<PAGE> 1
'
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): JULY 1, 1998
STAPLES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of Incorporation)
0-17586 04-2896127
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(Commission File Number) (I.R.S. Employer
Identification No.)
One Research Drive, Westborough, MA 01581
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(Address of principal executive office and zip code)
508-370-8500
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(Registrant's telephone number, including area code)
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ITEM 5. OTHER EVENTS
On May 21, 1998, Staples, Inc. (the "Company") acquired Quill Corporation and
certain related entities (collectively referred to as "Quill") (the "Merger").
The Merger is structured as an exchange of shares in which the stockholders of
Quill received approximately 26 million shares of the Company's common stock,
exchange ratio established at a combination of fixed and variable prices, and
cash paid to dissenting shareholder of approximately $48 million, which would
equate to a purchase price of approximately $690 million. The Merger was
accounted for as a pooling of interests. Accordingly, this Form 8-K is being
filed to provide certain historical financial information which has been
restated to give effect this transaction. Upon release of financial information
covering the periods in which the transaction was consummated, these
supplemental consolidated financial statements will become the historical
consolidated financial statements of the Company.
TABLE OF CONTENTS
FISCAL YEAR ENDED JANUARY 31, 1998:
Selected Financial Data ................................................ 2
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 3-10
Supplemental Consolidated Financial Statements:
Balance Sheets as of January 31, 1998 and February 1, 1997 ........... 11
Statements of Income for the years ended January 31, 1998,
February 1, 1997 and February 3, 1996 ............................. 12
Statements of Stockholders' Equity for the years ended
January 31, 1998, February 1, 1997 and February 3, 1996 ........... 13
Statements of Cash Flows for the years ended January 31, 1998,
February 1, 1997 and February 3, 1996 ............................. 14
Notes to Supplemental Consolidated Financial Statements .............. 15-34
Report of Independent Auditors .......................................... 35
QUARTER ENDED MAY 2, 1998:
Supplemental Unaudited Consolidated Financial Statements:
Balance Sheets ....................................................... 36
Statements of Income ................................................. 37
Statements of Cash Flows ............................................. 38
Notes to Supplemental Consolidated Financial Statements .............. 39-41
Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................ 42-46
Signature ............................................................... 47
Exhibit Table ........................................................... 48
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SELECTED SUPPLEMENTAL FINANCIAL DATA
The following selected financial data with respect to the Company's financial
position and its results of operations for each of the five years in the
period ended January 31, 1998 set forth below has been derived from the
audited consolidated financial statements of the Company. The selected
financial data and consolidated financial statements include adjustments to
give effect to the acquisition of Quill, effective May 21, 1998, which was
accounted for under the pooling of interests method. The selected financial
data presented below should be read in conjunction with the Consolidated
Financial Statements and related notes thereto in Item 8 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 8-K.
<TABLE>
<CAPTION>
Fiscal Year
1997 1996 1995 1994 1993
(in thousands, except per share and selected operating data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Sales $5,732,145 $4,493,589 $3,565,235 $2,418,793 $1,693,771
Operating income 307,327 245,398 182,392 114,684 63,386
Net income(1) 167,914 144,742 108,428 72,071 44,544
Pro forma net income(2) 153,128 129,413 94,539 59,219 34,507
Historical earnings per
common share $ 0.62 $ 0.54 $ 0.42 $ 0.31 $ 0.20
Historical earnings per common
share assuming dilution $ 0.59 $ 0.52 $ 0.41 $ 0.30 $ 0.20
Pro forma earnings per common
share(3) $ 0.56 $ 0.49 $ 0.37 $ 0.26 $ 0.15
Pro forma earnings per common
share assuming dilution(3) $ 0.54 $ 0.47 $ 0.35 $ 0.25 $ 0.15
Selected Operating Data:
Stores open 742 557 443 350 230
Balance Sheet Data:
Working capital $ 803,660 $ 623,835 $ 580,244 $ 355,639 $ 270,102
Total assets 2,638,862 1,955,636 1,552,199 1,141,496 764,341
Total long-term debt, less
current portion 518,959 402,985 351,508 257,122 132,765
Stockholders' equity 1,094,485 875,823 712,141 472,215 363,982
</TABLE>
(1) Net income for the year ended January 31, 1998 includes a pre-tax charge of
$29,665 resulting from costs incurred in connection with the proposed
merger with Office Depot, Inc.
(2) Pro forma net income includes the earnings of Quill with provision for
income taxes on previously untaxed earnings of pooled S-Corporation income.
(3) Earnings per common share have been restated to reflect 3 for 2 stock
splits effective January 1998, March 1996, July 1995 and October 1994 and
for FASB 128. The Company's fiscal year is the 52 or 53 weeks ending the
Saturday closest to January 31 of the following calendar year. Fiscal year
1995 was a 53 week fiscal year.
Some footnotes from Selected Financial Data in Form 10-K have been omitted.
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ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
RECENT DEVELOPMENTS
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Since January 31, 1998, the Company has acquired, in a pooling of interests
transaction, Quill Corporation and certain related entities (collectively
referred to as "Quill") with 1997 net sales of approximately $551 million. The
financial information set forth below includes adjustments to give effect to the
acquisition of Quill for all periods presented. Prior to its acquisition by the
Company, Quill elected to be treated as an S Corporation under the Internal
Revenue Code, and accordingly, its earnings were not subject to taxation at the
corporate level. Pro forma adjustments have been made to reflect a provision for
income taxes on such previously untaxed earnings for each period presented at an
assumed rate of 40%. The supplemental statements of income combine Staples'
historical operating results for the fiscal years ended January 31, 1998,
February 1, 1997 and February 3, 1996 with the corresponding Quill operating
results for the years ended December 31, 1997, 1996 and 1995.
RESULTS OF OPERATIONS
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COMPARISON OF FISCAL YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997, AND
FEBRUARY 3, 1996
GENERAL. During the fiscal year ended January 31, 1998, the Company
acquired Kingfisher PLC's interests in Staples UK and Staples (Deutschland) GmbH
("Staples Germany", formally MAXI- Papier-Markt-GmbH). The German stores now
operate as Staples Der Buro Mega Markt. Staples UK and Staples Germany operate a
chain of office products superstores in the UK and Germany, respectively. As a
result of these acquisitions, the Company's ownership interest of Staples UK
increased to 100% and its ownership interest in Staples Germany increased to
approximately 92%. The cash purchase price of approximately $57 million was
generated through additional borrowings under the Company's existing revolving
credit facility. The transactions were accounted for in accordance with the
purchase method of accounting and accordingly, the results of operations of
Staples UK and Staples Germany have been included in the Company's consolidated
financial statements since May, 1997. The excess of the purchase price has been
recorded as goodwill and is being amortized on a straight line basis over 40
years. Prior to May 1997, the operating results of Staples UK and Staples
Germany were accounted for under the equity method.
The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128, Earnings Per
Share ("FAS 128"). For further discussion of earnings per share and the impact
of FAS 128, see the Notes to the Consolidated Financial Statements.
The fiscal years ended January 31, 1998 and February 1, 1997 consisted of
52 weeks, while the fiscal year ended February 3, 1996 consisted of 53 weeks.
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SALES. Sales increased 28% to $5,732,145,000 in the fiscal year ended January
31, 1998 from $4,493,589,000 in the fiscal year ended February 1, 1997. Sales
increased 26% in the fiscal year ended February 1, 1997 from $3,565,235,000 in
the fiscal year ended February 3, 1996; excluding the additional week in the
fiscal year ended February 3, 1996, sales increased 28%. The growth in each year
was attributable to an increase in the number of open stores, increased sales in
existing stores and increased sales in the delivery and contract stationer
segments. In addition, sales for the fiscal year ended January 31, 1998 include
the consolidation of Staples UK and Staples Germany. Comparable store and
delivery hub sales for the fiscal year ended January 31, 1998 increased 10% over
the fiscal year ended February 1, 1997; comparable sales in the contract
stationer segment increased 12% over the year ended February 1, 1997. Comparable
store and delivery hub sales for the year ended February 1, 1997 increased 14%
over the year ended February 3, 1996; comparable sales in the contract stationer
segment increased 17% over the year ended February 3, 1996. As of January 31,
1998, February 1, 1997, and February 3, 1996, the Company had 742, 557, and 443
open stores, respectively. The January 31, 1998 total includes 130 stores opened
and one store closed during the twelve months ended January 31, 1998 and 56
stores acquired in the UK and Germany as a result of the acquisitions of Staples
UK and Staples Germany.
GROSS PROFIT. Gross profit was 24.1%, 24.1%, and 23.2% of sales for the
fiscal years ended January 31, 1998, February 1, 1997, and February 3, 1996,
respectively. The increase in gross profit rate for the year ended February 1,
1997 as compared to the prior year ended February 3, 1996 was primarily due to
improved margins in the retail and delivery business segments due to lower
product costs from vendors as a result of increased purchase discounts and
changes in product mix, as well as the leveraging of fixed distribution center
and delivery costs over a larger sales base. This was partially offset by
decreases in the margin rates in the retail store segment due to price
reductions as well as an increase in the sales of computer hardware (CPUs and
laptops), which generate a lower margin rate than other categories, to 7.4% of
total sales for the year ended January 31, 1998 from 6.0% in the year ended
February 1, 1997 and 5.6% in the year ended February 3, 1996.
OPERATING AND SELLING EXPENSES. Operating and selling expenses, which
consist of payroll, advertising and other operating expenses, were 14.5%, 14.5%,
and 14.1% of sales for the fiscal years ended January 31, 1998, February 1,
1997, and February 3, 1996, respectively. The increase as a percentage of sales
for the years ended January 31, 1998 and February 1, 1997 was primarily due to
increased advertising as well as increases in store labor and costs incurred for
the Company's store remodel program in which significant investments have been
made in store layouts and signing to improve shopability and enhance customer
service. In addition, operating and selling expenses for the year ended January
31, 1998 include the results of Staples UK and Staples Germany, which have
higher costs as a percentage of sales due to their early stage of development.
These increases were partially offset by increased leveraging of fixed store
payroll expenses and store operating costs as store sales have increased.
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Staples UK and Staples Germany store expenses are higher than most other
Staples stores as a result of their earlier stage of development. While most
store expenses vary proportionately with sales, there is a fixed cost component.
Because new stores typically generate lower sales than the Company average, the
fixed cost component results in higher store operating and selling expenses as a
percentage of sales in these stores during their start-up period. During periods
when new store openings as a percentage of the base are higher, store operating
and selling expenses as a percentage of sales may increase. In addition, as the
store base matures, the fixed cost component of operating expenses is leveraged
over an increased level of sales, resulting in a decrease in store operating and
selling expenses as a percentage of sales. The Company's strategy of continuing
to add stores to many existing markets can result in some new stores attracting
sales away from existing stores.
PRE-OPENING EXPENSES. Pre-opening expenses relating to new store openings,
which consist primarily of salaries, supplies, marketing and occupancy costs,
are expensed by the Company as incurred and, therefore, fluctuate from period to
period depending on the timing and number of new store openings. Pre-opening
expenses averaged $73,000, $72,000, and $58,000 per store for the stores opened
in the years ended January 31, 1998, February 1, 1997, and February 3, 1996,
respectively. The increase from the fiscal year ended February 3, 1996 was due
primarily to increased marketing expenses as well as higher costs incurred in
the initial shipment of product from the distribution centers to new stores.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses as
a percentage of sales were 3.9%, 3.9%, and 3.8% in the years ended January 31,
1998, February 1, 1997, and February 3, 1996, respectively. The increase as a
percentage of sales for the years ended January 31, 1998 and February 1, 1997 as
compared to the year ended February 3, 1996 was primarily due to significant
investments in the Company's information systems' staffing and infrastructure,
which the Company believes will reduce costs as a percentage of sales in future
years. In addition, general and administrative expenses for the year ended
January 31, 1998 include the results of Staples UK and Staples Germany, which
have higher costs as a percentage of sales; as their store bases mature overhead
expenses should decrease as a percentage of sales. The overall increase in
general and administrative costs were partially offset by the Company's ability
to increase sales without proportionately increasing overhead expenses in its
core retail business.
INTEREST AND OTHER EXPENSE, NET. Net interest expense totaled $21,955,000,
$22,962,000, and $15,671,000 in the fiscal years ended January 31, 1998,
February 1, 1997, and February 3, 1996, respectively. The increase in the years
ended January 31, 1998 and February 1, 1997 as compared to the year ended
February 3, 1996 was primarily due to increased borrowings which funded: the
increase in store inventories related to new store openings, expanded product
assortment, and improvements in in-stock levels; the acquisition of fixed assets
for new stores opened and remodeled; continued investments in the information
systems and distribution center infrastructure; and additional investments in
additional investments in Staples UK and Staples Germany as well as the purchase
of them during the fiscal year ended January 31, 1998.
MERGER-RELATED COSTS. During the year ended January 31, 1998, the Company
charged to expense certain non-recurring costs consisting primarily of legal,
accounting, transaction related costs, such as filing fees, and consulting fees
incurred in connection with the proposed merger with Office Depot, Inc.
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EQUITY IN LOSS OF AFFILIATES. Equity in Loss of Affiliates is comprised of
the Company's share of the losses incurred by Staples UK and Staples Germany
before the Company's acquisition of these entities in May, 1997. Prior to the
acquisitions, the Company's investments in Staples UK and Staples Germany were
accounted for using the equity method which resulted in the Company's share of
losses from operations being included in Equity in Loss of Affiliates. Equity in
Loss of Affiliates totaled $5,593,000, $11,073,000, and $12,153,000, in the
years ended January 31, 1998, February 1, 1997, and February 3, 1996,
respectively. The decrease in the Equity in Loss of Affiliates for the year
ended January 31, 1998 was due to the acquisition of Staples UK and Staples
Germany on May 6, 1997 and May 7, 1997. As a result of the acquisitions, the
Company's ownership interest of Staples UK increased to 100% and its ownership
of Staples Germany increased to approximately 92%. The transactions were
accounted for in accordance with the purchase method of accounting and
accordingly, the results of operations of Staples UK and Staples Germany have
been included in the Company's consolidated financial statements since the
respective acquisition dates.
INCOME TAXES. The provision for income taxes, on a pro forma basis,
adjusting for a provision for taxes on the previously untaxed earnings of Quill
included in results, the Company's effective tax rate would have been 38.7% for
the fiscal year ended January 31, 1998 and 38.8% for the fiscal years ended
February 1, 1997 and February 3, 1996.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
The Company has traditionally used a combination of cash generated from
operations and debt or equity offerings to fund its expansion and acquisition
activities. During the years ended January 31, 1998, February 1, 1997 and
February 3, 1996, the Company also utilized its revolving credit facility to
support its various growth initiatives.
The Company opened 130 stores, 115 stores, and 94 stores in the years ended
January 31, 1998, February 1, 1997 and February 3, 1996, respectively, and
closed one store in each of these fiscal years. In addition, in the fiscal year
ended January 31, 1998, 56 stores were added as a result of the acquisition of
Staples UK and Staples Germany. As the store base matures and becomes more
profitable, cash generated from store operations is expected to provide a
greater portion of funds required for new store inventories and other working
capital requirements. Sales generated by the contract stationer business segment
are made under regular credit terms, which requires that the Company carry its
own receivables from these sales. The Company also utilized capital equipment
financings to fund current working capital requirements. Subsequent to January
31, 1998, the Company paid mortgages in full on five distribution centers
acquired from Quill of approximately $14 million.
As of January 31, 1998, cash, cash equivalents, and short-term investments
totaled $386,990,000, an increase of $254,770,000 from the February 1, 1997
balance of $132,220,000. The principal sources of funds were primarily cash from
operations, an increase in accounts payable and accrued expenses of
$323,496,000, which financed the increase in merchandise inventory of
$227,076,000 related to new store openings, expanded product assortment and
improvements in in-stock levels; and cash provided from financing activities of
$158,771,000 due primarily to the issuance of $200,000,000
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of senior notes on August 12, 1997. These sources were partially offset by the
acquisition of property and equipment of $190,659,000 and cash used in the
acquisition of Staples UK and Staples Germany, net of cash acquired, of
$79,325,000.
The Company expects to open approximately 170 stores during fiscal 1998.
Management estimates that the Company's cash requirements, including pre-opening
expenses, leasehold improvements and fixtures (excluding store inventory
financed under vendor trade terms), will be approximately $1,400,000 for each
new store (excluding the cost of any acquisitions of lease rights). Accordingly,
the Company expects to use approximately $238,000,000 for store openings during
this period. In addition, the Company plans to continue to make investments in
information systems, distribution centers and store remodels to improve
operational efficiencies, and customer service, and may expend additional funds
to acquire businesses or lease rights from tenants occupying retail space that
is suitable for a Staples store. The Company will meet these cash requirements
through a combination of operating cash flow and borrowings from its existing
revolving line of credit.
The Company issued $200,000,000 of senior notes (the "Notes") on August 12,
1997 with an interest rate of 7.125% payable semi-annually on February 15 and
August 15 of each year commencing on February 15, 1998. Net proceeds of
approximately $198,000,000 from the sale of the Company's Notes were used for
repayment of indebtedness under the Company's revolving credit agreement and for
general working capital purposes, including the financing of new store openings,
distribution facilities and corporate offices.
Effective November 13, 1997 the Company entered into a new revolving credit
facility, effective through November 2002, with a syndicate of banks which
provides up to $350,000,000 of available borrowings. Borrowings made pursuant to
this facility will bear interest at either the lead bank's prime rate, the
federal funds rate plus 0.50%, the LIBOR rate plus a percentage spread based
upon certain defined ratios, a competitive bid rate or a swing line loan rate.
This agreement, among other conditions, contains certain restrictive covenants
including net worth maintenance, minimum fixed charge interest coverage and
limitations on indebtedness, sales of assets, and dividends. As of January 31,
1998, no borrowings were outstanding under the revolving credit agreement.
Staples Germany also has a revolving credit facility under which $8,746,000 was
outstanding as of January 31, 1998. Total cash short-term investments and
available revolving credit amounts totaled $763,002,000 as of January 31, 1998.
The Company expects that its current cash and cash equivalents and funds
available under its revolving credit will be sufficient to fund its planned
store openings and other recurring operating cash needs for at least the next
twelve to eighteen months. The Company is continually evaluating financing
possibilities, and it may seek to raise additional funds through any one or a
combination of public or private debt or equity-related offerings, dependent
upon market conditions, or through an additional commercial bank debt
arrangement.
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INFLATION AND SEASONALITY
While inflation or deflation has not had, and the Company does not expect
it to have, a material impact upon operating results, there can be no assurance
that the Company's business will not be affected by inflation or deflation in
the future. The Company believes that its business is somewhat seasonal, with
sales and profitability slightly lower during the first and second quarters of
its fiscal year.
FUTURE OPERATING RESULTS
Factors that could affect the Company's future operating results include,
without limitation, the following:
The Company operates in a highly competitive marketplace, in which it
competes with a variety of retailers, dealers and distributors. The Company
competes in most of its geographic markets with other high-volume office supply
chains that are similar in concept to the Company in terms of store format,
pricing strategy and product selection, such as Office Depot, OfficeMax and
Office World as well as mass merchants, such as Wal-Mart, warehouse clubs,
computer and electronics superstores, and other discount retailers. In addition,
the Company's retail stores, as well as its delivery and contract business
compete with numerous mail order firms, contract stationer businesses and direct
manufacturers. Such competitors have increased their presence in the Company's
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,
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seasonality, and one-time charges associated with acquisitions or other events
could contribute to this quarterly variability. In addition, the Company's
expense levels are based in part on expectations of future sales levels, and a
shortfall in expected sales could therefore result in a disproportionate
decrease in the Company's net income.
The Company's business, including sales, number of stores and number of
employees, has grown dramatically over the past several years. In addition, the
Company has consummated a number of significant acquisitions in the last few
years, and may make additional acquisitions in the future. This internal growth,
together with the acquisitions made by the Company, have placed significant
demand on the management and operational systems of the Company. To manage its
growth effectively, the Company will be required to continue to upgrade its
operational and financial systems, expand its management team and increase and
manage its employee base.
The Company has a presence in international markets in Canada and through
its recently acquired operations in Germany and the United Kingdom, and may seek
to expand into other international markets in the future. The Company's
operations in foreign markets are subject to risks similar to those affecting
its U.S. stores, in addition to a number of additional risks inherent in foreign
operations, including local customs and competitive conditions, and foreign
currency fluctuations. Staples' European operations are currently unprofitable,
and there can be no assurance that they will become profitable.
The Company currently expects that its current cash and cash equivalents
and funds available under its revolving credit facility will be sufficient to
fund its planned store openings and other operating cash needs for at least the
next twelve to eighteen months. However, there can be no assurance that the
Company will not require additional sources of financing prior to such time, as
a result of unanticipated cash needs or opportunities, an expanded growth
strategy or disappointing operating results. There also can be no assurance that
the additional funds required by the Company, whether within the next twelve to
eighteen months or thereafter, will be available to the Company on satisfactory
terms.
YEAR 2000
The Company has conducted a comprehensive review of its internal computer
systems and applications to identify those that might be affected by the year
2000 issue and has developed an implementation plan to resolve the year 2000
issue. The Company is in the process of correcting or replacing those systems
and applications which are not currently year 2000 compliant. The company
believes it will be able to modify or replace its affected systems and
applications in time to avoid any material detrimental impact on its operations.
The Company will incur internal staff costs as well as consulting and other
expenses related to infrastructure and facilities enhancements necessary to
prepare its systems and applications for the year 2000 issue. The preliminary
expense estimate for year 2000 corrective and replacement activities ranges from
$20 to $30 million, a portion of which would have been incurred as part of
normal system and application upgrades.
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It is anticipated that all year 2000 compliance efforts will be complete by
mid fiscal year 1999, including testing. However, if such modifications and
conversions are not completed in a timely manner, the year 2000 issue may have a
material impact on the operations of the Company. The Company is also working to
ensure that products purchased at Staples, as well as services utilized by
Staples, will be year 2000 compliant.
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STAPLES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
----------- -----------
<C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 381,088 $ 117,035
Short-term investments 5,902 15,185
Merchandise inventories 1,124,642 845,854
Receivables, net 203,143 211,459
Deferred income taxes 33,108 31,202
Prepaid expenses and other current assets 38,257 41,589
---------- ----------
TOTAL CURRENT ASSETS 1,786,140 1,262,324
PROPERTY AND EQUIPMENT:
Land and buildings 150,947 103,619
Leasehold improvements 292,128 235,006
Equipment 304,177 239,290
Furniture and fixtures 173,711 117,823
---------- ----------
TOTAL PROPERTY AND EQUIPMENT 920,963 695,738
Less accumulated depreciation and amortization 310,701 216,781
---------- ----------
NET PROPERTY AND EQUIPMENT 610,262 478,957
OTHER ASSETS:
Lease acquisition costs, net of amortization 43,244 42,552
Investments 16,450 10,046
Investments in affiliates -- 40,542
Goodwill, net of amortization 139,753 81,306
Deferred income taxes 15,451 16,708
Other 27,562 23,201
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TOTAL OTHER ASSETS 242,460 214,355
---------- ----------
$2,638,862 $1,955,636
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 672,956 $ 448,968
Accrued expenses and other current liabilities 266,023 181,236
Debt maturing within one year 43,501 8,285
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TOTAL CURRENT LIABILITIES 982,480 638,489
LONG-TERM DEBT 218,959 102,985
OTHER LONG-TERM OBLIGATIONS 42,803 38,339
CONVERTIBLE DEBENTURES 300,000 300,000
MINORITY INTEREST 135 --
STOCKHOLDER'S 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
278,159,308 shares at January 31, 1998 and
269,405,480 shares at February 1, 1997 167 162
Additional paid-in-capital 593,883 508,833
Cumulative foreign currency translation adjustments (10,315) (147)
Unrealized gain/loss on investments 1,056 20
Retained earnings 510,040 367,301
Less: treasury stock 59,149, at stock (346) (346)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 1,094,485 875,823
---------- ----------
$2,638,862 $1,955,636
========== ==========
</TABLE>
See notes to consolidated financial statements.
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STAPLES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Sales $5,732,145 $4,493,589 $3,565,235
Cost of goods sold and occupancy costs 4,353,161 3,410,263 2,738,596
---------- ---------- ----------
GROSS PROFIT 1,378,984 1,083,326 826,639
OPERATING EXPENSES:
Operating and selling 833,046 651,634 501,253
Pre-opening 9,443 8,299 5,607
General and administrative 225,587 175,704 135,420
Amortization of goodwill 3,581 2,291 1,967
---------- ---------- ----------
TOTAL OPERATING EXPENSES 1,071,657 837,928 644,247
---------- ---------- ----------
OPERATING INCOME 307,327 245,398 182,392
OTHER INCOME (EXPENSE):
Interest and other expense, net (21,955) (22,962) (15,671)
Merger-related costs (29,665) -- --
---------- ---------- ----------
TOTAL OTHER INCOME (EXPENSE) (51,620) (22,962) (15,671)
---------- ---------- ----------
INCOME BEFORE EQUITY IN LOSS OF
AFFILIATES AND INCOME TAXES 255,707 222,436 166,721
Equity in loss of affiliates (5,953) (11,073) (12,153)
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 249,754 211,363 154,568
Income tax expense 81,924 66,621 46,140
---------- ---------- ----------
NET INCOME BEFORE MINORITY INTEREST 167,830 144,742 108,428
Minority interest 84 -- --
---------- ---------- ----------
NET INCOME $ 167,914 $ 144,742 $ 108,428
========== ========== ==========
EARNINGS PER COMMON SHARE
Historical net income per
common share $ 0.62 $ 0.54 $ 0.42
========== ========== ==========
EARNINGS PER COMMON SHARE --
ASSUMING DILUTION
Historical net income per
common share $ 0.59 $ 0.52 $ 0.41
========== ========== ==========
PRO FORMA:
Historical net income $ 167,914 $ 144,742 $ 108,428
Provision for income taxes on
previously untaxed earnings of
pooled S-Corporation income 14,786 15,329 13,889
---------- ---------- ----------
PRO FORMA NET INCOME $ 153,128 $ 129,413 $ 94,539
========== ========== ==========
EARNINGS PER COMMON SHARE
Pro forma net income per
common share $ 0.56 $ 0.49 $ 0.37
========== ========== ==========
EARNINGS PER COMMON SHARE --
ASSUMING DILUTION
Pro forma net income per
common share $ 0.54 $ 0.47 $ 0.35
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
Page 12
<PAGE> 14
STAPLES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE FISCAL YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997,
AND FEBRUARY 3, 1996
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN UNREALIZED
ADDITIONAL CURRENCY GAIN
PAID-IN TRANSLATION (LOSS) ON RETAINED TREASURY
COMMON STOCK CAPITAL ADJUSTMENTS INVESTMENTS EARNINGS STOCK
------------ ---------- ----------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 28, 1995.......................... $143 $314,526 $ (2,228) $ (93) $160,213 $(346)
Issuance of common stock for
stock options exercised......................... 1 11,323
Tax benefit on exercise of options.................... 11,394
Contribution of common stock to Employees'
401(K) Savings Plan............................. 1,257
Sale of common stock under
Employee Stock Purchase Plan.................... 5,641
Conversion of debt to equity.......................... 8 114,049
Unrealized gain on short-term
investments, net of tax......................... 125
Translation adjustments............................... 155
Issuance of common stock for acquisitions
and other transactions.......................... 7 8,470 295
Dividends to shareholders of acquired S-Corp.......... (21,227)
Net income for the year............................... 108,428
---- -------- -------- ------ -------- -----
BALANCES AT FEBRUARY 3, 1996.......................... $159 $466,660 $ (2,073) $ 32 $247,709 $(346)
Issuance of common stock for
stock options exercised......................... 3 13,726
Tax benefit on exercise of options.................... 16,773
Contribution of common stock to Employees'
401(K) Savings Plan............................. 1,998
Sale of common stock under
Employee Stock Purchase Plan.................... 8,980
Issuance of Performance Accelerated
Restricted Stock................................ 532
Unrealized loss on short-term
investments, net of tax......................... (12)
Translation adjustments............................... 1,926
Issuance of common stock
for acquisitions and other transactions......... 164 (242)
Dividends to shareholders of acquired S-Corp.......... (24,908)
Net income for the year............................... 144,742
---- -------- -------- ------- -------- -----
BALANCES AT FEBRUARY 1, 1997.......................... $162 $508,833 $ (147) $ 20 $367,301 $(346)
Issuance of common stock for
stock options exercised......................... 5 32,178
Tax benefit on exercise of options.................... 32,873
Contribution of common stock to Employees'
401(K) Savings Plan............................. 2,318
Sale of common stock under
Employee Stock Purchase Plan.................... 10,499
Issuance of Performance Accelerated
Restricted Stock................................ 7,182
Unrealized gain on investments,
net of tax...................................... 1,036
Translation adjustments............................... (10,168)
Minority interest.....................................
Dividends to shareholders of acquired S-Corp.......... (25,175)
Net income for the year............................... 167,914
---- -------- -------- ------ -------- -----
BALANCES AT JANUARY 31, 1998.......................... $167 $593,883 $(10,315) $1,056 $510,040 $(346)
==== ======== ======== ====== ======== =====
</TABLE>
See notes to consolidated financial statements.
Page 13
<PAGE> 15
STAPLES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ........................................... $ 167,914 $ 144,742 $ 108,428
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Minority interest .................................. (84) -- --
Depreciation and amortization ...................... 90,714 61,497 48,401
Expense from 401K and PARS stock distribution ...... 10,409 2,715 1,633
Equity in loss of affiliates ....................... 5,953 11,073 12,153
Deferred income taxes (benefit)/expense ............ 3,877 3,137 (13,211)
Change in assets and liabilities, net of effects
of purchase of other companies:
Increase in merchandise inventories .............. (227,076) (171,593) (175,386)
Decrease (increase) in receivables ............... 17,569 (41,905) (49,731)
Increase in prepaid expenses and other assets ... (5,026) (7,026) (2,094)
Increase in accounts payable, accrued expenses
and other current liabilities ................... 323,496 179,803 60,956
Increase (decrease) in other long-term
obligations ..................................... 5,074 6,303 (1,625)
--------- ----------- -----------
224,906 44,004 (118,904)
--------- ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .. 392,820 188,746 (10,476)
INVESTING ACTIVITIES:
Acquisition of property and equipment ................ (190,659) (212,007) (124,121)
Acquisition of businesses, net of cash acquired ...... (79,325) -- --
Proceeds from sales and maturities of short-term
investments ......................................... 13,618 8,800 16,519
Purchase of short-term investments ................... (4,500) (9,595) (2,204)
Proceeds from sales and maturities of long-term
investments ......................................... 265 -- --
Purchase of long-term investments .................... (5,714) (10,036) --
Investment in affiliates ............................. (3,788) (18,629) (22,088)
Acquisition of lease rights .......................... (2,717) (5,534) (2,044)
Other ................................................ (11,998) 2,657 2,024
--------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES ................ (284,818) (244,344) (131,914)
FINANCING ACTIVITIES:
Proceeds from sale of capital stock .................. 48,043 21,773 17,857
Proceeds from convertible debentures, net of
deferred costs ...................................... -- -- 291,032
Proceeds from borrowings ............................. 965,921 1,171,174 1,226,895
Payments on borrowings ............................... (830,018) (1,120,670) (1,313,930)
Dividends to shareholders of acquired S-Corp ......... (25,175) (24,908) (21,227)
--------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ............ 158,771 47,369 200,627
Effect of exchange rate changes on cash .............. (2,720) 643 142
NET INCREASE IN CASH AND CASH EQUIVALENTS .............. 264,053 (7,586) 58,379
Cash and cash equivalents at beginning of period ....... 117,035 124,621 66,242
--------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............. $ 381,088 $ 117,035 $ 124,621
========= =========== ===========
</TABLE>
See notes to consolidated financial statements.
Page 14
<PAGE> 16
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: Staples, Inc. and subsidiaries ("the Company")
operates a chain of office supply stores and contract stationer/delivery
warehouses throughout North America and in Germany and the United Kingdom.
BASIS OF PRESENTATION: The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All intercompany
accounts and transactions are eliminated in consolidation.
FISCAL YEAR: The Company's fiscal year is the 52 or 53 weeks ending the
Saturday closest to January 31. Fiscal years 1997, 1996 and 1995, consisted of
the 52 weeks ended January 31, 1998 and February 1, 1997, and the 53 weeks ended
February 3, 1996, respectively. The pro forma statements of income combine
Staples' historical operating results for the fiscal years with the
corresponding Quill operating results for the years ended December 31, 1997,
1996 and 1995.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management of the Company
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
CASH EQUIVALENTS: The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS: The Company's securities are classified as
available for sale and consist principally of high-grade state and municipal
securities having an original maturity of more than three months. The
investments are carried at fair value, with the unrealized holding gains and
losses reported as a component of the Company's stockholders' equity. The cost
of securities sold is based on the specific identification method. No individual
issue in the portfolio constitutes greater than one percent of the total assets
of the Company.
MERCHANDISE INVENTORIES: Merchandise inventories are valued at the
lower of weighted-average cost or market.
RECEIVABLES: Receivables relate principally to amounts due from vendors
under various incentive and promotional programs and trade receivables financed
under regular commercial credit terms. Concentrations of credit risk with
respect to trade receivables are limited due to the Company's large number of
customers and their dispersions across many industries and geographic regions.
ADVERTISING: The Company expenses the production costs of advertising
the first time the advertising takes place, except for the direct-response
advertising, which is capitalized and amortized
Page 15
<PAGE> 17
over its expected period of future benefits. Direct-response advertising
consists primarily of the direct catalog production costs. The capitalized costs
of the advertising are amortized over the six month period following the
publication of the catalog in which it appears. At January 31, 1998, direct
catalog production costs included in prepaid and other assets totaled
$7,667,000. Total advertising and marketing expense was $288,838,000,
$221,000,000, $147,216,000 for the years ended January 31, 1998, February 1,
1997 and February 3, 1996, respectively.
PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost.
Depreciation and amortization, which includes the amortization of assets
recorded under capital lease obligations, are provided using the straight-line
method over the estimated useful lives of the assets or the terms of the
respective leases. Depreciation and amortization periods are as follows:
<TABLE>
<S> <C>
Buildings 40 years
Leasehold improvements 10 years or term of lease
Furniture and fixtures 5 to 10 years
Equipment 3 to 10 years
</TABLE>
LEASE ACQUISITION COSTS: Lease acquisition costs are recorded at cost
and amortized on the straight-line method over the respective lease terms,
including option renewal periods if renewal of the lease is probable, which
range from 5 to 40 years. Accumulated amortization at January 31, 1998 and
February 1, 1997 totaled $19,483,000 and $15,432,000, respectively.
INVESTMENT IN AFFILIATES: Investment in affiliates represents cash
invested by the Company in foreign affiliates in Germany and the United Kingdom,
which were accounted for under the equity method until May 1997, at which time
the Company acquired controlling interest in the affiliates (see Note I). As a
result, prior to May 1997, the Company accounted for its interests in these
affiliates under the equity method and subsequent to May 1997, it has
consolidated the affiliates in its financial statements.
GOODWILL: Goodwill arising from business acquisitions is amortized on a
straight-line basis over 40 years. Accumulated amortization was $10,622,000 and
$5,897,000 as of January 31, 1998 and February 1, 1997, respectively. Management
periodically evaluates the recoverability of goodwill, which would be adjusted
for a permanent decline in value, if any, as measured by the recoverability from
projected future cash flows from the acquired businesses.
PRE-OPENING COSTS: Pre-opening costs, which consist primarily of
salaries, supplies, marketing and occupancy costs, are charged to expense as
incurred.
PRIVATE LABEL CREDIT CARD RECEIVABLES: The Company offers a private
label credit card which is managed by a financial services company. Under the
terms of the agreement, the Company is obligated to pay fees which approximate
the financial institution's cost of processing and collecting the receivables,
which are non-recourse to the Company.
FOREIGN CURRENCY TRANSLATION: The assets and liabilities of the
Company's foreign subsidiaries, The Business Depot Ltd. ("Business Depot"),
Staples UK, and Staples Germany, are
Page 16
<PAGE> 18
translated into U.S. dollars at current exchange rates as of the balance sheet
date, and revenues and expenses are translated at average monthly exchange
rates. The resulting translation adjustments, and the net exchange gains and
losses resulting from the translation of investments in the Company's European
affiliates during the year ended January 31, 1998, are recorded in a separate
section of stockholders' equity titled "Cumulative foreign currency translation
adjustments".
STOCK OPTION PLANS: The Company has adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123"). As permitted by FAS 123, the Company continues to account for its
stock-based plans under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", and provides pro forma disclosures of the
compensation expense determined under the fair value provisions of FAS 123.
EARNINGS PER SHARE: In 1997, the Financial Accounting Standards Board
issued Statement No. 128, "Earnings per Share" ("FAS 128"). FAS 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where appropriate, restated to conform to
the FAS 128 requirements. See Note K for the computation of earnings per share
for the years ended January 31, 1998, February 1, 1997 and February 3, 1996.
FAIR VALUE OF FINANCIAL INSTRUMENTS. Pursuant to Statement of Financial
Accounting Standards No. 107, "Disclosure About Fair Value of Financial
Instruments" ("FAS 107"), the Company has estimated the fair value of its
financial instruments using the following methods and assumptions:
- The carrying amount of cash and cash equivalents, receivables and
accounts payable approximates fair value;
- The fair values of short-term investments and the 4 1/2%
Convertible Subordinated Debentures are based on quoted market
prices;
- The carrying amounts of the Company's debt approximates fair
value, estimated by discounted cash flow analyses based on the
Company's current incremental borrowing rates for similar types
of borrowing arrangements.
LONG-LIVED ASSETS: The Company has adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets To Be Disposed Of" ("FAS 121"), which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flow estimated to
be generated by those assets are less than the assets' carrying amount. The
Company has evaluated all long-lived assets and determined that no impairment
existed at January 31, 1998 and February 1, 1997, respectively. FAS 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of.
COMPREHENSIVE INCOME: In June 1997, the Financial Accounting Standards
Board issued Statement 130, "Reporting Comprehensive Income" ("FAS 130"). FAS
130 establishes new rules for
Page 17
<PAGE> 19
the reporting and display of comprehensive income and its components; however,
adoption in fiscal year 1998 will have no impact on the Company's net income or
stockholders' equity. FAS 130 requires unrealized gains or losses on the
Company's available-for-sale securities and the foreign currency translation
adjustments, which currently are reported in stockholders' equity, to be
included in other comprehensive income and the disclosure of total comprehensive
income. If the Company adopted FAS 130 for the year ended January 31, 1998, the
total of other comprehensive income items and comprehensive income (which
includes Quill pro forma net income) would be a loss of $10,168,000 and income
of $143,996,000, respectively, and would be displayed separately in the
consolidated statements of income.
SEGMENT REPORTING: In 1997, the Financial Accounting Standards Board
issued Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("FAS 131") which changes the way public companies report
information about operating segments. The Company will adopt FAS 131 in fiscal
year 1998. This statement, which is based on the management approach to segment
reporting, establishes requirements to report selected segment information
quarterly and to report entity-wide disclosures about products and services,
major customers, and the major countries in which the Company holds assets and
reports revenues.
NOTE B INVESTMENTS
The following is a summary of available-for-sale investments as of January 31,
1998 and February 1, 1997 (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
January 31, 1998 Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
Short-term:
Certificates of deposit $ 3,236 $ -- $ -- $ 3,236
Debt securities 2,659 7 -- 2,666
---------------------------------------------------
Total short-term $ 5,895 $ 7 $ -- $ 5,902
===================================================
Long-term:
Municipal obligations $ 9,986 $ $ $10,104
125 (7)
Equity securities 4,061 950 (15) 4,996
Money market instruments 1,350 -- -- 1,350
---------------------------------------------------
Total long-term $15,397 $1,075 $(22) $16,450
===================================================
</TABLE>
Page 18
<PAGE> 20
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
February 1, 1997 Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
Short-term:
Debt securities $ 7,968 $18 $ -- $ 7,986
Certificates of deposits 7,199 -- -- 7,199
---------------------------------------------------
Total short-term $15,167 $18 $ -- $15,185
===================================================
Long-term:
Municipal obligations 5,652 14 (6) 5,660
Money market instruments 3,573 -- -- 3,573
Equity securities 811 17 (15) 813
---------------------------------------------------
Total long-term $10,036 $31 $(21) $10,046
===================================================
</TABLE>
Proceeds from the sale of investment securities were $265,000 and $0 during the
year ended January 31, 1998 and February 1, 1997, respectively. Other reductions
in the cost balance resulted from maturities of securities. The net adjustment
to unrealized holding gains and losses on available-for-sale securities included
as a separate component of stockholders' equity totaled $1,036,000 and ($12,000)
for the years ended January 31, 1998 and February 1, 1997, respectively.
The amortized cost and estimated fair value of debt and marketable equity
securities at January 31, 1998, by contractual maturity, are shown below (in
thousands). Expected maturities will differ from contractual maturities because
the issuers of securities may have the right to prepay obligations without
prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Cost Fair Value
<S> <C> <C>
Due in one year or less $ 7,824 $ 7,831
Due after one year through five years 3,969 4,012
Due after five years 5,439 5,514
Equity securities 4,061 4,996
----------------------
Total $21,293 $22,353
======================
</TABLE>
Page 19
<PAGE> 21
NOTE C LONG-TERM DEBT AND CREDIT AGREEMENT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
======== ========
<S> <C> <C>
Capital lease obligations and other notes payable in
monthly installments with effective interest rates
from 4% to 16%; collateralized by the related equipment........... $ 14,909 $ 19,062
Note payable with a fixed rate of 6.16%.............................. 25,000 25,000
Senior notes with a fixed rate of 7.125%............................. 200,000 --
Mortgage notes at various rates ..................................... 13,805 12,708
Revolving lines of credit............................................ 8,746 54,500
-------- --------
$262,460 $111,270
Less current portion................................................. 43,501 8,285
-------- --------
$218,959 $102,985
======== ========
Aggregate annual maturities of long-term debt and capital lease obligations are
as follows (in thousands):
<CAPTION>
Fiscal year: Total
<S> <C>
1998............................................. $ 43,635
1999............................................. 3,790
2000............................................. 3,929
2001............................................. 1,295
2002............................................. 1,816
Thereafter....................................... 207,995
--------
$262,460
========
</TABLE>
Included in property and equipment are capital lease obligations for equipment
recorded at the net present value of the minimum lease payments of $25,352,000.
Future minimum lease payments of $7,956,000, excluding $2,292,000 of interest,
are included in aggregate annual maturities shown above. The Company entered
into capital lease agreements totaling $2,770,000 and $2,733,000 during the
fiscal years ended January 31, 1998 and February 1, 1997, respectively.
Page 20
<PAGE> 22
Senior Notes:
The Company issued $200,000,000 of senior notes (the "Notes") on August 12, 1997
with an interest rate of 7.125% payable semi-annually on February 15 and August
15 of each year commencing on February 15, 1998. The Notes are due August 15,
2007. Net proceeds of approximately $198,000,000 from the sale of the Company's
Notes were used for repayment of indebtedness under the Company's revolving
credit facility and for general working capital purposes, including the
financing of new store openings, distribution facilities and corporate offices.
Mortgage Notes:
The Company has mortgage notes on five distribution centers, which are secured
by the land and building of the distribution centers. The mortgages are carried
at various floating and fixed rates. The mortgages were paid in full by the
Company on May 21, 1998.
Credit Agreement:
Effective November 13, 1997, the Company entered into a new revolving credit
facility, effective through November 2002, with a syndicate of banks which
provides up to $350,000,000 of borrowings. Borrowings made pursuant to this
facility will bear interest at either the lead bank's prime rate, the federal
funds rate plus 0.50%, the LIBOR rate plus a percentage spread based upon
certain defined ratios, a competitive bid rate, or a swing line loan rate. This
agreement, among other conditions, contains certain restrictive covenants
including net worth maintenance, minimum fixed charge interest coverage and
limitations on indebtedness, sales of assets, and dividends. As of January 31,
1998, no borrowings were outstanding under the revolving credit facility.
Staples Germany also has a revolver of which $8,746,000 was outstanding as of
January 31, 1998.
Interest paid by the Company totaled $23,012,000, $22,501,000 and $14,715,000
for the fiscal years ended January 31, 1998, February 1, 1997, and February 3,
1996, respectively. Capitalized interest totaled $1,387,000 and $611,000 in the
years ended January 31, 1998 and February 1, 1997, respectively.
Interest Rate Swaps:
During fiscal 1996 the Company entered into a binding interest rate swap
agreement to reduce the impact of increases in interest rates on a portion of
its floating-rate debt. The risk to the Company from this swap agreement was
that the financial institution that was counterparty to this agreement fail to
perform its obligation under the agreement, which would cause the interest rate
on the notional amount under this agreement to reflect current market rates
rather than the contractual fixed rate. The agreement was with a major financial
institution which was expected to fully perform under the terms of the
agreement, which mitigated this off-balance sheet risk. At February 1, 1997 the
Company had one interest rate swap outstanding. The agreement bound the Company
to pay a fixed rate of 5.65% on $25,000,000 of the Company's floating rate debt.
In return the Company received payments based on a floating rate on $25,000,000
of the Company's floating rate debt. The floating rate equaled the 3-month LIBOR
in effect at any one of the quarterly reset dates. The fair market value of the
swap
Page 21
<PAGE> 23
agreement as of February 1, 1997 approximated the carrying value based on quoted
market prices. With the issuance of the Notes, the Company was able to repay all
outstanding revolving credit loans that were subject to floating rates. Thus,
the Company did not see the need to retain this interest rate swap arrangement
and terminated it on July 29, 1997.
NOTE D CONVERTIBLE DEBENTURES
By June 30, 1995, all of the Company's $115,000,000 of 5% Convertible
Subordinated Debentures due November 1, 1999 (the "5% Debentures"), were
converted into 19,406,250 shares of common stock at a conversion price of $5.93
per share. The total principal amount converted was credited to common stock and
additional paid-in capital, net of unamortized expenses of the original debt
issue and accrued but unpaid interest.
On October 5, 1995, the Company issued $300,000,000 of 4 1/2% Convertible
Subordinated Debentures due October 1, 2000 with interest payable semi-annually
(the "4 1/2% Debentures"), which are convertible, at the option of the holder,
into Common Stock at a conversion price of $14.67 per share. The 4 1/2%
Debentures are redeemable, in whole or in part, at the Company's option at
specified redemption prices on or after October 1, 1998 or in the event of
certain developments involving U.S. withholding taxes or certification
requirements. Costs incurred in connection with the issuance of the 4 1/2%
Debentures are included in Other Assets and are being amortized on the interest
method over the five year period to maturity. The fair value of the 4 1/2%
Debentures at January 31, 1998, based upon quoted market prices, totaled
$386,250,000.
NOTE E STOCKHOLDERS' EQUITY
On December 30, 1997, March 5, 1996 and June 29, 1995, the Board of Directors
approved three-for-two splits of the Company's common stock to be effected in
the form of 50% stock dividends. The dividends were distributed on January 30,
1998 to shareholders of record as of January 20, 1998, March 25, 1996 to
shareholders of record as of March 15, 1996 and July 24, 1995 to shareholders of
record as of July 14, 1995, respectively. The consolidated financial statements
have been retroactively restated to give effect to these stock splits.
At January 31, 1998, 83,409,662 shares of common stock were reserved for
issuance under the Company's stock option, employee stock ownership, 401(k),
employee stock purchase and director stock option plans. An additional
20,454,545 shares of common stock are reserved for issuance upon conversion of
the Company's 4 1/2% Debentures.
Page 22
<PAGE> 24
NOTE F EMPLOYEE BENEFIT PLANS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, since the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
EMPLOYEE STOCK PURCHASE PLAN
The Company's 1994 Employee Stock Purchase Plan authorizes a total of up to
5,906,250 shares of the Company's common stock to be sold to participating
employees. Participating employees may purchase shares of common stock at 85% of
its fair market value at the beginning or end of an offering period, whichever
is lower, through payroll deductions in an amount not to exceed 10% of an
employee's base compensation.
STOCK OPTION PLANS
Under the Company's 1992 Equity Incentive Plan ("1992 Plan") the Company may
grant to management and key employees incentive and nonqualified options to
purchase up to 58,500,000 shares of common stock and Performance Accelerated
Restricted Stock ("PARS"). This amount was approved by the shareholders of the
Company on June 18, 1997. As of February 27, 1997, the Company's 1987 Stock
Option Plan (the "1987 Plan") expired; unexercised options under this plan
however remain outstanding. The exercise price of options granted under the
plans may not be less than 100% of the fair market value of the Company's common
stock at the date of grant. Options generally have an exercise price equal to
the fair market value of the common stock on the date of grant. Some options
outstanding are exercisable at various percentages of the total shares subject
to the option starting one year after the grant, while other options are
exercisable in their entirety three to five years after the grant date. All
options expire ten years after the grant date, subject to earlier termination in
the event of employment termination.
The Company's 1990 Director Stock Option Plan ("Director's Plan") authorizes up
to 1,594,688 shares of common stock to be issued to non-employee directors. The
exercise price of options granted are equal to the fair market value of the
Company's common stock at the date of grant. Options become exercisable in equal
amounts over four years and expire ten years from the date of grant, subject to
earlier termination, in certain circumstances, in the event the optionee ceases
to serve as a director.
Pro forma information regarding net income and earnings per share is required by
FAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
January 28, 1995 under the fair valued method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1995,
1996, and 1997: risk-free interest
Page 23
<PAGE> 25
rates ranging from 5.49% to 6.12%; volatility factor of the expected market
price of the Company's common stock of .30 for fiscal years 1995 and 1996 and
.35 for fiscal year 1997; and a weighted-average expected life of the option of
4.0 years for the 1987 Plan and the 1992 Plan and 2.0 to 5.0 years for the
Director's Plan.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. For purposes of FAS
123's disclosure requirements, the Employee Stock Purchase Plan is considered a
compensatory plan. The expense was calculated based on the fair value of the
employees' purchase rights. This was estimated as the difference between the
employees' purchase price and the closing price. The Company's pro forma
information, which includes the pro forma results of Quill, follows (in
thousands except for earnings per share information):
<TABLE>
<CAPTION>
January 31, February 1, February 3,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma net income $138,983 $122,116 $90,521
Pro forma earnings per share $ 0.51 $ 0.46 $ 0.35
Pro forma earnings per common share - assuming dilution $ 0.49 $ 0.44 $ 0.34
</TABLE>
This pro forma impact only takes into account options granted since January 28,
1995 and is likely to increase in future years as additional options are granted
and amortized ratably over the vesting period.
Page 24
<PAGE> 26
Information with respect to options granted under the above plans are as
follows:
<TABLE>
<CAPTION>
Weighted-Average
Number of Exercise Price
Shares Per Share
---------- ----------------
<S> <C> <C>
Outstanding at January 28, 1995
Granted.................................. 31,908,470 $ 3.95
Exercised................................ 5,472,810 10.46
Canceled................................. (3,615,006) 3.27
(2,285,888) 5.31
---------- ------
Outstanding at February 3, 1996
Granted................................... 31,480,386 $ 4.93
Exercised................................. 4,781,291 13.23
Canceled.................................. (4,093,695) 3.43
(1,571,412) 7.34
---------- ------
Outstanding at February 1, 1997
Granted................................... 30,596,570 $ 6.39
Exercised................................. 6,437,705 15.65
Canceled.................................. (6,764,939) 4.17
(1,871,922) 11.15
---------- ------
Outstanding at January 31, 1998
28,397,414 $ 8.01
========== ======
</TABLE>
The weighted-average fair values of options granted during the years ended
January 31, 1998 and February 1, 1997 were $5.70 and $5.72, respectively.
Exercise prices for the options outstanding as of January 31, 1998 ranged from
$0.01 to $19.42.
Options to purchase 12,280,890 shares were exercisable at January 31, 1998.
PERFORMANCE ACCELERATED RESTRICTED STOCK ("PARS")
PARS are shares of the Company's Common Stock granted outright to employees
without cost to the employee. The shares, however, are restricted in that they
are not transferable (e.g. they may not be sold) by the employee until they
vest, generally after the end of five years. Such vesting date may accelerate if
the Company achieves certain compound annual earnings per share growth over a
certain number of interim years. If the employee leaves the Company prior to the
vesting date for any reason, the PARS shares will be forfeited by the employee
and will be returned to the Company. Once the PARS have vested, they become
unrestricted and may be transferred and sold like any other Staples shares.
Page 25
<PAGE> 27
PARS issued in the fiscal year ended January 31, 1998 totaling approximately
675,000 which have a weighted average fair value of $18.71, initially vest on
February 1, 2002 or will accelerate on May 1, in 1999, 2000, or 2001 upon
attainment of certain compound annual earnings per share targets in the prior
fiscal year. PARS totaling approximately 585,000 which have a weighted average
fair value of $14.75, issued in fiscal year 1996 will fully vest on May 1, 1998.
In connection with the issuance of the PARS, the Company included $7,496,000 and
$532,000 in compensation expense for the fiscal years ended January 31, 1998 and
February 1, 1997, respectively.
EMPLOYEES' 401(K) SAVINGS PLAN
Under the Company's Employees' 401(k) Savings Plan (the "401(k) Plan"), and
Supplemental Executive Retirement Plan (the "SERP Plan"), the Company may
contribute up to a total of 1,668,750 shares of common stock to these plans. The
401(k) Plan is available to all employees of the Company who meet minimum age
and length of service requirements. Company contributions are based upon a
matching formula applied to employee contributions, with additional
contributions made at the discretion of the Board of Directors. In connection
with these plans the Company included approximately $2,000,000 in expense for
each of the fiscal years ended January 31, 1998 and February 1, 1997.
NOTE G INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
and the approximate tax effect of the Company's deferred tax assets and
liabilities as of January 31, 1998 and February 1, 1997, are as follows (in
thousands):
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
---------- ----------
<S> <C> <C>
Deferred Tax Assets:
Inventory ............................................ $ 20,116 $22,597
Deferred rent ........................................ 14,797 7,566
Acquired NOL's ....................................... 7,132 --
Other net operating loss carryforwards ............... 22,907 5,206
Insurance ............................................ 5,967 5,756
Employee benefits .................................... 5,569 2,545
Other - net .......................................... 13,660 7,620
-------- -------
Total Deferred Tax Assets ............................ 90,148 51,290
-------- -------
Deferred Tax Liabilities:
Depreciation ......................................... (6,687) (1,922)
Other - net .......................................... (4,835) 208
-------- -------
Total Deferred Tax Liabilities ....................... (11,522) (1,714)
-------- -------
Total Valuation Allowance ................................. (30,067) (1,666)
-------- -------
Net Deferred Tax Assets ................................... $ 48,559 $47,910
======== =======
</TABLE>
Page 26
<PAGE> 28
Net deferred tax assets of approximately $4,500,000 and $440,000 attributable to
businesses acquired during the fiscal years ended January 31, 1998 and February
1, 1997, respectively, were allocated directly to reduce goodwill generated by
these acquisitions. The deferred tax assets disclosed as acquired NOL's and
other net operating loss carryforwards, totaling $30,000,000, have been fully
reserved for due to the uncertainty of the realization of the asset within the
local country jurisdiction. Further, if this asset is utilitized when income is
earned within the foreign jurisdiction, the Company will not have a consolidated
tax benefit as the Company will be required to pay U.S. income taxes on the
income offset by the foreign NOL.
For financial reporting purposes, income before taxes includes the following
components (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------
January 31, February 1, February 3,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Pretax income:
United States $213,549 $187,644 $159,210
Foreign 36,205 23,719 (4,642)
-------- -------- --------
$249,754 $211,363 $154,568
======== ======== ========
The provision for income taxes consists of the following (in thousands):
<CAPTION>
Fiscal Year Ended
------------------------------------------
January 31, February 1, February 3,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current tax expense:
Federal............................ $53,248 $50,546 $ 45,207
State.............................. 10,707 12,337 14,144
Foreign............................ 14,092 601 0
------- ------- ---------
78,047 63,484 59,351
Deferred tax expense (benefit).......... 3,877 3,137 (13,211)
------- ------- ---------
Total $81,924 $66,621 $ 46,140
======= ======= =========
</TABLE>
Page 27
<PAGE> 29
A reconciliation of the federal statutory tax rate to the Company's effective
tax rate on pro forma net income is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
January 31, February 1, February 3,
1998 1997 1996
<S> <C> <C> <C>
Federal statutory rate ........................... 35.0% 35.0% 35.0%
State taxes, net of federal benefit .............. 6.0% 6.3% 6.3%
Tax exempt interest .............................. (0.5%) (0.4%) (0.6%)
Tax benefit of loss carryforward ................. (0.0%) (0.2%) (0.6%)
Federal tax credits .............................. (0.0%) (0.0%) (0.9%)
Income of S-Corporation .......................... 0.2% 0.3% 0.3%
Other ............................................ (2.0%) (2.2%) (0.7%)
---- ---- ----
Effective tax rate ............................... 38.7% 38.8% 38.8%
==== ==== ====
A reconciliation of the federal statutory tax rate to the Company's effective
tax rate on historical net income is as follows:
<CAPTION>
Fiscal Year Ended
January 31, February 1, February 3,
1998 1997 1996
<S> <C> <C> <C>
Federal statutory rate ........................... 35.0% 35.0% 35.0%
State taxes, net of federal benefit .............. 6.0% 6.3% 6.3%
Tax exempt interest .............................. (0.5%) (0.4%) (0.6%)
Tax benefit of loss carryforward ................. (0.0%) (0.2%) (0.6%)
Federal tax credits .............................. (0.0%) (0.0%) (0.9%)
Untaxed earnings of S-Corporation ................ (5.7%) (7.0%) (8.6%)
Other ............................................ (2.0%) (2.2%) (0.7%)
---- ---- ----
Effective tax rate ............................... 32.8% 31.5% 29.9%
==== ==== ====
</TABLE>
Income tax payments were $23,487,877, $45,925,276, and $44,518,000, during
fiscal years ended January 31, 1998, February 1, 1997, and February 3, 1996,
respectively. The Company has net operating losses of approximately $83,500,000
that can be carried forward indefinitely, $16,500,000 of which is attributable
to the Company's increased ownership in Staples Germany.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $28,000,000 at January 31, 1998. Those earnings are considered to
be indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to
both U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries. Determination of the
amount of unrecognized deferred U.S. income tax liability is not practicable
because of the complexities associated with its hypothetical calculation.
Withholding taxes of approximately $500,000 would be payable upon remittance of
all previously unremitted earnings at January 31, 1998.
Page 28
<PAGE> 30
NOTE H LEASES AND OTHER OFF- BALANCE SHEET COMMITMENTS
The Company leases certain retail and support facilities under long-term
noncancellable lease agreements. Most lease agreements contain renewal options
and rent escalation clauses and require the Company to pay real estate taxes in
excess of specified amounts and, in some cases, allow termination within a
certain number of years with notice and a fixed payment. Certain agreements
provide for contingent rental payments based on sales.
Other long-term obligations at January 31, 1998 include $37,670,000 relating to
future rent escalation clauses and lease incentives under certain existing store
operating lease arrangements. These rent expenses are recognized on a
straight-line method over the respective terms of the leases. Future minimum
lease commitments for retail and support facilities (including lease commitments
for 79 retail stores not yet opened at January 31, 1998) under noncancellable
operating leases are due as follows (in thousands):
<TABLE>
<S> <C>
Fiscal year:
1998 ............................................ $ 221,127
1999 ............................................ 226,390
2000 ............................................ 219,160
2001 ............................................ 210,257
2002 ............................................ 197,434
Thereafter ..................................... 1,518,819
----------
$2,593,187
==========
</TABLE>
Rent expense approximated $193,990,000, $142,508,000, and $111,315,000, for the
fiscal years ended January 31, 1998, February 1, 1997, and February 3, 1996,
respectively.
Letters of credit are issued by the Company during the ordinary course of
business through major financial institutions as required by certain vendor
contracts. As of January 31, 1998, the Company had available open letters of
credit totaling $11,268,000.
NOTE I SUMMARIZED FINANCIAL INFORMATION OF AFFILIATES
The Company had equity interests in two affiliated companies in Germany and the
United Kingdom. On May 6, 1997 and May 7, 1997, the Company acquired Kingfisher
PLC's interests in Staples UK and Staples Germany, respectively. As a result of
these acquisitions, the Company's ownership interest of Staples UK increased to
100% and its ownership interest of Staples Germany increased to approximately
92%. The cash purchase price of approximately $57 million was generated through
additional borrowings under the Company's existing revolving credit and term
loan facility. The transactions were accounted for in accordance with the
purchase method of accounting and accordingly, the results of operations of
Staples UK and Staples Germany have been included in the Company's consolidated
financial statements since May, 1997. The following is a summary of the
significant financial information on a combined 100% basis of affiliated
companies accounted for on the equity method.
Page 29
<PAGE> 31
<TABLE>
<CAPTION>
12 Months Ended
-----------------------------
February 1, February 3,
1997 1996
(in thousands)
<S> <C> <C>
Current assets $64,858 $52,298
Other assets 32,538 33,125
Current liabilities 32,683 29,542
Other liabilities 8,550 15,094
Shareholders' equity 56,163 40,787
Net sales 230,845 154,626
Gross profit 68,500 44,655
Net loss before income taxes (22,961) (24,306)
</TABLE>
The Company's share of loss for the unconsolidated affiliated companies for the
fiscal years ended February 1, 1997 and February 3, 1996 was $11,073,000 and
$12,153,000, respectively. Prior to the acquisition, the Company's share of loss
in 1997 for the unconsolidated affiliated companies was $5,953,000.
Sales in the Canadian region are primarily generated from retail operations. The
sales amounts primarily reflect the rules and regulations of the respective
governing tax authorities. Operating income is determined by deducting from net
sales the related costs and operating expenses attributed to the region.
Identifiable assets include those directly identified with the region. For the
years ended January 31, 1998, February 1, 1997 and February 3, 1996, sales are
$555,753,000, $431,049,000 and $72,299,000, respectively; operating income is
$37,171,000, $24,466,000 and a loss of $1,832,000, respectively, and
identifiable assets are $276,643,000, $214,595,000 and $156,154,000,
respectively.
Page 30
<PAGE> 32
NOTE J QUARTERLY SUMMARY (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Fiscal Year Ended January 31, 1998
Sales ......................................... $1,292,721 $1,192,339 $1,552,393 $1,694,692
Gross Profit ............................... 304,666 286,621 375,471 412,226
Net income ................................. 19,777(1) 22,759(1) 52,030 73,348
Pro forma net income ....................... 15,229(2) 19,577(2) 48,602(2) 69,720(2)
Earnings per common share
Historical net income per common share ..... 0.07 0.08 0.19 0.27
Pro forma net income per common share ...... 0.06 0.07 0.18 0.25
Number of shares used in computing
earnings per common share ................ 269,048 270,156 272,822 276,240
Earnings per share - assuming dilution
Historical net income per common share ..... 0.07 0.08 0.18(3) 0.25(3)
Pro forma net income per common share ...... 0.06 0.07 0.17(3) 0.24(3)
Number of shares used in computing
earnings per common share ................ 277,352 279,193 301,569(3) 305,673(3)
Fiscal Year Ended February 1, 1997
Sales ......................................... $1,056,807 $ 932,747 $1,210,855 $1,293,180
Gross Profit ............................... 245,570 223,221 291,899 322,636
Net income ................................. 22,173 22,732 41,738 58,099
Pro forma net income ....................... 18,509(2) 19,481(2) 37,811(2) 53,612(2)
Earnings per common share
Historical net income per common share ..... 0.08 0.09 0.16 0.22
Pro forma net income per common share ...... 0.07 0.07 0.14 0.20
Number of shares used in computing
earnings per common share ................ 264,269 265,770 267,114 268,505
Earnings per share - assuming dilution
Historical net income per common share ..... 0.08 0.08 0.15(3) 0.20(3)
Pro forma net income per common share ...... 0.07 0.07 0.14(3) 0.19(3)
Number of shares used in computing
earnings per common share ................ 274,149 275,602 297,508(3) 297,364(3)
</TABLE>
(1) Net income for the quarters ended May 3, 1997 and August 2, 1997 include a
pre-tax charge of $20,562 and $9,103, respectively, resulting from costs
incurred in connection with the proposed merger with Office Depot, Inc.
(2) Pro forma net income includes the earnings of Quill with provision for
income taxes on previously untaxed earnings of pooled S-Corportation
income.
(3) Earnings per share - assuming dilution is calculated considering the $300
million of 4 1/2% Convertible Subordinated Debentures as common stock
equivalents for the quarters ended November 1, 1997, January 31, 1998,
November 2, 1996 and February 1, 1997. The Debentures are not considered in
the calculation of the earnings per share for the other quarters above as
the effect is antidilutive.
Page 31
<PAGE> 33
NOTE K COMPUTATION OF EARNINGS PER COMMON SHARE
The computation of earnings per common share and earnings per common share -
assuming dilution shown for both historical and pro forma results, for the
fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996 is as
follows (amounts in thousands, except for per share data):
<TABLE>
<CAPTION>
January 31, February 1, February 3,
HISTORICAL EARNINGS PER SHARE 1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
Numerator:
Historical net income ................................... $ 167,914 $ 144,742 $ 108,428
Interest expense on 5% Debentures,
net of tax (1) ....................................... -- -- 1,580
------------ ------------ ------------
Numerator for earnings per common share -- income
available to common stockholders ...................... $ 167,914 $ 144,742 $ 110,008
Effect of dilutive securities:
41/2% convertible debentures ............................ 9,365 9,373 --
Numerator for earnings per common share - assuming
dilution -- income available to common stockholders ------------ ------------ ------------
after assumed conversion .............................. $ 177,279 $ 154,115 $ 110,008
Denominator:
Weighted-average shares ................................. 272,063,765 266,413,382 260,553,340
Performance accelerated restricted stock ................ 1,553 -- --
Denominator for earnings per common ----------- ----------- -----------
share -- weighted-average shares ........................ 272,065,318 266,413,382 260,553,340
Effect of dilutive securities:
Incremental shares ...................................... 13,853,003 15,210,213 13,967,837
Windfall shares ......................................... (5,339,824) (5,696,787) (5,414,767)
Performance accelerated restricted stock ................ 139,728 -- --
41/2% convertible debentures ............................ 20,454,546 20,454,546 --
------------ ------------ ------------
Dilutive potential common shares ........................ 29,107,453 29,967,972 8,553,070
Denominator for earnings per common
share - assuming dilution -- adjusted
weighted-average shares and assumed
conversions ............................................ 301,172,771 296,381,354 269,106,410
Earnings per common share .................................. $ 0.62 $ 0.54 $ 0.42
============ ============ ============
Earnings per common share - assuming dilution $ 0.59 $ 0.52 $ 0.41
============ ============ ============
</TABLE>
Page 32
<PAGE> 34
<TABLE>
<CAPTION>
January 31, February 1, February 3,
PRO FORMA EARNINGS PER SHARE 1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Numerator:
Pro forma net income .................................... $ 153,128 $ 129,413 $ 94,539
Interest expense on 5% Debentures,
net of tax (1) ........................................ -- -- 1,580
Numerator for earnings per common share -- income ------------- ------------- -------------
available to common stockholders ...................... $ 153,128 $ 129,413 $ 96,119
Effect of dilutive securities:
41/2% convertible debentures ............................ 9,365 9,373 2,492
Numerator for earnings per common share - assuming ------------- ------------- -------------
dilution -- income available to common stockholders
after assumed conversion .............................. $ 162,493 $ 138,786 $ 98,611
Denominator:
Weighted-average shares ................................. 272,063,765 266,413,382 260,553,340
Performance accelerated restricted stock ................ 1,553
Denominator for earnings per common ------------- ------------- -------------
share -- weighted-average shares ........................ 272,065,318 266,413,382 260,553,340
Effect of dilutive securities:
Incremental shares ...................................... 13,853,003 15,210,213 13,967,837
Windfall shares ......................................... (5,339,824) (5,696,787) (5,414,767)
Performance accelerated restricted stock ................ 139,728 -- --
41/2% convertible debentures ............................ 20,454,546 20,454,546 9,090,909
------------- ------------- -------------
Dilutive potential common shares ........................ 29,107,453 29,967,972 17,643,979
Denominator for earnings per common
share - assuming dilution -- adjusted
weighted-average shares and assumed
conversions ........................................... 301,172,771 296,381,354 278,197,319
Earnings per common share .................................. $ 0.56 $ 0.49 $ 0.37
============= ============= =============
Earnings per common share - assuming dilution .............. $ 0.54 $ 0.47 $ 0.35
============= ============= =============
</TABLE>
(1) The 5% Debentures were substantially converted into common stock on June
30, 1995 (see Note D). For the computation of earnings per common share,
this conversion of 19,406,250 shares is assumed to have occurred at the
beginning of the fiscal year (January 29, 1995), and is included in the
weighted-average shares outstanding for the year. Therefore, the interest
expense and amortization of deferred charges related to the 5% Debentures
and incurred by the Company through June 30, 1995, net of tax, is added
back to reported net income to compute earnings per common share for the
fiscal year ended February 3, 1996.
Page 33
<PAGE> 35
NOTE L BUSINESS ACQUISITIONS
On May 21, 1998, the Company acquired Quill. The Merger is structured as an
exchange of shares in which the stockholders of Quill received approximately 26
million shares of the Company's common stock, exchange ratio established at a
combination of fixed and variable prices, and cash paid to dissenting
shareholder of approximately $48 million, which would equate to a purchase price
of approximately $690 million. The Merger was accounted for as a pooling of
interests and, accordingly, the Company's consolidated financial statements have
been restated to include the operations of Quill for all periods prior to the
merger. The supplemental statements of income combine Staples' historical
operating results for the fiscal years ended January 31, 1998, February 1, 1997
and February 3, 1996 with the corresponding Quill operating results for the
years ended December 31, 1997, 1996 and 1995, respectively. Prior to the
acquisition, Quill elected to be taxed as an S Corporation under the Internal
Revenue Code. Accordingly, the current taxable income of Quill was taxable to
its shareholders who were responsible for the payment of taxes thereon. Quill
will be included in 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.
Separate net sales and net income of the merged entities prior to the merger are
presented in the following table.
<TABLE>
<CAPTION>
January 31, February 1, February 3,
1998 1997 1996
========== ========== ==========
<S> <C> <C> <C>
Net sales:
Staples $5,181,035 $3,967,665 $3,068,061
Quill 551,110 525,924 497,174
---------- ---------- ----------
Combined $5,732,145 $4,493,589 $3,565,235
========== ========== ==========
Net income
Staples $ 130,949 $ 106,420 $ 73,705
Quill 36,965 38,322 34,723
---------- ---------- ----------
Combined $ 167,914 $ 144,742 $ 108,428
========== ========== ==========
Pro forma net income
Staples $ 130,949 $ 106,420 $ 73,705
Quill(1) 22,179 22,993 20,834
---------- ---------- ----------
Combined $ 153,128 $ 129,413 $ 94,539
========== ========== ==========
</TABLE>
(1) Reflects adjustment for provision for income taxes on previously untaxed
earnings.
Page 34
<PAGE> 36
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Staples, Inc.
We have audited the accompanying supplemental consolidated balance sheets of
Staples, Inc. (formed as a result of the consolidation of Staples, Inc., Quill
Corporation, Milbro, Inc., Cherokee Mill Limited Partnership, Lebanon Mill
Limited Partnership, Coppell Mill Limited Partnership and Agawam Mill Limited
Partnership) as of January 31, 1998 and February 1, 1997 and the related
supplemental consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended January 31, 1998. The
supplemental consolidated financial statements give retroactive effect to the
mergers of Staples, Inc., Quill Corporation, Milbro, Inc., Cherokee Mill Limited
Partnership, Lebanon Mill Limited Partnership, Coppell Mill Limited Partnership
and Agawam Mill Limited Partnership in May 1998, which have been accounted for
using the pooling-of-interests method as described in the notes to the
supplemental consolidated financial statements. These supplemental consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental consolidated
financial statements based on our audits. We did not audit the financial
statements of Quill Corporation which statements reflect total assets
constituting 6% for 1997 and 8% for 1996 of the related supplemental
consolidated financial statement totals, and which reflect net income
constituting approximately 20%, 25% and 30% of the related supplemental
consolidated financial statement totals for 1997, 1996 and 1995, respectively.
These statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to data included for
Quill Corporation is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
supplemental consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Staples, Inc.
at January 31, 1998 and February 1, 1997 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
January 31, 1998, after giving retroactive effect to the mergers of Quill
Corporation, Milbro, Inc., Cherokee Mill Limited Partnership, Lebanon Mill
Limited Partnership, Coppell Mill Limited Partnership and Agawam Mill Limited
Partnership, as described in the notes to the supplemental consolidated
financial statements, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
June 29, 1998
Page 35
<PAGE> 37
STAPLES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
May 2,
1998 January 31,
(Unaudited) 1998
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 256,652 $ 381,088
Short-term investments .................................................... 1,367 5,902
Merchandise inventories ................................................... 1,131,272 1,124,642
Receivables, net .......................................................... 241,634 203,143
Prepaid expenses and other current assets ................................. 80,880 71,365
---------- ----------
TOTAL CURRENT ASSETS ................................................. 1,711,805 1,786,140
PROPERTY AND EQUIPMENT:
Land and buildings ........................................................ 164,232 150,947
Leasehold improvements .................................................... 306,395 292,128
Equipment ................................................................. 317,885 304,177
Furniture and fixtures .................................................... 185,482 173,711
---------- ----------
TOTAL PROPERTY AND EQUIPMENT ......................................... 973,994 920,963
Less accumulated depreciation and amortization ............................ 339,466 310,701
---------- ----------
NET PROPERTY AND EQUIPMENT ........................................... 634,528 610,262
OTHER ASSETS:
Lease acquisition costs, net of amortization .............................. 79,148 43,244
Investments ............................................................... 15,565 16,450
Goodwill, net of amortization ............................................. 136,745 139,753
Other ..................................................................... 42,404 43,013
---------- ----------
TOTAL OTHER ASSETS ................................................... 273,862 242,460
---------- ----------
$2,620,195 $2,638,862
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .......................................................... $ 623,320 $ 672,956
Accrued expenses and other current liabilities ............................ 269,177 266,023
Debt maturing within one year ............................................. 19,819 43,501
---------- ----------
TOTAL CURRENT LIABILITIES ............................................ 912,316 982,480
LONG-TERM DEBT .................................................................. 218,066 218,959
OTHER LONG-TERM OBLIGATIONS ..................................................... 48,973 42,803
CONVERTIBLE DEBENTURES .......................................................... 300,000 300,000
MINORITY INTEREST ............................................................... 85 135
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 282,341,432 shares at May 2, 1998
and 278,159,308 shares at January 31, 1998 ................................ 169 167
Additional paid-in capital ................................................ 614,604 593,883
Cumulative foreign currency translation adjustments ....................... (8,117) (10,315)
Unrealized gain/(loss) on short-term investments .......................... 1,537 1,056
Retained earnings ......................................................... 535,155 510,040
Less: treasury stock, at cost, 147,281 shares at May 2, 1998
and 59,149 shares at January 31, 1998 ..................................... (2,593) (346)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY ....................................... 1,140,755 1,094,485
---------- ----------
$2,620,195 $2,638,862
========== ==========
</TABLE>
See notes to consolidated financial statements.
Page 36
<PAGE> 38
STAPLES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(Unaudited)
13 Weeks Ended
-------------------------------
May 2, May 3,
1998 1997
------------ ------------
<S> <C> <C>
Sales ................................................................... $ 1,670,611 $ 1,292,721
Cost of goods sold and occupancy costs .................................. 1,282,596 988,055
------------ ------------
GROSS PROFIT ........................................................ 388,015 304,666
Operating expenses:
Operating and selling ................................................. 255,648 198,598
Pre-opening ........................................................... 3,352 2,862
General and administrative ............................................ 67,486 47,031
Amortization of goodwill .............................................. 924 572
------------ ------------
TOTAL OPERATING EXPENSES ............................................ 327,410 249,063
------------ ------------
OPERATING INCOME .................................................... 60,605 55,603
Other income (expense):
Interest and other expense, net ....................................... (4,694) (3,936)
Merger-related costs .................................................. -- (20,562)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) ........................................ (4,694) (24,498)
INCOME BEFORE EQUITY IN LOSS OF
AFFILIATES AND INCOME TAXES ....................................... 55,911 31,105
Equity in gain/(loss) of affiliates .................................... -- (5,953)
------------ ------------
INCOME BEFORE INCOME TAXES ........................................... 55,911 25,152
Income tax expense ...................................................... 20,011 5,375
------------ ------------
NET INCOME BEFORE MINORITY INTEREST .................................. 35,900 19,777
Minority interest ..................................................... 50 --
============ ============
NET INCOME ........................................................... $ 35,950 $ 19,777
============ ============
Historical net income per common share .................................. $ 0.13 $ 0.07
============ ============
Historical net income per common share assuming dilution ................ $ 0.12 $ 0.07
============ ============
PRO FORMA:
Historical net income ................................................... $ 35,950 $ 19,777
Provision for income taxes on previously untaxed
earnings of pooled S-Corporation income ........................... 1,814 4,548
------------ ------------
PRO FORMA NET INCOME ................................................... $ 34,136 $ 15,229
============ ============
Pro forma net income per common share ................................... $ 0.12 $ 0.06
============ ============
Pro forma net income per common share assuming dilution ................. $ 0.12 $ 0.06
============ ============
Number of shares used in computing historical and pro forma
net income per common share ........................................ 279,351,552 269,046,566
============ ============
Number of shares used in computing historical and pro forma
net income per common share assuming dilution ...................... 307,744,245 277,350,655
============ ============
</TABLE>
See notes to consolidated financial statements.
Page 37
<PAGE> 39
STAPLES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
(Unaudited)
13 Weeks Ended
------------------------
May 2, May 3,
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income .............................................................. $ 35,950 $ 19,777
Adjustments to reconcile net income to net cash provided by/
(used in) operating activities:
Minority interest .................................................... (50) --
Depreciation and amortization ........................................ 28,652 21,148
Equity in loss of affiliates ......................................... -- 5,953
Net increase (decrease) in deferred tax assets ....................... 2,795 (3,456)
(Increase)/decrease in assets:
Merchandise inventories ........................................... (3,704) (10,299)
Receivables ....................................................... (37,841) (9,764)
Prepaid expenses and other assets ................................. (8,167) 2,011
(Decrease)/increase in accounts payable, accrued
expenses and other current liabilities ............................ (50,787) 24,530
Increase in other long-term obligations .............................. 6,009 2,208
--------- ---------
(63,093) 32,331
--------- ---------
NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES ..................... (27,143) 52,108
INVESTING ACTIVITIES:
Acquisition of property and equipment ................................... (50,925) (36,791)
Proceeds from sales and maturities of short-term investments ............ 11,389 6,924
Purchase of short-term investments ...................................... (6,854) --
Proceeds from sales and maturities of long-term investments ............. 3,430 --
Purchase of long-term investments ....................................... (2,545) --
Investment in affiliates ................................................ 762 (1,670)
Acquisition of lease rights ............................................. (36,826) (375)
Other ................................................................... (6,358) (9,107)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES ................................... (87,927) (41,019)
FINANCING ACTIVITIES:
Proceeds from sale of capital stock ..................................... 15,089 3,512
Proceeds from borrowings ................................................ (334) 365,880
Payments on borrowings .................................................. (24,575) (301,801)
--------- ---------
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES ..................... (9,820) 67,591
Effect of exchange rate changes on cash ................................. 454 (1,073)
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS ........................ (124,436) 77,607
Cash and cash equivalents at beginning of period ............................ 381,088 117,035
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................................. $ 256,652 $ 194,642
========= =========
</TABLE>
See notes to consolidated financial statements.
Page 38
<PAGE> 40
STAPLES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL 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 elsewhere in this Current Report on Form 8-K.
NOTE 2 - COMPUTATION OF EARNINGS PER SHARE
For the fiscal year ended January 31, 1998, the Company adopted Statement of
Accounting Standards No. 128 ("FAS 128") which requires the presentation of
Basic and Diluted earnings per share, which replaces primary and fully diluted
earnings per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. Earnings per share have been restated for all
periods presented to reflect the adoption of FAS 128.
Average common and common equivalent shares used in computing diluted earnings
per share include approximately 28,393,000 and 8,304,000 shares for the quarters
ended May 2, 1998 and May 3, 1997, respectively, as a result of applying the
treasury stock method to outstanding stock options as well as the convertible
debentures. Convertible debentures were not included in the calculations for the
quarter ended May 3, 1997 as their inclusion would be anti-dilutive.
NOTE 3 - GUARANTOR SUBSIDIARIES
The 7.125% senior notes due August 15, 2007, the 4.5% convertible subordinated
debentures due October 1, 2000 and the obligations under the $350,000,000
revolving credit facility effective through November, 2002 with a syndicate of
banks are fully and unconditionally guaranteed on an unsecured, joint and
several basis by certain wholly owned subsidiaries of the Company (the
"Guarantor Subsidiaries"). The following condensed consolidating financial data
illustrates the composition of Staples, Inc. (the "Parent Company"), Guarantor
Subsidiaries, and non-guarantor subsidiaries as of and for the quarter ended May
2, 1998. The non-guarantor subsidiaries represent more than an inconsequential
portion of the consolidated assets and revenues of the Company. Separate
complete financial statements of the respective Guarantors Subsidiaries would
not provide additional information which would be useful in assessing the
financial condition of the Guarantor Subsidiaries and thus, are not presented.
Page 39
<PAGE> 41
STAPLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Investments in subsidiaries are accounted for by the Parent Company on the
equity method for purposes of the supplemental consolidating presentation.
Earnings of subsidiaries are, therefore, reflected in the Parent Company's
investment accounts and earnings. The principal elimination entries eliminate
the Parent Company' investment in subsidiaries and intercompany balances and
transactions.
Condensed Consolidated Statement of Income For the thirteen weeks ended May 2,
1998 (in thousands)
<TABLE>
<CAPTION>
Staples, Inc. Guarantor Guarantor
(Parent Corp.) Subsidiaries Subsidiaries Consolidated
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Sales $ -- $ 1,264,650 $ 405,961 $ 1,670,611
Cost of goods sold 269 967,630 314,697 1,282,596
-------- ----------- --------- -----------
Gross profit (269) 297,020 91,264 388,015
Operating expenses 29,158 221,454 76,798 327,410
-------- ----------- --------- -----------
Operating income (29,427) 75,566 14,466 60,605
Interest expense, net (6,016) (8,034) 9,356 (4,694)
Provision for income taxes 1,965 (16,853) (5,123) (20,011)
Minority interest -- -- 50 50
-------- ----------- --------- -----------
Net income $(33,478) $ 50,679 $ 18,749 $ 35,950
======== =========== ========= ===========
Condensed Consolidating Balance Sheet
As of May 2, 1998
(in thousands)
<CAPTION>
Non-
Staples, Inc. Guarantor Guarantor
(Parent Corp.) Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments $ 73,585 $ 7,352 $ 177,082 $ $ 258,019
Merchandise inventories (6,046) 936,278 201,040 1,131,272
Other current assets and
intercompany 820,556 473,089 501,511 (1,472,642) 322,514
---------- ---------- ---------- ----------- ----------
Total current assets 888,095 1,416,719 879,633 (1,472,642) 1,711,805
Net property, equipment and other
assets 212,118 557,227 334,558 (195,513) 908,390
---------- ---------- ---------- ----------- ----------
Total assets 1,100,213 1,973,946 1,214,191 $(1,668,155) 2,620,195
========== ========== ========== =========== ==========
Total current liabilities $ 128,063 $ 714,808 $ 306,813 $ (237,368) $ 912,316
Total long-term liabilities 301,443 237,192 28,489 567,124
Total stockholders' equity 670,707 1,021,946 878,889 (1,430,787) 1,140,755
========== ========== ========== =========== ==========
Total liabilities and
stockholders' equity $1,100,213 $1,973,946 $1,214,191 $(1,668,155) $2,620,195
========== ========== ========== =========== ==========
</TABLE>
Page 40
<PAGE> 42
STAPLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Condensed Consolidated Statement of Cash Flows For the thirteen weeks ended
May 2, 1998 (in thousands)
<TABLE>
<CAPTION>
Non-
Staples, Inc. Guarantor Guarantor
(Parent Corp.) Subsidiaries Subsidiaries Consolidated
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net cash (used in)/provided by
operating activities $ (52,210) $ 594 $ 24,473 $ (27,143)
Investing Activities:
Acquisition of property,
equipment and lease rights (14,238) (65,722) (7,791) (87,751)
Other (43,267) 64,227 (21,136) (176)
--------- -------- --------- ---------
Cash used in investing activities (57,505) (1,495) (28,927) (87,927)
Financing Activities:
Payments on borrowings (25,251) -- 676 (24,575)
Other 19,225 -- (4,470) 14,755
--------- -------- --------- ---------
Cash used in financing activities (6,026) -- (3,794) (9,820)
Effect of exchange rate changes on
cash -- -- 454 454
--------- -------- --------- ---------
Net decrease in cash (115,741) (901) (7,794) (124,436)
Cash and cash equivalents at
beginning of period 189,252 8,253 183,583 381,088
--------- -------- --------- ---------
Cash and cash equivalents at end
of period $ 73,511 $ 7,352 $ 175,789 $ 256,652
========= ======== ========= =========
</TABLE>
NOTE 4 - INCOME TAXES
The provision for income taxes on previously untaxed earnings of pooled
S-Corporation included in results for the quarter ended May 2, 1998 have been
provided for on a pro forma basis at the Company's effective tax rate of 39%.
Page 41
<PAGE> 43
STAPLES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES. Sales increased 29% to $1,670,611,000 in the quarter ended May 2, 1998
from $1,292,721,000 in the quarter ended May 3, 1997. This growth is
attributable to an increase in the number of open stores, increased sales in
existing stores and in the delivery and contract stationer segments, and the
consolidation (beginning in May, 1997) of the sales of Staples UK and Staples
(Deutschland) GmbH ("Staples Germany", formally MAXI-Papier-Markt-GmbH). The
German stores now operate as Staples Der Buro Mega Markt. Comparable store and
delivery hub sales for the quarter ended May 2, 1998 increased 11% over the
quarter ended May 3, 1997. Comparable sales in the contract stationer segment
increased 9% for the quarter ended May 2, 1998 versus the quarter ended May 3,
1997. Comparable sales in the Quill segment increased 11% for the quarter ended
May 2, 1998 versus the quarter ended May 3, 1997. The Company had 782 stores
open as of May 2, 1998 compared to 599 stores as of May 3, 1997 and 742 stores
as of January 31, 1998. This total includes 41 stores opened and one closed
during the three months ended May 2, 1998 and 56 stores acquired in the UK and
Germany as a result of the acquisitions of Staples UK and Staples Germany in
May, 1997.
GROSS PROFIT. Gross profit as a percentage of sales was 23.2% for the three
months ended May 2, 1998 as compared to 23.6% for the same period in the prior
year. The decrease in gross profit rate for the three months ended May 2, 1998
was primarily due to decreases in the margin rates in the retail store segment,
due to price reductions as well as an increase in the sales of computer hardware
(CPU's and laptops), which generate a lower margin rate than other categories,
to 8.0% of sales from 6.6% of sales for the three months ended May 3, 1997. This
was partially offset by improved margins in the retail and delivery business
segments due to lower product costs from vendors as a result of increased
purchase discounts and changes in product mix, as well as the leveraging of
distribution center and delivery costs over a larger sales base.
OPERATING AND SELLING EXPENSES. Operating and selling expenses, which consist of
payroll, advertising and other store operating costs, decreased as a percentage
of sales in the three months ended May 2, 1998 to 15.3%, as compared to 15.4%
for the same period in the prior year. The decrease is primarily due to
increased leveraging of fixed store payroll expenses and other fixed store
operating costs as store sales have increased. This was partially offset by the
acquisitions of Staples UK and Staples Germany, which have higher costs as a
percentage of sales, and costs incurred for the Company's store remodel program
in which significant investments have been made in store layouts and signing to
improve shopability and to enhance customer service.
Staples UK and Staples Germany store expenses are higher as a result of their
earlier stage of development. While most store expenses vary proportionately
with sales, there is a fixed cost component. Because new stores typically
generate lower sales than the Company average, the fixed cost component results
in higher store operating and selling expenses as a percentage of sales in these
stores during their start-up period. During periods when new store openings as a
percentage of the base are higher, store operating and selling expenses as a
percentage of sales may increase. In addition, as the store base matures, the
fixed cost component of operating expenses is leveraged over an increased level
of sales, resulting in a decrease in store operating and selling expenses as a
percentage of sales. The Company's strategy of continuing to add stores to many
existing markets can result in some new stores attracting sales away from
existing stores.
Page 42
<PAGE> 44
PRE-OPENING EXPENSES. Pre-opening expenses relating to new store openings, which
consist primarily of salaries, supplies, marketing and occupancy costs, are
expensed by the Company as incurred and therefore fluctuate from period to
period depending on the timing and number of new store openings. Pre-opening
expenses averaged $82,000 per store for the three months ended May 2, 1998 as
compared to $67,000 per store for the same period in the prior year. The
increase in the average cost per store is primarily due to Staples UK and
Staples Germany store openings which are included in the three months ended
May 2, 1998 and carry a higher pre-opening expense.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the
three months ended May 2, 1998 increased as a percentage of sales to 4.0% as
compared to 3.6% for the same period in the prior year. This increase was
primarily due to significant investments in the Company's information systems'
staffing and infrastructure, which the Company believes will reduce costs as a
percentage of sales in future years. In addition, general and administrative
expense for the three months ended May 2, 1998 include the results of Staples UK
and Staples Germany, which have higher general and administrative costs as a
percentage of sales; as their store bases mature, overhead expenses should
decrease as a percentage of sales. The overall increase in general and
administrative costs was partially offset by the Company's ability to increase
sales without proportionately increasing overhead expenses in its core retail
business.
INTEREST AND OTHER EXPENSE, NET. Net interest and other expense for the three
months ended May 2, 1998 was $4,694,000 as compared to $3,936,000 for the same
period in the prior year. The increase from the three months ended May 3, 1997
was primarily due to increased borrowings, which funded the increase in store
inventories, related to new store openings, expanded product assortment, and
improvements in in-stock levels; the acquisition of fixed assets for new stores
opened and remodeled; and continued investments in the information systems and
distribution center infrastructure.
MERGER-RELATED COSTS. The Company charged to expense in the three months ended
May 3, 1997 certain non-recurring costs consisting primarily of legal,
accounting, transaction related costs (such as filing fees) and consulting fees
incurred in connection with the proposed merger with Office Depot, Inc.
EQUITY IN LOSS OF AFFILIATES. The Company's equity in loss of affiliates was
$5,953,000 for the three months ended May 3, 1997. The Company recorded no
equity in loss of affiliates for the three months ended May 2, 1998, due to the
acquisition of Staples UK and Staples Germany on May 6, 1997 and May 7, 1997,
respectively. As a result of the acquisitions, the Company's ownership interest
of Staples UK increased to 100% and its ownership of Staples Germany increased
to approximately 92%. The transactions were accounted for in accordance with the
purchase method of accounting and accordingly, the consolidated results of these
entities are reflected in the Company's financial statements since the
respective dates of acquisition. Prior to the acquisitions, Staples UK and
Staples Germany were accounted for under the equity method which resulted in the
Company's share of losses from operations being included in Equity in Loss of
Affiliates. As of May 2, 1998, Staples UK and Staples Germany operated 42 and 18
stores, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended May 2, 1998, cash and cash equivalents decreased
by $124,436,000. This decrease was attributable to cash used in investing
activities of $87,927,000, which includes capital
Page 43
<PAGE> 45
expenditures and acquisition of leases of $87,751,000 primarily incurred in
connection with the acquisition of leases from the bankrupt Rickels Home Center
chain and the opening of 41 new stores, and cash used in operating activities of
$27,143,000, which primarily reflects an increase in receivables and a decrease
in accrued expenses and other current liabilities partially offset by operating
income and depreciation and amortization. Cash used by financing activities was
primarily repayment on borrowing of $24,575,000 partially offset by proceeds
from capital stock of $15,089,000.
The Company opened 41 stores and closed one store during the three months ended
May 2, 1998, and expects to open approximately 110 additional stores in the last
three quarters of fiscal 1998. Management estimates that the Company's cash
requirements, including pre-opening expenses, leasehold improvements and
fixtures (net of store inventory financed under vendor trade terms), will be
approximately $1,400,000 for each new store (excluding the cost of any
acquisitions of lease rights). Accordingly, the Company expects to use in excess
of $154,000,000 for store openings during this period. In addition, the Company
plans to continue to make investments in information systems, distribution
centers and store remodels to improve operational efficiencies and customer
service, and may expend additional funds to acquire businesses or lease rights
from tenants occupying retail space that is suitable for a Staples store. The
Company expects to meet these cash requirements through a combination of
available cash, operating cash flow and borrowings from its existing revolving
line of credit.
The Company issued $200,000,000 of senior notes (the "Notes") on August 12, 1997
with an interest rate of 7.125% payable semi-annually on February 15 and August
15 of each year commencing on February 15, 1998. Net proceeds of approximately
$198,000,000 from the sale of the Notes are being used for repayment of
indebtedness under the Company's revolving credit agreement and for general
working capital purposes, including the financing of new store openings,
distribution facilities and corporate offices.
The Company also maintains a revolving credit facility, effective through
November 2002, with a syndicate of banks which provides up to $350,000,000 of
available borrowings. Borrowings made pursuant to this facility will bear
interest at either the lead bank's prime rate, the federal funds rate plus
0.50%, the LIBOR rate plus a percentage spread based upon certain defined
ratios, a competitive bid rate, or a swing line loan rate. This agreement, among
other conditions, contains certain restrictive covenants including net worth
maintenance, minimum fixed charge interest coverage and limitations on
indebtedness, sales of assets, and dividends. As of May 2, 1998, no borrowings
were outstanding under the revolving credit agreement. Staples Germany also has
a revolving credit facility under which $10,096,000 was outstanding at May 2,
1998. Total cash, short-term investments and available revolving credit amounts
totaled $625,378,000 as of May 2, 1998.
The Company expects that its current cash and cash equivalents and funds
available under its revolving credit facility will be sufficient to fund its
planned store openings and other recurring operational cash needs for the next
twelve to eighteen months. The Company is continually evaluating financing
possibilities, and it may seek to raise additional funds through any one or a
combination of public or private debt or equity-related offerings, dependent
upon market conditions, or through additional commercial bank debt arrangements.
Page 44
<PAGE> 46
FUTURE OPERATING RESULTS
This quarterly report on Form 10-Q contains a number of forward-looking
statements. There are a number of important factors that could cause the
Company's results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation, the
following: The Company operates in a highly competitive marketplace, in which it
competes with a variety of retailers, dealers and distributors. The Company
competes in most of its geographic markets with other high-volume office supply
chains that are similar in concept to the Company in terms of store format,
pricing strategy and product selection, such as Office Depot, OfficeMax and
Office World, as well as mass merchants, such as Wal-Mart, warehouse clubs,
computer and electronics superstores, and other discount retailers. In addition,
the Company's retail stores, as well as its delivery and contract business,
compete with numerous mail order firms, contract stationer businesses and direct
manufacturers. Such competitors have increased their presence in the Company's
markets in recent years. Some of the Company's current and potential competitors
in the office products industry are larger than the Company and have
substantially greater financial resources. No assurance can be given that
competition will not have an adverse effect on the Company's business.
An important part of the Company's business plan is an aggressive store growth
strategy. The Company opened 130 stores in the United States, Canada and Europe
in fiscal 1997 and plans to open approximately 150 new stores in fiscal 1998.
There can be no assurance that the Company will be able to identify and lease
favorable store sites, hire and train employees, and adapt its management and
operational systems to the extent necessary to fulfill its expansion plans. The
failure to open new stores in accordance with its growth plans could have a
material adverse impact on the Company's future sales and profits. Moreover, the
Company's expansion strategy is based in part on the continued addition of new
stores to its store network in existing markets to take advantage of economies
of scale in marketing, distribution and supervision costs; however, this can
result in the "cannibalization" of sales of existing stores. In addition, there
can be no assurance that the new stores opened by the Company will achieve sales
or profit levels commensurate with those of the Company's existing stores.
The Company has experienced and may experience in the future fluctuations in its
quarterly operating results. Moreover, there can be no assurance that Staples
will continue to realize the earnings growth experienced over recent years, or
that earnings in any particular quarter will not fall short of either a prior
fiscal quarter or investors' expectations. Factors such as the number of new
store openings (pre-opening expenses are expensed as incurred, and newer stores
are less profitable than mature stores), the extent to which new stores
"cannibalize" sales of existing stores, the mix of products sold, pricing
actions of competitors, the level of advertising and promotional expenses,
seasonality, and one-time charges associated with acquisitions or other events
could contribute to this quarterly variability. In addition, the Company's
expense levels are based in part on expectations of future sales levels, and a
shortfall in expected sales could therefore result in a disproportionate
decrease in the Company's net income.
The Company's business, including sales, number of stores and number of
employees, has grown dramatically over the past several years. In addition, the
Company has consummated a number of significant acquisitions in the last few
years, and may make additional acquisitions in the future. This internal growth,
together with the acquisitions made by the Company, have placed significant
demand on the management and operational systems of the Company. To manage its
growth effectively, the
Page 45
<PAGE> 47
Company will be required to continue to upgrade its operational and financial
systems, expand its management team and increase and manage its employee base.
The Company has a presence in international markets through The Business Depot
Ltd. in Canada and its recently acquired joint operations in Germany and the
United Kingdom, and may seek to expand in to other international markets in the
future. The Company's operations in foreign markets are subject to risks similar
to those affecting its U.S. stores, in addition to a number of additional risks
inherent in foreign operations, including local customs and competitive
conditions, and foreign currency fluctuations. Staples' European operations are
currently unprofitable, and there can be no assurance that they will become
profitable.
The Company currently expects that its current cash and cash equivalents and
funds available under its revolving credit facility will be sufficient to fund
its planned store openings and other operating cash needs for the next twelve to
eighteen months. However, there can be no assurance that the Company will not
require additional sources of financing prior to such time, as a result of
unanticipated cash needs or opportunities, an expanded growth strategy or
disappointing operating results. There also can be no assurance that the
additional funds required by the Company, whether within the next eighteen
months or thereafter, will be available to the Company on satisfactory terms.
Page 46
<PAGE> 48
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: July 1, 1998 /s/ John J. Mahoney
------------ -----------------------------------
John J. Mahoney
Executive Vice President and
Chief Administrative Officer
Page 47
<PAGE> 49
EXHIBIT INDEX
<TABLE>
<S> <C>
Consent of Ernst & Young LLP, Independent Auditors ..................... Exhibit 23.1
Consent of Independent Auditor Kupferberg,
Goldberg & Neimark, LLC ............................................ Exhibit 23.2
Financial Data Schedule for 1st Quarter 1998 Restated .................. Exhibit 27.1
Financial Data Schedule for Fiscal Year 1997 Restated .................. Exhibit 27.2
Financial Data Schedule for 3rd Quarter 1997 Restated .................. Exhibit 27.3
Financial Data Schedule for 2nd Quarter 1997 Restated .................. Exhibit 27.4
Financial Data Schedule for 1st Quarter 1997 Restated .................. Exhibit 27.5
Financial Data Schedule for Fiscal Year 1996 Restated .................. Exhibit 27.6
Financial Data Schedule for 3rd Quarter 1996 Restated .................. Exhibit 27.7
Financial Data Schedule for 2nd Quarter 1996 Restated .................. Exhibit 27.8
Financial Data Schedule for 1st Quarter 1996 Restated .................. Exhibit 27.9
Financial Data Schedule for Fiscal Year 1995 Restated .................. Exhibit 27.10
Financial Data Schedule for 3rd Quarter 1995 Restated .................. Exhibit 27.11
Financial Data Schedule for 2nd Quarter 1995 Restated .................. Exhibit 27.12
Financial Data Schedule for 1st Quarter 1995 Restated .................. Exhibit 27.13
Independent Auditors' Report of Kupferberg,
Goldberg & Neimark, LLC ............................................ Exhibit 99.1
</TABLE>
Page 48
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-3 No. 333-01913, 333-01643, 33-61653, and 333-31249 and Forms S-8 No.
33-30149, 33-38305, 33-38304, 33-52228, 33-43663, 33-52226, 33-68076, 33-81284,
33-79496, 33-81282, 333-12903, 333-36713, 333-36715, 333-39991 and 333-39993 and
Form S-4 No. 333-15853) of Staples, Inc. and in the related Prospectus of our
report dated June 29, 1998 with respect to the supplemental consolidated
financial statements of Staples, Inc. as of January 31, 1998 and February 1,
1997 and for each of the three years in the period ended January 31, 1998
included in this Current Report on Form 8-K.
/s/ Ernst & Young LLP
Boston, Massachusetts
June 29, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITOR
We consent to the incorporation by reference in the Registration Statements
(Forms S-3 No. 333-01913, 333-01643,333-61653, and 333-31249 and Forms S-8 No.
33-30149, 33-38305, 33-38304, 33-52228, 33-43663, 33-52226, 33-68076, 33-81284,
33-79496, 33-81282, 333-12903, 33-36713, 333-36715, 333-39991 and 333-39993 and
form S-4 No. 333-15853) of Staples, Inc. and in the related Prospectus of our
report dated February 24, 1998, with respect to the consolidated financial
statements of Quill corporation and Subsidiary as of December 31, 1997 and 1996,
and for each of the three years in the period ended December 31, 1997 included
in this Current Report on Form 8-K.
/s/ Kupferberg, Goldberg & Neimark, LLC
KUPFERBERG, GOLDBERG & NEIMARK, LLC
Chicago, Illinois
June 29, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF STAPLES, INC. FOR THE THREE MONTHS ENDED MAY 2, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> MAY-02-1998
<CASH> 256,652
<SECURITIES> 1,367
<RECEIVABLES> 245,440
<ALLOWANCES> 3,806
<INVENTORY> 1,131,272
<CURRENT-ASSETS> 1,711,805
<PP&E> 973,994
<DEPRECIATION> 339,466
<TOTAL-ASSETS> 2,620,195
<CURRENT-LIABILITIES> 912,316
<BONDS> 518,066
0
0
<COMMON> 169
<OTHER-SE> 1,140,586
<TOTAL-LIABILITY-AND-EQUITY> 2,620,195
<SALES> 1,670,611
<TOTAL-REVENUES> 1,670,611
<CGS> 1,282,596
<TOTAL-COSTS> 1,538,244
<OTHER-EXPENSES> 71,762
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,694
<INCOME-PRETAX> 55,911
<INCOME-TAX> 20,011
<INCOME-CONTINUING> 35,950
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,950
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.12
<FN>
<F1>
<INCOME-BEFORE MINORITY INTEREST> 35,900
<MINORITY INTEREST> 50
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF STAPLES, INC. FOR THE TWELVE MONTHS ENDED JANUARY 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 381,088
<SECURITIES> 5,902
<RECEIVABLES> 206,570
<ALLOWANCES> 3,427
<INVENTORY> 1,124,642
<CURRENT-ASSETS> 1,786,140
<PP&E> 920,963
<DEPRECIATION> 310,701
<TOTAL-ASSETS> 2,638,682
<CURRENT-LIABILITIES> 982,480
<BONDS> 518,959
0
0
<COMMON> 167
<OTHER-SE> 1,094,318
<TOTAL-LIABILITY-AND-EQUITY> 2,638,862
<SALES> 5,732,145
<TOTAL-REVENUES> 5,732,145
<CGS> 4,353,161
<TOTAL-COSTS> 5,186,207
<OTHER-EXPENSES> 238,611
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,955
<INCOME-PRETAX> 249,754
<INCOME-TAX> 81,924
<INCOME-CONTINUING> 167,914
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 167,914
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.59
<FN>
<F1>
<INCOME-BEFORE MINORITY INTEREST> 167,830
<MINORITY INTEREST> 84
</FN>
</TABLE>
<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 NOVEMBER 1,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> NOV-01-1997
<CASH> 247,498
<SECURITIES> 3,159
<RECEIVABLES> 277,153
<ALLOWANCES> 3,112
<INVENTORY> 1,082,601
<CURRENT-ASSETS> 1,675,397
<PP&E> 876,512
<DEPRECIATION> 292,595
<TOTAL-ASSETS> 2,509,876
<CURRENT-LIABILITIES> 960,745
<BONDS> 520,839
0
0
<COMMON> 165
<OTHER-SE> 984,962
<TOTAL-LIABILITY-AND-EQUITY> 2,509,876
<SALES> 4,037,453
<TOTAL-REVENUES> 4,037,453
<CGS> 3,070,695
<TOTAL-COSTS> 3,678,088
<OTHER-EXPENSES> 171,519
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,040
<INCOME-PRETAX> 136,188
<INCOME-TAX> 41,693
<INCOME-CONTINUING> 94,566
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 94,566
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.34
<FN>
<F1>
<INCOME-BEFORE MINORITY INTEREST> 94,495
<MINORITY INTEREST> 71
</FN>
</TABLE>
<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 2, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> AUG-02-1997
<CASH> 123,532
<SECURITIES> 5,124
<RECEIVABLES> 228,090
<ALLOWANCES> 4,402
<INVENTORY> 1,038,161
<CURRENT-ASSETS> 1,465,899
<PP&E> 813,771
<DEPRECIATION> 271,294
<TOTAL-ASSETS> 2,258,065
<CURRENT-LIABILITIES> 828,879
<BONDS> 470,583
0
0
<COMMON> 163
<OTHER-SE> 916,850
<TOTAL-LIABILITY-AND-EQUITY> 2,258,065
<SALES> 2,485,060
<TOTAL-REVENUES> 2,485,060
<CGS> 1,893,773
<TOTAL-COSTS> 2,273,635
<OTHER-EXPENSES> 109,004
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,828
<INCOME-PRETAX> 56,975
<INCOME-TAX> 14,495
<INCOME-CONTINUING> 42,536
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,536
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.15
<FN>
<F1>
<INCOME-BEFORE MINORITY INTEREST> 42,480
<MINORITY INTEREST> 56
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF STAPLES, INC. FOR THE THREE MONTHS ENDED MAY 3, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> MAY-03-1997
<CASH> 194,642
<SECURITIES> 8,261
<RECEIVABLES> 225,751
<ALLOWANCES> 4,692
<INVENTORY> 854,182
<CURRENT-ASSETS> 1,346,157
<PP&E> 730,958
<DEPRECIATION> 236,074
<TOTAL-ASSETS> 2,055,910
<CURRENT-LIABILITIES> 658,593
<BONDS> 467,679
0
0
<COMMON> 162
<OTHER-SE> 889,081
<TOTAL-LIABILITY-AND-EQUITY> 2,055,910
<SALES> 1,292,721
<TOTAL-REVENUES> 1,292,721
<CGS> 988,055
<TOTAL-COSTS> 1,186,653
<OTHER-EXPENSES> 50,465
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,936
<INCOME-PRETAX> 25,152
<INCOME-TAX> 5,375
<INCOME-CONTINUING> 19,777
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,777
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
<FN>
<F1>
<INCOME-BEFORE MINORITY INTEREST> 19,777
<MINORITY INTEREST> 0
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF STAPLES, INC. FOR THE TWELVE MONTHS ENDED FEBRUARY 1,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> FEB-03-1996
<PERIOD-END> FEB-01-1997
<CASH> 117,035
<SECURITIES> 15,185
<RECEIVABLES> 215,978
<ALLOWANCES> 4,519
<INVENTORY> 845,854
<CURRENT-ASSETS> 1,262,324
<PP&E> 695,738
<DEPRECIATION> 216,781
<TOTAL-ASSETS> 1,955,636
<CURRENT-LIABILITIES> 638,489
<BONDS> 402,985
0
0
<COMMON> 162
<OTHER-SE> 875,661
<TOTAL-LIABILITY-AND-EQUITY> 1,955,636
<SALES> 4,493,589
<TOTAL-REVENUES> 4,493,589
<CGS> 3,410,263
<TOTAL-COSTS> 4,061,897
<OTHER-EXPENSES> 183,294
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,962
<INCOME-PRETAX> 211,363
<INCOME-TAX> 66,621
<INCOME-CONTINUING> 144,742
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 144,742
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.52
<FN>
<F1>
<INCOME-BEFORE MINORITY INTEREST> 144,742
<MINORITY INTEREST> 0
</FN>
</TABLE>
<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 NOVEMBER 2,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> FEB-03-1996
<PERIOD-END> NOV-02-1996
<CASH> 93,527
<SECURITIES> 20,275
<RECEIVABLES> 271,494
<ALLOWANCES> 2,101
<INVENTORY> 841,045
<CURRENT-ASSETS> 1,302,954
<PP&E> 642,754
<DEPRECIATION> 213,569
<TOTAL-ASSETS> 1,940,453
<CURRENT-LIABILITIES> 652,658
<BONDS> 446,659
0
0
<COMMON> 160
<OTHER-SE> 801,344
<TOTAL-LIABILITY-AND-EQUITY> 1,940,453
<SALES> 3,200,409
<TOTAL-REVENUES> 3,200,409
<CGS> 2,439,719
<TOTAL-COSTS> 2,914,683
<OTHER-EXPENSES> 133,982
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,567
<INCOME-PRETAX> 123,915
<INCOME-TAX> 37,272
<INCOME-CONTINUING> 86,643
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 86,643
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.31
<FN>
<F1>
<INCOME-BEFORE MINORITY INTEREST> 86,643
<MINORITY INTEREST> 0
</FN>
</TABLE>
<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 3, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> FEB-03-1996
<PERIOD-END> AUG-03-1996
<CASH> 75,128
<SECURITIES> 11,165
<RECEIVABLES> 239,798
<ALLOWANCES> 2,229
<INVENTORY> 786,798
<CURRENT-ASSETS> 1,182,852
<PP&E> 580,398
<DEPRECIATION> 196,109
<TOTAL-ASSETS> 1,776,974
<CURRENT-LIABILITIES> 561,959
<BONDS> 420,767
0
0
<COMMON> 160
<OTHER-SE> 756,533
<TOTAL-LIABILITY-AND-EQUITY> 1,776,974
<SALES> 1,989,554
<TOTAL-REVENUES> 1,989,554
<CGS> 1,520,763
<TOTAL-COSTS> 1,822,641
<OTHER-EXPENSES> 85,637
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,341
<INCOME-PRETAX> 62,193
<INCOME-TAX> 17,288
<INCOME-CONTINUING> 44,905
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,905
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.16
<FN>
<F1>
<INCOME-BEFORE MINORITY INTEREST> 44,905
<MINORITY INTEREST> 0
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF STAPLES, INC. FOR THE THREE MONTHS ENDED MAY 4, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> FEB-03-1996
<PERIOD-END> MAY-03-1996
<CASH> 128,182
<SECURITIES> 6,110
<RECEIVABLES> 187,604
<ALLOWANCES> 2,171
<INVENTORY> 722,774
<CURRENT-ASSETS> 1,116,682
<PP&E> 521,456
<DEPRECIATION> 180,129
<TOTAL-ASSETS> 1,658,853
<CURRENT-LIABILITIES> 523,432
<BONDS> 366,235
0
0
<COMMON> 159
<OTHER-SE> 733,159
<TOTAL-LIABILITY-AND-EQUITY> 1,658,853
<SALES> 1,056,807
<TOTAL-REVENUES> 1,056,807
<CGS> 811,237
<TOTAL-COSTS> 973,321
<OTHER-EXPENSES> 43,108
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,346
<INCOME-PRETAX> 30,318
<INCOME-TAX> 8,145
<INCOME-CONTINUING> 22,173
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,173
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
<FN>
<F1>
<INCOME-BEFORE MINORITY INTEREST> 22,173
<MINORITY INTEREST> 0
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF STAPLES, INC. FOR THE TWELVE MONTHS ENDED FEBRUARY 3,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-03-1996
<PERIOD-START> JAN-28-1995
<PERIOD-END> FEB-03-1996
<CASH> 124,621
<SECURITIES> 14,889
<RECEIVABLES> 172,085
<ALLOWANCES> 2,627
<INVENTORY> 672,593
<CURRENT-ASSETS> 1,036,873
<PP&E> 482,437
<DEPRECIATION> 160,687
<TOTAL-ASSETS> 1,552,199
<CURRENT-LIABILITIES> 456,629
<BONDS> 351,508
0
0
<COMMON> 159
<OTHER-SE> 711,982
<TOTAL-LIABILITY-AND-EQUITY> 1,552,199
<SALES> 3,565,235
<TOTAL-REVENUES> 3,565,235
<CGS> 2,738,596
<TOTAL-COSTS> 3,239,849
<OTHER-EXPENSES> 142,994
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,671
<INCOME-PRETAX> 154,568
<INCOME-TAX> 46,140
<INCOME-CONTINUING> 108,428
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108,428
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.41
<FN>
<F1>
<INCOME-BEFORE MINORITY INTEREST> 108,428
<MINORITY INTEREST> 0
</FN>
</TABLE>
<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 28,
1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-03-1996
<PERIOD-START> JAN-28-1995
<PERIOD-END> OCT-28-1995
<CASH> 97,325
<SECURITIES> 20,404
<RECEIVABLES> 180,021
<ALLOWANCES> 1,829
<INVENTORY> 731,545
<CURRENT-ASSETS> 1,069,854
<PP&E> 445,502
<DEPRECIATION> 155,180
<TOTAL-ASSETS> 1,542,992
<CURRENT-LIABILITIES> 519,318
<BONDS> 328,607
0
0
<COMMON> 157
<OTHER-SE> 662,312
<TOTAL-LIABILITY-AND-EQUITY> 1,542,992
<SALES> 2,460,193
<TOTAL-REVENUES> 2,460,193
<CGS> 1,889,388
<TOTAL-COSTS> 2,246,686
<OTHER-EXPENSES> 103,375
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,788
<INCOME-PRETAX> 86,790
<INCOME-TAX> 24,314
<INCOME-CONTINUING> 62,476
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,476
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.22
<FN>
<F1>
<INCOME-BEFORE MINORITY INTEREST> 62,476
<MINORITY INTEREST> 0
</FN>
</TABLE>
<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 JULY 29, 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-03-1996
<PERIOD-START> JAN-28-1995
<PERIOD-END> JUL-29-1995
<CASH> 47,490
<SECURITIES> 20,967
<RECEIVABLES> 153,794
<ALLOWANCES> 1,574
<INVENTORY> 608,401
<CURRENT-ASSETS> 866,051
<PP&E> 408,179
<DEPRECIATION> 140,850
<TOTAL-ASSETS> 1,307,411
<CURRENT-LIABILITIES> 412,425
<BONDS> 232,544
0
0
<COMMON> 157
<OTHER-SE> 631,124
<TOTAL-LIABILITY-AND-EQUITY> 1,307,411
<SALES> 1,515,225
<TOTAL-REVENUES> 1,515,225
<CGS> 1,169,901
<TOTAL-COSTS> 1,395,528
<OTHER-EXPENSES> 66,209
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,561
<INCOME-PRETAX> 39,603
<INCOME-TAX> 10,576
<INCOME-CONTINUING> 29,027
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,027
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.11
<FN>
<F1>
<INCOME-BEFORE MINORITY INTEREST> 29,027
<MINORITY INTEREST> 0
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF STAPLES, INC. FOR THE THREE MONTHS ENDED APRIL 29, 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-03-1996
<PERIOD-START> JAN-28-1995
<PERIOD-END> APR-29-1995
<CASH> 61,809
<SECURITIES> 29,553
<RECEIVABLES> 131,836
<ALLOWANCES> 1,472
<INVENTORY> 544,614
<CURRENT-ASSETS> 809,708
<PP&E> 374,387
<DEPRECIATION> 126,880
<TOTAL-ASSETS> 1,223,609
<CURRENT-LIABILITIES> 395,186
<BONDS> 308,766
0
0
<COMMON> 144
<OTHER-SE> 489,481
<TOTAL-LIABILITY-AND-EQUITY> 1,223,609
<SALES> 792,669
<TOTAL-REVENUES> 792,669
<CGS> 614,736
<TOTAL-COSTS> 733,884
<OTHER-EXPENSES> 33,168
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,984
<INCOME-PRETAX> 18,881
<INCOME-TAX> 5,035
<INCOME-CONTINUING> 13,846
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,846
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
<FN>
<F1>
<INCOME-BEFORE MINORITY INTEREST> 13,846
<MINORITY INTEREST> 0
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Quill Corporation
Lincolnshire, Illinois
We have audited the accompanying consolidated balance sheets of Quill
Corporation and Subsidiary as of December 31, 1997 and 1996 and the related
consolidated statements of operating results and retained earnings and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Quill
Corporation and Subsidiary as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Kupferberg, Goldberg & Neimark, LLC
KUPFERBERG, GOLDBERG & NEIMARK, LLC
Chicago, Illinois
February 24, 1998
