<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended: May 2, 1998
-----------------------------------------------
Commission File Number: 0-17586
--------------------------------------------------------
STAPLES, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2896127
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Research Drive, Westborough, MA 01581
----------------------------------------------------
(Address of principal executive office and zip code)
508-370-8500
----------------------------------------------------
(Registrant's telephone number, including area code)
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.
Yes [X] No [ ]
The registrant had 282,754,534 shares of Common Stock, par value $.0006,
outstanding as of June 1, 1998.
<PAGE> 2
FORM 10-Q
STAPLES, INC.
MAY 2, 1998
TABLE OF CONTENTS
Page
----
Consolidated Balance Sheets ............................................ 3
Consolidated Statements of Income ...................................... 4
Consolidated Statements of Cash Flows .................................. 5
Notes to Consolidated Financial Statements ............................. 6-8
Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................. 9-13
Part II ................................................................ 14
Signature .............................................................. 15
Page 2
<PAGE> 3
STAPLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
May 2,
1998 January 31,
(Unaudited) 1998
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 229,131 $ 355,238
Short-term investments ................................. 1,167 2,666
Merchandise inventories ................................ 1,101,303 1,092,410
Receivables, net ....................................... 184,191 151,885
Prepaid expenses and other current assets .............. 76,948 64,134
---------- ----------
TOTAL CURRENT ASSETS .............................. 1,592,740 1,666,333
PROPERTY AND EQUIPMENT:
Land and buildings ..................................... 130,479 117,858
Leasehold improvements ................................. 302,427 288,213
Equipment .............................................. 267,441 257,116
Furniture and fixtures ................................. 180,002 168,411
---------- ----------
TOTAL PROPERTY AND EQUIPMENT ...................... 880,349 831,598
Less accumulated depreciation and amortization ......... 283,384 257,627
---------- ----------
NET PROPERTY AND EQUIPMENT ........................ 596,965 573,971
OTHER ASSETS:
Lease acquisition costs, net of amortization ........... 79,148 43,244
Investment in affiliates ............................... 136,745 139,753
Goodwill, net of amortization .......................... 28,752 31,209
---------- ----------
Other .................................................. 244,645 214,206
---------- ----------
TOTAL OTHER ASSETS ................................ $2,434,350 $2,454,510
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ....................................... $ 591,732 $ 641,851
Accrued expenses and other current liabilities ......... 256,314 259,290
Debt maturing within one year .......................... 15,499 39,779
---------- ----------
TOTAL CURRENT LIABILITIES ......................... 863,545 940,920
LONG-TERM DEBT ........................................... 208,342 208,876
OTHER LONG-TERM OBLIGATIONS .............................. 42,930 37,103
CONVERTIBLE DEBENTURES ................................... 300,000 300,000
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value-authorized
5,000,000 shares; no shares issued Common stock,
$.0006 par value-authorized 500,000,000 shares;
issued 256,352,015 shares at May 2, 1998 and
252,169,891 shares at January 31, 1998 ................. 108 106
Additional paid-in capital ............................. 614,616 593,895
Cumulative foreign currency translation adjustments .... (8,117) (10,315)
Unrealized gain/(loss) on short-term investments ....... 2 4
Retained earnings ...................................... 415,432 384,132
Less: treasury stock, at cost, 147,281 shares at
May 2, 1998 and 59,149 shares at January 31, 1998 ...... (2,593) (346)
Minority interest ...................................... 85 135
---------- ----------
TOTAL STOCKHOLDERS' EQUITY .................... 1,019,533 967,611
---------- ----------
$2,434,350 $2,454,510
========== ==========
</TABLE>
See notes to consolidated financial statements.
Page 3
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STAPLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(Unaudited)
13 Weeks Ended
-------------------------------
May 2, May 3,
1998 1997
------------ ------------
<S> <C> <C>
Sales ............................................ $ 1,517,472 $ 1,154,994
Cost of goods sold and occupancy costs ........... 1,160,793 886,239
------------ ------------
GROSS PROFIT ................................. 356,679 268,755
Operating expenses:
Operating and selling .......................... 241,806 184,794
Pre-opening .................................... 3,352 2,862
General and administrative ..................... 54,391 36,012
Amortization of goodwill ....................... 925 572
------------ ------------
TOTAL OPERATING EXPENSES ..................... 300,474 224,240
------------ ------------
OPERATING INCOME ............................. 56,205 44,515
Other income (expense):
Interest and other expense, net ................ (4,944) (4,219)
Merger-related costs ........................... - (20,562)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) ................. (4,944) (24,781)
INCOME BEFORE EQUITY IN LOSS OF
AFFILIATES AND INCOME TAXES ................ 51,261 19,734
Equity in gain/(loss) of affiliates ............. - (5,953)
------------ ------------
INCOME BEFORE INCOME TAXES .................... 51,261 13,781
Income tax expense ............................... 20,011 5,375
------------ ------------
NET INCOME BEFORE MINORITY INTEREST ........... 31,250 8,406
Minority interest .............................. 50 -
------------ ------------
NET INCOME .................................... $ 31,300 $ 8,406
============ ============
Net income per common share ...................... $ 0.12 $ 0.04
============ ============
Net income per common share assuming dilution .... $ 0.12 $ 0.03
============ ============
Number of shares used in computing net
income per common share ..................... 253,362,135 243,057,149
============ ============
Number of shares used in computing net
income per common share assuming dilution ... 281,754,828 251,361,238
============ ============
</TABLE>
See notes to consolidated financial statements.
Page 4
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STAPLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
(Unaudited)
13 Weeks Ended
-------------------------
May 2, May 3,
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ..................................................... $ 31,300 $ 8,406
Adjustments to reconcile net income to net cash provided by/
(used in) operating activities:
Minority interest ........................................... (50) -
Depreciation and amortization ............................... 25,645 18,889
Equity in loss of affiliates ................................ - 5,953
Net increase in deferred tax assets ......................... 2,795 (3,456)
(Increase)/decrease in assets:
Merchandise inventories .................................. (5,967) (16,760)
Receivables .............................................. (31,655) (7,023)
Prepaid expenses and other assets ........................ (9,618) 862
(Decrease)/increase in accounts payable, accrued
expenses and other current liabilities ................... (57,401) 29,786
Increase in other long-term obligations ..................... 5,666 2,276
--------- ---------
(70,585) 30,527
--------- ---------
NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES ............ (39,285) 38,933
INVESTING ACTIVITIES:
Acquisition of property and equipment .......................... (46,644) (36,174)
Proceeds from sales and maturities of short-term investments ... 8,353 3,123
Purchase of short-term investments ............................. (6,854) -
Investment in affiliates ....................................... 762 (1,670)
Acquisition of lease rights .................................... (36,826) (375)
Other .......................................................... 3,992 (1,991)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES .......................... (77,217) (37,087)
FINANCING ACTIVITIES:
Proceeds from sale of capital stock ............................ 15,089 3,513
Proceeds from borrowings ....................................... (334) 365,627
Payments on borrowings ......................................... (24,814) (301,261)
--------- ---------
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES ............ (10,059) 67,879
Effect of exchange rate changes on cash ........................ 454 (1,073)
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS ............... (126,107) 68,652
Cash and cash equivalents at beginning of period ................... 355,238 98,143
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......................... $ 229,131 $ 166,795
========= =========
</TABLE>
See notes to consolidated financial statements.
Page 5
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STAPLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying interim unaudited consolidated financial statements include the
accounts of Staples, Inc. and subsidiaries (the "Company"). All intercompany
accounts and transactions are eliminated in consolidation.
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, such interim statements reflect all adjustments (consisting of
normal recurring accruals) necessary to present fairly the financial position
and the results of operations and cash flows for the interim periods presented.
The results of operations for the interim periods are not necessarily indicative
of the results to be expected for the full year. These financial statements
should be read in conjunction with the audited consolidated financial statements
and footnotes included in the Company's Annual Report on Form 10-K dated April
17, 1998 for the year ended January 31, 1998.
NOTE 2 - COMPUTATION OF EARNINGS PER SHARE
For the fiscal year ended January 31, 1998, the Company adopted Statement of
Accounting Standards No. 128 ("FAS 128") which requires the presentation of
Basic and Diluted earnings per share, which replaces primary and fully diluted
earnings per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. Earnings per share have been restated for all
periods presented to reflect the adoption of FAS 128.
Average common and common equivalent shares used in computing diluted earnings
per share include approximately 28,393,000 and 8,304,000 shares for the quarters
ended May 2, 1998 and May 3, 1997, respectively, as a result of applying the
treasury stock method to outstanding stock options as well as the convertible
debentures. Convertible debentures were not included in the calculations for the
quarter ended May 3, 1997 as their inclusion would be anti-dilutive.
NOTE 3 - GUARANTOR SUBSIDIARIES
The 7.125% senior notes due August 15, 2007, the 4.5% convertible subordinated
debentures due October 1, 2000 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 the Company (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 quarter ended May
2, 1998. The non-guarantor subsidiaries represent more than an inconsequential
portion of the consolidated assets and revenues of the Company. 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.
Page 6
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STAPLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 thirteen weeks ended May 2, 1998
(in thousands)
<TABLE>
<CAPTION>
Non-
Staples, Inc. Guarantor Guarantor
(Parent Corp.) Subsidiaries Subsidiaries Consolidated
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ - $1,264,650 $252,822 $1,517,472
Cost of goods sold 269 967,630 192,894 1,160,793
-------- ---------- -------- ----------
Gross profit (269) 297,020 59,928 356,679
Operating expenses 29,158 221,454 49,862 300,474
-------- ---------- -------- ----------
Operating income (29,427) 75,566 10,066 56,205
Interest expense, net (6,016) (8,034) 9,106 (4,944)
Provision for income taxes 1,965 (16,853) (5,123) (20,011)
Minority interest - - 50 50
-------- ---------- -------- ----------
Net income $(33,478) $ 50,679 $ 14,099 $ 31,300
======== ========== ======== ==========
Condensed Consolidating Balance Sheet
As of May 2, 1998
(in thousands)
<CAPTION>
Non-
Staples, Inc. Guarantor Guarantor
(Parent Corp.) Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments $ 73,585 $ 7,352 $ 149,361 $ 230,298
Merchandise inventories (6,046) 936,278 171,071 1,101,303
Other current assets and
intercompany 820,556 473,089 440,136 (1,472,642) 261,139
---------- ---------- ---------- ----------- ----------
Total current assets 888,095 1,416,719 760,568 (1,472,642) 1,592,740
Net property, equipment and other
assets 212,118 557,227 267,778 (195,513) 841,610
---------- ---------- ---------- ----------- ----------
Total assets 1,100,213 1,973,946 1,028,346 $(1,668,155) 2,434,350
========== ========== ========== =========== ==========
Total current liabilities $ 128,063 $ 714,808 $ 258,042 $ (237,368) $ 863,545
Total long-term liabilities 301,443 237,192 12,637 551,272
Total stockholders' equity 670,707 1,021,946 757,667 (1,430,787) 1,019,533
========== ========== ========== =========== ==========
Total liabilities and
stockholders' equity $1,100,213 $1,973,946 $1,028,346 $(1,668,155) $2,434,350
========== ========== ========== =========== ==========
</TABLE>
Page 7
<PAGE> 8
STAPLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Condensed Consolidated Statement of Cash Flows
For the thirteen weeks ended May 2, 1998
(in thousands)
<TABLE>
<CAPTION>
Non-
Staples, Inc. Guarantor Guarantor
(Parent Corp.) Subsidiaries Subsidiaries Consolidated
-------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net cash (used in)/provided by
operating activities $ (52,210) $ 594 $ 12,331 $ (39,285)
Investing Activities:
Acquisition of property,
equipment and lease rights (14,238) (65,722) (3,510) (83,470)
Other (43,267) 64,227 (14,707) 6,253
--------- -------- -------- ---------
Cash used in investing activities (57,505) (1,495) (18,217) (77,217)
Financing Activities:
Payments on borrowings (25,251) - 437 (24,814)
Other 19,225 - (4,470) 14,755
--------- -------- -------- ---------
Cash used in financing activities (6,026) - (4,033) (10,059)
Effect of exchange rate changes on cash - - 454 454
--------- -------- -------- ---------
Net decrease in cash (115,741) (901) (9,465) (126,107)
Cash and cash equivalents at
beginning of period 189,252 8,253 157,733 355,238
--------- -------- -------- ---------
Cash and cash equivalents at end
of period $ 73,511 $ 7,352 $148,268 $ 229,131
========= ======== ======== =========
</TABLE>
NOTE 4 - SUBSEQUENT EVENT
On May 21, 1998, the Company completed the acquisition of Quill Corporation
("Quill") and certain related entities (the "Merger"). The Merger is structured
as a tax-free exchange of shares in which the stockholders of Quill and such
related entities received approximately 26 million shares of the Company's
common stock valued at a combination of fixed and variable prices and cash of
approximately $54 million which would equate to a purchase price of
approximately $690 million. The Merger is being accounted for as a pooling of
interests. Quill is a privately held company which sells office supplies to
businesses in the United States via a mail order catalog, the internet and
outbound telemarketing. Quill recorded $550 million in sales for the year ended
December 31, 1997.
Page 8
<PAGE> 9
STAPLES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales. Sales increased 31% to $1,517,472,000 in the quarter ended May 2, 1998
from $1,154,994,000 in the quarter ended May 3, 1997. This growth is
attributable to an increase in the number of open stores, increased sales in
existing stores and in the delivery and contract stationer segments, and the
consolidation (beginning in May, 1997) of the sales of Staples UK and Staples
(Deutschland) GmbH ("Staples Germany", formally MAXI-Papier-Markt-GmbH). The
German stores now operate as Staples Der Buro Mega Markt. Comparable store and
delivery hub sales for the quarter ended May 2, 1998 increased 11% over the
quarter ended May 3, 1997. Comparable sales in the contract stationer segment
increased 9% for the quarter ended May 2, 1998 versus the quarter ended May 3,
1997. The Company had 782 stores open as of May 2, 1998 compared to 599 stores
as of May 3, 1997 and 742 stores as of January 31, 1998. This total includes 41
stores opened and one closed during the three months ended May 2, 1998 and 56
stores acquired in the UK and Germany as a result of the acquisitions of Staples
UK and Staples Germany in May, 1997.
GROSS PROFIT. Gross profit as a percentage of sales was 23.5% for the three
months ended May 2, 1998 as compared to 23.3% for the same period in the prior
year. The increase in gross profit rate for the three months ended May 2, 1998
was primarily due to improved margins in the retail and delivery business
segments due to lower product costs from vendors as a result of increased
purchase discounts and changes in product mix, as well as the leveraging of
distribution center and delivery costs over a larger sales base. This was
partially offset by decreases in the margin rates in the retail store segment,
due to price reductions as well as an increase in the sales of computer hardware
(CPU's and laptops), which generate a lower margin rate than other categories,
to 8.8% of sales from 8.4% of sales for the three months ended May 3, 1997.
OPERATING AND SELLING EXPENSES. Operating and selling expenses, which consist of
payroll, advertising and other store operating costs, decreased as a percentage
of sales in the three months ended May 2, 1998 to 15.9%, as compared to 16.0%
for the same period in the prior year. The decrease is primarily due to
increased leveraging of fixed store payroll expenses and other fixed store
operating costs as store sales have increased. This was partially offset by the
acquisitions of Staples UK and Staples Germany, which have higher costs as a
percentage of sales, and costs incurred for the Company's store remodel program
in which significant investments have been made in store layouts and signing to
improve shopability and to enhance customer service.
Staples UK and Staples Germany store expenses are higher as a result of their
earlier stage of development. While most store expenses vary proportionately
with sales, there is a fixed cost component. Because new stores typically
generate lower sales than the Company average, the fixed cost component results
in higher store operating and selling expenses as a percentage of sales in these
stores during their start-up period. During periods when new store openings as a
percentage of the base are higher, store operating and selling expenses as a
percentage of sales may increase. In addition, as the store base matures, the
fixed cost component of operating expenses is leveraged over an increased level
of sales, resulting in a decrease in store operating and selling expenses as a
percentage of sales. The Company's strategy of continuing to add stores to many
existing markets can result in some new stores attracting sales away from
existing stores.
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<PAGE> 10
PRE-OPENING EXPENSES. Pre-opening expenses relating to new store openings, which
consist primarily of salaries, supplies, marketing and occupancy costs, are
expensed by the Company as incurred and therefore fluctuate from period to
period depending on the timing and number of new store openings. Pre-opening
expenses averaged $82,000 per store for the three months ended May 2, 1998 as
compared to $67,000 per store for the same period in the prior year. The
increase in the average cost per store is primarily due to Staples UK and
Staples Germany store openings which are included in the three months ended May
2, 1998 and carry a higher pre-opening expense.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the
three months ended May 2, 1998 increased as a percentage of sales to 3.6% as
compared to 3.1% for the same period in the prior year. This increase was
primarily due to significant investments in the Company's information systems'
staffing and infrastructure, which the Company believes will reduce costs as a
percentage of sales in future years. In addition, general and administrative
expense for the three months ended May 2, 1998 include the results of Staples UK
and Staples Germany, which have higher general and administrative costs as a
percentage of sales; as their store bases mature, overhead expenses should
decrease as a percentage of sales. The overall increase in general and
administrative costs was partially offset by the Company's ability to increase
sales without proportionately increasing overhead expenses in its core retail
business.
INTEREST AND OTHER EXPENSE, NET. Net interest and other expense for the three
months ended May 2, 1998 was $4,944,000 as compared to $4,219,000 for the same
period in the prior year. The increase from the three months ended May 3, 1997
was primarily due to increased borrowings, which funded the increase in store
inventories, related to new store openings, expanded product assortment, and
improvements in in-stock levels; the acquisition of fixed assets for new stores
opened and remodeled; and continued investments in the information systems and
distribution center infrastructure.
MERGER-RELATED COSTS. The Company charged to expense in the three months ended
May 3, 1997 certain non-recurring costs consisting primarily of legal,
accounting, transaction related costs (such as filing fees) and consulting fees
incurred in connection with the proposed merger with Office Depot, Inc.
EQUITY IN LOSS OF AFFILIATES. The Company's equity in loss of affiliates was
$5,953,000 for the three months ended May 3, 1997. The Company recorded no
equity in loss of affiliates for the three months ended May 2, 1998, 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, the Company's ownership interest
of Staples UK increased to 100% and its ownership of Staples Germany increased
to approximately 92%. The transactions were accounted for in accordance with the
purchase method of accounting and accordingly, the consolidated results of these
entities are reflected in the Company's 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 the
Company's share of losses from operations being included in Equity in Loss of
Affiliates. As of May 2, 1998, Staples UK and Staples Germany operated 42 and 18
stores, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended May 2, 1998, cash and cash equivalents decreased
by $126,107,000. This decrease was attributable to cash used in investing
activities of $77,217,000, which includes capital
Page 10
<PAGE> 11
expenditures and acquisition of leases of $83,470,000 primarily incurred in
connection with the acquisition of leases from the bankrupt Rickels Home Center
chain and the opening of 41 new stores, and cash used in operating activities of
$39,285,000, which primarily reflects an increase in receivables and a decrease
in accrued expenses and other current liabilities partially offset by operating
income and depreciation and amortization. Cash used by financing activities was
primarily repayment on borrowing of $24,814,000 partially offset by proceeds
from capital stock of $15,089,000.
The Company opened 41 stores and closed one store during the three months ended
May 2, 1998, and expects to open approximately 110 additional stores in the last
three quarters of fiscal 1998. Management estimates that the Company's cash
requirements, including pre-opening expenses, leasehold improvements and
fixtures (net of store inventory financed under vendor trade terms), will be
approximately $1,400,000 for each new store (excluding the cost of any
acquisitions of lease rights). Accordingly, the Company expects to use in excess
of $182,000,000 for store openings during this period. In addition, the Company
plans to continue to make investments in information systems, distribution
centers and store remodels to improve operational efficiencies and customer
service, and may expend additional funds to acquire businesses or lease rights
from tenants occupying retail space that is suitable for a Staples store. The
Company expects to meet these cash requirements through a combination of
available cash, operating cash flow and borrowings from its existing revolving
line of credit.
The Company issued $200,000,000 of senior notes (the "Notes") on August 12, 1997
with an interest rate of 7.125% payable semi-annually on February 15 and August
15 of each year commencing on February 15, 1998. Net proceeds of approximately
$198,000,000 from the sale of the Notes are being used for repayment of
indebtedness under the Company's revolving credit agreement and for general
working capital purposes, including the financing of new store openings,
distribution facilities and corporate offices.
The Company 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, sales of assets, and dividends. As of May 2, 1998, no borrowings
were outstanding under the revolving credit agreement. Staples Germany also has
a revolving credit facility under which $10,096,000 was outstanding at May 2,
1998. Total cash, short-term investments and available revolving credit amounts
totaled $625,378,000 as of May 2, 1998.
The Company 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 operational cash needs for the next
twelve to eighteen months. The Company is continually evaluating financing
possibilities, and it may seek to raise additional funds through any one or a
combination of public or private debt or equity-related offerings, dependent
upon market conditions, or through additional commercial bank debt arrangements.
Page 11
<PAGE> 12
FUTURE OPERATING RESULTS
This quarterly report on Form 10-Q contains a number of forward-looking
statements. There are a number of important factors that could cause the
Company's results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation, the
following: The Company operates in a highly competitive marketplace, in which it
competes with a variety of retailers, dealers and distributors. The Company
competes in most of its geographic markets with other high-volume office supply
chains that are similar in concept to the Company in terms of store format,
pricing strategy and product selection, such as Office Depot, OfficeMax and
Office World, as well as mass merchants, such as Wal-Mart, warehouse clubs,
computer and electronics superstores, and other discount retailers. In addition,
the Company's retail stores, as well as its delivery and contract business,
compete with numerous mail order firms, contract stationer businesses and direct
manufacturers. Such competitors have increased their presence in the Company's
markets in recent years. Some of the Company's current and potential competitors
in the office products industry are larger than the Company and have
substantially greater financial resources. No assurance can be given that
competition will not have an adverse effect on the Company's business.
An important part of the Company's business plan is an aggressive store growth
strategy. The Company opened 130 stores in the United States, Canada and Europe
in fiscal 1997 and plans to open approximately 150 new stores in fiscal 1998.
There can be no assurance that the Company will be able to identify and lease
favorable store sites, hire and train employees, and adapt its management and
operational systems to the extent necessary to fulfill its expansion plans. The
failure to open new stores in accordance with its growth plans could have a
material adverse impact on the Company's future sales and profits. Moreover, the
Company's expansion strategy is based in part on the continued addition of new
stores to its store network in existing markets to take advantage of economies
of scale in marketing, distribution and supervision costs; however, this can
result in the "cannibalization" of sales of existing stores. In addition, there
can be no assurance that the new stores opened by the Company will achieve sales
or profit levels commensurate with those of the Company's existing stores.
The Company has experienced and may experience in the future fluctuations in its
quarterly operating results. Moreover, there can be no assurance that Staples
will continue to realize the earnings growth experienced over recent years, or
that earnings in any particular quarter will not fall short of either a prior
fiscal quarter or investors' expectations. Factors such as the number of new
store openings (pre-opening expenses are expensed as incurred, and newer stores
are less profitable than mature stores), the extent to which new stores
"cannibalize" sales of existing stores, the mix of products sold, pricing
actions of competitors, the level of advertising and promotional expenses,
seasonality, and one-time charges associated with acquisitions or other events
could contribute to this quarterly variability. In addition, the Company's
expense levels are based in part on expectations of future sales levels, and a
shortfall in expected sales could therefore result in a disproportionate
decrease in the Company's net income.
The Company's business, including sales, number of stores and number of
employees, has grown dramatically over the past several years. In addition, the
Company has consummated a number of significant acquisitions in the last few
years, and may make additional acquisitions in the future. This internal growth,
together with the acquisitions made by the Company, have placed significant
demand on the management and operational systems of the Company. To manage its
growth effectively, the
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<PAGE> 13
Company will be required to continue to upgrade its operational and financial
systems, expand its management team and increase and manage its employee base.
The Company has a presence in international markets through The Business Depot
Ltd. in Canada and its recently acquired joint operations in Germany and the
United Kingdom, and may seek to expand in to other international markets in the
future. The Company's operations in foreign markets are subject to risks similar
to those affecting its U.S. stores, in addition to a number of additional risks
inherent in foreign operations, including local customs and competitive
conditions, and foreign currency fluctuations. Staples' European operations are
currently unprofitable, and there can be no assurance that they will become
profitable.
The Company currently expects that its current cash and cash equivalents and
funds available under its revolving credit facility will be sufficient to fund
its planned store openings and other operating cash needs for the next twelve to
eighteen months. However, there can be no assurance that the Company will not
require additional sources of financing prior to such time, as a result of
unanticipated cash needs or opportunities, an expanded growth strategy or
disappointing operating results. There also can be no assurance that the
additional funds required by the Company, whether within the next eighteen
months or thereafter, will be available to the Company on satisfactory terms.
Page 13
<PAGE> 14
PART II -- OTHER INFORMATION
ITEMS 1-5 - NOT APPLICABLE.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits
10.1 First Supplemental Indenture to Indenture dated as of October 5,
1995 between Staples, Inc., Staples Contract & Commercial, Inc.,
Staples the Office Superstore, Inc., Staples the Office Superstore
East, Inc. and Marine Midland Bank.
10.2 First Supplemental Indenture to Indenture (Senior Debt Securities)
dated as of August 12, 1997 between Staples, Inc., Staples Contract
& Commercial, Inc., Staples the Office Superstore, Inc., Staples the
Office Superstore East, Inc. and Chase Manhattan Bank.
27.1 Financial Data Schedule.
B. Reports on Form 8-K.
None
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<PAGE> 15
SIGNATURE
Pursuant to the requirements 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.
Date: June 2, 1998 /s/ John J. Mahoney
---------------------------------
John J. Mahoney
Executive Vice President and
Chief Administrative Officer
Page 15
<PAGE> 1
Exhibit 10.1
FIRST SUPPLEMENTAL INDENTURE
to
INDENTURE, DATED AS OF OCTOBER 5, 1995
This FIRST SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), is
entered into as of January 15, 1998, by and among Staples, Inc., a Delaware
corporation (the "Company"), Staples Contract & Commercial, Inc., a Delaware
corporation, Staples the Office Superstore, Inc., a Delaware corporation, and
Staples the Office Superstore East, Inc., a Delaware corporation (each, a
"Subsidiary Guarantor" and collectively, the "Subsidiary Guarantors"), and
Marine Midland Bank, a New York banking corporation and trust company, as
trustee under the Indenture referred to below (the "Trustee").
W I T N E S S E T H:
--------------------
WHEREAS, the Company has issued $300,000,000 principal amount of its 4 1/2%
Convertible Subordinated Debentures due October 1, 2000 (the "Securities")
pursuant to an indenture, dated as of October 5, 1995 (the "Indenture"), between
the Company and the Trustee;
WHEREAS, each of the Subsidiary Guarantors is a direct or indirect wholly
owned subsidiary of the Company;
WHEREAS, the Company desires to make certain additional capital
contributions to the Subsidiary Guarantors, including the transfer to such
Subsidiary
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<PAGE> 2
Guarantors of assets, cash or equity securities in other Subsidiaries (or any
combination of the foregoing) (collectively, the "Contributions");
WHEREAS, each Subsidiary Guarantor has agreed to accept such Contributions
subject to its providing a guarantee of the Company's payment obligations under
the Indenture as set forth herein;
WHEREAS, Section 8.1(6) of the Indenture contemplates the execution of
supplemental indentures without the consent of any Holders of Securities for the
purposes stated therein;
WHEREAS, the Company desires and has requested the Trustee, in a Company
Request, to join in the execution and delivery of this Supplemental Indenture
for the purpose of supplementing the Indenture in certain respects as set forth
in this Supplemental Indenture;
WHEREAS, such Company Request was accompanied by a Board Resolution
authorizing the execution of this Supplemental Indenture and by an Opinion of
Counsel as required by the Indenture;
WHEREAS, pursuant to Section 8.1 of the Indenture, upon receipt of the
documents set forth in the preceding recitals, the Trustee shall join in the
execution of a supplemental indenture without the consent of the Holders for the
purposes set forth in the preceding recitals; and
WHEREAS, all things necessary to make this Supplemental Indenture a valid
supplement to the Indenture have been done.
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<PAGE> 3
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company, the Subsidiary Guarantors and the Trustee mutually
covenant and agree for the equal and proportionate benefit of the respective
Holders from time to time of Securities as follows:
1. CAPITALIZED TERMS. Capitalized terms used herein but not otherwise
defined shall have the meanings assigned to them in the Indenture.
2. AGREEMENT TO GUARANTEE. Each Subsidiary Guarantor hereby absolutely
and unconditionally guarantees, jointly and severally with each other Subsidiary
Guarantor, to each Holder of a Security authenticated and delivered by the
Trustee pursuant to the Indenture and to the Trustee and its successors and
assigns, regardless of the validity and enforceability of the Indenture, the
Securities and the obligations of the Company under the Indenture and the
Securities, that:
(i) the principal of, premium, if any, and interest (including
Additional Amounts and Bearer Additional Amounts, if any, payable
pursuant to Section 10.4 of the Indenture) on the Securities and
coupons, as applicable, will be promptly paid in full when due,
whether at maturity, by acceleration, redemption or otherwise,
and interest on the overdue principal of, premium, if any, and
interest on the Securities, to the extent lawful, and all other
payment obligations of the Company to the Holders or the
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<PAGE> 4
Trustee thereunder will be promptly paid in full, all in
accordance with the terms thereof; and
(ii) in case of any extension of time for payment or renewal of any
Securities, that the same will be promptly paid in full when due
in accordance with the terms of the extension or renewal, whether
at stated maturity, by acceleration or otherwise (the matters
being guaranteed pursuant to this Supplemental Indenture are
referred to herein as the "Obligations").
Notwithstanding the foregoing, in the event that this guarantee would constitute
or result in a violation of any applicable fraudulent conveyance or similar law
of any relevant jurisdiction, the liability of each Subsidiary Guarantor under
this Supplemental Indenture and its guarantee shall be reduced to the maximum
amount permissible under such fraudulent conveyance or similar law.
3. AGREEMENTS AND OBLIGATIONS OF SUBSIDIARY GUARANTORS.
(a) If the Company shall default in the due and punctual payment of
any obligation under the Indenture including under the Securities, without the
necessity of action by the Trustee or any Holder of Securities, the Subsidiary
Guarantor will promptly and fully make such payments in the same manner as
required to have been made by the Company.
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<PAGE> 5
(b) To the extent permitted by law, the Obligations of each
Subsidiary Guarantor hereunder shall be continuing, absolute and unconditional,
and shall not be impaired, modified, released or limited by any occurrence or
condition whatsoever, including, without limitation, (i) any compromise,
settlement, release, waiver, renewal, extension, indulgence or modification of,
or any change in, any of the obligations and liabilities of the Company
contained in the Securities or in the Indenture or of any other Subsidiary
Guarantor contained in this Supplemental Indenture, (ii) any impairment,
modification, release or limitation of the liability of the Company or of any
other Subsidiary Guarantor in bankruptcy, or any remedy for the enforcement
thereof, resulting from the operation of any present or future provision of any
applicable federal or state bankruptcy, insolvency, reorganization or other
similar laws or from the decision of any court, (iii) the assertion or exercise
by the Company, any other Subsidiary Guarantor, or the Trustee of any rights or
remedies under the Securities, the Indenture or this Supplemental Indenture or
their delay in or failure to assert or exercise any such rights or remedies,
(iv) the voluntary or involuntary liquidation, dissolution, sale or other
disposition of all or substantially all of the assets, marshaling of assets and
liabilities, receivership, insolvency, bankruptcy, assignment for the benefit of
creditors, reorganization, arrangement, composition or readjustment of, or other
similar proceeding affecting, the Company or any other Subsidiary Guarantor or
any of their assets, or the disaffirmance of this Supplemental Indenture or the
Securities or the Indenture in any such proceeding, (v) the release or discharge
of the Company or any other Subsidiary Guarantor from the performance or
observance of any agreement, covenant, term
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<PAGE> 6
or condition contained in any of such instruments by operation of law, (vi) the
unenforceability of the Securities, the Indenture or this Supplemental
Indenture, or (vii) any other circumstance which might otherwise constitute a
legal or equitable discharge of a surety or guarantor.
(c) Each Subsidiary Guarantor hereby (i) waives diligence,
presentment, demand for payment, filing of claims with a court in the event of
the merger or bankruptcy of the Company, any right to require a proceeding first
against the Company or to realize on any collateral, protest, notice and all
demands whatsoever with respect to the payment obligations of the Company under
the Indenture, (ii) agrees that its Obligations hereunder constitute a guarantee
of payment and not of collection and are not in any way conditional or
contingent upon any attempt to collect from or enforce against the Company or
upon any other condition or contingency, (iii) acknowledges that any agreement,
instrument or document evidencing the obligations of the Company under the
Indenture may be transferred and that the benefit of its Obligations hereunder
shall extend to each holder of any agreement, instrument or document evidencing
such Obligations without notice to them and (iv) covenants that its guarantee
will not be discharged except by complete performance of its Obligations
hereunder.
(d) Each Subsidiary Guarantor further agrees that if at any time all
or any part of any payment theretofore applied by any person to any Obligation
is, or must be, rescinded or returned for any reason whatsoever, including,
without limitation, the insolvency, bankruptcy or reorganization of the Company
or any other Subsidiary Guarantor, such Obligation shall for the purposes of the
guarantee, to the extent that such payment is or must
-6-
<PAGE> 7
be rescinded or returned, be deemed to have continued in existence
notwithstanding such application, and the guarantee made pursuant to this
Supplemental Indenture shall continue to be effective or be reinstated, as the
case may be, as to such Obligation as though such application had not been made.
(e) Each Subsidiary Guarantor shall, to the extent of any payment
made by it pursuant to this Supplemental Indenture, be subrogated to all rights
of the Trustee and the Holders of the Securities as to all payments and damages
payable by the Company with respect to which payments have been made by such
Subsidiary Guarantors, but, so long as any Obligation remains outstanding, such
right of subrogation on the part of such Subsidiary Guarantor shall be subject
to the payment in full or discharge of all such Obligations.
(f) Each of the Subsidiary Guarantors shall have the right to seek
contribution from any other non-paying Subsidiary Guarantor so long as the
exercise of such right does not impair the rights of the Holders or the Trustee
under the guarantees made pursuant to this Supplemental Indenture.
4. CONVEYANCE, TRANSFER OR LEASE BY SUBSIDIARY GUARANTORS.
(a) Nothing contained in the Indenture, this Supplemental Indenture or in
the Securities shall prevent any conveyance, transfer or lease of the properties
and assets of any Subsidiary Guarantor (whether or not as an entirety) to the
Company or any other Subsidiary Guarantor, or any other wholly owned Subsidiary
of the Company that guarantees the Obligations, which guarantee is evidenced by
the execution of a supplemental indenture
-7-
<PAGE> 8
substantially in the form of this Supplemental Indenture and has the same effect
as if such wholly owned Subsidiary were a Subsidiary Guarantor hereunder.
(b) Except as set forth below, nothing contained in the Indenture,
this Supplemental Indenture or in the Securities shall prevent any conveyance,
transfer or lease of the properties and assets of any Subsidiary Guarantor
(whether or not as an entirety) to any Person other than the Company or any
other Subsidiary Guarantor. If in one transaction or a series of related
transactions the Company or one or more Subsidiary Guarantors conveys, transfers
or leases properties or assets, including the stock of one or more Subsidiary
Guarantors, which if owned by the Company, would constitute all or substantially
all of the properties and assets of the Company and its Subsidiaries (determined
on a consolidated basis), such conveyance, transfer or lease shall be deemed to
be a conveyance, transfer or lease by the Company of its properties and assets
substantially as an entirety for purposes of Section 7.1 of the Indenture.
5. RELEASE FOLLOWING SALE OF VOTING STOCK. If and when all of the issued
and outstanding shares of voting stock of a Subsidiary Guarantor are sold,
directly or indirectly, by the Company or another wholly owned Subsidiary of the
Company to any Person (other than the Company or another wholly owned Subsidiary
of the Company that has guaranteed the Obligations in a manner consistent with
the guarantee provided by this Supplemental Indenture), the guarantee of such
Subsidiary Guarantor shall be released and discharged in full; provided that if
any such sale when taken together with any other related sale, conveyance,
transfer or lease of assets of the Company that shall together constitute a
-8-
<PAGE> 9
conveyance, transfer or lease of all or substantially all of the properties and
assets of the Company and its Subsidiaries (determined on a consolidated basis),
such sale of the voting stock of such Subsidiary Guarantor shall be deemed to be
a conveyance, transfer or lease by the Company of its properties and assets
substantially as an entirety for purposes of Section 7.1 of the Indenture.
6. SUBORDINATION. The Obligations of each Subsidiary Guarantor hereunder
shall be subordinated, on the same basis and to the same extent as provided in
ARTICLE THIRTEEN of the Indenture, to any guarantee granted by such Subsidiary
Guarantor in respect of Senior Indebtedness of the Company and to any
indebtedness of such Subsidiary Guarantor which is of the type contemplated by
the definition of Senior Indebtedness.
7. MISCELLANEOUS.
(a) GOVERNING LAW. This Supplemental Indenture shall be governed by
and construed in accordance with the laws of the State of New York.
(b) COUNTERPARTS. This Supplemental Indenture may be executed in any
number of counterparts, each of which shall be an original, but such
counterparts shall together constitute but one and the same instrument.
(c) EFFECT OF HEADINGS. The section headings herein are for
convenience only and shall not affect the construction hereof.
(d) EFFECTIVE DATE. This Supplemental Indenture shall be effective as
of February 1, 1998.
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<PAGE> 10
(e) RECITALS. The recitals contained herein shall be the statements
of the Company and the Trustee assumes no responsibility for their correctness.
(f) INTERPRETATION. Except as expressly supplemented as provided in
this Supplemental Indenture, the Indenture shall remain in full force and
effect. All the terms and conditions of this Supplemental Indenture shall be
deemed to be part of the terms and conditions of the Indenture for any and all
purposes.
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed and attested, all as of the date first above
written.
[CORPORATE SEAL] STAPLES, INC.
Attest: By:
--------------------------- --------------------------------
Name: Name: John J. Mahoney
Title: Chief Financial Officer
[CORPORATE SEAL] STAPLES CONTRACT &
COMMERCIAL, INC.
Attest: By:
--------------------------- --------------------------------
Name: Name: Patrick Hickey
Title: Treasurer
[CORPORATE SEAL] STAPLES THE OFFICE
SUPERSTORE, INC.
Attest: By:
--------------------------- --------------------------------
Name: Name: Patrick Hickey
Title: Treasurer
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<PAGE> 11
[CORPORATE SEAL] STAPLES THE OFFICE
SUPERSTORE EAST, INC.
Attest: By:
--------------------------- --------------------------------
Name: Name: Patrick Hickey
Title: Treasurer
[CORPORATE SEAL] MARINE MIDLAND BANK, as Trustee
Attest: By:
--------------------------- --------------------------------
Name: Name:
Title:
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<PAGE> 12
COMMONWEALTH OF MASSACHUSETTS )
: ss.:
COUNTY OF WORCESTER )
On the ____ day of __________, 1998, before me personally came
John J. Mahoney, to me known, who, being by me duly sworn, did depose and say
that he is Chief Financial Officer of Staples, Inc., one of the corporations
described in and which executed the foregoing instrument; that he knows the seal
of said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by authority of the Board of Directors of said
corporation; and that he signed his name thereto by like authority.
------------------------------------
Notary Public
-12-
<PAGE> 13
COMMONWEALTH OF MASSACHUSETTS )
: ss.:
COUNTY OF WORCESTER )
On the ______ day of __________, 1998, before me personally came
Patrick Hickey, to me known, who, being by me duly sworn, did depose and say
that he is Treasurer of Staples Contract & Commercial, Inc., one of the
corporations described in and which executed the foregoing instrument; that he
knows the seal of said corporation; that the seal affixed to said instrument is
such corporate seal; that it was so affixed by authority of the Board of
Directors of said corporation; and that he signed his name thereto by like
authority.
------------------------------------
Notary Public
-13-
<PAGE> 14
COMMONWEALTH OF MASSACHUSETTS )
: ss.:
COUNTY OF WORCESTER )
On the _____ day of ______________, 1998, before me personally
came Patrick Hickey, to me known, who, being by me duly sworn, did depose and
say that he is Treasurer of Staples the Office Superstore, Inc., one of the
corporations described in and which executed the foregoing instrument; that he
knows the seal of said corporation; that the seal affixed to said instrument is
such corporate seal; that it was so affixed by authority of the Board of
Directors of said corporation; and that he signed his name thereto by like
authority.
------------------------------------
Notary Public
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<PAGE> 15
COMMONWEALTH OF MASSACHUSETTS )
: ss.:
COUNTY OF WORCESTER )
On the ____ day of ___________, 1998, before me personally came
Patrick Hickey, to me known, who, being by me duly sworn, did depose and say
that he is Treasurer of Staples the Office Superstore East, Inc., one of the
corporations described in and which executed the foregoing instrument; that he
knows the seal of said corporation; that the seal affixed to said instrument is
such corporate seal; that it was so affixed by authority of the Board of
Directors of said corporation; and that he signed his name thereto by like
authority.
------------------------------------
Notary Public
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<PAGE> 16
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On the _____ day of __________, 1998, before me personally came
_____________________, to me known, who, being by me duly sworn, did depose and
say that he is ______________________ of Marine Midland Bank, one of the
corporations described in and which executed the foregoing instrument; that he
knows the seal of said corporation; that the seal affixed to said instrument is
such corporate seal; that it was so affixed by authority of the Board of
Directors of said corporation; and that he signed his name thereto by like
authority.
------------------------------------
Notary Public
-16-
<PAGE> 1
Exhibit 10.2
FIRST SUPPLEMENTAL INDENTURE
to
INDENTURE (SENIOR DEBT SECURITIES), DATED AS OF AUGUST 12, 1997
This FIRST SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), is
entered into as of January 15, 1998, by and among Staples, Inc., a Delaware
corporation (the "Company"), Staples Contract & Commercial, Inc., a Delaware
corporation, Staples the Office Superstore, Inc., a Delaware corporation, and
Staples the Office Superstore East, Inc., a Delaware corporation (each, a
"Subsidiary Guarantor" and collectively, the "Subsidiary Guarantors"), and The
Chase Manhattan Bank, a banking corporation duly organized and existing under
the laws of the State of New York, as trustee under the Indenture referred to
below (the "Trustee").
W I T N E S S E T H
WHEREAS, the Company has heretofore executed and delivered to the Trustee
an indenture, dated as of August 12, 1997 (the "Indenture"), providing for the
issuance from time to time of its unsecured debentures, notes or other evidences
of indebtedness (the "Securities");
WHEREAS, on August 15, 1997, the Company issued a series of Securities,
consisting of $200,000,000 principal amount of its 7.125% Senior Notes due
August 15, 2007 pursuant to the Indenture;
<PAGE> 2
WHEREAS, the Company may from time to time in the future issue additional
series of Securities; WHEREAS, each of the Subsidiary Guarantors is a direct or
indirect wholly owned subsidiary of the Company;
WHEREAS, the Company desires to make certain additional capital
contributions to the Subsidiary Guarantors, including the transfer to such
Subsidiary Guarantors of assets, cash or equity securities in other Subsidiaries
(or any combination of the foregoing) (collectively, the "Contributions");
WHEREAS, each Subsidiary Guarantor has agreed to accept such Contributions
subject to its providing a guarantee of the Company's payment obligations under
the Indenture as set forth herein;
WHEREAS, Section 901 of the Indenture contemplates the execution of
supplemental indentures without the consent of any Holders of Securities for the
purposes stated therein;
WHEREAS, the Company desires and has requested the Trustee, in a Company
Request, to join in the execution and delivery of this Supplemental Indenture
for the purpose of supplementing the Indenture in certain respects as set forth
in this Supplemental Indenture;
WHEREAS, such Company Request was accompanied by a Board Resolution
authorizing the execution of this Supplemental Indenture and by an Opinion of
Counsel as required by the Indenture;
WHEREAS, pursuant to Section 901 of the Indenture, upon receipt of the
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<PAGE> 3
documents set forth in the preceding recitals, the Trustee shall join in the
execution of a supplemental indenture without the consent of the Holders for the
purposes set forth in the preceding recitals; and
WHEREAS, all things necessary to make this Supplemental Indenture a valid
supplement to the Indenture have been done.
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Subsidiary Guarantors and the Trustee mutually covenant and
agree for the equal and proportionate benefit of the respective Holders from
time to time of Securities as follows:
1. CAPITALIZED TERMS. Capitalized terms used herein but not otherwise
defined shall have the meanings assigned to them in the Indenture.
2. AGREEMENT TO GUARANTEE. Each Subsidiary Guarantor hereby absolutely
and unconditionally guarantees, jointly and severally with each other Subsidiary
Guarantor, to each Holder of a Security authenticated and delivered by the
Trustee pursuant to the Indenture and to the Trustee and its successors and
assigns, regardless of the validity and enforceability of the Indenture, the
Securities or the obligations of the Company under the Indenture or the
Securities, that:
(i) the principal of, premium, if any, and interest on the Securities
will be promptly paid in full when due, whether at maturity, by
acceleration, redemption or otherwise, and interest on the
overdue principal of, premium, if any, and interest on the
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<PAGE> 4
Securities, to the extent lawful, and all other payment
obligations of the Company to the Holders or the Trustee
thereunder or under the Indenture will be promptly paid in full,
all in accordance with the terms thereof and of the Indenture;
and
(ii) in case of any extension of time for payment or renewal of any
Securities, that the same will be promptly paid in full when due
in accordance with the terms of the extension or renewal, whether
at stated maturity, by acceleration or otherwise.
Notwithstanding the foregoing, in the event that this guarantee would constitute
or result in a violation of any applicable fraudulent conveyance or similar law
of any relevant jurisdiction, the liability of each Subsidiary Guarantor under
this Supplemental Indenture and its guarantee shall be reduced to the maximum
amount permissible under such fraudulent conveyance or similar law.
3. AGREEMENTS AND OBLIGATIONS OF SUBSIDIARY GUARANTORS.
(a) If the Company shall default in the due and punctual payment of
any obligation under the Indenture including under the Securities, without the
necessity of action by the Trustee or any Holder of Securities, the Subsidiary
Guarantor will promptly and fully make such payments in the same manner as
required to have been made by the Company.
(b) To the extent permitted by law, the obligations of each
Subsidiary Guarantor hereunder shall be continuing, absolute and unconditional,
and shall not be
-4-
<PAGE> 5
impaired, modified, released or limited by any occurrence or condition
whatsoever, including, without limitation, (i) any compromise, settlement,
release, waiver, renewal, extension, indulgence or modification of, or any
change in, any of the obligations and liabilities of the Company contained in
the Securities or in the Indenture or of any other Subsidiary Guarantor
contained in this Supplemental Indenture, (ii) any impairment, modification,
release or limitation of the liability of the Company or of any other Subsidiary
Guarantor in bankruptcy, or any remedy for the enforcement thereof, resulting
from the operation of any present or future provision of any applicable federal
or state bankruptcy, insolvency, reorganization or other similar laws or from
the decision of any court, (iii) the assertion or exercise by the Company, any
other Subsidiary Guarantor, or the Trustee of any rights or remedies under the
Securities, the Indenture or this Supplemental Indenture or their delay in or
failure to assert or exercise any such rights or remedies, (iv) the voluntary or
involuntary liquidation, dissolution, sale or other disposition of all or
substantially all of the assets, marshaling of assets and liabilities,
receivership, insolvency, bankruptcy, assignment for the benefit of creditors,
reorganization, arrangement, composition or readjustment of, or other similar
proceeding affecting, the Company or any other Subsidiary Guarantor or any of
their assets, or the disaffirmance of this Supplemental Indenture or the
Securities or the Indenture in any such proceeding, (v) the release or discharge
of the Company or any other Subsidiary Guarantor from the performance or
observance of any agreement, covenant, term or condition contained in any of
such instruments by operation of law, (vi) the unenforceability of the
Securities, the Indenture or this Supplemental Indenture or (vii) any other
circumstance which might
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<PAGE> 6
otherwise constitute a legal or equitable discharge of a surety or guarantor.
(c) Each Subsidiary Guarantor hereby (i) waives diligence,
presentment, demand for payment, filing of claims with a court in the event of
the merger or bankruptcy of the Company, any right to require a proceeding first
against the Company or to realize on any collateral, protest, notice and all
demands whatsoever with respect to the payment obligations of the Company under
the Indenture, (ii) agrees that its obligations hereunder constitute a guarantee
of payment and not of collection and are not in any way conditional or
contingent upon any attempt to collect from or enforce against the Company or
upon any other condition or contingency, (iii) acknowledges that any agreement,
instrument or document evidencing the obligations of the Company under the
Indenture may be transferred and that the benefit of its obligations hereunder
shall extend to each holder of any agreement, instrument or document evidencing
such obligations without notice to them and (iv) covenants that its guarantee
will not be discharged except by complete performance of the payment obligations
under the Securities and the Indenture.
(d) Each Subsidiary Guarantor further agrees that if at any time all
or any part of any payment theretofore applied by any person to any payment
obligation is, or must be, rescinded or returned for any reason whatsoever,
including, without limitation, the insolvency, bankruptcy or reorganization of
the Company or any other Subsidiary Guarantor, such obligation shall for the
purposes of the guarantee, to the extent that such payment is or must be
rescinded or returned, be deemed to have continued in existence notwithstanding
such application, and the guarantee made pursuant to this Supplemental Indenture
shall continue to
-6-
<PAGE> 7
be effective or be reinstated, as the case may be, as to such payment obligation
as though such application had not been made.
(e) Each Subsidiary Guarantor shall, to the extent of any payment
made by it pursuant to this Supplemental Indenture, be subrogated to all rights
of the Trustee and the Holders of the Securities as to all payments and damages
payable by the Company with respect to which payments have been made by such
Subsidiary Guarantor, but, so long as any payment obligation remains
outstanding, such right of subrogation on the part of such Subsidiary Guarantor
shall be subject to the payment in full or discharge of all such payment
obligations.
(f) Each of the Subsidiary Guarantors shall have the right to seek
contribution from any other non-paying Subsidiary Guarantor so long as the
exercise of such right does not impair the rights of the Holders or the Trustee
under the guarantees made pursuant to this Supplemental Indenture.
4. CONVEYANCE, TRANSFER OR LEASE BY SUBSIDIARY GUARANTORS.
(a) Nothing contained in the Indenture, this Supplemental Indenture
or in the Securities shall prevent any conveyance, transfer or lease of the
properties and assets of any Subsidiary Guarantor (whether or not as an
entirety) to the Company or any other Subsidiary Guarantor, or any other Wholly
Owned Subsidiary of the Company that guarantees the Company's payment
obligations, which guarantee is evidenced by the execution of a supplemental
indenture substantially in the form of this Supplemental Indenture and has the
-7-
<PAGE> 8
same effect as if such Wholly Owned Subsidiary were a Subsidiary Guarantor
hereunder.
(b) Except as set forth below, nothing contained in the Indenture,
this Supplemental Indenture or in the Securities shall prevent any conveyance,
transfer or lease of the properties and assets of any Subsidiary Guarantor
(whether or not as an entirety) to any Person other than the Company or any
other Subsidiary Guarantor. If one or more Subsidiary Guarantors, in one
transaction or a series of related transactions, conveys, transfers or leases
properties and assets which, if owned by the Company, would constitute all or
substantially all of the properties and assets of the Company and its
Subsidiaries (determined on a consolidated basis), such conveyance, transfer or
lease shall be deemed to be a conveyance, transfer or lease by the Company of
its properties and assets substantially as an entirety for purposes of (x)
Section 801 of the Indenture (if such conveyance, transfer or lease is to any
Person other than one or more Wholly Owned Subsidiaries of the Company) or (y)
Section 803 of the Indenture (if such conveyance, transfer or lease is solely to
one or more Wholly Owned Subsidiaries of the Company).
5. RELEASE FOLLOWING SALE OF VOTING STOCK. If and when all of the issued
and outstanding shares of Voting Stock of a Subsidiary Guarantor are sold,
directly or indirectly, by the Company or another Wholly Owned Subsidiary of the
Company to any Person (other than the Company or another Wholly Owned Subsidiary
of the Company), the guarantee of such Subsidiary Guarantor shall be released
and discharged in full.
-8-
<PAGE> 9
6. MISCELLANEOUS.
(a) GOVERNING LAW. This Supplemental Indenture shall be governed by
and construed in accordance with the laws of the State of New York.
(b) COUNTERPARTS. This Supplemental Indenture may be executed in any
number of counterparts, each of which shall be an original, but such
counterparts shall together constitute but one and the same instrument.
(c) EFFECT OF HEADINGS. The section headings herein are for
convenience only and shall not affect the construction hereof.
(d) EFFECTIVE DATE. This Supplemental Indenture shall be effective as
of February 1, 1998.
(e) RECITALS. The recitals contained herein shall be the statements
of the Company, and the Trustee assumes no responsibility for their correctness.
The Trustee shall not be responsible for, and assumes no liability with respect
to, the validity or sufficiency of this Supplemental Indenture.
(f) INTERPRETATION. Except as expressly supplemented as provided in
this Supplemental Indenture, the Indenture shall remain in full force and
effect. All the terms and conditions of this Supplemental Indenture shall be
deemed to be part of the terms and conditions of the Indenture for any and all
purposes.
-9-
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed and attested, all as of the date first above
written.
[CORPORATE SEAL] STAPLES, INC.
Attest: By:
--------------------------- --------------------------------
Name: Name: John J. Mahoney
Title: Chief Financial Officer
[CORPORATE SEAL] STAPLES CONTRACT &
COMMERCIAL, INC.
Attest: By:
--------------------------- --------------------------------
Name: Name: Patrick Hickey
Title: Treasurer
[CORPORATE SEAL] STAPLES THE OFFICE
SUPERSTORE, INC.
Attest: By:
--------------------------- --------------------------------
Name: Name: Patrick Hickey
Title: Treasurer
[CORPORATE SEAL] STAPLES THE OFFICE
SUPERSTORE EAST, INC.
Attest: By:
--------------------------- --------------------------------
Name: Name: Patrick Hickey
Title: Treasurer
[CORPORATE SEAL] THE CHASE MANHATTAN BANK, as
Trustee
Attest: By:
--------------------------- --------------------------------
Name: Name:
Title:
-10-
<PAGE> 11
COMMONWEALTH OF MASSACHUSETTS )
: ss.:
COUNTY OF WORCESTER )
On the ____ day of ______ , 1998, before me personally came John J.
Mahoney, to me known, who, being by me duly sworn, did depose and say that he is
Chief Financial Officer of Staples, Inc., one of the corporations described in
and which executed the foregoing instrument; that he knows the seal of said
corporation; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by authority of the Board of Directors of said
corporation; and that he signed his name thereto by like authority.
------------------------------------
Notary Public
-11-
<PAGE> 12
COMMONWEALTH OF MASSACHUSETTS )
: ss.:
COUNTY OF WORCESTER )
On the _______ day of ________, 1998, before me personally came Patrick
Hickey, to me known, who, being by me duly sworn, did depose and say that he is
Treasurer of Staples Contract & Commercial, Inc., one of the corporations
described in and which executed the foregoing instrument; that he knows the seal
of said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by authority of the Board of Directors of said
corporation; and that he signed his name thereto by like authority.
------------------------------------
Notary Public
-12-
<PAGE> 13
COMMONWEALTH OF MASSACHUSETTS )
: ss.:
COUNTY OF WORCESTER )
On the ______ day of _______, 1998, before me personally came Patrick
Hickey, to me known, who, being by me duly sworn, did depose and say that he is
Treasurer of Staples the Office Superstore, Inc., one of the corporations
described in and which executed the foregoing instrument; that he knows the seal
of said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by authority of the Board of Directors of said
corporation; and that he signed his name thereto by like authority.
------------------------------------
Notary Public
-13-
<PAGE> 14
COMMONWEALTH OF MASSACHUSETTS )
: ss.:
COUNTY OF WORCESTER )
On the ____ day of _________, 1998, before me personally came Patrick
Hickey, to me known, who, being by me duly sworn, did depose and say that he is
Treasurer of Staples the Office Superstore East, Inc., one of the corporations
described in and which executed the foregoing instrument; that he knows the seal
of said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by authority of the Board of Directors of said
corporation; and that he signed his name thereto by like authority.
------------------------------------
Notary Public
-14-
<PAGE> 15
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On the _____ day of ________, 1998, before me personally came____________ ,
to me known, who, being by me duly sworn, did depose and say that he is
___________________________ of The Chase Manhattan Bank, one of the corporations
described in and which executed the foregoing instrument; that he knows the seal
of said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by authority of the Board of Directors of said
corporation; and that he signed his name thereto by like authority.
------------------------------------
Notary Public
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF STAPLES, INC. FOR THE THREE MONTHS ENDED MAY 2, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> MAY-02-1998
<EXCHANGE-RATE> 1
<CASH> 229,131
<SECURITIES> 1,167
<RECEIVABLES> 187,068
<ALLOWANCES> 2,877
<INVENTORY> 1,101,303
<CURRENT-ASSETS> 1,592,740
<PP&E> 880,349
<DEPRECIATION> 283,384
<TOTAL-ASSETS> 2,434,350
<CURRENT-LIABILITIES> 863,545
<BONDS> 508,342
0
0
<COMMON> 108
<OTHER-SE> 1,019,425
<TOTAL-LIABILITY-AND-EQUITY> 2,434,350
<SALES> 1,517,472
<TOTAL-REVENUES> 1,517,472
<CGS> 1,160,793
<TOTAL-COSTS> 1,402,599
<OTHER-EXPENSES> 58,668
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,944
<INCOME-PRETAX> 51,261
<INCOME-TAX> 20,011
<INCOME-CONTINUING> 31,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,300
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
<FN>
<INCOME-BEFORE MINORITY INTEREST> 31,250
<MINORITY INTEREST> 50
<FN>
</TABLE>
