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Office Depot DEF 14A 2007 Table of Contents
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):
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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.
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PROXY
STATEMENT
FOR THE 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 Committee’s 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
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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 client’s 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.
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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 Company’s 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 Company’s 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
Director’s 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
Director’s 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
Director’s 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.
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If the Board of Directors accepts an incumbent Director’s
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 Director’s 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
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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.
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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 Dick’s 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 Women’s 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 Filene’s 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 women’s
specialty store, from February 1987 to December 1996. Prior to
those dates, she held management positions at Kaufmann’s
Division of the May Company, Mervyn’s Division of Target,
Inc. and the Limited. She is also a Director of The Men’s
Wearhouse, Hot Topic, Inc., and Genesco, Inc. Ms. Mason has
announced her intention not to stand for re-election to the
Boards of The Men’s 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
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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.
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CORPORATE
GOVERNANCE
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
Exchange’s 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.
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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 Company’s 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,
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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:
1-866-634-6854
www.odhotline.com
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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 Committee’s
responsibilities, discussed in detail in its charter, include,
among other duties, the duty to:
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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
Company’s 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 Committee’s 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 corporation’s 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
Committee’s 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.
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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 Company’s 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 Group’s
counsel to the Committee is uniquely enhanced due to the
consultant’s broad understanding of the Company’s
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.
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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 Committee’s 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 Company’s
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 management’s point of view
regarding compensation issues.
Only Compensation Committee members and others specifically
requested by the Compensation Committee participate in the
Committee’s 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 Company’s 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 Company’s 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
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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 Committee’s responsibilities, discussed in
detail in its charter include, among other duties, the duty to:
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EXECUTIVE
COMPENSATION
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 Company’s 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
Group’s 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.
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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 CEO’s 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 Committee’s 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 CEO’s 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 CEO’s 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 CEO’s 2006 compensation package to
target this percentile in the Peer Group, approximately 90% of
the CEO’s 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.
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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 Company’s 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 Depot’s
business currently is located outside North America; almost
one-third of the Company’s 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 CEO’s 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
officer’s 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
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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 role’s 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
management’s 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”).
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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.
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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
CEO’s 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 Company’s 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 Officer’s 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.
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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.
Discontinued
Programs
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.
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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 Company’s 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 Company’s
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 Company’s 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
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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
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Grants of
Plan-Based Awards in Fiscal Year 2006
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Outstanding
Equity Awards at 2006 Fiscal Year-End
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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 NEO’s. 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 Committee’s 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 Company’s 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 Director’s retirement and
the remainder was to be paid at the time of the Director’s
death. In order to fund these charitable gift payments, Viking
took out a life insurance policy on each Director’s 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
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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
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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 executive’s
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 executive’s 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 Committee’s 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:
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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. Odland’s 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. Odland’s
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. Odland’s 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. Odland’s employment
without cause or Mr. Odland’s resignation for good
reason, but upon or after a change of control, he receives:
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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. Odland’s Employment Agreement in the event he
violates his post-employment covenants.
In addition to the Company’s 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
Company’s 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. Odland’s 2007
special equity grant, and a copy of the Award Agreement, are
available in the Company’s 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:
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Ms. McKay’s employment is terminable at will by either
Ms. McKay or the Company. Except for cause, or as specified
in the letter agreement, if Ms. McKay’s employment is
involuntarily terminated by us, then she will be entitled to:
Ms. McKay’s 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. Rubin’s 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:
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Mr. Rubin’s 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. Rubin’s 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. Rubin’s 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. Rubin’s 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. Rubin’s
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. Rubin’s change of
control payments would be so reduced.
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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. Brown’s 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. Vanderlinde’s employment is terminable at will by
either Ms. Vanderlinde or us. Except for causes of
involuntary termination specified in the letter agreement, if
Ms. Vanderlinde’s employment is involuntarily
terminated by us, then she will be entitled to:
Ms. Vanderlinde’s 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.
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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.
Steve
Odland
Patricia
McKay
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Charles
Brown
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Carl
Rubin
Daisy
Vanderlinde
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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.
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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:
* * * *
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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 Company’s 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
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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 grantee’s death or disability while still
an employee of our Company, all of the grantee’s 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);
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(b) Upon a grantee’s 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 grantee’s 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 Company’s 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 grantee’s 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 grantee’s 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
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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
grantee’s 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 grantee’s 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;
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(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 grantee’s 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.
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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
grantee’s 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
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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
Depot’s 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 Company’s shareholders. Approval of the New
Plan by Office Depot’s 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.
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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
management’s 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 management’s 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 Company’s financial statements taken as
a whole.
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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 Committee’s Appointment of Deloitte & Touche LLP as our Independent Accountants
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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 Company’s 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 Deloitte’s 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 Company’s 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 Company’s
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 Company’s Disclosure Committee
which was formed to review the Company’s 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 Company’s 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 Company’s 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
Company’s audited financial statements for the fiscal year
ended December 30, 2006, included in the Company’s
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 Company’s
independent accountants, the matters required to be discussed by
Statement on Auditing Standards
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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 Company’s 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 Company’s management
and audited by its independent accountants be included in the
Company’s 2006 Annual Report to Shareholders, and that such
financial statements also be included in the Company’s
Annual Report on
Form 10-K,
for filing with the United States Securities and Exchange
Commission. The Committee also has appointed Deloitte as the
Company’s 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
Company’s financial statements are complete and accurate
and prepared in accordance with generally accepted accounting
principles. These are the responsibilities of the Company’s
management, internal auditors and independent accountants. In
discharging our duties as a Committee, we have relied on
(i) management’s 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
Company’s independent accountants with respect to such
financial statements.
Brenda J. Gaines (Chair)
Myra M. Hart
Kathleen Mason
Michael J. Myers
* * * *
Section 16(a) of the Securities Exchange Act of 1934
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