<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: August 1, 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 284,098,461 shares of Common Stock, par value $.0006,
outstanding as of September 2, 1998.
<PAGE> 2
FORM 10-Q
STAPLES, INC.
AUGUST 1, 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 ....................... 6-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................... 10-14
Part II .......................................................... 15
Signature ........................................................ 16
Page 2
<PAGE> 3
STAPLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
August 1,
1998 January 31,
(Unaudited) 1998
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 93,762 $ 381,088
Short-term investments ............................................. 1,443 5,902
Merchandise inventories ............................................ 1,293,654 1,124,642
Receivables, net ................................................... 254,641 203,143
Prepaid expenses and other current assets .......................... 80,825 71,365
----------- -----------
TOTAL CURRENT ASSETS ..................................... 1,724,325 1,786,140
PROPERTY AND EQUIPMENT:
Land and buildings ................................................. 195,378 150,947
Leasehold improvements ............................................. 327,476 292,128
Equipment .......................................................... 334,041 304,177
Furniture and fixtures ............................................. 197,821 173,711
----------- -----------
TOTAL PROPERTY AND EQUIPMENT ............................. 1,054,716 920,963
Less accumulated depreciation and amortization ..................... 352,915 310,701
----------- -----------
NET PROPERTY AND EQUIPMENT ............................... 701,801 610,262
OTHER ASSETS:
Lease acquisition costs, net of amortization ....................... 77,695 43,244
Investments ........................................................ -- 16,450
Goodwill, net of amortization ...................................... 135,818 139,753
Other .............................................................. 35,229 43,013
----------- -----------
TOTAL OTHER ASSETS ....................................... 248,742 242,460
----------- -----------
$ 2,674,868 $ 2,638,862
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................... $ 701,198 $ 672,956
Accrued expenses and other current liabilities ..................... 310,523 266,023
Debt maturing within one year ...................................... 4,443 43,501
----------- -----------
TOTAL CURRENT LIABILITIES ................................ 1,016,164 982,480
LONG-TERM DEBT ................................................................ 205,935 218,959
OTHER LONG-TERM OBLIGATIONS ................................................... 48,708 42,803
CONVERTIBLE DEBENTURES ........................................................ 300,000 300,000
MINORITY INTEREST ............................................................. (25) 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
284,483,644 shares at August 1, 1998 and
278,159,308 shares at January 31, 1998 ............................. 170 167
Additional paid-in capital ......................................... 631,967 593,883
Cumulative foreign currency translation adjustments ................ (12,792) (10,315)
Unrealized gain/(loss) on short-term investments ................... 2 1,056
Retained earnings .................................................. 492,977 510,040
Less: treasury stock, at cost, 352,948 shares at August 1, 1998
and 59,149 shares at January 31, 1998 .............................. (8,238) (346)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ........................... 1,104,086 1,094,485
----------- -----------
$ 2,674,868 $ 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 26 Weeks Ended
------------------------------ ------------------------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Sales ...................................................... $ 1,475,705 $ 1,192,339 $ 3,146,316 $ 2,485,060
Cost of goods sold and occupancy costs ..................... 1,120,780 905,718 2,403,376 1,893,773
------------- ------------- ------------- -------------
GROSS PROFIT ........................................... 354,925 286,621 742,940 591,287
Operating expenses:
Operating and selling .................................... 213,969 181,264 469,617 379,862
Pre-opening .............................................. 4,232 2,316 7,584 5,178
General and administrative ............................... 70,694 55,174 138,180 102,205
Amortization of goodwill ................................. 927 1,049 1,851 1,621
Merger-related and integration costs ..................... 41,000 9,103 41,000 29,665
------------- ------------- ------------- -------------
TOTAL OPERATING EXPENSES ............................... 330,822 248,906 658,232 518,531
------------- ------------- ------------- -------------
OPERATING INCOME ....................................... 24,103 37,715 84,708 72,756
Interest and other expense, net .......................... (5,920) (5,892) (10,614) (9,828)
------------- ------------- ------------- -------------
INCOME BEFORE EQUITY IN LOSS OF
AFFILIATES AND INCOME TAXES .......................... 18,183 31,823 74,094 62,928
Equity in gain/(loss) of affiliates ....................... -- -- -- (5,953)
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES .............................. 18,183 31,823 74,094 56,975
Income tax expense ......................................... 9,319 9,120 29,330 14,495
------------- ------------- ------------- -------------
NET INCOME BEFORE MINORITY INTEREST ..................... 8,864 22,703 44,764 42,480
Minority interest ........................................ 110 56 160 56
============= ============= ============= =============
NET INCOME .............................................. $ 8,974 $ 22,759 $ 44,924 $ 42,536
============= ============= ============= =============
Historical net income per common share ..................... $ 0.03 $ 0.08 $ 0.16 $ 0.16
============= ============= ============= =============
Historical net income per common share assuming dilution ... $ 0.03 $ 0.08 $ 0.16 $ 0.15
============= ============= ============= =============
PRO FORMA:
Historical net income ...................................... $ 22,759 $ 44,924 $ 42,536
Provision for income taxes on previously untaxed
earnings of pooled S-Corporation income ................ 3,182 1,814 7,730
------------- ------------- -------------
PRO FORMA NET INCOME ....................................... $ 19,577 $ 43,110 $ 34,806
============= ============= =============
Pro forma net income per common share ...................... $ 0.07 $ 0.15 $ 0.13
============= ============= =============
Pro forma net income per common share assuming dilution .... $ 0.07 $ 0.15 $ 0.13
============= ============= =============
Number of shares used in computing historical and pro
forma net income per common share ..................... 282,639,460 270,155,123 282,639,460 269,600,845
============= ============= ============= =============
Number of shares used in computing historical and pro
forma net income per common share assuming dilution ... 291,033,327 279,191,526 289,161,513 278,271,092
============= ============= ============= =============
</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>
26 Weeks Ended
-----------------------
August 1, August 2,
1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income .............................................................. $ 44,924 $ 42,536
Adjustments to reconcile net income to net cash provided by/
(used in) operating activities:ctivities:
Minority interest ................................................. (160) (56)
Depreciation and amortization ..................................... 45,725 45,943
Equity in loss of affiliates ...................................... -- 5,953
Net decrease in deferred tax assets ............................... (7,098) (10,665)
(Increase)/decrease in assets:
Merchandise inventories ...................................... (169,012) (134,318)
Receivables .................................................. (56,419) (2,655)
Prepaid expenses and other assets ............................ 8,616 (5,390)
Increase in accounts payable, accrued expenses and
other current liabilities .................................... 78,706 128,442
Increase in other long-term obligations ........................... 6,242 3,234
--------- ---------
(93,400) 30,488
--------- ---------
NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES ..................... (48,476) 73,024
INVESTING ACTIVITIES:
Acquisition of property and equipment ................................... (136,713) (78,820)
Proceeds from sales and maturities of short-term investments ............ 11,313 10,061
Purchase of short-term investments ...................................... (6,854) --
Proceeds from sales and maturities of long-term investments ............. 18,995 3,430
Purchase of long-term investments ....................................... (2,545) (3,505)
Acquisition of businesses, net of cash acquired ......................... -- (77,808)
Investment in affiliates ................................................ (1,075) (1,606)
Acquisition of lease rights ............................................. (36,690) (2,402)
Other ................................................................... (544) 2,059
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES ................................... (154,113) (148,591)
FINANCING ACTIVITIES:
Proceeds from sale of capital stock ..................................... 38,654 11,500
Proceeds from borrowings ................................................ 38 762,914
Payments on borrowings .................................................. (52,082) (677,375)
Purchase and retirement of acquired S-Corporation stock ................. (48,102) --
Dividends to shareholders of acquired S-Corporation ..................... (15,601) (14,257)
Other ................................................................... (7,892) --
--------- ---------
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES ..................... (84,985) 82,782
Effect of exchange rate changes on cash ................................. 248 (727)
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS ........................... (287,326) 6,488
Cash and cash equivalents at beginning of period ............................... 381,088 117,035
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................................... $ 93,762 $ 123,523
========= =========
</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 8,394,000 and 8,166,000 shares for the three and
six months ended August 1, 1998 and 9,036,000 and 8,670,000 for the same periods
ended August 2, 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 all periods
presented 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 six months ended
August 1, 1998 and 1997, total comprehensive income, which was comprised of net
income, foreign currency translation adjustments and unrealized gains (losses)
on short-term investments,
Page 6
<PAGE> 7
STAPLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
amounted to approximately $2,764,000 and $41,393,000 compared to $22,081,000 and
$39,127,000, 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 six
months ended August 2, 1997 with the corresponding Quill operating results for
the three and six months ended June 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 $0.12 and
$0.23 for the three and six months ended August 1, 1998, respectively.
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
August 1, 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 August 1, 1998
(in thousands)
<TABLE>
<CAPTION>
Non-
Staples, Inc. Guarantor Guarantor
(Parent Corp.) Subsidiaries Subsidiaries Consolidated
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ -- $1,118,437 $357,268 $1,475,705
Cost of goods sold 656 849,237 270,887 1,120,780
-------- ---------- -------- ----------
Gross profit (656) 269,200 86,381 354,925
Operating expenses 42,873 220,546 67,403 330,822
-------- ---------- -------- ----------
Operating income (43,529) 48,654 18,978 24,103
Interest and other expense, net (3,569) (10,308) 7,957 (5,920)
Provision for income taxes 4,511 (8,972) (4,858) (9,319)
Minority interest -- -- 110 110
-------- ---------- -------- ----------
Net income $(42,587) $ 29,374 $ 22,187 $ 8,974
======== ========== ======== ==========
</TABLE>
Condensed Consolidated Statement of Income
For the twenty-six weeks ended August 1, 1998
(in thousands)
<TABLE>
<CAPTION>
Non-
Staples, Inc. Guarantor Guarantor
(Parent Corp.) Subsidiaries Subsidiaries Consolidated
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ -- $2,383,087 $763,229 $3,146,316
Cost of goods sold 925 1,816,868 585,583 2,403,376
-------- ---------- -------- ----------
Gross profit (925) 566,219 177,646 742,940
Operating expenses 44,631 469,400 144,201 658,232
-------- ---------- -------- ----------
Operating income (45,556) 96,819 33,445 84,708
Interest and other expense, net (8,113) (19,815) 17,314 (10,614)
Provision for income taxes 6,477 (25,826) (9,981) (29,330)
Minority interest -- -- 160 160
-------- ---------- -------- ----------
Net income $(47,192) $ 51,178 $ 40,938 $ 44,924
======== ========== ======== ==========
</TABLE>
Page 8
<PAGE> 9
STAPLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Condensed Consolidating Balance Sheet
As of August 1, 1998
(in thousands)
<TABLE>
<CAPTION>
Non-
Staples, Inc. Guarantor Guarantor
(Parent Corp.) Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments $ 38,452 $ 16,928 $ 39,825 $ 95,205
Merchandise inventories (5,027) 1,075,302 223,379 1,293,655
Other current assets and
intercompany 901,607 457,689 520,203 (1,544,033) 335,467
----------- ---------- ---------- ----------- ----------
Total current assets 935,032 1,549,919 783,407 (1,544,033) 1,724,326
Net property, equipment and
other assets 235,972 604,114 334,155 (223,698) 950,542
----------- ---------- ---------- ----------- ----------
Total assets 1,171,004 2,154,033 1,117,562 $(1,767,731) 2,674,868
=========== ========== ========== =========== ==========
Total current liabilities $ 144,317 $ 865,118 $ 225,469 $ (218,740) $1,016,164
Total long-term liabilities 306,168 237,596 10,879 (25) 554,618
Total stockholders' equity 720,519 1,051,319 881,214 (1,548,966) 1,104,086
=========== ========== ========== =========== ==========
Total liabilities and
stockholders' equity $ 1,171,004 $2,154,033 $1,117,562 $(1,767,731) $2,674,868
=========== ========== ========== =========== ==========
</TABLE>
Condensed Consolidated Statement of Cash Flows
For the twenty-six weeks ended August 1, 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 $ (67,461) $ 3,579 $ 15,406 $ (48,476)
Investing Activities:
Acquisition of property,
equipment and lease rights (31,354) (129,773) (12,276) (173,403)
Other (56,769) 134,869 (58,810) 19,290
--------- --------- --------- ---------
Cash (used in) provided by investing
activities (88,123) 5,096 (71,086) (154,113)
Financing Activities:
Payments on borrowings (26,040) -- (26,042) (52,082)
Other 30,821 -- (63,724) (32,903)
--------- --------- --------- ---------
Cash provided by/(used) in
financing activities 4,781 -- (89,766) (84,985)
Effect of exchange rate changes on cash -- -- 248 248
--------- --------- --------- ---------
Net (decrease) increase in cash (150,803) 8,675 (145,198) (287,326)
Cash and cash equivalents at
beginning of period 189,252 8,253 183,583 381,088
--------- --------- --------- ---------
Cash and cash equivalents at end
of period $ 38,449 $ 16,928 $ 38,385 $ 93,762
========= ========= ========= =========
</TABLE>
Page 9
<PAGE> 10
STAPLES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES. Sales increased 24% to $1,475,705,000 in the quarter ended August 1, 1998
from $1,192,339,000 in the quarter ended August 2, 1997 and increased 27% to
$3,146,316,000 for the six months ended August 1, 1998 compared to
$2,485,060,000 for the six months ended August 2, 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. The growth
for the six month 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 ended August 1, 1998 increased 14% over the quarter ended August 2,
1997, and increased 13% for the six months ended August 1, 1998 versus the six
months ended August 2, 1997. Comparable sales in the contract stationer segment
including Quill increased 11% for the three months and 12% for the six months
ended August 1, 1998 versus the three and six months ended August 2, 1997. The
Company had 830 stores open as of August 1, 1998 compared to 682 stores as of
August 2, 1997 and 742 stores open as of January 31, 1998; this total includes
48 stores opened during the three months ended August 1, 1998 and 89 stores
opened and one store closed during the six months ended August 1, 1998.
GROSS PROFIT. Gross profit as a percentage of sales was 24.1% and 23.6% for the
three and six months ended August 1, 1998 as compared to 24.0% and 23.8% for the
same periods in the prior year. The gross profit rate was relatively unchanged
for the three and six months ended August 1, 1998 compared to the prior year not
withstanding decreased retail and contract margin rates as a result of price
reductions and changes in product mix because these reductions were offset by
lower product costs from vendors as a result of increased purchase discounts as
well as leveraging of distribution center and delivery costs over a larger sales
base. Also affecting gross profit were increased sales of computers and
accessories (which generate a lower margin rate than other categories) from
16.6% and 18.5% of sales to 19.0% and 20.7% of sales for the three and six
months ended August 2, 1997 and August 1, 1998, respectively. This increase in
computers and accessories was partially attributable to the launch of Windows 98
during the quarter ended August 1, 1998.
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 and six months ended August 1, 1998 to 14.5% and 14.9%, as
compared to 15.2% and 15.3% for the same periods in the prior year. The decrease
is 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 increase was partially
offset by the acquisitions 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 in which significant
investments have been 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 10
<PAGE> 11
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 $88,000 and $85,000 per store for the three and six months
ended August 1, 1998, respectively, as compared to $86,000 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 six months ended August 1, 1998 increased as a percentage of sales to
4.8% and 4.4%, respectively, as compared to 4.6% and 4.1% for the same periods
in the prior year. This increase was primarily due to costs incurred from
consultants for information systems ("IS"). The consultants expenses in IS are
primarily related to the Year 2000 compliance projects. In addition, the Company
has made other investments in the Company's 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 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. During the three and six months ended August 2, 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 six months ended August 1, 1998 was $5,920,000 and $10,614,000,
respectively, as compared to $5,892,000 and $9,828,000, 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 six months ended August 2, 1997.
The Company recorded no equity in loss of affiliates for the three and six
months ended August 1, 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
August 1, 1998, Staples UK and Staples Deutschland operated 44 and 20 stores,
respectively.
Page 11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended August 1, 1998, cash and cash equivalents decreased
by $287,326,000. This decrease was partially attributable to cash used in
operating activities of $48,476,000, which includes an increase in merchandise
inventories of $169,012,000 to support 89 new stores opened and back to school
stock offset by an increase in accounts payable, accrued expenses and other
current liabilities of $78,706,000 and and increase in depreciation and
amortization of $45,725,000. Cash used in investing activities of $154,113,000
was primarily due to the acquisition of property and equipment of $136,713,000,
mainly for the 89 new stores opened. The cash used in financing activities of
$84,985,000 was primarily repayment on borrowings of $52,082,000 and cash paid
to a dissenting Quill shareholder of $48,102,000.
The Company opened 89 stores and closed one store during the six months ended
August 1, 1998 and expects to open approximately 85 additional stores in the
last two 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 $84,000,000 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 August 1, 1998, no
borrowings were outstanding under the revolving credit agreement. Staples
Deutschland also has a revolving credit facility under which $10,132,000 was
outstanding at August 1, 1998. Total cash, short-term investments and available
revolving credit amounts totaled $485,778,000 as of August 1, 1998.
The Company expects that its current cash and cash equivalents and funds
available under its revolving credit and term loan facility will be sufficient
to fund its planned store openings and other 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.
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<PAGE> 13
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 175 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 13
<PAGE> 14
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.
YEAR 2000 COMPLIANCE
The Company has conducted a comprehensive review 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"). As a result, those programs could cause a system failure or
miscalculation resulting in business disruptions including, among other things,
a temporary inability to process transactions, send invoices or engage in
similar routine business activities. The Company has developed an implementation
plan to resolve the Year 2000 Issue and is in the process of correcting or
replacing those systems and applications which are not currently year 2000
compliant. The Company believes it will be able to modify or replace its
affected systems and applications in time to avoid any material detrimental
impact on its operations. This assessment also includes potential risks with
non-information technology systems (i.e. telecommunications and electricity) and
third parties (i.e. vendors and customers). The Company believes it is
effectively managing this risk to ensure there is not a material risk to the
Company's business.
The Company will incur internal staff costs as well as consulting and other
expenses related to infrastructure and facilities enhancements necessary to
prepare its systems and applications for the Year 2000 Issue. The preliminary
expense estimate for year 2000 corrective and replacement activities ranges from
$20 to $30 million, a portion of which would have been incurred as part of
normal system and application upgrades.
It is anticipated that all year 2000 compliance efforts will be complete by mid
fiscal year 1999, including testing. However, if such modifications and
conversions are not completed in a timely manner, the Company's inventory,
purchasing and MIS systems would need to be replaced, which would have a
material adverse impact on the operations of the Company. The Company is also
working to ensure that products purchased at Staples, as well as services
utilized by Staples, will be year 2000 compliant.
Page 14
<PAGE> 15
PART II -- OTHER INFORMATION
ITEMS 1, 3 AND 5 - NOT APPLICABLE.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 21, 1998, the Company acquired Quill Corporations 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
an aggregate of 29,989,417 shares of the Company's Common Stock pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held the 1998 Annual Meeting of Stockholders (the "Annual Meeting")
on June 4, 1998. At the Annual Meeting, the following actions were taken:
1. The stockholders elected W. Lawrence Heisey, James L. Moody, Jr.,
Martin Trust and Paul F. Walsh as Class I Directors, to serve for a
three-year term. Holders of 231,173,053 shares of Common Stock voted
for Mr. Heisey. Holders of 231,194,746 shares of common Stock voted for
Mr. Moody. Holders of 231,181,725 shares of Common Stock voted for Mr.
Trust. Holders of 231,238,582 shares of Common Stock voted for Mr.
Walsh.
2. The stockholders approved the Company's 1998 Employee Stock Purchase
Plan by a vote of 229,403,286 shares of Common Stock for 1,725,312
shares of Common Stock against and 1,224,518 shares of Common Stock not
voting.
3. The stockholders approved the Company's Executive Officer Incentive
Plan by a vote of 27,960,499 shares of Common Stock for, 3,264,416
shares of Common Stock against and 1,128,201 shares of Common Stock not
voting.
4. The stockholders ratified the appointment of Ernst & Young LLP as the
Company's independent auditors for the current fiscal year by a vote of
231,738,275 shares of Common Stock for, 271,804 shares common Stock
against and 343,037 shares of common Stock not voting.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits
27.1 Financial Data Schedule.
B. Reports on Form 8-K.
The Company filed the following reports on Form 8-K during the fiscal quarter
ended August 1, 1998.
1. Report on Form 8-K dated April 6, 1998, filed with the Commission on
April 15, 1998;
2. Report on form 8-K dated May 21, 1998, filed with the Commission on
June 4, 1998;
3. Report on Form 8-K dated July 1, 1998, filed with the Commission on
July 1, 1998; and
4. Report on Form 8-K dated July 9, 1998, filed with the Commission on
July 9, 1998.
Page 15
<PAGE> 16
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: September 3, 1998 By: /s/ John J. Mahoney
----------------- ----------------------------------
John J. Mahoney
Executive Vice President-Finance
and Chief Financial Officer
(Principal Financial Officer)
Page 16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF STAPLES, INC. FOR THE SIX MONTHS ENDED AUGUST 1, 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> 6-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> AUG-01-1998
<EXCHANGE-RATE> 1
<CASH> 93,762
<SECURITIES> 1,143
<RECEIVABLES> 258,224
<ALLOWANCES> 3,583
<INVENTORY> 1,293,654
<CURRENT-ASSETS> 1,724,325
<PP&E> 1,054,716
<DEPRECIATION> 352,915
<TOTAL-ASSETS> 2,674,868
<CURRENT-LIABILITIES> 1,016,164
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0
0
<COMMON> 170
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<SALES> 3,146,316
<TOTAL-REVENUES> 3,146,316
<CGS> 2,403,376
<TOTAL-COSTS> 2,872,993
<OTHER-EXPENSES> 188,615
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<INTEREST-EXPENSE> 10,614
<INCOME-PRETAX> 74,094
<INCOME-TAX> 29,330
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<INCOME-BEFORE MINORITY INTEREST> 44,764
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