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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
January 31, 1998 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
----------------------------------------------------
(Address of principal executive offices and zip code)
508-370-8500
(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.
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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,
1998 as reported by Nasdaq, was approximately $4.7 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 252,154,564 shares of Common Stock outstanding as of
February 28, 1998.
Documents Incorporated By Reference
Listed below is the document incorporated by reference and the part of the
Form 10-K into which the document is incorporated:
Portions of the Proxy Statement for the 1998 Annual Part III
Meeting of Stockholders
This Annual Report on Form 10-K contains a number of forward-looking
statements. Any statements contained herein (including without limitation
statements to the effect that the Company or its management "believes",
"expects", "anticipates", "plans" and similar expressions) that are not
statements of historical fact should be considered forward-looking statements.
There are a number of important factors that could cause the Company's actual
results to differ materially from those indicated by such forward-looking
statements. These factors include, without limitation, those set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Future Operating Results. "
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PART I
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ITEM 1. BUSINESS
Staples, Inc. ("Staples" or "the Company") pioneered the office products
superstore concept and is a leading office products distributor with a total of
742 retail stores located in the United States, Canada, the United Kingdom and
Germany as of January 31, 1998, in addition to a catalog 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 and is incorporated in the State of
Delaware.
BUSINESS STRATEGY
The Company views the office products market as a large diversified market
for office supplies and equipment, business machines and computers, and various
business services. Although there are no clear demarcations among segments, the
Company targets 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's ability to
address all four major end-user groups increases and diversifies its available
market opportunities, increases awareness of the Staples name among customers in
all four end-user groups (who often shop across distribution channels) and
allows the Company to enjoy a number of important economies of scale. These
include increased buying power, enhanced efficiencies in distribution and
advertising, and improved capacity to leverage certain general and
administrative functions.
The Company effectively reaches different sectors of the office products
market through different channels of distribution designed to be convenient to
each targeted market sector. Specifically, in-store operations seek to address
the retail needs of customers, while the Company's Contract and Commercial
division focuses on customers who desire delivery of their office products and
other specialized services.
NORTH AMERICAN SUPERSTORES
Staples' North American retail operations, consisting of 685 stores as of
January 31, 1998, are the core business of the Company, generating a substantial
majority of its sales and profits. The Company's retail operations focus on
serving the needs of customers primarily in the consumer, home office and small
business segments of the office products market.
Superstores. The Company's North American superstores are located in 32
states, the District of Columbia and nine Canadian provinces in both major
metropolitan markets and smaller outlying markets. The Company's current
superstore prototype is approximately 24,000 square feet and offers about 8,000
different stock keeping units ("SKUs"). The Company's strategy for its North
American superstores focuses on four key objectives: (i) providing superior
customer value through a combination of broad product selection, everyday low
prices, outstanding customer service and convenient locations; (ii) increasing
the Company's presence in targeted markets by adding new superstores and
achieving economies of scale in most of the major markets where it competes;
(iii) reducing operating costs to the lowest level consistent with providing
quality merchandise and service; and (iv) offering a comfortable, easy to shop
store environment with skilled sales associates available to assist the
customer.
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Express Stores. In select urban markets, the Company operates a smaller
store format, "Staples Express", which offers a more focused assortment of
products. These smaller stores give the Company the opportunity to meet the
office supply needs of customers in a store format that is efficient and
economical in an urban environment. Staples Express stores range from
approximately 6,000 to 10,000 square feet in size, and generally stock about
6,000 different SKUs.
CONTRACT AND COMMERCIAL
The Company's Contract and Commercial division is comprised of two
principal operations: the Company's catalog business, operating under the name
"Staples Direct", and the Company's contract stationer business, operating under
the names "Staples National Advantage" and "Staples Business Advantage".
Staples Direct. Launched in 1990, Staples Direct, the Company's direct mail
catalog business, reaches all targeted segments of the office products market
seeking the convenience of telephone ordering and free next day delivery for
orders over $50. Delivery orders are shipped from the Company's delivery
distribution centers and are distributed through dedicated delivery hubs. In
some markets, the Company also delivers products directly from its retail
stores. The Company markets Staples Direct through both direct mail catalogs and
a sales force primarily focused on generating new accounts. The Company recently
expanded Staples Direct into and has begun catalog operations in Canada, United
Kingdom and Germany.
Staples National Advantage and Staples Business Advantage. The Company's
contract stationer operations focus primarily on serving the needs of medium- to
large-size businesses that sometimes may seek more services than are provided by
a traditional retail or mail order business, such as customized pricing, payment
terms, usage reporting and the stocking of certain proprietary items. The
Company's 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 focused on selling to large multi-regional businesses.
Staples Business Advantage focuses on selling to medium- and large-size regional
companies and has the flexibility to handle smaller accounts. The Company
initially established this business through acquisitions of regional contract
stationers, and more recently has entered certain metropolitan markets through
the expanded sales and distribution capabilities of Staples Business Advantage.
INTERNATIONAL
The Company believes that foreign markets provide additional growth
opportunities. In 1991, the Company established its first international joint
venture, "Business Depot", in Canada. Business Depot became a wholly-owned
subsidiary of the Company in 1994 and operates as part of the Company's North
American Superstores and Contract and Commercial divisions. The Company also
became a partner in two overseas office products superstore joint ventures
operating in the United Kingdom under the name "Staples UK" and in Germany under
the name "MAXI-Papier-Markt-GmbH" ("MAXI-Papier"). In May 1997, the Company
increased its ownership interest in the Staples UK operations to 100% and in
MAXI-Papier to approximately 92%. As of January 31, 1998, Staples UK operated 40
stores and MAXI-Papier operated 17 stores. MAXI-Papier recently began operating
the German stores under the Staples brand name.
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STRATEGIC INITIATIVES
The Company is focusing on numerous 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: expanding product selection across
all key product categories; improving sales capabilities related to capital
goods (such as copiers, fax machines, computers and furniture); enhancing
business services; improving in-stock positions; improving customer service;
increasing staffing levels and personnel training; expanding store size; and
improving shopability and signage. Another key element of this strategy is the
Company's ongoing store remodeling program. This continuing remodeling program
incorporates the Company's improved Concept 97 store layout, lighting, signage
and the overall shopping environment, and will conform existing stores to the
new prototype to the maximum extent practicable.
Continue Rapid Growth in Staples Direct. The Company is implementing a
number of actions to profitably grow its delivery business. These actions
include: broadening the product offerings available for delivery; offering
specialized, more focused marketing; expanding the distribution areas of
catalogs; increasing the number of direct sales representatives; providing open
account invoicing to large accounts; and increasing distribution capacity. The
Company believes that Staples Direct's operations are also benefiting from the
increased marketing and advertising undertaken in connection with its store
sales growth strategy.
Continue Store Growth and Strengthen Infrastructure. The Company is
continuing its store growth program. In fiscal year 1997, the Company opened 129
new stores in North America and one new store in Europe. In fiscal 1998, the
Company intends to open approximately 155 stores in North America and 15 stores
in Europe. The Company's store growth strategy follows a three-pronged approach:
continuing the growth of its store network in existing markets; entering smaller
markets, within both existing and new geographic areas; and entering major new
markets. 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. To support this commitment, the
Company is taking steps to strengthen its infrastructure, including its
distribution capabilities.
Improve Productivity. The Company maintains its historical focus on being a
low cost operator and believes that it has significant opportunities to reduce
costs as a percentage of sales. The Company believes that its future expansion
will enable it to leverage certain fixed costs in store operations, marketing,
distribution and administration. The Company is also seeking to enhance
productivity through improvements in operating practices. The Company
continually evaluates the productivity of its retail space and changes
assortments, layouts and adjacencies as appropriate. The Contract and Commercial
division also seeks to improve the efficiency and productivity of its
distribution network.
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Improve Customer Service. The Company has increased staffing levels in
stores and delivery operations and made other investments to provide better
customer service. Starting in 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". The Company also
expanded its "mystery shopper program" in which outside representatives evaluate
customer service multiple times per year per store and has tied a portion of
incentive compensation to achievement of customer satisfaction goals.
PRODUCTS AND PURCHASING
PRODUCTS
The Company's current North American superstore 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 by regularly evaluating sales and profit
performance for each of its SKUs. 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 55% of the price difference (up to $55) as
a credit towards future purchases. The Company continuously compares its pricing
against other discount office supply stores, local stationers, nearby warehouse
clubs, mass merchants, computer superstores, consumer electronics retailers and
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 offers high-speed and self-service copying,
overnight mailing, faxing and other print services for its customers. The
Company's return policy entitles customers to return all goods, except
computers, printers and software, in original packaging within 30 days after the
date of sale for a full refund; computers and printers must be returned within
14 days to obtain a full refund. Software packages must be unopened to obtain a
full refund within 30 days; open packages will be exchanged only for the same
title.
The Company's Contract and Commercial division carries many of the same
products that are sold in the retail stores. Staples Direct catalogs typically
contain approximately 5,000 in-stock products; through a special orders catalog,
customers are offered an additional 20,000 items. The contract stationer catalog
typically offers approximately 6,000 products with unique pricing, billing and
other services available to each customer.
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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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January 31, 1998 February 1, 1997 February 3, 1996
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Office supplies, services and other supplies 44.7% 46.4% 52.4%
Equipment and business machines 24.0 22.7 19.6
Computers and related products 22.7 21.6 19.8
Office furniture 8.6 9.3 8.2
PURCHASING AND VENDOR SELECTION
Staples selects its vendors based upon quality, price, delivery reliability
and, where appropriate, customer brand recognition. The Company believes 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 attractively priced
high quality products from multiple vendors and thereby achieve substantial cost
savings in each product category.
The Company offers several hundred private label items including copy
paper, staplers, envelopes, mailing and shipping supplies, a variety of
fastening supplies, chairs, computer accessories, calculators and diskettes.
Through its global product sourcing program, the Company is able to procure
private label products at lower cost than brand name products, without
sacrificing quality.
Currently, the Company purchases products from several hundred active
vendors worldwide. 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
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. retail and catalog operations. The Company's contract
stationer operations also 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 are 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 cost. 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.
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The Company believes 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 results 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 operates 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.
The Company continues to enhance its distribution network to support its
retail stores. The Company recently opened two new distribution centers:
Hagerstown, Maryland (840,000 sq. ft.) in March 1997 and Killingly, Connecticut
(310,000 sq. ft.) in January, 1998. In addition, the Company expects to open a
520,000 sq. ft. facility in Rialto, California in early 1999. These 3 new
facilities are expected to replace a network of approximately 11 distribution
centers formerly used to support U.S. retail operations.
MARKETING STRATEGY
The Company pursues a variety of marketing strategies to attract and retain
target customers. These strategies include 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 1997, the Company continued to invest in its nationally recognized
television campaign and began to supplement its spot television schedule with
network ads. This television advertising is designed to raise awareness of
Staples and penetration levels for both the household and business customer
segments across the country. 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. The Company also entered into a naming rights agreement with L.A.
Arena Company, LLC, which is designing a new state of the art entertainment
complex in downtown Los Angeles. This agreement provides the Company with
marketing, promotional and signage rights, community-based programs and various
amenities in the STAPLES Center for the next 20 years. Finally, the Company
continued to build and refine its loyalty program and top customer database in
1997 through its "Dividends" program, which rewards the top store and catalog
customers with volume based rebates and a variety of other benefits.
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STORE OPERATIONS AND TRAINING
STORE OPERATIONS
The Company strives to be the lowest cost operator of office products
stores servicing its targeted customers. Staples seeks to create stores that
appeal to its target customers for their broad selection, everyday low prices,
convenience, shopability and helpful service. The Company's stores typically are
open 91 hours (seven days) per week; minor variations exist in the European
operations.
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 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.
Staples' computer systems replenish inventory levels for each SKU by store
based on its rate of sale and variability in rate of sale. Sales and inventory
levels are tracked by SKU at each store through the Company's point-of-sale
system and are transmitted nightly to the Company's host computer. Reorders from
the distribution center are processed 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. A new store layout design was approved for all new stores
and remodels in July, 1997. The new design, Concept 97, emphasizes technology
sales, service and computer upgrades through the Staples Tech Center. Also
included are enhanced product assortments in furniture, paper and office
supplies. In the services category, Concept 97 promotes the new Staples Copy
Center with enhanced services and, where market conditions warrant, expanded
copy centers ranging from 1,300 square feet to 2,500 square feet. The Company
will continue to rollout Concept 97 to all new stores and to varying degrees on
future remodels. The Company's current store prototype is approximately 24,000
square feet, which allows for enhanced business services, product depth and
capital goods sales. Where possible, the Company has expanded existing stores to
fit the new format.
The Company has continued to make an investment in computer-based,
multi-media training 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. Additionally, the Company continues 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
The Company places great importance on recruiting, training and providing
the proper incentives for quality store level personnel. This includes 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.
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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 eligible associates the opportunity to acquire equity in
the Company through an employee stock purchase plan, and also grants stock
options and restricted stock to certain of its associates as an incentive to
attract and retain such associates.
As of January 31, 1998, the Company employed 16,213 full-time and 16,073
part-time employees.
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 a network of stores in a
metropolitan market enhances profitability by leveraging marketing costs,
distribution expense and supervision costs.
The Company currently plans to open approximately 155 stores in North
America in fiscal 1998. Approximately 15 store openings are planned for the UK
and Germany in fiscal 1998. The Company's growth strategy calls for continuing
to increase its presence along both the East and West coasts of the United
States as well as portions of the Southeast and Midwest regions. 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, 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 its
customers choose among suppliers on the basis of price, breadth of selection,
service and convenience.
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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 it competitive advantages. Recently, however, some traditional
office product dealers have lowered prices and increased their service levels to
become more competitive with discount retailers.
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, OfficeMax, and Office World as well as mass merchants, such as Wal-Mart,
warehouse clubs, computer and electronics superstores, 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, contract stationer
businesses and direct manufacturers. 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 and the mark "Staples" in Canada, the United Kingdom and Germany.
ITEM 2. PROPERTIES
As of January 31, 1998 the Company operated 742 superstores in 32 states,
the District of Columbia, 9 provinces in Canada, 9 regions in the United Kingdom
and 5 states in Germany. The Company also operates 34 distribution centers. The
following table sets forth the locations of the Company's facilities.
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NUMBER NUMBER
STATE/PROVINCE/REGION OF STORES STATE/PROVINCE/REGION OF STORES
- --------------------- --------- --------------------- ---------
UNITED STATES UNITED KINGDOM
Arizona 15 South West 2
California 112 South East 5
Connecticut 27 London 5
Delaware 4 Wales 3
Florida 21 East Anglia 5
Idaho 3 Midlands 7
Iowa 10 North West 4
Illinois 8 North East 7
Indiana 11 North 2
Kentucky 6
Maine 7 GERMANY
Maryland 24 Hamburg 7
Massachusetts 36 Schleswig-Holstein 1
Michigan 28 Niedersachsen 3
Missouri 1 Bremen 2
Montana 2 Nordrhein-Westpfalen 4
New Hampshire 11
New Jersey 42 NUMBER OF
New York 66 STATE/PROVINCE/REGION DISTRIBUTION CENTERS
North Carolina 10 --------------------- --------------------
Ohio 24 UNITED STATES
Oregon 6 California 6
Pennsylvania 49 Colorado 1
Rhode Island 2 Connecticut 3
South Carolina 8 Delaware 1
Tennessee 5 Florida 2
Utah 7 Georgia 1
Vermont 4 Illinois 1
Virginia 24 Maryland 3
Washington 3 Massachusetts 4
Washington DC 2 Michigan 1
West Virginia 2 New Jersey 2
Wisconsin 2 New York 3
Pennsylvania 2
CANADA Texas 1
Alberta 10 Washington 1
British Columbia 11
Manitoba 4 CANADA
New Brunswick 3 Ontario 1
Newfoundland 2
Nova Scotia 3 GERMANY
Ontario 47 Schleswig-Holstein 1
Quebec 21
Saskatchewan 2
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Most of the existing stores are leased by the Company with initial lease
terms expiring between 1998 and 2023. In most instances, the Company has renewal
options at increased rents. Leases for 171 of the existing stores provide for
contingent rent based upon sales.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the last quarter of the fiscal year ended January 31, 1998.
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "SPLS".
At January 31, 1998, the number of holders of record of the Company's
Common Stock was 10,403.
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 split in
January, 1998.
FISCAL YEAR ENDED FEBRUARY 1, 1997 HIGH LOW
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First Quarter $14.42 $10.67
Second Quarter 14.33 9.59
Third Quarter 15.09 11.25
Fourth Quarter 14.67 11.42
FISCAL YEAR ENDED JANUARY 31, 1998
First Quarter $17.58 $11.75
Second Quarter 17.50 12.83
Third Quarter 19.50 15.33
Fourth Quarter 20.08 15.88
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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 part of APPENDIX B.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The information required by this Item is attached as part of 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
--------
The information required by Part III is omitted from this Annual Report on
Form 10-K, and incorporated herein by reference to the definitive proxy
statement with respect to the 1998 Annual Meeting of Stockholders (the "Proxy
Statement") which the Company will file with the Securities and Exchange
Commission not later than 120 days after the end of the fiscal year covered by
this Report.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will appear under the headings
"Election of Directors" and "Directors and Executive Officers of Staples" in the
Company's Proxy Statement, which sections are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will appear under the heading
"Directors and Executive Officers of Staples - Executive Compensation" in the
Company's Proxy Statement, which section is incorporated herein by reference.
-14-
15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will appear under the heading
"Beneficial Ownership of Common Stock" in the Company's Proxy Statement, which
section is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will appear under the heading
"Directors and Executive Officers of Staples - Executive Compensation" in the
Company's Proxy Statement, which sections are incorporated herein by reference.
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 - January 31, 1998 and February 1, 1997.
Consolidated Statements of Income - Fiscal years ended January 31,
1998, February 1, 1997, and February 3, 1996.
Consolidated Statements of Stockholders' Equity - Fiscal years ended
January 31, 1998, February 1, 1997, and February 3, 1996.
Consolidated Statements of Cash Flows - Fiscal years ended January 31,
1998, February 1, 1997, and February 3, 1996.
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.
-15-
16
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 17, 1998.
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/ Basil L. Anderson Director
- ----------------------------
Basil L. Anderson
/s/ Mary Elizabeth Burton Director
- ----------------------------
Mary Elizabeth Burton
/s/ W. Lawrence Heisey Director
- ----------------------------
W. Lawrence Heisey
/s/ James L. Moody, Jr. Director
- ----------------------------
James L. Moody, Jr.
/s/ Rowland T. Moriarty Director
- ----------------------------
Rowland T. Moriarty
/s/ Robert C. Nakasone Director
- ----------------------------
Robert C. Nakasone
/s/ W. Mitt Romney Director
- ----------------------------
W. Mitt Romney
-16-
17
SIGNATURES - CONT'D
Signature Capacity
--------- --------
/s/ Martin Trust Director
- ----------------------------
Martin Trust
/s/ Paul F. Walsh Director
- ----------------------------
Paul F. Walsh
/s/ John J. Mahoney Executive Vice President, Chief Administrative
- ---------------------------- Officer and Chief Financial Officer (Principal
John J. Mahoney Financial Officer)
/s/ Robert K. Mayerson Senior Vice President and Corporate Controller
- ---------------------------- (Principal Accounting Officer)
Robert K. Mayerson
-17-
18
APPENDIX A
FINANCIAL HIGHLIGHTS (1)
(Dollar Amounts in thousands, Except Per Share Amounts)
Fiscal Year Ended
----------------------------------------------------------------------------------
January 31, February 1, February 3, January 28, January 29,
1998 (2) 1997 1996 1995 (3) 1994 (4)
(52 weeks) (52 weeks) (53 weeks) (52 weeks) (52 weeks)
---------- ---------- ---------- ---------- ----------
STATEMENT OF INCOME DATA:
Sales $5,181,035 $3,967,665 $3,068,061 $2,000,149 1,308,634
Gross profit 1,246,863 944,386 701,878 465,789 295,624
Operating income 271,460 204,001 147,813 81,727 37,685
Net income 130,949 106,420 73,705 39,940 19,452
Earnings per common share $ 0.53 $ 0.44 $ 0.32 $ 0.19 $ 0.10
Earnings per common share -
assuming dilution $ 0.51 $ 0.43 $ 0.31 $ 0.19 $ 0.10
Dividends -- -- -- -- --
SELECTED OPERATING DATA (AT PERIOD END):
Stores open 742 557 443 350 230
BALANCE SHEET DATA:
Working capital 725,413 548,793 504,330 289,395 214,326
Total assets 2,454,510 1,787,752 1,402,775 1,008,454 650,756
Total long-term debt, less current portion 508,876 391,342 343,647 249,387 123,592
Stockholders' equity 967,611 761,686 611,416 384,990 287,207
(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 January, 1998, March, 1996, July, 1995, and October,
1994. See Note E of Notes to Consolidated Financial Statements.
(2) Results of operations for this period include a $29,665,000 charge relating
to costs incurred in connection with the proposed merger with Office Depot,
Inc. This item had the effect of reducing earnings per common share and
earnings per common share - assuming dilution by $0.08 and $0.07,
respectively.
(3) 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.
(4) 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.
19
ITEM 7. APPENDIX B
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
................................................................................
COMPARISON OF FISCAL YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997, AND
FEBRUARY 3, 1996
GENERAL. During the fiscal year ended January 31, 1998, the Company
acquired Kingfisher PLC interests in Staples UK and MAXI-Papier-Markt-GmbH
("MAXI-Papier"). Staples UK and MAXI-Papier operate a chain of office products
superstores in the UK and Germany, respectively. As a result of these
acquisitions, the Company's ownership interest of Staples UK increased to 100%
and its ownership interest in MAXI-Papier increased to approximately 92%. The
cash purchase price of approximately $57 million was generated through
additional borrowings under the Company's existing revolving credit facility.
The transactions were accounted for in accordance with the purchase method of
accounting and accordingly, the results of operations of Staples UK and
MAXI-Papier have been included in the Company's consolidated financial
statements since May, 1997. The excess of the purchase price has been recorded
as goodwill and is being amortized on a straight line basis over 40 years. Prior
to May 1997, the operating results of Staples UK and MAXI-Papier were accounted
for under the equity method.
The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128, Earnings Per
Share ("FAS 128"). For further discussion of earnings per share and the impact
of FAS 128, see the Notes to the Consolidated Financial Statements beginning on
Page C-7.
The fiscal years ended January 31, 1998 and February 1, 1997 consisted of
52 weeks, while the fiscal year ended February 3, 1996 consisted of 53 weeks.
SALES. Sales increased 31% to $5,181,035,000 in the fiscal year ended
January 31, 1998 from $3,967,665,000 in the fiscal year ended February 1, 1997.
Sales increased 29% 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%.
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. In addition, sales for the fiscal year ended
January 31, 1998 include the consolidation of Staples UK and MAXI-Papier.
Comparable store and delivery hub sales for the fiscal year ended January 31,
1998 increased 10% over the fiscal year ended February 1, 1997; comparable sales
in the contract stationer segment increased 12% over the year ended February 1,
1997. Comparable store and delivery hub sales for the year ended February 1,
1997 increased 14% over the year ended February 3, 1996; comparable sales in the
contract stationer segment increased 17% over the year ended February 3, 1996.
As of January 31, 1998, February 1, 1997, and February 3, 1996, the Company had
742, 557, and 443 open stores, respectively. The January 31, 1998 total includes
130 stores opened and one store closed during the twelve months ended January
31, 1998 and 56 stores that were acquired in the UK and Germany as a result of
the acquisitions of Staples UK and MAXI-Papier.
20
GROSS PROFIT. Gross profit was 24.1%, 23.8%, and 22.9% of sales for the
fiscal years ended January 31, 1998, February 1, 1997, and February 3, 1996,
respectively. The increase in gross profit rate for the years ended January 31,
1998 and February 1, 1997 was primarily due to improved margins in the retail
and delivery business segments due to lower product costs from vendors as a
result of increased purchase discounts and changes in product mix, as well as
the leveraging of fixed distribution center and delivery costs over a larger
sales base. This was partially offset by decreases in the margin rates in the
retail store segment due to price reductions as well as an increase in the sales
of computer hardware (CPU's and laptops), which generate a lower margin rate
than other categories, to 8.4% of total sales for the year ended January 31,
1998 from 7.7% in the year ended February 1, 1997 and 7.5% in the year ended
February 3, 1996.
OPERATING AND SELLING EXPENSES. Operating and selling expenses, which
consist of payroll, advertising and other operating costs, were 15.1%, 15.0%,
and 14.5% of sales for the fiscal years ended January 31, 1998, February 1,
1997, and February 3, 1996, respectively. The increase as a percentage of sales
for the years ended January 31, 1998 and February 1, 1997 was primarily due to
planned increases in advertising and circulars 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. In addition, operating and selling
expenses for the year ended January 31, 1998 include the results of Staples UK
and MAXI-Papier, which have higher costs as a percentage of sales due to their
early stage of development. These increases were partially offset by reduced
costs resulting from the Company's ability to leverage fixed store payroll
expenses and other fixed store operating costs as store sales have increased.
Staples UK and MAXI-Papier store expenses are higher than most other
Staples stores as a result of their earlier stage of development. 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 continuing
to add stores to many existing markets can result 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 $73,000, $72,000, and $58,000 per store for the stores opened
in the fiscal years ended January 31, 1998, February 1, 1997, and February 3,
1996, respectively. The increase from the fiscal year ended February 3, 1996 was
due primarily to increased marketing expenses as well as higher costs incurred
in the initial shipment of products from the distribution centers to new stores.
21
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses as
a percentage of sales were 3.5%, 3.4%, and 3.3% in the years ended January 31,
1998, February 1, 1997, and February 3, 1996, respectively. The increase as a
percentage of sales for the fiscal years ended January 31, 1998 and February 1,
1997 was 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. In addition, general and
administrative expenses for the fiscal year ended January 31, 1998 include the
results of Staples UK and MAXI-Papier, which have higher general and
administrative costs as a percentage of sales; as their store base matures
overhead expenses should decrease as a percentage of sales. This overall
increase in general and administrative costs were partially offset by the
Company's ability to increase sales without proportionately increasing overhead
expenses in its core retail business.
INTEREST AND OTHER EXPENSE, NET. Net interest expense totaled $23,053,000,
$19,887,000, and $15,815,000 in the fiscal years ended January 31, 1998,
February 1, 1997, and February 3, 1996, respectively. The increase in the fiscal
years ended January 31, 1998 and February 1, 1997 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 Staples UK and MAXI-Papier as well as the purchase
of them during the fiscal year ended January 31, 1998.
MERGER-RELATED COSTS. During the fiscal year ended January 31, 1998, the
Company charged to expense certain non-recurring costs consisting primarily of
legal, accounting, transaction related costs, such as filing fees, and
consulting fees incurred in connection with the proposed merger with Office
Depot, Inc.
EQUITY IN LOSS OF AFFILIATES. Equity in Loss of Affiliates is comprised of
the Company's share of the losses incurred by Staples UK and MAXI-Papier before
the Company's acquisition of these entities in May, 1997. Prior to the
acquisitions, the Company's investments in Staples UK and MAXI-Papier were
accounted for using the equity method which resulted in the Company's share of
losses from operations being included in Equity in Loss of Affiliates. Equity in
Loss of Affiliates totaled $5,953,000, $11,073,000, and $12,153,000, in the
fiscal years ended January 31, 1998, February 1, 1997, and February 3, 1996,
respectively. The decrease in the Equity in Loss of Affiliates for the fiscal
year ended January 31, 1998 was due to the acquisition of Staples UK and
MAXI-Papier on May 6, 1997 and May 7, 1997. As a result of the acquisitions, the
Company's ownership interest of Staples UK increased to 100% and its ownership
of MAXI-Papier increased to approximately 92%. The transactions were accounted
for in accordance with the purchase method of accounting and accordingly, the
results of operations of Staples UK and MAXI-Papier have been included in the
Company's consolidated financial statements since the respective acquisition
dates.
INCOME TAXES. The provision for income taxes as a percentage of pre-tax
income was 38.5% for each of the fiscal years ended January 31, 1998, February
1, 1997 and February 3, 1996.
22
LIQUIDITY AND CAPITAL RESOURCES
................................................................................
The Company traditionally uses a combination of cash generated from
operations and debt or equity offerings to fund its expansion and acquisition
activities. During the fiscal years ended January 31, 1998, February 1, 1997 and
February 3, 1996, the Company also utilized its revolving credit facility to
support its various growth initiatives.
The Company opened 130 stores, 115 stores, and 94 stores in the fiscal
years ended January 31, 1998, February 1, 1997 and February 3, 1996,
respectively, and closed one store in each of these fiscal years. In addition,
in the fiscal year ended January 31, 1998, 56 stores were added as a result of
the acquisition of Staples UK and MAXI-Papier. 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 also utilized capital
equipment financings to fund current working capital requirements.
As of January 31, 1998, cash, cash equivalents, and short-term investments
totaled $357,904,000, an increase of $251,775,000 from the February 1, 1997
balance of $106,129,000. The principal sources of funds were primarily cash from
operations, an increase in accounts payable and accrued expenses of
$320,527,000, which financed the increase in merchandise inventory of
$227,037,000 related to new store openings, expanded product assortment and
improvements in in-stock levels; and cash provided by financing activities of
$182,851,000 due primarily to the issuance of $200,000,000 of senior notes on
August 12, 1997. These sources were partially offset by the acquisition of
property and equipment of $183,133,000 and cash used in the acquisition of
Staples UK and MAXI-Papier, net of cash acquired, of $79,325,000.
The Company expects to open approximately 170 stores during fiscal 1998.
Management estimates that the Company's cash requirements, including pre-opening
expenses, leasehold improvements and fixtures (excluding 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 $238,000,000 for store openings during
this period. In addition, the Company plans to 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 expects to meet these cash
requirements through a combination of operating cash flow and borrowings from
its existing revolving line of credit.
The Company issued $200,000,000 of senior notes (the "Notes") on August
12, 1997 with an interest rate of 7.125% payable semi-annually on February 15
and August 15 of each year commencing on February 15, 1998. Net proceeds of
approximately $198,000,000 from the sale of the Company's Notes were used for
repayment of indebtedness under the Company's revolving credit agreement and for
general working capital purposes, including the financing of new store openings,
distribution facilities and corporate offices.
23
Effective November 13, 1997 the Company entered into a new revolving credit
facility, effective through November 2002, with a syndicate of banks which
provides up to $350,000,000 of available borrowings. 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, a competitive bid rate, or a swing line loan rate.
This agreement, among other conditions, contains certain restrictive covenants
including net worth maintenance, minimum fixed charge interest coverage and
limitations on indebtedness, sales of assets, and dividends. As of January 31,
1998, no borrowings were outstanding under the revolving credit agreement.
MAXI-Papier also has a revolving credit facility under which $8,746,000 was
outstanding as January 31, 1998. Total cash, short-term investments and
available revolving credit amounts totaled $733,916,000 as of January 31, 1998.
The Company expects that its current cash and cash equivalents and funds
available under its revolving credit will be sufficient to fund its planned
store openings and other recurring operational cash needs for at least the next
twelve to eighteen 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 additional commercial bank debt arrangement.
INFLATION AND SEASONALITY
While inflation or deflation 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 or deflation 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
Factors that could affect the Company's future operating results include,
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, OfficeMax, and
Office World as well as mass merchants, such as Wal-Mart, warehouse clubs,
computer and electronics superstores, 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, contract stationer businesses and direct
manufacturers. Such competitors have increased their presence in the Company's
market 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
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 130 stores in the United States, Canada and
Europe in fiscal 1997 and plans to open
24
approximately 170 new stores in fiscal 1998. 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 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 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. 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 in Canada and through
its recently acquired operations 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 U.S. stores, in addition to a number of additional risks inherent in foreign
operations, including local customs and competitive conditions, and foreign
currency fluctuations. Staples' European 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 facility will be sufficient to
fund its planned store openings and other operating cash needs for at least the
next twelve to eighteen 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 twelve to
eighteen months or thereafter, will be available to the Company on satisfactory
terms.
25
YEAR 2000
The Company has conducted a comprehensive review of its internal computer
systems and applications to identify those that might be affected by the year
2000 issue and has developed an implementation plan to resolve the year 2000
issue. The Company is in the process of correcting or replacing those systems
and applications which are not currently year 2000 compliant. The Company
believes it will be able to modify or replace its affected systems and
applications in time to avoid any material detrimental impact on its operations.
The Company will incur internal staff costs as well as consulting and other
expenses related to infrastructure and facilities enhancements necessary to
prepare its systems and applications for the year 2000 issue. The preliminary
expense estimate for year 2000 corrective and replacement activities ranges from
$15 to $20 million, a portion of which would have been incurred as part of
normal system and application upgrades.
It is anticipated that all year 2000 compliance efforts will be complete by
mid fiscal year 1999, including testing. However, if such modifications and
conversions are not completed in a timely manner, the year 2000 issue may have a
material impact on the operations of the Company. The Company is also working to
ensure that products purchased at Staples, as well as services utilized by
Staples, will be year 2000 compliant.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to market risk from changes in interest rates and
foreign exchange rates. The Company does not use these derivative instruments
for trading purposes. The Company initiated a risk management control process to
monitor the foreign exchange and interest rate risks. The risk management
process uses analytical techniques including market value, sensitivity analysis,
and value at risk estimates. The Company does not believe that the potential
exposure is significant in light of the size of the Company and its business. In
addition, the foreign exchange rate can move in the Company's favor. Recent
experience has demonstrated that gains on certain days are offset by losses on
other days. Therefore, the Company does not expect to incur material losses.
This risk management discussion and the effects of are forward-looking
statements. Actual results in the future may differ materially from these
projected results due to actual developments in the global financial markets.
The analytical methods used by the Company to assess and mitigate risk discussed
above should not be considered projections of future events or losses.
26
APPENDIX C
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements. Page
- --------------------- ----
Report of Independent Auditors .................................................C-2
Consolidated Balance Sheets - January 31, 1998 and February 1, 1997 ............C-3
Consolidated Statements of Income - Fiscal years ended January 31, 1998,
February 1, 1997, and February 3, 1996.......................................C-4
Consolidated Statements of Stockholders' Equity - Fiscal years ended
January 31, 1998, February 1, 1997, and February 3, 1996.....................C-5
Consolidated Statements of Cash Flows - Fiscal years ended January 31, 1998,
February 1, 1997, and February 3, 1996.......................................C-6
Notes to Consolidated Financial Statements......................................C-7
C-1
27
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 January 31, 1998 and February 1, 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended January 31, 1998. 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 January 31, 1998 and February 1, 1997 and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended January 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
- ----------------------
ERNST & YOUNG LLP
Boston, Massachusetts
March 3, 1998
except for Note L,
as to which the date
is April 7, 1998
C-2
28
STAPLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
January 31, February 1,
1998 1997
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 355,238 $ 98,143
Short-term investments ................................. 2,666 7,986
Merchandise inventories ................................ 1,092,410 813,661
Receivables, net ....................................... 151,885 167,072
Deferred income taxes .................................. 33,108 31,202
Prepaid expenses and other current assets .............. 31,026 33,284
---------- ----------
TOTAL CURRENT ASSETS ............................... 1,666,333 1,151,348
PROPERTY AND EQUIPMENT:
Land and buildings ..................................... 117,858 73,070
Leasehold improvements ................................. 288,213 231,604
Equipment .............................................. 257,116 197,258
Furniture and fixtures ................................. 168,411 111,967
---------- ----------
TOTAL PROPERTY AND EQUIPMENT ....................... 831,598 613,899
Less accumulated depreciation and amortization ......... 257,627 171,042
---------- ----------
NET PROPERTY AND EQUIPMENT ......................... 573,971 442,857
OTHER ASSETS:
Lease acquisition costs, net of amortization ........... 43,244 42,552
Investment in affiliates ............................... 40,542
Goodwill, net of amortization .......................... 139,753 81,306
Deferred income taxes .................................. 15,451 16,708
Other .................................................. 15,758 12,439
---------- ----------
TOTAL OTHER ASSETS ................................. 214,206 193,547
---------- ----------
$2,454,510 $1,787,752
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ....................................... $ 641,851 $ 421,051
Accrued expenses and other current liabilities ......... 259,290 174,284
Debt maturing within one year .......................... 39,779 7,220
---------- ----------
TOTAL CURRENT LIABILITIES .......................... 940,920 602,555
LONG-TERM DEBT ........................................... 208,876 91,342
OTHER LONG-TERM OBLIGATIONS .............................. 37,103 32,169
CONVERTIBLE DEBENTURES ................................... 300,000 300,000
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value-authorized
5,000,000 shares; no shares issued
Common stock, $.0006 par value-authorized
500,000,000 shares; issued
252,169,891 shares at January 31, 1998 and
243,416,063 shares at February 1, 1997 ................ 106 98
Additional paid-in capital ............................. 593,895 508,868
Cumulative foreign currency translation adjustments .... (10,315) (128)
Unrealized gain on short-term investments .............. 4 11
Retained earnings ...................................... 384,132 253,183
Less: 59,149 shares of treasury stock, at cost ......... (346) (346)
Minority interest ...................................... 135
---------- ----------
TOTAL STOCKHOLDERS' EQUITY ......................... 967,611 761,686
---------- ----------
$2,454,510 $1,787,752
========== ==========
See notes to consolidated financial statements.
29
STAPLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
FISCAL YEAR ENDED
-----------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
---------- ---------- ----------
Sales......................................... $5,181,035 $3,967,665 $3,068,061
Cost of goods sold and occupancy costs ....... 3,934,172 3,023,279 2,366,183
---------- ---------- ----------
GROSS PROFIT ............................. 1,246,863 944,386 701,878
OPERATING EXPENSES:
Operating and selling ...................... 779,789 594,978 446,324
Pre-opening ................................ 9,443 8,299 5,607
General and administrative ................. 182,590 134,817 100,167
Amortization of goodwill ................... 3,581 2,291 1,967
---------- ---------- ----------
TOTAL OPERATING EXPENSES ................. 975,403 740,385 554,065
---------- ---------- ----------
OPERATING INCOME ......................... 271,460 204,001 147,813
OTHER INCOME (EXPENSE):
Interest and other expense, net ............ (23,053) (19,887) (15,815)
Merger-related costs ....................... (29,665)
---------- ---------- ----------
TOTAL OTHER INCOME (EXPENSE) ............. (52,718) (19,887) (15,815)
---------- ---------- ----------
INCOME BEFORE EQUITY IN LOSS OF AFFILIATES
AND INCOME TAXES .................... 218,742 184,114 131,998
Equity in loss of affiliates ................. (5,953) (11,073) (12,153)
---------- ---------- ----------
INCOME BEFORE INCOME TAXES ................ 212,789 173,041 119,845
Income tax expense ........................... 81,924 66,621 46,140
---------- ---------- ----------
NET INCOME BEFORE MINORITY INTEREST ...... 130,865 106,420 73,705
Minority interest .......................... 84
---------- ---------- ----------
NET INCOME ............................... $ 130,949 $ 106,420 $ 73,705
========== ========== ==========
EARNINGS PER COMMON SHARE
Net income per common share .............. $ 0.53 $ 0.44 $ 0.32
EARNINGS PER COMMON SHARE - ASSUMING DILUTION
Net income per common share .............. $ 0.51 $ 0.43 $ 0.31
See notes to consolidated financial statements.
30
STAPLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE FISCAL YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997,
AND FEBRUARY 3, 1996
CUMULATIVE
FOREIGN UNREALIZED
ADDITIONAL CURRENCY GAIN RETAINED
PAID-IN TRANSLATION (LOSS) ON MINORITY EARNINGS TREASURY
COMMON STOCK CAPITAL ADJUSTMENTS INVESTMENTS INTEREST (DEFICIT) STOCK
------------ ------- ----------- ----------- -------- --------- -----
BALANCES AT JANUARY 28, 1995 ..... $ 85 $314,544 $ (2,205) $(93) $ 0 $ 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
Sale 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 $ 0 $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 of 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 $ 0 $253,183 $(346)
Issuance of common stock for
stock options exercised ........ 8 32,155
Tax benefit on exercise of
options ........................ 32,873
Contribution of common stock
to Employees' 401(K)
Savings Plan ................... 2,318
Sale of common stock under
Employee Stock Purchase Plan ... 10,499
Issuance of Performance
Accelerated Restricted Stock ... 7,182
Unrealized loss on short-term
investments, net of tax ........ (7)
Translation adjustments .......... (10,187)
Minority interest ................ 135
Net income for the year .......... 130,949
---- -------- -------- ---- ---- -------- -----
BALANCES AT JANUARY 31, 1998 ..... $106 $593,895 $(10,315) $ 4 $135 $384,132 $(346)
==== ======== ======== ==== ==== ======== =====
See notes to consolidated financial statements.
31
STAPLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
Fiscal Year Ended
-------------------------------------------
January 31, February 1, February 3,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income .................................................... $ 130,949 $ 106,420 $ 73,705
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Minority interest ........................................... (84)
Depreciation and amortization ............................... 83,380 55,948 43,551
Expense from 401K and PARS stock contribution ............... 10,409 2,715 1,633
Equity in loss of affiliates ................................ 5,953 11,073 12,153
Deferred income taxes (benefit)/expense ..................... 3,877 3,137 (13,211)
Change in assets and liabilities, net of
effects of purchase of other companies:
Increase in merchandise inventories ....................... (227,037) (167,479) (177,509)
(Increase) decrease in receivables ........................ 24,441 (44,523) (42,129)
(Increase) decrease in prepaid expenses
and other assets ....................................... (5,059) (4,349) 1,570
Increase in accounts payable, accrued
expenses and other current liabilities ................. 320,527 179,108 57,999
Increase in other long-term obligations ................... 5,544 5,883 2,094
--------- ----------- -----------
221,951 41,513 (113,849)
--------- ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ........... 352,900 147,933 (40,144)
INVESTING ACTIVITIES:
Acquisition of property and equipment ......................... (183,133) (199,614) (116,295)
Acquisition of businesses, net of cash acquired ............... (79,325)
Proceeds from sales and maturities of short-term investments .. 9,655 8,800 16,519
Purchase of short-term investments ............................ (4,500) (4,600)
Investment in affiliates ...................................... (3,788) (18,629) (22,088)
Acquisition of lease rights ................................... (2,717) (5,534) (2,044)
Other ......................................................... (12,128) 2,669 1,281
--------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES ......................... (275,936) (216,908) (122,627)
FINANCING ACTIVITIES:
Proceeds from sale of capital stock ........................... 48,045 21,773 16,964
Proceeds from convertible debentures, net of deferred costs ... 291,032
Proceeds from borrowings ...................................... 963,263 1,171,025 1,224,883
Payments on borrowings ........................................ (828,457) (1,124,453) (1,313,930)
--------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ..................... 182,851 68,345 218,949
Effect of exchange rate changes on cash ....................... (2,720) 643 142
NET INCREASE IN CASH AND CASH EQUIVALENTS ....................... 257,095 13 56,320
Cash and cash equivalents at beginning of period ................ 98,143 98,130 41,810
--------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 355,238 $ 98,143 $ 98,130
========= =========== ===========
See notes to consolidated financial statements.
32
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 North America and in Germany and the United Kingdom.
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 1997, 1996 and 1995, consisted of
the 52 weeks ended January 31, 1998 and February 1, 1997, and the 53 weeks ended
February 3, 1996, 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 amortized over its expected period of
future benefits. Direct-response advertising consists primarily of the direct
33
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 January 31, 1998, direct catalog production costs included in
prepaid and other assets totaled $2,794,000. Total advertising and marketing
expense was $261,425,000, $189,109,000, $120,288,000 for the years ended January
31, 1998, February 1, 1997 and February 3, 1996, 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 January 31, 1998 and February 1, 1997
totaled $19,483,000 and $15,432,000, respectively.
INVESTMENT IN AFFILIATES: Investment in affiliates represents cash invested
by the Company in foreign affiliates in Germany and the United Kingdom, which
were accounted for under the equity method until May 1997, at which time the
Company acquired controlling interest in the affiliates (see Note I). As a
result, prior to May 1997, the Company accounted for its interests in these
affiliates under the equity method and subsequent to May 1997, it has
consolidated the affiliates in its financial statements.
GOODWILL: Goodwill arising from business acquisitions is amortized on a
straight-line basis over 40 years. Accumulated amortization was $10,622,000 and
$5,897,000 as of January 31, 1998 and February 1, 1997, 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
34
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
foreign subsidiaries, The Business Depot Ltd. ("Business Depot"), Staples UK,
and MAXI-Papier, 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 affiliates during the year ended January 31, 1998, are
recorded in a separate section of stockholders' equity titled "Cumulative
foreign currency translation adjustments".
STOCK OPTION PLANS: The Company has 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: In 1997, the Financial Accounting Standards Board
issued Statement No. 128, "Earnings per Share" ("FAS 128"). FAS 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where appropriate, restated to conform to
the FAS 128 requirements. See Note K for the computation of earnings per share
for the years ended January 31, 1998, February 1, 1997 and February 3, 1996.
FAIR VALUE OF FINANCIAL INSTRUMENTS. Pursuant to Statement of Financial
Accounting Standards No. 107, "Disclosure About Fair Value of Financial
Instruments" ("FAS 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: The Company has 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
35
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
existed at January 31, 1998 and February 1, 1997, respectively. FAS 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of.
COMPREHENSIVE INCOME: In June 1997, the Financial Accounting Standards
Board issued Statement 130, "Reporting Comprehensive Income" ("FAS 130"). FAS
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, adoption in fiscal year 1998 will have no impact on
the Company's net income or stockholders' equity. FAS 130 requires unrealized
gains or losses on the Company's available-for-sale securities and the foreign
currency translation adjustments, which currently are reported in stockholders'
equity, to be included in other comprehensive income and the disclosure of total
comprehensive income. If the Company adopted FAS 130 for the year ended January
31, 1998, the total of other comprehensive income items and comprehensive income
(which includes net income) would be a loss of $10,194,000 and income of
$120,755,000, respectively, and would be displayed separately in the
consolidated statements of income.
SEGMENT REPORTING: In 1997, the Financial Accounting Standards Board issued
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("FAS 131") which changes the way public companies report
information about operating segments. The Company will adopt FAS 131 in fiscal
year 1998. This statement, which is based on the management approach to segment
reporting, establishes requirements to report selected segment information
quarterly and to report entity-wide disclosures about products and services,
major customers, and the major countries in which the Company holds assets and
reports revenues.
NOTE B INVESTMENTS
The following is a summary of available-for-sale investments as of January 31,
1998 and February 1, 1997 (in thousands):
January 31, 1998 Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
Debt securities $2,659 7 0 $2,666
====== ===== ===== ======
February 1, 1997 Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
Debt securities $7,968 18 0 $7,986
====== ===== ===== ======
36
There were no sales of investment securities during the year ended January 31,
1998. The reduction in the cost balance resulted from maturities of securities.
The net adjustment to unrealized holding gains on available-for-sale securities
included as a separate component of stockholders' equity totaled a decrease of
$7,000 and $21,000 for the years ended January 31, 1998 and February 1, 1997,
respectively.
The amortized cost and estimated fair value of debt and marketable equity
securities at January 31, 1998, 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 $2,659 $2,666
====== ======
NOTE C LONG-TERM DEBT AND CREDIT AGREEMENT
Long-term debt consists of the following (in thousands):
January 31, February 1,
1998 1997
-------- -------
Capital lease obligations and other notes payable in monthly
installments with effective interest rates from 4%
to 16%; collateralized by the related equipment .......... $ 14,909 $19,062
Note payable with a fixed rate of 6.16% .................... 25,000 25,000
Senior notes with a fixed rate of 7.125% ................... 200,000 0
Revolving lines of credit .................................. 8,746 54,500
-------- -------
$248,655 $98,562
Less current portion ....................................... 39,779 7,220
-------- -------
$208,876 $91,342
======== =======
Aggregate annual maturities of long-term debt and capital lease obligations are
as follows (in thousands):
Fiscal year: Total
-----
1998.............................. $ 39,779
1999.............................. 2,344
2000.............................. 1,332
2001.............................. 361
2002.............................. 225
Thereafter........................ 204,614
-------
$248,655
========
37
Included in property and equipment are capital lease obligations for equipment
recorded at the net present value of the minimum lease payments of $25,352,000.
Future minimum lease payments of $7,956,000, excluding $2,292,000 of interest,
are included in aggregate annual maturities shown above. The Company entered
into capital lease agreements totaling $2,770,000 and $2,733,000 during the
fiscal years ended January 31, 1998 and February 1, 1997, respectively.
Senior Notes:
The Company issued $200,000,000 of senior notes (the "Notes") on August 12, 1997
with an interest rate of 7.125% payable semi-annually on February 15 and August
15 of each year commencing on February 15, 1998. The Notes are due August 15,
2007. Net proceeds of approximately $198,000,000 from the sale of the Company's
Notes were used for repayment of indebtedness under the Company's revolving
credit facility and for general working capital purposes, including the
financing of new store openings, distribution facilities and corporate offices.
Credit Agreement:
Effective November 13, 1997, the Company entered into a new revolving credit
facility, effective through November 2002, with a syndicate of banks which
provides up to $350,000,000 of borrowings. 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, a competitive bid rate, or a swing line loan rate. This
agreement, among other conditions, contains certain restrictive covenants
including net worth maintenance, minimum fixed charge interest coverage and
limitations on indebtedness, sales of assets, and dividends. As of January 31,
1998, no borrowings were outstanding under the revolving credit facility.
MAXI-Papier also has a revolver of which $8,746,000 was outstanding as of
January 31, 1998.
Interest paid by the Company totaled $19,518,000, $19,626,000 and $11,946,000
for the fiscal years ended January 31, 1998, February 1, 1997, and February 3,
1996, respectively. Capitalized interest totaled $1,387,000 and $611,000 in the
years ended January 31, 1998 and February 1, 1997, respectively.
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 was
that the financial institution that was counterparty to this agreement fail 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 was with a major financial
institution which was expected to fully perform under the terms of the
agreement, which mitigated this off-balance sheet risk. At February 1, 1997 the
Company had one interest rate swap outstanding. The agreement bound 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 received payments based on a floating rate on $25,000,000
of the Company's floating rate debt. The floating rate equaled the 3-month LIBOR
in effect at any one of the quarterly reset dates. The fair market value of the
swap agreement as of February 1, 1997 approximated the carrying value based on
quoted market prices.
38
With the issuance of the Notes, the Company was able to repay all outstanding
revolving credit loans that were subject to floating rates. Thus, the Company
did not see the need to retain this interest rate swap arrangement and
terminated it on July 29, 1997.
NOTE D 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 19,406,250 shares of common stock at a conversion price of $5.93
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 $14.67 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 January 31, 1998, based upon quoted market prices, totaled
$386,250,000.
NOTE E STOCKHOLDERS' EQUITY
On December 30, 1997, March 5, 1996 and June 29, 1995, 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 January 30,
1998 to shareholders of record as of January 20, 1998, March 25, 1996 to
shareholders of record as of March 15, 1996 and July 24, 1995 to shareholders of
record as of July 14, 1995, respectively. The consolidated financial statements
have been retroactively restated to give effect to these stock splits.
At January 31, 1998, 83,409,662 shares of common stock were reserved for
issuance under the Company's stock option, employee stock ownership, 401(k),
employee stock purchase and director stock option plans. An additional
20,454,545 shares of common stock are reserved for issuance upon conversion of
the Company's 4 1/2% Debentures.
NOTE F 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.
39
EMPLOYEE STOCK PURCHASE PLAN
The Company's 1994 Employee Stock Purchase Plan authorizes a total of up to
5,906,250 shares of the Company's common stock to 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
Under the Company's 1992 Equity Incentive Plan ("1992 Plan") the Company may
grant to management and key employees incentive and nonqualified options to
purchase up to 58,500,000 shares of common stock and Performance Accelerated
Restricted Stock ("PARS"). This amount was approved by the shareholders of the
Company on June 18, 1997. As of February 27, 1997, the Company's 1987 Stock
Option Plan (the "1987 Plan") expired; unexercised options under this plan
however remain outstanding. 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 to five years after the grant date. All
options expire ten years after the grant date, subject to earlier termination in
the event of employment termination.
The Company's 1990 Director Stock Option Plan ("Director's Plan") authorizes up
to 1,594,688 shares of common stock to be issued 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
FAS 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,
1996, and 1997: risk-free interest rates ranging from 5.49% to 6.12%; volatility
factor of the expected market price of the Company's common stock of .30 for
fiscal years 1995 and 1996 and .35 for fiscal year 1997; 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.
40
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 FAS
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. This was estimated as the difference between the
employees' purchase price and the closing price. The Company's pro forma
information follows (in thousands except for earnings per share information):
January 31, February 1, February 3,
1998 1997 1996
----------- ----------- -----------
Pro forma net income $116,804 $99,123 $69,687
Pro forma earnings per share $ 0.47 $ 0.41 $ 0.30
Pro forma earnings per common share - assuming dilution $ 0.46 $ 0.40 $ 0.29
This pro forma impact only takes into account options granted since January 28,
1995 and is likely to increase in future years as additional options are granted
and amortized ratably over the vesting period.
Information with respect to options granted under the above plans are as
follows:
Weighted-Average
Number of Exercise Price
Shares Per Share
--------- --------------
Outstanding at January 28, 1995 ............ 31,908,470 $ 3.95
Granted .................................. 5,472,810 10.46
Exercised ................................ (3,615,006) 3.27
Canceled ................................. (2,285,888) 5.31
---------- ------
Outstanding at February 3, 1996 ............. 31,480,386 $ 4.93
Granted ................................... 4,781,291 13.23
Exercised ................................. (4,093,695) 3.43
Canceled .................................. (1,571,412) 7.34
---------- ------
Outstanding at February 1, 1997 ............. 30,596,570 $ 6.39
Granted ................................... 6,437,705 15.65
Exercised ................................. (6,764,939) 4.17
Canceled .................................. (1,871,922) 11.15
---------- ------
Outstanding at January 31, 1998 ............. 28,397,414 $ 8.01
========== ======
41
The weighted-average fair values of options granted during the years ended
January 31, 1998 and February 1, 1997 were $5.70 and $5.72, respectively.
Exercise prices for the options outstanding as of January 31, 1998 ranged from
$0.01 to $19.42.
Options to purchase 12,280,890 shares were exercisable at January 31, 1998.
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 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 the fiscal year ended January 31, 1998 totaling approximately
675,000 which have a weighted average fair value of $18.71, initially vest on
February 1, 2002 or will accelerate on May 1, in 1999, 2000, or 2001 upon
attainment of certain compound annual earnings per share targets in the prior
fiscal year. PARS totaling approximately 585,000 which have a weighted average
fair value of $14.75, issued in fiscal year 1996 will fully vest on May 1, 1998.
In connection with the issuance of the PARS, the Company included $7,496,000 and
$532,000 in compensation expense for the fiscal years ended January 31, 1998 and
February 1, 1997, respectively.
EMPLOYEES' 401(K) SAVINGS PLAN
Under the Company's Employees' 401(k) Savings Plan (the "401(k) Plan"), and
Supplemental Executive Retirement Plan (the "SERP Plan"), the Company may
contribute up to a total of 1,668,750 shares of common stock to these plans. The
401(k) 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 these plans the Company included approximately $2,000,000 in expense for
each of the fiscal years ended January 31, 1998 and February 1, 1997.
42
NOTE G 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 January 31, 1998 and February 1, 1997, are as follows (in
thousands):
January 31, February 1,
1998 1997
----------- -----------
Deferred Tax Assets:
Inventory .................................. $ 20,116 $ 22,597
Deferred rent .............................. 14,797 7,566
Acquired NOL's ............................. 7,132 0
Other net operating loss carryforwards ..... 22,907 5,206
Insurance .................................. 5,967 5,756
Employee benefits .......................... 5,569 2,545
Other - net ................................ 13,660 7,620
-------- --------
Total Deferred Tax Assets .................. 90,148 51,290
-------- --------
Deferred Tax Liabilities:
Depreciation ............................... (6,687) (1,922)
Other - net ................................ (4,835) 208
-------- --------
Total Deferred Tax Liabilities ............. (11,522) (1,714)
-------- --------
Total Valuation Allowance ................... (30,067) (1,666)
-------- --------
Net Deferred Tax Assets ..................... $ 48,559 $ 47,910
======== ========
Net deferred tax assets of approximately $4,500,000 and $440,000 attributable to
businesses acquired during the fiscal years ended January 31, 1998 and February
1, 1997, respectively, were allocated directly to reduce goodwill generated by
these acquisitions. The deferred tax assets disclosed as acquired NOL's and
other net operating loss carryforwards, totaling $30,000,000, have been fully
reserved for due to the uncertainty of the realization of the asset within the
local country jurisdiction. Further, if this asset is utilitized when income is
earned within the foreign jurisdiction, the Company will not have a consolidated
tax benefit as the Company will be required to pay U.S. income taxes on the
income offset by the foreign NOL.
For financial reporting purposes, income before taxes includes the following
components:
Fiscal Year Ended
-------------------------------------------
January 31, February 1, February 3,
1998 1997 1996
----------- ----------- -----------
Pretax income:
United States $176,584 $149,322 $ 124,487
Foreign 36,205 23,719 (4,642)
-------- -------- ---------
$212,789 $173,041 $ 119,845
======== ======== =========
43
The provision for income taxes consists of the following (in thousands):
Fiscal Year Ended
------------------------------------------
January 31, February 1, February 3,
1998 1997 1996
----------- ----------- -----------
Current tax expense:
Federal ...................................... $53,248 $50,546 $ 45,207
State ........................................ 10,707 12,337 14,144
Foreign ...................................... 14,092 601 0
------- ------- --------
78,047 63,484 59,351
Deferred tax expense (benefit) ................. 3,877 3,137 (13,211)
------- ------- --------
Total .......................................... $81,924 $66,621 $ 46,140
======= ======= ========
A reconciliation of the federal statutory tax rate to the Company's effective
tax rate is as follows:
Fiscal Year Ended
------------------------------------------
January 31, February 1, February 3,
1998 1997 1996
----------- ----------- -----------
Federal statutory rate ......................... 35.0% 35.0% 35.0%
State taxes, net of federal benefit ............ 6.0% 6.3% 6.3%
Tax exempt interest ............................ (0.5%) (0.4%) (0.6%)
Tax benefit of loss carryforward ............... (0.0%) (0.2%) (0.6%)
Federal tax credits ............................ (0.0%) (0.0%) (0.9%)
Other .......................................... (2.0%) (2.2%) (0.7%)
---- ---- ----
Effective tax rate ............................. 38.5% 38.5% 38.5%
==== ==== ====
Income tax payments were $23,487,877, $45,925,276, and $44,518,000, during
fiscal years ended January 31, 1998, February 1, 1997, and February 3, 1996,
respectively. The Company has net operating losses of approximately $83,500,000
that can be carried forward indefinitely, $16,500,000 of which is attributable
to the Company's increased ownership in MAXI-Papier.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $28,000,000 at January 31, 1998. Those earnings are considered to
be indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to
both U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries. Determination of the
amount of unrecognized deferred U.S. income tax liability is not practicable
because of the complexities associated with its hypothetical calculation.
Withholding taxes of approximately $500,000 would be payable upon remittance of
all previously unremitted earnings at January 31, 1998.
44
NOTE H 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 January 31, 1998 include $37,670,000 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.
Future minimum lease commitments for retail and support facilities (including
lease commitments for 79 retail stores not yet opened at January 31, 1998) under
noncancellable operating leases are due as follows (in thousands):
Fiscal year:
1998 .......................................... $214,739
1999 .......................................... 219,915
2000 .......................................... 212,964
2001 .......................................... 204,449
2002 .......................................... 193,868
Thereafter .................................... 1,504,787
----------
$2,550,722
==========
Rent expense approximated $187,448,000, $136,049,000, and $105,125,000, for the
fiscal years ended January 31, 1998, February 1, 1997, and February 3, 1996,
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 January 31, 1998, the Company had available open letters of
credit totaling $11,268,000.
45
NOTE I SUMMARIZED FINANCIAL INFORMATION OF AFFILIATES
The Company had equity interests in two affiliated companies in Germany and the
United Kingdom. On May 6, 1997 and May 7, 1997, the Company acquired Kingfisher
PLC's interests in Staples UK and MAXI-Papier-Markt-GmbH ("MAXI-Papier"),
respectively. As a result of these acquisitions, the Company's ownership
interest of Staples UK increased to 100% and its ownership interest of
MAXI-Papier increased to approximately 92%. The cash purchase price of
approximately $57 million was generated through additional borrowings under the
Company's existing revolving credit and term loan facility. The transactions
were accounted for in accordance with the purchase method of accounting and
accordingly, the results of operations of Staples UK and MAXI-Papier have been
included in the Company's consolidated financial statements since 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,
1997 1996
----------- -----------
(in thousands)
Current assets $64,858 $52,298
Other assets 32,538 33,125
Current liabilities 32,683 29,542
Other liabilities 8,550 15,094
Shareholders' equity 56,163 40,787
Net sales 230,845 154,626
Gross profit 68,500 44,655
Net loss before income taxes (22,961) (24,306)
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. Prior to the acquisition, the Company's share of loss
in 1997 for the unconsolidated affiliated companies was $5,953,000.
Sales in the Canadian region are primarily generated from retail operations. The
sales amounts primarily reflect the rules and regulations of the respective
governing tax authorities. Operating income is determined by deducting from net
sales the related costs and operating expenses attributed to the region.
Identifiable assets include those directly identified with the region. For the
years ended January 31, 1998, February 1, 1997 and February 3, 1996, sales are
$555,753,000, $431,049,000 and $72,299,000, respectively; operating income is
$37,171,000, $24,466,000 and a loss of $1,832,000, respectively, and
identifiable assets are $276,643,000, $214,595,000 and $156,154,000,
respectively.
46
NOTE J QUARTERLY SUMMARY (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share amounts)
FISCAL YEAR ENDED JANUARY 31, 1998
Sales ................................. $1,154,994 $1,061,867 $1,414,224 $1,549,950
Gross Profit .......................... 268,755 255,512 343,822 378,774
Net income ............................ 8,406(1) 14,803(1) 43,460 64,280
Earnings per common share
Net income per common share ........... 0.04 0.06 0.18 0.26
Number of shares used in computing
earnings per common share ........... 243,057 244,166 246,831 250,250
Earnings per share - assuming dilution
Net income per common share ........... 0.03 0.06 0.17(2) 0.24(2)
Number of shares used in computing
earnings per common share ........... 251,361 253,202 275,578(2) 279,683(2)
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
Net income per common share ........... 0.05 0.06 0.13 0.19
Number of shares used in computing
earnings per common share ........... 238,279 239,780 241,123 242,514
Earnings per share - assuming dilution
Net income per common share ........... 0.05 0.06 0.13(2) 0.18(2)
Number of shares used in computing
earnings per common share ........... 248,158 249,611 271,517(2) 271,373(2)
(1) Net income for the quarters ended May 3, 1997 and August 2, 1997 include a
pre-tax charge of $20,562 and $9,103, respectively, resulting from costs
incurred in connection with the proposed merger with Office Depot, Inc.
(2) Earnings per share - assuming dilution is calculated considering the $300
million of 4 1/2% Convertible Subordinated Debentures as common stock
equivalents for the quarters ended November 1, 1997, January 31, 1998,
November 2, 1996 and February 1, 1997. The Debentures are not considered in
the calculation of the earnings per share for the other quarters above as
the effect is antidilutive.
47
NOTE K COMPUTATION OF EARNINGS PER COMMON SHARE
The computation of earnings per common share and earnings per common share -
assuming dilution, for the fiscal years ended January 31, 1998, February 1, 1997
and February 3, 1996 is as follows (amounts in thousands, except for per share
data):
January 31, February 1, February 3,
1998 1997 1996
------------ ------------ ------------
Numerator:
Net income ..................................... $ 130,949 $ 106,420 $ 73,705
Interest expense on 5% Debentures, net of
tax(1) ........................................ 1,580
------------ ------------ ------------
Numerator for earnings per common share --
income available to common stockholders ....... $ 130,949 $ 106,420 $ 75,285
Effect of dilutive securities:
4 1/2% convertible debentures .................. 9,372
------------ ------------ ------------
Numerator for earnings per common share -
assuming dilution -- income available to
common stockholders after assumed conversion .. $ 140,321 $ 106,420 $ 75,285
Denominator:
Weighted-average shares ........................ 246,074,347 240,423,966 234,563,922
Performance accelerated restricted stock ....... 1,553
------------ ------------ ------------
Denominator for earnings per common
share -- weighted-average shares .............. 246,075,900 240,423,966 234,563,922
Effect of dilutive securities:
Incremental shares ............................. 13,853,001 15,210,213 13,967,838
Windfall shares ................................ (5,339,824) (5,696,787) (5,414,767)
Performance accelerated restricted stock ....... 139,730
4 1/2% convertible debentures .................. 20,454,545
------------ ------------ ------------
Dilutive potential common shares ............... 29,107,452 9,513,426 8,553,071
Denominator for earnings per common
share - assuming dilution -- adjusted
weighted-average shares and assumed
conversions ................................... 275,183,352 249,937,392 243,116,993
Earnings per common share ........................ $ 0.53 $ 0.44 $ 0.32
============ ============ ============
Earnings per common share - assuming dilution .... $ 0.51 $ 0.43 $ 0.31
============ ============ ============
48
(1) The 5% Debentures were substantially converted into common stock on June
30, 1995 (see Note D). For the computation of earnings per common share,
this conversion of 19,406,250 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.
NOTE L SUBSEQUENT EVENTS FOOTNOTE
On April 7, 1998, the Company entered into an Agreement and Plan of Merger with
Quill Corporation ("Quill"). The Merger is structured as a tax-free exchange of
shares in which the stockholders of Quill will receive approximately 30 million
shares of the Company's common stock at a combination of fixed and variable
prices which would equate to a purchase price of approximately $685 million. The
Merger would be accounted for as a pooling of interests. Quill is a privately
held company which sells office supplies to businesses in the United States via
a mail order catalog, the internet and outbound telemarketing. Quill recorded
$550 million in sales for the year ended December 31, 1997.
49
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
4.3 (5) --Indenture dated as of August 12, 1997 for the $200,000,000 7.125%
Senior Notes due August 15, 2007, between the Company and The
Chase Manhattan Bank
*10.1 (6) --1990 Director Stock Option Plan, as amended
*10.2 (7) --Amended and Restated 1992 Equity Incentive Plan
*10.3 --1997 United Kingdom Company Share Option Scheme
*10.4 --Executive Officer Incentive Plan
10.5 (8) --Revolving Credit Agreement dated as of November 13, 1997, between
the Company and BankBoston, N.A. and the banks named therein
*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 (10) --Form of Severance Benefits Agreement signed by executive officers
of the Company
12.1 --Computation of Ratio of Earnings to Fixed Charges
21.1 --Subsidiaries of the Company
23.1 --Consent of Ernst & Young LLP
27.1 --Financial Data Schedule for Fiscal Year 1997
27.2 --Financial Data Schedule for 1st Quarter 1997 Restated
27.3 --Financial Data Schedule for 2nd Quarter 1997 Restated
27.4 --Financial Data Schedule for 3rd Quarter 1997 Restated
27.5 --Financial Data Schedule for Fiscal Year 1996 Restated
27.6 --Financial Data Schedule for 1st Quarter 1996 Restated
27.7 --Financial Data Schedule for 2nd Quarter 1996 Restated
27.8 --Financial Data Schedule for 3rd Quarter 1996 Restated
27.9 --Financial Data Schedule for Fiscal Year 1995 Restated
27.10 --Financial Data Schedule for 1st Quarter 1995 Restated
27.11 --Financial Data Schedule for 2nd Quarter 1995 Restated
27.12 --Financial Data Schedule for 3rd Quarter 1995 Restated
- -----------
* 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 Quarterly Report on Form 10-Q for the
quarter ended May 3, 1997.
(3) Incorporated by reference to the Quarterly Report on Form 10-Q for the
quarter ended October 28, 1995.
(4) Incorporated by reference from Current Report on Form 8-K dated February 3,
1994.
(5) Incorporated by reference from the Registration Statement on Form S-3 (File
No. 333-31249).
(6) Incorporated by reference from the Annual Report on Form 10-K for the
fiscal year ended January 30, 1993.
E-1
50
(7) Incorporated by reference from the Registration Statement on Form S-8 (File
No. 333-36715).
(8) Incorporated by reference to the Quarterly Report on Form 10-Q for the
quarter ended November 1, 1997.
(9) Incorporated by reference to the Quarterly Report on Form 10-Q for the
quarter ended April 29, 1995.
(10) Incorporated by reference from the Annual Report on Form 10-K for the
fiscal year ended February 3, 1996.
E-2