depot and its affiliates, and her compliance with a Non-Compete Agreement entered into by Ms. McKay and us simultaneously with her execution of the employment letter agreement with us.
We are a party to both an Executive Employment Agreement and a change of control Employment Agreement, each dated March 1, 2004, with Carl Chuck Rubin, who was Executive Vice President Merchandising when the Executive Employment Agreement was initially entered into and who was subsequently named President, North American Retail in early 2006. The Executive Employment Agreement has been amended twice, once on June 15, 2004 and a second amendment on January 23, 2006, in connection with Mr. Rubins promotion to his current position of President, North American Retail.
The term of the Executive Employment Agreement runs for 18 months, which period is extended for successive one-year periods unless either Mr. Rubin or we give at least 6 months prior written notice that the term is not to be extended.
Under the Executive Employment Agreement, Mr. Rubin is entitled to the following compensation arrangements:
Mr. Rubins employment may be terminated by us or by Mr. Rubin at any time, subject to the terms and conditions of his Executive Employment Agreement. The respective rights and obligations of Mr. Rubin and the Company depend upon the party that initiates the termination and the reason for the termination.
In the event of Mr. Rubins termination by us for cause or his resignation without good reason, he receives his accrued compensation and benefits, but no pro rata bonus payment.
In the event of a termination resulting from death or disability, Mr. Rubin receives:
In the event of termination by us without cause or the resignation of Mr. Rubin for good reason, he is entitled to receive his accrued compensation and benefits as well as the following additional compensation and benefits for a period of 18 months:
Mr. Rubins Executive Employment Agreement subjects him to various restrictive covenants that can limit his post-employment activity. These include an 18-month non-competition period that bars employment or engaging in any business for any competitor. Other restrictions include non-solicitation and non-interference provisions substantively similar to those we have with Mr. Odland.
The Change of Control Agreement takes effect to govern the terms and conditions of Mr. Rubins employment for a period of one year starting with the date of a change of control (as defined in the Agreement). If we terminate Mr. Rubins employment other than for cause, death or disability or if Mr. Rubin resigns for good reason (as such terms are defined in the Agreement) following a change of control, Mr. Rubin would be entitled to, among other things, a lump sum payment (within 30 days after his termination date) equal to the aggregate of: (1) certain accrued compensation and obligations; and (2) an amount equal to two times the sum of his annual base salary and highest annual bonus (as defined).
Mr. Rubin is entitled to a tax gross-up if any payments would constitute an excess payment under IRC section 4999. However, if Mr. Rubin would not receive a net after-tax benefit of at least $50,000 (taking into account both income taxes and any excise tax payable on excess payments) as compared to eliminating the gross-up and having a reduction of the change of control payments to the largest amount that would not result in any parachute excise tax, then no gross-up payment would be made and Mr. Rubins change of control payments would be so reduced.
We entered into an Executive Employment Agreement dated October 8, 2001, amended as of July 26, 2005, with Charles E. Brown, President, International. In addition, the Company entered into a Change of Control Employment Agreement dated May 28, 1998, with Mr. Brown.
The term of the Executive Employment Agreement runs for two years commencing as of July 26, 2005. The term of the agreement is extended for successive one-year periods unless either Mr. Brown or we give at least 6 months prior written notice that the term is not to be extended.
Under the Executive Employment Agreement, Mr. Brown is entitled to the following compensation arrangements:
The substantive provisions of Mr. Browns Employment Agreement otherwise accord with those described above for Mr. Rubin except that Mr. Brown does not receive a post-employment target incentive bonus. In addition, the substantive provisions of the Change of Control Employment Agreement with Mr. Brown accord with those described above for Mr. Rubin.
No formal employment or change of control employment agreements are in effect with our Executive Vice President, Human Resources, Daisy Vanderlinde, pursuant to the policy referred to previously, adopted in mid-2005, under which we no longer enter into employment agreements with officers. However, we are a party to an employment offer letter agreement with Ms. Vanderlinde, dated September 14, 2005, which provides for:
Ms. Vanderlindes employment is terminable at will by either Ms. Vanderlinde or us. Except for causes of involuntary termination specified in the letter agreement, if Ms. Vanderlindes employment is involuntarily terminated by us, then she will be entitled to:
Ms. Vanderlindes severance entitlements are conditional upon her execution of a release of claims against Office Depot and its affiliates, and her compliance with a Non-Compete Agreement entered into by Ms. Vanderlinde and us simultaneously with her execution of the employment letter agreement with us.
The following tables quantify the potential termination and change of control payment amounts assuming a hypothetical triggering event had occurred as of December 31, 2006. The terms and conditions of the post employment and change of control provision for each of the NEOs are described in detail above.
STOCK OWNERSHIP INFORMATION
We have provided a stock ownership table below that contains certain information about shareholders whom we believe are the beneficial owners of more than five percent (5%) of our outstanding common stock, as well as information regarding stock ownership by our Directors, NEOs and our Directors and executive officers as a group. Except as described below, we know of no person that beneficially owns more than 5% of our outstanding common stock, based solely upon filings on Forms 13G, filed with the Securities and Exchange Commission.
Except as otherwise noted below, each person or entity named in the following table has the sole voting and investment power with respect to all shares of our common stock that he, she or it beneficially owns.
The number of options that are or will be exercisable within 60 days of March 20, 2007 for each person named in the table above and for our Executive Officers and Directors as a group is as follows:
* * * *
Item 2: Approval of the Office Depot, Inc. 2007 Long-Term Incentive Plan
Our existing Long-Term Equity Incentive Plan (the Existing Plan) will expire in October of this year. Once the Existing Plan expires, no new equity grants may be issued under the Existing Plan. On February 14, 2007, upon recommendation of the Compensation Committee of our Board of Directors, our Board of Directors adopted, subject to shareholder approval, a new 2007 Long-Term Incentive Plan (the New Plan). The New Plan was adopted in order to continue our equity incentive programs after the expiration of the Existing Plan. Like the Existing Plan, the New Plan will provide one important component of compensation for our officers, directors and certain other key employees. Our Board of Directors believes that the New Plan is a critical part of our overall compensation and is necessary for the purpose of attracting, retaining and rewarding the best available persons for positions of substantial responsibility in our Company.
In addition, the New Plan will serve to align the interests of our officers, directors and key employees with the interests of our shareholders. The New Plan will permit issuance of stock options (both incentive stock options and non-qualified stock options), stock appreciation rights (SARs), restricted stock, restricted stock units (RSUs) and performance awards. Grants will be made by the Compensation Committee of our Board of Directors, which consists solely of Independent Directors of our Company. The Board of Directors believes that the New Plan will provide the Company the continued flexibility needed to make equity awards of appropriate size and form to attract, retain and motivate talented executive management, directors, officers and key employees, while continuing to maintain best practices in corporate governance as they relate to equity compensation plans.
The following description of the material features of the New Plan is a summary and is qualified in its entirety by reference to the New Plan, the full text of which is attached to this Proxy Statement in Appendix A.
The Existing Plan will expire in October 2007. Once the Existing Plan expires, we will no longer be allowed to issue new equity grants under the Existing Plan. The Company considers long-term equity incentive compensation to be critical in attracting and retaining the best available employees and is necessary in the alignment of executive compensation with shareholder value creation. Therefore, a market competitive long-term incentive plan has become an integral part of the Companys overall compensation program.
Our Company has enjoyed continued growth since the adoption of the Existing Plan. We have substantially expanded our operations in Europe, Asia and North America. With these expansions of our business, we have added a number of key personnel, including new country management in Europe and Asia. In addition, our contract business continues to grow, and we expect to continue to add employees in this area.
This continued expansion in our overall business size, coupled with ambitious plans for the future growth of our Company, requires that we have sufficient shares authorized for issuance to new employees. If we do not have an equity incentive plan, we may be unable to attract the right caliber of personnel to our Company or to retain the services of key employees currently with our Company, including key executives in recently-acquired businesses, which could jeopardize the future growth prospects of our Company.
Description of the Plan
General. The New Plan allows us to grant stock options (both incentive stock options and non-qualified stock options), SARs, restricted stock, RSUs and performance awards or a combination of these. The New Plan is administered by the Compensation Committee of our Board of Directors. Because grants awarded under the New Plan are made entirely by the Compensation Committee, the recipients, amounts and values of future benefits to be received pursuant to the New Plan are not determinable at this time. The shares of our
common stock reserved for issuance pursuant to the New Plan are subject to adjustment in the event of a reorganization, recapitalization, stock split, stock dividend or similar change in our corporate structure or the outstanding shares of our common stock. Such shares may be authorized and unissued or reacquired and held as treasury shares.
The maximum number of shares of stock that may be issued pursuant to awards granted under the New Plan is 25,000,000, plus shares of stock that are represented by awards granted pursuant to the Existing Plan that are forfeited, terminated or expire unexercised, or otherwise terminate without delivery of shares after the termination of the Existing Plan. Each share of restricted stock, RSU, and performance share shall count as two shares toward the total limit of shares available under the New Plan. Each share underlying stock options and SARs shall count as one share toward the total limit of shares available under the New Plan. With respect to grants to a single employee during a calendar year, no more than 2,000,000 shares of stock may be issued in connection with stock options and/or stock SARs, no more than 1,000,000 shares of stock may be issued in the form of restricted stock and/or RSUs, and no more than 500,000 shares of stock may be issued in connection with other stock-based performance awards. The maximum aggregate amount payable under any cash-based performance awards granted in any year to an employee is $2,500,000. The number of shares authorized and available for issuance under the Existing Plan at the end of fiscal year 2006 is 10,543,292. After approval of the New Plan, no further grants will be made under the Existing Plan.
Eligibility. Our Directors, officers, key employees, including those of our subsidiaries, and non-employee service providers who are selected by our Compensation Committee are eligible to receive grants. As of March 2007, approximately 550 employees were eligible to participate.
Fair Market Value. The fair market value of a share of stock on a grant date will be the closing sale price of the stock on that date, as reported on the New York Stock Exchange Composite Tape or such other source as the Compensation Committee deems reliable, or if no such reported sale of the stock shall have occurred on that date, on the last day prior to that date on which there was such a reported sale.
Stock Options/SARs. Pursuant to the New Plan, our Compensation Committee may award grants of incentive stock options (incentive options) conforming to the provisions of Section 422 of the Internal Revenue Code of 1986, as amended (the Code), and other stock options (non-qualified options). The exercise price of any option is determined by our Compensation Committee in its discretion at the time of the grant, but may not be less than 100% of the fair market value of a share of our stock on the grant date. The exercise price of an incentive option awarded to a person who owns stock constituting more than 10% of the voting power of our Company may not be less than 110% of such fair market value on such date. The New Plan also provides that no option or SAR may be granted in substitution for a previously granted option or SAR if the new award would have a lower option exercise price or SAR appreciation base than the award it replaces. In other words, stock option repricing is not allowed under the New Plan.
The term of each option also is established by our Compensation Committee, subject to a maximum term of ten years from the date of grant (or five years from the grant date in the case of an incentive option granted to a person who owns stock constituting more than 10% of the voting power of Office Depot). Generally, the options granted by the Compensation Committee are awarded for a term of seven (7) years. In addition, the New Plan provides generally that with respect to grantees who are employees or service providers, all unvested options are forfeited on, and vested options terminate 90 days after, the date on which the grantee ceases to be an employee of, or to otherwise perform services for, Office Depot or its subsidiaries. However, Section 16 Officers and members of our Board of Directors, are provided a longer period under certain circumstances described below.
The New Plan also provides that unless our Compensation Committee decides otherwise:
(a) Upon a grantees death or disability while still an employee of our Company, all of the grantees options and SARs become fully vested and exercisable and remain so for 24 months after the date of death or disability (but in no event beyond the expiration date of the option or SAR);
(b) Upon a grantees retirement (leaving the Company after attaining age 60 and completing 5 years of continuous service), a grantee who is an employee will fully vest in all outstanding options and SARs and these options and SARs shall be exercisable for a period of 90 days after the date of retirement (but in no event beyond the expiration date of the option or SAR);
(c) Upon grant, all options granted to a member of the Board of Directors are immediately vested;
(d) Upon a grantees termination for cause (as defined in the New Plan), all options and SARs shall be forfeited immediately whether or not exercisable;
(e) Upon the voluntary separation of a Section 16 officer or a member of the Board of Directors, all options and SARs granted to such person which are vested at the date of such voluntary separation will remain exercisable for a period of 18 months after such voluntary separation; provided that the Section 16 officer or Director has had a period of service of five (5) years or longer as an employee or Director as of the date of such voluntary separation (but in no event beyond the expiration date of the stock option or SAR);
(f) Upon the involuntary separation of a Section 16 officer or a member of the Board of Directors, other than separation due to death, disability or cause (as defined in the New Plan), all options and SARs granted to such person which are vested at the date of such involuntary separation will remain exercisable for a period of 18 months after such involuntary separation, regardless of the period of service of such Section 16 officer or Director (but in no event beyond the expiration date of the option or SAR); and
(g) Upon a change in control of Office Depot, all options and SARs become fully vested and exercisable.
The New Plan also provides that if the last date on which an option or SAR can be exercised falls within a blackout period imposed by the Companys securities trading policy relative to disclosure and trading on inside information as described in the policy, the applicable exercise period shall be extended by a number of days equal to the number of business days that the applicable blackout period is in effect (but in no event beyond the expiration date of the option or SAR).
Restricted Stock/RSUs. Under the New Plan, our Compensation Committee also may award restricted stock and RSUs subject to conditions and restrictions (except as provided below), and for such duration (which shall be at least three years, subject to partial vesting at the end of the first anniversary of the grant or any time thereafter, except upon the occurrence of certain circumstances such as retirement, attaining certain age and service requirements, death, disability, a change in control or the achievement of performance goals) as the Committee may specify.
The New Plan also provides that unless our Compensation Committee provides otherwise:
(a) All restrictions on a grantees restricted stock and RSUs that vest solely on the requirement to continue to perform services (i.e., time based vesting) will lapse immediately prior to a change in control of our Company or at such time as the grantee ceases to be an employee of, or otherwise perform services for us or one of our subsidiaries due to death or disability;
(b) All restrictions on a grantees restricted stock and RSUs that have performance conditions as a requirement for vesting shall vest pro-rata, calculated as if any target amount has been reached over the elapsed portion of the performance cycle (i.e., performance based vesting) if the grantee ceases to be an employee of, or otherwise perform services for us or one of our subsidiaries due to death or disability.
(c) Upon a change in control all restricted stock and RSUs that vest based on performance will fully vest as if any target amount has been reached;
(d) Upon retiring (leaving the Company after attaining age 60 and completing 5 years of continuous service) a grantee who is an employee will (i) fully vest in all time-based RSUs and (ii) vest pro-rata in all
restricted stock and RSUs that have performance based vesting calculated as if any target amount has been reached for the elapsed portion of the performance cycle;
(e) Upon attaining age 60 and completing 5 years of continuous service (similar to retirement but remaining an active employee) a grantee who is an employee will fully vest in all time-based restricted stock and that all subsequent grants of such stock shall be without restriction and be fully vested upon grant;
(f) If a grantee ceases to serve as an employee of, or otherwise perform services for, our Company, all of he grantees restricted stock and RSUs as to which the applicable restrictions have not lapsed will be forfeited immediately;
(g) All grants of stock to Directors shall be without restriction and be fully vested upon grant; and
(h) Upon a grantees termination for cause (as defined in the New Plan), all restricted stock and RSUs shall be forfeited immediately.
Performance Awards. Our Compensation Committee may grant performance awards contingent upon achievement of set performance goals and objectives for certain awards over a specified performance cycle, as designated by the Compensation Committee. The goals and criteria may be particular to a grantee or may be based, in whole or part, on the performance of the Company or a business unit, division or subsidiary in which the grantee works, or on the performance of the Company generally. The list of performance criteria that may be selected by the Compensation Committee under the New Plan include earnings, earnings per share (EPS), consolidated pre-tax earnings, net earnings, operating income, EBIT (earnings before interest and taxes), EBITDA (earnings before interest, taxes, depreciation and amortization), gross margin, revenues, revenue growth, market value added, economic value added, return on equity, return on investment, return on assets, return on net assets (RONA), return on invested capital (ROIC), total stockholder return, profit, economic profit, capitalized economic profit, net operating profit after tax (NOPAT), pre-tax profit, cash flow measures, cash flow return, sales, comparable store sales, sales per square foot, inventory turnover, stock price (and stock price appreciation, either in absolute terms or in relationship to the appreciation among member of a peer group determined by the Compensation Committee), strategic milestones, or goals related to acquisitions or divestitures. Performance awards may include specific dollar-value target awards, performance units (the value of which is established by our Compensation Committee at the time of grant) and/or performance shares (the value of which is equal to the fair market value of a share of our common stock). The value of a performance award may be fixed or may fluctuate on the basis of specified performance criteria. The Compensation Committee can establish other performance measures for performance awards granted to grantees that are not covered employees (as defined in the New Plan) and for performance awards granted to covered employees that are not intended to qualify under the performance-based compensation exception of Code Section 162(m).
The New Plan also provides that unless our Compensation Committee provides otherwise:
(a) If a grantee ceases to be a Director, officer or employee of, or otherwise perform services for, Office Depot or its subsidiaries due to death or disability, prior to vesting, the grantee will receive the portion of the performance award payable to him or her calculated as if any target amount has been reached over the elapsed portion of the performance cycle;
(b) In the event of a change in control of our Company prior to completion of a performance cycle, the grantee will become fully vested in the performance award calculated as if any target amount has been reached;
(c) If a grantee ceases to be a Director either voluntarily or by not being re-nominated to the Board of Directors, any performance awards shall vest pro-rata calculated as if any target amount has been reached over the elapsed portion of the performance cycle;
(d) Upon retiring (leaving the Company after attaining age 60 and completing 5 years of continuous service) a grantee who is an employee will vest pro-rata in all performance awards calculated as if any target amount has been reached for the elapsed portion of the performance cycle;
(e) If a grantee ceases to be an employee of, or otherwise perform services for us or one of our subsidiaries for any other reason prior to completion of a performance cycle, the grantee will become ineligible to receive any portion of a performance award; and
(f) Upon a grantees termination for cause (as defined in the New Plan), all performance awards shall be forfeited immediately.
Transferability. Unless our Compensation Committee determines otherwise, no award made pursuant to the New Plan will be transferable otherwise than by will or the laws of descent and distribution, and each award may be exercised only by the grantee or his or her guardian or legal representative. However, officers may transfer non-qualified stock options to members of their immediate family, or certain family related trusts or partnerships in accordance with the New Plan and applicable laws.
Amendment and Termination of the Plan. No award may be granted under the New Plan after the close of business on April 24, 2017. The New Plan may be amended or terminated by our Board of Directors or Compensation Committee at any time. However, no such action will adversely affect any rights or obligations with respect to any awards previously granted under the New Plan, unless such action is required by law or any listing standards or the affected grantees consent in writing. In addition, no amendment will become effective without the approval of our shareholders if such approval is necessary for continued compliance with the performance-based compensation exception of Code Section 162(m) or any stock exchange listing requirements.
The following discussion is intended only as a brief summary of the federal income tax rules relevant to the New Plan, as based upon the Code as currently in effect. These rules are highly technical and subject to change in the future. Because federal income tax consequences will vary as a result of individual circumstances, grantees should consult their personal tax advisors with respect to tax consequences. Moreover, the following summary relates only to grantees United States federal income tax treatment. The State, local and foreign tax consequences may be substantially different. Certain New Plan participants are residents of foreign countries.
Non-Qualified Options. There are no federal income tax consequences to either us or the grantee upon the grant of a non-qualified option. However, the grantee will realize ordinary income upon the exercise of a non-qualified option in an amount equal to the excess of the fair market value of the stock acquired upon exercise over the option exercise price, and we will receive a corresponding tax deduction. Any such gain is taxed in the same manner as ordinary income in the year the option is exercised. Any gain realized upon a subsequent disposition of the stock will constitute either a short-term or long-term capital gain to the grantee, depending on how long the stock is held.
Incentive Options. There are no federal income tax consequences to either us or the grantee upon the grant or exercise of an incentive option. If the grantee does not dispose of the stock acquired through exercise of an incentive option within two years of the date of grant or one year of the date of exercise, any gain realized from a subsequent disposition would constitute long-term capital gain to the grantee. If the grantee disposes of the stock prior to the expiration of either of those holding periods, any gain based on the lesser of (a) the fair market value of the stock on the date of exercise and (b) the amount realized on the disposition of the stock if a sale or exchange, over the exercise price would constitute ordinary income to the grantee. Any additional gain realized upon the disposition would be taxable either as a short-term capital gain or long-term capital gain, depending upon how long the grantee held the stock. We would receive a deduction in the amount of any ordinary income recognized by the grantee.
SARs. No taxable income is recognized by a grantee upon the grant of a SAR. Upon the exercise or settlement of a SAR, the grantee will recognize as ordinary income the cash received, plus the fair market value of any stock acquired, in settlement of the SAR, less any amount required to be paid for the SAR. We will receive a federal income tax deduction equal to the amount of ordinary income realized by the grantee.
Restricted Stock. With respect to the grant of stock under the New Plan, the grantee will realize compensation income in an amount equal to the fair market value of the stock, less any amount paid for such stock, at the time when the grantees rights with respect to such stock are no longer subject to a substantial risk of forfeiture, unless the grantee elects, pursuant to a special election provided in the Code, to be taxed on the stock at the time it is granted. Accordingly, where restricted stock is awarded, and the grantee does not make a special tax election, the restricted stock awards will not be taxable to the grantee as long as the shares of stock remain nontransferable and subject to a substantial risk of forfeiture. When these transferability restrictions and/or forfeiture risks lapse or are removed, the grantee generally will recognize as ordinary income the fair market value of the stock, less any amounts that were paid to acquire the stock. We will receive a federal income tax deduction equal to the amount of ordinary income realized by the grantee.
Restricted Stock Units. A grantee will not recognize taxable income at the time of the grant of a restricted stock unit, and the Company will not be entitled to a tax deduction at such time. When the grantee receives shares pursuant to a restricted stock unit, the federal income tax consequences applicable to restricted stock awards, described above, will apply.
Performance Awards. A grantee generally will not recognize income, and we will not be allowed a tax deduction, at the time performance awards are granted, so long as the awards are subject to a substantial risk of forfeiture. When the grantee receives or has the right to receive payment of cash or shares of stock under the performance award, the cash amount or the fair market value of the shares of stock will be ordinary income to the grantee, and we will be allowed a corresponding federal income tax deduction at that time, subject to any applicable limitations under Code Section 162(m).
Payment of Taxes. Grantees are required to pay tax due upon exercise of a non-qualified option, exercise of a SAR, a lapse of restrictions on restricted stock, delivery of shares under an RSU, or other recognition event. Unless provided otherwise by the Compensation Committee, tax obligations may be satisfied by selling or forfeiting a portion of the shares of stock that would be realized from such exercise, vesting or other recognition event.
The following table summarizes information about our current and former equity compensation plan by type as of December 30, 2006.
Code Section 162(m) denies a deduction by an employer for certain compensation in excess of $1 million per year paid by a publicly traded company to the chief executive officer or any of the four most highly compensated executive officers other than the chief executive officer. Code Section 162(m) is inconsistent with new SEC proxy rules that define named executive officers as the CEO, CFO and three most highly
compensated executive officers. The IRS is reviewing this inconsistency. This section will be revised based on final IRS guidance, if any. Compensation realized with respect to stock options and SARs, including upon exercise of a SAR or a non-qualified option or upon a disqualifying disposition of an incentive option, as described above under Certain Federal Income Tax Consequences, will be excluded from this deduction limit if it satisfies certain requirements, including a requirement that the New Plan be approved by Office Depots shareholders. In addition, other awards under the New Plan may be excluded from this deduction limit if they are conditioned on the achievement of one or more performance criteria prescribed by Code Section 162(m) that have been approved by the Companys shareholders. Approval of the New Plan by Office Depots shareholders at the Annual Meeting will constitute approval of such performance criteria.
The affirmative vote of a majority of the votes cast by the holders of shares of Office Depot Common stock present in person or represented by proxy at our Annual Meeting is required for approval of the 2007 Long-Term Incentive Plan, provided that the total votes cast on the proposal represents over 50% in interest of all securities entitled to vote on the proposal.
Your Board of Directors Recommends a Vote FOR Item Number 2 on your Proxy
Card, Approving Our 2007 Long-Term Incentive Plan.
In accordance with the provisions of the Sarbanes-Oxley Act of 2002 (SOA), the Audit Committee of our Board of Directors has appointed the certified public accounting firm of Deloitte & Touche LLP (Deloitte) as independent accountants to audit our consolidated financial statements and our internal control over financial reporting for the fiscal year ended December 30, 2006 and to attest to managements report on internal control over financial reporting. Deloitte has audited our consolidated financial statements each year since 1990. Representatives of Deloitte will be present at our Annual Meeting with the opportunity to make a statement if they desire to do so, and they will be available to respond to appropriate questions from shareholders. Our Audit Committee also has appointed Deloitte as our independent outside accounting firm for 2007.
Although our Audit Committee already has appointed Deloitte as our independent accountants for 2007 and the vote of our shareholders is not required for this action under Delaware law or the SOA, we request that the shareholders nevertheless ratify this appointment.
The aggregate fees billed by our independent accountants for professional services rendered in connection with (i) the audit of our annual financial statements as set forth in our Annual Report on Form 10-K for the fiscal years ended December 31, 2005 and December 30, 2006, (ii) the review of our quarterly financial statements as set forth in our Quarterly Reports on Form 10-Q for each of our fiscal quarters during 2005 and 2006, (iii) the audit of our internal control over financial reporting with the objective of obtaining reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects and (iv) for the attestation of managements report on the effectiveness of internal control over financial reporting, as well as fees paid to our audit firm for audit-related work, tax compliance, tax planning and other consulting services are set forth below.
We did not engage Deloitte to provide any professional services in connection with (i) operating or supervising the operation of our information system or managing our local area network; or (ii) designing or implementing a hardware or software system that aggregates source data underlying the financial statements or generates information that is significant to the Companys financial statements taken as a whole.
In 2006, all work performed by Deloitte was approved in advance by our Audit Committee, including the amount of fees due and payable to them for such work. In addition, our Audit Committee also approved all non-audit related work performed by Deloitte in advance of the commencement of such work. Our Audit Committee has delegated to the Chair of the Committee the right to approve such non-audit related assignments between meetings of the Committee, and the Chair then reports on all such approvals and seeks ratification at the next meeting of the Committee.
The Audit Committee of our Board of Directors has determined that the non-audit services rendered by our independent accountants during our most recent fiscal year are compatible with maintaining their independence.
Your Audit Committee of the Board of Directors Recommends a Vote FOR Item 3 on Your Proxy Card:
Ratification of Our Audit Committees Appointment of Deloitte & Touche LLP as our Independent Accountants
The following Report of the Audit Committee does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates this Report by reference therein.
The Audit Committee of the Office Depot Board of Directors (the Committee) is comprised of four Independent Directors. The responsibilities of the Committee are set forth in its written charter (the Charter), which has been adopted by our Board of Directors. A copy of the Charter may be obtained from our Company in the manner described elsewhere in this Proxy Statement.
The duties of this Committee include oversight of the financial reporting process for the Company through periodic meetings with the Companys independent accountants, internal auditors and management of the Company to review accounting, auditing, internal controls and financial reporting matters. Pursuant to the Sarbanes-Oxley Act of 2002 (SOA), our Committee has certain other duties, which include the engagement of our independent accounting firm, Deloitte & Touche LLP (Deloitte), pre-approval of both audit and non-audit work in advance of Deloittes commencing such work and other obligations as imposed by SOA. Pursuant to applicable provisions of SOA, we have delegated to the Chair the authority to pre-approve engagements of Deloitte between meetings of our Committee, provided that she reports to us at each meeting on pre-approvals since the date of our last Committee meeting. Our Board of Directors has determined that the following members of our Audit Committee are audit committee financial experts under the regulations of the Securities and Exchange Commission promulgated pursuant to authority granted to it under SOA: Ms. Gaines, Ms. Mason and Mr. Myers. These persons qualifications are detailed in their biographical information set forth earlier in this Proxy Statement. In addition, in accordance with listing standards of the New York Stock Exchange, our Board of Directors has determined that each member of our Audit Committee is financially literate as required by such listing standards.
During fiscal year 2006, this Committee met seven (7) times, including four (4) meetings to discuss quarterly or annual earnings press releases in advance of release by the Company. The Companys senior financial management and independent and internal auditors were in attendance at all such meetings. At each such meeting, this Committee conducted a private session with the management of our Internal Audit Department as well as the Companys independent outside accountants, without the presence of management. In addition, our Audit Committee conducted private sessions at various meetings during 2006 with our Chief Executive Officer, Chief Financial Officer, Controller and General Counsel. In addition, our Audit Committee received periodic reports from the Companys Disclosure Committee which was formed to review the Companys disclosures and to ensure that effective controls and procedures are in place related thereto. Our Audit Committee also reviewed and approved the Disclosure Committee Charter.
The management of the Company is responsible for the preparation and integrity of the financial reporting information and related systems of internal controls. The Audit Committee, in carrying out its role, relies on the Companys senior management, including particularly its senior financial management, to prepare financial statements with integrity and objectivity and in accordance with generally accepted accounting principles, and relies upon the Companys independent accountants to review or audit, as applicable, such financial statements in accordance with generally accepted auditing standards.
We have reviewed and discussed with senior management the Companys audited financial statements for the fiscal year ended December 30, 2006, included in the Companys 2006 Annual Report to Shareholders. Management has confirmed to us that such financial statements (i) have been prepared with integrity and objectivity and are the responsibility of management and (ii) have been prepared in conformity with generally accepted accounting principles.
In discharging our oversight responsibility as to the audit process, we have discussed with Deloitte, the Companys independent accountants, the matters required to be discussed by Statement on Auditing Standards
61 (SAS 61 Communications with Audit Committees). SAS 61 requires our independent accountants to provide us with additional information regarding the scope and results of their audit of the Companys financial statements, including: (i) their responsibilities under generally accepted auditing standards, (ii) significant accounting policies, (iii) management judgments and estimates, (iv) any significant accounting adjustments, (v) any disagreements with management and (vi) any difficulties encountered in performing the audit.
We have obtained a letter from Deloitte that provides the disclosures required by Independence Standards Board of Directors Standard No. 1 (Independence Discussion with Audit Committees) with respect to any relationship between Deloitte and the Company that in their professional judgment may reasonably be thought to bear on independence. Deloitte has discussed its independence with us, and has confirmed in its letter to us that, in its professional judgment, it is independent of the Company within the meaning of the United States securities laws.
Based upon the foregoing review and discussions with our independent and internal auditors and senior management of the Company, we have recommended to our Board of Directors that the financial statements prepared by the Companys management and audited by its independent accountants be included in the Companys 2006 Annual Report to Shareholders, and that such financial statements also be included in the Companys Annual Report on Form 10-K, for filing with the United States Securities and Exchange Commission. The Committee also has appointed Deloitte as the Companys independent accounting firm for 2007.
As specified in the Charter, it is not the duty of this Committee to plan or conduct audits or to determine that the Companys financial statements are complete and accurate and prepared in accordance with generally accepted accounting principles. These are the responsibilities of the Companys management, internal auditors and independent accountants. In discharging our duties as a Committee, we have relied on (i) managements representations to us that the financial statements prepared by management have been prepared with integrity and objectivity and in conformity with generally accepted accounting principles and (ii) the report of the Companys independent accountants with respect to such financial statements.
Brenda J. Gaines (Chair)
Myra M. Hart
Michael J. Myers
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Section 16(a) of the Securities Exchange Act of 1934 requires our Dire