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FORM 10-K
Securities and Exchange Commission
Washington, D.C. 20549
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
or
[_] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended Commission File Number
February 1, 1997 0-17586
STAPLES, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2896127
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(State of Incorporation) (I.R.S. Employer
Identification No.)
One Research Drive, Westborough, Massachusetts 01581
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(Address of principal executive offices and zip code)
508-370-8500
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.0006 per share
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[ ]
2
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the last sale price of the Common Stock on February 28,
1997 as reported by Nasdaq, was approximately $2.7 billion. In determining the
market value of non-affiliate voting stock, shares of Common Stock beneficially
owned by each executive officer and director have been excluded. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
The registrant had 162,301,897 shares of Common Stock outstanding as of
February 28, 1997.
Documents Incorporated By Reference
No documents (other than exhibits) have been incorporated by reference to
this Annual Report on Form 10-K.
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PART I
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ITEM 1. BUSINESS
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Staples, Inc. ("the Company") pioneered the office supplies superstore
concept in 1986 and is a leading office supplies distributor with a total of 557
retail stores located in the United States and Canada as of February 1, 1997, in
addition to a direct mail delivery business and contract stationer operations.
The Company's executive offices are located at One Research Drive,
Westborough, Massachusetts 01581 (Telephone: (508) 370-8500). The Company was
organized in November 1985.
BUSINESS STRATEGY
The Company views the office products market as comprised of four principal
end-user groups: consumers and home offices; small businesses and organizations
with fewer than 50 office workers; medium-size businesses and organizations with
more than 50 office workers; and large businesses with more than 1,000 office
workers. The Company effectively addresses all four major end-user groups. In
addition to increasing and diversifying its available market opportunities, the
Company's decision to address all four major end-user groups is resulting in a
number of important business synergies for the Company, including increased
buying power, enhanced efficiencies in distribution and advertising, increased
awareness of the Staples name, and improved capacity to leverage certain general
and administrative functions.
The Company's strategy is focused on the following:
NORTH AMERICAN SUPERSTORES
Staples' superstores are the core business of the Company, generating a
substantial majority of its sales and profits.
SUBURBAN SUPERSTORES. Most of the Company's superstores are located in
suburban markets, primarily on the East Coast, West Coast and in portions of the
Southeast and Midwest regions of the United States and in Canada, in both major
metropolitan markets and smaller outlying markets. The Company's strategy for
its suburban superstores focuses on four key objectives: (i) providing superior
customer value through a combination of broad product selection, everyday low
prices, superior customer service and convenient locations; (ii) increasing its
presence in targeted metropolitan markets by adding new superstores and
achieving economies of scale in most of the major metropolitan markets where it
competes; (iii) maintaining operating costs at the lowest level that is
consistent with providing quality merchandise and service (thereby enabling the
Company to provide low prices to its customers); and (iv) providing superior
customer service, including sales consulting and a "user friendly" shopping
environment.
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The Company believes that its strategy of continuing to add new superstores
in its major metropolitan markets results in a number of advantages for the
Company. First, it enhances customer awareness of the Staples name within these
markets. Second, it makes shopping at Staples superstores more convenient for
its customers, which the Company believes is a significant criterion in the
customer's choice of office products superstores. Third, it enables the Company
to take advantage of economic efficiencies in management, advertising and
distribution for the stores within a market.
EXPRESS STORES. To increase its attractiveness to downtown businesses, the
Company has developed and refined a prototype for a downtown store, which
operates under the name "Staples Express". Staples Express stores average
approximately 9,000 square feet in size, and generally stock about 5,600 items,
which represents a more focused assortment of products than that offered at its
larger superstores.
CONTRACT AND COMMERCIAL
The Company's Contract and Commercial division is comprised of two
principal business operations: the Company's mail order operations, which
operate under the name Staples Direct, and the Company's contract stationer
business, which operates under the names Staples National Advantage and Staples
Business Advantage.
STAPLES DIRECT. In fiscal 1990, the Company introduced Staples Direct,
which the Company believes has increased its access to small- and medium-size
businesses that prefer to have their office products delivered. Staples Direct
offers a broad product assortment and everyday low prices similar to the
Company's suburban superstores, with the added convenience of telephone ordering
and free next-day delivery for orders over $50. Delivery orders are shipped from
either the Company's East Coast or West Coast delivery distribution centers, and
are distributed through small, dedicated delivery hubs in each of the Company's
major markets. The Company markets Staples Direct through both direct mail
catalogs and a sales force primarily focused on new accounts. In some markets,
the Company also delivers products directly from its retail stores.
STAPLES BUSINESS ADVANTAGE AND STAPLES NATIONAL ADVANTAGE. The Company's
contract stationer operations are focused on serving the needs of customers that
expect more services than a traditional mail order business provides, such as
customized pricing, payment terms, usage reporting and the stocking of certain
proprietary items. Staples' contract stationer business is divided into two
segments. Staples National Advantage, which was established in February 1994
through the acquisition of National Office Supply Company, Inc., is a nationwide
contract stationer business which focuses on selling to large multi-regional
corporations. Staples Business Advantage focuses on selling to medium- and
large-size regional companies and has the flexibility to handle smaller
accounts. Staples has established this business through a number of acquisitions
of regional contract stationers, as well as the introduction of Staples Business
Advantage into the New York and Washington D.C. metropolitan markets. The
Company may make additional acquisitions of contract stationers in order to fill
in or expand the markets currently served by its contract stationer business and
to increase the synergies realized in the
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areas of purchasing, distribution and management information systems. The
Company is also seeking to enhance the operations of its contract stationer
business by migrating to a common product line and catalog, broadening the
offerings of capital goods, introducing a retail convenience card and
consolidating distribution and administrative functions.
INTERNATIONAL
The Company believes that foreign markets may provide additional growth
opportunities. The Company approached these markets through joint ventures in
order to take advantage of local operating expertise and reduce the risk
associated with entering these new markets.
The Company's first international joint venture was in Canada with Business
Depot, in which the Company made its initial investment in 1991. In 1994,
Business Depot became a wholly-owned subsidiary of the Company. The Company is
also a partner in two overseas office products superstore joint ventures. In the
United Kingdom, the Company and Kingfisher plc, a British retailer
("Kingfisher"), are equal partners in Staples UK which was formed in 1992.
Staples UK operated 34 stores as of February 1, 1997. In Germany, Staples owns a
joint venture interest in MAXI-Papier-MARKT GmbH ("MAXI-Papier"); MAXI-Papier
operated 16 stores as of February 1, 1997. On December 11, 1996, the Company and
Kingfisher entered into a definitive agreement pursuant to which the Company
will acquire Kingfisher's interest in Staples UK and MAXI-Papier (which will
increase the Company's ownership interest in Staples UK to 100% and in
MAXI-Papier to approximately 91%). These acquisitions are expected to close in
May 1997. In fiscal 1997, Staples UK plans to open 6 stores and MAXI-Papier
plans to open 3 stores. There can be no assurance that the Company's joint
ventures will become profitable.
STRATEGIC INITIATIVES
In addition to pursuing its growth strategy, since fiscal 1993 the Company
has been focusing on the following five strategic priorities, with the objective
of enhancing its position as a leading office products supplier:
PROFITABLY INCREASE RETAIL SALES PER STORE. The Company is devoting
significant resources and efforts to profitably increase its retail sales per
store. Initiatives in this regard include: significantly increased marketing and
advertising, including television advertising, which has increased the Company's
exposure to households and small businesses; expanded product selection across
all key product categories; improved sales capabilities related to capital goods
(such as copiers, fax machines, computers and furniture); improved in-stock
positions; improved customer service; increased staffing levels and personnel
training; and expanded size and improved shopability and signage of the
prototype superstore. Another key element of this strategy is the Company's
store remodel program, pursuant to which Staples has remodeled over 180 existing
stores as of February 1, 1997. This program has improved store layout, lighting,
signage and the overall shopping environment, and will conform existing stores
to the new prototype to the maximum extent possible.
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PROFITABLY INCREASE DELIVERY SALES PER STORE. The Company is implementing a
number of actions to profitably increase its delivery sales per store. These
actions include: broadening the product offerings available for delivery;
expanding the distribution of catalogs; increasing the number of direct sales
representatives; providing open account invoicing to large accounts; and
increasing distribution capacity. The Company believes that its delivery
operations are also benefiting from the increased marketing and advertising
undertaken in connection with its store sales growth strategy. These initiatives
have helped produce significant increases in total delivery sales and in
delivery sales per store since the beginning of fiscal 1994.
CONTINUE AGGRESSIVE AND DIVERSIFIED STORE GROWTH STRATEGY. After opening 41
stores in fiscal 1992 and 56 stores in fiscal 1993, the Company significantly
accelerated its store growth by opening 90 new stores in fiscal 1994, 94 in
fiscal 1995 and 115 in fiscal 1996. In fiscal 1997 the Company intends to open
approximately 120 stores in North America. The Company's store growth strategy
follows a three-pronged approach: continuing the growth of its suburban store
network in its existing markets; entering smaller markets, within both existing
and new geographic areas; and entering major new markets each year. The Company
believes that its centralized distribution strategy facilitates its aggressive
store growth by enabling the Company to operate smaller stores than would
otherwise be required, thus reducing the cost of both opening and operating new
stores, while providing the same or better product selection as a larger,
competitive store.
REDUCE COSTS EVERYWHERE. The Company is maintaining its historical focus on
being a low-cost operator and is pursuing several initiatives to reduce costs as
a percentage of sales. The Company continues to add experienced personnel to its
buying team and has implemented enhancements in its replenishment software. The
Company also believes that its future expansion will enable it to leverage
certain fixed costs in store operations, distribution and administration.
IMPROVE CUSTOMER SERVICE. The Company has increased staffing levels in
stores and delivery operations and made other investments to provide better
customer service and become a more customer-oriented business. During 1995, the
Company initiated a corporate-wide CARE program designed to empower associates
to exceed customer expectations for service by providing "great service, every
day, every way". It has also implemented a "mystery shopper program" in which
outside representatives evaluate customer service multiple times per year per
store. Additionally, the Company is continuing to increase its commitment to
training and product knowledge among its sales associates and is implementing
several technological advancements to improve training, customer service and
ease of shopping.
PRODUCTS AND PURCHASING
Products
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The Company's current prototype stocks over 8,000 brand name and private
label office products in each retail location, including office supplies,
business machines, computers and related products, office furniture, and other
business-related products. The Company tailors its product mix to meet the needs
of its customers
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by regularly evaluating sales and profit performance for each of its stock
keeping units. In order to minimize unit costs and selling prices, the Company
sells most products in multi-unit packages. The lot sizes are designed to be
large enough to be cost effective without being burdensome to the Company's
small business customers.
The Company guarantees low prices to its customers and will not only match
competitive prices but will also pay 150% of the difference if competitive price
levels are lower. The Company's products are sold at prices which generally are
up to 30% to 70% below manufacturer suggested list prices. The Company
continuously compares its pricing against other discount office supply stores,
local stationers, nearby warehouse clubs, mass merchants, consumer electronics
retailers and national mail order stationers to ensure that the strategy of
maintaining everyday low prices is achieved.
The Company also offers its customers an array of services. Customers may
place orders by telephone for delivery or for customer pickup. Customers may pay
with MasterCard, Visa, American Express, Discover, or Staples private label
credit card, in addition to check or cash. The Company also offers customers an
option to lease business machines and computers through a third party lessor
with varying terms. The Company also offers high-speed and self-service copying,
overnight mailing, faxing and other print services for its customers. The
Company has a return policy that entitles customers to return all goods, except
computers, laptops and printers, in original packaging within 30 days after the
date of sale for a full refund; computers, laptops and printers must be returned
within 14 days to obtain a full refund.
The Company's Contract and Commercial division carries many of the same
products that are sold in the retail stores. Commercial catalogs mailed to
customers typically contain approximately 5,000 in-stock products; through the
special orders catalog, commercial offers an additional 20,000 items. The
contract catalog typically offers 6,000 in-stock products utilized by customers
serviced by the Company's contract stationers, with unique pricing and billing
services being available to each customer.
The following table shows sales by each major product line as a percentage
of total sales for the periods indicated:
Fiscal Year Ended
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February 1, February 3, January 28,
1997 1996 1995
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Office supplies, services and other supplies........... 46.4% 52.4% 53.7%
Equipment and business machines........................ 22.7 19.6 21.7
Computers and related products......................... 21.6 19.8 16.2
Office furniture....................................... 9.3 8.2 8.4
Purchasing and Vendor Selection
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Staples selects its vendors based upon quality, price, delivery reliability
and, where appropriate, customer brand recognition. The Company believes that it
is able to pursue this purchasing strategy with great effectiveness and at very
attractive costs in large part because of its centralized distribution
facilities. The Company can purchase in truckload quantities a smaller range of
attractively priced high quality products from multiple vendors and thereby
achieve substantial cost savings in each
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product category. The Company purchases the majority of its products in full
truckload quantities and minimizes freight costs through backhauls and
negotiated freight rates.
The Company offers several hundred private label items including copy
paper, staplers, envelopes, mailing and shipping supplies, and a variety of
fastening supplies. Through its industry leading global product sourcing
program, the Company is able to procure quality private label products at lower
cost than brand name products, without sacrificing quality.
Currently, the Company purchases products from several hundred active
vendors. Management believes that competitive sources of supply are available
for substantially all products it carries. The Company's buying and
merchandising staff centrally performs all product purchasing and merchandise
shelf and display planning for stores with the assistance of integrated computer
systems.
DISTRIBUTION
The Company operates centrally located distribution centers on the East and
West Coasts to service the majority of its replenishment and delivery
requirements for its U.S. stores and Staples Direct. The contract stationers
utilize additional distribution centers that fulfill the unique needs of their
customers. Most products are shipped from the Company's suppliers to the
distribution centers for reshipment to Staples stores and delivery hubs, or
directly shipped to customers. The distribution centers employ computerized
selection, just-in-time replenishment procedures and material handling equipment
that help to minimize overall Company inventory levels while maintaining optimal
in-stock positions at the store level. Product processing and ticketing are
performed at the distribution center to improve labor efficiency and reduce
costs. Furniture and other bulky items are shipped, typically in full truckload
quantities, from the Company's suppliers primarily to the Company's bulk
distribution centers in Connecticut, Maryland and California. These bulk
distribution centers process and ticket furniture, bulky items and high volume
items. Products generally are delivered to Staples stores within 48 hours after
the Company's automated replenishment system generates an order for the product
based on daily point of sale information.
The Company believes that its distribution centers provide it with
significant labor, merchandise and inventory shrinkage savings by centralizing
receiving and handling functions and by enabling the Company to purchase in full
truckloads from suppliers. The Company believes that the reduction in the number
of purchase orders and invoices processed has resulted in significant
administrative cost savings. The Company's centralized purchasing and
distribution systems also permit store employees to spend more time on customer
service and store presentation.
Since the distribution centers maintain backup inventory, in-store
inventory requirements are reduced and the Company is able to operate smaller
gross square footage stores than would otherwise be required. Smaller store size
reduces the Company's rental costs in the expensive markets in which it
currently operates and allows the Company improved flexibility in locating
stores more closely to its target customers.
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The Company has recently enhanced its distribution center network through
the construction of an 840,000 square foot facility in Hagerstown, Maryland. The
state of the art facility, which went into service in March 1997, will service
over 400 stores in the Mid-Atlantic, Southern and Midwestern regions of the
country once in full operation.
MARKETING STRATEGY
The Company pursues a variety of marketing strategies to attract and retain
target customers. These strategies include the use of broad-based media
advertising such as radio, television, newspaper circulars and print advertising
as well as catalogs and a sophisticated direct marketing system. In addition,
the Company markets to larger companies through a combination of direct mail
catalogs, customized catalogs and a field sales force. The Company changes its
level of marketing spending as well as the mix of media employed depending upon
market, competitive and cost factors. This flexible approach allows the Company
to optimize the effectiveness and efficiency of its marketing expenditures.
Through its store and catalog direct marketing system, the Company tracks
the buying habits of many of its customers, measures the response rate to
various catalog marketing and promotional efforts and responds to changes in
purchasing patterns and customer demands. The customer database for the
Company's direct marketing system is derived from a variety of sources,
including Staples private label charge cards, Staples tax-exempt customer cards,
and Staples delivery orders.
In 1996, the Company maintained a strong television presence based upon the
success of its expanded 1995 campaign. This television advertising is designed
to improve the Company's name recognition and penetration levels for both the
household and business customer segments. In addition, the Company expanded its
print advertising campaign in markets identified as having high incremental
sales potential and developed additional print programs to support key product
categories. Finally, the Company continued to build its loyalty program and top
customer database in 1996 through the expansion of its "Dividends" program,
which rewards the top store and catalog customers with rebates and a variety of
other benefits.
STORE OPERATIONS AND TRAINING
Store Operations
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The Company strives to be the lowest cost operator of office products
stores servicing its targeted customers. Staples has sought to create stores
that appeal to its target customers for their broad selection, everyday low
prices, convenience, shopability and helpful service.
Staples retail stores display inventory according to a plan-o-gram that
designates graphically the place each item in each section of the store is
displayed and specifies the quantity in which each inventory item is to be
stocked. Related items are typically grouped together for customer convenience.
Store layouts are as uniform as the various facilities allow, so that products
destined for stores can be picked at the distribution center to match store
aisles. Store employees, therefore, are able to place products received from the
distribution center directly onto the shelf without cumbersome store-level
receiving, double-handling or, in general, price marking.
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Staples' computer systems calculate replenishment points and target
inventory levels for each stock keeping unit by store based on its rate of sale
and variability in rate of sale. Sales and inventory levels are tracked by stock
keeping unit at each store through the Company's point-of-sale system and are
transmitted nightly to the Company's host computer, which in turn generates
reorders from the distribution center so that inventory arrives at Staples
stores on a just-in-time basis.
Stores are brightly lit and products are attractively displayed. Employees
are available to consult on purchases, particularly in the Company's furniture,
business machines and computer sections, where customers often need assistance
in decision-making. Recently, to provide enhanced business services, product
depth and capital goods sales, the Company expanded the size of its new
prototype store to 24,000 square feet. Where possible, the Company will expand
existing stores to fit the new format. The Company's stores typically are open
85 hours (seven days) per week.
The Company has invested in training and development programs to upgrade
staff selling skills and improve customer service at its retail stores and
delivery operations. Much of the training targets sales of capital goods such as
fax machines, copiers, furniture and computers. In addition, the Company has
continued to increase its efforts to improve its in-stock position as well as
expand the product depth in certain key categories in order to best serve its
customers.
Associates and Associate Training
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The Company places great importance on recruiting, training and providing
the proper incentives for quality store level personnel. The Company has focused
on building its store management organization from within. The Company recruits
actively on college campuses and also hires talented individuals with experience
in successful retail operations. Additionally, current associates are rewarded
for recruiting new associates. A majority of the Company's store managers have
been trained in the Company's management development program.
Management considers customer relations and its associates' knowledge of
office products and office-related capital goods to be significant to its
marketing approach and its ability to maintain customer satisfaction. New
management trainees advance through the store management structure by taking on
assignments in different areas as they are promoted. Store and telemarketing
employees prepare for new assignments by studying training modules, including
written manuals, video instruction and self-testing, which are prepared by the
Company and others. These associates are trained in a number of areas,
including, where appropriate, sales techniques, management techniques and
product knowledge.
The Company offers full time associates the opportunity to acquire equity
in the Company through an employee-stock purchase plan, and also grants stock
options to certain of its associates as an incentive to attract and retain such
associates.
As of February 1, 1997, the Company employed 12,473 full-time and 12,521
part-time employees.
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EXPANSION STRATEGY
The Company's expansion strategy involves the establishment of a strong
market position by increasing its presence in targeted metropolitan markets by
operating a full network of stores, entering small markets and focusing growth
in those markets where products can be cost effectively replenished through its
distribution centers. The Company believes that networks of stores in a
metropolitan market enhance profitability by leveraging marketing costs,
distribution expense and supervision costs.
The Company currently plans to open approximately 120 stores in the United
States and Canada in fiscal 1997. Approximately nine store openings are planned
for the UK and Germany in fiscal 1997. The Company's growth strategy calls for
continuing to increase its presence along both the East Coast and West Coast as
well as portions of the Southeast and Midwest regions of the United States.
Additionally, the Company plans to expand into one or more major new markets per
year as well as numerous smaller markets.
In determining where to open new stores, the Company evaluates the
concentration of small and medium-sized businesses and organizations, the number
of home offices, household income levels and the availability of quality real
estate locations, competitive factors and other factors. Ideally, stores are
located on high-traffic arteries convenient to the targeted businesses and
consumers, with parking adequate to support high sales volumes. While most of
its stores have been located in conventional strip shopping centers, the Company
has also successfully converted non-retail properties to Staples stores.
Although the Company often leases second-use properties, it has also entered
into ground leases where it plans to build a store or arranged to have landlords
construct free-standing buildings to its specifications. In addition, the
Company has on numerous occasions acquired lease rights from prior tenants. The
Company believes that this flexibility in selecting sites will prove helpful as
it seeks to locate additional stores in the difficult real estate markets in
which it operates.
COMPETITION
The Company competes with a variety of retailers, dealers and distributors
in the highly competitive office products market. The Company believes that its
customers choose among suppliers on the basis of price, breadth of selection,
service and convenience.
The Company's target customers have historically been serviced by
traditional office products dealers. The Company believes it has competed
favorably against these dealers in the past because it generally offered larger
discounts off catalog list prices than these dealers. In addition, the Company
believes that its broad product line, depth of in-stock inventory and extended
store hours offer competitive advantages. Recently, however, some of such
dealers have lowered prices and increased their service levels to become more
competitive with discount retailers.
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The Company also competes in most of its geographic markets with other
high-volume office supply chains that are similar in concept to the Company in
terms of store format, pricing strategy, and product selection, including Office
Depot and OfficeMax, as well as mass merchants, such as Wal-Mart, warehouse
clubs, such as Sam's, BJ's and Price/Costco, computer and electronics
superstores, such as CompUSA, Circuit City and Best Buy, and other discount
retailers. In addition, the Company's retail stores, as well as its delivery and
contract business, compete with numerous mail order firms (such as Viking and
Quill), contract stationer business (such as Corporate Express and US Office
Products) and direct manufacturers (such as Dell). Such competitors have
increased their presence in the Company's markets in recent years. Some of the
Company's current and potential competitors in the office products industry are
larger than the Company and have substantially greater financial resources. No
assurance can be given that such increased competition will not have an adverse
effect on the Company's business.
TRADEMARKS
The Company has registered the marks "Staples" and "Staples- The Office
Superstore" on the Principal Register of the United States Patent and Trademark
Office as well as in the UK.
SUBSEQUENT EVENTS
On September 4, 1996, the Company entered into an Agreement and Plan of
Merger with Marlin Acquisition Corp., a wholly-owned subsidiary of the Company
("Marlin"), and Office Depot, Inc. ("Office Depot") pursuant to which Marlin is
to be merged with and into Office Depot and Office Depot is to become a
wholly-owned subsidiary of Staples (the "Merger"). On March 10, 1997, the
Federal Trade Commission announced that it would seek to enjoin the Merger and
subsequently filed a motion for a preliminary injunction in Federal District
Court. Staples and Office Depot intend to oppose the injunction. The Merger is
structured as a tax-free exchange of shares in which the stockholders of Office
Depot would receive 1.14 shares of the Company's common stock for each
outstanding share of common stock of Office Depot they own. The Merger would be
accounted for as a pooling of interests. Office Depot operates over 500 retail
office supply stores in the US and Canada, a national delivery and contract
stationer business, and joint ventures or licensed operations in seven
countries, and had revenues of $6.1 billion for the year ended December 28,
1996. The information set forth in this Annual Report on Form 10-K describes the
Company without giving effect to the Merger.
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ITEM 2. PROPERTIES
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As of February 1, 1997 the Company operated 557 superstores in 30 states,
the District of Columbia and 9 provinces in Canada. The Company also operates 36
distribution centers. The following table sets forth the locations of the
Company's facilities.
NUMBER NUMBER
STATE/PROVINCE OF STORES STATE/PROVINCE OF STORES
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Arizona 13
California 95 Canada
Connecticut 23 ------
Delaware 4 Alberta 10
Florida 19 British Columbia 7
Iowa 4 Manitoba 3
Illinois 6 New Brunswick 1
Indiana 5 Newfoundland 1
Kentucky 5 Nova Scotia 2
Maine 5 Ontario 39
Maryland 22 Quebec 19
Massachusetts 34 Saskatchewan 2
Michigan 26
Missouri 1 NUMBER OF
Montana 1 STATE/PROVINCE DISTRIBUTION CENTERS
New Hampshire 10 -------------- --------------------
New Jersey 38 California 6
New York 61 Colorado 1
North Carolina 7 Connecticut 4
Ohio 13 Delaware 2
Oregon 2 Florida 2
Pennsylvania 40 Georgia 1
Rhode Island 2 Illinois 1
South Carolina 4 Maryland 3
Tennessee 3 Massachusetts 4
Utah 3 Michigan 1
Vermont 2 New Jersey 2
Virginia 20 New York 2
Washington 2 Ohio 1
Washington DC 2 Pennsylvania 2
West Virginia 1 Texas 2
Washington 1
Canada
------
Ontario 1
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Most of the existing stores are leased or subleased by the Company with
initial lease terms expiring between 1997 and 2023. In most instances, the
Company has renewal options at increased rents. Leases for 168 of the existing
stores provide for contingent rent based upon sales.
ITEM 3. LEGAL PROCEEDINGS
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On September 4, 1996, the Company entered into an Agreement and Plan of
Merger with Marlin and Office Depot pursuant to which Marlin is to be merged
with and into Office Depot and Office Depot is to become a wholly-owned
subsidiary of Staples. On March 10, 1997, the Federal Trade Commission announced
that it would seek to enjoin the Merger and subsequently filed a motion for a
preliminary injunction in Federal District Court. Staples and Office Depot
intend to oppose the injunction.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of the Company's security holders
during the last quarter of the fiscal year ended February 1, 1997.
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
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The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "SPLS".
At February 1, 1997, the number of holders of record of the Company's
Common Stock was 9,134.
The following table sets forth for the periods indicated the high and low
sale prices per share of the Common Stock on the Nasdaq National Market, as
reported by Nasdaq, retroactively adjusted for the three-for-two stock splits in
March, 1996 and July, 1995.
Fiscal Year Ended February 3, 1996 High Low
---------------------------------- ------ ------
First Quarter $12.89 $10.17
Second Quarter 15.67 10.17
Third Quarter 19.42 13.92
Fourth Quarter 18.83 12.58
Fiscal Year Ended February 1, 1997
----------------------------------
First Quarter $21.63 $16.00
Second Quarter 21.50 14.38
Third Quarter 22.63 16.88
Fourth Quarter 22.00 17.13
- 14 -
15
The Company has never paid a cash dividend on its Common Stock. The Company
presently intends to retain earnings for use in the operation and expansion of
its business and, therefore, does not anticipate paying any cash dividends in
the foreseeable future. In addition, the Company's revolving credit agreement
restricts the payment of dividends.
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
The information required by this Item is attached as Appendix A.
----------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
-------------
The information required by this Item is attached as Appendix B.
----------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
The information required by this Item is attached as Appendix C.
----------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not Applicable.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
CLASS 3 DIRECTORS HOLDING OFFICE FOR TERM EXPIRING AT THE 1997 ANNUAL MEETING:
LEO KAHN, age 80, is a co-founder of Staples and has been a Director since
January 1986. He has been a partner in United Properties Group, a real estate
partnership, since April 1985, and since November 1996 he has been Chief
Executive Officer of Nature's Heartland, a food retailer. Mr. Kahn is a Director
of Cambridge Soundworks, Inc.
ROBERT C. NAKASONE, age 49, has been a Director since January 1986. Mr.
Nakasone has served as President and Chief Operating Officer of Toys "R" Us,
Inc., a retail store chain, since January 1994. From January 1989 to January
1994, Mr. Nakasone served as Vice Chairman and President of Worldwide Toy Stores
of Toys "R" Us. Mr. Nakasone is a Director of Toys "R" Us.
THOMAS G. STEMBERG, age 48, is a co-founder of Staples and has been a
Director since January 1986. Mr. Stemberg has served as Staples' Chairman of the
Board of Directors and Chief Executive Officer since February 1988. Mr. Stemberg
is a Director of PETsMART, Inc.
CLASS 1 DIRECTORS HOLDING OFFICE FOR TERM EXPIRING AT THE 1998 ANNUAL MEETING:
W. LAWRENCE HEISEY, age 66, has been a Director since November 1994. Mr.
Heisey has served as Chairman Emeritus of Harlequin Enterprises Limited of
Toronto, Canada, a publishing company, since May 1990 and was a Director of The
Business Depot, Ltd. prior to its acquisition by Staples in August 1994.
- 15 -
16
JAMES L. MOODY, JR., age 65, has been a Director since September 1995. Mr.
Moody has served as Chairman of the Board of Hannaford Bros. Co., a food
retailer, since May 1992. Mr. Moody is also a Director of UNUM Corporation,
IDEXX Laboratories, Inc. and Penobscot Shoe Co. and is a Trustee of the Colonial
Group mutual funds.
MARTIN TRUST, age 62, has been a Director since June 1987. Mr. Trust has
served as President and Chief Executive Officer of Mast Industries, Inc., a
contract manufacturer, importer and wholesaler of women's apparel, and
wholly-owned subsidiary of The Limited, Inc., since 1970. Mr. Trust is a
Director of The Limited, Inc.
PAUL F. WALSH, age 47, has been a Director since December 1990. Mr. Walsh
has served as President and Chief Executive Officer of Wright Express
Corporation, an information and financial services company, since February 1995.
From January 1990 to February 1995, Mr. Walsh was Chairman of BancOne
Diversified Services Corporation, a financial services company. Mr. Walsh is a
Director of Intelligent Controls, Inc.
CLASS 2 DIRECTORS HOLDING OFFICE FOR TERM EXPIRING AT THE 1999 ANNUAL MEETING:
MARY ELIZABETH BURTON, age 45, has been a Director since June 1993. Ms.
Burton has served as Chief Executive Officer of BB Capital, Inc., an investment
company, since June 1994. From June 1992 to June of 1994, she was Chairman and
Chief Executive Officer of Supertans, Inc., a chain of tanning salons. Ms.
Burton is a director of Gantos, Inc.
MARTIN E. HANAKA, age 47, has served as President and Chief Operating
Officer of Staples since August 1994. From October 1992 to August 1994, he was
President and Chief Operating Officer and Executive Vice President of Lechmere,
Inc. Prior to joining Lechmere, Inc., he was with Sears Roebuck & Co. where,
commencing 1990, he served in various capacities, including Vice President-Brand
Central, Region Manager - Mid-South and General Manager-Sears Travel. Mr. Hanaka
is a Director of Wilmar Industries, Inc.
ROWLAND T. MORIARTY, age 50, has been a Director since March 1986. Mr.
Moriarty has been Chairman and Chief Executive Officer of Cubex Corporation, a
consulting company, since September 1992. He was a professor at Harvard Business
School from September 1982 to September 1992. Mr. Moriarty is a Director of
Capital American Financial Corporation.
W. MITT ROMNEY, age 50, has been a Director since January 1986. Since May
1992, Mr. Romney has been the Chief Executive Officer of Bain Capital, Inc., a
firm which manages certain venture capital funds. Mr. Romney has been a general
partner and the managing partner of each of Bain Capital Partners and Bain
Venture Capital, both general partners of venture capital limited partnerships,
since September 1984 and October 1987, respectively. Mr. Romney served as Chief
Executive Officer of Bain & Company, Inc., a management consulting firm, from
1991 to 1993, and now serves as a director of such firm. Mr. Romney is a
Director of Marriott International, Inc. and The Sports Authority, Inc.
EXECUTIVE OFFICERS.
In addition to Messrs. Stemberg and Hanaka, the following are the executive
officers of Staples:
- 16 -
17
JOHN C. BINGLEMAN, age 54, has served as President - North American
Superstores since August 1994. He was President of The Business Depot, Ltd. from
its founding in 1990 until its acquisition by Staples in August 1994.
HENRY P. EPSTEIN, age 61, has served as Vice President - Contract
Development & Operations since April 1994. Mr. Epstein was the Chairman of
Spectrum Office Products Inc. from April 1970 until its acquisition by Staples
in March 1994.
JAMES E. FLAVIN, age 54, has served as Senior Vice President - Finance and
Corporate Controller since February 1995. Prior to joining Staples, Mr. Flavin
was with Filene's in various capacities, most recently as Senior Vice President
Finance & MIS of the Filene's Division of May Department Stores Co.
RICHARD GENTRY, age 47, has served as Executive Vice President -
Merchandising since February 1996. Prior to joining Staples, Mr. Gentry was with
Lechmere, Inc. where he served as Executive Vice President Merchandising from
1993 to 1995 and Senior Vice President Merchandising from 1990 to 1993.
SUSAN S. HOYT, age 53, has served as Executive Vice President - Human
Resources since July 1996. Prior to joining Staples, Ms. Hoyt was with Dayton
Hudson Department Stores in Minneapolis, MN where she served as Executive Vice
President of Store Operations from 1993 to 1996, and prior to that as Senior
Vice President of Human Resources from 1991 to 1993.
TODD J. KRASNOW, age 39, has served as Executive Vice President - Small
Business since March 1996. Previously he served as Executive Vice President -
Sales & Marketing from April 1994 to March 1996. He served as Senior Vice
President - Sales & Marketing from November 1993 until April 1994, and from May
1992 until November 1993, he served as Senior Vice President - Joint Ventures.
Prior to holding that position, Mr. Krasnow was Vice President - Marketing &
Systems, California Operations from April 1990 until May 1992.
JEFFREY LEVITAN, age 42, has served as Senior Vice President - Strategic
Planning and Business Development since August 1996. From 1988 to 1996, Mr.
Levitan was with The Boston Consulting Group where he served as a strategic
management consultant.
JOHN J. MAHONEY, age 45, has served as Executive Vice President and Chief
Financial Officer since September 1996. From June 1996 to August 1996, Mr.
Mahoney was Executive Vice President and Chief Financial Officer at Hill,
Holliday, Connors, Cosmopulos. Prior to joining Hill, Holliday, he was a partner
with Ernst & Young LLP, where he served in various capacities in its accounting
and auditing groups from 1975 to June 1996.
RONALD L. SARGENT, age 41, has served as President - Staples Contract &
Commercial since June 1994. From September 1991 until June 1994 he served as
Vice President - Staples Direct and Executive Vice President - Contract &
Commercial.
- 17 -
18
EVAN P. STERN, age 55, has served as President of Staples National
Advantage since July 1995. From November 1994 to July 1995, he was President of
National Office Supply Company, Inc. which became a subsidiary of Staples in
February 1994. Prior to that, he served as President and Chief Operating Officer
of National Office Supply Company, Inc.
JOSEPH S. VASSALLUZZO, age 49, has served as President - Staples Realty
since September 1996. Mr. Vassalluzzo joined Staples in September 1989 and
served as Executive Vice President - Growth & Development until April 1993. From
April 1993 until November 1993, he served as Executive Vice President - Growth
and Support Services and from November 1993 to September 1996 he served as
Executive Vice President - Global Growth & Development.
Staples' Chairman of the Board of Directors is elected by the Board of
Directors for a one-year term and serves at the discretion of the Board. All
other executive officers of Staples are appointed by the Board of Directors and
serve at the Board's discretion. No family relationships exist between any of
the executive officers or Directors of Staples.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
In July 1996, Thomas G. Stemberg filed a late Form 5 reflecting a change in
the status of his indirect ownership of certain shares held by The Thomas G.
Stemberg Family Trust due to his resignation as Trustee as of November 15, 1995,
and a gift of shares to the Trust on December 14, 1995.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
SUMMARY COMPENSATION
The following table sets forth certain information concerning the
compensation for each of the last three fiscal years of Staples' Chief Executive
Officer and Staples' four other most highly compensated executive officers
during the fiscal year ended February 1, 1997 (the "Senior Executives").
- 18 -
19
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION (1) COMPENSATION AWARDS
----------------------- -------------------
RESTRICTED
NAME AND FISCAL STOCK ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS (2) AWARDS OPTIONS COMPENSATION (3)
- ------------------ ---- ------ --------- ------ ------- ----------------
Thomas G. Stemberg 1996 $447,917 $414,315 $1,216,875(4) 160,000
Chairman and CEO 1995 422,916 280,730 213,750
1994 349,167 300,888 480,937 1,324
Martin E. Hanaka 1996 $420,833 $313,038 $1,106,250(5) 210,000
President and COO 1995 372,916 198,162 150,000
1994 163,333 241,175 (6) 365,622
John C. Bingleman 1996 $356,609 (7) $243,065 $ 774,375(8) 115,000
President - North 1995 327,892 (9) 120,015 103,500 20,905(10)
American 1994 99,191 144,846 300,375
Superstores
Ronald L. Sargent 1996 $302,775 $208,257 $ 774,375(11) 115,000
President - Staples 1995 241,250 183,597 74,250
Contract & 1994 184,583 161,582 168,750
Commercial
Joseph S. 1996 $312,500 $193,347 $ 553,125(12) 70,000
Vassalluzzo 1995 283,333 125,503 37,500
President - 1994 247,083 186,849 84,375 1,086
Staples Realty
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted because such perquisites and other personal benefits
constituted less than the lesser of $50,000 or 10% of the total annual
salary and bonus for the Senior Executive for each year shown.
(2) Except as noted below, represents amounts paid under Staples' executive
bonus plan for the relevant fiscal year.
(3) Except as noted below, represents the full dollar amount of insurance
premiums paid by Staples with respect to life insurance for the benefit of
the Senior Executive.
(4) On October 1, 1996, Mr. Stemberg was awarded 55,000 PARS shares with a per
share value of $22.125. As of February 1, 1997 the restricted shares owned
by Mr. Stemberg had a total value of $1,127,500. See "Performance
Accelerated Restricted Stock Awards."
(5) On October 1, 1996, Mr. Hanaka was awarded 50,000 PARS shares with a per
share value of $22.125. As of February 1, 1997 the restricted shares owned
by Mr. Hanaka had a total value of $1,025,000. See "Performance Accelerated
Restricted Stock Awards."
(6) Mr. Hanaka joined Staples in August 1994. Bonus payment for 1994 was
calculated based on the full year results, and Mr. Hanaka's annualized
salary of $350,000 pursuant to his offer of employment.
(7) Includes payments of $25,993 paid to Mr. Bingleman by Staples' Canadian
subsidiary, The Business Depot, Ltd.
(8) On October 1, 1996, Mr. Bingleman was awarded 35,000 PARS shares with a per
share value of $22.125. As of February 1, 1997 the restricted shares owned
by Mr. Bingleman had a total value of $717,500. See "Performance
Accelerated Restricted Stock Awards."
(9) Includes payments of $25,530 paid to Mr. Bingleman by Staples' Canadian
subsidiary, The Business Depot, Ltd.
(10) Includes $20,905 for reimbursement of relocation expenses.
- 19 -
20
(11) On October 1, 1996, Mr. Sargent was awarded 35,000 PARS shares with a per
share value of $22.125. As of February 1, 1997 the restricted shares owned
by Mr. Sargent had a total value of $717,500. See "Performance Accelerated
Restricted Stock Awards."
(12) On October 1, 1996, Mr. Vassalluzzo was awarded 25,000 PARS shares with a
per share value of $22.125. As of February 1, 1997 the restricted shares
owned by Mr. Vassalluzzo had a total value of $512,500. See "Performance
Accelerated Restricted Stock Awards."
PERFORMANCE ACCELERATED RESTRICTED STOCK AWARDS ("PARS")
In order to maintain Staples' high risk-high reward philosophy, the
Compensation Committee adopted a PARS plan (the "Plan") for certain key
executives. Under the Plan, shares of Staples Common Stock are granted to
executives in consideration for services. The shares are "restricted" in that
they may not be sold or transferred to the executive until they "vest." Staples
PARS issued in fiscal 1996 will vest on February 1, 2002 subject to acceleration
upon achievement of certain pre-determined earnings per share ("EPS") growth
targets over the next two to five fiscal years. EPS growth targets are
determined by the Compensation Committee and approved by the Board of Directors
each year for grants under the Plan in that year. Once the PARS have vested,
they become "unrestricted" and may be freely sold or transferred. Generally the
PARS are forfeited if the executive's employment with Staples terminates prior
to vesting.
OPTIONS GRANTS
The following table sets forth certain information concerning grants of
stock options during the fiscal year ended February 1, 1997 for each of the
Senior Executives.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
-----------------
PERCENT OF POTENTIAL REALIZABLE VALUE AT
TOTAL ASSUMED ANNUAL RATE OF STOCK PRICE
OPTIONS APPRECIATION FOR OPTION TERM (3)
NUMBER OF GRANTED TO EXERCISE --------------------------------
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION
NAME GRANTED(1) FISCAL YEAR SHARE (2) DATE 0% 5% 10%
---- ---------- ----------- --------- ---- -- -- ---
Thomas G. Stemberg 160,000 4.38% $20.63 8/27/06 $0 $2,076,000 $5,258,400
Martin E. Hanaka 210,000 5.75% $20.63 8/27/06 $0 $2,724,750 $6,901,650
John C. Bingleman 60,000 1.64% $17.42 2/26/06 $0 $ 657,198 $1,665,798
55,000 1.51% $20.63 8/27/06 $0 $ 713,625 $1,807,575
Ronald L. Sargent 60,000 1.64% $17.42 2/26/06 $0 $ 657,198 $1,665,798
55,000 1.51% $20.63 8/27/06 $0 $ 713,625 $1,807,575
Joseph S. Vassalluzzo 70,000 1.92% $20.63 8/27/06 $0 $ 908,250 $2,300,550
- --------------
(1) Each of the options granted becomes exercisable in full on the third
anniversary of the date of grant, provided that the optionee continues to
be employed by Staples on such date. The exercisability of the options is
accelerated under certain circumstances. See "Employment Contracts,
Termination of Employment and Change-in-Control Agreements with Senior
Executives."
- 20 -
21
(2) The exercise price is equal to the fair market value per share of Common
Stock on the date of grant.
(3) In accordance with the rules of the Securities and Exchange Commission, the
amounts shown on this table represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. These gains are based on assumed rates of stock appreciation of 0%,
5% and 10% compounded annually from the date the respective options were
granted to their expiration date. The gains shown are net of the option
exercise price, but do not include deductions for taxes or other expenses
associated with the exercise. Actual gains, if any, on stock option
exercises will depend on the future performance of the Common Stock, the
option holders' continued employment through the option period, and the
date on which the options are exercised.
OPTION EXERCISES AND HOLDINGS
The following table sets forth certain information concerning each exercise
of stock options during the fiscal year ended February 1, 1997 by each of the
Senior Executives and the number and value of unexercised options held by each
of the Senior Executives on February 1, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR END
FISCAL YEAR-END OPTION VALUES
NO. OF NO. OF SHARES OF COMMON
SHARES OF STOCK UNDERLYING VALUE OF UNEXERCISED
COMMON STOCK UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE FISCAL YEAR END FISCAL YEAR END (2)
NAME ON EXERCISE REALIZED (1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- ------------ ------------------------- -------------------------
Thomas G. Stemberg 329,064 $3,535,393 2,328,750/955,937 $32,259,934/$7,545,129
Martin E. Hanaka 0 $ 0 0/725,622 $0/$4,743,173
John C. Bingleman 0 $ 0 112,500/406,375 $1,406,250/$2,620,804
Ronald L. Sargent 37,000 $ 641,719 258,730/343,657 $3,858,595/$2,358,457
Joseph S. Vassalluzzo 90,000 $1,523,835 507,207/267,813 $8,018,849/$2,194,533
- -----------------
(1) Represents the difference between the exercise price and the fair market
value of the Common Stock on the date of exercise.
(2) Based on the fair market value of the Common Stock on February 1, 1997
($20.50 per share), less the option exercise price.
COMPENSATION OF DIRECTORS.
Each non-employee Director receives a fee of $1,000 for each Board of
Directors meeting attended and $300 for each Committee meeting attended. All
Directors are reimbursed for certain company-related travel expenses.
The 1990 Director Stock Option Plan of Staples (the "Director Plan")
provides for the annual grant of an option to purchase 5,000 shares of Common
Stock, at an exercise price equal to the fair market value of the Common Stock
on the date of grant, to each non-employee Director who attends during a fiscal
year at least 75% of the total number of Board of Directors meetings held while
he or
- 21 -
22
she was a Director (excluding meetings held by telephone conference on less than
seven days notice) and meetings of committees of the Board of Directors on which
he or she then served during the fiscal year. The Director Plan provides for a
pro rata reduction in the number of shares subject to the option granted to a
Director for the fiscal year in which he or she was initially elected to the
Board based on the number of Board meetings held during the fiscal year prior to
his or her election to the Board. With respect to the fiscal year ended February
1, 1997, on March 6, 1997 each of Ms. Burton and Messrs. Heisey, Kahn, Moody,
Moriarty, Nakasone, Romney, Trust and Walsh was granted an option to purchase
5,000 shares of Common Stock at an exercise price of $24.375 per share.
All stock options granted under the Director Plan become exercisable on a
cumulative basis in four equal annual installments, commencing on the first
anniversary of the date of grant. In the event of a "Change in Control" of
Staples (as defined in the Director Plan), all options outstanding under the
Director Plan automatically become exercisable in full, unless the Board of
Directors expressly determines that the "Change in Control" provisions of the
Director Plan should not be triggered. Options outstanding under the Director
Plan will not become exercisable in full in the event of the closing of the
proposed merger transaction with Office Depot, Inc. An optionee generally may
exercise an option granted under the Director Plan, to the extent exercisable,
only while he or she is a Director of Staples and for up to six months
thereafter. Unexercised options expire ten years after the date of grant.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
AGREEMENTS.
Staples has entered into Severance Benefit Agreements (the "Severance
Agreements") with the Senior Executives. Under the Severance Agreements, which
expire May 31, 2000, the Senior Executives would be entitled to continuation of
salary and other benefits for (i) 18 months in the case of Messrs. Stemberg and
Hanaka, and (ii) 12 months in the case of Messrs. Bingleman, Sargent and
Vassalluzzo, following termination of employment by Staples without cause (or
"constructive discharge" as provided in the Severance Agreements). Each Senior
Executive would receive such benefits for an additional period of 6 months if
such termination occurred within two years following a "change in control" of
Staples (as defined in the Severance Agreements). A change in control of Staples
also results in an acceleration of the exercisability of certain options held by
Senior Executives pursuant to the terms of such options. Consummation of the
proposed transaction with Office Depot, Inc. would constitute a change in
control of Staples pursuant to the terms of the Severance Agreements and such
options.
Pursuant to their Severance Agreements, the exercisability of certain
options to purchase shares granted to Mr. Hanaka on August 15, 1994 and Mr.
Bingleman on June 30, 1994 accelerates if such Senior Executive's employment is
terminated without cause.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
Messrs. Heisey and Nakasone, non-employee Directors of Staples, served on
the Compensation Committee for the entire fiscal year ended February 1, 1997.
Mr. Kahn, a non-employee Director, served on the Compensation Committee until
May 23, 1996, at which time Mr.
- 22 -
23
Trust, also a non-employee Director, was appointed to the Compensation
Committee. Decisions relating to executive officer stock option grants and
awards are made by the Executive Officer Equity Incentive Subcommittee
consisting of Mr. Trust and Mr. Heisey.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- ------------------------------------------------------------------------
The following table sets forth the beneficial ownership of Staples' Common
Stock as of February 28, 1997 (i) by each person who is known by Staples to
beneficially own more than 5% of the outstanding shares of Common Stock, (ii) by
each Director, (iii) by each of the Senior Executives named in the Summary
Compensation Table set forth under the caption "Executive Compensation" below,
and (iv) by all current Directors and executive officers as a group:
BENEFICIAL OWNERSHIP OF COMMON STOCK
NUMBER OF
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING COMMON
BENEFICIAL OWNER OWNED (1) STOCK (2)
- ---------------- --------- ---------
5% Stockholders
- ---------------
FMR Corp. (3) 21,424,469 13.2%
82 Devonshire Street
Boston, MA 02109
Putnam Investments, Inc. (4) 8,741,974 5.4%
One Post Office Square
Boston, MA 02109
Directors
- ---------
Thomas G. Stemberg (5) 3,605,153 2.2%
Martin Trust (6) 1,967,264 1.2%
Leo Kahn (7) 724,509 *
Robert C. Nakasone (8) 307,850 *
Rowland T. Moriarty (9) 268,142 *
W. Mitt Romney (10) 182,841 *
Paul F. Walsh (11) 128,996 *
Martin E. Hanaka 56,622 *
Mary Elizabeth Burton (12) 52,696 *
W. Lawrence Heisey (13) 19,123 *
James L. Moody, Jr. (14) 14,625 *
Other Senior Executives
- -----------------------
John C. Bingleman (15) 156,143 *
Ronald L. Sargent (16) 323,205 *
Joseph S. Vassalluzzo (17) 539,254 *
All current Directors and Executive Officers as a group 10,271,171 6.3%
(22 persons) (18)
- -----------------
* Less than 1%
- 23 -
24
(1) Each person has sole investment and voting power with respect to the shares
indicated, except as otherwise noted. The inclusion herein of any shares as
beneficially owned does not constitute an admission of beneficial
ownership. Each of the persons or group of persons listed is deemed to
beneficially own shares issuable upon the exercise of stock options that
are exercisable within 60 days after February 28, 1997 ("Presently
Exercisable Options") and any shares issuable upon conversion of the
Company's 4-1/2% Convertible Subordinated Debentures due 2000 (the
"Debentures") held by the person or entity in question.
(2) Number of shares deemed outstanding includes 162,301,897 shares outstanding
as of February 28, 1997, any shares subject to Presently Exercisable
Options held by the person or entity in question, and any shares issuable
upon conversion of the Debentures held by the person or entity in question.
(3) Based on a Schedule 13G filed with the Securities and Exchange Commission
on February 14, 1997. Includes 376,359 shares issuable upon conversion of
the Debentures.
(4) Based on a Schedule 13G filed with the Securities and Exchange Commission
on January 31, 1997.
(5) Includes 310,674 shares owned by the Thomas G. Stemberg 1995 Trust, and
2,530 shares owned by Mr. Stemberg's wife. Also includes 2,328,750 shares
subject to Presently Exercisable Options.
(6) Includes 1,850,931 shares owned by Trust Investments, Inc., with which Mr.
Trust is affiliated. Mr. Trust has shared investment and voting control of
these shares. Also includes 7,593 shares held by Mr. Trust's wife. Also
includes 58,123 shares subject to Presently Exercisable Options.
(7) Includes 75,000 shares owned by Mr. Kahn's wife. Also includes 83,434
shares subject to Presently Exercisable Options.
(8) Includes 83,434 shares subject to Presently Exercisable Options.
(9) Includes 28,012 shares held by trusts for the benefit of Mr. Moriarty's
children and 21,429 shares owned by Cubex Corporation, of which Mr.
Moriarty is Chairman and Chief Executive Officer. Mr. Moriarty is not a
trustee of the trusts for the benefit of his children. Also includes 83,434
shares subject to Presently Exercisable Options.
(10) Includes 77,810 shares subject to Presently Exercisable Options. Also
includes 86,694 shares subject to Presently Exercisable Options granted to
Bain & Co., Inc., of which Mr. Romney is a director.
(11) Includes 121,403 shares subject to Presently Exercisable Options.
(12) Includes 52,696 shares subject to Presently Exercisable Options.
(13) Includes 14,061 shares subject to Presently Exercisable Options.
(14) Includes 4,500 shares subject to Presently Exercisable Options.
(15) Includes 112,500 shares subject to Presently Exercisable Options.
(16) Includes 279,824 shares subject to Presently Exercisable Options.
(17) Includes 507,207 shares subject to Presently Exercisable Options.
(18) Includes 4,565,703 shares subject to Presently Exercisable Options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------------------------------------------------------
In connection with Staples' acquisition of the stock of National Office
Supply Company, Inc. ("NOS"), Staples acquired leases in Chicago, Illinois and
Hackensack, New Jersey between NOS and certain partnerships of which Evan Stern
is a partner. Annual rental payments in 1996 were $532,432 and $680,000,
respectively. In addition, through Staples' acquisition of Spectrum Office
Products Inc. ("Spectrum"), Staples acquired a lease of its facility in
Rochester, New York with a partnership of which Henry Epstein is partner. Rental
payments in fiscal 1996 amounted to $576,514.72. As a result of such
acquisition, Staples also holds the mortgage note of such partnership on the
property pursuant to which the partnership paid Staples $80,987 in 1996. Each of
the above transactions was entered into prior to the acquisition of such
companies by Staples.
- 24 -
25
Staples has a policy that transactions and loans, if any, between Staples
and its officers, Directors and affiliates will be on terms no less favorable to
Staples than could be obtained from unrelated third parties and will be approved
by a majority of the members of the Board of Directors and by a majority of the
disinterested members of the Board of Directors. In addition, this policy
mandates that Staples may make loans to such officers, Directors and affiliates
for bona fide business purposes only. In accordance with Staples' policy, each
of the above transactions was approved by both the Board of Directors and the
disinterested members of the Board of Directors. Staples believes that the terms
of the above arrangements are no less favorable than could be obtained from
unrelated third parties.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) Index to Consolidated Financial Statements.
1. FINANCIAL STATEMENTS. The following financial statements and schedules
--------------------
of Staples, Inc. are included as APPENDIX C of this Report:
----------
Consolidated Balance Sheets - February 1, 1997 and February 3, 1996.
Consolidated Statements of Income - Fiscal years ended
February 1, 1997, February 3, 1996, and January 28, 1995.
Consolidated Statements of Stockholders' Equity - Fiscal years ended
February 1, 1997, February 3, 1996, and January 28, 1995.
Consolidated Statements of Cash Flows - Fiscal years ended
February 1, 1997, February 3, 1996, and January 28, 1995.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
-----------------------------
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are not applicable, and, therefore,
have been omitted.
3. EXHIBITS. The exhibits which are filed with this report or which are
---------
incorporated herein by reference are set forth in the Exhibit Index on
page E-1.
(b) Reports on Form 8-K.
Not applicable.
- 25 -
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on April 25, 1997.
Staples, Inc.
By: /s/ Thomas G. Stemberg
---------------------------------------------
Thomas G. Stemberg, Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated above.
Signature Capacity
--------- --------
/s/ Thomas G. Stemberg Chairman of the Board and Chief Executive Officer
------------------------ (Principal Executive Officer) and Director
Thomas G. Stemberg
/s/ Mary Elizabeth Burton Director
------------------------
Mary Elizabeth Burton
/s/ W. Lawrence Heisey Director
------------------------
W. Lawrence Heisey
/s/ Leo Kahn Director
------------------------
Leo Kahn
/s/ Martin E. Hanaka Director
------------------------
Martin E. Hanaka
/s/ James L. Moody, Jr. Director
------------------------
James L. Moody
/s/ Rowland T. Moriarty Director
------------------------
Rowland T. Moriarty
27
SIGNATURES - CONT'D
Signature Capacity
--------- --------
/s/ Robert C. Nakasone Director
------------------------
Robert C. Nakasone
/s/ W. Mitt Romney Director
------------------------
W. Mitt Romney
/s/ Martin Trust Director
------------------------
Martin Trust
/s/ Paul F. Walsh Director
------------------------
Paul F. Walsh
/s/ John J. Mahoney Executive Vice President - Finance
------------------------ and Chief Financial Officer (Principal Financial
John J. Mahoney Officer)
/s/ James E. Flavin Senior Vice President-Finance
------------------------ (Principal Accounting Officer)
James E. Flavin
28
Item 6. Selected Financial Data
- -------------------------------
FINANCIAL HIGHLIGHTS (1)
(Dollar Amounts in Thousands, Except Per Share Amounts)
Fiscal Year Ended
---------------------------------------------------------------------------------
February 1, February 3, January 28, January 29, January 30,
1997 1996 1995 (2) 1994 (3) 1993 (4)
(52 weeks) (53 weeks) (52 weeks) (52 weeks) (52 weeks)
----------- ----------- ----------- ----------- -----------
STATEMENT OF INCOME DATA:
Sales .................................... $3,967,665 $3,068,061 $2,000,149 $1,308,634 $1,041,636
Gross profit ............................. 944,386 701,878 465,789 295,624 234,469
Operating income ......................... 204,001 147,813 81,727 37,685 37,457
Net income ............................... 106,420 73,705 39,940 19,452 18,318
Earnings per common share ................ $ 0.64 $ 0.46 $ 0.28 $ 0.14 $ 0.14
Dividends................................. -- -- -- -- --
SELECTED OPERATING DATA (AT PERIOD END):
Stores open .............................. 557 443 350 230 174
BALANCE SHEET DATA:
Working capital .......................... $ 548,793 $ 504,330 $ 289,395 $ 214,326 $ 234,686
Total assets ............................. 1,787,752 1,402,775 1,008,454 650,756 545,207
Total long-term debt, less current portion 391,342 343,647 249,387 123,592 121,353
Stockholders' equity ..................... 761,686 611,416 384,990 287,207 256,321
(1) On February 23, 1994 and March 7, 1994, the Company acquired National
Office Supply Company, Inc. ("National"), and Spectrum Office Products,
Inc. ("Spectrum"), respectively. These transactions have been accounted for
using the pooling of interests method. As a result, the financial
information shown above has been restated to include the accounts and
results of operations of National and Spectrum, for all periods presented.
Also, all share numbers and earnings per share data have been restated to
give retroactive effect to the three-for-two splits of the Company's common
stock effected in March, 1996, July, 1995, October, 1994, and December,
1993. See Note F of Notes to Consolidated Financial Statements.
(2) Results of operations for this period include a $2,150,000 charge relating
to professional fees incurred for contract stationer acquisitions and a
$1,149,000 gain on the sale of the Company's investment in a contract
stationer. The net of these items had the effect of reducing net income per
share by $0.01.
(3) Results of operations for this period include a $7,600,000 charge relating
to the revision of the Company's computer merchandise strategy, a
$4,771,000 charge relating to nonrecurring merger expenses resulting from
the acquisitions of National and Spectrum, and a gain of $8,430,000
resulting from the sale of the Company's investment in a contract
stationer. The net of these items had the effect of reducing net income per
share by $0.02.
(4) Results of operations include expenses related to the Office Mart merger
(primarily consulting, legal, and accounting fees) of $1,200,000 which had
the effect of reducing net income per share by $0.01.
29
Item 7. APPENDIX B
- -------
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
................................................................................
COMPARISON OF FISCAL YEARS ENDED FEBRUARY 1, 1997, FEBRUARY 3, 1996, AND
JANUARY 28, 1995
GENERAL. The fiscal years ended February 1, 1997 and January 28, 1995
consisted of 52 weeks, while the fiscal year ended February 3, 1996 consisted of
53 weeks.
SALES. Sales increased 29% to $3,967,665,000 in the fiscal year ended
February 1, 1997 from $3,068,061,000 in the fiscal year ended February 3, 1996;
excluding the additional week in the fiscal year ended February 3, 1996, sales
increased 32%. Sales increased 53% in the fiscal year ended February 3, 1996
from sales of $2,000,149,000 in the fiscal year ended January 28, 1995; 3% of
the increase resulted from the additional week in the year ended February 3,
1996. The growth in each year was attributable to an increase in the number of
open stores, increased sales in existing stores and increased sales in the
delivery and contract stationer segments. Comparable store and delivery hub
sales for the fiscal year ended February 1, 1997 increased 14% over the fiscal
year ended February 3, 1996; comparable sales in the contract stationer segment
increased 17% over the year ended February 3, 1996. Comparable store and
delivery hub sales for the year ended February 3, 1996 increased 20% over the
year ended January 28, 1995; comparable sales in the contract stationer segment
increased 35% over the year ended January 28, 1995. As of February 1, 1997,
February 3, 1996, and January 28, 1995, the Company had 557, 443, and 350 open
stores, respectively.
GROSS PROFIT. Gross profit was 23.8%, 22.9%, and 23.3% of sales for the
fiscal years ended February 1, 1997, February 3, 1996 and January 28, 1995,
respectively. The increase in gross profit for the year ended February 1, 1997
was primarily due to the leveraging of fixed distribution center costs over a
larger sales base, improved margins in the delivery business segment as well as
lower product costs from vendors as a result of increased purchase discounts.
This was partially offset by decreases in the merchandise margin rates in the
retail segment, as sales of computer hardware (CPU's and laptops), which
generate a lower margin rate than other categories, increased to 7.7% of total
sales for the year ended February 1, 1997 versus 7.5% in the prior year. The
decrease in gross profit rate for the year ended February 3, 1996 from the year
ended January 28, 1995 primarily resulted from a change in product mix as a
result of increased volumes in lower margin items such as computers. This
decrease was partially offset by purchasing efficiencies gained through enhanced
vendor volume rebate programs and the leveraging of fixed occupancy and
distribution costs over a greater sales base.
OPERATING AND SELLING EXPENSES. Operating and selling expenses, which
consist of payroll, advertising and other operating expenses, were 15.0%, 14.5%,
and 15.4% of sales for the fiscal years ended February 1, 1997, February 3,
1996, and January 28, 1995, respectively. The increase as a percentage of sales
for the year ended February 1, 1997 was primarily due to increased advertising
as well as increases in store labor and costs incurred for the Company's store
remodel program in which significant investments have been made in store layouts
and signing to improve shopability and enhance customer service. The decrease as
a percentage of sales for the year ended February 3, 1996
30
from the year ended January 28, 1995 was primarily due to the leveraging of
store payroll and fixed store operating expenses over a larger sales base.
While most store expenses vary proportionately with sales, there is a fixed
cost component. Because new stores typically generate lower sales than the
Company average, the fixed cost component results in higher store operating and
selling expenses as a percentage of sales in these stores during their start-up
period. During periods when new store openings as a percentage of the base are
higher, store operating and selling expenses as a percentage of sales may
increase. In addition, as the store base matures, the fixed cost component of
operating expenses is leveraged over an increased level of sales, resulting in a
decrease in store operating and selling expenses as a percentage of sales. The
Company's strategy of saturating markets results in some new stores attracting
sales away from existing stores.
PRE-OPENING EXPENSES. Pre-opening expenses relating to new store openings,
which consist primarily of salaries, supplies, marketing and occupancy costs,
are expensed by the Company as incurred and, therefore, fluctuate from period to
period depending on the timing and number of new store openings. Pre-opening
expenses averaged $72,000, $58,000, and $56,000 per store for the stores opened
in the years ended February 1, 1997, February 3, 1996, and January 28, 1995,
respectively. The increase is due primarily to increased marketing expenses as
well as higher costs incurred in the initial shipment of product from the
distribution centers to new stores.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses as
a percentage of sales were 3.4%, 3.3%, and 3.5% in the years ended February 1,
1997, February 3, 1996, and January 28, 1995, respectively. The increase as a
percentage of sales for the year ended February 1, 1997 is primarily due to
significant investments in the Company's information systems staffing and
infrastructure, which the Company believes will reduce costs as a percentage of
sales in future years. The decrease as a percentage of sales for the year ended
February 3, 1996 from the year ended January 28, 1995 was primarily due to the
Company's ability to increase sales without proportionately increasing overhead
expenses in its core retail business.
INTEREST EXPENSE, NET. Net interest expense totaled $20,064,000,
$15,924,000, and $8,389,000 in the fiscal years ended February 1, 1997, February
3, 1996, and January 28, 1995, respectively. The increase in the years ended
February 1, 1997 and February 3, 1996 was primarily due to increased borrowings
which funded the increase in store inventories related to new store openings,
expanded product assortment, and improvements in in-stock levels; the
acquisition of fixed assets for new stores opened and remodeled; continued
investments in the information systems and distribution center infrastructure;
and additional investments in joint venture affiliates.
OTHER INCOME. Other income primarily relates to fees charged for
administrative services performed by the Company for its international
affiliates, which included Business Depot, Staples UK, and MAXI-Papier-Markt
GmbH ("MAXI"). This income totaled $177,000, $109,000, and $2,736,000, in the
years ended February 1, 1997, February 3, 1996, and January 28, 1995,
respectively. The decrease in the years ended February 1, 1997 and February 3,
1996 was primarily due to the consolidation of Business Depot subsequent to
August 26, 1994 which resulted in the elimination of this income in the
Company's consolidated results, as well as a contractual reduction in the fees
charged by the Company as the affiliates perform more of their own
administrative functions.
31
EQUITY IN LOSS OF AFFILIATES. Equity in loss of affiliates is comprised of
the Company's share of the losses incurred by Business Depot (before the
Company's acquisition in August, 1995 of the remaining 58% of the outstanding
shares it did not already own), MAXI, and Staples UK. The Company's investments
in MAXI and Staples UK are accounted for using the equity method; Business Depot
was accounted for under the equity method until August 26, 1994. Equity in loss
of affiliates totaled $11,073,000, $12,153,000, and $11,168,000, in the years
ended February 1, 1997, February 3, 1996, and January 28, 1995, respectively.
The decrease in the equity loss of affiliates for the year ended February 1,
1997 was due primarily to a store closure charge recorded by MAXI during the
year ended February 3, 1996 of which the Company's equity share was
approximately $2,500,000. This was offset in the year ended February 1, 1997 by
increased losses generated by Staples UK, the Company's joint venture in
England. The increase in the equity in loss for the year ended February 3, 1996
from the year ended January 28, 1995 was primarily due to the increase in the
number of new stores opened by the affiliates as well as the store closure
charge recorded by MAXI during the year ended February 3, 1996. The initial
investments in overhead, labor and advertising, combined with the fact that the
new stores typically generate lower sales than mature stores, cause these stores
to be unprofitable initially. There can be no assurance that the Company's joint
ventures will become profitable.
On December 11, 1996, the Company signed a definitive agreement to acquire
from Kingfisher PLC its interests in the two European joint ventures. As a
result of the acquisition, the Company's ownership interest of Staples UK will
increase to 100% and its ownership of MAXI-Papier-Markt-GmbH will increase to
approximately 91%. The transactions will be accounted for as purchases and are
expected to close in the second quarter of fiscal 1997. Subsequent to the
acquisitions, the Company's financial statements will reflect the consolidated
results of these entities.
INCOME TAXES. The provision for income taxes as a percentage of pre-tax
income was 38.5% for the fiscal years ended February 1, 1997 and February 3,
1996, as compared to 37.5% for the fiscal year ended January 28, 1995. The
increase in rate in the years ended February 1, 1997 and February 3, 1996 was
principally due to a decrease in federal targeted jobs credits resulting from
the expiration of the federal targeted jobs tax credit program on December 31,
1994.
LIQUIDITY AND CAPITAL RESOURCES
................................................................................
The Company has traditionally used a combination of cash generated from
operations and debt or equity offerings to fund its expansion and acquisition
activities. During the years ended February 1, 1997, February 3, 1996 and
January 28, 1995, the Company also utilized its revolving credit facility to
support its various growth initiatives.
The Company opened 115 stores, 94 stores, and 90 stores in the years ended
February 1, 1997, February 3, 1996, and January 28, 1995, respectively, and
closed one store in each of the years ended February 1, 1997 and February 3,
1996. As the store base matures and becomes more profitable, cash generated from
store operations is expected to provide a greater portion of funds required for
new store inventories and other working capital requirements. Sales generated by
the contract stationer business segment are made under regular credit terms,
which requires that the Company carry its own receivables from these sales. The
Company has also utilized capital equipment financings to fund current working
capital requirements.
As of February 1, 1997, cash, cash equivalents, and short-term investments
totaled $106,129,000, a decrease of $4,686,000 from the February 3, 1996 balance
of $110,815,000. The principal uses of
32
cash during 1997 consisted of an increase in inventory of $167,479,000 related
to new store openings, expanded product assortment, and improvements in in-stock
levels; acquisition of property and equipment of $199,614,000 for new stores,
the construction of the Hagerstown distribution center, and other corporate
uses; and increased investments in joint venture affiliates of $18,629,000;
these uses were partially offset by an increase in accounts payable and accrued
expenses of $179,108,000 which financed a portion of the increase in inventory.
The Company expects to open approximately 120 stores during fiscal 1997.
Management estimates that the Company's cash requirements, including pre-opening
expenses, leasehold improvements and fixtures (net of store inventory financed
under vendor trade terms), will be approximately $1,400,000 for each new store
(excluding the cost of any acquisitions of lease rights). Accordingly, the
Company expects to use approximately $175,000,000 for store openings during this
period. The Company will also expend $57,000,000 to complete the acquisition of
Staples UK and MAXI. In addition, the Company will continue to make investments
in information systems, distribution centers and store remodels to improve
operational efficiencies, and customer service, and may expend additional funds
to acquire businesses or lease rights from tenants occupying retail space that
is suitable for a Staples store. The Company will meet these cash requirements
through a combination of operating cash flow and borrowings from its existing
revolving line of credit.
By June 30, 1995, all of the Company's $115,000,000 of 5% Convertible
Subordinated Debentures due on November 1, 1999 ("the 5% Debentures"), other
than 5% Debentures in an aggregate amount of $184,000, were converted into
12,916,800 shares of common stock at a conversion price of $8.89 per share. The
total principal amount converted was credited to common stock and additional
paid-in-capital, net of unamortized expenses of the original debt issue and
accrued but unpaid interest. The remaining $184,000 of 5% Debentures were
redeemed on July 10, 1995 for a total redemption price of $192,359. The Company
sold 20,700 shares pursuant to a standby underwriting agreement to fund the
purchase price.
On October 5, 1995, the Company issued $300,000,000 of 4 1/2% Convertible
Subordinated Debentures (the "4 1/2% Debentures"), which are convertible, at the
option of the holder, into Common Stock at a conversion price of $22 per share.
The 4 1/2% Debentures are redeemable, in whole or in part, at the Company's
option at specified redemption prices on or after October 1, 1998. Costs
incurred in connection with the issuance of the 4 1/2% Debentures are included
in Other Assets and are being amortized on the interest method over the five
year period to maturity.
On July 10, 1996, the Company amended and restated its five-year revolving
credit facility with a syndicate of banks originally established on May 25,
1994, which increased available borrowings from $225,000,000 to $350,000,000.
Borrowings made pursuant to this facility will bear interest at either the lead
bank's prime rate, the federal funds rate plus 0.50%, the LIBOR rate plus a
percentage spread based upon certain defined ratios, or a competitive bid rate.
Borrowings outstanding at February 14, 1998 automatically convert into a term
loan, payable in eight installments due on the last day of each calendar
quarter. Term loan borrowings bear interest at either the lead bank's base rate
plus 0.25% or the Eurodollar lending rate plus 0.25%. This agreement, among
other conditions, contains certain restrictive covenants including net worth
maintenance, minimum interest coverage and limitations on indebtedness, sales of
assets, and dividends. As of February 1, 1997, borrowings pursuant to the
revolving credit facility totaled $54,500,000. Total cash, short-term
investments and available revolving credit amounts totaled $431,629,000 as of
February 1, 1997.
The Company expects that its current cash and cash equivalents and funds
available under its revolving credit and term loan facility will be sufficient
to fund its planned store openings and other
33
recurring operating cash needs for at least the next twelve months. The Company
is continually evaluating financing possibilities, and it may seek to raise
additional funds through any one or a combination of public or private debt or
equity-related offerings, dependent upon market conditions, or through an
additional commercial bank debt arrangement.
INFLATION AND SEASONALITY
While inflation has not had, and the Company does not expect it to have, a
material impact upon operating results, there can be no assurance that the
Company's business will not be affected by inflation in the future. The Company
believes that its business is somewhat seasonal, with sales and profitability
slightly lower during the first and second quarters of its fiscal year.
FUTURE OPERATING RESULTS
The future operating results of the Company may be affected by a number of
factors, including without limitation the following:
The Company operates in a highly competitive marketplace, in which it
competes with a variety of retailers, dealers and distributors. The Company
competes in most of its geographic markets with other high-volume office supply
chains that are similar in concept to the Company in terms of store format,
pricing strategy and product selection, such as Office Depot and OfficeMax. The
Company also competes with independent dealers, contract stationers, mail order
stationers, warehouse clubs, mass merchandisers, consumer electronics retailers,
computer superstores and manufacturers, and other discount retailers. Some of
the Company's current and potential competitors in the office products industry
are larger than the Company and have substantially greater financial resources.
No assurance can be given that competition will not have an adverse effect on
the Company's business.
An important part of the Company's business plan is an aggressive store
growth strategy. The Company opened 115 stores in the United States and Canada
in fiscal 1996 and plans to open approximately 120 new stores in fiscal 1997.
There can be no assurance that the Company will be able to identify and lease
favorable store sites, hire and train employees, and adapt its management and
operational systems to the extent necessary to fulfill its expansion plans. The
failure to open new stores in accordance with its growth plans could have a
material adverse impact on the Company's future sales and profits. Moreover, the
Company's expansion strategy is based in part on the continued addition of new
stores to its suburban store network in existing markets to take advantage of
economies of scale in marketing, distribution and supervision costs; however,
this can result in the "cannibalization" of sales of existing stores. In
addition, there can be no assurance that the new stores opened by the Company
will achieve sales or profit levels commensurate with those of the Company's
existing stores.
The Company has experienced and may experience in the future fluctuations
in its quarterly operating results. Moreover, there can be no assurance that
Staples will continue to realize the earnings growth experienced over recent
years, or that earnings in any particular quarter will not fall short of either
a prior fiscal quarter or investors' expectations. Factors such as the number of
new store openings (pre-opening expenses are expensed as incurred, and newer
stores are less profitable than mature stores), the extent to which new stores
"cannibalize" sales of existing stores, the mix of products sold, pricing
actions of competitors, the level of advertising and promotional expenses,
seasonality, and one-time charges associated with acquisitions or other events
could contribute to this
34
quarterly variability. In addition, the Company's expense levels are based in
part on expectations of future sales levels, and a shortfall in expected sales
could therefore result in a disproportionate decrease in the Company's net
income.
The Company's business, including sales, number of stores and number of
employees, has grown dramatically over the past several years. In addition, the
Company has consummated a number of significant acquisitions in the last few
years, and may make additional acquisitions in the future (including the pending
acquisition of Office Depot). This internal growth, together with the
acquisitions made by the Company, have placed significant demand on the
management and operational systems of the Company. To manage its growth
effectively, the Company will be required to continue to upgrade its operational
and financial systems, expand its management team and increase and manage its
employee base.
The Company has a presence in international markets through joint ventures
with locally-based companies in Germany and the United Kingdom, and may seek to
expand into other international markets in the future. The Company's operations
in foreign markets are subject to risks similar to those affecting its North
American stores, in addition to a number of additional risks inherent in foreign
operations, including lack of complete operating control, local customs and
competitive conditions and foreign currency fluctuations. Staples' foreign
operations are currently unprofitable, and there can be no assurance that they
will become profitable.
The Company currently expects that its current cash and cash equivalents
and funds available under its revolving credit and term loan facility will be
sufficient to fund its planned store openings and other operating cash needs for
at least the next 12 months. However, there can be no assurance that the Company
will not require additional sources of financing prior to such time, as a result
of unanticipated cash needs or opportunities, an expanded growth strategy or
disappointing operating results. There also can be no assurance that the
additional funds required by the Company, whether within the next 12 months or
thereafter, will be available to the Company on satisfactory terms.
35
APPENDIX C
----------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS. Page
- --------------------- ----
Report of Independent Auditors ................................................................. C-2
Consolidated Balance Sheets - February 1, 1997 and February 3, 1996 ............................ C-3
Consolidated Statements of Income - Fiscal years ended February 1, 1997,
February 3, 1996, and January 28, 1995....................................................... C-4
Consolidated Statements of Stockholders' Equity - Fiscal years ended February 1, 1997,
February 3, 1996, and January 28, 1995....................................................... C-5
Consolidated Statements of Cash Flows - Fiscal years ended February 1, 1997,
February 3, 1996, and January 28, 1995....................................................... C-6
Notes to Consolidated Financial Statements...................................................... C-7
C-1
36
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Staples, Inc.
We have audited the accompanying consolidated balance sheets of Staples, Inc.
and subsidiaries as of February 1, 1997 and February 3, 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended February 1, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Staples, Inc.
and subsidiaries at February 1, 1997 and February 3, 1996 and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended February 1, 1997 in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
- -----------------------------
ERNST & YOUNG LLP
Boston, Massachusetts
March 3, 1997, except for
Note B, as to which
the date is April 22, 1997
C-2
37
STAPLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
February 1, February 3,
1997 1996
------------ -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................... $ 98,143 $ 98,130
Short-term investments ............................ 7,986 12,685
Merchandise inventories ........................... 813,661 644,514
Receivables, net .................................. 167,072 122,453
Deferred income taxes ............................. 31,202 32,222
Prepaid expenses and other current assets ......... 33,284 15,867
---------- ----------
TOTAL CURRENT ASSETS .......................... 1,151,348 925,871
PROPERTY AND EQUIPMENT:
Land and buildings ................................ 73,070 24,364
Leasehold improvements ............................ 231,604 168,588
Equipment ......................................... 197,258 144,857
Furniture and fixtures ............................ 111,967 75,182
---------- ----------
TOTAL PROPERTY AND EQUIPMENT .................. 613,899 412,991
Less accumulated depreciation and amortization .... 171,042 120,496
---------- ----------
NET PROPERTY AND EQUIPMENT .................... 442,857 292,495
OTHER ASSETS:
Lease acquisition costs, net of amortization ...... 42,552 40,338
Investment in affiliates .......................... 40,542 32,940
Goodwill, net of amortization ..................... 81,306 80,361
Deferred income taxes ............................. 16,708 18,385
Other ............................................. 12,439 12,385
---------- ----------
TOTAL OTHER ASSETS ............................ 193,547 184,409
---------- ----------
$1,787,752 $1,402,775
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................. $ 421,051 $ 273,633
Accrued expenses and other current liabilities .... 174,284 139,641
Debt maturing within one year ..................... 7,220 8,267
---------- ----------
TOTAL CURRENT LIABILITIES ..................... 602,555 421,541
LONG-TERM DEBT ........................................... 91,342 43,647
OTHER LONG-TERM OBLIGATIONS .............................. 32,169 26,171
CONVERTIBLE DEBENTURES ................................... 300,000 300,000
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value-authorized
5,000,000 shares; no shares issued ................ 0 0
Common stock, $.0006 par value-authorized
500,000,000 shares; issued
162,277,375 shares at February 1, 1997 and
158,366,604 shares at February 3, 1996 ............ 98 95
Additional paid-in capital ........................ 508,868 466,684
Cumulative foreign currency translation adjustments (128) (2,054)
Unrealized gain on short-term investments ......... 11 32
Retained earnings ................................. 253,183 147,005
Less: 39,433 shares of treasury stock, at cost .... (346) (346)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY .................... 761,686 611,416
---------- ----------
$1,787,752 $1,402,775
========== ==========
See notes to consolidated financial statements.
38
STAPLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
FISCAL YEAR ENDED
----------------------------------------------------------
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
------------ ------------ ------------
Sales ........................................ $ 3,967,665 $ 3,068,061 $ 2,000,149
Cost of goods sold and occupancy costs ....... 3,023,279 2,366,183 1,534,360
------------ ------------ ------------
GROSS PROFIT ............................. 944,386 701,878 465,789
OPERATING EXPENSES:
Operating and selling ...................... 594,978 446,324 308,456
Pre-opening ................................ 8,299 5,607 4,858
General and administrative ................. 134,817 100,167 69,992
Amortization of goodwill ................... 2,291 1,967 756
------------ ------------ ------------
TOTAL OPERATING EXPENSES ................. 740,385 554,065 384,062
------------ ------------ ------------
OPERATING INCOME ......................... 204,001 147,813 81,727
Other income (expense):
Interest expense, net ...................... (20,064) (15,924) (8,389)
Gain on sale of investment ................. 0 0 1,149
Merger-related charges ..................... 0 0 (2,150)
Other income ............................... 177 109 2,736
------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) ............. (19,887) (15,815) (6,654)
------------ ------------ ------------
INCOME BEFORE EQUITY IN LOSS OF AFFILIATES
AND INCOME TAXES .................... 184,114 131,998 75,073
Equity in loss of affiliates ................. (11,073) (12,153) (11,168)
------------ ------------ ------------
INCOME BEFORE INCOME TAXES ................ 173,041 119,845 63,905
Income tax expense ........................... 66,621 46,140 23,965
------------ ------------ ------------
NET INCOME ............................... $ 106,420 $ 73,705 $ 39,940
============ ============ ============
Earnings per common share ................ $ 0.64 $ 0.46 $ 0.28
============ ============ ============
Number of shares used in computing
earnings per common share ......... 166,624,927 162,077,996 140,261,342
============ ============ ============
See notes to consolidated financial statements.
39
STAPLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1997, FEBRUARY 3, 1996
AND JANUARY 28, 1995
CUMULATIVE UNREALIZED
ADDITIONAL FOREIGN CURRENCY GAIN RETAINED
PAID-IN TRANSLATION (LOSS} ON EARNINGS TREASURY
COMMON STOCK CAPITAL ADJUSTMENTS INVESTMENTS (DEFICIT) STOCK
------------ ------- ----------- ----------- --------- --------
BALANCES AT JANUARY 29, 1994 ................. $85 $256,558 $(2,499) $ 33,065
Issuance of common stock for
stock options exercised ..................... 7,615
Contribution of common stock
to Employees' 401(K)
Savings Plan ............................... 452
Sale of common stock under
Employee Stock Purchase Plan ............... 2,965
Issuance of common stock
for acquisitions ............................ 46,954
Unrealized loss on short-term
investments, net of tax ..................... $(93)
Repurchase of shares
for treasury ................................ $(346)
Translation adjustments ....................... 294
Net income for the year ....................... 39,940
--- -------- ------- ---- -------- -----
BALANCES AT JANUARY 28, 1995 .................. $85 $314,544 $(2,205) $(93) $ 73,005 $(346)
Issuance of common stock for
stock options exercised ..................... 1 11,323
Tax benefit on exercise of options ............ 11,394
Contribution of common stock
to Employees' 401(K)
Savings Plan ................................ 1,257
Sate of common stock under
Employee Stock Purchase Plan ................ 5,641
Conversion of debt to equity .................. 8 114,049
Unrealized gain on short-term
investments, net of tax ..................... 125
Translation adjustments ....................... 151
Issuance of common stock
for acquisitions and other transactions ..... 1 8,476 295
Net income for the year ....................... 73,705
--- -------- ------- ---- -------- -----
BALANCES AT FEBRUARY 3, 1996 .................. $95 $466,684 $(2,054) $ 32 $147,005 $(346)
Issuance of common stock for
stock options exercised ..................... 3 13,726
Tax benefit on exercise of options ............ 16,773
Contribution of common stock
to Employees' 401(K)
Savings Plan ................................ 1,998
Sale of common stock under
Employee Stock Purchase Plan ................ 8,980
Issuance of Performance Accelerated
Restricted Stock ............................ 532
Unrealized loss on short-term
Investments, net on tax ..................... (21)
Translation adjustments ....................... 1,926
Issuance of common stock
for acquisitions and other transactions ..... 175 (242)
Net income for the year ....................... 106,420
--- -------- ------- ---- -------- -----
BALANCES AT FEBRUARY 1, 1997 .................. $98 $508,868 $ (128) $ 11 $253,183 $(346)
=== ======== ======= ==== ======== =====
See notes to consolidated financial statements.
40
STAPLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
Fiscal Year Ended
-------------------------------------------------------
February 1, February 3, January 28,
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income ................................................. $ 106,420 $ 73,705 $ 39,940
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................ 55,948 43,551 28,683
Expense from 401(K) and PARS stock contribution .......... 2,715 1,633 945
Equity in loss of affiliates ............................. 11,073 12,153 11,168
Gain on sale of investment ............................... (1,149)
Deferred income taxes (benefit)/expense .................. 3,137 (13,211) (5,850)
Change in assets and liabilities, net of
effects of purchase of other companies:
Increase in merchandise inventories .................... (167,479) (177,509) (172,038)
(Increase) decrease in receivables ..................... (44,523) (42,129) 2,831
(Increase) decrease in prepaid expenses
and other current assets ............................ (4,349) 1,570 615
Increase in accounts payable, accrued
expenses and other current liabilities .............. 179,108 57,999 92,866
Increase (decrease) in other long-term obligations ..... 5,883 2,094 (1,330)
----------- ----------- -----------
41,513 (113,849) (43,259)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .......... 147,933 (40,144) (3,319)
INVESTING ACTIVITIES:
Acquisition of property and equipment ...................... (199,614) (116,295) (64,663)
Acquisition of businesses, net of cash acquired ............ (58,712)
Proceeds from sales and maturities of short-term investments 8,800 16,519 43,338
Purchase of short-term investments ......................... (4,600)
Proceeds from sale of other investments .................... 1,149
Investment in affiliates ................................... (18,629) (22,088) (18,840)
Acquisition of lease rights ................................ (5,534) (2,044) (10,654)
Other ...................................................... 2,669 1,281 (2,718)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES ...................... (216,908) (122,627) (111,100)
FINANCING ACTIVITIES:
Proceeds from sale of capital stock ........................ 21,773 16,964 54,488
Proceeds from convertible debentures, net of deferred costs 291,032
Proceeds from borrowings ................................... 1,171,025 1,224,883 777,124
Payments on borrowings ..................................... (1,124,453) (1,313,930) (713,228)
Purchases of treasury stock ................................ (346)
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................. 68,345 218,949 118,038
Effect of exchange rate changes on cash .................... 643 142 215
NET INCREASE IN CASH AND CASH EQUIVALENTS .................... 13 56,320 3,834
Cash and cash equivalents at beginning of period ............. 98,130 41,810 37,976
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................... $ 98,143 $ 98,130 $ 41,810
=========== =========== ===========
See notes to consolidated financial statements.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------
NATURE OF OPERATIONS: Staples, Inc. and subsidiaries ("the Company")
operates a chain of office supply stores and contract stationer/delivery
warehouses throughout the United States and Canada. The Company is also an
investor in two joint venture affiliates in Europe which operate similar office
supply businesses.
BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All intercompany
accounts and transactions are eliminated in consolidation.
FISCAL YEAR: The Company's fiscal year is the 52 or 53 weeks ending the
Saturday closest to January 31. Fiscal years 1996, 1995 and 1994, consisted of
the 52 weeks ended February 1, 1997, the 53 weeks ended February 3, 1996, and
the 52 weeks ended January 28, 1995, respectively.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management of the Company
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
CASH EQUIVALENTS: The Company considers all highly liquid investments with
an original maturity of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS: The Company's securities are classified as
available for sale and consist principally of high-grade state and municipal
securities having an original maturity of more than three months. The
investments are carried at fair value, with the unrealized holding gains and
losses reported as a component of the Company's stockholders' equity. The cost
of securities sold is based on the specific identification method. No individual
issue in the portfolio constitutes greater than one percent of the total assets
of the Company.
MERCHANDISE INVENTORIES: Merchandise inventories are valued at the lower of
weighted average cost or market.
RECEIVABLES: Receivables relate principally to amounts due from vendors
under various incentive and promotional programs and trade receivables financed
under regular commercial credit terms. Concentrations of credit risk with
respect to trade receivables are limited due to the Company's large number of
customers and their dispersions across many industries and geographic regions.
ADVERTISING: The Company expenses the production costs of advertising the
first time the advertising takes place, except for the direct-response
advertising, which is capitalized and
42
amortized over its expected period of future benefits. Direct-response
advertising consists primarily of the direct catalog production costs. The
capitalized costs of the advertising are amortized over the six month period
following the publication of the catalog in which it appears. At February 1,
1997, direct catalog production costs included in prepaid and other assets
totaled $4,321,000. Total advertising and marketing expense was $189,109,000,
$120,288,000 and $73,034,000 for the years ending February 1, 1997, February 3,
1996 and January 28, 1995, respectively.
PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost.
Depreciation and amortization, which includes the amortization of assets
recorded under capital lease obligations, are provided using the straight-line
method over the estimated useful lives of the assets or the terms of the
respective leases. Depreciation and amortization periods are as follows:
Buildings 40 years
Leasehold improvements 10 years or term of lease
Furniture and fixtures 5 to 10 years
Equipment 3 to 10 years
LEASE ACQUISITION COSTS: Lease acquisition costs are recorded at cost and
amortized on the straight-line method over the respective lease terms, including
option renewal periods if renewal of the lease is probable, which range from 5
to 40 years. Accumulated amortization at February 1, 1997 and February 3, 1996
totaled $15,432,000 and $12,032,000, respectively.
INVESTMENT IN AFFILIATES: Investment in affiliates represents cash invested
by the Company in foreign affiliates in Germany and the United Kingdom, which
are accounted for under the equity method. These investments have been reduced
by the Company's cumulative equity in losses generated by these affiliates and
the cumulative foreign currency translation adjustments.
GOODWILL: Goodwill arising from business acquisitions is amortized on a
straight-line basis over 40 years. Accumulated amortization was $5,897,000 and
$3,606,000 as of February 1, 1997 and February 3, 1996, respectively. Management
periodically evaluates the recoverability of goodwill, which would be adjusted
for a permanent decline in value, if any, as measured by the recoverability from
projected future cash flows from the acquired businesses.
PRE-OPENING COSTS: Pre-opening costs, which consist primarily of salaries,
supplies, marketing and occupancy costs, are charged to expense as incurred.
PRIVATE LABEL CREDIT CARD RECEIVABLES: The Company offers a private label
credit card which is managed by a financial services company. Under the terms of
the agreement, the Company is obligated to pay fees which approximate the
financial institution's cost of processing and collecting the receivables, which
are non-recourse to the Company.
FOREIGN CURRENCY TRANSLATION: The assets and liabilities of the Company's
Canadian subsidiary, The Business Depot Ltd. ("Business Depot"), are translated
into U.S. dollars at current exchange rates as of the balance sheet date, and
revenues and expenses are translated at average monthly exchange rates. The
resulting translation adjustments, and the net exchange gains and losses
resulting from the translation of investments in the Company's European
43
affiliates accounted for under the equity method, are recorded in a separate
section of stockholders' equity titled "Cumulative foreign currency translation
adjustments".
STOCK OPTION PLANS: In 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123"). As permitted by FAS 123, the Company continues to account for its
stock-based plans under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", and provides pro forma disclosures of the
compensation expense determined under the fair value provisions of FAS 123.
EARNINGS PER SHARE: Earnings per share, as presented in the Statements of
Income, is based upon the weighted average number of shares of common stock and
common stock equivalents outstanding during each period. See Note L for the
computation of earnings per share for the years ended February 1, 1997, February
3, 1996 and January 28, 1995.
FAIR VALUE OF FINANCIAL INSTRUMENTS. Pursuant to Statement of Financial
Accounting Standards No. 107, "Disclosure About Fair Value of Financial
Instruments" ("Statement 107"), the Company has estimated the fair value of its
financial instruments using the following methods and assumptions:
- The carrying amount of cash and cash equivalents, receivables and
accounts payable approximates fair value;
- The fair values of short-term investments and the 4 1/2% Convertible
Subordinated Debentures are based on quoted market prices;
- The carrying amounts of the Company's debt approximates fair
value, estimated by discounted cash flow analyses based on the
Company's current incremental borrowing rates for similar
types of borrowing arrangements.
LONG -LIVED ASSETS: In 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets To Be Disposed Of" ("FAS 121"), which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flow estimated to
be generated by those assets are less than the assets' carrying amount. The
Company has evaluated all long-lived assets and determined that no impairment
exists at February 1, 1997. FAS 121 also addresses the accounting for long-lived
assets that are expected to be disposed of.
NOTE B MERGER WITH OFFICE DEPOT
- -------------------------------
On September 4, 1996, the Company entered into an Agreement and Plan of Merger
with Marlin Acquisition Corp., a wholly-owned subsidiary of the Company
("Marlin"), and Office Depot, Inc. ("Office Depot") pursuant to which Marlin is
to be merged with and into Office Depot and Office Depot is to become a
wholly-owned subsidiary of Staples (the "Merger"). On March 10, 1997, the
Federal Trade Commission announced that it would seek to enjoin the Merger and
subsequently filed a motion for a preliminary injunction in Federal District
Court. Staples and Office Depot intend to oppose the injunction. The Merger is
structured as a tax-free exchange
44
of shares in which the stockholders of Office Depot would receive 1.14 shares of
the Company's common stock for each outstanding share of common stock of Office
Depot they own. The Merger would be accounted for as a pooling of interests.
Office Depot operates over 500 retail office supply stores in the US and Canada,
a national delivery and contract stationer business, and joint ventures or
licensed operations in seven countries, and had revenues of $6.1 billion for the
year ended December 28, 1996.
The unaudited pro forma sales and net income of Office Depot for the year ended
December 28, 1996 combined with Staples for the year ended February 3, 1997 are
as follows:
Sales $10,036,263
Net Income $235,462
NOTE C INVESTMENTS
- -------------------
The following is a summary of available-for-sale investments as of February 1,
1997 and February 3, 1996 (in thousands):
February 1, 1997 Gross Gross
- ---------------- Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
Debt securities $ 7,968 18 0 $ 7,986
======= == = =======
February 3, 1996 Gross Gross
- ---------------- Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
Debt securities $12,603 82 0 $12,685
======= == = =======
During the year ended February 1, 1997, debt securities with a fair value at the
date of sale of $3,000,000 were sold. There were no gross realized gains or
losses on the sale. The net adjustment to unrealized holding gains on
available-for-sale securities included as a separate component of stockholders'
equity totaled a decrease of $21,000 and an increase of $125,000 for the years
ended February 1, 1997 and February 3, 1997, respectively.
The amortized cost and estimated fair value of debt and marketable equity
securities at February 1, 1997, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because the issuers
of securities may have the right to prepay obligations without prepayment
penalties.
Estimated
Cost Fair Value
---- ----------
Due in one year or less $2,154 $2,154
Due after one year through two years 5,814 5,832
------ ------
$7,968 $7,986
====== ======
45
NOTE D LONG-TERM DEBT AND CREDIT AGREEMENT
- -------------------------------------------
Long-term debt consists of the following (in thousands):
February 1, February 3,
1997 1996
----------- -----------
Capital lease obligations and other notes payable in monthly
installments with effective interest rates from 4% to 16%;
collateralized by the related equipment .......................... $19,062 $26,914
Note payable with a fixed rate of 6.16%................................ 25,000 0
Revolving lines of credit ............................................. 54,500 25,000
------- -------
$98,562 $51,914
------- -------
Less current portion .................................................. 7,220 8,267
------- -------
$91,342 $43,647
======= =======
Aggregate annual maturities of long-term debt and capital lease obligations are
as follows (in thousands):
Fiscal year: Total
-----
1997............................................ $ 7,220
1998............................................ 30,941
1999............................................ 2,575
2000............................................ 1,274
2001............................................ 409
Thereafter...................................... 56,143
-------
$98,562
=======
Included in property and equipment are capital lease obligations for equipment
recorded at the net present value of the minimum lease payments of $29,262,000.
Future minimum lease payments of $15,007,000, excluding $1,207,000 of interest,
are included in aggregate annual maturities shown above. The Company entered
into capital lease agreements totaling $2,733,000 and $5,994,000 during the
fiscal years ended February 1, 1997 and February 3, 1996, respectively.
Credit Agreement:
On July 10, 1996, the Company amended and restated its five year revolving
credit facility with a syndicate of banks increasing available borrowings from
$225,000,000 to $350,000,000. Borrowings made pursuant to this facility will
bear interest at either the lead bank's prime rate, the federal funds rate plus
0.50%, the LIBOR rate plus a percentage spread based upon certain defined
ratios, or a competitive bid rate. Borrowings outstanding at February 14, 1998
automatically convert into a term loan, payable in eight installments due on the
last day of each calendar quarter. Term loan borrowings bear interest at either
the lead bank's base rate plus 0.25%, or the Eurodollar lending rate plus 0.25%.
This agreement, among other conditions, contains certain restrictive covenants
including net worth maintenance, minimum interest coverage and limitations on
indebtedness, sales of assets, and dividends. As of February 1, 1997, the
Company had $54,500,000 outstanding under its revolving credit agreement.
46
Interest paid by the Company totaled $19,626,000, $11,946,000 and $11,788,000
for the fiscal years ended February 1, 1997, February 3, 1996, and January 28,
1995, respectively. Capitalized interest related to the construction of a
distribution center in Hagerstown, Maryland totaled $611,000 in the year ended
February 1, 1997.
Interest Rate Swaps:
During fiscal 1996 the Company entered into a binding interest rate swap
agreement to reduce the impact of increases in interest rates on a portion of
its floating-rate debt. The risk to the Company from this swap agreement is that
the financial institution that is counterparty to this agreement fails to
perform its obligation under the agreement, which would cause the interest rate
on the notional amount under this agreement to reflect current market rates
rather than the contractual fixed rate. The agreement is with a major financial
institution which is expected to fully perform under the terms of the agreement,
which mitigates this off-balance sheet risk. At February 1, 1997 the Company had
one interest rate swap outstanding. The agreement binds the Company to pay a
fixed rate of 5.65% on $25,000,000 of the Company's floating rate debt. In
return the Company will receive payments based on a floating rate on $25,000,000
of the Company's floating rate debt. The floating rate equals the 3-month LIBOR
in effect at any one of the quarterly reset dates. Unless certain conditions are
met, the agreement will terminate on August 7, 1998. If the 3-month LIBOR is
equal to or greater than 6.75% on any one of the quarterly reset dates, the
agreement terminates and the obligation of the Company and the counterparty are
extinguished. The fair market value of the swap agreement as of February 1, 1997
approximates the carrying value based on quoted market prices.
NOTE E CONVERTIBLE DEBENTURES
- -----------------------------
By June 30, 1995, all of the Company's $115,000,000 of 5% Convertible
Subordinated Debentures due November 1, 1999 (the "5% Debentures"), were
converted into 12,937,500 shares of common stock at a conversion price of $8.89
per share. The total principal amount converted was credited to common stock and
additional paid-in capital, net of unamortized expenses of the original debt
issue and accrued but unpaid interest.
On October 5, 1995, the Company issued $300,000,000 of 4 1/2% Convertible
Subordinated Debentures due October 1, 2000 with interest payable semi-annually
(the "4 1/2% Debentures"), which are convertible, at the option of the holder,
into Common Stock at a conversion price of $22 per share. The 4 1/2% Debentures
are redeemable, in whole or in part, at the Company's option at specified
redemption prices on or after October 1, 1998 or in the event of certain
developments involving U.S. withholding taxes or certification requirements.
Costs incurred in connection with the issuance of the 4 1/2% Debentures are
included in Other Assets and are being amortized on the interest method over the
five year period to maturity. The fair value of the 4 1/2% Debentures at
February 1, 1997, based upon quoted market prices, totaled $337,875,000.
47
NOTE F STOCKHOLDERS' EQUITY
- ---------------------------
On March 5, 1996, June 29, 1995, and October 3, 1994, the Board of Directors
approved three-for-two splits of the Company's common stock to be effected in
the form of 50% stock dividends. The dividends were distributed on March 25,
1996 to shareholders of record as of March 15, 1996, July 24, 1995 to
shareholders of record as of July 14, 1995 and October 28, 1994 to shareholders
of record as of October 14, 1994, respectively. The consolidated financial
statements have been retroactively restated to give effect to these stock
splits.
At February 1, 1997, 40,079,525 shares of common stock were reserved for
issuance under the Company's stock option, employee stock ownership, employee
stock purchase and director stock option plans. An additional 13,636,364 shares
of common stock are reserved for issuance upon conversion of the Company's 4
1/2% Debentures.
NOTE G EMPLOYEE BENEFIT PLANS
- -----------------------------
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, since the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
EMPLOYEE STOCK PURCHASE PLAN
The Company's 1994 Employee Stock Purchase Plan provides for a total of up to
3,937,500 shares of the Company's common stock which may be sold to
participating employees. Participating employees may purchase shares of common
stock at 85% of its fair market value at the beginning or end of an offering
period, whichever is lower, through payroll deductions in an amount not to
exceed 10% of an employee's base compensation.
STOCK OPTION PLANS
The Company has two stock option plans, the 1987 Stock Option Plan ("1987 Plan")
and the 1992 Equity Incentive Plan ("1992 Plan") pursuant to which the Company
may grant to management and key employees incentive and nonqualified options to
purchase up to 34,066,400 shares of common stock and PARS. This amount includes
the approval of an amendment to the Company's 1992 Equity Incentive Plan by the
shareholders of the Company on June 30, 1994 which increased the number of
shares of common stock authorized for issuance under this plan to 21,600,000. In
connection with the merger to Office Depot, the Company has requested
shareholder approval to increase the number of shares under the plan to
39,000,000. The exercise price of options granted under the plans may not be
less than 100% of the fair market value of the Company's common stock at the
date of grant. Options generally have an exercise price equal to the fair market
value of the common stock on the date of grant. Some options outstanding are
exercisable at various percentages of the total shares subject to the option
starting one year after the grant, while other options are exercisable in their
entirety three years after the grant date. All options expire ten years after
the grant date, subject to earlier termination in the event of employment
termination.
48
The Company's 1990 Director Stock Option Plan ("Director's Plan") provides for
the grant of options for up to 1,063,125 shares of common stock to non-employee
directors. The exercise price of options granted are equal to the fair market
value of the Company's common stock at the date of grant. Options become
exercisable in equal amounts over four years and expire ten years from the date
of grant, subject to earlier termination, in certain circumstances, in the event
the optionee ceases to serve as a director.
Pro forma information regarding net income and earnings per share is required by
Statement 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
January 28, 1995 under the fair valued method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted -average assumptions for 1995
and 1996: risk-free interest rates ranging from 5.57% to 6.12%; volatility
factor of the expected market price of the Company's common stock of .30; and a
weighted-average expected life of the option of 4.0 years for the 1987 Plan and
the 1992 Plan and 2.0 to 5.0 years for the Director's Plan.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. For purposes of
Statement 123's disclosure requirements, the Employee Stock Purchase Plan is
considered a compensatory plan. The expense was calculated based on the fair
value of the employees' purchase rights which was estimated by taking the
difference between the employees' purchase price and the closing price on the
date the shares were purchased. The Company's pro forma information follows (in
thousands except for earnings per share information):
February 1, February 3,
1997 1996
----------- -----------
Pro forma net income $99,123 $69,687
Pro forma earnings per share $0.59 $0.43
Because Statement 123 is applicable only to options granted subsequent to
January 28, 1995 its pro forma effect will not be fully reflected until 1997.
Information with respect to options granted under the above plans are as
follows:
49
Weighted Average
Number of Exercise Price
Shares Per Share
----------- ----------------
Outstanding at January 29, 1994 15,346,470 $ 5.07
Granted ............... 8,055,993 8.48
Exercised ............. (1,500,818) 2.60
Canceled .............. (629,332) 5.97
---------- ------
Outstanding at January 28, 1995 21,272,313 $ 5.93
Granted ................ 3,648,540 15.69
Exercised .............. (2,410,004) 4.90
Canceled ............... (1,523,925) 7.97
---------- ------
Outstanding at February 3, 1996 20,986,924 $ 7.39
Granted ................ 3,187,527 19.84
Exercised .............. (2,729,130) 5.15
Canceled ............... (1,047,608) 11.01
---------- ------
Outstanding at February 1, 1997 20,397,713 $ 9.58
========== ======
The weighted average fair values of options granted during the years ended
February 1, 1997 and February 3, 1996 were $5.72 and $5.58, respectively.
Exercise prices for the options outstanding as of February 1, 1997 ranged from
$0.01 to $22.13.
Options to purchase 7,696,494 shares were exercisable at February 1, 1997.
PERFORMANCE ACCELERATED RESTRICTED STOCK ("PARS")
PARS are shares of the Company's Common Stock granted outright to employees
without cost to the employee. The shares, however, are restricted in that they
are not transferable (e.g. they may not be sold) by the employee until they
vest, generally after the end of five or six years. Such vesting date may
accelerate if the Company achieves certain compound annual earnings per share
growth over a certain number of interim years. If the employee leaves the
Company prior to the vesting date for any reason, the PARS shares will be
forfeited by the employee and will be returned to the Company. Once the PARS
have vested, they become unrestricted and may be transferred and sold like any
other Staples shares.
PARS issued in fiscal year 1996, which totaled 388,740 shares, will initially
vest on February 1, 2002. The vesting date of such PARS will accelerate such
that they will vest 100% on May 1 in 1998, 1999, 2000, or 2001 upon attainment
of certain compound annual earnings per share targets in the prior fiscal year.
In connection with the issuance of the PARS, the Company included $532,000 in
compensation expense for the fiscal year ended February 1, 1997.
EMPLOYEES' 401(K) SAVINGS PLAN
Under the Company's Employees' 401(K) Savings Plan (the "401(K) Plan"), the
Company may contribute up to a total of 1,012,500 shares of common stock to the
401(K) Plan. The 401(K)
50
Plan is available to all employees of the Company who meet minimum age and
length of service requirements. Company contributions are based upon a matching
formula applied to employee contributions, with additional contributions made at
the discretion of the Board of Directors. In connection with this plan the
Company included $2,183,000 and $1,633,000 in expense for the fiscal years ended
February 1, 1997 and February 3, 1996, respectively.
NOTE H INCOME TAXES
- -------------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
and the approximate tax effect of the Company's deferred tax assets and
liabilities as of February 1, 1997 and February 3, 1996, are as follows (in
thousands):
February 1, February 3,
1997 1996
----------- -----------
Deferred Tax Assets:
Inventory ............................ $ 22,597 $ 21,149
Deferred rent ........................ 7,566 4,890
Acquired Business Depot NOL's ........ 0 4,766
Other net operating loss carryforwards 5,206 6,259
Insurance ............................ 5,756 5,789
Other - net .......................... 10,165 13,793
-------- --------
Total Deferred Tax Assets ............ 51,290 56,646
-------- --------
Deferred Tax Liabilities:
Depreciation ......................... 498 (1,274)
Other - net .......................... (2,212) (2,138)
-------- --------
Total Deferred Tax Liabilities ....... (1,714) (3,412)
-------- --------
Total Valuation Allowance ................ (1,666) (2,627)
-------- --------
Net Deferred Tax Assets .................. $ 47,910 $ 50,607
======== ========
Deferred tax assets of approximately $440,000 and $4,000,000 attributable to
businesses acquired during the fiscal years ended February 1, 1997 and February
3, 1996, respectively, were allocated directly to reduce goodwill generated by
these acquisitions.
For financial reporting purposes, income before taxes includes the following
components:
Fiscal Year Ended
----------------------------------------------
February 1, February 3, January 28,
1997 1996 1995
----------- ----------- -----------
Pretax income:
United States $149,322 $124,487 $62,640
Foreign 23,719 (4,642) 1,265
-------- -------- -------
$173,041 $119,845 $63,905
======== ======== =======
51
The provision for income taxes consists of the following (in thousands):
Fiscal Year Ended
------------------------------------------------
February 1, February 3, January 28,
1997 1996 1995
----------- ----------- -----------
Current tax expense:
Federal .................. $ 51,147 $ 45,207 $ 23,315
State .................... 12,337 14,144 6,500
-------- -------- --------
63,484 59,351 29,815
Deferred tax expense (benefit) 3,137 (13,211) (5,850)
-------- -------- --------
Total ........................ $ 66,621 $ 46,140 $ 23,965
======== ======== ========
A reconciliation of the federal statutory tax rate to the Company's effective
tax rate is as follows:
Fiscal Year Ended
-------------------------------------------
February 1, February 3, January 28,
1997 1996 1995
----------- ----------- -----------
Federal statutory rate ............ 35.0% 35.0% 35.0%
State taxes, net of federal benefit 6.3% 6.3% 6.4%
Tax exempt interest ............... (0.4%) (0.6%) (1.5%)
Tax benefit of loss carryforward .. (0.2%) (0.6%) (1.1%)
Federal tax credits ............... 0.0% (0.9%) (2.4%)
Other ............................. (2.2%) (0.7%) 1.1%
---- ---- ----
Effective tax rate ................ 38.5% 38.5% 37.5%
==== ==== ====
Income tax payments were $45,925,276, $44,518,000, and $25,936,000, during
fiscal years ended February 1, 1997, February 3, 1996, and January 28, 1995,
respectively. The Company has net operating loss carryforwards of approximately
$500,000 generated by Macauley's Business Resources, Inc. prior to being
acquired by the Company. These losses expire between the years 2007 and 2008 and
are subject to an annual limitation as a result of a stock ownership change.
Business Depot has net operating loss carryforwards of approximately $11,000,000
which expire between 2002 and 2003.
NOTE I LEASES AND OTHER OFF- BALANCE SHEET COMMITMENTS
- ------------------------------------------------------
The Company leases certain retail and support facilities under long-term
noncancellable lease agreements. Most lease agreements contain renewal options
and rent escalation clauses and require the Company to pay real estate taxes in
excess of specified amounts and, in some cases, allow termination within a
certain number of years with notice and a fixed payment. Certain agreements
provide for contingent rental payments based on sales.
Other long-term obligations at February 1, 1997 include $29,824,000 relating to
future rent escalation clauses and lease incentives under certain existing store
operating lease arrangements. These rent expenses are recognized on a
straight-line method over the respective terms of the leases.
52
Future minimum lease commitments for retail and support facilities (including
lease commitments for 75 retail stores not yet opened at February 1, 1997) under
noncancellable operating leases are due as follows (in thousands):
Fiscal year:
1997 ............................................ $ 159,323
1998 ............................................ 159,673
1999 ............................................ 156,152
2000 ............................................ 150,910
2001 ............................................ 146,071
Thereafter ...................................... 910,922
----------
$1,683,051
==========
Rent expense approximated $136,049,000, $105,125,000, and $78,562,000, for the
fiscal years ended February 1, 1997, February 3, 1996, and January 28, 1995,
respectively.
Letters of credit are issued by the Company during the ordinary course of
business through major financial institutions as required by certain vendor
contracts. As of February 1, 1997, the Company had available open letters of
credit totaling $13,300,000.
NOTE J SUMMARIZED FINANCIAL INFORMATION OF EQUITY AFFILIATES
- ------------------------------------------------------------
The Company has equity interests in two affiliated companies in Germany and the
United Kingdom. On December 11, 1996, the Company and Kingfisher entered into a
definitive agreement pursuant to which the Company will acquire Kingfisher's
interest in Staples UK and MAXI-Papier (which will increase the Company's
ownership interest in Staples UK to 100% and in MAXI-Papier to approximately
91%) for $57,000,000. These acquisitions are expected to close in May 1997. The
following is a summary of the significant financial information on a combined
100% basis of affiliated companies accounted for on the equity method.
|-----------------------12 Months Ended ----------------------|
February 1, February 3, January 28,
1997 1996 1995
----------- ----------- -----------
(in thousands)
Current assets $64,858 $52,298 $41,980
Other assets 32,538 33,125 23,356
Current liabilities 32,683 29,542 29,612
Other liabilities 8,550 15,094 9,950
Shareholders' equity 56,163 40,787 25,774
Net sales 230,845 154,626 89,210
Gross profit 68,500 44,655 26,913
Net loss before income taxes (22,961) (24,306) (18,106)
The Company's share of loss for the unconsolidated affiliated companies for the
fiscal years ended February 1, 1997 and February 3, 1996 was $11,073,000 and
$12,153,000, respectively.
53
NOTE K QUARTERLY SUMMARY(UNAUDITED)
- -----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share amounts)
Fiscal Year Ended February 1, 1997
- ----------------------------------
Sales.................................. $916,800 $808,056 $1,078,820 $1,163,989
Gross Profit........................... 208,573 191,071 257,442 287,300
Net income............................. 13,012 14,605 31,921 46,882
Earnings per common share.............. 0.08 0.09 0.19 0.28
Number of shares used in computing
earnings per common share............ 165,439 166,407 167,375 167,279
Fiscal Year Ended February 3, 1996
- ----------------------------------
Sales.................................. $668,795 $604,975 $818,756 $975,535
Gross Profit........................... 150,383 139,472 191,463 220,560
Net income............................. 7,878 9,018 21,944 34,865
Earnings per common share (1) ......... 0.05 0.06 0.13 0.21
Number of shares used in computing
earnings per common share............ 147,242 152,040 163,985 163,154
(1) Earnings per common share has been retroactively adjusted to reflect the
three-for-two stock splits effected in the form of a 50% stock dividend
distributed in March, 1996 and July, 1995 (see Note F).
NOTE L - COMPUTATION OF EARNINGS PER COMMON SHARE
- -------------------------------------------------
The computation of earnings per common share for the fiscal years ended February
1, 1997, February 3, 1996 and January 28, 1995 is as follows (amounts in
thousands, except for per share data):
February 1, February 3, January 28,
1997 1996 1995
----------- ----------- -----------
Net income ............................ $106,420 $ 73,705 $ 39,940
Add: interest expense on 5% Debentures,
net of tax .................... 0 1,580(1) 0
-------- -------- --------
Adjusted net income for earnings per
common share computation ...... $106,420 $ 75,285 $ 39,940
======== ======== ========
Number of shares used in computing
earnings per common share ..... 166,625 162,078(1) 140,261
======== ======== ========
Earnings per common share, as
reported ...................... 0.64 $ 0.46 $ 0.28
======== ======== ========
(1) The 5% Debentures were substantially converted into common stock on June
30, 1995 (see Note E). For the computation of earnings per common share,
this conversion of 12,937,500
54
shares is assumed to have occurred at the beginning of the fiscal year
(January 29, 1995), and is included in the weighted average shares
outstanding for the year. Therefore, the interest expense and amortization
of deferred charges related to the 5% Debentures and incurred by the
Company through June 30, 1995, net of tax, is added back to reported net
income to compute earnings per common share for the fiscal year ended
February 3, 1996.
55
EXHIBIT INDEX
-------------
EXHIBIT DESCRIPTION OF EXHIBIT PAGE
- ------- ---------------------- ----
3.1 (1) --Restated Certificate of Incorporation of the Company --
3.2 (2) --Amended and Restated By-laws of the Company
4.1 (3) --Staples, Inc. Indenture dated October 5, 1995 for the $300,000,000
4 1/2% Convertible Subordinated Debentures due October 1, 2000
4.2 (4) --Rights Agreement, dated as of February 3, 1994, between the Company
and The First National Bank of Boston
*10.1 (5) --1990 Director Stock Option Plan, as amended
*10.2 (6) --1992 Equity Incentive Plan, as amended
*10.3 --Bonus plans for twelve months ending January 31, 1998
*10.4 (7) --Employment Agreement dated March 7, 1994 between the Company
and Henry P. Epstein
10.5 (8) --Second Amended and Restated Revolving Credit Agreement
dated May 25, 1994 between the Company and The First National
Bank of Boston, and the banks named therein, (the "Credit Agreement")
as amended and restated as of July 10, 1996
*10.6 (9) --Form of Agreement Not To Compete signed by executive officers of
the Company
*10.7 (9) --Form of Proprietary and Confidential Information Agreement signed
by executive officers of the Company
*10.8 (2) --Form of Severance Benefits Agreement signed by executive officers
of the Company
10.9 (10) --Agreement and Plan of Merger dated as of September 4, 1996 among
the Company, Marlin Acquisition Corp. and Office Depot, Inc., as amended
21.1 --Subsidiaries of the Company
23.1 --Consent of Ernst & Young LLP
27.1 --Financial Data Schedule
-----------
* Management contract or compensatory plan or arrangement filed as an
exhibit to this Form pursuant to Items 14(a) and 14(c) of Form 10-K.
(1) Incorporated by reference from Quarterly Report on Form 10-Q/A for the
quarter ended August 3, 1996.
(2) Incorporated by reference from the Annual Report on Form 10-K for the
fiscal year ended February 3, 1996.
(3) Incorporated by reference to the Quarterly Report on Form 10-Q for the
quarter ended October 28, 1995.
E-1
56
(4) Incorporated by reference from Current Report on Form 8-K dated
February 3, 1994.
(5) Incorporated by reference from the Annual Report on Form 10-K for the
fiscal year ended January 30, 1993.
(6) Incorporated by reference from the Registration Statement on Form S-8
(File No. 33-81284).
(7) Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended April 30, 1994.
(8) Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended August 3, 1996.
(9) Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended April 29, 1995.
(10) Incorporated by reference from the Registration Statement on Form
S-4(File No. 333-15853).
E-2