<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended: July 31, 1999
-----------------------------------------------
Commission File Number: 0-17586
-------------------------------------------------------
STAPLES, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2896127
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Five Hundred Staples Drive, Framingham, MA 01702
----------------------------------------------------------
(Address of principal executive office and zip code)
508-253-5000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The registrant had 464,446,265 shares of Common Stock, par value $.0006,
outstanding as of September 10, 1999.
<PAGE> 2
FORM 10-Q
STAPLES, INC.
JULY 31, 1999
TABLE OF CONTENTS
-----------------
PAGE
Part I - Financial Information:
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets .......................................... 3
Consolidated Statements of Income .................................... 4
Consolidated Statements of Cash Flows ................................ 5
Notes to Consolidated Financial Statements ........................... 6-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 14-20
Item 3. Quantitative and Qualitative Disclosures about
Market Risk ................................................... 21
Part II - Other Information.......................................... 22
Signature ............................................................ 23
Page 2
<PAGE> 3
STAPLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
JULY 31,
1999 JANUARY 30,
(UNAUDITED) 1999
----------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................$ -- $ 357,993
Short-term investments................................ 1,252 17,428
Merchandise inventories............................... 1,518,768 1,340,432
Receivables, net...................................... 378,114 221,836
Deferred income taxes................................. 79,397 75,261
Prepaid expenses and other current assets............. 51,700 51,150
---------- ----------
TOTAL CURRENT ASSETS................................ 2,029,231 2,064,100
PROPERTY AND EQUIPMENT:
Land and buildings.................................... 246,948 231,378
Leasehold improvements................................ 407,722 372,451
Equipment............................................. 460,788 400,225
Furniture and fixtures................................ 260,868 239,755
---------- ----------
TOTAL PROPERTY AND EQUIPMENT........................ 1,376,326 1,243,809
Less accumulated depreciation and amortization........ 449,763 403,520
---------- ----------
NET PROPERTY AND EQUIPMENT.......................... 926,563 840,289
OTHER ASSETS:
Lease acquisition costs, net of amortization.......... 70,098 75,127
Investments........................................... 20,906 --
Goodwill, net of amortization......................... 301,323 148,201
Deferred income taxes................................. 30,819 28,735
Other................................................. 26,306 22,814
---------- ----------
TOTAL OTHER ASSETS.................................. 449,452 274,877
---------- ----------
$3,405,246 $3,179,266
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................................$ 863,878 $ 794,427
Accrued expenses and other current liabilities........ 444,224 438,311
Debt maturing within one year......................... 43,997 32,594
---------- ----------
TOTAL CURRENT LIABILITIES........................... 1,352,099 1,265,332
LONG-TERM DEBT......................................... 263,560 205,015
OTHER LONG-TERM OBLIGATIONS............................ 55,909 52,033
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value-authorized
5,000,000 shares; no shares issued -- --
Common stock, $.0006 par value-authorized
1,500,000,000 shares; issued
465,744,215 at July 31, 1999 and
461,538,061 shares at January 30, 1999................ 279 277
Additional paid-in capital............................ 1,096,308 1,043,194
Cumulative foreign currency translation adjustments... (12,772) (11,675)
Unrealized gain on investments........................ (31) 7
Retained earnings .................................... 736,378 633,321
Less: treasury stock at cost, 3,119,153 shares at
July 31, 1999 and 488,922 shares at January 30, 1999.. (86,484) (8,238)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY.......................... 1,733,678 1,656,886
---------- ----------
$3,405,246 $3,179,266
========== ==========
See notes to consolidated financial statements.
Page 3
<PAGE> 4
STAPLES, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
13 WEEKS ENDED 26 WEEKS ENDED
------------------------------ ------------------------------
JULY 31, AUGUST 1, JULY 31, AUGUST 1,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales .................................................. $ 1,840,110 $ 1,475,705 $ 3,912,176 $ 3,146,316
Cost of goods sold and occupancy costs ................. 1,385,551 1,127,778 2,962,864 2,417,611
----------- ----------- ----------- -----------
GROSS PROFIT ......................................... 454,559 347,927 949,312 728,705
OPERATING AND OTHER EXPENSES:
Operating and selling ................................ 270,737 206,971 586,057 455,382
Pre-opening .......................................... 4,899 4,232 9,407 7,584
General and administrative ........................... 85,510 70,694 174,250 138,180
Amortization of goodwill ............................. 2,971 927 5,258 1,851
Merger-related and integration costs ................. -- 41,000 -- 41,000
Interest and other expense, net ...................... 3,976 5,920 5,392 10,614
----------- ----------- ----------- -----------
TOTAL OPERATING AND OTHER EXPENSES ................. 368,093 329,744 780,364 654,611
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES ......................... 86,466 18,183 168,948 74,094
Income tax expense ..................................... 33,722 9,319 65,890 29,330
----------- ----------- ----------- -----------
NET INCOME BEFORE MINORITY INTEREST ................ 52,744 8,864 103,058 44,764
Minority interest .................................... -- 110 -- 160
----------- ----------- ----------- -----------
NET INCOME ......................................... $52,744 $ 8,974 $ 103,058 $ 44,924
=========== =========== =========== ===========
BASIC EARNINGS PER COMMON SHARE
Historical net income per common share ............. $ 0.11 $ 0.02 $ 0.22 $ 0.11
=========== =========== =========== ===========
DILUTED EARNINGS PER COMMON SHARE
Historical net income per common share ............. $ 0.11 $ 0.02 $ 0.22 $ 0.10
=========== =========== =========== ===========
PRO FORMA:
Historical net income ............................... $ 44,924
Provision for income taxes on
previously untaxed earnings of
pooled S-Corporation income ................... 1,814
-----------
PRO FORMA NET INCOME ............................... $ 43,110
===========
BASIC EARNINGS PER COMMON SHARE
Pro forma net income per common share .............. $ 0.10
===========
DILUTED EARNINGS PER COMMON SHARE
Pro forma net income per common share .............. $ 0.10
===========
Number of shares used in computing historical and
pro forma basic net income per common share ........ 462,421,805 423,959,190 462,627,140 421,493,259
=========== =========== =========== ===========
Number of shares used in computing historical and
pro forma diluted net income per common share ...... 476,032,234 436,549,991 476,416,623 433,742,268
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements
Page 4
<PAGE> 5
STAPLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
26 WEEKS ENDED
--------------------
JULY 31, AUGUST 1,
1999 1998
-------- --------
OPERATING ACTIVITIES:
Net income .............................................. $103,058 $ 44,924
Adjustments to reconcile net income to net cash
used in operating activities:
Minority interest ...................................... -- (160)
Depreciation and amortization .......................... 81,577 58,649
Merger-related and integration costs ................... -- 41,000
Expense from 401K and PARS stock contribution .......... 8,460 3,073
Deferred income tax benefit ............................ (6,208) (7,098)
Change in assets and liabilities, net of companies
acquired using purchase accounting:
Increase in merchandise inventories ................... (170,321) (169,012)
Increase in receivables ............................... (136,723) (56,419)
(Increase)/Decrease in prepaid expenses and
other assets ......................................... (977) 8,616
Increase in accounts payable, accrued
expenses and other current liabilities ............... 32,566 37,706
Increase in other long-term obligations ............... 2,863 6,242
-------- --------
(188,763) (77,403)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES ................... (85,705) (32,479)
INVESTING ACTIVITIES:
Acquisition of property and equipment ................... (147,787) (149,637)
Acquisition of businesses, net of cash acquired ......... (137,625) --
Proceeds from sales and maturities of short-term
investments ............................................ 32,765 11,313
Purchase of short-term investments ...................... (16,651) (6,854)
Proceeds from sales and maturities of long-term
investments ............................................ -- 18,995
Purchase of long-term investments ....................... (20,906) (2,545)
Acquisition of lease rights ............................. 1,946 (36,690)
Other ................................................... 88 (1,619)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ................... (288,170) (167,037)
FINANCING ACTIVITIES:
Proceeds from sale of capital stock ..................... 25,243 35,581
Proceeds from borrowings ................................ 316,984 38
Payments on borrowings .................................. (248,326) (52,082)
Purchase of dissenting shareholder S-Corporation stock .. -- (48,102)
Purchase of treasury stock .............................. (78,246) (7,892)
Dividends to shareholders of acquired S-Corp ............ -- (15,601)
-------- --------
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES ..... 15,655 (88,058)
Effect of exchange rate changes on cash ................. 227 248
NET DECREASE IN CASH AND CASH EQUIVALENTS ............... (357,993) (287,326)
Cash and cash equivalents at beginning of period ........ 357,993 381,088
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .............. $ -- $ 93,762
======== ========
See notes to consolidated financial statements.
Page 5
<PAGE> 6
STAPLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying interim unaudited consolidated financial statements include the
accounts of Staples, Inc. and subsidiaries ("Staples" and 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 only 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 fiscal year. These financial
statements should be read in conjunction with the audited consolidated financial
statements and footnotes included in the Company's Annual Report on Form 10-K
for the year ended January 30, 1999.
Certain previously reported amounts have been reclassified to conform with the
current period presentation.
NOTE 2 - COMPUTATION OF EARNINGS PER COMMON SHARE
Staples calculates earnings per share in accordance with Statement of Financial
Accounting Standards No. 128 "Earnings per Share" ("FAS 128") which requires
disclosure of basic and diluted earnings per share. Basic earnings per share
excludes any dilutive effects of options, warrants, and convertible securities,
while diluted earnings per share includes such effects.
Average common and common equivalent shares used in computing diluted earnings
per share include approximately 13,610,000 and 14,122,000 shares for the three
and six months ended July 31, 1999 and approximately 12,591,000 and 12,249,000
shares for the same periods ended August 1, 1998, respectively, as a result of
applying the treasury stock method to outstanding stock options, performance
accelerated restricted stock ("PARS") and derivative instruments. Outstanding
convertible debentures were not included in the calculations for the three and
six months ended August 1, 1998 as their inclusion would be anti-dilutive. All
of the convertible debentures were redeemed and/or converted by the quarter
ended January 30, 1999.
NOTE 3 - COMPREHENSIVE INCOME
Staples calculates comprehensive income in accordance with SFAS No. 130
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules
for the reporting and display of comprehensive income and its components. The
adoption of SFAS 130 had no impact on Staples' net income or stockholders'
equity. SFAS 130 requires Staples' to report comprehensive income which includes
net income, foreign currency translation adjustments and unrealized gains and
losses on short-term investments, which are reported separately in stockholders'
equity, in the notes to the financial statements for interim periods. During the
three and six months ended July 31, 1999 total comprehensive income amounted to
approximately $48,453,000 and $101,920,000, respectively, compared to $2,764,000
and $41,393,000, for the corresponding periods ended August 1, 1998.
Page 6
<PAGE> 7
STAPLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - DESCRIPTION OF THE TYPES OF PRODUCTS AND SERVICES FROM WHICH EACH
REPORTABLE SEGMENT DERIVES ITS REVENUES
Staples has three reportable segments: North America Retail, North America
Delivery Operations, and European Operations. Staples' North America Retail
division consists of two operating units that operate stores throughout the US
and Canada. Staples' North America Delivery Operations division consists of five
operating units that sell office products and supplies directly to businesses.
The European Operations segment consists of three operating units which operate
office supply stores and sell directly to businesses throughout the United
Kingdom and Germany.
Measurement of Segment Profit or Loss and Segment Assets
Staples evaluates performance and allocates resources based on profit or loss
from operations before income taxes, not including gains and losses on Staples'
investment portfolio. The accounting policies of the reportable segments are the
same as those described in the summary of significant accounting policies.
Intersegment sales and transfers are recorded at Staples' cost, therefore there
is no intercompany profit or loss recognized on these transactions.
Factors Management Used to Identify the Enterprise's Reportable Segments
Staples' reportable segments are business units that distribute office products
in different manners. The reportable segments are each managed separately
because they distribute products to different classes of customer with different
distribution methods. The European operations are considered a separate
operating segment because of the significant difference in the operating
environment from the North American operations.
The following is a summary of significant accounts and balances by reportable
segment for the thirteen and twenty-six weeks ended July 31, 1999 and August 1,
1998:
<TABLE>
<CAPTION>
Revenues from External Customers ($ in 000's)
--------------------------------------------------------------
13 Weeks Ended 26 Weeks Ended
------------------------------ -----------------------------
July 31, 1999 August 1, 1998 July 31, 1999 August 1, 1998
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
N. America Retail..................... $1,183,168 $ 956,983 $2,590,989 $2,088,478
N. America Delivery .................. 578,172 449,245 1,154,297 906,157
European Operations .................. 78,770 69,477 166,890 51,681
---------- ---------- ---------- ----------
Totals................................ $1,840,110 $1,475,705 $3,912,176 $3,146,316
========== ========== ========== ==========
</TABLE>
Page 7
<PAGE> 8
STAPLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
Merger and Integration Costs ($ in 000's)
--------------------------------------------------------------
13 Weeks Ended 26 Weeks Ended
------------------------------ -----------------------------
July 31, 1999 August 1, 1998 July 31, 1999 August 1, 1998
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
N. America Retail..................... $ -- $ -- $ -- $ --
N. America Delivery .................. -- 41,000 -- 41,000
European Operations .................. -- -- -- --
---------- ---------- ---------- ----------
Totals................................ $ -- $ 41,000 $ -- $ 41,000
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Depreciation and Amortization Costs ($ in 000's)
--------------------------------------------------------------
13 Weeks Ended 26 Weeks Ended
------------------------------ -----------------------------
July 31, 1999 August 1, 1998 July 31, 1999 August 1, 1998
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
N. America Retail..................... $ 35,801 $ 23,188 $ 60,491 $ 44,856
N. America Delivery .................. 8,520 4,842 15,839 10,006
European Operations .................. 2,800 1,966 5,247 3,787
---------- ---------- ---------- ----------
Totals................................ $ 47,121 $ 29,996 $ 81,577 $ 58,649
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Segment Profit (Loss) ($ in 000's)
--------------------------------------------------------------
13 Weeks Ended 26 Weeks Ended
------------------------------ -----------------------------
July 31, 1999 August 1, 1998 July 31, 1999 August 1, 1998
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
N. America Retail..................... $ 99,792 $ 70,949 $ 206,538 $ 145,780
N. America Delivery .................. 48,188 (3,196) 83,612 20,954
European Operations .................. (13,428) (6,670) (19,354) (10,631)
All Other(1) ......................... (48,086) (42,900) (101,850) (82,009)
---------- ---------- ---------- ----------
Totals................................ $ 86,466 $ 18,183 $ 168,948 $ 74,094
========== ========== ========== ==========
</TABLE>
(1) All other is composed of corporate general and administrative expenses.
Expenditures for Long-Lived Assets
($ in 000's)
-----------------------------
26 Weeks Ended
-----------------------------
July 31, 1999 August 1, 1998
------------- --------------
N. America Retail $146,740 $169,965
N. America Delivery 149,023 9,325
European Operations 8,609 7,037
-------- --------
Totals $304,372 $186,327
======== ========
Page 8
<PAGE> 9
STAPLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Total Assets ($ in 000's)
-------------------------------
July 31, 1999 January 30, 1999
------------- ----------------
N. America Retail ............................... $3,002,007 $2,866,114
N. America Delivery ............................. 569,659 448,452
European Operations ............................. 185,025 162,693
---------- ----------
Totals .......................................... 3,756,691 3,497,259
Elimination of Intercompany Receivables ......... (94,696) (89,664)
Elimination of Intercompany Investments ......... (256,749) (228,329)
---------- ----------
Total Consolidated Assets ....................... $3,405,246 $3,179,266
========== ==========
Geographic Information:
<TABLE>
<CAPTION>
Revenues from External Customers ($ in 000's)
--------------------------------------------------------------
13 Weeks Ended 26 Weeks Ended
------------------------------ ------------------------------
July 31, 1999 August 1, 1998 July 31, 1999 August 1, 1998
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
N. America .............................. $1,761,340 $1,406,228 $3,745,286 $2,994,635
European ................................ 78,770 69,477 166,890 151,681
---------- ---------- ---------- ----------
Totals .................................. $1,840,110 $1,475,705 $3,912,176 $3,146,316
========== ========== ========== ==========
</TABLE>
Long-lived Assets ($ in 000's)
---------------------------------
JULY 31, 1999 JANUARY 30, 1999
------------- ----------------
N. America ................................... $1,277,136 $1,027,704
European ..................................... 41,754 35,913
---------- ----------
Totals ....................................... $1,318,890 $1,063,617
========== ==========
NOTE 5 - GUARANTOR SUBSIDIARIES
The 7.125% senior notes due August 15, 2007 and the obligations under the
$350,000,000 revolving credit facility effective through November, 2002 with a
syndicate of banks are fully and unconditionally guaranteed on an unsecured,
joint and several basis by certain wholly owned subsidiaries of the Company (the
"Guarantor Subsidiaries"). The following condensed consolidating financial data
illustrates the composition of Staples, Inc. (the "Parent Company"), Guarantor
Subsidiaries, and non-guarantor subsidiaries as of and for the thirteen and
twenty-six weeks ended July 31, 1999 and August 1, 1998. The non-guarantor
subsidiaries represent more than an inconsequential portion of the consolidated
assets and revenues of the Company. Separate complete financial statements of
the respective Guarantor Subsidiaries would not provide additional information
which would be useful in assessing the financial condition of the Guarantor
Subsidiaries and thus are not presented.
Investments in subsidiaries are accounted for by the Parent Company on the
equity method for purposes of the supplemental consolidating presentation.
Earnings of subsidiaries are, therefore, reflected in the Parent Company's
investment accounts and earnings. The principal elimination entries eliminate
the Parent Company's investment in subsidiaries and intercompany balances and
transactions.
Page 9
<PAGE> 10
STAPLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Condensed Consolidating Balance Sheet
As of July 31, 1999
($ in 000's)
<TABLE>
<CAPTION>
Non-
Staples, Inc. Guarantor Guarantor
(Parent Co.) Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments .............. $ 5,324 $ 16,029 $ (20,101) $ -- $ 1,252
Merchandise inventories ............... (5,457) 1,213,963 310,262 -- 1,518,768
Other current assets and
Intercompany ........................ 758,078 498,656 634,324 (1,381,847) 509,211
---------- ---------- ---------- ----------- ----------
Total current assets .................. 757,945 1,728,648 924,485 (1,381,847) 2,029,231
Net property, equipment and
other assets ........................ 306,581 746,601 565,933 (243,100) 1,376,015
---------- ---------- ---------- ----------- ----------
Total assets .......................... $1,064,526 $2,475,249 $1,490,418 $(1,624,947) $3,405,246
========== ========== ========== =========== ==========
Total current liabilities ............. $ (135,546) $1,011,718 $ 461,025 $ 14,902 $1,352,099
Total long-term liabilities ........... 63,478 237,369 18,622 -- 319,469
Total stockholders' equity ............ 1,136,594 1,226,162 1,010,771 (1,639,849) 1,733,678
---------- ---------- ---------- ----------- ----------
Total liabilities and
stockholders' equity ................ $1,064,526 $2,475,249 $1,490,418 $(1,624,947) $3,405,246
========== ========== ========== =========== ==========
</TABLE>
Condensed Consolidating Balance Sheet
As of January 30, 1999
($ in 000's)
<TABLE>
<CAPTION>
Non-
Staples, Inc. Guarantor Guarantor
(Parent Co.) Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments .............. $ 219,426 $ 16,348 $ 139,647 $ -- $ 375,421
Merchandise inventories ............... (5,561) 1,095,906 250,087 -- 1,340,432
Other current assets and
Intercompany ........................ 780,629 396,920 552,395 (1,381,697) 348,247
---------- ---------- ---------- ----------- ----------
Total current assets .................. 994,494 1,509,174 942,129 (1,381,697) 2,064,100
Net property, equipment and
other assets ........................ 271,129 710,049 362,178 (228,190) 1,115,166
---------- ---------- ---------- ----------- ----------
Total assets .......................... $1,265,623 $2,219,223 $1,304,307 $(1,609,887) $3,179,266
========== ========== ========== =========== ==========
Total current liabilities ............. $ 86,206 $ 830,728 $ 266,789 $ 81,609 $1,265,332
Total long-term liabilities ........... 7,581 237,128 12,339 -- 257,048
Total stockholders' equity ............ 1,171,836 1,151,367 1,025,179 (1,691,496) 1,656,886
---------- ---------- ---------- ----------- ----------
Total liabilities and
stockholders' equity ................ $1,265,623 $2,219,223 $1,304,307 $(1,609,887) $3,179,266
========== ========== ========== =========== ==========
</TABLE>
Page 10
<PAGE> 11
STAPLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
Condensed Consolidated Statement of Income
For the thirteen weeks ended July 31, 1999
($ in 000's)
Staples, Inc. Guarantor Non-Guarantor
(Parent Co.) Subsidiaries Subsidiaries Consolidated
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Sales................................................ $ -- $1,372,395 $ 467,715 $1,840,110
Cost of goods sold and occupancy costs............... 169 1,038,507 346,875 1,385,551
---------- ---------- ---------- ----------
Gross profit......................................... (169) 333,888 120,840 454,559
Operating and other expenses......................... 7,855 266,877 93,361 368,093
---------- ---------- ---------- ----------
Income before income taxes........................... (8,024) 67,011 27,479 86,466
Provision/(Benefit) for income taxes................. (3,386) 26,171 10,937 33,722
---------- ---------- ---------- ----------
Net income........................................... $ (4,638) $ 40,840 $ 16,542 $ 52,744
========== ========== ========== ==========
Condensed Consolidated Statement of Income
For the thirteen weeks ended August 1, 1998
($ in 000's)
Staples, Inc. Guarantor Non-Guarantor
(Parent Co.) Subsidiaries Subsidiaries Consolidated
------------- ------------ -------------- ------------
Sales................................................ $ -- $1,118,437 $ 357,268 $1,475,705
Cost of goods sold and occupancy costs............... 656 856,235 270,887 1,127,778
---------- ---------- ---------- ----------
Gross profit......................................... (656) 262,202 86,381 347,927
Operating and other expenses......................... 46,442 223,856 59,446 329,744
---------- ---------- ---------- ----------
Income before income taxes........................... (47,098) 38,346 26,935 18,183
Provision/(Benefit) for income taxes................. (4,511) 8,972 4,858 9,319
Minority interest.................................... -- -- 110 110
---------- ---------- ---------- ----------
Net income........................................... $ (42,587) $ 29,374 $ 22,187 $ 8,974
========== ========== ========== ==========
Condensed Consolidated Statement of Income
For the twenty-six weeks ended July 31, 1999
($ in 000's)
Staples, Inc. Guarantor Non-Guarantor
(Parent Co.) Subsidiaries Subsidiaries Consolidated
------------- ------------ -------------- ------------
Sales................................................ $ -- $2,942,037 $ 970,139 $3,912,176
Cost of goods sold and occupancy costs............... 341 2,238,588 723,935 2,962,864
---------- ---------- ---------- ----------
Gross profit......................................... (341) 703,449 246,204 949,312
Operating and other expenses......................... 16,365 576,641 187,358 780,364
---------- ---------- ---------- ----------
Income before income taxes........................... (16,706) 126,808 58,846 168,948
Provision/(Benefit) for income taxes................. (6,181) 52,010 20,061 65,890
---------- ---------- ---------- ----------
Net income........................................... $ (10,525) $ 74,798 $ 38,785 $ 103,058
========== ========== ========== ==========
Condensed Consolidated Statement of Income
For the twenty-six weeks ended August 1, 1998
($ in 000's)
Staples, Inc. Guarantor Non-Guarantor
(Parent Co.) Subsidiaries Subsidiaries Consolidated
------------- ------------ -------------- ------------
Sales................................................ $ -- $2,383,087 $ 763,229 $3,146,316
Cost of goods sold and occupancy costs............... 925 1,831,103 585,583 2,417,611
---------- ---------- ---------- ----------
Gross profit......................................... (925) 551,984 177,646 728,705
Operating and other expenses......................... 52,744 474,980 126,887 654,611
---------- ---------- ---------- ----------
Income before income taxes........................... (53,669) 77,004 50,759 74,094
Provision/(Benefit) for income taxes................. (6,477) 25,826 9,981 29,330
Minority interest.................................... -- -- 160 160
---------- ---------- ---------- ----------
Net income........................................... $ (47,192) $ 51,178 $ 40,938 $ 44,924
========== ========== ========== ==========
</TABLE>
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STAPLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
Condensed Consolidated Statement of Cash Flows
For the twenty-six weeks ended July 31, 1999
($in 000's)
Staples, Inc. Guarantor Non-Guarantor
(Parent Co.) Subsidiaries Subsidiaries Consolidated
------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Net cash used in operating activities................ $ (70,182) $ (7,884) $ (7,639) $ (85,705)
Investing Activities:
Acquisition of property,
equipment and lease rights....................... (29,591) (79,899) (36,351) (145,841)
Other.............................................. (110,367) 87,464 (119,426) (142,329)
--------- --------- --------- ---------
Cash (used in)/provided by investing
activities......................................... (139,958) 7,565 (155,777) (288,170)
Financing Activities:
Payments on borrowings............................. (234,505) -- (13,821) (248,326)
Other.............................................. 230,543 -- 33,438 263,981
--------- --------- --------- ---------
Cash provided by financing activities................ 3,983 -- 19,617 15,655
Effect of exchange rate changes on cash.............. -- -- 227 227
--------- --------- --------- ---------
Net decrease in cash................................. (214,102) (319) (143,572) (357,993)
Cash and cash equivalents at
beginning of period................................ 219,426 16,348 122,219 357,993
--------- --------- --------- ---------
Cash and cash equivalents at end
of period.......................................... $ 5,324 $ 16,029 $ (21,353) $ --
========= ========= ========= =========
Condensed Consolidated Statement of Cash Flows
For the twenty-six weeks ended August 1, 1998
($ in 000's)
Staples, Inc. Guarantor Non-Guarantor
(Parent Co.) Subsidiaries Subsidiaries Consolidated
------------- ------------ -------------- ------------
Net cash (used in)/provided by
Operating activities............................... $ (64,388) $ 16,503 $ 15,406 $ (32,479)
Investing Activities:
Acquisition of property,
equipment and lease rights....................... (31,354) (142,697) (12,276) (186,327)
Other.............................................. (56,769) 134,869 (58,810) 19,290
--------- --------- --------- ---------
Cash used in investing
activities......................................... (88,123) (7,828) (71,086) (167,037)
Financing Activities:
Payments on borrowings............................. (26,040) -- (26,042) (52,082)
Other.............................................. 27,748 -- (63,724) (35,976)
--------- --------- --------- ---------
Cash provided by/(used in)
financing activities............................... 1,708 -- (89,766) (88,058)
Effect of exchange rate changes on cash.............. -- -- 248 248
--------- --------- --------- ---------
Net decrease in cash................................. (150,803) 8,675 (145,198) (287,326)
Cash and cash equivalents at
beginning of period................................ 189,252 8,253 183,583 381,088
--------- --------- --------- ---------
Cash and cash equivalents at end
of period.......................................... $ 38,449 $ 16,928 $ 38,385 $ 93,762
========= ========= ========= =========
</TABLE>
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STAPLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - INVESTMENTS
Investments consist of stock purchased in internet related companies whose stock
is not publicly traded on an exchange. These investments have been accounted for
on a cost basis as each investment represents an interest of no greater than
fifteen percent.
NOTE 7 - ACQUISITIONS
On February 26, 1999, Staples completed the acquisition of Claricom Holdings,
Inc. and certain related entities, now referred to as Staples Communications,
for a purchase price of approximately $137,900,000. The acquisition has been
accounted for using the purchase method of accounting and accordingly Staples
has recognized goodwill of approximately $158,400,000, including a provision for
merger related and integration costs of approximately $7,000,000. Staples
Communications is a full-service supplier of telecommunications services to
small and medium sized businesses in the United States.
NOTE 8 - EQUITY FORWARD PURCHASE AGREEMENT
During the quarter ended July 31, 1999, Staples entered into an equity forward
purchase to hedge against stock price fluctuations for the repurchase of Staples
common stock in connection with the annual stock option grant to employees and
directors. Under the agreement Staples must purchase 2,600,000 shares of Staples
stock at an average price of $30.263 or $78,700,000.
NOTE 9 - SUBSEQUENT EVENT
On August 11, 1999, Staples announced a definitive agreement to acquire three
European office supply companies, subject to regulatory approvals. The companies
to be acquired are Sigma Burowelt in Germany, Office Centre in the Netherlands,
and Office Centre in Portugal for a total of approximately $120,000,000. All
three companies operate office superstores focusing on every-day low pricing for
a wide assortment of office supplies. Staples will acquire a total of 41 stores,
including 15 in Germany, 21 in the Netherlands, and 5 in Portugal. This
acquisition will be accounted for using the purchase method of accounting.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES. Our sales increased 24.7% to $1,840,110,000 in the quarter ended July 31,
1999 from $1,475,705,000 in the quarter ended August 1, 1998 and increased 24.3%
to $3,912,176,000 for the six months ended July 31, 1999 compared to
$3,146,316,000 for the six months ended August 1, 1998. This growth was
attributable to an increased number of open stores and increased sales in
existing stores and in the delivery and contract stationer segments. Comparable
store and delivery hub sales for both the quarter and six months ended July 31,
1999 increased 9% over the same periods ended August 1, 1998. Comparable sales
in the contract stationer segment, including Quill, increased 11% for both the
three and six months ended July 31, 1999 as compared to the three and six months
ended August 1, 1998. The Company had 1,009 stores open as of July 31, 1999
compared to 830 stores as of August 1, 1998 and 913 stores as of January 30,
1999; this total includes 49 stores opened during the quarter ended July 31,
1999.
GROSS PROFIT. Our gross profit as a percentage of sales was 24.7% and 24.3% for
the three and six months ended July 31, 1999 as compared to 23.6% and 23.2% for
the same periods in the prior year. The gross profit rate was increased by
continually improving margins in the retail and delivery segments due to lower
product costs from vendors and improved worldwide buying as well as the
leveraging of fixed distribution center and delivery costs over a larger sales
base. Furthermore, Staples Communications, with its first full quarter of
operations, contributed to the increase in gross profit. These increases were
partially offset by continued price reductions and decreased margins on computer
hardware sales such as CPU's, laptops, and printers and new market occupancy
costs.
OPERATING AND SELLING EXPENSES. Our operating and selling expenses, which
consist of payroll, advertising and other operating expenses, increased as a
percentage of sales in the three and six months ended July 31, 1999 to 14.7% and
15.0%, as compared to 14.0% and 14.5% for the same period in the prior year. The
increase was primarily due to increased costs of investing in our selling
operations, primarily retail and call center personnel, increased marketing
costs in our delivery operations and Staples.com and the addition of Staples
Communications. Staples Communications had higher operating and selling expenses
as a percentage of sales. These increases were partially offset by the continued
leveraging of fixed store and delivery operating costs as sales have increased.
PRE-OPENING EXPENSES. Our pre-opening expenses relating to new store openings,
consisting primarily of salaries, supplies, marketing and occupancy costs, are
expensed as incurred and therefore fluctuate from period to period depending on
the timing and number of new store openings. Pre-opening expenses averaged
$100,000 and $98,000 per store for the three and six months ended July 31, 1999,
as compared to $88,000 and $85,000 per store for the same periods in the prior
year.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative expenses as
a percentage of sales were 4.7% and 4.5% for the three and six months ended July
31, 1999 respectively, as compared to 4.8% and 4.4% for the same periods in the
prior year. The decrease for the three months ended July 31, 1999 was primarily
due to decreased Year 2000 compliance and other information systems ("IS")
costs, synergies realized from the Quill integration as well as Staples' ability
to increase sales without proportionately increasing overhead expenses in its
core retail and direct business. These decreases were partially offset by costs
incurred for new business, including Staples Communications and Staples.com
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which have higher general and administrative expenses as a percentage of sales.
The increase as a percentage of sales for the six months ended July 31, 1999 was
primarily due to higher costs incurred for Year 2000 compliance projects and IS
staffing infrastructure for that period and the addition of Staples
Communications and Staples.com which have higher general and administrative
expenses as a percentage of sales.
AMORTIZATION OF GOODWILL. Amortization of goodwill for the three and six months
ended July 31, 1999 was $2,971,000 and $5,258,000 as compared to $927,000 and
$1,851,000 for the same periods in the prior year. The increase in amortization
is due to the goodwill from the acquisitions of Ivan Allen Corporation on
November 1, 1998 and Claricom Holdings, Inc., now referred to as Staples
Communications, on February 26, 1999.
MERGER-RELATED AND INTEGRATION COSTS. In connection with the acquisition of
Quill, we recorded a charge to operating expense of $41,000,000 during the three
months ended August 1, 1998. These costs consist of direct merger-related and
integration costs from the transaction.
INTEREST AND OTHER EXPENSE, NET. Net interest and other expense for the three
and six months ended July 31, 1999 was $3,976,000 and $5,392,000, respectively,
as compared to $5,920,000 and $10,614,000 for the same periods in the prior
year. The interest expense relates primarily to existing borrowings. The
decrease in net interest expense during the three and six months ended July 31,
1999 was primarily due to the conversion of Staples' $300,000,000 of 4 1/2%
Debentures into common stock in December 1998.
INCOME TAXES. Our provision for income taxes as a percentage of pre-tax income
was 39% for both the three and six months ended July 31, 1999 and 51.3% and
39.6% for the same periods ended August 1, 1998. On a pro forma basis, to
reflect a provision for income taxes on previously untaxed earnings of Quill,
Staples' effective tax rate would have been 42% for the six months ended August
1, 1998.
LIQUIDITY AND CAPITAL RESOURCES
We have traditionally used a combination of cash generated from operations and
debt or equity offerings to fund our expansion and acquisition activities. We
have also utilized our revolving credit facility to support various growth
initiatives.
We opened 96 stores and 89 stores during the six months ended July 31, 1999 and
August 1, 1998, respectively. During the six months ended August 1, 1998 one
store was closed. To the extent that 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
and certain direct mail customers are made under regular credit terms, which
requires that we carry our own receivables from these sales. As we expand our
contract and direct mail businesses worldwide, we anticipate that our accounts
receivable portfolio will grow. Receivables from our vendors under rebate,
cooperative advertising and marketing programs are a significant percentage of
our total receivables and tend to fluctuate somewhat seasonally. We also
utilized capital equipment financings to fund current working capital
requirements. We expect to open approximately 75 stores during the last two
quarters of fiscal 1999. We estimate that our cash requirements, including
pre-opening expenses, inventory, leasehold improvements and fixtures, will be
approximately $1,400,000 for each new store (excluding the cost of any
acquisitions of lease rights). Accordingly, we expect to use approximately
$105,000,000 for store openings during this period. In
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December 1998, we committed to a plan to close and relocate stores which cannot
be expanded and upgraded to our current store model. Lease agreements for the
relocation sites will be executed during fiscal year 1999 and the stores will be
closed and relocated during fiscal years 1999 and 2000.
During the six months ended July 31, 1999, cash and cash equivalents decreased
by $357,993,000. This decrease was primarily attributable to cash used in
investing activities of $288,170,000, including cash used in the acquisition of
Staples Communications of $137,625,000 and the acquisition of property and
equipment of $147,787,000, primarily for the 96 new stores opened; as well as
cash used in operating activities of $85,705,000, which includes an increase in
merchandise inventories of $170,321,000 and an increase in accounts receivable
of $136,723,000. Cash provided by financing activities of $15,655,000 includes
$68,658,000 of net borrowings and $25,243,000 of proceeds from sales of capital
stock for the exercise of stock options and the employee stock purchase plan
offset by treasury stock purchases of $78,246,000.
During the quarter ended May 1, 1999, we began a stock repurchase program
intended to provide shares for employee stock programs. We expect to repurchase
approximately 6,000,000 shares annually and have authorized up to $200,000,000
to be used in fiscal 1999 for these repurchases. During the six months ended
July 31, 1999 we repurchased 2,321,000 shares for approximately $68,962,000
under this program and 309,000 shares for approximately $9,284,000 from
employees upon exercise of PARS. In addition, during the quarter ended July 31,
1999, we entered into an equity forward purchase agreement to hedge against
stock price fluctuations for the repurchase of our common stock in connection
with the annual stock option grant to employees and directors. Under the
agreement we must purchase 2,600,000 shares at an average price of $30.263 or
$78,684,000.
During the quarter ended July 31, 1999, we made investments of approximately
$21,000,000 in internet related companies whose stock is not traded on a public
market. These investments are accounted for on a cost basis as each investment
represents an interest of no greater than fifteen percent. We also plan 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. We expect to meet
these cash requirements through a combination of operating cash flow and
borrowings from our existing revolving line of credit.
On August 12, 1997, we issued $200,000,000 of 7.125% senior notes with interest
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 senior notes were used for repayment of indebtedness under our revolving
credit agreement and for general working capital purposes, including the
financing of new store openings, distribution facilities and corporate offices.
We also maintain a revolving credit facility, effective through November 2002,
with a syndicate of banks which provides up to $350,000,000 of available
borrowings. Borrowings made pursuant to this facility will bear interest at
either the lead bank's prime rate, the federal funds rate plus 0.50%, the LIBOR
rate plus a percentage spread based upon certain defined ratios, a competitive
bid rate or a swing line loan rate. This agreement, among other conditions,
contains certain restrictive covenants including net worth maintenance, minimum
fixed charge interest coverage and limitations on indebtedness and sales of
assets.
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As of July 31, 1999, $60,000,000 of borrowings was outstanding under the
revolving credit agreement. We also have available $35,000,000 in other
uncommitted, short-term bank credit lines, of which no borrowings were
outstanding as of July 31, 1999. Staples UK has a $50,000,000 line of credit
which had an outstanding balance of $41,433,000 at July 31, 1999 and Business
Depot has a $16,610,000 line of credit which had no outstanding balance at July
31, 1999. Total short-term investments and available revolving credit amounts
totaled $351,429,000 as of July 31, 1999.
We expect that income from operations, together with our current short-term
investments and funds available under our revolving credit facility will be
sufficient to fund our planned store openings and other recurring operating cash
needs for at least the next twelve to eighteen months. We continually evaluate
financing possibilities, and we 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.
INFLATION AND SEASONALITY
While neither inflation nor deflation has had, and we do not expect either to
have, a material impact upon operating results, there can be no assurance that
our business will not be affected by inflation or deflation in the future. We
believe that our business is somewhat seasonal, with sales and profitability
slightly lower during the first and second quarters of our fiscal year.
FUTURE OPERATING RESULTS
This quarterly report on Form 10-Q includes or incorporates forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. You can identify these
forward-looking statements by our use of the words "believes", "anticipates",
"plans", "expects", "may", "will", "would", "intends", "estimates" and other
similar expressions, whether in the negative or affirmative. We cannot guarantee
that we actually will achieve these plans, intentions or expectations disclosed
in the forward looking statements we make. We have included important factors in
the cautionary statements below that we believe could cause our actual results
to differ materially from the forward-looking statements that we make. The
forward-looking statements do not reflect the potential impact of any future
acquisitions, mergers or dispositions. We do not assume any obligation to update
any forward-looking statement we make.
Our market is highly competitive and we may not continue to compete
successfully. We compete in a highly competitive marketplace with a variety of
retailers, dealers and distributors. In most of our geographic markets, we
compete with other high-volume office supply chains, such as Office Depot,
OfficeMax and Office World, that have store formats, pricing strategies and
product selections that are similar to ours. We also compete with mass
merchants, such as Wal-Mart, warehouse clubs, computer and electronic
superstores, and other discount retailers. In addition, our retail stores and
delivery and contract businesses compete with numerous mail order firms,
contract stationer businesses and direct manufacturers. Many of our competitors,
including Office Depot, OfficeMax and Wal-Mart, have in recent years
significantly increased the number of stores they operate within our markets.
Some of our current and potential competitors are larger than we are and have
substantially greater financial resources. It is possible that increased
competition or improved performance by our competitors may reduce our market
share, may force us to charge lower prices than we otherwise would, and may
adversely affect our business and financial performance in other ways.
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We may be unable to continue to successfully open new stores. An important part
of our business plan is to aggressively increase the number of our stores. We
opened 174 stores in the United States, Canada and Europe in fiscal 1998 and
plan to open approximately 170 new stores in fiscal 1999. For our growth
strategy to be successful, we must identify and lease favorable store sites,
hire and train employees and adapt our management and operational systems to
meet the needs of our expanded operations. These tasks may be difficult to
accomplish successfully. If we are unable to open new stores as quickly as
planned, our future sales and profits could be materially adversely affected.
Even if we succeed in opening new stores, these new stores may not achieve the
same sales or profit levels as our existing stores. Also, our expansion strategy
includes opening new stores in markets where we already have a presence so we
can take advantage of economies of scale in marketing, distribution and
supervision costs. However, these new stores may result in the loss of sales in
existing stores in nearby areas.
Our quarterly operating results are subject to significant fluctuation. Our
operating results have fluctuated from quarter to quarter in the past, and we
expect that they will continue to do so in the future. Our earnings may not
continue to grow at rates similar to the growth rates achieved in recent years
and may fall short of either a prior fiscal period or investors' expectations.
Factors that could cause these quarterly fluctuations include the following:
- the number of new store openings, primarily because we expense
pre-opening expenses as they are incurred and newer stores are less
profitable than mature stores;
- the extent to which sales in new stores result in the loss of sales in
existing stores;
- the mix of products sold;
- pricing actions of competitors;
- the level of advertising and promotional expenses;
- seasonality, primarily because the sales and profitability of our
stores are typically slightly lower in the first and second quarter of
our fiscal year than in other quarters; and
- charges associated with acquisitions.
Most of our operating expenses, such as rent expense, advertising expense and
employee salaries, do not vary directly with the amount of our sales and are
difficult to adjust in the short term. As a result, if sales in a particular
quarter are below our expectation for that quarter, we may not proportionately
reduce operating expenses for that quarter, and therefore this sales shortfall
would have a disproportionate effect on our net income for the quarter.
The market price of our common stock is based in large part on professional
securities analysts' expectations that our business will continue to grow and
that we will achieve certain levels of net income. If our financial performance
in a particular quarter does not meet the expectations of securities analysts,
this may adversely affect the views of those securities analysts concerning our
growth potential and future financial performance. If the securities analysts
that regularly follow our common stock lower their rating of the common stock or
lower their projections for our future growth and financial performance, the
market price of our common stock is likely to drop significantly. In addition,
in those circumstances the decrease in our common stock price would probably be
disproportionate to the shortfall in financial performance.
Our rapid growth may continue to strain our operations, which could adversely
affect our business and financial results. Our business, including sales, number
of stores and number of employees, has grown dramatically over the past several
years. In addition, we have acquired a number of significant companies
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in the last few years and may make additional acquisitions in the future. This
growth has placed significant demands on our management and operational systems.
If we are not successful in upgrading our operational and financial systems,
expanding our management team and increasing and effectively managing our
employee base, this growth is likely to result in operational inefficiencies and
ineffective management of our business and employees, which will in turn
adversely affect our business and financial performance.
Our international operations may not become profitable. We currently operate in
international markets through The Business Depot Ltd. in Canada, Staples UK in
the United Kingdom and Staples Deutschland in Germany. Subsequent to July 31,
1999, we have signed a definitive agreement to acquire three European companies
with operations in Germany, the Netherlands and Portugal. Our consolidated
European operations are currently unprofitable and we cannot guarantee that they
will become profitable. We may seek to expand further into other international
markets in the future. Our foreign operations encounter risks similar to those
faced by our US stores, as well as risks inherent in foreign operations, such as
local customs and competitive conditions and foreign currency fluctuations.
We may be unable to obtain adequate future financing. It is possible that we
will require additional sources of financing earlier than we anticipate, as a
result of unexpected cash needs or opportunities, and expanded growth strategy
or disappointing operating results. Additional funds may not be available on
satisfactory terms when needed, or at all, whether in the next twelve to
eighteen months or thereafter.
YEAR 2000 READINESS DISCLOSURE
We have completed a comprehensive assessment of our internal computer systems
and applications to identify those that might be affected by computer programs
using two digits rather than four to define the applicable year (the "Year 2000
issue"). We have used internal personnel as well as external contractors and
consultants to identify those systems and applications which are affected by the
Year 2000 issue. Those systems and applications identified as needing
remediation have been or will be replaced or modified and tested for compliance.
Remediation of the most critical Information Technology (IT) related systems and
applications was completed on schedule during the first quarter of 1999, and
anticipated individual application testing was completed during the second
quarter of 1999. These systems include Merchandising/Logistics, Distribution,
Store Point of Sale, and Corporate Finance. The remediation of the less critical
IT systems was also completed during the second quarter of 1999. These systems
and applications include Marketing Systems and Non-Mission Critical Desktop
Applications. Testing of these less critical IT systems and full "end to end"
testing of our most critical systems is expected to be finished during the third
quarter of 1999.
We have also finished our assessment of non-IT related systems and applications.
Assessment regarding the status of third parties' Year 2000 compliance continues
to be ongoing and may carry into early 2000. The non-IT related systems and
applications include but are not limited to telephone systems, store security
systems and electrical systems. The remediation of these systems was completed
during the first quarter of 1999 and testing will be completed during the third
quarter of 1999. We are also working with third parties, primarily major vendors
but also customers, to ensure that they will be Year 2000 compliant as our
schedule requires. Responses have been received from the majority of vendors,
but not all vendors have assured us that they will be compliant in time. As a
contingency, alternative lists of third party vendors have been created in case
a critical third party does not achieve compliance. We have
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completed our enterprise wide inventory review and have completed a
comprehensive risk assessment relative to vendor provided products, devices
and/or services. Due diligence and monitoring with respect to vendors with the
greatest impact on us is scheduled to be performed on a continuous basis
throughout 1999.
We have estimated that the total cost of Year 2000 compliance will be between
$25 and $30 million, $24 million of which had been spent as of July 31, 1999.
Most of the costs to be incurred are related to remediation and testing of
software using outside contracted services. The costs of compliance have been
included in our current 1999 IT budgets. The inclusion of Year 2000 compliance
has not caused any critical IT projects to be delayed or eliminated.
We are currently preparing a "what steps to follow" contingency plan in the
event that an area of our operations is impacted by the Year 2000 issue. A
formal plan will be adopted if it becomes more evident that there will be an
area of non-compliance in our systems or at a critical third party. We are
developing these procedures for all of our sites and listing those to contact in
the event a "Year 2000 suspected" issue is encountered. Although we expect to
achieve Year 2000 compliance as scheduled, there are potential risks if we do
not become, or are late in becoming, Year 2000 compliant. Such risks include
impairing our ability to process and deliver customer orders and payments,
procure saleable merchandise, and perform other critical business functions
which could have a material impact on financial performance. We have yet to
analyze the effect that an instance of critical non-compliance by us or a third
party would have on revenues and expenses since a worst case scenario has not
been identified. Further, there is also the risk that claims may be made against
us in the event of our non-compliance or the non-compliance of the products and
services which we sell. The costs of defending and settling such claims could
have a material impact on our financial statements. As of July 31, 1999, each
Staples point of customer contact (stores, call centers and customer service)
has access to a "Year 2000 Preparedness Guide" for its customers so we can be
proactive in assisting them with vendor contacts to answer their Year 2000
questions.
The information presented above is based on management's estimates which were
made using assumptions of future events. Uncontrollable factors such as the
compliance of the systems of third parties and the availability of resources
could materially increase the cost or delay the estimated date of Year 2000
compliance. All Year 2000 statements contained herein are designated as "Year
2000 Readiness Disclosures" pursuant to the Year 2000 Information and Readiness
Disclosures Act (P.L. 105-271).
EURO CURRENCY
On January 1, 1999, participating member countries of the European Union
established fixed conversion rates between their existing currencies and the
European Union's common currency ("the euro"). The former currencies of the
participating countries are scheduled to remain legal tender as denominations of
the euro until January 1, 2002 when the euro will be adopted as the sole legal
currency.
We have evaluated the potential impact on our business, including the ability of
our information systems to handle euro-denominated transactions and the impact
on exchange costs and currency exchange rate risks. Based on the results of this
evaluation, we do not expect the conversion to the Euro to have a material
impact on our operations or financial position.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISKS
We are exposed to market risk from changes in interest rates and foreign
exchange rates. We initiated a risk management control process to monitor our
foreign exchange and interest rate risks. The risk management process uses
analytical techniques including market value, sensitivity analysis, and value at
risk estimates. We do not believe that the potential exposure is significant in
light of our size and our business.
On May 11, 1999 and August 3, 1999, we entered into interest rate swaps, each
for an aggregate notional amount of $100,000,000, in order to minimize financing
costs associated with our $200,000,000 of 7.125% senior notes due August 15,
2007. The swap agreements are both scheduled to terminate on August 15, 2007.
Under the interest rate swap agreements, we are entitled to receive semi-annual
interest payments at a fixed rate of approximately 7.125% and are obligated to
pay interest based on 30-day US non-financial commercial paper rates. The
interest rate swap is being accounted for as a hedge and the differential to be
paid or received on the interest rate swap agreements is accrued and recognized
as an adjustment to interest rate expense over the life of the agreements. If
Staples and the counterparty to the agreements terminate the swaps prior to
their original maturity, any gain or loss upon termination will be amortized to
interest expense over the remaining original life of the agreements.
On July 2, 1999, we entered into an equity forward purchase agreement to hedge
against stock price fluctuations for the repurchase of Staples common stock in
connection with the annual stock option grant to employees and directors. Under
the agreement we must purchase 2,600,000 shares at an average price of $30.263
or $78,684,000.
We are exposed to foreign exchange risks through our subsidiaries in Canada, the
United Kingdom, and Germany. We have not entered into any derivative financial
instruments to hedge this exposure, and believe that the potential exposure is
not material to our overall financial position or the results of operations.
This risk management discussion, and the effects of changes in interest rates
and foreign exchange rates, are forward-looking statements. Actual results in
the future may differ materially from these projected results due to
developments in the global financial markets. The analytical methods used by us
to assess and mitigate risk discussed above should not be considered projections
of future events or losses.
Page 21
<PAGE> 22
PART II -- OTHER INFORMATION
ITEMS 1-3 AND 5 - NOT APPLICABLE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held the 1999 Annual Meeting of Stockholders (the "Annual Meeting")
on . At the Annual Meeting, the following Actions were taken:
1. The stockholders elected Mary Elizabeth Burton, Rowland T. Moriarty, W.
Mitt Romney and Margaret C. Whitman as Class II Directors, to serve for a
three-year term. Holders of 411,395,703 shares of Common Stock voted for
Ms. Burton. Holders of 411,401,810 shares of Common Stock voted for Mr.
Moriarty. Holders of 411,379,226 shares of Common Stock voted for Mr.
Romney. Holders of 411,399,902 shares of Common Stock voted for Ms.
Whitman.
2. The stockholders approved an amendment to the Company's Restated
Certificate of Incorporation increasing the number of authorized shares of
Common Stock from 1,000,000,000 to 1,500,000,000 shares by a vote of
393,574,908 shares of Common Stock for, 18,189,120 shares of Common Stock
against and 1,120,684 shares of Common Stock not voting.
3. The stockholders ratified the appointment of Ernst & Young LLP as the
Company's independent auditors for the current fiscal year by a vote of
411,625,011 shares of Common Stock for, 330,092 shares Common Stock against
and 929,609 shares of common Stock not voting.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 10-K.
A. Exhibits
27.1 Financial Data Schedule.
B. Reports on Form 8-K
Not Applicable
Page 22
<PAGE> 23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STAPLES, INC.
Date: September 10, 1999 By: /s/ John J. Mahoney
------------------ --------------------------------
John J. Mahoney
Executive Vice President-Finance
and Chief Financial Officer
(Principal Financial Officer)
Page 23
<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 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 0
<SECURITIES> 1,252
<RECEIVABLES> 381,473
<ALLOWANCES> 3,359
<INVENTORY> 1,518,768
<CURRENT-ASSETS> 2,029,231
<PP&E> 1,376,326
<DEPRECIATION> 449,763
<TOTAL-ASSETS> 3,405,246
<CURRENT-LIABILITIES> 1,412,099
<BONDS> 203,560
0
0
<COMMON> 279
<OTHER-SE> 1,733,399
<TOTAL-LIABILITY-AND-EQUITY> 3,405,246
<SALES> 3,912,176
<TOTAL-REVENUES> 3,912,176
<CGS> 2,962,864
<TOTAL-COSTS> 3,548,921
<OTHER-EXPENSES> 188,915
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,392
<INCOME-PRETAX> 168,948
<INCOME-TAX> 65,890
<INCOME-CONTINUING> 103,058
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 103,058
<EPS-BASIC> 0.22
<EPS-DILUTED> 0.22
<FN>
<F1>
<INCOME-BEFORE MINORITY INTEREST> 103,058
<MINORITY INTEREST> 0
</FN>
</TABLE>
