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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 30, 1999 0-17586
STAPLES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2896127
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(State of Incorporation) (I.R.S. Employer
Identification No.)
ONE RESEARCH DRIVE, WESTBOROUGH, MASSACHUSETTS 01581
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(Address of principal executive offices and zip code)
508-370-8500
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.0006 per share
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[ ]
2
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based on the last sale price of the Common Stock on February
28, 1999 as reported by Nasdaq, was approximately $13.4 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 463,881,546 shares of Common Stock outstanding as of
February 28, 1999.
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 1999 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 Staples 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 Staples' 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
ITEM 1. BUSINESS
Staples, Inc. and subsidiaries ("Staples" or "the Company") pioneered
the office products superstore concept and is a leading office products
distributor with a total of 913 retail stores located in the United States,
Canada, the United Kingdom and Germany as of January 30, 1999, in addition to a
catalog business, electronic commerce and contract stationer operations.
Staples' executive offices are located at 500 Staples Drive, Framingham,
Massachusetts 01702 (telephone: (508) 253-5000). Staples was organized in
November 1985 and is incorporated in the State of Delaware.
BUSINESS STRATEGY
Staples 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,
Staples 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. Staples' 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 Staples 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.
Staples 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 Staples' delivery operations focus on
customers who desire delivery of their office products and other specialized
services.
NORTH AMERICAN SUPERSTORES
Staples' North American retail operations, consisting of 840 stores as
of January 30, 1999, are the core business of the Company, generating a
substantial majority of its sales and profits. Staples' 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. Staples' North American superstores are located in 37
states, the District of Columbia and ten Canadian provinces in both major
metropolitan markets and smaller outlying markets. Staples' current superstore
prototype is approximately 24,000 square feet. Staples' 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
Staples' 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.
Express Stores. In select urban markets, Staples operates a smaller
store format, "Staples Express", which offers a more focused assortment of
products. These smaller stores give Staples 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.
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DELIVERY OPERATIONS
Staples' delivery operations are comprised of three principal
operations: Staples' catalog businesses, operating under the names "Staples
Direct" and "Quill Corporation", Staples' contract stationer businesses,
operating under the names "Staples National Advantage" and "Staples Business
Advantage," and Staples' internet electronic commerce business operating under
the name "Staples.com".
Staples Direct. Operating since 1990, Staples Direct, Staples' 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 Staples' delivery
distribution centers and are distributed through dedicated delivery hubs. In
some markets, Staples 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 also has Staples
Direct catalog operations in Canada, the United Kingdom and Germany.
Quill Corporation. Acquired in May 1998, Quill is a direct mail catalog
business with a targeted approach to servicing the business product needs of
more than 700,000 medium sized businesses in the United States. Quill markets
primarily through the distribution of catalogs designed to meet the needs of
specific customer segments. The business offers outstanding customer service, a
superior private label product, and special services to attract and retain its
customers.
Staples National Advantage and Staples Business Advantage. Staples'
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. Staples'
contract stationer business is divided into two segments. Staples National
Advantage 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. Staples 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.
Staples.com. Launched in November 1998, Staples' internet operation
markets over 6,000 products through its web-based superstore and offers free
delivery for orders over $50. Staples leverages existing resources wherever
possible such as offline advertising, call centers, distribution centers and
delivery hubs. On line marketing for Staples.com is currently done primarily
through major relationships with leading internet properties. Staples.com has
many innovative features and functionality which will allow Staples to better
service existing customers as well as attract a large number of new customers.
INTERNATIONAL
Staples believes that foreign markets will provide additional growth
opportunities. In 1991, Staples established its first international joint
venture, "Business Depot", in Canada. Business Depot became a wholly owned
subsidiary of Staples in 1994 and operates 131 stores as part of Staples' North
American superstores and delivery operations. Staples was also 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 "Staples Der
Buro Megamarkt" ("Staples Germany"). In May 1997, Staples increased its
ownership interest in the Staples UK operations to 100% and in Staples Germany
to approximately 92%. In December 1998, Staples increased its ownership interest
in Staples Germany to 100%. As of January 30, 1999, Staples UK
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operated 48 stores and Staples Germany operated 25 stores with delivery
operations in both countries. Staples plans to expand the operations of Quill
into Europe during the first quarter of 1999.
STRATEGIC INITIATIVES
Staples 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. Staples is devoting
significant resources and efforts to profitably increase its retail sales per
store in both North America and Europe. Initiatives in this regard include:
expanding product selection across all key product categories; enhancing
business services; improving in-stock positions in Europe; improving customer
service; increasing staffing levels and personnel training; expanding store
size; and improving shopability and signage. Another key element of this
strategy is Staples' ongoing store remodeling program and new store opening
programs. In addition, during 1998 Staples committed to a plan to close and
relocate stores which cannot be expanded and updated in order to improve
customers shopability and improve market share.
Continue Rapid Growth in Staples Delivery Operations. Staples 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; providing open account invoicing to large accounts; and increasing
its multi-channel distribution capacity. The Company believes that Staples
delivery operations are also benefiting from the increased marketing and
advertising undertaken in connection with its store sales growth strategy.
Staples also plans to focus on the electronic commerce market through
Staples.com and grow that business during fiscal 1999.
Continue Store Growth and Strengthen Infrastructure. Staples is
continuing its store growth program. In fiscal year 1998, Staples opened 158 new
stores in North America and 16 new stores in Europe. In fiscal 1999, Staples
intends to open approximately 150 stores in North America and 20 stores in
Europe. Staples' 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. Staples 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, Staples is taking steps
to strengthen its infrastructure, including its distribution capabilities.
Improve Productivity. Staples 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. Staples believes that its future expansion will
enable it to leverage certain fixed costs in store operations, marketing,
distribution and administration. Staples also seeks to enhance productivity
through improvements in operating practices.
Improve Customer Service. Staples has increased staffing levels in
stores and delivery operations and made other investments to provide better
customer service. Staples continues to drive a corporate-wide CARE program
designed to empower associates to exceed customer expectations for service by
providing "great service, every day, every way". Staples also focuses on its
"mystery shopper program" in which outside representatives evaluate customer
service multiple times per year and has tied a portion of incentive compensation
to achievement of customer satisfaction goals.
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PRODUCTS AND PURCHASING
PRODUCTS
Staples 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, Staples sells most products in
multi-unit packages. The lot sizes are designed to be large enough to be cost
effective without being burdensome to Staples' small business customers.
Staples 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. Staples continuously compares its pricing
against other discount office supply stores, local stationers, nearby warehouse
clubs, mass merchants, computer superstores, consumer electronics retailers,
electronic commerce distributors and mail order stationers to ensure that the
strategy of maintaining everyday low prices is achieved.
Staples offers its customers an array of services. Customers may place
orders by telephone for delivery or for customer pickup or via an internet
service. Customers may pay with MasterCard, Visa, American Express, Discover, or
Staples private label credit card, in addition to check or cash. Staples also
offers customers an option to lease business machines and computers through a
third party lessor with varying terms. Staples offers high-speed and
self-service copying, overnight mailing, faxing and other print services for its
customers. Staples' return policy entitles customers to return all goods, except
computers, business machines, printers and software, in original packaging
within 30 days after the date of sale for a full refund; computers, business
machines and printers must be returned in original packaging 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.
Staples' delivery operations carries many of the same products that are
sold in retail stores. The contract stationer catalog typically offers products
with unique pricing, billing and other services available to each customer.
The following table shows sales by each major product line as a
percentage of total sales for the periods indicated:
Fiscal Year Ended
January 30, 1999 January 31, 1998 February 1, 1997
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Office supplies, services and other supplies 45.9% 48.6% 50.9%
Equipment and business machines 23.7 22.0 20.6
Computers and related products 22.2 20.9 19.4
Office furniture 8.2 8.5 9.1
PURCHASING AND VENDOR SELECTION
Staples selects its vendors based upon quality, price, delivery
reliability and, where appropriate, customer brand recognition. Staples 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. Staples can purchase truckload quantities of attractively priced,
high-quality products from multiple vendors and thereby achieve substantial cost
savings in each product category.
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Staples 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, Staples is able to procure private
label products at lower cost than brand name products.
Currently, Staples purchases products from several hundred active
vendors worldwide. The Company believes that competitive sources of supply are
available for substantially all products it carries. Staples' buying and
merchandising staff centrally performs all product purchasing and merchandise
planning for stores and mail order with the assistance of integrated computer
systems.
SUPPLY CHAIN INITIATIVES
Staples 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, catalog and electronic commerce operations.
Staples' delivery operations also use distribution centers that fulfill the
unique needs of those customers. Most products are shipped from Staples'
suppliers to the distribution centers for reshipment to Staples stores and
delivery hubs, or are directly shipped to customers. The distribution centers
employ state of the art warehouse management systems and radio frequency
technology, 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 Staples' automated replenishment system generates an order
for the product based on daily point of sale information.
Staples 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. Staples believes that the reduction in the number of purchase
orders and invoices processed results in significant administrative cost
savings. Staples' 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 Staples operates smaller gross square
footage stores than would otherwise be required. Smaller store size reduces
Staples' 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.
Staples continues to enhance its distribution network to support its
operations. Staples 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, Staples expects to open a 520,000 sq. ft.
facility in Rialto, California and a 550,000 sq. ft. facility in Terre Haute,
Indiana in 1999. These four new facilities are expected to replace a network of
approximately 11 distribution centers formerly used to support U.S. retail
operations.
In late 1998, Staples retrofitted the former retail Putnam/Plainfield,
Connecticut distribution center (380,000 sq. ft.) to support all three channels
of its contract and catalog division. In 1999, Staples will open distribution
centers in two new markets, Stockton, California and Charlotte, North Carolina,
to further support the contract and catalog division.
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MARKETING STRATEGY
Staples 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, internet and print advertising as well
as catalogs and a sophisticated direct marketing system. In addition, Staples
markets to larger companies through a combination of direct mail catalogs,
customized catalogs and a field sales force. Staples 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 Staples to optimize
the effectiveness and efficiency of its marketing expenditures.
In 1998, Staples 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, Staples expanded its print advertising
campaign in order to support key product categories. In 1997, Staples also
entered into a naming rights agreement with L.A. Arena Company, LLC, which is
designing a new state of the art sports and entertainment complex in downtown
Los Angeles. This agreement provides Staples with marketing, promotional and
signage rights, community-based programs and various amenities in the Staples
Center for 20 years and is expected to be opened during 1999.
STORE OPERATIONS AND TRAINING
STORE OPERATIONS
Staples 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. Staples' stores typically are open
seven days per week.
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 Staples' 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 as needed.
Stores are brightly lit and products are attractively displayed.
Employees are available to consult on purchases, particularly in Staples'
furniture, business machines and computer sections, where customers often need
assistance in decision-making. Staples is continuing to roll out the new store
layout first designed in 1997 to all new and remodeled stores. This positions
Staples to offer our customers more technology solutions such as Build to Order
computers as well as computer upgrades and services through the Staples Tech
Center. Also included are enhanced product assortments in furniture, paper and
technical office supplies. In the services category, the Concept 97 design
promotes the Staples Copy Center with enhanced services and, where market
conditions warrant, expanded copy centers. Staples' current superstore prototype
is approximately 24,000 square feet, which allows for enhanced business
services, product depth and capital goods sales. Where possible, Staples has
expanded existing stores to fit the new
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format. Staples committed to a plan during 1998 to close and relocate stores
that are not deemed appropriate for expansion or upgrade to the Concept 97
design.
Staples 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, Staples 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
Staples 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. Staples 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. Staples' store managers are trained in the Company's
management development program.
Staples 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, that are prepared by
Staples and others. These associates are trained in a number of areas,
including, where appropriate, sales techniques, management techniques and
product knowledge.
Staples 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 30, 1999, Staples employed 21,580 full-time and 21,428
part-time employees.
EXPANSION STRATEGY
Staples' 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 and entering small markets and focusing
growth in those markets where products can be cost effectively replenished
through its distribution centers. Staples believes that a network of stores in a
metropolitan market enhances profitability by leveraging marketing costs,
distribution expense and supervision costs.
Staples currently plans to open approximately 150 stores in North
America and approximately 20 stores in the UK and Germany in fiscal 1999.
Staples' 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, Staples 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, Staples 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. While most of its
stores have been located in conventional strip shopping centers, Staples has
also successfully converted non-retail properties to Staples stores. Although
Staples often leases second-use properties, it has also entered
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into ground leases where it plans to build a store or arranged to have landlords
construct free-standing buildings to its specifications. In addition, Staples
has on numerous occasions acquired lease rights from prior tenants. Staples
believes that this flexibility in selecting sites proves helpful as it seeks to
locate additional stores in the challenging real estate markets in which it
operates.
Staples plans to expand its internet operation, Staples.com, during
fiscal 1999 by dedicating additional investments in personnel, technology and
marketing. Staples recognizes the long-term potential of electronic commerce and
plans to aggressively address this market.
COMPETITION
Staples competes with a variety of retailers, dealers and distributors
in the highly competitive office products market. Staples believes its customers
choose among suppliers on the basis of price, breadth of selection, service and
convenience.
Staples' target customers have historically been serviced by
traditional office products dealers. Staples believes it has competed favorably
against these dealers in the past because it generally offers lower prices. In
addition, Staples 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.
Staples also competes in most of its geographic markets with other
high-volume office supply chains that are similar in concept to Staples 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, Staples' retail stores, as well as its delivery
operations business, compete with numerous mail order firms, contract stationer
businesses, electronic commerce distributors and direct manufacturers. Such
competitors have increased their presence in Staples' markets in recent years.
Some of Staples' current and potential competitors in the office products
industry are larger than the Staples and have substantially greater financial
resources. No assurance can be given that such increased competition will not
have an adverse effect on Staples' 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 30, 1999 Staples operated 913 superstores in 37 states,
the District of Columbia, 10 provinces in Canada, 9 regions in the United
Kingdom and 6 states in Germany. Staples also operates 68 distribution centers.
The following table sets forth the locations of Staples' facilities as of
January 30, 1999.
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STATE/PROVINCE/REGION STATE/PROVINCE/REGION
- - --------------------- NUMBER --------------------- NUMBER
UNITED STATES OF STORES UNITED KINGDOM OF STORES
- - ------------- --------- -------------- ---------
Arizona 20 South West 4
California 124 South East 7
Connecticut 29 London 5
Delaware 4 Wales 3
Florida 22 East Anglia 6
Georgia 1 Midlands 8
Idaho 7 North West 5
Iowa 11 North East 7
Illinois 17 North 3
Indiana 13
Kansas 4 GERMANY
Kentucky 6 -------
Maine 7 Hamburg 8
Maryland 27 Schleswig-Holstein 1
Massachusetts 36 Niedersachsen 6
Michigan 29 Bremen 2
Missouri 1 Nordrhein-Westpfalen 7
Montana 5 Hessen 1
Nebraska 1
New Hampshire 12 STATE/PROVINCE/REGION NUMBER OF
New Jersey 57 --------------------- DISTRIBUTION CENTERS
New Mexico 1 UNITED STATES --------------------
New York 75 -------------
North Carolina 13 Alabama 1
Ohio 43 California 7
Oklahoma 4 Colorado 1
Oregon 12 Connecticut 3
Pennsylvania 55 Florida 3
Rhode Island 2 Georgia 17
South Carolina 11 Illinois 2
Tennessee 6 Maryland 2
Utah 8 Massachusetts 4
Vermont 4 Michigan 1
Virginia 25 New Jersey 3
Washington 5 New York 6
Washington DC 2 North Carolina 1
West Virginia 5 Ohio 4
Wisconsin 5 Oregon 1
Pennsylvania 4
CANADA Tennessee 2
- - ------ Texas 2
Alberta 17 Washington 1
British Columbia 16
Manitoba 4 CANADA
New Brunswick 4 ------
Newfoundland 2 Ontario 1
Nova Scotia 4
Ontario 54 UNITED KINGDOM
Quebec 27 --------------
Saskatchewan 2 Pensnett 1
Prince Edward Island 1
GERMANY
------
Schleswig-Holstein 1
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Most of the existing stores are leased by Staples with initial lease
terms expiring between 1999 and 2024. In most instances, the Company has renewal
options at increased rents. Leases for 176 of the existing stores provide for
contingent rent based upon sales.
ITEM 3. LEGAL PROCEEDINGS
Staples is not party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Staples held a Special Meeting of Stockholders (the "Special Meeting")
on January 21, 1999. At the Special Meeting, the following actions were taken:
1. The stockholders approved an amendment to the Company's Restated
Certificate of Incorporation increasing the number of authorized
shares of Common Stock from 500,000,000 to 1,000,000,000 shares
by a vote of 255,147,547 shares of Common Stock "for", 2,724,931
shares of Common Stock "against" and 837,779 shares of Common
Stock not voting.
2. The stockholders approved the amendment and restatement of the
Company's 1990 Director Stock Option Plan by a vote of 204,362,522
shares of Common Stock "for", 53,121,609 shares of Common Stock
"against" and 1,226,126 shares of Common Stock not voting.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Staples' Common Stock is traded on the Nasdaq National Market under
the symbol "SPLS".
At January 30, 1999, the number of holders of record of Staples'
Common Stock was 9,165.
The following table sets forth for the periods indicated the high and
low sale prices per share of the Common Stock on the Nasdaq National Market, as
reported by Nasdaq, retroactively adjusted for the three-for-two stock splits in
January, 1999 and 1998.
FISCAL YEAR ENDED JANUARY 30, 1999 HIGH LOW
- - ---------------------------------- -------- ------
First Quarter $17.13 $12.25
Second Quarter 22.83 15.67
Third Quarter 23.42 17.00
Fourth Quarter 32.50 21.13
-12-
13
FISCAL YEAR ENDED JANUARY 31, 1998
----------------------------------
First Quarter $11.72 $7.83
Second Quarter 11.67 8.55
Third Quarter 13.00 10.22
Fourth Quarter 13.39 10.59
Staples has never paid a cash dividend on its Common Stock. Staples
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, Staples' 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.
- 13 -
14
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 1999 Annual Meeting of Stockholders (the "Proxy
Statement") which Staples 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.
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 30, 1999 and January 31, 1998.
Consolidated Statements of Income - Fiscal years ended January 30,
1999, January 31, 1998, and February 1, 1997.
Consolidated Statements of Stockholders' Equity - Fiscal years ended
January 30, 1999, January 31, 1998, and February 1, 1997.
Consolidated Statements of Cash Flows - Fiscal years ended January
30, 1999, January 31, 1998, and February 1, 1997.
Notes to Consolidated Financial Statements.
- 14 -
15
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 1, 1999.
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
Thomas G. Stemberg (Principal Executive Officer)
and Director
/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/ George J. Mitchell Director
- - -------------------------------
George J. Mitchell
/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
- 16 -
17
SIGNATURES - CONT'D
SIGNATURE CAPACITY
--------- --------
/s/ W. Mitt Romney Director
- - -------------------------------
W. Mitt Romney
/s/ Martin Trust Director
- - -------------------------------
Martin Trust
/s/ Paul F. Walsh Director
- - -------------------------------
Paul F. Walsh
/s/ Margaret C. Whitman Director
- - -------------------------------
Margaret C. Whitman
/s/ John J. Mahoney Executive Vice President,
- - ------------------------------- Chief Administrative Officer and
John J. Mahoney Chief Financial Officer
(Principal Financial Officer)
/s/ Robert K. Mayerson Senior Vice President and
- - ------------------------------- Corporate Controller
Robert K. Mayerson (Principal Accounting Officer)
- 17 -
18
APPENDIX A
FINANCIAL HIGHLIGHTS (1)
(Dollar Amounts in thousands, Except Per Share Amounts)
FISCAL YEAR ENDED
--------------------------------------------------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1999 (2) 1998 (3) 1997 1996 1995 (4)
(52 WEEKS) (52 WEEKS) (52 WEEKS) (53 WEEKS) (52 WEEKS)
----------- ----------- ----------- ----------- -----------
STATEMENT OF INCOME DATA:
Sales $7,123,189 $5,732,145 $4,493,589 $3,565,235 $2,418,793
Gross profit 1,757,387 1,378,984 1,083,326 826,639 567,914
Net income 185,370 167,914 144,742 108,428 72,071
Pro forma net income (5) 183,556 153,128 129,413 94,539 59,219
Historical basic earnings per share (6) 0.43 0.41 0.36 0.28 0.21
Historical diluted earnings per share (6) 0.41 0.39 0.35 0.27 0.20
Pro forma basic earnings per share (5)(6) 0.43 0.38 0.32 0.24 0.17
Pro forma diluted earnings per share (5)(6) 0.41 0.36 0.31 0.23 0.16
Dividends -- -- -- -- --
SELECTED OPERATING DATA (AT PERIOD END):
Stores open 913 742 557 443 350
BALANCE SHEET DATA:
Working capital $ 798,768 $ 803,660 $ 623,835 $ 580,244 $ 355,639
Total assets 3,179,266 2,638,862 1,955,636 1,552,199 1,141,496
Total long-term debt, less current portion 205,015 518,959 402,985 351,508 257,122
Stockholders' equity 1,656,886 1,094,485 875,823 712,141 472,215
(1) On May 21, 1998, February 23, 1994 and March 7, 1994, the Company acquired
Quill Corporation ("Quill"), 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 Quill, 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 1999,
January 1998, March 1996, July 1995, and October 1994. See Note F of Notes
to Consolidated Financial Statements.
(2) Results of operations for this period include a $41,000,000 charge relating
to costs incurred in connection with the merger with Quill and a $49,706,000
charge relating to store closure costs.
(3) 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.
(4) 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.
(5) Pro forma net income includes a provision for income taxes on the previously
untaxed earnings of Quill, which had been an S Corporation prior to its
acquisition by the Company.
(6) Earnings per common share have been restated to reflect 3 for 2 stock splits
effective January 1999, January 1998, March 1996, July 1995 and October
1994.
The Company's fiscal year is the 52 or 53 weeks ending the Saturday closest to
January 31 of the following calendar year.
A - 1
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 30, 1999, JANUARY 31, 1998, AND
FEBRUARY 1, 1997
GENERAL. During the fiscal year ended January 30, 1999, Staples acquired,
in a pooling of interests transaction, Quill Corporation and certain related
entities (collectively referred to as "Quill") with 1997 net sales of
approximately $551 million. The financial information set forth below includes
adjustments to give effect to the acquisition of Quill for all periods
presented. Prior to its acquisition by Staples, Quill elected to be treated as
an S Corporation under the Internal Revenue Code, and accordingly, its earnings
were not subject to taxation at the corporate level. Pro forma adjustments have
been made to reflect a provision for income taxes on such previously untaxed
earnings for each period presented at an assumed rate of 40%. The statements of
income combine Staples' historical operating results for the fiscal years ended
January 31, 1998 and February 1, 1997 with corresponding Quill operating results
for the years ended December 31, 1997 and 1996.
SALES. Sales increased 24% to $7,123,189,000 in the fiscal year ended
January 30, 1999 from $5,732,145,000 in the fiscal year ended January 31, 1998.
Sales increased 28% in the fiscal year ended January 31, 1998 from
$4,493,589,000 in the fiscal year ended February 1, 1997. 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 delivery operations. In
addition, sales for the fiscal years ended January 30, 1999 and January 31, 1998
(beginning in May 1997) include the consolidation of Staples UK and Staples
(Deutschland) GmbH ("Staples Germany", formerly MAXI-Papier-Markt-GmbH).
Comparable store and delivery sales for the fiscal year ended January 30, 1999
increased 11% over the fiscal year ended January 31, 1998. Comparable store and
delivery hub sales for the year ended January 31, 1998 increased 10% over the
year ended February 1, 1997. As of January 30, 1999, January 31, 1998, and
February 1, 1997, Staples had 913, 742, and 557 open stores, respectively. The
January 30, 1999 total includes 174 stores opened and 3 stores closed during the
twelve months ended January 30, 1999.
GROSS PROFIT. Gross profit as a percentage of sales was 24.7%, 24.1%, and
24.1% for the fiscal years ended January 30, 1999, January 31, 1998, and
February 1, 1997, respectively. The gross profit rate was increased by
continually improving margins in the retail and delivery business segments due
to lower product costs from vendors and increased buying as well as the
leveraging of fixed distribution center and delivery costs over a larger sales
base. This was offset by decreases in the margin rates due to price reductions
as well as an increase in the sales of computer hardware (CPUs and laptops),
which generate a lower margin rate than other categories, to 7.6% of total sales
for the year ended January 30, 1999 from 7.4% in the year ended January 31, 1998
and 6.0% in the year ended February 1, 1997.
OPERATING AND SELLING EXPENSES. Operating and selling expenses, which
consist of payroll, advertising and other operating expenses, were 14.4%, 14.5%,
and 14.5% of sales for the fiscal years ended January 30, 1999, January 31,
1998, and February 1, 1997, respectively. The decrease as a percentage of sales
for the year ended January 30, 1999 was primarily due to decreased advertising
as a
B - 1
20
percentage of sales and increased leveraging of fixed store payroll expenses and
store operating costs as store sales have increased. These factors were
partially offset by increases in store labor and costs incurred for Staples'
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 30, 1999 and
the year ended January 31, 1998 (beginning in May 1997) include the results of
Staples UK and Staples Germany, which have higher costs as a percentage of
sales.
PRE-OPENING EXPENSES. Pre-opening expenses relating to new store
openings, consisting primarily of salaries, supplies, marketing and occupancy
costs, are expensed by Staples as incurred and therefore fluctuate from period
to period depending on the timing and number of new store openings. Pre-opening
expenses averaged $80,000, $73,000, and $72,000 per store for the stores opened
in the years ended January 30, 1999, January 31, 1998, and February 1, 1997,
respectively. The increase during the fiscal year ended January 30, 1999 was due
primarily to increased openings outside of the United States which generally
involve higher pre-opening expenses per store.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
as a percentage of sales were 4.2%, 3.9%, and 3.9% in the years ended January
30, 1999, January 31, 1998, and February 1, 1997, respectively. The increase as
a percentage of sales for the year ended January 30, 1999 as compared to the
years ended January 31, 1998 and February 1, 1997 was primarily due to costs
incurred for Year 2000 compliance projects. In addition, Staples has made other
investments in its information systems' ("IS") staffing and infrastructure,
which Staples believes will reduce costs as a percentage of sales in future
years. In addition, general and administrative expenses for the years ended
January 30, 1999 and January 31, 1998 include the results of Staples UK and
Staples Germany, which have higher costs as a percentage of sales. The overall
increase in general and administrative costs were partially offset by Staples'
ability to increase sales without proportionately increasing overhead expenses
in its core retail and direct business.
MERGER-RELATED AND INTEGRATION COSTS. In connection with the acquisition
of Quill, Staples recorded a charge to operating expense of $41,000,000 during
the year ended January 30, 1999. These costs consist of direct merger-related
and integration costs from the transaction. The merger transaction costs of
approximately $10,500,000 consist primarily of fees for investment bankers,
attorneys, accountants and other related charges. The integration costs
primarily include employee costs of approximately $7,000,000, contract and lease
termination costs of approximately $14,100,000, the write-down of leasehold
improvements of approximately $3,500,000 and other merger-related costs of
approximately $5,900,000. Staples paid approximately $14,000,000 in fiscal year
1998, which consists primarily of transaction and employee related costs. During
the year ended January 31, 1998, Staples charged to expense non-recurring costs
in connection with the proposed merger with Office Depot, Inc. of $29,665,000.
STORE CLOSURE CHARGE. In December 1998, Staples committed to a plan to
close and relocate stores which cannot be expanded and upgraded to the Company's
"Concept 97" model. In connection with this plan, Staples recorded a charge to
operating expense of $49,706,000. This charge includes $29,620,000 for future
rental payments under operating lease agreements that will be paid after the
store is closed and will not be subsidized by subtenant income, $4,966,000 in
fees, settlement costs and other expenses related to store closure and
$15,120,000 in asset impairment charges. Lease agreements for the relocation
sites will be executed during fiscal year 1999 and the stores will be closed and
relocated during fiscal years 1999 and 2000. Staples made no payments in fiscal
year 1998 related to the store closure charge.
B - 2
21
INTEREST AND OTHER EXPENSE, NET. Net interest and other expense totaled
$17,370,000, $21,955,000, and $22,962,000 in the fiscal years ended January 30,
1999, January 31, 1998, and February 1, 1997, respectively. The interest expense
relates primarily to existing borrowings which were used to fund the increase in
store inventories related to new store openings 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 Staples Germany as
well as the purchase of them during the fiscal year ended January 31, 1998. The
decrease in interest expense during the year ended January 30, 1999 is due
primarily to the conversion of the Company's $300,000,000 of 4 1/2% Debentures
into common stock in December 1998.
EQUITY IN LOSS OF AFFILIATES. Staples' Equity in Loss of Affiliates was
$5,953,000 and $11,073,000 respectively, in the years ended January 31, 1998 and
February 1, 1997. Staples recorded no equity in loss of affiliates for the year
ended January 30, 1999, due to the acquisition of Staples UK and Staples Germany
on May 6, 1997 and May 7, 1997, respectively. As a result of the acquisitions,
Staples' ownership interest of Staples UK increased to 100% and its ownership of
Staples Germany increased to approximately 92% which was increased to 100% in
December 1998. The transactions were accounted for in accordance with the
purchase method of accounting and accordingly, the consolidated results of these
entities are reflected in Staples' financial statements since the respective
dates of acquisition. Prior to the acquisitions, Staples UK and Staples Germany
were accounted for under the equity method which resulted in Staples' share of
losses from operations being included in Equity in Loss of Affiliates. As of
January 30, 1999, Staples UK and Staples Germany operated 48 and 25 stores,
respectively.
INCOME TAXES. The provision for income taxes as a percentage of pre-tax
income was 39.5%, 32.8% and 31.5% for the years ended January 30, 1999, January
31, 1998 and February 1, 1997. On a pro forma basis, to reflect a provision for
income taxes on previously untaxed earnings of Quill, Staples' effective tax
rate would have been 40.1%, 38.7% and 38.8% respectively for the same periods.
The increase in the pro forma tax rate in fiscal year 1998 was primarily due to
non-deductible merger-related costs.
LIQUIDITY AND CAPITAL RESOURCES
................................................................................
Staples has traditionally used a combination of cash generated from
operations and debt or equity offerings to fund its expansion and acquisition
activities. During the years ended January 30, 1999, January 31, 1998 and
February 1, 1997, Staples also utilized its revolving credit facility to support
its various growth initiatives.
Staples opened 174 stores, 130 stores, and 115 stores in the years
January 30, 1999, January 31, 1998 and February 1, 1997, respectively, and
closed three stores in the fiscal year ended January 30, 1999 and one store in
each of the fiscal years ended January 31, 1998 and February 1, 1997. In
addition, in the fiscal year ended January 31, 1998, 56 stores were added as a
result of the acquisition of Staples UK and Staples Germany. 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 Staples carry its own receivables from these sales. Staples also
utilized capital equipment financings to fund current working capital
requirements. During the year ended January 30, 1999, Staples paid mortgages in
full on five distribution centers acquired from Quill of approximately $14
million.
B - 3
22
As of January 30, 1999, cash, cash equivalents, and short-term
investments totaled $375,421,000, a decrease of $11,569,000 from the January 31,
1998 balance of $386,990,000. The principal sources of funds were primarily cash
from operations, including an increase in accounts payable and accrued expenses
of $363,988,000, which financed the increase in merchandise inventory of
$211,052,000 related to new store openings, expanded product assortment and
improvements in in-stock levels. These sources were partially offset by the
acquisition of property and equipment of $322,308,000 and cash used in the
acquisition of Quill of $48,102,000.
Staples expects to open approximately 170 stores during fiscal 1999.
Management estimates that the Company's cash requirements, including pre-opening
expenses, leasehold improvements and fixtures, will be approximately $1,400,000
for each new store (excluding the cost of any acquisitions of lease rights).
Accordingly, Staples expects to use approximately $238,000,000 for store
openings during this period. Staples plans to begin a stock repurchase program
during fiscal 1999 intended to provide shares for employee stock programs.
Staples expects to repurchase approximately six million shares annually. In
addition, Staples 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.
Staples expects to meet these cash requirements through a combination of
available cash, operating cash flow and borrowings from its existing revolving
line of credit. In a subsequent event on February 26, 1999, Staples completed
the acquisition of Claricom Holdings, Inc. and certain related entities for a
purchase price of approximately $140,000,000.
Staples 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 Staples' revolving credit agreement and for
general working capital purposes, including the financing of new store openings,
distribution facilities and corporate offices.
Staples also maintains a 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 and sales of assets. As of January 30, 1999, no borrowings were
outstanding under the revolving credit agreement. Staples also has available
$35,000,000 in uncommitted, short-term bank credit lines, of which no borrowings
were outstanding as of January 30, 1999. Staples UK has a $50,000,000 line of
credit which had an outstanding balance of $29,849,000 at January 30, 1999 and
Business Depot has a $16,545,000 line of credit with no outstanding balance at
January 30, 1999. Total cash, short-term investments and available revolving
credit amounts totaled $826,966,000 as of January 30, 1999.
Staples 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 recurring operating cash needs for at least the
next twelve to eighteen months. Staples continually evaluates financing
possibilities, and it may seek to raise additional funds through any one or a
combination of public or private debt or equity-related offerings, dependent
upon market conditions, or through an additional commercial bank debt
arrangement.
B - 4
23
INFLATION AND SEASONALITY
While inflation or deflation has not had, and Staples does not expect
it to have, a material impact upon operating results, there can be no assurance
that Staples' business will not be affected by inflation or deflation in the
future. Staples believes that its business is somewhat seasonal, with sales and
profitability slightly lower during the first and second quarters of its fiscal
year.
B - 5
24
FUTURE OPERATING RESULTS
This annual report on Form 10-K contains forward-looking statements
that involve risks and uncertainties. Any statement (including statements to the
effect that Staples "believes", "expects", "anticipates", "plans" and similar
expressions) that are not statements relating to historical matters should be
considered forward-looking statements. Our actual results may differ materially
from the results discussed in the forward-looking statements as a result of
numerous important factors, including those discussed below.
STAPLES OPERATES IN A HIGHLY COMPETITIVE MARKET. Staples competes in a
highly competitive marketplace with a variety of retailers, dealers and
distributors. In most of our geographic markets, we compete with other
high-volume office supply chains, such as Office Depot, OfficeMax and Office
World, that have store formats, pricing strategies and product selections that
are similar to ours. Staples also competes with mass merchants (such as
Wal-Mart), warehouse clubs, computer and electronic superstores, and other
discount retailers. In addition, our retail stores and delivery and contract
businesses compete with numerous mail order firms, contract stationer businesses
and direct manufacturers. Many of our competitors, including Office Depot,
OfficeMax and Wal-Mart, have in recent years significantly increased the number
of stores they operate within our markets. Some of our current and potential
competitors are larger than we are and have substantially greater financial
resources. It is possible that increased competition or improved performance by
our competitors may reduce our market share, may force us to charge lower prices
than we otherwise would, and may adversely affect our business and financial
performance in other ways.
OUR SUCCESS DEPENDS ON OUR ABILITY TO SUCCESSFULLY OPEN NEW STORES. An
important part of our business plan is to aggressively increase the number of
our stores. Staples opened 174 stores in the United States, Canada and Europe in
fiscal 1998 and plans to open approximately 170 new stores in fiscal 1999. For
our growth strategy to be successful, Staples must identify and lease favorable
store sites, hire and train employees and adapt our management and operational
systems to meet the needs of our expanded operations. These tasks may be
difficult to accomplish successfully. If we are unable to open new stores as
quickly as we plan, our future sales and profits could be materially adversely
affected. Even if Staples succeeds in opening new stores, new stores may not
achieve the same sales or profit levels as our existing stores. Also, our
expansion strategy includes opening new stores in markets where Staples has a
presence so that we can take advantage of economies of scale in marketing,
distribution and supervision costs. However, these new stores may result in the
loss of sales in existing stores in nearby areas.
OUR OPERATING RESULTS MAY VARY FROM QUARTER TO QUARTER. Our operating
results have fluctuated from quarter to quarter in the past, and we expect that
they will continue to do so in the future. Our earnings may not continue to grow
at rates similar to the growth rates achieved in recent years and may fall short
of either a prior fiscal period or investors' expectations. Factors that could
cause these quarterly fluctuations include the following:
* 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 sales in new stores result in the loss of sales in
existing stores;
* the mix of products sold;
* pricing actions of competitors;
* the level of advertising and promotional expenses;
* seasonality (the sales and profitability of our stores are typically
slightly lower in the first and second quarter of our fiscal year than in
other quarters); and
B - 6
25
* one-time charges associated with acquisitions.
Most of our operating expenses, such as rent expense, advertising
expense and employee salaries, do not vary directly with the amount of our sales
and are difficult to adjust in the short term. As a result, if sales in a
particular quarter are below our expectation for that quarter, Staples could not
proportionately reduce operating expenses for that quarter, and therefore this
sales shortfall would have a disproportionate effect on our expected net income
for the quarter.
The market price of our Common Stock is based in large part on
professional securities analysts' expectations that our business will continue
to grow and that Staples will achieve certain levels of new income. If our
financial performance in a particular quarter does not meet the expectations of
securities analysts, this may adversely affect the views of those securities
analysts concerning our growth potential and future financial performance. If
the securities analysts that regularly follow us lower their rating of our
Common Stock or lower their projections for our future growth and financial
performance, the market price of our Common Stock is likely to drop
significantly. In addition, in those circumstances the decrease in Common Stock
price would probably be disproportionate to the shortfall in our financial
performance.
RAPID GROWTH COULD STRAIN OUR OPERATIONS. Our business, including
sales, number of stores and number of employees, has grown dramatically over the
past several years. In addition, Staples has acquired a number of significant
companies in the last few years and may make additional acquisitions in the
future. This growth has placed significant demands on our management and
operational systems. If we are not successful in upgrading our operational and
financial systems, expanding our management team and increasing and effectively
managing our employee base, this growth is likely to result in operational
inefficiencies and ineffective management of our business and employees, which
will in turn adversely affect our business and financial performance.
OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO ADDITIONAL RISKS. Staples
currently operates in international markets through The Business Depot Ltd. in
Canada, Staples UK in the United Kingdom and Staples Germany in Germany. Staples
may seek to expand into other international markets in the future. Our foreign
operations encounter risks similar to those faced by our US stores, as well as
risks inherent in foreign operations, such as local customs and competitive
conditions and foreign currency fluctuations. Our European operations are
currently unprofitable, and we cannot guarantee that they will become
profitable.
THE TERMS AND TIMING OF FUTURE FINANCINGS ARE UNCERTAIN. Staples
currently expects that current cash and cash equivalents and funds available
under our revolving credit facility will be sufficient to fund our planned new
store openings and other operating cash needs for at least the next twelve to
eighteen months. However, it is possible that Staples will require additional
sources of financing earlier than anticipated, as a result of unexpected cash
needs or opportunities, an expanded growth strategy or disappointing operating
results. Additional funds may not be available on satisfactory terms when
needed, whether within the next twelve to eighteen months or thereafter.
YEAR 2000 COMPLIANCE
Staples has completed a comprehensive assessment of its internal
computer systems and applications to identify those that might be affected by
computer programs using two digits rather than four to define the applicable
year (the "Year 2000 issue"). Staples has used internal personnel as well as
B - 7
26
external contractors and consultants to identify those systems and applications
which are affected by the Year 2000 issue. Those systems and applications
identified as needing remediation will be replaced or modified and tested for
compliance. Remediation of the most critical Information Technology (IT) related
systems and applications remain on schedule for completion during the first
quarter of 1999 and it is anticipated that testing will be completed by the end
of the second quarter of 1999. These systems include Merchandising/Logistics,
Distribution, Store Point of Sale, and Corporate Finance. The remediation of the
less critical IT systems is expected to be completed during the second quarter
of 1999. These systems and applications include Marketing Systems and
Non-Mission Critical Desktop Applications. Testing of these less critical IT
systems and applications is expected to be finished during the third quarter of
1999.
Staples has also finished its assessment of non-IT-related systems and
applications and is continuing to assess the status of third parties with regard
to Year 2000 compliance. The non-IT-related systems and applications include
telephone systems, store security systems, and electrical systems, among others.
The remediation of these systems is expected to be completed during the first
quarter of 1999 with testing to be finished by the end of the second quarter of
1999. Staples is also working with third parties, primarily major vendors, but
also customers to ensure that they will be Year 2000 compliant as Staples'
schedule requires. Responses have been received from the majority of vendors,
but not all vendors have assured Staples that they will be compliant in time. As
a contingency, alternative lists of third party vendors have been created in
case a critical third party does not achieve compliance. Staples has completed
its enterprise-wide inventory review and has completed the most critical aspects
of a comprehensive risk assessment relative to vendor-provided products, devices
and/or services. The balance of this risk assessment will be completed during
the first quarter of 1999. Comprehensive due diligence and monitoring with
respect to vendors with the greatest impact on Staples will be performed on a
continuous basis throughout 1999.
Staples has estimated that the total cost of Year 2000 compliance will
be between $20 and $30 million, $14 million of which had been spent as of
January 30, 1999. While Staples has purchased hardware and software, it has done
so in support of configuration management and growth and these purchases have
not been capitalized. Most of the costs to be incurred are related to
remediation and testing of software using outside contracted services. The costs
of compliance have been included in Staples' current 1999 IT budgets. The
inclusion of Year 2000 compliance in the IT budget has not caused any critical
IT projects to be delayed or eliminated.
Staples currently does not have a formal contingency plan in the event
that an area of its operations does not become Year 2000 compliant. A formal
plan will be adopted if it becomes more evident that there will be an area of
non-compliance in its systems or at a critical third party. Staples is
developing procedures for all its sites, listing those to contact in the event a
"Y2K suspected" issue is encountered. Although Staples expects to achieve Year
2000 compliance as scheduled, there are potential risks if the company does not
become or is late in becoming Year 2000 compliant. Such risks include impairing
the Company's ability to process and deliver customer orders and payments,
procure saleable merchandise, and perform other critical business functions
which could have a material impact on financial performance. Staples has yet to
make an analysis of the effect that an instance of critical non-compliance by
the Company or a third party would have on revenues and expenses since a worst
case scenario has not been identified. Further, there is also the risk that
claims may be made against Staples in the event of its non-compliance or the
non-compliance of the products and services which it sells. The costs of
defending and settling such claims could have a material impact on the financial
statements of the Company. Staples is preparing a "Y2K Preparedness Guide" for
its customers so the Company can be proactive in assisting them with vendor
contacts to answer their Y2K questions.
B - 8
27
The information presented above is based on management's estimates
which were made using assumptions of future events. Uncontrollable factors such
as the compliance of the systems of third parties and the availability of
resources could materially increase the cost or delay the estimated date of Year
2000 compliance.
EURO CURRENCY
On January 1, 1999, certain member countries of the European Union
established fixed conversion rates between their existing currencies and the
European Union's common currency, ("the euro"). The former currencies of the
participating countries are scheduled to remain legal tender as denominations of
the euro until January 1, 2002 when the euro will be adopted as the sole legal
currency.
Staples has evaluated the potential impact on its business including
the ability of its information systems to handle euro-denominated transactions
and the impact on exchange costs and currency exchange rate risks. The
conversion to the euro is not expected to have a material impact on Staples'
operations or financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Staples is exposed to market risk from changes in interest rates and
foreign exchange rates. Staples does not use these derivative instruments for
trading purposes. Staples 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. Staples 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 Staples' favor. Recent experience has
demonstrated that gains on certain days are offset by losses on other days.
Therefore, Staples does not expect to incur material losses.
This risk management discussion, and the effects of changes in interest
rates and foreign exchange rates, 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
Staples to assess and mitigate risk discussed above should not be considered
projections of future events or losses.
B - 9
28
APPENDIX C
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS. PAGE
Report of Independent Auditors...............................................C-2
Consolidated Balance Sheets - January 30, 1999 and January 31, 1998..........C-3
Consolidated Statements of Income - Fiscal years ended January 30, 1999,
January 31, 1998, and February 1, 1997..................................C-4
Consolidated Statements of Stockholders' Equity - Fiscal years ended
January 30, 1999, January 31, 1998, and February 1, 1997................C-5
Consolidated Statements of Cash Flows - Fiscal years ended January 30,
1999, January 31, 1998, and February 1, 1997............................C-6
Notes to Consolidated Financial Statements...........................C-7 to C-27
C - 1
29
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 30, 1999 and January 31, 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended January 30, 1999. 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 did not audit the 1996 and 1997 financial statements of Quill
Corporation, a wholly owned subsidiary, which statements reflect 6% of total
assets as of January 31, 1998 and 20% and 25% of net income for the years ended
January 31, 1998 and February 1, 1997, respectively. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for Quill Corporation, is based
solely on the report of the other auditors.
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, based on our audits and, for 1996 and 1997, the report of other
auditors, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Staples, Inc. and
subsidiaries at January 30, 1999 and January 31, 1998 and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended January 30, 1999 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
---------------------
ERNST & YOUNG LLP
Boston, Massachusetts
March 4, 1999
C - 2
30
STAPLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
JANUARY 30, JANUARY 31,
1999 1998
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 357,993 $ 381,088
Short-term investments ............................................... 17,428 5,902
Merchandise inventories .............................................. 1,340,432 1,124,642
Receivables, net ..................................................... 221,836 203,143
Deferred income taxes ................................................ 75,261 33,108
Prepaid expenses and other current assets ............................ 51,150 38,257
---------- ----------
TOTAL CURRENT ASSETS ............................................... 2,064,100 1,786,140
PROPERTY AND EQUIPMENT:
Land and buildings ................................................... 231,378 150,947
Leasehold improvements ............................................... 372,451 292,128
Equipment ............................................................ 400,225 304,177
Furniture and fixtures ............................................... 239,755 173,711
---------- ----------
TOTAL PROPERTY AND EQUIPMENT ....................................... 1,243,809 920,963
Less accumulated depreciation and amortization ....................... 403,520 310,701
---------- ----------
NET PROPERTY AND EQUIPMENT ......................................... 840,289 610,262
OTHER ASSETS:
Lease acquisition costs, net of amortization ......................... 75,127 43,244
Investments .......................................................... -- 16,450
Goodwill, net of amortization ........................................ 148,201 139,753
Deferred income taxes ................................................ 28,735 15,451
Other ................................................................ 22,814 27,562
---------- ----------
TOTAL OTHER ASSETS ................................................. 274,877 242,460
---------- ----------
$3,179,266 $2,638,862
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ..................................................... $ 794,427 $ 672,956
Accrued expenses and other current liabilities ....................... 438,311 266,023
Debt maturing within one year ........................................ 32,594 43,501
---------- ----------
TOTAL CURRENT LIABILITIES .......................................... 1,265,332 982,480
LONG-TERM DEBT ........................................................... 205,015 218,959
OTHER LONG-TERM OBLIGATIONS .............................................. 52,033 42,803
CONVERTIBLE DEBENTURES ................................................... -- 300,000
MINORITY INTEREST ........................................................ -- 135
STOCKHOLDERS' EQUITY:
Preferred stock, $ 01 par value-authorized 5,000,000 shares; no shares
issued
Common stock, $ 0006 par value-authorized 1,000,000,000 shares;
issued 461,538,061 shares at January 30, 1999 and
417,238,962 shares at January 31, 1998 ............................... 277 167
Additional paid-in capital ........................................... 1,043,194 593,883
Cumulative foreign currency translation adjustments .................. (11,675) (10,315)
Unrealized gain on investments ....................................... 7 1,056
Retained earnings .................................................... 633,321 510,040
Less: treasury stock at cost, 488,922 shares at
January 30, 1999 and 88,724 shares at January 31, 1998 ............... (8,238) (346)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY ..................................... 1,656,886 1,094,485
---------- ----------
$3,179,266 $2,638,862
========== ==========
See notes to consolidated financial statements
C - 3
31
STAPLES, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
FISCAL YEAR ENDED
-----------------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
----------- ----------- -----------
Sales ......................................... $7,123,189 $ 5,732,145 $ 4,493,589
Cost of goods sold and occupancy costs ........ 5,365,802 4,353,161 3,410,263
---------- ----------- -----------
GROSS PROFIT .............................. 1,757,387 1,378,984 1,083,326
OPERATING AND OTHER EXPENSES:
Operating and selling ....................... 1,023,848 833,046 651,634
Pre-opening ................................. 13,836 9,443 8,299
General and administrative .................. 301,627 225,587 175,704
Amortization of goodwill .................... 3,739 3,581 2,291
Merger-related and integration costs ........ 41,000 29,665 --
Store closure charge ........................ 49,706 -- --
Interest and other expense, net ............. 17,370 21,955 22,962
---------- ----------- -----------
TOTAL OPERATING AND OTHER EXPENSES ........ 1,451,126 1,123,277 860,890
---------- ----------- -----------
INCOME BEFORE EQUITY IN LOSS OF AFFILIATES
AND INCOME TAXES .......................... 306,261 255,707 222,436
Equity in loss of affiliates .................. -- (5,953) (11,073)
---------- ----------- -----------
INCOME BEFORE INCOME TAXES ................. 306,261 249,754 211,363
Income tax expense ............................ 121,026 81,924 66,621
---------- ----------- -----------
NET INCOME BEFORE MINORITY INTEREST ....... 185,235 167,830 144,742
Minority interest ........................... 135 84 --
---------- ----------- -----------
NET INCOME ................................ $ 185,370 $ 167,914 $ 144,742
========== =========== ===========
BASIC EARNINGS PER COMMON SHARE
Historical net income per common share .... $ 0.43 $ 0.41 $ 0.36
========== =========== ===========
DILUTED EARNINGS PER COMMON SHARE
Historical net income per common share .... $ 0.41 $ 0.39 $ 0.35
========== =========== ===========
PRO FORMA:
Historical net income ...................... $ 185,370 $ 167,914 $ 144,742
Provision for income taxes on
previously untaxed earnings of
pooled S-Corporation income .......... 1,814 14,786 15,329
---------- ----------- -----------
PRO FORMA NET INCOME ...................... $ 183,556 $ 153,128 $ 129,413
========== =========== ===========
BASIC EARNINGS PER COMMON SHARE
Pro forma net income per common share ..... $ 0.43 $ 0.38 $ 0.32
========== =========== ===========
DILUTED EARNINGS PER COMMON SHARE
Pro forma net income per common share ..... $ 0.41 $ 0.36 $ 0.31
========== =========== ===========
See notes to consolidated financial statements
C - 4
32
STAPLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE FISCAL YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998,
AND FEBRUARY 1, 1997
CUMULATIVE UNREALIZED
ADDITIONAL FOREIGN CURRENCY GAIN
PAID-IN TRANSLATION (LOSS) ON RETAINED
COMMON STOCK CAPITAL ADJUSTMENTS INVESTMENTS EARNINGS
------------ ----------- ---------------- ----------- ----------
BALANCES AT FEBRUARY 3, 1996 .......................... $ 159 $ 466,660 $ (2,073) $ 32 $247,709
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 ......................... (12)
Translation adjustments ............................... 1,926
Issuance of common stock
for acquisitions and other transactions ......... 164 (242)
Dividends to shareholders of acquired S-Corp .......... (24,908)
Net income for the year ............................... 144,742
--------- ----------- -------- ------ --------
BALANCES AT FEBRUARY 1, 1997 .......................... $ 162 $ 508,833 $ (147) $ 20 $367,301
Issuance of common stock for
stock options exercised ......................... 5 32,178
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 gain on investments,
net of tax ...................................... 1,036
Translation adjustments ............................... (10,168)
Dividends to shareholders of acquired S-Corp .......... (25,175)
Net income for the year ............................... 167,914
--------- ----------- -------- ------ --------
BALANCES AT JANUARY 31, 1998 .......................... $ 167 $ 593,883 $(10,315) $1,056 $510,040
Issuance of common stock for
stock options exercised ......................... 5 50,118
Issuance of common stock for conversion of
debentures, net of interest and deferred charges 13 298,520
Stock split and cash paid in lieu of fractional shares 92 (607)
Tax benefit on exercise of options .................... 74,157
Contribution of common stock
to Employees' 401(K) Savings Plan ............... 3,288
Sale of common stock under
Employee Stock Purchase Plan .................... 13,210
Issuance of Performance Accelerated
Restricted Stock ................................ 10,654
Unrealized loss on investments, net of tax ............ (1,049)
Translation adjustments ............................... (1,360)
Purchase and retirement of S-Corporation shares ....... (29) (48,073)
Dividends to shareholders of acquired S-Corp .......... (15,904)
Adjustment to conform fiscal year of Quill Corporation 1,888
Net income for the year ............................... 185,370
Purchase of treasury shares ...........................
--------- ----------- -------- ------ --------
BALANCES AT JANUARY 30, 1999 .......................... $ 277 $ 1,043,194 $(11,675) $ 7 $633,321
========= =========== ======== ====== ========
TREASURY COMPREHENSIVE
STOCK INCOME
-------- -------------
BALANCES AT FEBRUARY 3, 1996 .......................... $ (346)
Issuance of common stock for
stock options exercised .........................
Tax benefit on exercise of options ....................
Contribution of common stock
to Employees' 401(K) Savings Plan ...............
Sale of common stock under
Employee Stock Purchase Plan ....................
Issuance of Performance Accelerated
Restricted Stock ................................
Unrealized loss on short-term
investments, net of tax ......................... (12)
Translation adjustments ............................... 1,926
Issuance of common stock
for acquisitions and other transactions .........
Dividends to shareholders of acquired S-Corp ..........
Net income for the year ............................... 144,742
------- --------
BALANCES AT FEBRUARY 1, 1997 .......................... $ (346) $146,656
========
Issuance of common stock for
stock options exercised .........................
Tax benefit on exercise of options ....................
Contribution of common stock
to Employees' 401(K) Savings Plan ...............
Sale of common stock under
Employee Stock Purchase Plan ....................
Issuance of Performance Accelerated
Restricted Stock ................................
Unrealized gain on investments,
net of tax ...................................... 1,036
Translation adjustments ............................... (10,168)
Dividends to shareholders of acquired S-Corp ..........
Net income for the year ............................... 167,914
------- --------
BALANCES AT JANUARY 31, 1998 .......................... $ (346) $158,782
========
Issuance of common stock for
stock options exercised .........................
Issuance of common stock for conversion of
debentures, net of interest and deferred charges
Stock split and cash paid in lieu of fractional shares
Tax benefit on exercise of options ....................
Contribution of common stock
to Employees' 401(K) Savings Plan ...............
Sale of common stock under
Employee Stock Purchase Plan ....................
Issuance of Performance Accelerated
Restricted Stock ................................
Unrealized loss on investments, net of tax ............ (1,049)
Translation adjustments ............................... (1,360)
Purchase and retirement of S-Corporation shares .......
Dividends to shareholders of acquired S-Corp ..........
Adjustment to conform fiscal year of Quill Corporation
Net income for the year ............................... 185,370
Purchase of treasury shares ........................... (7,892)
------- --------
BALANCES AT JANUARY 30, 1999 .......................... $(8,238) $182,961
======= ========
See notes to consolidated financial statements.
C - 5
33
STAPLES, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
FISCAL YEAR ENDED
----------------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
- - ----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income ................................................................ $ 185,370 $ 167,914 $ 144,742
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Minority interest ........................................................ (135) (84) --
Depreciation and amortization ............................................ 99,207 90,714 61,497
Merger-related and integration costs ..................................... 41,000 29,665 --
Store closure charge ..................................................... 49,706 -- --
Expense from 401(K) and PARS stock contribution .......................... 12,764 10,409 2,715
Equity in loss of affiliates ............................................. -- 5,953 11,073
Deferred income taxes (benefit)/expense .................................. (55,569) 3,877 3,137
Change in assets and liabilities, net of companies acquired
using purchase accounting:
Increase in merchandise inventories .................................... (211,052) (227,076) (171,593)
Decrease (increase) in receivables ..................................... (15,993) 17,569 (41,905)
Increase in prepaid expenses and other assets .......................... (9,839) (5,026) (7,026)
Increase in accounts payable, accrued
expenses and other current liabilities .............................. 273,280 293,831 179,803
Increase in other long-term obligations ................................ 9,597 5,074 6,303
--------- --------- -----------
192,966 224,906 44,004
--------- --------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................................. 378,336 392,820 188,746
INVESTING ACTIVITIES:
Acquisition of property and equipment ..................................... (322,308) (190,659) (212,007)
Acquisition of businesses, net of cash acquired ........................... (13,500) (79,325) --
Proceeds from sales and maturities of short-term investments .............. 10,338 13,618 8,800
Purchase of short-term investments ........................................ (22,913) (4,500) (9,595)
Proceeds from sales and maturities of long-term investments ............... 18,995 265 --
Purchase of long-term investments ......................................... (2,545) (5,714) (10,036)
Investment in affiliates .................................................. -- (3,788) (18,629)
Acquisition of lease rights ............................................... (37,182) (2,717) (5,534)
Other ..................................................................... 1,208 (11,998) 2,657
--------- --------- -----------
NET CASH USED IN INVESTING ACTIVITIES ..................................... (367,907) (284,818) (244,344)
FINANCING ACTIVITIES:
Proceeds from sale of capital stock ....................................... 63,996 48,043 21,773
Proceeds from borrowings .................................................. 392,261 965,921 1,171,174
Payments on borrowings .................................................... (417,323) (830,018) (1,120,670)
Purchase of dissenting shareholder S-Corporation stock .................... (48,102) -- --
Purchase of treasury stock ................................................ (7,892) -- --
Dividends to shareholders of acquired S-Corp .............................. (15,904) (25,175) (24,908)
--------- --------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ....................... (32,964) 158,771 47,369
Effect of exchange rate changes on cash ................................... (560) (2,720) 643
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ......................... (23,095) 264,053 (7,586)
Cash and cash equivalents at beginning of period ............................. 381,088 117,035 124,621
--------- --------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................... $ 357,993 $ 381,088 $ 117,035
========= ========= ===========
See notes to consolidated financial statements.
C - 6
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: Staples, Inc. and subsidiaries ("Staples" or "the
Company") operates a chain of office supply stores and contract
stationer/delivery warehouses throughout North America and in the United Kingdom
and Germany.
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: Staples' fiscal year is the 52 or 53 weeks ending the
Saturday closest to January 31. Fiscal years 1998, 1997 and 1996, consisted of
the 52 weeks ended January 30, 1999, January 31, 1998 and February 1, 1997
respectively. As more fully described in Note L, the statements of income
combine Staples' historical operating results for the fiscal years with the
corresponding Quill Corporation ("Quill") operating results for the calendar
years ended December 31, 1997 and 1996. Accordingly, to conform fiscal years for
1998, an adjustment for Quill's operating results for January 1998 was made to
retained earnings.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management of Staples 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: Staples considers all highly liquid investments with
an original maturity of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS: Staples' 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 Staples' 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 Staples.
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 Staples' large number of
customers and their dispersion across many industries and geographic regions.
ADVERTISING: Staples 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
catalog production costs. The capitalized costs of the advertising are amortized
over the six month period
C - 7
35
following the publication of the catalog in which it appears. Direct catalog
production costs included in prepaid and other assets totaled $9,854,000 at
January 30, 1999 and $7,667,000 at January 31, 1998. Total advertising and
marketing expense was $356,928,000, $288,838,000, and $221,000,000 for the years
ended January 30, 1999, January 31, 1998, and February 1, 1997, 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 30, 1999 and
January 31, 1998 totaled $24,674,000 and $19,483,000, respectively.
GOODWILL: Goodwill arising from business acquisitions is amortized on a
straight-line basis over 40 years. Accumulated amortization was $13,053,000 and
$10,622,000 as of January 30, 1999 and January 31, 1998, 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: Staples offers a private label
credit card which is managed by a financial services company. Under the terms of
the agreement, Staples is obligated to pay fees which approximate the financial
institution's cost of processing and collecting the receivables, which are
primarily non-recourse to Staples.
FOREIGN CURRENCY TRANSLATION: The assets and liabilities of Staples'
foreign subsidiaries, The Business Depot Ltd. ("Business Depot"), Staples UK,
and Staples Germany, 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
Staples' foreign subsidiaries during the years ended January 30, 1999, January
31, 1998 and February 1, 1997, are recorded in a separate section of
stockholders' equity titled "Cumulative foreign currency translation
adjustments."
STOCK OPTION PLANS: Staples has adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123"). As permitted by FAS 123, Staples 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.
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EARNINGS PER SHARE: Staples calculates earnings per share in accordance
with Statement of Financial Accounting Standards No. 128 "Earnings per Share"
("FAS 128") which requires disclosure of basic and diluted earnings per share.
Basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities, while diluted earnings per share includes such effects.
See Note K for the computation of earnings per share for the years ended January
30, 1999, January 31, 1998 and February 1, 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS. Pursuant to Statement of Financial
Accounting Standards No. 107, "Disclosure About Fair Value of Financial
Instruments" ("FAS 107"), Staples 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 Staples' debt approximates fair value,
estimated by discounted cash flow analyses based on Staples'
current incremental borrowing rates for similar types of
borrowing arrangements.
LONG-LIVED ASSETS: Staples adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of" ("FAS 121"), which requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flow estimated to be generated
by those assets are less than the assets' carrying amount. Staples' policy is to
evaluate long-lived assets for impairment at a store level.
COMPREHENSIVE INCOME: Effective February 1, 1998, Staples adopted SFAS
No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new
rules for the reporting and display of comprehensive income and its components.
The adoption of SFAS 130 had no impact on Staples' net income or shareholders'
equity. SFAS 130 requires Staples' to report comprehensive income which includes
net income, foreign currency translation adjustments and unrealized gains and
losses on short-term investments, to be reported separately in stockholders'
equity.
SEGMENT REPORTING: Effective February 1, 1998, Staples adopted the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("Statement 131"). Statement 131 superseded FASB Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise". Statement 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. Statement 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of Statement 131 did not affect the results of operations or
financial position, but did affect the disclosure of segment information, see
note N.
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NOTE B INVESTMENTS
The following is a summary of available-for-sale investments as of January 30,
1999 and January 31, 1998 (in thousands):
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
January 31, 1999 COST GAINS LOSSES FAIR VALUE
------- ---------- ---------- ----------
Short-term:
Municipal obligations................................... $10,515 $46 $ -- $10,561
Agency Bonds ........................................... 6,902 7 (42) 6,867
------- --- ---- -------
Total short-term .................................... $17,417 $53 $(42) $17,428
======= === ==== =======
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
January 31, 1998 COST GAINS LOSSES FAIR VALUE
------- ---------- ---------- ----------
Short-term:
Certificates of deposit ................................ $ 3,236 $ -- $ -- $ 3,236
Debt securities ........................................ 2,659 7 -- 2,666
------- ------ ---- -------
Total short-term .................................... $ 5,895 $ 7 $ -- $ 5,902
======= ====== ==== =======
Long-term:
Municipal obligations .................................. $ 9,986 $ 125 $ (7) $10,104
Equity securities ...................................... 4,061 950 (15) 4,996
Money market instruments ............................... 1,350 -- -- 1,350
------- ------ ---- -------
Total long-term ................................. $15,397 $1,075 $(22) $16,450
======= ====== ==== =======
Proceeds from the sale of investment securities were $14,599,000 and $265,000
during the years ended January 30, 1999 and January 31, 1998, respectively.
Other reductions in the cost balance resulted from maturities of securities. The
net adjustment to unrealized holding gains and losses on available-for-sale
investments included as a separate component of stockholders' equity totaled
$(1,049,000) and $1,036,000 for the years ended January 30, 1999 and January 31,
1998, respectively.
The amortized cost and estimated fair value of debt and marketable equity
securities at January 30, 1999, 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............................ $ 17,417 $ 17,428
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NOTE C ACCRUED LIABILITIES
Accrued liabilities consist of: JANUARY 30, JANUARY 31,
1999 1998
----------- -----------
Taxes ................................................. $114,179 $ 76,118
Acquisition and store closure reserves ................ 91,484 16,596
Employee related ...................................... 88,551 63,126
Advertising and direct marketing ...................... 30,543 24,845
Other ................................................. 113,554 85,338
-------- --------
Total ................................................. $438,311 $266,023
======== ========
NOTE D LONG-TERM DEBT AND CREDIT AGREEMENT
Long-term debt consists of the following (in thousands):
JANUARY 30, JANUARY 31,
1999 1998
----------- ----------
Capital lease obligations and other notes payable in monthly installments with
effective interest rates from 4% to 16%; collateralized by the related
equipment ............................................................... $ 7,760 $ 14,909
Note payable with a fixed rate of 6.16% ...................................... -- 25,000
Senior notes with a fixed rate of 7.125% ..................................... 200,000 200,000
Mortgage notes at various rates .............................................. -- 13,805
Lines of credit .............................................................. 29,849 8,746
-------- --------
$237,609 $262,460
Less current portion ......................................................... 32,594 43,501
-------- --------
$205,015 $218,959
======== ========
Aggregate annual maturities of long-term debt and capital lease obligations are
as follows (in thousands):
Fiscal year: TOTAL
-----
1999............................................ $ 32,594
2000............................................ 1,579
2001............................................ 434
2002............................................ 308
2003............................................ 311
Thereafter...................................... 202,383
--------
$237,609
========
Included in property and equipment are capital lease obligations for equipment
recorded at the net present value of the minimum lease payments of $20,664,000.
Future minimum lease payments of $3,001,000 excluding $201,000 of interest, are
included in aggregate annual maturities shown above. Staples did not enter into
any new capital lease agreements during the fiscal year ended January 30, 1999.
New capital lease agreements totaling $2,770,000 were entered into during the
fiscal year ended January 31, 1998.
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Senior Notes:
Staples 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 Staples' Notes
were used for repayment of indebtedness under Staples' revolving credit facility
and for general working capital purposes, including the financing of new store
openings, distribution facilities and corporate offices.
Credit Agreements:
Effective November 13, 1997, Staples entered into a 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 and sales of assets. As of January 30, 1999, no borrowings were
outstanding under the revolving credit facility. Staples also has available
$35,000,000 in uncommitted, short-term bank credit lines, of which no borrowings
were outstanding as of January 30, 1999. Staples UK has a $50,000,000 line of
credit which had an outstanding balance of $29,849,000 at January 30, 1999 and
Business Depot has a $16,545,000 line of credit with no outstanding balance at
January 30, 1999.
Interest paid by Staples totaled $29,600,000, $23,012,000 and $22,501,000 for
the fiscal years ended January 30, 1999, January 31, 1998, and February 1, 1997,
respectively. Capitalized interest totaled $2,254,000, $1,387,000 and $611,000
in the years ended January 30, 1999, January 31, 1998 and February 1, 1997,
respectively.
NOTE E CONVERTIBLE DEBENTURES
On October 5, 1995, Staples 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"). During fiscal 1998, $299,995,000 of Staples'
$300,000,000 of 4 1/2% Debentures were converted into an aggregate of 30,674,276
shares of common stock at a conversion price of $9.78 per share. The remaining
$5,000 were called at par value plus a premium of 1.8% and accrued interest. 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.
NOTE F STOCKHOLDERS' EQUITY
On November 12, 1998, December 30, 1997, March 5, 1996 and June 29, 1995, the
Board of Directors approved three-for-two splits of Staples' common stock to be
effected in the form of 50% stock dividends. The dividends were distributed on
January 28, 1999 to shareholders of record as of January 18, 1999, 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,
C - 12
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1995, respectively. The consolidated financial statements have been
retroactively restated to give effect to these stock splits.
During fiscal year 1998, Staples purchased treasury stock of $7,892,000 from
employees and directors to fund the income taxes incurred by those employees and
directors associated with the vesting of performance accelerated restricted
stock (PARS).
At January 30, 1999, 72,614,501 shares of common stock were reserved for
issuance under Staples' stock option, 401(k), employee stock purchase and
director stock option plans.
NOTE G EMPLOYEE BENEFIT PLANS
Staples 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 Staples' employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
EMPLOYEE STOCK PURCHASE PLAN
Staples' 1998 Employee Stock Purchase Plan authorizes a total of up to 6,000,000
shares of Staples' 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. Staples' 1994 Employee Stock Purchase Plan expired during 1998.
STOCK OPTION PLANS
Under Staples' 1992 Equity Incentive Plan ("1992 Plan") Staples may grant to
management and key employees incentive and nonqualified options to purchase up
to 87,750,000 shares of common stock and Performance Accelerated Restricted
Stock ("PARS"). This amount was approved by the shareholders of Staples on June
18, 1997. As of February 27, 1997, Staples' 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 Staples' 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.
Staples' 1990 Director Stock Option Plan ("Director's Plan") authorizes shares
of common stock to be issued to non-employee directors. The exercise price of
options granted is equal to the fair market value of Staples' 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.
C - 13
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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 Staples
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 1996, 1997, and 1998:
risk-free interest rates ranging from 5.21% to 6.12%; volatility factor of the
expected market price of Staples' common stock of .30 for fiscal year 1996, .35
for fiscal year 1997, and .36 for fiscal year 1998; 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.
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. Staples' pro forma information, which includes the
pro forma results of Quill, follows (in thousands except for earnings per share
information):
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
----------- ----------- -----------
Pro forma net income ........................... $156,265 $138,983 $122,116
Pro forma basic earnings per common share ...... $ 0.36 $ 0.34 $ 0.31
Pro forma diluted earnings per common share .... $ 0.35 $ 0.33 $ 0.30
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 is as follows:
WEIGHTED-AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
---------- ---------------
Outstanding at February 3, 1996 47,220,579 $ 3.29
Granted ................ 7,171,937 8.82
Exercised .............. (6,140,543) 2.29
Canceled ............... (2,357,118) 4.89
----------- ------
Outstanding at February 1, 1997 45,894,855 $ 4.26
Granted ................ 9,656,558 10.43
Exercised .............. (10,147,409) 2.78
Canceled ............... (2,807,883) 7.43
----------- ------
Outstanding at January 31, 1998 42,596,121 $ 5.34
Granted ................ 13,698,644 20.22
Exercised .............. (13,965,713) 3.64
Canceled ............... (1,938,669) 11.55
----------- ------
Outstanding at January 30, 1999 40,390,383 $11.58
=========== ======
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The following table summarizes information concerning currently outstanding and
exercisable options:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- - ---------------------------------------------------------------------------------------------------------------------
$ 0 53 - $ 3 56 5,083,310 4.14 $2.76 5,083,310 $ 2.76
$ 3.65 - $ 5.56 4,542,693 5.67 $4.10 4,509,999 $ 4.09
$ 5.70 - $ 8.30 4,800,123 6.45 $8.06 3,392,963 $ 8.12
$ 8.37 - $ 9.17 4,623,599 7.56 $9.11 22,627 $ 8.57
$ 9.47 - $ 9.83 229,980 8.10 $9.64 0 $ 0.00
$10.28 - $10.28 5,734,482 8.57 $10.28 1,125 $10.28
$10.44 - $19.42 3,004,779 8.72 $12.92 26,928 $10.82
$20.08 - $20.08 10,699,422 9.42 $20.08 0 $ 0.00
$20.75 - $27.71 1,511,123 9.83 $23.10 0 $ 0.00
$29.13 - $29.13 160,872 10.01 $29.13 0 $ 0.00
- - ---------------------------------------------------------------------------------------------------------------------
$ 0.53 - $29.13 40,390,383 7.60 $11.58 13,036,952 $ 4.64
The weighted-average fair values of options granted during the years ended
January 30, 1999, January 31, 1998 and February 1, 1997 were $7.18, $3.80 and
$3.81, respectively. Exercise prices for the options outstanding as of January
30, 1999 ranged from $0.53 to $29.13.
PERFORMANCE ACCELERATED RESTRICTED STOCK ("PARS")
PARS are shares of Staples' Common Stock granted outright to employees and
non-employee directors without cost to the employee or director. The shares,
however, are restricted in that they are not transferable (e.g. they may not be
sold) by the employee or director until they vest, generally after the end of
five years. Such vesting date may accelerate if Staples achieves certain
compound annual earnings per share growth over a certain number of interim
years. If the employee leaves Staples, or the director ceases to serve as a
director of Staples, prior to the vesting date for any reason, the PARS shares
will be forfeited by the employee or director, as the case may be, and will be
returned to Staples. 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 30, 1999 totaling approximately
1,381,000 shares which have a weighted average fair value of $17.56, initially
vest on February 1, 2003 or will accelerate on May 1, in 2000, 2001, or 2002
upon attainment of certain compound annual earnings per share targets in the
prior fiscal year. PARS totaling approximately 798,000 shares which have a
weighted average fair value of $12.47, issued in fiscal year 1997 will vest on
May 1, 1999 as a result of Staples achieving its target earnings goal for the
fiscal year ended January 30, 1999.
In connection with the issuance of the PARS, Staples included $9,796,000,
$7,496,000 and $532,000 in compensation expense for the fiscal years ended
January 30, 1999, January 31, 1998 and February 1, 1997, respectively.
C - 15
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EMPLOYEES' 401(K) SAVINGS PLAN
Under Staples' Employees' 401(k) Savings Plan (the "401(k) Plan"), and
Supplemental Executive Retirement Plan (the "SERP Plan"), Staples may contribute
up to a total of 2,503,125 shares of common stock to these plans. The 401(k)
Plan is available to all employees of Staples 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 Staples
included approximately $3,000,000 in expense for fiscal year ended January 30,
1999 and $2,000,000 in expense for each of the fiscal years ended January 31,
1998 and February 1, 1997.
NOTE H INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
and the approximate tax effect of Staples' deferred tax assets and liabilities
as of January 30, 1999 and January 31, 1998, are as follows (in thousands):
JANUARY 30, JANUARY 31,
1999 1998
----------- -----------
Deferred Tax Assets:
Inventory ............................ $ 27,328 $ 20,116
Deferred rent ........................ 19,713 14,797
Acquired NOL's ....................... 8,743 7,132
Other net operating loss carryforwards 27,259 22,907
Insurance ............................ 7,639 5,967
Employee benefits .................... 9,746 5,569
Merger related charges ............... 10,823 --
Store closure charge ................. 20,274 --
Other - net .......................... 17,711 13,660
--------- --------
Total Deferred Tax Assets ............ 149,236 90,148
--------- --------
Deferred Tax Liabilities:
Depreciation ......................... (2,312) (6,687)
Other - net .......................... (5,164) (4,835)
--------- --------
Total Deferred Tax Liabilities ....... (7,476) (11,522)
--------- --------
Total Valuation Allowance ................. (37,765) (30,067)
--------- --------
Net Deferred Tax Assets ................... $ 103,995 $ 48,559
========= ========
Net deferred tax assets of approximately $4,500,000 attributable to businesses
acquired during the fiscal year ended January 31, 1998 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
$36,002,000, have been fully reserved due to the uncertainty of the realization
of the asset within the local country jurisdiction. Further, if this asset is
utilized when income is earned within the foreign jurisdiction, Staples will
not have a consolidated tax benefit, as Staples will be required to pay U.S.
income taxes on the income offset by the foreign NOL.
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For financial reporting purposes, income before taxes includes the following
components (in thousands):
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
----------- ----------- -----------
Pretax income:
United States $262,067 $213,549 $187,644
Foreign ..... 44,194 36,205 23,719
-------- -------- --------
$306,261 $249,754 $211,363
======== ======== ========
The provision for income taxes consists of the following (in thousands):
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
----------- ----------- -----------
Current tax expense:
Federal ................. $ 135,922 $53,248 $50,546
State ................... 18,875 10,707 12,337
Foreign ................. 21,798 14,092 601
--------- ------- -------
176,595 78,047 63,484
Deferred tax expense (benefit) (55,569) 3,877 3,137
--------- ------- -------
Total ........................ $ 121,026 $81,924 $66,621
========= ======= =======
A reconciliation of the federal statutory tax rate to Staples' effective tax
rate on historical net income is as follows:
FISCAL YEAR ENDED
-------------------------------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
----------- ----------- -----------
Federal statutory rate ........................... 35.0% 35.0% 35.0%
State taxes, net of federal benefit .............. 6.0% 6.0% 6.3%
Tax exempt interest .............................. (0.5%) (0.5%) (0.4%)
Tax benefit of loss carryforward ................. (0.0%) (0.0%) (0.2%)
Income of S-Corporation .......................... (0.6%) (5.7%) (7.0%)
Other ............................................ (0.4%) (2.0%) (2.2%)
---- ---- ----
Effective tax rate ............................... 39.5% 32.8% 31.5%
==== ==== ====
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A reconciliation of the federal statutory tax rate to Staples' effective tax
rate on pro forma net income is as follows:
FISCAL YEAR ENDED
-------------------------------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
----------- ----------- -----------
Federal statutory rate ........................... 35.0% 35.0% 35.0%
State taxes, net of federal benefit .............. 6.0% 6.0% 6.3%
Tax exempt interest .............................. (0.5%) (0.5%) (0.4%)
Tax benefit of loss carryforward ................. (0.0%) (0.0%) (0.2%)
Other ............................................ (0.4%) (1.8%) (1.9%)
---- ---- ----
Effective tax rate ............................... 40.1% 38.7% 38.8%
==== ==== ====
Income tax payments were $94,729,602, $23,487,877, and $45,925,276, during
fiscal years ended January 30, 1999, January 31, 1998, and February 1, 1997,
respectively. Staples has net operating losses of approximately $101,300,000
that can be carried forward indefinitely, $21,900,000 of which is attributable
to Staples' increased ownership in Staples UK and Staples Germany.
Undistributed earnings of Staples' foreign subsidiaries amounted to
approximately $54,700,000 at January 30, 1999. 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, Staples 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 $1,800,000 would be payable upon remittance
of all previously unremitted earnings at January 30, 1999.
NOTE I LEASES AND OTHER OFF-BALANCE SHEET COMMITMENTS
Staples leases certain retail and support facilities under long-term
noncancellable lease agreements. Most lease agreements contain renewal options
and rent escalation clauses and require Staples 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 30, 1999 include $49,000,000 relating to
future rent escalation clauses and lease incentives under certain existing store
operating lease arrangements. These rent expenses are recognized following the
straight-line basis over the respective terms of the leases. Future minimum
lease commitments for retail and support facilities (including lease commitments
for 116 retail stores not yet opened at January 30, 1999) under noncancellable
operating leases are due as follows (in thousands):
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Fiscal year:
1999............................................ $271,741
2000............................................ 294,675
2001............................................ 290,547
2002............................................ 280,104
2003............................................ 276,425
Thereafter...................................... 2,439,592
----------
$3,853,084
==========
Rent expense approximated $234,609,000, $193,990,000, and $142,508,000, for the
fiscal years ended January 30, 1999, January 31, 1998, and February 1, 1997,
respectively.
Letters of credit are issued by Staples during the ordinary course of business
through major financial institutions as required by certain vendor contracts. As
of January 30, 1999, Staples had available open letters of credit totaling
$7,923,000.
NOTE J QUARTERLY SUMMARY (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
(In thousands, except per share amounts)
Fiscal Year Ended January 30, 1999
Sales ..................................... $1,670,611 $1,475,705 $1,899,770 $2,077,103
Gross Profit .............................. 388,015 354,925 475,913 538,534
Net income ................................ 35,950 8,974(1) 69,186 71,260(4)
Pro forma net income ...................... 34,136(2) 8,974(1) 69,186 71,260(4)
Basic earnings per share
Historical net income per common share..... $ 0.09 $ 0.02 $ 0.16 $ 0.16(4)
Pro forma net income per common share..... $ 0.08 $ 0.02 $ 0.16 $ 0.16(4)
Number of shares used in computing
earnings per common share ............... 419,027 423,959 426,184 448,074
Diluted earnings per share
Historical net income per common share .... $ 0.08(3) $ 0.02 $ 0.15(3) $ 0.15(4)
Pro forma net income per common share .... $ 0.08(3) $ 0.02 $ 0.15(3) $ 0.15(4)
Number of shares used in computing
earnings per common share ................ 461,616(3) 436,550 469,768(3) 473,490
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FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
(In thousands, except per share amounts)
FISCAL YEAR ENDED JANUARY 31, 1998
Sales .................................. $1,292,721 $1,192,339 $1,552,393 $1,694,692
Gross Profit ........................... 304,666 286,621 375,471 412,226
Net income ............................. 19,777(1) 22,759(1) 52,030 73,348
Pro forma net income ................ 15,229(2) 19,577(2) 48,602(2) 69,720(2)
Basic earnings per common share
Historical net income per common share.. $ 0.05 $ 0.06 $ 0.13 $ 0.18
Pro forma net income per common share.. $ 0.04 $ 0.05 $ 0.12 $ 0.17
Number of shares used in computing
earnings per common share ............ 403,570 405,233 409,231 414,358
Diluted earnings per share
Historical net income per common share.. $ 0.05 $ 0.05 $ 0.12(3) $ 0.17(3)
Pro forma net income per common share.. $ 0.04 $ 0.05 $ 0.11(3) $ 0.16(3)
Number of shares used in computing
earnings per common share ............ 416,026 418,787 452,352(3) 458,508(3)
(1) Net income for the quarter ended August 1, 1998 includes a pre-tax charge
of $41,000 resulting from costs incurred in connection with the merger with
Quill Corporation. 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 then proposed merger
with Office Depot, Inc.
(2) Pro forma net income includes the earnings of Quill with provision for
income taxes on previously untaxed earnings of pooled S-Corporation income.
(3) 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 January 30, 1999, October 31, 1998, May
2, 1998, January 31, 1998, and November 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.
(4) Net income for the quarter ended January 30, 1999 includes a pre-tax charge
of $49,706 resulting from a store closure charge.
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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 30, 1999, January 31, 1998
and February 1, 1997 is as follows (amounts in thousands, except for per share
data):
Historical Earnings Per Share JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
------------ ------------ ------------
Numerator:
Net income ................................................ $ 185,370 $ 167,914 $ 144,742
Effect of dilutive securities:
4 1/2% convertible debentures (1) ......................... 7,451 9,365 9,373
------------ ------------ ------------
Numerator for diluted earnings per common
share - income available to common
stockholders after assumed conversion ................... $ 192,821 $ 177,279 $ 154,115
Denominator:
Weighted-average shares ................................... 429,308,638 408,095,647 399,620,073
Performance accelerated restricted stock .................. 2,314 2,330 --
------------ ------------ ------------
Denominator for basic earnings per common
share -- weighted-average shares .......................... 429,310,952 408,097,977 399,620,073
Effect of dilutive securities:
Incremental and windfall shares ........................... 12,648,979 12,769,769 14,270,139
Performance accelerated restricted stock .................. 208,300 209,592 --
4 1/2% convertible debentures ............................. 25,856,165 30,681,819 30,681,819
------------ ------------ ------------
Dilutive potential common shares .......................... 38,713,444 43,661,180 44,951,958
Denominator for diluted earnings per common
share -- adjusted weighted-average shares and assumed
conversions ............................................. 468,024,396 451,759,157 444,572,031
Basic earnings per common share .............................. $ 0.43 $ 0.41 $ 0.36
============ ============ ============
Diluted earnings per common share ............................ $ 0.41 $ 0.39 $ 0.35
============ ============ ============
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PRO FORMA EARNINGS PER SHARE JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
------------ ------------ ------------
Numerator:
Net income ................................................ $ 183,556 $ 153,128 $ 129,413
Effect of dilutive securities:
4 1/2% convertible debentures (1) ......................... 7,451 9,365 9,373
------------ ------------ ------------
Numerator for diluted earnings per common
share - income available to common
stockholders after assumed conversion ................... $ 191,007 $ 162,493 $ 138,786
Denominator:
Weighted-average shares ................................... 429,308,638 408,095,647 399,620,073
Performance accelerated restricted stock .................. 2,314 2,330 --
------------ ------------ ------------
Denominator for basic earnings per common
share -- weighted-average shares .......................... 429,310,952 408,097,977 399,620,073
Effect of dilutive securities:
Incremental and windfall shares ........................... 12,648,979 12,769,769 14,270,139
Performance accelerated restricted stock .................. 208,300 209,592 --
4 1/2% convertible debentures ............................. 25,856,165 30,681,819 30,681,819
------------ ------------ ------------
Dilutive potential common shares .......................... 38,713,444 43,661,180 44,951,958
Denominator for diluted earnings per common
share - adjusted weighted-average shares and assumed
conversions ............................................. 468,024,396 451,759,157 444,572,031
Basic earnings per common share .............................. $ 0.43 $ 0.38 $ 0.32
============ ============ ============
Diluted earnings per common share ............................ $ 0.41 $ 0.36 $ 0.31
============ ============ ============
(1) The 4 1/2% Debentures were substantially converted into common stock on
December 2, 1998 (see Note D). For the computation of earnings per common
share, this conversion of 30,674,276 shares is assumed to have occurred
at the beginning of the fiscal year (February 1, 1998), and is included
in the weighted-average shares outstanding for the year. Therefore, the
interest expense and amortization of deferred charges related to the
4 1/2% Debentures incurred by Staples through December 2, 1998, net of
tax, is added back to reported net income to compute earnings per
common share for each fiscal year presented above.
NOTE L BUSINESS ACQUISITIONS
On May 21, 1998, Staples acquired Quill. The Merger was structured as an
exchange of shares in which the stockholders of Quill received approximately
26 million shares of Staples' common stock, at an exchange ratio established
at a combination of fixed and variable prices, and cash paid to dissenting
shareholder of approximately $48,000,000, which equates to a purchase price of
approximately $690,000,000. The Merger was accounted for as a pooling of
interests and, accordingly, Staples' consolidated financial statements have
been restated to include the operations of Quill for all periods prior to the
merger. The statements of income combine Staples' historical operating results
for the fiscal years ended January 31, 1998 and February 1, 1997 with the
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corresponding Quill operating results for the years ended December 31, 1997
and 1996 respectively. Prior to the acquisition, Quill elected to be taxed as
an S Corporation under the Internal Revenue Code. Accordingly, the current
taxable income of Quill was taxable to its shareholders who were responsible
for the payment of taxes thereon. Quill will be included in Staples' U.S.
federal income tax return subsequent to the date of the acquisition. Pro forma
adjustments have been made to the restated statements of operations to reflect
the income taxes that would have been provided had Quill been subject to
income taxes.
In connection with the acquisition of Quill, Staples committed to a plan that
results in the integration of the two businesses. As a result of the
acquisition and integration plan, Staples recorded a charge to operating
expense of $41,000,000 during the year ended January 30, 1999. These costs
consist of direct merger-related and integration costs from the transaction.
The merger transaction costs of approximately $10,500,000 consist primarily of
fees for investment bankers, attorneys, accountants, and other related
charges. The integration costs primarily include employee costs of
approximately $7,000,000, contract and lease termination costs of
approximately $14,100,000, the write-down of leasehold improvements of
approximately $3,500,000 and other merger-related costs of approximately
$5,900,000. Through January 30, 1999, Staples paid approximately $14,000,000,
which consists primarily of transaction and employee related costs.
Separate net sales and net income of the merged entities prior to the merger
are presented in the following table (in thousands):
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
Net sales:
Staples ....... $5,181,035 $3,967,665
Quill ......... 551,110 525,924
---------- ----------
Combined . $5,732,145 $4,493,589
========== ==========
Net income
Staples ....... $ 130,949 $ 106,420
Quill ......... 36,965 38,322
---------- ----------
Combined . $ 167,914 $ 144,742
========== ==========
Pro forma net income
Staples ....... $ 130,949 $ 106,420
Quill(1) ...... 22,179 22,993
---------- ----------
Combined . $ 153,128 $ 129,413
========== ==========
(1) Reflects adjustment for provision for income taxes on previously untaxed
earnings.
NOTE M STORE CLOSURE CHARGE
In the fourth quarter of 1998, Staples committed to a plan to relocate certain
stores which cannot be expanded and upgraded to Staples "Concept 97" model and
reported a pre-tax store closure charge of $49,706,000. The charge includes
$29,620,000 for future rental payments under operating lease agreements that
will be paid after the store is closed, $4,966,000 in fees, settlement costs and
other expenses related to store closure and $15,120,000 in asset impairment
charges. Lease agreements for
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the relocation sites will be executed during fiscal year 1999 and the stores
will be closed and relocated during fiscal years 1999 and 2000.
As a result of Staples' commitment to exit these stores, the Company evaluated
the long-lived assets at each location in accordance with FAS 121. The analysis
indicated that the long-lived assets of the designated stores were impaired.
Accordingly, Staples estimated the fair value of these assets based on
discounted cash flows and recorded an impairment charge of $15,120,000, which is
included in the store closure charge. Staples will continue to depreciate these
assets based on their revised useful life.
NOTE N DESCRIPTION OF THE TYPES OF PRODUCTS AND SERVICES FROM WHICH EACH
REPORTABLE SEGMENT DERIVES ITS REVENUES
Staples has three reportable segments: North America Retail, North America
Delivery Operations, and European Operations. Staples' North America Retail
division consists of two operating units that operate stores throughout the US
and Canada. Staples' North America Delivery Operations division consists of four
operating units that sell office products and supplies directly to businesses.
The European Operations segment consists of two operating units which operate
office supply stores and sell directly to businesses throughout the United
Kingdom and Germany.
Measurement of Segment Profit or Loss and Segment Assets
Staples evaluates performance and allocates resources based on profit or loss
from operations before income taxes, not including gains and losses on Staples'
investment portfolio. The accounting policies of the reportable segments are the
same as those described in the summary of significant accounting policies.
Intersegment sales and transfers are recorded at Staples' cost, therefore there
is no intercompany profit or loss recognized on these transactions.
Factors Management Used to Identify the Enterprise's Reportable Segments
Staples' reportable segments are business units that distribute office products
in different manners. The reportable segments are each managed separately
because they distribute products to different classes of customer with different
distribution methods. The European operations are considered a separate
operating segment because of the significant difference in the operating
environment from the North American operations.
Information about Segment Profit/Loss and Segment Assets (in thousands)
Year ended January 30, 1999:
N. AMERICA N. AMERICA DELIVERY EUROPEAN
RETAIL OPERATIONS OPERATIONS ALL OTHER(1) TOTALS
--------------------------------------------------------------------------------
Revenues from external
customers .............. $4,867,124 $ 1,914,975 $ 341,090 $ -- $7,123,189
Merger and store closure .. 49,706 41,000 -- -- 90,706
Depreciation expense ...... 67,208 5,164 6,818 -- 79,190
Segment profit (loss) ..... 381,900 118,548 (17,077) (177,110) 306,261
Segment assets ............ 2,886,114 448,452 162,693 -- 3,497,259
Expenditures for long-lived
assets ................. 307,817 1,362 13,129 -- 322,308
(1) All other includes corporate general and administrative expenses.
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Year ended January 31, 1998:
N. AMERICA N. AMERICA DELIVERY EUROPEAN
RETAIL OPERATIONS OPERATIONS ALL OTHER(1) TOTALS
--------------------------------------------------------------------------------
Revenues from external
customers ............... $3,854,745 $ 1,652,215 $ 225,185 $ -- $ 5,732,145
Merger expenses ........... -- -- -- 29,665 29,665
Depreciation expense ...... 52,479 3,908 4,358 -- 60,745
Segment profit (loss) ..... 319,939 112,031 (8,049) (174,167) 249,754
Segment assets ............ 2,432,696 386,053 130,088 -- 2,948,837
Expenditures for long-lived
assets .................. 173,767 7,527 43,932 -- 225,226
(1) All other includes corporate general and administrative expenses and merger
related costs in connection with the then proposed merger with Office
Depot, Inc.
ASSETS JANUARY 30, JANUARY 31,
- - ------ 1999 1998
----------- -----------
Total assets for reportable segments ...... $ 3,497,259 $ 2,948,837
Elimination of intercompany receivables.... (89,664) (114,504)
Elimination of intercompany investments.... (228,329) (195,471)
----------- -----------
Total consolidated assets.... $ 3,179,266 $ 2,638,862
=========== ===========
Geographic Information
Year ended January 30, 1999:
REVENUES LONG-LIVED ASSETS
---------- -----------------
North America .... $6,782,099 $1,027,704
Europe ........... 341,090 35,913
---------- ----------
Consolidated Total $7,123,189 $1,063,617
========== ==========
Year ended January 31, 1998:
REVENUES LONG-LIVED ASSETS
---------- -----------------
North America .... $5,506,959 $762,371
Europe ........... 225,186 30,888
---------- --------
Consolidated Total $5,732,145 $793,259
========== ========
NOTE O GUARANTOR SUBSIDIARIES
The 7.125% senior notes due August 15, 2007 and the obligations under the
$350,000,000 revolving credit facility effective through November, 2002 with a
syndicate of banks are fully and unconditionally guaranteed on an unsecured,
joint and several basis by certain wholly owned subsidiaries of Staples (the
"Guarantor Subsidiaries"). The following condensed consolidating financial data
illustrates the composition of Staples, Inc. (the "Parent Company"), Guarantor
Subsidiaries, and non-guarantor subsidiaries as of and for the year ended
January 30, 1999. Prior to February 1, 1998 the Company's debt was registered
with Staples, Inc., which held the assets and operations that guaranteed the
related debt, therefore the consolidated financial statements represent those of
Staples and separate disclosure is not necessary for the years ended January 31,
1998 and February 1, 1997. The non-guarantor subsidiaries represent more than an
inconsequential portion of the consolidated assets and revenues of Staples.
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Separate complete financial statements of the respective Guarantors Subsidiaries
would not provide additional information which would be useful in assessing the
financial condition of the Guarantor Subsidiaries and thus, are not presented.
Investments in subsidiaries are accounted for by the Parent Company on the
equity method for purposes of the supplemental consolidating presentation.
Earnings of subsidiaries are, therefore, reflected in the Parent Company's
investment accounts and earnings. The principal elimination entries eliminate
the Parent Company' investment in subsidiaries and intercompany balances and
transactions.
Condensed Consolidated Statement of Income
For the year ended January 30, 1999
(in thousands)
NON-
STAPLES, INC GUARANTOR GUARANTOR
(PARENT CO.) SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------------ ------------ ------------ ------------
Sales .......................... $ -- $ 5,428,414 $ 1,694,775 $ 7,123,189
Cost of goods sold and occupancy
costs ........................ 1,477 4,079,847 1,284,478 5,365,802
-------- ----------- ----------- -----------
Gross profit ................... (1,477) 1,348,567 410,297 1,757,387
Operating and other expenses ... 30,096 1,106,734 314,296 1,451,126
-------- ----------- ----------- -----------
Income before income taxes ..... (31,573) 241,833 96,001 306,261
Provision for income taxes ..... 24,057 (98,808) (46,275) (121,026)
Minority interest .............. -- -- 135 135
-------- ----------- ----------- -----------
Net income ..................... $ (7,516) $ 143,025 $ 49,861 $ 185,370
======== =========== =========== ===========
Condensed Consolidating Balance Sheet
As of January 30, 1999
(in thousands)
NON-
STAPLES, INC GUARANTOR GUARANTOR
(PARENT CO.) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
Cash, cash equivalents and
short-term investments .. $ 219,426 $ 16,348 $ 139,647 $ -- $ 375,421
Merchandise inventories ... (5,561) 1,095,906 250,087 -- 1,340,432
Other current assets and
Intercompany ............ 780,629 396,920 552,395 (1,381,697) 348,247
----------- ---------- ---------- ----------- -----------
Total current assets ...... 994,494 1,509,174 942,129 (1,381,697) 2,064,100
Net property, equipment and
other assets ............ 271,129 710,049 362,178 (228,190) 1,115,166
----------- ---------- ---------- ----------- -----------
Total assets .............. $ 1,265,623 $2,219,223 $1,304,307 $(1,609,887) $ 3,179,266
=========== ========== ========== =========== ===========
Total current liabilities . $ 86,206 $ 830,728 $ 266,789 $ 81,609 1,265,332
Total long-term liabilities 7,581 237,128 12,339 -- 257,048
Total stockholders' equity 1,171,836 1,151,367 1,025,179 (1,691,496) 1,656,886
----------- ---------- ---------- ----------- -----------
Total liabilities and
stockholders' equity .... $ 1,265,623 $2,219,223 $1,304,307 $(1,609,887) $ 3,179,266
=========== ========== ========== =========== ===========
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Condensed Consolidated Statement of Cash Flows
For the year ended January 30, 1999
(in thousands)
NON-
STAPLES, INC GUARANTOR GUARANTOR
(PARENT CO.) SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------------ ------------ ------------ ------------
Net cash (used in)/provided by
operating activities ................ $(136,712) $ 336,445 $ 178,603 $ 378,336
Investing Activities:
Acquisition of property,
equipment and lease rights......... (62,535) (261,575) (35,380) (359,490)
Other ............................... 211,299 (66,776) (152,940) (8,417)
--------- --------- --------- ---------
Cash (used in)/provided by investing
148,764 (328,351) (188,320) (367,907)
Activities
Financing Activities:
Payments on borrowings .............. (393,713) -- (23,610) (417,323)
Other ............................... 411,835 -- (27,476) 384,359
--------- --------- --------- ---------
Cash provided by/(used) in
financing activities ................ 18,122 -- (51,086) (32,964)
Effect of exchange rate changes on cash -- -- (560) (560)
--------- --------- --------- ---------
Net (decrease) increase in cash ....... 30,174 8,094 (61,363) (23,095)
Cash and cash equivalents at
beginning of period ................. 189,252 8,253 183,583 381,088
--------- --------- --------- ---------
Cash and cash equivalents at end
of period ........................... $ 219,426 $ 16,347 $ 122,220 $ 357,993
========= ========= ========= =========
NOTE P SUBSEQUENT EVENTS
On February 26, 1999, Staples completed the acquisition of Claricom Holdings,
Inc. and certain related entities ("Claricom") for a purchase price of
approximately $140,000,000. The acquisition will be accounted for using the
purchase method. Claricom is a full-service supplier of telecommunications
services to small and medium sized businesses in the United States.
On March 4, 1999 the Board of Directors approved a stock repurchase program
intended to provide shares for employee stock programs. Staples expects to
repurchase approximately six million shares annually.
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EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
3.1 -- Amended and Restated Certificate of Incorporation of the Company
3.2(1) -- Amended and Restated By-laws of the Company
4.2 -- Rights Agreement, dated as of February 3, 1994, between Staples
and BankBoston, N.A., as amended
4.3(2) -- Indenture dated as of August 12, 1997 for the $200,000,000 7.125%
Senior Notes due August 15, 2007, between Staples and The Chase
Manhattan Bank
*10.1 -- Amended and Restated 1990 Director Stock Option Plan
*10.2(3) -- Amended and Restated 1992 Equity Incentive Plan
*10.3(4) -- 1997 United Kingdom Company Share Option Scheme
*10.4(4) -- Executive Officer Incentive Plan
10.5(5) -- Revolving Credit Agreement dated as of November 13, 1997, between
Staples and BankBoston, N.A. and the banks named therein
*10.6(6) -- Form of Agreement Not To Compete signed by executive officers of
the Company
*10.7(6) -- Form of Proprietary and Confidential Information Agreement signed
by executive officers of the Company
*10.8(7) -- 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, Independent Auditors
23.2 -- Consent of Independent Auditor Kupferberg, Goldberg & Neimark,
LLC
27.1 -- Financial Data Schedule for Fiscal Year 1998
27.2 -- Financial Data Schedule for 1st Quarter 1998 Restated
27.3 -- Financial Data Schedule for 2nd Quarter 1998 Restated
27.4 -- Financial Data Schedule for 3rd Quarter 1998 Restated
27.5 -- Financial Data Schedule for Fiscal Year 1997 Restated
27.6 -- Financial Data Schedule for 1st Quarter 1997 Restated
27.7 -- Financial Data Schedule for 2nd Quarter 1997 Restated
27.8 -- Financial Data Schedule for 3rd Quarter 1997 Restated
27.9 -- Financial Data Schedule for Fiscal Year 1996 Restated
27.10 -- Financial Data Schedule for 1st Quarter 1996 Restated
27.11 -- Financial Data Schedule for 2nd Quarter 1996 Restated
27.12 -- Financial Data Schedule for 3rd Quarter 1996 Restated
99.1 -- Independent Auditors' Report of Kupferberg, Goldberg & Neimark,
LLC
- - ----------
* 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 the Quarterly Report on Form 10-Q for the
quarter ended May 3, 1997.
(2) Incorporated by reference from the Registration Statement on Form S-3 (File
No. 333-31249).
E-1
56
(3) Incorporated by reference from the Registration Statement on Form S-8 (File
No. 333-36715).
(4) Incorporated by reference from the Annual Report on Form 10-K for the
fiscal year ended January 31, 1998.
(5) Incorporated by reference to the Quarterly Report on Form 10-Q for the
quarter ended November 1, 1997.
(6) Incorporated by reference to the Quarterly Report on Form 10-Q for the
quarter ended April 29, 1995.
(7) Incorporated by reference from the Annual Report on Form 10-K for the
fiscal year ended February 3, 1996.
E-2