<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: October 31, 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
incorporation or organization) Identification No.)
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 307,307,123 shares of Common Stock, par value $.0006,
outstanding as of December 11, 1998.
<PAGE> 2
FORM 10-Q
STAPLES, INC.
OCTOBER 31, 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 ............................. 6-10
Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................ 11-17
Part II ................................................................ 18
Signature .............................................................. 19
Page 2
<PAGE> 3
STAPLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
October 31,
1998 January 31,
(Unaudited) 1998
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 193,645 $ 381,088
Short-term investments ............................................... 1,459 5,902
Merchandise inventories .............................................. 1,303,329 1,124,642
Receivables, net ..................................................... 270,421 203,143
Prepaid expenses and other current assets ............................ 96,079 71,365
----------- -----------
TOTAL CURRENT ASSETS ........................................... 1,864,933 1,786,140
PROPERTY AND EQUIPMENT:
Land and buildings ................................................... 215,904 150,947
Leasehold improvements ............................................... 349,409 292,128
Equipment ............................................................ 371,125 304,177
Furniture and fixtures ............................................... 219,972 173,711
----------- -----------
TOTAL PROPERTY AND EQUIPMENT ................................... 1,156,410 920,963
Less accumulated depreciation and amortization ....................... 379,512 310,701
----------- -----------
NET PROPERTY AND EQUIPMENT ..................................... 776,898 610,262
OTHER ASSETS:
Lease acquisition costs, net of amortization ......................... 77,363 43,244
Investments .......................................................... -- 16,450
Goodwill, net of amortization ........................................ 134,917 139,753
Other ................................................................ 40,566 43,013
----------- -----------
TOTAL OTHER ASSETS ............................................. 252,846 242,460
----------- -----------
$ 2,894,677 $ 2,638,862
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ..................................................... $ 726,537 $ 672,956
Accrued expenses and other current liabilities ....................... 395,744 266,023
Debt maturing within one year ........................................ 3,420 43,501
----------- -----------
TOTAL CURRENT LIABILITIES ...................................... 1,125,701 982,480
LONG-TERM DEBT .............................................................. 231,925 218,959
OTHER LONG-TERM OBLIGATIONS ................................................. 49,403 42,803
CONVERTIBLE DEBENTURES ...................................................... 299,835 300,000
MINORITY INTEREST ........................................................... -- 135
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value-authorized
5,000,000 shares; no shares issued
Common stock, $.0006 par value-authorized
500,000,000 shares; issued
285,573,929 shares at October 31, 1998 and
278,159,308 shares at January 31, 1998 ............................... 172 167
Additional paid-in capital ........................................... 647,420 593,883
Cumulative foreign currency translation adjustments .................. (13,672) (10,315)
Unrealized gain/(loss) on short-term investments ..................... 11 1,056
Retained earnings .................................................... 562,120 510,040
Less: treasury stock, at cost, 352,948 shares at October 31, 1998
and 59,149 shares at January 31, 1998 ................................ (8,238) (346)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ................................. 1,187,813 1,094,485
----------- -----------
$ 2,894,677 $ 2,638,862
=========== ===========
</TABLE>
See notes to consolidated financial statements.
Page 3
<PAGE> 4
STAPLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
13 Weeks Ended 39 Weeks Ended
----------------------------- ------------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Sales .......................................................... $ 1,899,770 $ 1,552,393 $ 5,046,086 $ 4,037,453
Cost of goods sold and occupancy costs ......................... 1,423,857 1,176,922 3,827,233 3,070,695
------------ ------------ ------------ ------------
GROSS PROFIT ............................................... 475,913 375,471 1,218,853 966,758
Operating expenses:
Operating and selling ........................................ 272,314 227,531 741,931 607,393
Pre-opening .................................................. 4,011 2,773 11,595 7,951
General and administrative ................................... 79,958 58,734 218,138 160,939
Amortization of goodwill ..................................... 901 1,008 2,752 2,629
Merger-related and integration costs ......................... -- -- 41,000 29,665
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES ................................... 357,184 290,046 1,015,416 808,577
------------ ------------ ------------ ------------
OPERATING INCOME ........................................... 118,729 85,425 203,437 158,181
Interest and other expense, net .............................. (4,372) (6,212) (14,961) (16,040)
------------ ------------ ------------ ------------
INCOME BEFORE EQUITY IN LOSS OF
AFFILIATES AND INCOME TAXES .............................. 114,357 79,213 188,476 142,141
Equity in gain/(loss) of affiliates ........................... -- -- -- (5,953)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES .................................. 114,357 79,213 188,476 136,188
Income tax expense ............................................. 45,171 27,198 74,501 41,693
------------ ------------ ------------ ------------
NET INCOME BEFORE MINORITY INTEREST ......................... 69,186 52,015 113,975 94,495
Minority interest ........................................... -- 15 135 71
------------ ------------ ------------ ------------
NET INCOME .................................................. $ 69,186 $ 52,030 $ 114,110 $ 94,566
============ ============ ============ ============
Historical net income per common share ......................... $ 0.24 $ 0.19 $ 0.40 $ 0.35
============ ============ ============ ============
Historical net income per common share assuming dilution ....... $ 0.23 $ 0.18 $ 0.39 $ 0.34
============ ============ ============ ============
PRO FORMA:
Historical net income ....................................... $ 52,030 $ 114,110 $ 94,566
Provision for income taxes on previously untaxed
earnings of pooled S-Corporation income ................... 3,428 1,814 11,159
------------ ------------ ------------
PRO FORMA NET INCOME ........................................ 48,602 $ 112,296 $ 83,407
============ ============ ============
Pro forma net income per common share ....................... $ 0.18 $ 0.40 $ 0.31
============ ============ ============
Pro forma net income per common share assuming dilution ..... $ 0.17 $ 0.38 $ 0.30
============ ============ ============
Number of shares used in computing historical and pro forma
net income per common share ............................... 284,122,452 272,820,608 282,037,821 270,674,099
============ ============ ============ ============
Number of shares used in computing historical and pro forma
net income per common share assuming dilution ............. 313,178,753 301,567,837 310,796,127 279,218,490
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements
Page 4
<PAGE> 5
STAPLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
(Unaudited)
39 Weeks Ended
-----------------------------
October 31, November 1,
1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................. $ 114,110 $ 94,566
Adjustments to reconcile net income to net cash provided by/
(used in) operating activities:
Minority interest ....................................... (135) (66)
Depreciation and amortization ........................... 74,597 69,272
Equity in loss of affiliates ............................ -- 5,953
Net decrease in deferred tax assets ..................... (23,388) (8,025)
(Increase)/decrease in assets:
Merchandise inventories .............................. (177,353) (179,673)
Receivables .......................................... (74,394) (52,970)
Prepaid expenses and other assets .................... 4,501 (3,405)
Increase in accounts payable, accrued expenses and
other current liabilities ............................ 191,228 260,695
Increase in other long-term obligations ................. 7,267 4,992
--------- ---------
2,323 96,773
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................. 116,433 191,339
INVESTING ACTIVITIES:
Acquisition of property and equipment ...................... (239,055) (141,983)
Proceeds from sales and maturities of short-term
investments .......................................... 11,356 19,769
Purchase of short-term investments ......................... (6,899) (7,743)
Proceeds from sales and maturities of long-term investments 18,995 --
Purchase of long-term investments .......................... (2,545) --
Acquisition of businesses, net of cash acquired ............ -- (77,808)
Acquisition of lease rights ................................ (37,705) (2,533)
Other ...................................................... 2,994 5,093
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES ...................... (252,859) (205,205)
FINANCING ACTIVITIES:
Proceeds from sale of capital stock ........................ 48,348 28,241
Proceeds from borrowings ................................... 26,171 813,408
Payments on borrowings ..................................... (53,598) (675,534)
Purchase and retirement of acquired S-Corporation stock .... (48,101) --
Dividends to shareholders of acquired S-Corporation ........ (15,904) (19,703)
Other ...................................................... (8,057) --
--------- ---------
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES ........ (51,141) 146,412
Effect of exchange rate changes on cash .................... 124 (2,083)
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS ............ (187,443) 130,463
Cash and cash equivalents at beginning of period ................ 381,088 117,035
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 193,645 $ 247,498
========= =========
</TABLE>
See notes to consolidated financial statements.
Page 5
<PAGE> 6
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 for the year
ended January 31, 1998 and the Company's Current Report on Form 8-K dated July
1, 1998, which includes financial information for the year ended January 31,
1998 and the quarter ended May 2, 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 29,056,000 and 28,758,000 shares for the three
and nine months ended October 31, 1998 and 28,747,000 and 8,544,000 for the same
periods ended November 1, 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
nine months ended November 1, 1997 as their inclusion would be anti-dilutive.
NOTE 3 - COMPREHENSIVE INCOME
Effective February 1, 1998, the Company 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 the Company's net income or shareholders' equity.
SFAS 130 requires the Company's foreign currency translation adjustments and
unrealized gains and losses on short term investments, which are reported
separately in shareholders' equity, to be disclosed in the notes to the
financial statements for interim periods. During the three and nine months ended
October 31, 1998 and November 1, 1997, total comprehensive income, which was
comprised of net income, foreign currency translation adjustments and unrealized
gains (losses) on short-
Page 6
<PAGE> 7
STAPLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
term investments, amounted to approximately $68,315,000 and $109,708,000
compared to $51,564,000 and $90,691,000, respectively.
NOTE 4 - ACQUISITIONS
On May 21, 1998, the Company acquired Quill Corporation and certain related
entities (collectively referred to as "Quill")(the "Merger"). The Merger was
structured as an exchange of shares in which the stockholders of Quill received
approximately 26 million shares of the Company's common stock (determined by an
exchange ratio established at a combination of fixed and variable prices). The
Company also paid cash of approximately $48 million to a dissenting shareholder,
which equates to a purchase price of approximately $690 million. The Merger was
accounted for as a pooling of interests and, accordingly, the Company's
historical 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 three and nine
months ended November 1, 1997 with the corresponding Quill operating results for
the three and nine months ended September 30, 1997. 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
the Company's 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 Merger, the Company recorded a charge to operating
expense of $41,000,000 during the quarter ended August 1, 1998. These costs
consist primarily of direct and other merger related and integration costs from
the merger transaction. The merger transaction costs consist primarily of fees
for investment bankers, attorneys, accountants and other related charges. The
integration costs primarily include employee costs, contract and lease
termination costs and the write down of lease costs. Excluding the merger
related and integration costs, earnings per share would have been $0.46 for the
nine months ended October 31, 1998.
NOTE 5 - 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
October 31, 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 7
<PAGE> 8
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 October 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Non-
Staples, Inc. Guarantor Guarantor
(Parent Co.) Subsidiaries Subsidiaries Consolidated
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ -- $ 1,440,647 $ 459,123 $ 1,899,770
Cost of goods sold and occupancy
costs 389 1,077,324 346,144 1,423,857
---------------------------------------------------------------
Gross profit (389) 363,323 112,979 475,913
Operating expenses 3,714 273,341 80,129 357,184
---------------------------------------------------------------
Operating income (4,103) 89,982 32,850 118,729
Interest and other expense, net (2,542) (9,957) 8,127 (4,372)
Provision for income taxes 16,304 (45,820) (15,655) (45,171)
Minority interest -- -- -- --
---------------------------------------------------------------
Net income $ 9,659 $ 34,205 $ 25,322 $ 69,186
===============================================================
</TABLE>
Condensed Consolidated Statement of Income
For the thirty-nine weeks ended October 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Non-
Staples, Inc. Guarantor Guarantor
(Parent Co.) Subsidiaries Subsidiaries Consolidated
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ -- $ 3,823,734 $ 1,222,352 $ 5,046,086
Cost of goods sold and occupancy
costs 1,314 2,894,192 931,727 3,827,233
-----------------------------------------------------------------
Gross profit (1,314) 929,542 290,625 1,218,853
Operating expenses 48,345 742,741 224,330 1,015,416
-----------------------------------------------------------------
Operating income (49,659) 186,801 66,295 203,437
Interest and other expense, net (10,655) (29,772) 25,466 (14,961)
Provision for income taxes 22,781 (71,646) (25,636) (74,501)
Minority interest -- -- 135 135
-----------------------------------------------------------------
Net income $(37,533) $ 85,383 $ 66,260 $ 114,110
=================================================================
</TABLE>
Page 8
<PAGE> 9
STAPLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Condensed Consolidating Balance Sheet
As of October 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Non-
Staples, Inc. Guarantor Guarantor
(Parent Co.) Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments $ 19,033 $ 12,652 $ 163,419 $ $ 195,104
Merchandise inventories (4,996) 1,080,452 227,873 1,303,329
Other current assets and
intercompany 919,403 459,862 527,814 (1,540,579) 366,500
----------------------------------------------------------------------------------
Total current assets 933,440 1,552,966 919,106 (1,540,579) 1,864,933
Net property, equipment and
other assets 252,615 662,294 338,533 (223,698) 1,029,744
----------------------------------------------------------------------------------
Total assets 1,186,055 2,215,260 1,257,639 $(1,764,277) 2,894,677
==================================================================================
Total current liabilities $ 136,688 $ 881,568 $ 215,321 $ (107,876) $1,125,701
Total long-term liabilities 305,523 237,827 37,951 (138) 581,163
Total stockholders' equity 743,844 1,095,865 1,004,367 (1,656,263) 1,187,813
==================================================================================
Total liabilities and
stockholders' equity $ 1,186,055 $2,215,260 $1,257,639 $(1,764,277) $2,894,677
==================================================================================
</TABLE>
Condensed Consolidated Statement of Cash Flows
For the thirty-nine weeks ended October 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Non-
Staples, Inc. Guarantor Guarantor
(Parent Co.) Subsidiaries Subsidiaries Consolidated
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net cash (used in)/provided by
operating activities $ (89,699) $ 119,685 $ 86,447 $ 116,433
Investing Activities:
Acquisition of property,
equipment and lease rights (44,748) (210,232) (21,780) (276,760)
Other (54,448) 94,946 (16,597) 23,901
------------------------------------------------------------
Cash (used in)/provided by investing
activities (99,196) (115,286) (38,377) (252,859)
Financing Activities:
Payments on borrowings (26,916) -- (26,682) (53,598)
Other 45,574 -- (43,117) (2,457)
------------------------------------------------------------
Cash provided by/(used) in
financing activities 18,658 -- (69,799) (51,141)
Effect of exchange rate changes on cash -- -- 124 124
------------------------------------------------------------
Net (decrease) increase in cash (170,237) 4,399 (21,605) (187,443)
Cash and cash equivalents at
beginning of period 189,252 8,253 183,583 381,088
------------------------------------------------------------
Cash and cash equivalents at end
of period $ 19,015 $ 12,652 $ 161,978 $ 193,645
============================================================
</TABLE>
Page 9
<PAGE> 10
STAPLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - RECLASSIFICATIONS:
Certain previously reported amounts have been reclassified to conform with the
current period presentation.
NOTE 7 - SUBSEQUENT EVENTS
As of November 1, 1998, the Company completed the acquisition of the office and
manufactured products units of Ivan Allen Corporation. The acquired business
units of Ivan Allen had annual revenues of more than $60,000,000 in 1997 and
distributes office products throughout the Southeastern United States. The
acquisition will be accounted for using the purchase method.
On November 12, 1998, the Board of Directors authorized, subject to shareholder
approval of the charter amendment described below, a three for two stock split
to be distributed on or about January 28, 1999, to shareholders of record at the
close of business on January 18, 1999. To facilitate the split, the Board of
Directors has recommended that shareholders approve a charter amendment that
would increase the number of authorized shares of common stock from 500,000,000
to 1,000,000,000.
On November 13, 1998, the Company issued a Notice of Redemption for its 4 1/2%
Convertible Subordinated Debentures due October 1, 2000. As of December 2, 1998
all debenture holders had converted their outstanding debentures into common
stock of the Company at a conversion price of $14.67 per share.
Page 10
<PAGE> 11
STAPLES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES. Sales increased 22% to $1,899,770,000 in the quarter ended October 31,
1998 from $1,552,393,000 in the quarter ended November 1, 1997 and increased 25%
to $5,046,086,000 for the nine months ended October 31, 1998 compared to
$4,037,453,000 for the nine months ended November 1, 1997. This growth is
attributable to an increased number of open stores and increased sales in
existing stores and in the delivery and contract stationer segments. The growth
for the nine months also includes the consolidation (beginning in May, 1997) of
the sales of Staples UK and Staples (Deutschland) GmbH ("Staples Deutschland",
formally MAXI-Papier-Markt-GmbH). Comparable store and delivery hub sales for
the quarter and nine months ended October 31, 1998 increased 12% over the
corresponding periods ended November 1, 1997. Comparable sales in the contract
stationer segment including Quill increased 13% for the three months and 12% for
the nine months ended October 31, 1998 as compared to the three and nine months
ended November 1, 1997. The Company had 878 stores open as of October 31, 1998
compared to 720 stores as of November 1, 1997 and 742 stores as of January 31,
1998; this total includes 47 stores opened and one store closed during the three
months ended October 31, 1998 and 139 stores opened and three stores closed
during the nine months ended October 31, 1998.
GROSS PROFIT. Gross profit as a percentage of sales was 25.1% and 24.2% for the
three and nine months ended October 31, 1998 as compared to 24.2% and 23.9% for
the same periods in the prior year. The increase in gross profit rate for the
quarter ended October 31, 1998 compared to the quarter ended November 1, 1997
was primarily due to lower product costs from vendors as a result of increased
purchase discounts as well as increased leveraging of fixed distribution center
and delivery costs over a larger sales base and increased buying improvements.
These increases were partially offset by increased sales of computers (which
generate a lower margin rate than other categories) to 8.2% and 7.4% of sales
from 8.0% and 6.8% of sales for the three and nine months ended October 31, 1998
and November 1, 1997 respectively.
OPERATING AND SELLING EXPENSES. Operating and selling expenses, which consist of
payroll, advertising and other operating costs, decreased as a percentage of
sales in the three and nine months ended October 31, 1998 to 14.3% and 14.7% as
compared to 14.7% and 15.0% for the same periods in the prior year. The decrease
was primarily due to the timing of marketing and advertising programs and the
increased leveraging of fixed store payroll expenses and other fixed store
operating costs as store sales have increased. This decrease was partially
offset by the impact of Staples UK and Staples Deutschland, which have higher
costs as a percentage of sales, as well as increased store labor and costs
incurred for the Company's store remodel program. The store remodel program
includes significant investments made in store layouts and signing to improve
shopability and to enhance customer service.
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.
Page 11
<PAGE> 12
PRE-OPENING EXPENSES. Pre-opening expenses relating to new store openings,
consisting 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 $85,000 and $83,000 per store for the three and nine months
ended October 31, 1998, respectively, as compared to $73,000 and $74,000,
respectively, per store for the same periods in the prior year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the
three and nine months ended October 31, 1998 increased as a percentage of sales
to 4.2% and 4.3%, respectively, as compared to 3.8% and 4.0% for the same
periods in the prior year. This increase was primarily due to costs incurred for
Year 2000 compliance projects. In addition, the Company has made other
investments in the Company's information systems ("IS") staffing and
infrastructure, which the Company believes will reduce costs as a percentage of
sales in future years. This was partially offset by the Company's 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, the Company recorded a charge to operating expense of $41,000,000 during
the nine months ended October 31, 1998. These costs consist of direct and other
merger related and integration costs from the merger transaction. The merger
transaction costs consist primarily of fees for investment bankers, attorneys,
accountants and other related charges. The integration costs primarily include
employee costs, contract and lease termination costs and the write down of lease
costs. During the nine months ended November 1, 1997, the Company charged to
expense similar non-recurring costs in connection with the proposed merger with
Office Depot, Inc.
INTEREST AND OTHER EXPENSE, NET. Net interest and other expense for the three
and nine months ended October 31, 1998 was $4,485,000 and $15,099,000,
respectively, as compared to $6,212,000 and $16,040,000, respectively, for the
same periods in the prior year. The interest expense relates primarily to
existing borrowings which were used to fund 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.
EQUITY IN LOSS OF AFFILIATES. The Company's Equity in Loss of Affiliates was $0
and $5,953,000, respectively, for the three and nine months ended November 1,
1997. The Company recorded no equity in loss of affiliates for the three and
nine months ended October 31, 1998, due to the acquisition of Staples UK and
Staples Deutschland 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 Deutschland 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 Deutschland 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
October 31, 1998, Staples UK and Staples Deutschland operated 47 and 21 stores,
respectively.
Page 12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended October 31, 1998, cash and cash equivalents
decreased by $187,443,000. This decrease was partially attributable to cash used
in investing activities of $252,859,000, which was primarily due to the
acquisition of property and equipment of $239,055,000, mainly for the 139 new
stores opened. The decrease in cash was partially offset by cash provided by
operating activities of $116,433,000, which includes an increase in merchandise
inventories of $177,353,000 to support 139 new stores opened offset by an
increase in accounts payable, accrued expenses and other current liabilities of
$191,366,000 and depreciation and amortization of $74,597,000. The cash used in
financing activities of $51,141,000 was primarily repayment on borrowings of
$53,598,000 and cash paid to a dissenting Quill shareholder of $48,101,000,
offset by the proceeds from capital stock sales of $48,348,000.
The Company opened 139 stores and closed three stores during the nine months
ended October 31, 1998 and expects to open approximately 30 additional stores in
the last quarter 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
approximately $42,000,000 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 Company's Notes were used for repayment of
indebtedness under the Company's revolving credit agreement and for general
working capital purposes, including the financing of new store openings,
distribution facilities and corporate offices.
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 October 31, 1998, no
borrowings were outstanding under the revolving credit agreement. Business
Depot, Staples UK and Staples Deutschland each have revolving credit facilities
under which only Staples UK had an outstanding balance of $26,467,000 at October
31, 1998. Total cash, short-term investments and available revolving credit
amounts TOTALED $639,408,000 as of October 31, 1998.
The Company expects its current cash and cash equivalents and funds available
under its revolving credit and term loan facility will be sufficient to fund its
planned store openings and other recurring operational cash needs for the next
twelve to eighteen months. The Company 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 additional commercial bank debt arrangements.
Page 13
<PAGE> 14
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 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 170 new stores in fiscal 1998.
There can be no assurance that the Company will be able to identify and lease
favorable store sites, hire and train employees, and adapt its management and
operational systems to the extent necessary to fulfill its expansion plans. The
failure to open new stores in accordance with its growth plans could have a
material adverse impact on the Company's future sales and profits. Moreover, the
Company's expansion strategy is based in part on the continued addition of new
stores to its store network in existing markets to take advantage of economies
of scale in marketing, distribution and supervision costs; however, this can
result in the "cannibalization" of sales of existing stores. In addition, there
can be no assurance that the new stores opened by the Company will achieve sales
or profit levels commensurate with those of the Company's existing stores.
The Company has experienced and may experience in the future fluctuations in its
quarterly operating results. Moreover, there can be no assurance that Staples
will continue to realize the earnings growth experienced over recent years, or
that earnings in any particular quarter will not fall short of either a prior
fiscal quarter or investors' expectations. Factors such as the number of new
store openings (pre-opening expenses are expensed as incurred, and newer stores
are less profitable than mature stores), the extent to which new stores
"cannibalize" sales of existing stores, the mix of products sold, pricing
actions of competitors, the level of advertising and promotional expenses,
seasonality, and one-time charges associated with acquisitions or other events
could contribute to this quarterly variability. In addition, the Company's
expense levels are based in part on expectations of future sales levels, and a
shortfall in expected sales could therefore result in a disproportionate
decrease in the Company's net income.
The Company's business, including sales, number of stores and number of
employees, has grown dramatically over the past several years. In addition, the
Company has consummated a number of significant acquisitions in the last few
years, and may make additional acquisitions in the future. This internal growth,
together with the acquisitions made by the Company, have placed significant
demand on the management and operational systems of the Company. To manage its
growth effectively, the Company will be required to continue to upgrade its
operational and financial systems, expand its management team and increase and
manage its employee base.
Page 14
<PAGE> 15
The Company has a presence in international markets through The Business Depot
Ltd. in Canada and its 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.
YEAR 2000 COMPLIANCE.
The Company 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"). The Company has used internal personnel as well as 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. It
is anticipated that remediation of the most critical Information Technology (IT)
related systems and applications will be completed during the first quarter of
1999 and 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 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.
The Company 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 third quarter of
1999. The Company is working with third parties, primarily major vendors, but
also customers to ensure that they will be Year 2000 compliant as the Company's
schedule requires. Responses have been received from a number of vendors, but
not all vendors have assured the Company 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. The Company has
completed its enterprise-wide inventory review and is expecting to have
comprehensive risk assessment relative to vendor-provided products, devices
and/or services completed during the fourth quarter 1998. Comprehensive due
diligence and testing with respect to vendors with the greatest impact on the
Company will be performed on a continuous basis throughout 1999.
The Company has estimated that the total cost of Year 2000 compliance will be
between $20 and $30 million, $9 million of which had been spent as of October
31, 1998. 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 the Company's current 1998 and projected 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.
Page 15
<PAGE> 16
The Company 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. Although the Company
expects to achieve Year 2000 compliance as scheduled, there are potential risks
if the Company or a critical third party 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. The Company 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 the
Company 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.
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. All Year 2000 statements contained herein are designated as "Year
2000 Readiness Disclosures" pursuant to the Year 2000 Information and Readiness
Disclosure Act (P.L. 105-271).
EURO CURRENCY
On January 1, 1999, certain member countries of the European Union are scheduled
to establish 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.
The Company has revenues from its European operations and is currently assessing
the impact that the conversion to the euro will have on the Company. The Company
is evaluating the potential impact in several areas of 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. Although the
Company is still in the assessment phase, the conversion to the euro is not
expected to have a material impact on the Company's operations or financial
position.
Page 16
<PAGE> 17
PART II -- OTHER INFORMATION
ITEMS 1, 3-4 - NOT APPLICABLE.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS.
On November 13, 1998, the Company issued a Notice of Redemption for its 4 1/2%
Convertible Subordinated Debentures due October 1, 2000. As of December 2, 1998
debenture holders had converted their outstanding debentures into 20,454,206
shares of common stock of the Company at a conversion price of $14.67 per share.
As of October 31, 1998, a total of 11,245 shares of common stock had been issued
to debenture holders upon the conversion of the debentures. No underwriters were
involved in such issuances, and such shares were issued and sold pursuant to the
registration exemption in Section 3(a)(9) of the Securities Act of 1933.
ITEM 5 - OTHER EVENTS.
Stockholder Proposals for 1999 Annual Meeting
As set forth in the Company's Proxy Statement for its 1998 Annual Meeting of
Stockholders (which was held on June 4, 1998), proposals of stockholders
submitted pursuant to Rule 14a-8 under the Securities Exchange Act of 1934 (the
"Exchange Act") to be presented at the 1999 Annual Meeting of Stockholders must
be received by the Company no later than December 20, 1998 in order to be
considered for inclusion in the Company's proxy materials for the 1999 Annual
Meeting. Proposals must be in writing and sent to the Corporate Secretary at One
Research Drive, Westborough, Massachusetts 01581.
The Company's By-laws require that the Company be given advance written notice
of stockholder nominations for election to the Company's Board of Directors and
of other matters which stockholders wish to present for action at an annual
meeting of stockholders (other than matters included in the Company's proxy
materials in accordance with Rule 14a-8 under the Exchange Act). The Secretary
of the Company must receive such notice at the address noted above not less than
60 days or more than 90 days prior to the meeting; provided, however, that if
the date of such meeting is not provided to stockholders or publicly disclosed
at least 70 days before the date of such meeting, such notice must be mailed or
delivered to the Secretary not later than the close of business on the 10th day
following the day on which notice of the meeting was mailed or public
announcement of the date of the meeting was made, whichever occurs first. The
Company's By-laws also specify requirements relating to the content of the
notice which stockholders must provide to the Secretary of the Company for any
matter, including a stockholder nomination for director, to be properly
presented at a stockholders meeting.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits
27.1 Financial Data Schedule.
Page 17
<PAGE> 18
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.
STAPLES, INC.
Date: December 14, 1998 By: /s/ John J. Mahoney
----------------- ----------------------------------
John J. Mahoney
Executive Vice President-Finance
and Chief Financial Officer
(Principal Financial Officer)
Page 18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF STAPLES, INC. FOR THE NINE MONTHS ENDED OCTOBER 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 193,645
<SECURITIES> 1,459
<RECEIVABLES> 273,571
<ALLOWANCES> 3,150
<INVENTORY> 1,303,329
<CURRENT-ASSETS> 1,864,933
<PP&E> 1,156,410
<DEPRECIATION> 379,512
<TOTAL-ASSETS> 2,894,677
<CURRENT-LIABILITIES> 1,125,701
<BONDS> 531,760
0
0
<COMMON> 172
<OTHER-SE> 1,187,641
<TOTAL-LIABILITY-AND-EQUITY> 2,894,677
<SALES> 5,046,086
<TOTAL-REVENUES> 5,046,086
<CGS> 3,827,233
<TOTAL-COSTS> 4,569,164
<OTHER-EXPENSES> 273,485
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,961
<INCOME-PRETAX> 188,476
<INCOME-TAX> 74,501
<INCOME-CONTINUING> 114,110
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 114,110
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.39
<FN>
<F1>
INCOME BEFORE MINORITY INTEREST 113,975
MINORITY INTEREST 135
</FN>
</TABLE>
